SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NO. 0-25053
THEGLOBE.COM, INC.
(EXACT NAME OF REGISTRANT 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: [X]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 the Securities Exchange Act of 1934). Yes [ ] No [X]
Registrant's revenues for the fiscal year ended December 31, 2004 were
$16,041,032.
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value (the "Common Stock") as of March 10, 2005 was 175,186,997.
Aggregate market value of the voting Common Stock held by non-affiliates of the
registrant as of the close of business on March 10, 2005: $18,314,614.*
*Includes voting stock held by third parties, which may be deemed to be
beneficially owned by affiliates, but for which such affiliates have disclaimed
beneficial ownership.
THEGLOBE.COM, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Business 5
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities 18
Item 6. Management's Discussion and Analysis or Plan of Operation 20
Item 7. Consolidated Financial Statements and Supplementary Data 51
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 85
Item 8A. Controls and Procedures 85
Item 8B. Other Information 85
PART III
Item 9. Directors and Executive Officers of the Registrant 86
Item 10. Executive Compensation 89
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 93
Item 12. Certain Relationships and Related Transactions 94
Item 13. Exhibits 96
Item 14. Principal Accountant Fees and Services 99
SIGNATURES 100
FORWARD LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements within the meaning of the
federal securities laws that relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology, such as "may," "will," "should," "could," "expect," "plan,"
"anticipate," "believe," "estimate," "project," "predict," "intend," "potential"
or "continue" or the negative of such terms or other comparable terminology,
although not all forward-looking statements contain such terms. In addition,
these forward-looking statements include, but are not limited to, statements
regarding:
o implementing our business plans;
o marketing and commercialization of our existing products and those
products under development;
o plans for future products and services and for enhancements of
existing products and services;
o our ability to implement cost reduction programs;
o potential governmental regulation and taxation;
o the outcome of any litigation;
o our intellectual property;
o our estimates of future revenue and profitability;
o our estimates or expectations of continued losses;
o our expectations regarding future expenses, including research and
development, sales and marketing, and general and administrative
expenses;
o difficulty or inability to raise additional financing, if needed, on
terms acceptable to us;
o our estimates regarding our capital requirements and our needs for
additional financing;
o attracting and retaining customers and employees;
o rapid technological changes in our industry and relevant markets;
o sources of revenue and anticipated revenue;
o plans for future acquisitions and entering new lines of business;
o plans for divestitures of certain businesses or assets;
o competition in our market; and
o our ability to continue to operate as a going concern.
These statements are only predictions. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. We
are not required to and do not intend to update any of the forward-looking
statements after the date of this Form 10-KSB or to conform these statements to
actual results. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Form 10-KSB might not occur. Actual
results, levels of activity, performance, achievements and events may vary
significantly from those implied by the forward-looking statements. A
description of risks that could cause our results to vary appears under "Risk
Factors" and elsewhere in this Form 10-KSB.
In this Form 10-KSB, we refer to information regarding our potential markets and
other industry data. We believe that we have obtained this information from
reliable sources that customarily are relied upon by companies in our industry,
but we have not independently verified any of this information.
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PART I
ITEM 1. BUSINESS
As of December 31, 2004, theglobe.com, inc. (the "Company" or "theglobe")
managed three primary lines of business. One line of business, Voice over the
Internet Protocol ("VoIP") telephony services, includes voiceglo Holdings, Inc.,
a wholly-owned subsidiary of theglobe that offers VoIP-based phone services and
features. The term VoIP refers to a category of hardware and software that
enables people to use the Internet to make phone calls. The second line of
business consists of our historical network of three wholly-owned businesses,
each of which specializes in the games business by delivering games information
and selling games in the United States and abroad. These businesses are: our
print publication Computer Games Magazine; our Computer Games Online website
(www.cgonline.com), which is the online counterpart to Computer Games Magazine;
and our Chips & Bits, Inc. (www.chipsbits.com) games distribution company. We
entered a third line of business, marketing services, on September 1, 2004, with
our acquisition of SendTec, Inc. ("SendTec"), a direct response marketing
services and technology company.
As of December 31, 2004, the Company's revenue was derived principally from the
newly acquired operations of SendTec, as well as from the operations of our
computer games related businesses. Our VoIP products and services have yet to
produce any significant revenue.
Subsequent to December 31, 2004, management has been actively re-evaluating the
Company's primary business lines, particularly in view of the Company's critical
need for cash and the overall net losses of the Company. As a result, management
is currently exploring a number of strategic alternatives for the Company and/or
its businesses, including continuing to operate the businesses, selling certain
businesses or assets, or entering into new lines of businesses. See the
"Liquidity and Capital Resources" section of Management's Discussion and
Analysis or Plan of Operation for a more complete discussion.
HISTORICAL OVERVIEW
theglobe was incorporated on May 1, 1995 (inception) and commenced operations on
that date. Originally, theglobe.com was an online community with registered
members and users in the United States and abroad. That product gave users the
freedom to personalize their online experiences by publishing their own content
and by interacting with others having similar interests. However, due to the
deterioration of the online advertising market, the Company was forced to
restructure and ceased the operations of its online community on August 15,
2001. The Company then sold most of its remaining online and offline properties.
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). On June
1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became Chief
Executive Officer and President of the Company, respectively.
On November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets and is now aggressively pursuing opportunities related to this
acquisition under the brand names, voiceglo, GloPhone and GloConnect. In
exchange for the assets, the Company issued warrants to acquire 1,750,000 shares
of its Common Stock and an additional 425,000 warrants as part of an earn-out
structure upon the attainment of certain performance targets. The earn-out
performance targets were not achieved and the 425,000 earn-out warrants expired
on December 31, 2003.
In February 2003, the Company committed to fund operating expenses of Tralliance
Corporation ("Tralliance"), a development stage Internet related business
venture, at the Company's discretion in the form of a loan. Approximately $1.0
million had been advanced to the venture as of December 31, 2004. We have the
option to acquire Tralliance in exchange for the issuance of an aggregate of
1,500,000 shares of our Common Stock. In November 2004, the Company announced
that Tralliance had entered into exclusive technical and commercial negotiations
with the Internet Corporation for Assigned Names and Numbers ("ICANN") to become
the registry for the ".travel" top-level domain. As of March 25, 2005,
Tralliance continues to negotiate with ICANN and has not yet been awarded the
right to become the registry operator for the ".travel" top-level domain.
On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a
company engaged in VoIP telephony services in exchange for 1,375,000 shares of
the Company's Common Stock and the issuance of warrants to acquire 500,000
shares of the Company's Common Stock. The transaction included an earn-out
arrangement whereby the former stockholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share upon the attainment of certain performance targets by
DPT over approximately a three year period following the date of acquisition.
The performance targets for the first 500,000 of these earn-out warrants were
not achieved and expired on March 31, 2004. An additional 750,000 of the
warrants will be forfeited effective March 31, 2005, as performance targets for
the second of the three year periods will not be achieved. Subject to certain
qualifications, the warrants will accelerate and be deemed earned in the event
of a "change in control" of the Company, as defined in the acquisition
documents.
DPT was a specialized international communications carrier providing VoIP
communications services to emerging countries. The DPT network had provided
"next generation" packet-based telephony and value added data services to
carriers and businesses in the United States and internationally. The Company
acquired all of the physical assets and intellectual property of DPT and
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originally planned to continue to operate the company as a subsidiary and engage
in the provision of VoIP services to other telephony businesses on a wholesale
transactional basis. In the first quarter of 2004, the Company decided to
suspend DPT's wholesale business and dedicate the DPT physical and intellectual
assets to its retail VoIP business. As a result, the Company wrote off the
goodwill associated with the purchase of DPT and has since employed these
physical assets in the build out of the retail VoIP network.
On September 1, 2004, the Company closed upon an Agreement and Plan of Merger
dated August 31, 2004, pursuant to which the Company acquired all of the issued
and outstanding shares of capital stock of SendTec, a direct response marketing
services and technology company. Pursuant to the terms of the Merger, in
consideration for the acquisition of SendTec, theglobe paid consideration
consisting of: (i) $6,000,000 in cash, excluding transaction costs, (ii) the
issuance of an aggregate of 17,500,024 shares of theglobe's Common Stock, (iii)
the issuance of an aggregate of 175,000 shares of Series H Automatically
Converting Preferred Stock (which as more fully described below, was
subsequently converted into approximately 17,500,500 shares of theglobe's Common
Stock), and (iv) the issuance of a subordinated promissory note in the amount of
$1 million. In addition, warrants to acquire shares of the Company's Common
Stock would be issued to SendTec shareholders when and if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005. The number of earn-out warrants would range from an aggregate
of 250,000 to 2,500,000 (if actual operating income exceeds the forecast by at
least 10%). If and to the extent the warrants are earned, the exercise price of
the performance warrants would be $0.27 per share and they will be exercisable
for a period of five years. The Company also issued an aggregate of
approximately 4,000,000 replacement options to acquire theglobe's Common Stock
for each of the issued and outstanding options to acquire SendTec shares held by
the former employees of SendTec. The subordinated promissory note bears interest
at the rate of 4% per annum and matures in one lump sum of principal and
interest on September 1, 2005.
Each share of the Series H Preferred Stock was automatically converted into 100
shares of theglobe's Common Stock on December 1, 2004, the effective date of the
amendment to the Company's certificate of incorporation increasing its
authorized shares of Common Stock from 200,000,000 shares to 500,000,000 shares.
OUR LINES OF BUSINESS
OUR VOIP TELEPHONY BUSINESS
The use of the Internet to provide voice communications services is becoming
more prevalent as new providers enter the market and the technology becomes more
accepted. According to Insight Research, VoIP-based services will grow from
$13.0 billion in 2002 to nearly $197.0 billion in 2007. VoIP technology
translates voice into data packets, transmits the packets over data networks and
reconverts them into voice at their destination. Unlike traditional telephone
networks, VoIP does not require dedicated circuits to complete telephone calls.
Instead, VoIP networks can be shared by multiple users for voice, data and video
simultaneously. These types of data networks are more efficient than dedicated
circuit networks because they are not restricted by "one-call, one-line"
limitations of traditional telephone networks. Accordingly, improved efficiency
creates cost savings that can be passed on to the consumer in the form of lower
rates.
Development of our VoIP Business. On November 14, 2002, we entered the VoIP
business by acquiring certain software assets from Brian Fowler. Today those
assets serve as the foundation of the products we offer and market under the
brand names, "voiceglo," "GloPhone" and "GloConnect."
On May 28, 2003, the Company acquired DPT, a company engaged in VoIP wholesale
telephony services. At the time we acquired DPT, it was a specialized
international communications carrier providing wholesale VoIP communications
services to emerging countries. In the first quarter of 2004, we decided to
suspend DPT's wholesale business and dedicate the DPT physical and intellectual
assets to our retail VoIP business.
During the third quarter of 2003, the Company launched its first suite of
consumer and business level VoIP services. The Company launched its
browser-based GloPhone product during the first quarter of 2004. These services
allow consumers and enterprises to communicate using VoIP technology for
dramatically reduced pricing compared to traditional telephony networks. The
services also offer traditional telephony features such as voicemail, caller ID,
call forwarding, and call waiting for no additional cost to the consumer, as
well as incremental services that are not currently supported by the public
switched telephone network ("PSTN") like the ability to use numbers remotely and
voicemail to email services.
Additionally, in November 2004, the Company announced a beta version of an
"instant messenger" or "IM" related application which it is marketing under the
name "GloConnect." The new GloConnect application utilizes the Company's
proprietary web and PC-based GloPhone platform and enables users to chat via
voice or text across multiple platforms using their preferred instant messenger
service, such as AOL's AIM, MSN's Messenger, Yahoo! Messenger and ICQ.
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The Company now offers VoIP services, on a retail basis, to individual consumers
and currently provides two primary types of services:
o Browser-Based - full functioning voice and messaging capabilities
that reside on the computer desktop and also include web-based
solutions. The only system requirements are a browser and an
Internet connection. The Company is seeking various patents to
protect its position. The browser-based products work on broadband,
dial-up and wi-fi Internet connections and can optionally be used
with a USB phone or other peripheral devices.
o Hardware-Based - a traditional phone line replacement service.
Requires a voiceglo adapter, a regular phone and an Internet
connection or can optionally be used with a USB phone directly over
a user's computer if desired. The service works on broadband,
dial-up and wi-fi Internet connections.
The browser-based products are marketed under the names "GloPhone" and
"GloConnect":
o Users acquire the products by downloading a simple "plug-in" to
their browsers. The download is a simple process and once it's
completed, the user's browser is enabled for voice and messaging
communications;
o Users choose their levels of service from a number of packages
offered as part of the download process and are enabled with a
working United States telephone number;
o GloPhone and GloConnect users speak and message free to other
GloPhone and GloConnect users;
o Both products are used by either utilizing the computer's microphone
and speakers or using an external device, such as a USB phone or
headset; and
o Users can utilize their services when traveling through the "Glo2Go"
web-based applications.
The hardware-based home and business replacement products are provided as
different "packages" under the "voiceglo" brand:
o The home and business replacement products are meant to "replace"
existing traditional phone service with voiceglo's service;
o The voiceglo adapter allows use of traditional telephone handsets
with the voiceglo service;
o All voiceglo packages include features such as caller ID, call
waiting, etc.; and
o voiceglo users speak free to other voiceglo users.
During the latter part of 2004, the Company discontinued offering its "voiceglo"
hardware-based home and business replacement products to new customers, and is
now only providing service to and supporting existing "voiceglo" customers. The
Company is currently developing and testing a number of new VoIP products and
features, which allow users to communicate via mobile phones, traditional land
line phones and/or computers. It plans to release a number of these new products
and features beginning in the second quarter of 2005.
Sales and Marketing. The Company is continuing to develop its 2005 product sales
and distribution strategy, which is presently focused on promoting its new
products and features to be released in 2005 in connection with its current
"GloPhone" and "GloConnect" products. The Company intends to market its services
through both direct and indirect retail sales channels, primarily through
Internet advertising and structured customer referral programs.
Development of our Network and Carrier Relationships; Equipment Suppliers. In
order to offer our services we have invested substantial time, capital and other
resources on the development of our VoIP network. Our VoIP network is comprised
of switching hardware and software, servers, billing and inventory systems, and
telecommunication carrier services. We own and operate VoIP equipment located in
leased data center facilities in Miami, New York, Atlanta and Boston, and
interconnect these switches utilizing a leased transport network through
numerous carrier agreements with third party providers. Through these carrier
relationships we are able to carry the traffic of our customers over the
Internet and interact with the PSTN. These carrier relationships also provide
the Company with a leased network for telephone numbers, or "footprint," in more
than 100 area codes in approximately 34 states. The network also provides for
both domestic and international call termination. We generally enter into one
year agreements with these data centers and carriers, with the terms of several
agreements extending to three to five years. The capacity of our VoIP network,
presently greatly exceeds the current level of customer demand and usage. The
Company has been successful in recently terminating substantially all of the
minimum usage requirement commitments for which it was previously obligated
under certain of its carrier agreements. Additionally, the Company is currently
negotiating to reduce the amounts payable during 2005 for other network data
center and carrier circuit interconnection services.
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Research and Development. Internet telephony is a technical service offering. As
a technology, basic VoIP service, although complex, is well-understood and has
been adapted by many companies that are selling basic services to consumers and
businesses worldwide. The Company, however, believes that in order to be
competitive and differentiate itself among its peers, it must continuously
upgrade its service offering. To that end, the Company is engaged in a program
of continuous development of its products. Since the initial launch of its VoIP
service, the Company has introduced a number of new features which have
increased the functionality of its products and has plans to introduce
additional new products and features in the future.
OUR COMPUTER GAMES BUSINESS
Computer Games Magazine and Now Playing Magazine
Computer Games Magazine is a consumer print magazine for gamers.
- As a leading consumer print publication for games, Computer Games magazine
boasts: a reputation for being a reliable, trusted, and engaging games
magazine; more editorial, tips and hints than most other similar
magazines; a knowledgeable editorial staff providing increased editorial
integrity and content; and, broad-based editorial coverage, appealing to a
wide audience of gamers.
- In Spring 2004, a new magazine, Now Playing began to be delivered within
Computer Games magazine and in March 2005, Now Playing began to be
distributed as a separate publication. Now Playing covers movies, DVD's,
television, music, games, comics and anime, and is designed to fulfill the
wider pop culture interests of our current readers and to attract a more
diverse group of advertisers; autos, television, telecommunications and
film to name a few.
Computer Games Online
Computer Games Online (www.cgonline.com) is the online counterpart to Computer
Games magazine. Computer Games Online is a source of free computer games news
and information for the sophisticated gamer, featuring news, reviews and
previews.
- Features of Computer Games Online include: game industry news; truthful,
concise reviews; first looks, tips and hints; multiple content links;
thousands of archived files; and easy access to game buying.
Now Playing Online
Now Playing Online (www.nowplayingmag.com) is the online counterpart for Now
Playing magazine. Now Playing Online provides free, up-to-date entertainment
news and information for the pop culture consumer.
- Features of Now Playing Online include: industry news in music, movies and
games; reviews of concerts, movies and DVDs; and exclusive video
interviews by Now Playing writers done with well-known Hollywood stars.
Chips & Bits
Chips & Bits (www.chipsbits.com) is a games distribution business that attracts
customers in the United States and abroad. Chips & Bits covers all the major
game platforms available, including Macintosh, Window-based PCs, Sony
PlayStation, Sony PlayStation2, Microsoft's Xbox, Nintendo 64, Nintendo's
GameCube, Nintendo's Game Boy, and Sega Dreamcast, among others.
Advertising. We continue to attract major advertisers to our Computer Games
print magazine, which is a widely respected consumer print magazine for gamers.
During the years ended December 31, 2004 and 2003, no single advertiser
accounted for more than 10% of total net revenue. For the twelve months ended
December 31, 2004, 42 clients advertised in our Computer Games magazine.
Following a series of cost reduction measures and restructuring, we currently
have an internal advertising sales staff of two account executives and an
advertising director, all of whom are dedicated to selling advertising space in
our Computer Games print magazine and online. Although these professionals focus
on developing long-term strategic relationships with clients as they sell
advertisements in our Computer Games print magazine, most of our actual
advertising contracts are for periods of one to three months.
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OUR MARKETING SERVICES BUSINESS
On September 1, 2004, the Company acquired SendTec, a direct response marketing
services and technology company. SendTec provides clients a complete offering of
direct marketing products and services to help their clients market their
products both on the Internet ("online") and through traditional media channels
such as television, radio and print advertising ("offline"). By utilizing
SendTec's marketing products and services, SendTec's clients seek to increase
the effectiveness and the return on investment of their advertising campaigns.
SendTec's online and offline direct marketing products and services include
strategic campaign development, creative development, creative production and
post-production, media buying and tracking, campaign management, campaign
analysis and optimization, technology systems implementation and integration for
campaign tracking and many other agency type services. In addition, SendTec has
a suite of technology solutions, Results, Optimization, Yield ("ROY"), SendTec
Optimization and Reporting ("SOAR") and iFactz, which enable it to deliver,
track, and optimize direct marketing campaigns across multiple distribution
channels, including television, radio, direct mail, print and the Internet. The
combination of SendTec's direct marketing capabilities, technology and
experience in both online and offline marketing, enable its clients to optimize
their advertising campaigns across a broad spectrum of advertising mediums.
SendTec is organized into two primary product line divisions, the Direct Net
Advertising Division and the Creative South Division. Additionally, its
proprietary iFactz technology provides software tracking solutions that benefit
both the Direct Net Advertising and Creative South businesses.
DirectNet Advertising (DNA)
DNA is the digital marketing services division of SendTec. DNA offers a variety
of products and services that enable online advertisers and publishers to
generate performance based results through online marketing channels such as,
web advertising, e-commerce up-sells, affiliate marketing, search marketing and
email marketing. DNA's broad range of products and services include creative
strategy and execution, strategic offer development, production planning, media
planning, media buying and search optimization. Through these products and
services DNA's clients can address all aspects of the marketing continuum, from
strategic planning through execution, including results management and campaign
refinements. DNA's proprietary technologies, including its ROY online tracking
software, allow advertisers and publishers to track, report and optimize online
campaign activity all the way to the "conversion level" (which means a
consumer's actual response to the offer, as for example, by making a purchase).
DNA's knowledge of digital advertising strategies, targeting methods, media
placements and creative executions combined with its innovative and dependable
technology help DNA's clients to improve their advertising performance and
return on investment.
Creative South
Creative South is the creative strategy, production and media buying division of
SendTec. Creative South services both online and offline clients of SendTec, and
its production capabilities cover a range of distribution media including
television, radio, direct mail, print and digital. Creative South has developed,
produced and distributed numerous direct response television campaigns for
clients and has received national awards for its creative and production work.
Creative South maintains in-house two state-of-the-art non-linear digital video
editing suites. Creative South's production department includes experienced
directors, producers and editors on staff. Creative South's media buying
department provides a full range of services including strategic media planning,
media trafficking, media buying, media tracking and post-buy media and financial
analysis. Creative South's media buying department has executed media buying
assignments for all types of television (broadcast and cable), radio and print
formats and Creative South's long time relationships with its media partners
have enabled SendTec to provide its clients competitive media prices.
iFactz
iFactz is SendTec's Application Service Provider or "ASP" technology that tracks
and reports the online responses that are generated from offline direct response
advertising. Historically, advertisers have lacked the ability to accurately
track which offline advertising yields results online and thus advertisers have
been unable to properly optimize their media buys. iFactz intelligently tracks
and reports web activity from all offline advertising - TV (even national
cable), radio, print and direct mail - in real time. iFactz's Intelligent
Sourcing(TM) is a patent-pending media technology that informs the user where
online customers come from, and what corresponding activity they produced on the
user's website. The iFactz patent was filed in November of 2001 and SendTec
expects the patent application for iFactz to be reviewed during 2005. iFactz's
ASP design enables advertisers to implement and access the technology in a
timely and cost efficient manner, as there are no cumbersome, time-consuming and
costly implementation expenses and lead times. iFactz is licensed to clients
both as a stand alone technology solution and as part of an overall campaign
offering.
COMPETITION
VOIP TELEPHONY BUSINESS. The telecommunications industry has experienced a great
deal of instability during the past several years. During the 1990s, forecasts
of very high levels of future demand brought a significant number of new
entrants and new capital investments into the industry. New global carriers were
joined by many of the largest traditional carriers and built large global or
regional networks to compete with the global wholesalers. However, in the last
several years many of the new global carriers and many industry participants
have either gone through bankruptcy or no longer exist. The networks were built
primarily to meet the expected explosion in bandwidth demand from data, with
specific emphasis upon Internet applications. Those forecasts have not
9
materialized, telecommunications capacity now far exceeds actual demand, and the
resulting marketplace is characterized by fierce price competition as
traditional and next generation carriers compete to secure market share.
Resulting lower prices have eroded margins and have kept many carriers from
attaining positive cash flow from operations.
During the past several years, a number of companies have introduced services
that make Internet telephony or voice services over the Internet available to
businesses and consumers. All major telecommunications companies, including
entities like AT&T, Verizon, Sprint and MCI, as well as iBasis, Net2Phone and
deltathree, compete or can compete directly with us. A number of cable operators
have also begun to offer VoIP telephony services via cable modems which provide
access to the Internet.
Our competitors can be divided into domestic competitors and international
competitors. The international market is highly localized. In markets where
telecommunications have been fully deregulated, the competition continues to
increase. In newly deregulated markets even new entrants to the VoIP space can
rapidly capture significant market share. Competitors in these markets include
both government-owned and incumbent phone companies, as well as emerging
competitive carriers. The principle competitive factors in this marketplace
include: price, quality of service, distribution, customer service, reliability,
network capacity, and brand recognition. The long distance market in the United
States is highly competitive. There are numerous competitors in the pure play
VoIP space and we expect to face continuing competition from these existing, as
well as new, competitors. The principal competitive factors in the marketplace
include those identified above, as well as enhanced communications services. Our
competitors include VoIP services companies such as Net2Phone, Skype, Vonage,
Go2Call and deltathree.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
brand recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies which may hinder our ability to market our voice
services.
COMPUTER GAMES BUSINESS. Competition among games print magazines is high. We
compete for advertising and circulation revenues principally with publishers of
other technology and games magazines with similar editorial content as our
magazine. The technology magazine industry has traditionally been dominated by a
small number of large publishers. We believe that we compete with other
technology and games publications based on the nature and quality of our
magazines' editorial content and the attractive demographics of our readers.
The computer games marketplace has become increasingly competitive due to
acquisitions, strategic partnerships and the continued consolidation of a
previously fragmented industry. In addition, an increasing number of major
retailers have increased the selection of video games offered by their
traditional "bricks and mortar" locations and their online commerce sites,
resulting in increased competition.
MARKETING SERVICES BUSINESS. The direct response advertising market is highly
competitive. We compete with a variety of large and small advertising agencies
but our primary competitors are interactive marketing companies such as
ValueClick, aQuantive, Advertising.com and Performics. Currently, the online
performance based advertising market in which we compete is still evolving and
it is expected that certain government regulations may be implemented to better
define acceptable practices and methodologies.
Many current and potential competitors have advantages over us, such as longer
operating histories, greater name recognition, larger client bases, greater
access to advertising space on high-traffic websites and significantly greater
financial, technical and marketing resources. In addition, existing or future
competitors may develop or offer services that provide significant performance,
price, creative or other advantages over those offered by us.
Current and potential competitors may establish cooperative relationships among
themselves or with third parties to increase the ability of their products and
services to address the needs of our clients and prospective clients. As a
result it is possible that new competitors may emerge and rapidly acquire
significant market share. If we fail to compete effectively against other
advertising service companies, we could lose clients or advertising inventory
and our revenue could decline. We expect competition to continue to increase
because there are no significant barriers to entry.
Our Results, Optimization, Yield ("ROY") online tracking software provides the
Company with a unique competitive advantage by enabling us to optimize campaigns
and by enabling advertising clients and distribution partners to access
real-time conversion information. Additionally, our iFactz software provides an
excellent complementary platform for our ROY tracking software and enables us to
offer a complete technology tracking solution for online and offline direct
response marketing. We believe that iFactz currently provides the Company with a
significant competitive advantage in its marketing services business and we are
not aware of any similar technologies available in the market today.
Historically, a high percentage of SendTec's marketing services revenue has been
generated from a few major customers. We believe that a limited number of
clients will continue to be the source of a substantial portion of our marketing
services revenue for the foreseeable future. Key factors in maintaining our
relationships with these clients include our performance on individual
campaigns, the strength of our professional reputation and the relationships of
our key executives with client personnel. To the extent that our performance
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does not meet client expectations, or our reputation or relationships with one
or more major clients are impaired, our marketing services revenue could decline
and its operating results could be adversely affected.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our websites and underlying technology as
proprietary. In addition, we have developed in our VoIP business and direct
response marketing business certain technologies which we believe are
proprietary. Further, we are investigating other opportunities and are seeking
to develop additional proprietary technology. We attempt to protect these assets
by relying on intellectual property laws. We also generally enter into
confidentiality agreements with our employees and consultants and in connection
with our license agreements with third parties. We also seek to control access
to and distribution of our technology, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. We pursue the
registration of our trademarks in the United States and internationally. We are
also currently pursuing patent protection for certain of our VoIP technologies,
including certain technology related to our linkage of a telephone number to an
IP address and our browser to telephone interface, and for our direct response
marketing business' iFactz Intelligent Sourcing(TM) media technology.
Effective trademark, service mark, copyright, patent and trade secret protection
may not be available in every country in which our services are made available
through the Internet. Policing unauthorized use of our proprietary information
is difficult. Existing or future trademarks or service marks applied for or
registered by other parties and which are similar to ours may prevent us from
expanding the use of our trademarks and service marks into other areas.
Enforcing our patent rights could result in costly litigation. Our patent
applications could be rejected or any patents granted could be invalidated in
litigation. Should this happen, we may lose a significant competitive advantage.
Additionally, our competitors or others could be awarded patents on technologies
and business processes that could require us to significantly alter our
technology, change our business processes or pay substantial license and royalty
fees. (See "Risk Factors-We rely on intellectual property and proprietary
rights.")
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
IN GENERAL. We are subject to laws and regulations that are applicable to
various Internet activities. There are an increasing number of federal, state,
local and foreign laws and regulations pertaining to the Internet and
telecommunications, including Voice over Internet Protocol ("VoIP"). In
addition, a number of federal, state, local and foreign legislative and
regulatory proposals are under consideration. Laws or regulations have been and
may continue to 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, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online
payment services, broadband residential Internet access, and the characteristics
and quality of products and services.
Changes in tax laws relating to electronic commerce could materially affect our
business, prospects and financial condition. One or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction companies that engage in electronic commerce. A successful
assertion by one or more states or foreign countries that we should collect
sales or other taxes on services could result in substantial tax liabilities for
past sales, decrease our ability to compete with traditional telephony, and
otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to
electronic commerce. However, a number of states, as well as the U.S. Congress,
have been considering various initiatives that could limit or supersede the
Supreme Court's position regarding sales and use taxes on electronic commerce.
If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect sales and use taxes. The imposition by state and local
governments of various taxes upon electronic commerce could create
administrative burdens for us and could adversely affect our VoIP business
operations, and ultimately our financial condition, operating results and future
prospects.
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. It is not clear how existing laws governing issues such as property
ownership, sales and other taxes, libel, and personal privacy apply to the
Internet and electronic commerce. 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.
New laws and regulations may increase our costs of compliance and doing
business, decrease the growth in Internet use, decrease the demand for our
services or otherwise have a material adverse effect on our business.
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VOIP REGULATION. The use of the Internet and private IP networks to provide
voice services over the Internet is a relatively recent market development.
Although the provision of such services is currently permitted by United States
federal law and largely unregulated within the United States, several foreign
governments have adopted laws and/or regulations that could restrict or prohibit
the provision of voice communications services over the Internet or private IP
networks.
FEDERAL COMMUNICATIONS COMMISSION REGULATION. In the United States, the Federal
Communications Commission (the "FCC") has so far declined to make a general
conclusion that all forms of VoIP services constitute telecommunications
services (rather than information services). The FCC's Internet Policy Working
Group was established to assist the FCC in identifying, evaluating, and
addressing policy issues that will arise as traditional telecommunications
services migrate to Internet based platforms. The FCC has held a forum on VoIP
to study and discuss issues including regulatory classification and has held two
solutions summits regarding VoIP: the first solutions summit focused on VoIP
solutions for E911 issues and the second solutions summit focused on VoIP
solutions for disability access issues.
On March 10, 2004, the FCC released its IP-enabled Services Notice of Proposed
Rulemaking which included guidelines and questions upon which it is seeking
public comment to determine what regulation, if any, will govern companies that
provide VoIP services. Specifically, the FCC has expressed an intention to
further examine the question of whether certain forms of phone-to-phone VoIP
services are information services or telecommunications services. The two
classifications are treated differently in several respects, with certain
information services being regulated to a lesser degree than telecommunications
services. The FCC has noted that certain forms of phone-to-phone VoIP services
bear many of the same characteristics as more traditional voice
telecommunications services and lack the characteristics that would render them
information services. The FCC has indicated that the mechanisms for contributing
to the Universal Service Fund, issues as to applicability of access charges and
other matters will be considered in that context.
On March 10, 2004, (on the same day that the FCC released its IP-Enabled
Services Notice of Proposed Rulemaking), in a response to a petition by
Pulver.com which sought a declaration that Pulver.com's Free World Dialup
("FWD") is neither telecommunications nor a telecommunications service, the FCC
ruled that Pulver.com's FWD offering is an unregulated information service
subject to the FCC's jurisdiction. The ruling specifically does not address
whether traditional phone regulations might apply to VoIP services in which end
users interconnect with the traditional telephone system.
In April 2004, in response to a petition by AT&T which sought a declaration to
preclude local exchange carriers from imposing access charges on certain AT&T
"phone-to-phone" IP telephony services the FCC ruled that the service that AT&T
described is a telecommunications service upon which interstate access charges
may be assessed. However, the FCC emphasized that its decision is limited to the
type of service described by AT&T in that proceeding, i.e., an interexchange
service that: (1) uses ordinary customer premises equipment (CPE) with no
enhanced functionality; (2) originates and terminates on the public switched
telephone network (PSTN); and (3) undergoes no net protocol conversion and
provides no enhanced functionality to end users due to the provider's use of IP
technology.
In November 2004, the FCC issued a Memorandum Opinion and Order ("MO&O") which
preempted an order of the Minnesota Public Utilities Commission applying its
traditional telephone company regulations to Vonage's DigitalVoice service,
which provides VoIP service and other communications capabilities. The FCC
issued this MO&O in response to a petition that Vonage filed with the FCC. The
FCC concluded that the DigitalVoice service cannot be separated into interstate
and intrastate communications for compliance with Minnesota's requirements
without negating valid federal policies and rules. In so doing, the FCC
clarified that it, not the state commissions, has the responsibility and
obligation to decide whether certain regulations apply to DigitalVoice and other
IP-enabled services having the same capabilities. The FCC stated that for such
services, comparable regulations of other states must likewise yield to
important federal objectives. However, in this MO&O, the FCC did not express an
opinion on the applicability to Vonage of Minnesota's general laws governing
entities conducting business within Minnesota, such as laws concerning taxation;
fraud; general commercial dealings; and marketing, advertising, and other
business practices. The FCC stated that it expects that as it moves forward in
establishing policies and rules for DigitalVoice and other IP-enabled services,
states will continue to play their vital role in protecting consumers from
fraud, enforcing fair business practices, for example, in advertising and
billing, and generally responding to consumer inquiries and complaints.
At the same time as Vonage filed its petition with the FCC, it filed a lawsuit
in the district court in Minnesota against the Minnesota Public Utilities
Commission ("Minnesota Commission") to challenge the Minnesota Commission's
order asserting regulatory jurisdiction over Vonage and ordering Vonage to
comply with all state statutes and regulations relating to the offering of
telephone service in Minnesota. In October 2003, the district court entered a
permanent injunction in favor of Vonage. In January 2004, the court denied a
motion by the Minnesota Commission for reconsideration, and an appeal to the
U.S. Court of Appeals for the Eighth Circuit is pending. However, other states
are not bound by this decision and may reject the VoIP operator's position and
may seek to subject us to regulation.
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If the FCC or any state determines to regulate VoIP, they may impose surcharges,
taxes, licensing or additional regulations upon providers of VoIP. These
surcharges could include access charges payable to local exchange carriers to
carry and terminate traffic, contributions to the Universal Service Fund or
other charges. In August 2004, the FCC issued a Notice of Proposed Rulemaking in
which it tentatively concluded that providers of VoIP services that the
Department of Justice, Federal Bureau of Investigation, and Drug Enforcement
Agency (collectively, "Law Enforcement") characterize as "managed" or "mediated"
are subject to the Communications Assistance for Law Enforcement Act ("CALEA")
as telecommunications carriers under the "Substantial Replacement Provision."
The Substantial Replacement Provision describes the unique definition of
"telecommunications carrier" in CALEA to include entities that provide "a
replacement for a substantial portion of the local telephone exchange service."
Law Enforcement describes managed or mediated VoIP services as those services
that offer voice communications calling capability whereby the VoIP provider
acts as a mediator to manage the communication between its end points and to
provide call set up, connection, termination, and party identification features,
often generating or modifying dialing, signaling, switching, addressing or
routing functions for the user. Law Enforcement distinguishes managed
communications from "non-managed" or "peer-to-peer" communications, which
involve disintermediated communications that are set up and managed by the end
user via its customer premises equipment or personal computer. In these
non-managed, or disintermediated, communications, the VoIP provider has minimal
or no involvement in the flow of packets during the communication, serving
instead primarily as a directory that provides users' Internet web addresses to
facilitate peer-to-peer communications. In this proceeding, the FCC has
requested comment on the appropriateness of this distinction between managed and
non-managed VoIP communications for purposes of CALEA.
Regulations requiring compliance with CALEA, or provision of enhanced 911
services could also place a significant financial burden on us. The imposition
of any such additional fees, charges, taxes, licenses and regulations on VoIP
services could materially increase our costs and may reduce or eliminate the
competitive pricing advantage we seek to enjoy.
STATE REGULATION. Although VoIP services are presently largely unregulated by
the state governments, such state governments and their regulatory authorities
may assert jurisdiction over the provision of intrastate IP communications
services where they believe that their telecommunications regulations are broad
enough to cover regulation of IP services. A number of state regulators have
recently taken the position that VoIP providers are telecommunications providers
and must register as such within their states. VoIP operators have resisted such
registration on the position that VoIP is not, and should not be, subject to
such regulations because VoIP is an information service, not a telecommunication
service and because VoIP is interstate in nature, not intrastate. Various state
regulatory authorities have initiated proceedings to examine the regulatory
status of Internet telephony services, and in several cases rulings have been
obtained to the effect that the use of the Internet to provide certain
intrastate services does not exempt an entity from paying intrastate access
charges in the jurisdictions in question. However, in the Vonage MO&O, the FCC
found that the characteristics of Vonage's DigitalVoice service preclude any
practical identification of, and separation into, interstate and intrastate
communications for purposes of effectuating a dual federal/state regulatory
scheme. Therefore, because it is a jurisdictionally mixed service, the FCC has
exclusive jurisdiction under the Act to determine the policies and rules, if
any, that govern the interstate aspect of DigitalVoice service. In fact, the FCC
stated that multiple state regulatory regimes would likely violate the Commerce
Clause because of the unavoidable effect that regulation on an intrastate
component would have on interstate use of the service. As state governments,
courts, and regulatory authorities continue to examine the regulatory status of
Internet telephony services, they could render decisions or adopt regulations
affecting providers of VoIP or requiring such providers to pay intrastate access
charges or to make contributions to universal service funding. Should the
Commission determine to regulate IP services, states may decide to follow the
FCC's lead and impose additional obligations as well.
OTHER REGULATION. The regulatory treatment of IP communications outside the
United States varies significantly from country to country. Some countries
currently impose little or no regulation on Internet telephony services, as in
the United States. Other countries, including those in which the governments
prohibit or limit competition for traditional voice telephony services,
generally do not permit Internet telephony services or strictly limit the terms
under which those services may be provided. Still other countries regulate
Internet telephony services like traditional voice telephony services, requiring
Internet telephony companies to make various telecommunications service
contributions and pay other taxes. We may incur substantial liabilities for
expenses necessary to comply with these laws and regulations or penalties for
any failure to comply. Compliance with these laws and regulations may also cause
us to have to change or limit our business practices in a manner adverse to our
business.
More aggressive regulation of Internet telephony providers and VoIP services may
adversely affect our VoIP business operations, and ultimately our financial
condition, operating results and future prospects.
CERTAIN OTHER REGULATION AFFECTING THE INTERNET. Today, there are still
relatively few laws specifically directed towards online services. However, due
to the increasing popularity and use of the Internet and online services, many
laws and regulations relating to the Internet are being debated at all levels of
governments around the world and it is possible that such laws and regulations
will be adopted. It is not clear how existing laws governing issues such as
property ownership, copyrights and other intellectual property issues, taxation,
libel and defamation, obscenity, and personal privacy apply to online
businesses. The vast majority of these laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. In the
United States, Congress has recently adopted legislation that regulates certain
aspects of the Internet, including online content, user privacy and taxation. In
addition, Congress and other federal entities are considering other legislative
and regulatory proposals that would further regulate the Internet. Congress has,
for example, considered legislation on a wide range of issues including Internet
spamming, database privacy, gambling, pornography and child protection, Internet
fraud, privacy and digital signatures. For example, Congress recently passed and
13
the President signed into law several proposals that have been made at the U.S.
state and local level that would impose additional taxes on the sale of goods
and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce, and could diminish our
opportunity to derive financial benefit from our activities. For example, in
December 2004, the U.S. federal government enacted the Internet Tax
Nondiscrimination Act (the "ITNA"). While the ITNA generally extends through
November 2007 the moratorium on taxes on Internet access and multiple and
discriminatory taxes on electronic commerce, it does not affect the imposition
of tax on a charge for voice or similar service utilizing Internet Protocol or
any successor protocol. In addition, the ITNA does not prohibit federal, state,
or local authorities from collecting taxes on our income or from collecting
taxes that are due under existing tax rules. Various states have adopted and are
considering Internet-related legislation. Increased U.S. regulation of the
Internet, including Internet tracking technologies, may slow its growth,
particularly if other governments follow suit, which may negatively impact the
cost of doing business over the Internet and materially adversely affect our
business, financial condition, results of operations and future prospects.
Legislation has also been proposed that would clarify the regulatory status of
VoIP service. The Company has no way of knowing whether legislation will pass or
what form it might take. Domain names have been the subject of significant
trademark litigation in the United States and internationally. The current
system for registering, allocating and managing domain names has been the
subject of litigation and may be altered in the future. The regulation of domain
names in the United States and in foreign countries may change. Regulatory
bodies are anticipated to establish additional top-level domains and may appoint
additional domain name registrars or modify the requirements for holding domain
names, any or all of which may dilute the strength of our names. We may not
acquire or maintain our domain names in all of the countries in which our
websites may be accessed, or for any or all of the top-level domain names that
may be introduced.
Internationally, the European Union has also enacted several directives relating
to the Internet. The European Union has, for example, adopted a directive that
imposes restrictions on the collection and use of personal data. Under the
directive, citizens of the European Union are guaranteed rights to access their
data, rights to know where the data originated, rights to have inaccurate data
rectified, rights to recourse in the event of unlawful processing and rights to
withhold permission to use their data for direct marketing. The directive could,
among other things, affect U.S. companies that collect or transmit information
over the Internet from individuals in European Union member states, and will
impose restrictions that are more stringent than current Internet privacy
standards in the U.S. In particular, companies with offices located in European
Union countries will not be allowed to send personal information to countries
that do not maintain adequate standards of privacy. Compliance with these laws
is both necessary and difficult. Failure to comply could subject us to lawsuits,
fines, criminal penalties, statutory damages, adverse publicity, and other
losses that could harm our business. Changes to existing laws or the passage of
new laws intended to address these privacy and data protection and retention
issues could directly affect the way we do business or could create uncertainty
on the Internet. This could reduce demand for our services, increase the cost of
doing business as a result of litigation costs or increased service or delivery
costs, or otherwise harm our business. Other laws that reference the Internet,
such as the European Union's Directive on Distance Selling and Electronic
Commerce has begun to be interpreted by the courts and implemented by the
European Union member states, but their applicability and scope remain somewhat
uncertain. Regulatory agencies or courts may claim or hold that we or our users
are either subject to licensure or prohibited from conducting our business in
their jurisdiction, either with respect to our services in general, or with
respect to certain categories or items of our services. In addition, because our
services are accessible worldwide, and we facilitate VoIP telephony services to
users worldwide, foreign jurisdictions may claim that we are required to comply
with their laws. For example, the Australian high court has ruled that a U.S.
website in certain circumstances must comply with Australian laws regarding
libel. As we expand our international activities, we become obligated to comply
with the laws of the countries in which we operate. Laws regulating Internet
companies outside of the U.S. may be less favorable than those in the U.S.,
giving greater rights to consumers, content owners, and users. Compliance may be
more costly or may require us to change our business practices or restrict our
service offerings relative to those in the U.S. Our failure to comply with
foreign laws could subject us to penalties ranging from criminal prosecution to
bans on our services.
EMPLOYEES
As of March 15, 2005, we had approximately 118 active full-time employees. Our
future success depends, in part, on our ability to continue to attract, retain
and motivate highly qualified technical and management personnel. Competition
for these persons is intense. From time to time, we also employ independent
contractors to support our network operations, research and development,
marketing, sales and support and administrative organizations. Our employees are
not represented by any collective bargaining unit and we have never experienced
a work stoppage. We believe that our relations with our employees are good.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). You may read a
copy of any document we file without charge at the public reference facility
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a Website at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding registrants that file electronically with the SEC.
14
ITEM 2. PROPERTIES
Our corporate headquarters is located in Fort Lauderdale, Florida, where we
lease approximately 26,000 square feet of office space. 15,000 square feet of
this space is sublet from a company which is controlled by our Chairman and the
remaining 11,000 square feet is sublet from an unaffiliated company. We maintain
approximately 9,500 square feet of office space in two separate locations in
Vermont in connection with the operations of our Computer Games magazine and
Chips & Bits, Inc. We own one property and the other is a lease which expires in
September 2005. In June of 2004, we signed a two year lease for approximately
5,000 square feet of warehouse space in Pompano Beach, Florida. Additionally, we
have obtained colocation space in secure telecommunications data centers located
in Florida, Georgia, Massachusetts and New York which is used to house certain
Internet routing and computer equipment. Our subsidiary, SendTec, Inc., leases
approximately 14,500 square feet of office space in St. Petersburg, Florida and
approximately 300 square feet of office space in New York City. The St.
Petersburg lease commenced in April of 2004 and expires in March of 2010. The
New York lease commenced in July of 2004 and expired in February of 2005. We are
currently occupying temporary space in New York on a month-to-month basis and
are planning to lease new space in New York.
ITEM 3. LEGAL PROCEEDINGS
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 (the
"Individual Defendants"), 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 the Company's November 23, 1998 initial public offering and its
May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is now
the operative complaint, was filed in the Southern District of New York on April
19, 2002. The action seeks damages in an unspecified amount. On February 19,
2003, a motion to dismiss all claims against the Company was denied by the
Court. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions and noted that the decision is
intended to provide strong guidance to all parties regarding class certification
in the remaining cases. Plaintiffs have not yet moved to certify a class in
theglobe.com case.
The Company has approved a settlement agreement and related agreements which set
forth the terms of a settlement between the Company, the Individual Defendants,
the plaintiff class and the vast majority of the other approximately 300 issuer
defendants. Among other provisions, the settlement provides for a release of the
Company and the Individual Defendants for the conduct alleged in the action to
be wrongful. The Company would agree to undertake certain responsibilities,
including agreeing to assign away, not assert, or release certain potential
claims the Company may have against its underwriters. The settlement agreement
also provides a guaranteed recovery of $1 billion to plaintiffs for the cases
relating to all of the approximately 300 issuers. To the extent that the
underwriter defendants settle all of the cases for at least $1 billion, no
payment will be required under the issuers' settlement agreement. To the extent
that the underwriter defendants settle for less than $1 billion, the issuers are
required to make up the difference. It is anticipated that any potential
financial obligation of the Company to plaintiffs pursuant to the terms of the
settlement agreement and related agreements will be covered by existing
insurance. The Company currently is not aware of any material limitations on the
expected recovery of any potential financial obligation to plaintiffs from its
insurance carriers. Its carriers are solvent, and the Company is not aware of
any uncertainties as to the legal sufficiency of an insurance claim with respect
to any recovery by plaintiffs. Therefore, we do not expect that the settlement
will involve any payment by the Company. If material limitations on the expected
recovery of any potential financial obligation to the plaintiffs from the
Company's insurance carriers should arise, the Company's maximum financial
obligation to plaintiffs pursuant to the settlement agreement would be less than
$3.4 million. On February 15, 2005, the court granted preliminary approval of
the settlement agreement, subject to certain modifications consistent with its
opinion. Judge Scheindlin ruled that the issuer defendants and the plaintiffs
must submit a revised settlement agreement which provides for a mutual bar of
all contribution claims by the settling and non-settling parties and does not
bar the parties from pursuing other claims. There will be a conference with
Judge Scheindlin on April 4, 2005 to discuss the status of the revised
settlement agreement. The underwriter defendants will have an opportunity to
object to the revised settlement agreement. There is no assurance that the
parties to the settlement will be able to agree to a revised settlement
agreement consistent with the court's opinion, or that the court will grant
final approval to the settlement to the extent the parties reach agreement. If
the settlement agreement is not approved and the Company is found liable, we are
unable to estimate or predict the potential damages that might be awarded,
whether such damages would be greater than the Company's insurance coverage, and
whether such damages would have a material impact on our results of operations
or financial condition in any future period.
15
On December 16, 2004, the Company, together with its wholly-owned subsidiary,
voiceglo Holdings, Inc., were named as defendants in NeoPets, Inc. v. voiceglo
Holdings, Inc. and theglobe.com, inc., a lawsuit filed in Los Angeles Superior
Court. The Company and its subsidiary, were parties to an agreement dated May 6,
2004, with NeoPets, Inc. ("NeoPets"), whereby NeoPets agreed to host a voiceglo
advertising feature on its website for the purpose of generating registered
activations of the voiceglo product featured. Consideration to NeoPets was to
include specified commissions, including cash payments based on registered
activations, as defined, as well as the issuance of Common Stock of theglobe.com
and additional cash payments, upon the attainment of certain performance
criteria. NeoPets' complaint asserts claims for breach of contract and specific
performance and seeks payment of approximately $2.5 million in cash, plus
interest, as well as the issuance of 1,000,000 shares of theglobe.com Common
Stock. On February 22, 2005, the Company and voiceglo answered the complaint and
asserted cross-claims against NeoPets for fraud and deceit, rescission, breach
of contract, breach of the implied covenant of good faith and fair dealing and
set-off. NeoPets has not yet answered the cross-claims and discovery has not yet
begun.
Through December 31, 2004, the Company has recorded amounts due for commissions
pursuant to the terms of the agreement totaling approximately $246,000. The
Company believes that this is the amount NeoPets has earned relating to services
performed and intends to vigorously defend its position. It is too early in the
process to determine the likelihood of an unfavorable outcome, however, an
unfavorable outcome could result in a liability in excess of the amount
recorded.
The Company is currently a party to certain other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. The Company currently believes that the ultimate outcome of
these other proceedings, individually and in the aggregate, will not have a
material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of litigation, should the outcome of these actions be unfavorable,
the Company's business, financial condition, results of operations and cash
flows could be materially and adversely affected.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2004 Annual Meeting of Shareholders on November 30, 2004.
At the Annual Meeting, Edward A. Cespedes, Michael S. Egan, Robin
Segaul-Lebowitz and Paul Soltoff were elected as Directors. All directors serve
for a term of one year or until their successors are duly elected and qualified.
In addition, shareholders voted to approve an amendment to the certificate of
incorporation of the Company to increase the total authorized shares of Common
Stock from 200,000,000 shares to 500,000,000 shares. Shareholders also voted to
approve the Company's 2000 Stock Option Plan as amended and restated as of
December 1, 2004.
The tabulation of the vote for the foregoing matters is set forth below:
A. Election of Directors For Against Withheld*
----------- --------- ----------
1. Edward A. Cespedes 121,467,511 -- 455,025
2. Michael S. Egan 121,455,002 -- 467,534
3. Robin Segaul-Lebowitz 121,467,032 -- 455,504
4. Paul Soltoff 121,467,932 -- 454,604
B. Proposal to Increase Authorized Shares
For Against Withheld*
----------- --------- ----------
104,183,467 1,028,541 2,360,628
C. Proposal to Amend and Restate Stock Option Plan
For Against Withheld*
----------- --------- ----------
91,523,708 765,517 397,787
-------------------
*Includes broker non-votes and abstentions
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The shares of our Common Stock trade in the over-the-counter market on what is
commonly referred to as the electronic bulletin board, under the symbol
"TGLO.OB" The following table sets forth the range of high and low bid prices of
our Common Stock for the periods indicated as reported by the over-the-counter
market (the electronic bulletin board). The quotations below reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions:
2004 2003
------------- ---------------
High Low High Low
----- ----- ----- -----
Fourth Quarter $0.56 $0.36 $2.12 $1.30
Third Quarter $0.65 $0.24 $1.97 $1.12
Second Quarter $0.96 $0.28 $2.56 $0.13
First Quarter $1.42 $0.83 $0.20 $0.06
The market price of our Common Stock is highly volatile and fluctuates in
response to a wide variety of factors. (See "Risk Factors-Our Stock Price is
Volatile and May Decline.")
HOLDERS OF COMMON STOCK
We had approximately 717 holders of record of Common Stock as March 10, 2005.
This does not reflect persons or entities that hold Common Stock in nominee or
"street" name through various brokerage firms.
DIVIDENDS
We have not paid any cash dividends on our Common Stock since our inception and
do not intend to pay dividends in the foreseeable future. Our board of directors
will determine if we pay any future dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2004
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
Plan outstanding options, options, warrants and future issuance under equity
Category warrants and rights rights compensation plans
----------------------- ---------------------------- -------------------------- -----------------------------
Equity Compensation 4,729,020 $ 1.40 8,063,897
plans approved by
security holders
Equity Compensation 11,255,165 $ 0.14 2,139,835
plans not approved by
security holders
Total 15,984,185 $ 0.51 10,203,732
Equity compensation plans not approved by security holders consist of the
following:
o 200,000 shares of Common Stock of theglobe.com, inc., issued to
Charles Peck pursuant to the Non-Qualified Stock Option Agreement
dated June 1, 2002 at an exercise price of $0.035 per share. These
stock options vested immediately and have a life of ten years from
date of grant.
18
o 1,750,000 shares of Common Stock of theglobe.com, inc., issued to
Edward A. Cespedes pursuant to the Non-Qualified Stock Option
Agreement dated August 12, 2002 at an exercise price of $0.02 per
share. These stock options vested immediately and have a life of ten
years from date of grant.
o 2,500,000 shares of Common Stock of theglobe.com, inc., issued to
Michael S. Egan pursuant to the Non-Qualified Stock Option Agreement
dated August 12, 2002 at an exercise price of $0.02 per share. These
stock options vested immediately and have a life of ten years from
date of grant.
o 500,000 shares of Common Stock of theglobe.com, inc., issued to
Robin S. Lebowitz pursuant to the Non-Qualified Stock Option
Agreement dated August 12, 2002 at an exercise price of $0.02 per
share. These stock options vested immediately and have a life of ten
years from date of grant.
o The Company's 2003 Amended and Restated Non-Qualified Stock Option
Plan (the "2003 Plan"). The purpose of the 2003 Plan is to
strengthen theglobe.com, inc. by providing an incentive to certain
employees and consultants (or in certain circumstances, individuals
who are the principals of certain consultants) of the Company or any
subsidiary of the Company, with a view toward encouraging them to
devote their abilities and industry to the success of the Company's
business enterprise. The 2003 Plan is administered by a Committee
appointed by the Board to administer the Plan, which has the power
to determine those eligible individuals to whom options shall be
granted under the 2003 Plan and the number of such options to be
granted and to prescribe the terms and conditions (which need not be
identical) of each such option, including the exercise price per
share subject to each option and vesting schedule of options granted
thereunder, and make any amendment or modification to any agreement
consistent with the terms of the 2003 Plan. The maximum number of
shares that may be made the subject of options granted under the
2003 Plan is 1,000,000 and no option may have a term in excess of 10
years. Options to acquire an aggregate of 41,000 shares of Common
Stock have been issued to various independent sales agents at a
weighted average exercise price of $1.54. These stock options vested
immediately and have a life of ten years from date of grant. Options
to acquire an aggregate of 400,000 shares of Common Stock have been
issued to various employees and independent contractors at a
weighted average exercise price of $1.00. These stock options vested
immediately and have a life of ten years from date of grant. Options
to acquire an aggregate of 110,000 shares of Common Stock have been
issued to two independent contractors at a weighted average exercise
price of $1.22. These stock options vested immediately and have a
life of five years from date of grant. Options to acquire 200,000
shares of Common Stock were issued to an employee at an exercise
price of $0.01 per share. These stock options, with a life of ten
years, were to vest upon attainment of specific performance
criteria. However, in January of 2005, the employee was terminated
and his options were completely vested as part of his termination
agreement.
o The Company's 2004 Stock Incentive Plan (the "2004 Plan"). The
purpose of the 2004 Plan is to enhance the profitability and value
of the Company for the benefit of its stockholders by enabling the
Company to offer eligible employees, consultants and non-employee
directors stock-based and other incentives, thereby creating a means
to raise the level of equity ownership by such individuals in order
to attract, retain and reward such individuals and strengthen the
mutuality of interests between such individuals and the Company's
stockholders. The 2004 Plan is administered by a Committee appointed
by the Board to administer the Plan, which has the power to
determine those eligible individuals to whom stock options, stock
appreciation rights, restricted stock awards, performance awards, or
other stock-based awards shall be granted under the 2004 Plan and
the number of such options, rights or awards to be granted and to
prescribe the terms and conditions (which need not be identical) of
each such option, right or award, including the exercise price per
share subject to each option and vesting schedule of options granted
thereunder, and make any amendment or modification to any agreement
consistent with the terms of the 2004 Plan. The maximum number of
shares that may be made the subject of options, rights or awards
granted under the 2004 Plan is 7,500,000 and no option may have a
term in excess of 10 years. Options to acquire an aggregate of
250,000 shares of Common Stock have been issued to several employees
and consultants of SendTec, Inc. at an exercise price of $0.34 per
share. Twenty-five percent of these options vested immediately and
the balance will vest in three equal annual installments. These
options have a life of five years from date of grant. As part of the
merger with SendTec, Inc., replacement options of 3,974,165 were
issued to the former SendTec employees. Of these replacement
options, 3,273,668 have been issued at an exercise price of $0.06
per share and 700,497 have been issued at an exercise price of $0.27
per share. The terms of these replacement options were as negotiated
between representatives of theglobe and the Stock Option Committee
for the SendTec 2000 Amended and Restated Stock Option Plan. In
addition, theglobe also granted 1,000,000 stock options at an
exercise price of $0.27 per share in connection with the
establishment of a bonus option pool pursuant to which various
employees of SendTec could vest in such options if SendTec exceeds
certain performance targets. In October of 2004, options to acquire
an aggregate of 330,000 shares of Common Stock were issued to two
employees. 250,000 were issued at an exercise price of $0.52, of
which 62,500 of these stock options vested immediately and the
balance will vest ratably on a quarterly basis over three years.
80,000 were issued at an exercise price of $0.37 of which 32,000 of
these stock options vested immediately and the balance will vest
ratably on a quarterly basis over three years, although vesting may
be accelerated subject to certain performance criteria. These
options have a life of ten years from date of grant.
19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
As of December 31, 2004, we managed three primary lines of business. One line of
business, Voice over the Internet Protocol ("VoIP") telephony services, includes
voiceglo Holdings, Inc., a wholly-owned subsidiary of theglobe.com that offers
VoIP-based phone service. The term "VoIP" refers to a category of hardware and
software that enables people to use the Internet to make phone calls. The second
line of business consists of our historical network of three wholly-owned
operations, each of which specializes in the games business by delivering games
information and selling games in the United States and abroad. These businesses
are: our print publication Computer Games Magazine; our Computer Games Online
website (www.cgonline.com), which is the online counterpart to Computer Games
Magazine; and our Chips & Bits, Inc. (www.chipsbits.com) games distribution
company. We entered a third line of business, marketing services, on September
1, 2004, with our acquisition of SendTec, Inc. ("SendTec"). SendTec is a direct
response marketing services and technology company.
As of December 31, 2004, our revenues were derived principally from the newly
acquired operations of SendTec, as well as from the operations of our games
related businesses. Our VoIP products and services have yet to produce any
significant revenue.
BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS; GOING CONCERN
Certain matters discussed below under "Liquidity and Capital Resources" raise
substantial doubt about our ability to continue as a going concern. In addition,
we have received a report from our independent accountants, relating to our
December 31, 2004 audited financial statements containing an explanatory
paragraph stating that our recurring losses from operations and our accumulated
deficit raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, our
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
RESULTS OF OPERATIONS
The nature of our business has significantly changed from 2002 to 2003 to 2004.
As a result of our decision to enter the VoIP business, we have incurred
substantial expenditures without corresponding revenue as we developed our
retail VoIP product line and as we put into place the infrastructure for our
VoIP products. Consequently, and primarily as a result of these factors, the
results of operations for the year ended December 31, 2003 are not necessarily
comparable to the year ended December 31, 2002. In addition, we recently entered
into a new business line, marketing services, as a result of our acquisition of
SendTec. SendTec's results are included in the Company's consolidated operating
results from its date of acquisition, September 1, 2004. Because of our entrance
into the VoIP business and our acquisition of SendTec, our results of operations
for the year ended December 31, 2004 are not necessarily comparable to the year
ended December 31, 2003.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET REVENUE. Net revenue totaled $16.0 million for the year ended December 31,
2004 as compared to $5.3 million for the year ended December 31, 2003. The $10.7
million increase in consolidated net revenue was principally the result of the
$12.5 million in additional net revenue, net of intersegment eliminations,
resulting from the operations of SendTec, which was acquired on September 1,
2004. Partially offsetting this additional revenue were declines of $1.6 million
and $0.2 million in net revenue of our computer games and VoIP telephony
services business segments, respectively.
NET REVENUE BY BUSINESS SEGMENT:
2004 2003
------------ ------------
Computer games ........................ $ 3,107,637 $ 4,736,032
Marketing services .................... 13,408,183 --
VoIP telephony services ............... 391,154 548,081
Intersegment eliminations ............. (865,942) --
------------ ------------
$ 16,041,032 $ 5,284,113
============ ============
20
Decreases of $0.8 million in sales of games products by Chips and Bits, Inc.,
$0.5 million in print advertisements in our games magazine and $0.3 million in
sales of the games magazine, respectively, accounted for the decline in net
revenue experienced by our computer games segment. As discussed in Note 1(j) of
the Notes to Consolidated Financial Statements, we use outside agents to obtain
new subscribers for our Computer Games magazine, whereby the agents retain a
percentage of the subscription proceeds as their commission. Previously these
commissions had been classified as sales and marketing expense within the
consolidated statements of operations. Effective June 2004, we changed our
method of accounting for these commissions, reporting them as a reduction of
magazine sales subscription revenue. We believe this alternative accounting
method is a more commonly used industry practice and is preferable under the
circumstances. This reclassification had no impact on our net loss as previously
reported. Net revenue as presented in the accompanying consolidated statements
of operations has been shown net of approximately $1.1 million and $1.3 million
of agency fees for the years ended December 31, 2004 and 2003, respectively.
SendTec's DirectNet Advertising division, which provides online interactive
marketing services for its clients, generated approximately 86% of the net
revenue reported for the marketing services segment for the year ended December
31, 2004. SendTec also provided marketing services to our VoIP telephony
services business segment which resulted in the recording of approximately $0.9
million of intersegment marketing services revenue since its date of
acquisition.
Net revenue generated by our telephony services division totaled $0.4 million
for the year ended 2004 as compared to $0.5 million in 2003. As part of the
Company's strategy to enter the VoIP business, the Company acquired Direct
Partner Telecom, Inc. ("DPT"), an international licensed telecommunications
carrier engaged in the purchase and resale of telecommunications services over
the Internet, in May 2003. Telephony services net revenue generated by DPT
during 2003 represented approximately 89% of total telephony services net
revenue and was derived principally from the charges to customers for
international call completion based on the volume of minutes utilized. During
the first quarter of 2004, management decided to suspend the wholesale business
of DPT and dedicate DPT's physical and intellectual assets to the Company's
retail VoIP business. Telephony services net revenue for the year ended 2004
consisted solely of revenue attributable to sale of our voiceglo and GloPhone
branded retail products.
OPERATING EXPENSES BY BUSINESS SEGMENT:
Depreciation
Cost of Sales and Product General and and
Years ended: Revenue Marketing Development Administrative Amortization Total
----------- ----------- ----------- ------------- ----------- ----------
2004
Computer games ................ $ 2,114,716 $ 377,531 $ 475,785 $ 571,285 $ 10,606 $ 3,549,923
Marketing services............. 9,670,229 691,654 -- 1,621,146 227,270 12,210,299
VoIP telephony services ....... 6,940,023 6,720,531 578,101 3,266,366 1,355,532 18,860,553
Corporate expenses............. -- -- -- 3,643,354 32,138 3,675,492
Intersegment eliminations...... (462,863) (403,079) -- -- -- (865,942)
----------- ----------- ----------- ------------- ----------- -----------
$18,262,105 $ 7,386,637 $ 1,053,886 $ 9,102,151 $ 1,625,546 37,430,325
=========== =========== =========== ============= ===========
VoIP telephony services
Impairment charge............ 1,661,975
Loss on settlement of
Contractual obligation.... 406,750
-----------
$39,499,050
===========
Depreciation
Cost of Sales and Product General and and
Revenue Marketing Development Administrative Amortization Total
----------- ----------- ----------- ------------- ----------- -----------
2003
Computer games ................ $ 3,121,734 $ 586,420 $ 543,139 $ 301,624 $ 62,208 $4,615,125
VoIP telephony services ....... 1,579,604 1,400,606 341,651 1,175,939 258,334 4,756,134
Corporate expenses............. -- -- -- 3,808,349 9,200 3,817,549
----------- ----------- ----------- ------------- ----------- ----------
$ 4,701,338 $ 1,987,026 $ 884,790 $ 5,285,912 $ 329,742 13,188,808
=========== =========== =========== ============= ===========
VoIP telephony services
Impairment charge........... 908,384
-----------
$14,097,192
===========
COST OF REVENUE. Cost of revenue totaled $18.3 million for the year ended
December 31, 2004, an increase of $13.6 million from the $4.7 million reported
for the year ended December 31, 2003. An increase of $5.4 million in costs
incurred by our VoIP telephony services business segment, as well as the
inclusion of marketing services cost of revenue related to the operations of
SendTec from date of acquisition (September 1, 2004) totaling approximately $9.2
million, net of intersegment eliminations, were slightly offset by a decrease of
$1.0 million in cost of revenue reported by our computer games segment as
compared to 2003.
21
Cost of revenue related to our computer games business segment consists
primarily of printing costs of our games magazine, Internet connection charges,
personnel costs, maintenance costs of website equipment and the costs of
merchandise sold and shipping fees in connection with our online store. Cost of
revenue of our computer games segment totaled approximately $2.1 million in
2004, a decrease of approximately $1.0 million from 2003, due primarily to the
revenue decreases discussed above.
Cost of revenue related to our marketing services business segment consists of
fees paid to third party vendors for project related research, production and
post-production services and products. Additionally, cost of revenue includes
third party vendor fees incurred to acquire online advertising media, including
the actual cost of the media. Intersegment eliminations in 2004, represent
approximately $0.5 million of costs incurred by SendTec related to marketing
services provided to our VoIP telephony services segment.
Cost of revenue of our VoIP telephony services business segment for the year
ended December 31, 2004 totaled $6.9 million and principally includes carrier
transport and circuit interconnection costs related to our retail products
marketed under the voiceglo and GloPhone brand names, as well as personnel and
consulting costs incurred in support of our Internet telecommunications network.
Additionally, during the year ended December 31, 2004, cost of revenue included
charges of $1.5 million related to write-downs of telephony equipment inventory
(See Note 1(f) of the Consolidated Financial Statements). Cost of revenue of
$1.6 million reported for the VoIP telephony services business during the year
ended December 31, 2003, consisted principally of costs related to the wholesale
telephony services business marketed by DPT, as well as start up costs of our
retail VoIP operation.
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 and promotional activities. Sales
and marketing expenses totaled $7.4 million in 2004 versus $2.0 million in 2003.
The rise in consolidated sales and marketing expenses was principally the result
of the $5.3 million increase in sales and marketing expenses of the VoIP
telephony services division as compared to 2003. During 2004, the VoIP telephony
services division increased Internet and television advertising and incurred
increased commissions expenses related to "free" GloPhone sign-ups, as well as
higher personnel costs. The $0.7 million of sales and marketing expenses
incurred by SendTec subsequent to its acquisition by the Company on September 1,
2004, was partially offset by the $0.2 million decline in sales and marketing
expenses of the computer games business segment as compared to the year ended
2003. As mentioned in the discussion of net revenue above, commissions paid to
agents to obtain subscribers to our Computer Games magazine had previously been
reported as sales and marketing expenses. Effective June 2004, we changed our
method of accounting for these agency fees, reporting them as a reduction of
magazine sales subscription revenue, which we believe is a preferable
alternative accounting method and a more commonly used industry practice.
Approximately $0.4 million of intersegment sales and marketing expenses were
recognized by the VoIP telephony services segment during the year ended 2004.
These expenses relate to services which were provided by SendTec subsequent to
its acquisition by the Company and have been eliminated in consolidation.
PRODUCT DEVELOPMENT. Product development expenses include salaries and related
personnel costs; expenses incurred in connection with website development,
testing and upgrades; editorial and content costs; and costs incurred in the
development of our voiceglo and GloPhone branded products. Product development
expenses totaled $1.1 million for the year ended December 31, 2004 as compared
to $0.9 million for the year ended December 31, 2003. The year over year
increase in product development expenses was principally attributable to
increases in personnel and consulting costs related to the development of our
retail VoIP telephony products and services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and other personnel costs related to management, finance
and accounting functions, facilities, outside legal and professional fees,
information-technology consulting, directors and officers insurance, bad debt
expenses and general corporate overhead costs. General and administrative
expenses of $9.1 million in 2004 increased $3.8 million from the $5.3 million
reported for 2003. Increases in personnel costs and other general and
administrative expenses directly attributable to our VoIP telephony services
division, as well as general and administrative expenses incurred by SendTec
since date of acquisition by the Company, were principally responsible for the
increase in this expense category as compared to 2003. Other expense categories
which increased as compared to 2003 largely as a result of the Company's
entrance into the VoIP business included legal fees, information-technology
consulting, other professional fees and facilities costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense totaled
$1.6 million for the year ended December 31, 2004. The $1.3 million increase
from the prior year resulted principally from investments related to the
development of our VoIP network and to a lesser extent to costs incurred in the
development of our VoIP telephony customer billing system. As discussed in
"Impairment Charge" below, certain long-lived assets of the VoIP telephony
services division were written-off effective December 31, 2004, as a result of
the Company's review of its long-lived assets for impairment. Approximately $0.5
million of depreciation and amortization expense related to the assets
written-off was recorded during 2004.
22
IMPAIRMENT CHARGE. Due to the significant operating and cash flow losses
incurred by the Company's VoIP telephony services division during 2004 and 2003,
coupled with management's projection of continued losses in the foreseeable
future, the Company performed an evaluation of the recoverability of the
division's long-lived assets during the first quarter of 2005 in connection with
the preparation of our 2004 annual financial statements. This evaluation
indicated that the carrying value of certain of our VoIP division's long-lived
assets exceeded the fair value of such assets, as measured by quoted market
prices or our estimate of fair value. As a result, we recorded an impairment
charge of approximately $1.7 million in the accompanying consolidated statement
of operations for the year ended December 31, 2004. The impairment loss included
the write-off of the full value of amounts previously capitalized by the VoIP
telephony services division as internal-use software, website development costs,
acquired technology and patent costs, as well as certain other assets. The
long-lived assets affected by this charge may continue to be used in operations.
As a result of this impairment charge, we expect to realize reductions in
depreciation and amortization expense in future periods.
LOSS ON SETTLEMENT OF CONTRACTUAL OBLIGATION. Subsequent to year-end 2004, the
Company formally terminated its contract with a supplier of VoIP telephony
handsets and agreed to settle the unconditional purchase obligation under such
contract, which totaled approximately $3.0 million. The settlement provided for
(i) a cash payment of $0.2 million, (ii) the return of 35,000 VoIP handset units
from the Company's inventory, and (iii) the issuance of 300,000 shares of
theglobe.com Common Stock. The value attributed to the loss on the settlement of
the contractual obligation, which approximated $0.4 million, was accrued at
December 31, 2004, and included as a component of operating expenses reported
for 2004.
INTEREST INCOME (EXPENSE), NET. On February 2, 2004, our Chairman and Chief
Executive Officer and his spouse, entered into a Note Purchase Agreement with
the Company pursuant to which they acquired a demand convertible promissory note
(the "Bridge Note") in the aggregate principal amount of $2,000,000. Non-cash
interest expense of $0.7 million was recorded during 2004 related to the
beneficial conversion feature of the Bridge Note as the Bridge Note was
convertible into our Common Stock at a price below the fair market value (for
accounting purposes) of our Common Stock, based on the closing price of our
Common Stock as reflected on the OTCBB on the issuance date of the Note.
Non-cash interest expense of approximately $1.6 million was recorded during 2003
related to the beneficial conversion features of the $1,750,000 Secured
Convertible Notes and warrant issued on May 22, 2003.
OTHER EXPENSE, NET. Other expense, net, includes reserves against the amounts
loaned by the Company to Tralliance Corporation, a development stage internet
related business venture, totaling $0.5 million in each of the years ended
December 31, 2004 and 2003. Partially offsetting the 2004 expense, was a
favorable settlement of a previously disputed vendor claim by the computer games
business segment of approximately $0.4 million.
INCOME TAXES. No tax benefit was recorded for the years ended December 31, 2004
and 2003 as we recorded a 100% valuation allowance against our otherwise
recognizable deferred tax assets due to the uncertainty surrounding the timing
or ultimate realization of the benefits of our net operating loss carry forwards
in future periods. Our effective tax rate differs from the statutory Federal
income tax rate, primarily as a result of the uncertainty regarding our ability
to utilize our net operating loss carryforwards. As of December 31, 2004, the
Company had net operating loss carryforwards available for U.S. and foreign tax
purposes of approximately $162 million. These carryforwards expire through 2024.
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. As defined in the Internal Revenue Code of 1986, as amended, due
to the change in our ownership interests in August 1997 and May 1999 and the
Company's private offering of securities in March 2004 (together with the
exercise and conversion of various securities in connection with such private
offering of securities) and the issuance of shares in connection with our
acquisition of SendTec on September 1, 2004, the Company may have substantially
limited or eliminated the availability of its net operating loss carryforwards.
There can be no assurance that the Company will be able to avail itself of any
net operating loss carryforwards.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET REVENUE. Our revenue sources were principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games; the sale of video games and related products through our games
distribution business Chips & Bits, Inc.; the sale of our games information
magazine through newsstands and subscriptions; and to a lesser extent from the
sale of VoIP telephony services.
NET REVENUE BY BUSINESS SEGMENT:
2003 2002
----------- -----------
Computer games .................... $ 4,736,032 $ 7,245,276
VoIP telephony services ........... 548,081 --
----------- -----------
$ 5,284,113 $ 7,245,276
=========== ===========
23
Net revenue totaled $5.3 million for the year ended December 31, 2003 as
compared to $7.2 million for the year ended December 31, 2002. The $1.9 million
decline in total net revenue was primarily attributable to decreases in net
revenue from electronic commerce, advertising and magazine sales, partially
offset by net revenue generated by our VoIP telephony services division.
Advertising revenue from the sale of print advertisements in our games magazine
was $2.6 million, or 48%, of total net revenue for the year ended December 31,
2003, versus $3.1 million, or 43%, of total net revenue for the prior year.
Barter advertising revenue represented approximately 2% of total net revenue for
each of the years ended December 31, 2003 and 2002, respectively.
Net revenue attributable to the sale of our games information magazine was $0.7
million, or 14%, of total net revenue for the 2003 year as compared to $1.0
million, or 14%, of total net revenue in 2002. As discussed in the comparison of
the year ended December 31, 2004 to the year ended December 31, 2003, we changed
the classification of agency fees paid to third parties as commissions for
obtaining new subscribers to our Computer Games magazine. Previously these
commissions had been classified as sales and marketing expense within the
consolidated statement of operations. Effective June 2004, we changed our method
of accounting for these agency fees, reporting them as a reduction of magazine
sales subscription revenue. We believe this alternative accounting method is a
more commonly used industry practice and is preferable under the circumstances.
This reclassification had no impact on our net loss as previously reported. Net
revenue as presented in the accompanying consolidated statements of operations
is shown net of approximately $1.3 million and $2.4 million of agency fees for
the years ended December 31, 2003 and 2002, respectively. The decline in net
revenue from the sale of our games magazine as compared to the previous year was
primarily the result of a decrease in the circulation base of our games
magazine. As rates for print advertising charged to advertisers are driven
largely by the circulation of the publication, the decline in the circulation
base of our games magazine has also contributed to the decrease in our
advertising revenue.
Sales of products through our online store, Chips & Bits, Inc., accounted for
$1.5 million, or 28%, of total net revenue for the year ended December 31, 2003
as compared to $3.1 million, or 42%, of total net revenue for 2002. The $1.6
million decrease was primarily the result of advances in technology and the
number of releases of console and online games, which traditionally have less
sales loyalty to our online store, coupled with the continued decline in the
number of major PC game releases, on which our online store relies for the
majority of sales. In addition, an increasing number of major retailers have
increased the selection of video games offered by both their traditional "bricks
and mortar" locations and their online commerce sites resulting in increased
competition.
Net revenue from VoIP telephony services totaled $0.5 million for the year ended
December 31, 2003. As discussed in the comparison of the year ended December 31,
2004 to the year ended December 31, 2003, approximately 89% of total telephony
services net revenue in 2003 was attributable to the operation of DPT's
wholesale business. Net revenue attributable to the launch of the Company's
retail VoIP products during the second half of 2003 represented the remaining
11% of total 2003 telephony services net revenue.
OPERATING EXPENSES BY BUSINESS SEGMENT:
Depreciation
Cost of Sales and Product General and and
Years ended: Revenue Marketing Development Administrative Amortization Total
----------- ----------- ----------- ------------- ----------- -----------
2003
Computer games ................ $ 3,121,734 $ 586,420 $ 543,139 $ 301,624 $ 62,208 $ 4,615,125
VoIP telephony services ....... 1,579,604 1,400,606 341,651 1,175,939 258,334 4,756,134
Corporate expenses............. -- -- -- 3,808,349 9,200 3,817,549
----------- ----------- ----------- ------------- ----------- -----------
$ 4,701,338 $ 1,987,026 $ 884,790 $ 5,285,912 $ 329,742 13,188,808
=========== =========== =========== ============= ===========
VoIP telephony services
Impairment charge........... 908,384
-----------
$14,097,192
===========
Depreciation
Cost of Sales and Product General and and
Revenue Marketing Development Administrative Amortization Total
----------- ----------- ----------- ------------- ----------- -----------
2002
Computer games ................ $ 5,453,136 $ 1,101,417 $ 652,997 $ 364,025 $ 85,327 $ 7,656,902
VoIP telephony services ....... -- -- -- 1,196 -- 1,196
Corporate expenses............. -- -- -- 2,524,713 3,253 2,527,966
----------- ----------- ----------- ------------- ----------- -----------
$ 5,453,136 $ 1,101,417 $ 652,997 $ 2,889,934 $ 88,580 $10,186,064
=========== =========== =========== ============= =========== ===========
24
COST OF REVENUE. Cost of revenue related to our computer games division totaled
approximately $3.1 million and $5.5 million for the years ended December 31,
2003 and 2002, respectively. The gross margin of the Company's games division
approximated 34% in 2003 as compared to 25% in 2002. The overall improvement in
the gross margin of the games division as compared to the prior year resulted
from the increase in advertising revenue as a percentage of total net revenue,
coupled with an improvement in the gross profit margin of Chips & Bits.
VoIP telephony services cost of revenue totaled $1.6 million in 2003 and
includes carrier transport and circuit interconnection costs related to the
Company's wholesale telephony services business marketed by DPT and the
Company's retail telephony services business marketed under the voiceglo and
GloPhone brand names. Personnel and consulting costs incurred in support of the
Company's Internet telecommunications network, as well as customer equipment
costs related to the sale of the Company's voiceglo service launched during
mid-August 2003 are also included in this expense category.
SALES AND MARKETING. Sales and marketing expenses were $2.0 million for the year
ended December 31, 2003 as compared to $1.1 million for the year ended December
31, 2002. Sales and marketing expenses of the VoIP telephony services division
totaling $1.4 million were partially offset by a decline of $0.5 million in
sales and marketing expenses of the Company's games division as compared to
2002. As mentioned in the discussion of Net Revenue above, commissions paid to
agents to obtain subscribers to our Computer Games magazine had previously been
reported as sales and marketing expenses. Effective June 2004, we changed our
method of accounting for these agency fees, reporting them as a reduction of
magazine sales subscription revenue, which we believe is a preferable
alternative accounting method and a more commonly used industry practice. Sales
and marketing expenses of the games division represented approximately 12% and
15% of total net revenue attributable to the games division's operations for the
years ended December 31, 2003 and 2002, respectively. Costs related to employee
salaries, the identification and continuing development of an independent
outside sales network and advertising the VoIP product line were the principal
components of sales and marketing expenses of the VoIP telephony services
division during the year ended December 31, 2003.
PRODUCT DEVELOPMENT. Product development expenses increased to $0.9 million for
the year ended December 31, 2003, as compared to $0.7 million for the year ended
December 31, 2002. The increase was principally attributable to personnel costs
and consulting expenses relating to the development of our retail VoIP telephony
products and services, which totaled approximately $0.3 million during 2003.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$5.3 million for the year ended December 31, 2003, as compared to $2.9 million
for the year ended December 31, 2002. Increases in headcount and the resulting
personnel expenses, as well as other general and administrative expenses
directly attributable to the Company's new line of business, VoIP telephony
services, were major factors contributing to the $2.4 million increase in total
general and administrative expenses. Other expense categories which increased as
compared to 2002 largely as a result of the Company's entrance into the VoIP
business, included legal fees, other professional fees and facilities costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $0.3
million in 2003 included approximately $0.1 million representing amortization of
the non-compete agreement recorded in connection with the acquisition of DPT
prior to its write-off at year-end 2003, as well as amortization of capitalized
patent costs related to our retail VoIP products.
IMPAIRMENT CHARGE. During the first quarter of 2004, the Company decided to
suspend DPT's wholesale business and decided to dedicate the DPT physical and
intellectual assets to its retail VoIP business, which is conducted under the
brand names of voiceglo and GloPhone. As a result, management reviewed the
long-lived assets associated with the wholesale VoIP business for impairment.
Goodwill of approximately $0.6 million and the unamortized balance of the
non-compete intangible asset of approximately $0.3 million recorded in
connection with the May 2003 acquisition of DPT were written off and recorded as
an impairment loss in 2003. No impairment charges were recorded during 2002.
INTEREST INCOME (EXPENSE), NET. Non-cash interest expense of $1.5 million was
recorded in the second quarter of 2003 related to the beneficial conversion
feature of the $1,750,000 in Secured Convertible Notes issued on May 22, 2003.
The expense resulted as the Secured Convertible Notes were convertible into our
Common Stock at a price below the fair market value of our Common Stock (for
accounting purposes), based on the closing price of our Common Stock as
reflected on the OTCBB on the issuance date of the notes. In addition, the
warrant to acquire 3,888,889 shares of our Common Stock issued to one of the
note holders was exercisable at a price below the fair market value of our
Common Stock (for accounting purposes), based on the closing price of our Common
Stock as reflected on the OTCBB on the date of issuance. The value assigned to
the warrant was recorded as a discount to the face value of the Secured
Convertible Notes to be amortized to interest expense over the term of the
Secured Convertible Notes. Discount amortization of approximately $0.2 million
was included in interest expense, net, during the year ended December 31, 2003.
OTHER EXPENSE, NET. Other expense, net, of $0.5 million was reported for the
year ended December 31, 2003 and consisted of reserves against the amounts
loaned by the Company to Tralliance Corporation, a development stage Internet
related business venture totaling $0.5 million (as more fully described in Note
4, "Acquisitions and Disposition," of the Notes to Consolidated Financial
Statements).
25
INCOME TAXES. As was the case in the year ended December 31, 2004, no tax
benefit was recorded for the year ended December 31, 2003 as we recorded a 100%
valuation allowance against our otherwise recognizable deferred tax assets due
to the uncertainty surrounding the timing or ultimate realization of the
benefits of our net operating loss carryforwards in future periods. The income
tax provision recorded for the year ended December 31, 2002 was based solely on
state and local taxes on business and investment capital.
LIQUIDITY AND CAPITAL RESOURCES
FUTURE AND CRITICAL NEED FOR CAPITAL
For the reasons described below, Company management does not presently believe
that cash on hand and cash flow generated internally by the Company will be
adequate to fund the operation of its businesses and the implementation of its
current VoIP business plan beyond a short period of time. We have received a
report from our independent accountants, relating to our December 31, 2004
audited financial statements containing an explanatory paragraph stating that
our recurring losses from operations and our accumulated deficit raise
substantial doubts about our ability to continue as a going concern. If we are
not successful in entering into a financing, sale, or business transaction that
infuses sufficient cash resources into the Company sometime during the second
quarter of 2005, management believes that it will no longer be able to continue
the implementation of its current VoIP business plan. In such event, it is
likely that we would be required to either temporarily suspend or permanently
shutdown the operation of our VoIP telephony services business. Additionally, in
such event, management believes that it may also be required to revise the
business plan of some or all of its other business segments and/or further
implement company-wide cost reduction programs. There can be no assurance that
the Company would be successful in implementing such revised business plans and
effectively restructuring its businesses so that the Company would have the
ability to continue to operate as a going concern in the future.
At December 31, 2004, the Company's sole source of liquidity consisted of $6.8
million of cash and cash equivalents. The Company continues to incur substantial
consolidated net losses and management believes the Company will continue to be
unprofitable for the foreseeable future. Consequently, as of March 25, 2005, the
Company's cash and cash equivalent resources had diminished to approximately
$3.9 million.
The Company's consolidated net losses and cash usage during 2004 and 2003 and
projected future periods relate primarily to the operation of its VoIP telephony
services business and to a lesser extent to corporate overhead expenses.
SendTec, the Company's marketing services business, has contributed net income
and cash flow since being acquired on September 1, 2004, and management expects
that SendTec will continue to be profitable and provide positive cash flow in
future periods. Management does not expect that its computer games business
segment will incur significant net losses or use significant amounts of cash in
the foreseeable future.
In order to offer our VoIP services, we have invested substantial capital and
made substantial commitments related to the development of the VoIP network. The
VoIP network is comprised of switching hardware and software, servers, billing
and inventory systems, and telecommunications carrier services. We own and
operate VoIP equipment located in leased data center facilities in Miami, New
York, Atlanta and Boston, and interconnect this equipment utilizing a leased
transport network through numerous carrier agreements with third party
providers. Through these carrier relationships we are able to carry the traffic
of our customers over the Internet and interact with the public switched
telephone network. We generally enter into one year agreements with these data
centers and carriers, with the term of several agreements extending to three or
five years. Based upon our existing contractual commitments at December 31,
2004, minimum amounts payable over the next twelve months for network data
center and carrier circuit interconnection service expenses, exclusive of
regulatory taxes, fees and charges, are approximately $2.1 million.
During 2004 the Company expended significant costs to implement a number of
marketing programs geared toward increasing the number of its VoIP retail
customers and telephony revenue. None of these programs have proven to be
successful to any significant degree. Our inability to generate telephony
revenue sufficient to cover the fixed costs of operating our VoIP network,
including carrier, data center, personnel and administrative costs, as well as
our marketing and other variable costs, has resulted in the Company incurring
substantial net losses during 2004.
The Company believes that the capacity of its VoIP network, including its lease
obligations relating to such network, will continue to be greatly in excess of
customer demand and usage levels for the foreseeable future. The Company has
been successful in recently terminating certain minimum usage requirement
commitments for which it was previously obligated to make carrier payments
totaling approximately $1.9 million, exclusive of regulatory taxes, fees and
charges, during 2005. Additionally, the Company is currently negotiating to
reduce the amounts payable during 2005 for other network data center and carrier
circuit interconnection services.
During October 2004, the Company engaged financial advisors to assist the
Company in raising capital through a private placement of its equity securities,
or in entering into other business relationships with certain strategic
investors. In February 2005, the Company engaged an additional financial advisor
to assist the Company in connection with raising capital through a private
placement of equity securities in either the Company or its SendTec wholly-owned
subsidiary or alternatively in selling either part or all of the Company's
26
businesses or assets, including its SendTec business. We currently have no
access to credit facilities with traditional third party lenders and there can
be no assurance that we would be able to raise capital or sell any of our
businesses or assets. In addition, any financing that could be obtained would
likely significantly dilute existing shareholders. As more fully described
below, management is exploring a number of strategic alternatives regarding the
Company's future business operations and is in the process of developing and
implementing internal actions to improve the Company's liquidity and business
performance. The Company's future strategic direction is highly dependent upon
the outcome of its efforts to raise capital and/or sell certain businesses or
assets.
Subsequent to December 31, 2004, the Company reevaluated its existing VoIP
telephony services business plan and is currently in the process of terminating
and/or modifying certain of its existing product offerings and marketing
programs, as well as developing and testing certain new VoIP products and
features. The Company has also recently made the decision to discontinue using
its SendTec business to perform marketing services for its VoIP business, and to
instead dedicate 100% of SendTec's marketing services to support and grow its
own third party customer base. Additionally, in order to reduce its near term
consolidated net losses and cash usage, the Company is currently in the process
of implementing a number of cost-reduction actions at its VoIP telephony
services business, including decreases in personnel and salary levels, carrier
and data center costs (including the minimum commitment costs discussed above),
and marketing/advertising expenses.
Management believes that it will be difficult to implement its new VoIP product
and marketing plans, once fully developed and tested, without additional cash
being provided from a prospective financing or sale transaction(s). Should the
Company's new VoIP product offerings achieve market acceptance and significantly
increase the Company's current customer and revenue base, additional cash
resources to fund capital expenditures related to the Company's VoIP network and
customer billing systems and to fund future marketing and other business
development costs would be required. No significant capital expenditures are
expected to be required to accommodate the operation or growth of either the
Company's SendTec marketing services business or its computer games business in
the near term future.
There can be no assurance that the Company's new VoIP product offerings will be
successful in attracting a sufficient number of new customers to its VoIP
network and increasing telephony revenue to desired levels. Even if the Company
is able to raise additional capital, management may at any time, decide to
terminate the operations of its VoIP telephony services business, either by
asset sale or abandonment, if future investment returns are considered
inadequate and/or preferable investment alternatives exist.
Although substantially dependent upon our ability to consummate a financing or
sale transaction that provides additional cash resources to the Company, we may
enter into new lines of business in the future. In this regard, in November
2004, we announced our preliminary intent to exercise our purchase option to
acquire Tralliance Corporation ("Tralliance"), a development stage
Internet-related business venture that had recently entered into exclusive
technical and commercial negotiations with the Internet Corporation for Assigned
Names and Numbers ("ICANN") to become the registry for the ".travel" top-level
domain. Tralliance was created to develop, operate and administer the ".travel"
top level domain, a new segment of the Internet devoted to the travel industry.
The exercise of our purchase option to acquire Tralliance is conditioned upon a
number of factors, including ICANN final approval of Tralliance to be the
registry of the ".travel" top-level domain. If and when the Company exercises
its purchase option, we would issue 1.5 million shares of our Common Stock in
exchange for all of the outstanding capital stock of Tralliance and also may
need to fund start-up and initial operating expenses of a yet undetermined
amount. As of March 25, 2005, Tralliance continues to negotiate with ICANN and
has not yet been awarded the right to become the registry operator for the
".travel" top-level domain.
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or OTCBB. Since the trading price
of our Common Stock is less than $5.00 per share, trading in our Common Stock is
also subject to the requirements of Rule 15g-9 of the Exchange Act. Our Common
Stock is also considered a penny stock under the Securities Enforcement Remedies
and Penny Stock Reform Act of 1990, which defines a penny stock, generally, as
any equity security not traded on an exchange or quoted on the Nasdaq SmallCap
Market that has a market price of less than $5.00 per share. Under Rule 15g-9,
brokers who recommend our Common Stock to persons who are not established
customers and accredited investors, as defined in the Exchange Act, must satisfy
special sales practice requirements, including requirements that they make an
individualized written suitability determination for the purchaser; and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosures in connection with any trades involving a penny stock, including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with that market.
Such requirements may severely limit the market liquidity of our Common Stock
and the ability of purchasers of our equity securities to sell their 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 may also incur additional costs under state blue sky
laws if we sell equity due to our delisting.
27
CASH FLOW ITEMS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
As of December 31, 2004, we had approximately $6.8 million in cash and cash
equivalents as compared to $1.1 million as of December 31, 2003. Net cash used
in operating activities was $17.7 million and $7.1 million, for the years ended
December 31, 2004 and 2003, respectively. The period-to-period increase in net
cash used in operating activities resulted primarily from the increase in our
net operating losses, partially offset by the effect of non-cash charges.
Net cash of $5.4 million was used in investing activities during 2004. As more
fully described in the following "Capital Transactions" section of this
Management's Discussion and Analysis or Plan of Operation and Note 4,
"Acquisitions and Disposition," in the accompanying Consolidated Financial
Statements, in connection with its acquisition of SendTec on September 1, 2004,
the Company paid cash consideration of approximately $6.0 million, excluding
transaction costs. As of the date of acquisition, SendTec held approximately
$3.6 million of cash. Thus, the Company used a net amount of approximately $2.4
million of cash to acquire SendTec. Additionally, the Company incurred costs
totaling $2.7 million and $2.4 million for capital expenditures related
primarily to the development of its VoIP telephony network and to a lesser
extent to the development of its VoIP telephony customer billing system during
the years ended December 31, 2004 and 2003, respectively. We also loaned
approximately $0.5 million to Tralliance Corporation, a development stage
Internet related business venture, during each of the years of 2004 and 2003,
respectively.
Net cash provided by financing activities was $28.9 million for 2004. As
discussed below and in the Notes to the Consolidated Financial Statements, the
Company completed a private offering of its Common Stock and warrants to acquire
its Common Stock in March 2004 resulting in the issuance of 33,381,647 shares of
Common Stock, and warrants to acquire 16,690,824 shares of its Common Stock, for
gross proceeds of approximately $28.4 million. Offering costs included $1.2
million in cash commissions paid to the placement agent and approximately $0.2
million in legal and accounting fees. In addition, on February 2, 2004, the
Company issued a $2,000,000 Bridge Note which was subsequently converted into
our Common Stock in connection with the March 2004 private offering. Proceeds of
approximately $0.2 million were received from the exercise of stock options and
warrants during 2004. Cash provided by financing activities during the year
ended December 31, 2003, included proceeds of $8.6 million, net of offering
costs, from the issuance of Series G Preferred Stock and the associated warrants
in July 2003, proceeds of $0.5 million from the issuance of Series F Convertible
Preferred Stock and $1.75 million in proceeds from Secured Convertible Notes
issued during the first half of 2003.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
As of December 31, 2003, we had approximately $1.1 million in cash and cash
equivalents as compared to $0.7 million as of December 31, 2002. Net cash used
in operating activities was $7.1 million and $2.0 million for the years ended
December 31, 2003 and 2002, respectively. The year-over-year increase in net
cash used in operating activities resulted primarily from an increase in our net
operating losses, partially offset by the impact of non-cash charges recorded in
2003 and favorable working capital changes recorded in 2002. The most
significant of these non-cash charges during 2003 included the non-cash interest
expense recorded as a result of the beneficial conversion feature of the
$1,750,000 in Secured Convertible Notes and associated warrants, as well as the
non-cash impairment charge related to the write-off of goodwill and a
non-compete intangible originally recorded as a result of the acquisition of
DPT.
Net cash of $3.2 million was used in investing activities during the year ended
December 31, 2003. The Company incurred $2.4 million in capital expenditures
during 2003, primarily within the VoIP telephony services division. These
expenditures included costs incurred in the development of our VoIP telephony
network used to support the retail VoIP product line, as well as the Company's
wholesale VoIP business. Additionally, in February 2003, the Company committed
to fund operating expenses of Tralliance Corporation, a development stage
Internet related business venture, at the Company's discretion, in the form of a
loan. As of December 31, 2003, approximately $0.5 million had been advanced to
the venture. During 2003, the Company invested approximately $10.3 million in
marketable securities, the funds of which were principally from the proceeds
received in connection with the issuance of the Company's Series G Preferred
Stock. Approximately $10.1 million of investments were sold throughout the
second half of 2003 as working capital was required to fund operations.
Partially offsetting these uses of funds in 2003 was the $0.1 million in net
cash acquired upon the May 2003 acquisition of DPT. The purchase price of DPT
consisted of the issuance of 1,375,000 shares of the Company's Common Stock and
the issuance of warrants to acquire 500,000 shares of the Company's Common
Stock. Warrants to acquire an additional 2,750,000 shares of our Common Stock
could be issued if certain performance or other criteria are satisfied.
Effective March 31, 2004, 500,000 of the earn-out warrants were forfeited as
performance targets had not been achieved for the first of the earn-out periods.
An additional 750,000 of the warrants will be forfeited effective March 31,
2005, as performance targets for the second of the three year periods will not
be achieved. Net cash provided by investing activities in 2002 was $0.1 million
principally resulting from the sale of the assets of the Happy Puppy website.
28
Net cash provided by financing activities in 2003 totaled $10.6 million. As
discussed below and in the Notes to the Consolidated Financial Statements, the
Company issued $0.5 million in Series F Convertible Preferred Stock in March
2003, $1.75 million of Secured Convertible Notes in May 2003, and approximately
$8.6 million, net of offering costs, of Series G Automatically Converting
Preferred Stock and associated warrants in July 2003. Immediately after the May
2003 closing of the DPT acquisition, the Company paid $0.5 million in cash to
the former stockholders of DPT in repayment of certain loans which they had
extended to DPT prior to its acquisition by theglobe.com.
CAPITAL TRANSACTIONS
On September 1, 2004, the Company closed upon an agreement and plan of merger
dated August 31, 2004 pursuant to which the Company acquired all of the issued
and outstanding shares of capital stock of SendTec. Pursuant to the terms of the
Merger, in consideration for the acquisition of SendTec, theglobe paid
consideration consisting of: (i) $6,000,000 in cash, excluding transaction
costs, (ii) the issuance of an aggregate of 17,500,024 shares of theglobe's
Common Stock, (iii) the issuance of an aggregate of 175,000 shares of Series H
Automatically Converting Preferred Stock (which as more fully described below,
was subsequently converted into approximately 17,500,500 shares of theglobe's
Common Stock), and (iv) the issuance of a subordinated promissory note in the
amount of $1 million. In addition, warrants to acquire shares of the Company's
Common Stock would be issued to SendTec shareholders when and if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005 (the "Earn-out Consideration"). The number of earn-out
warrants would range from an aggregate of 250,000 to 2,500,000 (if actual
operating income exceeds the forecast by at least 10%). If and to the extent the
warrants are earned, the exercise price of the performance warrants would be
$0.27 per share and they will be exercisable for a period of 5 years. The Note
bears interest at the rate of 4% per annum and matures in one lump sum of
principal and interest on September 1, 2005.
As part of the Merger, 100,000 shares of Series H Preferred Stock (which was
subsequently converted into 10 million shares of Common Stock as described
below) (the "Escrow Shares") are being held in escrow for potential recovery by
us in the event of a breach of the Merger Agreement by SendTec or its former
shareholders. In general, the Escrow Shares, together with the sums due under
the Note, are the sole source of recourse against the shareholders of SendTec in
the event of breach of the Merger Agreement and theglobe would not have recourse
against the cash portion or other shares of Common Stock or Series H Preferred
Stock distributed to the SendTec shareholders as part of the merger
consideration. Assuming no claims are then pending, the Escrow Shares will be
distributed to SendTec shareholders after expiration of one year from the date
of closing.
Each share of the Series H Preferred Stock was automatically converted into 100
shares of theglobe's Common Stock on December 1, 2004, the effective date of the
amendment to the Company's certificate of incorporation increasing its
authorized shares of Common Stock from 200,000,000 shares to 500,000,000 shares.
The Company agreed to file a registration statement relating to the resale of
the shares of Common Stock issued in the Merger and the shares of Common Stock
underlying the Series H Preferred Stock and to cause the effectiveness of such
registration on or before September 1, 2005. The Company also agreed to keep the
registration statement effective until at least the third anniversary of the
Closing. Pursuant to the terms of the Merger, in general, the equity securities
issued in the Merger may not be sold or otherwise transferred for a period of
one (1) year without the prior written consent of the Company.
theglobe also issued an aggregate of approximately 4.0 million replacement
options to acquire shares of theglobe's Common Stock for each of the issued and
outstanding options to acquire shares of SendTec held by the former employees of
SendTec. Of these replacement options, approximately 3.27 million have exercise
prices of $0.06 per share and approximately 700 thousand have exercise prices of
$0.27 per share. The terms of these replacement options were as negotiated
between representatives of theglobe and the Stock Option Committee for the
SendTec 2000 Amended and Restated Stock Option Plan. theglobe also agreed to
grant an aggregate of 250,000 options to other employees and a consultant of
SendTec at an exercise price of $0.34 per share. Twenty-five percent of these
options vested immediately and the balance will vest in three equal annual
installments assuming the continued employment of the option holders. In
addition, theglobe also granted 1,000,000 stock options at an exercise price of
$0.27 per share in connection with the establishment of a bonus option pool
pursuant to which various employees of SendTec could vest in such options on
terms substantially similar to the circumstances in which the Earn-out
Consideration may be earned.
In connection with the Merger, the SendTec executives (whom collectively
received approximately 82% of the shares of Common Stock and Preferred Stock
issued in the Merger), theglobe and Messrs. Michael Egan and Edward Cespedes,
our Chairman and Chief Executive Officer and President, respectively
(individually and on behalf of certain affiliated entities) entered into a
Stockholders' Agreement. Pursuant to the terms of the Stockholders' Agreement,
the SendTec executives granted an irrevocable proxy to vote their shares to E&C
Capital Partners LLLP, an affiliate of Mr. Egan on all matters (including the
election of directors) other than with respect to certain potential affiliated
transactions involving Messr. Egan or Cespedes. After giving effect to the grant
of the proxy (and excluding outstanding options and warrants held by Mr. Egan),
Mr. Egan has voting power over approximately 83.6 million shares of theglobe
representing approximately 48.3% of the issued and outstanding voting securities
of the Company. The SendTec executives were also granted certain pre-emptive
rights involving potential new issuances of securities by theglobe, together
with a co-sale right to participate in certain qualifying sales of stock by
Messrs. Egan, Cespedes and their affiliates. Messrs. Egan, Cespedes and their
affiliates were granted a right of first refusal on certain sales (generally, in
excess of 10 million shares) by the SendTec executives, together with the right
to "drag-along" the SendTec executives with regard to certain major sales of
their stock or a sale or merger of theglobe.
29
In March 2004, the Company completed a private offering of 333,816 units (the
"Units") for a purchase price of $85 per Unit (the "PIPE Offering"). Each Unit
consisted of 100 shares of the Company's Common Stock, $0.001 par value (the
"Common Stock"), and warrants to acquire 50 shares of the Company's Common Stock
(the "Warrants"). The Warrants are exercisable for a period of five years
commencing 60 days after the initial closing at an initial exercise price of
$0.001 per share. The aggregate number of shares of Common Stock issued in the
PIPE Offering was 33,381,647 shares for an aggregate consideration of
$28,374,400, or approximately $0.57 per share assuming the exercise of the
16,690,824 Warrants. As of December 31, 2004, approximately 11,102,000 of the
Warrants remain outstanding.
The securities offered in the PIPE Offering were not registered under the
Securities Act of 1933 and may not be offered or resold in the United States
absent registration or an applicable exemption from such registration
requirements. Pursuant to the terms of the PIPE Offering, the Company filed a
registration statement relating to the resale of the Securities on April 16,
2004 which became effective on May 11, 2004. Most of our investors from prior
capital raises also elected to register their shares for resale pursuant to that
registration statement.
Halpern Capital, Inc., acted as placement agent for the PIPE Offering, and was
paid a commission of $1.2 million and issued a warrant to acquire 1,000,000
shares of Common Stock at $0.001 per share. As of December 31, 2004,
approximately 459,000 of these warrants remain outstanding.
The purpose of the PIPE Offering was to raise funds for use primarily in the
Company's developing VoIP business, including the deployment of networks,
website development, marketing, and capital infrastructure expenditures and
working capital. Other intended uses of proceeds included funding requirements
in connection with the Company's other existing or future business operations,
including acquisitions.
In connection with the PIPE Offering, Mr. Egan, our Chairman, Chief Executive
Officer and principal stockholder, together with certain of his affiliates,
including E&C Capital Partners, converted a $2,000,000 convertible Bridge Note,
$1,750,000 of Secured Convertible Notes and all of the Company's outstanding
shares of Series F Preferred Stock, and exercised (on a "cashless" basis) all of
the warrants issued in connection with the foregoing $1,750,000 Secured
Convertible Notes and Series F Preferred Stock, together with certain warrants
issued to Dancing Bear Investments, an affiliate of Mr. Egan. As a result of
such conversions and exercises, the Company issued an aggregate of 48,775,909
additional shares of Common Stock.
On February 2, 2004, Michael S. Egan and his wife, S. Jacqueline Egan, entered
into a Note Purchase Agreement with the Company pursuant to which they acquired
a convertible promissory note due on demand (the "Bridge Note") in the aggregate
principal amount of $2,000,000. The Bridge Note was convertible into shares of
the Company's Common Stock. The Bridge Note provided for interest at the rate of
ten percent per annum and was secured by a pledge of substantially all of the
assets of the Company. Such security interest was shared with the holders of the
Company's $1,750,000 Secured Convertible Notes issued on May 22, 2003 to E&C
Capital Partners and certain affiliates of Michael S. Egan. In addition, the
Egans were issued a warrant to acquire 204,082 shares of Common Stock at an
exercise price of $1.22 per share. This warrant is exercisable at any time on or
before February 2, 2009. The exercise price of the warrant, together with the
number of shares for which such warrant is exercisable, is subject to adjustment
upon the occurrence of certain events.
On July 2, 2003, theglobe.com, inc. completed a private offering of Series G
Automatically Converting Preferred Stock for an aggregate purchase price of
approximately $8.7 million. In accordance with the terms of such Preferred
stock, the Series G Preferred shares converted into Common Stock at $0.50 per
share (or an aggregate of approximately 17.4 million shares) upon the filing of
an amendment to the Company's certificate of incorporation to increase its
authorized shares of Common Stock from 100,000,000 shares to 200,000,000 shares.
Such an amendment was filed on July 29, 2003. Investors also received warrants
to acquire approximately 3.5 million shares of Common Stock. The warrants are
exercisable for a period of five years at an exercise price of $1.39 per common
share. The exercise price of the warrants, together with the number of warrants
issuable upon exercise, are subject to adjustment upon the occurrence of certain
events. The purpose of the Series G Preferred Stock offering was to raise funds
for use primarily in the Company's VoIP telephony services business, including
the deployment of networks, website development, marketing, and limited capital
infrastructure expenditures and working capital.
On May 22, 2003, E&C Capital Partners together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired $1,750,000 of Secured Convertible Notes. The
Secured Convertible Notes were convertible into a maximum of approximately
19,444,000 shares of the Company's Common Stock at a blended rate of $0.09 per
share. The Secured Convertible Notes provided for interest at the rate of ten
percent per annum payable semi-annually, a one year maturity and were secured by
a pledge of substantially all of the assets of the Company. In addition, E&C
Capital Partners was issued a Warrant to acquire 3,888,889 shares of the
Company's Common Stock at an exercise price of $0.15 per share. The Warrant was
exercisable at any time on or before May 22, 2013.
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On March 28, 2003, E&C Capital Partners signed a Preferred Stock Purchase
Agreement and other related documentation pertaining to a $500,000 investment
via the purchase of shares of a new Series F Preferred Stock of theglobe.com and
closed on the investment. Pursuant to the Preferred Stock Purchase Agreement,
E&C Capital Partners received 333,333 shares of Series F Preferred Stock
convertible into shares of the Company's Common Stock at a price of $0.03 per
share. The Series F Preferred Stock had a liquidation preference of $1.50 per
share, provided for payment of a dividend at the rate of 8% per annum and
entitled the holder to vote on an "as-converted" basis with the holders of
Common Stock. In addition, as part of the $500,000 investment, E&C Capital
Partners received warrants to purchase 3,333,333 shares of theglobe.com Common
Stock at an exercise price of $0.125 per share. The warrants were exercisable at
any time on or before March 28, 2013 and both the warrants' exercise price and
number were subject to adjustment.
As a result of the preferential conversion features of the Series G Preferred
Stock and the Series F Preferred Stock, a total of $8,120,000 in non-cash
dividends to preferred stockholders were recognized during the year ended
December 31, 2003.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2004, 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 revenue and expenses during
the reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, valuation of inventories, valuation of goodwill,
intangible assets and other long-lived assets and capitalization of computer
software costs. Our accounting policies and procedures related to these areas
are summarized below.
REVENUE RECOGNITION
The Company's revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games; through the sale of our games information magazine through
newsstands and subscriptions; from the sale of video games and related products
through our online store Chips & Bits; from the sale of direct response
marketing services by our recently acquired wholly-owned subsidiary, SendTec and
from the sale of VoIP telephony services. There is no certainty that events
beyond anyone's control such as economic downturns or significant decreases in
the demand for our services and products will not occur and accordingly, cause
significant decreases in revenue.
COMPUTER GAMES BUSINESSES
Advertising revenues for the games information magazine are recognized at the
on-sale date of the magazine.
The Company uses outside agents to obtain new subscribers for its Computer Games
magazine, whereby the agents retain a percentage of the subscription proceeds as
their commission. Previously these commissions had been classified as sales and
marketing expense within the consolidated statements of operations. Effective
June 2004, the Company changed its method of accounting for these agency fees,
reporting them as a reduction of magazine sales subscription revenue. We believe
this alternative accounting method is a more commonly used industry practice and
is preferable under the circumstances.
Newsstand sales of the games information magazine are recognized at the on-sale
date of the magazine, net of provisions for estimated returns. Subscription
revenue, which is net of agency fees, is deferred when initially received and
recognized as income ratably over the subscription term.
Sales of video games and related products from the online store are recognized
as revenue when the product is shipped to the customer. Amounts billed to
customers for shipping and handling charges are included in net revenue. The
Company provides an allowance for returns of merchandise sold through its online
store. The allowance provided to date has not been significant.
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MARKETING SERVICES
Revenue from the distribution of Internet advertising is recognized when
Internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by the Company's tracking
software.
Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount the Company bills to
clients significantly exceeds the amount of revenue that is earned due to the
existence of various "pass-through" charges such as the cost of the television
and radio media. Amounts received in advance of media airings are deferred as
customer advances until the associated media is aired.
Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized when the programs are complete and have been
delivered or are available for immediate and unconditional delivery. Production
activities generally take eight to twelve weeks and the Company usually collects
amounts in advance and at various points throughout the production process.
Amounts received from customers prior to completion of commercials are reported
as deferred revenue and direct costs associated with the production of
commercials in process are deferred and reported as deferred production costs
until the associated project is complete.
VOIP TELEPHONY SERVICES
VoIP telephony services revenue represents fees charged to customers for voice
services and is recognized based on minutes of customer usage or as services are
provided. The Company records payments received in advance for prepaid services
as deferred revenue until the related services are provided. Sales of peripheral
VoIP telephony equipment are recognized as revenue when the product is shipped
to the customer. Amounts billed to customers for shipping and handling charges
are included in net revenue.
VALUATION OF CUSTOMER RECEIVABLES
Provisions for the 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.
VALUATION OF INVENTORIES
Inventories are recorded on a first-in, first-out basis and valued at the lower
of cost or market value. We generally manage our inventory levels based on
internal forecasts of customer demand for our products, which is difficult to
predict and can fluctuate substantially. Our inventories include high technology
items that are specialized in nature or subject to rapid obsolescence. If our
demand forecast is greater than our actual demand for our products, we may be
required to record charges related to increases in our inventory valuation
reserves. The value of our inventory is also dependent on our estimate of future
average selling prices, and, if our projected average selling prices are over
estimated, we may be required to adjust our inventory value to reflect the lower
of cost or market.
GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
certain acquired intangible assets in a business combination be recognized as
assets separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles with indefinite lives should no longer be amortized, but rather
tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of the asset has decreased below its carrying
value.
Our policy calls for the assessment of the potential impairment of goodwill and
other identifiable intangibles with indefinite lives whenever events or changes
in circumstances indicate that the carrying value may not be recoverable or at
least on an annual basis. Some factors we consider important which could trigger
an impairment review include the following:
o Significant under-performance relative to historical, expected or
projected future operating results;
o Significant changes in the manner of our use of the acquired assets
or the strategy for our overall business; and
o Significant negative industry or economic trends.
When we determine that the carrying value of goodwill or other identified
intangibles with indefinite lives may not be recoverable, we measure any
impairment based on a projected discounted cash flow method.
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LONG-LIVED ASSETS
Historically, the Company's long-lived assets, other than goodwill, have
primarily consisted of property and equipment, capitalized costs of internal-use
software, values attributable to covenants not to compete, acquired technology
and patent costs.
Long-lived assets held and used by the Company and intangible assets with
determinable lives are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." We evaluate recoverability of assets to be held and used by comparing
the carrying amount of the assets, or the appropriate grouping of assets, to an
estimate of undiscounted future cash flows to be generated by the assets, or
asset group. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair values are based on quoted market
values, if available. If quoted market prices are not available, the estimate of
fair value may be based on the discounted value of the estimated future cash
flows attributable to the assets, or other valuation techniques deemed
reasonable in the circumstances.
CAPITALIZATION OF COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over the
expected useful life, or three years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this standard to have a material impact on its
financial condition, results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock options on the grant date and is effective for interim or annual
periods beginning after June 15, 2005. In accordance with the revised statement,
the expense attributable to stock options granted or vested subsequent to July
1, 2005 will be required to be recognized by the Company. The Company has not
yet evaluated the impact of this pronouncement on the Company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 requires all companies to recognize a
current-period charge for abnormal amounts of idle facility expense, freight,
handling costs and wasted materials. This statement also requires that the
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be effective
for fiscal years beginning after June 15, 2005. The Company does not expect the
adoption of this statement to have a material effect on its consolidated
financial statements.
In December 2003, the FASB issued Interpretation ("FIN") No. 46-R "Consolidation
of Variable Interest Entities." FIN 46-R, which modifies certain provisions and
effective dates of FIN 46, sets forth the criteria to be used in determining
whether an investment in a variable interest entity should be consolidated.
These provisions are based on the general premise that if a company controls
another entity through interests other than voting interests, that company
should consolidate the controlled entity. The Company believes that currently,
it does not have any material arrangements that meet the definition of a
variable interest entity which would require consolidation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
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all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on the Company's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the Company's results of operations or financial position.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004 and 2003, we did not have any material off-balance sheet
arrangements that have or are reasonably likely to have a material effect on our
current or future financial condition, revenues or expenses, results of
operations, liquidity, or capital resources.
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
RISKS RELATING TO OUR BUSINESS GENERALLY
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
We have recently engaged certain financial advisors to assist the Company in
raising capital through private placement of equity securities or alternatively
in selling either part or all of the Company's businesses or assets. We
currently have no access to credit facilities with traditional third party
lenders and there can be no assurance that we would be able to raise any such
capital or sell any of our businesses or assets. In addition, any financing that
could be obtained would likely significantly dilute existing stockholders.
We do not presently believe that cash on hand and cash flow generated internally
by the Company will be adequate to fund the operation of our businesses and the
implementation of our current VoIP business plan beyond a short period of time.
We have received a report from our independent accountants, relating to our
December 31, 2004 audited financial statements containing an explanatory
paragraph stating that our recurring losses from operations and our accumulated
deficit raise substantial doubts about our ability to continue as a going
concern. If we are not successful in entering into a financing, sale, or
business transaction that infuses sufficient cash resources into the Company
sometime during the second quarter of 2005, management believes that it will no
longer be able to continue the implementation of its current VoIP business plan.
In such event, it is likely that we would be required to either temporarily
suspend or permanently shutdown the operation of our VoIP telephony services
business. Additionally, in such event, management believes that it may also be
required to revise the business plan of some or all of its other business
segments and/or further implement company-wide cost reduction programs. There
can be no assurance that the Company would be successful in implementing such
revised business plans and effectively restructuring its businesses so that the
Company would have the ability to continue to operate as a going concern in the
future.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES.
Since our inception, we have incurred net losses in each quarter, except the
fourth quarter of 2002 where we had net income of approximately $17,000. We
expect that we will continue to incur net losses for the foreseeable future. We
had net losses of approximately $24.3 million, $11.0 million and $2.6 million
for the years ended December 31, 2004, 2003 and 2002, respectively. The
principal causes of our losses are likely to continue to be:
o costs resulting from the operation of our businesses;
o costs relating to entering new business lines;
o failure to generate sufficient revenue; and
o selling, general and administrative expenses.
Although we have restructured our businesses, we still expect to continue to
incur losses as we continue to develop our VoIP telephony services business and
while we explore a number of strategic alternatives for our businesses,
including continuing to operate the businesses, selling certain businesses or
assets, or acquiring or developing additional businesses or complementary
products.
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OUR ENTRY INTO NEW LINES OF BUSINESS, AS WELL AS POTENTIAL FUTURE ACQUISITIONS,
JOINT VENTURES OR STRATEGIC TRANSACTIONS ENTAILS NUMEROUS RISKS AND
UNCERTAINTIES.
We have entered into new business lines, VoIP telephony services and marketing
services. In November 2002, we acquired certain VoIP assets from an entrepreneur
in exchange for 1,750,000 warrants to purchase our Common Stock. On May 28,
2003, we acquired Direct Partner Telecom, Inc. ("DPT"), an international
licensed telecommunications carrier then engaged in the purchase and resale of
telecommunication services over the Internet. On September 1, 2004, we acquired
SendTec, Inc. ("SendTec"), a direct response marketing services and technology
company. Although highly dependent upon our obtaining additional capital, we may
also enter into new or different lines of business, as determined by management
and our Board of Directors. Our acquisitions, as well as any future acquisitions
or joint ventures could result, and in some instances have resulted in numerous
risks and uncertainties, including:
o potentially dilutive issuances of equity securities, which may be
issued at the time of the transaction or in the future if certain
performance or other criteria are met or not met, as the case may
be. These securities may be freely tradable in the public market or
subject to registration rights which could require us to publicly
register a large amount of our Common Stock, which could have a
material adverse effect on our stock price;
o diversion of management's attention and resources from our existing
businesses;
o significant write-offs if we determine that the business acquisition
does not fit or perform up to expectations;
o the incurrence of debt and contingent liabilities or impairment
charges related to goodwill and other long-lived assets;
o difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired
companies;
o regulatory and tax risks relating to the new or acquired business;
o the risks of entering geographic and business markets in which we
have no or limited prior experience;
o the risk that the acquired business will not perform as expected;
and
o material decreases in short-term or long-term liquidity.
OUR NET OPERATING LOSS CARRY FORWARDS MAY BE LIMITED.
As of December 31, 2004, we had net operating loss carryforwards potentially
available for U.S. and foreign tax purposes of approximately $162 million. These
carryforwards expire through 2024. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to the
change in our ownership interests in August 1997 and May 1999, the Company's
private offering in March 2004 (together with the exercise and conversion of
various securities in connection with such private offering) and the issuance of
Common Stock in connection with the acquisition of SendTec on September 1, 2004,
as defined in the Internal Revenue Code of 1986, as amended, we may have
substantially limited or eliminated the availability of our net operating loss
carryforwards. There can be no assurance that we will be able to utilize any net
operating loss carryforwards in the future.
WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF GOODWILL AND/OR INTANGIBLE
ASSETS ON OUR BALANCE SHEET.
Our acquisition of SendTec has resulted in the recording of a significant amount
of goodwill and intangible assets on our balance sheet. The goodwill was
recorded because the fair value of the net assets acquired was less than the
purchase price. We may not realize the full value of the goodwill and/or
intangible assets. As such, we evaluate on a regular basis whether events and
circumstances indicate that some or all of the carrying value of goodwill and/or
intangible assets are no longer recoverable, in which case we would write off
the unrecoverable portion as a charge to our earnings.
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE
INTERNET.
Our marketing services business, VoIP telephony services business and computer
games businesses are substantially dependent upon the continued growth in the
general use of the Internet. Internet and electronic commerce growth may be
inhibited for a number of reasons, including:
o inadequate network infrastructure;
o security and authentication concerns;
35
o inadequate quality and availability of cost-effective, high-speed
service;
o general economic and business downturns; and
o catastrophic events, including war and terrorism.
As web usage grows, the Internet infrastructure may not be able to support the
demands placed on it by this growth or its performance and reliability may
decline. Websites have experienced interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays frequently occur in the future, web
usage, as well as usage of our services, could grow more slowly or decline.
Also, the Internet's commercial viability may be significantly hampered due to:
o delays in the development or adoption of new operating and technical
standards and performance improvements required to handle increased
levels of activity;
o increased government regulation;
o potential governmental taxation of such services; and
o insufficient availability of telecommunications services which could
result in slower response times and adversely affect usage of the
Internet.
WE MAY FACE INCREASED GOVERNMENT REGULATION, TAXATION AND LEGAL UNCERTAINTIES IN
OUR INDUSTRY, WHICH COULD HARM OUR BUSINESS.
There are an increasing number of federal, state, local and foreign laws and
regulations pertaining to the Internet and telecommunications. In addition, a
number of federal, state, local and foreign legislative and regulatory proposals
are under consideration. Laws or regulations have been and may continue to 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, data
protection, pricing, content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of online payment
services, broadband residential Internet access, and the characteristics and
quality of products and services.
Changes in tax laws relating to electronic commerce could materially affect our
business, prospects and financial condition. One or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction companies that engage in electronic commerce. A successful
assertion by one or more states or foreign countries that we should collect
sales or other taxes on services could result in substantial tax liabilities for
past sales, decrease our ability to compete with traditional telephony, and
otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to
electronic commerce. However, a number of states, as well as the U.S. Congress,
have been considering various initiatives that could limit or supersede the
Supreme Court's position regarding sales and use taxes on electronic commerce.
If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect sales and use taxes. The imposition by state and local
governments of various taxes upon electronic commerce could create
administrative burdens for us and could adversely affect our VoIP business
operations, and ultimately our financial condition, operating results and future
prospects.
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. It is not clear how existing laws governing issues such as property
ownership, sales and other taxes, libel, and personal privacy apply to the
Internet and electronic commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease the
growth in the use of the Internet or VoIP telephony services, may impose
additional burdens on electronic commerce or may alter how we do business. This
could decrease the demand for our existing or proposed services, increase our
cost of doing business, increase the costs of products sold through the Internet
or otherwise have a material adverse effect on our business, plans, prospects,
results of operations and financial condition.
Our ability to offer VoIP services outside the U.S. is also subject to the local
regulatory environment, which may be complicated and often uncertain. Regulatory
treatment of Internet telephony outside the United States varies from country to
country.
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WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our websites and underlying technology, as
well as certain assets relating to our VoIP and direct response marketing
businesses and other opportunities we are investigating, as proprietary and
attempt to protect them by relying on intellectual property laws and
restrictions on disclosure. We also generally enter into confidentiality
agreements with our employees and consultants. In connection with our license
agreements with third parties, we generally seek to control access to and
distribution of our technology and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information without authorization or to develop similar
technology independently. Thus, we cannot assure you that the steps taken by us
will prevent misappropriation or infringement of our proprietary information,
which could have an adverse effect on our business. In addition, our competitors
may independently develop similar technology, duplicate our products, or design
around our intellectual property rights.
We pursue the registration of our trademarks in the United States and, in some
cases, internationally. We are also seeking patent protection for certain VoIP
and direct response marketing assets which we acquired or which we have
developed. However, effective intellectual property protection may not be
available in every country in which our services are distributed or made
available through the Internet. Policing unauthorized use of our proprietary
information is difficult. Legal standards relating to the validity,
enforceability and scope of protection of proprietary rights in Internet-related
businesses are also uncertain and still evolving. We cannot assure you about the
future viability or value of any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. However, we may not have sufficient funds or personnel to adequately
litigate or otherwise protect our rights. Furthermore, we cannot assure you that
our business activities and product offerings will not infringe upon the
proprietary rights of others, or that other parties will not assert infringement
claims against us, including claims related to providing hyperlinks to websites
operated by third parties or providing advertising on a keyword basis that links
a specific search term entered by a user to the appearance of a particular
advertisement. Moreover, from time to time, third parties have asserted and may
in the future assert claims of alleged infringement by us of their intellectual
property rights. Any litigation claims or counterclaims could impair our
business because they could:
o be time-consuming;
o result in significant costs;
o subject us to significant liability for damages;
o result in invalidation of our proprietary rights;
o divert management's attention;
o cause product release delays; or
o require us to redesign our products or require us to enter into
royalty or licensing agreements that may not be available on terms
acceptable to us, or at all.
We license from third parties various technologies incorporated into our
products, networks and 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 products and services or could adversely affect the
performance of our existing products and services until equivalent technology
can be identified, licensed and integrated.
The regulation of domain names in the United States and in foreign countries may
change. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names, any or all of which may dilute the strength of our names. We may not
acquire or maintain our domain names in all of the countries in which our
websites may be accessed, or for any or all of the top-level domain names that
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.
37
WE MAY BE UNSUCCESSFUL IN ESTABLISHING AND MAINTAINING BRAND AWARENESS; BRAND
IDENTITY IS CRITICAL TO OUR COMPANY.
Our success in the markets in which we operate will depend on our ability to
create and maintain brand awareness for our product offerings. This may require
a significant amount of capital to allow us to market our products and establish
brand recognition and customer loyalty. Many of our competitors are larger than
us and have substantially greater financial resources. Additionally, many of the
companies offering VoIP services have already established their brand identity
within the marketplace. We can offer no assurances that we will be successful in
establishing awareness of our brand allowing us to compete in the VoIP market.
If we fail to promote and maintain our various brands or our businesses' brand
values are diluted, our businesses, operating results, financial condition, and
our ability to attract buyers for any of our businesses could be materially
adversely affected. The importance of brand recognition will continue to
increase because low barriers of entry to the industries in which we operate may
result in an increased number of direct competitors. To promote our brands, we
may be required to continue to increase our financial commitment to creating and
maintaining brand awareness. We may not generate a corresponding increase in
revenue to justify these costs.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE.
Due to our significant change in operations, including the entry into new lines
of business, our historical quarterly operating results are not necessarily
reflective of future results. The factors that will cause our quarterly
operating results to fluctuate in the future include:
o acquisitions of new businesses or sales of our businesses or assets;
o changes in the number of sales or technical employees;
o the level of traffic on our websites;
o the overall demand for Internet telephony services, print,
television, radio and Internet advertising and electronic commerce;
o the addition or loss of VoIP customers, clients of our marketing
services business, advertisers of our computer games businesses,
subscribers to our magazine, and electronic commerce partners on our
websites;
o overall usage and acceptance of the Internet;
o seasonal trends in advertising and electronic commerce sales and
member usage in our businesses;
o other costs relating to the maintenance of our operations;
o the restructuring of our business;
o failure to generate significant revenues and profit margins from new
products and services; and
o competition from others providing services similar to ours.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT. OUR
INEXPERIENCE IN THE INTERNET TELEPHONY BUSINESS WILL MAKE FINANCIAL FORECASTING
EVEN MORE DIFFICULT.
We have a limited operating history for you to use in evaluating our prospects
and us. Our prospects should be considered in light of the risks encountered by
companies operating in new and rapidly evolving markets like ours. We may not
successfully address these risks. For example, we may not be able to:
o maintain or increase levels of user traffic on our e-commerce
websites;
o attract customers to our VoIP telephony service;
o adequately forecast anticipated customer purchase and usage of our
retail VoIP products;
o maintain or increase advertising revenue for our computer games
magazine;
o maintain or increase direct response marketing services revenue;
o adapt to meet changes in our markets and competitive developments;
and
38
o identify, attract, retain and motivate qualified personnel.
OUR MANAGEMENT TEAM IS INEXPERIENCED IN THE MANAGEMENT OF A LARGE OPERATING
COMPANY.
Only our Chairman has had experience managing a large operating company.
Accordingly, we cannot assure you that:
o our key employees will be able to work together effectively as a
team;
o we will be able to retain the remaining members of our management
team;
o we will be able to hire, train and manage our employee base;
o our systems, procedures or controls will be adequate to support our
operations; and
o our management will be able to achieve the rapid execution necessary
to fully exploit the market opportunity for our products and
services.
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract, retain and
motivate highly qualified technical expertise and managerial personnel necessary
to operate our businesses. We may need to give retention bonuses and stock
incentives to certain employees to keep them, which can be costly to us. The
loss of the services of members of our management team or other key personnel
could harm our business. Our future success depends to a significant extent on
the continued service of key management, client service, product development,
sales and technical personnel. We do not maintain key person life insurance on
any of our executive officers and do not intend to purchase any in the future.
Although we generally enter into non-competition agreements with our key
employees, our business could be harmed if one or more of our officers or key
employees decided to join a competitor or otherwise compete with us.
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. Also, we may
have difficulty attracting qualified employees to work in the geographically
remote location in Vermont of Chips & Bits, Inc. and Strategy Plus, Inc. If we
were unable to attract and retain the technical and managerial personnel
necessary to support and grow our businesses, our businesses would likely be
materially and adversely affected.
OUR OFFICERS, INCLUDING OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND PRESIDENT
HAVE OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH
SOME OF OUR DIRECTORS; ALL OF OUR DIRECTORS ARE EMPLOYEES OR STOCKHOLDERS OF THE
COMPANY OR AFFILIATES OF OUR LARGEST STOCKHOLDER.
Because our Chairman and Chief Executive Officer, Mr. Michael Egan, is an
officer or director of other companies, we have to compete for his time. Mr.
Egan became our Chief Executive Officer effective June 1, 2002. Mr. Egan is also
the controlling investor of Dancing Bear Investments, Inc., an entity controlled
by Mr. Egan, which is our largest stockholder. Mr. Egan has not committed to
devote any specific percentage of his business time with us. Accordingly, we
compete with Dancing Bear Investments, Inc. and Mr. Egan's other related
entities for his time.
Our President, Treasurer and Chief Financial Officer and Director, Mr. Edward A.
Cespedes, is also an officer or director of other companies. Accordingly, we
must compete for his time. Mr. Cespedes is an officer or director of various
privately held entities and is also affiliated with Dancing Bear Investments.
Our Vice President of Finance and Director, Ms. Robin Lebowitz is also
affiliated with Dancing Bear Investments. She is also an officer or director of
other companies or entities controlled by Mr. Egan and Mr. Cespedes.
Due to the relationships with his related entities, Mr. Egan will have an
inherent conflict of interest in making any decision related to transactions
between the related entities and us. Furthermore, the Company's Board of
Directors presently is comprised entirely of individuals which are employees of
theglobe, and therefore are not "independent." We intend to review related party
transactions in the future on a case-by-case basis.
39
WE RELY ON THIRD PARTY OUTSOURCED HOSTING FACILITIES OVER WHICH WE HAVE LIMITED
CONTROL.
Our principal servers are located in Florida and New York primarily at third
party outsourced hosting facilities. Our operations depend on the ability to
protect our systems against damage from unexpected events, including fire, power
loss, water damage, telecommunications failures and vandalism. Any disruption in
our Internet access could have a material adverse effect on us. In addition,
computer viruses, electronic break-ins or other similar disruptive problems
could also materially adversely affect our businesses. Our reputation,
theglobe.com brand and the brands of our individual businesses could be
materially and adversely affected by any problems experienced by our sites or
our supporting VoIP network. 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 businesses depends on maintaining
relevant security features. Substantial or ongoing security breaches on our
systems or other Internet-based systems could significantly harm our business.
We incur substantial expenses protecting against and remedying security
breaches. Security breaches also could damage our reputation and expose us to a
risk of loss or litigation. Experienced programmers or "hackers" have
successfully penetrated our systems and we expect that these attempts will
continue to occur from time to time. Because a hacker who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our products and services, we may have to expend significant
capital and resources to protect against or to alleviate problems caused by
these hackers. Additionally, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such security breaches could
materially adversely affect our company. In addition, the transmission of
computer viruses resulting from hackers or otherwise could expose us to
significant liability. Our insurance may not be adequate to reimburse us for
losses caused by security breaches. We also face risks associated with security
breaches affecting third parties with whom we have relationships.
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED
OVER THE INTERNET.
Users may access content on our websites or the websites of our distribution
partners or other third parties through website links or other means, and they
may download content and subsequently transmit this content to others over the
Internet. This could result in claims against us based on a variety of theories,
including defamation, obscenity, negligence, copyright infringement, trademark
infringement or the wrongful actions of third parties. Other theories may be
brought based on the nature, publication and distribution of our content or
based on errors or false or misleading information provided on our websites.
Claims have been brought against online services in the past and we have
received inquiries from third parties regarding these matters. Such claims could
be material in the future.
WE MAY BE EXPOSED TO LIABILITY FOR PRODUCTS OR SERVICES SOLD OVER THE INTERNET,
INCLUDING PRODUCTS AND SERVICES SOLD BY OTHERS.
We enter into agreements with commerce partners and sponsors under which, in
some cases, we are entitled to receive a share of revenue from the purchase of
goods and services through direct links from our sites. We sell products
directly to consumers which may expose us to additional legal risks, regulations
by local, state, federal and foreign authorities and potential liabilities to
consumers of these products and services, even if we do not ourselves provide
these products or services. We cannot assure you that any indemnification that
may be provided to us in some of these agreements with these parties will be
adequate. Even if these claims do not result in our liability, we could incur
significant costs in investigating and defending against these claims. The
imposition of potential liability for information carried on or disseminated
through our systems could require us to implement measures to reduce our
exposure to liability. Those measures may require the expenditure of substantial
resources and limit the attractiveness of our services. Additionally, our
insurance policies may not cover all potential liabilities to which we are
exposed.
WE ARE A PARTY TO LITIGATION MATTERS THAT MAY SUBJECT US TO SIGNIFICANT
LIABILITY AND BE TIME CONSUMING AND EXPENSIVE.
As described in Note 11, "Commitments and Contingencies," in the Notes to
Consolidated Financial Statements, we are currently a defendant in a lawsuit
asserting claims of breach of contract and specific performance and which seeks
payment of approximately $2.5 million in cash, plus interest, as well as the
issuance of 1.0 million shares of our Common Stock. In addition, we are a party
to securities class action litigation.
At this time we cannot reasonably estimate the range of any loss or damages
resulting from these lawsuits due to uncertainty regarding the ultimate outcome.
The defense of this litigation may be expensive to defend and divert
management's attention from day-to-day operations. An adverse outcome in this
litigation could materially and adversely affect our results of operations and
financial position and may utilize a significant portion of our cash resources.
40
WE MAY NOT BE ABLE TO IMPLEMENT SECTION 404 OF THE SARBANES-OXLEY ACT ON A
TIMELY BASIS.
The SEC, as directed by Section 404 of The Sarbanes-Oxley Act, adopted rules
generally requiring each public company to include a report of management on the
company's internal controls over financial reporting in its annual report on
Form 10-K that contains an assessment by management of the effectiveness of the
company's internal controls over financial reporting. In addition, the company's
independent registered public accounting firm must attest to and report on
management's assessment of the effectiveness of the company's internal controls
over financial reporting. This requirement will first apply to our annual report
on Form 10-K for the fiscal year ending December 31, 2006.
We are currently at the beginning stages of developing our Section 404
implementation plan. We have in the past discovered, and may in the future
discover, areas of our internal controls that need improvement. How companies
should be implementing these new requirements including internal control reforms
to comply with Section 404's requirements, and how independent auditors will
apply these requirements and test companies' internal controls, is still
reasonably uncertain.
We expect that we will need to hire and/or engage additional personnel and incur
incremental costs in order to complete the work required by Section 404. There
can be no assurance that we will be able to complete our Section 404 plan on a
timely basis. The Company's liquidity position in 2005 and 2006 may also
negatively impact our ability to adequately fund our Section 404 efforts.
Even if we timely complete our Section 404 plan, we may not be able to conclude
that our internal controls over financial reporting are effective, or in the
event that we conclude that our internal controls are effective, our independent
accountants may disagree with our assessment and may issue a report that is
qualified. This could subject the Company to regulatory scrutiny and a loss of
public confidence in our internal controls. In addition, any failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could harm the Company's operating results or cause the
Company to fail to meet its reporting obligations.
RISKS RELATING TO OUR VOIP TELEPHONY BUSINESS
WE ARE UNABLE TO PREDICT THE VOLUME OF USAGE AND OUR CAPACITY NEEDS FOR OUR VOIP
BUSINESS; DISADVANTAGEOUS CONTRACTS HAVE REDUCED OUR OPERATING MARGINS AND MAY
ADVERSELY AFFECT OUR LIQUIDITY AND FINANCIAL CONDITION.
We have entered into a number of long-term agreements (generally for terms of
one year, with the terms of several agreements extending to three to five years)
for leased communications transmission capacity and data center facilities with
various carriers and other third parties. The minimum amounts payable under
these agreements and the underlying current capacity of our VoIP network greatly
exceeds our current estimates of customer demand and usage for the foreseeable
future. The Company is currently negotiating to reduce the amounts payable
during 2005 under these network-related agreements. Although the Company has
been successful in recently terminating substantially all of the minimum usage
requirement commitments for which it was previously obligated under certain of
its carrier agreements, there can be no assurance that it will be able to
further reduce its network-related contractual commitments. If the Company is
not successful in significantly reducing such commitments, its liquidity and
financial condition could be materially and adversely impacted.
THE VOIP MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
DEPEND ON NEW PRODUCT INTRODUCTIONS AND INNOVATIONS IN ORDER TO ESTABLISH,
MAINTAIN AND GROW OUR BUSINESS.
VoIP is an emerging market that is characterized by rapid changes in customer
requirements, frequent introductions of new and enhanced products, and
continuing and rapid technological advances. To enter and compete successfully
in this emerging market, we must continually design, develop 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 and selling such
products and services will depend on a variety of factors, including:
o access to sufficient capital to complete our development efforts;
o the identification of market demand for new products;
o the determination of appropriate product inventory levels;
o product and feature selection;
o timely implementation of product design and development;
o product performance;
41
o cost-effectiveness of products under development;
o securing effective sources of equipment supply; and
o success of promotional efforts.
Additionally, we may also be required to collaborate with third parties to
develop our products and may not be able to do so on a timely and cost-effective
basis, if at all. If we are unable, due to resource constraints or technological
or other reasons, to develop and introduce new or enhanced products in a timely
manner or if such new or enhanced products do not achieve sufficient market
acceptance, our operating results will suffer and our business will not grow.
OUR ABILITY AND PLANS TO PROVIDE TELECOMMUNICATION SERVICES AT ATTRACTIVE RATES
ARISE IN LARGE PART FROM THE FACT VOIP SERVICES ARE NOT CURRENTLY SUBJECT TO THE
SAME REGULATION AS TRADITIONAL TELEPHONY.
Because their services are not currently regulated to the same extent as
traditional telephony, some VoIP providers can currently avoid paying certain
charges that traditional telephone companies must pay. Many traditional
telephone operators are lobbying the Federal Communications Commission (FCC) and
the states to regulate VoIP on the same or similar basis as traditional
telephone services. The FCC and several states are examining this issue.
If the FCC or any state determines to regulate VoIP, they may impose surcharges,
taxes or additional regulations upon providers of VoIP. These surcharges could
include access charges payable to local exchange carriers to carry and terminate
traffic, contributions to the Universal Service Fund or other charges.
Regulations requiring compliance with the Communications Assistance for Law
Enforcement Act, or provision of enhanced 911 services could also place a
significant financial burden on us. The imposition of any such additional fees,
charges, taxes, licenses and regulations on VoIP services could materially
increase our costs and may reduce or eliminate the competitive pricing advantage
we seek to enjoy.
THE INTERNET TELEPHONY BUSINESS IS HIGHLY COMPETITIVE AND ALSO COMPETES WITH
TRADITIONAL AND CELLULAR TELEPHONY PROVIDERS.
The long distance telephony market and the Internet telephony market are highly
competitive. There are several large and numerous small competitors and we
expect to face continuing competition based on price and service offerings from
existing competitors and new market entrants in the future. The principal
competitive factors in our market include price, quality of service, breadth of
geographic presence, customer service, reliability, network size and capacity,
and the availability of enhanced communications services. Our competitors
include major and emerging telecommunications carriers in the U.S. and abroad.
Financial difficulties in the past several years of many telecommunications
providers are rapidly altering the number, identity and competitiveness of the
marketplace. Many of the competitors for our current and planned VoIP service
offerings have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we have. As
a result, certain of these competitors may be able to adopt more aggressive
pricing policies which could hinder our ability to market our voice services.
During the past several years, a number of companies have introduced services
that make Internet telephony or voice services over the Internet available to
businesses and consumers. All major telecommunications companies, including
entities like AT&T, Verizon, Sprint and MCI, either presently or potentially
compete or can compete directly with us. Other Internet telephony service
providers, such as Net2Phone and deltathree, also focus on a retail customer
base and compete with us. These companies may offer the kinds of voice services
we currently offer or intend to offer in the future. In addition, companies
currently in related markets have begun to provide voice over the Internet
services or adapt their products to enable voice over the Internet services.
These related companies may potentially migrate into the Internet telephony
market as direct competitors. A number of cable operators have also begun to
offer VoIP telephony services via cable modems which provide access to the
Internet. These companies, which tend to be large entities with substantial
resources, generally have large budgets available for research and development,
and therefore may further enhance the quality and acceptance of the transmission
of voice over the Internet. We also compete with cellular telephony providers.
PRICING PRESSURES AND INCREASING USE OF VOIP TECHNOLOGY MAY LESSEN OUR
COMPETITIVE PRICING ADVANTAGE.
One of the main competitive advantages of our current and planned VoIP service
offerings is the ability to provide discounted local and long distance telephony
services by taking advantage of cost savings achieved by carrying voice traffic
employing VoIP technology, as compared to carrying calls over traditional
networks. In recent years, the price of telephone service has fallen. The price
of telephone service may continue to fall for various reasons, including the
adoption of VoIP technology by other communications carriers. Many carriers have
adopted pricing plans such that the rates that they charge are not always
substantially higher than the rates that VoIP providers charge for similar
service. In addition, other providers of long distance services are offering
unlimited or nearly unlimited use of some of their services for increasingly
lower monthly rates.
42
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.
Our success in the VoIP market is partly dependent on our ability to forge
marketing, engineering and carrier partnerships. VoIP communication systems are
extremely complex and no single company possesses all the technology components
needed to build a complete end to end solution. We will likely need to enter
into partnerships to augment our development programs and to assist us in
marketing complete solutions to our targeted customers. We may not be able to
develop such partnerships in the course of our operations and product
development. Even if we do establish the necessary partnerships, we may not be
able to adequately capitalize on these partnerships to aid in the success of our
business.
THE FAILURE OF VOIP NETWORKS TO MEET THE RELIABILITY AND QUALITY STANDARDS
REQUIRED FOR VOICE COMMUNICATIONS COULD RENDER OUR PRODUCTS OBSOLETE.
Circuit-switched telephony networks feature very high reliability, with a
guaranteed quality of service. In addition, such networks have imperceptible
delay and consistently satisfactory audio quality. VoIP networks will not be a
viable alternative to traditional circuit switched telephony unless they can
provide reliability and quality consistent with these standards.
ONLINE CREDIT CARD FRAUD CAN HARM OUR BUSINESS.
The sale of our products and services over the Internet exposes us to credit
card fraud risks. Many of our products and services, including our VoIP
services, can be ordered or established (in the case of new accounts) over the
Internet using a major credit card for payment. As is prevalent in retail
telecommunications and Internet services industries, we are exposed to the risk
that some of these credit card accounts are stolen or otherwise fraudulently
obtained. In general, we are not able to recover fraudulent credit card charges
from such accounts. In addition to the loss of revenue from such fraudulent
credit card use, we also remain liable to third parties whose products or
services are engaged by us (such as termination fees due telecommunications
providers) in connection with the services which we provide. In addition,
depending upon the level of credit card fraud we experience, we may become
ineligible to accept the credit cards of certain issuers. We are currently
authorized to accept Discover, together with Visa and MasterCard (which are both
covered by a single merchant agreement with us). Visa/MasterCard constitutes the
primary credit card used by our VoIP customers. The loss of eligibility for
acceptance of Visa/MasterCard could significantly and adversely affect our
business. During 2004, we updated our fraud controls and will attempt to manage
fraud risks through our internal controls and our monitoring and blocking
systems. If those efforts are not successful, fraud could cause our revenue to
decline significantly and our business, financial condition and results of
operations to be materially and adversely affected.
RISKS RELATED TO OUR MARKETING SERVICES BUSINESS
ANY DECREASE IN DEMAND FOR OUR ONLINE MARKETING SERVICES COULD SUBSTANTIALLY
REDUCE OUR REVENUES.
A substantial portion of our revenue is derived from Internet advertising. We
expect that online advertising will continue to account for a substantial
portion of our revenue in the future. However, our revenue from Internet
advertising may decrease in the future for a number of reasons, including the
following:
o the rate at which Internet users click on advertisements or take
action in response to an advertisement has always been low and could
decline as the volume of Internet advertising increases;
o Internet users can install software programs that allow them to
prevent advertisements from appearing on their screens or block the
receipt of emails;
o advertisers may prefer an alternative Internet advertising format,
product or service which we might not offer at that time; and
o we may be unable to make the transition to new Internet advertising
formats preferred by advertisers.
IF OUR PRICING MODELS ARE NOT ACCEPTED BY OUR ADVERTISER CLIENTS, WE COULD LOSE
CLIENTS AND OUR REVENUE COULD DECLINE.
Most of our services are offered to advertisers based on cost-per-action or
cost-per-click pricing models, under which advertisers only pay us if we provide
the results they specify. These results-based pricing models differ from the
fixed-rate pricing model used by many Internet advertising companies, under
which the fee is based on the number of times the advertisement is shown without
regard to effectiveness. Our ability to generate significant revenue from
advertisers will depend, in part, on our ability to demonstrate the
effectiveness of our primary pricing models to advertisers, who may be more
accustomed to a fixed-rate pricing model.
43
Furthermore, intense competition among websites and other Internet advertising
providers has led to the development of a number of alternative pricing models
for Internet advertising. The proliferation of multiple pricing alternatives may
confuse advertisers and make it more difficult for them to differentiate among
these alternatives. In addition, it is possible that new pricing models may be
developed and gain widespread acceptance that are not compatible with our
business model or our technology. These alternatives, and the likelihood that
additional pricing models will be introduced, make it difficult for us to
project the levels of advertising revenue or the margins that we, or the
Internet advertising industry in general, will realize in the future. If
advertisers do not understand the benefits of our pricing models, then the
market for our services may decline or develop more slowly than we expect, which
may limit our ability to grow our revenue or cause our revenue to decline.
ONLINE TRANSACTIONS FROM WHICH WE DERIVE OUR REVENUE ARE SUBJECT TO VALIDATION.
OUR REVENUE AND MARGINS COULD BE REDUCED AS A RESULT OF INVALID TRANSACTIONS.
SendTec derives revenue from its online cost per action advertising business
based on the number of actions it generates for clients each month. SendTec
determines the number of actions generated for clients based on digital tracking
technology and reports from its clients detailing the number of actions received
by them. SendTec relies upon its digital tracking methods and final reports from
its clients to determine the number of actions for which it pays its publisher
network. On average SendTec pays its network of publishers between 30 days and
60 days from the end of the month. In certain situations, SendTec may be
required to reimburse its clients for actions which SendTec has previously
verified as valid actions but the client has subsequently determined to be
invalid due to fraud or other factors. In these instances, SendTec generally may
not have recourse against the publishers in its network that have generated the
actions and therefore SendTec may not be able to recover any portion of the
reimbursements it makes to its clients from its publishers.
WE DEPEND ON A LIMITED NUMBER OF CLIENTS FOR A SIGNIFICANT PERCENTAGE OF OUR
REVENUE, AND THE LOSS OF ONE OR MORE OF THESE ADVERTISERS COULD CAUSE OUR
REVENUE TO DECLINE.
The results of SendTec's operations have been included in our consolidated
results since date of acquisition, September 1, 2004. During the four months
ended December 31, 2004, two customers of SendTec accounted for approximately
52% of SendTec's total net revenue. We believe that a limited number of clients
will continue to be the source of a substantial portion of our revenue for the
foreseeable future. Key factors in maintaining our relationships with these
clients include our performance on individual campaigns, the strength of our
professional reputation and the relationships of our key executives with client
personnel. To the extent that our performance does not meet client expectations,
or our reputation or relationships with one or more major clients are impaired,
our revenues could decline and our operating results could be adversely
affected. During the second quarter of 2004, one of SendTec's major customers
acquired a business that competes with SendTec. This acquisition, other similar
acquisitions, or general business consolidation within the marketing services
industry could also cause our revenue and operating results to decline and
adversely affect SendTec's business.
ANY LIMITATION ON OUR USE OF DATA DERIVED FROM OUR CLIENTS' ADVERTISING
CAMPAIGNS COULD SIGNIFICANTLY DIMINISH THE VALUE OF OUR SERVICES AND CAUSE US TO
LOSE CLIENTS AND REVENUE.
When an individual visits our clients' websites, we use technologies, including
cookies and web beacons, to collect information such as the user's IP address,
advertisements delivered by us that have been viewed by the user and responses
by the user to such advertisements. We aggregate and analyze this information to
determine the placement of advertisements across our affiliate network of
advertising space. Although the data we collect from campaigns of different
clients, once aggregated, are not identifiable, our clients might decide not to
allow us to collect some or all of this data or might limit our use of this
data. Any limitation on our ability to use such data could make it more
difficult for us to deliver online marketing programs that meet client demands.
In addition, although our contracts generally permit us to aggregate data from
advertising campaigns, our clients might nonetheless request that we discontinue
using data obtained from their campaigns that have already been aggregated with
other clients' campaign data. It would be difficult, if not impossible, to
comply with these requests, and such requests could result in significant
expenditures of resources. Interruptions, failures or defects in our data
collection, mining and storage systems, as well as privacy concerns regarding
the collection of user data, could also limit our ability to aggregate and
analyze data from our clients' advertising campaigns. If that happens, we may
lose clients and our revenue may decline.
IF THE MARKET FOR INTERNET ADVERTISING FAILS TO CONTINUE TO DEVELOP, OUR REVENUE
AND OUR OPERATING RESULTS COULD BE HARMED.
Our future success is highly dependent on the continued use and growth of the
Internet as an advertising medium. The Internet advertising market is relatively
new and rapidly evolving, and it uses different measurements than traditional
media to gauge its effectiveness. As a result, demand for and market acceptance
of Internet advertising services is uncertain. Many of our current or potential
advertiser clients have little or no experience using the Internet for
advertising purposes and have allocated only limited portions of their
advertising budgets to the Internet. The adoption of Internet advertising,
particularly by those entities that have historically relied upon traditional
44
media for advertising, requires the acceptance of a new way of conducting
business, exchanging information, measuring success and evaluating new
advertising products and services. Such clients may find Internet advertising to
be less effective for promoting their products and services than traditional
advertising media. We cannot assure you that the market for Internet advertising
will continue to grow or become sustainable. If the market for Internet
advertising fails to continue to develop or develops more slowly than we expect,
our revenue and business could be harmed.
WE DEPEND ON ONLINE PUBLISHERS FOR ADVERTISING SPACE TO DELIVER OUR CLIENTS'
ADVERTISING CAMPAIGNS, AND ANY DECLINE IN THE SUPPLY OF ADVERTISING SPACE
AVAILABLE THROUGH OUR NETWORK COULD CAUSE OUR REVENUE TO DECLINE.
The websites, search engines and email publishers that sell or venture their
advertising space to or with us are not bound by long-term contracts that ensure
us a consistent supply of advertising space, which we refer to as our inventory.
We generate a significant portion of our revenue from the advertising inventory
provided by a limited number of publishers. In most instances, publishers can
change the amount of inventory they make available to us at any time, as well as
the price at which they make it available. In addition, publishers may place
significant restrictions on our use of our advertising inventory. These
restrictions may prohibit advertisements from specific advertisers or specific
industries, or restrict the use of certain creative content or format. If a
publisher decides not to make inventory available to us, or decides to increase
the price, or places significant restrictions on the use of such inventory, we
may not be able to replace this with inventory from other publishers that
satisfy our requirements in a timely and cost-effective manner. If this happens,
our revenue could decline or our cost of acquiring inventory may increase.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO OBTAIN SUFFICIENT ADVERTISING
INVENTORY THAT MEETS OUR PRICING AND QUALITY REQUIREMENTS.
Our growth depends on our ability to effectively manage and expand the volume of
our inventory of advertising space. To attract new advertisers, we must increase
our supply of inventory that meets our performance and pricing requirements. Our
ability to purchase or venture sufficient quantities of suitable advertising
inventory will depend on various factors, some of which are beyond our control.
These factors include:
o our ability to offer publishers a competitive price for our
inventory;
o our ability to estimate the quality of the available inventory; and
o our ability to efficiently manage our existing advertising
inventory.
In addition, the number of competing Internet advertising networks that purchase
advertising inventory from websites, search engine and email publishers
continues to increase. We cannot assure you that we will be able to purchase or
venture advertising inventory that meets our performance, price and quality
requirements, and if we cannot do so, our ability to generate revenue could be
limited.
ANY LIMITATION ON OUR ABILITY TO POST ADVERTISEMENTS THROUGHOUT OUR NETWORK OF
ADVERTISING SPACE COULD HARM OUR BUSINESS.
We execute advertising programs for clients primarily by posting advertisements,
which we refer to as ad delivery, on our affiliate network of advertising space.
Our business could suffer from a variety of factors that could limit or reduce
our ability to post advertisements across our affiliate network, including:
o technological changes that render the delivery of our advertisements
obsolete or incompatible with the operating systems of consumers
and/or the systems of online publishers;
o lawsuits or injunctions based on claims that our ad delivery
methodologies violate the proprietary rights of other parties; and
o interruptions, failures or defects in our ad delivery and tracking
systems.
CONSOLIDATION OF ONLINE PUBLISHERS MAY IMPAIR OUR ABILITY TO PROVIDE MARKETING
SERVICES, ACQUIRE ADVERTISING INVENTORY AT FAVORABLE RATES AND COLLECT CAMPAIGN
DATA.
The consolidation of Internet advertising networks, web portals, search engines
and other online publishers could eventually lead to a concentration of
desirable advertising inventory on a very small number of networks and large
websites. Such concentration could:
o increase our costs if these publishers use their greater bargaining
power to increase rates for advertising inventory; and
o impair our ability to provide marketing services if these publishers
prevent us from distributing our clients' advertising campaigns on
their websites or if they adopt ad delivery systems that are not
compatible with our ad delivery methodologies.
45
OUR BUSINESS COULD BE HARMED IF THE USE OF TRACKING TECHNOLOGY IS RESTRICTED OR
BECOMES SUBJECT TO NEW REGULATION.
In conjunction with the delivery of advertisements to websites, we typically
place small files of information, commonly known as cookies, on an Internet
user's hard drive, generally without the user's knowledge or consent. Cookie
information is passed to us through an Internet user's browser software. We use
cookies to collect information regarding the advertisements we deliver to
Internet users and their interaction with these advertisements. We use this
information to identify Internet users who have received our advertisements in
the past and to monitor and prevent potentially fraudulent activity. In
addition, our technology uses this information to monitor the performance of
ongoing advertising campaigns and plan future campaigns.
Some Internet commentators and privacy advocates have proposed limiting or
eliminating the use of cookies and other Internet tracking technologies, and
legislation has been introduced in some jurisdictions to regulate Internet
tracking technologies. The European Union has already adopted a directive
requiring that when cookies are used, the user must be informed and offered an
opportunity to opt-out of the cookies' use. If there is a further reduction or
limitation in the use of Internet tracking technologies such as cookies:
o we may have to replace or re-engineer our tracking technology, which
could require significant amounts of our time and resources, may not
be completed in time to avoid losing clients or advertising
inventory, and may not be commercially or technically feasible;
o we may have to develop or acquire other technology to prevent fraud;
and
o we may become subject to costly and time-consuming litigation or
investigations due to our use of cookie technology or other
technologies designed to collect Internet usage information.
Any one or more of these occurrences could result in increased costs, require us
to change our business practices or divert management's attention.
IF WE OR OUR ADVERTISER OR PUBLISHER CLIENTS FAIL TO COMPLY WITH REGULATIONS
GOVERNING CONSUMER PRIVACY, WE COULD FACE SUBSTANTIAL COSTS AND OUR BUSINESS
COULD BE HARMED.
Our collection, maintenance and sharing of information regarding Internet users
could result in lawsuits or government inquiries. These actions may include
those related to U.S. federal and state legislation or European Union directives
limiting the ability of companies like ours to collect, receive and use
information regarding Internet users. Litigation and regulatory inquiries are
often expensive and time-consuming and their outcome is uncertain. Any
involvement by us in any of these matters could require us to:
o spend significant amounts on legal defense;
o divert the attention of senior management from other aspects of our
business;
o defer or cancel new product launches as a result of these claims or
proceedings; and
o make changes to our present and planned products or services.
Further, we cannot assure you that our advertiser and publisher clients are
currently in compliance, or will remain in compliance, with their own privacy
policies, regulations governing consumer privacy or other applicable legal
requirements. We may be held liable if our clients use our technology or the
data we collect on their behalf in a manner that is not in compliance with
applicable laws or regulations or their own stated privacy standards.
WE MAY BE LIABLE FOR CONTENT IN THE ADVERTISEMENTS WE DELIVER FOR OUR CLIENTS.
We may be liable to third parties for content in the advertisements we deliver
if the artwork, text or other content involved violates copyrights, trademarks
or other intellectual property rights of third parties or if the content is
defamatory. Although we generally receive warranties from our advertisers that
they have the right to use any copyrights, trademarks or other intellectual
property included in an advertisement and are normally indemnified by the
advertisers, a third party may still file a claim against us. Any claims by
third parties against us could be time-consuming, could result in costly
litigation and adverse judgments and could require us to change our business.
46
MISAPPROPRIATION OF CONFIDENTIAL INFORMATION HELD BY US COULD CAUSE US TO LOSE
CLIENTS OR INCUR LIABILITY.
We retain highly confidential information on behalf of our clients in our
systems and databases. Although we maintain security features in our systems,
our operations may be susceptible to hacker interception, break-ins and other
disruptions. These disruptions may jeopardize the security of information stored
in and transmitted through our systems. If confidential information is
compromised, we could be subject to lawsuits by the affected clients or Internet
users, which could damage our reputation among our current and potential
clients, require significant expenditures of capital and other resources and
cause us to lose business and revenues.
WE FACE INTENSE AND GROWING COMPETITION, WHICH COULD RESULT IN PRICE REDUCTIONS,
REDUCED OPERATING MARGINS AND LOSS OF MARKET SHARE.
The direct response advertising market is highly competitive. If we fail to
compete effectively against other advertising service companies, we could lose
clients or advertising inventory and our revenues could decline. We expect
competition to continue to increase because there are no significant barriers to
entry.
Many current and potential competitors have advantages over us, such as longer
operating histories, greater name recognition, larger client bases, greater
access to advertising space on high-traffic websites and significantly greater
financial, technical and marketing resources. In addition, existing or future
competitors may develop or offer services that provide significant performance,
price, creative or other advantages over those offered by us.
Current and potential competitors may establish cooperative relationships among
themselves or with third parties to increase the ability of their products and
services to address the needs of our clients and prospective clients. As a
result, it is possible that new competitors may emerge and rapidly acquire
significant market share.
If we fail to compete successfully, we could have difficulties attracting and
retaining advertising clients or advertising inventory, which may decrease our
revenues and adversely affect our operating results. Increased competition may
also result in price reductions and reduced operating income.
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CLIENTS.
Our clients typically hire us on a project-by-project basis or on an annual
contractual relationship. Moreover, our clients generally have the right to
terminate their relationships with us without penalty and with relatively short
or no notice. Once a project is completed we cannot be assured that a client
will engage us for further services. From time to time, highly successful
engagements have ended because our client was acquired and the new owners
decided not to retain us. A client that generates substantial revenue for us in
one period may not be a substantial source of revenue in a subsequent period. We
expect a relatively high level of client concentration to continue, but not
necessarily involve the same clients from period to period. The termination of
our business relationships with any of our significant clients, or a material
reduction in the use of our services by any of our significant clients, could
adversely affect our future financial performance.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR EXPENSES COULD INCREASE AND OUR
MANAGEMENT'S TIME AND ATTENTION COULD BE DIVERTED.
As we continue to increase the scope of our operations, we will need an
effective planning and management process to implement our business plan
successfully in the rapidly evolving Internet advertising market. Our business,
results of operations and financial condition will be substantially harmed if we
are unable to manage our expanding operations effectively. We plan to continue
to expand the sales and marketing, customer support and research and development
organizations. Growth may place a significant strain on our management systems
and resources. We will likely need to continue to improve our financial and
managerial controls and our reporting systems and procedures. In addition, we
will need to expand, train and manage our work force. Our failure to manage our
growth effectively could increase our expenses and divert management's time and
attention.
IF WE FAIL TO ESTABLISH, MAINTAIN AND EXPAND OUR TECHNOLOGY BUSINESS AND
MARKETING ALLIANCES AND PARTNERSHIPS, OUR ABILITY TO GROW OUR MARKETING SERVICES
BUSINESS COULD BE LIMITED.
In order to grow our technology business, we must generate, retain and
strengthen successful business and marketing alliances with advertising
agencies. We depend, and expect to continue to depend, on our business and
marketing alliances, which are companies with which we have written or oral
agreements to work together to provide services to our clients and to refer
business from their clients and customers to us. If companies with which we have
business and marketing alliances do not refer their clients and customers to us
to perform their online campaign and message management, our revenue and results
of operations would be severely harmed.
47
RISKS RELATING TO OUR COMPUTER GAMES BUSINESS
THE MARKET SITUATION CONTINUES TO BE A CHALLENGE FOR CHIPS & BITS DUE TO
ADVANCES IN CONSOLE AND ONLINE GAMES, WHICH HAVE LOWER MARGINS AND TRADITIONALLY
LESS SALES LOYALTY TO CHIPS & BITS.
Our subsidiary, Chips & Bits, Inc. depends on major releases in the Personal
Computer (PC) market for the majority of sales and profits. Advances in
technology and the game industry's increased focus on console and online game
platforms, such as Xbox, 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. Because of the large installed base of
personal computers, revenue and gross margin percentages may fluctuate with
changes in the PC game market. However, we are unable to predict when, if ever,
there will be a turnaround in the PC game market, or if we will be successful in
adequately increasing our future sales of non PC games.
WE HAVE HISTORICALLY RELIED SUBSTANTIALLY ON ADVERTISING REVENUES, WHICH COULD
DECLINE IN THE FUTURE.
We historically derived a substantial portion of our revenues from the sale of
advertisements, primarily in our Computer Games Magazine. Our games business
model and our ability to generate sufficient future levels of print and online
advertising revenues are highly dependent on the print circulation of our
Computer Games magazine, as well as the amount of traffic on our websites and
our ability to properly monetize website traffic. Print and online advertising
market volumes have declined in the past and may decline in the future, which
could have a material adverse effect on us. Many advertisers have been
experiencing financial difficulties which could further negatively impact our
revenues and our ability to collect our receivables. For these reasons, we
cannot assure you that our current advertisers will continue to purchase
advertisements from our computer games businesses.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE ELECTRONIC COMMERCE
MARKETPLACE.
The games marketplace has become increasingly competitive due to acquisitions,
strategic partnerships and the continued consolidation of a previously
fragmented industry. In addition, an increasing number of major retailers have
increased the selection of video games offered by both their traditional "bricks
and mortar" locations and their online commerce sites, resulting in increased
competition. Our Chips & Bits subsidiary may not be able to compete successfully
in this highly competitive marketplace.
We also face many uncertainties, which may affect our ability to generate
electronic commerce revenues and profits, including:
o our ability to obtain new customers at a reasonable cost, retain
existing customers and encourage repeat purchases;
o the likelihood that both online and retail purchasing trends may
rapidly change;
o the level of product returns;
o merchandise shipping costs and delivery times;
o our ability to manage inventory levels;
o our ability to secure and maintain relationships with vendors; and
o the possibility that our vendors may sell their products through
other sites.
Additionally, if use of the Internet for electronic commerce does not continue
to grow, our business and financial condition would be materially and adversely
affected.
INTENSE COMPETITION FOR ELECTRONIC COMMERCE REVENUES HAS RESULTED IN DOWNWARD
PRESSURE ON GROSS MARGINS.
Due to the ability of consumers to easily compare prices of similar products or
services on competing websites and consumers' potential preference for competing
website's user interface, gross margins for electronic commerce transactions,
which are narrower than for advertising businesses, may further narrow in the
future and, accordingly, our revenues and profits from electronic commerce
arrangements may be materially and adversely affected.
OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT LIABILITY CLAIMS
AGAINST US.
Consumers may sue us if any of the products that we sell are defective, fail to
perform properly or injure the user. Consumers are also increasingly seeking to
impose liability on game manufacturers and distributors based upon the content
of the games and the alleged affect of such content on behavior. 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.
48
RISKS RELATING TO OUR COMMON STOCK
THE VOLUME OF SHARES AVAILABLE FOR FUTURE SALE IN THE OPEN MARKET COULD DRIVE
DOWN THE PRICE OF OUR STOCK OR KEEP OUR STOCK PRICE FROM IMPROVING, EVEN IF OUR
FINANCIAL PERFORMANCE IMPROVES.
As of December 31, 2004, we had issued and outstanding approximately 173.6
million shares, of which approximately 37.3 million shares were freely tradable
over the public markets. There is limited trading volume in our shares and we
are now traded only in the over-the-counter market. On April 16, 2004, we filed
a registration statement relating to the potential resale of up to approximately
131 million of our shares (including approximately 27 million shares underlying
outstanding warrants to acquire our Common Stock). The registration statement
became effective on May 11, 2004. Sales of significant amounts of Common Stock
in the public market in the future, the perception that sales will occur or the
registration of additional shares pursuant to existing contractual obligations
could materially and adversely drive down the price of our stock. In addition,
such factors could adversely affect the ability of the market price of the
Common Stock to increase even if our business prospects were to improve.
Substantially all of our stockholders holding restricted securities, including
shares issuable upon the exercise of warrants to purchase our Common Stock, have
registration rights under various conditions. Also, we may issue additional
shares of our Common Stock or other equity instruments which may be convertible
into Common Stock at some future date, which could further adversely affect our
stock price.
In addition, as of December 31, 2004, there were outstanding options to purchase
approximately 15,984,000 shares of our 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 shares upon exercise of these
options is registered under the Securities Act and consequently, subject to
certain volume restrictions as to shares issuable to executive officers, will be
freely tradable.
Also as of December 31, 2004, we had issued and outstanding warrants to acquire
approximately 18,125,000 shares of our Common Stock. In addition, the Company
holds in escrow warrants to acquire up to 2,250,000 shares of Common Stock,
subject to release over approximately the next year (some of which may
accelerate under certain events) upon the attainment of certain performance
objectives and may issue warrants to acquire up to an additional 2,500,000
shares of Common Stock upon attainment of certain performance criteria related
to the SendTec acquisition. Many of the outstanding instruments representing the
warrants contain anti-dilution provisions pursuant to which the exercise prices
and number of shares issuable upon exercise may be adjusted.
As part of the acquisition of SendTec, we issued an aggregate of approximately
35 million shares of our Common Stock. Pursuant to our contractual obligations,
we will file a registration statement relating to the potential resale of these
shares. We are obligated to cause such registration statement to become
effective on or before September 1, 2005. Upon registration, and subject to
waiver or expiration of a lock-up agreement which expires September 1, 2005, all
such shares will be eligible for resale over the open market.
OUR CHAIRMAN MAY CONTROL US.
After giving effect to the proxies to vote the shares of Common Stock granted by
five of the former shareholders of SendTec, Michael S. Egan, our Chairman and
Chief Executive Officer, beneficially owns or controls, directly or indirectly,
approximately 87.7 million shares of our Common Stock as of March 10, 2005,
which in the aggregate represents approximately 48.9% of the outstanding shares
of our Common Stock (treating as outstanding for this purpose the shares of
Common Stock issuable upon exercise of the options and warrants owned by Mr.
Egan or his affiliates). Accordingly, Mr. Egan will be able to exercise
significant influence over, if not control, any stockholder vote.
DELISTING OF OUR COMMON STOCK MAKES IT MORE DIFFICULT FOR INVESTORS TO SELL
SHARES. THIS MAY POTENTIALLY LEAD TO FUTURE MARKET DECLINES.
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or "OTCBB." As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of the securities. The delisting has made trading our
shares more difficult for investors, potentially leading to further declines in
share price and making it less likely our stock price will increase. It has also
made it more difficult for us to raise additional capital. We may also incur
additional costs under state blue-sky laws if we sell equity due to our
delisting.
OUR COMMON STOCK IS PRESENTLY SUBJECT TO THE "PENNY STOCK" RULES WHICH MAY MAKE
IT A LESS ATTRACTIVE INVESTMENT.
Since the trading price of our Common Stock is less than $5.00 per share,
trading in our Common Stock is also subject to the requirements of Rule 15g-9 of
the Exchange Act. Our Common Stock is also considered a penny stock under the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which
defines a penny stock, generally, as any equity security not traded on an
exchange or quoted on the Nasdaq SmallCap Market that has a market price of less
than $5.00 per share. Under Rule 15g-9, brokers who recommend our Common Stock
to persons who are not established customers and accredited investors, as
defined in the Exchange Act, must satisfy special sales practice requirements,
including requirements that they make an individualized written suitability
49
determination for the purchaser; and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosures in connection with any
trades involving a penny stock, including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated with that market. Such requirements may severely limit the
market liquidity of our Common Stock and the ability of purchasers of our equity
securities to sell their securities in the secondary market. For all of these
reasons, an investment in our equity securities may not be attractive to our
potential investors.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions of our charter, by-laws and stockholder rights plan and provisions of
applicable Delaware law may:
o have the effect of delaying, deferring or preventing a change in
control of our company;
o discourage bids of our Common Stock at a premium over the market
price; or
o adversely affect the market price of, and the voting and other
rights of the holders of, our Common Stock.
Certain Delaware laws could have the effect of delaying, deterring or preventing
a change in control of our company. One of these laws prohibits us from engaging
in a business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder, unless various
conditions are met. In addition, provisions of our charter and by-laws, and the
significant amount of Common Stock held by our current executive officers,
directors and affiliates, could together have the effect of discouraging
potential takeover attempts or making it more difficult for stockholders to
change management. In addition, the employment contracts of our Chairman, CEO
and Vice President of Finance provide for substantial lump sum payments ranging
from 2 (for the Vice President) to 10 times (for each of the Chairman and CEO)
of their respective average combined salaries and bonuses (together with the
continuation of various benefits for extended periods) in the event of their
termination without cause or a termination by the executive for "good reason,"
which is conclusively presumed in the event of a "change-in-control" (as such
terms are defined in such agreements).
OUR STOCK PRICE IS VOLATILE AND MAY DECLINE.
The trading price of our Common Stock has been volatile and may continue to be
volatile in response to various factors, including:
o the performance and public acceptance of our new product lines;
o quarterly variations in our operating results;
o competitive announcements;
o sales of any of our businesses;
o the operating and stock price performance of other companies that
investors may deem comparable to us;
o news relating to trends in our markets; and
o entrance into new lines of business and acquisitions of businesses,
including our SendTec acquisition.
In addition, with regard to our acquisition of SendTec the trading price of our
Common Stock may decline if:
o integration of theglobe.com and SendTec is unsuccessful or is
delayed;
o the combined company does not achieve the perceived benefits of the
acquisition as rapidly or to the extent anticipated by investors;
o the effect of the acquisition on the combined company's financial
results or condition is not consistent with the expectations of
financial investors; or
o the dilution in shareholder ownership related to the issuance of
shares of theglobe.com's Common Stock in connection with the
acquisition is perceived negatively by investors.
The market price of our Common Stock could also decline as a result of
unforeseen factors related to the acquisition. 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.
50
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THEGLOBE.COM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS F-2
STATEMENTS OF OPERATIONS F-3
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) F-4
STATEMENTS OF CASH FLOWS F-5
NOTES TO FINANCIAL STATEMENTS F-7
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
theglobe.com, inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of theglobe.com,
inc. and Subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years ended December 31, 2004,
2003 and 2002. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
theglobe.com, inc. and Subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years ended December 31, 2004, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
March 23, 2005, except for Note 2, as to which the date is March 25, 2005
F-1
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Year ended December 31,
------------------------------
2004 2003
------------- -------------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 6,828,200 $ 1,061,702
Marketable securities 42,736 267,970
Accounts receivable, less allowance for doubtful
accounts of approximately $274,000 and
$113,000, respectively 7,740,692 958,487
Inventory, less reserves of approximately
$1,333,000 and $109,000, respectively 589,579 770,314
Prepaid expenses 1,590,139 550,930
Deposits on inventory purchases 77,250 820,675
Other current assets 316,926 26,357
------------- -------------
Total current assets 17,185,522 4,456,435
Goodwill 11,702,317 --
Intangible assets 1,680,000 199,020
Property and equipment, net 3,406,370 2,416,383
Other assets 42,956 100,240
------------- -------------
Total assets $ 34,017,165 $ 7,172,078
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 7,447,550 $ 1,935,142
Accrued expenses and other current liabilities 2,803,544 840,376
Deferred revenue 739,665 176,591
Notes payable and current portion of long-term debt 1,277,405 121,919
------------- -------------
Total current liabilities 12,268,164 3,074,028
Long-term debt 26,997 1,792,568
Other long-term liabilities 204,616 124,943
------------- -------------
Total liabilities 12,499,777 4,991,539
------------- -------------
Stockholders' Equity:
Preferred stock, $0.001 par value; 3,000,000 shares
authorized; 333,333 shares
issued and outstanding at December 31, 2003
at liquidation value -- 500,000
Common stock, $0.001 par value; 500,000,000 shares
authorized; 174,315,678 and 50,245,574 shares
issued at December 31, 2004 and December 31, 2003,
respectively 174,316 50,246
Additional paid-in capital 282,289,404 238,301,862
Treasury stock, 699,281 common shares, at cost (371,458) (371,458)
Accumulated other comprehensive income -- 1,562
Accumulated deficit (260,574,874) (236,301,673)
------------- -------------
Total stockholders' equity 21,517,388 2,180,539
------------- -------------
Total liabilities and stockholders' equity $ 34,017,165 $ 7,172,078
============= =============
See notes to consolidated financial statements.
F-2
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net Revenue $ 16,041,032 $ 5,284,113 $ 7,245,276
------------ ------------ -------------
Operating Expenses:
Cost of revenue 18,262,105 4,701,338 5,453,136
Sales and marketing 7,386,637 1,987,026 1,101,417
Product development 1,053,886 884,790 652,997
General and administrative 9,102,151 5,285,912 2,889,934
Depreciation 1,402,712 257,560 88,580
Amortization of intangible assets 222,834 72,182 --
Impairment charge 1,661,975 908,384 --
Loss on settlement of contractual obligation 406,750 -- --
------------ ------------ -------------
39,499,050 14,097,192 10,186,064
------------ ------------ -------------
Loss from Operations (23,458,018) (8,813,079) (2,940,788)
------------ ------------ -------------
Other Income (Expense):
Interest income (expense), net (656,633) (1,759,246) 349,895
Other expense, net (158,550) (462,072) (11,768)
------------ ------------ -------------
(815,183) (2,221,318) 338,127
------------ ------------ -------------
Loss Before Provision for Income Taxes (24,273,201) (11,034,397) (2,602,661)
Provision for Income Taxes -- -- 12,000
------------ ------------ -------------
Net Loss $(24,273,201) $(11,034,397) $ (2,614,661)
============ ============ =============
Basic and Diluted Net Loss Per Common Share $ (0.19) $ (0.49) $ (0.09)
============ ============ =============
Weighted Average Common Shares Outstanding 127,842,923 38,710,917 30,382,293
============ ============ =============
See notes to consolidated financial statements.
F-3
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
Common Stock Additional
Preferred --------------------------- Paid-in Treasury
Stock Shares Amount Capital Stock
------------- ----------- ------------- ------------- -------------
Balance, December 31, 2001 $ -- 31,081,574 $ 31,082 $ 218,255,565 $ (371,458)
Year Ended December 31, 2002:
Net loss -- -- -- -- --
Disposal of Attitude Network-
translation loss -- -- -- -- --
Net unrealized (loss) on securities -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of stock options:
Severance arrangement -- -- -- 13,000 --
Acquisition -- -- -- 42,000 --
------------- ----------- ------------- ------------- -------------
Balance, December 31, 2002 -- 31,081,574 31,082 218,310,565 (371,458)
Year Ended December 31, 2003:
Net loss -- -- -- -- --
Net unrealized gain on securities -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of preferred stock:
Series F Preferred Stock 500,000 -- -- 500,000 --
Series G Automatically Converting Preferred
Stock 7,315,000 -- -- 8,945,690 --
Issuance of common stock:
Conversion of Series G Automatically
Converting Preferred Stock (7,315,000) 17,360,000 17,360 7,297,640 --
Acquisition of Direct Partner Telecom, Inc. -- 1,375,000 1,375 636,625 --
Exercise of stock options -- 429,000 429 118,166 --
Beneficial conversion feature of
Convertible Notes -- -- -- 1,750,000 --
Employee stock-based compensation -- -- -- 417,567 --
Issuance of stock options to non-employees -- -- -- 225,609 --
Contributed capital in lieu of salary by officer -- -- -- 100,000 --
------------- ----------- ------------- ------------- -------------
Balance, December 31, 2003 500,000 50,245,574 50,246 238,301,862 (371,458)
Year Ended December 31, 2004:
Net loss -- -- -- -- --
Realized gain on securities -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of common stock:
Private offering, net of offering costs -- 33,381,647 33,382 26,939,363 --
Conversion of Series F Preferred Stock and
exercise of associated warrants (500,000) 19,639,856 19,640 480,360 --
Conversion of $1,750,000 Convertible
Notes -- 22,829,156 22,829 1,654,546 --
Conversion of $2,000,000 Bridge Note -- 3,527,337 3,527 1,996,473 --
Acquisition of SendTec, Inc. 17,500 17,500,024 17,500 11,163,275 --
Conversion of Series H Preferred Stock (17,500) 17,500,500 17,500 -- --
Exercise of warrants owned by Dancing Bear
Investments -- 2,779,560 2,780 (2,780) --
Exercise of stock options -- 639,000 639 183,907 --
Exercise of warrants -- 6,273,024 6,273 5,151 --
Beneficial conversion feature of $2,000,000
Bridge Note and warrants -- -- -- 687,000 --
Employee stock-based compensation -- -- -- 416,472 --
Issuance of stock options to non-employees -- -- -- 463,775 --
------------- ----------- ------------- ------------- -------------
Balance, December 31, 2004 $ -- 174,315,678 $ 174,316 $ 282,289,404 $ (371,458)
============= =========== ============= ============= =============
Accumulated
Other
Comprehensive Accumulated
Income (Loss) Deficit Total
------------- ------------- -------------
Balance, December 31, 2001 $ (120,866) $(214,532,615) $ 3,261,708
Year Ended December 31, 2002:
Net loss -- (2,614,661) (2,614,661)
Disposal of Attitude Network-
translation loss 121,516 -- 121,516
Net unrealized (loss) on securities (650) -- (650)
-------------
Comprehensive loss -- -- (2,493,795)
-------------
Issuance of stock options:
Severance arrangement -- -- 13,000
Acquisition -- -- 42,000
------------- ------------- -------------
Balance, December 31, 2002 -- (217,147,276) 822,913
Year Ended December 31, 2003:
Net loss -- (11,034,397) (11,034,397)
Net unrealized gain on securities 1,562 -- 1,562
-------------
Comprehensive loss -- -- (11,032,835)
-------------
Issuance of preferred stock:
Series F Preferred Stock -- (500,000) 500,000
Series G Automatically Converting Preferred
Stock -- (7,620,000) 8,640,690
Issuance of common stock:
Conversion of Series G Automatically
Converting Preferred Stock -- -- --
Acquisition of Direct Partner Telecom, Inc. -- -- 638,000
Exercise of stock options -- -- 118,595
Beneficial conversion feature of
Convertible Notes -- -- 1,750,000
Employee stock-based compensation -- -- 417,567
Issuance of stock options to non-employees -- -- 225,609
Contributed capital in lieu of salary by officer -- -- 100,000
------------- ------------- -------------
Balance, December 31, 2003 1,562 (236,301,673) 2,180,539
Year Ended December 31, 2004:
Net loss -- (24,273,201) (24,273,201)
Realized gain on securities (1,562) -- (1,562)
-------------
Comprehensive loss -- -- (24,274,763)
-------------
Issuance of common stock:
Private offering, net of offering costs -- -- 26,972,745
Conversion of Series F Preferred Stock and
exercise of associated warrants -- -- --
Conversion of $1,750,000 Convertible
Notes -- -- 1,677,375
Conversion of $2,000,000 Bridge Note -- -- 2,000,000
Acquisition of SendTec, Inc. -- -- 11,198,275
Conversion of Series H Preferred Stock -- -- --
Exercise of warrants owned by Dancing Bear
Investments -- -- --
Exercise of stock options -- -- 184,546
Exercise of warrants -- -- 11,424
Beneficial conversion feature of $2,000,000
Bridge Note and warrants -- -- 687,000
Employee stock-based compensation -- -- 416,472
Issuance of stock options to non-employees -- -- 463,775
------------- ------------- -------------
Balance, December 31, 2004 $ -- $(260,574,874) $ 21,517,388
============= ============= =============
See notes to consolidated financial statements.
F-4
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $(24,273,201) $(11,034,397) $ (2,614,661)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation and amortization 1,625,546 329,742 88,580
Provision for excess and obsolete inventory 1,289,196 110,126 --
Provision for uncollectible accounts receivable 198,537 114,888 --
Non-cash interest expense 735,416 1,739,635 --
Reserve against amounts loaned to Internet venture 506,500 495,000 --
Employee stock compensation 416,472 417,567 --
Compensation related to non-employee stock options 463,775 225,609 --
Contingent commissions expenses 130,366 -- --
Non-cash impairment charge 1,661,975 908,384 --
Write-down of inventory deposit 221,450 -- --
Loss on settlement of contractual obligation 406,750 -- --
Non-cash compensation -- 100,000 --
Loss on disposal or write-off of equipment 69,709 61,072 855
Non-cash gain on settlements of liabilities (352,455) (64,207) --
Disposal of Attitude Network- translation loss -- -- 121,516
Gain on sale of Happy Puppy -- -- (134,500)
Other, net 12,746 19,623 12,350
Changes in operating assets and liabilities, net of
acquisition and dispositions:
Accounts receivable, net (1,305,551) 328,453 290,502
Inventory, net (1,108,461) (516,458) 168,583
Prepaid and other current assets (392,969) (1,058,806) 706,856
Accounts payable 1,311,101 508,862 55,301
Accrued expenses and other current liabilities 609,124 253,215 (592,047)
Deferred revenue 41,342 7,072 (59,957)
------------ ------------ ------------
Net cash and cash equivalents used in operating
activities (17,732,632) (7,054,620) (1,956,622)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of marketable securities -- (10,345,828) --
Proceeds from sales and maturities of marketable securities 225,070 10,079,420 57,650
Net cash acquired (paid) in acquisition of business (2,389,520) 60,948 --
Proceeds from sale of properties -- -- 135,000
Purchases of property and equipment (2,683,342) (2,424,791) (32,250)
Amounts loaned to Internet venture (466,500) (495,000) (40,000)
Patent costs incurred (107,748) (62,492) --
Other, net 24,063 (7,600) 11,000
------------ ------------ ------------
Net cash and cash equivalents provided by (used in)
investing activities (5,397,977) (3,195,343) 131,400
------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings on notes payable and long-term debt 2,000,000 1,750,000 --
Payments on notes payable and long-term debt (151,898) (545,529) (13,184)
Proceeds from issuance of preferred stock, net -- 9,140,690 --
Proceeds from issuance of common stock, net 26,972,745 -- --
Proceeds from exercise of common stock options 184,546 118,595 --
Proceeds from exercise of warrants 11,424 -- --
Increase in (payments of) other long-term liabilities, net (119,710) 122,487 --
------------ ------------ ------------
Net cash and cash equivalents provided by (used in)
financing activities 28,897,107 10,586,243 (13,184)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 5,766,498 336,280 (1,838,406)
Cash and Cash Equivalents, Beginning 1,061,702 725,422 2,563,828
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 6,828,200 $ 1,061,702 $ 725,422
============ ============ ============
See notes to consolidated financial statements (Continued)
F-5
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended December 31,
----------------------------------------
2004 2003 2002
------------- ------------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 184,093 $ 39,819 $ 25,018
============= ============= ========
Income taxes $ -- $ -- $ --
============= ============= ========
Supplemental Disclosure of Non-Cash Transactions:
Common stock, preferred stock and stock options
issued in connection with the acquisition of
SendTec, Inc. $ 11,198,275 $ -- $ --
============= ============= ========
Note payable issued in connection with acquisition of
SendTec, Inc. $ 1,000,009 $ -- $ --
============= ============= ========
Common stock and warrants issued in connection with
acquisition of Direct Partner Telecom, Inc. $ -- $ 638,000 $ --
============= ============= ========
Conversion of Series G Automatically Converting
Preferred Stock into Common Stock $ -- $ 7,315,000 $ --
============= ============= ========
Additional paid-in capital attributable to beneficial
conversion features of Series F Preferred Stock,
$1,750,000 Convertible Notes and $2,000,000
Bridge Note $ 687,000 $ 2,250,000 $ --
============= ============= ========
Preferred dividends recorded as a result of beneficial
conversion features of preferred stock issued $ -- $ 8,120,000 $ --
============= ============= ========
Conversion of Series F Preferred Stock, $1,750,000
Convertible Notes and $2,000,000 Bridge Note $ 4,177,375 $ -- $ --
============= ============= ========
Debt assumed in purchase of intangible asset $ -- $ -- $122,960
============= ============= ========
Intangible asset purchased in exchange for warrants $ -- $ -- $ 42,000
============= ============= ========
Debt assumed in purchase of property and equipment $ 164,870 $ -- $ --
============= ============= ========
See notes to consolidated financial statements.
F-6
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995
(inception) and commenced operations on that date. Originally, theglobe.com was
an online community with registered members and users in the United States and
abroad. That product gave users the freedom to personalize their online
experience by publishing their own content and by interacting with others having
similar interests. However, due to the deterioration of the online advertising
market, the Company was forced to restructure and ceased the operations of its
online community on August 15, 2001. The Company then sold most of its remaining
online and offline properties. The Company continues to operate its Computer
Games print magazine and the associated website Computer Games Online
(www.cgonline.com), as well as the computer games distribution business of Chips
& Bits, Inc. (www.chipsbits.com). On June 1, 2002, Chairman Michael S. Egan and
Director Edward A. Cespedes became Chief Executive Officer and President of the
Company, respectively.
On November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets and is now aggressively pursuing opportunities related to this
acquisition under the brand names, "voiceglo" and "GloPhone." In exchange for
the assets, the Company issued warrants to acquire 1,750,000 shares of its
Common Stock and an additional 425,000 warrants as part of an earn-out structure
upon the attainment of certain performance targets. The earn-out performance
targets were not achieved and the 425,000 earn-out warrants expired on December
31, 2003.
On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a
company engaged in VoIP telephony services in exchange for 1,375,000 shares of
the Company's Common Stock and the issuance of warrants to acquire 500,000
shares of the Company's Common Stock. The transaction included an earn-out
arrangement whereby the former shareholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share upon the attainment of certain performance targets by
DPT, or upon a change in control as defined, over approximately a three year
period following the date of acquisition. Effective March 31, 2004, 500,000 of
the earn-out warrants were forfeited as performance targets had not been
achieved for the first of the three year periods. An additional 750,000 of the
warrants will be forfeited effective March 31, 2005, as performance targets for
the second of the three year periods will not be achieved.
The Company acquired all of the physical assets and intellectual property of DPT
and originally planned to continue to operate the company as a subsidiary and
engage in the provision of VoIP services to other telephony businesses on a
wholesale transactional basis. In the first quarter of 2004, the Company decided
to suspend DPT's wholesale business and dedicate the DPT physical and
intellectual assets to its retail VoIP business, which is conducted under the
names "voiceglo" and "GloPhone." As a result, the Company wrote-off the goodwill
associated with the purchase of DPT as of December 31, 2003, and has since
employed DPT's physical assets in the build out of the retail VoIP network.
On September 1, 2004, the Company acquired SendTec, Inc. ("SendTec"), a direct
response marketing services and technology company. As more fully discussed in
Note 4, "Acquisitions and Disposition," the Company paid $6.0 million in cash,
excluding transaction costs, and issued debt and equity securities valued at a
total of approximately $12 million to purchase SendTec.
As of December 31, 2004, the Company's revenue sources were derived principally
from the newly acquired operations of SendTec which comprises our marketing
services division, as well as from the operations of our games related
businesses. The Company's retail VoIP products and services have yet to produce
any significant revenue.
F-7
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries from their respective dates of acquisition. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. These estimates and assumptions relate to estimates of collectibility of
accounts receivable, the valuation of inventory, accruals, the valuations of
fair values of options and warrants, the impairment of long-lived assets and
other factors. Actual results could differ from those estimates.
(c) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds and highly liquid short-term
investments with qualified financial institutions. The Company considers all
highly liquid securities with original maturities of three months or less to be
cash equivalents. Included in cash and cash equivalents in the accompanying
consolidated balance sheet at December 31, 2004, was approximately $93,000 of
cash held in escrow for purposes of sweepstakes promotions being conducted by
the VoIP telephony division.
(d) MARKETABLE SECURITIES
The Company accounts for its investment in debt and equity securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." All such
investments are classified as available-for-sale as of December 31, 2004 and
2003. Available-for-sale securities are stated at market value, which
approximates fair value, and unrealized holding gains and losses are excluded
from earnings and included as a component of stockholders' equity until
realized.
The following is a summary of available-for-sale securities:
December 31, 2004 December 31, 2003
------------------------ ------------------------
Cost Fair Value Cost Fair Value
-------- -------- -------- --------
Preferred Securities $ -- $ -- $225,000 $225,000
U.S. Treasury Bills 42,736 42,736 41,408 42,970
-------- -------- -------- --------
Total $ 42,736 $ 42,736 $266,408 $267,970
======== ======== ======== ========
During the year ended December 31, 2004 and 2003, the Company had no significant
gross realized gains or losses on sales of available-for-sale securities. The
gross unrealized gain of $1,562 as of December 31, 2003, has been included in
stockholders' equity as "Accumulated Other Comprehensive Income" in the
accompanying consolidated balance sheet.
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company's financial instruments, including
cash, cash equivalents, marketable securities, accounts receivable, accounts
payable, accrued expenses and deferred revenue, approximate their fair value at
December 31, 2004 and 2003 due to their short maturities.
(f) INVENTORY
Inventories are recorded on a first in, first out basis and valued at the lower
of cost or market value. The Company's reserve for excess and obsolete inventory
as of December 31, 2004 and 2003, was approximately $1,333,000 and $109,000,
respectively.
During the year ended December 31, 2004, the Company's VoIP telephony services
business recorded charges to cost of revenue totaling approximately $1,477,000
as a result of write-downs required to state its inventory on-hand and related
deposits for inventory on order at the lower of cost or market value. As of
December 31, 2004, such market values considered certain transactions, completed
subsequent to year-end, as well as the Company's estimate of future unit sales
and selling prices of its telephony equipment inventory in its retail VoIP
business.
F-8
Effective January 31, 2005, the Company formally terminated its contract with a
supplier for VoIP telephony handsets and reached an agreement with the supplier
to settle the unconditional purchase obligation under such contract, which
totaled approximately $3,000,000 (see Note 11, "Commitments and Contingencies,"
for further discussion). As a result, the Company recorded charges to cost of
revenue which increased the inventory reserves related to its VoIP handset
inventory by approximately $300,000 as of December 31, 2004. During the third
quarter of 2004, the Company had recorded a $600,000 charge to cost of revenue
and a corresponding increase to its reserve for excess and obsolete inventory
related to the VoIP handset inventory.
In January 2005, the Company sold essentially all of its voiceglo adapter
inventory on-hand for $235,000 in cash. As a result, inventory reserves at
December 31, 2004 include approximately $356,000 of additional provisions
related to cost of revenue charges required to reflect the voiceglo adapter
inventory at net realizable value. During 2004, the Company also made advance
payments of approximately $299,000 towards future purchases of adapter
inventory. The Company recorded a charge to cost of revenue of approximately
$221,000 to write down the value of such deposits on inventory purchases to
estimated net realizable value of $77,250 as of December 31, 2004.
The Company manages its inventory levels based on internal forecasts of customer
demand for its products, which is difficult to predict and can fluctuate
substantially. In addition, the Company's inventories include high technology
items that are specialized in nature or subject to rapid obsolescence. If the
Company's demand forecast is greater than the actual customer demand for its
products, the Company may be required to record additional charges related to
increases in its inventory valuation reserves in future periods. The value of
inventories is also dependent on the Company's estimate of future average
selling prices, and, if projected average selling prices are over estimated, the
Company may be required to further adjust its inventory value to reflect the
lower of cost or market.
(g) GOODWILL AND INTANGIBLE ASSETS
The Company accounts for goodwill and intangible assets in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that
goodwill and other intangibles with indefinite lives should no longer be
amortized, but rather be tested for impairment annually or on an interim basis
if events or circumstances indicate that the fair value of the asset has
decreased below its carrying value.
Goodwill is stated at cost. At December 31, 2004 and 2003, the Company had no
other intangible assets with indefinite lives. Intangible assets subject to
amortization, included in the accompanying consolidated balance sheets as of
December 31, 2004 and 2003, were being amortized on a straight-line basis over
their estimated useful lives, ranging from three to five years. See Note 3,
"Impairment Charges," for a discussion of the charges recorded by the Company as
a result of the review of goodwill and intangible assets for impairment in
connection with the preparation of the accompanying consolidated financial
statements.
(h) LONG-LIVED ASSETS
Long-lived assets, including property and equipment and intangible assets
subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." If events or changes in circumstances indicate
that the carrying amount of an asset, or an appropriate grouping of assets, may
not be recoverable, the Company estimates the undiscounted future cash flows to
result from the use of the asset, or asset group. If the sum of the undiscounted
cash flows is less than the carrying value, the Company recognizes an impairment
loss, measured as the amount by which the carrying value exceeds the fair value
of the assets. Fair values are based on quoted market values, if available. If
quoted market values are not available, the estimate of fair value may be based
on the discounted value of the estimated future cash flows attributable to the
assets, or other valuation techniques deemed reasonable in the circumstances.
See Note 3, "Impairment Charges," for discussion of impairment charges recorded
by the Company as a result of the review of long-lived assets for impairment in
connection with the preparation of the accompanying consolidated financial
statements.
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets, as follows:
Estimated
Useful Lives
-------------
VoIP Network equipment 3 years
Computer software 3 years
Other equipment 3 years
Furniture and fixtures 3-7 years
Leasehold improvements 3-6 years
F-9
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over three
years.
(i) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents, marketable securities and trade
accounts receivable. The Company maintains its cash and cash equivalents with
various financial institutions and invests its funds among a diverse group of
issuers and instruments. The Company performs ongoing credit evaluations of its
customers' financial condition and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. Concentration of credit risk is generally limited
due to the large number of customers in the Company's computer games businesses
and its VoIP telephony services division.
A single SendTec customer represented $1,444,515, or 22%, of SendTec's total
accounts receivable as of December 31, 2004.
(j) REVENUE RECOGNITION
COMPUTER GAMES BUSINESSES
Advertising revenue from the sale of print advertisements under short-term
contracts in the games information magazine, Computer Games, are recognized at
the on-sale date of the magazine.
The Company participates in barter transactions whereby the Company trades
marketing data in exchange for advertisements in the publications of other
companies. Barter revenue and expenses are recorded at the fair market value of
services provided or received, whichever is more readily determinable in the
circumstances. Revenue from barter transactions is recognized as income when
advertisements or other products are delivered by the Company. Barter expense is
recognized when the Company's advertisements are run in other companies'
magazines, which typically occurs within one to six months from the period in
which barter revenue is recognized. Barter revenue represented less than 1% of
consolidated net revenue for the year ended December 31, 2004 and approximately
2% of consolidated net revenue in the years ended December 31, 2003 and 2002.
The Company uses outside agents to obtain new subscribers for its Computer Games
magazine, whereby the agents retain a percentage of the subscription proceeds as
their commission. Previously these commissions had been classified as sales and
marketing expense within the consolidated statements of operations. Effective
June 2004, the Company changed its method of accounting for these agency fees,
reporting them as a reduction of magazine sales subscription revenue. We believe
this alternative accounting method is a more commonly used industry practice and
is preferable under the circumstances. This reclassification had no impact on
net loss as previously reported by the Company. Net revenue in the accompanying
consolidated statements of operations has been shown net of such agency fees for
all periods presented. These agency fees totaled approximately $1,054,000,
$1,296,000 and $2,422,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. Newsstand sales of the games information magazine are recognized
at the on-sale date of the magazine, net of provisions for estimated returns.
Subscription revenue, which is net of agency fees, is deferred when initially
received and recognized as income ratably over the subscription term.
Sales of video games and related products from the Company's online store are
recognized as revenue when the product is shipped to the customer. Amounts
billed to customers for shipping and handling charges are included in net
revenue. The Company provides an allowance for returns of merchandise sold
through its online store. The allowance for returns provided to date has not
been significant.
MARKETING SERVICES
Revenue from the distribution of Internet advertising is recognized when
Internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by the Company's tracking
software.
Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount the Company bills to
clients significantly exceeds the amount of revenue that is earned due to the
existence of various "pass-through" charges such as the cost of the television
and radio media. Amounts received in advance of media airings are deferred and
included in deferred revenue in the accompanying consolidated balance sheet.
F-10
Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized when the programs are complete and have been
delivered or are available for immediate and unconditional delivery. Production
activities generally take eight to twelve weeks and the Company usually collects
amounts in advance and at various points throughout the production process.
Amounts received from customers prior to completion of commercials are included
in deferred revenue and direct costs associated with the production of
commercials in process are deferred and included within other current assets in
the accompanying condensed consolidated balance sheet.
VOIP TELEPHONY SERVICES
VoIP telephony services revenue represents fees charged to customers for voice
services and is recognized based on minutes of customer usage or as services are
provided. The Company records payments received in advance for prepaid services
as deferred revenue until the related services are provided. Sales of peripheral
VoIP telephony equipment are recognized as revenue when the product is shipped
to the customer. Amounts billed to customers for shipping and handling charges
are included in net revenue.
(k) ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expense. Advertising costs were approximately $2,051,000, $411,000 and
$182,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The
Company incurred no barter advertising costs during the year ended December 31,
2004. Barter advertising costs were approximately 2% of total net revenue for
each of the years ended December 31, 2003 and 2002.
(l) PRODUCT DEVELOPMENT
Product development expenses include salaries and related personnel costs;
expenses incurred in connection with website development, testing and upgrades
of our computer games website; editorial and content costs; and costs incurred
in the development of our retail VoIP products. Product development costs and
enhancements to existing products are charged to operations as incurred.
(m) STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS 123
allows entities to continue to apply the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25") and provide pro forma net earnings (loss)
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS 123 had been applied. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123,"
which provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. SFAS No. 148
also requires more prominent and more frequent disclosures in both interim and
annual financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and
continues to apply the measurement provisions of APB No. 25.
F-11
Had the Company determined compensation expense based on the fair value at the
grant date for its stock options issued to employees under SFAS No. 123, the
Company's net loss would have been adjusted to the pro forma amounts indicated
below:
Year Ended December 31,
--------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net loss - as reported $(24,273,201) $(11,034,397) $ (2,614,661)
Add: Stock-based employee compensation
expense included in net loss as
reported 416,472 417,567 --
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards (1,606,271) (1,821,170) (99,339)
------------ ------------ ------------
Net loss - pro forma $(25,463,000) $(12,438,000) $ (2,714,000)
============ ============ ============
Basic net loss per share -
as reported $ (0.19) $ (0.49) $ (0.09)
============ ============ ============
Basic net loss per share -
pro forma $ (0.20) $ (0.53) $ (0.09)
============ ============ ============
A total of 7,749,595 stock options were granted during the year ended December
31, 2004, including 1,490,430 stock options with a per share weighted-average
fair value of $0.51 and whose exercise price equaled the market price of the
stock on the grant date. A total of 6,259,165 stock options were granted during
the year ended December 31, 2004 with an exercise price below the market price
of the stock on the grant date and a per share weighted-average fair value of
$0.47. The per share weighted-average fair value of stock options granted during
2003 on a total of 3,907,450 options whose exercise price equaled the market
price of the stock on the grant date was $0.82. In addition, 500,000 stock
options were granted in 2003 with an exercise price below the market price of
the stock on the grant date and a per share weighted-average fair value of
$1.49. The per share weighted-average fair value of stock options granted during
2002 was $0.02 on the date of grant. Fair values of stock options were
calculated using the option-pricing method with the following weighted-average
assumptions:
Year Ended December 31,
-------------------------------
2004 2003 2002
-------- --------- --------
Risk-free interest rate 3.00% 3.00% 4.78%
Expected life 3 - 5 years 5 years 10 years
Volatility 160% 160% 135%-160%
Expected dividend rate 0 0 0
The Company follows FASB Interpretation No 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN No. 44") which provides
guidance for applying APB Opinion No 25. With certain exceptions, FIN No. 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000.
(n) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated results of operations in the period that the tax change occurs.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
(o) NET LOSS PER COMMON SHARE
The Company reports net loss per common share in accordance with SFAS No. 128,
"Computation of Earnings Per Share." In accordance with SFAS 128 and the SEC
Staff Accounting Bulletin No. 98, basic earnings-per-share is computed using the
weighted average number of common shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
conversion of the convertible preferred stock and convertible notes (using the
if-converted method) and the shares issuable upon the exercise of stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the calculation if their effect is anti-dilutive.
F-12
During the year ended December 31, 2003, the Company issued equity securities
with common stock conversion features which were immediately convertible into
Common Stock. As further discussed in Note 9, "Stockholders' Equity," the
Company accounted for the issuance of these securities in accordance with EITF
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios," which resulted in the recognition
of non-cash preferred dividends totaling $8,120,000 at the respective dates of
the securities' issuance. Net loss applicable to common stockholders was
calculated as follows:
Year Ended December 31,
---------------------------------------------
2004 2003 2002
------------- ------------- ------------
Net loss $ (24,273,201) $ (11,034,397) $ (2,614,661)
Beneficial conversion features of
preferred stock and warrants -- (8,120,000) --
------------- ------------- ------------
Net loss applicable to common stockholders $ (24,273,201) $ (19,154,397) $ (2,614,661)
============= ============= ============
Due to the Company's net losses, the effect of potentially dilutive securities
or common stock equivalents that could be issued was excluded from the diluted
net loss per common share calculation due to the anti-dilutive effect. Such
potentially dilutive securities and common stock equivalents consisted of the
following for the periods ended:
December 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
Options to purchase common stock 15,984,000 9,943,000 5,971,000
Common shares issuable upon conversion
of Series F Preferred Stock -- 16,667,000 --
Common shares issuable upon conversion
of Convertible Notes -- 19,444,000 --
Common shares issuable upon exercise
of Warrants 20,375,000 22,802,000 6,187,000
---------- ---------- ----------
Total 36,359,000 68,856,000 12,158,000
========== ========== ==========
(p) COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in accordance with the SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income (loss) generally
represents all changes in stockholders' equity during the year except those
resulting from investments by, or distributions to, stockholders. The Company's
comprehensive loss was approximately $24.3 million, $11.0 million and $2.5
million for the years ended December 31, 2004, 2003 and 2002, respectively,
which approximated the Company's reported net loss.
(q) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this standard to have a material impact on its
financial condition, results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock options on the grant date and is effective for interim or annual
periods beginning after June 15, 2005. In accordance with the revised statement,
the expense attributable to stock options granted or vested subsequent to July
1, 2005 will be required to be recognized by the Company. The Company has not
yet evaluated the impact of this pronouncement on the Company.
F-13
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 requires all companies to recognize a
current-period charge for abnormal amounts of idle facility expense, freight,
handling costs and wasted materials. This statement also requires that the
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be effective
for fiscal years beginning after June 15, 2005. The Company does not expect the
adoption of this statement to have a material effect on its consolidated
financial statements.
In December 2003, the FASB issued Interpretation ("FIN") No. 46-R "Consolidation
of Variable Interest Entities." FIN 46-R, which modifies certain provisions and
effective dates of FIN 46, sets forth the criteria to be used in determining
whether an investment in a variable interest entity should be consolidated.
These provisions are based on the general premise that if a company controls
another entity through interests other than voting interests, that company
should consolidate the controlled entity. The Company believes that currently,
it does not have any material arrangements that meet the definition of a
variable interest entity which would require consolidation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on the Company's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the Company's results of operations or financial position.
(r) RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
NOTE 2. GOING CONCERN CONSIDERATIONS
The Company's December 31, 2004 consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
suffered recurring losses from operations since inception, has an accumulated
deficit as of December 31, 2004, of $260,574,874 and has recorded impairment
charges (See Note 3, "Impairment Charges" below for further discussion) during
2004 and 2003 of $1,661,975 and $908,384, respectively, related to its VoIP
telephony services division. Net cash and cash equivalents used in operations
totaled $17,732,632 for 2004 due primarily to net losses incurred by its VoIP
telephony services division.
During 2004, the Company expended significant costs to implement a number of
marketing programs geared toward increasing the number of its VoIP retail
customers and telephony revenue. None of these programs have proven to be
successful to any significant degree. At December 31, 2004, the Company's sole
source of liquidity consisted of $6,828,200 of cash and cash equivalents. The
Company continues to incur substantial consolidated net losses and management
believes the Company will continue to be unprofitable for the foreseeable
future. Consequently, as of March 25, 2005, the Company's cash and cash
equivalent resources had diminished to approximately $3,900,000. These
conditions raise significant doubt about the Company's ability to continue as a
going concern.
MANAGEMENT'S PLANS
During October 2004, the Company engaged financial advisors to assist the
Company in raising capital through a private placement of its equity securities,
or in entering into other business relationships with certain strategic
investors. In February 2005, the Company engaged an additional financial advisor
to assist the Company in connection with raising capital through a private
placement of equity securities in either the Company or its SendTec wholly-owned
subsidiary or alternatively in selling either part or all of the Company's
businesses or assets, including its SendTec business. The Company currently has
no access to credit facilities with traditional third
F-14
party lenders and there can be no assurance that it would be able to raise
capital or sell any of its businesses or assets. In addition, any financing that
could be obtained would likely significantly dilute existing shareholders.
Management is exploring a number of strategic alternatives regarding the
Company's future business operations and is in the process of developing and
implementing internal actions to improve the Company's liquidity and business
performance. The Company's future strategic direction is highly dependent upon
the outcome of its efforts to raise capital and/or sell certain businesses or
assets.
Subsequent to December 31, 2004, the Company reevaluated its existing VoIP
telephony services business plan and is currently in the process of terminating
and/or modifying certain of its existing product offerings and marketing
programs, as well as developing and testing certain new VoIP products and
features. The Company has also recently made the decision to discontinue using
its SendTec business to perform marketing services for its VoIP business, and to
instead dedicate 100% of SendTec's marketing services to support and grow its
own third party customer base. Additionally, in order to reduce its near term
consolidated net losses and cash usage, the Company is currently in the process
of implementing a number of cost-reduction actions at its VoIP telephony
services business, including decreases in personnel and salary levels, carrier
and data center costs, and marketing/advertising expenses.
Management believes that it will be difficult to implement its new VoIP product
and marketing plans, once fully developed and tested, without additional cash
being provided from a prospective financing or sale transaction(s). Should the
Company's new product offerings achieve market acceptance and significantly
increase the Company's current customer and revenue base, additional cash
resources to fund capital expenditures related to the Company's VoIP network and
customer billing systems and to fund future marketing and other business
development costs would be required.
There can be no assurance that the Company's new VoIP product offerings will be
successful in attracting a sufficient number of new customers to its VoIP
network and increasing telephony revenue to desired levels. Even if the Company
is able to raise additional capital, management may at any time, decide to
terminate the operations of its VoIP telephony services business, either by
asset sale or abandonment, if future investment returns are considered
inadequate and/or preferable investment alternatives exist. The Company may
alternatively decide to enter into new lines of business including potentially
exercising its purchase option to acquire Tralliance Corporation, a development
stage Internet-related business that is attempting to become the registry for
the ".travel" top-level domain, a new segment of the Internet devoted to the
travel industry (See Note 4. "Acquisitions and Dispositions" for further
details).
SUMMARY
If the Company is not successful in entering into a financing, sale, or business
transaction that infuses sufficient cash resources into the Company sometime
during the second quarter of 2005, management believes that it will no longer be
able to continue the implementation of its current VoIP business plan. In such
event, it is likely that the Company would be required to either temporarily
suspend or permanently shutdown the operation of its VoIP telephony services
business. Additionally, in such event, management believes that it may also be
required to revise the business plan of some or all of its other business
segments and/or further implement company-wide cost reduction programs. There
can be no assurance that the Company would be successful in implementing such
revised business plans and effectively restructuring its businesses so that the
Company would have the ability to continue to operate as a going concern in the
future.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 3. IMPAIRMENT CHARGES
As a result of the significant operating and cash flow losses incurred by the
Company's VoIP telephony services division during 2004 and 2003, coupled with
management's projection of continued losses in the foreseeable future, the
Company performed an evaluation of the recoverability of the division's
long-lived assets during the first quarter of 2005 in connection with the
preparation of the accompanying consolidated financial statements. The
evaluation indicated that the carrying value of certain of the division's
long-lived assets exceeded the fair value of such assets, as measured by quoted
market prices or other management estimates. As a result, the Company recorded
an impairment charge of $1,661,975 in the accompanying statement of operations
for the year ended December 31, 2004. The impairment charge included the
write-off of the carrying value of amounts previously capitalized by the
division as internal-use software, website development costs, acquired
technology and patent costs, as well as certain other assets.
During the first quarter of 2004, the Company's management decided to suspend
DPT's wholesale business and to dedicate the DPT physical and intellectual
assets to its retail VoIP business. As a result, the Company reviewed the
long-lived assets associated with the wholesale VoIP business for impairment.
Goodwill of $577,134 and the unamortized balance of the non-compete intangible
asset of $331,250 recorded in connection with the May 2003 acquisition of DPT
were written off and recorded as an impairment loss in the accompanying
statement of operations for the year ended December 31, 2003. Refer to Note 4,
"Acquisitions and Disposition" for a discussion of the purchase of DPT.
F-15
NOTE 4. ACQUISITIONS AND DISPOSITION
ACQUISITION OF SENDTEC, INC.
On September 1, 2004, the Company acquired SendTec, a direct response marketing
services and technology company. In exchange for all of the issued and
outstanding shares of capital stock of SendTec the Company paid consideration
consisting of: (i) $6,000,000 in cash, excluding transaction costs, (ii) the
issuance of an aggregate of 17,500,024 shares of the Company's Common Stock,
(iii) the issuance of an aggregate of 175,000 shares of Series H Automatically
Converting Preferred Stock (which was converted into approximately 17,500,500
shares of the Company's Common Stock effective December 1, 2004), and (iv) the
issuance of a subordinated promissory note in the amount of $1,000,009. The
Company also issued an aggregate of 3,974,165 replacement options to acquire the
Company's Common Stock for each of the issued and outstanding options to acquire
SendTec shares held by the former employees of SendTec.
The preliminary SendTec purchase price allocation was as follows:
Cash $ 3,610,000
Accounts receivable 5,534,000
Other current assets 194,000
Fixed assets 1,031,000
Non-compete agreements 1,800,000
Goodwill 11,702,000
Other assets 124,000
Assumed liabilities (5,597,000)
-----------
$18,398,000
===========
In addition, warrants to acquire shares of theglobe.com Common Stock will be
issued to SendTec shareholders when and if SendTec exceeds forecasted operating
income, as defined, of $10.125 million, for the year ending December 31, 2005.
The number of earn-out warrants may range from an aggregate of 250,000 to
2,500,000 (if actual operating income exceeds the forecast by at least 10%).
Because the number of warrants that will be earned is not yet determinable, no
consideration related to this contingency was included in the determination of
the SendTec purchase price.
As part of the Merger, 100,000 shares of Series H Preferred Stock (which was
subsequently converted into 10 million shares of Common Stock) (the "Escrow
Shares") are being held in escrow for potential recovery by the Company in the
event of a breach of the Merger Agreement by SendTec or its former shareholders.
In general, the Escrow Shares, together with the sums due under the Note, are
the sole source of recourse against the shareholders of SendTec in the event of
breach of the Merger Agreement and theglobe would not have recourse against the
cash portion or other shares of Common Stock or Series H Preferred Stock
distributed to the SendTec shareholders as part of the Merger Consideration.
Assuming no claims are then pending, the Escrow Shares will be distributed to
SendTec shareholders after expiration of one year from the date of closing.
As part of the SendTec acquisition transaction, certain executives of SendTec
entered into new employment agreements with SendTec. The employment agreements
each have a term of five years and automatically renew for an additional year at
expiration unless either party provides the requisite notice of non-renewal. The
agreements also contain certain noncompete provisions for periods as specified
by the agreements. The $1,800,000 value assigned to the non-compete agreements
is being amortized on a straight-line basis over 5 years. Annual amortization
expense of the non-compete agreements is estimated to be $360,000 in 2005
through 2008 and $240,000 in 2009. The related accumulated amortization as of
December 31, 2004, was $120,000.
The following pro forma condensed consolidated results of operations for the
years ended December 31, 2004 and 2003 assumes the acquisition of SendTec
occurred as of January 1, 2003. The pro forma results reflected below include
SendTec's revenue utilizing the revenue recognition methods employed by the
Company since SendTec's date of acquisition. The pro forma information is not
necessarily indicative of what the actual results of operations of the combined
company would have been had the acquisition occurred on January 1, 2003, nor is
it necessarily indicative of future results.
F-16
PRO FORMA RESULTS 2004 2003
------------ ------------
Years ended December 31,
Revenue $ 36,559,000 $ 20,725,000
Net Loss (22,453,000) (9,502,000)
Basic and diluted net loss per common share $ (0.14) $ (0.24)
ACQUISITION OF DIRECT PARTNER TELECOM, INC.
On May 28, 2003, the Company completed the acquisition of Direct Partner
Telecom, Inc. ("DPT"), a company engaged in VoIP telephony services, in exchange
for 1,375,000 shares of the Company's Common Stock and the issuance of warrants
to acquire 500,000 shares of the Company's Common Stock. The warrants are
exercisable any time before May 23, 2013 at an exercise price of $0.72 per
share. In addition, the former shareholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share if DPT achieves certain revenue and earnings targets
over approximately the next three years. Effective March 31, 2004, 500,000 of
the earn-out warrants were forfeited as performance targets had not been
achieved for the first of the three year periods. An additional 750,000 of the
warrants will be forfeited effective March 31, 2005, as performance targets for
the second of the three year periods will not be achieved. The warrants will
accelerate and be deemed earned in the event of a "change in control" of the
Company, as defined in the acquisition documents. In addition, as part of the
transaction, the Company agreed to repay loans totaling $600,000 to certain of
the former shareholders of DPT, including $500,000 immediately after the closing
of the acquisition. The Company issued promissory notes for $100,000, with a
two-year maturity and interest at prime, for the balance.
The total purchase price of DPT was allocated as follows:
Cash $ 61,000
Accounts receivable 155,000
Fixed assets 196,000
Non-compete agreement 375,000
Goodwill 577,000
Assumed debt to former
shareholders (600,000)
Other assumed liabilities (126,000)
---------
$ 638,000
=========
As part of the DPT acquisition transaction, the former Chief Executive Officer
of DPT agreed to an employment agreement with a one-year term which
automatically renewed for an additional year. The employment agreement also
contained non-compete provisions during the term of the agreement and for a
period of three years following termination of the agreement, as specified. The
$375,000 value assigned to the non-compete agreement was to be amortized on a
straight-line basis over 5 years.
As discussed in Note 1, as a result of decisions made during the first quarter
of 2004, the Company performed a review of its long-lived assets for impairment.
As a result, effective December 31, 2003, the Company wrote off the goodwill and
the unamortized balance of the non-compete agreement arising from the
acquisition of DPT which totaled $908,384. Amortization expense of the
non-compete agreement totaled $43,750 in 2003. The former Chief Executive
Officer of DPT terminated his employment with the Company effective May 2004.
The following pro forma condensed consolidated results of operations for the
years ended December 31, 2003 and 2002 assumes the acquisition of DPT occurred
as of October 1, 2002, the date which DPT began operations. The pro forma
information is not necessarily indicative of the results of operations of the
combined company had these events occurred at the beginning of the periods
presented, nor is it necessarily indicative of future results.
Years ended December 31, 2003 2002
------------ ------------
Revenue $ 6,076,000 $ 7,770,000
Net Loss (11,116,000) (2,860,000)
Basic and diluted net loss per common share $ (0.50) $ (0.09)
F-17
LOAN AND PURCHASE OPTION AGREEMENT
On February 25, 2003, theglobe.com entered into a Loan and Purchase Option
Agreement with Tralliance Corporation ("Tralliance"), a development stage
Internet related business venture, pursuant to which it agreed to fund, in the
form of a loan, at the discretion of the Company, Tralliance's operating
expenses and obtained the option to acquire all of the outstanding capital stock
of Tralliance in exchange for, when and if exercised, $40,000 in cash and the
issuance of an aggregate of 2,000,000 unregistered restricted shares of
theglobe.com's Common Stock (the "Option"). The Loan is secured by a lien on the
assets of the venture. The Option is exercisable at anytime on or before ten
days after theglobe.com's receipt of notice relating to the award of a certain
contract (the "Contract") currently being pursued by Tralliance. In the event of
the exercise of the Option, (i) the existing CEO and CFO of Tralliance have
agreed to enter into employment agreements whereby each would agree to remain in
the employ of Tralliance 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 shares of theglobe.com
Common Stock issued upon such exercise will be entitled to certain "piggy-back"
registration rights. If the Option is not exercised, then theglobe.com has
agreed, subject to certain exceptions, to forgive repayment of $60,000 of the
amount loaned.
On September 30, 2004, the Loan and Purchase Option Agreement was amended so as
to reduce the aggregate consideration to be paid by the Company upon exercise of
the Option to 1,500,000 shares of the Company's Common Stock. Additionally,
effective March 3, 2005, the Loan and Purchase Option Agreement and related
promissory note were amended extending the maturity date to April 1, 2005.
Advances to Tralliance totaled $1,001,500 and $535,000 as of December 31, 2004
and 2003, respectively. Due to the uncertainty of collectibility of the Loan,
the Company has provided a reserve equal to the full amount of the Loan.
Additions to the Loan reserve of $506,500 and $495,000 were included in other
expense in the accompanying consolidated statements of operations for the years
ended December 31, 2004 and 2003, respectively (See the "Future Capital Needs"
section of Management's Discussion and Analysis or Plan of Operation for further
details).
ACQUISITION OF VOIP ASSETS
On November 14, 2002, the Company acquired certain VoIP assets from an
entrepreneur. In exchange for the assets, the Company issued warrants to acquire
1,750,000 shares of its Common Stock and an additional 425,000 warrants as part
of an earn-out arrangement upon the attainment of certain performance targets by
December 31, 2003. None of the performance targets had been attained as of
December 31, 2003, resulting in the forfeiture of the 425,000 warrants. In
conjunction with the acquisition, E&C Capital Partners, a privately held
investment holding company owned by our Chairman and Chief Executive Officer,
Michael S. Egan, and our President, Edward A. Cespedes, entered into a
non-binding letter of intent with theglobe.com to provide new financing in the
amount of $500,000 through the purchase of Series F Preferred Stock. Refer to
Note 9, "Stockholders' Equity," for further details.
As a result of the Company's review of certain long-lived assets for impairment,
the unamortized value of the assets acquired was written-off effective December
31, 2004. See Notes 3 and 5 for further details.
DISPOSITION OF WEBSITE
On February 27, 2002, the Company sold all of the assets used in connection with
the Happy Puppy website for $135,000, resulting in the recognition of a gain on
the sale of $134,500.
NOTE 5. INTANGIBLE ASSETS
The components of intangible assets were as follows:
December 31, 2004 December 31, 2003
------------------------------ ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ---------- ---------- ----------
Amortized Intangible Assets:
Non-compete agreements $1,800,000 $ 120,000 $ -- $ --
Digital telephony -- -- 227,452 28,432
---------- ---------- ---------- ----------
$1,800,000 $ 120,000 $ 227,452 $ 28,432
========== ========== ========== ==========
F-18
As discussed in Note 4, "Acquisitions and Disposition," certain executives of
SendTec entered into new employment agreements with SendTec upon the acquisition
of SendTec by theglobe.com. The agreements contain certain noncompete provisions
for periods as specified by the agreements. The $1,800,000 value assigned to the
non-compete agreements is being amortized on a straight-line basis over five
years.
As discussed in Note 3, "Impairment Charges," the Company performed an
evaluation of the recoverability of the long-lived assets of its VoIP telephony
services division. As a result, effective December 31, 2004, the Company
wrote-off the unamortized balance of its digital telephony assets which totaled
$192,106. Such assets consisted of certain VoIP assets which were recorded at
the value assigned to the warrants to acquire 1,750,000 shares of the Company's
Common Stock issued in connection with the acquisition of the assets on November
14, 2002 and patent application costs.
During the year ended December 31, 2004, intangible asset amortization totaled
$222,834, including $102,834 of amortization related to the digital telephony
intangible assets prior to their write-off as of December 31, 2004. Intangible
asset amortization expense totaled $72,182 for the year ended December 31, 2003,
including $43,750 of amortization related to the non-compete agreement recorded
in connection with the acquisition of DPT. As discussed in Note 3, the Company
wrote-off the $331,250 unamortized balance of the non-compete agreement as of
December 31, 2003. There was no amortization expense for intangible assets
during the year ended December 31, 2002. As of December 31, 2004, annual
intangible asset amortization expense was projected to be as follows:
Year ending December 31,
2005 $ 360,000
2006 360,000
2007 360,000
2008 360,000
2009 240,000
----------
$1,680,000
==========
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
-----------------------------
2004 2003
---------- ----------
VoIP network equipment and software $2,929,051 $1,712,537
Other equipment 1,127,910 679,597
Capitalized software costs 750,056 690,602
Land and building 181,110 181,110
Furniture and fixtures 348,888 149,714
Leasehold improvements 18,798 9,402
---------- ----------
5,355,813 3,422,962
Less: Accumulated depreciation and
amortization 1,949,443 1,006,579
---------- ----------
$3,406,370 $2,416,383
========== ==========
See Note 3, "Impairment Charges," for a discussion of write-offs recorded during
2004 in connection with the Company's evaluation of the recoverability of the
VoIP telephony services division's long-lived assets. The impairment charge
included the write-off of the carrying value of amounts previously capitalized
by the division as internal-use software and website development costs, as well
as certain other property and equipment, which totaled $1,469,869.
F-19
NOTE 7. DEBT
Debt consisted of the following:
December 31,
-----------------------------
2004 2003
---------- ----------
4% Subordinated promissory note; interest and principal due
September 1, 2005 $1,000,009 $ --
10% Convertible Notes; interest and principal due May 2004 -- 1,750,000
Promissory notes issued in connection with the acquisition
of DPT; interest and principal due May 2005; interest at
prime rate (5.25% and 4.00% at December 31, 2004
and 2003, respectively) 100,000 100,000
Mortgage note payable; interest payable monthly at 9%;
principal due May 2005 73,351 82,612
Related party obligations payable in Canadian dollars; due in
monthly installments of principal and interest approximating
$3,500 through September 2006; interest at prime plus 2-3% 69,233 102,916
Financing of computer software and related maintenance costs;
quarterly installments of principal and interest
approximating $21,400 through September 2005 61,809 --
---------- ----------
1,304,402 2,035,528
Less: unamortized debt discount -- 121,041
Less: short-term portion 1,277,405 121,919
---------- ----------
Long-term portion $ 26,997 $1,792,568
========== ==========
As discussed in Note 4, "Acquisitions and Disposition," on September 1, 2004 the
Company issued a subordinated promissory note in the amount of $1,000,009 in
connection with the acquisition of SendTec.
On February 2, 2004, our Chairman and Chief Executive Officer and his spouse,
entered into a Note Purchase Agreement with the Company pursuant to which they
acquired a demand convertible promissory note (the "Bridge Note") in the
aggregate principal amount of $2,000,000. The Bridge Note was convertible into
shares of the Company's Common Stock. The Bridge Note provided for interest at
the rate of ten percent per annum and was secured by a pledge of substantially
all of the assets of the Company. Such security interest was shared with the
holders of the Company's $1,750,000 Convertible Notes issued to E&C Capital
Partners and certain affiliates of our Chairman and Chief Executive Officer. In
addition, the Chairman and Chief Executive Officer and his spouse were issued a
warrant to acquire 204,082 shares of the Company's Common Stock at an exercise
price of $1.22 per share. The Warrant is exercisable at any time on or before
February 2, 2009. The exercise price of the Warrant, together with the number of
shares for which such Warrant is exercisable, is subject to adjustment upon the
occurrence of certain events.
An allocation of the proceeds received from the issuance of the Bridge Note was
made between the debt instrument and the Warrant by determining the pro rata
share of the proceeds for each by comparing the fair value of each security
issued to the total fair value. The fair value of the Warrant was determined
using the Black Scholes model. The fair value of the Bridge Note was determined
by measuring the fair value of the common shares on an "as-converted" basis. As
a result, $170,000 was allocated to the Warrant and recorded as a discount on
the debt issued and additional paid in capital. The value of the beneficial
conversion feature of the Bridge Note was calculated by comparing the fair value
of the underlying common shares of the Bridge Note on the date of issuance based
on the closing price of our Common Stock as reflected on the OTCBB to the
"effective" conversion price. This resulted in a beneficial conversion discount
of $517,000, which was recorded as interest expense in the accompanying
consolidated statement of operations for the year ended December 31, 2004 as the
Bridge Note was immediately convertible into common shares. In addition, the
value allocated to the Warrant and characterized as discount on the Bridge Note
was recognized as interest expense, as the Bridge Note was due on demand.
In connection with the March 2004 private offering of the Company's Common
Stock, the Chairman and his spouse converted the Bridge Note into 3,527,337
shares of theglobe.com Common Stock.
F-20
On May 22, 2003, E&C Capital Partners together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired convertible promissory notes (the "Secured
Convertible Notes") in the aggregate principal amount of $1,750,000. The Secured
Convertible Notes were convertible at anytime into a maximum of approximately
19,444,000 shares of the Company's Common Stock at a blended rate of $0.09 per
share. The Secured Convertible Notes had a one year maturity date and were
secured by a pledge of substantially all of the assets of the Company. The
Secured Convertible Notes provided for interest at the rate of ten percent per
annum, payable semi-annually. Effective October 3, 2003, the holders of the
Secured Convertible Notes waived the right to receive accrued interest payable
in shares of the Company's Common Stock. Additionally, each of the holders of
the Secured Convertible Notes agreed to defer receipt of interest until June 1,
2004. Additional interest at ten percent per annum accrued on any interest
amounts deferred. The outstanding balance of the Secured Convertible Notes as of
December 31, 2003, has been reflected as long-term debt in the accompanying
consolidated balance sheet as a result of the conversion of the Secured
Convertible Notes into the Company's Common Stock in March 2004.
In addition, E&C Capital Partners was issued a warrant (the "Warrant") to
acquire 3,888,889 shares of the Company's Common Stock at an exercise price of
$0.15 per share. The Warrant was exercisable at any time on or before May 22,
2013. An allocation of the proceeds received from the issuance of the Secured
Convertible Notes was made between the debt instruments and the Warrant by
determining the pro-rata share of the proceeds for each by comparing the fair
value of each security issued to the total fair value. The fair value of the
Warrant was determined using the Black Scholes model. The fair value of the
Secured Convertible Notes was determined by measuring the fair value of the
common shares on an "as-converted" basis. As a result, $290,500 was allocated to
the Warrant and recorded as a discount on the debt issued and additional paid in
capital. The value of the beneficial conversion feature of the Secured
Convertible Notes was calculated by comparing the fair value of the underlying
common shares of the Secured Convertible Notes on the date of issuance based on
the closing price of our Common Stock as reflected on the OTCBB to the
"effective" conversion price. This resulted in a preferential conversion
discount, limited to the previously discounted value of the Secured Convertible
Notes, of $1,459,500, which was recorded as interest expense in the accompanying
consolidated statement of operations for the year ended December 31, 2003, as
the Secured Convertible Notes were immediately convertible into common shares.
Effective August 18, 2004, the maturity date of the mortgage note payable was
extended to May 31, 2005.
Repayment of debt is due as follows:
Year ending December 31,
2005 $1,277,405
2006 26,997
----------
$1,304,402
==========
NOTE 8. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2004 and
2003 are presented below.
2004 2003
------------ ------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 61,300,000 $ 57,642,000
Allowance for doubtful accounts 483,000 244,000
Issuance of warrants 1,052,000 982,000
Inventory reserve 661,000 43,000
Offering costs 105,000 --
Depreciation and amortization 46,000 (230,000)
Other 153,000 80,000
------------ ------------
Total gross deferred tax assets 63,800,000 58,761,000
Less: valuation allowance (63,800,000) (58,761,000)
------------ ------------
Total net deferred tax assets $ -- $ --
============ ============
F-21
Because of the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a 100% valuation allowance. The valuation allowance
for net deferred tax assets was $63.8 million and $58.8 million as of December
31, 2004 and 2003, respectively. The net change in the total valuation allowance
was $5.0 million and $4.0 million for the years ended December 31, 2004 and
2003, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets,
which consist of tax benefits primarily from net operating loss carryforwards,
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Of the total valuation
allowance of $63.8 million, subsequently recognized tax benefits, if any, in the
amount of $6.5 million will be applied directly to contributed capital.
At December 31, 2004, the Company had net operating loss carryforwards available
for U.S. and foreign tax purposes of approximately $162 million. These
carryforwards expire through 2024.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),
the utilization of net operating loss carryforwards may be limited under the
change in stock ownership rules of the Code. As a result of ownership changes,
which occurred in August 1997 and May 1999, the Company's private offering in
March 2004 (together with the exercise and conversion of various securities in
connection with such private offering) and the issuance of Common Stock in
connection with the acquisition of SendTec on September 1, 2004, the Company may
have substantially limited or eliminated the availability of its net operating
loss carryforwards. There can be no assurance that the Company will be able to
avail itself of any net operating loss carryforwards.
NOTE 9. STOCKHOLDERS' EQUITY
As discussed in Note 4, "Acquisitions and Disposition," on September 1, 2004,
the Company closed upon an agreement and plan of merger dated August 31, 2004,
pursuant to which the Company acquired all of the issued and outstanding shares
of capital stock of SendTec. As part of the purchase price paid for SendTec, the
Company issued an aggregate of 17,500,024 shares of the Company's Common Stock
and an aggregate of 175,000 shares of Series H Automatically Converting
Preferred Stock (which were converted into approximately 17,500,500 shares of
the Company's Common Stock effective December 1, 2004). In addition, warrants to
acquire shares of theglobe.com Common Stock with an exercise price of $0.27 per
share would be issued to SendTec shareholders when and if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005. The number of earn-out warrants would range from an aggregate
of 250,000 to 2,500,000 (if actual operating income exceeds the forecast by at
least 10%) and the earn-out warrants will be exercisable for a period of five
years.
Each share of the Series H Preferred Stock was automatically converted into 100
shares of theglobe's Common Stock on December 1, 2004, the effective date of the
amendment to the Company's certificate of incorporation increasing its
authorized shares of Common Stock from 200,000,000 shares to 500,000,000 shares.
The Company agreed to file a registration statement relating to the resale of
the shares of Common Stock issued in the Merger and the shares of Common Stock
underlying the Series H Preferred Stock and to cause the effectiveness of such
registration on or before September 1, 2005. The Company also agreed to keep the
registration statement effective until at least the third anniversary of the
Closing. Pursuant to the terms of the Merger, in general, the equity securities
issued in the Merger may not be sold or otherwise transferred for a period of
one year without the prior written consent of the Company.
In March 2004, theglobe.com completed a private offering of 333,816 units (the
"Units") for a purchase price of $85 per Unit (the "Private Offering"). Each
Unit consisted of 100 shares of the Company's Common Stock, $0.001 par value
(the "Common Stock"), and warrants to acquire 50 shares of the Company's Common
Stock (the "Warrants"). The Warrants are exercisable for a period of five years
commencing 60 days after the initial closing at an initial exercise price of
$0.001 per share. The aggregate number of shares of Common Stock issued in the
Private Offering was 33,381,647 shares for an aggregate consideration of
$28,374,400, or approximately $0.57 per share assuming the exercise of the
16,690,824 Warrants. As of December 31, 2004, approximately 11,102,000 of the
Warrants remain outstanding.
The Private Offering was directed solely to investors who are sophisticated and
accredited within the meaning of applicable securities laws, most of whom were
not affiliates of the Company. The purpose of the Private Offering was to raise
funds for use primarily in the Company's developing VoIP business, including the
deployment of networks, website development, marketing and capital
infrastructure expenditures and working capital. Other intended uses of proceeds
included funding requirements in connection with theglobe's other existing or
future business operations, including acquisitions.
F-22
Halpern Capital, Inc., acted as placement agent for the Private Offering, and
was paid a commission of $1.2 million and issued a warrant to acquire 1,000,000
shares of Common Stock at $0.001 per share. As of December 31, 2004,
approximately 459,000 of these warrants remain outstanding.
Pursuant to the terms of the Private Offering, the Company filed a registration
statement relating to the resale of the Securities on April 16, 2004 which
became effective on May 11, 2004.
In connection with the Private Offering, Michael S. Egan, our Chairman, Chief
Executive Officer and principal stockholder, together with certain of his
affiliates, including E&C Capital Partners, converted a $2,000,000 Convertible
Bridge Note, $1,750,000 of Secured Convertible Notes and all of the Company's
outstanding shares of Series F Preferred Stock, and exercised (on a "cashless"
basis) all of the warrants issued in connection with the foregoing $1,750,000
Secured Convertible Notes and Series F Preferred Stock, together with certain
warrants issued to Dancing Bear Investments, an affiliate of Mr. Egan. As a
result of such conversions and exercises, the Company issued an aggregate of
48,775,909 additional shares of Common Stock.
On July 2, 2003, the Company completed a private offering of 17,360 shares of
Series G Automatically Converting Preferred Stock ("Series G Preferred Stock")
and warrants to acquire 3,472 shares of Series G Preferred Stock at a purchase
price of $500 per share for a total of $8,680,000 in gross proceeds. Each share
of Series G Preferred Stock was automatically converted into 1,000 shares of
theglobe's Common Stock on July 29, 2003, the effective date of the amendment to
the Company's certificate of incorporation increasing its authorized shares of
Common Stock from 100,000,000 shares to 200,000,000 shares (the "Capital
Amendment"). Similarly, upon the effective date of the Capital Amendment, each
warrant to acquire a share of the Series G Preferred Stock was automatically
converted into a warrant to acquire 1,000 shares of Common Stock. The warrants
are exercisable for a period of 5 years at an initial exercise price of $1.39
per share. A total of 17,360,000 shares of Common Stock were issued pursuant to
the Series G Preferred Stock private offering, while, subject to certain
adjustment mechanisms, a total of 3,472,000 shares of Common Stock will be
issuable upon exercise of the associated warrants.
At the time of the issuance of the Series G Preferred Stock, an allocation of
proceeds received was made between the preferred shares and the associated
warrants. The allocation was made by determining the pro-rata share of the
proceeds for each by comparing the fair value of each security issued to the
total fair value. The fair value of the warrants was determined using the Black
Scholes model. The fair value of the Series G Preferred Stock was determined by
measuring the fair value of the common shares on an "as-converted" basis. As a
result, $1,365,000 was allocated to the warrants sold. In addition, the value of
the preferential conversion was calculated by comparing the fair value of the
underlying common shares based on the closing price of the Company's Common
Stock as reflected on the OTCBB on the date of issuance to the "effective"
conversion price. This resulted in a preferential conversion discount related to
the preferred shares and the associated warrants, limited to the proceeds from
the sale, of $7,315,000 and $305,000, respectively, which were recorded as
dividends to the preferred stockholders in July 2003, as the preferred shares
and associated warrants were immediately convertible into common shares and
warrants to acquire common shares.
As more fully discussed in Note 7, "Debt," on May 22, 2003, Secured Convertible
Notes totaling $1,750,000 were issued to E&C Capital Partners together with
certain affiliates of Michael S. Egan. The Secured Convertible Notes were
convertible at anytime into a maximum of approximately 19,444,000 shares of the
Company's Common Stock at a blended rate of $0.09 per share. In addition, E&C
Capital Partners was issued a warrant to acquire 3,888,889 shares of the
Company's Common Stock at an exercise price of $0.15 per share. The warrant was
exercisable at any time on or before May 22, 2013.
On March 28, 2003, E&C Capital Partners entered into a Preferred Stock Purchase
Agreement with the Company (the "Preferred Stock Investment"), whereby E&C
Capital Partners received 333,333 shares of Series F Preferred Stock convertible
into shares of the Company's Common Stock at a price of $0.03 per share. If
fully converted, and without regard to the anti-dilutive adjustment mechanisms
applicable to the Series F Preferred Stock, an aggregate of approximately
16,667,000 shares of Common Stock could be issued. The Series F Preferred Stock
had a liquidation preference of $1.50 per share (and thereafter participates
with the holders of Common Stock on an "as-converted" basis), included a
dividend at the rate of 8% per annum and entitled the holder to vote on an
"as-converted" basis with the holders of Common Stock. In addition, as part of
the $500,000 investment, E&C Capital Partners received warrants to purchase
3,333,333 shares of the Company's Common Stock at an exercise price of $0.125
per share. The warrants were exercisable at any time on or before March 28,
2013. E&C Capital Partners is entitled to certain demand registration rights in
connection with its investment.
The proceeds attributable to the issuance of the Series F Preferred Stock and
the related warrants were allocated to each security in the same manner as
described in the discussion of the Series G Preferred Stock. As a result,
$83,000 was allocated to the warrants sold. In addition, the value of the
preferential conversion was calculated by comparing the fair value of the
underlying common shares on the date of issuance based on the closing price of
the Company's Common Stock as reflected on the OTCBB to the "effective"
conversion price. This resulted in a preferential conversion discount, limited
to the proceeds from the sale, of $417,000. The sum of the two discounts,
$500,000, was recorded as a dividend to the preferred stockholders in March
2003, as the preferred shares were immediately convertible into common shares.
F-23
As a result of the issuance of the Series F Preferred Stock, the Series G
Automatically Converting Preferred Stock, the $1,750,000 Secured Convertible
Notes and the associated warrants at their respective conversion and exercise
prices, certain anti-dilution provisions applicable to previously outstanding
warrants to acquire approximately 4,103,000 shares of the Company's Common Stock
were triggered. Like many types of warrants commonly issued, these outstanding
warrants to acquire shares of the Company's Common Stock included weighted
average anti-dilution provisions which result in a lowering of the exercise
price, and an increase in the number of warrants to acquire shares of the
Company's Common Stock any time shares of common stock are issued (or options or
other securities exercisable or convertible into common stock) for a price per
share less than the then exercise price of the warrants. As a result of the
Preferred Stock Investment and the issuance of the Series G Preferred Stock and
the Secured Convertible Notes, the exercise price was lowered from approximately
$1.39 to $0.66 per share on these warrants and the number of shares issuable
upon exercise was proportionally increased from approximately 4,103,000 shares
to 6,836,000 shares. As stated previously, all of these warrants were exercised
on a cashless basis in connection with the March 2004 Private Offering of the
Company's Common Stock.
Certain holders of Common Stock are subject to substantial restrictions on the
transfer or sale of shares and also have certain "piggy-back" and demand
registration rights which, with certain exceptions, require the Company to make
all reasonable efforts to include within any of the Company's registration
statements to sell such securities any shares that have been requested to be so
included.
NOTE 10. STOCK OPTION PLANS
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the Board of Directors in December 1996 and
August 1997. Under the Amended Plan, a total of 1,582,000 common shares were
reserved for issuance. Any incentive stock options granted under the Amended
Plan were required to be granted at the fair market value of the Company's
Common Stock at the date the option was issued.
Under the Company's 1998 Stock Option Plan (the "1998 Plan") a total of
3,400,000 common shares were reserved for issuance and provides for the grant of
"incentive stock options" intended to qualify under Section 422 of the Code and
stock options which do not so qualify. The granting of incentive stock options
is subject to limitation as set forth in the 1998 Plan. Directors, officers,
employees and consultants of the Company and its subsidiaries are eligible to
receive grants under the 1998 Plan.
In January 2000, the Board adopted the 2000 Broad Based Employee Stock Option
Plan (the "Broad Based Plan"). Under the Broad Based Plan, 850,000 shares of
Common Stock were reserved for issuance. The intention of the Broad Based Plan
is that at least 50% of the options granted will be to individuals who are not
managers or officers of theglobe. In April 2000, the Company's 2000 Stock Option
Plan (the "2000 Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company. The 2000 Plan authorized the issuance of 500,000
shares of Common Stock, subject to adjustment as provided in the 2000 Plan. The
Broad Based Plan and the 2000 Plan provide for the grant of "incentive stock
options" intended to qualify under Section 422 of the Code and stock options
which do not so qualify. The granting of incentive stock options is subject to
limitation as set forth in the Broad Based Plan and the 2000 Plan. Directors,
officers, employees and consultants of the Company and its subsidiaries are
eligible to receive grants under the Broad Based Plan and the 2000 Plan.
In September 2003, the Board adopted the 2003 Sales Representative Stock Option
Plan (the "2003 Plan") which authorized the issuance of up to 1,000,000
non-qualified stock options to purchase the Company's Common Stock to sales
representatives who are not employed by the Company or its subsidiaries. In
January 2004, the Board amended the 2003 Plan to include certain employees and
consultants of the Company.
The Company's Board of Directors adopted a new benefit plan entitled the 2004
Stock Incentive Plan (the "2004 Plan") on August 31, 2004. An aggregate of
7,500,000 shares of the Company's Common Stock may be issued pursuant to the
2004 Plan. Employees, consultants, and prospective employees and consultants of
theglobe and its affiliates and non-employee directors of theglobe are eligible
for grants of non-qualified stock options, stock appreciation rights, restricted
stock awards, performance awards and other stock-based awards under the 2004
Plan.
On December 1, 2004, based upon approval of the stockholders of the Company, the
2000 Plan was amended and restated to (i) increase the number of shares reserved
for issuance under the 2000 Plan by 7,500,000 shares to a total of 8,000,000
shares and (ii) to remove a previous plan provision that limited the number of
options that may be awarded to any one individual.
In accordance with the provisions of the Company's stock option plans,
nonqualified stock options may be granted to officers, directors, other
employees, consultants and advisors of the Company. The option price for
nonqualified stock options shall be at least 85% of the fair market value of the
Company's Common Stock. In general, options granted under the Company's stock
option plans expire after a ten-year period and in certain circumstances
options, under the 1995 and 1998 plans, are subject to the acceleration of
vesting. Incentive options granted to stockholders who own greater than 10% of
the total combined voting power of all classes of stock of the Company must be
issued at 110% of the fair market value of the stock on the date the options are
granted. A committee
F-24
selected by the Company's Board of Directors has the authority to approve
optionees and the terms of the stock options granted, including the option price
and the vesting terms.
As discussed in Note 4, "Acquisitions and Disposition," pursuant to the
agreement and plan of merger in connection with the acquisition of SendTec on
September 1, 2004, the Company issued an aggregate of 3,974,165 replacement
options to acquire shares of theglobe's Common Stock for each of the issued and
outstanding options to acquire shares of SendTec common stock held by employees
of SendTec. Of these replacement options, 3,273,668 have exercise prices of
$0.06 and 700,497 have exercise prices of $0.27 per share. The Company also
agreed to grant an aggregate of 225,000 options to employees of SendTec and
25,000 options to a consultant of SendTec at an exercise price of $0.34 per
share under similar terms as other stock option grants of theglobe. The Company
also granted 1,000,000 stock options at an exercise price of $0.27 per share in
connection with the establishment of a bonus option pool pursuant to which
various employees of SendTec could vest in such options if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005. Due to the contingent nature of the 1,000,000 bonus pool
stock options, no amounts have been recognized in the results of operations for
the years ended December 31, 2004.
Excluding the aforementioned stock options issued in connection with the
acquisition of SendTec, a total of 2,525,430 stock options were granted during
the year ended December 31, 2004, including grants of 390,000 stock options to
non-employees. Options were granted during 2003 for a total of 4,407,450 shares
of Common Stock, of which 500,000 options were granted pursuant to an individual
nonqualified stock option agreement and not pursuant to any of the plans
described above. During 2002, a total of 5,347,500 stock options were granted,
of which 5,175,000 were granted pursuant to individual nonqualified stock
options agreements and not pursuant to any of the plans described above.
The Company applies APB Opinion No. 25 in accounting for grants to employees
pursuant to stock option plans and, accordingly, compensation cost of $421,952
was recognized for stock options granted to employees at exercise prices below
fair market value during the year ended December 31, 2004, including those
issued in connection with the SendTec acquisition. During the year ended
December 31, 2003, $233,750 was recognized for stock options granted to
employees at exercise prices below fair market value. No stock options were
granted to employees with exercise prices below fair market value during 2002.
In addition, approximately $17,188 and $152,884 of stock compensation expense
was recorded during the years ended December 31, 2004 and 2003, respectively, as
a result of the accelerated vesting of stock options issued to certain
terminated employees. Compensation cost recognized in connection with stock
options granted in recognition of services rendered by non-employees was
$463,775, $225,609, and $13,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
In 2000, the Company repriced a group of stock options issued to its employees.
The Company is accounting for these re-priced stock options using variable
accounting in accordance with FIN No. 44. Accordingly, the stock based
compensation recorded in connection with these re-priced stock options was a
credit of $22,666 in 2004 and expense of $30,933 in 2003. There was no
compensation charge relating to the re-priced options during the year ended
December 31, 2002. At December 31, 2004, a total of 42,010 options remained
outstanding which were being accounted for in accordance with FIN No. 44.
Stock option activity during the periods indicated is as follows:
Weighted
Options Total Average
Vested Options Exercise Price
--------- ----------- ---------------
Outstanding at December 31, 2002 5,870,749 5,971,440 $0.63
==========
Granted 4,407,450 0.80
Exercised (429,000) 0.28
Canceled (7,080) 1.07
-----------
Outstanding at December 31, 2003 8,475,232 9,942,810 0.72
==========
Granted 7,749,595 0.30
Exercised (639,000) 0.29
Canceled (1,069,220) 0.96
-----------
Outstanding at December 31, 2004 11,784,625 15,984,185 $0.51
========== =========== =====
Options available at December 31, 2002 4,259,547
==========
Options available at December 31, 2003 1,359,177
==========
Options available at December 31, 2004 10,203,732
==========
F-25
The weighted average exercise prices and remaining lives of outstanding stock
options and weighted average exercise prices of vested stock options as of
December 31, 2004 were as follows:
Options Outstanding Options Vested
------------------- --------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range Outstanding Life Price Vested Price
------------- ----------- -------- --------- --------- ---------
$ .01 -$ .02 5,075,000 7.5 $ 0.02 4,875,000 $ 0.02
.035- .035 200,000 7.4 0.035 200,000 0.035
.04 - .05 47,500 7.2 0.05 32,825 0.05
.06 - .06 3,273,668 8.4 0.06 1,979,873 0.06
.14 - .14 105,000 8.3 0.14 105,000 0.14
.23 - .34 2,045,497 6.5 0.28 555,748 0.28
.37 - .49 750,430 9.8 0.42 493,394 0.43
.52 - .54 327,000 9.5 0.52 101,737 0.53
.56 - .56 1,650,000 8.4 0.56 1,650,000 0.56
.63 - .65 210,000 8.4 0.63 178,128 0.63
.90 - 1.03 625,000 9.1 0.97 489,844 0.98
1.14 - 1.29 428,500 7.5 1.24 290,230 1.24
1.33 - 1.47 212,500 8.7 1.41 122,501 1.41
1.50 - 1.52 526,500 8.8 1.50 202,755 1.50
1.59 - 1.59 16,590 5.2 1.59 16,590 1.59
1.72 - 2.50 38,500 6.3 2.25 38,500 2.25
4.50 - 6.69 332,500 3.7 4.69 332,500 4.69
15.75 -15.75 120,000 4.0 15.75 120,000 15.75
----------- ----------
15,984,185 11,784,625
=========== ==========
NOTE 11. COMMITMENTS AND CONTINGENCIES
NETWORK COMMITMENTS
The Company and its subsidiaries are a party to various network service
agreements which provide for specified services, including the use of secure
data transmission facilities, capacity and other network carrier services. The
term of the agreements are generally for one year, with the term of several
agreements extending to three or five years. Certain of the agreements contain
early cancellation penalties. Commitments under such network service agreements,
exclusive of regulatory taxes, fees and charges, are as follows:
Year ending December 31:
2005 $2,063,000
2006 873,000
2007 503,000
2008 202,000
2009 12,000
Thereafter --
----------
$3,653,000
==========
Commitments for minimum usage requirements of approximately $43,000 are included
in the total commitments amount for the year ended December 31, 2005. The
Company has recently terminated all other minimum usage requirement commitments
for which it was obligated under previous network carrier agreements.
F-26
PURCHASE OBLIGATIONS
Effective January 31, 2005, the Company formally terminated its contract with a
supplier of VoIP telephony handsets and agreed to settle the unconditional
purchase obligation under such contract, which totaled approximately $3,000,000.
The settlement provided for (i) a cash payment of $200,000, (ii) the return of
35,000 VoIP handset units from the Company's inventory, and (iii) the issuance
of 300,000 shares of theglobe.com Common Stock. The value attributed to the loss
on the settlement of the contractual obligation of $406,750 has been included in
the accompanying consolidated statement of operations for the year ended
December 31, 2004.
EMPLOYMENT AGREEMENTS
On August 1, 2003, the Company entered into employment agreements with its
Chairman and Chief Executive Officer, President and Vice President of Finance
(its former Chief Financial Officer). The three agreements, which are for a
period of one year and automatically extend for one day each day until either
party notifies the other not to further extend the employment period, provide
for annual base salaries totaling $650,000 and annual bonuses based on pre-tax
operating income, as defined, for an annual minimum of $100,000 in total. The
agreements also provide for severance benefits under certain circumstances, as
defined, which in the case of the Chairman and Chief Executive Officer and the
President, include lump-sum payments equal to ten times the sum of the
executive's base salary and the highest annual bonus earned by the executive,
and in the case of the Vice President of Finance, include lump-sum payments
equal to two times the sum of the executive's base salary and the highest annual
bonus earned by the executive. In addition, these severance benefits also
require the Company to maintain insurance benefits for a period of up to ten
years, in the case of the Chairman and Chief Executive Officer and the
President, and up to two years, in the case of the Vice President of Finance,
substantially equivalent to the insurance benefits existing upon termination.
Effective June 1, 2004, the annual base salary of the Vice President of Finance
was reduced to $140,000.
As discussed in Note 4, "Acquisitions and Disposition," as part of the SendTec
acquisition transaction on September 1, 2004, certain executives of SendTec
entered into new employment agreements with SendTec. The employment agreements
each have a term of five years and automatically renew for an additional year at
expiration unless either party provides the requisite notice of non-renewal. The
agreements provide for total base salaries of $900,000 per annum and also
contain certain noncompete provisions for periods as specified by the
agreements.
On October 4, 2004, the Company entered into a new employment agreement with its
current Chief Technical Officer which provides for a base salary of $150,000 per
year. The agreement has a term of two years and automatically renews for an
additional two years unless either party provides the requisite notice of
non-renewal. The agreement also contains certain non-compete provisions and
provides for specified severance payments.
SEVERANCE AGREEMENT
In the second quarter of 2002, severance benefits of $699,833 were recorded and
paid. In connection with his termination, the former Chief Executive Officer was
paid $625,000 on May 31, 2002, reflecting the terms of his severance package.
Additionally, options to purchase 425,000 shares of the Company's Common Stock
at an exercise price of $0.035 per share (the closing price on May 6, 2002)
valued at $13,000 (calculated using Black-Scholes) were granted on May 6, 2002,
further reflecting the terms of his severance package. These options immediately
vested upon grant and have a life of ten years.
OPERATING LEASES
The Company leases facilities under noncancelable operating leases. These leases
generally contain renewal options and require the Company to pay certain
executory costs such as maintenance and insurance. Rent expense for the years
ended December 31, 2004, 2003 and 2002 totaled approximately $691,000, $326,000
and $73,000, respectively.
Effective September 1, 2003, the Company entered into a sublease agreement for
office space with a company controlled by our Chairman. The lease term is for
approximately four years with base rent of approximately $284,000 during the
first year of the sublease. Per the agreement, base rent increases by
approximately $23,000 per year thereafter. Rent expense for the year ended
December 31, 2004, as noted in the preceding paragraph included approximately
$334,000 of expense related to this sublease.
F-27
The approximate future minimum lease payments under noncancelable operating
leases with initial or remaining terms of one year or more at December 31, 2004,
were as follows:
2005 $ 867,000
2006 717,000
2007 433,000
2008 232,000
2009 232,000
Thereafter 39,000
----------
$2,520,000
==========
TERMINATION OF 401(K) PLAN
During November 2002, the Company terminated its 401k plan.
SendTec, which was acquired on September 1, 2004, maintained a SIMPLE IRA
savings plan (the "Plan") for the benefit of all of SendTec's eligible employees
who had completed six months of service. The Plan allowed employees to make
certain tax deferred voluntary contributions and discretionary contributions by
SendTec. Approximately $33,000 in Plan contributions were made by SendTec since
its acquisition by theglobe. The Plan was terminated December 31, 2004.
LETTER OF CREDIT
At December 31, 2004, the Company had $20,000 in outstanding standby letters of
credit used to support an agreement with one of its telecommunications carriers.
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 (the
"Individual Defendants"), 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 the Company's November 23, 1998 initial public offering and its
May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is now
the operative complaint, was filed in the Southern District of New York on April
19, 2002. The action seeks damages in an unspecified amount. On February 19,
2003, a motion to dismiss all claims against the Company was denied by the
Court. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions and noted that the decision is
intended to provide strong guidance to all parties regarding class certification
in the remaining cases. Plaintiffs have not yet moved to certify a class in
theglobe.com case.
The Company has approved a settlement agreement and related agreements which set
forth the terms of a settlement between the Company, the Individual Defendants,
the plaintiff class and the vast majority of the other approximately 300 issuer
defendants. Among other provisions, the settlement provides for a release of the
Company and the Individual Defendants for the conduct alleged in the action to
be wrongful. The Company would agree to undertake certain responsibilities,
including agreeing to assign away, not assert, or release certain potential
claims the Company may have against its underwriters. The settlement agreement
also provides a guaranteed recovery of $1 billion to plaintiffs for the cases
relating to all of the approximately 300 issuers. To the extent that the
underwriter defendants settle all of the cases for at least $1 billion, no
payment will be required under the issuers' settlement agreement. To the extent
that the underwriter defendants settle for less than $1 billion, the issuers are
required to make up the difference. It is anticipated that any potential
financial obligation of the Company to plaintiffs pursuant to the terms of the
settlement agreement and related agreements will be covered by existing
insurance. The Company currently is not aware of any material limitations on the
expected recovery of any potential financial obligation to plaintiffs from its
insurance carriers. Its carriers are solvent, and the Company is not aware of
any uncertainties as to the legal sufficiency of an insurance claim with respect
to any
F-28
recovery by plaintiffs. Therefore, we do not expect that the settlement will
involve any payment by the Company. If material limitations on the expected
recovery of any potential financial obligation to the plaintiffs from the
Company's insurance carriers should arise, the Company's maximum financial
obligation to plaintiffs pursuant to the settlement agreement would be less than
$3.4 million. On February 15, 2005, the court granted preliminary approval of
the settlement agreement, subject to certain modifications consistent with its
opinion. Judge Scheindlin ruled that the issuer defendants and the plaintiffs
must submit a revised settlement agreement which provides for a mutual bar of
all contribution claims by the settling and non-settling parties and does not
bar the parties from pursuing other claims. There will be a conference with
Judge Scheindlin on April 4, 2005 to discuss the status of the revised
settlement agreement. The underwriter defendants will have an opportunity to
object to the revised settlement agreement. There is no assurance that the
parties to the settlement will be able to agree to a revised settlement
agreement consistent with the court's opinion, or that the court will grant
final approval to the settlement to the extent the parties reach agreement. If
the settlement agreement is not approved and the Company is found liable, we are
unable to estimate or predict the potential damages that might be awarded,
whether such damages would be greater than the Company's insurance coverage, and
whether such damages would have a material impact on our results of operations
or financial condition in any future period.
On December 16, 2004, the Company, together with its wholly-owned subsidiary,
voiceglo Holdings, Inc., were named as defendants in NeoPets, Inc. v. voiceglo
Holdings, Inc. and theglobe.com, inc., a lawsuit filed in Los Angeles Superior
Court. The Company and its subsidiary, were parties to an agreement dated May 6,
2004, with NeoPets, Inc. ("NeoPets"), whereby NeoPets agreed to host a voiceglo
advertising feature on its website for the purpose of generating registered
activations of the voiceglo product featured. Consideration to NeoPets was to
include specified commissions, including cash payments based on registered
activations, as defined, as well as the issuance of Common Stock of theglobe.com
and additional cash payments, upon the attainment of certain performance
criteria. NeoPets' complaint asserts claims for breach of contract and specific
performance and seeks payment of approximately $2.5 million in cash, plus
interest, as well as the issuance of 1,000,000 shares of theglobe.com Common
Stock. On February 22, 2005, the Company and voiceglo answered the complaint and
asserted cross-claims against NeoPets for fraud and deceit, rescission, breach
of contract, breach of the implied covenant of good faith and fair dealing and
set-off. NeoPets has not yet answered the cross-claims and discovery has not yet
begun.
Through December 31, 2004, the Company has recorded amounts due for commissions
pursuant to the terms of the agreement totaling approximately $246,000. The
Company believes that this is the amount NeoPets has earned relating to services
performed and intends to vigorously defend its position. It is too early in the
process to determine the likelihood of an unfavorable outcome, however, an
unfavorable outcome could result in a liability in excess of the amount
recorded.
On July 3, 2003, an action was commenced against one of the Company's
subsidiaries, Direct Partner Telecom, Inc. ("DPT"). Global Communications
Consulting Corp. v. Michelle Nelson, Jason White, VLAN, Inc., Geoffrey Amend,
James Magruder, Direct Partner Telecom, Inc., et al. was filed in the Superior
Court of New Jersey, Monmouth County, and removed to the United States District
Court for the District of New Jersey on September 16, 2003. Plaintiff is the
former employer of Michelle Nelson, an employee of theglobe and a former
consultant of DPT. Plaintiff alleges that while Nelson was its employee, she
provided plaintiff's confidential and proprietary trade secret information, to
among others, DPT and certain employees, and diverted corporate opportunities
from plaintiff to DPT and the other named defendants. Plaintiff asserts claims
against Nelson including breach of fiduciary duty, breach of the duty of loyalty
and tortious interference with contract. Plaintiff also asserts claims against
Nelson and DPT, among others, for contractual interference, tortious
interference with prospective economic advantage and misappropriation of
proprietary information and trade secrets. Plaintiff seeks injunctive relief and
damages in an unspecified amount, including punitive damages. The Answer to the
Complaint, with counterclaims, was served on October 20, 2003, denying
plaintiff's allegations of improper and unlawful conduct in their entirety. The
parties reached an amicable resolution of this matter, including a mutual
release of all claims, which was filed with the Court in April 2004.
The Company is currently a party to certain other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. The Company currently believes that the ultimate outcome of
these other proceedings, individually and in the aggregate, will not have a
material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of litigation, should the outcome of these actions be unfavorable,
the Company's business, financial condition, results of operations and cash
flows could be materially and adversely affected.
NOTE 12. RELATED PARTY TRANSACTIONS
Certain directors of the Company also serve as officers and directors of Dancing
Bear Investments, Inc. ("Dancing Bear"). Dancing Bear is a stockholder of the
Company and an entity controlled by our Chairman.
As discussed more fully in Note 7, "Debt," in connection with a demand
convertible promissory note in the amount of $2,000,000 due the Company's
Chairman and his spouse, the Company paid interest totaling approximately
$17,500 during the year ended December 31, 2004.
F-29
Interest expense on the $1,750,000 Convertible Notes due E&C Capital Partners
together with certain affiliates of our Chairman totaled approximately $108,200,
excluding the amortization of the discount on the Notes, during the year ended
December 31, 2003. The interest remained unpaid at December 31, 2003, and was
included in accrued expenses in the accompanying consolidated balance sheet.
Interest expense related to the $1,750,000 Convertible Notes totaled
approximately $32,000 during the year ended December 31, 2004. As a result of
the conversion of the $1,750,000 Convertible Notes into the Company's Common
Stock in March 2004, all interest accrued was paid by the Company during the
year ended December 31, 2004.
During the year ended December 31, 2004, the Company paid approximately $151,200
to an entity controlled by the Chairman's son-in-law for the production of a
commercial advertisement.
Several entities controlled by our Chairman have provided services to the
Company and two of its subsidiaries, including: the lease of office and
warehouse space; and the outsourcing of customer service and warehouse functions
for the Company's VoIP operation. During the years ended December 31, 2004 and
2003, a total of approximately $566,000 and $383,000 of expense was recorded
related to these services, respectively. Approximately $5,300 and $70,000
related to these services was included in accounts payable and accrued expenses
at December 31, 2004 and 2003.
Additionally, included in other current assets in the accompanying Consolidated
Balance Sheet at December 31, 2004, was approximately $90,000 advanced to a
newly formed entity in which E&C Capital Partners has an ownership interest. The
entity was to provide marketing services to theglobe's VoIP telephony services
division. The entity ceased operations in January 2005. E&C Capital Partners
LLLP has represented to theglobe that the $90,000 will be repaid prior to the
end of 2005.
STOCKHOLDERS' AGREEMENT
In connection with the acquisition of SendTec, certain of the SendTec executives
(whom collectively received approximately 82% of the shares of theglobe.com
Common Stock and Preferred Stock issued in the Merger), theglobe and the
Company's Chairman and Chief Executive Officer and President (individually and
on behalf of certain affiliated entities) entered into a Stockholders'
Agreement. Pursuant to the terms of the Stockholders' Agreement, the SendTec
executives granted an irrevocable proxy to vote their shares to E&C Capital
Partners LLLP, an affiliate of the Company's Chairman and Chief Executive
Officer, on all matters (including the election of directors) other than with
respect to certain potential affiliated transactions involving the Company's
Chairman and Chief Executive Officer or President. After giving effect to the
grant of the proxy (and excluding outstanding options and warrants held by the
Chairman and Chief Executive Officer), the Chairman and Chief Executive Officer
has voting power over approximately 83.6 million shares of theglobe representing
approximately 47.7% of the issued and outstanding voting securities of the
Company. The SendTec executives were also granted certain pre-emptive rights
involving potential new issuances of securities by theglobe, together with a
co-sale right to participate in certain qualifying sales of stock by the
Chairman and Chief Executive Officer and the President and their affiliates. In
addition, the Chairman and Chief Executive Officer and President and their
affiliates were granted a right of first refusal on certain sales (generally, in
excess of 10 million shares) by the SendTec executives, together with the right
to "drag-along" the SendTec executives with regard to certain major sales of
their stock or a sale or merger of theglobe.
In 1997, the Chairman, the former Co-Chief Executive Officers, two Directors of
the Company and Dancing Bear (an entity controlled by the Chairman) entered into
a Stockholders' Agreement (the "Stockholders' Agreement") pursuant to which the
Chairman and Dancing Bear or certain entities controlled by the Chairman and
certain permitted transferees (the "Chairman Group") agreed to vote for certain
nominees of the former Co-Chief Executive Officers or certain entities
controlled by the former Co-Chief Executive Officers and certain permitted
transferees (the "Former Co-Chief Executive Officer Groups") to the Board of
Directors and the Former Co-Chief Executive Officer Groups agreed to vote for
the Chairman Group's nominees to the Board, who would represent up to five
members of the Board. Additionally, pursuant to the terms of the Stockholders'
Agreement, the former Co-Chief Executive Officer and the two Directors granted
an irrevocable proxy to Dancing Bear with respect to any shares acquired by them
pursuant to the exercise of outstanding Warrants transferred to each of them by
Dancing Bear. Such shares would be voted by Dancing Bear, which is controlled by
the Chairman, and would be subject to a right of first refusal in favor of
Dancing Bear upon certain private transfers. The Stockholders' Agreement also
provided that if the Chairman Group sold shares of Common Stock and Warrants
representing 25% or more of the Company's outstanding Common Stock (including
the Warrants) in any private sale, the Former Co-Chief Executive Officer Groups
and the two Directors of the Company would be required to sell up to the same
percentage of their shares as the Chairman Group's sales. If either the Chairman
Group sold shares of Common Stock or Warrants representing 25% or more of the
Company's outstanding Common Stock (including the Warrants) or the Former
Co-Chief Executive Officer Groups sold shares or Warrants representing 7% or
more of the shares and Warrants of the Company in any private sale, each other
party to the Stockholders' Agreement, including entities controlled by them and
their permitted transferees, had the option to sell up to the same percentage of
their shares. Effective March 28, 2003, the Stockholders' Agreement was
terminated.
F-30
NOTE 13. SEGMENTS AND GEOGRAPHIC INFORMATION
The Company applies the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which establishes annual and interim
reporting standards for operating segments of a company. SFAS No. 131 requires
disclosures of selected segment-related financial information about products,
major customers and geographic areas. Effective with the September 1, 2004
acquisition of SendTec, the Company is now organized in three operating segments
for purposes of making operating decisions and assessing performance: the
computer games division, the marketing services division and the VoIP telephony
services division. The computer games division consists of the operations of the
Company's Computer Games print magazine and the associated website Computer
Games Online (www.cgonline.com) and the operations of Chips & Bits, Inc., its
games distribution business. The marketing services division consists of the
operations of the Company's newly acquired subsidiary, SendTec. The VoIP
telephony services division is principally involved in the sale of
telecommunications services over the Internet to consumers.
The chief operating decision maker evaluates performance, makes operating
decisions and allocates resources based on financial data of each segment. Where
appropriate, the Company charges specific costs to each segment where they can
be identified. Certain items are maintained at the Company's corporate
headquarters ("Corporate") and are not presently allocated to the segments.
Corporate expenses primarily include personnel costs related to executives and
certain support staff and professional fees. Corporate assets principally
consist of cash and cash equivalents. Subsequent to its acquisition on September
1, 2004, SendTec provided various intersegment marketing services to the
Company's VoIP telephony services division. Prior to the acquisition of SendTec,
there were no intersegment transactions. The accounting policies of the segments
are the same as those for the Company as a whole.
F-31
The following table presents financial information regarding the Company's
different segments:
Year Ended December 31,
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
NET REVENUE:
Computer games $ 3,107,637 $ 4,736,032 $ 7,245,276
Marketing services 13,408,183 -- --
VoIP telephony services 391,154 548,081 --
Intersegment eliminations (865,942) -- --
------------ ------------ ------------
$ 16,041,032 $ 5,284,113 $ 7,245,276
============ ============ ============
INCOME (LOSS) FROM OPERATIONS:
Computer games $ (442,286) $ 120,907 $ (411,626)
Marketing services 1,197,884 -- --
VoIP telephony services (20,538,124) (5,116,437) (1,196)
Corporate expenses (3,675,492) (3,817,549) (2,527,966)
------------ ----------- ------------
Loss from operations (23,458,018) (8,813,079) (2,940,788)
Other income (expense), net (815,183) (2,221,318) 338,127
------------ ----------- ------------
Consolidated loss before income tax $(24,273,201) $(11,034,397) $ (2,602,661)
============ =========== ============
DEPRECIATION AND AMORTIZATION:
Computer games $ 10,606 $ 62,208 $ 85,327
Marketing services 227,270 -- --
VoIP telephony services 1,355,532 258,334 --
Corporate expenses 32,138 9,200 3,253
------------ ------------ ------------
$ 1,625,546 $ 329,742 $ 88,580
============ ============ ============
CAPITAL EXPENDITURES:
Computer games $ 55,845 $ -- $ 32,250
Marketing services 40,324 -- --
VoIP telephony services 2,537,133 2,366,047 --
Corporate 50,040 58,744 --
------------ ------------ ------------
$ 2,683,342 $ 2,424,791 $ 32,250
============ ============ ============
IDENTIFIABLE ASSETS:
Computer games $ 2,000,230 $ 1,957,714 $ 2,602,834
Marketing services 24,764,361 -- --
VoIP telephony services 3,497,698 4,251,082 164,960
Corporate assets 3,754,876 963,282 279,191
------------ ------------ ------------
$ 34,017,165 $ 7,172,078 $ 3,046,985
============ ============ ============
The Company's historical net revenues have been earned primarily from customers
in the United States. In 2003, VoIP telephony services net revenue was primarily
attributable to the sale of telephony services outside of the United States.
Telephony services revenue derived from Thailand represented approximately
$458,000 or 9% of consolidated net revenue for the year ended December 31, 2003.
In addition, all significant operations and assets are based in the United
States.
Revenue generated by two customers of SendTec since its acquisition date, or
September 1, 2004, represented approximately 44% of consolidated net revenue
reported for the year ended December 31, 2004.
F-32
NOTE 14. VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance
At Additions Additions Balance
Beginning Charged To Charged To At End Of
Period Ended, Of Period Expense Other Accounts Deductions Period
----------------- ---------- ------------- ----------- ----------- ----------
December 31, 2004 $ 112,986 $ 198,537 $ 9,750 $ (47,260) $ 274,013
December 31, 2003 $ 128,613 $ 114,888 $ -- $ (130,515) $ 112,986
December 31, 2002 $3,203,295 $ -- $ -- $(3,074,682) $ 128,613
NOTE 15. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended
------------------------------------------------------------
December 31, September 30, June 30, March 31,
2004 2004 2004 2004
------------- ------------ ------------- -------------
Net revenue $ 10,660,697 $ 3,698,108 $ 826,230 $ 855,997
Operating expenses 18,914,508 9,821,608 6,128,867 4,634,067
Loss from operations (8,253,811) (6,123,500) (5,302,637) (3,778,070)
Net loss (8,385,886) (5,869,656) (5,355,961) (4,661,698)
Net loss applicable to common
stockholders (8,385,886) (5,869,656) (5,355,961) (4,661,698)
Basic and diluted net loss per
share $ (0.05) $ (0.04) $ (0.04) $ (0.07)
Quarter Ended
------------------------------------------------------------
December 31, September 30, June 30, March 31,
2003 2003 2003 2003
------------- ------------- ----------- -------------
Net revenue $ 1,492,237 $ 1,447,784 $ 1,101,810 $ 1,242,282
Operating expenses 6,239,271 3,776,319 2,295,895 1,785,707
Loss from operations (4,747,034) (2,328,535) (1,194,085) (543,425)
Net loss (5,077,665) (2,517,614) (2,757,371) (681,747)
Net loss applicable to common
stockholders (5,077,665) (10,137,614) (2,757,371) (1,181,747)
Basic and diluted net loss per
share $ (0.10) $ (0.23) $ (0.09) $ (0.04)
Net loss applicable to common stockholders for the 2003 quarterly periods
includes the preferred dividend impact of the beneficial conversion features of
the preferred stock and warrants issued.
Quarter Ended
------------------------------------------------------------
December 31, September 30, June 30, March 31,
2002 2002 2002 2002
-------------- --------------- ------------- ------------
Net revenue $ 2,009,701 $ 1,698,278 $ 1,684,942 $ 1,852,355
Operating expenses 1,873,157 2,225,921 3,330,776 2,756,210
Income (loss) from operations 136,544 (527,643) (1,645,834) (903,855)
Net income (loss) 16,922 (492,046) (1,633,429) (506,108)
Net loss applicable to common
stockholders 16,922 (492,046) (1,633,429) (506,108)
Basic and diluted net loss per
share $ -- $ (0.02) $ (0.05) $ (0.02)
F-33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure (1)
that information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's ("SEC") rules and forms, and (2)
that this information is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost benefit relationship of possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2004.
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.
Our management, with the participation of our Chief Executive Officer and our
Chief Financial Officer, have evaluated any change in our internal control over
financial reporting that occurred during the quarter ended December 31, 2004
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting, and have determined there to be no
reportable changes.
ITEM 8B. OTHER INFORMATION
On January 31, 2005, theglobe.com, inc., and Promotion Display Technology Ltd.
("PDT"), entered into a termination of agreement related to an agreement dated
August 7, 2003 for the purchase of USB handsets. The provisions of this
termination of agreement are discussed in Item 6 under the caption "Loss on
Settlement of Contractual Obligation" in the discussion of our results of
operations for the year ended December 31, 2004 compared to the year ended
December 31, 2003.
Although we treated the original August 7, 2003 agreement with PDT as a material
contract, we did not file a Form 8-K relating to the termination of this
contract. Due to previous disclosures in theglobe.com's Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 2004, of amounts written-off
related to USB handset inventory purchases pursuant to this contract and that a
material part of our business was no longer dependent upon this supplier, the
actual termination of the contract may not have been a termination of a material
agreement requiring it to be reported on Form 8-K.
85
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The following table sets forth the names, ages and current positions with the
Company held by our Directors and Executive Officers. There is no immediate
family relationship between or among any of the Directors or Executive Officers,
and the Company is not aware of any arrangement or understanding between any
Director or Executive Officer and any other person pursuant to which he was
elected to his current position.
POSITION OR OFFICE
NAME AGE WITH THE COMPANY
--------------------------------------------------------------------------------
Michael S. Egan 64 Chairman and Chief Executive Officer
Edward A. Cespedes 39 President, Treasurer and Chief Financial
Officer and Director
Robin S. Lebowitz 40 Vice President of Finance and Director
Paul Soltoff 50 Chief Executive Officer of SendTec
Michael S. Egan. Michael Egan has served as theglobe.com's Chairman since 1997
and as its Chief Executive Officer since June 1, 2002. Since 1996, Mr. Egan has
been the controlling investor of Dancing Bear Investments, a privately held
investment company. Since 2002, Mr. Egan has been the controlling investor of
E&C Capital Partners LLLP, a privately held investment partnership. Mr. Egan is
also Chairman of Certified Vacations, a privately held wholesale travel company
which was founded in 1980. Certified Vacations specializes in designing,
marketing and delivering vacation packages. Mr. Egan spent over 30 years in the
rental car business. He began with Alamo Rent-A-Car in 1973, became an owner in
1979, and became Chairman and majority owner from January 1986 until November
1996 when he sold the company to AutoNation. In 2000, AutoNation spun off the
rental division, ANC Rental (Other OTC: ANCXZ.PK), and Mr. Egan served as
Chairman until October 2003. Prior to acquiring Alamo, he held various
administration positions at Yale University and taught at the University of
Massachusetts at Amherst. Mr. Egan is a graduate of Cornell University where he
received his Bachelor's degree in Hotel Administration.
Edward A. Cespedes. Edward Cespedes has served as a director of theglobe.com
since 1997, as President of theglobe.com since June 1, 2002 and as Treasurer and
Chief Financial Officer of theglobe.com since February 1, 2005. Mr. Cespedes is
also the President of E&C Capital Ventures, Inc., the general partner of E&C
Capital Partners LLLP. Mr. Cespedes served as the Vice Chairman of Prime
Ventures, LLC, from May 2000 to February 2002. From August 2000 to August 2001,
Mr. Cespedes served as the President of the Dr. Koop Lifecare Corporation and
was a member of the Company's Board of Directors from January 2001 to December
2001. From 1996 to 2000, Mr. Cespedes was a Managing Director of Dancing Bear
Investments. Concurrent with his position at Dancing Bear Investments, from 1998
to 2000, Mr. Cespedes also served as Vice President for corporate development
for theglobe.com where he had primary responsibility for all mergers,
acquisitions, and capital markets activities. In 1996, prior to joining Dancing
Bear Investments, Mr. Cespedes was the Director of Corporate Finance for Alamo
Rent-A-Car. From 1988 to 1996, Mr. Cespedes worked in the Investment Banking
Division of J.P. Morgan and Company, where he most recently focused on mergers
and acquisitions. In his capacity as a venture capitalist, Mr. Cespedes has
served as a member of the board of directors of various portfolio companies. Mr.
Cespedes is the founder of the Columbia University Hamilton Associates, a
foundation for university academic endowments. In 1988 Mr. Cespedes received a
Bachelor's degree in International Relations from Columbia University.
Robin S. Lebowitz. Robin Lebowitz has served as a director of theglobe.com since
December 2001, as Secretary of theglobe.com since June 1, 2002, and as Vice
President of Finance of theglobe.com since February 23, 2004. Ms. Lebowitz also
served as Treasurer of theglobe.com from June 1, 2002 until February 23, 2004
and as Chief Financial Officer of theglobe.com from July 1, 2002 until February
23, 2004. Ms. Lebowitz has worked in various capacities for the Company's
Chairman, Michael Egan, for eleven years. She is the Controller/Managing
Director of Dancing Bear Investments, Mr. Egan's privately held investment
management and holding company. Previously, Ms. Lebowitz served on the Board of
Directors of theglobe.com from August 1997 to October 1998. At Alamo Rent-A-Car,
she served as Financial Assistant to the Chairman (Mr. Egan). Prior to joining
Alamo, Ms. Lebowitz was the Corporate Tax Manager at Blockbuster Entertainment
Group where she worked from 1991 to 1994. From 1986 to 1989, Ms. Lebowitz worked
in the audit and tax departments of Arthur Andersen & Co. Ms. Lebowitz received
a Bachelor of Science in Economics from the Wharton School of the University of
Pennsylvania; a Masters in Business Administration from the University of Miami
and is a Certified Public Accountant.
86
Paul Soltoff. Paul Soltoff has served as Chairman of the Board and Chief
Executive Officer of SendTec since its inception in February 2000. Commensurate
with the SendTec merger on September 1, 2004, Mr. Soltoff continued in the
position of Chief Executive Officer of SendTec, now theglobe.com's wholly-owned
subsidiary, and was elected to theglobe.com's Board of Directors. On February
21, 2005, Mr. Soltoff resigned as the Company's Director, however, he continues
to serve as Chief Executive Officer of SendTec. In 1997, Mr. Soltoff became the
Chief Executive Officer of Soltoff Direct Corporation, a specialized direct
marketing consulting company located in St. Petersburg, Florida. Since the
inception of SendTec, Soltoff Direct Corporation has been largely inactive. Mr.
Soltoff is a graduate of Temple University where he received his Bachelor of
Science degree in Business Marketing in 1995.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Michael Egan, theglobe.com's Chairman and CEO, was Chairman of ANC Rental
Corporation from late 2000 until October 2003 and was Chief Executive Officer of
ANC Rental Corporation from late 2000 until April 4, 2002. In November 2001, ANC
Rental Corporation filed voluntary petitions for relief under Chapter 11 or
Title 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware (Case No. 01-11200).
Edward Cespedes, a director and the President, Treasurer and Chief Financial
Officer of theglobe.com, was also a director of Dr. Koop Lifecare Corporation
from January 2001 to December 2001. In December 2001, Dr. Koop Lifecare
Corporation filed petitions seeking relief under Chapter 7 of the United States
Bankruptcy Code.
BOARD MEETINGS AND COMMITTEES OF THE BOARD
Including unanimous written actions of the Board, the Board of Directors met 24
times in 2004. No incumbent director who was on the Board for the entire year
attended less than 75% of the total number of all meetings of the Board and any
committees of the Board on which he or she served, if any, during 2004.
The Board of Directors has a standing Audit and Compensation Committee but no
standing Nominating Committee.
AUDIT COMMITTEE
The Audit Committee, which was formed in July 1998, reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our auditors
and our accounting practices and internal controls. The Audit Committee operates
pursuant to a written charter, as amended, adopted by the Board of Directors on
June 12, 2000. The current members of the Audit Committee are Messrs. Egan and
Cespedes and Ms. Lebowitz, all of whom are employee directors. None of the
current committee members are considered "independent" within the meaning of
applicable NASD rules. Ms. Lebowitz serves as the "audit committee financial
expert" as required by Section 407 of The Sarbanes-Oxley Act, but is not
considered independent within the meaning of applicable NASD rules. Including
unanimous written actions of the Committee, the Audit Committee held 7 meetings
in 2004.
COMPENSATION COMMITTEE
The Compensation Committee, which met 9 times in 2004 (including unanimous
written actions of the Committee), establishes salaries, incentives and other
forms of compensation for officers and other employees of theglobe.com. The
Compensation Committee also approves option grants under all of our outstanding
stock based incentive plans. The current members of the Compensation Committee
are Messrs. Egan and Cespedes.
NOMINATING COMMITTEE
The Board of Directors does not have a separate nominating committee. Rather,
the entire Board of Directors acts as nominating committee. Based on the
Company's Board currently consisting only of employee directors, the Board of
Directors does not believe the Company would derive any significant benefit from
a separate nominating committee. Due primarily to their status as employees of
the Company, none of the members of the Board are "independent" as defined in
the NASD listing standards. The Company does not have a Nominating Committee
charter.
In recommending director candidates in the future, the Board intends to take
into consideration such factors as it deems appropriate based on the Company's
current needs. These factors may include diversity, age, skills, decision-making
ability, inter-personal skills, experience with businesses and other
organizations of comparable size, community activities and relationships, and
the interrelationship between the candidate's experience and business
background, and other Board members' experience and business background, whether
such candidate would be considered "independent," as such term is defined in the
NASD listing standards, as well as the candidate's ability to devote the
required time and effort to serve on the Board.
87
The Board will consider for nomination by the Board director candidates
recommended by stockholders if the stockholders comply with the following
requirements. Under our By-Laws, if a stockholder wishes to nominate a director
at the Annual Meeting, we must receive the stockholder's written notice not less
than 60 days nor more than 90 days prior to the date of the annual meeting,
unless we give our stockholders less than 70 days' notice of the date of our
Annual Meeting. If we provide less than 70 days' notice, then we must receive
the stockholder's written notice by the close of business on the 10th day after
we provide notice of the date of the Annual Meeting. The notice must contain the
specific information required in our By-Laws. A copy of our By-Laws may be
obtained by writing to the Secretary. If we receive a stockholder's proposal
within the time periods required under our By-Laws, we may choose, but are not
required, to include it in our proxy statement. If we do, we may tell the other
stockholders what we think of the proposal, and how we intend to use our
discretionary authority to vote on the proposal. All proposals should be made in
writing and sent via registered, certified or express mail, to our executive
offices, 110 East Broward Boulevard, Suite 1400, Fort Lauderdale, Florida 33301,
Attention: Robin S. Lebowitz, Corporate Secretary.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Any stockholder who wishes to send communications to the Board of Directors
should mail them addressed to the intended recipient by name or position in care
of: Corporate Secretary, theglobe.com, inc., 110 East Broward Boulevard, Suite
1400, Fort Lauderdale, Florida, 33301. Upon receipt of any such communications,
the Corporate Secretary will determine the identity of the intended recipient
and whether the communication is an appropriate stockholder communication. The
Corporate Secretary will send all appropriate stockholder communications to the
intended recipient. An "appropriate stockholder communication" is a
communication from a person claiming to be a stockholder in the communication,
the subject of which relates solely to the sender's interest as a stockholder
and not to any other personal or business interest.
In the case of communications addressed to the Board of Directors, the Corporate
Secretary will send appropriate stockholder communications to the Chairman of
the Board. In the case of communications addressed to any particular directors,
the Corporate Secretary will send appropriate stockholder communications to such
director. In the case of communications addressed to a committee of the board,
the Corporate Secretary will send appropriate stockholder communications to the
Chairman of such committee.
ATTENDANCE AT ANNUAL MEETINGS
The Board of Directors encourages, but does not require, its directors to attend
the Company's annual meeting of stockholders. Last year, all of the Company's
directors attended the annual meeting.
CODE OF ETHICS
The Company has adopted a Code of Ethics applicable to its officers, including
its principal executive officer, principal financial officer, principal
accounting officer or controller and any other persons performing similar
functions. The Code of Ethics will be provided free of charge by the Company to
interested parties upon request. Requests should be made in writing and directed
to the Company at the following address: 110 East Broward Boulevard; Suite 1400;
Fort Lauderdale, Florida 33301.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent (10%) of a registered
class of our equity securities, to file certain reports regarding ownership of,
and transactions in, our securities with the SEC and with The NASDAQ Stock
Market, Inc. Such officers, directors, and 10% stockholders are also required to
furnish theglobe with copies of all Section 16(a) forms that they file.
Based solely on our review of copies of Forms 3 and 4 and any amendments
furnished to us pursuant to Rule 16a-3(e) and Forms 5 and any amendments
furnished to us with respect to the 2004 fiscal year, and any written
representations referred to in Item 405(b)(2)(i) of Regulation S-K stating that
no Forms 5 were required, we believe that, during the 2004 fiscal year, our
officers and directors have complied with all Section 16(a) applicable filing
requirements.
88
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for services
in all capacities awarded to, earned by or paid by us to those persons serving
as the chief executive officer at any time during the last year and our four
other most highly compensated executive officers (collectively, the "Named
Executive Officers"):
Long-Term
Compensation(1)
-------------------
Annual Compensation
---------------------------------------
Number of
Securities All Other
Name and Salary Bonus Underlying Compensation
Principal Position Year ($) ($) Options (#) ($)
---------------------------------- -------- ----------- ------------ ------------------- -----------------
Michael S. Egan, 2004 250,000 77,500 -- --
Chairman, Chief Executive 2003 125,000 50,000 1,000,000 --
Officer (2) 2002 -- -- 2,507,500 --
Edward A. Cespedes, 2004 250,000 77,500 -- --
President, Treasurer and Chief 2003 225,000 50,000 550,000 --
Financial Officer (3) 2002 100,000 25,000 1,757,500 41,668
Albert J. Detz, 2004 100,139 -- 200,000 --
Former Chief Financial Officer,
Treasurer (4)
Robin S. Lebowitz, 2004 144,167 17,500 -- --
Former Chief Financial Officer; (5) 2003 137,500 -- 100,000 --
Vice President of Finance 2002 58,350 10,000 507,500 --
Paul Soltoff, 2004 100,000 17,000 477,337 --
Chief Executive Officer, (6)
SendTec, Inc.
------------
(1) Included in long-term compensation for 2004 are 200,000 options granted to
Mr. Detz at an exercise price of $0.38 per share. In addition, long-term
compensation for 2004 includes replacement options to acquire 477,337
shares of theglobe.com Common Stock granted to Mr. Soltoff at an exercise
price of $0.06 per share in exchange for options which Mr. Soltoff held
prior to the acquisition of SendTec, Inc. by theglobe.com. Included in
long-term compensation for 2003 are 1,650,000 options granted during the
year at $0.56 per share to the Named Executive Officers. Included in
long-term compensation for 2002 are 7,500 options granted to each of
Messrs. Egan and Cespedes and Ms. Lebowitz in June 2002 at an exercise
price of $0.04 per share in accordance with the Company's Director
Compensation Plan; and 2,500,000, 1,750,000, and 500,000 options granted
in June 2002 at an exercise price of $0.02 per share related to bonuses
earned in 2002 for Messrs. Egan and Cespedes and Ms. Lebowitz,
respectively.
(2) Mr. Egan became an executive officer in July 1998. We began paying Mr.
Egan a base salary in July 2003. We did not pay Mr. Egan a base salary in
2002 or 2001.
(3) Mr. Cespedes became President in June 2002 and Treasurer and Chief
Financial Officer in February 2005. Prior to this, Mr. Cespedes served as
a consultant to the Company and was paid $41,668 for these services.
(4) Mr. Detz became Chief Financial Officer and Treasurer in June 2004 at a
base salary of $175,000 per year. Effective February 1, 2005, Mr. Detz
resigned his positions with the Company. Effective February 2, 2005, Mr.
Detz began performing various financial and accounting consulting services
on a project basis to the Company.
(5) Ms. Lebowitz became an officer of the Company in June 2002 and Chief
Financial Officer in July 2002. In February 2004, Ms. Lebowitz resigned
her position as Chief Financial Officer and became Vice President of
Finance.
(6) Mr. Soltoff became a Director of the Company and Chief Executive Officer
of SendTec, Inc. in September 2004. On February 21, 2005, Mr. Soltoff
resigned as the Company's Director but continues to serve as CEO of
SendTec, Inc. His current base salary is $300,000 per year. Salary for
2004 represents amounts earned since September 1, 2004, the date SendTec
was acquired by the Company.
89
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND 2004 YEAR-END OPTION
VALUES
The following tables set forth for each of the Named Executive Officers (a) the
number of options exercised during 2004, (b) the total number of unexercised
options for common stock (exercisable and unexercisable) held at December 31,
2004, (c) the value of those options that were in-the-money on December 31, 2004
based on the difference between the closing price of our Common Stock on
December 31, 2004 and the exercise price of the options on that date, and (d)
the total number of options granted to such persons in 2004.
Number of Securities Value of Unexercised
Underlying Unexercised Stock In-the-Money Stock Options
Options at Fiscal Year-End (#) at Fiscal Year End (1)
------------------------------- ----------------------------------
Shares
Acquired on Value Un- Un-
Name Exercise # Realized Exercisable Exercisable Exercisable Exercisable
----------------------- ------------- --------- -------------- ------------- ------------- -----------------
Michael S. Egan -- -- 3,841,182 3,818 $ 1,003,016 $ 1,259
Edward A. Cespedes -- -- 2,461,182 3,818 703,016 1,259
Albert J. Detz -- -- 83,334 116,666 3,333 4,667
Robin S. Lebowitz -- -- 625,025 9,055 208,722 3,378
Paul Soltoff -- -- 238,669 238,668 85,921 85,920
----------
(1) Value represents closing price of our Common Stock on December 31, 2004
less the exercise price of the stock option, multiplied by the number of
shares exercisable or unexercisable, as applicable.
OPTION GRANTS IN 2004
Percent of
Total Market
Number of Options Exercise Price
Securities Granted to or Base on Date
Underlying Employees Price of Grant
Name Options Granted in 2004 ($/Share) ($/share) Expiration Date
----------------------------------- --------------------- ------------ --------- --------- ---------------
Michael S. Egan - - - - -
Edward A. Cespedes - - - - -
Albert J. Detz 200,000 (1) 2.6% $0.38 $0.38 6/04/2014
Robin S. Lebowitz - - - - -
Paul Soltoff 477,337 (2) 6.2% $0.06 $0.41 10/01/2013
----------
(1) 60,000 of these options vested immediately, with the balance vesting
ratably on a quarterly basis over the following three years as long as Mr.
Detz was employed by the Company. Upon Mr. Detz' resignation and pursuant
to the terms of his consulting agreement, 130,000 of the options became
vested effective February 2, 2005, with the 70,000 remaining to vest upon
Mr. Detz' performance of consulting services on a continuous basis for at
least six months from the effective date of the agreement, February 2,
2005.
(2) 238,669 of these options vested on September 30, 2004 and the remainder
vest on September 30, 2005.
EMPLOYMENT AGREEMENTS
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT AND PRESIDENT EMPLOYMENT AGREEMENT.
On August 1, 2003, we entered into separate employment agreements with our Chief
Executive Officer ("CEO"), Michael S. Egan, and our President, Edward A.
Cespedes. The two employment agreements are substantially similar and each
provides for the following:
o employment as one of our executives;
o an annual base salary of $250,000 with eligibility to receive annual
increases as determined in the sole discretion of the Board of
Directors;
o an annual cash bonus, which will be awarded upon the achievement of
specified pre-tax operating income (not be less than $50,000 per
year);
o participation in all welfare, benefit and incentive plans (including
equity based compensation plans) offered to senior management;
90
o a term of employment which commenced on August 1, 2003 and continues
through the first anniversary thereof. The term automatically
extends for one day each day unless either the Company or executive
provides written notice to the other not to further extend. The
agreement provides that, in the event of termination by us without
"cause" or by the executive for "good reason" (which includes a
"Change of Control"), the executive will be entitled to receive from
us:
- (A) his base salary through the date of termination and an
amount equal to the product of (x) the higher of (i) the
executive's average annual incentive paid or payable under the
Company's annual incentive plan for the last three full fiscal
years, including any portion which has been earned but
deferred and (ii) the annual incentive paid or payable under
the Company's annual incentive plan for the most recently
completed fiscal year, including any portion thereof which has
been earned but deferred (and annualized if the fiscal year
consists of less than twelve full months or, if during which,
the executive was employed for less than twelve full months)
and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the date of
termination, and the denominator of which is 365;
- (B) any accrued vacation pay; and
- (C) a lump-sum cash payment equal to ten (10) times the sum of
executive's base salary and highest annual incentive;
- for the continued benefit of executive, his spouse and his
dependents for a period of ten (10) years following the date
of termination, the medical, hospitalization, dental, and life
insurance programs in which executive, his spouse and his
dependents were participating immediately prior to the date of
termination at the level in effect and upon substantially the
same terms and conditions as existed immediately prior to the
date of termination;
- reimbursement for any reasonable and necessary monies advanced
or expenses incurred in connection with the executive's
employment; and
- executive will be vested, as of the date of termination, in
all rights under any equity award agreements (e.g., stock
options that would otherwise vest after the date of
termination) and in the case of stock options, stock
appreciation rights or similar awards, thereafter shall be
permitted to exercise any and all such rights until the
earlier of (i) the third anniversary of the date of
termination and (ii) the end of the term of such awards
(regardless of any termination of employment restrictions
therein contained) and any restricted stock held by executive
will become immediately vested as of the date of termination.
EMPLOYMENT AGREEMENT WITH FORMER CHIEF FINANCIAL OFFICER. We also entered into
an employment agreement with our then Chief Financial Officer ("CFO"), Robin
Segaul Lebowitz, on August 1, 2003. Her employment agreement provides for the
following:
o employment as one of our executives;
o an annual base salary of $150,000 with eligibility to receive annual
increases as determined in the sole discretion of the Board of
Directors;
o a discretionary annual cash bonus, which will be awarded at our
Board's discretion;
o participation in all welfare, benefit and incentive plans (including
equity based compensation plans) offered to senior management;
o term of employment which commenced on August 1, 2003 and continues
through the first anniversary thereof. The term automatically
extends for one day each day unless either the Company or executive
provides written notice to the other not to further extend. The
agreement provides that, in the event of termination by us without
"cause" or by the executive for "good reason" (which includes a
"Change of Control"), the executive will be entitled to receive from
us:
- (A) her base salary through the date of termination and an
amount equal to the product of (x) the higher of (i) the
executive's average annual incentive paid or payable under the
Company's annual incentive plan for the last three full fiscal
years, including any portion which has been earned but
deferred and (ii) the annual incentive paid or payable under
the Company's annual incentive plan for the most recently
completed fiscal year, including any portion thereof which has
been earned but deferred (and annualized if the fiscal year
consists of less than twelve full months or, if during which,
the executive was employed for less than twelve full months)
and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the date of
termination, and the denominator of which is 365;
91
- (B) any accrued vacation pay; and
- (C) a lump-sum cash payment equal to two (2) times the sum of
executive's base salary and highest annual incentive;
- for the continued benefit of executive, her spouse and her
dependents for a period of two (2) years following the date of
termination, the medical, hospitalization, dental, and life
insurance programs in which executive, her spouse and her
dependents were participating immediately prior to the date of
termination at the level in effect and upon substantially the
same terms and conditions as existed immediately prior to the
date of termination;
- reimbursement for any reasonable and necessary monies advanced
or expenses incurred in connection with the executive's
employment; and
- executive will be vested, as of the date of termination, in
all rights under any equity award agreements (e.g., stock
options that would otherwise vest after the date of
termination) and in the case of stock options, stock
appreciation rights or similar awards, thereafter shall be
permitted to exercise any and all such rights until the
earlier of (i) the third anniversary of the date of
termination and (ii) the end of the term of such awards
(regardless of any termination of employment restrictions
therein contained) and any restricted stock held by executive
will become immediately vested as of the date of termination.
Effective February 23, 2004, Ms. Lebowitz's employment agreement was amended.
Ms. Lebowitz's new title is Vice President, Finance and effective June 1, 2004
her annual base salary is $140,000.
CHIEF FINANCIAL OFFICER AND TREASURER AGREEMENT. We also entered into an
agreement with our former Chief Financial Officer ("CFO") and Treasurer, Albert
J. Detz, on June 3, 2004. That agreement had provided for the following:
o an annual base salary of $175,000 with eligibility to receive annual
increases as determined in the sole discretion of the Board of
Directors;
o a grant of 200,000 options to acquire theglobe.com Common Stock at
an exercise price of $0.38 per share. 60,000 of these options vested
immediately and the balance vest ratably on a quarterly basis over 3
years;
o a discretionary annual cash bonus, which will be awarded at our
Board's discretion;
o participation in all welfare, benefit and incentive plans offered to
senior management of the Company; and
o in the event of termination by us after six months of employment but
less than one year, the executive will be entitled to receive from
us his base salary for a period of three months from the date of
such termination. In the event of termination by us after one year
of employment, the executive will be entitled to receive from us his
base salary for a period of six months from the date of such
termination.
Effective February 1, 2005, Mr. Detz resigned his positions with the Company and
his employment with the Company ended. Pursuant to a consulting agreement
effective February 2, 2005, Mr. Detz began performing various financial and
accounting consulting services on a project basis to the Company.
SENDTEC CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT. As part of the SendTec
Acquisition, on September 1, 2004, we entered into an employment agreement with
Paul Soltoff to continue as Chief Executive Officer ("CEO") of SendTec, Inc.,
now a wholly-owned subsidiary of the Company. His employment agreement provides
for the following:
o an annual base salary of $300,000 with eligibility to receive annual
increases as determined in the sole discretion of the Board of
Directors;
o a discretionary annual cash bonus, which will be awarded at our
Board's discretion;
o participation in all welfare, benefit and incentive plans offered to
senior management of the Company;
o a 5 year term of employment which commenced on September 1, 2003.
The agreement provides that, in the event of termination by us
without "cause" or by the executive for "good reason," the executive
will be entitled to receive from us his base salary for a period of
2 years from the date of such termination, any accrued vacation pay
and for the continued benefit of executive, his spouse and his
dependents for a period of one (1) year following the date of
termination, the medical, hospitalization, dental, and life
92
insurance programs in which executive, his spouse and his dependents
were participating immediately prior to the date of termination at
the level in effect and upon substantially the same terms and
conditions as existed immediately prior to the date of termination;
and
o customary provisions relating to confidentiality, work-product and
covenants not to compete.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of March 10, 2005 (except as otherwise
indicated) by (i) each person who owns beneficially more than 5% of our Common
Stock, (ii) each of our directors, (iii) each of our "Named Executive Officers"
and (iv) all directors and executive officers as a group. A total of 175,186,997
shares of theglobe.com's Common Stock were issued and outstanding on March 10,
2005.
The amounts and percentage of common stock beneficially owned are reported on
the basis of regulations of the Securities and Exchange Commission ("SEC")
governing the determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a "beneficial owner" of a security if
that person has or shares "voting power," which includes the power to vote or to
direct the voting of such security, or "investment power," which includes the
power to dispose of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which that person has
a right to acquire beneficial ownership within 60 days. Under these rules, more
than one person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest. Unless otherwise indicated below, the address
of each person named in the table below is in care of theglobe.com, inc., P.O.
Box 029006, Fort Lauderdale, Florida 33302.
SHARES BENEFICIALLY OWNED
---------------------------------------------
DIRECTORS, NAMED EXECUTIVE OFFICERS TITLE OF
AND 5% STOCKHOLDERS NUMBER PERCENT CLASS
------------------------------------------ ----------- ------- -----------
Dancing Bear Investments, Inc. (1) ... 8,303,148 4.7% Common
Michael S. Egan (2)(9) ............... 87,646,061 48.9% Common
Edward A. Cespedes (3) ............... 2,462,153 1.4% Common
Robin S. Lebowitz (4) ................ 627,057 * Common
Paul Soltoff (5) ..................... 10,435,959 6.0% Common
Albert J. Detz (6) ................... 130,000 * Common
E&C Capital Partners LLLP (7) ........ 61,168,886 34.9% Common
Wellington Management Company, LLP (8) 24,136,050 13.1% Common
Stockholder Agreement Group (9) ...... 87,646,061 48.9% Common
All directors and executive officers
as a group (5 persons) ............. 91,118,040 49.9% Common
---------------------------
* less than 1%
(1) Mr. Egan owns Dancing Bear Investments, Inc.
(2) Includes the shares that Mr. Egan is deemed to beneficially own as the
controlling investor of Dancing Bear Investments, Inc. and E&C Capital
Partners, LLLP and as the Trustee of the Michael S. Egan Grantor Retained
Annuity Trusts for the benefit of his children. Also includes (i)
3,841,684 shares of our Common Stock issuable upon exercise of options
that are currently exercisable and 469 shares of our Common Stock issuable
upon exercise of options that are exercisable within 60 days of March 10,
2005; (ii) 3,541,337 shares of our Common Stock held by Mr. Egan's wife,
as to which he disclaims beneficial ownership; and (iii) 204,082 shares of
our Common Stock issuable upon exercise of warrants at $1.22 per share
owned by Mr. Egan and his wife.
(3) Includes 2,461,182 shares of our Common Stock issuable upon exercise of
options that are currently exercisable and 971 shares of our Common Stock
issuable upon exercise of options that are exercisable within 60 days of
March 10, 2005.
(4) Includes 625,025 shares of our Common Stock issuable upon exercise of
options that are currently exercisable and 2,032 shares of our Common
Stock issuable upon exercise of options that are exercisable within 60
days of March 10, 2005.
(5) Includes 238,669 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of March 10,
2005.
93
(6) Includes 130,000 shares of our Common Stock issuable upon exercise of
options that are currently exercisable.
(7) E&C Capital Partners, LLLP is a privately held investment vehicle
controlled by our Chairman, Michael S. Egan. Our President, Edward A.
Cespedes, has a minority, non-controlling interest in E&C Capital
Partners, LLLP. Includes 28,699,874 shares of Common Stock over which E&C
holds an irrevocable proxy pursuant to the Stockholders' Agreement.
(8) Includes 9,043,750 shares of our Common Stock issuable upon exercise of
warrants at $0.001 per share. The information about Wellington Management
Company, LLP is as of December 31, 2004 and is derived from an SEC filing
on Schedule 13G by Wellington Management. Wellington Management in its
capacity as an investment adviser, may be deemed to have beneficial
ownership of 24,136,050 shares of Common Stock that are owned by numerous
investment advisory clients, none of which is known to have such interest
with respect to more than five percent of the class of shares. Wellington
Management has shared voting authority over 11,259,450 shares and shared
dispositive power over 24,136,050 shares. Wellington Management is a
registered investment advisor under the Investment Advisers Act of 1940,
as amended. Wellington Management's mailing address is 75 State Street,
Boston, MA 02109.
(9) In connection with the SendTec Acquisition, the Company and certain former
executives of SendTec (consisting of Paul Soltoff, Eric Obeck, Donald
Gould, Harry Greene and Irv and Nadine Brechner) entered into a
Stockholders' Agreement dated September 1, 2004 with Dancing Bear
Investments, Inc., E&C Capital Partners, LLLP ("E&C"), Michael S. Egan and
Edward Cespedes (the "Stockholders' Agreement"). Pursuant to the
Stockholders' Agreement the SendTec executives granted an irrevocable
proxy to vote their shares to E&C on all matters (including the election
of directors) other than with respect to certain potential affiliated
transactions involving Messr. Egan or Cespedes. The amount set forth in
the table includes 28,699,874 shares of Common Stock over which E&C holds
such irrevocable proxy. The amount set forth in the table also includes
3,842,153 shares of our Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of March 10,
2005 for Michael S. Egan, but does not include options of an aggregate of
511,837 held by the other members of the Stockholder Agreement Group.
Please also refer to the appropriate footnotes relating to each individual
member of the Stockholder Agreement Group.
Information regarding securities authorized for issuance under equity
compensation plans is set forth under Item 4 of this Report on Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ARRANGEMENTS WITH ENTITIES CONTROLLED BY VARIOUS DIRECTORS AND OFFICERS. On
November 14, 2002, E&C Capital Partners, LLLP ("E&C Partners"), a privately held
investment holding company owned by Michael S. Egan, our Chairman and CEO and a
major stockholder, 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. 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 was subject to adjustment upon the occurrence of
certain events, including downward adjustment on a weighted-average basis in the
event the Company issued 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 16,666,650 million shares of Common Stock would be issuable. The
Series F Preferred Stock had a liquidation preference of $1.50 per share (and
was thereafter entitled to participate with the Common Stock on an "as
converted" basis), and was entitled to a dividend at the rate of 8% per annum if
and to the extent declared by the board and was also entitled to participate in
any dividend declared on the Company's Common Stock. The Series F Preferred
Stock also was entitled to vote on an "as converted" basis with the holders of
Common Stock. In addition, as part of the $500,000 investment, E&C 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 was
exercisable at any time on or before March 28, 2013. E & C Partners also
received certain demand registration rights in connection with its investment.
On May 22, 2003, E&C Partners and certain trusts, of which Mr. Egan is the
trustee, entered into a Note Purchase Agreement with the Company pursuant to
which they acquired convertible promissory notes (the "Convertible Notes") in
the aggregate principal amount of $1,750,000. The Convertible Notes were
convertible at anytime into shares of the Company's Common Stock at a blended
rate of $.09 per share (the Convertible Note held by E&C was convertible at
approximately $.079 per share and the Convertible Notes held by the Trusts were
convertible at $.10 per share), which if fully converted, would result in the
issuance of approximately 19,444,000 shares. The Convertible Notes had a one
year maturity date, which could be extended at the option of the holder of the
Note for periods aggregating two years, and was secured by a pledge of
substantially all of the assets of the Company. In addition, E&C Partners was
issued a warrant to acquire 3,888,889 shares of theglobe.com Common Stock at an
exercise price of $.15 per share. The warrant was exercisable at any time on or
before May 22, 2013. E&C Partners and the trusts are entitled to certain demand
and "piggy-back" registration rights in connection with their investment.
On February 2, 2004, Michael S. Egan (our Chairman and Chief Executive Officer)
and his wife, S. Jacqueline Egan, entered into a Note Purchase Agreement with
the Company pursuant to which they acquired convertible promissory notes (the
"Bridge Notes") in the aggregate principal amount of $2,000,000. The Bridge
Notes were convertible at anytime into shares of the Company's Common Stock at
an initial rate of $.98 per share. The conversion rate was initially adjustable
based on an amount equal to the rate at which the Company sold its Common Stock
94
in any subsequent qualified private offering (defined as an offering which
raises a minimum of $7.5 million) (or at a 20% discount to such amount,
depending upon the timing of completion, and amount of, such private offering).
This conversion was subsequently adjusted to $.57 per share, which was the
effective per share rate of the subsequent qualified private offering. The
Bridge Notes were due on demand from the holder, and were secured by a pledge of
substantially all of the assets of the Company. The security interest was shared
with the holders of the Company's Secured Convertible Notes in the principal
amount of $1,750,000. The Bridge Notes paid interest at the rate of ten (10)
percent per annum. In addition, the Egans were issued a warrant to acquire
204,082 shares of theglobe.com Common Stock at an initial exercise price of
$1.22 per share. This warrant is exercisable at any time on or before February
2, 2009. The Egans are entitled to certain demand and "piggy-back" registration
rights in connection with this investment.
On March 11, 2004, theglobe.com, inc. completed the PIPE Offering. In connection
with the PIPE Offering, Mr. Egan, our Chairman, Chief Executive Officer and
principal stockholder, together with certain of his affiliates and other
parties, converted the $2,000,000 Bridge Note, the $1,750,000 of Secured
Convertible Notes and all of the Company's outstanding shares of Series F
Preferred Stock, and exercised (on a cashless exercise basis) all of the
warrants issued in connection with the foregoing Secured Convertible Notes and
Series F Preferred Stock, together with certain warrants issued to Dancing Bear
Investments (an affiliate of Mr. Egan). As a result of such conversions and
exercises, the Company issued an aggregate of approximately 48.75 million shares
of Common Stock to such parties.
Interest expense on the $1,750,000 Convertible Notes totaled approximately
$108,200, excluding the amortization of the discount on the Notes, during the
year ended December 31, 2003. The interest remained unpaid at December 31, 2003,
and was included in accrued expenses in our consolidated balance sheet. As a
result of the conversion of the $1,750,000 Convertible Notes into the Company's
Common Stock in March 2004, all accrued interest, including approximately
$32,000 relating to the first quarter of 2004, was paid by June 30, 2004. As a
result of the conversion of the $2,000,000 Bridge Note into the Company's Common
Stock in March 2004, accrued interest of approximately $17,500 relating to the
first quarter of 2004 was paid by June 30, 2004
Two of our directors, Mr. Egan and Ms. Lebowitz, also serve as officers and
directors of Dancing Bear Investments, Inc. ("Dancing Bear"). Dancing Bear is a
stockholder of the Company and an entity controlled by Mr. Egan, our Chairman.
Several entities controlled by our Chairman have provided services to the
Company and two of its subsidiaries, including: the lease of office and
warehouse space; and the outsourcing of customer service and warehouse functions
for the Company's VoIP operations.
We sublease approximately 15,000 square feet of office space for our executive
offices from Certified Vacations, a company which is controlled by our Chairman
and CEO Michael Egan. The sublease commenced on September 1, 2003 and expires on
July 31, 2007. The initial base rent is $18.91 per square foot on an annual
basis ($283,650 annually in the aggregate) and will increase on each anniversary
of the sublease by $1.50 per square foot. During 2003, approximately $148,000 of
expense was recorded related to the lease of the office space. During the year
ended August 31, 2004, approximately $334,000 of expense was recorded related to
the lease of the office space. In addition, from August 2003 through August 2004
we outsourced our Customer Service function from Certified Vacations under
renewable short term agreements at incremental cost, for which we paid an
aggregate of $109,000 during the year ended December 31, 2003 and $134,000
during the year ended December 31, 2004.
Beginning in August, 2003, our subsidiary, Voiceglo Holdings, Inc. ("voiceglo"),
began outsourcing warehouse space and related services from Thomas Street
Logistics LLC, which is controlled by our Chairman and CEO, Michael Egan, and
our President, Edward Cespedes. Our agreement with Thomas Street Logistics
included secure warehouse space, equipment rental, insurance, utilities, office
space, inventory management, shipping services, personnel and provisioning of
our equipment for $25,000 per month and a nominal shipping and handling fee per
item shipped. Effective, April 15, 2004, voiceglo terminated its arrangement
with Thomas Street Logistics and has transitioned these functions to voiceglo
personnel and warehouse space. During 2003, approximately $126,000 of expense
was recorded for warehouse space and related outsourcing functions. During the
year ended December 31, 2004, approximately $99,000 of expense was recorded for
warehouse space and related outsourcing functions.
In addition, as of December 31, 2004, approximately $90,000 of advances made by
the Company to a newly formed entity controlled by our Chairman, Global Voice
Network LLC, remained unpaid. The entity was to provide services to voiceglo,
however, the entity ceased operations in January 2005. E&C Capital Partners LLLP
has represented to theglobe.com that the $90,000 will be repaid to the Company
prior to the end of 2005.
ARRANGEMENTS WITH RELATIVES. In March 2004, the Company engaged the services of
Pay the Rent, a company controlled by the son-in-law of our Chairman and CEO,
Michael Egan. Pay the Rent was contracted for the production, audio and video
post-production, voice-over, and scoring of a television commercial featuring
voiceglo. Payment in full in the amount of $151,200 was remitted during 2004. In
2003, we reimbursed Pay the Rent $18,013 for marketing and promotion expenses
(at cost) for a separate marketing promotion.
95
ITEM 13. EXHIBITS
EXHIBITS
NO. ITEM
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of the
Company (3).
3.2 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation (19).
3.3 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on July 29,
2003 (19).
3.4 Certificate relating to Previously Outstanding Series of Preferred Stock
and Relating to the Designation, Preferences and Rights of the Series F
Preferred Stock (14).
3.5 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Junior Participating Preferred Stock (16).
3.6 Form of By-Laws of the Company (19).
3.7 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Series H Automatically Converting Preferred Stock (18).
3.8 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on December 1,
2004. (22)
4.1 Registration Rights Agreement, dated as of September 1, 1998(5).
4.2 Amendment No.1 to Registration Rights Agreement, dated as of April 9,
1999(6).
4.3 Specimen certificate representing shares of Common Stock of the Company
(4).
4.4 Amended and Restated Warrant to Acquire Shares of Common Stock (2).
4.5 Form of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent (3).
4.6 Form of Warrant dated November 12, 2002 to acquire shares of Common Stock
(9).
4.7 Form of Warrant dated March 28, 2003 to acquire shares of Common Stock
(14).
4.8 Form of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of theglobe.com Common Stock (10).
4.9 Form of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc. (11).
4.10 Form of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc. (17).
4.11 Form of Warrant relating to potential issuance of Earn-out Consideration
(18).
10.1 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers (1).
10.2 Lease Agreement dated January 12, 1999 between the Company and Broadpine
Realty Holding Company, Inc. (6).
10.3 2000 Broad Based Stock Option Plan (7).
10.4 1998 Stock Option Plan, as amended (6).
10.5 1995 Stock Option Plan (1).
10.6 Employee Stock Purchase Plan (5).
10.7 Technology Purchase Agreement dated November 12, 2002, among theglobe.com,
inc., and Brian Fowler (9).
96
10.8 Employment Agreement dated November 12, 2002, among theglobe.com, inc. and
Brian Fowler (9).
10.9 Payment Agreement dated November 12, 2002, among theglobe.com, inc.,
1002390 Ontario Inc., and Robert S. Giblett (9).
10.10 Release Agreement dated November 12, 2002, among theglobe.com, inc. and
certain other parties named therein (9).
10.11 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital Partners, LLLP. (14).
10.12 Loan and Purchase Option Agreement dated February 25, 2003 (13).
10.13 Amended and Restated Promissory Note (13).
10.14 Form of Stock Purchase Agreement (13).
10.15 Note Purchase Agreement dated May 22, 2003 between theglobe.com, inc. and
E&C Capital Partners, LLLP and certain other investors named therein (10)
10.16 Agreement and Plan of Merger dated May 23, 2003 between theglobe.com,
inc., DPT Acquisition, Inc., Direct Partner Telecom, Inc., and the
stockholders thereof (10).
10.17 Employment Agreement dated May 28, 2003 between theglobe.com and James
Magruder (10).
10.18 Form of Subscription Agreement relating to the purchase of Units of Series
G Preferred Stock and Warrants of theglobe.com, inc. (11).
10.19 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Michael S. Egan (12).
10.20 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Edward A. Cespedes (12).
10.21 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Robin Segaul Lebowitz (12).
10.22 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Michael S. Egan (12).
10.23 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Edward A. Cespedes (12).
10.24 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz (12).
10.25 Non-Qualified Stock Option Agreement dated as of July 17, 2003 between
theglobe.com, inc. and Kellie L. Smythe (12).
10.26 2003 Sales Representatives Stock Option Plan (12).
10.27 Securities Purchase and Registration Agreement dated March 2, 2004
relating to the purchase of Units of Common Stock and Warrants of
theglobe.com, inc. (15)
10.28 Amendment to the Service Order Agreement Terms and Conditions dated July
30, 2003, and October 24, 2003 between XO Communications, Inc. and Direct
Partner Telecom, Inc., including XO Services Terms and Conditions.(15)*
10.29 Agreement dated August 7, 2003 by and between Promotion and Display
Technology, Ltd. and theglobe.com, inc. (15) *
10.30 Broad Capacity Services Agreement dated October 17, 2003 by and between
Direct Partner Telecom, Inc. and Progress Telecom Corporation. (15)*
10.31 Agreement and Plan of Merger dated August 31, 2004 by and between
theglobe.com, inc., SendTec Acquisition Corporation and SendTec, Inc.,
among others (18).
10.32 Employment Agreement dated September 1, 2004 by and between SendTec, Inc.
and Paul Soltoff (18).
97
10.33 Stockholders' Agreement dated September 1, 2004 by and between
theglobe.com and certain named stockholders (18).
10.34 theglobe.com 2004 Amended and Restated Stock Option Plan (21).
10.35 Promissory Note dated September 1, 2004 (18).
10.36 Form of Potential Conversion Note relating to Series H Preferred Stock
(18).
10.37 Termination of Agreement dated as of January 31, 2005 between
theglobe.com, inc., and Promotion and Display Technology Ltd.**
10.38 Consulting Agreement effective as of February 2, 2005 (fully executed as
of March 28, 2005) between theglobe.com, inc. and Albert J. Detz.
10.39 Carrier Services Agreement between XO Communications, Inc. and Direct
Partner Telecom, Inc., as amended and made effective by the First
Amendment to the Carrier Services Agreement dated March 25, 2005.
18.1 Independent Accountant Preferability Letter
21. Subsidiaries
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a).
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
---------------
1. Incorporated by reference from our registration statement on Form S-1
filed July 24, 1998 (Registration No. 333-59751).
2. Incorporated by reference from our Form S-1/A filed August 20, 1998.
3. Incorporated by reference from our Form S-1/A filed September 15, 1998.
4. Incorporated by reference from our Form S-1/A filed October 14, 1998.
5. Incorporated by reference from our Form 10-K for the year ended December
31, 1998 filed March 30, 1999.
6. Incorporated by reference from our Form S-1 filed April 13, 1999.
7. Incorporated by reference from our Form 10-Q for the quarter ended March
31, 2000 dated May 15, 2000.
8. Incorporated by reference from our Form 8-K filed August 13, 2002.
9. Incorporated by reference from our Form 8-K filed on November 26, 2002.
10. Incorporated by reference from our Form 8-K filed on June 6, 2003.
11. Incorporated by reference from our Form 8-K filed on July 11, 2003.
12. Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
13. Incorporated by reference from our Form 8-K filed on March 3, 2003, as
amended on December 6, 2004.
98
14. Incorporated by reference from our Form 10-K filed on March 31, 2003.
15. Incorporated by reference from our Form 10-KSB filed on March 30, 2004.
16. Incorporated by reference from our Registration Statement on Form SB-2
filed on April 16, 2004 (Registration No. 333-114556).
17. Incorporated by reference from our Form 8-K filed on March 17, 2004.
18. Incorporated by reference from our Form 8-K filed September 7, 2004.
19. Incorporated by reference from our Form SB-2 filed April 16, 2004.
20. Incorporated by reference from our Post Effective Amendment No. 1 to our
Form SB-2 filed on May 7, 2004.
21. Incorporated by reference from our S-8 filed October 13, 2004.
22. Incorporated by reference from our Form 8-K filed on December 2, 2004.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential
treatment.
** Confidential depository account information has been omitted from this
exhibit and will be made available to the Commission upon request.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board of Directors, upon the recommendation of the Audit Committee, has
appointed Rachlin Cohen & Holtz, LLP, Fort Lauderdale, Florida as the firm of
independent public accountants to audit our books and accounts for the fiscal
year ended December 31, 2004.
AUDIT FEES. Audit fees include the aggregate fees billed for the audit of the
Company's annual consolidated financial statements and the reviews of each of
the quarterly consolidated financial statements included in the Company's Forms
10-KSB and Forms 10-QSB, respectively. The aggregate audit fees billed to the
Company by Rachlin Cohen & Holtz, LLP were $104,739 and $202,977 during 2004 and
2003, respectively.
AUDIT-RELATED FEES. During the last two fiscal years, Rachlin Cohen & Holtz, LLP
provided the Company with the following services that are reasonably related to
the performance of the audit of our financial statements:
Assurance and related services related to audits and review of various SEC
filings (including S-8's, proxy and private placements): $29,784 for 2004
and $8,641 for 2003; and
Other services relating to consultation and research of various accounting
pronouncements and technical issues: $3,574 for 2004 and $7,633 for 2003.
TAX FEES. The aggregate fees billed for tax services provided by Rachlin Cohen &
Holtz, LLP in connection with tax compliance, tax consulting and tax planning
services during 2004 and 2003, were $81,963 and $78,079, respectively.
ALL OTHER FEES. Other than the fees for services described above, there were no
additional fees billed by Rachlin Cohen & Holtz, LLP in 2004 or 2003.
PRE-APPROVAL OF SERVICES BY THE EXTERNAL AUDITOR. In April of 2004, the Audit
Committee adopted a policy for pre-approval of audit and permitted non-audit
services by the Company's external auditor. The Audit Committee will consider
annually and, if appropriate, approve the provision of audit services by its
external auditor and consider and, if appropriate, pre-approve the provision of
certain defined audit and non-audit services. The Audit Committee will also
consider on a case by case basis and, if appropriate, approve specific
engagements that are not otherwise pre-approved. Of the Audit-Related Fees and
Tax Fees described above, the Audit Committee pre-approved the audit related
engagements but did not pre-approve the tax related services. All such tax
related services will be subject to pre-approval by the Audit Committee in the
future.
---------------
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2005 theglobe.com, inc
By: /s/ Michael S. Egan
----------------------------------
Michael S. Egan
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Edward A. Cespedes
----------------------------------
Edward A. Cespedes
President, Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 30th day of March 2005.
/s/ Michael S. Egan
-----------------------------
Michael S. Egan
Chairman, Director
/s/ Edward A. Cespedes
-----------------------------
Edward A. Cespedes
Director
/s/ Robin Lebowitz
-----------------------------
Robin Lebowitz
Director
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EXHIBIT INDEX
NO. ITEM
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of the
Company (3).
3.2 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation (19).
3.3 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on July 29,
2003(19).
3.4 Certificate relating to Previously Outstanding Series of Preferred Stock
and Relating to the Designation, Preferences and Rights of the Series F
Preferred Stock (14).
3.5 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Junior Participating Preferred Stock (16).
3.6 Form of By-Laws of the Company (19).
3.7 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Series H Automatically Converting Preferred Stock (18).
3.8 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on December 1,
2004 (22).
4.1 Registration Rights Agreement, dated as of September 1, 1998(5).
4.2 Amendment No.1 to Registration Rights Agreement, dated as of April 9,
1999(6).
4.3 Specimen certificate representing shares of Common Stock of the Company
(4).
4.4 Amended and Restated Warrant to Acquire Shares of Common Stock (2).
4.5 Form of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent (3).
4.6 Form of Warrant dated November 12, 2002 to acquire shares of Common Stock
(9).
4.7 Form of Warrant dated March 28, 2003 to acquire shares of Common Stock
(14).
4.8 Form of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of theglobe.com Common Stock (10).
4.9 Form of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc. (11).
4.10 Form of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc. (13).
4.11 Form of Warrant relating to potential issuance of Earn-out Consideration
(18).
10.1 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers (1).
10.2 Lease Agreement dated January 12, 1999 between the Company and Broadpine
Realty Holding Company, Inc.(6).
10.3 2000 Broad Based Stock Option Plan (7).
10.4 1998 Stock Option Plan, as amended (6).
10.5 1995 Stock Option Plan (1).
10.6 Employee Stock Purchase Plan (5).
10.7 Technology Purchase Agreement dated November 12, 2002, among theglobe.com,
inc., and Brian Fowler (9).
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10.8 Employment Agreement dated November 12, 2002, among theglobe.com, inc. and
Brian Fowler (9).
10.9 Payment Agreement dated November 12, 2002, among theglobe.com, inc.,
1002390 Ontario Inc., and Robert S. Giblett (9).
10.10 Release Agreement dated November 12, 2002, among theglobe.com, inc. and
certain other parties named therein (9).
10.11 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital Partners, LLLP (14).
10.12 Loan and Purchase Option Agreement dated February 25, 2003 (13).
10.13 Amended and Restated Promissory Note (13).
10.14 Form of Stock Purchase Agreement (13).
10.15 Note Purchase Agreement dated May 22, 2003 between theglobe.com, inc. and
E&C Capital Partners, LLLP and certain other investors named therein (10)
10.16 Agreement and Plan of Merger dated May 23, 2003 between theglobe.com,
inc., DPT Acquisition, Inc., Direct Partner Telecom, Inc., and the
stockholders thereof (10).
10.17 Employment Agreement dated May 28, 2003 between theglobe.com and James
Magruder (10).
10.18 Form of Subscription Agreement relating to the purchase of Units of Series
G Preferred Stock and Warrants of theglobe.com, inc. (11).
10.19 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Michael S. Egan (12).
10.20 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Edward A. Cespedes (12).
10.21 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Robin Segaul Lebowitz (12).
10.22 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Michael S. Egan (12).
10.23 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Edward A. Cespedes (12).
10.24 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz (12).
10.25 Non-Qualified Stock Option Agreement dated as of July 17, 2003 between
theglobe.com, inc. and Kellie L. Smythe (12).
10.26 2003 Sales Representatives Stock Option Plan (12).
10.27 Securities Purchase and Registration Agreement dated March 2, 2004
relating to the purchase of Units of Common Stock and Warrants of
theglobe.com, inc. (15)
10.28 Amendment to the Service Order Agreement Terms and Conditions dated July
30, 2003, and October 24, 2003 between XO Communications, Inc. and Direct
Partner Telecom, Inc., including XO Services Terms and Conditions.(15)*
10.29 Agreement dated August 7, 2003 by and between Promotion and Display
Technology, Ltd. and theglobe.com, inc. (15) *
10.30 Broad Capacity Services Agreement dated October 17, 2003 by and between
Direct Partner Telecom, Inc. and Progress Telecom Corporation. (15)*
10.31 Agreement and Plan of Merger dated August 31, 2004 by and between
theglobe.com, inc., SendTec Acquisition Corporation and SendTec, Inc.,
among others (18).
10.32 Employment Agreement dated September 1, 2004 by and between SendTec, Inc.
and Paul Soltoff (18).
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10.33 Stockholders' Agreement dated September 1, 2004 by and between
theglobe.com and certain named stockholders (18).
10.34 theglobe.com 2004 Amended and Restated Stock Option Plan (21).
10.35 Promissory Note dated September 1, 2004 (18).
10.36 Form of Potential Conversion Note relating to Series H Preferred Stock
(18).
10.37 Termination of Agreement dated as of January 31, 2005 between
theglobe.com, inc., and Promotion and Display Technology Ltd.**
10.38 Consulting Agreement effective as of February 2, 2005 (fully executed as
of March 28, 2005) between theglobe.com, inc. and Albert J. Detz.
10.39 Carrier Services Agreement between XO Communications, Inc. and Direct
Partner Telecom, Inc., as amended and made effective by the First
Amendment to the Carrier Services Agreement dated March 25, 2005.
18.1 Independent Accountant Preferability Letter
21. Subsidiaries
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
and rule 15d-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
and rule 15d-14(a).
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
--------------------------
1. Incorporated by reference from our registration statement on Form S-1
filed July 24, 1998 (Registration No. 333-59751).
2. Incorporated by reference as Exhibit to our Form S-1/A filed August 20,
1998.
3. Incorporated by reference from our Form S-1/A filed September 15, 1998.
4. Incorporated by reference from our Form S-1/A filed October 14, 1998.
5. Incorporated by reference from our Form 10-K for the year ended December
31, 1998 filed March 30, 1999.
6. Incorporated by reference from our Form S-1 filed April 13, 1999.
7. Incorporated by reference from our Form 10-Q for the quarter ended March
31, 2000 dated May 15, 2000.
8. Incorporated by reference from our Form 8-K filed August 13, 2002.
9. Incorporated by reference from our Form 8-K filed on November 26, 2002.
10. Incorporated by reference from our Form 8-K filed on June 6, 2003.
11. Incorporated by reference from our Form 8-K filed on July 11, 2003.
12. Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
13. Incorporated by reference from our Form 8-K filed on March 3, 2003, as
amended on December 6, 2004.
103
14. Incorporated by reference from our Form 10-K filed on March 31, 2003.
15. Incorporated by reference from our Form 10-KSB filed on March 30, 2004.
16. Incorporated by reference from our Registration Statement on Form SB-2
filed on April 16, 2004 (Registration No. 333-114556).
17. Incorporated by reference from our Form 8-K filed on March 17, 2004.
18. Incorporated by reference from our Form 8-K filed on September 7, 2004.
19. Incorporated by reference from our Form SB-2 filed April 16, 2004.
20. Incorporated by reference from our Post Effective Amendment No. 1 to our
Form SB-2 filed on May 7, 2004.
21. Incorporated by reference from our S-8 filed October 13, 2004.
22. Incorporated by reference from our Form 8-K filed on December 2, 2004.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential
treatment.
** Confidential depository account information has been omitted from this
exhibit and will be made available to the Commission upon request.
104