-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E3QRy7w4tIFL9n5smknHn9qXizqP0ITqoRL1jNgCARak/9p/n6uWP7qBRFiOEh9t P/BgAbIGKwPg97FyllyVjA== 0001144204-05-015301.txt : 20050513 0001144204-05-015301.hdr.sgml : 20050513 20050513164710 ACCESSION NUMBER: 0001144204-05-015301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050513 DATE AS OF CHANGE: 20050513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THEGLOBE COM INC CENTRAL INDEX KEY: 0001066684 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 141782422 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25053 FILM NUMBER: 05830005 BUSINESS ADDRESS: STREET 1: 110 EAST BROWARD BOULEVARD STREET 2: SUITE 1400 CITY: FORT LAUDERDALE STATE: FL ZIP: 33301 BUSINESS PHONE: 954 769 5900 MAIL ADDRESS: STREET 1: PO BOX 029006 CITY: FORT LAUDERDALE STATE: FL ZIP: 33302 10-Q 1 v017931_10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter period ended March 31, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________ COMMISSION FILE NO. 0-25053 THEGLOBE.COM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) STATE OF DELAWARE 14-1782422 ---------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 110 EAST BROWARD BOULEVARD, SUITE 1400 FORT LAUDERDALE, FL. 33301 -------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (954) 769 - 5900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 the Securities Exchange Act of 1934). Yes |_| No |X| The number of shares outstanding of the Registrant's Common Stock, $.001 par value (the "Common Stock") as of May 4, 2005 was 175,816,973 THEGLOBE.COM, INC. FORM 10-Q TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at March 31, 2005 (unaudited) and December 31, 2004 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004 4 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 43 Item 4. Controls and Procedures 43 PART II: OTHER INFORMATION Item 1. Legal Proceedings 44 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44 Item 3. Defaults Upon Senior Securities 44 Item 4. Submission of Matters to a Vote of Security Holders 44 Item 5. Other Information 44 Item 6. Exhibits 44 SIGNATURES 46 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THEGLOBE.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2005 2004 ------------ ------------- ASSETS (UNAUDITED) ------ Current Assets: Cash and cash equivalents $ 3,280,189 $ 6,828,200 Marketable securities 42,736 42,736 Accounts receivable, less allowance for doubtful accounts of approximately $268,000 and $274,000, respectively 7,541,329 7,740,692 Inventory, less reserves of approximately $271,000 and $1,333,000, respectively 229,894 589,579 Prepaid expenses 998,654 1,590,139 Deposits on inventory purchases 77,250 77,250 Other current assets 292,881 316,926 ------------ ------------- Total current assets 12,462,933 17,185,522 Goodwill 11,709,952 11,702,317 Intangible assets 1,590,000 1,680,000 Property and equipment, net 3,220,881 3,406,370 Other assets 79,356 42,956 ------------ ------------- Total assets $ 29,063,122 $ 34,017,165 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable $ 6,187,071 $ 7,447,550 Accrued expenses and other current liabilities 3,020,065 2,803,544 Deferred revenue 571,668 739,665 Notes payable and current portion of long-term debt 1,257,345 1,277,405 ------------ ------------- Total current liabilities 11,036,149 12,268,164 Long-term debt 15,972 26,997 Other long-term liabilities 130,366 204,616 ------------ ------------- Total liabilities 11,182,487 12,499,777 ------------ ------------- Stockholders' Equity: Common stock, $0.001 par value; 500,000,000 shares authorized; 175,904,504 and 174,315,678 shares issued at March 31, 2005 and December 31, 2004, respectively 175,905 174,316 Additional paid-in capital 282,616,635 282,289,404 Treasury stock, 699,281 common shares, at cost (371,458) (371,458) Accumulated deficit (264,540,447) (260,574,874) ------------ ------------- Total stockholders' equity 17,880,635 21,517,388 ------------ ------------- Total liabilities and stockholders' equity $ 29,063,122 $ 34,017,165 ============ =============
See notes to unaudited condensed consolidated financial statements. 3 THEGLOBE.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, ---------------------------- 2005 2004 ------------- ------------ (UNAUDITED) Net Revenue $ 9,438,728 $ 855,997 ------------- ------------ Operating Expenses: Cost of revenue 8,273,362 1,323,127 Sales and marketing 1,173,396 827,296 Product development 325,841 175,516 General and administrative 2,939,646 2,072,017 Depreciation 368,543 216,000 Amortization of intangible assets 90,000 20,111 ------------- ------------ 13,170,788 4,634,067 ------------- ------------ Loss from Operations (3,732,060) (3,778,070) ------------- ------------ Other Income (Expense): Interest income (expense), net 12,125 (793,829) Other expense, net (229,288) (89,799) ------------- ------------ (217,163) (883,628) ------------- ------------ Loss Before Provision for Income Taxes (3,949,223) (4,661,698) Provision for Income Taxes 16,350 -- ------------- ------------ Net Loss $ (3,965,573) $ (4,661,698) ============= ============ Basic and Diluted Net Loss Per Common Share $ (0.02) $ (0.07) ============= ============ Weighted Average Common Shares Outstanding 174,821,229 70,986,256 ============= ============ See notes to unaudited condensed consolidated financial statements. 4 THEGLOBE.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, --------------------------- 2005 2004 ----------- ------------ (UNAUDITED) Cash Flows from Operating Activities: Net loss $(3,965,573) $ (4,661,698) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization 458,543 236,111 Provision for excess and obsolete inventory -- (4,485) Provision for uncollectible accounts receivable -- 20,000 Non-cash interest expense -- 785,886 Reserve against amounts loaned to Internet venture 230,000 110,000 Employee stock compensation 208,281 150,533 Compensation related to non-employee stock options 42,124 294,796 Other, net (173) 5,262 Changes in operating assets and liabilities, net: Accounts receivable, net 199,363 177,531 Inventory, net 359,685 (580,085) Prepaid and other current assets 615,530 115,537 Accounts payable (1,260,479) (690,480) Accrued expenses and other current liabilities 208,886 375,335 Deferred revenue (167,997) 52,668 ----------- ------------ Net cash and cash equivalents used in operating activities (3,071,810) (3,613,089) ----------- ------------ Cash Flows from Investing Activities: Proceeds from sales and maturities of marketable securities -- 225,070 Purchases of property and equipment (183,054) (288,601) Amounts loaned to Internet venture (230,000) (110,000) Patent costs incurred -- (25,252) Other, net (36,400) (3,500) ----------- ------------ Net cash and cash equivalents used in investing activities (449,454) (202,283) ----------- ------------ Cash Flows from Financing Activities: Borrowings on notes payable and long-term debt -- 2,000,000 Payments on notes payable and long-term debt (30,912) (24,655) Proceeds from issuance of common stock, net -- 27,055,281 Proceeds from exercise of common stock options 3,094 139,545 Proceeds from exercise of warrants 1,071 -- ----------- ------------ Net cash and cash equivalents provided by (used in) financing activities (26,747) 29,170,171 ----------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents (3,548,011) 25,354,799 Cash and Cash Equivalents, at beginning of period 6,828,200 1,061,702 ----------- ------------ Cash and Cash Equivalents, at end of period $ 3,280,189 $ 26,416,501 =========== ============
See notes to unaudited condensed consolidated financial statements. 5 THEGLOBE.COM, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF THEGLOBE.COM theglobe.com, inc. (the "Company" or "theglobe") was incorporated on May 1, 1995 (inception) and commenced operations on that date. Originally, theglobe.com was an online community with registered members and users in the United States and abroad. That product gave users the freedom to personalize their online experience by publishing their own content and by interacting with others having similar interests. However, due to the deterioration of the online advertising market, the Company was forced to restructure and ceased the operations of its online community on August 15, 2001. The Company then sold most of its remaining online and offline properties. The Company continues to operate its Computer Games print magazine and the associated website Computer Games Online (www.cgonline.com), as well as the computer games distribution business of Chips & Bits, Inc. ("Chips & Bits") (www.chipsbits.com). On June 1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became Chief Executive Officer and President of the Company, respectively. On November 14, 2002, the Company acquired certain Voice over Internet Protocol ("VoIP") assets and is now aggressively pursuing opportunities related to this acquisition. In exchange for the assets, the Company issued warrants to acquire 1,750,000 shares of its Common Stock and an additional 425,000 warrants as part of an earn-out structure upon the attainment of certain performance targets. The earn-out performance targets were not achieved and the 425,000 earn-out warrants expired on December 31, 2003. On May 28, 2003, the Company acquired Direct Partner Telecom, Inc. ("DPT"), a company engaged in VoIP telephony services in exchange for 1,375,000 shares of the Company's Common Stock and the issuance of warrants to acquire 500,000 shares of the Company's Common Stock. The transaction included an earn-out arrangement whereby the former shareholders of DPT may earn additional warrants to acquire up to 2,750,000 shares of the Company's Common Stock at an exercise price of $0.72 per share upon the attainment of certain performance targets by DPT, or upon a change in control as defined, over approximately a three year period following the date of acquisition. Effective March 31, 2004, 500,000 of the earn-out warrants were forfeited as performance targets had not been achieved for the first of the three year periods. An additional 750,000 of the warrants were forfeited effective March 31, 2005, as performance targets for the second of the three year periods were not achieved. The Company acquired all of the physical assets and intellectual property of DPT and originally planned to continue to operate the company as a subsidiary and engage in the provision of VoIP services to other telephony businesses on a wholesale transactional basis. In the first quarter of 2004, the Company decided to suspend DPT's wholesale business and dedicate the DPT physical and intellectual assets to its retail VoIP business. As a result, the Company wrote-off the goodwill associated with the purchase of DPT as of December 31, 2003, and has since employed DPT's physical assets in the build out of the retail VoIP network. On September 1, 2004, the Company acquired SendTec, Inc. ("SendTec"), a direct response marketing services and technology company. As more fully discussed in Note 3, "Acquisition of SendTec, Inc.," the Company paid $6.0 million in cash, excluding transaction costs, and issued debt and equity securities valued at a total of approximately $12 million to purchase SendTec. As of March 31, 2005, the Company's revenue sources were derived principally from the acquired operations of SendTec which comprises our marketing services division, as well as from the operations of our games related businesses. The Company's retail VoIP products and services have yet to produce any significant revenue. (b) PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries from their respective dates of acquisition. All significant intercompany balances and transactions have been eliminated in consolidation. (c) UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION The unaudited interim condensed consolidated financial statements of the Company as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations relating to interim condensed consolidated financial statements. 6 In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company at March 31, 2005 and the results of its operations and its cash flows for the three months ended March 31, 2005 and 2004. (d) 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. (e) CASH AND CASH EQUIVALENTS Cash equivalents consist of money market funds and highly liquid short-term investments with qualified financial institutions. The Company considers all highly liquid securities with original maturities of three months or less to be cash equivalents. Included in cash and cash equivalents in the accompanying condensed consolidated balance sheet at March 31, 2005, was approximately $62,000 of cash held in escrow for purposes of sweepstakes promotions being conducted by the VoIP telephony division. (f) MARKETABLE SECURITIES The Company accounts for its investment in debt and equity securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All such investments are classified as available-for-sale as of March 31, 2005 and December 31, 2004. Available-for-sale securities are stated at market value, which approximates fair value, and unrealized holding gains and losses are excluded from earnings and included as a component of stockholders' equity until realized. Available-for-sale securities at March 31, 2005 and December 31, 2004, consisted of U.S. Treasury Bills with a cost basis and fair value of $42,736. During the three months ended March 31, 2005 and 2004, the Company had no significant gross realized gains or losses on sales of available-for-sale securities. (g) COMPREHENSIVE INCOME (LOSS) The Company reports comprehensive income (loss) in accordance with 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 $4.0 million and $4.7 million for the three months ended March 31, 2005 and 2004, respectively, which approximated the Company's reported net loss. (h) 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 March 31, 2005 and December 31, 2004, was approximately $271,000 and $1,333,000, respectively. 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. (i) CONCENTRATION OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. The Company maintains its cash and cash equivalents with various financial institutions and invests its funds among a diverse group of issuers and instruments. The Company performs ongoing credit evaluations of its customers' financial condition and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. Amounts receivable from four of SendTec's customers represented approximately $4,009,000, or 59%, of SendTec's total accounts receivable as of March 31, 2005. Concentration of credit risk in the Company's computer games and VoIP telephony services divisions is generally limited due to the large number of customers in these businesses. 7 (j) REVENUE RECOGNITION Computer Games Businesses Advertising revenue from the sale of print advertisements under short-term contracts in the games information magazine, Computer Games, are recognized at the on-sale date of the magazine. Newsstand sales of the games information magazine are recognized at the on-sale date of the magazine, net of provisions for estimated returns. Subscription revenue, which is net of agency fees, is deferred when initially received and recognized as income ratably over the subscription term. Sales of video games and related products from the Company's online store are recognized as revenue when the product is shipped to the customer. Amounts billed to customers for shipping and handling charges are included in net revenue. The Company provides an allowance for returns of merchandise sold through its online store. The allowance for returns provided to date has not been significant. Marketing Services Revenue from the distribution of Internet advertising is recognized when Internet users visit and complete actions at an advertiser's website. Revenue consists of the gross value of billings to clients, including the recovery of costs incurred to acquire online media required to execute client campaigns. Recorded revenue is based upon reports generated by the Company's tracking software. Revenue derived from the purchase and tracking of direct response media, such as television and radio commercials, is recognized on a net basis when the associated media is aired. In many cases, the amount the Company bills to clients significantly exceeds the amount of revenue that is earned due to the existence of various "pass-through" charges such as the cost of the television and radio media. Amounts received in advance of media airings are deferred and included in deferred revenue in the accompanying condensed consolidated balance sheet. Revenue generated from the production of direct response advertising programs, such as infomercials, is recognized on the completed contract method when such programs are complete and available for airing. Production activities generally take eight to twelve weeks and the Company usually collects amounts in advance and at various points throughout the production process. Amounts received from customers prior to completion of commercials are included in deferred revenue and direct costs associated with the production of commercials in process are deferred and included within other current assets in the accompanying condensed consolidated balance sheet. VoIP Telephony Services VoIP telephony services revenue represents fees charged to customers for voice services and is recognized based on minutes of customer usage or as services are provided. The Company records payments received in advance for prepaid services as deferred revenue until the related services are provided. Sales of peripheral VoIP telephony equipment are recognized as revenue when the product is shipped to the customer. Amounts billed to customers for shipping and handling charges are included in net revenue. (k) NET LOSS PER SHARE The Company reports net loss per common share in accordance with SFAS No. 128, "Computation of Earnings Per Share." In accordance with SFAS No. 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. Due to the Company's net losses, the effect of potentially dilutive securities or common stock equivalents that could be issued was excluded from the diluted net loss per common share calculation due to the anti-dilutive effect. Such potentially dilutive securities and common stock equivalents consisted of the following for the periods ended March 31: 8 2005 2004 ---------- ---------- Options to purchase common stock 15,605,000 9,924,000 Common shares issuable upon exercise of warrants 20,782,000 26,504,000 ---------- ---------- Total 36,387,000 36,428,000 ========== ========== (l) RECENT ACCOUNTING PRONOUNCEMENTS In March 2005, the FASB issued Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement Obligations", an interpretation of FASB Statement No. 143, "Accounting for Asset Retirement Obligations." The interpretation clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The effective date of this interpretation is no later than the end of fiscal years ending after December 15, 2005. The Company is currently investigating the effect, if any, that FIN 47 would have on the Company's financial position, cash flows and results of operations. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its financial condition, results of operations, or liquidity. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The standard requires companies to expense the fair value of stock options on the grant date and is effective for annual periods beginning after June 15, 2005. In accordance with the revised statement, the expense attributable to stock options granted or vested subsequent to January 1, 2006 will be required to be recognized by the Company. The Company has not yet evaluated the impact of this pronouncement on the Company. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4." SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements. In December 2003, the FASB issued FIN No. 46-R "Consolidation of Variable Interest Entities." FIN 46-R, which modifies certain provisions and effective dates of FIN 46, sets forth the criteria to be used in determining whether an investment in a variable interest entity should be consolidated. These provisions are based on the general premise that if a company controls another entity through interests other than voting interests, that company should consolidate the controlled entity. The Company believes that currently, it does not have any material arrangements that meet the definition of a variable interest entity which would require consolidation. (m) RECLASSIFICATIONS Certain 2004 amounts have been reclassified to conform to the 2005 presentation. (2) GOING CONCERN CONSIDERATIONS The Company's March 31, 2005 condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations since inception, has an accumulated deficit as of March 31, 2005, of $264,540,447 and has recorded impairment charges related to its VoIP telephony services division totaling $2,570,359 during 2004 and 2003. Net cash and cash equivalents used in operations totaled $3,071,810 for the first quarter of 2005 due primarily to net losses incurred by its VoIP telephony services division. During 2004, the Company expended significant costs to implement a number of marketing programs geared toward increasing the number of its VoIP retail customers and telephony revenue. None of these programs have proven to be successful to any significant degree. At March 31, 2005, the Company's sole source of liquidity consisted of $3,280,189 of cash and cash equivalents. The Company continues to incur substantial consolidated net losses and management believes the Company will continue to be unprofitable for the foreseeable future. These conditions raise significant doubt about the Company's ability to continue as a going concern. 9 Management's Plans During October 2004, the Company engaged financial advisors to assist the Company in raising capital through a private placement of its equity securities, or in entering into other business relationships with certain strategic investors. In February 2005, the Company engaged an additional financial advisor to assist the Company in connection with raising capital through a private placement of equity securities in either the Company or its SendTec wholly-owned subsidiary or alternatively in selling either part or all of the Company's businesses or assets, including its SendTec business. The Company currently has no access to credit facilities with traditional third party lenders and there can be no assurance that it would be able to raise capital or sell any of its businesses or assets. In addition, any financing that could be obtained would likely significantly dilute existing shareholders. Management is exploring a number of strategic alternatives regarding the Company's future business operations. Management has also implemented a number of internal actions in an effort to improve the Company's liquidity and business performance, including those described below. The Company's future strategic direction is highly dependent upon the outcome of its efforts to raise capital and/or sell certain businesses or assets. During the first quarter of 2005, the Company reevaluated its existing VoIP telephony services business plan and is currently in the process of terminating and/or modifying certain of its existing product offerings and marketing programs, as well as developing and testing certain new VoIP products and features. The Company also, during the first quarter of 2005, made the decision to discontinue using its SendTec business to perform marketing services for its VoIP business, and to instead dedicate 100% of SendTec's marketing services to support and grow its own third party customer base. Additionally, in order to reduce its near term consolidated net losses and cash usage, the Company implemented a number of cost-reduction actions at its VoIP telephony services business, including decreases in personnel and salary levels, carrier and data center costs, and marketing/advertising expenses during the first quarter of 2005. Management believes that it will be difficult to implement its new VoIP product and marketing plans, once fully developed and tested, without additional cash being provided from a prospective financing or sale transaction(s). Should the Company's new product offerings achieve market acceptance and significantly increase the Company's current customer and revenue base, additional cash resources to fund capital expenditures related to the Company's VoIP network and customer billing systems and to fund future marketing and other business development costs would be required. There can be no assurance that the Company's new VoIP product offerings will be successful in attracting a sufficient number of new customers to its VoIP network and increasing telephony revenue to desired levels. Even if the Company is able to raise additional capital, management may at any time, decide to terminate the operations of its VoIP telephony services business, either by asset sale or abandonment, if future investment returns are considered inadequate and/or preferable investment alternatives exist. The Company may alternatively decide to enter into new lines of business. (See Note 4, "Other Assets" for further details regarding the Company's acquisition of Tralliance Corporation in May 2005). On April 22, 2005, entities controlled by our Chairman and Chief Executive Officer and our President entered into an agreement with the Company pursuant to which the entities acquired secured demand convertible promissory notes in the aggregate amount of $1,500,000 together with options to acquire an additional $2,500,000 in the aggregate of such notes on or before July 22, 2005 (see Note 9, "Subsequent Events," for further details). The proceeds from the sale of the notes are intended to provide the Company with temporary short-term liquidity to operate its businesses while it seeks to raise additional capital, which may involve the potential sale of one or more of the Company's subsidiaries, including SendTec. The Company's cash and cash equivalents balance at May 6, 2005, inclusive of the $1,500,000 in proceeds received from the sale of the notes, was approximately $4,000,000. Summary If the Company is not successful in entering into a financing, sale, or business transaction that infuses sufficient additional cash resources into the Company, by sometime during the third quarter of 2005, management expects to pursue the remaining $2.5 million of optional convertible promissory note financing. If such funding is received, management believes the funding will provide the Company with additional short-term liquidity into the fourth quarter of 2005. There can be no assurance that this financing will be available when and if required, nor that demand for repayment will not be made prior to such date. In the event that the Company is not successful in obtaining the remaining $2.5 million funding, or in the event that such remaining funds are received and depleted prior to our raising of sufficient additional capital, management believes that the Company will no longer be able to continue the implementation of its current VoIP business plan. As a result, it is likely that the Company would be required to either temporarily suspend or permanently shutdown the operation of its VoIP telephony services business. Additionally, in such event, management believes that it may also be required to revise the business plan of some or all of its other business segments and/or further implement company-wide cost-reduction programs. There can be no assurance that the Company would be successful in implementing such revised business plans and effectively restructuring its businesses so that the Company would have the ability to continue to operate as a going concern in the future. 10 The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (3) ACQUISITION OF SENDTEC, INC. On September 1, 2004, the Company acquired SendTec, a direct response marketing services and technology company. In exchange for all of the issued and outstanding shares of capital stock of SendTec the Company paid consideration consisting of: (i) $6,000,000 in cash, excluding transaction costs, (ii) the issuance of an aggregate of 17,500,024 shares of the Company's Common Stock, (iii) the issuance of an aggregate of 175,000 shares of Series H Automatically Converting Preferred Stock (which was converted into approximately 17,500,500 shares of the Company's Common Stock effective December 1, 2004), and (iv) the issuance of a subordinated promissory note in the amount of $1,000,009. The Company also issued an aggregate of 3,974,165 replacement options to acquire the Company's Common Stock for each of the issued and outstanding options to acquire SendTec shares held by the former employees of SendTec. The preliminary SendTec purchase price allocation was as follows: Cash $ 3,610,000 Accounts receivable 5,534,000 Other current assets 194,000 Fixed assets 1,031,000 Non-compete agreements 1,800,000 Goodwill 11,710,000 Other assets 124,000 Assumed liabilities (5,605,000) ------------ $ 18,398,000 ============ In addition, warrants to acquire shares of theglobe.com Common Stock will be issued to SendTec shareholders when and if SendTec exceeds forecasted operating income, as defined, of $10.125 million, for the year ending December 31, 2005. The number of earn-out warrants may range from an aggregate of 250,000 to 2,500,000 (if actual operating income exceeds the forecast by at least 10%). Because the number of warrants that will be earned is not yet determinable, no consideration related to this contingency was included in the determination of the SendTec purchase price. As part of the Merger, 100,000 shares of Series H Preferred Stock (which was subsequently converted into 10 million shares of Common Stock) (the "Escrow Shares") are being held in escrow for potential recovery by the Company in the event of a breach of the Merger Agreement by SendTec or its former shareholders. In general, the Escrow Shares, together with the sums due under the subordinated promissory note, are the sole source of recourse against the shareholders of SendTec in the event of breach of the Merger Agreement and theglobe would not have recourse against the cash portion or other shares of Common Stock distributed to the SendTec shareholders as part of the Merger Consideration. Assuming no claims are then pending, the Escrow Shares will be distributed to SendTec shareholders after expiration of one year from the date of closing. As part of the SendTec acquisition transaction, certain executives of SendTec entered into new employment agreements with SendTec. The employment agreements each have a term of five years and automatically renew for an additional year at expiration unless either party provides the requisite notice of non-renewal. The agreements also contain certain non-compete provisions for periods as specified by the agreements. The $1,800,000 value assigned to the non-compete agreements is being amortized on a straight-line basis over 5 years. Annual amortization expense of the non-compete agreements is estimated to be $360,000 in 2005 through 2008 and $240,000 in 2009. The related accumulated amortization as of March 31, 2005 and December 31, 2004, was $210,000 and $120,000, respectively, and amortization expense was $90,000 for the three months ended March 31, 2005. The following pro forma condensed consolidated results of operations for the three months ended March 31, 2004 assumes the acquisition of SendTec occurred as of January 1, 2004. The pro forma results reflected below include SendTec's revenue utilizing the revenue recognition methods employed by the Company since SendTec's date of acquisition. The pro forma information is not necessarily indicative of what the actual results of operations of the combined company would have been had the acquisition occurred on January 1, 2004, nor is it necessarily indicative of future results. 11 PRO FORMA RESULTS 2004 ------------- Three months ended March 31, Revenue $ 8,103,000 Net loss (3,766,000) Basic and diluted net loss per common share $ (0.04) Weighted average common shares 105,986,780 (4) OTHER ASSETS On February 25, 2003, theglobe.com entered into a Loan and Purchase Option Agreement, as amended, with Tralliance Corporation ("Tralliance"), a development stage Internet related business venture, pursuant to which it agreed to fund, in the form of a loan, at the discretion of the Company, Tralliance's operating expenses and obtained the option to acquire all of the outstanding capital stock of Tralliance in exchange for, when and if exercised, $40,000 in cash and the issuance of an aggregate of 2,000,000 unregistered restricted shares of theglobe.com's Common Stock (the "Option"). The Loan was secured by a lien on the assets of the venture. On May 5, 2005, Tralliance and the Internet Corporation for Assigned Names and Numbers ("ICANN") entered into an agreement designating Tralliance as the registry for the ".travel" top-level domain. On May 9, 2005, the Company exercised its option to acquire all of the outstanding capital stock of Tralliance. The purchase price consisted of the issuance of 2,000,000 shares of theglobe.com Common Stock, warrants to acquire 475,000 shares of theglobe.com Common Stock and $40,000 in cash. The warrants are exercisable for a period of five years at an exercise price of $0.11 per share. The Common Stock issued as a result of the acquisition of Tralliance is entitled to certain "piggy-back" registration rights. In addition, as part of the transaction, the Company agreed to pay approximately $154,000 in outstanding liabilities of Tralliance immediately after the closing of the acquisition. Upon acquisition, the existing CEO and CFO of Tralliance entered into employment agreements, which include certain non-compete provisions, whereby each would agree to remain in the employ of Tralliance for a period of two years in exchange for base compensation plus participation in a bonus pool based upon the pre-tax income of the venture. Advances to Tralliance totaled $1,231,500 as of March 31, 2005. Due to the uncertainty of the ultimate collectibility of the Loan, the Company has historically provided a reserve equal to the full amount of the funds advanced to Tralliance. Additions to the reserve of $230,000 and $110,000 were included in other expense in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2005 and 2004, respectively. (5) STOCK OPTION PLANS A total of 111,000 stock options were granted to employees during the three months ended March 31, 2005. No stock options were granted to non-employees during the first quarter of 2005. A total of 892,500 stock options were granted during the three months ended March 31, 2004, including grants of 215,000 stock options to non-employees. Compensation expense of $180,281 was recorded during the three months ended March 31, 2005, related to vesting of prior year employee option grants with below-market exercise prices. In addition, $28,000 of compensation expense was recorded during the first quarter of 2005 as a result of the accelerated vesting of stock options issued to a terminated employee. The remaining $42,124 of stock compensation expense recorded during the 2005 first quarter resulted from the vesting of non-employee stock options granted in prior years. During the three months ended March 31, 2004, stock compensation expense included $150,533 related to employee option grants with below-market exercise prices and $294,796 recognized with respect to non-employee stock options. A total of 218,226 stock options were exercised and a total of 272,247 stock options were cancelled during the three months ended March 31, 2005. During the first quarter of 2004, 286,500 stock options were exercised and 625,110 stock options were cancelled. In 2000, the Company repriced a group of stock options issued to its employees. The Company is accounting for these re-priced options using variable accounting in accordance with FIN No. 44. No compensation expense was recorded in connection with the re-priced stock options during the three months ended March 31, 2005 and 2004. At March 31, 2005, a total of 29,060 options remained outstanding which were being accounted for in accordance with FIN No. 44. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2005: no dividend yield; an expected life of three to five years; 160% expected volatility and 3.00% risk free interest rate. In accordance with SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for stock-based awards granted to employees. The following table presents the Company's pro forma net loss for the three months ended March 31, 2005 and 2004, 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: 12 Three Months Ended March 31, -------------------------- 2005 2004 ----------- ----------- Net loss - as reported $(3,965,573) $(4,661,698) Add: Stock-based employee compensation expense included in net loss as reported 208,281 150,533 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards (296,708) (842,835) ----------- ----------- Net loss - pro forma $(4,054,000) $(5,354,000) =========== =========== Basic net loss per share - as reported $ (0.02) $ (0.07) =========== =========== Basic net loss per share - pro forma $ (0.02) $ (0.08) =========== =========== (6) LITIGATION On and after August 3, 2001 and as of the date of this filing, the Company is aware that six putative shareholder class action lawsuits were filed against the Company, certain of its current and former officers and directors (the "Individual Defendants"), and several investment banks that were the underwriters of the Company's initial public offering. The lawsuits were filed in the United States District Court for the Southern District of New York. The lawsuits purport to be class actions filed on behalf of purchasers of the stock of the Company during the period from November 12, 1998 through December 6, 2000. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company's initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for the Company's initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. On December 5, 2001, an amended complaint was filed in one of the actions, alleging the same conduct described above in connection with the Company's November 23, 1998 initial public offering and its May 19, 1999 secondary offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed in the Southern District of New York on April 19, 2002. The action seeks damages in an unspecified amount. On February 19, 2003, a motion to dismiss all claims against the Company was denied by the Court. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in theglobe.com case. The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers' settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and the Company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by the Company. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Company's insurance carriers should arise, the Company's maximum financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The issuers and plaintiffs have negotiated a revised settlement agreement consistent with the Court's opinion and are in the process of obtaining approval from those issuer defendants that are not in bankruptcy. The parties have submitted a revised settlement agreement to the Court. The underwriter defendants will have until May 16, 2005, to object to the revised settlement agreement. There is no assurance that the Court will grant final approval to the settlement. If the settlement agreement is not approved and the Company is found liable, we are unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Company's insurance coverage, or whether such damages would have a material impact on our results of operations or financial condition in any future period. 13 On December 16, 2004, the Company, together with its wholly-owned subsidiary, voiceglo Holdings, Inc., were named as defendants in NeoPets, Inc. v. voiceglo Holdings, Inc. and theglobe.com, inc., a lawsuit filed in Los Angeles Superior Court. The Company and its subsidiary, were parties to an agreement dated May 6, 2004, with NeoPets, Inc. ("NeoPets"), whereby NeoPets agreed to host a voiceglo advertising feature on its website for the purpose of generating registered activations of the voiceglo product featured. Consideration to NeoPets was to include specified commissions, including cash payments based on registered activations, as defined, as well as the issuance of Common Stock of theglobe.com and additional cash payments, upon the attainment of certain performance criteria. NeoPets' complaint asserts claims for breach of contract and specific performance and seeks payment of approximately $2.5 million in cash, plus interest, as well as the issuance of 1,000,000 shares of theglobe.com Common Stock. On February 22, 2005, the Company and voiceglo answered the complaint and asserted cross-claims against NeoPets for fraud and deceit, rescission, breach of contract, breach of the implied covenant of good faith and fair dealing and set-off. NeoPets has not yet answered the cross-claims and discovery has not yet begun. Through March 31, 2005, the Company has recorded amounts due for commissions pursuant to the terms of the agreement totaling approximately $246,000. The Company believes that this is the amount NeoPets has earned relating to services performed and intends to vigorously defend its position. It is too early in the process to determine the likelihood of an unfavorable outcome, however, an unfavorable outcome could result in a liability in excess of the amount recorded and could have a material adverse effect on the Company. The Company is currently a party to certain other legal proceedings, claims, disputes and litigation arising in the ordinary course of business, including those noted above. The Company currently believes that the ultimate outcome of these other proceedings, individually and in the aggregate, will not have a material adverse affect on the Company's financial position, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company's business, financial condition, results of operations and cash flows could be materially and adversely affected. (7) SEGMENTS AND GEOGRAPHIC INFORMATION The Company applies the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for operating segments of a company. SFAS No. 131 requires disclosures of selected segment-related financial information about products, major customers and geographic areas. Effective with the September 1, 2004 acquisition of SendTec, the Company is now organized in three operating segments for purposes of making operating decisions and assessing performance: the computer games division, the marketing services division and the VoIP telephony services division. The computer games division consists of the operations of the Company's Computer Games print magazine and the associated website Computer Games Online (www.cgonline.com) and the operations of Chips & Bits, Inc. ("Chips & Bits"), its games distribution business. The marketing services division consists of the operations of the Company's acquired subsidiary, SendTec. The VoIP telephony services division is principally involved in the sale of telecommunications services over the Internet to consumers. The chief operating decision maker evaluates performance, makes operating decisions and allocates resources based on financial data of each segment. Where appropriate, the Company charges specific costs to each segment where they can be identified. Certain items are maintained at the Company's corporate headquarters ("Corporate") and are not presently allocated to the segments. Corporate expenses primarily include personnel costs related to executives and certain support staff and professional fees. Corporate assets principally consist of cash and cash equivalents. Subsequent to its acquisition on September 1, 2004, SendTec provided various intersegment marketing services to the Company's VoIP telephony services division. Prior to the acquisition of SendTec, there were no intersegment transactions. The accounting policies of the segments are the same as those for the Company as a whole. The following table presents financial information regarding the Company's different segments: Three Months Ended March 31, ---------------------------- 2005 2004 ------------ ------------ (UNAUDITED) NET REVENUE: Computer games $ 561,392 $ 756,449 Marketing services 9,105,820 -- VoIP telephony services 87,092 99,548 Intersegment eliminations (315,576) -- ------------ ------------ $ 9,438,728 $ 855,997 ============ ============ 14 Three Months Ended March 31, ---------------------------- 2005 2004 ------------ ------------ (UNAUDITED) INCOME (LOSS) FROM OPERATIONS: Computer games $ (315,154) $ (109,888) Marketing services 800,626 -- VoIP telephony services (3,322,862) (2,128,367) Corporate expenses (894,670) (1,539,815) ------------ ------------ Loss from operations (3,732,060) (3,778,070) Other expense, net (217,163) (883,628) ------------ ------------ Consolidated loss before income tax $ (3,949,223) $ (4,661,698) ============ ============ DEPRECIATION AND AMORTIZATION: Computer games $ 7,719 $ 3,429 Marketing services 172,612 -- VoIP telephony services 268,633 226,770 Corporate expenses 9,579 5,912 ------------ ------------ $ 458,543 $ 236,111 ============ ============ March 31, December 31, 2005 2004 ------------ ------------ (UNAUDITED) IDENTIFIABLE ASSETS: Computer games $ 2,129,164 $ 2,000,230 Marketing services 22,903,952 24,764,361 VoIP telephony services 2,842,182 3,497,698 Corporate assets 1,187,824 3,754,876 ------------ ------------ $ 29,063,122 $ 34,017,165 ============ ============ (8) COMMITMENTS As of March 31, 2005, the Company had approximately $20,000 in outstanding standby letters of credit used to support the agreement with one of our telecommunications carriers. Revenue generated by three customers of SendTec represented approximately 59% of consolidated net revenue reported for the three months ended March 31, 2005. (9) SUBSEQUENT EVENTS On April 22, 2005, E&C Capital Partners, LLLP and another entity controlled by the Company's Chairman and Chief Executive Officer and the Company's President, entered into a Note Purchase Agreement (the "Agreement") with theglobe pursuant to which they acquired secured demand convertible promissory notes (the "Notes") in the aggregate principal amount of $1,500,000. Under the terms of the Agreement, E&C Capital Partners, LLLP and the other entity were also granted the optional right, for a period of 90 days from the date of the Agreement, to purchase additional secured demand convertible promissory notes such that the aggregate principal amount of Notes issued under the Agreement may total $4,000,000. The 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. The 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. Reference should be made to Note 4, "Other Assets", for details regarding the Company's acquisition of Tralliance Corporation in May 2005. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology, although not all forward-looking statements contain such terms. In addition, these forward-looking statements include, but are not limited to, statements regarding: o implementing our business plans; o marketing and commercialization of our existing products and those products under development; o plans for future products and services and for enhancements of existing products and services; o our ability to implement cost-reduction programs; o potential governmental regulation and taxation; o the outcome of any litigation; o our intellectual property; o our estimates of future revenue and profitability; o our estimates or expectations of continued losses; o our expectations regarding future expenses, including cost of revenue, product development, sales and marketing, and general and administrative expenses; o difficulty or inability to raise additional financing, if needed, on terms acceptable to us; o our estimates regarding our capital requirements and our needs for additional financing; o attracting and retaining customers and employees; o rapid technological changes in our industry and relevant markets; o sources of revenue and anticipated revenue; o plans for future acquisitions and entering new lines of business; o plans for divestitures of certain businesses or assets; o competition in our market; and o our ability to continue to operate as a going concern. These statements are only predictions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are not required to and do not intend to update any of the forward-looking statements after the date of this Form 10-Q 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-Q 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-Q. The following discussion should be read together in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto and the audited consolidated financial statements and notes to those statements contained in the Annual Report on Form 10-KSB for the year ended December 31, 2004. 16 OVERVIEW As of March 31, 2005, theglobe.com, inc. (the "Company" or "theglobe") managed three primary lines of business. One line of business, Voice over the Internet Protocol ("VoIP") telephony services, includes voiceglo Holdings, Inc., a wholly-owned subsidiary of theglobe that offers VoIP-based phone services and features. The term VoIP refers to a category of hardware and software that enables people to use the Internet to make phone calls. The second line of business consists of our historical network of three wholly-owned businesses, each of which specializes in the games business by delivering games information and selling games in the United States and abroad. These businesses are: our print publication Computer Games Magazine; our Computer Games Online website (www.cgonline.com), which is the online counterpart to Computer Games Magazine; and our Chips & Bits, Inc. ("Chips & Bits") (www.chipsbits.com) games distribution company. We entered a third line of business, marketing services, on September 1, 2004, with our acquisition of SendTec, Inc. ("SendTec"), a direct response marketing services and technology company. At the current time, the Company's revenue is derived principally from the acquired operations of SendTec, as well as from the operations of our computer games related businesses. Our VoIP products and services have yet to produce any significant revenue. During the first quarter of 2005, management began actively re-evaluating the Company's primary business lines, particularly in view of the Company's critical need for cash and the overall net losses of the Company. As a result, management is currently exploring a number of strategic alternatives for the Company and/or its businesses, including continuing to operate the businesses, selling certain businesses or assets, or entering into new lines of businesses. See the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for a more complete discussion. BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS; GOING CONCERN Certain matters discussed below under "Liquidity and Capital Resources" raise substantial doubt about our ability to continue as a going concern. In addition, we received a report from our independent accountants, relating to our December 31, 2004 audited financial statements containing an explanatory paragraph stating that our recurring losses from operations and our accumulated deficit raise substantial doubt about our ability to continue as a going concern. Our condensed 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 condensed 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. OUR VOIP TELEPHONY 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 GloPhone product during the first quarter of 2004. These services allow consumers and enterprises to communicate using VoIP technology for dramatically reduced pricing compared to traditional telephony networks. The services also offer traditional telephony features such as voicemail, caller ID, call forwarding, and call waiting for no additional cost to the consumer, as well as incremental services that are not currently supported by the public switched telephone network ("PSTN") like the ability to use numbers remotely and voicemail to email services. Additionally, in November 2004, the Company announced a beta version of an "instant messenger" or "IM" related application which it is marketing under the name "GloConnect." The new GloConnect application utilizes the Company's proprietary web and PC-based GloPhone platform and enables users to chat via voice or text across multiple platforms using their preferred instant messenger service, such as AOL's AIM, MSN's Messenger, Yahoo! Messenger and ICQ. The Company now offers VoIP services, on a retail basis, to individual consumers and currently provides two primary types of services: o Browser-Based - full functioning voice and messaging capabilities that reside on the computer desktop and also include web-based solutions. The only system requirements are a browser and an Internet connection. The Company is seeking various patents to protect its position. The browser-based products work on broadband, dial-up and wi-fi Internet connections and can optionally be used with a USB phone or other peripheral devices. o Hardware-Based - a traditional phone line replacement service. Requires a voiceglo adapter, a regular phone and an Internet connection or can optionally be used with a USB phone directly over a user's computer if desired. The service works on broadband, dial-up and wi-fi Internet connections. 17 During the latter part of 2004, the Company discontinued offering its "voiceglo" hardware-based home and business replacement products to new customers, and is now only providing service to and supporting existing "voiceglo" customers. The Company is currently developing and testing a number of new VoIP products and features, which allow users to communicate via mobile phones, traditional land line phones and/or computers. It plans to release a number of these new products and features beginning in the second quarter of 2005. OUR COMPUTER GAMES BUSINESS Computer Games Magazine is a consumer print magazine for gamers. As a leading consumer print publication for games, Computer Games magazine boasts: a reputation for being a reliable, trusted, and engaging games magazine; more editorial content, tips and hints than most other similar magazines; a knowledgeable editorial staff providing increased editorial integrity and content; and, broad-based editorial coverage, appealing to a wide audience of gamers. In Spring 2004, a new magazine, Now Playing began to be delivered within Computer Games magazine and in March 2005, Now Playing began to be distributed as a separate publication. Now Playing covers movies, DVD's, television, music, games, comics and anime, and is designed to fulfill the wider pop culture interests of our current readers and to attract a more diverse group of advertisers; autos, television, telecommunications and film to name a few. Computer Games Online (www.cgonline.com) is the online counterpart to Computer Games magazine. Computer Games Online is a source of free computer games news and information for the sophisticated gamer, featuring news, reviews and previews. Features of Computer Games Online include: game industry news; truthful, concise reviews; first looks, tips and hints; multiple content links; thousands of archived files; and easy access to game buying. Now Playing Online (www.nowplayingmag.com) is the online counterpart for Now Playing magazine. Now Playing Online provides free, up-to-date entertainment news and information for the pop culture consumer. Features of Now Playing Online include: industry news in music, movies and games; reviews of concerts, movies and DVDs; and exclusive video interviews by Now Playing writers done with well-known Hollywood stars. Chips & Bits (www.chipsbits.com) is a games distribution business that attracts customers in the United States and abroad. Chips & Bits covers all the major game platforms available, including Macintosh, Window-based PCs, Sony PlayStation, Sony PlayStation2, Microsoft's Xbox, Nintendo 64, Nintendo's GameCube, Nintendo's Game Boy, and Sega Dreamcast, among others. OUR MARKETING SERVICES BUSINESS On September 1, 2004, the Company acquired SendTec, a direct response marketing services and technology company. SendTec provides clients a complete offering of direct marketing products and services to help their clients market their products both on the Internet ("online") and through traditional media channels such as television, radio and print advertising ("offline"). SendTec is organized into two primary product line divisions: the DirectNet Advertising Division, which provides digital marketing services; and the Creative South Division, which provides creative production and media buying services. Additionally, its proprietary iFactz technology provides software tracking solutions that benefit both the Direct Net Advertising and Creative South businesses. o DirectNet Advertising ("DNA") - DNA delivers results based interactive marketing programs for advertisers through a network of online distribution partners including websites, search engines and email publishers. SendTec's proprietary software technology is used to track, optimize and report results of marketing campaigns to advertising clients and distribution partners. Pricing options for DNA's services include cost-per-action ("CPA"), cost-per-click ("CPC") and cost-per-thousand impressions ("CPM"), with most payments resulting from CPA agreements. o Creative South - Creative South provides online and offline agency marketing services including creative development, campaign management, creative production, post production, media planning and media buying services. Most services provided by Creative South are priced on a fee-per-project basis, where the client pays an agreed upon fixed fee for a designated scope of work. Creative South also receives monthly retainer fees from clients from service to such clients as their Agency of Record. o iFactz - iFactz is SendTec's Application Service Provider ("ASP") technology that tracks and reports on a real time basis the online responses generated from offline direct response advertising, such as television, radio, print advertising and direct mail. iFactz' Intelligent Sourcing (TM) is a patent-pending media technology that informs the user where online customers come from, and what corresponding activity they produced on the user's website. The iFactz patent application was filed in November 2001 and the Company expects the application to be reviewed during 2005. iFactz is licensed to clients based on a monthly fixed license fee, with license terms ranging from three months to one year. 18 RESULTS OF OPERATIONS Effective September 1, 2004, we entered into a new line of business, marketing services, as a result of our acquisition of SendTec. SendTec's results are included in the Company's consolidated operating results from its date of acquisition. As a result of the SendTec acquisition, the results of operations for the three months ended March 31, 2005, are not necessarily comparable to the three months ended March 31, 2004. THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004 NET REVENUE. Net revenue totaled $9.4 million for the three months ended March 31, 2005 as compared to $0.9 million for the three months ended March 31, 2004. The $8.5 million increase in consolidated net revenue was principally the result of the $8.8 million in additional net revenue, net of intersegment eliminations, resulting from the operations of SendTec, which was acquired on September 1, 2004. Partially offsetting this additional revenue was a decline of $0.2 million in net revenue of our computer games business segment due primarily to a decrease in the volume of games products sold by Chips & Bits, our computer games distribution business. Net revenue generated by our telephony services division totaled approximately $0.1 million in each of the first quarters of 2005 and 2004. NET REVENUE BY BUSINESS SEGMENT: 2005 2004 ----------- -------- Computer games .......... $ 561,392 $756,449 Marketing services ...... 9,105,820 -- VoIP telephony services . 87,092 99,548 Intersegment eliminations (315,576) -- ----------- -------- $ 9,438,728 $855,997 =========== ======== SendTec's DirectNet Advertising division, which provides online interactive marketing services for its clients, generated approximately 91% of the net revenue reported for the marketing services segment for the three months ended March 31, 2005. SendTec also provided marketing services to our VoIP telephony services business segment which resulted in the recording of approximately $0.3 million of intersegment marketing services revenue during the first quarter of 2005. OPERATING EXPENSES BY BUSINESS SEGMENT:
Depreciation Cost of Sales and Product General and and Three months ended: Revenue Marketing Development Administrative Amortization Total ----------- ----------- ----------- -------------- ------------ ----------- 2005 - ---- Computer games ................ $ 491,567 $ 85,683 $ 155,139 $ 136,438 $ 7,719 $ 876,546 Marketing services............. 6,479,044 518,633 -- 1,134,905 172,612 8,305,194 VoIP telephony services ....... 1,491,815 695,592 170,702 783,212 268,633 3,409,954 Corporate expenses............. -- -- -- 885,091 9,579 894,670 Intersegment eliminations...... (189,064) (126,512) -- -- -- (315,576) ----------- ----------- ----------- -------------- ------------ ----------- $ 8,273,362 $ 1,173,396 $ 325,841 $ 2,939,646 $ 458,543 $13,170,788 =========== =========== =========== ============== ============ =========== Depreciation Cost of Sales and Product General and and Revenue Marketing Development Administrative Amortization Total ----------- ----------- ----------- -------------- ------------ ----------- 2004 - ---- Computer games ................ $ 585,925 $ 87,728 $ 119,666 $ 69,589 $ 3,429 $ 866,337 VoIP telephony services ....... 737,202 739,568 55,850 468,525 226,770 2,227,915 Corporate expenses............. -- -- -- 1,533,903 5,912 1,539,815 ----------- ----------- ----------- -------------- ------------ ---------- $ 1,323,127 $ 827,296 $ 175,516 $ 2,072,017 $ 236,111 $4,634,067 =========== =========== =========== ============== ============ ==========
19 COST OF REVENUE. Cost of revenue totaled $8.3 million for the three months ended March 31, 2005, an increase of $7.0 million from the $1.3 million reported for the three months ended March 31, 2004. An increase of $0.8 million in costs incurred by our VoIP telephony services business segment, as well as the inclusion of marketing services cost of revenue related to the operations of SendTec totaling approximately $6.3 million, net of intersegment eliminations, were slightly offset by a decrease of $0.1 million in cost of revenue reported by our computer games segment as compared to 2004. Cost of revenue related to our computer games business segment consists primarily of printing costs of our games magazine, Internet connection charges, personnel costs, maintenance costs of website equipment and the costs of merchandise sold and shipping fees in connection with our online store. Cost of revenue of our computer games segment totaled approximately $0.5 million for the three months ended March 31, 2005, a decrease of approximately $0.1 million from the same period in 2004, due primarily to the revenue decreases discussed above. Cost of revenue related to our marketing services business segment consists of fees paid to third party vendors for project related research, production and post-production services and products. Additionally, cost of revenue includes third party vendor fees incurred to acquire online advertising media, including the actual cost of the media. Intersegment eliminations in 2005, represent approximately $0.2 million of costs incurred by SendTec related to marketing services provided to our VoIP telephony services segment. Cost of revenue of our VoIP telephony services business segment is principally comprised of carrier transport and circuit interconnection costs related to our retail products, as well as personnel and consulting costs incurred in support of our Internet telecommunications network. Although VoIP telephony services net revenue was essentially unchanged compared to the first quarter of 2004, cost of revenue attributable to this segment increased $0.8 million in comparison to the same period in 2004. Throughout 2004, the Company increased its VoIP network capacity by entering into agreements with numerous carriers for leased equipment and services and with third parties for a number of leased data center facilities. The Company also expanded its internal network support function by hiring additional technical personnel. As a result, our VoIP network capacity, as well as our network's operating and support costs, have increased in 2005 compared to 2004. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries and related expenses of sales and marketing personnel, commissions, advertising and marketing costs, public relations expenses and promotional activities. Sales and marketing expenses totaled $1.2 million for the three months ended March 31, 2005 versus $0.8 million for the same period in 2004. The rise in consolidated sales and marketing expenses as compared to 2004 was principally the result of the $0.4 million in sales and marketing expenses, net of intersegment eliminations, incurred by the Company's marketing services business segment. PRODUCT DEVELOPMENT. Product development expenses include salaries and related personnel costs; expenses incurred in connection with website development, testing and upgrades; editorial and content costs; and costs incurred in the development of our VoIP telephony products. Product development expenses totaled $0.3 million for the three months ended March 31, 2005 as compared to $0.2 million for the three months ended March 31, 2004. The period over period increase in product development expenses was principally attributable to increases in personnel and consulting costs related to the development of our retail VoIP telephony products and services. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of salaries and other personnel costs related to management, finance and accounting functions, facilities, outside legal and professional fees, information-technology consulting, directors and officers insurance, bad debt expenses and general corporate overhead costs. General and administrative expenses of $2.9 million in the first quarter of 2005 increased $0.8 million from the $2.1 million reported for the same period of 2004. The increase in consolidated general and administrative expenses as compared to the 2004 first quarter was primarily attributable to the $1.1 million of general and administrative expenses incurred by the Company's marketing services segment. At year-end 2004, the Company wrote-off the carrying value of its VoIP telephony billing system as a result of its review and evaluation of the VoIP telephony services segment's long-lived assets for impairment. Costs incurred during the 2005 first quarter in the further development of the VoIP telephony billing system have been included within general and administrative expenses. These costs, as well as higher salaries and facilities costs contributed to the $0.3 million increase in general and administrative expenses of the VoIP telephony services segment as compared to the first quarter of 2004. Corporate general and administrative expense declined $0.6 million as compared to the 2004 first quarter primarily due to decreases in stock compensation expenses recorded as a result of stock option grants, personnel related expenses and legal expenses. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense totaled $0.5 million for the three months ended March 31, 2005. The $0.3 million increase from the same period of the prior year resulted principally from the depreciation and intangible asset amortization expenses incurred by the Company's marketing services business. INTEREST INCOME (EXPENSE), NET. Approximately $0.7 million of non-cash interest expense was recorded during the first quarter of 2004 related to the beneficial conversion feature of the $2,000,000 demand convertible promissory note acquired by our Chairman and Chief Executive Officer and his spouse in February 2004. 20 OTHER EXPENSE, NET. Other expense, net, includes reserves against the amounts advanced by the Company to Tralliance Corporation, a development stage internet related business venture, totaling $0.2 million and $0.1 million in the three month periods ended March 31, 2005 and 2004, respectively. See Note 4, "Other Assets", in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the Company's acquisition of Tralliance in May 2005. INCOME TAXES. The income tax provision of $16,350 recorded for the three months ended March 31, 2005 consisted solely of state and local income taxes. No federal tax benefit was recorded for the first quarters of 2005 and 2004 as we recorded a 100% valuation allowance against our otherwise recognizable deferred tax assets due to the uncertainty surrounding the timing or ultimate realization of the benefits of our net operating loss carry forwards in future periods. Our effective tax rate differs from the statutory Federal income tax rate, primarily as a result of the uncertainty regarding our ability to utilize our net operating loss carryforwards. As of December 31, 2004, the Company had net operating loss carryforwards available for U.S. and foreign tax purposes of approximately $162 million. These carryforwards expire through 2024. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. As defined in the Internal Revenue Code of 1986, as amended, due to the change in our ownership interests in August 1997 and May 1999 and the Company's private offering of securities in March 2004 (together with the exercise and conversion of various securities in connection with such private offering of securities) and the issuance of shares in connection with our acquisition of SendTec on September 1, 2004, the Company may have substantially limited or eliminated the availability of its net operating loss carryforwards. There can be no assurance that the Company will be able to avail itself of any net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES FUTURE AND CRITICAL NEED FOR CAPITAL At March 31, 2005, the Company's sole source of liquidity consisted of $3.3 million of cash and cash equivalents. On April 22, 2005, we entered into a Note Purchase Agreement (the "Agreement") with E&C Capital Partners, LLLP, and E&C Capital Partners II, Ltd. ("the E&C Partnerships"), entities controlled by our Chairman and Chief Executive Officer and our President, pursuant to which the E&C Partnerships acquired secured demand convertible promissory notes (the "Notes") in the aggregate principal amount of $1.5 million. Under the terms of the Agreement, the E&C Partnerships were also granted the optional right, for a period of 90 days from the date of the Agreement, to purchase additional secured demand convertible promissory notes such that the aggregate principal amount of Notes issued under the Agreement may total $4.0 million. The Notes are convertible, at the option of the noteholders into shares of our Common Stock at an initial price of $0.05 per share. The 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 Notes are due and payable five days after demand for payment by the E&C Partnerships. Based on its current financial position, the Company would not have the resources to pay the Notes following any such demand. The Company's cash and cash equivalents balance at May 6, 2005, inclusive of the $1.5 million in proceeds received from the sale of the Notes, was approximately $4.0 million. The Company continues to incur substantial consolidated net losses and management believes the Company will continue to be unprofitable for the foreseeable future. The Company's consolidated net losses and cash usage during its recent past and projected future periods relate primarily to the operation of its VoIP telephony services business and to a lesser extent to corporate overhead expenses. SendTec, the Company's marketing services business, has contributed net income and cash flow since being acquired on September 1, 2004, and management expects that SendTec will continue to be profitable and provide positive cash flow in future periods. Management does not expect that its computer games business segment will incur significant net losses or use significant amounts of cash in the foreseeable future. In order to offer our VoIP services, we have invested substantial capital and made substantial commitments related to the development of the VoIP network. The VoIP network is comprised of switching hardware and software, servers, billing and inventory systems, and telecommunications carrier services. We own and operate VoIP equipment located in leased data center facilities in Miami, New York, Atlanta and Boston, and interconnect this equipment utilizing a leased transport network through numerous carrier agreements with third party providers. Through these carrier relationships we are able to carry the traffic of our customers over the Internet and interact with the public switched telephone network. We generally enter into one year agreements with these data centers and carriers, with the term of several agreements extending to three or five years. Based upon our existing contractual commitments at December 31, 2004, minimum amounts payable during calendar year 2005 for network data center and carrier circuit interconnection service expenses, exclusive of regulatory taxes, fees and charges, are approximately $2.1 million. During 2004, the Company expended significant costs to implement a number of marketing programs geared toward increasing the number of its VoIP retail customers and telephony revenue. None of these programs proved to be successful to any significant degree. Our inability to generate telephony revenue sufficient to cover the fixed costs of operating our VoIP network, including carrier, data center, personnel and administrative costs, as well as our marketing and other variable costs, has resulted in the Company incurring substantial net losses during 2004 and during the first quarter of 2005. 21 The Company believes that the capacity of its VoIP network, including its lease obligations relating to such network, will continue to be greatly in excess of customer demand and usage levels for the foreseeable future. The Company was successful in recently terminating certain minimum usage requirement commitments for which it was previously obligated to make carrier payments totaling approximately $1.9 million, exclusive of regulatory taxes, fees and charges, during 2005. Additionally, the Company is currently negotiating to reduce the approximate $2.1 million remaining minimum amounts payable during 2005 for other network data center and carrier circuit interconnection services. During October 2004, the Company engaged financial advisors to assist the Company in raising capital through a private placement of its equity securities, or in entering into other business relationships with certain strategic investors. In February 2005, the Company engaged an additional financial advisor to assist the Company in connection with raising capital through a private placement of equity securities in either the Company or its SendTec wholly-owned subsidiary or alternatively in selling either part or all of the Company's businesses or assets, including its SendTec business. We currently have no access to credit facilities with traditional third party lenders and there can be no assurance that we would be able to raise capital or sell any of our businesses or assets. In addition, any financing that could be obtained would likely significantly dilute existing shareholders. As more fully described below, management is exploring a number of strategic alternatives regarding the Company's future business operations and is in the process of developing and implementing internal actions to improve the Company's liquidity and business performance. The Company's future strategic direction is highly dependent upon the outcome of its efforts to raise capital and/or sell certain businesses or assets. During the first quarter of 2005, the Company reevaluated its existing VoIP telephony services business plan and is currently in the process of terminating and/or modifying certain of its existing product offerings and marketing programs, as well as developing and testing certain new VoIP products and features. The Company also, during the first quarter of 2005, made the decision to discontinue using its SendTec business to perform marketing services for its VoIP business, and to instead dedicate 100% of SendTec's marketing services to support and grow its own third party customer base. Additionally, in order to reduce its near term consolidated net losses and cash usage, the Company implemented a number of cost-reduction actions at its VoIP telephony services business, including decreases in personnel and salary levels, carrier and data center costs (including the minimum commitment costs discussed above), and marketing/advertising expenses during the first quarter of 2005. Management believes that it will be difficult to implement its new VoIP product and marketing plans, once fully developed and tested, without additional cash being provided from a prospective financing or sale transaction(s). Should the Company's new VoIP product offerings achieve market acceptance and significantly increase the Company's current customer and revenue base, additional cash resources to fund capital expenditures related to the Company's VoIP network and customer billing systems and to fund future marketing and other business development costs would be required. No significant capital expenditures are expected to be required to accommodate the operation or growth of either the Company's SendTec marketing services business or its computer games business in the near term future. There can be no assurance that the Company's new VoIP product offerings will be successful in attracting a sufficient number of new customers to its VoIP network and increasing telephony revenue to desired levels. Even if the Company is able to raise additional capital, management may at any time, decide to terminate the operations of its VoIP telephony services business, either by asset sale or abandonment, if future investment returns are considered inadequate and/or preferable investment alternatives exist. On May 9, 2005, the Company exercised its purchase option and we acquired Tralliance Corporation ("Tralliance"), a development stage Internet-related business venture. Tralliance was created to develop, operate and administer the ".travel" top-level domain, a new segment of the Internet devoted to the travel industry. Tralliance recently entered into an agreement with the Internet Corporation for Assigned Names and Numbers ("ICANN") to become the registry for the ".travel" top-level domain. The Tralliance purchase price consisted of the issuance of 2,000,000 shares of theglobe.com Common Stock, warrants to acquire 475,000 shares of theglobe.com Common Stock and $40,000 in cash. The warrants are exercisable for a period of five years at an exercise price of $0.11 per share. The Common Stock issued as a result of the acquisition of Tralliance is entitled to certain "piggy-back" registration rights. In addition, as part of the transaction, the Company agreed to pay approximately $0.2 million in outstanding liabilities of Tralliance immediately after the closing of the acquisition. Additionally, the Company expects to fund approximately $0.7 million of Tralliance's start-up costs prior to the end of the third quarter of 2005. Based upon the foregoing, Company management does not presently believe that cash on hand and cash flow generated internally by the company will be adequate to fund the operation of its businesses and the implementation of its current VoIP business plan beyond a short period of time. We received a report from our independent accountants, relating to our December 31, 2004 audited financial statements containing an explanatory paragraph stating that our recurring losses from operations and our accumulated deficit raise substantial doubts about our ability to continue as a going concern. We believe that the funding received and potentially receivable in connection with the E&C Partnerships' Note Purchase Agreement (maximum of $4.0 million as discussed above and assuming that no demand for payment is made by the Noteholders) provides the Company with temporary short-term liquidity to operate its businesses while it seeks to raise sufficient additional capital, which may involve the potential sale of one or more of the Company's subsidiaries, including SendTec. 22 If we are not successful in entering into a financing, sale, or business transaction that infuses sufficient additional cash resources into the Company, by sometime during the third quarter of 2005, we expect to pursue the remaining $2.5 million of optional convertible promissory note financing. If such funding is received we believe the funding will provide the Company with additional short-term liquidity into the fourth quarter of 2005. There can be no assurance that this financing will be available when and if required, nor that demand for repayment will not be made prior to such date. In the event that we are not successful in obtaining the remaining $2.5 million in funding from E&C Partnerships or in the event that such remaining funds are received and depleted prior to our raising of sufficient additional capital, we believe that the Company will no longer be able to continue the implementation of its current VoIP business plan. As a result, it is likely that we would be required to either temporarily suspend or permanently shutdown the operation of our VoIP telephony services business. Additionally, in such event, management believes that it may also be required to revise the business plan of some or all of its other business segments and/or further implement company-wide cost-reduction programs. There can be no assurance that the Company would be successful in implementing such revised business plans and effectively restructuring its businesses so that the Company would have the ability to continue to operate as a going concern in the future. The shares of our Common Stock were delisted from the NASDAQ national market in April 2001 and are now traded in the over-the-counter market on what is commonly referred to as the electronic bulletin board or OTCBB. Since the trading price of our Common Stock is less than $5.00 per share, trading in our Common Stock is also subject to the requirements of Rule 15g-9 of the Exchange Act. Our Common Stock is also considered a penny stock under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which defines a penny stock, generally, as any equity security not traded on an exchange or quoted on the Nasdaq SmallCap Market that has a market price of less than $5.00 per share. Under Rule 15g-9, brokers who recommend our Common Stock to persons who are not established customers and accredited investors, as defined in the Exchange Act, must satisfy special sales practice requirements, including requirements that they make an individualized written suitability determination for the purchaser; and receive the purchaser's written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosures in connection with any trades involving a penny stock, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated with that market. Such requirements may severely limit the market liquidity of our Common Stock and the ability of purchasers of our equity securities to sell their securities in the secondary market. Consequently, it has also made it more difficult for us to raise additional capital, although the Company has had some success in offering its securities as consideration for the acquisition of various business opportunities or assets. We may also incur additional costs under state blue sky laws if we sell equity due to our delisting. CASH FLOW ITEMS As of March 31, 2005, we had approximately $3.3 million in cash and cash equivalents as compared to $6.8 million as of December 31, 2004. Net cash used in operating activities was $3.1 million and $3.6 million, for the three months ended March 31, 2005 and 2004, respectively. The period-to-period decrease in net cash used in operating activities resulted primarily from the decrease in our net operating losses and favorable working capital changes offset by decreases in non-cash charges. Net cash of $0.4 million was used in investing activities during the three months ended March 31, 2005. The Company incurred costs totaling $0.2 million and $0.3 million for capital expenditures related primarily to the development of its VoIP telephony network and to a lesser extent to the development of its VoIP telephony customer billing system during the three months ended March 31, 2005 and 2004, respectively. We also loaned approximately $0.2 million and $0.1 million to Tralliance Corporation, a development stage Internet related business venture, during the three months ended 2005 and 2004, respectively. Net cash used in financing activities was $27,000 and net cash provided by financing activities was $29.2 million for the three months ended 2005 and 2004, respectively. As discussed in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004, the Company completed a private offering of its Common Stock and warrants to acquire its Common Stock in March 2004 resulting in the issuance of 33,381,647 shares of Common Stock, and warrants to acquire 16,690,824 shares of its Common Stock, for gross proceeds of approximately $28.4 million. Offering costs included $1.2 million in cash commissions paid to the placement agent and approximately $0.2 million in legal and accounting fees. In addition, on February 2, 2004, the Company issued a $2,000,000 Bridge Note which was subsequently converted into our Common Stock in connection with the March 2004 private offering. Proceeds of approximately $0.1 million were received from the exercise of stock options and warrants during 2004. EFFECTS OF INFLATION Due to relatively low levels of inflation in 2005 and 2004, inflation has not had a significant effect on our results of operations since inception. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and 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. 23 Certain of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, valuation of customer receivables, valuation of inventories, valuation of goodwill, intangible assets and other long-lived assets and capitalization of computer software costs. Our accounting policies and procedures related to these areas are summarized below. REVENUE RECOGNITION The Company's revenues were derived principally from the sale of print advertisements under short-term contracts in our games information magazine Computer Games; through the sale of our games information magazine through newsstands and subscriptions; from the sale of video games and related products through our online store Chips & Bits; from the sale of direct response marketing services by our recently acquired wholly-owned subsidiary, SendTec and from the sale of VoIP telephony services. There is no certainty that events beyond anyone's control such as economic downturns or significant decreases in the demand for our services and products will not occur and accordingly, cause significant decreases in revenue. Computer Games Businesses Advertising revenues for the games information magazine are recognized at the on-sale date of the magazine. Newsstand sales of the games information magazine are recognized at the on-sale date of the magazine, net of provisions for estimated returns. Subscription revenue, which is net of agency fees, is deferred when initially received and recognized as income ratably over the subscription term. Sales of video games and related products from the online store are recognized as revenue when the product is shipped to the customer. Amounts billed to customers for shipping and handling charges are included in net revenue. The Company provides an allowance for returns of merchandise sold through its online store. The allowance provided to date has not been significant. Marketing Services Revenue from the distribution of Internet advertising is recognized when Internet users visit and complete actions at an advertiser's website. Revenue consists of the gross value of billings to clients, including the recovery of costs incurred to acquire online media required to execute client campaigns. Recorded revenue is based upon reports generated by the Company's tracking software. Revenue derived from the purchase and tracking of direct response media, such as television and radio commercials, is recognized on a net basis when the associated media is aired. In many cases, the amount the Company bills to clients significantly exceeds the amount of revenue that is earned due to the existence of various "pass-through" charges such as the cost of the television and radio media. Amounts received in advance of media airings are deferred as customer advances until the associated media is aired. Revenue generated from the production of direct response advertising programs, such as infomercials, is recognized on the completed contract method when such programs are complete and available for airing. Production activities generally take eight to twelve weeks and the Company usually collects amounts in advance and at various points throughout the production process. Amounts received from customers prior to completion of commercials are reported as deferred revenue and direct costs associated with the production of commercials in process are deferred and reported as deferred production costs until the associated project is complete. VoIP Telephony Services VoIP telephony services revenue represents fees charged to customers for voice services and is recognized based on minutes of customer usage or as services are provided. The Company records payments received in advance for prepaid services as deferred revenue until the related services are provided. Sales of peripheral VoIP telephony equipment are recognized as revenue when the product is shipped to the customer. Amounts billed to customers for shipping and handling charges are included in net revenue. VALUATION OF CUSTOMER RECEIVABLES Provisions for the allowance for doubtful accounts are made based on historical loss experience adjusted for specific credit risks. Measurement of such losses requires consideration of the Company's historical loss experience, judgments about customer credit risk, and the need to adjust for current economic conditions. 24 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 our actual demand for our products, we may be required to record charges related to increases in our inventory valuation reserves. The value of our inventory is also dependent on our estimate of future average selling prices, and, if our projected average selling prices are over estimated, we may be required to adjust our inventory value to reflect the lower of cost or market. GOODWILL AND INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that certain acquired intangible assets in a business combination be recognized as assets separate from goodwill. SFAS No. 142 requires that goodwill and other intangibles with indefinite lives should no longer be amortized, but rather tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. Our policy calls for the assessment of the potential impairment of goodwill and other identifiable intangibles with indefinite lives whenever events or changes in circumstances indicate that the carrying value may not be recoverable or at least on an annual basis. Some factors we consider important which could trigger an impairment review include the following: o significant under-performance relative to historical, expected or projected future operating results; o significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and o significant negative industry or economic trends. When we determine that the carrying value of goodwill or other identified intangibles with indefinite lives may not be recoverable, we measure any impairment based on a projected discounted cash flow method. 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 March 2005, the FASB issued Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement Obligations", an interpretation of FASB Statement No. 143, "Accounting for Asset Retirement Obligations." The interpretation clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The effective date of this interpretation is no later than the end of fiscal years ending after December 15, 2005. The Company is currently investigating the effect, if any, that FIN 47 would have on the Company's financial position, cash flows and results of operations. 25 In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its financial condition, results of operations, or liquidity. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The standard requires companies to expense the fair value of stock options on the grant date and is effective for annual periods beginning after June 15, 2005. In accordance with the revised statement, the expense attributable to stock options granted or vested subsequent to January 1, 2006 will be required to be recognized by the Company. The Company has not yet evaluated the impact of this pronouncement on the Company. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4." SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements. In December 2003, the FASB issued FIN No. 46-R "Consolidation of Variable Interest Entities." FIN 46-R, which modifies certain provisions and effective dates of FIN 46, sets forth the criteria to be used in determining whether an investment in a variable interest entity should be consolidated. These provisions are based on the general premise that if a company controls another entity through interests other than voting interests, that company should consolidate the controlled entity. The Company believes that currently, it does not have any material arrangements that meet the definition of a variable interest entity which would require consolidation. 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 recently engaged certain financial advisors to assist the Company in raising capital through private placement of equity securities or alternatively in selling either part or all of the Company's businesses or assets. We currently have no access to credit facilities with traditional third party lenders and there can be no assurance that we would be able to raise any such capital or sell any of our businesses or assets. In addition, any financing that could be obtained would likely significantly dilute existing stockholders. We do not presently believe that cash on hand and cash flow generated internally by the Company will be adequate to fund the operation of our businesses and the implementation of our current VoIP business plan beyond a short period of time. We received a report from our independent accountants, relating to our December 31, 2004 audited financial statements containing an explanatory paragraph stating that our recurring losses from operations and our accumulated deficit raise substantial doubts about our ability to continue as a going concern. We believe that the funding received and potentially receivable in connection with the E & C Partnerships' Note Purchase Agreement (maximum of $4.0 million and assuming that no demand for payment is made by the Noteholders) provides the Company with temporary short-term liquidity to operate its businesses while it seeks to raise sufficient additional capital, which may involve the potential sale of one or more of the Company's subsidiaries, including SendTec. 26 If we are not successful in entering into a financing, sale, or business transaction that infuses sufficient additional cash resources into the Company, by sometime during the third quarter of 2005, we expect to pursue the remaining $2.5 million, of optional convertible promissory note financing. If such funding is received, we believe the funding will provide the Company with additional short-term liquidity into the fourth quarter of 2005. There can be no assurance that this financing will be available when and if required, nor that demand for repayment will not be made prior to such date. In the event that we are not successful in obtaining the remaining $2.5 million in funding from E&C Partnerships or in the event that such remaining funds are received and depleted prior to our raising of sufficient additional capital, we believe that the Company will no longer be able to continue the implementation of its current VoIP business plan. As a result, it is likely that we would be required to either temporarily suspend or permanently shutdown the operation of our VoIP telephony services business. Additionally, in such event, management believes that it may also be required to revise the business plan of some or all of its other business segments and/or further implement company-wide cost-reduction programs. There can be no assurance that the Company would be successful in implementing such revised business plans and effectively restructuring its businesses so that the Company would have the ability to continue to operate as a going concern in the future. Although the secured demand convertible notes (the "Notes") are owned by certain entities which are controlled by our Chairman, if any of such entities were to make demand for payment of the Notes, we do not have the financial resources to honor such payment. Absent additional financing, in the event demand is made for repayment of the Notes, the Company will not have the resources to repay the Notes. Inasmuch as substantially all of the assets of the Company and its subsidiaries secure the Notes, in connection with any resulting proceeding to collect the indebtedness relating to the Notes, the Noteholders could seize and sell the assets of the Company and its subsidiaries, any or all of which would have a material adverse effect on the Company and its operations. We Have A History Of Operating Losses And Expect To Continue To Incur Losses. Since our inception, we have incurred net losses in each quarter, except the fourth quarter of 2002 where we had net income of approximately $17,000. We expect that we will continue to incur net losses for the foreseeable future. We had net losses of approximately $24.3 million and $11.0 million for the years ended December 31, 2004 and 2003, respectively, and approximately $4.0 million for the first three months of 2005. The principal causes of our losses are likely to continue to be: o costs resulting from the operation of our businesses; o costs relating to entering new business lines; o failure to generate sufficient revenue; and o selling, general and administrative expenses. Although we have restructured our businesses, we still expect to continue to incur losses as we continue to develop our VoIP telephony services business and while we explore a number of strategic alternatives for our businesses, including continuing to operate the businesses, selling certain businesses or assets, or acquiring or developing additional businesses or complementary products. Our Entry Into New Lines Of Business, As Well As Potential Future Acquisitions, Joint Ventures Or Strategic Transactions Entails Numerous Risks And Uncertainties. We have entered into new business lines, VoIP telephony services and marketing services. In November 2002, we acquired certain VoIP assets from an entrepreneur in exchange for 1,750,000 warrants to purchase our Common Stock. On May 28, 2003, we acquired Direct Partner Telecom, Inc. ("DPT"), an international licensed telecommunications carrier then engaged in the purchase and resale of telecommunication services over the Internet. On September 1, 2004, we acquired SendTec, Inc. ("SendTec"), a direct response marketing services and technology company. On May 9, 2005, we acquired Tralliance Corporation ("Tralliance"), a development stage Internet-related business venture. Tralliance was recently awarded the contract to operate as the registry for the ".travel" top-level domain by the Internet Corporation for Assigned Names and Numbers. Although highly dependent upon our obtaining additional capital, we may also enter into new or different lines of business, as determined by management and our Board of Directors. Our acquisitions, as well as any future acquisitions or joint ventures could result, and in some instances have resulted in numerous risks and uncertainties, including: o potentially dilutive issuances of equity securities, which may be issued at the time of the transaction or in the future if certain performance or other criteria are met or not met, as the case may be. These securities may be freely tradable in the public market or subject to registration rights which could require us to publicly register a large amount of our Common Stock, which could have a material adverse effect on our stock price; o diversion of management's attention and resources from our existing businesses; o significant write-offs if we determine that the business acquisition does not fit or perform up to expectations; o the incurrence of debt and contingent liabilities or impairment charges related to goodwill and other long-lived assets; o difficulties in the assimilation of operations, personnel, technologies, products and information systems of the acquired companies; 27 o regulatory and tax risks relating to the new or acquired business; o the risks of entering geographic and business markets in which we have no or limited prior experience; o the risk that the acquired business will not perform as expected; and o material decreases in short-term or long-term liquidity. Our Net Operating Loss Carry Forwards May Be Limited. As of December 31, 2004, we had net operating loss carryforwards potentially available for U.S. and foreign tax purposes of approximately $162 million. These carryforwards expire through 2024. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Due to the change in our ownership interests in August 1997 and May 1999, the Company's private offering in March 2004 (together with the exercise and conversion of various securities in connection with such private offering) and the issuance of Common Stock in connection with the acquisition of SendTec on September 1, 2004, as defined in the Internal Revenue Code of 1986, as amended, we may have substantially limited or eliminated the availability of our net operating loss carryforwards. There can be no assurance that we will be able to utilize any net operating loss carryforwards in the future. We Could Be Adversely Affected By An Impairment Of Goodwill And/Or Intangible Assets On Our Balance Sheet. Our acquisition of SendTec has resulted in the recording of a significant amount of goodwill and intangible assets on our balance sheet. The goodwill was recorded because the fair value of the net assets acquired was less than the purchase price. We may not realize the full value of the goodwill and/or intangible assets. As such, we evaluate on a regular basis whether events and circumstances indicate that some or all of the carrying value of goodwill and/or intangible assets are no longer recoverable, in which case we would write off the unrecoverable portion as a charge to our earnings. We Depend On The Continued Growth In The Use And Commercial Viability Of The Internet. Our marketing services business, VoIP telephony services business and computer games businesses are substantially dependent upon the continued growth in the general use of the Internet. Internet and electronic commerce growth may be inhibited for a number of reasons, including: o inadequate network infrastructure; o security and authentication concerns; o inadequate quality and availability of cost-effective, high-speed service; o general economic and business downturns; and o catastrophic events, including war and terrorism. As web usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth or its performance and reliability may decline. Websites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays frequently occur in the future, web usage, as well as usage of our services, could grow more slowly or decline. Also, the Internet's commercial viability may be significantly hampered due to: o delays in the development or adoption of new operating and technical standards and performance improvements required to handle increased levels of activity; o increased government regulation; o potential governmental taxation of such services; and o insufficient availability of telecommunications services which could result in slower response times and adversely affect usage of the Internet. 28 We May Face Increased Government Regulation, Taxation And Legal Uncertainties In Our Industry, Which Could Harm Our Business. There are an increasing number of federal, state, local and foreign laws and regulations pertaining to the Internet and telecommunications. In addition, a number of federal, state, local and foreign legislative and regulatory proposals are under consideration. Laws or regulations have been and may continue to be adopted with respect to the Internet relating to, among other things, fees and taxation of VoIP telephony services, liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access, and the characteristics and quality of products and services. Changes in tax laws relating to electronic commerce could materially affect our business, prospects and financial condition. One or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction companies that engage in electronic commerce. A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional telephony, and otherwise harm our business. Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to electronic commerce. However, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court's position regarding sales and use taxes on electronic commerce. If any of these initiatives addressed the Supreme Court's constitutional concerns and resulted in a reversal of its current position, we could be required to collect sales and use taxes. The imposition by state and local governments of various taxes upon electronic commerce could create administrative burdens for us and could adversely affect our VoIP business operations, and ultimately our financial condition, operating results and future prospects. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment and personal privacy is uncertain and developing. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, and personal privacy apply to the Internet and electronic commerce. Any new legislation or regulation, or the application or interpretation of existing laws or regulations, may decrease the growth in the use of the Internet or VoIP telephony services, may impose additional burdens on electronic commerce or may alter how we do business. This could decrease the demand for our existing or proposed services, increase our cost of doing business, increase the costs of products sold through the Internet or otherwise have a material adverse effect on our business, plans, prospects, results of operations and financial condition. Our ability to offer VoIP services outside the U.S. is also subject to the local regulatory environment, which may be complicated and often uncertain. Regulatory treatment of Internet telephony outside the United States varies from country to country. We Rely On Intellectual Property And Proprietary Rights. We regard substantial elements of our websites and underlying technology, as well as certain assets relating to our VoIP and direct response marketing businesses and other opportunities we are investigating, as proprietary and attempt to protect them by relying on intellectual property laws and restrictions on disclosure. We also generally enter into confidentiality agreements with our employees and consultants. In connection with our license agreements with third parties, we generally seek to control access to and distribution of our technology and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. Thus, we cannot assure you that the steps taken by us will prevent misappropriation or infringement of our proprietary information, which could have an adverse effect on our business. In addition, our competitors may independently develop similar technology, duplicate our products, or design around our intellectual property rights. We pursue the registration of our trademarks in the United States and, in some cases, internationally. We are also seeking patent protection for certain VoIP and direct response marketing assets which we acquired or which we have developed. However, effective intellectual property protection may not be available in every country in which our services are distributed or made available through the Internet. Policing unauthorized use of our proprietary information is difficult. Legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are also uncertain and still evolving. We cannot assure you about the future viability or value of any of our proprietary rights. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. However, we may not have sufficient funds or personnel to adequately litigate or otherwise protect our rights. Furthermore, we cannot assure you that our business activities and product offerings will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us, including claims related to providing hyperlinks to websites operated by third parties or providing advertising on a keyword basis that links a specific search term entered by a user to the appearance of a particular advertisement. Moreover, from time to time, third parties have asserted and may in the future assert claims of alleged infringement by us of their intellectual property rights. Any litigation claims or counterclaims could impair our business because they could: 29 o be time-consuming; o result in significant costs; o subject us to significant liability for damages; o result in invalidation of our proprietary rights; o divert management's attention; o cause product release delays; or o require us to redesign our products or require us to enter into royalty or licensing agreements that may not be available on terms acceptable to us, or at all. We license from third parties various technologies incorporated into our products, networks and sites. We cannot assure you that these third-party technology licenses will continue to be available to us on commercially reasonable terms. Additionally, we cannot assure you that the third parties from which we license our technology will be able to defend our proprietary rights successfully against claims of infringement. As a result, our inability to obtain any of these technology licenses could result in delays or reductions in the introduction of new products and services or could adversely affect the performance of our existing products and services until equivalent technology can be identified, licensed and integrated. The regulation of domain names in the United States and in foreign countries may change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names, any or all of which may dilute the strength of our names. We may not acquire or maintain our domain names in all of the countries in which our websites may be accessed, or for any or all of the top-level domain names that may be introduced. The relationship between regulations governing domain names and laws protecting proprietary rights is unclear. Therefore, we may not be able to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. We May Be Unsuccessful In Establishing And Maintaining Brand Awareness; Brand Identity Is Critical To Our Company. Our success in the markets in which we operate will depend on our ability to create and maintain brand awareness for our product offerings. This has in some cases required, and may continue to require, a significant amount of capital to allow us to market our products and establish brand recognition and customer loyalty. Many of our competitors are larger than us and have substantially greater financial resources. Additionally, many of the companies offering VoIP services have already established their brand identity within the marketplace. We can offer no assurances that we will be successful in establishing awareness of our brand allowing us to compete in the VoIP market. If we fail to promote and maintain our various brands or our businesses' brand values are diluted, our businesses, operating results, financial condition, and our ability to attract buyers for any of our businesses could be materially adversely affected. The importance of brand recognition will continue to increase because low barriers of entry to the industries in which we operate may result in an increased number of direct competitors. To promote our brands, we may be required to continue to increase our financial commitment to creating and maintaining brand awareness. We may not generate a corresponding increase in revenue to justify these costs. Our Quarterly Operating Results Fluctuate. Due to our significant change in operations, including the entry into new lines of business, our historical quarterly operating results are not necessarily reflective of future results. The factors that will cause our quarterly operating results to fluctuate in the future include: o acquisitions of new businesses or sales of our businesses or assets; o changes in the number of sales or technical employees; o the level of traffic on our websites; o the overall demand for Internet telephony services, print, television, radio and Internet advertising and electronic commerce; 30 o the addition or loss of VoIP customers, clients of our marketing services business, advertisers of our computer games businesses, subscribers to our magazine, and electronic commerce partners on our websites; o overall usage and acceptance of the Internet; o seasonal trends in advertising and electronic commerce sales and member usage in our businesses; o other costs relating to the maintenance of our operations; o the restructuring of our business; o failure to generate significant revenues and profit margins from new products and services; and o competition from others providing services similar to ours. Our Limited Operating History Makes Financial Forecasting Difficult. Our Inexperience In The Internet Telephony Business Will Make Financial Forecasting Even More Difficult. We have a limited operating history for you to use in evaluating our prospects and us. Our prospects should be considered in light of the risks encountered by companies operating in new and rapidly evolving markets like ours. We may not successfully address these risks. For example, we may not be able to: o maintain or increase levels of user traffic on our e-commerce websites; o attract customers to our VoIP telephony service; o adequately forecast anticipated customer purchase and usage of our retail VoIP products; o maintain or increase advertising revenue for our computer games magazine; o maintain or increase direct response marketing services revenue; o adapt to meet changes in our markets and competitive developments; and o identify, attract, retain and motivate qualified personnel. Our Management Team Is Inexperienced In The Management Of A Large Operating Company. Only our Chairman has had experience managing a large operating company. Accordingly, we cannot assure you that: o our key employees will be able to work together effectively as a team; o we will be able to retain the remaining members of our management team; o we will be able to hire, train and manage our employee base; o our systems, procedures or controls will be adequate to support our operations; and o our management will be able to achieve the rapid execution necessary to fully exploit the market opportunity for our products and services. We Depend On Highly Qualified Technical And Managerial Personnel. Our future success also depends on our continuing ability to attract, retain and motivate highly qualified technical expertise and managerial personnel necessary to operate our businesses. We may need to give retention bonuses and stock incentives to certain employees to keep them, which can be costly to us. The loss of the services of members of our management team or other key personnel could harm our business. Our future success depends to a significant extent on the continued service of key management, client service, product development, sales and technical personnel. We do not maintain key person life insurance on any of our executive officers and do not intend to purchase any in the future. Although we generally enter into non-competition agreements with our key employees, our business could be harmed if one or more of our officers or key employees decided to join a competitor or otherwise compete with us. 31 We may be unable to attract, assimilate or retain highly qualified technical and managerial personnel in the future. Wages for managerial and technical employees are increasing and are expected to continue to increase in the future. We have from time to time in the past experienced, and could continue to experience in the future if we need to hire any additional personnel, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Also, we may have difficulty attracting qualified employees to work in the geographically remote location in Vermont of Chips & Bits, Inc. and Strategy Plus, Inc. If we were unable to attract and retain the technical and managerial personnel necessary to support and grow our businesses, our businesses would likely be materially and adversely affected. Our Officers, Including Our Chairman And Chief Executive Officer And President Have Other Interests And Time Commitments; We Have Conflicts Of Interest With Some Of Our Directors; All Of Our Directors Are Employees Or Stockholders Of The Company Or Affiliates Of Our Largest Stockholder. Because our Chairman and Chief Executive Officer, Mr. Michael Egan, is an officer or director of other companies, we have to compete for his time. Mr. Egan became our Chief Executive Officer effective June 1, 2002. Mr. Egan is also the controlling investor of Dancing Bear Investments, Inc., an entity controlled by Mr. Egan, which is our largest stockholder. Mr. Egan has not committed to devote any specific percentage of his business time with us. Accordingly, we compete with Dancing Bear Investments, Inc. and Mr. Egan's other related entities for his time. Our President, Treasurer and Chief Financial Officer and Director, Mr. Edward A. Cespedes, is also an officer or director of other companies. Accordingly, we must compete for his time. Mr. Cespedes is an officer or director of various privately held entities and is also affiliated with Dancing Bear Investments, Inc. Our Vice President of Finance and Director, Ms. Robin Lebowitz is also affiliated with Dancing Bear Investments, Inc. She is also an officer or director of other companies or entities controlled by Mr. Egan and Mr. Cespedes. Due to the relationships with his related entities, Mr. Egan will have an inherent conflict of interest in making any decision related to transactions between the related entities and us. Furthermore, the Company's Board of Directors presently is comprised entirely of individuals which are employees of theglobe, and therefore are not "independent." We intend to review related party transactions in the future on a case-by-case basis. We Rely On Third Party Outsourced Hosting Facilities Over Which We Have Limited Control. Our principal servers are located in Florida and New York primarily at third party outsourced hosting facilities. Our operations depend on the ability to protect our systems against damage from unexpected events, including fire, power loss, water damage, telecommunications failures and vandalism. Any disruption in our Internet access could have a material adverse effect on us. In addition, computer viruses, electronic break-ins or other similar disruptive problems could also materially adversely affect our businesses. Our reputation, theglobe.com brand and the brands of our individual businesses could be materially and adversely affected by any problems experienced by our sites or our supporting VoIP network. We may not have insurance to adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. We do not presently have any secondary off-site systems or a formal disaster recovery plan. Hackers May Attempt To Penetrate Our Security System; Online Security Breaches Could Harm Our Business. Consumer and supplier confidence in our businesses depends on maintaining relevant security features. Substantial or ongoing security breaches on our systems or other Internet-based systems could significantly harm our business. We incur substantial expenses protecting against and remedying security breaches. Security breaches also could damage our reputation and expose us to a risk of loss or litigation. Experienced programmers or "hackers" have successfully penetrated our systems and we expect that these attempts will continue to occur from time to time. Because a hacker who is able to penetrate our network security could misappropriate proprietary or confidential information (including customer billing information) or cause interruptions in our products and services, we may have to expend significant capital and resources to protect against or to alleviate problems caused by these hackers. Additionally, we may not have a timely remedy against a hacker who is able to penetrate our network security. Such security breaches could materially adversely affect our company. In addition, the transmission of computer viruses resulting from hackers or otherwise could expose us to significant liability. Our insurance may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties with whom we have relationships. 32 We May Be Exposed To Liability For Information Retrieved From Or Transmitted Over The Internet. Users may access content on our websites or the websites of our distribution partners or other third parties through website links or other means, and they may download content and subsequently transmit this content to others over the Internet. This could result in claims against us based on a variety of theories, including defamation, obscenity, negligence, copyright infringement, trademark infringement or the wrongful actions of third parties. Other theories may be brought based on the nature, publication and distribution of our content or based on errors or false or misleading information provided on our websites. Claims have been brought against online services in the past and we have received inquiries from third parties regarding these matters. Such claims could be material in the future. We May Be Exposed To Liability For Products Or Services Sold Over The Internet, Including Products And Services Sold By Others. We enter into agreements with commerce partners and sponsors under which, in some cases, we are entitled to receive a share of revenue from the purchase of goods and services through direct links from our sites. We sell products directly to consumers which may expose us to additional legal risks, regulations by local, state, federal and foreign authorities and potential liabilities to consumers of these products and services, even if we do not ourselves provide these products or services. We cannot assure you that any indemnification that may be provided to us in some of these agreements with these parties will be adequate. Even if these claims do not result in our liability, we could incur significant costs in investigating and defending against these claims. The imposition of potential liability for information carried on or disseminated through our systems could require us to implement measures to reduce our exposure to liability. Those measures may require the expenditure of substantial resources and limit the attractiveness of our services. Additionally, our insurance policies may not cover all potential liabilities to which we are exposed. We Are A Party To Litigation Matters That May Subject Us To Significant Liability And Be Time Consuming And Expensive. We are currently a defendant in a lawsuit asserting claims of breach of contract and specific performance and which seeks payment of approximately $2.5 million in cash, plus interest, as well as the issuance of 1.0 million shares of our Common Stock. In addition, we are a party to securities class action litigation. At this time we cannot reasonably estimate the range of any loss or damages resulting from these lawsuits due to uncertainty regarding the ultimate outcome. The defense of this litigation may be expensive to defend and divert management's attention from day-to-day operations. An adverse outcome in this litigation could materially and adversely affect our results of operations and financial position and may utilize a significant portion of our cash resources. We May Not Be Able To Implement Section 404 Of The Sarbanes-Oxley Act On A Timely Basis. The SEC, as directed by Section 404 of The Sarbanes-Oxley Act, adopted rules generally requiring each public company to include a report of management on the company's internal controls over financial reporting in its annual report on Form 10-K that contains an assessment by management of the effectiveness of the company's internal controls over financial reporting. In addition, the company's independent registered public accounting firm must attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting. This requirement will first apply to our annual report on Form 10-K for the fiscal year ending December 31, 2006. We are currently at the beginning stages of developing our Section 404 implementation plan. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. How companies should be implementing these new requirements including internal control reforms to comply with Section 404's requirements, and how independent auditors will apply these requirements and test companies' internal controls, is still reasonably uncertain. We expect that we will need to hire and/or engage additional personnel and incur incremental costs in order to complete the work required by Section 404. There can be no assurance that we will be able to complete our Section 404 plan on a timely basis. The Company's liquidity position in 2005 and 2006 may also negatively impact our ability to adequately fund our Section 404 efforts. Even if we timely complete our Section 404 plan, we may not be able to conclude that our internal controls over financial reporting are effective, or in the event that we conclude that our internal controls are effective, our independent accountants may disagree with our assessment and may issue a report that is qualified. This could subject the Company to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company's operating results or cause the Company to fail to meet its reporting obligations. RISKS RELATING TO OUR VOIP TELEPHONY BUSINESS We Are Unable To Predict The Volume Of Usage And Our Capacity Needs For Our VoIP Business; Disadvantageous Contracts Have Reduced Our Operating Margins And May Adversely Affect Our Liquidity And Financial Condition. 33 We have entered into a number of long-term agreements (generally for terms of one year, with the terms of several agreements extending to three to five years) for leased communications transmission capacity and data center facilities with various carriers and other third parties. The minimum amounts payable under these agreements and the underlying current capacity of our VoIP network greatly exceeds our current estimates of customer demand and usage for the foreseeable future. The Company is currently negotiating to reduce the amounts payable during 2005 under these network-related agreements. Although the Company has been successful in recently terminating substantially all of the minimum usage requirement commitments for which it was previously obligated under certain of its carrier agreements, there can be no assurance that it will be able to further reduce its network-related contractual commitments. If the Company is not successful in significantly reducing such commitments, its liquidity and financial condition could be materially and adversely impacted. The VoIP Market Is Subject To Rapid Technological Change And We Will Need To Depend On New Product Introductions And Innovations In Order To Establish, Maintain And Grow Our Business. VoIP is an emerging market that is characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advances. To enter and compete successfully in this emerging market, we must continually design, develop and sell new and enhanced VoIP products and services that provide increasingly higher levels of performance and reliability at lower costs. These new and enhanced products must take advantage of technological advancements and changes, and respond to new customer requirements. Our success in designing, developing and selling such products and services will depend on a variety of factors, including: o access to sufficient capital to complete our development efforts; o the identification of market demand for new products; o the determination of appropriate product inventory levels; o product and feature selection; o timely implementation of product design and development; o product performance; o cost-effectiveness of products under development; o securing effective sources of equipment supply; and o success of promotional efforts. Additionally, we may also be required to collaborate with third parties to develop our products and may not be able to do so on a timely and cost-effective basis, if at all. If we are unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced products in a timely manner or if such new or enhanced products do not achieve sufficient market acceptance, our operating results will suffer and our business will not grow. Our Ability And Plans To Provide Telecommunication Services At Attractive Rates Arise In Large Part From The Fact VoIP Services Are Not Currently Subject To The Same Regulation As Traditional Telephony. Because their services are not currently regulated to the same extent as traditional telephony, some VoIP providers can currently avoid paying certain charges that traditional telephone companies must pay. Many traditional telephone operators are lobbying the Federal Communications Commission (FCC) and the states to regulate VoIP on the same or similar basis as traditional telephone services. The FCC and several states are examining this issue. If the FCC or any state determines to regulate VoIP, they may impose surcharges, taxes or additional regulations upon providers of VoIP. These surcharges could include access charges payable to local exchange carriers to carry and terminate traffic, contributions to the Universal Service Fund or other charges. Regulations requiring compliance with the Communications Assistance for Law Enforcement Act, or provision of enhanced 911 services could also place a significant financial burden on us. The imposition of any such additional fees, charges, taxes, licenses and regulations on VoIP services could materially increase our costs and may reduce or eliminate the competitive pricing advantage we seek to enjoy. 34 The Internet Telephony Business Is Highly Competitive And Also Competes With Traditional And Cellular Telephony Providers. The long distance telephony market and the Internet telephony market are highly competitive. There are several large and numerous small competitors and we expect to face continuing competition based on price and service offerings from existing competitors and new market entrants in the future. The principal competitive factors in our market include price, quality of service, breadth of geographic presence, customer service, reliability, network size and capacity, and the availability of enhanced communications services. Our competitors include major and emerging telecommunications carriers in the U.S. and abroad. Financial difficulties in the past several years of many telecommunications providers are rapidly altering the number, identity and competitiveness of the marketplace. Many of the competitors for our current and planned VoIP service offerings have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we have. As a result, certain of these competitors may be able to adopt more aggressive pricing policies which could hinder our ability to market our voice services. During the past several years, a number of companies have introduced services that make Internet telephony or voice services over the Internet available to businesses and consumers. All major telecommunications companies, including entities like AT&T, Verizon, Sprint and MCI, either presently or potentially compete or can compete directly with us. Other Internet telephony service providers, such as Net2Phone and deltathree, also focus on a retail customer base and compete with us. These companies may offer the kinds of voice services we currently offer or intend to offer in the future. In addition, companies currently in related markets have begun to provide voice over the Internet services or adapt their products to enable voice over the Internet services. These related companies may potentially migrate into the Internet telephony market as direct competitors. A number of cable operators have also begun to offer VoIP telephony services via cable modems which provide access to the Internet. These companies, which tend to be large entities with substantial resources, generally have large budgets available for research and development, and therefore may further enhance the quality and acceptance of the transmission of voice over the Internet. We also compete with cellular telephony providers. Pricing Pressures And Increasing Use Of VoIP Technology May Lessen Our Competitive Pricing Advantage. One of the main competitive advantages of our current and planned VoIP service offerings is the ability to provide discounted local and long distance telephony services by taking advantage of cost savings achieved by carrying voice traffic employing VoIP technology, as compared to carrying calls over traditional networks. In recent years, the price of telephone service has fallen. The price of telephone service may continue to fall for various reasons, including the adoption of VoIP technology by other communications carriers. Many carriers have adopted pricing plans such that the rates that they charge are not always substantially higher than the rates that VoIP providers charge for similar service. In addition, other providers of long distance services are offering unlimited or nearly unlimited use of some of their services for increasingly lower monthly rates. If We Do Not Develop And Maintain Successful Partnerships For VoIP Products, We May Not Be Able To Successfully Market Any Of Our VoIP Products. Our success in the VoIP market is partly dependent on our ability to forge marketing, engineering and carrier partnerships. VoIP communication systems are extremely complex and no single company possesses all the technology components needed to build a complete end to end solution. We will likely need to enter into partnerships to augment our development programs and to assist us in marketing complete solutions to our targeted customers. We may not be able to develop such partnerships in the course of our operations and product development. Even if we do establish the necessary partnerships, we may not be able to adequately capitalize on these partnerships to aid in the success of our business. The Failure Of VoIP Networks To Meet The Reliability And Quality Standards Required For Voice Communications Could Render Our Products Obsolete. Circuit-switched telephony networks feature very high reliability, with a guaranteed quality of service. In addition, such networks have imperceptible delay and consistently satisfactory audio quality. VoIP networks will not be a viable alternative to traditional circuit switched telephony unless they can provide reliability and quality consistent with these standards. Online Credit Card Fraud Can Harm Our Business. The sale of our products and services over the Internet exposes us to credit card fraud risks. Many of our products and services, including our VoIP services, can be ordered or established (in the case of new accounts) over the Internet using a major credit card for payment. As is prevalent in retail telecommunications and Internet services industries, we are exposed to the risk that some of these credit card accounts are stolen or otherwise fraudulently obtained. In general, we are not able to recover fraudulent credit card charges from such accounts. In addition to the loss of revenue from such fraudulent credit card use, we also remain liable to third parties whose products or services are engaged by us (such as termination fees due telecommunications providers) in connection with the services which we provide. In addition, depending upon the level of credit card fraud we experience, we may become ineligible to accept the credit cards of certain issuers. We are currently authorized to accept Discover, together with Visa and MasterCard (which are both covered by a single merchant agreement with us). Visa/MasterCard constitutes the primary credit card used by our VoIP customers. The loss of eligibility for acceptance of Visa/MasterCard could significantly and adversely affect our business. During 2004, we updated our fraud controls and will attempt to manage fraud risks through our internal controls and our monitoring and blocking systems. If those efforts are not successful, fraud could cause our revenue to decline significantly and our business, financial condition and results of operations to be materially and adversely affected. 35 RISKS RELATED TO OUR MARKETING SERVICES BUSINESS Any Decrease In Demand For Our Online Marketing Services Could Substantially Reduce Our Revenues. A substantial portion of our revenue is derived from Internet advertising. We expect that online advertising will continue to account for a substantial portion of our revenue in the future. However, our revenue from Internet advertising may decrease in the future for a number of reasons, including the following: o the rate at which Internet users click on advertisements or take action in response to an advertisement has always been low and could decline as the volume of Internet advertising increases; o Internet users can install software programs that allow them to prevent advertisements from appearing on their screens or block the receipt of emails; o advertisers may prefer an alternative Internet advertising format, product or service which we might not offer at that time; and o we may be unable to make the transition to new Internet advertising formats preferred by advertisers. If Our Pricing Models Are Not Accepted By Our Advertiser Clients, We Could Lose Clients And Our Revenue Could Decline. Most of our services are offered to advertisers based on cost-per-action or cost-per-click pricing models, under which advertisers only pay us if we provide the results they specify. These results-based pricing models differ from the fixed-rate pricing model used by many Internet advertising companies, under which the fee is based on the number of times the advertisement is shown without regard to effectiveness. Our ability to generate significant revenue from advertisers will depend, in part, on our ability to demonstrate the effectiveness of our primary pricing models to advertisers, who may be more accustomed to a fixed-rate pricing model. Furthermore, intense competition among websites and other Internet advertising providers has led to the development of a number of alternative pricing models for Internet advertising. The proliferation of multiple pricing alternatives may confuse advertisers and make it more difficult for them to differentiate among these alternatives. In addition, it is possible that new pricing models may be developed and gain widespread acceptance that are not compatible with our business model or our technology. These alternatives, and the likelihood that additional pricing models will be introduced, make it difficult for us to project the levels of advertising revenue or the margins that we, or the Internet advertising industry in general, will realize in the future. If advertisers do not understand the benefits of our pricing models, then the market for our services may decline or develop more slowly than we expect, which may limit our ability to grow our revenue or cause our revenue to decline. Online Transactions From Which We Derive Our Revenue Are Subject To Validation. Our Revenue And Margins Could Be Reduced As A Result Of Invalid Transactions. SendTec derives revenue from its online cost per action advertising business based on the number of actions it generates for clients each month. SendTec determines the number of actions generated for clients based on digital tracking technology and reports from its clients detailing the number of actions received by them. SendTec relies upon its digital tracking methods and final reports from its clients to determine the number of actions for which it pays its publisher network. On average SendTec pays its network of publishers between 30 days and 60 days from the end of the month. In certain situations, SendTec may be required to reimburse its clients for actions which SendTec has previously verified as valid actions but the client has subsequently determined to be invalid due to fraud or other factors. In these instances, SendTec generally may not have recourse against the publishers in its network that have generated the actions and therefore SendTec may not be able to recover any portion of the reimbursements it makes to its clients from its publishers. We Depend On A Limited Number Of Clients For A Significant Percentage Of Our Revenue And The Loss Of One Or More Of These Advertisers Could Cause Our Revenue To Decline. The results of SendTec's operations have been included in our consolidated results since date of acquisition, September 1, 2004. During the first quarter 2005, three customers of SendTec accounted for approximately 62% of SendTec's total net revenue. For the four months ended December 31, 2004, two customers of SendTec accounted for approximately 52% of SendTec's total net revenue. We believe that a limited number of clients will continue to be the source of a substantial portion of our revenue for the foreseeable future. Key factors in maintaining our relationships with these clients include our performance on individual campaigns, the strength of our professional reputation and the relationships of our key executives with client personnel. To the extent that our performance does not meet client expectations, or our reputation or relationships with one or more major clients are impaired, our revenues could decline and our operating results could be adversely affected. During the second quarter of 2004, one of SendTec's major customers acquired a business that competes with SendTec. This acquisition, other similar acquisitions, or general business consolidation within the marketing services industry could also cause our revenue and operating results to decline and adversely affect SendTec's business. 36 Any Limitation On Our Use Of Data Derived From Our Clients' Advertising Campaigns Could Significantly Diminish The Value Of Our Services And Cause Us To Lose Clients And Revenue. When an individual visits our clients' websites, we use technologies, including cookies and web beacons, to collect information such as the user's IP address, advertisements delivered by us that have been viewed by the user and responses by the user to such advertisements. We aggregate and analyze this information to determine the placement of advertisements across our affiliate network of advertising space. Although the data we collect from campaigns of different clients, once aggregated, are not identifiable, our clients might decide not to allow us to collect some or all of this data or might limit our use of this data. Any limitation on our ability to use such data could make it more difficult for us to deliver online marketing programs that meet client demands. In addition, although our contracts generally permit us to aggregate data from advertising campaigns, our clients might nonetheless request that we discontinue using data obtained from their campaigns that have already been aggregated with other clients' campaign data. It would be difficult, if not impossible, to comply with these requests, and such requests could result in significant expenditures of resources. Interruptions, failures or defects in our data collection, mining and storage systems, as well as privacy concerns regarding the collection of user data, could also limit our ability to aggregate and analyze data from our clients' advertising campaigns. If that happens, we may lose clients and our revenue may decline. If The Market For Internet Advertising Fails To Continue To Develop, Our Revenue And Our Operating Results Could Be Harmed. Our future success is highly dependent on the continued use and growth of the Internet as an advertising medium. The Internet advertising market is relatively new and rapidly evolving, and it uses different measurements than traditional media to gauge its effectiveness. As a result, demand for and market acceptance of Internet advertising services is uncertain. Many of our current or potential advertiser clients have little or no experience using the Internet for advertising purposes and have allocated only limited portions of their advertising budgets to the Internet. The adoption of Internet advertising, particularly by those entities that have historically relied upon traditional media for advertising, requires the acceptance of a new way of conducting business, exchanging information, measuring success and evaluating new advertising products and services. Such clients may find Internet advertising to be less effective for promoting their products and services than traditional advertising media. We cannot assure you that the market for Internet advertising will continue to grow or become sustainable. If the market for Internet advertising fails to continue to develop or develops more slowly than we expect, our revenue and business could be harmed. We Depend On Online Publishers For Advertising Space To Deliver Our Clients' Advertising Campaigns And Any Decline In The Supply Of Advertising Space Available Through Our Network Could Cause Our Revenue To Decline. The websites, search engines and email publishers that sell or venture their advertising space to or with us are not bound by long-term contracts that ensure us a consistent supply of advertising space, which we refer to as our inventory. We generate a significant portion of our revenue from the advertising inventory provided by a limited number of publishers. In most instances, publishers can change the amount of inventory they make available to us at any time, as well as the price at which they make it available. In addition, publishers may place significant restrictions on our use of our advertising inventory. These restrictions may prohibit advertisements from specific advertisers or specific industries, or restrict the use of certain creative content or format. If a publisher decides not to make inventory available to us, or decides to increase the price, or places significant restrictions on the use of such inventory, we may not be able to replace this with inventory from other publishers that satisfy our requirements in a timely and cost-effective manner. If this happens, our revenue could decline or our cost of acquiring inventory may increase. Our Growth May Be Limited If We Are Unable To Obtain Sufficient Advertising Inventory That Meets Our Pricing And Quality Requirements. Our growth depends on our ability to effectively manage and expand the volume of our inventory of advertising space. To attract new advertisers, we must increase our supply of inventory that meets our performance and pricing requirements. Our ability to purchase or venture sufficient quantities of suitable advertising inventory will depend on various factors, some of which are beyond our control. These factors include: o our ability to offer publishers a competitive price for our inventory; o our ability to estimate the quality of the available inventory; and o our ability to efficiently manage our existing advertising inventory. 37 In addition, the number of competing Internet advertising networks that purchase advertising inventory from websites, search engine and email publishers continues to increase. We cannot assure you that we will be able to purchase or venture advertising inventory that meets our performance, price and quality requirements, and if we cannot do so, our ability to generate revenue could be limited. Any Limitation On Our Ability To Post Advertisements Throughout Our Network Of Advertising Space Could Harm Our Business. We execute advertising programs for clients primarily by posting advertisements, which we refer to as ad delivery, on our affiliate network of advertising space. Our business could suffer from a variety of factors that could limit or reduce our ability to post advertisements across our affiliate network, including: o technological changes that render the delivery of our advertisements obsolete or incompatible with the operating systems of consumers and/or the systems of online publishers; o lawsuits or injunctions based on claims that our ad delivery methodologies violate the proprietary rights of other parties; and o interruptions, failures or defects in our ad delivery and tracking systems. Consolidation Of Online Publishers May Impair Our Ability To Provide Marketing Services, Acquire Advertising Inventory At Favorable Rates And Collect Campaign Data. The consolidation of Internet advertising networks, web portals, search engines and other online publishers could eventually lead to a concentration of desirable advertising inventory on a very small number of networks and large websites. Such concentration could: o increase our costs if these publishers use their greater bargaining power to increase rates for advertising inventory; and o impair our ability to provide marketing services if these publishers prevent us from distributing our clients' advertising campaigns on their websites or if they adopt ad delivery systems that are not compatible with our ad delivery methodologies. Our Business Could Be Harmed If The Use Of Tracking Technology Is Restricted Or Becomes Subject To New Regulation. In conjunction with the delivery of advertisements to websites, we typically place small files of information, commonly known as cookies, on an Internet user's hard drive, generally without the user's knowledge or consent. Cookie information is passed to us through an Internet user's browser software. We use cookies to collect information regarding the advertisements we deliver to Internet users and their interaction with these advertisements. We use this information to identify Internet users who have received our advertisements in the past and to monitor and prevent potentially fraudulent activity. In addition, our technology uses this information to monitor the performance of ongoing advertising campaigns and plan future campaigns. Some Internet commentators and privacy advocates have proposed limiting or eliminating the use of cookies and other Internet tracking technologies, and legislation has been introduced in some jurisdictions to regulate Internet tracking technologies. The European Union has already adopted a directive requiring that when cookies are used, the user must be informed and offered an opportunity to opt-out of the cookies' use. If there is a further reduction or limitation in the use of Internet tracking technologies such as cookies: o we may have to replace or re-engineer our tracking technology, which could require significant amounts of our time and resources, may not be completed in time to avoid losing clients or advertising inventory, and may not be commercially or technically feasible; o we may have to develop or acquire other technology to prevent fraud; and o we may become subject to costly and time-consuming litigation or investigations due to our use of cookie technology or other technologies designed to collect Internet usage information. Any one or more of these occurrences could result in increased costs, require us to change our business practices or divert management's attention. If We Or Our Advertiser Or Publisher Clients Fail To Comply With Regulations Governing Consumer Privacy, We Could Face Substantial Costs And Our Business Could Be Harmed. Our collection, maintenance and sharing of information regarding Internet users could result in lawsuits or government inquiries. These actions may include those related to U.S. federal and state legislation or European Union directives limiting the ability of companies like ours to collect, receive and use information regarding Internet users. Litigation and regulatory inquiries are often expensive and time-consuming and their outcome is uncertain. Any involvement by us in any of these matters could require us to: 38 o spend significant amounts on legal defense; o divert the attention of senior management from other aspects of our business; o defer or cancel new product launches as a result of these claims or proceedings; and o make changes to our present and planned products or services. Further, we cannot assure you that our advertiser and publisher clients are currently in compliance, or will remain in compliance, with their own privacy policies, regulations governing consumer privacy or other applicable legal requirements. We may be held liable if our clients use our technology or the data we collect on their behalf in a manner that is not in compliance with applicable laws or regulations or their own stated privacy standards. We May Be Liable For Content In The Advertisements We Deliver For Our Clients. We may be liable to third parties for content in the advertisements we deliver if the artwork, text or other content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory. Although we generally receive warranties from our advertisers that they have the right to use any copyrights, trademarks or other intellectual property included in an advertisement and are normally indemnified by the advertisers, a third party may still file a claim against us. Any claims by third parties against us could be time-consuming, could result in costly litigation and adverse judgments and could require us to change our business. Misappropriation Of Confidential Information Held By Us Could Cause Us To Lose Clients Or Incur Liability. We retain highly confidential information on behalf of our clients in our systems and databases. Although we maintain security features in our systems, our operations may be susceptible to hacker interception, break-ins and other disruptions. These disruptions may jeopardize the security of information stored in and transmitted through our systems. If confidential information is compromised, we could be subject to lawsuits by the affected clients or Internet users, which could damage our reputation among our current and potential clients, require significant expenditures of capital and other resources and cause us to lose business and revenues. We Face Intense And Growing Competition, Which Could Result In Price Reductions, Reduced Operating Margins And Loss Of Market Share. The direct response advertising market is highly competitive. If we fail to compete effectively against other advertising service companies, we could lose clients or advertising inventory and our revenues could decline. We expect competition to continue to increase because there are no significant barriers to entry. Many current and potential competitors have advantages over us, such as longer operating histories, greater name recognition, larger client bases, greater access to advertising space on high-traffic websites and significantly greater financial, technical and marketing resources. In addition, existing or future competitors may develop or offer services that provide significant performance, price, creative or other advantages over those offered by us. Current and potential competitors may establish cooperative relationships among themselves or with third parties to increase the ability of their products and services to address the needs of our clients and prospective clients. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share. If we fail to compete successfully, we could have difficulties attracting and retaining advertising clients or advertising inventory, which may decrease our revenues and adversely affect our operating results. Increased competition may also result in price reductions and reduced operating income. We Generally Do Not Have Long-Term Contracts With Our Clients. Our clients typically hire us on a project-by-project basis or on an annual contractual relationship. Moreover, our clients generally have the right to terminate their relationships with us without penalty and with relatively short or no notice. Once a project is completed we cannot be assured that a client will engage us for further services. From time to time, highly successful engagements have ended because our client was acquired and the new owners decided not to retain us. A client that generates substantial revenue for us in one period may not be a substantial source of revenue in a subsequent period. We expect a relatively high level of client concentration to continue, but not necessarily involve the same clients from period to period. The termination of our business relationships with any of our significant clients, or a material reduction in the use of our services by any of our significant clients, could adversely affect our future financial performance. 39 If We Fail To Manage Our Growth Effectively, Our Expenses Could Increase And Our Management's Time And Attention Could Be Diverted. As we continue to increase the scope of our operations, we will need an effective planning and management process to implement our business plan successfully in the rapidly evolving Internet advertising market. Our business, results of operations and financial condition will be substantially harmed if we are unable to manage our expanding operations effectively. We plan to continue to expand the sales and marketing, customer support and research and development organizations. Growth may place a significant strain on our management systems and resources. We will likely need to continue to improve our financial and managerial controls and our reporting systems and procedures. In addition, we will need to expand, train and manage our work force. Our failure to manage our growth effectively could increase our expenses and divert management's time and attention. If We Fail To Establish, Maintain And Expand Our Technology Business And Marketing Alliances And Partnerships, Our Ability To Grow Our Marketing Services Business Could Be Limited. In order to grow our technology business, we must generate, retain and strengthen successful business and marketing alliances with advertising agencies. We depend, and expect to continue to depend, on our business and marketing alliances, which are companies with which we have written or oral agreements to work together to provide services to our clients and to refer business from their clients and customers to us. If companies with which we have business and marketing alliances do not refer their clients and customers to us to perform their online campaign and message management, our revenue and results of operations may be severely harmed. RISKS RELATING TO OUR COMPUTER GAMES BUSINESS The Market Situation Continues To Be A Challenge For Chips & Bits Due To Advances In Console And Online Games, Which Have Lower Margins And Traditionally Less Sales Loyalty To Chips & Bits. Our subsidiary, Chips & Bits depends on major releases in the Personal Computer (PC) market for the majority of sales and profits. Advances in technology and the game industry's increased focus on console and online game platforms, such as Xbox, PlayStation and GameCube, has dramatically reduced the number of major PC releases, which resulted in significant declines in revenues and gross margins for Chips & Bits. Because of the large installed base of personal computers, revenue and gross margin percentages may fluctuate with changes in the PC game market. However, we are unable to predict when, if ever, there will be a turnaround in the PC game market, or if we will be successful in adequately increasing our future sales of non-PC games. We Have Historically Relied Substantially On Advertising Revenues, Which Could Decline In The Future. We historically derived a substantial portion of our revenues from the sale of advertisements, primarily in our Computer Games Magazine. Our games business model and our ability to generate sufficient future levels of print and online advertising revenues are highly dependent on the print circulation of our Computer Games magazine, as well as the amount of traffic on our websites and our ability to properly monetize website traffic. Print and online advertising market volumes have declined in the past and may decline in the future, which could have a material adverse effect on us. Many advertisers have been experiencing financial difficulties which could further negatively impact our revenues and our ability to collect our receivables. For these reasons, we cannot assure you that our current advertisers will continue to purchase advertisements from our computer games businesses. We May Not Be Able To Successfully Compete In The Electronic Commerce Marketplace. The games marketplace has become increasingly competitive due to acquisitions, strategic partnerships and the continued consolidation of a previously fragmented industry. In addition, an increasing number of major retailers have increased the selection of video games offered by both their traditional "bricks and mortar" locations and their online commerce sites, resulting in increased competition. Our Chips & Bits subsidiary may not be able to compete successfully in this highly competitive marketplace. We also face many uncertainties, which may affect our ability to generate electronic commerce revenues and profits, including: o our ability to obtain new customers at a reasonable cost, retain existing customers and encourage repeat purchases; o the likelihood that both online and retail purchasing trends may rapidly change; o the level of product returns; o merchandise shipping costs and delivery times; 40 o our ability to manage inventory levels; o our ability to secure and maintain relationships with vendors; and o the possibility that our vendors may sell their products through other sites. Additionally, if use of the Internet for electronic commerce does not continue to grow, our business and financial condition would be materially and adversely affected. Intense Competition For Electronic Commerce Revenues Has Resulted In Downward Pressure On Gross Margins. Due to the ability of consumers to easily compare prices of similar products or services on competing websites and consumers' potential preference for competing website's user interface, gross margins for electronic commerce transactions, which are narrower than for advertising businesses, may further narrow in the future and, accordingly, our revenues and profits from electronic commerce arrangements may be materially and adversely affected. Our Electronic Commerce Business May Result In Significant Liability Claims Against Us. Consumers may sue us if any of the products that we sell are defective, fail to perform properly or injure the user. Consumers are also increasingly seeking to impose liability on game manufacturers and distributors based upon the content of the games and the alleged affect of such content on behavior. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. As a result, any claims, whether or not successful, could seriously damage our reputation and our business. 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 31, 2005, we had issued and outstanding approximately 175.2 million shares, of which approximately 48.4 million shares were freely tradable over the public markets. There is limited trading volume in our shares and we are now traded only in the over-the-counter market. On April 16, 2004, we filed a registration statement relating to the potential resale of up to approximately 131 million of our shares (including approximately 27 million shares underlying outstanding warrants to acquire our Common Stock). The registration statement became effective on May 11, 2004. As part of the acquisition of SendTec, we issued an aggregate of approximately 35 million shares of our Common Stock. Pursuant to our contractual obligations, we will file a registration statement relating to the potential resale of these shares. We are obligated to cause such registration statement to become effective on or before September 1, 2005. In the event we fail to timely register such shares, we may be held liable for any damages suffered by holders of such stock. Upon registration, and subject to waiver or expiration of a lock-up agreement which expires September 1, 2005, all such shares will be eligible for resale over the open market. 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 to purchase our Common Stock, have registration rights under various conditions. Also, we may issue additional shares of our Common Stock or other equity instruments which may be convertible into Common Stock at some future date, which could further adversely affect our stock price. In addition, as of March 31, 2005, there were outstanding options to purchase approximately 15,605,000 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 issuance of shares upon exercise of these options is 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 31, 2005, we had issued and outstanding warrants to acquire approximately 16,782,000 shares of our Common Stock. In addition, the Company holds in escrow warrants to acquire up to 1,500,000 shares of Common Stock, subject to release over approximately the next year (some of which may accelerate under certain events) upon the attainment of certain performance objectives and may issue warrants to acquire up to an additional 2,500,000 shares of Common Stock upon attainment of certain performance criteria related to the SendTec acquisition. Many of the outstanding instruments representing the warrants contain anti-dilution provisions pursuant to which the exercise prices and number of shares issuable upon exercise may be adjusted. 41 Our Chairman May Control Us. After giving effect to the proxies to vote the shares of Common Stock granted by five of the former shareholders of SendTec, Michael S. Egan, our Chairman and Chief Executive Officer, beneficially owns or controls, directly or indirectly, approximately 169.4 million shares of our Common Stock as of May 4, 2005, which in the aggregate represents approximately 64.8% of the outstanding shares of our Common Stock (assuming the full $4.0 million funding of the secured demand convertible promissory notes and treating as outstanding for this purpose the shares of Common Stock issuable upon exercise and/or conversion of the options, secured demand convertible promissory notes and warrants owned by Mr. Egan or his affiliates). Accordingly, Mr. Egan will be able to exercise significant influence over, if not control, any stockholder vote. Delisting Of Our Common Stock Makes It More Difficult For Investors To Sell Shares. This May Potentially Lead To Future Market Declines. The shares of our Common Stock were delisted from the NASDAQ national market in April 2001 and are now traded in the over-the-counter market on what is commonly referred to as the electronic bulletin board or "OTCBB." As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of the securities. The delisting has made trading our shares more difficult for investors, potentially leading to further declines in share price and making it less likely our stock price will increase. It has also made it more difficult for us to raise additional capital. We may also incur additional costs under state blue-sky laws if we sell equity due to our delisting. Our Common Stock Is Presently Subject To The "Penny Stock" Rules Which May Make It A Less Attractive Investment. Since the trading price of our Common Stock is less than $5.00 per share, trading in our Common Stock is also subject to the requirements of Rule 15g-9 of the Exchange Act. Our Common Stock is also considered a penny stock under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which defines a penny stock, generally, as any equity security not traded on an exchange or quoted on the Nasdaq SmallCap Market that has a market price of less than $5.00 per share. Under Rule 15g-9, brokers who recommend our Common Stock to persons who are not established customers and accredited investors, as defined in the Exchange Act, must satisfy special sales practice requirements, including requirements that they make an individualized written suitability determination for the purchaser; and receive the purchaser's written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosures in connection with any trades involving a penny stock, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated with that market. Such requirements may severely limit the market liquidity of our Common Stock and the ability of purchasers of our equity securities to sell their securities in the secondary market. For all of these reasons, an investment in our equity securities may not be attractive to our potential investors. Anti-Takeover Provisions Affecting Us Could Prevent Or Delay A Change Of Control. Provisions of our charter, by-laws and stockholder rights plan and provisions of applicable Delaware law may: o have the effect of delaying, deferring or preventing a change in control of our company; o discourage bids of our Common Stock at a premium over the market price; or o adversely affect the market price of, and the voting and other rights of the holders of, our Common Stock. Certain Delaware laws could have the effect of delaying, deterring or preventing a change in control of our company. One of these laws prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder, unless various conditions are met. In addition, provisions of our charter and by-laws, and the significant amount of Common Stock held by our current executive officers, directors and affiliates, could together have the effect of discouraging potential takeover attempts or making it more difficult for stockholders to change management. In addition, the employment contracts of our Chairman, CEO and Vice President of Finance provide for substantial lump sum payments ranging from 2 (for the Vice President) to 10 times (for each of the Chairman and CEO) of their respective average combined salaries and bonuses (together with the continuation of various benefits for extended periods) in the event of their termination without cause or a termination by the executive for "good reason," which is conclusively presumed in the event of a "change-in-control" (as such terms are defined in such agreements). Our Stock Price Is Volatile And May Decline. The trading price of our Common Stock has been volatile and may continue to be volatile in response to various factors, including: o the performance and public acceptance of our new product lines; o quarterly variations in our operating results; 42 o competitive announcements; o sales of any of our businesses; o the operating and stock price performance of other companies that investors may deem comparable to us; o news relating to trends in our markets; and o entrance into new lines of business and acquisitions of businesses, including our SendTec acquisition. In addition, with regard to our acquisition of SendTec the trading price of our Common Stock may decline if: o integration of theglobe.com and SendTec is unsuccessful or is delayed; o the combined company does not achieve the perceived benefits of the acquisition as rapidly or to the extent anticipated by investors; o the effect of the acquisition on the combined company's financial results or condition is not consistent with the expectations of financial investors; or o the dilution in shareholder ownership related to the issuance of shares of theglobe.com's Common Stock in connection with the acquisition is perceived negatively by investors. The market price of our Common Stock could also decline as a result of unforeseen factors related to the acquisition. The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies, particularly Internet-related companies, have been highly volatile. Our stock is also more volatile due to the limited trading volume. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that we classify as cash and cash equivalents have original maturities of three months or less and therefore, are not affected in any material respect by changes in market interest rates. Marketable securities at March 31, 2005, of $42,736 are classified as available-for-sale and stated at fair value. At March 31, 2005, debt outstanding includes approximately $1.1 million of fixed rate instruments with an aggregate average interest rate of 4.52% and approximately $0.2 million of variable rate instruments with an aggregate average interest rate of 6.92%. All but approximately $16,000 of principal of the variable rate debt outstanding as of the end of the 2005 first quarter matures within the next twelve months. Foreign Currency Risk. We transact business in U.S. dollars. Our exposure to changes in foreign currency rates has been limited to a related party obligation payable in Canadian dollars, which totals approximately $58,000 (U.S.) at March 31, 2005. Foreign currency exchange rate fluctuations do not have a material effect on our results of operations. ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms, and (2) that this information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its 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 March 31, 2005. 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 March 31, 2005 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. 43 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 6, "Litigation," of the Financial Statements included in this Report. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) Unregistered Sales of Equity Securities. None. Subsequent to the quarter ended March 31, 2005, the registrant reported the sale of unregistered secured demand convertible promissory notes on a Form 8-K dated April 26, 2005. (b) Use of Proceeds From Sales of Registered Securities. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION On January 31, 2005, theglobe.com, inc., and Promotion Display Technology Ltd. ("PDT"), entered into a termination of agreement related to an agreement dated August 7, 2003 for the purchase of USB handsets. The provisions of this termination of agreement are discussed in Item 6 under the caption "Loss on Settlement of Contractual Obligation" in the discussion of our results of operations for the year ended December 31, 2004 compared to the year ended December 31, 2003, as included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004. Although we treated the original August 7, 2003 agreement with PDT as a material contract, we did not file a Form 8-K relating to the termination of this contract. Due to previous disclosures in theglobe.com's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2004, of amounts written-off related to USB handset inventory purchases pursuant to this contract and that a material part of our business was no longer dependent upon this supplier, the actual termination of the contract may not have been a termination of a material agreement requiring it to be reported on Form 8-K. ITEM 6. EXHIBITS 4.1 Form of Secured Demand Convertible Promissory Note (2). 4.2 Security Agreement dated April 22, 2005 by theglobe.com, inc. and certain other parties named therein (2). 4.3 Unconditional Guaranty Agreement dated April 22, 2005 (2). 10.1 Termination of Agreement dated as of January 31, 2005 between theglobe.com, inc. and Promotion and Display Technology Ltd. (1). 10.2 Consulting Agreement effective as of February 2, 2005 (fully executed as of March 28, 2005) between theglobe.com, inc. and Albert J. Detz (1). 10.3 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 (1). 44 10.4 Note Purchase Agreement dated April 22, 2005 between theglobe.com, inc. and certain named investors (2). 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 Form 10-KSB for the year ended December 31, 2004, filed on March 30, 2005. (2) Incorporated by reference from our Form 8-K filed on April 26, 2005. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 13, 2005 theglobe.com, inc. 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) 46 EXHIBIT INDEX 4.1 Form of Secured Demand Convertible Promissory Note (2). 4.2 Security Agreement dated April 22, 2005 by theglobe.com, inc. and certain other parties named therein (2). 4.3 Unconditional Guaranty Agreement dated April 22, 2005 (2). 10.1 Termination of Agreement dated as of January 31, 2005 between theglobe.com, inc. and Promotion and Display Technology Ltd. (1). 10.2 Consulting Agreement effective as of February 2, 2005 (fully executed as of March 28, 2005) between theglobe.com, inc. and Albert J. Detz (1). 10.3 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 (1). 10.4 Note Purchase Agreement dated April 22, 2005 between theglobe.com, inc. and certain named investors (2). 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 Form 10-KSB for the year ended December 31, 2004, filed on March 30, 2005. (2) Incorporated by reference from our Form 8-K filed on April 26, 2005. 47 EX-31.1 2 v017931_ex31-1.txt EXHIBIT 31.1 CERTIFICATE PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) OF CHIEF EXECUTIVE OFFICER I, Michael S. Egan, Chief Executive Officer of theglobe.com, inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of theglobe.com, inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2005 /s/ Michael S. Egan ------------------------------- Name: Michael S. Egan Title: Chief Executive Officer EX-31.2 3 v017931_ex31-2.txt EXHIBIT 31.2 CERTIFICATE PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) OF CHIEF FINANCIAL OFFICER I, Edward A. Cespedes, Chief Financial Officer of theglobe.com, inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of theglobe.com, inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2005 /s/ Edward A. Cespedes ------------------------------- Name: Edward A. Cespedes Title: Chief Financial Officer EX-32.1 4 v017931_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of theglobe.com, inc. (the "Company") on Form 10-Q for the three months ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael S. Egan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2005 /s/ Michael S. Egan ----------------------- Michael S. Egan Chief Executive Officer EX-32.2 5 v017931_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of theglobe.com, inc. (the "Company") on Form 10-Q for the three months ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward A. Cespedes, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2005 /s/ Edward A. Cespedes ------------------------- Edward A. Cespedes Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----