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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
May 11, 2000
Date of Report (Date of earliest reported event)
AMERINET GROUP.COM, INC.
(Exact name of registrant as specified in its chapter)
Delaware
(State or other jurisdiction of incorporation
000-03718
(Commission File Number)
11-2050317
(IRS Employer Identification No.)
Crystal Corporate Center; 2500 North Military Trail, Suite 225-C;
Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
(561) 998-3435
Registrant's telephone number, including area code
(Not Applicable)
(Former name or former address, if changed since last report)
Page 1
INFORMATION INCLUDED IN THE REPORT
ITEM 1. ACQUISITION OR DISPOSITION OF ASSETS.
On May 11, 2000, the Registrant completed the acquisition of all of the
capital stock (being 111 shares of common stock, $0.01 par value) of Lorilei
Communications, Inc., a Florida corporation engaged in the advertising and
television news production business). Lorilei was acquired by the Registrant in
a reorganization designed to comply with Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended (the "Code"), in exchange for:
* 572,519 shares of the Registrant's common stock, $0.01 par value per
share (the "Registrant's common stock"), issued in reliance on the
exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act") provided by Section 4(2) thereof; and
* Up to 572,518 additional shares of the Registrant's common stock to be
issued to the former stockholders of Lorilei during the period ending
on June 30, 2003, based on the following performance thresholds:
(1) If Lorilei attains earnings before interest, taxes,
depreciation and amortization, determined in accordance with
generally accepted accounting principles, consistently applied
("GAAP"), of at least $500,000 during the period starting on
July 1, 2000 and ending on June 30, 2001, then Lorilei's
former stockholders will be issued an aggregate of 114,504
additional shares of the Registrant's common stock;
(2) If Lorilei attains earnings before interest, taxes,
depreciation and amortization, determined in accordance with
GAAP, of at least $1,400,000 during the period starting on
July 1, 2001 and ending on June 30, 2002, then Lorilei's
former stockholders will be issued an aggregate 305,343
additional shares of the Registrant's common stock (including
the 114,504 that either were or could have been earned as of
June 30, 2001);
(3) If Lorilei attains earnings before interest, taxes,
depreciation and amortization, determined in accordance with
GAAP, of at least $2,900,000 during the period starting on
July 1, 2000 and ending on June 30, 2003, then Lorilei's
former stockholders will be issued all 572,518 of the
additional shares of the Registrant's common stock (including
the 305,343 that either were or could have been earned as of
June 30, 2002); however, all rights to any of the Registrant's
common stock not earned as of such date will thereupon expire.
(4) The additional shares of the Registrant's common stock were
reserved for future issuance immediately following the closing
and will be issued within 30 days after AmeriNet's audit for
the subject fiscal year confirming the calculations called
for.
In addition to consideration provided to the former Lorilei
stockholders for their Lorilei capital stock, the Registrant also agreed to:
* Invest up to $500,000 in Lorilei within 300 days after completion of
the reorganization and the filing of required reports with the United
States Securities and Exchange Commission (the "Commission"), and,
* To reserve an additional 335,378 shares of the Registrant's common
stock for future issuance through incentive stock options (as defined
in Section 422 of the Code) to be granted to Lorilei employees,
provided, however, that rights to such shares will vest on an annual
basis, subject to attainment of the following net, pre-tax profit
projections determined in accordance with GAAP:
(1) If Lorilei attains earnings before interest, taxes,
depreciation and amortization, determined in accordance with
GAAP, of at least $500,000 during the period starting on July
1, 2000 and ending on June 30, 2001, then the first 67,976
shares of the Registrant's common stock reserved for issuance
in the event of exercise of the subject incentive stock
options will vest;
Page 2
(2) If Lorilei attains earnings before interest, taxes,
depreciation and amortization, determined in accordance with
GAAP, of at least $1,400,000 during the period starting on
July 1, 2000 and ending on June 30, 2002, then all rights to
179,770 (including the 67,976 shares vested, if any, on June
30, 2001) of the shares of the Registrant's common stock
reserved for issuance in the event of exercise of the subject
incentive stock options will vest; and
(3) If Lorilei attains earnings before interest, taxes,
depreciation and amortization, determined in accordance with
GAAP, of at least $2,900,000 during the period starting on
July 1, 2000 and ending on June 30, 2003, then all rights to
all of the shares (including the shares vested, if any, on
June 30, 2001 and June 30, 2002) of the Registrant's common
stock reserved for issuance in the event of exercise of the
subject incentive stock options will vest.
(4) All rights to the incentive stock options in the subject
employment agreements that have not vested as of July 1, 2003
will expire on such date, and no further rights of any kind
thereto or to the underlying shares of the Registrant's common
stock reserved for such purpose will exist thereafter, the
reservation therefor terminating on such date.
(5) The vested incentive stock options will be exercisable during
the three fiscal year period after they vest at a price of
$1.3125 per share, provided that, as required by Code Section
422, all rights to or under the incentive stock options will
expire 90 days after termination of employment with Lorilei.
The exchange ratio for Lorilei's capital stock was determined by arms
length negotiation by the parties based on the approximate market price of the
Registrant's common stock during the period preceding May 11, 2000, the value
that Lorilei's management felt was reflective of its operating performance since
its inception, and the anticipated future value of Lorilei. The Registrant used
a formula of approximately eight times Lorilei's earnings during the year ended
on December 31, 1999, as the basis for its valuation. The use of contingent
consideration seeks to make the component of the valuation based on future
performance more objectively ascertainable.
The names of the former Lorilei stockholders are Gerald R. Cunningham,
who serves as Lorilei's president, chief executive officer, treasurer, chief
financial officer and a member of Lorilei's board of directors; and, Leigh A.
Cunningham, Mr. Cunningham's spouse, who serves as Lorilei's vice president,
secretary and as the other member of Lorilei's board of directors.. To the best
of the Registrant's knowledge, no material relationship existed between any such
person and the Registrant or any of its affiliates, any director or officer of
the Registrant, or any associate of any such director or officer.
No funds were used directly to acquire Lorilei, however, the Registrant
obtained the funds it used to provide Lorilei with the $100,000 in funding due
at closing through a loan from its strategic consultant, the Yankee Companies,
Inc., a Florida corporation ("Yankees").
Lorilei's assets include improved real estate held in fee simple,
television productio equipment, computers and other office equipment, leased
facilities and equipment and other physical property currently used in
conjunction with its business. Such use will be continued and Lorilei will
continue to be operated by its current management, unless it fails to meet at
least 70% of its operating projections.
Copies of the reorganization agreement, the employment agreements with
Lorilei employees and the related schedules and exhibits are filed as exhibits
to this current report (see "Item 7(c), exhibit Index"). See Item 5 for a more
complete description of Lorilei's business
ITEM 5. OTHER EVENTS.
MATERIAL INFORMATION CONCERNING LORILEI
The following information pertaining to Lorilei is provided under the
item numbers and captions of Commission Regulation SB:
Page 3
ITEM 503. SUMMARY INFORMATION AND RISK FACTORS
Summary Information
Lorilei Communications, Inc. operates under two trade names, The Firm
Multimedia, a full-service advertising agency, and Ocala News Tonight, a nightly
half-hour newscast. It was founded in 1993 as a Florida partnership doing
business under the fictitious name, "The Firm," and was incorporated as a
Florida corporation in July of 1994.
Gross sales in 1999 surpassed $1.5 million, with 1999 billings of
approximately $1.1 million and EBITDA of approximately $162,000. Lorilei
projects substantial sales increases, with a June 30, 2001 fiscal year billing
target of $2.5 million and an EBITDA target of $500,000. Lorilei projects
billings to exceed $5 million with EBITDA of $1.5 million in the fiscal year
ending June 30, 2003.
The Firm Multimedia is a division of Lorilei which operates as an
advertising agency offering full advertising agency services, including
consulting on marketing and advertising issues; graphic layout, design, and
printing; video and audio production; media planning and placement; internet
website design and website promotion; interactive CD-rom design; long and
short-form direct response television production; long and short-form direct
response placement; and, placement of long-form television programming under
commercial leased access FCC rules.
Lorilei's management intends to expand Lorilei's marketing and
advertising efforts and to expand its sales organization with regional sales
offices in major Florida and Southeastern United States cities, through
development of its commercial leased access abilities, and through acquisitions
of synergistic companies. Commercial leased access to cable systems is a segment
of communications law mandated by Congress in cable television deregulation.
Enforced through FCC rules, commercial leased access to cable systems affords
programmers not affiliated with the cable operator the opportunity of purchasing
minimum half-hour time increments in substantially better time periods than
offered through traditional commercial venues. The amount paid by the programmer
is regulated by the FCC. Lorilei intends to continue and expand its proprietary
database of cable systems nationwide, enabling Lorilei to offer commercial
leased access to cable systems as alternatives for direct response television
marketers, as well as other types of programers.
An example of other types of television programming that can be
established under commercial leased access to cable systems is Lorilei's
prototype local evening news program, Ocala News Tonight. Ocala News Tonight
debuted in January of 2000 and is produced by The Firm Multimedia. Ocala News
Tonight is a traditional news, weather and sports half-hour newscast available
to approximately 73,000 television households in Marion County, Florida. This
advertiser-supported program fills a local news niche left open by Orlando and
Gainesville, Florida broadcasters that cover a very wide geographic area and are
unable to devote either airtime or personnel to adequately cover all market
segments within their service area . Viewers of Ocala News Tonight receive
information not available elsewhere. Lorilei expects to use Ocala News Tonight
as a prototype for additional news operations in additional markets.
Address and Telephone Number
Lorilei's principal offices are located at 7325 Southwest 32nd Street;
Ocala, Florida 34474; however, its mailing address is Post Office Box 770787;
Ocala, Florida 34477. Its main telephone number is (352) 861-1350 and its
general fax number is fax (352) 861-1339. Lorilei's general e-mail address is
thefirm@callthefirm.com, but e-mail to Lorilei's officers can be sent directly
to gerry@callthefirm.com. Websites for Lorilei's two divisions are located at
http://www.callthefirm.com (The Firm Multimedia) and
http://www.ocalanewstonight.com (Ocala News tonight).
Risk Factors
The statements contained in this report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including without limitation statements regarding Lorilei's expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this document are based on information available to
Lorilei on the date hereof. The forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause actual results,
experience and the performance or achievements of Lorilei to be materially
different from those
Page 4
anticipated, expressed or implied by the forward-looking statements. In
evaluating Lorilei's business, the following factors, in addition to the risk
factors set forth below and other information set forth herein, should be
carefully considered: successful deployment and integration of systems; factors
affecting internal growth and management of growth; success of marketing,
integration and operational initiatives, including Internet marketing
initiatives; dependence on technology; labor and technology costs; cost and
availability of advertising and promotional efforts; success of the acquisition
strategy and availability of acquisition financing; success in entering new
segments of the advertising industry and new geographic areas; dependence on
commercial leased access rules; risks associated with the advertising industry
generally; seasonal and quarterly fluctuations; competition; and general
economic conditions. In addition, Lorilei's operating strategy and growth
strategy involve a number of risks and challenges, and there can be no assurance
that these risks and other factors will not have a material adverse effect on
Lorilei.
Management of Growth; Factors Affecting Internal Growth.
Lorilei expects to grow internally through increase in number of sales
offices, news operations, and national sales. Lorilei expects to spend
significant time and effort implementing these endeavors. There can be no
assurance that Lorilei's systems; procedures or controls will be adequate to
support Lorilei's operations as they expand. Any future growth will add
significant responsibilities on members of senior management, including the need
to identify, recruit and integrate new senior level managers and executives.
There can be no assurance that such additional management will be identified or
retained by Lorilei. To the extent that Lorilei is unable to manage its growth
efficiently and effectively, or is unable to attract and retain qualified
management, Lorilei's business, financial condition and results of operations
could be materially adversely affected. While Lorilei has experienced revenue
and earnings growth thus far in its history, there can be no assurance that
Lorilei will continue to experience internal growth comparable to historic
levels, if at all. Factors affecting the ability of Lorilei to continue to
experience internal growth include, but are not limited to, business acceptance
of Lorilei's services, the ability to sell advertising time to support its news
operations, the ability to recruit and retain qualified sales personnel and
continued access to capital.
Risks Related to Lorilei's Acquisition Strategy.
Acquisitions involve a number of special risks, including possible
adverse effects on Lorilei's operating results, diversion of management's
attention, loss of key personnel, risks associated with unanticipated events or
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on Lorilei's business, financial condition,
and results of operations. Customer dissatisfaction or performance problems at a
single acquired company could have an adverse effect on the reputation of
Lorilei. Further, there can be no assurance that businesses acquired will
achieve anticipated revenues and earnings. To the extent that Lorilei intends to
increase its revenues, expand the markets it serves and increase its service
offerings through the acquisition of additional companies, there can be no
assurance that Lorilei will be able to identify, acquire, or profitably manage
additional businesses or successfully integrate acquired businesses into Lorilei
without substantial costs, delays or other operational or financial problems.
Increased competition for acquisition candidates may also develop, in which
event there may be fewer acquisition opportunities available to Lorilei, as well
as higher acquisition costs. As of the date of this report, Lorilei is not party
to any binding agreements with respect to any acquisition.
Risks Related to Acquisition Financing and Possible Need for Additional Capital
Lorilei plans to finance future acquisitions by using shares of
AmeriNet's common stock ("AmeriNet Stock") for all of the consideration to be
paid. In some cases, however it is probable that Lorilei could be required to
make cash investments in the acquired businesses, as AmeriNet is making in
Lorilei. Lorilei would be charged against earnings for any AmeriNet Stock used
to effect acquisitions, consequently, it must take care to assure that the
benefits of the acquisitions exceed the costs of the AmeriNet Stock used as
consideration and the cash investment required, if any. In the event that the
AmeriNet Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept AmeriNet Stock as
consideration for the sale of their businesses, Lorilei may be required to use
more of its cash resources, if available, in order to maintain its acquisition
program. If Lorilei has insufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity financing.
There can be no assurance that AmeriNet will make required capital available or
that other financing will be available on terms Lorilei deems acceptable. If
Lorilei is unable to obtain financing sufficient for all of its desired
acquisitions, it may be
Page 5
unable to fully implement its acquisition strategy. In addition, to maintain
historical levels of growth, Lorilei may need to seek additional funding.
Adequate funds for these purposes may not be available when needed or may not be
available on terms acceptable to Lorilei. If funding is insufficient, Lorilei
may be required to delay, reduce the scope of or eliminate some or all of its
expansion programs.
Dependence Upon Technology
Lorilei's business is currently dependent upon computer-based
technology in order to produce the majority of its services. Because
technological change has been extremely dynamic, technological obsolescence has
become an increasingly important factor when making capital expenditures. No
assurances can be provided that the state of the arts systems used by Lorilei
will remain state of the art for a period sufficient to amortize their
expenditure. Lorilei's strategy is to incrementally add equipment piece by piece
to its operations as prices for new technology decrease and as production demand
increases, so as to consistently add new, better, faster computers, cameras,
scanners, etc. to its available equipment inventory. There can be no assurance,
however, that new advances in technology will not hasten the obsolescence of
Lorilei's equipment, resulting in additional necessary capital expense which
could be substantial. In this event Lorilei's management envisions the
utilization of leases, financing, or an additional capital investment in order
to satisfy these requirements.
Equipment required to establish anticipated news operations in each
additional market will cost approximately $200,000.
Risks Associated with the Advertising Industry; General Economic Conditions
Lorilei's results of operations are dependent upon factors generally
affecting the advertising industry. Lorilei's revenues and earnings are
especially sensitive to events that affects businesses' plans to expand into new
markets, develop marketing plans for new products or services, or seek new
streams or revenue. A number of factors could result in the overall decline in
demand for advertising including a decline in general economic conditions,
extreme weather conditions, armed hostilities, or excessive inflation. These
type of events could have a material adverse effect on Lorilei's business,
financial condition and results of operations.
Reliance on Key Personnel
Lorilei's operations are dependent on the efforts, experience and
relationships of Gerald R. Cunningham, Leigh A. Cunningham and Lorilei's other
essential staff. Furthermore, Lorilei may become dependent on the senior
management of businesses acquired in the future. If any of these individuals are
unable to continue in their roles, Lorilei's business or prospects could be
adversely affected. Although Lorilei has entered into an employment agreement
with each of its executive officers, there can be no assurance that such
individuals will continue in their present capacity for any particular period of
time.
Reliance on Existing FCC Rules
Lorilei relies on FCC rules mandated by Section 612 of the 92 Cable Act
in order to gain access to cable systems. If that statute is repealed or
modified by Congress, or in the event the FCC alters its rules on leased access,
Lorilei's business, financial condition and results of operations could be
adversely effected.
Control by Existing Management
Pursuant to the terms of the reorganization agreement between Lorilei
and AmeriNet, Lorilei's current management will have the right to elect a
majority of the members of its board of directors for the foreseeable future
unless Lorilei fails to attain at least 70% of its EBITDA projections. Such
requirement may prevent or delay AmeriNet from taking actions to correct
problems with Lorilei's management and such inability may materially impair
Lorilei's operations.
Page 6
ITEM 101. DESCRIPTION OF BUSINESS
Overview
Lorilei Communications, Inc., a Florida corporation ("Lorilei"), was
organized in July of 1994 by Gerald R. Cunningham, its current president, and
Leigh A. Cunningham, its current secretary and treasurer. Lorilei is the
successor to a Florida general partnership doing business as "The Firm."
Lorilei is a full-service advertising and marketing company doing
business under the fictitious name "The Firm Multimedia" which is registered
with the Florida Department of State. As the term "multimedia" (a combination of
text, data, sound, graphics, photography, animation, motion pictures, computer
software and additional newly evolving elements) infers, Lorilei offers an array
of advertising and marketing services including in-house production of video,
audio, internet authoring, interactive CD-Rom, graphics, and pre-press. Lorilei
believes that its principal target clientele is comprised of companies wishing
to enter the direct response and e-commerce markets, although it also targets
traditional "image" advertisers.
Lorilei was formed to provide incremental advertising services to
regional and local advertisers and marketers based on Lorilei's competitive
advantages in speed, quality and price. Such advantages are made possible by
Lorilei's use of new, lower cost technology, to provide competitively priced
production services in-house, unlike larger advertising agencies and marketing
companies which subcontract most of their production.
Lorilei has become a national leader in providing its clients with
commercial leased access to cable systems and has been instrumental in the
formulation of Federal Communications Commission ("FCC") rules regulating that
aspect of the cable industry. Under the applicable FCC rules, the cost of
commercial leased access to cable systems is determined by the FCC's "implicit
fee" formula plus actual costs of tape playback or satellite reception (rates
significantly lower than those charged by broadcast television). Through a
proprietary database developed by Lorilei over a four-year period, it has the
ability to place its client's television programs on virtually any cable
television system in the United States at reduced rates for periods ranging from
half an hour to full time station access.
During January, 2000, Lorilei started a venture under the trade name
"Ocala News Tonight." Ocala News Tonight is a half-hour advertiser-supported
television news program featuring local news, weather and sports, cablecast six
days per week at 6:30 PM and again at 10:30 PM to approximately 73,000 cable
households in the Marion County, Florida area. Using efficiencies in desktop
video, and new technological innovations in "prosumer" cameras, this concept
allows television news to be produced at a much lower cost than was previously
possible, allowing for profitability on a community basis. Like numerous other
geographically distinct local consumer markets throughout the United States,
although part of a regional television area of dominant influence (an FCC
concept generally referred to as an "ADI"), Marion County receives very little
local television news coverage from broadcast television outlets within the ADI
(the Orlando, Florida television ADI ). Ocala News Tonight is the prototype of a
concept Lorilei intends to replicate as a solution to "under-coverage" for
market areas with similar characteristics across the nation.
Lorilei maintains websites under each of its trade names. The Firm
Multimedia website features video and audio clips illustrating Lorilei's work as
well as examples of graphic design and links to authored websites. Lorilei's
website is a major source of client lead generation. Ocala News Tonight also has
a website used primarily as an interactive focal point for the viewing audience.
It includes content updated on a daily basis with highlights from the newscast
as well as viewer opinion polls. Advertising is accepted and actively solicited
for the Ocala News Tonight website.
Industry
Domestic advertising expenditures were estimated at $308.9 Billion in
1999. Of this sum, 57.1% or $176.5 Billion was devoted to some form of direct
marketing, up 7.2% over 1998. The market for direct marketing overall is highly
fragmented across direct mail and telephone marketing which account for about
half of the total, however direct response television (DRTV), a $20.4 Billion
market, is a much less fragmented segment and is growing at a faster pace
Page 7
than direct marketing overall. DRTV expenditures increased by 58% in the period
1994-1999 versus overall direct marketing which increased by 46%.
According to Bear Stearns E-volve report, $1.5 trillion in goods and
services are expected to be sold over the Internet by 2003. The same Bear
Stearns report estimates that spending on Internet infrastructure tools will
expand from $600 million in 1999 to over $4 billion by 2003. DRTV predates the
Internet in enabling consumers to purchase goods and services directly from the
manufacturers and providers and Lorilei's management believes that it is a
natural means of converting television viewers into effective website browsers
by introducing the website and demonstrating its operative features and
abilities. Lorilei's management believes that as pressure by consumers for
increased bandwidth to access the Internet is met, video in DRTV format via the
Internet using interactive application software already available, will provide
Lorilei with materially increased opportunities to expand its operations in that
genre.
Business
Geographic Coverage
Lorilei offers its general advertising services throughout the United
States, however, at present, advertising clients on its local news programs are
local to the cablecast area. Clients of its "The Firm Multimedia" division
outside the Central Florida production area are easily communicated with by
Internet, fax, courier, in-person sales calls and in some cases, non-local
client visits to Lorilei's offices. As described above, Lorilei intends to
materially expand its physical geographic presence by adding additional sales
offices, first in Florida, then regionally and nationally.
Ocala News Tonight clients are primarily located in Marion County, Florida.
As additional news markets are added the clients for each news operation will
also primarily be located in the community of service. However, it is not
unlikely that national clients may also become interested in the efficient
advertising options available through local cablecasts. Sales facilities for The
Firm Multimedia will be co-located with each news facility, including field
content acquisition support personnel where practical. Raw content will be
shipped or transmitted from all commercial field production operations to the
Ocala production facility for post-production.
E-Commerce
Lorilei provides clients with a turn-key e-commerce approach by both
authoring websites and providing marketing and advertising services to drive
traffic. Lorilei also provides clients with consultative advice covering a wide
range of issues including domain names and registration, input on competitive
content items such as pricing, placement, inventory, target marketing, and
demographic, qualitative and perceptual customer research.
Lorilei uses state of the art software including "Flash" "Shockwave"
and Quicktime video to author client websites with rich content. Each website is
custom-authored according to the client's specifications and may include
specialized applications, including database access. Lorilei believes rich
content websites, including sites featuring video and audio, will become a
critical component in commercial website development as competition on the
Internet continues to drive more complex websites.
Lorilei does not currently host its clients' websites, however, it
intends to either refer hosting to other AmeriNet subsidiaries or to form a
joint venture with other AmeriNet subsidiaries to develop state of the art
hosting capabilities with geographically dispersed sites, permitting additional
safety in the event of local power problems or emergencies. Lorilei will also
seek to develop joint ventures with other AmeriNet subsidiaries for development
of Internet access services, initially to specialized groups but depending on
the level of acceptance, technological developments, perceived demand and
cross-marketing opportunities, may determine that expansion of such services to
the general public may be appropriate.
Channel Leasing
Lorilei pioneered the use of channel leasing options mandated by
federal cable deregulation legislation through petitions filed with the FCC and
has played a major role in shaping the rules under which channel leasing is
available
Page 8
(see "Lorilei" at www.fcc.gov). Lorilei developed and operates a proprietary
database of cable systems that features the ability to accurately quote rates,
household counts, and in some cases channel position in individual systems'
programming. No other company that Lorilei is aware of currently operates a
comparable system. Lorilei intends to continue development of the database by
increasing the quantity, quality and timeliness of available information and to
market such capabilities aggressively in order to establish a public
identification of related services with Lorilei's "The Firm Multimedia"
division.
Channel leasing is available on a part-time and full-time basis (up to
the set-aside capacity of the cable system involved). Under current FCC rules, a
cable operator must make an unused channel available for use by a programmer
committing to at least eight hours of daily programming for a one-year period.
While Lorilei has focused on part-time channel leasing, its management believes
that sufficient demand currently exists in many areas for full-time channel
leasing services to larger advertisers and marketers and intends to aggressively
explore such opportunities.
With the advent of the Internet, large companies are altering customer
prospecting strategies to take advantage of its interactive 24 hours a day,
seven days a week ("24/7") capabilities as a portal to connect with prospects
and customers. A principal limiting factor at present is the absence of adequate
bandwidth to service demand. Bandwidth limitations are expected to continue
hampering commercial use of the Internet for the foreseeable future as growth in
Internet users, program sizes and transmission rates continues to exceed
transmission capacity. Because business attention has been directed by the
Internet to non-traditional means of communication, Lorilei believes that
significant opportunities are developing for alternative methods of broad-scale,
low-cost communication with consumers and that channel leasing is a viable
alternative. Consequently, Lorilei intends to increase awareness of channel
leasing in general and of Lorilei's special channel leasing capabilities and
experience in particular. If successful, Lorilei believes that channel leasing
activities could have a substantial impact on its profitability and that even
one full-time channel leasing client in a moderate number of markets could
materially increase current projections for both gross revenues and net profit.
DRTV
Lorilei offers a comprehensive solution for direct response television
marketers including concept, scripting, infomercial and spot production, media
planning and placement, and an array of direct response-related graphics
services.
The fact that Lorilei offers a wide array of services through in-house
facilities and staff sets it apart in the DRTV industry and is a significant
competitive advantage for those clients seeking turn-key solutions Consequently,
most of Lorilei's clientele has been direct, rather than agency business.
While most half-hour infomercial time is limited to overnights, early
mornings and other time slots that are deemed non-productive for revenue
purposes by broadcasters and cablecasters due to the low number of viewers;
Lorilei has developed contacts at major cable networks and broadcast stations,
and has the ability to buy airtime competitively on a supply and demand basis.
Lorilei's purchase of half-hour airtime in prime-time viewing hours through
channel leasing on a market-targetable basis gives it a primary niche in the
DRTV business. Lorilei's management believes that channel leasing is highly
profitable because FCC regulations mandate prices fixed according to an FCC
formula rather than permitting them to float with supply and demand. Lorilei
intends to continue to expand the DRTV, channel leasing segment of its business
by increasing:
* Advertising agency and buying-service awareness of Lorilei's capabilities
* Business with the DRTV trade; and
* Direct to client business.
B2B Business Opportunities
Lorilei's management believes that a wealth of potential business
exists in the business to business (commonly referred to as B2B) Internet
website promotion and operation area. Lorilei personnel are encountering a
surprising number of relatively large companies with websites but without an
Internet strategy. Those companies that intend to
Page 9
compete effectively in the business to business sales environment will
eventually be compelled to develop effective Internet strategies, either through
costly internal development and maintenance of in house staffs or through
reliance on the more cost effective, less capital intensive and less
technologically obsolescent alternative of firms such as The Firm Multimedia for
ongoing outsourced assistance. Lorilei believes that it offers clients in the
B2B arena comprehensive advantages by having the centralized, in house capacity
to develop required strategies, develop required materials and articulate
required messages in multiple media. Thus, while not having the internal
centralized responsiveness of a captive, in house, full service department,
Lorilei's clients will not be subject to the diffusion of responsibility that is
inherent in use of multiple, one dimensional outside sources (e.g., absence of
coordination and ease in shifting responsibility to unrelated partes).
Because of the price advantages inherent in business through cyberspace
(materially reduced facilities, personnel costs, utility and inventory costs),
traditional facility oriented businesses (now commonly referred to as brick and
mortar retailers) will be forced to seek non-traditional revenue streams in
order to maintain their existing clientele as well as to compete with new
business opportunities generated by e-retailers. Based on Lorilei's experience,
one of the best ways to establish a productive B2B presence is through
development of a versatile, user friendly, interactive e-commerce website
supported with DRTV resulting in telephone sales as well as sales through the
Internet website.
Local News Programming
Lorilei's experience in channel leasing and its existing studio
facilities, equipment and technology (including desktop video and high quality
prosumer cameras available through The Firm Multimedia division) provided
Lorilei with the opportunity to produce a prototype, nightly
advertiser-supported news program dedicated to a targeted geographic area,
similar to the familiar news, weather and sports format used by most local
broadcast television stations, without a large capital investment.
The prototype program, Ocala News Tonight, is a network of four cable
systems produced six days per week and airing twice nightly, at 6:30 PM and
10:30 PM to over 73,000 households in the Marion County, Florida area. The
criteria that Lorilei expects to use to determine whether additional areas are
viable includes market composition, market geography, market identity, presence
of local television news coverage, available advertising revenues (estimated as
a percentage of total retail sales), and cable television penetration. Lorilei
chose Marion County, Florida as the prototype for the concept because the Marion
County area met such guidelines (i.e., it had a local identity apart from either
Orlando or Gainesville, sufficient retail sales to provide a local advertiser
base, and adequate cable television penetration) and because production
operations were already in place. While the area is part of the Orlando
television market it receives very little local news coverage from the Orlando
stations, and minimal coverage from Gainesville stations located 35 miles away.
Due to its distance from Orlando and Gainesville, and with the Gainesville
market's strong identity with the University of Florida, it appeared unlikely
that any television station from either area would make a concerted effort to
compete with the program.
Management has identified two expansion markets for the concept and
expects to launch the first additional operation in July, 2001, with the second
additional operation coming online in July, 2002. Beginning in July, 2003,
Lorilei intends to launch two additional operations per year for the next three
years.
Sales and Marketing
Lorilei uses a mix of marketing tools, including an infomercial
produced to generate business to business leads, direct mail, telemarketing,
trade and business publication print, Internet advertising, trade show displays
and participation in competitive, award granting events. It has used a
combination of inside and outside sales representatives in the past for The Firm
Multimedia and intends to expand the use of inside sales representatives in two
areas (1) to support outside sales with appointment setting, and (2) to sell
DRTV to dot com and e-commerce companies and the DRTV trade. In the past, The
Firm Multimedia employed generalist-type sales professionals, expending
considerable time in training the person to represent Lorilei's many services.
Management now feels that its sales require sales professionals proficient in
four major specialty areas: Print graphics, DRTV and Video, Internet and
e-commerce, and Agency services. Under its current marketing plan, Lorilei will
generate specific leads in one of its specialty areas and, using a consultative
selling approach, will identify other specialty areas where it might be of
service. It will then allocate leads among its sales
Page 10
personnel based on their compatibility with the potential client and its
requirements at the appropriate time. Management believes this approach will
result in less training time and higher sales revenues.
Ocala News Tonight uses outside sales representatives who call on local
business. Direct mail and on-air advertising solicitation, as well as
telemarketing by the outside representatives is used to generate leads. Lorilei
intends to expand its field sales offices to include locations in South Florida,
Tampa Bay, and Atlanta in the near term. Field sales offices will also be
co-located with additional Ocala News Tonight-type news operations.
Competition
The advertising industry is highly fragmented with low entry barriers
to establishment of an advertising agency. Advertising production is also
competitive, however capital costs for equipment and facilities are a
significant barrier to entry. Lorilei competes with other advertising agencies,
television and radio stations, other direct response television companies, cable
television providers and television broadcasters. Lorilei competes for customers
based on service, price, quality, specialized in-depth knowledge, and
creativity. Most DRTV competitors are located in Western states, making West
coast-based business a more difficult competitive challenging.
Many potential competitors have access to substantial capital, physical
and personnel resources and established reputations (e.g., national television
networks, cable companies, advertising agencies and public relations firms) with
which Lorilei can compete only by providing innovative services at reduced
prices.
Governmental Regulation
General
Lorilei will be subject to applicable provisions of federal and state
securities laws, especially with reference to periodic reporting requirements
and, the operations of Lorilei are subject to regulation normally incident to
business operations (e.g., occupational safety and health acts, workmen's
compensation statutes, unemployment insurance legislation and income tax and
social security related regulations).
Because Lorilei is subject to regulation in every state and country in
which it transacts business and because government regulation tends to be
extremely dynamic, Lorilei will have to carefully monitor current and proposed
legislation in order to continuously comply therewith. There can be no assurance
that Lorilei's operations will always be in compliance with applicable
governmental regulation and in the event that it fails to comply with applicable
regulatory requirements, its activities may be curtailed and it may be exposed
to fines and adverse publicity. In any such event, Lorilei's business could be
detrimentally affected.
Required Government Approvals for Products or Services
Advertising
Based on First Amendment protections, most of Lorilei's advertising
activities are not subject to pre-approval by government agencies; however, its
activities are subject to government imposed repercussions in the event that its
materials are materially inaccurate, libelous or violate government policies.
Such after the fact regulation is provided federally through the FCC, the
Federal Trade Commission (the "FTC"), the United States Department of Justice
and the United States Securities and Exchange Commission (the "SEC"). Similar
agencies regulate Lorilei's activities on a state level. In addition to
governmental agencies, Lorilei is a voluntary member of numerous industry and
trade associations on a national, state and local basis, many of which have
codes or standards of conduct to which members are expected to adhere.
Cable
Lorilei's success is dependent in part on the existence of federal
regulations which require cable operations to lease cable access at low rates
pursuant to FCC rules promulgated under the Cable Television Consumer Protection
Page 11
Act of 1992 (the "1992 Cable Act"). A change in the 1992 Cable Act or the
regulations promulgated thereunder could significantly impair Lorilei's ability
to successfully compete against larger advertising companies.
The statutory framework for commercial leased cable access was
established by the Cable Communications Policy Act of 1984 (the "1984 Cable
Act") and amended by the 1992 Cable Act. The 1984 Cable Act established leased
access to unused channel capacity of cable systems by parties unaffiliated with
the cable operator that wanted to distribute video programming free from
editorial control by the cable operator. Channel set-aside requirements were
established in proportion to a system's total activated channel capacity in
order to assure that the widest possible diversity of information sources were
made available to the public by cable systems in a manner consistent with the
growth and development of cable systems. A cable system operator was permitted
to use any unused leased access channel capacity for its own purposes until such
time as a written agreement for a leased channel use was obtained. Each system
operator subject to such requirements was to establish the "price, terms, and
conditions of such use which were to be at least sufficient to assure that such
use would not adversely affect the operation, financial condition, or market
development of the cable system. The only exception to the leased commercial
access channel set-aside under the 1984 Cable Act was that up to 33% of a
system's designated leased commercial access channel capacity could be used for
qualified minority or educational programming from sources affiliated with the
operator.
The 1992 Cable Act amendments broadened the statutory purpose to
include "the promotion of competition in the delivery of diverse sources of
video programming" and the FCC was provided with expanded authority: (1) to
determine the maximum reasonable rates that a cable operator could establish for
leased access use, including the rate charged for the billing of subscribers and
for the collection of revenue from subscribers by the cable operator for such
use; (2) to establish reasonable terms and conditions for leased access,
including those for billing and collection; and (3), to establish procedures for
the expedited resolution of leased access disputes. The legislative history of
the 1992 amendments expressed concern that some cable operators may have
established unreasonable terms or may have had financial incentives to refuse to
lease channel capacity to potential leased access users based on
anti-competitive motives, especially if the operator had a financial interest in
the programming services it carried.
Any person aggrieved by the failure or the refusal of a cable operator
to make commercial channel capacity available or to charge rates as required by
FCC rules may file a petition for relief with the FCC within 60 days of the
alleged violation. In order to enforce its rights under the 1992 Act, Lorilei
has filed a number of such petitions with varied results. In order to merit
relief, the petition must show by clear and convincing evidence that the
operator violated the leased access statutory or regulatory provisions or
otherwise acted unreasonably or in bad faith. Relief may be in the form of
refunds, injunctive relief or forfeitures. The FCC encourages parties to use
alternative dispute resolution procedures such as settlement negotiation,
conciliation, facilitation, mediation, fact finding, mini-trials and
arbitration. The 1992 Cable Act provides for both judicial and FCC review of
leased commercial access disputes.
Effect of Existing or Probable Governmental Regulations on the Business
Lorilei is subject to regulation by the FCC, the Federal Communications
Commission, the Justice Department, the SEC, and by comparable state agencies.
The costs of monitoring and complying with existing regulations is
expensive and time consuming. Lorilei's management is required to expend
significant resources to obtain required regulatory clearance and the delays
incident thereto have and are expected to continue to deprive Lorilei of
significant opportunities. However, because such regulations also apply to
Lorilei's competitors, they merely tend to make all participants in the industry
less effective, rather than to affect Lorilei's competitive business posture.
More importantly, FCC regulations are actually a benefit to Lorilei's
operations since access requirements and pricing controls make Lorilei
competitive with vastly larger organizations. The absence of such regulations
would have a materially adverse impact on Lorilei's business.
Page 12
Estimate of the Amount Spent During Each of the Last Two Fiscal Years on
Research and Development Activities, and if Applicable the Extent to Which the
Cost of Such Activities are Borne Directly by Customers
During the last two years, Lorilei has expended approximately $8,200 in
research and development activities. Such expenses are passed along to the
public indirectly in the form of components of Lorilei's pricing decisions. The
bulk of the research and development activities involved production of local
news programs and activities with the FCC designed to assure access to unused
cable system channel capacity.
Costs and Effects of Compliance with Environmental Laws(Federal,State and Local)
To the best of management's knowledge, Lorilei will not be required to
directly incur material expenses in conjunction with federal, state or local
environmental regulations, however, like all other companies, there are many but
incalculable indirect expenses associated with compliance by other entities that
affect the prices paid by Lorilei for goods and services.
Employees
As of April 1, 2000, Lorilei had 20 full time employees and 3 part-time
employees. Lorilei requires that all full-time employees sign a non-competition
and confidentiality agreement as a condition of employment. No employee
contracts currently exist (except for agreements with Lorilei's executive
officers) and all employment is at will. No employees are currently represented
by an labor unions. Lorilei believes its relations with employees to be good,
however additional employees will need to be recruited to meet its growth
projections. Management believes that required personnel can be recruited on
acceptable terms from the large, technically and professional pool in the Marion
and Alachua county regions of Florida, at very favorable rates.
Lorilei anticipates adding up to ten additional staff members in the
near future, primarily in sales, marketing and support functions.
ITEM 102. PROPERTIES
Operations Facilities
Lorilei's principle place of business is located at 7325 Southwest 32nd
Street, Ocala, Florida, 34474. This is an industrial park type setting where the
other businesses are warehouse or light manufacturing businesses. The building
is approximately 5,000 square feet in total space, with 3,500 square feet
devoted to office and production space and 1,500 square feet devoted to studio
space. All space is air-conditioned and heated. The property is encumbered by a
first mortgage in the original principal amount of $194,000 in favor of Small
Business Loan Source. The loan bears interest at the rate of 11.75% per annum
and is payable over a term of 25 years. The property is in the opinion of
Lorilei's management adequately covered by insurance.
Management believes the current facility to be adequate for anticipated
growth through the 2003 fiscal year. Management cannot, however, guarantee that
the square footage will be sufficient for all production operations. Additional
construction or additional leased space could be required, either of which could
result in additional unanticipated expense.
Sales Offices
Lorilei leases field sales offices in Jacksonville and Orlando,
Florida, and intends to open additional offices in the Tampa Bay and Boca Raton,
Florida areas within the year 2000. As part of such expansion, additional sales
offices in targeted major cities are contemplated. Rental costs for such
additional space is expected to be minimized through use of "office suite" type
space that can be expanded if justified by sales volume. If sales volume becomes
substantial in a given metropolitan area it could require considerably more
square footage in leased office space than has been projected.
Page 13
Foreign Locations
Lorilei does not have any material portion of its assets, operations or
customers located outside of the United States. Substantially all of Lorilei's
revenues are from customers within the United States, where all of Lorilei's
services are provided.
ITEM 103. LEGAL PROCEEDINGS
Lorilei is not a party to any pending legal proceedings. However,
Lorilei presently owes real estate taxes to Marion County, Florida and personal
property taxes to the State of Florida in the approximate, aggregate amount of
$10,272.20. Lorilei has also declined to pay $21,420 to Home and Garden
Television ("HGTV") pending confirmation of sums due based on Lorilei's belief
that advertising time slots purchased were not provided.
ITEM 201. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No market exists for Lorilei's common stock. Lorilei has never had more
than three stockholders, with AmeriNet being its sole current stockholder.
Despite having been taxed as an S corporation for federal income tax purposes
until it was acquired by AmeriNet, Lorilei did not pay dividends during 1998,
1999 or 2000.
Lorilei has never had any outstanding options, warrants or convertible
securities; its securities have never had a public market; and, it has never
agreed to register its securities with the SEC or any comparable state agencies.
ITEM 202. DESCRIPTION OF SECURITIES
Lorilei's Articles of Incorporation, as amended, authorize it to issue
2,000 shares of common stock, $0.01 par value per share. As of the date of its
acquisition by AmeriNet, 111 shares of common stock were outstanding. This
description of the capital stock of Lorilei is qualified by and subject to the
Florida Business Corporation Act and Lorilei's Articles of Incorporation and
By-laws, copies of which are filed with the SEC as exhibits to AmeriNet periodic
reports.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders and have no cumulative voting
rights. Holders of common stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the board of directors out of
funds legally available therefor. In the event of liquidation, dissolution, or
winding up of Lorilei, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock offered hereby will also be fully paid and nonassessable.
The Articles also recognize the obligation of Lorilei's stockholder, AmeriNet
Group.com, Inc. to elect members to Lorilei's board of directors in the manner
reflected in the reorganization agreement between Lorilei and AmeriNet.
Lorilei has issued one promissory note for $46,143 to John B. LaTorraca
which bears interest at the rate of 8.5% per annum on which a total of
$51,084.16 is presently owed.
ITEM 303. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis
Lorilei provides client businesses with advertising and marketing
services. Lorilei's services include creative production and placement in both
new and old media. Lorilei believes that its ability to place half-hour
infomercials on cable television in prime-time through commercial leased access
will enable it to offer direct response television services to a majority of
companies striving to drive e-commerce business. In 1998, Direct Response
Magazine reported that $844 million ($844M) was spent on television infomercials
which contributed to generating over $759 billion ($759B) in consumer spending.
By way of comparison, industry authority International Data Corporation (IDC)
estimates that consumers will purchase only $16 billion ($16B) in goods from
the Internet in 2000. The e-commerce market is projected to hit $3.2 Trillion
($3.2T) by 2004 in North America (Forrester Research).
Page 14
Revenues
Lorilei classifies classify revenues into the following major
categories: commission and retainer, Video production, Graphics, Web, and
Commercial Leased Access and Spot Airtime. The following discussion does not
include revenues for a new 2000 category, News.
The principal factors that propel Lorilei's revenues are detailed
below.
Commission and retainer revenue:
Income from traditional commissioned advertising agency time and space
business as well as advertising agency monthly retainers, promotions
and public relations.
Video production revenue:
Includes income from both video and audio projects, including brokered
duplication.
Graphics revenue:
Income from all graphics projects including traditional layout and
design, brokered printing, pre-press as well as new media-related
projects such as animation.
Website revenue:
Includes income from website design, maintenance, hosting, and
interactive projects.
Commercial Leased Access and Spot and program airtime revenue:
Income from brokered time sales (as contrasted with traditional
advertising agency 15% commission on time and space purchases).
Lorilei news programming will generate revenues from advertising sales
beginning in 2000. They are expected to increase materially as new market
operations are incrementally rolled out. The initial operation is based at
Lorilei's Ocala, Florida headquarters.
Lorilei expects commission and retainer income to decrease throughout
the advertising industry as businesses seek broader solutions to advertising and
marketing challenges. Lorilei intends to anticipate this trend and to replace
the related income with project income in the other revenue driver categories.
Lorilei expects video production income to increase due to Lorilei's
expanding direct response television business and increased demand fueled by
web-based video applications. Graphics income will vary in relation to Lorilei's
client mix during given fiscal periods, with printing income expected to be the
major variable. Print-intensive clients can have a large impact on this revenue
driver. Lorilei's goal is to seek these types of clients and to complement their
use of print with electronic media opportunities, while servicing their core
advertising media requirements.
Web-based revenue is expected to increase dramatically as Lorilei's
Internet hosting capacity increases and it implements new Internet related
business plans, including development of:
* The 15C2-11 websites (originally allocated by AmeriNet to WRI);
* A joint venture with other AmeriNet subsidiaries for website hosting
services;
* A joint venture with other AmeriNet subsidiaries for Internet access
("ISP") services; and
* "Webcasting" capacity.
Commercial leased access and spot and program airtime revenues are
expected to dramatically increase in the coming years as more businesses
discover direct response television and as the trend toward tightening of
infomercial availabilities directly through cable networks increases
(e.g., Turner Broadcasting's recent decision to stop making half-hour time slots
available).
Page 15
Cost of Goods and Services
Costs are classified with their related revenue stream. The major
factors (exclusive of labor) associated with Lorilei's costs are listed below:
Printing Costs Associated with Graphic Print Jobs:
Costs associated with graphic print jobs are film output, film and
chemical supplies, actual third party printing charges based on size,
quantity, paper quality, number of colors used, folding and bindery.
Printing costs for 1998 were $124,517 and $70,415 for 1999. A portion
of the decrease from 1998 to 1999 was attributable to Lorilei's
purchase of a pre-press machine which permitted it to process the film
in- house before sending it to printers.
Capitalized Media:
There were no capitalized media costs for 1998. Costs for capitalized
media in 1999 were $27,548. The capitalized media costs for 1999 were
associated with a group of six technical schools that booked a full
year of media to promote each school.
Commercial Leased Access and Brokered Spot Airtime:
Commercial leased access cost for 1998 were $49,387 and $48,743 for
1999. Commercial leased access refers to cable programs running for a
half hour or longer which give the public information on a specific
product or service. There were no costs incurred for spot airtime and
program airtime for 1998. In 1999 the spot airtime costs were $15,129.
Spot airtime consists of direct response television spots of 30 to 60
seconds in length. Program airtime costs for 1999 were $3,655. Program
airtime spots are half hour television programs.
Videotape and Videotape Duplication:
Videotape costs for 1998 were $5,000. These costs involve videotape
inventories required for use on behalf of clients. Videotape
duplication costs for 1998 were $10,685. Videotape duplication is a
service offered to clients that require multiple copies of videotapes
for promotional or informational reasons. Videotape costs for 1999
were $4,696. Videotape duplication costs for 1999 were $32,501. The
increase in videotape duplication costs from 1998 to 1999 was
attributable to development of client relationships requiring promoted
products and services.
Shipping Costs:
Shipping costs for 1998 graphics and video production were $16,616.
These costs are incurred on behalf of clients for transport services
provided. Shipping costs for graphics in 1999 were $4,673. These costs
were incurred for print jobs for clients. Shipping costs for video
production in 1999 were $13,696. These costs were for shipping video
duplications in bulk to clients.
Results of Operations
Revenues from Lorilei's business categories for the year ended December
31, 1999 compared to the year ended December 31, 1998, were as follows:
Page 16
Revenue
Total revenues increased $109,468, or 11% to $1,102,329 for the year
ended December 31, 1999 from $992,861 for the year ended December 31, 1998. This
increase was attributable to the growth of commercial leased access and spot and
program airtime sales.
Commission and retainer revenue decreased by $185,794 or 67.1% to
$90,897 for the year ended December 31, 1999 from $276,691 for the year ended
December 31, 1998. This was due mainly to client turnover. Management believes
this is a trend throughout the advertising industry with middle market companies
abandoning traditional advertising agencies in favor of project-based companies
such as Lorilei.
Video production revenue increased by $29,616 or 11.3% to $291,156 for
the year ended December 31, 1999 from $261,540 for the year ended December 31,
1998. This increase was due in part to an on-going agreement with Advent Product
Development for spot production.
Graphics revenue decreased by $105,599 or 31.7% for the year ended
December 31, 1999 from $332,903 for the year ended December 31, 1998. This
decrease was partially due to client turnover and partially due to a decrease in
brokered printing projects. This is a revenue category that is especially
sensitive to Lorilei's client mix and will vary accordingly.
Website revenues increased by $10,055 or 60% for the year ended
December 31, 1999 from $16,743 for the year ended December 31, 1998. This was
due to increased demand for website design, hosting, maintenance and interactive
services. Management expects this trend to continue into the foreseeable future.
Commercial leased access and spot and program airtime increased by
$404,614 or 879% to $450,610 in the year ended December 31, 1999 from $45,996 in
the year ended December 31, 1998. This increase is due to increased demand for
prime-time infomercial airings and in part due to capitalized television and
radio spot media. Management expects this category to continue to increase
substantially in 2000.
Cost of Goods and Services
Costs of goods and services increased by $77,574 or 32% to $320,029 for
the year ended December 31, 1999, from $242,455 for the year ended December 31,
1998. As a percentage of revenues, cost of goods and services for the year ended
December 31, 1999 was 29%, compared with 24% for the year ended December 31,
1998. The increase was due to an increase in capitalized agency billings
resulting from a shift in Lorilei's agency client mix.
Payroll Expense
Payroll expense, including officer's salaries, increased by $28,136 or
6.8% to $439,938 for the year ended December 31, 1999 from $411,802 for the year
ended December 31, 1998. As a percentage of revenues, payroll expense declined
from 41% in the year ended December 31, 1998 to 39.9% for the year ended
December 31, 1999. While overall payroll expense is expected to increase in 2000
due to the addition of sales staff and news operation personnel, management
believes payroll will remain close to 1999 levels as a percentage of revenues.
Depreciation Expense
Depreciation expense increased by $14,979 or 21% to $86,319 for the
year ended December 31, 1999 from $71,340 for the year ended December 31, 1998.
This was due to new equipment placed in service in 1999.
Page 17
Plan of Operation
Strategic Goals
Lorilei's goals pertaining to The Firm Multimedia division's clients is
to:
* Provide high-quality content that creates demand for their products and
services;
* Offer candid, constructive consultative advice that results in increased
sales;
* Generate effective exposure (such as commercial leased access to cable
systems) that is not easily duplicated by potential competitors;
* Anticipate and implement opportunities made possible by emerging
technologies; and
* Meet their personalized requirements in a creative, effective, timely
and reliable manner.
Lorilei's goal for its local under-served television area programming
(e.g., Ocala News Tonight) is to present content that is focused on local news,
weather, and sports in a style which both appeals to and reflects the community,
making it a staple choice in the local viewing area and providing results and
value for Lorilei's advertisers. In the event that such concept proves viable
and generates sufficient, demand, Lorilei may consider expansion of programming
hours and content.
Expansion of Personnel and Facilities
Lorilei's plan for growth is multifaceted. Lorilei intends to grow
through recruiting additional professional salespeople in the specialized market
segments Lorilei intends to service, and to open additional sales offices in
geographically targeted areas. Lorilei also intends to establish additional news
operations similar in structure to Ocala News Tonight, in areas of the United
States which demonstrate an abundant advertiser base and community identity, and
that are either under-served by broadcast television news. Factors that Lorilei
will look for in selecting appropriate areas will include:
* The size of the television area of dominant influence;
* Geographic boundaries or terrain which segment the market, or in some
cases; and
* The existence of markets with a substantial foreign-language-speaking
population not served by compatible, foreign language television
programming.
Lorilei also intends to grow by acquisition of companies it feels are
synergistic with its operations.
In order to increase its own client generation capabilities, Lorilei
has developed a multi-pronged, coordinated marketing campaign. First, it intends
to aggressively recruit professional sales personnel to operate from Lorilei's
operations center in Ocala Florida (including lead generation specialists, sales
supervisors, problem resolution expediters and telemarketers). Concurrently with
such recruitment drive, Lorilei intends to:
* Launch an intensive and geographically evolving advertising and
marketing campaign under both trade names in areas where it has or is
about to open offices; and
* Progressively open and expand small and efficient sales offices staffed
by account executives.
Lorilei's regional sales offices will initially be in the Central
Florida area and in areas where it can use facilities and personnel shared with
other AmeriNet subsidiaries in South Florida. Then, based on marketing and
personnel recruitment opportunities presented, additional sales offices will be
established:
* In all major state regions (e.g., the Florida "panhandle,"
Tallahassee, Jacksonville, Daytona, Orlando, Tampa- St.
Petersburg-Clearwater, Sarasota, Melbourne-Jupiter-Stuart, Palm
Beach-Boca Raton, Fort Lauderdale- Hollywood, Dade County and the
Florida Keys);
Page 18
* In the United States Southeast (Atlanta, Charleston-Savannah,
Charlotte, Nashville-Memphis, Richmond- Washington D.C.-Baltimore),
and
* In major United States metropolitan areas (New York City, Chicago,
Dallas, Phoenix, Los Angeles, San Francisco).
Based on available marketing and personnel opportunities, Lorilei
intends to staff its sales offices with account executives and problem
resolution expediters. Because of the extremely cost effective business
operational and personal living costs, and, the abundance of technical and
professional personnel found in the Ocala-Gainesville area, Lorilei intends to
maintain and expand its production facilities in Central Florida, from which it
will service its regional offices. However, more active regional offices that
require non-sales personnel in order to service local requirements will be
expanded based on an analysis of the existing client opportunities, potential
for client growth, and risks presented by such expansion.
Only the initial expansion goals are covered by Lorilei's current
capital budget which it anticipates AmeriNet to fund. Thereafter, subject to
AmeriNet's approval, expansion may be funded from operating income, loans from
commercial sources or equity investors. Lorilei's management believes that
increased sales volume from expansion of its client base will generate material
economies of scale that will enhance Lorilei's price competitiveness while
enabling it to maintain technological and service superiority, increasing the
profitability of all of its divisions.
Investment in Technology
Lorilei has always invested carefully in emerging technologies. In
addition to having the largest and best equipped television facilities in its
operating area (which compare favorably with the closest on air commercial
television stations), it has already made the transition to digital, non- linear
video editing (versus the older tape-based linear tape editing) and intends to
invest in high definition video equipment as distribution facilities and high
definition television ("HDTV" sets-in-use increase to a critical mass.
Nonetheless, Lorilei recognizes that in the field of computer hardware, capital
investments should be carefully made in order to stay technologically
competitive while not expending unreasonable sums to modernize equipment based
on fads or improvements that are themselves about to be exceeded. Lorilei's
computer inventory includes both Microsoft Windows(R) and Apple (R) equipment
inter-networked to permit regular cross-connectivity and extremely high
resolution scanning and internal printing capabilities. Because of the low cost,
extremely competitive available printing resources, client printing is
outsourced based on best available prices at the time.
Lorilei intends to position itself as a company offering advanced
solutions to the latest Internet applications, including Internet website design
and hosting as well as Internet portal and broadcasting. It is also considering
providing specialized Internet access services to its clients through a joint
venture with other AmeriNet subsidiaries and intends to produce content
materials which may be offered to other Internet broadcasters for a fee.
Economies of Scale and Best Practices
Lorilei's location provides major operational benefits as a result of
the lower cost of living, beneficial quality of life, and resultant moderate
salaries that prevail in the Marion County, Florida area. In addition, Lorilei's
management believes that it will be able to avail itself of quality personnel
available through its close proximity to the University of Florida. Management
intends to keep its personnel satisfied and motivated through use of incentive
stock options available from AmeriNet and through benchmarking employee
compensation to productivity and profits (encouraging them to both increase
income and reduce expenses).
Lorilei's management believes that it will achieve significant
economies of scale as gross sales levels increase. Lorilei's management and
staff will continue to participate actively in industry seminars and local
community affairs and will elicit, evaluate and act on feedback from clients,
their customers and the local community. By extending projects through multiple
content platforms (e.g., graphics clients become video clients, etc.) and
through productivity gains made possible through incentives to employees,
revenue management processes and increased vertical integration, Lorilei expects
to reduce client costs while maximizing customer revenues, increasing its own
profitability. Lorilei believes by continuous attention to its own results, to
industry and technical innovations and to the performance of its competitors,
it will be able to continuously evaluate and improve its operations.
Page 19
Expansion Through Acquisitions
Beginning in 2001, Lorilei anticipates that it will seek to acquire
other marketing and advertising firms as a method of:
* Increasing market share and overall sales volume;
* Acquiring targeted clients;
* Recruiting experienced personnel;
* Expanding its geographic presence;
* Adding complimentary services (e.g., direct response fulfillment).
Acquisitions may also be undertaken in order to acquire specific
products or services which management believes could have considerable profit
potential compatible with Lorilei's marketing methods and capabilities.
Acquisitions may be undertaken in a manner that does not conform to
AmeriNet's current policies (acquisitions solely for stock, with funds provided
only to fund expansion related activities) because, unlike the situation with
AmeriNet, where management of the acquired companies is expected to remain, it
is likely that management could be superfluous in acquisitions for the purposes
described. In such case, Lorilei, either through AmeriNet or through other
sources, would have to provide cash as a material component and such cash would
be unavailable for other corporate purposes. A poor acquisition decision could
have materially negative affects on Lorilei's business.
Comprehensive Brand Strategy
Lorilei's management believes that goodwill associated with "brand
equity" (a good name built from honest products and services, sold by honest
people telling an honest story) is as important to Lorilei's products and
services as it is to those of its clients. Consequently, it intends to actively
develop and protect the brand equity of its two current divisions, as well as
such other proprietary brand names as it may develop, acquire or use in the
future.
Lorilei's goal is to develop an association among its current and
potential customers, between Lorilei's brand names and the values and goals that
Lorilei has established for its business operations, and to avail itself of such
brand equity to increase its client base, for personnel recruitment purposes
and, potentially, for licensing purposes, strategic alliances and acquisitions.
Lorilei intents to launch a multi-pronged advertising and marketing
campaign for its brand names (currently, "The Firm Multimedia" and "Ocala News
Tonight"), using:
* Participation in industry award generating activities;
* Participation in national, regional, state and local community affairs;
* Co-participation with educational institutions, clients and targeted
potential clients in charitable, educational and civic affairs;
* National DRTV print and directory ads;
* Regional business publication print ads;
Page 20
* Keyword-driven Internet banner ads;
* Business to business ("B2B") direct mail; and
* B2B telemarketing
In addition to the foregoing, Lorilei intends to promote its local news
program brand equity through an advertising and marketing campaign consisting
of:
* Outdoor advertising;
* High frequency cable spot advertising on different channels in the
cable systems Lorilei services;
* Exchange of marketing time with other media (e.g., bartered radio spots
campaigns);
* Signs on news vehicles;
* Direct mail revenue-generating promotion campaigns with a four-color
prize mailer;
* B2B direct mailers announcing the campaign as a lead generation source
for Lorilei's outside salespeople;
* On-going revenue-generating co-promotions featuring local program
personalities (e.g., Ocala News Tonight personalities) on-location at
client locations.
ITEM 304. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During Lorilei's two most recent fiscal years and during the year 2000,
no principal independent accountant or accountant for a significant subsidiary
of Lorilei on whom the principal accountant expressed reliance in its report has
resigned , declined to stand for reelection, or was dismissed. Lorilei's
financial statements have never been audited.
ITEM 306. AUDIT COMMITTEE REPORT
Lorilei has never had an audit committee, consequently, no audit report
has been received. In the future, Lorilei's financial statements are expected to
be consolidated with those of AmeriNet and Lorilei will rely on the audit
committee of AmeriNet's board of directors for all required reports, charters,
etc.
ITEM 310. FINANCIAL STATEMENTS
Lorilei has never prepared financial statements complying with
generally accepted accounting principals consistently applied ("GAAP"), rather,
it has maintained internally generated financial information based on the Quick
Books(R) bookkeeping programs from which James Moore & Company, P.A., certified
public accountants ("James Moore & Company"), have prepared annual tax returns
and provided tax related advice. As a condition to Lorilei's acquisition by
AmeriNet, it has agreed to an audit of its financial statements which will be
performed by James Moore & Company if an independent audit is required under
applicable SEC rules, or by AmeriNet's chief financial officer if it is not. If
SEC rules require an independent audit, it is to be prepared and filed with the
SEC on or before the earlier of the 75th day following Lorilei's acquisition by
AmeriNet or the 60th day following the filing of a report of current event on
Commission Form 8-K with the SEC by AmeriNet, disclosing its acquisition of
Lorilei. See Item 7(a) "Financial Statements of Businesses Acquired" for a
discussion of the availability of Lorilei financial statements in this report.
Page 21
ITEM 401. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Nominees to AmeriNet's Board of Directors
Gerald R. Cunningham and Leigh A. Cunningham will be nominated by
AmeriNet's management and are expected to be elected as members of AmeriNet's
board of directors at the annual meeting of stockholders currently expected to
be held during June of 2000.
Lorilei's Executive Officers and Directors
The following table sets forth information concerning Lorilei's
directors and executive officers. All executive officers and directors have held
their positions since Lorilei's inception during Jule of 1994.
Name Age Position
Gerald R. Cunningham 48 Chief executive officer, president,
treasurer, chief financial officer and
director
Leigh A. Cunningham 32 Vice president, chief operating officer
and secretary
All officers and directors are parties to employment agreements on a
revolving one year basis which call for them to be elected to their current
positions. In addition, pursuant to the terms of the reorganization agreement
between Lorilei and AmeriNet, Lorilei's current management will have the right
to elect a majority of the members of its board of directors for the foreseeable
future, unless Lorilei fails to attain at least 70% of its earnings before
interest, taxes, depreciation and amortization ("EBITDA") projections
Biographies of Executive Officers and Directors
Gerald R. Cunningham, age 48, has served as president, chief executive
officer and as a member of the board of directors of Lorilei since its
incorporation in July of 1994, and as a partner in its predecessor, a Florida
general partnership operating under the fictitious name "The Firm," organized by
Mr. Cunningham and his wife during 1993. In 1991 Mr. Cunningham obtained a
bachelor of science degree in business administration from Pacific Western
University located in Los Angeles, California. In 1968 he received a third class
radiotelephone operator's permit from the FCC and began an on-air radio
broadcasting career with major market stations through 1982, when he entered
radio advertising sales and sales management, specializing in improving sales at
newly established stations or stations whose sales had declined. Mr. Cunningham
is not currently a director in any other company.
Leigh A. Cunningham, age 32, has served as vice president, secretary
and as a member of the board of directors of Lorilei since its incorporation in
July of 1994, and was a partner in its predecessor, a Florida general
partnership operating under the fictitious name "The Firm," organized by Ms.
Cunningham and her husband during 1993. Ms. Cunningham attended San Diego State
University, San Diego, California during 1986 and became a marketing coordinator
for Pacific Southwest Airlines' Executive Flyer Club in 1987. In 1988 Ms.
Cunningham began a career in radio broadcasting as a traffic manager, later
moving into sales and sales management. Ms. Cunningham is not currently a
director in any other company.
Significant Employees
Mary Lee, age 32, has served as business manager of Lorilei since
October , 1998. From April, 1994 to September 1998 she was Office Manager with
Simmons, Hart and Sheehe, an Ocala, Florida law firm.
Brian Trahan, age 37, has served as Lorilei's production manager since
December, 1998. From July, 1998 to December 1998 he was employed by Zebra
Publishing in Gainesville, Florida, as production manager. From June 1995 to
July 1997 Mr. Strahan served as creative director for the Belk's Florida and
South Georgia group offices, and from March 1994 to June 1995 Mr. Strahan was
graphics coordinator at Bear Archery.
Page 22
Family Relationships
Gerald R. Cunningham and Leigh A. Cunningham are husband and wife.
Involvement in Certain Proceedings
None of the following events have occurred with regard to the
directors, executive officers, promoters or control persons of Lorilei during
the last five years:
Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
Being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
Being found by a court of competent jurisdiction (in a civil action),
the SEC or the Commodity Futures Trading Commission to have violated a federal
or state securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
ITEM 402. EXECUTIVE COMPENSATION
Prior to May 11, 2000, none of the officers , directors or key
employees of Lorilei worked pursuant to written employment agreements. During
the previous three fiscal years, the officers and directors of Lorilei have
received the compensation disclosed in the summary compensation table below. No
dividends have been paid to any shareholder since inception. Since December 31,
1999, Gerald R. Cunningham has received total cash compensation of $13,383.72
and Leigh A. Cunningham has received total cash compensation of $10,764.18. No
long term compensation was awarded to either during the period prior to
Lorilei's acquisition by AmeriNet. Since the inception of Lorilei a total of
$57,677.72 has been repaid to Mr. and Ms. Cunningham for loans advanced to, or
on behalf of Lorilei. Lorilei provides child care for the children of Mr. and
Ms. Cunningham.
The following table sets forth the aggregate compensation paid to
Lorilei's Chief Executive Officer and Lorilei's only other executive officer (
"Named Executive Officers") with respect to the years ended December 31, 1999,
1998 and 1997:
Page 23
Summary Compensation Table
Annual Compensation Long Term Compensation
Awards Payouts
Restric- Securities
Name and ted Underlying Long Term All
Principal Stock Options & Stock Incentive Other
Position Year Salary Bonus Other Awards Appreciation Rights Payouts Compensation
- -------- ---- ------ ----- ----- ------ ------------------- ------- ------------
(1) 1999 33,375 * 15,000 (3) * * * *
(2) 1999 31,146 * 15,000 (3) * * * *
(1) 1998 38,625 * 12,000 (3) * * * *
(2) 1998 32,188 * 12,000 (3) * * * *
(1) 1997 38,475 * 8,000 (3) * * * *
(2) 1997 30,663 * 8,000 (3) * * * *
- ------
(1) Gerald R. Cunningham, president, treasurer and chief executive officer.
(2) Leigh A. Cunningham, vice president and secretary
(3) These sums represent expense allowances for automobiles, health insurance
and child care services.
* None.
Executive Compensation; Employment Agreements; Covenants-not-to-compete
Lorilei's two executive officers have materially identical employment
agreements with Lorilei. Each of the agreements provides that the employee will
not enter the employ of or serve as a consultant to, or in any way perform any
services with or without compensation to, any other persons, business or
organization without the prior consent of Lorilei's board of directors. They
also contain non-competition, non-circumvention and confidentiality covenants
during the term of the agreement, all renewals thereof and for a period of two
years after their termination. Each agreement expires on June 30, 2001 but is
automatically renewed unless specifically canceled by Lorilei. Each agreement
has an annual base salary of $60,000, plus an annual bonus in a sum equal to
2.5% of Lorilei's pre-tax, net profits and an aggregate of up to $12,000 per
year in benefits comprised of car allowance, health insurance and child care. In
addition to the compensation described, each of the two officers is entitled to
incentive stock options, as described under "Long Term Incentive Plans" below.
Indemnification Agreements
The employment agreements with Lorilei's executive officers each
contain indemnification provisions. The provisions require, among other things,
that Lorilei indemnify its directors and executive officers to the fullest
extent permitted by law, and advance to the directors and executive officers all
related expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. Although the indemnification provisions offer
substantially the same scope of coverage afforded by provisions in Lorilei's
charter and bylaws, it provides greater assurance to directors and executive
officers that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the board of directors or by
AmeriNet as Lorilei's stockholder, to eliminate the rights it provides. In
addition, Lorilei's articles of incorporation provide that it shall indemnify
its officers, directors, advisory directors and employees to the fullest extent
permitted by law.
Lorilei has authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify its directors and officers to the extent provided
in such statute. In general, Florida law permits a Florida corporation to
indemnify its directors, officers, employees and agents, and persons serving at
Lorilei's request in such capacities for another enterprise, against liabilities
arising from conduct that such persons reasonably believed to be in, or not
opposed to, the best interests of Lorilei and, with respect to any criminal
action or proceeding, had no reasonable cause to believe their conduct was
unlawful.
Page 24
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of non- monetary relief will remain available under Florida law. In addition,
each director will continue to be subject to liability for (a) violations of the
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful; (b)
deriving an improper personal benefit from a transaction; (c) voting for or
assenting to an unlawful distribution; and (d) willful misconduct or a conscious
disregard for the best interests of Lorilei in a proceeding by or in the right
of Lorilei to procure a judgment in its favor or in a proceeding by or in the
right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
Long-term Incentive Plan
Pursuant to the terms of the reorganization agreement, AmeriNet has
reserved 335,378 shares of AmeriNet Stock for future issuance through incentive
stock options (as defined in Section 422 of the Code) granted in Lorilei's
executive officers' employment agreements, provided, however, that rights to
such shares will vest on an annual basis, subject to attainment of the following
EBITDA projections determined in accordance with GAAP:
(a) If Lorilei attains EBITDA of at least $500,000 during
the period starting on July 1, 2000 and ending on
June 30, 2001, then the first 67,976 shares of
AmeriNet's common stock reserved for issuance in the
event of exercise of the subject incentive stock
options will vest;
(b) If Lorilei attains EBITDA of at least $1,400,000
during the period starting on July 1, 2000 and ending
on June 30, 2002, then all rights to 179,769
(including the 67,976 shares vested, if any, on June
30, 2001) of the shares of AmeriNet's common stock
reserved for issuance in the event of exercise of the
subject incentive stock options will vest; and
(c) If Lorilei attains EBITDA of at least $2,900,000
during the period starting on July 1, 2000 and ending
on June 30, 2003, then all rights to all of the
335,378 shares (including the shares vested, if any,
on June 30, 2001 and June 30, 2002) of AmeriNet's
common stock reserved for issuance in the event of
exercise of the subject incentive stock options will
vest.
(2) All rights to the incentive stock options in the subject
employment agreements that have not vested as of July 1, 2003
will expire on such date, and no further rights of any kind
thereto or to the underlying shares of AmeriNet's common stock
reserved for such purpose will exist thereafter, the
reservation therefor terminating on such date.
(3) The vested incentive stock options will be exercisable during
the three fiscal year period after they vest at a price of
$1.3125 per share, provided that as required by Code Section
422, all rights to or under the incentive stock options will
expire within 90 days after termination of employment with
Lorilei.
ITEM 403. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock Owned by Principal Shareholders, Officers and Directors of Lorilei
The following Table discloses the common stock in Lorilei and AmeriNet
(the only outstanding class of equity securities for either company),
beneficially owned by all Lorilei executive officers, directors and Lorilei
nominees to AmeriNet's board of directors, naming them each; each of the named
Lorilei executive officers as defined in Item 402(a) of Commission Regulation
S-B; and, all Lorilei directors and executive officers as a group, without
naming them. The table shows in columns 2 and 4 the total number of shares
beneficially owned and in columns 3 and 5 the percent owned. Of the number of
shares shown in column 4, the associated footnotes indicate the amount of
shares, if any, with respect
Page 25
to which such persons have the right to acquire beneficial ownership as
specified in Commission Rule 13(d)(1), within 60 days following the date of this
report. For purposes of this Table, 11,722,410 shares of AmeriNet's common stock
are assumed to be outstanding because none of the persons listed have any
options to acquire shares of AmeriNet's common stock exercisable within the next
60 days.
Lorilei Shares AmeriNet Shares
Shareholder Name, Beneficially Owned Beneficially Owned
Corporate Office, Prior to Reorganization After Reorganization
and Address Number Percent Number Percent
Gerald R. Cunningham 111(1) 100% 572,519 4.88%
Director, chairman of the board,
president and chief executive officer
7325 Southwest 32nd Street
Ocala, Florida 34474
Leigh A. Cunningham 111(1) 100% 572,519 4.88%
Director, vice president
and secretary
7325 Southwest 32nd Street
Ocala, Florida 34474
All Lorilei executive officers
and directors as a group 111(1) 100% 572,519 4.88%
(1) All of Lorilei's common stock was held by Mr. and Mrs. Cunningham as
tenants by the entirety and all of the AmeriNet common stock acquired in
exchange for the Lorilei common stock is held by Mr. and Mrs. Cunningham as
tenants by the entirety.
(2) 367,176 of the 572,519 shares of AmeriNet's common stock issued to Mr. and
Mrs. Cunningham were issued in the name of Bruce Brashear, Esquire, who
serves as legal counsel to Mr. and Mrs. Cunningham but is acting as escrow
agent for Mr. and Mrs. Cunningham and AmeriNet. Such shares are to be
released from escrow, on the following terms:
(A) As soon after June 30, 2001, as Lorilei's EBITDA can be definitively
determined based on the annual audit of AmeriNet's financial
statements, 286,260 of the shares will be transferred to:
1. Mr. and Mrs. Cunningham, as tenants by the entirety, if Lorilei's
EBITDA for the fiscal year ended June 30, 2001 is at least
$250,000; or
2. To AmeriNet if Lorilei's EBITDA for the fiscal year ended June
30, 2001 is less than $250,000; and
(B) At such time as a final, legally binding determination is made as to
the amount, if any, payable to HGTV based on the liability currently
being challenged by Lorilei, then a pro rata portion of the remaining
80,916 shares being held in escrow by Mr. Brashear shall be
transferred to Mr. and Mrs. Cunningham, as tenants by the entirety,
representing the portion of such liability that was not payable (e.g.,
if only 50% of the liability was payable, then 40,458 shares would be
transferred to Mr. and Mrs. Cunningham), with the balance, if any,
transferred to AmeriNet.
(3) 114,504 of the 572,519 shares of AmeriNet's common stock issued to Mr. and
Mrs. Cunningham were issued to The Yankee Companies, Inc. (a Florida
corporation that serves as AmeriNet's strategic consultant) as escrow agent
for AmeriNet and Mr. and Ms. Cunningham, to be used from time to time to
discharge undisclosed
liabilities of Lorilei or other violations of its obligations under the
reorganization agreement with AmeriNet, as described in Article Seven
thereof, with the balance, if any, transferred to Mr. and Mrs.
Cunningham, as tenants by the entirety, at such time as AmeriNet's
audited financial statements for the year ended June 30, 2001 are filed
with the SEC.
Page 26
(4) Does not include an additional 572,518 shares of AmeriNet's common
stock (because they cannot be obtained within the next 60 days, the
"Performance Shares") that have been reserved for possible issuance to
Mr. and Mrs. Cunningham, on the following terms and subject to the
following requirements:
(A) If Lorilei attains EBITDA of at least $500,000 during the period
starting on July 1, 2000 and ending on June 30, 2001, then Mr.
and Mrs. Cunningham will be issued an aggregate of 114,504 of the
Performance Shares;
(B) If Lorilei attains EBITDA of at least $1,400,000 during the
period starting on July 1, 2001 and ending on June 30, 2002, then
Mr. and Mrs. Cunningham will be issued an aggregate of 305,343 of
the Performance Shares (including the 114,504 that either were or
could have been earned as of June 30, 2001);
(C) If Lorilei attains EBITDA of at least $2,900,000 during the
period starting on July 1, 2002 and ending on June 30, 2003, then
Mr. and Mrs. Cunningham will be issued all 572,518 of the
Performance Shares (including the 305,343 that either were or
could have been earned as of June 30, 2002); however, all rights
to any of the Performance Shares not earned as of such date will
thereupon expire.
(5) Does not include up to an additional 335,378 shares of AmeriNet's
common stock that may be issued to Mr. and Mrs. Cunningham pursuant to
the incentive stock options described in response to Item 402 of SEC
Regulation SB, "Executive Compensation - Long Term Incentive Plan"
because such incentive stock options are not exercisable within the
next 60 days.
ITEM 404. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since Lorilei's inception, it was a party to the following transactions
in which a director or executive officer of Lorilei; a nominee for election as a
director; a beneficial owner of ten percent or more of Lorilei's common stock,
or, any member of the immediate family of any of the foregoing; had or will have
a direct or indirect interest, and did not involve: rates or charges determined
by competitive bids; services at rates or charges fixed by law or governmental
authority; services as a bank depository of funds, transfer agent, registrar,
trustee under a trust indenture; or, similar services:
Relationship Nature of Interest Amount of
Name To Lorilei In the Transaction Such Interest
- ---- ---------- ------------------ -------------
Gerald R. Cunningham (1) (3) (3)
Leigh Cunningham (2) (3) (3)
- -------
(1) President, treasurer, director and former 100% stockholder.
(2) Vice president, secretary, director and former 100% stockholder.
(3) (A) Lorilei pays for child care for Mr. and Ms. Cunningham's son.
(B) For amounts allocated to benefits paid to Mr. and Mrs. Cunningham,
please see Item 402 of SEC Regulation SB, "Executive Compensation-
Summary Compensation Table."
(C) Since its inception, a total of $57,677.72 been repaid to Mr. and
Ms. Cunningham for funds advanced to Lorilei.
Page 27
(D) Pursuant to the terms of the reorganization agreement between
Lorilei and AmeriNet, approximately $340,079.14 in funds owed
by Lorilei that have been guaranteed by Mr. and Mrs.
Cunningham are to either be refinanced in a manner removing
the personal guarantees, or, Lorilei is to agree to indemnify
and hold the guarantors' harmless for any consequences of a
default in the payment of such debts, and to secure such
indemnity with a lien on Lorilei's real estate assets.
Lorilei and AmeriNet (based on information provided by Mr. and Mrs.
Cunningham) believe that each of the foregoing transactions was undertaken for
the benefit of Lorilei, on terms more favorable than would have been available
in arms length transactions.
ITEM 405. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Lorilei does not have a class of equity securities registered pursuant
to the Exchange Act. However, Mr. and Mrs. Cunningham have filed or have agreed
to file before their respective due dates, all reports pertaining to stock
ownership in AmeriNet required under the Exchange Act, including reports on SEC
Form 3 and SEC Schedule 13D.
ITEM 504. USE OF PROCEEDS
AmeriNet has provided Lorilei with $100,000 in funding since its
acquisition and based on Lorilei's compliance with its obligations under the
reorganization agreement and attainment of its economic projections, expects to
provide Lorilei with an additional $400,000 in funding. After deducting
approximately $12,500 in costs incurred by Lorilei in conjunction with its
acquisition by AmeriNet, Lorilei would receive up to $487,500 in net proceeds
from AmeriNet which, it is anticipated, would be used to pay existing accounts
receivable, personal property and real estate taxes; repair existing equipment
and purchase new equipment; employ additional support staff; pay advertising and
marketing costs, and provide working capital.
The amounts and timing of expenditures is subject to the reasonable
discretion of Lorilei's management which will be exercised based on factors such
as the amount of net proceeds available to Lorilei, the effects of favorable
opportunities and competition, as well as many unforeseeable factors that are
beyond Lorilei's control. As currently contemplated, the net proceeds would be
allocated among the following general categories:
Item Amount Percentage
- ---- ------ ----------
Accounts Payable and Taxes $198,854 40.8%
Equipment repairs and upgrades $18,000 04.0%
New equipment * $12,000 02.5%
New personnel salaries $60,646 12.4%
Advertising and marketing $100,000 20.5%
Additional sales offices $20,000 04.1%
Cable channel leasing costs $10,000 02.0%
Relocation expenses and travel $6,000 01.2%
Insurance $7,000 01.4%
Anticipated startup costs for
internet activities $5,000 01.0%
Working Capital $50,000 10.3%
- --------------- ------- -----
Total $487,500 100%
- ------
* The total cost of new equipment, especially in conjunction with
additional local news programs would be significantly greater, however,
a substantial portion of such cost may be financed.
The initial $100,000 provided by AmeriNet to Lorilei has been used to
pay Lorilei's expenses associated directly with the reorganization
(approximately $12,500) and will be used to pay approximately $42,000 of the
accounts payable and taxes, with the balance used to pay for equipment repairs
and upgrades, new equipment, salaries for additional sales personnel and working
capital.
ITEM 505. DETERMINATION OF OFFERING PRICE
The reorganization price for Lorilei's common shares was established
through arms-length negotiations between AmeriNet and Lorilei, taking into
account the market value of similar publicly held companies and the effect of
the increased resources available to Lorilei following the reorganization, based
on approximately eight times Lorilei's earnings for the year ended December 31,
1999, with substantial additional exchange value if Lorilei meets its EBITDA
projections for the period ending on June 30, 2003.
Page 28
Immediately prior to closing, Mr. and Mrs. Cunningham agreed to place a
substantial portion of the AmeriNet shares they were to receive at closing in
escrow with their attorney based on concerns expressed by Yankees, AmeriNet's
strategic consultant, about the write off of a very large receivable, and a
potential $20,000 claim by HGTV (see note (2) to table responding to Regulation
SB Item 403, "Security Ownership of Certain Beneficial Owners and Management -
Common Stock Owned by Principal Shareholders, Officers and Directors of
Lorilei."
ITEM 507. SELLING SECURITY SHAREHOLDERS
This information is combined with disclosure in response to Item 403.
ITEM 508. PLAN OF DISTRIBUTION
No securities were offered except to AmeriNet and the two existing
shareholders of Lorilei in connection with the Reorganization. Each of the
parties has represented and warranted that the securities are being acquired for
investment purposes only and not with a view to further distribution, and have
agreed that the securities will bear legends restricting their transfer except
in compliance with applicable laws.
ITEM 509. INTEREST OF NAMED EXPERTS AND COUNSEL
No experts or counsel involved in the acquisition of Lorilei were hired
on a contingent basis, will receive a direct or indirect interest in Lorilei or
was a promoter, underwriter, voting trustee, director, officer or employee of
Lorilei or AmeriNet.
ITEM 511. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Lorilei advised AmeriNet that its estimated legal, accounting and
filing fees associated with the reorganization were approximately $12,500.
ITEM 701. RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM
REGISTERED SECURITIES
Eleven shares of its common stock were sold on May 16, 1998 by Lorilei
to John B. LaTorraca, the father of Lorilei founder, officer and director Leigh
A. Cunningham, and the father-in-law of Lorilei founder, officer and director
Gerald R. Cunningham, for $25,000. The proceeds were used by Lorilei for working
capital and the issuance of the shares was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933. All of the shares were legended
restricting transfer except in compliance with applicable securities laws. Such
shares were purchased by Mr. and Mrs. Cunningham from Mr. LaTorraca on December
31, 1999.
ITEM 702. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The right of the shareholders to sue any director for misconduct in
conducting the affairs of Lorilei is limited by its Articles of Incorporation
which limit Director's liability to the extent allowed by law. Section 607.0850
Florida Statutes, (1999), permits indemnification against expenses actually and
reasonably incurred by a director, officer, employee or agent to the extent that
such person has been successful in the defense of a matter eligible for
indemnification under the statute. Under certain circumstances, expenses may be
paid by Lorilei in advance, subject to repayment, unless the defendant
ultimately is determined to be ineligible for indemnification. In addition, the
statute permits Lorilei to indemnify directors and officers against certain
liabilities and to purchase and maintain director and officer liability and
reimbursement insurance against liabilities, whether or not Lorilei would have
the power of indemnification against such liabilities.
Page 29
ITEM 510. DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, may be permitted to directors, officers or persons controlling
Lorilei pursuant to the foregoing provisions, Lorilei has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in such act and is therefore unenforceable.
ITEM 601. EXHIBITS
See Item 7(c) of this Report.
RESIGNATION OF MICHAEL JORDAN AS PRESIDENT OF THE REGISTRANT, ELECTION OF
LAWRENCE R. VAN ETTEN AS THE REGISTRANT'S CHIEF OPERATING OFFICER, INTERIM
PRESIDENT AND AS A MEMBER OF THE REGISTRANT'S BOARD OF DIRECTORS
Michael Jordan (also known as Michael Harris Jordan), resigned as the
Registrant's president at a meeting of the Registrant's board of directors held
on Monday, May 22, 2000. At that time the board of directors accepted Mr.
Jordan's resignation and elected Lawrence R. Van Etten as the Registrant's chief
operating officer, as its interim president and as a member of the Registrant's
board of directors. Mr. Jordan is expected to remain as a member of the
Registrant's board of directors and in conjunction with such continuing
services, will be allowed to retain all of the compensation called for under his
employment agreement with the Registrant. Mr. Jordan has not provided the
Registrant with a written resignation letter; however, he provided the following
quote for use in the press release announcing his resignation and Mr. Van
Etten's election:
"As AmeriNet completes the acquisition phase of its strategic plan, it
now requires the addition of senior level executives with substantial
experience in personnel management, business operations, emerging
technologies and integration of diverse businesses and personalities
into a top notch corporate team. Because of the challenges and
opportunities presented by AmeriNet's current subsidiaries and the
anticipated acquisitions of Custom Software Systems, Inc., of Houston,
Texas, and iDVDBox.com, Inc., of Boca Raton, Florida, AmeriNet has
determined that the functions heretofore performed by its president
should be allocated to:
* A chief executive officer who will provide long term strategic
leadership and access to required business, political and
investment banking relationships; and
* A separate chief operating officer with a substantial
background in personnel management and operation of companies
in the computer, software and Internet industries.
While AmeriNet anticipated that such leadership would be generated from
the executive officers of its subsidiaries, it has been presented with
the opportunity to recruit an individual who ideally meets its
operational requirements. Mr. Van Etten has been working on AmeriNet
projects since April and I am fully confident that he will perform
extraordinarily in his new, formalized role."
Yankees had previously recommended that Mr. Van Etten be elected as the
Registrant's chief operating officer, executive vice president and as a member
of its board of directors based on Yankees' belief that integration and
supervision of the Registrant's subsidiaries required someone with substantial
experience in managing personnel and operating companies. At such time as the
Registrant elects a permanent president and chief executive officer, Mr. Van
Etten will assume the role of the Registrant's executive vice president. Mr. Van
Etten will assist Yankees to identify and recruit candidates for the position of
the Registrant's president and chief executive officer, which will be presented
to the Registrant's board of directors for consideration.
Mr. Van Etten will sign an employment agreement with the Registrant on
terms materially similar to those in Mr. Jordan's agreement with the Registrant,
except that his outside activities will be limited to those involving his pre-
existing association as an independent contract consultant to Yankees (to which
he owes fiduciary duties). A copy of Mr. Van Etten's agreement with the
Registrant is filed as an exhibit to this report (see "Item 7(c), Exhibits")
Page 30
As compensation for Mr. Van Etten's services to the Registrant, he will
be permitted to immediately purchase 50,000 unregistered shares of the
Registrant's common stock, $0.01 par value per share, at a price of $0.60 per
share; and, he will be granted an option pursuant to Section 422 et. seq. of the
Internal Revenue Code of 1986, as amended (the "Code") to purchase up to 100,000
shares of the Registrant's common stock during the 36 month period commencing at
the end of the 365th day following commencement of the initial term of his
agreement, at an exercise price of $0.56 provided that he remains in the employ
of the Registrant for a period of not less than 365 consecutive days; he has not
been discharged by the Registrant for cause; and, he fully complies with the
provisions of his agreement, including, without limitation, the confidentiality
and non-competition sections thereof. In addition , in the event that Mr. Van
Etten arranges or provides funding for the Registrant on terms more beneficial
than those reflected in the Registrant's current principal financing agreements,
copies of which are included among the Registrant's records available through
the SEC's EDGAR web site, Mr. Van Etten will be entitled, at its election, to
either a fee equal to 5% of such savings, on a continuing basis; or, if equity
funding is provided through Mr. Van Etten or any of his affiliates, a discount
of 5% from the bid price for the subject equity securities, if they are issuable
as free trading securities, or, a discount of 25% from the bid price for the
subject equity securities, if they are issuable as restricted securities (as the
term restricted is used for purposes of SEC Rule 144); and, if equity funding is
arranged for the Registrant by Mr. Van Etten and the Registrant is not obligated
to pay any other source compensation in conjunction therewith, other than the
normal commissions charged by broker dealers in securities in compliance with
the compensation guidelines of the NASD, Mr. Van Etten will be entitled to a
bonus in a sum equal to 5% of the net proceeds of such funding. In the event
that Mr. Van Etten generates business for the Registrant, then, on any sales
resulting therefrom, Mr. Van Etten will be entitled to a commission equal to 5%
of the net income derived by the Registrant therefrom, on a continuing basis.
Mr. Van Etten will be entitled to any benefits generally made available
to all other employees (rather than to a specified employee or group of
employees) and will be entitled to a $500 per month, non-accountable,
non-refundable expense allowance. He will also be entitled to indemnification,
from all liabilities, suits, judgments, fines, penalties or disabilities,
including expenses associated directly, therewith (e.g. legal fees, court costs,
investigative costs, witness fees, etc.) resulting from any reasonable actions
taken by him in good faith on behalf of the Registrant, its affiliates or for
other persons or entities at the request of the board of directors of the
Registrant, to the fullest extent legally permitted, with all required
expenditures made in a manner making it unnecessary for Mr. Van Etten to incur
any out of pocket expenses; provided, however, that Mr. Van Etten permits the
Registrant to select and supervise all personnel involved in such defense and
that Mr. Van Etten waives any conflicts of interest that such personnel may have
as a result of also representing the Registrant, its stockholders or other
personnel and agrees to hold them harmless from any matters involving such
representation, except such as involve fraud or bad faith.
Mr. Van Etten adds strong organizational skills to the Registrant. He
has a thirty-year background with IBM (NYSE: IBM) where he held several senior
management positions including Corporate Control Operations Manager, Corporate
Scheduling Manager and Director of Logistics Special Processes. Since leaving
IBM, Mr. Van Etten has served as vice president with several companies in the
United States and Canada and owned and managed his own consulting company. Much
of his recent work experience has dealt with business management systems,
personal computer application software and the Internet. His focus will be on
due diligence and on coordination and supervision of the Registrant's
subsidiaries by assisting them to streamline their operations and enhance their
bottom-line profitability.
Page 31
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
List below the financial statements, pro forma financial information
and exhibits, if any, filed as a part of this report.
As a condition to Lorilei's acquisition by AmeriNet, it has agreed to
an audit of its financial statements which will be performed by James Moore &
Company if an independent audit is required under applicable SEC rules, or by
AmeriNet's chief financial officer if it is not. If SEC rules require an
independent audit, it is to be prepared and filed with the SEC on or before the
earlier of the 75th day following Lorilei's acquisition by AmeriNet or the 60th
day following the filing of a report of current event on Commission Form 8-K
with the SEC by AmeriNet, disclosing its acquisition of Lorilei. See Item 7(a)
"Financial Statements of Businesses Acquired" for a discussion of the
availability of Lorilei financial statements in this report.
(a) Financial statements of businesses acquired.
As permitted by subsection (a)(4) of this Item, the Registrant will
file the financial statements required by this item (if any) by amendment not
later than 60 days after the date that this report on Form 8-K is being filed.
The Registrant is including a minimal unaudited balance sheet and operating
statement provided by Lorilei as an exhibit to the reorganization agreement as a
component of such agreement, filed as an exhibit to this current report.
(b) Pro forma financial information.
As permitted by subsection (a)(4) of this Item, the Registrant will
file the pro forma financial information required by this item (if any) by
amendment not later than 60 days after the date that this report on Form 8-K is
being filed.
(c) Exhibits.
Designation Page
of Exhibit Number
as Set Forth or Source of
in Item 601 of Incorporation
Regulation S-B By Reference Description
(2) Plan of acquisition, reorganization, arrangement
liquidation or succession:
.18 35 Reorganization Agreement dated May 11, 2000
between the Registrant and Lorilei. ***
(3) (i) Certificate or Articles of Incorporation:
3.5 217 Current articles of incorporation for Lorilei,
as amended to date.
(ii) Bylaws:
3.6 223 Current bylaws for Lorilei, as amended to date.
Page 32
Designation Page
of Exhibit Number
as Set Forth or Source of
in Item 601 of Incorporation
Regulation S-B By Reference Description
(5) Opinion re: legality
5.1 * Opinion of Brashear & Associates, P.L. dated
May 11, 2000.
5.2 * Opinion of George Franjola, AmeriNet General
Counsel, dated May 11, 2000.
(10) Material Contracts
(i) Material agreements pertaining to the Registrant
10.50 ** Proposed Employment agreement between the
Registrant and Lawrence R. Van Etten.
(ii) Material agreements to which Lorilei is a party
or by which it is bound:
10.lc * Mortgage and promissory note dated September 18,
1996 to Small Business Loan Source.
10.lc * Employment Agreement with Gerald R. Cunningham
dated May 11, 2000.
10.lc * Employment Agreement with Leigh A. Cunningham
dated May 11, 2000.
10.lc * Affiliate Agreement with Gerald and Leigh
Cunningham
(99) Additional Exhibits:
99.52 ** Resignation letter from Michael Jordan
- -------
* Included as exhibits to or in the schedules to the Reorganization
Agreement dated May 11, 2000 between the Registrant and Lorilei filed
herewith as exhibit 2.18.
** To be provided by amendment.
*** Schedules 2.10, 2.12, 2.14, 2.15, 2.21, and 5.7 to the Reorganization
Agreement have been filed with the Commission in paper rather than
electronic format because Bruce Brashear, Esquire, legal counsel to
Lorilei, who was to have provided them in Edgar format to the
Registrant on or before May 21,2000, had not done so by the time this
report was required to be filed. The Registrant will file them
electronically as soon as they are made available by Mr. Brashear.
Page 33
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AmeriNet Group.com, Inc
Dated: May 25, 2000 /s/ Lawrence R. Van Etten
---------------------------------
Lawrence R. Van Etten
President
Page 34