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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NO.: 0-25053
THEGLOBE.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1782422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 PENN PLAZA, SUITE 1500
NEW YORK, NEW YORK 10121
(Address of principal executive offices) (Zip Code)
(212) 292-5667
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
________________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (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-K or any amendment to this Form 10-K [X].
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value (the "Common Stock") as of March 20, 2002 was 31,081,574.
Aggregate market value of the voting Common Stock held by non-affiliates of the
registrant as of the close of business on March 20, 2002: $1,864,894.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrant's definitive proxy
statement relating to the annual meeting of stockholders to be held in 2002
which definitive proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report
relates.
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.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants and Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
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PART I
ITEM 1. BUSINESS
OVERVIEW
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995
(inception) and commenced operations on that date. theglobe.com was an online
property with registered members and users in the United States and abroad which
allowed its users to personalize their online experience by publishing their own
content and interacting with others having similar interests. However, due to
the continuing decline in the advertising market, the Company was forced to take
additional cost-reduction and restructuring initiatives, which included closing
www.theglobe.com effective August 15, 2001. The Company then began to
aggressively seek buyers for some or all of its remaining online and offline
properties, which consisted primarily of games-related properties. In October
2001, the Company sold all of the assets used in connection with the Games
Domain and Console Domain websites to British Telecommunications plc, and all of
the assets used in connection with the Kids Domain website to Kaboose Inc. (See
Note 4 of notes to consolidated financial statements - Dispositions).
As of December 31, 2001, the Company continued to operate its Computer Games
print magazine and the associated website Computer Games Online
(www.cgonline.com), as well as the games distribution business of Chips & Bits,
- ------------------
Inc. (www.chipsbits.com). Also as of December 31, 2001, the Company continued
to host its Happy Puppy website for game downloads only, but with no associated
sales staff or editorial staff, for purposes of finding a buyer for the site and
preserving the Happy Puppy brand. In February 2002, the Company sold all of the
assets used in connection with the Happy Puppy website to Internet Game
Distribution, LLC (See Note 16 of notes to consolidated financial statements -
Subsequent Events). As of December 31, 2001, the Company continued to actively
explore a number of strategic alternatives for its remaining online and offline
game properties, including selling some or all of these properties and/or
entering into new or different lines of business, which may include investments
in real estate.
As of December 31, 2001, the Company's revenue sources are principally from the
sale of print advertising in its Computer Games magazine; the sale of video
games and related products through Chips & Bits, Inc., its games distribution
business; the sale of its Computer Games magazine through newsstands and
subscriptions; and the limited sales of online advertising.
The Company's December 31, 2001 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 that raise substantial
doubt about its ability to continue as a going concern. Management and the
Board of Directors are currently exploring a number of strategic alternatives
regarding its remaining assets and the use of its cash on-hand, and is also
continuing to identify and implement internal actions to improve the Company's
liquidity and operations. These alternatives may include selling assets, which
in any such case could result in significant changes in the Company's business,
or entering into new or different lines of business, which may include
investments in real estate. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BUSINESS STRATEGY
Due to the continuing decline in the advertising market, in August 2001 the
Company was forced to take significant additional cost-reduction and
restructuring initiatives, which included closing its community
(www.theglobe.com) and small-business Web-hosting (www.webjump.com) businesses
- ---------------
effective August 15, 2001. The Company also began to actively explore a number
of strategic alternatives for its game properties and to identify and implement
internal actions to improve the Company's liquidity and operations. These
alternatives include selling assets or entering into new or different lines of
business, which may include investments in real estate. In October 2001, the
Company sold all of the assets used in connection with the Games Domain and
Console Domain websites to British Telecommunications plc, and all of the assets
used in connection with the Kids Domain website to Kaboose Inc. (See Note 4 of
notes to consolidated financial statements - Dispositions).
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As of December 31, 2001, the Company continued to actively explore a number of
strategic alternatives for its remaining online and offline game properties,
including selling some or all of these properties and/or entering into new or
different lines of business, which may include investments in real estate.
Computer Games print magazine and the associated website Computer Games Online
(www.cgonline.com), the games distribution business of Chips & Bits, Inc.
- -----------------
(www.chipsbits.com), and the Happy Puppy website. In February 2002, the Company
- -----------------
sold all of the assets used in connection with the Happy Puppy website to
Internet Game Distribution, LLC (See Note 16 of notes to consolidated financial
statements - Subsequent Events).
As of December 31, 2001 and while the Company seeks buyers for some or all of
these remaining properties, Computer Games magazine and Chips & Bits, Inc.
remain fully staffed and fully operational. The Company may determine to retain
one or both businesses in connection with its future operations.
Chips & Bits, Inc. is a games distribution business that covers all the major
game platforms available and attracts customers in the United States and
worldwide. Chips & Bits, Inc. continues to pursue a strategy of cost
containment, affiliations, keyword search, and technology enhancements in order
to grow the business in pursuit of profitability. Chips & Bits, Inc. continues
to work with referring partners on the Internet as well as with Amazon.com and
Yahoo, Inc. in order to increase its business and develop a growing customer
base.
Computer Games Magazine continues to pursue a strategy of increasing paid
circulation while containing costs. As computer games become increasingly
mainstream demand for games information has increased accordingly and Computer
Games Magazine intends to participate in this increasing consumer demand by
providing superior, broad-based editorial content and high-quality production.
PRODUCTS AND SERVICES
theglobe.com was an online property with registered members and users in the
United States and abroad which allowed its users to personalize their online
experience by publishing their own content and interacting with others having
similar interests. However, due to the continuing decline in the advertising
market, the Company was forced to take additional cost-reduction and
restructuring initiatives, which included closing www.theglobe.com website
----------------
effective August 15, 2001. In October 2001, the Company sold all of the assets
used in connection with the Games Domain and Console Domain websites to British
Telecommunications plc, and all of the assets used in connection with the Kids
Domain website to Kaboose Inc.
As of December 31, 2001, the Company continued to operate its Computer Games
print magazine and the associated website Computer Games Online
(www.cgonline.com), as well as the games distribution business of Chips & Bits,
--
Inc. (www.chipsbits.com). Also as of December 31, 2001, the Company continued
to host its Happy Puppy website for game downloads only, but with no associated
sales staff or editorial staff, for purposes of finding a buyer for the site and
preserving the Happy Puppy brand. In February 2002, the Company sold all of the
assets used in connection with the Happy Puppy website to Internet Game
Distribution, LLC (See Note 16 of notes to consolidated financial statements -
Subsequent Events). As of December 31, 2001, the Company continued to actively
explore a number of strategic alternatives for its remaining online and offline
game properties, including selling some or all of these properties and/or
entering into new or different lines of business, which may include investments
in real estate.
COMPUTER GAMES MAGAZINE. Computer Games Magazine, which the Company acquired in
February 2000, is one of the most widely respected consumer print magazines for
gamers today.
- As a leading consumer print publication for games, Computer Games
magazine boasts: an average paid circulation of 374,000 for the year
2001 (Source: BPA International) and a reputation for being a
reliable, trusted, and engaging games magazine; more editorial, tips
and cheats than most other similar magazines; a highly-educated
editorial staff providing increased editorial integrity and content;
and, broad-based editorial coverage, appealing to the widest, largest
audience of gamers.
- One of the most popular features of Computer Games is a CD ROM
containing game demos, which comes bundled monthly with the magazine
in all newsstand editions and a portion of copies mailed to
subscribers.
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COMPUTER GAMES ONLINE. Computer Games Online (www.cdmag.com), which the Company
-------------
acquired in February 2000, is the online counterpart to Computer Games magazine.
Computer Games Online is a leading source of free games news and information for
the sophisticated gamer, featuring news, reviews and previews, along with a
powerful Web-wide search engine.
- Features of Computer Games Online include: a constant stream of
accurate game industry news; truthful, hard-hitting, concise reviews;
insightful hands-on previews; first looks, tips and cheats; multiple
content links; thousands of archived files; discussion forums
supporting all genres of PCs; and, easy access to game buying.
CHIPS & BITS. Chips & Bits (www.chipsbits.com), which the Company acquired in
-----------------
February 2000, is a games distribution business that attracts customers in the
United States and worldwide. Chips & Bits covers all the major game platforms
available, including Macintosh, Window-based PCs, Sony PlayStation, Sony
PlayStation2, Microsoft's Xbox, Nintendo 64, Game Boy, and Sega Dreamcast, among
others.
HAPPY PUPPY. Happy Puppy (www.happypuppy.com), which the Company acquired in
------------------
April 1999, and which was the first-ever commercial game site on the Web,
delivers free, objective and edgy editorial content online, covering all games
platforms.
- Happy Puppy was updated daily until August 2001 when the Company was
forced to layoff almost all remaining staff due to the continued
decline in the online advertising market. Prior to August 2001, the
site offered its users free downloads and information including:
commercial software reviews, downloadable programs, game cheats,
Web-based games, and feature articles.
ADVERTISING CUSTOMERS
We continue to attract leading advertisers to our Computer Games print magazine,
which is a widely respected consumer print magazines for gamers. We believe our
ability to continue to attract leading advertisers is a direct result of our
average paid circulation of 374,000 for the year 2001 (Source: BPA
International) and a reputation for being a reliable, trusted, and engaging
games magazine; more editorial, tips and cheats than most other similar
magazines; a highly-educated editorial staff providing increased editorial
integrity and content; and, broad-based editorial coverage, appealing to the
widest, largest audience of gamers.
Prior to August 2001 when we were forced to layoff all national sales staff (who
sold online space and began cross-selling print space) due to the continued
decline in the advertising market, we had also attracted mass-market consumer
product companies and technology-related businesses to advertise on our
websites. We continue to employ a sales staff of two (2) people specializing in
selling magazine space to games companies, while working at expanding to
consumer and technology advertisers.
In 2001, no single advertiser accounted for more than 10% of total revenues.
For the twelve months ended December 31, 2001, over 200 clients advertised on
our sites and in our Computer Games magazine.
ADVERTISING SALES STAFF
In August 2001, we were forced to layoff almost all remaining staff due to the
continued decline in the advertising market. As a result, we have an internal
advertising sales staff of two (2) professionals as of December 31, 2001, both
of whom are dedicated to selling advertising space in our Computer Games print
magazine, and to a lesser extent on our Computer Games Online website, which is
the online counterpart to Computer Games magazine. These professionals focus on
developing long-term strategic relationships with clients as they sell
advertisements in our Computer Games print magazine and its online counterpart
Computer Games Online. A significant portion of our sales personnel's
compensation is commission based.
5
MARKETING AND PROMOTIONS
In 2001, we committed approximately $5.1 million to offline and online media
advertising. Substantially all of these dollars were committed prior to August
2001, when we closed our community business as part of aggressive cost-reduction
and restructuring initiatives necessitated by the decline in the advertising
market. Our marketing efforts were focused on:
- Increasing awareness and interest in the Internet and advertising
industries in support of our distribution/licensing and advertising
sales efforts;
- Attracting and retaining highly targeted traffic to our individual
websites; and,
- Promoting our games information network, games.theglobe.com, at E3
(Electronic Entertainment Expo), the largest interactive entertainment
tradeshow of the year.
TECHNOLOGY
Through August 31, 2001, our data processing systems and servers were hosted at
the New York Teleport in Staten Island, New York. In conjunction with our
cost-reduction and restructuring initiatives implemented in August 2001, we
discontinued the use of these servers on August 31, 2001 and we now use New
Jersey based outsourced facilities to host our remaining live web sites.
COMPETITION
Competition among games print magazines is high and increasing as online and
pc-based games continue to gain mainstream popularity, and new, cutting-edge
games and console systems continue to come to the consumer market. The magazine
publishing industry is highly competitive. We compete for advertising and
circulation revenues principally with publishers of other technology and games
magazines with similar editorial content as our magazine. The technology
magazine industry has traditionally been dominated by a small number of large
publishers. We believe that we compete with other technology and games
publications based on our top-3 position within the games magazine sector, the
nature and quality of our magazines' editorial content and the attractive
demographics of our readers. In addition to other technology and games
magazines, our magazine also competes for advertising revenues with
general-interest magazines and other forms of media, including broadcast and
cable television, radio, newspaper, direct marketing and electronic media. In
competing with general-interest magazines and other forms of media, we rely on
our ability to reach a targeted segment of the population in a cost-effective
manner.
We believe our Chips & Bits games distribution business faces competition from a
variety of competitors, including:
- Mall stores such as Gamestop and Electronics Boutique
- Discount chains such as Wal-Mart and Target
- Electronics Chains such as Best Buy and CompUSA
- Office stores such as Staples
- Online stores such as EBWorld
- Direct online games, which bypass traditional sales venues
The market situation continues to be a challenge for Chips & Bits due to recent
advances in console and online games, which have lower margins and traditionally
less sales loyalty to Chips & Bits. Chips & Bits depends on major releases in
the Personal Computer (PC) market for the majority of sales and profits. The
game industry's focus on X-Box, Playstation and GameCube has dramatically
reduced the number of major PC releases. Because of the large installed base of
personal computers, it is felt that this is a temporary phenomenon. However,
Chips & Bits has no knowledge as to when there will be a turnaround in the PC
game market.
Competition among games-focused websites is also growing rapidly, as new
companies continue to enter the market and existing companies continue to layer
games applications onto their websites. We expect that the market will continue
to evolve rapidly, and the rate of product innovations and new product
introductions will remain high. We face competitive pressures from many
companies, both in the United States and abroad. With the abundance of
companies operating in the games market, consumers and advertisers have a wide
selection of services to choose from. Our games information websites compete
for users and advertisers with:
- Games information sites such as Snowball's IGN, ZDnet's Gamespot, and
CNET's GameCenter; and,
- Online games centers, where users can play games such as Uproar, Pogo
and Lycos' Gamesville.
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In addition, many companies involved in the games market may be acquired by,
receive investments from, or enter into commercial relationships with larger,
well-established and well-financed companies. As a result of this highly
fragmented and competitive market, consolidations and strategic ventures may
continue in the future.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our Websites and underlying technology as
proprietary. We attempt to protect them 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. THEGLOBE.COM and THEGLOBE.COM logo are registered in the
United States and many international jurisdictions. The HAPPY PUPPY mark and
logo are registered in the United States, and enjoy international protection as
well.
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. See
"Risk Factors-We rely on intellectual property and proprietary rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
We are subject to laws and regulations that are applicable to various Internet
activities. There are many legislative and regulatory proposals under
consideration by federal, state, local and foreign governments and agencies,
including matters relating to:
- online content;
- privacy;
- Internet taxation;
- liability for information retrieved from or transmitted over the
Internet;
- domain names; and,
- jurisdiction.
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.
ONLINE CONTENT
General Restrictions on Transmitting Indecent and Obscene Content. Several
federal and state statutes generally prohibit the transmission of indecent or
obscene information and content, including sexually explicit information and
content. The constitutionality of some of these statutes is unclear at this
time. For example, in 1997 the Supreme Court of the United States held that
selected parts of the federal Communications Decency Act of 1996 imposing
criminal penalties for transmitting indecent and patently offensive content were
unconstitutional. Many other provisions of the Communications Decency Act,
however, including those relating to obscenity, remain in effect. For example,
on April 19, 1999, the Supreme Court summarily affirmed a lower court decision
holding that selected parts of the Communications Decency Act imposing criminal
penalties for transmitting indecent comments or images with an intent to annoy
was constitutional, as long as those comments or images were also obscene.
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Restrictions on Transmitting Indecent and Obscene Content to Minors. Other
federal and state statutes specifically prohibit transmission of certain content
to minors. The Child Online Protection Act requires websites engaged in the
business of the commercial distribution of material that is deemed to be obscene
or harmful to minors to restrict minors' access to this material. However, the
Child Online Protection Act exempts from liability telecommunications carriers,
Internet service providers and companies involved in the transmission, storage,
retrieval, hosting, formatting or translation of third-party communications
where these companies do not select or alter the third-party material. In 1999,
a federal district court in Pennsylvania entered a preliminary injunction
preventing enforcement of the harmful-to-minors portion of the act. The
provisions of the act relating to obscenity, however, remain in effect. On June
22, 2000, United States Court of Appeals for the Third Circuit affirmed the
lower court ruling. The decision of the United States Supreme Court, which
heard argument of the case on November 28, 2001, is pending. A similar state
statute in New Mexico has been found unconstitutional by the Tenth Circuit Court
of Appeals.
Consumer Fraud and Advertising. Some states have enacted laws or adopted
regulations that expressly or as a matter of judicial interpretation apply
various consumer fraud and false advertising requirements to parties who conduct
business over the Internet. The constitutionality and the enforceability of
some of these statutes is unclear at this time.
PRIVACY
Various laws and regulations have been enacted or adopted in regard to the
collection, use, and disclosure of personally identifiable information. Any
additional legislation or regulations relating to consumer privacy or the
application or interpretation of existing laws and regulations could affect the
way in which we are allowed to conduct our business, especially those aspects
that contemplate the collection or use of our website visitors' personal
information.
Federal Privacy Bills. Numerous bills relating to consumer privacy have been
introduced in Congress. We cannot predict the exact form of any legislation
that the Congress might enact. Accordingly, we cannot assure you that our
current practices will comply with any legislative scheme that Congress
ultimately adopts or that we will not have to make significant changes to comply
with such laws.
FTC Enforcement Activity. The Federal Trade Commission Act prohibits unfair and
deceptive practices in and affecting commerce. The FTC Act authorizes the FTC
to seek injunctive and other relief for violations of the FTC Act, and provides
a basis for government enforcement of fair information practices. For instance,
failure to comply with a stated privacy policy may constitute a deceptive
practice in some circumstances and the FTC would have authority to pursue the
remedies available under the Act for any violations. Furthermore, in some
circumstances, the FTC may assert that information practices may be inherently
deceptive or unfair, regardless of whether the entity has publicly adopted any
privacy policies.
The FTC has conducted investigations into the privacy practices of companies
that collect information on the Internet. In several instances, the FTC has
entered into consent orders with such companies in regard to their collection
and use of personally identifiable information. On January 22, 2001, the FTC
completed an investigation of the advertising and data collection practices of
DoubleClick, Inc., a leading provider of Internet-based advertising services
from whom we license our advertising management system. DoubleClick has advised
the FTC that it would make a number of modifications intended to enhance the
effectiveness of its privacy policy. DoubleClick has also disclosed that it is
the subject of inquiries involving the attorneys general of several states
relating to its collection, maintenance and sharing of information about
Internet users and its disclosure about those practices to users.
We cannot assure you that the FTC's activities, or the activities of other
regulatory authorities, in this area will not adversely affect our ability to
collect demographic and personal information from website visitors, which could
have an adverse effect on our ability to attract advertisers. This could have a
material adverse effect on us.
Voluntary Self-Regulation. Some industry groups and other organizations have
proposed, or are in the process of proposing, various voluntary standards
regarding the treatment of data collected over the Internet. Our website
privacy policies set forth, among other things, the personal information being
collected, how it will be used, and with whom it may be shared. We cannot
assure you that the adoption of voluntary standards will preclude any
legislative or administrative body from taking governmental action regarding
Internet privacy.
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European Union Directive on Data Protection. At the international level, the
European Union has adopted a directive that requires EU member countries to
impose restrictions on the collection and use of personal data. Among other
provisions, the directive generally requires member countries to prevent the
transfer of personally identifiable data to countries that do not offer adequate
privacy protections. The Directive could, among other things, affect United
States companies that collect information over the Internet from individuals in
EU member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In response, the
United States Department of Commerce, in coordination with the European
Commission, developed safe harbor principles that address notice, choice,
access, security, and compliance, among other matters. Organizations that come
within the safe harbor are presumed by the EU to maintain an adequate level of
privacy protection and may receive personal data transfers from EU member
countries. A company that wishes to qualify under the safe harbor must notify
the Department of Commerce, which began maintaining a list of companies that
adhere to the safe harbor principles on November 1, 2000. Relatively few
companies have made a decision to take such action, which is voluntary. We have
not elected to qualify under the safe harbor.
We continue to review our privacy policies and practices in light of the
directive and the safe harbor. We cannot assure you that US and EU activities
in this area will not adversely affect our ability to collect demographic and
personal information from website visitors, which could have an adverse effect
on our ability to attract advertisers. This could have a material adverse
effect on us.
INTERNET TAXATION
Governments at the federal, state and local level, and some foreign governments,
have made a number of proposals that would impose additional taxes on the sale
of goods and services and various other Internet activities. In 1998, the
federal Internet Tax Freedom Act (ITFA) was signed into law, placing a
moratorium until October 2001, on state and local taxes on Internet access and
on multiple or discriminatory taxes on electronic commerce. In November 2001 the
moratorium established by the ITFA was extended until November 1, 2003.
However, this moratorium does not apply to existing state or local laws. We
cannot assure you that future laws imposing taxes or other impositions on
Internet commerce would not substantially impair the growth of Internet commerce
and as a result materially adversely affect our business. In addition, we
cannot assure you that foreign countries will not seek to tax Internet
transactions.
LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET
Liability issues relating to information retrieved or transmitted over the
Internet include claims for copyright or trademark infringement, defamation,
unsolicited electronic mail, negligence, or other claims based on the nature and
content of these materials.
Defamation. The Communications Decency Act of 1996 provides that no provider or
user of an interactive computer service shall be treated as the publisher or
speaker of any information provided by another information content provider.
Revenue Sharing. We sell products directly to consumers and we also enter into
agreements with commerce and service partners and sponsors under which we are
entitled to receive a share of the revenue from the purchase of goods and
services through direct links from our site. These arrangements may expose us
to additional legal risks, including potential liabilities to consumers by
virtue of our involvement in providing access to these products or services,
even if we do not ourselves provide these products or services. Some of our
agreements with these parties provide that these parties will indemnify us
against liabilities. However, we cannot assure you that this indemnification
will be enforceable or adequate. Although we carry general liability insurance,
our insurance may not cover all potential claims or liabilities to which we are
exposed. Any imposition of liability that is not covered by insurance could
have a material adverse effect on our business.
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Third-party Content. Materials may be downloaded and publicly distributed over
the Internet by the Internet services operated or facilitated by us. Future
legislation or regulations or court decisions may hold us liable for listings
and other content accessible through our website, including through hyperlinks,
or through content and materials posted in our chat rooms or bulletin boards.
Liability might arise from claims alleging that, by directly or indirectly
providing hyperlinks to websites operated by third parties, we are liable for
copyright or trademark infringement or other wrongful actions by these third
parties. If any material on our website contains informational errors, someone
might sue us for losses incurred in reliance on the erroneous information. We
attempt to reduce our exposure to potential liability through, among other
things, provisions in member agreements, user policies, insurance and
disclaimers. However, the enforceability and effectiveness of these measures
are uncertain. Future legislation or regulation in the area of liability for
information received from or transmitted over the Internet could decrease the
growth of Internet use. These factors could decrease the demand for our
services. We may also incur significant costs in investigating and defending
against these claims.
DOMAIN NAMES
Domain names have been the subject of significant trademark litigation in the
United States. The current system for registering, allocating and managing
domain names has been the subject of litigation and is currently subject to
regulatory reform.
We have registered several domain names, including: "theglobe.com,"
"globeclubs.com," "azazz.com," "attitude.net," "cgonline.com," "tglo.com,"
"happypuppy.com" and "cdmag.com." We cannot assure you that third parties will
not bring claims for infringement against us for the use of these names.
Moreover, because domain names derive value from the individual's ability to
remember the names, we cannot assure you that our domain names will not lose
their value if, for example, users begin to rely on mechanisms other than domain
names to access online resources. We cannot assure you that our domain names
will not lose their value, or that we will not have to obtain entirely new
domain names in addition to or in place of our current domain names.
JURISDICTION
Due to the global reach of the Internet the governments of various states and
foreign countries have attempted to regulate Internet activity and may assert
that their laws and regulations are applicable to our transmissions. Our
facilities are located primarily in New York and Vermont. Until October 2001,
we owned websites based in the United Kingdom. We cannot assure you that
violations of these laws will not be alleged or charged by state or foreign
governments and that these laws will not be modified, or new laws enacted, in
the future. Any actions of this type could have a material adverse effect on
our business.
EMPLOYEES
As of December 31, 2001, we had approximately 40 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 research and development, marketing, sales and
support and administrative organizations. Our employees are not represented by
any collective bargaining unit and we have never experienced a work stoppage.
We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
In August 2001, we terminated our lease for our 47,000 square foot headquarters
facility located in New York City and relocated our headquarters to a
significantly smaller temporary facility in New York City. As a result of
terminating this lease, in October 2001 restricted cash of $1.5 million was
released and became available. We maintain approximately 9,000 square feet of
office space in two separate locations in Vermont in connection with our
Computer Games magazine and Chips & Bits, Inc. operations. One of these leases
is on a month-to-month basis and the other expires in September 2005. In May
2001, we terminated our lease for our sales office in San Francisco, California,
in conjunction with the closure of that office.
ITEM 3. LEGAL PROCEEDINGS
On June 20, 2000, Infonent.com, Inc. filed a Complaint and a motion for a
preliminary injunction to enjoin the Company from invoking its contractual right
to terminate the registration statement for Infonent.com, Inc.'s shares in the
Company. In an order entered July 18, 2000, the U.S. Bankruptcy Court for the
Northern District of California (San Jose Division) granted Infonent.com, Inc.'s
motion to the extent of barring the Company from terminating the registration
statement for a period of 45 days, commencing on July 3, 2000. On October 26,
2000, the Securities and Exchange Commission declared effective the Company's
amended registration statement, which terminated the registration statement
relating to Infonent.com's shares in the Company.
10
On February 14, 2001, Mohammed Poonja, Chapter 11 Trustee for the estate of
Infonent.com, Inc. (the "Trustee"), served an Amended Complaint on the Company
and Jump Acquisition, LLC ("Jump"). The Amended Complaint asserts claims for
violation of the automatic stay provision, 11 U.S.C. Sec. 362, as a result of
the Company's exercise of its contractual right to terminate the registration
statement for Infonent.com, Inc.'s shares in the Company pursuant to a November
30, 1999 Registration Rights Agreement between the Company and Infonent.com,
Inc.; breach of contract for the Company's and Jump's alleged failure to make
certain earn-out payments to Infonent.com, Inc. in connection with a November
30, 1999 purchase agreement (the "Agreement"); breach of the implied covenant of
good faith and fair dealing in connection with the Agreement; fraud; negligence;
breach of contract; and breach of the implied covenant of good faith and fair
dealing for its alleged delay in registering newly-issued shares of the
Company's common stock in connection with the Registration Rights Agreement.
The Amended Complaint sought $9,524,859 in damages, plus interest, compensatory
damages on the automatic stay cause of action, costs and disbursements of the
action, and attorneys' fees. The Company filed an Answer on May 2, 2001 denying
the allegations made in the Amended Complaint. The Trustee has withdrawn its
claim for violation of the Automatic Stay by the Company. In August 2001, the
Company executed a Settlement Agreement with the trustee for Infonent.com in
which the trustee agreed to dismiss all claims in return for a payment of
$175,000 by the Company.
On and after August 3, 2001 and as of the date of this filing, the Company is
aware that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors, and several
investment banks that were the underwriters of the Company's initial public
offering. The lawsuits were filed in the United States District Court for the
Southern District of New York. The lawsuits purport to be class actions filed on
behalf of purchasers of the stock of the Company during the period from November
12, 1998 through December 6, 2000. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in the Company's initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for
the Company's initial public offering was false and misleading and in violation
of the securities laws because it did not disclose these arrangements. On
December 5, 2001, an amended complaint was filed in one of the actions, alleging
the same conduct described above in connection with both the Company's November
23, 1998 initial public offering and its May 19, 1999 secondary offering. The
actions seek damages in an unspecified amount. The Company and its current and
former officers and directors intend to vigorously defend the actions. The
complaints have been consolidated into a single action, entitled Kofsky v.
theglobe.com, inc. et al., Case No. 01 Civ. 7247. The Company is not required
to respond to Plaintiffs' claims before a consolidated complaint is filed.
However, due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the litigation. Any unfavorable outcome of this
litigation could have a material adverse impact on our business, financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders' for a vote during the three
months ended December 31, 2001.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The shares of our Common Stock were delisted from the Nasdaq national market in
April 2001 and now trade in the over-the-counter market on what is commonly
referred to as the electronic bulletin board, under the symbol "TGLO.OB" The
following table sets forth the range of high and low closing sales prices of our
common stock for the periods indicated as reported by the NASDAQ stock market
(prior to April 2001) and the over-the-counter market (the electronic bulletin
board) (after April 2001):
2001 2000
------------ ------------
High Low High Low
----- ----- ----- -----
Fourth Quarter $0.08 $0.03 $0.94 $0.13
Third Quarter $0.23 $0.01 $2.66 $0.72
Second Quarter $0.34 $0.13 $6.44 $1.31
First Quarter $0.88 $0.05 $8.50 $5.75
The market price of our Common Stock is highly volatile and fluctuates in
response to a wide variety of factors. See "Risk Factors-Our stock price is
volatile."
HOLDERS OF COMMON STOCK
We had approximately 440 holders of record of Common Stock as of March 20, 2002.
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.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data with respect to our consolidated
balance sheets as of December 31, 2001 and 2000 and the related consolidated
statements of operations for the years ended December 31, 2001, 2000, and 1999
have been derived from our audited consolidated financial statements which are
included herein and have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from operations since
inception that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The selected consolidated
financial data with respect to our consolidated balance sheets as of December
31, 1999, 1998, and 1997 and the related consolidated statements of operations
for the years ended December 31, 1998 and 1997 have been derived from our
audited consolidated financial statements, which are not included herein. The
following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
--------- ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . . $ 16,074 $ 29,862 $ 18,641 $ 5,510 $ 770
Cost of revenues. . . . . . . . . . . . 12,145 19,080 8,548 2,136 257
--------- ---------- --------- --------- --------
Gross profit. . . . . . . . . . . . . . 3,929 10,782 10,093 3,374 513
Operating expenses:
Sales and marketing . . . . . . . . . 9,755 23,917 19,352 9,402 1,415
Product development . . . . . . . . . 3,811 10,242 10,488 2,633 154
General and administrative. . . . . . 6,596 13,173 12,165 6,828 2,828
Restructuring and impairment
charges. . . . . . . . . . . . . . . 17,091 41,348 - - -
Non-recurring charges . . . . . . . . - - - 1,370 -
Amortization of goodwill and
intangible assets 8,469 27,236 20,460 - -
--------- ---------- --------- --------- --------
Total operating expenses. . . . . . . . 45,722 115,916 62,465 20,233 4,397
--------- ---------- --------- --------- --------
Loss from operations. . . . . . . . . . (41,793) (105,134) (52,372) (16,859) (3,884)
Other income, net . . . . . . . . . . . 1,189 1,536 1,705 892 335
--------- ---------- --------- --------- --------
Loss before provision for income taxes
and extraordinary item . . . . . . . (40,604) (103,598) (50,667) (15,967) (3,549)
Provision for income taxes. . . . . . . 16 268 290 79 36
--------- ---------- --------- --------- --------
Loss before extraordinary item. . . . . (40,620) (103,866) (50,957) (16,046) (3,585)
Extraordinary item-gain on early
retirement of debt . . . . . . . . . - - 1,356 - -
--------- ---------- --------- --------- --------
Net loss. . . . . . . . . . . . . . . . $(40,620) $(103,866) $(49,601) $(16,046) $(3,585)
========= ========== ========= ========= ========
Basic and diluted net loss per
share (1):
Loss before extraordinary item. . . . $ (1.31) $ (3.43) $ (2.06) $ (3.37) $ (1.56)
Extraordinary item-gain on early
retirement of debt. . . . . . . . . - - 0.06 - -
--------- ---------- --------- --------- --------
Net loss. . . . . . . . . . . . . . . $ (1.31) $ (3.43) $ (2.00) $ (3.37) $ (1.56)
========= ========== ========= ========= ========
Weighted average shares outstanding
used in basic and diluted per share
calculation (1) . . . . . . . . . . . . 31,081 30,286 24,777 4,762 2,294
========= ========== ========= ========= ========
(1) Weighted average shares outstanding do not include any common stock
equivalents because the inclusion of those common stock equivalents would
have been anti-dilutive. See the consolidated financial statements and the
related notes appearing elsewhere in this Form 10-K for the determination
of shares used in computing basic and diluted net loss per share.
13
DECEMBER 31,
--------------------------------------------------
2001 2000 1999 1998 1997
------ ------- --------------- ------- -------
(in thousands)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents and short-
term investments . . . . . . . . . $2,614 $16,346 $ 55,875 $30,149 $18,874
Working capital. . . . . . . . . . . 3,012 13,568 52,965 27,009 17,117
Total assets . . . . . . . . . . . . 5,973 54,531 138,843 38,130 19,462
Capital lease obligations, excluding
current installments . . . . . . . - 382 2,201 2,006 99
Total stockholders' equity . . . . . 3,262 43,946 126,909 30,301 17,352
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
- ----------------------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements can be identified by the
use of predictive, future-tense or forward-looking terminology, such as
"believes," "anticipates," "expects," "estimates," "plans," "may," "intends,"
"will," or similar terms. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various factors
described under "Risk Factors" and elsewhere in this report. The following
discussion should be read together with the consolidated financial statements
and notes to those statements included elsewhere in this report.
OVERVIEW
As of December 31, 2001, we were a network of four wholly owned properties, each
of which specializes in the games business by delivering games information and
selling games in the United States and abroad. These properties are: our print
publication Computer Games Magazine; our Computer Games Online website
(www.cgonline.com), which is the online counterpart to Computer Games Magazine;
- -----------------
our Chips & Bits, Inc. (www.chipsbits.com) games distribution company; and, our
-----------------
Happy Puppy website (www.happypuppy.com), which provides game reviews, cheats,
and downloads for users. In February 2002, the Company sold all of the assets
used in connection with the Happy Puppy website to Internet Game Distribution,
LLC (See Note 16 of notes to consolidated financial statements - Subsequent
Events).
Our revenues are derived principally from the sale of print advertisements under
short-term contracts in our games information magazine Computer Games, which we
acquired in February 2000; through the sale of video games and related products
through our games distribution business Chips & Bits, Inc.; through the sale of
our games information magazine through newsstands and subscriptions; through
electronic commerce revenue shares (representing our share of the proceeds from
our e-commerce partners' sales); and through limited sale of online
advertisements, which includes the development and sale of sponsorship
placements within our web sites (we earn revenue on sponsorship contracts for
fees relating to the design, coordination, and integration of the customer's
content and links).
In April 1999, we acquired Attitude Networks, Ltd., a provider of online games
information content whose websites included Happy Puppy, Games Domain and Kids
Domain, three leading websites serving game enthusiasts. The aggregate purchase
price amounted to $46.8 million and was comprised, in part, of approximately 1.6
million shares of newly issued Common Stock.
In May 1999, we completed a secondary public offering of 3.5 million shares of
Common Stock at an offering price of $20.00 per share. Net proceeds amounted to
$65.0 million, after underwriting discounts of $3.5 million and offering costs
of $1.5 million.
In December 1999, we acquired the web hosting assets of Webjump.com, a web
hosting property that primarily focuses on small businesses. The total purchase
price for this transaction was $13.0 million and was primarily comprised of 1.1
million shares of newly issued Common Stock. An additional $12.5 million,
payable in newly issued shares of Common Stock, was contingent based upon the
attainment of certain performance targets measured as of November 30, 2000.
Management determined that such targets were not achieved as of the measurement
date, however, on February 14, 2001 the former shareholder group filed a law
suit against us claiming that they are entitled to $9.5 million related to the
above mentioned targets. That lawsuit was settled by the Company for payment of
$175,000 in August 2001. See Part I - Item 3 - "Legal Proceedings" and Note 5
(d) of our consolidated financial statements for additional information.
15
In February 2000, we acquired Chips & Bits, Inc. and Strategy Plus, Inc.,
providers of online and offline entertainment content focused towards game
enthusiasts. The total purchase price for this transaction was approximately
$15.3 million and was comprised, in part, of 1.9 million newly issued shares of
Common Stock. An additional $1.25 million, payable in newly issued shares of
Common Stock, was contingent on the attainment of certain performance targets by
Chips & Bits, Inc. and Strategy Plus, Inc. During August 2001, the Company
settled the contingency resulting in no additional consideration being paid to
the former shareholders.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Our revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games, which was acquired in February 2000; through the sale of video
games and related products through games distribution business Chips & Bits,
Inc.; through the sale of our games information magazine through newsstands and
subscriptions; and through limited sale of online advertisements principally
under short-term advertising arrangements, averaging one to three months.
Revenues decreased to $16.1 million for the year ended December 31, 2001 as
compared to $29.9 million for the year ended December 31, 2000. Advertising
revenues for the year ended December 31, 2001 were $6.4 million, which
represented 40% of total revenues. Advertising revenues for the year ended
December 31, 2000 were $19.5 million, which represented 65% of total revenues.
The decrease in advertising revenues was primarily attributable to a significant
industry-wide decrease in the online advertising market, which is expected to
continue through at least the second quarter of 2002, and possibly through the
full-year 2002, and to a dramatic reduction in the Company's sales force as part
of the August 2001 cost reduction and restructuring initiatives, which included
closing of www.theglobe.com website business. Advertising revenue from our
----------------
online properties decreased to $2.9 million for the year ended December 31,
2001, compared to $15.0 million for the year ended December 31, 2000.
Advertising revenue from our games magazine, which was acquired in February
2000, accounted for $3.5 million and $4.5 million, of the total advertising
revenues for the years ended December 31, 2001 and December 31, 2000,
respectively.
Sales of merchandise through our online store accounted for 31% of total
revenues for the year ended December 31, 2001, or $5.1 million, as compared to
24% for the year ended December 31, 2000, or $7.2 million. The decrease was
partially attributable to recent advances in console and online games, which
traditionally have less sales loyalty to our online store, and to a dramatic
reduction in the number of major PC games releases, on which our online store
relies for the majority of sales and profits. In order to realign our
e-commerce operations to focus on video games and related products, the Company
elected in April 2000 to shut down its electronic commerce operations in
Seattle, Washington, which it acquired in February 1999 (see Notes 3 and 4 to
the consolidated financial statements). Sales of our games information magazine
through newsstands and subscriptions accounted for $4.7 million, or 29%, and
$3.2 million, or 11%, of total revenues for the years ended December 31, 2001
and December 31, 2000, respectively. We acquired our games information magazine
in February 2000. Price increases and significant increases in circulation
account for the year-over-year increase. Barter advertising revenues represented
1% of total revenues for the year ended December 31, 2001 and 4% of total
revenues for the year ended December 31, 2000.
Cost of Revenues. Cost of revenues consists primarily of Internet connection
charges, staff and related costs of operations personnel, depreciation and
maintenance costs of website equipment, printing costs of our games magazine and
the costs of merchandise sold and shipping fees in connection with our online
store. Gross margins were 24% and 36% for the years ended December 31, 2001 and
December 31, 2000, respectively. The year-to-year decrease in gross margins was
primarily attributable to a higher concentration of electronic commerce and
print advertising sales in our games information magazine, both of which
traditionally result in lower gross margins than online advertising revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and related expenses of sales and marketing personnel, commissions, advertising
and marketing costs, public relations expenses, promotional activities and
barter expenses. Sales and marketing expenses were $9.8 million for the year
ended December 31, 2001 as compared to $23.9 million for the year ended December
31, 2000. The year-to-year decrease in sales and marketing expense was
attributable to reduced personnel costs and decreased advertising costs. As of
December 31, 2001, we have an internal advertising sales staff of two (2)
professionals as of December 31, 2001, both of whom are dedicated to selling
advertising space in our Computer Games print magazine, and to a lesser extent
on our Computer Games Online website, which is the online counterpart to
Computer Games magazine. In August 2001 we were forced to lay off almost all
our national sales staff due to the continue decline in the advertising market.
As of December 31, 2001, we have 19 employees employed in our sales and
marketing department.
16
Product Development. Product development expenses include salaries and related
personnel costs, expenses incurred in connection with the development of,
testing of and upgrades to our websites and community management tools, and
editorial and content costs. Product development expenses decreased to $3.8
million for the year ended December 31, 2001, as compared to $10.5 million for
the year ended December 31, 2000. The year-to-year decrease was related to our
restructuring and cost containment initiatives. In August 2001 we were forced
to lay off almost all our product development staff due to the continue decline
in the business. As of December 31, 2001, we have 12 employees employed in our
product development department.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related personnel costs for general corporate
functions including finance, human resources, legal and facilities, outside
legal and professional fees, directors and officers insurance, bad debt expenses
and general corporate overhead costs. General and administrative expenses were
$6.6 million for the year ended December 31, 2001 as compared to $13.2 million
for the year ended December 31, 2000. The year-to-year decrease was primarily
attributable to decreased salaries and personnel costs as a result of our
restructuring and cost containment initiatives. In August 2001 we were forced
to lay off almost all our general and administration staff due to the continue
decline in the business. As of December 31, 2001, we have 8 employees employed
in our general and administration department.
Restructuring and Impairment Charges. For the years ended December 31, 2001,
and December 31, 2000, the Company recorded restructuring and impairment charges
of $17.1 million and $41.3 million, respectively.
Year ended December 31, 2001
In the second quarter of 2001, we announced cost-reduction initiatives. These
initiatives included the elimination of 59 positions, or 31% of our workforce.
The severance benefits of $470,000 were paid in the second quarter of 2001.
Additionally, we closed our San Francisco office in May 2001 and an additional
$54,000 security deposit was relinquished as settlement to terminate the
remaining lease obligation.
In the second quarter of 2001, we recorded impairment charges of $4.5 million
related to the servers and computers used for serving and hosting
www.webjump.com and www.theglobe.com as a result of management's ongoing
- ----------------
business review and impairment analysis performed under its existing policy
regarding impairment of long-lived assets.
In the third quarter of 2001, we continued our cost cutting measures. We
eliminated 60 additional positions, or 58% of our workforce. As a result,
severance benefits of $1.0 million were paid in the third quarter of 2001.
Additionally, we terminated our lease at 120 Broadway in New York and relocated
our operations to a significantly smaller temporary facility in New York, in
September 2001. We also decided to shut down our www.theglobe.com and
www.webjump.com websites effective August 15, 2001. The servers located in a
facility in Staten Island, New York were in use through August 31, 2001. We
discontinued the use of these servers on August 31, 2001 and we are now using
outsourced hosted facilities for our live websites. As a result of these
measures, we recorded net restructuring and impairment charges related to the
fixed assets consisting of computer hardware and software, furniture and
fixtures, communications equipment and leasehold improvements at the two
locations totaling approximately $3.67 million, and miscellaneous net
restructuring credit amounts related to the settlement of prepaid items,
accruals and capital lease obligations totaling approximately $0.26 million.
17
Further, in the third quarter of 2001, we recorded additional impairment charges
of $4.2 million, of which $3.6 million related to Chips & Bits and Strategy Plus
and $0.6 million related to Attitude Network, Ltd. related to goodwill and other
intangible assets, as a result of management's ongoing business review and
impairment analysis performed under its existing policy regarding impairment of
long-lived assets.
In the fourth quarter of 2001, severance benefits of $0.1 million were paid out
relating to the cost cutting measures initiated in the third quarter 2001. The
company recorded an additional impairment charge of $3.3 million in goodwill
related to Chips & Bits and Strategy Plus as result of as a result of
management's ongoing business review and impairment analysis performed under its
existing policy regarding impairment of long-lived assets.
Where impairment indicators were identified, management determined the amount of
the impairment charge by comparing the carrying values of goodwill and other
long-lived assets to their fair values. Management determines fair value based
on a market approach, which during 2001, mainly included proposals for sale of
its business properties. As a result, during management's quarterly review of
the value and periods of amortization of both goodwill and other long-lived
assets, it was determined that the carrying value of goodwill and certain other
tangible and intangible assets were not fully recoverable.
During 2001, our revaluation of goodwill and intangible assets related to
Attitude Network, Ltd., Strategy Plus, Inc. and Chips & Bits, Inc. and certain
acquired tangible assets such as the servers and computers used for serving and
hosting our various websites was triggered by the continued and prolonged
decline in Internet advertising throughout 2000 and 2001, which significantly
impacted current projected advertising revenue generated from these web-based
properties and downturn in computer games e-commerce business and has resulted
in declines in operating and financial metrics over the past several quarters,
in comparison to the metrics forecasted at the time of their respective
acquisitions.
It was determined that the fair value of goodwill and intangible assets related
to our web-based properties, other businesses and tangible assets were less than
the recorded amount. The methodology used to test for and measure the amount of
the impairment charge related to the intangible assets was based on the same
methodology as used during the initial acquisition valuation of these web-based
properties and other businesses. The impairment related to the tangible assets
was based on the estimated net realizable value of these assets. The impairment
factors evaluated by management may change in subsequent periods, given that our
business operates in a highly volatile business environment. This could result
in material impairment charges in the future.
As of December 31, 2001, the amount remaining in the Company's restructuring
accruals recorded in 2001 and 2000 was $200,000 and $0.
As of December 31, 2001, after giving effect to the fourth quarter of 2000 and
full-year 2001 impairment charges the total remaining amount of goodwill and
other intangible assets, net, is $0 for Attitude Networks, which was acquired in
April 1999, and $0 for Chips & Bits and Strategy Plus, which was acquired in
February 2000. The impairment factors evaluated by management may change in
subsequent periods, given that our business operates in a highly volatile
business environment.
Year ended December 31, 2000
In the second quarter of 2000, we recorded a $15.6 million restructuring charge
as a result of a strategic decision made by management to shut down our
electronic commerce operations in Seattle, Washington in order to realign our
electronic commerce operations to focus on the direct sale of video games and
related products as well as revenue share relationships with third parties who
are interested in reaching our targeted audiences. The $15.6 million charge
incurred primarily related to a $12.8 million write-off of the remaining
goodwill and intangibles associated with our 1999 acquisition of
Factorymall.com, costs associated with the closing of the Seattle operations of
$0.5 million, write-offs related to the disposal of inventory, equipment and
other assets of $1.7 million as well as $0.6 million of employee severance and
related benefits incurred primarily related to the termination of 30 employees.
In the fourth quarter of 2000, we incurred an additional $25.7 million in
restructuring and impairment charges as follows:
18
- We recorded a restructuring charge of $1.8 million, including $398,000
of non-cash compensation, as a result of strategic decisions made by
management to increase operational efficiencies, improve margins and
further reduce expenses. The restructuring charge primarily related to
a workplace reduction of 26 employees.
- In addition, we recorded an impairment charge of $4.3 million in
connection with our termination of a distribution agreement with
Sportsline in November 2000.
- We also recorded impairment charges of $19.6 million as a result of
management's ongoing business review and impairment analysis performed
under its existing policy regarding impairment of long-lived assets.
In 1999, we completed acquisitions of Attitude Network, Ltd. and the web hosting
assets of Webjump.com that were financed principally with shares of our common
stock, and were valued based on the price of our common stock at that time. Our
revaluation was triggered by the continued decline in Internet advertising
throughout 2000, which significantly impacted current projected advertising
revenue generated from these web based properties. In addition, each of these
web based properties have experienced declines in operating and financial
metrics over the past several quarters, primarily due to the continued weak
overall demand of on-line advertising and marketing services, in comparison to
the metrics forecasted at the time of their respective acquisitions. The
impairment analysis considered that these web-based properties were acquired
during 1999 and that the intangible assets recorded at the time of acquisition
was being amortized over useful lives of 2-3 years (3 years for goodwill). As a
result, it was determined that the fair value of Attitude's and Webjump's
goodwill and other intangible assets were less than the recorded amount,
therefore, an impairment charge of $13.6 million and $6.0 million, respectively,
were recorded. The methodology used to test for and measure the amount of the
impairment charge was based on the same methodology we used during our initial
acquisition valuation of Attitude and Webjump in 1999.
Amortization of Goodwill and Intangible Assets. Amortization expense was $8.5
million for the year ended December 31, 2001, compared to $27.2 million for the
year ended December 31, 2000. The year-to-year decrease in amortization expense
was primarily attributable to the write-down of goodwill and intangibles assets
that occurred in the fourth quarter of 2000 and second quarter of 2001. See
Recent Accounting Pronouncements of notes to consolidated financial statements,
Note 1 (u).
Interest and other income, net. Interest and other income, net primarily
includes interest income from our cash and cash equivalents and short-term
investments, interest expense related to our capital lease obligations and
realized gains and losses from the sale of short-term investments. Interest and
other income, net were $1.2 million and $1.5 million for the years ended
December 31, 2001 and December 31, 2000, respectively. The year-over-year
decrease was primary attributable to a decrease in income earned as a result of
a lower cash and cash equivalent and short-term investment balance.
Income Taxes. Income taxes were approximately $16,000 for the year ended
December 31, 2001 compared with $268,000 for the year ended December 31, 2000.
Income taxes were based solely on state and local taxes on business and
investment capital. Our effective tax rate differs from the statutory federal
income tax rate, primarily as a result of the uncertainty regarding our ability
to utilize our net operating loss carryforwards. Due to the uncertainty
surrounding the timing or realization of the benefits of our net operating loss
carryforwards in future tax returns, we have placed a 100% valuation allowance
against our otherwise recognizable deferred tax assets. At December 31, 2001,
the Company had net operating loss carry forwards available for U.S. and foreign
tax purposes of approximately $115 million. These carryforwards expire through
2021. The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Due to the change in our ownership
interests in the third quarter of 1997 and May 1999, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), future utilization of our net
operating loss carryforwards prior to the change of ownership will be subject to
certain limitations or annual restrictions.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues increased to $29.9 million for the year ended December 31,
2000 as compared to $18.6 million for the year ended December 31, 1999.
Advertising revenues for the year ended December 31, 2000 were $19.5 million,
which represented 65% of total revenues. Advertising revenues for the year
ended December 31, 1999 were $16.4 million, which represented 88% of total
revenues. The growth in advertising revenues was attributable to the revenues
from our games magazine, which was acquired in February 2000. Revenue from our
games magazine accounted for $4.5 million of the total advertising revenues for
the year ended December 31, 2000. The increase in advertising revenues
attributable to our games magazine was partially offset by a decline in online
advertising revenues due to an industry-wide decline in online advertising
spending primarily in the second half of 2000, and which continued into 2001.
Sales of merchandise through our online store accounted for 24% of total
revenues for the year ended December 31, 2000, or $7.2 million, as compared with
12% of total revenues for the year ended December 31, 1999, or $2.2 million.
The increase in electronic commerce revenue of $5.0 million was attributable to
increased online sales from our acquisition of Chips & Bits, Inc. in February
2000. In order to realign our e-commerce operations to focus on video games and
related products, the Company elected in April 2000 to shut down its electronic
commerce operations in Seattle, Washington which we acquired in February 1999
(see Notes 3 and 4 to the consolidated financial statements). Other revenues of
$3.2 million were comprised of newsstand sales and subscriptions of our games
information magazine, which we acquired in February 2000. Barter advertising
revenues represented 4% of total revenues for the year ended December 31, 2000
and 5% of total revenues for the year ended December 31, 1999.
19
Cost of Revenues. Gross margins were 36% and 54% for the years ended December
31, 2000 and 1999, respectively. The year-to-year decrease in the gross margins
was primarily attributable to a higher mix of electronic commerce sales and
print advertising sales in our games information magazine, both of which
traditionally result in lower gross margins than online advertising revenues.
The absolute dollar increase in cost of revenues was mainly due to printing
costs related to our games magazine, which was acquired in February 2000, and
additional costs of merchandise attributable to increased sales through our
online store. Additional absolute dollar increases were due to an increase in
Internet connection costs to support the increase in web site traffic, an
increase in depreciation expense related to increased equipment costs and
personnel costs required to support the expansion of our sites and services.
Sales and Marketing. Sales and marketing expenses were $23.9 million for the
year ended December 31, 2000 as compared to $19.4 million for the year ended
December 31, 1999. The year-to-year increase in sales and marketing expense was
mainly attributable to promotional expenses incurred in order to promote our
games magazine and support our online store.
Product Development. Product development expenses were $10.2 million for the
year ended December 31, 2000 as compared to $10.5 million for the year ended
December 31, 1999. Product development expenses have decreased slightly from
prior year mainly as a result of our effort to consolidate duties and reduce
headcount.
General and Administrative Expenses. General and administrative expenses were
$13.2 million for the year ended December 31, 2000 as compared to $12.2 million
for the year ended December 31, 1999. The year-to-year increase was primarily
attributable to increased costs associated with the operation of our games
magazine and our games online store, which we acquired in February 2000, and
higher than anticipated bad-debt expenses.
Restructuring and Impairment Charges. For the year ended December 31, 2000, we
recorded restructuring and impairment charges of $41.3 million.
In the second quarter of 2000, we recorded a $15.6 million restructuring charge
as a result of a strategic decision made by management to shut down our
electronic commerce operations in Seattle, Washington in order to realign our
electronic commerce operations to focus on the direct sale of video games and
related products as well as revenue share relationships with third parties who
are interested in reaching our targeted audiences. The $15.6 million charge
incurred primarily related to a $12.8 million write-off of the remaining
goodwill and intangibles associated with our 1999 acquisition of
Factorymall.com, costs associated with the closing of the Seattle operations of
$0.5 million, write-offs related to the disposal of inventory, equipment and
other assets of $1.7 million as well as $0.6 million of employee severance and
related benefits incurred primarily related to the termination of 30 employees.
In the fourth quarter of 2000, we incurred an additional $25.7 million in
restructuring and impairment charges as follows:
20
- We recorded a restructuring charge of $1.8 million, including $398,000
of non-cash compensation, as a result of strategic decisions made by
management to increase operational efficiencies, improve margins and
further reduce expenses. The restructuring charge primarily related to
a workplace reduction of 26 employees.
- In addition, we recorded an impairment charge of $4.3 million in
connection with our termination of a distribution agreement with CBS
Sportsline in November 2000.
- As discussed above, we also recorded impairment charges of $19.6
million as a result of management's ongoing business review and
impairment analysis performed under its existing policy regarding
impairment of long-lived assets.
Amortization of Goodwill and Intangible Assets. Amortization expense was $27.2
million for the year ended December 31, 2000 as compared to $20.5 million for
the year ended December 31, 1999. The year-to-year increase in amortization
expense was primarily attributable to the acquisitions of Chips & Bits, Inc. and
Strategy Plus, Inc. in February 2000 and the purchase of the web hosting assets
of Webjump.com in December 1999. The Company recorded goodwill and intangible
assets of $28.7 million in connection with these transactions. The total gross
amount of goodwill and purchased intangibles, after eliminating impairment
charges discussed above, as of December 31, 2000 was $56.5 million and is being
amortized over the expected periods of benefit ranging from two to three years
(three years for goodwill).
Interest and other income, net. Interest and other income, net were $1.3
million and $1.7 million for the years ended December 31, 2000 and December 31,
1999, respectively. The decrease was primarily attributable to a decrease in
interest income earned as a result of a lower cash and cash equivalent and
short-term investment balance.
Income Taxes. Income taxes were approximately $268,000 for the year ended
December 31, 2000 as compared with $290,000 for the year ended December 31,
1999. Income taxes were based solely on state and local taxes on business and
investment capital.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had approximately $2.6 million in cash and cash
equivalents and approximately $51,000 in short-term investments. Net cash used
in operating activities was $16.4 million, $34.7 million, and $30.1 million for
the years ended December 31, 2001, December 31, 2000, and December 31, 1999,
respectively. The decrease in net cash used in operating activities from
December 31, 2000 to December 31, 2001 resulted primarily from a decrease in our
net operating losses, exclusive of depreciation expenses and amortization
expenses related to our acquisitions and non-cash charges. This decrease was
also attributable to a reduction in accounts receivable and prepaid expenses,
offset by a reduction in accounts payable and accrued expenses.
Net cash provided by (used in) investing activities was $7.2 million, $13.3
million, and ($25.4) million for the years ended December 31, 2001, December 31,
2000, and December 31, 1999, respectively. The decreases in net cash provided
in investing activities was primarily attributable to decreases in the proceeds
received from the sale of short-term investments, the receipt of security
deposits which were partially used to buy out certain capital and operating
lease obligations offset by lower purchases of property and equipment and
increase in proceeds from sale of property.
Net cash provided by (used in) by financing activities was approximately ($1.6)
million, ($2.0) million, and $62.8 million for the years ended December 31,
2001, December 31, 2000, and December 31, 1999, respectively. The decrease from
December 31, 2000 to December 31, 2001 in net cash used in financing activities
was primarily attributable to less capital lease obligations in 2001. The cash
provided by financing activities in 1999 was mainly attributable to net proceeds
received from our secondary public offering of Common Stock and proceeds
received from the exercise of stock options and warrants.
As of December 31, 2001, there was $200,000 to be paid out as a result of
restructuring activities during the years December 31, 2001 and 2000. The
remaining amount will be expended through March 2002.
21
Currently, the Company is in discussions with Mr. Charles M. Peck, Chief
Executive Officer, regarding potential additional cash compensation of up to $1
million to be paid to Mr. Peck upon future achievement of certain incentives.
Our capital requirements depend on numerous factors, including market acceptance
of our services, the capital required to maintain our websites, the resources we
devote to marketing and selling our services and our brand promotions and other
factors. We have experienced a substantial decrease in our capital and
marketing expenditures and lease arrangements since last year consistent with
the reduction in our operations and staffing. We have received a report from our
independent accountants, relating to our December 31, 2001 audited financial
statements containing an explanatory paragraph stating that our recurring losses
from operations since inception and requirement for additional financing raise
substantial doubt about our ability to continue as a going concern. In addition
to the revenue plan, management and the Board of Directors are currently
exploring a number of strategic alternatives and are also continuing to identify
and implement internal actions to improve the Company's liquidity or financial
performance. These alternatives may include selling assets, which in any such
case could result in significant changes in our business plan, or entering into
new or different lines of business, which may include investments in real
estate.
As of December 31, 2001, our sole source of liquidity consisted of $2.6 million
of cash and cash equivalents and short-term investments. We currently do not
have access to any other sources of funding, including debt and equity financing
facilities. As of December 31, 2001, our principal commitments consisted of
amounts outstanding under operating leases. Due to our cost-reductions and
restructuring initiatives, we believe that we have sufficient funds to continue
operating at our present level of operations for a period of at least 6 months,
and potentially, up to 12 months depending upon the economic conditions
affecting the advertising, magazine subscription and e-commerce revenue
generating activities for our remaining properties and amounts received, if any,
if we sell any of our remaining assets. The Company has limited operating
capital and no current access to credit facilities. The Company's continued
operations therefore will depend on its ability to keep costs down, achieve
revenue goals, and sell assets or raise additional funds through bank borrowings
or equity or debt financing which financing is very unlikely.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of our Common Stock were delisted from the Nasdaq national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board. As a result, an investor may find
it more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. The trading volume of our shares has dramatically
declined since the delisting. In addition, we are now subject to a Rule
promulgated by the Securities and Exchange Commission that, if we fail to meet
criteria set forth in such Rule, various practice requirements are imposed on
broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transactions prior to sale. Consequently, the Rule may have a materially
adverse effect on the ability of broker-dealers to sell the securities, which
may materially affect the ability of shareholders to sell the securities in the
secondary market.
The delisting has made trading our shares more difficult for investors,
potentially leading to further declines in share price. It would also make it
more difficult for us to raise additional capital, although we have no
intentions to do so. We will also incur additional costs under state blue sky
laws if we sell equity due to our delisting.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2001, 2000 and 1999, inflation has
not had a significant effect on our results of operations since inception.
22
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, impairment of intangible assets, restructuring reserves
and income tax recognition of deferred tax items. Our policy and related
procedures for revenue recognition, valuation of customer receivables,
impairment of intangible assets and restructuring reserves are summarized below.
REVENUE RECOGNITION.
The Company's revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games, through the sale of our games information magazine through
newsstands and subscriptions; and through limited sale of online advertisements
principally under short-term advertising arrangements, averaging one to three
months.
Online advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include the guarantee of a minimum number of
"impressions", defined as the number of times that an advertisement appears in
pages viewed by the users of the Company's online properties, for a fixed fee.
Payments received from advertisers prior to displaying their advertisements on
the Company's sites are recorded as deferred revenues and are recognized as
revenue ratably when the advertisement is displayed. To the extent minimum
guaranteed impressions levels are not met, the Company defers recognition of the
corresponding revenues until guaranteed levels are achieved. The Company's
online advertising revenue includes the development and sale of sponsorship
placements within its web sites. Development fees related to the sale of
sponsorship placements on the Company's web sites are deferred and recognized
ratably as revenue over the term of the contract.
The Company also derives revenue through the sale of advertisements in its games
information magazine, Advertising revenues for the games information magazine
are recognized at the on-sale date of the magazine.
The Company trades advertisements on its web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or received,
whichever is more readily determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered on
the Company's web properties. Barter expense is recognized when the Company's
advertisements are run on other companies' web sites, which typically occurs in
the same period in which barter revenue is recognized.
The Company derives other revenues from the sale of video games and related
products through its online store, the sale of its games information magazine
through newsstands and subscriptions. Sales from the online store are recognized
as revenue when the product is shipped to the customer. Freight out costs are
included in net sales and have not been significant to date. The Company
provides an allowance for merchandise sold through its online store. The
allowance provided to date has not been significant.
Newsstand sales of the games information magazine are recognized at the on-sale
date of the magazine, net of provisions for estimated returns. Subscriptions
are recorded as deferred revenue when initially received and recognized as
income pro ratably over the subscription term. Revenues from the Company's share
of the proceeds from its e-commerce partners' sales are recognized upon
notification from its partners of sales attributable to the Company's sites.
There is no certainty that events beyond anyone's control such as economic
downturns or significant decreases in print advertisement could occur and
accordingly, cause significant decreases in revenue.
23
VALUATION OF CUSTOMER RECEIVABLES
Provisions for allowance for doubtful accounts are made based on historical loss
experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
IMPAIRMENT OF INTANGIBLE ASSETS
Impairment of intangible assets result in a charge to operations whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of an asset to be held and used is measured
by a comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The
measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the company's future
operations and future economic conditions which may affect those cash flows.
The measurement of fair value in lieu of a public market for such assets or a
willing unrelated buyer relies on management's reasonable estimate of what a
willing buyer would pay for such assets. Management's estimate is based on its
knowledge of the industry, what similar assets have been valued in sales
transactions and current market conditions.
The Company will adopt SFAS 142 in 2002, which requires that goodwill and
intangible assets with indefinite lives will no longer be amortized but will be
subject to impairment review. Long-lived tangible assets and intangible assets
with definite lives will be subject to impairment under SFAS No. 144.
RESTRUCTURING RESERVES
The Company has adopted restructuring plans, in relation to its business in
recent years. In order to identify and calculate the associated costs to exit
these businesses, management makes assumptions regarding estimates of future
liabilities for operating leases and other contractual obligations, the net
realizable value of assets held for disposal. Management believes its
estimates, which are reviewed quarterly, to be reasonable and considers its
knowledge of the industry, its previous experience in exiting activities and
valuations from independent third parties, in calculation of such estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and subsequently SFAS No.
144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1 2001 and SFAS
No. 142 is effective January 1, 2002. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business combination
completed after June 30, 2001, but before SFAS No. 142 is adopted in full, are
not amortized. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized and tested for
impairment prior to the full adoption of SFAS No. 142.
24
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new criteria in SFAS No. 141 for recognition separate from goodwill.
The Company will be required to reassess the useful lives and residual values of
all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. If an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. The second step is required to be completed as
soon as possible, but no later than the end of the year of adoption. In the
second step, the Company must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair value to all
of it assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated
for impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Management has determined that the adoption of Statement 144 will not have a
material impact on the Company's financial statements.
25
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
WE HAVE CLOSED OUR COMMUNITY SITE, OUR SMALL BUSINESS WEB-HOSTING PROPERTY AND
HAVE SOLD CERTAIN OF OUR GAMES PROPERTIES AND INTEND TO SELL THE REMAINDER OF
OUR GAMES PROPERTIES. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES FOR ANY
SIGNIFICANT VALUE.
Due to the significant and prolonged decline in the Internet advertising sector,
the Company elected to close its community web site at www.theglobe.com and its
----------------
small business web-hosting property at www.webjump.com in August 2001. In
---------------
addition, the Company is seeking buyers for its games properties in order to
reduce its cash burn and preserve working capital. The Company has already sold
substantially all the assets of (i) Kaleidoscope Networks Limited, the English
subsidiary of Attitude Network Ltd. that operated GamesDomain.com and
GamesDomain.co.uk, (ii) KidsDomain.com and KidsDomain.co.uk, and (iii)
HappyPuppy.com and HappyPuppy.co.uk. In addition, the Company sold the URL of
webjump.com. This strategy has resulted in the Company shifting its business
strategy from operating as a going concern to trying to sell its game
properties. The Company may shift its business strategy in the future. The
Company may be unable to sell its remaining games properties quickly, if at all,
which would result in continued depletion of its cash position since the games
business currently operates at a cash loss. The games properties may also lose
some of their value while we try to sell them as we do not have full corporate
staff to support these businesses. In addition, the "theglobe.com" brand
continues to lose significant value since the website www.theglobe.com was taken
----------------
offline August 15, 2001. The closing of our community site and our small
business web-hosting site may also adversely affect our electronic commerce due
to the inability of those web sites after their closure to refer traffic to the
Chips & Bits web site. We cannot assure you that we will be able to sell all or
any of the remaining games business quickly, if at all, or at any significant
price, or that there will be any return to our equity holders.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN IF WE ARE UNABLE TO SELL OUR
REMAINING GAMES BUSINESSES.
We may not be able to operate the remaining business in the event that we cannot
sell the business or enter into another arrangement. We may determine to use
our remaining capital in a different line of business. At this point there are
minimal prospects for a meaningful return on investment.
WE MAY DECIDE TO RETAIN OUR CHIPS & BITS INC. GAME DISTRIBUTION BUSINESS AND WE
MAY ALSO ENTER NEW LINES OF BUSINESS WHICH MAY OR MAY NOT BE RELATED TO THE
INTERNET.
Our board of directors is reviewing various options for use of our remaining
assets. While we continue to seek buyers for some or all of our remaining games
related properties, including our Computer Games print magazine and the
associated website Computer Games Online, our Board of Directors may decide to
retain our Chips & Bits Inc. game distribution business. If and when we are
able to sell our Computer Games print magazine business and the associated
website Computer Games Online, our Board of Directors may consider entering into
new or different lines of business, including non-Internet related lines of
business and investments in real estate. Even if we are unable to sell our
Computer Games print magazine and the associated website Computer Games Online,
our Board of Directors may still decide to enter into new or different lines of
business, including non-Internet related lines of business and investments in
real estate.
26
WE MAY HAVE TO TAKE ACTIONS TO AVOID REGISTRATION UNDER THE INVESTMENT COMPANY
ACT.
Under the Investment Company Act of 1940 (the "1940 Act"), a company meeting the
definition of an "investment company" is subject to various stringent legal
requirements on its operations. A company can become subject to the 1940 Act
if, among other reasons, it owns investment securities with a value exceeding 40
percent of the value of its total assets (excluding government securities and
cash items) on an unconsolidated basis, unless a particular exemption of safe
harbor applies. Although we are not currently subject to the 1940 Act, at some
point in the future due to the ongoing sale of our assets, the percentage of the
Company's assets which consist of investment securities may exceed 40 percent of
the value of its total assets on an unconsolidated basis. Rule 3a-2 of the 1940
Act provides a temporary exemption from registration under the 1940 Act, for up
to one year, for companies that have a bona fide intent to engage, as soon as
reasonably possible, in business other than investing, reinvesting, owning,
holding or trading in securities ("transient investment companies"). If, due to
future sales of our assets, we become subject to the 1940 Act, we intend to take
all actions that would allow reliance on the one-year exemption for "transient
investment companies", including a resolution by the Board of Directors that the
Company has bona fide intent to engage, as soon as reasonably possible, in
business other than investing, reinvesting, owning, holding or trading in
securities.
DELISTING OF OUR COMMON STOCK MAKES IT MORE DIFFICULT FOR INVESTORS TO SELL
SHARES. THIS MAY POTENTIALLY LEAD TO FUTURE MARKET DECLINES.
The shares of our Common Stock were delisted from the Nasdaq national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board. As a result, an investor may find
it more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. The trading volume of our shares has dramatically
declined since the delisting. In addition, we are now subject to a Rule
promulgated by the Securities and Exchange Commission that, if we fail to meet
criteria set forth in such Rule, various practice requirements are imposed on
broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transactions prior to sale. Consequently, the Rule may have a materially
adverse effect on the ability of broker-dealers to sell the securities, which
may materially affect the ability of shareholders to sell the securities in the
secondary market.
The delisting has made trading our shares more difficult for investors,
potentially leading to further declines in share price. It would also make it
more difficult for us to raise additional capital, although we have no
intentions to do so. We will also incur additional costs under state blue sky
laws if we sell equity due to our delisting.
REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH
Although we achieved significant total revenue growth during 1999 and 2000, our
online advertising revenue decreased in 2001 due to the softness in the
advertising market, which is expected to continue, and due to our cost-reduction
and restructuring initiatives, which have resulted in a dramatic reduction in
our sales force. Overall, our revenues decreased period to period in each of
the first, second, third and fourth quarters of 2001. Commencing in the third
quarter 2000, our online advertising revenues decreased by $2.5 million compared
to second quarter 2000, and decreased an additional $0.2 million in the fourth
quarter of 2000. Additionally, in April 2000, we elected to shut down our
e-commerce operations in Seattle, Washington in an effort to realign our
electronic commerce operations to focus on video games and related products.
This negatively impacted our projected revenue growth from e-commerce.
THE COMPANY HAS RESTRUCTURED AND PLANS TO SELL SOME OR ALL OF ITS REMAINING
PROPERTIES WHICH WILL MATERIALLY NEGATIVELY AFFECT OUR REVENUES; OR ENTER INTO
NEW LINES OF BUSINESS, WHICH MAY INCLUDE INVESTMENTS IN REAL ESTATE
On August 3, 2001, we elected to shut down our community operations and small
business web hosting. On October 17, 2001, we sold the Games Domain/Console
Domain websites. On October 30, 2001, we sold the Kids Domain website. On
February 27, 2002, we sold the Happy Puppy website. We also are seeking buyers
for the remaining game properties, which may materially affect revenues for our
games business since a number of advertisers could choose not to do business
with us during the phase-down period. We also dramatically reduced the number
of employees, including almost the entire sales staff, which will continue to
have a dramatic negative impact on our revenues going forward. Accurate
predictions of revenue are also difficult because we are seeking to sell our
remaining assets and are exploring various future alternatives, which may
include investment in real estate.
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WE HAVE RECEIVED A REPORT FROM OUR INDEPENDENT AUDITORS THAT RAISE SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Investors should not rely on past revenues as a prediction of future revenues.
In addition, we have received a report from our independent accountants
containing an explanatory paragraph stating that we suffered recurring losses
from operations since inception that raise substantial doubt about our ability
to continue as a going concern.
WE EXPECT TO CONTINUE TO INCUR LOSSES.
We have incurred net losses in each quarter since our inception and we expect
that we will continue to incur net losses for the foreseeable future. We had net
losses of approximately $40.7 million, $103.9 million, $49.6 million, $16.0
million, and $3.6 million for the years ended December 31, 2001, 2000, 1999,
1998, and 1997, respectively. As of December 31, 2001, we had an accumulated
deficit of approximately $214.5 million. The principal causes of our losses are
likely to continue to be:
- costs resulting from the operation of our services;
- costs resulting from the write down of goodwill;
- failure to generate sufficient revenue; and,
- general an