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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NO.: 0-25053
THEGLOBE.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1782422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 PENN PLAZA, SUITE 1500
NEW YORK, NEW YORK 10121
(Address of principal executive offices) (Zip Code)
(212) 292-5667
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
________________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X].
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value (the "Common Stock") as of March 20, 2002 was 31,081,574.
Aggregate market value of the voting Common Stock held by non-affiliates of the
registrant as of the close of business on March 20, 2002: $1,864,894.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrant's definitive proxy
statement relating to the annual meeting of stockholders to be held in 2002
which definitive proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report
relates.
Includes voting stock held by third parties, which may be deemed to be
beneficially owned by affiliates, but for which such affiliates have disclaimed
beneficial ownership.
THEGLOBE.COM, INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants and Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
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PART I
ITEM 1. BUSINESS
OVERVIEW
theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995
(inception) and commenced operations on that date. theglobe.com was an online
property with registered members and users in the United States and abroad which
allowed its users to personalize their online experience by publishing their own
content and interacting with others having similar interests. However, due to
the continuing decline in the advertising market, the Company was forced to take
additional cost-reduction and restructuring initiatives, which included closing
www.theglobe.com effective August 15, 2001. The Company then began to
aggressively seek buyers for some or all of its remaining online and offline
properties, which consisted primarily of games-related properties. In October
2001, the Company sold all of the assets used in connection with the Games
Domain and Console Domain websites to British Telecommunications plc, and all of
the assets used in connection with the Kids Domain website to Kaboose Inc. (See
Note 4 of notes to consolidated financial statements - Dispositions).
As of December 31, 2001, the Company continued to operate its Computer Games
print magazine and the associated website Computer Games Online
(www.cgonline.com), as well as the games distribution business of Chips & Bits,
- ------------------
Inc. (www.chipsbits.com). Also as of December 31, 2001, the Company continued
to host its Happy Puppy website for game downloads only, but with no associated
sales staff or editorial staff, for purposes of finding a buyer for the site and
preserving the Happy Puppy brand. In February 2002, the Company sold all of the
assets used in connection with the Happy Puppy website to Internet Game
Distribution, LLC (See Note 16 of notes to consolidated financial statements -
Subsequent Events). As of December 31, 2001, the Company continued to actively
explore a number of strategic alternatives for its remaining online and offline
game properties, including selling some or all of these properties and/or
entering into new or different lines of business, which may include investments
in real estate.
As of December 31, 2001, the Company's revenue sources are principally from the
sale of print advertising in its Computer Games magazine; the sale of video
games and related products through Chips & Bits, Inc., its games distribution
business; the sale of its Computer Games magazine through newsstands and
subscriptions; and the limited sales of online advertising.
The Company's December 31, 2001 consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
suffered recurring losses from operations since inception that raise substantial
doubt about its ability to continue as a going concern. Management and the
Board of Directors are currently exploring a number of strategic alternatives
regarding its remaining assets and the use of its cash on-hand, and is also
continuing to identify and implement internal actions to improve the Company's
liquidity and operations. These alternatives may include selling assets, which
in any such case could result in significant changes in the Company's business,
or entering into new or different lines of business, which may include
investments in real estate. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BUSINESS STRATEGY
Due to the continuing decline in the advertising market, in August 2001 the
Company was forced to take significant additional cost-reduction and
restructuring initiatives, which included closing its community
(www.theglobe.com) and small-business Web-hosting (www.webjump.com) businesses
- ---------------
effective August 15, 2001. The Company also began to actively explore a number
of strategic alternatives for its game properties and to identify and implement
internal actions to improve the Company's liquidity and operations. These
alternatives include selling assets or entering into new or different lines of
business, which may include investments in real estate. In October 2001, the
Company sold all of the assets used in connection with the Games Domain and
Console Domain websites to British Telecommunications plc, and all of the assets
used in connection with the Kids Domain website to Kaboose Inc. (See Note 4 of
notes to consolidated financial statements - Dispositions).
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As of December 31, 2001, the Company continued to actively explore a number of
strategic alternatives for its remaining online and offline game properties,
including selling some or all of these properties and/or entering into new or
different lines of business, which may include investments in real estate.
Computer Games print magazine and the associated website Computer Games Online
(www.cgonline.com), the games distribution business of Chips & Bits, Inc.
- -----------------
(www.chipsbits.com), and the Happy Puppy website. In February 2002, the Company
- -----------------
sold all of the assets used in connection with the Happy Puppy website to
Internet Game Distribution, LLC (See Note 16 of notes to consolidated financial
statements - Subsequent Events).
As of December 31, 2001 and while the Company seeks buyers for some or all of
these remaining properties, Computer Games magazine and Chips & Bits, Inc.
remain fully staffed and fully operational. The Company may determine to retain
one or both businesses in connection with its future operations.
Chips & Bits, Inc. is a games distribution business that covers all the major
game platforms available and attracts customers in the United States and
worldwide. Chips & Bits, Inc. continues to pursue a strategy of cost
containment, affiliations, keyword search, and technology enhancements in order
to grow the business in pursuit of profitability. Chips & Bits, Inc. continues
to work with referring partners on the Internet as well as with Amazon.com and
Yahoo, Inc. in order to increase its business and develop a growing customer
base.
Computer Games Magazine continues to pursue a strategy of increasing paid
circulation while containing costs. As computer games become increasingly
mainstream demand for games information has increased accordingly and Computer
Games Magazine intends to participate in this increasing consumer demand by
providing superior, broad-based editorial content and high-quality production.
PRODUCTS AND SERVICES
theglobe.com was an online property with registered members and users in the
United States and abroad which allowed its users to personalize their online
experience by publishing their own content and interacting with others having
similar interests. However, due to the continuing decline in the advertising
market, the Company was forced to take additional cost-reduction and
restructuring initiatives, which included closing www.theglobe.com website
----------------
effective August 15, 2001. In October 2001, the Company sold all of the assets
used in connection with the Games Domain and Console Domain websites to British
Telecommunications plc, and all of the assets used in connection with the Kids
Domain website to Kaboose Inc.
As of December 31, 2001, the Company continued to operate its Computer Games
print magazine and the associated website Computer Games Online
(www.cgonline.com), as well as the games distribution business of Chips & Bits,
--
Inc. (www.chipsbits.com). Also as of December 31, 2001, the Company continued
to host its Happy Puppy website for game downloads only, but with no associated
sales staff or editorial staff, for purposes of finding a buyer for the site and
preserving the Happy Puppy brand. In February 2002, the Company sold all of the
assets used in connection with the Happy Puppy website to Internet Game
Distribution, LLC (See Note 16 of notes to consolidated financial statements -
Subsequent Events). As of December 31, 2001, the Company continued to actively
explore a number of strategic alternatives for its remaining online and offline
game properties, including selling some or all of these properties and/or
entering into new or different lines of business, which may include investments
in real estate.
COMPUTER GAMES MAGAZINE. Computer Games Magazine, which the Company acquired in
February 2000, is one of the most widely respected consumer print magazines for
gamers today.
- As a leading consumer print publication for games, Computer Games
magazine boasts: an average paid circulation of 374,000 for the year
2001 (Source: BPA International) and a reputation for being a
reliable, trusted, and engaging games magazine; more editorial, tips
and cheats than most other similar magazines; a highly-educated
editorial staff providing increased editorial integrity and content;
and, broad-based editorial coverage, appealing to the widest, largest
audience of gamers.
- One of the most popular features of Computer Games is a CD ROM
containing game demos, which comes bundled monthly with the magazine
in all newsstand editions and a portion of copies mailed to
subscribers.
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COMPUTER GAMES ONLINE. Computer Games Online (www.cdmag.com), which the Company
-------------
acquired in February 2000, is the online counterpart to Computer Games magazine.
Computer Games Online is a leading source of free games news and information for
the sophisticated gamer, featuring news, reviews and previews, along with a
powerful Web-wide search engine.
- Features of Computer Games Online include: a constant stream of
accurate game industry news; truthful, hard-hitting, concise reviews;
insightful hands-on previews; first looks, tips and cheats; multiple
content links; thousands of archived files; discussion forums
supporting all genres of PCs; and, easy access to game buying.
CHIPS & BITS. Chips & Bits (www.chipsbits.com), which the Company acquired in
-----------------
February 2000, is a games distribution business that attracts customers in the
United States and worldwide. Chips & Bits covers all the major game platforms
available, including Macintosh, Window-based PCs, Sony PlayStation, Sony
PlayStation2, Microsoft's Xbox, Nintendo 64, Game Boy, and Sega Dreamcast, among
others.
HAPPY PUPPY. Happy Puppy (www.happypuppy.com), which the Company acquired in
------------------
April 1999, and which was the first-ever commercial game site on the Web,
delivers free, objective and edgy editorial content online, covering all games
platforms.
- Happy Puppy was updated daily until August 2001 when the Company was
forced to layoff almost all remaining staff due to the continued
decline in the online advertising market. Prior to August 2001, the
site offered its users free downloads and information including:
commercial software reviews, downloadable programs, game cheats,
Web-based games, and feature articles.
ADVERTISING CUSTOMERS
We continue to attract leading advertisers to our Computer Games print magazine,
which is a widely respected consumer print magazines for gamers. We believe our
ability to continue to attract leading advertisers is a direct result of our
average paid circulation of 374,000 for the year 2001 (Source: BPA
International) and a reputation for being a reliable, trusted, and engaging
games magazine; more editorial, tips and cheats than most other similar
magazines; a highly-educated editorial staff providing increased editorial
integrity and content; and, broad-based editorial coverage, appealing to the
widest, largest audience of gamers.
Prior to August 2001 when we were forced to layoff all national sales staff (who
sold online space and began cross-selling print space) due to the continued
decline in the advertising market, we had also attracted mass-market consumer
product companies and technology-related businesses to advertise on our
websites. We continue to employ a sales staff of two (2) people specializing in
selling magazine space to games companies, while working at expanding to
consumer and technology advertisers.
In 2001, no single advertiser accounted for more than 10% of total revenues.
For the twelve months ended December 31, 2001, over 200 clients advertised on
our sites and in our Computer Games magazine.
ADVERTISING SALES STAFF
In August 2001, we were forced to layoff almost all remaining staff due to the
continued decline in the advertising market. As a result, we have an internal
advertising sales staff of two (2) professionals as of December 31, 2001, both
of whom are dedicated to selling advertising space in our Computer Games print
magazine, and to a lesser extent on our Computer Games Online website, which is
the online counterpart to Computer Games magazine. These professionals focus on
developing long-term strategic relationships with clients as they sell
advertisements in our Computer Games print magazine and its online counterpart
Computer Games Online. A significant portion of our sales personnel's
compensation is commission based.
5
MARKETING AND PROMOTIONS
In 2001, we committed approximately $5.1 million to offline and online media
advertising. Substantially all of these dollars were committed prior to August
2001, when we closed our community business as part of aggressive cost-reduction
and restructuring initiatives necessitated by the decline in the advertising
market. Our marketing efforts were focused on:
- Increasing awareness and interest in the Internet and advertising
industries in support of our distribution/licensing and advertising
sales efforts;
- Attracting and retaining highly targeted traffic to our individual
websites; and,
- Promoting our games information network, games.theglobe.com, at E3
(Electronic Entertainment Expo), the largest interactive entertainment
tradeshow of the year.
TECHNOLOGY
Through August 31, 2001, our data processing systems and servers were hosted at
the New York Teleport in Staten Island, New York. In conjunction with our
cost-reduction and restructuring initiatives implemented in August 2001, we
discontinued the use of these servers on August 31, 2001 and we now use New
Jersey based outsourced facilities to host our remaining live web sites.
COMPETITION
Competition among games print magazines is high and increasing as online and
pc-based games continue to gain mainstream popularity, and new, cutting-edge
games and console systems continue to come to the consumer market. The magazine
publishing industry is highly competitive. We compete for advertising and
circulation revenues principally with publishers of other technology and games
magazines with similar editorial content as our magazine. The technology
magazine industry has traditionally been dominated by a small number of large
publishers. We believe that we compete with other technology and games
publications based on our top-3 position within the games magazine sector, the
nature and quality of our magazines' editorial content and the attractive
demographics of our readers. In addition to other technology and games
magazines, our magazine also competes for advertising revenues with
general-interest magazines and other forms of media, including broadcast and
cable television, radio, newspaper, direct marketing and electronic media. In
competing with general-interest magazines and other forms of media, we rely on
our ability to reach a targeted segment of the population in a cost-effective
manner.
We believe our Chips & Bits games distribution business faces competition from a
variety of competitors, including:
- Mall stores such as Gamestop and Electronics Boutique
- Discount chains such as Wal-Mart and Target
- Electronics Chains such as Best Buy and CompUSA
- Office stores such as Staples
- Online stores such as EBWorld
- Direct online games, which bypass traditional sales venues
The market situation continues to be a challenge for Chips & Bits due to recent
advances in console and online games, which have lower margins and traditionally
less sales loyalty to Chips & Bits. Chips & Bits depends on major releases in
the Personal Computer (PC) market for the majority of sales and profits. The
game industry's focus on X-Box, Playstation and GameCube has dramatically
reduced the number of major PC releases. Because of the large installed base of
personal computers, it is felt that this is a temporary phenomenon. However,
Chips & Bits has no knowledge as to when there will be a turnaround in the PC
game market.
Competition among games-focused websites is also growing rapidly, as new
companies continue to enter the market and existing companies continue to layer
games applications onto their websites. We expect that the market will continue
to evolve rapidly, and the rate of product innovations and new product
introductions will remain high. We face competitive pressures from many
companies, both in the United States and abroad. With the abundance of
companies operating in the games market, consumers and advertisers have a wide
selection of services to choose from. Our games information websites compete
for users and advertisers with:
- Games information sites such as Snowball's IGN, ZDnet's Gamespot, and
CNET's GameCenter; and,
- Online games centers, where users can play games such as Uproar, Pogo
and Lycos' Gamesville.
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In addition, many companies involved in the games market may be acquired by,
receive investments from, or enter into commercial relationships with larger,
well-established and well-financed companies. As a result of this highly
fragmented and competitive market, consolidations and strategic ventures may
continue in the future.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard substantial elements of our Websites and underlying technology as
proprietary. We attempt to protect them by relying on intellectual property
laws. We also generally enter into confidentiality agreements with our
employees and consultants and in connection with our license agreements with
third parties. We also seek to control access to and distribution of our
technology, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information without authorization or to develop similar
technology independently.
We pursue the registration of our trademarks in the United States and
internationally. THEGLOBE.COM and THEGLOBE.COM logo are registered in the
United States and many international jurisdictions. The HAPPY PUPPY mark and
logo are registered in the United States, and enjoy international protection as
well.
Effective trademark, service mark, copyright, patent and trade secret protection
may not be available in every country in which our services are made available
through the Internet. Policing unauthorized use of our proprietary information
is difficult. Existing or future trademarks or service marks applied for or
registered by other parties and which are similar to ours may prevent us from
expanding the use of our trademarks and service marks into other areas. See
"Risk Factors-We rely on intellectual property and proprietary rights."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
We are subject to laws and regulations that are applicable to various Internet
activities. There are many legislative and regulatory proposals under
consideration by federal, state, local and foreign governments and agencies,
including matters relating to:
- online content;
- privacy;
- Internet taxation;
- liability for information retrieved from or transmitted over the
Internet;
- domain names; and,
- jurisdiction.
New laws and regulations may increase our costs of compliance and doing
business, decrease the growth in Internet use, decrease the demand for our
services or otherwise have a material adverse effect on our business.
ONLINE CONTENT
General Restrictions on Transmitting Indecent and Obscene Content. Several
federal and state statutes generally prohibit the transmission of indecent or
obscene information and content, including sexually explicit information and
content. The constitutionality of some of these statutes is unclear at this
time. For example, in 1997 the Supreme Court of the United States held that
selected parts of the federal Communications Decency Act of 1996 imposing
criminal penalties for transmitting indecent and patently offensive content were
unconstitutional. Many other provisions of the Communications Decency Act,
however, including those relating to obscenity, remain in effect. For example,
on April 19, 1999, the Supreme Court summarily affirmed a lower court decision
holding that selected parts of the Communications Decency Act imposing criminal
penalties for transmitting indecent comments or images with an intent to annoy
was constitutional, as long as those comments or images were also obscene.
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Restrictions on Transmitting Indecent and Obscene Content to Minors. Other
federal and state statutes specifically prohibit transmission of certain content
to minors. The Child Online Protection Act requires websites engaged in the
business of the commercial distribution of material that is deemed to be obscene
or harmful to minors to restrict minors' access to this material. However, the
Child Online Protection Act exempts from liability telecommunications carriers,
Internet service providers and companies involved in the transmission, storage,
retrieval, hosting, formatting or translation of third-party communications
where these companies do not select or alter the third-party material. In 1999,
a federal district court in Pennsylvania entered a preliminary injunction
preventing enforcement of the harmful-to-minors portion of the act. The
provisions of the act relating to obscenity, however, remain in effect. On June
22, 2000, United States Court of Appeals for the Third Circuit affirmed the
lower court ruling. The decision of the United States Supreme Court, which
heard argument of the case on November 28, 2001, is pending. A similar state
statute in New Mexico has been found unconstitutional by the Tenth Circuit Court
of Appeals.
Consumer Fraud and Advertising. Some states have enacted laws or adopted
regulations that expressly or as a matter of judicial interpretation apply
various consumer fraud and false advertising requirements to parties who conduct
business over the Internet. The constitutionality and the enforceability of
some of these statutes is unclear at this time.
PRIVACY
Various laws and regulations have been enacted or adopted in regard to the
collection, use, and disclosure of personally identifiable information. Any
additional legislation or regulations relating to consumer privacy or the
application or interpretation of existing laws and regulations could affect the
way in which we are allowed to conduct our business, especially those aspects
that contemplate the collection or use of our website visitors' personal
information.
Federal Privacy Bills. Numerous bills relating to consumer privacy have been
introduced in Congress. We cannot predict the exact form of any legislation
that the Congress might enact. Accordingly, we cannot assure you that our
current practices will comply with any legislative scheme that Congress
ultimately adopts or that we will not have to make significant changes to comply
with such laws.
FTC Enforcement Activity. The Federal Trade Commission Act prohibits unfair and
deceptive practices in and affecting commerce. The FTC Act authorizes the FTC
to seek injunctive and other relief for violations of the FTC Act, and provides
a basis for government enforcement of fair information practices. For instance,
failure to comply with a stated privacy policy may constitute a deceptive
practice in some circumstances and the FTC would have authority to pursue the
remedies available under the Act for any violations. Furthermore, in some
circumstances, the FTC may assert that information practices may be inherently
deceptive or unfair, regardless of whether the entity has publicly adopted any
privacy policies.
The FTC has conducted investigations into the privacy practices of companies
that collect information on the Internet. In several instances, the FTC has
entered into consent orders with such companies in regard to their collection
and use of personally identifiable information. On January 22, 2001, the FTC
completed an investigation of the advertising and data collection practices of
DoubleClick, Inc., a leading provider of Internet-based advertising services
from whom we license our advertising management system. DoubleClick has advised
the FTC that it would make a number of modifications intended to enhance the
effectiveness of its privacy policy. DoubleClick has also disclosed that it is
the subject of inquiries involving the attorneys general of several states
relating to its collection, maintenance and sharing of information about
Internet users and its disclosure about those practices to users.
We cannot assure you that the FTC's activities, or the activities of other
regulatory authorities, in this area will not adversely affect our ability to
collect demographic and personal information from website visitors, which could
have an adverse effect on our ability to attract advertisers. This could have a
material adverse effect on us.
Voluntary Self-Regulation. Some industry groups and other organizations have
proposed, or are in the process of proposing, various voluntary standards
regarding the treatment of data collected over the Internet. Our website
privacy policies set forth, among other things, the personal information being
collected, how it will be used, and with whom it may be shared. We cannot
assure you that the adoption of voluntary standards will preclude any
legislative or administrative body from taking governmental action regarding
Internet privacy.
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European Union Directive on Data Protection. At the international level, the
European Union has adopted a directive that requires EU member countries to
impose restrictions on the collection and use of personal data. Among other
provisions, the directive generally requires member countries to prevent the
transfer of personally identifiable data to countries that do not offer adequate
privacy protections. The Directive could, among other things, affect United
States companies that collect information over the Internet from individuals in
EU member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In response, the
United States Department of Commerce, in coordination with the European
Commission, developed safe harbor principles that address notice, choice,
access, security, and compliance, among other matters. Organizations that come
within the safe harbor are presumed by the EU to maintain an adequate level of
privacy protection and may receive personal data transfers from EU member
countries. A company that wishes to qualify under the safe harbor must notify
the Department of Commerce, which began maintaining a list of companies that
adhere to the safe harbor principles on November 1, 2000. Relatively few
companies have made a decision to take such action, which is voluntary. We have
not elected to qualify under the safe harbor.
We continue to review our privacy policies and practices in light of the
directive and the safe harbor. We cannot assure you that US and EU activities
in this area will not adversely affect our ability to collect demographic and
personal information from website visitors, which could have an adverse effect
on our ability to attract advertisers. This could have a material adverse
effect on us.
INTERNET TAXATION
Governments at the federal, state and local level, and some foreign governments,
have made a number of proposals that would impose additional taxes on the sale
of goods and services and various other Internet activities. In 1998, the
federal Internet Tax Freedom Act (ITFA) was signed into law, placing a
moratorium until October 2001, on state and local taxes on Internet access and
on multiple or discriminatory taxes on electronic commerce. In November 2001 the
moratorium established by the ITFA was extended until November 1, 2003.
However, this moratorium does not apply to existing state or local laws. We
cannot assure you that future laws imposing taxes or other impositions on
Internet commerce would not substantially impair the growth of Internet commerce
and as a result materially adversely affect our business. In addition, we
cannot assure you that foreign countries will not seek to tax Internet
transactions.
LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET
Liability issues relating to information retrieved or transmitted over the
Internet include claims for copyright or trademark infringement, defamation,
unsolicited electronic mail, negligence, or other claims based on the nature and
content of these materials.
Defamation. The Communications Decency Act of 1996 provides that no provider or
user of an interactive computer service shall be treated as the publisher or
speaker of any information provided by another information content provider.
Revenue Sharing. We sell products directly to consumers and we also enter into
agreements with commerce and service partners and sponsors under which we are
entitled to receive a share of the revenue from the purchase of goods and
services through direct links from our site. These arrangements may expose us
to additional legal risks, including potential liabilities to consumers by
virtue of our involvement in providing access to these products or services,
even if we do not ourselves provide these products or services. Some of our
agreements with these parties provide that these parties will indemnify us
against liabilities. However, we cannot assure you that this indemnification
will be enforceable or adequate. Although we carry general liability insurance,
our insurance may not cover all potential claims or liabilities to which we are
exposed. Any imposition of liability that is not covered by insurance could
have a material adverse effect on our business.
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Third-party Content. Materials may be downloaded and publicly distributed over
the Internet by the Internet services operated or facilitated by us. Future
legislation or regulations or court decisions may hold us liable for listings
and other content accessible through our website, including through hyperlinks,
or through content and materials posted in our chat rooms or bulletin boards.
Liability might arise from claims alleging that, by directly or indirectly
providing hyperlinks to websites operated by third parties, we are liable for
copyright or trademark infringement or other wrongful actions by these third
parties. If any material on our website contains informational errors, someone
might sue us for losses incurred in reliance on the erroneous information. We
attempt to reduce our exposure to potential liability through, among other
things, provisions in member agreements, user policies, insurance and
disclaimers. However, the enforceability and effectiveness of these measures
are uncertain. Future legislation or regulation in the area of liability for
information received from or transmitted over the Internet could decrease the
growth of Internet use. These factors could decrease the demand for our
services. We may also incur significant costs in investigating and defending
against these claims.
DOMAIN NAMES
Domain names have been the subject of significant trademark litigation in the
United States. The current system for registering, allocating and managing
domain names has been the subject of litigation and is currently subject to
regulatory reform.
We have registered several domain names, including: "theglobe.com,"
"globeclubs.com," "azazz.com," "attitude.net," "cgonline.com," "tglo.com,"
"happypuppy.com" and "cdmag.com." We cannot assure you that third parties will
not bring claims for infringement against us for the use of these names.
Moreover, because domain names derive value from the individual's ability to
remember the names, we cannot assure you that our domain names will not lose
their value if, for example, users begin to rely on mechanisms other than domain
names to access online resources. We cannot assure you that our domain names
will not lose their value, or that we will not have to obtain entirely new
domain names in addition to or in place of our current domain names.
JURISDICTION
Due to the global reach of the Internet the governments of various states and
foreign countries have attempted to regulate Internet activity and may assert
that their laws and regulations are applicable to our transmissions. Our
facilities are located primarily in New York and Vermont. Until October 2001,
we owned websites based in the United Kingdom. We cannot assure you that
violations of these laws will not be alleged or charged by state or foreign
governments and that these laws will not be modified, or new laws enacted, in
the future. Any actions of this type could have a material adverse effect on
our business.
EMPLOYEES
As of December 31, 2001, we had approximately 40 full-time employees. Our
future success depends, in part, on our ability to continue to attract, retain
and motivate highly qualified technical and management personnel. Competition
for these persons is intense. From time to time, we also employ independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. Our employees are not represented by
any collective bargaining unit and we have never experienced a work stoppage.
We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
In August 2001, we terminated our lease for our 47,000 square foot headquarters
facility located in New York City and relocated our headquarters to a
significantly smaller temporary facility in New York City. As a result of
terminating this lease, in October 2001 restricted cash of $1.5 million was
released and became available. We maintain approximately 9,000 square feet of
office space in two separate locations in Vermont in connection with our
Computer Games magazine and Chips & Bits, Inc. operations. One of these leases
is on a month-to-month basis and the other expires in September 2005. In May
2001, we terminated our lease for our sales office in San Francisco, California,
in conjunction with the closure of that office.
ITEM 3. LEGAL PROCEEDINGS
On June 20, 2000, Infonent.com, Inc. filed a Complaint and a motion for a
preliminary injunction to enjoin the Company from invoking its contractual right
to terminate the registration statement for Infonent.com, Inc.'s shares in the
Company. In an order entered July 18, 2000, the U.S. Bankruptcy Court for the
Northern District of California (San Jose Division) granted Infonent.com, Inc.'s
motion to the extent of barring the Company from terminating the registration
statement for a period of 45 days, commencing on July 3, 2000. On October 26,
2000, the Securities and Exchange Commission declared effective the Company's
amended registration statement, which terminated the registration statement
relating to Infonent.com's shares in the Company.
10
On February 14, 2001, Mohammed Poonja, Chapter 11 Trustee for the estate of
Infonent.com, Inc. (the "Trustee"), served an Amended Complaint on the Company
and Jump Acquisition, LLC ("Jump"). The Amended Complaint asserts claims for
violation of the automatic stay provision, 11 U.S.C. Sec. 362, as a result of
the Company's exercise of its contractual right to terminate the registration
statement for Infonent.com, Inc.'s shares in the Company pursuant to a November
30, 1999 Registration Rights Agreement between the Company and Infonent.com,
Inc.; breach of contract for the Company's and Jump's alleged failure to make
certain earn-out payments to Infonent.com, Inc. in connection with a November
30, 1999 purchase agreement (the "Agreement"); breach of the implied covenant of
good faith and fair dealing in connection with the Agreement; fraud; negligence;
breach of contract; and breach of the implied covenant of good faith and fair
dealing for its alleged delay in registering newly-issued shares of the
Company's common stock in connection with the Registration Rights Agreement.
The Amended Complaint sought $9,524,859 in damages, plus interest, compensatory
damages on the automatic stay cause of action, costs and disbursements of the
action, and attorneys' fees. The Company filed an Answer on May 2, 2001 denying
the allegations made in the Amended Complaint. The Trustee has withdrawn its
claim for violation of the Automatic Stay by the Company. In August 2001, the
Company executed a Settlement Agreement with the trustee for Infonent.com in
which the trustee agreed to dismiss all claims in return for a payment of
$175,000 by the Company.
On and after August 3, 2001 and as of the date of this filing, the Company is
aware that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors, and several
investment banks that were the underwriters of the Company's initial public
offering. The lawsuits were filed in the United States District Court for the
Southern District of New York. The lawsuits purport to be class actions filed on
behalf of purchasers of the stock of the Company during the period from November
12, 1998 through December 6, 2000. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in the Company's initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for
the Company's initial public offering was false and misleading and in violation
of the securities laws because it did not disclose these arrangements. On
December 5, 2001, an amended complaint was filed in one of the actions, alleging
the same conduct described above in connection with both the Company's November
23, 1998 initial public offering and its May 19, 1999 secondary offering. The
actions seek damages in an unspecified amount. The Company and its current and
former officers and directors intend to vigorously defend the actions. The
complaints have been consolidated into a single action, entitled Kofsky v.
theglobe.com, inc. et al., Case No. 01 Civ. 7247. The Company is not required
to respond to Plaintiffs' claims before a consolidated complaint is filed.
However, due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the litigation. Any unfavorable outcome of this
litigation could have a material adverse impact on our business, financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders' for a vote during the three
months ended December 31, 2001.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The shares of our Common Stock were delisted from the Nasdaq national market in
April 2001 and now trade in the over-the-counter market on what is commonly
referred to as the electronic bulletin board, under the symbol "TGLO.OB" The
following table sets forth the range of high and low closing sales prices of our
common stock for the periods indicated as reported by the NASDAQ stock market
(prior to April 2001) and the over-the-counter market (the electronic bulletin
board) (after April 2001):
2001 2000
------------ ------------
High Low High Low
----- ----- ----- -----
Fourth Quarter $0.08 $0.03 $0.94 $0.13
Third Quarter $0.23 $0.01 $2.66 $0.72
Second Quarter $0.34 $0.13 $6.44 $1.31
First Quarter $0.88 $0.05 $8.50 $5.75
The market price of our Common Stock is highly volatile and fluctuates in
response to a wide variety of factors. See "Risk Factors-Our stock price is
volatile."
HOLDERS OF COMMON STOCK
We had approximately 440 holders of record of Common Stock as of March 20, 2002.
This does not reflect persons or entities that hold Common Stock in nominee or
"street" name through various brokerage firms.
DIVIDENDS
We have not paid any cash dividends on our Common Stock since our inception and
do not intend to pay dividends in the foreseeable future. Our board of
directors will determine if we pay any future dividends.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data with respect to our consolidated
balance sheets as of December 31, 2001 and 2000 and the related consolidated
statements of operations for the years ended December 31, 2001, 2000, and 1999
have been derived from our audited consolidated financial statements which are
included herein and have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from operations since
inception that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The selected consolidated
financial data with respect to our consolidated balance sheets as of December
31, 1999, 1998, and 1997 and the related consolidated statements of operations
for the years ended December 31, 1998 and 1997 have been derived from our
audited consolidated financial statements, which are not included herein. The
following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes thereto and the
information contained in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
--------- ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . . $ 16,074 $ 29,862 $ 18,641 $ 5,510 $ 770
Cost of revenues. . . . . . . . . . . . 12,145 19,080 8,548 2,136 257
--------- ---------- --------- --------- --------
Gross profit. . . . . . . . . . . . . . 3,929 10,782 10,093 3,374 513
Operating expenses:
Sales and marketing . . . . . . . . . 9,755 23,917 19,352 9,402 1,415
Product development . . . . . . . . . 3,811 10,242 10,488 2,633 154
General and administrative. . . . . . 6,596 13,173 12,165 6,828 2,828
Restructuring and impairment
charges. . . . . . . . . . . . . . . 17,091 41,348 - - -
Non-recurring charges . . . . . . . . - - - 1,370 -
Amortization of goodwill and
intangible assets 8,469 27,236 20,460 - -
--------- ---------- --------- --------- --------
Total operating expenses. . . . . . . . 45,722 115,916 62,465 20,233 4,397
--------- ---------- --------- --------- --------
Loss from operations. . . . . . . . . . (41,793) (105,134) (52,372) (16,859) (3,884)
Other income, net . . . . . . . . . . . 1,189 1,536 1,705 892 335
--------- ---------- --------- --------- --------
Loss before provision for income taxes
and extraordinary item . . . . . . . (40,604) (103,598) (50,667) (15,967) (3,549)
Provision for income taxes. . . . . . . 16 268 290 79 36
--------- ---------- --------- --------- --------
Loss before extraordinary item. . . . . (40,620) (103,866) (50,957) (16,046) (3,585)
Extraordinary item-gain on early
retirement of debt . . . . . . . . . - - 1,356 - -
--------- ---------- --------- --------- --------
Net loss. . . . . . . . . . . . . . . . $(40,620) $(103,866) $(49,601) $(16,046) $(3,585)
========= ========== ========= ========= ========
Basic and diluted net loss per
share (1):
Loss before extraordinary item. . . . $ (1.31) $ (3.43) $ (2.06) $ (3.37) $ (1.56)
Extraordinary item-gain on early
retirement of debt. . . . . . . . . - - 0.06 - -
--------- ---------- --------- --------- --------
Net loss. . . . . . . . . . . . . . . $ (1.31) $ (3.43) $ (2.00) $ (3.37) $ (1.56)
========= ========== ========= ========= ========
Weighted average shares outstanding
used in basic and diluted per share
calculation (1) . . . . . . . . . . . . 31,081 30,286 24,777 4,762 2,294
========= ========== ========= ========= ========
(1) Weighted average shares outstanding do not include any common stock
equivalents because the inclusion of those common stock equivalents would
have been anti-dilutive. See the consolidated financial statements and the
related notes appearing elsewhere in this Form 10-K for the determination
of shares used in computing basic and diluted net loss per share.
13
DECEMBER 31,
--------------------------------------------------
2001 2000 1999 1998 1997
------ ------- --------------- ------- -------
(in thousands)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents and short-
term investments . . . . . . . . . $2,614 $16,346 $ 55,875 $30,149 $18,874
Working capital. . . . . . . . . . . 3,012 13,568 52,965 27,009 17,117
Total assets . . . . . . . . . . . . 5,973 54,531 138,843 38,130 19,462
Capital lease obligations, excluding
current installments . . . . . . . - 382 2,201 2,006 99
Total stockholders' equity . . . . . 3,262 43,946 126,909 30,301 17,352
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
- ----------------------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements can be identified by the
use of predictive, future-tense or forward-looking terminology, such as
"believes," "anticipates," "expects," "estimates," "plans," "may," "intends,"
"will," or similar terms. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various factors
described under "Risk Factors" and elsewhere in this report. The following
discussion should be read together with the consolidated financial statements
and notes to those statements included elsewhere in this report.
OVERVIEW
As of December 31, 2001, we were a network of four wholly owned properties, each
of which specializes in the games business by delivering games information and
selling games in the United States and abroad. These properties are: our print
publication Computer Games Magazine; our Computer Games Online website
(www.cgonline.com), which is the online counterpart to Computer Games Magazine;
- -----------------
our Chips & Bits, Inc. (www.chipsbits.com) games distribution company; and, our
-----------------
Happy Puppy website (www.happypuppy.com), which provides game reviews, cheats,
and downloads for users. In February 2002, the Company sold all of the assets
used in connection with the Happy Puppy website to Internet Game Distribution,
LLC (See Note 16 of notes to consolidated financial statements - Subsequent
Events).
Our revenues are derived principally from the sale of print advertisements under
short-term contracts in our games information magazine Computer Games, which we
acquired in February 2000; through the sale of video games and related products
through our games distribution business Chips & Bits, Inc.; through the sale of
our games information magazine through newsstands and subscriptions; through
electronic commerce revenue shares (representing our share of the proceeds from
our e-commerce partners' sales); and through limited sale of online
advertisements, which includes the development and sale of sponsorship
placements within our web sites (we earn revenue on sponsorship contracts for
fees relating to the design, coordination, and integration of the customer's
content and links).
In April 1999, we acquired Attitude Networks, Ltd., a provider of online games
information content whose websites included Happy Puppy, Games Domain and Kids
Domain, three leading websites serving game enthusiasts. The aggregate purchase
price amounted to $46.8 million and was comprised, in part, of approximately 1.6
million shares of newly issued Common Stock.
In May 1999, we completed a secondary public offering of 3.5 million shares of
Common Stock at an offering price of $20.00 per share. Net proceeds amounted to
$65.0 million, after underwriting discounts of $3.5 million and offering costs
of $1.5 million.
In December 1999, we acquired the web hosting assets of Webjump.com, a web
hosting property that primarily focuses on small businesses. The total purchase
price for this transaction was $13.0 million and was primarily comprised of 1.1
million shares of newly issued Common Stock. An additional $12.5 million,
payable in newly issued shares of Common Stock, was contingent based upon the
attainment of certain performance targets measured as of November 30, 2000.
Management determined that such targets were not achieved as of the measurement
date, however, on February 14, 2001 the former shareholder group filed a law
suit against us claiming that they are entitled to $9.5 million related to the
above mentioned targets. That lawsuit was settled by the Company for payment of
$175,000 in August 2001. See Part I - Item 3 - "Legal Proceedings" and Note 5
(d) of our consolidated financial statements for additional information.
15
In February 2000, we acquired Chips & Bits, Inc. and Strategy Plus, Inc.,
providers of online and offline entertainment content focused towards game
enthusiasts. The total purchase price for this transaction was approximately
$15.3 million and was comprised, in part, of 1.9 million newly issued shares of
Common Stock. An additional $1.25 million, payable in newly issued shares of
Common Stock, was contingent on the attainment of certain performance targets by
Chips & Bits, Inc. and Strategy Plus, Inc. During August 2001, the Company
settled the contingency resulting in no additional consideration being paid to
the former shareholders.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Our revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games, which was acquired in February 2000; through the sale of video
games and related products through games distribution business Chips & Bits,
Inc.; through the sale of our games information magazine through newsstands and
subscriptions; and through limited sale of online advertisements principally
under short-term advertising arrangements, averaging one to three months.
Revenues decreased to $16.1 million for the year ended December 31, 2001 as
compared to $29.9 million for the year ended December 31, 2000. Advertising
revenues for the year ended December 31, 2001 were $6.4 million, which
represented 40% of total revenues. Advertising revenues for the year ended
December 31, 2000 were $19.5 million, which represented 65% of total revenues.
The decrease in advertising revenues was primarily attributable to a significant
industry-wide decrease in the online advertising market, which is expected to
continue through at least the second quarter of 2002, and possibly through the
full-year 2002, and to a dramatic reduction in the Company's sales force as part
of the August 2001 cost reduction and restructuring initiatives, which included
closing of www.theglobe.com website business. Advertising revenue from our
----------------
online properties decreased to $2.9 million for the year ended December 31,
2001, compared to $15.0 million for the year ended December 31, 2000.
Advertising revenue from our games magazine, which was acquired in February
2000, accounted for $3.5 million and $4.5 million, of the total advertising
revenues for the years ended December 31, 2001 and December 31, 2000,
respectively.
Sales of merchandise through our online store accounted for 31% of total
revenues for the year ended December 31, 2001, or $5.1 million, as compared to
24% for the year ended December 31, 2000, or $7.2 million. The decrease was
partially attributable to recent advances in console and online games, which
traditionally have less sales loyalty to our online store, and to a dramatic
reduction in the number of major PC games releases, on which our online store
relies for the majority of sales and profits. In order to realign our
e-commerce operations to focus on video games and related products, the Company
elected in April 2000 to shut down its electronic commerce operations in
Seattle, Washington, which it acquired in February 1999 (see Notes 3 and 4 to
the consolidated financial statements). Sales of our games information magazine
through newsstands and subscriptions accounted for $4.7 million, or 29%, and
$3.2 million, or 11%, of total revenues for the years ended December 31, 2001
and December 31, 2000, respectively. We acquired our games information magazine
in February 2000. Price increases and significant increases in circulation
account for the year-over-year increase. Barter advertising revenues represented
1% of total revenues for the year ended December 31, 2001 and 4% of total
revenues for the year ended December 31, 2000.
Cost of Revenues. Cost of revenues consists primarily of Internet connection
charges, staff and related costs of operations personnel, depreciation and
maintenance costs of website equipment, printing costs of our games magazine and
the costs of merchandise sold and shipping fees in connection with our online
store. Gross margins were 24% and 36% for the years ended December 31, 2001 and
December 31, 2000, respectively. The year-to-year decrease in gross margins was
primarily attributable to a higher concentration of electronic commerce and
print advertising sales in our games information magazine, both of which
traditionally result in lower gross margins than online advertising revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and related expenses of sales and marketing personnel, commissions, advertising
and marketing costs, public relations expenses, promotional activities and
barter expenses. Sales and marketing expenses were $9.8 million for the year
ended December 31, 2001 as compared to $23.9 million for the year ended December
31, 2000. The year-to-year decrease in sales and marketing expense was
attributable to reduced personnel costs and decreased advertising costs. As of
December 31, 2001, we have an internal advertising sales staff of two (2)
professionals as of December 31, 2001, both of whom are dedicated to selling
advertising space in our Computer Games print magazine, and to a lesser extent
on our Computer Games Online website, which is the online counterpart to
Computer Games magazine. In August 2001 we were forced to lay off almost all
our national sales staff due to the continue decline in the advertising market.
As of December 31, 2001, we have 19 employees employed in our sales and
marketing department.
16
Product Development. Product development expenses include salaries and related
personnel costs, expenses incurred in connection with the development of,
testing of and upgrades to our websites and community management tools, and
editorial and content costs. Product development expenses decreased to $3.8
million for the year ended December 31, 2001, as compared to $10.5 million for
the year ended December 31, 2000. The year-to-year decrease was related to our
restructuring and cost containment initiatives. In August 2001 we were forced
to lay off almost all our product development staff due to the continue decline
in the business. As of December 31, 2001, we have 12 employees employed in our
product development department.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related personnel costs for general corporate
functions including finance, human resources, legal and facilities, outside
legal and professional fees, directors and officers insurance, bad debt expenses
and general corporate overhead costs. General and administrative expenses were
$6.6 million for the year ended December 31, 2001 as compared to $13.2 million
for the year ended December 31, 2000. The year-to-year decrease was primarily
attributable to decreased salaries and personnel costs as a result of our
restructuring and cost containment initiatives. In August 2001 we were forced
to lay off almost all our general and administration staff due to the continue
decline in the business. As of December 31, 2001, we have 8 employees employed
in our general and administration department.
Restructuring and Impairment Charges. For the years ended December 31, 2001,
and December 31, 2000, the Company recorded restructuring and impairment charges
of $17.1 million and $41.3 million, respectively.
Year ended December 31, 2001
In the second quarter of 2001, we announced cost-reduction initiatives. These
initiatives included the elimination of 59 positions, or 31% of our workforce.
The severance benefits of $470,000 were paid in the second quarter of 2001.
Additionally, we closed our San Francisco office in May 2001 and an additional
$54,000 security deposit was relinquished as settlement to terminate the
remaining lease obligation.
In the second quarter of 2001, we recorded impairment charges of $4.5 million
related to the servers and computers used for serving and hosting
www.webjump.com and www.theglobe.com as a result of management's ongoing
- ----------------
business review and impairment analysis performed under its existing policy
regarding impairment of long-lived assets.
In the third quarter of 2001, we continued our cost cutting measures. We
eliminated 60 additional positions, or 58% of our workforce. As a result,
severance benefits of $1.0 million were paid in the third quarter of 2001.
Additionally, we terminated our lease at 120 Broadway in New York and relocated
our operations to a significantly smaller temporary facility in New York, in
September 2001. We also decided to shut down our www.theglobe.com and
www.webjump.com websites effective August 15, 2001. The servers located in a
facility in Staten Island, New York were in use through August 31, 2001. We
discontinued the use of these servers on August 31, 2001 and we are now using
outsourced hosted facilities for our live websites. As a result of these
measures, we recorded net restructuring and impairment charges related to the
fixed assets consisting of computer hardware and software, furniture and
fixtures, communications equipment and leasehold improvements at the two
locations totaling approximately $3.67 million, and miscellaneous net
restructuring credit amounts related to the settlement of prepaid items,
accruals and capital lease obligations totaling approximately $0.26 million.
17
Further, in the third quarter of 2001, we recorded additional impairment charges
of $4.2 million, of which $3.6 million related to Chips & Bits and Strategy Plus
and $0.6 million related to Attitude Network, Ltd. related to goodwill and other
intangible assets, as a result of management's ongoing business review and
impairment analysis performed under its existing policy regarding impairment of
long-lived assets.
In the fourth quarter of 2001, severance benefits of $0.1 million were paid out
relating to the cost cutting measures initiated in the third quarter 2001. The
company recorded an additional impairment charge of $3.3 million in goodwill
related to Chips & Bits and Strategy Plus as result of as a result of
management's ongoing business review and impairment analysis performed under its
existing policy regarding impairment of long-lived assets.
Where impairment indicators were identified, management determined the amount of
the impairment charge by comparing the carrying values of goodwill and other
long-lived assets to their fair values. Management determines fair value based
on a market approach, which during 2001, mainly included proposals for sale of
its business properties. As a result, during management's quarterly review of
the value and periods of amortization of both goodwill and other long-lived
assets, it was determined that the carrying value of goodwill and certain other
tangible and intangible assets were not fully recoverable.
During 2001, our revaluation of goodwill and intangible assets related to
Attitude Network, Ltd., Strategy Plus, Inc. and Chips & Bits, Inc. and certain
acquired tangible assets such as the servers and computers used for serving and
hosting our various websites was triggered by the continued and prolonged
decline in Internet advertising throughout 2000 and 2001, which significantly
impacted current projected advertising revenue generated from these web-based
properties and downturn in computer games e-commerce business and has resulted
in declines in operating and financial metrics over the past several quarters,
in comparison to the metrics forecasted at the time of their respective
acquisitions.
It was determined that the fair value of goodwill and intangible assets related
to our web-based properties, other businesses and tangible assets were less than
the recorded amount. The methodology used to test for and measure the amount of
the impairment charge related to the intangible assets was based on the same
methodology as used during the initial acquisition valuation of these web-based
properties and other businesses. The impairment related to the tangible assets
was based on the estimated net realizable value of these assets. The impairment
factors evaluated by management may change in subsequent periods, given that our
business operates in a highly volatile business environment. This could result
in material impairment charges in the future.
As of December 31, 2001, the amount remaining in the Company's restructuring
accruals recorded in 2001 and 2000 was $200,000 and $0.
As of December 31, 2001, after giving effect to the fourth quarter of 2000 and
full-year 2001 impairment charges the total remaining amount of goodwill and
other intangible assets, net, is $0 for Attitude Networks, which was acquired in
April 1999, and $0 for Chips & Bits and Strategy Plus, which was acquired in
February 2000. The impairment factors evaluated by management may change in
subsequent periods, given that our business operates in a highly volatile
business environment.
Year ended December 31, 2000
In the second quarter of 2000, we recorded a $15.6 million restructuring charge
as a result of a strategic decision made by management to shut down our
electronic commerce operations in Seattle, Washington in order to realign our
electronic commerce operations to focus on the direct sale of video games and
related products as well as revenue share relationships with third parties who
are interested in reaching our targeted audiences. The $15.6 million charge
incurred primarily related to a $12.8 million write-off of the remaining
goodwill and intangibles associated with our 1999 acquisition of
Factorymall.com, costs associated with the closing of the Seattle operations of
$0.5 million, write-offs related to the disposal of inventory, equipment and
other assets of $1.7 million as well as $0.6 million of employee severance and
related benefits incurred primarily related to the termination of 30 employees.
In the fourth quarter of 2000, we incurred an additional $25.7 million in
restructuring and impairment charges as follows:
18
- We recorded a restructuring charge of $1.8 million, including $398,000
of non-cash compensation, as a result of strategic decisions made by
management to increase operational efficiencies, improve margins and
further reduce expenses. The restructuring charge primarily related to
a workplace reduction of 26 employees.
- In addition, we recorded an impairment charge of $4.3 million in
connection with our termination of a distribution agreement with
Sportsline in November 2000.
- We also recorded impairment charges of $19.6 million as a result of
management's ongoing business review and impairment analysis performed
under its existing policy regarding impairment of long-lived assets.
In 1999, we completed acquisitions of Attitude Network, Ltd. and the web hosting
assets of Webjump.com that were financed principally with shares of our common
stock, and were valued based on the price of our common stock at that time. Our
revaluation was triggered by the continued decline in Internet advertising
throughout 2000, which significantly impacted current projected advertising
revenue generated from these web based properties. In addition, each of these
web based properties have experienced declines in operating and financial
metrics over the past several quarters, primarily due to the continued weak
overall demand of on-line advertising and marketing services, in comparison to
the metrics forecasted at the time of their respective acquisitions. The
impairment analysis considered that these web-based properties were acquired
during 1999 and that the intangible assets recorded at the time of acquisition
was being amortized over useful lives of 2-3 years (3 years for goodwill). As a
result, it was determined that the fair value of Attitude's and Webjump's
goodwill and other intangible assets were less than the recorded amount,
therefore, an impairment charge of $13.6 million and $6.0 million, respectively,
were recorded. The methodology used to test for and measure the amount of the
impairment charge was based on the same methodology we used during our initial
acquisition valuation of Attitude and Webjump in 1999.
Amortization of Goodwill and Intangible Assets. Amortization expense was $8.5
million for the year ended December 31, 2001, compared to $27.2 million for the
year ended December 31, 2000. The year-to-year decrease in amortization expense
was primarily attributable to the write-down of goodwill and intangibles assets
that occurred in the fourth quarter of 2000 and second quarter of 2001. See
Recent Accounting Pronouncements of notes to consolidated financial statements,
Note 1 (u).
Interest and other income, net. Interest and other income, net primarily
includes interest income from our cash and cash equivalents and short-term
investments, interest expense related to our capital lease obligations and
realized gains and losses from the sale of short-term investments. Interest and
other income, net were $1.2 million and $1.5 million for the years ended
December 31, 2001 and December 31, 2000, respectively. The year-over-year
decrease was primary attributable to a decrease in income earned as a result of
a lower cash and cash equivalent and short-term investment balance.
Income Taxes. Income taxes were approximately $16,000 for the year ended
December 31, 2001 compared with $268,000 for the year ended December 31, 2000.
Income taxes were based solely on state and local taxes on business and
investment capital. Our effective tax rate differs from the statutory federal
income tax rate, primarily as a result of the uncertainty regarding our ability
to utilize our net operating loss carryforwards. Due to the uncertainty
surrounding the timing or realization of the benefits of our net operating loss
carryforwards in future tax returns, we have placed a 100% valuation allowance
against our otherwise recognizable deferred tax assets. At December 31, 2001,
the Company had net operating loss carry forwards available for U.S. and foreign
tax purposes of approximately $115 million. These carryforwards expire through
2021. The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Due to the change in our ownership
interests in the third quarter of 1997 and May 1999, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), future utilization of our net
operating loss carryforwards prior to the change of ownership will be subject to
certain limitations or annual restrictions.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues increased to $29.9 million for the year ended December 31,
2000 as compared to $18.6 million for the year ended December 31, 1999.
Advertising revenues for the year ended December 31, 2000 were $19.5 million,
which represented 65% of total revenues. Advertising revenues for the year
ended December 31, 1999 were $16.4 million, which represented 88% of total
revenues. The growth in advertising revenues was attributable to the revenues
from our games magazine, which was acquired in February 2000. Revenue from our
games magazine accounted for $4.5 million of the total advertising revenues for
the year ended December 31, 2000. The increase in advertising revenues
attributable to our games magazine was partially offset by a decline in online
advertising revenues due to an industry-wide decline in online advertising
spending primarily in the second half of 2000, and which continued into 2001.
Sales of merchandise through our online store accounted for 24% of total
revenues for the year ended December 31, 2000, or $7.2 million, as compared with
12% of total revenues for the year ended December 31, 1999, or $2.2 million.
The increase in electronic commerce revenue of $5.0 million was attributable to
increased online sales from our acquisition of Chips & Bits, Inc. in February
2000. In order to realign our e-commerce operations to focus on video games and
related products, the Company elected in April 2000 to shut down its electronic
commerce operations in Seattle, Washington which we acquired in February 1999
(see Notes 3 and 4 to the consolidated financial statements). Other revenues of
$3.2 million were comprised of newsstand sales and subscriptions of our games
information magazine, which we acquired in February 2000. Barter advertising
revenues represented 4% of total revenues for the year ended December 31, 2000
and 5% of total revenues for the year ended December 31, 1999.
19
Cost of Revenues. Gross margins were 36% and 54% for the years ended December
31, 2000 and 1999, respectively. The year-to-year decrease in the gross margins
was primarily attributable to a higher mix of electronic commerce sales and
print advertising sales in our games information magazine, both of which
traditionally result in lower gross margins than online advertising revenues.
The absolute dollar increase in cost of revenues was mainly due to printing
costs related to our games magazine, which was acquired in February 2000, and
additional costs of merchandise attributable to increased sales through our
online store. Additional absolute dollar increases were due to an increase in
Internet connection costs to support the increase in web site traffic, an
increase in depreciation expense related to increased equipment costs and
personnel costs required to support the expansion of our sites and services.
Sales and Marketing. Sales and marketing expenses were $23.9 million for the
year ended December 31, 2000 as compared to $19.4 million for the year ended
December 31, 1999. The year-to-year increase in sales and marketing expense was
mainly attributable to promotional expenses incurred in order to promote our
games magazine and support our online store.
Product Development. Product development expenses were $10.2 million for the
year ended December 31, 2000 as compared to $10.5 million for the year ended
December 31, 1999. Product development expenses have decreased slightly from
prior year mainly as a result of our effort to consolidate duties and reduce
headcount.
General and Administrative Expenses. General and administrative expenses were
$13.2 million for the year ended December 31, 2000 as compared to $12.2 million
for the year ended December 31, 1999. The year-to-year increase was primarily
attributable to increased costs associated with the operation of our games
magazine and our games online store, which we acquired in February 2000, and
higher than anticipated bad-debt expenses.
Restructuring and Impairment Charges. For the year ended December 31, 2000, we
recorded restructuring and impairment charges of $41.3 million.
In the second quarter of 2000, we recorded a $15.6 million restructuring charge
as a result of a strategic decision made by management to shut down our
electronic commerce operations in Seattle, Washington in order to realign our
electronic commerce operations to focus on the direct sale of video games and
related products as well as revenue share relationships with third parties who
are interested in reaching our targeted audiences. The $15.6 million charge
incurred primarily related to a $12.8 million write-off of the remaining
goodwill and intangibles associated with our 1999 acquisition of
Factorymall.com, costs associated with the closing of the Seattle operations of
$0.5 million, write-offs related to the disposal of inventory, equipment and
other assets of $1.7 million as well as $0.6 million of employee severance and
related benefits incurred primarily related to the termination of 30 employees.
In the fourth quarter of 2000, we incurred an additional $25.7 million in
restructuring and impairment charges as follows:
20
- We recorded a restructuring charge of $1.8 million, including $398,000
of non-cash compensation, as a result of strategic decisions made by
management to increase operational efficiencies, improve margins and
further reduce expenses. The restructuring charge primarily related to
a workplace reduction of 26 employees.
- In addition, we recorded an impairment charge of $4.3 million in
connection with our termination of a distribution agreement with CBS
Sportsline in November 2000.
- As discussed above, we also recorded impairment charges of $19.6
million as a result of management's ongoing business review and
impairment analysis performed under its existing policy regarding
impairment of long-lived assets.
Amortization of Goodwill and Intangible Assets. Amortization expense was $27.2
million for the year ended December 31, 2000 as compared to $20.5 million for
the year ended December 31, 1999. The year-to-year increase in amortization
expense was primarily attributable to the acquisitions of Chips & Bits, Inc. and
Strategy Plus, Inc. in February 2000 and the purchase of the web hosting assets
of Webjump.com in December 1999. The Company recorded goodwill and intangible
assets of $28.7 million in connection with these transactions. The total gross
amount of goodwill and purchased intangibles, after eliminating impairment
charges discussed above, as of December 31, 2000 was $56.5 million and is being
amortized over the expected periods of benefit ranging from two to three years
(three years for goodwill).
Interest and other income, net. Interest and other income, net were $1.3
million and $1.7 million for the years ended December 31, 2000 and December 31,
1999, respectively. The decrease was primarily attributable to a decrease in
interest income earned as a result of a lower cash and cash equivalent and
short-term investment balance.
Income Taxes. Income taxes were approximately $268,000 for the year ended
December 31, 2000 as compared with $290,000 for the year ended December 31,
1999. Income taxes were based solely on state and local taxes on business and
investment capital.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had approximately $2.6 million in cash and cash
equivalents and approximately $51,000 in short-term investments. Net cash used
in operating activities was $16.4 million, $34.7 million, and $30.1 million for
the years ended December 31, 2001, December 31, 2000, and December 31, 1999,
respectively. The decrease in net cash used in operating activities from
December 31, 2000 to December 31, 2001 resulted primarily from a decrease in our
net operating losses, exclusive of depreciation expenses and amortization
expenses related to our acquisitions and non-cash charges. This decrease was
also attributable to a reduction in accounts receivable and prepaid expenses,
offset by a reduction in accounts payable and accrued expenses.
Net cash provided by (used in) investing activities was $7.2 million, $13.3
million, and ($25.4) million for the years ended December 31, 2001, December 31,
2000, and December 31, 1999, respectively. The decreases in net cash provided
in investing activities was primarily attributable to decreases in the proceeds
received from the sale of short-term investments, the receipt of security
deposits which were partially used to buy out certain capital and operating
lease obligations offset by lower purchases of property and equipment and
increase in proceeds from sale of property.
Net cash provided by (used in) by financing activities was approximately ($1.6)
million, ($2.0) million, and $62.8 million for the years ended December 31,
2001, December 31, 2000, and December 31, 1999, respectively. The decrease from
December 31, 2000 to December 31, 2001 in net cash used in financing activities
was primarily attributable to less capital lease obligations in 2001. The cash
provided by financing activities in 1999 was mainly attributable to net proceeds
received from our secondary public offering of Common Stock and proceeds
received from the exercise of stock options and warrants.
As of December 31, 2001, there was $200,000 to be paid out as a result of
restructuring activities during the years December 31, 2001 and 2000. The
remaining amount will be expended through March 2002.
21
Currently, the Company is in discussions with Mr. Charles M. Peck, Chief
Executive Officer, regarding potential additional cash compensation of up to $1
million to be paid to Mr. Peck upon future achievement of certain incentives.
Our capital requirements depend on numerous factors, including market acceptance
of our services, the capital required to maintain our websites, the resources we
devote to marketing and selling our services and our brand promotions and other
factors. We have experienced a substantial decrease in our capital and
marketing expenditures and lease arrangements since last year consistent with
the reduction in our operations and staffing. We have received a report from our
independent accountants, relating to our December 31, 2001 audited financial
statements containing an explanatory paragraph stating that our recurring losses
from operations since inception and requirement for additional financing raise
substantial doubt about our ability to continue as a going concern. In addition
to the revenue plan, management and the Board of Directors are currently
exploring a number of strategic alternatives and are also continuing to identify
and implement internal actions to improve the Company's liquidity or financial
performance. These alternatives may include selling assets, which in any such
case could result in significant changes in our business plan, or entering into
new or different lines of business, which may include investments in real
estate.
As of December 31, 2001, our sole source of liquidity consisted of $2.6 million
of cash and cash equivalents and short-term investments. We currently do not
have access to any other sources of funding, including debt and equity financing
facilities. As of December 31, 2001, our principal commitments consisted of
amounts outstanding under operating leases. Due to our cost-reductions and
restructuring initiatives, we believe that we have sufficient funds to continue
operating at our present level of operations for a period of at least 6 months,
and potentially, up to 12 months depending upon the economic conditions
affecting the advertising, magazine subscription and e-commerce revenue
generating activities for our remaining properties and amounts received, if any,
if we sell any of our remaining assets. The Company has limited operating
capital and no current access to credit facilities. The Company's continued
operations therefore will depend on its ability to keep costs down, achieve
revenue goals, and sell assets or raise additional funds through bank borrowings
or equity or debt financing which financing is very unlikely.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of our Common Stock were delisted from the Nasdaq national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board. As a result, an investor may find
it more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. The trading volume of our shares has dramatically
declined since the delisting. In addition, we are now subject to a Rule
promulgated by the Securities and Exchange Commission that, if we fail to meet
criteria set forth in such Rule, various practice requirements are imposed on
broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transactions prior to sale. Consequently, the Rule may have a materially
adverse effect on the ability of broker-dealers to sell the securities, which
may materially affect the ability of shareholders to sell the securities in the
secondary market.
The delisting has made trading our shares more difficult for investors,
potentially leading to further declines in share price. It would also make it
more difficult for us to raise additional capital, although we have no
intentions to do so. We will also incur additional costs under state blue sky
laws if we sell equity due to our delisting.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2001, 2000 and 1999, inflation has
not had a significant effect on our results of operations since inception.
22
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, impairment of intangible assets, restructuring reserves
and income tax recognition of deferred tax items. Our policy and related
procedures for revenue recognition, valuation of customer receivables,
impairment of intangible assets and restructuring reserves are summarized below.
REVENUE RECOGNITION.
The Company's revenues were derived principally from the sale of print
advertisements under short-term contracts in our games information magazine
Computer Games, through the sale of our games information magazine through
newsstands and subscriptions; and through limited sale of online advertisements
principally under short-term advertising arrangements, averaging one to three
months.
Online advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include the guarantee of a minimum number of
"impressions", defined as the number of times that an advertisement appears in
pages viewed by the users of the Company's online properties, for a fixed fee.
Payments received from advertisers prior to displaying their advertisements on
the Company's sites are recorded as deferred revenues and are recognized as
revenue ratably when the advertisement is displayed. To the extent minimum
guaranteed impressions levels are not met, the Company defers recognition of the
corresponding revenues until guaranteed levels are achieved. The Company's
online advertising revenue includes the development and sale of sponsorship
placements within its web sites. Development fees related to the sale of
sponsorship placements on the Company's web sites are deferred and recognized
ratably as revenue over the term of the contract.
The Company also derives revenue through the sale of advertisements in its games
information magazine, Advertising revenues for the games information magazine
are recognized at the on-sale date of the magazine.
The Company trades advertisements on its web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or received,
whichever is more readily determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered on
the Company's web properties. Barter expense is recognized when the Company's
advertisements are run on other companies' web sites, which typically occurs in
the same period in which barter revenue is recognized.
The Company derives other revenues from the sale of video games and related
products through its online store, the sale of its games information magazine
through newsstands and subscriptions. Sales from the online store are recognized
as revenue when the product is shipped to the customer. Freight out costs are
included in net sales and have not been significant to date. The Company
provides an allowance for merchandise sold through its online store. The
allowance provided to date has not been significant.
Newsstand sales of the games information magazine are recognized at the on-sale
date of the magazine, net of provisions for estimated returns. Subscriptions
are recorded as deferred revenue when initially received and recognized as
income pro ratably over the subscription term. Revenues from the Company's share
of the proceeds from its e-commerce partners' sales are recognized upon
notification from its partners of sales attributable to the Company's sites.
There is no certainty that events beyond anyone's control such as economic
downturns or significant decreases in print advertisement could occur and
accordingly, cause significant decreases in revenue.
23
VALUATION OF CUSTOMER RECEIVABLES
Provisions for allowance for doubtful accounts are made based on historical loss
experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
IMPAIRMENT OF INTANGIBLE ASSETS
Impairment of intangible assets result in a charge to operations whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of an asset to be held and used is measured
by a comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The
measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the company's future
operations and future economic conditions which may affect those cash flows.
The measurement of fair value in lieu of a public market for such assets or a
willing unrelated buyer relies on management's reasonable estimate of what a
willing buyer would pay for such assets. Management's estimate is based on its
knowledge of the industry, what similar assets have been valued in sales
transactions and current market conditions.
The Company will adopt SFAS 142 in 2002, which requires that goodwill and
intangible assets with indefinite lives will no longer be amortized but will be
subject to impairment review. Long-lived tangible assets and intangible assets
with definite lives will be subject to impairment under SFAS No. 144.
RESTRUCTURING RESERVES
The Company has adopted restructuring plans, in relation to its business in
recent years. In order to identify and calculate the associated costs to exit
these businesses, management makes assumptions regarding estimates of future
liabilities for operating leases and other contractual obligations, the net
realizable value of assets held for disposal. Management believes its
estimates, which are reviewed quarterly, to be reasonable and considers its
knowledge of the industry, its previous experience in exiting activities and
valuations from independent third parties, in calculation of such estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and subsequently SFAS No.
144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1 2001 and SFAS
No. 142 is effective January 1, 2002. Goodwill and intangible assets determined
to have an indefinite useful life acquired in a purchase business combination
completed after June 30, 2001, but before SFAS No. 142 is adopted in full, are
not amortized. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized and tested for
impairment prior to the full adoption of SFAS No. 142.
24
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new criteria in SFAS No. 141 for recognition separate from goodwill.
The Company will be required to reassess the useful lives and residual values of
all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. If an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. The second step is required to be completed as
soon as possible, but no later than the end of the year of adoption. In the
second step, the Company must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair value to all
of it assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated
for impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Management has determined that the adoption of Statement 144 will not have a
material impact on the Company's financial statements.
25
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
WE HAVE CLOSED OUR COMMUNITY SITE, OUR SMALL BUSINESS WEB-HOSTING PROPERTY AND
HAVE SOLD CERTAIN OF OUR GAMES PROPERTIES AND INTEND TO SELL THE REMAINDER OF
OUR GAMES PROPERTIES. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES FOR ANY
SIGNIFICANT VALUE.
Due to the significant and prolonged decline in the Internet advertising sector,
the Company elected to close its community web site at www.theglobe.com and its
----------------
small business web-hosting property at www.webjump.com in August 2001. In
---------------
addition, the Company is seeking buyers for its games properties in order to
reduce its cash burn and preserve working capital. The Company has already sold
substantially all the assets of (i) Kaleidoscope Networks Limited, the English
subsidiary of Attitude Network Ltd. that operated GamesDomain.com and
GamesDomain.co.uk, (ii) KidsDomain.com and KidsDomain.co.uk, and (iii)
HappyPuppy.com and HappyPuppy.co.uk. In addition, the Company sold the URL of
webjump.com. This strategy has resulted in the Company shifting its business
strategy from operating as a going concern to trying to sell its game
properties. The Company may shift its business strategy in the future. The
Company may be unable to sell its remaining games properties quickly, if at all,
which would result in continued depletion of its cash position since the games
business currently operates at a cash loss. The games properties may also lose
some of their value while we try to sell them as we do not have full corporate
staff to support these businesses. In addition, the "theglobe.com" brand
continues to lose significant value since the website www.theglobe.com was taken
----------------
offline August 15, 2001. The closing of our community site and our small
business web-hosting site may also adversely affect our electronic commerce due
to the inability of those web sites after their closure to refer traffic to the
Chips & Bits web site. We cannot assure you that we will be able to sell all or
any of the remaining games business quickly, if at all, or at any significant
price, or that there will be any return to our equity holders.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN IF WE ARE UNABLE TO SELL OUR
REMAINING GAMES BUSINESSES.
We may not be able to operate the remaining business in the event that we cannot
sell the business or enter into another arrangement. We may determine to use
our remaining capital in a different line of business. At this point there are
minimal prospects for a meaningful return on investment.
WE MAY DECIDE TO RETAIN OUR CHIPS & BITS INC. GAME DISTRIBUTION BUSINESS AND WE
MAY ALSO ENTER NEW LINES OF BUSINESS WHICH MAY OR MAY NOT BE RELATED TO THE
INTERNET.
Our board of directors is reviewing various options for use of our remaining
assets. While we continue to seek buyers for some or all of our remaining games
related properties, including our Computer Games print magazine and the
associated website Computer Games Online, our Board of Directors may decide to
retain our Chips & Bits Inc. game distribution business. If and when we are
able to sell our Computer Games print magazine business and the associated
website Computer Games Online, our Board of Directors may consider entering into
new or different lines of business, including non-Internet related lines of
business and investments in real estate. Even if we are unable to sell our
Computer Games print magazine and the associated website Computer Games Online,
our Board of Directors may still decide to enter into new or different lines of
business, including non-Internet related lines of business and investments in
real estate.
26
WE MAY HAVE TO TAKE ACTIONS TO AVOID REGISTRATION UNDER THE INVESTMENT COMPANY
ACT.
Under the Investment Company Act of 1940 (the "1940 Act"), a company meeting the
definition of an "investment company" is subject to various stringent legal
requirements on its operations. A company can become subject to the 1940 Act
if, among other reasons, it owns investment securities with a value exceeding 40
percent of the value of its total assets (excluding government securities and
cash items) on an unconsolidated basis, unless a particular exemption of safe
harbor applies. Although we are not currently subject to the 1940 Act, at some
point in the future due to the ongoing sale of our assets, the percentage of the
Company's assets which consist of investment securities may exceed 40 percent of
the value of its total assets on an unconsolidated basis. Rule 3a-2 of the 1940
Act provides a temporary exemption from registration under the 1940 Act, for up
to one year, for companies that have a bona fide intent to engage, as soon as
reasonably possible, in business other than investing, reinvesting, owning,
holding or trading in securities ("transient investment companies"). If, due to
future sales of our assets, we become subject to the 1940 Act, we intend to take
all actions that would allow reliance on the one-year exemption for "transient
investment companies", including a resolution by the Board of Directors that the
Company has bona fide intent to engage, as soon as reasonably possible, in
business other than investing, reinvesting, owning, holding or trading in
securities.
DELISTING OF OUR COMMON STOCK MAKES IT MORE DIFFICULT FOR INVESTORS TO SELL
SHARES. THIS MAY POTENTIALLY LEAD TO FUTURE MARKET DECLINES.
The shares of our Common Stock were delisted from the Nasdaq national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board. As a result, an investor may find
it more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. The trading volume of our shares has dramatically
declined since the delisting. In addition, we are now subject to a Rule
promulgated by the Securities and Exchange Commission that, if we fail to meet
criteria set forth in such Rule, various practice requirements are imposed on
broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transactions prior to sale. Consequently, the Rule may have a materially
adverse effect on the ability of broker-dealers to sell the securities, which
may materially affect the ability of shareholders to sell the securities in the
secondary market.
The delisting has made trading our shares more difficult for investors,
potentially leading to further declines in share price. It would also make it
more difficult for us to raise additional capital, although we have no
intentions to do so. We will also incur additional costs under state blue sky
laws if we sell equity due to our delisting.
REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH
Although we achieved significant total revenue growth during 1999 and 2000, our
online advertising revenue decreased in 2001 due to the softness in the
advertising market, which is expected to continue, and due to our cost-reduction
and restructuring initiatives, which have resulted in a dramatic reduction in
our sales force. Overall, our revenues decreased period to period in each of
the first, second, third and fourth quarters of 2001. Commencing in the third
quarter 2000, our online advertising revenues decreased by $2.5 million compared
to second quarter 2000, and decreased an additional $0.2 million in the fourth
quarter of 2000. Additionally, in April 2000, we elected to shut down our
e-commerce operations in Seattle, Washington in an effort to realign our
electronic commerce operations to focus on video games and related products.
This negatively impacted our projected revenue growth from e-commerce.
THE COMPANY HAS RESTRUCTURED AND PLANS TO SELL SOME OR ALL OF ITS REMAINING
PROPERTIES WHICH WILL MATERIALLY NEGATIVELY AFFECT OUR REVENUES; OR ENTER INTO
NEW LINES OF BUSINESS, WHICH MAY INCLUDE INVESTMENTS IN REAL ESTATE
On August 3, 2001, we elected to shut down our community operations and small
business web hosting. On October 17, 2001, we sold the Games Domain/Console
Domain websites. On October 30, 2001, we sold the Kids Domain website. On
February 27, 2002, we sold the Happy Puppy website. We also are seeking buyers
for the remaining game properties, which may materially affect revenues for our
games business since a number of advertisers could choose not to do business
with us during the phase-down period. We also dramatically reduced the number
of employees, including almost the entire sales staff, which will continue to
have a dramatic negative impact on our revenues going forward. Accurate
predictions of revenue are also difficult because we are seeking to sell our
remaining assets and are exploring various future alternatives, which may
include investment in real estate.
27
WE HAVE RECEIVED A REPORT FROM OUR INDEPENDENT AUDITORS THAT RAISE SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Investors should not rely on past revenues as a prediction of future revenues.
In addition, we have received a report from our independent accountants
containing an explanatory paragraph stating that we suffered recurring losses
from operations since inception that raise substantial doubt about our ability
to continue as a going concern.
WE EXPECT TO CONTINUE TO INCUR LOSSES.
We have incurred net losses in each quarter since our inception and we expect
that we will continue to incur net losses for the foreseeable future. We had net
losses of approximately $40.7 million, $103.9 million, $49.6 million, $16.0
million, and $3.6 million for the years ended December 31, 2001, 2000, 1999,
1998, and 1997, respectively. As of December 31, 2001, we had an accumulated
deficit of approximately $214.5 million. The principal causes of our losses are
likely to continue to be:
- costs resulting from the operation of our services;
- costs resulting from the write down of goodwill;
- failure to generate sufficient revenue; and,
- general and administrative expenses.
Although we have restructured our business, we still expect to continue to incur
losses while we seek to sell our remaining assets.
THE MARKET SITUATION CONTINUES TO BE A CHALLENGE FOR CHIPS & BITS DUE TO RECENT
ADVANCES IN CONSOLE AND ONLINE GAMES, WHICH HAVE LOWER MARGINS AND TRADITIONALLY
LESS SALES LOYALTY TO CHIPS & BITS.
Chips & Bits depends on major releases in the Personal Computer (PC) market for
the majority of sales and profits. The game industry's focus on X-Box,
Playstation and GameCube has dramatically reduced the number of major PC
releases. Gross margins for Chips & Bits, Inc. were 22% and 26% for the years
ended December 31, 2001 and December 31, 2000, respectively. Because of the
large installed base of personal computers, this may be a temporary phenomenon.
However, Chips & Bits has no knowledge as to when, if ever, there will be a
turnaround in the PC game market.
Competition among games-focused websites is also growing rapidly, as new
companies continue to enter the market and existing companies continue to layer
games applications onto their websites. We expect that the market will continue
to evolve rapidly, and the rate of product innovations and new product
introductions will remain high. We face competitive pressures from many
companies, both in the United States and abroad. With the abundance of
companies operating in the games market, consumers and advertisers have a wide
selection of services to choose from. Our games information websites compete
for users and advertisers with:
- Games information sites such as Snowball's IGN, ZDnet's Gamespot, and
CNET's GameCenter; and
- Online games centers, where users can play games such as Uproar, Pogo
and Lycos' Gamesville.
In addition, many companies involved in the games market may be acquired by,
receive investments from, or enter into commercial relationships with larger,
well-established and well-financed companies. As a result of this highly
fragmented and competitive market, consolidations and strategic ventures may
continue in the future.
28
OUR FINANCIAL PERFORMANCE AND SUBSEQUENT REDUCTIONS OF OUR WORKFORCE MAY AFFECT
THE MORALE AND PERFORMANCE OF OUR REMAINING PERSONNEL AND OUR ABILITY TO ENTER
INTO NEW BUSINESS RELATIONSHIPS OR SELL OUR ASSETS.
We have incurred significant net losses since our inception. In an effort to
reduce our cash expenses, we began to implement certain restructuring
initiatives and cost reductions. In October 2000, we reduced our workforce by
26 employees. In April 2001, we further reduced our workforce by 59 employees.
On August 3, 2001, we further reduced our workforce by 60 employees. We have
also left positions unfilled when certain employees have left the Company. In
addition, recent trading levels of our common stock have basically eliminated
the value of the stock options granted to employees pursuant to our stock option
plan. As a result of these factors, our remaining personnel may seek employment
with larger, more stable companies or companies they perceive to have better
prospects. Our failure to retain qualified employees to fulfill our needs could
halt our ability to operate our games business and have a material adverse
affect on our business.
In addition, the publicity we receive in connection with our financial
performance and measures to remedy it may negatively affect our reputation and
our business partners and other market participants' perception of the Company.
If we are unable to maintain our existing, and develop new, business
relationships, our revenues and collections could suffer materially. In
addition, the announcement that we have closed our community web sites and are
looking for buyers for our games properties could have a material adverse effect
on our ability to retain the employees necessary to operate the games business
and generate revenues and subsequently collect them, and to retain the games
business value prior to a sale.
WE HAVE HISTORICALLY RELIED SUBSTANTIALLY ON ONLINE ADVERTISING REVENUES. THE
ONLINE ADVERTISING MARKET HAS SIGNIFICANTLY DECLINED OVER THE PAST SEVERAL
QUARTERS. IN ADDITION, WE HAVE DRAMATICALLY REDUCED OUR SALES FORCE DOWN TO
ONLY TWO (2) SALES PEOPLE NATIONWIDE.
We historically derived a substantial portion of our revenues from the sale of
advertisements on our web sites and in our magazine Computer Games Magazine. Our
business model and revenues were highly dependent on the amount of traffic on
our sites and our ability to properly monetize this traffic. Due to the August
3, 2001, restructuring, we now have only two sales people and will have
tremendous difficulty maintaining revenues and monetizing traffic to our games
properties. In addition, the editorial content on certain of the game
properties is only being updated periodically, if at all, which may lead to a
further decrease in the number of viewers and which could adversely effect our
efforts to sell these properties. The level of traffic on our sites determines
the amount of online advertising inventory we can sell and the price for which
we can sell our games business. Our ability to generate online advertising
revenues depends, in part, on our ability to create new advertising programs
without diluting the perceived value of our existing programs. Due to the
reduction in headcount, we are unable to create new advertising programs going
forward. Online advertising has dramatically decreased since the middle of 2000
and continued to decline throughout 2001 and may continue to decline, which
could continue to have a material effect on the Company. Many online
advertisers have been experiencing financial difficulties which could materially
impact our revenues and our ability to collect our receivables. Due to our
announcement regarding our closing of our community business and our other asset
sales, it may become even more difficult to collect receivables.
The development of the Internet advertising market has slowed dramatically
during the last year and if it continues to slow down, our business performance
would continue to be materially adversely affected. To date, substantially all
our online advertising contracts have been for terms averaging one to three
months in length, with relatively few longer-term advertising contracts.
Moreover, measurements of site visitors may not be accurate or trusted by our
advertising customers. There are no uniformly accepted standards for the
measurement of visitors to a web site, and there exists no one accurate
measurement for any given Internet visitor metric. Indeed, different website
traffic measurement firms will tend to arrive at different numbers for the same
metric. For any of the foregoing reasons, we cannot assure you that our current
advertisers will continue to purchase advertisements on our sites.
WE NOW RELY SUBSTANTIALLY ON PRINT ADVERTISING REVENUES. THE PRINT ADVERTISING
MARKET HAS SIGNIFICANTLY DECLINED OVER THE PAST SEVERAL QUARTERS. IN ADDITION,
WE HAVE DRAMATICALLY REDUCED OUR SALES FORCE DOWN TO ONLY TWO (2) SALES PEOPLE
NATIONWIDE.
29
We now derive a substantial portion of our revenues from the sale of
advertisements in our Computer Games print magazine. Our business model and
revenues are highly dependent on the print circulation of our Computer Games
magazine. Due to the August 3, 2001 restructuring, we now have only two sales
people and will have tremendous difficulty maintaining print advertising
revenues within our Computer Games magazine. Print advertising has dramatically
decreased since the middle of 2000 and continued to decline throughout 2001 and
may continue to decline, which could continue to have a material effect on the
Company. Many print advertisers have been experiencing financial difficulties
which could materially impact our revenues and our ability to collect our
receivables. For these reasons, we cannot assure you that our current
advertisers will continue to purchase advertisements on our sites.
COMPETITION FOR USERS AND ADVERTISERS, AS WELL AS COMPETITION IN THE ELECTRONIC
COMMERCE MARKET IS INTENSE AND IS EXPECTED TO INCREASE SIGNIFICANTLY.
The market for users and Internet advertising among web sites is relatively new
and rapidly evolving. Competition for users and advertisers, as well as
competition in the electronic commerce market, is intense and is expected to
increase significantly. Barriers to entry are relatively insubstantial and we
believe we will face competitive pressures from many additional companies both
in the United States and abroad. Accordingly, pricing pressure on advertising
rates will continue to increase in the future, which could have a material
adverse effect on us to the extent that any remaining businesses rely on
advertising. All types of web sites compete for users. Competitor web sites
include other games information networks and various other types of web sites.
We believe that the principal competitive factors in attracting users to a site
are:
- functionality of the web site;
- brand recognition;
- affinity and loyalty;
- broad demographic focus;
- open access for visitors;
- critical mass of users;
- attractiveness of content and services to users; and
- pricing and customer service for electronic commerce sales.
We compete for users, advertisers and electronic commerce marketers with the
following types of companies:
- publishers and distributors of television, radio and print, such as
CBS, NBC and AOL Time Warner;
- electronic commerce web sites, such as Amazon.com; and
- other web sites serving game enthusiasts, including Ziff Davis'
Gamespot and CNET's Gamecenter.
Many of our existing and potential competitors and traditional media companies,
have the following advantages:
- longer operating histories in the Internet market,
- greater name recognition;
- larger customer bases;
- significantly greater financial, technical and marketing resources;
and,
- not seeking to sell their businesses.
In addition, there has been significant consolidation in the industry. This
consolidation may continue in the future. We could face increased competition in
the future from traditional media companies, including cable, newspaper,
magazine, television and radio companies. A number of these large traditional
media companies have been active in Internet related activities including the
games space. Those competitors may be able to undertake more extensive marketing
campaigns for their brands and services, adopt more aggressive advertising
pricing policies and make more attractive offers to potential employees,
distribution partners, electronic commerce companies, advertisers, third-party
content providers and acquisition targets. Furthermore, our existing and
potential competitors may develop sites that are equal or superior in quality
to, or that achieve greater market acceptance than, our sites. We cannot assure
you that advertisers may not perceive our competitors' sites as more desirable
than ours.
30
Web browsers offered by Netscape and Microsoft also increasingly incorporate
prominent search buttons that direct traffic to services that compete with ours.
These features could make it more difficult for Internet users to find and use
our products and services. In the future, Netscape, Microsoft and other browser
suppliers may also more tightly integrate products and services similar to ours
into their browsers or their browsers' pre-set home page. Additionally, entities
that sponsor or maintain high-traffic web sites or that provide an initial point
of entry for Internet viewers, such as the Regional Bell Operating Companies,
cable companies or Internet service providers, such as Microsoft and America
Online, offer and can be expected to consider further development, acquisition
or licensing of Internet search and navigation functions that compete with us.
These competitors could also take actions that make it more difficult for
viewers to find and use our products and services.
Additionally, the electronic commerce market is rapidly evolving, and we expect
competition among electronic commerce merchants to continue to increase
significantly. Because the Internet allows consumers to easily compare prices of
similar products or services on competing web sites and there are low barriers
to entry for potential competitors, gross margins for electronic commerce
transactions may continue to be narrow in the future. Many of the products that
we sell on our web site may be sold by the maker of the product directly or by
other web sites. Competition among Internet retailers, our electronic commerce
partners and product makers may have a material adverse effect on our ability to
generate revenues through electronic commerce transactions or from these
electronic commerce partners.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND VARY BY SEASON.
Due to our significant change in operations, our historical quarterly operating
results are not reflective of future results. We have not achieved past
expectations and it is likely that in one or more future quarters, our operating
results will fall below the expectation of investors. If this occurs, the
trading price of our Common Stock would almost certainly be materially and
adversely affected. The factors which will cause our quarterly operating results
to fluctuate in the future include:
- sales of our assets;
- the drastic decline in the number of sales employees;
- the level of traffic on our web sites;
- the overall demand for Internet advertising and electronic commerce;
- the addition or loss of advertisers and electronic commerce partners
on our web sites;
- overall usage and acceptance of the Internet;
- seasonal trends in advertising and electronic commerce sales and
member usage;
- other costs relating to the maintenance of our operations;
- the restructuring of our business;
- failure to generate significant revenues and profit margins from new
products and services;
- financial performance of other internet companies who advertise on our
site; and,
- competition from others providing services similar to those of ours.
We have historically derived a substantial portion of our revenues from the sale
of advertising under short-term contracts. These contracts average one to three
months in length. As a result, our quarterly revenues and operating results have
been, to a significant extent, dependent on advertising revenues from contracts
entered into within the quarter, and on our ability to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. A slowdown in
the advertising market can happen quickly and lasts an unknown amount of time.
The advertising market has not yet recovered from the current slowdown. We
believe that advertising sales in traditional media, such as television and
radio, generally are lower in the first and third calendar quarters. If the
Internet transitions from an emerging to a more developed form of media, these
same patterns may develop in Internet advertising sales. Internet advertising
expenditures may also develop a different seasonality pattern. We now have only
two (2) salespersons. Traffic levels on our sites and the Internet have
typically declined during the summer and year-end vacation and holiday periods.
Revenues from our games magazine are subject to the same seasonal trends as
traditional media.
31
In addition to selling advertising, a substantial and increasing portion of our
revenues may be generated from electronic commerce through our Chips & Bits,
Inc. subsidiary. We also have existing electronic commerce arrangements with
third parties for the sale of merchandise on our electronic commerce site, which
are terminable upon short notice. We have cut down to only two (2) salespersons,
resulting in very little revenue from advertising. We now have a substantial
portion of revenue from e-commerce. Our revenues from electronic commerce may
fluctuate significantly from period to period depending on the level of demand
for products featured on our site and overall competition in the marketplace.
OUR BUSINESS MODEL IS UNPROVEN AND WILL CHANGE.
Our revised business model is unproven. This model depends upon our ability to
obtain revenues by using our games information properties without any other
source of revenue. To be successful, we must, among other things, develop and
market products and services that achieve broad market acceptance by our users,
advertisers and electronic commerce vendors. We must continue to develop
electronic commerce revenue streams by marketing products directly to users and
having users purchase products through our electronic commerce site. We cannot
assure you that any e-commerce business will achieve broad market acceptance and
will be able to generate significant electronic commerce revenues. We also
cannot assure you that our business model will be successful, that it will
sustain revenue growth or that it will be profitable. Furthermore, our board of
directors and management are exploring alternatives for our business and our
business model may change significantly.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT.
We have never operated solely as a games business. Accordingly, we have a
limited operating history for you to use in evaluating our prospects and us. Our
prospects should be considered in light of the risks encountered by companies
operating in new and rapidly evolving markets like ours. We may not successfully
address these risks. For example, we may not be able to:
- maintain levels of user traffic on our web sites;
- maintain or increase the percentage of our advertising inventory sold;
- maintain or increase both CPM levels and sponsorship revenues;
- adapt to meet changes in our markets and competitive developments;
- develop or acquire content for our services; and
- identify, attract, retain and motivate qualified personnel.
Moreover, we are exploring other alternatives, which may make financial
forecasting even more difficult.
OUR ACQUISITIONS, JOINT VENTURES OR STRATEGIC TRANSACTIONS ENTAIL NUMEROUS RISKS
AND UNCERTAINTIES. WE MAY ENTER NEW LINES OF BUSINESS.
On February 24, 2000, we acquired Chips & Bits, Inc., an electronic commerce
retailer that focuses primarily on game enthusiasts' and Strategy Plus, Inc.,
media property that publishes a monthly games magazine and a game enthusiast web
site. Due to the significant and prolonged decline in the Internet advertising
sector, we closed our community web site at www.theglobe.com and our small
----------------
business web-hosting property at www.webjump.com in August 2001. On October 17,
---------------
2001, we sold the Games Domain/Console Domain websites. On October 30, 2001, we
sold the Kids Domain web site. On February 27, 2002, we sold the Happy Puppy
website. We also are seeking buyers for the remaining game properties. In
conjunction with our efforts to sell our remaining games properties, we are
considering and evaluating potential business combinations or sales of these
remaining assets. If consummated, any such transaction could result in a change
of control of our company or could otherwise be material to our business or to
your investment in our Common Stock. In addition, as part of the sale of our
games business, we could obtain stock of another company or be the surviving
company in a merger. These transactions may or may not be consummated. If such
a transaction is not consummated, it is unclear how long we will continue to be
able to operate. We may also enter into new or different lines of business,
which may include investments in real estate, as determined by management and
our Board of Directors. Our future acquisitions or joint ventures could result
in numerous risks and uncertainties, including:
32
- - potentially dilutive issuances of equity securities, which may be issued
at the time of the transaction or in the future if certain tests are met or not
met, as the case may be. These securities may be freely tradable in the public
market or subject to registration rights which could require us to publicly
register a large amount of Common Stock, which could have a material adverse
effect on our stock price;
- large and immediate write-offs;
- significant write-offs if we determine that the business acquisition
does not fit or perform up to expectations;
- the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets;
- difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired
companies;
- the risks of entering a new or different line of business which may
include real estate;
- the risks of entering geographic and business markets in which we have
no or limited prior experience; and
- the risk that the acquired business will not perform as expected.
WE MAY BE UNSUCCESSFUL IN ESTABLISHING AND MAINTAINING BRAND AWARENESS; BRAND
IDENTITY IS CRITICAL TO US AND OUR ABILITY TO SELL OUR REMAINING ASSETS.
We believe that establishing and maintaining awareness of the brand name of our
wholly owned subsidiaries, including the brand names of all our games properties
("Chips & Bits", "Strategy Plus" and "CGonline.com") is critical to attracting
buyers for these properties and to expanding our member base, the traffic on our
web sites and our advertising and electronic commerce relationships. The closure
of the community web site at www.theglobe.com, the Company's flagship web site,
----------------
will adversely affect the public's perception of the Company. If we fail to
promote and maintain our brand or our brand value is diluted, our continuing
games business, operating results, financial condition, and our ability to
attract buyers for these properties could be materially adversely affected. The
importance of brand recognition will increase because low barriers to entry may
result in an increased number of web sites. To promote our brand, we may be
required to continue to increase our financial commitment to creating and
maintaining brand awareness. We may not generate a corresponding increase in
revenues to justify these costs. Additionally, if Internet users, advertisers
and customers do not perceive our games properties to be of high quality, the
value of our brand could be materially diluted.
WE HAVE DRAMATICALLY REDUCED OUR PERSONNEL, INCLUDING PERSONNEL THAT WE HAVE
HISTORICALLY PLACED SUBSTANTIAL DEPENDENCE ON.
Our performance is substantially dependent on the continued service of our
senior management and key technical personnel, as well as on our sales force. In
particular, our success has depended on the continued efforts of our senior
management team, especially our Chief Executive Officer, our President and Chief
Operating Officer, our Chief Financial Officer, our Vice President of Legal &
Business Affairs and our Chief Technology Officer. Our President and Chief
Operating Officer, Chief Financial Officer, and Chief Technology Officer were no
longer with the Company after August 2001, and our Vice President of Legal &
Business Affairs was no longer with the Company after October 2001, which has
made operation of the Company significantly more difficult. In addition, the
dramatic reduction in the number of personnel, particularly sales personnel, in
August 2001 has made operating the Company significantly more difficult. We do
not carry key person life insurance on any of our personnel.
In the fourth quarter of 2000, we announced the reduction of our workforce by 26
employees. In the second quarter of 2001, we announced the reduction of our
workforce by 59 employees. On August 3, 2001, we announced the reduction of our
workforce by 60 employees. These reductions included substantially all
employees at the management level, with the exception of our Chief Executive
Officer. As a result of this reduction, we may experience inefficiencies and a
decrease in productivity throughout our business. This may have a material
effect on our operating results.
33
WE DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL PERSONNEL.
Our future success also depends on our continuing ability to attract, retain and
motivate highly qualified technical expertise and managerial personnel necessary
to operate our remaining business. Our seeking to sell our remaining games
properties may also encourage existing employees to seek employment at another
company. If this were to occur, it could have a material effect on our efforts
to sell these remaining games properties. We may need to give retention bonuses
to certain employees to keep them, which can be costly to the Company. We may
be unable to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. Wages for managerial and technical employees
are increasing and are expected to continue to increase in the future. We have
from time to time in the past experienced, and could continue to experience in
the future if we need to hire any additional personnel, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications.
Furthermore, we will not be able to effectively offer stock options due to the
delisting of the common stock, low trading volume and cash position of the
Company. In addition, we may have difficulty attracting qualified employees due
to the Company's restructuring, financial position and scaling down of
operations. Also, we may have difficulty attracting qualified employees to work
in the geographically remote location in Vermont of Chips & Bits, Inc. and
Strategy Plus, Inc., the Company's two subsidiaries that contains most of the
employees after August 2001. If we are unable to attract and retain the
technical and managerial personnel necessary to support our business, our
business would likely be materially and adversely affected.
OUR MANAGEMENT TEAM IS INEXPERIENCED IN THE MANAGEMENT OF A PUBLIC COMPANY AND
IS SMALL FOR AN OPERATING COMPANY.
We hired a new Chief Executive Officer in August 2000, who has not had previous
experience managing a public company. Furthermore, the remaining members of our
senior management, other than the Chairman, have not had any previous experience
managing a public company or a large operating company. Accordingly, we cannot
assure you that:
- our key employees will be able to work together effectively as a team;
- we will be able to retain the remaining members of our management
team;
- we will be able to hire, train and manage our employee base;
- our systems, procedures or controls will be adequate to support our
operations; and
- our management will be able to achieve the rapid execution necessary
to fully exploit the market opportunity for our products and services.
In addition, after August 2001, the Chief Executive Officer is the only member
of executive management with significant financial experience.
OUR CHAIRMAN HAS OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF
INTEREST WITH SOME OF OUR DIRECTORS; OUR BOARD HAS DECREASED FROM NINE TO SIX
MEMBERS.
Because our Chairman, Mr. Michael Egan, is an officer of other companies, we
have to compete for his time. Mr. Egan serves as the Chairman of our board of
directors and as an executive officer of other entities with primary
responsibility for day-to-day strategic planning and financing arrangements. Mr.
Egan is also the controlling investor of Dancing Bear Investments, Inc., an
entity controlled by Mr. Egan, which is our largest stockholder. Mr. Egan has
not committed to devote any specific percentage of his business time with us.
Accordingly, we compete with Dancing Bear Investments, Inc. and Mr. Egan's other
related entities for his time. Mr. Egan is also Chairman and Chief Executive
Officer of ANC Rental Corporation, a spin-off of the car rental business of
AutoNation, Inc.
We have had revenue agreements with entities controlled by Mr. Egan and by H.
Wayne Huizenga, one of our former directors. These agreements were not the
result of arm's-length negotiations, but we believe that the terms of these
agreements were on comparable terms as if they were entered into with
unaffiliated third parties. The revenues recognized from such agreements
represented less than 1%, 1% and 4% of total revenues for the years ended
December 31, 2001, 2000, and 1999, respectively. Due to their relationships
with his related entities, Mr. Egan will have an inherent conflict of interest
in making any decision related to transactions between their related entities
and us. We intend to review related party transactions in the future on a
case-by-case basis.
34
Due to certain time constraints, two (2) members of our Board resigned during
2001 due to other commitments, and were replaced with two (2) new Directors.
The charter of the Company was amended at the annual meeting of shareholders in
June 2001 to allow between 5 and 9 directors to serve on the Board of Directors.
Only two (2) of our directors, Mr. Robert M. Halperin and Ms. Robin M. Segaul,
are neither significant holders of theglobe.com stock nor have they at any time
during 2001, or at any other time, been officers or employees of theglobe.com.
However, Ms. Segaul is an employee of Dancing Bear Investments, Inc., which is
controlled by Mr. Egan. We may determine to further reduce the size of the
Board due to the change in the operations of the business. As a result, the
charter may be further amended to reduce the minimum number of Directors.
WE RELY ON A THIRD PARTY OUTSOURCED HOSTING FACILITY OVER WHICH WE HAVE LIMITED
CONTROL.
Our principal servers are located in New Jersey at a third party outsourced
hosting facility operated by AT&T. Our operations depend on the ability to
protect our systems against damage from unexpected events, including fire, power
loss, water damage, telecommunications failures and vandalism. Any disruption
in our Internet access due to the transition or otherwise could have a material
adverse effect on us. In addition, computer viruses, electronic break-ins or
other similar disruptive problems could also materially adversely affect our web
sites. Our reputation, theglobe.com brand and the brands of our subsidiaries
and game properties could be materially and adversely affected by any problems
to our sites. Our insurance policies may not adequately compensate us for any
losses that may occur due to any failures or interruptions in our systems. We
do not presently have any secondary off-site systems or a formal disaster
recovery plan.
HACKERS MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY BREACHES
COULD HARM OUR BUSINESS.
Consumer and supplier confidence in our web sites depends on maintaining
relevant security features. Substantial or ongoing security breaches on our
systems or other Internet-based systems could significantly harm our business.
We incur substantial expenses protecting against and remedying security
breaches. Security breaches also could damage our reputation and expose us to a
risk of loss or litigation. Experienced programmers or "hackers" have
successfully penetrated our systems and we expect that these attempts will
continue to occur from time to time. Because a hacker who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our products and services, we may have to expend significant
capital and resources to protect against or to alleviate problems caused by
these hackers. Additionally, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such security breaches could
materially adversely affect our company. In addition, the transmission of
computer viruses resulting from hackers or otherwise could expose us to
significant liability. Our insurance policies carry low coverage limits, which
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 DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE
WEB.
Our market is rapidly evolving. Our remaining business is substantially
dependent upon the continued growth in the use of the Internet, PC and console
games and electronic commerce on the Internet becoming more widespread. Web
usage and electronic commerce growth may be inhibited for a number of reasons,
including:
- inadequate network infrastructure;
- security and authentication concerns with respect to transmission over
the Internet of confidential information, including credit card
numbers, or other personal information;
- ease of access;
- inconsistent quality of service;
- availability of cost-effective, high-speed service; and
- bandwidth availability.
35
If web usage grows, the Internet infrastructure may not be able to support the
demands placed on it by this growth or its performance and reliability may
decline. Web sites have experienced interruptions in their service as a result
of outages and other delays occurring throughout the Internet network
infrastructure. If these outages or delays frequently occur in the future, web
usage, as well as usage of our web sites, could grow more slowly or decline.
Also, the Internet's commercial viability may be significantly hampered due to:
- delays in the development or adoption of new operating and technical
standards and performance improvements required to handle increased
levels of activity;
- increased government regulation; and
- insufficient availability of telecommunications services which could
result in slower response times and adversely affect usage of the
Internet.
WE MAY BE MATERIALLY ADVERSELY AFFECTED IF ELECTRONIC COMMERCE DOES NOT BECOME A
VIABLE SOURCE OF SIGNIFICANT REVENUES OR PROFITS FOR THE COMPANY. IN ADDITION,
OUR ELECTRONIC COMMERCE BUSINESS MAY RESULT IN SIGNIFICANT LIABILITY CLAIMS
AGAINST US.
In February 2000, we acquired Chips & Bits, Inc., a direct marketer of video
games and related products over the Internet. However, we have limited
experience in the sale of products online as compared to many of our competitors
and the development of relationships with manufacturers and suppliers of these
products. In addition, the closing of our community site and our small business
web-hosting site may adversely affect our electronic commerce due to the
inability of those web sites after their closure to refer traffic to the Chips &
Bits web site. We also face many uncertainties, which may affect our ability to
generate electronic commerce revenues and profits, including:
- our ability to obtain new customers at a reasonable cost, retain
existing customers and encourage repeat purchases;
- the likelihood that both online and retail purchasing trends may
rapidly change;
- the level of product returns;
- merchandise shipping costs and delivery times;
- our ability to manage inventory levels;
- our ability to secure and maintain relationships with vendors;
- the possibility that our vendors may sell their products through other
sites; and
- intense competition for electronic commerce revenues, resulting in
downward pressure on gross margins.
In April 2000, we elected to shut down our e-commerce operations in Seattle,
Washington in order to focus our e-commerce operations on video games and
related products (see Note 3 to the condensed consolidated financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations). Accordingly, we cannot assure you that electronic commerce
transactions will provide a significant or sustainable source of revenues or
profits. Additionally, due to the ability of consumers to easily compare prices
of similar products or services on competing web sites and consumers' potential
preference for competing web site's user interface, gross margins for electronic
commerce transactions which are narrower than for advertising businesses may
further narrow in the future and, accordingly, our revenues and profits from
electronic commerce arrangements may be materially and adversely affected. If
use of the Internet for electronic commerce does not continue to grow, our
business and financial condition would be materially and adversely affected.
Additionally, consumers may sue us if any of the products that we sell are
defective, fail to perform properly or injure the user. Some of our agreements
with manufacturers contain provisions intended to limit our exposure to
liability claims. However, these limitations may not prevent all potential
claims. Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any claims, whether or
not successful, could seriously damage our reputation and our business.
36
INTERNET ADVERTISING HAS NOT PROVEN AS EFFECTIVE AS TRADITIONAL MEDIA.
The Internet advertising market is relatively new and rapidly evolving. We
cannot yet gauge its effectiveness as compared to traditional advertising media.
Many of our current or potential advertising partners have limited or no
experience using the Internet for advertising purposes and they have allocated
only a limited portion of their advertising budgets to Internet advertising. The
adoption of Internet advertising, particularly by those entities that have
historically relied upon traditional media, requires the acceptance of a new way
of conducting business, exchanging information and advertising products and
services. Advertisers that have traditionally relied upon other advertising
media may be reluctant to advertise on the Internet or find it less effective.
No standards have been widely accepted to measure the effectiveness of Internet
advertising or to measure the demographics of our user base. Additionally, no
standards have been widely accepted to measure the number of members, unique
users, page views or impressions related to a particular site. We cannot assure
you that any standards will become available in the future, that standards will
accurately measure our users or the full range of user activity on our sites or
that measurement services will accurately report our user activity based on
their standards. If standards do not develop, advertisers may not advertise on
the Internet. In addition, we depend on third parties to provide these
measurement services. These measurements are often based on sampling techniques
or other imprecise measures and may materially differ from each other and from
our estimates. We cannot assure you that advertisers will accept our or other
parties' measurements. The rejection by advertisers of these measurements could
have a material adverse effect on our business and financial condition.
The sale of Internet advertising is subject to intense competition that has
resulted in a wide variety of pricing models, rate quotes and advertising
services. For example, advertising rates may be based on the number of user
requests for additional information made by clicking on the advertisement, known
as "click throughs," on the number of times an advertisement is displayed to a
user, known as "impressions," or on the number of times a user completes an
action at an advertiser's web site after clicking through, known as "cost per
action." Our contracts with advertisers typically guarantee the advertiser a
minimum number of impressions. To the extent that minimum impression levels are
not achieved for any reason, including the failure to obtain the expected
traffic, our contracts with advertisers may require us to provide additional
impressions after the contract term, which may adversely affect the availability
of our advertising inventory. In addition, certain long-term contracts with
advertisers may be canceled if response rates or sales generated from our site
are less than advertisers' expectations. This could have a material adverse
effect on us. Online advertisers are increasingly demanding "cost per click"
and "cost per action" advertising campaigns, which require many more page views
to achieve equal revenue, which significantly affects our revenues. If online
advertisers continue to demand those "cost per action" deals, it could
negatively impact our business.
Our revenues and the value of the assets we are seeking to sell could be
materially adversely affected if we are unable to adapt to other pricing models
for Internet advertising if they are adopted. It is difficult to predict which,
if any, pricing models for Internet advertising will emerge as the industry
standard. This makes it difficult to project our future advertising rates and
revenues. Online advertising pricing has been declining. Additionally, it is
possible that Internet access providers may, in the future, act to block or
limit various types of advertising or direct solicitations, whether at their own
behest or at the request of users. Moreover, "filter" software programs that
limit or prevent advertising from being delivered to an Internet user's computer
are available. Widespread adoption of this software could adversely affect the
commercial viability of Internet advertising. In addition, concerns regarding
the privacy of user data on the Web may reduce the amount of user data collected
in the future, thus reducing our ability to provide targeted advertisements.
This may, in turn, put downward pressure on cost per thousand impressions
("CPM").
WE RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard substantial elements of our web sites and underlying technology 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.
37
We pursue the registration of our trademarks in the United States and
internationally. However, effective intellectual property protection may not be
available in every country in which our services are distributed or made
available through the Internet. Policing unauthorized use of our proprietary
information is difficult. Legal standards relating to the validity,
enforceability and scope of protection of proprietary rights in Internet-related
businesses are also uncertain and still evolving. We cannot assure you about the
future viability or value of any of our proprietary rights.
Litigation may be necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. However, we may not have sufficient funds or personnel to adequately
litigate or otherwise protect our rights. Furthermore, we cannot assure you
that our business activities will not infringe upon the proprietary rights of
others, or that other parties will not assert infringement claims against us,
including claims related to providing hyperlinks to web sites operated by third
parties or providing advertising on a keyword basis that links a specific search
term entered by a user to the appearance of a particular advertisement.
Moreover, from time to time, third parties may assert claims of alleged
infringement, by us or our members, of their intellectual property rights. Any
litigation claims or counterclaims could impair our business because they could:
- be time-consuming;
- result in costly litigation;
- subject us to significant liability for damages;
- result in invalidation of our proprietary rights;
- divert management's attention;
- cause product release delays; or
- require us to redesign our products or require us to enter into
royalty or licensing agreements that may not be available on terms
acceptable to us, or at all.
We license from third parties various technologies incorporated into our sites.
We cannot assure you that these third-party technology licenses will continue to
be available to us on commercially reasonable terms. Additionally, we cannot
assure you that the third parties from which we license our technology will be
able to defend our proprietary rights successfully against claims of
infringement. As a result, our inability to obtain any of these technology
licenses could result in delays or reductions in the introduction of new
services or could adversely affect the performance of our existing services
until equivalent technology can be identified, licensed and integrated.
We have registered several Internet domain names including "theglobe.com",
"globeclubs.com", "tglo.com," "happypuppy.com," "azazz.com," "attitude.net, "
"cgonline" and "cdmag.com." The regulation of domain names in the United States
and in foreign countries may change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names, any or all of which may dilute
the strength of our names. We may not acquire or maintain our domain names in
all of the countries in which our web sites may be accessed, or for any or all
of the top-level domain names that may be introduced. The relationship between
regulations governing domain names and laws protecting proprietary rights is
unclear. Therefore, we may not be able to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our trademarks and
other proprietary rights.
WE MAY FACE INCREASED GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES IN OUR
INDUSTRY.
There are an increasing number of federal, state, local and foreign laws and
regulations pertaining to the Internet. In addition, a number of federal, state,
local and foreign legislative and regulatory proposals are under consideration.
Laws or regulations may be adopted with respect to the Internet relating to
liability for information retrieved from or transmitted over the Internet,
online content regulation, user privacy and quality of products and services.
Changes in tax laws relating to electronic commerce could materially affect our
business and financial condition. Moreover, the applicability to the Internet of
existing laws governing issues such as intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment
and personal privacy is uncertain and developing. Any new legislation or
regulation, or the application or interpretation of existing laws or
regulations, may decrease the growth in the use of the Internet, may impose
additional burdens on electronic commerce or may alter how we do business. This
could decrease the demand for our 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, results of operations and financial
condition.
38
WE ARE INVOLVED IN SECURITIES CLASS ACTION LITIGATION.
We are a party to the securities class action litigation described in Part I,
Item 3 - "Legal Proceedings" of this report. The defense of the litigation
described in Part I, Item 3 may increase our expenses and will occupy
management's attention and resources, and an adverse outcome in this litigation
could materially adversely affect us.
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED
OVER THE INTERNET OR FOR PRODUCTS SOLD OVER THE INTERNET.
Users may access content on our web sites or the web sites of our distribution
partners or other third parties through web site links or other means, and they
may download content and subsequently transmit this content to others over the
Internet. This could result in claims against us based on a variety of theories,
including defamation, obscenity, negligence, copyright infringement, trademark
infringement or the wrongful actions of third parties. Other theories may be
brought based on the nature, publication and distribution of our content or
based on errors or false or misleading information provided on our web sites.
Claims have been brought against online services in the past and we have
received inquiries from third parties regarding these matters. The claims could
be material in the future. We could also be exposed to liability for third party
content posted by users in our chat rooms or on our bulletin boards.
We also enter into agreements with commerce partners and sponsors under which we
are entitled to receive a share of any revenue from the purchase of goods and
services through direct links from our sites. We sell products directly to
consumers which may expose us to additional legal risks, regulations by local,
state, federal and foreign authorities and potential liabilities to consumers of
these products and services, even if we do not ourselves provide these products
or services. We cannot assure you that any indemnification that may be provided
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.
VARIOUS STOCKHOLDERS, INDIVIDUALLY OR IN THE AGGREGATE, MAY CONTROL US.
Michael S. Egan, our Chairman, beneficially owns or controls, directly or
indirectly, 9,877,106 shares of our Common Stock, which in the aggregate
represents approximately 26.3% of the outstanding shares of our Common Stock.
Todd V. Krizelman and Stephan J. Paternot, together, beneficially own 8.4% of
the outstanding shares of Common Stock. Accordingly, Mr. Egan would likely be
able to exercise significant influence in any stockholder vote, particularly if
Messrs. Krizelman and Paternot support his position.
Messrs. Egan, Krizelman, and Edward A. Cespedes, all of whom are current
Directors of our company, and Mr. Paternot and Rosalie V. Arthur, both of whom
are former directors of our company, have entered into a stockholders' agreement
with us. As a result of the stockholders' agreement, Mr. Egan has agreed to vote
for up to two nominees of Messrs. Krizelman and Paternot to the board of
directors and Messrs. Krizelman and Paternot have agreed to vote for the
nominees of Mr. Egan to the board, which will be up to five directors.
Consequently, Messrs. Egan, Krizelman and Paternot will likely be able to elect
a majority of our directors. Additionally, each party other than Mr. Egan has
granted an irrevocable proxy with respect to all matters subject to a
stockholder vote to Dancing Bear Investments, Inc., an entity controlled by Mr.
Egan, for any shares held by that party received upon the exercise of
outstanding warrants for 400,000 shares of our Common Stock. The stockholders'
agreement also provides for tag-along and drag-along rights in connection with
any private sale of these securities.
39
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock has been volatile and may continue to be
volatile in response to various factors, including:
- delisting of our Common Stock from Nasdaq national market;
- sales of any of our games properties;
- shut down of our community web site and small business web-hosting web
site;
- the loss of a significant number of our employees;
- quarterly variations in our operating results;
- decreased trading volume;
- competitive announcements; - the operating and stock price performance
of other companies that investors may deem comparable to us; and
- news relating to trends in our markets.
The stock market has experienced significant price and volume fluctuations, and
the market prices of technology companies, particularly Internet-related
companies, have been highly volatile.
THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD KEEP OUR
STOCK PRICE FROM IMPROVING.
Sales of significant amounts of Common Stock in the public market in the future,
the perception that sales will occur or the registration of such shares could
materially and adversely affect the ability of the market price of the Common
Stock to increase even if our business prospects were to improve. We currently
have approximately 22 million shares of Common Stock that are freely tradable.
Approximately 8,158,450 shares of Common Stock are held by our "affiliates,"
within the meaning of the Securities Act of 1933, and are currently eligible for
sale in the public market subject to volume limitation. Additionally, we may
issue additional shares of our common stock, which could further adversely
affect our stock price.
There are outstanding options to purchase 3,104,349 shares of Common Stock,
which become eligible for sale in the public market from time to time depending
on vesting and the expiration of lock-up agreements. The issuance of these
securities is registered under the Securities Act. In addition, there are
outstanding warrants to purchase up to 4,011,534 shares of our Common Stock upon
exercise. Substantially all of our stockholders holding restricted securities,
including shares issuable upon the exercise of warrants to purchase our Common
Stock, are entitled to registration rights under various conditions.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions of our charter, by-laws and stockholder rights plan and provisions of
applicable Delaware law may:
- have the effect of delaying, deferring or preventing a change in
control of our company;
- discourage bids of our Common Stock at a premium over the market
price; or
- adversely affect the market price of, and the voting and other rights
of the holders of, our Common Stock.
40
We must follow Delaware laws that could have the effect of delaying, deterring
or preventing a change in control of our company. One of these laws prohibits
us from engaging in a business combination with any interested stockholder for a
period of three years from the date the person became an interested stockholder,
unless various conditions are met. In addition, provisions of our charter and
by-laws, and the significant amount of Common Stock held by our current and
former executive officers, directors and affiliates, could together have the
effect of discouraging potential takeover attempts or making it more difficult
for stockholders to change management.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS.
We do not anticipate paying any cash dividends in the foreseeable future.
41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Collection Risks. Our accounts receivables are subject, in the normal course of
business, to collection risks. Although the Company regularly assesses these
risks and has policies and business practices to mitigate the adverse effects of
collection risks, significant losses may result due to the non-payment of
receivables by our advertisers.
Interest Rate Risk. Our return on its investments in cash and cash equivalents
and short-term investments is subject to interest rate risks. We regularly
assess these risks and have established policies and business practices to
manage the market risk of its short-term securities.
Foreign Currency Risk. We transact business in the United Kingdom.
Accordingly, we are subject to exposure from adverse movements in foreign
currency exchange rates. The effect of foreign currency exchange rate
fluctuations for 2001 was not material. We do not use derivative financial
instruments to limit our foreign currency risk exposure.
42
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . 44
Consolidated Balance Sheets as of December 31, 2001 and 2000. . . . . . . 45
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2001. . . . . . . . . . . . 46
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for each of the years in the three-year period ended December 31, 2001. 47
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2001. . . . . . . . . . . . 49
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . 51
All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
43
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
theglobe.com, inc.:
We have audited the accompanying consolidated balance sheets of theglobe.com,
inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended
December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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
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 financial position of theglobe.com, inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring losses
from operations since inception that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to this matter are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
New York, New York
March 25, 2002
44
THEGLOBE.COM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
2001 2000
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,563,828 $ 13,349,554
Short-term investments 50,650 2,996,250
Accounts receivable, less allowance for doubtful accounts of $3,203,295 and $2,260,324 in
2001 and 2000, respectively. 1,537,892 4,316,973
Inventory, less reserve for obsolescence of $64,311 and $39,955 in 2001 and 2000,
respectively 532,565 694,474
Prepaid and other current assets 1,037,970 1,744,908
-------------- --------------
Total current assets 5,722,905 23,102,159
Property and equipment, net 242,802 7,975,967
Restricted investments 7,000 3,485,007
Goodwill and intangible assets, net - 19,967,910
-------------- --------------
Total assets . $ 5,972,707 $ 54,531,043
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,340,628 $ 2,677,679
Accrued expenses 1,035,271 2,540,289
Accrued compensation 3,965 1,670,088
Deferred revenue 229,476 729,027
Current portion of long-term debt 101,659 11,986
Current installments of obligations under capital leases - 1,905,091
-------------- --------------
Total current liabilities 2,710,999 9,534,160
Long-term debt - 116,002
Obligations under capital leases, excluding current installments - 382,335
Deferred rent - 552,227
-------------- --------------
Total liabilities 2,710,999 10,584,724
Stockholders' equity:
Preferred stock, $0.001 par value; 3,000,000 shares authorized; no shares
issued and outstanding at December 31, 2001 and 2000, respectively - -
Common stock, $0.001 par value; 100,000,000 shares authorized; 31,081,574 and
31,079,574 shares issued at December 31, 2001 and 2000, respectively 31,082 31,080
Additional paid-in capital 218,255,565 218,254,968
Common stock, 699,281 common shares, held in treasury, at cost (371,458) (371,458)
Accumulated other comprehensive loss (120,866) (55,682)
Accumulated deficit (214,532,615) (173,912,589)
-------------- --------------
Total stockholders' equity 3,261,708 43,946,319
-------------- --------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 5,972,707 $ 54,531,043
============== ==============
See accompanying notes to consolidated financial statements.
45
THEGLOBE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- -------------- -------------
Revenues:
Advertising $ 6,381,072 $ 19,500,170 $ 16,398,914
Electronic commerce and other 9,693,321 10,361,799 2,242,046
------------- -------------- -------------
Total revenues 16,074,393 29,861,969 18,640,960
Cost of revenues 12,144,915 19,079,693 8,547,514
------------- -------------- -------------
Gross profit 3,929,478 10,782,276 10,093,446
Operating expenses:
Sales and marketing 9,755,315 23,917,228 19,352,022
Product development 3,810,876 10,241,792 10,488,190
General and administrative 6,596,500 13,173,344 12,164,650
Restructuring and impairment charges 17,091,343 41,347,738 -
Amortization of goodwill and intangible assets 8,468,620 27,236,506 20,459,526
------------- -------------- -------------
Total operating expenses 45,722,654 115,916,608 62,464,388
------------- -------------- -------------
Loss from operations (41,793,176) (105,134,332) (52,370,942)
Other income (expense):
Interest and other income 1,250,500 2,089,743 2,485,293
Interest and other expense (61,246) (553,332) (780,654)
------------- -------------- -------------
Total other income, net 1,189,254 1,536,411 1,704,639
------------- -------------- -------------
Loss before provision for income taxes
and extraordinary item (40,603,922) (103,597,921) (50,666,303)
Provision for income taxes 16,104 267,800 290,337
------------- -------------- -------------
Loss before extraordinary item (40,620,026) (103,865,721) (50,956,640)
Extraordinary item-gain on early retirement of debt - - 1,355,698
------------- -------------- -------------
Net loss $(40,620,026) $(103,865,721) $(49,600,942)
============= ============== =============
Basic and diluted net loss per share:
Loss before extraordinary item $ (1.31) $ (3.43) $ (2.06)
Extraordinary item-gain on early retirement of debt - - 0.06
------------- -------------- -------------
Net loss $ (1.31) $ (3.43) $ (2.00)
============= ============== =============
Weighted average basic and diluted shares outstanding 31,081,324 30,286,102 24,777,444
============= ============== =============
See accompanying notes to consolidated financial statements.
46
THEGLOBE.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
ACCUMUL
ATED
OTHER
ADDITIONAL DEFERRED COMPREH TOTAL
PAID-IN TREASURY COMPEN ENSIVE ACCUMULATED STOCKHOLDERS'
COMMON STOCK CAPITAL STOCK SATION LOSS DEFICIT EQUITY
------------------- ------------ ---------- ---------- ---------- -------------- ---------------
SHARES AMOUNT
---------- -------
Balance at December 31,
1998 . . . . . . . . . . 20,624,512 $20,625 $ 50,904,181 $ - $(128,251) $ (50,006) $ (20,445,926) $ 30,300,623
Net loss . . . . . . . . . - - - - - - (49,600,942) (49,600,942)
Changes in net unrealized
loss on securities . . . . - - - - - (58,923) - (58,923)
Foreign currency
translation
Adjustment . . . . . . . - - - - - (533) - (533)
---------------
Comprehensive loss . . . - - - - - - - (49,660,398)
Deferred compensation. . . - - 251,622 - (251,622) - - -
Amortization of deferred
Compensation . . . . . . - - - - 110,566 - - 110,566
Issuance of common stock
in connection with
exercise of stock
options. . . . . . . . . 175,480 175 417,286 - - - - 417,461
Issuance of common stock
in connection with
Employee Stock
Purchase Plan. . . . . . 7,200 7 75,042 - - - - 75,049
Issuance of common stock
in connection with
exercise of warrants . . 100,000 100 145,286 - - - - 145,386
Issuance of common stock
and options in
connection with
acquisitions . . . . . . 3,363,726 3,364 80,472,172 - - - - 80,475,536
Issuance of common stock
in connection with
Secondary Public
Offering, net of
offering costs . . . . . 3,500,000 3,500 65,009,935 - - - - 65,013,435
Non-cash compensation. . . - - 31,769 - - - - 31,769
---------- ------- ------------ ---------- ---------- ---------- -------------- ---------------
Balance at December 31,
1999 . . . . . . . . . . . 27,770,918 27,771 197,307,293 - (269,307) (109,462) (70,046,868) 126,909,427
Net loss . . . . . . . . . - - - - - - (103,865,721) (103,865,721)
Changes in net unrealized
loss on securities . . . . - - - - - 108,929 - 108,929
Foreign currency
translation adjustment . . - - - - - (55,149) - (55,149)
---------------
Comprehensive loss. . - - - - - - - (103,811,941)
Amortization of deferred
compensation . . . . . . . - - - - (269,307) - - (269,307)
Issuance of common stock
in connection with - -
exercise of stock options. 663,799 664 365,556 - - 366,220
Issuance of common stock
in connection with
Employee Stock Purchase
Plan . . . . . . . . . . . 41,603 42 64,768 - - - - 64,810
Issuance of common stock
and options in connection
with acquisitions. . . . . 1,903,973 1,904 15,063,314 - - - - 15,065,218
Common stock issued in
connection with
Sportsline distribution
agreement. . . . . . . . . 699,281 699 4,999,301 - - - - 5,000,000
47
Common stock
repurchased for treasury,
699,281 common shares. . . - - - (371,458) - - - (371,458)
Common stock options
issued in lieu of services
rendered . . . . . . . . . - - 57,024 - - - - 57,024
Acceleration of stock
options in connection with
severance arrangements
- - 397,712 - - - - 397,712
---------- ------- ------------ ---------- ---------- ---------- -------------- ---------------
Balance at December 31,
2000 . . . . . . . . . . . 31,079,574 31,080 218,254,968 (371,458) - (55,682) (173,912,589) 43,946,319
Net loss . . . . . . . . . - - - - - - (40,620,026) (40,620,026)
Foreign currency
translation adjustment . - - - - - (65,834) - (65,834)
Net unrealized loss on
securities . . . . . . . - - - - - 650 - 650
---------------
Comprehensive loss . . . - - - - - - - (40,685,210)
Issuance of common stock
in connection with
exercise of stock
options. . . . . . . . . 2,000 2 597 - - - - 599
---------- ------- ------------ ---------- ---------- ---------- -------------- ---------------
Balance at December 31,
2001 . . . . . . . . . . 31,081,574 $31,082 $218,255,565 $(371,458) $ - $(120,866) $(214,532,615) $ 3,261,708
========== ======= ============ ========== ========== ========== ============== ===============
See accompanying notes to consolidated financial statements.
48
THEGLOBE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- -------------- -------------
Cash flows from operating activities:
Net loss $(40,620,026) $(103,865,721) $(49,600,942)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 11,164,527 31,372,656 23,004,644
Non-cash restructuring and impairment charges 14,861,821 36,914,147 -
Non-cash marketing expenses - 2,313,276 -
Loss on sale of Games Domain and Console Domain 32,398 - -
Gain on sale of Kids Domain (4,839) - -
Non-cash compensation - 454,736 31,769
Amortization of deferred compensation - 269,307 110,566
Loss on disposal of equipment 62,198 - 99,179
Amortization of debt discount - - 147,012
(Gain) loss on sale of short-term securities (70,144) 108,929 -
Gain on early retirement of debt - - (1,355,698)
Deferred rent 56,982 113,964 438,263
Changes in operating assets and liabilities, net of acquisitions
and dispositions:
Inventory, net 161,909 (121,048) 48,312
Accounts receivable, net 2,779,081 915,062 (1,896,755)
Prepaid and other current assets 426,938 (584,307) (1,405,132)
Accounts payable (1,337,051) (2,583,741) (502,479)
Accrued expenses (3,418,339) (102,713) 1,444,820
Deferred revenue (499,551) 132,980 (654,472)
------------- -------------- -------------
Net cash used in operating activities (16,404,096) (34,662,473) (30,090,913)
------------- -------------- -------------
Cash flows from investing activities:
Purchase of securities (58,638) (35,076,829) (30,135,867)
Proceeds from sale of securities 3,074,386 51,369,206 11,686,864
Proceeds from sale of property and equipment 382,944 - -
Purchases of property and equipment (440,689) (2,871,235) (5,556,647)
-------------
Release (payment of) security deposits, net 3,478,007 172,490 (1,898,897)
Proceeds from sale of properties 790,000 - -
(Cash paid for) acquired from acquisitions - (274,973) 552,159
------------- -------------- -------------
Net cash provided by (used in) investing activities 7,226,010 13,318,659 (25,352,388)
------------- -------------- -------------
Cash flows from financing activities:
Payments of long-term debt (116,002) (8,145) (1,379,738)
Payments under capital lease obligations (1,447,302) (2,003,389) (1,492,333)
Proceeds from exercise of common stock options and warrants - 366,220 562,847
Net proceeds from issuance of common stock 599 64,810 65,088,484
Payments for treasury stock - (371,458) -
------------- -------------- -------------
Net cash (used in) / provided by financing activities (1,562,705) (1,951,962) 62,779,260
------------- -------------- -------------
Net change in cash and cash equivalents (10,740,791) (23,295,776) 7,335,958
Effect of exchange rate changes on cash and cash equivalents (44,935) 59,332 (533)
Cash and cash equivalents at beginning of period 13,349,554 36,585,998 29,250,572
------------- -------------- -------------
Cash and cash equivalents at end of period $ 2,563,828 $ 13,349,554 $ 36,585,998
============= ============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 174,111 $ 364,316 $ 534,458
============= ============== =============
Income taxes $ 100,206 $ 156,313 $ 209,723
============= ============== =============
Supplemental disclosure of non-cash transactions:
Common stock and options issued in connection with business acquired $ - $ 15,065,218 $ 80,475,536
============= ============== =============
Equipment acquired under capital leases $ - $ 132,431 $ 2,545,134
============= ============== =============
See accompanying notes to consolidated financial statements.
49
THEGLOBE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of the Company
theglobe.com, inc. was incorporated on May 1, 1995 (inception) and commenced
operations on that date. theglobe.com was an online property with registered
members and users in the United States and abroad which allowed its users to
personalize their online experience by publishing their own content and
interacting with others having similar interests. However, due to the
continuing decline in the advertising market, the Company was forced to take
additional cost-reduction and restructuring initiatives, which included closing
www.theglobe.com business effective August 15, 2001. The Company then began to
- ----------------
aggressively seek buyers for some or all of its remaining online and offline
properties, which consisted primarily of games-related properties. In October
2001, the Company sold all of the assets used in connection with the Games
Domain and Console Domain websites to British Telecommunications plc, and all of
the assets used in connection with the Kids Domain website to Kaboose Inc. (See
Note 4 of notes to consolidated financial statements - Dispositions).
As of December 31, 2001, the Company 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). Also as of December 31, 2001, the Company continued
to host its Happy Puppy.com website for game downloads only, but with no
associated sales staff or editorial staff, for purposes of finding a buyer for
the site and preserving the Happy Puppy brand. In February 2002, the Company
sold all of the assets used in connection with the Happy Puppy website to
Internet Game Distribution, LLC (See Note 16 of notes for consolidated
financial statements - Subsequent Events). As of December 31, 2001, the Company
continued to actively explore a number of strategic alternatives for its
remaining online and offline game properties, including selling some or all of
these properties and/or entering into new or different lines of business, which
may include investments in real estate.
Currently, the Company's revenue sources are principally from the sale of print
advertising in its Computer Games magazine; the sale of video games and related
products through Chips & Bits, Inc., its games distribution business; the sale
of its Computer Games magazine through newsstands and subscriptions; and the
limited sales of online advertising.
The Company's common Stock was delisted from the Nasdaq national market in April
2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board. As a result, an investor may find
it more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. The trading volume the Company's shares has
dramatically declined since the delisting. In addition, the company is now
subject to a Rule promulgated by the Securities and Exchange Commission that, if
the company fails to meet criteria set forth in such Rule, various practice
requirements are imposed on broker-dealers who sell securities governed by the
Rule to persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transactions prior to sale. Consequently, the Rule may have a
materially adverse effect on the ability of broker-dealers to sell the
securities, which may materially affect the ability of shareholders to sell the
securities in the secondary market.
The delisting has made trading the Company's shares more difficult for
investors, potentially leading to further declines in share price. It would
also make it more difficult for the Company to raise additional capital,
although the Company has no intentions to do so. We will also incur additional
costs under state blue sky laws if we sell equity due to our delisting.
50
The Company's December 31, 2001 consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
suffered recurring losses from operations since inception that raise substantial
doubt about its ability to continue as a going concern. Management and the
Board of Directors are currently exploring a number of strategic alternatives
and also continuing to identify and implement internal actions to improve the
Company's liquidity and operations. These alternatives may include selling
assets, which could result in significant changes in the Company's business
plan, or entering into new or different lines of business, which may include
investments in real estate. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries from their respective dates of acquisition (see
Note 5 of notes for consolidated financial statements). All significant
inter-company balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid securities with maturities of three
months or less to be cash equivalents. Cash equivalents were $0 and $13.3
million at December 31, 2001 and 2000, respectively, and consisted of government
securities.
(d) Short-term Investments
The Company accounts for its short-term investments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). SFAS 115 establishes the
accounting and reporting requirements for all debt securities and for
investments in equity securities that have readily determinable fair market
value. All short-term marketable securities must be classified as one of the
following: held-to-maturity, available-for-sale or trading securities. The
Company's short-term investments consist of held-to-maturity securities. The
Company's held-to-maturity securities are carried at amortized cost in the
statement of financial position. The amortization of the discount or premium
that arises at acquisition is included in earnings. The Company's
available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as Accumulated Other Comprehensive Loss in stockholders'
equity. Realized gains, realized losses and declines in value judged to be
other-than-temporary, are included in interest income (expense). All such gains
and losses are calculated on basis of specific-identification method. Interest
earned is included in earnings.
For the years ended December 31, 2001, 2000, and 1999, realized gains or losses
upon the sale of securities were not material. At December 31, 2001 and 2000,
the fair value of the Company's available-for-sale securities approximated cost
and unrealized gains and losses were not material. The Company's short-term
investments were comprised of the following at December 31, 2001 and 2000:
DECEM BER 31,
2001 2000
-------- ---------
(IN THO USANDS)
-------- ---------
Available-for-sale securities $ 51 $ -
Held-to-maturity securities . - 2,996
-------- ---------
Short-term investments. . . $ 51 $ 2,996
======== =========
(e) Inventory
Inventories, consisting of products available for sale, are recorded using the
specific-identification method and valued at the lower of cost or market value.
The Company's provision for obsolescent inventory as of December 31, 2001 and
December 30, 2000 was $64,311 and $39,955, respectively.
51
(f) Property and Equipment
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, generally three to
five years for equipment, three years for software and five to seven years for
furniture and fixtures.
(g) Restricted Investments and Letter of Credit
At December 31, 2001 restricted investments consisted of $7,000 in security
deposits related to office space. At December 31, 2000, restricted investments
included security deposits held in certificates of deposit and other interest
bearing accounts as collateral for certain capital lease equipment and office
space leases of $3.5 million. The Company was contingently liable under a
standby letter of credit of $1.4 million at December 31, 2000. The letter of
credit related to the Company's office-space lease, which was fully secured by a
restricted certificate of deposit held by the Company. At December 31, 2001, the
Company had no letters of credit outstanding. The remaining $2.1 million of
restricted cash was various security deposits, which were held as collateral
against various operating and capital leases. These security deposits were all
liquidated, as substantially all of the Company's operating and capital leases
were terminated or settled in 2001.
(h) Goodwill and Intangible Assets
Goodwill and intangible assets primarily relate to the Company's acquisitions
accounted for under the purchase method of accounting, or its purchase of
intangible assets. Under the purchase method of accounting, the excess of the
purchase price over the identifiable net tangible assets of the acquired entity
is recorded as identified intangible assets and goodwill. Goodwill and
intangible assets are stated at cost, net of accumulated amortization, and are
being amortized using the straight-line method over the expected period of
benefit ranging from 2 to 3 years (3 years for goodwill). See note 3.
(i) Impairment of Long-Lived Assets
Long-lived assets, including fixed assets, goodwill and other intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, the Company estimates the undiscounted future cash flows to
result from the use of the asset and its ultimate disposition. 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 asset. Fair value would generally be
determined by market value. Assets to be disposed of are the lower of the
carrying value or fair value less costs to sell. In 2000, the Company wrote off
$32.4 million in net book value of goodwill and intangible assets. In 2001, the
Company wrote off $10.7 million in net book value of goodwill and intangible
assets and $5.2 million in net book value of fixed assets.
(j) Fair Value of Financial Instruments
The carrying amount of certain of the Company's financial instruments, including
cash, cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and deferred revenue, approximate their fair value at
December 31, 2001 and 2000 because of their short maturities.
(k) 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.
52
(l) 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, which was acquired in February 2000; through the sale of video
games and related products through our games distribution business Chips & Bits,
Inc.; through the sale of our games information magazine through newsstands and
subscriptions; and through limited sale of online advertisements principally
under short-term advertising arrangements, averaging one to three months.
ADVERTISING
Online advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include the guarantee of a minimum number of
"impressions", defined as the number of times that an advertisement appears in
pages viewed by the users of the Company's online properties, for a fixed fee.
Payments received from advertisers prior to displaying their advertisements on
the Company's sites are recorded as deferred revenues and are recognized as
revenue ratably when the advertisement is displayed. To the extent minimum
guaranteed impressions levels are not met, the Company defers recognition of the
corresponding revenues until guaranteed levels are achieved. The Company's
online advertising revenue includes the development and sale of sponsorship
placements within its web sites. Development fees related to the sale of
sponsorship placements on the Company's web sites are deferred and recognized
ratably as revenue over the term of the contract.
The Company also derives revenue through the sale of advertisements in its games
information magazine, which was acquired in February 2000. Advertising revenues
for the games information magazine are recognized at the on-sale date of the
magazine.
Advertising revenue from the Company's online properties for the years ended
December 31, 2001, 2000 and 1999 was $2.9 million, $15.0 million, and 16.4
million, respectively. Advertising revenue from the Company's games magazine,
which was acquired in February 2000, for the years ended December 31, 2001 and
2000 was $3.5 million and $4.5 million, respectively. Advertising revenue
accounted for 40%, 65% and 5% of total revenues for the years ended December 31,
2001, 2000, and 1999, respectively.
The Company traded advertisements on its web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or received,
whichever is more readily determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered on
the Company's web properties. Barter expense is recognized when the Company's
advertisements are run on other companies' web sites, which typically occurs in
the same period in which barter revenue is recognized. Barter revenues were 1%,
4% and 4% of total revenues for the years ended December 31, 2001, 2000 and
1999, respectively.
ELECTRONIC COMMERCE AND OTHER
The Company derives other revenues from the sale of video games and related
products through its online store and the sale of its games information magazine
through newsstands and subscriptions.
Sales from the online store are recognized as revenue when the product is
shipped to the customer. Freight out costs are included in net sales and have
not been significant to date. The Company provides an allowance for merchandise
sold through its online store. The allowance provided to date has not been
significant.
Newsstand sales of the games information magazine are recognized at the on-sale
date of the magazine, net of provisions for estimated returns. Subscriptions
are recorded as deferred revenue when initially received and recognized as
income pro ratably over the subscription term.
53
Revenues from the Company's share of the proceeds from its e-commerce partners'
sales are recognized upon notification from its partners of sales attributable
to the Company's sites. To date revenues from e-commerce revenue shares have
been immaterial.
Sales through the online store accounted for 31% or $5.1 million, 24% or $7.2
million, and 12% or $2.2 million of total revenues for the years ended December
31, 2001, 2000, and 1999, respectively. Sales of the Company's games
information magazine, which was acquired in February 2000, through newsstands
and subscriptions accounted for 29% or $4.9 million and 11% or $3.2 million of
total revenue for the years ended December 31, 2001 and 2000, respectively. The
Company acquired its games information magazine in February 2000.
(m) Advertising Costs
Advertising costs are expensed as incurred and are included in sales and
marketing expense. Advertising costs were $5.1 million, $7.9 million and $8.7
million for the years ended December 31, 2001, 2000, and 1999, respectively.
Barter advertising costs were 1%, 4% and 4% of total revenues for the years
ended December 31, 2001, 2000 and 1999, respectively.
(n) Product Development
Product development expenses include professional fees, staff costs and related
expenses associated with the development, testing and upgrades to the Company's
website as well as expenses related to its editorial content and community
management and support. Product development costs and enhancements to existing
products are charged to operations as incurred. The Company accounts for
development costs in accordance with the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
requires all costs related to the development of internal use software other
than those incurred during the application development stage to be expensed as
incurred. Its also provides guidance on the capitalization of costs incurred
during the application development stage for computer software developed or
obtained for internal use. As of December 31, 2001 there were no amounts
capitalized.
(o) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), 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 Principle Board
Opinion No. 25 ("APB 25") and provide pro forma net earnings disclosures for
employee stock option grants if the fair-value-based method defined in SFAS 123
had been applied. The Company has elected to continue to apply the provisions
of APB Opinion 25 and provide the pro forma disclosure provisions of SFAS 123.
The Company has adopted FASB Interpretation No 44, Accounting for Certain
Transactions Involving Stock Compensation" ("FIN No. 44") which provides
guidance for applying APB Opinion No 25. "Accounting for Stock Issued to
Employees. 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. The
Company applied FIN No. 44 to account for its cancellation and reissuance of
options and there has been no impact on its results of operations for the years
ended December 31, 2001 and 2000. (See note 2 of notes for consolidated
financial statements) The Company cannot estimate the impact of FIN No. 44 on
its future results of operations as the charge is dependent on the future market
price of the Company's common stock, which cannot be predicted with any degree
of certainty. Depending upon movements in the market value of the Company's
common stock, this accounting treatment may result in significant non-cash
compensation charges in future periods.
(p) Net Loss Per Common Share
The Company reports net loss per common share in accordance with Statement of
Financial Accounting Standard No. 128, "Computation of Earnings Per Share,"
("SFAS 128"). In accordance with SFAS 128 and the SEC Staff Accounting Bulletin
No. 98, basic earnings-per-share is computed using the weighted average number
of common shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the conversion of the
Convertible Preferred Stock (using the if-converted method) and 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.
54
Diluted loss per share has not been presented separately, as the outstanding
stock options, warrants and contingent stock purchase warrants are anti-dilutive
for each of the periods presented. Diluted net loss per common share for the
years ended December 31, 2001, 2000 and 1999 does not include the effects of
options to purchase 3,104,349, 3,891,317, and 4,301,887 shares of Common Stock,
respectively nor warrants to purchase 4,011,534, for each of the years then
ended.
(q) Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with the Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement establishes standards for the reporting and
display of comprehensive income (loss) and its components in a full set of
general-purpose financial statements. Comprehensive income (loss) generally
represents all changes in shareholders' equity during the year except those
resulting from investments by, or distributions to, shareholders.
(r) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. These
estimates and assumptions relate to estimates of collectibility of accounts
receivable, the valuation of inventory, the realization of goodwill and other
intangible assets, accruals and other factors. Actual results could differ from
those estimates.
(s) Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents, short-term investments, trade
accounts receivable and restricted investments. The Company invests its cash
and cash equivalents and short-term investments among a diverse group of issuers
and instruments. The Company performs periodic evaluations of these investments
and the relative credit standings of the institutions with which it invests.
The Company's customers are primarily concentrated in the United States. The
Company performs ongoing credit evaluations of its customers' financial
condition and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of customers, historical trends and other
information. Concentration of credit risk is limited due to the Company's large
number of customers, however the Company's online advertising client base has
been until recently concentrated among dedicated internet companies.
For the years ended December 31, 2001, 2000, and 1999 there were no customers
that accounted for over 10% of revenues generated by the Company. The Company
had no customers that represented more than 10% of accounts receivable as of
December 31, 2001 and 2000.
(t) Segment Reporting
The Company applies the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes annual and interim reporting
standards for operating segments of a company. SFAS 131 requires disclosures of
selected segment-related financial information about products, major customers
and geographic areas. The Company is organized in a single operating segment
for purposes of making operating decisions and assessing performance. The chief
operating decision maker evaluates performance, makes operating decisions and
allocates resources based on financial data consistent with the presentation in
the accompanying condensed consolidated financial statements.
55
The Company's revenues have been earned primarily from customers in the United
States. In addition, all significant operations and assets are based in the
United States.
(u) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and subsequently SFAS No.
144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001 and SFAS
No. 142 is effective January 1, 2002. Goodwill and intangible assets determined
to have an indefinite useful life acquired in purchase business combinations
completed after June 30, 2001, but before SFAS No. 142 is adopted in full, are
not amortized. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized and tested for
impairment prior to the full adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing
intangible assets and goodwill that were acquired in a purchase business
combination, and to make any necessary reclassifications in order to conform
with the new criteria in SFAS No. 141 for recognition separate from goodwill.
The Company will be required to reassess the useful lives and residual values of
all intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. If an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. The second step is required to be completed as
soon as possible, but no later than the end of the year of adoption. In the
second step, the Company must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair value to all
of it assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated
for impairment under Statement No. 142, Goodwill and Other Intangible Assets.
56
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Management has determined that the adoption of Statement 144 will not have a
material impact on the Company's financial statements.
(2) STOCK OPTION REPRICING
On May 31, 2000, the Company offered to substantially all of its employees,
excluding executive officers and the Board of Directors, the right to cancel
certain outstanding stock options and receive new options with an exercise price
equal to the then current fair market value of the stock. Options to purchase a
total of approximately 1.1 million shares, approximately 20% of outstanding
options, were canceled and approximately 856,000 new options were granted at an
exercise price of $1.594 per share, which was based on the closing price of the
Company's common stock on May 31, 2000. The new options vest at the same rate
that they would have vested under previous option plans. As described above in
note 1(o), the Company is accounting for these re-priced stock options using
variable accounting in accordance with FIN No. 44. In addition, as a result of
options, which were granted within six months of the cancellations, an
additional 244,000 options also require variable accounting in accordance with
FIN No. 44. For the years ended December 31, 2001 and 2000, there has been no
compensation charge relating to the re-pricing due to the decrease in value of
the common stock price. Depending upon movements in the market value of the
Company's common stock, this accounting treatment may result in significant
non-cash compensation charges in future periods.
(3) RESTRUCTURING AND IMPAIRMENT CHARGES
For the years ended December 31, 2001, and December 31, 2000, the Company
recorded restructuring and impairment charges of $17.1 million and $41.3
million, respectively.
In the second quarter of 2001, the Company announced cost-reduction initiatives.
These initiatives included the elimination of 59 positions, or 31% of the
Company's workforce at that time. The severance benefits of $470,000 were paid
in the second quarter of 2001. Additionally, the Company closed its San
Francisco office in May 2001 and an additional $54,000 security deposit was
relinquished as settlement to terminate the remaining lease obligation.
In the second quarter of 2001, the Company recorded impairment charges of $4.5
million related to the servers and computers used for serving and hosting
www.webjump.com and www.theglobe.com as a result of management's ongoing
- --------------- ----------------
business review and impairment analysis performed under its existing policy
regarding impairment of long-lived assets.
In the third quarter of 2001, the Company continued its cost cutting measures.
The Company eliminated 60 additional positions, or 58% of the Company's
workforce. As a result, severance benefits of $1.0 million were paid in the
third quarter of 2001.
Additionally, the Company terminated its lease at 120 Broadway in New York and
its operations relocated to a significantly smaller facility in New York, in
September 2001. The Company also decided to shut down its www.theglobe.com and
----------------
www.webjump.com websites effective August 15, 2001. The servers located in a
- ---------------
facility in Staten Island, New York were in use through August 31, 2001. The
Company discontinued the use of these servers on August 31, 2001 and is now
using hosted facilities for its live websites. As a result of these measures,
the Company recorded net restructuring and impairment charges related to the
fixed assets consisting of computer hardware and software, furniture and
fixtures, communications equipment and leasehold improvements at the two
locations totaling approximately $3.67 million, and miscellaneous net
restructuring credit amounts related to the settlement of prepaid items,
accruals and capital lease obligations totaling approximately $0.26 million.
57
Further, in the third quarter of 2001, the Company recorded additional
impairment charges of $4.2 million, of which $3.6 million related to Chips &
Bits and Strategy Plus and $0.6 million related to Attitude Network, Ltd.
related to goodwill and other intangible assets, as a result of management's
ongoing business review and impairment analysis performed under its existing
policy regarding impairment of long-lived assets.
In the fourth quarter of 2001, severance benefits of $0.1 million were paid
relating to the cost cutting measures initiated in the third quarter 2001. The
company also wrote off $3.3 million in goodwill as result of comparing the
carrying values of goodwill to their fair values.
Where impairment indicators were identified, management determined the amount of
the impairment charge by comparing the carrying values of goodwill and other
long-lived assets to their fair values. Management determines fair value based
on a market approach, which during 2001 and 2000 mainly included proposals for
sale of its business properties. As a result, during management's quarterly
review of the value and periods of amortization of both goodwill and other
long-lived assets, it was determined that the carrying value of goodwill and
certain other tangible and intangible assets were not fully recoverable.
The Company acquired certain tangible assets such as server and computer
equipment used for serving and hosting the various websites of the Company
during 1999 and 2000. These tangible assets were used for serving and hosting
the various websites of the Company. The Company's revaluation of goodwill and
intangible assets related to Attitude Network, Ltd., Strategy Plus, Inc. and
Chips & Bits, Inc. and the tangible assets was triggered by the continued and
prolonged decline in Internet advertising throughout 2000 and 2001, which
significantly impacted current projected advertising revenue generated from
these web-based properties and the downturn in computer games e-commerce
business and has resulted in declines in operating and financial metrics over
the past several quarters, in comparison to the metrics forecasted at the time
of their respective acquisitions.
It was determined that the fair value of goodwill and intangible assets related
to its web-based properties, other businesses and tangible assets were less than
the recorded amount. The methodology used to test for and measure the amount of
the impairment charge related to the intangible assets was based on the same
methodology as used during the initial acquisition valuation of these web-based
properties and other businesses. The impairment related to the tangible assets
was based on the estimated net realizable value of these assets. The impairment
factors evaluated by management may change in subsequent periods, given that the
Company's business operates in a highly volatile business environment. This
could result in material impairment charges in the future.
As of December 31, 2001, the amount remaining in the Company's restructuring
accruals recorded in 2001 and 2000 were $200,000 and $0, respectively.
As of December 31, 2001, after giving effect to the fourth quarter of 2000 and
full-year 2001 impairment charges, the total remaining amount of goodwill and
other intangible assets, net, is $0 for Attitude Networks, which was acquired in
April 1999, and $0 for Chips & Bits and Strategy Plus which were acquired in
February 2000. The impairment factors evaluated by management may change in
subsequent periods, given that our business operates in a highly volatile
business environment.
In the second quarter of 2000, we recorded a $15.6 million restructuring charge
as a result of a strategic decision made by management to shut down our
electronic commerce operations in Seattle, Washington in order to realign our
electronic commerce operations to focus on the direct sale of video games and
related products as well as revenue share relationships with third parties who
are interested in reaching our targeted audiences. The $15.6 million charge
incurred primarily related to a $12.8 million write-off of the remaining
goodwill and intangibles associated with our 1999 acquisition of
Factorymall.com, costs associated with the closing of the Seattle operations of
$0.5 million, write-offs related to the disposal of inventory, equipment and
other assets of $1.7 million as well as $0.6 million of employee severance and
related benefits incurred primarily related to the termination of 30 employees.
58
In the fourth quarter of 2000, we incurred an additional $25.7 million in
restructuring and impairment charges as follows:
- We recorded a restructuring charge of $1.8 million, including $398,000
of non-cash compensation, as a result of strategic decisions made by
management to increase operational efficiencies, improve margins and
further reduce expenses. The restructuring charge primarily related to
a workplace reduction of 26 employees.
- In addition, we recorded an impairment charge of $4.3 million in
connection with our termination of a distribution agreement with
Sportsline in November 2000.
- As discussed below, we also recorded impairment charges of $19.6
million as a result of management's ongoing business review and
impairment analysis performed under its existing policy regarding
impairment of long-lived assets.
In 1999, the Company completed acquisitions of Attitude Network, Ltd. and the
web hosting assets of Webjump.com that were financed principally with shares of
the Company's common stock, and were valued based on the price of the Company's
common stock at that time. The revaluation was triggered by the continued
decline in Internet advertising throughout 2000, which significantly impacted
current projected advertising revenue generated from these web based properties.
In addition, each of these web based properties have experienced declines in
operating and financial metrics over the past several quarters, primarily due to
the continued weak overall demand of on-line advertising and marketing services,
in comparison to the metrics forecasted at the time of their respective
acquisitions. The impairment analysis considered that these web-based
properties were acquired during 1999 and that the intangible assets recorded at
the time of acquisition was being amortized over useful lives of 2 - 3 years (3
years for goodwill). As a result, it was determined that the fair value of
Attitude's and Webjump's goodwill and other intangible assets were less than the
recorded amount, therefore, an impairment charge of $13.6 million and $6.0
million, respectively, were recorded. The methodology used to test for and
measure the amount of the impairment charge was based on the same methodology
the Company used during its initial acquisition valuation of Attitude and
Webjump in 1999.
The Company's management performs on-going business reviews and, based on
quantitative and qualitative measures, assesses the need to record impairment
losses on long-lived assets used in operations when impairment indicators are
present. Where impairment indicators were identified, management determined the
amount of the impairment charge by comparing the carrying values of goodwill and
other long-lived assets to their fair values. These evaluations of impairment
are based on achievement of business plan objectives and milestones of each web
based property, the fair value of each ownership interest relative to its
carrying value, the financial condition and prospects of the web based property,
and other relevant factors. The business plan objectives and milestones that are
considered include, among others, those related to financial performance, such
as achievement of planned financial results and completion of capital raising
activities, if any, and those that are not primarily financial in nature, such
as the launching or enhancements of a web site, the hiring of key employees, the
number of people who have registered to be part of the associated properties'
web community, and the number of visitors to the associated properties' web site
per month. Management determines fair value based on a market approach, which
includes analysis of market price multiples of companies engaged in lines of
business similar to the company. The market price multiples are selected and
applied to the company based on the relative performance, future prospects and
risk profile of the company in comparison to the guideline companies. As a
result, during management's quarterly review of the value and periods of
amortization of both goodwill and other long-lived assets, it was determined
that the carrying value of goodwill and certain other intangible assets were not
fully recoverable.
(4) DISPOSITIONS
In August 2001, the Company sold the www.webjump.com URL to USGO Inc. for
---------------
$20,000, of which the entire amount represents gain on sale of other assets.
On October 30, 2001, the Company sold to the management of Kaboose.com, Inc. all
of the assets used in connection with the KidsDomain.com web site for $75,000.
As a result, the Company recognized a gain on the sale of Kids Domain assets of
approximately $5,000.
59
On October 17, 2001, the Company sold to British Telecommunications, plc all of
the assets used in connection with the Games Domain and Console Domain web
sites. The total consideration for the purchase is the sum of: $420,000 upon
contract completion; a first installment payment of a minimum of $147,500,
which was received in 2002 and up to a maximum of $220,500, based on the
percentage achievement of a predetermined revenue target for the fourth quarter
of 2001, ending December 31, 2001; and, a second installment of a minimum of
$147,500 and up to a maximum of $220,500, based on the percentage achievement
of a predetermined revenue target for the first quarter of 2002, ending
March 31, 2002. The minimum consideration is $715,000 and the maximum
potential consideration is $861,000. Accordingly, as of December 31, 2001, the
Company recognized a loss on the sale of the Games Domain and Console Domain
assets of approximately $32,000 based on the minimum potential consideration as
of December 31, 2001. The Company has a receivable from British
Telecommunications plc in the amount of $358,293 as of December 31, 2001, which
is included in prepaid expenses and other current assets in the consolidated
balance sheet.
(5) ACQUISITIONS
a) factorymall.com, inc.
On February 1, 1999, theglobe formed Nirvana Acquisition Corp. ("Nirvana"), a
Washington corporation and a wholly owned subsidiary of theglobe. Nirvana was
merged with and into factorymall.com, inc., a Washington corporation d/b/a Azazz
("factorymall"), with factorymall as the surviving corporation. The merger was
effected pursuant to the Agreement and Plan of Merger, dated February 1, 1999,
by and among theglobe.com, Nirvana, and factorymall and certain shareholders
thereof. As a result of the merger, factorymall became a wholly owned subsidiary
of theglobe. factorymall operated Azazz, a leading interactive department store.
This transaction was accounted for under the purchase method of accounting.
The consideration paid by theglobe in connection with the merger consisted of
approximately 614,104 newly issued shares of Common Stock, valued at $17.5
million. In addition, options to purchase shares of factorymall's common stock,
without par value, were exchanged for options to purchase approximately 82,034
shares of theglobe's Common Stock, valued at $1.7 million. Warrants to purchase
shares of factorymall common stock were exchanged for warrants to purchase
approximately 18,810 shares of theglobe's Common Stock, valued at $0.4 million.
theglobe also assumed certain bonus obligations of factorymall triggered in
connection with the merger that resulted in the issuance by theglobe of
approximately 73,728 shares of Common Stock, valued at $2.0 million, and payment
by theglobe of approximately $0.5 million in cash, which has been included as
part of the total purchase price consideration. The Company also incurred
expenses of approximately $0.7 million related to the merger.
The total purchase price for this transaction was approximately $22.8 million.
Of this amount, approximately $0.1 million of the purchase price was allocated
to net tangible assets. The historical carrying amounts of such net tangible
assets approximated their fair values. The purchase price in excess of the fair
value of the net tangible assets assumed, in the amount of $22.7 million was
allocated to goodwill and certain identifiable intangible assets and is being
amortized using the straight-line method over its estimated useful life of 2 to
3 years (3 years for goodwill), the expected period of benefit. Factorymall's
results of operations are included in the consolidated statement of operations
from February 1, 1999. In April 2000, the Company decided to close
Factorymall's operations and recorded an impairment and restructuring charge
(see Note 3 for additional information).
b) Attitude Network, Ltd.
On April 5, 1999, theglobe formed Bucky Acquisition Corp. ("Bucky"), a Delaware
corporation and a wholly owned subsidiary of theglobe. Bucky was merged with and
into Attitude Network, Ltd., a Delaware corporation ("Attitude"), with Attitude
as the surviving corporation. The merger was effective pursuant to the Agreement
and Plan of Merger, dated April 5, 1999, which closed on April 9, 1999, by and
among theglobe.com, Bucky, Attitude and certain shareholders thereof. As a
result of the merger, Attitude became a wholly owned subsidiary of theglobe.com.
Attitude's properties publish games information content and include HappyPuppy,
Kids Domain, Console Domain and Games Domain. This transaction was accounted for
under the purchase method of accounting.
60
The consideration paid by theglobe.com in connection with the merger consisted
of 1,570,922 newly issued shares of Common Stock, valued at $43.1 million. In
addition, options to purchase shares of Attitude's common stock were exchanged
for options to purchase approximately 84,760 shares of Common Stock, valued at
$1.9 million. Warrants to purchase shares of Attitude common stock were
exchanged for warrants to purchase approximately 46,706 shares of theglobe
Common Stock, valued at $1.0 million. The Company also incurred expenses of
approximately $0.8 million related to the merger.
The total purchase price for this transaction was approximately $46.8 million.
Of this amount, approximately $0.2 million of the purchase price was allocated
to net tangible liabilities. The historical carrying amounts of such net
tangible liabilities approximated their fair values. The purchase price in
excess of the fair value of the net tangible liabilities assumed in the amount
of $47.0 million was allocated to goodwill and certain identifiable intangible
assets and is being amortized using the straight-line method over a its
estimated useful life of 3 years, the expected period of benefit. Attitude's
results of operations are included in the consolidated statement of operations
from April 9, 1999. See Note 3 of notes for consolidated financial statements
for additional information regarding impairment charge. See Note 4 of notes for
consolidated financial statements for additional information regarding the
disposition of Attitude's assets.
(c) Chips & Bits and Strategy Plus
On February 24, 2000, CB Acquisition Corp. ("CB Merger Sub"), a Vermont
corporation and a wholly owned subsidiary of theglobe.com was merged with and
into Chips & Bits, Inc., a Vermont corporation ("Chips & Bits"), with Chips &
Bits as the surviving corporation (the "CB Merger"). Also on February 24, 2000,
SP Acquisition Corp. ("SP Merger Sub"), a Vermont corporation and a wholly owned
subsidiary of theglobe.com, was merged with and into Strategy Plus, Inc., a
Vermont corporation ("Strategy Plus"), with Strategy Plus as the surviving
corporation (together with the CB Merger, the "Mergers"). The Mergers were
effected pursuant to an Agreement and Plan of Merger dated as of January 13,
2000 by and among theglobe.com, CB Merger Sub, SP Merger Sub, Chips & Bits,
Strategy Plus, Yale Brozen and Christina Brozen (the "Merger Agreement"). As a
result of the Mergers, both Chips & Bits and Strategy Plus became wholly owned
subsidiaries of theglobe.com.
The consideration paid by the Company consisted of 1,903,977 shares of the
Company's Common Stock, valued at $14.9 million. The Company also incurred
acquisition costs of approximately $0.6 million. An additional payment of $1.3
million in newly issued shares of Common Stock was contingent upon the
attainment of certain performance targets by Chips & Bits and Strategy Plus
during the 2000 fiscal year. During August 2001, the Company settled this
contingency resulting in no additional consideration being paid to the former
shareholders.
This transaction was accounted for under the purchase method of accounting. The
aggregate purchase price of these transactions was $15.5 million. The Company
has allocated $1.1 million to the net tangible assets of Chips & Bits and $1.6
million to the net tangible liabilities of Strategy Plus. The historical
carrying amounts of the net tangible assets acquired and liabilities assumed by
the Company approximated their fair market value on the date of acquisition.
The purchase price in excess of the fair market value of the net tangible assets
acquired and liabilities assumed by the Company amounted to $16.0 million and
was allocated to goodwill. The goodwill amount is being amortized under the
straight-line method over an estimated useful life of 3 years, the expected
period of benefit. Chips & Bits and Strategy Plus's results of operations are
included in the condensed consolidated statement of operations from February 24,
2000. See Note 3 of notes for consolidated financial statements for additional
information regarding impairment charge.
The following unaudited pro forma consolidated financial information gives
effect to the Chip & Bits and Strategy Plus acquisitions, as if the acquisition
had occurred at January 1, 2000 by consolidating the results of operations of
the Company, Chips & Bits and Strategy Plus for the year ended December 31,
2000.
61
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- -------------------
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . $ 31,560 $ 31,376
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . (105,187) (62,406)
Net loss per share-basic and diluted. . . . . . . . . . . $ (3.44) $ (2.30)
Weighted average basic and diluted shares outstanding (1) 30,568 27,165
(1) The weighted average common shares used to compute pro forma basic net
loss per share includes the actual weighted average common shares
outstanding for the historical year ended December 31, 2000, plus the
common shares issued in connection with the Chips & Bits and Strategy Plus
acquisition as if it occurred on January 1, 2000.
(d) Web Hosting Assets of Webjump.com
On November 30, 1999, Jump Acquisition LLC ("Jump LLC"), a Delaware limited
liability company and a wholly owned subsidiary of theglobe, acquired all of the
assets of Webjump.com ("Webjump"), a web hosting property. The purchase of the
Webjump assets was affected pursuant to an Agreement of Purchase and Sale, dated
November 30, 1999, by and among theglobe, Jump LLC, Infonent.com and certain
stockholders of Infonent.com. The assets acquired in connection with this
transaction consisted of data, intellectual property and other physical property
used in connection with the operation of Webjump's web hosting property.
The Company issued 1,104,972 shares of newly issued Common Stock, valued at
$12.9 million, in connection with this transaction. An additional $12.5
million, payable in newly issued shares of Common Stock, was contingent based
upon the attainment by the Webjump property of certain performance targets on or
prior to November 30, 2000. Management determined that such targets were not
achieved as of the measurement date, however, on February 14, 2001 the former
shareholder group filed a lawsuit against us claiming that they are entitled to
$9.5 million related to the above mentioned targets. In August 2001, the
Company executed a settlement agreement with the trustee for Infonent.com in
which the trustee agreed to dismiss all claims in return for a payment of
$175,000 by the Company. See Note 13 (d) of notes for consolidated financial
statements for additional information.
In addition to the issuance of Common Stock, the Company incurred acquisition
costs of $0.1 million. The aggregate purchase price of $13.0 million has been
accounted for as purchased intangible assets and will be amortized using the
straight-line method over an estimated useful life of 3 years, the expected
period of benefit. See Note 3 of notes for consolidated financial statements
for additional information regarding impairment charge.
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, DECEMBER 31,
2001 2000
------------- --------------
(in thousands)
Computer equipment and software, including assets under capital leases of $0
and $5,666, respectively . . . . . . . . . . . . . . . . . . . . . . . . . $ 588 $ 11,948
Furniture and fixtures, including assets under capital leases of $0 and $42,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 1,632
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,112
------------- --------------
899 15,692
Less accumulated depreciation and amortization, including amounts related to
assets under capital leases of $0 and $3,672 respectively. . . . . . . . . 656 7,716
------------- --------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 243 $ 7,976
============= ==============
62
(7) INCOME TAXES
Income taxes for the years ended December 31, 2001 and 2000 are based solely on
state and local taxes on business and investment capital.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2001,
2000 and 1999 are presented below.
2001 2000
---------- ---------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 52,974 $ 49,473
Allowance for doubtful accounts 1,069 728
Depreciation - (447)
Issuance of warrants 813 630
Deferred compensation - 580
Start-up costs - 105
Deferred revenue - 19
---------- ---------
Total gross deferred tax assets 54,856 51,088
Less valuation allowance (54,856) (50,632)
---------- ---------
Total net deferred tax assets 456
Deferred tax liabilities:
Intangible assets other than goodwill - (456)
---------- ---------
Total gross deferred tax liabilities - -
---------- ---------
$ - $ -
---------- ---------
Because of the Company's lack of earnings history, the deferred tax assets have
been fully offset by a 100% valuation allowance. The valuation allowance for
deferred tax assets was $54.9 million and $50.6 million as of December 31, 2001
and 2000, respectively. The net change in the total valuation allowance was
$4.3 million and $18.7 million for the years ended December 31, 2001 and 2000,
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 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 $54.9 million, subsequently recognized tax benefits, if any, in the
amount of $5.8 million will be applied directly to contributed capital.
At December 31, 2001 and December 31, 2000, the Company had net operating loss
carryforwards available for US and foreign tax purposes of approximately $115
million and $105.2 million respectively. These carryforwards expire through
2021.
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 operating tax loss
carryforwards and tax credit carryforwards are subject to these limitations.
(8) SPORTSLINE.COM, INC. DISTRIBUTION AGREEMENT
In February 2000, the Company entered into a strategic two-year partnership with
Sportsline.com, Inc. ("Sportsline"), whereby the Company became the exclusively
developer and operator of community solutions on the Sportsline web site
("Sportsline Agreement"). In accordance with the Sportsline Agreement,
Sportsline received $5.0 million, paid in the Company's Common Stock and the
Company received the exclusive right to sell advertising, sponsorships and
non-sports related e-commerce within the Sportsline community area. The total
shares of Common Stock issued in connection with the Sportsline Agreement were
699,281 valued at $7.15 per share. The Company recorded the initial $5.0 million
payment in connection with this firmly committed executory contract in other
assets and began amortizing the amount under the straight-line method over the
two year contractual term of the Sportsline Agreement which commenced upon
Sportsline's launch of the Company's community solutions on its web site in
April 2000.
63
In connection with the $5 million payment, the Company guaranteed that if
Sportsline elected to sell any of its 699,281 shares during defined selling
periods and Sportsline's net proceeds from the sale of these shares was less
than the original issue price of $7.15 per share, the Company would be required
to pay Sportsline the difference, however, the total guarantee was limited to
$2,450,000 payable in cash and/or the Company's Common Stock at the Company's
option. The Company was required to provide a $1.5 million security deposit for
its obligation to pay the guarantee.
As of June 30, 2000, the Company recorded an additional $2.45 million in other
assets and additional paid-in-capital in connection with this guarantee payment
based upon the fair market value of the Company's Common Stock at June 30, 2000.
This amount was being amortized over the remaining contractual terms of the
agreement and was being adjusted accordingly at each interim balance sheet date
for fluctuations in the fair market value of the Company's Common Stock.
On November 1, 2000, theglobe.com and Sportsline terminated this agreement,
whereby theglobe.com agreed to settle its guarantee payment by releasing the
$1.5 million security deposit held in escrow. As a result of the termination,
the Company recorded an impairment charge in the fourth quarter of 2000 of
$4,311,724, representing the write-off of the remaining unamortized initial and
guarantee payments of $5,261,724 in the aggregate, the relinquishment of the
security deposit of $1,500,000 offset by the $2,450,000 guarantee liability
originally recorded as additional paid-in capital, as the Company originally
intended to satisfy any potential guarantee payments under this agreement
through the issuance of Common Stock. The total amount of amortization costs
recorded during 2000 in connection with the Sportsline Agreement, excluding the
$4,311,724 impairment charge was $2,188,276. These costs are included within
sales and marketing. In addition, the Company also agreed to purchase the
699,281 shares of common stock held by Sportsline for $371,458 based upon the
closing trading price on that date, or $0.531 per share. This transaction was
accounted for as treasury stock within stockholders' equity.
(9) STOCKHOLDERS' EQUITY
Common Stock
In May 1999, the Company completed a secondary public offering of 3,500,000
shares of its Common Stock at an offering price of $20.00 per share. Net
proceeds to the Company amounted to $65.0 million, after underwriting discounts
and offering costs of $3.5 million and $1.5 million, respectively.
In 1999, the Company issued shares of Common Stock in connection with the
acquisitions of factorymall, Attitude and the web hosting assets of Webjump.
The shares issued in connection with these transactions amounted to 687,832,
1,570,922 and 1,104,972, respectively.
In 2000, the Company issued 1,903,973 shares of Common Stock in connection with
the acquisitions of Chips & Bits and Strategy Plus.
Certain holders of Common Stock are subject to substantial restrictions on the
transfer or sale of shares and also have certain 'piggyback' 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.
64
Stock Dividend
On May 14, 1999, the Company affected a 2-for-1 stock dividend to all
shareholders of record as of May 3, 1999. All share and per share information
in the accompanying consolidated financial statements has been retroactively
restated to reflect the effect of the stock dividend.
Convertible Preferred Stock
In August 1997, the Company authorized and issued 51 shares of Series D
Preferred Stock for an aggregate cash amount of $20,000,000 in connection with
the investment by Dancing Bear Investments, Inc., an entity controlled by the
Chairman, which holds a majority interest in the Company. These shares
constituted 51% of the fully diluted capital stock of the Company at the time of
exercise, as defined. In addition to the Series D Preferred Stock, Dancing Bear
Investments, Inc. also received warrants which provided the right to purchase up
to 10 shares of
Series E Preferred Stock ("Series E Warrants") representing 10% of the fully
diluted capital stock of the Company at the time of exercise for an aggregate
purchase price of $5,882,353, if exercised in total.
Upon consummation of the Company's initial public offering in November 1998, all
of the Company's outstanding Preferred Stock was converted into 10,947,470
shares of Common Stock.
The number of common shares that the outstanding Series E Warrants are
convertible into upon exercise became fixed as a result of the consummation of
the initial public offering at 4,046,018 shares. These warrants are immediately
exercisable at approximately $1.45 per share. In May 1999, 100,000 shares of
the Series E Warrants were exercised.
(10) STOCK OPTION PLAN
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, the Board of Directors may issue incentive
stock options or nonqualified stock options to purchase up to 1,582,000 common
shares, as amended. Incentive stock options must be granted at the fair market
value of the Company's Common Stock at the date the option is issued.
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.
In July 1998, the Company's 1998 Stock Option Plan (the "1998 Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company. The
1998 Plan authorized the issuance of 2,400,000 shares of Common Stock, subject
to adjustment as provided in the 1998 Plan. In March 1999, the Board of
Directors authorized an increase in the number of shares reserved for issuance
under the 1998 Plan from 2,400,000 to 3,400,000. This increase was subsequently
approved by the Company's stockholders in June 1999. The 1998 Plan 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. 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. Options granted under the
Broad Based Plan and the 2000 Plan expire after a ten year period.
In July 2000, the Company granted options to purchase 1,250,000 shares of Common
Stock to Charles Peck in connection with his becoming the Company's new Chief
Executive Officer. These options have an exercise price of $1.94 per share and
have various vesting terms ranging from immediate to ten years. Certain options
have automatic accelerated vesting provisions in which the options vest if the
Company's common stock share price reaches certain thresholds. These options
were granted pursuant to individual nonqualified stock option agreements between
Mr. Peck and the Company and not pursuant to any of the plans described above.
During 2000, the Company recorded approximately $398,000 of non-cash
compensation expense in connection with the acceleration of vesting of options
to purchase 210,000 shares of common stock pursuant to a severance agreement
with a former executive officer of the Company. The charge represents the
difference between the original exercise price of the option grants and the fair
value of the Company's common stock on the date of termination. This non-cash
compensation charge was included as part of severance costs in connection with
the fourth quarter of 2000 restructuring charges.
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, compensation cost of $0, $62,570, and $66,000 has been
recognized for stock options granted to employees below fair market value in
2001, 2000 and 1999, respectively, in the accompanying consolidated financial
statements. Compensation cost recognized in connection with stock options
granted in lieu of services rendered to non-employees was $0, $263,761 and
$55,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
There were no stock options granted to non-employees, other than directors,
during 2001.
The Company applies APB No. 25 in accounting for its stock options granted to
employees and accordingly, no compensation expense has been recognized in the
consolidated financial statements (except for those options issued with exercise
prices less than fair market value at date of grant). 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:
2001 2000 1999
--------------- -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss-as reported. . . . . . . . . . . . $ 40,620 $ 103,866 $ 49,601
=============== ============== ============
Net loss-pro forma. . . . . . . . . . . . . $ 40,537 $ 107,876 $ 61,071
=============== ============== ============
Basic net loss per common share-as reported $ (1.31) $ (3.43) $ (2.00)
=============== ============== ============
Basic net loss per common share-pro forma . $ (1.31) $ (3.56) $ (2.46)
=============== ============== ============
The per share weighted-average fair value of stock options granted during 2001,
2000, and 1999 was $0.32, $1.64, and $13.85, respectively, on the date of grant
using the option-pricing method with the following weighted-average assumptions:
2001-risk free interest rate 3.75%, an expected life of four years and a
volatility of 130%, 2000-risk-free interest rate 6.22%, and an expected life of
four years, and a volatility of 130%; 1999-risk-free interest rate 5.14%, and an
expected life of four years, and a volatility of 111%.
Stock option activity during the periods indicated is as follows:
65
WEIGHTED
OPTIONS AVERAGE
GRANTED EXERCISE PRICE
----------- ---------------
Outstanding at December 31, 1998. . . . 2,830,242 $ 2.93
Granted . . . . . . . . . . . . . . . . 1,823,300 $ 16.32
Assumed in connection with acquisitions 522,885 $ 24.80
Exercised . . . . . . . . . . . . . . . (175,480) $ 2.38
Canceled. . . . . . . . . . . . . . . . (699,060) $ 22.83
-----------
Outstanding at December 31, 1999. . . . 4,301,887 $ 8.06
Granted . . . . . . . . . . . . . . . . 4,143,182 $ 2.21
Exercised . . . . . . . . . . . . . . . (663,799) $ 0.53
Canceled. . . . . . . . . . . . . . . . (2,666,467) $ 9.42
-----------
Outstanding at December 31, 2000. . . . 5,114,803 $ 3.59
Granted . . . . . . . . . . . . . . . . 340,400 $ 0.32
Exercised . . . . . . . . . . . . . . . (2,000) $ 0.20
Canceled. . . . . . . . . . . . . . . . (2,348,854) $ 2.18
----------- ---------------
Outstanding at December 31, 2001. . . . 3,104,349 $ 5.77
=========== ===============
Vested at December 31, 2000 . . . . . . 2,352,574
===========
Vested at December 31, 2001 . . . . . . 2,073,874
===========
Options available at December 31, 2001. 278,700
===========
The following table summarizes information about stock options outstanding at
December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -------------------------------
WEIGHTED-
AVERAGE
ACTUAL RANGE OF NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE AVERAGE EXERCISABLE AT AVERAGE
AT 12/31/01 (YEARS) EXERCISE PRICE 12/31/01 EXERCISE PRICE
- ---------------- ----------- ----------------- --------------- -------------- ---------------
0.05 - $0.05 39,584 4.0 $ 0.05 39,584 $ 0.05
0.20 - $0.23 42,500 6.8 $ 0.21 26,248 $ 0.20
0.35 - $0.41 210,952 0.6 $ 0.36 210,139 $ 0.36
0.53 - $0.78 99,462 7.8 $ 0.54 34,287 $ 0.53
1.59 - $2.38 1,347,475 7.8 $ 1.67 411,106 $ 1.63
3.85 - $4.95 910,526 2.6 $ 4.50 908,650 $ 4.50
6.69 - $6.69 55,000 1.9 $ 6.69 55,000 $ 6.69
10.65 - $15.88 398,450 2.0 $ 14.88 388,700 $ 14.88
25.38 - $25.38 400 7.2 $ 25.38 160 $ 25.38
- ---------------- ----------- ----------------- --------------- -------------- ---------------
0.05 - $25.38 3,104,349 2.9 $ 5.77 2,073,874 $ 6.04
================ =========== ================= =============== ============== ===============
See notes 1 (o) and 2 for stock option repricing.
(11) EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ("ESPP") was adopted by the Board of
Directors in February 1999 and subsequently approved by the Company's
stockholders in June 1999. The ESPP provides eligible employees of the Company
the opportunity to apply a portion of their compensation to the purchase of
shares of the Company at a 15% discount. The Company has reserved 400,000
authorized shares of Common Stock for issuance under the ESPP. As of and for
the year ended December 31, 2001, the Company no longer offers an ESPP.
66
(12) EXTRAORDINARY ITEM-GAIN ON EARLY RETIREMENT OF DEBT
In connection with the acquisition of Attitude, the Company assumed a
non-interest bearing obligation, payable over 17 years, ("happypuppy note") to
the former owner of the happypuppy.com website ("happypuppy"), an online
property acquired by Attitude prior to its acquisition by the Company. The net
present value of the happypuppy note as of the date of acquisition was
approximately $2.7 million. In October 1999, in connection with the settlement
of certain litigation between the Company and the former owner of happypuppy,
the Company made a lump sum payment of approximately $1.4 million to the former
owner of happypuppy. The $1.4 million represented full repayment of the
happypuppy note. At the time of repayment, the net present value of the
happypuppy note was approximately $2.8 million. Accordingly, the Company
recognized an extraordinary gain of $1.4 million on the early retirement of
long-term debt.
(13) COMMITMENTS & CONTINGENCIES
(a) Operating Leases
The Company does not have any material non-cancelable operating leases as of
December 31, 2001.
(b) Capital Leases
The Company does not have any material non-cancelable capital leases as of
December 31, 2001.
(c) Employment Agreements
The Company maintains several employment agreements, with employees of the
Company. The employment agreements provide for minimum salary levels, incentive
compensation and severance benefits, among other items.
(d) Litigation
On June 20, 2000, Infonent.com, Inc. filed a Complaint and a motion for a
preliminary injunction to enjoin the Company from invoking its contractual right
to terminate the registration statement for Infonent.com, Inc.'s shares in the
Company. In an order entered July 18, 2000, the U.S. Bankruptcy Court for the
Northern District of California (San Jose Division) granted Infonent.com, Inc.'s
motion to the extent of barring the Company from terminating the registration
statement for a period of 45 days, commencing on July 3, 2000. On October 26,
2000, the Securities and Exchange Commission declared effective the Company's
amended registration statement, which terminated the registration statement
relating to Infonent.com's shares in the Company.
On February 14, 2001, Mohammed Poonja, Chapter 11 Trustee for the estate of
Infonent.com, Inc. (the "Trustee"), served an Amended Complaint on the Company
and Jump Acquisition, LLC ("Jump"). The Amended Complaint asserts claims for
violation of the automatic stay provision, 11 U.S.C. Sec. 362, as a result of
the Company's exercise of its contractual right to terminate the registration
statement for Infonent.com, Inc.'s shares in the Company pursuant to a November
30, 1999 Registration Rights Agreement between the Company and Infonent.com,
Inc.; breach of contract for the Company's and Jump's alleged failure to make
certain earn-out payments to Infonent.com, Inc. in connection with a November
30, 1999 purchase agreement (the "Agreement"); breach of the implied covenant of
good faith and fair dealing in connection with the Agreement; fraud; negligence;
breach of contract and breach of the implied covenant of good faith and fair
dealing for its alleged delay in registering newly-issued shares of the
Company's common stock in connection with the Registration Rights Agreement.
The Amended Complaint sought $9,524,859 in damages, plus interest, compensatory
damages on the automatic stay cause of action, costs and disbursements of the
action, and attorneys' fees. The Company filed an Answer on May 2, 2001 denying
the allegations made in the Amended Complaint. The Trustee has withdrawn its
claim for violation of the Automatic Stay by the Company. In August 2001, the
Company executed a Settlement Agreement with the trustee for Infonent.com in
which the trustee agreed to dismiss all claims in return for a payment of
$175,000 by the Company.
67
On and after August 3, 2001 and as of the date of this filing, the Company is
aware that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors, and several
investment banks that were the underwriters of the Company's initial public
offering. The lawsuits were filed in the United States District Court for the
Southern District of New York. The lawsuits purport to be class actions filed on
behalf of purchasers of the stock of the Company during the period from November
12, 1998 through December 6, 2000. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in the Company's initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for
the Company's initial public offering was false and misleading in violation of
the securities laws because it did not disclose these arrangements. On December
5, 2001, an amended complaint was filed in one of the actions, alleging the same
conduct described above in connection with both the Company's November 23, 1998
initial public offering and its May 19, 1999 secondary offering. The actions
seek damages in an unspecified amount. The Company and its current and former
officers and directors intend to vigorously defend the actions. The complaints
have been consolidated into a single action, entitled Kofsky v. theglobe.com,
inc. et al., Case No. 01 Civ. 7247. The Company is not required to respond to
Plaintiffs' claims before a consolidated complaint is filed. However, due to the
inherent uncertainties of litigation, we cannot accurately predict the ultimate
outcome of the litigation. Any unfavorable outcome of this litigation could
have a material adverse impact on our business, financial condition and results
of operations.
(14) RELATED PARTY TRANSACTIONS
Certain directors of the Company also serve as officers and directors of Dancing
Bear Investments, Inc. Dancing Bear is a shareholder of the company and an
entity controlled by our Chairman.
In 1998, the Company entered into an electronic commerce contract with
AutoNation, Inc. ("AutoNation"), (formerly doing business as Republic
Industries), an entity affiliated with a Director of the Company, pursuant to
which the Company granted a right of first negotiation with respect to the
exclusive right to engage in or conduct an automotive "clubsite" on theglobe
website through AutoNation. Additionally, AutoNation agreed to purchase
advertising from the Company for a three-year period at a price, which adjusted
to match any more favorable advertising price quoted to a third party by the
Company, excluding certain short-term advertising rates. For the years ended
December 31, 2001, 2000 and 1999, the Company recognized revenue of $0.2 million
$0.3 million and $0.3 million, respectively, in connection with the AutoNation
agreement.
Additionally in 1998, the Company entered into an electronic commerce
arrangement with InteleTravel, an entity controlled by the Chairman of the
Company, whereby the Company agreed to develop a web community for InteleTravel
in order for its travel agents to conduct business through theglobe in exchange
for access to InteleTravel customers for distribution of the Company's products
and services. For the year ended December 31, 1999, the Company recognized
revenue of $0.3 million in connection with the InteleTravel agreement. There
was no revenue recognized for the year ended December 31, 2001 and 2000.
In 1999, the Company entered into a community agreement with ClikVacations.com
Inc., an entity controlled by the Chairman of the Company, whereby the Company
agreed to co-brand certain products and services of theglobe for use on the
Clik.com website. Additionally, the Company agreed to sell all advertising
inventory related to these co-branded products and services in exchange for a
portion of the net advertising sales. The Company recognized revenue of $0.1
million in connection with the ClikVacations.com agreement for the year ended
December 31, 1999. There was no revenue recognized for the years ended December
31, 2001 and 2000.
The Company believes that the terms of the foregoing arrangements are on
comparable terms as if they were entered into with unaffiliated third parties.
STOCKHOLDERS' AGREEMENT
In 1997, the Chairman, the former Co-Chief Executive Officers, two Directors of
the Company and Dancing Bear Investments, Inc. (an entity controlled by the
Chairman) entered into a Stockholders' Agreement (the "Stockholders' Agreement")
pursuant to which the Chairman and Dancing Bear Investments, Inc. or certain
entities controlled by the Chairman and certain permitted transferees (the
"Chairman Group") will agree 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 will agree to vote for the Chairman Group's nominees to
the Board, who will 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 have granted an irrevocable proxy to
Dancing Bear Investments, Inc. with respect to any shares that may be acquired
by them pursuant to the exercise of outstanding Warrants transferred to each of
them by Dancing Bear Investments, Inc. Such shares will be voted by Dancing
Bear Investments, Inc., which is controlled by the Chairman, and will be subject
to a right of first refusal in favor of Dancing Bear Investments, Inc. upon
certain private transfers. The Stockholders' Agreement also provides that if
the Chairman Group sells shares of Common Stock and Warrants representing 25% or
more of the Company's outstanding Common Stock (including the Warrants) in any
private sale after the Offerings, the Former Co-Chief Executive Officer Groups
and the two Directors of the Company will be required to sell up to the same
percentage of their shares as the Chairman Group sells. If either the Chairman
Group sells 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 sell shares or Warrants representing 7% or
more of the shares and Warrants of the Company in any private sale after the
Offerings, each other party to the Stockholders' Agreement, including entities
controlled by them and their permitted transferees, may, at their option, sell
up to the same percentage of their shares.
68
(15) VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE
AT ADDITIONS ADDITIONS BALANCE
BEGINNING DUE TO CHARGED TO AT END OF
YEAR ENDED, OF PERIOD ACQUISITONS EXPENSE DEDUCTIONS PERIOD
- ----------------- ---------- ------------ ----------- ----------- ----------
December 31, 2001 $2,260,324 $ - $ 1,373,521 $ 430,550 $3,203,295
December 31, 2000 $1,408,092 $ 262,426 $ 3,005,746 $ 2,415,940 $2,260,324
December 31, 1999 $ 300,136 $ 1,881,473 $ 1,881,473 $ 773,517 $1,408,092
(16) SUBSEQUENT EVENTS
On February 27, 2002, the Company sold to Internet Game Distribution, LLC all of
the assets used in connection with the Happy Puppy website for $135,000, of
which the entire amount was a gain.
(17) QUARTERLY FINANCIAL INFORMATION - UNAUDITED
CONDENSED QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000
------------------------------------------ ------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
Revenue $ 3,410 $ 3,369 $ 4,548 $ 4,747 $ 7,756 $ 6,749 $ 8,377 $ 6,979
Cost of revenues 2,241 2,512 3,713 3,679 5,143 4,845 4,683 4,408
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 1,169 857 834 1,068 2,613 1,904 3,694 2,571
Sales & Marketing 960 1,768 3,233 3,794 4,346 6,056 7,918 5,597
Product Development 254 643 1,114 1,800 1,888 2,562 2,824 2,968
General & administrative 871 1,706 1,934 2,083 2,569 3,866 3,527 3,211
Restructuring and impairment charges 3,405 8,625 5,061 - 25,765 - 15,583 -
Amortization of goodwill and
intangible assets 746 2,040 2,840 2,843 6,316 6,316 6,981 7,624
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses 6,236 14,782 14,182 10,520 40,884 18,800 36,833 19,400
--------- --------- --------- --------- --------- --------- --------- ---------
Loss from operations (5,067) (13,925) (13,349) (9,453) (38,270) (16,896) (33,139) (16,829)
Other income, net 291 79 723 96 299 361 456 420
--------- --------- --------- --------- --------- --------- --------- ---------
Loss before provision for income taxes (4,776) (13,847) (12,625) (9,356) (37,971) (16,535) (32,683) (16,409)
Provision for income taxes - (6) (79) 101 94 54 50 70
--------- --------- --------- --------- --------- --------- --------- ---------
Net (loss) (4,776) (13,841) (12,546) (9,457) (38,065) (16,589) (32,733) (16,479)
--------- --------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per
Common share $ (0.15) $ (0.46) $ (0.41) $ (0.31) $ (1.24) $ (0.53) $ (1.07) $ (0.57)
========= ========= ========= ========= ========= ========= ========= =========
Due to changes in the number of shares outstanding, quarterly loss per share
amounts do not necessarily add to the totals for the years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
69
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Part III, Item 10, regarding the Registrant's
directors is included in the our Proxy Statement relating to our annual meeting
of stockholders to be held in June 2002, and is incorporated herein by
reference. The information appears in the Proxy Statement under the caption
"Election of Directors." The Proxy Statement will be filed within 120 days of
December 31, 2001, the Company's year-end.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Part III, Item 11, is included in the our Proxy
Statement relating to the our annual meeting of stockholders to be held in June
2002, and is incorporated herein by reference. The information appears in the
Proxy Statement under the caption "Executive Compensation." The Proxy Statement
will be filed within 120 days of December 31, 2001, the Company's year-end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Part III, Item 12, is included in the our Proxy
Statement relating to the our annual meeting of stockholders to be held in June
2002, and is incorporated herein by reference. The information appears in the
Proxy Statement under the caption "Beneficial Ownership of Shares." The Proxy
Statement will be filed within 120 days of December 31, 2001, the Company's
year-end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding our relationships and related transactions is available
under "Certain Transactions" in our Proxy Statement relating to our annual
meeting of stockholders to be held in June 2002, and is incorporated herein by
reference. The Proxy Statement will be filed within 120 days of December 31,
2001, the Company's year-end.
70
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements
at Item 8 on page 45 of this report.
(2) Financial Statement Schedule: See Notes to Consolidated Financial
Statements at Item 8 on page 45 of this report.
(3) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference:
2.1 Agreement and Plan of Merger dated as of February 1, 1999 by and
among theglobe.com, inc., Nirvana Acquisition Corp.,
factorymall.com, inc. d/b/a Azazz, and certain selling
stockholders thereof**
2.2 Agreement and Plan or Merger dated as of April 5, 1999 by and
among theglobe.com, inc., Bucky Acquisition Corp., Attitude
Network, Ltd. and certain shareholders thereof***
2.3 Agreement of Purchase and Sale as dated November 30, 1999 by and
among theglobe.com, inc., Jump Acquisition LLC, Infonent.com,
Inc. and certain stockholders thereof****
2.4 Agreement and Plan of Merger dated as of January 13, 2000 by and
among theglobe.com, inc., Chips & Bits, Inc., Strategy Plus,
Inc., CB Acquisition Corp., SP Acquisition Corp., Yale Brozen and
Tina Brozen*****
3.1 Form of Fourth Amended and Restated Certificate of Incorporation
of the Company*
3.2 Form of By-Laws of the Company*
4.1 Second Amended and Restated Investor Rights Agreement among the
Company and certain equity holders of the Company, dated as of
August 13, 1997*
4.2 Amendment No.1 to Second Amended and Restated Investor Rights
Agreement among the Company and certain equity holders of the
Company, dated as of August 31, 1998********
4.3 Amendment No.2 to Second Amended and Restated Investor Rights
Agreement among the Company and certain equity holders of the
Company, dated April 9, 1999*******
4.4 Form of Amendment No.3 to the Second Amended and Restated
Investor Rights Agreement among the Company and certain equity
holders of the Company*******
4.5 Registration Rights Agreement, dated as of September 1,
1998********
4.6 Amendment No.1 to Registration Rights Agreement, dated as of
April 9, 1999*******
4.7 Specimen certificate representing shares of Common Stock of the
Company*
4.8 Amended and Restated Warrant to Acquire Shares of Common Stock*
4.9 Form of Rights Agreement, by and between the Company and American
Stock Transfer & Trust Company as Rights Agent*
4.10 Registration Rights Agreement among the Company and certain
equity holders of the Company, dated February 1, 1999, in
connection with the acquisition of factorymall.com********
4.11 Form of Amended and Restated Registration Rights Agreement among
the Company and certain equity holders of the Company in
connection with the acquisition of factorymall.com*******
4.12 Registration Rights Agreement among the Company and certain
shareholders of the Company, dated April 9, 1999, in connection
with the acquisition of Attitude Network, Ltd*******
4.13 Registration Rights Agreement among the Company and certain
shareholders of the Company, dated November 30, 1999, in
connection with the acquisition of Webjump.com from Infonent.com,
Inc.
4.14 Registration Rights Agreement among the Company and certain
shareholders of the Company, dated February 24, 1999, in
connection with the acquisition of Chips & Bits, Inc. and
Strategy Plus, Inc.
9.1 Stockholders' Agreement by and among Dancing Bear Investments,
Inc., Michael Egan, Todd V. Krizelman, Stephan J. Paternot,
Edward A. Cespedes and Rosalie V. Arthur, dated as of February
14, 1999***
10.1 Employment Agreement dated June 6, 2000, by and between the
Company and Todd V. Krizelman*
10.2 Employment Agreement dated June 6, 2000, by and between the
Company and Stephan J. Paternot*
10.3 Employment Agreement dated July 14, 2000, by and between the
Company and Charles Peck*
10.4 Form of Indemnification Agreement between the Company and each of
its Directors and Executive Officers*
10.5 Lease Agreement dated January 12, 1999 between the Company and
Broadpine Realty Holding Company, Inc.********
10.6 2000 Broad Based Stock Option Plan (filed with Form 10K filed for
2000)
10.7 1998 Stock Option Plan, as amended*******
10.8 1995 Stock Option Plan*
10.9 factorymall.com, inc. 1998 Stock Option Plan******
10.10 Form of Nonqualified Stock Option Agreement with James
McGoodwin, Kevin McKeown and Mark Tucker******
10.11 Attitude Network, Ltd. Stock Option Plan*******
10.12 Employee Stock Purchase Plan********
23.1 Consent of KPMG LLP
(b) Reports on Form 8-K
None filed during the three-month period ended December 31, 2001.
71
* Incorporated by reference from our registration statement on
Form S-1 (Registration No. 333-59751).
** Incorporated by reference from our report on Form 8-K filed
on February 16, 1999.
*** Incorporated by reference from our report on Form 8-K filed
on April 9, 1999.
**** Incorporated by reference from our report on Form 8-K filed
on November 30, 1999.
***** Incorporated by reference from our report on Form 8-K filed on
February 24, 2000.
****** Incorporated by reference from our Registration of Form S-8
(No.333-75503), filed on April 1, 1999
******* Incorporated by reference from our registration statement on
Form S-1 (Registration No. 333-76153).
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 16, 2002 theglobe.com, inc.
By /S/ CHARLES M. PECK
----------------------------
CHARLES M. PECK
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 16th day of April 2002.
/s/MICHAEL S. EGAN
- ----------------------------------------
MICHAEL S. EGAN Chairman
/s/CHARLES M. PECK
- ----------------------------------------
CHARLES M. PECK Director
/s/TODD V. KRIZELMAN
- ----------------------------------------
TODD V. KRIZELMAN Director
/s/EDWARD A. CESPEDES
- ----------------------------------------
EDWARD A. CESPEDES Director
/s/ROBIN M. SEGAUL
- ----------------------------------------
ROBIN M. SEGAUL Director
/s/ROBERT M. HALPERIN
- ----------------------------------------
ROBERT M. HALPERIN Director
73