FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-84145
PROSPECTUS
7,443,153 SHARES
GLOBAL MEDIA CORP.
COMMON STOCK
---------------
GLOBAL MEDIA CORP.
400 Robson Street
Vancouver, British Columbia
We have prepared this prospectus to allow selling stockholders to sell up to
7,443,153 shares of our common stock which the selling stockholders may
acquire on conversion or exercise of:
- shares of our outstanding Series A convertible preferred stock;
- related investment options; and
- warrants.
SELLING STOCKHOLDERS: See page 49 for the names of the selling stockholders
We have registered these shares by filing a registration statement with the
Securities and Exchange Commission using a "shelf" registration process. This
process allows the selling stockholders to sell their shares of common stock
over a period of time and in varying amounts. We expect that the selling
stockholders will sell their shares of common stock from time to time as
described under "Plan of Distribution."
TRADING MARKET AND SYMBOL:
NASD OTC Bulletin Board - GLMC
We will receive no proceeds from the conversion of the Series A convertible
preferred stock or sale of the offered shares. We will receive the proceeds
from the selling stockholders' exercise of investment options on conversion
of the Series A preferred stock and their exercise of the warrants, if any.
The selling stockholders are under no obligation to exercise the investment
options or warrants.
---------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is January 19, 2000
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................5
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.........................17
USE OF PROCEEDS..............................................................17
MARKET INFORMATION, SHAREHOLDERS AND DIVIDENDS...............................17
CAPITALIZATION...............................................................19
SELECTED FINANCIAL DATA......................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................21
BUSINESS.....................................................................28
MANAGEMENT...................................................................41
CERTAIN TRANSACTIONS.........................................................45
SELLING STOCKHOLDERS.........................................................47
PLAN OF DISTRIBUTION.........................................................48
PRINCIPAL STOCKHOLDERS.......................................................49
DESCRIPTION OF CAPITAL STOCK.................................................50
SHARES ELIGIBLE FOR FUTURE SALE..............................................55
LEGAL MATTERS................................................................56
EXPERTS......................................................................56
WHERE YOU CAN FIND ADDITIONAL INFORMATION....................................56
INDEX TO FINANCIAL STATEMENTS...............................................F-1
- -------------------
"Global Media," "globalmedia.com," "store.globalmedia.com," "Global Media
Network," "Global Media Broadcast Network," "indieaudio.com,"
"globalmediacorp.com" and "gmcorp.net" are trademarks and service marks of
Global Media Corp. All other trademarks, service marks or trade names
referred to in this prospectus are the property of their respective owners.
Except as otherwise required by the context, all references in this
prospectus to (a) "we," "us," "our" or "Global Media" refer to the
consolidated operations of Global Media Corp., a Nevada corporation, and its
wholly-owned subsidiaries, Westcoast Wireless Cable Ltd. and Global Media
(Canada) Entertainment Corporation, (b) "you" refers to prospective investors
in our common stock, (c) the "Web" refers to the World Wide Web and (d) "our
site" refers to our Web site at www.globalmedia.com. Unless otherwise
indicated or unless the context otherwise requires, all information in this
prospectus assumes the conversion of all the shares of Series A preferred
stock and the exercise of all the warrants and investment options by the
selling stockholders as more fully described in "Selling Stockholders,"
"Description of Capital Stock" and "Plan of Distribution."
This prospectus includes statistical data regarding us and the Internet
industry. Such data are based on our records or are taken or derived from
information published by various sources, including International Data
Corporation.
PROSPECTUS SUMMARY
THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THIS OFFERING. BECAUSE
IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING
THE SECTION ENTITLED "RISK FACTORS" AND OUR CONSOLIDATED FINANCIAL STATEMENTS
AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INTENTIONS. THE
CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING
APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN
THIS PROSPECTUS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THIS PROSPECTUS. SEE "CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS."
GLOBAL MEDIA
OVERVIEW. Global Media sells music CDs and cassettes, home videos
and digital video discs (DVDs), books and other entertainment products. Sales
are made through our own online store and through the private-label
storefronts which we create for the network associates in our Global Media
Network program. Visitors to those storefronts can place merchandise orders
from the storefront on our network associates' Web sites, which we then
process through our e-commerce backend solution and fulfill through our
fulfillment partners.
We also offer an award-winning streaming media broadcasting solution
to radio and television stations and internet sites through our Global Media
Broadcast Network program. The centerpiece of our Broadcast Network solution
is the Global Media Player, a streaming media player that is being developed
for us by Real Networks, Inc. The Global Media Player is private-label
branded for our broadcasting associates and enables listeners to stream live
and simulated live audio, video and other multimedia content (such as radio
feeds) from our 10 proprietary music stations and from the stations of each
of our broadcast associates.
MARKET OPPORTUNITY. International Data Corporation estimates that
the number of persons accessing the Web will reach 320 million by 2002 and
that worldwide business-to-consumer sales over the Internet will increase
from approximately $11 billion in 1998 to approximately $93 billion by 2002.
Advances in technology, such as streaming media technologies which enable the
continuous transmission and playback of multimedia content, and broadband
access are making the Internet an increasingly important new medium for
multimedia content delivery and distribution. We are positioning ourselves to
take advantage of the explosive growth in online business and services and
the convergence of traditional audio and video media with the Internet and
electronic commerce.
NETWORK ASSOCIATE PROGRAM. We offer our network associates a
complete, end-to-end entertainment product e-commerce solution. Our solution
consists of a customized, merchant-branded storefront on the network
associate's own Web site which we integrate with our own back-end e-commerce
systems, order fulfillment services and customer service support. Network
associates pay us a low, up-front price for the creation of the private label
storefronts and we pay them a percentage of the gross margin for products we
sell through their sites.
We are initially marketing our Network Associate program to radio
and television stations to take advantage of the synergies between
entertainment product retailing and the media industry. By establishing
network associate relationships with radio and television stations and other
media businesses, our goal is to leverage off the existing brand identities
and marketing efforts -both online and offline - of our network associates to
drive sales of our entertainment merchandise. Eventually, we intend to market
our e-commerce solution to a wide variety of businesses ranging from small
Internet start-ups to large "bricks-and-mortar" retailers.
BROADCAST NETWORK PROGRAM. Our Broadcast Network program enables our
broadcast associates to deliver simulated live and live Internet broadcast of
audio, video and other multimedia content from their Web sites. We believe
that our Broadcast Network will be a compelling solution to radio and
television stations that are interested in extending their brands onto the
Internet and developing new sources of revenues. We launched our Broadcast
Network program with the beta version of the Global Media Player in October
1999, and incorporated the commercial version into our Broadcast Network in
December 1999.
Our Broadcast Network is designed so that its streaming media
capabilities can be combined with our private label e-commerce solution. When
our Broadcast Network is integrated with our e-commerce solution, our network
associates can offer their customers a tightly integrated entertainment and
online shopping experience. For example, accessing our Broadcast Network will
enable a network associate's customers to listen to live music programming
through the Global Media Player and purchase CDs of the featured artists at
the same time.
OUR WEB SITES. We launched a beta version of our own e-commerce site
in May 1999 to demonstrate our e-commerce solution, and commercially launched
our own online store in September 1999. We significantly revised our online
store on November 29, 1999 to offer greater functionality and ease of use.
Our online store combines an extensive catalogue of music, books, videos and
other entertainment products, with easy-to-use navigation and search
capabilities and entertainment-focused content. Additionally, visitors can
download the Global Media Player for free. We are continuing the further
development of our online store and e-commerce backend to provide additional
1
features and content, and expect that these enhancements will improve the
revenue generating potential of our own store and the stores of our network
associates.
We also operate another related Web site, "indieaudio.com." This
site focuses on content and community oriented to independent lifestyles,
musicians and fans of alternative music, and helps route business to our
online store.
Our online store currently offers a catalogue of more than 1.3
million entertainment products, including over 353,000 CD titles, over 85,000
home video titles, over 4,000 DVD titles, and over 1,000,000 book titles. In
addition, we offer book, music and movie reviews, current entertainment news,
interviews with artists and authors, and artist biographies and lists of
their works. Customers can browse our catalog through using a selection of
search parameters, such as title, author or artist, subject matter, keyword,
publication date or ISBN (International Standard Book Number). We enhance the
shopping experience of our music customers by enabling them to sample music
clips from many CDs we offer, before they order them.
We are currently in the process of extending our online offerings to
include digital audio files that can be downloaded for purchase from the
Internet and we intend to expand into online magazine subscription sales,
concert and event ticket sales and other entertainment-oriented services. We
intend to build an online community centered on music, movies and books by
encouraging our customers, artists and others in the music and entertainment
industry to post their own reviews, sponsor competitions and provide various
forums for discussion.
BACKGROUND. We were incorporated in Nevada in April 1997. In May
1997, we acquired Westcoast Wireless Cable Ltd., which marketed
direct-to-home satellite broadcast hardware and programming services, from
our controlling stockholder. However, in late 1997, a Canadian federal court
prohibited the delivery of U.S.-based satellite programming in Canada, which
had been a significant part of our business. As a result, we wound down our
home satellite business and discontinued those operations completely in the
fourth quarter of fiscal 1998. In October 1997, we began operating a call
center, which provided investor relations services to U.S. and Canadian
public companies. We discontinued those operations in the third quarter of
fiscal 1999 after we adopted our e-commerce business plan.
Our principal executive offices are located at 400 Robson Street,
Vancouver, British Columbia, Canada V6B 2B4 and our telephone number is (604)
688-9994.
INFORMATION CONTAINED ON OUR WEB SITES SHOULD NOT
BE CONSIDERED A PART OF THIS PROSPECTUS.
2
THE OFFERING
COMMON STOCK OFFERED BY SELLING STOCKHOLDERS: 7,443,153 shares
COMMON STOCK OUTSTANDING BEFORE THIS OFFERING: 20,759,616 shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING: 28,202,769 shares
USE OF PROCEEDS FROM CONVERSION OF
SERIES A PREFERRED STOCK: We will receive no proceeds from conversion
of the Series A preferred stock, nor will we
receive any of the proceeds from sale of the
shares by the selling stockholders.
USE OF PROCEEDS FROM EXERCISE OF THE INVESTMENT
OPTIONS AND WARRANTS: We will receive the exercise price of investment
options and warrants that are exercised by the
selling stockholders, if any. Assuming exercise
of all of the investment options and warrants,
the gross proceeds to us from the exercise of
(a) the investment options would be $8,500,000 plus
additional amounts which accrue from time to time
on the stated value of the outstanding Series A
preferred stock at the rate of 5% per annum,
and (b) the warrants would be $5,737,500. We intend
to use any proceeds from exercise of the investment
options and warrants for working capital and general
corporate purposes.
NASD OTC BULLETIN BOARD SYMBOL: "GLMC"
---------------
The number of shares offered by the selling stockholders set forth above
represents the total number of shares that we had reserved, as of the date of
filing the registration statement of which this prospectus is a part, for
issuance upon conversion of the Series A preferred stock, exercise of the
related investment options and exercise of the warrants. Because the actual
conversion price of the Series A preferred stock and the exercise price of
the related investment options may vary with fluctuations in the market price
of our common stock, the actual number of shares offered by the selling
stockholders and therefore the number of shares outstanding after this
offering may be higher or lower than the numbers set forth above. See
"Description of Capital Stock -Preferred Stock - Series A Convertible
Preferred Stock - Conversion Rights."
The number of shares outstanding before and after this offering set forth
above is as of January 11, 2000, and does not include (a) 4,000,000 shares
reserved for issuance upon exercise of outstanding stock options granted
under our stock option plans and other warrants currently outstanding or (b)
32,535 shares reserved for issuance as of that date under certain shareholder
loan restructuring arrangements described in "Certain Transactions Loans to
and from Affiliates." It does include 175,339 shares of common stock issued
through January 11, 2000, upon conversion of 750 shares of Series A preferred
stock.
RISK FACTORS
Potential investors should carefully consider the risk factors set forth
under the caption "Risk Factors" beginning on page 5 and the other
information included in this prospectus prior to purchasing our common stock.
An investment in our common stock involves a high degree of risk. We have a
limited operating history and had minimal operating revenues from our
internet business in fiscal 1999. We anticipate operating losses and negative
operating cash flow for fiscal 2000, and anticipate achieving breakeven in
fiscal 2001 and profitability during fiscal 2002. The success of our internet
operations will depend on the growth and commercial acceptance of the
Internet and e-commerce, the viability of our unproven business model, the
implementation of our Network Associate and Broadcast Network programs, our
relationships with strategic partners and key vendors, and the availability
of additional capital. Our business is subject to intense competition, rapid
technological change, government regulation and legal uncertainties
associated with the Internet, e-commerce, systems interruptions and security
risks. Each section of this "Description of Business", the "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
and the other sections of this prospectus, describe these and other risk
factors in more detail.
3
SUMMARY FINANCIAL DATA
The following summary financial information was derived from our historical
consolidated financial statements. Net revenues exclude the results of
operations of our discontinued home satellite and call center businesses, as
described in "Prospectus Summary - Global Media." See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Discontinued Operations." You should read this information in conjunction
with the Consolidated Financial Statements and the related Notes and the
discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained elsewhere in this prospectus.
YEARS ENDED JULY 31, QUARTER ENDED
1999 1998 OCTOBER 31, 1999
------------------------------------------------------
(AUDITED) (UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ 7,091 $ -- $ 13,645
Loss from continuing operations.......... (2,228,493) (304,919) (1,562,910)
Loss from discontinued operations........
(2,581) (147,909) --
Net loss................................. (2,231,074) (452,898) (1,555,272)
Net loss applicable to common stockholders $ (2,231,074) $ (452,898) $ (1,555,272)
================ ================ ===============
Basic and diluted loss per share......... $ (0.11) $ (0.02) $ (0.08)
Shares used in computing basic and diluted loss per 20,245,889 19,554,402 20,680,894
share....................................
JULY 31 OCTOBER 31
CONSOLIDATED BALANCE SHEET DATA: 1999 1999
----------------- ----------------
(AUDITED) (UNAUDITED)
Working capital (deficiency) $(5,289,038) $1,325,502
Total assets...................................... 7,548,603 6,148,002
Total liabilities................................. 722,131 832,552
Total stockholders' equity (deficiency)................ (263,303) 5,315,450
4
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. WE HAVE DESCRIBED THESE RISKS AND UNCERTAINTIES UNDER THE
FOLLOWING GENERAL CATEGORIES: "RISKS RELATED TO OUR BUSINESS," "RISKS RELATED
TO THE INTERNET INDUSTRY" AND "RISKS RELATED TO THIS OFFERING AND OUR COMMON
STOCK." OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE
MATERIALLY AND ADVERSELY AFFECTED BY ANY OF THESE OR OTHER RISKS. IN THAT
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE
ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK. YOU SHOULD ALSO
CONSIDER THE RISKS AND UNCERTAINTIES ASSOCIATED WITH FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS PROSPECTUS WITH RESPECT TO OUR PLANS, OBJECTIVES,
EXPECTATIONS, AND INTENTIONS. SEE "CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS."
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF CURRENT OPERATIONS ON WHICH TO EVALUATE OUR
POTENTIAL FOR FUTURE SUCCESS
We were incorporated in April 1997 and acquired Westcoast Wireless Cable Ltd.
in May 1997. We discontinued Westcoast's historical operations, the sale and
servicing of direct-to-home satellite broadcast hardware and programming
services, in the fourth quarter of fiscal 1998, and discontinued our other
historical operations, the operation of an investor relations call center, in
the third quarter of fiscal 1999. We launched our main e-commerce site in May
1999, and our streaming media solution in October 1999, and have generated
minimal revenues from our new operations. Accordingly, we have a very limited
operating history on which you can evaluate our business and prospects. You
must consider the risks and uncertainties frequently encountered by early
stage companies in new and rapidly evolving markets, such as electronic
commerce. To address the risks and uncertainties we face, we must:
- gain broad market acceptance of our Network Associate program by
program and rapidly rolling out private label online storefronts for
numerous network associates;
- together with RealNetworks, complete development of our Broadcast
Network system and gain broad market acceptance of the streaming media
services we intend to offer through our Broadcast Network program;
- further develop our online store, improve reliability and performance
of both front-end and back-end systems and order fulfillment, and
timely and successfully develop new features and functionality of our
online store and those of our network associates;
- successfully respond to competition to our entertainment product
e-commerce operations from Amazon.com, Inc., CDNow, Inc. and others,
and to our streaming media services from Broadcast.com, Inc. and
others;
- develop and maintain strategic relationships to enhance the features
(including content) and utility of our online store and those of our
network associates and to enable us to deliver streaming media
services;
- recruit and retain key management, technical and other employees; and
- implement adequate internal processes and controls to manage our
growth.
Our business strategy may be unsuccessful and we may be unable to address the
risks we face in a cost-effective manner, if at all. Our inability to
successfully address these risks will cause significant harm to our business,
financial condition and results of operations.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES FOR THE NEAR FUTURE
Since our inception, we have incurred significant losses, including losses
from our discontinued operations. SEE "Discontinued Operations." Since third
quarter of fiscal 1999, these losses have resulted primarily from costs
related to developing our e-commerce products and our Web sites, developing
or acquiring technologies to be used in our business and general corporate
overhead, and have generated minimal revenues from our new operations. We
expect to continue incurring net losses for the foreseeable future, as we
plan to invest in:
- promoting our network associate program;
- completing, launching and marketing our Broadcast Network;
5
- enhancing our e-commerce site and improving its reliability and
functionality;
- developing infrastructure and applications;
- marketing our Network Associate and Broadcast Network programs; and
- hiring additional employees.
We believe these expenditures are necessary to attract more customers to our
site and the Web sites of our network associates, and to generate greater
online revenues. As a result, we anticipate operating losses and negative
operating cash flow for fiscal 2000, and anticipate achieving breakeven in
fiscal 2001 and profitability during fiscal 2002. If our revenue growth is
slower than we anticipate or our operating expenses exceed our expectations,
our losses will be significantly greater. We may never achieve or sustain
profitability.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY
Our revenues for the foreseeable future will derive primarily from
advertising and product sales and will depend primarily on the number of
network and broadcast associates that we sign up, the number of listeners on
our simulated live stations, the number of visitors that we are able to
attract to our online store and that our network associates are able to
attract to their stores, and on how many of those visitors purchase our
products. Our Broadcast Network revenues will also depend to a significant
extent on our ability to attract customers (such as radio and television
stations) for these streaming media services. We have recently initiated a
program to market streaming media consulting services and expect that over
time this service line could become a significant revenue contributor. We
cannot forecast with any degree of certainty the number of visitors to our
site of our network associates, the number of visitors that will become
customers, the number of customers we will be able to secure for our
streaming media services, or the amount of entertainment product sales and
streaming media services revenues.
We expect our operating results to fluctuate significantly from period to
period. Both seasonal fluctuations in Internet usage and traditional retail
seasonality may affect our business. Internet usage generally declines during
the summer. Sales in the traditional retail book and music industries usually
increase significantly in the fourth calendar quarter of each year and are
correspondingly lower in other quarters. If similar seasonal patterns emerge
in e-commerce business, our revenues may vary significantly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Seasonality."
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- technical difficulties with our system, downtime, system failures or
interruptions in Internet access;
- our ability to attract new and repeat visitors to our online store and
convert them into customers;
- our ability to attract and retain network associates and broadcast
associates;
- our network associates' ability to attract new and repeat visitors to
their sites and convert them into customers;
- the demand for the streaming media services;
- our ability to keep current with the evolving tastes of our target
markets;
- the frequency of repeat purchases by customers, our average order size
and the mix of products we sell;
- the success of our existing competitors, the emergence of new
competitors, and the ability of our competitors to offer new or
enhanced Web site features, products or services;
- our ability, through our fulfillment partners, to ensure sufficient
product supply;
- changes in our pricing policies or the pricing policies of our
competitors;
- our ability to scale technology and upgrade order processing
capabilities;
- price competition;
6
- varying operating costs and capital expenditures related to the
expansion of our business operations and infrastructure, including the
hiring of new employees, and to the acquisition or development of new
technologies or businesses;
- unanticipated cost increases, delays or interruptions in transaction
processing and order fulfillment;
- unanticipated delays or cost increases with respect to the
introduction of new products or services; and
- the costs, timing and impact of our marketing and promotion
initiatives.
Because of these and other factors, we believe that period-to-period
comparisons of our results of operations are not good indicators of our
future performance. If our operating results fall below the expectations of
investors and other market participants in some future periods, then our
stock price may decline.
CONSUMERS OF ENTERTAINMENT MERCHANDISE MAY NOT ACCEPT OUR ONLINE SOLUTIONIf a
high volume of first-time and repeat customers are not attracted to the Web
sites of our network associates and our online store at a reasonable cost,
our business and operating results will be negatively affected. We may not be
able to convert a large number of customers from traditional shopping methods
to online shopping for CDs, videos, DVDs, books and other entertainment
merchandise. Specific factors that could prevent widespread customer
acceptance of our solution, and our ability to grow revenues, include:
- shipping charges, which do not apply to shopping at traditional
retailers of the merchandise we offer;
- delivery time associated with Internet orders, as compared to the
immediate receipt of products at a physical store;
- pricing that does not meet customer expectations of finding the lowest
price on the Internet;
- lack of consumer awareness of our online store and those of our
network associates;
- customer concerns about the security of online transactions and the
privacy of their personal information;
- product damage incurred during shipping or shipments of wrong products
from our fulfillment partners, resulting in a failure to establish
customers' trust in buying items online;
- delays in responses to customer inquiries or in deliveries to
customers; and
- difficulties in returning or exchanging orders.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can
launch new sites at a relatively low cost. We may not be able to compete
successfully against current and future competitors. Further, as a strategic
response to changes in the competitive environment, we may, from time to
time, make certain pricing, service or marketing decisions or acquisitions
that could adversely affect our business, results of operations and financial
condition.
We currently or potentially compete with a number of other companies. We
compete with traditional physical retailers of entertainment merchandise,
including large, well-established book, music and video stores such as Barnes
& Noble, Inc., Borders Group, Inc. and Wherehouse Entertainment, Inc., and
mass market retailers such as Wal-Mart and Kmart Corporation. In the market
for online retailing of books, CDs, video cassettes and DVDs, we compete with
large, well-established companies such as Amazon.com, CDNow.com,
barnesandnoble.com, inc. and Borders Online, Inc. Once we begin offering
streaming media services, we will be competing with large, well-established
Internet broadcasters such as Broadcast.com and InterVU Inc.
Certain of our competitors currently offer, either alone or through strategic
relationships with other companies, a blend of multimedia content delivery
and e-commerce services to the principal target market for our network
associate program. For example, a visitor to the Web site of Broadcast.com,
which broadcasts the radio signals of over 400 radio stations and over 40
television stations, can listen to a CD on Broadcast.com's site and purchase
it by seamlessly clicking through to
7
Amazon.com's site to place an order, or can listen to an audio book and
purchase the print version from Amazon.com. In addition, other companies
offer e-commerce and content delivery services, including streaming media, to
the radio industry, such as Onradio.com, Inc., which provides content
delivery and e-commerce capabilities through strategic relationships with
Amazon.com (for e-commerce), Microsoft (for its Media Player), InterVU (for
streaming media services) and Vibe/SPIN Ventures (for other music-focused
content). Because companies like Broadcast.com and Onradio.com already have
established relationships with significant numbers of radio stations (in many
cases, under exclusive contracts), we may have difficulty establishing market
acceptance of our network associate program in the media industry even if we
can offer a better integrated content delivery and e-commerce solution than
these and other companies. Moreover, since our solution relies on
technologies which are not proprietary to us, other competitors could
license, acquire or develop the same or similar technologies to deliver a
similar solution.
Certain of our current and many of our potential competitors have longer
operating histories, larger customer bases, greater brand recognition in
other business and Internet markets, and significantly greater financial,
marketing, technical and other resources than us. In addition, other online
retailers may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases.
Therefore, certain of our competitors with other revenue sources may be able
to devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
Web site and systems development than us. Competitive pressures created by
any one of these companies, or by our competitors collectively, may result in
loss of market share and reduced operating margins, any of which could have a
material adverse effect on our business, results of operations and financial
condition.
WE FACE THE RISK OF SYSTEMS INTERRUPTIONS AND CAPACITY CONSTRAINTS
The satisfactory performance, reliability and availability of our
recently-opened online store, transaction processing systems and network
infrastructure are critical to our reputation and our ability to attract and
retain customers and maintain adequate customer service levels. From time to
time, we have experienced temporary system interruptions for a variety of
reasons, including software bugs and lack of reliable integration between
various elements of our e-commerce and other systems and those of our
vendors. We may not be able to correct any problem in a timely manner.
Because we outsource certain aspects of our system and because some of the
reasons for a systems interruption may be outside of our control, we also may
not exercise sufficient control to remedy the problem quickly or at all. Any
future system interruption that results in the unavailability of our site or
reduced order fulfillment performance could result in negative publicity and
reduce the volume of goods sold and the attractiveness of our online store,
which would negatively affect our business.
We opened our online store for customers in May 1999 and to the extent that
customer traffic grows substantially, we may need to expand the capacity of
our systems to accommodate a larger number of visitors. We may be required to
add additional software and hardware and further develop and upgrade our
existing technology, transaction-processing systems, network infrastructure
and distribution capabilities to accommodate increased traffic on our site
and those of our network associates and increased sales volume. Any inability
to scale our systems may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service, impaired quality
and speed of order fulfillment, or delays in reporting accurate financial
information. We are not certain that we will be able to:
- accurately project the rate or timing of increases, if any, in the use
of our site and those of our network associates;
- effectively upgrade and expand our transaction-processing and other
systems in a timely manner; or
- integrate smoothly any newly developed or purchased modules within our
existing systems.
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR NETWORK ASSOCIATE PROGRAM OR OUR
NETWORK ASSOCIATES MAY FAIL TO ATTRACT SIGNIFICANT NUMBERS OF CUSTOMERS
Our business and results of operations will depend in large part on the
success of our Network Associate program. While we have started to market the
Network Associate to companies in our target markets for those services, to
date, we have only entered into a limited number of definitive agreements
with network associates and have not rolled out any private label online
stores for those with whom we have contracts. In order to attract and retain
significant numbers of network associates, we must:
- build a larger sales force to promote our network associate program,
particularly to the radio and television industries;
8
- successfully promote the benefits of our end-to-end e-commerce
solution to potential network associates;
- be able to offer customized, merchant-branded store fronts with
content and merchandise selection that can be specifically tailored to
different types of potential network associates with different target
markets or customers; and
- successfully compete against other companies that offer, or in the
future may offer, similar e-commerce and content-delivery solutions,
either on their own or through strategic relationships with other
parties.
In addition, in order to retain our network associates:
- our e-commerce system must work reliably and effectively with our
network associates' own Web sites;
- we must reliably fulfill orders of customers who purchase products
through our network associates' storefronts;
- we must provide a high level of customer service; and
- our program must result in significant direct or indirect financial
benefit to our network associates.
We may encounter significant barriers to our ability to establish a large
base of network associates with a substantial online customer presence,
particularly in the radio and television industries. We may face obstacles in
signing up significant numbers of network associates in the media industry,
despite the appeal to radio and television stations of our private label
e-commerce solution bundled with streaming media services. For example,
Broadcast.com, a leading Internet broadcaster of radio, television and other
multimedia content, has established relationships with more than 400 radio
stations across the country, including stations in 18 of the top 20 radio
markets in the U.S., and can offer its streaming media customers some
e-commerce solutions that are competitive to our own through strategic
relationships with other companies such as Amazon.com. Because Broadcast.com
has exclusive relationships with many of its streaming media customers, those
customers may not be willing or able contractually to become network
associates.
We intend to control our own marketing and promotion expenditures by relying
on the marketing efforts of our network associates. Our business and results
of operations may therefore suffer if our network associates are unsuccessful
in attracting significant numbers of visitors to their Web sites. While we
analyze our potential network associates' plans for increasing traffic to
their Web sites, we have no control of the steps they actually take to
attract visitors to their sites.
WE DEPEND SIGNIFICANTLY ON OUR STRATEGIC RELATIONSHIP WITH REALNETWORKS AND
WE HAVE ONLY A NON-EXCLUSIVE LICENSE TO THE TECHNOLOGIES THEY ARE DEVELOPING
FOR US
We have entered into a strategic relationship with RealNetworks to develop
the Global Media Player. Our ability to implement our Broadcast Network
program would be negatively affected and our business would be harmed by:
- any termination of our agreement with RealNetworks prior to their
completion of the Global Media Player;
- any other unexpected delay in the development or deployment of the
commercial version of the Global Media Player; or
- failure of the Global Media Player to provide expected functionality
with third-party systems, to perform as expected, or to operate
reliably.
We will have no proprietary ownership interest in or exclusive license to the
technologies developed by RealNetworks for our Global Media Player. Although
our rights to use those technologies will be perpetual, they will be
non-exclusive. Consequently, RealNetworks could license those technologies to
one or more of our existing or future competitors or could use those
technologies themselves to launch a competitive solution. Although our
streaming media services agreement with RealNetworks has a term of three
years which automatically renews for successive terms, any early termination
of that agreement as a result of our breach or otherwise would significantly
disrupt our business and potentially result in claims against us by customers
of our streaming media services.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT
NETWORK ASSOCIATES
We believe that successful implementation of our Network Associate and
Broadcast Network programs will depend on our ability to establish an
aggressive and effective internal sales organization. At January 11, 2000,
our internal sales team had
9
twelve members. We may need to substantially increase this sales force in the
future in order to execute our business plan. Our ability to increase our
sales force involves a number of risks and uncertainties, including
competition for employees and the length of time for new sales employees to
become productive. If we do not develop an effective internal sales force, we
are likely to have difficulty securing significant numbers of network
associates and our business will be negatively affected.
WE DEPEND ON OUR FULFILLMENT PARTNERS; IF THEY DO NOT PERFORM OR OUR
RELATIONSHIP WITH THEM IS TERMINATED, OUR BUSINESS MAY SUFFER
To generate the significant customer traffic, volume of purchases and repeat
purchases that we believe are crucial to obtaining sufficient revenues, we
must develop and maintain customer trust in the timing and accuracy of our
product deliveries. We currently carry no inventory of our own and depend on
fulfillment partners for rapid order fulfillment. We currently purchase all
of the merchandise we offer online from two fulfillment partners, Baker &
Taylor, Inc. (through its Entertainment division and Books division) and the
iFill division of Valley Media, Inc., who performs order fulfillment for us.
We also need to secure other fulfillment partners to expand the range of
titles that we can currently offer through Baker & Taylor and Valley Media.
While we intend to enter into other fulfillment agreements to have
alternative sources of supply and expand our product offerings, we are
primarily dependent on Baker & Taylor and Valley Media for order fulfillment.
We may not be able to secure alternative fulfillment partners on acceptable
terms in a timely manner, or at all. Negotiating and implementing
relationships with additional fulfillment partners would take substantial
time and resources. If for any reason our relationship with Baker & Taylor or
Valley Media were terminated before we were able to establish and implement
alternative fulfillment arrangements, we might be unable to fulfill our
customers' orders and our business would suffer. Our agreements with Baker &
Taylor have one-year terms (ending in May 2000). While these agreements renew
on an annual basis for up to five succeeding years, they can be terminated
prior to the annual renewal date. We cannot be certain that our contract with
Baker & Taylor will be renewed or that they will not terminate our agreement
earlier for breach.
Our ability to fulfill our customers' orders may be significantly hampered
and our business will suffer major disruptions if Baker & Taylor, Valley
Media, or any alternative fulfillment partners with whom we may establish
relationships in the future:
- fail to comply with federal, state and local regulations that apply to
their performance of services for us;
- breach or terminate their agreements with us;
- suffer adverse developments that affect their ability to supply
products to us, such as employee strikes, system crashes and inclement
weather;
- are unable or unwilling to supply products to us in sufficient
quantities or in a timely manner; or
- are unable or unwilling to ship products to any markets in which we
have customers.
Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. In addition, our order
fulfillment and distribution process requires us to cooperate extensively
with our fulfillment partners with respect to the coordination of separate
information technology systems. From time to time we have experienced
problems relating to the integration of our systems with those of Baker &
Taylor, which has affected our ability to timely fill customers' orders.
While we have corrected these problems, we cannot ensure that any future
problems will be resolved on a timely basis or at all. In addition, if we
establish new fulfillment partner relationships, we cannot be sure that we
will be able to integrate our respective information systems on a timely
basis. If our fulfillment partners' systems fail or are unable to scale or
adapt to changing needs, our ability to timely fill customers' orders may be
hindered and we may not have adequate, accurate or timely inventory or
financial information. Our failure to have adequate, accurate or timely
inventory and financial information would harm our ability to manage our
business effectively.
WE RELY HEAVILY ON THIRD PARTIES FOR ESSENTIAL BUSINESS OPERATIONS AND MAY BE
ADVERSELY AFFECTED BY DISRUPTIONS OR FAILURES IN SERVICE
We depend on third parties for important aspects of our business, including
Internet access and Web hosting services, development of software for our
Broadcast Network system, and new Web site features and content. We have
limited control over these third parties, and we are not their only client.
We may not be able to maintain satisfactory relationships with any of them on
acceptable commercial terms. Further, we cannot be certain that the quality
of products and services that they provide will remain at levels needed to
enable us to conduct our business effectively. We may not be able to renew
agreements with third party vendors on current terms.
10
Our dependence on other vendors entails various risks, including:
- our current vendors may not continue to provide services to us on
current terms;
- we may not be able to establish new or extend current vendor terms on
a timely basis or at all; and
- we depend on our vendors to comply with federal, state and local
regulations that apply to their performance of services for us.
If we cannot develop and maintain relationships with vendors that allow us to
obtain sufficient quantities of merchandise or necessary services on
acceptable commercial terms or if our vendors fail to comply with applicable
law, our business may be harmed.
We also rely on third-party carriers for product shipments, including
shipments to and from our fulfillment partners' distribution facilities. We
are therefore subject to the risks, including employee strikes and inclement
weather, associated with third-party carriers' ability to provide delivery
services to meet our shipping needs. Failure to deliver products to our
customers in a timely and accurate manner would harm our reputation, and our
business and results of operations.
OUR SYSTEMS AND OPERATIONS, AND THOSE OF OUR VENDORS AND DISTRIBUTORS, ARE
VULNERABLE TO NATURAL DISASTERS, SYSTEMS INTERRUPTIONS AND OTHER UNEXPECTED
PROBLEMS
Substantially all of our computer and communications hardware is located at
our leased facilities in Nanaimo and Vancouver, British Columbia, Canada, and
our systems infrastructure is hosted at third-party hosting providers'
facilities in Vancouver, British Columbia and Seattle, Washington. The
continuing and uninterrupted performance of those systems is critical to our
success. Our systems and operations and those of our hosting providers are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, earthquakes and similar events. In addition, our
servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions, which could lead to interruptions, delays, loss of
data or the inability to accept and fulfill customer orders. Sustained or
repeated system failures or interruptions of our site connection services
would reduce the attractiveness of our site to customers, and could therefore
have a material adverse effect on our business. We do not currently have
redundant systems or a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate for losses that may
occur. Our fulfillment partners, including Baker & Taylor and Valley Media,
may also face these risks.
We depend on the efficient operation of Internet connections from customers
to our systems. These connections, in turn, depend on the efficient operation
of Web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or experienced
outages. Any system delays, failures or loss of data, whatever the cause,
could reduce customer satisfaction with our applications and services and
harm our business.
We retain confidential customer information in our processing centers.
Therefore, it is critical that our facilities and infrastructure remain
secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. A material security breach could damage our
reputation or result in liability to us.
WE ARE GROWING RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT
We are currently experiencing a period of significant expansion. In order to
execute our business plan, we must continue to grow significantly. This
growth will strain our personnel, management, systems, policies and
procedures and other resources. To manage our growth, we must implement
operational and financial systems and controls and recruit, train and manage
new employees. We cannot be certain that we will be able to integrate new
executives and other employees into our organization effectively. If we do
not implement adequate systems and controls, recruit, integrate and retain
necessary personnel or otherwise manage growth effectively, our business,
results of operations and financial condition will be materially and
adversely affected.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE
ABLE TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS
GROWS
Our performance is substantially dependent on the continued services of our
executive officers and other key employees, particularly Michael Metcalfe,
our Chairman and President, Robert Fuller, our Chief Executive Officer, L.
James Porter, our Chief Financial Officer, and Winston V. Barta, our Vice
President of Marketing and Business Development. The loss of the services of
any of our executive officers could materially and adversely affect our
business. We do not maintain key man insurance on any of our employees.
Additionally, we believe we will need to attract, retain and motivate
talented management and other highly skilled employees, particularly those
with technical backgrounds, to be successful.
11
Competition for employees that possess knowledge of both the Internet
industry and our target market is intense. We may be unable to retain our key
employees or attract, assimilate and retain other highly qualified employees
in the future.
WE MAY NEED FURTHER CAPITAL
We currently anticipate that our available funds will be sufficient to meet
our anticipated needs for working capital, capital expenditures and business
expansion through the fiscal 2000. Thereafter, we may need to raise
additional funds. We may need to raise additional funds sooner in order to
fund more rapid expansion, to develop new or enhanced services or products,
to respond to competitive pressures or to acquire complementary products,
businesses or technologies. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership
of our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences and privileges
senior to those of our common stock. There can be no assurance that
additional financing will be available on terms favorable to us or at all. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to develop or enhance services or products, respond to
competitive pressures, fund expansion or take advantage of unanticipated
acquisition opportunities. Such inability could negatively impact our
business.
WE MAY FAIL TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH OTHER WEB SITES TO
INCREASE NUMBERS OF CUSTOMERS AND INCREASE OUR REVENUES
We intend to establish alliances with other Web sites to increase the number
of visitors to our site. There is intense competition for placements on these
sites, and we may not be able to enter into these relationships on
commercially reasonable terms or at all. Even if we enter into alliances with
other Web sites, they themselves may not attract significant numbers of users
to our site. Moreover, we may have to pay significant fees to establish these
relationships. Our inability to enter into alliances with popular Web sites -
or the failure of such alliances to provide the expected benefits - could
adversely affect our business.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
To be successful, we must adapt to rapidly changing Internet technologies and
continually enhance the features and services provided on our site and to our
network associates. We could incur substantial, unanticipated costs if we
need to modify our site, software and infrastructure to incorporate new
technologies demanded by our customers or our network associates. We may use
new technologies ineffectively or we may fail to adapt our site,
transaction-processing systems and network infrastructure to user
requirements or emerging industry standards.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
PROPRIETARY RIGHTS
We rely or may in the future rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology and proprietary content. These legal
protections afford only limited protection for our intellectual property and
trade secrets. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our proprietary
technology or otherwise obtain and use information that we regard as
proprietary.
We are in the process of filing Canadian and U.S. applications for trademark
registration of "Global Media," "globalmedia.com," "Global Media Network,"
"Global Media Broadcast Network" or any of our other trademarks. Were we to
file for such registrations, we may be unable to secure them. It is also
possible that our competitors or others will adopt service names similar to
ours, thereby possibly leading to customer confusion. In addition, there
could be potential trade name or trademark infringement claims brought by
owners of other trademarks that incorporate variations of the term "Global
Media." Any claims or customer confusion related to our trademarks, or our
failure to obtain trademark registrations, could negatively affect our
business.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets and domain names and determine
the validity and scope of the proprietary rights of others. If third parties
prepare and file applications in the United States or other countries that
claim trademarks used or registered by us, we may oppose those applications
and be required to participate in proceedings before the United States Patent
and Trademark Office or foreign regulatory agencies to determine priority of
rights to the trademarks. Any litigation or adverse priority proceeding could
result in substantial costs and diversion of resources and could seriously
harm our business and operating results. In September 1999, we received a
letter claiming trademark infringement by our use of the phrases "Global
Media Network", "Global Media Broadcast Network" and "Global Network" solely
in Canada. We believe that this claim will ultimately be unsuccessful.
However, success on the claim could have a material adverse effect on our
name recognition in the Canadian marketplace. We do not believe that the
claim, even if successful, would have a material adverse effect on our
business, results of operations or financial condition.
12
Finally, to the extent that we sell products internationally, the laws of
many countries do not protect our proprietary rights to as great an extent as
do the laws of the United States. Many countries have a "first-to-file"
trademark registration system. As a result, we may be prevented from
registering or using our trademarks in certain countries if third parties
have previously filed applications to register or have registered the same or
similar trademark. Our means of protecting our proprietary rights may not be
adequate, and our competitors could independently develop similar technology.
We hold rights to various Web domain names, including "globalmedia.com,"
"gmcorp.net," "globalmediacorp.com," "indieaudio.com" and "indielife.com."
Governmental agencies typically regulate domain names. These regulations are
subject to change. We may not be able to acquire or maintain appropriate
domain names in all countries in which we do business. Furthermore,
regulations governing domain names may not protect our trademarks and similar
proprietary rights. We may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or diminish the value of our
trademarks and other proprietary rights.
WE MAY BE FOUND TO INFRINGE THE PROPRIETARY RIGHTS OF OTHERS OR FACE
LIABILITY FOR CONTENT ON OUR WEB SITES
Third parties may claim infringement by us with respect to past, current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, whether
meritorious or not, could be time-consuming, result in costly litigation, or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at
all.
Because we post our own content and content licensed from third parties
on our site, we face potential liability for negligence, copyright, patent,
trademark, defamation, indecency and other claims based on the nature and
content of the materials that we post. Such claims have been brought, and
sometimes successfully pressed, against Internet content distributors. In
addition, we could be exposed to liability with respect to the unauthorized
duplication of content.
Although we maintain general liability insurance, our insurance may not cover
potential claims of the types described above or may not be adequate to
indemnify us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance
coverage could harm our business.
OUR SALES COULD BE NEGATIVELY AFFECTED IF WE ARE REQUIRED TO CHARGE TAXES ON
PURCHASES AND OUR BUSINESS COULD BE NEGATIVELY AFFECTED BY ANY NEW
INTERNET-RELATED TAXES
We currently do not collect United States sales or other similar taxes in
respect of goods sold by us However, one or more states, provinces or other
jurisdictions may seek to impose the obligation to collect sales or other
similar taxes on out-of-jurisdiction companies (such as us) which engage in
or facilitate online commerce. A successful assertion by one or more states,
provinces or foreign countries that we should collect further sales or other
similar taxes on the sales of products through our site or those of our
network associates could negatively affect our revenues and business. A
number of proposals have been made at the state and local level in the U.S.
that would impose additional taxes on the sale of goods and services through
the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce, and could adversely affect our opportunity to
derive financial benefit from such activities. Although there is currently a
U.S. federal moratorium on the imposition of new taxes on the sale of goods
and services through the Internet, this moratorium is set to expire in
October 2001, and may not be renewed.
RISKS RELATED TO THE INTERNET INDUSTRY
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business would be adversely
affected if Web usage and e-commerce does not continue to grow. Web usage may
be inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- inconsistent quality of service;
- unavailability of cost-effective, high-speed service; or
- imposition of transactional or other taxes.
13
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability
may decline. In addition, Web sites, including ours, have experienced a
variety of interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, Web usage, including usage
of our Web sites or the Web sites of our network associates, could grow
slowly or decline.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET AND
THE MARKET FOR STREAMING MEDIA SERVICES, WHICH IS UNCERTAIN
Our future revenues and profits depend substantially on the widespread
acceptance and use of the Web as an effective medium of commerce by
consumers, as well as the widespread acceptance of the Internet as a medium
of broadcast by consumers and producers of audio, video and other multimedia
content. Rapid growth in the use of the Web and consumer e-commerce is a
recent phenomenon and the commercial use of the Internet as a broadcast
medium is in its early stages. Demand for recently introduced services and
products over the Web is subject to a high level of uncertainty. The
development of the Web as a viable commercial marketplace or as a broadcast
medium is subject to a number of factors, including the following:
- e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- Internet broadcasts of multimedia content are generally of lower
quality than broadcasts in traditional mediums and are subject to
frequent interruptions and packet loss;
- radio listeners, television viewers and consumers of other multimedia
content may be unwilling to shift their consumption of such content to
the Internet or it may be more difficult to establish viable revenue
streams from Internet broadcasts;
- insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
- adverse publicity and consumer concerns about the security of commerce
transactions on the Internet could discourage its acceptance and
growth.
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND
SUBJECT US TO LIABILITY
The need to securely transmit confidential information (such as credit card
and other personal information) over the Internet has been a significant
barrier to e-commerce and communications over the Web. Any well-publicized
compromise of security could deter more people from using the Web or from
using it to conduct transactions that involve transmitting confidential
information, such as purchases of goods or services. To the extent that our
activities or the activities of third-party contractors involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could disrupt our business, damage our reputation and
expose us to a risk of loss or litigation and possible liability. We could be
liable for claims based on unauthorized purchases with credit card
information, impersonation or other similar fraud claims. Claims could also
be based on other misuses of personal information, such as for unauthorized
marketing purposes. We may need to spend a great deal of money and use other
resources to protect against the threat of security breaches or to alleviate
problems caused by security breaches.
WE FACE RISKS ASSOCIATED WITH GOVERNMENT REGULATION OF AND LEGAL
UNCERTAINTIES SURROUNDING THE INTERNET
Any new law or regulation pertaining to, or the application or interpretation
of existing laws to, the Internet could increase our cost of doing business
or otherwise adversely affect our business. Laws and regulations directly
applicable to Internet communications, commerce and advertising are becoming
more prevalent. The law governing the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws governing intellectual
property, copyright, privacy, obscenity, libel and taxation apply to the
Internet. In addition, the growth and development of e-commerce may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad. Governments in foreign jurisdictions may regulate Internet or
other online services in such areas as content, privacy, network security,
encryption or distribution more stringently than in the United States. This
may affect our ability to conduct business internationally. We also may be
subject to future regulation not specifically related to the Internet,
including laws affecting direct marketers.
14
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE
As of January 11, 2000, 7,750 shares of our Series A preferred stock, having an
aggregate stated value of $7,750,000, were issued and outstanding. The shares of
Series A preferred stock are convertible into such number of shares of our
common stock as is determined by dividing the stated value of the Series A
preferred stock being converted ($1,000 per share), plus an additional amount
which accrues at the rate of 5% per annum, by the conversion price in effect at
the time of conversion. The conversion price is determined by reference to the
then-current market price of our common stock or, if less, a fixed conversion
price. In addition, the holders of the Series A preferred stock hold investment
options under which they may purchase an additional share of common stock at an
exercise price equal to the then-current conversion price for each share of
common stock received upon conversion. Based on the conversion price in effect
immediately prior to our initial filing of the registration statement of which
this prospectus is a part, the total number of shares that we would have issued
to the selling stockholders at that time had they converted the total number of
shares of Series A preferred stock and exercised the related investment options
in full would have been 3,041,576 shares. However, the actual number of shares
that may be issued on conversion of the Series A preferred stock and exercise of
the related investment options may prove to be significantly greater in the
event of a decrease in the trading price of our common stock.
In addition, as described in "Description of Capital Stock - Preferred Stock -
Series A Convertible Preferred Stock," the conversion price was adjusted
downward since our common stock was not listed on the Nasdaq National Market or
the Nasdaq Small Cap Market by November 6, 1999. We filed our listing
application on November 15, 1999, however, there is no assurance that our
application will be approved. The decrease in the fixed and variable
conversion prices caused by this downward adjustment, and by any future
decreases in the trading price in of our common stock will increase the number
of shares of common stock issuable upon conversion, which could cause
substantial dilution to other holders of our common stock. In addition,
purchasers of common stock could experience further substantial dilution of
their investment upon exercise of the related investment options by the selling
stockholders. Based on the adjusted conversion price in effect on January 11,
2000, the total number of shares that we would have issued to the selling
stockholders at that time had they converted the total outstanding shares of
Series A preferred stock and exercised the related investment options in full
would have been 3,779,501 shares.
As of January 11, 2000, warrants to purchase 680,000 shares of common stock
issued to the holders of the Series A preferred stock were outstanding. These
warrants may be exercised over the next five years at a price of $8.4375, which
price may be adjusted from time to time under certain antidilution provisions.
As of January 11, 2000, 4,000,000 shares of common stock were reserved for
issuance upon exercise of outstanding stock options granted under our stock
option plans at exercise prices ranging from $4.00 to $8.00 per share, of which
2,204,774 are currently exercisable. In addition, at such date we had other
warrants to purchase a total of 62,769 shares at an exercise price of $8.125 per
share outstanding which are currently exercisable. Purchasers of common stock
could experience substantial dilution of their investment upon exercise of stock
options and warrants.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock in the public
market in the future, including shares issued upon the conversion or exercise of
outstanding shares of Series A preferred stock, investment options and warrants,
then the market price of our common stock could fall.
At January 11, 2000, 21,599,700 shares of our common stock were outstanding. Of
these outstanding shares, 5,812,700 were freely tradable without restriction.
The remaining 15,787,000 shares are eligible for sale in the public markets
within the limits of Rule 144 under the Securities Act. See "Shares Eligible for
Future Sale."
We have filed registration statements to register all shares of common stock
issuable under certain of our stock option plans. Consequently, shares issued
upon exercise of stock options granted under those plans will be eligible for
resale in the public market without restriction (except to the extent they are
issued to our executive officers and directors). At January 11, 2000, options
covering a total of 3,047,440 shares, of which 2,204,774 were vested, were
outstanding under these plans.
To date, we have had limited trading volume in our common stock. Sales of
substantial amounts of common stock under Rule 144, the registration statement
of which this prospectus is a part, our other registration statements or
otherwise could adversely affect the prevailing market price of our common stock
and could impair our ability to raise capital at that time through the sale of
our securities.
15
WE ARE CONTROLLED BY OFFICERS, DIRECTORS AND EXISTING STOCKHOLDERS, IN
PARTICULAR OUR CHAIRMAN AND PRESIDENT
At January 11, 2000, executive officers, directors and entities affiliated
with them, in the aggregate, beneficially owned approximately 75.25%, and
Michael Metcalfe, our Chairman and President beneficially owned approximately
66.06%, of our outstanding shares of common stock. Mr. Metcalfe is able to
control substantially all matters requiring approval by our stockholders,
including the election of directors, amendments to our articles of
incorporation, and mergers or other business combination transactions. Mr.
Metcalfe's substantial equity stake could also make us a much less attractive
acquisition candidate to potential acquirers, because Mr. Metcalfe alone
could have sufficient votes to prevent the approval or the tax-free treatment
of an acquisition.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT
We are a Nevada corporation. The anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire or gain control of us, even
if such a transaction would be beneficial to stockholders. Our articles of
incorporation provide that our board of directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it more
difficult for a third party to acquire us. Each of these factors could adversely
affect prevailing market prices for our common stock. See "Description of
Capital Stock - Nevada Anti-Takeover Laws and Certain Charter Provisions."
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock has been, and is likely to continue to be,
highly volatile. See "Market Information, Shareholders And Dividends - Market
Information." Purchasers of our common stock may not be able to resell their
shares following periods of volatility because of the market's adverse reaction
to volatility. The trading prices of many technology and Internet-related
companies' stocks reached historical highs our 1999 fiscal year and have
reflected valuations substantially above historical levels. During the same
period, these companies' stocks have also been highly volatile and have recorded
lows well below historical highs. We cannot assure you that our stock will trade
at the same levels of other Internet stocks or that Internet stocks in general
will sustain their current market prices. Factors that could cause volatility in
our stock price may include, among other things:
- actual or anticipated fluctuations in our quarterly operating
results;
- announcements of technological innovations, new products or
services by us or our competitors;
- changes in financial estimates or recommendation by securities
analysts;
- conditions or trends in the Internet industry;
- changes in the market valuations of other Internet companies;
- the addition or loss of strategic relationships or key
vendors;
- conditions or trends in the Internet, online commerce and
media streaming markets;
- changes in the market valuations of other Internet, online
service or software companies;
- announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or
capital commitments;
- additions or departures of key personnel;
- sales of our common stock; and
- general stock market conditions and conditions in the
technology and Internet sectors in particular.
16
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology. These forward-looking statements include,
without limitation, statements about our market opportunity, our strategies,
competition, expected activities and expenditures as we pursue our business
plan, and the adequacy of our available cash resources. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. The information set forth under the headings "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identify important additional factors that could materially
adversely affect our actual results and performance. All forward-looking
statements attributable to us are expressly qualified in their entirety by the
foregoing cautionary statement. Moreover, neither we nor anyone else assumes
responsibility for the accuracy and completeness of such statements. We
undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
USE OF PROCEEDS
We will not receive any proceeds upon conversion of the Series A preferred
stock, nor will we receive any of the proceeds from the sale by the selling
stockholders of the shares issued upon such conversion.
We will receive the exercise price of any investment options and warrants that
are exercised by the selling stockholders, but they are under no obligation to
exercise. Assuming exercise of all of the investment options and warrants, the
gross proceeds to us from the exercise of (a) the investment options would be
$8,500,000 plus additional amounts which accrue from time to time on the stated
value of the outstanding Series A preferred stock at a rate of 5% per annum, and
(b) the warrants would be $5,737,500. We intend to use any proceeds from
exercise of the investment options and warrants for working capital and general
corporate purposes.
MARKET INFORMATION, SHAREHOLDERS AND DIVIDENDS
MARKET INFORMATION
Our common stock has been traded on the OTC Bulletin Board under the trading
symbol "GLMC" since August 24, 1998. Prior to that date, our common stock was
not traded in the public market. The following table sets forth, for the periods
indicated, the high and low closing prices for our common stock as reported on
the OTC Bulletin Board. The quotations do not reflect adjustments for retail
mark-ups, mark-downs, or commissions and may not necessarily represent actual
transactions. On January 11, 2000, the closing price for our common stock on the
OTC Bulletin Board was $5.50 per share.
PERIOD LOW CLOSE HIGH CLOSE
FISCAL YEAR ENDING JULY 31, 2000:
First Quarter $5.437 $8.187
FISCAL YEAR ENDING JULY 31, 1999:
Fourth Quarter $4.00 $ 13.375
Third Quarter $4.00 $ 5.100
Second Quarter $ .437 $ 8.875
First Quarter (from August 24, 1998) $ .437 $ 2.500
The market price of our common stock has been, and is likely to continue to be,
highly volatile. Purchasers of our common stock may not be able to resell their
shares following periods of volatility because of the market's adverse reaction
to volatility. The trading prices of many technology and Internet-related
companies' stocks reached historical highs during our 1999 fiscal year, and
reflected valuations substantially above historical levels. During the same
period, these companies' stocks have also been highly volatile and have recorded
lows well below historical highs. We cannot assure you that our stock will trade
at the same levels of other Internet stocks or that Internet stocks in general
will sustain their current market prices.
17
SHAREHOLDERS
As of January 11, 2000, there were 51 holders of record of 21,599,700 shares of
the Common Stock, and one holder of 7,750 shares of Global Media's Series A
preferred stock.
DIVIDENDS
To date, we have not declared or paid any dividends on any of our capital stock.
Prior to our acquisition of Westcoast, however, it paid $114,632 in cash
dividends in fiscal 1997. We currently intend to retain earnings, if any, to
fund the development and growth of our business and do not anticipate paying
cash dividends in the foreseeable future. Payment of future dividends, if any,
will be at the discretion of our board of directors after taking into account
various factors, including our financial condition, operating results, current
and anticipated cash needs and plans for expansion. So long as shares of our
Series A preferred stock are outstanding, the payment of dividends on our common
stock will require the consent of the holders of a majority of the shares of
Series A preferred stock then outstanding.
18
CAPITALIZATION
The following table sets forth as of July 31, 1999: (a) our actual
capitalization, (b) our pro forma capitalization after giving effect to our sale
on May 6, 1999 of a convertible debenture in the original principal amount of
$8,500,000 and related warrants to RGC International Investors, LDC as described
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Events," and (c) our pro forma capitalization as adjusted to
give effect to our conversion on July 19, 1999 of the debentures into 8,500
shares of Series A preferred stock as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent Events" and
"Description of Capital Stock - Preferred Stock - Series A Convertible Preferred
Stock." This information should be read in conjunction with our Consolidated
Financial Statements and the related Notes appearing elsewhere in this
prospectus.
JULY 31, 1999
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED
Mezzanine Equity:
Preferred Stock:
Authorized shares - actual; 100,000,000 shares
Series A preferred stock, designated - 8,500 shares (1) $7,089,775 -
Stockholders' equity:
Preferred Stock:
Authorized shares -100,000,000 shares pro forma as adjusted
Series A preferred stock, designated -
none actual; 8,500 shares pro forma as adjusted (1)
Issued and outstanding - none actual; 8,500 pro forma as
adjusted (1)........................................... - $7,089,775
Common stock, $0.001 par value per share:
Authorized shares - 200,000,000 shares actual and pro forma as
adjusted
Issued and outstanding - 20,544,431 shares actual and pro
forma as adjusted(2)...................................... 12,658 12,658
Additional paid-in capital............................... 2,617,109 2,617,109
Accumulated deficit...................................... (2,893,070) (2,893,070)
Total stockholders' equity (deficit)........................ (263,303) 6,826,472
Total capitalization................................... $ 6,826,472 $ 6,826,472
- --------------------------
(1) Before the exercise of 750 shares of Series A preferred stock into 175,339
shares of common stock through January 11, 2000.
(2) Excludes the following, which were outstanding at July 31, 1999:
- - Shares of common stock issuable on exercise of options as follows: 237,500
shares at an exercise price of $0.50 per share, 2,930,000 at an exercise
price of $4.00 per share, and 89,500 shares at an exercise price of $6.25
per share.
- - 62,769 shares of common stock issuable upon exercise of warrants issued to
the placement agents in connection with our convertible debenture offering,
at an exercise price of $8.125 per share.
- - 680,000 shares of common stock issuable upon exercise of the warrants
issued in connection with the our Series A preferred stock at an exercise
price of $8.3475 per share, and up to 1,369,361 shares of common stock
issuable upon exercise of the related investment options for the conversion
price of the Series A preferred stock upon any conversion.
- - 338,983 shares of common stock issuable to Standard Radio Inc., at a
purchase price of $5.90 per share, issued to Standard Radio in December
1999.
19
SELECTED FINANCIAL DATA
The selected historical financial information for (a) the fiscal years ended
July 31, 1999 and 1998 is derived from our consolidated financial statements,
which were audited by Ernst & Young LLP, independent chartered accountants and
(b) the quarter ended October 31, 1999, is derived from our unaudited
consolidated financial statements for that period. Net revenues, gross profit
and operating expenses in the table set forth below do not include the results
of operations of our discontinued home satellite and call center businesses
described in "Prospectus Summary - Global Media." See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Discontinued Operations."
You should read this information in conjunction with the Consolidated Financial
Statements and the related Notes and the discussion in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained
elsewhere in this prospectus.
YEARS ENDED JULY 31, QUARTER ENDED
----------------------------------------------------------
1999 1998 OCTOBER 31, 1999
----------------------------------------------------------
(AUDITED) (UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ 7,091 -- $ 13,645
Gross profit................................ 7,091 -- (59,145)
Operating expenses.......................... (2,312,426) (304,919) (1,503,765)
Loss from continuing operations............. (2,228,493) (304,919) (1,562,910)
Loss from discontinued operations........... (2,581) (147,909) --
Net loss.................................... (2,231,074) (452,898) (1,555,272)
Net loss applicable to common stockholders.. $ (2,231,074) $ (452,898) $ (1,555,272)
============= ============ ================
Basic and diluted loss per share............ $ (0.11) $ (0.02) $ (0.08)
Weighted-average shares outstanding used in
computing basic and diluted loss per share.. 20,245,889 19,554,402 20,680,894
JULY 31, OCTOBER 31,
CONSOLIDATED BALANCE SHEET DATA: 1999 1998 1999
----------------------------------------------------------
(AUDITED) (UNAUDITED)
Working capital (deficiency)........................ $ 5,289,038 $ (279,214) $ 1,325,502
Total assets........................................ 7,548,603 271,562 6,148,002
Liabilities......................................... 722,131 378,141 832,552
Total stockholders' equity (deficiency)............. (263,303) (106,579) 5,315,450
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This section contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are not guarantees of our future
performance. They are subject to risks and uncertainties related to business
operations, some of which are beyond our control. Our actual results may differ
materially from those anticipated in these forward-looking statements. See
"Cautionary Note Regarding Forward-Looking Statements."
- --------------------------------------------------------------------------------
OVERVIEW
We sell music CDs and cassettes, home videos and digital video discs (DVDs),
books and other entertainment products. Sales are made through our own online
store and through the private-label storefronts which we create for the network
associates in our Global Media Network program. We also offer an award winning
streaming media broadcasting solution to radio and television stations and
internet sites through our Global Media Broadcast Network program.
We were incorporated in April 1997 and acquired Westcoast Wireless Cable Ltd. in
May 1997 from our controlling shareholder. We discontinued Westcoast's
historical operations, the sale and servicing of direct-to-home satellite
broadcast hardware and programming services, in the fourth quarter of fiscal
1998, and discontinued our other historical operations, the operation of an
investor relations call center, in the third quarter of fiscal 1999. See
"Discontinued Operations."
Since our inception, we have incurred significant losses, including losses from
our discontinued operations. See "Discontinued Operations." Since third quarter
of fiscal 1999, these losses have resulted primarily from costs related to
developing our e-commerce products and our Web sites, developing or acquiring
technologies to be used in our business and general corporate overhead, and have
generated minimal revenues from our new operations. We expect to continue
incurring net losses for the foreseeable future, as we plan to invest in:
- - promoting our network associate program;
- - completing, launching and marketing our Broadcast Network;
- - enhancing our e-commerce site and improving its reliability and
functionality;
- - developing our infrastructure and applications;
- - marketing and promotion; and
- - hiring additional employees.
We believe these expenditures are necessary to attract more customers to our
site and the Web sites of our network associates, and to generate greater online
revenues.
Our revenues for the foreseeable future will derive primarily from advertising
and product sales and will depend primarily on the number of network and
broadcast associates that we sign up, the number of listeners on our simulated
live stations, the number of visitors that we are able to attract to our online
store and that our network associates are able to attract to their stores, and
on how many of those visitors purchase our products. Our Broadcast Network
revenues will also depend to a significant extent on our ability to attract
customers (such as radio and television stations) for these streaming media
services. We have recently initiated a program to market streaming media
consulting services and expect that over time this service line could become a
significant revenue contributor. We cannot forecast with any degree of certainty
the number of visitors to our online store or the stores of our network
associates, the number of visitors that will become customers, the number of
customers we will be able to secure for our streaming media services, or the
amount of entertainment product sales and streaming media services revenues. If
our revenue growth is slower than anticipated or our operating expenses exceed
our expectations, our losses will be significantly greater. We may never achieve
or sustain profitability.
Because of our discontinued operations, the development stage of our business
and the seasonality inherent in a retail business, our results of operations
discussed below are not necessarily indicative of the results you should expect
for any future comparable period. See " - Seasonality". Inflation has not
historically had any material effect on our operations.
21
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NOTE: The financial results contained in the following discussion have been
restated to exclude our discontinued call center and home satellite
businesses. For summary financial results from those operations,
SEE " - Discontinued Operations."
- --------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
NET REVENUES. We had $7,091 in revenues from our e-commerce operations
in fiscal 1999, and none in fiscal 1998, as our internet-focused business did
not begin generating revenue until after the end of fiscal 1999. SEE " - Recent
Events."
OPERATING EXPENSES. Our operating expenses increased 658% to $2,312,426
in fiscal 1999, from $304,919 in fiscal 1998. This increase was due primarily to
compensation expense relating to stock option grants to our employees and
directors, increased legal, accounting and other expense related to being a
public reporting company, expenses related to our new facility, and development
and launch of our internet sites and our network associate programs, as follows:
- - Advertising and marketing expenses increased 911% to $67,672 in fiscal
1999, from $6,691 in fiscal 1998, due to investigations regarding
development of the e-commerce model, marketing of the network associate
program, and related press releases.
- - Amortization increased 893% to $297,655 in fiscal 1999, from $29,973 in
fiscal 1998, due primarily to our acquisition of additional capital assets
and the amortization of costs associated with our financing activities.
- - Professional fees increased 57% to $146,367 in fiscal 1999, from $93,505 in
fiscal 1998, due primarily to the issuance of stock options in lieu of
consulting fees.
- - Shareholder communication expenses increased 306% to $218,969 in fiscal
1999, from $53,995 in fiscal 1998, due primarily to press releases and
other costs of becoming a publicly-traded company.
- - Technical operations and development expense were $203,420 in fiscal 1999,
as compared and zero in fiscal 1998. These expenses were primarily due to
non-software related costs of developing our e-commerce and streaming media
technology.
- - Travel expense increased 772% to $184,572 in fiscal 1999, from $21,174 in
fiscal 1998, due primarily to travel relating to development of strategic
alliances, working with web site designers and developers, attending
industry related conferences, and meeting with potential financing sources.
- - We incurred stock option compensation expenses of $548,800 in fiscal 1999,
compared to none in fiscal 1998, as the result of issuing stock options to
certain officers and employees of Global Media for less than the market
trading price of our common stock on the date we began trading on the OTC
Bulletin Board. SEE "Certain Transactions."
INTEREST. We earned $76,842 in interest income in fiscal 1999, compared
to zero in fiscal 1998, on the funds received in our Convertible Debenture and
Warrant Offering. We incurred interest expense of $210,855 in fiscal 1999,
compared to $1,298 in fiscal 1998. This increase was due primarily to interest
accruing on the Rolling Oaks Enterprises, LLC loan, the Convertible Debenture
and the Shareholder loans. SEE "- Liquidity and Capital Resources" and "Certain
Transactions."
NET LOSS FROM CONTINUING OPERATIONS. We experienced a $2,228,493 net
loss from continuing operations for fiscal 1999, up 631% from our $304,919 net
loss from continuing operations for fiscal 1998, due primarily to the increase
in operating expenses and the lack of revenues from continuing operations.
NET LOSS FROM ALL OPERATIONS. We experienced a $2,231,074 net loss
from all operations for fiscal 1999, up 393% from our $452,828 net loss from all
operations for fiscal 1999. SEE " - Discontinued Operations."
22
QUARTER ENDED OCTOBER 31, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998
SALES. Revenues of $13,645 were generated from the Company's e-commerce
and broadcasting operations in the first quarter of fiscal 2000, compared to
none in the first quarter of fiscal 1999. The Company's internet-focused
business did not commence until the third quarter of fiscal 1999. SEE " - Recent
Events."
COST OF SALES. Expenditures of $72,790 were recorded in the first
quarter of fiscal 2000, compared to none in the first quarter of fiscal 1999,
due primarily from incurring minimum contractual broadcasting related charges
that were payable as we continued to develop our network.
OPERATING EXPENSES. Our operating expenses increased 114% to $1,503,765
in the first quarter of fiscal 2000, from $701,887 in the first quarter of
fiscal 1999. This increase was due primarily to increased legal, accounting and
other expenses related to being a public reporting company, expenses related to
our new Vancouver, B.C. facility, and personnel, capital assets and other costs
associated with the development and launch of our internet sites and our network
associate programs, as follows:
- - Amortization increased to $91,584 in the first quarter of fiscal 2000, from
$13,047 in the first quarter of fiscal 1999, due primarily to the
acquisition of additional capital assets.
- - General and administrative expenses increased 221% to $290,091 in the first
quarter of fiscal 2000, from $90,369 in the first quarter of fiscal 1999,
due primarily to the costs associated with multiple office locations and
the administration required for a significantly larger organization.
- - Sales and marketing expenses increased to $547,134 in the first quarter of
fiscal 2000, compared to $8,702 in the first quarter of fiscal 1999. The
increase was primarily due to the costs associated with attending industry
related conferences, marketing of the Network Associate program and travel
relating to the development of strategic alliances and potential financing
sources.
- - Shareholder communication expenses increased 64% to $67,200 in the first
quarter of fiscal 2000, from $40,969 in the first quarter of fiscal 1999,
due primarily to the costs of being a publicly-traded company for the full
quarter versus a partial quarter in the prior year.
- - Technical operations and development expenses were $507,756 in the first
quarter of fiscal 2000, as compared to none in the first quarter of fiscal
1999. These expenses were primarily due to the costs of developing our
e-commerce and streaming media technologies.
- - We incurred no stock option compensation expenses in the first quarter of
fiscal 2000, compared to $548,800 in the first quarter of fiscal 1999 as
the result of issuing stock options in fiscal 1999 to certain of our
officers and employees for less than the market trading price of our common
stock on the date we began trading on the OTC Bulletin Board.
INTEREST. We earned $12,273 in interest income in the first quarter of
fiscal 2000, compared to none in the first quarter of fiscal 1999, on the funds
received from our convertible debenture and warrant offering to RGC. SEE "-
Liquidity and Capital Resources."
NET LOSS FROM CONTINUING OPERATIONS. We experienced a $1,555,272 net
loss from continuing operations for the first quarter of fiscal 2000, up 121%
from our $705,100 net loss from continuing operations for the first quarter of
fiscal 1999, due primarily to the increase in operating expenses as we
implemented our internet-focused business plan.
NET LOSS FROM ALL OPERATIONS. We experienced a $1,555,272 net loss from
all operations for the first quarter of fiscal 2000, up 118% from our $712,149
net loss from all operations for the first quarter of fiscal 1999. SEE " -
Discontinued Operations."
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
NOTE: The financial results contained in the following discussion have been
restated to exclude our discontinued call center and home satellite
businesses. For summary financial results from those operations, SEE "
- Discontinued Operations." This section should be read in conjunction
with " - Results of Operations", above.
- --------------------------------------------------------------------------------
23
YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
FINANCING ACTIVITIES. We financed our operations and capital
expenditures in fiscal 1999 primarily from the proceeds of common stock sales
and loans from stockholders and third-party lenders.
COMMON STOCK. Cash received upon the exercise of stock options
was $393,250 in fiscal 1999, due to the exercise of 769,500 options. No stock
options were exercised in fiscal 1998. However, cash received from sales of
common stock was $221,267 in fiscal 1998.
LOANS. In fiscal 1999, we obtained cash from three loans. The
loans consisted of (a) a one-year loan of $500,000, with a 24% interest rate,
from Rolling Oaks Enterprises, LLC, (b) $299,549 in net short-term loans from
stockholders and affiliates, as compared to $48,176 in fiscal 1998, and (c) $8.5
million from our May 1999 convertible debenture offering which was offset by a
finder's fee of $510,000. The Rolling Oak loan was paid off from the proceeds of
the convertible debenture offering. We have entered into agreements with the
stockholders to convert 50% of the loans into common stock and the remaining 50%
into notes that will be repaid with interest within the next year. The
convertible debenture was converted into 8,500 shares of our Series A preferred
stock on July 19, 1999. SEE " - Recent Events." In addition, we obtained lines
of credit from three of our suppliers, which are secured by $170,000 in term
deposits funded from the proceeds of our convertible debenture offering. These
lines of credit expire on either May 12, 2000 or June 14, 2000.
CAPITAL EXPENDITURES AND COMMITMENTS. Our capital expenditures
increased 682% to $1,483,360 in fiscal 1999, from $189,706 in fiscal 1998,
primarily as the result of capitalized development costs for our Web sites and
computer hardware and software purchases. As of July 31, 1999, we had no
material commitments outstanding for purchases of additional capital assets,
except for our April 20, 1999 engagement of RealNetworks to perform consulting
services in connection with the design and development of our Broadcast Network.
Under the terms of the agreement, as amended on June 4, 1999, we are required to
make payments totaling $3,655,000 over the duration of the project with the
final payment date projected to be December 21, 1999.
WORKING CAPITAL (DEFICIENCY). At July 31, 1999, we had working capital
of $5,289,038 and a working capital ratio of 8.32. At July 31, 1998, we had a
working capital deficiency of $279,214 and a working capital ratio of .26.
QUARTER ENDED OCTOBER 31, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998
FINANCING ACTIVITIES. We financed our operations and capital
expenditures in first quarter fiscal 2000 primarily from existing cash
resources. Cash received upon the exercise of stock options was $44,250 in first
quarter fiscal 2000, due to the exercise of 49,125 stock options. No stock
options were exercised in first quarter fiscal 1999.
CAPITAL EXPENDITURES AND COMMITMENTS. Our capital expenditures
increased to $2,547,269 in first quarter fiscal 2000, from $26,524 in first
quarter fiscal 1999, primarily as the result of capitalized development costs
for our Broadcast Network and Global Media Player, and computer hardware,
software and operating equipment purchases. As of October 31, 1999, we had no
material commitments outstanding for purchases of additional capital assets,
except for $825,000 due under our April 20, 1999 engagement of RealNetworks to
perform consulting services in connection with the design and development of our
Broadcast Network and Global Media Player.
WORKING CAPITAL (DEFICIENCY). At October 31, 1999, we had working
capital of $1,325,502 and a working capital ratio of 2.59. This represents an
improvement from our October 31, 1998 working capital deficiency of $436,869 and
working capital ratio of 0.14.
RECENT EVENTS
OFFERING TO RGC INTERNATIONAL INVESTORS LDC
OFFERING. In May 1999, we raised $8.5 million through the sale of a
convertible debenture, in the original principal amount of $8.5 million, to RGC
International Investors LDC. On July 19, 1999, we exercised our right to convert
the debenture into 8,500 shares of our Series A convertible preferred stock. In
the offering, we also issued RGC a five-year warrant to purchase 680,000 shares
of common stock at $8.3475 per share. In addition, we granted RGC the option,
exercisable simultaneously with conversion of the Series A preferred stock into
common stock, to purchase an equal number of additional shares of common stock
at a per share price equal to the conversion price in effect at the time of
conversion. Without giving effect to the accrual of additional amounts on the
stated value of the Series A preferred stock since May 6, 1999, the exercise in
full of the these investment options could result in up to an additional $8.5
million being invested by RGC. With full exercise of warrants and options, the
potential total investment by RGC would be $22.7 million. Subsequent
24
to the quarter end, RGC exercised options for the purchase of 164,217 common
shares, providing additional cash proceeds of $668,399 to the Company.
TERMS OF PREFERRED STOCK. The stated value of each share of Series A
preferred stock ($1,000), plus an amount accruing thereon at the rate of 5% per
annum, is convertible from time to time into shares of our common stock based
upon the lesser (a) a fixed conversion price of $8.125, which is 130% of the
three-day average ending April 30, 1999, the date RGC committed to the
investment, or (b) a variable conversion price equal to 100% of the future
market price of the common stock at the time of conversion. The Series A
preferred stock has no voting rights, except that the holders of the Series A
preferred stock have the right to vote on issues directly affecting the Series A
preferred stock as a class. Under certain circumstances, we may be required to
redeem the Series A preferred stock upon the occurrence of certain events that
are within our control. To the extent not previously converted, the shares of
Series A preferred stock will automatically convert into common stock on May 6,
2002.
NASDAQ LISTING. We filed a listing application with Nasdaq on November
15, 1999, for inclusion on its Small Cap market. However, there is no assurance
that our application will be approved. The fixed conversion price and the
applicable percentage of the future market price used in the variable conversion
price calculation was adjusted downward since our common stock was not listed on
the Nasdaq National Market or the Nasdaq SmallCap Market by November 6, 1999.
The decrease in the fixed and variable conversion prices will increase the
number of shares of common stock issuable upon conversion, which could cause
substantial additional dilution to other holders of our common stock.
REGISTRATION OF UNDERLYING COMMON SHARES. Effective as of August 26,
1999, we registered 7,443,153 shares of our common stock which the selling
holders of those shares may acquire on conversion or exercise of shares of the
outstanding Series A convertible preferred stock, related warrants and related
investment options. As of January 11, 2000, RGC had converted a total of 750
shares of our Series A preferred stock into 175,339 shares of common stock, had
exercised investment options to purchase 175,339 shares of our common stock, and
had exercised none of the related warrants.
LAUNCH OF E-COMMERCE SITE.
We launched a beta version of our online store in May 1999 and commercially
launched it in September 1999. We adopted an initial pricing policy intended to
result in a small initial volume of transactions while site development and
systems integration was fully completed. We do not anticipate earning
significant e-commerce revenues until we launch a substantial number of private
label online stores for associates participating in our network associate
program.
STRATEGIC RELATIONSHIP WITH STANDARD RADIO, INC.
On December 7, 1999, we entered into a strategic relationship with Standard
Radio, Inc. We expect this relationship to provide significant opportunities for
future revenues and growth, in addition to the initial cash investment. In that
transaction (a) Standard invested $2,000,000 in exchange for 338,983 shares of
our common stock at a purchase price of $5.90 per share, (b) Standard's
president and chief executive officer, Gary Slaight, was appointed to a seat on
our Board of Directors and granted options to purchase 125,000 shares of common
stock, (c) we entered into agreements with eight members of Standard's
management team under which they will serve on our marketing advisory committee
and will promote our solutions to other radio stations in North America, for
which each will receive unvested options to purchase up to 20,000 shares of our
common stock, (d) Standard agreed to cause each of the radio stations owned and
controlled by it now and for the next three years to become our e-commerce and
broadcast associates, and (e) Standard received the right to approve agreements
between us and radio stations which compete in the same genre and locale as each
of Standard's stations in Canada.
FUTURE CAPITAL REQUIREMENTS
We expect negative cash flow from operations to continue for fiscal 2000, as we
continue to develop and market our internet-focused operations, and anticipate
achieving breakeven in fiscal 2001 and profitability during fiscal 2002. We
currently anticipate that approximately $4 million of additional funds will be
required to meet our anticipated needs for working capital, capital expenditures
and business expansion through fiscal 2000. However, we currently anticipate
that our available funds will be sufficient to meet our anticipated needs for
working capital, capital expenditures and business expansion through fiscal
2000.
We may need to raise additional funds sooner in order to fund more rapid
expansion, to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders
25
will be reduced, stockholders may experience additional dilution and such
securities may have rights, preferences and privileges senior to those of our
common stock.
There can be no assurance that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to develop or enhance services
or products, respond to competitive pressures, fund expansion or take advantage
of unanticipated acquisition opportunities. Such inability could negatively
impact our business.
SEASONALITY
We expect our operating results to fluctuate significantly from period to
period. Both seasonal fluctuations in internet usage and traditional retail
seasonality may affect our business. Internet usage generally declines during
the summer. Sales in the traditional retail book and music industries usually
increase significantly in the fourth calendar quarter of each year and are
correspondingly lower in other quarters. If similar seasonal patterns emerge in
e-commerce, our revenues may vary significantly from period to period.
FOREIGN CURRENCY TRANSLATION
We have translated our monetary assets and liabilities which are denominated in
a foreign currency into U.S. dollars at the period-end exchange rate, and have
translated other balances at the rates in effect on the dates of the
transaction. We have translated our income and expense items at the average
exchange rates prevailing during the fiscal period. Exchange gains and losses
arising on translation are reflected in net income for the period.
DISCONTINUED OPERATIONS
CALL CENTER BUSINESS
Our discontinued call center business provided small U.S. and Canadian public
companies with investor relations and information dissemination services in
various industries, using its customized contact management software and contact
database. This database was based in part on the customer list from our home
satellite business. SEE "- Home Satellite Business." We began our call center
business in the first quarter of fiscal 1998 and discontinued it in the third
quarter of fiscal 1999, due to the difficulty of replacing a terminated key
employee and our decision to focus on e-commerce activities. We have accounted
for the call center business as a discontinued operation, and accordingly, its
operations have been segregated in the accompanying consolidated statements of
operations. The following chart summarizes our revenue and expenses from the
call center business:
Years Ended
July 31,
------------------------------------
1998 1999
------------------------------------
Total revenue $326,279 $20,130
General and administrative expenses 217,666 $20,130
------- -------
Net profit (loss) $108,613 $0
======== ==
HOME SATELLITE BUSINESS
Westcoast Wireless Cable Ltd., one of our wholly-owned subsidiaries, was in the
business of direct marketing of home satellite programming and hardware since
May 1994. Our president, Michael Metcalfe, was originally the sole owner of
Westcoast. We acquired all of the stock of Westcoast from Mr. Metcalfe in May
1997, in exchange for 8,000,000 shares of our common stock and $100,000 in cash.
SEE "Certain Transactions." Westcoast discontinued its home satellite operations
in the fourth quarter of fiscal 1998 following a decision by the Canadian
Federal Court of Appeal in November, 1997 prohibiting the sale of U.S.-based
satellite and programming services in Canada. Westcoast has been accounted for
as a discontinued operation, and accordingly, its operations have been
segregated in the accompanying consolidated statements of operations.
RISKS ASSOCIATED WITH THE YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a
26
temporary inability to process transactions, send invoices or engage in
similar normal business activities. Any failure of our material systems, our
vendors' material systems or the Internet to be year 2000 compliant would
have material adverse consequences for us. These consequences would include
difficulties in operating our site effectively, taking product orders, making
product deliveries or conducting other fundamental parts of our business.
We have assessed the year 2000 readiness of the software, computer technology
and other systems that we use internally. Based on our review, we do not believe
that we have material exposure to the year 2000 issue with respect to our own
information systems since our existing systems correctly define the year 2000.
We have inquired of our material vendors as to the year 2000 compliance of their
own systems or whether they have or finalized any contingency plans to address
year 2000 problems that may arise. We have received information from Baker &
Taylor, Valley Media and MCI Worldcom, asserting that they are year 2000
compliant. We are currently unable to predict the extent to which the year 2000
issue will affect our other suppliers, or the extent to which we would be
vulnerable to our suppliers' failure to remediate any year 2000 issues on a
timely basis. The failure of a major supplier subject to the year 2000 issue to
convert its systems on a timely basis or a conversion that is incompatible with
our systems could have a material adverse effect on us.
We also depend on the year 2000 compliance of the computer systems and financial
services used by consumers. A significant disruption in the ability of consumers
to reliably access the Internet or portions of it or to use their credit cards
would have an adverse effect on demand for our products and services. We
anticipate that most of the sales through our e-commerce sites will be made with
credit cards. Our business and results of operations therefore may be materially
adversely affected to the extent that our customers are unable to use their
credit cards due to year 2000 issues that are not rectified by credit card
providers. One further, and more extreme, case may be the failure of the
communication mode (telephone, cable or satellite) over the Internet, which
could significantly impact our ability to generate sales.
At this time, we have not yet developed a contingency plan to address situations
that may result if we, our suppliers or the credit card systems used by our
customers are unable to achieve year 2000 compliance. The cost of developing and
implementing such a plan, if necessary, could be significant and could have a
material adverse effect on our business.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS133, "Accounting for
derivative instruments and hedging activities". SFAS 133 is effective for
financial statements for fiscal years beginning after June 15, 2000. We are
unable to predict to what extent, if any, that our business will be effected
once SFAS 133 is effective.
27
BUSINESS
OVERVIEW
We sell music CDs and cassettes, home videos and digital video discs (DVDs),
books and other entertainment products through our own online store and through
our Network Associate program, a growing network of third-party private label
storefronts. Under that program, we provide our network associates with an
e-commerce solution that consists of a customizable, private label,
entertainment merchandise store on the network associate's own Web site. This
storefront is integrated with our back-end transaction processing systems,
contracted order fulfillment services and customer service support, which allows
customers to place orders on the network associate's Web site that we process
and fulfill.
In addition to our e-commerce solution, we have developed an internet
broadcasting solution, our Broadcast Network, which includes a growing network
of radio and television stations and internet sites. The centerpiece of our
Broadcast Network solution is a streaming media player, the Global Media Player,
that is being developed for us by Real Networks, Inc. The Global Media Player is
private-label branded for our broadcasting associates and enables listeners to
stream live and simulated live audio, video and other multimedia content (such
as radio feeds) from our 10 proprietary music stations and from the stations of
each of our broadcast associates. We launched our Broadcast Network program with
the beta version of the Global Media Player in October 1999, and incorporated
the commercial version into our Broadcast Network in December 1999. When our
Broadcast Network is integrated with our e-commerce solution, our network
associates can offer their customers a tightly integrated entertainment and
online shopping experience. For example, subscribing to our Broadcast Network
will enable a network associate's customers to listen to live music programming
through the Global Media Player and purchase CDs of the featured artists at the
same time.
We launched a beta version of our own e-commerce site in May 1999 to demonstrate
our e-commerce solution, and commercially launched our own online store in
September 1999. We significantly revised our online store on November 29, 1999
to offer greater functionality and ease of use. Our online store combines an
extensive catalogue of music, books, videos and other entertainment products,
with easy-to-use navigation and search capabilities and entertainment-focused
content. Additionally, visitors can download the Global Media Player for free.
We are continuing the further development of our online store and e-commerce
backend to provide additional features and content, and expect that these
enhancements will improve the revenue generating potential of our own store and
the stores of our network associates.
INDUSTRY BACKGROUND
THE INTERNET
The impact of the Internet on, and its importance to, the global economy is
increasing significantly. International Data Corporation estimates that the
number of persons accessing the Web will reach 320 million by 2002 and total
Internet commerce the purchase of goods and services over the Internet by both
businesses and consumers - will approach $250 billion by 2002. Advances in
technology, such as streaming media technologies, and broadband access are
making the Internet an increasingly important new medium for multimedia content
delivery and distribution. We believe that the increase in usage of the Web for
commerce and multimedia content delivery will be due to a number of factors,
including the following:
- a large and growing base of personal computers and other Web access
devices in the home and workplace;
- declines in the cost of personal computers and other Web access
devices;
- declines in the cost of Internet access;
- increases in the performance of personal computers;
- broadband access and increases in Internet bandwidth;
- advances in streaming media technologies that enable the continuous
transmission and playback of multimedia content, such as audio and
video, which will improve the type and quality of content available on
the Web;
- the availability of a broader range of online products and services;
and
- growing awareness by businesses and consumers of the benefits of
online shopping and the delivery or consumption of multimedia content.
28
The Internet is unique as a multipurpose medium for communicating, delivering
and finding information and other content and purchasing products and services.
The Internet offers powerful characteristics, such as instant access to a wide
variety of content and commerce destinations, vast selection, interactivity and
personalization, that differentiate it from traditional media and commerce
distribution channels. We believe that, among other things, these
characteristics will facilitate use of the Internet as a purchasing medium.
International Data Corporation estimates that worldwide business-to-consumer
sales over the Internet will increase from approximately $11 billion in 1998 to
approximately $93 billion by 2002.
E-COMMERCE AND INTERNET BROADCASTING
The e-commerce and internet broadcasting industries are new and rapidly
evolving. Rapid growth in the use of the Web and consumer e-commerce is a recent
phenomenon, and the commercial use of the Internet as a broadcast medium is in
its early stages. Demand for recently introduced services and products over the
Web is subject to a high level of uncertainty. The development of the Web as a
viable commercial marketplace or as a broadcast medium is subject to a number of
factors, including the following:
- e-commerce is at an early stage and buyers may be unwilling to
shift their purchasing from traditional vendors to online
vendors;
- Internet broadcasts of multimedia content are generally of lower
quality than broadcasts in traditional mediums and are subject to
frequent interruptions and packet loss;
- radio listeners, television viewers and consumers of other
multimedia content may be unwilling to shift their consumption of
such content to the Internet or it may be more difficult to
establish viable revenue streams from Internet broadcasts;
- insufficient availability of internet infrastructure could result
in slower response times;
- adverse publicity and consumer concerns about the security of
commerce transactions on the Internet could discourage its
acceptance and growth;
- transmission of confidential information (such as credit card and
other personal information) over the Internet has been a
significant barrier to e-commerce and communications over the
Web;
- unavailability of cost-effective, high-speed Internet service
could limit demand for Web services and products; and
- frequent outages or delays on the Internet could slow Web usage
or cause it to decline.
RETAIL ENTERTAINMENT MERCHANDISING
Traditional channels of retail entertainment merchandise distribution, such as
music stores, home video stores, bookstores and mass market retailers, have many
limitations, including:
- - INCONVENIENCE. Shopping at a physical store can be inconvenient. It
involves time-consuming activities such as making a trip to the store,
finding a parking space, searching for desired merchandise and waiting in
line to make a purchase. Searching for merchandise can be especially
time-consuming if the consumer is simply browsing (i.e., is not looking for
a particular title or artist), since searching generally for entertainment
merchandise that may interest the consumer can involve significant time
combing through aisles of CDs or rows and rows of books or videos.
- - NARROW SELECTION. Consumers of entertainment products value the opportunity
to select items from a broad range of products that best fit their
interests. Often, consumers must choose from a narrow selection at
traditional store-based retailers. In the entertainment merchandising
industry, stores often specialize in particular types of products, such as
books or music only, forcing the consumer to make a trip to more than one
store. Even mass market retailers that offer selections from a wide variety
of entertainment product categories often have a narrow selection of titles
or genres within those categories because of limitations on the amount of
shelf-space and the resulting need to offer only the fastest selling
titles, genres or products.
- - LACK OF INFORMATION AND PERSONALIZATION. Physical retailers are
space-constrained and invest heavily in inventory, real estate, building
improvements and hiring and training of store personnel. Although some
large entertainment merchandisers have made strides to include customized
information and better opportunities for consumers to
29
sample the products they carry (such as kiosks at music retailers that
allow customers to preview CDs), physical retailers generally lack the
display space and resources to provide consumers in-depth information,
such as book or music reviews and interviews with authors and artists,
that could greatly enhance the shopping experience. Physical retailers
also have no way of instantaneously gauging and responding to an
individual consumer's personal tastes.
Because online retailers of entertainment products incur a fraction of the costs
for physical space and personnel and have almost unlimited "virtual" shelf
space, they can offer consumers a broader range of product categories, and
selections within those categories, than can physical retailers. In addition,
online retailers can provide consumers with a wide range of useful and
entertaining information as part of the online shopping experience, such as
interviews with authors or artists, book, music or video reviews, discographies
and other lists of artists' works, historical perspectives and feedback from
other consumers. The online shopping experience can be interactive, such as
giving consumers the opportunity to provide their own personal reviews of
products that they have bought. Online retailing also offers the opportunity to
create communities of like-minded consumers. Finally, online retailers can also
use technology to instantaneously gauge and respond to a particular consumer's
interests, such as offering online recommendations or suggestions by e-mail of
other products the consumer may be interested in based on the buying patterns of
customers who bought the same product or information provided by the consumer
about his or her own interests.
Many online retailers of entertainment merchandise provide a shopping experience
that, while convenient, informative and offering a wide selection of products,
fails to fully deliver on entertainment value. Certain strategic relationships
between online retailers and multimedia content delivery companies have
attempted to create a blended online commerce and entertainment experience, but
these initiatives are often limited in the product selection offered on the
content deliverer's Web site and give a "piecemeal" impression to consumers, who
are exposed to multiple companies' brands and Web site "look-and-feel" as part
of the shopping/entertainment experience.
OUR STRATEGY
Our objective is to become a leading online entertainment company. Our strategy
to achieve this objective is to build a network of private label entertainment
product storefronts on the Web and to offer an online broadcast solution for the
delivery of streaming media over the Internet. To implement our strategy, we are
striving to attract a growing base of consumers to our network associates' Web
sites and to our own online store, and to provide them with a superior shopping
and entertainment experience. Key elements of our strategy include:
FOCUS ON CORE STRENGTHS AND ENHANCE STRATEGIC RELATIONSHIPS. We intend
to leverage off our management team's extensive experience and understanding of
the entertainment industry and the convergence of entertainment and the Internet
to deliver an integrated entertainment merchandise retailing and content
solution. We will rely extensively on third parties for cutting edge
technologies to enable us to provide e-commerce and multimedia streaming
services, and for order fulfillment and shipment. By aggregating the best in
technology, content, entertainment products and distribution services through
strategic relationships with third parties, we believe that we can maintain our
focus on continuously enhancing the shopping and entertainment experiences of
our customers.
CONTINUOUSLY IMPROVE OUR ONLINE STORE AND SERVICES. We seek to combine
a wide product selection and eye-catching multimedia content and information
with the unique aspects of the Internet to deliver a convenient, entertaining
and personalized shopping experience. To improve our e-commerce solution and our
own site, we intend to
- expand our product offerings, both within our existing categories and
by extending into other categories of entertainment-oriented products
and services,
- improve the depth and variety of content, including streamed audio,
video and other multimedia content, and
- offer more personalized services, such as recommendations based on
purchases by consumers of similar product selections or preferences
provided by the customer.
EXTEND REACH THROUGH NETWORK ASSOCIATE AND BROADCASTING NETWORK. We
intend to aggressively promote our Network Associate and Broadcast Network
programs. By offering our network associates a reasonably priced solution for
selling entertainment products online in connection with multimedia content
streaming capabilities, we believe that we will extend our customer reach on the
Web more effectively and on a more cost-effective basis than if we were to try
to obtain that reach solely through our own store.globalmedia.com online store.
MAINTAIN TECHNOLOGY FOCUS. We intend to use technology that we develop
or that we acquire or license through strategic relationships with third
parties. We will continue to develop our site's navigation and search
capabilities and
30
features to further personalize our customers' shopping experience and their
ability to find products and content. We will also use technology to increase
the efficiency of order processing and fulfillment services.
ENSURE QUICK AND EFFICIENT DISTRIBUTION. We intend to continuously
increase the automation and efficiency of our fulfillment and distribution
capabilities. Because we outsource our order fulfillment operations, we intend
to work with our fulfillment partners to find more ways to ensure prompt order
processing and delivery to our customers.
OUR SOLUTIONS
OUR E-COMMERCE SOLUTION
Our e-commerce solution leverages the Internet's capabilities for delivering
multimedia content, including live video and audio programming, to create a
unique, integrated shopping and entertainment experience for the customers of
our network associates and our own online store. The key features of our
solution consist of the following:
CONVENIENCE. Our online store and those of our network associates may
be reached from wherever the customer has access to the Web, such as the home or
office. Customers may shop 24 hours a day, seven days a week. We deliver
directly to the customer's home or office, obviating the need for a trip to a
physical store. Customers can quickly search an extensive catalogue of products
using a variety of search parameters.
SELECTION. Without the inventory or shelf-space limitations of physical
retailers, we offer a large selection of CDs, videos, DVDs and books and will
expand that selection as we add more fulfillment partners. We also have become
involved in new forms of distribution of entertainment products, such as direct
download of audio files, and intend to offer complementary products and
services, such as magazine subscriptions and concert and event ticket sales.
CONTENT. Through our online store and those of our network associates,
we offer entertainment-focused content ranging from music and entertainment news
to interviews with artists and authors, biographies and lists of their works. We
also offer content in formats designed to enhance the customer's shopping
experience, such as music clips that customers may sample before ordering CDs.
We have integrated the Global Media Player into our e-commerce solution because
we believe that online consumers of entertainment merchandise expect a more
entertaining and informative shopping experience than they can find at
traditional retail stores and in most online stores.
COMMUNITY. To create an online experience that will encourage customers
to return to our main store, we sponsor competitions and plan to build community
by hosting entertainment-oriented chat sessions.
EXTENDED REACH THROUGH NETWORK ASSOCIATE AND BROADCASTING PROGRAMS. Our
Network Associate program will extend our reach on the Web for consumers of
entertainment merchandise. We have initially targeted the radio and television
industry to take advantage of the synergies between that industry and
entertainment product retailing. In order to succeed, we must
- successfully implement our Network Associate program by establishing
broad market acceptance of the program and rapidly rolling out private
label online storefronts for numerous network associates;
- successfully implement our Broadcast Network system and gain broad
market acceptance of the streaming media services we intend to offer
through our Broadcast Network program;
- further develop our site, improve reliability and performance of both
front-end and back-end systems and order fulfillment, and timely and
successfully develop new features and functionality of our online
store and those of our network associates;
- attract a high volume of first-time and repeat customers to the Web
sites of our network associates and our online store;
- successfully respond to competition to our entertainment product
e-commerce operations from Amazon.com, Inc., CDNow, Inc. and others,
and to our streaming media services from Broadcast.com, Inc.,
Netradio.com and others;
- develop and maintain strategic relationships to enhance the features
(including content) and utility of our online store and those of our
network associates and to enable us to deliver streaming media
services;
- recruit and retain key management, technical and other employees; and
- implement adequate internal processes and controls to manage our
growth.
31
OUR NETWORK ASSOCIATE PROGRAM
Under our Network Associate program, we offer our network associates a complete,
end-to-end entertainment product e-commerce solution. Using storefront templates
that we have developed, we design a customized online storefront through which
the network associate can provide the e-commerce services and related content
that we offer. Unlike the affiliate or associate programs that are prevalent in
the consumer e-commerce industry, our program enables a network associate to
maintain a complete online storefront under its own brand name consistent with
the "look and feel" of its own Web site. We plan to offer customized private
label storefronts which offer products and related content tailored to the
network associate's target audience. We integrate the network associate's online
storefront with our back end e-commerce system and services. We believe our
Network Associate program is attractive for a variety of reasons because it:
- enables companies that lack the financial and technical resources to
develop and maintain their own proprietary e-commerce solutions to
enter into the e-commerce business for a low up-front cost and minimal
continuing direct cost (other than what they spend to market their
online stores);
- helps companies expand their Web sites to provide additional revenue
streams and enhance the appeal to their online audiences;
- allows companies to extend their brands onto the Web or maintain their
existing online brands and avoid the "brand dilution" and disjointed
customer experience engendered by industry-prevalent e-commerce
affiliate programs, which are offered under the merchant partner's own
brand - sometimes with an entirely different "look and feel" from the
affiliate's own Web site;
- allows companies to focus on core businesses and strengths by
outsourcing their e-commerce business to us; and
- includes the Global Media Player which allows customers to listen to
music while they shop.
Our business and results of operations will depend in large part on the success
of our Network Associate program. As of January 11, 2000, we had 88 Network
Associate agreements in place initially covering approximately 26 radio and TV
stations and other Internet sites. In order to attract and retain significant
numbers of network associates, we must:
- build a larger sales force to promote our network associate program,
particularly to the radio and television industries, and successfully
promote the benefits of our end-to-end e-commerce solution to
potential network associates;
- be able to offer customized, merchant-branded store fronts with
content and merchandise selection that can be specifically tailored to
different types of potential network associates with different target
markets or customers, that work reliably and effectively with our
network associates' own Web sites, and that reliably fulfill orders of
customers who purchase products through our network associates'
storefronts; and
- successfully compete against other companies that offer, or in the
future may offer, similar e-commerce and content-delivery solutions,
either on their own or through strategic relationships with other
parties.
Our business and results of operations may suffer if our network associates are
unsuccessful in attracting significant numbers of visitors to their Web sites.
While we analyze our potential network associates' plans for increasing traffic
to their Web sites, we have no control of the steps they actually take to
attract visitors to their sites.
OUR BROADCAST NETWORK PROGRAM
We have developed our Broadcast Network to take advantage of significant
improvements in multimedia streaming technologies, the resulting convergence of
radio, television and other multimedia content with the Internet and e-commerce.
Our business will depend significantly on the successful implementation of our
Broadcast Network, the successful marketing of that solution to potential
broadcast associates in the radio and television industries, and our ability to
maintain those relationships.
Using the Global Media Player, a customized RealNetworks multimedia player and
the Real Broadcast Network multimedia streaming infrastructure, our Broadcast
Network enables broad-cast associates to deliver live and simulated live
multimedia content such as radio feeds. Our Broadcast Network provides
cutting-edge multimedia content delivery capabilities and can be combined with
the private label entertainment product merchandising solution offered under our
Network Associate program. We will derive revenues from (a) product sales on the
networks associate's Web site, (b) resale of streaming media
32
bandwidth on the Real Broadcast Network to our broadcast associates, and (c)
advertising revenues from advertisements in the Global Media Player.
OUR WEB SITES
OUR MAIN STORE.
Visitors to our online store at "store.globalmedia.com" see a home page
that highlights our three product departments: "Music", "Books" and "Videos", as
well as entertainment focused news and interviews with artists and authors. We
periodically rotate specific title promotions in each of the departments on our
store's home page. Shoppers can launch the Global Media Player and enjoy music
in various genres while browsing the store. Shoppers browse the store by
clicking on the permanently displayed department names to move directly to the
department home page and to view selected title promotions within that
department, current top-selling titles and additional content oriented to the
products offered in that department. Shoppers can also search the store by
entering text, such as a title, an artist's or author's name, or a keyword, in
the search box at the top of any page. Search results return a list of one or
more products that relate to the search term, and customers can click on a link
to the desired item to obtain more information such as:
- CDs: artist name, genre, label, release date, song titles and price
- Books: author name, genre, format (hardcover or paperback), number of
pages, publication date, publisher and prices
- Videos: director name, names of actors, studio name, format (video
cassette or DVD), available releases and prices
A shopper can order a product by clicking on the "buy" button next to
the desired product and the product is then added to the shopper's "shopping
cart." The shopper can add or delete items from his or her shopping cart at any
time prior to final purchase. When the shopper finishes selecting the desired
products, he or she goes to checkout. The checkout page presents the shopper
with the various items he or she has selected, the subtotal, tax (if applicable)
and shipping charges. The shopper may add or delete products at this stage or
change the method of shipping. When satisfied with the order, the shopper clicks
on the "purchase" button and the final order is entered into our system. A
shopper will be notified by e-mail of the receipt of the order, if the credit
card information was declined, and when the products ordered have been shipped.
We strive to use content effectively to encourage purchases by
customers who may be browsing our site without a specific title, author or
artist in mind. All of the textual content we provide on our main home page and
department home pages have direct links to related products. For example, an
interview with a member of a particular rock band might include a "buy" button
that links the customer to the product listing for the band's latest release. We
also seek to use content to enhance the information and entertainment value of
our customers' shopping experience. For example, for many of the CDs we carry,
customers can sample audio tracks before purchasing the CD. We also include
useful and entertaining textual information about many of our products, such as
a summary review of the CD, video or book, information about the artists, and
short excerpts from third party reviews.
INDIEAUDIO.COM.
Our other Web site, "www.indieaudio.com", focuses on content and
community which is oriented to musicians and fans of alternative music. From
this site, users can download the Global Media Player and use it to play our
proprietary station, Indieaudio Radio, or can click through to our main online
store. While we expect that this site may generate some revenue from advertising
and other activities, we currently view it primarily as means of driving
customer traffic to our main online store.
Indieaudio.com currently offers:
- the opportunity for new and independent bands (a) to sign up and have
their music played on Indieaudio Radio, (b) to sell individual songs
by direct download from indieaudio.com, or (c) to sell their CD's
through Indieaudio's online store;
- the latest alternative music news (from tours to upcoming new
releases), reviews of new music and in-depth interviews with the
artists and other personalities active in the alternative music and
independent lifestyle scenes;
- other news and content about issues of concern or interest to the
target audience; and
- forums to chat with other visitors.
33
Indieaudio.com is an affiliate in Liquid Audio, Inc.'s "Liquid Music
Network." As a Liquid Music Network associate, indieaudio.com offers for
purchase downloadable, CD-quality audio files from selected titles of various
artists in the Liquid Music Network catalogue. Using Liquid Audio's technology,
customers can purchase individual songs from one or more artists and create
their own unique digital mixes.
CUSTOMER SERVICE
We believe that our ability to establish and maintain long-term relationships
with our customers (and those of our network associates) and to encourage repeat
visits and purchases will depend in part on the strength of our customer support
and service operations. We employ six customer support and service staff and
automate certain of the tools used by them to enhance the efficiency and quality
of our customer support and service efforts. In addition, we will seek to
achieve frequent communication with and feedback from our customers to
continually improve our e-commerce solution, product offerings and related
services.
MARKETING AND PROMOTION
We believe that successful implementation of our Network Associate and Broadcast
Network programs will depend on our ability to establish an aggressive and
effective internal sales organization. At January 11, 2000, our internal sales
team had twelve members. We will need to increase this sales force in the future
in order to execute our business plan. Our ability to increase our sales force
involves a number of risks and uncertainties, including competition for
employees and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, we are likely to have
difficulty securing significant numbers of network associates and our business
will be negatively affected.
While we view our Network Associate and Broadcast Network programs as the
critical components of our plan to increase sales of our entertainment products,
our marketing strategy will also focus on:
- increasing traffic to our main online store, the indieaudio.com store
and the online stores of our network associates;
- building customer loyalty;
- maximizing repeat purchases; and
- developing incremental revenue opportunities.
We intend to pursue a variety of media, business development and promotional
methods to achieve these goals, including online and traditional advertising and
public relations activities (such as sponsoring concerts and other events). We
may also offer our own affiliate program, which will embed one or more general
or product-specific links to our site on our affiliates' Web sites. Affiliates
would be paid a commission on orders placed by customers who are directed to our
site from the affiliates' Web sites.
We also intend to establish alliances with other Web sites to increase the
number of visitors to our site. There is intense competition for placements on
these sites, and we may not be able to enter into these relationships on
commercially reasonable terms or at all. Even if we enter into alliances with
other Web sites, they themselves may not attract significant numbers of users to
our site. Moreover, we may have to pay significant fees to establish these
relationships. Our inability to enter into alliances with popular Web sites - or
the failure of such alliances to provide the expected benefits - could adversely
affect our business.
STRATEGIC ALLIANCES
In order to maintain and improve our online store and related services and
increase traffic to our site, we seek to enter into strategic relationships with
business partners who can offer technology, content and distribution
capabilities, as well as marketing and cross-promotional opportunities.
FULFILLMENT PARTNERS
We have outsourced all of our order fulfillment and shipping operations in order
to allow us to focus on our core strengths of developing and enhancing
compelling online entertainment product merchandising and content delivery
initiatives and to avoid the need to invest in warehouse and other distribution
infrastructure or carry inventory. We currently purchase all of the merchandise
we offer online from two fulfillment partners, Baker & Taylor, Inc. (through its
Entertainment division and Books division) and the iFill division of Valley
Media, Inc. Our agreements with Baker & Taylor and Valley Media have
34
one-year terms (ending in May 2000) and renew on an annual basis for up to
five succeeding years, but they can be terminated prior to the annual renewal
date. We cannot be certain that these contracts will be renewed or terminated
prior to their expiration.
We intend to pursue other fulfillment partners to expand our product offerings.
However, if for any reason our relationship with Baker & Taylor or Valley Media
were terminated before we were able to establish and implement alternative
fulfillment arrangements, we might be unable to fulfill our customers' orders
and our business would suffer. In addition, our ability to fulfill our
customers' orders may be significantly hampered and our business will suffer
major disruptions if Baker & Taylor, Valley Media, or any alternative
fulfillment partners with whom we may establish relationships in the future:
- fail to comply with federal, state and local regulations that apply to
their performance of services for us;
- breach or terminate their agreements with us;
- suffer adverse developments that affect their ability to supply
products to us, such as employee strikes, system crashes and inclement
weather;
- are unable or unwilling to supply products to us in sufficient
quantities or in a timely manner; or
- are unable or unwilling to ship products to any markets in which we
have customers.
Because we rely on third parties to fulfill orders, we depend on their systems
for tracking inventory and financial data. In addition, our order fulfillment
and distribution process requires us to cooperate extensively with our
fulfillment partners with respect to the coordination of separate information
technology systems. From time to time we have experienced problems relating to
the integration of our systems with those of Baker & Taylor, which has affected
our ability to timely fill customers' orders. While we have corrected these
problems, we cannot ensure that any future problems will be resolved on a timely
basis or at all. In addition, if we establish new fulfillment partner
relationships, we cannot be sure that we will be able to integrate our
respective information systems on a timely basis. If our fulfillment partners'
systems fail or are unable to scale or adapt to changing needs, our ability to
timely fill customers' orders may be hindered and we may not have adequate,
accurate or timely inventory or financial information. Our failure to have
adequate, accurate or timely inventory and financial information would harm our
ability to manage our business effectively.
REALNETWORKS
We have entered into an agreement with RealNetworks under which it is developing
an advanced multimedia player, the Global Media Player, which is the core of our
Broadcast Network. We launched the beta version of the Global Media Player in
October 1999. We will have no proprietary ownership interest in or exclusive
license to the technologies developed for us by RealNetworks. Although our
rights to use those technologies will be perpetual, they will be non-exclusive.
Consequently, RealNetworks could license those technologies to one or more of
our existing or future competitors or could use those technologies themselves to
launch a competitive solution. We will also rely on RealNetwork's streaming
media infrastructure, the Real Broadcast Network, to deliver streaming media
services to our network associates in our Broadcast Network. Although our
streaming media services agreement with RealNetworks has a term of three years
which automatically renews for successive terms, any early termination of that
agreement as a result of our breach or otherwise would significantly disrupt our
business and potentially result in claims against us by customers of our
streaming media services. Our ability to implement our Broadcast Network would
be negatively affected and our business would be harmed by:
- any termination of our agreement with RealNetworks prior to completion
of the Global Media Player;
- any other unexpected delay in the development or deployment of our
Broadcast Network; or
- failure of our Broadcast Network to provide expected functionality
with third-party systems, to perform as expected, or to operate
reliably.
STANDARD RADIO, INC.
On December 7, 1999, we entered into a strategic relationship with Standard
Radio, Inc. We expect this relationship to provide significant opportunities for
future revenues and growth, in addition to the initial cash investment. In that
transaction (a) Standard invested $2,000,000 in exchange for 338,983 shares of
our common stock at a purchase price of $5.90 per share, (b) Standard's
president and chief executive officer, Gary Slaight, was appointed to a seat on
our Board of Directors and
35
granted options to purchase 125,000 shares of common stock, (c) we entered
into agreements with eight members of Standard's management team under which
they will serve on our marketing advisory committee and will promote our
solutions to other radio stations in North America, for which each will
receive unvested options to purchase up to 20,000 shares of our common stock,
(d) Standard agreed to cause each of the radio stations owned and controlled
by it now and for the next three years to become our e-commerce and broadcast
associates, and (e) Standard received the right to approve agreements between
us and radio stations which compete in the same genre and locale as each of
Standard's stations in Canada.
CONTENT PROVIDERS
We currently license content from a variety of sources, including online
publishers of entertainment and music news and artist interviews, games,
animation and multimedia content. In one case we issued unregistered stock to a
content provider in connection with a streaming media content contract.
VENDORS
In addition to our strategic partners, we depend on third parties for important
aspects of our business, including Internet access and Web hosting services,
development of software for our Broadcast Network system, and new Web site
features and content. We have limited control over these third parties, and we
are not their only client. We may not be able to maintain satisfactory
relationships with any of them on acceptable commercial terms. Further, we
cannot be certain that the quality of products and services that they provide
will remain at levels needed to enable us to conduct our business effectively.
We may not be able to renew agreements with third party vendors on current
terms. Our dependence on other vendors entails various risks, including:
- our current vendors may not continue to provide services to us on
current terms;
- we may not be able to establish new or extend current vendor terms on
a timely basis or at all; and
- we depend on our vendors to comply with federal, state and local
regulations that apply to their performance of services for us.
If we cannot develop and maintain relationships with vendors that allow us to
obtain sufficient quantities of merchandise or necessary services on acceptable
commercial terms or if our vendors fail to comply with applicable law, our
business may be harmed.
We also rely on third-party carriers for product shipments, including shipments
to and from our fulfillment partners' distribution facilities. We are therefore
subject to the risks, including employee strikes and inclement weather,
associated with third-party carriers' ability to provide delivery services to
meet our shipping needs. Failure to deliver products to our customers in a
timely and accurate manner would harm our reputation, our business and results
of our operations.
TECHNOLOGY OPERATIONS
We employ a broad range of technologies for both our e-commerce and streaming
media operations. Our e-commerce systems are being developed using open source
technologies to ensure scalability, reliability and innovation. Highlights of
our e-commerce systems include the following:
NETWORK:
- Partnership with a key tier one Internet provider to deliver high
bandwidth scalable connectivity
- Several peering arrangements to ensure redundancy, speed, and minimal
network bottlenecks
SYSTEMS AND SOFTWARE:
- Standards-based architecture on open source software
- High portability avoiding "vendor specific lock-in"
- High performance platform
36
- Modular design for rapid application development
Our streaming media solution is being developed through several strategic
technological partnerships and through the implementation of our own proprietary
advancements. In addition, we have established a strategic relationship with
RealNetworks to develop the Global Media Player, which has been combined with
our e-commerce, ad-serving and other systems to create our Broadcast Network.
We depend on the efficient operation of Internet connections from customers to
our systems. These connections, in turn, depend on the efficient operation of
Web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or experienced
outages. Any system delays, failures or loss of data, whatever the cause, could
reduce customer satisfaction with our applications and services and harm our
business.
Substantially all of our computer and communications hardware is located at our
leased facilities in Nanaimo and Vancouver, British Columbia, Canada, and our
systems infrastructure is hosted at third-party hosting providers' facilities in
Vancouver, British Columbia, and Seattle, Washington. The continuing and
uninterrupted performance of those systems is critical to our success. Our
systems and operations and those of our hosting providers are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure,
earthquakes and similar events. In addition, our servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of data or the inability to
accept and fulfill customer orders. Sustained or repeated system failures or
interruptions of our site connection services would reduce the attractiveness of
our site to customers, and could therefore have a material adverse effect on our
business. We do not currently have redundant systems or a formal disaster
recovery plan and do not carry sufficient business interruption insurance to
compensate for losses that may occur. Our fulfillment partners, including Baker
& Taylor and Valley Media, may also face these risks.
We retain confidential customer information in our processing centers.
Therefore, it is critical that our facilities and infrastructure remain secure
and that our facilities and infrastructure are perceived by the marketplace to
be secure. A material security breach could damage our reputation or result in
liability to us.
The satisfactory performance, reliability and availability of our
recently-opened online store, transaction processing systems and network
infrastructure are critical to our reputation and our ability to attract and
retain customers and maintain adequate customer service levels. From time to
time, we have experienced temporary system interruptions for a variety of
reasons, including software bugs and lack of reliable integration between
various elements of our e-commerce and other systems and those of our vendors.
We may not be able to correct any problem in a timely manner. Because we
outsource certain aspects of our system and because some of the reasons for a
systems interruption may be outside of our control, we also may not exercise
sufficient control to remedy the problem quickly or at all. Any future system
interruption that results in the unavailability of our site or reduced order
fulfillment performance could result in negative publicity and reduce the volume
of goods sold and the attractiveness of our online store, which would negatively
affect our business.
To the extent that customer traffic on our sites and those of our network
associates grows substantially, we may need to expand the capacity of our
systems to accommodate a larger number of visitors. We may be required to add
additional software and hardware and further develop and upgrade our existing
technology, transaction-processing systems, network infrastructure and
distribution capabilities to accommodate the increased traffic. To be
successful, we must adapt to rapidly changing Internet technologies and
continually enhance the features and services provided on our online store and
to our network associates. We could incur substantial, unanticipated costs if we
need to modify our online store, software and infrastructure to incorporate new
technologies demanded by our customers or our network associates. We may use new
technologies ineffectively or we may fail to adapt our site,
transaction-processing systems and network infrastructure to user requirements
or emerging industry standards. Any inability to scale our systems may cause
unanticipated system disruptions, slower response times, degradation in levels
of customer service, impaired quality and speed of order fulfillment, or delays
in reporting accurate financial information.
COMPETITION
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites. We may not be able to compete successfully against current and future
competitors. Further, as a strategic response to changes in the competitive
environment, we may, from time to time, make certain pricing, service or
marketing decisions or acquisitions that could adversely affect our business,
results of operations and financial condition.
We currently or potentially compete with a number of other companies. We compete
with traditional physical retailers of entertainment merchandise, including
large, well-established book, music and video stores such as Barnes & Noble,
Inc., Borders Group, Inc. and Wherehouse Entertainment, Inc., and mass market
retailers such as Wal-Mart Stores, Inc. and Kmart
37
Corporation. In the market for online retailing of books, CDs, video
cassettes and DVDs, we compete with large, well-established companies such as
Amazon.com, CDNow.com, barnesandnoble.com and borders.com. We compete with
large, well-established Internet broadcasters such as Broadcast.com,
Onradio.com and InterVU.
We may encounter significant barriers to our ability to establish a large base
of network associates with a substantial online customer presence, particularly
in the radio and television industries. We may face obstacles in signing up
significant numbers of network associates in the media industry, despite the
appeal to radio and television stations of our private label e-commerce solution
bundled with streaming media services. For example, Broadcast.com, a leading
Internet broadcaster of radio, television and other multimedia content, has
established relationships with more than 400 radio stations across the country,
including stations in 18 of the top 20 radio markets in the U.S., and can offer
its streaming media customers some e-commerce solutions that are competitive to
our own through strategic relationships with other companies such as Amazon.com.
Because Broadcast.com has exclusive relationships with many of its streaming
media customers, those customers may not be willing or able contractually to
become network associates.
Certain of our competitors currently offer, either alone or through strategic
relationships with other companies, a blend of multimedia content delivery and
e-commerce services to the principal target market for our network associate
program. For example, a visitor to the Web site of Broadcast.com, which
broadcasts the radio signals of over 400 radio stations and over 40 television
stations, can listen to a CD on Broadcast.com's site and purchase it by
seamlessly clicking through to Amazon.com's site to place an order, or can
listen to an audio book and purchase the print version from Amazon.com. In
addition, other companies offer e-commerce and content delivery services,
including streaming media, to the radio industry, such as Onradio.com, which
provides content delivery and e-commerce capabilities through strategic
relationships with Amazon.com (for e-commerce), Microsoft (for its Media
Player), InterVU (for streaming media services) and Vibe/SPIN Ventures (for
other music-focused content). Because companies like Broadcast.com and
Onradio.com already have established relationships with significant numbers of
radio stations (in many cases, under exclusive contracts), we may have
difficulty establishing market acceptance of our network associate program in
the media industry even if we can offer a better integrated content delivery and
e-commerce solution than these and other companies. Moreover, since our solution
relies on technologies which are not proprietary to us, other competitors could
license, acquire or develop the same or similar technologies to deliver a
similar solution.
Certain of our current and many of our potential competitors have longer
operating histories, larger customer bases, greater brand recognition in other
business and Internet markets and significantly greater financial, marketing,
technical and other resources than us. In addition, other online retailers may
be acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Therefore, certain of our
competitors with other revenue sources may be able to devote greater resources
to marketing and promotional campaigns, adopt more aggressive pricing policies
and devote substantially more resources to Web site and systems development than
us. Competitive pressures created by any one of these companies, or by our
competitors collectively, may result in loss of market share and reduced
operating margins, either of which could have a material adverse effect on our
business, results of operations and financial condition.
INTELLECTUAL PROPERTY
We rely or may in the future rely on a combination of patent, trademark, trade
secret and copyright law and contractual restrictions to protect the proprietary
aspects of our technology and proprietary content. These legal protections
afford only limited protection for our intellectual property and trade secrets.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our proprietary technology or otherwise obtain and
use information that we regard as proprietary.
We are in the process of applying for Canadian and U.S. trademark registration
of "Global Media", "store.globalmedia.com", "Global Media Network", "Global
Media Broadcast Network" and other of our trademarks; however, there is no
assurance that we will secure them. It is also possible that our competitors or
others will adopt service names similar to ours, possibly leading to customer
confusion. In addition, there could be potential trade name or trademark
infringement claims brought by owners of other registered trademarks or
trademarks that incorporate variations of the term "Global Media." Any claims or
customer confusion related to our trademarks, or our failure to obtain trademark
registrations, could negatively affect our business. In September 1999, we
received a letter claiming trademark infringement by our use of the phrases
"Global Media Network", "Global Media Broadcast Network" and "Global Network"
solely in Canada. We believe that this claim will ultimately be unsuccessful.
However, success on the claim could have a material adverse effect on our name
recognition in the Canadian marketplace. We do not believe that the claim, even
if successful, would have a material adverse effect on our business, results of
operations or financial condition.
Third parties may also claim infringement by us with respect to past, current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in
38
our industry segment grows. Any such claim, whether meritorious or not, could
be time-consuming, result in costly litigation, or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to us or at all.
Because we post our own content and content licensed from third parties on our
site, we face potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that we post. Such claims have been brought, and sometimes
successfully pressed, against Internet content distributors. In addition, we
could be exposed to liability with respect to the unauthorized duplication of
content.
Finally, to the extent that we sell our products internationally, the laws of
many countries do not protect our proprietary rights to as great an extent as do
the laws of the United States. Many countries have a "first-to-file" trademark
registration system. As a result, we may be prevented from registering or using
our trademarks in certain countries if third parties have previously filed
applications to register or have registered the same or similar trademark. Our
means of protecting our proprietary rights may not be adequate, and our
competitors could independently develop similar technology.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets and domain names and determine the validity
and scope of the proprietary rights of others. If third parties prepare and file
applications in the United States or other countries that claim trademarks used
or registered by us, we may oppose those applications and be required to
participate in proceedings before the United States Patent and Trademark Office
or foreign regulatory agencies to determine priority of rights to the trademark.
Although we maintain general liability insurance, our insurance may not cover
potential claims of the types described above or may not be adequate to
indemnify us for all liability that may be imposed. Any litigation, adverse
priority proceeding, or imposition of liability that is not covered by insurance
or is in excess of insurance coverage, could result in substantial costs and
diversion of resources and could seriously harm our business and operating
results.
GOVERNMENT REGULATION
Our company, operations and products and services are all subject to regulations
set forth by various U.S. and Canadian federal, state, provincial and local
regulatory agencies. We take measures to ensure our compliance with all such
regulations as promulgated by these agencies from time to time. Historically,
there have been few laws and regulations directly applicable to the Internet.
While laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent, the law governing the
Internet remains largely unsettled, even in areas where there has been some
legislative action. Several states in the U.S., however, have proposed
legislation that would limit the uses of personal user information gathered
online or require online services to establish privacy policies and the Federal
Trade Commission has initiated action against at least one online service
regarding the manner in which personal information is collected from users and
provided to third parties. It is possible that a number of other laws and
regulations may be adopted with respect to the Internet covering issues such as
consumer protection, pricing, content, copyrights and other intellectual
property, distribution, antitrust, obscenity, libel and characteristics and
quality of products and services.
We currently do not collect sales or other similar taxes in respect of goods
sold by us. There is currently a U.S. federal moratorium on the imposition of
new taxes on the sale of goods and services through the Internet which expires
in October 2001. Tax authorities in a number of states in the U.S. are currently
reviewing the appropriate tax treatment of companies engaged in online commerce,
and new state tax regulations may subject us to additional state sales and
income taxes.
Governments in foreign jurisdictions may regulate Internet or other online
services in such areas as content, privacy, network security, encryption,
distribution or taxation more stringently than in the United States. This may
affect our ability to conduct business internationally. In addition, because our
sites are accessible worldwide and we facilitate sales of goods to users
worldwide, other jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in a particular state or foreign country. Our
failure to qualify as a foreign corporation in a jurisdiction where it is
required to do so could subject us to taxes and penalties for the failure to
qualify and could result in our inability to enforce contracts in such
jurisdictions.
Any such new U.S. or foreign legislation or regulation, or the application or
interpretation of existing laws to, the Internet could have a material adverse
effect on our business, results of operations and financial condition by (a)
increasing our cost of doing business, (b) creating uncertainty in the
marketplace that could reduce demand for our products and services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs, or (c) otherwise adversely affect our business results of
operations and financial condition.
39
EMPLOYEES
As of January 11, 2000, we employed approximately 113 full time staff. We also
engage independent contractors from time to time for Web site development and to
provide content such as editorials. None of our employees is represented by a
labor union, and we consider our employee relations to be good. Competition for
qualified personnel in our industry is intense, particularly for software
development and other technical staff and management. We believe our future
success will depend in part on our ability to attract, hire and retain qualified
personnel.
Our performance is substantially dependent on the continued services of our
executive officers and other key employees, particularly Michael Metcalfe, our
Chairman, and President, Robert Fuller, our Chief Executive Officer, L. James
Porter, our Chief Financial Officer and Winston V. Barta, our Vice President of
Marketing and Business Development. The loss of the services of any of our
executive officers could materially and adversely affect our business. We do not
maintain key man insurance on any of our employees. Additionally, we believe we
will need to attract, retain and motivate talented management and other highly
skilled employees, particularly those with technical backgrounds, to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future.
MANAGEMENT OF GROWTH
We are currently experiencing a period of significant expansion. In order to
execute our business plan, we must continue to grow significantly. This growth
will strain our personnel, management, systems, policies and procedures and
other resources. To manage our growth, we must implement operational and
financial systems and controls and recruit, train and manage new employees. We
cannot be certain that we will be able to integrate new executives and other
employees into our organization effectively. If we do not implement adequate
systems and controls, recruit, integrate and retain necessary personnel or
otherwise manage growth effectively, our business, results of operations and
financial condition will be materially and adversely affected.
DESCRIPTION OF PROPERTY
Our principal executive office and operations are located in Vancouver, British
Columbia, Canada in approximately 13,000 square feet of leased office space. The
lease expires in August 2004. We continue to lease approximately 5,700 square
feet of office space in Nanaimo, British Columbia. This lease expires in July
2002. We also lease approximately 1,100 square feet of office space in New York,
New York. That lease expires in September 2000. We are considering leasing space
in Los Angeles, California. We believe our leased facilities, when combined with
an additional U.S. office, will be adequate for our current operations, and that
additional leased space can be obtained if needed.
LEGAL PROCEEDINGS
From time to time, we may be subject to legal proceedings and claims which may
have a material adverse effect on our business. We are not aware of any current
legal proceedings or claims that will have, individually or in the aggregate, a
material adverse effect on our business, prospects, financial condition or
results of operations.
40
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our current directors, executive officers and other key employees, and their
ages, as of January 11, 2000 are as follows:
NAME AGE POSITION
---- --- --------
Michael Metcalfe 43 Chairman of the Board and President
Robert Fuller (1) 39 Director and Chief Executive Officer
Winston V. Barta 28 Director, Vice President of Marketing and
Business Development
L. James Porter (2) 34 Director, Chief Financial Officer, Vice
President Finance and Administration, and
Secretary
Jack MacDonald (1)(2) 70 Director
Barr Potter (1)(2) 50 Director
Gary Slaight 49 Director
Monte Walls-Burris 29 Vice President of Corporate Affairs
- -------------------------------------
(1) Compensation committee member
(2) Audit committee member
MICHAEL METCALFE. Mr. Metcalfe is Global Media's founder. Mr. Metcalfe
has held the positions of Chairman of the Board and President since Global
Media's formation in April 1997, and previously held the same positions with
Westcoast Wireless Cable Ltd. since May 1994. Mr. Metcalfe was director of sales
and marketing for Starscan Communications International, Inc., a marketer of
satellite equipment and television programming located in Vancouver, B.C., from
October 1991 to April 1994; and executive director of production for North
American Pictures, Inc., a film production company, located in Vancouver, B.C.,
from January 1985 through June 1991.
ROBERT FULLER. Mr. Fuller has been our Chief Executive Officer and a
director since May 1997. Mr. Fuller has also been the president and a director
of Lifestyle Development Ltd., a private fitness center operator located in
Nanaimo, B.C. since September 1991. Prior to joining Global Media, Mr. Fuller
was the president and a director of 375801 BC Ltd., a private operator of a
hotel and pub located in Bamfield, B.C., from June 1994 to May 1997; the
president and a director of Promark Construction Co. Inc., a private real estate
developer located in Nanaimo, B.C., from February 1992 to December 1997; and an
accountant with, and then a manager in, the Entrepreneurial Division of Ernst &
Young, Chartered Accountants in Vancouver, B.C. from May 1983 to September 1989.
Mr. Fuller is a Canadian Chartered Accountant and received a bachelor of
commerce degree from the University of British Columbia in accounting and
management information systems.
WINSTON V. BARTA. Mr. Barta has been our Vice President of Marketing
and Business Development, and a director since September 1997 and was Secretary
from that time until August 1999. Previously, Mr. Barta was a vice president of
marketing for Starnet Communications International, Inc., a publicly traded
Internet company located in Vancouver, B.C., from July 1996 to July 1997, and a
senior account executive at Motion Works Group, a publicly traded consumer
software developer company located in Vancouver, B.C., from June 1995 to April
1996. Mr. Barta has a bachelor of commerce degree in marketing from Concordia
University in Montreal and an MBA in marketing from Simon Fraser University in
Vancouver, B.C.
L. JAMES PORTER. Mr. Porter has been our Chief Financial Officer since
April 1999, Assistant Secretary since May 1999, and a director, Vice President
Finance and Administration, and Secretary since August 1999. Since August 1998,
Mr. Porter has served as president of LJ Ventures, a financial consulting firm.
From February 1995 through July 1998, Mr. Porter was a director, chief financial
officer and secretary of Harriston Corporation, a diversified holding company
with offices in Vancouver, B.C., New York, New York and Costa Mesa, California.
From September 1987 through January 1995, Mr. Porter was a senior manager and
held other positions with Arthur Andersen, Chartered Accountants, in Vancouver,
B.C.
41
Mr. Porter has a bachelor of commerce degree in Finance from the University
of British Columbia. He is a Canadian Chartered Accountant, a U.S. Certified
Public Accountant, and a U.S. Chartered Financial Analyst.
JACK D. MACDONALD. Mr. MacDonald has been director of Global Media
since November 1997 and is chair of its Audit and Compensation committees. Mr.
MacDonald was a director of TKO Resources Inc., a publicly traded mining
exploration company located in Vancouver, B.C., from May 1996 to September 1997,
and was the president, chief executive officer and a director of Salus Resource
Corp., and of its predecessor, Arapaho Mining Corp., a publicly-traded mining
exploration company located in Vancouver, B.C., from May 1990 to October 1996.
BARR POTTER. Mr. Potter has been a director of Global Media since May
1999. Mr. Potter currently serves as the chairman and chief executive officer of
Tripod Entertainment, Inc., a feature films production and distribution company
located in Los Angeles, California. From April 1994 through March 1999, Mr.
Potter was the chairman and chief executive officer of Largo Entertainment,
Inc., a feature films production and distribution company located in Los
Angeles, California and a subsidiary of JVC Entertainment, Inc. ("JVC
Entertainment"). Mr. Potter earned a bachelor of arts degree in economics from
Yale University and a juris doctor degree from Columbia University School of
Law.
GARY SLAIGHT. Mr. Slaight has been a director of Global Media since
December 1999. Mr. Slaight currently serves as the president and chief executive
officer of Standard Broadcasting, Inc. and of Standard Radio, Inc. Mr. Slaight
has been in broadcast media for over 25 years. He is currently on the board of
the Canadian Association of Broadcasters.
MONTE WALLS-BURRIS. Mr. Burris has been our Vice President of Corporate
Affairs since January 1998. Previously, Mr. Burris was an institutional trader
at Dominick & Dominick, a private stock brokerage and market maker located in
New York, New York, with offices in Vancouver, B.C., from August 1996 to January
1998. From January 1995 to June 1996, he was a vice president, international
business at Hansa Bank in the British West Indies. Mr. Burris earned a bachelor
of arts degree in Art History and 20th Century American History from the
University of Western Ontario.
BOARD OF DIRECTORS
Under our articles of incorporation and bylaws, our directors hold office until
the next annual meeting of Global Media's stockholders and until their
successors have been elected and duly qualified, and the board of directors
appoint our executive officers at the first board of directors' meeting after
each annual meeting of stockholders. Executive officers hold office at the
pleasure of the board of directors. To date, we have not held a stockholders
meeting to elect directors or otherwise. Mr. Metcalfe was appointed a director
upon formation of Global Media and each of Mr. Fuller, Mr. Barta, Mr. MacDonald,
Mr. Potter, Mr. Porter, and Mr. Slaight was appointed by the board of directors
to fill a vacancy created by an increase in the authorized number of directors
approved by the board of directors.
Our directors do not receive cash compensation for their services as directors
or members of committees of the board of directors, if any, but are eligible to
receive stock options under our stock option plans. Director stock option grants
are determined on a case by case basis. SEE " - Benefit Plans" and "Certain
Transactions." We also reimburse directors for their reasonable expenses
incurred in attending meetings of the board of directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for services
in all capacities awarded to, earned by or paid to our then-President and our
Chief Executive Officer during the fiscal year ended July 31, 1999
(collectively, the "Named Executives"):
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- --------------------- ALL OTHER
SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) ($)
- ------------------------------------------ -------------- ------------- --------------------- ---------------
Michael Metcalfe, then-President 0 0 700,000 0
Robert Fuller, Chief Executive Officer 0 0 700,000 0
OPTION GRANTS, OPTION EXERCISES AND OPTION VALUES
The following table sets forth information on grants of stock options or other
similar rights by Global Media during the last fiscal year to the Named
Executives.
42
# OF SECURITIES % OF TOTAL OPTIONS EXERCISE OR
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
- ---------------------- -------------------------- --------------------------- ----------------- ------------
Michael Metcalfe 200,000 (1) .50 8/21/00
500,000 4.00 4/23/04
--------------------------
Total 700,000 17.4%
Robert Fuller 200,000(1) .50 8/21/00
500,000 4.00 4/23/04
--------------------------
Total 700,000 17.4%
- -----------------
(1) These option grants were made as of August 21, 1998. Prior to that time,
there had been no public market for our common stock and the price at which
we last sold any of our common stock was at $0.50 per share. The options
were granted with an exercise price of $0.50 per share. However, on August
24, 1998, our common stock began trading on the OTC Bulletin Board and
closed that day at $1.06 per share. As a result of the disparity between
the closing price on August 24, 1998 and the exercise price of the options
granted on August 21, 1998, we were required under established accounting
principles to recognize compensation expense totaling $548,800 for the
980,000 options granted to directors, executive officers and employees. SEE
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Fiscal Year Ending July 31, 1999
compared to Fiscal Year Ending July 31, 1998."
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercise of stock options
during the last fiscal year by each Named Executive and the fiscal year-end
value of unexercised options:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (#) AT FY-END ($)
----------------------------- -------------------------------
SHARES ACQUIRED
NAME ON EXERCISE (#) VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------------ ---------------- ------------- --------------- --------------- ---------------
Michael Metcalfe 200,000 $700,000 500,000 0 $1,968,500 0
Robert Fuller 200,000 $700,000 500,000 0 $1,968,500 0
EMPLOYMENT AGREEMENTS
None of our executive officers have employment agreements with us.
BENEFIT PLANS
We have three stock option plans which provide for the grant of options to
purchase shares of our common stock to executives, directors, employees,
consultants or advisors. The plans are summarized as follows as of January 11,
2000:
SHARES OPTIONS AVAILABLE OPTIONS
PLAN NAME EFFECTIVE DATE RESERVED ISSUED SHARES EXERCISED
- ----------------------------------------------- ------------------- ------------ ------------ ------------ -----------
1997 Directors and Officers Stock Option Plan April 8, 1997 500,000 0 500,000 0
1998 Directors and Officers Stock Option Plan August 21, 1998 1,000,000 1,000,000 0 802,000
1999 Stock Option Plan March 24, 1999 4,000,000 3,047,440 952,560 3,000
43
Each of the plans expires ten years from its effective date. The plans are
administered by the board of directors who have sole discretion and authority to
determine individuals eligible for awards. The conditions of exercise of each
grant are determined individually by the board at the time of the grant. We
intend to cancel the 1997 stock option plan in the near future.
We have registered the options and shares of common stock issuable under the
1998 and 1999 stock option plans on Form S-8 registration statements. The
options granted under our 1998 stock option plan had an exercise price of $.50
per share. All of these options were fully exercisable from the date of grant.
The options granted under our 1999 stock option plan have exercise prices
ranging from $4.00 to $8.00 per share. As of January 11, 2000, 3,021,815 of
these options are subject to vesting requirements, and 2,204,774 are fully
exercisable.
KEY MAN INSURANCE
We do not currently have any key man insurance and have no plans to purchase
such insurance in the near future.
44
CERTAIN TRANSACTIONS
STOCK ISSUANCES TO FOUNDER AND OTHER INSIDERS
In connection with our formation and initial capitalization in April 1997, we
offered and sold a total 11,000,000 shares of our common stock at a price of
$0.01 per share per share to various individual investors, including Michael
Metcalfe, our founder, President and Chairman of the Board. Mr. Metcalfe
purchased six million shares for total consideration of $60,000 and Mr. Fuller
purchased 1 million shares for total consideration of $10,000.
In connection with our second round of financing, from June 1997 until November
1997, we offered and sold a total of 890,831 shares of our common stock at a
price of $0.50 per share to various individual and other investors, including
Robert Fuller, our Chief Executive Officer and a director. Mr. Fuller purchased
288,000 shares for total consideration of $144,000.
ACQUISITION OF WESTCOAST FROM FOUNDER
In May 1997, we entered into an agreement with Mr. Metcalfe relating to the
acquisition of Westcoast Wireless Cable, Ltd. At the time, Mr. Metcalfe was the
sole shareholder of Westcoast. Under that agreement, we purchased from Mr.
Metcalfe all of his Westcoast stock in exchange for consideration consisting of
eight million shares of our common stock and cash in the amount of $100,000.
LOANS TO AND FROM AFFILIATES
LOANS FROM BENNETT METCALFE. From October 1998 through December 1999,
Bennett Metcalfe, Michael Metcalfe's father and one of our stockholders,
advanced a total of approximately $263,000 to us. The proceeds of these loans
were used for working capital. These loans had no fixed repayment or interest
terms. In connection with our convertible debenture and warrant financing
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Events", we agreed to (a) repay one-half of the
principal balance outstanding at May 6, 1999 ($221,091), plus $16,445 in accrued
interest, by issuing shares of our common stock at $6.25 per share, which was
the average closing bid prices of the Common Stock on the OTC Bulletin Board for
the three consecutive trading days ended April 30, 1999, and (b) issue a
promissory note for the remaining one-half of the principal balance plus $16,445
in accrued interest, which is to be repaid in four quarterly installments and
which will bear interest at 9% per annum. This restructuring was completed
effective as of July 26, 1999.
LOANS FROM ROBERT FULLER AND AFFILIATES. From November 1998 to March
1999, Mr. Fuller and companies which his family controls, advanced a total of
approximately $187,000 to us. The proceeds of these loans were used for working
capital. These loans had no fixed repayment or interest terms. In connection
with our convertible debenture and warrant financing, we agreed to (a) repay Mr.
Fuller $8,413 plus approximately $1,352 in interest from the proceeds of the
convertible debenture offering proceeds, (b) repay one-half of the remaining
principal balance outstanding at May 6, 1999 ($132,946), plus $8,413 in accrued
interest, by issuing shares of our common stock at $6.25 per share, which was
the average closing bid prices of the Common Stock on the OTC Bulletin Board for
the three consecutive trading days ended April 30, 1999, and (c) issue a
promissory note for the remaining one-half of the principal balance plus $8,413
in accrued interest, which is to be repaid in four quarterly installments and
which will bear interest at 9% per annum. This restructuring was completed
effective as of July 26, 1999.
LOANS TO AND FROM MICHAEL METCALFE AND AFFILIATES. When we purchased
Westcoast in April 1997, it had a $71,065 receivable due from a company owned by
Michael Metcalfe, and a $79,269 payable due to Michael Metcalfe. In August 1998,
Michael Metcalfe and Global Media agreed to offset the receivable owed Westcoast
by his affiliated company against the payable which Westcoast owed him.
OPTION GRANTS TO EXECUTIVE OFFICERS AND DIRECTORS
1998 PLAN. We granted 600,000 of the 1,000,000 options granted under
our 1998 Plan to our directors and executive officers as follows:
45
NAME POSITION OPTIONS
- ---- -------- -------
Michael Metcalfe Chairman of the Board; President 200,000
Robert Fuller Chief Executive Officer; Director 200,000
Winston V. Barta Vice President of Marketing and 100,000
Business Development; Director
Monte Walls Burris Vice President of Corporate Affairs 100,000
-------------
TOTAL 600,000
None of these options were subject to vesting requirements and were fully
exercisable from the date of grant. These option grants were made as of August
21, 1998. Prior to that time, there had been no public market for our common
stock and the price at which we last sold any of our common stock was at $0.50
per share. The options were granted with an exercise price of $0.50 per share.
However, on August 24, 1998, our common stock began trading on the OTC Bulletin
Board and closed that day at $1.06 per share. As a result of the disparity
between the closing price on August 24, 1998 and the exercise price of the
options granted on August 21, 1998, we were required under established
accounting principles to recognize compensation expense totaling $548,800 for
the 980,000 options granted to directors, executive officers and employees. SEE
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Fiscal Year Ending July 31,1999 compared to
Fiscal Year Ending July 31, 1998." All options granted to our executives under
our 1998 stock option plan have been exercised.
1999 PLAN. As of January 11, 2000, 1,975,000 options of the total
3,047,440 options granted under our 1999 Plan were granted to directors and
executive officers as follows. All of these options are fully vested.
NAME POSITION OPTIONS
- ---- -------- -------
Michael Metcalfe Chairman of the Board; President 500,000
Robert Fuller Chief Executive Officer; Director 500,000
Winston V. Barta Vice President of Marketing and 250,000
Business Development, Director
L. James Porter Chief Financial Officer, Secretary, 200,000
Director
Monte Walls Burris Vice President of Corporate Affairs 250,000
Jack McDonald Director 25,000
Barr Potter Director 125,000
Gary Slaight Director 125,000
---------
TOTAL 1,975,000
Each of these option grants, except those to Mr. Slaight, were granted as of
April 23, 1999 at an exercise price of $4.00 per share. During that day, our
common stock traded at $4.00 per share on the OTC Bulletin Board. Consequently,
we are not required to recognize any related compensation expense.
AGREEMENT WITH BARR POTTER
In connection with appointing Mr. Potter to our board of directors in May 1999,
we entered into an agreement with him in which we agree to (a) appoint him as an
independent director on our board for a one-year term, (b) grant him 125,000
stock options under our 1999 Plan (SEE "Security Ownership Of Certain Beneficial
Owners And Management" and " - Fiscal 1999 Option Grants to Executive Officers
and Directors - 1999 Plan"), (c) to sublease space to him in any Los Angeles
office that we may open in the future. (SEE "Description of Business
Properties"), and (d) to obtain Directors and Officers insurance, for which we
are currently in the process of applying.
46
SELLING STOCKHOLDERS
This prospectus relates to the offering by RGC International Investors, LDC and
its pledgees, donees, transferees or other successors in interest (collectively,
the "selling stockholders") for resale of shares of our common stock acquired by
them upon conversion or exercise of shares of Series A preferred stock, related
investment options and warrants which the selling stockholders received in a
private placement transaction. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Events Convertible
Debenture and Warrant Offering" and "Description of Capital Stock - Preferred
Stock" and " - Registration Rights." All of the shares of common stock offered
by this prospectus are being offered by the selling stockholders for their own
accounts.
The following table sets forth certain information with respect to the common
stock beneficially owned by the selling stockholders as of the date of this
prospectus, including shares obtainable under convertible debentures upon
conversion or exercise of shares of Series A preferred stock, related investment
options and/or warrants convertible or exercisable within 60 days of such date.
The selling stockholders provided us the information included in the table
below. To our knowledge, the selling stockholders would have sole voting and
investment power over the shares of common stock listed in the table below if
the Series A preferred stock, and related warrants and investment options were
converted into common stock. No selling stockholder, to our knowledge, has had a
material relationship with us during the last three years, other than as an
owner of our common stock or other securities.
BENEFICIAL OWNERSHIP OF COMMON STOCK PRIOR BENEFICIAL OWNERSHIP OF COMMON
TO THE OFFERING STOCK AFTER THE OFFERING
-------------------------------------------- ------------------------------------
NUMBER OF NUMBER OF SHARES TO BE
SELLING STOCKHOLDER SHARES SOLD UNDER THIS PROSPECTUS NUMBER OF SHARES PERCENT OF CLASS
------------------- ------------ -------------------------- ---------------- ----------------
RGC International Investors, LDC 7,443,153 7,443,153 0 0
The number of shares set forth in the table for RGC represents 200% of the
number of shares issuable upon conversion or exercise of the Series A preferred
stock, related investment options and warrants as of the date of filing of the
registration statement of which this prospectus is a part. The actual number of
shares of common stock issuable upon conversion of the Series A preferred stock
and exercise of the related investment options and warrants is indeterminate, is
subject to adjustment and could be materially less or more than such estimated
number depending on factors which cannot be predicted by us at this time,
including, among other factors, the future market price of our common stock. The
actual number of shares of common stock offered in this prospectus, and included
in the registration statement of which this prospectus is a part, includes such
additional number of shares of common stock as may be issued or issuable upon
conversion of the Series A preferred stock and exercise of the related
investment options and warrants by reason of any stock split, stock dividend or
similar transaction involving our common stock, in accordance with Rule 416
under the Securities Act. As of the date we initially filed the registration
statement, under the terms of the Series A preferred stock the conversion price
was $5.652, which is the lesser of (a) 100% of the average of the seven
consecutive lowest closing bid prices of the common stock reported on the OTC
Bulletin Board during the 35 trading days ending immediately prior to such date,
and (b) 130% of the average of the closing bid prices of the common stock for
the three consecutive trading days ending April 30, 1999 ($8.125). At that
conversion price, the Series A preferred stock would have been converted into
approximately 1,520,788 shares of common stock and the related investment
options would have, assuming full exercise, resulted in the issuance of an
additional 1,520,788 shares. The warrants issued to RGC are exercisable into
680,000 shares of common stock at an exercise price of $8.4375. In accordance
with our agreement with RGC, we have reserved 200% of the total number of shares
currently issuable on conversion at exercise of the Series A preferred stock,
investment options and warrants to assure adequate shares are available in the
event of decreases in the conversion price of the Series A preferred stock and
the exercise price of the investment options.
Under the terms of the Series A preferred stock and the warrants, the shares of
Series A preferred stock are convertible and the warrants are exercisable by any
holder only to the extent that the number of shares of common stock issuable
pursuant to such securities, together with the number of shares of common stock
owned by such holder and its affiliates (but not including shares of common
stock underlying unconverted shares of Series A preferred stock or unexercised
warrants) would not exceed 4.9% of our then-outstanding common stock as
determined in accordance with Section 13(d) of the Exchange Act. Accordingly,
the number of shares of common stock set forth in the table for RGC exceeds the
number of shares of common stock that RGC could own beneficially at any given
time through its ownership of the Series A preferred stock and the warrants. In
that regard, the beneficial ownership of our common stock by RGC set forth in
the table is not determined in accordance with Rule 13d-3 under the Exchange
Act.
As of January 11, 2000, the selling stockholder had converted a total of 750
shares of our Series A preferred stock into 175,339 shares of common stock at
conversion prices ranging from $3.6714 to $4.525.
47
PLAN OF DISTRIBUTION
The shares being offered by the selling stockholders or their respective
pledgees, donees, transferees or other successors in interest, will be sold from
time to time in one or more transactions (which may involve block transactions):
- on the OTC Bulletin Board or on such other market on which our common
stock may from time to time be trading,
- in privately-negotiated transactions,
- through the writing of options on the shares,
- short sales, or
- any combination thereof.
The sale price to the public may be the market price prevailing at the time of
sale, a price related to such prevailing market price, at negotiated prices or
such other price as the selling stockholders determine from time to time. The
shares may also be sold pursuant to Rule 144. The selling stockholders shall
have the sole and absolute discretion not to accept any purchase offer or make
any sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. There
can be no assurance that all or any of the shares offered by this prospectus
will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered by this prospectus, may be deemed "underwriters" as that
term is defined under the Securities Act or the Exchange Act, or the rules and
regulations under such acts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered by this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If a selling stockholder
enters into such an agreement or agreements, the relevant details will be set
forth in a supplement or revisions to this prospectus.
The selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations under such act,
including, without limitation, Regulation M, which provisions may restrict
certain activities of, and limit the timing of purchases and sales of any of the
shares by the selling stockholders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the selling stockholders or their
respective pledgees, donees, transferees or other successors in interest, may be
required to make in respect of such liabilities.
48
PRINCIPAL STOCKHOLDERS
The following table shows, to the best of our knowledge, the common stock
beneficially owned as of January 11, 2000, by:
- each person, or group of affiliated persons, who we know beneficially
owns 5% or more of our common stock (as determined under Rule 13d-3 of
the Exchange Act);
- each of our directors and executive officers; and
- all of our directors and executive officers as a group.
Unless otherwise indicated in the footnotes to the table, (a) the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own, and (b) the address of each beneficial owner
listed below is c/o Global Media Corp., 400 Robson Street, Vancouver, British
Columbia, Canada V6B 2B4.
None of the shares beneficially owned by the following directors and officers
will be offered for sale or sold in this offering.
NUMBER OF SHARES
NAME BENEFICIALLY OWNED (1) PERCENT OF CLASS(1)
- -------------------------------------------------------------------- ------------------------ -------------------
Michael Metcalfe 14,600,000 (2) 66.06
Robert Fuller 2,088,000 (3) 9.45
Winston V. Barta 299,000 (4) 1.37
Jack MacDonald 75,000 (5) *
Barr Potter 125,000 (6) *
L. James Porter 200,000 (7) *
Gary Slaight 125,000 (8) *
Monte Walls-Burris 283,000 (9) 1.29
-----------
All Officers and Directors as a Group 17,670,000 75.25%
(8 persons shown above)
- ---------------------
* Less than 1%.
(1) Shares that a person has the right to acquire within 60 days are treated as
outstanding for determining the amount and percentage of common stock owned
by such person but are not deemed to be outstanding as to any other person
or group.
(2) Includes currently exercisable options to purchase 500,000 shares of common
stock.
(3) Includes (a) currently exercisable options to purchase 500,000 shares of
common stock owned by Mr. Fuller, and (b) 200,000 shares owned by Mr.
Fuller's spouse.
(4) Includes currently exercisable options to purchase 250,000 shares of common
stock.
(5) Includes currently exercisable options to purchase 25,000 shares of common
stock.
(6) Consists of currently exercisable options to purchase 125,000 shares of
common stock.
(7) Consists of currently exercisable options to purchase 200,000 shares of
common stock.
(8) Consists of currently exercisable options to purchase 125,000 shares of
common stock.
(9) Includes currently exercisable options to purchase 250,000 shares of common
stock.
49
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and various provisions of our
articles of incorporation and our bylaws are summaries. Statements contained in
this prospectus relating to such provisions are not necessarily complete, and
reference is made to the articles of incorporation, as amended, and bylaws, as
amended, copies of which have been filed with the SEC as exhibits to our
registration statement of which this prospectus constitutes a part, and
provisions of applicable law.
As of January 11, 2000, our authorized capital stock consists of (a) 200,000,000
shares of common stock, par value $0.001 per share, of which 21,599,700 shares
were issued and outstanding, and (b) 100,000,000 shares of preferred stock, of
which 8,500 shares had been designated Series A convertible preferred stock, all
of which were issued and outstanding. See "- Preferred Stock." As of January 11,
2000, we estimated that there were approximately 51 holders of record of our
common stock.
COMMON STOCK
The holders of outstanding shares of common stock are entitled to share ratably
in dividends declared out of assets legally available for dividends at such time
and in such amounts as the board of directors may from time to time lawfully
determine. Each holder of common stock is entitled to one vote for each share
held. Cumulative voting in elections of directors and all other matters brought
before stockholders meetings, whether they be annual or special, is not provided
for under the Company's articles of incorporation or bylaws. The common stock is
not entitled to conversion or preemptive rights and is not subject to redemption
or assessment. Upon liquidation, dissolution or winding up of Global Media, any
assets legally available for distribution to stockholders as such are to be
distributed ratably among the holders of the common stock at that time
outstanding. The common stock presently outstanding is fully paid and
nonassessable.
PREFERRED STOCK
GENERALLY
Our articles of incorporation give us the authority to issue the
preferred stock from time to time in such series, in such amounts and subject to
such rights and preferences as the board of directors shall determine prior to
issuance, without further action or approval by the stockholders. These rights
and preferences can be superior to those of common stock and include but are not
limited to dividend preferences, special voting rights, rights to convert into
common stock, redemption rights, and priority over common stock on distributions
of assets in the event of liquidation or dissolution of Global Media.
A series of preferred stock may also be used to create voting
impediments or to frustrate persons seeking to effect a merger with us or to
otherwise gain control of us. If used for such an anti-takeover purpose, such
series of preferred stock could be privately placed with persons affiliated with
us with an agreement or understanding as to the manner in which the shares of
such series of preferred stock would be voted. We do not contemplate the
declaration of an anti-takeover series of preferred stock. Moreover, we could
not create such a series of preferred stock without the approval by the holders
of at least a majority of the outstanding shares of Series A preferred stock.
The issuance of series of preferred stock from time to time would
likely affect the holders of common stock by taking priority as to distributions
dividends or of assets upon the liquidation or dissolution of Global Media
remaining after the payment of creditors. In addition, special voting rights and
rights to convert preferred stock into common stock would reduce the voting
power of holders of the common stock.
SERIES A CONVERTIBLE PREFERRED STOCK
In May 1999, we issued and sold to RGC International Investors, LDC in
a private transaction a convertible debenture in the original principal amount
of $8.5 million. However, in accordance with its terms, under certain
circumstances we had the option to convert the debenture into shares of Series A
convertible preferred stock having certain rights and preferences. In connection
with the RGC transaction, our board of directors approved a certificate of
designation relating to the Series A preferred stock, subject to the
effectiveness of the stockholder consent approving articles of amendment to our
articles of incorporation authorizing the preferred stock and the filing of
those articles of amendment with the Nevada Secretary of State. Immediately
after filing the articles of amendment, we filed the certificate of designation
with respect to the Series A preferred stock. On July 19, 1999, we effected the
conversion of RGC's convertible debenture into 8,500 shares of Series A
preferred stock.
50
The following is a summary of the rights and preferences of the Series
A preferred stock:
- DIVIDENDs: The Series A preferred stock does not bear any dividends.
However, so long as Series A preferred stock is outstanding, no
dividends may be declared on the common stock or any other
subsequently designated and issued junior securities without the prior
consent of the holders of a majority of the outstanding shares Series
A preferred stock.
- LIQUIDATION PREFERENCE: If we declare bankruptcy, become insolvent,
appoint a receiver, file for dissolution, or similar events, and there
are assets and funds available for distribution to the holders of our
capital stock, then the holders of the outstanding shares of Series A
preferred stock will receive an amount equal to $1,000, the stated
value per share of the Series A preferred stock, plus interest at 5%
per year from May 6, 1999 prior to any distribution to the holders of
common stock. If we (a) sell all or substantially all of our assets
(b) effect a transaction or series of transactions in which 50% or
more of our common stock is sold, or (c) merge, consolidate or
otherwise combine with another business entity, then the holders of
the Series A preferred stock may elect to treat such actions as a
liquidating event, enabling the holders to receive an amount equal to
118% of their liquidation preference.
- MANDATORY REDEMPTION: In the event of certain mandatory redemption
events, we must redeem outstanding shares of Series A preferred stock
upon the demand of the holders of at least 50% of such shares, or
automatically, in the case of certain mandatory redemption events.
Mandatory redemption events include: the failure to timely issue
common stock upon conversion of the Series A preferred stock; failure
to obtain or maintain effectiveness of a registration statement
enabling the holders of the Series A preferred stock to publicly
resell the shares of common stock acquired on conversion; bankruptcy,
insolvency or similar events involving Global Media; and failure to
maintain the listing of the common stock on the OTC Bulletin Board or,
after becoming listed on the Nasdaq Stock Market or certain other
designated securities markets, the failure to maintain such listing.
The redemption would be at an amount equal to the greater of (i) 120%
of the stated value of the shares being redeemed plus 5% per annum
thereon from May 6, 1999 through the redemption payment date, together
with certain other payments due as a result of our breach of certain
covenants under the Series A preferred stock certificate of
designation or related agreements, and (ii) the "parity value" of the
shares to be redeemed. The parity value is an amount equal to the
maximum number of shares of common stock issuable to the holder of the
Series A preferred stock times the highest closing price for the
common stock during the period between the date of the mandatory
redemption event and the effective date of the redemption.
- TRADING MARKET REDEMPTION: In the event the Series A preferred stock
is not convertible as a result of limitations imposed on us by any
stock exchange or the Nasdaq Stock Market requiring stockholder
approval, and we have not obtained that stockholder approval, then we
must immediately redeem the number of shares not convertible as a
result of such limitation for the mandatory redemption amount.
- CONVERSION RIGHTS: Holders of the Series A preferred stock may, at
their own option, convert their shares into our common stock in whole
or in part. The conversion amount is determined by dividing (a) the
sum of the stated value of the Series A preferred stock ($1,000) being
converted plus a premium amount equal to 5% per annum thereon by (b)
the conversion price (described below) in effect on the conversion
date. However, in no event may a holder exercise the conversion rights
in excess of an amount that will result in the holder's beneficial
ownership of common stock being greater than 4.9% of our outstanding
common stock. The conversion price is the lesser of a fixed conversion
price or a variable conversion price. The variable conversion price
was originally equal to 100% of the lowest average closing bid prices
for our common stock for any seven consecutive trading days during the
35 trading days prior to the date of conversion (the "market price").
However, since our common stock was not listed for trading on the
Nasdaq National Market or Nasdaq SmallCap Market by November 6, 1999,
(i) the fixed conversion price is the lesser of $8.125 and 110% of the
average of closing bid prices for our common stock for the ten
consecutive trading days ended November 6, 1999 and (ii) the
applicable percentage of the market price for purposes of determining
the variable conversion price from time to time will be 80% of the
market price. The conversion price is also subject to adjustment as a
result of stock splits, stock dividends, merger, consolidation or
exchange of shares for periods during which the registration statement
of which this prospectus is a part is not effective.
- INVESTMENT OPTIONS: On any conversion date, for each share of common
stock issuable to the holder converting shares of Series A preferred
stock, that holder has the option to acquire one additional share of
common stock by paying us an amount per share equal to the conversion
price in effect at that time.
51
- AUTOMATIC CONVERSION: Subject to the terms and conditions of set forth
in the Series A preferred stock certificate of designation, each share
of Series A preferred stock outstanding on May 6, 2002 shall be
converted into common stock at the applicable conversion price in
effect at that time.
- VOTING RIGHTS: The Series A preferred stock does not have voting
rights except as required by Nevada law or the certificate of
designation. The holders of the Series A preferred stock are entitled
to receive the same notice as holders of common stock of any
stockholders meeting or corporate action. In the event a vote of the
holders of the Series A preferred stock as a class is required, each
share of Series A preferred stock shall be entitled to one vote and a
majority of the shares of Series A preferred stock shall constitute
approval of that series.
- PROTECTIVE RIGHTS: So long as shares of Series A preferred stock are
outstanding, we may not take the following actions without the prior
approval of at least a majority of the then outstanding shares of the
Series A preferred stock:
a. alter or change (whether by merger, consolidation or otherwise) the
rights, preferences or privileges of the Series A preferred stock or
any other capital stock so as to adversely affect the Series A
preferred stock;
b. create or issue any new class or series or capital stock having a
preference over the Series A preferred stock as to distribution of
assets upon our liquidation, dissolution or winding up;
c. create or issue any new class or series or capital stock ranking the
same as the Series A preferred stock as to distribution of assets
upon our liquidation, dissolution or winding up; or
d. increase the authorized number or par value of shares of Series A
preferred stock;
e. do any act not authorized or contemplated by the certificate of
designation which would result in taxation of the holders of the
Series A preferred stock.
REGISTRATION RIGHTS
Under a registration rights agreement with RGC entered into on May 6, 1999, we
agreed to register the shares of common stock issuable to RGC and its successors
and assigns upon conversion of shares of Series A preferred stock, exercise of
the related investment options and exercise of the warrants. This prospectus is
part of the registration statement which we filed to satisfy that obligation. We
must also keep this registration statement effective until all of the common
stock offered issuable under the Series A Preferred stock, and related warrants
and investment options have been sold. We are responsible for the payment of all
of our fees and costs associated with the registration of the common stock
covered by this registration statement. We are required to indemnify and hold
harmless each selling stockholder and its representatives and RGC and its agents
or representatives against: (a) any untrue statement of a material fact in this
registration statement; (b) any untrue statement or alleged untrue statement
contained in any preliminary prospectus if used prior to the effective date of
the registration statement; or (c) any violation or alleged violation of the
Securities Act or the Exchange Act. Specific procedures for carrying out such
indemnification are set forth in the registration rights agreement. Under the
registration rights agreement, RGC also has the right to include all or a part
of its common stock in a registration filed by us for purposes of a public
offering ("piggyback registration") in the event that we fail to satisfy our
other obligations as to the registration of the common stock acquired by RGC.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF NEVADA LAW AND GLOBAL MEDIA'S
CERTIFICATE OF INCORPORATION AND BYLAWS
We are incorporated under the laws of the State of Nevada and are therefore
subject to various provisions of the Nevada corporation laws which may have the
effect of delaying or deterring a change in the control or management of Global
Media.
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444, which applies to Nevada corporations like us having at
least 200 stockholders, prohibits an "interested stockholder" from entering into
a "combination" with the corporation, unless certain conditions are met. A
"combination" includes (a) any merger with an "interested stockholder," or any
other corporation which is or after the merger would be, an affiliate or
associate of the interested stockholder, (b) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets, in one transaction or
a series of transactions, to an "interested stockholder,' having (i) an
aggregate market value equal to 5% or more of the corporation's assets, (ii) an
aggregate market value equal to 5% or more of the aggregate market value of all
outstanding shares of the corporation, or (iii) representing 10% or more of the
earning power or net income of the
52
corporation, (c) any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an aggregate market value
equal to 5% or more of the aggregate market value of all the outstanding shares
of the corporation, (d) the adoption of any plan or proposal for the liquidation
or dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would have the effect of increasing the proportionate
share of outstanding shares of the corporation owned by the "interested
stockholder," or (f) the receipt of benefits, except proportionately as a
stockholder, of any loans, advances or other financial benefits by an
"interested stockholder." An "interested stockholder" is a person who (i)
directly or indirectly owns 10% or more of the voting power of the outstanding
voting shares of the corporation or (ii) an affiliate or associate of the
corporation which at any time within three years before the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a "combination"
within three years after the interested stockholder acquired its shares, unless
the combination or the interested stockholder's acquisition of shares was
approved by the board of directors before the interested stockholder acquired
the shares. If this approval was not obtained, then after the three-year period
expires, the combination may be consummated if all the requirements in the
Articles of Incorporation are met and either (a)(i) The board of directors of
the corporation approves, prior to such person becoming an "interested
stockholder," the combination or the purchase of shares by the "interested
stockholder" or (ii) the combination is approved by the affirmative vote of
holders of a majority of voting power not beneficially owned by the "interested
stockholder" at a meeting called no earlier than three years after the date the
"interest stockholder" became such or (b) the aggregate amount of cash and the
market value of consideration other than cash to be received by holders of
common shares and holders of any other class or series of shares meets the
minimum requirements set forth in Sections 78.411 through 78.443, inclusive, and
prior to the consummation of the combination, except in limited circumstances,
the "interested stockholder" will not have become the beneficial owner of
additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statutes
78.378-78.379, prohibits an acquiror, under certain circumstances, from voting
shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. While we do not currently exceed these thresholds, we may
well do so in the near future. In addition, although we do not presently "do
business" in Nevada within the meaning of the Control Share Acquisition Statute,
we may do so in the future. Therefore, it likely that the Control Share
Acquisition Statute will apply to us in the future. The statute specifies three
thresholds: at least one-fifth but less than one-third, at least one-third but
less than a majority, and a majority or more, of all the outstanding voting
power. Once an acquiror crosses one of the above thresholds, shares which it
acquired in the transaction taking it over the threshold or within ninety days
become "Control Shares" which are deprived of the right to vote until a majority
of the disinterested stockholders restore that right. A special stockholders'
meeting may be called at the request of the acquiror to consider the voting
rights of the acquiror's shares no more than 50 days (unless the acquiror agrees
to a later date) after the delivery by the acquiror to the corporation of an
information Statement which sets forth the range of voting power that the
acquiror has acquired or proposes to acquire and certain other information
concerning the acquiror and the proposed control share acquisition. If no such
request for a stockholders' meeting is made, consideration of the voting rights
of the acquiror's shares must be taken at the next special or annual
stockholders' meeting. If the stockholders fail to restore voting rights to the
acquiror or if the acquiror fails to timely deliver an information Statement to
the corporation, then the corporation may, if so provided in its articles of
incorporation or bylaws, call certain of the acquiror's shares for redemption.
Our articles of incorporation and bylaws do not currently permit us to call an
acquiror's shares for redemption under these circumstances. The Control Share
Acquisition Statute also provides that the stockholders who do not vote in favor
of restoring voting rights to the Control Shares may demand payment for the
"fair value" of their shares (which is generally equal to the highest price paid
in the transaction subjecting the stockholder to the statute).
Certain provisions of our bylaws which are summarized below may affect potential
changes in control of Global Media. The board of directors believes that these
provisions are in the best interests of stockholders because they will encourage
a potential acquiror to negotiate with the board of directors, which will be
able to consider the interests of all stockholders in a change in control
situation. However, the cumulative effect of these terms may be to make it more
difficult to acquire and exercise control of Global Media and to make changes in
management more difficult.
The bylaws provide the number of directors of Global Media shall be established
by the board of directors, but shall be no less than one. Between stockholder
meetings, the board may appoint new directors to fill vacancies or newly created
directorships. A director may be removed from office by the affirmative vote of
66-2/3% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors.
53
The bylaws further provide that stockholder action may be taken at a meeting of
stockholders and may be effected by a consent in writing if such consent is
signed by the holders of the percentage of our shares required to approve the
action at a meeting.
We are not aware of any proposed takeover attempt or any proposed attempt to
acquire a large block of common stock.
The provisions described above may have the effect of delaying or deterring a
change in the control of our management.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We believe that certain provisions of our articles of incorporation and bylaws
will be useful to attract and retain qualified persons as directors and
officers. Our articles of incorporation limit the liability of directors and
officers to the fullest extent permitted by Nevada law. This is intended to
allow our directors and officers the benefit of Nevada's corporation law which
provides that directors and officers of Nevada corporations may be relieved of
monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including (a) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or (b) the payment
of unlawful distributions.
There is no pending litigation or proceeding involving any of our directors,
officers, associates or other agents of as to which indemnification is being
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification by any director, officer, associate or other agent.
TRANSFER AGENT AND REGISTRAR
Pacific Stock Transfer Company is the transfer agent and registrar for our
common stock.
54
SHARES ELIGIBLE FOR FUTURE SALE
On January 11, 2000, 21,599,700 shares of our common stock were outstanding. Of
these, 5,812,700 shares of common stock are immediately eligible for sale in
the public market without restriction or further registration.
All other outstanding shares of our common stock are "restricted securities" as
such term is defined under Rule 144 under the Securities Act, in that such
shares were issued in private transactions not involving a public offering,
and/or are "control securities" as such term is defined under Rule 144, in the
such shares are held by our officers, directors or other affiliates. Restricted
and control securities may not be sold in the absence of registration other than
in accordance with Rule 144 or another exemption from registration. In general,
under Rule 144, as currently in effect, a person (or persons whose shares are
required to be aggregated), including an affiliate, who has beneficially owned
restricted securities for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of our common stock or (b) the average weekly trading volume
in our common stock during the four calendar weeks preceding the date on which
notice of such sale is filed, subject to various restrictions. In addition, a
person who is not deemed to have been an affiliate of ours at any time during
the 90 days preceding a sale and who has beneficially owned restricted
securities proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. An officer, director or other affiliate who holds shares which are not
restricted securities may sell such shares within the volume limitations
described above but is not subject to the holding period described above. As of
January 11, 2000, 15,787,000 of our outstanding shares were eligible for sale in
compliance with Rule 144.
As of January 11, 2000, 4,000,000 shares of common stock were subject to options
outstanding under our stock option plans. See "Management -- Employee Benefit
Plans." We have filed registration statements on Form S-8 to register for resale
the 5,000,000 shares of common stock originally reserved for issuance under our
1998 and 1999 stock option plans. Shares covered by those registration
statements are eligible for sale in the public market upon exercise of the
options without restriction, unless held by an "affiliate" of ours, as that term
is defined under Rule 144. As of January 11, 2000, 3,047,440 of the options were
outstanding: 2,204,774 of which were currently exercisable and 842,666 of
which were unvested.
In addition, as of January 11, 2000, 2,110,911 shares of common stock were
issuable upon conversion or exercise of the outstanding 7,750 Series A
convertible preferred stock, the related investment options and warrants held by
the selling stockholders, and 62,769 shares of common stock were issuable
upon exercise of outstanding warrants held by the placement agents in our
convertible debenture offering. The shares of common stock issuable upon
conversion or exercise of the shares of Series A preferred stock, related
investment options, and warrants held by the selling stockholders are registered
on the registration statement of which this prospectus is a part and are
currently eligible for sale in the public market subject to restrictions
included in our agreements with the selling stockholders. See "Description of
Capital Stock -- Preferred Stock -- Series A Convertible Preferred Stock."
There has been very limited trading volume in our common stock to date. Sales of
substantial amounts of our common stock under Rule 144, this prospectus or
otherwise could adversely affect the prevailing market price of our common stock
and could impair our ability to raise capital through the future sale of our
securities. See "Risk Factors -- Shares Eligible For Future Sale By Our Current
Stockholders May Adversely Affect Our Stock Price."
55
LEGAL MATTERS
The validity of the issuance of common stock offered by this prospectus has been
passed upon for us by Dennis Brovarone, Esq., Westminster, Colorado.
EXPERTS
Ernst & Young LLP, independent chartered accountants, have audited our
consolidated financial statements at July 31, 1999 and 1998, and for each of the
years then ended, as set forth in their report. We have included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form SB-2. This
prospectus, which is a part of the registration statement, does not contain all
of the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any contract, agreement or
other document of Global Media, such references are not necessarily complete and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract, agreement or other document. You may review a
copy of the registration statement, including exhibits, at the SEC's public
reference room at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 or Seven World Trade Center, 13th Floor, New York, New York 10048 or
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms.
We also file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information on file at the public reference rooms. You can also request copies
of these documents, for a copying fee, by writing to the SEC.
Our SEC filings and the registration statement can also be reviewed by accessing
the SEC's Internet site at http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding registrants that are
filed electronically with the SEC.
56
INDEX TO FINANCIAL STATEMENTS
GLOBAL MEDIA, INC. AND SUBSIDIARIES
PAGE
----
AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors..................................................................................F-2
Consolidated Balance Sheets as at July 31, 1999 and 1998........................................................F-3
Consolidated Statements of Loss and Comprehensive Loss for the years ended July 31, 1999 and 1998...............F-4
Consolidated Statements of Shareholders' Equity (Deficiency) for the years ended July 31, 1999 and 1998.........F-5
Consolidated Statements of Cash Flows for the years ended July 31, 1999 and 1998................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
Consolidated Balance Sheets as at October 31, 1999 and July 31, 1999............................................F-16
Consolidated Statements of Loss and Comprehensive Loss for the quarters ended October 31, 1999
and 1998...................................................................................................F-17
Consolidated Statements of Shareholders Equity (Deficiency) for the year ended July 31, 1999,
and the quarter ended October 31, 1999.....................................................................F-18
Consolidated Statements of Cash Flows for the quarters ended October 31, 1999 and 1998..........................F-19
Notes
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
GLOBAL MEDIA CORP.
We have audited the accompanying consolidated balance sheets of GLOBAL MEDIA
CORP. as of July 31, 1999 and 1998 and the related consolidated statements of
loss and comprehensive loss, shareholders' equity (deficiency) and cash flows
for the years then ended. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of Global Media Corp. of July 31, 1999 and
1998 and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Vancouver, Canada,
September 23, 1999 (except as to
Notes 9[i] and 12[i] which are
as at October 19, 1999). Chartered Accountants
F-2
GLOBAL MEDIA CORP.
CONSOLIDATED BALANCE SHEETS
As at July 31 (in US dollars)
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 5,649,073 14,996
Short-term investments [NOTE 4] 240,000 --
Other receivable 84,336 2,645
Prepaid expenses 37,760 10,221
Due from affiliated companies -- 71,065
- --------------------------------------------------------------------------------------------------
6,011,169 98,927
Capital assets [NOTES 3 AND 5] 1,537,434 172,635
- --------------------------------------------------------------------------------------------------
7,548,603 271,562
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable and accrued liabilities [NOTE 6] 368,094 252,588
Due to affiliated company [NOTE 6] 132,946 46,284
Due to shareholders [NOTE 6] 221,091 79,269
- --------------------------------------------------------------------------------------------------
722,131 378,141
- --------------------------------------------------------------------------------------------------
Commitments and contingencies [NOTE 9]
Convertible preferred shares [NOTE 8] 7,089,775 --
100,000,000 authorized, 8,500 issued and outstanding
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common shares, par value $0.001 each, 200,000,000
authorized, 20,656,331 and 19,890,831 issued and
outstanding [NOTE 7]
Share capital 12,658 11,892
Additional paid in capital [NOTE 8] 2,617,109 543,525
Deficit (2,893,070) (661,996)
- --------------------------------------------------------------------------------------------------
(263,303) (106,579)
- --------------------------------------------------------------------------------------------------
7,548,603 271,562
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-3
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF LOSS
AND COMPREHENSIVE LOSS
Years ended July 31 (in US dollars)
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
REVENUE
Sales 7,091 --
- --------------------------------------------------------------------------------------------------
Interest income 76,842 --
- --------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising and marketing 67,672 6,691
Amortization [NOTE 8] 297,655 29,973
Bank charges and interest [NOTES 6 AND 8] 210,855 1,298
Foreign exchange 29,975 12,222
Office and miscellaneous 76,670 18,288
Professional fees [NOTE 7] 146,367 93,505
Rent and maintenance 72,436 50,114
Shareholder communications 218,969 53,995
Stock options compensation [NOTE 7] 548,800 --
Technical operations and development 203,420 --
Travel 184,572 21,174
Wages and benefits 255,035 17,659
- --------------------------------------------------------------------------------------------------
2,312,426 304,919
- --------------------------------------------------------------------------------------------------
Loss and comprehensive loss from continuing operations (2,228,493) (304,919)
- --------------------------------------------------------------------------------------------------
Discontinued operations [NOTES 1 AND 3]
Call center -- 108,613
Satellite (2,581) (256,522)
- --------------------------------------------------------------------------------------------------
Loss and comprehensive loss from discontinued operations (2,581) (147,909)
- --------------------------------------------------------------------------------------------------
LOSS AND COMPREHENSIVE LOSS FOR THE YEAR (2,231,074) (452,828)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Loss per common share from continuing operations (0.11) (0.02)
Loss per common share from discontinued operations (0.00) (0.00)
- --------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE (0.11) (0.02)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES USED IN THE COMPUTATION
OF LOSS PER SHARE 20,245,889 19,554,402
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-4
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIENCY)
Years ended July 31 (in US dollars)
PREFERRED STOCK COMMON STOCK ADDITIONAL UNISSUED RETAINED
------------------- -------------------- PAID-IN SHARE EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL CAPITAL (DEFICIT)
# $ # $ $ $ $
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1997 -- -- 11,059,400 11,059 128,641 144,001 (209,168)
Common shares issued for cash -- -- 730,533 731 364,536 (144,000) --
Common shares issued for other than
cash consideration:
Consideration for shares in
Westcoast Wireless [NOTE 1] -- -- 8,000,000 1 -- (1) --
In kind services -- -- 100,898 101 50,348 -- --
Loss for the year -- -- -- -- -- -- (452,828)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1998 -- -- 19,890,831 11,892 543,525 -- (661,996)
Preferred shares issued [NOTE 8] 8,500 7,089,775 -- -- -- -- --
Warrants issued on financing [NOTE 8] -- -- -- -- 1,000,000 -- --
Stock options exercised -- -- 765,500 766 392,484 -- --
Compensatory stock options -- -- -- -- 681,100 -- --
Loss for the year -- -- -- -- -- -- (2,231,074)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1999 8,500 7,089,775 20,656,331 12,658 2,617,109 -- (2,893,070)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-5
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31 (in US dollars)
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the year (2,231,074) (452,828)
Items not requiring an outlay of funds
Interest on convertible debentures 101,528 --
Interest on related party loans [NOTE 6] 26,682 --
Share option compensation expense [NOTE 7] 548,800 --
Share option professional fees expense [NOTE 7] 37,300 --
Amortization 297,655 38,658
Services settled through share issuance -- 50,449
- --------------------------------------------------------------------------------------------------
(1,219,109) (363,721)
Changes in non-cash operating working capital
Other receivable (81,691) 56,193
Prepaid expenses (27,539) 6,165
Accounts payable and accrued liabilities 8,078 127,815
Deferred revenue -- (12,062)
- --------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,320,261) (185,610)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (1,483,360) (189,706)
Purchase of short-term investments [NOTE 4] (240,000) --
- --------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (1,723,360) (189,706)
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from (to) shareholder 141,822 (4,821)
Advances from affiliated companies 157,727 52,997
Common share subscriptions -- 221,267
Stock options exercised 393,250 --
Preferred share subscriptions and warrants [NOTE 8] 8,500,000 --
Deferred financing costs [NOTE 8] (510,000) --
- --------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 8,682,799 269,443
- --------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (5,101) (1,021)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,634,077 (106,894)
DURING THE YEAR
Cash and cash equivalents, beginning of year 14,996 121,890
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 5,649,073 14,996
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest - paid 184,173 9,180
Income taxes paid (recovered) -- (6,783)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-6
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Global Media Corp. (the "Company") was incorporated on April 8, 1997 in the
State of Nevada and is headquartered in Vancouver, B.C., Canada. The Company
(through its subsidiary Westcoast Wireless Cable Ltd. ("Westcoast Wireless"))
was originally engaged in the marketing of satellite programming and hardware
and later was engaged in the business of providing call center services
[see note 3]. The Company discontinued its satellite line of business by the
end of fiscal 1998, and the call center business during the third quarter of
fiscal 1999. During the third quarter of fiscal 1999, the company adopted an
internet-focused business plan and was engaged primarily in the development
of an electronic commerce web site, the development of a broadcast network
over the internet, and the development of templates for the application of
the e-commerce back-end system to multiple sites on the internet. A beta
version of the e-commerce web site, globalmedia.com, was launched on May 18,
1999.
On May 20, 1997 the Company issued 8,000,000 common shares and paid $100,000
in cash for all of the outstanding shares of Westcoast Wireless. Since the
companies were under common control, this transaction was accounted for in a
manner similar to a pooling of interests.
In August 1998, the Company incorporated a new subsidiary, Global Media
(Canada) Entertainment Corp.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all its subsidiaries.
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost. Amortization has been calculated using
the following methods and rates, except in the year of acquisition when one
half of the rate is used.
Communications infrastructure 3 year straight line
Computer hardware 30% declining balance
Leasehold improvements 5 year straight line
Office furniture and equipment 20% declining balance
Software 30% declining balance
Web site development 3 year straight line
ADVERTISING AND MARKETING COSTS
Advertising and marketing costs are expensed as incurred.
FOREIGN CURRENCY TRANSLATION
All transactions in currencies other than the United States dollar during the
year are translated at the exchange rates on the transaction dates. Monetary
assets and liabilities denominated in a foreign currency are translated at
the prevailing year end rates of exchange. Non-monetary assets and
liabilities denominated in foreign currencies are translated into United
States dollars at the rates of exchange in effect at the date of the
transaction. Exchange gains or losses are included in the consolidated
statements of income (loss).
WEBSITE DEVELOPMENT COSTS
Website development costs incurred subsequent to establishing technological
feasibility are capitalized. Capitalized costs are amortized using straight
line method over three years. Capitalization ceases and amortization
commences on the date that the software is ready for use.
The recoverability of the website costs is dependent upon realization of
sufficient undiscounted future revenues from this product.
BROADCAST NETWORK DEVELOPMENT COSTS
Broadcast network development costs incurred subsequent to establishing
technological feasibility are capitalized. Capital costs are amortized using
the straight line method over three years. Capitalization ceases and
amortization commences on the date that the network is ready for use.
The recoverability of the network development costs is dependent upon
realization of sufficient undiscounted future revenues from this product.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25") for stock based compensation for employees.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company's
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and related notes to the financial
statements. Actual results may differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments approximate fair
values due to their short term nature, except as otherwise disclosed in the
financial statements.
LOSS PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding. No dilutive potential common share is included in
the computation of per share amounts because the effect would be
anti-dilutive due to the Company's loss from operations.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash includes cash equivalents, which are investments that are held to
maturity and have terms to maturity of three months or less when acquired.
Cash equivalents consist of term deposits with a Canadian chartered bank.
Cash and cash equivalents are carried at cost, which approximates their fair
value.
Short-term investments are investments that are held to maturity and have
terms greater than three months. Short-term investments consist of term
deposits with a Canadian chartered bank. Short-term investments are carried
at cost, which approximates their fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS 133, `Accounting for
Derivative Instruments and Hedging Activities'. SFAS 133 is effective for
financial statements for fiscal years beginning after June 15, 2000. The
Company has not yet determined the impact of SFAS 133.
3. DISCONTINUED OPERATIONS
In November 1997, a decision was made by the Canadian Federal Court of
Appeal, ruling that the sale of US satellite and programming services in
Canada was not permitted. Following a period of trading in Canadian satellite
and programming services the management of Westcoast Wireless decided to
withdraw completely from the home satellite business in late fiscal 1998. The
home satellite business included all operations of Westcoast Wireless.
This subsidiary company has been accounted for as a discontinued operation,
and accordingly, its operations have been segregated in the accompanying
consolidated statements of operations.
Revenues of the discontinued satellite operations for the year ended July 31,
1999 were $nil [1998 - $591,938]. At July 31, 1999, net current liabilities
of the discontinued satellite operations were $23,086 [1998 - $130,076]
consisting principally of accounts payable and balances due to shareholder.
Net non-current assets at July 31, 1999 were $nil [1998 - $15,352].
The Company was engaged in providing call center services until the third
quarter of fiscal 1999. The Company elected to abandon the business during
the third quarter of fiscal 1999 and focus its efforts on its
internet-focused business plan. Accordingly, the call center operations have
been segregated and accounted for as a discontinued operation in the
accompanying consolidated statements of loss and comprehensive loss.
Revenues of the discontinued call center operations for the year ended July
31, 1999 were $20,130 [1998- $326,279]. At July 31, 1999, net current
liabilities of the discontinued call center operations were $nil
[1998 - $19,484] consisting principally of accounts payable.
4. SHORT-TERM INVESTMENTS
The Company has assigned $170,000 of its term deposits in order to establish
lines of credit with three suppliers. The letters of credit have terms of
2.25% interest and expire on either May 12, 2000 or June 14, 2000.
5. CAPITAL ASSETS
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
- --------------------------------------------------------------------------------------------------
JULY 31, 1999
Broadcast network development 704,803 -- 704,803
Communications infrastructure 89,391 44,463 44,928
Computer hardware 295,417 59,834 235,583
Leasehold improvements 14,925 2,269 12,656
Office furniture and equipment 50,661 6,477 44,184
Software 73,450 15,484 57,966
Web site development [NOTE 7] 525,859 88,545 437,314
- --------------------------------------------------------------------------------------------------
1,754,506 217,072 1,537,434
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
JULY 31, 1998
Communications infrastructure 91,575 17,325 74,250
Computer hardware 70,107 13,117 56,990
Leasehold improvements 8,594 4,905 3,689
Office furniture and equipment 18,859 4,842 14,018
Software 27,209 3,520 23,689
- --------------------------------------------------------------------------------------------------
216,344 43,702 172,635
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
6. RELATED PARTY TRANSACTIONS
[i] AMOUNTS DUE TO SHAREHOLDERS
The Company was advanced $263,000 by shareholders during the period of
October 1998 through December 1998. At July 31, 1999, a balance of $221,091
was outstanding.
As part of the Securities Purchase Agreement with RGC International
Investors LDC ("RGC") [see note 8], the Company agreed to restructure the
amounts due to shareholder. The agreement provided that any restructuring
of amounts due to shareholders in common stock be at the conversion price
of $6.25, which was the average closing bid prices of the common shares
reported on the OTC Bulletin Board for the three consecutive days ended
April 30, 1999.
On July 26, 1999, the Company entered into an agreement with the
shareholders to convert 50% of the amount due plus interest of $16,455
($127,000) into common stock. The remaining $110,545 will be repaid in four
quarterly installments of $31,750 beginning October 31, 1999 and ending on
July 31, 2000.
As of July 31, 1999, the shares had not been issued.
[ii] AMOUNTS DUE TO AFFILIATED COMPANY
The Company was advanced $187,000 by an affiliated company, wholly-owned by
a shareholder, during the period of November 1998 through March 1999. At
July 31, 1999, a balance of $132,946 was outstanding.
As part of the Securities Purchase Agreement with RGC International
Investors LDC ("RGC") [see note 8], the Company agreed to restructure the
amounts due to the affiliated company. The agreement provided that any
restructuring of amounts due to the affiliated company in common stock be
at the conversion price of $6.25, which as the average closing bid prices
of the common shares reported on the OTC Bulletin Board for the three
consecutive days ended April 30, 1999.
On July 26, 1999 the Company entered into an agreement with the affiliated
company to convert 50% of the amount due plus interest of $8,413 ($74,886)
into common stock. The remaining $66,473 will be repaid in four quarterly
installments of $18,722 beginning October 31, 1999 and ending on July 31,
2000.
As of July 31, 1999, the shares had not been issued.
7. SHARE CAPITAL
STOCK OPTION PLANS
As of July 31, 1999, the Company had stock options outstanding under two
plans: 237,500 pertain to the 1998 Stock Option Plan and 3,019,500 pertain to
the 1999 Stock Option Plan. All the plans are administered by the Board of
Directors who have sole discretion and authority to determine individuals
eligible for awards. The conditions of exercise of each grant are determined
individually by the Board at the time of the grant.
The 1997 plan, which became effective on April 8, 1997, provides for the
issuance of 1,000,000 options within a period of 10 years from the effective
date. No options have been granted under the 1997 plan.
The 1998 plan, which became effective on August 21, 1998, provides for the
issuance of 1,000,000 options within a period of 10 years from the effective
date. All 1,000,000 options were granted during 1999 at an exercise price of
$0.50 per share of which 980,000 were granted to employees and 20,000 were
granted to independent contractors. All options vested immediately. Of the
1,000,000 options, 400,000 have a life of 2 years and the remaining 600,000
have no expiry date. During 1999, 762,500 of these options were exercised.
At the time of granting options under the 1998 plan, the Company's shares
were not yet publicly trading. On the first day of public trading, the
Company's shares had a market price of $1.06 per share. The Company has
recognized compensation expense in 1999 of $548,800 for the granting of these
options to employees in accordance with APB 25. In addition, the Company has
recognized compensation expense of $12,600 in 1999 for the granting of 20,000
options to independent contractors in accordance with SFAS 123.
The 1999 plan, which became effective on March 24, 1999, provides for the
issuance of a total of 4,000,000 options, within a period of 10 years from
the effective date. During 1999, 2,933,000 options at an exercise price of
$4.00 and 89,500 options at an exercise price of $6.25 were granted of which
35,000 options were granted to independent contractors. Of these 3,022,500
options, 2,025,000 options vest immediately and 997,500 options vest on a
quarterly basis over one year. The options expire five years from the date of
grant. During 1999, 3,000 of the $4.00 options were exercised. The Company
has recognized compensation expense in 1999 of $24,700 for granting 10,000
options to independent contractors in accordance with SFAS 123.
In addition in 1999, the Company issued 25,000 options to third parties for
the acquisition of the domain name for its website. The Company has
capitalized the fair value of these options in the amount of $95,000.
Activity in the stock option plans for 1999 and 1998 was as follows:
1999 1998
---------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE
PRICE PRICE
# $ # $
- --------------------------------------------------------------------------------------------------
Outstanding, beginning of year -- -- -- --
Granted 4,022,500 3.18 -- --
Exercised (765,500) 0.51 -- --
- --------------------------------------------------------------------------------------------------
Outstanding, end of year 3,257,000 3.81 -- --
- --------------------------------------------------------------------------------------------------
Options exercisable at year end 2,497,167
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
The following table summarizes significant ranges of outstanding and exercisable
options as of July 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS REMAINING EXERCISE PRICE OPTIONS EXERCISE PRICE
$ # LIFE $ # $
- --------------------------------------------------------------------------------------------------
0.50 237,500 1.1 years 0.50 237,500 0.50
4.00 2,930,000 4.8 years 4.00 2,259,667 4.00
6.35 89,500 5 years 6.25 -- --
- --------------------------------------------------------------------------------------------------
3,257,000 3.25 2,497,167 3.67
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies APB 25 in accounting for its stock option plans for grants
to employees. Where the exercise price is equal to or greater than the fair
value of the stock, no compensation is recorded. When the exercise price is less
than the fair value, compensation expense for each option granted is recorded to
the extent that the fair value exceeds the exercise price.
If the fair values of the options granted had been recognized as compensation
expense on a straight line basis over the vesting period of the grant
(consistent with the method prescribed by SFAS 123), stock based compensation
costs would have increased the net loss as follows:
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
Net loss as reported (2,231,074) (452,828)
Pro forma net loss under FAS 123 (8,446,922) (452,828)
Net loss per share - basic, as reported (0.11) (0.02)
Pro forma net loss per share - basic, under FAS 123 (0.42) (0.02)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
The fair value of option grants is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1999
- --------------------------------------------------------------------------------------------------
Dividend yield 0%
Expected volatility 105%
Risk-free interest rate 5.6%
Expected life of the option 3 years
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
The fair value of stock options granted during 1999 was $0.63 for the options
under the 1998 plan and $3.52 for the options under the 1999 plan.
8. CONVERTIBLE PREFERRED SHARES
On May 6, 1999, the Company entered into a Securities Purchase Agreement and
ancillary agreements with RGC International Investors LDC ("RGC") pursuant to
which the Company issued, for cash, a convertible debenture to RGC in the
aggregate principal amount of $8,500,000 at an interest rate of 5%. The
financing was arranged by Broadmark Capital which received a fee of $510,000. An
amendment to the Company's articles of incorporation was approved by the
majority shareholder on July 18, 1999 to allow the issuance of preferred shares
in the Company. On July 19, 1999, the debenture was converted into 8,500
convertible preferred shares with a dividend rate of 5%.
The convertible preferred shares are convertible from time to time at RGC's
option into shares of the Company at the lesser of a fixed conversion price or a
variable conversion price based on the market price of the common shares at the
time of conversion.
The fixed conversion price was determined to be $8.125 per common share, which
represented 130% of the average closing bid prices of the common shares reported
on the OTC Bulletin Board for the three consecutive trading days ended April 30,
1999.
The variable conversion price will be based on 100% of the average of the seven
consecutive lowest closing bid prices of the common shares reported on the OTC
Bulletin Board during the 35 trading days ending one day prior to the date that
RGC exercises its right to convert.
If the Company's common shares are not approved for trading on the NASDAQ Stock
Market by November 6, 1999, the conversion terms of the preferred shares change.
The conversion term would be the lessor of:
[a] the fixed conversion price of $8.125 per common share;
[b] 80% of the average of the seven consecutive lowest closing bid prices of
the common shares reported on the OTC Bulletin Board during the 35 trading
days ending one day prior to the date that RGC exercises its right to
convert; or
[c] 110% of the average closing bid price of the common shares reported on the
OTC Bulletin Board over the ten trading days ending on November 6, 1999.
The amount of preferred shares which are convertible into common shares includes
accrued interest on the convertible debenture prior to its conversion to
convertible preferred shares.
The preferred shares include an investment option, exercisable by RGC at the
time of conversion, to acquire a number of additional common shares equal to the
number of common shares with respect to which RGC is converting the preferred
shares, at an exercise price equal to the conversion price then in effect. This
investment option has a three year term.
The preferred shares have a three year term, after which any previously
unconverted portion is converted automatically into common shares under the same
conversion terms.
In connection with the financing, RGC also received warrants to purchase 680,000
common shares of the Company at an exercise price of $8.3475. The warrants have
a five year term.
The proceeds from RGC have been allocated to the underlying instruments in
accordance with their fair values at the date of issuance such that $7,500,000
was allocated to the preferred shares and its investment option and $1,000,000
was allocated to the warrants and included in additional paid in capital.
Total financing costs of $621,322 were incurred in respect of this arrangement.
In addition, the Company agreed to provide the agents warrants to purchase
62,769 of common shares at an exercise price of $8.125 which expire in five
years. During 1999, $41,989 of these finance costs were expensed. The remaining
unamortized finance costs are presented as a reduction of the carrying value of
the preferred shares.
During 1999, amortization expense of $67,580 was recorded in the statement of
loss, as the proceeds allocated to additional paid in capital were considered a
discount to be amortized over the term of the financing. During 1999, interest
expense of $101,528 was recorded in the statement of loss as the financing was
classified as debt at the date of issuance. As at July 31, 1999, the carrying
value of the convertible preferred shares comprises the following:
$
- --------------------------------------------------------------------------------------------------
Fair value upon issuance 7,500,000
Accrued interest on debenture 101,528
Amortization of discount 67,580
Less: deferred financing costs (579,333)
- --------------------------------------------------------------------------------------------------
7,089,775
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
As at July 31, 1999, there existed a mandatory liquidation event with respect to
this financing which was outside of the control of the Company. This mandatory
liquidation event was that the preferred shares would be mandatorily redeemed
should the Company fail to obtain effectiveness with the Securities and Exchange
Commission (SEC) of their registration statement on form SB-2 which registered
for resale the common shares issuable upon exercise of the preferred shares. As
a result, the convertible preferred shares were required to be classified as
mezzanine equity as there was a potential mandatory redemption event at July 31,
1999.
On August 26, 1999, the Company's form SB-2 registration statement was declared
effective by the SEC. As a result, the preferred shares from this date onwards
will be classified as equity. The accompanying pro forma shareholders' equity
gives effect to the discharge of the mandatory redemption event discussed above:
PRO FORMA
JULY 31,
1999
$
- --------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Convertible preferred shares, net of financing costs 7,089,775
Share capital 12,658
Additional paid in capital 2,617,109
Deficit (2,893,070)
- --------------------------------------------------------------------------------------------------
6,826,472
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
[i] The Company received notice from an interested party on September 27, 1999
that it believes the Company to be in violation of certain registered
trademarks which it possesses. While no legal proceedings have been
initiated by the other party, the notice represents an asserted claim that
is reasonably possible of assertion.
Management is of the opinion that an estimate of any potential liability,
if any, can not be determined at this time.
[ii] During 1999, the Company has entered into website content agreements with
two companies requiring combined monthly payments of $13,500 for a term of
one year.
[iii]By agreement dated April 20, 1999, as amended on June 4, 1999, the Company
entered into an arrangement to engage RealNetworks, Inc. to perform
consulting services in connection with our Broadcast Network project which
is for the development of internet-use software. Under the terms of the
agreement, the Company is required to make payments totaling $3,655,000
over the duration of the project with the final payment date projected to
be December 21, 1999.
At July 31, 1999, the balance of the commitment is $2,970,000. Subsequent
to year end, the Company has made payments with respect to this agreement
aggregating to $2,145,000.
[iv] The Company holds operating leases in respect of office premises in both
Vancouver and Nanaimo. Minimum payments under these lease commitments over
the next five years are represented in the table below.
NANAIMO VANCOUVER
OFFICE OFFICE
$ $
---------------------------------------------------------------------------------------------
2000 78,078 72,000
2001 80,609 94,500
2002 80,609 112,500
2003 -- 120,500
2004 -- 130,500
---------------------------------------------------------------------------------------------
239,296 530,000
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
In addition to the basic rent costs identified above for the Vancouver
office, the Company is also responsible for other costs including any
applicable taxes, operating costs, maintenance costs, and any other
additional rents as defined in the lease agreement.
[v] On June 9, 1999, the Company entered into a three year Frame Relay Service
Agreement with MCI WorldCom. The agreement requires a monthly variable
charge based on usage with a minimum monthly commitment of $25,000 per
month.
[vi] YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties will be fully resolved.
10. INCOME TAXES
At July 31, 1999, the Company had total net operating loss carryforwards of
$2,588,114 comprised of United States net operating loss carryforwards of
$1,451,591 [1998 - $240,407] which will begin to expire in 2012, and Canadian
net operating loss carryforwards of $1,136,522 [1998 - $250,671] which will
begin to expire in 2006. Utilization of these carryforwards depends on the
recognition of future taxable income.
For financial reporting purposes, a valuation allowance has been established for
all deferred tax assets due to the uncertainty of realization. As a result of
certain stock transactions, utilization of the Company's net operating loss
carryforwards may be subject to certain limitations in the event that a change
in ownership has occurred, as defined in Section 382 of the Internal Revenue
Code of 1986, as amended.
Deferred tax assets reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards 1,161,912 196,094
Tax vs. accounting value in fixed assets -- 5,431
Foreign exchange loss 14,346 4,155
- --------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,176,258 205,680
Less valuation allowance (1,176,258) (205,680)
- --------------------------------------------------------------------------------------------------
Net deferred tax assets -- --
- --------------------------------------------------------------------------------------------------
Excess book value over tax basis of capital assets (2,314) --
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
11. COMPARATIVE FIGURES
Certain amounts for 1998 have been reclassified to conform with the current
year's presentation.
12. SUBSEQUENT EVENTS
[i] CO-MARKETING AND SALES AGREEMENT
On October 7, 1999, the Company entered into a letter of intent for a
strategic relationship with Standard Radio Inc. ("Standard"). Standard will
invest $2 million into the Company and receive 338,983 common shares of the
Company. In return, Standard would cause all radio stations owned by it now
or during the three years following, to become network associates in the
Global Media E-Commerce Network and in our Broadcast Network.
In connection with the agreement, the Company will be required to nominate
a Standard representative to the Company's Board of Directors. The nominee,
upon accepting a position on the Board, will receive 125,000 options
pursuant to the 1999 Stock Option Plan at an exercise price equal to the
closing price of the common stock on the OTC Bulletin Board on the date of
the grant. The options will vest over a three year period on a quarterly
basis from the date of grant and will expire five years from the grant
date.
Furthermore, the Company and each of the six general managers of the
Standard radio stations, Standard's national program director and the
general manger of Standard's syndication division will enter into a
consulting agreement. In exchange for future services granted, the Company
will grant each individual up to 20,000 options pursuant to the 1999 Stock
Option Plan at an exercise price equal to the closing price of the common
stock on the OTC Bulletin Board on the date of the grant. The options will
vest over a one year period from the date of grant and will expire five
years from the grant date.
[ii] OPERATING EVENTS
On August 31, 1999, the Company began the implementation of its Network
Associate program services including the launch of e-commerce sites.
[iii] OPTIONS
During August 1999, the Company granted 85,000 additional options under the
1999 stock option plan at exercise prices of $6.63 and $7.00. The options
expire five years from the date of grant.
GLOBAL MEDIA CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in US dollars)
OCTOBER 31 JULY 31
1999 1999
$ $
- --------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 1,797,883 5,649,073
Short-term investments 240,000 240,000
Trade and other receivables 101,670 84,336
Prepaid expenses 18,501 37,760
- --------------------------------------------------------------------------------------------------
2,158,054 6,011,169
Capital assets [NOTE 4] 3,989,948 1,537,434
- --------------------------------------------------------------------------------------------------
6,148,002 7,548,603
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 471,554 368,094
Due to affiliated company [NOTE 5] 135,870 132,946
Due to shareholders [NOTE 5] 225,128 221,091
- --------------------------------------------------------------------------------------------------
832,552 722,131
- --------------------------------------------------------------------------------------------------
Commitments and contingencies [NOTE 8]
Convertible preferred shares [NOTE 7] -- 7,089,775
SHAREHOLDERS' EQUITY
Convertible preferred shares [NOTE 7] 7,210,871 --
100,000,000 authorized, 8,500 issued and outstanding
Common shares, par value $0.001 each, 200,000,000 authorized, 12,707 12,658
20,705,456 and 20,656,331 issued and outstanding [NOTE 6]
- --------------------------------------------------------------------------------------------------
7,223,578 12,658
- --------------------------------------------------------------------------------------------------
Additional paid in capital [NOTE 7] 2,661,310 2,617,109
Deficit (4,569,438) (2,893,070)
- --------------------------------------------------------------------------------------------------
5,315,450 (263,303)
- --------------------------------------------------------------------------------------------------
6,148,002 7,548,603
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF LOSS
AND COMPREHENSIVE LOSS
(Unaudited)
(in US dollars)
FOR 3 MONTHS
ENDED OCTOBER 31
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
SALES 13,645 --
COST OF SALES 72,790 --
- --------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) (59,145) --
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Depreciation and amortization [NOTE 7] 13,047
General and administrative 290,091 90,369
Sales and marketing 547,134 8,702
Shareholder communications 67,200 40,969
Stock options compensation [NOTE 6] -- 548,800
Technical operations and development 507,756 --
- --------------------------------------------------------------------------------------------------
1,503,765 701,887
LOSS FROM CONTINUING OPERATIONS
AND BEFORE OTHER ITEMS (1,562,910) (705,100)
- --------------------------------------------------------------------------------------------------
OTHER ITEMS
Interest 12,273 --
Foreign exchange (4,635) (3,213)
- --------------------------------------------------------------------------------------------------
LOSS AND COMPREHENSIVE LOSS BEFORE
DISCONTINUED OPERATIONS (1,555,272) (705,100)
DISCONTINUED OPERATIONS [NOTES 1 AND 3] -- (7,049)
- --------------------------------------------------------------------------------------------------
LOSS AND COMPREHENSIVE LOSS FOR THE QUARTER (1,555,272) (712,149)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE (0.08) (0.04)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES USED IN THE COMPUTATION
OF LOSS PER SHARE 20,680,894 19,890,831
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
(in US dollars)
ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
# $ # $ $ $
- ------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1998 -- -- 19,890,831 11,892 543,525 (661,996)
Preferred shares issued [NOTE 7] 8,500 7,089,775 -- -- -- --
Warrants issued on financing [NOTE -- -- -- -- 1,000,000 --
7]
Stock options exercised -- -- 765,500 766 392,484 --
Compensatory stock options -- -- -- -- 681,100 --
Loss for the year -- -- -- -- -- (2,231,074)
- ------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1999 8,500 7,089,775 20,656,331 12,658 2,617,109 (2,893,070)
Stock options exercised -- -- 49,125 49 44,201 --
Loss for the quarter -- -- -- -- -- (1,555,272)
- ------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 1999 8,500 7,210,871 20,705,456 12,707 2,661,310 (4,569,438)
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in US dollars)
FOR 3 MONTHS
ENDED OCTOBER 31
1999 1998
$ $
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the quarter (1,555,272) (712,149)
Items not requiring an outlay of funds
Share option compensation expense [NOTE 6] -- 548,800
Share option professional fees expense [NOTE 6] -- 12,600
Amortization 1,463,688 13,633
- --------------------------------------------------------------------------------------------------
(1,463,688) (137,116)
Changes in non-cash operating working capital
Other receivable (17,334) (320)
Inventory -- 1,199
Prepaid expenses 19,259 7,641
Accounts payable and accrued liabilities 103,460 117,504
- --------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,358,303) (11,092)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capitalized development costs (2,145,170) --
Purchase of capital assets (402,099) (26,524)
- --------------------------------------------------------------------------------------------------
Cash used in investing activities (2,547,269) (26,524)
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from (to) shareholders 2,924 (68,127)
Advances from affiliated company 4,037 151,431
Stock options exercised 44,250 --
- --------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 51,211 83,304
- --------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 3,171 5,985
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE (3,851,190) 51,673
QUARTER
Cash and cash equivalents, beginning of quarter 5,649,073 14,996
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF QUARTER 1,797,883 66,669
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest - paid -- 1,765
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
NOTES
The following notes are to be read in conjunction with the notes to our
audited financial statements contained in our Annual Report on Form 10-KSB,
filed with the Securities and Exchange Commission on November 1, 1999.
1. NATURE OF BUSINESS
Global Media Corp. (the "Company") was incorporated on April 8, 1997 in the
State of Nevada and is headquartered in Vancouver, B.C., Canada. The Company
was previously engaged in the marketing of satellite programming and hardware
and providing call center services [see note 3]. The Company discontinued its
satellite line of business by the end of fiscal 1998, and the call center
business during the third quarter of fiscal 1999. During the third quarter of
fiscal 1999, the company adopted an internet-focused business plan. Since
then, it has been engaged primarily in the development of an electronic
commerce web site, the development of a broadcast network over the internet,
including streaming services, a customized media player and simulated live
internet-only radio stations, and the development of templates for the
application of the e-commerce back-end system to multiple sites on the
internet.
On May 18, 1999 a beta version of the e-commerce web site was launched and in
September 1999, trial implementations were started for network associate
e-commerce storefronts. Also on August 31, 1999, the beta implementation of
the Global Media Broadcast Network began with the launch of three live
network associate stations. In October, 1999, ten simulated live stations
were launched by the Company and integrated into the Global Media Player,
currently still under development.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
COMPARATIVE FIGURES
Certain amounts for 1999 have been reclassified to conform with the current
quarter's presentation.
LOSS PER SHARE
Basic and fully diluted earnings per share has been computed using the
weighted average number of common shares outstanding during the applicable
period. The effect of common stock options and warrants would be
anti-dilutive and therefore is not included in the calculation of fully
diluted earnings per share.
3. DISCONTINUED OPERATIONS
The Company withdrew from the home satellite business in late fiscal 1998,
and the call center business during the third quarter of fiscal 1999, and has
therefore accounted for these businesses as discontinued operations,
segregated in the accompanying consolidated statements of loss and
comprehensive loss.
4. CAPITAL ASSETS
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
- --------------------------------------------------------------------------------------------------
OCTOBER 31, 1999
Broadcast network development 2,849,973 -- 2,849,973
Communications infrastructure 90,599 52,850 37,749
Computer hardware 599,717 92,007 507,710
Leasehold improvements 31,989 3,503 28,486
Office furniture and equipment 107,596 10,282 97,314
Software 93,790 20,933 72,857
Web site development 528,111 132,252 395,859
- --------------------------------------------------------------------------------------------------
4,301,775 311,827 3,989,948
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
JULY 31, 1999
Broadcast network development 704,803 -- 704,803
Communications infrastructure 89,391 44,463 44,928
Computer hardware 295,417 59,834 235,583
Leasehold improvements 14,925 2,269 12,656
Office furniture and equipment 50,661 6,477 44,184
Software 73,450 15,484 57,966
Web site development 525,859 88,545 437,314
- --------------------------------------------------------------------------------------------------
1,754,506 217,072 1,537,434
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
[i] AMOUNTS DUE TO SHAREHOLDER AND AFFILIATED COMPANY
As part of the Securities Purchase Agreement with RGC International
Investors LDC ("RGC") [see note 7], the Company agreed to restructure the
amounts due to a shareholder and an affiliated company. The agreement
provided that one half of the amounts due to the shareholder and affiliated
company will be repaid by the issue of common stock at a conversion price
of $6.25 per share, which was the average closing bid prices of the common
shares reported on the OTC Bulletin Board for the three consecutive days
ended April 30, 1999.
On July 26, 1999, the Company entered into an agreement with the
shareholder to convert 50% of the amount due plus interest of $16,455 (for
a total of $127,000) into common stock. The remaining $127,000 will be
repaid in four quarterly installments of $31,750 beginning October 31, 1999
and ending on July 31, 2000. As of October 31, 1999, the shares had not
been issued and no repayment had occurred.
On July 26, 1999 the Company entered into an agreement with the affiliated
company to convert 50% of the amount due plus interest of $8,413 (for a
total of $74,886) into common stock. The remaining $74,886 will be repaid
in four quarterly installments of $18,722 beginning October 31, 1999 and
ending on July 31, 2000. As of October 31, 1999, the shares had not been
issued and no repayment had occurred.
6. SHARE CAPITAL
STOCK OPTION PLANS
As of October 31, 1999, the Company had stock options outstanding under two
plans: 194,000 pertain to the 1998 Stock Option Plan and 3,115,075 pertain to
the 1999 Stock Option Plan. Both plans are administered by the Board of
Directors who have sole discretion and authority, subject to the plans, to
determine awards including the conditions of exercise.
The 1998 plan, which became effective on August 21, 1998, provided for the
issuance of 1,000,000 options within a period of 10 years from the effective
date. All 1,000,000 options were granted during the 1999 fiscal year at an
exercise price of $0.50 per share, of which 980,000 were granted to employees
and 20,000 were granted to outside contractors. All options vested
immediately. During the current quarter, 43,500 of these options were
exercised. The 194,000 outstanding options have a remaining life of
approximately nine months.
At the time of granting options under the 1998 plan, the Company's shares
were not yet publicly traded. On the first day of public trading, the
Company's shares had a closing market price of $1.06 per share. The Company
recognized compensation expense in the first quarter of the 1999 fiscal year
of $548,800 for the granting of these options to employees in accordance with
APB 25. In addition, the Company recognized compensation expense of $12,600
in the first quarter of the 1999 fiscal year for the granting of 20,000
options to outside contractors in accordance with SFAS 123.
The 1999 plan, which became effective on March 24, 1999, provides for the
issuance of a total of 4,000,000 options, within a period of 10 years from
the effective date. During the current quarter, 1,200 options at an exercise
price of $6.63, 15,000 at an exercise price of $7.00, 77,000 at an exercise
price of $8.00 and 8,000 at an exercise price of $6.06 were granted, of which
9,200 options were granted to independent contractors. Of the 3,123,700
options granted in total, 2,034,200 options vest immediately and 1,089,500
vest on a quarterly basis over one year. The options expire five years from
the date of grant. During the current quarter, 5,625 of the $4.00 options
were exercised providing proceeds of $22,500.
Activity in the stock option plans for the current quarter and prior year is
as follows:
2000 1999
---------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE PRICE
PRICE
# $ # $
Outstanding, beginning of quarter 3,257,000 3.81 -- --
Granted 101,200 7.68 4,022,500 3.18
Exercised (49,125) 0.90 (765,500) 0.51
- ----------------------------------------------------------------------------------------------------
Outstanding, end of quarter 3,309,075 3.97 3,257,000 3.81
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Options exercisable at the end of the 2,727,284 3.78 2,497,167 3.67
quarter
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies APB 25 in accounting for its stock option plans for
grants to employees. Where the exercise price is equal to or greater than the
fair value of the stock at the date of the grant, no compensation is
recorded. When the exercise price is less than the fair value, compensation
expense for each option granted is recorded to the extent that the fair value
exceeds the exercise price.
7. CONVERTIBLE PREFERRED SHARES
On May 6, 1999, the Company entered into a Securities Purchase Agreement and
ancillary agreements with RGC International Investors LDC ("RGC") pursuant to
which the Company issued, for cash, a convertible debenture to RGC in the
aggregate principal amount of $8,500,000 at an interest rate of 5%. On July
19, 1999, the debenture was converted into 8,500 convertible preferred shares
with a dividend rate of 5%. The convertible preferred shares were convertible
from time to time at RGC's option into shares of the Company at the lesser of
a fixed conversion price or a variable conversion price based on the market
price of the common shares at the time of conversion.
As the Company's common shares were not approved for trading on the Nasdaq
Stock Market by November 6, 1999, the conversion term of the preferred shares
changes to the lesser of:
[a] the fixed conversion price of $8.125 per common share;
[b] 80% of the average of the seven consecutive lowest closing bid prices of
the common shares reported on the OTC Bulletin Board (or Nasdaq Stock
Market) during the 35 trading days ending one day prior to the date that
RGC exercises its right to convert; or
[c] 110% of the average closing bid price of the common shares over the ten
trading days ending on November 6, 1999.
The preferred shares include an investment option, exercisable by RGC at the
time of conversion, to acquire a number of additional common shares equal to
the number of common shares with respect to which RGC is converting the
preferred shares, at an exercise price equal to the conversion price. This
investment option has a three year term.
The preferred shares have a three year term, after which any previously
unconverted portion is converted automatically into common shares under the
same conversion terms described above.
In connection with the financing, RGC also received warrants to purchase
680,000 common shares of the Company at an exercise price of $8.3475. The
warrants have a five year term.
The proceeds from RGC have been allocated to preferred shares and additional
paid in capital in accordance with their fair values at the date of issuance.
In addition, the Company agreed to provide the financing agents warrants to
purchase 62,769 common shares at an exercise price of $8.125 which expire in
five years. During the current quarter, $52,202 of finance costs were
expensed. The remaining unamoritzed finance costs are presented as a
reduction of the carrying value of the preferred shares.
During the current quarter, amortization expense of $84,018 was recorded in
the statement of loss, as the proceeds allocated to additional paid in
capital were considered a discount to be amortized over the term of the
financing.
As of October 31, 1999, the carrying value of the convertible preferred
shares was comprised of the following:
OCTOBER 31 July 31
1999 1999
$ $
- --------------------------------------------------------------------------------------------------
Fair value upon issuance 7,500,000 7,500,000
Accrued interest on debenture 101,528 101,528
Accrued dividend payable 121,096
Amortization of discount 67,580 67,580
Less: deferred financing costs (579,333) (579,333)
- --------------------------------------------------------------------------------------------------
7,210,871 7,089,775
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
As at July 31, 1999, there existed a mandatory liquidation event with respect
to this financing which was outside of the control of the Company. This
mandatory liquidation event was that the preferred shares would be
mandatorily redeemed should the Company fail to obtain effectiveness with the
Securities and Exchange Commission (SEC) of its registration statement on
Form SB-2 which registered for resale the common shares issuable upon
exercise of the preferred shares. As a result, the convertible preferred
shares were required to be classified as mezzanine equity as there was a
potential mandatory redemption event as at July 31, 1999. On August 26, 1999,
the Company's Form SB-2 registration statement was declared effective by the
SEC. As a result, the preferred shares from this date onwards have been
classified as shareholders' equity.
8. COMMITMENTS AND CONTINGENCIES
[i] The Company received notice from an interested party on September 27, 1999
that it believes the Company to be in violation of certain registered
trademarks which it possesses in certain Canadian provinces. While no legal
proceedings have been initiated by this party, the notice represents an
asserted claim that is reasonably possible of assertion. Management
believes the claim is without merit and if asserted, will not be
successful. However, Management believes that if successfully asserted, the
impact of the claim will be immaterial.
[ii] Except as described in Note 11[i], no commitments outside of the regular
course of business were entered into during the quarter.
[iii]By agreement dated April 20, 1999, as amended on June 4, 1999, the Company
entered into an arrangement to engage RealNetworks, Inc. to perform
consulting services in connection with the development of the Global Media
Player and Broadcast Network. Under the terms of the agreement, the Company
was required to make payments totaling $3,655,000 over the duration of the
project with the final payment date projected to be December 21, 1999. At
October 31, 1999, the remaining balance of the commitment was $825,000 and
is only payable based on the satisfactory completion of the project.
9. INCOME TAXES
For financial reporting purposes, a valuation allowance has been established
for all deferred tax assets due to the uncertainty of realization.
11. SUBSEQUENT EVENTS
[i] CO-MARKETING AND SALES AGREEMENT
On October 7, 1999, the Company entered into a letter of intent for a
strategic relationship with Standard Radio Inc. ("Standard"). This
transaction was closed as of December 7, 1999. Under the terms of this
transaction, Standard invested $2 million into the Company and received
338,983 restricted common shares of the Company with piggy-back
registration rights. Standard also committed to cause all radio stations
owned by it at the time or during the three years following, to become
network associates in the Global Media E-Commerce Network and Global Media
Broadcast Network.
In connection with the agreement, on December 7, 1999 the Company nominated
Standard's Chief Executive Officer to the Company's Board of Directors. The
nominee, upon accepting his position on the Board, received 125,000 options
pursuant to the 1999 Stock Option Plan at an exercise price equal to the
closing price of the common stock on the OTC Bulletin Board on the date of
the grant. The options will vest over a three year period on a quarterly
basis from the date of grant and will expire five years from the grant
date.
Furthermore, effective December 7, 1999 the Company and each of the six
general managers of the Standard radio stations, Standard's national
program director and the general manger of Standard's syndication division
entered into a consulting agreement. In exchange for future services
granted, the Company granted each individual up to 20,000 options pursuant
to the 1999 Stock Option Plan at an exercise price equal to the closing
price of the common stock on the OTC Bulletin Board on the date of the
grant. The options will vest over a one year period from the date of grant
depending on certain performance criteria being met, and will expire five
years from the grant date.
[ii] OPTIONS
Subsequent to quarter end, RGC International Investors LDC ("RGC")
exercised its investment options to purchase 164,217 common shares of the
Company, in conjunction with conversion of an equivalent number of
preferred shares. The Company received net proceeds of $668,399 from the
investment option exercises.