Exhibit 99.4
DIRECT PARTNER TELECOM, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Direct Partner Telecom, Inc.
Fort Lauderdale, Florida
We have audited the accompanying balance sheet of Direct Partner Telecom, Inc.
as of December 31, 2002, and the related statements of operations, stockholders'
equity, and cash flows for the period from inception (October 1, 2002) to
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Direct Partner Telecom, Inc. as
of December 31, 2002, and the results of their operations and their cash flows
for the period from inception (October 1, 2002) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations since
inception that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
June 20, 2003
DIRECT PARTNER TELECOM, INC.
BALANCE SHEETS
March 31, December 31,
ASSETS 2003 2002
Current Assets: (Unaudited)
Cash $ 137,326 $ 7,690
Accounts receivable 37,225 111,153
Unbilled revenues 69,008 159,574
--------- ---------
Total current assets 243,559 278,417
Property and Equipment, Net 44,115 46,153
Deposits and Other Assets 112,695 85,537
--------- ---------
Total assets $ 400,369 $ 410,107
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 100,604 $ 179,440
Due to stockholders 583,336 461,336
--------- ---------
Total current liabilities 683,940 640,776
--------- ---------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Deficiency:
Common stock, $0.01 par value; 10,000,000 shares authorized;
1,000,000 shares issued and outstanding 10,000 10,000
Additional paid in capital (9,990) (9,990)
Accumulated deficit (283,581) (230,679)
--------- ---------
Total stockholders' deficiency (283,571) (230,669)
--------- ---------
Total liabilities and stockholders' deficiency $ 400,369 $ 410,107
========= =========
See notes to financial statements.
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DIRECT PARTNER TELECOM, INC.
STATEMENTS OF OPERATIONS
Inception
Three Months (October 1, 2002)
Ended to
March 31, December 31,
2003 2002
(Unaudited)
--------- ---------
Revenues $ 448,957 $ 524,548
Cost of Revenues 383,700 462,312
--------- ---------
Gross Margin 65,257 62,236
General and Administrative Expenses 108,362 287,653
--------- ---------
Loss from Operations (43,105) (225,417)
Interest Expense 9,797 5,262
--------- ---------
Net Loss $ (52,902) $(230,679)
========= =========
Net Loss Per Common Share- Basic and Diluted:
Historical $ (0.05) $ (0.23)
========= =========
Pro Forma $ (0.04) $ (0.17)
========= =========
See notes to financial statements.
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DIRECT PARTNER TELECOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Accumulated
Shares Amount Paid in Capital Deficit Total
--------- --------- --------- --------- ---------
Inception (October 1, 2002) to December 31, 2002:
Stock issued at inception 1,000,000 $ 10,000 $ (9,990) $ -- $ 10
Net loss -- -- -- (230,679) (230,679)
--------- --------- --------- --------- ---------
Balance, December 31, 2002 1,000,000 10,000 (9,990) (230,679) (230,669)
Three Months Ended March 31, 2003 (Unaudited):
Net loss -- -- -- (52,902) (52,902)
--------- --------- --------- --------- ---------
Balance, March 31, 2003 (Unaudited) 1,000,000 $ 10,000 $ (9,990) $(283,581) $(283,571)
========= ========= ========= ========= =========
-4-
See notes to financial statements.
DIRECT PARTNER TELECOM, INC.
STATEMENTS OF CASH FLOWS
Inception
Three Months (October 1, 2002)
Ended to
March 31, December 31,
2003 2002
--------- ---------
Cash Flows from Operating Activities: (Unaudited)
Net loss $ (52,902) $(230,679)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 2,038 2,599
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 73,928 (111,153)
Unbilled revenues 90,566 (159,574)
Other assets 4,624 (6,084)
Increase (decrease) in accounts payable and accrued expenses (78,836) 179,440
--------- ---------
Net cash provided by (used in) operating activities 39,418 (325,451)
--------- ---------
Cash Flows from Investing Activities:
Deposits on property and equipment (31,782) (79,453)
Purchases of property and equipment -- (48,752)
--------- ---------
Net cash used in investing activities (31,782) (128,205)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock -- 10
Proceeds from shareholder loans 122,000 461,336
--------- ---------
Net cash provided by financing activities 122,000 461,346
--------- ---------
Net Increase in Cash 129,636 7,690
Cash, Beginning 7,690 --
--------- ---------
Cash, Ending $ 137,326 $ 7,690
========= =========
See notes to financial statements.
-5-
DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003 (UNAUDITED) and DECEMBER 31, 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CAPITALIZATION
Direct Partner Telecom, Inc. (the "Company", "DPT") began business
October 1, 2002 and was incorporated on November 19, 2002 in the
State of Florida.
The Board authorized 10,000,000 shares of $0.01 par value common
stock of which 1,000 shares were issued at inception. On February
3, 2003, the Board of Directors authorized a 1,000 for 1 stock
split, which increased the issued and outstanding shares to
1,000,000.
The effect of this action has been reflected retroactively in the
accompanying financial statements.
BUSINESS
The Company is engaged in providing Voice over the Internet
("VoIP") telephony services internationally.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated
depreciation. Property and equipment is depreciated using the
straight-line method over the estimated useful lives of the related
assets, generally five years for office equipment and three years
for software.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including property and equipment are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates
the undiscounted future cash flows to result from the use of the
asset and its ultimate disposition. If the sum of the undiscounted
cash flows is less than the carrying value, the Company recognizes
an impairment loss, measured as the amount by which the carrying
value exceeds the fair value of the asset. Fair value would
generally be determined by market value. Assets to be disposed of
are carried at the lower of the carrying value or fair value less
costs to sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company's financial
instruments, including cash, accounts receivable, unbilled
revenues, and accounts payable and accrued expenses, approximate
their fair value at March 31, 2003 and December 31, 2002 because of
their short maturities.
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DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company was taxed under the provisions of Subchapter S of the
Internal Revenue Code up to the Plan of Merger (See Note 7). Under
the Subchapter S provisions, the Company generally does not pay
federal corporate tax, but rather, the stockholders' share of
income or loss is included in their individual tax returns. The
Company terminated the S Corporation election effective May 23,
2003. A pro forma provision has been prepared for income taxes for
the period from inception (October 1, 2002) to December 31, 2002
and for the three months ended March 31, 2003, which resulted in no
income tax expense due to net losses in both periods.
REVENUE RECOGNITION
The Company recognizes telephony service revenue and the related
costs at the time the services are rendered, and generally bills
its customers on a bimonthly basis. Substantially all of the
Company's sales transactions are derived from the resale of
international minutes of calling time. Unbilled revenues represent
service charges which were not billed until the month following the
month the services were rendered.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising
costs were not material for the three months ended March 31, 2003
or for the period ended December 31, 2002.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB
No. 25"), and related interpretations, in accounting for its
employee stock options rather than the alternative fair value
accounting allowed by SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION." APB No. 25 provides that the compensation expense
related to the Company's employee stock options is measured based
on the intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a pro-forma
disclosure of the impact of applying the fair value method of SFAS
No. 123.
The Company follows SFAS No. 123 in accounting for stock options
issued to non-employees.
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DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET LOSS PER COMMON SHARE
The Company computes earnings (loss) per common share in accordance
with SFAS No. 128, "EARNINGS PER SHARE" which requires the
presentation of both basic and diluted earnings (loss) per share.
Historical basic net loss per common share has been computed based
upon the weighted average number of shares of common stock
outstanding during the periods. The number of shares used in the
computation was 1,000,000 for both periods. The Company's
potentially issuable shares of common stock pursuant to outstanding
stock options are excluded from the Company's diluted computation
as their effect would be anti-dilutive.
Pro forma basic and diluted net loss per common share has been
computed assuming that the event described in Note 7 had been in
effect as of the beginning of each of the periods. The number of
shares used in the pro forma computation was 1,375,000.
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, accruals, the
valuations of fair values of options and other factors. Actual
results could differ from those estimates.
CONCENTRATIONS
The Company had two customers during the three months ended March
31, 2003 and the period from inception (October 1, 2002) through
December 31, 2002, that accounted for approximately 94% and 97% of
the Company's sales, respectively.
Inception
Through
March 31, December 31,
2003 2002
---- ----
(Unaudited)
Customer A 82% 64%
Customer B 12% 33%
The Company had one vendor during the three months ended March 31,
2003 and the period from inception (October 1, 2002) through
December 31, 2002, that accounted for approximately 89% (Unaudited)
and 94% of the Company's cost of revenue, respectively.
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DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable.
CASH
From time to time during the year, the Company may have had
deposits in financial institutions in excess of the federally
insured limits. At March 31, 2003, the Company has bank deposits
of approximately $37,000 in excess of federally insured limits.
As of December 31, 2002, the Company's bank deposits were not in
excess of federally insured limits. The Company maintains its
cash with a high quality financial institution, which the
Company believes limits the risk.
ACCOUNTS RECEIVABLE
The Company does business and extends credit based on an
evaluation of the customers' financial condition generally
without requiring collateral. Exposure to losses on receivables
is expected to vary by customer due to the financial condition
of each customer. The Company monitors exposure to credit losses
and maintains allowances for anticipated losses considered
necessary under the circumstances.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standard Board ("FASB")
issued SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." This
statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not believe that
the adoption of SFAS 150 will have a material effect on the
financial statements.
-9-
DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE." This
statement amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. SFAS
No. 148 also amends APB Opinion No. 28, "INTERIM FINANCIAL
REPORTING," to require disclosure about those effects in interim
financial information. The provisions of SFAS No. 148 which amend
SFAS No. 123 are effective for fiscal years ending after December
15, 2002. The provisions of SFAS No. 148 which amend APB Opinion
No. 28 are effective during the first quarter of 2003. The Company
does not believe that the adoption of this statement had a material
effect on the financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"GUARANTOR'S ACCOUNTING AND DISCLOSE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS." FIN 45
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
certain guarantees it has issued. The Interpretation also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 is effective for
interim or annual periods ending after December 15, 2002. The
Company does not believe that the adoption of FIN 45 had a material
effect on the financial statements.
In June 2002, FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." This statement
addresses financial accounting and reporting for costs associated
with exit or disposal activities. SFAS No. 146 will become
effective in the second quarter of fiscal 2003. The Company
believes that the adoption of this statement will not have a
material effect on the financial statements.
NOTE 2. GOING CONCERN CONSIDERATIONS
The Company's financial statements have been prepared assuming the
Company will continue as a going concern. The Company has suffered
losses from operations since inception and has an accumulated deficit
as of March 31, 2003 of approximately $284,000 (unaudited). These
conditions raise substantial doubt about the Company's ability to
continue as a going concern.
-10-
DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. GOING CONCERN CONSIDERATIONS (Continued)
MANAGEMENT'S PLANS
Effective May 28, 2003, theglobe.com, inc. ("theglobe") acquired
the assets and certain liabilities of the Company in exchange for
1,375,000 shares of theglobe common stock and the issuance of
warrants to acquire 500,000 shares of theglobe's common stock at
an exercise price of $0.72 per share. The warrants are exercisable
any time before May 23, 2013. In addition, the former stockholders
of DPT may earn additional warrants to acquire up to 2,750,000
shares of theglobe common stock at an exercise price of $0.72 per
share if DPT achieves certain revenue and earnings targets over
approximately the next three years. The warrants will also
accelerate and be deemed earned in the event of a "change of
control," as defined in the Agreement and Plan of Merger.
Simultaneously with the acquisition, DPT was merged with a newly
formed wholly owned subsidiary of theglobe, DPT Acquisition, Inc.
In addition, theglobe agreed to repay obligations to certain of the
former stockholders of DPT totaling $600,000 immediately after the
closing of the transaction. Settlement consisted of a cash payment
of $500,000 and the issuance of $100,000 of promissory notes with
a two year maturity.
On July 2, 2003, theglobe completed a private offering of a newly
created series of preferred stock known as the "Series G
Automatically Converting Preferred Stock" for an aggregate
purchase price of approximately $8.7 million (the "Private
Offering"). The Private Offering was directed solely to investors
who are sophisticated and accredited within the meaning of
applicable securities laws, most of whom were not affiliates of
theglobe. The purpose of the Private Offering was to raise funds
for use primarily in theglobe's planned voiceglo business,
including the deployment of networks, website development,
marketing, and limited capital infrastructure expenditures and
working capital. Proceeds may also be used in connection with
theglobe's other existing or future business operations.
SUMMARY
In view of these matters, continuation of the Company as a going
concern is dependent upon the success of the Company's and
theglobe's management's ability to develop profitable operations
from the products and services. Management believes that the
actions presently being taken provide the opportunity for the
Company to continue as a going concern. However, there can be no
assurances that management will be successful in the
implementation of its plan, that future operations will be
profitable or that the Company will have adequate capital to
execute its plan.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2003 and
December 31, 2002, respectively:
Estimated Useful March 31, December 31,
LIVES (YEARS) 2003 2002
------------- ---- ----
(Unaudited)
Equipment 3 $35,737 $35,737
Software 3 13,015 13,015
------ ------
48,752 48,752
Less accumulated depreciation 4,637 2,599
-------- --------
$44,115 $46,153
======= =======
NOTE 4. DUE TO STOCKHOLDERS
Due to stockholders represents unsecured loans payable to certain major
stockholders of the Company. These notes are due on demand and bear
interest at 8.5% per annum. Interest on these loans of approximately
$9,800 and $5,300 for the periods ended March 31, 2003 (Unaudited) and
December 31, 2002, respectively, has been accrued and is included on
the accompanying balance sheets in accounts payable and accrued
expenses. The outstanding balance due to these stockholders was repaid
in connection with the acquisition of the assets and certain
liabilities of Direct Partner Telecom, Inc. (see Note 7).
NOTE 5. STOCK OPTION PLAN
The Company's 2003 Incentive Stock Option Plan (the "Plan") provides
for the granting of restricted stock, incentive stock options ("ISO's")
and nonqualified stock options to purchase shares of the Company's
common stock to officers, key employees, non-employee directors and
advisors. Under the terms of the Plan, the exercise price of options
granted shall be determined by the Board of Directors and for ISO's
shall not be less than fair market value of the common stock on the
date of grant, as defined. Options generally vest annually in equal
installments over a three year period. The expiration date of each
stock option shall be determined by the Board of Directors, but shall
not exceed 10 years from the date of grant.
Changes in outstanding options to acquire common stock are as
follows:
SHARES
------
Three Months Ended March 31, 2003 (Unaudited):
Options granted 20,000
------
Balance, March 31, 2003 20,000
======
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DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. STOCK OPTION PLAN (Continued)
The following table summarizes information about outstanding
options at March 31, 2003 (Unaudited):
Options Outstanding
-------------------------------------------------
Number Weighted
Outstanding Average
at Remaining
Exercise March 31, Contractual
PRICE 2003 LIFE
-------- ------------ -----------
$.75 20,000 10 years
==== ====== ========
No options were exercisable as of March 31, 2003.
On May 23, 2003, these options were mutually terminated in
connection with the Agreement and Plan of Merger (See Note 7).
NOTE 6. COMMITMENTS AND CONTINGENCIES
OPERATING AND CAPITAL LEASES
The Company does not have any material non-cancelable operating or
capital leases as of March 31, 2003 or December 31, 2002.
LEGAL MATTERS
The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of its business. In the
opinion of management, all such matters are without merit or
involve such amounts that an unfavorable disposition would not have
a material adverse effect on the financial position or results of
operations of the Company.
-13-
DIRECT PARTNER TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. SUBSEQUENT EVENT
Effective May 28, 2003, theglobe.com, inc. ("theglobe") acquired the
assets and certain liabilities of the Company in exchange for 1,375,000
shares of theglobe common stock and the issuance of warrants to acquire
500,000 shares of theglobe's common stock at an exercise price of $0.72
per share. The warrants are exercisable any time before May 23, 2013.
In addition, the former stockholders of DPT may earn additional
warrants to acquire up to 2,750,000 shares of theglobe common stock at
an exercise price of $0.72 per share if DPT achieves certain revenue
and earnings targets over approximately the next three years. The
warrants will also accelerate and be deemed earned in the event of a
"change of control," as defined in the Agreement and Plan of Merger.
Simultaneously with the acquisition, DPT was merged with a newly formed
wholly owned subsidiary of theglobe, DPT Acquisition, Inc.
In addition, theglobe agreed to repay obligations to certain of the
former stockholders of DPT totaling $600,000 immediately after the
closing of the transaction. Settlement consisted of a cash payment of
$500,000 and the issuance of $100,000 of promissory notes with a two
year maturity.
As part of the acquisition, theglobe entered into an employment
agreement with the Chief Executive Officer of DPT. The term of the
agreement is one year and automatically renews for an additional year
at expiration. The agreement also contains certain non-compete
provisions for a period of three years following the termination of the
Chief Executive Officer of DPT.
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