NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. However, due to the deterioration of the online advertising
market, the Company was forced to restructure and ceased the operations of its
online community on August 15, 2001. The Company then sold most of its
remaining online and offline properties. The Company continued to operate
its Computer Games print magazine and the associated CGOnline website, as well
as the e-commerce games distribution business of Chips & Bits. On June
1, 2002, Chairman Michael S. Egan and Director Edward A. Cespedes became Chief
Executive Officer and President of the Company, respectively. On November
14, 2002, the Company entered into the Voice over Internet Protocol (“VoIP”)
business by acquiring certain VoIP assets. On September 1, 2004, the
Company acquired SendTec, Inc., a direct response marketing services and
technology company.
On May 9,
2005, the Company exercised an option to acquire all of the outstanding capital
stock of Tralliance Corporation (“Tralliance”), an entity which had been
designated as the registry for the “.travel” top-level domain through an
agreement with the Internet Corporation for Assigned Names and Numbers
(“ICANN”).
As more
fully discussed in Note 4, “Discontinued Operations,” in October 2005, the
Company completed the sale of the business and substantially all of the assets
of SendTec, Inc. Additionally, in March 2007, management and the Board of
Directors of the Company made the decision to (i) cease all activities related
to its computer games businesses, including discontinuing the operations of its
magazine publications, games distribution business and related websites; and
(ii) discontinue the operating, research and development activities of its VoIP
telephony services business and terminate all of the remaining employees of that
business.
On
September 29, 2008, the Company sold its Tralliance business and issued
229,000,000 shares of its Common Stock to a company controlled by Michael S.
Egan, the Company’s Chairman and Chief Executive Officer (see Note 3, “Sale of
Tralliance and Share Issuance”). As a result of the sale of its Tralliance
business, the Company became a shell company (as defined in Rule 12b-2 of the
Securities and Exchange Act of 1934) with no material operations or
assets. However, certain matters, as more fully discussed in Note 2,
“Liquidity and Going Concern Considerations,” raise substantial doubt about the
Company’s ability to continue as a going concern.
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.
UNAUDITED
INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The
unaudited interim condensed consolidated financial statements of the Company as
of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009
included herein have been prepared in accordance with the instructions for Form
10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of
Regulation S-X under the Securities Act of 1933, as amended. Certain information
and note disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations relating to interim
condensed consolidated financial statements.
In the
opinion of management, the accompanying unaudited interim condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at June 30, 2010 and the results of its operations and its cash flows
for the three and six months ended June 30, 2010 and 2009. The results of
operations and cash flows for such periods are not necessarily indicative of
results expected for the full year or for any future period.
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 primarily to estimates of the
collectability of accounts receivable, accounts payable and accrued expenses. At
June 30, 2010 and December 31, 2009, a significant portion of our liabilities of
discontinued operations relate to charges that have been disputed by the Company
and for which estimates have been required. Our estimates, judgments and
assumptions are continually evaluated based upon available information and
experience. Because of estimates inherent in the financial reporting process,
actual results could differ from those estimates.
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.
NET
INCOME PER SHARE
The
Company reports basic and diluted net income per common share in accordance with
FASB ASC Topic 260, "Earnings Per Share." 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 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 anti-dilutive effect of potentially dilutive securities or common stock
equivalents that could be issued, such securities were excluded from the diluted
net loss per common share calculation for all periods presented. Such
potentially dilutive securities and common stock equivalents consisted of the
following for the periods ended June 30:
|
|
|
2010
|
|
|
2009
|
|
|
Options
to purchase common stock
|
|
|
13,543,000
|
|
|
|
13,597,000
|
|
|
Common
shares issuable upon exercise of warrants
|
|
|
7,250,000
|
|
|
|
12,725,000
|
|
|
Total
|
|
|
20,793,000
|
|
|
|
26,322,000
|
|
RECENT
ACCOUNTING PRONOUNCEMENTS
Management
has determined that all recently issued accounting pronouncements will not have
a material impact on the Company’s financial statements or do not apply to the
Company’s operations.
RECLASSIFICATIONS
Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation.
(2)
LIQUIDITY AND GOING CONCERN CONSIDERATIONS
The
accompanying 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, the condensed consolidated financial statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. However, for the reasons described below, Company management
does not believe that cash on hand and cash flow generated internally by the
Company will be adequate to fund its limited overhead and other cash
requirements beyond a short period of time. These reasons raise significant
doubt about the Company’s ability to continue as a going concern.
During
its recent past, the Company was able to continue operating as a going concern
due principally to funding of $500,000 received during 2008 under a Revolving
Loan Agreement with an entity controlled by Michael S. Egan, its Chairman and
Chief Executive Officer and a total of approximately $544,000 received during
2009 and 2010 under an Earn-out Agreement with an entity also controlled by Mr.
Egan.
At June
30, 2010, the Company had a net working capital deficit of approximately
$3,135,000. Such working capital deficit included (i) a total of
approximately $598,000 in principal and accrued interest owed under the
aforementioned Revolving Loan Agreement; (ii) a total of approximately $225,000
in management service fees owed under a Master Services Agreement to an entity
controlled by Mr. Egan; and (iii) an aggregate of approximately $2,300,000 in
unsecured accounts payable and accrued expenses owed to vendors and other
non-related third parties (of which approximately $1,700,000 relates to
liabilities of our VoIP telephony service discontinued business, with a
significant portion of such liabilities related to charges which have been
disputed by theglobe). theglobe believes that its ability to continue as a going
concern for any significant length of time in the future will be heavily
dependent, among other things, on the continued forbearance of Mr. Egan and
related entities in making demand for payment for amounts outstanding under the
Revolving Loan Agreement and the Master Services Agreement, and its ability to
prevail and avoid making any payments with respect to such disputed vendor
charges and/or to negotiate favorable settlements (including discounted payment
and/or payment term concessions) with the aforementioned
creditors.
As more
fully discussed in Note 3, “Sale of Tralliance and Share Issuance,” on September
29, 2008, the Company (i) sold the business and substantially all of the assets
of its Tralliance Corporation subsidiary to Tralliance Registry Management, and
(ii) issued 229,000,000 shares of its Common Stock (the “Shares”) to Registry
Management (the “Purchase Transaction”). Tralliance Registry Management and
Registry Management are entities controlled by Michael S. Egan. The closing of
the Purchase Transaction resulted in the cancellation of all of the Company’s
remaining Convertible Debt, related accrued interest and rent and accounts
payable owed to entities controlled by Mr. Egan as of the date of closing
(totaling approximately $6,400,000). However, the Company continues to be
obligated to repay its principal borrowings totaling $500,000, plus accrued
interest at the rate of 10% per annum (approximately $98,000 as of June 30,
2010), due to an entity controlled by Mr. Egan under the aforementioned
Revolving Loan Agreement. All unpaid borrowings under the Revolving Loan
Agreement, as amended on May 7, 2009, including accrued interest, are due and
payable by the Company in one lump sum on the earlier of (i) five business days
following any demand for payment, which demand can be made at any time, or (ii)
the occurrence of an event of default as defined in the Revolving Loan
Agreement. The Company currently has no ability to repay this loan should a
demand for payment be made by the noteholder. All borrowings under the
Revolving Loan Agreement are secured by a pledge of all of the assets of the
Company and its subsidiaries. After giving effect to the closing of the Purchase
Transaction and the issuance of the Shares thereunder, Mr. Egan now beneficially
owns approximately 76% of the Company’s issued and outstanding Common Stock at
June 30, 2010.
As
additional consideration under the Purchase Transaction, Tralliance Registry
Management is obligated to pay an earn-out to theglobe equal to 10% (subject to
certain minimums) of Tralliance Registry Management’s net revenue (as defined)
derived from “.travel” names registered by Tralliance Registry Management from
September 29, 2008 through May 5, 2015 (the “Earn-out”). The minimum Earn-out
payable by Tralliance Registry Management to theglobe was $300,000 in the first
year, and will increase by $25,000 in each subsequent year (pro-rated for the
final year of the Earn-out).
In
connection with the closing of the Purchase Transaction, the Company also
entered into a Master Services Agreement with an entity controlled by Mr. Egan
whereby for a fee of $20,000 per month ($240,000 per annum) such entity will
provide personnel and services to the Company so as to enable it to continue its
existence as a public company without the necessity of any full-time employees
of its own. Additionally, commensurate with the closing of the Purchase
Transaction, Termination Agreements with each of its current executive officers,
which terminated their previous and then existing employment agreements, were
executed. Notwithstanding the termination of these employment agreements, each
of our current executive officers and directors remain as executive officers and
directors of the Company.
Immediately
following the closing of the Purchase Transaction, theglobe became a shell
company with no material operations or assets, and no source of revenue other
than under the Earn-out. It is expected that theglobe’s future operating
expenses as a public shell company will consist primarily of expenses incurred
under the aforementioned Master Services Agreement and other customary public
company expenses, including legal, audit and other miscellaneous public company
costs.
MANAGEMENT’S
PLANS
As a
shell company, management believes that theglobe will most likely continue to
incur net losses for the foreseeable future. However, assuming that no
significant unplanned costs are incurred, management believes that theglobe’s
future losses will be limited. Further, in the event that Registry Management is
successful in substantially increasing net revenue derived from “.travel” name
registrations (and as the result maximizing theglobe’s Earn-out revenue) in the
future, theglobe’s prospects for achieving profitability will be enhanced.
To date, the Company has received only the minimum payments pursuant to the
Earn-out.
It is the
Company’s preference to avoid filing for protection under the U.S. Bankruptcy
Code. However, based upon the Company’s current financial condition as discussed
above, management believes that additional debt or equity capital will need to
be raised in order for theglobe to continue to operate as a going concern on a
long-term basis. Such capital will be needed both to (i) fund its expected
limited future net losses and (ii) repay the $598,000 of secured debt and
related accrued interest due under the Revolving Loan Agreement and the $225,000
of management service fees due under the Master Services Agreement, and a
portion of the $2,300,000 unsecured indebtedness (assuming theglobe is
successful in favorably resolving and settling certain disputed and non-disputed
vendor charges related to such unsecured indebtedness). Any such capital
would likely come from Mr. Egan, or affiliates of Mr. Egan, as the Company
currently has no access to credit facilities and had traditionally relied upon
borrowings from related parties to meet short-term liquidity needs. Any
such capital raised would likely result in very substantial dilution in the
number of outstanding shares of the Company’s Common Stock.
On a
short-term liquidity basis, the Company must be successful in collecting the
quarterly Earn-out payments contractually due from Tralliance Registry
Management on a timely basis, and must receive the continued indulgence of
substantially all of its creditors, in order to continue to operate as a going
concern in the near term. Given theglobe’s current financial condition and
the state of the current United States capital markets and economy, it has no
current intent to seek to acquire, or start, any other
businesses.
(3) SALE
OF TRALLIANCE AND SHARE ISSUANCE
On
September 29, 2008, theglobe closed upon a Purchase Agreement (the “Purchase
Agreement”), by and between theglobe.com, its subsidiary, Tralliance, Registry
Management and Tralliance Registry Management, a wholly-owned subsidiary of
Registry Management. In connection with the closing, Registry Management
assigned certain of its rights and obligations with respect to the purchased
assets of Tralliance to Tralliance Registry Management. Pursuant to the
provisions of the Purchase Agreement, theglobe (i) issued two hundred twenty
nine million (229,000,000) shares of its Common Stock (the “Shares”) (the “Share
Issuance”) and (ii) sold the business and substantially all of the assets of its
subsidiary, Tralliance to Tralliance Registry Management (the “Asset Sale” and,
together with the Share Issuance, the “Sale” or “Purchase Transaction”) for (i)
consideration totaling approximately $6,409,800 and consisting of surrender to
theglobe and satisfaction of secured demand convertible promissory notes issued
by theglobe and held by the Registry Management in the aggregate principal
amount of $4,250,000, together with all accrued and unpaid interest of
approximately $1,290,300 through the date of the closing of the Purchase
Transaction and satisfaction of approximately $869,500 in outstanding rent and
miscellaneous fees due and unpaid to Registry Management through the date of
closing of the Purchase Transaction, and (ii) an earn-out equal to 10% of
Tralliance Registry Management’s “net revenue” (as defined) derived from
“.travel” names registered by Tralliance Registry Management from September 29,
2008 through May 5, 2015 (the “Earn-out”). Registry Management and
Tralliance Registry Management are directly or indirectly controlled by Michael
S. Egan, our Chairman and Chief Executive Officer and principal stockholder and
each of our two remaining Board members own a minority interest in Registry
Management. After giving effect to the closing of the Purchase
Transaction, and the issuance of the Shares thereunder, Mr. Egan now
beneficially owns approximately 76% of the Company’s issued and outstanding
Common Stock.
Commensurate
with the closing of the Purchase Agreement on September 29, 2008, the Company
also entered into several ancillary agreements. These agreements included
an Earn-out Agreement pursuant to which the aforementioned “net revenue”
Earn-out would be paid (the “Earn-out Agreement”), and Termination Agreements
with each of our executive officers (each a “Termination Agreement”). The
minimum Earn-out amount payable under the Earn-out Agreement was $300,000 in the
first year of the Earn-out Agreement and will increase by $25,000 in each
subsequent year (pro-rated for the final year of the Earn-out) with incremental
Earn-out payments to be determined and paid to the Company on an annual basis to
the extent that 10% of Tralliance Registry Management’s “net revenue” (as
defined) exceeds the minimum Earn-out amount payable for such year. For
the first annual Earn-out period that was completed on September 29, 2009, no
incremental Earn-out payments were due or paid to the Company. Pursuant to
the Termination Agreements, the Company’s employment agreements with each of
Michael S. Egan, Edward A. Cespedes and Robin Segaul Lebowitz, the Company’s
Chief Executive Officer, President and Vice President of Finance, all dated
August 1, 2003, respectively, were terminated. Notwithstanding the
termination of these employment
agreements,
each of Messrs. Egan, Cespedes and Ms. Lebowitz remains as an officer and
director of the Company.
Due to
various factors related to the collectability of Earn-out payments from
Tralliance Registry Management, including the current weak financial condition
of Tralliance Registry Management, and the fact that such Earn-out payments are
payable to theglobe over an extended period of time until May 2015, no portion
of the Earn-out was included in the purchase price for the Purchase Transaction
as of the closing of the transaction. Instead, the Company intends to
recognize income related to the Earn-out on a prospective basis as and to the
extent that future Earn-out payments are collected. During the six months
ended June 30, 2010 and 2009, income related to the Earn-out of $162,500 and
$150,000, respectively, was recorded as related party other income in the
Unaudited Condensed Consolidated Statement of Operations for such
periods.
In
connection with the closing of the Purchase Agreement, the Company also entered
into a Master Services Agreement (“Services Agreement”) with Dancing Bear
Investments, Inc. (“Dancing Bear”), which is controlled by Mr. Egan. Under
the terms of the Services Agreement, for a fee of $20,000 per month ($240,000
per annum), Dancing Bear will provide personnel and services to the Company so
as to enable it to continue its existence as a public company without the
necessity of any full-time employees of its own. The Services Agreement
has a term of one year and is subject to renewal or early termination under
certain events. On August 9, 2010, the parties to the Services Agreement
acknowledged their prior extension of the term of that Agreement until September
28, 2010, and amended the Agreement to provide that after September 28, 2010,
the term would automatically renew for additional one year terms unless either
party gives notice to the other of its intent not to renew at least 60 days
prior to the end of the then applicable term. Services under the Services
Agreement include, without limitation, accounting, assistance with financial
reporting, accounts payable, treasury/financial planning, record retention and
secretarial and investor relations functions. A total of $120,000 related to the
Services Agreement has been expensed during both of the six month periods ended
June 30, 2010 and 2009. At June 30, 2010, a total of $224,750 remains
unpaid and is accrued on the Company’s condensed consolidated balance sheet.
After
giving effect to the closing of the Purchase Transaction, theglobe has no
material operations or assets and no source of revenue other than the
Earn-out.
(4) DISCONTINUED
OPERATIONS
In
March 2007, management and the Board of Directors of the Company made the
decision to cease all activities related to its Computer Games businesses,
including discontinuing the operations of its magazine publications, games
distribution business and related websites. The Company’s decision to shutdown
its computer games businesses was based primarily on the historical losses
sustained by these businesses during the recent past and management’s
expectations of continued future losses. As of June 30, 2010, all significant
elements of its computer games business shutdown plan have been completed by the
Company.
In
addition, in March 2007, management and the Board of Directors of the Company
decided to discontinue the operating, research and development activities of its
VoIP telephony services business and terminate all of the remaining employees of
the business.
The
Company’s decision to discontinue the operations of its VoIP telephony services
business was based primarily on the historical losses sustained by the business
during the past several years, management’s expectations of continued losses for
the foreseeable future and estimates of the amount of capital required to
attempt to successfully monetize its business. As of June 30, 2010, all
significant elements of its VoIP telephony services business shutdown plan have
been completed by the Company, except for the resolution of certain vendor
disputes and the payment of remaining outstanding vendor payables.
In
October 2005, the Company completed the sale of the business and substantially
all of the assets of SendTec, Inc., its former Marketing Services
subsidiary. During the second quarter of 2009, the Company recorded an
interest accrual totaling $23,000 in connection with prior year income tax
audits of this subsidiary. During the fourth quarter of 2009, the Company
settled and paid to a state taxing authority approximately $88,000 in income
taxes and interest due in connection with such audits. The Company is not
currently aware of any other pending or unsettled Marketing Services business
liabilities at this time.
Results
of operations for the Computer Games, VoIP telephony services and Marketing
Services businesses have been reported separately as “Discontinued Operations”
in the accompanying condensed consolidated statements of operations for all
periods presented. There are no discontinued operations assets included in the
accompanying condensed consolidated balance sheets. The liabilities of the
Computer Games, VoIP telephony services and Marketing Services businesses have
been included in the caption, “Liabilities of Discontinued Operations” in the
accompanying condensed consolidated balance sheets for all applicable periods
presented.
The
following is a summary of the liabilities of the discontinued operations of the
Computer Games, VoIP telephony services and Marketing Services businesses as
included in the accompanying condensed consolidated balance sheets. A
significant portion of the liabilities of discontinued operations at June 30,
2010 and December 31, 2009 relate to charges that have been disputed by the
Company and for which estimates have been required.
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2010
|
|
2009
|
|
|
Liabilities
of discontinued operations:
|
|
|
|
|
|
|
VoIP
Telephony Services
|
|
$
|
1,699,556
|
|
$
|
|
1,729,556
|
|
|
Total
liabilities of discontinued operations
|
|
$
|
1,699,556
|
|
$
|
|
1,729,556
|
|
Summarized
results of operations financial information for the discontinued operations of
our Computer Games, VoIP telephony services and Marketing Services businesses
was as follows:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer
Games
|
|
$
|
—
|
|
|
$
|
(397
|
)
|
|
$
|
(1,268
|
)
|
|
$
|
(3,095
|
)
|
|
VoIP
Telephony Services
|
|
$
|
(150
|
)
|
|
$
|
(150
|
)
|
|
$
|
(484
|
)
|
|
$
|
(449
|
)
|
|
Marketing
Services
|
|
$
|
—
|
|
|
$
|
(23,000
|
)
|
|
$
|
—
|
|
|
$
|
(23,000
|
)
|
|
Total
Loss from discontinued operations, net of tax
|
|
$
|
(150
|
)
|
|
$
|
(23,547
|
)
|
|
$
|
(1,752
|
)
|
|
$
|
(26,544
|
)
|
(5)
STOCK OPTION PLANS
We have
several stock option plans under which nonqualified stock options may be granted
to officers, directors, other employees, consultants and advisors of the
Company. In general, options granted under the Company’s stock option plans
expire after a ten-year period and generally vest no later than three years from
the date of grant. Incentive options granted to stockholders who own greater
than 10% of the total combined voting power of all classes of stock of the
Company must be issued at 110% of the fair market value of the stock on the date
the options are granted. As of June 30, 2010, there were approximately 9,442,000
shares available for grant under the Company’s stock option plans.
There
were no stock option grants or exercises during each of the six months ended
June 30, 2010 and 2009.
Stock
option activity during the six months ended June 30, 2010 was as
follows:
|
|
|
Total Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Outstanding at December
31, 2009
|
|
|
13,596,580
|
|
|
$
|
0.18
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
Expired
|
|
|
(54,080
|
)
|
|
|
4.39
|
|
|
Outstanding
at June 30, 2010
|
|
|
13,542,500
|
|
|
$
|
0.16
|
|
|
Options
exercisable at June 30, 2010
|
|
|
13,542,500
|
|
|
$
|
0.16
|
|
Each of
the weighted-average remaining contractual terms of stock options outstanding
and stock options exercisable at June 30, 2010 were 3.7 years. The aggregate
intrinsic value of both options outstanding and stock options exercisable at
June 30, 2010 was $0.
Stock
compensation cost is recognized on a straight-line basis over the vesting
period. Stock compensation expense totaling $2,855 was charged to continuing
operations during the six months ended June 30, 2009, including $426 of expense
resulting from the vesting of non-employee stock options.
At June
30, 2010, there was no unrecognized compensation expense related to unvested
stock options.
The
Company estimates the fair value of each stock option at the grant date by using
the Black Scholes option-pricing model using the following assumptions: no
dividend yield; a risk free interest rate based on the U.S. Treasury yield in
effect at the time of grant; an expected option life based on historical and
expected exercise behavior; and expected volatility based on the historical
volatility of the Company’s stock price over a time period that is consistent
with the expected life of the option.
(6)
LITIGATION
On and
after August 3, 2001 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 and secondary offering.
The lawsuits were filed in the United States District Court for the Southern
District of New York. A Consolidated Amended Complaint, which is now the
operative complaint, was filed in the Southern District of New York on April 19,
2002.
The
lawsuit purports to be a class action filed on behalf of purchasers of the stock
of the Company during the period from November 12, 1998 through December 6,
2000. The purported class action alleges violations of Sections 11 and 15 of the
Securities Act of 1933 (the “1933 Act”) and Sections 10(b), Rule 10b-5 and 20(a)
of the Securities Exchange Act of 1934 (the “1934 Act”). Plaintiffs allege that
the underwriter defendants agreed to allocate stock in the Company's initial
public offering and its secondary 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 Prospectuses for the Company's initial public
offering and its secondary offering were false and misleading and in violation
of the securities laws because it did not disclose these arrangements. The
action seeks damages in an unspecified amount. On October 9, 2002, the Court
dismissed the Individual Defendants from the case without prejudice. This
dismissal disposed of the Section 15 and 20(a) control person claims without
prejudice.
At the
Court’s request, plaintiffs selected six “focus” cases, which do not include the
Company. The Court indicated that its decisions in the six focus cases are
intended to provide strong guidance for the parties in the remaining
cases. On December 5, 2006, the U.S. Court of Appeals for the Second
Circuit vacated a decision by the District Court granting class certification in
the focus cases. On April 6, 2007, the Second Circuit denied a petition for
rehearing filed by plaintiffs, but noted that plaintiffs could ask the District
Court to certify more narrow classes than those that were rejected.
The
parties in the approximately 300 coordinated cases, including ours, reached a
settlement. The insurers for the issuer defendants in the coordinated cases will
make the settlement payment on behalf of the issuers, including theglobe.
On October 5, 2009, the Court granted final approval of the settlement. A
group of three objectors has filed a petition to the Second Circuit seeking
permission to appeal the District Court’s final approval order on the basis that
the settlement class is broader than the class previously rejected by the Second
Circuit in its December 5, 2006 order vacating the District Court’s order
certifying classes in the focus cases. Plaintiffs have filed an opposition
to the petition. Objectors, including the objectors that filed the
petition seeking permission to appeal, filed six notices of appeal of the
Court’s order finally approving the settlement. The deadline to file
additional notices of appeal has run. Subject to court approval, the
Objectors will file their briefs in the Second Circuit no later than October 6,
2010 and answering briefs will be due no later than February 3,
2011.
Due to
the inherent uncertainties of litigation, the Company cannot accurately predict
the ultimate outcome of the matter. If the settlement does not survive appeal
and the Company is found liable, we are unable to estimate or predict the
potential damages that might be awarded, whether such damages would be greater
than the Company’s insurance coverage, and whether such damages would have a
material impact on our results of operations or financial condition in any
future period.
The
Company is currently a party to certain other claims and disputes arising in the
ordinary course of business, including certain disputes related to vendor
charges incurred primarily as the result of the failure and subsequent shutdown
of its discontinued VoIP telephony services business. The Company believes that
it has recorded adequate accruals on its balance sheet to cover such disputed
charges and is seeking to resolve and settle such disputed charges for amounts
substantially less than recorded amounts. An adverse outcome in any of these
matters, however, could materially and adversely effect our financial position
and prospects, utilizing all or a significant portion of our limited cash
resources, and adversely affect our ability to continue as a going concern (see
Note 4, “Discontinued Operations”).
(7)
RELATED PARTY
TRANSACTIONS
On June
6, 2008, the Company entered into a Revolving Loan Agreement with Dancing Bear
Investments, Inc. (“Dancing Bear”), pursuant to which Dancing Bear may loan up
to $500,000 to the Company on a revolving basis (the “Credit Line”).
Dancing Bear is an entity controlled by Michael S. Egan, the Company’s
Chairman and Chief Executive Officer. During 2008 the Company made
borrowings totaling the full amount of the $500,000 Credit Line. At June
30, 2010, outstanding principal and accrued interest under the Credit Line
totaled $500,000 and $98,027, respectively. During the six months ended
June 30, 2010 and 2009, interest expense related to the Credit Line of $24,794
and $24,795, respectively, was recorded. All borrowings under the Credit
Line, including accrued interest on borrowed funds at the rate of 10% per annum,
were initially due and payable in one lump sum on the first anniversary of the
Credit Line, or June 6, 2009, or sooner upon the occurrence of an event of
default under the loan documentation. On May 7, 2009, such repayment terms
were amended so as to require the Company to repay any or all amounts due under
the Credit Line in one lump sum on the earlier of (i) five business days
following any demand for payment that is made on or after June 6, 2009, or
(ii) the occurrence of an event of default as defined in the Revolving Credit
Agreement.
During
the six months ended June 30, 2010 and 2009, the Company received minimum
Earn-out installment payments totaling $122,500 and $225,000, respectively, from
Tralliance Registry Management Company LLC (“Tralliance Registry Management”)
under an Earn-out Agreement entered into on September 29, 2008 by and between
Tralliance Registry Management and the Company. Tralliance Registry
Management is an entity controlled by Michael S. Egan, and each of our two
remaining executive officers and Board members, Edward A. Cespedes, our
President, and Robin S. Lebowitz, our Vice President of Finance, who own a
minority interest in The Registry Management Company, LLC, the parent company of
Tralliance Registry Management.
During
the six months ended June 30, 2010 and 2009, the Company paid management
services fees totaling $15,250 and $160,667, respectively, to Dancing Bear under
a Master Services Agreement entered into on September 29, 2008 by and between
Dancing Bear and the Company. At June 30, 2010, a total of $224,750
in management service fees remains unpaid and is accrued on the Company’s
condensed consolidated balance sheet.
(8)
SUBSEQUENT EVENTS
We have
performed an evaluation of subsequent events that have occurred after the
balance sheet date, but before the financial statements were available to be
issued, which the Company considers to be the date the financial statements were
issued. On August 9, 2010, the Company and Dancing Bear
Investments, Inc. acknowledged their prior extension of the term of the Master
Services Agreement dated September 29, 2008 between the parties until September
28, 2010, and amended the Agreement to provide that after September 28, 2010,
the term would automatically renew for additional one year terms unless either
party gives notice to the other of its intent not to renew at least 60 days
prior to the end of the then applicable term (see Note 3 “Sale of Tralliance and
Share Issuance”).