AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ___________________
COMMISSION FILE NO. 0-25053
THEGLOBE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 14-1782422
------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
110 EAST BROWARD BOULEVARD, SUITE 1400
FORT LAUDERDALE, FL. 33301
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(954) 769 - 5900
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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
The number of shares outstanding of the Registrant's Common Stock, $.001
par value (the "Common Stock"), as of November 14, 2002 was 31,081,574.
THEGLOBE.COM, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2002 (unaudited)
and December 31, 2001 1
Unaudited Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2002 and 2001 2
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Qualitative and Quantitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings II-1
Item 2. Changes in Securities and Use of Proceeds II-1
Item 3. Defaults Upon Senior Securities II-1
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 5. Other Information II-1
Item 6. Exhibits and Reports on Form 8-K II-1
A. Exhibits
B. Reports on Form 8-K II-1
Signatures II-2
Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 of Chief Financial Officer II-3
Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 of Chief Executive Officer II-4
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THEGLOBE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- --------------
(UNAUDITED) (NOTE 1(C))
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 754,955 $ 2,563,828
Short-term investments . . . . . . . . . . . . . . . . . . . . 0 50,650
Accounts receivable, net.. . . . . . . . . . . . . . . . . . . 1,076,510 1,537,892
Inventory, net . . . . . . . . . . . . . . . . . . . . . . . . 439,521 532,565
Prepaid and other current assets . . . . . . . . . . . . 257,173 1,037,970
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 2,528,159 5,722,905
Property and equipment, net. . . . . . . . . . . . . . . . . . . . 200,708 242,802
Restricted investments . . . . . . . . . . . . . . . . . . . . . . 1,675 7,000
--------------- --------------
Total assets .. . . . . . . . . . . . . . . . . . . . . . $ 2,730,542 $ 5,972,707
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 1,313,346 $ 1,340,628
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 507,762 1,039,236
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 163,655 229,476
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . 100,129 101,659
--------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 2,084,892 2,710,999
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 31,082 31,082
Additional paid-in capital . . . . . . . . . . . . . . . . . . 218,255,565 218,255,565
Common stock, 699,281 common shares, held in treasury, at cost (371,458) (371,458)
Accumulated other comprehensive loss . . . . . . . . . . . . . (116,849) (120,866)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (217,152,690) (214,532,615)
--------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . 645,650 3,261,708
--------------- --------------
Total liabilities and stockholders' equity . . . . . . . . $ 2,730,542 $ 5,972,707
=============== ==============
See accompanying notes to unaudited condensed consolidated financial statements.
1
THEGLOBE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------- ------------ -------------
UNAUDITED UNAUDITED
--------------------------- ---------------------------
Revenues:
Advertising . . . . . . . . . . . . . . . . . . . $ 807,066 $ 1,230,485 $ 2,055,324 $ 5,318,958
Electronic commerce and other . . . . . . . . . . 1,452,197 2,138,171 5,147,752 7,344,680
------------ ------------- ------------ -------------
Total revenues. . . . . . . . . . . . . . . . 2,259,263 3,368,656 7,203,076 12,663,638
Cost of revenues. . . . . . . . . . . . . . . . . . . 1,184,889 2,512,505 4,352,955 9,904,513
------------ ------------- ------------ -------------
Gross profit. . . . . . . . . . . . . . . . . . 1,074,374 856,151 2,850,121 2,759,125
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . 774,850 1,767,985 2,861,371 8,795,309
Product development . . . . . . . . . . . . . . . 138,647 642,517 517,158 3,556,636
General and administrative. . . . . . . . . . . . 688,520 1,706,391 2,550,902 5,724,027
Restructuring and impairment charges. . . . . . . - 8,624,908 - 13,685,901
Amortization of goodwill and intangible assets. . - 2,040,098 - 7,723,293
------------ ------------- ------------ -------------
Total operating expenses. . . . . . . . . . . . . . . 1,602,017 14,781,899 5,929,431 39,485,166
------------ ------------- ------------ -------------
Loss from operations. . . . . . . . . . . . . . . . . (527,643) (13,925,748) (3,079,310) (36,726,041)
Interest and other income, net. . . . . . . . . . . . 35,597 78,568 445,046 897,787
------------ ------------- ------------ -------------
Loss before provision for income taxes. . . . . . . . (492,046) (13,847,180) (2,634,264) (35,828,254)
Provision for income taxes. . . . . . . . . . . . . . (0) (6,429) (703) 16,104
------------ ------------- ------------ -------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (492,046) $(13,840,751) (2,633,561) $(35,844,358)
============ ============= ============ =============
Basic and diluted net loss per share: . . . . . . . . $ (0.02) $ (0.46) $ (0.08) $ (1.18)
============ ============= ============ =============
Weighted average basic and diluted shares outstanding 31,081,574 30,382,036 31,081,574 30,382,036
============ ============= ============ =============
See accompanying notes to unaudited condensed consolidated financial statements.
2
THEGLOBE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2002 2001
---------------- ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (2,633,561) $ (35,844,358)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . 64,924 10,443,670
Loss/(Gain) on sale of property and equipment. . . . . (5,321) 2,307
Loss/(Gain) on sale of short-term securities . . . . . - (70,344)
Non-cash restructuring and impairment charges. . . . . - 11,567,707
Gain on sale of Happy Puppy assets . . . . . . . . . . (134,500) -
Non-cash favorable settlements of liabilities. . . . . (297,955) -
Stock options granted in connection with termination . 13,500 -
Deferred rent. . . . . . . . . . . . . . . . . . . . . - 56,982
Changes in operating assets and liabilities, net of
dispositions:
Inventory, net . . . . . . . . . . . . . . . . . . . . 93,044 -
Accounts receivable, net . . . . . . . . . . . . . . . 461,382 1,834,170
Prepaid and other current assets . . . . . . . . . . . 786,122 1,299,546
Accounts payable . . . . . . . . . . . . . . . . . . . 57,672 (1,025,901)
Accrued expenses . . . . . . . . . . . . . . . . . . . (318,485) (2,778,708)
Accrued compensation . . . . . . . . . . . . . . . . . - -
Deferred revenue . . . . . . . . . . . . . . . . . . . (65,821) (677,894)
---------------- ----------------
Net cash used in operating activities. . . . . . . . . . . (1,979,000) (15,192,823)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term securities . . . . . . . . . . - (58,638)
Proceeds from sale of marketable securities. . . . . . 50,650 3,074,386
Proceed from sale of property and equipment. . . . . . - 235,357
Purchases of property and equipment. . . . . . . . . . (17,510) (440,689)
Receipt of security deposits / escrow. . . . . . . . . - 1,996,001
Net proceeds from sale of Happy Puppy assets . . . . . 134,500 -
---------------- ----------------
Net cash provided by (used in) investing activities. . . . 167,640 4,806,417
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations . . . . . . . (1,530) (1,642,913)
Proceeds from issuance of common stock . . . . . . . . - 599
Net cash used in financing activities. . . . . . . . . . . (1,530) (1,642,314)
---------------- ----------------
Net change in cash and cash equivalents. . . . . . . . (1,812,890) (12,028,720)
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . 4,017 (25,284)
Cash and cash equivalents at beginning of period . . . . . 2,563,828 13,349,554
---------------- ----------------
Cash and cash equivalents at end of period . . . . . . . . $ 754,955 $ 1,295,550
================ ================
See accompanying notes to unaudited condensed consolidated financial statements.
3
THEGLOBE.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of the theglobe.com
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. 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 4).
As of September 30, 2002, 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). As of September 30, 2002, the Company continued to
actively explore a number of strategic alternatives for its business, including
its remaining online and offline game properties, including continuing its
operations and using its cash on hand, selling some or all of these properties
and/or entering into new or different lines of business.
As of September 30, 2002, the Company's revenue sources are principally
from the sale of print advertising in its Computer Games magazine; the sale of
video games and related products through Chips & Bits, Inc., its games
distribution business; 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. We have
received a report from our independent accountants containing an explanatory
paragraph stating that we have suffered recurring losses from operations since
inception that raise substantial doubt about our ability to continue as a going
concern. Management and the Board of Directors are currently exploring a number
of strategic alternatives regarding its remaining assets and the use of its cash
on-hand, and are also continuing to identify and implement internal actions to
improve the Company's liquidity and operations. These alternatives may include
selling assets, which in any such case could result in significant changes in
the Company's business, or entering into new or different lines of business. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(b) Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries from their respective dates of
acquisition. All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Unaudited Interim Condensed Consolidated Financial Information
The unaudited interim condensed consolidated financial statements of the
Company as of September 30, 2002 and for the three and nine months ended
September 30, 2002 and 2001 included herein have been prepared in accordance
with the instructions for Form 10-Q under the Securities Exchange Act of 1934,
as amended, and Article 10 of Regulation S-X under the Securities Act of 1933,
as amended. Certain information and note disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations relating to interim condensed consolidated financial statements.
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at September 30, 2002 and the results of its operations for three
and nine months ended September 30, 2002 and 2001 and its cash flows for the
nine months ended September 30, 2002 and 2001.
The results of operations for such periods are not necessarily indicative
of results expected for the full year or for any future period. These financial
statements should be read in conjunction with the audited financial statements
as of December 31, 2001, and for the three years then ended and related notes
included in the Company's 10-K filed with the Securities and Exchange
Commission.
4
(d) 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, accruals and other factors.
Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. Cash equivalents were $0 at
September 30, 2002 and at December 31, 2001.
(f) 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.
The Company's short-term investments were comprised of the following at
September 30, 2002 and December 31, 2001:
SEPTEMBER 30,
2002 DECEMBER 31, 2001
--------------- ------------------
Available-for-Sale Securities . . . . $ - $ 51,000
Held-to-maturity Securities . . . . . - -
--------------- ------------------
$ 0 $ 51,000
=============== ==================
(g) Restricted Investments
At September 30, 2002, restricted investments were $1,675, consisting of
security deposits related to office space.
(h) Comprehensive Loss
The Company's comprehensive loss was approximately $.5 million and $13.9
million for the three months ended September 30, 2002 and 2001, respectively,
and $2.6 million and $ 35.9 million, respectively for the nine months ended
September 30, 2002 and 2001. The Company's accumulated other comprehensive loss
as of September 30, 2002 and December 31, 2001 consisted of approximately
$117,000 and $121,000 of losses, respectively. The September 30, 2002 and
December 31, 2001 other comprehensive loss is related to the Company's foreign
currency translation adjustment and unrealized gains and losses on short-term
marketable securities.
(i) 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 September 30,
2002 and December 31, 2001 was approximately $64,000.
(j) Revenue Recognition
ADVERTISING
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.
5
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. Advertising revenue from our
online sales accounted for $0 and $.5 million of the total advertising revenues
for the three-month period, ended September 30, 2002 and 2001, respectively, and
$0 and $2.9 million, of the total advertising revenues for the nine-month
period, ended September 30, 2002 and 2001, respectively.
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 games magazine for the
three months ended September 30, 2002 and 2001 was $0.8 million and $.7 million,
respectively, and for the nine months ended September 30, 2002 and 2001 was $2.1
million and $2.4, respectively. Advertising revenue accounted for 36% and 37% of
total revenues for the three months ended September 30, 2002 and 2001; and 29%
and 42% of total revenues for the nine months ended September 30, 2002 and 2001,
respectively.
ELECTRONIC COMMERCE AND OTHER
The Company derives other revenues from the sale of DVD's, 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 is included in net sales and has 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. To date revenues from e-commerce revenue
shares have been immaterial.
Sales through the online store accounted for 29%, or $0.7 million, and 31%,
or $ 1.0 million, of total revenues for the three months ended September 30,
2002 and 2001, respectively; and for 33%, or $2.4 million, and 28%, or $3.6
million, of total revenues for the nine months ended September 30, 2002 and
2001, respectively. Sales of the Company's games information magazine, through
newsstands and subscriptions accounted for 35%, or $.8 million, and 33%, or $1.1
million, of total revenues for the three months ended September 30, 2002 and
2001, respectively, and for 39%, or $2.8 million, and 29%, or $3.7 million, of
total revenue for the nine months ended September 30, 2002 and 2001,
respectively. The Company acquired its games information magazine in February
2000.
(k) 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 three and nine months ended September 30, 2002 and 2001, there were
no customers that accounted for over 10% of revenues generated by the Company.
The Company had two customers that represented more than 10% of net accounts
receivable as of September 30, 2002. These customers were Computec and Curtis
Circulation. The Company had only one supplier that represented more than 10%
of accounts payable as of September 30, 2002. We believe there are other
suppliers readily available if necessary.
6
(l) Net loss per share
Diluted net 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 share for the three and nine months ended September
30, 2002 and 2001 does not include the effects of (1) options to purchase
5,969,590 and 3,472,292 shares of common stock, respectively, and (2) warrants
to purchase 4,011,534 and 4,011,534 shares of common stock, respectively.
(m) 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.
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.
(n) Recent Accounting Pronouncements
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 adopted Statement 144 effective January 1, 2002. Management
has determined that the adoption of Statement 144 for long-lived assets held for
use did not 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4
required all gains and losses from the extinguishment of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishment not to be reported as
extraordinary items when the use of debt extinguishment is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed, therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal
difference between SFAS No. 146 and EITF 94-3 relates to the timing of liability
recognition. Under SFAS No. 146, a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's financial position or results of operations.
7
(2) STOCK OPTIONS
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 amend
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 amended 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. 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 three
and nine months ended September 30, 2002, there was 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.
Stock Option Activity
On August 12, 2002, options to purchase 4,875,000 shares of the Company's
common stock at an exercise price of $0.02 per share (the closing price on
August 12, 2002) were granted to employees, valued at $97,000. These options
immediately vested upon grant for a period of ten years. Of these options,
4,750,000 were granted to officers and directors of the Company. The effect on
total stock options outstanding is shown below:
Total Stock Options at 6/30/02 3,343,916
Add: Options Issued 4,875,000
Less: Options Exercised -
Less: Options Expired / Cancelled (2,249,326)
--------------
Total Stock Options at 9/30/02 5,969,590
==============
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002: no dividend yield; an
expected life of ten years; 160% expected volatility and 4.78% risk free
interest rate. Under the accounting provisions of SFAS 123, the Company's net
loss and loss per share would have been adjusted in connection with options
issued to employees to the pro forma amounts indicated below:
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
------------- ------------- ------------ ------------
Net loss:
As reported (492,046) (13,840,751) (2,633,561) (35,844,358)
Pro forma (589,046) (13,840,751) (2,730,561) (35,844,358)
Loss per share - basic and diluted:
As reported ($0.02) ($0.46) ($0.08) ($1.18)
Pro forma ($0.02) ($0.46) ($0.08) ($1.18)
(3) COMMITMENTS AND CONTINGENCIES
(a) Litigation
On and after August 3, 2001, and as of the date of this filing, the Company
is aware that six putative shareholder class action lawsuits were filed against
the Company, certain of its current and former officers and directors, and
several investment banks that were the underwriters of the Company's initial
public offering and its May 19, 1999 secondary offering. The lawsuits were
filed in the United States District Court for the Southern District of New York.
The complaints have been consolidated into a single action and a consolidated
amended complaint has been filed. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in the Company's initial public offering and
secondary offering to certain investors in exchange for excessive and
8
undisclosed commissions and agreements by those investors to make additional
purchases of stock in the aftermarket at pre-determined prices. Plaintiffs
allege that the Registration Statements and Prospectuses for the Company's
initial public offering and secondary offering were false and misleading in
violation of the securities laws because they did not disclose these
arrangements. 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 action is being coordinated with more than three hundred other
nearly identical actions filed against other companies and no date has been set
for any response to the complaint. Any unfavorable outcome of this litigation
could have a material adverse impact on our business, financial condition and
results of operations.
From time to time the Company has been named in other claims arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
(4) DISPOSITIONS AND OTHER INCOME
On February 27, 2002, the Company sold to Internet Game Distribution, LLC
all of the assets used in connection with the Happy Puppy website. The total
consideration received was $135,000. The Company received $67,500 immediately,
and $67,500 to be held in escrow until the Company transferred all assets used
in connection with the Happy Puppy website. On May 6, 2002, $67,500 was
released to the Company. The Company recognized a gain on the sale of
$134,500, in the first quarter 2002.
The Company had other non-cash gains from favorable settlement payments
with vendors for $297,955 for the nine month period ending September 30, 2002,
which has been included in other income and accompanying condensed consolidated
statement of operations.
(5) OTHER EVENTS
Effective May 31, 2002, our former Chief Executive Officer, Charles M. Peck
was no longer employed with the Company and no longer serves on the Company's
Board of Directors. Reflecting the terms of his severance package, $625,000 in
cash was paid in full to Mr. Peck on May 31, 2002. Additionally, options to
purchase 425,000 shares of the Company's common stock at an exercise price of
$0.035 per share were granted to Mr. Peck on May 6, 2002, valued at $13,500,
also reflecting the terms of his severance package. These options immediately
vested upon grant for a period of ten years.
(6) SUBSEQUENT EVENTS
On November 14, 2002, we acquired certain digital telephony assets from an
entrepreneur. theglobe.com has issued 1.75 million warrants to acquire shares
of Common Stock in conjunction with this acquisition. The Company has also
issued 425,000 warrants to acquire shares of Common Stock as part of an earn-out
structure. These warrants will be held in escrow by the Company and only
released upon attainment of certain performance targets.
In conjunction with the acquisition, E&C Capital Partners, a privately held
investment vehicle controlled by our Chairman and Chief Executive Officer,
Michael S. Egan and our President, Edward A. Cespedes, has entered into a letter
of intent with theglobe.com to provide new financing in the amount of $500,000
through the purchase of a new series of preferred securities. The investment is
subject to a number of closing conditions, including execution of definitive
documentation and resolution of certain operating and tax liabilities.
ITEM 2. 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 September 30, 2002, we were a network of three wholly owned
properties, each of which specializes in the games business by delivering games
information and selling games in the United States and abroad. These properties
are: our print publication Computer Games Magazine; our Computer Games Online
website "www.cgonline.com", which is the online counterpart to Computer Games
Magazine; and, our Chips & Bits, Inc. "www.chipsbits.com" games distribution
company. As of September 30, 2002, the Company continued to actively explore a
number of strategic alternatives for its remaining online and offline game
properties, including continuing its operations and using its cash on hand,
selling some or all of these properties and/or entering into new or different
lines of business.
9
As of September 30, 2002, our 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 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.
Effective July 10, 2002, we launched various direct marketing initiatives
through a newly created, wholly-owned subsidiary called tglo direct. The
subsidiary markets products such as safe e-mail lists, e-books, lead generation
tools and other products to entrepreneurs that wish to enter into new web-based
businesses or promote their existing businesses. Most of the products are
subscription-based, with prices ranging from approximately $11.00 per year to
approximately $69.95 per year.
Effective August 1, 2002, the Company's corporate offices located at 2 Penn
Plaza, Suite 1500, New York, New York, 10121 were closed and relocated to: 110
East Broward Boulevard, Suite 1400, Fort Lauderdale, Florida 33301. The
Company's corporate mailing address is: P.O. Box 029006, Fort Lauderdale,
Florida 33302.
Effective August 8, 2002, we dismissed our independent accountants, KPMG
LLP ("KPMG"), and engaged Rachlin Cohen & Holtz LLP ("Rachlin Cohen") as our new
independent accountants.
SUBSEQUENT EVENTS
On November 14, 2002, we acquired certain digital telephony assets from an
entrepreneur. theglobe.com has issued 1.75 million warrants to acquire shares of
Common Stock in conjunction with this acquisition. The Company has also issued
425,000 warrants to acquire shares of Common Stock as part of an earn-out
structure. These warrants will be held in escrow by the Company and only
released upon attainment of certain performance targets.
RESULTS OF OPERATIONS
Revenues. Our revenue is currently derived principally from the sale of
print advertisements under short-term contracts in our games information
magazine Computer Games; through the sale of video games and related products
through our games distribution business Chips & Bits, Inc.; through newsstand
sales and subscriptions of our games information magazine and through limited
sale of online advertisements principally under short-term advertising
arrangements, averaging one to three months.
Revenues decreased to $2.2 million and $7.2 million for the three and nine
months ended September 30, 2002, as compared to $3.4 million and $12.7 million
for the three and nine months ended September 30, 2001. Advertising revenues for
the three and nine months ended September 30, 2002 were $0.8 million and $2.1
million, respectively, which represented 36% and 29% of total revenues,
respectively. Advertising revenues for the three and nine months ended September
30, 2001 were $1.2 million and $5.3 million, which represented 37% and 42% of
total revenues, respectively. The decrease in advertising revenues was primarily
attributable to a significant industry-wide decrease in the online advertising
market, which is expected to continue at least 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 sales
accounted for $0 and $0 for the three and nine months ended September 30, 2002,
as compared to $.5 million and $2.9 million of the total advertising revenues
for the three and nine-month period, ended September 30, 2001. Advertising
revenue from the Company's games magazine, for the three and nine months ended
September 30, 2002 was $0.8 million and $2.1 million and $0.7 million and $2.4
for the three and nine month period ending September 30, 2001.
Sales through the online store accounted for 29%, or $0.7 million, and 31%,
or $1 million, of total revenues for the three months ended September 30, 2002
and 2001, respectively, and for 33%, or $2.4 million, and 28%, or $3.6 million,
of total revenues for the nine months ended September 30, 2002 and 2001,
respectively. 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 game
releases, on which our online store relies for the majority of sales and
profits. Sales of the Company's games information magazine, through newsstands
and subscriptions accounted for 35%, or $.8 million, and 33%, or $1.1 million,
of total revenues for the three months ended September 30, 2002 and 2001,
respectively, and for 39%, or $2.8 million, and 29%, or $3.7 million, of total
revenue for the nine months ended September 30, 2002 and 2001, respectively. We
acquired our games information magazine in February 2000. Barter advertising
revenues represented 1.3% and 2.1% of total revenues for the three months ended
September 30, 2002 and 2001, respectively and 1.4% and 1.5% of total revenues
for the nine months ended September 30, 2002 and 2001, respectively.
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 48% and 25% for the three months ended
September 30, 2002 and 2001, respectively, and 40% and 22% for the nine months
ended September 30, 2002 and 2001, respectively. The period-to-period increase
in gross margins was primarily attributable to a higher concentration of revenue
derived from subscriptions and newsstand sales of the magazine, which has high
gross margins.
10
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 $.8 million
and $1.8 million for the three months ended September 30, 2002 and 2001,
respectively and $2.9 million and $8.8 million for the nine months ended
September 30, 2002 and 2001, respectively. The year-to-year decrease in sales
and marketing expense was attributable to reduced personnel costs and decreased
advertising costs. As of September 30, 2002, we have an internal advertising
sales staff of two (2) professionals, both of whom are dedicated to selling
advertising space in our Computer Games print magazine, and to a lesser extent
on our Computer Games Online website, which is the online counterpart to
Computer Games magazine. In August 2001 we were forced to lay off almost all our
national sales staff due to the continued decline in the advertising market.
Product Development. Product development expenses include salaries and
related personnel costs, expenses incurred in connection with the development
of, testing of and upgrades to our websites and community management tools, and
editorial and content costs. Product development expenses decreased to $.1
million and $.6 million for the three months ended September 30, 2002 and 2001,
respectively, as compared to $.5 million and $3.6 million for the nine months
ended September 30, 2002 and 2001, respectively. The period-to-period 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 continuing decline in the business.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related personnel costs for general corporate
functions including finance, human resources, legal and facilities, outside
legal and professional fees, directors and officers insurance, bad debt expenses
and general corporate overhead costs. In the second quarter of 2002, severance
benefits of $699,833 were recorded and paid. In connection with his termination,
our former Chief Executive Officer, Charles Peck, was paid $625,000 on May 31,
2002, reflecting the terms of his severance package. Additionally, options to
purchase 425,000 shares of the Company's common stock at an exercise price of
$0.035 per share were granted to Mr. Peck on May 6, 2002, valued at $13,500,
also reflecting the terms of his severance package. These options immediately
vested upon grant for a period of ten years.
General and administrative expenses were $.7 million and $1.7 million for
the three months ended September 30, 2002 and 2001, respectively, as compared to
$2.5 million and $5.7 million for the nine months ended September 30, 2002 and
2001, respectively. The period-to-period 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 continued decline in the business.
Restructuring and Impairment Charges. For the three and nine months ended
September 30, 2002, we recorded restructuring and impairment charges of $0 as
compared to $8.6 and $13.7 million for the three and nine months ended September
30, 2001. Restructuring charges for the three and nine months ended September
30, 2001 related to workforce reductions and impairment charges resulting from
management's ongoing business review and impairment analysis of long-lived
assets.
Amortization of Goodwill and Intangible Assets. Amortization expense was $0
for the three and nine months ended September 30, 2002, compared to $2 million
and $7.7 million for the three and nine months ended September 30, 2001. The
period-to-period decrease in amortization expense was attributable to the
write-down of goodwill and intangibles assets that occurred in the fourth
quarter of 2001 and second quarter of 2001.
Interest and other income, net. Interest and other income, net primarily
includes interest income from our cash and cash equivalents and short-term
investments, interest expense related to our capital lease obligations and
realized gains and losses from the sale of short-term investments. Interest and
other income, net was $0 million and $0.4 million for the three and nine months
ended September 30, 2002, compared to $0 million and $0.9 million for the three
and nine months ended September 30, 20021, respectively. The period-to-period
decrease was primary attributable to a decline in interest income related to the
decrease in cash and the decline in net proceeds from the liquidation of
collateral deposits for buyouts of capitalized leases which occurred in 2001.
Income Taxes. Income taxes were approximately a credit of ($0) and
($1,000) for the three and nine months ended September 30, 2002, compared with a
credit of ($6,000) and an expense of $16,000 for the three and nine months ended
September 30, 2001. Income taxes were based solely on state and local taxes on
business and investment capital. Our effective tax rate differs from the
statutory federal income tax rate, primarily as a result of the uncertainty
regarding our ability to utilize our net operating loss carryforwards. Due to
the uncertainty surrounding the timing or realization of the benefits of our net
operating loss carryforwards in future tax returns, we have placed a 100%
valuation allowance against our 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 97 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.
Additionally, any future ownership change could further limit the ability to use
these carryforwards.
11
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had approximately $.7 million in cash and cash
equivalents. Net cash used in operating activities was $1.9 million and
$15.2 million, for the nine months ended September 30, 2002 and 2001,
respectively. The period-to-period decrease in net cash used in operating
activities resulted primarily from a decrease in our net operating losses,
exclusive of depreciation expenses related to our property and equipment and
non-cash charges.
Net cash provided by investing activities was $0.2 million and $4.8 million
for the nine months ended September 30, 2002 and 2001, respectively. The
decrease in net cash provided by investing activities, was primarily
attributable to the proceeds from sale of property offset by the receipt of
security deposits in 2001.
Net cash used in financing activities was $0 million and $1.6 million for
the nine months ended September 30, 2002 and 2001, respectively. The
period-to-period decrease was primarily attributable to less capital lease
obligations in 2002.
In connection with his termination, our former Chief Executive Officer,
Charles Peck, was paid $625,000 on May 31, 2002, reflecting the terms of his
severance package.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the capital required to maintain our websites, the
resources we devote to marketing and selling our services and our brand
promotions and other factors. We have experienced a substantial decrease in our
capital and marketing expenditures and lease arrangements since last year
consistent with the reduction in our operations and staffing. We have received a
report from our independent accountants, relating to our December 31, 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. 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.
As of September 30, 2002, our sole source of liquidity consisted of $.7
million of cash and cash equivalents. We currently do not have access to any
other sources of funding, including debt and equity financing facilities. The
Company has limited operating capital and no current access to credit
facilities. Though we believe that we have enough capital to last throughout the
remainder of 2002, there is no guarantee that we will have enough capital. If
we are unable to keep operating costs down, grow revenue, and maintain terms
with our creditors, we may have to try and raise additional funds through asset
sales, bank borrowings, or equity or debt financing. Obtaining financing from
an unaffiliated third party is very unlikely and any financing that could be
obtained would probably dilute existing shareholders significantly.
E & C Capital Partners, a privately held investment holding company
controlled by Michael S. Egan, our Chairman and CEO, and Edward A. Cespedes, our
President and a Director, have entered into a letter of intent with theglobe.com
to provide $500,000 of new financing via the purchase of shares of a new Series
F Preferred Stock of theglobe.com. The Series F Preferred Stock will be
convertible into shares of the Company's Common Stock at a price of $.03 per
share. If fully converted, and without regard to anti-dilutive adjustment
mechanisms applicable to the Series F Preferred Stock, an aggregate of
approximately 16.7 million shares of Common Stock could be issued. In addition,
as part of the $500,000 investment, E & C Capital Partners is expected to
receive warrants to purchase approximately 3.3 million shares of theglobe.com
Common Stock at an exercise price of $0.125 per share.
The financing is subject to a number of closing conditions, including
execution of definitive documentation, satisfactory resolution of certain
Company liabilities, satisfactory resolution of other tax and business
considerations, and obtaining certain releases. The financing is also subject to
completion of an investment agreement satisfactory to the parties.
If consummated, the financing will result in substantial dilution of the
number of outstanding securities of theglobe.com.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2002 and 2001, inflation has
not had a significant effect on our results of operations since inception.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
12
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 is included
in net sales and has 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.
VALUATION OF CUSTOMER RECEIVABLES
Provisions for allowance for doubtful accounts are made based on historical
loss experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 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
13
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 adopted Statement 144 effective January 1, 2002. Management has
determined that the adoption of Statement 144 for long-lived assets held for use
did not have a material impact on the Company's financial statements because the
impairment assessment under Statement 144 is largely unchanged from Statement
121.
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
WE HAVE CLOSED OUR COMMUNITY SITE, OUR SMALL BUSINESS WEB-HOSTING PROPERTY AND
HAVE SOLD CERTAIN OF OUR GAMES PROPERTIES AND MAY SELL THE REMAINDER OF OUR
GAMES PROPERTIES. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES FOR ANY
SIGNIFICANT VALUE.
Due to the significant and prolonged decline in the Internet advertising
sector, the Company elected to close its community web site at
"www.theglobe.com" and its small business web-hosting property at
"www.webjump.com" in August 2001. In addition, the Company is seeking buyers
for its games properties in order to reduce its cash burn and preserve working
capital. The Company has already sold substantially all the assets of (i)
Kaleidoscope Networks Limited, the English subsidiary of Attitude Network Ltd.
that operated GamesDomain.com and GamesDomain.co.uk, (ii) KidsDomain.com and
KidsDomain.co.uk, and (iii) HappyPuppy.com and HappyPuppy.co.uk. In addition,
the Company sold the URL of webjump.com. 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 NOT BE ABLE TO CONTINUE AS A GOING CONCERN IF WE ARE UNABLE TO OBTAIN
ADDITIONAL DEBT OR EQUITY CAPITAL.
As of September 30, 2002, our sole source of liquidity consisted of $.7
million of cash and cash equivalents. We currently do not have access to any
other sources of funding, including debt and equity financing facilities. The
Company has limited operating capital and no current access to credit
facilities. Although we believe that we have enough capital to last throughout
the remainder of 2002, there is no guarantee that we will have enough capital
and we will likely require significant additional equity capital to continue in
operation beyond 2002 or to enter into any new lines of business. If we are
unable to keep operating costs down, grow revenue, and maintain terms with our
creditors, we may have to try and raise additional funds through asset sales,
bank borrowings, or equity or debt financing. Obtaining financing from any
unaffiliated third party is very unlikely and any financing that could be
obtained would probably dilute existing shareholders significantly. We received
a report from our independent accountants, relating to our 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.
14
WE MAY DECIDE TO RETAIN OUR CURRENT OPERATING BUSINESSES 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 operating businesses, our Board of Directors may decide to retain
them. If and when we are able to sell our operating businesses, our Board of
Directors may consider entering into new or different lines of business,
including non-Internet related lines of business . Even if we are unable to
sell our operating businesses, our Board of Directors may still decide to enter
into new or different lines of business, including non-Internet related lines of
business . Theglobe.com currently has a significant net operating loss
carry-forward that may help to offset federal income taxes in the future, should
the Company achieve profitability. The rules governing use of the net operating
loss carry-forward asset are complex and depend on a variety of factors,
including maintaining some continuity of existing business lines. There is no
guarantee that we will be able to maintain use of the net operating loss
carry-forward if we choose to enter different business lines in the future.
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 or changes in the value of
our existing 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. After the one-year period, we would be required to comply with the
1940 Act unless our operations and assets result in us no longer meeting the
definition of Investment Company.
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 and making it less likely
our stock price will increase. 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 IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE REVENUE
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 MAY SELL SOME OR ALL OF ITS REMAINING
PROPERTIES WHICH WILL MATERIALLY NEGATIVELY AFFECT OUR REVENUES; OR ENTER INTO
NEW LINES OF BUSINESS
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
15
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 and costs are also difficult because we are
exploring various future alternatives, including the sale of assets and entering
new lines of business.
WE HAVE RECEIVED A REPORT FROM OUR INDEPENDENT AUDITORS THAT RAISES SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
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 September 30, 2002, we had an
accumulated deficit of approximately $217 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 explore the sale of our remaining assets or other changes
to our business.
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, which resulted in significant declines in revenues and gross margins
for Chips & Bits, Inc. Gross margins for Chips & Bits, Inc. remained at 25% for
the three and nine months ended September 30, 2002, and at 24% for the three and
nine months ended September 30, 2001. Because of the large installed base of
personal computers, these revenue and gross margin percentages may fluctuate
with changes in the PC game market. 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.
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. As
of September 30, 2002, we had approximately 19 full-time employees. 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.
16
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 (2) 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,
continues to decline thus far in 2002, 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. 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.
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 (2)
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, continues to decline thus far in 2002, 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.
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 PC games magazine sector
(Source: BPA International),the nature and quality of our magazines' editorial
content, and the attractive demographics of our readers. Due to our limited
resources, we may not be able to compete effectively in any of the preceding
categories in the future. 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.
17
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.
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.
18
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 that 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.
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.
19
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:
- 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.
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. Our former Chief Executive Officer, Charles M. Peck, was no longer
with the Company in any capacity as of May 31, 2002. Effective June 1, 2002,
Michael S. Egan, our Chairman, assumed the role of Chief Executive Officer of
the Company. Additionally, effective June 1, 2002, Edward A. Cespedes, a
director of the Company, was appointed President, and Robin M. Segaul, also a
director of the Company, was appointed Treasurer and Secretary. Effective July
1, 2002, Robin M. Segaul was also appointed Chief Financial Officer. 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.
20
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.
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 were
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.
Our Chief Executive Officer through May 31, 2002, Chuck Peck, had not had
previous experience managing a public company. The remaining members of our
senior management, other than our Chairman and President, have not had any
previous experience managing a public company. Only our Chairman has had
experience managing 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.
OUR OFFICERS, INCLUDING OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND PRESIDENT
HAVE OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH
SOME OF OUR DIRECTORS; WE HAVE FURTHER REDUCED OUR BOARD OF DIRECTORS. ALL OF
OUR DIRECTORS ARE EMPLOYEES OR STOCKHOLDERS OF THE COMPANY OR AFFILIATES OF OUR
LARGEST STOCKHOLDER.
Because our Chairman and Chief Executive Officer, Mr. Michael Egan, is an
officer or director of other companies, we have to compete for his time. Mr.
Egan became our Chief Executive Officer effective June 1, 2002. Mr. Egan is
also the controlling investor of Dancing Bear Investments, Inc., an entity
controlled by Mr. Egan, which is our largest stockholder. Mr. Egan has not
committed to devote any specific percentage of his business time with us.
Accordingly, we compete with Dancing Bear Investments, Inc. and Mr. Egan's other
related entities for his time. Mr. Egan is also Chairman of ANC Rental
Corporation, a spin-off of the car rental business of AutoNation, Inc.
Our President and Director, Mr. Edward A. Cespedes, is also an officer or
director of other companies. Accordingly, we must compete for his time. Mr.
Cespedes is an officer or director of various privately held entities and is
also affiliated with Dancing Bear Investments.
Our Treasurer, Secretary and Director, Ms. Robin M. Segaul is also
affiliated with Dancing Bear Investments. She is also an officer or director of
other companies or entities controlled by Mr. Egan and Mr. Cespedes.
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
21
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.
At our shareholder meeting in June 2002, we received shareholder approval
to amend the charter of the Company to allow between 1 and 9 directors to serve
on the Board of Directors due to the change in the operations of the business.
Three (3) nominees were elected as directors at the Company's 2002 Annual
Stockholders Meeting: Michael Egan, Edward Cespedes, and Robin Segaul.
Effective June 1, 2002, Michael Egan became the Company's Chief Executive
Officer, Edward Cespedes became the Company's President, and Robin Segaul became
the Company's Treasurer and Secretary. Additionally, Ms. Segaul became the
Company's Chief Financial Officer effective July 1, 2002. All of them are
employees or stockholders of the Company or affiliates of Dancing Bear
Investments, our largest stockholder.
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. 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.
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.
22
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. 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.
INTERNET ADVERTISING HAS NOT PROVEN AS EFFECTIVE AS TRADITIONAL MEDIA.
The Internet advertising market is relatively new and continues to evolve.
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
23
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.
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," "azazz.com," "attitude.net, " "cgonline" and
"cdmag.com." The regulation of domain names in the United States and in foreign
24
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.
WE ARE INVOLVED IN SECURITIES CLASS ACTION LITIGATION.
We are a party to the securities class action litigation described in (note
3(a)). The defense of the litigation 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
whom 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.
Including all warrants, all vested options, and all options vesting within
60 days of September 30, 2002, Michael S. Egan, our Chairman and Chief Executive
Officer, beneficially owns or controls, directly or indirectly, 12,371,580
shares of our Common Stock, which in the aggregate represents approximately
30.3% of the outstanding shares of our Common Stock. Accordingly, Mr. Egan
would likely be able to exercise significant influence in any stockholder vote.
Messrs. Egan and Edward A. Cespedes, both of whom are current Directors of
our company, and Messrs. Paternot and Krizelman, who 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.
25
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;
- competitive announcements;
- entrance into new lines of business;
- 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. Our stock is also more volatile due to
the limited trading volume.
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. A
substantial majority of our common stock is freely tradable. Also, we may issue
additional shares of our common stock, which could further adversely affect our
stock price.
There are outstanding options to purchase 5,946,440 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.
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.
WE CHANGED OUR INDEPENDENT AUDITORS.
On August 8, 2002, we dismissed our independent accountants, KPMG LLP
("KPMG"), and engaged Rachlin Cohen & Holtz LLP ("Rachlin Cohen") as our new
independent accountants.
26
ITEM 3. QUALITATIVE AND QUANTITATIVE 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 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.
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure
(1) that information required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's ("SEC") rules and forms,
and (2) that this information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgement in
evaluating the cost benefit relationship of possible controls and procedures.
In October 2002, under the supervision and review of our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them in a timely manner to material information regarding us (including our
consolidated subsidiaries) that is required to be included in our periodic
reports to the SEC.
In addition, there have been no significant changes in our internal
controls or in other factors that could significantly affect those controls
since our October 2002 evaluation. We cannot assure you, however, that our
system of disclosure controls and procedures will always achieve its stated
goals under all future conditions, no matter how remote.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 3(a) to the accompanying financial statements - "Litigation"
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Sales of Registered Securities.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K.
Current Report on Form 8-K filed September 20, 2002, relating to Item 5,
Other Events, and an event dated September 18, 2002.
Current Report on Form 8-K filed August 14, 2002, relating to Item 9,
Regulation F-D Disclosure, and an event dated August 14, 2002.
Current Report on Form 8-K filed August 13, 2002, relating to Item 4,
Change in Registrant's Certifying Accountant, and an event dated August 13,
2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereto duly authorized.
theglobe.com, inc.
/s/ Michael S. Egan
-----------------------------
Michael S. Egan
Chief Executive Officer
/s/ Edward A, Cespedes
-----------------------------
Edward A. Cespedes
President
/s/ Robin M. Segaul
-----------------------------
Robin M. Segaul
Chief Financial Officer
November 14, 2002
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CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
OF CHIEF FINANCIAL OFFICER
I, Robin M. Segaul, Chief Financial Officer of theglobe.com, certify that:
1. I have reviewed this quarterly report on Form 10-Q of theglobe.com.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; and
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or person performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there are significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
--------------------------------
Name: Robin M. Segaul
Title: Chief Financial Officer
II-3
CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
OF CHIEF EXECUTIVE OFFICER
I, Michael S. Egan, Chief Executive Officer of theglobe.com, certify that:
1. I have reviewed this quarterly report on Form 10-Q of theglobe.com.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report; and
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or person performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there are significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
-----------------------------------
Name: Michael S. Egan
Title: Chief Executive Officer
II-4