AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON SEPTEMBER __, 2005
Registration No. 333-114556
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST EFFECTIVE AMENDMENT NO. 2 TO FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
THEGLOBE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7310 14-1782422
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
110 EAST BROWARD BLVD, SUITE 1400
FT. LAUDERDALE, FL 33301
(954) 769-5900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Name, address, including zip code, and Copies of all communications to:
telephone number, including area code,
of agent for service:
EDWARD A. CESPEDES, PRESIDENT DONALD E. THOMPSON, II, ESQ.
110 EAST BROWARD BOULEVARD PROSKAUER ROSE LLP
SUITE 1400 2255 GLADES ROAD, SUITE 340W
FT. LAUDERDALE, FLORIDA 33301 BOCA RATON, FLORIDA 33431
(954) 769-5900 TEL (561) 241-7400 -
FAX (561) 241-7145
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Maximum Maximum Amount of
Class of Securities Amount to be Offering Price Aggregate Registration
To be Registered Registered (1) Per Security (2) Offering Price Fee
--------------------------------------------------------------------------------------------------------------
Common stock, par $.001 (3) 100,598,406 $.92 $ 92,550,534 $ 11,726
Common stock, par $.001 (4) 26,798,534 $.92 24,654,651 3,124
Common stock, par $.001 (5) 3,000,000 $.92 2,760,000 350
----------- ------------ ---------
130,396,940 $119,965,185 $ 15,200 (6)
=========== ============ =========
(1) This registration statement covers any additional shares of common stock of
theglobe.com, inc. that become issuable by reason of (i) any stock dividend,
stock split, recapitalization or any other similar transaction without receipt
of consideration that results in an increase in the number of shares of our
outstanding common stock or (ii) any changes in the exercise price of certain
warrants in accordance with the terms thereof.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933, as amended, based on
the average of the bid and asked price for our common stock on the OTC Bulletin
Board on April 14, 2004.
(3) Represents shares of common stock held by the Selling Stockholders.
(4) Represents shares of common stock issuable upon the exercise of outstanding
warrants and other rights.
(5) Represents shares of common stock which may be issuable to a certain Selling
Stockholder upon the achievement of various earn-out requirements.
(6) $16,301 was previously paid in connection with the initial filing of the
registration statement on April 16, 2004. Pursuant to a pre-effective amendment,
the Registrant added an additional 3,000,000 shares to the registration
statement issuable under the circumstances set forth in footnote (5) above and
removed from registration an aggregate of 12,445,644 shares which could have
been issuable to certain of the Selling Stockholders who acquired securities in
the Company's March 2004 private offering, in the event the Registrant did not
satisfy its registration obligations to such Selling Stockholders.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the registration shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION SEPTEMBER __, 2005
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
[LOGO] theglobe.com
UP TO 130,396,940 SHARES OF COMMON STOCK
This offering relates to the resale of an aggregate of up to 130,396,940 shares
of the common stock, $.001 par value (the "Common Stock"), of theglobe.com, inc.
by persons who are referred to in this prospectus as "Selling Stockholders". The
shares that may be resold pursuant to this prospectus include 100,598,406 shares
of Common Stock owned by the Selling Stockholders, 26,798,534 shares of Common
Stock issuable upon the exercise of warrants owned by the Selling Stockholders
and 3,000,000 shares of Common Stock which may be issued to one of our selling
stockholders upon the attainment of certain business goals. Our filing of the
registration statement of which this prospectus is a part is intended to satisfy
our obligations to certain of the Selling Stockholders to register for resale
the shares issued to them and the shares issuable upon exercise of the warrants
issued to them.
We are not offering or selling any shares of our Common Stock pursuant to this
prospectus. We will not receive any proceeds from the sale of the shares by the
Selling Stockholders. We will, however, receive proceeds if Selling Stockholders
pay cash to exercise some or all of the warrants owned by the Selling
Stockholders. We will bear the expenses of the offering of the shares, except
that the Selling Stockholders will pay any applicable underwriting discounts,
brokerage fees or commissions and transfer taxes, as well as fees and
disbursements of their counsel and advisors.
Our Common Stock is quoted on the over-the-counter or OTC Bulletin Board under
the trading symbol "TGLO.OB." On September 20, 2005, the average of the bid and
asked price of our Common Stock was $.12. The Selling Stockholders may sell the
shares from time to time in public or private transactions occurring on or off
the OTC Bulletin Board, at prevailing market prices or at negotiated prices.
Sales may be made directly to purchasers or through brokers or to dealers, who
are expected to receive customary commissions or discounts.
This prospectus is a part of a registration statement that we filed with the
Securities and Exchange Commission. You should read both this prospectus and any
related prospectus supplement together with additional information described
under "Where You Can Find More Information".
All references in this prospectus to "theglobe", "the Registrant", "the
Company," "we," "us," or "our" mean theglobe.com, inc. and, as the context
requires, its subsidiaries.
YOU SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 4 BEFORE
MAKING A DECISION TO PURCHASE SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is September ___, 2005.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ......................................................... 1
RISK FACTORS ............................................................... 4
FORWARD-LOOKING STATEMENTS ................................................. 26
USE OF PROCEEDS ............................................................ 27
DETERMINATION OF OFFERING PRICE ............................................ 27
SELLING STOCKHOLDERS ....................................................... 27
PLAN OF DISTRIBUTION ....................................................... 37
LEGAL PROCEEDINGS .......................................................... 38
MANAGEMENT ................................................................. 39
EXECUTIVE COMPENSATION ..................................................... 41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................. 45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............. 47
DESCRIPTION OF SECURITIES .................................................. 49
TRANSFER AGENT AND REGISTRAR ............................................... 55
VALIDITY OF SECURITIES ..................................................... 55
EXPERTS .................................................................... 55
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES ......................................................... 55
DESCRIPTION OF BUSINESS .................................................... 56
RECENT EVENTS -AGREEMENT TO SELL ALL OF THE ASSETS OF OUR SUBSIDIARY,
SENDTEC, INC. ........................................................... 69
DESCRIPTION OF THE PROPOSED ASSET SALE ..................................... 69
THE PURCHASE AGREEMENT ..................................................... 70
CERTAIN PRO FORMA FINANCIAL INFORMATION AND RELATED DATA ................... 83
SENDTEC, INC. BUSINESS ..................................................... 89
SELECTED SENDTEC, INC. FINANCIAL DATA ...................................... 89
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SENDTEC'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................... 90
SENDTEC, INC. UNAUDITED FINANCIAL STATEMENTS ............................... 98
i
SELECTED CONSOLIDATED FINANCIAL DATA OF THEGLOBE.COM, INC. ................. 114
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THEGLOBE.COM, INC. ............................. 115
DESCRIPTION OF PROPERTY .................................................... 136
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................... 136
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................... 139
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ................................................ 183
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................. 183
WHERE YOU CAN FIND MORE INFORMATION ABOUT THEGLOBE.COM, INC. ............... 183
ii
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that which
is contained in this prospectus. This prospectus may be used only where it is
legal to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of securities.
iii
PROSPECTUS SUMMARY
This summary highlights key aspects of the information contained elsewhere in
this prospectus. This summary does not contain all of the information you should
consider before investing in our securities. You should read this entire
prospectus carefully, especially the risks of investing in our securities
discussed under "Risk Factors."
References to "we," "us," "our company" and "theglobe" refer to theglobe.com,
inc. together with its subsidiaries.
OUR BUSINESS
As of September 2005, theglobe.com, inc. (the "Company" or "theglobe") managed
four primary lines of business. One line of business, Voice over Internet
Protocol ("VoIP") telephony services, includes voiceglo Holdings, Inc., a
wholly-owned subsidiary of theglobe that offers VoIP-based phone services. The
term VoIP refers to a category of hardware and software that enables people to
use the Internet to make phone calls. The second line of business consists of
our historical network of three wholly-owned businesses, each of which
specializes in the games business by delivering games information and selling
games in the United States and abroad. These businesses are: our print
publication business, which consists of Computer Games and Now Playing
magazines; our online website business, which consists of our Computer Games
Online website (www.cgonline.com) and our Now Playing Online website
(www.nowplayingmag.com), which are the online counterparts to our magazine
publications; and our Chips & Bits, Inc. (www.chipsbits.com) games distribution
company ("Chips & Bits"). We entered a third line of business, marketing
services, on September 1, 2004, with our acquisition of SendTec, Inc.
("SendTec"), a direct response marketing services and technology company. On May
9, 2005, we entered a fourth line of business, which we call our Internet
Services business, when we exercised our option to acquire Tralliance
Corporation ("Tralliance"), a company which had recently entered into an
agreement to become the registry for the ".travel" top-level Internet domain.
As of September 2005, our revenue was derived principally from the operations of
SendTec, and to a lesser extent from the operations of our computer games
related businesses. Our VoIP products and services have yet to produce any
significant revenue. Tralliance does not expect to begin generating revenue
until sometime during the fourth quarter of 2005.
During the first quarter of 2005, management began actively re-evaluating the
Company's primary business lines, particularly in view of the Company's critical
need for cash and the overall net losses of the Company. As a result, management
with the assistance of its third party financial advisors has explored a number
of strategic alternatives for the Company and/or its component businesses,
including continuing to operate the businesses, selling certain businesses or
assets, or entering into new businesses.
Described below are certain significant transactions and events regarding our
Company which occurred in our recent past.
On June 1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became
our Chief Executive Officer and President, respectively.
On November 14, 2002, we acquired certain VoIP assets from Brian Fowler (now our
Chief Technology Officer) and we are now pursuing opportunities related to this
acquisition.
On May 28, 2003, we acquired Direct Partner Telecom, Inc. ("DPT"). DPT was a
specialized international communications carrier providing VoIP communications
services to emerging countries. We acquired all of the physical assets and
intellectual property of DPT and originally planned to continue to operate the
company as a subsidiary and engage in the provision of VoIP services to other
telephony businesses on a wholesale transactional basis. In the first quarter of
2004 we decided to suspend further wholesale telephony business in DPT and to
dedicate the DPT physical and intellectual assets to our developing retail VoIP
business.
1
In March 2004, we completed a private offering of 333,816 units for a purchase
price of $85 per unit (the "PIPE Offering"). Each unit consisted of 100 shares
of the Company's Common Stock, and warrants to acquire 50 shares of the Common
Stock at an exercise price of $.001 per share. The aggregate number of shares of
Common Stock issued in the PIPE Offering was 33,381,647 shares for an aggregate
consideration of $28,374,400, or approximately $0.57 per share assuming the
exercise of the 16,690,824 warrants. The purpose of the PIPE Offering was to
raise funds for use primarily in our developing retail VoIP business, including
the deployment of networks, website development, marketing, and capital
infrastructure expenditures and working capital. We were obligated to file a
registration statement, of which the prospectus is a part, pursuant to the terms
of PIPE Offering. Most of our investors from prior capital raises also elected
to register their shares for resale pursuant to the PIPE Offering registration
statement. The registration statement, which related to the resale of up to
approximately 131 million of our shares (including approximately 27 million
shares underlying outstanding warrants to acquire our Common Stock and 3 million
shares of Common Stock which may be issued upon the attainment of certain
business goals), became effective on May 11, 2004.
On September 1, 2004, we closed on the acquisition of SendTec, a direct response
marketing services company based in St. Petersburg, Florida (the "SendTec
Acquisition"). In exchange for the acquisition of SendTec we paid consideration
consisting of: (i) $6,000,000 in cash, excluding transaction costs, (ii) the
issuance of an aggregate of 17,500,024 shares of our Common Stock, (iii) the
issuance of an aggregate of 175,000 shares of our Series H Automatically
Converting Preferred Stock (which, in accordance with its terms, were
automatically converted into approximately 17,500,500 shares of our Common Stock
on December 1, 2004), and (iv) the issuance of a subordinated promissory note in
the amount of $1 million. We also issued an aggregate of approximately 4,000,000
replacement options to acquire our Common Stock for each of the issued and
outstanding options to acquire SendTec shares held by the former employees of
SendTec. In addition, warrants to acquire shares of our Common Stock would be
issued to the former shareholders of SendTec when and if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005. The number of earn-out warrants would range from an aggregate
of approximately 250,000 to 2,500,000 (if actual operating income exceeds the
forecast by at least 10%). Pursuant to our contractual obligations, we were
obligated to file a registration statement relating to the potential resale of
these shares and to cause such registration statement to become effective on or
before September 1, 2005. We have not yet filed such a registration statement.
Because we have not filed and caused such registration statement to become
effective on or before September 1, 2005, we may be held liable for damages
suffered by holders of such stock. Upon registration all such shares will be
eligible for resale over the open market. Even if not registered, the shares
issued in the SendTec acquisition are eligible for resale over the public
markets pursuant to and subject to the limitations of Rule 144. If we
successfully redeem the majority of the shares issued as part of the SendTec
acquisition (or approximately 28,900,000 shares) in connection with the sale of
SendTec's business to RelationServe Media, Inc. as discussed in the "Recent
Events" section below, we would substantially mitigate our risks related to our
failure to timely register these shares.
On April 22, 2005, E&C Capital Partners, LLLP and E&C Capital Partners II, Ltd.
(the "Noteholders"), entities controlled by the Company's Chairman and Chief
Executive Officer, entered into a Note Purchase Agreement (the "Agreement") with
theglobe pursuant to which they acquired secured demand convertible promissory
notes (the "Convertible Notes") in the aggregate principal amount of $1,500,000.
Under the terms of the Agreement, the Noteholders were also granted the optional
right, for a period of 90 days from the date of the Agreement, to purchase
additional Convertible Notes such that the aggregate principal amount of
Convertible Notes issued under the Agreement may total $4,000,000 (the
"Option"). On June 1, 2005, the Noteholders exercised a portion of the Option
and acquired an additional $1,500,000 of Convertible Notes. On July 18, 2005,
the Noteholders exercised the remainder of the Option and acquired an additional
$1,000,000 of Convertible Notes.
The Convertible Notes are convertible at the option of the Noteholders into
shares of the Company's Common Stock at an initial price of $0.05 per share.
Through September 15, 2005, an aggregate of $600,000 of Convertible Notes were
converted by the Noteholders into an aggregate of 12,000,000 shares of the
Company's Common Stock. The Convertible Notes provide for interest at the rate
of ten percent per annum and are secured by a pledge of substantially all of the
assets of the Company. The Convertible Notes are due and payable five days after
demand for payment by the Noteholders. The Noteholders are entitled to certain
demand and "piggy-back" registration rights in connection with their investment.
Assuming full conversion of all remaining outstanding Convertible Notes,
68,000,000 shares of the Company's Common Stock would be issued to the
Noteholders.
On May 9, 2005, we exercised our option to acquire all of the outstanding
capital stock of Tralliance Corporation, the registry for the ".travel"
top-level Internet domain. The purchase price consisted of the issuance of
2,000,000 shares of theglobe Common Stock and warrants to acquire 475,000 shares
of theglobe Common Stock, as well as the payment of $40,000 in cash. The
warrants are exercisable for a period of five years at an exercise price of
$0.11 per share. The 2,000,000 shares of our Common Stock issued as a result of
the acquisition of Tralliance are entitled to certain "piggy-back" registration
rights.
Our executive offices are located at 110 East Broward Blvd., Suite 1400, Fort
Lauderdale, Florida 33301. Our telephone number is (954) 769-5900.
2
RECENT EVENTS
PROPOSED SALE OF ALL OF THE ASSETS OF SENDTEC.
On August 10, 2005 (as amended on August 23, 2005) we entered into an Asset
Purchase Agreement ("Purchase Agreement") with RelationServe Media, Inc.
("RelationServe"), to sell the business and substantially all of the net assets
of our subsidiary, SendTec, Inc., to RelationServe for $37.5 million in cash
subject to certain adjustments. In addition to the Purchase Agreement, we have
entered into or will be entering into several ancillary agreements and
transactions. These agreements include, or will include, a Redemption Agreement
pursuant to which theglobe will redeem 28,879,097 shares of its Common Stock
held by the management of SendTec and one or more Termination Agreements
pursuant to which certain options, warrants and other rights owned by SendTec
management and a few other employees will be terminated. The ancillary
agreements will result in payments totaling approximately $12.6 million in cash
to the management and employees of SendTec. The Board of Directors has
determined that the asset sale is advisable and in the best interests of
theglobe and its stockholders. The asset sale involves risks, including the
existence of conditions to the obligation of RelationServe to complete the asset
sale, all of which must either be satisfied or waived prior to the completion of
the asset sale. The Purchase Agreement and related agreements and transactions
are more fully described in the section entitled "RECENT EVENTS - AGREEMENT TO
SELL ALL OF THE ASSETS OF OUR SUBSIDIARY - SENDTEC, INC."
Mr. Michael Egan, the Chairman and CEO of theglobe, together with certain of his
affiliates, and a few other stockholders whom collectively are the beneficial
owners of approximately 51% of the issued and outstanding shares of theglobe
Common Stock, the sole class of voting securities of theglobe, have executed a
written consent adopting the Purchase Agreement and approving the transactions
contemplated thereby in accordance with Section 228 of Delaware Law. The action
by written consent is sufficient to approve the asset sale and the other
transactions contemplated by the Purchase Agreement without any further action
or vote of the stockholders of theglobe. On September 16, 2005, we sent out a
definitive Information Statement to our stockholders which describes the
proposed sale of assets. The closing of the sale of assets of SendTec is
anticipated to occur on or about October 11, 2005 (20 calendar days after the
mailing of the definitive Information Statement).
THE OFFERING:
Common stock initially offered by Selling Stockholders 100,598,406 shares
Common stock remaining to be offered by Selling
Stockholders (1) 96,058,427 shares
Common stock initially issuable upon exercise
of outstanding warrants 26,798,534 shares
Common stock which continues to be issuable upon
exercise of outstanding warrants (1) 8,126,142 shares
Common stock initially issuable upon attainment of certain
business goals (2) 3,000,000 shares
Common stock outstanding:
Prior to the offering (3) 199,329,666 shares
After the offering (4) 207,455,808 shares
----------------
(1) As of September 15, 2005, based solely upon a review of our stock transfer
records we believe there are approximately 96,058,427 shares and 8,126,142
shares issuable upon exercise of outstanding warrants, respectively, which
continue to be offered by the Selling Stockholders.
(2) These shares are no longer issuable.
(3) As of September 15, 2005.
(4) Assumes that all warrants issued to the Selling Stockholders as per this
Registration Statement are exercised. Excludes options, warrants and convertible
securities, including 68,000,000 shares of Common Stock relating to the
remaining outstanding Convertible Notes, which are not being registered as a
part of this Registration Statement.
3
RISK FACTORS
This offering and an investment in our securities involves a high degree of
risk. Investors should consider each of the risks and uncertainties described in
this section, in the "Recent Events" section, and all of the other information
in this prospectus before deciding to invest in our Common Stock. Our business,
financial condition and results of operations could be severely harmed by any of
the following risks. The trading price of our Common Stock could decline if any
of these risks and uncertainties develop into actual events. Investors may lose
all or part of the money paid to buy our common stock.
Refer to "Recent Events - Agreement to Sell All of the Assets of Our Subsidiary,
SendTec, Inc.," for risk factors relating to the SendTec asset sale and the
disposition of the SendTec business.
RISKS RELATING TO OUR BUSINESS GENERALLY
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
We have engaged certain financial advisors to assist the Company in raising
capital through private placement of equity securities or alternatively in
selling either part or all of the Company's businesses or assets. We currently
have no access to credit facilities with traditional third party lenders and
there can be no assurance that we would be able to raise any such capital or
sell any of our businesses or assets. In addition, any financing that could be
obtained would likely significantly dilute existing stockholders.
We do not presently believe that cash on hand and cash flow generated internally
by the Company will be adequate to fund the operation of our businesses and the
implementation of our current VoIP business plan beyond a short period of time.
We received a report from our independent accountants, relating to our December
31, 2004 audited financial statements containing an explanatory paragraph
stating that our recurring losses from operations and our accumulated deficit
raise substantial doubts about our ability to continue as a going concern. We
believe that the funding received in connection with the E&C Capital
Partnerships' Note Purchase Agreement (total of $4.0 million of secured demand
convertible notes - See Note 16, "Subsequent Events," of the Notes to
Consolidated Financial Statements), and assuming that no demand for payment is
made by the Noteholders, provides the Company with temporary short-term
liquidity to operate its businesses while it seeks to raise sufficient
additional capital, which may involve the potential sale of one or more of the
Company's subsidiaries, including SendTec. On September 6, 2005, the Company
failed to make the principal and interest payments due on the $1.0 million
promissory note issued in connection with the SendTec acquisition, and is
currently in default under the terms of the promissory note.
On August 10, 2005, we entered into a definitive agreement to sell the business
and substantially all of the net assets of our SendTec marketing services
subsidiary to RelationServe Media, Inc. ("RelationServe"). See Note 16,
"Subsequent Events," of the Notes to Consolidated Financial Statements for
further details. If we are not successful in consummating the RelationServe
asset sale or in entering into another financing, sale, or business transaction
that otherwise infuses sufficient additional cash resources into the Company by
no later than sometime during the fourth quarter of 2005, we believe that the
Company will no longer be able to continue the implementation of its current
VoIP business plan. In this event, we also believe the Company will continue to
not be able to pay its current financial obligations on a timely basis,
including paying the overdue principal and interest on the aforementioned $1.0
million promissory note. As a result, it is likely that we would be required to
either temporarily suspend or permanently shutdown the operation of our VoIP
telephony services business. Additionally, in such event, management believes
that it may also be required to revise the business plan of some or all of its
other business segments and/or further implement company-wide cost-reduction
programs. There can be no assurance that the Company would be successful in
implementing such revised business plans and effectively restructuring its
businesses so that the Company would have the ability to continue to operate as
a going concern in the future.
Although the E&C Capital Partnerships' secured demand convertible notes (the
"Notes") are owned by certain entities which are controlled by our Chairman, if
any of such entities were to make demand for payment of the Notes, absent
additional financing, we do not have the financial resources to honor such
payment. Inasmuch as substantially all of the assets of the Company and its
subsidiaries secure the Notes, in connection with any resulting proceeding to
collect the indebtedness relating to the Notes, the Noteholders could seize and
sell the assets of the Company and its subsidiaries, any or all of which would
have a material adverse effect on the Company and its operations.
4
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO CONTINUE TO INCUR LOSSES.
Since our inception, we have incurred net losses in each quarter, except the
fourth quarter of 2002 where we had net income of approximately $17,000. We
expect that we will continue to incur net losses for the foreseeable future. We
had net losses of approximately $24.3 million and $11.0 million for the years
ended December 31, 2004 and 2003, respectively, and approximately $10.4 million
for the first six months of 2005. The principal causes of our losses are likely
to continue to be:
o costs resulting from the operation of our businesses;
o costs relating to entering new business lines;
o failure to generate sufficient revenue; and
o selling, general and administrative expenses.
Although we have restructured our businesses, we still expect to continue to
incur losses as we continue to develop our VoIP telephony services business and
while we explore a number of strategic alternatives for our businesses,
including continuing to operate the businesses, selling certain businesses or
assets, or acquiring or developing additional businesses or complementary
products.
OUR ENTRY INTO NEW LINES OF BUSINESS, AS WELL AS POTENTIAL FUTURE ACQUISITIONS,
JOINT VENTURES OR STRATEGIC TRANSACTIONS ENTAILS NUMEROUS RISKS AND
UNCERTAINTIES.
We have entered into new business lines, VoIP telephony services, marketing
services and Internet services. In November 2002, we acquired certain VoIP
assets from an entrepreneur in exchange for 1,750,000 warrants to purchase our
Common Stock. On May 28, 2003, we acquired Direct Partner Telecom, Inc. ("DPT"),
an international licensed telecommunications carrier then engaged in the
purchase and resale of telecommunication services over the Internet. On
September 1, 2004, we acquired SendTec, Inc. ("SendTec"), a direct response
marketing services and technology company. On May 9, 2005, we acquired
Tralliance Corporation ("Tralliance"), an Internet related business venture.
Tralliance was recently awarded the contract to operate as the registry for the
".travel" top-level domain by the Internet Corporation for Assigned Names and
Numbers. Although highly dependent upon our obtaining additional capital, we may
also enter into new or different lines of business, as determined by management
and our Board of Directors. Our acquisitions, as well as any future acquisitions
or joint ventures could result, and in some instances have resulted in numerous
risks and uncertainties, including:
o potentially dilutive issuances of equity securities, which may be issued at
the time of the transaction or in the future if certain performance or other
criteria are met or not met, as the case may be. These securities may be freely
tradable in the public market or subject to registration rights which could
require us to publicly register a large amount of our Common Stock, which could
have a material adverse effect on our stock price;
o diversion of management's attention and resources from our existing
businesses;
o significant write-offs if we determine that the business acquisition does not
fit or perform up to expectations;
o the incurrence of debt and contingent liabilities or impairment charges
related to goodwill and other long-lived assets;
o difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
o regulatory and tax risks relating to the new or acquired business;
o the risks of entering geographic and business markets in which we have no or
limited prior experience;
o the risk that the acquired business will not perform as expected; and
o material decreases in short-term or long-term liquidity.
5
OUR NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED.
As of December 31, 2004, we had net operating loss carryforwards potentially
available for U.S. and foreign tax purposes of approximately $162 million. These
carryforwards expire through 2024. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to various
significant changes in our ownership interests, as defined in the Internal
Revenue Code of 1986, as amended, commencing in August 1997 through our most
recent issuance of convertible notes in July 2005, and assuming conversion of
such notes, we may have substantially limited or eliminated the availability of
our net operating loss carryforwards. There can be no assurance that we will be
able to utilize any net operating loss carryforwards in the future.
WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF GOODWILL AND/OR INTANGIBLE
ASSETS ON OUR BALANCE SHEET.
Our acquisition of SendTec has resulted in the recording of a significant amount
of goodwill and intangible assets on our balance sheet. The goodwill was
recorded because the fair value of the net assets acquired was less than the
purchase price. If the proposed sale of our SendTec business to RelationServe is
not consummated, we may not ultimately realize the full value of the goodwill
and/or intangible assets. As such, we evaluate on a regular basis whether events
and circumstances indicate that some or all of the carrying value of goodwill
and/or intangible assets are no longer recoverable, in which case we would write
off the unrecoverable portion as a charge to our earnings.
WE DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE
INTERNET.
Our marketing services business, VoIP telephony services business, Internet
services business and computer games businesses are substantially dependent upon
the continued growth in the general use of the Internet. Internet and electronic
commerce growth may be inhibited for a number of reasons, including:
o inadequate network infrastructure;
o security and authentication concerns;
o inadequate quality and availability of cost-effective, high-speed service;
o general economic and business downturns; and
o catastrophic events, including war and terrorism.
As web usage grows, the Internet infrastructure may not be able to support the
demands placed on it by this growth or its performance and reliability may
decline. Websites have experienced interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays frequently occur in the future, web
usage, as well as usage of our services, could grow more slowly or decline.
Also, the Internet's commercial viability may be significantly hampered due to:
o delays in the development or adoption of new operating and technical standards
and performance improvements required to handle increased levels of activity;
o increased government regulation;
o potential governmental taxation of such services; and
o insufficient availability of telecommunications services which could result in
slower response times and adversely affect usage of the Internet.
WE MAY FACE INCREASED GOVERNMENT REGULATION, TAXATION AND LEGAL UNCERTAINTIES IN
OUR INDUSTRY, WHICH COULD HARM OUR BUSINESS.
There are an increasing number of federal, state, local and foreign laws and
regulations pertaining to the Internet and telecommunications. In addition, a
number of federal, state, local and foreign legislative and regulatory proposals
are under consideration. Laws or regulations have been and may continue to be
adopted with respect to the Internet relating to, among other things, fees and
taxation of VoIP telephony services, liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts and
other communications, consumer protection, public safety issues like enhanced
911 emergency service ("E911"), the Communications Assistance for Law
Enforcement Act ("CALEA"), the provision of online payment services, broadband
residential Internet access, and the characteristics and quality of products and
services.
6
Changes in tax laws relating to electronic commerce could materially affect our
business, prospects and financial condition. One or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction companies that engage in electronic commerce. A successful
assertion by one or more states or foreign countries that we should collect
sales or other taxes on services could result in substantial tax liabilities for
past sales, decrease our ability to compete with traditional telephony, and
otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to
electronic commerce. However, a number of states, as well as the U.S. Congress,
have been considering various initiatives that could limit or supersede the
Supreme Court's position regarding sales and use taxes on electronic commerce.
If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect sales and use taxes. The imposition by state and local
governments of various taxes upon electronic commerce could create
administrative burdens for us and could adversely affect our VoIP business
operations, and ultimately our financial condition, operating results and future
prospects.
Regardless of the type of state tax imposed, the threshold issue involving state
taxation of any transaction is always whether sufficient nexus, or contact,
exists between the taxing entity and the taxpayer or the transaction to which
the tax is being applied. The concept of nexus is constantly changing and no
bright line exists that would sufficiently alert a business as to whether it is
subject to tax in a specific jurisdiction. All states which have attempted to
tax Internet access or online services have done so by asserting that the sale
of such telecommunications services, information services, data processing
services or other type of transaction is subject to tax in that particular
state.
A handful of states impose taxes on computer services, data processing services,
information services and other similar types of services. Some of these states
have asserted that Internet access and/or online information services are
subject to these taxes.
Most states have telecommunications sales or gross receipts taxes imposed on
interstate calls or transmissions of data. A sizable minority tax only
intrastate calls. Although these taxes were enacted long before the birth of
electronic commerce and VoIP, several states have asserted that Internet access
and/or online information services are subject to these taxes.
For example, in the 2005 Florida legislative session, Florida incorporated into
the tax imposed by Chapter 202, Florida Statutes, (the Communications Services
Tax) language which establishes tax nexus in Florida for VoIP. The Florida
legislature inserted this language to protect the scope of the tax base for the
Communications Services Tax. The language could have the effect of imposing the
Communications Services Tax on VoIP services not based in the state of Florida.
The Florida legislature borrowed the language that it used to amend the Florida
Statute from the national Streamlined Sales Tax Project. This project is being
touted by many states as a proposed tax simplification plan. If adopted by other
states, the language included in the Florida law could have a far reaching
effect in many states in the United States.
Moreover, the applicability to the Internet of existing laws governing issues
such as intellectual property ownership and infringement, copyright, trademark,
trade secret, obscenity, libel, employment and personal privacy is uncertain and
developing. It is not clear how existing laws governing issues such as property
ownership, sales and other taxes, libel, and personal privacy apply to the
Internet and electronic commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease the
growth in the use of the Internet or VoIP telephony services, may impose
additional burdens on electronic commerce or may alter how we do business. This
could decrease the demand for our existing or proposed services, increase our
cost of doing business, increase the costs of products sold through the Internet
or otherwise have a material adverse effect on our business, plans, prospects,
results of operations and financial condition.
Our ability to offer VoIP services outside the U.S. is also subject to the local
regulatory environment, which may be complicated and often uncertain. Regulatory
treatment of Internet telephony outside the United States varies from country to
country.
7
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our websites and underlying technology, as
well as certain assets relating to our VoIP and direct response marketing
businesses and other opportunities we are investigating, as proprietary and
attempt to protect them by relying on intellectual property laws and
restrictions on disclosure. We also generally enter into confidentiality
agreements with our employees and consultants. In connection with our license
agreements with third parties, we generally seek to control access to and
distribution of our technology and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information without authorization or to develop similar
technology independently. Thus, we cannot assure you that the steps taken by us
will prevent misappropriation or infringement of our proprietary information,
which could have an adverse effect on our business. In addition, our competitors
may independently develop similar technology, duplicate our products, or design
around our intellectual property rights.
We pursue the registration of our trademarks in the United States and, in some
cases, internationally. We are also seeking patent protection for certain VoIP
and direct response marketing assets which we acquired or which we have
developed. However, effective intellectual property protection may not be
available in every country in which our services are distributed or made
available through the Internet. Policing unauthorized use of our proprietary
information is difficult. Legal standards relating to the validity,
enforceability and scope of protection of proprietary rights in Internet related
businesses are also uncertain and still evolving. We cannot assure you about the
future viability or value of any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. However, we may not have sufficient funds or personnel to adequately
litigate or otherwise protect our rights. Furthermore, we cannot assure you that
our business activities and product offerings will not infringe upon the
proprietary rights of others, or that other parties will not assert infringement
claims against us, including claims related to providing hyperlinks to websites
operated by third parties or providing advertising on a keyword basis that links
a specific search term entered by a user to the appearance of a particular
advertisement. Moreover, from time to time, third parties have asserted and may
in the future assert claims of alleged infringement by us of their intellectual
property rights. Any litigation claims or counterclaims could impair our
business because they could:
o be time-consuming;
o result in significant costs;
o subject us to significant liability for damages;
o result in invalidation of our proprietary rights;
o divert management's attention;
o cause product release delays; or
o require us to redesign our products or require us to enter into royalty or
licensing agreements that may not be available on terms acceptable to us, or at
all.
We license from third parties various technologies incorporated into our
products, networks and sites. We cannot assure you that these third-party
technology licenses will continue to be available to us on commercially
reasonable terms. Additionally, we cannot assure you that the third parties from
which we license our technology will be able to defend our proprietary rights
successfully against claims of infringement. As a result, our inability to
obtain any of these technology licenses could result in delays or reductions in
the introduction of new products and services or could adversely affect the
performance of our existing products and services until equivalent technology
can be identified, licensed and integrated.
The regulation of domain names in the United States and in foreign countries may
change. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names, any or all of which may dilute the strength of our names. We may not
acquire or maintain our domain names in all of the countries in which our
websites may be accessed, or for any or all of the top-level domain names that
may be introduced. The relationship between regulations governing domain names
and laws protecting proprietary rights is unclear. Therefore, we may not be able
to prevent third parties from acquiring domain names that infringe or otherwise
decrease the value of our trademarks and other proprietary rights.
8
WE MAY BE UNSUCCESSFUL IN ESTABLISHING AND MAINTAINING BRAND AWARENESS; BRAND
IDENTITY IS CRITICAL TO OUR COMPANY.
Our success in the markets in which we operate will depend on our ability to
create and maintain brand awareness for our product offerings. This has in some
cases required, and may continue to require, a significant amount of capital to
allow us to market our products and establish brand recognition and customer
loyalty. Many of our competitors are larger than us and have substantially
greater financial resources. Additionally, many of our competitors have already
established their brand identity. We can offer no assurances that we will be
successful in establishing awareness of our brands allowing us to compete
effectively in our targeted markets.
If we fail to promote and maintain our various brands or our businesses' brand
values are diluted, our businesses, operating results, financial condition, and
our ability to attract buyers for any of our businesses could be materially
adversely affected. The importance of brand recognition will continue to
increase because low barriers of entry to the industries in which we operate may
result in an increased number of direct competitors. To promote our brands, we
may be required to continue to increase our financial commitment to creating and
maintaining brand awareness. We may not generate a corresponding increase in
revenue to justify these costs.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE.
Due to our significant change in operations, including the entry into new lines
of business, our historical quarterly operating results are not necessarily
reflective of future results. The factors that will cause our quarterly
operating results to fluctuate in the future include:
o acquisitions of new businesses or sales of our businesses or assets;
o changes in the number of sales or technical employees;
o the level of traffic on our websites;
o the overall demand for Internet telephony services, print, television, radio
and Internet advertising and electronic commerce;
o the addition or loss of VoIP customers, clients of our marketing services
business, advertisers of our computer games businesses, subscribers to our
magazines, and ".travel" registered users;
o overall usage and acceptance of the Internet;
o seasonal trends in advertising and electronic commerce sales and member usage
in our businesses;
o other costs relating to the maintenance of our operations;
o the restructuring of our business;
o failure to generate significant revenues and profit margins from new products
and services; and
o competition from others providing services similar to ours.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT. OUR
INEXPERIENCE IN THE VOIP TELEPHONY BUSINESS AND INTERNET SERVICES BUSINESS WILL
MAKE FINANCIAL FORECASTING EVEN MORE DIFFICULT.
We have a limited operating history for you to use in evaluating our prospects
and us. Our prospects should be considered in light of the risks encountered by
companies operating in new and rapidly evolving markets like ours. We may not
successfully address these risks. For example, we may not be able to:
o maintain or increase levels of user traffic on our e-commerce websites;
o attract customers to our VoIP telephony service;
9
o adequately forecast anticipated customer purchase and usage of our retail VoIP
products;
o maintain or increase advertising revenue for our magazines;
o maintain or increase direct response marketing services revenue;
o generate sufficient ".travel" registered users;
o adapt to meet changes in our markets and competitive developments; and
o identify, attract, retain and motivate qualified personnel.
OUR MANAGEMENT TEAM IS INEXPERIENCED IN THE MANAGEMENT OF A LARGE OPERATING
COMPANY.
Only our Chairman has had experience managing a large operating company.
Accordingly, we cannot assure you that:
o our key employees will be able to work together effectively as a team;
o we will be able to retain the remaining members of our management team;
o we will be able to hire, train and effectively manage our employee base;
o our systems, procedures or controls will be adequate to support our
operations; and
o our management will be able to achieve the rapid execution necessary to fully
exploit the market opportunity for our products and services.
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract, retain and
motivate highly qualified technical expertise and managerial personnel necessary
to operate our businesses. We may need to give retention bonuses and stock
incentives to certain employees to keep them, which can be costly to us. The
loss of the services of members of our management team or other key personnel
could harm our business. Our future success depends to a significant extent on
the continued service of key management, client service, product development,
sales and technical personnel. We do not maintain key person life insurance on
any of our executive officers and do not intend to purchase any in the future.
Although we generally enter into non-competition agreements with our key
employees, our business could be harmed if one or more of our officers or key
employees decided to join a competitor or otherwise compete with us.
We may be unable to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. Wages for managerial and technical employees
are increasing and are expected to continue to increase in the future. We have
from time to time in the past experienced, and could continue to experience in
the future if we need to hire any additional personnel, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. Also, we may
have difficulty attracting qualified employees to work in the geographically
remote location in Vermont of Chips & Bits, Inc. and Strategy Plus, Inc. If we
were unable to attract and retain the technical and managerial personnel
necessary to support and grow our businesses, our businesses would likely be
materially and adversely affected.
OUR OFFICERS, INCLUDING OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND PRESIDENT
HAVE OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH
SOME OF OUR DIRECTORS; ALL OF OUR DIRECTORS ARE EMPLOYEES OR STOCKHOLDERS OF THE
COMPANY OR AFFILIATES OF OUR LARGEST STOCKHOLDER.
Because our Chairman and Chief Executive Officer, Mr. Michael Egan, is an
officer or director of other companies, we have to compete for his time. Mr.
Egan became our Chief Executive Officer effective June 1, 2002. Mr. Egan is also
the controlling investor of Dancing Bear Investments, Inc., an entity controlled
by Mr. Egan, which is our largest stockholder. Mr. Egan has not committed to
devote any specific percentage of his business time with us. Accordingly, we
compete with Dancing Bear Investments, Inc. and Mr. Egan's other related
entities for his time. Our President, Treasurer and Chief Financial Officer and
Director, Mr. Edward A. Cespedes, is also an officer or director of other
companies. Accordingly, we must compete for his time. Mr. Cespedes is an officer
or director of various privately held entities and is also affiliated with
Dancing Bear Investments, Inc.
10
Our Vice President of Finance and Director, Ms. Robin Lebowitz is also
affiliated with Dancing Bear Investments, Inc. She is also an officer or
director of other companies or entities controlled by Mr. Egan and Mr. Cespedes.
Due to the relationships with his related entities, Mr. Egan will have an
inherent conflict of interest in making any decision related to transactions
between the related entities and us. Furthermore, the Company's Board of
Directors presently is comprised entirely of individuals which are employees of
theglobe, and therefore are not "independent." We intend to review related party
transactions in the future on a case-by-case basis.
WE RELY ON THIRD PARTY OUTSOURCED HOSTING FACILITIES OVER WHICH WE HAVE LIMITED
CONTROL.
Our principal servers are located in Florida and New York primarily at third
party outsourced hosting facilities. Our operations depend on the ability to
protect our systems against damage from unexpected events, including fire, power
loss, water damage, telecommunications failures and vandalism. Any disruption in
our Internet access could have a material adverse effect on us. In addition,
computer viruses, electronic break-ins or other similar disruptive problems
could also materially adversely affect our businesses. Our reputation,
theglobe.com brand and the brands of our individual businesses could be
materially and adversely affected by any problems experienced by our sites or
our supporting VoIP network. We may not have insurance to adequately compensate
us for any losses that may occur due to any failures or interruptions in our
systems. We do not presently have any secondary off-site systems or a formal
disaster recovery plan.
HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY BREACHES
COULD HARM OUR BUSINESS.
Consumer and supplier confidence in our businesses depends on maintaining
relevant security features. Substantial or ongoing security breaches on our
systems or other Internet-based systems could significantly harm our business.
We incur substantial expenses protecting against and remedying security
breaches. Security breaches also could damage our reputation and expose us to a
risk of loss or litigation. Experienced programmers or "hackers" have
successfully penetrated our systems and we expect that these attempts will
continue to occur from time to time. Because a hacker who is able to penetrate
our network security could misappropriate proprietary or confidential
information (including customer billing information) or cause interruptions in
our products and services, we may have to expend significant capital and
resources to protect against or to alleviate problems caused by these hackers.
Additionally, we may not have a timely remedy against a hacker who is able to
penetrate our network security. Such security breaches could materially
adversely affect our company. In addition, the transmission of computer viruses
resulting from hackers or otherwise could expose us to significant liability.
Our insurance may not be adequate to reimburse us for losses caused by security
breaches. We also face risks associated with security breaches affecting third
parties with whom we have relationships.
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED
OVER THE INTERNET.
Users may access content on our websites or the websites of our distribution
partners or other third parties through website links or other means, and they
may download content and subsequently transmit this content to others over the
Internet. This could result in claims against us based on a variety of theories,
including defamation, obscenity, negligence, copyright infringement, trademark
infringement or the wrongful actions of third parties. Other theories may be
brought based on the nature, publication and distribution of our content or
based on errors or false or misleading information provided on our websites.
Claims have been brought against online services in the past and we have
received inquiries from third parties regarding these matters. Such claims could
be material in the future.
WE MAY BE EXPOSED TO LIABILITY FOR PRODUCTS OR SERVICES SOLD OVER THE INTERNET,
INCLUDING PRODUCTS AND SERVICES SOLD BY OTHERS.
We enter into agreements with commerce partners and sponsors under which, in
some cases, we are entitled to receive a share of revenue from the purchase of
goods and services through direct links from our sites. We sell products
directly to consumers which may expose us to additional legal risks, regulations
by local, state, federal and foreign authorities and potential liabilities to
consumers of these products and services, even if we do not ourselves provide
these products or services. We cannot assure you that any indemnification that
may be provided to us in some of these agreements with these parties will be
adequate. Even if these claims do not result in our liability, we could incur
significant costs in investigating and defending against these claims. The
imposition of potential liability for information carried on or disseminated
through our systems could require us to implement measures to reduce our
exposure to liability. Those measures may require the expenditure of substantial
resources and limit the attractiveness of our services. Additionally, our
insurance policies may not cover all potential liabilities to which we are
exposed.
11
WE ARE A PARTY TO LITIGATION MATTERS THAT MAY SUBJECT US TO SIGNIFICANT
LIABILITY AND BE TIME CONSUMING AND EXPENSIVE.
We are currently a party to securities class action litigation. At this time we
cannot reasonably estimate the range of any loss or damages resulting from this
lawsuit due to uncertainty regarding the ultimate outcome. The defense of this
litigation may be expensive and divert management's attention from day-to-day
operations. An adverse outcome in this litigation could materially and adversely
affect our results of operations and financial position and may utilize a
significant portion of our cash resources.
WE MAY NOT BE ABLE TO IMPLEMENT SECTION 404 OF THE SARBANES-OXLEY ACT ON A
TIMELY BASIS.
The SEC, as directed by Section 404 of The Sarbanes-Oxley Act, adopted rules
generally requiring each public company to include a report of management on the
company's internal controls over financial reporting in its annual report on
Form 10-K that contains an assessment by management of the effectiveness of the
company's internal controls over financial reporting. In addition, the company's
independent registered public accounting firm must attest to and report on
management's assessment of the effectiveness of the company's internal controls
over financial reporting. This requirement will first apply to our annual report
on Form 10-K for the fiscal year ending December 31, 2007.
We are currently at the beginning stages of developing our Section 404
implementation plan. We have in the past discovered, and may in the future
discover, areas of our internal controls that need improvement. How companies
should be implementing these new requirements including internal control reforms
to comply with Section 404's requirements, and how independent auditors will
apply these requirements and test companies' internal controls, is still
reasonably uncertain.
We expect that we will need to hire and/or engage additional personnel and incur
incremental costs in order to complete the work required by Section 404. There
can be no assurance that we will be able to complete our Section 404 plan on a
timely basis. The Company's liquidity position in 2005 and 2006 may also
negatively impact our ability to adequately fund our Section 404 efforts.
Even if we timely complete our Section 404 plan, we may not be able to conclude
that our internal controls over financial reporting are effective, or in the
event that we conclude that our internal controls are effective, our independent
accountants may disagree with our assessment and may issue a report that is
qualified. This could subject the Company to regulatory scrutiny and a loss of
public confidence in our internal controls. In addition, any failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could harm the Company's operating results or cause the
Company to fail to meet its reporting obligations.
RISKS RELATING TO OUR VOIP TELEPHONY BUSINESS
WE ARE UNABLE TO PREDICT THE VOLUME OF USAGE AND OUR CAPACITY NEEDS FOR OUR VOIP
BUSINESS; DISADVANTAGEOUS CONTRACTS HAVE REDUCED OUR OPERATING MARGINS AND
ADVERSELY AFFECTED OUR LIQUIDITY AND FINANCIAL CONDITION.
We have entered into a number of agreements (generally for terms of one year,
with the terms of several agreements extending to three to five years) for
leased communications transmission capacity and data center facilities with
various carriers and other third parties. The minimum amounts payable under
these agreements and the underlying current capacity of our VoIP network greatly
exceeds our current estimates of customer demand and usage for the foreseeable
future. We are currently negotiating to reduce the amounts payable during 2005
under these network-related agreements. Although we were successful in recently
terminating substantially all of the minimum usage requirement commitments for
which we were previously obligated under certain of our carrier agreements,
there can be no assurance that we will be able to further reduce our
network-related contractual commitments. If we are not successful in
significantly reducing such commitments, our liquidity and financial condition
could be further materially and adversely impacted.
12
THE VOIP MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE WILL NEED TO
DEPEND ON NEW PRODUCT INTRODUCTIONS AND INNOVATIONS IN ORDER TO ESTABLISH,
MAINTAIN AND GROW OUR BUSINESS.
VoIP is an emerging market that is characterized by rapid changes in customer
requirements, frequent introductions of new and enhanced products, and
continuing and rapid technological advances. To enter and compete successfully
in this emerging market, we must continually design, develop and sell new and
enhanced VoIP products and services that provide increasingly higher levels of
performance and reliability at lower costs. These new and enhanced products must
take advantage of technological advancements and changes, and respond to new
customer requirements. Our success in designing, developing and selling such
products and services will depend on a variety of factors, including:
o access to sufficient capital to complete our development efforts;
o the identification of market demand for new products;
o the determination of appropriate product inventory levels;
o product and feature selection;
o timely implementation of product design and development;
o product performance;
o cost-effectiveness of products under development;
o securing effective sources of equipment supply; and
o success of promotional efforts.
Additionally, we may also be required to collaborate with third parties to
develop our products and may not be able to do so on a timely and cost-effective
basis, if at all. If we are unable, due to resource constraints or technological
or other reasons, to develop and introduce new or enhanced products in a timely
manner or if such new or enhanced products do not achieve sufficient market
acceptance, our operating results will suffer and our business will not grow.
OUR ABILITY AND PLANS TO PROVIDE TELECOMMUNICATIONS SERVICES AT ATTRACTIVE RATES
ARISE IN LARGE PART FROM THE FACT THAT VOIP SERVICES ARE NOT CURRENTLY SUBJECT
TO THE SAME REGULATION AS TRADITIONAL TELEPHONY.
Because their services are not currently regulated to the same extent as
traditional telephony, some VoIP providers, such as the Company, can currently
avoid paying certain charges that traditional telephone companies must pay. Many
traditional telephone operators are lobbying the Federal Communications
Commission (FCC) and the states to regulate VoIP on the same or similar basis as
traditional telephone services. The FCC and several states are examining this
issue.
If the FCC or any state determines to regulate VoIP, they may impose surcharges,
taxes or additional regulations upon providers of VoIP. These surcharges could
include access charges payable to local exchange carriers to carry and terminate
traffic, contributions to the Universal Service Fund or other charges.
Regulations requiring compliance with the CALEA could also place a significant
financial burden on us. The imposition of any such additional fees, charges,
taxes, licenses and regulations on VoIP services could materially increase our
costs and may reduce or eliminate the competitive pricing advantage we seek to
enjoy.
RECENT REGULATORY ENACTMENTS BY THE FCC WILL REQUIRE US TO PROVIDE ENHANCED
EMERGENCY 911 DIALING CAPABILITIES TO OUR SUBSCRIBERS AS PART OF OUR STANDARD
VOIP SERVICES AND TO COMPLY WITH CERTAIN NOTIFICATION REQUIREMENTS WITH RESPECT
TO SUCH CAPABILITIES. THESE REQUIREMENTS WILL RESULT IN INCREASED COSTS AND
RISKS ASSOCIATED WITH OUR DELIVERY OF OUR VOIP SERVICES, INCLUDING A POSSIBLE
REQUIRED DISCONTINUATION OF SUCH SERVICES WITH RESPECT TO A POTENTIALLY MATERIAL
PORTION OF OUR SUBSCRIBERS.
13
On June 3, 2005, the FCC released the "IP-Enabled Services and E911 Requirements
for IP-Enabled Service Providers, First Report and Order and Notice of Proposed
Rulemaking" (the "E911 Order"). The E911 Order requires, among other things,
that VoIP service providers that interconnect to the public switched telephone
network ("Interconnected VoIP Providers") supply enhanced emergency 911 dialing
capabilities ("E911") to their subscribers no later than 120 days from the
effective date of the E911 Order. The effective date of the E911 Order is July
29, 2005. As part of such E911 capabilities, Interconnected VoIP Providers are
required to mimic the 911 emergency calling capabilities offered by traditional
landline phone companies. Specifically, all Interconnected VoIP Providers must
deliver 911 calls to the appropriate local public safety answering point
("PSAP"), along with call back number and location, where the PSAP is able to
receive that information. Such E911 capabilities must be included in the basic
service offering of the Interconnected VoIP Providers; it cannot be an optional
or extra feature. The PSAP delivery obligation, along with call back number and
location information must be provided regardless of whether the service is
"fixed" or "nomadic." User registration of location is permissible initially,
although the FCC is committed to an advanced form of E911 that will determine
user location without user intervention, one of the topics of the further Notice
of Proposed Rulemaking to be released.
Additionally, the E911 Order required that, by July 29, 2005 (the effective date
of the E911 Order), each Interconnected VoIP Provider must have: (1)
specifically advised every new and existing subscriber, prominently and in plain
language, of the circumstances under which the E911 capabilities service may not
be available through its VoIP services or may in some way be limited by
comparison to traditional landline E911 services; (2) obtained and kept a record
of affirmative acknowledgement from all subscribers, both new and existing, of
having received and understood the advisory described in the preceding item (1);
and (3) distributed to its existing subscribers warning stickers or other
appropriate labels warning subscribers if E911 service may be limited or not
available and instructing the subscriber to place them on or near the equipment
used in conjunction with the provider's VoIP services. We have complied with the
requirements set forth in the preceding items (1) and (3). However, despite
engaging in significant efforts, as of August 10, 2005, we have received the
affirmative acknowledgements required by the preceding item (2) from less than
15% of our VoIP subscribers.
On July 26, 2005, noting the efforts made by Interconnected VoIP Providers to
comply with the E911 Order's affirmative acknowledgement requirement, the
Enforcement Bureau of the FCC (the "EB") released a Public Notice communicating
that, until August 30, 2005, it would not initiate enforcement action against
any Interconnected VoIP Provider with respect to such affirmative
acknowledgement requirement on the condition that the provider file a detailed
report with the FCC by August 10, 2005. The report must set forth certain
specific information relating to the provider's efforts to comply with the
requirements of the E911 Order. Furthermore, the EB stated its expectation that
that if an Interconnected VoIP Provider has not received such affirmative
acknowledgements from 100% of its existing subscribers by August 29, 2005, then
the Interconnected VoIP Provider would disconnect, no later than August 30,
2005, all subscribers from whom it has not received such acknowledgements. On
August 26, 2005, the EB released another Public Notice communicating that it
would not, until September 28, 2005, initiate enforcement action regarding the
affirmative acknowledgement requirement against those providers that: (1)
previously filed reports on or before August 10, 2005 in accordance with the
July 26 Public Notice; and (2) file two separate updated reports with the FCC by
September 1, 2005 and September 22, 2005 containing certain additional required
information relating to such provider's compliance efforts with respect to the
E911 Order's requirements. The EB further stated in the second Public Notice its
expectation that, during the additional period of time afforded by the
extension, all Interconnected VoIP Providers that qualified for such extension
would continue to use all means available to them to obtain affirmative
acknowledgements from all of their subscribers.
Our VoIP services that are subject to the E911 Order account for a material
portion of our current VoIP revenues. However, our current VoIP net revenues are
not substantial and for the six months ended June 30, 2005 were approximately
$163,000. Although we continue to engage in efforts to comply with all of the
requirements of the E911 Order, we may not be able to provide the E911
capabilities required by the E911 Order to all of our subscribers by 120 days
after the effective date thereof. Moreover, although we have complied with the
reporting requirements of the EB's July 26, 2005 and August 26, 2005 Public
Notices and, accordingly, the Company qualifies for the September 28, 2005
extension, as of August 10, 2005, we have received the required affirmative
acknowledgements from less than 15% of our VoIP subscribers. Therefore, while we
continue to be engaged in efforts to obtain affirmative acknowledgements from
all of our VoIP subscribers, we expect that we will not receive such affirmative
acknowledgements from 100% of our VoIP subscribers by the September 28, 2005
deadline. Moreover, we can provide no assurances as to whether the percentage of
our VoIP subscribers that provide us with the required affirmative
acknowledgements will rise significantly or at all. If we are unable to comply
with one or more of the requirements of the E911 Order, including the
requirement to obtain affirmative acknowledgements from 100% of our VoIP
subscribers by the FCC's stated deadlines, the EB may bring an enforcement
action against the Company and/or we may need to suspend delivery of our VoIP
services to those of our customers with respect to which we have not complied
with the requirements of the E911 Order. Although the EB has thus far granted
two extensions to its deadline for obtaining affirmative acknowledgements from
100% of Interconnected VoIP Providers' subscribers, the EB may or may not
provide additional extensions to such deadline and the Company may or may not
qualify for such extensions. If we are required by the EB to suspend VoIP
service to a material portion of our VoIP subscribers for a material period of
time due to our non-compliance with the E911 Order, our revenues and operating
results from our current VoIP operations will deteriorate.
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Even assuming our full compliance with the E911 Order, such compliance and our
efforts to achieve such compliance, will increase our cost of doing business in
the VoIP arena and may adversely affect our ability to deliver our VoIP
telephony services to new and existing customers in all geographic regions.
THE IP DIALTONE SERVICE PROVIDED BY US IS ONLY AS RELIABLE AS EACH OF OUR
CUSTOMERS' RESPECTIVE CUSTOMER PREMISES EQUIPMENT (CPE) AND UNDERLYING BROADBAND
DATA CONNECTION.
Our ability to provide our VoIP services to our customers, including the E911
capabilities required by the E911 Order, are directly dependent on each of our
customers' respective CPE and underlying broadband data connection. We do not
provide broadband data connection service and in many cases do not provide the
CPE used by our customers. Accordingly, we may not be able to control our
ability to provide the E911 capabilities required by the E911 Order and which
our customers may expect as part of our VoIP offerings. Any interruption in our
delivery of E911, whether or not as a result of any factors under our control,
could expose us to potential litigation from our customers or enforcement or
other actions from the FCC or other government regulators. Such exposure could
potentially result in our incurring costs and expenses associated with
addressing such litigation and/or actions and in potential liability for the
Company, any or all of which could negatively impact our reputation, results of
operations and our ability to generate additional revenues.
THE INTERNET TELEPHONY BUSINESS IS HIGHLY COMPETITIVE AND ALSO COMPETES WITH
TRADITIONAL AND CELLULAR TELEPHONY PROVIDERS.
The long distance telephony market and the Internet telephony market are highly
competitive. There are several large and numerous small competitors and we
expect to face continuing competition based on price and service offerings from
existing competitors and new market entrants in the future. The principal
competitive factors in our market include price, quality of service, breadth of
geographic presence, customer service, reliability, network size and capacity,
and the availability of enhanced communications services. Our competitors
include major and emerging telecommunications carriers in the U.S. and abroad.
Financial difficulties in the past several years of many telecommunications
providers are rapidly altering the number, identity and competitiveness of the
marketplace. Many of the competitors for our current and planned VoIP service
offerings have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we have. As
a result, certain of these competitors may be able to adopt more aggressive
pricing policies which could hinder our ability to market our voice services.
During the past several years, a number of companies have introduced services
that make Internet telephony or voice services over the Internet available to
businesses and consumers. All major telecommunications companies, including
entities like AT&T, Verizon, Sprint and MCI, either presently or potentially
compete or can compete directly with us. Other Internet telephony service
providers, such as Vonage, Net2Phone and deltathree, also focus on a retail
customer base and compete with us. These companies may offer the kinds of voice
services we currently offer or intend to offer in the future. In addition,
companies currently in related markets have begun to provide voice over the
Internet services or adapt their products to enable voice over the Internet
services. These related companies may potentially migrate into the Internet
telephony market as direct competitors. A number of cable operators have also
begun to offer VoIP telephony services via cable modems which provide access to
the Internet. These companies, which tend to be large entities with substantial
resources, generally have large budgets available for research and development,
and therefore may further enhance the quality and acceptance of the transmission
of voice over the Internet. We also compete with cellular telephony providers.
PRICING PRESSURES AND INCREASING USE OF VOIP TECHNOLOGY MAY LESSEN OUR
COMPETITIVE PRICING ADVANTAGE.
One of the main competitive advantages of our current and planned VoIP service
offerings is the ability to provide discounted local and long distance telephony
services by taking advantage of cost savings achieved by carrying voice traffic
employing VoIP technology, as compared to carrying calls over traditional
networks. In recent years, the price of telephone service has fallen. The price
of telephone service may continue to fall for various reasons, including the
adoption of VoIP technology by other communications carriers. Many carriers have
adopted pricing plans such that the rates that they charge are not always
substantially higher than the rates that VoIP providers charge for similar
service. In addition, other providers of long distance services are offering
unlimited or nearly unlimited use of some of their services for increasingly
lower monthly rates.
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IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL PARTNERSHIPS FOR VOIP PRODUCTS, WE
MAY NOT BE ABLE TO SUCCESSFULLY MARKET ANY OF OUR VOIP PRODUCTS.
Our success in the VoIP market is partly dependent on our ability to forge
marketing, engineering and carrier partnerships. VoIP communication systems are
extremely complex and no single company possesses all the technology components
needed to build a complete end to end solution. We will likely need to enter
into partnerships to augment our development programs and to assist us in
marketing complete solutions to our targeted customers. We may not be able to
develop such partnerships in the course of our operations and product
development. Even if we do establish the necessary partnerships, we may not be
able to adequately capitalize on these partnerships to aid in the success of our
business.
THE FAILURE OF VOIP NETWORKS TO MEET THE RELIABILITY AND QUALITY STANDARDS
REQUIRED FOR VOICE COMMUNICATIONS COULD RENDER OUR PRODUCTS OBSOLETE.
Circuit-switched telephony networks feature very high reliability, with a
guaranteed quality of service. In addition, such networks have imperceptible
delay and consistently satisfactory audio quality. VoIP networks will not be a
viable alternative to traditional circuit switched telephony unless they can
provide reliability and quality consistent with these standards.
ONLINE CREDIT CARD FRAUD CAN HARM OUR BUSINESS.
The sale of our products and services over the Internet exposes us to credit
card fraud risks. Many of our products and services, including our VoIP
services, can be ordered or established (in the case of new accounts) over the
Internet using a major credit card for payment. As is prevalent in retail
telecommunications and Internet services industries, we are exposed to the risk
that some of these credit card accounts are stolen or otherwise fraudulently
obtained. In general, we are not able to recover fraudulent credit card charges
from such accounts. In addition to the loss of revenue from such fraudulent
credit card use, we also remain liable to third parties whose products or
services are engaged by us (such as termination fees due telecommunications
providers) in connection with the services which we provide. In addition,
depending upon the level of credit card fraud we experience, we may become
ineligible to accept the credit cards of certain issuers. We are currently
authorized to accept Discover, together with Visa and MasterCard (which are both
covered by a single merchant agreement with us). Visa/MasterCard constitutes the
primary credit card used by our VoIP customers. The loss of eligibility for
acceptance of Visa/MasterCard could significantly and adversely affect our
business. During 2004, we updated our fraud controls and will attempt to manage
fraud risks through our internal controls and our monitoring and blocking
systems. If those efforts are not successful, fraud could cause our revenue to
decline significantly and our business, financial condition and results of
operations to be materially and adversely affected.
RISKS RELATED TO OUR MARKETING SERVICES BUSINESS
Should we consummate the proposed sale of our SendTec business to RelationServe
as planned, the risks and uncertainties described in this section and in the
"Recent Events" section as related directly or indirectly to our SendTec
business would no longer exist. However, there can be no assurance that the
proposed sale of our SendTec business to RelationServe will be consummated as
planned.
ANY DECREASE IN DEMAND FOR OUR ONLINE MARKETING SERVICES COULD SUBSTANTIALLY
REDUCE OUR REVENUES.
A substantial portion of our revenue is derived from Internet advertising. We
expect that online advertising will continue to account for a substantial
portion of our revenue in the future. However, our revenue from Internet
advertising may decrease in the future for a number of reasons, including the
following:
o the rate at which Internet users click on advertisements or take action in
response to an advertisement has always been low and could decline as the volume
of Internet advertising increases;
o Internet users can install software programs that allow them to prevent
advertisements from appearing on their screens or block the receipt of emails;
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o advertisers may prefer an alternative Internet advertising format, product or
service which we might not offer at that time; and
o we may be unable to make the transition to new Internet advertising formats
preferred by advertisers.
IF OUR PRICING MODELS ARE NOT ACCEPTED BY OUR ADVERTISER CLIENTS, WE COULD LOSE
CLIENTS AND OUR REVENUE COULD DECLINE.
Most of our services are offered to advertisers based on cost-per-action or
cost-per-click pricing models, under which advertisers only pay us if we provide
the results they specify. These results-based pricing models differ from the
fixed-rate pricing model used by many Internet advertising companies, under
which the fee is based on the number of times the advertisement is shown without
regard to effectiveness. Our ability to generate significant revenue from
advertisers will depend, in part, on our ability to demonstrate the
effectiveness of our primary pricing models to advertisers, who may be more
accustomed to a fixed-rate pricing model.
Furthermore, intense competition among websites and other Internet advertising
providers has led to the development of a number of alternative pricing models
for Internet advertising. The proliferation of multiple pricing alternatives may
confuse advertisers and make it more difficult for them to differentiate among
these alternatives. In addition, it is possible that new pricing models may be
developed and gain widespread acceptance that are not compatible with our
business model or our technology. These alternatives, and the likelihood that
additional pricing models will be introduced, make it difficult for us to
project the levels of advertising revenue or the margins that we, or the
Internet advertising industry in general, will realize in the future. If
advertisers do not understand the benefits of our pricing models, then the
market for our services may decline or develop more slowly than we expect, which
may limit our ability to grow our revenue or cause our revenue to decline.
ONLINE TRANSACTIONS FROM WHICH WE DERIVE OUR REVENUE ARE SUBJECT TO VALIDATION.
OUR REVENUE AND MARGINS COULD BE REDUCED AS A RESULT OF INVALID TRANSACTIONS.
SendTec derives revenue from its online cost-per-action advertising business
based on the number of actions it generates for clients each month. SendTec
determines the number of actions generated for clients based on digital tracking
technology and reports from its clients detailing the number of actions received
by them. SendTec relies upon its digital tracking methods and final reports from
its clients to determine the number of actions for which it pays its publisher
network. On average SendTec pays its network of publishers between 30 days and
60 days from the end of the month. In certain situations, SendTec may be
required to reimburse its clients for actions which SendTec has previously
verified as valid actions but the client has subsequently determined to be
invalid due to fraud or other factors. In these instances, SendTec generally may
not have recourse against the publishers in its network that have generated the
actions and therefore SendTec may not be able to recover any portion of the
reimbursements it makes to its clients from its publishers.
WE DEPEND ON A LIMITED NUMBER OF CLIENTS FOR A SIGNIFICANT PERCENTAGE OF OUR
REVENUE AND THE LOSS OF ONE OR MORE OF THESE CLIENTS COULD CAUSE OUR REVENUE TO
DECLINE.
The results of SendTec's operations have been included in our consolidated
results since date of acquisition, September 1, 2004. During the first half of
2005, two customers of SendTec accounted for approximately 45% of SendTec's
total net revenue. For the four months ended December 31, 2004, two customers of
SendTec accounted for approximately 52% of SendTec's total net revenue. We
believe that a limited number of clients will continue to be the source of a
substantial portion of our revenue for the foreseeable future. Key factors in
maintaining our relationships with these clients include our performance on
individual campaigns, the strength of our professional reputation and the
relationships of our key executives with client personnel. To the extent that
our performance does not meet client expectations, or our reputation or
relationships with one or more major clients are impaired, our revenues could
decline and our operating results could be adversely affected. During the second
quarter of 2004, one of SendTec's major customers acquired a business that
competes with SendTec. This acquisition, other similar acquisitions, or general
business consolidation within the marketing services industry could also cause
our revenue and operating results to decline and adversely affect SendTec's
business.
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ANY LIMITATION ON OUR USE OF DATA DERIVED FROM OUR CLIENTS' ADVERTISING
CAMPAIGNS COULD SIGNIFICANTLY DIMINISH THE VALUE OF OUR SERVICES AND CAUSE US TO
LOSE CLIENTS AND REVENUE.
When an individual visits our clients' websites, we use technologies, including
cookies and web beacons, to collect information such as the user's IP address,
advertisements delivered by us that have been viewed by the user and responses
by the user to such advertisements. We aggregate and analyze this information to
determine the placement of advertisements across our affiliate network of
advertising space. Although the data we collect from campaigns of different
clients, once aggregated, are not identifiable, our clients might decide not to
allow us to collect some or all of this data or might limit our use of this
data. Any limitation on our ability to use such data could make it more
difficult for us to deliver online marketing programs that meet client demands.
In addition, although our contracts generally permit us to aggregate data from
advertising campaigns, our clients might nonetheless request that we discontinue
using data obtained from their campaigns that have already been aggregated with
other clients' campaign data. It would be difficult, if not impossible, to
comply with these requests, and such requests could result in significant
expenditures of resources. Interruptions, failures or defects in our data
collection, mining and storage systems, as well as privacy concerns regarding
the collection of user data, could also limit our ability to aggregate and
analyze data from our clients' advertising campaigns. If that happens, we may
lose clients and our revenue may decline.
IF THE MARKET FOR INTERNET ADVERTISING FAILS TO CONTINUE TO DEVELOP, OUR REVENUE
AND OUR OPERATING RESULTS COULD BE HARMED.
Our future success is highly dependent on the continued use and growth of the
Internet as an advertising medium. The Internet advertising market is relatively
new and rapidly evolving, and it uses different measurements than traditional
media to gauge its effectiveness. As a result, demand for and market acceptance
of Internet advertising services is uncertain. Many of our current or potential
advertiser clients have little or no experience using the Internet for
advertising purposes and have allocated only limited portions of their
advertising budgets to the Internet. The adoption of Internet advertising,
particularly by those entities that have historically relied upon traditional
media for advertising, requires the acceptance of a new way of conducting
business, exchanging information, measuring success and evaluating new
advertising products and services. Such clients may find Internet advertising to
be less effective for promoting their products and services than traditional
advertising media. We cannot assure you that the market for Internet advertising
will continue to grow or become sustainable. If the market for Internet
advertising fails to continue to develop or develops more slowly than we expect,
our revenue and business could be harmed.
WE DEPEND ON ONLINE PUBLISHERS FOR ADVERTISING SPACE TO DELIVER OUR CLIENTS'
ADVERTISING CAMPAIGNS AND ANY DECLINE IN THE SUPPLY OF ADVERTISING SPACE
AVAILABLE THROUGH OUR NETWORK COULD CAUSE OUR REVENUE TO DECLINE.
The websites, search engines and email publishers that sell or venture their
advertising space to or with us are not bound by long-term contracts that ensure
us a consistent supply of advertising space, which we refer to as our inventory.
We generate a significant portion of our revenue from the advertising inventory
provided by a limited number of publishers. In most instances, publishers can
change the amount of inventory they make available to us at any time, as well as
the price at which they make it available. In addition, publishers may place
significant restrictions on our use of our advertising inventory. These
restrictions may prohibit advertisements from specific advertisers or specific
industries, or restrict the use of certain creative content or format. If a
publisher decides not to make inventory available to us, or decides to increase
the price, or places significant restrictions on the use of such inventory, we
may not be able to replace this with inventory from other publishers that
satisfy our requirements in a timely and cost-effective manner. If this happens,
our revenue could decline or our cost of acquiring inventory may increase.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO OBTAIN SUFFICIENT ADVERTISING
INVENTORY THAT MEETS OUR PRICING AND QUALITY REQUIREMENTS.
Our growth depends on our ability to effectively manage and expand the volume of
our inventory of advertising space. To attract new advertisers, we must increase
our supply of inventory that meets our performance and pricing requirements. Our
ability to purchase or venture sufficient quantities of suitable advertising
inventory will depend on various factors, some of which are beyond our control.
These factors include:
o our ability to offer publishers a competitive price for our inventory;
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o our ability to estimate the quality of the available inventory; and
o our ability to efficiently manage our existing advertising inventory.
In addition, the number of competing Internet advertising networks that purchase
advertising inventory from websites, search engine and email publishers
continues to increase. We cannot assure you that we will be able to purchase or
venture advertising inventory that meets our performance, price and quality
requirements, and if we cannot do so, our ability to generate revenue could be
limited.
ANY LIMITATION ON OUR ABILITY TO POST ADVERTISEMENTS THROUGHOUT OUR NETWORK OF
ADVERTISING SPACE COULD HARM OUR BUSINESS.
We execute advertising programs for clients primarily by posting advertisements,
which we refer to as ad delivery, on our affiliate network of advertising space.
Our business could suffer from a variety of factors that could limit or reduce
our ability to post advertisements across our affiliate network, including:
o technological changes that render the delivery of our advertisements obsolete
or incompatible with the operating systems of consumers and/or the systems of
online publishers;
o lawsuits or injunctions based on claims that our ad delivery methodologies
violate the proprietary rights of other parties; and
o interruptions, failures or defects in our ad delivery and tracking systems.
CONSOLIDATION OF ONLINE PUBLISHERS MAY IMPAIR OUR ABILITY TO PROVIDE MARKETING
SERVICES, ACQUIRE ADVERTISING INVENTORY AT FAVORABLE RATES AND COLLECT CAMPAIGN
DATA.
The consolidation of Internet advertising networks, web portals, search engines
and other online publishers could eventually lead to a concentration of
desirable advertising inventory on a very small number of networks and large
websites. Such concentration could:
o increase our costs if these publishers use their greater bargaining power to
increase rates for advertising inventory; and
o impair our ability to provide marketing services if these publishers prevent
us from distributing our clients' advertising campaigns on their websites or if
they adopt ad delivery systems that are not compatible with our ad delivery
methodologies.
OUR BUSINESS COULD BE HARMED IF THE USE OF TRACKING TECHNOLOGY IS RESTRICTED OR
BECOMES SUBJECT TO NEW REGULATION.
In conjunction with the delivery of advertisements to websites, we typically
place small files of information, commonly known as cookies, on an Internet
user's hard drive, generally without the user's knowledge or consent. Cookie
information is passed to us through an Internet user's browser software. We use
cookies to collect information regarding the advertisements we deliver to
Internet users and their interaction with these advertisements. We use this
information to identify Internet users who have received our advertisements in
the past and to monitor and prevent potentially fraudulent activity. In
addition, our technology uses this information to monitor the performance of
ongoing advertising campaigns and plan future campaigns.
Some Internet commentators and privacy advocates have proposed limiting or
eliminating the use of cookies and other Internet tracking technologies, and
legislation has been introduced in some jurisdictions to regulate Internet
tracking technologies. The European Union has already adopted a directive
requiring that when cookies are used, the user must be informed and offered an
opportunity to opt-out of the cookies' use. If there is a further reduction or
limitation in the use of Internet tracking technologies such as cookies:
o we may have to replace or re-engineer our tracking technology, which could
require significant amounts of our time and resources, may not be completed in
time to avoid losing clients or advertising inventory, and may not be
commercially or technically feasible;
o we may have to develop or acquire other technology to prevent fraud; and
19
o we may become subject to costly and time-consuming litigation or
investigations due to our use of cookie technology or other technologies
designed to collect Internet usage information.
Any one or more of these occurrences could result in increased costs, require us
to change our business practices or divert management's attention.
IF WE OR OUR ADVERTISER OR PUBLISHER CLIENTS FAIL TO COMPLY WITH REGULATIONS
GOVERNING CONSUMER PRIVACY, WE COULD FACE SUBSTANTIAL COSTS AND OUR BUSINESS
COULD BE HARMED.
Our collection, maintenance and sharing of information regarding Internet users
could result in lawsuits or government inquiries. These actions may include
those related to U.S. federal and state legislation or European Union directives
limiting the ability of companies like ours to collect, receive and use
information regarding Internet users. Litigation and regulatory inquiries are
often expensive and time-consuming and their outcome is uncertain. Any
involvement by us in any of these matters could require us to:
o spend significant amounts on legal defense;
o divert the attention of senior management from other aspects of our business;
o defer or cancel new product launches as a result of these claims or
proceedings; and
o make changes to our present and planned products or services.
Further, we cannot assure you that our advertiser and publisher clients are
currently in compliance, or will remain in compliance, with their own privacy
policies, regulations governing consumer privacy or other applicable legal
requirements. We may be held liable if our clients use our technology or the
data we collect on their behalf in a manner that is not in compliance with
applicable laws or regulations or their own stated privacy standards.
WE MAY BE LIABLE FOR CONTENT IN THE ADVERTISEMENTS WE DELIVER FOR OUR CLIENTS.
We may be liable to third parties for content in the advertisements we deliver
if the artwork, text or other content involved violates copyrights, trademarks
or other intellectual property rights of third parties or if the content is
defamatory. Although we generally receive warranties from our advertisers that
they have the right to use any copyrights, trademarks or other intellectual
property included in an advertisement and are normally indemnified by the
advertisers, a third party may still file a claim against us. Any claims by
third parties against us could be time-consuming, could result in costly
litigation and adverse judgments and could require us to change our business.
MISAPPROPRIATION OF CONFIDENTIAL INFORMATION HELD BY US COULD CAUSE US TO LOSE
CLIENTS OR INCUR LIABILITY.
We retain highly confidential information on behalf of our clients in our
systems and databases. Although we maintain security features in our systems,
our operations may be susceptible to hacker interception, break-ins and other
disruptions. These disruptions may jeopardize the security of information stored
in and transmitted through our systems. If confidential information is
compromised, we could be subject to lawsuits by the affected clients or Internet
users, which could damage our reputation among our current and potential
clients, require significant expenditures of capital and other resources and
cause us to lose business and revenues.
WE FACE INTENSE AND GROWING COMPETITION, WHICH COULD RESULT IN PRICE REDUCTIONS,
REDUCED OPERATING MARGINS AND LOSS OF MARKET SHARE.
The direct response advertising market is highly competitive. If we fail to
compete effectively against other advertising service companies, we could lose
clients or advertising inventory and our revenues could decline. We expect
competition to continue to increase because there are no significant barriers to
entry.
Many current and potential competitors have advantages over us, such as longer
operating histories, greater name recognition, larger client bases, greater
access to advertising space on high-traffic websites and significantly greater
financial, technical and marketing resources. In addition, existing or future
competitors may develop or offer services that provide significant performance,
price, creative or other advantages over those offered by us.
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Current and potential competitors may establish cooperative relationships among
themselves or with third parties to increase the ability of their products and
services to address the needs of our clients and prospective clients. As a
result, it is possible that new competitors may emerge and rapidly acquire
significant market share.
If we fail to compete successfully, we could have difficulties attracting and
retaining advertising clients or advertising inventory, which may decrease our
revenues and adversely affect our operating results. Increased competition may
also result in price reductions and reduced operating income.
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CLIENTS.
Our clients typically hire us on a project-by-project basis or on an annual
contractual relationship. Moreover, our clients generally have the right to
terminate their relationships with us without penalty and with relatively short
or no notice. Once a project is completed we cannot be assured that a client
will engage us for further services. From time to time, highly successful
engagements have ended because our client was acquired and the new owners
decided not to retain us. A client that generates substantial revenue for us in
one period may not be a substantial source of revenue in a subsequent period. We
expect a relatively high level of client concentration to continue, but not
necessarily involve the same clients from period to period. The termination of
our business relationships with any of our significant clients, or a material
reduction in the use of our services by any of our significant clients, could
adversely affect our future financial performance.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR EXPENSES COULD INCREASE AND OUR
MANAGEMENT'S TIME AND ATTENTION COULD BE DIVERTED.
As we continue to increase the scope of our operations, we will need an
effective planning and management process to implement our business plan
successfully in the rapidly evolving Internet advertising market. Our business,
results of operations and financial condition will be substantially harmed if we
are unable to manage our expanding operations effectively. We plan to continue
to expand the sales and marketing, customer support and research and development
organizations. Growth may place a significant strain on our management systems
and resources. We will likely need to continue to improve our financial and
managerial controls and our reporting systems and procedures. In addition, we
will need to expand, train and manage our work force. Our failure to manage our
growth effectively could increase our expenses and divert management's time and
attention.
IF WE FAIL TO ESTABLISH, MAINTAIN AND EXPAND OUR TECHNOLOGY BUSINESS AND
MARKETING ALLIANCES AND PARTNERSHIPS, OUR ABILITY TO GROW OUR MARKETING SERVICES
BUSINESS COULD BE LIMITED.
In order to grow our technology business, we must generate, retain and
strengthen successful business and marketing alliances with advertising
agencies. We depend, and expect to continue to depend, on our business and
marketing alliances, which are companies with which we have written or oral
agreements to work together to provide services to our clients and to refer
business from their clients and customers to us. If companies with which we have
business and marketing alliances do not refer their clients and customers to us
to perform their online campaign and message management, our revenue and results
of operations may be severely harmed.
RISKS RELATING TO OUR COMPUTER GAMES BUSINESS
THE MARKET SITUATION CONTINUES TO BE A CHALLENGE FOR CHIPS & BITS DUE TO
ADVANCES IN CONSOLE AND ONLINE GAMES, WHICH HAVE LOWER MARGINS AND TRADITIONALLY
LESS SALES LOYALTY TO CHIPS & BITS.
Our subsidiary, Chips & Bits depends on major releases in the Personal Computer
(PC) market for the majority of sales and profits. Advances in technology and
the game industry's increased focus on console and online game platforms, such
as Xbox, PlayStation and GameCube, has dramatically reduced the number of major
PC releases, which resulted in significant declines in revenues and gross
margins for Chips & Bits. Because of the large installed base of personal
computers, revenue and gross margin percentages may fluctuate with changes in
the PC game market. However, we are unable to predict when, if ever, there will
be a turnaround in the PC game market, or if we will be successful in adequately
increasing our future sales of non-PC games.
21
WE HAVE HISTORICALLY RELIED SUBSTANTIALLY ON ADVERTISING REVENUES, WHICH COULD
DECLINE IN THE FUTURE.
We historically derived a substantial portion of our revenues from the sale of
advertisements, primarily in our Computer Games Magazine. Our games business
model and our ability to generate sufficient future levels of print and online
advertising revenues are highly dependent on the print circulation of our
magazines, as well as the amount of traffic on our websites and our ability to
properly monetize website traffic. Print and online advertising market volumes
have declined in the past and may decline in the future, which could have a
material adverse effect on us. Many advertisers have been experiencing financial
difficulties which could further negatively impact our revenues and our ability
to collect our receivables. For these reasons, we cannot assure you that our
current advertisers will continue to purchase advertisements from our computer
games businesses.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE ELECTRONIC COMMERCE
MARKETPLACE.
The games marketplace has become increasingly competitive due to acquisitions,
strategic partnerships and the continued consolidation of a previously
fragmented industry. In addition, an increasing number of major retailers have
increased the selection of video games offered by both their traditional "bricks
and mortar" locations and their online commerce sites, resulting in increased
competition. Our Chips & Bits subsidiary may not be able to compete successfully
in this highly competitive marketplace.
We also face many uncertainties, which may affect our ability to generate
electronic commerce revenues and profits, including:
o our ability to obtain new customers at a reasonable cost, retain existing
customers and encourage repeat purchases;
o the likelihood that both online and retail purchasing trends may rapidly
change;
o the level of product returns;
o merchandise shipping costs and delivery times;
o our ability to manage inventory levels;
o our ability to secure and maintain relationships with vendors; and
o the possibility that our vendors may sell their products through other sites.
Additionally, if use of the Internet for electronic commerce does not continue
to grow, our business and financial condition would be materially and adversely
affected.
INTENSE COMPETITION FOR ELECTRONIC COMMERCE REVENUES HAS RESULTED IN DOWNWARD
PRESSURE ON GROSS MARGINS.
Due to the ability of consumers to easily compare prices of similar products or
services on competing websites and consumers' potential preference for competing
website's user interface, gross margins for electronic commerce transactions,
which are narrower than for advertising businesses, may further narrow in the
future and, accordingly, our revenues and profits from electronic commerce
arrangements may be materially and adversely affected.
OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT LIABILITY CLAIMS
AGAINST US.
Consumers may sue us if any of the products that we sell are defective, fail to
perform properly or injure the user. Consumers are also increasingly seeking to
impose liability on game manufacturers and distributors based upon the content
of the games and the alleged affect of such content on behavior. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. As a result, any claims, whether or not successful,
could seriously damage our reputation and our business.
22
RISKS RELATING TO OUR INTERNET SERVICES BUSINESS
OUR CONTRACT TO SERVE AS THE REGISTRY FOR THE ".TRAVEL" TOP-LEVEL DOMAIN MAY BE
TERMINATED EARLY, WHICH WOULD LIKELY DO IRREPARABLE HARM TO OUR NEWLY DEVELOPING
INTERNET SERVICES BUSINESS.
Our contract with the Internet Corporation for Assigned Names and Numbers
("ICANN") to serve as the registry for the ".travel" top-level Internet domain
is for an initial term of ten years. Additionally, we have agreed to engage in
good faith negotiations at regular intervals throughout the term of our contract
(at least once every three years) regarding possible changes to the provisions
of the contract, including changes in the fees and payments that we are required
to make to ICANN. In the event that we materially and fundamentally breach the
contract and fail to cure such breach within thirty days of notice, ICANN has
the right to immediately terminate our contract.
Should our ".travel" registry contract be terminated early by ICANN, we could
suffer a loss of prestige that could force us to permanently shutdown our
Internet services business. Further, we could be held liable to pay additional
fees or financial damages to ICANN or certain of our related subcontractors and,
in certain limited circumstances, to pay punitive, exemplary or other damages to
ICANN. Any such developments could have a material adverse effect on our
financial condition and results of operations.
OUR BUSINESS COULD BE MATERIALLY HARMED IF IN THE FUTURE THE ADMINISTRATION AND
OPERATION OF THE INTERNET NO LONGER RELIES UPON THE EXISTING DOMAIN NAME SYSTEM.
The domain name registration industry continues to develop and adapt to changing
technology. This development may include changes in the administration or
operation of the Internet, including the creation and institution of alternate
systems for directing Internet traffic without the use of the existing domain
name system. The widespread acceptance of any alternative systems could
eliminate the need to register a domain name to establish an online presence and
could materially adversely affect our business, financial condition and results
of operations.
WE OUTSOURCE CERTAIN OPERATIONS WHICH EXPOSES US TO RISKS RELATED TO OUR THIRD
PARTY VENDORS.
We do not develop and maintain all of the products and services that we offer.
We offer most of our services to our customers through various third party
service providers engaged to perform these services on our behalf and also
outsource most of our operations to third parties. Accordingly, we are
dependent, in part, on the services of third party service providers, which may
raise concerns by our customers regarding our ability to control the services we
offer them if certain elements are managed by another company. In the event that
these service providers fail to maintain adequate levels of support, do not
provide high quality service, discontinue their lines of business, cease or
reduce operations or terminate their contracts with us, our business, operations
and customer relations may be impacted negatively and we may be required to
pursue replacement third party relationships, which we may not be able to obtain
on as favorable terms or at all. If a problem should arise with a provider,
transitioning services and data from one provider to another can often be a
complicated and time consuming process and we cannot assure that if we need to
switch from a provider we would be able to do so without significant
disruptions, or at all. If we were unable to complete a transition to a new
provider on a timely basis, or at all, we could be forced to either temporarily
or permanently discontinue certain services which may disrupt services to our
customers. Any failure to provide services would have a negative impact on our
revenue, profitability and financial condition and could materially harm our
Internet services business.
REGULATORY AND STATUTORY CHANGES COULD HARM OUR INTERNET SERVICES BUSINESS.
We cannot predict with any certainty the effect that new governmental or
regulatory policies, including changes in consumer privacy policies or industry
reaction to those policies, will have on our domain name registry business.
Additionally, ICANN's limited resources may seriously affect its ability to
carry out its mandate or could force ICANN to impose additional fees on
registries. Changes in governmental or regulatory statutes or policies could
cause decreases in future revenue and increases in future costs which could have
a material adverse effect on the development of our domain name registry
business.
23
RISKS RELATING TO OUR COMMON STOCK
THE VOLUME OF SHARES AVAILABLE FOR FUTURE SALE IN THE OPEN MARKET COULD DRIVE
DOWN THE PRICE OF OUR STOCK OR KEEP OUR STOCK PRICE FROM IMPROVING, EVEN IF OUR
FINANCIAL PERFORMANCE IMPROVES.
As of September 15, 2005, we had issued and outstanding approximately 199.3
million shares, of which approximately 57.3 million shares were freely tradable
over the public markets. There is limited trading volume in our shares and we
are now traded only in the over-the-counter market. On April 16, 2004, we filed
a registration statement, of which this prospectus is a part, relating to the
potential resale of up to approximately 131 million of our shares (including
approximately 27 million shares underlying outstanding warrants to acquire our
Common Stock). The registration statement became effective on May 11, 2004. As
part of the acquisition of SendTec, we issued an aggregate of approximately 35
million shares of our Common Stock. Pursuant to our contractual obligations, we
are obligated to file a registration statement relating to the potential resale
of these shares and to cause such registration statement to become effective on
or before September 1, 2005. We have not yet filed such a registration
statement. Because we have not filed and caused such registration statement to
become effective before September 1, 2005, we may be held liable for damages
suffered by holders of such stock. Upon registration all such shares will be
eligible for resale over the open market. Even if not registered, the shares
issued in the SendTec acquisition are eligible for resale over the public
markets pursuant to and subject to the limitations of Rule 144. If we
successfully redeem the majority of the shares issued as part of the SendTec
acquisition (or approximately 28,900,000 shares) in connection with the sale of
SendTec's business to RelationServe Media, Inc. (See Note 16, "Subsequent
Events," in the Notes to Consolidated Financial Statements), we would
substantially mitigate our risks related to our failure to timely register these
shares.
Sales of significant amounts of Common Stock in the public market in the future,
the perception that sales will occur or the registration of additional shares
pursuant to existing contractual obligations could materially and adversely
drive down the price of our stock. In addition, such factors could adversely
affect the ability of the market price of the Common Stock to increase even if
our business prospects were to improve. Substantially all of our stockholders
holding restricted securities, including shares issuable upon the exercise of
warrants or the conversion of the remaining outstanding Convertible Notes to
acquire our Common Stock (which are convertible into 68 million shares), have
registration rights under various conditions and will become available for
resale in the future.
In addition, as of June 30, 2005, there were outstanding options to purchase
approximately 20,302,000 shares of our Common Stock, which common shares become
eligible for sale in the public market from time to time depending on vesting
and the expiration of lock-up agreements. The shares issuable upon exercise of
these options are registered under the Securities Act and consequently, subject
to certain volume restrictions as to shares issuable to executive officers, will
be freely tradable.
In addition, as of September 15, 2005, we had issued and outstanding warrants to
acquire approximately 7,601,000 shares of our Common Stock. In addition, the
Company holds in escrow warrants to acquire up to 1,500,000 shares of Common
Stock, subject to release over approximately the next year (some of which may
accelerate under certain events) upon the attainment of certain performance
objectives and may issue warrants to acquire up to an additional 2,500,000
shares of Common Stock upon attainment of certain performance criteria related
to the SendTec acquisition. Many of the outstanding instruments representing the
warrants contain anti-dilution provisions pursuant to which the exercise prices
and number of shares issuable upon exercise may be adjusted.
OUR CHAIRMAN MAY CONTROL US.
After giving effect to the proxies to vote the shares of Common Stock granted by
five of the former shareholders of SendTec, Michael S. Egan, our Chairman and
Chief Executive Officer, beneficially owns or controls, directly or indirectly,
approximately 169.4 million shares of our Common Stock as of September 15, 2005,
which in the aggregate represents approximately 62% of the outstanding shares of
our Common Stock (treating as outstanding for this purpose the shares of Common
Stock issuable upon exercise and/or conversion of the options, secured demand
convertible promissory notes and warrants owned by Mr. Egan or his affiliates).
Accordingly, Mr. Egan will be able to exercise significant influence over, if
not control, any stockholder vote.
24
DELISTING OF OUR COMMON STOCK MAKES IT MORE DIFFICULT FOR INVESTORS TO SELL
SHARES. THIS MAY POTENTIALLY LEAD TO FUTURE MARKET DECLINES.
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or "OTCBB." As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of the securities. The delisting has made trading our
shares more difficult for investors, potentially leading to further declines in
share price and making it less likely our stock price will increase. It has also
made it more difficult for us to raise additional capital. We may also incur
additional costs under state blue-sky laws if we sell equity due to our
delisting.
OUR COMMON STOCK IS PRESENTLY SUBJECT TO THE "PENNY STOCK" RULES WHICH MAY MAKE
IT A LESS ATTRACTIVE INVESTMENT.
Since the trading price of our Common Stock is less than $5.00 per share,
trading in our Common Stock is also subject to the requirements of Rule 15g-9 of
the Exchange Act. Our Common Stock is also considered a penny stock under the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which
defines a penny stock, generally, as any equity security not traded on an
exchange or quoted on the Nasdaq SmallCap Market that has a market price of less
than $5.00 per share. Under Rule 15g-9, brokers who recommend our Common Stock
to persons who are not established customers and accredited investors, as
defined in the Exchange Act, must satisfy special sales practice requirements,
including requirements that they make an individualized written suitability
determination for the purchaser; and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosures in connection with any
trades involving a penny stock, including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated with that market. Such requirements may severely limit the
market liquidity of our Common Stock and the ability of purchasers of our equity
securities to sell their securities in the secondary market. For all of these
reasons, an investment in our equity securities may not be attractive to our
potential investors.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions of our charter, by-laws and stockholder rights plan and provisions of
applicable Delaware law may:
o have the effect of delaying, deferring or preventing a change in control of
our company;
o discourage bids of our Common Stock at a premium over the market price; or
o adversely affect the market price of, and the voting and other rights of the
holders of, our Common Stock.
Certain Delaware laws could have the effect of delaying, deterring or preventing
a change in control of our company. One of these laws prohibits us from engaging
in a business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder, unless various
conditions are met. In addition, provisions of our charter and by-laws, and the
significant amount of Common Stock held by our current executive officers,
directors and affiliates, could together have the effect of discouraging
potential takeover attempts or making it more difficult for stockholders to
change management. In addition, the employment contracts of our Chairman, CEO
and Vice President of Finance provide for substantial lump sum payments ranging
from 2 (for the Vice President) to 10 times (for each of the Chairman and CEO)
of their respective average combined salaries and bonuses (together with the
continuation of various benefits for extended periods) in the event of their
termination without cause or a termination by the executive for "good reason,"
which is conclusively presumed in the event of a "change-in-control" (as such
terms are defined in such agreements).
OUR STOCK PRICE IS VOLATILE AND MAY DECLINE.
The trading price of our Common Stock has been volatile and may continue to be
volatile in response to various factors, including:
o the performance and public acceptance of our new product lines;
o quarterly variations in our operating results;
o competitive announcements;
o sales of any of our businesses, including our sale of the SendTec business;
o the operating and stock price performance of other companies that investors
may deem comparable to us;
25
o news relating to trends in our markets; and
o entrance into new lines of business and acquisitions of businesses, including
our Tralliance acquisition.
In addition, with regard to our acquisition of Tralliance the trading price of
our Common Stock may decline if:
o integration of theglobe.com and the acquired company is unsuccessful or is
delayed;
o the combined company does not achieve the perceived benefits of the
acquisition as rapidly or to the extent anticipated by investors;
o the effect of the acquisition on the combined company's financial results or
condition is not consistent with the expectations of financial investors; or
o the dilution in shareholder ownership related to the issuance of shares of
theglobe.com's Common Stock in connection with the acquisition is perceived
negatively by investors.
The market price of our Common Stock could also decline as a result of
unforeseen factors related to the sale of the SendTec business or the Tralliance
acquisition. The stock market has experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet related companies, have been highly volatile. Our stock is also more
volatile due to the limited trading volume.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the
federal securities laws that relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology, such as "may," "will," "should," "could," "expect," "plan,"
"anticipate," "believe," "estimate," "project," "predict," "intend," "potential"
or "continue" or the negative of such terms or other comparable terminology,
although not all forward-looking statements contain such terms. In addition,
these forward-looking statements include, but are not limited to, statements
regarding:
o implementing our business plans;
o marketing and commercialization of our existing products and those
products under development;
o plans for future products and services and for enhancements of
existing products and services;
o plans for divestitures of certain businesses or assets, including
our SendTec business;
o our ability to implement cost-reduction programs;
o potential governmental regulation and taxation;
o the outcome of any pending litigation;
o our intellectual property;
o our estimates of future revenue and profitability;
o our estimates or expectations of continued losses;
o our expectations regarding future expenses, including cost of
revenue, product development, sales and marketing, and general and
administrative expenses;
o difficulty or inability to raise additional financing, if needed, on
terms acceptable to us;
o our estimates regarding our capital requirements and our needs for
additional financing;
o attracting and retaining customers and employees;
26
o rapid technological changes in our industry and relevant markets;
o sources of revenue and anticipated revenue;
o plans for future acquisitions and entering new lines of business;
o competition in our market; and
o our ability to continue to operate as a going concern.
These statements are only predictions. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. We
are not required to and do not intend to update any of the forward-looking
statements after the date of this prospectus or to conform these statements to
actual results. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur. Actual
results, levels of activity, performance, achievements and events may vary
significantly from those implied by the forward-looking statements. A
description of risks that could cause our results to vary appears under "Risk
Factors" and elsewhere in this prospectus.
In this prospectus, we refer to information regarding our potential markets and
other industry data. We believe that we have obtained this information from
reliable sources that customarily are relied upon by companies in our industry,
but we have not independently verified any of this information.
USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares of Common Stock by the
Selling Stockholders. The Company will only receive proceeds in the event the
Selling Stockholders exercise their warrants. We intend to use the proceeds from
the exercise of warrants for working capital and other general corporate
purposes.
DETERMINATION OF OFFERING PRICE
The shares of Common Stock will be sold at prevailing market prices at the time
of the sale or at negotiated prices by the Selling Stockholders.
SELLING STOCKHOLDERS
The following table sets forth certain information known to us with respect to
the beneficial ownership of the Company's Common Stock as of September 15, 2005
by the Selling Stockholders who may sell their Common Stock pursuant to this
prospectus. This information is based upon information originally provided by
each respective Selling Stockholder as of May 11, 2004, and Schedules 13D and
other public accounts filed with the Commission, as updated to September 15,
2005 based solely upon our review of our stockholders of record as of such date
based on information provided by the Company's stock registrar and transfer
agent.
The shares offered by this prospectus may be offered for sale from time to time
by the Selling Stockholders. Because the Selling Stockholders may offer all,
some or none of the shares pursuant to this prospectus, and because there are
currently no agreements, arrangements or understandings with respect to the sale
of any shares, no estimate can be given as to the number of shares that will be
held by the Selling Stockholders after the completion of this offering.
Accordingly, it is assumed that all the shares offered pursuant to this
prospectus are sold. No selling stockholder has, or within the past three years
has had, any position, office or other material relationship with us or any of
our predecessors or affiliates, except as noted.
The number of shares of Common Stock beneficially owned by the Selling
Stockholders includes the shares of Common Stock known by us to be beneficially
owned by the Selling Stockholders as of September 15, 2005. Except as otherwise
indicated, to our knowledge, the Selling Stockholders have sole voting and
investment power with respect to all shares beneficially owned by them, or with
respect to the shares underlying warrants, will have sole voting and investment
power at the time such shares are sold. The percentages shown in the table below
are based upon 199,329,666 shares of Common Stock outstanding as of September
15, 2005. The numbers shown in the column "Remaining Shares Being Offered"
include additional shares of Common Stock that may be issued to many of the
Selling Stockholders upon exercise of any warrant held by them.
27
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
Telestra Super Pty Ltd. (29) 360,000 360,000 - 360,000 - *
Wellington Management Portfolios (Dublin) 202,500 202,500 - 202,500 - *
- Global Smaller Companies Equity
Portfolio (29)
New Zealand Funds Management Limited (29) 300,000 300,000 - 300,000 - *
SEI Institutional Investments Trust, Small 1,350,000 1,350,000 - 1,350,000 - *
Cap Fund (29)
Seligman Portfolios, Inc., Seligman Global 33,750 33,750 - 33,750 - *
Smaller Companies Portfolio (29)
Australian Retirement Fund (29) 420,000 420,000 - 420,000 - *
Emergency Services Superannuation Board 285,000 285,000 - 285,000 - *
(29)
Retail Employees Superannuation Trust (29) 495,000 495,000 - 495,000 - *
SEI Institutional Investments Trust, Small 255,000 255,000 - 255,000 - *
Mid Cap Equity Fund (29)
Talvest Global Small Cap Fund (29) 345,000 345,000 - 345,000 - *
BC Telecom Pension Plan for Management and 75,000 75,000 - 75,000 - *
Exempt Employees (29)
J B Were Global Small Companies Pooled 1,425,000 1,425,000 - 1,425,000 - *
Fund (29)
SEI Institutional Managed Trust, Small Cap 1,575,000 1,575,000 - 1,575,000 - *
Growth Fund (29)
Seligman Global Fund Series, Inc., 900,000 900,000 - 900,000 - *
Seligman Global Smaller companies Fund (29)
TELUS Corporation Foreign Equity Active 165,000 165,000 - 165,000 - *
Pool (29)
British Columbia Investment Management 645,000 645,000 - 645,000 - *
Corporation (29)
The Dow Chemical Employees' Retirement 1,155,000 1,155,000 - 1,155,000 - *
Plan (29)
The Robert Wood Johnson Foundation (29) 1,425,000 1,425,000 - 1,425,000 - *
Laborers' District Council and 375,000 375,000 - 375,000 - *
Contractors' of Ohio Pension Fund (29)
Wellington Trust Company, National 1,800,000 1,800,000 - 1,800,000 - *
Association Multiple Collective Investment
Funds Trust, Emerging Companies Portfolio
(29)
28
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
Government of Singapore Investment Company 4,950,000 4,950,000 - 4,950,000 - *
Pte, Ltd. (29)
New York State Nurses Association Pension 780,000 780,000 - 780,000 - *
Plan (29)
Oregon Investment Council (29) 2,550,000 2,550,000 - 2,550,000 - *
Wellington Trust Company, National 1,950,000 1,950,000 - 1,950,000 - *
Association Multiple Common Trust Funds
Trust, Emerging Companies Portfolio (29)
Howard Hughes Medical Institute (29) 1,275,000 1,275,000 - 1,275,000 - *
Ohio Carpenters' Pension Fund (29) 405,000 405,000 - 405,000 - *
The Retirement Program Plan for Employees 1,050,000 1,050,000 - 1,050,000 - *
of Union Carbide Corporation (29)
The Maritime Life Discovery Fund (29) 585,000 585,000 - 585,000 - *
Proxmity Partners, LP 611,775 - - - - *
Proximity Fund LP 611,775 - - - - *
Gamma Opportunity Capital Partners LP 882,450 - - - - *
Enable Growth Partners 611,700 203,900 203,900 203,900 - *
Capital Ventures International 3,058,800 - - - - *
SF Capital Partners, Ltd. 3,211,800 173,500 - 173,500 - *
Longview Fund, LP 1,764,750 - - - - *
Longview Equity Fund, LP 2,084,550 - - - - *
Longview International Equity Fund, LP 694,800 - - - - *
Alpha Capital AG 1,764,750 1,577,250 - 1,577,250 - *
Manuel Senderos F 1,588,235 798,235 - 798,235 - *
Gruber & McBaine International 344,250 - - - - *
Jon D. Gruber & Linda W. Gruber 344,250 - - - - *
Lagunitas Partners LP 996,750 - - - - *
J. Patterson McBaine 150,000 - - - - *
Seneca Capital LP 520,500 173,500 173,500 173,500 - *
Seneca Capital International Ltd. 1,008,900 336,300 336,300 336,300 - *
Sergio Rosengaus Leizgold 150,000 150,000 - 150,000 - *
Carinthia Pte, Ltd. 1,614,707 1,574,707 - 1,574,707 - *
29
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
Mauricio Garduno 529,411 211,911 - 211,911 - *
Paul Tomasi 432,950 432,950 - 352,950 80,000 *
Garrett Pettingell (3) 106,618 44,118 - 44,118 - *
Idlewyld, LLC 337,956 337,956 - 337,956 - *
David Dohrmann 11,914 11,914 11,914 11,914 - *
William C. Begien 109,489 109,489 109,489 109,489 - *
Baruch & Shoshana Halpern, 540,641 540,641 - 540,641 - *
Huizenga Investments Limited Partnership 2,400,000 2,400,000 400,000 2,400,000 - *
(4)
Berard Holdings Limited Partnership 600,000 600,000 100,000 600,000 - *
Actarus Fund II, LLP (4) 1,380,000 430,000 230,000 430,000 - *
Stephan Paternot (4) 364,957 364,957 364,957 364,957 - *
Michael E. Maroone 240,000 40,000 40,000 40,000 - *
Henry C. Duques (4) 60,000 60,000 10,000 60,000 - *
Robert W. and Sarah M. Tuthill, BDE 96,425 96,425 14,000 84,000 12,425 *
Robert Emmett McTigue 60,000 60,000 10,000 60,000 - *
James A. Jordan, IRA 240,000 240,000 40,000 240,000 - *
Janet Jordan 136,000 136,000 20,000 120,000 16,000 *
Marjorie W. Egan 120,000 20,000 20,000 20,000 - *
Susan B. Segaul (5) 60,000 20,000 10,000 20,000 - *
Michael G. Moore 245,000 245,000 40,000 240,000 5,000 *
Celeste V. Allen (6) 120,000 120,000 20,000 120,000 - *
Rosalie V. Arthur (7) 70,002 70,002 10,000 60,000 10,002 *
Robert F. and Mary M. Dwors, JTROS 72,000 12,000 12,000 12,000 - *
Weezor I Limited Partnership 60,000 60,000 10,000 60,000 - *
Ron Castell 60,000 60,000 10,000 60,000 - *
James J. and Nancy W. Blosser, JTROS 60,000 60,000 10,000 60,000 - *
Ted and Carol Drum, JTROS 60,000 60,000 10,000 60,000 - *
William J. Gross 60,400 60,400 10,000 60,000 400 *
Thomas G. Egan III (8) 240,000 240,000 40,000 240,000 - *
John T. Mooney (9) 145,000 145,000 20,000 120,000 25,000 *
30
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
Grant J. and Eliza Egan Smith, JTROS (9) 60,000 60,000 10,000 60,000 - *
Kenneth and Jessica Beir, TBE (10) 168,125 168,125 20,000 120,000 48,125 *
Laurent F. Sidon (11) 381,000 381,000 40,000 240,000 141,000 *
Thomas First 120,000 20,000 20,000 20,000 - *
Revocable Living Trust of George E. 240,000 240,000 40,000 240,000 - *
Pittinos
Jan Vitrofsky (12) 24,000 4,000 4,000 4,000 - *
Kenneth and Marguerite Larsen, JTROS 240,000 240,000 40,000 240,000 - *
Charles P. and Linda H. Irwin, JTROS 60,000 10,000 10,000 10,000 - *
Macdonald and Juliet H. Clark, JTROS 120,000 120,000 20,000 120,000 - *
Daniel Walsh 24,000 24,000 4,000 24,000 - *
Michael J. Kennelty (13) 148,084 24,000 4,000 24,000 - *
Robert Giannini 60,000 60,000 10,000 60,000 - *
Stephen N. Lipton 170,000 170,000 20,000 120,000 50,000 *
John M. Pennekamp 72,000 12,000 12,000 12,000 - *
Michael and Joan Sher, TROS (14) 60,000 60,000 10,000 60,000 - *
Jack Paltani 120,000 120,000 20,000 120,000 - *
Albert R. Paonessa 60,000 60,000 10,000 60,000 - *
John A. Schneider 240,000 240,000 40,000 240,000 - *
Thomas W. Scott 240,000 240,000 40,000 240,000 - *
Gregory A. McLaughlin as trustee of the 480,000 80,000 80,000 80,000 - *
Tripp, Scott, Conklin & Smith, PA Profit
Sharing Plan fbo Norman D. Tripp
Tripperoo Family Limited Partnership 480,000 80,000 80,000 80,000 - *
Class AA Florida Limited Partnership
Tripp Scott P.A. Amended and Restated 180,000 180,000 30,000 180,000 - *
Profit Sharing Plan fbo Dennis Dustin Smith
Smith Trust 60,000 60,000 10,000 60,000 - *
Tripp Scott Conklin & Smith PSP fbo Garry 65,000 35,000 10,000 30,000 5,000 *
W. Johnson
Philip P. and Susan A. Smith, JTROS 240,000 240,000 40,000 240,000 - *
The Nantucket Irrevocable Trust (15) 1,200,000 1,200,000 200,000 1,200,000 - *
31
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
The Nantucket Irrevocable Trust 1,200,000 1,200,000 200,000 1,200,000 - *
David A. Mitchell 276,000 276,000 46,000 276,000 - *
Frank Fowler 96,000 96,000 16,000 96,000 - *
Charles A. Hinnant 120,000 120,000 20,000 120,000 - *
R.F. Decosimo 70,000 70,000 10,000 60,000 10,000 *
Eloise D. Robbins 230,000 230,000 30,000 180,000 50,000 *
Barbara N. and Walter D. Moore, Jr., JTWROS 60,000 10,000 10,000 10,000 - *
J. Melville Armstrong 60,000 60,000 10,000 60,000 - *
Joseph F. Decosimo 510,000 510,000 80,000 480,000 30,000 *
Rita F. Kerr 84,000 84,000 14,000 84,000 - *
W.A. Bryan Patten 1,325,000 1,325,000 200,000 1,200,000 125,000 *
Michael F. McGauley 250,000 250,000 20,000 120,000 130,000 *
Judith F. Stone 60,000 60,000 10,000 60,000 - *
Brenda G. McKenzie 240,000 40,000 40,000 40,000 - *
Creel Medical Service, Inc. Profit Sharing 60,000 60,000 10,000 60,000 - *
Trust
Joy W. Jones 60,000 60,000 10,000 60,000 - *
Lawrence Partners, LP 70,000 70,000 10,000 60,000 10,000 *
Lesslie W. Lee, IRA 60,000 60,000 10,000 60,000 - *
Brent S. Mills 60,000 60,000 10,000 60,000 - *
Stan Martynski Rollover IRA 65,000 15,000 10,000 10,000 5,000 *
Brent L. Norris, M.D. 60,000 60,000 10,000 60,000 - *
Thomas R. Northcott, IRA 60,000 60,000 10,000 60,000 - *
Patten & Patten, Inc. Profit Sharing Plan 120,000 120,000 20,000 120,000 - *
Patten & Patten, Inc. Profit Sharing fbo 180,000 180,000 30,000 180,000 - *
Frank M. Robbins, III
Jack Stocker 70,000 70,000 10,000 60,000 10,000 *
R. Alan Winger 60,000 10,000 10,000 10,000 - *
James L. Wolford 240,000 240,000 40,000 240,000 - *
Lawrence I. Young, M.D. IRA Rollover 60,000 60,000 10,000 60,000 - *
711 East Company 360,000 360,000 60,000 360,000 - *
32
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
Suntrust Bank, Chattanooga Trustee for 60,000 60,000 10,000 60,000 - *
Miller & Martin Profit Sharing Plan -
James M. Haley IV
Suntrust Bank, Chattanooga Trustee for 60,000 60,000 10,000 60,000 - *
Miller & Martin Profit Sharing Plan -
Lowry F. Kline, DIA
Suntrust Bank, Chattanooga Trustee for 60,000 60,000 10,000 60,000 - *
Miller & Martin Projet Sharing Plan -
Howard Levine
A-OK Supply Co. Employee Profit Sharing 60,000 60,000 10,000 60,000 - *
Plan
Charlie H. Armstrong & Barbara Mayer 70,000 20,000 10,000 10,000 10,000 *
Armstrong, JTWROS
Jean R. Bowden 60,000 60,000 10,000 60,000 - *
James L. Caldwell, Jr. 60,000 60,000 10,000 60,000 - *
Malcolm B. Daniell and Zella C. Daniell 120,000 120,000 20,000 120,000 - *
JTWROS
Eliot Family Limited Partnership 120,000 120,000 20,000 120,000 - *
George I. Haigler 48,000 8,000 8,000 8,000 - *
Julia Elizabeth Haigler-Baker 12,000 2,000 2,000 2,000 - *
Margaret Susan Haigler 12,000 2,000 2,000 2,000 - *
Ruth A. Liu 60,000 60,000 10,000 60,000 - *
T.E. Mynatt, Jr. 60,000 10,000 10,000 10,000 - *
Kathleen Cartter Patten 157,500 157,500 20,000 120,000 37,500 *
William Allen Bryan Patten 160,000 160,000 20,000 120,000 40,000 *
Fred Robinson 60,000 60,000 10,000 60,000 - *
Sarah Caldwell Patten 157,500 157,500 20,000 120,000 37,500 *
Michael A. Stoker 60,000 60,000 10,000 60,000 - *
W.A. Bryan Patten and Z. Cartter Patten, 340,000 340,000 40,000 240,000 100,000 *
III Trustees U/WZ. Cartter Patten, Jr. -
Sons Trust
Wayne E. Tipps 60,000 60,000 10,000 60,000 - *
Charles R. Adcock 60,000 10,000 10,000 10,000 - *
Douglas W. Curtis, IRA 60,000 60,000 10,000 60,000 - *
Fletcher Bright 240,000 240,000 40,000 240,000 - *
Robert W. Jones 60,000 60,000 10,000 60,000 - *
33
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
J. Nelson and Deanne W. Irvine, JTWROS 60,000 60,000 10,000 60,000 - *
Joel B. Clements, MD Rollover IRA 60,000 60,000 10,000 60,000 - *
C. Robert Clark Rollover IRA 60,000 60,000 10,000 60,000 - *
Donald A. Bodley Rollover IRA 60,000 60,000 10,000 60,000 - *
Richard E. Cormier Rollover IRA 60,000 60,000 10,000 60,000 - *
Linda T. Collins Rollover IRA 60,000 60,000 10,000 60,000 - *
John W. Moore, IRA 60,000 60,000 10,000 60,000 - *
John A. Kosik, IRA 84,000 84,000 14,000 84,000 - *
John A. Hewgley, IRA 60,000 60,000 10,000 60,000 - *
Paul E. Henson, Jr. M.D. Rollover IRA 70,000 70,000 10,000 60,000 10,000 *
A.R. Fortune, II Rollover IRA 60,000 60,000 10,000 60,000 - *
Charles P. Driver Rollover IRA 60,000 60,000 10,000 60,000 - *
Henry Crumbliss Rollover IRA 60,000 60,000 10,000 60,000 - *
Robert T. Spalding Rollover IRA 60,000 60,000 10,000 60,000 - *
Robert L. Raitz, M.D. Rollover IRA 60,000 60,000 10,000 60,000 - *
Earl T. McGhee Rollover IRA 60,000 60,000 10,000 60,000 - *
Bonnie G. McBride Rollover IRA 60,000 60,000 10,000 60,000 - *
Steve A. McKenzie 240,000 240,000 40,000 240,000 - *
Frank J.B. Varallo 240,000 240,000 40,000 240,000 - *
Kevin Lancey (16) 80,000 30,000 30,000 30,000 - *
Jeffrey S. Roschman (16) 1,760,000 660,000 660,000 660,000 - *
Robert J. Roschman (16) 1,760,000 660,000 660,000 660,000 - *
James L. Magruder (16) (18) 660,000 150,000 150,000 150,000 - *
Todd Krizelman (19) 709,976 - - - - *
Brain Fowler (20) 1,815,000 2,025,312 1,750,000 1,750,000 275,312 *
Michael S. Egan (21) (22) 58,943,274 169,397,505 204,082 48,979,991 120,417,514 44.12%
S. Jacqueline Egan (23) (24) 3,745,419 3,745,419 204,082 3,731,419 14,000 *
E&C Capital Partners LLLP (25) 32,469,012 101,168,886 - 32,469,012 68,699,874 29.44%
Dancing Bear Investments, Inc. (26) 8,303,148 8,303,148 - 2,779,560 5,523,588 2.77%
The Michael S. Egan Grantor Retained 2,007,000 2,007,000 - 2,000,000 7,000 *
Annuity Trust F/B/O Sarah Egan Mooney (27)
34
Number of Number of Number of
Shares Shares Remaining Shares Percentage
Beneficially Beneficially Number of Beneficially Beneficial
Owned as Owned As of Shares Remaining Owned After Ownership
Disclosed in September 15, Underlying Shares Being this Offering After this
Selling Security Holder Original Offering 2005 Warrants (1) Offered (2) Offering
------------------------------------------------------------------------------------------------------------------------------------
The Michael S. Egan Grantor Retained 2,007,000 2,007,000 - 2,000,000 7,000 *
Annuity Trust F/B/O Eliza Shenners Egan
(27)
The Michael S. Egan Grantor Retained 2,014,000 2,014,000 - 2,000,000 14,000 *
Annuity Trust F/B/O Catherine Lewis Egan
(27)
The Michael S. Egan Grantor Retained 2,014,000 2,014,000 - 2,000,000 14,000 *
Annuity Trust F/B/O Teague Michael Thomas
Egan (27)
The Michael S. Egan Grantor Retained 2,014,000 2,014,000 - 2,000,000 14,000 *
Annuity Trust F/B/O Riley Martin Michael
Egan (27)
(28) 3,000,000 3,000,000 - 3,000,000 - *
---------------------------------------------------------------------------
Total** 142,182,214 228,875,347 8,126,142 107,184,569 121,690,778
===========================================================================
* less than 1%
** Does not count more than once shares which are beneficially owned by more
than one person.
(1) Pursuant to Rule 13d-3 of the Exchange Act, as used in this table,
"beneficial ownership" means the sole or shared power to vote, or to direct the
disposition of, a security and a person is deemed to have "beneficial ownership"
of any security that the person has the right to acquire within 60 days of
September 15, 2005. Without limiting the generality of the foregoing, includes
all of the underlying shares of common stock in the column labeled "Number of
Shares Underlying Warrants".
(2) Assumes the sale by the Selling Stockholders of all shares registered
hereby. Shares beneficially owned after this offering are based upon information
originally provided to us by the Selling Stockholders in May 2004, as updated
through September 15, 2005 based solely upon our review of our stock records.
Shares beneficially owned but not held in record name have not been updated from
our original filing.
(3) Mr. Pettingell was our Chief Financial Officer until June 2004.
(4) A former director (or a company controlled by such a former director) of
ours who resigned or whose term ended in June 2001.
(5) Mother of Robin Lebowitz, one of our executive officers.
(6) President of Certified Vacations, a company controlled by our Chairman,
Michael Egan.
(7) One of our former board members who resigned in November 2001.
(8) Brother of our Chairman, Michael Egan.
(9) Son-in-law or daughter of our Chairman, Michael Egan.
(10) Brother-in-law of our Chairman, Michael Egan.
(11) Son-in-law of our Chairman, Michael Egan. A company controlled by Laurent
Sidon also provides services to us. See "Certain Relationships and Related
Transactions".
35
(12) Serves as the President of Thomas Street Logistics LLC, a company
controlled by our Chairman, Michael Egan. Thomas Street Logistics formerly
provided services to the Company. See "Certain Relationships and Related
Transactions".
(13) One of our former employees.
(14) Parents-in-law of our President, Edward Cespedes.
(15) Trust for the benefit of the children of our Chairman, Michael Egan.
(16) Includes shares underlying certain earn-out warrants, which have not yet
been earned as follows: (i) Lancey, 30,000 warrants; (ii) J. Roschman, 660,000
warrants; (iii) R. Roschman, 660,000 warrants; and (iv) Magruder, 150,000
warrants. J. Roschman has agreed, when and if such warrants are earned, to
transfer 500,000 of such warrants to Izor Investments.
(17) Not used.
(18) Mr. Magruder was the Director of Carrier Relations of our subsidiary,
Direct Partner Telecom until May 2004.
(19) One of our former directors who did not seek reelection in June 2002.
(20) Mr. Fowler is our Chief Technology Officer.
(21) Mr. Egan is our Chairman and Chief Executive Officer.
(22) Includes the shares that Mr. Egan is deemed to beneficially own as the
controlling investor of Dancing Bear Investments, Inc., E&C Capital Partners,
LLLP, and E&C Capital Partners II Ltd. and as the Trustee of each of the Michael
S. Egan Grantor Retained Annuity Trusts for the benefit of his children. Also
includes (i) 5,593,128 shares of our common stock issuable upon exercise of
options that are currently exercisable and 469 shares of our common stock
issuable upon exercise of options that are exercisable within 60 days of
September 15, 2005; (ii) 3,541,337 shares of our common stock held by Mr. Egan's
wife, as to which he disclaims beneficial ownership; and (iii) 204,082 shares of
our common stock issuable upon exercise of warrants at $1.22 per share owned by
Mr. Egan and his wife. Also includes 28,699,874 shares of common stock over
which E&C Capital Partners, LLLP holds an irrevocable proxy, ("Proxy Shares")
pursuant to the Stockholders' Agreement and 68,000,000 shares of our common
stock issuable upon the conversion of the Convertible Notes. In connection with
the proposed sale of SendTec, the Stockholders' Agreement will be terminated and
E&C Capital Partners, LLLP's voting rights with respect to the Proxy Shares will
terminate.
(23) Ms. Egan is the spouse of Mr. Egan, our Chairman and Chief Executive
Officer.
(24) Includes 204,082 shares of our common stock issuable upon exercise of
warrants owned jointly by Mr. and Mrs. Egan.
(25) E&C Capital Partners, LLLP is a privately held investment vehicle
controlled by our Chairman, Michael S. Egan. Our President, Edward A. Cespedes,
has a minority, non-controlling interest in E&C Capital Partners, LLLP. Also
includes 28,699,874 shares of common stock over which E&C Capital Partners, LLLP
holds an irrevocable proxy, ("Proxy Shares") pursuant to the Stockholders'
Agreement and 34,000,000 shares of our common stock issuable upon the conversion
of the Convertible Notes. In connection with the proposed sale of SendTec, the
Stockholders' Agreement will be terminated and E&C Capital Partners, LLLP's
voting rights with respect to the Proxy Shares will terminate.
(26) Dancing Bear Investments, Inc., is controlled by our Chairman, Michael
Egan.
(27) Each of these Trusts is for the benefit of one of the children of our
Chairman, Michael Egan.
(28) These shares related to an agreement with us relating to advertising and
marketing. All 3,000,000 of such shares were issuable in various stages subject
to meeting certain business criteria set forth in the agreement. This agreement
has been terminated and as of September 15, 2005, no shares have been issued.
(29) These are the beneficial owners of the stock based upon information
provided to us in May 2004 by such owners or their representatives. However,
these shares are held by different record holders in our stock record books.
Accordingly, while we can determine from a review of our stock records that a
number of these shares have been sold, we cannot identify the beneficial owners
on whose behalf such shares were sold. Accordingly, we have not updated the
holdings of the beneficial owners from the original prospectus dated May 11,
2004. We believe that approximately 9,168,050 shares in the aggregate have been
sold as of September 15, 2005 for these beneficial owners and that approximately
17,963,200 shares are still owned.
36
PLAN OF DISTRIBUTION
The Selling Stockholders, or by their pledgees, transferees or other successors
in interest, may sell the shares of Common Stock from time to time in public or
private transactions occurring on or off the OTC Bulletin Board, at prevailing
market prices or at negotiated prices. Sales may be made directly to purchasers
or through brokers or to dealers, who are expected to receive customary
commissions or discounts. To this end, the Selling Stockholders may offer their
shares for sale in one or more of the following transactions listed and
described below:
o In the over-the-counter market, including the OTC Bulletin Board;
o Through the facilities of any national securities exchange or U.S.
automated inter-dealer quotation system of a registered national
securities association on which any of the shares of Common Stock
are then listed, admitted to unlisted trading privileges or included
for quotation in privately negotiated transactions;
o In transactions other than on such exchanges or in the
over-the-counter market;
o In connection with short sales of our common stock;
o In ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o In block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o In purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o In privately negotiated transactions;
o Broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o In a combination of any such methods of sale; and
o Any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
If the Selling Stockholders sell their shares directly, or indirectly through
underwriters, broker-dealers or agents acting on their behalf, in connection
with such sales, the broker-dealers or agents may receive compensation in the
form of commissions, concessions, allowances or discounts from the Selling
Stockholders and/or the purchasers of the shares for whom they may act as agent
or to whom they sell the shares as principal or both. Such commissions,
concessions, allowances or discounts might be in excess of customary amounts. To
comply with the securities laws of certain jurisdictions, the securities offered
in this prospectus will be offered or sold in those jurisdictions only through
registered or licensed broker/dealers. In addition, in certain jurisdictions the
securities offered in this prospectus may not be offered or sold unless they
have been registered or qualified for sale in those jurisdictions, or unless an
exemption from registration or qualification is available and is complied with.
We are not aware of any definitive selling arrangement at the date of this
prospectus between any Selling Stockholder and any broker-dealer or agent. We
will not receive any of the proceeds from the sale of the shares by the Selling
Stockholders, but may receive certain funds upon the exercise of warrants as
described under "Use of Proceeds."
In connection with the distribution of their shares, certain of the Selling
Stockholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares in the course of hedging the positions they assume with the Selling
Stockholders.
The Selling Stockholders may also sell the shares short and redeliver the shares
of Common Stock to close out the short positions.
The Selling Stockholders may also enter into option or other transactions with
broker-dealers, which require the delivery of the shares to the broker-dealer.
37
The Selling Stockholders may also loan or pledge their shares to a
broker-dealer. The broker-dealer may then sell the loaned shares or, upon a
default, may sell the pledged shares.
The selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledges or other successors in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The Selling Stockholders and any dealer acting in connection with the offering
or any broker executing a sell order on behalf of a selling stockholder may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"). In that case, any profit on the sale of shares
by a selling stockholder and any commissions or discounts received by any such
broker or dealer may be deemed to be underwriting compensation under the
Securities Act. Any such broker or dealer may be required to deliver a copy of
this prospectus to any person who purchases any of the shares from or through
such broker or dealer. These shares may later be distributed, sold, pledged,
hypothecated or otherwise transferred. In addition to any other applicable laws
or regulations, Selling Stockholders must comply with regulations relating to
distributions by Selling Stockholders, including Regulation M under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
LEGAL PROCEEDINGS
On and after August 3, 2001 and as of the date of this filing, the Company is
aware that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors (the
"Individual Defendants"), and several investment banks that were the
underwriters of the Company's initial public offering. The lawsuits were filed
in the United States District Court for the Southern District of New York.
The lawsuits purport to be class actions filed on behalf of purchasers of the
stock of the Company during the period from November 12, 1998 through December
6, 2000. Plaintiffs allege that the underwriter defendants agreed to allocate
stock in the Company's initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading and in violation of the securities laws because it did
not disclose these arrangements. On December 5, 2001, an amended complaint was
filed in one of the actions, alleging the same conduct described above in
connection with the Company's November 23, 1998 initial public offering and its
May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is now
the operative complaint, was filed in the Southern District of New York on April
19, 2002. The action seeks damages in an unspecified amount. On February 19,
2003, a motion to dismiss all claims against the Company was denied by the
Court. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions and noted that the decision is
intended to provide strong guidance to all parties regarding class certification
in the remaining cases. Plaintiffs have not yet moved to certify a class in
theglobe.com case.
The Company has approved a settlement agreement and related agreements which set
forth the terms of a settlement between the Company, the Individual Defendants,
the plaintiff class and the vast majority of the other approximately 300 issuer
defendants. Among other provisions, the settlement provides for a release of the
Company and the Individual Defendants for the conduct alleged in the action to
be wrongful. The Company would agree to undertake certain responsibilities,
including agreeing to assign away, not assert, or release certain potential
claims the Company may have against its underwriters. The settlement agreement
also provides a guaranteed recovery of $1 billion to plaintiffs for the cases
relating to all of the approximately 300 issuers. To the extent that the
underwriter defendants settle all of the cases for at least $1 billion, no
payment will be required under the issuers' settlement agreement. To the extent
that the underwriter defendants settle for less than $1 billion, the issuers are
required to make up the difference. It is anticipated that any potential
financial obligation of the Company to plaintiffs pursuant to the terms of the
settlement agreement and related agreements will be covered by existing
insurance. The Company currently is not aware of any material limitations on the
expected recovery of any potential financial obligation to plaintiffs from its
insurance carriers. Its carriers are solvent, and the Company is not aware of
any uncertainties as to the legal sufficiency of an insurance claim with respect
to any recovery by plaintiffs. Therefore, we do not expect that the settlement
will involve any payment by the Company. If material limitations on the expected
recovery of any potential financial obligation to the plaintiffs from the
Company's insurance carriers should arise, the Company's maximum financial
obligation to plaintiffs pursuant to the settlement agreement would be less than
$3.4 million. On February 15, 2005, the Court granted preliminary approval of
38
the settlement agreement, subject to certain modifications consistent with its
opinion. The Court ruled that the issuer defendants and the plaintiffs were
required to submit a revised settlement agreement which provides for a mutual
bar of all contribution claims by the settling and non-settling parties and does
not bar the parties from pursuing other claims. The issuers and plaintiffs have
submitted to the Court a revised settlement agreement consistent with the
Court's opinion. The revised settlement agreement has been approved by all of
the issuer defendants that are not in bankruptcy. The underwriter defendants
have submitted limited objections to the revised settlement agreement, such as
an objection that it seeks to impose the cost of identifying and notifying class
members on the underwriters, and an objection that it does not provide the
underwriters with sufficient time to gather the information sought by the claims
administrator. There is no assurance that the Court will grant final approval to
the settlement. If the settlement agreement is not approved and the Company is
found liable, we are unable to estimate or predict the potential damages that
might be awarded, whether such damages would be greater than the Company's
insurance coverage, and whether such damages would have a material impact on our
results of operations or financial condition in any future period.
On December 16, 2004, the Company, together with its wholly-owned subsidiary,
voiceglo Holdings, Inc., were named as defendants in NeoPets, Inc. v. voiceglo
Holdings, Inc. and theglobe.com, inc., a lawsuit filed in Los Angeles Superior
Court. The Company and its subsidiary, were parties to an agreement dated May 6,
2004, with NeoPets, Inc. ("NeoPets"), whereby NeoPets agreed to host a voiceglo
advertising feature on its website for the purpose of generating registered
activations of the voiceglo product featured. Consideration to NeoPets was to
include specified commissions, including cash payments based on registered
activations, as defined, as well as the issuance of Common Stock of theglobe.com
and additional cash payments, upon the attainment of certain performance
criteria. NeoPets' complaint asserts claims for breach of contract and specific
performance and seeks payment of approximately $2.5 million in cash, plus
interest, as well as the issuance of 1,000,000 shares of theglobe.com Common
Stock. On February 22, 2005, the Company and voiceglo answered the complaint and
asserted cross-claims against NeoPets for fraud and deceit, rescission, breach
of contract, breach of the implied covenant of good faith and fair dealing and
set-off. NeoPets answered the cross-claims on March 24, 2005.
During 2004, the Company recorded amounts due for commissions pursuant to the
terms of the agreement totaling approximately $246,000. On August 5, 2005, the
Company, together with voiceglo Holdings, Inc., its wholly-owned subsidiary, and
NeoPets (collectively "the Parties") agreed to amicably resolve their dispute
and entered into a settlement agreement (the "Settlement Agreement"). Under the
terms of the Settlement Agreement, the Parties agreed to dismiss the lawsuit,
release each other from all claims and to terminate their May 6, 2004 website
advertising agreement in consideration for voiceglo Holdings, Inc. making cash
payments totaling $200,000 to NeoPets within thirty days of the date of the
Settlement Agreement.
The Company is currently a party to certain other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. The Company currently believes that the ultimate outcome of
these other proceedings, individually and in the aggregate, will not have a
material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of litigation, should the outcome of these actions be unfavorable,
the Company's business, financial condition, results of operations and cash
flows could be materially and adversely affected.
MANAGEMENT
The following table sets forth the names, ages and current positions with the
Company held by our Directors and Executive Officers. There is no immediate
family relationship between or among any of the Directors or Executive Officers,
and the Company is not aware of any arrangement or understanding between any
Director or Executive Officer and any other person pursuant to which he was
elected to his current position.
POSITION OR OFFICE
NAME AGE WITH THE COMPANY
--------------------------------------------------------------------------------
Michael S. Egan 65 Chairman and Chief Executive Officer
Edward A. Cespedes 39 President, Treasurer and Chief
Financial Officer and Director
Robin S. Lebowitz 41 Vice President of Finance and Director
Paul Soltoff 51 Chief Executive Officer of SendTec
39
Michael S. Egan. Michael Egan has served as theglobe.com's Chairman since 1997
and as its Chief Executive Officer since June 1, 2002. Since 1996, Mr. Egan has
been the controlling investor of Dancing Bear Investments, Inc., a privately
held investment company. Since 2002, Mr. Egan has been the controlling investor
of E&C Capital Partners LLLP, a privately held investment partnership. Mr. Egan
is also Chairman of Certified Vacations, a privately held wholesale travel
company which was founded in 1980. Certified Vacations specializes in designing,
marketing and delivering vacation packages. Mr. Egan spent over 30 years in the
rental car business. He began with Alamo Rent-A-Car in 1973, became an owner in
1979, and became Chairman and majority owner from January 1986 until November
1996 when he sold the company to AutoNation. In 2000, AutoNation spun off the
rental division, ANC Rental Corporation (Other OTC: ANCXZ.PK), and Mr. Egan
served as Chairman until October 2003. Prior to acquiring Alamo, he held various
administration positions at Yale University and taught at the University of
Massachusetts at Amherst. Mr. Egan is a graduate of Cornell University where he
received his Bachelor's degree in Hotel Administration.
Edward A. Cespedes. Edward Cespedes has served as a director of theglobe.com
since 1997, as President of theglobe.com since June 1, 2002 and as Treasurer and
Chief Financial Officer of theglobe.com since February 1, 2005. Mr. Cespedes is
also the President of E&C Capital Ventures, Inc., the general partner of E&C
Capital Partners LLLP. Mr. Cespedes served as the Vice Chairman of Prime
Ventures, LLC, from May 2000 to February 2002. From August 2000 to August 2001,
Mr. Cespedes served as the President of the Dr. Koop Lifecare Corporation and
was a member of the Company's Board of Directors from January 2001 to December
2001. From 1996 to 2000, Mr. Cespedes was a Managing Director of Dancing Bear
Investments, Inc. Concurrent with his position at Dancing Bear Investments, Inc.
from 1998 to 2000, Mr. Cespedes also served as Vice President for corporate
development for theglobe.com where he had primary responsibility for all
mergers, acquisitions, and capital markets activities. In 1996, prior to joining
Dancing Bear Investments, Inc., Mr. Cespedes was the Director of Corporate
Finance for Alamo Rent-A-Car. From 1988 to 1996, Mr. Cespedes worked in the
Investment Banking Division of J.P. Morgan and Company, where he most recently
focused on mergers and acquisitions. In his capacity as a venture capitalist,
Mr. Cespedes has served as a member of the board of directors of various
portfolio companies. Mr. Cespedes is the founder of the Columbia University
Hamilton Associates, a foundation for university academic endowments. In 1988
Mr. Cespedes received a Bachelor's degree in International Relations from
Columbia University.
Robin S. Lebowitz. Robin Lebowitz has served as a director of theglobe.com since
December 2001, as Secretary of theglobe.com since June 1, 2002, and as Vice
President of Finance of theglobe.com since February 23, 2004. Ms. Lebowitz also
served as Treasurer of theglobe.com from June 1, 2002 until February 23, 2004
and as Chief Financial Officer of theglobe.com from July 1, 2002 until February
23, 2004. Ms. Lebowitz has worked in various capacities for the Company's
Chairman, Michael Egan, for twelve years. She is the Controller/Managing
Director of Dancing Bear Investments, Inc., Mr. Egan's privately held investment
management and holding company. Previously, Ms. Lebowitz served on the Board of
Directors of theglobe.com from August 1997 to October 1998. At Alamo Rent-A-Car,
she served as Financial Assistant to the Chairman (Mr. Egan). Prior to joining
Alamo, Ms. Lebowitz was the Corporate Tax Manager at Blockbuster Entertainment
Group where she worked from 1991 to 1994. From 1986 to 1989, Ms. Lebowitz worked
in the audit and tax departments of Arthur Andersen & Co. Ms. Lebowitz received
a Bachelor of Science in Economics from the Wharton School of the University of
Pennsylvania; a Masters in Business Administration from the University of Miami
and is a Certified Public Accountant.
Paul Soltoff. Paul Soltoff has served as Chairman of the Board and Chief
Executive Officer of SendTec since its inception in February 2000. Commensurate
with the SendTec merger on September 1, 2004, Mr. Soltoff continued in the
position of Chief Executive Officer of SendTec, now theglobe.com's wholly-owned
subsidiary, and was elected to theglobe.com's Board of Directors. On February
21, 2005, Mr. Soltoff resigned from our Board of Directors, however, he
continues to serve as Chief Executive Officer of SendTec. In 1997, Mr. Soltoff
became the Chief Executive Officer of Soltoff Direct Corporation, a specialized
direct marketing consulting company located in St. Petersburg, Florida. Since
the inception of SendTec, Soltoff Direct Corporation has been largely inactive.
Mr. Soltoff is a graduate of Temple University where he received his Bachelor of
Science degree in Business Marketing in 1995.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Michael Egan, theglobe.com's Chairman and CEO, was Chairman of ANC Rental
Corporation from late 2000 until October 2003 and was Chief Executive Officer of
ANC Rental Corporation from late 2000 until April 4, 2002. In November 2001, ANC
Rental Corporation filed voluntary petitions for relief under Chapter 11 or
Title 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware (Case No. 01-11200).
40
Edward Cespedes, a director and the President, Treasurer and Chief Financial
Officer of theglobe.com, was also a director of Dr. Koop Lifecare Corporation
from January 2001 to December 2001. In December 2001, Dr. Koop Lifecare
Corporation filed petitions seeking relief under Chapter 7 of the United States
Bankruptcy Code.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for services
in all capacities awarded to, earned by or paid by us to those persons serving
as the chief executive officer at any time during the last calendar year and our
four other most highly compensated executive officers (collectively, the "Named
Executive Officers"):
Long-Term
Annual Compensation Compensation(1)
--------------------------------- ---------------
Number of
Securities All Other
Name and Salary Bonus Underlying Compensation
Principal Position Year ($) ($) Options (#) ($)
---------------------------------- ------ ----------- ---------- --------------- -------------
Michael S. Egan, 2004 250,000 77,500 -- --
Chairman, Chief Executive 2003 125,000 50,000 1,000,000 --
Officer (2) 2002 -- -- 2,507,500 --
Edward A. Cespedes, 2004 250,000 77,500 -- --
President, Treasurer and Chief 2003 225,000 50,000 550,000 --
Financial Officer (3) 2002 100,000 25,000 1,757,500 41,668
Albert J. Detz, 2004 100,139 -- 200,000 --
Former Chief Financial Officer,
Treasurer (4)
Robin S. Lebowitz, 2004 144,167 17,500 -- --
Former Chief Financial Officer; 2003 137,500 -- 100,000 --
Vice President of Finance (5) 2002 58,350 10,000 507,500 --
Paul Soltoff, 2004 100,000 17,000 477,337 --
Chief Executive Officer,
SendTec, Inc. (6)
(1) Included in long-term compensation for 2004 are 200,000 options granted to
Mr. Detz at an exercise price of $0.38 per share. In addition, long-term
compensation for 2004 includes replacement options to acquire 477,337 shares of
theglobe.com Common Stock granted to Mr. Soltoff at an exercise price of $0.06
per share in exchange for options which Mr. Soltoff held prior to the
acquisition of SendTec, Inc. by theglobe.com. Included in long-term compensation
for 2003 are 1,650,000 options granted during the year at $0.56 per share to the
Named Executive Officers. Included in long-term compensation for 2002 are 7,500
options granted to each of Messrs. Egan and Cespedes and Ms. Lebowitz in June
2002 at an exercise price of $0.04 per share in accordance with the Company's
Director Compensation Plan; and 2,500,000, 1,750,000, and 500,000 options
granted in June 2002 at an exercise price of $0.02 per share related to bonuses
earned in 2002 for Messrs. Egan and Cespedes and Ms. Lebowitz, respectively.
(2) Mr. Egan became an executive officer in July 1998. We began paying Mr. Egan
a base salary in July 2003. We did not pay Mr. Egan a base salary in 2002 or
2001. Effective in March 2005, the Company discontinued paying Mr. Egan's base
salary, at his request. The Company is obligated to pay all such deferred salary
amounts to Mr. Egan upon his demand. At June 30, 2005, deferred base salary
payable to Mr. Egan totaled approximately $80,800.
(3) Mr. Cespedes became President in June 2002 and Treasurer and Chief Financial
Officer in February 2005. Prior to this, Mr. Cespedes served as a consultant to
the Company and was paid $41,668 for these services.
(4) Mr. Detz became Chief Financial Officer and Treasurer in June 2004 at a base
salary of $175,000 per year. In February 2005, Mr. Detz resigned his positions
with the Company and thereafter began performing various financial and
accounting consulting services on a project basis to the Company.
(5) Ms. Lebowitz became an officer of the Company in June 2002 and Chief
Financial Officer in July 2002. In February 2004, Ms. Lebowitz resigned her
position as Chief Financial Officer and became Vice President of Finance.
(6) Mr. Soltoff became a Director of the Company and Chief Executive Officer of
SendTec, Inc. in September 2004. On February 21, 2005, Mr. Soltoff resigned from
the Company's Board of Directors but continues to serve as CEO of SendTec, Inc.
His current base salary is $300,000 per year. Salary for 2004 represents amounts
earned since September 1, 2004, the date SendTec was acquired by the Company.
41
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND 2004 YEAR-END OPTION
VALUES
The following tables set forth for each of the Named Executive Officers (a) the
number of options exercised during 2004, (b) the total number of unexercised
options for common stock (exercisable and unexercisable) held at December 31,
2004, (c) the value of those options that were in-the-money on December 31, 2004
based on the difference between the closing price of our Common Stock on
December 31, 2004 and the exercise price of the options on that date, and (d)
the total number of options granted to such persons in 2004.
Number of Securities Value of Unexercised
Underlying Unexercised Stock In-the-Money Stock Options
Options at Fiscal Year-End (#) at Fiscal Year End (1)
--------------------------- ------------------------------
Shares
Acquired on Value Un- Un-
Name Exercise # Realized Exercisable Exercisable Exercisable Exercisable
-------------------- ------------ --------- ------------- ------------- ------------- ---------------
Michael S. Egan -- -- 3,841,182 3,818 $ 1,003,016 $ 1,259
Edward A. Cespedes -- -- 2,461,182 3,818 703,016 1,259
Albert J. Detz -- -- 83,334 116,666 3,333 4,667
Robin S. Lebowitz -- -- 625,025 9,055 208,722 3,378
Paul Soltoff -- -- 238,669 238,668 85,921 85,920
(1) Value represents closing price of our Common Stock on December 31, 2004 less
the exercise price of the stock option, multiplied by the number of shares
exercisable or unexercisable, as applicable.
OPTION GRANTS IN 2004
Percent Potential Realizable Value
of Total Market at Assumed Annual Rates of Stock
Number of Options Exercise Price Price Appreciation for Option Term (3)
Securities Granted to or Base on Date -----------------------------------------
Underlying Employees Price of Grant Expiration 5% 10% 0%
Name Options Granted in 2004 ($/Share) ($/share) Date ($) ($) ($)
------------------- ----------------- ----------- --------- --------- ----------- -------- -------- --------
Michael S. Egan - - - - - - - -
Edward A. Cespedes - - - - - - - -
Albert J. Detz 200,000 (1) 2.6% $0.38 $0.38 6/04/2014 $ 47,796 $121,124 -
Robin S. Lebowitz - - - - - - - -
Paul Soltoff 477,337 (2) 6.2% $0.06 $0.41 10/01/2013 $290,148 $478,976 $167,068
(1) 60,000 of these options vested immediately, with the balance vesting ratably
on a quarterly basis over the following three years as long as Mr. Detz was
employed by the Company. Upon Mr. Detz' resignation and pursuant to the terms of
his consulting agreement, 130,000 of the options became vested effective
February 2, 2005, with the 70,000 remaining to vest upon Mr. Detz' performance
of consulting services on a continuous basis for at least six months from the
effective date of the agreement, February 2, 2005.
(2) 238,669 of these options vested on September 30, 2004 and the remainder vest
on September 30, 2005.
(3) These amounts represent assumed rates of appreciation in conformity with
Securities and Exchange Commission disclosure requirements. Actual gains, if
any, on stock option exercises are dependent on future performance of our Common
Stock.
EMPLOYMENT AGREEMENTS
CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT AND PRESIDENT EMPLOYMENT AGREEMENT.
On August 1, 2003, we entered into separate employment agreements with our Chief
Executive Officer ("CEO"), Michael S. Egan, and our President, Edward A.
Cespedes. The two employment agreements are substantially similar and each
provides for the following:
o employment as one of our executives;
42
o an annual base salary of $250,000 with eligibility to receive annual increases
as determined in the sole discretion of the Board of Directors;
o an annual cash bonus, which will be awarded upon the achievement of specified
pre-tax operating income (not be less than $50,000 per year);
o participation in all welfare, benefit and incentive plans (including equity
based compensation plans) offered to senior management;
o a term of employment which commenced on August 1, 2003 and continues through
the first anniversary thereof. The term automatically extends for one day each
day unless either the Company or executive provides written notice to the other
not to further extend. The agreement provides that, in the event of termination
by us without "cause" or by the executive for "good reason" (which includes a
"Change of Control"), the executive will be entitled to receive from us:
- (A) his base salary through the date of termination and an amount equal to the
product of (x) the higher of (i) the executive's average annual incentive paid
or payable under the Company's annual incentive plan for the last three full
fiscal years, including any portion which has been earned but deferred and (ii)
the annual incentive paid or payable under the Company's annual incentive plan
for the most recently completed fiscal year, including any portion thereof which
has been earned but deferred (and annualized if the fiscal year consists of less
than twelve full months or, if during which, the executive was employed for less
than twelve full months) and (y) a fraction, the numerator of which is the
number of days in the current fiscal year through the date of termination, and
the denominator of which is 365;
- (B) any accrued vacation pay; and
- (C) a lump-sum cash payment equal to ten (10) times the sum of executive's
base salary and highest annual incentive;
- for the continued benefit of executive, his spouse and his dependents for a
period of ten (10) years following the date of termination, the medical,
hospitalization, dental, and life insurance programs in which executive, his
spouse and his dependents were participating immediately prior to the date of
termination at the level in effect and upon substantially the same terms and
conditions as existed immediately prior to the date of termination;
- reimbursement for any reasonable and necessary monies advanced or expenses
incurred in connection with the executive's employment; and
- executive will be vested, as of the date of termination, in all rights under
any equity award agreements (e.g., stock options that would otherwise vest after
the date of termination) and in the case of stock options, stock appreciation
rights or similar awards, thereafter shall be permitted to exercise any and all
such rights until the earlier of (i) the third anniversary of the date of
termination and (ii) the end of the term of such awards (regardless of any
termination of employment restrictions therein contained) and any restricted
stock held by executive will become immediately vested as of the date of
termination.
EMPLOYMENT AGREEMENT WITH FORMER CHIEF FINANCIAL OFFICER. We also entered into
an employment agreement with our then Chief Financial Officer ("CFO"), Robin
Segaul Lebowitz, on August 1, 2003. Her employment agreement provides for the
following:
o employment as one of our executives;
o an annual base salary of $150,000 with eligibility to receive annual increases
as determined in the sole discretion of the Board of Directors;
o a discretionary annual cash bonus, which will be awarded at our Board's
discretion;
o participation in all welfare, benefit and incentive plans (including equity
based compensation plans) offered to senior management;
43
o term of employment which commenced on August 1, 2003 and continues through the
first anniversary thereof. The term automatically extends for one day each day
unless either the Company or executive provides written notice to the other not
to further extend. The agreement provides that, in the event of termination by
us without "cause" or by the executive for "good reason" (which includes a
"Change of Control"), the executive will be entitled to receive from us:
- (A) her base salary through the date of termination and an amount equal to the
product of (x) the higher of (i) the executive's average annual incentive paid
or payable under the Company's annual incentive plan for the last three full
fiscal years, including any portion which has been earned but deferred and (ii)
the annual incentive paid or payable under the Company's annual incentive plan
for the most recently completed fiscal year, including any portion thereof which
has been earned but deferred (and annualized if the fiscal year consists of less
than twelve full months or, if during which, the executive was employed for less
than twelve full months) and (y) a fraction, the numerator of which is the
number of days in the current fiscal year through the date of termination, and
the denominator of which is 365;
- (B) any accrued vacation pay; and
- (C) a lump-sum cash payment equal to two (2) times the sum of executive's base
salary and highest annual incentive;
- for the continued benefit of executive, her spouse and her dependents for a
period of two (2) years following the date of termination, the medical,
hospitalization, dental, and life insurance programs in which executive, her
spouse and her dependents were participating immediately prior to the date of
termination at the level in effect and upon substantially the same terms and
conditions as existed immediately prior to the date of termination;
- reimbursement for any reasonable and necessary monies advanced or expenses
incurred in connection with the executive's employment; and
- executive will be vested, as of the date of termination, in all rights under
any equity award agreements (e.g., stock options that would otherwise vest after
the date of termination) and in the case of stock options, stock appreciation
rights or similar awards, thereafter shall be permitted to exercise any and all
such rights until the earlier of (i) the third anniversary of the date of
termination and (ii) the end of the term of such awards (regardless of any
termination of employment restrictions therein contained) and any restricted
stock held by executive will become immediately vested as of the date of
termination.
Effective February 23, 2004, Ms. Lebowitz's employment agreement was amended.
Ms. Lebowitz's new title is Vice President, Finance and effective June 1, 2004
her annual base salary is $140,000.
CHIEF FINANCIAL OFFICER AND TREASURER AGREEMENT. We also entered into an
agreement with our former Chief Financial Officer ("CFO") and Treasurer, Albert
J. Detz, on June 3, 2004. That agreement had provided for the following:
o an annual base salary of $175,000 with eligibility to receive annual increases
as determined in the sole discretion of the Board of Directors;
o a grant of 200,000 options to acquire theglobe.com Common Stock at an exercise
price of $0.38 per share. 60,000 of these options vested immediately and the
balance vest ratably on a quarterly basis over 3 years;
o a discretionary annual cash bonus, which will be awarded at our Board's
discretion;
o participation in all welfare, benefit and incentive plans offered to senior
management of the Company; and
o in the event of termination by us after six months of employment but less than
one year, the executive will be entitled to receive from us his base salary for
a period of three months from the date of such termination. In the event of
termination by us after one year of employment, the executive will be entitled
to receive from us his base salary for a period of six months from the date of
such termination.
Effective February 1, 2005, Mr. Detz resigned his positions with the Company and
his employment with the Company ended. Pursuant to a consulting agreement
effective February 2, 2005, Mr. Detz began performing various financial and
accounting consulting services on a project basis to the Company.
44
SENDTEC CHIEF EXECUTIVE OFFICER EMPLOYMENT AGREEMENT. As part of the SendTec
Acquisition, on September 1, 2004, we entered into an employment agreement with
Paul Soltoff to continue as Chief Executive Officer ("CEO") of SendTec, Inc.,
now a wholly-owned subsidiary of the Company. His employment agreement provides
for the following:
o an annual base salary of $300,000 with eligibility to receive annual increases
as determined in the sole discretion of the Board of Directors;
o a discretionary annual cash bonus, which will be awarded at our Board's
discretion;
o participation in all welfare, benefit and incentive plans offered to senior
management of the Company;
o a 5 year term of employment which commenced on September 1, 2004. The
agreement provides that, in the event of termination by us without "cause" or by
the executive for "good reason," the executive will be entitled to receive from
us his base salary for a period of 2 years from the date of such termination,
any accrued vacation pay and for the continued benefit of executive, his spouse
and his dependents for a period of one (1) year following the date of
termination, the medical, hospitalization, dental, and life insurance programs
in which executive, his spouse and his dependents were participating immediately
prior to the date of termination at the level in effect and upon substantially
the same terms and conditions as existed immediately prior to the date of
termination; and
o customary provisions relating to confidentiality, work-product and covenants
not to compete.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ARRANGEMENTS WITH ENTITIES CONTROLLED BY VARIOUS DIRECTORS AND OFFICERS. On
November 14, 2002, E&C Capital Partners, LLLP ("E&C Partners"), a privately held
investment holding company owned by Michael S. Egan, our Chairman and CEO and a
major stockholder, and Edward A. Cespedes, our President and a Director, entered
into a non-binding letter of intent with theglobe.com to provide $500,000 of new
financing via the purchase of shares of a new Series F Preferred Stock of
theglobe.com. On March 28, 2003, the parties signed a Preferred Stock Purchase
Agreement and other related documentation pertaining to the investment and
closed on the investment. Pursuant to the Preferred Stock Purchase Agreement,
E&C Capital Partners received 333,333 shares of Series F Preferred Stock
convertible into shares of the Company's Common Stock at a price of $0.03 per
share. The conversion price was subject to adjustment upon the occurrence of
certain events, including downward adjustment on a weighted-average basis in the
event the Company issued securities at a purchase price below $0.03 per share.
If fully converted, and without regard to the anti-dilutive adjustment
mechanisms applicable to the Series F Preferred Stock, an aggregate of
approximately 16,666,650 million shares of Common Stock would be issuable. The
Series F Preferred Stock had a liquidation preference of $1.50 per share (and
was thereafter entitled to participate with the Common Stock on an
"as-converted" basis), and was entitled to a dividend at the rate of 8% per
annum if and to the extent declared by the board and was also entitled to
participate in any dividend declared on the Company's Common Stock. The Series F
Preferred Stock also was entitled to vote on an "as converted" basis with the
holders of Common Stock. In addition, as part of the $500,000 investment, E&C
Partners received warrants to purchase approximately 3.3 million shares of
theglobe.com Common Stock at an exercise price of $0.125 per share. The warrant
was exercisable at any time on or before March 28, 2013. E & C Partners also
received certain demand registration rights in connection with its investment.
On May 22, 2003, E&C Partners and certain trusts, of which Mr. Egan is the
trustee, entered into a Note Purchase Agreement with the Company pursuant to
which they acquired convertible promissory notes (the "$1,750,000 Convertible
Notes") in the aggregate principal amount of $1,750,000. The $1,750,000
Convertible Notes were convertible at anytime into shares of the Company's
Common Stock at a blended rate of $.09 per share (the Convertible Note held by
E&C was convertible at approximately $.079 per share and the Convertible Notes
held by the Trusts were convertible at $.10 per share), which if fully
converted, would result in the issuance of approximately 19,444,000 shares. The
$1,750,000 Convertible Notes had a one year maturity date, which could be
extended at the option of the holder of the Note for periods aggregating two
years, and was secured by a pledge of substantially all of the assets of the
Company. In addition, E&C Partners was issued a warrant to acquire 3,888,889
shares of theglobe.com Common Stock at an exercise price of $.15 per share. The
warrant was exercisable at any time on or before May 22, 2013. E&C Partners and
the trusts are entitled to certain demand and "piggy-back" registration rights
in connection with their investment.
45
On February 2, 2004, Michael S. Egan (our Chairman and Chief Executive Officer)
and his wife, S. Jacqueline Egan, entered into a Note Purchase Agreement with
the Company pursuant to which they acquired convertible promissory notes (the
"Bridge Notes") in the aggregate principal amount of $2,000,000. The Bridge
Notes were convertible at anytime into shares of the Company's Common Stock at
an initial rate of $.98 per share. The conversion rate was initially adjustable
based on an amount equal to the rate at which the Company sold its Common Stock
in any subsequent qualified private offering (defined as an offering which
raises a minimum of $7.5 million) (or at a 20% discount to such amount,
depending upon the timing of completion, and amount of, such private offering).
This conversion was subsequently adjusted to $.57 per share, which was the
effective per share rate of the subsequent qualified private offering. The
Bridge Notes were due on demand from the holder, and were secured by a pledge of
substantially all of the assets of the Company. The security interest was shared
with the holders of the Company's $1,750,000 Convertible Notes in the principal
amount of $1,750,000. The Bridge Notes paid interest at the rate of ten (10)
percent per annum. In addition, the Egans were issued a warrant to acquire
204,082 shares of theglobe.com Common Stock at an initial exercise price of
$1.22 per share. This warrant is exercisable at any time on or before February
2, 2009. The Egans are entitled to certain demand and "piggy-back" registration
rights in connection with this investment.
On March 11, 2004, theglobe.com, inc. completed the PIPE Offering. In connection
with the PIPE Offering, Mr. Egan, our Chairman, Chief Executive Officer and
principal stockholder, together with certain of his affiliates and other
parties, converted the $2,000,000 Bridge Note, the $1,750,000 Convertible Notes
and all of the Company's outstanding shares of Series F Preferred Stock, and
exercised (on a cashless exercise basis) all of the warrants issued in
connection with the foregoing $1,750,000 Convertible Notes and Series F
Preferred Stock, together with certain warrants issued to Dancing Bear
Investments, Inc. (an affiliate of Mr. Egan). As a result of such conversions
and exercises, the Company issued an aggregate of approximately 48.75 million
shares of Common Stock to such parties.
Interest expense on the $1,750,000 Convertible Notes totaled approximately
$108,200, excluding the amortization of the discount on the Notes, during the
year ended December 31, 2003. The interest remained unpaid at December 31, 2003,
and was included in accrued expenses in our consolidated balance sheet. As a
result of the conversion of the $1,750,000 Convertible Notes into the Company's
Common Stock in March 2004, all accrued interest, including approximately
$32,000 relating to the first quarter of 2004, was paid by June 30, 2004. As a
result of the conversion of the $2,000,000 Bridge Note into the Company's Common
Stock in March 2004, accrued interest of approximately $17,500 relating to the
first quarter of 2004 was paid by June 30, 2004.
On April 22, 2005, E&C Partners and E&C Capital Partners II, Ltd. (the
"Noteholders"), entities controlled by the Company's Chairman and Chief
Executive Officer, entered into a Note Purchase Agreement (the "Agreement") with
theglobe pursuant to which they acquired secured demand convertible promissory
notes (the "Convertible Notes") in the aggregate principal amount of $1,500,000.
Under the terms of the Agreement, the Noteholders were also granted the optional
right, for a period of 90 days from the date of the Agreement, to purchase
additional Convertible Notes such that the aggregate principal amount of
Convertible Notes issued under the Agreement may total $4,000,000 (the
"Option"). On June 1, 2005, the Noteholders exercised a portion of the Option
and acquired an additional $1,500,000 of Convertible Notes. On July 18, 2005,
the Noteholders exercised the remainder of the Option and acquired an additional
$1,000,000 of Convertible Notes.
The Convertible Notes are convertible at the option of the Noteholders into
shares of the Company's Common Stock at an initial price of $0.05 per share.
Through September 15, 2005 an aggregate of $600,000 of Convertible Notes were
converted by the Noteholders into an aggregate of 12,000,000 shares of the
Company's Common Stock. The Convertible Notes provide for interest at the rate
of ten percent per annum and are secured by a pledge of substantially all of the
assets of the Company. Approximately $41,000 of interest expense was recorded
during the six months ended June 30, 2005 related to the Convertible Notes. The
Convertible Notes are due and payable five days after demand for payment by the
Noteholders. The Noteholders are entitled to certain demand and "piggy-back"
registration rights in connection with their investment. Assuming full
conversion of all remaining outstanding Convertible Notes, 68,000,000 shares of
the Company's Common Stock would be issued to the Noteholders.
Two of our directors, Mr. Egan and Ms. Lebowitz, also serve as officers and
directors of Dancing Bear Investments, Inc. ("Dancing Bear"). Dancing Bear is a
stockholder of the Company and an entity controlled by Mr. Egan, our Chairman.
Several entities controlled by our Chairman have provided services to the
Company and various of its subsidiaries, including: the lease of office and
warehouse space; the outsourcing of customer service and warehouse functions for
the Company's VoIP operation; and the outsourcing of human resources and payroll
processing functions for the Parent Company and various of the Company's
subsidiaries.
46
We sublease approximately 15,000 square feet of office space for our executive
offices from Certified Vacations, a company which is controlled by our Chairman
and CEO Michael Egan. The sublease commenced on September 1, 2003 and expires on
July 31, 2007. The initial base rent is $18.91 per square foot on an annual
basis ($283,650 annually in the aggregate) and will increase on each anniversary
of the sublease by $1.50 per square foot. During 2003, approximately $148,000 of
expense was recorded related to the lease of the office space. During the year
ended December 31, 2004, approximately $334,000 of expense was recorded related
to the lease of the office space. During the six months ended June 30, 2005
approximately $177,000 of expense was recorded related to the lease of office
space from Certified Vacations. In addition, from August 2003 through August
2004 we outsourced our customer service function from Certified Vacations under
renewable short term agreements at incremental cost, for which we paid an
aggregate of $109,000 during the year ended December 31, 2003 and $134,000
during the year ended December 31, 2004.
Beginning in August, 2003, our subsidiary, Voiceglo Holdings, Inc. ("voiceglo"),
began outsourcing warehouse space and related services from Thomas Street
Logistics LLC, which is controlled by our Chairman and CEO, Michael Egan, and
our President, Edward Cespedes. Our agreement with Thomas Street Logistics
included secure warehouse space, equipment rental, insurance, utilities, office
space, inventory management, shipping services, personnel and provisioning of
our equipment for $25,000 per month and a nominal shipping and handling fee per
item shipped. Effective, April 15, 2004, voiceglo terminated its arrangement
with Thomas Street Logistics and has transitioned these functions to voiceglo
personnel and warehouse space. During 2003, approximately $126,000 of expense
was recorded for warehouse space and related outsourcing functions. During the
year ended December 31, 2004, approximately $99,000 of expense was recorded for
warehouse space and related outsourcing functions.
Beginning April 2005, we outsourced our human resources and payroll processing
functions from Certified Vacations and approximately $8,000 of expense was
recorded during the six months ended June 30, 2005 related to these functions.
In addition, as of December 31, 2004, approximately $90,000 of advances made by
the Company to a newly formed entity controlled by our Chairman, Global Voice
Network LLC, remained unpaid. At the time these funds were advanced, the entity
was anticipated to enter into a joint venture to provide services to voiceglo
and the Company was negotiating the terms of such joint venture. The Company and
such new entity subsequently agreed to abandon the proposed joint venture and
the entity ceased operations in January 2005. Additional advances of
approximately $2,000 were made to the entity during January 2005. E&C Capital
Partners LLLP has represented to theglobe.com that the amounts advanced, which
approximate $92,000 as of June 30, 2005, will be repaid to the Company prior to
the end of 2005.
Our subsidiary, Tralliance Corporation, which was acquired on May 9, 2005,
subleases office space in New York City on a month-to-month basis from an entity
controlled by its President and Chief Executive Officer. As of July 2005, the
base rent for the office space totals $3,160 per month.
ARRANGEMENTS WITH RELATIVES. During the six months ended June 30, 2005, payments
of approximately $4,300 were made to the son-in-law of our Chairman and CEO as
reimbursements of marketing expenses incurred on the Company's behalf. In March
2004, the Company engaged the services of Pay the Rent, a company controlled by
the son-in-law of our Chairman and CEO. Pay the Rent was contracted for the
production, audio and video post-production, voice-over, and scoring of a
television commercial featuring voiceglo. Payment in full in the amount of
$151,200 was remitted during 2004. In 2003, we reimbursed Pay the Rent $18,013
for marketing and promotion expenses (at cost) for a separate marketing
promotion.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of September 15, 2005 (except as otherwise
indicated) by (i) each person who owns beneficially more than 5% of our Common
Stock, (ii) each of our directors, (iii) each of our "Named Executive Officers"
and (iv) all directors and executive officers as a group. A total of 199,329,666
shares of theglobe.com's Common Stock were issued and outstanding on September
15, 2005.
The amounts and percentage of common stock beneficially owned are reported on
the basis of regulations of the Securities and Exchange Commission ("SEC")
governing the determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a "beneficial owner" of a security if
that person has or shares "voting power," which includes the power to vote or to
direct the voting of such security, or "investment power," which includes the
power to dispose of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which that person has
a right to acquire beneficial ownership within 60 days. Under these rules, more
than one person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest. Unless otherwise indicated below, the address
of each person named in the table below is in care of theglobe.com, inc., P.O.
Box 029006, Fort Lauderdale, Florida 33302.
47
SHARES BENEFICIALLY OWNED
---------------------------------
DIRECTORS, NAMED EXECUTIVE OFFICERS TITLE OF
AND 5% STOCKHOLDERS NUMBER PERCENT CLASS
---------------------------------------- ----------- ------- --------
Dancing Bear Investments, Inc. (1) ... 8,303,148 4.2% Common
Michael S. Egan (2)(9) ............... 169,397,505 62.0% Common
Edward A. Cespedes (3) ............... 4,213,597 2.1% Common
Robin S. Lebowitz (4) ................ 1,031,121 * Common
Paul Soltoff (5) ..................... 10,674,627 5.3% Common
Albert J. Detz (6) ................... 218,750 * Common
E&C Capital Partners LLLP (7) ........ 101,168,886 43.4% Common
Wellington Management Company, LLP (8) 24,136,050 12.1% Common
Stockholder Agreement Group (9) ...... 169,397,505 62.0% Common
E&C Capital Partners II Ltd. (10) .... 40,000,000 17.1% Common
All directors and executive officers
as a group (5 persons) ............. 175,352,410 62.8% Common
* less than 1%
(1) Mr. Egan owns Dancing Bear Investments, Inc.
(2) Includes the shares that Mr. Egan is deemed to beneficially own as the
controlling investor of Dancing Bear Investments, Inc., E&C Capital Partners,
LLLP, and E&C Capital Partners II Ltd and as the Trustee of the Michael S. Egan
Grantor Retained Annuity Trusts for the benefit of his children. Also includes
(i) 5,593,128 shares of our Common Stock issuable upon exercise of options that
are currently exercisable and 469 shares of our Common Stock issuable upon
exercise of options that are exercisable within 60 days of September 15, 2005;
(ii) 3,541,337 shares of our Common Stock held by Mr. Egan's wife, as to which
he disclaims beneficial ownership; and (iii) 204,082 shares of our Common Stock
issuable upon exercise of warrants at $1.22 per share owned by Mr. Egan and his
wife.
(3) Includes 4,213,128 shares of our Common Stock issuable upon exercise of
options that are currently exercisable and 469 shares of our Common Stock
issuable upon exercise of options that are exercisable within 60 days of
September 15, 2005.
(4) Includes 1,029,089 shares of our Common Stock issuable upon exercise of
options that are currently exercisable and 2,032 shares of our Common Stock
issuable upon exercise of options that are exercisable within 60 days of
September 15, 2005.
(5) Includes 477,337 shares of Common Stock issuable upon exercise of options
that are currently exercisable or exercisable within 60 days of September 15,
2005.
(6) Includes 215,625 shares of our Common Stock issuable upon exercise of
options that are currently exercisable and 3,125 shares of our Common Stock
issuable upon exercise of options that are exercisable within 60 days of
September 15, 2005.
(7) E&C Capital Partners, LLLP is a privately held investment vehicle controlled
by our Chairman, Michael S. Egan. Our President, Edward A. Cespedes, has a
minority, non-controlling interest in E&C Capital Partners, LLLP. Includes
28,699,874 shares of Common Stock over which E&C holds an irrevocable proxy
pursuant to the Stockholders' Agreement. Also includes 34,000,000 shares of our
Common Stock issuable upon the conversion of the Convertible Notes.
48
(8) The information about Wellington Management Company, LLP is as of December
31, 2004 and is derived from an SEC filing on Schedule 13G by Wellington
Management. Wellington Management in its capacity as an investment adviser, may
be deemed to have beneficial ownership of 24,136,050 shares of Common Stock that
are owned by numerous investment advisory clients, none of which is known to
have such interest with respect to more than five percent of the class of
shares. Wellington Management has shared voting authority over 11,259,450 shares
and shared dispositive power over 24,136,050 shares. Wellington Management is a
registered investment advisor under the Investment Advisers Act of 1940, as
amended. Wellington Management's mailing address is 75 State Street, Boston, MA
02109.
(9) In connection with the SendTec Acquisition, the Company and certain former
executives of SendTec (consisting of Paul Soltoff, Eric Obeck, Donald Gould,
Harry Greene and Irv and Nadine Brechner) entered into a Stockholders' Agreement
dated September 1, 2004 with Dancing Bear Investments, Inc., E&C Capital
Partners, LLLP ("E&C"), Michael S. Egan and Edward Cespedes (the "Stockholders'
Agreement"). Pursuant to the Stockholders' Agreement the SendTec executives
granted an irrevocable proxy to vote their shares to E&C on all matters
(including the election of directors) other than with respect to certain
potential affiliated transactions involving Messr. Egan or Cespedes. The amount
set forth in the table includes 28,699,874 shares of Common Stock over which E&C
holds such irrevocable proxy. The amount set forth in the table also includes
5,593,597 shares of our Common Stock issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of September 15, 2005 for
Michael S. Egan, but does not include options of an aggregate of 1,023,673 held
by the other members of the Stockholder Agreement Group. Please also refer to
the appropriate footnotes relating to each individual member of the Stockholder
Agreement Group.
(10) E&C Capital Partners II Ltd. is a privately held investment vehicle
controlled by our Chairman, Michael S. Egan. Includes 34,000,000 shares of our
Common Stock issuable upon the conversion of the Convertible Notes.
DESCRIPTION OF SECURITIES
GENERALLY
We are currently authorized to issue 503,000,000 shares of capital stock
consisting of:
o 500,000,000 shares of common stock, par value of $.001 per share
("Common Stock"), 199,329,666 shares of which were issued and
outstanding as of September 15, 2005, and
o 3,000,000 shares of preferred stock, $.001 par value, of which as of
September 15, 2005, (i) 425,000 shares of which have been designated
as "Series F Preferred Stock", of which no shares are issued and
outstanding, (ii) 25,000 shares of which have been designated as
"Series G Preferred Stock", of which no shares are issued and
outstanding, (iii) 180,000 shares of which have been designated as
"Series H Preferred Stock" of which no shares are issued and
outstanding, and (iv) 250,000 shares of which have been designated
Junior Participating Preferred, of which no shares are issued and
outstanding, and which was created as part of the Company's
stockholder rights plan.
Each holder of Common Stock is entitled to one vote per share on all matters
submitted to a vote of stockholders, including the election of directors. The
Common Stock does not have cumulative voting rights, which means that (subject
to the rights of the holders of any Preferred Stock), the holders of a majority
of the shares voting for election of directors can elect all members of the
Board of Directors. Subject to the preferential rights of the holders of shares
of Preferred Stock, the holders of Common Stock are entitled to share ratably in
such dividends, if any, as may be declared and paid by the Board of Directors
out of funds legally available therefore. At this time, we do not anticipate
paying any cash dividends for the foreseeable future. Upon liquidation or
dissolution of the Company, the holders of Common Stock of the Company will be
entitled to share ratably in the assets of the Company legally available for
distribution to stockholders after payment of liabilities and subject to the
prior rights of any holders of Preferred Stock then outstanding. Holders of
Common Stock have no conversion, sinking fund, redemption, preemptive or
subscription rights. The rights, preferences, and privileges of holders of
Common Stock are subject to the rights of the holders of shares of any series of
Preferred Stock which the Company may issue in the future.
The Board of Directors is authorized, subject to any limitations prescribed by
law, from time to time to issue up to an aggregate of 3,000,000 shares of
Preferred Stock in one or more classes or series, each of such class or series
to have such preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors in a
resolution or resolutions providing for the issue of such class or series of
Preferred Stock. Thus, any class or series may, if so determined by the Board of
Directors, have full voting rights with the Common Stock or superior or limited
voting rights, to be convertible into Common Stock or another security of the
Company, and have such other preferences, relative rights and limitations as the
Company's Board of Directors shall determine. As a result, any class or series
of Preferred Stock could have rights which could adversely affect the voting
power of the Common Stock or which could delay, defer or prevent a change in
control of the Company. The shares of any class or series of Preferred Stock
need not be identical.
49
OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE NOTES
As of June 30, 2005, we had issued and outstanding options to acquire
approximately 20,302,000 shares of our Common Stock. As of September 15, 2005,
we had issued and outstanding warrants and convertible notes to acquire
approximately 7,601,000 and 68,000,000 shares of our Common Stock, respectively.
In addition to the warrants described above the Company also holds in escrow
warrants to acquire up to 1,500,000 shares of Common Stock, subject to release
over approximately the next two years (some of which may accelerate under
certain events) upon the attainment of certain performance objectives and may
issue warrants to acquire up to an additional 2,500,000 shares of Common Stock
upon attainment of certain performance criteria related to the acquisition of
SendTec. Many of the outstanding instruments representing the warrants contain
anti-dilution provisions pursuant to which the exercise prices and number of
shares issuable upon exercise may be adjusted.
REGISTRATION RIGHTS
The Company filed a registration statement, of which this prospectus is a part
and which was originally declared effective on May 11, 2004, pursuant to
registration rights which it granted as part of the March 2004 PIPE Offering.
Pursuant to the PIPE Offering, the Company agreed to file a registration
statement relating to the resale of the shares of common stock and the shares of
common stock underlying the warrants (the "Underlying Shares") issued in such
Offering no later than April 22, 2004. The Company further agreed to keep such
registration statement effective until the earlier of (i) March 15, 2006, (ii)
the date by which all of the shares and Underlying Shares have been sold
pursuant to such registration statement, and (iii) the date by which the shares
and Underlying Shares are eligible to be sold by non-affiliates of the Company
under Rule 144(k) promulgated under the Securities Act.
Holders of substantially all other privately placed securities of the Company
also have certain registration rights, including various demand registration
rights which, subject to certain qualifications and deferrals, may be exercised
by certain of the investors commencing after the effective date of the
registration statement of which this prospectus is a part, and as to others,
commencing in July 2004 and thereafter. The Company has voluntarily included, on
a "piggy-back" basis, in this prospectus shares to be offered by other selling
stockholders who were granted registration rights by the Company prior to the
PIPE Offering.
As part of the SendTec Acquisition on September 1, 2004, the Company agreed to
file a registration statement relating to the resale of the shares of Common
Stock issued in the SendTec Acquisition (including the shares of Common Stock
which were issued upon the conversion of Preferred Stock issued in such
Acquisition) and the resale of up to 2,499,997 shares of Common Stock
potentially issuable upon exercise of certain warrants which may be earned upon
attainment of designated performance criteria and to cause the effectiveness of
such registration on or before September 1, 2005. The Company also agreed to
keep the registration effective until at least September 1, 2007 (the third
anniversary of the closing of the SendTec Acquisition). We have not yet filed
such a registration statement, primarily due to our efforts to sell SendTec and
reacquire substantially all of the shares which we issued in connection with our
acquisition of SendTec. Because we have not filed and caused such registration
statement to become effective on or before September 1, 2005, we may be held
liable for damages suffered by holders of such stock. Upon registration all such
shares will be eligible for resale over the open market. Even if not registered,
the shares issued in the SendTec acquisition are eligible for resale over the
public markets pursuant to and subject to the limitations of Rule 144. If we
successfully redeem the majority of the shares issued as part of the SendTec
acquisition (or approximately 28,900,000 shares) in connection with the sale of
SendTec's business to RelationServe Media, Inc. as discussed in the "Recent
Events" section of this registration statement, we would substantially mitigate
our risks related to our failure to timely register these shares.
We also granted "piggy-back" registration rights relating to the shares of our
Common Stock issued in connection with the Tralliance acquisition and shares
issued in settlement of certain contractual obligations with a vendor.
On April 22, 2005, the Company entered into a Note Purchase Agreement with E&C
Capital Partners, LLLP and E&C Capital Partners II, Ltd. (the "Noteholders"),
pursuant to which the Noteholders acquired convertible promissory notes (the
"Convertible Notes") in the aggregate principal amount of $4,000,000. The
Convertible Notes are convertible at anytime prior to payment into shares of the
Company's Common Stock at the rate of $0.05 per share. Through September 15,
2005, an aggregate of $600,000 of Convertible Notes were converted by the
Noteholders into an aggregate of 12,000,000 shares of the Company's Common
Stock. Assuming full conversion of all remaining outstanding Convertible Notes,
an additional 68,000,000 shares of the Company's Common Stock would be issued to
the Noteholders. The Noteholders are entitled to certain demand and piggy-back
registration rights in connection with their investment.
50
LIMITATION ON LIABILITY
Our certificate of incorporation limits or eliminates the liability of our
directors or officers to us or our stockholders for monetary damages to the
fullest extent permitted by the Delaware General Corporation Law, or DGCL, as
amended. The DGCL provides that a director of our company shall not be
personally liable to us or our stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability:
o for any breach of such person's duty of loyalty;
o for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
o for the payment of unlawful dividends and some other actions
prohibited by Delaware corporate law; and
o for any transaction resulting in receipt by such person of an
improper personal benefit.
The certificate of incorporation also provides that the directors shall be
entitled to the benefits of all limitations on the liability of directors
generally that now or hereafter become available under the DGCL.
The certificate of incorporation also contains provisions indemnifying our
directors, officers and employees to the fullest extent permitted by the DGCL.
We maintain directors' and officers' liability insurance to provide our
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts.
RIGHTS AGREEMENT
Our board of directors adopted a Rights Agreement. Under the Rights Agreement:
o our board of directors declared a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of our common
stock; and
o each Right entitles the registered holder a purchase from us one
one-thousandth of a share of a new series of junior participating
preferred stock, par value $.001 per share (the "Junior Preferred
Stock"), at a price to be determined by our board of directors, per
one one-thousandth of a share (the "Purchase Price"), with
adjustment.
The description and terms of the Rights are described in a Rights Agreement
between us and the designated Rights Agent. The description presented below is
intended as a summary only and is qualified in its entirety by reference to the
Rights Agreement, a form of which has been filed as an exhibit to one of
previous registration statements. See "Where You Can Find More Information".
The Rights are attached to all certificates representing outstanding shares of
our common stock, and no separate Right Certificates were distributed. The
Rights will separate from the shares of our common stock as soon as one of the
following two events occur:
o a public announcement that, without the prior consent of our board
of directors, a person or group (an "Acquiring Person"), including
any affiliates or associates of that person or group, acquired
beneficial ownership of securities having 15% or more of the voting
power of all our outstanding voting securities. Dancing Bear
Investments, Michael S. Egan, certain other designated individuals
or any entities controlled by these persons are not included in the
definition of Acquiring Person; and
o ten (10) business days, or a later date as our board of directors
may determine, following the commencement of, or announcement of an
intention that remains in effect for five (5) business days to make,
tender offer or exchange offer that would result in any person or
group becoming an Acquiring Person.
51
We refer to the earlier of these dates as the "Distribution Date." The first
date of public announcement that a person or group has become an Acquiring
Person is the "Stock Acquisition Date."
Until the Distribution Date, Rights will be transferred with and only with the
shares of our Common Stock. In addition, until the Distribution Date, or earlier
redemption or expiration, of the Rights:
o new common stock certificates issued upon transfer or new issuance
of shares of common stock will contain a notation incorporating the
Rights Agreement by reference; and
o the surrender for transfer of any certificates for shares of common
stock outstanding, even without a notation, will also constitute the
transfer of the Rights associated with the shares of common stock
represented by the certificate.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the shares of common stock as of the close of business on the Distribution
Date, and to each initial record holder of various shares of common stock issued
after the Distribution Date. The separate Right Certificates alone will evidence
the Rights. The Rights are not exercisable until the Distribution Date and will
expire at 5:00 P.M., New York, New York time, on the tenth (10th) anniversary of
the date of issuance, unless earlier redeemed by us as described below.
If any person becomes an Acquiring Person, except by a Permitted Offer as
defined below, each holder of a Right will have, under the terms of the Rights
Agreement, the right (the "Flip-In Right") to receive upon exercise the number
of shares of common stock, or, in the discretion of our board of directors, the
number of one-thousandths of a share of Junior Preferred Stock, or, in some
circumstances, our other securities, having a value immediately before the
triggering event equal to two times the Purchase Price. Notwithstanding the
description above, following the occurrence of the event described above, all
Rights that are, or generally were, beneficially owned by any Acquiring Person
or any affiliate or associate of an Acquiring Person will be null and void.
A "Permitted Offer" is a tender or exchange offer for all outstanding shares of
common stock which is at a price and on terms determined, before the purchase of
shares under the tender or exchange offer, by a majority of Disinterested
Directors, as defined below, to be adequate, taking into account all factors
that the Disinterested Directors deem relevant, and otherwise in our best
interests and our stockholders' best interest, other than the person or any
affiliate or associate on whose behalf the offer is being made, taking into
account all factors that the Disinterested Directors may deem relevant.
"Disinterested Directors" are our directors who are not our officers and who are
not Acquiring Persons or affiliates or associates of Acquiring Persons, or
representatives of any of them.
If, at any time following the Stock Acquisition Date,
o we are acquired in a merger or other business combination
transaction in which the holders of all of the outstanding shares of
common stock immediately before the consummation of the transaction
are not the holders of all of the surviving corporation's voting
power; or
o more than 50% of our assets or earning power is sold or transferred
with or to an Interested Stockholder; or
o if in the transaction all holders of shares of common stock are not
offered the same consideration as any other person; then each holder
of a Right, except Rights which previously have been voided as
described above, shall afterwards have the right (the "Flip-Over
Right") to receive, upon exercise, shares of common stock of the
acquiring company having a value equal to two times the Purchase
Price. The holders of a Right will continue to have the Flip-Over
Right whether or not the holder exercises or surrenders the Flip-In
Right.
The Purchase Price payable, and the number of one-thousandths of a share of
Junior Preferred Stock or other securities issuable, upon exercise of the Rights
may be adjusted from time to time to prevent dilution in the event of any one of
the following:
o a stock dividend on, or a subdivision, combination or
reclassification of, the shares of Junior Preferred Stock; the grant
to holders of the shares of Junior Preferred stock of various rights
or warrants to subscribe for or purchase shares of Junior Preferred
Stock at a price;
52
o or securities convertible into shares of Junior Preferred Stock with
a conversion price, less than the then current market price of the
shares of Junior Preferred Stock; or
o the distribution to holders of the shares of Junior Preferred Stock
of evidences of indebtedness or assets, excluding regular quarterly
cash dividends, or of subscription rights or warrants, other than
those referred to above.
The Purchase Price payable, and the number of one-thousandths of a share of
Junior Preferred Stock or other securities issuable, upon exercise of the Rights
may also be adjusted in the event of a stock split of the shares of common
stock, or a stock dividend on the shares of common stock payable in shares of
common stock, or subdivisions, consolidations or combinations of the shares of
common stock occurring, in any case, before the Distribution Date.
With some exceptions, no adjustment in the Purchase Price will be required until
cumulative adjustments require an adjustment of at least 1% in the Purchase
Price. No fractional one-thousandths of a share of Junior Preferred Stock will
be issued and, instead, an adjustment in cash will be made based on the market
price of the shares of Junior Preferred Stock on the last trading day before the
date of exercise.
At any time before the earlier to occur of (1) a person becoming an Acquiring
Person or (2) the expiration of the Rights, we may redeem the Rights in whole,
but not in part, at a price of $.001 per Right (the "Redemption Price"), which
redemption shall be effective upon the action of our board of directors.
Additionally, we may redeem the then outstanding Rights in whole, but not in
part, at the Redemption Price at any one of the following times:
o after the triggering of the Flip-In Right and before the expiration
of any period during which the Flip-In Right may be exercised in
connection with a merger or other business combination transaction
or series of transactions involving us in which all holders of
shares of our common stock are not offered the same consideration
but not involving an Interested Stockholder, as defined in the
Rights Agreement;
o following an event giving rise to, and the expiration of the
exercise period for, the Flip-In Right if and for as long as no
person beneficially owns securities representing 15% or more of the
voting power of our voting securities; and
o when the Acquiring Person reduces his ownership below 5% in
transactions not involving us.
The redemption of Rights described above shall be effective only as of the time
when the Flip-In Right is not exercisable, and in any event, only after ten (10)
business days' prior notice. Upon the effective date of the redemption of the
Rights, the right to exercise the Rights will terminate and the only rights of
the holders of Rights will be to receive the Redemption Price.
The shares of Junior Preferred Stock purchasable upon exercise of the Rights
will be nonredeemable and junior to any other series of preferred stock we may
issue, unless otherwise provided in the terms of the stock. Each share of Junior
Preferred Stock will have a preferential quarterly dividend in an amount equal
to 1,000 times the dividend declared on each share of common stock, but in no
event less than $1.00. In the event of liquidation, the holders of Junior
Preferred Stock will receive a minimum preferred liquidation payment equal to
the greater of $1.00 or 1,000 times the payment made per each share of common
stock. Each share of Junior Preferred Stock will have 1,000 votes, voting
together with the shares of common stock. In the event of any merger,
consolidation or other transaction in which shares of common stock are
exchanged, each share of Junior Preferred Stock will be entitled to receive
1,000 times the amount and type of consideration received per share of common
stock. The rights of the Junior Preferred Stock as to dividends, liquidation and
voting, and in the vent of mergers and consolidations are protected by customary
anti-dilution provisions. Fractional shares of Junior Preferred Stock will be
issuable; however, we may elect to distribute depositary receipts in lieu of
fractional shares. In lieu of fractional shares other than fractions that are
multiples of one one-thousandth of a share, an adjustment in cash will be made
based on the market price of the Junior Preferred Stock on the last trading date
before the date of exercise.
Until a Right is exercised, the holder will have no rights as our stockholder,
including, without limitation, the right to vote or to receive dividends. While
the distribution of the Rights was not taxable to our stockholders, stockholders
may, depending upon the circumstances, recognize taxable income should the
Rights become exercisable or upon the occurrence of some subsequent events.
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The Rights have various anti-takeover effects. The Rights will cause substantial
dilution to a person or group of persons that attempts to acquire us on terms
not approved by our board of directors. The Rights should not interfere with any
merger of other business combination approved by our board of directors before
the time that a person or group has acquired beneficial ownership of fifteen
percent (15%) or more of our Common Stock since the Rights may be redeemed by us
at the Redemption Price until that time.
"Interested Stockholder" means any Acquiring Person or any of their affiliates
or associates, or any other person in which an Acquiring Person or their
affiliates or associates have in excess of five percent (5%) of the total
combined economic or voting power, or any person acting in concert or on behalf
of any Acquiring Person or their affiliates or associates.
DELAWARE LAW AND VARIOUS CHARTER AND BY-LAWS PROVISIONS
DELAWARE LAW. We must comply with the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three (3) years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns, or,
in some cases, within three (3) years prior, did own, fifteen percent (15%) or
more of the corporation's voting stock. Under Section 203, a business
combination between the Company and an interested stockholder is prohibited
unless it satisfies one of the following three (3) conditions:
o our board of directors must have previously approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
o upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding at
the time the transaction commenced, excluding, for purposes of
determining the number of shares outstanding, shares owned by (1)
persons who are directors and also officers and (2) employee stock
plans, in some instances; and
o the business combination is approved by our board of directors and
authorized at an annual or special meeting of the stockholders by
the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
SPECIAL MEETINGS. Our by-laws provide that special meetings of stockholders for
any purpose or purposes can be called only upon the request of our chairman of
the board, our president, our board of directors, or the holders of shares
entitled to at least a majority of the votes at the meeting.
AMENDMENT OF OUR BY-LAWS. To adopt, repeal, alter or amend the provisions of our
by-laws, our by-laws require either the affirmative vote of the holders of at
least a majority of the voting power of all of the issued and outstanding shares
of our capital stock entitled to vote on the matter or by our board of
directors.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS. Our by-laws
establish advance notice procedures for stockholders to make nominations of
candidates for election as directors, or bring other business before an annual
meeting of our stockholders. These procedures provide that only persons who are
nominated by or at the direction of our board of directors, or by a stockholder
who has given timely written notice to our secretary before the meeting at which
directors are to be elected, will be eligible for election as one of our
directors. Further, these procedures provide that at an annual meeting, the only
business that may be conducted is the business that has been specified in the
notice of the meeting given by, or at the direction of, our board of by a
stockholder who has given timely written notice to our secretary of such
stockholder's intention to bring that business before the meeting.
Under these procedures, notice of stockholder nominations to be made or business
to be conducted at an annual meeting must be received by us not less than 60
days nor more than 90 days before the date of the meeting, or, if less than 70
days' notice or prior public disclosure of the date of the meeting is given or
made to the stockholders, the 10th day following the earlier of (1) the day
notice was mailed, or (2) the day public disclosure was made. Under these
procedures, notice of a stockholder nomination to be made at a special meeting
at which directors are to be elected must be received by us not later than the
close of business on the tenth (10th) day following the day on which notice of
the date of the special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever occurs first.
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Under our by-laws, a stockholder's notice nominating a person for election as a
director must contain specific information about the proposed nominee and the
nominating stockholder. If our chairman determines that a nomination was not
made in the manner described in our by-laws, the nomination will be disregarded.
Similarly, a stockholder's notice proposing the conduct of business must contain
specific information about the business and about the proposing stockholder. If
our chairman determines that business was not properly brought before the
meeting in the manner described in our by-laws, the business will not be
conducted.
By requiring advance notice of nominations by stockholders, our by-laws afford
our board an opportunity to consider the qualifications of the proposed nominee
and, to the extent deemed necessary or desirable by our board, to inform
stockholders about these qualifications. By requiring advance notice of other
proposed business, our by-laws also provide an orderly procedure for conducting
annual meetings of stockholders and, to the extent deemed necessary or desirable
by our board, provides our board with an opportunity to inform stockholders,
before meetings, of any business proposed to be conducted at the meetings,
together with any recommendations as to our board's position regarding action to
be taken with respect to the business, so that stockholders can better decide
whether to attend a meeting or to grant a proxy regarding the disposition of any
business.
Although our certificate does not give our board any power to approve or
disapprove stockholder nominations of the election of directors or proposals for
action, the foregoing provisions may have the effect of precluding a contest for
the election of directors or the consideration of stockholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of these nominees or proposals might be harmful or beneficial to
us and our stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company.
VALIDITY OF SECURITIES
Proskauer Rose LLP will pass on the validity of the common stock offered under
this prospectus for the Company.
EXPERTS
The consolidated financial statements of theglobe.com are included herein and in
the registration statement in reliance upon the report of Rachlin Cohen & Holtz
LLP, independent registered public accounting firm, and upon the authority of
said firm as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Section 145 of the Delaware General Corporation Law ("DGCL") provides that, to
the extent a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding, whether civil, criminal, administrative or investigative or in
defense of any claim, issue, or matter therein (hereinafter a "Proceeding"), by
reason of the fact that person is or was a director, officer, employee or agent
of a corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise (collectively an "Agent" of the
corporation) that person shall be indemnified against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
therewith.
The DGCL also provides that a corporation may indemnify any person who was or is
a party or is threatened to be made a party to any threatened Proceeding by
reason of the fact that person is or was an Agent of the corporation, against
expenses (including attorney's fees), judgment, fines and amounts paid in
settlement actually and reasonably incurred by that person in connection with
such action, suit or proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in, or not opposed to, the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that person's conduct was
unlawful; provided, however, that in an action by or in the right of the
corporation, the corporation may not indemnify such person in respect of any
claim, issue, or matter as to which that person is adjudged to be liable to the
corporation unless, and only to the extent that, the Court of Chancery or the
court in which such proceeding was brought determined that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is reasonably entitled to indemnity.
55
Article VI of the By-laws requires the Company to indemnify any person who was
or is a party or is threatened to be made a party to or is involved (including,
without limitation, as a witness) in any threatened, pending or completed
action, suit, arbitration, alternative dispute mechanism, investigation,
administrative hearing or any other proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) brought by reason of the fact that he or she is or was a director or
officer of the Company, or, while a director or officer of the Company, is or
was serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefits plan against expenses (including
attorneys' fees, judgments, fines, excise taxes under the Employee Retirement
Income Security Act of 1974, penalties and amounts paid in settlement) incurred
by him or her in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Article VI of the Company's Fourth Amended and Restated Certificate of
Incorporation (the "Certificate") provides that to the fullest extent that the
DGCL, as it now exists or may hereafter be amended, permits the limitation or
elimination of the liability of directors, a director of the Company shall not
be liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director.
The Company has entered into indemnification agreements with certain of its
directors and officers. These agreements provide, in general, that the Company
will indemnify such directors and officers for, and hold them harmless from and
against, any and all amounts paid in settlement or incurred by, or assessed
against, such directors and officers arising out of or in connection with the
service of such directors and officers as a director or officer of the Company
or its Affiliates (as defined therein) to the fullest extent permitted by
Delaware Law.
The Company maintains directors' and officers' liability insurance which
provides for payment, on behalf of the directors and officers of the Company and
its subsidiaries, of certain losses of such persons (other than matters
uninsurable under law) arising from claims, including claims arising under the
Securities Act, for acts or omissions by such persons while acting as directors
or officers of the Company and/or its subsidiaries, as the case may be.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
DESCRIPTION OF BUSINESS
As of September 2005, theglobe.com, inc. (the "Company" or "theglobe") managed
four primary lines of business. One line of business, Voice over Internet
Protocol ("VoIP") telephony services, includes voiceglo Holdings, Inc., a
wholly-owned subsidiary of theglobe that offers VoIP-based phone services and
features. The term VoIP refers to a category of hardware and software that
enables people to use the Internet to make phone calls. The second line of
business consists of our historical network of three wholly-owned businesses,
each of which specializes in the games business by delivering games information
and selling games in the United States and abroad. These businesses are: our
print publication business, which consists of Computer Games and Now Playing
magazines; our online website business, which consists of our Computer Games
Online website (www.cgonline.com) and our Now Playing Online website
(www.nowplayingmag.com), which are the online counterparts to our magazine
publications; and our Chips & Bits, Inc. ("Chips & Bits") games distribution
company (www.chipsbits.com). We entered into a third line of business, marketing
services, on September 1, 2004, with our acquisition of SendTec, Inc.
("SendTec"), a direct response marketing services and technology company. On May
9, 2005, the Company entered into a fourth line of business when it exercised
its option to acquire Tralliance Corporation ("Tralliance"), a company which had
recently entered into an agreement to become the registry for the ".travel"
top-level Internet domain.
During 2002 and 2003, the Company's computer games business segment provided
100% and 90%, respectively, of our consolidated net revenue. In 2004, our
SendTec business, which comprises our marketing services business segment, and
our computer games business segment provided 78% and 19% of consolidated net
revenue, net of intersegment eliminations, respectively. As of September 2005,
the Company's revenue continues to be derived principally from the operations of
SendTec, and to a lesser extent from the operations of our computer games
related businesses. Our VoIP products and services have yet to produce any
significant revenue. Tralliance does not expect to begin generating revenue
until sometime during the fourth quarter of 2005.
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During the first quarter of 2005, management began actively re-evaluating the
Company's primary business lines, particularly in view of the Company's critical
need for cash and the overall net losses of the Company. As a result, management
is currently exploring a number of strategic alternatives for the Company and/or
its businesses, including continuing to operate the businesses, selling certain
businesses or assets, or entering into new lines of businesses.
HISTORICAL OVERVIEW
theglobe was incorporated on May 1, 1995 (inception) and commenced operations on
that date. Originally, theglobe.com was an online community with registered
members and users in the United States and abroad. That product gave users the
freedom to personalize their online experiences by publishing their own content
and by interacting with others having similar interests. However, due to the
deterioration of the online advertising market, the Company was forced to
restructure and ceased the operations of its online community on August 15,
2001. The Company then sold most of its remaining online and offline properties.
The Company continues to operate its Computer Games print magazine and the
associated website Computer Games Online (www.cgonline.com), as well as the
games distribution business of Chips & Bits, Inc. (www.chipsbits.com). On June
1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became Chief
Executive Officer and President of the Company, respectively.
On November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets and is now pursuing 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. The
earn-out performance targets were not achieved and the 425,000 earn-out warrants
expired on December 31, 2003.
On February 25, 2003, theglobe.com entered into a Loan and Purchase Option
Agreement, as amended, with Tralliance, an Internet related business venture,
pursuant to which it agreed to fund, in the form of a loan, at the discretion of
the Company, Tralliance's operating expenses and obtained the option to acquire
all of the outstanding capital stock of Tralliance in exchange for, when and if
exercised, $40,000 in cash and the issuance of an aggregate of 2,000,000
unregistered restricted shares of theglobe's Common Stock (the "Option"). On May
5, 2005, Tralliance and the Internet Corporation for Assigned Names and Numbers
("ICANN") entered into an agreement designating Tralliance as the registry for
the ".travel" top-level domain. On May 9, 2005, the Company exercised its option
to acquire all of the outstanding capital stock of Tralliance. The purchase
price consisted of the issuance of 2,000,000 shares of theglobe's Common Stock,
warrants to acquire 475,000 shares of theglobe's Common Stock and $40,000 in
cash. The warrants are exercisable for a period of five years at an exercise
price of $0.11 per share. The Common Stock issued as a result of the acquisition
of Tralliance is entitled to certain "piggy-back" registration rights.
On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a
company engaged in VoIP telephony services in exchange for 1,375,000 shares of
the Company's Common Stock and the issuance of warrants to acquire 500,000
shares of the Company's Common Stock. The transaction included an earn-out
arrangement whereby the former stockholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share upon the attainment of certain performance targets by
DPT over approximately a three year period following the date of acquisition.
The performance targets for the first 500,000 of these earn-out warrants were
not achieved and expired on March 31, 2004. An additional 750,000 of the
warrants were forfeited effective March 31, 2005, as performance targets for the
second of the three year periods were not achieved. Subject to certain
qualifications, the warrants will accelerate and be deemed earned in the event
of a "change in control" of the Company, as defined in the acquisition
documents.
DPT was a specialized international communications carrier providing VoIP
communications services to emerging countries. The DPT network had provided
"next generation" packet-based telephony and value added data services to
carriers and businesses in the United States and internationally. The Company
acquired all of the physical assets and intellectual property of DPT and
originally planned to continue to operate the company as a subsidiary and engage
in the provision of VoIP services to other telephony businesses on a wholesale
transactional basis. In the first quarter of 2004, the Company decided to
suspend DPT's wholesale business and dedicate the DPT physical and intellectual
assets to its retail VoIP business. As a result, the Company wrote off the
goodwill associated with the purchase of DPT and has since employed these
physical assets in the build out of the retail VoIP network.
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On September 1, 2004, the Company closed upon an Agreement and Plan of Merger
dated August 31, 2004, pursuant to which the Company acquired all of the issued
and outstanding shares of capital stock of SendTec, a direct response marketing
services and technology company. Pursuant to the terms of the Merger, in
consideration for the acquisition of SendTec, theglobe paid consideration
consisting of: (i) $6,000,000 in cash, excluding transaction costs, (ii) the
issuance of an aggregate of 17,500,024 shares of theglobe's Common Stock, (iii)
the issuance of an aggregate of 175,000 shares of Series H Automatically
Converting Preferred Stock (which as more fully described below, was
subsequently converted into approximately 17,500,500 shares of theglobe's Common
Stock), and (iv) the issuance of a subordinated promissory note in the amount of
$1 million. In addition, warrants to acquire shares of the Company's Common
Stock would be issued to the former shareholders of SendTec when and if SendTec
exceeds forecasted operating income, as defined, of $10.125 million, for the
year ending December 31, 2005. The number of earn-out warrants would range from
an aggregate of approximately 250,000 to 2,500,000 (if actual operating income
exceeds the forecast by at least 10%). If and to the extent the warrants are
earned, the exercise price of the performance warrants would be $0.27 per share
and they will be exercisable for a period of five years. The Company also issued
an aggregate of approximately 4,000,000 replacement options to acquire
theglobe's Common Stock for each of the issued and outstanding options to
acquire SendTec shares held by the former employees of SendTec. The subordinated
promissory note bears interest at the rate of 4% per annum and matured in one
lump sum of principal and interest on September 1, 2005. Due to its short-term
liquidity problems, the Company did not pay such promissory note when due, and
it went into default under the promissory note on September 6, 2005. The note
bears interest at the rate of 15% per annum while in default and the Company is
obligated to pay the noteholders' collection costs, if any.
Each share of the Series H Preferred Stock was automatically converted into 100
shares of theglobe's Common Stock on December 1, 2004, the effective date of the
amendment to the Company's certificate of incorporation increasing its
authorized shares of Common Stock from 200,000,000 shares to 500,000,000 shares.
OUR LINES OF BUSINESS
OUR VOIP TELEPHONY BUSINESS
The use of the Internet to provide voice communications services is becoming
more prevalent as new providers enter the market and the technology becomes more
accepted. According to Insight Research, VoIP-based services will grow from
$13.0 billion in 2002 to nearly $197.0 billion in 2007. VoIP technology
translates voice into data packets, transmits the packets over data networks and
reconverts them into voice at their destination. Unlike traditional telephone
networks, VoIP does not require dedicated circuits to complete telephone calls.
Instead, VoIP networks can be shared by multiple users for voice, data and video
simultaneously. These types of data networks are more efficient than dedicated
circuit networks because they are not restricted by "one-call, one-line"
limitations of traditional telephone networks. Accordingly, improved efficiency
creates cost savings that can be passed on to the consumer in the form of lower
rates.
Development of our VoIP Business.
On November 14, 2002, we entered the VoIP business by acquiring certain software
assets from Brian Fowler. Today those assets serve as the foundation of the
retail VoIP products and services that we provide to our customers.
On May 28, 2003, the Company acquired DPT, a company engaged in VoIP wholesale
telephony services. At the time we acquired DPT, it was a specialized
international communications carrier providing wholesale VoIP communications
services to emerging countries. In the first quarter of 2004, we decided to
suspend DPT's wholesale business and dedicate the DPT physical and intellectual
assets to our retail VoIP business.
During the third quarter of 2003, the Company launched its first suite of
consumer and business level VoIP services. The Company launched its
browser-based VoIP product during the first quarter of 2004. These services
allow consumers and enterprises to communicate using VoIP technology for
dramatically reduced pricing compared to traditional telephony networks. The
services also offer traditional telephony features such as voicemail, caller ID,
call forwarding, and call waiting for no additional cost to the consumer, as
well as incremental services that are not currently supported by the public
switched telephone network ("PSTN") like the ability to use numbers remotely and
voicemail to email services. In the fourth quarter of 2004, the Company
announced an "instant messenger" or "IM" related application which enables users
to chat via voice or text across multiple platforms using their preferred
instant messenger service. Additionally, during the second quarter of 2005, the
Company released a number of new VoIP products and features which allow users to
communicate via mobile phones, traditional land line phones and/or computers.
The Company now provides the following VoIP services, on a retail basis, to
individual consumers and businesses:
o Browser-Based - full functioning voice and messaging capabilities that reside
on the computer desktop and also include web-based solutions. The only system
requirements are a browser and an Internet connection. The Company is seeking
various patents to protect its position. The browser-based products work on
broadband, dial-up and wi-fi Internet connections and can optionally be used
with a USB phone or other peripheral devices.
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o Hardware-Based - a long-distance or phone line replacement service. Requires
an Internet connection and can optionally be used with an adapter or regular,
cellular, wi-fi or USB phone directly over a user's computer if desired. The
service works on broadband, dial-up and wi-fi Internet connections.
The Company's retail VoIP products are provided under various tradenames
including "voiceglo", "GloPhone" and "tglo". Customers choose their levels of
service from a number of available packages and complete online registrations
and credit card payment transactions via websites maintained by the Company. The
Company's browser-based plans require the customers to download a simple
"plug-in" to their browsers to enable voice and messaging communications.
Certain of the Company's hardware-based plans require the customer to either
register the phones (and phone numbers) that the customer will be using and/or
to purchase and install certain peripheral equipment such as adapters or bridge
devices prior to activating service.
Sales and Marketing.
The Company is continuing to develop its future product sales and distribution
strategy, which is primarily focused on promoting the new products and features
that were released in the second quarter of 2005. The Company intends to market
its services through both direct and indirect retail sales channels, primarily
through Internet advertising, structured customer referral programs and
partnerships with established third party retailers.
Development of our Network and Carrier Relationships; Equipment Suppliers.
In order to offer our services we have invested substantial time, capital and
other resources on the development of our VoIP network. Our VoIP network is
comprised of switching hardware and software, servers, billing and inventory
systems, and telecommunication carrier services. We own and operate VoIP
equipment located in leased data center facilities in Miami, New York, Atlanta
and Boston, and interconnect these switches utilizing a leased transport network
through numerous carrier agreements with third party providers. Through these
carrier relationships we are able to carry the traffic of our customers over the
Internet and interact with the PSTN. These carrier relationships also provide
the Company with a leased network for telephone numbers, or "footprint," in more
than 100 area codes in approximately 34 states. The network also provides for
both domestic and international call termination. We generally enter into one
year agreements with these data centers and carriers, with the terms of several
agreements extending to three to five years. The capacity of our VoIP network,
presently greatly exceeds the current level of customer demand and usage. The
Company has been successful in recently terminating substantially all of the
minimum usage requirement commitments for which it was previously obligated
under certain of its carrier agreements. Additionally, the Company is currently
negotiating to reduce the amounts payable during 2005 for other network data
center and carrier circuit interconnection services.
Research and Development.
Internet telephony is a technical service offering. As a technology, basic VoIP
service, although complex, is well-understood and has been adapted by many
companies that are selling basic services to consumers and businesses worldwide.
The Company, however, believes that in order to be competitive and differentiate
itself among its peers, it must continuously upgrade its service offering. To
that end, the Company is engaged in a program of continuous development of its
products. Since the initial launch of its VoIP service, the Company has
introduced a number of new features which have increased the functionality of
its products and has plans to introduce additional new products and features in
the future.
OUR COMPUTER GAMES BUSINESS
Computer Games Magazine and Now Playing Magazine
- As a leading consumer print publication for games, Computer Games magazine
boasts: a reputation for being a reliable, trusted, and engaging games magazine;
more editorial, tips and hints than most other similar magazines; a
knowledgeable editorial staff providing increased editorial integrity and
content; and, broad-based editorial coverage, appealing to a wide audience of
gamers.
- In Spring 2004, a new magazine, Now Playing began to be delivered within
Computer Games magazine and in March 2005, Now Playing began to be distributed
as a separate publication. Now Playing covers movies, DVD's, television, music,
games, comics and anime, and is designed to fulfill the wider pop culture
interests of our current readers and to attract a more diverse group of
advertisers; autos, television, telecommunications and film to name a few.
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Computer Games Online
Computer Games Online (www.cgonline.com) is the online counterpart to Computer
Games magazine.
Computer Games Online is a source of free computer games news and information
for the sophisticated gamer, featuring news, reviews and previews.
- Features of Computer Games Online include: game industry news; truthful,
concise reviews; first looks, tips and hints; multiple content links; thousands
of archived files; and easy access to game buying.
Now Playing Online
Now Playing Online (www.nowplayingmag.com) is the online counterpart for Now
Playing magazine. Now Playing Online provides free, up-to-date entertainment
news and information for the pop culture consumer.
- Features of Now Playing Online include: industry news in music, movies and
games; reviews of concerts, movies and DVDs; and exclusive video interviews by
Now Playing writers done with well-known Hollywood stars.
Chips & Bits
Chips & Bits (www.chipsbits.com) is a games distribution business that attracts
customers in the United States and abroad. Chips & Bits covers all the major
game platforms available, including Macintosh, Window-based PCs, Sony
PlayStation, Sony PlayStation2, Microsoft's Xbox, Nintendo 64, Nintendo's
GameCube, Nintendo's Game Boy, and Sega Dreamcast, among others.
Advertising.
During the years ended December 31, 2004 and 2003, no single advertiser
accounted for more than 10% of total net revenue from our computer games
division. For the twelve months ended December 31, 2004, 42 clients advertised
in our Computer Games magazine. Following a series of cost reduction measures
and restructuring, we currently have an internal advertising sales staff of two
account executives, both of whom are dedicated to selling advertising space in
our Computer Games and Now Playing print magazines and online. Although these
professionals focus on developing long-term strategic relationships with clients
as they sell advertisements in our Computer Games print magazine, most of our
actual advertising contracts are for periods of one to three months.
OUR MARKETING SERVICES BUSINESS
On September 1, 2004, the Company acquired SendTec, a direct response marketing
services and technology company. SendTec provides clients a complete offering of
direct marketing products and services to help their clients market their
products both on the Internet ("online") and through traditional media channels
such as television, radio and print advertising ("offline"). By utilizing
SendTec's marketing products and services, SendTec's clients seek to increase
the effectiveness and the return on investment of their advertising campaigns.
SendTec's online and offline direct marketing products and services include
strategic campaign development, creative development, creative production and
post-production, media buying and tracking, campaign management, campaign
analysis and optimization, technology systems implementation and integration for
campaign tracking and many other agency type services. In addition, SendTec has
a suite of technology solutions, Results, Optimization, Yield ("ROY"), SendTec
Optimization and Reporting ("SOAR") and iFactz, which enable it to deliver,
track, and optimize direct marketing campaigns across multiple distribution
channels, including television, radio, direct mail, print and the Internet. The
combination of SendTec's direct marketing capabilities, technology and
experience in both online and offline marketing, enable its clients to optimize
their advertising campaigns across a broad spectrum of advertising mediums.
SendTec is organized into two primary product line divisions, the DirectNet
Advertising Division and the Creative South Division. Additionally, its
proprietary iFactz technology provides software tracking solutions that benefit
both the DirectNet Advertising and Creative South businesses.
A substantial portion of SendTec's revenue is derived from a limited number of
customers. During the first half of 2005, two customers of SendTec accounted for
approximately 45% of SendTec's total net revenue and during the four months
ended December 31, 2004, two customers of SendTec accounted for approximately
52% of SendTec's total net revenue. Two of SendTec's customers, Sureclick
Promotions LLC and DDB Worldwide Communications Group, Inc., each accounted for
greater than 10% of the Company's consolidated net revenue for the year ended
December 31, 2004. For the six months ended June 30, 2005, SendTec customers who
individually comprised over 10% of the Company's consolidated net revenue
included Sureclick Promotions LLC and RealNetworks, Inc. The loss of any one or
more of these customers could have a material adverse effect on SendTec's
business.
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We are currently under contract to sell the SendTec business. See the "Recent
Events" section for additional information on the proposed transaction.
DirectNet Advertising (DNA)
DNA is the digital marketing services division of SendTec. DNA offers a variety
of products and services that enable online advertisers and publishers to
generate performance based results through online marketing channels such as,
web advertising, e-commerce up-sells, affiliate marketing, search marketing and
email marketing. DNA's broad range of products and services include creative
strategy and execution, strategic offer development, production planning, media
planning, media buying and search optimization. Through these products and
services DNA's clients can address all aspects of the marketing continuum, from
strategic planning through execution, including results management and campaign
refinements. DNA's proprietary technologies, including its ROY online tracking
software, allow advertisers and publishers to track, report and optimize online
campaign activity all the way to the "conversion level" (which means a
consumer's actual response to the offer, as for example, by making a purchase).
DNA's knowledge of digital advertising strategies, targeting methods, media
placements and creative executions combined with its innovative and dependable
technology help DNA's clients to improve their advertising performance and
return on investment.
Creative South
Creative South is the creative strategy, production and media buying division of
SendTec. Creative South services both online and offline clients of SendTec, and
its production capabilities cover a range of distribution media including
television, radio, direct mail, print and digital. Creative South has developed,
produced and distributed numerous direct response television campaigns for
clients and has received national awards for its creative and production work.
Creative South maintains in-house two state-of-the-art non-linear digital video
editing suites. Creative South's production department includes experienced
directors, producers and editors on staff. Creative South's media buying
department provides a full range of services including strategic media planning,
media trafficking, media buying, media tracking and post-buy media and financial
analysis. Creative South's media buying department has executed media buying
assignments for all types of television (broadcast and cable), radio and print
formats and Creative South's long time relationships with its media partners
have enabled SendTec to provide its clients competitive media prices.
iFactz
iFactz is SendTec's Application Service Provider or "ASP" technology that tracks
and reports the online responses that are generated from offline direct response
advertising. Historically, advertisers have lacked the ability to accurately
track which offline advertising yields results online and thus advertisers have
been unable to properly optimize their media buys. iFactz intelligently tracks
and reports web activity from all offline advertising - TV (even national
cable), radio, print and direct mail - in real time. iFactz's Intelligent
Sourcing(TM) is a patent-pending media technology that informs the user where
online customers come from, and what corresponding activity they produced on the
user's website. The iFactz patent was filed in November of 2001 and SendTec
expects the patent application for iFactz to be reviewed during 2005. iFactz's
ASP design enables advertisers to implement and access the technology in a
timely and cost efficient manner, as there are no cumbersome, time-consuming and
costly implementation expenses and lead times. iFactz is licensed to clients
both as a stand alone technology solution and as part of an overall campaign
offering.
OUR INTERNET SERVICES BUSINESS
Tralliance, headquartered in New York City, was incorporated in 2002 to develop
products and services to enhance online commerce between consumers and the
travel and tourism industries, including administration of the ".travel"
top-level domain. In February 2003, theglobe entered into a Loan and Purchase
Option Agreement, as amended, with Tralliance in which theglobe agreed to fund,
in the form of a loan, at the discretion of theglobe, Tralliance's operating
expenses and obtained the option to acquire all of the outstanding capital stock
of Tralliance. On May 5, 2005, the Internet Corporation for Assigned Names and
Numbers (ICANN) and Tralliance entered into a contract whereby Tralliance was
designated as the registry for the ".travel" top-level domain for a period of
ten years. Effective May 9, 2005, theglobe exercised its option to purchase
Tralliance.
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As the registry for the ".travel" top-level domain, Tralliance will be
responsible for the administration and maintenance of the master directory and
database of all second-level ".travel" domain names. In addition, Tralliance
will be offering, free of charge, to all ".travel" top-level domain registrants
the ".travel" directory, a global online source of travel data organized
according to a unique vocabulary for the travel industry. Tralliance has
outsourced or is planning to outsource to third parties many of the processes
required to operate as the ".travel" registry. Expected to launch in the 2005
fourth quarter, the full introduction of ".travel" will be preceded by a start
up period for limited registration of pre-authenticated ".travel" registrants
during the third quarter of 2005. Tralliance does not expect to begin collecting
fees from ".travel" registrars for its services until sometime in the fourth
quarter 2005.
COMPETITION
VoIP Telephony Business
The telecommunications industry has experienced a great deal of instability
during the past several years. During the 1990s, forecasts of very high levels
of future demand brought a significant number of new entrants and new capital
investments into the industry. New global carriers were joined by many of the
largest traditional carriers and built large global or regional networks to
compete with the global wholesalers. However, in the last several years many of
the new global carriers and many industry participants have either gone through
bankruptcy or no longer exist. The networks were built primarily to meet the
expected explosion in bandwidth demand from data, with specific emphasis upon
Internet applications. Those forecasts have not materialized, telecommunications
capacity now far exceeds actual demand, and the resulting marketplace is
characterized by fierce price competition as traditional and next generation
carriers compete to secure market share. Resulting lower prices have eroded
margins and have kept many carriers from attaining positive cash flow from
operations.
During the past several years, a number of companies have introduced services
that make Internet telephony or voice services over the Internet available to
businesses and consumers. All major telecommunications companies, including
entities like AT&T, Verizon, Sprint and MCI, as well as iBasis, Net2Phone and
deltathree, compete or can compete directly with us. A number of cable operators
have also begun to offer VoIP telephony services via cable modems which provide
access to the Internet.
Our competitors can be divided into domestic competitors and international
competitors. The international market is highly localized. In markets where
telecommunications have been fully deregulated, the competition continues to
increase. In newly deregulated markets even new entrants to the VoIP space can
rapidly capture significant market share. Competitors in these markets include
both government-owned and incumbent phone companies, as well as emerging
competitive carriers. The principle competitive factors in this marketplace
include: price, quality of service, distribution, customer service, reliability,
network capacity, and brand recognition. The long distance market in the United
States is highly competitive. There are numerous competitors in the pure play
VoIP space and we expect to face continuing competition from these existing, as
well as new, competitors. The principal competitive factors in the marketplace
include those identified above, as well as enhanced communications services. Our
competitors include VoIP services companies such as Net2Phone, Skype, Vonage,
Go2Call and deltathree.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
brand recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies which may hinder our ability to market our voice
services.
Computer Games Business
Competition among games print magazines is high. We compete for advertising and
circulation revenues principally with publishers of other technology and games
magazines with similar editorial content as our magazines. The technology
magazine industry has traditionally been dominated by a small number of large
publishers. We believe that we compete with other technology and games
publications based on the nature and quality of our magazines' editorial content
and the attractive demographics of our readers.
The computer games marketplace has become increasingly competitive due to
acquisitions, strategic partnerships and the continued consolidation of a
previously fragmented industry. In addition, an increasing number of major
retailers have increased the selection of video games offered by their
traditional "bricks and mortar" locations and their online commerce sites,
resulting in increased competition.
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Marketing Services Business
The direct response advertising market is highly competitive. We compete with a
variety of large and small advertising agencies but our primary competitors are
interactive marketing companies such as ValueClick, aQuantive, Advertising.com
and Performics. Currently, the online performance based advertising market in
which we compete is still evolving and it is expected that certain government
regulations may be implemented to better define acceptable practices and
methodologies.
Many current and potential competitors have advantages over us, such as longer
operating histories, greater name recognition, larger client bases, greater
access to advertising space on high-traffic websites and significantly greater
financial, technical and marketing resources. In addition, existing or future
competitors may develop or offer services that provide significant performance,
price, creative or other advantages over those offered by us.
Current and potential competitors may establish cooperative relationships among
themselves or with third parties to increase the ability of their products and
services to address the needs of our clients and prospective clients. As a
result it is possible that new competitors may emerge and rapidly acquire
significant market share. If we fail to compete effectively against other
advertising service companies, we could lose clients or advertising inventory
and our revenue could decline. We expect competition to continue to increase
because there are no significant barriers to entry.
Our Results, Optimization, Yield ("ROY") online tracking software provides the
Company with a unique competitive advantage by enabling us to optimize campaigns
and by enabling advertising clients and distribution partners to access
real-time conversion information. Additionally, our iFactz software provides an
excellent complementary platform for our ROY tracking software and enables us to
offer a complete technology tracking solution for online and offline direct
response marketing. We believe that iFactz currently provides SendTec with a
significant competitive advantage in its marketing services business and we are
not aware of any similar technologies available in the market today.
Historically, a high percentage of SendTec's marketing services revenue has been
generated from a few major customers. We believe that a limited number of
clients will continue to be the source of a substantial portion of SendTec's
marketing services revenue for the foreseeable future. Key factors in
maintaining SendTec's relationships with these clients include SendTec's
performance on individual campaigns, the strength of SendTec's professional
reputation and the relationships of SendTec's key executives with client
personnel. To the extent that SendTec's performance does not meet client
expectations, or SendTec's reputation or relationships with one or more major
clients are impaired, SendTec's marketing services revenue could decline and its
operating results could be adversely affected.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our websites and underlying technology as
proprietary. In addition, we have developed in our VoIP business and direct
response marketing business certain technologies which we believe are
proprietary. Further, we are investigating other opportunities and are seeking
to develop additional proprietary technology. We attempt to protect these assets
by relying on intellectual property laws. We also generally enter into
confidentiality agreements with our employees and consultants and in connection
with our license agreements with third parties. We also seek to control access
to and distribution of our technology, documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. We pursue the
registration of our trademarks in the United States and internationally. We are
also currently pursuing patent protection for certain of our VoIP technologies,
including certain technology related to our linkage of a telephone number to an
IP address and our browser to telephone interface, and for SendTec's direct
response marketing business' iFactz Intelligent Sourcing(TM) media technology.
Effective trademark, service mark, copyright, patent and trade secret protection
may not be available in every country in which our services are made available
through the Internet. Policing unauthorized use of our proprietary information
is difficult. Existing or future trademarks or service marks applied for or
registered by other parties and which are similar to ours may prevent us from
expanding the use of our trademarks and service marks into other areas.
Enforcing our patent rights could result in costly litigation. Our patent
applications could be rejected or any patents granted could be invalidated in
litigation. Should this happen, we may lose a significant competitive advantage.
Additionally, our competitors or others could be awarded patents on technologies
and business processes that could require us to significantly alter our
technology, change our business processes or pay substantial license and royalty
fees.
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GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
In General
We are subject to laws and regulations that are applicable to various Internet
activities. There are an increasing number of federal, state, local and foreign
laws and regulations pertaining to the Internet and telecommunications,
including Voice over Internet Protocol ("VoIP"). In addition, a number of
federal, state, local and foreign legislative and regulatory proposals are under
consideration. Laws or regulations have been and may continue to be adopted with
respect to the Internet relating to, among other things, fees and taxation of
VoIP telephony services, liability for information retrieved from or transmitted
over the Internet, online content regulation, user privacy, data protection,
pricing, content, copyrights, distribution, electronic contracts and other
communications, consumer protection, including public safety issues like
enhanced 911 emergency service ("E911"), the Communications Assistance for Law
Enforcement Act ("CALEA"), the provision of online payment services, broadband
residential Internet access, and the characteristics and quality of products and
services.
Changes in tax laws relating to electronic commerce could materially affect our
business, prospects and financial condition. One or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction companies that engage in electronic commerce. A successful
assertion by one or more states or foreign countries that we should collect
sales or other taxes on services could result in substantial tax liabilities for
past sales, decrease our ability to compete with traditional telephony, and
otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to
electronic commerce. However, a number of states, as well as the U.S. Congress,
have been considering various initiatives that could limit or supersede the
Supreme Court's position regarding sales and use taxes on electronic commerce.
If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect sales and use taxes. The imposition by state and local
governments of various taxes upon electronic commerce could create
administrative burdens for us and could adversely affect our VoIP business
operations, and ultimately our financial condition, operating results and future
prospects.
Regardless of the type of state tax imposed, the threshold issue involving state
taxation of any transaction is always whether sufficient nexus, or contact,
exists between the taxing entity and the taxpayer or the transaction to which
the tax is being applied. The concept of nexus is constantly changing and no
bright line exists that would sufficiently alert a business as to whether it is
subject to tax in a specific jurisdiction. All states which have attempted to
tax Internet access or online services have done so by asserting that the sale
of such telecommunications services, information services, data processing
services or other type of transaction is subject to tax in that particular
state.
A handful of states impose taxes on computer services, data processing services,
information services and other similar types of services. Some of these states
have asserted that Internet access and/or online information services are
subject to these taxes.
Most states have telecommunications sales or gross receipts taxes imposed on
interstate calls or transmissions of data. A sizable minority tax only
intrastate calls. Although these taxes were enacted long before the birth of
electronic commerce and VoIP, several states have asserted that Internet access
and/or online information services are subject to these taxes.
For example, in the 2005 Florida legislative session, Florida incorporated into
the tax imposed by Chapter 202, Florida Statutes, (the Communications Services
Tax) language which establishes tax nexus in Florida for VoIP. The Florida
legislature inserted this language to protect the scope of the tax base for the
Communications Services Tax. The language could have the effect of imposing the
Communications Services Tax on VoIP services not based in the state of Florida.
The Florida legislature borrowed the language that it used to amend the Florida
Statute from the national Streamlined Sales Tax Project. This project is being
touted by many states as a proposed tax simplification plan. If adopted by other
states, the language included in the Florida law could have a far reaching
effect in many states in the United States.
Moreover, the applicability to the Internet of existing laws governing issues
such as intellectual property ownership and infringement, copyright, trademark,
trade secret, obscenity, libel, employment and personal privacy is uncertain and
developing. It is not clear how existing laws governing issues such as property
ownership, sales and other taxes, libel, and personal privacy apply to the
Internet and electronic commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease the
growth in the use of the Internet or VoIP telephony services, may impose
additional burdens on electronic commerce or may alter how we do business.
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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.
VoIP Regulation
The use of the Internet and private IP networks to provide voice services over
the Internet is a relatively recent market development. Although the provision
of such services is currently permitted by United States federal law and largely
unregulated within the United States, several foreign governments have adopted
laws and/or regulations that could restrict or prohibit the provision of voice
communications services over the Internet or private IP networks.
Federal Communications Commission Regulation
In the United States, the Federal Communications Commission (the "FCC") has so
far declined to make a general conclusion that all forms of VoIP services
constitute telecommunications services (rather than information services). The
FCC's Internet Policy Working Group was established to assist the FCC in
identifying, evaluating, and addressing policy issues that will arise as
traditional telecommunications services migrate to Internet based platforms. The
FCC has held a forum on VoIP to study and discuss issues including regulatory
classification and has held two solutions summits regarding VoIP: the first
solutions summit focused on VoIP solutions for E911 issues and the second
solutions summit focused on VoIP solutions for disability access issues.
On March 10, 2004, the FCC released its IP-Enabled Services Notice of Proposed
Rulemaking which included guidelines and questions upon which it is seeking
public comment to determine what regulation, if any, will govern companies that
provide VoIP services. Specifically, the FCC has expressed an intention to
further examine the question of whether certain forms of phone-to-phone VoIP
services are information services or telecommunications services. The two
classifications are treated differently in several respects, with certain
information services being regulated to a lesser degree than telecommunications
services. The FCC has noted that certain forms of phone-to-phone VoIP services
bear many of the same characteristics as more traditional voice
telecommunications services and lack the characteristics that would render them
information services. The FCC has indicated that the mechanisms for contributing
to the Universal Service Fund, issues as to applicability of access charges and
other matters will be considered in that context.
On March 10, 2004, (on the same day that the FCC released its IP-Enabled
Services Notice of Proposed Rulemaking), in a response to a petition by
Pulver.com which sought a declaration that Pulver.com's Free World Dialup
("FWD") is neither telecommunications nor a telecommunications service, the FCC
ruled that Pulver.com's FWD offering is an unregulated information service
subject to the FCC's jurisdiction. The ruling specifically does not address
whether traditional phone regulations might apply to VoIP services in which end
users interconnect with the traditional telephone system.
In April 2004, in response to a petition by AT&T which sought a declaration to
preclude local exchange carriers from imposing access charges on certain AT&T
"phone-to-phone" IP telephony services the FCC ruled that the service that AT&T
described is a telecommunications service upon which interstate access charges
may be assessed. However, the FCC emphasized that its decision is limited to the
type of service described by AT&T in that proceeding, i.e., an interexchange
service that: (1) uses ordinary customer premises equipment (CPE) with no
enhanced functionality; (2) originates and terminates on the public switched
telephone network (PSTN); and (3) undergoes no net protocol conversion and
provides no enhanced functionality to end users due to the provider's use of IP
technology.
In November 2004, the FCC issued a Memorandum Opinion and Order ("MO&O") which
preempted an order of the Minnesota Public Utilities Commission applying its
traditional telephone company regulations to Vonage's DigitalVoice service,
which provides VoIP service and other communications capabilities. The FCC
issued this MO&O in response to a petition that Vonage filed with the FCC. The
FCC concluded that the DigitalVoice service cannot be separated into interstate
and intrastate communications for compliance with Minnesota's requirements
without negating valid federal policies and rules. In so doing, the FCC
clarified that it, not the state commissions, has the responsibility and
obligation to decide whether certain regulations apply to DigitalVoice and other
IP-enabled services having the same capabilities. The FCC stated that for such
services, comparable regulations of other states must likewise yield to
important federal objectives. However, in this MO&O, the FCC did not express an
opinion on the applicability to Vonage of Minnesota's general laws governing
entities conducting business within Minnesota, such as laws concerning taxation;
fraud; general commercial dealings; and marketing, advertising, and other
business practices. The FCC stated that it expects that as it moves forward in
establishing policies and rules for DigitalVoice and other IP-enabled services,
states will continue to play their vital role in protecting consumers from
fraud, enforcing fair business practices, for example, in advertising and
billing, and generally responding to consumer inquiries and complaints.
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At the same time as Vonage filed its petition with the FCC, it filed a lawsuit
in the district court in Minnesota against the Minnesota Public Utilities
Commission ("Minnesota Commission") to challenge the Minnesota Commission's
order asserting regulatory jurisdiction over Vonage and ordering Vonage to
comply with all state statutes and regulations relating to the offering of
telephone service in Minnesota. In October 2003, the district court entered a
permanent injunction in favor of Vonage. In January 2004, the court denied a
motion by the Minnesota Commission for reconsideration, and an appeal to the
U.S. Court of Appeals for the Eighth Circuit is pending. However, other states
are not bound by this decision and may reject the VoIP operator's position and
may seek to subject us to regulation.
If the FCC or any state determines to regulate VoIP, they may impose surcharges,
taxes, licensing or additional regulations upon providers of VoIP. These
surcharges could include access charges payable to local exchange carriers to
carry and terminate traffic, contributions to the Universal Service Fund or
other charges. In August 2004, the FCC issued a Notice of Proposed Rulemaking in
which it tentatively concluded that providers of VoIP services that the
Department of Justice, Federal Bureau of Investigation, and Drug Enforcement
Agency (collectively, "Law Enforcement") characterize as "managed" or "mediated"
are subject to the CALEA as telecommunications carriers under the "Substantial
Replacement Provision." The Substantial Replacement Provision describes the
unique definition of "telecommunications carrier" in CALEA to include entities
that provide "a replacement for a substantial portion of the local telephone
exchange service." Law Enforcement describes managed or mediated VoIP services
as those services that offer voice communications calling capability whereby the
VoIP provider acts as a mediator to manage the communication between its end
points and to provide call set up, connection, termination, and party
identification features, often generating or modifying dialing, signaling,
switching, addressing or routing functions for the user. Law Enforcement
distinguishes managed communications from "non-managed" or "peer-to-peer"
communications, which involve disintermediated communications that are set up
and managed by the end user via its customer premises equipment or personal
computer. In these non-managed, or disintermediated, communications, the VoIP
provider has minimal or no involvement in the flow of packets during the
communication, serving instead primarily as a directory that provides users'
Internet web addresses to facilitate peer-to-peer communications. In this
proceeding, the FCC has requested comment on the appropriateness of this
distinction between managed and non-managed VoIP communications for purposes of
CALEA.
Regulations requiring compliance with CALEA could also place a significant
financial burden on us. The imposition of any such additional fees, charges,
taxes, licenses and regulations on VoIP services could materially increase our
costs and may reduce or eliminate the competitive pricing advantage we seek to
enjoy.
On June 3, 2005, the FCC released the "IP-Enabled Services and E911 Requirements
for IP-Enabled Service Providers, First Report and Order and Notice of Proposed
Rulemaking" (the "E911 Order"). The E911 Order requires, among other things,
that VoIP service providers that interconnect to the public switched telephone
network ("Interconnected VoIP Providers") supply enhanced emergency 911 dialing
capabilities ("E911") to their subscribers no later than 120 days from the
effective date of the E911 Order. The effective date of the E911 Order is July
29, 2005. As part of such E911 capabilities, Interconnected VoIP Providers are
required to mimic the 911 emergency calling capabilities offered by traditional
landline phone companies. Specifically, all Interconnected VoIP Providers must
deliver 911 calls to the appropriate local public safety answering point
("PSAP"), along with call back number and location, where the PSAP is able to
receive that information. Such E911 capabilities must be included in the basic
service offering of the Interconnected VoIP Providers; it cannot be an optional
or extra feature. The PSAP delivery obligation, along with call back number and
location information must be provided regardless of whether the service is
"fixed" or "nomadic." User registration of location is permissible initially,
although the FCC is committed to an advanced form of E911 that will determine
user location without user intervention, one of the topics of the further Notice
of Proposed Rulemaking to be released.
Additionally, the E911 Order required that, by July 29, 2005 (the effective date
of the E911 Order), each Interconnected VoIP Provider must have: (1)
specifically advised every new and existing subscriber, prominently and in plain
language, of the circumstances under which the E911 capabilities service may not
be available through its VoIP services or may in some way be limited by
comparison to traditional landline E911 services; (2) obtained and kept a record
of affirmative acknowledgement from all subscribers, both new and existing, of
having received and understood the advisory described in the preceding item (1);
and (3) distributed to its existing subscribers warning stickers or other
appropriate labels warning subscribers if E911 service may be limited or not
available and instructing the subscriber to place them on or near the equipment
used in conjunction with the provider's VoIP services. We have complied with the
requirements set forth in the preceding items (1) and (3). However, despite
engaging in significant efforts, as of August 10, 2005, we have received the
affirmative acknowledgements required by the preceding item (2) from less than
15% of our VoIP subscribers.
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On July 26, 2005, noting the efforts made by Interconnected VoIP Providers to
comply with the E911 Order's affirmative acknowledgement requirement, the
Enforcement Bureau of the FCC (the "EB") released a Public Notice communicating
that, until August 30, 2005, it would not initiate enforcement action against
any Interconnected VoIP Provider with respect to such affirmative
acknowledgement requirement on the condition that the provider file a detailed
report with the FCC by August 10, 2005. The report must set forth certain
specific information relating to the provider's efforts to comply with the
requirements of the E911 Order. Furthermore, the EB stated its expectation that
that if an Interconnected VoIP Provider has not received such affirmative
acknowledgements from 100% of its existing subscribers by August 29, 2005, then
the Interconnected VoIP Provider would disconnect, no later than August 30,
2005, all subscribers from whom it has not received such acknowledgements. On
August 26, 2005, the EB released another Public Notice communicating that it
would not, until September 28, 2005, initiate enforcement action regarding the
affirmative acknowledgement requirement against those providers that: (1)
previously filed reports on or before August 10, 2005 in accordance with the
July 26 Public Notice; and (2) file two separate updated reports with the FCC by
September 1, 2005 and September 22, 2005 containing certain additional required
information relating to such provider's compliance efforts with respect to the
E911 Order's requirements. The EB further stated in the second Public Notice its
expectation that, during the additional period of time afforded by the
extension, all Interconnected VoIP Providers that qualified for such extension
would continue to use all means available to them to obtain affirmative
acknowledgements from all of their subscribers.
Our VoIP services that are subject to the E911 Order account for a material
portion of our current VoIP revenues. However, our current VoIP net revenues are
not substantial and for the six months ended June 30, 2005 were approximately
$163,000. Although we continue to engage in efforts to comply with all of the
requirements of the E911 Order, we may not be able to provide the E911
capabilities required by the E911 Order to all of our subscribers by 120 days
after the effective date thereof. Moreover, although we have complied with the
reporting requirements of the EB's July 26, 2005 and August 26, 2005 Public
Notices and, accordingly, the Company qualifies for the September 28, 2005
extension, as of August 10, 2005, we have received the required affirmative
acknowledgements from less than 15% of our VoIP subscribers. Therefore, while we
continue to be engaged in efforts to obtain affirmative acknowledgements from
all of our VoIP subscribers, we expect that we will not receive such affirmative
acknowledgements from 100% of our VoIP subscribers by the September 28, 2005
deadline. Moreover, we can provide no assurances as to whether the percentage of
our VoIP subscribers that provide us with the required affirmative
acknowledgements will rise significantly or at all. If we are unable to comply
with one or more of the requirements of the E911 Order, including the
requirement to obtain affirmative acknowledgements from 100% of our VoIP
subscribers by the FCC's stated deadlines, the EB may bring an enforcement
action against the Company and/or we may need to suspend delivery of our VoIP
services to those of our customers with respect to which we have not complied
with the requirements of the E911 Order. Although the EB has thus far granted
two extensions to its deadline for obtaining affirmative acknowledgements from
100% of Interconnected VoIP Providers' subscribers, the EB may or may not
provide additional extensions to such deadline and the Company may or may not
qualify for such extensions. If we are required by the EB to suspend VoIP
service to a material portion of our VoIP subscribers for a material period of
time due to our non-compliance with the E911 Order, our revenues and operating
results from our current VoIP operations will deteriorate.
Even assuming our full compliance with the E911 Order, such compliance and our
efforts to achieve such compliance, will increase our cost of doing business in
the VoIP arena and may adversely affect our ability to deliver our VoIP
telephony services to new and existing customers in all geographic regions.
State Regulation
Although VoIP services are presently largely unregulated by the state
governments, such state governments and their regulatory authorities may assert
jurisdiction over the provision of intrastate IP communications services where
they believe that their telecommunications regulations are broad enough to cover
regulation of IP services. A number of state regulators have recently taken the
position that VoIP providers are telecommunications providers and must register
as such within their states. VoIP operators have resisted such registration on
the position that VoIP is not, and should not be, subject to such regulations
because VoIP is an information service, not a telecommunications service and
because VoIP is interstate in nature, not intrastate. Various state regulatory
authorities have initiated proceedings to examine the regulatory status of
Internet telephony services, and in several cases rulings have been obtained to
the effect that the use of the Internet to provide certain intrastate services
does not exempt an entity from paying intrastate access charges in the
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jurisdictions in question. However, in the Vonage MO&O, the FCC found that the
characteristics of Vonage's DigitalVoice service preclude any practical
identification of, and separation into, interstate and intrastate communications
for purposes of effectuating a dual federal/state regulatory scheme. Therefore,
because it is a jurisdictionally mixed service, the FCC has exclusive
jurisdiction under the Act to determine the policies and rules, if any, that
govern the interstate aspect of DigitalVoice service. In fact, the FCC stated
that multiple state regulatory regimes would likely violate the Commerce Clause
because of the unavoidable effect that regulation on an intrastate component
would have on interstate use of the service. As state governments, courts, and
regulatory authorities continue to examine the regulatory status of Internet
telephony services, they could render decisions or adopt regulations affecting
providers of VoIP or requiring such providers to pay intrastate access charges
or to make contributions to universal service funding. Should the Commission
determine to regulate IP services, states may decide to follow the FCC's lead
and impose additional obligations as well.
Other Regulation
The regulatory treatment of IP communications outside the United States varies
significantly from country to country. Some countries currently impose little or
no regulation on Internet telephony services, as in the United States. Other
countries, including those in which the governments prohibit or limit
competition for traditional voice telephony services, generally do not permit
Internet telephony services or strictly limit the terms under which those
services may be provided. Still other countries regulate Internet telephony
services like traditional voice telephony services, requiring Internet telephony
companies to make various telecommunications service contributions and pay other
taxes. We may incur substantial liabilities for expenses necessary to comply
with these laws and regulations or penalties for any failure to comply.
Compliance with these laws and regulations may also cause us to have to change
or limit our business practices in a manner adverse to our business.
More aggressive regulation of Internet telephony providers and VoIP services may
adversely affect our VoIP business operations, and ultimately our financial
condition, operating results and future prospects.
Certain Other Regulation Affecting The Internet
Today, there are still relatively few laws specifically directed towards online
services. However, due to the increasing popularity and use of the Internet and
online services, many laws and regulations relating to the Internet are being
debated at all levels of governments around the world and it is possible that
such laws and regulations will be adopted. It is not clear how existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel and defamation, obscenity, and personal privacy
apply to online businesses. The vast majority of these laws were adopted prior
to the advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. In the United States, Congress has recently adopted legislation
that regulates certain aspects of the Internet, including online content, user
privacy and taxation. In addition, Congress and other federal entities are
considering other legislative and regulatory proposals that would further
regulate the Internet. Congress has, for example, considered legislation on a
wide range of issues including Internet spamming, database privacy, gambling,
pornography and child protection, Internet fraud, privacy and digital
signatures. For example, Congress recently passed and the President signed into
law several proposals that have been made at the U.S. state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. These proposals, if adopted, could substantially impair the growth of
e-commerce, and could diminish our opportunity to derive financial benefit from
our activities. For example, in December 2004, the U.S. federal government
enacted the Internet Tax Nondiscrimination Act (the "ITNA"). While the ITNA
generally extends through November 2007 the moratorium on taxes on Internet
access and multiple and discriminatory taxes on electronic commerce, it does not
affect the imposition of tax on a charge for voice or similar service utilizing
Internet Protocol or any successor protocol. In addition, the ITNA does not
prohibit federal, state, or local authorities from collecting taxes on our
income or from collecting taxes that are due under existing tax rules. Various
states have adopted and are considering Internet-related legislation. Increased
U.S. regulation of the Internet, including Internet tracking technologies, may
slow its growth, particularly if other governments follow suit, which may
negatively impact the cost of doing business over the Internet and materially
adversely affect our business, financial condition, results of operations and
future prospects. Legislation has also been proposed that would clarify the
regulatory status of VoIP service. The Company has no way of knowing whether
legislation will pass or what form it might take. Domain names have been the
subject of significant trademark litigation in the United States and
internationally. The current system for registering, allocating and managing
domain names has been the subject of litigation and may be altered in the
future. The regulation of domain names in the United States and in foreign
countries may change. Regulatory bodies are anticipated to establish additional
top-level domains and may appoint additional domain name registrars or modify
the requirements for holding domain names, any or all of which may dilute the
strength of our names. We may not acquire or maintain our domain names in all of
the countries in which our websites may be accessed, or for any or all of the
top-level domain names that may be introduced.
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Internationally, the European Union has also enacted several directives relating
to the Internet. The European Union has, for example, adopted a directive that
imposes restrictions on the collection and use of personal data. Under the
directive, citizens of the European Union are guaranteed rights to access their
data, rights to know where the data originated, rights to have inaccurate data
rectified, rights to recourse in the event of unlawful processing and rights to
withhold permission to use their data for direct marketing. The directive could,
among other things, affect U.S. companies that collect or transmit information
over the Internet from individuals in European Union member states, and will
impose restrictions that are more stringent than current Internet privacy
standards in the U.S. In particular, companies with offices located in European
Union countries will not be allowed to send personal information to countries
that do not maintain adequate standards of privacy. Compliance with these laws
is both necessary and difficult. Failure to comply could subject us to lawsuits,
fines, criminal penalties, statutory damages, adverse publicity, and other
losses that could harm our business. Changes to existing laws or the passage of
new laws intended to address these privacy and data protection and retention
issues could directly affect the way we do business or could create uncertainty
on the Internet. This could reduce demand for our services, increase the cost of
doing business as a result of litigation costs or increased service or delivery
costs, or otherwise harm our business. Other laws that reference the Internet,
such as the European Union's Directive on Distance Selling and Electronic
Commerce has begun to be interpreted by the courts and implemented by the
European Union member states, but their applicability and scope remain somewhat
uncertain. Regulatory agencies or courts may claim or hold that we or our users
are either subject to licensure or prohibited from conducting our business in
their jurisdiction, either with respect to our services in general, or with
respect to certain categories or items of our services. In addition, because our
services are accessible worldwide, and we facilitate VoIP telephony services to
users worldwide, foreign jurisdictions may claim that we are required to comply
with their laws. For example, the Australian high court has ruled that a U.S.
website in certain circumstances must comply with Australian laws regarding
libel. As we expand our international activities, we become obligated to comply
with the laws of the countries in which we operate. Laws regulating Internet
companies outside of the U.S. may be less favorable than those in the U.S.,
giving greater rights to consumers, content owners, and users. Compliance may be
more costly or may require us to change our business practices or restrict our
service offerings relative to those in the U.S. Our failure to comply with
foreign laws could subject us to penalties ranging from criminal prosecution to
bans on our services.
EMPLOYEES
As of September 15, 2005, we had approximately 118 active full-time employees.
Our future success depends, in part, on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel.
Competition for these persons is intense. From time to time, we also employ
independent contractors to support our network operations, research and
development, marketing, sales and support and administrative organizations. Our
employees are not represented by any collective bargaining unit and we have
never experienced a work stoppage. We believe that our relations with our
employees are good.
RECENT EVENTS - AGREEMENT TO SELL ALL OF THE ASSETS OF OUR
SUBSIDIARY, SENDTEC, INC.
DESCRIPTION OF THE PROPOSED ASSET SALE
On August 10, 2005, theglobe entered into an Asset Purchase Agreement (as
amended, the "Purchase Agreement") with RelationServe Media, Inc. a Nevada
corporation ("RelationServe"), whereby theglobe.com, inc. ("theglobe") agreed to
sell all of the assets of its subsidiary, SendTec, Inc., ("SendTec"), to
RelationServe for $37.5 million in cash, subject to certain adjustments (the
"Asset Sale"). On August 23, 2005 we entered into Amendment No. 1 to the Asset
Purchase Agreement with RelationServe. The Company also entered into or plans to
enter into several ancillary agreements to the Purchase Agreement (the
"Ancillary Agreements"), including the Redemption Agreement dated August 23,
2005, whereby the Company will redeem 28,879,097 shares of its Common Stock from
six members of SendTec management for an aggregate redemption price of
approximately $11.6 million and one or more Termination Agreements whereby the
Company will terminate certain options and warrants held by or issuable to
SendTec's management for aggregate consideration of approximately $400,000. The
following summaries of the Purchase Agreement and the Redemption Agreement are
qualified in their entirety to the actual agreements which are available for
inspection as exhibits to our prior filings. We currently anticipate that the
closing of the Asset Sale will occur on or about October 11, 2005.
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THE PURCHASE AGREEMENT
Purchase and Sale of Assets
In exchange for $37,500,000 and the assumption by RelationServe of certain
existing ordinary course SendTec liabilities as of the closing date, SendTec and
theglobe will sell and transfer to RelationServe all rights, properties and
assets held or used by theglobe or SendTec in connection with SendTec's direct
marketing advertising business. The principal assets being sold to RelationServe
are: cash and accounts receivable, property and equipment, all rights to
SendTec's proprietary software, customer lists, contracts with customers,
equipment, leases, use of the SendTec name, as well as contracts, records and
documents maintained and used by SendTec in connection with its direct marketing
advertising business, including personal property, contract rights, intellectual
property, governmental licenses, permits, and all books, records and other
documents maintained by SendTec and the goodwill of the business in connection
with its operation of its business.
Payment of Purchase Price
The $37.5 million purchase price will be paid in the following manner:
o Thirty-Six Million Five Hundred Thousand Dollars ($36,500,000) will
be paid as follows at closing:
o Thirty-Five Million Five Hundred Thousand Dollars
($35,500,000) will be paid in immediately available funds by
wire transfer to the bank account of theglobe; and
o One Million Dollars ($1,000,000), which will be released
pursuant to the terms of an Escrow Agreement by and between
RelationServe, theglobe and Proskauer Rose LLP (the "Escrow
Agent"), and sent by wire transfer to the bank account of
theglobe; and
o One Million Dollars in cash ($1,000,000), together with a number of
shares of our restricted Common Stock having an aggregate value of
Seven Hundred and Fifty Thousand Dollars ($750,000) (valued at the
average closing price of theglobe's Common Stock over a trailing ten
(10) day period prior to the Closing), will be held by the Escrow
Agent pursuant to the terms of an Escrow Agreement to secure
theglobe's indemnification obligations under the Purchase Agreement,
portions of which sum are subject to release beginning upon the
earlier of six months or completion by RelationServe of an audit of
SendTec's business for the year ended December 31, 2005 following
the closing of the asset sale. If at the time a claim is made for
indemnification, the escrow shares have diminished below $750,000,
then theglobe must make up the difference of any shortfall (up to
the $750,000 amount) in cash. theglobe may also elect to pay cash in
lieu of releasing any of the escrow shares in the event of a claim.
Any shares released from escrow will be entitled to customary
"piggy-back" registration rights.
Working Capital
The Purchase Agreement provides that the Purchase Price will be adjusted upward
or downward to the extent that SendTec's estimated closing date working capital
is greater than or less than zero. On August 11, 2005, theglobe distributed $2
million from SendTec to itself following the signing of the Purchase Agreement.
SendTec's remaining working capital as of the date of closing is anticipated to
range from $1.5 to $2.0 million, assuming that the asset sale closes on or about
October 11, 2005 and no further working capital distributions are made prior to
the closing date. The Purchase Agreement also provides for a post-closing audit
of the closing date working capital. In the event the audit reveals an amount
other than the estimated working capital number used for the closing, there will
be an adjustment to the Purchase Price.
Representations, Warranties, and Covenants
The Purchase Agreement contains substantial representations and warranties of
theglobe regarding SendTec's direct marketing advertising business and the
assets being transferred to RelationServe. These representations are effective
as of the date of signing of the Purchase Agreement and as of the date of the
closing of the asset sale, except as to certain representations relating to the
operation of SendTec which theglobe did not give until it received comparable
representations from management of SendTec in the Redemption Agreement. The
representations and warranties include many that the parties have defined as
"Operational Representations" and which relate primarily to various operational
aspects of the SendTec business and assets. As to these Operational
Representations, theglobe is only responsible for a breach of such Operational
Representations if:
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o SendTec management did not breach corresponding representations and
warranties given by them to theglobe in the Redemption Agreement; or
o if the damages suffered by RelationServe exceed the amount which
RelationServe is able to recover from SendTec management (which
pursuant to a separate agreement between RelationServe and SendTec
management is anticipated to be limited to recovery of up to 200,000
shares of RelationServe common stock to be owned by SendTec
management).
The primary representations and warranties made by theglobe are as follows:
Organization; Authority. theglobe is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with full
corporate power and authority to conduct its respective business as it is being
conducted. theglobe and SendTec each have the necessary power to own the assets
and to carry on the SendTec business as it is being conducted. Each has all
requisite power and authority to enter into and perform under the Purchase
Agreement and the ancillary agreements to the Purchase Agreement, and the
execution and delivery of the Purchase Agreement and the ancillary agreements to
the Purchase Agreement has been duly authorized by all necessary corporate
action and constitute valid and binding obligations of theglobe and SendTec.
Non-Contravention. The execution and performance of the Purchase Agreement will
not cause theglobe or SendTec to be in breach of its certificate of
incorporation, bylaws or any contract binding upon it and will not conflict with
or violate any applicable law, rule or regulation.
Financial Statements and SEC Reports. The financial statements provided by
theglobe to RelationServe were prepared in accordance with GAAP and present
fairly in all material respects the financial position, assets and liabilities
of theglobe, and in the case of the financial statements of SendTec, of SendTec.
Certain annual and quarterly reports of theglobe filed with the SEC since August
30, 2004, do not contain any untrue statement of a material fact or omit to
state a material fact, and such SEC filings comply in all material respects with
the Securities Exchange Act of 1934.
Absence of Changes. SendTec has conducted its business in the ordinary course
since June 30, 2005 and since that date there has not been a material adverse
change in its operations and it has not taken nor suffered various other acts or
obligations.
Title to Properties. SendTec has good, clear and marketable title to all of the
assets being transferred free of any liens or encumbrances except as permitted
by the Purchase Agreement.
Intellectual Property. SendTec owns or has exclusive right to use the
intellectual property to be transferred to RelationServe, and has taken steps to
protect such intellectual property, and that the operation of SendTec's business
does not infringe on any intellectual property owned by any third parties.
No Prior Claims Against Prior SendTec Owners. theglobe has not asserted any
historical claims against the sellers of the SendTec business since theglobe
acquired it on September 1, 2004;
Other Customary Representations. theglobe has also made various customary
representations and warranties (most of which are considered Operational
Representations) in the Purchase Agreement including representations and
warranties with respect to following matters:
o absence of any material liabilities relating to the SendTec
business, other than the liabilities being assumed;
o lack of any consents to consummation of the asset sale;
o lack of any pending litigation except as otherwise disclosed;
o labor and employee benefit plans and related matters;
o the nature and types of certain contracts being transferred as part
of SendTec's business and the lack of any breach by SendTec of such
contracts;
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o environmental matters relating to the operation of the SendTec
business;
o tax matters and the payment of taxes relating to the SendTec
business;
o SendTec's relationship with its suppliers and customers, including
identification of its major customers; and
o absence of any knowing material misstatements or omissions in
Purchase Agreement.
In general, the representations and warranties of theglobe and SendTec will
survive for a period of one year and 45 days after the closing. With a few
exceptions in which theglobe's survival period is longer, the operational
representations which theglobe received from SendTec management will survive for
the same period of time.
The representations and warranties made by RelationServe cover the following
topics as they relate to RelationServe:
o organization and good standing;
o authorization, execution and delivery of the Purchase Agreement and
related agreements by RelationServe;
o the absence of conflicts between the Purchase Agreement and
RelationServe's certificate of incorporation or bylaws;
o the lack of any necessary consents;
o that it is not involved any litigation, except as noted; and
o that it has received financing commitments in the amount of at least
$30 million.
Operation of the SendTec Business Pending Closing
During the period between the signing of the Purchase Agreement and the closing
of the asset sale as contemplated by the Purchase Agreement, theglobe is
restricted from taking a significant number of actions that could impact the
SendTec business or any of the assets to be transferred to RelationServe.
Without the prior written consent of RelationServe, SendTec has agreed that
until the closing it shall do the following with respect to the SendTec
business:
o continue to operate the SendTec business consistent with past
practice and not take action with respect to the SendTec business
outside of the ordinary course of business;
o use its reasonable best efforts to preserve its business intact, the
value of its assets and comply with applicable laws;
o not to split, repurchase or take certain other actions involving its
capital stock;
o amend its charter or bylaws;
o enter into certain mergers or acquisitions of others;
o incur any indebtedness except for short term borrowings in the
ordinary course of business;
o amend any benefit plan or increase the rate of pay of its employees
except increases in the ordinary course of business;
o not terminate or modify any of the contracts to be assumed by
RelationServe; and
o certain other restrictions with respect to the conduct of the
SendTec business.
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Additional Covenants
Covenants of theglobe
Until the closing of the asset sale, theglobe has agreed to take certain actions
to help ensure that all of the conditions to closing the asset sale are
satisfied and that theglobe uses its best efforts to preserve the value of the
assets to be purchased by RelationServe. These actions include:
o using its best efforts to preserve the accuracy of its
representations and warranties in the Purchase Agreement;
o using its best efforts to satisfy all the conditions precedent to
closing the asset sale;
o notifying RelationServe of certain matters, including an adverse
change in the SendTec business or any material default under the
contacts being assumed by RelationServe;
o providing access to information about SendTec and its assets;
o undertaking to secure stockholder approval within 7 days of the date
of the Purchase Agreement which was secured by the written action;
and
o undertaking to prepare, file and mail a definitive Information
Statement to theglobe.com's stockholders.
Covenants of RelationServe
Prior to the closing, RelationServe has agreed to undertake certain actions to
help ensure that the conditions to the closing of the asset sale are all
satisfied. These actions include:
o using its best efforts to preserve the accuracy of its
representations and warranties in the Purchase Agreement; and
o using its best efforts to satisfy the conditions precedent to
closing the asset sale agreement.
No Solicitation of Alternative Transactions
In addition to the covenants discussed above, until the asset sale has been
completed or the Purchase Agreement has been terminated, theglobe has agreed not
to allow any of its officers, directors, employees, or other agents to, directly
or indirectly, take any of the following actions:
o solicit, initiate, or encourage an "acquisition proposal;"
o engage in negotiations with, or disclose any nonpublic information
relating to theglobe to, any person that would encourage or
facilitate the making of an acquisition proposal; or
o enter into any letter of intent, memorandum of understanding or
definitive agreement with respect to an acquisition proposal.
Notwithstanding the foregoing, theglobe and its board of directors shall not be
prevented from engaging in discussion with any person in connection with an
unsolicited, bona fide written acquisition proposal (a "Third Party Proposal")
that is superior to the proposal offered by RelationServe if:
o a majority of theglobe's Board of Directors determines in good faith
(after consultation with its financial advisors) that the
transactions contemplated by such Third-Party Proposal are capable
of being completed and that such Third-Party Proposal is or is
reasonably expected to result in a Superior Transaction (as defined
herein);
o a majority of theglobe's Board of Directors determines in good faith
(after receiving the advice of outside legal counsel) that the
failure to pursue such Superior Proposal would likely result in a
reasonable possibility of a breach of their fiduciary duties as
directors under applicable law; and
o theglobe complies in all material respects with its obligations to
inform and provide to RelationServe of such Proposals.
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In the event that the Board of Directors determines to accept a Superior
Proposal and terminate the asset sale with RelationServe, theglobe has agreed to
pay RelationServe a break-up fee of $1 million as liquidated damages.
A "Superior Proposal" means a bona fide Third-Party Proposal to purchase at
least a majority of the outstanding equity securities of either theglobe or
SendTec pursuant to a stock purchase agreement, tender offer or exchange offer
or to effect any merger, consolidation, business combination or sale of all or
substantially all of the assets being acquired pursuant to the Purchase
Agreement, recapitalization or similar transaction involving SendTec, on terms
which a majority of theglobe's Board of Directors determines in good faith
(after consultation with its financial advisors) to be superior to theglobe and
its shareholders (in their capacity as shareholders) from a financial point of
view (taking into account, among other things, all legal, financial, regulatory
and other aspects of the proposal and identity of the offeror) as compared to
o the transactions contemplated by the asset sale with RelationServe
and
o any alternative proposed by RelationServe in response to such
Third-Party Proposal (taking into account the same factors,
including whether it is reasonably capable of being consummated)
(any such transaction is referred to as a "Superior Transaction").
Conditions Precedent to the Closing of the Asset Sale
Conditions Precedent to Obligations of both theglobe (and SendTec) and
RelationServe. The obligations of RelationServe and theglobe to complete the
asset sale are subject to the satisfaction or waiver of several closing
conditions, including the following:
o All necessary consents of third parties to the asset sale shall have
been obtained;
o There shall not be pending or threatened any action before any
governmental entity challenging or otherwise seeking to prevent the
consummation of the asset sale;
o The parties shall have received all necessary permits and approvals
of governmental entities;
o theglobe shall have entered into the Redemption Agreement and the
Termination Agreement;
o theglobe, RelationServe and the Escrow Agent shall have entered into
the Escrow Agreement;
o theglobe shall have received Operational Representations from
SendTec's management;
o all proceedings in connection with the asset sale shall be
satisfactory in all reasonable respects to the parties and their
counsel, including expiration of the applicable waiting period after
the date the definitive Information Statement was first mailed to
theglobe's stockholders; and
o theglobe shall have received a favorable fairness opinion from
Thomas Weisel Partners.
Each of the conditions listed above may be severally waived by RelationServe or
theglobe without notice, liability or obligation to any person.
Conditions Precedent to Obligations of RelationServe. RelationServe's
obligations to complete the asset sale are subject to the satisfaction or waiver
of several conditions precedent, including each of the following conditions, at
or prior to the closing of the transactions contemplated by the Purchase
Agreement:
o The representations and warranties of theglobe shall be true and
correct as of the date of the Purchase Agreement and shall be true
and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date, except for
those representations and warranties which speak as of a specific
date, and theglobe shall have complied with all covenants and
agreements and satisfied all conditions on theglobe's part in the
Purchase Agreement, and theglobe shall have provided RelationServe
with a certificate with respect to the foregoing signed by an
authorized officer of theglobe;
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o All encumbrances on the assets shall have been released (with
certain exceptions);
o RelationServe shall have received from Florida and Delaware counsel
for theglobe, a written opinion dated the Closing Date and addressed
to RelationServe, in substantially the form attached to the Purchase
Agreement;
o RelationServe will have received such bills of sale and other
documents of transfer relating to transfer of the assets;
o theglobe shall have entered into and delivered to RelationServe the
non-competition and confidentiality agreement;
o RelationServe shall have entered into employment agreements, stock
agreements and related documents with each member of SendTec
management;
o No material adverse effect shall have occurred since the signing of
the Purchase Agreement; and
o certain other matters.
Each of the conditions listed above is solely for the benefit of RelationServe
and may be waived by RelationServe without notice, liability or obligation to
any person.
Conditions Precedent to Obligations of theglobe and SendTec. theglobe's and
SendTec's obligations to complete the asset sale are subject to the satisfaction
or waiver of the following conditions at or prior to the closing of the
transactions contemplated by the Purchase Agreement:
o the representations and warranties of RelationServe in the agreement
shall be true and correct as of the date of the Purchase Agreement
and be true and correct in all material respects on and as of the
closing, except for those representations and warranties which speak
as of a specific date, and RelationServe shall have complied with
all covenants and agreements and satisfied all conditions on
RelationServe's part in the Purchase Agreement, and RelationServe
shall have provided theglobe and SendTec with a certificate with
respect to the foregoing signed by an authorized officer of
RelationServe;
o certain employees of SendTec (besides management) designated by
theglobe shall have entered into termination agreements with respect
to certain options and warrants which they hold to acquire shares of
theglobe's common stock; and
o theglobe shall have received from counsel for RelationServe, a
written opinion dated the Closing Date and addressed to theglobe and
SendTec, in substantially the form attached to the Purchase
Agreement.
Each of the conditions listed above is solely for the benefit of theglobe and
SendTec and may be waived by theglobe and SendTec without notice, liability or
obligation to any person.
Post-Closing Obligations
Following the closing, theglobe and RelationServe have agreed to undertake
various actions, including the following:
o that RelationServe will offer employment to each SendTec's employees
employed by SendTec on the closing date and the transitioning of
various employee benefits;
o theglobe will provide RelationServe with access to certain books and
records retained by SendTec;
o that for a period of one year after closing (with noted exceptions),
theglobe and SendTec will not engage in any advertising agency or
similar business primarily engaged in, and deriving a majority of
its annual revenue from managing or procuring advertising services
for others nor any business engaged in offline direct response
marketing technology;
o that for the same one year period neither theglobe nor SendTec will
solicit or raid customers or personnel of the business being sold;
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o theglobe will use its commercially reasonable efforts to collect
account receivables relating to the SendTec business; and
o each party will take such further actions and execute such further
documents as is necessary to carry out the transactions contemplated
by the Purchase Agreement.
Indemnification and Escrow
theglobe and SendTec are jointly obligated to indemnify RelationServe in the
following circumstances:
o any failure to perform or breach of any representation or warranty
(other than an Operational Representation, which is addressed
below), covenant, obligation or undertaking made by either Globe or
Seller in any of the transaction documents (including the Schedules
and Exhibits hereto or thereto), or in any other statement,
certificate or other instrument delivered pursuant hereto or
thereto, or any misrepresentation contained therein;
o the ownership or operation of the SendTec business prior to the
Closing Date other than as to liabilities being assumed by
RelationServe;
o any of the assets of SendTec being retained by SendTec and not
included in the asset sale; and
o any breach of an Operational Representation, but only if:
o such breach of an Operational Representation is not also a breach of
the corresponding Operational Representation made by SendTec's
management in the Redemption Agreement (or other agreement that
contains Operational Representations by Seller Management) or
o if the damages suffered by RelationServe exceed the amount which
RelationServe is able to recover from SendTec management (which
pursuant to a separate agreement between RelationServe and SendTec
management is anticipated to be limited to recovery of up to 200,000
shares of RelationServe common stock to be owned by SendTec
management).
theglobe will not be liable for any indemnification claims made by RelationServe
unless the aggregate amount of damages incurred by RelationServe is in excess of
$175,000, in which case theglobe will be liable only for the portion in excess
of $75,000.
In the absence of intentional fraud, RelationServe's sole and exclusive recourse
against SendTec and theglobe are the right to:
o offset losses against the cash and the escrowed shares pursuant to
the Holdback Escrow Agreement;
o to require payment of any deficit in the share value of the shares
of common stock being held in the escrow; and
o to require payment arising in connection with any adjustment
relating to the working capital adjustment to the purchase price.
Termination
At any time prior to the closing, the Purchase Agreement may be terminated by
either party as follows:
o by mutual written consent each of RelationServe, theglobe and
SendTec;
o by either party if the closing shall not have occurred on or before
October 31, 2005;
theglobe and SendTec may, on or prior to the closing, terminate this Agreement
without liability if:
76
o there shall have been a material breach of any representations or
warranties set forth in the Purchase Agreement on the part of
RelationServe or if any representations or warranties of
RelationServe shall have become untrue, provided that neither
theglobe nor SendTec have materially breached any of their
obligations;
o there shall have been a material breach by RelationServe of any of
its covenants of agreements and the breach would materially and
adversely affect the ability of RelationServe or SendTec to
consummate the asset sale, and RelationServe has not cured such
breach within 10 business days after notice; provided that neither
theglobe nor SendTec has materially breached any of their
obligations; or
o any condition precedent to theglobe's or SendTec obligation to close
is not fulfilled by RelationServe or waived by SendTec by the
closing date.
RelationServe may, on or prior to the closing, terminate the Purchase Agreement
without liability if:
o there shall have been a material breach of any representations or
warranties set forth in the Purchase Agreement on the part of either
theglobe or SendTec or if any representations or warranties of
either theglobe or SendTec shall have become untrue to the extent it
would have a material adverse effect provided that RelationServe has
not materially breached any of its obligations hereunder;
o there shall have been a material breach by SendTec or theglobe of
one or more of their respective covenants or agreements having a
material adverse effect on SendTec or its business or materially
adversely affecting (or materially delaying) the ability of SendTec
and RelationServe to consummate the asset sale, and neither theglobe
nor SendTec has cured such breach within 10 business days after
notice, provided that RelationServe has not materially breached any
of its obligations hereunder;
o any condition precedent to RelationServe's obligation to close is
not fulfilled or waived by RelationServe by the closing date.
Termination Fees
If the Purchase Agreement is terminated because theglobe enters into an
acquisition transaction relating to a Superior Proposal, theglobe must pay
RelationServe a break-up termination fee of $1,000,000 in cash promptly
following such termination. Provided that RelationServe is not then entitled to
terminate the Purchase Agreement, if SendTec exercises certain of its rights to
terminate the Purchase Agreement then RelationServe must pay theglobe a
termination fee of $1,000,000.
ANCILLARY AGREEMENTS TO THE PURCHASE AGREEMENT
Redemption Agreement
General
In connection with the Asset Purchase Agreement, theglobe entered into a
Redemption Agreement dated August 23, 2005 with SendTec's management providing
for the redemption by theglobe from them of an aggregate of 28,879,097 shares of
theglobe's common stock for an aggregate redemption price of approximately $11.6
million. The redemption price was arrived at through arms-length negotiation
between theglobe and SendTec management as to the value of the stock and
reflects theglobe management's judgment as to the amount necessary to be paid
for the stock to ensure participation by SendTec management in the transaction.
Although the redemption price per share of approximately $0.40 exceeds the
recent trading price of our stock, our stock trades only on the over-the-counter
market with very little trading volume, and in the view of management the
trading price does not accurately reflect the fair market value of a large block
of our stock after giving affect to the Asset Sale.
Representations and Warranties
Each member of SendTec's management will make certain representations and
warranties to theglobe in connection with the redemption, including as to:
o their ownership of the shares being redeemed;
77
o non-contravention of other agreements;
o the absence of litigation concerning the Redemption Agreement and
the shares;
o their financial experience; and
o their access to information.
Each member of SendTec's management is also making certain representations and
warranties to the best of his or her knowledge, to theglobe concerning
operational matters associated with the business of SendTec (which are sometimes
referred to as the "Operational Representations"). theglobe is relying on these
Operational Representations to make corresponding representations to
RelationServe in the Purchase Agreement. RelationServe is also entitled to rely
on such Operational Representations from SendTec's management. Generally
speaking, these Operational Representations will survive the closing for a
period of 1 year and 45 days.
In turn, theglobe is making certain representations and warranties to SendTec's
management, including as to:
o its authority to enter into the Redemption Agreement;
o the absence of any litigation concerning the Redemption Agreement
and the shares being redeemed;
o that the entering into, and performance of, the Redemption Agreement
does not violate law, rule or regulation; and
o that the entering into of the Redemption Agreement and payment of
the redemption price does not violate Delaware corporate law.
Termination of Stockholders' Agreement
Upon consummation of the redemption, the Stockholders' Agreement to which
SendTec's management are a party will be terminated.
Directors and Officers Liability Insurance
The Redemption Agreement requires that, for so long as any of Michael Egan,
Edward Cespedes and Robin Segaul Lebowitz are covered by a policy of directors
and officers liability insurance with respect to their service as a current or
former director and/or officer of theglobe, but for not more than five years,
Paul Soltoff will be afforded the same coverage as is available to Mr. Egan, Mr.
Cespedes and/or Ms. Segaul Lebowitz under such policy.
Conditions Precedent
There are certain conditions precedent to the obligations of the parties under
the Redemption Agreement, including:
o confirmation of the accuracy of the parties' representations and
warranties and compliance with covenants;
o certification by theglobe as to the resolutions of its Board
approving the Redemption Agreement and the incumbency of its
officers; and
o the closing of the Purchase Agreement.
General Releases
The Redemption Agreement provides for mutual general releases by SendTec's
management and theglobe. Excluded from the general release to be provided by
SendTec's management are matters involving:
o the Redemption Agreement itself;
o theglobe's obligations under the $1 million promissory note issued
to Paul Soltoff as agent for the benefit of SendTec's management and
others;
78
o claims for indemnification as a former director or officer of
theglobe or its affiliates; and
o claims based upon their employment.
Excluded form the general release to be provided by theglobe are matters
involving the Redemption Agreement itself.
The general releases will become null and void if, pursuant to a final,
non-appealable determination of a court of competent jurisdiction:
o the Redemption Agreement is held to be null and void and
unenforceable or the consideration paid by theglobe under the
Redemption Agreement is determined to violate the Delaware General
Corporation Law, fraudulent transfer laws, or similar laws; and
o the consideration paid by theglobe under the Redemption Agreement is
required to be returned to theglobe.
Indemnification
The Redemption Agreement provides for mutual indemnification by the parties
relating to breaches of their respective representations and warranties and
failure to abide by their respective agreements. theglobe, however, will have no
recourse against SendTec's management for breach of the Operational
Representations, other than recovery of 50% of its legal fees up to an aggregate
of $50,000. Instead, as a third-party beneficiary to the Operational
Representations being made by SendTec's management, RelationServe will have the
ability to seek indemnification for a breach of those representations.
RelationServe's recovery against SendTec's management will be generally limited
to recovery of 200,000 shares of RelationServe's stock which theglobe
understands RelationServe intends to issue, and hold in escrow, pursuant to a
separate agreement between RelationServe and SendTec management.
Termination
The Redemption Agreement may be terminated at any time prior to the closing of
the Purchase Agreement:
o by theglobe and Paul Soltoff, with the consent of RelationServe
(which consent will be deemed given if the escrow agreement pursuant
to which 200,000 shares of RelationServe stock are to be held in
escrow is terminated. The 200,000 shares represent shares which we
understand RelationServe intends to issue to SendTec management and
hold in escrow pursuant to a separate agreement between them in
connection with the closing of the asset sale) by mutual written
agreement;
o by theglobe or by Paul Soltoff, if the closing of the Asset Purchase
Agreement does not occur on or prior to November 30, 2005;
o by theglobe or by Paul Soltoff, if the Asset Purchase Agreement is
terminated.
Termination Agreement
General
In connection with the Purchase Agreement, theglobe will enter into one or more
Termination Agreements with SendTec's management providing for the termination
and cancellation, effective upon the closing of the Purchase Agreement, of
options and warrants held by, or issuable to, SendTec's management for an
aggregate consideration of approximately $400,000. The Termination Agreement
also contains the agreement of SendTec's management to the termination of their
employment with SendTec effective upon the closing of the Purchase Agreement. We
anticipate entering into similar agreements with a few other employees of
SendTec with regard to options and warrants which they own. The Termination
Agreement is also anticipated to contain customary representations and
warranties. The following summarizes the anticipated general terms of the
Termination Agreement.
79
Release
Each member of SendTec's management will, effective at the closing of the
Purchase Agreement, release theglobe, SendTec and their respective affiliates
from claims associated with their ownership of the options and warrants and
their employment with SendTec.
Covenant not to Sue
Each member of SendTec's management will agree not to assert any claim against
theglobe, SendTec and/or their respective affiliates that is the subject of his
or her release.
Survival of Confidentiality Obligations
Each member of SendTec's management that is party to an Employment Agreement
with SendTec will agree that his confidentiality obligations under his
Employment Agreement will survive the termination of his Employment Agreement.
Termination
The Termination Agreement may be terminated at any time prior to the closing of
the Purchase Agreement:
o by theglobe and Paul Soltoff by mutual written agreement;
o by theglobe or by Paul Soltoff, if the closing of the Purchase
Agreement does not occur on or prior to November 30, 2005; or
o by theglobe or by Paul Soltoff, if the Purchase Agreement is
terminated.
Hold Back Escrow Agreement
The Purchase Agreement provides for the execution and delivery by RelationServe,
theglobe, and Olshan Grundman Frome Rosenzweig & Wolosky, LLP, as escrow agent,
of an Escrow Agreement. The Escrow Agreement will govern the Escrow Fund
described above in "The Purchase Agreement - Indemnification and Escrow" and as
further described below.
The Escrow Fund will consist of $1 million in cash, together with a number of
shares of our restricted common stock having an aggregate value of Seven Hundred
and Fifty Thousand Dollars ($750,000) (valued at the average closing price of
theglobe's Common Stock over a trailing ten (10) day period prior to the
Closing), and its purpose is to secure theglobe's indemnification obligations
under the Purchase Agreement. Funds will be released from escrow to theglobe in
accordance with the following schedule: $750,000 in cash after the sooner of 6
months from the date of closing and completion by RelationServe of the audit of
SendTec's operations for the period ending December 31, 2005, with the shares
constituting the balance of the escrow fund being released after one year and 45
days from the closing date, in each case assuming no claims against the escrow.
If at the time a claim is made for indemnification the escrow shares have
diminished in value below $750,000, then theglobe must make up the difference of
any shortfall (up to the $750,000 amount) in cash. theglobe may also elect to
pay cash in lieu of releasing any of the escrow shares in the event of a claim.
Any shares released from escrow will be entitled to customary "piggy-back"
registration rights.
The Escrow Agreement will also set forth the duties of the Escrow Agent and
contain various other customary provisions.
REASONS FOR THE ASSET SALE
SendTec was originally acquired by us on September 1, 2004 in exchange for
consideration consisting of:
o $6,000,000 in cash,
o the issuance of an aggregate of approximately 35,000,000 shares of
theglobe's Common Stock,
o a subordinated promissory note in the amount of $1 million due
September 1, 2005; and
o an undertaking to issue warrants to acquire an additional 2,500,000
shares of Common Stock to the SendTec shareholders when and if
SendTec achieves certain earnings before income taxes, depreciation
and amortization ("EBITDA") targets for the year ending December 31,
2005.
We also issued various replacement options and earn-out options to employees of
SendTec in connection with the acquisition.
80
During the first quarter of 2005, management began actively re-evaluating
theglobe's primary business lines, particularly in view of theglobe's critical
need for cash and the overall net losses of theglobe. Since that time,
management with the assistance of Thomas Weisel Partners, its financial
advisors, has explored a number of strategic alternatives for theglobe and/or
its component businesses, including continuing to operate the businesses,
selling certain businesses or assets, or entering into new businesses.
As part of the re-evaluation process, theglobe, during the first quarter of
2005, made the decision to discontinue using its SendTec business to perform
marketing services for its VoIP telephony business, and to instead dedicate 100%
of SendTec's marketing resources to support and grow SendTec's own third party
revenue producing customer base. A significant part of the rationale for
theglobe's acquisition of SendTec in September 2004 related to the perceived
synergies initially thought to be obtainable by having SendTec effectively
function as the marketing department for theglobe's VoIP telephony business. By
the first quarter of 2005, it became apparent that this marketing strategy was
not viable and that the initially perceived synergies would not be realized. It
was at this point in time that the continued ownership of SendTec became less
strategically important to the Company.
On May 9, 2005, based upon management's expectation of favorable investment
returns, theglobe exercised its purchase option and acquired Tralliance
Corporation ("Tralliance"), an Internet related business venture. Tralliance was
created to develop, operate and administer the ".travel" top-level domain, a new
segment of the Internet devoted to the travel industry. Tralliance recently
entered into an agreement with the Internet Corporation for Assigned Names and
Numbers ("ICANN") to become the registry operator for the ".travel" top-level
domain. The Tralliance purchase price consisted of the issuance of 2,000,000
shares of theglobe's Common Stock, warrants to acquire 475,000 shares of
theglobe's Common Stock at $0.11 per share and $40,000 in cash.
theglobe's consolidated cash and cash equivalents balance at September 15, 2005
was approximately $1.6 million. We currently have no access to credit facilities
with traditional third party lenders. Notwithstanding the $4.0 million in total
proceeds received from the issuance of convertible promissory notes to
partnerships controlled by our Chairman and Chief Executive Officer during
April, June and July of 2005, our attempts to raise additional equity capital
since the beginning of 2005 have not been successful. Additionally, based upon
its current financial condition, management does not believe that theglobe would
be able to raise additional equity capital in the foreseeable future. Management
also believes that other than its SendTec business, theglobe owns no other
business or asset(s) that could likely be sold within the short-term future for
significant cash proceeds.
Management believes that theglobe will continue to be unprofitable and use cash
in its operations during the remainder of 2005. Additionally, the $1.0 million
promissory note issued in connection with the SendTec acquisition became due on
September 1, 2005. Due to its short-term liquidity problems, the Company did not
pay such promissory note when due, which constitutes an event of default under
the promissory note. Upon default, the Company is required to pay a default rate
of interest of 15% per annum and to pay the noteholders' collection costs, if
any.
In consideration of the above, theglobe's Board of Directors concluded that
their failure to approve the sale of its SendTec business to RelationServe would
expose theglobe to the risk of forced asset liquidation and/or further equity
dilution at or below current market price and/or having to file for bankruptcy
protection. The Board further concluded that the net cash proceeds received from
the sale of SendTec would provide sufficient liquidity to enable theglobe to
complete the development of and begin the implementation of a strategic business
plan and to operate its remaining businesses on a going concern basis.
OUR FUTURE PLANS
The Company's VoIP telephony services and computer games business continue to
incur operating losses at the present time. Additionally, our newly-acquired
Internet service business, Tralliance, is on the verge of evolving from the
start-up phase of its operations and plans to begin collecting fees for its
services during the fourth quarter of 2005. Following the consummation of the
Asset Sale, we intend to continue to operate our remaining businesses, while we
complete the development of our new strategic business plan.
Our new business plan may involve making certain changes to improve the
profitability of existing businesses or may instead result in decisions to sell
or dispose of certain unprofitable businesses or components. Additionally, we
may use the proceeds from the Asset Sale to enter into one or more new lines of
business, through either acquisitions or internal development.
81
For information showing the pro forma effect of the asset sale, see "Certain Pro
Forma Financial Information and Related Data."
RISK FACTORS RELATING TO THE SENDTEC ASSET SALE AND THE DISPOSITION OF THE
SENDTEC BUSINESS
The SendTec Asset Sale Is Subject To Satisfaction Of A Number Of Closing
Conditions, Some Of Which May Be Beyond Our Ability To Control.
The consummation of the Asset Sale involves risks, including conditions to the
obligation of RelationServe to complete the Asset Sale, all of which must either
be satisfied or waived prior to the completion of the Asset Sale. We do not
control all of these conditions to closing.
If all closing conditions are not satisfied on a timely basis, the Asset Sale
could be delayed. If certain closing conditions are not satisfied at all, the
Asset Sale may never be closed. If the Asset Sale breaks up and never closes,
the Company may not be able to find an alternative buyer for its SendTec
business or otherwise raise sufficient capital needed to operate its businesses.
In any of such events, the Company's liquidity and cash resources would likely
decrease, resulting in an adverse impact to its business operations and
financial condition.
The Anticipated Benefits Of The SendTec Asset Sale May Not Be Realized.
The cash proceeds received from the SendTec Asset Sale are expected to provide
sufficient liquidity to enable the Company to operate on a going concern basis
and to complete the development of and begin the implementation of a strategic
business plan. SendTec currently represents the Company's only profitable
business, with its VoIP telephony services and computer games businesses
continuing to incur operating losses at the present time. It's newly acquired
Internet services business, Tralliance Corporation ("Tralliance"), is on the
verge of evolving from the start-up phase of its operations and plans to begin
collecting fees for its services in the fourth quarter of 2005.
In order to capitalize on and realize the benefits of the SendTec Asset Sale,
the Company must either sell or dispose of unprofitable businesses, make changes
which transform unprofitable businesses into profitable ones, and/or acquire or
internally develop new profitable businesses, including Tralliance. There can be
no assurance that the Company will be successful in taking any of the above
actions which would enable it to achieve satisfactory investment returns in
future periods and realize the benefits of selling its SendTec business.
The Market Price Of theglobe.com's Common Stock May Decline As A Result Of The
SendTec Asset Sale.
The market price of our Common Stock may decline as a result of the SendTec
Asset Sale if:
o the sale of the SendTec business, theglobe's only profitable business, is
perceived negatively by investors; or
o investors become skeptical that theglobe can invest the cash proceeds received
for the SendTec Asset Sale in businesses that have acceptable returns on
investment in future periods.
The market price of theglobe.com's Common Stock could also decline as a result
of unforeseen factors related to the SendTec Asset Sale.
82
theglobe.com, inc.
CERTAIN PRO FORMA FINANCIAL INFORMATION AND RELATED DATA
INDEX TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page
----
Introduction to Pro Forma Condensed
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . PF-2
Pro Forma Condensed Consolidated
Balance Sheet as of June 30, 2005. . . . . . . . . . . . . . . . . . . . . PF-3
Pro Forma Condensed Consolidated Statement
of Operations for the year ended December 31, 2004. . . . . . . . . . . . . PF-4
Pro Forma Condensed Consolidated Statement
of Operations for the six months ended June 30, 2005. . . . . . . . . . . . PF-5
Notes to Pro Forma Condensed Consolidated Financial Statements. . . . . . . PF-6
PF-1
theglobe.com, inc.
INTRODUCTION TO PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma condensed consolidated financial statements give effect
to (i) the Asset Purchase Agreement (the "Agreement") with RelationServe Media,
Inc. ("RelationServe") entered into by theglobe.com, inc. ("theglobe" or the
"Company") and SendTec, Inc. ("SendTec") on August 10, 2005, as amended, whereby
the Company agreed to sell all of the business and substantially all of the net
assets of its SendTec marketing services subsidiary to RelationServe, and (ii)
the related ancillary agreements, including the Redemption Agreement and the
Termination Agreement (the "Ancillary Agreements") as contemplated by the
transaction. The pro forma condensed consolidated balance sheet of theglobe as
of June 30, 2005 has been prepared as if the Company's sale of the SendTec
business and the redemption and termination of shares pursuant to the Ancillary
Agreements had been consummated on June 30, 2005. The pro forma condensed
consolidated statements of operations of theglobe for the year ended December
31, 2004 and the six months ended June 30, 2005 are presented as if the
Company's sale of the SendTec business and the redemption of shares pursuant to
the Redemption Agreement occurred on September 1, 2004 (the original date of
acquisition of SendTec by the Company) and the effect was carried forward
through the balance of the year 2004 and the six month period ended June 30,
2005. The pro forma condensed consolidated statement of operations for the year
ended December 31, 2004 excludes the estimated net gain resulting from the sale
of the SendTec business.
Pursuant to the terms of the Agreement, the sales price of the SendTec business
will be $37,500,000 in cash, subject to certain net working capital adjustments.
The closing of the transaction is subject to the satisfaction of a number of
closing conditions. Pursuant to the terms of the Ancillary Agreements, the
Company will redeem approximately 28,900,000 shares of its Common Stock, and
terminate certain other options and warrants, owned by management and certain
employees of SendTec for approximately $12,600,000 in cash. These shares and
related options and warrants were issued to management and certain employees of
SendTec in connection with the Company's acquisition of SendTec on September 1,
2004.
The pro forma condensed consolidated financial statements are based upon
available information and certain assumptions considered reasonable by
management. The pro forma condensed consolidated financial statement reflect
estimated federal and state income tax liabilities which may be subject to
further adjustment based on the actual carrying value of net assets sold at the
date of closing, among other considerations. The pro forma condensed
consolidated financial statements do not represent what the Company's financial
position would have been assuming the completion of the Company's sale of the
SendTec business and the redemption and termination of shares pursuant to the
Ancillary Agreements had occurred on June 30, 2005, or what the Company's
results of operations would have been assuming the completion of the Company's
sale of the SendTec business and the redemption of shares pursuant to the
Redemption Agreement had occurred on September 1, 2004, nor do they project the
Company's financial position or results of operations at any future date or for
any future period. These pro forma condensed consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2004 and its Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005 as filed with the Securities and Exchange
Commission.
PF-2
theglobe.com, inc.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2005
(UNAUDITED)
Securities
theglobe Disposition Redemption/ PRO FORMA
HISTORICAL Adjustments Termination ADJUSTED
---------- ----------- ----------- --------
Assets
Current Assets:
Cash and cash equivalents $ 4,976,487 $(3,926,426) (a) $(12,600,000) (f) $26,461,516
36,200,000 (b)
(1,000,000) (c)
2,811,455 (d)
Restricted cash -- 1,000,000 (c) -- 1,000,000
Marketable securities 42,736 -- -- 42,736
Accounts receivable, net 8,210,661 (7,385,596) (a) -- 825,065
Inventory, net 247,195 -- -- 247,195
Prepaid expenses 995,946 (390,767) (a) -- 605,179
Deposits on inventory purchases 77,250 -- -- 77,250
Other current assets 277,647 (2,600) (a) -- 275,047
------------- ------------- ------------- -------------
Total current assets 14,827,922 27,306,066 (12,600,000) 29,533,988
Goodwill 11,709,952 (11,709,952) (a) -- --
Intangible assets 2,045,211 (1,500,000) (a) -- 545,211
Property and equipment, net 2,931,215 (902,969) (a) -- 2,028,246
Other assets 95,422 (28,604) (a) -- 66,818
------------- ------------- ------------- -------------
Total assets $31,609,722 $ 13,164,541 $(12,600,000) $ 32,174,263
============= ============= ============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 8,701,615 $ (6,650,682) (a) $ -- $ 2,050,933
Accrued expenses and other current
liabilities 3,479,574 (2,104,667) (a) -- 2,374,907
1,000,000 (e)
Deferred revenue 266,719 (138,585) (a) -- 128,134
Notes payable and current portion
of long-term debt 4,131,379 -- -- 4,131,379
------------- ------------- ------------- -------------
Total current liabilities 16,579,287 (7,893,934) -- 8,685,353
Long-term debt 7,264 -- -- 7,264
Other long-term liabilities 130,366 -- -- 130,366
------------- ------------- ------------- -------------
Total liabilities 16,716,917 (7,893,934) -- 8,822,983
------------- ------------- ------------- -------------
Stockholders' Equity:
Common stock 187,355 7,500 (c) (29,578) (f) 165,277
Additional paid-in capital 286,070,574 742,500 (c) (112,829) (f) 286,700,245
Treasury stock, at cost (371,458) -- 371,458 (f) --
Escrowed shares -- (750,000) (c) -- (750,000)
Accumulated deficit (270,993,666) 21,058,475 (e) (12,829,051) (f) (262,764,242)
------------- ------------- ------------- -------------
Total stockholders' equity 14,892,805 21,058,475 (12,600,000) 23,351,280
------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity $ 31,609,722 $ 13,164,541 $ (12,600,000) $ 32,174,263
============= ============= ============= =============
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
PF-3
theglobe.com, inc.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(UNAUDITED)
theglobe Disposition PRO FORMA
HISTORICAL Adjustments ADJUSTED
------------ ------------ ------------
Net revenue $16,041,032 $(13,408,183) (g) $3,498,791
------------ ------------
865,942 (h)
------------
Operating expenses:
Cost of revenue 18,262,105 (9,670,229) (g) 9,054,739
462,863 (h)
Sales and marketing 7,386,637 (691,654) (g) 7,098,062
403,079 (h)
Product development 1,053,886 -- 1,053,886
General and administrative 9,102,151 (1,621,146) (g) 7,246,774
(234,231) (i)
Depreciation 1,402,712 (107,270) (g) 1,295,442
Amortization of intangibles 222,834 (120,000) (g) 102,834
Impairment charge 1,661,975 -- 1,661,975
Loss on settlement of contractual obligation 406,750 -- 406,750
------------ ------------ ------------
Total operating expenses 39,499,050 (11,578,588) 27,920,462
------------ ------------ ------------
Loss from operations (23,458,018) (963,653) (24,421,671)
------------ ------------ ------------
Other expense, net:
Interest expense, net (656,633) (9,715) (g) (666,348)
Other expense, net (158,550) -- (158,550)
------------ ------------ ------------
Other expense, net (815,183) (9,715) (824,898)
------------ ------------ ------------
Loss before income taxes (24,273,201) (973,368) (25,246,569)
Income taxes -- -- --
------------ ------------ ------------
Net loss $(24,273,201) $ (973,368) $(25,246,569)
============ ============ ============
Basic and diluted net loss per common share $ (0.19) $ (0.21)
============ ============
Weighted average basic and diluted
shares outstanding 127,843,000 121,886,000 (j)
============ ============
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
PF-4
theglobe.com, inc.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
theglobe Disposition PRO FORMA
HISTORICAL Adjustments ADJUSTED
------------ ------------ ------------
Net revenue $ 19,425,046 $(18,469,603) (g) $ 1,280,160
------------ -------------
324,717 (h)
------------
Operating expenses:
Cost of revenue 16,638,712 (12,669,759) (g) 4,165,571
196,618 (h)
Sales and marketing 2,175,902 (1,063,516) (g) 1,240,485
128,099 (h)
Product development 654,257 -- 654,257
General and administrative 6,099,641 (2,357,554) (g) 3,412,777
(329,310) (i)
Depreciation 752,539 (169,368) (g) 583,171
Amortization of intangibles 198,800 (180,000) (g) 18,800
------------ ------------ ------------
Total operating expenses 26,519,851 (16,444,790) 10,075,061
------------ ------------ ------------
Loss from operations (7,094,805) (1,700,096) (8,794,901)
------------ ------------ ------------
Other expense, net:
Interest expense, net (3,029,574) (25,032) (g) (3,054,606)
Other expense, net (278,837) -- (278,837)
------------ ------------ ------------
Other expense, net (3,308,411) (25,032) (3,333,443)
------------ ------------ ------------
Loss before income taxes (10,403,216) (1,725,128) (12,128,344)
Income taxes 15,576 (15,576) (g) --
------------ ------------ ------------
Net loss $(10,418,792) $ (1,709,552) $(12,128,344)
============ ============ ============
Basic and diluted net loss
per common share $ (0.06) $ (0.08)
============ ===========
Weighted average basic and diluted
shares outstanding 177,680,000 148,801,000 (j)
============ ===========
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
PF-5
theglobe.com, inc.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BALANCE SHEET
(a) To reflect the adjustment required to eliminate the assets sold and
liabilities assumed in connection with the sale of our SendTec business to
RelationServe.
(b) To reflect the $37,500,000 in cash proceeds as per the Agreement, less a
$1,000,000 fee payable to the Company's financial advisors and $300,000 in other
estimated transaction costs.
(c) To reflect the $1,000,000 in cash proceeds and common shares valued at
$750,000 which will be escrowed as per the Escrow Agreement.
(d) To reflect the cash proceeds received as a result of the net working capital
adjustment as defined in the Agreement, estimated herein using net working
capital of SendTec as of June 30, 2005.
(e) To reflect the estimated gain on sale of SendTec assets net of applicable
estimated Federal and state income taxes and to reflect accruals for such
estimated income taxes.
(f) To record the redemption and retirement of 28,879,097 common shares
purchased from the management of SendTec pursuant to the terms of the Ancillary
Agreements. Also assumes the retirement of the 699,281 shares of treasury stock
held by the Company as of June 30, 2005. Also reflects the redemption and
cancellation of certain options to acquire common stock of theglobe previously
issued to SendTec management and employees.
STATEMENT OF OPERATIONS
(g) To reflect the adjustment required to eliminate the results of operations of
our SendTec subsidiary for the period indicated.
(h) To reflect the adjustment to reverse the elimination of intercompany revenue
recorded and the related costs incurred by SendTec for marketing services
provided to the Company's VoIP telephony services business for the period
indicated.
(i) To reflect the elimination of deferred compensation recorded related to
replacement stock options issued to SendTec employees in connection with the
acquisition of SendTec on September 1, 2004 for the period indicated.
(j) The weighted average basic and diluted shares outstanding for the twelve
months ended December 31, 2004 assumes the common shares redeemed were split
evenly between those issued as of September 1, 2004, the SendTec acquisition
date, and those issued December 1, 2004 as a result of the conversion of
preferred shares issued at acquisition into theglobe.com Common Stock, and that
such shares were redeemed on their respective date of issuance. The weighted
average basic and diluted shares outstanding for the six months ended June 30,
2005 assumes the common shares were redeemed as of January 1, 2005.
PF-6
INFORMATION ABOUT SENDTEC, INC. ("SENDTEC")
SENDTEC, INC. BUSINESS
For a description of SendTec's business, please refer to "Description of
Business - Our Marketing Services Business' included elsewhere herein.
SELECTED SENDTEC, INC. FINANCIAL DATA (1)
The selected balance sheet data as of December 31, 2004 and 2003 and as of June
30, 2005 and the selected operating data for the years ended December 31, 2004,
2003 and 2002 and the six months ended June 30, 2005 and June 30, 2004 have been
derived from SendTec's unaudited financial statements included elsewhere herein.
The selected balance sheet data as of December 31, 2002, 2001 and 2000 and as of
June 30, 2004 and the selected operating data for the years ended December 31,
2001 and 2000 have been derived from SendTec's unaudited financial statements
not included herein. The selected SendTec financial data presented below,
together with the accompanying notes, should be read in conjunction with
SendTec's unaudited financial statements and related notes and SendTec's
Management's Discussion and Analysis of Financial Condition and Results of
Operation contained elsewhere in this Registration Statement.
Six Months Ended
June 30, Year Ended December 31,
--------------------- -----------------------------------------------------
2005(2) 2004 2004(2) 2003 2002 2001 2000
---------- ------- --------- ------ ------- ------- -------
(In thousands)
Operating Data:
Net revenue $ 18,470 $ 13,922 $ 32,652 $ 15,441 $ 8,569 $ 3,586 $ 3,883
Gross profit 5,800 4,740 10,089 6,751 3,316 1,622 1,573
Operating expenses 3,771 2,875 7,171 4,130 2,988 2,655 1,640
Income (loss) from Operations 2,029 1,865 2,918 2,621 328 (1,034) (67)
Net income (loss) 1,275 1,134 1,722 1,603 178 (966) 6
Balance Sheet Data (at end of period):
Total assets $ 30,538 $ 8,060 $ 27,649 $ 7,458 $ 4,244 $ 1,973 $ 3,837
(1) Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on the net income
(loss) previously reported by SendTec, Inc. ("SendTec").
(2) On September 1, 2004, theglobe acquired 100% of the issued and outstanding
capital stock of SendTec for a total purchase price of approximately $18.4
million. For financial reporting purposes, theglobe's purchase price was "pushed
down" into the accounts of SendTec, resulting effectively in a recapitalization
of SendTec as of September 1, 2004. The allocation of theglobe's purchase price
to the SendTec acquired assets resulted in the establishment of goodwill and
intangible assets related to non-compete agreements of $11.7 million and $1.8
million, respectively, on SendTec's balance sheet as of the date of acquisition.
The balance sheet data presented above at June 30, 2005 and December 31, 2004
reflects such purchase price allocation. Amortization expense related to the
non-compete intangibles of $180 thousand and $120 thousand is included in the
operating data results above for the six months ended June 30, 2005 and the year
ended December 31, 2004, respectively.
89
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SENDTEC'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS; GOING CONCERN
Certain matters discussed below under "Liquidity and Capital Resources" related
to the liquidity and financial condition of theglobe, SendTec's parent company,
raise substantial doubt about theglobe's and SendTec's ability to continue as
going concerns. In addition, theglobe received a report from its independent
accountants, relating to its December 31, 2004 audited financial statements
containing an explanatory paragraph stating that its recurring losses from
operations and its accumulated deficit raise substantial doubt about its ability
to continue as a going concern. As SendTec is a wholly-owned subsidiary of
theglobe, such going concern doubt also extends to SendTec. SendTec's financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, SendTec's financial statements do
not include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should it be unable to
continue as a going concern.
OVERVIEW
SendTec was incorporated in February 2000 in the State of Florida and commenced
operations on that date. Originally, SendTec incorporated under the name
prizecrazy.com and was envisioned to become a free consumer gaming website that
monetized consumer traffic on the website through online "cost-per-impression"
or "CPM" advertising. Because of a significant decline in the pricing of online
CPM advertising during this period of time, the prizecrazy.com website
development was abandoned and the company modified its business strategy so as
to become a direct response marketing services company. In conjunction with this
change in strategy, prizecrazy.com changed its name to DirectNet Advertising.net
("DNA") to better define the company's operational focus.
At the time, DNA was one of only a few online marketing services companies that
was providing performance-based (i.e. cost-per-action, cost-per-lead,
cost-per-sale) advertising solutions to advertising clients. As part of its
marketing services offering, DNA also began developing proprietary software to
facilitate the tracking of actions online for its advertisers and its
distribution network. Today, SendTec's Results, Optimization, Yield ("ROY")
online tracking software provides the company with a unique competitive
advantage by enabling SendTec to optimize campaigns and by enabling advertising
clients and distribution partners to access real-time conversion information. In
February of 2002, DNA acquired 100% of the stock of iFactz, Inc. ("iFactz") in a
merger transaction. iFactz has developed software that enables the tracking of
online response to distinct sources of offline advertising. The iFactz software
provides an excellent complementary platform for DNA's ROY tracking software and
enables DNA to offer a complete technology tracking solution for online and
offline direct response marketing. During this same period of time, DNA changed
its name to SendTec, Inc. to better define itself in the market.
Today, SendTec is a direct response marketing services and technology company.
SendTec provides customers a complete offering of direct marketing products and
services to help them market their products both on the Internet ("online") and
through traditional media channels such as television, radio and print
advertising ("offline"). By utilizing SendTec's marketing products and services,
SendTec's clients seek to increase the effectiveness and the return on
investment of their advertising campaigns. SendTec's online and offline direct
marketing products and services include strategic campaign development, creative
development, creative production and post-production, media buying and tracking,
campaign management, campaign analysis and optimization, technology systems
implementation and integration for campaign tracking and many other agency type
services.
On September 1, 2004, theglobe acquired all of the issued and outstanding shares
of the capital stock of SendTec for consideration consisting of: (i) $6.0
million in cash, (ii) the issuance of an aggregate of 17,500,024 shares of
theglobe's common stock, (iii) the issuance of an aggregate of 175,000 shares of
theglobe's Series H Automatically Converting Preferred Stock (which was
subsequently converted into approximately 17,500,500 shares of theglobe's common
stock), and (iv) the issuance of a subordinated promissory note in the amount of
$1 million. In addition, warrants to acquire shares of theglobe's common stock
would be issued to the former shareholders of SendTec when and if SendTec
exceeds forecasted operating income, as defined, of $10.125 million, for the
year ending December 31, 2005. The number of earn-out warrants would range from
an aggregate of approximately 250,000 to 2,500,000 (if actual operating income
exceeds the forecast by at least 10%). If and to the extent the warrants are
earned, the exercise price of the performance warrants would be $0.27 per share
and they will be exercisable for a period of five years. theglobe also issued an
aggregate of approximately 4,000,000 replacement options to acquire theglobe's
common stock for each of the issued and outstanding options to acquire SendTec
shares held by the former employees of SendTec. The total consideration paid by
theglobe to acquire SendTec was valued at approximately $18.4 million. For
financial accounting purposes, theglobe's purchase price was "pushed down" into
the accounts of SendTec, resulting effectively in a recapitalization of SendTec
as of September 1, 2004. The allocation of theglobe's purchase price to the
SendTec acquired assets also resulted in the establishment of goodwill and
intangible assets related to non-compete agreements of $11.7 million and $1.8
million, respectively, on SendTec's balance sheet at the date of acquisition.
90
Due to the weak financial condition and liquidity of theglobe, SendTec's parent
company (see the "Liquidity and Capital Resources" section for further details),
theglobe's management during the first quarter of 2005 engaged financial
advisors to assist theglobe in connection with raising capital through a private
placement of equity securities in either theglobe or its SendTec wholly-owned
subsidiary or alternatively in selling either part or all of theglobe's
businesses or assets, including its SendTec business. On August 10, 2005,
theglobe entered into an asset purchase agreement, as amended on August 23, 2005
(the "Purchase Agreement") with RelationServe Media, Inc. ("RelationServe")
whereby theglobe and SendTec agreed to sell all of the business and
substantially all of the net assets of SendTec to RelationServe for $37.5
million in cash, subject to certain net working capital adjustments. In
addition, on August 23, 2005, theglobe entered into a Redemption Agreement with
six members of the management of SendTec (the "Redemption Agreement") to redeem
approximately 28.9 million shares of theglobe's common stock owned by such
management for approximately $11.6 million in cash. The closing of the
redemption of these shares is contingent on, and will occur immediately after,
the closing of the Purchase Agreement. theglobe also anticipates that it will be
terminating and canceling certain options and warrants held by these six members
of management for approximately $0.4 million in cash. These shares and related
options and warrants were issued to SendTec management in connection with
theglobe's acquisition of SendTec. theglobe further expects to terminate or
cancel the options of a few other employees of SendTec and enter into severance
bonus arrangements with others for cash payments totaling approximately $0.5
million. The closing of the asset sale is subject to the satisfaction of a
number of closing conditions including distribution of a definitive information
statement describing the asset sale to theglobe's stockholders which was
undertaken commencing on September 16, 2005, with the closing anticipated to
occur on or about October 11, 2005.
Due to the acquisition of SendTec by theglobe on September 1, 2004, the
presentation and discussions below are not in all respects comparable to the
discussion of SendTec (and the marketing services segment) contained in
theglobe's consolidated financial statements and related Management's Discussion
and Analysis of Financial Condition and Results of Operations found elsewhere in
this document.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004
NET REVENUE: Net Revenue totaled $18.5 million for the six months ended June 30,
2005 as compared to $13.9 million for the six months ended June 30, 2004.
SendTec's net revenue was primarily generated from three areas: online
performance advertising, offline direct response television media buying and
online and offline strategic marketing services. The increase of $4.6 million in
total net revenue as compared to the first half of 2004 was primarily
attributable to increased online performance advertising revenue. Online
performance advertising revenue totaled $16.0 million for the six months ended
June 30, 2005 as compared to $12.3 for the six months ended June 30, 2004. The
30% increase in online performance advertising resulted from the addition of
several new online advertising clients. Online performance advertising revenue
comprised approximately 87.0% and 88.7% of SendTec's total net revenue for the
six months ended June 30, 2005 and 2004, respectively.
COST OF REVENUE: Cost of revenue consists of third party vendor costs for
research, production and post production services plus all third party vendor
fees incurred to acquire advertising media, including the actual cost of the
media. Cost of revenue totaled $12.7 million for the six months ended June 30,
2005 as compared to $9.2 million for the same period of the prior year.
Approximately 98.4% of the increase in cost of revenue as compared to the first
half of 2004 resulted from an increase in cost of revenue related to online
performance advertising. This increase was directly attributable to the increase
in online performance based advertising revenue in the six months ended June 30,
2005, as compared to the same period in 2004. Cost of revenue related to online
performance advertising represented approximately 95.4% and 94.2% of SendTec's
total cost of revenue for the six months ended June 30, 2005 and 2004,
respectively. Additionally, cost of revenue resulting from online performance
advertising was approximately 75.3% and 70.1% of online performance advertising
revenue for the six months ended June 30, 2005 and 2004, respectively.
91
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs of sales, operations and general and administrative employees. This
expense category also includes costs for facilities rent, legal and professional
services, server hosting and bandwidth services, marketing services and other
general corporate overhead. Selling, general and administrative expenses totaled
$3.4 million for the six months ended June 30, 2005 as compared to $2.7 million
for the six months ended June 30, 2004. Employee salaries, commissions and
benefits represented approximately 77.7% and 78.4% of total selling, general and
administrative expenses for the six months ended June 30, 2005 and 2004
respectively. Approximately $0.5 million of the total increase in selling,
general and administrative expenses as compared to the six months ended June 30,
2004 resulted from increased salaries, commissions and benefits paid to
employees. The increase in employee costs was primarily a result of an increase
in the number of employees as compared to the first half of 2004. SendTec
employed 58 and 41 at the end of June 30, 2005 and 2004 respectively.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense totaled
$0.3 million for the six months ended June 30, 2005. The $0.2 million increase
from the same period of the prior year resulted principally from the
amortization of non-compete intangibles recorded as a result of the acquisition
of SendTec by theglobe.com.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET REVENUE: Net Revenue totaled $32.7 million for the year ended December 31,
2004 as compared to $15.4 million for the year ended December 31, 2003.
SendTec's net revenue was primarily generated from three areas: online
performance advertising, offline direct response television media buying and
online and offline strategic marketing services. The increase of $17.3 million
in total net revenue as compared to 2003 was primarily attributable to increased
online performance advertising revenue. Online performance advertising revenue
totaled $28.4 million during 2004 as compared to $12.3 during 2003. The 131%
increase in online performance advertising resulted from the addition of several
new online advertising clients and a $7.3 million increase in the revenue
generated by SendTec's largest existing online performance advertising client.
Online performance advertising revenue represented approximately 87.0% and 79.5%
of SendTec's total net revenue in 2004 and 2003, respectively.
COST OF REVENUE: Cost of revenue consists of third party vendor costs for
research, production and post production services plus all third party vendor
fees incurred to acquire advertising media, including the actual cost of the
media. Cost of revenue totaled $22.6 million for 2004 as compared to $8.7
million for 2003. The increase in cost of revenue related to online performance
advertising accounted for the entire increase in total cost of revenue as
compared to the year ended December 31, 2003. The increase was directly
attributable to the increase in online performance based advertising revenue in
2004 as compared to 2003. Cost of revenue related to online performance
advertising represented approximately 95.1% and 85.3% of SendTec's total cost of
revenue for 2004 and 2003, respectively. Additionally, online performance
advertising cost of revenue was approximately 75.6% and 60.4% of online
performance advertising revenue during 2004 and 2003, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs of sales, operations and general and administrative employees. This
expense category also includes costs for facilities rent, legal and professional
services, server hosting and bandwidth services, marketing services and other
general corporate overhead. Selling, general and administrative expenses totaled
$6.8 million for the year ended December 31, 2004 as compared to $3.9 million
for the year ended December 31, 2003. Employee salaries, commissions and
benefits represented approximately 76.7% and 80.9% of total selling, general and
administrative expenses in 2004 and 2003, respectively. Approximately $2.0
million of the $2.9 million increase in selling, general and administrative
expenses as compared to 2004 resulted from increased salaries, commissions and
benefits paid to employees. This increase in employee costs was principally due
to the increase in the number of employees between 2003 and 2004. SendTec
employed 51 and 32 at the end of 2004 and 2003, respectively. Additionally,
professional fees increased $0.3 million in 2004 as compared to 2003 primarily
due to legal, accounting and investment banking fees related to the acquisition
of SendTec by theglobe.com on September 1, 2004.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense totaled
$0.4 million for the year ended December 31, 2004. The $0.2 million increase
from the prior year was primarily due to the amortization of non-compete
intangibles recorded as a result of the acquisition of SendTec by theglobe.com
and an increase in depreciation expense as a result of capital expenditures
related to SendTec's new office facility.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET REVENUE: Net Revenue totaled $15.4 million for the year ended December 31,
2003 as compared to $8.6 million for the year ended December 31, 2002. SendTec's
net revenue was principally generated from three areas: online performance
advertising, offline direct response television media buying and online and
offline strategic marketing services. The increase of $6.8 million in total net
revenue as compared to 2002 was primarily attributable to increased online
performance advertising revenue. Online performance advertising revenue totaled
$12.3 million for 2003 as compared to $7.0 for 2002. The 76% increase in online
performance advertising revenue resulted from the addition of several new online
advertising clients and a $3.3 million increase in the revenues generated by
SendTec's largest existing online performance advertising client. Online
performance advertising revenue represented approximately 79.5% and 81.4% of
SendTec's total net revenue in 2003 and 2002, respectively.
92
COST OF REVENUE: Cost of revenue consists of third party vendor costs for
research, production and post production services plus all third party vendor
fees incurred to acquire advertising media, including the actual cost of the
media. Cost of revenue totaled $8.7 million for 2003 as compared to $5.3 million
for 2002. Approximately $3.0 million of the total increase in cost of revenue as
compared to the prior year resulted from the increase in online performance
advertising cost of revenue. The increase in online performance advertising cost
of revenue was directly attributable to the increase in online performance based
advertising revenue as compared to 2002. Online performance advertising cost of
revenue represented approximately 85.3% and 84.1% of total cost of revenue
during 2003 and 2002, respectively. Additionally, cost of revenue resulting from
online performance advertising represented approximately 60.4% and 63.3% of
online performance advertising revenue in 2003 and 2002, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs of sales, operations and general and administrative employees. This
expense category also includes costs for facilities rent, legal and professional
services, server hosting and bandwidth services, marketing services and other
general corporate overhead. Selling, general and administrative expenses totaled
$3.9 million for the year ended December 31, 2003 as compared to $2.7 million
for the year ended December 31, 2002. Employee salaries, commissions and
benefits represented approximately 80.9% and 78.7% of total selling, general and
administrative expenses in 2003 and 2002, respectively. Approximately $1.0
million of the total increase in selling, general and administrative expenses as
compared to 2002 resulted from increased salaries, commissions and benefits paid
to employees. The increase in employee costs was primarily a result of an
increase in the number of SendTec employees from 2002 to 2003 and discretionary
year-end bonuses of approximately $0.5 million in 2003. SendTec employed 32 and
26 at the end of 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ITEMS
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004
As of June 30, 2005, SendTec had approximately $3.9 million in cash and cash
equivalents as compared to $3.1 million at December 31, 2004. Net cash provided
by operating activities was $2.7 million for the six months ended June 30, 2005
compared to net cash of $0.1 million used in operating activities for the same
period of the prior year. The period-to-period increase in net cash provided by
operating activities was due mainly to the favorable impact of working capital
changes, related principally to income taxes payable and accrued expenses, in
2005 compared to 2004. During the six months ended June 30, 2005, SendTec made
cash advances totaling $1.5 million to theglobe, its parent company, and made
advances related to the providing of advertising services totaling $0.3 million
to an affiliated wholly-owned subsidiary of theglobe.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
As of December 31, 2004, SendTec had approximately $3.1 million in cash and cash
equivalents as compared to $3.3 million at December 31, 2003. Net cash provided
by operating activities was $2.9 million and $2.2 million for the years ended
December 31, 2004 and 2003, respectively. The period-to-period increase in net
cash provided by operating activities was related primarily to favorable working
capital changes in 2004 compared to 2003. During the year ended December 31,
2004, SendTec made cash advances totaling $1.8 million to theglobe, its parent
company, and made advances related to the providing of advertising services
totaling $1.0 million to an affiliated wholly-owned subsidiary of theglobe.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
As of December 31, 2003, SendTec had approximately $3.3 million in cash and cash
equivalents as compared to $1.2 million at December 31, 2002. Net cash provided
by operating activities was $2.2 million and $0.7 million for the years ended
December 31, 2003 and 2002, respectively. The period-to-period increase in net
cash provided by operating activities was related primarily to higher net income
earned in 2003 compared to 2002.
93
FUTURE AND CRITICAL NEED FOR CAPITAL
SendTec's parent company, theglobe, continues to incur substantial consolidated
net losses and its management believes that theglobe will continue to be
unprofitable and use cash in its operations for the foreseeable future.
theglobe's consolidated net losses and cash usage during its recent past and
projected future periods relate primarily to the operation of its VoIP telephony
services business and to a lesser extent to corporate overhead expenses and the
operations of its computer games business. SendTec has contributed net income
and cash flow since being acquired on September 1, 2004, and management expects
that SendTec will continue to be profitable and provide positive cash flow in
future periods.
During the first quarter of 2005, theglobe's management began actively
re-evaluating theglobe's primary business lines, particularly in view of
theglobe's critical need for cash and the overall net losses of theglobe. Since
that time, management, with the assistance of its financial advisors has
explored a number of strategic alternatives for theglobe and/or its component
businesses, including continuing to operate the businesses, selling certain
businesses or assets, or entering into new businesses.
As part of the re-evaluation process, theglobe, during the first quarter of
2005, made the decision to discontinue using its SendTec business to perform
marketing services for its VoIP telephony business, and to instead dedicate 100%
of SendTec's marketing resources to support and grow SendTec's own third party
revenue producing customer base. A significant part of the rationale for
theglobe's acquisition of SendTec in September 2004 related to the perceived
synergies initially thought to be obtainable by having SendTec effectively
function as the marketing department for theglobe's VoIP telephony business. By
the first quarter of 2005, it became apparent that this marketing strategy was
not viable and that the initially perceived synergies would not be realized. It
was at this point in time that the continued ownership of SendTec became less
strategically important to theglobe and theglobe's management concluded that the
best alternative for theglobe was to actively pursue a sale of its SendTec
business.
theglobe's consolidated cash and cash equivalents balance at September 15, 2005,
was approximately $1.6 million. theglobe has no access to credit facilities with
traditional third party lenders and there can be no assurance that theglobe
would be able to raise equity capital within a short-term timeframe.
As discussed earlier in the "Overview" section of this Management's Discussion
and Analysis of SendTec's Financial Condition and Results of Operations, on
August 10, 2005, theglobe and SendTec entered into a definitive agreement to
sell the business and substantially all of the net assets of SendTec to
RelationServe. If theglobe is not successful in consummating the RelationServe
asset sale or in entering into another financing, sale, or business transaction
that otherwise infuses sufficient additional cash resources into theglobe by no
later than sometime during the fourth quarter of 2005, theglobe's management
believes that theglobe will no longer be able to pay its current financial
obligations on a timely basis. In this event, theglobe would likely be required
to temporarily or permanently shutdown certain of its unprofitable businesses,
including its VoIP telephony services business and implement company-wide cost
reduction programs. There can be no assurance that theglobe would be successful
in implementing such restructuring plans so that theglobe and its wholly-owned
subsidiary, SendTec, could continue to operate as going concerns in the future.
MANAGEMENT'S DISCUSSION OF SENDTEC'S CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, valuation of goodwill, intangible assets and other
long-lived assets and capitalization of computer software costs. Our accounting
policies and procedures related to these areas are summarized below.
REVENUE RECOGNITION
Revenue from the distribution of Internet advertising is recognized when
Internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by SendTec's tracking software.
94
Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount SendTec bills to clients
significantly exceeds the amount of revenue that is earned due to the existence
of various "pass-through" charges such as the cost of the television and radio
media. Amounts received in advance of media airings are deferred and included in
deferred revenue in the accompanying balance sheet.
Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized on the completed contract method when such
programs are complete and available for airing. Production activities generally
take eight to twelve weeks and SendTec usually collects amounts in advance and
at various points throughout the production process. Amounts received from
customers prior to completion of commercials are included in deferred revenue
and direct costs associated with the production of commercials in process are
deferred and included within other current assets in the accompanying balance
sheet.
VALUATION OF CUSTOMER RECEIVABLES
Provisions for the allowance for doubtful accounts are made based on historical
loss experience adjusted for specific credit risks. Measurement of such losses
requires consideration of SendTec's historical loss experience, judgments about
customer credit risk, and the need to adjust for current economic conditions.
GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
certain acquired intangible assets in a business combination be recognized as
assets separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles with indefinite lives should no longer be amortized, but rather
tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of the asset has decreased below its carrying
value.
Our policy calls for the assessment of the potential impairment of goodwill and
other identifiable intangibles with indefinite lives whenever events or changes
in circumstances indicate that the carrying value may not be recoverable or at
least on an annual basis. Some factors we consider important which could trigger
an impairment review include the following:
o significant under-performance relative to historical, expected or projected
future operating results;
o significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and
o significant negative industry or economic trends.
When we determine that the carrying value of goodwill or other identified
intangibles with indefinite lives may not be recoverable, we measure any
impairment based on a projected discounted cash flow method.
LONG-LIVED ASSETS
SendTec's long-lived assets, other than goodwill, primarily consist of property
and equipment, capitalized costs of internal-use software and values
attributable to covenants not to compete.
Long-lived assets held and used by SendTec and intangible assets with
determinable lives are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." We evaluate recoverability of assets to be held and used by comparing
the carrying amount of the assets, or the appropriate grouping of assets, to an
estimate of undiscounted future cash flows to be generated by the assets, or
asset group. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair values are based on quoted market
values, if available. If quoted market prices are not available, the estimate of
fair value may be based on the discounted value of the estimated future cash
flows attributable to the assets, or other valuation techniques deemed
reasonable in the circumstances.
CAPITALIZATION OF COMPUTER SOFTWARE COSTS
SendTec capitalizes the cost of internal-use software which has a useful life in
excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over the
expected useful life, or three years.
95
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 applies to all voluntary changes in accounting principles and requires
retrospective application to prior periods' financial statements of changes in
accounting principles. This statement also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. SFAS 154 carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. SendTec does not expect the
adoption of this standard to have a material impact on its financial condition,
results of operations or liquidity.
In March 2005, the FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," an interpretation of FASB Statement
No. 143, "Accounting for Asset Retirement Obligations." The interpretation
clarifies that the term conditional asset retirement obligation refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. An entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The effective date of this
interpretation is no later than the end of fiscal years ending after December
15, 2005. SendTec is currently investigating the effect, if any, that FIN 47
would have on SendTec's financial position, cash flows and results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. SendTec
does not expect the adoption of this standard to have a material impact on its
financial condition, results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock options on the grant date and is effective for annual periods
beginning after June 15, 2005. In accordance with the revised statement, the
expense attributable to stock options granted or vested subsequent to January 1,
2006 will be required to be recognized. The precise impact of the adoption of
SFAS No. 123R cannot be predicted at this time because it will depend on the
levels of share-based payments that are granted in the future and whether the
related compensation expense is allocated to SendTec by theglobe for the SendTec
employees participating in the Parent Company's stock option plans. However,
SendTec believes that the adoption of this standard may have a significant
effect on SendTec's results of operations or financial position.
In December 2003, the FASB issued FIN No. 46-R "Consolidation of Variable
Interest Entities." FIN 46-R, which modifies certain provisions and effective
dates of FIN 46, sets forth the criteria to be used in determining whether an
investment in a variable interest entity should be consolidated. These
provisions are based on the general premise that if a company controls another
entity through interests other than voting interests, that company should
consolidate the controlled entity. SendTec believes that currently, it does not
have any material arrangements that meet the definition of a variable interest
entity which would require consolidation.
96
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on SendTec's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on SendTec's results of operations or financial position.
97
SendTec, Inc.
Page
Financial Statements (Unaudited)
Balance Sheets FF-1
Statements of Operations FF-2
Statements of Stockholders' Equity FF-3
Statements of Cash Flows FF-4
Notes to Unaudited Financial Statements FF-5
98
SENDTEC, INC.
BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2005 2004 2003
----------- ----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 3,926,426 $ 3,098,932 $ 3,263,255
Accounts receivable 7,385,596 6,620,382 3,456,493
Prepaid expenses 390,767 648,823 102,565
Other current assets 2,600 34,557 33,739
----------- ----------- -----------
Total current assets 11,705,389 10,402,694 6,856,052
Goodwill 11,709,952 11,702,317 --
Intangible assets 1,500,000 1,680,000 --
Property and equipment, net of accumulated depreciation
of $276,638, $107,270 and $607,690 at June 30, 2005
and December 31, 2004 and 2003, respectively 902,969 963,757 558,433
Due from parent company 3,283,350 1,800,000 --
Due from affiliated company 1,408,151 1,084,253 --
Other assets 28,604 15,593 43,277
----------- ----------- -----------
Total assets $30,538,415 $27,648,614 $ 7,457,762
=========== =========== ===========
Total Liabilities And Stockholders' Equity
Current Liabilities
Accounts payable $ 6,650,682 $ 6,383,502 $ 2,882,902
Accrued expenses and other current liabilities 2,104,667 1,083,543 104,530
Deferred revenue 138,585 575,950 144,343
Income taxes payable to Parent Company 1,196,029 431,873 --
Income taxes payable -- -- 797,000
Deferred tax liabilities -- -- 39,000
----------- ----------- -----------
Total Current Liabilities 10,089,963 8,474,868 3,967,775
Stockholders' Equity
Preferred stock -- -- --
Common stock 1 1 4,377
Additional paid-in capital 18,398,019 18,398,019 2,486,489
Treasury stock, at cost -- -- (75,580)
Notes receivable - common stock -- -- (55,350)
Retained earnings 2,050,432 775,726 1,130,051
----------- ----------- -----------
Total stockholders' equity 20,448,452 19,173,746 3,489,987
----------- ----------- -----------
Total liabilities and stockholders' equity $30,538,415 $27,648,614 $ 7,457,762
=========== =========== ===========
See notes to unaudited financial statements.
FF-1
SENDTEC, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30, Year Ended December 31,
------------------------------ ----------------------------------------------
2005 2004 2004 2003 2002
------------ ------------ ------------ ------------ ------------
Net Revenue:
Third party customers $ 18,144,886 $ 13,919,138 $ 31,396,583 $ 15,440,509 $ 8,568,694
Affiliated
company (subsidiary
of theglobe.com, inc.) 324,717 3,333 1,255,290 -- --
------------ ------------ ------------ ------------ ------------
18,469,603 13,922,471 32,651,873 15,440,509 8,568,694
------------ ------------ ------------ ------------ ------------
Cost of Revenue 12,669,759 9,182,070 22,563,049 8,689,941 5,253,067
------------ ------------ ------------ ------------ ------------
Gross Profit 5,799,844 4,740,401 10,088,824 6,750,568 3,315,627
Operating Expenses:
Selling, general
and administrative 3,421,070 2,748,811 6,767,798 3,908,018 2,747,220
Depreciation 169,368 126,341 283,599 221,892 240,000
Amortization
of intangible assets 180,000 -- 120,000 -- --
------------ ------------ ------------ ------------ ------------
3,770,438 2,875,152 7,171,397 4,129,910 2,987,220
------------ ------------ ------------ ------------ ------------
Income from operations 2,029,406 1,865,249 2,917,427 2,620,658 328,407
Other Income (Expense):
Interest income 25,032 11,635 27,298 -- --
Other income (expense) -- (19,974) (19,974) 23,952 16,681
------------ ------------ ------------ ------------ ------------
25,032 (8,339) 7,324 23,952 16,681
------------ ------------ ------------ ------------ ------------
Income Before
Provision For
Income Taxes 2,054,438 1,856,910 2,924,751 2,644,610 345,088
Provision For Income Taxes 779,732 723,000 1,202,669 1,042,000 167,000
------------ ------------ ------------ ------------ ------------
Net Income $ 1,274,706 $ 1,133,910 $ 1,722,082 $ 1,602,610 $ 178,088
============ ============ ============ ============ ============
See notes to unaudited financial statements.
FF-2
SENDTEC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Notes (Accumulated
Common Stock Additional Receivable - Deficit)
------------------------ Paid-In Treasury Common Retained
Shares Amount Capital Stock Stock Earnings Total
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance At
December 31, 2001 2,362,267 $ 2,362 $ 1,913,504 $ (60,000) $ (55,350) $ (650,647) $ 1,149,869
Issuance of common stock 15,555 15 34,985 -- -- -- 35,000
Issuance of common stock
for iFactz 2,000,000 2,000 538,000 -- -- -- 540,000
Repurchase of common
stock for cash -- -- -- (580) -- -- (580)
Net income for the year -- -- -- -- -- 178,088 178,088
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance At
December 31, 2002 4,377,822 4,377 2,486,489 (60,580) (55,350) (472,559) 1,902,377
Repurchase of
common stock
stock for cash -- -- -- (15,000) -- -- (15,000)
Net income for the year -- -- -- -- -- 1,602,610 1,602,610
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance At
December 31, 2003 4,377,822 4,377 2,486,489 (75,580) (55,350) 1,130,051 3,489,987
Issuance of
common stock 1,000 1 2,249 -- -- -- 2,250
Payoff of notes receivable -- -- -- -- 55,350 -- 55,350
Net income, eight months
ended August 31, 2004 -- -- -- -- -- 946,356 946,356
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance August 31, 2004
- Before
Recapitalization 4,378,822 4,378 2,488,738 (75,580) -- 2,076,407 4,493,943
Recapitalization,
September 1, 2004 (4,378,722) (4,377) 15,909,281 75,580 -- (2,076,407) 13,904,077
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance After
Recapitalization
on September 1, 2004 100 1 18,398,019 -- -- -- 18,398,020
Net income,
four months ended
December 31, 2004 -- -- -- -- -- 775,726 775,726
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance At
December 31, 2004 100 1 18,398,019 -- -- 775,726 19,173,746
Net income for the
six months ended
June 30, 2005 -- -- -- -- -- 1,274,706 1,274,706
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance At June 30, 2005 100 $ 1 $ 18,398,019 $ -- $ -- $ 2,050,432 $ 20,448,452
========= ============ ============ ============ ============ ============ ============
See notes to unaudited financial statements.
FF-3
SENDTEC, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30, Year Ended December 31,
-------------------------- -----------------------------------------
2005 2004 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Cash Flows From
Operating Activities
Net income $ 1,274,706 $ 1,133,910 $ 1,722,082 $ 1,602,610 $ 178,088
Adjustments to
reconcile net income
to net cash and cash
equivalents provided
by (used in)
operating activities:
Depreciation
and amortization 349,368 126,341 403,599 221,892 240,000
Loss on disposal
of property
and equipment -- 19,974 19,974 -- --
Provision for bad debts -- -- -- -- 22,775
Common stock issued
for services -- -- -- -- 10,000
Changes in
operating assets and
liabilities:
Accounts receivable (765,214) (786,497) (3,272,112) (1,313,958) (1,131,961)
Prepaid expenses
and other assets 277,002 (62,774) (519,392) (105,004) (19,228)
Deferred tax assets -- (1,000) -- 245,000 167,000
Accounts payable 267,180 (98,326) 3,500,600 1,201,921 824,645
Accrued expenses
and other
liabilities 1,013,489 291,046 210,375 34,444 29,451
Deferred revenue (437,365) 71,127 431,607 (446,587) 410,156
Income taxes
payable to
Parent Company 764,156 -- 431,873 -- --
Income taxes payable -- (797,000) -- 797,000 --
----------- ----------- ----------- ----------- -----------
Net cash and
cash equivalents
provided by
(used in)
operating
activities 2,743,322 (103,199) 2,928,606 2,237,318 730,926
----------- ----------- ----------- ----------- -----------
Cash Flows From
Investing Activities
Advances to
parent company (1,483,350) -- (1,800,000) -- --
Advances to
affiliated company (323,898) -- (976,030) -- --
Proceeds from
sales of property
and equipment -- 10,000 10,000 -- --
Purchase of property
and equipment (108,580) (310,865) (384,499) (144,146) (89,472)
----------- ----------- ----------- ----------- -----------
Net cash
used by
investing
activities (1,915,828) (300,865) (3,150,529) (144,146) (89,472)
----------- ----------- ----------- ----------- -----------
Cash Flows From
Financing Activities
Sale of common stock -- 2,250 2,250 -- 25,000
Proceeds from payoff
of notes receivable
- common stock -- -- 55,350 -- --
Purchase of
common stock -- -- -- (15,000) (580)
----------- ----------- ----------- ----------- -----------
Net cash
provided by
(used in)
financing
activities -- 2,250 57,600 (15,000) 24,420
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease)
In Cash and Cash
Equivalents 827,494 (401,814) (164,323) 2,078,172 665,874
Cash and Cash
Equivalents, Beginning 3,098,932 3,263,255 3,263,255 1,185,083 519,209
----------- ----------- ----------- ----------- -----------
Cash and Cash
Equivalents, Ending $ 3,926,426 $ 2,861,441 $ 3,098,932 $ 3,263,255 $ 1,185,083
=========== =========== =========== =========== ===========
See notes to unaudited financial statements.
FF-4
SENDTEC, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
SendTec, Inc. (the "Company" or "SendTec") was incorporated in February 2000 in
the State of Florida and commenced operations on that date. SendTec incorporated
under the name prizecrazy.com, originally planning a free consumer gaming
website that monetized consumer traffic on its website through the sale of
online advertising. Due to a significant decline in the pricing of online
advertising at that time, the Company modified its business strategy to become a
direct response marketing services company.
On September 1, 2004 the Company was acquired by theglobe.com, inc. ("theglobe"
or the "Parent Company") and became a wholly-owned subsidiary of theglobe as of
that date.
Reference should be made to Note 12, "Subsequent Event," regarding theglobe's
and the Company's entrance into an asset purchase agreement, dated August 10,
2005, for the sale of the SendTec Business and substantially all of the net
assets of SendTec to RelationServe Media, Inc. ("RelationServe").
The Company provides advertising and marketing services for its customers
located throughout the United States of America. These services include
distribution of internet advertising, purchase of direct response television
media for customers, and production of television commercials for direct
response advertising.
The accompanying financial statements include the accounts of SendTec and
reflect all adjustments consisting only of normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the period presented.
(b) Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. These estimates and assumptions relate to estimates of collectibility of
accounts receivable, accruals, the impairment of long-lived assets and other
factors. Actual results could differ from those estimates.
(c) Fair Value of Financial Instruments
The carrying amount of certain of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and deferred revenue, approximate their fair value at June 30, 2005 and
December 31, 2004 and 2003 due to their short maturities.
(d) Receivables and Credit Policies
Accounts receivable are uncollateralized customer obligations due under normal
trade terms generally requiring payment within 30 days from the invoice date.
Follow-up correspondence is made if unpaid accounts receivable go beyond 30
days.
Payments on accounts receivable are allocated to the specific invoices
identified on the customer's remittance advice.
Trade accounts receivable are stated at the amount management expects to collect
from outstanding balances. The carrying amounts of accounts receivable
approximate management's best estimate of the amounts that will be collected.
Management individually reviews all accounts receivable balances that exceed the
due date and estimates the portion, if any, of the balance that will not be
collected. Balances still outstanding after management has used reasonable
collection efforts are written off through a charge to earnings and a credit to
trade accounts receivable. Bad debt expense is not material to the financial
statements.
FF-5
(e) Unbilled Revenue
Included in accounts receivable at December 31, 2004 and 2003 is unbilled
revenue of $994,686 and $1,058,590, respectively, and $103,600 at June 30, 2005.
(f) Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that
goodwill and other intangibles with indefinite lives should no longer be
amortized, but rather be tested for impairment annually or on an interim basis
if events or circumstances indicate that the fair value of the asset has
decreased below its carrying value.
Goodwill is stated at cost. At June 30, 2005, December 31, 2004 and 2003, the
Company had no other intangible assets with indefinite lives. Intangible assets
subject to amortization, included in the accompanying balance sheets as of June
30, 2005 and December 31, 2004, were being amortized on a straight-line basis
over their estimated useful lives or five years.
(g) Long-Lived Assets
Long-lived assets, including property and equipment and intangible assets
subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." If events or changes in circumstances indicate
that the carrying amount of an asset, or an appropriate grouping of assets, may
not be recoverable, the Company estimates the undiscounted future cash flows to
result from the use of the asset, or asset group. If the sum of the undiscounted
cash flows is less than the carrying value, the Company recognizes an impairment
loss, measured as the amount by which the carrying value exceeds the fair value
of the assets. Fair values are based on quoted market values, if available. If
quoted market values are not available, the estimate of fair value may be based
on the discounted value of the estimated future cash flows attributable to the
assets, or other valuation techniques deemed reasonable in the circumstances.
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets, as follows:
Furniture and equipment 5-7 years
Software 3 years
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over three
years.
(h) Revenue Recognition
Revenue from the distribution of Internet advertising is recognized when
Internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by the Company's tracking
software.
Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount the Company bills to
clients significantly exceeds the amount of revenue that is earned due to the
existence of various "pass-through" charges such as the cost of the television
and radio media. Amounts received in advance of media airings are deferred and
included in deferred revenue in the accompanying balance sheet.
FF-6
Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized on the completed contract method when such
programs are complete and available for airing. Production activities generally
take eight to twelve weeks and the Company usually collects amounts in advance
and at various points throughout the production process. Amounts received from
customers prior to completion of commercials are included in deferred revenue
and direct costs associated with the production of commercials in process are
deferred and included within other current assets in the accompanying balance
sheet.
(i) Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the results of operations in the period that the tax change occurs. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
(j) Stock-Based Compensation
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was
issued and provided companies an alternative to accounting for stock-based
compensation as prescribed under APB Opinion No. 25. SFAS No. 123 encourages,
but does not require, companies to recognize compensation expense for
stock-based awards based on their fair market value at the date of grant. SFAS
No. 123 allows companies to continue to follow existing accounting rules
(intrinsic value method under APB No. 25) provided that pro-forma disclosures
are made of what net income would have been had the new fair value method been
used. The required disclosures were amended in December 2002 with the issuance
of SFAS No. 148, Accounting for Stock Based Compensation - Transition and
Disclosure. The Company adopted the disclosure requirements of SFAS No. 123 as
amended by SFAS No. 148, but continues to account for stock-based compensation
under APB No. 25.
Until its acquisition by theglobe on September 1, 2004, the Company had a
stock-based compensation plan which is more fully described in Note 6, "Stock
Option Plans." Upon its acquisition by theglobe, the employees of SendTec became
eligible to participate in the stock option plans of theglobe. theglobe accounts
for its stock option plans in accordance with the measurement provisions of APB
No. 25 and has adopted the disclosure provisions of SFAS No. 148.
No stock compensation expense was reflected in net income for the six months
ended June 30, 2005 or the years ended December 31, 2004, 2003 and 2002. There
would have been no effect on net income for the eight months ended August 31,
2004 (the 2004 period prior to the Company's acquisition by theglobe) and the
years ended December 31, 2003 and 2002 if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation. Had
theglobe determined stock compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123 and allocated the compensation
expense to the Company for its employees participating in theglobe's stock
option plans, the Company's net income would have been reduced to the pro forma
amounts indicated below:
Six Months Ended Year Ended
June 30, December 31,
2005 2004
---------------- --------------
Net income, as reported $ 1,274,706 $ 1,722,082
Stock-based compensation
expense, net of tax (107,496) (162,410)
---------------- --------------
Pro forma net income $ 1,167,210 $ 1,559,672
================ ==============
FF-7
(k) Recently Issued Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 applies to all voluntary changes in accounting principles and requires
retrospective application to prior periods' financial statements of changes in
accounting principles. This statement also requires that a change in
depreciation, amortization or depletion method for long- lived, non-financial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. SFAS 154 carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not expect the
adoption of this standard to have a material impact on its financial condition,
results of operations or liquidity.
In March 2005, the FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," an interpretation of FASB Statement
No. 143, "Accounting for Asset Retirement Obligations." The interpretation
clarifies that the term conditional asset retirement obligation refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. An entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The effective date of this
interpretation is no later than the end of fiscal years ending after December
15, 2005. The Company is currently investigating the effect, if any, that FIN 47
would have on the Company's financial position, cash flows and results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this standard to have a material impact on its
financial condition, results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock options on the grant date and is effective for annual periods
beginning after June 15, 2005. In accordance with the revised statement, the
expense attributable to stock options granted or vested subsequent to January 1,
2006 will be required to be recognized. The precise impact of the adoption of
SFAS No. 123R cannot be predicted at this time because it will depend on the
levels of share-based payments that are granted in the future and whether the
related compensation expense is allocated to the Company by theglobe for the
SendTec employees participating in the Parent Company's stock option plans.
However, the Company believes that the adoption of this standard may have a
significant effect on the Company's results of operations or financial position.
In December 2003, the FASB issued FIN No. 46-R "Consolidation of Variable
Interest Entities." FIN 46-R, which modifies certain provisions and effective
dates of FIN 46, sets forth the criteria to be used in determining whether an
investment in a variable interest entity should be consolidated. These
provisions are based on the general premise that if a company controls another
entity through interests other than voting interests, that company should
consolidate the controlled entity. The Company believes that currently, it does
not have any material arrangements that meet the definition of a variable
interest entity which would require consolidation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on the Company's results of operations or financial position.
FF-8
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the Company's results of operations or financial position.
(l) Reclassifications
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
NOTE 2 - GOING CONCERN CONSIDERATIONS
Certain matters related to the liquidity and financial condition of theglobe,
SendTec's parent company, raise substantial doubt about theglobe's and SendTec's
ability to continue as going concerns. theglobe has suffered recurring losses
from operations since inception and theglobe's management believes that theglobe
will continue to be unprofitable and use cash in its operations for the
foreseeable future. theglobe's consolidated net losses and cash usage during its
recent past and projected future periods relate primarily to the operations of
its VoIP telephony services business and to a lesser extent to corporate
overhead expenses and the operations of its computer games business. SendTec has
contributed net income and cash flow since being acquired on September 1, 2004,
and management expects that SendTec will continue to be profitable and provide
cash flow in future periods. theglobe's consolidated cash and cash equivalents
balance at September 15, 2005 was approximately $1.6 million. theglobe has no
access to credit facilities with traditional third party lenders and there can
be no assurance that theglobe would be able to raise equity capital within a
short-term timeframe.
In addition, theglobe received a report from its independent accountants,
relating to its December 31, 2004 audited financial statements containing an
explanatory paragraph stating that its recurring losses from operations and its
accumulated deficit raise substantial doubt about its ability to continue as a
going concern. SendTec's financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly,
SendTec's financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should it be unable to continue as a going concern.
As further discussed in Note 12, "Subsequent Event," on August 10, 2005,
theglobe and SendTec entered into a definitive agreement to sell the business
and substantially all of the net assets of SendTec to RelationServe. If theglobe
is not successful in consummating the RelationServe asset sale or in entering
into another financing, sale, or business transaction that otherwise infuses
sufficient additional cash resources into theglobe by no later than sometime
during the fourth quarter of 2005, theglobe's management believes that theglobe
will no longer be able to pay its current financial obligations on a timely
basis. In that event, theglobe would likely be required to temporarily or
permanently shutdown certain of its unprofitable businesses, including its VoIP
telephony services business and implement company-wide cost reduction programs.
There can be no assurance that theglobe would be successful in implementing such
restructuring plans so that theglobe and its wholly-owned subsidiary, SendTec,
could continue to operate as a going concern in the future.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
FF-9
NOTE 3 - RECAPITALIZATION UPON SENDTEC'S ACQUISITION BY THEGLOBE
On September 1, 2004, theglobe acquired SendTec. In exchange for all of the
issued and outstanding shares of capital stock of SendTec. theglobe paid
consideration consisting of: (i) $6,000,000 in cash, excluding transaction
costs, (ii) the issuance of an aggregate of 17,500,024 shares of theglobe's
common stock, (iii) the issuance of an aggregate of 175,000 shares of theglobe's
Series H Automatically Converting Preferred Stock (which was subsequently
converted into approximately 17,500,500 shares of theglobe's common stock
effective December 1, 2004), and (iv) the issuance of a subordinated promissory
note in the amount of $1,000,009 by theglobe. An aggregate of 3,974,165
replacement options to acquire theglobe common stock were also issued by
theglobe for each of the issued and outstanding options to acquire SendTec
shares held by the employees of SendTec as of the acquisition date.
For financial reporting purposes, theglobe's purchase price was "pushed down"
into the accounts of SendTec, resulting effectively in a recapitalization of
SendTec as of September 1, 2004.
In addition, warrants to acquire shares of theglobe common stock would be issued
to SendTec stockholders when and if SendTec exceeds forecasted operating income,
as defined, of $10.125 million, for the year ending December 31, 2005. The
number of earn-out warrants may range from an aggregate of 250,000 to 2,500,000,
if actual operating income exceeds the forecast by at least 10%. Because the
number of warrants that may be earned is not yet determinable, no consideration
related to this contingency was included in the determination of the SendTec
purchase price.
As part of the SendTec acquisition transaction, certain executives of SendTec
entered into new employment agreements with SendTec. The employment agreements
each have a term of five years and automatically renew for an additional year at
expiration unless either party provides the requisite notice of non-renewal. The
agreements also contain certain non-compete provisions for periods as specified
by the agreements. The $1,800,000 value assigned to the non-compete agreements
is being amortized on a straight-line basis over 5 years. Annual amortization
expense of the non-compete agreements is estimated to be $360,000 in 2005
through 2008 and $240,000 in 2009. The related accumulated amortization as of
June 30, 2005 and December 31, 2004, was $300,000 and $120,000, respectively.
SendTec issued 100 shares of $0.01 par value common stock to theglobe to
capitalize the new entity.
The preliminary SendTec purchase price allocation was as follows:
Cash $ 3,610,000
Accounts receivable 5,534,000
Other current assets 194,000
Fixed assets 1,031,000
Non-compete agreements 1,800,000
Goodwill 11,702,000
Other assets 124,000
Assumed liabilities (5,597,000)
-------------
$ 18,398,000
=============
NOTE 4 - ACQUISITION OF IFACTZ
Effective February 2002, the Company acquired all of the outstanding shares of
iFactz, Inc. (an entity with stockholders common to both entities) in exchange
for 2,000,000 of the Company's shares. The value of the Company's shares was
estimated to be $0.27 per share (based on a recent stock transaction) and
totaled $540,000.
The sole asset of iFactz was developed software that tracks offline media
sources. The Company allocated the full purchase price to software which is
included as property and equipment in the accompanying balance sheet. Prior to
SendTec's acquisition by theglobe, the software was being amortized on a
straight-line basis using a five year life. Effective with the September 1, 2004
acquisition of SendTec by theglobe, the value attributed to the software is
being amortized using the straight-line method over an estimated useful life of
three years.
FF-10
NOTE 5 - STOCKHOLDERS' EQUITY PRIOR TO THE ACQUISITION OF SENDTEC BY THEGLOBE
Preferred Stock
Prior to its acquisition by theglobe, SendTec had authorized a total of
10,000,000 shares of $0.001 par value preferred stock. No shares had been
issued.
Common Stock
Prior to its acquisition by theglobe, SendTec had authorized a total of
100,000,000 shares of common stock with 4,377,822 shares issued as of December
31, 2003.
Treasury Stock
During 2003, the Company purchased 45,000 shares of its common stock from two
stockholders for a total of $15,000. At December 31, 2003, the Company had a
total of 346,028 shares with a total cost of $75,580 reported as treasury stock
in the accompanying balance sheet.
Notes Receivable - Common Stock
Prior to 2003, the Company issued 205,000 shares of its common stock to three
Company officers in exchange for promissory notes totaling $55,350. The value of
the shares was based upon management's estimate of the fair value of the shares
in June 2001. The notes were due in June 2006 with interest at the Mid-Term
Applicable Federal Rate in accordance with Section 1274(d) of the Internal
Revenue Code of 1986, as amended. The notes receivable were repaid to the
Company in 2004 prior to its acquisition by theglobe.
NOTE 6 - STOCK OPTION PLANS
SendTec Stock Option Plan
During 2000 the Company established the SendTec Stock Option Plan (SendTec Plan)
which authorized the issuance of a maximum of 750,000 shares of the Company's
common stock. Officers, key employees, directors and consultants were eligible
for grants under the terms of the SendTec Plan. The maximum term of the stock
options granted under the SendTec Plan was 10 years and most optionees vested in
the options over a 24 month period.
Options under the SendTec Plan may be options which qualify under Section 422 of
the Internal Revenue Code (incentive stock options) or options which do not
qualify under Section 422 (nonqualified options).
The following table summarizes SendTec Plan option activity for the period from
January 1, 2004 to August 31, 2004 and the year ended December 31, 2003:
2004 (January 1, thru August 31, 2004) Weighted Average
Shares Exercise Price
---------------------- -------------------
Stock option activity outstanding at beginning of year 318,200 $ 2.25
Granted 288,100 $ 5.40
Expired or surrendered (56,000) $ 2.25
---------------------- -------------------
Outstanding at end of period 550,300 $ 3.90
====================== ===================
Exercisable at end of period 85,550 $ 2.25
====================== ===================
2003
Stock option activity outstanding at beginning of year 87,550 $ 2.25
Granted 241,150 $ 2.25
Expired or surrendered (10,500) $ 2.25
---------------------- -------------------
Outstanding at end of year 318,200 $ 2.25
====================== ===================
Exercisable at end of year 52,050 $ 2.25
====================== ===================
FF-11
The weighted average life of the options was five years. The estimated fair
value of stock options at the time of the grant using the Black-Scholes option
pricing model was as follows:
August 31, December 31,
2004 2003
------------------ -----------------
Fair value per option $ -- $ --
Assumptions:
Annualized dividend yield 0% 0%
Expected volatility 0% 0%
Risk free interest rate 5% 4%
Expected option terms (in years) 5 5
theglobe Stock Option Plans
Pursuant to the agreement and plan of merger in connection with the acquisition
of the Company on September 1, 2004, theglobe issued an aggregate of 3,974,165
replacement options to acquire shares of theglobe's common stock for each of the
issued and outstanding options to acquire shares of SendTec common stock held by
employees of SendTec. Of these replacement options, 3,273,668 have exercise
prices of $0.06 and 700,497 have exercise prices of $0.27 per share. theglobe
also agreed to grant an aggregate of 225,000 options to employees of SendTec and
25,000 options to a consultant of SendTec at an exercise price of $0.34 per
share under similar terms as other stock option grants of theglobe. theglobe
also granted 1,000,000 stock options at an exercise price of $0.27 per share in
connection with the establishment of a bonus option pool pursuant to which
various employees of SendTec could vest in such options if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005.
theglobe is accounting for the replacement options issued in accordance with
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44") which requires the value of the unvested portion of
the stock options issued to be treated as deferred compensation to be recognized
in the results of operations over the remaining vesting period. Had theglobe
allocated the compensation expense related to the replacement options to the
Company, additional expense of $329,310 and $234,231 would have been recognized
for the six months ended June 30, 2005 and the year ended December 31, 2004.
NOTE 7 - COMMITMENTS
As discussed in Note 3, "Recapitalization Upon SendTec's Acquisition by
theglobe," as part of the SendTec acquisition transaction on September 1, 2004,
certain executives of SendTec entered into new employment agreements with
SendTec. The employment agreements each have a term of five years and
automatically renew for an additional year at expiration unless either party
provides the requisite notice of non-renewal. The agreements provide for total
base salaries of $900,000 per annum and contain certain non-compete provisions
for periods as specified by the agreements.
The Company has noncancelable operating lease agreements for buildings and
equipment. Future minimum lease payments required under the operating leases are
as follows as of December 31, 2004:
Year Ending December 31,
2005 $ 223,851
2006 229,447
2007 235,183
2008 241,063
2009 247,089
Thereafter 62,151
--------------
$ 1,238,784
==============
Rent expense for all operating leases for the years ended December 31, 2004,
2003 and 2002 was approximately $208,000, $133,000 and $113,000, respectively,
and $145,000 for the six months ended June 30, 2005.
FF-12
NOTE 8 - INCOME TAXES
Subsequent to its acquisition by theglobe, SendTec is included in theglobe's
consolidated income tax return. Income tax expense in the accompanying
statements of operations has been determined in accordance with SFAS No. 109,
"Accounting for Income Taxes," as if SendTec were a separate taxpayer for all
periods presented. All tax-related balances resulting from such income tax
allocation are included in Income Taxes Payable to Parent Company in the
accompanying balance sheet at June 30, 2005 and December 31, 2004.
The provision for income taxes consists of the following for:
December 31,
June 30, ------------------------------------------
2005 2004 2003 2002
----------- ----------- ----------- -----------
Current
Federal $ 725,939 $ 1,145,347 $ 681,000 $ --
State 124,266 196,060 116,000 --
----------- ----------- ----------- -----------
850,205 1,341,407 797,000 --
Deferred
Federal (60,173) (118,460) 209,000 142,000
State (10,300) (20,278) 36,000 25,000
----------- ----------- ----------- -----------
(70,473) (138,738) 245,000 167,000
----------- ----------- ----------- -----------
$ 779,732 $ 1,202,669 $ 1,042,000 $ 167,000
=========== =========== =========== ===========
The income tax expense differs from the amount computed using the statutory
federal income tax rate as follows:
December 31,
June 30, --------------------------------------
2005 2004 2003 2002
---------- ---------- ---------- ----------
Income tax expense at federal statutory rate $ 698,509 $ 994,416 $ 899,000 $ 117,000
State tax expense, net of federal benefit 75,218 116,016 96,000 13,000
Transaction expenses -- 82,620 -- --
Other 6,005 9,617 47,000 37,000
---------- ---------- ---------- ----------
$ 779,732 $1,202,669 $1,042,000 $ 167,000
========== ========== ========== ==========
The primary components of deferred tax asset and liability amounts relate to
differences in book/tax depreciation, amortization and accrued liabilities.
Deferred tax assets and/or liabilities have been included in Income Taxes
Payable to Parent in the accompanying balance sheet as of June 30, 2005 and
December 31, 2004.
During 2003 and the first eight months of 2004, the Company used federal and
state net operating loss carryforwards to offset taxable income of approximately
$602,000 and $4,894, respectively, prior to its acquisition by theglobe.
NOTE 9 - SIGNIFICANT CUSTOMERS
A significant portion of the Company's revenue is attributable to a small number
of customers. Three customers accounted for approximately 56% of the Company's
net revenue during the six months ended June 30, 2005. During the years ended
December 31, 2004 and 2002, two customers accounted for approximately 59% and
47% of the Company's net revenue, respectively. During the year ended December
31, 2002, three customers accounted for approximately 63% of the Company's net
revenue.
Amounts receivable from two of the Company's customers represented approximately
$2,884,000, or 39%, of its total accounts receivable as of June 30, 2005. Three
customers represented approximately $2,868,000, or 43%, of the Company's total
accounts receivable as of December 31, 2004. Two customers represented
approximately $2,021,000, or 58%, of the Company's total accounts receivable as
of December 31, 2003.
FF-13
NOTE 10 - RETIREMENT PLAN
Effective January 1, 2003, the Company established a SIMPLE IRA savings plan
(Plan) for the benefit of all eligible employees who have completed six months
of service. The Plan allowed employees to make certain tax deferred voluntary
contributions. The Company contributed to the Plan such amounts as deemed
appropriate. Contributions made by the Company totaled approximately $77,000 and
$57,000 for the years ended December 31, 2004 and 2003, respectively. The Plan
was terminated on December 31, 2004.
NOTE 11 - QUARTERLY FINANCIAL INFORMATION
Quarter Ended
-------------------------------
June 30, March 31,
2005 2005
--------------- ---------------
Net revenue $ 9,363,783 $ 9,105,820
Gross profit 3,173,068 2,626,776
Operating expenses 1,944,288 1,826,150
Income from operations 1,228,780 800,626
Net income 767,620 507,086
Quarter Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
2004 2004 2004 2004
--------------- ---------------- --------------- ---------------
Net revenue $ 10,579,365 $ 8,150,037 $ 7,365,707 $ 6,556,764
Gross profit 2,923,025 2,425,398 2,342,662 2,397,739
Operating expenses 1,944,531 2,351,714 1,538,014 1,337,138
Income from operations 978,494 73,684 804,648 1,060,601
Net income (loss) 642,650 (54,478) 487,905 646,005
Quarter Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
2003 2003 2003 2003
--------------- ---------------- --------------- ---------------
Net revenue $ 4,054,839 $ 4,356,283 $ 3,466,091 $ 3,563,296
Gross profit 1,731,529 1,993,737 1,568,891 1,456,411
Operating expenses 1,476,017 987,309 833,717 832,867
Income from operations 255,512 1,006,428 735,174 623,544
Net income 173,637 597,170 455,449 376,354
FF-14
NOTE 12 - SUBSEQUENT EVENT
On August 10, 2005, the Company and theglobe entered into an asset purchase
agreement, as amended on August 23, 2005 (the "Purchase Agreement") with
RelationServe whereby the Company and theglobe agreed to sell all of the
business and substantially all of the net assets of SendTec to RelationServe for
$37,500,000 in cash, subject to certain net working capital adjustments. In
addition, on August 23, 2005, theglobe entered into a Redemption Agreement with
six members of the management of SendTec (the "Redemption Agreement") to redeem
approximately 28.9 million shares of theglobe common stock owned by such
management for approximately $11.6 million in cash. The closing of the
redemption of these shares is contingent on, and will occur immediately after,
the closing of the Purchase Agreement. theglobe also anticipates that it will be
terminating and canceling certain options and warrants held by these six members
of management for approximately $400,000 in cash. These shares and related
options and warrants were issued to SendTec management in connection with
theglobe's acquisition of SendTec. theglobe further expects to terminate or
cancel the options of a few other employees of SendTec and enter into severance
bonus arrangements with others for cash payments totaling approximately
$500,000. The closing of the asset sale is subject to the satisfaction of a
number of closing conditions including distribution of a definitive information
statement describing the asset sale to theglobe's stockholders which was
undertaken commencing on September 16, 2005, with the closing anticipated to
occur on or about October 11, 2005.
FF-15
SELECTED CONSOLIDATED FINANCIAL DATA OF THEGLOBE.COM, INC. (1)
The selected consolidated balance sheet data as of December 31, 2004 and 2003
and the selected consolidated operating data for the years ended December 31,
2004, 2003 and 2002 have been derived from our audited consolidated financial
statements included elsewhere herein. The selected consolidated balance sheet
data as of June 30, 2005 and the selected consolidated operating data for the
six months ended June 30, 2005 and 2004 have been derived from our unaudited
consolidated financial statements included elsewhere herein. The selected
consolidated balance sheet data as of December 31, 2002, 2001 and 2000 and the
selected consolidated operating data for the years ended December 31, 2001 and
2000 have been derived from our audited consolidated financial statements not
included herein. The selected consolidated balance sheet data as of June 30,
2004 has been derived from our unaudited consolidated financial statements not
included herein. In the opinion of management, the unaudited information has
been prepared substantially on the same basis as our audited consolidated
financial statements appearing elsewhere herein and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the unaudited consolidated quarterly
results of operations and unaudited consolidated balance sheet data. The nature
of our business has changed significantly from 2000 to 2005. As a result, our
historical results are not necessarily comparable. Additionally, our historical
results are not necessarily indicative of results for any future period and
interim results are not necessarily indicative of results for any future interim
period or for a full year. You should read these selected consolidated financial
data, together with the accompanying notes, in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Prospectus and our consolidated financial statements
and the related notes appearing at the end of this Prospectus.
Six Months Ended June 30, Year Ended December 31,
------------------------------- -------------------------------------------------------------------
Pro Forma Actual Pro Forma Actual
--------- ------------------- --------- --------------------------------------------------------
2005(3) 2005 2004 2004(3) 2004 2003 2002 2001(2) 2000(2)
-------- -------- -------- -------- -------- -------- -------- --------- ---------
(In thousands, except per share data)
Operating Data:
Net revenue $ 1,280 $ 19,425 $ 1,682 $ 3,499 $ 16,041 $ 5,284 $ 7,245 $ 12,735 $ 27,959
Operating expenses 10,075 26,520 10,763 27,921 39,499 14,097 10,186 54,528 133,093
Loss from operations (8,795) (7,095) (9,081) (24,422) (23,458) (8,813) (2,941) (41,793) (105,134)
Net loss (12,128) (10,419) (10,018) (25,247) (24,273) (11,034) (2,615) (40,620) (103,866)
Net loss applicable to
common stockholders (12,128) (10,419) (10,018) (25,247) (24,273) (19,154) (2,615) (40,620) (103,866)
Basic and diluted net
loss per common
share $ (0.08) $ (0.06) $ (0.10) $ (0.21) $ (0.19) $ (0.49) $ (0.09) $ (1.34) $ (3.43)
Balance Sheet Data
(at end of period):
Total assets $ 32,174 $ 31,610 $ 34,017 $ 35,213 $ 34,017 $ 7,172 $ 3,047 $ 5,973 $ 54,531
Long-term debt(4) 7 7 27 27 27 1,793 88 -- 498
(1) Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on the net losses as
previously reported by the Company. Significant events affecting our historical
performance in 2002 through the second quarter of 2005 are described in
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
(2) Net losses in 2000 and 2001 related primarily to certain previously owned
Internet-related businesses which were sold or closed during those years and
include significant restructuring and impairment charges related to those
businesses.
114
(3) The selected pro forma consolidated financial data give effect to (i) the
Asset Purchase Agreement with RelationServe Media, Inc. (RelationServe) entered
into by theglobe.com, inc. and SendTec, Inc. ("SendTec") on August 10, 2005, and
as amended on August 23, 2005, whereby we agreed to sell all of the business and
substantially all of the net assets of our SendTec marketing services subsidiary
to RelationServe, and (ii) the related ancillary agreements, including the
Redemption Agreement and the Termination Agreement as contemplated by the
transaction. The selected pro forma consolidated balance sheet data as of June
30, 2005 and December 31, 2004 have been prepared as if our sale of the SendTec
business and the redemption and termination of shares pursuant to the Ancillary
Agreements had been consummated on each of the respective dates. The selected
pro forma consolidated operating data for the year ended December 31, 2004 and
the six months ended June 30, 2005 have been prepared as if the sale of the
SendTec business and the redemption of shares pursuant to the Redemption
Agreement occurred on September 1, 2004 (the original date of acquisition of
SendTec by us) and the effect was carried forward through the balance of the
year 2004 and the six month period ended June 30, 2005. The selected pro forma
operating data for the year ended December 31, 2004 excludes the estimated net
gain resulting from the sale of the SendTec business.
(4) Represents long-term debt and capital lease obligations, less the current
portion.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THEGLOBE.COM, INC.
BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS; GOING CONCERN
Certain matters discussed below under "Liquidity and Capital Resources" raise
substantial doubt about our ability to continue as a going concern. In addition,
we received a report from our independent accountants, relating to our December
31, 2004 audited financial statements containing an explanatory paragraph
stating that our recurring losses from operations and our accumulated deficit
raise substantial doubt about our ability to continue as a going concern. Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, our
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
OVERVIEW
During 2000 and 2001, the Company restructured its business operations and sold
off or closed most of its businesses. As of September 2005, we managed four
primary lines of business. One line of business, Voice over Internet Protocol
("VoIP") telephony services, includes voiceglo Holdings, Inc., a wholly-owned
subsidiary of theglobe.com that offers VoIP-based phone service. The term "VoIP"
refers to a category of hardware and software that enables people to use the
Internet to make phone calls. The second line of business consists of our
historical network of three wholly-owned businesses, each of which specializes
in the games business by delivering games information and selling games in the
United States and abroad. These businesses are: our print publication business,
which consists of Computer Games and Now Playing magazines; our online website
business, which consists of our Computer Games Online website (www.cgonline.com)
and our Now Playing Online website (www.nowplayingmag.com), which are the online
counterparts to our magazine publications; and our Chips & Bits, Inc. ("Chips &
Bits") games distribution company (www.chipsbits.com). We entered into a third
line of business, marketing services, on September 1, 2004, with our acquisition
of SendTec, Inc. ("SendTec"), a direct response marketing services and
technology company. On May 9, 2005, the Company entered into a fourth line of
business when it exercised its option to acquire Tralliance Corporation
("Tralliance"), a company which had recently entered into an agreement to become
the registry for the ".travel" top-level Internet domain. (See Note 4,
"Acquisitions and Dispositions," of the Notes to Consolidated Financial
Statements for further details).
As of September 2005, our revenues were derived principally from the operations
of SendTec, as well as from the operations of our games related businesses. Our
VoIP products and services have yet to produce any significant revenue.
Tralliance does not expect to begin generating revenue until sometime during the
fourth quarter of 2005.
During the first quarter of 2005, management began actively re-evaluating the
Company's primary business lines, particularly in view of the Company's critical
need for cash and the overall net losses of the Company. As a result, management
with the assistance of its third party financial advisors has explored a number
of strategic alternatives for the Company and/or its component businesses,
including continuing to operate the businesses, selling certain businesses or
assets, or entering into new businesses.
115
On August 10, 2005, the Company entered into an asset purchase agreement, as
amended on August 23, 2005 (the "Purchase Agreement") with RelationServe Media,
Inc. ("RelationServe") whereby the Company agreed to sell all of the business
and substantially all of the net assets of its SendTec marketing services
subsidiary to RelationServe for $37,500,000 in cash, subject to certain net
working capital adjustments. In addition, on August 23, 2005, the Company
entered into a Redemption Agreement with six members of the management of
SendTec (the "Redemption Agreement") to redeem approximately 28.9 million shares
of theglobe Common Stock owned by such management for approximately $11.6
million in cash. The closing of the redemption of these shares is contingent on,
and will occur immediately after, the closing of the Purchase Agreement. The
Company also anticipates that it will be terminating and canceling certain
options and warrants held by these six members of management for approximately
$400,000 in cash. These shares and related options and warrants were issued to
SendTec management in connection with theglobe's acquisition of SendTec. The
Company further expects to terminate or cancel the options of a few other
employees of SendTec and enter into severance bonus arrangements with others for
cash payments totaling approximately $500,000. The closing of the asset sale is
subject to the satisfaction of a number of closing conditions including
distribution of a definitive information statement describing the asset sale to
our stockholders which was undertaken commencing on September 16, 2005, with the
closing anticipated to occur on or about October 11, 2005. See the "Recent
Events" section of this Registration Statement for additional information.
See the "Liquidity and Capital Resources" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
more complete discussion.
RESULTS OF OPERATIONS
The nature of our business has significantly changed from 2002 to 2005. As a
result of our decision to enter into the VoIP business, we have incurred
substantial expenditures without corresponding revenue as we developed our VoIP
product line and as we put into place the infrastructure for our VoIP products.
In addition, we entered into two new business lines, marketing services and
Internet services, as a result of our acquisitions of SendTec on September 1,
2004 and Tralliance on May 9, 2005, respectively. The results of operations of
SendTec and Tralliance are included in the Company's consolidated operating
results from their respective dates of acquisition. Consequently, and primarily
as a result of these factors, the results of operations for each of the years
ended December 31, 2004, 2003 and 2002 are not necessarily comparable.
Similarly, as a result of our entrance into the VoIP business and our
acquisitions, our results of operations for the six months ended June 30, 2005
are not necessarily comparable to the six months ended June 30, 2004.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004
NET REVENUE. Net revenue totaled $19.4 million for the six months ended June 30,
2005 as compared to $1.7 million for the six months ended June 30, 2004. The
$17.7 million increase in consolidated net revenue was principally the result of
the $18.1 million in additional net revenue, net of intersegment eliminations,
resulting from the operations of SendTec. Partially offsetting this additional
revenue was a decline of $0.4 million in net revenue of our computer games
business segment due primarily to a decrease in the volume of games products
sold by Chips & Bits, Inc., our retail distribution business. Net revenue
generated by our telephony services division totaled approximately $0.2 million
in each of the first six months of 2005 and 2004.
NET REVENUE BY BUSINESS SEGMENT:
Six months ended: 2005 2004
------------- ------------
Computer games $ 1,116,775 $ 1,474,874
Marketing services 18,469,603 --
VoIP telephony services 163,385 207,353
Intersegment eliminations (324,717) --
------------- -----------
$ 19,425,046 $ 1,682,227
============= ===========
SendTec's DirectNet Advertising division, which provides online interactive
marketing services for its clients, generated approximately 87% of the net
revenue reported for the marketing services segment for the six months ended
June 30, 2005. SendTec also provided marketing services to our VoIP telephony
services business segment which resulted in the recording of approximately $0.3
million of intersegment marketing services revenue during the six months ended
June 30, 2005.
116
OPERATING EXPENSES BY BUSINESS SEGMENT:
Six months ended:
Depreciation
Cost of Sales and Product General and and
2005 Revenue Marketing Development Administrative Amortization Total
---- ------------ ------------ ------------ ------------ ------------ ------------
Computer games $ 1,215,385 $ 221,202 $ 319,127 $ 324,361 $ 15,438 $ 2,095,513
Internet services -- 9,238 -- 185,536 18,800 213,574
Marketing services 12,669,759 1,063,516 -- 2,357,554 349,368 16,440,197
VoIP telephony services 2,950,186 1,010,045 335,130 1,447,165 548,576 6,291,102
Corporate expenses -- -- -- 1,785,025 19,157 1,804,182
Intersegment eliminations (196,618) (128,099) -- -- -- (324,717)
------------ ------------ ------------ ------------ ------------ ------------
$ 16,638,712 $ 2,175,902 $ 654,257 $ 6,099,641 $ 951,339 $ 26,519,851
============ ============ ============ ============ ============ ============
Depreciation
Cost of Sales and Product General and and
2005 Revenue Marketing Development Administrative Amortization Total
---- ------------ ------------ ------------ ------------ ------------ ------------
Computer games $ 1,105,899 $ 171,155 $ 233,909 $ 271,134 $ 4,788 $ 1,786,885
VoIP telephony services 2,387,527 2,551,076 132,275 1,386,330 516,399 6,973,607
Corporate expenses -- -- -- 1,988,936 13,506 2,002,442
------------ ------------ ------------ ------------ ------------ ------------
$ 3,493,426 $ 2,722,231 $ 366,184 $ 3,646,400 $ 534,693 $ 10,762,934
============ ============ ============ ============ ============ ============
COST OF REVENUE. Cost of revenue totaled $16.6 million for the six months ended
June 30, 2005, an increase of $13.1 million from the $3.5 million reported for
the six months ended June 30, 2004. The increase consisted primarily of the
inclusion of marketing services cost of revenue related to the operations of
SendTec totaling $12.5 million, net of intersegment eliminations, as well as an
increase of $0.6 million in costs incurred by our VoIP telephony services
business segment as compared to 2004. Cost of revenue of our computer games
segment totaled $1.2 million for the six months ended June 30, 2005, an increase
of $0.1 million from the same period in 2004, due primarily to the costs
associated with our new magazine publication, Now Playing, which we began
distributing in March 2005.
Cost of revenue related to our marketing services business segment consists of
fees paid to third party vendors for project related research, production and
post-production services and products. Additionally, cost of revenue includes
third party vendor fees incurred to acquire online advertising media, including
the actual cost of the media.
Cost of revenue of our VoIP telephony services business segment is principally
comprised of carrier transport and circuit interconnection costs related to our
retail products, as well as personnel and consulting costs incurred in support
of our Internet telecommunications network. Although VoIP telephony services net
revenue was essentially unchanged compared to the first half of 2004, cost of
revenue attributable to this segment increased $0.6 million in comparison to the
same period of 2004. Throughout 2004, the Company increased its VoIP network
capacity by entering into agreements with numerous carriers for leased equipment
and services and with third parties for a number of leased data center
facilities. The Company also expanded its internal network support function by
hiring additional technical personnel. As a result, the Company incurred higher
network operating and support costs during the six months ended June 30, 2005
compared to the six months ended June 30, 2004.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and related expenses of sales and marketing personnel, commissions, advertising
and marketing costs, public relations expenses and promotional activities. Sales
and marketing expenses totaled $2.2 million for the six months ended June 30,
2005, a decrease of $0.5 million from the $2.7 million reported for the same
period in 2004. A decline of $1.5 million in sales and marketing expenses of the
VoIP telephony services division as compared to the first half of 2004 was
partially offset by the $0.9 million, net of intersegment eliminations, in sales
and marketing expenses of SendTec. The VoIP telephony services business incurred
significant costs during the first half of 2004 for Internet and television
advertising campaigns, as well as commissions expenses related to its VoIP
products. During the first quarter of 2005, the Company reevaluated its existing
VoIP telephony services business plan and began the process of terminating
and/or modifying certain of its existing product offerings and marketing
programs. The Company also began to develop and test certain new VoIP products
and features, some of which were completed and released during the 2005 second
quarter. As a result, the VoIP telephony services business segment has
significantly slowed its sales and marketing efforts, as compared to the first
six months of 2004.
117
PRODUCT DEVELOPMENT. Product development expenses include salaries and related
personnel costs; expenses incurred in connection with website development,
testing and upgrades; editorial and content costs; and costs incurred in the
development of our VoIP telephony products. Product development expenses totaled
$0.7 million for the six months ended June 30, 2005 as compared to $0.4 million
for the six months ended June 30, 2004. The increase in product development
expenses as compared to the first half of 2004 was primarily due to increases in
personnel costs related to the continued development of our retail VoIP
telephony products and services and increases in website development costs
incurred by our computer games business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and other personnel costs related to management, finance
and accounting functions, facilities, outside legal and professional fees,
information-technology consulting, directors and officers insurance, bad debt
expenses and general corporate overhead costs. General and administrative
expenses of $6.1 million for the six months ended June 30, 2005 increased $2.5
million from the $3.6 million reported for the same period of 2004. The increase
in general and administrative expenses as compared to 2004 was primarily
attributable to the inclusion of $2.4 million and $0.2 million of general and
administrative expenses incurred by the Company's marketing services and
Internet services businesses, respectively. SendTec, which comprises our
marketing services segment was acquired in September 2004 and Tralliance, which
comprises our Internet services segment, was acquired in May 2005. The results
of operations of both businesses have been included in our results only since
their respective dates of acquisition. Corporate general and administrative
expense declined $0.2 million as compared to the first six months of 2004
primarily due to lower personnel related expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense totaled
$1.0 million for the six months ended June 30, 2005. The $0.4 million increase
from the same period of the prior year resulted primarily from the depreciation
and intangible asset amortization expenses incurred by the Company's marketing
services business.
INTEREST EXPENSE, NET. Interest expense, net of interest income, totaled $3.0
million for the first six months of 2005 as compared to $0.8 million in the same
period of the prior year. A total of $3.0 million of non-cash interest expense
was recorded during 2005 related to the beneficial conversion feature of the
$3,000,000 secured demand convertible promissory notes issued by the Company
during the 2005 second quarter. During the first six months of 2004, $0.7
million of non-cash interest expense was recorded related to the beneficial
conversion feature of the $2,000,000 demand convertible promissory note acquired
by our Chairman and Chief Executive Officer and his spouse in February 2004.
OTHER EXPENSE, NET. Reserves against the amounts advanced by the Company to
Tralliance Corporation prior to its acquisition were the principal components of
other expense, net for both the first six months of 2005 and 2004. Such reserves
totaled $0.3 million and $0.2 million for the six month periods ended June 30,
2005 and 2004, respectively.
INCOME TAXES. The income tax provision of approximately $16,000 recorded for the
first half of 2005 consisted solely of state and local income taxes. No federal
income tax or benefit was recorded for the first six months of 2005 as we
recorded a 100% valuation allowance against our otherwise recognizable deferred
tax assets due to the uncertainty surrounding the timing or ultimate realization
of the benefits of our net operating loss carryforwards in future periods. Our
effective tax rate differs from the statutory Federal income tax rate, primarily
as a result of the uncertainty regarding our ability to utilize our net
operating loss carryforwards. As of December 31, 2004, the Company had net
operating loss carryforwards available for U.S. and foreign tax purposes of
approximately $162 million. These carryforwards expire through 2024. The Tax
Reform Act of 1986 imposes substantial restrictions on the utilization of net
operating losses and tax credits in the event of an "ownership change" of a
corporation. Due to various significant changes in our ownership interests, as
defined in the Internal Revenue Code of 1986, as amended, commencing in August
1997 through our most recent issuance of convertible notes in July 2005, and
assuming conversion of such notes, we may have substantially limited or
eliminated the availability of our net operating loss carryforwards. There can
be no assurance that we will be able to utilize any net operating loss
carryforwards in the future.
118
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET REVENUE. Net revenue totaled $16.0 million for the year ended December 31,
2004 as compared to $5.3 million for the year ended December 31, 2003. The $10.7
million increase in consolidated net revenue was principally the result of the
$12.5 million in additional net revenue, net of intersegment eliminations,
resulting from the operations of SendTec, which was acquired on September 1,
2004 (and for which all presentations below are since such date of acquisition).
Partially offsetting this additional revenue were declines of $1.6 million and
$0.2 million in net revenue of our computer games and VoIP telephony services
business segments, respectively.
NET REVENUE BY BUSINESS SEGMENT:
Years ended: 2004 2003
------------ ------------
Computer games $ 3,107,637 $ 4,736,032
Marketing services 13,408,183 --
VoIP telephony services 391,154 548,081
Intersegment eliminations (865,942) --
------------ ------------
$ 16,041,032 $ 5,284,113
============ ============
Decreases of $0.8 million in sales of games products by Chips and Bits, Inc.,
$0.5 million in print advertisements in our games magazine and $0.3 million in
sales of the games magazine, respectively, accounted for the decline in net
revenue experienced by our computer games segment as compared to 2003. As
discussed in Note 1(k) of the Notes to Consolidated Financial Statements, we use
outside agents to obtain new subscribers for our Computer Games magazine,
whereby the agents retain a percentage of the subscription proceeds as their
commission. Previously these commissions had been classified as sales and
marketing expense within the consolidated statements of operations. Effective
June 2004, we changed our method of accounting for these commissions, reporting
them as a reduction of magazine sales subscription revenue. We believe this
alternative accounting method is a more commonly used industry practice and is
preferable under the circumstances. This reclassification had no impact on our
net loss as previously reported. Net revenue as presented in the accompanying
consolidated statements of operations has been shown net of approximately $1.1
million and $1.3 million of agency fees for the years ended December 31, 2004
and 2003, respectively.
SendTec's DirectNet Advertising division, which provides online interactive
marketing services for its clients, generated approximately 86% of the net
revenue reported for the marketing services segment for the year ended December
31, 2004. SendTec also provided marketing services to our VoIP telephony
services business segment which resulted in the recording during 2004 of
approximately $0.9 million of intersegment marketing services revenue since its
date of acquisition.
Net revenue generated by our telephony services division totaled $0.4 million
for the year ended 2004 as compared to $0.5 million in 2003. As part of the
Company's strategy to enter the VoIP business, the Company acquired Direct
Partner Telecom, Inc. ("DPT"), an international licensed telecommunications
carrier engaged in the purchase and resale of telecommunications services over
the Internet, in May 2003. Telephony services net revenue generated by DPT
during 2003 represented approximately 89% of total telephony services net
revenue and was derived principally from the charges to customers for
international call completion based on the volume of minutes utilized. During
the first quarter of 2004, management decided to suspend the wholesale business
of DPT and dedicate DPT's physical and intellectual assets to the Company's
retail VoIP business. Telephony services net revenue for the year ended 2004
consisted solely of revenue attributable to sale of our retail VoIP products.
119
OPERATING EXPENSES BY BUSINESS SEGMENT:
Depreciation
Cost of Sales and Product General and and
Years ended: Revenue Marketing Development Administrative Amortization Total
------------ ------------ ------------ ------------ ------------ ------------
2004
Computer games $ 2,114,716 $ 377,531 $ 475,785 $ 571,285 $ 10,606 $ 3,549,923
Marketing services 9,670,229 691,654 -- 1,621,146 227,270 12,210,299
VoIP telephony services 6,940,023 6,720,531 578,101 3,266,366 1,355,532 18,860,553
Corporate expenses -- -- -- 3,643,354 32,138 3,675,492
Intersegment eliminations (462,863) (403,079) -- -- -- (865,942)
------------ ------------ ------------ ------------ ------------ ------------
$ 18,262,105 $ 7,386,637 $ 1,053,886 $ 9,102,151 $ 1,625,546 37,430,325
============ ============ ============ ============ ============
VoIP telephony services
Impairment charge 1,661,975
Loss on settlement of
contractual obligation 406,750
------------
$ 39,499,050
============
Depreciation
Cost of Sales and Product General and and
Revenue Marketing Development Administrative Amortization Total
------------ ------------ ------------ ------------ ------------ ------------
2003
Computer games $ 3,121,734 $ 586,420 $ 543,139 $ 301,624 $ 62,208 $ 4,615,125
VoIP telephony services 1,579,604 1,400,606 341,651 1,175,939 258,334 4,756,134
Corporate expenses -- -- -- 3,808,349 9,200 3,817,549
------------ ------------ ------------ ------------ ------------ ------------
$ 4,701,338 $ 1,987,026 $ 884,790 $ 5,285,912 $ 329,742 13,188,808
============ ============ ============ ============ ============
VoIP telephony services
Impairment charge 908,384
------------
$ 14,097,192
============
COST OF REVENUE. Cost of revenue totaled $18.3 million for the year ended
December 31, 2004, an increase of $13.6 million from the $4.7 million reported
for the year ended December 31, 2003. An increase of $5.4 million in costs
incurred by our VoIP telephony services business segment, as well as the
inclusion of marketing services cost of revenue related to the operations of
SendTec from date of acquisition (September 1, 2004) totaling approximately $9.2
million, net of intersegment eliminations, were slightly offset by a decrease of
$1.0 million in cost of revenue reported by our computer games segment as
compared to 2003.
Cost of revenue related to our computer games business segment consisted
primarily of printing costs of our games magazine, Internet connection charges,
personnel costs, maintenance costs of website equipment and the costs of
merchandise sold and shipping fees in connection with our online store. Cost of
revenue of our computer games segment totaled approximately $2.1 million in
2004, a decrease of approximately $1.0 million from 2003, due primarily to the
revenue decreases discussed above.
Cost of revenue related to our marketing services business segment consisted of
fees paid to third party vendors for project related research, production and
post-production services and products. Additionally, cost of revenue included
third party vendor fees incurred to acquire online advertising media, including
the actual cost of the media. Intersegment eliminations in 2004, represented
approximately $0.5 million of costs incurred by SendTec related to marketing
services provided to our VoIP telephony services segment.
Cost of revenue of our VoIP telephony services business segment for the year
ended December 31, 2004 totaled $6.9 million and principally included carrier
transport and circuit interconnection costs related to our retail products
marketed under the voiceglo and GloPhone brand names, as well as personnel and
consulting costs incurred in support of our Internet telecommunications network.
Additionally, during the year ended December 31, 2004, cost of revenue included
charges of $1.5 million related to write-downs of telephony equipment inventory
(See Note 1(g) of the Consolidated Financial Statements). Cost of revenue of
$1.6 million reported for the VoIP telephony services business during the year
ended December 31, 2003, consisted principally of costs related to the wholesale
telephony services business marketed by DPT, as well as start up costs of our
retail VoIP operation.
120
SALES AND MARKETING. Sales and marketing expenses consisted primarily of
salaries and related expenses of sales and marketing personnel, commissions,
advertising and marketing costs, public relations expenses and promotional
activities. Sales and marketing expenses totaled $7.4 million in 2004 versus
$2.0 million in 2003. The rise in consolidated sales and marketing expenses was
principally the result of the $5.3 million increase in sales and marketing
expenses of the VoIP telephony services division as compared to 2003. During
2004, the VoIP telephony services division increased Internet and television
advertising and incurred increased commissions expenses related to "free" retail
VoIP product sign-ups, as well as higher personnel costs. The $0.7 million of
sales and marketing expenses incurred by SendTec subsequent to its acquisition
by the Company on September 1, 2004, was partially offset by the $0.2 million
decline in sales and marketing expenses of the computer games business segment
as compared to the year ended 2003. As mentioned in the discussion of net
revenue above, commissions paid to agents to obtain subscribers to our Computer
Games magazine had previously been reported as sales and marketing expenses.
Effective June 2004, we changed our method of accounting for these agency fees,
reporting them as a reduction of magazine sales subscription revenue, which we
believe is a preferable alternative accounting method and a more commonly used
industry practice. The $0.4 million of intersegment sales and marketing expenses
eliminated for the 2004 period represented costs incurred by SendTec for
services provided to the VoIP telephony services division.
PRODUCT DEVELOPMENT. Product development expenses included salaries and related
personnel costs; expenses incurred in connection with website development,
testing and upgrades; editorial and content costs; and costs incurred in the
development of our retail VoIP products. Product development expenses totaled
$1.1 million for the year ended December 31, 2004 as compared to $0.9 million
for the year ended December 31, 2003. The year over year increase in product
development expenses was principally attributable to increases in personnel and
consulting costs related to the development of our retail VoIP telephony
products and services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and other personnel costs related to management,
finance and accounting functions, facilities, outside legal and professional
fees, information-technology consulting, directors and officers insurance, bad
debt expenses and general corporate overhead costs. General and administrative
expenses of $9.1 million in 2004 increased $3.8 million from the $5.3 million
reported for 2003. Increases in personnel costs and other general and
administrative expenses directly attributable to our VoIP telephony services
division, as well as general and administrative expenses incurred by SendTec
since date of acquisition by the Company, were principally responsible for the
increase in this expense category as compared to 2003. Other expense categories
which increased as compared to 2003 largely as a result of the Company's
entrance into the VoIP business included legal fees, information-technology
consulting, other professional fees and facilities costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense totaled
$1.6 million for the year ended December 31, 2004. The $1.3 million increase
from the prior year resulted principally from investments related to the
development of our VoIP network and to a lesser extent to costs incurred in the
development of our VoIP telephony customer billing system. As discussed in
"Impairment Charge" below, certain long-lived assets of the VoIP telephony
services division were written-off effective December 31, 2004, as a result of
the Company's review of its long-lived assets for impairment. Approximately $0.5
million of depreciation and amortization expense related to the assets
written-off was recorded during 2004.
IMPAIRMENT CHARGE. Due to the significant operating and cash flow losses
incurred by the Company's VoIP telephony services division during 2004 and 2003,
coupled with management's projection of continued losses in the foreseeable
future, the Company performed an evaluation of the recoverability of the
division's long-lived assets during the first quarter of 2005 in connection with
the preparation of our 2004 annual financial statements. This evaluation
indicated that the carrying value of certain of our VoIP division's long-lived
assets exceeded the fair value of such assets, as measured by quoted market
prices or our estimate of fair value. As a result, we recorded an impairment
charge of approximately $1.7 million in the accompanying consolidated statement
of operations for the year ended December 31, 2004. The impairment loss included
the write-off of the full value of amounts previously capitalized by the VoIP
telephony services division as internal-use software, website development costs,
acquired technology and patent costs, as well as certain other assets. As a
result of this impairment charge, we expect to realize reductions in
depreciation and amortization expense in future periods.
LOSS ON SETTLEMENT OF CONTRACTUAL OBLIGATION. Subsequent to year-end 2004, the
Company formally terminated its contract with a supplier of VoIP telephony
handsets and agreed to settle the unconditional purchase obligation under such
contract, which totaled approximately $3.0 million. The settlement provided for
(i) a cash payment of $0.2 million, (ii) the return of 35,000 VoIP handset units
from the Company's inventory, and (iii) the issuance of 300,000 shares of
theglobe.com Common Stock. The value attributed to the loss on the settlement of
the contractual obligation, which approximated $0.4 million, was accrued at
December 31, 2004, and included as a component of operating expenses reported
for 2004.
121
INTEREST INCOME (EXPENSE), NET. On February 2, 2004, our Chairman and Chief
Executive Officer and his spouse, entered into a Note Purchase Agreement with
the Company pursuant to which they acquired a demand convertible promissory note
(the "Bridge Note") in the aggregate principal amount of $2,000,000. Non-cash
interest expense of $0.7 million was recorded during 2004 related to the
beneficial conversion feature of the Bridge Note as the Bridge Note was
convertible into our Common Stock at a price below the fair market value (for
accounting purposes) of our Common Stock, based on the closing price of our
Common Stock as reflected on the OTCBB on the issuance date of the Note.
Non-cash interest expense of approximately $1.6 million was recorded during 2003
related to the beneficial conversion features of the $1,750,000 Secured
Convertible Notes and warrant issued on May 22, 2003.
OTHER EXPENSE, NET. Other expense, net, included reserves against the amounts
loaned by the Company to Tralliance Corporation, totaling $0.5 million in each
of the years ended December 31, 2004 and 2003 (See Note 4, "Acquisitions and
Dispositions," of the Notes to Consolidated Financial Statements). Partially
offsetting the 2004 expense, was a favorable settlement of a previously disputed
vendor claim by the computer games business segment of approximately $0.4
million.
INCOME TAXES. No tax benefit was recorded for the years ended December 31, 2004
and 2003 as we recorded a 100% valuation allowance against our otherwise
recognizable deferred tax assets due to the uncertainty surrounding the timing
or ultimate realization of the benefits of our net operating loss carryforwards
in future periods. Our effective tax rate differs from the statutory Federal
income tax rate, primarily as a result of the uncertainty regarding our ability
to utilize our net operating loss carryforwards. As of December 31, 2004, the
Company had net operating loss carryforwards available for U.S. and foreign tax
purposes of approximately $162 million. These carryforwards expire through 2024.
The Tax Reform Act of 1986 imposes substantial restrictions on the utilization
of net operating losses and tax credits in the event of an "ownership change" of
a corporation. As defined in the Internal Revenue Code of 1986, as amended, due
to the change in our ownership interests in August 1997 and May 1999 and the
Company's private offering of securities in March 2004 (together with the
exercise and conversion of various securities in connection with such private
offering of securities) and the issuance of shares in connection with our
acquisition of SendTec on September 1, 2004, the Company may have substantially
limited or eliminated the availability of its net operating loss carryforwards.
There can be no assurance that the Company will be able to avail itself of any
net operating loss carryforwards.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET REVENUE. Our revenue sources were principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games; the sale of video games and related products through our games
distribution business Chips & Bits, Inc.; the sale of our games information
magazine through newsstands and subscriptions; and during 2003, to a lesser
extent from the sale of VoIP telephony services.
NET REVENUE BY BUSINESS SEGMENT:
Years ended: 2003 2002
---------- ----------
Computer games $4,736,032 $7,245,276
VoIP telephony services 548,081 --
---------- ----------
$5,284,113 $7,245,276
========== ==========
Net revenue totaled $5.3 million for the year ended December 31, 2003 as
compared to $7.2 million for the year ended December 31, 2002. The $1.9 million
decline in total net revenue was primarily attributable to decreases in net
revenue from electronic commerce, advertising and magazine sales, partially
offset by net revenue generated by our VoIP telephony services division.
122
Advertising revenue from the sale of print advertisements in our games magazine
was $2.6 million, or 48%, of total net revenue for the year ended December 31,
2003, versus $3.1 million, or 43%, of total net revenue for the prior year.
Barter advertising revenue represented approximately 2% of total net revenue for
each of the years ended December 31, 2003 and 2002, respectively.
Net revenue attributable to the sale of our games information magazine was $0.7
million, or 14%, of total net revenue for the 2003 year as compared to $1.0
million, or 14%, of total net revenue in 2002. As discussed in the comparison of
the year ended December 31, 2004 to the year ended December 31, 2003, we changed
the classification of agency fees paid to third parties as commissions for
obtaining new subscribers to our Computer Games magazine. Previously these
commissions had been classified as sales and marketing expense within the
consolidated statement of operations. Effective June 2004, we changed our method
of accounting for these agency fees, reporting them as a reduction of magazine
sales subscription revenue. We believe this alternative accounting method is a
more commonly used industry practice and is preferable under the circumstances.
This reclassification had no impact on our net loss as previously reported. Net
revenue as presented in the accompanying consolidated statements of operations
is shown net of approximately $1.3 million and $2.4 million of agency fees for
the years ended December 31, 2003 and 2002, respectively. The decline in net
revenue from the sale of our games magazine as compared to the previous year was
primarily the result of a decrease in the circulation base of our games
magazine. As rates for print advertising charged to advertisers are driven
largely by the circulation of the publication, the decline in the circulation
base of our games magazine has also contributed to the decrease in our
advertising revenue.
Sales of products through our online store, Chips & Bits, Inc., accounted for
$1.5 million, or 28%, of total net revenue for the year ended December 31, 2003
as compared to $3.1 million, or 42%, of total net revenue for 2002. The $1.6
million decrease was primarily the result of advances in technology and the
number of releases of console and online games, which traditionally have less
sales loyalty to our online store, coupled with the continued decline in the
number of major PC game releases, on which our online store relies for the
majority of sales. In addition, an increasing number of major retailers have
increased the selection of video games offered by both their traditional "bricks
and mortar" locations and their online commerce sites resulting in increased
competition.
Net revenue from VoIP telephony services totaled $0.5 million for the year ended
December 31, 2003. As discussed in the comparison of the year ended December 31,
2004 to the year ended December 31, 2003, approximately 89% of total telephony
services net revenue in 2003 was attributable to the operation of DPT's
wholesale business. Net revenue attributable to the launch of the Company's
retail VoIP products during the second half of 2003 represented the remaining
11% of total 2003 telephony services net revenue.
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OPERATING EXPENSES BY BUSINESS SEGMENT:
Depreciation
Cost of Sales and Product General and and
Years ended: Revenue Marketing Development Administrative Amortization Total
----------- ----------- ----------- ----------- ----------- ----------
2003
Computer games $ 3,121,734 $ 586,420 $ 543,139 $ 301,624 $ 62,208 $ 4,615,125
VoIP telephony services 1,579,604 1,400,606 341,651 1,175,939 258,334 4,756,134
Corporate expenses -- -- -- 3,808,349 9,200 3,817,549
----------- ----------- ----------- ----------- ----------- ------------
$ 4,701,338 $ 1,987,026 $ 884,790 $ 5,285,912 $ 329,742 13,188,808
=========== =========== =========== =========== ===========
VoIP telephony services
Impairment charge 908,384
------------
$ 14,097,192
============
Depreciation
Cost of Sales and Product General and and
Revenue Marketing Development Administrative Amortization Total
----------- ----------- ----------- ----------- ----------- ------------
2002
Computer games $ 5,453,136 $ 1,101,417 $ 652,997 $ 364,025 $ 85,327 $ 7,656,902
VoIP telephony services -- -- -- 1,196 -- 1,196
Corporate expenses -- -- -- 2,524,713 3,253 2,527,966
----------- ----------- ----------- ----------- ----------- ------------
$ 5,453,136 $ 1,101,417 $ 652,997 $ 2,889,934 $ 88,580 $ 10,186,064
=========== =========== =========== =========== =========== ============
COST OF REVENUE. Cost of revenue related to our computer games division totaled
approximately $3.1 million and $5.5 million for the years ended December 31,
2003 and 2002, respectively. The gross margin of the Company's games division
approximated 34% in 2003 as compared to 25% in 2002. The overall improvement in
the gross margin of the games division as compared to the prior year resulted
from the increase in advertising revenue as a percentage of total net revenue,
coupled with an improvement in the gross profit margin of Chips & Bits.
VoIP telephony services cost of revenue totaled $1.6 million in 2003 and
included carrier transport and circuit interconnection costs related to the
Company's wholesale telephony services business marketed by DPT and the
Company's retail VoIP telephony services business. Personnel and consulting
costs incurred in support of the Company's Internet telecommunications network,
as well as customer equipment costs related to the sale of the Company's retail
VoIP service launched during mid-August 2003 were also included in this expense
category.
SALES AND MARKETING. Sales and marketing expenses were $2.0 million for the year
ended December 31, 2003 as compared to $1.1 million for the year ended December
31, 2002. Sales and marketing expenses of the VoIP telephony services division
totaling $1.4 million were partially offset by a decline of $0.5 million in
sales and marketing expenses of the Company's games division as compared to
2002. As mentioned in the discussion of Net Revenue above, commissions paid to
agents to obtain subscribers to our Computer Games magazine had previously been
reported as sales and marketing expenses. Effective June 2004, we changed our
method of accounting for these agency fees, reporting them as a reduction of
magazine sales subscription revenue, which we believe is a preferable
alternative accounting method and a more commonly used industry practice. Sales
and marketing expenses of the games division represented approximately 12% and
15% of total net revenue attributable to the games division's operations for the
years ended December 31, 2003 and 2002, respectively. Costs related to employee
salaries, the identification and continuing development of an independent
outside sales network and advertising the VoIP product line were the principal
components of sales and marketing expenses of the VoIP telephony services
division during the year ended December 31, 2003.
PRODUCT DEVELOPMENT. Product development expenses increased to $0.9 million for
the year ended December 31, 2003, as compared to $0.7 million for the year ended
December 31, 2002. The increase was principally attributable to personnel costs
and consulting expenses relating to the development of our retail VoIP telephony
products and services, which totaled approximately $0.3 million during 2003.
124
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$5.3 million for the year ended December 31, 2003, as compared to $2.9 million
for the year ended December 31, 2002. Increases in headcount and the resulting
personnel expenses, as well as other general and administrative expenses
directly attributable to the Company's new line of business, VoIP telephony
services, were major factors contributing to the $2.4 million increase in total
general and administrative expenses. Other expense categories which increased as
compared to 2002 largely as a result of the Company's entrance into the VoIP
business, included legal fees, other professional fees and facilities costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $0.3
million in 2003 included approximately $0.1 million representing amortization of
the non-compete agreement recorded in connection with the acquisition of DPT
prior to its write-off at year-end 2003, as well as amortization of capitalized
patent costs related to our retail VoIP products.
IMPAIRMENT CHARGE. During the first quarter of 2004, the Company decided to
suspend DPT's wholesale business and decided to dedicate the DPT physical and
intellectual assets to its retail VoIP business. As a result, management
reviewed the long-lived assets associated with the wholesale VoIP business for
impairment. Goodwill of approximately $0.6 million and the unamortized balance
of the non-compete intangible asset of approximately $0.3 million recorded in
connection with the May 2003 acquisition of DPT were written off and recorded as
an impairment loss in 2003. No impairment charges were recorded during 2002.
INTEREST INCOME (EXPENSE), NET. Non-cash interest expense of $1.5 million was
recorded in the second quarter of 2003 related to the beneficial conversion
feature of the $1,750,000 in Secured Convertible Notes issued on May 22, 2003.
The expense resulted as the Secured Convertible Notes were convertible into our
Common Stock at a price below the fair market value of our Common Stock (for
accounting purposes), based on the closing price of our Common Stock as
reflected on the OTCBB on the issuance date of the notes. In addition, the
warrant to acquire 3,888,889 shares of our Common Stock issued to one of the
noteholders was exercisable at a price below the fair market value of our Common
Stock (for accounting purposes), based on the closing price of our Common Stock
as reflected on the OTCBB on the date of issuance. The value assigned to the
warrant was recorded as a discount to the face value of the Secured Convertible
Notes to be amortized to interest expense over the term of the Secured
Convertible Notes. Discount amortization of approximately $0.2 million was
included in interest expense, net, during the year ended December 31, 2003.
OTHER EXPENSE, NET. Other expense, net, of $0.5 million was reported for the
year ended December 31, 2003 and consisted of reserves against the amounts
loaned by the Company to Tralliance Corporation totaling $0.5 million (See Note
4, "Acquisitions and Dispositions," of the Notes to Consolidated Financial
Statements).
INCOME TAXES. As was the case in the year ended December 31, 2004, no tax
benefit was recorded for the year ended December 31, 2003 as we recorded a 100%
valuation allowance against our otherwise recognizable deferred tax assets due
to the uncertainty surrounding the timing or ultimate realization of the
benefits of our net operating loss carryforwards in future periods. The income
tax provision recorded for the year ended December 31, 2002 was based solely on
state and local taxes on business and investment capital.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ITEMS
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
As of June 30, 2005, we had approximately $5.0 million in cash and cash
equivalents as compared to $6.8 million as of December 31, 2004. Net cash used
in operating activities was $4.0 million and $8.2 million, for the six months
ended June 30, 2005 and 2004, respectively. The period-to-period decrease in net
cash used in operating activities resulted primarily from operating income
provided in 2005 from SendTec, which was acquired on September 1, 2004 and the
favorable impact of working capital changes in 2005 compared to 2004.
Net cash of $0.6 million was used in investing activities during the six months
ended June 30, 2005 as compared to $1.7 million in the same period of the prior
year. The Company incurred costs totaling $0.3 million and $1.7 million for
capital expenditures related primarily to the development of its VoIP telephony
network and customer billing system during the six months ended June 30, 2005
and 2004, respectively. We also loaned approximately $0.3 million and $0.2
million to Tralliance prior to its acquisition by the Company during the six
months ended 2005 and 2004, respectively.
125
Net cash provided by financing activities was $2.8 million and $29.0 million for
the six months ended June 30, 2005 and 2004, respectively. As discussed
previously, we issued $3.0 million in Convertible Notes during the second
quarter of 2005. During March 2004, the Company completed a private offering of
its Common Stock and warrants to acquire its Common Stock, for net proceeds
totaling approximately $27.0 million. In addition, on February 2, 2004, the
Company issued a $2,000,000 Bridge Note which was subsequently converted into
our Common Stock in connection with the March 2004 private offering.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
As of December 31, 2004, we had approximately $6.8 million in cash and cash
equivalents as compared to $1.1 million as of December 31, 2003. Net cash used
in operating activities was $17.7 million and $7.1 million, for the years ended
December 31, 2004 and 2003, respectively. The period-to-period increase in net
cash used in operating activities resulted primarily from the increase in our
net operating losses, partially offset by the effect of non-cash charges.
Net cash of $5.4 million was used in investing activities during 2004. As more
fully described in the following "Capital Transactions" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 4, "Acquisitions and Dispositions," in the accompanying
Consolidated Financial Statements, in connection with its acquisition of SendTec
on September 1, 2004, the Company paid cash consideration of approximately $6.0
million, excluding transaction costs. As of the date of acquisition, SendTec
held approximately $3.6 million of cash. Thus, the Company used a net amount of
approximately $2.4 million of cash to acquire SendTec. Additionally, the Company
incurred costs totaling $2.7 million and $2.4 million for capital expenditures
related primarily to the development of its VoIP telephony network and to a
lesser extent to the development of its VoIP telephony customer billing system
during the years ended December 31, 2004 and 2003, respectively. We also loaned
approximately $0.5 million to Tralliance Corporation during each of the years of
2004 and 2003, respectively.
Net cash provided by financing activities was $28.9 million for 2004. As
discussed below and in the Notes to the Consolidated Financial Statements, the
Company completed a private offering of its Common Stock and warrants to acquire
its Common Stock in March 2004 resulting in the issuance of 33,381,647 shares of
Common Stock, and warrants to acquire 16,690,824 shares of its Common Stock, for
gross proceeds of approximately $28.4 million. Offering costs included $1.2
million in cash commissions paid to the placement agent and approximately $0.2
million in legal and accounting fees. In addition, on February 2, 2004, the
Company issued a $2,000,000 Bridge Note which was subsequently converted into
our Common Stock in connection with the March 2004 private offering. Proceeds of
approximately $0.2 million were received from the exercise of stock options and
warrants during 2004. Cash provided by financing activities during the year
ended December 31, 2003, included proceeds of $8.6 million, net of offering
costs, from the issuance of Series G Automatically Converting Preferred Stock
and the associated warrants in July 2003, proceeds of $0.5 million from the
issuance of Series F Convertible Preferred Stock and $1.75 million in proceeds
from Secured Convertible Notes issued during the first half of 2003.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
As of December 31, 2003, we had approximately $1.1 million in cash and cash
equivalents as compared to $0.7 million as of December 31, 2002. Net cash used
in operating activities was $7.1 million and $2.0 million for the years ended
December 31, 2003 and 2002, respectively. The year-over-year increase in net
cash used in operating activities resulted primarily from an increase in our net
operating losses, partially offset by the impact of non-cash charges recorded in
2003 and favorable working capital changes recorded in 2002. The most
significant of these non-cash charges during 2003 included the non-cash interest
expense recorded as a result of the beneficial conversion feature of the
$1,750,000 in Secured Convertible Notes and associated warrants, as well as the
non-cash impairment charge related to the write-off of goodwill and a
non-compete intangible originally recorded as a result of the acquisition of
DPT.
Net cash of $3.2 million was used in investing activities during the year ended
December 31, 2003. The Company incurred $2.4 million in capital expenditures
during 2003, primarily within the VoIP telephony services division. These
expenditures included costs incurred in the development of our VoIP telephony
network used to support the retail VoIP product line, as well as the Company's
wholesale VoIP business. Additionally, in February 2003, the Company committed
to fund operating expenses of Tralliance Corporation, at the Company's
discretion, in the form of a loan. As of December 31, 2003, approximately $0.5
million had been advanced to the venture. During 2003, the Company invested
approximately $10.3 million in marketable securities, the funds of which were
principally from the proceeds received in connection with the issuance of the
Company's Series G Automatically Converting Preferred Stock. Approximately $10.1
million of investments were sold throughout the second half of 2003 as working
capital was required to fund operations. Partially offsetting these uses of
funds in 2003 was the $0.1 million in net cash acquired upon the May 2003
acquisition of DPT. The purchase price of DPT consisted of the issuance of
1,375,000 shares of the Company's Common Stock and the issuance of warrants to
acquire 500,000 shares of the Company's Common Stock. Warrants to acquire an
additional 2,750,000 shares of our Common Stock could have been issued if
certain performance or other criteria were satisfied. To date, 1,250,000 of the
earn-out warrants have been forfeited as performance targets have not been
achieved. Net cash provided by investing activities in 2002 was $0.1 million
principally resulting from the sale of the assets of the Happy Puppy website.
126
Net cash provided by financing activities in 2003 totaled $10.6 million. As
discussed below and in the Notes to the Consolidated Financial Statements, the
Company issued $0.5 million in Series F Convertible Preferred Stock in March
2003, $1.75 million of Secured Convertible Notes in May 2003, and approximately
$8.6 million, net of offering costs, of Series G Automatically Converting
Preferred Stock and associated warrants in July 2003. Immediately after the May
2003 closing of the DPT acquisition, the Company paid $0.5 million in cash to
the former stockholders of DPT in repayment of certain loans which they had
extended to DPT prior to its acquisition by theglobe.com.
CAPITAL TRANSACTIONS
On August 10, 2005, the Company entered into an asset purchase agreement, as
amended on August 23, 2005 (the "Purchase Agreement") with RelationServe Media,
Inc. ("RelationServe") whereby the Company agreed to sell all of the business
and substantially all of the net assets of its SendTec marketing services
subsidiary to RelationServe for $37,500,000 in cash, subject to certain net
working capital adjustments. In addition, on August 23, 2005, the Company
entered into a Redemption Agreement with six members of the management of
SendTec (the "Redemption Agreement") to redeem approximately 28.9 million shares
of theglobe Common Stock owned by such management for approximately $11.6
million in cash. The closing of the redemption of these shares is contingent on,
and will occur immediately after, the closing of the Purchase Agreement. The
Company also anticipates that it will be terminating and canceling certain
options and warrants held by these six members of management for approximately
$400,000 in cash. These shares and related options and warrants were issued to
SendTec management in connection with theglobe's acquisition of SendTec. The
Company further expects to terminate or cancel the options of a few other
employees of SendTec and enter into severance bonus arrangements with others for
cash payments totaling approximately $500,000. The closing of the asset sale is
subject to the satisfaction of a number of closing conditions including
distribution of a definitive Information Statement describing the asset sale to
our stockholders which was undertaken commencing on September 16, 2005, with the
closing anticipated to occur on or about October 11, 2005.
On May 9, 2005, we exercised our option to acquire all of the outstanding
capital stock of Tralliance. The purchase price consisted of the issuance of
2,000,000 shares of theglobe.com Common Stock, warrants to acquire 475,000
shares of theglobe.com Common Stock and $40,000 in cash. The warrants are
exercisable for a period of five years at an exercise price of $0.11 per share.
As part of the transaction, 10,000 shares of our Common Stock were also issued
to a third party in payment of a finder's fee resulting from the acquisition.
The Common Stock issued as a result of the acquisition of Tralliance is entitled
to certain "piggy-back" registration rights.
On April 22, 2005, E&C Capital Partners, LLLP and E&C Capital Partners II, Ltd.
(the "Noteholders"), entities controlled by the Company's Chairman and Chief
Executive Officer, entered into a Note Purchase Agreement (the "Agreement") with
theglobe pursuant to which they acquired secured demand convertible promissory
notes (the "Convertible Notes") in the aggregate principal amount of $1,500,000.
Under the terms of the Agreement, the Noteholders were also granted the optional
right, for a period of 90 days from the date of the Agreement, to purchase
additional Convertible Notes such that the aggregate principal amount of
Convertible Notes issued under the Agreement may total $4,000,000 (the
"Option"). On June 1, 2005, the Noteholders exercised a portion of the Option
and acquired an additional $1,500,000 of Convertible Notes. On July 18, 2005,
the Noteholders exercised the remainder of the Option and acquired an additional
$1,000,000 of Convertible Notes.
The Convertible Notes are convertible at the option of the Noteholders into
shares of the Company's Common Stock at an initial price of $0.05 per share.
Through September 15, 2005, an aggregate of $600,000 of Convertible Notes were
converted by the Noteholders into an aggregate of 12,000,000 shares of the
Company's Common Stock. Assuming full conversion of all Convertible Notes,
68,000,000 additional shares of the Company's Common Stock would be issued to
the Noteholders. The Convertible Notes provide for interest at the rate of ten
percent per annum and are secured by a pledge of substantially all of the assets
of the Company. The Convertible Notes are due and payable five days after demand
for payment by the Noteholders. Based upon its current financial position, the
Company would not have the resources to pay the Convertible Notes following any
such demand.
127
On September 1, 2004, the Company closed upon an agreement and plan of merger
dated August 31, 2004, pursuant to which the Company acquired all of the issued
and outstanding shares of capital stock of SendTec. Pursuant to the terms of the
Merger, in consideration for the acquisition of SendTec, theglobe paid
consideration consisting of: (i) $6,000,000 in cash, excluding transaction
costs, (ii) the issuance of an aggregate of 17,500,024 shares of theglobe's
Common Stock, (iii) the issuance of an aggregate of 175,000 shares of Series H
Automatically Converting Preferred Stock (which as more fully described below,
was subsequently converted into approximately 17,500,500 shares of theglobe's
Common Stock), and (iv) the issuance of a subordinated promissory note in the
amount of $1 million (the "Note"). In addition, warrants to acquire shares of
the Company's Common Stock would be issued to the former shareholders of SendTec
when and if SendTec exceeds forecasted operating income, as defined, of $10.125
million, for the year ending December 31, 2005 (the "Earn-out Consideration").
The number of earn-out warrants would range from an aggregate of approximately
250,000 to 2,500,000 (if actual operating income exceeds the forecast by at
least 10%). If and to the extent the warrants are earned, the exercise price of
the performance warrants would be $0.27 per share and they will be exercisable
for a period of 5 years. The Note bears interest at the rate of 4% per annum and
matured in one lump sum of principal and interest on September 1, 2005. Due to
its short-term liquidity problems, the Company has not paid such promissory note
when due and is currently in default under the promissory note. Upon default,
the Company is required to pay a default interest rate of 15% per annum and to
pay the noteholders' collection costs, if any.
Each share of the Series H Preferred Stock was automatically converted into 100
shares of theglobe's Common Stock on December 1, 2004, the effective date of the
amendment to the Company's certificate of incorporation increasing its
authorized shares of Common Stock from 200,000,000 shares to 500,000,000 shares.
The Company agreed to file a registration statement relating to the resale of
the shares of Common Stock issued in connection with the Merger and to cause the
effectiveness of such registration on or before September 1, 2005. The Company
also agreed to keep the registration statement effective until at least the
third anniversary of the Closing. We have not yet filed such a registration
statement. Because we have not filed and caused such registration statement to
become effective before September 1, 2005, we may be held liable for damages
suffered by holders of such stock. Upon registration all such shares will be
eligible for resale over the open market. Even if not registered, the shares
issued in the SendTec acquisition are eligible for resale over the public
markets pursuant to and subject to the limitations of Rule 144. If we
successfully redeem the majority of the shares issued as part of the SendTec
acquisition (or approximately 28,900,000 shares) in connection with the sale of
SendTec's business to RelationServe, we would substantially mitigate our risk
related to our failure to timely register these shares.
theglobe also issued an aggregate of approximately 4.0 million replacement
options to acquire shares of theglobe's Common Stock for each of the issued and
outstanding options to acquire shares of SendTec held by the former employees of
SendTec. Of these replacement options, approximately 3.27 million have exercise
prices of $0.06 per share and approximately 700 thousand have exercise prices of
$0.27 per share. The terms of these replacement options were as negotiated
between representatives of theglobe and the Stock Option Committee for the
SendTec 2000 Amended and Restated Stock Option Plan. theglobe also agreed to
grant an aggregate of 250,000 options to other employees and a consultant of
SendTec at an exercise price of $0.34 per share. Twenty-five percent of these
options vested immediately and the balance will vest in three equal annual
installments assuming the continued employment of the option holders. In
addition, theglobe also granted 1,000,000 stock options at an exercise price of
$0.27 per share in connection with the establishment of a bonus option pool
pursuant to which various employees of SendTec could vest in such options on
terms substantially similar to the circumstances in which the Earn-out
Consideration may be earned.
In connection with the Merger, the SendTec executives (whom collectively
received approximately 82% of the shares of Common Stock and Preferred Stock
issued in the Merger), theglobe and Messrs. Michael Egan and Edward Cespedes,
our Chairman and Chief Executive Officer and President, respectively
(individually and on behalf of certain affiliated entities) entered into a
Stockholders' Agreement. Pursuant to the terms of the Stockholders' Agreement,
the SendTec executives granted an irrevocable proxy to vote their shares to E&C
Capital Partners, LLLP, an affiliate of Mr. Egan on all matters (including the
election of directors) other than with respect to certain potential affiliated
transactions involving Messr. Egan or Cespedes. After giving effect to the grant
of the proxy (and excluding outstanding options, warrants and convertible notes
held or controlled by Mr. Egan), as of September 15, 2005, Mr. Egan has voting
power over approximately 95.6 million of the issued and outstanding shares of
theglobe representing approximately 48% of the issued and outstanding voting
securities of the Company. The SendTec executives were also granted certain
pre-emptive rights involving potential new issuances of securities by theglobe,
together with a co-sale right to participate in certain qualifying sales of
stock by Messrs. Egan, Cespedes and their affiliates. Messrs. Egan, Cespedes and
their affiliates were granted a right of first refusal on certain sales
(generally, in excess of 10 million shares) by the SendTec executives, together
with the right to "drag-along" the SendTec executives with regard to certain
major sales of their stock or a sale or merger of theglobe.
In March 2004, the Company completed a private offering of 333,816 units (the
"Units") for a purchase price of $85 per Unit (the "PIPE Offering"). Each Unit
consisted of 100 shares of the Company's Common Stock, $0.001 par value (the
"Common Stock"), and warrants to acquire 50 shares of the Company's Common Stock
(the "Warrants"). The Warrants are exercisable for a period of five years
commencing 60 days after the initial closing at an initial exercise price of
$0.001 per share. The aggregate number of shares of Common Stock issued in the
PIPE Offering was 33,381,647 shares for an aggregate consideration of
$28,374,400, or approximately $0.57 per share assuming the exercise of the
16,690,824 Warrants. As of September 15, 2005, approximately 714,000 of the
Warrants remain outstanding.
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The securities offered in the PIPE Offering were not registered under the
Securities Act of 1933 and may not be offered or resold in the United States
absent registration or an applicable exemption from such registration
requirements. Pursuant to the terms of the PIPE Offering, the Company filed a
registration statement relating to the resale of the Securities on April 16,
2004 which became effective on May 11, 2004. Most of our investors from prior
capital raises also elected to register their shares for resale pursuant to that
registration statement.
Halpern Capital, Inc., acted as placement agent for the PIPE Offering, and was
paid a commission of $1.2 million and issued a warrant to acquire 1,000,000
shares of Common Stock at $0.001 per share. As of September 15, 2005,
approximately 121,000 of these warrants remain outstanding.
The purpose of the PIPE Offering was to raise funds for use primarily in the
Company's developing VoIP business, including the deployment of networks,
website development, marketing and capital infrastructure expenditures and
working capital. Other intended uses of proceeds included funding requirements
in connection with the Company's other existing or future business operations,
including acquisitions.
In connection with the PIPE Offering, Mr. Egan, our Chairman, Chief Executive
Officer and principal stockholder, together with certain of his affiliates,
including E&C Capital Partners, LLLP converted a $2,000,000 Convertible Bridge
Note, $1,750,000 of Secured Convertible Notes and all of the Company's
outstanding shares of Series F Preferred Stock, and exercised (on a "cashless"
basis) all of the warrants issued in connection with the foregoing $1,750,000
Secured Convertible Notes and Series F Preferred Stock, together with certain
warrants issued to Dancing Bear Investments, an affiliate of Mr. Egan. As a
result of such conversions and exercises, the Company issued an aggregate of
48,775,909 additional shares of Common Stock.
On February 2, 2004, Michael S. Egan and his wife, S. Jacqueline Egan, entered
into a Note Purchase Agreement with the Company pursuant to which they acquired
a convertible promissory note due on demand (the "Bridge Note") in the aggregate
principal amount of $2,000,000. The Bridge Note was convertible into shares of
the Company's Common Stock. The Bridge Note provided for interest at the rate of
ten percent per annum and was secured by a pledge of substantially all of the
assets of the Company. Such security interest was shared with the holders of the
Company's $1,750,000 Secured Convertible Notes issued on May 22, 2003 to E&C
Capital Partners, LLLP and certain affiliates of Michael S. Egan. In addition,
the Egans were issued a warrant to acquire 204,082 shares of Common Stock at an
exercise price of $1.22 per share. This warrant is exercisable at any time on or
before February 2, 2009. The exercise price of the warrant, together with the
number of shares for which such warrant is exercisable, is subject to adjustment
upon the occurrence of certain events.
On July 2, 2003, theglobe.com, inc. completed a private offering of Series G
Automatically Converting Preferred Stock for an aggregate purchase price of
approximately $8.7 million. In accordance with the terms of such Preferred
stock, the Series G Preferred shares converted into Common Stock at $0.50 per
share (or an aggregate of approximately 17.4 million shares) upon the filing of
an amendment to the Company's certificate of incorporation to increase its
authorized shares of Common Stock from 100,000,000 shares to 200,000,000 shares.
Such an amendment was filed on July 29, 2003. Investors also received warrants
to acquire approximately 3.5 million shares of Common Stock. The warrants are
exercisable for a period of five years at an exercise price of $1.39 per common
share. The exercise price of the warrants, together with the number of warrants
issuable upon exercise, are subject to adjustment upon the occurrence of certain
events. The purpose of the Series G Automatically Converting Preferred Stock
offering was to raise funds for use primarily in the Company's VoIP telephony
services business, including the deployment of networks, website development,
marketing, and limited capital infrastructure expenditures and working capital.
On May 22, 2003, E&C Capital Partners, LLLP, together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired $1,750,000 of Secured Convertible Notes. The
Secured Convertible Notes were convertible into a maximum of approximately
19,444,000 shares of the Company's Common Stock at a blended rate of $0.09 per
share. The Secured Convertible Notes provided for interest at the rate of ten
percent per annum payable semi-annually, a one year maturity and were secured by
a pledge of substantially all of the assets of the Company. In addition, E&C
Capital Partners, LLLP was issued a Warrant to acquire 3,888,889 shares of the
Company's Common Stock at an exercise price of $0.15 per share. The Warrant was
exercisable at any time on or before May 22, 2013.
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On March 28, 2003, E&C Capital Partners, LLLP signed a Preferred Stock Purchase
Agreement and other related documentation pertaining to a $500,000 investment
via the purchase of shares of a new Series F Preferred Stock of theglobe.com and
closed on the investment. Pursuant to the Preferred Stock Purchase Agreement,
E&C Capital Partners, LLLP received 333,333 shares of Series F Preferred Stock
convertible into shares of the Company's Common Stock at a price of $0.03 per
share. The Series F Preferred Stock had a liquidation preference of $1.50 per
share, provided for payment of a dividend at the rate of 8% per annum and
entitled the holder to vote on an "as-converted" basis with the holders of
Common Stock. In addition, as part of the $500,000 investment, E&C Capital
Partners, LLLP received warrants to purchase 3,333,333 shares of theglobe.com
Common Stock at an exercise price of $0.125 per share. The warrants were
exercisable at any time on or before March 28, 2013 and both the warrants'
exercise price and number were subject to adjustment.
As a result of the preferential conversion features of the Series G
Automatically Converting Preferred Stock and the Series F Preferred Stock, a
total of $8,120,000 in non-cash dividends to preferred stockholders were
recognized during the year ended December 31, 2003.
FUTURE AND CRITICAL NEED FOR CAPITAL
At June 30, 2005, the Company's sole source of liquidity consisted of $5.0
million of cash and cash equivalents and as discussed earlier in "Capital
Transactions," an additional $1.0 million subsequently borrowed under the Note
Purchase Agreement between the Company and entities controlled by its Chairman
and Chief Executive Officer. On July 18, 2005, the Company issued Convertible
Notes and borrowed the remaining $1.0 million available under the Note Purchase
Agreement. The Company's cash and cash equivalents balance at September 15, 2005
was approximately $1.6 million.
The Company continues to incur substantial consolidated net losses and
management believes the Company will continue to be unprofitable and use cash in
its operations for the foreseeable future. The Company's consolidated net losses
and cash usage during its recent past and projected future periods relate
primarily to the operation of its VoIP telephony services business and to a
lesser extent to corporate overhead expenses and the operations of its computer
games business. SendTec, the Company's marketing services business, has
contributed net income and cash flow since being acquired on September 1, 2004,
and management expects that SendTec will continue to be profitable and provide
positive cash flow in future periods. However, in connection with our
acquisition of SendTec, we also have a $1.0 million promissory note obligation
which became due and payable on September 1, 2005. Due to its short-term
liquidity problems, the Company has not paid such promissory note when due and
is currently in default under the promissory note. Upon default, the Company is
required to pay a default interest rate of 15% per annum and to pay the
noteholders' collection costs, if any.
In order to offer our VoIP services, we have invested substantial capital and
made substantial commitments related to the development of the VoIP network. The
VoIP network is comprised of switching hardware and software, servers, billing
and inventory systems, and telecommunications carrier services. We own and
operate VoIP equipment located in leased data center facilities in Miami, New
York, Atlanta and Boston, and interconnect this equipment utilizing a leased
transport network through numerous carrier agreements with third party
providers. Through these carrier relationships we are able to carry the traffic
of our customers over the Internet and interact with the public switched
telephone network. We generally enter into one year agreements with these data
centers and carriers, with the term of several agreements extending to three or
five years. Based upon our existing contractual commitments at June 30, 2005,
minimum amounts payable during the next twelve months for network data center
and carrier circuit interconnection service expenses, exclusive of regulatory
taxes, fees and charges, are approximately $1.1 million. The Company believes
that the capacity of its VoIP network, including its lease obligations relating
to such network, will continue to be greatly in excess of customer demand and
usage levels for the foreseeable future. Therefore, the Company is currently
negotiating to reduce its total commitment for future network data center and
carrier circuit interconnection services, including further reducing the $1.1
minimum amounts payable during the next twelve months.
The Company has expended, particularly during 2004, significant costs to
implement a number of marketing programs geared toward increasing the number of
its VoIP retail customers and telephony revenue. None of these programs have
proven to be successful to any significant degree. Our inability to generate
telephony revenue sufficient to cover the fixed costs of operating our VoIP
network, including carrier, data center, personnel and administrative costs, as
well as our marketing and other variable costs, has resulted in the Company
incurring substantial net losses during 2004 and during 2005.
130
During the first quarter of 2005, the Company reevaluated its existing VoIP
telephony services business plan and subsequently terminated or is in the
process of terminating and/or modifying certain of its existing product
offerings and marketing programs. Additionally, the Company began to develop and
test certain new VoIP products and features, some of which were completed and
released during the second quarter of 2005. The Company also, during the first
quarter of 2005, made the decision to discontinue using its SendTec business to
perform marketing services for its VoIP business, and to instead dedicate 100%
of SendTec's marketing resources to support and grow its own third party revenue
producing customer base. Additionally, in order to reduce its near term
consolidated net losses and cash usage, the Company implemented a number of
cost-reduction actions at its VoIP telephony services business, including
decreases in personnel and salary levels, carrier and data center costs
(including the minimum commitment costs discussed above), and
marketing/advertising expenses during the first quarter of 2005.
Management believes that it will be difficult to implement its new VoIP product
and marketing plans, once fully developed and tested, without significant
additional cash being provided from a prospective financing or sale
transaction(s). Should the Company's new VoIP product offerings achieve market
acceptance and significantly increase the Company's current customer and revenue
base, additional cash resources to fund capital expenditures related to the
Company's VoIP network and customer billing systems and to fund future marketing
and other business development costs would be required. No significant capital
expenditures are expected to be required to accommodate the operation or growth
of either the Company's SendTec marketing services business or its computer
games business in the near term future.
There can be no assurance that the Company's new VoIP product offerings will be
successful in attracting a sufficient number of new customers to its VoIP
network and increasing telephony revenue to desired levels. Even if the Company
is able to raise additional capital, management may at any time decide to
terminate the operations of its VoIP telephony services business, either by
asset sale or abandonment, if future investment returns are considered
inadequate and/or preferable investment alternatives exist.
On May 9, 2005, the Company exercised its purchase option and acquired
Tralliance Corporation, an Internet related business venture. Tralliance was
created to develop, operate and administer the ".travel" top-level domain, a new
segment of the Internet devoted to the travel industry. Tralliance recently
entered into an agreement with the Internet Corporation for Assigned Names and
Numbers ("ICANN") to become the registry for the ".travel" top-level domain. The
Tralliance purchase price consisted of the issuance of 2,000,000 shares of
theglobe.com Common Stock, warrants to acquire 475,000 shares of theglobe.com
Common Stock and $40,000 in cash. The warrants are exercisable for a period of
five years at an exercise price of $0.11 per share. The Common Stock issued as a
result of the acquisition of Tralliance is entitled to certain "piggy-back"
registration rights. In addition, as part of the transaction, the Company agreed
to pay approximately $0.2 million in outstanding liabilities of Tralliance
immediately after the closing of the acquisition.
During October 2004, the Company engaged financial advisors to assist the
Company in raising capital through a private placement of its equity securities,
or in entering into other business relationships with certain strategic
investors. In February 2005, the Company engaged an additional financial advisor
to assist the Company in connection with raising capital through a private
placement of equity securities in either the Company or its SendTec wholly-owned
subsidiary or alternatively in selling either part or all of the Company's
businesses or assets, including its SendTec business. We currently have no
access to credit facilities with traditional third party lenders and there can
be no assurance that we would be able to raise capital or sell any of our
businesses or assets. In addition, any financing that could be obtained would
likely significantly dilute existing shareholders. As described above,
management is exploring a number of strategic alternatives regarding the
Company's future business operations and is in the process of developing and
implementing internal actions to improve the Company's liquidity and business
performance. The Company's future strategic direction is highly dependent upon
the outcome of its efforts to raise capital and/or sell certain businesses or
assets, including principally its SendTec business. See the "Recent Events"
section of this Registration Statement for further information regarding the
proposed sale of our SendTec business.
Based upon the foregoing and assuming that we do not conclude the sale of our
SendTec business, Company management does not presently believe that cash on
hand and cash flow generated internally by the company will be adequate to fund
the operation of its businesses and the implementation of its current VoIP
business plan beyond a short period of time. We received a report from our
independent accountants, relating to our December 31, 2004 audited financial
statements containing an explanatory paragraph stating that our recurring losses
from operations and our accumulated deficit raise substantial doubts about our
ability to continue as a going concern. We believe that the funding received in
connection with the recent Note Purchase Agreement (total of $4.0 million as
discussed earlier and assuming that no demand for payment is made by the
Noteholders) provides the Company with temporary short-term liquidity to operate
its businesses while it seeks to raise sufficient additional capital, which, as
demonstrated by the proposed sale of SendTec, may involve the potential sale of
one or more of the Company's subsidiaries.
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As discussed earlier in the Overview section of this Management's Discussion and
Analysis of Financial Condition and Results of Operations, on August 10, 2005,
the Company entered into a definitive agreement to sell the business and
substantially all of the net assets of its SendTec marketing services subsidiary
to RelationServe. If we are not successful in consummating the RelationServe
asset sale or in entering into another financing, sale, or business transaction
that otherwise infuses sufficient additional cash resources into the Company by
no later than sometime during the fourth quarter of 2005, we believe that the
Company will no longer be able to continue the implementation of its current
VoIP business plan. In this event, we also believe the Company will continue to
not be able to pay its current financial obligations on a timely basis,
including paying the overdue principal and interest on the $1.0 million
promissory note issued in connection with the SendTec acquisition. As a result,
it is likely that we would be required to either temporarily suspend or
permanently shutdown the operation of our VoIP telephony services business.
Additionally, in such event, management believes that it may also be required to
revise the business plan of some or all of its other business segments and/or
further implement company-wide cost-reduction programs. There can be no
assurance that the Company would be successful in implementing such revised
business plans and effectively restructuring its businesses so that the Company
would have the ability to continue to operate as a going concern in the future.
If the Company consummates the sale of its SendTec business to RelationServe as
planned and on a timely basis, substantial cash resources will be infused into
the Company. Assuming that the RelationServe transaction closes as planned,
management believes that the estimated net cash proceeds of approximately $24.0
million received from the sale (and after giving effect to the repurchase of
shares and cancellation of options and warrants from SendTec management and
certain employees) would provide sufficient liquidity to enable the Company to
operate on a going concern basis through at least the end of 2006.
The shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or OTCBB. Since the trading price
of our Common Stock is less than $5.00 per share, trading in our Common Stock is
also subject to the requirements of Rule 15g-9 of the Exchange Act. Our Common
Stock is also considered a penny stock under the Securities Enforcement Remedies
and Penny Stock Reform Act of 1990, which defines a penny stock, generally, as
any equity security not traded on an exchange or quoted on the Nasdaq SmallCap
Market that has a market price of less than $5.00 per share. Under Rule 15g-9,
brokers who recommend our Common Stock to persons who are not established
customers and accredited investors, as defined in the Exchange Act, must satisfy
special sales practice requirements, including requirements that they make an
individualized written suitability determination for the purchaser; and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosures in connection with any trades involving a penny stock, including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with that market.
Such requirements may severely limit the market liquidity of our Common Stock
and the ability of purchasers of our equity securities to sell their securities
in the secondary market. Consequently, it has also made it more difficult for us
to raise additional capital, although the Company has had some success in
offering its securities as consideration for the acquisition of various business
opportunities or assets. We may also incur additional costs under state blue sky
laws if we sell equity due to our delisting.
CONTRACTUAL OBLIGATIONS
The following table summarizes theglobe's contractual obligations as of December
31, 2004. These contractual obligations are more fully disclosed in Note 7,
"Debt," and Note 11, "Commitments and Contingencies," in the accompanying Notes
to Consolidated Financial Statements.
Payments Due By Period
------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
---------- ---------- ---------- ---------- ----------
Debt, including current portion $1,304,402 $1,277,405 $ 26,997 $ -- $ --
Network commitments 3,653,000 2,063,000 1,376,000 214,000 --
Operating leases 2,520,000 867,000 1,150,000 464,000 39,000
---------- ---------- ---------- ---------- ----------
Total contractual obligations $7,477,402 $4,207,405 $2,552,997 $ 678,000 $ 39,000
========== ========== ========== ========== ==========
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Excluded from the above table were unconditional purchase obligations totaling
$3,000,000 at December 31, 2004 for the purchase of VoIP telephony handsets.
Effective January 31, 2005, the Company formally terminated its contract with
the VoIP telephony handset supplier and agreed to a settlement of the obligation
under such contract which provided for (i) a cash payment of $200,000, (ii) the
return of 35,000 VoIP handset units from the Company's inventory, and (iii) the
issuance of 300,000 shares of theglobe.com Common Stock.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004 and June 30, 2005, 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.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2004, 2003 and 2002, as well as the
first six months of 2005, inflation has not had a significant effect on our
results of operations.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, valuation of inventories, valuation of goodwill,
intangible assets and other long-lived assets and capitalization of computer
software costs. Our accounting policies and procedures related to these areas
are summarized below.
REVENUE RECOGNITION
The Company's revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games; through the sale of our games information magazine through
newsstands and subscriptions; from the sale of video games and related products
through our online store Chips & Bits; from the sale of direct response
marketing services by our wholly-owned subsidiary, SendTec and from the sale of
VoIP telephony services. There is no certainty that events beyond anyone's
control such as economic downturns or significant decreases in the demand for
our services and products will not occur and accordingly, cause significant
decreases in revenue.
Computer Games Businesses
Advertising revenues for the Company's magazine publications are recognized at
the on-sale date of the magazine.
Newsstand sales of the Company's magazine publications are recognized at the
on-sale date of the magazine, net of provisions for estimated returns.
Subscription revenue, which is net of agency fees, is deferred when initially
received and recognized as income ratably over the subscription term.
Sales of video games and related products from the online store are recognized
as revenue when the product is shipped to the customer. Amounts billed to
customers for shipping and handling charges are included in net revenue. The
Company provides an allowance for returns of merchandise sold through its online
store. The allowance provided to date has not been significant.
Marketing Services
Revenue from the distribution of Internet advertising is recognized when
Internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by the Company's tracking
software.
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Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount the Company bills to
clients significantly exceeds the amount of revenue that is earned due to the
existence of various "pass-through" charges such as the cost of the television
and radio media. Amounts received in advance of media airings are deferred and
included in deferred revenue in the accompanying consolidated balance sheet.
Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized on the completed contract method when such
programs are complete and available for airing. Production activities generally
take eight to twelve weeks and the Company usually collects amounts in advance
and at various points throughout the production process. Amounts received from
customers prior to completion of commercials are included in deferred revenue
and direct costs associated with the production of commercials in process are
deferred and included within other current assets in the accompanying
consolidated balance sheet.
VoIP Telephony Services
VoIP telephony services revenue represents fees charged to customers for voice
services and is recognized based on minutes of customer usage or as services are
provided. The Company records payments received in advance for prepaid services
as deferred revenue until the related services are provided. Sales of peripheral
VoIP telephony equipment are recognized as revenue when the product is shipped
to the customer. Amounts billed to customers for shipping and handling charges
are included in net revenue.
VALUATION OF CUSTOMER RECEIVABLES
Provisions for the allowance for doubtful accounts are made based on historical
loss experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the Company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
VALUATION OF INVENTORIES
Inventories are recorded on a first-in, first-out basis and valued at the lower
of cost or market value. We generally manage our inventory levels based on
internal forecasts of customer demand for our products, which is difficult to
predict and can fluctuate substantially. Our inventories include high technology
items that are specialized in nature or subject to rapid obsolescence. If our
demand forecast is greater than the actual customer demand for our products, we
may be required to record charges related to increases in our inventory
valuation reserves. The value of our inventory is also dependent on our estimate
of future average selling prices, and, if our projected average selling prices
are over estimated, we may be required to adjust our inventory value to reflect
the lower of cost or market.
GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
certain acquired intangible assets in a business combination be recognized as
assets separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles with indefinite lives should no longer be amortized, but rather
tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of the asset has decreased below its carrying
value.
Our policy calls for the assessment of the potential impairment of goodwill and
other identifiable intangibles with indefinite lives whenever events or changes
in circumstances indicate that the carrying value may not be recoverable or at
least on an annual basis. Some factors we consider important which could trigger
an impairment review include the following:
o significant under-performance relative to historical, expected or projected
future operating results;
o significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and
o significant negative industry or economic trends.
When we determine that the carrying value of goodwill or other identified
intangibles with indefinite lives may not be recoverable, we measure any
impairment based on a projected discounted cash flow method.
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LONG-LIVED ASSETS
Historically, the Company's long-lived assets, other than goodwill, have
primarily consisted of property and equipment, capitalized costs of internal-use
software, values attributable to covenants not to compete, acquired technology
and patent costs.
Long-lived assets held and used by the Company and intangible assets with
determinable lives are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." We evaluate recoverability of assets to be held and used by comparing
the carrying amount of the assets, or the appropriate grouping of assets, to an
estimate of undiscounted future cash flows to be generated by the assets, or
asset group. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair values are based on quoted market
values, if available. If quoted market prices are not available, the estimate of
fair value may be based on the discounted value of the estimated future cash
flows attributable to the assets, or other valuation techniques deemed
reasonable in the circumstances.
CAPITALIZATION OF COMPUTER SOFTWARE COSTS
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over the
expected useful life, or three years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 applies to all voluntary changes in accounting principles and requires
retrospective application to prior periods' financial statements of changes in
accounting principles. This statement also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. SFAS 154 carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not expect the
adoption of this standard to have a material impact on its financial condition,
results of operations or liquidity.
In March 2005, the FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," an interpretation of FASB Statement
No. 143, "Accounting for Asset Retirement Obligations." The interpretation
clarifies that the term conditional asset retirement obligation refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. An entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The effective date of this
interpretation is no later than the end of fiscal years ending after December
15, 2005. The Company is currently investigating the effect, if any, that FIN 47
would have on the Company's financial position, cash flows and results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this standard to have a material impact on its
financial condition, results of operations, or liquidity.
135
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock options on the grant date and is effective for annual periods
beginning after June 15, 2005. In accordance with the revised statement, the
expense attributable to stock options granted or vested subsequent to January 1,
2006 will be required to be recognized by the Company. The precise impact of the
adoption of SFAS No. 123R cannot be predicted at this time because it will
depend on the levels of share-based payments that are granted in the future.
However, the Company believes that the adoption of this standard may have a
significant effect on the Company's results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 requires all companies to recognize a
current-period charge for abnormal amounts of idle facility expense, freight,
handling costs and wasted materials. This statement also requires that the
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be effective
for fiscal years beginning after June 15, 2005. The Company does not expect the
adoption of this statement to have a material effect on its consolidated
financial statements.
In December 2003, the FASB issued FIN No. 46-R "Consolidation of Variable
Interest Entities." FIN 46-R, which modifies certain provisions and effective
dates of FIN 46, sets forth the criteria to be used in determining whether an
investment in a variable interest entity should be consolidated. These
provisions are based on the general premise that if a company controls another
entity through interests other than voting interests, that company should
consolidate the controlled entity. The Company believes that currently, it does
not have any material arrangements that meet the definition of a variable
interest entity which would require consolidation.
DESCRIPTION OF PROPERTY
Our corporate headquarters is located in Fort Lauderdale, Florida, where we
lease approximately 26,000 square feet of office space. 15,000 square feet of
this space is sublet from a company which is controlled by our Chairman and the
remaining 11,000 square feet is sublet from an unaffiliated company. We maintain
approximately 9,500 square feet of office space in two separate locations in
Vermont in connection with the operations of our magazine publications and Chips
& Bits, Inc. We own one property and the other is a lease which expires in
September 2005. In June of 2004, we signed a two year lease for approximately
5,000 square feet of warehouse space in Pompano Beach, Florida. Additionally, we
have obtained colocation space in secure telecommunications data centers located
in Florida, Georgia, Massachusetts and New York which is used to house certain
Internet routing and computer equipment. Our subsidiary, SendTec, Inc., leases
approximately 14,500 square feet of office space in St. Petersburg, Florida and
approximately 2,500 square feet of office space in New York City. The St.
Petersburg lease commenced in April of 2004 and expires in March of 2010. The
New York lease commenced in June of 2005 and expires in December of 2009. Our
subsidiary, Tralliance Corporation, subleases approximately 1,100 square feet of
office space in New York City on a month-to-month basis from an entity
controlled by its President and Chief Executive Officer.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The shares of our Common Stock trade in the over-the-counter market on what is
commonly referred to as the electronic bulletin board, under the symbol
"TGLO.OB". The following table sets forth the range of high and low bid prices
of our Common Stock for the periods indicated as reported by the
over-the-counter market (the electronic bulletin board). The quotations below
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions:
2005 2004 2003
------------- ------------- ---------------
High Low High Low High Low
----- ----- ----- ----- ----- -----
Fourth Quarter -- -- $0.56 $0.36 $2.12 $1.30
Third Quarter -- -- $0.65 $0.24 $1.97 $1.12
Second Quarter $0.16 $0.08 $0.96 $0.28 $2.56 $0.13
First Quarter $0.43 $0.12 $1.42 $0.83 $0.20 $0.06
The market price of our Common Stock is highly volatile and fluctuates in
response to a wide variety of factors. (See "Risk Factors-Our Stock Price is
Volatile and May Decline.")
136
HOLDERS OF COMMON STOCK
We had approximately 724 holders of record of Common Stock as of September 15,
2005. This does not reflect persons or entities that hold Common Stock in
nominee or "street" name through various brokerage firms.
DIVIDENDS
We have not paid any cash dividends on our Common Stock since our inception and
do not intend to pay dividends in the foreseeable future. Our board of directors
will determine if we pay any future dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2004
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants future issuance under Plan
Category warrants and rights and rights equity compensation plans
------------------- ------------------- ----------------------- --------------------------
Equity Compensation 4,729,020 $ 1.40 8,063,897
plans approved by
security holders
Equity Compensation 11,255,165 $ 0.14 2,139,835
plans not approved by
security holders
Total 15,984,185 $ 0.51 10,203,732
Equity compensation plans not approved by security holders consist of the
following:
o 200,000 shares of Common Stock of theglobe.com, inc., issued to Charles Peck
pursuant to the Non-Qualified Stock Option Agreement dated June 1, 2002 at an
exercise price of $0.035 per share. These stock options vested immediately and
have a life of ten years from date of grant.
o 1,750,000 shares of Common Stock of theglobe.com, inc., issued to Edward A.
Cespedes pursuant to the Non-Qualified Stock Option Agreement dated August 12,
2002 at an exercise price of $0.02 per share. These stock options vested
immediately and have a life of ten years from date of grant.
o 2,500,000 shares of Common Stock of theglobe.com, inc., issued to Michael S.
Egan pursuant to the Non-Qualified Stock Option Agreement dated August 12, 2002
at an exercise price of $0.02 per share. These stock options vested immediately
and have a life of ten years from date of grant.
o 500,000 shares of Common Stock of theglobe.com, inc., issued to Robin S.
Lebowitz pursuant to the Non-Qualified Stock Option Agreement dated August 12,
2002 at an exercise price of $0.02 per share. These stock options vested
immediately and have a life of ten years from date of grant.
o The Company's 2003 Amended and Restated Non-Qualified Stock Option Plan (the
"2003 Plan"). The purpose of the 2003 Plan is to strengthen theglobe.com, inc.
by providing an incentive to certain employees and consultants (or in certain
circumstances, individuals who are the principals of certain consultants) of the
Company or any subsidiary of the Company, with a view toward encouraging them to
devote their abilities and industry to the success of the Company's business
enterprise. The 2003 Plan is administered by a Committee appointed by the Board
to administer the Plan, which has the power to determine those eligible
individuals to whom options shall be granted under the 2003 Plan and the number
of such options to be granted and to prescribe the terms and conditions (which
need not be identical) of each such option, including the exercise price per
share subject to each option and vesting schedule of options granted thereunder,
and make any amendment or modification to any agreement consistent with the
terms of the 2003 Plan. The maximum number of shares that may be made the
subject of options granted under the 2003 Plan is 1,000,000 and no option may
have a term in excess of ten years. Options to acquire an aggregate of 41,000
shares of Common Stock have been issued to various independent sales agents at a
weighted average exercise price of $1.54. These stock options vested immediately
and have a life of ten years from date of grant. Options to acquire an aggregate
of 400,000 shares of Common Stock have been issued to various employees and
independent contractors at a weighted average exercise price of $1.00. These
stock options vested immediately and have a life of ten years from date of
grant. Options to acquire an aggregate of 110,000 shares of Common Stock have
been issued to two independent contractors at a weighted average exercise price
of $1.22. These stock options vested immediately and have a life of five years
from date of grant. Options to acquire 200,000 shares of Common Stock were
issued to an employee at an exercise price of $0.01 per share. These stock
options, with a life of ten years, were to vest upon attainment of specific
performance criteria. However, in January of 2005, the employee was terminated
and his options were completely vested as part of his termination agreement.
137
o The Company's 2004 Stock Incentive Plan (the "2004 Plan"). The purpose of the
2004 Plan is to enhance the profitability and value of the Company for the
benefit of its stockholders by enabling the Company to offer eligible employees,
consultants and non-employee directors stock-based and other incentives, thereby
creating a means to raise the level of equity ownership by such individuals in
order to attract, retain and reward such individuals and strengthen the
mutuality of interests between such individuals and the Company's stockholders.
The 2004 Plan is administered by a Committee appointed by the Board to
administer the Plan, which has the power to determine those eligible individuals
to whom stock options, stock appreciation rights, restricted stock awards,
performance awards, or other stock-based awards shall be granted under the 2004
Plan and the number of such options, rights or awards to be granted and to
prescribe the terms and conditions (which need not be identical) of each such
option, right or award, including the exercise price per share subject to each
option and vesting schedule of options granted thereunder, and make any
amendment or modification to any agreement consistent with the terms of the 2004
Plan. The maximum number of shares that may be made the subject of options,
rights or awards granted under the 2004 Plan is 7,500,000 and no option may have
a term in excess of ten years. Options to acquire an aggregate of 250,000 shares
of Common Stock have been issued to several employees and consultants of
SendTec, Inc. at an exercise price of $0.34 per share. Twenty-five percent of
these options vested immediately and the balance will vest in three equal annual
installments. These options have a life of five years from date of grant. As
part of the merger with SendTec, Inc., replacement options of 3,974,165 were
issued to the former SendTec employees. Of these replacement options, 3,273,668
have been issued at an exercise price of $0.06 per share and 700,497 have been
issued at an exercise price of $0.27 per share. The terms of these replacement
options were as negotiated between representatives of theglobe and the Stock
Option Committee for the SendTec 2000 Amended and Restated Stock Option Plan. In
addition, theglobe also granted 1,000,000 stock options at an exercise price of
$0.27 per share in connection with the establishment of a bonus option pool
pursuant to which various employees of SendTec could vest in such options if
SendTec exceeds certain performance targets. In October of 2004, options to
acquire an aggregate of 330,000 shares of Common Stock were issued to two
employees. 250,000 were issued at an exercise price of $0.52, of which 62,500 of
these stock options vested immediately and the balance will vest ratably on a
quarterly basis over three years. 80,000 were issued at an exercise price of
$0.37 of which 32,000 of these stock options vested immediately and the balance
will vest ratably on a quarterly basis over three years, although vesting may be
accelerated subject to certain performance criteria. These options have a life
of ten years from date of grant.
138
CONSOLIDATED FINANCIAL STATEMENTS
THEGLOBE.COM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS F-2
STATEMENTS OF OPERATIONS F-3
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) F-4
STATEMENTS OF CASH FLOWS F-5
NOTES TO FINANCIAL STATEMENTS F-7
139
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
theglobe.com, inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of theglobe.com,
inc. and Subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years ended December 31, 2004,
2003 and 2002. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
theglobe.com, inc. and Subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years ended December 31, 2004, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
March 23, 2005
F-1
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31, December 31,
2005 2004 2003
------------- ------------- -------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 4,976,487 $ 6,828,200 $ 1,061,702
Marketable securities 42,736 42,736 267,970
Accounts receivable, less allowance for doubtful
accounts of approximately $248,000 (unaudited),
$274,000 and $113,000, respectively 8,210,661 7,740,692 958,487
Inventory, less reserves of approximately $315,000 (unaudited),
$1,333,000 and $109,000, respectively 247,195 589,579 770,314
Prepaid expenses 995,946 1,590,139 550,930
Deposits on inventory purchases 77,250 77,250 820,675
Other current assets 277,647 316,926 26,357
------------- ------------- -------------
Total current assets 14,827,922 17,185,522 4,456,435
Goodwill 11,709,952 11,702,317 --
Intangible assets 2,045,211 1,680,000 199,020
Property and equipment, net 2,931,215 3,406,370 2,416,383
Other assets 95,422 42,956 100,240
------------- ------------- -------------
Total assets $ 31,609,722 $ 34,017,165 $ 7,172,078
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,701,615 $ 7,447,550 $ 1,935,142
Accrued expenses and other current liabilities 3,479,574 2,803,544 840,376
Deferred revenue 266,719 739,665 176,591
Notes payable and current portion of long-term debt 4,131,379 1,277,405 121,919
------------- ------------- -------------
Total current liabilities 16,579,287 12,268,164 3,074,028
Long-term debt 7,264 26,997 1,792,568
Other long-term liabilities 130,366 204,616 124,943
------------- ------------- -------------
Total liabilities 16,716,917 12,499,777 4,991,539
------------- ------------- -------------
Stockholders' Equity:
Preferred stock, $0.001 par value; 3,000,000
shares authorized; 333,333 shares issued and
outstanding at December 31, 2003; at liquidation value -- -- 500,000
Common stock, $0.001 par value; 500,000,000 shares
authorized; 187,355,004 (unaudited), 174,315,678 and
and 50,245,574 shares issued at June 30, 2005,
December 31, 2004 and December 31, 2003, respectively 187,355 174,316 50,246
Additional paid-in capital 286,070,574 282,289,404 238,301,862
Treasury stock, 699,281 common shares, at cost (371,458) (371,458) (371,458)
Accumulated other comprehensive income -- -- 1,562
Accumulated deficit (270,993,666) (260,574,874) (236,301,673)
------------- ------------- -------------
Total stockholders' equity 14,892,805 21,517,388 2,180,539
------------- ------------- -------------
Total liabilities and stockholders' equity $ 31,609,722 $ 34,017,165 $ 7,172,078
============= ============= =============
See notes to consolidated financial statements
F-2
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, Year Ended December 31,
------------------------------- ------------------------------------------------
2005 2004 2004 2003 2002
------------- ------------- ------------- ------------- -------------
(Unaudited)
Net Revenue $ 19,425,046 $ 1,682,227 $ 16,041,032 $ 5,284,113 $ 7,245,276
------------- ------------- ------------- ------------- -------------
Operating Expenses:
Cost of revenue 16,638,712 3,493,426 18,262,105 4,701,338 5,453,136
Sales and marketing 2,175,902 2,722,231 7,386,637 1,987,026 1,101,417
Product development 654,257 366,184 1,053,886 884,790 652,997
General and administrative 6,099,641 3,646,400 9,102,151 5,285,912 2,889,934
Depreciation 752,539 492,350 1,402,712 257,560 88,580
Amortization of intangible assets 198,800 42,343 222,834 72,182 --
Impairment charge -- -- 1,661,975 908,384 --
Loss on settlement of contractual
obligation -- -- 406,750 -- --
------------- ------------- ------------- ------------- -------------
26,519,851 10,762,934 39,499,050 14,097,192 10,186,064
------------- ------------- ------------- ------------- -------------
Loss from Operations (7,094,805) (9,080,707) (23,458,018) (8,813,079) (2,940,788)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income (expense), net (3,029,574) (802,123) (656,633) (1,759,246) 349,895
Other expense, net (278,837) (134,829) (158,550) (462,072) (11,768)
------------- ------------- ------------- ------------- -------------
(3,308,411) (936,952) (815,183) (2,221,318) 338,127
------------- ------------- ------------- ------------- -------------
Loss Before Provision for Income Taxes (10,403,216) (10,017,659) (24,273,201) (11,034,397) (2,602,661)
Provision for Income Taxes 15,576 -- -- -- 12,000
------------- ------------- ------------- ------------- -------------
Net Loss $ (10,418,792) $ (10,017,659) $ (24,273,201) $ (11,034,397) $ (2,614,661)
============= ============= ============= ============= =============
Basic and Diluted Net Loss
Per Common Share $ (0.06) $ (0.10) $ (0.19) $ (0.49) $ (0.09)
============= ============= ============= ============= =============
Weighted Average Common
Shares Outstanding 177,680,000 102,914,000 127,842,923 38,710,917 30,382,293
============= ============= ============= ============= =============
See notes to consolidated financial statements.
F-3
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Common Stock Additional
Preferred ----------------------------- Paid-in Treasury
Stock Shares Amount Capital Stock
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001 $ -- 31,081,574 $ 31,082 $ 218,255,565 $ (371,458)
Year Ended December 31, 2002:
Net loss -- -- -- -- --
Disposal of Attitude Network-translation loss -- -- -- -- --
Net unrealized (loss) on securities -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of stock options:
Severance arrangement -- -- -- 13,000 --
Acquisition -- -- -- 42,000 --
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 -- 31,081,574 31,082 218,310,565 (371,458)
Year Ended December 31, 2003:
Net loss -- -- -- -- --
Net unrealized gain on securities -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of preferred stock:
Series F Preferred Stock 500,000 -- -- 500,000 --
Series G Automatically Converting
Preferred Stock 7,315,000 -- -- 8,945,690 --
Issuance of common stock:
Conversion of Series G Automatically
Converting Preferred Stock (7,315,000) 17,360,000 17,360 7,297,640 --
Acquisition of Direct Partner Telecom, Inc. -- 1,375,000 1,375 636,625 --
Exercise of stock options -- 429,000 429 118,166 --
Beneficial conversion feature of
Convertible Notes -- -- -- 1,750,000 --
Employee stock-based compensation -- -- -- 417,567 --
Issuance of stock options to non-employees -- -- -- 225,609 --
Contributed capital in lieu of salary by officer -- -- -- 100,000 --
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 500,000 50,245,574 50,246 238,301,862 (371,458)
Year Ended December 31, 2004:
Net loss -- -- -- -- --
Realized gain on securities -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of common stock:
Private offering, net of offering costs -- 33,381,647 33,382 26,939,363 --
Conversion of Series F Preferred Stock and
exercise of associated warrants (500,000) 19,639,856 19,640 480,360 --
Conversion of $1,750,000 Convertible Notes -- 22,829,156 22,829 1,654,546 --
Conversion of $2,000,000 Bridge Note -- 3,527,337 3,527 1,996,473 --
Acquisition of SendTec 17,500 17,500,024 17,500 11,163,275 --
Conversion of Series H Preferred Stock (17,500) 17,500,500 17,500 -- --
Exercise of warrants owned by Dancing Bear
Investments -- 2,779,560 2,780 (2,780) --
Exercise of stock options -- 639,000 639 183,907 --
Exercise of warrants -- 6,273,024 6,273 5,151 --
Beneficial conversion feature of $2,000,000
Bridge Note and warrants -- -- -- 687,000 --
Employee stock-based compensation -- -- -- 416,472 --
Issuance of stock options to non-employees -- -- -- 463,775 --
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 -- 174,315,678 174,316 282,289,404 (371,458)
Six Months Ended June 30, 2005 (unaudited):
Net loss -- -- -- -- --
Issuance of common stock:
Settlement of contractual obligation -- 300,000 300 73,950 --
Acquisition of Tralliance -- 2,010,000 2,010 196,877 --
Exercise of stock options -- 218,226 218 2,876 --
Exercise of warrants -- 10,511,100 10,511 -- --
Beneficial conversion features of $3,000,000
in Convertible Notes -- -- -- 3,000,000 --
Employee stock-based compensation -- -- -- 367,870 --
Issuance of stock options to non-
employees -- -- -- 139,597 --
------------- ------------- ------------- ------------- -------------
Balance, June 30, 2005 (unaudited) $ -- 187,355,004 $ 187,355 $ 286,070,574 $ (371,458)
============= ============= ============= ============= =============
Accumulated
Other
Comprehensive Accumulated
Income (Loss) Deficit Total
------------- ------------- -------------
Balance at December 31, 2001 $ (120,866) $(214,532,615) $ 3,261,708
Year Ended December 31, 2002:
Net loss -- (2,614,661) (2,614,661)
Disposal of Attitude Network-translation loss 121,516 -- 121,516
Net unrealized (loss) on securities (650) -- (650)
-------------
Comprehensive loss -- -- (2,493,795)
-------------
Issuance of stock options:
Severance arrangement -- -- 13,000
Acquisition -- -- 42,000
------------- ------------- -------------
Balance, December 31, 2002 -- (217,147,276) 822,913
Year Ended December 31, 2003:
Net loss -- (11,034,397) (11,034,397)
Net unrealized gain on securities 1,562 -- 1,562
-------------
Comprehensive loss -- -- (11,032,835)
-------------
Issuance of preferred stock:
Series F Preferred Stock -- (500,000) 500,000
Series G Automatically Converting
Preferred Stock -- (7,620,000) 8,640,690
Issuance of common stock:
Conversion of Series G Automatically
Converting Preferred Stock -- -- --
Acquisition of Direct Partner Telecom, Inc. -- -- 638,000
Exercise of stock options -- -- 118,595
Beneficial conversion feature of
Convertible Notes -- -- 1,750,000
Employee stock-based compensation -- -- 417,567
Issuance of stock options to non-employees -- -- 225,609
Contributed capital in lieu of salary by officer -- -- 100,000
------------- ------------- -------------
Balance, December 31, 2003 1,562 (236,301,673) 2,180,539
Year Ended December 31, 2004:
Net loss -- (24,273,201) (24,273,201)
Realized gain on securities (1,562) -- (1,562)
-------------
Comprehensive loss -- -- (24,274,763)
-------------
Issuance of common stock:
Private offering, net of offering costs -- -- 26,972,745
Conversion of Series F Preferred Stock and
exercise of associated warrants -- -- --
Conversion of $1,750,000 Convertible Notes -- -- 1,677,375
Conversion of $2,000,000 Bridge Note -- -- 2,000,000
Acquisition of SendTec -- -- 11,198,275
Conversion of Series H Preferred Stock -- -- --
Exercise of warrants owned by Dancing Bear
Investments -- -- --
Exercise of stock options -- -- 184,546
Exercise of warrants -- -- 11,424
Beneficial conversion feature of $2,000,000
Bridge Note and warrants -- -- 687,000
Employee stock-based compensation -- -- 416,472
Issuance of stock options to non-employees -- -- 463,775
------------- ------------- -------------
Balance, December 31, 2004 -- (260,574,874) 21,517,388
Six Months Ended June 30, 2005 (unaudited):
Net loss -- (10,418,792) (10,418,792)
Issuance of common stock:
Settlement of contractual obligation -- -- 74,250
Acquisition of Tralliance -- -- 198,887
Exercise of stock options -- -- 3,094
Exercise of warrants -- -- 10,511
Beneficial conversion features of $3,000,000
in Convertible Notes -- -- 3,000,000
Employee stock-based compensation -- -- 367,870
Issuance of stock options to non-
employees -- -- 139,597
------------- ------------- -------------
Balance, June 30, 2005 (unaudited) $ -- $(270,993,666) $ 14,892,805
============= ============= =============
See notes to consolidated financial statements.
F-4
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, Year Ended December 31,
-------------------------- ----------------------------------------
2005 2004 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(Unaudited)
Cash Flows from Operating Activities:
Net loss $(10,418,792) $(10,017,659) $(24,273,201) $(11,034,397) $ (2,614,661)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation and amortization 951,339 534,693 1,625,546 329,742 88,580
Provision for excess and obsolete inventory 43,839 16,515 1,289,196 110,126 --
Provision for uncollectible accounts receivable -- 121,509 198,537 114,888 --
Non-cash interest expense 3,000,000 735,416 735,416 1,739,635 --
Reserve against amounts loaned to Tralliance
prior to acquisition 280,000 222,500 506,500 495,000 --
Employee stock compensation 367,870 168,304 416,472 417,567 --
Compensation related to non-employee stock options 139,597 332,094 463,775 225,609 --
Contingent commissions expenses -- 155,968 130,366 -- --
Non-cash impairment charge -- -- 1,661,975 908,384 --
Write-down of inventory deposit -- -- 221,450 -- --
Loss on settlement of contractual obligation -- -- 406,750 -- --
Non-cash compensation -- -- -- 100,000 --
Loss on disposal or write-off of equipment -- -- 69,709 61,072 855
Non-cash gain on settlements of liabilities -- -- (352,455) (64,207) --
Disposal of Attitude Network-translation loss -- -- -- -- 121,516
Gain on sale of Happy Puppy -- -- -- -- (134,500)
Other, net (324) 9,347 12,746 19,623 12,350
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable, net (469,969) 138,497 (1,305,551) 328,453 290,502
Inventory, net 298,545 (548,346) (1,108,461) (516,458) 168,583
Prepaid and other current assets 638,908 (690,108) (392,969) (1,058,806) 706,856
Accounts payable 1,178,175 315,443 1,311,101 508,862 55,301
Accrued expenses and other current liabilities 439,275 268,123 609,124 253,215 (592,047)
Deferred revenue (472,946) 3,113 41,342 7,072 (59,957)
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents used in
operating activities (4,024,483) (8,234,591) (17,732,632) (7,054,620) (1,956,622)
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of marketable securities -- -- -- (10,345,828) --
Proceeds from sales and maturities of marketable securities -- 225,070 225,070 10,079,420 57,650
Net cash acquired (paid) in acquisition of businesses 14,450 -- (2,389,520) 60,948 --
Proceeds from sale of properties -- -- -- -- 135,000
Purchases of property and equipment (277,384) (1,696,525) (2,683,342) (2,424,791) (32,250)
Amounts loaned to Tralliance prior to Acquisition (280,000) (182,500) (466,500) (495,000) (40,000)
Patent costs incurred -- (66,079) (107,748) (62,492) --
Other, net (52,466) (14,500) 24,063 (7,600) 11,000
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents provided by
(used in) investing activities (595,400) (1,734,534) (5,397,977) (3,195,343) 131,400
------------ ------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings on notes payable and long-term debt 3,000,000 2,000,000 2,000,000 1,750,000 --
Payments on notes payable and long-term debt (245,435) (85,573) (151,898) (545,529) (13,184)
Proceeds from issuance of preferred stock, net -- -- -- 9,140,690 --
Proceeds from issuance of common stock, net -- 26,974,344 26,972,745 -- --
Proceeds from exercise of common stock options 3,094 177,046 184,546 118,595 --
Proceeds from exercise of warrants 10,511 10,918 11,424 -- --
Increase in (payments of) other long-term liabilities, net -- (119,711) (119,710) 122,487 --
------------ ------------ ------------ ------------ ------------
Net cash and cash equivalents provided by
(used in) financing activities 2,768,170 28,957,024 28,897,107 10,586,243 (13,184)
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,851,713) 18,987,899 5,766,498 336,280 (1,838,406)
Cash and Cash Equivalents, Beginning 6,828,200 1,061,702 1,061,702 725,422 2,563,828
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 4,976,487 $ 20,049,601 $ 6,828,200 $ 1,061,702 $ 725,422
============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-5
THEGLOBE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------------------------
2005 2004 2004 2003 2002
---------- ------------ -------------- ------------- --------
(Unaudited)
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 10,121 $ 62,528 $ 184,093 $ 39,819 $ 25,018
========== ============ ============== ============= ========
Income taxes $ -- $ -- $ -- $ -- $ --
========== ============ ============== ============= ========
Supplemental Disclosure of Non-Cash Transactions:
Common stock and warrants issued in connection with
acquisition of Tralliance Corporation $ 198,887 $ -- $ -- $ -- $ --
========== ============ ============== ============= ========
Common stock, preferred stock and stock options
issued in connection with the acquisition of
SendTec, Inc. $ -- $ -- $ 11,198,275 $ -- $ --
========== ============ ============== ============= ========
Note payable issued in connection with acquisition
of SendTec, Inc. $ -- $ -- $ 1,000,009 $ -- $ --
========== ============ ============== ============= ========
Common stock and warrants issued in connection with
acquisition of Direct Partner Telecom, Inc. $ -- $ -- $ -- $ 638,000 $ --
========== ============ ============== ============= ========
Common stock issued in connection with the
settlement of a contractual obligation $ 74,250 $ -- $ -- $ -- $ --
========== ============ ============== ============= ========
Conversion of Series G Automatically Converting
Preferred Stock into Common Stock $ -- $ -- $ -- $ 7,315,000 $ --
========== ============ ============== ============= ========
Additional paid-in capital attributable to beneficial
conversion features of Series F Preferred Stock,
$1,750,000 Convertible Notes and $2,000,000
Bridge Note $ -- $ 687,000 $ 687,000 $ 2,250,000 $ --
========== ============ ============== ============= ========
Preferred dividends recorded as a result of beneficial
conversion features of preferred stock issued $ -- $ -- $ -- $ 8,120,000 $ --
========== ============ ============== ============= ========
Conversion of Series F Preferred Stock, $1,750,000
Convertible Notes and $2,000,000 Bridge Note $ -- $ 4,177,375 $ 4,177,375 $ -- $ --
========== ============ ============== ============= ========
Debt assumed in purchase of intangible asset $ -- $ -- $ -- $ -- $122,960
========== ============ ============== ============= ========
Intangible asset purchased in exchange for warrants $ -- $ -- $ -- $ -- $ 42,000
========== ============ ============== ============= ========
Debt assumed in purchase of property and equipment $ -- $ -- $ 164,870 $ -- $ --
========== ============ ============== ============= ========
See notes to consolidated financial statements.
F-6
THEGLOBE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information regarding events subsequent to December 31, 2004 is unaudited.)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995
(inception) and commenced operations on that date. Originally, theglobe.com was
an online community with registered members and users in the United States and
abroad. That product gave users the freedom to personalize their online
experience by publishing their own content and by interacting with others having
similar interests. However, due to the deterioration of the online advertising
market, the Company was forced to restructure and ceased the operations of its
online community on August 15, 2001. The Company then sold most of its remaining
online and offline properties. The Company continues to operate its Computer
Games print magazine and the associated website Computer Games Online
(www.cgonline.com), as well as the computer games distribution business of Chips
& Bits, Inc. (www.chipsbits.com). On June 1, 2002, Chairman Michael S. Egan and
Director Edward A. Cespedes became Chief Executive Officer and President of the
Company, respectively.
On November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets and is now pursuing 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. The
earn-out performance targets were not achieved and the 425,000 earn-out warrants
expired on December 31, 2003.
On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a
company engaged in VoIP telephony services in exchange for 1,375,000 shares of
the Company's Common Stock and the issuance of warrants to acquire 500,000
shares of the Company's Common Stock. The transaction included an earn-out
arrangement whereby the former shareholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share upon the attainment of certain performance targets by
DPT, or upon a change in control as defined, over approximately a three year
period following the date of acquisition. Effective March 31, 2004, 500,000 of
the earn-out warrants were forfeited as performance targets had not been
achieved for the first of the three year periods. An additional 750,000 of the
warrants were forfeited effective March 31, 2005, as performance targets for the
second of the three year periods were not achieved.
The Company acquired all of the physical assets and intellectual property of DPT
and originally planned to continue to operate the company as a subsidiary and
engage in the provision of VoIP services to other telephony businesses on a
wholesale transactional basis. In the first quarter of 2004, the Company decided
to suspend DPT's wholesale business and dedicate the DPT physical and
intellectual assets to its retail VoIP business. As a result, the Company
wrote-off the goodwill associated with the purchase of DPT as of December 31,
2003, and has since employed DPT's physical assets in the build out of the
retail VoIP network.
On September 1, 2004, the Company acquired SendTec, Inc. ("SendTec"), a direct
response marketing services and technology company. As more fully discussed in
Note 4, "Acquisitions and Dispositions," the Company paid $6.0 million in cash,
excluding transaction costs, and issued debt and equity securities valued at a
total of approximately $12 million to purchase SendTec.
As more fully discussed in Note 4, "Acquisitions and Dispositions," and Note 16,
"Subsequent Events," on May 9, 2005, the Company exercised its option to acquire
Tralliance Corporation ("Tralliance"), a company which had recently entered into
an agreement to become the registry for the ".travel" top-level Internet domain.
The Company issued 2,000,000 shares of its Common Stock, warrants to acquire
475,000 shares of its Common Stock and paid $40,000 in cash to acquire
Tralliance.
In addition, reference should be made to Note 16, "Subsequent Events," regarding
the Company's entrance into an asset purchase agreement, dated August 10, 2005,
for the sale of the SendTec Business and substantially all of the net assets of
its SendTec subsidiary to RelationServe Media, Inc.
F-7
As of June 30, 2005, the Company's revenue sources were derived principally from
the operations of SendTec which comprises our marketing services division, and
to a lesser extent from the operations of our games related businesses. The
Company's retail VoIP products and services have yet to produce any significant
revenue. Tralliance does not expect to begin collecting fees from ".travel"
registrars for its services until sometime during the fourth quarter of 2005.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries from their respective dates of acquisition. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements of the Company as of June 30, 2005
and for the six months ended June 30, 2005 and 2004 included herein are
unaudited. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at June 30, 2005 and the results of its operations and its cash
flows for the six months ended June 30, 2005 and 2004. The results of operations
and cash flows for such periods are not necessarily indicative of results
expected for the full year or for any future period.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. These estimates and assumptions relate to estimates of collectibility of
accounts receivable, the valuation of inventory, accruals, the valuations of
fair values of options and warrants, the impairment of long-lived assets and
other factors. Actual results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds and highly liquid short-term
investments with qualified financial institutions. The Company considers all
highly liquid securities with original maturities of three months or less to be
cash equivalents. Included in cash and cash equivalents in the accompanying
consolidated balance sheet at June 30, 2005 and December 31, 2004, was
approximately $31,000 (unaudited) and $93,000, respectively, of cash held in
escrow for purposes of sweepstakes promotions being conducted by the VoIP
telephony division.
(e) MARKETABLE SECURITIES
The Company accounts for its investment in debt and equity securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." All such
investments are classified as available-for-sale as of June 30, 2005, December
31, 2004 and December 31, 2003. Available-for-sale securities are stated at
market value, which approximates fair value, and unrealized holding gains and
losses are excluded from earnings and included as a component of stockholders'
equity until realized.
F-8
The following is a summary of available-for-sale securities:
June 30, 2005 December 31, 2004 December 31, 2003
------------------- ------------------- -------------------
Fair Fair Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(Unaudited)
Preferred Securities $ -- $ -- $ -- $ -- $225,000 $225,000
U.S. Treasury Bills 42,736 42,736 42,736 42,736 41,408 42,970
-------- -------- -------- -------- -------- --------
Total $ 42,736 $ 42,736 $ 42,736 $ 42,736 $266,408 $267,970
======== ======== ======== ======== ======== ========
During the six months ended June 30, 2005 and 2004, the Company had no
significant gross realized gains or losses on sales of available-for-sale
securities (unaudited). During the year ended December 31, 2004 and 2003, the
Company had no significant gross realized gains or losses on sales of
available-for-sale securities. The gross unrealized gain of $1,562 as of
December 31, 2003, has been included in stockholders' equity as "Accumulated
Other Comprehensive Income" in the accompanying consolidated balance sheet.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company's financial instruments, including
cash, cash equivalents, marketable securities, accounts receivable, accounts
payable, accrued expenses and deferred revenue, approximate their fair value at
June 30, 2005 and December 31, 2004 and 2003 due to their short maturities.
(g) INVENTORY
Inventories are recorded on a first in, first out basis and valued at the lower
of cost or market value. The Company's reserve for excess and obsolete inventory
as of June 30, 2005, December 31, 2004 and 2003, was approximately $315,000
(unaudited), $1,333,000 and $109,000, respectively.
During the year ended December 31, 2004, the Company's VoIP telephony services
business recorded charges to cost of revenue totaling approximately $1,477,000
as a result of write-downs required to state its inventory on-hand and related
deposits for inventory on order at the lower of cost or market value. As of
December 31, 2004, such market values considered certain transactions, completed
subsequent to year-end, as well as the Company's estimate of future unit sales
and selling prices of its telephony equipment inventory in its retail VoIP
business.
Effective January 31, 2005, the Company formally terminated its contract with a
supplier for VoIP telephony handsets and reached an agreement with the supplier
to settle the unconditional purchase obligation under such contract, which
totaled approximately $3,000,000 (see Note 11, "Commitments and Contingencies,"
for further discussion). As a result, the Company recorded charges to cost of
revenue which increased the inventory reserves related to its VoIP handset
inventory by approximately $300,000 as of December 31, 2004. During the third
quarter of 2004, the Company had recorded a $600,000 charge to cost of revenue
and a corresponding increase to its reserve for excess and obsolete inventory
related to the VoIP handset inventory.
In January 2005, the Company sold essentially all of its voiceglo adapter
inventory on-hand for $235,000 in cash. As a result, inventory reserves at
December 31, 2004 included approximately $356,000 of additional provisions
related to cost of revenue charges required to reflect the voiceglo adapter
inventory at net realizable value. During 2004, the Company also made advance
payments of approximately $299,000 towards future purchases of adapter
inventory. The Company recorded a charge to cost of revenue of approximately
$221,000 to write down the value of such deposits on inventory purchases to
estimated net realizable value of $77,250 as of December 31, 2004.
F-9
The Company manages its inventory levels based on internal forecasts of customer
demand for its products, which is difficult to predict and can fluctuate
substantially. In addition, the Company's inventories include high technology
items that are specialized in nature or subject to rapid obsolescence. If the
Company's demand forecast is greater than the actual customer demand for its
products, the Company may be required to record additional charges related to
increases in its inventory valuation reserves in future periods. The value of
inventories is also dependent on the Company's estimate of future average
selling prices, and, if projected average selling prices are over estimated, the
Company may be required to further adjust its inventory value to reflect the
lower of cost or market.
(h) GOODWILL AND INTANGIBLE ASSETS
The Company accounts for goodwill and intangible assets in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that
goodwill and other intangibles with indefinite lives should no longer be
amortized, but rather be tested for impairment annually or on an interim basis
if events or circumstances indicate that the fair value of the asset has
decreased below its carrying value.
Goodwill is stated at cost. At June 30, 2005, December 31, 2004 and 2003, the
Company had no other intangible assets with indefinite lives. Intangible assets
subject to amortization, included in the accompanying consolidated balance
sheets as of June 30, 2005, December 31, 2004 and 2003, were being amortized on
a straight-line basis over their estimated useful lives, ranging from three to
five years. See Note 3, "Impairment Charges," for a discussion of the charges
recorded by the Company as a result of the review of goodwill and intangible
assets for impairment in connection with the preparation of the accompanying
consolidated financial statements.
(i) LONG-LIVED ASSETS
Long-lived assets, including property and equipment and intangible assets
subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." If events or changes in circumstances indicate
that the carrying amount of an asset, or an appropriate grouping of assets, may
not be recoverable, the Company estimates the undiscounted future cash flows to
result from the use of the asset, or asset group. If the sum of the undiscounted
cash flows is less than the carrying value, the Company recognizes an impairment
loss, measured as the amount by which the carrying value exceeds the fair value
of the assets. Fair values are based on quoted market values, if available. If
quoted market values are not available, the estimate of fair value may be based
on the discounted value of the estimated future cash flows attributable to the
assets, or other valuation techniques deemed reasonable in the circumstances.
See Note 3, "Impairment Charges," for discussion of impairment charges recorded
by the Company as a result of the review of long-lived assets for impairment in
connection with the preparation of the accompanying consolidated financial
statements.
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets, as follows:
Estimated Useful Lives
----------------------
VoIP network equipment 3 years
Computer software 3 years
Other equipment 3 years
Furniture and fixtures 3-7 years
Leasehold improvements 3-6 years
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over three
years.
F-10
(j) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents, marketable securities and trade
accounts receivable. The Company maintains its cash and cash equivalents with
various financial institutions and invests its funds among a diverse group of
issuers and instruments. The Company performs ongoing credit evaluations of its
customers' financial condition and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information.
Amounts receivable from four of SendTec's customers represented approximately
$3,470,000 (unaudited), or 47%, of SendTec's total accounts receivable as of
June 30, 2005. A single SendTec customer represented $1,444,515, or 22%, of
SendTec's total accounts receivable as of December 31, 2004. Concentration of
credit risk in the Company's computer games and VoIP telephony services
divisions is generally limited due to the large number of customers in these
businesses.
(k) REVENUE RECOGNITION
COMPUTER GAMES BUSINESSES
Advertising revenue from the sale of print advertisements under short-term
contracts in the Company's magazine publications are recognized at the on-sale
date of the magazines.
The Company participates in barter transactions whereby the Company trades
marketing data in exchange for advertisements in the publications of other
companies. Barter revenue and expenses are recorded at the fair market value of
services provided or received, whichever is more readily determinable in the
circumstances. Revenue from barter transactions is recognized as income when
advertisements or other products are delivered by the Company. Barter expense is
recognized when the Company's advertisements are run in other companies'
magazines, which typically occurs within one to six months from the period in
which barter revenue is recognized. Barter revenue represented less than 1% of
consolidated net revenue for the year ended December 31, 2004 and approximately
2% of consolidated net revenue in the years ended December 31, 2003 and 2002.
The Company had no barter revenue during the six months ended June 30, 2005.
Barter revenue represented approximately 4% (unaudited) of consolidated net
revenue for the six months ended June 30, 2004.
The Company uses outside agents to obtain new subscribers for its magazine
publications, whereby the agents retain a percentage of the subscription
proceeds as their commission. Previously these commissions had been classified
as sales and marketing expense within the consolidated statements of operations.
Effective June 2004, the Company changed its method of accounting for these
agency fees, reporting them as a reduction of magazine sales subscription
revenue. We believe this alternative accounting method is a more commonly used
industry practice and is preferable under the circumstances. This
reclassification had no impact on net loss as previously reported by the
Company. Net revenue in the accompanying consolidated statements of operations
has been shown net of such agency fees for all periods presented. These agency
fees totaled approximately $1,054,000, $1,296,000 and $2,422,000 for the years
ended December 31, 2004, 2003 and 2002, respectively. During the six months
ended June 30, 2005 and 2004, agency fees totaled approximately $432,000
(unaudited) and $537,000(unaudited), respectively.
Newsstand sales of the Company's magazine publications are recognized at the
on-sale date of the magazines, net of provisions for estimated returns.
Subscription revenue, which is net of agency fees, is deferred when initially
received and recognized as income ratably over the subscription term.
Sales of video games and related products from the Company's online store are
recognized as revenue when the product is shipped to the customer. Amounts
billed to customers for shipping and handling charges are included in net
revenue. The Company provides an allowance for returns of merchandise sold
through its online store. The allowance for returns provided to date has not
been significant.
MARKETING SERVICES
Revenue from the distribution of Internet advertising is recognized when
Internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by the Company's tracking
software.
F-11
Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount the Company bills to
clients significantly exceeds the amount of revenue that is earned due to the
existence of various "pass-through" charges such as the cost of the television
and radio media. Amounts received in advance of media airings are deferred and
included in deferred revenue in the accompanying consolidated balance sheet.
Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized on the completed contract method when such
programs are complete and available for airing. Production activities generally
take eight to twelve weeks and the Company usually collects amounts in advance
and at various points throughout the production process. Amounts received from
customers prior to completion of commercials are included in deferred revenue
and direct costs associated with the production of commercials in process are
deferred and included within other current assets in the accompanying
consolidated balance sheet.
VOIP TELEPHONY SERVICES
VoIP telephony services revenue represents fees charged to customers for voice
services and is recognized based on minutes of customer usage or as services are
provided. The Company records payments received in advance for prepaid services
as deferred revenue until the related services are provided. Sales of peripheral
VoIP telephony equipment are recognized as revenue when the product is shipped
to the customer. Amounts billed to customers for shipping and handling charges
are included in net revenue.
(l) ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expense. Advertising costs were approximately $99,000 (unaudited) and
$1,292,000 (unaudited) for the six months ended June 30, 2005 and 2004,
respectively. The Company incurred no barter advertising costs during the six
months ended June 30, 2005 and 2004. Advertising costs were approximately
$2,051,000, $411,000 and $182,000 for the years ended December 31, 2004, 2003
and 2002, respectively. The Company incurred no barter advertising costs during
the year ended December 31, 2004. Barter advertising costs were approximately 2%
of total net revenue for each of the years ended December 31, 2003 and 2002.
(m) PRODUCT DEVELOPMENT
Product development expenses include salaries and related personnel costs;
expenses incurred in connection with website development, testing and upgrades
of our computer games websites; editorial and content costs; and costs incurred
in the development of our retail VoIP products. Product development costs and
enhancements to existing products are charged to operations as incurred.
(n) STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS 123
allows entities to continue to apply the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25") and provide pro forma net earnings (loss)
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS 123 had been applied. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123,"
which provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. SFAS No. 148
also requires more prominent and more frequent disclosures in both interim and
annual financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and
continues to apply the measurement provisions of APB No. 25.
F-12
Had the Company determined compensation expense based on the fair value at the
grant date for its stock options issued to employees under SFAS No. 123, the
Company's net loss would have been adjusted to the pro forma amounts indicated
below:
Six Months Ended June 30, Year Ended December 31,
---------------------------- --------------------------------------------
2005 2004 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(Unaudited)
Net loss - as reported $(10,418,792) $(10,017,659) $(24,273,201) $(11,034,397) $ (2,614,661)
Add: Stock-based employee
compensation expense included
in net loss as reported 367,870 168,304 416,472 417,567 --
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
Awards (835,078) (982,645) (1,606,271) (1,821,170) (99,339)
------------ ------------ ------------ ------------ ------------
Net loss - pro forma $(10,886,000) $(10,832,000) $(25,463,000) $(12,438,000) $ (2,714,000)
============ ============ ============ ============ ============
Basic net loss per share -
as reported $ (0.06) $ (0.10) $ (0.19) $ (0.49) $ (0.09)
============ ============ ============ ============ ============
Basic net loss per share -
pro forma $ (0.06) $ (0.11) $ (0.20) $ (0.53) $ (0.09)
============ ============ ============ ============ ============
A total of 5,584,750 (unaudited) stock options were granted during the six
months ended June 30, 2005 with a per share weighted-average fair value of $0.10
(unaudited) and whose exercise price equaled the market price of the stock on
the grant date.
A total of 7,749,595 stock options were granted during the year ended December
31, 2004, including 1,490,430 stock options with a per share weighted-average
fair value of $0.51 and whose exercise price equaled the market price of the
stock on the grant date. A total of 6,259,165 stock options were granted during
the year ended December 31, 2004 with an exercise price below the market price
of the stock on the grant date and a per share weighted-average fair value of
$0.47.
The per share weighted-average fair value of stock options granted during 2003
on a total of 3,907,450 options whose exercise price equaled the market price of
the stock on the grant date was $0.82. In addition, 500,000 stock options were
granted in 2003 with an exercise price below the market price of the stock on
the grant date and a per share weighted-average fair value of $1.49. The per
share weighted-average fair value of the 5,347,500 stock options granted during
2002 was $0.02 on the date of grant.
Fair values of stock options were calculated using the Black Scholes
option-pricing method with the following weighted-average assumptions:
Six Months Ended Year Ended
June 30, December 31,
--------------------------- --------------------------
2005 2004 2003 2002
------- ------- ------- -------
(Unaudited)
Risk-free interest rate 3.00 - 4.00% 3.00% 3.00% 4.78%
Expected life 3 - 5 years 3 - 5 years 5 years 10 years
Volatility 160% 160% 160% 135%-160%
Expected dividend rate 0 0 0 0
F-13
The Company follows FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN No. 44") which provides
guidance for applying APB Opinion No 25. With certain exceptions, FIN No. 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000.
(o) INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated results of operations in the period that the tax change occurs.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
(p) NET LOSS PER COMMON SHARE
The Company reports net loss per common share in accordance with SFAS No. 128,
"Computation of Earnings Per Share." In accordance with SFAS 128 and the SEC
Staff Accounting Bulletin No. 98, basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
conversion of convertible preferred stock and convertible notes (using the
if-converted method), if any, and the shares issuable upon the exercise of stock
options and warrants (using the treasury stock method). Common equivalent shares
are excluded from the calculation if their effect is anti-dilutive.
During the year ended December 31, 2003, the Company issued equity securities
with common stock conversion features which were immediately convertible into
Common Stock. As further discussed in Note 9, "Stockholders' Equity," the
Company accounted for the issuance of these securities in accordance with EITF
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios," which resulted in the recognition
of non-cash preferred dividends totaling $8,120,000 at the respective dates of
the securities' issuance. Net loss applicable to common stockholders was
calculated as follows:
Six Months Ended June 30, Year Ended December 31,
---------------------------- --------------------------------------------
2005 2004 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(Unaudited)
Net loss $(10,418,792) $(10,017,659) $(24,273,201) $(11,034,397) $ (2,614,661)
Beneficial conversion features
of preferred stock and
Warrants -- -- -- (8,120,000) --
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
Stockholders $(10,418,792) $(10,017,659) $(24,273,201) $(19,154,397) $ (2,614,661)
============ ============ ============ ============ ============
F-14
Due to the Company's net losses, the effect of potentially dilutive securities
or common stock equivalents that could be issued was excluded from the diluted
net loss per common share calculation due to the anti-dilutive effect. Such
potentially dilutive securities and common stock equivalents consisted of the
following for the periods ended:
June 30, December 31,
----------------------- ------------------------------------
2005 2004 2004 2003 2002
---------- ---------- ---------- ---------- ----------
(Unaudited)
Options to purchase common stock 20,302,000 9,923,000 15,984,000 9,943,000 5,971,000
Common shares issuable upon conversion
of Series F Preferred Stock -- -- -- 16,667,000 --
Common shares issuable upon conversion
of Convertible Notes 60,000,000 -- -- 19,444,000 --
Common shares issuable upon exercise
of Warrants 11,816,000 20,880,000 20,375,000 22,802,000 6,187,000
---------- ---------- ---------- ---------- ----------
Total 92,118,000 30,803,000 36,359,000 68,856,000 12,158,000
========== ========== ========== ========== ==========
(q) COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in accordance with the SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income (loss) generally
represents all changes in stockholders' equity during the year except those
resulting from investments by, or distributions to, stockholders. The Company's
comprehensive loss was approximately $10.4 million (unaudited) and $10.0 million
(unaudited) for the six months ended June 30, 2005 and 2004, respectively, which
approximated the Company's reported net loss. The Company's comprehensive loss
was approximately $24.3 million, $11.0 million and $2.5 million for the years
ended December 31, 2004, 2003 and 2002, respectively, which approximated the
Company's reported net loss.
(r) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 applies to all voluntary changes in accounting principles and requires
retrospective application to prior periods' financial statements of changes in
accounting principles. This statement also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. SFAS 154 carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not expect the
adoption of this standard to have a material impact on its financial condition,
results of operations or liquidity.
In March 2005, the FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," an interpretation of FASB Statement
No. 143, "Accounting for Asset Retirement Obligations." The interpretation
clarifies that the term conditional asset retirement obligation refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. An entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The effective date of this
interpretation is no later than the end of fiscal years ending after December
15, 2005. The Company is currently investigating the effect, if any, that FIN 47
would have on the Company's financial position, cash flows and results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this standard to have a material impact on its
financial condition, results of operations, or liquidity.
F-15
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock options on the grant date and is effective for annual periods
beginning after June 15, 2005. In accordance with the revised statement, the
expense attributable to stock options granted or vested subsequent to January 1,
2006 will be required to be recognized by the Company. The precise impact of the
adoption of SFAS No. 123R cannot be predicted at this time because it will
depend on the levels of share-based payments that are granted in the future.
However, the Company believes that the adoption of this standard may have a
significant effect on the Company's results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 requires all companies to recognize a
current-period charge for abnormal amounts of idle facility expense, freight,
handling costs and wasted materials. This statement also requires that the
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be effective
for fiscal years beginning after June 15, 2005. The Company does not expect the
adoption of this statement to have a material effect on its consolidated
financial statements.
In December 2003, the FASB issued FIN No. 46-R "Consolidation of Variable
Interest Entities." FIN 46-R, which modifies certain provisions and effective
dates of FIN 46, sets forth the criteria to be used in determining whether an
investment in a variable interest entity should be consolidated. These
provisions are based on the general premise that if a company controls another
entity through interests other than voting interests, that company should
consolidate the controlled entity. The Company believes that currently, it does
not have any material arrangements that meet the definition of a variable
interest entity which would require consolidation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on the Company's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the Company's results of operations or financial position.
(s) RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
NOTE 2. GOING CONCERN CONSIDERATIONS
The Company's June 30, 2005 and December 31, 2004 consolidated financial
statements have been prepared assuming the Company will continue as a going
concern. The Company has suffered recurring losses from operations since
inception, has an accumulated deficit as of June 30, 2005, of $270,993,666
(unaudited) and has recorded impairment charges (See Note 3, "Impairment
Charges" below for further discussion) during 2004 and 2003 of $1,661,975 and
$908,384, respectively, related to its VoIP telephony services division. Net
cash and cash equivalents used in operations totaled $4,024,483 (unaudited) for
the six months ended June 30, 2005 and $17,732,632 for the year ended December
31, 2004 due primarily to net losses incurred by its VoIP telephony services
division.
F-16
The Company has expended, particularly during 2004, significant costs to
implement a number of marketing programs geared toward increasing the number of
its VoIP retail customers and telephony revenue. None of these programs have
proven to be successful to any significant degree. At June 30, 2005, the
Company's sole source of liquidity consisted of $4,976,487 (unaudited) of cash
and cash equivalents and as further discussed below, the $1,000,000 (unaudited)
subsequently borrowed under the Note Purchase Agreement between the Company and
E&C Capital Partners, LLLP and E&C Capital Partners II, Ltd. The Company
continues to incur substantial consolidated net losses and management believes
the Company will continue to be unprofitable for the foreseeable future. These
conditions raise significant doubt about the Company's ability to continue as a
going concern.
MANAGEMENT'S PLANS
During October 2004, the Company engaged financial advisors to assist the
Company in raising capital through a private placement of its equity securities,
or in entering into other business relationships with certain strategic
investors. In February 2005, the Company engaged an additional financial advisor
to assist the Company in connection with raising capital through a private
placement of equity securities in either the Company or its SendTec wholly-owned
subsidiary or alternatively in selling either part or all of the Company's
businesses or assets, including its SendTec business. The Company currently has
no access to credit facilities with traditional third party lenders and there
can be no assurance that it would be able to raise capital or sell any of its
businesses or assets. In addition, any financing that could be obtained would
likely significantly dilute existing shareholders. Management is exploring a
number of strategic alternatives regarding the Company's future business
operations. Management has also implemented a number of internal actions in an
effort to improve the Company's liquidity and business performance, including
those described below. The Company's future strategic direction is highly
dependent upon the outcome of its efforts to raise capital and/or sell certain
businesses or assets.
During the first quarter of 2005, the Company reevaluated its existing VoIP
telephony services business plan and subsequently terminated or is currently in
the process of terminating and/or modifying certain of its existing product
offerings and marketing programs. Additionally, the Company began to develop and
test certain new VoIP products and features, some of which were completed and
released during the second quarter of 2005. The Company also, during the first
quarter of 2005, made the decision to discontinue using its SendTec business to
perform marketing services for its VoIP business, and to instead dedicate 100%
of SendTec's marketing resources to support and grow its own third party revenue
producing customer base. Additionally, in order to reduce its near term
consolidated net losses and cash usage, the Company implemented a number of
cost-reduction actions at its VoIP telephony services business, including
decreases in personnel and salary levels, carrier and data center costs, and
marketing/advertising expenses during the first quarter of 2005.
Management believes that it will be difficult to implement its new VoIP product
and marketing plans, once fully developed and tested, without significant
additional cash being provided from a prospective financing or sale
transaction(s). Should the Company's new VoIP product offerings achieve market
acceptance and significantly increase the Company's current customer and revenue
base, additional cash resources to fund capital expenditures related to the
Company's VoIP network and billing systems and to fund future marketing and
other business development costs would be required.
There can be no assurance that the Company's new VoIP product offerings will be
successful in attracting a sufficient number of new customers to its VoIP
network and increasing telephony revenue to desired levels. Even if the Company
is able to raise additional capital, management may at any time decide to
terminate the operations of its VoIP telephony services business, either by
asset sale or abandonment, if future investment returns are considered
inadequate and/or preferable investment alternatives exist. The Company may
alternatively decide to enter into new lines of business. (See Note 4,
"Acquisitions and Dispositions," for further details regarding the Company's
acquisition of Tralliance Corporation in May 2005).
On April 22, 2005, entities controlled by our Chairman and Chief Executive
Officer entered into an agreement with the Company pursuant to which the
entities acquired secured demand convertible promissory notes in the aggregate
amount of $1,500,000 together with options to acquire an additional $2,500,000
in the aggregate of such notes on or before July 22, 2005. On June 1, 2005, the
Noteholders exercised a portion of the Option and acquired an additional
$1,500,000 of Convertible Notes. On July 18, 2005, the Noteholders exercised the
remainder of the Option and acquired an additional $1,000,000 of Convertible
Notes (see Note 7, "Debt," for further details). The proceeds from the sale of
the notes are intended to provide the Company with temporary short-term
liquidity to operate its businesses while it seeks to raise additional capital,
which may involve the potential sale of one or more of the Company's
subsidiaries, including SendTec. The Company's cash and cash equivalents balance
at September 15, 2005 was approximately $1,600,000 (unaudited).
F-17
On August 10, 2005, the Company entered into an asset purchase agreement, as
amended on August 23, 2005, with RelationServe Media, Inc. ("RelationServe")
whereby the Company agreed to sell all of the business and substantially all of
the net assets of its SendTec marketing services subsidiary to RelationServe for
$37,500,000 in cash, subject to certain net working capital adjustments.
RelationServe has also agreed to separately provide certain substantial
RelationServe stock ownership consideration to SendTec management at the time of
closing. The closing of the asset sale is subject to the satisfaction of a
number of closing conditions including distribution of a definitive information
statement describing the asset sale to our stockholders (which was undertaken
commencing on September 16, 2005) and entry into a redemption agreement and a
termination agreement whereby the Company will redeem approximately 28,900,000
shares of its Common Stock, and cancel certain other options and warrants, owned
by management and certain employees of SendTec for approximately $12,600,000 in
cash. These shares and related options and warrants were issued to SendTec
management in connection with the Company's acquisition of SendTec. (See Note
16, "Subsequent Events").
Summary
If the Company is not successful in consummating the RelationServe asset sale or
in entering into another financing, sale, or business transaction that otherwise
infuses sufficient additional cash resources into the Company by no later than
sometime during the fourth quarter of 2005, management believes that the Company
will no longer be able to continue the implementation of its current VoIP
business plan. In this event, management also believes that the Company will
continue to not be able to pay its current financial obligations on a timely
basis, including paying the overdue principal and interest on the $1.0 million
promissory note issued in connection with the SendTec acquisition (see Note 7,
"Debt," for further details). As a result, it is likely that the Company would
be required to either temporarily suspend or permanently shutdown the operation
of its VoIP telephony services business. Additionally, in such event, management
believes that it may also be required to revise the business plan of some or all
of its other business segments and/or further implement company-wide
cost-reduction programs. There can be no assurance that the Company would be
successful in implementing such revised business plans and effectively
restructuring its businesses so that the Company would have the ability to
continue to operate as a going concern in the future.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 3. IMPAIRMENT CHARGES
As a result of the significant operating and cash flow losses incurred by the
Company's VoIP telephony services division during 2004 and 2003, coupled with
management's projection of continued losses in the foreseeable future, the
Company performed an evaluation of the recoverability of the division's
long-lived assets during the first quarter of 2005 in connection with the
preparation of the accompanying 2004 consolidated financial statements. The
evaluation indicated that the carrying value of certain of the division's
long-lived assets exceeded the fair value of such assets, as measured by quoted
market prices or other management estimates. As a result, the Company recorded
an impairment charge of $1,661,975 in the accompanying statement of operations
for the year ended December 31, 2004. The impairment charge included the
write-off of the carrying value of amounts previously capitalized by the
division as internal-use software, website development costs, acquired
technology and patent costs, as well as certain other assets.
During the first quarter of 2004, the Company's management decided to suspend
DPT's wholesale business and to dedicate the DPT physical and intellectual
assets to its retail VoIP business. As a result, the Company reviewed the
long-lived assets associated with the wholesale VoIP business for impairment.
Goodwill of $577,134 and the unamortized balance of the non-compete intangible
asset of $331,250 recorded in connection with the May 2003 acquisition of DPT
were written off and recorded as an impairment loss in the accompanying
statement of operations for the year ended December 31, 2003. Refer to Note 4,
"Acquisitions and Dispositions," for a discussion of the purchase of DPT.
F-18
NOTE 4. ACQUISITIONS AND DISPOSITIONS
ACQUISITION OF TRALLIANCE CORPORATION
On February 25, 2003, theglobe.com entered into a Loan and Purchase Option
Agreement, as amended, with Tralliance, an Internet related business venture,
pursuant to which it agreed to fund, in the form of a loan, at the discretion of
the Company, Tralliance's operating expenses and obtained the option to acquire
all of the outstanding capital stock of Tralliance in exchange for, when and if
exercised, $40,000 in cash and the issuance of an aggregate of 2,000,000
unregistered restricted shares of theglobe.com's Common Stock (the "Option").
The Loan was secured by a lien on the assets of the venture. On May 5, 2005,
Tralliance and the Internet Corporation for Assigned Names and Numbers ("ICANN")
entered into an agreement designating Tralliance as the registry for the
".travel" top-level domain. On May 9, 2005, the Company exercised its option to
acquire all of the outstanding capital stock of Tralliance. The purchase price
(unaudited) consisted of the issuance of 2,000,000 shares of theglobe.com Common
Stock, warrants to acquire 475,000 shares of theglobe.com Common Stock and
$40,000 in cash. The warrants are exercisable for a period of five years at an
exercise price of $0.11 per share. As part of the transaction, 10,000 shares of
theglobe.com Common Stock were also issued to a third party in payment of a
finder's fee resulting from the acquisition. The Common Stock issued as a result
of the acquisition of Tralliance is entitled to certain "piggy-back"
registration rights. In addition, as part of the transaction, the Company agreed
to pay approximately $154,000 (unaudited) in outstanding liabilities of
Tralliance immediately after the closing of the acquisition.
The preliminary Tralliance purchase price allocation was as follows (unaudited):
Cash $ 54,000
Other current assets 6,000
Intangible assets 564,000
Assumed liabilities (370,000)
-----------
$ 254,000
===========
Upon acquisition, the existing CEO and CFO of Tralliance entered into employment
agreements, which include certain non-compete provisions, whereby each would
agree to remain in the employ of Tralliance for a period of two years in
exchange for annual base compensation totaling $400,000 (unaudited) plus
participation in a bonus pool based upon the pre-tax income of the venture.
The value assigned to the intangible assets acquired is being amortized on a
straight-line basis over the expected useful life. Annual amortization expense
(unaudited) of the intangible assets is estimated to be approximately $75,200 in
2005, $112,800 for 2006 through 2009 and $37,600 in 2010. The related
accumulated amortization as of June 30, 2005 was $18,800 (unaudited) and
amortization expense totaled $18,800 (unaudited) for the three and six months
ended June 30, 2005.
Advances to Tralliance totaled $1,281,500 (unaudited) immediately prior to its
acquisition by the Company. At December 31, 2004 and 2003, advances to
Tralliance totaled $1,001,500 and $535,000, respectively. Due to the uncertainty
of the ultimate collectibility of the Loan, the Company had historically
provided a reserve equal to the full amount of the funds advanced to Tralliance.
Additions to the reserve of $280,000 (unaudited) and $222,500 (unaudited) were
included in other expense in the accompanying consolidated statements of
operations for the six months ended June 30, 2005 and 2004, respectively.
Additions to the Loan reserve of $506,500 and $495,000 were included in other
expense in the accompanying consolidated statements of operations for the years
ended December 31, 2004 and 2003, respectively (See the "Future Capital Needs"
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations for further details).
F-19
The following unaudited pro forma condensed consolidated results of operations
for the six months ended June 30, 2005 and 2004 assumes the acquisition of
Tralliance occurred as of January 1, 2004. The pro forma information is not
necessarily indicative of what the actual results of operations of the combined
company would have been had the acquisition occurred on January 1, 2004, nor is
it necessarily indicative of future results.
UNAUDITED PRO FORMA RESULTS: 2005 2004
------------ ------------
Six months ended June 30,
Net revenue $ 19,425,000 $ 1,682,000
Net loss (10,449,000) (10,139,000)
Basic and diluted net loss per common share $ (0.06) $ (0.10)
ACQUISITION AND PROPOSED DISPOSITION OF SENDTEC, INC.
On September 1, 2004, the Company acquired SendTec, a direct response marketing
services and technology company. In exchange for all of the issued and
outstanding shares of capital stock of SendTec the Company paid consideration
consisting of: (i) $6,000,000 in cash, excluding transaction costs, (ii) the
issuance of an aggregate of 17,500,024 shares of the Company's Common Stock,
(iii) the issuance of an aggregate of 175,000 shares of Series H Automatically
Converting Preferred Stock (which was converted into approximately 17,500,500
shares of the Company's Common Stock effective December 1, 2004), and (iv) the
issuance of a subordinated promissory note in the amount of $1,000,009. The
Company also issued an aggregate of 3,974,165 replacement options to acquire the
Company's Common Stock for each of the issued and outstanding options to acquire
SendTec shares held by the former employees of SendTec.
The preliminary SendTec purchase price allocation was as follows:
Cash $ 3,610,000
Accounts receivable 5,534,000
Other current assets 194,000
Fixed assets 1,031,000
Non-compete agreements 1,800,000
Goodwill 11,710,000
Other assets 124,000
Assumed liabilities (5,605,000)
-----------
$18,398,000
===========
In addition, warrants to acquire shares of theglobe.com Common Stock will be
issued to the former shareholders of SendTec when and if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005. The number of earn-out warrants may range from an aggregate
of approximately 250,000 to 2,500,000 (if actual operating income exceeds the
forecast by at least 10%). Because the number of warrants that will be earned is
not yet determinable, no consideration related to this contingency was included
in the determination of the SendTec purchase price.
F-20
As part of the SendTec acquisition transaction, certain executives of SendTec
entered into new employment agreements with SendTec. The employment agreements
each have a term of five years and automatically renew for an additional year at
expiration unless either party provides the requisite notice of non-renewal. The
agreements also contain certain non-compete provisions for periods as specified
by the agreements. The $1,800,000 value assigned to the non-compete agreements
is being amortized on a straight-line basis over 5 years. Annual amortization
expense of the non-compete agreements is estimated to be $360,000 in 2005
through 2008 and $240,000 in 2009. The related accumulated amortization as of
June 30, 2005 and December 31, 2004, was $300,000 (unaudited) and $120,000,
respectively.
The following unaudited pro forma condensed consolidated results of operations
for the six months ended June 30, 2004 and for the years ended December 31, 2004
and 2003 assumes the acquisition of SendTec occurred as of January 1, 2003. The
unaudited pro forma results reflected below include SendTec's revenue utilizing
the revenue recognition methods employed by the Company since SendTec's date of
acquisition. The unaudited pro forma information is not necessarily indicative
of what the actual results of operations of the combined company would have been
had the acquisition occurred on January 1, 2003, nor is it necessarily
indicative of future results.
UNAUDITED PRO FORMA RESULTS 2004 2003
------ ------
Years ended December 31,
Net Revenue $ 36,559,000 $ 20,725,000
Net Loss (22,453,000) (9,502,000)
Basic and diluted net loss per common share $ (0.14) $ (0.24)
Weighted average common shares 155,623,000 73,711,000
Six Months ended June 30,
Net Revenue $ 17,090,000
Net Loss (8,457,000)
Basic and diluted net loss per common share $ (0.06)
Weighted average common shares 137,915,000
See Note 16, "Subsequent Events," for a discussion of the agreement to sell
SendTec's business and assets entered into by the Company on August 10, 2005.
ACQUISITION OF DIRECT PARTNER TELECOM, INC.
On May 28, 2003, the Company completed the acquisition of Direct Partner
Telecom, Inc. ("DPT"), a company engaged in VoIP telephony services, in exchange
for 1,375,000 shares of the Company's Common Stock and the issuance of warrants
to acquire 500,000 shares of the Company's Common Stock. The warrants are
exercisable any time before May 23, 2013 at an exercise price of $0.72 per
share. In addition, the former shareholders of DPT may earn additional warrants
to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise
price of $0.72 per share if DPT achieves certain revenue and earnings targets
over approximately the next three years. Effective March 31, 2004, 500,000 of
the earn-out warrants were forfeited as performance targets had not been
achieved for the first of the three year periods. An additional 750,000 of the
warrants were forfeited effective March 31, 2005, as performance targets for the
second of the three year periods were not achieved. The warrants will accelerate
and be deemed earned in the event of a "change in control" of the Company, as
defined in the acquisition documents. In addition, as part of the transaction,
the Company agreed to repay loans totaling $600,000 to certain of the former
shareholders of DPT, including $500,000 immediately after the closing of the
acquisition. The Company issued promissory notes for $100,000, with a two-year
maturity and interest at prime, for the balance. The $100,000 in promissory
notes were repaid in June 2005.
F-21
The total purchase price of DPT was allocated as follows:
Cash $ 61,000
Accounts receivable 155,000
Fixed assets 196,000
Non-compete agreement 375,000
Goodwill 577,000
Assumed debt to former Shareholders (600,000)
Other assumed liabilities (126,000)
---------
$ 638,000
=========
As part of the DPT acquisition transaction, the former Chief Executive Officer
of DPT agreed to an employment agreement with a one-year term which
automatically renewed for an additional year. The employment agreement also
contained non-compete provisions during the term of the agreement and for a
period of three years following termination of the agreement, as specified. The
$375,000 value assigned to the non-compete agreement was to be amortized on a
straight-line basis over 5 years.
As discussed in Note 1, as a result of decisions made during the first quarter
of 2004, the Company performed a review of its long-lived assets for impairment.
As a result, effective December 31, 2003, the Company wrote-off the goodwill and
the unamortized balance of the non-compete agreement arising from the
acquisition of DPT which totaled $908,384. Amortization expense of the
non-compete agreement totaled $43,750 in 2003. The former Chief Executive
Officer of DPT terminated his employment with the Company effective May 2004.
The following unaudited pro forma condensed consolidated results of operations
for the years ended December 31, 2003 and 2002 assumes the acquisition of DPT
occurred as of October 1, 2002, the date which DPT began operations. The
unaudited pro forma information is not necessarily indicative of the results of
operations of the combined company had these events occurred at the beginning of
the periods presented, nor is it necessarily indicative of future results.
Years ended December 31, 2003 2002
------- ------
Net Revenue $ 6,076,000 $ 7,770,000
Net Loss (11,116,000) (2,860,000)
Basic and diluted net loss per common share $ (0.50) $ (0.09)
ACQUISITION OF VOIP ASSETS
On November 14, 2002, the Company acquired certain VoIP assets from an
entrepreneur. In exchange for the assets, the Company issued warrants to acquire
1,750,000 shares of its Common Stock and an additional 425,000 warrants as part
of an earn-out arrangement upon the attainment of certain performance targets by
December 31, 2003. None of the performance targets had been attained as of
December 31, 2003, resulting in the forfeiture of the 425,000 warrants. In
conjunction with the acquisition, E&C Capital Partners, LLLP, a privately held
investment holding company owned by our Chairman and Chief Executive Officer,
Michael S. Egan, and our President, Edward A. Cespedes, entered into a
non-binding letter of intent with theglobe.com to provide new financing in the
amount of $500,000 through the purchase of Series F Preferred Stock. Refer to
Note 9, "Stockholders' Equity," for further details.
As a result of the Company's review of certain long-lived assets for impairment,
the unamortized value of the assets acquired was written-off effective December
31, 2004. See Notes 3, "Impairment Charges," and 5, "Intangible Assets," for
further details.
F-22
DISPOSITION OF WEBSITE
On February 27, 2002, the Company sold all of the assets used in connection with
the Happy Puppy website for $135,000, resulting in the recognition of a gain on
the sale of $134,500.
NOTE 5. INTANGIBLE ASSETS
The components of intangible assets were as follows:
June 30, 2005 December 31, 2004 December 31, 2003
--------------------------- --------------------------- --------------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
---------- ---------- ---------- ---------- ---------- ----------
Amortized Intangible (UNAUDITED)
Assets:
Non-compete agreements $2,364,011 $ 318,800 $1,800,000 $ 120,000 $ -- $ --
Digital telephony -- -- -- -- 227,452 28,432
---------- ---------- ---------- ---------- ---------- ----------
$2,364,011 $ 318,800 $1,800,000 $ 120,000 $ 227,452 $ 28,432
========== ========== ========== ========== ========== ==========
As discussed in Note 4, "Acquisitions and Dispositions," certain executives of
SendTec entered into new employment agreements with SendTec upon the acquisition
of SendTec by theglobe.com. The agreements contain certain non-compete
provisions for periods as specified by the agreements. The $1,800,000 value
assigned to the non-compete agreements is being amortized on a straight-line
basis over five years. In addition, upon the May 9, 2005 acquisition of
Tralliance, the existing CEO and CFO of Tralliance entered into employment
agreements which include certain non-compete provisions as specified by the
agreements. The $564,011 (unaudited) value assigned to the non-compete
agreements is being amortized on a straight-line basis over five years.
As discussed in Note 3, "Impairment Charges," the Company performed an
evaluation of the recoverability of the long-lived assets of its VoIP telephony
services division. As a result, effective December 31, 2004, the Company
wrote-off the unamortized balance of its digital telephony assets which totaled
$192,106. Such assets consisted of certain VoIP assets which were recorded at
the value assigned to the warrants to acquire 1,750,000 shares of the Company's
Common Stock issued in connection with the acquisition of the assets on November
14, 2002 and patent application costs.
During the six months ended June 30, 2005 and 2004, intangible asset
amortization totaled $198,800 (unaudited) and $42,343 (unaudited). During the
year ended December 31, 2004, intangible asset amortization totaled $222,834,
including $102,834 of amortization related to the digital telephony intangible
assets prior to their write-off as of December 31, 2004. Intangible asset
amortization expense totaled $72,182 for the year ended December 31, 2003,
including $43,750 of amortization related to the non-compete agreement recorded
in connection with the acquisition of DPT. As discussed in Note 3, "Impairment
Charges," the Company wrote-off the $331,250 unamortized balance of the
non-compete agreement as of December 31, 2003. There was no amortization expense
for intangible assets during the year ended December 31, 2002. As of December
31, 2004, annual intangible asset amortization expense was projected to be as
follows:
Year ending December 31,
2005 $ 360,000
2006 360,000
2007 360,000
2008 360,000
2009 240,000
----------
$1,680,000
==========
F-23
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 30, December 31,
----------- --------------------------
2005 2004 2003
---------- ---------- ----------
(Unaudited)
VoIP network equipment and software $3,056,972 $2,929,051 $1,712,537
Other equipment 1,231,009 1,127,910 679,597
Capitalized software costs 782,842 750,056 690,602
Land and building 181,110 181,110 181,110
Furniture and fixtures 362,470 348,888 149,714
Leasehold improvements 18,798 18,798 9,402
---------- ---------- ----------
5,633,201 5,355,813 3,422,962
Less: Accumulated depreciation and
amortization 2,701,986 1,949,443 1,006,579
---------- ---------- ----------
$2,931,215 $3,406,370 $2,416,383
========== ========== ==========
See Note 3, "Impairment Charges," for a discussion of write-offs recorded during
2004 in connection with the Company's evaluation of the recoverability of the
VoIP telephony services division's long-lived assets. The 2004 impairment charge
included the write-off of the carrying value of amounts previously capitalized
by the division as internal-use software and website development costs, as well
as certain other property and equipment, which totaled $1,469,869.
F-24
NOTE 7. DEBT
Debt consisted of the following:
June 30, December 31,
---------- --------------------------
2005 2004 2003
---------- ---------- ----------
(Unaudited)
10% Convertible Promissory Notes; due on demand $3,000,000 $ -- $ --
4% Subordinated promissory note; interest and principal due
September 1, 2005 1,000,009 1,000,009 --
10% Convertible Notes; interest and principal due May 2004 -- -- 1,750,000
Promissory notes issued in
connection with the
acquisition of DPT; interest
and principal due May 2005;
interest at prime rate (5.25%
and 4.00% at December 31,
2004 and 2003,
respectively); repaid June 2005 -- 100,000 100,000
Mortgage note payable; interest payable monthly at 9%;
principal due September 2005 70,052 73,351 82,612
Related party obligations payable in Canadian dollars; due in
monthly installments of principal and interest approximating
$3,500 through September 2006; interest at prime plus 2-3% 47,520 69,233 102,916
Financing of computer software and related maintenance costs;
quarterly installments of principal and interest
approximating $21,400 through September 2005 21,062 61,809 --
---------- ---------- ----------
4,138,643 1,304,402 2,035,528
Less: unamortized debt discount -- -- 121,041
Less: short-term portion 4,131,379 1,277,405 121,919
---------- ---------- ----------
Long-term portion $ 7,264 $ 26,997 $1,792,568
========== ========== ==========
Reference should be made to Note 16, "Subsequent Events," for the discussion of
a Note Purchase Agreement entered into by certain related parties and
theglobe.com on April 22, 2005, providing for the issuance of an aggregate of
$4,000,000 of secured demand convertible promissory notes.
As discussed in Note 4, "Acquisitions and Dispositions," on September 1, 2004
the Company issued a subordinated promissory note in the amount of $1,000,009 in
connection with the acquisition of SendTec. The Company has not paid the
principal and interest due on the promissory note by the due date (including the
grace period) and as a result is currently in default under the promissory note.
Upon default, the Company is required to pay a default interest rate of 15% per
annum and to pay the noteholders' collection costs, if any.
On February 2, 2004, our Chairman and Chief Executive Officer and his spouse,
entered into a Note Purchase Agreement with the Company pursuant to which they
acquired a demand convertible promissory note (the "Bridge Note") in the
aggregate principal amount of $2,000,000. The Bridge Note was convertible into
shares of the Company's Common Stock. The Bridge Note provided for interest at
the rate of ten percent per annum and was secured by a pledge of substantially
all of the assets of the Company. Such security interest was shared with the
holders of the Company's $1,750,000 Secured Convertible Notes issued to E&C
Capital Partners, LLLP and certain affiliates of our Chairman and Chief
Executive Officer. In addition, the Chairman and Chief Executive Officer and his
spouse were issued a warrant to acquire 204,082 shares of the Company's Common
Stock at an exercise price of $1.22 per share. The Warrant is exercisable at any
time on or before February 2, 2009. The exercise price of the Warrant, together
with the number of shares for which such Warrant is exercisable, is subject to
adjustment upon the occurrence of certain events.
F-25
An allocation of the proceeds received from the issuance of the Bridge Note was
made between the debt instrument and the Warrant by determining the pro rata
share of the proceeds for each by comparing the fair value of each security
issued to the total fair value. The fair value of the Warrant was determined
using the Black Scholes model. The fair value of the Bridge Note was determined
by measuring the fair value of the common shares on an "as-converted" basis. As
a result, $170,000 was allocated to the Warrant and recorded as a discount on
the debt issued and additional paid in capital. The value of the beneficial
conversion feature of the Bridge Note was calculated by comparing the fair value
of the underlying common shares of the Bridge Note on the date of issuance based
on the closing price of our Common Stock as reflected on the OTCBB to the
"effective" conversion price. This resulted in a beneficial conversion discount
of $517,000, which was recorded as interest expense in the accompanying
consolidated statement of operations for the year ended December 31, 2004 as the
Bridge Note was immediately convertible into common shares. In addition, the
value allocated to the Warrant and characterized as discount on the Bridge Note
was recognized as interest expense, as the Bridge Note was due on demand.
In connection with the March 2004 private offering of the Company's Common
Stock, the Chairman and his spouse converted the Bridge Note into 3,527,337
shares of theglobe.com Common Stock.
On May 22, 2003, E&C Capital Partners, LLLP, together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired convertible promissory notes (the "Secured
Convertible Notes") in the aggregate principal amount of $1,750,000. The Secured
Convertible Notes were convertible at anytime into a maximum of approximately
19,444,000 shares of the Company's Common Stock at a blended rate of $0.09 per
share. The Secured Convertible Notes had a one year maturity date and were
secured by a pledge of substantially all of the assets of the Company. The
Secured Convertible Notes provided for interest at the rate of ten percent per
annum, payable semi-annually. Effective October 3, 2003, the holders of the
Secured Convertible Notes waived the right to receive accrued interest payable
in shares of the Company's Common Stock. Additionally, each of the holders of
the Secured Convertible Notes agreed to defer receipt of interest until June 1,
2004. Additional interest at ten percent per annum accrued on any interest
amounts deferred. The outstanding balance of the Secured Convertible Notes as of
December 31, 2003, has been reflected as long-term debt in the accompanying
consolidated balance sheet as a result of the conversion of the Secured
Convertible Notes into the Company's Common Stock in March 2004.
In addition, E&C Capital Partners, LLLP was issued a warrant (the "Warrant") to
acquire 3,888,889 shares of the Company's Common Stock at an exercise price of
$0.15 per share. The Warrant was exercisable at any time on or before May 22,
2013. An allocation of the proceeds received from the issuance of the Secured
Convertible Notes was made between the debt instruments and the Warrant by
determining the pro-rata share of the proceeds for each by comparing the fair
value of each security issued to the total fair value. The fair value of the
Warrant was determined using the Black Scholes model. The fair value of the
Secured Convertible Notes was determined by measuring the fair value of the
common shares on an "as-converted" basis. As a result, $290,500 was allocated to
the Warrant and recorded as a discount on the debt issued and additional paid in
capital. The value of the beneficial conversion feature of the Secured
Convertible Notes was calculated by comparing the fair value of the underlying
common shares of the Secured Convertible Notes on the date of issuance based on
the closing price of our Common Stock as reflected on the OTCBB to the
"effective" conversion price. This resulted in a preferential conversion
discount, limited to the previously discounted value of the Secured Convertible
Notes, of $1,459,500, which was recorded as interest expense in the accompanying
consolidated statement of operations for the year ended December 31, 2003, as
the Secured Convertible Notes were immediately convertible into common shares.
Effective May 26, 2005, the maturity date of the mortgage note payable was
extended to September 30, 2005.
Repayment of debt is due as follows:
Year ending December 31,
2005 $1,277,405
2006 26,997
----------
$1,304,402
==========
F-26
NOTE 8. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2005 and
December 31, 2004 and 2003 are presented below.
June 30, December 31, December 31,
2005 2004 2003
------------ ------------ ------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 64,336,000 $ 61,300,000 $ 57,642,000
Allowance for doubtful accounts 579,000 483,000 244,000
Issuance of warrants 1,228,000 1,052,000 982,000
Inventory reserve 119,000 661,000 43,000
Offering costs 105,000 105,000 --
Depreciation and amortization 234,000 46,000 (230,000)
Other 11,000 153,000 80,000
------------ ------------ ------------
Total gross deferred tax assets 66,612,000 63,800,000 58,761,000
Less: valuation allowance (66,612,000) (63,800,000) (58,761,000)
------------ ------------ ------------
Total net deferred tax assets $ -- $ -- $ --
============ ============ ============
Because of the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a 100% valuation allowance. The valuation allowance
for net deferred tax assets was $66.6 million as of June 30, 2005 and $63.8
million and $58.8 million as of December 31, 2004 and 2003, respectively. The
net change in the total valuation allowance was $2.8 million for the period
ended June 30, 2005 and $5.0 million and $4.0 million for the years ended
December 31, 2004 and 2003, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets,
which consist of tax benefits primarily from net operating loss carryforwards,
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Of the total valuation
allowance of $63.8 million as of December 31, 2004, subsequently recognized tax
benefits, if any, in the amount of $6.5 million will be applied directly to
contributed capital.
At December 31, 2004, the Company had net operating loss carryforwards available
for U.S. and foreign tax purposes of approximately $162 million. These
carryforwards expire through 2024.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),
the utilization of net operating loss carryforwards may be limited under the
change in stock ownership rules of the Code. As a result of ownership changes,
which occurred in August 1997 and May 1999, the Company's private offering in
March 2004 (together with the exercise and conversion of various securities in
connection with such private offering) and the issuance of Common Stock in
connection with the acquisition of SendTec on September 1, 2004, the Company may
have substantially limited or eliminated the availability of its net operating
loss carryforwards. There can be no assurance that the Company will be able to
avail itself of any net operating loss carryforwards.
NOTE 9. STOCKHOLDERS' EQUITY
Reference should be made to Note 16, "Subsequent Events," for the discussion of
a Note Purchase Agreement entered into by certain related parties and
theglobe.com on April 22, 2005, providing for the issuance of an aggregate of
$4,000,000 of secured demand convertible promissory notes. The convertible
promissory notes are convertible at the option of the noteholders into shares of
the Company's Common Stock at an initial price of $0.05 per share. Assuming full
conversion of all of the convertible promissory notes which remain outstanding
as of September 15, 2005, 68,000,000 shares of the Company's Common Stock would
be issued to the noteholders.
F-27
As more fully described in Note 4, "Acquisitions and Dispositions," and Note 16,
"Subsequent Events," on May 9, 2005, the Company exercised its option to acquire
all of the outstanding capital stock of Tralliance. The purchase price consisted
of the issuance of 2,000,000 shares of theglobe.com Common Stock and warrants to
acquire 475,000 shares of theglobe.com Common Stock, as well as the payment of
$40,000 in cash. The warrants are exercisable for a period of five years at an
exercise price of $0.11 per share. The Common Stock issued as a result of the
acquisition of Tralliance is entitled to certain "piggy-back" registration
rights.
As discussed in Note 4, "Acquisitions and Dispositions," on September 1, 2004,
the Company closed upon an agreement and plan of merger dated August 31, 2004,
pursuant to which the Company acquired all of the issued and outstanding shares
of capital stock of SendTec. As part of the purchase price paid for SendTec, the
Company issued an aggregate of 17,500,024 shares of the Company's Common Stock
and an aggregate of 175,000 shares of Series H Automatically Converting
Preferred Stock (which were converted into approximately 17,500,500 shares of
the Company's Common Stock effective December 1, 2004). In addition, warrants to
acquire shares of theglobe.com Common Stock with an exercise price of $0.27 per
share would be issued to the former shareholders of SendTec when and if SendTec
exceeds forecasted operating income, as defined, of $10.125 million, for the
year ending December 31, 2005. The number of earn-out warrants would range from
an aggregate of approximately 250,000 to 2,500,000 (if actual operating income
exceeds the forecast by at least 10%) and the earn-out warrants will be
exercisable for a period of five years.
Each share of the Series H Preferred Stock was automatically converted into 100
shares of theglobe's Common Stock on December 1, 2004, the effective date of the
amendment to the Company's certificate of incorporation increasing its
authorized shares of Common Stock from 200,000,000 shares to 500,000,000 shares.
The Company agreed to file a registration statement relating to the resale of
the shares of Common Stock issued in the Merger and the shares of Common Stock
underlying the Series H Preferred Stock and to cause the effectiveness of such
registration on or before September 1, 2005. The Company also agreed to keep the
registration statement effective until at least the third anniversary of the
Closing. We have not yet filed such a registration statement. Because we have
not filed and caused such registration statement to become effective before
September 1, 2005, we may be held liable for damages suffered by holders of such
stock. Upon registration all such shares will be eligible for resale over the
open market. Even if not registered, the shares issued in the SendTec
acquisition are eligible for resale over the public markets pursuant to and
subject to the limitations of Rule 144. Pursuant to the terms of the Merger, in
general, the equity securities issued in the Merger may not be sold or otherwise
transferred for a period of one year without the prior written consent of the
Company.
As more fully described in Note 16, "Subsequent Events," the Company has agreed
to redeem approximately 28,900,000 shares of Common Stock originally issued upon
the acquisition of SendTec.
In March 2004, theglobe.com completed a private offering of 333,816 units (the
"Units") for a purchase price of $85 per Unit (the "Private Offering"). Each
Unit consisted of 100 shares of the Company's Common Stock, $0.001 par value
(the "Common Stock"), and warrants to acquire 50 shares of the Company's Common
Stock (the "Warrants"). The Warrants are exercisable for a period of five years
commencing 60 days after the initial closing at an initial exercise price of
$0.001 per share. The aggregate number of shares of Common Stock issued in the
Private Offering was 33,381,647 shares for an aggregate consideration of
$28,374,400, or approximately $0.57 per share assuming the exercise of the
16,690,824 Warrants. As of June 30, 2005 and December 31, 2004, approximately
929,000 (unaudited) and 11,440,000 of the Warrants remain outstanding.
The Private Offering was directed solely to investors who are sophisticated and
accredited within the meaning of applicable securities laws, most of whom were
not affiliates of the Company. The purpose of the Private Offering was to raise
funds for use primarily in the Company's developing VoIP business, including the
deployment of networks, website development, marketing and capital
infrastructure expenditures and working capital. Other intended uses of proceeds
included funding requirements in connection with theglobe's other existing or
future business operations, including acquisitions.
Halpern Capital, Inc., acted as placement agent for the Private Offering, and
was paid a commission of $1.2 million and issued a warrant to acquire 1,000,000
shares of Common Stock at $0.001 per share. As of both June 30, 2005 and
December 31, 2004, approximately 121,000 of these warrants remain outstanding.
Pursuant to the terms of the Private Offering, the Company filed a registration
statement relating to the resale of the Securities on April 16, 2004 which
became effective on May 11, 2004.
F-28
In connection with the Private Offering, Michael S. Egan, our Chairman, Chief
Executive Officer and principal stockholder, together with certain of his
affiliates, including E&C Capital Partners, LLLP, converted a $2,000,000
Convertible Bridge Note, $1,750,000 of Secured Convertible Notes and all of the
Company's outstanding shares of Series F Preferred Stock, and exercised (on a
"cashless" basis) all of the warrants issued in connection with the foregoing
$1,750,000 Secured Convertible Notes and Series F Preferred Stock, together with
certain warrants issued to Dancing Bear Investments, Inc., an affiliate of Mr.
Egan. As a result of such conversions and exercises, the Company issued an
aggregate of 48,775,909 additional shares of Common Stock.
On July 2, 2003, the Company completed a private offering of 17,360 shares of
Series G Automatically Converting Preferred Stock ("Series G Preferred Stock")
and warrants to acquire 3,472 shares of Series G Preferred Stock at a purchase
price of $500 per share for a total of $8,680,000 in gross proceeds. Each share
of Series G Preferred Stock was automatically converted into 1,000 shares of
theglobe's Common Stock on July 29, 2003, the effective date of the amendment to
the Company's certificate of incorporation increasing its authorized shares of
Common Stock from 100,000,000 shares to 200,000,000 shares (the "Capital
Amendment"). Similarly, upon the effective date of the Capital Amendment, each
warrant to acquire a share of the Series G Preferred Stock was automatically
converted into a warrant to acquire 1,000 shares of Common Stock. The warrants
are exercisable for a period of 5 years at an initial exercise price of $1.39
per share. A total of 17,360,000 shares of Common Stock were issued pursuant to
the Series G Preferred Stock private offering, while, subject to certain
adjustment mechanisms, a total of 3,472,000 shares of Common Stock will be
issuable upon exercise of the associated warrants.
At the time of the issuance of the Series G Preferred Stock, an allocation of
proceeds received was made between the preferred shares and the associated
warrants. The allocation was made by determining the pro-rata share of the
proceeds for each by comparing the fair value of each security issued to the
total fair value. The fair value of the warrants was determined using the Black
Scholes model. The fair value of the Series G Preferred Stock was determined by
measuring the fair value of the common shares on an "as-converted" basis. As a
result, $1,365,000 was allocated to the warrants sold. In addition, the value of
the preferential conversion was calculated by comparing the fair value of the
underlying common shares based on the closing price of the Company's Common
Stock as reflected on the OTCBB on the date of issuance to the "effective"
conversion price. This resulted in a preferential conversion discount related to
the preferred shares and the associated warrants, limited to the proceeds from
the sale, of $7,315,000 and $305,000, respectively, which were recorded as
dividends to the preferred stockholders in July 2003, as the preferred shares
and associated warrants were immediately convertible into common shares and
warrants to acquire common shares.
As more fully discussed in Note 7, "Debt," on May 22, 2003, Secured Convertible
Notes totaling $1,750,000 were issued to E&C Capital Partners, LLLP together
with certain affiliates of Michael S. Egan. The Secured Convertible Notes were
convertible at anytime into a maximum of approximately 19,444,000 shares of the
Company's Common Stock at a blended rate of $0.09 per share. In addition, E&C
Capital Partners, LLLP was issued a warrant to acquire 3,888,889 shares of the
Company's Common Stock at an exercise price of $0.15 per share. The warrant was
exercisable at any time on or before May 22, 2013.
On March 28, 2003, E&C Capital Partners, LLLP entered into a Preferred Stock
Purchase Agreement with the Company (the "Preferred Stock Investment"), whereby
E&C Capital Partners, LLLP received 333,333 shares of Series F Preferred Stock
convertible into shares of the Company's Common Stock at a price of $0.03 per
share. If fully converted, and without regard to the anti-dilutive adjustment
mechanisms applicable to the Series F Preferred Stock, an aggregate of
approximately 16,667,000 shares of Common Stock could be issued. The Series F
Preferred Stock had a liquidation preference of $1.50 per share (and thereafter
participates with the holders of Common Stock on an "as-converted" basis),
included a dividend at the rate of 8% per annum and entitled the holder to vote
on an "as-converted" basis with the holders of Common Stock. In addition, as
part of the $500,000 investment, E&C Capital Partners, LLLP received warrants to
purchase 3,333,333 shares of the Company's Common Stock at an exercise price of
$0.125 per share. The warrants were exercisable at any time on or before March
28, 2013.
The proceeds attributable to the issuance of the Series F Preferred Stock and
the related warrants were allocated to each security in the same manner as
described in the discussion of the Series G Preferred Stock. As a result,
$83,000 was allocated to the warrants sold. In addition, the value of the
preferential conversion was calculated by comparing the fair value of the
underlying common shares on the date of issuance based on the closing price of
the Company's Common Stock as reflected on the OTCBB to the "effective"
conversion price. This resulted in a preferential conversion discount, limited
to the proceeds from the sale, of $417,000. The sum of the two discounts,
$500,000, was recorded as a dividend to the preferred stockholders in March
2003, as the preferred shares were immediately convertible into common shares.
F-29
As a result of the issuance of the Series F Preferred Stock, the Series G
Automatically Converting Preferred Stock, the $1,750,000 Secured Convertible
Notes and the associated warrants at their respective conversion and exercise
prices, certain anti-dilution provisions applicable to previously outstanding
warrants to acquire approximately 4,103,000 shares of the Company's Common Stock
were triggered. Like many types of warrants commonly issued, these outstanding
warrants to acquire shares of the Company's Common Stock included weighted
average anti-dilution provisions which result in a lowering of the exercise
price, and an increase in the number of warrants to acquire shares of the
Company's Common Stock any time shares of common stock are issued (or options or
other securities exercisable or convertible into common stock) for a price per
share less than the then exercise price of the warrants. As a result of the
Preferred Stock Investment and the issuance of the Series G Preferred Stock and
the Secured Convertible Notes, the exercise price was lowered from approximately
$1.39 to $0.66 per share on these warrants and the number of shares issuable
upon exercise was proportionally increased from approximately 4,103,000 shares
to 6,836,000 shares. As stated previously, all of these warrants were exercised
on a cashless basis in connection with the March 2004 Private Offering of the
Company's Common Stock.
Certain holders of Common Stock are subject to substantial restrictions on the
transfer or sale of shares and also have certain "piggy-back" and demand
registration rights which, with certain exceptions, require the Company to make
all reasonable efforts to include within any of the Company's registration
statements to sell such securities any shares that have been requested to be so
included.
NOTE 10. STOCK OPTION PLANS
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the Board of Directors in December 1996 and
August 1997. Under the Amended Plan, a total of 1,582,000 common shares were
reserved for issuance. Any incentive stock options granted under the Amended
Plan were required to be granted at the fair market value of the Company's
Common Stock at the date the option was issued.
Under the Company's 1998 Stock Option Plan (the "1998 Plan") a total of
3,400,000 common shares were reserved for issuance and provides for the grant of
"incentive stock options" intended to qualify under Section 422 of the Code and
stock options which do not so qualify. The granting of incentive stock options
is subject to limitation as set forth in the 1998 Plan. Directors, officers,
employees and consultants of the Company and its subsidiaries are eligible to
receive grants under the 1998 Plan.
In January 2000, the Board adopted the 2000 Broad Based Employee Stock Option
Plan (the "Broad Based Plan"). Under the Broad Based Plan, 850,000 shares of
Common Stock were reserved for issuance. The intention of the Broad Based Plan
is that at least 50% of the options granted will be to individuals who are not
managers or officers of theglobe. In April 2000, the Company's 2000 Stock Option
Plan (the "2000 Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company. The 2000 Plan authorized the issuance of 500,000
shares of Common Stock, subject to adjustment as provided in the 2000 Plan. The
Broad Based Plan and the 2000 Plan provide for the grant of "incentive stock
options" intended to qualify under Section 422 of the Code and stock options
which do not so qualify. The granting of incentive stock options is subject to
limitation as set forth in the Broad Based Plan and the 2000 Plan. Directors,
officers, employees and consultants of the Company and its subsidiaries are
eligible to receive grants under the Broad Based Plan and the 2000 Plan.
In September 2003, the Board adopted the 2003 Sales Representative Stock Option
Plan (the "2003 Plan") which authorized the issuance of up to 1,000,000
non-qualified stock options to purchase the Company's Common Stock to sales
representatives who are not employed by the Company or its subsidiaries. In
January 2004, the Board amended the 2003 Plan to include certain employees and
consultants of the Company.
The Company's Board of Directors adopted a new benefit plan entitled the 2004
Stock Incentive Plan (the "2004 Plan") on August 31, 2004. An aggregate of
7,500,000 shares of the Company's Common Stock may be issued pursuant to the
2004 Plan. Employees, consultants, and prospective employees and consultants of
theglobe and its affiliates and non-employee directors of theglobe are eligible
for grants of non-qualified stock options, stock appreciation rights, restricted
stock awards, performance awards and other stock-based awards under the 2004
Plan.
On December 1, 2004, based upon approval of the stockholders of the Company, the
2000 Plan was amended and restated to (i) increase the number of shares reserved
for issuance under the 2000 Plan by 7,500,000 shares to a total of 8,000,000
shares and (ii) to remove a previous plan provision that limited the number of
options that may be awarded to any one individual.
F-30
In accordance with the provisions of the Company's stock option plans,
nonqualified stock options may be granted to officers, directors, other
employees, consultants and advisors of the Company. The option price for
nonqualified stock options shall be at least 85% of the fair market value of the
Company's Common Stock. In general, options granted under the Company's stock
option plans expire after a ten-year period and in certain circumstances
options, under the 1995 and 1998 plans, are subject to the acceleration of
vesting. Incentive options granted to stockholders who own greater than 10% of
the total combined voting power of all classes of stock of the Company must be
issued at 110% of the fair market value of the stock on the date the options are
granted. A committee selected by the Company's Board of Directors has the
authority to approve optionees and the terms of the stock options granted,
including the option price and the vesting terms.
A total of 5,584,750 (unaudited) stock options were granted during the six
months ended June 30, 2005, including grants of 650,000 stock options to
non-employees. A total of 1,285,000 (unaudited) stock options were granted
during the six months ended June 30, 2004, including grants of 215,000
(unaudited) stock options to non-employees.
As discussed in Note 4, "Acquisitions and Dispositions," pursuant to the
agreement and plan of merger in connection with the acquisition of SendTec on
September 1, 2004, the Company issued an aggregate of 3,974,165 replacement
options to acquire shares of theglobe's Common Stock for each of the issued and
outstanding options to acquire shares of SendTec common stock held by employees
of SendTec. Of these replacement options, 3,273,668 have exercise prices of
$0.06 and 700,497 have exercise prices of $0.27 per share. The Company also
agreed to grant an aggregate of 225,000 options to employees of SendTec and
25,000 options to a consultant of SendTec at an exercise price of $0.34 per
share under similar terms as other stock option grants of theglobe. The Company
also granted 1,000,000 stock options at an exercise price of $0.27 per share in
connection with the establishment of a bonus option pool pursuant to which
various employees of SendTec could vest in such options if SendTec exceeds
forecasted operating income, as defined, of $10.125 million, for the year ending
December 31, 2005. Due to the contingent nature of the 1,000,000 bonus pool
stock options, no amounts have been recognized in the results of operations for
the years ended December 31, 2004.
Reference should be made to Note 16, "Subsequent Events," for discussion of the
Company's intent to terminate and cancel certain stock options issued to members
of the management of SendTec in connection with the sale of the assets and
business of SendTec.
Excluding the aforementioned stock options issued in connection with the
acquisition of SendTec, a total of 2,525,430 stock options were granted during
the year ended December 31, 2004, including grants of 390,000 stock options to
non-employees. Options were granted during 2003 for a total of 4,407,450 shares
of Common Stock, of which 500,000 options were granted pursuant to an individual
nonqualified stock option agreement and not pursuant to any of the plans
described above. During 2002, a total of 5,347,500 stock options were granted,
of which 5,175,000 were granted pursuant to individual nonqualified stock
options agreements and not pursuant to any of the plans described above.
The Company applies APB Opinion No. 25 in accounting for grants to employees
pursuant to stock option plans and, accordingly, compensation cost of $339,870
(unaudited) was recorded during the six months ended June 30, 2005, primarily
related to vesting of prior year employee option grants with below-market
exercise prices. During the year ended December 31, 2004, $421,952 was
recognized for stock options granted to employees at exercise prices below fair
market value, including those issued in connection with the SendTec acquisition.
During the year ended December 31, 2003, $233,750 was recognized for stock
options granted to employees at exercise prices below fair market value. No
stock options were granted to employees with exercise prices below fair market
value during 2002. In addition, $28,000 (unaudited), $17,188 and $152,884 of
stock compensation expense was recorded during the six months ended June 30,
2005 and the years ended December 31, 2004 and 2003, respectively, as a result
of the accelerated vesting of stock options issued to certain terminated
employees. Compensation cost recognized in connection with stock options granted
in recognition of services rendered by non-employees was $139,597 (unaudited),
$463,775, $225,609, and $13,000 for the six months ended June 30, 2005 and the
years ended December 31, 2004, 2003 and 2002, respectively.
In 2000, the Company repriced a group of stock options issued to its employees.
The Company is accounting for these re-priced stock options using variable
accounting in accordance with FIN No. 44. No compensation expense was recorded
in connection with the re-priced stock options during the six months ended June
30, 2005 and 2004 (unaudited). The stock based compensation recorded in
connection with these re-priced stock options was a credit of $22,666 for the
year ended December 31, 2004 and expense of $30,933 for the year ended December
31, 2003. There was no compensation charge relating to the re-priced options
during the year ended December 31, 2002. At June 30, 2005 and December 31, 2004,
a total of 29,060 (unaudited) and 42,010 options remained outstanding which were
being accounted for in accordance with FIN No. 44.
F-31
Stock option activity during the periods indicated was as follows:
Weighted
Options Total Average
Vested Options Exercise Price
--------- ---------- --------------
Outstanding at December 31, 2001 3,104,349 $5.77
Granted 5,347,500 0.02
Exercised -- --
Canceled (2,480,409) 3.31
--------------
Outstanding at December 31, 2002 5,870,749 5,971,440 0.63
==========
Granted 4,407,450 0.80
Exercised (429,000) 0.28
Canceled (7,080) 1.07
--------------
Outstanding at December 31, 2003 8,475,232 9,942,810 0.72
==========
Granted 7,749,595 0.30
Exercised (639,000) 0.29
Canceled (1,069,220) 0.96
--------------
Outstanding at December 31, 2004 11,784,625 15,984,185 0.51
==========
Granted (unaudited) 5,584,750 0.12
Exercised (unaudited) (218,226) 0.01
Canceled (unaudited) (1,048,742) 0.62
--------------
Outstanding at June 30, 2005 (unaudited) 16,292,472 20,301,967 $0.41
========== ============== ====
Options available at December 31, 2002 4,259,547
==============
Options available at December 31, 2003 1,359,177
==============
Options available at December 31, 2004 10,203,732
==============
Options available at June 30, 2005 (unaudited) 4,850,294
==============
F-32
The weighted average exercise prices and remaining lives of outstanding stock
options and weighted average exercise prices of vested stock options as of June
30, 2005 were as follows (unaudited):
Options Outstanding Options Vested
--------------------------- -------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range Outstanding Life Price Vested Price
------------- -------------- ------ -------- ------------ ---------
$ .02 - $ .02 4,875,000 7.1 $ 0.02 4,875,000 $ 0.02
.035- .035 200,000 6.9 0.035 200,000 0.035
.04 - .05 47,500 6.7 0.05 38,765 0.05
.06 - .06 3,089,674 8.0 0.06 2,093,781 0.06
.11 - .13 5,473,750 9.8 0.12 4,293,438 0.12
.14 - .18 145,000 8.3 0.15 117,500 0.14
.22 - .34 1,874,973 6.1 0.28 726,760 0.27
.37 - .49 639,430 9.3 0.42 526,187 0.42
.52 - .54 318,000 9.1 0.52 130,500 0.52
.56 - .56 1,650,000 7.9 0.56 1,650,000 0.56
.63 - .65 85,000 7.9 0.63 63,754 0.63
.90 - 1.03 392,500 8.6 0.98 362,036 0.99
1.14 - 1.29 328,500 6.6 1.23 293,198 1.23
1.33 - 1.47 152,500 8.2 1.41 109,220 1.41
1.50 - 1.52 526,500 8.3 1.50 308,693 1.50
1.59 - 1.59 12,640 4.7 1.59 12,640 1.59
1.72 - 2.50 38,500 5.9 2.25 38,500 2.25
4.50 - 6.69 332,500 3.2 4.69 332,500 4.69
15.75 -15.75 120,000 3.5 15.75 120,000 15.75
------------- -------------
20,301,967 16,292,472
============= =============
The weighted average exercise prices and remaining lives of outstanding stock
options and weighted average exercise prices of vested stock options as of
December 31, 2004 were as follows:
Options Outstanding Options Vested
--------------------------- -------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range Outstanding Life Price Vested Price
------------- -------------- ------ -------- ------------ ---------
$ .01 - $ .02 5,075,000 7.5 $ 0.02 4,875,000 $ 0.02
.035- .035 200,000 7.4 0.035 200,000 0.035
.04 - .05 47,500 7.2 0.05 32,825 0.05
.06 - .06 3,273,668 8.4 0.06 1,979,873 0.06
.14 - .14 105,000 8.3 0.14 105,000 0.14
.23 - .34 2,045,497 6.5 0.28 555,748 0.28
.37 - .49 750,430 9.8 0.42 493,394 0.43
.52 - .54 327,000 9.5 0.52 101,737 0.53
.56 - .56 1,650,000 8.4 0.56 1,650,000 0.56
.63 - .65 210,000 8.4 0.63 178,128 0.63
.90 - 1.03 625,000 9.1 0.97 489,844 0.98
1.14 - 1.29 428,500 7.5 1.24 290,230 1.24
1.33 - 1.47 212,500 8.7 1.41 122,501 1.41
1.50 - 1.52 526,500 8.8 1.50 202,755 1.50
1.59 - 1.59 16,590 5.2 1.59 16,590 1.59
1.72 - 2.50 38,500 6.3 2.25 38,500 2.25
4.50 - 6.69 332,500 3.7 4.69 332,500 4.69
15.75 -15.75 120,000 4.0 15.75 120,000 15.75
------------- -------------
15,984,185 11,784,625
============= =============
F-33
NOTE 11. COMMITMENTS AND CONTINGENCIES
NETWORK COMMITMENTS
The Company and its subsidiaries are a party to various network service
agreements which provide for specified services, including the use of secure
data transmission facilities, capacity and other network carrier services. The
term of the agreements are generally for one year, with the term of several
agreements extending to three or five years. Certain of the agreements contain
early cancellation penalties. Commitments under such network service agreements,
exclusive of regulatory taxes, fees and charges, are as follows:
Year ending December 31:
2005 $2,063,000
2006 873,000
2007 503,000
2008 202,000
2009 12,000
Thereafter --
----------
$3,653,000
==========
Commitments for minimum usage requirements of approximately $43,000 are included
in the total commitments amount for the year ended December 31, 2005. The
Company has recently terminated all other minimum usage requirement commitments
for which it was obligated under previous network carrier agreements.
PURCHASE OBLIGATIONS
Effective January 31, 2005, the Company formally terminated its contract with a
supplier of VoIP telephony handsets and agreed to settle the unconditional
purchase obligation under such contract, which totaled approximately $3,000,000.
The settlement provided for (i) a cash payment of $200,000, (ii) the return of
35,000 VoIP handset units from the Company's inventory, and (iii) the issuance
of 300,000 shares of theglobe.com Common Stock. The value attributed to the loss
on the settlement of the contractual obligation of $406,750 has been included in
the accompanying consolidated statement of operations for the year ended
December 31, 2004.
EMPLOYMENT AGREEMENTS
On August 1, 2003, the Company entered into employment agreements with its
Chairman and Chief Executive Officer, President and Vice President of Finance
(its former Chief Financial Officer). The three agreements, which are for a
period of one year and automatically extend for one day each day until either
party notifies the other not to further extend the employment period, provide
for annual base salaries totaling $650,000 and annual bonuses based on pre-tax
operating income, as defined, for an annual minimum of $100,000 in total. The
agreements also provide for severance benefits under certain circumstances, as
defined, which in the case of the Chairman and Chief Executive Officer and the
President, include lump-sum payments equal to ten times the sum of the
executive's base salary and the highest annual bonus earned by the executive,
and in the case of the Vice President of Finance, include lump-sum payments
equal to two times the sum of the executive's base salary and the highest annual
bonus earned by the executive. In addition, these severance benefits also
require the Company to maintain insurance benefits for a period of up to ten
years, in the case of the Chairman and Chief Executive Officer and the
President, and up to two years, in the case of the Vice President of Finance,
substantially equivalent to the insurance benefits existing upon termination.
Effective June 1, 2004, the annual base salary of the Vice President of Finance
was reduced to $140,000.
Effective in March 2005, the Company discontinued paying Mr. Egan's base salary,
at his request. The Company is obligated to pay all such deferred salary amounts
to Mr. Egan upon his demand. At June 30, 2005, deferred base salary payable to
Mr. Egan totaled approximately $80,800 (unaudited).
As discussed in Note 4, "Acquisitions and Dispositions," as part of the SendTec
acquisition transaction on September 1, 2004, certain executives of SendTec
entered into new employment agreements with SendTec. The employment agreements
each have a term of five years and automatically renew for an additional year at
expiration unless either party provides the requisite notice of non-renewal. The
agreements provide for total base salaries of $900,000 per annum and also
contain certain non-compete provisions for periods as specified by the
agreements.
F-34
On October 4, 2004, the Company entered into a new employment agreement with its
current Chief Technical Officer which provides for a base salary of $150,000 per
year. The agreement has a term of two years and automatically renews for an
additional two years unless either party provides the requisite notice of
non-renewal. The agreement also contains certain non-compete provisions and
provides for specified severance payments.
As discussed in Note 4, "Acquisitions and Dispositions," as part of the
Tralliance acquisition on May 9, 2005, the existing CEO and CFO of Tralliance
entered into employment agreements, which include certain non-compete
provisions, whereby each would agree to remain in the employ of Tralliance for a
period of two years in exchange for annual base compensation totaling $400,000
(unaudited) plus participation in a bonus pool based upon the pre-tax income of
the venture.
SEVERANCE AGREEMENT
In the second quarter of 2002, severance benefits of $699,833 were recorded and
paid. In connection with his termination, the former Chief Executive Officer was
paid $625,000 on May 31, 2002, reflecting the terms of his severance package.
Additionally, options to purchase 425,000 shares of the Company's Common Stock
at an exercise price of $0.035 per share (the closing price on May 6, 2002)
valued at $13,000 (calculated using Black-Scholes) were granted on May 6, 2002,
further reflecting the terms of his severance package. These options immediately
vested upon grant and have a life of ten years.
OPERATING LEASES
The Company leases facilities under noncancelable operating leases. These leases
generally contain renewal options and require the Company to pay certain
executory costs such as maintenance and insurance. Rent expense for the years
ended December 31, 2004, 2003 and 2002 totaled approximately $691,000, $326,000
and $73,000, respectively.
Effective September 1, 2003, the Company entered into a sublease agreement for
office space with a company controlled by our Chairman. The lease term is for
approximately four years with base rent of approximately $284,000 during the
first year of the sublease. Per the agreement, base rent increases by
approximately $23,000 per year thereafter. Rent expense for the year ended
December 31, 2004, as noted in the preceding paragraph included approximately
$334,000 of expense related to this sublease.
The approximate future minimum lease payments under noncancelable operating
leases with initial or remaining terms of one year or more at December 31, 2004,
were as follows:
2005 $ 867,000
2006 717,000
2007 433,000
2008 232,000
2009 232,000
Thereafter 39,000
----------
$2,520,000
==========
Tralliance Corporation, which was acquired May 9, 2005, subleases office space
in New York City on a month-to-month basis from an entity controlled by its
President and Chief Executive Officer for $3,160 per month.
TERMINATION OF 401(K) PLAN
During November 2002, the Company terminated its 401k plan.
SendTec, which was acquired on September 1, 2004, maintained a SIMPLE IRA
savings plan (the "Plan") for the benefit of all of SendTec's eligible employees
who had completed six months of service. The Plan allowed employees to make
certain tax deferred voluntary contributions and discretionary contributions by
SendTec. Approximately $33,000 in Plan contributions were made by SendTec since
its acquisition by theglobe. The Plan was terminated December 31, 2004.
F-35
LETTER OF CREDIT
At both June 30, 2005 (unaudited) and December 31, 2004, the Company had $20,000
in outstanding standby letters of credit used to support an agreement with one
of its telecommunications carriers.
LITIGATION
On and after August 3, 2001 and as of the date of this filing, the Company is
aware that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors (the
"Individual Defendants"), and several investment banks that were the
underwriters of the Company's initial public offering. The lawsuits were filed
in the United States District Court for the Southern District of New York.
The lawsuits purport to be class actions filed on behalf of purchasers of the
stock of the Company during the period from November 12, 1998 through December
6, 2000. Plaintiffs allege that the underwriter defendants agreed to allocate
stock in the Company's initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading and in violation of the securities laws because it did
not disclose these arrangements. On December 5, 2001, an amended complaint was
filed in one of the actions, alleging the same conduct described above in
connection with the Company's November 23, 1998 initial public offering and its
May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is now
the operative complaint, was filed in the Southern District of New York on April
19, 2002. The action seeks damages in an unspecified amount. On February 19,
2003, a motion to dismiss all claims against the Company was denied by the
Court. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions and noted that the decision is
intended to provide strong guidance to all parties regarding class certification
in the remaining cases. Plaintiffs have not yet moved to certify a class in
theglobe.com case.
The Company has approved a settlement agreement and related agreements which set
forth the terms of a settlement between the Company, the Individual Defendants,
the plaintiff class and the vast majority of the other approximately 300 issuer
defendants. Among other provisions, the settlement provides for a release of the
Company and the Individual Defendants for the conduct alleged in the action to
be wrongful. The Company would agree to undertake certain responsibilities,
including agreeing to assign away, not assert, or release certain potential
claims the Company may have against its underwriters. The settlement agreement
also provides a guaranteed recovery of $1 billion to plaintiffs for the cases
relating to all of the approximately 300 issuers. To the extent that the
underwriter defendants settle all of the cases for at least $1 billion, no
payment will be required under the issuers' settlement agreement. To the extent
that the underwriter defendants settle for less than $1 billion, the issuers are
required to make up the difference. It is anticipated that any potential
financial obligation of the Company to plaintiffs pursuant to the terms of the
settlement agreement and related agreements will be covered by existing
insurance. The Company currently is not aware of any material limitations on the
expected recovery of any potential financial obligation to plaintiffs from its
insurance carriers. Its carriers are solvent, and the Company is not aware of
any uncertainties as to the legal sufficiency of an insurance claim with respect
to any recovery by plaintiffs. Therefore, we do not expect that the settlement
will involve any payment by the Company. If material limitations on the expected
recovery of any potential financial obligation to the plaintiffs from the
Company's insurance carriers should arise, the Company's maximum financial
obligation to plaintiffs pursuant to the settlement agreement would be less than
$3.4 million. On February 15, 2005, the Court granted preliminary approval of
the settlement agreement, subject to certain modifications consistent with its
opinion. The Court ruled that the issuer defendants and the plaintiffs were
required to submit a revised settlement agreement which provides for a mutual
bar of all contribution claims by the settling and non-settling parties and does
not bar the parties from pursuing other claims. The issuers and plaintiffs have
submitted to the Court a revised settlement agreement consistent with the
Court's opinion. The revised settlement agreement has been approved by all of
the issuer defendants that are not in bankruptcy. The underwriter defendants
have submitted limited objections to the revised settlement agreement, such as
an objection that it seeks to impose the cost of identifying and notifying class
members on the underwriters, and an objection that it does not provide the
underwriters with sufficient time to gather the information sought by the claims
administrator. There is no assurance that the Court will grant final approval to
the settlement. If the settlement agreement is not approved and the Company is
found liable, we are unable to estimate or predict the potential damages that
might be awarded, whether such damages would be greater than the Company's
insurance coverage, and whether such damages would have a material impact on our
results of operations or financial condition in any future period.
F-36
On December 16, 2004, the Company, together with its wholly-owned subsidiary,
voiceglo Holdings, Inc., were named as defendants in NeoPets, Inc. v. voiceglo
Holdings, Inc. and theglobe.com, inc., a lawsuit filed in Los Angeles Superior
Court. The Company and its subsidiary were parties to an agreement dated May 6,
2004, with NeoPets, Inc. ("NeoPets"), whereby NeoPets agreed to host a voiceglo
advertising feature on its website for the purpose of generating registered
activations of the voiceglo product featured. Consideration to NeoPets was to
include specified commissions, including cash payments based on registered
activations, as defined, as well as the issuance of Common Stock of theglobe.com
and additional cash payments, upon the attainment of certain performance
criteria. NeoPets' complaint asserts claims for breach of contract and specific
performance and seeks payment of approximately $2.5 million in cash, plus
interest, as well as the issuance of 1,000,000 shares of theglobe.com Common
Stock. On February 22, 2005, the Company and voiceglo answered the complaint and
asserted cross-claims against NeoPets for fraud and deceit, rescission, breach
of contract, breach of the implied covenant of good faith and fair dealing and
set-off. NeoPets answered the cross-claims on March 24, 2005.
During 2004, the Company recorded amounts due for commissions pursuant to the
terms of the agreement totaling approximately $246,000. On August 5, 2005, the
Company, together with voiceglo Holdings, Inc., its wholly-owned subsidiary, and
NeoPets (collectively "the Parties") agreed to amicably resolve their dispute
and entered into a settlement agreement (the "Settlement Agreement"). Under the
terms of the Settlement Agreement, the Parties agreed to dismiss the lawsuit,
release each other from all claims and to terminate their May 6, 2004 website
advertising agreement in consideration for voiceglo Holdings, Inc. making cash
payments totaling $200,000 to NeoPets within thirty days of the date of the
Settlement Agreement.
On July 3, 2003, an action was commenced against one of the Company's
subsidiaries, Direct Partner Telecom, Inc. ("DPT"). Global Communications
Consulting Corp. v. Michelle Nelson, Jason White, VLAN, Inc., Geoffrey Amend,
James Magruder, Direct Partner Telecom, Inc., et al. was filed in the Superior
Court of New Jersey, Monmouth County, and removed to the United States District
Court for the District of New Jersey on September 16, 2003. Plaintiff is the
former employer of Michelle Nelson, an employee of theglobe and a former
consultant of DPT. Plaintiff alleges that while Nelson was its employee, she
provided plaintiff's confidential and proprietary trade secret information, to
among others, DPT and certain employees, and diverted corporate opportunities
from plaintiff to DPT and the other named defendants. Plaintiff asserts claims
against Nelson including breach of fiduciary duty, breach of the duty of loyalty
and tortious interference with contract. Plaintiff also asserts claims against
Nelson and DPT, among others, for contractual interference, tortious
interference with prospective economic advantage and misappropriation of
proprietary information and trade secrets. Plaintiff seeks injunctive relief and
damages in an unspecified amount, including punitive damages. The Answer to the
Complaint, with counterclaims, was served on October 20, 2003, denying
plaintiff's allegations of improper and unlawful conduct in their entirety. The
parties reached an amicable resolution of this matter, including a mutual
release of all claims, which was filed with the Court in April 2004.
The Company is currently a party to certain other legal proceedings, claims,
disputes and litigation arising in the ordinary course of business, including
those noted above. The Company currently believes that the ultimate outcome of
these other proceedings, individually and in the aggregate, will not have a
material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of litigation, should the outcome of these actions be unfavorable,
the Company's business, financial condition, results of operations and cash
flows could be materially and adversely affected.
NOTE 12. RELATED PARTY TRANSACTIONS
Certain directors of the Company also serve as officers and directors of Dancing
Bear Investments, Inc. ("Dancing Bear"). Dancing Bear is a stockholder of the
Company and an entity controlled by our Chairman.
As discussed more fully in Note 7, "Debt," in connection with a demand
convertible promissory note in the amount of $2,000,000 due the Company's
Chairman and his spouse, the Company paid interest totaling approximately
$17,500 during the year ended December 31, 2004.
Interest expense on the $1,750,000 Convertible Notes due E&C Capital Partners,
LLLP together with certain affiliates of our Chairman totaled approximately
$108,200, excluding the amortization of the discount on the Notes, during the
year ended December 31, 2003. The interest remained unpaid at December 31, 2003,
and was included in accrued expenses in the accompanying consolidated balance
sheet. Interest expense related to the $1,750,000 Convertible Notes totaled
approximately $32,000 during the year ended December 31, 2004. As a result of
the conversion of the $1,750,000 Convertible Notes into the Company's Common
Stock in March 2004, all interest accrued was paid by the Company during the
year ended December 31, 2004.
F-37
During the year ended December 31, 2004, the Company paid approximately $151,200
to an entity controlled by the Chairman's son-in-law for the production of a
commercial advertisement. The costs related to the production of the commercial
advertisement were recorded as sales and marketing expense during the six months
ended June 30, 2004. During the six months ended June 30, 2005, payments of
approximately $4,300 (unaudited) in reimbursements of marketing expenses
incurred on the Company's behalf were made to the Chairman's son-in-law.
Several entities controlled by our Chairman have provided services to the
Company and various of its subsidiaries, including: the lease of office and
warehouse space; and the outsourcing of customer service and warehouse functions
for the Company's VoIP operation. During the first quarter of 2005, an entity
controlled by our Chairman also began performing human resource and payroll
processing functions for the Company and several of its subsidiaries. During the
years ended December 31, 2004 and 2003, a total of approximately $566,000 and
$383,000 of expense was recorded related to these services, respectively. During
the six months ended June 30, 2005, approximately $185,000 (unaudited) of
expenses related to these services were recorded. Approximately $126,000
(unaudited), $5,300 and $70,000 related to these services was included in
accounts payable and accrued expenses at June 30, 2005, December 31, 2004 and
2003, respectively.
Additionally, included in other current assets in the accompanying Consolidated
Balance Sheet at December 31, 2004, was approximately $90,000 advanced to a
newly formed entity in which E&C Capital Partners, LLLP has an ownership
interest. At the time these funds were advanced, the entity was anticipated to
enter into a joint venture to provide marketing services to voiceglo and the
Company was negotiating the terms of such joint venture. The Company and such
new entity subsequently agreed to abandon the proposed joint venture and the
entity ceased operations in January 2005. Additional advances of approximately
$2,000 (unaudited) were made to the entity during January 2005. E&C Capital
Partners LLLP has represented to theglobe that the amounts advanced, which
approximate $92,000 (unaudited) as of June 30, 2005 will be repaid prior to the
end of 2005.
Reference should be made to Note 16, "Subsequent Events," for details regarding
the $4,000,000 Note Purchase Agreement entered into with entities controlled by
the Company's Chairman and Chief Executive Officer on April 22, 2005.
Approximately $41,000 (unaudited) of interest expense related to the borrowings
under the Note Purchase Agreement was recognized during the six months ended
June 30, 2005 and was included in accrued expenses as of that date in the
accompanying consolidated balance sheet.
Tralliance Corporation, which was acquired May 9, 2005, subleases office space
in New York City on a month-to-month basis from an entity controlled by its
President and Chief Executive Officer for $3,160 per month.
STOCKHOLDERS' AGREEMENT
In connection with the acquisition of SendTec, certain of the SendTec executives
(whom collectively received approximately 82% of the shares of theglobe.com
Common Stock and Preferred Stock issued in the Merger), theglobe and the
Company's Chairman and Chief Executive Officer and President (individually and
on behalf of certain affiliated entities) entered into a Stockholders'
Agreement. Pursuant to the terms of the Stockholders' Agreement, the SendTec
executives granted an irrevocable proxy to vote their shares to E&C Capital
Partners LLLP, an affiliate of the Company's Chairman and Chief Executive
Officer, on all matters (including the election of directors) other than with
respect to certain potential affiliated transactions involving the Company's
Chairman and Chief Executive Officer or President. After giving effect to the
grant of the proxy (and excluding outstanding options, warrants and convertible
stock held or controlled by the Chairman and Chief Executive Officer), at
September 15, 2005, the Chairman and Chief Executive Officer has voting power
over approximately 95.6 million issued and outstanding shares of theglobe
representing approximately 48% of the issued and outstanding voting securities
of the Company. The SendTec executives were also granted certain pre-emptive
rights involving potential new issuances of securities by theglobe, together
with a co-sale right to participate in certain qualifying sales of stock by the
Chairman and Chief Executive Officer and the President and their affiliates. In
addition, the Chairman and Chief Executive Officer and President and their
affiliates were granted a right of first refusal on certain sales (generally, in
excess of 10 million shares) by the SendTec executives, together with the right
to "drag-along" the SendTec executives with regard to certain major sales of
their stock or a sale or merger of theglobe.
F-38
In 1997, the Chairman, the former Co-Chief Executive Officers, two Directors of
the Company and Dancing Bear (an entity controlled by the Chairman) entered into
a Stockholders' Agreement (the "Stockholders' Agreement") pursuant to which the
Chairman and Dancing Bear or certain entities controlled by the Chairman and
certain permitted transferees (the "Chairman Group") agreed to vote for certain
nominees of the former Co-Chief Executive Officers or certain entities
controlled by the former Co-Chief Executive Officers and certain permitted
transferees (the "Former Co-Chief Executive Officer Groups") to the Board of
Directors and the Former Co-Chief Executive Officer Groups agreed to vote for
the Chairman Group's nominees to the Board, who would represent up to five
members of the Board. Additionally, pursuant to the terms of the Stockholders'
Agreement, the former Co-Chief Executive Officer and the two Directors granted
an irrevocable proxy to Dancing Bear with respect to any shares acquired by them
pursuant to the exercise of outstanding Warrants transferred to each of them by
Dancing Bear. Such shares would be voted by Dancing Bear, which is controlled by
the Chairman, and would be subject to a right of first refusal in favor of
Dancing Bear upon certain private transfers. The Stockholders' Agreement also
provided that if the Chairman Group sold shares of Common Stock and Warrants
representing 25% or more of the Company's outstanding Common Stock (including
the Warrants) in any private sale, the Former Co-Chief Executive Officer Groups
and the two Directors of the Company would be required to sell up to the same
percentage of their shares as the Chairman Group's sales. If either the Chairman
Group sold shares of Common Stock or Warrants representing 25% or more of the
Company's outstanding Common Stock (including the Warrants) or the Former
Co-Chief Executive Officer Groups sold shares or Warrants representing 7% or
more of the shares and Warrants of the Company in any private sale, each other
party to the Stockholders' Agreement, including entities controlled by them and
their permitted transferees, had the option to sell up to the same percentage of
their shares. Effective March 28, 2003, the Stockholders' Agreement was
terminated.
NOTE 13. SEGMENTS AND GEOGRAPHIC INFORMATION
The Company applies the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which establishes annual and interim
reporting standards for operating segments of a company. SFAS No. 131 requires
disclosures of selected segment-related financial information about products,
major customers and geographic areas. Effective with the May 9, 2005 acquisition
of Tralliance, the Company was organized in four operating segments for purposes
of making operating decisions and assessing performance: the computer games
division, the Internet services division, the marketing services division and
the VoIP telephony services division. The computer games division consists of
the operations of the Company's magazine publications and the associated
websites and the operations of Chips & Bits, Inc., its games distribution
business. The Internet services division consists of the newly acquired
operations of Tralliance. The marketing services division consists of the
operations of the Company's subsidiary, SendTec. The VoIP telephony services
division is principally involved in the sale of telecommunications services over
the Internet to consumers.
The chief operating decision maker evaluates performance, makes operating
decisions and allocates resources based on financial data of each segment. Where
appropriate, the Company charges specific costs to each segment where they can
be identified. Certain items are maintained at the Company's corporate
headquarters ("Corporate") and are not presently allocated to the segments.
Corporate expenses primarily include personnel costs related to executives and
certain support staff and professional fees. Corporate assets principally
consist of cash and cash equivalents. Subsequent to its acquisition on September
1, 2004, SendTec provided various intersegment marketing services to the
Company's VoIP telephony services division. Prior to the acquisition of SendTec,
there were no intersegment transactions. The accounting policies of the segments
are the same as those for the Company as a whole.
F-39
The following table presents financial information regarding the Company's
different segments:
Six Months Ended June 30, Year Ended December 31,
------------------------------- --------------------------------------------------
2005 2004 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(Unaudited)
NET REVENUE:
Computer games $ 1,116,775 $ 1,474,874 $ 3,107,637 $ 4,736,032 $ 7,245,276
Marketing services 18,469,603 -- 13,408,183 -- --
VoIP telephony services 163,385 207,353 391,154 548,081 --
Intersegment eliminations (324,717) -- (865,942) -- --
------------ ------------ ------------ ------------ ------------
$ 19,425,046 $ 1,682,227 $ 16,041,032 $ 5,284,113 $ 7,245,276
============ ============ ============ ============ ============
INCOME (LOSS) FROM OPERATIONS:
Computer games $ (978,738) $ (312,011) $ (442,286) $ 120,907 $ (411,626)
Marketing services 2,029,406 -- 1,197,884 -- --
VoIP telephony services (6,127,717) (6,766,254) (20,538,124) (5,116,437) (1,196)
Internet services (213,574) -- -- -- --
Corporate expenses (1,804,182) (2,002,442) (3,675,492) (3,817,549) (2,527,966)
------------ ------------ ------------ ------------ ------------
Loss from operations (7,094,805) (9,080,707) (23,458,018) (8,813,079) (2,940,788)
Other income (expense), net (3,308,411) (936,952) (815,183) (2,221,318) 338,127
------------ ------------ ------------ ------------ ------------
Consolidated loss before income tax $(10,403,216) $(10,017,659) $(24,273,201) $(11,034,397) $ (2,602,661)
============ ============ ============ ============ ============
DEPRECIATION AND AMORTIZATION:
Computer games $ 15,438 $ 4,788 $ 10,606 $ 62,208 $ 85,327
Marketing services 349,368 -- 227,270 -- --
VoIP telephony services 548,576 516,399 1,355,532 258,334 --
Internet services 18,800 -- -- -- --
Corporate expenses 19,157 13,506 32,138 9,200 3,253
------------ ------------ ------------ ------------ ------------
$ 951,339 $ 534,693 $ 1,625,546 $ 329,742 $ 88,580
============ ============ ============ ============ ============
CAPITAL EXPENDITURES:
Computer games $ 20,500 $ 26,607 $ 55,845 $ -- $ 32,250
Marketing services 108,580 -- 40,324 -- --
VoIP telephony services 148,304 1,633,397 2,537,133 2,366,047 --
Corporate -- 36,521 50,040 58,744 --
------------ ------------ ------------ ------------ ------------
$ 277,384 $ 1,696,525 $ 2,683,342 $ 2,424,791 $ 32,250
============ ============ ============ ============ ============
June 30, December 31,
----------- ---------------------------------------------
2005 2004 2003 2002
----------- ----------- ----------- -----------
(Unaudited)
IDENTIFIABLE ASSETS:
Computer games $ 1,378,652 $ 2,000,230 $ 1,957,714 $ 2,602,834
Marketing services 25,846,914 24,764,361 -- --
VoIP telephony services 2,584,635 3,497,698 4,251,082 164,960
Internet services 643,278 -- -- --
Corporate assets 1,156,243 3,754,876 963,282 279,191
----------- ----------- ----------- -----------
$31,609,722 $34,017,165 $ 7,172,078 $ 3,046,985
=========== =========== =========== ===========
F-40
The Company's historical net revenues have been earned primarily from customers
in the United States. In 2003, VoIP telephony services net revenue was primarily
attributable to the sale of telephony services outside of the United States.
Telephony services revenue derived from Thailand represented approximately
$458,000 or 9% of consolidated net revenue for the year ended December 31, 2003.
In addition, all significant operations and assets are based in the United
States.
Revenue generated by two customers of SendTec represented approximately 43%
(unaudited) of consolidated net revenue reported for the six months ended June
30, 2005. Revenue generated by two customers of SendTec since its acquisition
date, or September 1, 2004, represented approximately 44% of consolidated net
revenue reported for the year ended December 31, 2004.
NOTE 14. VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance
At Additions Additions Balance
Beginning Charged To Charged To At End Of
Period Ended, Of Period Expense Other Accounts Deductions Period
------------- ----------- ----------- ----------- ------------ -----------
June 30, 2005 $ 274,013 $ -- $ -- $ (26,324) $ 247,689
(Unaudited)
December 31, 2004 $ 112,986 $ 198,537 $ 9,750 $ (47,260) $ 274,013
December 31, 2003 $ 128,613 $ 114,888 $ -- $ (130,515) $ 112,986
December 31, 2002 $ 3,203,295 $ -- $ -- $(3,074,682) $ 128,613
NOTE 15. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended
----------------------------------
June 30, March 31,
2005 2005
------------- ------------
Net revenue $ 9,986,318 $ 9,438,728
Operating expenses 13,349,063 13,170,788
Loss from operations (3,362,745) (3,732,060)
Net loss (6,453,219) (3,965,573)
Net loss applicable to common
Stockholders (6,453,219) (3,965,573)
Basic and diluted net loss per
Share $ (0.04) $ (0.02)
Quarter Ended
---------------------------------------------------------------------
December 31, September 30, June 30, March 31,
2004 2004 2004 2004
------------ ------------ ------------ ------------
Net revenue $ 10,660,697 $ 3,698,108 $ 826,230 $ 855,997
Operating expenses 18,914,508 9,821,608 6,128,867 4,634,067
Loss from operations (8,253,811) (6,123,500) (5,302,637) (3,778,070)
Net loss (8,385,886) (5,869,656) (5,355,961) (4,661,698)
Net loss applicable to common
Stockholders (8,385,886) (5,869,656) (5,355,961) (4,661,698)
Basic and diluted net loss per
Share $ (0.05) $ (0.04) $ (0.04) $ (0.07)
F-41
Quarter Ended
---------------------------------------------------------------------
December 31, September 30, June 30, March 31,
2003 2003 2003 2003
------------ ------------ ------------ ------------
Net revenue $ 1,492,237 $ 1,447,784 $ 1,101,810 $ 1,242,282
Operating expenses 6,239,271 3,776,319 2,295,895 1,785,707
Loss from operations (4,747,034) (2,328,535) (1,194,085) (543,425)
Net loss (5,077,665) (2,517,614) (2,757,371) (681,747)
Net loss applicable to common
Stockholders (5,077,665) (10,137,614) (2,757,371) (1,181,747)
Basic and diluted net loss per
share $ (0.10) $ (0.23) $ (0.09) $ (0.04)
Net loss applicable to common stockholders for the 2003 quarterly periods
includes the preferred dividend impact of the beneficial conversion features of
the preferred stock and warrants issued.
Quarter Ended
-----------------------------------------------------------------
December 31, September 30, June 30, March 31,
2002 2002 2002 2002
------------ ------------ ------------ ------------
Net revenue $ 2,009,701 $ 1,698,278 $ 1,684,942 $ 1,852,355
Operating expenses 1,873,157 2,225,921 3,330,776 2,756,210
Income (loss) from operations 136,544 (527,643) (1,645,834) (903,855)
Net income (loss) 16,922 (492,046) (1,633,429) (506,108)
Net loss applicable to common
Stockholders 16,922 (492,046) (1,633,429) (506,108)
Basic and diluted net loss per
Share $ -- $ (0.02) $ (0.05) $ (0.02)
NOTE 16. SUBSEQUENT EVENTS
The following transactions and/or events were completed subsequent to December
31, 2004, the date of the Company's most recent audited financial statements
and, therefore, were not reflected in the accompanying consolidated financial
statements as of December 31, 2004 and for the periods then ended.
On April 22, 2005, E&C Capital Partners, LLLP and E&C Capital Partners II, Ltd.
(the "Noteholders"), entities controlled by the Company's Chairman and Chief
Executive Officer, entered into a Note Purchase Agreement (the "Agreement") with
theglobe pursuant to which they acquired secured demand convertible promissory
notes (the "Convertible Notes") in the aggregate principal amount of $1,500,000.
Under the terms of the Agreement, the Noteholders were also granted the optional
right, for a period of 90 days from the date of the Agreement, to purchase
additional Convertible Notes such that the aggregate principal amount of
Convertible Notes issued under the Agreement may total $4,000,000 (the
"Option"). On June 1, 2005, the Noteholders exercised a portion of the Option
and acquired an additional $1,500,000 of Convertible Notes. On July 18, 2005,
the Noteholders exercised the remainder of the Option and acquired an additional
$1,000,000 of Convertible Notes.
The Convertible Notes are convertible at the option of the Noteholders into
shares of the Company's Common Stock at an initial price of $0.05 per share.
Through September 15, 2005, an aggregate of $600,000 of Convertible Notes were
converted by the Noteholders into an aggregate of 12,000,000 shares of the
Company's Common Stock. Assuming full conversion of all Convertible Notes, an
additional 68,000,000 shares of the Company's Common Stock would be issued to
the Noteholders. The Convertible Notes provide for interest at the rate of ten
percent per annum and are secured by a pledge of substantially all of the assets
of the Company. The Convertible Notes are due and payable five days after demand
for payment by the Noteholders. Based upon its current financial position, the
Company would not have the resources to pay the Convertible Notes following any
such demand.
F-42
As the Notes were immediately convertible into common shares of the Company at
issuance, an aggregate of $3,000,000 of non-cash interest expense was recorded
during the 2005 second quarter and $1,000,000 was recorded during the 2005 third
quarter as a result of the beneficial conversion features of the Convertible
Notes. The value attributed to the beneficial conversion features was calculated
by comparing the fair value of the underlying common shares of the Convertible
Notes on the date of issuance based on the closing price of our Common Stock as
reflected on the OTCBB to the conversion price and was limited to the aggregate
proceeds received from the issuance of the Convertible Notes.
Reference should be made to Note 4, "Acquisitions and Dispositions," for details
regarding the Company's acquisition of Tralliance Corporation on May 9, 2005.
On August 10, 2005, the Company entered into an asset purchase agreement, as
amended on August 23, 2005 (the "Purchase Agreement") with RelationServe Media,
Inc. ("RelationServe") whereby the Company agreed to sell all of the business
and substantially all of the net assets of its SendTec marketing services
subsidiary to RelationServe for $37,500,000 in cash, subject to certain net
working capital adjustments. In addition, on August 23, 2005, the Company
entered into a Redemption Agreement with six members of the management of
SendTec (the "Redemption Agreement") to redeem approximately 28.9 million shares
of theglobe Common Stock owned by such management for approximately $11.6
million in cash. The closing of the redemption of these shares is contingent on,
and will occur immediately after, the closing of the Purchase Agreement. The
Company also anticipates that it will be terminating and canceling certain
options and warrants held by these six members of management for approximately
$400,000 in cash. These shares and related options and warrants were issued to
SendTec management in connection with theglobe's acquisition of SendTec. The
Company further expects to terminate or cancel the options of a few other
employees of SendTec and enter into severance bonus arrangements with others for
cash payments totaling approximately $500,000. The closing of the asset sale is
subject to the satisfaction of a number of closing conditions including
distribution of a definitive information statement describing the asset sale to
our stockholders which was undertaken commencing on September 16, 2005, with the
closing anticipated to occur on or about October 11, 2005.
At June 30, 2005, the carrying amount of SendTec's assets and liabilities, net
of the elimination of intercompany receivables and payables, was as follows:
Cash $ 3,926,000
Accounts receivable 7,386,000
Prepaid and other
current assets 393,000
Fixed assets 903,000
Non-compete agreements 1,500,000
Goodwill 11,710,000
Other assets 29,000
Accounts payable (6,651,000)
Accrued expenses (2,105,000)
Deferred revenue (138,000)
-----------
$16,953,000
===========
In September 2005, the Company failed to make the principal and interest
payments on the $1.0 million promissory note issued in connection with the
SendTec acquisition by the September 1, 2005 due date (and related grace period)
and as a result is currently in default under the promissory note (see Note 7,
"Debt"). Upon default, the Company is required to pay a default interest rate of
15% per annum and to pay the noteholders' collection costs, if any.
F-43
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Interest rate risk refers to fluctuations in the value of a
security resulting from changes in the general level of interest rates.
Investments that we classify as cash and cash equivalents have original
maturities of three months or less and therefore, are not affected in any
material respect by changes in market interest rates. Marketable securities at
June 30, 2005, of $42,736 are classified as available-for-sale and stated at
fair value. At June 30, 2005, debt outstanding includes approximately $4.1
million of fixed rate instruments with an aggregate average interest rate of
8.51% and approximately $48,000 of variable rate instruments with an aggregate
average interest rate of 6.78%. All but approximately $7,000 of principal of the
variable rate debt outstanding, as of the end of the 2005 second quarter,
matures within the next twelve months.
Foreign Currency Risk. We transact business in U.S. dollars. Our exposure to
changes in foreign currency rates has been limited to a related party obligation
payable in Canadian dollars, which totals approximately $48,000 (U.S.) at June
30, 2005. Foreign currency exchange rate fluctuations do not have a material
effect on our results of operations.
WHERE YOU CAN FIND MORE INFORMATION ABOUT THEGLOBE.COM, INC.
We have filed with the SEC a registration statement and related post effective
amendments under the Securities Act that registers the shares of our Common
Stock to be sold in this offering. The registration statement, including the
attached exhibits, contains additional relevant information about us and our
capital stock. The rules and regulations of the SEC allow us to omit from this
document certain information included in the registration statement. You may
read and copy the reports and other information we file with the SEC at the
SEC's Public Reference Room at 100 F. Street, Washington D.C. 20549. You may
obtain information regarding the operation of the public reference room by
calling 1(800) SEC-0330. The SEC also maintains a website that contains reports,
proxy statements and other information about issuers, like us, who file
electronically with the SEC. The address of that website is http://www.sec.gov.
We are subject to the reporting and information requirements of the Securities
and Exchange Act of 1934, as amended, and as a result file periodic reports,
proxy statements and other information with the SEC. These periodic reports,
proxy statements and other information will be available for inspection and
copying at the SEC's Public Reference Room and the website of the SEC referred
to above, as well as on our website, http://www.theglobe.com. The contents of
our website are not part of this prospectus, and you should not consider the
contents of our website in making an investment decision with respect to our
Common Stock.
183
130,296,940 SHARES
COMMON STOCK
PROSPECTUS
[LOGO] theglobe.com
September ____, 2005
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the offering, including all post-effective amendments,
all of which are to be borne by the Company, are as follows:
SEC Registration Fee* $ 16,301
Printing Expenses* 15,000
Accounting Fees and Expenses* 25,000
Legal Fees and Expenses 350,000
Registrar and Transfer Agent Fee* 2,500
Miscellaneous* 5,000
--------
Total* $413,801
========
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that, to
the extent a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding, whether civil, criminal, administrative or investigative or in
defense of any claim, issue, or matter therein (hereinafter a "Proceeding"), by
reason of the fact that person is or was a director, officer, employee or agent
of a corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise (collectively an "Agent" of the
corporation) that person shall be indemnified against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
therewith.
The DGCL also provides that a corporation may indemnify any person who was or is
a party or is threatened to be made a party to any threatened Proceeding by
reason of the fact that person is or was an Agent of the corporation, against
expenses (including attorney's fees), judgment, fines and amounts paid in
settlement actually and reasonably incurred by that person in connection with
such action, suit or proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in, or not opposed to, the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that person's conduct was
unlawful; provided, however, that in an action by or in the right of the
corporation, the corporation may not indemnify such person in respect of any
claim, issue, or matter as to which that person is adjudged to be liable to the
corporation unless, and only to the extent that, the Court of Chancery or the
court in which such proceeding was brought determined that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is reasonably entitled to indemnity.
Article VI of the By-laws requires the Company to indemnify any person who was
or is a party or is threatened to be made a party to or is involved (including,
without limitation, as a witness) in any threatened, pending or completed
action, suit, arbitration, alternative dispute mechanism, investigation,
administrative hearing or any other proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) brought by reason of the fact that he or she is or was a director or
officer of the Company, or, while a director or officer of the Company, is or
was serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefits plan against expenses (including
attorneys' fees, judgments, fines, excise taxes under the Employee Retirement
Income Security Act of 1974, penalties and amounts paid in settlement) incurred
by him or her in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Article VI of the Company's Fourth Amended and Restated Certificate of
Incorporation (the "Certificate") provides that to the fullest extent that the
DGCL, as it now exists or may hereafter be amended, permits the limitation or
elimination of the liability of directors, a director of the Company shall not
be liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director.
184
The Company has entered into indemnification agreements with certain of its
directors and officers. These agreements provide, in general, that the Company
will indemnify such directors and officers for, and hold them harmless from and
against, any and all amounts paid in settlement or incurred by, or assessed
against, such directors and officers arising out of or in connection with the
service of such directors and officers as a director or officer of the Company
or its Affiliates (as defined therein) to the fullest extent permitted by
Delaware Law.
The Company maintains directors' and officers' liability insurance which
provides for payment, on behalf of the directors and officers of the Company and
its subsidiaries, of certain losses of such persons (other than matters
uninsurable under law) arising from claims, including claims arising under the
Securities Act, for acts or omissions by such persons while acting as directors
or officers of the Company and/or its subsidiaries, as the case may be.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets from Brian Fowler (now Chief Technology Officer of the Company)
in exchange for the issuance of warrants to acquire 1,750,000 shares of the
Company's Common Stock and the potential to earn a warrant to acquire an
additional 425,000 shares as part of an earn-out arrangement. The performance
targets for the warrants to acquire the additional 425,000 shares were not met
and expired on December 31, 2003. The exercise price of the warrants is $0.065
and the warrants are exercisable at anytime before November 12, 2012.
On March 28, 2003, E&C Capital Partners, LLLP signed a Preferred Stock Purchase
Agreement and other related documentation pertaining to a $500,000 investment
via the purchase of shares of a new Series F Preferred Stock of theglobe.com and
closed on the investment. Pursuant to the Preferred Stock Purchase Agreement,
E&C Capital Partners, LLLP received 333,333 shares of Series F Preferred Stock
convertible into shares of the Company's Common Stock at a price of $0.03 per
share. The Series F Preferred Stock had a liquidation preference of $1.50 per
share, provided for payment of a dividend at the rate of 8% per annum and
entitled the holder to vote on an "as-converted" basis with the holders of
Common Stock. In addition, as part of the $500,000 investment, E&C Capital
Partners, LLLP received warrants to purchase approximately 3,333,333 shares of
theglobe.com Common Stock at an exercise price of $0.125 per share. The warrants
were exercisable at any time on or before March 28, 2013 and both the warrants'
exercise price and number were subject to adjustment. E&C Capital Partners, LLLP
received certain piggy-back and demand registration rights in connection with
its investment.
On May 22, 2003, E&C Capital Partners, LLLP, together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired $1,750,000 of Secured Convertible Notes. The
Secured Convertible Notes were convertible into a maximum of approximately
19,444,000 shares of the Company's Common Stock at a blended rate of $0.09 per
share. The Secured Convertible Notes provided for interest at the rate of ten
percent per annum payable semi-annually, a one year maturity and were secured by
a pledge of substantially all of the assets of the Company. In addition, E&C
Capital Partners, LLLP was issued a Warrant to acquire 3,888,889 shares of the
Company's Common Stock at an exercise price of $0.15 per share. The Warrant was
exercisable at any time on or before May 22, 2013. The investors received
certain piggy-back and demand registration rights in connection with their
investment.
185
On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a
company engaged in VoIP telephony services. The purchase price consisted of
1,375,000 shares of theglobe.com Common Stock and warrants to purchase an
additional 500,000 shares of Common Stock, together with the ability to earn
additional warrants to purchase up to an additional 2,750,000 shares. As of
March 31, 2005, 1,250,000 of the earn-out warrants have been forfeited as
performance targets have not been achieved. Subject to certain qualifications,
the warrants will also accelerate and be deemed earned in the event of a "change
in control" of the Company, as defined in the acquisition documents. The initial
warrants (and any additional warrants if and to the extent earned) have an
exercise price of $.72 per share and expire on May 22, 2013.
On July 2, 2003, the Company completed a private offering of Series G
Automatically Converting Preferred Stock for an aggregate purchase price of
approximately $8.7 million. In accordance with the terms of such Preferred
stock, the Series G Preferred shares converted into Common Stock at $0.50 per
share (or an aggregate of approximately 17.4 million shares) upon the filing of
an amendment to the Company's certificate of incorporation to increase its
authorized shares of Common Stock from 100,000,000 shares to 200,000,000 shares.
Such an amendment was filed on July 29, 2003. Investors also received warrants
to acquire approximately 3.5 million shares of Common Stock. The warrants are
exercisable for a period of five years at an exercise price of $1.39 per common
share. The exercise price of the warrants, together with the number of warrants
issuable upon exercise, are subject to adjustment upon the occurrence of certain
events. The purpose of the Series G Preferred Stock offering was to raise funds
for use primarily in the Company's VoIP telephony services business, including
the deployment of networks, website development, marketing, and limited capital
infrastructure expenditures and working capital. The investors in the Series G
Preferred Stock Offering, together with the former stockholders of DPT, are
entitled to one demand registration right commencing in July 2004.
On February 2, 2004, Michael S. Egan (our Chairman and Chief Executive Officer)
and his wife, S. Jacqueline Egan, entered into a Note Purchase Agreement with
the Company pursuant to which they acquired a convertible promissory note (the
"Bridge Note") in the aggregate principal amount of $2,000,000. The Bridge Note
was convertible at anytime into shares of the Company's Common Stock at an
initial rate of $.98 per share. The conversion rate was subject to adjustment
based upon the rate (effectively, $.57 per share) at which the Company sold its
Common Stock in the subsequent March 2004 private offering (which is described
below). The Bridge Note was due on demand from the holder, and was secured by a
pledge of substantially all of the assets of the Company. Such security interest
was shared with the then holders of the Company's Secured Convertible Notes in
the principal amount of $1,750,000 issued on May 22, 2003 to various entities
affiliated with Michael S. Egan. The Bridge Notes bore interest at the rate of
ten (10) percent per annum.
In addition, the Egans were issued a warrant to acquire 204,082 shares of
theglobe.com Common Stock at an exercise price of $1.22 per share. The warrant
is exercisable at any time on or before February 2, 2009. The Egans are entitled
to certain demand and piggy-back registration rights in connection with their
investment. The exercise price of the warrant (together with the number of
shares for which such warrant is exercisable) is subject to adjustment upon the
occurrence of certain events.
On March 11, 2004, theglobe.com, inc. completed a private offering of 329,916
units (the "Units") for a purchase price of $85 per Unit (the "PIPE Offering").
Each Unit consisted of 100 shares of the Company's Common Stock and warrants to
acquire 50 shares of the Common Stock (the "PIPE Warrants"). The PIPE Warrants
are exercisable for a period of five (5) years commencing May 4, 2004 at an
initial exercise price of $.001 per share. The Company also granted an option to
one party to acquire an additional 3,900 Units on or before March 22, 2004 on
the same terms, which option was fully exercised. Assuming the exercise of the
PIPE Warrants, the aggregate number of shares of Common Stock issued in the PIPE
Offering was 50,072,471 shares for an aggregate consideration of $28,374,400, or
approximately $.57 per share.
Halpern Capital, Inc., acted as placement agent for the PIPE offering, and was
paid a commission of $1.2 million and issued a warrant to acquire 1,000,000
shares of common stock at $.001 per share.
Pursuant to the terms of the PIPE Offering the Company was contractually
obligated to file a registration statement relating to the resale of the
Securities on or about April 22, 2004 and to cause such registration statement
to become effective before on or about July 6, 2004 (or 30 days earlier if such
registration statement is not reviewed by the SEC). In the event the Company was
late in any of its registration obligations, it would have been liable for
payment of a late fee of 5% of the amount raised in the PIPE Offering per month
(not to exceed 25% in the aggregate), unless such fee was waived under certain
conditions. Any such late fee would have been payable in either cash or
additional shares of Common Stock (valued for such purpose at $.57 per share),
or any combination of the two, at the option of the Company.
186
In connection with the PIPE Offering, Mr. Egan, our Chairman, Chief Executive
Officer and principal stockholder, together with certain of his affiliates and
other parties, converted the $2,000,000 Bridge Note, an aggregate of $1,750,000
of Secured Convertible Notes and all of the Company's outstanding shares of
Series F Preferred Stock, and exercised all of the warrants issued in connection
with the foregoing Secured Convertible Notes and Series F Preferred Stock,
together with certain warrants issued to Dancing Bear Investments, Inc. (an
affiliate of Mr. Egan). As a result of such conversions and exercises, the
Company issued an aggregate of 48,775,909 shares of Common Stock.
On May 6, 2004, the Company entered into an agreement with NeoPets, Inc. which
provides for certain marketing and advertising services associated with the
Company's voiceglo VoIP services on NeoPets website. As part of the
consideration for such services, the Company agreed to issue up to 3,000,000
shares in various stages upon the attainment of certain business objectives. The
Company agreed to certain registration rights relating to the shares issued or
issuable and agreed to cause the registration of such shares.
All of the foregoing private offerings or acquisitions were directed solely to a
limited number of investors who are sophisticated and, with the exception of the
November 2002 acquisition from Brian Fowler, who are accredited within the
meaning of applicable securities laws. The Company believes that such offers and
sales were exempt from registration pursuant to Sections 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.
On September 1, 2004, theglobe closed upon an Agreement and Plan of Merger dated
August 31, 2004 (the "Merger Agreement"), pursuant to which the Company acquired
all of the issued and outstanding shares of capital stock of SendTec, Inc.
("SendTec"). Pursuant to the terms of the merger, in consideration for the
acquisition of SendTec, theglobe paid consideration consisting of: (i)
$6,000,000 in cash, excluding transaction costs, (ii) the issuance of an
aggregate of 17,500,024 shares of theglobe's Common Stock (the "Common Shares"),
(iii) the issuance of an aggregate of 175,000 shares of Series H Automatically
Converting Preferred Stock (which as more fully described below, was converted
into approximately 17,500,500 shares of theglobe's Common Stock) (the "Preferred
Stock"), and (iv) the issuance of a subordinated promissory note in the amount
of $1 million (the "Note") (collectively, the "Initial Merger Consideration").
In addition, warrants to acquire shares of Common Stock would be issued to the
former shareholders of SendTec when and if SendTec exceeds forecasted operating
income, as defined, of $10.125 million (the "Income Target"), for the year
ending December 31, 2005 (the "Earn-out Consideration" and collectively with the
Initial Merger Consideration, the "Merger Consideration"). The number of
Earn-out Warrants would range from an aggregate of approximately 250,000 to
2,500,000 (if actual operating income exceeds the forecast by at least 10%). If
and to the extent the warrants are earned, the exercise price of the performance
warrants would be $0.27 per share and they will be exercisable for a period of 5
years. The Note bears interest at the rate of 4% per annum and matured in one
lump sum of principal and interest on September 1, 2005. Due to its short-term
liquidity problems, the Company has not paid such promissory note when due and
is currently in default under the promissory note. Upon default, the Company is
required to pay a default interest rate of 15% per annum and to pay the
noteholders' collection costs, if any.
The Merger Consideration was distributed pro rata to the former shareholders of
SendTec in accordance with their respective ownership interests.
Except as provided by law, the Preferred Stock voted with the holders of common
stock on all matters on an "as-converted" basis, other than the Capital
Amendment described below as to which it did not vote. The Preferred Stock
automatically converted into shares of theglobe's Common Stock on a 1 for 100
basis on December 1, 2004, the date upon which theglobe filed an amendment to
its certificate of incorporation with the Delaware Secretary of State's Office
to increase its authorized shares of Common Stock from 200,000,000 to
500,000,000 (the "Capital Amendment").
The Company agreed to file a registration statement relating to the resale of
the shares of Common Stock issued in connection with the Merger and to cause the
effectiveness of such registration on or before September 1, 2005. The Company
also agreed to keep the registration statement effective until at least the
third anniversary of the Closing. We have not yet filed such a registration
statement. Because we have not filed and caused such registration statement to
become effective before September 1, 2005, we may be held liable for damages
suffered by holders of such stock. Upon registration all such shares will be
eligible for resale over the open market. Even if not registered, the shares
issued in the SendTec acquisition are eligible for resale over the public
markets pursuant to and subject to the limitations of Rule 144. If we
successfully redeem the majority of the shares issued as part of the SendTec
acquisition (or approximately 28,900,000 shares) in connection with the sale of
SendTec's business to RelationServe, we would substantially mitigate our risk
related to our failure to timely register these shares.
187
The Merger Securities issued or issuable in the SendTec Acquisition were
directed solely to the approximately 35 former shareholders of SendTec. The
Company believes that the former shareholders were, either alone or with their
representatives in the merger, sophisticated and further that substantially all
of the former shareholders of SendTec were accredited, within the meaning of
such terms under applicable securities laws. Consequently, the Company believes
that such offers and sales of the Merger Securities were exempt from
registration pursuant to Sections 4(2) of the Securities Act of 1933 and Rule
506 of Regulation D promulgated thereunder.
On January 31, 2005, the Company terminated its contract with a supplier of VoIP
telephony handsets and, as part of the consideration paid, issued 300,000 shares
of theglobe.com's Common Stock to the supplier. The Company further agreed to
provide customary "piggy-back" registration rights with respect to these shares
for a period of one year from the contract termination date.
On April 22, 2005, E&C Capital Partners, LLLP and E&C Capital Partners II, Ltd.
(the "Noteholders"), entities controlled by the Company's Chairman and Chief
Executive Officer, entered into a Note Purchase Agreement (the "Agreement") with
theglobe pursuant to which they acquired secured demand convertible promissory
notes (the "Convertible Notes") in the aggregate principal amount of $1,500,000.
Under the terms of the Agreement, the Noteholders were also granted the optional
right, for a period of 90 days from the date of the Agreement, to purchase
additional Convertible Notes such that the aggregate principal amount of
Convertible Notes issued under the Agreement may total $4,000,000 (the
"Option"). On June 1, 2005, the Noteholders exercised a portion of the Option
and acquired an additional $1,500,000 of Convertible Notes. On July 18, 2005,
the Noteholders exercised the remainder of the Option and acquired an additional
$1,000,000 of Convertible Notes.
The Convertible Notes are convertible at the option of the Noteholders into
shares of the Company's Common Stock at an initial price of $0.05 per share.
Through September 15, 2005, an aggregate of $600,000 of Convertible Notes were
converted by the Noteholders into an aggregate of 12,000,000 shares of the
Company's Common Stock. Assuming full conversion of all Convertible Notes,
68,000,000 additional shares of the Company's Common Stock would be issued to
the Noteholders. The Convertible Notes provide for interest at the rate of ten
percent per annum and are secured by a pledge of substantially all of the assets
of the Company. The Convertible Notes are due and payable five days after demand
for payment by the Noteholders. Based upon its current financial position, the
Company would not have the resources to pay the Convertible Notes following any
such demand. The Noteholders are entitled to certain demand and "piggy-back"
registration rights in connection with their investment.
On May 9, 2005, the Company exercised its option to acquire all of the
outstanding capital stock of Tralliance Corporation ("Tralliance"). The purchase
price consisted of the issuance of 2,000,000 shares of theglobe.com Common Stock
and warrants to acquire 475,000 shares of theglobe.com Common Stock, as well as
the payment of $40,000 in cash. The warrants are exercisable for a period of
five years at an exercise price of $0.11 per share. The Common Stock issued as a
result of the acquisition of Tralliance is entitled to certain "piggy-back"
registration rights.
188
ITEM 16. EXHIBITS
NO. ITEM
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of the
Company (3).
3.2 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation (19).
3.3 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on July 29,
2003 (19).
3.4 Certificate relating to Previously Outstanding Series of Preferred Stock
and Relating to the Designation, Preferences and Rights of the Series F
Preferred Stock (14).
3.5 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Junior Participating Preferred Stock.
3.6 Form of By-Laws of the Company (19).
3.7 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Series H Automatically Converting Preferred Stock (18).
3.8 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on December 1,
2004. (22)
4.1 Registration Rights Agreement, dated as of September 1, 1998(5).
4.2 Amendment No.1 to Registration Rights Agreement, dated as of April 9,
1999(6).
4.3 Specimen certificate representing shares of Common Stock of the Company
(4).
4.4 Amended and Restated Warrant to Acquire Shares of Common Stock (2).
4.5 Form of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent (3).
4.6 Form of Warrant dated November 12, 2002 to acquire shares of Common Stock
(9).
4.7 Form of Warrant dated March 28, 2003 to acquire shares of Common Stock
(14).
4.8 Form of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of theglobe.com Common Stock (10).
4.9 Form of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc. (11).
4.10 Form of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc. (17).
4.11 Form of Warrant relating to potential issuance of Earn-out Consideration
(18).
4.12 Form of Secured Demand Convertible Promissory Note (24).
4.13 Security Agreement dated April 22, 2005 by and between theglobe.com, inc.
and certain other parties named therein (24).
4.14 Unconditional Guaranty Agreement dated April 22, 2005 (24).
5.1 Opinion of Proskauer Rose LLP
10.1 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers (1).
189
10.2 Lease Agreement dated January 12, 1999 between the Company and Broadpine
Realty Holding Company, Inc. (6).
10.3 2000 Broad Based Stock Option Plan (7).
10.4 1998 Stock Option Plan, as amended (6).
10.5 1995 Stock Option Plan (1).
10.6 Employee Stock Purchase Plan (5).
10.7 Technology Purchase Agreement dated November 12, 2002, among theglobe.com,
inc., and Brian Fowler (9).
10.8 Employment Agreement dated November 12, 2002, among theglobe.com, inc. and
Brian Fowler (9).
10.9 Payment Agreement dated November 12, 2002, among theglobe.com, inc.,
1002390 Ontario Inc., and Robert S. Giblett (9).
10.10 Release Agreement dated November 12, 2002, among theglobe.com, inc. and
certain other parties named therein (9).
10.11 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital Partners, LLLP. (14).
10.12 Loan and Purchase Option Agreement dated February 25, 2003 (13).
10.13 Amended and Restated Promissory Note (13).
10.14 Form of Stock Purchase Agreement (13).
10.15 Note Purchase Agreement dated May 22, 2003 between theglobe.com, inc. and
E&C Capital Partners, LLLP and certain other investors named therein (10)
10.16 Agreement and Plan of Merger dated May 23, 2003 between theglobe.com,
inc., DPT Acquisition, Inc., Direct Partner Telecom, Inc., and the
stockholders thereof (10).
10.17 Employment Agreement dated May 28, 2003 between theglobe.com and James
Magruder (10).
10.18 Form of Subscription Agreement relating to the purchase of Units of Series
G Preferred Stock and Warrants of theglobe.com, inc. (11).
10.19 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Michael S. Egan (12).
10.20 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Edward A. Cespedes (12).
10.21 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Robin Segaul Lebowitz (12).
10.22 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Michael S. Egan (12).
10.23 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Edward A. Cespedes (12).
10.24 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz (12).
10.25 Non-Qualified Stock Option Agreement dated as of July 17, 2003 between
theglobe.com, inc. and Kellie L. Smythe (12).
10.26 2003 Sales Representatives Stock Option Plan (12).
190
10.27 Securities Purchase and Registration Agreement dated March 2, 2004
relating to the purchase of Units of Common Stock and Warrants of
theglobe.com, inc. (15)
10.28 Amendment to the Service Order Agreement Terms and Conditions dated July
30, 2003, and October 24, 2003 between XO Communications, Inc. and Direct
Partner Telecom, Inc., including XO Services Terms and Conditions.(15)*
10.29 Agreement dated August 7, 2003 by and between Promotion and Display
Technology, Ltd. and theglobe.com, inc. (15) *
10.30 Broad Capacity Services Agreement dated October 17, 2003 by and between
Direct Partner Telecom, Inc. and Progress Telecom Corporation. (15)*
10.31 Agreement and Plan of Merger dated August 31, 2004 by and between
theglobe.com, inc., SendTec Acquisition Corporation and SendTec, Inc.,
among others (18).
10.32 Employment Agreement dated September 1, 2004 by and between SendTec, Inc.
and Paul Soltoff (18).
10.33 Stockholders' Agreement dated September 1, 2004 by and between
theglobe.com and certain named stockholders (18).
10.34 theglobe.com 2004 Amended and Restated Stock Option Plan (21).
10.35 Promissory Note dated September 1, 2004 (18).
10.36 Form of Potential Conversion Note relating to Series H Preferred Stock
(18).
10.37 Termination of Agreement dated as of January 31, 2005 by and between
theglobe.com, inc. and Promotion and Display Technology Ltd. (23).
10.38 Consulting Agreement effective as of February 2, 2005 (fully executed as
of March 28, 2005) between theglobe.com, inc. and Albert J. Detz (23).
10.39 Carrier Services Agreement between XO Communications, Inc. and Direct
Partner Telecom, Inc., as amended and made effective by the First
Amendment to the Carrier Services Agreement dated March 25, 2005 (23).
10.40 First Amendment to Carrier Services Agreement dated March 25, 2005 (23).
10.41 Note Purchase Agreement dated April 22, 2005 by and between theglobe.com,
inc. and certain named investors (24).
10.42 Asset Purchase Agreement dated as of August 10, 2005 by and among
theglobe.com, inc., SendTec, Inc. and RelationServe Media, Inc. (25).
10.43 1st Amendment to the Asset Purchase Agreement dated as of August 23, 2005,
by and among theglobe.com, inc., SendTec, Inc. and RelationServe Media,
Inc. (26).
10.44 Redemption Agreement dated August 23, 2005 between theglobe.com, inc. and
certain members of management of SendTec, Inc. (27).
16. Letter dated August 13, 2002 from KPMG LLP relating to change of
independent certified accountants (8).
21. Subsidiaries
23.1 Consent of Rachlin Cohen & Holtz LLP. **
23.2 Consent of Proskauer Rose LLP (included in Exhibit 5.1)
24. Power of Attorney (16)
---------------
191
1. Incorporated by reference from our registration statement on Form S-1
filed July 24, 1998 (Registration No. 333-59751).
2. Incorporated by reference from our Form S-1/A filed August 20, 1998.
3. Incorporated by reference from our Form S-1/A filed September 15, 1998.
4. Incorporated by reference from our Form S-1/A filed October 14, 1998.
5. Incorporated by reference from our Form 10-K for the year ended December
31, 1998 filed March 30, 1999.
6. Incorporated by reference from our Form S-1 filed April 13, 1999.
7. Incorporated by reference from our Form 10-Q for the quarter ended March
31, 2000 dated May 15, 2000.
8. Incorporated by reference from our Form 8-K filed August 13, 2002.
9. Incorporated by reference from our Form 8-K filed on November 26, 2002.
10. Incorporated by reference from our Form 8-K filed on June 6, 2003.
11. Incorporated by reference from our Form 8-K filed on July 11, 2003.
12. Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
13. Incorporated by reference from our Form 8-K filed on March 3, 2003, as
amended on December 6, 2004.
14. Incorporated by reference from our Form 10-K filed on March 31, 2003.
15. Incorporated by reference from our Form 10-KSB filed on March 30, 2004.
16. Included on the signature page to this registration statement.
17. Incorporated by reference from our Form 8-K filed on March 17, 2004.
18. Incorporated by reference from our Form 8-K filed September 7, 2004.
19. Incorporated by reference from our Form SB-2 filed April 16, 2004.
20. Incorporated by reference from our Post Effective Amendment No. 1 to our
Form SB-2 filed on May 7, 2004.
21. Incorporated by reference from our S-8 filed October 13, 2004.
22. Incorporated by reference from our Form 8-K filed on December 2, 2004.
23. Incorporated by reference from our 10-KSB filed on March 30, 2005.
24. Incorporated by reference from our 8-K filed on April 26, 2005.
25. Incorporated by reference from our 8-K filed on August 16, 2005.
26. Incorporated by reference to Annex A of our Definitive Information
Statement filed on September 15, 2005.
27. Incorporated by reference to Annex B of our Definitive Information
Statement filed on September 15, 2005.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential
treatment.
** Filed herewith
192
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) reflect in the prospectus any facts or events which, individually or in the
aggregate, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) include any additional or changed material information with respect to the
plan of distribution.
(2) That, for the purpose of determining liability under the Securities Act,
each such post effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has caused this Post Effective Amendment No. 2 to the Form S-1
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Fort Lauderdale, State of Florida, on the 27th of
September, 2005.
theglobe.com, inc.
By: /s/ Michael S. Egan
----------------------------------------
Michael S. Egan, Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post Effective
Amendment No. 2 to the Form S-1 Registration Statement has been signed by the
following persons in the capacities and on the date indicated.
/s/ Michael S. Egan September 27, 2005
----------------------------------------------
Michael S. Egan, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ Edward A. Cespedes September 27, 2005
----------------------------------------------
Edward A. Cespedes, President, Chief Financial
Officer and Director
(Principal Financial Officer)
/s/ Robin Segaul Lebowitz September 27, 2005
----------------------------------------------
Robin Segaul Lebowitz, Director
194
EXHIBIT INDEX
NO. ITEM
3.1 Form of Fourth Amended and Restated Certificate of Incorporation of the
Company (3).
3.2 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation (19).
3.3 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on July 29,
2003(19).
3.4 Certificate relating to Previously Outstanding Series of Preferred Stock
and Relating to the Designation, Preferences and Rights of the Series F
Preferred Stock (14).
3.5 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Junior Participating Preferred Stock.
3.6 Form of By-Laws of the Company(19).
3.7 Certificate of Amendment Relating to the Designation Preferences and
Rights of the Series H Automatically Converting Preferred Stock (18).
3.8 Certificate of Amendment to Fourth Amended and Restated Certificate of
Incorporation filed with the Secretary of State of Delaware on December 1,
2004. (22)
4.1 Registration Rights Agreement, dated as of September 1, 1998(5).
4.2 Amendment No.1 to Registration Rights Agreement, dated as of April 9,
1999(6).
4.3 Specimen certificate representing shares of Common Stock of the Company
(4).
4.4 Amended and Restated Warrant to Acquire Shares of Common Stock (2).
4.5 Form of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent (3).
4.6 Form of Warrant dated November 12, 2002 to acquire shares of Common Stock
(9).
4.7 Form of Warrant dated March 28, 2003 to acquire shares of Common Stock
(14).
4.8 Form of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of theglobe.com Common Stock (10).
4.9 Form of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc. (11).
4.10 Form of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc. (13).
4.11 Form of Warrant relating to potential issuance of Earn-out Consideration
(18).
4.12 Form of Secured Demand Convertible Promissory Note (24).
4.13 Security Agreement dated April 22, 2005 by and between theglobe.com, inc.
and certain other parties named therein (24).
4.14 Unconditional Guaranty Agreement dated April 22, 2005 (24).
5.1 Opinion of Proskauer Rose LLP
10.1 Form of Indemnification Agreement between the Company and each of its
Directors and Executive Officers (1).
195
10.2 Lease Agreement dated January 12, 1999 between the Company and Broadpine
Realty Holding Company, Inc.(6).
10.3 2000 Broad Based Stock Option Plan (7).
10.4 1998 Stock Option Plan, as amended (6).
10.5 1995 Stock Option Plan (1).
10.6 Employee Stock Purchase Plan (5).
10.7 Technology Purchase Agreement dated November 12, 2002, among theglobe.com,
inc., and Brian Fowler (9).
10.8 Employment Agreement dated November 12, 2002, among theglobe.com, inc. and
Brian Fowler (9).
10.9 Payment Agreement dated November 12, 2002, among theglobe.com, inc.,
1002390 Ontario Inc., and Robert S. Giblett (9).
10.10 Release Agreement dated November 12, 2002, among theglobe.com, inc. and
certain other parties named therein (9).
10.11 Preferred Stock Purchase Agreement dated March 28, 2003 between
theglobe.com, inc. and E&C Capital Partners, LLLP (14).
10.12 Loan and Purchase Option Agreement dated February 25, 2003 (13).
10.13 Amended and Restated Promissory Note (13).
10.14 Form of Stock Purchase Agreement (13).
10.15 Note Purchase Agreement dated May 22, 2003 between theglobe.com, inc. and
E&C Capital Partners, LLLP and certain other investors named therein (10)
10.16 Agreement and Plan of Merger dated May 23, 2003 between theglobe.com,
inc., DPT Acquisition, Inc., Direct Partner Telecom, Inc., and the
stockholders thereof (10).
10.17 Employment Agreement dated May 28, 2003 between theglobe.com and James
Magruder (10).
10.18 Form of Subscription Agreement relating to the purchase of Units of Series
G Preferred Stock and Warrants of theglobe.com, inc. (11).
10.19 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Michael S. Egan (12).
10.20 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Edward A. Cespedes (12).
10.21 Employment Agreement dated August 1, 2003 between theglobe.com, inc. and
Robin Segaul Lebowitz (12).
10.22 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Michael S. Egan (12).
10.23 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Edward A. Cespedes (12).
10.24 Amended & Restated Non-Qualified Stock Option Agreement effective as of
August 12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz (12).
10.25 Non-Qualified Stock Option Agreement dated as of July 17, 2003 between
theglobe.com, inc. and Kellie L. Smythe (12).
10.26 2003 Sales Representatives Stock Option Plan (12).
196
10.27 Securities Purchase and Registration Agreement dated March 2, 2004
relating to the purchase of Units of Common Stock and Warrants of
theglobe.com, inc. (15)
10.28 Amendment to the Service Order Agreement Terms and Conditions dated July
30, 2003, and October 24, 2003 between XO Communications, Inc. and Direct
Partner Telecom, Inc., including XO Services Terms and Conditions.(15)*
10.29 Agreement dated August 7, 2003 by and between Promotion and Display
Technology, Ltd. and theglobe.com, inc. (15) *
10.30 Broad Capacity Services Agreement dated October 17, 2003 by and between
Direct Partner Telecom, Inc. and Progress Telecom Corporation. (15)*
10.31 Agreement and Plan of Merger dated August 31, 2004 by and between
theglobe.com, inc., SendTec Acquisition Corporation and SendTec, Inc.,
among others (18).
10.32 Employment Agreement dated September 1, 2004 by and between SendTec, Inc.
and Paul Soltoff (18).
10.33 Stockholders' Agreement dated September 1, 2004 by and between
theglobe.com and certain named stockholders (18).
10.34 theglobe.com 2004 Amended and Restated Stock Option Plan (21).
10.35 Promissory Note dated September 1, 2004 (18).
10.36 Form of Potential Conversion Note relating to Series H Preferred Stock
(18).
10.37 Termination of Agreement dated as of January 31, 2005 by and between
theglobe.com, inc. and Promotion and Display Technology Ltd. (23).
10.38 Consulting Agreement effective as of February 2, 2005 (fully executed as
of March 28, 2005) between theglobe.com, inc. and Albert J. Detz (23).
10.39 Carrier Services Agreement between XO Communications, Inc. and Direct
Partner Telecom, Inc., as amended and made effective by the First
Amendment to the Carrier Services Agreement dated March 25, 2005 (23).
10.40 First Amendment to Carrier Services Agreement dated March 25, 2005 (23).
10.41 Note Purchase Agreement dated April 22, 2005 by and between theglobe.com,
inc. and certain named investors (24).
10.42 Asset Purchase Agreement dated as of August 10, 2005 by and among
theglobe.com, inc., SendTec, Inc. and RelationServe Media, Inc. (25).
10.43 1st Amendment to the Asset Purchase Agreement dated as of August 23, 2005,
by and among theglobe.com, inc., SendTec, Inc. and RelationServe Media,
Inc. (26).
10.44 Redemption Agreement dated August 23, 2005 between theglobe.com, inc. and
certain members of management of SendTec, Inc. (27).
16. Letter dated August 13, 2002 from KPMG LLP relating to change of
independent certified accountants (8).
21. Subsidiaries
23.1 Consent of Rachlin Cohen & Holtz LLP. **
23.2 Consent of Proskauer Rose LLP (included in Exhibit 5.1)
24. Power of Attorney (16)
--------------
197
1. Incorporated by reference from our registration statement on Form S-1
filed July 24, 1998 (Registration No. 333-59751).
2. Incorporated by reference as Exhibit to our Form S-1/A filed August 20,
1998.
3. Incorporated by reference from our Form S-1/A filed September 15, 1998.
4. Incorporated by reference from our Form S-1/A filed October 14, 1998.
5. Incorporated by reference from our Form 10-K for the year ended December
31, 1998 filed March 30, 1999.
6. Incorporated by reference from our Form S-1 filed April 13, 1999.
7. Incorporated by reference from our Form 10-Q for the quarter ended March
31, 2000 dated May 15, 2000.
8. Incorporated by reference from our Form 8-K filed August 13, 2002.
9. Incorporated by reference from our Form 8-K filed on November 26, 2002.
10. Incorporated by reference from our Form 8-K filed on June 6, 2003.
11. Incorporated by reference from our Form 8-K filed on July 11, 2003.
12. Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
13. Incorporated by reference from our Form 8-K filed on March 3, 2003, as
amended on December 6, 2004.
14. Incorporated by reference from our Form 10-K filed on March 31, 2003.
15. Incorporated by reference from our Form 10-KSB filed on March 30, 2004.
16. Included on the signature page to this registration statement.
17. Incorporated by reference from our Form 8-K filed on March 17, 2004.
18. Incorporated by reference from our Form 8-K filed on September 7, 2004.
19. Incorporated by reference from our Form SB-2 filed April 16, 2004.
20. Incorporated by reference from our Post Effective Amendment No. 1 to our
Form SB-2 filed on May 7, 2004.
21. Incorporated by reference from our S-8 filed October 13, 2004.
22. Incorporated by reference from our Form 8-K filed on December 2, 2004.
23. Incorporated by reference from our 10-KSB filed on March 30, 2005.
24. Incorporated by reference from our 8-K filed on April 26, 2005.
25. Incorporated by reference from our 8-K filed on August 16, 2005.
26. Incorporated by reference to Annex A of our Definitive Information
Statement filed on September 15, 2005.
27. Incorporated by reference to Annex B of our Definitive Information
Statement filed on September 15, 2005.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential
treatment.
** Filed herewith
198