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, 2002 COMMISSION FILE NO.: 0-25053
THEGLOBE.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1782422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
110 East Broward Blvd., Suite 1400
Fort Lauderdale, FL 33301
(Address of principal executive offices) (Zip Code)
(954) 769-5900
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-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].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No [X]
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value (the "Common Stock") as of March 18, 2003 was 30,382,293.
Aggregate market value of the voting Common Stock held by non-affiliates of the
registrant as of the close of business on June 28, 2002: $892,594.
_________
*Includes voting stock held by third parties, which may be deemed to be
beneficially owned by affiliates, but for which such affiliates have disclaimed
beneficial ownership.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrant's definitive proxy
statement relating to the annual meeting of stockholders to be held in 2003
which definitive proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report
relates.
THEGLOBE.COM, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .9
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . .9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . 34
Item 8. Consolidated Financial Statements and Supplementary Data . . . . 35
Item 9. Changes in and Disagreements with Accountants and Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 36
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 37
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 13. Certain Relationships and Related Transactions . . . . . . . . . 37
Item 14. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 37
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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FORWARD LOOKING STATEMENTS
- --------------------------
This Form 10-K, including without limitation 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, as well as the "Risk Factors" set forth in Part I,
Item 7 below.
PART I
ITEM 1. BUSINESS
OVERVIEW AND BUSINESS STRATEGY
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995
(inception) and commenced operations on that date. theglobe.com was an online
property with registered members and users in the United States and abroad which
allowed its users to personalize their online experience by publishing their own
content and interacting with others having similar interests. However, due to
the decline in the advertising market, the Company was forced to take
cost-reduction and restructuring initiatives, which included closing its
community www.theglobe.com effective August 15, 2001. The Company then began to
aggressively seek buyers for some or all of its remaining online and offline
properties, which consisted primarily of games-related properties. In October
2001, the Company sold all of the assets used in connection with the Games
Domain and Console Domain websites to British Telecommunications plc, and all of
the assets used in connection with the Kids Domain website to Kaboose Inc. In
February 2002, the Company sold all of the assets used in connection with the
Happy Puppy website to Internet Game Distribution, LLC (See Note 3 of notes to
consolidated financial statements - Dispositions).
Effective June 1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes
became Chief Executive Officer and President of the Company, respectively. As of
December 31, 2002, the Company continues to operate its Computer Games print
magazine and the associated website Computer Games Online (www.cgonline.com), as
well as the games distribution business of Chips & Bits, Inc.
(www.chipsbits.com). The Company may determine to retain one or both businesses
in connection with its future operations.
The Company continues to actively explore a number of strategic alternatives for
its remaining online and offline game properties, including continuing its
operations and using its cash on hand, selling some or all of these properties
and/or entering into new or different lines of business. On November 14, 2002,
the Company acquired certain Voice over the Internet Protocol (VoIP) assets from
an entrepreneur and is currently investigating opportunities related to this
acquisition. In exchange for the assets, the Company issued warrants to acquire
1,750,000 shares of its common stock and an additional 425,000 warrants as part
of an earn-out structure upon the attainment of certain performance targets. In
conjunction with the acquisition, E&C Capital Partners, a privately held
investment vehicle controlled by our Chairman and Chief Executive Officer,
Michael S. Egan and our President, Edward A. Cespedes, entered into a
non-binding letter of intent with theglobe.com to provide new financing in the
amount of $500,000 through the purchase of a new series of preferred securities.
That investment closed on March 28, 2003. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources.")
Concurrently with the closing of the preferred stock investment, certain
affiliates of Michael S. Egan and Edward A. Cespedes entered into a non-binding
letter of intent to loan up to $1 million to the Company pursuant to a
convertible secured loan facility. The loan facility would be convertible into
shares of the Company's common stock at the rate of $.09 per share, which if
fully funded and converted, would result in the issuance of approximately 11.1
million shares. In addition, assuming the loan is fully funded, it is
anticipated that the investor group would be issued a warrant to acquire
approximately 2.2 million shares of theglobe.com Common Stock at an exercise
price of $.15 per share. The convertible debt financing is subject to a number
of closing conditions, including execution of definitive documentation,
satisfactory resolution of certain Company liabilities and other tax and
business considerations. In addition, it is contemplated that the loan facility
will require that certain performance criteria be achieved by the company as a
condition to all or part of the funding. The financing is also subject to
completion of a loan facility and related documentation satisfactory to the
parties. If consummated, the convertible debt financing will result in
substantial dilution of the number of securities of theglobe.com either issued
and outstanding or obtainable upon conversion of the debt or exercise of the
warrant. There can be no assurance, if and when, the financing will be
consummated.
On February 25, 2003 the Company entered into a Loan and Purchase Option
Agreement with a development stage internet related business venture pursuant to
which it agreed to loan the venture up to $160,000 to fund its operating
expenses and obtained the option to acquire all of the outstanding capital stock
of the venture in exchange for, when and if exercised, $40,000 and the issuance
of an aggregate of 2,000,000 unregistered restricted shares of theglobe.com's
common stock (See Note 2 of notes to the consolidated financial statements -
Management's Plans).
As of December 31, 2002, the Company's revenue sources are principally from the
sale of print advertising in its Computer Games magazine; the sale of video
games and related products through Chips & Bits, Inc., its games distribution
business; and the sale of its Computer Games magazine through newsstands and
subscriptions.
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The Company's December 31, 2002 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. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PRODUCTS AND SERVICES
COMPUTER GAMES MAGAZINE. Computer Games Magazine, which the Company acquired in
February 2000, is a highly respected consumer print magazines for gamers.
- As a leading consumer print publication for games, Computer Games
magazine boasts: a reputation for being a reliable, trusted, and
engaging games magazine; more editorial, tips and cheats than most
other similar magazines; a highly-educated editorial staff providing
increased editorial integrity and content; and, broad-based editorial
coverage, appealing to a wide audience of gamers.
- One of the most popular features of Computer Games is a CD ROM
containing game demos, which comes bundled monthly with the magazine
in all newsstand editions and a portion of copies mailed to
subscribers.
COMPUTER GAMES ONLINE. Computer Games Online (www.cdmag.com), which the Company
acquired in February 2000, is the online counterpart to Computer Games magazine.
Computer Games Online is a 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: game industry news;
truthful, concise reviews; first looks, tips and cheats; multiple
content links; thousands of archived files; 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, Nintendo's GameCube, Nintendo's
Game Boy, and Sega Dreamcast, among others.
VOICE OVER INTERNET PROTOCOL (VOIP). On November 12, 2002, theglobe.com
completed the acquisition of certain VoIP assets. In exchange for the assets,
theglobe.com issued 1.75 million warrants to acquire shares of theglobe.com
Common Stock at the price of $.065 per share. The Company also issued 425,000
warrants to acquire shares of theglobe.com Common Stock at the same exercise
price as part of an earn-out structure that will be released upon the attainment
of certain performance targets. The holder of the Warrant is entitled to certain
"piggy-back" registration rights related to the Warrants.
The acquisition will assist theglobe.com in its desire to enter into the
fast-growing VoIP communications markets by providing theglobe.com with a
technology platform from which it will seek to develop and market cost
effective, next generation products and services to both consumers and
enterprises. The Company is in the process of developing a business plan to
enable it to utilize this technology. The Company intends to deliver its voice
communications services offerings through a subsidiary under the brand name
"voiceglo." In addition to further development of the technology, the Company
believes that launching "voiceglo" may require significant additional capital.
Obtaining financing from any unaffiliated third party is very unlikely and any
financing that could be obtained would dilute existing shareholders. The Company
is currently seeking patent protection for certain of the assets acquired, but
there can be no assurance that any such patent will be granted, or that even if
granted, that it will be commercially viable.
ADVERTISING
We continue to attract major advertisers to our Computer Games print magazine,
which is a widely respected consumer print magazine for gamers. In 2002, no
single advertiser accounted for more than 10% of total revenues. For the twelve
months ended December 31, 2002, over 53 clients advertised on our sites and in
our Computer Games magazine. Following a series of cost reduction measures and
restructuring, we currently have an internal advertising sales staff of two (2)
professionals , both of whom are dedicated to selling advertising space in our
Computer Games print magazine. Although these professionals focus on developing
long-term strategic relationships with clients as they sell advertisements in
our Computer Games print magazine and its online counterpart Computer Games
Online, most of our actual advertising contracts are for periods of one to three
months. A significant portion of our sales personnel's compensation is
commission based.
COMPETITION
Competition among games print magazines is high. We compete for advertising and
circulation revenues principally with publishers of other technology and games
magazines with similar editorial content as our magazine. The technology
magazine industry has traditionally been dominated by a small number of large
publishers. We believe that we compete with other technology and games
publications based on the
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nature and quality of our magazines' editorial content and the attractive
demographics of our readers. In recent years, demand for online and PC based
games has decreased as non PC based game consoles, including those from Sony
(PlayStation II), Microsoft (X-Box) and Nintendo (Game Boy and GameCube), have
made major product advancements.
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 Costco, Wal-Mart and Target
- Electronics chains such as Best Buy and CompUSA
- Office stores such as Staples and Office Depot
- 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 II and GameCube has dramatically
reduced the number of major PC releases. Because of the large installed base of
personal computers, we believe PC based games continue to represent a good
longer term market. However, we cannot predict when and if there will be a
turnaround in the PC game market.
Competition among games-focused websites is also growing rapidly, as new
companies continue to enter the market and existing companies continue to layer
games applications onto their websites. We expect that the market will continue
to evolve rapidly, and the rate of product innovations and new product
introductions will remain high. We face competitive pressures from many
companies, both in the United States and abroad. With the abundance of companies
operating in the games market, consumers and advertisers have a wide selection
of services to choose from. Our games information websites compete for users and
advertisers with:
- Games information sites such as Snowball's IGN, ZDnet's Gamespot,
and CNET's GameCenter; and,
- Online games centers, where users can play games such as Uproar,
Pogo and Terra Lycos' Gamesville.
In addition, many companies involved in the games market may be acquired by,
receive investments from, or enter into commercial relationships with larger,
well-established and well-financed companies. As a result of this highly
fragmented and competitive market, consolidations and strategic ventures may
continue in the future.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our Websites and underlying technology as
proprietary. In addition, we are seeking to develop proprietary technology
through our recent acquisition of certain VoIP assets. 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 and we
are currently pursuing patent protection for certain of our VoIP assets.
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;
- jurisdiction
- domain names; and,
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- internet telephony (VoIP) regulation.
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.
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 United States Supreme Court vacated the judgment and
remanded the case to the Third Circuit on May 13, 2002, and the Third Circuit
again affirmed the lower court on March 6, 2003. Another round of appeals is
possible, followed by eventual trial in the lower court. 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. The Federal Trade Commission has
stated that its rules applying to consumer fraud and false advertising apply to
business conducted over the Internet.
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.
Privacy Legislation. Federal and state legislatures have adopted a number of
laws regulating privacy. The Children's Online Privacy Protection Act (COPPA)
requires websites that collect information from children to comply with certain
requirements. The Gramm-Leach-Bliley (GLB) Act contains provisions that govern
information collection by financial institutions. Because the definition of
"financial institution" is extremely broad under the Act, and regulatory
authorities have yet to bring a substantial number of actions for enforcement,
the precise scope of the regulation cannot be predicted with certainty at this
time.
In addition, 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.
California has enacted a law, to take effect July 3, 2003, that will require any
company that does business in California to notify customers of any computer
security breach that results in possible access to personal information by an
unauthorized person. The constitutionality of the law, and its cost and effect
on business, have yet to be determined.
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. In addition, the
FTC has enforcement power over privacy policies under the GLB Act and COPPA.
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 FTC 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
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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.
Recently, the FTC has indicated that it will investigate and bring complaints
against Internet service providers that fail to provide a sufficient or
advertised level of security for private information. In 2002, the FTC settled
charges against Eli Lilly after an accidental release of information concerning
persons on a mailing list for the medication Prozac; and the FTC settled charges
against Microsoft that alleged Microsoft's Passport service failed to provide
the promised "reasonable security measures" for protecting personal information,
even though no breach had occurred.
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.
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, trespass, 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.
However, future legislation or court decisions may limit the availability of
this defense in all circumstances in which it currently applies.
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. 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.
Unsolicited Commercial E-mail. A number of states have adopted legislation that
prohibits the transmission of unsolicited commercial e-mail.
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Most such statutes exempt Internet service providers from liability, but the
scope of such exemptions may vary from jurisdiction to jurisdiction. In
addition, new legislation or strengthened legislation may be passed to combat
unsolicited commercial e-mail. Such legislation could subject us to liability or
have an adverse effect on our business.
Third-party Content. Materials may be downloaded and publicly distributed over
the Internet by the Internet services operated or facilitated by us. The Digital
Millennium Copyright Act exempts Internet service providers from liability for
copyright infringement for materials posted or transmitted by third parties
provided certain requirements are met. Nevertheless, 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.
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 or
activities. Our facilities are now located primarily in Florida and Vermont. We
cannot assure you that violations of the laws of other jurisdictions 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.
DOMAIN NAMES
Domain names have been the subject of significant trademark litigation in the
United States and internationally. The current system for registering,
allocating and managing domain names has been the subject of litigation and may
be altered in the future. The regulation of domain names in the United States
and in foreign countries may change. Regulatory bodies are anticipated to
establish additional top-level domains and may appoint additional domain name
registrars or modify the requirements for holding domain names, any or all of
which may dilute the strength of our names. We may not acquire or maintain our
domain names in all of the countries in which our web sites may be accessed, or
for any or all of the top-level domain names that may be introduced.
We have registered several domain names. We cannot assure you that third parties
will not bring claims for infringement, dilution or cybersquatting 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.
INTERNET TELEPHONY (VOIP) REGULATION
Although we have not yet launched such services, aided by our recent acquisition
of certain VoIP technology, we are currently developing and intend to enter into
the VoIP services business. The use of the Internet and private IP networks to
provide voice communications services is a relatively recent market development.
Although the provision of such services is currently permitted by United States
federal law and largely unregulated within the United States, several foreign
governments have adopted laws and/or regulations that could restrict or prohibit
the provision of voice communications services over the Internet or private IP
networks. In the United States, the Federal Communications Commission (FCC) has
so far declined to conclude that IP telephony services constitute
telecommunications services but has indicated that it would undertake a
subsequent examination of the question whether certain forms of phone-to-phone
Internet telephony are information services or telecommunications services. The
FCC has indicated that in the future it would consider the extent to which
phone-to-phone-Internet telephony providers could be considered
"telecommunications carriers" such that they could be subject to the regulations
governing traditional telephone companies such as the imposition of access
charges. To date the FCC has determined that providers of Internet telephony
services should not be required to pay interstate access charges, this decision
may be reconsidered in the future. We cannot predict what regulations, if any
the FCC will impose.
Although Internet telephony and VoIP services are presently largely unregulated
by the state governments, such state governments and their regulatory
authorities may assert jurisdiction over the provision of intrastate IP
communications services where they believe that their telecommunications
regulations are broad enough to cover regulation of IP services. Various state
regulatory authorities have initiated proceedings to examine the regulatory
status of Internet telephony services, and in several cases rulings have been
obtained to the effect that the use of the Internet to provide certain
intrastate services does not exempt an entity from paying intrastate access
charges in the jurisdictions in question. As state governments, courts, and
regulatory authorities continue to examine the regulatory status of Internet
telephony services, they could render decisions or adopt regulations affecting
providers of Internet telephony services or requiring such providers to pay
intrastate access charges or to make contributions to universal service funding.
Should the FCC determine to regulate IP services, states may decide to follow
the FCC's lead and impose additional obligations as well.
8
The regulatory treatment of IP communications outside the United States varies
significantly from country to country. Some countries currently impose little or
no regulation on Internet telephony services, as in the United States. Other
countries, including those in which the governments prohibit or limit
competition for traditional voice telephony services, generally do not permit
Internet telephony services or strictly limit the terms under which those
services may be provided. Still other countries regulate Internet telephony
services like traditional voice telephony services, requiring Internet telephony
companies to make various telecommunications service contributions and pay other
taxes.
More aggressive regulation of Internet telephony providers and VoIP services may
adversely affect our proposed VoIP business operations, and ultimately our
financial condition, operating results and future prospects.
EMPLOYEES
As of December 31, 2002, we had approximately 21 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.
In conjunction with our November 2002 acquisition of certain VoIP assets, the
Company has entered into an employment agreement with Brian Fowler whereby Mr.
Fowler will serve as Chief Technical Officer of theglobe.com. Per the Agreement,
Mr. Fowler receives a base salary of $125,000 per annum and is subject to
significant non-compete provisions. The term of the employment agreement is
annual with renewal options.
ITEM 2. PROPERTIES
Effective August 1, 2002, we terminated our lease at our temporary office
facility in New York City and relocated the Company's corporate offices to
temporary space in Fort Lauderdale, Florida. We maintain approximately 9,500
square feet of office space in two separate locations in Vermont in connection
with our Computer Games magazine and Chips & Bits, Inc. operations. We own one
property and the other is a lease which expires in September 2005.
ITEM 3. LEGAL PROCEEDINGS
On and after August 3, 2001 and as of the date of this filing, the Company is
aware that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors, and several
investment banks that were the underwriters of the Company's initial public
offering. The lawsuits were filed in the United States District Court for the
Southern District of New York. The lawsuits purport to be class actions filed on
behalf of purchasers of the stock of the Company during the period from November
12, 1998 through December 6, 2000. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in the Company's initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for
the Company's initial public offering was false and misleading and in violation
of the securities laws because it did not disclose these arrangements. On
December 5, 2001, an amended complaint was filed in one of the actions, alleging
the same conduct described above in connection with both the Company's November
23, 1998 initial public offering and its May 19, 1999 secondary offering. The
actions seek damages in an unspecified amount. On February 19, 2003, a motion to
dismiss all claims against the Company was denied by the Court. The Company and
its current and former officers and directors intend to vigorously defend the
actions. The complaints have been consolidated into a single action, entitled
Kofsky v. theglobe.com, inc. et al., Case No. 01 Civ. 7247. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the litigation. Any unfavorable outcome of this litigation could have a
material adverse impact on our business, financial condition and results of
operations.
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, 2002.
9
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):
2002 2001
------------ ------------
High Low High Low
----- ----- ----- -----
Fourth Quarter $0.17 $0.05 $0.08 $0.03
Third Quarter $0.12 $0.01 $0.23 $0.01
Second Quarter $0.08 $0.04 $0.34 $0.13
First Quarter $0.09 $0.03 $0.88 $0.05
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 467 holders of record of Common Stock as of March 18, 2003.
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.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the acquisition of certain VoIP assets, on November 14, 2002,
the Company issued 1.75 million warrants to acquire shares of theglobe.com's
Common Stock at the price of $.065 per share. The Company also issued 425,000
warrants to acquire shares of theglobe.com Common Stock at the same exercise
price as part of an earn-out structure that will be released upon the attainment
of certain performance targets. The warrants were issued to a total of two
individuals. The warrants (including the 425,000 warrants to the extent earned)
are exercisable until November 14, 2003. Warrant holders are entitled to certain
"piggy-back" registration rights related to the warrants. The Company relied
upon the exemption afforded by section 4(2) of the Securities Act of 1933 in
issuing the warrants without registration.
10
SECURITIES OFFERED UNDER EQUITY COMPENSATION PLANS
Number of securities to be Weighted-average exercise
issued upon exercise of price of outstanding Number of securities remaining
outstanding options, warrants options, warrants and available for future issuance
Plan category and rights rights under equity compensation plan
- ----------------- ----------------------------- ------------------------- ------------------------------
Equity
Compensation
plans approved by
security holders 796,440 4.55 5,535,560
- ----------------- ----------------------------- ------------------------- ------------------------------
Equity
Compensation
plans not
approved by
security holders 5,175,000 0.02 -
- ----------------- ----------------------------- ------------------------- ------------------------------
Total 5,971,440 0.63 5,535,560
- ----------------- ----------------------------- ------------------------- ------------------------------
Equity compensation plans not approved by security holders includes the
following:
- 425,000 shares of common stock of theglobe.com, inc., par value
$.001 per share (the "Common Stock"), issued to Charles Peck
pursuant to the Non-Qualified Stock Option Agreement dated June
1, 2002 at an exercise price of $0.035 per share. These stock
options vested immediately and have a life of ten years from date
of grant.
- 1,750,000 shares of Common Stock of theglobe.com, inc., issued to
Edward A. Cespedes pursuant to the Non-Qualified Stock Option
Agreement dated August 12, 2002 at an exercise price of $0.02 per
share. These stock options vested immediately and have a life of
ten years from date of grant.
- 2,500,000 shares of Common Stock of theglobe.com, inc., issued to
Michael S. Egan pursuant to the Non-Qualified Stock Option
Agreement dated August 12, 2002 at an exercise price of $0.02 per
share. These stock options vested immediately and have a life of
ten years from date of grant.
- 500,000 shares of Common Stock of theglobe.com, inc., issued to
Robin M. Segaul pursuant to the Non-Qualified Stock Option
Agreement dated August 12, 2002 at an exercise price of $0.02 per
share. These stock options vested immediately and have a life of
ten years from date of grant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data with respect to our consolidated
balance sheets as of December 31, 2002 and 2001 and the related consolidated
statements of operations for the years ended December 31, 2002, 2001, and 2000
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 2 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
2. 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, 2000, 1999, and 1998 and the related consolidated statements of operations
for the years ended December 31, 1999 and 1998 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."
11
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000 1999 1998
--------- ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . . $ 9,667 $ 16,074 $ 29,862 $ 18,641 $ 5,510
Cost of revenues. . . . . . . . . . . . 5,563 12,145 19,080 8,548 2,136
--------- ---------- --------- --------- --------
Gross profit. . . . . . . . . . . . . . 4,104 3,929 10,782 10,093 3,374
Operating expenses:
Sales and marketing . . . . . . . . . 3,523 9,755 23,917 19,352 9,402
Product development . . . . . . . . . 653 3,811 10,242 10,488 2,633
General and administrative. . . . . . 2,869 6,596 13,173 12,165 6,828
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. . . . . . . . 7,045 45,722 115,916 62,465 20,233
--------- ---------- --------- --------- --------
Loss from operations. . . . . . . . . . (2,941) (41,793) (105,134) (52,372) (16,859)
Gain on early retirement of debt . . . - - - 1,356 -
Other income, net . . . . . . . . . . . 338 1,189 1,536 1,705 892
--------- ---------- --------- --------- --------
Loss before provision for income taxes. ( 2,603) (40,604) (103,598) (49,311) (15,967)
Provision for income taxes. . . . . . . 12 16 268 290 79
--------- ---------- --------- --------- --------
Net loss. . . . . . . . . . . . . . . . $ (2,615) $(40,620) $(103,866) $(49,601) $(16,046)
========= ========== ========= ========= ========
Basic and diluted net loss per
Share(1) (2). . . . . . . . . . . . . $ (0.09) $ (1.34) $ (3.43) $ (2.00) $ (3.37)
========= ========== ========= ========= ========
Weighted average shares outstanding
used in basic and diluted per share
calculation (1) . . . . . . . . . . . . 30,382 30,382 30,286 24,777 4,762
========= ========== ========= ========= ========
(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.
(2) In 1999, gain on early retirement of debt was presented as an extraordinary
item; the Company has reclassified this gain in accordance with SFAS No.
145.
12
DECEMBER 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------- ------- ------- -------
(in thousands)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents and short-
term investments . . . . . . . . . $ 725 $2,614 $16,346 $55,875 $30,149
Working capital. . . . . . . . . . . 532 3,012 13,568 52,965 27,009
Total assets . . . . . . . . . . . . 3,047 5,973 54,531 138,843 38,130
Long term debt . . . . . . . . . . . 88 - - - -
Capital lease obligations, excluding
current installments . . . . . . . - - 382 2,201 2,006
Total stockholders' equity . . . . . 823 3,262 43,946 126,909 30,301
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Throughout 2000 and 2001, and to a lesser extent, in 2002, the Company embarked
on a significant restructuring of its businesses operations, selling off many of
its businesses and closing others. As of December 31, 2002, we were a network of
three wholly owned properties, each of which specializes in the games business
by delivering games information and selling games in the United States and
abroad. These properties are: our print publication Computer Games Magazine; our
Computer Games Online website (www.cgonline.com), which is the online
counterpart to Computer Games Magazine; and our Chips & Bits, Inc.
(www.chipsbits.com) games distribution company. Management of the Company
continues to actively explore a number of strategic alternatives for its
remaining online and offline game properties, including continuing its existing
operations and using its cash on hand, selling some or all of these properties
and/or entering into new or different lines of business.
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; and through
limited sale of online advertisements.
Set forth below is a summary of certain significant corporate actions taken by
the Company in the last three fiscal years as it has sought to effectuate its
restructuring and implement its business plans. In December 1999, we acquired
the web hosting assets of Webjump.com, a web hosting property that primarily
focused on small businesses. The total purchase price for this transaction was
$13.0 million and was primarily comprised of 1.1 million shares of 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 were 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.
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.
In 2001, due to the decline in the advertising market, the Company was forced to
take cost-reduction and restructuring initiatives, which included closing its
community www.theglobe.com effective August 15, 2001. The Company then began to
aggressively seek buyers for some or all of its remaining online and offline
properties, which consisted primarily of games-related properties. In October
2001, the Company sold all of the assets used in connection with the Games
Domain and Console Domain websites to British Telecommunications plc, and all of
the assets used in connection with the Kids Domain website to Kaboose Inc.
On February 27, 2002, the Company sold to Internet Game Distribution, LLC all of
the assets used in connection with the Happy Puppy website. The total
consideration received was $135,000. The Company received $67,500 immediately,
and $67,500 to be held in escrow until
13
the Company transferred all assets used in connection with the Happy Puppy
website. On May 6, 2002, $67,500 was released to the Company. The Company
recognized a gain on the sale of $134,500, in the first quarter 2002.
Effective June 1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes
became Chief Executive Officer and President of the Company, respectively. In
August 2002, the Company's corporate offices located at 2 Penn Plaza, Suite
1500, New York, New York, 10121 were closed and relocated to: 110 East Broward
Boulevard, Suite 1400, Fort Lauderdale, Florida 33301. The Company's corporate
mailing address is: P.O. Box 029006, Fort Lauderdale, Florida 33302.
Effective July 10, 2002, we launched various direct marketing initiatives
through a newly createddivision called tglo direct. The subsidiary markets
products such as safe e-mail lists, e-books, lead generation tools and other
products to entrepreneurs that wish to enter into new web-based businesses or
promote their existing businesses. Most of the products are subscription-based,
with prices ranging from approximately $11.00 per year to approximately $69.95
per year. This operation is in "beta" launch and accounted for only $4,000 of
revenue in 2002. The Company is investigating ways to increase the level of this
business.
Effective August 8, 2002, we dismissed our independent accountants, KPMG LLP
("KPMG"), and engaged Rachlin Cohen & Holtz LLP ("Rachlin Cohen") as our new
independent accountants.
On November 14, 2002, we acquired certain VoIP assets. We issued 1.75 million
warrants to acquire shares of our Common Stock in conjunction with the closing
of this acquisition. The Company also issued 425,000 warrants to acquire shares
of Common Stock as part of an earn-out structure. These warrants are held in
escrow by the Company and will only be released upon attainment of certain
performance targets. In conjunction with the acquisition, E&C Capital Partners,
a privately held investment vehicle controlled by our Chairman and Chief
Executive Officer, Michael S. Egan and our President, Edward A. Cespedes,
entered into a letter of intent with theglobe.com to provide new financing in
the amount of $500,000 through the purchase of a new series of preferred
securities. This investment was consummated on March 28, 2003.
On February 25, 2003, the Company entered into a Loan and Purchase Option
Agreement with a development stage internet related business venture pursuant to
which it agreed to loan the venture up to $160,000 to fund its operating
expenses and obtained the option to acquire all of the outstanding capital stock
of the venture in exchange for, when and if exercised, $40,000 and the issuance
of an aggregate of 2,000,000 unregistered restricted shares of theglobe.com's
common stock (See Note 2 of notes to the consolidated financial statements -
Management's Plans).
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
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.; and through the sale of our games information magazine through newsstands
and subscriptions.
Revenues decreased to $9.7 million for the year ended December 31, 2002 as
compared to $16.1 million for the year ended December 31, 2001. Advertising
revenues for the year ended December 31, 2002 were $3.1 million, which
represented 32% of total revenues. Advertising revenues for the year ended
December 31, 2001 were $6.4 million, which represented 40% of total revenues.
The decrease in advertising revenues was primarily attributable to continued
industry-wide decreases in the online advertising market, which are expected to
continue, 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. We had no advertising revenue from
our online properties for the year ended December 31, 2002, compared to $2.9
million for the year ended December 31, 2001. Advertising revenue from our games
magazine accounted for $3.1 million and $3.5 million, of the total advertising
revenues for the years ended December 31, 2002 and December 31, 2001,
respectively. Sales of our games information magazine through newsstands and
subscriptions accounted for $3.5 million, or 36%, and $4.6 million, or 29%, of
total revenues for the years ended December 31, 2002 and December 31, 2001,
respectively. The decrease is due to negative industry trends. Barter
advertising revenues represented 1% of total revenues for the year ended
December 31, 2002 and 1% of total revenues for the year ended December 31, 2001.
Sales of merchandise through our online store accounted for 31% of total
revenues for the year ended December 31, 2002, or $3.1 million, as compared to
31% for the year ended December 31, 2001, or $5.1 million. The decrease was
partially attributable to advances in console and online games, which
traditionally have less sales loyalty to our online store, and to a dramatic
reduction in the number of major PC games releases, on which our online store
relies for the majority of sales and profits.
Cost of Revenues. Cost of revenues consists primarily of Internet connection
charges, staff and related costs of operations personnel, depreciation and
maintenance costs of website equipment, printing costs of our games magazine and
the costs of merchandise sold and shipping fees in connection with our online
store. Gross margins were 42% and 24% for the years ended December 31, 2002 and
December 31, 2001, respectively. The year-to-year increase in gross margins was
primarily attributable a higher concentration of revenue derived from
subscriptions and newsstand sales of the magazine, which has higher gross
margins.
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
14
expenses were $3.5 million for the year ended December 31, 2002 as compared to
$9.8 million for the year ended December 31, 2001. The year-to-year decrease in
sales and marketing expense was attributable to reduced personnel costs and
decreased advertising costs. As of December 31, 2002, we have an internal
advertising sales staff of two (2) professionals, both of whom are dedicated to
selling advertising space in our Computer Games print magazine, and to a lesser
extent on our Computer Games Online website, which is the online counterpart to
Computer Games magazine. In August 2001 we were forced to lay off almost all our
national sales staff due to the continued decline in the advertising market.
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 $0.7
million for the year ended December 31, 2002, as compared to $3.8 million for
the year ended December 31, 2001. 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 continued decline
in the business.
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. In the second quarter of 2002, severance
benefits of $699,833 were recorded and paid. This amount includes $625,000 paid
on May 31, 2002 to our former Chief Executive Officer, Charles Peck, reflecting
the terms of his severance package. Additionally, options to purchase 425,000
shares of the Company's common stock at an exercise price of $0.035 per share
were granted to Mr. Peck on May 6, 2002, valued at $13,500, also reflecting the
terms of his severance package. These options immediately vested upon grant and
have a life of ten years. General and administrative expenses were $2.9 million
for the year ended December 31, 2002 as compared to $6.6 million for the year
ended December 31, 2001. The year-to-year decrease was primarily attributable to
decreased salaries and personnel costs as a result of our 2001 restructuring and
cost containment initiatives. In August 2001, we were forced to lay off almost
all our general and administration staff due to the continued decline in the
business.
Restructuring and Impairment Charges. For the years ended December 31, 2002, and
December 31, 2001, the Company recorded restructuring and impairment charges of
$0.0 million and $17.1 million, respectively. Restructuring charges for 2001
related to workforce reductions and impairment charges resulting from
management's ongoing business review and impairment analysis of long-lived
assets. ( See "Restructuring and Impairment Charges - Year ended December 31,
2001.")
Amortization of Goodwill and Intangible Assets. Amortization expense was $0 for
the year ended December 31, 2002, compared to $8.5 million for the year ended
December 31, 2001. The year-to-year decrease in amortization expense was
primarily attributable to the write-down of goodwill and intangibles assets that
occurred in the second quarter of 2001. (See Recent Accounting Pronouncements of
notes to consolidated financial statements, Note 1.) We implemented SFAS No.
142, "Goodwill and Other Intangible Assets" during 2002. Due to the fact that as
of December 31, 2001 all goodwill relating to previous acquisitions had been
expensed in connection with impairment evaluations performed in 2000 and 2001,
the implementation of SFAS No. 142 had no impact on the 2002 consolidated
financial statements.
SFAS 142 was adopted January 1 for 2002. The following table shows the Company's
2002, 2001 and 2000 results, adjusted to exclude amortization related to
goodwill.
Year Ended December 31
--------------------------------------------
2002 2001 2000
------------ ------------- ---------------
Net loss - as reported $(2,614,661) $(40,620,026) $ (103,865,721)
------------ ------------- ---------------
Add back:
Goodwill amortization - 8,439,174 43,893,747
------------ ------------- ---------------
Net loss per share - as adjusted $(2,614,661) $(32,180,852) $( 59,971,974)
============ ============= ===============
Net loss per share - as reported $ (0.09) $ (1.34) $ (3.43)
Add back:
Goodwill amortization - 0.28 1.46
------------ ------------- ---------------
Net loss per share - as adjusted $ (0.09) $ (1.06) $ (1.97)
============ ============= ===============
Although SFAS No. 142 requires disclosure of these amounts to reflect the impact
of adoption on the Company's results for the years ending December 31, 2001 and
2000, had goodwill not been amortized and been added back, the effect would have
resulted in additional impairment charges being recorded in each of the
respective years.
In August 2002, we acquired certain VoIP assets which are intangible. We are
currently developing a business strategy to utilize these assets. When they are
placed in service, they will be amortized over their useful life and evaluated
annually for impairment.
Interest and other income, net. Interest and other income, net 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 was $.3 million and $1.2 million for the years ended December
31, 2002 and December 31, 2001, respectively.
15
The year-to-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
balances and the decline in net proceeds from the liquidation of collateral
deposits for buyouts of capitalized leases which occurred in 2001.
Income Taxes. Income taxes were approximately $12,000 for the year ended
December 31, 2002 compared with $16,000 for the year ended December 31, 2001.
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 deferred tax assets. At December 31, 2002, the Company had net
operating loss carry forwards available for U.S. and foreign tax purposes of
approximately $134 million. These carryforwards expire through 2022. The Tax
Reform Act of 1986 imposes substantial restrictions on the utilization of net
operating losses and tax credits in the event of an "ownership change" of a
corporation. Due to the change in our ownership interests in the third quarter
of 1997 and May 1999, as defined in the Internal Revenue Code of 1986, as
amended (the "Code"), future utilization of our net operating loss carryforwards
prior to the change of ownership will be subject to certain limitations or
annual restrictions. Additionally, any future ownership change could further
limit the ability to use these carryforwards.
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 continued 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 our games information magazine through newsstands and
subscriptions accounted for $4.6 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.
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).
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 had 19 employees employed in our sales and marketing
department.
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
16
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 continued decline in the
business. As of December 31, 2001, we had 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 had 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. See "Restructuring and Impairment
Charges" below.
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.
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.
RESTRUCTURING AND IMPAIRMENT CHARGES.
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 our former
properties, 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. In August 2002 we relocated our executive offices to Ft.
Lauderdale, Florida. 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.
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
17
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 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 values 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:
- 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
18
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, we had approximately $0.7 million in cash and cash
equivalents. Net cash used in operating activities was ($2.0) million, ($16.4)
million, and ($34.7) million for the years ended December 31, 2002, December 31,
2001, and December 31, 2000, respectively. The decrease in net cash used in
operating activities from December 31, 2001 to December 31, 2002 resulted
primarily from a decrease in our net operating losses, exclusive of depreciation
expenses and non-cash charges. This decrease was also attributable to reductions
in accounts receivable, accounts payable, accrued expenses and deferred revenue
offset by an increase in prepaid expenses.
Net cash provided by investing activities was $0.1 million, $7.2 million, and
$13.3 million for the years ended December 31, 2002, December 31, 2001, and
December 31, 2000, respectively. The decreases in net cash provided by investing
activities was primarily attributable to decreases in the proceeds received from
the sale of short-term investments, decreases in the receipt of security
deposits which were partially used to buy out certain capital and operating
lease obligations in 2001 and decreases in proceeds from the sale of property
offset by lower purchases of property and equipment.
Net cash used in financing activities was approximately ($0.01) million, ($1.6)
million, and( $2.0) million for the years ended December 31, 2002, December 31,
2001, and December 31, 2000, respectively. The decrease from December 31, 2001
to December 31, 2002 in net cash used in financing activities was primarily
attributable to capital lease obligations in connection with our 2001
restructuring initiatives.
In connection with his termination, our former Chief Executive Officer, Charles
Peck, was paid $625,000 on May 31, 2002, reflecting the terms of his severance
package.
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, 2002 audited financial statements containing an explanatory
paragraph stating that our recurring losses from operations since inception and
requirement for additional financing raise substantial doubt about our ability
to continue as a going concern. Management and the Board of Directors are
currently exploring a number of strategic alternatives and are also continuing
to identify and implement internal actions to improve the Company's liquidity or
financial performance. These alternatives may include selling assets, which in
any such case could result in significant changes in our business plan, or
entering into new or different lines of business or cessation of certain
business operations or plans to expand our business.
As of December 31, 2002, our sole source of liquidity consisted of $0.7 million
of cash and cash equivalents. Subsequent to December 31, 2002, we committed to
loan $160 thousand to a development stage Internet related company in connection
with our securing an option to acquire such third party, of which $40,000 was
advanced prior to yearend. We may loan additional amounts to such company as
well. Consequently, as of March 25, 2003 our liquidity had diminished to
approximately $0.3 million. Our liquidity will be temporarily enhanced by the
recent investment of $500,000 by an affiliate of the Company as more fully
described below. We currently do not have access to any other sources of
funding, including debt and equity financing facilities. The Company has limited
operating capital and no current access to credit facilities. Our cash needs
remain critical. Management does not believe that our current capital will
sustain operations through the end of the fiscal year. If we are unable to keep
operating costs down, grow revenue, and maintain terms with our creditors, we
may have to try and raise additional funds through asset sales, bank borrowings,
or equity or debt financing. Obtaining financing from an unaffiliated third
party is very unlikely and any financing that could be obtained would dilute
existing shareholders significantly.
On November 14, 2002, E & C Capital Partners, a privately held investment
holding company controlled by Michael S. Egan, our Chairman and CEO and a major
shareholder, and Edward A. Cespedes, our President and a Director, entered into
a non-binding letter of intent with theglobe.com to provide $500,000 of new
financing via the purchase of shares of a new Series F Preferred Stock of
theglobe.com. On March 28, 2003, the parties signed a Preferred Stock Purchase
Agreement and other related documentation pertaining to the investment and
closed on the investment. Pursuant to the Preferred Stock Purchase Agreement, E
& C Capital Partners received 333,333 shares of Series F Preferred Stock
convertible into shares of the Company's Common Stock at a price of $0.03 per
share. The conversion price is subject to adjustment upon the occurrence of
certain events, including downward adjustment on a weighted-average basis in the
event the Company should issue securities at a purchase price below $0.03 per
share. If fully converted, and without regard to the anti-dilutive adjustment
mechanisms applicable to the Series F Preferred Stock, an aggregate of
approximately 16.7 million shares of Common Stock could be issued. The Series F
Preferred Stock has a liquidation preference of $1.50 per share, will pay a
dividend at the rate of 8% per annum and entitles the holder to vote on an "as
converted" basis with the holders of Common Stock. In addition, as part of the
$500,000 investment, E & C Capital Partners received warrants to purchase
approximately 3.3 million shares of theglobe.com Common Stock at an exercise
price of $0.125 per share. The warrant is exercisable at any time on or before
March 28, 2013. E & C Capital Partners is entitled to certain demand
registration rights in
19
connection with its investment. The Company intends to use the proceeds from the
investment for its general working capital requirements. As a result of the
foregoing investment, the beneficial ownership (which, in accordance with
applicable rules of the Securities and Exchange Commission, assumes the
conversion of the Series F Preferred Stock and the exercise of the foregoing
warrant) of Michael S. Egan increased from approximately 35.1 % to approximately
57.8 %. Accordingly, Mr. Egan would likely be able to exercise significant
influence in, if not control, any matter submitted to a stockholder vote of the
Company.
Concurrently with the closing of the preferred stock investment, certain
affiliates of Michael S. Egan and Edward A. Cespedes entered into a non-binding
letter of intent to loan up to $1 million to the Company pursuant to a
convertible secured loan facility. The loan facility would be convertible into
shares of the Company's common stock at the rate of $.09 per share, which if
fully funded and converted, would result in the issuance of approximately 11.1
million shares. In addition, assuming the loan is fully funded, it is
anticipated that the investor group would be issued a warrant to acquire
approximately 2.2 million shares of theglobe.com Common Stock at an exercise
price of $.15 per share. The convertible debt financing is subject to a number
of closing conditions, including execution of definitive documentation,
satisfactory resolution of certain Company liabilities and other tax and
business considerations. In addition, it is contemplated that the loan facility
will require that certain performance criteria be achieved by the company as a
condition to all or part of the funding. The financing is also subject to
completion of a loan facility and related documentation satisfactory to the
parties. If consummated, the convertible debt financing will result in
substantial dilution of the number of securities of theglobe.com either issued
and outstanding or obtainable upon conversion of the debt or exercise of the
warrant. There can be no assurance, if and when, the financing will be
consummated.
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board. The trading volume of our shares
has dramatically declined since the delisting. In addition, we are now subject
to a Rule promulgated by the Securities and Exchange Commission that, if we fail
to meet criteria set forth in such Rule, various practice requirements are
imposed on broker-dealers who sell securities governed by the Rule to persons
other than established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transactions prior to sale. Consequently, the Rule may have a materially adverse
effect on the ability of broker-dealers to sell the securities, which may
materially affect the ability of shareholders to sell the securities in the
secondary market. Consequently, it has also made it more difficult for us to
raise additional capital, although the Company has had some success in offering
its securities as consideration for the acquisition of various business
opportunities or assets. We will also incur additional costs under state blue
sky laws if we sell equity due to our delisting.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2002, 2001 and 2000, inflation has
not had a significant effect on our results of operations since inception.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, impairment of intangible assets, restructuring reserves
and income tax recognition of deferred tax items. Our policy and related
procedures for revenue recognition and valuation of customer receivables are
summarized below.
REVENUE RECOGNITION
The Company's revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games, through the sale of our games information magazine through
newsstands and subscriptions; from the sale of video games and related products
through our online store Chips & Bits; and through limited sale of online
advertisements principally under short-term advertising arrangements, averaging
one to three months. There is no certainty that events beyond anyone's control
such as economic downturns or significant decreases in print advertisement will
not occur and accordingly, cause significant decreases in revenue.
The Company participates in barter transactions. Barter revenues and expenses
are recorded at the fair market value of services provided or received,
whichever is more readily determinable in the circumstances. Revenue from barter
transactions is recognized as income when advertisements or other products are
delivered by the Company. Barter expense is recognized when the Company's
advertisements are run on other companies' web sites or in their magazines,
which typically occurs within one to six months from the period in which the
related barter revenue is recognized. Barter advertising revenues represented 1%
of total revenues for the year ended December 31, 2002 and 1% of total revenues
for the year ended December 31, 2001.
Advertising. Advertising revenues for the games information magazine are
recognized at the on-sale date of the magazine. Online advertising revenues are
recognized ratably in the period in which the advertisement is displayed,
provided that no significant Company obligations remain
20
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.
Electronic Commerce and Other. Sales from the online store are recognized as
revenue when the product is shipped to the customer. Freight out costs are
included in net sales and have not been significant to date. The Company
provides an allowance for merchandise sold through its online store. The
allowance provided to date has not been significant.
Newsstand sales of the games information magazine are recognized at the on-sale
date of the magazine, net of provisions for estimated returns. Subscriptions are
recorded as deferred revenue when initially received and recognized as income
pro ratably over the subscription term. Revenues from the Company's share of the
proceeds from its e-commerce partners' sales are recognized upon notification
from its partners of sales attributable to the Company's sites.
VALUATION OF CUSTOMER RECEIVABLES
Provisions for allowance for doubtful accounts are made based on historical loss
experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4 required
all gains and losses from the extinguishment of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishment not to be reported as
extraordinary items when the use of debt extinguishment is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed, therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations. As a result of the
Company's adoption of SFAS No. 145 in 2002, the Company's $ 1.4 million, or
$0.06 per share, gain on early retirement of debt in 1999, which was previously
recorded as an extraordinary item, was required to be reclassified to continuing
operations. (See Item 6 - Selected Consolidated Financial Data for 1999
financial information.)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and EITF 94-3 relates to the timing of liability
recognition. Under SFAS No. 146, a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 as
it relates to the transition by an entity to the fair value method of accounting
for stock-based employee compensation. The provisions of SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. The Company has not yet made a decision to change the method of accounting
for stock-based employee compensation.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" an Interpretation of ARB 51. This statement requires under
certain circumstances consolidation of variable interest entities (primarily
joint ventures and other participating activities). The adoption of this
statement is not expected to have a significant impact on the Company's
financial position or results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2002, we did not have any material off-balance sheet
arrangements that have or are reasonably likely to have a material effect on our
current or future financial condition, revenues or expenses, results of
operations, liquidity, or capital resources.
21
CONTRACTUAL OBLIGATIONS
The following table summarizes, as of December 31, 2002, the timing of future
cash payments due under certain contractual obligations (in thousands):
Payments Due in
------------------------------------------
Less than 1-5 More than
Total 1 year years 5 years
-------- ---------- -------- ----------
Long Term Debt $212,000 $ 124,000 $ 88,000 $ 0
- -------------------------- -------- ---------- -------- ----------
Employment Contract 109,000 109,000 0 0
- -------------------------- -------- ---------- -------- ----------
Operating Lease Obligation 123,000 45,000 78,000 0
- -------------------------- -------- ---------- -------- ----------
Other Commitments 410,000 410,000 0 0
- -------------------------- -------- ---------- -------- ----------
- -------------------------- ======== ========== ======== ==========
Total $854,000 $ 688,000 $166,000 $ 0
- -------------------------- ======== ========== ======== ==========
22
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
WE HAVE CLOSED OUR COMMUNITY SITE, OUR SMALL BUSINESS WEB-HOSTING PROPERTY AND
HAVE SOLD CERTAIN OF OUR GAMES PROPERTIES AND MAY SELL THE REMAINDER OF OUR
GAMES PROPERTIES. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES FOR ANY
SIGNIFICANT VALUE.
Due to the significant and prolonged decline in the Internet advertising sector,
the Company elected to close its community web site at "www.theglobe.com" and
its small business web-hosting property at "www.webjump.com" in August 2001. In
addition, the Company is seeking buyers for its games properties in order to
reduce its cash burn and preserve working capital. The Company has already sold
substantially all the assets of (i) Kaleidoscope Networks Limited, the English
subsidiary of Attitude Network Ltd. that operated GamesDomain.com and
GamesDomain.co.uk, (ii) KidsDomain.com and KidsDomain.co.uk, and (iii)
HappyPuppy.com and HappyPuppy.co.uk. In addition, the Company sold the URL of
webjump.com. The Company may try to sell its remaining game properties or shift
its business strategy in the future. The Company may be unable to sell its
remaining games properties quickly, if at all, which would result in continued
depletion of its cash position since the games business currently operates at a
cash loss. The games properties may also lose some of their value while we try
to sell them as we do not have full corporate staff to support these businesses.
In addition, the "theglobe.com" brand continues to lose significant value since
the website "www.theglobe.com" was taken offline August 15, 2001. The closing of
our community site and our small business web-hosting site has also adversely
affect our electronic commerce due to the inability of those web sites after
their closure to refer traffic to the Chips & Bits web site. We cannot assure
you that we will be able to sell all or any of the remaining games business
quickly, if at all, or at any significant price, or that there will be any
return to our equity holders.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN
We may not be able to operate the remaining business in the event that we cannot
sell the business or enter into another arrangement. We may determine to use our
remaining capital in a different line of business and have committed a
substantial portion of our remaining capital to funding of the operations of a
company upon which we have secured an option to acquire the company. At this
point there are minimal prospects for a meaningful return on investment. As of
December 31, 2002, our sole source of liquidity consisted of $0.7 million of
cash and cash equivalents. We currently do not have access to any other sources
of funding, including debt and equity financing facilities. The Company has
limited operating capital and no current access to credit facilities. If we are
unable to keep operating costs down, grow revenue, and maintain terms with our
creditors, we may have to try and raise additional funds through asset sales,
bank borrowings, or equity or debt financing. Obtaining financing from any
unaffiliated third party is very unlikely and any financing that could be
obtained would probably dilute existing shareholders significantly. We received
a report from our independent accountants, relating to our Dece