THEGLOBE COM INC - Annual Report: 2006 (Form 10-K)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
x
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the fiscal year ended December 31, 2006
or
o
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
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14-1782422
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(STATE
OR OTHER JURISDICTION OF
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(I.R.S.
EMPLOYER
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INCORPORATION
OR ORGANIZATION)
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IDENTIFICATION
NO.)
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110
EAST
BROWARD BOULEVARD, SUITE 1400, FORT LAUDERDALE, FL. 33301
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
Registrant’s
telephone number, including area code (954) 769 - 5900
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.001 per share
Preferred
Stock Purchase Rights
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o
Yes x No
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: x Yes o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer o
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
o
Yes x No
Aggregate
market value of the voting Common Stock held by non-affiliates of the registrant
as of the close of business on March 19, 2007: $4,227,395.*
*Includes
voting stock held by third parties, which may be deemed to be beneficially
owned
by affiliates, but for which such affiliates have disclaimed beneficial
ownership.
The
number of shares outstanding of the Registrant's Common Stock, $.001 par value
(the "Common Stock") as of March 19, 2007 was 172,484,838.
theglobe.com,
inc.
FORM
10-K
TABLE
OF CONTENTS
Page
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PART
I
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Item
1.
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Business
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2
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Item
1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff Comments
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23
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Item
2.
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Properties
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23
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Item
3.
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Legal
Proceedings
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23
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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25
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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25
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Item
6.
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Selected
Financial Data
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29
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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30
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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48
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Item
8.
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Financial
Statements and Supplementary Data
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F-1
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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49
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Item
9A.
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Controls
and Procedures
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49
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Item
9B.
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Other
Information
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49
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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49
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Item
11.
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Executive
Compensation
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52
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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59
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Item
13.
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Certain
Relationships and Related Transactions, and Director Independence
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60
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Item
14.
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Principal
Accounting Fees and Services
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62
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PART
IV
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Item
15.
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Exhibits
and Financial Statements Schedules
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63
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SIGNATURES
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68
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i
FORWARD
LOOKING STATEMENTS
This
Form
10-K contains forward-looking statements within the meaning of the federal
securities laws that relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology, such as "may," "will," "should," "could," "expect," "plan,"
"anticipate," "believe," "estimate," "project," "predict," "intend," "potential"
or "continue" or the negative of such terms or other comparable terminology,
although not all forward-looking statements contain such terms. In addition,
these forward-looking statements include, but are not limited to, statements
regarding:
·
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implementing
our business plans;
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·
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marketing
and commercialization of our products and services;
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·
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plans
for future products and services and for enhancements of existing
products
and services;
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·
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our
ability to implement cost-reduction programs;
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·
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potential
governmental regulation and taxation;
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·
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the
outcome of pending litigation;
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·
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our
intellectual property;
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·
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our
estimates of future revenue and profitability;
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·
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our
estimates or expectations of continued losses;
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·
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our
expectations regarding future expenses, including cost of revenue,
product
development, sales and marketing, and general and administrative
expenses;
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·
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difficulty
or inability to raise additional financing, if needed, on terms acceptable
to us;
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·
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our
estimates regarding our capital requirements and our needs for additional
financing;
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·
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attracting
and retaining customers and employees;
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·
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rapid
technological changes in our industry and relevant markets;
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·
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sources
of revenue and anticipated revenue;
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·
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plans
to shutdown certain businesses;
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our
ability to sell and/or recover certain business assets;
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·
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competition
in our market; and
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·
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our
ability to continue to operate as a going concern.
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These
statements are only predictions. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements.
We
are not required to and do not intend to update any of the forward-looking
statements after the date of this Form 10-K or to conform these statements
to
actual results. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Form 10-K might not occur. Actual
results, levels of activity, performance, achievements and events may vary
significantly from those implied by the forward-looking statements. A
description of risks that could cause our results to vary appears under "Risk
Factors" and elsewhere in this Form 10-K.
1
In
this
Form 10-K, we refer to information regarding our potential markets and other
industry data. We believe that we have obtained this information from reliable
sources that customarily are relied upon by companies in our industry, but
we
have not independently verified any of this information.
PART
I
DESCRIPTION
OF BUSINESS
During
2006 theglobe.com, inc. (the "Company" or "theglobe") managed three primary
lines of business, as follows:
· |
Computer
games businesses —
Our print
publication business comprised of Computer Games magazine and MMOGames
magazine (renamed from Massive Magazine in the first quarter of 2007);
our
online website business, comprised of the CGOnline website (www.cgonline.com),
the MMOGames magazine website (www.mmogamesmag.com)
and the Game Swap Zone website (www.gameswapzone.com);
and our e-commerce games distribution company, Chips & Bits, Inc.
(www.chipsbits.com).
Our Now Playing magazine publication and the accompanying website
were
sold in January 2006 for approximately $130 thousand in cash;
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· |
Voice
over Internet Protocol (“VoIP”) telephony services business — Consisting
of tglo.com, inc. (formerly known as voiceglo Holdings, Inc.). The
term
“VoIP” refers to a category of hardware and software that enables people
to use the Internet to make phone calls;
and
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· |
Internet
services business — Consisting of Tralliance Corporation (“Tralliance”)
which is the registry for the “.travel” top-level Internet
domain.
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In
March
2007, management made the decision to shutdown the operations of both its
computer games and VoIP telephony services lines of business and to focus 100%
of its resources and efforts to further develop its Internet services business.
See Note 19, “Subsequent Events,” of the Notes to Consolidated Financial
Statements and the "Liquidity and Capital Resources" section of the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included within this Form 10-K for a more complete discussion.
On
October 31, 2005, the Company completed the sale of all of the business and
substantially all of the net assets of SendTec, Inc. (“SendTec”), our direct
response marketing services and technology company, for approximately $39.9
million in cash. Results of operations for SendTec have been reported separately
as “Discontinued Operations” in the accompanying consolidated statement of
operations for the years ended December 31, 2005 and 2004.
During
2006, 2005 and 2004, the Company's computer games business segment provided
approximately 59%, 81% and 89%, respectively, of our consolidated net revenue
from continuing operations. Tralliance which comprises our Internet services
business segment contributed approximately 40% of our consolidated net revenue
during 2006, up from approximately 8% in the prior year as Tralliance did not
begin generating revenue until the fourth quarter of 2005. Our VoIP products
and
services have not produced any significant revenue. All revenue derived from
the
business segments which comprised our operations during 2006 was considered
to
be attributable to the United States because it was impracticable to determine
the country of origin.
HISTORICAL
OVERVIEW
theglobe
was incorporated on May 1, 1995 (inception) and commenced operations on that
date. Originally, theglobe.com was an online community with registered members
and users in the United States and abroad. That product gave users the freedom
to personalize their online experiences by publishing their own content and
by
interacting with others having similar interests. However, due to the
deterioration of the online advertising market, the Company was forced to
restructure and ceased the operations of its online community on August 15,
2001. The Company then sold most of its remaining online and offline properties.
The Company continued to operate its Computer Games print magazine and the
associated CGOnline website, as well as the e-commerce games distribution
business of Chips & Bits. On June 1, 2002, Chairman Michael S. Egan and
Director Edward A. Cespedes became Chief Executive Officer and President of
the
Company, respectively.
2
On
November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets. In exchange for the assets, the Company issued warrants to
acquire 1,750,000 shares of its Common Stock and an additional 425,000 warrants
as part of an earn-out structure upon the attainment of certain performance
targets. The earn-out performance targets were not achieved and the 425,000
earn-out warrants expired on December 31, 2003.
On
February 25, 2003, theglobe entered into a Loan and Purchase Option Agreement,
as amended, with Tralliance, an Internet related business venture, pursuant
to
which it agreed to fund, in the form of a loan, at the discretion of the
Company, Tralliance's operating expenses and obtained the option to acquire
all
of the outstanding capital stock of Tralliance in exchange for, when and if
exercised, $40,000 in cash and the issuance of an aggregate of 2,000,000
unregistered restricted shares of theglobe’s Common Stock. On May 5, 2005,
Tralliance and the Internet Corporation for Assigned Names and Numbers ("ICANN")
entered into an agreement designating Tralliance as the registry for the
".travel" top-level domain. On May 9, 2005, the Company exercised its option
to
acquire all of the outstanding capital stock of Tralliance. The purchase price
consisted of the issuance of 2,000,000 shares of theglobe’s Common Stock,
warrants to acquire 475,000 shares of theglobe’s Common Stock and $40,000 in
cash. The warrants are exercisable for a period of five years at an exercise
price of $0.11 per share. The Common Stock issued as a result of the acquisition
of Tralliance is entitled to certain "piggy-back" registration rights.
On
May
28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a company
engaged in VoIP telephony services in exchange for 1,375,000 shares of the
Company’s Common Stock and the issuance of warrants to acquire 500,000 shares of
the Company’s Common Stock. DPT was a specialized international communications
carrier providing VoIP communications services to emerging countries. The DPT
network had provided "next generation" packet-based telephony and value added
data services to carriers and businesses in the United States and
internationally. The Company acquired all of the physical assets and
intellectual property of DPT and originally planned to continue to operate
the
company as a subsidiary and engage in the provision of VoIP services to other
telephony businesses on a wholesale transactional basis. In the first quarter
of
2004, the Company decided to suspend DPT’s wholesale business and dedicate the
DPT physical and intellectual assets to its retail VoIP business. As a result,
the Company wrote-off the goodwill associated with the purchase of DPT as of
December 31, 2003, and has since employed DPT’s physical assets in the build out
of its VoIP network.
On
September 1, 2004, the Company closed upon an Agreement and Plan of Merger
dated
August 31, 2004, pursuant to which the Company acquired all of the issued and
outstanding shares of capital stock of SendTec, Inc., (“SendTec”), a direct
response marketing services and technology company. Pursuant to the terms of
the
Merger, in consideration for the acquisition of SendTec, theglobe paid
consideration consisting of: (i) $6,000,000 in cash, excluding transaction
costs, (ii) the issuance of an aggregate of 17,500,024 shares of theglobe’s
Common Stock, (iii) the issuance of an aggregate of 175,000 shares of Series
H
Automatically Converting Preferred Stock (which was converted into 17,500,500
shares of theglobe’s Common Stock on December 1, 2004, the effective date of the
amendment to the Company's certificate of incorporation increasing its
authorized shares of Common Stock from 200,000,000 shares to 500,000,000
shares), and (iv) the issuance of a subordinated promissory note in the amount
of $1 million. The Company also issued an aggregate of 3,974,165 replacement
options to acquire theglobe’s Common Stock for each of the issued and
outstanding options to acquire SendTec shares held by the former employees
of
SendTec.
On
August
10, 2005, the Company entered into an Asset Purchase Agreement with
RelationServe Media, Inc. ("RelationServe") whereby the Company agreed to sell
all of the business and substantially all of the net assets of the SendTec
marketing services subsidiary to RelationServe for $37.5 million in cash,
subject to certain net working capital adjustments. On August 23, 2005, the
Company entered into Amendment No. 1 to the Asset Purchase Agreement with
RelationServe (the “1st
Amendment”
and together with the original Asset Purchase Agreement, the “Purchase
Agreement”). On October 31, 2005, the Company completed the asset sale.
Including preliminary adjustments to the purchase price related to estimated
excess working capital of SendTec as of the date of sale, the Company received
an aggregate of approximately $39.9 million in cash pursuant to the Purchase
Agreement.
Additionally,
as contemplated by the Purchase Agreement, immediately following the asset
sale,
the Company completed the redemption of approximately 28.9 million shares of
theglobe’s Common Stock owned by six members of the former management of SendTec
for approximately $11.6 million in cash pursuant to a Redemption Agreement
dated
August 23, 2005. Pursuant to a separate Termination Agreement, the Company
also
terminated and canceled approximately 1.3 million stock options and the
contingent interest in approximately 2.1 million earn-out warrants held by
the
six members of the former management in exchange for approximately $400 thousand
in cash. The Company also terminated stock options of certain other
non-management employees of SendTec and entered into bonus arrangements with
a
number of other non-management SendTec employees for amounts totaling
approximately $600 thousand.
3
OUR
LINES OF BUSINESS
OUR
INTERNET SERVICES BUSINESS
Tralliance
was incorporated in 2002 to develop products and services to enhance online
commerce between consumers and the travel and tourism industries, including
administration of the “.travel” top-level domain. In February 2003, theglobe
entered into a Loan and Purchase Option Agreement, as amended, with Tralliance
in which theglobe agreed to fund, in the form of a loan, at the discretion
of
theglobe, Tralliance’s operating expenses and obtained the option to acquire all
of the outstanding capital stock of Tralliance. On May 5, 2005, the Internet
Corporation for Assigned Names and Numbers (“ICANN”) and Tralliance entered into
a contract whereby Tralliance was designated as the exclusive registry for
the
“.travel” top-level domain for an initial period of ten years. Renewal of the
ICANN contract beyond the initial ten year term is conditioned upon the
negotiation of renewal terms reasonably acceptable to ICANN. Additionally,
we
have agreed to engage in good faith negotiations at regular intervals throughout
the term of our contract (at least once every three years) regarding possible
changes to the provisions of the contract, including changes in the fees and
payments that we are required to make to ICANN. In the event that we materially
and fundamentally breach the contract and fail to cure such breach within thirty
days of notice, ICANN has the right to immediately terminate our contract.
Effective May 9, 2005, theglobe exercised its option to purchase Tralliance.
The
establishment of the “.travel” top-level domain enables businesses,
organizations, governmental agencies and other enterprises that operate within
the travel and tourism industry to establish a unique Internet domain name
from
which to communicate and conduct commerce. An Internet domain name is made
up of
a top-level domain and a second-level domain. For example, in the domain name
“companyX.travel”, “companyX” is the second-level domain and “.travel” is the
top-level domain. As the registry for the “.travel” top-level domain, Tralliance
is responsible for maintaining the master database of all second-level “.travel”
domain names and their corresponding Internet Protocol (“IP”) addresses.
To
facilitate the “.travel” domain name registration process, Tralliance has
entered into contracts with a number of registrars. These registrars act as
intermediaries between Tralliance and customers (referred to as registrants)
seeking to register “.travel” domain names. The registrars handle the billing
and collection of registration fees, customer service and technical management
of the registration database. Registrants can register “.travel” domain names
for terms of one year (minimum) up to 10 years (maximum). The registrars retain
a portion of the registration fee collected by them as their compensation and
remit the remainder, presently $80 per domain name per year, of the registration
fee to Tralliance.
In
order
to register a “.travel” domain name, a registrant must first be verified as
being eligible (“authenticated”) by virtue of being a valid participant in the
travel industry. Additionally, eligibility data is required to be updated and
reviewed annually, subsequent to initial registration. Once authenticated,
a
registrant is only permitted to register “.travel” domain names that are
associated with the registrant’s business or organization. Tralliance has
entered into contracts with a number of travel associations or other independent
organizations (“authentication providers”) whereby, in consideration for the
payment of fixed and/or variable fees, all required authentication procedures
are performed by such authentication providers. Tralliance has also outsourced
various other registry operations, database maintenance and policy formulation
functions to certain other independent businesses or organizations in
consideration for the payment of certain fixed and/or variable fees.
In
launching the “.travel” top-level domain registry, Tralliance adopted a phased
approach consisting of three distinct stages. During the third quarter of 2005,
Tralliance implemented phase one, which consisted of a pre-authentication of
a
limited group of potential registrants. During the fourth quarter of 2005,
Tralliance implemented phase two, which involved the registration of the limited
group of registrants who had been pre-authenticated. It was during this limited
registration phase that Tralliance initially began collecting registration
fees
from its “.travel” registrars. Finally, in January 2006, Tralliance commenced
the final phase of its launch, which culminated in live “.travel” registry
operations. As of March 20, 2007 the total number of “.travel” domain names
registered approximated 26,400.
4
On
August
15, 2006, the Company introduced its online search engine dedicated to the
travel industry, www.search.travel.
The
search engine was developed by Tralliance to benefit both consumers at large
and
“.travel” domain name registrants, as the search engine delivers qualified
search results from the entire World Wide Web, giving priority to destinations
and businesses that are authenticated “.travel” registrants. During August 2006,
the Company launched a national television campaign to promote the new search
engine and website. The Company has begun marketing the www.search.travel
website
to potential advertisers interested in targeting the travel consumer and plans
to seek additional net revenue through the sale of advertising sponsorships.
As
of March 19, 2007, advertising net revenue attributable to the www.search.travel
website
has not been significant.
OUR
COMPUTER GAMES BUSINESS
In
February 2000, the Company entered the computer games business by acquiring
Computer Games Magazine, a print publication for personal computer (“PC”)
gamers; CGOnline, the online counterpart to Computer Games magazine; and Chips
& Bits, an e-commerce games distribution business.
Historically,
content of Computer Games Magazine and CGOnline focused primarily on the PC
games market niche, which has experienced declining sales during recent years.
Additionally, the overall games distribution marketplace has become increasingly
competitive during recent years due to the increased selection and number of
video games offered by mass merchants, regional chains, video game and PC
software specialty stores, toy retail chains, consumer electronic stores and
online retailers. Due in large part to the above factors, the total net revenue
derived from the Company’s computer games business decreased significantly
during the past several years (from $7.2 million in 2002 to $2.0 million in
2006).
During
2004, the Company developed and began to implement plans to expand its business
beyond games and into other areas of the entertainment industry. In Spring
2004,
a new magazine, Now Playing began to be delivered within Computer Games Magazine
and in March 2005, Now Playing began to be distributed as a separate
publication. Now Playing covered movies, DVD’s, television, music, games, comics
and anime, and was designed to fulfill the wider pop culture interests of
readers and to attract a more diverse group of advertisers: autos, television,
telecommunications and film to name a few. During 2005, the Now Playing online
website (www.nowplaying.com),
the
online counterpart for Now Playing magazine, was implemented and costs were
also
incurred to develop a new corporate website (www.theglobe.com),
also
targeted at the broader entertainment marketplace.
In
August
2005, based upon a re-evaluation of the capital requirements and risks/rewards
related to completing the transition to a broader-based entertainment business,
the Company decided to abort its diversification efforts and refocus its
strategy back to operating and improving its traditional games-based businesses.
During the remainder of 2005, the Company implemented a number of revenue
enhancement programs, including establishing a used game auction website
(www.gameswapzone.com),
introducing a digital version of its Computer Games Magazine, and entering
into
several marketing partnership affiliate programs. Additionally, during the
latter part of 2005, the Company completed the implementation of a number of
cost-reduction programs related to facility consolidations, headcount
reductions, and decreases in magazine publishing and sales costs.
In
January 2006, the Company completed the sale of all assets related to Now
Playing Magazine and the Now Playing Online website for approximately $130,000.
The
premiere issue of a new quarterly print publication, Massive Magazine (renamed
MMOGames Magazine in 2007), was released in September 2006. The new magazine
was
dedicated solely to “massively multiplayer online” games (“MMO” games) and
included features on the culture of MMO games, focusing on players, guilds
and
communities. The editorial staff of Computer Games Magazine produced the content
for the new magazine. The new magazine was also accompanied by a complementary
website ( www.mmogamesmag.com).
5
In
March
2007, management and the Board of Directors of the Company made the decision
to
cease all activities related to its Computer Games businesses, including
discontinuing the operations of its magazine publications, games distribution
business and related websites. The Company’s decision to shutdown its Computer
Games businesses was based primarily on the historical losses sustained by
these
businesses during the recent past and management’s expectations of continued
future losses. The Company is currently in the process of implementing a
business shutdown plan, which includes the termination of employee and vendor
relationships and the collection and payment of outstanding accounts receivables
and payables. We are also attempting to sell certain of the businesses’
component assets; however, we do not expect the proceeds from such sales to
be
significant. (See Note 19, “Subsequent Events,” in the Notes to Consolidated
Financial Statements).
Our
games
businesses derived substantially all of their revenue from sales of magazines
via subscriptions and newsstands, sale of advertising, primarily in our
magazines but to a lesser extent on our websites, and to the sales of video
and
computer games products. Curtis Circulation Company, which handled the newsstand
distribution of our games businesses magazine publications, accounted for
approximately 12% of the total net revenue of our games business segment during
2006. During each of the years ended December 31, 2005 and 2004, no single
customer accounted for more than 10% of the total net revenue of our computer
games business segment.
OUR
VOIP TELEPHONY BUSINESS
On
November 14, 2002, we entered the VoIP business by acquiring certain software
assets from Brian Fowler. On May 28, 2003, the Company acquired DPT, a company
engaged in VoIP wholesale telephony services. At the time we acquired DPT,
it
was a specialized international communications carrier providing wholesale
VoIP
communications services to emerging countries. In the first quarter of 2004,
we
decided to suspend DPT's wholesale business and dedicate the DPT physical and
intellectual assets to our retail VoIP business.
During
the third quarter of 2003, the Company launched its first suite of consumer
and
business level VoIP services. The Company launched its browser-based VoIP
product during the first quarter of 2004. These services allowed customers
to
communicate using VoIP technology for dramatically reduced pricing compared
to
traditional telephony networks. The services also offered traditional telephony
features such as voicemail, caller ID, call forwarding, and call waiting for
no
additional cost to the customer, as well as incremental services that were
not
then supported by the public switched telephone network ("PSTN") like the
ability to use numbers remotely and voicemail to email services. In the fourth
quarter of 2004, the Company announced an "instant messenger" or "IM" related
application which enabled users to chat via voice or text across multiple
platforms using their preferred instant messenger service. During the second
quarter of 2005, the Company released a number of new VoIP products and features
which allowed users to communicate via mobile phones, traditional land line
phones and/or computers. From the initial launch of its VoIP services in 2003
through 2005, the Company continued to expand its VoIP network, which was
comprised of switching hardware and software, servers, billing and inventory
systems, and telecommunication carrier contractual relationships. Throughout
this period, the capacity of our VoIP network greatly exceeded usage.
The
Company’s retail VoIP service plans had included both “peer-to-peer” plans, for
which subscribers were able to place calls free of charge over the Internet
to
other subscribers’ Internet connections, and “paid” plans which involved
interconnection with the PSTN and for which subscribers were charged certain
fixed and/or variable service charges.
During
2003 through 2005, the Company attempted to market and distribute its VoIP
retail products through various direct and indirect sales channels including
Internet advertising, structured customer referral programs, network marketing,
television infomercials and partnerships with third party national retailers.
None of the marketing and sales programs implemented during these years were
successful in generating a significant number of “paid” plan customers or
revenue. The Company’s marketing efforts during this period of time achieved
only limited success in developing a “peer-to-peer” subscriber base of free
service plan users.
During
2006, the Company re-focused its efforts on VoIP product development. During
the
first quarter of 2006, the Company developed a plan to reconfigure, phase out
and eliminate certain components of its existing VoIP network. During the second
quarter of 2006, the Company discontinued offering service to its small existing
“paid” plan customer base and completed the implementation of its plan to
significantly reduce the excess capacity and operating costs of its VoIP
network. During November 2006, the Company entered into a license agreement
with
Speecho, LLC, which granted a license to use the Company’s chat, VoIP and video
communications technology for a monthly license fee of $10,000 per month with
an
initial term of ten years. The Company’s Chairman, the Company’s President and
the Company’s Vice President of Finance, as well as certain other current and
former employees of the Company, are members of a company that owns 50% of
the
membership interests in Speecho, LLC.
6
In
March
2007, management and the Board of Directors of the Company decided to
discontinue the operating, research and development activities of its VoIP
telephony services business and terminate all of the remaining employees of
the
business. At this time, the Company intends to only incur those costs required
to maintain the service obligations of the license agreement with Speecho,
LLC.
The Company has no plans to actively market the further licensing of its chat,
VoIP and video communications technology. The Company’s decision to discontinue
the operations of its VoIP telephony services business was based primarily
on
the historical losses sustained by the business during the past several years,
management’s expectations of continued losses for the foreseeable future and
estimates of the amount of capital required to attempt to successfully monetize
its business. (See Note 19, “Subsequent Events,” in the Notes to the
Consolidated Financial Statements).
COMPETITION
Internet
Services Business
We
face
competition from a number of businesses and organizations that have longer
operating histories, greater name recognition and more advanced and complete
technical systems. Additionally, many of our competitors are larger enterprises
that have greater financial, technical and marketing resources than we have.
While
we
do not face direct competition for the registry of “.travel” domain names
because of the exclusive nature of our ICANN contract, we compete with other
companies that maintain the registries for different domain names, including
Verisign, Inc., which manages the “.com” and “.net” registries; Afilias Limited,
which manages the “.info” registry; and a number of country-specific domain name
registries (such as “.uk” for domain names in the United Kingdom).
Our
www.search.travel
search
engine competes for advertising dollars with large Internet portal and search
engine sites, such as Google, America Online, MSN and Yahoo!, that offer
listings or other advertising opportunities for travel companies. These
companies have significantly greater financial, technical, marketing and other
resources and larger client bases. In addition, we also compete with traditional
media companies, such as newspaper and magazine publishers, that provide online
advertising opportunities on their websites.
In
developing and distributing future products and services for the Internet-based
services markets and in seeking the renewal of our existing contract or
obtaining new ICANN contracts, we expect to face intense competition from
multiple competitors.
INTELLECTUAL
PROPERTY AND PROPRIETARY RIGHTS
We
regard
substantial elements of our websites and underlying technology as proprietary.
In addition, we have developed in our VoIP business certain technologies which
we believe are proprietary. We attempt to protect these assets by relying on
intellectual property laws. We also generally enter into confidentiality
agreements with our employees and consultants and in connection with our license
agreements with third parties. We also seek to control access to and
distribution of our technology, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization
or to
develop similar technology independently. We pursue the registration of our
trademarks in the United States and internationally. We have been awarded a
patent for our VoIP technology related to the origination and termination of
telephone calls between subscriber terminals connected to a public packet
network.
Effective
trademark, service mark, copyright, patent and trade secret protection may
not
be available in every country in which our services are made available through
the Internet. Policing unauthorized use of our proprietary information is
difficult. Existing or future trademarks or service marks applied for or
registered by other parties and which are similar to ours may prevent us from
expanding the use of our trademarks and service marks into other areas.
Enforcing our patent rights could result in costly litigation. Our patent
applications could be rejected or any patents granted could be invalidated
in
litigation. Additionally, our competitors or others could be awarded patents
on
technologies and business processes that could require us to significantly
alter
our technology, change our business processes or pay substantial license and
royalty fees. In the fourth quarter of 2005, we were sued by Sprint
Communications Company, L.P. (“Sprint”) for alleged unauthorized use of
“inventions” described and claimed in seven patents held by Sprint. In August
2006, we entered into a settlement agreement with Sprint which resolved the
pending patent infringement lawsuit. As part of the settlement, we agreed to
enter into a non-exclusive license under certain of Sprint’s patents. (See “Risk
Factors-We Rely on Intellectual Property and Proprietary Rights.”).
7
GOVERNMENT
REGULATION AND LEGAL UNCERTAINTIES
In
General
We
are
subject to laws and regulations that are applicable to various Internet
activities. There are an increasing number of federal, state, local and foreign
laws and regulations pertaining to the Internet. In addition, a number of
federal, state, local and foreign legislative and regulatory proposals are
under
consideration. Laws and regulations have been and will likely continue to be
adopted with respect to the Internet relating to, among other things, liability
for information retrieved from or transmitted over the Internet, online content
regulation, user privacy, data protection, pricing, content, copyrights,
distribution, email solicitation, “spam”, electronic contracts and other
communications, consumer protection, the provision of online payment services,
broadband residential Internet access, and the characteristics and quality
of
products and services. On June 1, 2006, we were sued by MySpace, Inc.
(“MySpace”) for alleged violations of the CAN-SPAM Act, the Lanham Act and the
California Business & Professions Code § 17529.5 (the “California Act”), as
well as trademark infringement, false advertising, breach of contract, breach
of
the covenant of good faith and fair dealing, and unfair competition. On February
28, 2007, the United States District Court for the Central District of
California entered an order granting in part MySpace’s motion for summary
judgment, finding that we were liable for violation of the CAN-SPAM Act and
the
California Business & Professions Code, and for breach of
contract. On
March
15, 2007, the Company entered into a Settlement Agreement with MySpace whereby,
among other things, the Company agreed to pay MySpace approximately $2.6 million
on or before April 5, 2007 in exchange for a mutual release of all claims
against one another, including any claims against the Company’s directors and
officers. (See
“Risk Factors-We Rely on Intellectual Property and Proprietary Rights.” and
“Item 3. Legal Proceedings”).
Changes
in tax laws relating to electronic commerce could materially affect our
business, prospects and financial condition. One or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction companies that engage in electronic commerce. A successful
assertion by one or more states or foreign countries that we should collect
sales or other taxes on services could result in substantial tax liabilities
for
past sales, decrease our ability to compete with other entities involved in
the
industries in which we participate, and otherwise harm our business.
Currently,
decisions of the U.S. Supreme Court restrict the imposition of obligations
to
collect state and local sales and use taxes with respect to electronic commerce.
However, a number of states, as well as the U.S. Congress, have been considering
various initiatives that could limit or supersede the Supreme Court's position
regarding sales and use taxes on electronic commerce. If any of these
initiatives addressed the Supreme Court's constitutional concerns and resulted
in a reversal of its current position, we could be required to collect sales
and
use taxes. The imposition by state and local governments of various taxes upon
electronic commerce could create administrative burdens for us and could
adversely affect our business operations, and ultimately our financial
condition, operating results and future prospects.
Regardless
of the type of state tax imposed, the threshold issue involving state taxation
of any transaction is always whether sufficient nexus, or contact, exists
between the taxing entity and the taxpayer or the transaction to which the
tax
is being applied. The concept of nexus is constantly changing and no bright
line
exists that would sufficiently alert a business as to whether it is subject
to
tax in a specific jurisdiction. All states which have attempted to tax Internet
access or online services have done so by asserting that the sale of such
information services, data processing services or other type of transaction
is
subject to tax in that particular state.
8
A
handful
of states impose taxes on computer services, data processing services,
information services and other similar types of services. Some of these states
have asserted that Internet access and/or online information services are
subject to these taxes.
Moreover,
the applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment and personal privacy is uncertain and
developing. It is not clear how existing laws governing issues such as property
ownership, sales and other taxes, libel, and personal privacy apply to the
Internet and electronic commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease
the
growth in the use of the Internet, may impose additional burdens on electronic
commerce or may alter how we do business.
Certain
Other Regulation Affecting the Internet Generally
New
laws
and regulations affecting the Internet generally may increase our costs of
compliance and doing business, decrease the growth in Internet use, decrease
the
demand for our services or otherwise have a material adverse effect on our
business.
Today,
there are still relatively few laws specifically directed towards online
services. However, due to the increasing popularity and use of the Internet
and
online services, many laws and regulations relating to the Internet are being
debated at all levels of governments around the world and it is possible that
such laws and regulations will be adopted. It is not clear how existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel and defamation, obscenity, and personal privacy
apply to online businesses. The vast majority of these laws were adopted prior
to the advent of the Internet and related technologies and, as a result, do
not
contemplate or address the unique issues of the Internet and related
technologies. In the United States, Congress has recently adopted legislation
that regulates certain aspects of the Internet, including online content, user
privacy and taxation. In addition, Congress and other federal entities are
considering other legislative and regulatory proposals that would further
regulate the Internet. Congress has, for example, considered legislation on
a
wide range of issues including Internet spamming, database privacy, gambling,
pornography and child protection, Internet fraud, privacy and digital
signatures. For example, Congress recently passed and the President signed
into
law several proposals that have been made at the U.S. state and local level
that
would impose additional taxes on the sale of goods and services through the
Internet. These proposals, if adopted, could substantially impair the growth
of
e-commerce, and could diminish our opportunity to derive financial benefit
from
our activities. For example, in December 2004, the U.S. federal government
enacted the Internet Tax Nondiscrimination Act (the "ITNA"). While the ITNA
generally extends through November 2007 the moratorium on taxes on Internet
access and multiple and discriminatory taxes on electronic commerce, it does
not
affect the imposition of tax on a charge for voice or similar service utilizing
Internet Protocol or any successor protocol. In addition, the ITNA does not
prohibit federal, state, or local authorities from collecting taxes on our
income or from collecting taxes that are due under existing tax rules.
Various
states have adopted and are considering Internet-related legislation. Increased
U.S. regulation of the Internet, including Internet tracking technologies,
may
slow its growth, particularly if other governments follow suit, which may
negatively impact the cost of doing business over the Internet and materially
adversely affect our business, financial condition, results of operations and
future prospects. The Company has no way of knowing whether legislation will
pass or what form it might take. Domain names have been the subject of
significant trademark litigation in the United States and internationally.
The
current system for registering, allocating and managing domain names has been
the subject of litigation and may be altered in the future. The regulation
of
domain names in the United States and in foreign countries may change.
Regulatory bodies are anticipated to establish additional top-level domains
and
may appoint additional domain name registrars or modify the requirements for
holding domain names, any or all of which may dilute the strength of our names.
We may not acquire or maintain our domain names in all of the countries in
which
our websites may be accessed, or for any or all of the top-level domain names
that may be introduced.
International
Regulation of Internet Services
Internationally,
the European Union has enacted several directives relating to the Internet.
The
European Union has, for example, adopted a directive that imposes restrictions
on the collection and use of personal data. Under the directive, citizens of
the
European Union are guaranteed rights to access their data, rights to know where
the data originated, rights to have inaccurate data rectified, rights to
recourse in the event of unlawful processing and rights to withhold permission
to use their data for direct marketing. The directive could, among other things,
affect U.S. companies that collect or transmit information over the Internet
from individuals in European Union member states, and will impose restrictions
that are more stringent than current Internet privacy standards in the U.S.
In
particular, companies with offices located in European Union countries will
not
be allowed to send personal information to countries that do not maintain
adequate standards of privacy. Compliance with these laws is both necessary
and
difficult. Failure to comply could subject us to lawsuits, fines, criminal
penalties, statutory damages, adverse publicity, and other losses that could
harm our business. Changes to existing laws or the passage of new laws intended
to address these privacy and data protection and retention issues could directly
affect the way we do business or could create uncertainty on the Internet.
This
could reduce demand for our services, increase the cost of doing business as
a
result of litigation costs or increased service or delivery costs, or otherwise
harm our business.
9
Other
laws that reference the Internet, such as the European Union's Directive on
Distance Selling and Electronic Commerce has begun to be interpreted by the
courts and implemented by the European Union member states, but their
applicability and scope remain somewhat uncertain. Regulatory agencies or courts
may claim or hold that we or our users are either subject to licensure or
prohibited from conducting our business in their jurisdiction, either with
respect to our services in general, or with respect to certain categories or
items of our services. As we expand our international activities, we become
obligated to comply with the laws of the countries in which we operate. Laws
regulating Internet companies outside of the U.S. may be less favorable than
those in the U.S., giving greater rights to consumers, content owners, and
users. Compliance may be more costly or may require us to change our business
practices or restrict our service offerings relative to those in the U.S. Our
failure to comply with foreign laws could subject us to penalties ranging from
criminal prosecution to bans on our services.
EMPLOYEES
As
of
March 19, 2007, we had approximately 37 active full-time employees. Our future
success depends, in part, on our ability to continue to attract, retain and
motivate highly qualified technical and management personnel. Competition for
these persons is intense. From time to time, we also employ independent
contractors to support our network operations, research and development,
marketing, sales and support and administrative organizations. Our employees
are
not represented by any collective bargaining unit and we have never experienced
a work stoppage. We believe that our relations with our employees are good.
ITEM
1A. RISK FACTORS
In
addition to the other information in this report, the following factors should
be carefully considered in evaluating our business and prospects.
RISKS
RELATING TO OUR BUSINESS GENERALLY
WE
MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
We
have
received a report from our independent accountants, relating to our December
31,
2006 audited financial statements containing an explanatory paragraph stating
that our recurring losses from operations and our accumulated deficit raise
substantial doubt about our ability to continue as a going concern. For the
reasons described below, Company management does not believe that cash on hand
and cash flow generated internally by the Company will be adequate to fund
the
operation of its businesses beyond a short period of time. These reasons raise
significant doubt about the Company’s ability to continue as a going concern.
As
more
fully discussed in Note 14, “Litigation,” of the Notes to Consolidated Financial
Statements, on March 15, 2007, the Company entered into a Settlement Agreement
with MySpace, Inc. (“MySpace”), related to a lawsuit which was filed by MySpace
on June 1, 2006 in the United States District Court for the Central District
of
California (the “Court”). The lawsuit alleged, among other things, that the
Company sent unsolicited and unauthorized commercial email messages to MySpace
members in violation of certain federal and state laws and the Company’s
contract with MySpace. On February 28, 2007, the Court entered an order (the
“Order”) finding
the Company liable for violating certain federal and state laws and for
breaching its contract with MySpace.
The
Order was not a final judgment nor did it make a determination as to the actual
amount of damages to be awarded. However, based upon preliminary estimates,
the
Company believes that total awarded damages could range from approximately
$45.5
million to $125.5 million, excluding “per incident” damages assessed under
California law. Pursuant to the Settlement Agreement, the Company agreed to
pay
MySpace approximately $2.6 million on or before April 5, 2007 in exchange for
a
mutual release of all claims against one another, including any claims against
the Company’s directors and officers. As part of the settlement, Michael Egan,
the Company’s CEO, who is also an affiliate, agreed to enter into an agreement
with MySpace on or before April 5th
pursuant
to which he would, among other things, provide a letter of credit, cash or
other
equivalent security (collectively, the “Security”) in form and substance
satisfactory to MySpace. Such Security is to expire and be released on the
100th
day
following the Company’s payment of the foregoing $2.6 million so long as no
bankruptcy petition, assignment for the benefit of creditors or like
liquidation, reorganization or insolvency proceeding is instituted or filed
related to the Company during such 100-day period.
10
The
Company does not currently have the resources to both pay the $2.6 million
settlement amount and to fund operations beyond April 2007. The Company intends
to seek to raise capital or otherwise borrow funds with which to pay such amount
and otherwise to fund operations. Although there is no commitment to do so,
any
such funds would most likely come primarily from Mr. Egan or affiliates of
Mr.
Egan or the Company, as the Company currently has no access to credit facilities
with traditional third party lenders and has historically relied on borrowings
from related parties to meet short-term liquidity needs. Any such capital raised
would not be registered under the Securities Act of 1933 and would not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. There can be no assurance that the
Company will be successful in raising such capital or borrowing such funds
and
any capital raised will likely result in very substantial dilution of the number
of shares outstanding or which could be outstanding upon the exercise or
conversion of any derivative securities issued by the Company as part of such
capital raise. The failure to pay the $2.6 million to MySpace and/or the failure
to satisfactorily provide the Security would result in a resumption of the
litigation with MySpace and, in all likelihood, would have a material adverse
effect on the Company, including the potential bankruptcy and cessation of
business of the Company.
The
Company continues to incur consolidated net losses and management believes
that
the Company will continue to be unprofitable in the foreseeable future. As
of
February 28, 2007, the Company had a net working capital deficit of
approximately $7.3 million, inclusive of a cash and cash equivalents balance
of
approximately $4.0 million. Such working capital deficit includes a settlement
liability of approximately $2.6 million owed to MySpace and an aggregate of
$3.4
million in secured convertible demand notes (the “Convertible Notes”) and
accrued interest of approximately $611 thousand due to entities controlled
by
the Company’s Chairman and Chief Executive Officer. Inasmuch as substantially
all of the assets of the Company and its subsidiaries secure the Convertible
Notes, in connection with any resulting proceeding to collect the indebtedness
related to the Convertible Notes, the noteholders could seize and sell the
assets of the Company and its subsidiaries, any or all of which would have
a
material adverse effect on the financial condition and future operations of
the
Company, including the potential bankruptcy or cessation of business of the
Company.
It
is our
preference to avoid filing for protection under the U.S. Bankruptcy Code.
However, in order to avoid such filing and continue as a going concern, we
believe that, in addition to settling the MySpace litigation as discussed above,
we must (i) quickly raise a sufficient amount of capital; (ii) successfully
implement a business plan focused primarily on expanding our Tralliance Internet
services revenue base, and reducing Tralliance and corporate overhead expenses;
and (iii) successfully eliminate future losses incurred by our VoIP telephony
services and computer games business segments by effectuating our planned
shutdown and/or selling certain component assets of these businesses. There
can
be no assurance that the Company will be able to successfully complete any
or
all of the above actions which we believe are required in order to continue
as a
going concern.
WE
HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO CONTINUE TO INCUR
LOSSES.
Since
our
inception, we have incurred net losses each year and we expect that we will
continue to incur net losses for the foreseeable future. We had losses from
continuing operations, net of applicable income tax benefits, of approximately
$17.0 million, $13.3 million and $24.9 million for the years ended December
31,
2006, 2005 and 2004, respectively. The principal causes of our losses are likely
to continue to be:
·
|
costs
resulting from the operation of our
business;
|
11
·
|
failure
to generate sufficient revenue; and
|
·
|
selling,
general and administrative
expenses.
|
Although
we have restructured our businesses, we still expect to continue to incur losses
as we attempt to improve the performance and operating results of our Internet
services business and while we attempt to sell components of our recently
discontinued computer games and VoIP telephony services businesses.
WE
ARE A PARTY TO LITIGATION MATTERS AND OTHER CLAIMS THAT MAY SUBJECT US TO
SIGNIFICANT LIABILITY AND BE TIME CONSUMING AND EXPENSIVE.
We
are
currently a party to litigation and other claims and/or disputes arising in
the
ordinary course of business. At this time, other than the $2.6 million
settlement amount owed to MySpace, we cannot reasonably estimate the range
of
any loss or damages resulting from any of the pending lawsuits or claims due
to
uncertainty regarding the ultimate outcome. The defense of any litigation or
the
process required to resolve outstanding claims and/or disputes may be expensive
and divert management's attention from day-to-day operations. An adverse outcome
in any of these matters could materially and adversely affect our results of
operations and financial position and may utilize a significant portion of
our
cash resources. See Note 14, “Litigation,” in the Notes to Consolidated
Financial Statements for further details regarding outstanding
lawsuits.
OUR
NET OPERATING LOSS CARRYFORWARDS MAY BE SUBSTANTIALLY
LIMITED.
As
of
December 31, 2006, we had net operating loss carryforwards which may be
potentially available for U.S. tax purposes of approximately $162 million.
These
carryforwards expire through 2026. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to various
significant changes in our ownership interests, as defined in the Internal
Revenue Code of 1986, as amended, we have substantially limited the availability
of our net operating loss carryforwards. There can be no assurance that we
will
be able to utilize any net operating loss carryforwards in the
future.
WE
DEPEND ON THE CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE
INTERNET.
Our
Internet services business is substantially dependent upon the continued growth
in the general use of the Internet. Internet and electronic commerce growth
may
be inhibited for a number of reasons, including:
·
|
inadequate
network infrastructure;
|
·
|
security
and authentication concerns;
|
·
|
inadequate
quality and availability of cost-effective, high-speed
service;
|
·
|
general
economic and business downturns;
and
|
·
|
catastrophic
events, including war and
terrorism.
|
As
web
usage grows, the Internet infrastructure may not be able to support the demands
placed on it by this growth or its performance and reliability may decline.
Websites have experienced interruptions in their service as a result of outages
and other delays occurring throughout the Internet network infrastructure.
If
these outages or delays frequently occur in the future, web usage, as well
as
usage of our services, could grow more slowly or decline. Also, the Internet's
commercial viability may be significantly hampered due to:
·
|
delays
in the development or adoption of new operating and technical standards
and performance improvements required to handle increased levels
of
activity;
|
12
·
|
increased
government regulation;
|
·
|
potential
governmental taxation of such services;
and
|
·
|
insufficient
availability of telecommunications services which could result in
slower
response times and adversely affect usage of the
Internet.
|
WE
MAY FACE INCREASED GOVERNMENT REGULATION, TAXATION AND LEGAL UNCERTAINTIES
IN
OUR INDUSTRY, BOTH DOMESTICALLY AND INTERNATIONALLY, WHICH COULD NEGATIVELY
IMPACT OUR FINANCIAL CONDITION AND/OR OUR RESULTS OF
OPERATIONS.
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
and
regulations have been and will likely continue to be adopted with respect to
the
Internet relating to, among other things, liability for information retrieved
from or transmitted over the Internet, online content regulation, user privacy,
data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online
payment services, broadband residential Internet access and the characteristics
and quality of products and services.
Changes
in tax laws relating to electronic commerce could materially affect our
business, prospects and financial condition. One or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction companies that engage in electronic commerce. A successful
assertion by one or more states or foreign countries that we should collect
sales or other taxes on services could result in substantial tax liabilities
for
past sales, decrease our ability to compete with other entities involved in
the
industries in which we participate, and otherwise harm our
business.
Moreover,
the applicability to the Internet of existing laws governing issues such as
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment and personal privacy is uncertain and
developing. It is not clear how existing laws governing issues such as property
ownership, sales and other taxes, libel, and personal privacy apply to the
Internet and electronic commerce. Any new legislation or regulation, or the
application or interpretation of existing laws or regulations, may decrease
the
growth in the use of the Internet, may impose additional burdens on electronic
commerce or may alter how we do business. This could decrease the demand for
our
existing or proposed services, increase our cost of doing business, increase
the
costs of products sold through the Internet or otherwise have a material adverse
effect on our business, plans, prospects, results of operations and financial
condition.
WE
RELY ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We
regard
substantial elements of our websites and underlying technology, as well as
certain VoIP technology assets, 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.
13
We
pursue
the registration of our trademarks in the United States and, in some cases,
internationally. We have been awarded patent protection for certain VoIP assets
which we acquired or which we have developed. However, effective intellectual
property protection may not be available in every country in which our services
are distributed or made available through the Internet. Policing unauthorized
use of our proprietary information is difficult. Legal standards relating to
the
validity, enforceability and scope of protection of proprietary rights in
Internet related businesses are also uncertain and still evolving. We cannot
assure you about the future viability or value of any of our proprietary
rights.
Litigation
may be necessary in the future to enforce our intellectual property rights
or to
determine the validity and scope of the proprietary rights of others. However,
we may not have sufficient funds or personnel to adequately litigate or
otherwise protect our rights. Furthermore, we cannot assure you that our
business activities and product offerings will not infringe upon the proprietary
rights of others, or that other parties will not assert infringement claims
against us, including claims related to providing hyperlinks to websites
operated by third parties, sending unsolicited email messages or providing
advertising on a keyword basis that links a specific search term entered by
a
user to the appearance of a particular advertisement. Moreover, from time to
time, third parties have asserted and may in the future assert claims of alleged
infringement by us of their intellectual property rights. In the fourth quarter
of 2005, we were sued by Sprint Communications Company, L.P. (“Sprint”) for
alleged unauthorized use of “inventions” described and claimed in seven patents
held by Sprint. In August 2006, we entered into a settlement agreement with
Sprint which resolved the pending patent infringement lawsuit. As part of the
settlement, we agreed to enter into a non-exclusive license under certain of
Sprint’s patents. Additionally, on February 28, 2007, the United States District
Court for the Central District of California entered an order, related to the
lawsuit filed against theglobe by MySpace, Inc. (“MySpace”), granting in part
MySpace’s motion for summary judgment, finding that we were liable for violation
of the CAN-SPAM Act and the California Business & Professions Code, and for
breach of contract. On March 15, 2007, the Company entered into a Settlement
Agreement with MySpace whereby, among other things, the Company agreed to pay
MySpace approximately $2.6 million on or before April 5, 2007 in exchange for
a
mutual release of all claims against one another, including any claims against
the Company’s directors and officers. See
Note
14, “Litigation,” in the Notes to Consolidated Financial Statements for further
details regarding the litigation mentioned above. Any litigation claims
or counterclaims could impair our business because they could:
·
|
be
time-consuming;
|
·
|
result
in significant costs;
|
·
|
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 products,
networks and sites. We cannot assure you that these third-party technology
licenses will continue to be available to us on commercially reasonable terms.
Additionally, we cannot assure you that the third parties from which we license
our technology will be able to defend our proprietary rights successfully
against claims of infringement. As a result, our inability to obtain any of
these technology licenses could result in delays or reductions in the
introduction of new products and services or could adversely affect the
performance of our existing products and services until equivalent technology
can be identified, licensed and integrated.
14
The
regulation of domain names in the United States and in foreign countries may
change. Regulatory bodies could establish and have established additional
top-level domains, could appoint additional domain name registries or could
modify the requirements for holding domain names, any or all of which may dilute
the strength of our names or our “.travel” domain registry business. We may not
acquire or maintain our domain names in all of the countries in which our
websites may be accessed, or for any or all of the top-level domain names that
may be introduced. The relationship between regulations governing domain names
and laws protecting proprietary rights is unclear. Therefore, we may not be
able
to prevent third parties from acquiring domain names that infringe or otherwise
decrease the value of our trademarks and other proprietary rights.
WE
MAY BE UNSUCCESSFUL IN ESTABLISHING AND MAINTAINING BRAND AWARENESS; BRAND
IDENTITY IS CRITICAL TO OUR COMPANY.
Our
success in the markets in which we operate will depend on our ability to create
and maintain brand awareness for our product offerings. This has in some cases
required, and may continue to require, a significant amount of capital to allow
us to market our products and establish brand recognition and customer loyalty.
Many of our competitors are larger than us and have substantially greater
financial resources.
If
we
fail to promote and maintain our various brands or our business' brand values
are diluted, our business, operating results, and financial condition could
be
materially adversely affected. The importance of brand recognition will continue
to increase because low barriers of entry to the industries in which we operate
may result in an increased number of direct competitors. To promote our brands,
we may be required to continue to increase our financial commitment to creating
and maintaining brand awareness. We may not generate a corresponding increase
in
revenue to justify these costs.
OUR
QUARTERLY OPERATING RESULTS FLUCTUATE.
Due
to
our significant change in operations, including the entry into new lines of
business and disposition of other lines of business, our historical quarterly
operating results are not necessarily reflective of future results. The factors
that will cause our quarterly operating results to fluctuate in the future
include:
·
|
the
outcome and costs related to defending and settling outstanding
litigation, claims and disputes;
|
·
|
sales
of our recently discontinued businesses or
assets;
|
·
|
changes
in the number of sales or technical
employees;
|
·
|
the
level of traffic on our websites;
|
·
|
the
overall demand for Internet travel services and Internet
advertising;
|
·
|
the
addition or loss of “.travel” domain name registrants, advertising clients
of our www.search.travel
website and electronic commerce partners on our
website;
|
·
|
overall
usage and acceptance of the
Internet;
|
·
|
seasonal
trends in advertising and electronic commerce sales in our
business;
|
·
|
costs
relating to the implementation or cessation of marketing plans for
our
business;
|
·
|
other
costs relating to the maintenance of our
operations;
|
·
|
the
restructuring of our business;
|
15
·
|
failure
to generate significant revenues and profit margins from new and/or
existing products and services; and
|
·
|
competition
from others providing services similar to
ours.
|
OUR
LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT. OUR
INEXPERIENCE IN THE INTERNET SERVICES BUSINESS WILL MAKE FINANCIAL FORECASTING
EVEN MORE DIFFICULT.
We
have a
limited operating history for you to use in evaluating our prospects and us,
particularly as it pertains to our Internet services business. 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
or increase levels of user traffic on our www.search.travel
website;
|
·
|
generate
and maintain adequate levels of “.travel” domain name
registrations;
|
·
|
generate
and maintain adequate www.search.travel
advertising revenue;
|
·
|
adapt
to meet changes in our markets and competitive developments;
and
|
·
|
identify,
attract, retain and motivate qualified
personnel.
|
OUR
MANAGEMENT TEAM IS INEXPERIENCED IN THE MANAGEMENT OF A LARGE OPERATING
COMPANY.
Only
our
Chairman has had experience managing a large operating company. Accordingly,
we
cannot assure you that:
·
|
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.
|
WE
DEPEND ON HIGHLY QUALIFIED TECHNICAL AND MANAGERIAL
PERSONNEL
Our
future success also depends on our continuing ability to attract, retain and
motivate highly qualified technical expertise and managerial personnel necessary
to operate our businesses. We may need to give retention bonuses and stock
incentives to certain employees to keep them, which can be costly to us. The
loss of the services of members of our management team or other key personnel
could harm our business. Our future success depends to a significant extent
on
the continued service of key management, client service, product development,
sales and technical personnel. We do not maintain key person life insurance
on
any of our executive officers and do not intend to purchase any in the future.
Although we generally enter into non-competition agreements with our key
employees, our business could be harmed if one or more of our officers or key
employees decided to join a competitor or otherwise compete with
us.
16
We
may be
unable to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. Our deteriorating financial performance
creates uncertainty that may result in departures of key employees and our
inability to attract suitable replacements and/or additional 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. If we were
unable to attract and retain the technical and managerial personnel necessary
to
support and grow our businesses, our businesses would likely be materially
and
adversely affected.
OUR
OFFICERS, INCLUDING OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND PRESIDENT
HAVE
OTHER INTERESTS AND TIME COMMITMENTS; WE HAVE CONFLICTS OF INTEREST WITH SOME
OF
OUR DIRECTORS; ALL OF OUR DIRECTORS ARE EMPLOYEES OR STOCKHOLDERS OF THE COMPANY
OR AFFILIATES OF OUR LARGEST STOCKHOLDER.
Because
our Chairman and Chief Executive Officer, Mr. Michael Egan, is an officer or
director of other companies, we have to compete for his time. Mr. Egan became
our Chief Executive Officer effective June 1, 2002. Mr. Egan is also the
controlling investor of Dancing Bear Investments, Inc. and E&C Capital
Partners LLLP, which are our largest stockholders. Mr. Egan has not committed
to
devote any specific percentage of his business time with us. Accordingly, we
compete with Dancing Bear Investments, Inc., E&C Capital Partners LLLP, Blue
Wall, LLC, Speecho, LLC and Mr. Egan's other related entities for his time.
Our
President, Treasurer and Chief Financial Officer and Director, Mr. Edward A.
Cespedes, is also an officer or director of other companies. Accordingly, we
must compete for his time. Mr. Cespedes is an officer or director of various
privately held entities and is also affiliated with Dancing Bear Investments,
Inc.
Our
Vice
President of Finance and Director, Ms. Robin Lebowitz is also affiliated with
Dancing Bear Investments, Inc. She is also an officer or director of other
companies or entities controlled by Mr. Egan and Mr. Cespedes.
Due
to
the relationships with his related entities, Mr. Egan will have an inherent
conflict of interest in making any decision related to transactions between
the
related entities and us, including investment in our securities. Furthermore,
the Company's Board of Directors presently is comprised entirely of individuals
which are employees of theglobe, and therefore are not "independent." We intend
to review related party transactions in the future on a case-by-case basis.
WE
RELY ON THIRD PARTY OUTSOURCED HOSTING FACILITIES OVER WHICH WE HAVE LIMITED
CONTROL.
Our
principal servers are located in areas throughout the eastern region of the
United States primarily at third party outsourced hosting facilities. Our
operations depend on the ability to protect our systems against damage from
unexpected events, including fire, power loss, water damage, telecommunications
failures and vandalism. Any disruption in our Internet access could have a
material adverse effect on us. In addition, computer viruses, electronic
break-ins or other similar disruptive problems could also materially adversely
affect our businesses. Our reputation and/or the brands of our business could
be
materially and adversely affected by any problems experienced by our websites,
databases or our supporting information technology networks. We may not have
insurance to adequately compensate us for any losses that may occur due to
any
failures or interruptions in our systems. We do not presently have any secondary
off-site systems or a formal disaster recovery plan.
HACKERS
MAY ATTEMPT TO PENETRATE OUR SECURITY SYSTEM; ONLINE SECURITY BREACHES COULD
HARM OUR BUSINESS.
Consumer
and supplier confidence in our businesses depends on maintaining relevant
security features. Substantial or ongoing security breaches on our systems
or
other Internet-based systems could significantly harm our business. We incur
substantial expenses protecting against and remedying security breaches.
Security breaches also could damage our reputation and expose us to a risk
of
loss or litigation. Experienced programmers or "hackers" have successfully
penetrated our systems and we expect that these attempts will continue to occur
from time to time. Because a hacker who is able to penetrate our network
security could misappropriate proprietary or confidential information or cause
interruptions in our products and services, we may have to expend significant
capital and resources to protect against or to alleviate problems caused by
these hackers. Additionally, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such security breaches could
materially adversely affect our company. In addition, the transmission of
computer viruses resulting from hackers or otherwise could expose us to
significant liability. Our insurance may not be adequate to reimburse us for
losses caused by security breaches. We also face risks associated with security
breaches affecting third parties with whom we have relationships.
17
WE
MAY BE EXPOSED TO LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER
THE INTERNET.
Users
may
access content on our websites or the websites of our distribution partners
or
other third parties through website links or other means, and they may download
content and subsequently transmit this content to others over the Internet.
This
could result in claims against us based on a variety of theories, including
defamation, obscenity, negligence, copyright infringement, trademark
infringement or the wrongful actions of third parties. Other theories may be
brought based on the nature, publication and distribution of our content or
based on errors or false or misleading information provided on our websites.
Claims have been brought against online services in the past and we have
received inquiries from third parties regarding these matters. Such claims
could
be material in the future.
WE
MAY BE EXPOSED TO LIABILITY FOR PRODUCTS OR SERVICES SOLD OVER THE INTERNET,
INCLUDING PRODUCTS AND SERVICES SOLD BY OTHERS.
We
enter
into agreements with commerce partners and sponsors under which, in some cases,
we are entitled to receive a share of revenue from the purchase of goods and
services through direct links from our sites. We 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.
WE
MAY NOT BE ABLE TO IMPLEMENT SECTION 404 OF THE SARBANES-OXLEY ACT ON A TIMELY
BASIS.
The
Securities and Exchange Commission (the “SEC”), as directed by Section 404 of
The Sarbanes-Oxley Act, adopted rules generally requiring each public company
to
include a report of management on the company's internal controls over financial
reporting in its annual report on Form 10-K that contains an assessment by
management of the effectiveness of the company's internal controls over
financial reporting. In addition, the company's independent registered public
accounting firm must attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting.
This
requirement will first apply to our annual report on Form 10-K for the fiscal
year ending December 31, 2007.
We
have
not yet developed a Section 404 implementation plan. We have in the past
discovered, and may in the future discover, areas of our internal controls
that
need improvement.
We
expect
that we will need to hire and/or engage additional personnel and incur
incremental costs in order to complete the work required by Section 404. There
can be no assurance that we will be able to complete a Section 404 plan on
a
timely basis. The Company's liquidity position will also impact our ability
to
adequately fund our Section 404 efforts.
Even
if
we timely complete a Section 404 plan, we may not be able to conclude that
our
internal controls over financial reporting are effective, or in the event that
we conclude that our internal controls are effective, our independent
accountants may disagree with our assessment and may issue a report that is
qualified. This could subject the Company to regulatory scrutiny and a loss
of
public confidence in our internal controls. In addition, any failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could harm the Company's operating results or cause the
Company to fail to meet its reporting obligations.
18
RISKS
RELATING TO OUR INTERNET SERVICES BUSINESS
OUR
CONTRACT TO SERVE AS THE REGISTRY FOR THE “.TRAVEL” TOP-LEVEL DOMAIN MAY BE
TERMINATED EARLY, WHICH WOULD LIKELY DO IRREPARABLE HARM TO OUR DEVELOPING
INTERNET SERVICES BUSINESS.
Our
contract with the Internet Corporation for Assigned Names and Numbers (“ICANN”)
to serve as the registry for the “.travel” top-level Internet domain is for an
initial term of ten years. Additionally, we have agreed to engage in good faith
negotiations at regular intervals throughout the term of our contract (at least
once every three years) regarding possible changes to the provisions of the
contract, including changes in the fees and payments that we are required to
make to ICANN. In the event that we materially and fundamentally breach the
contract and fail to cure such breach within thirty days of notice, ICANN has
the right to immediately terminate our contract.
Should
our “.travel” registry contract be terminated early by ICANN, we would likely
permanently shutdown our Internet services business. Further, we could be held
liable to pay additional fees or financial damages to ICANN or certain of our
related subcontractors and, in certain limited circumstances, to pay punitive,
exemplary or other damages to ICANN. Any such developments could have a material
adverse effect on our financial condition and results of
operations.
OUR
BUSINESS COULD BE MATERIALLY HARMED IF IN THE FUTURE THE ADMINISTRATION AND
OPERATION OF THE INTERNET NO LONGER RELIES UPON THE EXISTING DOMAIN NAME
SYSTEM.
The
domain name registration industry continues to develop and adapt to changing
technology. This development may include changes in the administration or
operation of the Internet, including the creation and institution of alternate
systems for directing Internet traffic without the use of the existing domain
name system. The widespread acceptance of any alternative systems could
eliminate the need to register a domain name to establish an online presence
and
could materially adversely affect our business, financial condition and results
of operations.
WE
OUTSOURCE CERTAIN OPERATIONS WHICH EXPOSES US TO RISKS RELATED TO OUR THIRD
PARTY VENDORS.
We
do not
develop and maintain all of the products and services that we offer. We offer
most of our services to our customers through various third party service
providers engaged to perform these services on our behalf and also outsource
most of our operations to third parties. Accordingly, we are dependent, in
part,
on the services of third party service providers, which may raise concerns
by
our customers regarding our ability to control the services we offer them if
certain elements are managed by another company. In the event that these service
providers fail to maintain adequate levels of support, do not provide high
quality service, discontinue their lines of business, cease or reduce operations
or terminate their contracts with us, our business, operations and customer
relations may be impacted negatively and we may be required to pursue
replacement third party relationships, which we may not be able to obtain on
as
favorable terms or at all. If a problem should arise with a provider,
transitioning services and data from one provider to another can often be a
complicated and time consuming process and we cannot assure that if we need
to
switch from a provider we would be able to do so without significant
disruptions, or at all. If we were unable to complete a transition to a new
provider on a timely basis, or at all, we could be forced to either temporarily
or permanently discontinue certain services which may disrupt services to our
customers. Any failure to provide services would have a negative impact on
our
revenue, profitability and financial condition and could materially harm our
Internet services business.
19
REGULATORY
AND STATUTORY CHANGES COULD HARM OUR INTERNET SERVICES
BUSINESS.
We
cannot
predict with any certainty the effect that new governmental or regulatory
policies, including changes in consumer privacy policies or industry reaction
to
those policies, will have on our domain name registry business. Additionally,
ICANN’s limited resources may seriously affect its ability to carry out its
mandate or could force ICANN to impose additional fees on registries. Changes
in
governmental or regulatory statutes or policies could cause decreases in future
revenue and increases in future costs which could have a material adverse effect
on the development of our domain name registry business.
OUR
INTERNET SERVICES BUSINESS IS DEPENDENT ON THE TRAVEL INDUSTRY. OUR BUSINESS
MAY
AFFECTED BY EVENTS WHICH AFFECT THE TRAVEL INDUSTRY IN
GENERAL.
Revenue
and cash flows of our Internet services business principally result from the
registrations of domain names in the “.travel” top level domain. The ability to
register such domain names are only available to businesses which are involved
in the travel industry. Events such as terrorist attacks, military actions
and
natural disasters have had a significant adverse affect on the travel industry
in the past. In addition, recessions or other economic pressures, such as the
level of employment in the U.S or abroad have also had negative impacts on
the
travel industry. The overall demand for advertising, as well as the level of
consumer travel may also be linked to such events or economic conditions. If
such events result in a negative impact on the travel industry, such impact
could have a material adverse effect on our business, results of operations
and
financial condition.
WE
MAY NOT BE ABLE TO ATTRACT ADVERTISERS OR INTERNET USERS TO OUR SEARCH.TRAVEL
WEBSITE.
Our
www.search.travel
search
engine competes for advertising dollars with large Internet portal and search
engine sites, such as Google, America Online, MSN and Yahoo!, that offer
listings or other advertising opportunities for travel companies. These
companies have significantly greater financial, technical, marketing and other
resources and larger client bases. In addition, we also compete with traditional
media companies, such as newspaper and magazine publishers, that provide online
advertising opportunities on their websites. We expect to face additional
competition as other companies enter the online advertising market. If we do
not
attract a sufficient number of Internet users and advertisers to our search
engine website, our present business model may not be successful and our
business could be adversely affected.
RISKS
RELATING TO OUR RECENTLY DISCONTINUED OPERATIONS
WE
MAY NOT BE ABLE TO RECOVER THE FULL CARRYING VALUE OF THE ASSETS OF OUR RECENTLY
DISCONTINUED BUSINESSES.
In
connection with our recent decision to discontinue the operations of our
computer games and VoIP telephony services businesses, we are currently in
the
process of evaluating the recoverability of the carrying value of the remaining
assets of these businesses. At the present time, management is not aware of
any
issues that would negatively impact the recoverability of these assets. However,
there can be no assurance that future events will not occur, particularly with
respect to the collection of approximately $500 thousand in accounts receivable
of our computer games businesses, which will adversely impact the recoverability
of these discontinued business assets. Any such adverse future events could
negatively impact the Company’s already weakened liquidity and financial
condition.
WE
MAY INCUR EXCESSIVE SHUTDOWN COSTS.
In
connection with our recent decision to discontinue the operations of our
computer games and VoIP telephony services businesses, we are in the process
of
evaluating the amount of costs expected to be incurred in shutting down these
businesses. The amount of these shutdown costs, including employee termination
benefits and vendor contract termination costs, are not yet certain, however,
at
the present time, we believe that total shutdown costs for both businesses
combined will range from between $20 thousand to $835 thousand. Although we
will
attempt to negotiate vendor settlements near the lower end of this range, there
can be no assurance that we will be successful. Additionally, liabilities
presently unknown to us could be identified in the future. Either or both of
these adverse outcomes could negatively impact the Company’s already weakened
liquidity and financial condition.
20
RISKS
RELATING TO OUR COMMON STOCK
THE
VOLUME OF SHARES AVAILABLE FOR FUTURE SALE IN THE OPEN MARKET COULD DRIVE DOWN
THE PRICE OF OUR STOCK OR KEEP OUR STOCK PRICE FROM IMPROVING, EVEN IF OUR
FINANCIAL PERFORMANCE IMPROVES.
As
of
March 19, 2007, we had issued and outstanding approximately 172.5 million
shares, of which approximately 84.8 million shares were freely tradable over
the
public markets. There is limited trading volume in our shares and we are now
traded only in the over-the-counter market. Most of our outstanding restricted
shares of Common Stock were issued more than one year ago and are therefore
eligible to be resold over the public markets pursuant to Rule 144 promulgated
under the Securities Act of 1933, as amended.
Sales
of
significant amounts of Common Stock in the public market in the future, the
perception that sales will occur or the registration of additional shares
pursuant to existing contractual obligations could materially and adversely
drive down the price of our stock. In addition, such factors could adversely
affect the ability of the market price of the Common Stock to increase even
if
our business prospects were to improve. Substantially all of our stockholders
holding restricted securities, including shares issuable upon the exercise
of
warrants or the conversion of convertible notes to acquire our Common Stock
(which are convertible into 68 million shares), have registration rights under
various conditions and are or will become available for resale in the
future.
In
addition, as of December 31, 2006, there were outstanding options to purchase
approximately 20.1 million shares of our 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 shares issuable upon exercise of these
options are registered under the Securities Act and consequently, subject to
certain volume restrictions as to shares issuable to executive officers, will
be
freely tradable.
Also
as
of March 19, 2007, we had issued and outstanding warrants to acquire
approximately 16.9 million shares of our Common Stock. Many
of
the outstanding instruments representing the warrants contain anti-dilution
provisions pursuant to which the exercise prices and number of shares issuable
upon exercise may be adjusted.
OUR
CHAIRMAN MAY CONTROL US.
Michael
S. Egan, our Chairman and Chief Executive Officer, beneficially owns or
controls, directly or indirectly, approximately 150 million shares of our Common
Stock as of March 19, 2007, which in the aggregate represents approximately
58%
of the outstanding shares of our Common Stock (treating as outstanding for
this
purpose the shares of Common Stock issuable upon exercise and/or conversion
of
the options, convertible promissory notes and warrants owned by Mr. Egan or
his
affiliates). Accordingly, Mr. Egan will be able to exercise significant
influence over, if not control, any stockholder vote.
DELISTING
OF OUR COMMON STOCK MAKES IT MORE DIFFICULT FOR INVESTORS TO SELL SHARES. THIS
MAY POTENTIALLY LEAD TO FUTURE MARKET DECLINES.
The
shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or "OTCBB." As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of the securities. The delisting has made trading our
shares more difficult for investors, potentially leading to further declines
in
share price and making it less likely our stock price will increase. It has
also
made it more difficult for us to raise additional capital. We may also incur
additional costs under state blue-sky laws if we sell equity due to our
delisting.
21
OUR
COMMON STOCK MAY BECOME SUBJECT TO CERTAIN "PENNY STOCK" RULES WHICH MAY MAKE
IT
A LESS ATTRACTIVE INVESTMENT.
Since
the
trading price of our Common Stock is less than $5.00 per share, trading in
our
Common Stock would be subject to the requirements of Rule 15g-9 of the Exchange
Act if our net tangible assets were to fall below $2.0 million. Under Rule
15g-9, brokers who recommend penny stocks to persons who are not established
customers and accredited investors, as defined in the Exchange Act, must satisfy
special sales practice requirements, including requirements that they make
an
individualized written suitability determination for the purchaser; and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosures in connection with any trades involving a penny stock, including
the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with that market.
Such requirements may severely limit the market liquidity of our Common Stock
and the ability of purchasers of our equity securities to sell their securities
in the secondary market. For all of these reasons, an investment in our equity
securities may not be attractive to our potential investors.
ANTI-TAKEOVER
PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF
CONTROL.
Provisions
of our charter, by-laws and stockholder rights plan and provisions of applicable
Delaware law may:
·
|
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.
|
Certain
Delaware laws could have the effect of delaying, deterring or preventing a
change in control of our Company. One of these laws prohibits us from engaging
in a business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder, unless various
conditions are met. In addition, provisions of our charter and by-laws, and
the
significant amount of Common Stock held by our current executive officers,
directors and affiliates, could together have the effect of discouraging
potential takeover attempts or making it more difficult for stockholders to
change management. In addition, the employment contracts of our Chairman and
CEO, President and Vice President of Finance provide for substantial lump sum
payments ranging from 2 (for the Vice President) to 10 times (for each of the
Chairman and President) of their respective average combined salaries and
bonuses (together with the continuation of various benefits for extended
periods) in the event of their termination without cause or a termination by
the
executive for “good reason,” which is conclusively presumed in the event of a
“change-in-control” (as such terms are defined in such agreements).
OUR
STOCK PRICE IS VOLATILE AND MAY DECLINE.
The
trading price of our Common Stock has been volatile and may continue to be
volatile in response to various factors, including:
·
|
the
performance and public acceptance of our product
lines;
|
·
|
quarterly
variations in our operating
results;
|
·
|
competitive
announcements;
|
·
|
sales
of any of our recently discontinued businesses and/or components
of their
assets;
|
·
|
the
operating and stock price performance of other companies that investors
may deem comparable to us; and
|
22
·
|
news
relating to trends in our markets.
|
The
market price of our Common Stock could also decline as a result of unforeseen
factors. 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 and the high number of shares
eligible for trading in the market.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
Our
corporate headquarters is located in Fort Lauderdale, Florida, where we sublease
approximately 15,000 square feet of office space from a company which is
controlled by our Chairman. We lease approximately 2,200 square feet of office
space in Vermont in connection with the operations of our computer games
division and also lease approximately 5,000 square feet of warehouse space
in
Pompano Beach, Florida. Additionally,
we currently utilize space in secure telecommunications data centers located
in
several states which is used to house certain Internet routing and computer
equipment.
On
June
1, 2006, MySpace, Inc. (“MySpace”), a Delaware corporation, filed a lawsuit in
the United States District Court for the Central District of California against
theglobe.com, inc. (the “Company”). We were served with the lawsuit on June 6,
2006. MySpace alleged that the Company sent at least 100,000 unsolicited and
unauthorized commercial email messages to MySpace members using MySpace user
accounts improperly established by the Company, that the user accounts were
used
in a false and misleading fashion and that the Company's alleged activities
constituted violations of the CAN-SPAM Act, the Lanham Act and California
Business & Professions Code § 17529.5 (the “California Act”), as well as
trademark infringement, false advertising, breach of contract, breach of the
covenant of good faith and fair dealing, and unfair competition. MySpace seeks
monetary penalties, damages and injunctive relief for these alleged violations.
It asserts entitlement to recover "a minimum of" $62.3 million of damages,
in
addition to three times the amount of MySpace's actual damages and/or
disgorgement of the Company's purported profits from alleged violations of
the
Lanham Act, punitive damages and attorneys’ fees. Subsequent discovery in the
case disclosed that the total number of unsolicited messages was approximately
400,000.
On
February 28, 2007, the Court entered an order (the “Order”) granting in part
MySpace’s motion for summary judgment, finding that the Company was liable for
violation of the CAN-SPAM Act and the California Business & Professions
Code, and for breach of contract (as embodied in MySpace’s “Terms of Service”
contract). The Order also upheld as valid that portion of MySpace’s Terms of
Service contract which provides for liquidated damages of $50 per email message
sent after March 17, 2006 in violation of such Terms. The Company estimates
that
approximately 110,000 of the emails in question were sent after such date,
which
could result in damages of approximately $5.5 million. In addition, the CAN-SPAM
Act provides for statutory damages of between $100 and $300 per email sent
in
violation of the statute. Total damages under CAN-SPAM could therefore range
between about $40 million to about $120 million. In addition, under the
California Act, statutory damages of $1,000,000 “per incident” could be
assessed.
On
March
15, 2007, the Company entered into a Settlement Agreement with MySpace whereby
it agreed to pay MySpace approximately $2.6 million on or before April 5, 2007
in exchange for a mutual release of all claims against one another, including
any claims against the Company’s directors and officers. As part of the
settlement, Michael Egan, the Company’s CEO, who is also an affiliate of the
Company, agreed to enter into an agreement with MySpace on or before April
5th
pursuant
to which he would, among other things, provide a letter of credit, cash or
other
equivalent security (collectively, “Security”) in form and substance
satisfactory to MySpace. Such Security is to expire and be released on the
100th
day
following the Company’s payment of the foregoing $2.6 million so long as no
bankruptcy petition, assignment for the benefit of creditors or like
liquidation, reorganization or insolvency proceeding is instituted or filed
related to the Company during such 100-day period.
23
The
Company does not currently have the resources to both pay the $2.6 million
settlement amount and to fund operations beyond April 2007. The Company intends
to seek to raise capital or otherwise borrow funds with which to pay such amount
and otherwise to fund operations. Although there is no commitment to do so,
any
such funds would most likely come primarily from Mr. Egan or affiliates of
Mr.
Egan or the Company. Any such capital raised would not be registered under
the
Securities Act of 1933 and would not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
There can be no assurance that the Company will be successful in raising such
capital or borrowing such funds and any capital raised will likely result in
very substantial dilution of the number of shares outstanding or which could
be
outstanding upon the exercise or conversion of any derivative securities issued
by the Company as part of such capital raise. The failure to pay the $2.6
million to MySpace and/or the failure to satisfactorily provide the Security
would result in a resumption of the litigation with MySpace and, in all
likelihood, would have a material adverse effect on the Company, including
the
potential bankruptcy and cessation of business of the Company.
On
and
after August 3, 2001 and as of the date of this filing, the Company is aware
that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors (the
“Individual Defendants”), and several investment banks that were the
underwriters of the Company's initial public offering. The lawsuits were filed
in the United States District Court for the Southern District of New
York.
The
lawsuits purport to be class actions filed on behalf of purchasers of the stock
of the Company during the period from November 12, 1998 through December 6,
2000. Plaintiffs allege that the underwriter defendants agreed to allocate
stock
in the Company's initial public offering to certain investors in exchange for
excessive and undisclosed commissions and agreements by those investors to
make
additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading and in violation of the securities laws because it
did
not disclose these arrangements. On December 5, 2001, an amended complaint
was
filed in one of the actions, alleging the same conduct described above in
connection with the Company's November 23, 1998 initial public offering and
its
May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is
now
the operative complaint, was filed in the Southern District of New York on
April
19, 2002. The action seeks damages in an unspecified amount. On February 19,
2003, a motion to dismiss all claims against the Company was denied by the
Court. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions (the “focus cases”) and noted
that the decision is intended to provide strong guidance to all parties
regarding class certification in the remaining cases. The Underwriter Defendants
appealed the decision and the Second Circuit vacated the district court’s
decision granting class certification in those six cases on December 5, 2006.
Plaintiffs have not yet moved to certify a class in theglobe.com
case.
The
Company has approved a settlement agreement and related agreements which set
forth the terms of a settlement between the Company, the Individual Defendants,
the plaintiff class and the vast majority of the other approximately 300 issuer
defendants. It is unclear what impact the Second Circuit’s decision vacating
class certification in the six focus cases will have on the settlement, which
has not yet been finally approved by the Court. On
December 14, 2006, Judge Scheindlin held a hearing. Plaintiffs informed the
Court that they planned to file a petition for rehearing and rehearing
en
banc.
The
Court stayed all proceedings, including a decision on final approval of the
settlement and any amendments of the complaints, pending the Second Circuit’s
decision on Plaintiffs’ petition for rehearing. Plaintiffs filed the petition
for rehearing and rehearing en
banc on
January 5, 2007.
Among
other provisions, if it is ultimately approved by the Court, the settlement
provides for a release of the Company and the Individual Defendants for the
conduct alleged in the action to be wrongful. The Company would agree to
undertake certain responsibilities, including agreeing to assign away, not
assert, or release certain potential claims the Company may have against its
underwriters. The settlement agreement also provides a guaranteed recovery
of $1
billion to plaintiffs for the cases relating to all of the approximately 300
issuers. To the extent that the underwriter defendants settle all of the cases
for at least $1 billion, no payment will be required under the issuers’
settlement agreement. To the extent that the underwriter defendants settle
for
less than $1 billion, the issuers are required to make up the difference.
On
April
20, 2006, JPMorgan Chase and the Plaintiffs reached a preliminary agreement
to
settle for $425 million. The JPMorgan Chase preliminary agreement has not yet
been approved by the Court. In an amendment to the issuers’ settlement
agreement, the issuers’ insurers agreed that the JPMorgan preliminary agreement,
if approved, would offset the insurers’ obligation to cover the remainder of
Plaintiffs’ guaranteed $1 billion recovery by 50% of the value of the JP Morgan
settlement, or $212.5 million. Therefore, if the JP Morgan preliminary agreement
to settle is finalized, and then preliminarily and finally approved by the
Court, then the maximum amount that the issuers’ insurers will be potentially
liable for is $787.5 million. It is unclear what impact the Second Circuit’s
decision vacating class certification in the focus cases will have on the JP
Morgan preliminary agreement.
24
It
is
anticipated that any potential financial obligation of the Company to plaintiffs
pursuant to the terms of the issuers’ settlement agreement and related
agreements will be covered by existing insurance. The Company currently is
not
aware of any material limitations on the expected recovery of any potential
financial obligation to plaintiffs from its insurance carriers. Its carriers
are
solvent, and the company is not aware of any uncertainties as to the legal
sufficiency of an insurance claim with respect to any recovery by plaintiffs.
Therefore, we do not expect that the settlement will involve any payment by
the
Company. If material limitations on the expected recovery of any potential
financial obligation to the plaintiffs from the Company's insurance carriers
should arise, the Company's maximum financial obligation to plaintiffs pursuant
to the settlement agreement would be less than $3.4 million. However,
if the JPMorgan Chase preliminary agreement is finalized, then preliminarily
and
finally approved, the Company’s maximum financial obligation would be less than
$2.7 million.
There
is
no assurance that the court will grant final approval to the issuers’
settlement. If the settlement agreement is not approved and the Company is
found
liable, we are unable to estimate or predict the potential damages that might
be
awarded, whether such damages would be greater than the Company’s insurance
coverage, and whether such damages would have a material impact on our results
of operations or financial condition in any future period.
The
Company is currently a party to certain other claims and disputes arising in
the
ordinary course of business. The Company currently believes that the ultimate
outcome of these other matters, individually and in the aggregate, will not
have
a material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of legal proceedings, should the outcome of these matters be
unfavorable, the Company's business, financial condition, results of operations
and cash flows could be materially and adversely affected.
None.
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET
INFORMATION
The
shares of our Common Stock trade in the over-the-counter market on what is
commonly referred to as the electronic bulletin board, under the symbol
"TGLO.OB". The following table sets forth the
range
of high and low bid prices of our Common Stock for the periods indicated as
reported by the over-the-counter market (the electronic bulletin board). The
quotations below reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions:
|
2006
|
2005
|
2004
|
||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||
Fourth
Quarter
|
$
|
0.09
|
$
|
0.05
|
$
|
0.49
|
$
|
0.24
|
$
|
0.56
|
$
|
0.36
|
|||||||
Third
Quarter
|
$
|
0.27
|
$
|
0.08
|
$
|
0.45
|
$
|
0.10
|
$
|
0.65
|
$
|
0.24
|
|||||||
Second
Quarter
|
$
|
0.31
|
$
|
0.09
|
$
|
0.16
|
$
|
0.08
|
$
|
0.96
|
$
|
0.28
|
|||||||
First
Quarter
|
$
|
0.44
|
$
|
0.30
|
$
|
0.43
|
$
|
0.12
|
$
|
1.42
|
$
|
0.83
|
The
market price of our Common Stock is highly volatile and fluctuates in response
to a wide variety of factors. (See "Risk Factors-Our Stock Price is Volatile
and
May Decline.")
25
HOLDERS
OF COMMON STOCK
We
had
approximately 657 holders of record of Common Stock as of March 19, 2007. This
does not reflect persons or entities that hold Common Stock in nominee or
"street" name through various brokerage firms.
DIVIDENDS
We
have
not paid any cash dividends on our Common Stock since our inception and do
not
intend to pay dividends in the foreseeable future. Our board of directors will
determine if we pay any future dividends.
DECEMBER
31, 2006
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
|||||||
Equity
Compensation plans approved by security holders
|
11,271,620
|
$
|
0.56
|
647,600
|
||||||
|
||||||||||
Equity
Compensation plans not approved by security holders
|
8,871,000
|
$
|
0.11
|
2,194,141
|
||||||
|
||||||||||
Total
|
20,142,620
|
$
|
0.36
|
2,841,741
|
Equity
compensation plans not approved by security holders consist of the following:
·
|
1,750,000
shares of Common Stock of theglobe.com, inc., issued to Edward A.
Cespedes
pursuant to the Non-Qualified Stock Option Agreement dated August
12, 2002
at an exercise price of $0.02 per share. These stock options vested
immediately and have a life of ten years from date of grant.
|
|
|
·
|
2,500,000
shares of Common Stock of theglobe.com, inc., issued to Michael S.
Egan
pursuant to the Non-Qualified Stock Option Agreement dated August
12, 2002
at an exercise price of $0.02 per share. These stock options vested
immediately and have a life of ten years from date of grant.
|
|
|
·
|
500,000
shares of Common Stock of theglobe.com, inc., issued to Robin S.
Lebowitz
pursuant to the Non-Qualified Stock Option Agreement dated August
12, 2002
at an exercise price of $0.02 per share. These stock options vested
immediately and have a life of ten years from date of grant.
|
|
|
·
|
The
Company's 2003 Amended and Restated Non-Qualified Stock Option Plan
(the
"2003 Plan"). The purpose of the 2003 Plan is to strengthen theglobe.com,
inc. by providing an incentive to certain employees and consultants
(or in
certain circumstances, individuals who are the principals of certain
consultants) of the Company or any subsidiary of the Company, with
a view
toward encouraging them to devote their abilities and industry to
the
success of the Company's business enterprise. The 2003 Plan is
administered by a Committee appointed by the Board to administer
the Plan,
which has the power to determine those eligible individuals to whom
options shall be granted under the 2003 Plan and the number of such
options to be granted and to prescribe the terms and conditions (which
need not be identical) of each such option, including the exercise
price
per share subject to each option and vesting schedule of options
granted
thereunder, and make any amendment or modification to any agreement
consistent with the terms of the 2003 Plan. The maximum number of
shares
that may be made the subject of options granted under the 2003 Plan
is
1,000,000 and no option may have a term in excess of ten years. Options
to
acquire an aggregate of 41,000 shares of Common Stock have been issued
to
various independent sales agents at a weighted average exercise price
of
$1.54. These stock options vested immediately and have a life of
ten years
from date of grant. Options to acquire an aggregate of 65,000 shares
of
Common Stock have been issued to various employees and independent
contractors at a weighted average exercise price of $1.00. These
stock
options vested immediately and have a life of ten years from date
of
grant. Options to acquire an aggregate of 110,000 shares of Common
Stock
have been issued to two independent contractors at a weighted average
exercise price of $1.22. These stock options vested immediately and
have a
life of five years from date of grant.
|
26
·
|
The
Company's 2004 Stock Incentive Plan (the "2004 Plan"). The purpose
of the
2004 Plan is to enhance the profitability and value of the Company
for the
benefit of its stockholders by enabling the Company to offer eligible
employees, consultants and non-employee directors stock-based and
other
incentives, thereby creating a means to raise the level of equity
ownership by such individuals in order to attract, retain and reward
such
individuals and strengthen the mutuality of interests between such
individuals and the Company's stockholders. The 2004 Plan is administered
by a Committee appointed by the Board to administer the Plan, which
has
the power to determine those eligible individuals to whom stock options,
stock appreciation rights, restricted stock awards, performance awards,
or
other stock-based awards shall be granted under the 2004 Plan and
the
number of such options, rights or awards to be granted and to prescribe
the terms and conditions (which need not be identical) of each such
option, right or award, including the exercise price per share subject
to
each option and vesting schedule of options granted thereunder, and
make
any amendment or modification to any agreement consistent with the
terms
of the 2004 Plan. The maximum number of shares that may be made the
subject of options, rights or awards granted under the 2004 Plan
is
7,500,000 and no option may have a term in excess of ten years. In
October
of 2004, options to acquire 250,000 shares of Common Stock were issued
to
an employee at an exercise price of $0.52, of which 62,500 of these
stock
options vested immediately and the balance vests ratably on a quarterly
basis over three years. These options have a life of ten years from
date
of grant. In June of 2006, options to acquire 1,000,000 shares of
Common
Stock were issued to two employees at an exercise price of $0.10,
of which
25% of these options vested immediately and the balance vests ratably
on a
quarterly basis over three years. These options have a life of ten
years
from date of grant. In August of 2006, options to acquire 2,655,000
shares
of Common Stock were issued to 28 employees at an exercise price
of $0.14,
of which 25% of these options vested immediately and the balance
vests
ratably on a quarterly basis over three years. These options have
a life
of ten years from date of grant.
|
27
The
following graph compares the cumulative total return on theglobe’s common stock
during the last five fiscal years with the NASDAQ Stock Market Index (U.S.
Companies) and the AMEX Interactive Week Internet Index during the same period.
The graph shows the value, at the end of each of the last five fiscal years,
of
$100 invested in theglobe common stock or the indices on December 31, 2001,
and
assumes the reinvestment of all dividends. Historical stock price performance
is
not necessarily indicative of future stock price performance.
At
December 31
|
|||||||||||||||||||
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||
theglobe
|
$
|
100
|
$
|
200
|
$
|
4,433
|
$
|
1,400
|
$
|
1,300
|
$
|
200
|
|||||||
NASDAQ
|
$
|
100
|
$
|
69
|
$
|
104
|
$
|
113
|
$
|
115
|
$
|
127
|
|||||||
AMEX
Internet
|
$
|
100
|
$
|
57
|
$
|
98
|
$
|
119
|
$
|
120
|
$
|
137
|
The
shares of our common stock were delisted from the NASDAQ national market in
April 2001 and now trade in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or “OTCBB”, under the symbol
“TGLO.OB”.
28
RECENT
SALES OF UNREGISTERED SECURITIES
ITEM
6. SELECTED FINANCIAL DATA
SELECTED
CONSOLIDATED FINANCIAL DATA OF THEGLOBE.COM, INC. (1)
The
selected consolidated balance sheet data as of December 31, 2006 and 2005 and
the selected consolidated operating data for the years ended December 31, 2006,
2005 and 2004 have been derived from our audited consolidated financial
statements included elsewhere herein. The selected consolidated balance sheet
data as of December 31, 2004, 2003 and 2002 and the selected consolidated
operating data for the years ended December 31, 2003 and 2002 have been derived
from our audited consolidated financial statements not included herein. The
nature of our business has changed significantly from 2002 to 2006. As a result,
our historical results are not necessarily comparable. Additionally, our
historical results are not necessarily indicative of results for any future
period. You should read these selected consolidated financial data, together
with the accompanying notes, in conjunction with the “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” section of this
10-K and our consolidated financial statements and the related notes.
Year
Ended December 31,
|
||||||||||||||||
|
2006
|
2005(2)
|
2004
|
2003
|
2002
|
|||||||||||
Operating
Data:
|
(In
thousands, except per share data)
|
|||||||||||||||
Continuing
Operations:
|
||||||||||||||||
Net
revenue
|
$
|
3,482
|
$
|
2,395
|
$
|
3,499
|
$
|
5,284
|
$
|
7,245
|
||||||
Operating
expenses
|
20,470
|
24,940
|
27,921
|
14,097
|
10,186
|
|||||||||||
|
||||||||||||||||
Loss
from continuing operations
|
(16,974
|
)
|
(13,348
|
)
|
(24,876
|
)
|
(11,034
|
)
|
(2,615
|
)
|
||||||
Discontinued
operations, net of tax
|
—
|
1,838
|
603
|
—
|
—
|
|||||||||||
Net
loss
|
(16,974
|
)
|
(11,510
|
)
|
(24,273
|
)
|
(11,034
|
)
|
(2,615
|
)
|
||||||
Net
loss applicable to common
|
||||||||||||||||
stockholders
|
(16,974
|
)
|
(11,510
|
)
|
(24,273
|
)
|
(19,154
|
)
|
(2,615
|
)
|
||||||
|
||||||||||||||||
Basic
and diluted net loss per
|
||||||||||||||||
common
share:
|
||||||||||||||||
Loss
from continuing operations
|
$
|
(0.10
|
)
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
$
|
(0.49
|
)
|
$
|
(0.09
|
)
|
|
Net
loss
|
(0.10
|
)
|
(0.06
|
)
|
(0.19
|
)
|
(0.49
|
)
|
(0.09
|
)
|
||||||
|
||||||||||||||||
Balance
Sheet Data (at end of period):
|
||||||||||||||||
|
||||||||||||||||
Total
assets
|
$
|
7,405
|
$
|
21,411
|
$
|
34,017
|
$
|
7,172
|
$
|
3,047
|
||||||
Long-term
debt
|
—
|
—
|
27
|
1,793
|
88
|
(1)
Certain prior year amounts have been reclassified to conform to the current
year
presentation. These reclassifications had no effect on the net losses as
previously reported by the Company. Significant events affecting our historical
performance in 2004 through 2006 are described in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(2)
2005
consolidated financial data include transactions related to (i) the sale of
the
business and substantially all of the net assets of SendTec, Inc. to
RelationServe Media, Inc. on October 31, 2005 (the “SendTec Asset Sale”) and the
resultant gain on sale of approximately $1.7 million, and (ii) the repurchase
of
Common Stock and termination of stock options and warrants in accordance with
certain SendTec Asset Sale ancillary agreements, including the Redemption
Agreement and the Termination Agreement.
29
BASIS
OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS; GOING
CONCERN
Certain
matters discussed below under “Liquidity and Capital Resources” raise
substantial doubt about our ability to continue as a going concern. In addition,
we have received a report from our independent accountants, relating to our
December 31, 2006 audited financial statements containing an explanatory
paragraph stating that our recurring losses from operations and our accumulated
deficit raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly,
our
consolidated financial statements do not include any adjustments relating to
the
recoverability of assets and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
OVERVIEW
During
2006 theglobe.com, inc. (the "Company" or "theglobe") managed three primary
lines of business, as follows:
· |
Computer
games businesses —
Our print
publication business comprised of Computer Games magazine and MMOGames
magazine (renamed from Massive Magazine in the first quarter of
2007); our
online website business, comprised of the CGOnline website (www.cgonline.com),
the MMOGames magazine website (www.mmogamesmag.com)
and the Game Swap Zone website (www.gameswapzone.com);
and our e-commerce games distribution company, Chips & Bits, Inc.
(www.chipsbits.com).
Our Now Playing magazine publication and the accompanying website
were
sold in January 2006;
|
· |
Voice
over Internet Protocol (“VoIP”) telephony services business — Consisting
of tglo.com, inc. (formerly known as voiceglo Holdings, Inc.).
The term
“VoIP” refers to a category of hardware and software that enables people
to use the Internet to make phone calls;
and
|
· |
Internet
services business - Consisting of Tralliance Corporation which
is the
registry for the “.travel” top-level Internet
domain.
|
In
March
2007, management and the Board of Directors made the decision to shutdown the
operations of both its Computer Games and VoIP telephony services lines of
business and to focus 100% of its resources and efforts to further develop
its
Internet services business. See the "Liquidity and Capital Resources" section
of
this Management's Discussion and Analysis of Financial Condition and Results
of
Operations for a more complete discussion.
On
October 31, 2005, we completed the sale of the business and substantially all
of
the net assets of SendTec, Inc. (“SendTec”), a direct response marketing
services and technology company, for approximately $39.9 million in cash. We
acquired SendTec effective September 1, 2004. Results of operations for SendTec
have been reported separately as “Discontinued Operations” in the accompanying
consolidated statements of operations for the years ended December 31, 2005
and
2004.
The
nature of our business has significantly changed from 2004 to 2006. As a result
of our decision to enter into the VoIP business, we have incurred substantial
expenditures without corresponding revenue as we attempted to develop our VoIP
product line and as we put into place the infrastructure for our VoIP products.
In addition, we entered into two new business lines, marketing services and
Internet services, as a result of our acquisitions of SendTec on September
1,
2004 and Tralliance on May 9, 2005, respectively. In addition, we sold the
business and substantially all of the net assets of SendTec effective October
31, 2005, and as a result have reported SendTec’s results of operations as
“Discontinued Operations” for the years ended December 31, 2005 and 2004. The
results of operations of Tralliance are included in the Company's consolidated
operating results only from its date of acquisition. Consequently, and primarily
as a result of these factors, the results of operations for each of the years
ended December 31, 2006, 2005 and 2004 are not necessarily comparable.
30
YEAR
ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
NET
REVENUE. Net revenue totaled $3.5 million for the year ended December 31, 2006
as compared to $2.4 million for the year ended December 31, 2005. The $1.1
million increase in consolidated net revenue was principally the result of
the
additional revenue generated by our Internet services business segment.
NET
REVENUE BY BUSINESS SEGMENT:
Years
ended:
|
2006
|
2005
|
|||||
Computer
games
|
$
|
2,038,649
|
$
|
1,948,716
|
|||
Internet
services
|
1,408,737
|
197,873
|
|||||
VoIP
telephony services
|
34,638
|
248,789
|
|||||
|
$
|
3,482,024
|
$
|
2,395,378
|
Increases
of $72 thousand in net revenue derived from print advertisements in our magazine
publications and $97 thousand in sales of our magazines as compared to the
year
ended December 31, 2005, were partially offset by a $79 thousand decrease in
sales of products by our e-commerce games distribution company.
Advertising
revenue from the sale of print advertisements in our magazine publications
totaled approximately $1.4 million in each of the years ended December 31,
2006
and 2005, while net revenue attributable to the sale of our magazine
publications totaled $417 thousand in 2006 compared to $320 thousand in 2005.
Approximately 87% and 95% of the net revenue generated by our publishing
operations, or $1.6 million, in each of 2006 and 2005, respectively, was
attributable to our magazine publication which is focused on PC gaming. Over
the
last several years, the market for PC games has deteriorated, while the console
games market has experienced growth. This shift in the gaming market negatively
impacted the print advertising sales and circulation of our magazine focused
on
PC gaming. In order to attempt to capture market share of the current gaming
audience, we introduced a new quarterly magazine publication in September 2006
which focuses on “massively multiplayer online” (“MMO”) games, which contributed
approximately $247 thousand in net revenue during 2006. During January 2006,
we
completed the sale of our Now Playing magazine which had contributed
approximately $78 thousand in net revenue during 2005.
Sales
of
products by our e-commerce games distribution business totaled approximately
$186 thousand, or 5% of consolidated net revenue, for the year ended December
31, 2006. This represented a decline from the $265 thousand, or 11% of
consolidated net revenue, reported for the year ended December 31, 2005. Our
e-commerce games distribution business continued to operate in a highly
competitive environment, experiencing competitive pressure from other Internet
commerce websites such as Amazon.com. In addition, an increasing number of
major
retailers have increased the selection of video, console and PC games offered
by
both their traditional “bricks and mortar” locations and their online commerce
sites resulting in increased competition.
Our
Internet services business, Tralliance, contributed $1.4 million in net revenue
for the year ended December 31, 2006 as compared to $198 thousand for the prior
year. Tralliance, which was acquired in May 2005, began collecting fees for
Internet domain name registrations in October 2005. Thus, the results of
operations for 2006 include a full year of revenue recognition related to the
operations of Tralliance versus three months of revenue recognition during
2005.
Net revenue attributable to such domain name registrations is recognized as
revenue on a straight-line basis over the term of the registrations.
Net
revenue generated by our VoIP telephony services division totaled $35 thousand
in 2006 as compared to $249 thousand in 2005. During the second quarter of
2006,
the Company discontinued offering service to its small VoIP “paid” plan customer
base and completed the implementation of a plan to significantly reduce the
excess capacity and operating costs of its VoIP network.
31
OPERATING
EXPENSES BY BUSINESS SEGMENT:
2006
|
Cost
of
Revenue
|
Sales
and Marketing
|
Product
Development
|
General
and Administrative
|
Depreciation
and Amortization
|
Total
|
|||||||||||||
Computer
games
|
$
|
1,173,118
|
$
|
578,368
|
$
|
498,434
|
$
|
483,940
|
$
|
28,286
|
$
|
2,762,146
|
|||||||
Internet
services
|
454,563
|
3,109,533
|
—
|
1,768,065
|
232,575
|
5,564,736
|
|||||||||||||
VoIP
telephony services
|
2,532,994
|
300,150
|
880,711
|
4,910,733
|
785,379
|
9,409,967
|
|||||||||||||
Corporate
expenses
|
—
|
—
|
—
|
2,703,783
|
29,616
|
2,733,399
|
|||||||||||||
|
$
|
4,160,675
|
$
|
3,988,051
|
$
|
1,379,145
|
$
|
9,866,521
|
$
|
1,075,856
|
$
|
20,470,248
|
2005
|
Cost
of Revenue
|
Sales
and Marketing
|
Product
Development
|
General
and Administrative
|
Depreciation
and Amortization
|
Total
|
|||||||||||||
Computer
games
|
$
|
2,049,896
|
$
|
537,005
|
$
|
697,803
|
$
|
780,258
|
$
|
30,845
|
$
|
4,095,807
|
|||||||
Internet
services
|
86,486
|
488,275
|
—
|
831,269
|
87,112
|
1,493,142
|
|||||||||||||
VoIP
telephony services
|
6,288,577
|
1,692,420
|
693,056
|
3,611,686
|
1,109,743
|
13,395,482
|
|||||||||||||
Corporate
expenses
|
—
|
—
|
—
|
5,918,956
|
36,598
|
5,955,554
|
|||||||||||||
|
$
|
8,424,959
|
$
|
2,717,700
|
$
|
1,390,859
|
$
|
11,142,169
|
$
|
1,264,298
|
$
|
24,939,985
|
COST
OF
REVENUE. Cost of revenue totaled $4.2 million for the year ended December 31,
2006 as compared to $8.4 million for the year ended December 31, 2005. The
$4.2
million decrease in consolidated cost of revenue was principally attributable
to
the decline in cost of revenue of the VoIP telephony services segment.
Cost
of
revenue related to our computer games business segment consists primarily of
printing, delivery and other fulfillment costs of our games magazines and the
cost of merchandise sold and shipping fees in connection with our e-commerce
games distribution business. Cost of revenue of our computer games segment
totaled $1.2 million for the year ended December 31, 2006, a decrease of $877
thousand, or 43%, from the prior year. The decline in cost of revenue as
compared to 2005 was principally the result of lower printing, paper and freight
costs incurred in the production of our magazine publications. We reduced the
total number of copies printed for each issue of our magazines and also
published one less issue of our monthly gaming publication in 2006 as compared
to 2005. In addition, the cost of revenue associated with our e-commerce games
distribution business also declined as compared to 2005 primarily due to a
lower
volume of games sold.
Cost
of
revenue of our Internet services division consists primarily of fees paid to
third party service providers which furnish outsourced services, including
verification of registration eligibility, maintenance of the “.travel” directory
of consumer-oriented registrant travel data, as well as other services. Fees
for
some of these services vary based on transaction levels or transaction types.
Fees incurred for outsourced services are generally deferred and amortized
to
cost of revenue over the term of the related domain name registration. The
results of operations for 2006 include a full year of cost of revenue related
to
the operations of Tralliance versus three months of costs during 2005, the
principal factor contributing to the $368 thousand increase in cost of revenue
as compared to the prior year. Cost of revenue as a percent of net revenue
was
approximately 32% for 2006 as compared to 44% for 2005. This was due in part
to
Tralliance performing more verifications of registration eligibility in-house
during the last half of 2006.
Cost
of
revenue of our VoIP telephony services business segment is principally comprised
of network data center, carrier transport and circuit interconnection costs,
as
well as personnel and consulting costs incurred in support of our Internet
telecommunications network. During 2006, we placed significant emphasis on
the
reduction of excess capacity of our VoIP network, which included the
renegotiation, non-renewal and/or termination of certain network agreements,
as
well as network personnel cost reductions. These efforts, as well as steps
taken
during the latter half of 2005 to reduce network support costs resulted in
the
$3.8 million decrease in cost of revenue of our VoIP telephony services business
segment as compared to 2005. Network data center and carrier costs decreased
$2.4 million, or 58%, and direct costs of employees supporting our Internet
telecommunications network declined $588 thousand, or 58%, in comparison to
the
year ended December 31, 2005. Additionally, costs related to the purchase of
network software declined $379 thousand as compared to 2005. The Company
discontinued the capitalization of software development costs in its VoIP
telephony business and began charging such costs to operations as
incurred.
32
SALES
AND
MARKETING. Sales and marketing expenses consist primarily of salaries and
related expenses of sales and marketing personnel, commissions, advertising
and
marketing costs, public relations expenses and promotional activities. Sales
and
marketing expenses totaled $4.0 million for the year ended December 31, 2006,
an
increase of $1.3 million from the $2.7 million reported for 2005.
On
November 22, 2006, the Company entered into certain marketing services
agreements with two entities and issued 10,000,000 warrants to the controlling
shareholder of the entities as consideration. The fair value attributable to
the
warrants of $515 thousand, as calculated using the Black Scholes model, was
charged to sales and marketing expenses of Tralliance as the two entities will
be focusing their marketing efforts on our Internet services business. Excluding
the charge related to the warrants, sales and marketing expenses of Tralliance
totaled $2.6 million for the year ended December 31, 2006, or an increase of
$2.1 million from the prior year. During August 2006, Tralliance introduced
its
web portal and search engine, www.search.travel,
through
the use of a targeted television and Internet advertising campaign. As a result,
total 2006 advertising costs of Tralliance increased $619 thousand from 2005
to
a total of $678 thousand. In addition, during the third quarter of 2006,
Tralliance engaged several outside parties to promote its registry operations
and the www.search.travel
website
internationally, which resulted in the recognition of $442 thousand of
consulting fees and related costs. The Company also reassigned personnel from
its VoIP telephony services division during 2006 to perform marketing functions
for Tralliance which resulted in a $508 thousand increase in sales and marketing
personnel costs of Tralliance as compared to 2005. The remaining $538 thousand
increase in Tralliance’s sales and marketing expenses as compared to the year
ended December 31, 2005, consisted primarily of higher public relations, trade
show and promotional costs.
Sales
and
marketing expenses of our VoIP telephony services business segment totaled
$300
thousand for the year ended December 31, 2006, a decrease of $1.4 million,
or
82%, from the prior year. During 2005, the Company re-evaluated its existing
VoIP telephony services business plan and began the process of terminating
and/or modifying certain of its then existing product offerings and marketing
programs. During 2006, the Company refocused its efforts on the further
expansion of its “peer-to-peer”, or free service plan, customer base. As a
result, the VoIP telephony services business segment significantly reduced
its
sales and marketing spending. Additionally, as discussed in the paragraph above,
the Company reassigned certain personnel from its VoIP telephony services
division during 2006 to perform marketing and administrative functions for
Tralliance.
PRODUCT
DEVELOPMENT. Product development expenses include salaries and related personnel
costs; expenses incurred in connection with website development, testing and
upgrades; editorial and content costs; and costs incurred in the development
of
our VoIP telephony products. Product development expenses totaled $1.4 million
in each of the years ended December 31, 2006 and 2005. A $199 thousand decrease
in product development costs incurred by our computer games businesses as
compared to 2005, resulting principally from lower website development costs,
was almost entirely offset by a $188 thousand increase in product development
expenses incurred by our VoIP telephony services division, due primarily to
higher personnel costs.
GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and other personnel costs related to management, finance
and accounting functions, facilities, outside legal and professional fees,
information-technology consulting, directors and officers insurance, bad debt
expenses and general corporate overhead costs. As discussed in Note 14,
“Litigation,” in the Notes to Consolidated Financial Statements, on March 15,
2007, the Company and Michael Egan entered into a Settlement Agreement with
MySpace, Inc. (the “Settlement Agreement”). The Settlement Agreement required,
among other things, the Company to pay to MySpace approximately $2.6 million
in
cash on or before April 5, 2007. Excluding the $2.6 million settlement, as
well
as an increase of $680 thousand in attorneys’ fees incurred by the VoIP
telephony services division as compared to 2005, consolidated general and
administrative expenses declined $4.5 million as compared to the prior year.
This decrease was principally due to $3.0 million lower bonus awards to
executive officers. In addition, excluding the legal costs mentioned previously,
general and administrative expenses of our VoIP telephony services division
decreased $1.9 million, or 63%, as compared to the prior year primarily due
to
lower employee bonuses and information technology consulting costs. General
and
administrative expenses of our Internet services business increased $937
thousand as compared to 2005 primarily due to increases in personnel costs
of
$340 thousand and travel and entertainment costs of $356 thousand. During 2006,
we reassigned employees from the VoIP telephony services division in order
to
accommodate the increase in authentication and registration activity experienced
by Tralliance. In order to increase awareness of the “.travel” top-level domain,
we have increased our participation in travel industry meetings and conferences,
both nationally and internationally, since the October 2005 launch of our
“.travel” domain registry operations which was the principal factor contributing
to the increase in travel and entertainment costs.
33
As
discussed in Note 1, “Organization and Summary of Significant Accounting
Policies,” and Note 11, “Stock Option Plans,” of the Notes to Consolidated
Financial Statements, we adopted Statement of Financial Accounting Standards
No.
123R (“SFAS No. 123R”) effective January 1, 2006 using the modified prospective
application method. SFAS No. 123R generally requires all companies to apply
a
fair-value-based measurement method in accounting for share-based payment
transactions with employees and to recognize the related cost in its financial
statements. As a result, general and administrative expenses of the corporate
division included approximately $436 thousand of additional stock compensation
expense recognized in accordance with the requirements of SFAS No. 123R. Prior
to January 1, 2006, we accounted for employee stock options pursuant to
Accounting Principles Board Opinion No. 25 and financial results in the
accompanying consolidated financial statements for prior periods have not been
restated to give effect to the provisions of SFAS No. 123R. At December 31,
2006, there was approximately $542 thousand of unrecognized compensation expense
related to unvested stock options, excluding the 550,000 options which vest
on
the achievement of certain performance targets, which is expected to be
recognized over a weighted-average period of 1.5 years.
DEPRECIATION
AND AMORTIZATION. Depreciation and amortization expense totaled $1.1 million
for
the year ended December 31, 2006 as compared to $1.3 million for the prior
year.
The $324 thousand decrease in depreciation and amortization expense incurred
by
our VoIP telephony services division as compared to 2005 was partially offset
by
an increase of $145 thousand in depreciation and intangible asset amortization
expenses incurred by our Internet services business.
INTEREST
INCOME (EXPENSE), NET. Interest income, net of interest expense, totaled $120
thousand for the year ended December 31, 2006. During the year ended December
31, 2005, we reported a total of $4.1 million of net interest expense. A total
of $4.0 million of non-cash interest expense was recorded during 2005 related
to
the beneficial conversion features of the $4.0 million of secured demand
convertible promissory notes issued by the Company during 2005.
OTHER
INCOME (EXPENSE), NET. Other income, net, of $19 thousand reported for 2006
included a $130 thousand net gain on the sale of our Now Playing Magazine
publication and associated website and a $130 thousand net loss on the sale
of
certain VoIP property and equipment. Other expense, net, of $274 thousand
reported for 2005 included $280 thousand of reserves provided against amounts
loaned by the Company to Tralliance prior to its acquisition in May
2005.
INCOME
TAXES. The income tax provision of $124 thousand recognized for continuing
operations for the year ended December 31, 2006, resulted from additional state
income taxes due upon the finalization of the Company’s 2005 consolidated tax
returns. An income tax benefit of $13.6 million was recognized for continuing
operations for the year ended December 31, 2005, as we were able to utilize
our
2005 losses incurred by continuing operations, as well as losses from prior
years, to partially offset the 2005 income and gain on sale of our discontinued
operations. As of December 31, 2006, the Company had net operating loss
carryforwards available for U.S. tax purposes of approximately $162 million.
These carryforwards expire through 2026. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Due to various
significant changes in our ownership interests, as defined in the Internal
Revenue Code of 1986, as amended, we have substantially limited the availability
of our net operating loss carryforwards. There can be no assurance that we
will
be able to utilize any net operating loss carryforwards in the future.
34
DISCONTINUED
OPERATIONS
As
mentioned previously, the Company sold the business and substantially all of
the
net assets of SendTec, its marketing services business, effective October 31,
2005. SendTec was originally acquired by the Company on September 1, 2004.
Accordingly, the results of SendTec have been reported as discontinued
operations for the year ended December 31, 2005.
Income
from the activities of discontinued operations, net of income taxes, totaled
approximately $69 thousand for the year ended December 31, 2005. The gain on
the
sale of SendTec included in the Company’s results of operations for 2005,
totaled approximately $1.8 million, net of an income tax provision of
approximately $13.2 million. Reference should be made to Note 3, “Discontinued
Operations - SendTec, Inc.”, of the Notes to Consolidated Financial Statements
for details regarding the sale.
YEAR
ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
CONTINUING
OPERATIONS
NET
REVENUE. Net revenue totaled $2.4 million for the year ended December 31, 2005
as compared to $3.5 million for the year ended December 31, 2004. The $1.1
million decrease in consolidated net revenue was principally the result of
the
$1.2 million decline in the net revenue of our computer games business segment.
NET
REVENUE BY BUSINESS SEGMENT:
Years
ended:
|
2005
|
2004
|
|||||
Computer
games
|
$
|
1,948,716
|
$
|
3,107,637
|
|||
Internet
services
|
197,873
|
—
|
|||||
VoIP
telephony services
|
248,789
|
391,154
|
|||||
|
$
|
2,395,378
|
$
|
3,498,791
|
Decreases
of $637 thousand in print advertisements in our magazine publications, $441
thousand in sales of games products by our e-commerce games distribution company
and $81 thousand in sales of our magazines, accounted for the decline in net
revenue experienced by our computer games segment as compared to 2004.
Advertising
revenue from the sale of print advertisements in our magazine publications
totaled $1.4 million and $2.0 million for the years ended December 31, 2005
and
2004, respectively, or approximately 57% of each year’s consolidated net
revenue. Net
revenue attributable to the sale of our magazine publications totaled $320
thousand in 2005 compared to $401 thousand in 2004. Our PC gaming focused
magazine publication accounted for approximately 95% of the net revenue derived
from our publishing business in 2005. As stated in the comparison of the year
ended December 31, 2006 compared to the year ended December 31, 2005, over
the
last several years, the market for PC games has deteriorated, while the console
games market has experienced growth. This shift in the gaming market negatively
impacted our print advertising sales and the circulation of our PC gaming
magazine.
Sales
of
products by our e-commerce games distribution business totaled approximately
$265 thousand, or 11% of consolidated net revenue, for the year ended December
31, 2005. This represented a decline from the $706 thousand, or 20% of
consolidated net revenue, reported for the year ended December 31, 2004.
Our
Internet services business, Tralliance, contributed $198 thousand in net revenue
for the year ended December 31, 2005. Tralliance, which was acquired in May
2005, began collecting fees for Internet domain name registrations in October
2005. Net revenue attributable to such domain name registrations is recognized
as revenue on a straight-line basis over the term of the registrations.
Net
revenue generated by our VoIP telephony services division totaled $249 thousand
in 2005 as compared to $391 thousand in 2004. During 2004 and 2005, we continued
to experience difficulties in creating customer awareness and gaining customer
acceptance of our paid VoIP telephony products. As a result, we revised our
VoIP
product offerings and shifted our focus on the development of new products
and
features. In addition, as a result of the liquidity issues experienced by the
Company during 2005, VoIP marketing and advertising programs were curtailed.
35
OPERATING
EXPENSES BY BUSINESS SEGMENT:
2005
|
Cost
of Revenue
|
Sales
and Marketing
|
Product
Development
|
General
and Administrative
|
Depreciation
and Amortization
|
Total
|
|||||||||||||
Computer
games
|
$
|
2,049,896
|
$
|
537,005
|
$
|
697,803
|
$
|
780,258
|
$
|
30,845
|
$
|
4,095,807
|
|||||||
Internet
services
|
86,486
|
488,275
|
—
|
831,269
|
87,112
|
1,493,142
|
|||||||||||||
VoIP
telephony services
|
6,288,577
|
1,692,420
|
693,056
|
3,611,686
|
1,109,743
|
13,395,482
|
|||||||||||||
Corporate
expenses
|
—
|
—
|
—
|
5,918,956
|
36,598
|
5,955,554
|
|||||||||||||
|
$
|
8,424,959
|
$
|
2,717,700
|
$
|
1,390,859
|
$
|
11,142,169
|
$
|
1,264,298
|
$
|
24,939,985
|
2004
|
Cost
of Revenue
|
Sales
and Marketing
|
Product
Development
|
General
and Administrative
|
Depreciation
and Amortization
|
Total
|
|||||||||||||
Computer
games
|
$
|
2,114,716
|
$
|
377,531
|
$
|
475,785
|
$
|
571,285
|
$
|
10,606
|
$
|
3,549,923
|
|||||||
VoIP
telephony services
|
6,940,023
|
6,720,531
|
578,101
|
3,266,366
|
1,355,532
|
18,860,553
|
|||||||||||||
Corporate
expenses
|
—
|
—
|
—
|
3,409,123
|
32,138
|
3,441,261
|
|||||||||||||
|
$
|
9,054,739
|
$
|
7,098,062
|
$
|
1,053,886
|
$
|
7,246,774
|
$
|
1,398,276
|
25,851,737
|
||||||||
VoIP
telephony services:
|
|||||||||||||||||||
Impairment
charge
|
1,661,975
|
||||||||||||||||||
Loss
on settlement of
|
|||||||||||||||||||
contractual
obligation
|
406,750
|
||||||||||||||||||
|
$
|
27,920,462
|
COST
OF
REVENUE. Cost of revenue totaled $8.4 million for the year ended December 31,
2005 as compared to $9.1 million for the year ended December 31, 2004. The
$630
thousand decrease in consolidated cost of revenue was principally attributable
to the decline in cost of revenue of the VoIP telephony services segment.
Cost
of
revenue of our computer games segment totaled $2.0 million for the year ended
December 31, 2005, a decrease of $65 thousand from the year ended December
31,
2004. A decline of $268 thousand in cost of revenue associated with our
e-commerce games distribution business resulting primarily from a lower volume
of games sold as compared to 2004 was partially offset by a $203 thousand
increase in cost of revenue attributable to our magazine publishing business.
We
began distribution of a new publication, Now Playing magazine, in March 2005
which was the principal factor contributing to the increase in cost of revenue
compared to 2004. We sold Now Playing magazine and the accompanying website
in
January 2006 for $130 thousand in cash.
During
the years ended December 31, 2005 and 2004, VoIP telephony services cost of
revenue included charges of approximately $71 thousand and $1.5 million,
respectively, related to write-downs of telephony equipment inventory. Excluding
the impact of such charges on both 2005 and 2004, cost of revenue of our VoIP
telephony services division increased $754 thousand as compared to 2004.
Throughout 2004, the Company increased its VoIP network capacity by entering
into agreements with numerous carriers for leased equipment and services and
with third parties for a number of leased data center facilities. The Company
also expanded its internal network support function by hiring additional
technical personnel. Due to the ramp-up of network costs during 2004, the
Company incurred higher network operating and support costs during 2005 compared
to 2004. In addition, the Company discontinued the capitalization of software
development costs in its VoIP telephony business and began charging such costs
to expense as incurred as a result of the review of long-lived assets for
impairment performed in connection with the preparation of its 2004 year-end
consolidated financial statements. Cost of revenue for the year ended December
31, 2005 included approximately $420 thousand in expenses related to such
software costs.
36
SALES
AND
MARKETING. Sales and marketing expenses totaled $2.7 million for the year ended
December 31, 2005, a decrease of $4.4 million from the $7.1 million reported
for
2004. The VoIP telephony services business incurred significant costs during
2004 for Internet and television advertising campaigns, as well as commissions
expenses related to its VoIP products. During the first quarter of 2005, the
Company re-evaluated its existing VoIP telephony services business plan and
began the process of terminating and/or modifying certain of its existing
product offerings and marketing programs. The Company also began to develop
and
test certain new VoIP products and features. As a result, the VoIP telephony
services business segment essentially curtailed its sales and marketing efforts
in 2005, which resulted in a year over year decline of $5.0 million in this
expense category as compared to 2004. Partially offsetting this decline were
the
sales and marketing expenses incurred by Tralliance since date of acquisition
of
$488 thousand and an increase of $159 thousand in sales and marketing expenses
of our computer games segment.
PRODUCT
DEVELOPMENT. Product development expenses totaled $1.4 million for the year
ended December 31, 2005 as compared to $1.1 million for the year ended December
31, 2004. The increase in product development expenses as compared to 2004
was
primarily due to increases in website development costs incurred by our computer
games businesses and personnel costs related to the continued development of
our
retail VoIP telephony products.
GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses of $11.1
million for the year ended December 31, 2005 increased $3.9 million from the
$7.2 million reported for 2004. The primary factors contributing to the increase
in consolidated general and administrative expenses as compared to 2004 were
$3.0 million in higher bonuses awarded to executive officers and the inclusion
of approximately $831 thousand in general and administrative expenses incurred
by our Internet services business in 2005. Tralliance, which comprises our
Internet services segment, was acquired in May 2005 and the results of its
operations have been included in our results only since its date of acquisition.
DEPRECIATION
AND AMORTIZATION. Depreciation and amortization expense totaled $1.3 million
for
the year ended December 31, 2005 as compared to $1.4 million for the year ended
December 31, 2004. Depreciation and amortization expense incurred by our VoIP
telephony services division declined approximately $246 thousand in comparison
to 2004 primarily as a result of the write-off of certain long-lived assets
as
of December 31, 2004.
INTEREST
EXPENSE, NET. Interest expense, net of interest income, totaled $4.1 million
for
the year ended December 31, 2005 as compared to $666 thousand in 2004. A total
of $4.0 million of non-cash interest expense was recorded during 2005 related
to
the beneficial conversion features of the $4.0 million of secured demand
convertible promissory notes issued by the Company during 2005. During 2004,
approximately $687 thousand of non-cash interest expense was recorded related
to
the beneficial conversion feature of the $2.0 million demand convertible
promissory note acquired by our Chairman and Chief Executive Officer and his
spouse in February 2004.
OTHER
EXPENSE, NET. Other expense, net, included reserves against the amounts loaned
by the Company to Tralliance prior to its acquisition, totaling approximately
$280 thousand and $507 thousand in 2005 and 2004, respectively. Partially
offsetting the 2004 expense, was a favorable settlement of a vendor claim
previously disputed by the computer games business segment of approximately
$350
thousand.
INCOME
TAXES. An income tax benefit of $13.6 million was recognized for continuing
operations for the year ended December 31, 2005, as we were able to utilize
our
2005 losses incurred by continuing operations, as well as losses from prior
years, to partially offset the 2005 income and gain on sale of our discontinued
operations. During the year ended December 31, 2004, an income tax benefit
of
approximately $371 thousand was recognized for continuing operations which
served to offset the income tax provision recorded for discontinued
operations.
DISCONTINUED
OPERATIONS
As
mentioned previously, the Company sold the business and substantially all of
the
net assets of SendTec, its marketing services business, effective October 31,
2005. SendTec was originally acquired by the Company on September 1, 2004.
Accordingly, the results of SendTec have been reported as discontinued
operations in the accompanying consolidated statements of operations for the
years ended December 31, 2005 and 2004.
37
Income
from the activities of discontinued operations, net of income taxes, totaled
approximately $69 thousand for the year ended December 31, 2005 compared to
$602
thousand for the year ended December 31, 2004. The gain on the sale of SendTec
included in the Company’s results of operations for 2005, totaled approximately
$1.8 million, net of an income tax provision of approximately $13.2 million.
Reference should be made to Note 3, “Discontinued Operations - SendTec, Inc.”,
of the Notes to Consolidated Financial Statements for details regarding the
sale.
FUTURE
AND CRITICAL NEED FOR CAPITAL
For
the
reasons described below, Company management does not believe that cash on hand
and cash flow generated internally by the Company will be adequate to fund
the
operation of its businesses beyond a short period of time. Additionally, we
have
received a report from our independent accountants, relating to our December
31,
2006 audited financial statements, containing an explanatory paragraph stating
that our recurring losses from operations and our accumulated deficit raise
substantial doubts about our ability to continue as a going
concern.
On
June
1, 2006, MySpace, Inc. (“MySpace”), a Delaware corporation, filed a lawsuit in
the United States District Court for the Central District of California against
theglobe.com, inc. (the “Company”). We were served with the lawsuit on June 6,
2006. MySpace alleged that the Company sent at least 100,000 unsolicited and
unauthorized commercial email messages to MySpace members using MySpace user
accounts improperly established by the Company, that the user accounts were
used
in a false and misleading fashion and that the Company's alleged activities
constituted violations of the CAN-SPAM Act, the Lanham Act and California
Business & Professions Code § 17529.5 (the “California Act”), as well as
trademark infringement, false advertising, breach of contract, breach of the
covenant of good faith and fair dealing, and unfair competition. MySpace seeks
monetary penalties, damages and injunctive relief for these alleged violations.
It asserts entitlement to recover "a minimum of" $62.3 million of damages,
in
addition to three times the amount of MySpace's actual damages and/or
disgorgement of the Company's purported profits from alleged violations of
the
Lanham Act, punitive damages and attorneys’ fees. Subsequent discovery in the
case disclosed that the total number of unsolicited messages was approximately
400,000.
On
February 28, 2007, the Court entered an order (the “Order”) granting in part
MySpace’s motion for summary judgment, finding that the Company was liable for
violation of the CAN-SPAM Act and the California Business & Professions
Code, and for breach of contract (as embodied in MySpace’s “Terms of Service”
contract). The Order also upheld as valid that portion of MySpace’s Terms of
Service contract which provides for liquidated damages of $50 per email message
sent after March 17, 2006 in violation of such Terms. The Company estimates
that
approximately 110,000 of the emails in question were sent after such date,
which
could result in damages of approximately $5.5 million. In addition, the CAN-SPAM
Act provides for statutory damages of between $100 and $300 per email sent
in
violation of the statute. Total damages under CAN-SPAM could therefore range
between about $40 million to about $120 million. In addition, under the
California Act, statutory damages of $1 million “per incident” could be
assessed.
On
March
15, 2007, the Company entered into a Settlement Agreement with MySpace whereby
it agreed to pay MySpace approximately $2.6 million on or before April 5, 2007
in exchange for a mutual release of all claims against one another, including
any claims against the Company’s directors and officers. As part of the
settlement, Michael Egan, the Company’s CEO, who is also an affiliate of the
Company, agreed to enter into an agreement with MySpace on or before April
5th
pursuant
to which he would, among other things, provide a letter of credit, cash or
other
equivalent security (collectively, “Security”) in form and substance
satisfactory to MySpace. Such Security is to expire and be released on the
100th
day
following the Company’s payment of the foregoing $2.6 million so long as no
bankruptcy petition, assignment for the benefit of creditors or like
liquidation, reorganization or insolvency proceeding is instituted or filed
related to the Company during such 100-day period.
38
The
Company does not currently have the resources to both pay the $2.6 million
settlement amount and to fund operations beyond April 2007. The Company intends
to seek to raise capital or otherwise borrow funds with which to pay such amount
and otherwise to fund operations. Although there is no commitment to do so,
any
such funds would most likely come primarily from Mr. Egan or affiliates of
Mr.
Egan or the Company, as the Company currently has no access to credit facilities
with traditional third party lenders and has historically relied on borrowings
from related parties to meet short-term liquidity needs. Any such capital raised
would not be registered under the Securities Act of 1933 and would not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. There can be no assurance that the
Company will be successful in raising such capital or borrowing such funds
and
any capital raised will likely result in very substantial dilution of the number
of shares outstanding or which could be outstanding upon the exercise or
conversion of any derivative securities issued by the Company as part of such
capital raise. The failure to pay the $2.6 million to MySpace and/or the failure
to satisfactorily provide the Security would result in a resumption of the
litigation with MySpace and, in all likelihood, would have a material adverse
effect on the Company, including the potential bankruptcy and cessation of
business of the Company.
The
Company continues to incur consolidated net losses and management believes
that
the Company will continue to be unprofitable in the foreseeable future. As
of
February 28, 2007, the Company had a net working capital deficit of
approximately $7.3 million, inclusive of a cash and cash equivalents balance
of
approximately $4.0 million. Such working capital deficit includes a settlement
liability of approximately $2.6 million owed to MySpace and an aggregate of
$3.4
million in secured convertible demand notes (the “Convertible Notes”) and
approximately $611 thousand of accrued interest due to entities controlled
by
the Company’s Chairman and Chief Executive Officer. Inasmuch as substantially
all of the assets of the Company and its subsidiaries secure the Convertible
Notes, in connection with any resulting proceeding to collect the indebtedness
related to the Convertible Notes, the noteholders could seize and sell the
assets of the Company and its subsidiaries, any or all of which would have
a
material adverse effect on the financial condition and future operations of
the
Company, including the potential bankruptcy or cessation of business of the
Company.
It
is our
preference to avoid filing for protection under the U.S. Bankruptcy Code.
However, in order to avoid such filing and continue as a going concern, we
believe that, in addition to settling the MySpace litigation as discussed above,
we must (i) quickly raise a sufficient amount of capital; (ii) successfully
implement a business plan focused primarily on expanding our Tralliance Internet
services revenue base, and reducing Tralliance and corporate overhead expenses;
and (iii) successfully eliminate future losses incurred by our VoIP telephony
services and computer games business segments by effectuating our planned
shutdown and/or selling certain component assets of these businesses. There
can
be no assurance that the Company will be able to successfully complete any
or
all of the above actions which we believe are required in order to continue
as a
going concern.
Tralliance,
the Company’s Internet services business, began collecting fees related to its
“.travel” registry business in October 2005. In August 2006, we introduced our
online search engine dedicated to the travel industry, www.search.travel,
and
launched a national television campaign to promote the new search engine and
website. During the third quarter of 2006, we also expanded Tralliance’s
domestic and international sales and marketing infrastructure, principally
by
entering into a number of arrangements with third party consultants and
travel-related organizations. At this time, our primary objective is to quickly
and substantially increase Tralliance’s revenue levels. In this regard, we are
focused on accelerating the rate of new “.travel” domain name registrations,
both in the U.S. and in international markets, in order to generate current
revenue and to also provide a base for future registration renewal revenue.
Additionally, we are focused on generating sponsorship and search advertising
revenue streams from our newly established www.search.travel
search
engine and website. In addition to the factors set forth in the preceding
paragraph, management presently believes that its success in quickly and
substantially increasing Tralliance’s revenue levels will be a critical factor
in the Company’s ability to continue as a going concern.
In
March
2007 management and the Board of Directors of the Company made the decision
to
cease all activities related to its Computer Games businesses, including
discontinuing the operations of its magazine publications, e-commerce games
distribution business and related websites. The Company’s decision to shutdown
its Computer Games businesses was based primarily on the historical losses
sustained by these businesses during the recent past and management’s
expectations of continued future losses. The Company is currently in the process
of implementing a business shutdown plan, which includes the termination of
employee and vendor relationships and the collection and payment of outstanding
accounts receivables and payables. We are also attempting to sell certain of
the
businesses’ component assets; however, we do not expect the proceeds from such
sales to be significant. As of December 31, 2006, the carrying amount of the
major classes of the Computer Games business segment’s assets and liabilities
consisted of current assets of $600 thousand, fixed assets of $39 thousand
and
current liabilities of $321 thousand.
39
In
addition, in March 2007, management and the Board of Directors of the Company
decided to discontinue the operating, research and development
activities of
its
VoIP telephony services business and terminate all of the remaining employees
of
the business. At this time, the Company intends to only incur those costs
required to maintain the service obligations of the license agreement with
Speecho, LLC. The Company has no plans to actively market the further licensing
of its chat, VoIP and video communications technology. The Company’s decision to
discontinue the operations of its VoIP telephony services business was based
primarily on the historical losses sustained by the business during the past
several years, management’s expectations of continued losses for the foreseeable
future and estimates of the amount of capital required to attempt to
successfully monetize its business. The Company is currently in the process
of
implementing a business shutdown plan, which includes the termination of its
existing carrier and vendor relationships, as well as the payment and/or
settlement of outstanding payables. We are also attempting to sell certain
of
the businesses’ component assets; however, we do not expect the proceeds from
such sales to be significant. As of December 31, 2006, the carrying amount
of
the major classes of the VoIP telephony services business segment’s assets and
liabilities consisted of current assets of $139 thousand, fixed assets of $182
thousand and current liabilities of approximately $2.3 million.
We
are in
the process of evaluating the recoverability of our existing computer games
and
VoIP telephony services businesses’ assets, and at this time, we do not
anticipate significant future impairment or other charges in this regard. Any
such charges, if and when determined to be required, will be recorded when
identified. We are also in the process of evaluating the amount of costs
expected to be incurred in shutting down our computer games and VoIP telephony
services businesses. The amount of these shutdown costs, including costs related
to employee termination benefits and vendor contract termination costs are
not
yet certain, however, at the present time, we believe that total cash
expenditures for shutdown costs will range between $20 thousand and $135
thousand for our computer games business and between zero and $700 thousand
for
our VoIP telephony services business. We currently expect the shutdown of our
computer games and VoIP telephony services businesses to be substantially
completed by the end of the second quarter of 2007.
The
shares of our Common Stock were delisted from the NASDAQ national market in
April 2001 and are now traded in the over-the-counter market on what is commonly
referred to as the electronic bulletin board or OTCBB. Since the trading price
of our Common Stock is less than $5.00 per share, trading in our Common Stock
may also become subject to the requirements of Rule 15g-9 of the Exchange Act
if
our net tangible assets should fall below $2.0 million. Under Rule 15g-9,
brokers who recommend penny stocks to persons who are not established customers
and accredited investors, as defined in the Exchange Act, must satisfy special
sales practice requirements, including requirements that they make an
individualized written suitability determination for the purchaser; and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosures in connection with any trades involving a penny stock, including
the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with that market.
Such requirements may severely limit the market liquidity of our Common Stock
and the ability of purchasers of our equity securities to sell their securities
in the secondary market. We may also incur additional costs under state blue
sky
laws if we sell equity due to our delisting.
CASH
FLOW ITEMS
YEAR
ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
As
of
December 31, 2006, we had approximately $5.3 million in cash and cash
equivalents as compared to $16.5 million, excluding $1.0 million of funds held
in escrow, as of December 31, 2005. Net cash and cash equivalents used in
operating activities of continuing operations were $12.4 million and $17.6
million, for the years ended December 31, 2006 and 2005, respectively. The
period-to-period decrease in net cash and cash equivalents used in operating
activities of continuing operations resulted primarily from the impact of lower
losses from continuing operations before income taxes in 2006 compared to 2005,
partially offset by lower non-cash expenses and lower favorable working capital
changes in 2006 compared to 2005. The operating activities of discontinued
operations provided approximately $3.0 million of net cash and cash equivalents
during 2005.
40
Net
cash
and cash equivalents of $1.2 million were provided by investing activities
during the year ended December 31, 2006. As a result of the October 2005 sale
of
the SendTec business, we were required to place $1.0 million of cash in an
escrow account to secure our indemnification obligations. In March 2006,
pursuant to the related escrow agreement, $750 thousand of the escrow funds
were
released to the Company, with the remaining $250 thousand released in December
2006. The remaining $32 thousand in escrow funds released during 2006
represented funds which had been held in escrow in connection with sweepstakes
promotions conducted by the VoIP telephony services division. In addition,
during 2006, we received proceeds of $138 thousand from the sale of certain
VoIP
property and equipment and $130 thousand from the sale of our Now Playing
magazine publication and website. During 2005, our continuing operations used
a
total of $1.4 million in investing activities, including the $1.0 million in
funds placed in escrow as a result of the SendTec sale mentioned above, $296
thousand for capital expenditures and $280 thousand of loans to Tralliance
prior
to its acquisition by the Company.
Cash
proceeds related to the October 31, 2005 sale of our SendTec marketing services
business, net of related transaction costs and cash held by SendTec of
approximately $2.4 million which was included in the sale, totaled approximately
$34.8 million. Immediately following the sale of the SendTec business on October
31, 2005, we completed the redemption of approximately 28.9 million shares
of
our Common Stock owned by six members of management of SendTec for approximately
$11.6 million in cash pursuant to a Redemption Agreement dated August 23, 2005.
Approximately $7.6 million of the redemption payment was allocated to the
SendTec sale transaction and recorded as a reduction of the gain on the sale,
with the remaining $4.0 million of the redemption payment attributed to the
“fair value” of the shares of theglobe’s Common Stock redeemed and recorded as
treasury shares. The “fair value” of the shares for financial accounting
purposes was calculated based on the closing price of the Company’s Common Stock
as reflected on the OTCBB on August 10, 2005, the date the principal terms
of
the Redemption Agreement were announced publicly. The closing of the redemption
occurred on October 31, 2005.
Cash
and
cash equivalents used in financing activities totaled $12 thousand and $1.2
million for the years ended December 31, 2006 and 2005, respectively. During
2005, we received proceeds of $4.0 million from the issuance of Convertible
Notes and we also paid $1.4 million of outstanding debt balances. As mentioned
above, approximately $4.0 million of the total $11.6 million cash paid for
the
redemption of the 28.9 million shares of our Common Stock from the former
management of SendTec was attributed to the “fair value” of the Common Stock
issued for financial accounting purposes.
YEAR
ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
As
of
December 31, 2005, we had approximately $16.5 million in cash and cash
equivalents as compared to $6.7 million as of December 31, 2004. These balances
do not include cash held in escrow accounts totaling approximately $1.0 million
and $93 thousand as of December 31, 2005 and 2004, respectively. Net cash and
cash equivalents used in operating activities of continuing operations were
$17.6 million and $19.6 million, for the years ended December 31, 2005 and
2004,
respectively.
The
period-to-period decrease in net cash and cash equivalents used in operating
activities of continuing operations resulted primarily from decreased net losses
attributable to continuing operations in combination with the impact of higher
non-cash interest expense and favorable working capital changes in 2005 compared
to 2004, partially offset by the $13.6 million deferred tax benefit recorded
for
continuing operations for 2005.
Net
cash
and cash equivalents provided by operating activities of discontinued operations
totaled approximately $3.0 million in 2005, an increase of $1.1 million from
the
$1.9 million reported for 2004.
Net
cash
and cash equivalents of $1.4 million were used in investing activities of
continuing operations during the year ended December 31, 2005 as compared to
$3.1 million in 2004. Net funds placed in escrow accounts totaled $938 thousand
in 2005 and $93 thousand in 2004. As a result of the October 2005 sale of the
SendTec business, we were required to place $1.0 million of cash in an escrow
account to secure our indemnification obligations. We incurred costs totaling
$296 thousand and $2.6 million for capital expenditures during 2005 and 2004,
respectively. Capital expenditures in 2004 related primarily to the development
of our VoIP telephony network and VoIP customer billing system. We also loaned
approximately $280 thousand and $467 thousand to Tralliance prior to its
acquisition by the Company during the years ended December 31, 2005 and 2004,
respectively.
41
Cash
proceeds related to the October 31, 2005 sale of our SendTec marketing services
business, net of related transaction costs and cash held by SendTec of
approximately $2.4 million which was included in the sale, totaled approximately
$34.8 million. Immediately following the sale of the SendTec business on October
31, 2005, we completed the redemption of approximately 28.9 million shares
of
our Common Stock owned by six members of management of SendTec for approximately
$11.6 million in cash pursuant to a Redemption Agreement dated August 23, 2005.
Approximately $7.6 million of the redemption payment was allocated to the
SendTec sale transaction and recorded as a reduction of the gain on the sale,
with the remaining $4.0 million of the redemption payment attributed to the
“fair value” of the shares of theglobe’s Common Stock redeemed and recorded as
treasury shares. The “fair value” of the shares for financial accounting
purposes was calculated based on the closing price of the Company’s Common Stock
as reflected on the OTCBB on August 10, 2005, the date the principal terms
of
the Redemption Agreement were announced publicly. The closing of the redemption
occurred on October 31, 2005. SendTec was originally acquired on September
1,
2004, for a total purchase price consisting of the payment of $6.0 million
in
cash, excluding transaction costs, and the issuance of debt and equity
securities then valued at a total of approximately $12.4 million. As of the
date
of acquisition, SendTec held approximately $3.6 million of cash. Thus, we used
a
net amount of approximately $2.4 million of cash to acquire SendTec in 2004.
We
used
$1.2 million of cash and cash equivalents in financing activities during 2005.
As discussed previously in the comparison of the results of operations for
the
year ended December 31, 2006 compared to the year ended December 31, 2005,
we
received proceeds of $4.0 million from the issuance of Convertible Notes during
2005. We also paid $1.4 million of outstanding debt balances during 2005. As
mentioned above, approximately $4.0 million of the total $11.6 million cash
paid
for the redemption of the 28.9 million shares of our Common Stock from the
former management of SendTec was attributed to the “fair value” of the Common
Stock issued for financial accounting purposes. During the year ended December
31, 2004, $28.9 million of cash and cash equivalents were provided by financing
activities. During March 2004, the Company completed a private offering of
its
Common Stock and warrants to acquire its Common Stock, for net proceeds totaling
approximately $27.0 million. In addition, in February 2004, the Company issued
a
$2.0 million Bridge Note which was subsequently converted into our Common Stock
in connection with the March 2004 private offering.
CAPITAL
TRANSACTIONS
On
November 22, 2006, the Company entered into certain Marketing Services
Agreements (the “Marketing Services Agreements”) with two entities whereby the
entities agreed to market certain of the Company’s products in exchange for
certain commissions and promotional fees and which granted the Company exclusive
right to certain uses of a tradename in connection with certain of the Company’s
websites. Additionally, on November 22, 2006, in connection with the Marketing
Services Agreements, the Company entered into a Warrant Purchase Agreement
with
Carl Ruderman, the controlling shareholder of the entities. The Warrant Purchase
Agreement provides for the issuance to Mr. Ruderman of one warrant to purchase
5,000,000 shares of the Company’s Common Stock at an exercise price of $0.15 per
share with a three year term and a second warrant to purchase 5,000,000 shares
of the Company’s Common Stock at an exercise price of $0.15 per share with a
term of four years. Each warrant provides for the extension of the exercise
term
by an additional three years if certain criteria are met under the Marketing
Services Agreements. The Warrant Purchase Agreement grants to Mr. Ruderman
“piggy-back” registration rights with respect to the shares of the Company’s
Common Stock issuable upon exercise of the warrants.
In
connection with the issuance of the warrants, on November 22, 2006, Mr. Ruderman
entered into a Stockholders’ Agreement with the Company’s chairman and chief
executive officer, the Company’s president and certain of their affiliates.
Pursuant to the Stockholders’ Agreement, Mr. Ruderman granted an irrevocable
proxy over the shares issuable upon exercise of the warrants to E&C Capital
Partners, LLLP and granted a right of first refusal over his shares to all
of
the other parties to the Stockholders’ Agreement. Mr. Ruderman also agreed to
sell his shares under certain circumstances in which the other parties to the
Stockholders’ Agreement have agreed to sell their respective shares. Mr.
Ruderman was also granted the right to participate in certain sales of the
Company’s Common Stock by the other parties to the Stockholders’
Agreement.
On
August
10, 2005, we entered into an Asset Purchase Agreement with RelationServe Media,
Inc. ("RelationServe") whereby we agreed to sell all of the business and
substantially all of the net assets of our SendTec marketing services subsidiary
to RelationServe for $37.5 million in cash, subject to certain net working
capital adjustments. On August 23, 2005, we entered into Amendment No. 1 to
the
Asset Purchase Agreement with RelationServe (the “1st
Amendment”
and together with the original Asset Purchase Agreement, the “Purchase
Agreement”). On October 31, 2005, we completed the asset sale. Including
adjustments to the purchase price related to excess working capital of SendTec
as of the date of sale, we received an aggregate of approximately $39.9 million
in cash pursuant to the Purchase Agreement. In accordance with the terms of
an
escrow agreement established as a source to secure our indemnification
obligations under the Purchase Agreement, $1.0 million of the purchase price
and
an aggregate of 2,272,727 shares of theglobe’s unregistered Common Stock (valued
at $750 thousand pursuant to the terms of the Purchase Agreement based upon
the
average closing price of the stock in the 10 day period preceding the closing
of
the sale) were placed into escrow. During 2006, the escrowed cash and shares
of
theglobe’s Common Stock were released to the Company and the common shares were
retired.
42
Additionally,
as contemplated by the Purchase Agreement, immediately following the asset
sale,
we completed the redemption of 28,879,097 shares of our Common Stock owned
by
six members of management of SendTec for approximately $11.6 million in cash
pursuant to a Redemption Agreement dated August 23, 2005. The 28,879,097 common
shares redeemed were retired effective October 31, 2005. Pursuant to a separate
Termination Agreement, we also terminated and canceled 1,275,783 stock options
and the contingent interest in 2,062,785 earn-out warrants held by the six
members of management in exchange for approximately $400 thousand in cash.
We
also terminated 829,678 stock options of certain other non-management employees
of SendTec and entered into bonus arrangements with a number of other
non-management SendTec employees for amounts totaling approximately $600
thousand.
On
May 9,
2005, we exercised our option to acquire all of the outstanding capital stock
of
Tralliance. The purchase price consisted of the issuance of 2,000,000 shares
of
our Common Stock, warrants to acquire 475,000 shares of our Common Stock and
$40
thousand in cash. The warrants are exercisable for a period of five years at
an
exercise price of $0.11 per share. As part of the transaction, 10,000 shares
of
our Common Stock were also issued to a third party in payment of a finder’s fee
resulting from the acquisition. The Common Stock issued as a result of the
acquisition of Tralliance is entitled to certain "piggy-back" registration
rights.
On
April
22, 2005, E&C Capital Partners, LLLP and E&C Capital Partners II, LLLP
(the "Noteholders"), entities controlled by the Company's Chairman and Chief
Executive Officer, entered into a Note Purchase Agreement (the "Agreement")
with
theglobe pursuant to which they acquired secured demand convertible promissory
notes (the "Convertible Notes") in the aggregate principal amount of $1.5
million. Under the terms of the Agreement, the Noteholders were also granted
the
optional right, for a period of 90 days from the date of the Agreement, to
purchase additional Convertible Notes such that the aggregate principal amount
of Convertible Notes issued under the Agreement could total $4.0 million (the
"Option"). On June 1, 2005, the Noteholders exercised a portion of the Option
and acquired an additional $1.5 million of Convertible Notes. On July 18, 2005,
the Noteholders exercised the remainder of the Option and acquired an additional
$1.0 million of Convertible Notes.
The
Convertible Notes are convertible at the option of the Noteholders into shares
of our Common Stock at an initial price of $0.05 per share. Through December
31,
2006, an aggregate of $600 thousand of Convertible Notes were converted by
the
Noteholders into an aggregate of 12,000,000 shares of our Common Stock. Assuming
full conversion of all Convertible Notes which remain outstanding as of December
31, 2006, an additional 68,000,000 shares of our Common Stock would be issued
to
the Noteholders. The Convertible Notes provide for interest at the rate of
ten
percent per annum and are secured by a pledge of substantially all of the assets
of the Company. The Convertible Notes are due and payable five days after demand
for payment by the Noteholders.
On
September 1, 2004, we closed upon an agreement and plan of merger dated August
31, 2004, pursuant to which we acquired all of the issued and outstanding shares
of capital stock of SendTec. Pursuant to the terms of the Merger, in
consideration for the acquisition of SendTec, we paid consideration consisting
of: (i) $6.0 million in cash, excluding transaction costs, (ii) the issuance
of
an aggregate of 17,500,024 shares of theglobe’s Common Stock, (iii) the issuance
of an aggregate of 175,000 shares of Series H Automatically Converting Preferred
Stock (which was converted into 17,500,500 shares of theglobe’s Common Stock on
December 1, 2004, the effective date of the amendment to the Company’s
certificate of incorporation increasing its authorized shares of Common Stock
from 200,000,000 shares to 500,000,000 shares), and (iv) the issuance of a
subordinated promissory note in the amount of $1.0 million. The subordinated
promissory note provided for interest at the rate of four percent per annum
and
was due on September 1, 2005. We paid the principal and interest due under
the
terms of the subordinated promissory note on October 31, 2005, including default
interest at a rate of 15% per annum for the period the debt was outstanding
subsequent to the original due date.
43
In
addition, warrants to acquire shares of our Common Stock would be issued to
the
former shareholders of SendTec when and if SendTec exceeded forecasted operating
income, as defined, of $10.125 million, for the year ended December 31, 2005.
The number of earn-out warrants issuable ranged from an aggregate of
approximately 250,000 to 2,500,000 (if actual operating income exceeded the
forecast by at least 10%). Pursuant to the Termination Agreement described
above, the contingent interest in approximately 2,063,000 of the earn-out
warrants was canceled effective October 31, 2005. The remainder of the earn-out
warrants expired on December 31, 2005, as the operating income target was not
achieved.
We
also
issued an aggregate of 3,974,165 replacement options to acquire shares of our
Common Stock for each of the issued and outstanding options to acquire shares
of
SendTec held by the former employees of SendTec. Of these replacement options,
approximately 3,273,668 had exercise prices of $0.06 per share and 700,497
had
exercise prices of $0.27 per share. The terms of these replacement options
were
as negotiated between representatives of theglobe and the Stock Option Committee
for the SendTec 2000 Amended and Restated Stock Option Plan. We also agreed
to
grant an aggregate of 250,000 options to other employees and a consultant of
SendTec at an exercise price of $0.34 per share. In addition, we also granted
1,000,000 stock options at an exercise price of $0.27 per share in connection
with the establishment of a bonus option pool pursuant to which various
employees of SendTec could vest in such options on terms substantially similar
to the circumstances in which the earn-out warrants would have been earned.
Pursuant to the Termination Agreement mentioned above, we terminated and
canceled an aggregate of 2,105,461 stock options held by employees of SendTec
effective October 31, 2005. The remaining 477,000 outstanding stock options
related to the bonus option pool which was established as of the acquisition
were terminated as the forecasted operating income targets for the year ended
December 31, 2005 had not been achieved.
In
March
2004, we completed a private offering of 333,816 units (the "Units") for a
purchase price of $85 per Unit (the "PIPE Offering"). Each Unit consisted of
100
shares of our Common Stock, $0.001 par value (the "Common Stock"), and warrants
to acquire 50 shares of our Common Stock (the "Warrants"). The Warrants are
exercisable for a period of five years commencing 60 days after the initial
closing at an initial exercise price of $0.001 per share. The aggregate number
of shares of Common Stock issued in the PIPE Offering was 33,381,647 shares
for
an aggregate consideration of approximately $28.4 million, or approximately
$0.57 per share assuming the exercise of the 16,690,824 Warrants. As of December
31, 2006, approximately 510,000 of the Warrants remained outstanding.
Halpern
Capital, Inc., acted as placement agent for the PIPE Offering, and was paid
a
commission of $1.2 million and issued a warrant to acquire 1,000,000 shares
of
our Common Stock at $0.001 per share. All of the shares underlying the warrant
had been issued by year-end 2005.
In
connection with the PIPE Offering, Michael S. Egan, our Chairman, Chief
Executive Officer and principal stockholder, together with certain of his
affiliates, including E&C Capital Partners, LLLP converted a $2,000,000
Convertible Bridge Note, $1,750,000 of Secured Convertible Notes and all of
the
outstanding shares of Series F Preferred Stock, and exercised (on a "cashless"
basis) all of the warrants issued in connection with the foregoing $1,750,000
Secured Convertible Notes and Series F Preferred Stock, together with certain
warrants issued to Dancing Bear Investments, an affiliate of Mr. Egan. As a
result of such conversions and exercises, we issued an aggregate of 48,775,909
additional shares of our Common Stock.
On
February 2, 2004, Michael S. Egan and his wife, S. Jacqueline Egan, entered
into
a Note Purchase Agreement with the Company pursuant to which they acquired
a
convertible promissory note due on demand (the “Bridge Note”) in the aggregate
principal amount of $2,000,000. The Bridge Note was convertible into shares
of
our Common Stock. The Bridge Note provided for interest at the rate of ten
percent per annum and was secured by a pledge of substantially all of the assets
of the Company. Such security interest was shared with the holders of our
$1,750,000 Secured Convertible Notes issued on May 22, 2003 to E&C Capital
Partners, LLLP and certain affiliates of Michael S. Egan. In addition, the
Egans
were issued a warrant to acquire 204,082 shares of our Common Stock at an
exercise price of $1.22 per share. This warrant is exercisable at any time
on or
before February 2, 2009. The exercise price of the warrant, together with the
number of shares for which such warrant is exercisable, is subject to adjustment
upon the occurrence of certain events.
44
The
following table summarizes theglobe’s contractual obligations as of December 31,
2006. These contractual obligations are more fully disclosed in Note 9, “Debt,”
and Note 13, “Commitments,” in the accompanying Notes to Consolidated Financial
Statements.
|
Payments
Due By Period
|
|||||||||||||||
|
|
Less
than
|
|
|
After
|
|||||||||||
|
Total
|
1
year
|
1-3
years
|
4-5
years
|
5
years
|
|||||||||||
Notes
payable*
|
$
|
3,400,000
|
$
|
3,400,000
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Network
commitments
|
539,000
|
503,000
|
36,000
|
—
|
—
|
|||||||||||
Registry
commitments
|
1,254,000
|
329,000
|
311,000
|
220,000
|
394,000
|
|||||||||||
Operating
leases
|
264,000
|
248,000
|
16,000
|
—
|
—
|
|||||||||||
Other
purchase obligations
|
240,000
|
240,000
|
—
|
—
|
—
|
|||||||||||
Total
contractual obligations
|
$
|
5,697,000
|
$
|
4,720,000
|
$
|
363,000
|
$
|
220,000
|
$
|
394,000
|
*
Excludes accrued and unpaid interest of approximately $556,000 as of December
31, 2006.
OFF-BALANCE
SHEET ARRANGEMENTS
As
of
December 31, 2006, we did not have any material off-balance sheet arrangements
that have or are reasonably likely to have a material effect on our current
or
future financial condition, revenues or expenses, results of operations,
liquidity, or capital resources.
EFFECTS
OF INFLATION
Due
to
relatively low levels of inflation in 2006, 2005 and 2004, inflation has not
had
a significant effect on our results of operations.
MANAGEMENT'S
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Our estimates, judgments and assumptions are continually evaluated
based
on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
Certain
of our accounting policies require higher degrees of judgment than others in
their application. These include revenue recognition, valuation of customer
receivables, valuation of inventories, valuation of goodwill, intangible assets
and other long-lived assets and capitalization of computer software costs.
Our
accounting policies and procedures related to these areas are summarized below.
REVENUE
RECOGNITION
The
Company's revenue from continuing operations was derived principally from the
sale of print advertisements under short-term contracts in our magazine
publications; through the sale of our magazine publications through newsstands
and subscriptions; from the sale of video games and related products through
our
e-commerce games distribution business; from the sale of Internet domain
registrations and from the sale of VoIP telephony services. There is no
certainty that events beyond anyone's control such as economic downturns or
significant decreases in the demand for our services and products will not
occur
and accordingly, cause significant decreases in revenue.
45
COMPUTER
GAMES BUSINESSES
Advertising
revenues for the Company's magazine publications are recognized at the on-sale
date of the magazines.
Newsstand
sales of the Company's magazine publications are recognized at the on-sale
date
of the magazines, net of provisions for estimated returns. Subscription revenue,
which is net of agency fees, is deferred when initially received and recognized
as income ratably over the subscription term.
Sales
of
games and related products from the online store are recognized as revenue
when
the product is shipped to the customer. Amounts billed to customers for shipping
and handling charges are included in net revenue. The Company provides an
allowance for returns of merchandise sold through its online store. The
allowance provided to date has not been significant.
INTERNET
SERVICES
Internet
services net revenue consists principally of registration fees for Internet
domain registrations, which generally have terms of one year, but may be up
to
ten years. Such registration fees are reported net of transaction fees paid
to
an unrelated third party which serves as the registry operator for the Company.
Net registration fee revenue is recognized on a straight line basis over the
registrations term.
VOIP
TELEPHONY SERVICES
VoIP
telephony services revenue represents fees charged to customers for voice
services and is recognized based on minutes of customer usage or as services
are
provided. The Company records payments received in advance for prepaid services
as deferred revenue until the related services are provided.
VALUATION
OF CUSTOMER RECEIVABLES
Provisions
for the allowance for doubtful accounts are made based on historical loss
experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the Company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
VALUATION
OF INVENTORIES
Inventories
are recorded on a first-in, first-out basis and valued at the lower of cost
or
market value. We generally manage our inventory levels based on internal
forecasts of customer demand for our products, which is difficult to predict
and
can fluctuate substantially. Our inventories include high technology items
that
are specialized in nature or subject to rapid obsolescence. If our demand
forecast is greater than the actual customer demand for our products, we may
be
required to record charges related to increases in our inventory valuation
reserves. The value of our inventory is also dependent on our estimate of future
average selling prices, and, if our projected average selling prices are over
estimated, we may be required to adjust our inventory value to reflect the
lower
of cost or market.
GOODWILL
AND INTANGIBLE ASSETS
In
June
2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that
certain acquired intangible assets in a business combination be recognized
as
assets separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles with indefinite lives should no longer be amortized, but rather
tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of the asset has decreased below its carrying
value.
46
Our
policy calls for the assessment of the potential impairment of goodwill and
other identifiable intangibles with indefinite lives whenever events or changes
in circumstances indicate that the carrying value may not be recoverable or
at
least on an annual basis. Some factors we consider important which could trigger
an impairment review include the following:
·
|
significant
under-performance relative to historical, expected or projected future
operating results;
|
·
|
significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business; and
|
|
|
·
|
significant
negative industry or economic trends.
|
When
we
determine that the carrying value of goodwill or other identified intangibles
with indefinite lives may not be recoverable, we measure any impairment based
on
a projected discounted cash flow method.
LONG-LIVED
ASSETS
Historically,
the Company's long-lived assets, other than goodwill, have primarily consisted
of property and equipment, capitalized costs of internal-use software, values
attributable to covenants not to compete, acquired technology and patent costs.
Long-lived
assets held and used by the Company and intangible assets with determinable
lives are reviewed for impairment whenever events or circumstances indicate
that
the carrying amount of assets may not be recoverable in accordance with SFAS
No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We
evaluate recoverability of assets to be held and used by comparing the carrying
amount of the assets, or the appropriate grouping of assets, to an estimate
of
undiscounted future cash flows to be generated by the assets, or asset group.
If
such assets are considered to be impaired, the impairment to be recognized
is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Fair values are based on quoted market values, if
available. If quoted market prices are not available, the estimate of fair
value
may be based on the discounted value of the estimated future cash flows
attributable to the assets, or other valuation techniques deemed reasonable
in
the circumstances.
CAPITALIZATION
OF COMPUTER SOFTWARE COSTS
The
Company capitalizes the cost of internal-use software which has a useful life
in
excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over the
expected useful life, or three years.
IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities.”
SFAS No. 159 expands the scope of what entities may carry at fair value by
offering an irrevocable option to record many types of financial assets and
liabilities at fair value. Changes in fair value would be recorded in an
entity’s income statement. This accounting standard also establishes
presentation and disclosure requirements that are intended to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for the
Company on January 1, 2008. Earlier application is permitted under certain
circumstances. We are currently evaluating the requirements of SFAS No. 159
and
have not yet determined the impact on our consolidated financial
statements.
47
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
standard defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles and expands disclosure about fair
value
measurements. SFAS No. 157 applies to other accounting standards that require
or
permit fair value measurements. Accordingly, this statement does not require
any
new fair value measurement. This statement is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
We are currently evaluating the requirements of SFAS No. 157 and have not
determined the impact on our consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how
the effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB No. 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements as
if
the “dual approach” had always been used or (ii) recording the cumulative effect
of initially applying the “dual approach” as adjustments to the carrying value
of assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of the “cumulative
effect” transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment
and
how and when it arose.
The
adoption of this standard did not have a material impact on the Company’s
financial condition, results of operations or liquidity.
In
June
2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty
in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for
Income Taxes,” which clarifies accounting for and disclosure of uncertainty in
tax positions. FIN No. 48 prescribes a recognition threshold and measurement
attribute for the financial recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation is effective for
fiscal years beginning after December 15, 2006. We are currently evaluating
the
impact of adopting FIN No. 48 on our consolidated financial statements. At
this
point, the Company does not believe that the adoption of FIN No. 48 will have
a
material effect on its consolidated financial position, cash flows and results
of operations.
Interest
Rate Risk. Interest rate risk refers to fluctuations in the value of a security
resulting from changes in the general level of interest rates. Investments
that
we classify as cash and cash equivalents have original maturities of three
months or less and therefore, are not affected in any material respect by
changes in market interest rates. At December 31, 2006,
debt
was
composed of $3.4 million of fixed rate instruments due to affiliates on demand
with an aggregate average interest rate of 10.0%.
Foreign
Currency Risk. We transact business in U.S. dollars. Foreign currency exchange
rate fluctuations do not have a material effect on our results of operations.
48
CONSOLIDATED
FINANCIAL STATEMENTS
THEGLOBE.COM,
INC. AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS
|
PAGE
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-2
|
|
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
BALANCE
SHEETS
|
F-3
|
|
|
|
|
STATEMENTS
OF OPERATIONS
|
F-4
|
|
|
|
|
STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
|
||
INCOME
(LOSS)
|
F-5
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
F-6
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
F-9
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
theglobe.com,
inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of theglobe.com, inc.
and
Subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended December
31,
2006. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of theglobe.com,
inc. and Subsidiaries as of December 31, 2006 and 2005, and the consolidated
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States.
The
accompanying 2006 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the
consolidated financial statements, the Company has suffered recurring net losses
and has a significant deficit that raise substantial doubt about its ability
to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
RACHLIN
COHEN & HOLTZ LLP
Fort
Lauderdale, Florida
March
28,
2007
F-2
THEGLOBE.COM,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
DECEMBER
31,
|
DECEMBER
31,
|
|||||
|
2006
|
2005
|
|||||
ASSETS
|
|
|
|||||
Current
Assets:
|
|
|
|||||
Cash
and cash equivalents
|
$
|
5,316,218
|
$
|
16,480,660
|
|||
Restricted
cash
|
—
|
1,031,764
|
|||||
Accounts
receivable, less allowance for doubtful accounts of
|
|||||||
of
approximately $20,000 and $128,000, respectively
|
589,180
|
452,398
|
|||||
Inventory,
less reserves of approximately $370,000 and $434,000,
|
|||||||
respectively
|
37,736
|
66,271
|
|||||
Prepaid
expenses
|
508,082
|
1,022,771
|
|||||
Other
current assets
|
21,546
|
146,889
|
|||||
|
|||||||
Total
current assets
|
6,472,762
|
19,200,753
|
|||||
|
|||||||
Property
and equipment, net
|
365,524
|
1,455,653
|
|||||
Intangible
assets
|
526,824
|
715,035
|
|||||
Other
assets
|
40,000
|
40,000
|
|||||
|
|||||||
Total
assets
|
$
|
7,405,110
|
$
|
21,411,441
|
|||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|||||||
Current
Liabilities:
|
|||||||
Accounts
payable
|
$
|
2,796,637
|
$
|
2,564,988
|
|||
Accrued
expenses and other current liabilities
|
4,284,655
|
2,177,815
|
|||||
Income
taxes payable
|
—
|
806,406
|
|||||
Deferred
revenue
|
1,294,532
|
985,981
|
|||||
Notes
payable due affiliates
|
3,400,000
|
3,400,000
|
|||||
Current
portion of long-term debt
|
—
|
28,447
|
|||||
|
|||||||
Total
current liabilities
|
11,775,824
|
9,963,637
|
|||||
|
|||||||
Deferred
revenue
|
232,433
|
173,003
|
|||||
|
|||||||
Total
liabilities
|
12,008,257
|
10,136,640
|
|||||
Commitments
and Contingencies (Notes 13 and 14)
|
|||||||
|
|||||||
Stockholders'
Equity (Deficit):
|
|||||||
Common
stock, $0.001 par value; 500,000,000 shares authorized;
|
|||||||
172,484,838
and 174,373,091 shares issued at December 31, 2006
|
|||||||
and
December 31, 2005, respectively
|
172,485
|
174,373
|
|||||
Additional
paid-in capital
|
289,088,557
|
288,740,889
|
|||||
Escrow
shares
|
—
|
(750,000
|
)
|
||||
Accumulated
deficit
|
(293,864,189
|
)
|
(276,890,461
|
)
|
|||
Total
stockholders' equity (deficit)
|
(4,603,147
|
)
|
11,274,801
|
||||
Total
liabilities and stockholders' equity (deficit)
|
$
|
7,405,110
|
$
|
21,411,441
|
See
notes
to consolidated financial statements.
F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
Net
Revenue
|
$
|
3,482,024
|
$
|
2,395,378
|
$
|
3,498,791
|
||||
Operating
Expenses:
|
||||||||||
Cost
of revenue
|
4,160,675
|
8,424,959
|
9,054,739
|
|||||||
Sales
and marketing
|
3,988,051
|
2,717,700
|
7,098,062
|
|||||||
Product
development
|
1,379,145
|
1,390,859
|
1,053,886
|
|||||||
General
and administrative
|
9,866,521
|
11,142,169
|
7,246,774
|
|||||||
Depreciation
|
887,645
|
1,189,097
|
1,295,442
|
|||||||
Intangible
asset amortization
|
188,211
|
75,201
|
102,834
|
|||||||
Impairment
charge
|
—
|
—
|
1,661,975
|
|||||||
Loss
on settlement of contractual obligation
|
—
|
—
|
406,750
|
|||||||
|
20,470,248
|
24,939,985
|
27,920,462
|
|||||||
|
||||||||||
Operating
Loss from Continuing Operations
|
(16,988,224
|
)
|
(22,544,607
|
)
|
(24,421,671
|
)
|
||||
|
||||||||||
Other
Income (Expense), net:
|
||||||||||
Interest
income (expense), net
|
120,171
|
(4,143,229
|
)
|
(666,348
|
)
|
|||||
Other
income (expense), net
|
18,638
|
(274,082
|
)
|
(158,550
|
)
|
|||||
|
138,809
|
(4,417,311
|
)
|
(824,898
|
)
|
|||||
|
||||||||||
Loss
from Continuing Operations
|
||||||||||
Before
Income Tax
|
(16,849,415
|
)
|
(26,961,918
|
)
|
(25,246,569
|
)
|
||||
Income
Tax Provision (Benefit)
|
124,313
|
(13,613,538
|
)
|
(370,891
|
)
|
|||||
Loss
from Continuing Operations
|
(16,973,728
|
)
|
(13,348,380
|
)
|
(24,875,678
|
)
|
||||
Discontinued
Operations, net of tax:
|
||||||||||
Income
from operations
|
—
|
68,801
|
602,477
|
|||||||
Gain
on sale of discontinued operations
|
—
|
1,769,531
|
—
|
|||||||
Income
from Discontinued Operations
|
—
|
1,838,332
|
602,477
|
|||||||
Net
Loss
|
$
|
(16,973,728
|
)
|
$
|
(11,510,048
|
)
|
$
|
(24,273,201
|
)
|
|
Earnings
(Loss) Per Share -
|
||||||||||
Basic
and Diluted:
|
||||||||||
Continuing
Operations
|
$
|
(0.10
|
)
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
|
Discontinued
Operations
|
$
|
—
|
$
|
0.01
|
$
|
—
|
||||
Net
Loss
|
$
|
(0.10
|
)
|
$
|
(0.06
|
)
|
$
|
(0.19
|
)
|
|
|
||||||||||
Weighted
Average Common Shares Outstanding
|
174,674,000
|
182,539,000
|
127,843,000
|
See
notes
to consolidated financial statements.
F-4
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND
COMPREHENSIVE INCOME (LOSS)
Common
Stock
|
Additional
Paid-in
|
Escrow
|
Treasury
|
Accumulated
|
|||||||||||||||||||||
Preferred
Stock
|
Shares
|
Amount
|
Capital
|
Shares
|
Stock
|
Deficit
|
Total
|
||||||||||||||||||
Balance,
December 31, 2003
|
|
$
|
500,000
|
|
|
50,245,574
|
|
$
|
50,246
|
|
$
|
238,301,862
|
|
$
|
-
|
|
$
|
(371,458
|
)
|
$
|
(236,300,111
|
)
|
$
|
2,180,539
|
|
Year
Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24,273,201
|
)
|
|
(24,273,201
|
)
|
Realized
gain on securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,562
|
)
|
|
(1,562
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24,274,763
|
)
|
Issuance
of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
offering, net of
|
|||||||||||||||||||||||||
offering
costs
|
|
|
-
|
|
|
33,381,647
|
|
|
33,382
|
|
|
26,939,363
|
|
|
-
|
|
-
|
|
|
-
|
|
|
26,972,745
|
|
|
Conversion
of Series F Preferred
|
|||||||||||||||||||||||||
Stock
and exercise of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
associated
warrants
|
|
|
(500,000
|
)
|
|
19,639,856
|
|
|
19,640
|
|
|
480,360
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Conversion
of $1,750,000
|
|||||||||||||||||||||||||
Convertible
Notes
|
|
|
-
|
|
|
22,829,156
|
|
|
22,829
|
|
|
1,654,546
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,677,375
|
|
Conversion
of $2,000,000
|
|||||||||||||||||||||||||
Bridge
Note
|
|
|
-
|
|
|
3,527,337
|
|
|
3,527
|
|
|
1,996,473
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,000,000
|
|
Acquisition
of SendTec
|
|
|
17,500
|
|
|
17,500,024
|
|
|
17,500
|
|
|
11,163,275
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,198,275
|
|
Conversion
of Series H
|
|||||||||||||||||||||||||
Preferred
Stock
|
|
|
(17,500
|
)
|
|
17,500,500
|
|
|
17,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise
of warrants owned
|
|||||||||||||||||||||||||
by
Dancing Bear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
-
|
|
|
2,779,560
|
|
|
2,780
|
|
|
(2,780
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise
of stock options
|
|
|
-
|
|
|
639,000
|
|
|
639
|
|
|
183,907
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
184,546
|
|
Exercise
of warrants
|
|
|
-
|
|
|
6,273,024
|
|
|
6,273
|
|
|
5,151
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,424
|
|
Beneficial
conversion feature
|
|||||||||||||||||||||||||
of
$2,000,000 Bridge Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
687,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
687,000
|
|
Employee
stock-based
|
|||||||||||||||||||||||||
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
416,472
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
416,472
|
|
Issuance
of stock options to
|
|||||||||||||||||||||||||
non-employees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
463,775
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
463,775
|
|
Balance,
December 31, 2004
|
|
|
-
|
|
|
174,315,678
|
|
|
174,316
|
|
|
282,289,404
|
|
|
-
|
|
|
(371,458
|
)
|
|
(260,574,874
|
)
|
|
21,517,388
|
|
Year
Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,510,048
|
)
|
|
(11,510,048
|
)
|
Issuance
of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
of contractual
|
|||||||||||||||||||||||||
obligation
|
|
|
-
|
|
|
300,000
|
|
|
300
|
|
|
73,950
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
74,250
|
|
Acquisition
of Tralliance
|
|
|
-
|
|
|
2,010,000
|
|
|
2,010
|
|
|
196,877
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
198,887
|
|
Conversion
of Convertible Notes
|
|
|
-
|
|
|
12,000,000
|
|
|
12,000
|
|
|
588,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
600,000
|
|
Exercise
of stock options
|
|
|
-
|
|
|
2,001,661
|
|
|
2,001
|
|
|
164,840
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
166,841
|
|
Exercise
of warrants
|
|
|
-
|
|
|
11,051,403
|
|
|
11,051
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,051
|
|
Beneficial
conversion features of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4,000,000
Convertible Notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,000,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,000,000
|
|
Employee
stock-based
|
|||||||||||||||||||||||||
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,987
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,987
|
|
Issuance
of stock options to
|
|||||||||||||||||||||||||
non-employees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
176,050
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
176,050
|
|
Stock-based
compensation
|
|||||||||||||||||||||||||
related
to discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
455,054
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
455,054
|
|
Issuance
of escrow shares
|
|
|
-
|
|
|
2,272,727
|
|
|
2,273
|
|
|
747,727
|
|
|
(750,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Redemption
of common stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,043,074
|
)
|
|
-
|
|
|
(4,043,074
|
)
|
Repurchase
of vested stock options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(420,585
|
)
|
|
(420,585
|
)
|
Retirement
of treasury stock
|
|
|
-
|
|
|
(29,578,378
|
)
|
|
(29,578
|
)
|
|
-
|
|
|
-
|
|
|
4,414,532
|
|
|
(4,384,954
|
)
|
|
-
|
|
Balance,
December 31, 2005
|
|
|
-
|
|
|
174,373,091
|
|
|
174,373
|
|
288,740,889
|
|
(750,000
|
)
|
|
-
|
|
|
(276,890,461
|
)
|
11,274,801
|
|
|||
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16,973,728
|
)
|
|
(16,973,728
|
)
|
Issuance
of common stock for
|
|||||||||||||||||||||||||
services
rendered
|
-
|
35,000
|
35
|
3,115
|
-
|
-
|
-
|
3,150
|
|||||||||||||||||
Issuance
of warrants
|
-
|
|
-
|
|
-
|
|
|
515,262
|
-
|
|
-
|
|
-
|
|
515,262
|
||||||||||
Exercise
of stock options
|
|
|
-
|
|
|
349,474
|
|
|
350
|
|
|
18,070
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,420
|
|
Employee
stock-based
|
|||||||||||||||||||||||||
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
449,749
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
449,749
|
|
Issuance
of stock options to
|
|||||||||||||||||||||||||
non-employees
|
-
|
-
|
-
|
109,199
|
-
|
-
|
-
|
109,199
|
|||||||||||||||||
Retirement
of escrow shares
|
-
|
|
(2,272,727
|
)
|
|
(2,273
|
)
|
(747,727
|
)
|
750,000
|
|
-
|
|
-
|
|
-
|
|
||||||||
Balance,
December 31, 2006
|
|
$
|
-
|
|
|
172,484,838
|
|
$
|
172,485
|
|
$
|
289,088,557
|
|
$
|
-
|
$
|
-
|
|
$
|
(293,864,189
|
)
|
$
|
(4,603,147
|
)
|
See
notes
to consolidated financial statements.
F-5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
Cash
Flows from Operating Activities:
|
|
|
|
|||||||
Net
loss
|
$
|
(16,973,728
|
)
|
$
|
(11,510,048
|
)
|
$
|
(24,273,201
|
)
|
|
(Income)
from discontinued operations
|
—
|
(1,838,332
|
)
|
(602,477
|
)
|
|||||
Net
loss from continuing operations
|
(16,973,728
|
)
|
(13,348,380
|
)
|
(24,875,678
|
)
|
||||
Adjustments
to reconcile net loss from continuing operations to net cash flows
from
operating activities:
|
||||||||||
Depreciation
and amortization
|
1,075,856
|
1,264,298
|
1,398,276
|
|||||||
Non-cash
expense related to issuance of warrants
|
515,262
|
—
|
—
|
|||||||
Employee
stock compensation
|
449,749
|
48,987
|
182,970
|
|||||||
Loss
on sale of property and equipment
|
130,424
|
—
|
—
|
|||||||
Compensation
related to non-employee stock options
|
109,199
|
176,050
|
463,046
|
|||||||
Provision
for uncollectible accounts receivable
|
17,076
|
125,000
|
183,149
|
|||||||
Non-cash
settlements of liabilities
|
(384,060
|
)
|
—
|
(352,455
|
)
|
|||||
Gain
on sale of Now Playing magazine
|
(130,000
|
)
|
—
|
—
|
||||||
Non-cash
interest expense
|
—
|
4,000,000
|
735,416
|
|||||||
Reserve
against amounts loaned to Tralliance prior to acquisition
|
—
|
280,000
|
506,500
|
|||||||
Provision
for excess and obsolete inventory
|
—
|
191,261
|
1,289,196
|
|||||||
Write-down
of inventory deposit
|
—
|
77,250
|
221,450
|
|||||||
Deferred
tax benefit
|
—
|
(13,613,538
|
)
|
—
|
||||||
Non-cash
impairment charge
|
—
|
—
|
1,661,975
|
|||||||
Loss
on settlement of contractual obligation
|
—
|
—
|
406,750
|
|||||||
Other,
net
|
6,839
|
(136,284
|
)
|
212,821
|
||||||
Changes
in operating assets and liabilities, net of acquisitions and dispositions:
|
||||||||||
Accounts
receivable, net
|
(153,858
|
)
|
542,912
|
(327,756
|
)
|
|||||
Inventory,
net
|
28,535
|
332,047
|
(1,108,461
|
)
|
||||||
Prepaid
and other current assets
|
640,032
|
86,824
|
28,681
|
|||||||
Accounts
payable
|
634,383
|
1,425,050
|
(751,595
|
)
|
||||||
Accrued
expenses and other current liabilities
|
2,106,840
|
(90,057
|
)
|
548,169
|
||||||
Income
taxes payable
|
(806,406
|
)
|
—
|
—
|
||||||
Deferred
revenue
|
367,981
|
995,269
|
(12,876
|
)
|
||||||
|
||||||||||
Net
cash flows from operating activities of continuing operations
|
(12,365,876
|
)
|
(17,643,311
|
)
|
(19,590,422
|
)
|
||||
Net
cash flows from operating activities of discontinued operations
|
—
|
2,990,299
|
1,857,790
|
|||||||
|
||||||||||
Net
cash flows from operating activities
|
(12,365,876
|
)
|
(14,653,012
|
)
|
(17,732,632
|
)
|
||||
|
||||||||||
Cash
Flows from Investing Activities:
|
||||||||||
Purchases
of property and equipment
|
(86,158
|
)
|
(296,170
|
)
|
(2,643,018
|
)
|
||||
Net
cash released from / (placed in) escrow
|
1,031,764
|
(938,357
|
)
|
(93,407
|
)
|
|||||
Proceeds
from the sale of property and equipment
|
137,626
|
—
|
—
|
|||||||
Proceeds
from the sale of Now Playing magazine
|
130,000
|
—
|
—
|
|||||||
Amounts
loaned to Tralliance prior to acquisition
|
—
|
(280,000
|
)
|
(466,500
|
)
|
|||||
Other,
net
|
—
|
119,814
|
141,385
|
|||||||
Net
cash flows from investing activities of continuing operations
|
1,213,232
|
(1,394,713
|
)
|
(3,061,540
|
)
|
(Continued)
F-6
THEGLOBE.COM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
|
Year
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
|
|
||||||||
Sale
of discontinued operations, net of cash sold
|
—
|
34,762,384
|
—
|
|||||||
Redemption
agreement payment allocation to sale
|
—
|
(7,560,872
|
)
|
—
|
||||||
Acquisition
of discontinued operations, net of cash acquired
|
—
|
—
|
(2,389,520
|
)
|
||||||
Purchases
of property and equipment by discontinued operations
|
—
|
(184,115
|
)
|
(40,324
|
)
|
|||||
|
||||||||||
Net
cash flows from investing activities
|
1,213,232
|
25,622,684
|
(5,491,384
|
)
|
||||||
|
||||||||||
Cash
Flows from Financing Activities:
|
||||||||||
Proceeds
from exercise of stock options and warrants
|
18,420
|
177,892
|
195,970
|
|||||||
Borrowings
on notes payable and long-term debt
|
—
|
4,000,000
|
2,000,000
|
|||||||
Payments
on notes payable and long-term debt
|
(30,218
|
)
|
(1,358,623
|
)
|
(151,898
|
)
|
||||
Redemption
of common stock
|
—
|
(4,043,074
|
)
|
—
|
||||||
Proceeds
from issuance of common stock, net
|
—
|
—
|
26,972,745
|
|||||||
Payments
of other long-term liabilities, net
|
—
|
—
|
(119,710
|
)
|
||||||
|
||||||||||
Net
cash flows from financing activities
|
(11,798
|
)
|
(1,223,805
|
)
|
28,897,107
|
|||||
|
||||||||||
Net
Increase / (Decrease) in Cash and Cash Equivalents
|
(11,164,442
|
)
|
9,745,867
|
5,673,091
|
||||||
Cash
and Cash Equivalents, at beginning of period
|
16,480,660
|
6,734,793
|
1,061,702
|
|||||||
|
||||||||||
Cash
and Cash Equivalents, at end of period
|
$
|
5,316,218
|
$
|
16,480,660
|
$
|
6,734,793
|
See
notes
to consolidated financial statements.
F-7
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
|
Year
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|||||||
|
|
|
|
|||||||
Cash
paid during the period for:
|
|
|
|
|||||||
Interest
|
$
|
12,958
|
$
|
87,140
|
$
|
184,093
|
||||
|
||||||||||
Income
taxes
|
$
|
930,719
|
$
|
—
|
$
|
—
|
||||
|
||||||||||
Supplemental
Disclosure of Non-Cash Transactions:
|
||||||||||
Conversion
of debt and equity securities into common stock
|
$
|
—
|
$
|
600,000
|
$
|
4,177,375
|
||||
|
||||||||||
Additional
paid-in capital attributable to the beneficial conversion
|
||||||||||
features
of debt and equity securities
|
$
|
—
|
$
|
4,000,000
|
$
|
687,000
|
||||
|
||||||||||
Common
stock and warrants issued in connection with the
|
||||||||||
acquisition
of Tralliance Corporation
|
$
|
—
|
$
|
198,887
|
$
|
—
|
||||
|
||||||||||
Common
stock, preferred stock and stock options issued in
|
||||||||||
connection
with the acquisition of SendTec, Inc.
|
$
|
—
|
$
|
—
|
$
|
11,198,275
|
||||
|
||||||||||
Note
payable issued in connection with the acquisition of
|
||||||||||
SendTec,
Inc.
|
$
|
—
|
$
|
—
|
$
|
1,000,009
|
||||
|
||||||||||
Common
stock issued in connection with the settlement of a
|
||||||||||
contractual
obligation
|
$
|
—
|
$
|
74,250
|
$
|
—
|
See
notes
to consolidated financial statements.
F-8
THEGLOBE.COM,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION
OF THE COMPANY
theglobe.com,
inc. (the "Company" or "theglobe") was incorporated on May 1, 1995 (inception)
and commenced operations on that date. Originally, theglobe.com was an online
community with registered members and users in the United States and abroad.
That product gave users the freedom to personalize their online experience
by
publishing their own content and by interacting with others having similar
interests. However, due to the deterioration of the online advertising market,
the Company was forced to restructure and ceased the operations of its online
community on August 15, 2001. The Company then sold most of its remaining online
and offline properties. The Company continued to operate its Computer Games
print magazine and the associated CGOnline website (www.cgonline.com),
as
well as the e-commerce games distribution business of Chips & Bits, Inc.
(www.chipsbits.com).
On
June 1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became
Chief Executive Officer and President of the Company, respectively.
On
November 14, 2002, the Company acquired certain Voice over Internet Protocol
("VoIP") assets. In exchange for the assets, the Company issued warrants to
acquire 1,750,000 shares of its Common Stock and an additional 425,000 warrants
as part of an earn-out structure upon the attainment of certain performance
targets. The earn-out performance targets were not achieved and the 425,000
earn-out warrants expired on December 31, 2003.
On
May
28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a company
engaged in VoIP telephony services in exchange for 1,375,000 shares of the
Company's Common Stock and the issuance of warrants to acquire 500,000 shares
of
the Company's Common Stock. The Company acquired all of the physical assets
and
intellectual property of DPT and originally planned to continue to operate
the
company as a subsidiary and engage in the provision of VoIP services to other
telephony businesses on a wholesale transactional basis. In the first quarter
of
2004, the Company decided to suspend DPT's wholesale business and dedicate
the
DPT physical and intellectual assets to its retail VoIP business. As a result,
the Company wrote-off the goodwill associated with the purchase of DPT as of
December 31, 2003.
On
September 1, 2004, the Company acquired SendTec, Inc. ("SendTec"), a direct
response marketing services and technology company for a total purchase price
of
approximately $18.4 million. As more fully discussed in Note 3, "Discontinued
Operations - SendTec Inc.,” on October 31, 2005, the Company completed the sale
of all of the business and substantially all of the net assets of SendTec for
approximately $39.9 million in cash.
As
more
fully discussed in Note 4, “Acquisition of Tralliance Corporation,” on May 9,
2005, the Company exercised its option to acquire Tralliance Corporation
(“Tralliance”), a company which had recently entered into an agreement to become
the registry for the “.travel” top-level Internet domain. The Company issued
2,000,000 shares of its Common Stock, warrants to acquire 475,000 shares of
its
Common Stock and paid $40,000 in cash to acquire Tralliance.
As
of
December 31, 2006, sources of the Company's revenue were derived principally
from the operations of its games related businesses and its Internet services
business conducted by Tralliance. The Company’s retail VoIP products and
services have not produced any significant revenue. See Note 19, “Subsequent
Events,” regarding the March 2007 decision by the Company’s management and Board
of Directors to discontinue the operations of the Company’s computer games and
VoIP telephony services businesses.
F-9
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries from their respective dates of acquisition. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. These estimates and assumptions relate to estimates of collectibility
of
accounts receivable, the valuation of inventory, accruals, the valuations of
fair values of options and warrants, the impairment of long-lived assets and
other factors. Actual results could differ from those estimates. In addition,
the accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of
America on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business (See Note
2, “Going Concern Considerations”).
CASH
AND CASH EQUIVALENTS
Cash
equivalents consist of money market funds and highly liquid short-term
investments with qualified financial institutions. The Company considers all
highly liquid securities with original maturities of three months or less to
be
cash equivalents.
RESTRICTED
CASH
Included
in restricted cash in the accompanying consolidated balance sheet at December
31, 2005, was approximately $1,000,000 of cash held in escrow in connection
with
the October 31, 2005 sale of all of the business and substantially all of the
net assets of SendTec (see Note 3, “Discontinued Operations - SendTec, Inc.” for
further discussion). In addition, at December 31, 2005, restricted cash included
$31,764 of cash held in escrow for purposes of sweepstakes promotions being
conducted by the VoIP telephony division. The Company has no restricted cash
balances as of December 31, 2006.
The
Company accounts for its investment in debt and equity securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." All such investments
were classified as held-to-maturity as of December 31, 2006 and 2005 and were
being accounted for at amortized cost. The following is a summary of securities:
|
December
31, 2006
|
December
31, 2005
|
|||||||||||
|
Amortized
|
|
Amortized
|
||||||||||
|
Cost
|
Cost
Basis
|
Cost
|
Cost
Basis
|
|||||||||
Commercial
Paper
|
$
|
995,561
|
$
|
999,704
|
$
|
4,981,666
|
$
|
4,992,666
|
|||||
Municipal
Bond Funds
|
—
|
—
|
1,000,000
|
1,000,071
|
|||||||||
|
|||||||||||||
Amount
classified as cash equivalents
|
$
|
995,561
|
$
|
999,704
|
$
|
5,981,666
|
$
|
5,992,737
|
During
the years ended December 31, 2006, 2005 and 2004, the Company had no significant
gross realized gains or losses on sales of securities.
F-10
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
carrying amount of certain of the Company's financial instruments, including
cash, cash equivalents, restricted cash, marketable securities, accounts
receivable, accounts payable, accrued expenses and short-term deferred revenue,
approximate their fair value at December 31, 2006 and 2005 due to their short
maturities.
INVENTORY
Inventories
are recorded on a first in, first out basis and valued at the lower of cost
or
market value. The Company's reserve for excess and obsolete inventory as of
December 31, 2006 and 2005, was approximately $370,000 and $434,000,
respectively.
During
the years ended December 31, 2005 and 2004, the Company's VoIP telephony
services business recorded charges to cost of revenue totaling approximately
$71,000 and $1,477,000, respectively, as a result of write-downs required to
state its inventory on-hand and related deposits for inventory on order at
the
lower of cost or market value.
Effective
January 31, 2005, the Company formally terminated its contract with a supplier
for VoIP telephony handsets and reached an agreement with the supplier to settle
the unconditional purchase obligation under such contract. As a result, the
Company recorded charges to cost of revenue which increased the inventory
reserves related to its VoIP handset inventory by approximately $300,000 as
of
December 31, 2004. During the third quarter of 2004, the Company had recorded
a
$600,000 charge to cost of revenue and a corresponding increase to its reserve
for excess and obsolete inventory related to the VoIP handset inventory.
In
January 2005, the Company sold essentially all of its VoIP adapter inventory
on-hand for $235,000 in cash. As a result, approximately $356,000 of additional
provisions for excess and obsolete inventory were recorded in order to reflect
the VoIP adapter inventory at net realizable value as of December 31, 2004.
During 2004, the Company also made advance payments of approximately $299,000
towards future purchases of adapter inventory. The Company recorded charges
of
approximately $77,250 and $221,000 during the years ended December 31, 2005
and
2004, respectively, to write down the value of such deposits on inventory
purchases.
The
Company manages its inventory levels based on internal forecasts of customer
demand for its products, which is difficult to predict and can fluctuate
substantially. In addition, the Company's inventories include high technology
items that are specialized in nature or subject to rapid obsolescence. If the
Company's demand forecast is greater than the actual customer demand for its
products, the Company may be required to record additional charges related
to
increases in its inventory valuation reserves in future periods. The value
of
inventories is also dependent on the Company's estimate of future average
selling prices, and, if projected average selling prices are over estimated,
the
Company may be required to further adjust its inventory value to reflect the
lower of cost or market.
GOODWILL
AND INTANGIBLE ASSETS
The
Company accounts for goodwill and intangible assets in accordance with SFAS
No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill
and other intangibles with indefinite lives should no longer be amortized,
but
rather be tested for impairment annually or on an interim basis if events or
circumstances indicate that the fair value of the asset has decreased below
its
carrying value.
At
December 31, 2006, the Company had no goodwill and had no other intangible
assets with indefinite lives. Intangible assets subject to amortization and
included in the accompanying consolidated balance sheet as of December 31,
2006,
which consist of the values assigned to certain non-compete agreements, are
being amortized on a straight-line basis over an estimated useful life of five
years. See Note 5, "Impairment Charge," for a discussion of the charges recorded
by the Company as a result of the review of goodwill and intangible assets
for
impairment in connection with the preparation of the consolidated financial
statements as of December 31, 2004.
F-11
LONG-LIVED
ASSETS
Long-lived
assets, including property and equipment and intangible assets subject to
amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with SFAS No. 144, "Accounting for the Impairment
or
Disposal of Long-Lived Assets." If events or changes in circumstances indicate
that the carrying amount of an asset, or an appropriate grouping of assets,
may
not be recoverable, the Company estimates the undiscounted future cash flows
to
result from the use of the asset, or asset group. If the sum of the undiscounted
cash flows is less than the carrying value, the Company recognizes an impairment
loss, measured as the amount by which the carrying value exceeds the fair value
of the assets. Fair values are based on quoted market values, if available.
If
quoted market values are not available, the estimate of fair value may be based
on the discounted value of the estimated future cash flows attributable to
the
assets, or other valuation techniques deemed reasonable in the circumstances.
See
Note
5, "Impairment Charge," for discussion of the impairment charge recorded by
the
Company as a result of the review of long-lived assets for impairment in
connection with the preparation of the accompanying consolidated statement
of
operations for the year ended December 31, 2004.
Property
and equipment is stated at cost, net of accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets, as follows:
Estimated
Useful
Lives
|
||
VoIP
network equipment
Capitalized
software
Other
equipment
Furniture
and fixtures
Leasehold
improvements
|
3
years
3
years
3
years
3-7
years
3-4
years
|
The
Company capitalizes the cost of internal-use software which has a useful life
in
excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Subsequent additions, modifications, or upgrades
to
internal-use software are capitalized only to the extent that they allow the
software to perform a task it previously did not perform. Software maintenance
and training costs are expensed in the period in which they are incurred.
CONCENTRATION
OF CREDIT RISK
Financial
instruments which subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, marketable securities and trade accounts
receivable. The Company maintains its cash and cash equivalents with various
financial institutions and invests its funds among a diverse group of issuers
and instruments. The Company performs ongoing credit evaluations of its
customers' financial condition and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information.
Concentration
of credit risk in the Company’s Internet services division is generally limited
due to the large number of customers of the business. Two customers of the
computer games division represented an aggregate of approximately $155,000,
or
26%, of net consolidated accounts receivable as of December 31, 2006. Trade
accounts receivable of the VoIP telephony services division as of December
31,
2006, which approximated $25,000, consisted entirely of funds held as a deposit
by our credit card processor.
F-12
REVENUE
RECOGNITION
Continuing
Operations
COMPUTER
GAMES BUSINESSES
Advertising
revenue from the sale of print advertisements under short-term contracts in
the
Company’s magazine publications are recognized at the on-sale date of the
magazines.
The
Company participates in barter transactions whereby the Company trades marketing
data in exchange for advertisements in the publications of other companies.
Barter revenue and expenses are recorded at the fair market value of services
provided or received, whichever is more readily determinable in the
circumstances. Revenue from barter transactions is recognized as income when
advertisements or other products are delivered by the Company. Barter expense
is
recognized when the Company's advertisements are run in other companies'
magazines, which typically occurs within one to six months from the period
in
which barter revenue is recognized. The Company had no barter revenue during
the
years ended December 31, 2006 and 2005. Barter revenue represented approximately
2% of consolidated net revenue from continuing operations for the year ended
December 31, 2004.
Newsstand
sales of the Company’s magazine publications are recognized at the on-sale date
of the magazines, net of provisions for estimated returns. Subscription revenue,
which is net of agency fees, is deferred when initially received and recognized
as income ratably over the subscription term.
Sales
of
games and related products from the Company's online store are recognized as
revenue when the product is shipped to the customer. Amounts billed to customers
for shipping and handling charges are included in net revenue. The Company
provides an allowance for returns of merchandise sold through its online store.
The allowance for returns provided to date has not been significant.
INTERNET
SERVICES
Internet
services revenue consists principally of registration fees for Internet domain
registrations, which generally have terms of one year, but may be up to ten
years. Such registration fees are reported net of transaction fees paid to
an
unrelated third party which serves as the registry operator for the Company.
Payments of registration fees are deferred when initially received and
recognized as revenue on a straight-line basis over the registration terms.
VOIP
TELEPHONY SERVICES
VoIP
telephony services net revenue represents fees charged to customers for voice
services and is recognized based on minutes of customer usage or as services
are
provided. The Company records payments received in advance for prepaid services
as deferred revenue until the related services are provided. Sales of peripheral
VoIP telephony equipment are recognized as revenue when the product is shipped
to the customer. Amounts billed to customers for shipping and handling charges
are included in net revenue.
MARKETING
SERVICES -Discontinued Operations
Revenue
from the distribution of Internet advertising was recognized when Internet
users
visited and completed actions at an advertiser's website. Revenue consisted
of
the gross value of billings to clients, including the recovery of costs incurred
to acquire online media required to execute client campaigns. Recorded revenue
was based upon reports generated by the Company's tracking software.
Revenue
derived from the purchase and tracking of direct response media, such as
television and radio commercials, was recognized on a net basis when the
associated media was aired. In many cases, the amount the Company billed to
clients significantly exceeded the amount of revenue that was earned due to
the
existence of various "pass-through" charges such as the cost of the television
and radio media. Amounts received in advance of media airings were deferred.
F-13
Revenue
generated from the production of direct response advertising programs, such
as
infomercials, was recognized on the completed contract method when such programs
were complete and available for airing. Production activities generally ranged
from eight to twelve weeks and the Company usually collected amounts in advance
and at various points throughout the production process. Amounts received from
customers prior to completion of commercials were included in deferred revenue
and direct costs associated with the production of commercials in process were
deferred.
ADVERTISING
COSTS
Advertising
costs are expensed as incurred and are included in sales and marketing expense.
Advertising costs were approximately $1,019,000, $463,000 and
$2,294,000 for
the
years ended December 31, 2006, 2005 and 2004, respectively. Barter advertising
costs were approximately 2% and 4% of total net revenue from continuing
operations for the years ended December 31, 2006 and 2005, respectively. The
Company incurred no barter advertising costs for the year ended December 31,
2004.
PRODUCT
DEVELOPMENT
Product
development expenses include salaries and related personnel costs; expenses
incurred in connection with website development, testing and upgrades of our
computer games websites; editorial and content costs; and costs incurred in
the
development of our VoIP products. Product development costs and enhancements
to
existing products are charged to operations as incurred.
STOCK-BASED
COMPENSATION
In
December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation", supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and amends SFAS No. 95, “Statement of
Cash Flows.” The statement eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS No. 123, which generally resulted
in no compensation expense recorded in the financial statements related to
the
issuance of equity awards to employees. The statement also requires that the
cost resulting from all share-based payment transactions be recognized in the
financial statements. It establishes fair value as the measurement objective
in
accounting for share-based payment arrangements and generally requires all
companies to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees. The Company adopted SFAS No.
123R effective January 1, 2006, using the modified prospective
application method in accordance with the statement. This application requires
the Company to record compensation expense for all awards granted to employees
and directors after the adoption date and for the unvested portion of awards
that are outstanding at the date of adoption. The Company’s consolidated
financial statements as of and for the year ended December 31, 2006, reflect
the
impact of SFAS No. 123R. In accordance with the modified prospective application
method, the Company’s consolidated financial statements for prior periods have
not been restated to reflect and do not include the impact of SFAS No.
123R.
Prior
to
January 1, 2006, the Company had historically followed SFAS No. 123, "Accounting
for Stock-Based Compensation," which permitted entities to continue to apply
the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25") and provide
pro forma net earnings (loss) disclosures for employee stock option grants
as if
the fair-value-based method defined in SFAS No. 123 had been applied. Under
this
method, compensation expense was recorded on the date of grant only if the
then
current market price of the underlying stock exceeded the exercise price. The
following table presents the Company's pro forma historical net loss had the
Company determined compensation cost based on the fair value at the grant date
for all of its employee stock options issued under SFAS No. 123:
F-14
Year
Ended December 31,
|
|||||||
|
2005
|
2004
|
|||||
Net
loss - as reported
|
$
|
(11,510,048
|
)
|
$
|
(24,273,201
|
)
|
|
|
|||||||
Add:
Stock-based employee compensation expense included in net loss as
reported
|
502,217
|
416,472
|
|||||
|
|||||||
Deduct:
Total stock-based employee compensation expense determined under
fair
value method for all awards
|
(1,242,169
|
)
|
(1,606,271
|
)
|
|||
|
|||||||
Net
loss - pro forma
|
$
|
(12,250,000
|
)
|
$
|
(25,463,000
|
)
|
|
Basic
net loss per share - as reported
|
$
|
(0.06
|
)
|
$
|
(0.19
|
)
|
|
Basic
net loss per share - pro forma
|
$
|
(0.07
|
)
|
$
|
(0.20
|
)
|
During
the year ended December 31, 2006, a total of 6,130,000 stock options were
granted with a per share weighted-average fair value of $0.14 and whose exercise
price equaled the market price of the stock on the date of grant. A total of
5,922,250 stock options were granted during the year ended December 31, 2005
with a per share weighted-average fair value of $0.10 and whose exercise price
equaled the market price of the stock on the grant date. A total of 7,749,595
stock options were granted during the year ended December 31, 2004, including
1,490,430 stock options with a per share weighted-average fair value of $0.51
and whose exercise price equaled the market price of the stock on the grant
date. A total of 6,259,165 stock options were granted during the year ended
December 31, 2004 with an exercise price below the market price of the stock
on
the grant date and a per share weighted-average fair value of $0.47.
Fair
values of stock options were calculated using the Black Scholes option-pricing
method based on the assumptions noted in the following table. Expected
volatilities are based on the historical volatility of theglobe’s Common Stock,
over a time period that is consistent with the expected life of the option.
Effective January 1, 2006, the Company began using the simplified method as
allowed by SEC Staff Accounting Bulletin No. 107 to calculate the expected
term
of stock option grants, which is the average of the option’s weighted average
vesting period and its contractual term. The risk fee interest rate is based
on
the U.S. Treasury yield in effect at the time of the grant.
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
|||||||
Risk-free
interest rate
|
4.00
- 5.00
|
%
|
3.00
- 4.00
|
%
|
3.00
|
%
|
||||
Expected
term / life
|
3
- 6 years
|
3
- 5 years
|
3
- 5 years
|
|||||||
Volatility
|
115
-150
|
%
|
160
|
%
|
160
|
%
|
||||
Weighted
average volatility
|
140
|
%
|
160
|
%
|
160
|
%
|
||||
Expected
dividend rate
|
0
|
0
|
0
|
INCOME
TAXES
The
Company accounts for income taxes using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases for operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the consolidated results
of operations in the period that the tax change occurs. Valuation allowances
are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
F-15
NET
LOSS PER COMMON SHARE
The
Company reports net loss per common share in accordance with SFAS No. 128,
"Computation of Earnings Per Share." In accordance with SFAS 128 and the SEC
Staff Accounting Bulletin No. 98, basic earnings per share is computed using
the
weighted average number of common shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
conversion of convertible preferred stock and convertible notes (using the
if-converted method), if any, and the shares issuable upon the exercise of
stock
options and warrants (using the treasury stock method). Common equivalent shares
are excluded from the calculation if their effect is anti-dilutive or if a
loss
from continuing operations is reported.
Due
to
the Company's net losses from continuing operations, the effect of potentially
dilutive securities or common stock equivalents that could be issued was
excluded from the diluted net loss per common share calculation due to the
anti-dilutive effect. Such potentially dilutive securities and common stock
equivalents consisted of the following for the periods ended:
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
|||||||
Options
to purchase common stock
|
20,143,000
|
15,373,000
|
15,984,000
|
|||||||
|
||||||||||
Common
shares issuable upon
|
||||||||||
conversion
of Convertible Notes
|
68,000,000
|
68,000,000
|
— | |||||||
|
||||||||||
Common
shares issuable upon exercise
|
||||||||||
of
Warrants
|
16,911,000
|
8,776,000
|
20,375,000
|
|||||||
Total
|
105,054,000
|
92,149,000
|
36,359,000
|
COMPREHENSIVE
INCOME (LOSS)
The
Company reports comprehensive income (loss) in accordance with the SFAS No.
130,
"Reporting Comprehensive Income." Comprehensive income (loss) generally
represents all changes in stockholders' equity during the year except those
resulting from investments by, or distributions to, stockholders. The Company's
comprehensive loss was approximately $17.0 million, $11.5 million and $24.3
million for the years ended December 31, 2006, 2005 and 2004, respectively,
which approximated the Company's reported net loss.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities.”
SFAS No. 159 expands the scope of what entities may carry at fair value by
offering an irrevocable option to record many types of financial assets and
liabilities at fair value. Changes in fair value would be recorded in an
entity’s income statement. This accounting standard also establishes
presentation and disclosure requirements that are intended to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for the
Company on January 1, 2008. Earlier application is permitted under certain
circumstances. We are currently evaluating the requirements of SFAS No. 159
and
have not yet determined the impact on our consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
standard defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles and expands disclosure about fair
value
measurements. SFAS No. 157 applies to other accounting standards that require
or
permit fair value measurements. Accordingly, this statement does not require
any
new fair value measurement. This statement is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
We are currently evaluating the requirements of SFAS No. 157 and have not
determined the impact on our consolidated financial statements.
F-16
In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how
the effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB No. 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements as
if
the “dual approach” had always been used or (ii) recording the cumulative effect
of initially applying the “dual approach” as adjustments to the carrying value
of assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of the “cumulative
effect” transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment
and
how and when it arose. The adoption of this standard did not have a material
impact on the Company’s financial condition, results of operations or
liquidity.
In
June
2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty
in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for
Income Taxes,” which clarifies accounting for and disclosure of uncertainty in
tax positions. FIN No. 48 prescribes a recognition threshold and measurement
attribute for the financial recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation is effective for
fiscal years beginning after December 15, 2006. We are currently evaluating
the
impact of adopting FIN No. 48 on our consolidated financial statements. At
this
point, the Company does not believe that the adoption of FIN No. 48 will have
a
material effect on its consolidated financial position, cash flows and results
of operations.
RECLASSIFICATIONS
Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation. In accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”, the operations of SendTec
have been accounted for in accordance with the provisions of SFAS No. 144 and
the results of SendTec’s operations have been included in income from
discontinued operations for the 2005 and 2004 periods.
(2)
GOING CONCERN CONSIDERATIONS
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly,
the
consolidated financial statements do not include any adjustments relating to
the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. However,
for the reasons described below, Company management does not believe that cash
on hand and cash flow generated internally by the Company will be adequate
to
fund the operation of its businesses beyond a short period of time. These
reasons raise significant doubt about the Company’s ability to continue as a
going concern.
As
more
fully discussed in Note 14, “Litigation,” the Company is a defendant in a
lawsuit which was filed by MySpace, Inc. (“MySpace”) on June 1, 2006 in the
United States District Court for the Central District of California (the
“Court”). The lawsuit alleges, among other things, that the Company sent
unsolicited and unauthorized commercial email messages to MySpace members in
violation of certain federal and state laws and the Company’s contract with
MySpace.
On
February 28, 2007, the Court entered an order (the “Order”) granting in part
MySpace’s motion for summary judgment, finding that the Company was liable for
violation of the CAN-SPAM Act and the California Business & Professions
Code, and for breach of contract (as embodied in MySpace’s “Terms of Service”
contract). The Order also upheld as valid that portion of MySpace’s Terms of
Service contract which provides for liquidated damages of $50 per email message
sent after March 17, 2006 in violation of such Terms. The Company estimates
that
approximately
110,000 of the emails in question were sent after such date, which could result
in damages of approximately $5.5 million. In addition, the CAN-SPAM Act provides
for statutory damages of between $100 and $300 per email sent in violation
of
the statute. Total damages under CAN-SPAM could therefore range between about
$40 million to about $120 million. In addition, under the California Act,
statutory damages of $1 million “per incident” could be assessed.
F-17
On
March
15, 2007, the Company entered into a Settlement Agreement with MySpace whereby
it agreed to pay MySpace approximately $2,550,000 on or before April 5, 2007
in
exchange for a mutual release of all claims against one another, including
any
claims against the Company’s directors and officers. As part of the settlement,
Michael Egan, the Company’s CEO, who is also an affiliate of the Company, agreed
to enter into an agreement with MySpace on or before April 5th
pursuant
to which he would, among other things, provide a letter of credit, cash or
other
equivalent security (collectively, “Security”) in form and substance
satisfactory to MySpace. Such Security is to expire and be released on the
100th
day
following the Company’s payment of the foregoing $2,550,000 so long as no
bankruptcy petition, assignment for the benefit of creditors or like
liquidation, reorganization or insolvency proceeding is instituted or filed
related to the Company during such 100-day period.
The
Company does not currently have the resources to both pay the $2,550,000
settlement amount and to fund operations beyond April 2007. The Company intends
to seek to raise capital or otherwise borrow funds with which to pay such amount
and otherwise to fund operations. Although there is no commitment to do so,
any
such funds would most likely come primarily from Mr. Egan or affiliates of
Mr.
Egan or the Company, as the Company currently has no access to credit facilities
with traditional third party lenders and has historically relied on borrowings
from related parties to meet short-term liquidity needs. Any such capital raised
would not be registered under the Securities Act of 1933 and would not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. There can be no assurance that the
Company will be successful in raising such capital or borrowing such funds
and
any capital raised will likely result in very substantial dilution of the number
of shares outstanding or which could be outstanding upon the exercise or
conversion of any derivative securities issued by the Company as part of such
capital raise. The failure to pay the $2,550,000 to MySpace and/or the failure
to satisfactorily provide the Security would result in a resumption of the
litigation with MySpace and, in all likelihood, would have a material adverse
effect on the Company, including the potential bankruptcy and cessation of
business of the Company.
The
Company continues to incur consolidated net losses and management believes
that
the Company will continue to be unprofitable in the foreseeable future. As
of
February 28, 2007, the Company had a net working capital deficit of
approximately $7,300,000 (unaudited), inclusive of a cash and cash equivalents
balance of approximately $4,000,000 (unaudited). Such working capital deficit
includes a settlement liability of $2,550,000 owed to MySpace and an aggregate
of $3,400,000 in secured convertible demand notes (the “Convertible Notes”) and
accrued interest of approximately $611,000 due to entities controlled by the
Company’s Chairman and Chief Executive Officer. Inasmuch as substantially all of
the assets of the Company and its subsidiaries secure the Convertible Notes,
in
connection with any resulting proceeding to collect the indebtedness related
to
the Convertible Notes, the noteholders could seize and sell the assets of the
Company and its subsidiaries, any or all of which would have a material adverse
effect on the financial condition and future operations of the Company,
including the potential bankruptcy or cessation of business of the
Company.
Management’s
Plans
It
is our
preference to avoid filing for protection under the U.S. Bankruptcy Code.
However, in order to avoid such filing and continue as a going concern, we
believe that, in addition to settling the MySpace litigation as discussed above,
we must (i) quickly raise a sufficient amount of capital; (ii) successfully
implement a business plan focused primarily on expanding our Tralliance Internet
services revenue base, and reducing Tralliance and corporate overhead expenses;
and (iii) successfully eliminate future losses incurred by our VoIP telephony
services and computer games business segments by effectuating our planned
shutdown and/or selling certain component assets of these businesses. There
can
be no assurance that the Company will be able to successfully complete any
or
all of the above actions which we believe are required in order to continue
as a
going concern.
F-18
(3)
DISCONTINUED OPERATIONS - SENDTEC, INC.
On
August
10, 2005, the Company entered into an Asset Purchase Agreement with
RelationServe Media, Inc. ("RelationServe") whereby the Company agreed to sell
all of the business and substantially all of the net assets of its SendTec
marketing services subsidiary to RelationServe for $37,500,000 in cash, subject
to certain net working capital adjustments. On August 23, 2005, the Company
entered into Amendment No. 1 to the Asset Purchase Agreement with RelationServe
(the “1st
Amendment”
and together with the original Asset Purchase Agreement, the “Purchase
Agreement”). On October 31, 2005, the Company completed the asset sale.
Including adjustments to the purchase price related to estimated excess working
capital of SendTec as of the date of sale, the Company received an aggregate
of
$39,850,000 in cash pursuant to the Purchase Agreement.
In
accordance with the terms of an escrow agreement established as a source to
secure the Company’s indemnification obligations under the Purchase Agreement,
$1,000,000 of the purchase price and an aggregate of 2,272,727 shares of
theglobe’s unregistered Common Stock (valued at $750,000 pursuant to the terms
of the Purchase Agreement based upon the average closing price of the stock
in
the 10 day period preceding the closing of the sale) were placed into escrow.
Additionally,
as contemplated by the Purchase Agreement, immediately following the asset
sale,
the Company completed the redemption of 28,879,097 shares of its Common Stock
owned by six members of management of SendTec for approximately $11,604,000
in
cash pursuant to a Redemption Agreement dated August 23, 2005, (the “Redemption
Payment”). Pursuant to a separate Termination Agreement, the Company also
terminated and canceled 1,275,783 stock options and the contingent interest
in
2,062,785 earn-out warrants held by the six members of management in exchange
for approximately $400,000 in cash. The Company also terminated 829,678 stock
options of certain other non-management employees of SendTec and entered into
bonus arrangements with a number of other non-management SendTec employees
for
amounts totaling approximately $600,000. Approximately $4,043,000 of the
Redemption Payment was attributed to the “fair value” of the shares of Common
Stock redeemed and recorded as treasury shares. The “fair value” for financial
accounting purposes was calculated based on the closing price of the Company’s
Common Stock as reflected on the OTCBB on August 10, 2005, the date the
principal terms of the Redemption Agreement were announced publicly. The closing
of the redemption occurred on October 31, 2005. The remaining portion of the
Redemption Payment, or approximately $7,561,000, was recorded as a reduction
to
the gain on the sale of the SendTec business, as the excess of the price paid
to
redeem the shares over the “fair value” for financial accounting purposes was
attributed to the sale in accordance with FASB Technical Bulletin 85-6.
On
March
31, 2006, a partial release of $750,000 of the escrowed cash was made to the
Company pursuant to the terms of the escrow agreement, less $318,750 of cash
due
to RelationServe in final settlement of the purchase price net working capital
adjustments. On December 22, 2006, the remaining $250,000 of escrowed cash,
as
well as the Common Stock held in escrow, was released to the Company.
Results
of operations for SendTec have been reported separately as “Discontinued
Operations” in the accompanying consolidated statements of operations for the
years ended December 31, 2005 and 2004. Summarized financial information for
the
discontinued operations of SendTec was as follows:
Year
Ended December 31,
|
|||||||
|
2005
|
2004
|
|||||
Net
revenue, net of intercompany eliminations
|
$
|
31,872,229
|
$
|
12,542,241
|
|||
|
|||||||
Income
from operations
|
$
|
1,014,430
|
$
|
973,368
|
|||
Provision
for income taxes
|
(945,629
|
)
|
(370,891
|
)
|
|||
Income
from operations, net of tax
|
68,801
|
602,477
|
|||||
|
|||||||
Gain
on sale of business
|
15,017,621
|
—
|
|||||
Provision
for income taxes
|
(13,248,090
|
)
|
—
|
||||
Gain
on sale, net of tax
|
1,769,531
|
—
|
|||||
|
|||||||
Net
income from discontinued operations, net of taxes
|
$
|
1,838,332
|
$
|
602,477
|
F-19
The
Company originally acquired SendTec on September 1, 2004. In exchange for all
of
the issued and outstanding shares of capital stock of SendTec, the Company
paid
consideration consisting of: (i) $6,000,000 in cash, excluding transaction
costs, (ii) the issuance of an aggregate of 17,500,024 shares of the Company's
Common Stock, (iii) the issuance of an aggregate of 175,000 shares of Series
H
Automatically Converting Preferred Stock (which was converted into 17,500,500
shares of the Company's Common Stock effective December 1, 2004), and (iv)
the
issuance of a subordinated promissory note in the amount of $1,000,009. The
Company also issued an aggregate of 3,974,165 replacement options to acquire
the
Company's Common Stock for each of the issued and outstanding options to acquire
SendTec shares held by the former employees of SendTec.
In
addition, warrants to acquire shares of the Company’s Common Stock would be
issued to the former shareholders of SendTec when and if SendTec exceeded
forecasted operating income, as defined, of $10.125 million, for the year ended
December 31, 2005. The number of earn-out warrants issuable ranged from an
aggregate of approximately 250,000 to 2,500,000 (if actual operating income
exceeded the forecast by at least 10%). Pursuant to the Termination Agreement
mentioned above, the contingent interest in 2,062,785 of the earn-out warrants
was canceled effective October 31, 2005. The remainder of the earn-out warrants
expired on December 31, 2005, as the operating income target was not achieved.
As
part
of the SendTec acquisition transaction, certain executives of SendTec entered
into new employment agreements with SendTec. The employment agreements each
had
a term of five years and contained certain non-compete provisions for periods
as
specified by the agreements. The $1,800,000 value assigned to the non-compete
agreements was being amortized on a straight-line basis over five years.
Pursuant to the Termination Agreement mentioned above, the employment agreements
were terminated effective October 31, 2005 and the unamortized balance of the
non-compete intangible was charged to discontinued operations’ expense.
(4)
ACQUISITION OF TRALLIANCE CORPORATION
On
February 25, 2003, the Company entered into a Loan and Purchase Option
Agreement, as amended, with Tralliance, an Internet related business venture,
pursuant to which it agreed to fund, in the form of a loan, at the discretion
of
the Company, Tralliance's operating expenses and obtained the option to acquire
all of the outstanding capital stock of Tralliance in exchange for, when and
if
exercised, $40,000 in cash and the issuance of an aggregate of 2,000,000
unregistered restricted shares of the Company's Common Stock. The Loan was
secured by a lien on the assets of the venture. On May 5, 2005, Tralliance
and
the Internet Corporation for Assigned Names and Numbers ("ICANN") entered into
an agreement designating Tralliance as the registry for the ".travel" top-level
domain. On May 9, 2005, the Company exercised its option to acquire all of
the
outstanding capital stock of Tralliance. The purchase price consisted of the
issuance of 2,000,000 shares of the Company’s Common Stock, warrants to acquire
475,000 shares of the Company’s Common Stock and $40,000 in cash. The warrants
are exercisable for a period of five years at an exercise price of $0.11 per
share. As part of the transaction, 10,000 shares of the Company’s Common Stock
were also issued to a third party in payment of a finder's fee resulting from
the acquisition. The Common Stock issued as a result of the acquisition of
Tralliance is entitled to certain "piggy-back" registration rights. In addition,
as part of the transaction, the Company agreed to pay approximately $154,000
in
outstanding liabilities of Tralliance immediately after the closing of the
acquisition.
Upon
acquisition, the then existing CEO and CFO of Tralliance entered into employment
agreements, which included certain non-compete provisions, whereby each would
agree to remain in the employ of Tralliance for a period of two years in
exchange for annual base compensation totaling $200,000 to each officer, plus
participation in a bonus pool based upon the pre-tax income of the venture.
The
value
assigned to the non-compete provisions of the employment agreements is being
amortized on a straight-line basis over a five year estimated useful life.
Annual amortization expense of the intangible assets is estimated to be:
$158,047 for each of 2007 through 2009 and $52,683 in 2010. The related
accumulated amortization as of December 31, 2006 and 2005 was $263,412 and
$75,201, respectively. Amortization expense totaled $188,211 and $75,201 for
the
years ended December 31, 2006 and 2005, respectively.
F-20
Advances
to Tralliance totaled $1,281,500 prior to its acquisition by the Company. Due
to
the uncertainty of the ultimate collectibility of the Loan, the Company had
historically provided a reserve equal to the full amount of the funds advanced
to Tralliance. For the years ended December 31, 2005 and 2004, additions to
the
reserve of $280,000 and $506,500, respectively, were included in other expense
in the accompanying consolidated statements of operations.
(5)
IMPAIRMENT CHARGE
As
a
result of the significant operating and cash flow losses incurred by the
Company's VoIP telephony services division during 2004 and 2003, coupled with
management's projection of continued losses in the foreseeable future, the
Company performed an evaluation of the recoverability of the division's
long-lived assets during the first quarter of 2005 in connection with the
preparation of its 2004 consolidated financial statements. The evaluation
indicated that the carrying value of certain of the division's long-lived assets
exceeded the fair value of such assets, as measured by quoted market prices
or
other management estimates. As a result, the Company recorded an impairment
charge of $1,661,975 in the accompanying statement of operations for the year
ended December 31, 2004. The impairment charge included the write-off of the
carrying value of amounts previously capitalized by the division as internal-use
software, website development costs, acquired technology and patent costs, as
well as certain other assets.
(6)
INTANGIBLE ASSETS
As
discussed in Note 4, “Acquisition of Tralliance Corporation,” upon the May 9,
2005 acquisition of Tralliance, the then existing CEO and CFO of Tralliance
entered into employment agreements which include certain non-compete provisions
as specified by the agreements. At December 31, 2006 and 2005, intangible assets
consist of the $790,236 value assigned to the non-compete agreements which
is
being amortized on a straight-line basis over five years. Accumulated
amortization as of December 31, 2006 and 2005 totaled $263,412 and $75,201,
respectively.
As
discussed in Note 5, "Impairment Charge," the Company performed an evaluation
of
the recoverability of the long-lived assets of its VoIP telephony services
division, and as a result, effective December 31, 2004, the Company wrote-off
the unamortized balance of its digital telephony intangible assets which totaled
$192,106. Such assets consisted of certain VoIP assets which were recorded
at
the value assigned to the warrants to acquire 1,750,000 shares of the Company's
Common Stock issued in connection with the acquisition of the assets on November
14, 2002, as well as patent application costs.
During
the years ended December 31, 2006 and 2005, intangible asset amortization
totaled $188,211 and $75,201, respectively. During the year ended December
31,
2004, intangible asset amortization totaled $102,834 which represented
amortization related to the VoIP intangible assets prior to their write-off
as
of December 31, 2004.
As
of
December 31, 2006, annual amortization expense of intangible assets is projected
to be: $158,047 for each of 2007 through 2009 and $52,683 in 2010.
(7)
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
December
31,
|
|||||||
|
2006
|
2005
|
|||||
VoIP
network equipment and software
|
$
|
1,888,321
|
$
|
3,056,971
|
|||
Other
equipment
|
878,186
|
870,706
|
|||||
Capitalized
software costs
|
339,154
|
262,349
|
|||||
Furniture
and fixtures
|
204,686
|
202,813
|
|||||
Leasehold
improvements
|
7,007
|
7,007
|
|||||
|
3,317,354
|
4,399,846
|
|||||
|
|||||||
Less:
Accumulated depreciation and amortization
|
2,951,830
|
2,944,193
|
|||||
|
$
|
365,524
|
$
|
1,455,653
|
F-21
(8)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consisted of the following:
December
31,
|
|||||||
|
2006
|
2005
|
|||||
Accrued
legal settlement
|
$
|
2,550,000
|
$
|
—
|
|||
Interest
payable on 10% promissory notes due affiliates
|
556,164
|
216,164
|
|||||
Other
|
1,178,491
|
1,961,651
|
|||||
|
$
|
4,284,655
|
$
|
2,177,815
|
(9)
DEBT
Debt
consisted of the following:
December
31,
|
|||||||
|
2006
|
2005
|
|||||
10%
Convertible Promissory Notes due to affiliates; due on demand
|
$
|
3,400,000
|
$
|
3,400,000
|
|||
|
|||||||
Obligations
payable in Canadian dollars; paid in full
|
|||||||
September
2006
|
—
|
28,447
|
|||||
|
3,400,000
|
3,428,447
|
|||||
Less:
short-term portion
|
3,400,000
|
3,428,447
|
|||||
Long-term
portion
|
$
|
—
|
$
|
—
|
On
April
22, 2005, E&C Capital Partners, LLLP and E&C Capital Partners II, LLLP
(the "Noteholders"), entities controlled by the Company's Chairman and Chief
Executive Officer, entered into a Note Purchase Agreement (the "Agreement")
with
theglobe pursuant to which they acquired secured demand convertible promissory
notes (the "Convertible Notes") in the aggregate principal amount of $1,500,000.
Under the terms of the Agreement, the Noteholders were also granted the optional
right, for a period of 90 days from the date of the Agreement, to purchase
additional Convertible Notes such that the aggregate principal amount of
Convertible Notes issued under the Agreement could total $4,000,000 (the
"Option"). On June 1, 2005, the Noteholders exercised a portion of the Option
and acquired an additional $1,500,000 of Convertible Notes. On July 18, 2005,
the Noteholders exercised the remainder of the Option and acquired an additional
$1,000,000 of Convertible Notes.
The
Convertible Notes are convertible at the option of the Noteholders into shares
of the Company's Common Stock at an initial price of $0.05 per share. Through
December 31, 2006, an aggregate of $600,000 of Convertible Notes have been
converted by the Noteholders into an aggregate of 12,000,000 shares of the
Company’s Common Stock. Assuming full conversion of all Convertible Notes which
remain outstanding as of December 31, 2006, an additional 68,000,000 shares
of
the Company's Common Stock would be issued to the Noteholders. The Convertible
Notes provide for interest at the rate of ten percent per annum and are secured
by a pledge of substantially all of the assets of the Company. The Convertible
Notes are due and payable five days after demand for payment by the Noteholders.
As
the
Notes were immediately convertible into common shares of the Company at
issuance, an aggregate of $4,000,000 of non-cash interest expense was recorded
during the year ended December 31, 2005 as a result of the beneficial conversion
features of the Convertible Notes. The value attributed to the beneficial
conversion features was calculated by comparing the fair value of the underlying
common shares of the Convertible Notes on the date of issuance based on the
closing price of theglobe's Common Stock as reflected on the OTCBB to the
conversion price and was limited to the aggregate proceeds received from the
issuance of the Convertible Notes.
As
discussed in Note 3, “Discontinued Operations - SendTec, Inc.,” on September 1,
2004 the Company issued a subordinated promissory note in the amount of
$1,000,009 in connection with the acquisition of SendTec. The subordinated
promissory note provided for interest at the rate of four percent per annum
and
was due on September 1, 2005. The Company paid the principal and interest due
under the terms of the subordinated promissory note on October 31, 2005,
including default interest at a rate of 15% per annum for the period the debt
was outstanding subsequent to the original due date.
F-22
On
February 2, 2004, our Chairman and Chief Executive Officer and his spouse,
entered into a Note Purchase Agreement with the Company pursuant to which they
acquired a demand convertible promissory note (the "Bridge Note") in the
aggregate principal amount of $2,000,000. The Bridge Note was convertible into
shares of the Company's Common Stock. The Bridge Note provided for interest
at
the rate of ten percent per annum and was secured by a pledge of substantially
all of the assets of the Company. Such security interest was shared with the
holders of the Company's $1,750,000 Secured Convertible Notes issued to E&C
Capital Partners, LLLP and certain affiliates of our Chairman and Chief
Executive Officer. In addition, the Chairman and Chief Executive Officer and
his
spouse were issued a warrant to acquire 204,082 shares of the Company's Common
Stock at an exercise price of $1.22 per share. The Warrant is exercisable at
any
time on or before February 2, 2009. The exercise price of the Warrant, together
with the number of shares for which such Warrant is exercisable, is subject
to
adjustment upon the occurrence of certain events. In connection with the March
2004 private offering of the Company's Common Stock, the Chairman and his spouse
converted the Bridge Note into 3,527,337 shares of theglobe.com Common Stock.
An
allocation of the proceeds received from the issuance of the Bridge Note was
made between the debt instrument and the Warrant by determining the pro rata
share of the proceeds for each by comparing the fair value of each security
issued to the total fair value. The fair value of the Warrant was determined
using the Black Scholes model. The fair value of the Bridge Note was determined
by measuring the fair value of the common shares on an "as-converted" basis.
As
a result, $170,000 was allocated to the Warrant and recorded as a discount
on
the debt issued and additional paid in capital. The value of the beneficial
conversion feature of the Bridge Note was calculated by comparing the fair
value
of the underlying common shares of the Bridge Note on the date of issuance
based
on the closing price of our Common Stock as reflected on the OTCBB to the
"effective" conversion price. This resulted in a beneficial conversion discount
of $517,000, which was recorded as interest expense in the accompanying
consolidated statement of operations for the year ended December 31, 2004 as
the
Bridge Note was immediately convertible into common shares. In addition, the
value allocated to the Warrant and characterized as discount on the Bridge
Note
was recognized as interest expense, as the Bridge Note was due on demand.
On
May
22, 2003, E&C Capital Partners, LLLP, together with certain affiliates of
Michael S. Egan, entered into a Note Purchase Agreement with the Company
pursuant to which they acquired convertible promissory notes (the "Secured
Convertible Notes") in the aggregate principal amount of $1,750,000. The Secured
Convertible Notes were convertible at anytime into a maximum of approximately
19,444,000 shares of the Company's Common Stock at a blended rate of $0.09
per
share. The Secured Convertible Notes had a one year maturity date and were
secured by a pledge of substantially all of the assets of the Company. The
Secured Convertible Notes provided for interest at the rate of ten percent
per
annum, payable semi-annually. Effective October 3, 2003, the holders of the
Secured Convertible Notes waived the right to receive accrued interest payable
in shares of the Company's Common Stock. Additionally, each of the holders
of
the Secured Convertible Notes agreed to defer receipt of interest until June
1,
2004. Additional interest at ten percent per annum accrued on any interest
amounts deferred. In addition, E&C Capital Partners, LLLP was issued a
warrant (the "Warrant") to acquire 3,888,889 shares of the Company's Common
Stock at an exercise price of $0.15 per share. The Warrant was exercisable
at
any time on or before May 22, 2013. In connection with the March 2004 private
offering of the Company’s Common Stock discussed in Note 10, “Stockholders’
Equity”, E&C Capital Partners, LLLP, converted the $1,750,000 of Secured
Convertible Notes and exercised (on a “cashless” basis) the 3,888,889 Warrant
issued in connection with the $1,750,000 Secured Convertible Notes.
(10)
STOCKHOLDERS' EQUITY
On
November 22, 2006, the Company entered into certain Marketing Services
Agreements (the “Marketing Services Agreements”) with two entities whereby the
entities agreed to market certain of the Company’s products in exchange for
certain commissions and promotional fees and which granted the Company exclusive
right to certain uses of a tradename in connection with certain of the Company’s
websites. Additionally, on November 22, 2006, in connection
with the Marketing Services Agreements, the Company entered into a Warrant
Purchase Agreement with Carl Ruderman, the controlling shareholder of the
entities. The Warrant Purchase Agreement provides for the issuance to Mr.
Ruderman of one warrant to purchase 5,000,000 shares of the Company’s Common
Stock at an exercise price of $0.15 per share with a three year term and a
second warrant to purchase 5,000,000 shares of the Company’s Common Stock at an
exercise price of $0.15 per share with a term of four years. Each warrant
provides for the extension of the exercise term by an additional three years
if
certain criteria are met under the Marketing Services Agreements. The Warrant
Purchase Agreement grants to Mr. Ruderman “piggy-back” registration rights with
respect to the shares of the Company’s Common Stock issuable upon exercise of
the warrants. The $515,262 fair value of the warrants was determined using
the
Black Scholes model and was recorded as a charge to sales and marketing expense
and additional paid in capital in the accompanying 2006 consolidated financial
statements.
F-23
In
connection with the issuance of the warrants, on November 22, 2006, Mr. Ruderman
entered into a Stockholders’ Agreement with the Company’s chairman and chief
executive officer, the Company’s president and certain of their affiliates.
Pursuant to the Stockholders’ Agreement, Mr. Ruderman granted an irrevocable
proxy over the shares issuable upon exercise of the warrants to E&C Capital
Partners, LLLP and granted a right of first refusal over his shares to all
of
the other parties to the Stockholders’ Agreement. Mr. Ruderman also agreed to
sell his shares under certain circumstances in which the other parties to the
Stockholders’ Agreement have agreed to sell their respective shares. Mr.
Ruderman was also granted the right to participate in certain sales of the
Company’s Common Stock by the other parties to the Stockholders’
Agreement.
On
December 31, 2005, the Company’s Board of Directors authorized the retirement of
699,281 common shares held in treasury.
As
discussed in Note 3, "Discontinued Operations - SendTec, Inc.," the Company
completed the sale of the business and substantially all of the net assets
of
its SendTec marketing services subsidiary on October 31, 2005. As contemplated
by the Purchase Agreement, immediately following the asset sale, the Company
completed the redemption of 28,879,097 shares of its Common Stock owned by
six
members of management of SendTec for approximately $11,604,000 in cash pursuant
to a Redemption Agreement dated August 23, 2005 (the “Redemption Payment”).
Approximately $4,043,000 of the Redemption Payment was attributed to the “fair
value” of the shares of Common Stock redeemed and recorded as treasury shares.
The “fair value” for financial accounting purposes was calculated based on the
closing price of the Company’s Common Stock as reflected on the OTCBB on August
10, 2005, the date the principal terms of the Redemption Agreement were
announced publicly. The closing of the redemption occurred on October 31, 2005.
The remaining portion of the Redemption Payment, or approximately $7,561,000,
was recorded as a reduction to the gain on the sale of the SendTec business,
as
the excess of the price paid to redeem the shares over the “fair value” for
financial accounting purposes was attributed to the sale in accordance with
FASB
Technical Bulletin 85-6. The 28,879,097 common shares redeemed were retired
effective October 31, 2005. Pursuant to a separate Termination Agreement, the
Company also terminated and canceled 1,275,783 stock options and the contingent
interest in 2,062,785 earn-out warrants held by the six members of management
in
exchange for approximately $400,000 in cash.
In
accordance with the terms of an escrow agreement established as a source to
secure the Company’s indemnification obligations under the Purchase Agreement,
$1,000,000 of the purchase price and an aggregate of 2,272,727 shares of
theglobe’s unregistered Common Stock (valued at $750,000 pursuant to the terms
of the Purchase Agreement based upon the average closing price of the stock
in
the 10 day period preceding the closing of the sale) were placed into escrow.
During the year ended December 31, 2006, the escrowed cash and shares of the
theglobe’s Common Stock were released to the Company and the common shares were
retired.
The
Company originally acquired SendTec on September 1, 2004. In exchange for all
of
the issued and outstanding shares of capital stock of SendTec the Company paid
consideration consisting of: (i) $6,000,000 in cash, excluding transaction
costs, (ii) the issuance of an aggregate of 17,500,024 shares of the Company's
Common Stock, (iii) the issuance of an aggregate of 175,000 shares of Series
H
Automatically Converting Preferred Stock (which was converted into 17,500,500
shares of the Company's Common Stock effective December 1, 2004, the effective
date of the amendment to the Company’s certificate of incorporation increasing
its authorized shares of Common Stock from 200,000,000 shares to 500,000,000
shares), and (iv) the issuance of a subordinated promissory note in the amount
of $1,000,009.
F-24
As
more
fully described in Note 4, “Acquisition of Tralliance Corporation,” on May 9,
2005, the Company exercised its option to acquire all of the outstanding capital
stock of Tralliance. The purchase price consisted of the issuance of 2,000,000
shares of the Company’s Common Stock and warrants to acquire 475,000 shares of
the Company’s Common Stock, as well as the payment of $40,000 in cash. The
warrants are exercisable for a period of five years at an exercise price of
$0.11 per share. The Common Stock issued as a result of the acquisition of
Tralliance is entitled to certain “piggy-back” registration rights.
Reference
should be made to Note 9, “Debt,” for the discussion of a Note Purchase
Agreement entered into by certain related parties and theglobe on April 22,
2005, providing for the issuance of an aggregate of $4,000,000 of Convertible
Notes. The Convertible Notes are convertible at the option of the Noteholders
into shares of the Company's Common Stock at an initial price of $0.05 per
share. Through December 31, 2006, an aggregate of $600,000 of Convertible Notes
had been converted by the Noteholders into an aggregate of 12,000,000 shares
of
the Company’s Common Stock. Assuming full conversion of all of the Convertible
Notes which remain outstanding as of December 31, 2006, 68,000,000 shares of
the
Company’s Common Stock would be issued to the Noteholders.
In
March
2004, theglobe completed a private offering of 333,816 units (the "Units")
for a
purchase price of $85 per Unit (the "Private Offering"). Each Unit consisted
of
100 shares of the Company's Common Stock, $0.001 par value, and warrants to
acquire 50 shares of the Company's Common Stock (the "Warrants"). The Warrants
are exercisable for a period of five years commencing 60 days after the initial
closing at an initial exercise price of $0.001 per share. The aggregate number
of shares of Common Stock issued in the Private Offering was 33,381,647 shares
for an aggregate consideration of $28,374,400, or approximately $0.57 per share
assuming the exercise of the 16,690,824 Warrants. As of December 31, 2006,
approximately 510,000 of the Warrants remain outstanding. Halpern
Capital, Inc., acted as placement agent for the Private Offering, and was paid
a
commission of $1.2 million and issued a warrant to acquire 1,000,000 shares
of
Common Stock at $0.001 per share. All of the shares underlying the warrant
had
been issued by December 31, 2005.
In
connection with the Private Offering, Michael S. Egan, our Chairman, Chief
Executive Officer and principal stockholder, together with certain of his
affiliates, including E&C Capital Partners, LLLP, converted a $2,000,000
Convertible Bridge Note, $1,750,000 of Secured Convertible Notes and all of
the
Company's outstanding shares of Series F Preferred Stock, and exercised (on
a
"cashless" basis) all of the warrants issued in connection with the foregoing
$1,750,000 Secured Convertible Notes and Series F Preferred Stock, together
with
certain warrants issued to Dancing Bear Investments, Inc., an affiliate of
Mr.
Egan. As a result of such conversions and exercises, the Company issued an
aggregate of 48,775,909 additional shares of Common Stock.
(11)
STOCK OPTION PLANS
During
1995, the Company established the 1995 Stock Option Plan, which was amended
(the
"Amended Plan") by the Board of Directors in December 1996 and August 1997.
Under the Amended Plan, a total of 1,582,000 common shares were reserved for
issuance. Any incentive stock options granted under the Amended Plan were
required to be granted at the fair market value of the Company's Common Stock
at
the date the option was issued.
Under
the
Company's 1998 Stock Option Plan (the "1998 Plan") a total of 3,400,000 common
shares were reserved for issuance and provides for the grant of "incentive
stock
options" intended to qualify under Section 422 of the Code and stock options
which do not so qualify. The granting of incentive stock options is subject
to
limitation as set forth in the 1998 Plan. Directors, officers, employees and
consultants of the Company and its subsidiaries are eligible to receive grants
under the 1998 Plan.
In
January 2000, the Board adopted the 2000 Broad Based Employee Stock Option
Plan
(the "Broad Based Plan"). Under the Broad Based Plan, 850,000 shares of Common
Stock were reserved for issuance. The intention of the Broad Based Plan is
that
at least 50% of the options granted will be to individuals who are not managers
or officers of theglobe. In April 2000, the Company's 2000 Stock Option Plan
(the "2000 Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company. The 2000 Plan authorized the issuance of 500,000
shares of Common Stock, subject to adjustment as provided in the 2000 Plan.
The
Broad Based Plan and the 2000 Plan provide for the grant of "incentive stock
options" intended to qualify under Section 422 of the Code and stock
options
which do not so qualify. The granting of incentive stock options is subject
to
limitation as set forth in the Broad Based Plan and the 2000 Plan. Directors,
officers, employees and consultants of the Company and its subsidiaries are
eligible to receive grants under the Broad Based Plan and the 2000 Plan.
F-25
In
September 2003, the Board adopted the 2003 Sales Representative Stock Option
Plan (the "2003 Plan") which authorized the issuance of up to 1,000,000
non-qualified stock options to purchase the Company's Common Stock to sales
representatives who are not employed by the Company or its subsidiaries. In
January 2004, the Board amended the 2003 Plan to include certain employees
and
consultants of the Company.
The
Company's Board of Directors adopted a new benefit plan entitled the 2004 Stock
Incentive Plan (the "2004 Plan") on August 31, 2004. An aggregate of 7,500,000
shares of the Company's Common Stock may be issued pursuant to the 2004 Plan.
Employees, consultants, and prospective employees and consultants of theglobe
and its affiliates and non-employee directors of theglobe are eligible for
grants of non-qualified stock options, stock appreciation rights, restricted
stock awards, performance awards and other stock-based awards under the 2004
Plan.
On
December 1, 2004, based upon approval of the stockholders of the Company, the
2000 Plan was amended and restated to (i) increase the number of shares reserved
for issuance under the 2000 Plan by 7,500,000 shares to a total of 8,000,000
shares and (ii) to remove a previous plan provision that limited the number
of
options that may be awarded to any one individual.
In
accordance with the provisions of the Company's stock option plans, nonqualified
stock options may be granted to officers, directors, other employees,
consultants and advisors of the Company. The option price for nonqualified
stock
options shall be at least 85% of the fair market value of the Company's Common
Stock. In general, options granted under the Company's stock option plans expire
after a ten-year period and in certain circumstances options, under the 1995
and
1998 plans, are subject to the acceleration of vesting. Incentive options
granted to stockholders who own greater than 10% of the total combined voting
power of all classes of stock of the Company must be issued at 110% of the
fair
market value of the stock on the date the options are granted. A committee
selected by the Company's Board of Directors has the authority to approve
optionees and the terms of the stock options granted, including the option
price
and the vesting terms. Stock option awards are generally granted with an
exercise price equal to the market price of theglobe’s Common Stock at the date
of grant with 25% of the stock option grant vesting immediately and the
remainder vesting equally over the next twelve quarters.
A
total
of 6,130,000 stock options were granted during the year ended December 31,
2006.
The 2006 total included the issuance of 550,000 stock options in connection
with
a consulting agreement which will vest only upon achievement of certain
performance targets, as well as grants of 250,000 stock options to other
non-employees. Options were granted during 2005 for a total of 5,922,250 shares
of Common Stock, including grants of 775,000 stock options to non-employees.
During 2004, a total of 7,749,595 stock options were granted, of which 415,000
were granted to non-employees.
As
discussed in Note 3, "Discontinued Operations - SendTec, Inc.," pursuant to
the
agreement and plan of merger in connection with the acquisition of SendTec
on
September 1, 2004, the Company issued an aggregate of 3,974,165 replacement
options to acquire shares of theglobe's Common Stock for each of the issued
and
outstanding options to acquire shares of SendTec common stock held by employees
of SendTec. Of these replacement options, 3,273,668 had exercise prices of
$0.06
and 700,497 had exercise prices of $0.27 per share. The Company also granted
an
aggregate of 225,000 options to employees of SendTec and 25,000 options to
a
consultant of SendTec at an exercise price of $0.34 per share under similar
terms as other stock option grants of theglobe. Additionally, the Company
granted 1,000,000 stock options at an exercise price of $0.27 per share in
connection with the establishment of a bonus option pool pursuant to which
various employees of SendTec could vest in such options if SendTec exceeded
certain forecasted operating income targets for the year ending December 31,
2005.
As
a
result of the sale of the SendTec business on October 31, 2005, and pursuant
to
a Termination Agreement, the Company terminated and canceled 1,275,783 stock
options and the contingent interest in 2,062,785 earn-out warrants held by
the
six members of management in exchange for approximately $400,000 in cash. The
Company also terminated 829,678 stock options of certain other non-management
employees of SendTec and entered into bonus
arrangements with a number of other non-management SendTec employees for amounts
totaling approximately $600,000. Remaining outstanding stock options related
to
the bonus option pool which was established as of the acquisition, totaling
477,000 options, were also terminated as the forecasted operating income targets
for the year ended December 31, 2005 had not been achieved.
F-26
Stock
option exercises during the years ended December 31, 2006, 2005 and 2004,
resulted in cash inflows to the Company of $18,420, $166,841 and $184,546,
respectively. The corresponding intrinsic value as of exercise date of the
349,474 stock options exercised during the year ended December 31, 2006 was
$119,628. Intrinsic values as of exercise date of the 2,001,661 and 639,000
stock options exercised during the years ended December 31, 2005 and 2004 were
$418,268 and $416,070, respectively.
Stock
option activity during the year ended December 31, 2006 was as follows:
|
|
Weighted
|
|||||||||||
|
Number
of
|
Weighted
Average Exercise
|
Average
Remaining Contractual
|
Aggregate
Intrinsic
|
|||||||||
|
Options
|
Price
|
Term
|
Value
|
|||||||||
|
|
|
|
||||||||||
Outstanding
at December 31, 2005
|
15,373,103
|
$
|
0.46
|
||||||||||
|
|||||||||||||
Granted
|
6,130,000 |
0.17
|
|||||||||||
Exercised
|
(349,474 | ) |
0.05
|
||||||||||
Canceled
|
(1,011,009 | ) |
0.73
|
||||||||||
Outstanding
at December 31, 2006
|
20,142,620 |
$
|
0.36
|
6.8
years
|
$
|
195,700
|
|||||||
|
|||||||||||||
Exercisable
at December 31, 2006
|
14,905,815
|
$
|
0.43
|
6.8
years
|
$
|
195,700
|
|||||||
|
|||||||||||||
Options
available at December 31, 2006
|
2,841,741
|
Compensation
cost charged to operating expenses of continuing operations in connection with
stock options granted in recognition of services rendered by non-employees
was
$109,199, $176,050 and $463,046, for the years ended December 31, 2006, 2005
and
2004, respectively. During 2006, the Company granted 550,000 stock options
in
connection with a consulting agreement whereby the stock options immediately
vest upon the attainment of certain sales, marketing and promotional targets.
In
accordance with SFAS No. 123R, no stock compensation cost has been recognized
in
the accompanying consolidated statement of operations for the year ended
December 31, 2006, as the performance targets had not yet been
achieved.
F-27
At
December 31, 2006, there was approximately $542,000 of unrecognized compensation
expense related to unvested stock options, excluding the 550,000 options which
vest on the achievement of certain performance targets, which is expected to
be
recognized over a weighted-average period of 1.5 years.
(12)
INCOME TAXES
The
total
provision (benefit) for income taxes is summarized as follows:
|
Year
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
Continuing
operations
|
$
|
124,313
|
$
|
(13,613,538
|
)
|
$
|
(370,891
|
)
|
||
Discontinued
operations
|
—
|
14,193,719
|
370,891
|
|||||||
|
$
|
124,313
|
$
|
580,181
|
$
|
—
|
The
provision (benefit) attributable to the loss from continuing operations before
income taxes was as follows:
|
Year
Ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
Current:
|
|
|
|
|||||||
Federal
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
State
|
124,313
|
—
|
—
|
|||||||
|
124,313
|
—
|
—
|
|||||||
Deferred:
|
||||||||||
Federal
|
—
|
(12,193,647 | ) |
(332,207
|
)
|
|||||
State
|
—
|
(1,419,891
|
) |
(38,684
|
)
|
|||||
|
—
|
(13,613,538
|
) |
(370,891
|
)
|
|||||
Provision
(benefit) for income taxes
|
$
|
124,313
|
$
|
(13,613,538
|
) |
$
|
(370,891
|
)
|
The
following is a reconciliation of the federal income tax provision (benefit)
at
the federal statutory rate to the Company’s tax benefit attributable to
continuing operations:
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
|||||||
Statutory
federal income tax rate
|
34.00
|
%
|
34.00
|
%
|
34.00
|
%
|
||||
Beneficial
conversion interest
|
—
|
(5.04
|
)
|
(0.29
|
)
|
|||||
Nondeductible
items
|
(0.08
|
)
|
(2.19
|
)
|
(0.05
|
)
|
||||
State
income taxes, net of federal benefit
|
3.22
|
3.96
|
3.96
|
|||||||
Change
in valuation allowance
|
(39.09
|
)
|
19.92
|
(20.17
|
)
|
|||||
Change
in effective tax rate
|
—
|
—
|
(11.52
|
)
|
||||||
Other
|
1.22
|
(0.15
|
)
|
(4.46
|
)
|
|||||
Effective
tax rate
|
(0.73
|
)%
|
50.50
|
%
|
1.47
|
%
|
F-28
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005
are presented below.
|
December
31,
|
December
31,
|
|||||
|
2006
|
2005
|
|||||
Deferred
tax assets (liabilities):
|
|
|
|||||
Net
operating loss carryforwards
|
$
|
61,527,000
|
$
|
55,862,000
|
|||
Issuance
of warrants
|
1,182,000
|
922,000
|
|||||
Allowance
for doubtful accounts
|
—
|
48,000
|
|||||
Inventory
reserve
|
147,000
|
164,000
|
|||||
AMT
tax credit
|
313,000
|
313,000
|
|||||
Litigation
settlement accrual
|
977,000
|
—
|
|||||
Depreciation
and amortization
|
107,000
|
(104,000
|
)
|
||||
Other
|
377,000
|
203,000
|
|||||
Total
gross deferred tax assets
|
64,630,000
|
57,408,000
|
|||||
Less:
valuation allowance
|
(64,630,000
|
)
|
(57,408,000
|
)
|
|||
Total
net deferred tax assets
|
$
|
—
|
$
|
—
|
Because
of the Company's lack of earnings history, the net deferred tax assets have
been
fully offset by a 100% valuation allowance. The valuation allowance for net
deferred tax assets was $64.6 million and $57.4 million as of December 31,
2006
and 2005, respectively. The net change in the total valuation allowance was
$7.2
million and $6.4 million for the years ended December 31, 2006 and 2005,
respectively. The Company had a tax benefit in 2005 of $13.6 million resulting
from the effect of changes in the valuation assessment of current and prior
year
net operating losses, due to the sale of SendTec.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets, which
consist of tax benefits primarily from net operating loss carryforwards, is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Of the total valuation
allowance of $64.6 million as of December 31, 2006, subsequently recognized
tax
benefits, if any, in the amount of $6.4 million will be applied directly to
contributed capital.
At
December 31, 2006, the Company had net operating loss carryforwards available
for U.S. tax purposes of approximately $162.1 million. These carryforwards
expire through 2026. Under Section 382 of the Internal Revenue Code of 1986,
as
amended (the "Code"), the utilization of net operating loss carryforwards may
be
limited under the change in stock ownership rules of the Code. Due to various
significant changes in our ownership interests, as defined in the Internal
Revenue Code of 1986, as amended, the Company has substantially limited the
availability of its net operating loss carryforwards. There can be no assurance
that the Company will be able to avail itself of any net operating loss
carryforwards.
(13)
COMMITMENTS
NETWORK
COMMITMENTS
The
Company and its subsidiaries are a party to various network service agreements
which provide for specified services, including the use of secure data
transmission facilities, capacity and other network carrier services. Certain
of
the agreements contain early cancellation penalties. Commitments under such
network service agreements, exclusive of regulatory taxes, fees and charges,
are
as follows:
Year
ending December 31:
|
|
|||
2007
|
$
|
503,000
|
||
2008
|
36,000
|
|||
|
$
|
539,000
|
F-29
REGISTRY
COMMITMENTS
Tralliance
has entered into various agreements with unrelated third parties for the
outsourcing of certain marketing, administrative and registry functions. Fees
for some of these services vary based on transaction levels, but the agreements
generally provide for annual and/or monthly payments, and in the case of one
agreement specifies minimum payments of $100,000 annually. The term of the
agreement which specifies the minimum payment of $100,000 annually continues
for
as long as the agreement designating Tralliance as the sole registry for the
“.travel” top-level domain by the Internet Corporation for Assigned Names and
Numbers (“ICANN”) is in effect, including any renewal periods. The initial term
of the agreement with ICANN is ten years. Commitments under such marketing,
administrative and registry agreements are as follows:
Year
ending December 31:
|
|
|||
2007
|
$
|
329,000
|
||
2008
|
201,000
|
|||
2009
|
110,000
|
|||
2010
|
110,000
|
|||
2011
|
110,000
|
|||
Thereafter
|
394,000
|
|||
|
$
|
1,254,000
|
PURCHASE
OBLIGATIONS
Effective
January 31, 2005, the Company formally terminated its contract with a supplier
of VoIP telephony handsets and agreed to settle the unconditional purchase
obligation under such contract, which totaled approximately $3,000,000. The
settlement provided for (i) a cash payment of $200,000, (ii) the return of
35,000 VoIP handset units from the Company's inventory, and (iii) the issuance
of 300,000 shares of the Company’s Common Stock. The value attributed to the
loss on the settlement of the contractual obligation of $406,750 has been
included in the accompanying consolidated statement of operations for the year
ended December 31, 2004.
EMPLOYMENT
AGREEMENTS
On
August
1, 2003, the Company entered into employment agreements with its Chairman and
Chief Executive Officer, President and Vice President of Finance (its former
Chief Financial Officer). The three agreements, which are for a period of one
year and automatically extend for one day each day until either party notifies
the other not to further extend the employment period, provide for annual base
salaries totaling $640,000 (as amended) and annual bonuses based on pre-tax
operating income, as defined, for an annual minimum of $100,000 in total. The
agreements also provide for severance benefits under certain circumstances,
as
defined, which in the case of the Chairman and Chief Executive Officer and
the
President, include lump-sum payments equal to ten times the sum of the
executive's base salary and the highest annual bonus earned by the executive,
and in the case of the Vice President of Finance, include lump-sum payments
equal to two times the sum of the executive's base salary and the highest annual
bonus earned by the executive. In addition, these severance benefits also
require the Company to maintain insurance benefits for a period of up to ten
years, in the case of the Chairman and Chief Executive Officer and the
President, and up to two years, in the case of the Vice President of Finance,
substantially equivalent to the insurance benefits existing upon termination.
On
October 4, 2004, the Company entered into a new employment agreement with its
current Chief Technical Officer (“CTO”) which provides for a base salary of
$150,000 per year. The agreement had an initial term of two years and
automatically renewed for an additional two years upon the expiration of the
initial term of the agreement.
F-30
The
agreement also contains certain non-compete provisions and provides for
specified severance payments. Effective March 16, 2007, the Company and the
CTO
entered into an employment termination agreement whereby each agreed to the
mutual release of certain obligations under the original employment agreement,
including the CTO’s right to receive any severance payments.
As
discussed in Note 4, “Acquisition of Tralliance Corporation,” as part of the
Tralliance acquisition on May 9, 2005, the then existing CEO and CFO of
Tralliance entered into employment agreements, which include certain non-compete
provisions, whereby each would agree to remain in the employ of Tralliance
for a
period of two years in exchange for annual base compensation totaling $200,000
to each officer, plus participation in a bonus pool based upon the pre-tax
income of the venture.
OPERATING
LEASES
The
Company leases facilities under noncancelable operating leases. These leases
generally contain renewal options and require the Company to pay certain
executory costs such as maintenance and insurance. Rent expense charged to
continuing operations for the years ended December 31, 2006, 2005 and 2004
totaled approximately $700,000, $761,000 and $606,000, respectively.
Effective
September 1, 2003, the Company entered into a sublease agreement for office
space with a company controlled by our Chairman. The lease term is for
approximately four years with base rent of approximately $284,000 during the
first year of the sublease. Per the agreement, base rent increases by
approximately $23,000 per year thereafter. Rent expense for the years ended
December 31, 2006, 2005 and 2004, as noted in the preceding paragraph included
approximately $416,000, $353,000 and $334,000, respectively, of expense related
to this sublease.
Tralliance
Corporation, which was acquired May 9, 2005, subleases office space in New
York
City on a month-to-month basis from an entity controlled by its President for
approximately $3,400 per month.
The
approximate future minimum lease payments under noncancelable operating leases
with initial or remaining terms of one year or more at December 31, 2006, were
as follows:
2007
|
$
|
248,000
|
||
2008
|
12,000
|
|||
2009
|
4,000
|
|||
|
$
|
264,000
|
OTHER
COMMITMENTS
The
Company’s subsidiaries are a party to two separate agreements which contain
cancellation clauses upon termination of the contracts. These contracts include
fulfillment services in connection with our magazine publications and Internet
marketing services. The financial commitment under the two contracts for the
year ended December 31, 2007 is estimated to total approximately $240,000.
(14)
LITIGATION
On
June
1, 2006, MySpace, Inc. (“MySpace”), a Delaware corporation, filed a lawsuit in
the United States District Court for the Central District of California against
theglobe.com, inc. (the “Company”). We were served with the lawsuit on June 6,
2006. MySpace alleged that the Company sent at least 100,000 unsolicited and
unauthorized commercial email messages to MySpace members using MySpace user
accounts improperly established by the Company, that the user accounts were
used
in a false and misleading fashion and that the Company's alleged activities
constituted violations of the CAN-SPAM Act, the Lanham Act and California
Business & Professions Code § 17529.5 (the “California Act”), as well as
trademark infringement, false advertising, breach of contract, breach of the
covenant of good faith and fair dealing, and unfair competition. MySpace seeks
monetary penalties, damages and injunctive relief for these alleged violations.
It asserts entitlement to recover "a minimum of" $62.3 million
of damages, in addition to three times the amount of MySpace's actual damages
and/or disgorgement of the Company's purported profits from alleged violations
of the Lanham Act, punitive damages and attorneys’ fees. Subsequent discovery in
the case disclosed that the total number of unsolicited messages was
approximately 400,000.
F-31
On
February 28, 2007, the Court entered an order (the “Order”) granting in part
MySpace’s motion for summary judgment, finding that the Company was liable for
violation of the CAN-SPAM Act and the California Business & Professions
Code, and for breach of contract (as embodied in MySpace’s “Terms of Service”
contract). The Order also upheld as valid that portion of MySpace’s Terms of
Service contract which provides for liquidated damages of $50 per email message
sent after March 17, 2006 in violation of such Terms. The Company estimates
that
approximately 110,000 of the emails in question were sent after such date,
which
could result in damages of approximately $5.5 million. In addition, the CAN-SPAM
Act provides for statutory damages of between $100 and $300 per email sent
in
violation of the statute. Total damages under CAN-SPAM could therefore range
between about $40 million to about $120 million. In addition, under the
California Act, statutory damages of $1,000,000 “per incident” could be
assessed.
On
March
15, 2007, the Company entered into a Settlement Agreement with MySpace whereby
it agreed to pay MySpace $2,550,000 on or before April 5, 2007 in exchange
for a
mutual release of all claims against one another, including any claims against
the Company’s directors and officers. As part of the settlement, Michael Egan,
the Company’s CEO, who is also an affiliate of the Company, agreed to enter into
an agreement with MySpace on or before April 5th
pursuant
to which he would, among other things, provide a letter of credit, cash or
other
equivalent security (collectively, “Security”) in form and substance
satisfactory to MySpace. Such Security is to expire and be released on the
100th
day
following the Company’s payment of the foregoing $2,550,000 so long as no
bankruptcy petition, assignment for the benefit of creditors or like
liquidation, reorganization or insolvency proceeding is instituted or filed
related to the Company during such 100-day period. In accordance with SFAS
No.
5, “Accounting for Contingencies,” the payment required by the Settlement
Agreement has been included in accrued liabilities in the accompanying
consolidated balance sheet as of December 31, 2006 and has been charged to
general and administrative expenses in the accompanying consolidated statement
of operations for the year ended December 31, 2006.
The
Company does not currently have the resources to both pay the $2,550,000
settlement amount and to fund operations beyond April 2007. The Company intends
to seek to raise capital or otherwise borrow funds with which to pay such amount
and otherwise to fund operations. Although there is no commitment to do so,
any
such funds would most likely come primarily from Mr. Egan or affiliates of
Mr.
Egan or the Company. Any such capital raised would not be registered under
the
Securities Act of 1933 and would not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
There can be no assurance that the Company will be successful in raising such
capital or borrowing such funds and any capital raised will likely result in
very substantial dilution of the number of shares outstanding or which could
be
outstanding upon the exercise or conversion of any derivative securities issued
by the Company as part of such capital raise. The failure to pay the $2,550,000
to MySpace and/or the failure to satisfactorily provide the Security would
result in a resumption of the litigation with MySpace and, in all likelihood,
would have a material adverse effect on the Company, including the potential
bankruptcy and cessation of business of the Company.
On
October 4, 2005, Sprint Communications Company, L.P. (“Sprint”) filed a
Complaint in the United States District Court for the District of Kansas against
theglobe, theglobe’s subsidiary, tglo.com (formerly known as voiceglo Holdings,
Inc. or “voiceglo”), and Vonage Holdings Corp. (“Vonage”). On October 12, 2005,
Sprint filed a First Amended Complaint naming Vonage America, Inc. (“Vonage
America”) as an additional defendant. Neither theglobe nor voiceglo has any
affiliation with Vonage or Vonage America. Sprint alleged that theglobe and
voiceglo had made unauthorized use of “inventions” described and claimed in
seven patents held by Sprint. Sprint sought monetary and injunctive relief
for
this alleged infringement. On November 21, 2005, theglobe and voiceglo filed an
Answer to Sprint’s First Amended Complaint, denying infringement and interposing
affirmative defenses, including that each of the asserted patents were invalid.
voiceglo counterclaimed against Sprint for a declaratory judgment of
non-infringement and invalidity. On January 18, 2006, the court issued a
Scheduling Order which called for, among other
things, discovery to be completed by December 29, 2006, and for trial to
commence August 7, 2007. On August 22, 2006, the Company, together with its
subsidiary, and Sprint entered into a settlement agreement (the “Settlement”)
which resolved the pending patent infringement lawsuit. As part of the
Settlement, the Company and its subsidiary agreed to enter into a non-exclusive
license under certain of Sprint’s patents.
F-32
On
and
after August 3, 2001 and as of the date of this filing, the Company is aware
that six putative shareholder class action lawsuits were filed against the
Company, certain of its current and former officers and directors (the
“Individual Defendants”), and several investment banks that were the
underwriters of the Company's initial public offering. The lawsuits were filed
in the United States District Court for the Southern District of New
York.
The
lawsuits purport to be class actions filed on behalf of purchasers of the stock
of the Company during the period from November 12, 1998 through December 6,
2000. Plaintiffs allege that the underwriter defendants agreed to allocate
stock
in the Company's initial public offering to certain investors in exchange for
excessive and undisclosed commissions and agreements by those investors to
make
additional purchases of stock in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading and in violation of the securities laws because it
did
not disclose these arrangements. On December 5, 2001, an amended complaint
was
filed in one of the actions, alleging the same conduct described above in
connection with the Company's November 23, 1998 initial public offering and
its
May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is
now
the operative complaint, was filed in the Southern District of New York on
April
19, 2002. The action seeks damages in an unspecified amount. On February 19,
2003, a motion to dismiss all claims against the Company was denied by the
Court. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions (the “focus cases”) and noted
that the decision is intended to provide strong guidance to all parties
regarding class certification in the remaining cases. The Underwriter Defendants
appealed the decision and the Second Circuit vacated the district court’s
decision granting class certification in those six cases on December 5, 2006.
Plaintiffs have not yet moved to certify a class in theglobe.com
case.
The
Company has approved a settlement agreement and related agreements which set
forth the terms of a settlement between the Company, the Individual Defendants,
the plaintiff class and the vast majority of the other approximately 300 issuer
defendants. It is unclear what impact the Second Circuit’s decision vacating
class certification in the six focus cases will have on the settlement, which
has not yet been finally approved by the Court. On
December 14, 2006, Judge Scheindlin held a hearing. Plaintiffs informed the
Court that they planned to file a petition for rehearing and rehearing
en
banc.
The
Court stayed all proceedings, including a decision on final approval of the
settlement and any amendments of the complaints, pending the Second Circuit’s
decision on Plaintiffs’ petition for rehearing. Plaintiffs filed the petition
for rehearing and rehearing en
banc on
January 5, 2007.
Among
other provisions, if it is ultimately approved by the Court, the settlement
provides for a release of the Company and the Individual Defendants for the
conduct alleged in the action to be wrongful. The Company would agree to
undertake certain responsibilities, including agreeing to assign away, not
assert, or release certain potential claims the Company may have against its
underwriters. The settlement agreement also provides a guaranteed recovery
of $1
billion to plaintiffs for the cases relating to all of the approximately 300
issuers. To the extent that the underwriter defendants settle all of the cases
for at least $1 billion, no payment will be required under the issuers’
settlement agreement. To the extent that the underwriter defendants settle
for
less than $1 billion, the issuers are required to make up the difference.
On
April
20, 2006, JPMorgan Chase and the Plaintiffs reached a preliminary agreement
to
settle for $425 million. The JPMorgan Chase preliminary agreement has not yet
been approved by the Court. In an amendment to the issuers’ settlement
agreement, the issuers’ insurers agreed that the JPMorgan preliminary agreement,
if approved, would offset the insurers’ obligation to cover the remainder of
Plaintiffs’ guaranteed $1 billion recovery by 50% of the value of the JP Morgan
settlement, or $212.5 million. Therefore, if the JP Morgan preliminary agreement
to settle is finalized, and then preliminarily and finally approved by the
Court, then the maximum amount that the issuers’ insurers will be potentially
liable for is $787.5 million. It is unclear what impact the Second Circuit’s
decision vacating class certification in the focus cases will have on the JP
Morgan preliminary agreement.
F-33
It
is
anticipated that any potential financial obligation of the Company to plaintiffs
pursuant to the terms of the issuers’ settlement agreement and related
agreements will be covered by existing insurance. The Company currently is
not
aware of any material limitations on the expected recovery of any potential
financial obligation to plaintiffs from its insurance carriers. Its carriers
are
solvent, and the company is not aware of any uncertainties as to the legal
sufficiency of an insurance claim with respect to any recovery by plaintiffs.
Therefore, we do not expect that the settlement will involve any payment by
the
Company. If material limitations on the expected recovery of any potential
financial obligation to the plaintiffs from the Company's insurance carriers
should arise, the Company's maximum financial obligation to plaintiffs pursuant
to the settlement agreement would be less than $3.4 million. However,
if the JPMorgan Chase preliminary agreement is finalized, then preliminarily
and
finally approved, the Company’s maximum financial obligation would be less than
$2.7 million.
There
is
no assurance that the court will grant final approval to the issuers’
settlement. If the settlement agreement is not approved and the Company is
found
liable, we are unable to estimate or predict the potential damages that might
be
awarded, whether such damages would be greater than the Company’s insurance
coverage, and whether such damages would have a material impact on our results
of operations or financial condition in any future period.
The
Company is currently a party to certain other claims and disputes arising in
the
ordinary course of business. The Company currently believes that the ultimate
outcome of these other matters, individually and in the aggregate, will not
have
a material adverse affect on the Company's financial position, results of
operations or cash flows. However, because of the nature and inherent
uncertainties of legal proceedings, should the outcome of these matters be
unfavorable, the Company's business, financial condition, results of operations
and cash flows could be materially and adversely affected.
(15)
RELATED PARTY TRANSACTIONS
Certain
directors of the Company also serve as officers and directors of Dancing Bear
Investments, Inc. ("Dancing Bear"). Dancing Bear is a stockholder of the Company
and an entity controlled by our Chairman.
On
November 22, 2006, the Company entered into a License Agreement (the “License
Agreement”) with Speecho, LLC which grants a license to use the Company’s chat,
VoIP and video communications technology for a minimum license fee of $10,000
per month with an initial term of ten years. The Company’s Chairman, the
Company’s President and the Company’s Vice President of Finance, as well as
certain other employees of the Company, are members of a company that owns
50%
of the membership interests in Speecho, LLC. As of December 31, 2006, no revenue
has yet been recognized by the Company related to the License Agreement.
As
discussed more fully in Note 9, “Debt,” on April 22, 2005, E&C Capital
Partners, LLLP and E&C Capital Partners II, LLLP, entities controlled by the
Company’s Chairman, entered into a Note Purchase Agreement with the Company
pursuant to which the entities ultimately acquired secured demand convertible
promissory notes totaling $4,000,000. During the year ended December 31, 2005,
an aggregate of $600,000 of the promissory notes were converted into the
Company’s Common Stock. Interest
associated with the demand convertible promissory notes of approximately
$340,000 and $216,200 was charged to expense during the years ended December
31,
2006 and 2005, respectively, and remained unpaid as of December 31, 2006.
During
the year ended December 31, 2004, a $2,000,000 demand convertible promissory
note due to the Company’s Chairman and his spouse and $1,750,000 of Convertible
Notes due E&C Capital Partners, LLLP, together with certain affiliates of
the Chairman, were converted into the Company’s Common Stock. As a result,
during 2004, approximately $49,500 of interest associated with the
aforementioned convertible debt was charged to expense and $157,700 of interest,
including accruals from the prior year, was paid.
During
the year ended December 31, 2006, the Company paid $5,000 to an entity
controlled by the Chairman’s son-in-law for various software and related
services. During the year ended December 31, 2004, the Company paid
approximately $151,200 to an entity controlled by the Chairman's son-in-law
for
the production of a commercial advertisement which was charged to sales and
marketing expense.
F-34
Several
entities controlled by our Chairman have provided services to the Company and
various of its subsidiaries, including: the lease of office and warehouse space;
and the outsourcing of customer service and warehouse functions for the
Company's VoIP operation. During the first quarter of 2005, an entity controlled
by our Chairman also began performing human resource and payroll processing
functions for the Company and several of its subsidiaries. During the years
ended December 31, 2006, 2005 and 2004, a total of approximately $466,000,
$386,000 and $566,000 of expense was recorded related to these services,
respectively. Approximately $158,000 and $134,000 related to these services
was
included in accounts payable and accrued expenses at December 31, 2006 and
2005,
respectively.
Additionally,
included in other current assets in the accompanying consolidated balance sheet
at December 31, 2005, was approximately $92,000 advanced to a newly formed
entity in which E&C Capital Partners, LLLP had an ownership interest. The
balance was repaid to the Company by E&C Capital Partners LLLP on January
31, 2006.
Tralliance
Corporation, which was acquired May 9, 2005, subleases office space in New
York
City on a month-to-month basis from an entity controlled by its President for
approximately $3,400 per month. A total of approximately $41,000 and $23,000
in
rent expense related to this month-to-month sublease was included in the
accompanying statement of operations for the years ended December 31, 2006
and
2005, respectively.
(16)
SEGMENTS AND GEOGRAPHIC INFORMATION
The
Company applies the provisions of SFAS No. 131, "Disclosures About Segments
of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for operating segments of a company. SFAS No. 131 requires
disclosures of selected segment-related financial information about products,
major customers and geographic areas. During the year ended December 31, 2006,
the Company was organized in three operating segments for purposes of making
operating decisions and assessing performance: (i) the computer games division,
consisting of the operations of the Company’s magazine publications, the
associated websites and the operations of its e-commerce games distribution
business; (ii) the Internet services division, consisting of the operations
of
Tralliance, which was acquired on May 9, 2005; and (iii) the VoIP telephony
services division, consisting of the activities involved in the sale and license
of telecommunications services over the Internet to consumers and businesses.
Identifiable assets of “discontinued operations” presented below consist of the
net assets of the Company's former subsidiary, SendTec, the operations of which
were sold effective October 31, 2005.
The
chief
operating decision maker evaluates performance, makes operating decisions and
allocates resources based on financial data of each segment. Where appropriate,
the Company charges specific costs to each segment where they can be identified.
Certain items are maintained at the Company's corporate headquarters
("Corporate") and are not presently allocated to the segments. Corporate
expenses primarily include personnel costs related to executives and certain
support staff and professional fees. Corporate assets principally consist of
cash and cash equivalents. Subsequent to its acquisition on September 1, 2004,
SendTec provided various intersegment marketing services to the Company's VoIP
telephony services division. Prior to the acquisition of SendTec, there were
no
intersegment transactions. The accounting policies of the segments are the
same
as those for the Company as a whole.
The
following table presents financial information regarding the Company's different
segments:
Year
Ended December 31,
|
|
|||||||||
|
|
2006
|
|
2005
|
|
2004
|
||||
NET
REVENUE FROM CONTINUING
|
|
|
|
|||||||
OPERATIONS:
|
|
|
|
|||||||
Computer
games
|
$
|
2,038,649
|
$
|
1,948,716
|
$
|
3,107,637
|
||||
Internet
services
|
1,408,737
|
197,873
|
--
|
|||||||
VoIP
telephony services
|
34,638
|
248,789
|
391,154
|
|||||||
$
|
3,482,024
|
$
|
2,395,378
|
$
|
3,498,791
|
F-35
Year
Ended December 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
OPERATING
INCOME (LOSS) FROM
|
|
|
|
|||||||
CONTINUING
OPERATIONS:
|
|
|
|
|||||||
Computer
games
|
$
|
(723,497
|
)
|
$
|
(2,147,091
|
)
|
$
|
(442,286
|
)
|
|
Internet
services
|
(4,155,999
|
)
|
(1,295,269
|
)
|
—
|
|||||
VoIP
telephony services
|
(9,375,329
|
)
|
(13,146,693
|
)
|
(20,538,124
|
)
|
||||
Corporate
expenses
|
(2,733,399
|
)
|
(5,955,554
|
)
|
(3,441,261
|
)
|
||||
Operating
loss from continuing operations
|
(16,988,224
|
)
|
(22,544,607
|
)
|
(24,421,671
|
)
|
||||
Other
income (expense), net
|
138,809
|
(4,417,311
|
)
|
(824,898
|
)
|
|||||
Loss
from continuing operations before income tax
|
$
|
(16,849,415
|
)
|
$
|
(26,961,918
|
)
|
$
|
(25,246,569
|
)
|
|
|
||||||||||
DEPRECIATION
AND AMORTIZATION OF
|
||||||||||
CONTINUING
OPERATIONS:
|
||||||||||
Computer
games
|
$
|
28,286
|
$
|
30,845
|
$
|
10,606
|
||||
Internet
services
|
232,575
|
87,112
|
—
|
|||||||
VoIP
telephony services
|
785,379
|
1,109,743
|
1,355,532
|
|||||||
Corporate
expenses
|
29,616
|
36,598
|
32,138
|
|||||||
|
$
|
1,075,856
|
$
|
1,264,298
|
$
|
1,398,276
|
||||
|
||||||||||
CAPITAL
EXPENDITURES OF CONTINUING
|
||||||||||
OPERATIONS:
|
||||||||||
Computer
games
|
$
|
12,155
|
$
|
28,001
|
$
|
55,845
|
||||
Internet
services
|
72,130
|
119,862
|
—
|
|||||||
VoIP
telephony services
|
—
|
148,307
|
2,537,133
|
|||||||
Corporate
|
1,873
|
—
|
50,040
|
|||||||
|
$
|
86,158
|
$
|
296,170
|
$
|
2,643,018
|
December
31,
|
||||||||||
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
IDENTIFIABLE
ASSETS:
|
||||||||||
Computer
games
|
$
|
638,873
|
$
|
637,417
|
$
|
1,585,944
|
||||
Internet
services
|
725,756
|
1,161,344
|
—
|
|||||||
VoIP
telephony services
|
321,407
|
1,817,809
|
3,562,384
|
|||||||
Corporate
assets *
|
5,719,074
|
17,794,871
|
7,203,408
|
|||||||
Continuing
operations
|
7,405,110
|
21,411,441
|
12,351,736
|
|||||||
Discontinued
operations
|
—
|
—
|
21,665,429
|
|||||||
|
$
|
7,405,110
|
$
|
21,411,441
|
$
|
34,017,165
|
*
Corporate assets include cash held at subsidiaries for purposes of the
presentation above.
The
Company's historical net revenues have been earned primarily from customers
in
the United States. In addition, all significant operations and assets are based
in the United States.
F-36
(17)
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
Quarter
Ended
|
||||||||||||
|
December
31,
|
September
30,
|
June
30,
|
March
31,
|
|||||||||
|
2006
|
2006
|
2006
|
2006
|
|||||||||
Continuing
Operations:
|
|
|
|
|
|||||||||
Net
revenue
|
$
|
1,041,156
|
$
|
909,938
|
$
|
829,773
|
$
|
701,157
|
|||||
Operating
expenses
|
6,728,445
|
3,739,883
|
4,565,094
|
5,436,826
|
|||||||||
Operating
loss
|
(5,687,289
|
)
|
(2,829,945
|
)
|
(3,735,321
|
)
|
(4,735,669
|
)
|
|||||
|
|||||||||||||
Net
loss
|
(5,694,051
|
)
|
(2,952,380
|
)
|
(3,782,684
|
)
|
(4,544,613
|
)
|
|||||
Net
loss applicable to common
|
|||||||||||||
stockholders
|
(5,694,051
|
)
|
(2,952,380
|
)
|
(3,782,684
|
)
|
(4,544,613
|
)
|
|||||
|
|||||||||||||
Basic
and diluted net loss per share
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
Quarter Ended
|
|||||||||||||
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
Continuing
Operations:
|
|||||||||||||
Net
revenue
|
$
|
705,960
|
$
|
409,258
|
$
|
631,676
|
$
|
648,484
|
|||||
Operating
expenses
|
9,164,648
|
5,700,276
|
5,065,385
|
5,009,676
|
|||||||||
Operating
loss
|
(8,458,688
|
)
|
(5,291,018
|
)
|
(4,433,709
|
)
|
(4,361,192
|
)
|
|||||
Income
(loss) from continuing operations
|
4,137,876
|
(6,007,862
|
)
|
(7,123,521
|
)
|
(4,354,873
|
)
|
||||||
|
|||||||||||||
Discontinued
Operations, net of tax:
|
|||||||||||||
Income
(loss) from operations
|
(1,626,856
|
)
|
636,055
|
670,302
|
389,300
|
||||||||
Gain
on sale
|
1,769,531
|
—
|
—
|
—
|
|||||||||
|
|||||||||||||
Net
income (loss)
|
4,280,551
|
(5,371,807
|
)
|
(6,453,219
|
)
|
(3,965,573
|
)
|
||||||
Net
income (loss) applicable to common
|
|||||||||||||
stockholders
|
4,280,551
|
(5,371,807
|
)
|
(6,453,219
|
)
|
(3,965,573
|
)
|
||||||
|
|||||||||||||
Basic
and diluted net income (loss) per share:
|
|||||||||||||
Continuing
operations
|
$
|
0.02
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
||
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Net
income (loss)
|
$
|
0.02
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.02
|
)
|
(18)
VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR DOUBTFUL
ACCOUNTS
|
Additions
|
|||||||||||||||
Balance
at
|
Additions
|
Charged
|
Balance
|
|||||||||||||
Beginning
|
Charged
to
|
to
Other
|
at
End
|
|||||||||||||
Period
ended,
|
of
Period
|
Expense
|
Accounts
|
Deductions
|
of
Period
|
|||||||||||
December
31, 2006
|
$
|
128,378
|
$
|
17,076
|
$
|
—
|
$
|
(125,335
|
)
|
$
|
20,119
|
|||||
December
31, 2005
|
$
|
274,013
|
$
|
125,000
|
$
|
—
|
$
|
(270,635
|
)
|
$
|
128,378
|
|||||
December 31, 2004
|
$
|
112,986
|
$
|
183,149
|
$
|
9,750
|
$
|
(31,872
|
)
|
$
|
274,013
|
F-37
(19)
SUBSEQUENT EVENTS
See
Note
14, “Litigation,” for information regarding the Settlement Agreement between
MySpace, Inc., the Company and Michael Egan executed on March 15,
2007.
In
March
2007, management and the Board of Directors of the Company made the decision
to
cease all activities related to its computer games businesses, including
discontinuing the operations of its magazine publications, games distribution
business and related websites. The Company’s decision to shutdown its computer
games businesses was based primarily on the historical losses sustained by
these
businesses during the recent past and management’s expectations of continued
future losses. The Company is currently in the process of implementing a
business shutdown plan, which includes the termination of employee and vendor
relationships and the collection and payment of outstanding accounts receivables
and payables. We are also attempting to sell certain of the businesses’
component assets; however, we do not expect the proceeds from such sales to
be
significant. As of December 31, 2006, the carrying amount of the major classes
of the computer games business segment’s assets and liabilities consisted of
current assets of $600,000, fixed assets of $39,000 and current liabilities
of
$321,000.
In
addition, in March 2007, management and the Board of Directors of the Company
decided to discontinue the operating, research and development
activities of
its
VoIP telephony services business and terminate all of the remaining employees
of
the business. At this time, the Company intends to only incur those costs
required to maintain the service obligations of the license agreement with
Speecho, LLC. The Company has no plans to actively market the further licensing
of its chat, VoIP and video communications technology. The Company’s decision to
discontinue the operations of its VoIP telephony services business was based
primarily on the historical losses sustained by the business during the past
several years, management’s expectations of continued losses for the foreseeable
future and estimates of the amount of capital required to attempt to
successfully monetize its business. The Company is currently in the process
of
implementing a business shutdown plan, which includes the termination of its
carrier and vendor relationships, as well as the payment and/or settlement
of
outstanding payables. We are also attempting to sell certain of the businesses’
component assets; however, we do not expect the proceeds from such sales to
be
significant. As of December 31, 2006, the carrying amount of the major classes
of the VoIP telephony services business segment’s assets and liabilities
consisted of current assets of $139,000, fixed assets of $182,000 and current
liabilities of $2,290,000.
The
Company is in the process of evaluating the recoverability of its existing
computer games and VoIP telephony services businesses’ assets, and at this time,
does not anticipate significant future impairment or other charges in this
regard. Any such charges, if and when determined to be required, will be
recorded by the Company when identified. The Company is also in the process
of
evaluating the amount of costs expected to be incurred in shutting down its
computer games and VoIP telephony services businesses. The amount of these
shutdown costs, including costs related to employee termination benefits and
vendor contract termination costs are not yet certain, however, at the present
time, management believes that total cash expenditures for shutdown costs will
range between $20,000 and $135,000 for the computer games business and between
zero and $700,000 for the VoIP telephony services business. The Company
currently expects the shutdown of its computer games and VoIP telephony services
businesses to be substantially completed by the end of the second quarter of
2007.
Effective
January 1, 2007, the Computer Games and the VoIP telephony services business
segments’ assets, liabilities and results of operations will be reported as
“Discontinued Operations” in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.”
F-38
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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 judgment in evaluating
the
cost benefit relationship of possible controls and procedures.
Our
Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2006. 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.
Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, have evaluated any change in our internal control over
financial reporting that occurred during the quarter ended December 31, 2006
that has materially affected, or is reasonably likely to materially affect,
our
internal control over financial reporting, and have determined there to be
no
reportable changes.
None.
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth the names, ages and current positions with the
Company held by our Directors and Executive Officers. There is no immediate
family relationship between or among any of the Directors or Executive Officers,
and the Company is not aware of any arrangement or understanding between any
Director or Executive Officer and any other person pursuant to which he was
elected to his current position. Each of the following persons are Directors
of
the Company.
NAME
|
AGE
|
POSITION
OR OFFICE WITH
THE
COMPANY
|
DIRECTOR
SINCE
|
|||
|
|
|
|
|||
Michael
S. Egan
|
66
|
Chairman
and Chief Executive Officer
|
1997
|
|||
|
|
|
|
|||
Edward
A. Cespedes
|
41
|
President,
Treasurer and Chief Financial Officer and Director
|
1997
|
|||
|
|
|
|
|||
Robin
S. Lebowitz
|
42
|
Vice
President of Finance and Director
|
2001
|
Michael
S. Egan. Michael Egan has served as theglobe’s Chairman since 1997 and as its
Chief Executive Officer since June 1, 2002. Since 1996, Mr. Egan has been the
controlling investor of Dancing Bear Investments, Inc., a privately held
investment company. Since 2002, Mr. Egan has been the controlling investor
of
E&C Capital Partners LLLP, a privately held investment partnership. Mr. Egan
is also Chairman of Certified Vacations, a privately held wholesale travel
company which was founded in 1980. Certified Vacations specializes in designing,
marketing and delivering vacation packages. Mr. Egan spent over 30 years in
the
rental car business. He
began
with Alamo Rent-A-Car in 1973, became an owner in 1979, and became Chairman
and
majority owner from January 1986 until November 1996 when he sold the company
to
AutoNation. In 2000, AutoNation spun off the rental division, ANC Rental
Corporation (Other OTC: ANCXZ.PK), and Mr. Egan served as Chairman until October
2003. Prior to acquiring Alamo, he held various administration positions at
Yale
University and taught at the University of Massachusetts at Amherst. Mr. Egan
is
a graduate of Cornell University where he received his Bachelor’s degree in
Hotel Administration.
49
Edward
A.
Cespedes. Edward Cespedes has served as a director of theglobe since 1997,
as
President of theglobe since June 1, 2002 and as Treasurer and Chief Financial
Officer of theglobe since February 1, 2005. Mr. Cespedes is also the President
of E&C Capital Ventures, Inc., the general partner of E&C Capital
Partners LLLP. Mr. Cespedes served as the Vice Chairman of Prime Ventures,
LLC,
from May 2000 to February 2002. From August 2000 to August 2001, Mr. Cespedes
served as the President of the Dr. Koop Lifecare Corporation and was a member
of
the Company’s Board of Directors from January 2001 to December 2001. From 1996
to 2000, Mr. Cespedes was a Managing Director of Dancing Bear Investments,
Inc.
Concurrent with his position at Dancing Bear Investments, Inc., from 1998 to
2000, Mr. Cespedes also served as Vice President for corporate development
for
theglobe where he had primary responsibility for all mergers, acquisitions,
and
capital markets activities. In 1996, prior to joining Dancing Bear Investments,
Inc., Mr. Cespedes was the Director of Corporate Finance for Alamo Rent-A-Car.
From 1988 to 1996, Mr. Cespedes worked in the Investment Banking Division of
J.P. Morgan and Company, where he most recently focused on mergers and
acquisitions. In his capacity as a venture capitalist, Mr. Cespedes has served
as a member of the board of directors of various portfolio companies. Mr.
Cespedes is the founder of the Columbia University Hamilton Associates, a
foundation for university academic endowments. In 1988 Mr. Cespedes received
a
Bachelor’s degree in International Relations from Columbia University.
Robin
S.
Lebowitz. Robin Lebowitz has served as a director of theglobe since December
2001, as Secretary of theglobe since June 1, 2002, and as Vice President of
Finance of theglobe since February 23, 2004. Ms. Lebowitz also served as
Treasurer of theglobe from June 1, 2002 until February 23, 2004 and as Chief
Financial Officer of theglobe from July 1, 2002 until February 23, 2004. Ms.
Lebowitz has worked in various capacities for the Company’s Chairman, Michael
Egan, for thirteen years. She is the Controller/Managing Director of Dancing
Bear Investments, Inc., Mr. Egan’s privately held investment management and
holding company. Previously, Ms. Lebowitz served on the Board of Directors
of
theglobe from August 1997 to October 1998. At Alamo Rent-A-Car, she served
as
Financial Assistant to the Chairman (Mr. Egan). Prior to joining Alamo, Ms.
Lebowitz was the Corporate Tax Manager at Blockbuster Entertainment Group where
she worked from 1991 to 1994. From 1986 to 1989, Ms. Lebowitz worked in the
audit and tax departments of Arthur Andersen & Co. Ms. Lebowitz received a
Bachelor of Science in Economics from the Wharton School of the University
of
Pennsylvania; a Masters in Business Administration from the University of Miami
and is a Certified Public Accountant.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
None.
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Section
16(a) of the Securities and Exchange Act of 1934 requires our officers and
directors, and persons who own more than ten percent (10%) of a registered
class
of our equity securities, to file certain reports regarding ownership of, and
transactions in, our securities with the SEC and with The NASDAQ Stock Market,
Inc. Such officers, directors, and 10% stockholders are also required to furnish
theglobe with copies of all Section 16(a) forms that they file.
Based
solely on our review of copies of Forms 3 and 4 and any amendments furnished
to
us pursuant to Rule 16a-3(e) and Forms 5 and any amendments furnished to us
with
respect to the 2005 fiscal year, and any written representations referred to
in
Item 405(b)(2)(i) of Regulation S-K stating that no Forms 5 were required,
we
believe that, during the 2006 fiscal year, our officers, directors and all
persons owning more than 10% of a registered class of our equity securities
have
complied with all Section 16(a) applicable filing requirements.
50
CODE
OF ETHICS
The
Company has adopted a Code of Ethics applicable to its officers, including
its
principal executive officer, principal financial officer, principal accounting
officer or controller and any other persons performing similar functions. The
Code of Ethics will be provided free of charge by the Company to interested
parties upon request. Requests should be made in writing and directed to the
Company at the following address: 110 East Broward Boulevard; Suite 1400; Fort
Lauderdale, Florida 33301.
BOARD
MEETINGS AND COMMITTEES OF THE BOARD
Including
unanimous written actions of the Board, the Board
of
Directors met 14 times in 2006. No incumbent director who was on the Board
for
the entire year attended less than 75% of the total number of all meetings
of
the Board and any committees of the Board on which he or she served, if any,
during 2006.
The
Board
of Directors has a standing Audit and Compensation Committee but no standing
Nominating Committee.
Audit
Committee. The
Audit
Committee, which was formed in July 1998, reviews, acts on and reports to the
Board of Directors with respect to various auditing and accounting matters,
including the selection of our independent auditors, the scope of the annual
audits, fees to be paid to the auditors, the performance of our auditors and
our
accounting practices and internal controls. The Audit Committee operates
pursuant to a written charter, as amended, adopted by the Board of Directors
on
June 12, 2000. The current members of the Audit Committee are Messrs. Egan
and
Cespedes and Ms. Lebowitz, all of whom are employee directors. None of the
current committee members are considered “independent” within the meaning of
applicable NASD rules. Ms. Lebowitz serves as the “audit committee financial
expert” within the meaning of applicable SEC rules, but is not considered
“independent” within the meaning of applicable NASD rules. Including unanimous
written actions of the Committee, the Audit Committee held 5 meetings in 2006.
Compensation
Committee.
The
Compensation Committee, which met 9 times in 2006 (including unanimous written
actions of the Committee), establishes salaries, incentives and other forms
of
compensation for officers and other employees of theglobe. The Compensation
Committee (as well as the entire Board of Directors) also approves option grants
under all of our outstanding stock based incentive plans. The current members
of
the Compensation Committee are Messrs. Egan and Cespedes.
Nominating
Committee.
The
Board of Directors does not have a separate nominating committee. Rather, the
entire Board of Directors acts as nominating committee. Based on the Company’s
Board currently consisting only of employee directors, the Board of Directors
does not believe the Company would derive any significant benefit from a
separate nominating committee. Due primarily to their status as employees of
the
Company, none of the members of the Board are “independent” as defined in the
NASD listing standards. The Company does not have a Nominating Committee
charter.
In
recommending director candidates in the future (including director candidates
recommended by stockholders), the Board intends to take into consideration
such
factors as it deems appropriate based on the Company’s current needs. These
factors may include diversity, age, skills, decision-making ability,
inter-personal skills, experience with businesses and other organizations of
comparable size, community activities and relationships, and the
interrelationship between the candidate’s experience and business background,
and other Board members’ experience and business background, whether such
candidate would be considered “independent”, as such term is defined in the NASD
listing standards, as well as the candidate’s ability to devote the required
time and effort to serve on the Board.
The
Board
will consider for nomination by the Board director candidates recommended by
stockholders if the stockholders comply with the following requirements. Under
our By-Laws, if a stockholder wishes to nominate a director at the Annual
Meeting, we must receive the stockholder’s written notice not less than 60 days
nor more than 90 days prior to the date of the annual meeting, unless we give
our stockholders less than 70 days’ notice of the date of our Annual Meeting. If
we provide less than 70 days’ notice, then we must receive the stockholder’s
written notice by the close of business on the 10th day after we provide notice
of the date of the Annual Meeting. The notice must contain the specific
information required in our By-Laws. A copy of our By-Laws may be obtained
by
writing to the Corporate Secretary. If we receive a stockholder’s proposal
within the time periods required under our By-Laws, we may choose, but are
not
required, to include it in our proxy statement. If we do, we may tell the other
stockholders what we think of the proposal, and how we intend to use our
discretionary authority to vote on the proposal. All proposals should be made
in
writing and sent via registered, certified or express mail, to our executive
offices, 110 East Broward Boulevard, Suite 1400, Fort Lauderdale, Florida 33301,
Attention: Robin S. Lebowitz, Corporate Secretary.
51
Shareholder
Communications with the Board of Directors. Any
shareholder who wishes to send communications to the Board of Directors should
mail them addressed to the intended recipient by name or position in care of:
Corporate Secretary, theglobe.com, inc., 110 East Broward Boulevard, Suite
1400,
Fort Lauderdale, Florida, 33301. Upon receipt of any such communications, the
Corporate Secretary will determine the identity of the intended recipient and
whether the communication is an appropriate shareholder communication. The
Corporate Secretary will send all appropriate shareholder communications to
the
intended recipient. An "appropriate shareholder communication" is a
communication from a person claiming to be a shareholder in the communication,
the subject of which relates solely to the sender’s interest as a shareholder
and not to any other personal or business interest.
In
the
case of communications addressed to the Board of Directors, the Corporate
Secretary will send appropriate shareholder communications to the Chairman
of
the Board. In the case of communications addressed to any particular directors,
the Corporate Secretary will send appropriate shareholder communications to
such
director. In the case of communications addressed to a committee of the Board,
the Corporate Secretary will send appropriate shareholder communications to
the
Chairman of such committee.
ATTENDANCE
AT ANNUAL MEETINGS
The
Board
of Directors encourages, but does not require, its directors to attend the
Company’s annual meeting of stockholders. The Company did not hold an annual
meeting last year.
COMPENSATION
DISCUSSION AND ANALYSIS
OVERVIEW
The
Company’s compensation program is intended to meet three principal objectives
(1) attract, reward, and retain executive officers and other key employees;
(2)
motivate these individuals to achieve short-term and long-term corporate goals
that enhance stockholder value; and (3) promote internal equity and external
competitiveness. Our Compensation Committee, which for all periods included
in
this Compensation Discussion and Analysis, consisted of Mr. Michael S. Egan,
our
Chairman and Chief Executive Officer and Mr. Edward A. Cespedes, our President,
Treasurer, Chief Financial Officer and a Director (See “Corporate Governance -
Compensation Committee”), establishes our compensation policies as well as
detail compensation plans and specific compensation levels for all Company
employees and executives, including themselves. The Compensation Committee
also
administers the Company’s equity incentive plans.
The
Compensation Committee’s compensation policies are based upon the following
principles:
·
|
Compensation
levels should be competitive with pay plans for positions of similar
responsibility at other companies of comparable complexity and
size.
|
·
|
Compensation
plans should reward both individual performance and the achievement
of the
Company’s short-term and long-term strategic, operating and financial
goals.
|
·
|
Compensation
levels should be higher for senior individuals with greater responsibility
and greater ability to influence our achievement of strategic, operating
and financial goals.
|
·
|
Incentive
compensation should be a greater part of total compensation for senior
individuals with greater responsibility and the opportunity to create
greater stockholder value.
|
52
EMPLOYMENT
AGREEMENTS
On
August
1, 2003, we entered into separate employment agreements with each of our named
executive officers. The employment agreements with the Chief Executive Officer
and President each provide for an annual base salary of $250,000 with
eligibility to receive annual increases as determined in the sole discretion
of
the Board of Directors and an annual cash bonus, which will be awarded upon
the
achievement of specified pre-tax operating income, not to be less than $50,000
per year. The employment agreement, as amended, with the Vice President of
Finance currently provides for an annual base salary of $140,000 and a
discretionary annual cash bonus, awarded at the discretion of the Board of
Directors.
Additionally,
each of the employment agreements with the named executive officers provide
for
(i) employment as one of our executives; (ii) participation in all welfare,
benefit and incentive plans, including equity based compensation plans, offered
to senior management; and (iii) a term of employment which commenced on August
1, 2003 through the first anniversary thereof, and which automatically extends
for one day each day unless either the Company or the executive provides written
notice to the other not to further extend. Each of the employment agreements
also provides for certain payments and/or benefits upon termination, which
are
more fully described under the section, “Potential Payments Upon Termination or
Change In Control”.
ELEMENTS
OF COMPENSATION
Our
executive compensation program has three primary elements: base salary, annual
performance-based cash bonuses and the potential for long-term equity
incentives. These primary elements are supplemented by the opportunity to
participate in health, welfare and benefit plans that are generally available
to
all of our employees, as well as car allowances.
Base
Salary.
We
provide our executive officers with base salary to provide them with a fixed
base amount of compensation for services rendered during the fiscal year. We
believe this is consistent with competitive practices and will help assure
we
retain qualified leadership in those positions. Base salary for each of our
executive officers was initially established in their respective August 1,
2003
employment agreements, with no base salary increases subsequently awarded to
any
executive officer.
Cash
Bonus.
Additional compensation in the form of annual cash bonuses is made in accordance
with each executive officer’s employment agreement, where applicable or at the
discretion of the Compensation Committee, taking into account the performance
and contributions made by the executive officers of theglobe. All executive
officers bonuses are approved by the full Board. Our rationale for paying annual
cash bonuses is based upon our desire to encourage achievement of short-term
and
long-term financial and operating results and to reward our executive officers
for their performance in achieving desired results. For the 2006 fiscal year,
cash bonuses of $50,000 each were awarded to Messrs. Egan and Cespedes,
representing the minimal required amounts specified in their employment
agreements, and a cash bonus of $25,000 was awarded to Robin S. Lebowitz, our
Vice President of Finance. All 2006 fiscal year bonuses were paid in January
2007. For the 2005 fiscal year, cash bonuses of $1,500,000 each were awarded
to
Messrs. Egan and Cespedes and a $125,000 bonus was awarded to Ms. Lebowitz.
The
2005 fiscal year bonuses were based principally on the contributions made by
each of the aforementioned executive officers in selling the SendTec marketing
services business on October 31, 2005 for net cash proceeds totaling
approximately $23.0 million, or a ten (10) times cash-over-cash return. All
2005
fiscal year bonuses were paid in November 2005.
Long-Term
Equity Incentives.
Long-term incentives are provided primarily by stock option grants. The grants
are designed to align the interest of each executive officer with those of
the
stockholder and provide each executive officer with a significant incentive
to
manage the Company from the perspective of an owner with an equity stake in
the
business. Each grant allows the executive officer to acquire shares of the
Company’s Common Stock at a fixed price per share (the market price on the date
of grant) over a specified time period (generally up to 10 years). The number
of
shares subject to each option grant is set at a level intended to create a
meaningful opportunity for stock ownership based on the officer’s current
position with the Company, the base salary associated with that position, the
individual’s potential for increasing stockholder value, and the individual’s
personal performance. The Compensation Committee does not adhere to any specific
guidelines as to the relative option holding of the Company’s executive
officers, nor does it have any program, plan or practice to time the grant
of
stock options in coordination with material non-public information.
53
Health,
Welfare and Benefit Plans.
To be
competitive in attracting and retaining qualified personnel, we offer a standard
range of health and welfare benefits to all employees, including our executive
officers. These benefits include medical, prescription drugs and dental
coverage, life insurance and disability and accidental death and dismemberment
insurance. Under the benefit plans, the cost of employee coverage, including
executive officers’ coverage, is borne 100% by the Company. All employees, with
the exception of the executive officers, contribute towards the cost of spousal
and dependent health insurance coverage. Additionally, our executive officers
currently receive annual car allowances, totaling $17,000 for each of the
Chairman and the President and $10,000 for the Vice President of
Finance.
Deductibility
of Compensation over $1 Million.
Section
162(m) of the Internal Revenue Code imposes a limit of $1 million, unless
compensation is performance-based or another exception applies, on the amount
that a publicly held corporation may deduct in any year for the compensation
paid to its chief executive officer and the four other most highly compensated
executive officers. The cash compensation paid to executive officers for the
2006 fiscal year did not exceed the $1 million limit per officer. During the
2005 fiscal year, however, Messrs. Egan and Cespedes’ compensation both exceeded
$1 million. Therefore, in filing our 2005 federal and state income tax returns,
our compensation deductions for executive officer pay were limited. However,
current year losses and available prior year net operating losses were utilized
in filing our 2005 returns, which served to eliminate substantially all of
the
incremental income taxes that would have been otherwise paid at that time.
We
are mindful of the potential impact that Section 162(m) may have on the income
taxes that the Company may have to pay in the future and intend generally to
structure our compensation arrangements, where feasible, to eliminate or
minimize the impact of the Section 162(m) limitations.
Termination
and Change-in-Control Payments.
On
August 1, 2003, the Company entered into separate employment agreements with
each of our current executive officers that specify, among other things, the
obligation of the Company in the case of termination or change-in-control.
The
Company’s obligations under these employment agreements are described in more
detail in a subsequent section of this Report on Form 10-K which is entitled
“Potential Payments Upon Termination or Change-In-Control.” These employment
agreements were entered into to induce our executive officers to perform their
roles and to continue employment with the Company for an extended period of
time. The particular events which trigger termination payments under the
employment agreements are generally based upon customary business practices
in
the United States.
54
SUMMARY
COMPENSATION TABLE
The
following table sets forth information concerning compensation for services
in
all capacities awarded to, earned by or paid by us to those persons serving
as
the principal executive officer and principal financial officer at any time
during the last calendar year and our other executive officer for the year
ended
December 31, 2006 (collectively, the "Named Executive
Officers"):
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards
(1)
($)
|
|
All
Other (2)
($)
|
|
Total
($)
|
|||||||
Michael
S. Egan,
|
2006
|
250,000
|
50,000
|
—
|
17,868
|
317,868
|
|||||||||||||
Chairman,
Chief Executive
|
2005
|
250,000
|
1,500,000
|
175,000
|
17,987
|
1,942,987
|
|||||||||||||
Officer
(3)
|
2004
|
250,000
|
77,500
|
—
|
13,853
|
341,353
|
|||||||||||||
|
|||||||||||||||||||
Edward
A. Cespedes,
|
2006
|
250,000
|
50,000
|
—
|
33,605
|
333,605
|
|||||||||||||
President,
Treasurer and Chief
|
2005
|
250,000
|
1,500,000
|
175,000
|
31,714
|
1,956,714
|
|||||||||||||
Financial
Officer (4)
|
2004
|
250,000
|
77,500
|
—
|
28,064
|
355,564
|
|||||||||||||
|
|||||||||||||||||||
Robin
S. Lebowitz,
|
2006
|
140,000
|
25,000
|
13,000
|
25,580
|
203,580
|
|||||||||||||
Former
Chief Financial Officer;
|
2005
|
140,000
|
125,000
|
40,000
|
14,632
|
319,632
|
|||||||||||||
Vice
President of Finance (5)
|
2004
|
144,167
|
17,500
|
—
|
(6)
|
161,667
|
(1)
Amounts represent the aggregate grant date fair value of stock options in
accordance with Statement of Financial Accounting Standards No. 123R. See Note
1, “Organization and Summary of Significant Accounting Policies - Stock Based
Compensation,” and Note 11, “Stock Option Plans,” in the accompanying
consolidated financial statements as of December 31, 2006 and for the year
then
ended for information regarding the assumptions used in the valuation of stock
option awards.
(2)
Other
compensation includes car allowances paid to the named executive officers and
the cost of life, disability and accidental death and dismemberment insurance
premiums paid on behalf of the named executive officers. In the case of the
President and the Vice President of Finance, other compensation also includes
the cost of medical and dental insurance coverage for the named executive
officer, their spouse and dependents, as applicable.
(3)
Mr.
Egan became an executive officer in July 1998. We began paying Mr. Egan a base
salary in July 2003. The 2005 option awards include a grant of 1,750,000 options
at an exercise price of $0.12 per share.
(4)
Mr.
Cespedes became President in June 2002 and Treasurer and Chief Financial Officer
in February 2005. The 2005 option awards include a grant of 1,750,000 options
at
an exercise price of $0.12 per share.
(5)
Ms.
Lebowitz became an officer of the Company in June 2002 and Chief Financial
Officer in July 2002. In February 2004, Ms. Lebowitz resigned her position
as
Chief Financial Officer and became Vice President of Finance. The option awards
include grants of 400,000 and 100,000 options at an exercise price of $0.12
and
$0.14 per share in 2005 and 2006, respectively.
(6)
Not
reported as the aggregate of the items was less than $10,000.
55
The
following plan-based awards were made to the Named Executive Officers in
2006:
|
|
|
|
Non-Incentive
Plan
|
|
|
|
|
|
||||
|
|
|
|
Option
Awards:
|
|
|
|
Exercise
|
|
||||
|
|
|
|
Number
of
|
|
|
|
or
Base
|
|
||||
|
|
|
|
Securities
|
|
|
|
Price
of
|
|
||||
|
|
Grant
|
|
Underlying
|
|
|
|
Option
Awards
|
|
||||
Name
|
|
Date
|
|
Options
(#)
|
|
|
|
($/Share)
|
|||||
Robin
S. Lebowitz
|
8/15/2006
|
100,000
|
(1)
|
$
|
0.14
|
(1)
The
stock option award was immediately exercisable at date of grant.
OUTSTANDING
EQUITY AWARDS AT FISCAL 2006 YEAR-END
Number
of Securities
Underlying
Unexercised Options (1)
|
|
|
Option
|
|
|
Option
|
|
||||||
Name
|
|
|
Exercisable
(#)
|
|
|
Unexercisable
(#)
|
|
|
Exercise
Price
($)
|
|
|
Expiration
Date
|
|
Michael
S. Egan
|
50,000
|
—
|
$
|
4.50
|
7/16/2008
|
||||||||
179,798
|
—
|
4.50
|
8/1/2008
|
||||||||||
20,202
|
—
|
4.95
|
8/1/2008
|
||||||||||
70,000
|
—
|
15.75
|
1/6/2009
|
||||||||||
10,000
|
—
|
6.69
|
2/17/2010
|
||||||||||
7,500
|
—
|
0.23
|
6/27/2011
|
||||||||||
7,500
|
—
|
0.04
|
6/21/2012
|
||||||||||
2,500,000
|
—
|
0.02
|
8/13/2012
|
||||||||||
1,000,000
|
—
|
0.56
|
5/22/2013
|
||||||||||
1,750,000
|
—
|
0.12
|
4/7/2015
|
||||||||||
Edward
A. Cespedes
|
50,000
|
—
|
$
|
4.50
|
7/16/2008
|
||||||||
7,500
|
—
|
4.50
|
8/1/2008
|
||||||||||
50,000
|
—
|
15.75
|
1/6/2009
|
||||||||||
15,000
|
—
|
6.69
|
2/17/2010
|
||||||||||
20,000
|
—
|
2.50
|
4/18/2010
|
||||||||||
7,500
|
—
|
2.38
|
6/8/2010
|
||||||||||
7,500
|
—
|
0.23
|
6/27/2011
|
||||||||||
7,500
|
—
|
0.04
|
6/21/2012
|
||||||||||
1,750,000
|
—
|
0.02
|
8/13/2012
|
||||||||||
550,000
|
—
|
0.56
|
5/22/2013
|
||||||||||
1,750,000
|
—
|
0.12
|
4/7/2015
|
||||||||||
Robin
S. Lebowitz
|
1,580
|
—
|
$
|
1.59
|
5/31/2010
|
||||||||
25,000
|
—
|
0.05
|
12/14/2011
|
||||||||||
7,500
|
—
|
0.04
|
6/21/2012
|
||||||||||
500,000
|
—
|
0.02
|
8/13/2012
|
||||||||||
100,000
|
—
|
0.56
|
5/22/2013
|
||||||||||
400,000
|
—
|
0.12
|
4/7/2015
|
||||||||||
100,000
|
—
|
0.14
|
8/16/2016
|
(1)
All
stock option awards included in the above table are fully vested. None of the
named executive officers exercised any stock options during the year ended
December 31, 2006.
56
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
The
Company has entered into separate employment agreements with each of the named
executive officers which specify the obligations of the Company, as well as
the
named executive officer in the case of termination or a
change-in-control.
Each
of
the employment agreements provide for payments to be made to the executive
officers if they are terminated “without cause” or if the executive terminates
with “good reason”, or in the event that the executive officer’s employment is
terminated as a result of disability or death. Events which may be considered
“good reason” as defined by the employment agreements include:
(a)
any
change in the duties, responsibilities or status of the executive officer that
is inconsistent in any material and adverse respect with the executive’s
position, duties, responsibilities or status with the Company;
(b)
a
material and adverse change in the executive officer’s titles or offices held
with the Company;
(c)
a
reduction in the executive officer’s base salary, guaranteed bonus or bonus
opportunity;
(d)
the
relocation of the Company’s principal executive offices or the executive
officer’s own office location to a location more than 25 miles outside of Fort
Lauderdale, Florida;
(e)
any
refusal by the Company or any affiliate to continue to permit the executive
officer to engage in activities not directly related to the business of the
Company which the executive officer was permitted to engage as of the date
the
employment agreement was entered into;
(f)
any
reason following a change in control, as defined by the employment agreement;
or
(g)
any
other breach of a material provision of the employment agreement by the Company
or any affiliate.
Each
of
the employment agreements between the Company and the Chief Executive Officer
and the President provide, in the case of termination by the Company without
cause or termination by the executive officer for good reason, the payment
within five days of such termination of (i) any accrued and unpaid base salary;
(ii) a pro-rated incentive payment, as defined by the agreement, for the current
year through the date of termination; (iii) any accrued vacation pay; and (iv)
a
Lump-Sum Cash Payment (“Lump-Sum Cash Payment”) equal to ten times the sum of
the executive officer’s base salary and highest annual incentive, as defined by
the employment agreement. In addition, the employment agreements provide that
the Company shall maintain in full force and effect, for a period of ten years
following the date of termination, the medical, hospitalization, dental and
life
insurance programs in which the executive officer, his spouse and his dependents
were participating immediately prior to the date of termination at the level
in
effect and upon substantially the same terms and conditions as existed
immediately prior to the date of termination. Such insurance benefits terminate
on the date the executive officer receives equivalent coverage and benefits
under the plans or programs of a subsequent employer. The employment agreements
also provide for the acceleration of vesting of any stock, stock option, stock
appreciation right or similar awards, as of the date of termination and permit
the executive officer to exercise such awards until the earlier of (i) the
third
anniversary of the date of termination or (ii) the end of the term of the award.
The
employment agreement between the Company and the Vice President of Finance
provides for, in the case of termination by the Company without cause or
termination by the executive officer for good reason, payments and benefits
similar to the employment agreements of the Chief Executive Officer and
President except that the Lump-Sum Cash Payment shall equal two times the sum
of
the Vice President of Finance’s base salary and highest annual incentive and the
Company will be required to maintain insurance benefits for a period of two
years following the date of termination.
57
In
the
event the named executive officer’s employment is terminated as a result of
disability, the employment agreements provide for the payment of all accrued
salary and benefits through the termination date, including a pro-rated
incentive payment, as defined by the agreement, as well as the payment of
insurance benefits for a period of one year subsequent to termination.
In
the
event the named executive officer’s employment is terminated as a result of the
officer’s death, the employment agreements provide for the payment of all
accrued salary and benefits through the termination date. Additionally, the
employment agreements specify that the Company shall provide the named executive
officer’s spouse and dependents with insurance benefits for a period of ten
years in the case of the Chief Executive Officer and the President and for
a
period of one year in the case of the Vice President of Finance.
Assuming
the named executive officers were terminated by the Company without cause or
the
named executive officers terminated with good reason as of December 31, 2006,
Lump-Sum Cash Payments totaling $7,925,000 would be payable to each of the
Chief
Executive Officer and the President of the Company and a Lump-Sum Cash Payment
totaling $391,666 would be payable to the Vice President of Finance of the
Company. In addition, the Company’s estimated obligation for insurance benefits
to be provided for the Chief Executive Officer, the President and the Vice
President of Finance in accordance with their respective employment agreement
totaled approximately $9,700, $168,000 and $31,000, respectively.
COMPENSATION
OF DIRECTORS
Directors
who are also our employees receive no compensation for serving on our Board
or
committees. We reimburse non-employee directors for all travel and other
expenses incurred in connection with attending Board and committee meetings.
Non-employee directors are also eligible to receive automatic stock option
grants under our 1998 Stock Option Plan, as amended and restated. As of December
31, 2006 there were no directors who met this definition.
Each
director who becomes an eligible non-employee director for the first time
receives an initial grant of options to acquire 25,000 shares of our Common
Stock. In addition, each eligible non-employee director will receive an annual
grant of options to acquire 7,500 shares of our Common Stock on the first
business day following each annual meeting of stockholders that occurs while
the
1998 Stock Option Plan or 2000 Stock Option Plan is in effect. These stock
options will be granted with per share exercise prices equal to the fair market
value of our common stock as of the date of grant.
COMPENSATION
COMMITTEE
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Michael
S. Egan, theglobe’s Chairman and Chief Executive Officer and Edward A. Cespedes,
theglobe’s President, Treasurer and Chief Financial Officer and Director served
as members of the Compensation Committee of the Board of Directors during 2006.
Although certain relationships and related transactions between Messrs. Egan
and
Cespedes and theglobe are disclosed in the section of this Annual Report on
Form
10-K entitled “Certain Relationships and Related Transactions,” none of these
relationships or transactions relate to interlocking directorships or
compensation committees.
COMPENSATION
COMMITTEE REPORT
The
Compensation Committee of the Board of Directors establishes our general
compensation policies as well as the compensation plans and specific
compensation levels for executive officers. The Compensation Committee also
administers our stock based incentive plans for executive officers.
58
The
Compensation Committee has reviewed the information provided within the
“Compensation Discussion and Analysis” section of this Annual Report on Form
10-K and based on this review, the Compensation Committee has recommended to
the
entire Board of Directors that the “Compensation Discussion and Analysis” be
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2006.
COMPENSATION
COMMITTEE:
Michael
S. Egan
Edward
A.
Cespedes
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information regarding beneficial ownership
of
our Common Stock as of March 19, 2007 (except as otherwise indicated) by (i)
each person who owns beneficially more than 5% of our Common Stock, (ii) each
of
our directors, (iii) each of our "Named Executive Officers" and (iv) all
directors and executive officers as a group. A total of 172,484,838 shares
of
theglobe’s Common Stock were issued and outstanding on March 19, 2007.
The
amounts and percentage of common stock beneficially owned are reported on the
basis of regulations of the Securities and Exchange Commission ("SEC") governing
the determination of beneficial ownership of securities. Under the rules of
the
SEC, a person is deemed to be a "beneficial owner" of a security if that person
has or shares "voting power," which includes the power to vote or to direct
the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person has
a
right to acquire beneficial ownership within 60 days. Under these rules, more
than one person may be deemed a beneficial owner of the same securities and
a
person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest. Unless otherwise indicated below, the address
of each person named in the table below is in care of theglobe.com, inc., P.O.
Box 029006, Fort Lauderdale, Florida 33302.
|
SHARES
BENEFICIALLY OWNED
|
|||||||||
DIRECTORS,
NAMED EXECUTIVE OFFICERS
|
|
|
TITLE
OF
|
|||||||
AND
5% STOCKHOLDERS
|
NUMBER
|
PERCENT
|
CLASS
|
|||||||
Dancing
Bear Investments, Inc. (1)
|
8,303,148
|
4.8
|
%
|
Common
|
||||||
|
||||||||||
Michael
S. Egan (1)(2)(6)(7)(8)
|
149,699,034
|
58.4
|
%
|
Common
|
||||||
|
||||||||||
Edward
A. Cespedes (3)
|
4,215,000
|
2.4
|
%
|
Common
|
||||||
|
||||||||||
Robin
S. Lebowitz (4)
|
1,134,080
|
*
|
Common
|
|||||||
|
||||||||||
Carl
Ruderman (5)
|
10,000,000
|
5.5
|
%
|
Common
|
||||||
|
||||||||||
E&C
Capital Partners, LLLP (6)(8)
|
82,469,012
|
38.1
|
%
|
Common
|
||||||
|
||||||||||
E&C
Capital Partners II, LLLP(7)
|
40,000,000
|
19.4
|
%
|
Common
|
||||||
|
||||||||||
All
directors and executive officers
|
||||||||||
as
a group (3 persons)
|
155,048,114
|
59.3
|
%
|
Common
|
*
less
than 1%
59
(1)
Mr.
Egan owns Dancing Bear Investments, Inc.
(2)
Includes the shares that Mr. Egan is deemed to beneficially own as the
controlling investor of Dancing Bear Investments, Inc., E&C Capital
Partners, LLLP, and E&C Capital Partners II, LLLP and as the Trustee of the
Michael S. Egan Grantor Retained Annuity Trusts for the benefit of his children.
Also includes (i) 5,595,000 shares of our Common Stock issuable upon exercise
of
options that are currently exercisable; (ii) 3,541,337 shares of our Common
Stock held by Mr. Egan's wife, as to which he disclaims beneficial ownership;
and (iii) 204,082 shares of our Common Stock issuable upon exercise of warrants
at $1.22 per share owned by Mr. Egan and his wife.
(3)
Includes 4,215,000 shares of our Common Stock issuable upon exercise of options
that are currently exercisable.
(4)
Includes 1,134,080 shares of our Common Stock issuable upon exercise of options
that are currently exercisable.
(5)
Includes 10,000,000 shares of Common Stock issuable upon the exercise of
warrants at $0.15 per share.
(6)
E&C Capital Partners, LLLP is a privately held investment vehicle controlled
by our Chairman, Michael S. Egan. Our President, Edward A. Cespedes, has a
minority, non-controlling interest in E&C Capital Partners, LLLP. Includes
34,000,000 shares of our Common Stock issuable upon the conversion of the
Convertible Notes. Also, includes 10,000,000 shares of Common Stock if and
to
the extent issued upon exercise of the warrants described in footnote (5) over
which E&C holds an irrevocable proxy pursuant to the Stockholders’ Agreement
described in footnote (8) below.
(7)
E&C Capital Partners II, LLLP is a privately held investment vehicle
controlled by our Chairman, Michael S. Egan. Includes 34,000,000 shares of
our
Common Stock issuable upon the conversion of the Convertible Notes.
(8)
In
connection with certain Marketing Services Agreements entered with Universal
Media of Miami, Inc. and Trans Digital Media, LLC on November 22, 2006, the
Company entered into a warrant purchase agreement with Carl Ruderman, the
controlling shareholder of such entities. In connection with the issuance of
the
warrants, Mr. Ruderman entered into a Stockholders’ Agreement with our Chairman
and Chief Executive Officer, Michael S. Egan, our President, Edward A. Cespedes,
and certain of their affiliates. Pursuant to the Stockholders’ Agreement, Mr.
Ruderman granted an irrevocable proxy over the shares issuable upon exercise
of
the warrants to E&C Capital Partners, LLLP and granted a right of first
refusal over his shares to all of the other parties to the Stockholders’
Agreement. Mr. Ruderman also agreed to sell his shares under certain
circumstances in which the other parties to the Stockholders’ Agreement have
agreed to sell their respective shares. Mr. Ruderman was granted the right
to
participate in certain sales of the Company’s Common Stock by the other parties
to the Stockholders’ Agreement. The amount set forth in the table includes
10,000,000 shares of Common Stock if and to the extent issued upon exercise
of
the warrants described in footnote (5) over which E&C holds such irrevocable
proxy.
Transactions
with Related Persons.
Two
of
our directors, Mr. Egan and Ms. Lebowitz, also serve as officers and directors
of Dancing Bear Investments, Inc. ("Dancing Bear"). Dancing Bear is a
stockholder of the Company and an entity controlled by Mr. Egan, our Chairman
and Chief Executive Officer (“CEO”).
On
November 22, 2006, the Company entered into a License Agreement (the “License
Agreement”) with Speecho, LLC which grants a license to use the Company’s chat,
VoIP and video communications technology for a minimum license fee of $10,000
per month with an initial term of ten years. Mr. Egan, the Company’s Chairman
and CEO, Mr. Cespedes, the Company’s President and Robin Lebowitz, the Company’s
Vice President of Finance, as well as certain other employees of the Company,
are members of Blue Wall, LLC, a company that owns 50% of the membership
interests in Speecho, LLC. As of December 31, 2006, the Company had not
recognized any revenue related to the License Agreement.
60
On
November 22, 2006, the Company entered into certain Marketing Services
Agreements (the “Marketing Services Agreements”) with two entities whereby the
entities agreed to market certain of the Company’s products in exchange for
certain commissions and promotional fees and which granted the Company exclusive
right to certain uses of a tradename in connection with certain of the Company’s
websites. Additionally, on November 22, 2006, in connection with the Marketing
Services Agreements, the Company entered into a Warrant Purchase Agreement
with
Carl Ruderman, the controlling shareholder of the entities. The Warrant Purchase
Agreement provides for the issuance to Mr. Ruderman of one warrant to purchase
5,000,000 shares of the Company’s Common Stock at an exercise price of $0.15 per
share with a three year term and a second warrant to purchase 5,000,000 shares
of the Company’s Common Stock at an exercise price of $0.15 per share with a
term of four years. Each warrant provides for the extension of the exercise
term
by an additional three years if certain criteria are met under the Marketing
Services Agreements. The Warrant Purchase Agreement grants to Mr. Ruderman
“piggy-back” registration rights with respect to the shares of the Company’s
Common Stock issuable upon exercise of the warrants.
In
connection with the issuance of the warrants, on November 22, 2006, Mr. Ruderman
entered into a Stockholders’ Agreement with Mr. Egan, the Company’s chairman and
chief executive officer, Mr. Cespedes, the Company’s president and certain of
their affiliates. Pursuant to the Stockholders’ Agreement, Mr. Ruderman granted
an irrevocable proxy over the shares issuable upon exercise of the warrants
to
E&C Capital Partners, LLLP and granted a right of first refusal over his
shares to all of the other parties to the Stockholders’ Agreement. Mr. Ruderman
also agreed to sell his shares under certain circumstances in which the other
parties to the Stockholders’ Agreement have agreed to sell their respective
shares. Mr. Ruderman was also granted the right to participate in certain sales
of the Company’s Common Stock by the other parties to the Stockholders’
Agreement.
On
April
22, 2005, E&C Capital Partners, LLLP and E&C Capital Partners II, LLLP
(the “Noteholders”), entities controlled by the Company's Chairman and CEO,
entered into a Note Purchase Agreement (the "Agreement") with theglobe pursuant
to which they acquired secured demand convertible promissory notes (the
"Convertible Notes") in the aggregate principal amount of $1,500,000. Under
the
terms of the Agreement, the Noteholders were also granted the optional right,
for a period of 90 days from the date of the Agreement, to purchase additional
Convertible Notes such that the aggregate principal amount of Convertible Notes
issued under the Agreement could total $4,000,000 (the “Option”). On June 1,
2005, the Noteholders exercised a portion of the Option and acquired an
additional $1,500,000 of Convertible Notes. On July 18, 2005, the Noteholders
exercised the remainder of the Option and acquired an additional $1,000,000
of
Convertible Notes.
The
Convertible Notes are convertible at the option of the Noteholders into shares
of the Company's Common Stock at an initial price of $0.05 per share. During
the
year ended December 31, 2005 an aggregate of $600,000 of Convertible Notes
were
converted by the Noteholders into an aggregate of 12,000,000 shares of the
Company’s Common Stock. Assuming full conversion of all Convertible Notes which
remain outstanding as of December 31, 2006, an additional 68,000,000 shares
of
the Company’s Common Stock would be issued to the Noteholders. The Convertible
Notes provide for interest at the rate of ten percent per annum and are secured
by a pledge of substantially all of the assets of the Company. Approximately
$340,000 of interest expense was recorded during the year ended December 31,
2006 related to the Convertible Notes. As of December 31, 2006, a total of
$556,200 in accrued interest related to the Convertible Notes remained unpaid.
The Convertible Notes are due and payable five days after demand for payment
by
the Noteholders. The Noteholders are entitled to certain demand and “piggy-back”
registration rights in connection with their investment.
An
entity
controlled by our Chairman and CEO has provided services to the Company and
various of its subsidiaries during the year ended December 31, 2006, including:
the lease of office space and the outsourcing of human resources and payroll
processing functions.
We
sublease approximately 15,000 square feet of office space for our executive
offices from Certified Vacations, a company which is controlled by our Chairman
and CEO. The sublease commenced on September 1, 2003 and expires on July 31,
2007. The initial base rent of $18.91 per square foot on an annual basis
($283,650 annually in the aggregate), increases on each anniversary of the
sublease by $1.50 per square foot. During the year ended December 31, 2006
approximately $416,000 of expense was recorded related to the lease of office
space from Certified Vacations, including allocated building operating expenses
and sales taxes.
61
Beginning
April 2005, we outsourced our human resources and payroll processing functions
from Certified Vacations and approximately $50,000 of expense was recorded
during the year ended December 31, 2006 related to these functions.
Review,
Approval or Ratification of Transactions with Related Persons.
The
Board of Directors has adopted a Code of Ethics and Business Conduct, which
applies to all officers, employees and directors of the Company. The Code of
Ethics and Business Conduct describes the Company’s policies and standards for
protecting the Company’s integrity and provides guidance to the Company’s
officers, employees and directors in recognizing and reporting activities that
conflict with, or have the appearance of conflicting with, the best interests
of
the Company and its stockholders. The Code of Ethics and Business Conduct
provides that no officer, employee or director of the Company shall derive
any
personal gain from any Company activity unless the transaction has been fully
disclosed to and approved in writing by the Company’s Compliance Officer, Ms.
Lebowitz, or the Board of Directors as the case may be.
Director
Independence.
None of
the current members of the Company’s Board of Directors are considered
“independent” within the meaning of applicable NASD rules
Audit
Fees.
The
aggregate fees billed by Rachlin Cohen & Holtz LLP (“Rachlin Cohen”),
independent public accountants, for professional services rendered for the
audit
of our annual financial statements during 2006 and 2005 and the reviews of
the
financial statements included in our Forms 10-Q and 10-K, as appropriate, were
$128,625 and $110,645, respectively.
Audit-Related
Fees.
During
the last two fiscal years, Rachlin Cohen provided the Company with the following
services that are reasonably related to the performance of the audit of our
financial statements:
The
Company incurred no assurance and related services related to audits and review
for various SEC filings (including S-8’s, proxy and private placements) during
2006. Fees related to these services were $32,983 for 2005; and
Other
services relating to consultation and research of various accounting
pronouncements and technical issues were $3,340 for 2006 and $4,211 for 2005.
Tax
Fees.
The
aggregate fees billed for tax services provided by Rachlin Cohen in connection
with tax compliance, tax consulting and tax planning services during 2006 and
2005, were $88,860 and $103,021, respectively.
All
Other Fees.
Except
as described above, the Company had no other fees for services provided by
Rachlin Cohen during 2006 and 2005.
Pre-Approval
of Services by the External Auditor.
In
April 2004, the Audit Committee adopted a policy for pre-approval of audit
and
permitted non-audit services by the Company’s external auditor. The Audit
Committee will consider annually and, if appropriate, approve the provision
of
audit services by its external auditor and consider and, if appropriate,
pre-approve the provision of certain defined audit and non-audit services.
The
Audit Committee will also consider on a case-by-case basis and, if appropriate,
approve specific engagements that are not otherwise pre-approved. The Audit
Committee pre-approved the audit related engagements and tax services billed
by
the amounts described above.
62
(1)
|
Financial
statements are listed in the index to the consolidated financial
statements on page F-1 of this Report.
|
|
(2)
|
No
financial statement schedules are included because they are not applicable
or are not required or the information required to be set forth therein
is
included in the consolidated financial statements or notes thereto.
|
|
(3)
|
Exhibit
Index
|
|
3.1
|
Form
of Fourth Amended and Restated Certificate of Incorporation of the
Company
(3).
|
|
|
|
|
3.2
|
Certificate
of Amendment to Fourth Amended and Restated Certificate of Incorporation
(18).
|
|
|
|
|
3.3
|
Certificate
of Amendment to Fourth Amended and Restated Certificate of Incorporation
filed with the Secretary of State of Delaware on July 29, 2003 (18).
|
|
|
|
|
3.4
|
Certificate
relating to Previously Outstanding Series of Preferred Stock and
Relating
to the Designation, Preferences and Rights of the Series F Preferred
Stock
(13).
|
|
|
|
|
3.5
|
Certificate
of Amendment Relating to the Designation Preferences and Rights of
the
Junior Participating Preferred Stock (15).
|
|
|
|
|
3.6
|
Form
of By-Laws of the Company (18).
|
|
|
|
|
3.7
|
Certificate
of Amendment Relating to the Designation Preferences and Rights of
the
Series H Automatically Converting Preferred Stock (17).
|
|
|
|
|
3.8
|
Certificate
of Amendment to Fourth Amended and Restated Certificate of Incorporation
filed with the Secretary of State of Delaware on December 1, 2004
(21).
|
|
|
|
|
4.1
|
Registration
Rights Agreement, dated as of September 1, 1998 (5).
|
|
|
|
|
4.2
|
Amendment
No.1 to Registration Rights Agreement, dated as of April 9, 1999
(6).
|
|
|
|
|
4.3
|
Specimen
certificate representing shares of Common Stock of the Company (4).
|
|
|
|
|
4.4
|
Amended
and Restated Warrant to Acquire Shares of Common Stock (2).
|
|
|
|
|
4.5
|
Form
of Rights Agreement, by and between the Company and American Stock
Transfer & Trust Company as Rights Agent (3).
|
|
|
|
|
4.6
|
Form
of Warrant dated November 12, 2002 to acquire shares of Common Stock
(9).
|
|
|
|
|
4.7
|
Form
of Warrant dated March 28, 2003 to acquire shares of Common Stock
(13).
|
|
|
|
|
4.8
|
Form
of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of
theglobe.com Common Stock (10).
|
|
|
|
|
4.9
|
Form
of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc.
(11).
|
|
|
|
|
4.10
|
Form
of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc.
(16).
|
63
4.11
|
Form
of Warrant relating to potential issuance of Earn-out Consideration
(17).
|
|
|
|
|
4.12
|
Form
of Secured Demand Convertible Promissory Note (23).
|
4.13
|
Security
Agreement dated April 22, 2005 by and between theglobe.com, inc.
and
certain other parties named therein (23).
|
|
|
|
|
4.14
|
Unconditional
Guaranty Agreement dated April 22, 2005 (23).
|
|
|
|
|
10.1
|
Form
of Indemnification Agreement between the Company and each of its
Directors
and Executive Officers (1).
|
|
|
|
|
10.2
|
2000
Broad Based Stock Option Plan (7).**
|
|
|
|
|
10.3
|
1998
Stock Option Plan, as amended (6).**
|
|
|
|
|
10.4
|
1995
Stock Option Plan (1).**
|
|
|
|
|
10.5
|
Employee
Stock Purchase Plan (5).**
|
|
|
|
|
10.6
|
Technology
Purchase Agreement dated November 12, 2002, among theglobe.com, inc.
and
Brian Fowler (9).
|
|
|
|
|
10.7
|
Employment
Agreement dated November 12, 2002, among theglobe.com, inc. and Brian
Fowler (9).**
|
|
|
|
|
10.8
|
Payment
Agreement dated November 12, 2002, among theglobe.com, inc., 1002390
Ontario Inc., and Robert S. Giblett (9).
|
|
|
|
|
10.9
|
Release
Agreement dated November 12, 2002, among theglobe.com, inc. and certain
other parties named therein (9).
|
|
|
|
|
10.10
|
Agreement
and Plan of Merger dated May 23, 2003 between theglobe.com, inc.,
DPT
Acquisition, Inc., Direct Partner Telecom, Inc., and the stockholders
thereof (10).
|
|
|
|
|
10.11
|
Form
of Subscription Agreement relating to the purchase of Units of Series
G
Preferred Stock and Warrants of theglobe.com, inc. (11).
|
|
|
|
|
10.12
|
Employment
Agreement dated August 1, 2003 between theglobe.com, inc. and Michael
S.
Egan (12).**
|
|
|
|
|
10.13
|
Employment
Agreement dated August 1, 2003 between theglobe.com, inc. and Edward
A.
Cespedes (12).**
|
|
|
|
|
10.14
|
Employment
Agreement dated August 1, 2003 between theglobe.com, inc. and Robin
Segaul
Lebowitz (12).**
|
|
|
|
|
10.15
|
Amended
& Restated Non-Qualified Stock Option Agreement effective as of August
12, 2002 between theglobe.com, inc. and Michael S. Egan (12).**
|
|
|
|
|
10.16
|
Amended
& Restated Non-Qualified Stock Option Agreement effective as of August
12, 2002 between theglobe.com, inc. and Edward A. Cespedes (12).**
|
|
|
|
|
10.17
|
Amended
& Restated Non-Qualified Stock Option Agreement effective as of August
12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz (12).**
|
|
|
|
|
10.18
|
2003
Amended and Restated Non-Qualified Stock Option Plan (28).**
|
64
10.19
|
Securities
Purchase and Registration Agreement dated March 2, 2004 relating
to the
purchase of Units of Common Stock and Warrants of theglobe.com, inc.
(14).
|
|
|
|
|
10.20
|
Amendment
to the Service Order Agreement Terms and Conditions dated July 30,
2003,
and October 24, 2003 between XO Communications, Inc. and Direct Partner
Telecom, Inc., including XO Services Terms and Conditions (14).*
|
|
|
|
|
10.21
|
Broad
Capacity Services Agreement dated October 17, 2003 by and between
Direct
Partner Telecom, Inc. and Progress Telecom Corporation (14).*
|
10.22
|
Agreement
and Plan of Merger dated August 31, 2004 by and between theglobe.com,
inc., SendTec Acquisition Corporation and SendTec, Inc., among others
(16).
|
|
|
|
|
10.23
|
Employment
Agreement dated September 1, 2004 by and between SendTec, Inc. and
Paul
Soltoff (16).**
|
|
|
|
|
10.24
|
Stockholders’
Agreement dated September 1, 2004 by and between theglobe.com and
certain
named stockholders (17).
|
|
|
|
|
10.25
|
theglobe.com
2004 Amended and Restated Stock Option Plan (20).
|
|
|
|
|
10.26
|
Promissory
Note dated September 1, 2004 (17).
|
|
|
|
|
10.27
|
Form
of Potential Conversion Note relating to Series H Preferred Stock
(17).
|
|
|
|
|
10.28
|
Termination
of Agreement dated as of January 31, 2005 by and between theglobe.com,
inc. and Promotion and Display Technology Ltd. (22).
|
|
|
|
|
10.29
|
Consulting
Agreement effective as of February 2, 2005 (fully executed as of
March 28,
2005) between theglobe.com, inc. and Albert J. Detz (22).**
|
|
|
|
|
10.30
|
Carrier
Services Agreement between XO Communications, Inc. and Direct Partner
Telecom, Inc., as amended and made effective by the First Amendment
to the
Carrier Services Agreement dated March 25, 2005 (22).
|
|
|
|
|
10.31
|
First
Amendment to Carrier Services Agreement dated March 25, 2005 (22).
|
|
|
|
|
10.32
|
Note
Purchase Agreement dated April 22, 2005 by and between theglobe.com,
inc.
and certain named investors (23).
|
|
|
|
|
10.33
|
Asset
Purchase Agreement dated as of August 10, 2005 by and among theglobe.com,
inc., SendTec, Inc. and RelationServe Media, Inc. (24).
|
|
|
|
|
10.34
|
1
st
Amendment
to the Asset Purchase Agreement dated as of August 23, 2005, by and
among
theglobe.com, inc., SendTec, Inc. and RelationServe Media, Inc. (25).
|
|
|
|
|
10.35
|
Redemption
Agreement dated August 23, 2005 between theglobe.com, inc. and certain
members of management of SendTec, Inc. (26).
|
|
|
|
|
10.36
|
Escrow
Agreement dated as of October 31, 2005, by and among theglobe.com,
inc.,
SendTec, Inc., RelationServe Media, Inc. and Olshan Grundman Frome
Rosenzweig & Wolosky LLP (27).
|
|
|
|
|
10.37
|
Termination
Agreement dated as of October 31, 2005, by and among theglobe.com,
inc.,
SendTec, Inc., Paul Soltoff, Eric Obeck, Donald Gould, Harry Greene,
Irvine and Nadine Brechner, as tenants by the entirety, Allen Vance,
G.
Thomas Alison and Steven Morvay (27).
|
|
10.38
|
.travel
Sponsored TLD Registry Agreement dated May 5, 2005 by and between
ICANN
and Tralliance Corporation.
|
65
10.39
|
Warrant
Purchase Agreement dated as of November 22, 2006 by and between
theglobe.com, inc. and Carl Ruderman.*
|
|
10.40
|
Stockholders’
Agreement dated as of November 22, 2006 by and among theglobe.com,
inc.,
Michael S. Egan, Edward A. Cespedes, E&C Capital Partners, LLLP,
E&C Capital Partners II, Ltd., Dancing Bear Investments, Inc. and Carl
Ruderman.
|
|
10.41
|
Warrant
to Acquire 5,000,000 shares of theglobe.com, inc. dated as of November
22,
2006 issued to Carl Ruderman.*
|
|
10.42
|
Warrant
to Acquire 5,000,000 shares of theglobe.com, inc. dated as of November
22,
2006 issued to Carl Ruderman.*
|
|
10.43
|
Amended
and Restated License Agreement dated as of January 26, 2007 by and
between
tglo.com, inc. and Speecho LLC.*
|
|
10.44
|
NeuLevel
Master Service Agreement dated as of October 11, 2005 by and between
NeuLevel, Inc. and Tralliance Corporation.*
|
|
10.45
|
Settlement
Agreement between MySpace, Inc. and theglobe.com, inc. and Michael
Egan.
|
|
10.46
|
Marketing
Services Agreement dated as of November 22, 2006 between theglobe.com,
inc. and Trans Digital Media, LLC.*
|
|
10.47
|
Marketing
Services Agreement dated as of November 22, 2006 between theglobe.com,
inc. and Universal Media of Miami, Inc.*
|
|
21.
|
Subsidiaries
|
|
|
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a).
|
|
|
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a).
|
|
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350
as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
|
|
|
|
1.
Incorporated by reference from our registration statement on Form S-1 filed
July
24, 1998 (Registration No. 333-59751).
2.
Incorporated by reference from our Form S-1/A filed August 20, 1998.
3.
Incorporated by reference from our Form S-1/A filed September 15, 1998.
4.
Incorporated by reference from our Form S-1/A filed October 14, 1998.
5.
Incorporated by reference from our Form 10-K for the year ended December 31,
1998 filed March 30, 1999.
6.
Incorporated by reference from our Form S-1 filed April 13, 1999.
66
7.
Incorporated by reference from our Form 10-Q for the quarter ended March 31,
2000 dated May 15, 2000.
8.
Incorporated by reference from our Form 8-K filed August 13, 2002.
9.
Incorporated by reference from our Form 8-K filed on November 26, 2002.
10.
Incorporated by reference from our Form 8-K filed on June 6, 2003.
11.
Incorporated by reference from our Form 8-K filed on July 11, 2003.
12.
Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
13.
Incorporated by reference from our Form 10-K filed on March 31, 2003.
14.
Incorporated by reference from our Form 10-KSB filed on March 30, 2004.
15.
Incorporated by reference from our Registration Statement on Form SB-2 filed
on
April 16, 2004 (Registration No. 333-114556).
16.
Incorporated by reference from our Form 8-K filed on March 17, 2004.
17.
Incorporated by reference from our Form 8-K filed September 7, 2004.
18.
Incorporated by reference from our Form SB-2 filed April 16, 2004.
19.
Incorporated by reference from our Post Effective Amendment No. 1 to our Form
SB-2 filed on May 7, 2004.
20.
Incorporated by reference from our S-8 filed October 13, 2004.
21.
Incorporated by reference from our Form 8-K filed on December 2, 2004.
22.
Incorporated by reference from our 10-KSB filed on March 30, 2005.
23.
Incorporated by reference from our Form 8-K filed on April 26, 2005.
24.
Incorporated by reference from our Form 8-K filed on August 16, 2005.
25.
Incorporated by reference to Annex A of our Definitive Information Statement
filed on September 15, 2005.
26.
Incorporated by reference to Annex B of our Definitive Information Statement
filed on September 15, 2005.
27.
Incorporated by reference from our Form 8-K filed on November 4, 2005.
28.
Incorporated by reference from our Form S-8 filed January 22, 2004.
*
Confidential portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
**
Management contract or compensatory plan or arrangement.
67
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
theglobe.com,
inc.
|
||
|
|
|
Dated:
March 30, 2007
|
By: |
/s/
Michael S.
Egan
|
Michael
S. Egan
|
||
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
By: |
/s/
Edward A.
Cespedes
|
|
Edward
A. Cespedes
|
||
President,
Chief Financial Officer
(Principal
Financial Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the Registrant in the capacities
and on the dates indicated.
/s/
Michael S.
Egan
|
March
30, 2007
|
|
Michael
S. Egan
|
|
|
Chairman,
Director
|
|
|
|
|
|
/s/
Edward A. Cespedes
|
March
30, 2007
|
|
Edward
A. Cespedes
|
|
|
Director
|
|
|
|
|
|
/s/
Robin Lebowitz
|
March
30 ,
2007
|
|
Robin
Lebowitz
|
|
|
Director
|
|
68
NO.
ITEM
|
|
|
3.1
|
Form
of Fourth Amended and Restated Certificate of Incorporation of
the Company
(3).
|
|
|
|
|
3.2
|
Certificate
of Amendment to Fourth Amended and Restated Certificate of Incorporation
(18).
|
|
|
|
|
3.3
|
Certificate
of Amendment to Fourth Amended and Restated Certificate of Incorporation
filed with the Secretary of State of Delaware on July 29, 2003
(18).
|
|
|
|
|
3.4
|
Certificate
relating to Previously Outstanding Series of Preferred Stock
and Relating
to the Designation, Preferences and Rights of the Series F Preferred
Stock
(13).
|
|
|
|
|
3.5
|
Certificate
of Amendment Relating to the Designation Preferences and Rights
of the
Junior Participating Preferred Stock (15).
|
|
|
|
|
3.6
|
Form
of By-Laws of the Company (18).
|
|
|
|
|
3.7
|
Certificate
of Amendment Relating to the Designation Preferences and Rights
of the
Series H Automatically Converting Preferred Stock (17).
|
|
|
|
|
3.8
|
Certificate
of Amendment to Fourth Amended and Restated Certificate of Incorporation
filed with the Secretary of State of Delaware on December 1,
2004 (21).
|
|
|
|
|
4.1
|
Registration
Rights Agreement, dated as of September 1, 1998 (5).
|
|
|
|
|
4.2
|
Amendment
No.1 to Registration Rights Agreement, dated as of April 9, 1999
(6).
|
|
|
|
|
4.3
|
Specimen
certificate representing shares of Common Stock of the Company
(4).
|
|
|
|
|
4.4
|
Amended
and Restated Warrant to Acquire Shares of Common Stock (2).
|
|
|
|
|
4.5
|
Form
of Rights Agreement, by and between the Company and American
Stock
Transfer & Trust Company as Rights Agent (3).
|
|
|
|
|
4.6
|
Form
of Warrant dated November 12, 2002 to acquire shares of Common
Stock (9).
|
|
|
|
|
4.7
|
Form
of Warrant dated March 28, 2003 to acquire shares of Common Stock
(13).
|
|
|
|
|
4.8
|
Form
of Warrant dated May 28, 2003 to acquire an aggregate of 500,000
shares of
theglobe.com Common Stock (10).
|
4.9
|
Form
of Warrant dated July 2, 2003 to acquire securities of theglobe.com,
inc.
(11).
|
||
|
|
||
4.10
|
Form
of Warrant dated March 5, 2004 to acquire securities of theglobe.com,
inc.
(16).
|
||
|
|
||
4.11
|
Form
of Warrant relating to potential issuance of Earn-out Consideration
(17).
|
||
4.12
|
Form
of Secured Demand Convertible Promissory Note (23).
|
||
|
|
||
4.13
|
Security
Agreement dated April 22, 2005 by and between theglobe.com, inc.
and
certain other parties named therein (23).
|
69
4.14
|
Unconditional
Guaranty Agreement dated April 22, 2005 (23).
|
||
|
|
||
10.1
|
Form
of Indemnification Agreement between the Company and each of
its Directors
and Executive Officers (1).
|
||
|
|
||
10.2
|
2000
Broad Based Stock Option Plan (7).**
|
||
|
|
||
10.3
|
1998
Stock Option Plan, as amended (6).**
|
||
|
|
||
10.4
|
1995
Stock Option Plan (1).**
|
||
|
|
||
10.5
|
Employee
Stock Purchase Plan (5).**
|
||
|
|
||
10.6
|
Technology
Purchase Agreement dated November 12, 2002, among theglobe.com,
inc. and
Brian Fowler (9).
|
||
|
|
||
10.7
|
Employment
Agreement dated November 12, 2002, among theglobe.com, inc. and
Brian
Fowler (9).**
|
||
|
|
||
10.8
|
Payment
Agreement dated November 12, 2002, among theglobe.com, inc.,
1002390
Ontario Inc., and Robert S. Giblett (9).
|
||
|
|
||
10.9
|
Release
Agreement dated November 12, 2002, among theglobe.com, inc. and
certain
other parties named therein (9).
|
||
|
|
||
10.10
|
Agreement
and Plan of Merger dated May 23, 2003 between theglobe.com, inc.,
DPT
Acquisition, Inc., Direct Partner Telecom, Inc., and the stockholders
thereof (10).
|
||
|
|
||
10.11
|
Form
of Subscription Agreement relating to the purchase of Units of
Series G
Preferred Stock and Warrants of theglobe.com, inc. (11).
|
||
|
|
||
10.12
|
Employment
Agreement dated August 1, 2003 between theglobe.com, inc. and
Michael S.
Egan (12).**
|
||
|
|
||
10.13
|
Employment
Agreement dated August 1, 2003 between theglobe.com, inc. and
Edward A.
Cespedes (12).**
|
||
|
|
||
10.14
|
Employment
Agreement dated August 1, 2003 between theglobe.com, inc. and
Robin Segaul
Lebowitz (12).**
|
||
|
|
||
10.15
|
Amended
& Restated Non-Qualified Stock Option Agreement effective as of
August
12, 2002 between theglobe.com, inc. and Michael S. Egan (12).**
|
||
|
|
||
10.16
|
Amended
& Restated Non-Qualified Stock Option Agreement effective as of
August
12, 2002 between theglobe.com, inc. and Edward A. Cespedes (12).**
|
||
|
|
||
10.17
|
Amended
& Restated Non-Qualified Stock Option Agreement effective as of
August
12, 2002 between theglobe.com, inc. and Robin Segaul Lebowitz
(12).**
|
||
|
|
||
10.18
|
2003
Amended and Restated Non-Qualified Stock Option Plan (28).**
|
||
|
|
||
10.19
|
Securities
Purchase and Registration Agreement dated March 2, 2004 relating
to the
purchase of Units of Common Stock and Warrants of theglobe.com,
inc. (14).
|
||
|
|
||
10.20
|
Amendment
to the Service Order Agreement Terms and Conditions dated July
30, 2003,
and October 24, 2003 between XO Communications, Inc. and Direct
Partner
Telecom, Inc., including XO Services Terms and Conditions (14).*
|
70
10.21
|
Broad
Capacity Services Agreement dated October 17, 2003 by and between
Direct
Partner Telecom, Inc. and Progress Telecom Corporation (14).*
|
||
|
|
||
10.22
|
Agreement
and Plan of Merger dated August 31, 2004 by and between theglobe.com,
inc., SendTec Acquisition Corporation and SendTec, Inc., among
others
(16).
|
||
|
|
||
10.23
|
Employment
Agreement dated September 1, 2004 by and between SendTec, Inc.
and Paul
Soltoff (16).**
|
||
|
|
||
10.24
|
Stockholders’
Agreement dated September 1, 2004 by and between theglobe.com
and certain
named stockholders (17).
|
||
|
|
||
10.25
|
theglobe.com
2004 Amended and Restated Stock Option Plan (20).
|
||
|
|
||
10.26
|
Promissory
Note dated September 1, 2004 (17).
|
||
|
|
||
10.27
|
Form
of Potential Conversion Note relating to Series H Preferred Stock
(17).
|
||
|
|
||
10.28
|
Termination
of Agreement dated as of January 31, 2005 by and between theglobe.com,
inc. and Promotion and Display Technology Ltd. (22).
|
||
|
|
||
10.29
|
Consulting
Agreement effective as of February 2, 2005 (fully executed as
of March 28,
2005) between theglobe.com, inc. and Albert J. Detz (22).**
|
||
|
|
||
10.30
|
Carrier
Services Agreement between XO Communications, Inc. and Direct
Partner
Telecom, Inc., as amended and made effective by the First Amendment
to the
Carrier Services Agreement dated March 25, 2005 (22).
|
||
|
|
||
10.31
|
First
Amendment to Carrier Services Agreement dated March 25, 2005
(22).
|
||
|
|
||
10.32
|
Note
Purchase Agreement dated April 22, 2005 by and between theglobe.com,
inc.
and certain named investors (23).
|
||
|
|
||
10.33
|
Asset
Purchase Agreement dated as of August 10, 2005 by and among theglobe.com,
inc., SendTec, Inc. and RelationServe Media, Inc. (24).
|
||
|
|
||
10.34
|
1
st
Amendment
to the Asset Purchase Agreement dated as of August 23, 2005,
by and among
theglobe.com, inc., SendTec, Inc. and RelationServe Media, Inc.
(25).
|
||
|
|
||
10.35
|
Redemption
Agreement dated August 23, 2005 between theglobe.com, inc. and
certain
members of management of SendTec, Inc. (26).
|
||
|
|
||
10.36
|
Escrow
Agreement dated as of October 31, 2005, by and among theglobe.com,
inc.,
SendTec, Inc., RelationServe Media, Inc. and Olshan Grundman
Frome
Rosenzweig & Wolosky LLP (27).
|
||
|
|
||
10.37
|
Termination
Agreement dated as of October 31, 2005, by and among theglobe.com,
inc.,
SendTec, Inc., Paul Soltoff, Eric Obeck, Donald Gould, Harry
Greene,
Irvine and Nadine Brechner, as tenants by the entirety, Allen
Vance, G.
Thomas Alison and Steven Morvay (27).
|
||
10.38
|
.travel
Sponsored TLD Registry Agreement dated May 5, 2005 by and between
ICANN
and Tralliance Corporation.
|
||
10.39
|
Warrant
Purchase Agreement dated as of November 22, 2006 by and between
theglobe.com, inc. and Carl Ruderman.*
|
||
10.40
|
Stockholders’
Agreement dated as of November 22, 2006 by and among theglobe.com,
inc.,
Michael S. Egan, Edward A. Cespedes, E&C Capital Partners, LLLP,
E&C Capital Partners II, Ltd., Dancing Bear Investments, Inc. and
Carl
Ruderman.
|
71
10.41
|
Warrant
to Acquire 5,000,000 shares of theglobe.com, inc. dated as of
November 22,
2006 issued to Carl Ruderman.*
|
||
10.42
|
Warrant
to Acquire 5,000,000 shares of theglobe.com, inc. dated as of
November 22,
2006 issued to Carl Ruderman.*
|
||
10.43
|
Amended
and Restated License Agreement dated as of January 26, 2007 by
and between
tglo.com, inc. and Speecho LLC.*
|
||
10.44
|
NeuLevel
Master Service Agreement dated as of October 11, 2005 by and
between
NeuLevel, Inc. and Tralliance Corporation.*
|
||
10.45
|
Settlement
Agreement between MySpace, Inc. and theglobe.com, inc. and Michael
Egan.
|
||
10.46
|
Marketing
Services Agreement dated as of November 22, 2006 between theglobe.com,
inc. and Trans Digital Media, LLC.*
|
||
10.47
|
Marketing
Services Agreement dated as of November 22, 2006 between theglobe.com,
inc. and Universal Media of Miami, Inc.*
|
||
21.
|
Subsidiaries
|
||
|
|
||
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule
15d-14(a).
|
||
|
|
||
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule
15d-14(a).
|
||
|
|
||
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.
|
||
|
|
||
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.
|
1.
Incorporated by reference from our registration statement on Form S-1 filed
July
24, 1998 (Registration No. 333-59751).
2.
Incorporated by reference from our Form S-1/A filed August 20, 1998.
3.
Incorporated by reference from our Form S-1/A filed September 15, 1998.
4.
Incorporated by reference from our Form S-1/A filed October 14, 1998.
5.
Incorporated by reference from our Form 10-K for the year ended December
31,
1998 filed March 30, 1999.
6.
Incorporated by reference from our Form S-1 filed April 13, 1999.
7.
Incorporated by reference from our Form 10-Q for the quarter ended March
31,
2000 dated May 15, 2000.
8.
Incorporated by reference from our Form 8-K filed August 13, 2002.
9.
Incorporated by reference from our Form 8-K filed on November 26, 2002.
72
10.
Incorporated by reference from our Form 8-K filed on June 6, 2003.
11.
Incorporated by reference from our Form 8-K filed on July 11, 2003.
12.
Incorporated by reference from our Form 10-QSB filed on November 14, 2003.
13.
Incorporated by reference from our Form 10-K filed on March 31, 2003.
14.
Incorporated by reference from our Form 10-KSB filed on March 30, 2004.
15.
Incorporated by reference from our Registration Statement on Form SB-2 filed
on
April 16, 2004 (Registration No. 333-114556).
16.
Incorporated by reference from our Form 8-K filed on March 17, 2004.
17.
Incorporated by reference from our Form 8-K filed September 7, 2004.
18.
Incorporated by reference from our Form SB-2 filed April 16, 2004.
19.
Incorporated by reference from our Post Effective Amendment No. 1 to our
Form
SB-2 filed on May 7, 2004.
20.
Incorporated by reference from our S-8 filed October 13, 2004.
21.
Incorporated by reference from our Form 8-K filed on December 2, 2004.
22.
Incorporated by reference from our 10-KSB filed on March 30, 2005.
23.
Incorporated by reference from our Form 8-K filed on April 26, 2005.
24.
Incorporated by reference from our Form 8-K filed on August 16, 2005.
25.
Incorporated by reference to Annex A of our Definitive Information Statement
filed on September 15, 2005.
26.
Incorporated by reference to Annex B of our Definitive Information Statement
filed on September 15, 2005.
27.
Incorporated by reference from our Form 8-K filed on November 4, 2005.
28.
Incorporated by reference from our Form S-8 filed January 22, 2004.
*
Confidential portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
**
Management contract or compensatory plan or arrangement.
73