AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1999
REGISTRATION NO. 333-______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GLOBAL MEDIA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 4541 91-1842480
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification Number)
Incorporation or Code Number)
Organization)
400 ROBSON STREET
VANCOUVER, BRITISH COLUMBIA
CANADA V6B 2B4
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Executive Offices)
ROBERT FULLER
CHIEF EXECUTIVE OFFICER
GLOBAL MEDIA CORP.
400 ROBSON STREET
VANCOUVER, BRITISH COLUMBIA
CANADA V6B 2B4
(604) 688-9994
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Co-Agents for Service)
---------------
COPY TO:
Eric A. DeJong, Esq.
Eugenie D. Mansfield, Esq.
Davis Wright Tremaine LLP
2600 Century Square
1501 Fourth Avenue
Seattle, WA 98101-1688
(206) 622-3150
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
---------------
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
- --------------------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED(1) SHARE PRICE (2) FEES
- --------------------------------------------------------------------------------------------------------------------------
Common stock issued upon conversion of
Series A preferred stock and exercise of
investment options 6,083,153 $ 8.063 (2) $49,045,422 (2) $13,635
Common stock issued upon exercise of
warrants 1,360,000 $8.4375 (3) $11,475,000 (3) $3,190
- --------------------------------------------------------------------------------------------------------------------------
TOTAL 7,443,153 -- $60,520,422 $16,825
- --------------------------------------------------------------------------------------------------------------------------
(1) The number of shares being registered represents our good faith estimate
of the maximum number of shares we may issue upon (a) conversion of our Series A
convertible preferred stock, (b) exercise of investment options to purchase an
equal number of shares as are converted, and (c) exercise of common stock
purchase warrants. For purposes of estimating the number of shares of common
stock to be included in this registration statement, we calculated 200% of the
maximum number of shares of common stock issuable in connection with:
- the conversion of the Series A preferred stock, based on a conversion
price of $8.063, which is the average of the seven lowest consecutive
closing bid prices of our common stock reported on the National
Association of Securities Dealers Over-the-Counter Bulletin Board (the
"OTC Bulletin Board") during the 35 consecutive trading days ending
July 22, 1999;
- the exercise of the same number of investment options at the same
exercise price; and
- the exercise of the warrants at an exercise price of $8.4375.
The actual number of shares of common stock received upon conversion of the
Series A preferred stock and exercise of the investment options and warrants may
vary from this number. In addition to the shares set forth in the table, the
amount of shares to be registered under this registration statement includes an
indeterminate number of shares issuable upon conversion of or in respect of the
Series A preferred stock and the investment options and warrants, as such number
may be adjusted as a result of stock splits, stock dividends and similar
transactions in accordance with Rule 416 under the Securities Act of 1933.
(2) Based on the average of the reported high and low prices of the common
stock reported on the OTC Bulletin Board on July 22, 1999, for the purpose of
calculating the registration fee in accordance with Rule 457(c) under the
Securities Act of 1933.
(3) Based on the warrant exercise price of $8.4375 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, JULY 30, 1999
PROSPECTUS
7,443,153 SHARES
[GLOBAL MEDIA LOGO]
COMMON STOCK
---------------
GLOBAL MEDIA CORP. We have prepared this prospectus to allow
400 Robson Street selling stockholders to sell up to 7,443,153
Vancouver, British Columbia shares of our common stock which the selling
Canada V6B 2B4 stockholders may acquire on conversion or
exercise of:
- shares of our outstanding Series A
convertible preferred stock;
- related investment options, and
- warrants.
SELLING STOCKHOLDERS: We are registering these shares by filing a
registration statement with the Securities
See page 43 for the names of and Exchange Commission using a "shelf"
the selling stockholders 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: We will receive no proceeds from the
conversion of blue Series A Convertible
Preferred Stock or the 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.
NASD OTC Bulletin Board - GLMC
---------------
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 ________, 1999
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY........................................................1
RISK FACTORS..............................................................5
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.....................17
USE OF PROCEEDS..........................................................18
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY..........................19
CAPITALIZATION...........................................................20
SELECTED FINANCIAL DATA..................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................22
BUSINESS.................................................................28
MANAGEMENT...............................................................38
CERTAIN TRANSACTIONS.....................................................41
SELLING STOCKHOLDERS.....................................................43
PLAN OF DISTRIBUTION.....................................................44
PRINCIPAL STOCKHOLDERS...................................................45
DESCRIPTION OF CAPITAL STOCK.............................................47
SHARES ELIGIBLE FOR FUTURE SALE..........................................52
LEGAL MATTERS............................................................53
EXPERTS..................................................................53
WHERE YOU CAN FIND ADDITIONAL INFORMATION................................53
---------------
"Global Media," "globalmedia.com," "Global Media Network," "Global Media
Broadcast Network," "indielife.com," "indieaudio.com," "globalmediacorp.com" and
"gmcorp.net" are trademarks and service marks of Global Media Corp. All other
trademarks, service marks or tradenames 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 the 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 is an online seller of music compact discs (CDs),
home video cassettes, digital video disks (DVDs), books and other entertainment
products. We are striving to become a leading online seller of music and
entertainment merchandise and a major entertainment destination on the Web by
combining an extensive catalogue of products, easy-to-use navigation and search
capabilities, rich, entertainment-focused content and a vibrant online community
for fans of music, books and entertainment.
Our initial product is our "Global Media Network, " which will provide
radio and television stations and other businesses an end-to-end, private label
e-commerce solution. In order to demonstrate this solution to potential network
associates, and to also generate revenues from direct product sales, we launched
our own internet storefront at "www.globalmedia.com" in May 1999.
In addition, we are currently developing our "Global Media Broadcast
Network" which will allow us to offer broadcast network associates the capacity
to stream live and simulated live audio, video and other multimedia content
(such as radio feeds) over the Internet. When these Internet-broadcasting
abilities are combined with our private label storefront product, we will be
able to offer an integrated e-commerce and multimedia content delivery
solution.
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. Through the Global Media Network program, our
network associates will be able to offer a online entertainment merchandise
store under their own private-label brands. We will offer our network associates
a complete, end-to-end entertainment merchandise e-commerce solution consisting
of a customized, merchant-branded storefront on the network associate's own Web
site integrated with our own back-end e-commerce systems, order fulfillment
services and customer service support. Network associates will pay us a low,
up-front price plus a percentage of the gross margin realized on products sold
through the network associate's private label online storefront.
We plan to market our Global Media Network program initially to the media
industry (radio and television) 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 businesses,
we will 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 Global Media
Network program to a wide variety of businesses ranging from small Internet
start-ups to large "bricks-and-mortar" retailers.
STREAMING MEDIA SERVICES. We are developing the Global Media Broadcast
Network through a strategic relationship with RealNetworks. The Global Media
Broadcast Network will be combined with our private label e-commerce product to
enable broadcast network associates to deliver simulated live and live Internet
broadcast of audio, video and other multimedia content from their Web sites.
While we will offer streaming media services to customers on a stand-alone
basis, we believe that the Global Media Broadcast Network will be a compelling
solution to radio and
1
television stations that are interested in extending their brands onto the
Internet and developing new sources of revenues.
OUR WEB SITES. In October 1998, we began developing our online store,
globalmedia.com. We commercially launched our online store in May 1999. We
currently operate two other related Web sites, "indielife.com" and
"indieaudio.com." These sites focus on content and community oriented to
independent lifestyles, musicians and fans of alternative music and help route
business to our online store.
Our online store offers customers a rich variety of content to entertain
and engage them and to enhance the shopping experience. We currently offer a
catalogue of more than 1.3 million entertainment products, including over
353,000 CD titles, over 85,000 home video, and 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 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 magazine subscription, concert and event
ticket sales and other entertainment-oriented services. We aim to 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 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. Global Media was 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 fourth quarter 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 third quarter 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: 20,653,331 shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING: 28,096,484 shares
USE OF PROCEEDS FROM CONVERSION OF SERIES A We will receive no proceeds from conversion of the Series
PREFERRED STOCK: 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 We will receive the exercise price of any investment
OPTIONS AND WARRANTS: options and warrants that are exercised by the selling
stockholders. 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
approximately $8,595,477 (plus additional amounts which
after the date of this prospectus would accrue from time
to time on the stated value of the outstanding Series A
preferred stock), 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 have reserved, as of the date of
this prospectus , for issuance upon conversion of the Series A preferred stock,
exercise of the related investment options and exercise of the warrants. See
"Selling Stockholders." 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, as described in
"Description of Capital Stock - Preferred Stock, Series A Convertible Preferred
Stock - Conversion Rights," 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.
The number of shares to be outstanding after this offering set forth above
does not include 3,328,169 shares reserved for issuance upon exercise of
outstanding stock options granted under our stock option plans and other
warrants currently outstanding.
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 anticipate losses and negative operating cash flow for the
foreseeable future. Our operations are dependent 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 program, 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, and systems interruptions security risks. See "Risk Factors"
for a description of these and other risks.
3
SUMMARY FINANCIAL DATA
The following summary financial information was derived from our historical
consolidated financial statements. Net revenues excludes 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, NINE MONTHS ENDED APRIL 30,
-------------------------------------------------------------------
1997 1998 1998 1999
---- ---- ---- ----
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ -- $ -- $ -- $ --
Loss from continuing operations.......... (72,214) (304,919) (171,840) (1,257,322)
Loss from discontinued operations........ (36,785) (167,755) (57,961) (2,080)
Net loss................................. (108,999) (472,674) (229,801) (1,259,402)
Net loss applicable to common stockholders
$ (108,999) $ (472,674) $ (229,801) $ (1,259,402)
--------------- --------------- -------------- ---------------
--------------- --------------- -------------- ---------------
Basic and diluted loss per share......... $ (0.01) $ (0.02) $ (0.01) $ (0.06)
Shares used in computing basic and diluted
loss per share........................... 11,059,400 19,890,831 19,619,116 20,253,942
APRIL 30,
----------------
CONSOLIDATED BALANCE SHEET DATA: 1999
(UNAUDITED)
Working capital deficiency...................................................................... $ (991,176)
Total assets............................................................................... 742,656
Total liabilities.......................................................................... 111,890
Total stockholders' equity (deficiency).................................................... (369,234)
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 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 have
generated minimal revenues from our new operations. We have not yet launched
private label e-commerce sites for any network associates nor have we
implemented our streaming media product. 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:
- successfully implement our Global Media Network and Global Media
Broadcast Network;
- establish and maintain broad market acceptance of our online
entertainment product merchandising and streaming media services and
convert that acceptance into direct and indirect sources of revenue;
- 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 site;
- 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 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 FORESEEABLE FUTURE
Since our inception, we have incurred significant losses, including losses
from discontinued operations. Since refocusing our business on the online
merchandising of entertainment products, we have continued to incur net losses,
resulting 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. At April 30, 1999, we had an
accumulated deficit of $1.94 million. We plan to invest heavily in:
5
- implementing the Global Media Network program;
- completing and launching the Global Media Broadcast Network;
- enhancing our e-commerce site and improving its reliability and
functionality;
- development of infrastructure and applications;
- marketing and promotion; and
- hiring additional employees.
As a result, we expect to incur net losses for the foreseeable future. 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. 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 remain primarily dependent on
the number of visitors that we are able to attract to our site or that our
network associates are able to attract to their sites and on how many of those
visitors purchase our products. After we launch the Global Media Broadcast
Network, our revenues will also be dependent to a significant extent on our
ability to attract customers (such as radio and television stations) for these
streaming media services. We cannot forecast with any degree of certainty the
number of visitors to our site or the Web sites 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.
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 site and convert
them into customers;
- our ability to attract and retain network associates;
- our network associates' ability to attract new and repeat visitors to
their sites and convert them into customers;
- 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
- the demand for the streaming media services that we will offer over the
Global Media Broadcast Network;
- 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 SOLUTION
If 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;
- 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 using commercially-available software. 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.
7
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, 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 to 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 site 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 through our
transaction-processing systems. 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 Global Media Network program. While we have started to market
the Global Media Network to companies in our target markets for those
8
services, to date, we have only entered into a limited number of definitive
agreements with any network associates. 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;
- 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
Our business will depend significantly on the successful implementation of
the Global Media Broadcast Network, the successful marketing of that solution to
potential network associates in the radio and television industries, and our
ability to maintain relationships with those network associates after they have
become customers of the Global Media Broadcast Network streaming media services.
We have entered into a strategic relationship with RealNetworks to develop that
system and provide streaming media services to our network associates in the
Global Media Broadcast Network. Our ability to implement our media-focused
network associate program would be negatively affected and our business would be
harmed by:
9
- any termination of our agreement with RealNetworks prior to their
completion of the Global Media Broadcast Network;
- any other unexpected delay in the development or deployment of the
Global Media Broadcast Network; or
- failure of the Global Media Broadcast Network 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 Broadcast
Network. 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 Global Media Network
program will depend on our ability to establish an aggressive and effective
internal sales organization. Our internal sales team currently has five
members. We will need to substantially increase this sales force in the coming
year 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 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.
10
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 Global
Media 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, 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, Seattle, Washington, and San
Diego, California. 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
11
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. 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 second quarter of fiscal 2000, which ends January 31,
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
12
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 have not filed any U.S. or foreign 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. 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," "globalmedia corp.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.
13
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD-PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT
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. Such consequences would include difficulties in operating our site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business. While we have assessed the year 2000
readiness of the software, computer technology and other systems that we use
internally and believe them to be year 2000 compliant, we have not begun
inquiries of our material vendors as to the year 2000 compliance of their own
systems or whether they have finalized any contingency plans to address year
2000 problems that may arise. At this time, we have not yet developed a
contingency plan to address situations that may result if our systems or the
systems of our vendors are not year 2000 compliant. The cost of developing and
implementing such a plan, if necessary, could be significant.
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" for a further description of the issues we
face with regard to the year 2000.
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.
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.
14
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.
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE
As of July 23, 1999, 8,500 shares of our Series A preferred stock, having
an aggregate stated value of $8.5 million, were issued and outstanding. The
shares of Series A preferred stock are convertible into such number of shares
15
of our common stock as is determined by dividing the stated value of the
Series A preferred stock being converted, 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. If the selling stockholders had
converted the total number of shares of Series A preferred stock on July 23,
1999, and exercised the related investment options in full, the number of shares
of our common stock that we would have issued to the selling stockholders would
have been 3,041,577 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. Purchasers of common stock
could therefore experience substantial dilution of their investment upon
conversion of the Series A preferred stock and exercise of the related
investment options by the selling stockholders.
As of July 23, 1999, 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 July 23, 1999, 3,328,169 shares of common stock were reserved for issuance
upon exercise of outstanding stock options granted under our stock option plans
and warrants, other than those issued in connection with the Series A preferred
stock, at exercise prices ranging from $4.00 to $6.25 per share. Of such stock
options and other warrants, 2,559,336 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 July 23, 1999, 20,653,331 shares of our common stock were outstanding.
Of these outstanding shares, 4,835,331 were freely tradeable without restriction
under our Form S-8 Registration Statements. The remaining 15,818,000 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 also filed registration statements to register all shares of common
stock issuable under certain of our stock option plans. Options covering a
total of 3,265,400 shares, 2,198,567 of which are currently vested, are
outstanding under these 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).
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.
WE ARE CONTROLLED BY OFFICERS, DIRECTORS AND EXISTING STOCKHOLDERS, IN
PARTICULAR OUR CHAIRMAN AND PRESIDENT
Executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately 92.4%, and Michael Metcalfe, our
Chairman and President beneficially owns approximately 71.4%, of our outstanding
shares of common stock (without giving effect to this offering). 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
16
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. For example, during the 48-week period between the date
our common stock began trading on August 24, 1998 and July 27, 1999, the price
of our common stock ranged from $0.4375 to $13.375 per share. 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 have reached
historical highs within the last 52 weeks 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.
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.
17
USE OF PROCEEDS
We 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. 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 approximately $8,595,477 (plus additional
amounts which after the date of this prospectus would accrue from time to time
on the stated value of the outstanding Series A preferred stock), 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.
18
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
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 July 23, 1999, the closing price for our
common stock on the OTC Bulletin Board was $8.062 per share.
PERIOD LOW CLOSE HIGH CLOSE
Fiscal Year Ending July 31, 1999:
--------------------------------
Fourth Quarter (through July 23, 1999) $4.00 $13.375
Third Quarter $4.00 $ 5.10
Second Quarter $ .437 $ 8.875
First Quarter (from August 24, 1998) $ .437 $ 2.50
To date, we have not declared or paid any dividends on any of our capital
stock. Westcoast, however, paid $114,632 in cash dividends in fiscal 1997 prior
to its acquisition by the Company. 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 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.
19
CAPITALIZATION
The following table sets forth as of April 30, 1999: (a) our actual
capitalization, (b) our pro forma capitalization after giving effect to our sale
on May 6, 1999 of convertible debentures in the original principal amount of
$8,500,000 and related warrants to RGC International Investors, LDC as described
in "Certain Transactions - Offering of Debentures and Warrants," 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 "Certain Transactions - Offering of Debentures and Warrants" 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.
APRIL 30, 1999
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- --------------- -----------------
(UNAUDITED)
Long-term debt:
Convertible debentures.......................................... $ -- $ 8,500,000 $ --
------------- ------------- ---------------
Stockholders' equity:
Preferred Stock, $0.001 par value per share:
Authorized shares - none actual or pro forma; 100,000,000 shares
pro forma as adjusted
Series A preferred stock, designated -
none actual or pro forma; 8,500 shares pro forma as adjusted Issued and
outstanding - none actual or pro forma; 8,500
pro forma as adjusted................................... -- -- 8,500,000(1)
Common stock, $0.001 par value per share:
Authorized shares - 200,000,000 shares actual, pro forma, and pro
forma as adjusted
Issued and outstanding - 20,544,431 shares actual, pro forma,
and pro forma as adjusted(2)............................... 12,546 12,546 12,546
Additional paid-in capital............................... 1,550,771 1,550,771 1,550,771
Accumulated deficit...................................... (1,941,221) (1,941,221) (1,941,221)
Cumulative translation adjustment........................ 8,670 8,670 8,670
------------- ------------- ---------------
Total stockholders' equity (deficit)........................ (369,234) (369,234) 8,130,766(1)
------------- ------------- ---------------
Total capitalization.................................... $ (369,234) $ 8,130,766 $ 8,130,766
------------- ------------- ---------------
------------- ------------- ---------------
- ------------------
(1) Inclusion of the stated value of the Series A preferred stock in our
stockholders' equity may be disallowed under applicable accounting rules if
the registration statement of which this prospectus is a part is not
declared effective by the SEC by November 6, 1999.
(2) Excludes:
- 346,400 shares of common stock issuable on exercise of options
outstanding at April 30, 1999 with an exercise price of $0.50 per
share; and
- 2,933,000 shares of common stock issuable upon the exercise of options
outstanding at April 30, 1999 with an exercise price of $4.00 per
share.
20
SELECTED FINANCIAL DATA
The following selected financial information was derived from our
historical consolidated financial statements. The selected historical financial
information for the fiscal years ended July 31, 1998 and 1997 is derived from
our consolidated financial statements, which were audited by Ernst & Young LLP,
independent chartered accountants. The selected historical financial
information for the nine-months ended April 30, 1999 and 1998 is derived from
our unaudited consolidated financial statements. In our opinion, the unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
for the periods presented. 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, NINE MONTHS ENDED APRIL 30,
----------------------------------------------------------------
1997 1998 1998 1999
---- ---- ---- ----
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ -- $ -- $ -- $ --
Gross profit................................ -- -- -- --
Operating expenses.......................... (72,214) (304,919) (171,840) (1,257,322)
Loss from continuing operations............. (72,214) (304,919) (171,840) (1,257,322)
Loss from discontinued operations........... (36,785) (167,755) (57,961) (2,080)
Net loss.................................... (108,999) (472,674) (229,801) (1,259,402)
Net loss applicable to common stockholders.. $ (108,999) $ (472,674) $ (229,801) $ (1,259,402)
------------- ------------ ------------- --------------
------------- ------------ ------------- --------------
Basic and diluted loss per share............ $ (0.01) $ (0.02) $ (0.01) $ (0.06)
Weighted-average shares outstanding used in
computing basic and diluted loss per share.. 11,059,400 19,890,831 19,619,116 20,253,942
JULY 31, APRIL 30,
---------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1997 1998 1999
---- ---- ----
(UNAUDITED)
Working capital (deficiency)........................ $ 53,967 (279,214) (991,176)
Total assets........................................ 295,458 271,562 742,656
Liabilities......................................... 220,925 378,141 1,111,890
Total stockholders' equity (deficiency)............. 74,533 (106,579) (369,234)
21
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
Global Media is an online seller of CDs, home video cassettes, DVDs, books
and other entertainment products. In May 1999, we launched our main e-commerce
site "globalmedia.com". We have also begun marketing our "Global Media Network"
associate program. Under this program, we will offer radio and television
stations and other businesses online entertainment product merchandising
capabilities for a low, up-front cost. Our network associates will be able to
offer a customized, private label online entertainment merchandise store to
their customers and we will provide an integrated back-end e-commerce system,
order fulfillment services and customer service support. We anticipate that the
Global Media Network will significantly extend our customer reach on the Web and
provide additional revenue streams beyond product sales through our own
globalmedia.com online store. In addition, through a strategic relationship
with RealNetworks, we are developing the "Global Media Broadcast Network," which
will enable our network associates to stream live and simulated live audio,
video and other multimedia content (such as radio feeds) over the Internet. The
Global Media Broadcast Network streaming capabilities will be able to be
combined with our Global Media Network e-commerce program to provide a highly
integrated e-commerce and multimedia content delivery solution. See "Business".
Before launching our e-commerce and streaming media businesses, we were
originally engaged in the home satellite marketing business until fourth quarter
fiscal 1998 through our subsidiary, Westcoast Wireless Cable Ltd. ("Westcoast
Wireless"), and in the business of providing call center services until third
quarter fiscal 1999. See " - Discontinued Operations."
Because of our discontinued operations, and because of 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.
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, 1998 COMPARED TO YEAR ENDED JULY 31, 1997
NET REVENUES. We had no revenues from our e-commerce or streaming media
operations in fiscal 1998 as we did not adopt our internet-focused plan until
first quarter fiscal 1999.
OPERATING EXPENSES. Our operating expenses increased 322% to $304,919 in
fiscal 1998 from $72,214 in fiscal 1997. This increase was due primarily to
one-time costs for legal and accounting fees associated with registering as a
public reporting company with the SEC, and the costs associated with renting and
occupying our new facility in Nanaimo, British Columbia, as follows:
- Advertising expense increased to $6,691 from zero in fiscal 1997, due
to the cost of press releases.
- Amortization increased to $29,973 in fiscal 1998 from zero in fiscal
1997, due to our purchase of computer equipment, leasehold improvements
and office furniture.
- Professional fees increased 199% to $147,500 in fiscal 1998 from
$49,386 in fiscal 1997, for legal and accounting services for our SEC
registration.
22
- Office expenses increased 213% to $68,402 from $21,842 in fiscal 1997,
mainly due to increased rent for the new facility.
- Travel expenses increased to $21,174 in fiscal 1998 from zero in
fiscal 1997, for travel associated with trade shows and funding
efforts.
- Wages and benefits increased 1,109% to $17,659 in fiscal 1998 from
$1,461 in fiscal 1997, due to hiring office staff.
INTEREST EXPENSE. Our net interest expense and financing fees increased
192% to $1,298 in fiscal 1998 from $445 in fiscal 1997, due primarily to
interest assessed on late paid payroll withholdings.
NET LOSS FROM CONTINUING OPERATIONS. We experienced a $304,919 net loss
from our continuing operations in fiscal 1998, up 322% from our $72,214 net
loss from continuing operations in fiscal 1997, as the result of our lack of
revenues from continuing operations and increased operating expenses, as
discussed above.
NET LOSS FROM ALL OPERATIONS. We experienced a $472,674 net loss from all
operations in fiscal 1998, up 334% from our $108,999 net loss from all
operations in fiscal 1997 as the result of our increased operating expenses and
declining revenues from discontinued operations. See " - Discontinued
Operations."
NINE MONTHS ENDED APRIL 30, 1999 COMPARED TO NINE MONTHS ENDED APRIL 30, 1998
NET REVENUES. We had no revenues from our e-commerce and streaming media
operations in the nine months ended April 30, 1999, as our internet-focused
business did not begin generating revenue until May 1999. See " - Recent
Events".
OPERATING EXPENSES. Our operating expenses increased 606% to $1,210,039 in
the nine months ended April 30, 1999, from $171,494 in the nine months ended
April 30, 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, investor relations and marketing expenses increased 3,999%
to $144,648 in the nine months ended April 30, 1999, from $3,529 in the
nine months ended April 30, 1998, due to investigations regarding
development of the e-commerce model, marketing of the network associate
program, and related press releases.
- Amortization increased 440% to $90,060 in the nine months ended April
30, 1999, from $16,678 in the nine months ended April 30, 1998, due to
our acquisition of additional capital assets and our incurring a full
nine months of depreciation as opposed to a partial period in the
previous year.
- Professional fees increased 84% to $159,114 in the nine months ended
April 30, 1999, from $86,586 in the nine months ended April 30, 1998,
due to the issuance of stock options in lieu of consulting fees.
- Office and miscellaneous expenses increased 175% to $114,740 in the
nine months ended April 30, 1999, from $41,708 in the nine months ended
April 30, 1998, due to the increased cost of our new facility.
- Travel expense increased 385% to $75,549 in the nine months ended April
30, 1999, from $15,590 in the nine months ended April 30, 1998, due 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 the nine
months ended April 30, 1999, compared to zero in the nine months ended
April 30, 1998, as the result of issuing stock options to certain
officers and employees of the Company 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."
23
INCREASE OF INTEREST EXPENSE. Our net interest expense and financing fees
increased 13,566% to $47,283 in the nine months ended April 30, 1999, from $346
in the nine months ended April 30, 1998, due primarily to interest payments on
the Rolling Oaks Enterprises, LLC loan. See "- Financing Activities."
NET LOSS FROM CONTINUING OPERATIONS. We experienced a $1,257,322 net loss
from continuing operations for the nine months ended April 30, 1999, up 632%
from our $171,840 net loss from continuing operations for the nine months ended
April 30, 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 $1,259,402 net loss from
all operations for the nine months ended April 30, 1999, up 448% from our
$229,801 net loss from all operations for the nine months ended April 30, 1998.
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.
- --------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997
FINANCING ACTIVITIES. We financed our operations and capital expenditures
in fiscal 1998 primarily by selling common stock through private placements
which were exempt from registration under Rule 504 of Regulation D under the
Securities Act. Cash from sales of common stock decreased 22% to $221,267 in
fiscal 1998 from $283,700 in fiscal 1997. However, in fiscal 1998 we paid no
dividends to our stockholders, as compared to $114, 632 in dividends paid out in
fiscal 1997.
CAPITAL EXPENDITURES AND COMMITMENTS. Our capital expenditures increased
1,336% to $189,706 in fiscal 1998 from $13,209 in fiscal 1997, primarily due to
purchases of office equipment and leasehold improvements for our new facility,
and computer equipment and software. As of fiscal year end 1998 we had no
material commitments outstanding for purchases of additional capital assets.
WORKING CAPITAL (DEFICIENCY). At fiscal year ends 1998 and 1997, we had
working capital (deficiency) of ($279,214), and $66,029, and working capital
ratios of .26 and 1.32, respectively.
NINE MONTHS ENDED APRIL 30, 1999 COMPARED TO NINE MONTHS ENDED APRIL 30, 1998
FINANCING ACTIVITIES. We financed our operations and capital expenditures
in the nine months ended April 30, 1999 primarily from the proceeds of common
stock sales, and loans from stockholders and a third-party lender. See "-
Recent Events." Cash from common stock sales upon the exercise of stock options
increased 48% to $326,800 in the nine months ended April 30, 1999, from $221,267
from common stock sales in the nine months ended April 1998. In the nine months
ended April 30, 1999, we obtained cash from loans totaling $825,751. The
loans consisted of a one-year loan of $500,000, with a 24% interest rate, from
Rolling Oaks Enterprises, LLC, and $325,751 in net short-term loans from
stockholders and affiliates, as compared to our net loan repayment of $36,697 in
the nine months ended April 30, 1998. These stockholder loans had no fixed term
of repayment and were therefore classified as current liabilities on our balance
sheet for April 30, 1999.
CAPITAL EXPENDITURES AND COMMITMENTS. Our capital expenditures increased
180% to $462,463 in the nine months ended April 30, 1999, from $165,414 in the
nine months ended April 30, 1998, primarily as the result of capitalized
development costs for our Web sites and our other initiatives, and computer
hardware and software purchases. As of April 30, 1999, we had no material
commitments outstanding for purchases of additional capital assets, except for
our April 20, 1999 engagement of RealNetworks Inc. to perform consulting
services in connection with the design and development of the Global Media
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 April 30, 1999 and April 30, 1998, we had
working capital (deficiency) of ($991,176) and ($279,844), and working capital
ratios of .11 and .26, respectively.
24
RECENT EVENTS
CONVERTIBLE DEBENTURE AND WARRANT 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, and a five-year warrant to purchase 680,000
shares of common stock, to RGC International Investors LDC. We converted the
debentures into 8,500 shares of our Series A preferred stock on July 19, 1999,
once our stockholders authorized us to issue preferred stock. The Series A
preferred stock and the investment options related to that stock are convertible
pursuant to a market-based formula, and the warrants are exercisable at $8.3475
per share (135% of the average closing bid price of our common stock for the
three trading days ending April 30, 1999, the date RGC committed to the
investment).
The debenture and warrants were sold pursuant to a Securities Purchase
Agreement between us and RGC, in a private placement pursuant to Regulation D
under the Securities Act of 1933, as amended. The debenture was convertible at
our option into shares of Series A preferred stock pending the effectiveness of
stockholder approval of articles of amendment to our articles of incorporation
authorizing 100 million shares of preferred stock and authorizing our Board of
Directors to designate the number and the rights, preferences, privileges and
restrictions of that preferred stock from time to time in series, our filing of
those articles of amendment with the Nevada Secretary of State, and our filing
with the Nevada Secretary of State of a certificate of designation of the
rights, preferences, privileges and restrictions of Series A preferred stock
adopted by resolution of our board of directors. On July 19, 1999, we exercised
our right to convert the debenture into shares of Series A preferred stock. The
terms of the debenture were substantially similar to the terms of the Series A
preferred stock.
The stated value, plus an amount accruing thereon at the rate of 5% per
annum, of each share of Series A preferred stock 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 fixed conversion price and the applicable percentage of the
future market price are subject to adjustment if our common stock is not listed
on the Nasdaq National Market or the Nasdaq SmallCap Market by November 6, 1999.
Under the terms of the Series A preferred stock, RGC or its assigns have the
option, exercisable simultaneously with their conversion of the Series A
preferred stock into common stock from time to time, 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 an additional $8.5 million being invested by RGC, for a total
investment by RGC of $17 million. To the extent not previously converted, the
shares of Series A preferred stock will automatically convert into common stock
on May 6, 2002. See "Description of Capital Stock - Preferred Stock - Series A
Convertible Preferred Stock."
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,
the Series A preferred stock may become redeemable, mandatorily or at the option
of RGC depending on the applicable circumstance. See "Description of Capital
Stock - Preferred Stock - Series A Convertible Preferred Stock."
Pursuant to a Registration Rights Agreement entered between us and RGC, we
were obligated to file with the SEC by a certain date the registration statement
of which this prospectus is a part to register for resale the shares of our
common stock which may be acquired upon conversion of, and exercise of the
investment options relating to, the shares of Series A preferred stock issued to
RGC, as well as the shares of common stock issuable upon exercise of the
warrants. See "Description of Capital Stock - Registration Rights."
LOAN REPAYMENT. In May 1999, we repaid the $500,000 loan from Rolling Oaks
Enterprises, LLC, plus $48,200 in accrued interest, from the proceeds of the
convertible debenture offering.
LAUNCH OF E-COMMERCE SITE. We launched our "globalmedia.com" online store
on May 18, 1999. We adopted an initial pricing policy intended to result in a
small initial volume of transactions while site development and systems
integration is fully completed. We intend to generally lower prices during the
first quarter fiscal 2000, which is anticipated to have the effect of increasing
sales. We do not anticipate earning significant revenues until we implement the
pricing changes and launch our Global Media Network program.
FUTURE CAPITAL REQUIREMENTS
We expect negative cash flow from operations to continue for the
foreseeable future, as we continue to develop and market our internet-focused
operations. We believe that the net proceeds from our convertible debenture
offering and
25
revenue from our Web sites, plus the potential availability of additional
stockholder and affiliate loans, will be sufficient to meet our operating
cash requirements and budgeted capital expenditures through second quarter
fiscal 2000. We expect to meet our long-term cash and operational
requirements through equity financings and revenues from our Web sites,
Global Media Network program and Global Media Broadcast Network streaming
media program.
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. We
have historically recorded the resulting translation adjustments for
Westcoast as a separate component of stockholders' equity. 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 first quarter fiscal 1998
and discontinued it in third quarter 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 the Company's revenue and expenses from the call center business:
YEARS ENDED NINE MONTHS ENDED
JULY 31, APRIL 30,
--------------------- -----------------------
1997 1998 1998 1999
--------------------- -----------------------
Total revenue $ 0 $326,279 $261,954 $20,534
General and
administrative expenses 0 217,666 115,457 20,534
------ -------- -------- -------
Net profit $ 0 $108,613 $146,497 $ 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. The Company acquired all of the stock of Westcoast from Mr.
Metcalfe in May 1997, in exchange for 8,000,000 shares of the Company's 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.
26
YEARS ENDED
JULY 31,
---------------------------
1997 1998
---------------------------
Total revenue $1,637,732 $ 591,938
Cost of sales 755,446 418,167
Commission paid 621,597 133,934
----------- -----------
Gross profit 260,689 39,837
General and administrative expenses 297,474 324,887
Income tax recovery -- 8,682
----------- -----------
Net profit (loss) $ (36,785) $ (276,368)
----------- -----------
----------- -----------
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 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 are currently assessing the year 2000 readiness of the software,
computer technology and other systems that we use internally which may not be
year 2000 compliant. However, 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 not begun inquiries 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 are
currently unable to predict the extent to which the year 2000 issue will affect
our suppliers, or the extent to which it 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 site 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 their
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
Global Media is an online seller of music CDs, home videos, cassettes,
DVDs, books and other entertainment products. Through our "Global Media
Network," we intend to offer radio and television stations and other businesses
an end-to-end, private label e-commerce solution that will significantly extend
our customer reach on the Web and provide additional revenue streams beyond
product sales on our own site. Our "network associates" will be able to offer a
customized online entertainment merchandise store under their own brands. Our
direct sales storefront can be found on the Web at www.globalmedia.com. By
combining an extensive catalogue of products, easy-to-use navigation and search
capabilities, rich, entertainment-focused content and a vibrant online community
for fans of music, books, videos, and other entertainment products, we are
striving to demonstrate our e-commerce solution to potential network associates
and to generate direct sales of music and entertainment merchandise. In
addition, using the Global Media Broadcast Network, which we are developing
through a strategic relationship with RealNetworks, Inc., our network associates
will be able to stream live and simulated live audio, video and other multimedia
content (such as radio feeds) over the Internet. Once developed, these
Internet-broadcasting abilities will be able to be combined with the private
label storefront to offer an integrated e-commerce and multimedia content
delivery solution.
INDUSTRY BACKGROUND
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.
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.
Traditional channels of entertainment merchandise retail distribution, such
as music stores, home video stores, bookstores and mass market retailers, have
many limitations, including:
28
- 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 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.
Many online retailers initially assumed heavy spending on marketing and
brand creation would be limited to the early years of their companies'
histories. However, with barriers to entry in online retailing low and price
competition intense, we believe that the cost of attracting and keeping online
retail customers will remain high and even increase. Many in the online
retailing industry now believe that continued heavy spending on marketing will
be necessary just to defend market share, making profitability in online
retailing all that more elusive.
OUR 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:
29
- 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 intend to 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 T-shirt, magazine subscription and
concert and event ticket sales.
- CONTENT. We currently offer entertainment-focused content on our
site, ranging from music and entertainment news to interviews with
artists and authors, biographies and lists of their works. We
will also offer content in formats designed to enhance the
customer's shopping experience, such as music clips that customers
may sample before ordering CDs. 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, we are
planning to further integrate streaming media into our online
merchandising solution.
- COMMUNITY. To create an online experience that will encourage
customers to return to our site, we strive to build community by
inviting customers and artists to post reviews of the products we
sell, sponsor competitions and host entertainment-oriented chat
sessions. On our indielife.com and indieaudio.com sites, we offer
content and community relating to alternative music and
independent lifestyles and enable visitors to those sites to click
through to our main storefront if they desire to purchase
products.
- EXTENDED REACH THROUGH NETWORK ASSOCIATE AND BROADCASTING
PROGRAMS. Our Global Media Network program will extend our reach
on the Web for consumers of entertainment merchandise. We will
initially target the radio and television industry to take
advantage of the obvious synergies between entertainment product
retailing and that industry. We will offer our network associates
a customized, private label online storefront. In addition,
through a strategic relationship with RealNetworks, we are
developing the Global Media Broadcast Network, which we will offer
to network associates to enable them to stream audio, video and
other multimedia content and create a blended entertainment and
e-commerce experience.
OUR STRATEGY
Our objective is to become a leading online seller of music, videos, books
and other entertainment merchandise and a leading on-line broadcaster of audio
and video streams. To achieve our objective, we intend to attract a growing
base of consumers of entertainment products and content to our network
associates Web sites and to our online store, and 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 inventory management, 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 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
30
and variety of content on our site, 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
INITIATIVES. We intend to aggressively pursue our Global Media
Network and Global Media Broadcast Network programs to drive sales
of our entertainment merchandise and provide additional revenue
streams. By offering our network associates a low-cost solution
for offering online entertainment product retailing and, if
desired, multimedia content streaming capabilities, we believe
that we will extend our customer reach on the Web on a more
cost-effective basis than if we were to try to establish and
maintain that reach solely through our own direct marketing and
promotion efforts.
- 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 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 GLOBAL MEDIA NETWORK PROGRAM AND THE GLOBAL MEDIA BROADCAST NETWORK
We have developed a "network associate" program, the Global Media Network,
to drive sales of the entertainment merchandise that we carry. Under this
program, we will offer network associates a complete, end-to-end entertainment
product e-commerce solution. Using storefront templates that we have developed,
we will 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 will enable a network associate to maintain a
private-label online store under its own brand and "look and feel." The network
associate maintains this private label storefront on its own Web site and the
store can be customized to 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. While
visitors to the network associate's storefront will have an associate-branded
shopping experience, the orders will actually be placed through and processed
by our back-end system, the orders will be fulfilled and shipped by our
fulfillment partners and we will provide all related customer service. We will
share with our network associates a small percentage of sales revenue generated
through our network associates' stores.
We believe our Global Media Network program will be attractive to companies
for a variety of reasons. In particular, our program:
- enables companies that lack the financial resources and expertise
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.
To take advantage of significant improvements in multimedia streaming
technologies, the resulting convergence of radio, television and other
multimedia content with the Internet, and the potential for creating a
compelling e-
31
commerce and entertainment system, we are developing the "Global Media Broadcast
Network" through a strategic relationship with RealNetworks. The Global Media
Broadcast Network will provide cutting-edge multimedia content delivery
capabilities and can be combined with the private label entertainment product
merchandising solution offered under our Global Media Network program. Using a
customized RealNetworks multimedia player, other software being developed by
RealNetworks, and the Real Broadcast Network multimedia streaming
infrastructure, the Global Media Broadcast Network will enable our participating
network associates in the Global Media Broadcast Network to deliver live and
simulated live multimedia content such as radio feeds and, if desired,
e-commerce functions over their own Web sites. As with our standard network
associate program, network associates in the Global Media Broadcast Network
offer their own branded storefront while we will provide the back end systems,
order fulfillment services and customer service. In addition to the revenues we
derive from product sales on the networks associate's Web site, we will derive
revenues from resale of streaming media bandwidth on the Real Broadcast Network
to our Global Media Broadcast Network associates.
We believe our network associate programs, including the Global Media
Broadcast Network, will significantly extend our customer reach on the Web and
drive sales of the entertainment merchandise we carry while minimizing the
efforts and expense we believe we would otherwise expend to establish and
maintain that reach under our own online store. The programs will allow us to
leverage off the efforts of our network associates to promote their own brands
and other businesses, both online and offline.
OUR WEB SITES
OUR MAIN STORE.
Visitors to globalmedia.com see a home page that highlights our three
product "departments," Music, Books and Videos, as well as content such as
entertainment focused news and interviews with artists and authors. We
periodically rotate specific title promotions in each of the departments on our
home page. A visitor can launch the "Global Media Radio" station, which
continuously streams commercial-free music in various genres, from our home page
and enjoy the music while browsing the store. A shopper can browse the store by
clicking on the permanently displayed department names to move directly to the
department home page and 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 customer can order a product by clicking on the "buy" button next to the
desired product (and, if relevant, format). The product is then added to the
customer's "shopping cart." The customer can add or delete items from his or
her shopping cart at any time prior to final purchase. When the customer
finishes selecting the desired products, he or she goes to checkout. (A
first-time purchaser registers his or her name, e-mail address, password,
shipping address and valid credit card information. All of this information is
maintained in a secure format and remains available for the customer's future
access. The next time he or she wants to purchase products from our site, our
system automatically recalls this registration information to make the checkout
process quick and easy.) The checkout page presents the customer with the
various items he or she has selected, the subtotal, tax (if applicable) and
shipping charges. The customer may add or delete products at this stage or
change the method of shipping. When satisfied with the order, the customer
clicks on the "purchase" button and the final order is entered into our system.
A customer 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
32
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. We enable
visitors to submit reviews of products we carry that can be read by other
visitors as part of their shopping experience.
OUR OTHER SITES.
We currently operate two other related Web sites, indielife.com and
indieaudio.com, which focus on content and community oriented to independent
lifestyles, musicians and fans of alternative music. While we expect that these
sites may generate some revenues from advertising and other activities, we
currently view these sites primarily as means of driving customer traffic to our
main online store. Our indielife.com and indieaudio.com sites currently offer:
- 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;
- forums to chat with other visitors;
- interactive games;
- audio/visual content such as animation and streamed video from
content providers such as Honkworm International and Pseudo TV; and
- three series of online radio channels broadcasting media streams.
Our indieaudio.com site also recently became an affiliate in Liquid Audio,
Inc.'s "Liquid Music Network." As a Liquid Music Network associate, we offer
for purchase on our indieaudio.com site 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 intend to expand our 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
While we view our network associate programs as the critical component of
our plan to increase sales of our entertainment products, our marketing strategy
will also focus on:
- increasing traffic to our main online store and the indielife.com
and indieaudio.com sites;
- 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 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 will be paid a commission on orders placed by customers who are
directed to our site from the affiliates' Web sites.
33
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.
Examples include:
- OUR RELATIONSHIP WITH REALNETWORKS. We have entered into an
agreement with RealNetworks under which they are developing an
advanced multimedia player and other software that will be
combined with our e-commerce, ad-serving and other systems to
create the Global Media Broadcast Network. We will also rely on
RealNetwork's streaming media infrastructure, the Real Broadcast
Network, to deliver streaming media services to our network
associates in the Global Media Broadcast Network.
- OUR RELATIONSHIP WITH FULFILLMENT PARTNERS. We have outsourced
our order fulfillment and shipping operations to Baker & Taylor
and Valley Media. We also intend to pursue other fulfillment
partners to expand our product offerings. These relationships will
allow us to focus on our core strengths of developing and enhancing
compelling online entertainment product merchandising and content
delivery initiatives. Moreover, we avoid the need to invest in
warehouse and other distribution infrastructure or carry
inventory.
- OUR RELATIONSHIPS WITH 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.
TECHNOLOGY OPERATIONS
We employ a broad range of technologies for both our e-commerce and
streaming media services 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 key tier 1 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
- Modular design for rapid application development
Our streaming media services solution will be provided through several
strategic technological partnerships with industry leaders and through the
implementation of our own proprietary advancements. We have developed a key
relationship with MCI/WorldCom to provide Internet connectivity for our Global
Media Broadcast Network. In addition, we have established a strategic
relationship with RealNetworks to develop an advanced multimedia player and
other software that will be combined with our e-commerce, ad-serving and other
systems to create the Global Media Broadcast Network.
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 at a relatively low cost using commercially-available software. We
may not be able to compete
34
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 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. At such time as we begin offering streaming
media services through our strategic relationship with RealNetworks, we will be
competing with large, well-established Internet broadcasters such as
broadcast.com and InterVU.
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 have not filed any U.S. or foreign 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, 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.
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. Any litigation or adverse priority proceeding could result in
substantial costs and diversion of resources and could seriously harm our
business and operating results. Finally, to the extent that we sell our
products internationally, the laws of many countries do not protect our
proprietary
35
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.
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. There
are currently few laws and regulations directly applicable to 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. It is possible that a number of laws and regulations may be
adopted with respect to the Internet covering issues such as user privacy,
pricing, content, copyrights, distribution, antitrust and characteristics and
quality of products and services. The growth of the market for online commerce
may prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online 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. 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.
Several states in the U.S. have also proposed legislation that would limit
the uses of personal user information gathered online or require online services
to establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create 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 could in some other manner have a material adverse
effect on our business, results of operations and financial condition. 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 legislation or regulation, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to
our business, could have a material adverse effect on our business, results of
operations and financial condition.
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.
EMPLOYEES
As of July 23, 1999, we employed approximately 50 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.
36
FACILITIES
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 also continue to lease 6,000
square feet of office space in Nanaimo, British Columbia. This lease expires
July, 2002. We believe our leased facilities are adequate for our current
operations and that additional leased space can be obtained if needed.
37
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our current directors, executive officers and other key employees, and
their ages, as of July 23, 1999 are as follows:
NAME AGE POSITION
---- --- --------
Michael Metcalfe 42 Chairman of the Board and
President
Robert Fuller 38 Director and Chief Executive
Officer
Winston V. Barta 28 Director, Vice President of
Marketing and Business
Development and Secretary
L. James Porter 34 Chief Financial Officer and
Assistant Secretary
Monte Walls-Burris 29 Vice President of Corporate
Affairs
Annie Ho 29 Vice President of Human
Resources
Jack MacDonald 70 Director
Barr Potter 50 Director
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 since May 1994. Mr. Metcalfe was director of sales and
marketing for Starscan Communications, 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 Global Media's 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 Global Media's Vice President of
Marketing and Business Development, Secretary, and a director since
September 1997. Previously, Mr. Barta was a vice president of marketing for
Starnet Communications, 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 Global Media's Chief Financial
Officer since April 1999 and assistant secretary since May 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
38
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. 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.
MONTE WALLS-BURRIS. Mr. Burris has been Global Media's 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.
ANNIE HO. Ms. Ho has been Global Media's Vice President of Human Resources
since April 1999. From March 1996 to March 1996, she was a human resources
manager for R.A. Malatest and Associates Ltd. ("Malatest"), an economic and
market research company located in Victoria, B.C., and from October 1993 until
April 1999 she served as a senior researcher at Malatest. Ms. Ho holds a
bachelor of arts degree in Economics and Sociology from the University of
Victoria and a master of arts degree in organizational leadership and training
from Royal Road University.
JACK D. MACDONALD. Mr. MacDonald has been a director of Global Media since
November, 1997. 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 1, 1994
through March 31, 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.
BOARD OF DIRECTORS
Under our Articles of Incorporation and Bylaws, our directors hold office
until the next annual meeting of the Company'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
and Mr. Potter 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 President and
Chief Executive Officer during the fiscal years ended July 31, 1998
(collectively, the "Named Executives"):
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------------- ALL OTHER
SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) ($)
- ----------------------------------------------------------------------------------------------------------------------------------
Michael Metcalfe, President 54,525 -- -- --
Robert Fuller, Chief Executive Officer -- -- -- --
39
OPTION GRANTS, OPTION EXERCISES AND OPTION VALUES
No stock options were granted to the Named Executives during the fiscal
year ended July 31, 1998 and the Named Executive Officers held no stock options
at the end of such fiscal year.
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 July 23,
1999:
SHARES OPTIONS AVAILABLE OPTIONS
PLAN NAME EFFECTIVE DATE RESERVED ISSUED SHARES EXERCISED
- -----------------------------------------------------------------------------------------------------------------
1997 Directors and Officers Stock April 8, 1997 500,000 0 500,000 0
Option Plan
1998 Directors and Officers Stock August 21, 1998 1,000,000 1,000,000 0 757,100
Option Plan
1999 Stock Option Plan March 24, 1999 4,000,000 3,022,500 977,500 0
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, and
approximately 457,100 of such shares have been sold under those registration
statements upon exercise of options under those plans. See "Certain
Transactions."
The options granted under our 1998 stock option plan had 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 $6.25 per share. Of these options, 768,853 are
subject to vesting requirements, and 2,253,667 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.
40
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 eight million
shares of our common stock and cash in the amount of $100,000.
LOANS TO AND FROM AFFILIATES
LOANS FROM BENJAMIN METCALFE. From October 1998 through December 1999,
Benjamin Metcalfe, Michael Metcalfe's father and one of our stockholders,
advanced a total of approximately $263,000 to us, of which $220,552 in
principal is still outstanding. 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
below, we agreed to (a) repay one-half of the principal balance, plus $16,724
in accrued interest, by issuing shares of our common stock at the fair market
price as of the date of conversion, and (b) issue a promissory note for the
remaining one-half of the principal balance plus $16,724 in accrued interest,
which is to be repaid in four quarterly installments and which will bear
interest at 9% per annum.
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, of which $137,931 in principal is still
outstanding. 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 $8,848 plus approximately $1,352 in interest from the proceeds of the
convertible debenture offering proceeds, (b) repay one-half of the remaining
outstanding principal balance plus $10,345 in accrued interest, by issuing
shares of our common stock at the fair market price as of the date of
conversion, and (c) issue a promissory note for the remaining one-half of the
principal balance plus $10,345 in accrued interest, which is to be repaid in
four quarterly installments and which will bear interest at 9% per annum.
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 the Company agreed to offset the receivable owed
Westcoast by his affiliated company against the payable which Westcoast owed
him.
FISCAL 1999 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:
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
41
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 - Nine months ended April 30, 1999 compared
to nine months ended April 30, 1998." All options held by executives have
been exercised and approximately one-half of the shares issued upon exercise
have been sold pursuant to a Form S-8 registration statement.
1999 PLAN. We granted 1,910,000 of the 3,022,500 options currently
outstanding under our 1999 Plan to our shareholders, directors and executive
officers as follows:
NAME POSITION OPTIONS VESTED UNVESTED
- ---- -------- ------- ------- --------
Michael Metcalfe Chairman of the Board; President 500,000 500,000 0
Robert Fuller Chief Executive Officer; Director 500,000 500,000 0
Winston V. Barta Vice President of Marketing and 250,000 250,000 0
Business Development and Director
L. James Porter Chief Financial Officer 200,000 200,000 0
Monte Walls Burris Vice President of Corporate Affairs 250,000 250,000 0
Annie Ho Vice President of Human Resources 60,000 20,000 40,000
Jack McDonald Director 25,000 25,000 0
Barr Potter Director 125,000 125,000 0
------- ------- -------
TOTALS 1,910,000 1,870,000 40,000
These option grants were made 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. As of July 23, 1999, none of these options had been
exercised.
42
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 "Certain
Transactions - Offering of Debentures and Warrants" 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, each of the selling stockholders has sole voting and
investment power over the shares of common stock listed in the table below. 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 BENEFICIAL OWNERSHIP OF COMMON STOCK
STOCK PRIOR TO THE OFFERING AFTER THE OFFERING
---------------------------------------------------------------------------------------
NUMBER OF SHARES
NUMBER OF TO BE SOLD UNDER
SELLING STOCKHOLDER SHARES THIS PROSPECTUS NUMBER OF SHARES PERCENT OF CLASS
------------------- ------ --------------- ---------------- ----------------
RGC International 0 0
Investors, LDC 7,443,153 7,443,153
The number of shares set forth in the table for RGC represents an estimate
of the number of shares of common stock which may be offered by RGC. 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. Under the terms of the Series A
preferred stock, if the Series A preferred stock had been actually converted on
July 27, 1999, the conversion price would have been $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 July 27, 1999; 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,
at which price the Series A preferred stock would have been converted into
approximately 1,520,785 shares of common stock and the related investment
options would have, assuming full exercise, resulted in the issuance of an
additional 1,520,785 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.
43
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 the 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.
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PRINCIPAL STOCKHOLDERS
The following table shows, to the best of our knowledge, the common stock
beneficially owned as of July 23, 1999, 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) 71.4
Robert Fuller 2,068,000 (3) 12.1
Winston V. Barta 300,000 (4) 2.6
Jack MacDonald 75,000 (5) *
1904 111 Beach Ave.
Vancouver, B.C. Canada V6E 1T9
Barr Potter 125,000 (6) 1.2
2029 Century Park East, Suite 2500
Los Angeles, CA 90067
L. James Porter 200,000 (7) 1.9
Monte Walls-Burris 300,000 (8) 2.6
Annie Ho 20,000 (9) *
----------
All Officers and Directors as a Group 17,688,000 92.7%
(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 owned by Mr. Metcalfe.
(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
his wife, Jasmine Fuller.
(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.
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(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) Includes currently exercisable options to purchase 250,000 shares of
common stock.
(9) Consists of currently exercisable options to purchase 40,000 shares of
common stock. Does not include unvested options to purchase 20,000
shares.
46
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.
Our authorized capital stock consists of (a) 200,000,000 shares of common
stock, par value $0.001 per share, of which 20,653,331 shares were issued and
outstanding as of July 23, 1999, and (b) 100,000,000 shares of preferred stock,
of which 8,500 shares had been designated Series A convertible preferred stock,
of which all 8,500 were issued and outstanding as of July 23, 1999. See "-
Preferred Stock." As of July 23, 1999, we estimated that there were
approximately 43 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.
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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: In the event of Global Media's bankruptcy,
insolvency, appointment of a receiver, dissolution or similar events
and there are assets and funds available for distribution to the
holders of our capital stock, 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 five
percent per annum from May 6, 1999 (the liquidation preference) prior
to any distribution to the holders of common stock. At the option of
the holders of the Series A preferred stock, certain fundamental
corporate changes, such as mergers, consolidations and the sale of
shares representing 50% or more of the voting power of Global Media,
may be treated 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 (i) 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 (ii)
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 is
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"). If our common
stock is not listed for trading on the Nasdaq National Market or Nasdaq
SmallCap Market prior to November 6, 1999, then (i) the fixed
conversion price will be 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%. 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.
48
- 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.
- 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 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;
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 intended to satisfy this
obligation. The registration rights agreement requires us to file a
registration statement with respect to the shares and to have the registration
statement be declared effective within a certain period of time (November 6,
1999). We must also keep the registration statement effective until all of the
common stock offered pursuant to such registration statement 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 the registration statement. We are
required to indemnify and hold harmless each selling stockholder and its
representatives and RGC and its agents or representatives against: (i) any
untrue statement of a material fact in the registration statement; (ii) any
untrue statement or alleged untrue statement contained in any preliminary
prospectus if used prior to the effective date of the registration statement; or
(iii) 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 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.
49
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 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).
50
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.
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 management of Global Media.
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 (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or (ii) the payment
of unlawful distributions.
There is no pending litigation or proceeding involving a director, officer,
associate or other agent of Global Media 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.
51
SHARES ELIGIBLE FOR FUTURE SALE
On July 23, 1999, 20,653,331 shares of our common stock were outstanding,
and 3,265,400 shares of common stock were subject to options granted under our
stock option plans. See "Management--Employee Benefit Plans." In addition,
3,721,577 shares of common stock were issuable upon conversion or exercise of
Series A 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 parties other than the selling
stockholders. Of the outstanding shares, 4,835,331 shares of common stock are
immediately eligible for sale in the public market without restriction or
further registration under our Form S-8 Registration Statements, unless held by
any "affiliate" of ours, as that term is defined in Rule 144, described below.
All other outstanding shares of our common stock are "restricted securities" as
such term is defined under Rule 144, 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(d) or 144(k) promulgated under the Securities Act or another exemption
from registration.
In general, under Rule 144(d), 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. To the extent that shares were acquired from an
affiliate, such person's holding period for the purpose of effecting a sale
under Rule 144 commences on the date of transfer from the affiliate. An
officer, director or other affiliate who holds control securities which are not
restricted may sell shares within the volume limitations described above but is
not subject to the holding period described above. As of July 23, 1999,
15,818,000 of our outstanding shares were eligible for sale in compliance with
Rule 144.
The shares of common stock issuable upon conversion or exercise of the
shares of Series A preferred stock, investor related options, and warrants held
by the selling stockholders are being registered on the registration statement
of which this prospectus is a part. Upon effectiveness of that registration
statement, such shares will also be immediately 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." We also 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. As of July 23, 1999, 3,265,400 of the
options were outstanding, 2,496,567 of which were currently exercisable and
768,833 of which were unvested.
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."
52
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
The balance sheets as of July 31, 1997 and 1998 and the statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
years then ended included in this prospectus have been audited by Ernst & Young
LLP, independent chartered accountants, to the extent and for the periods set
forth in their reports appearing elsewhere herein and in the registration
statement of which this prospectus is a part, and are included in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
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.
53
INDEX TO FINANCIAL STATEMENTS
GLOBAL MEDIA, INC. AND SUBSIDIARIES
PAGE
RESTATED AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors..................................................................................F-2
Consolidated Balance Sheets as at July 31, 1998 and 1997......................................................F-3
Consolidated Statements of Operations for the years ended July 31, 1998 and 1997................................F-4
Consolidated Statements of Shareholders' Equity (Deficiency) for the years ended
July 31, 1998 and 1997........................................................................................F-5
Consolidated Statements of Cash Flows for the years ended July 31, 1998 and 1997................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
RESTATED UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of April 30, 1999 and July 31, 1998.............................................F-16
Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and
nine months ended April 30, 1999 and 1998 ...................................................................F-17
Consolidated Statements of Shareholders' Equity (Deficiency) for the nine months ended April 30, 1999
and the years ended July 31, 1998 and 1997...................................................................F-18
Consolidated Statements of Cash Flows for the nine months ended April 30, 1999 and 1998 .......................F-19
Notes to Restated Financial Statements.........................................................................F-20
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
GLOBAL MEDIA CORP.
We have audited the accompanying consolidated balance sheets of GLOBAL MEDIA
CORP. as at July 31, 1998 and 1997 and the consolidated statements of
operations, 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, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of the company as at
July 31, 1998 and 1997 and the consolidated results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Vancouver, Canada,
October 23, 1998 (except as to /s/ Ernst & Young LLP
Notes 1, 3 and 10 which are as of June Chartered Accountants
18, 1999).
F-2
GLOBAL MEDIA CORP.
CONSOLIDATED BALANCE SHEETS
As at July 31 (in US dollars)
1998 1997
$ $
- --------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash 14,996 121,890
Accounts receivable, net of allowance for
doubtful accounts of $92,366 [1997 - $13,307] 206 58,838
Inventory 1,992 15,469
Prepaid expenses 8,229 917
Due from affiliated companies [NOTE 4] 71,065 77,778
Income taxes recoverable [NOTE 5] 2,439 --
- --------------------------------------------------------------------------------------------------
98,927 274,892
Capital assets [NOTES 3, 4 AND 6] 172,635 20,566
- --------------------------------------------------------------------------------------------------
271,562 295,458
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable and accrued liabilities 201,234 94,649
Taxes payable 51,354 30,124
Due to affiliated company [NOTE 4] 46,284 --
Due to shareholders [NOTE 4] 79,269 84,090
- --------------------------------------------------------------------------------------------------
378,141 208,863
Deferred revenue -- 12,062
- --------------------------------------------------------------------------------------------------
378,141 220,925
- --------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share capital [NOTE 7] 11,892 11,059
Additional paid in capital [NOTE 7] 543,525 128,641
Unissued share capital [NOTE 7] -- 144,001
Deficit (681,819) (209,145)
Cumulative translation adjustment 19,823 (23)
- --------------------------------------------------------------------------------------------------
(106,579) 74,533
- --------------------------------------------------------------------------------------------------
271,562 295,458
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
On behalf of the Board:
Director Director
F-3
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended July 31 (in US dollars)
1998 1997
$ $
- --------------------------------------------------------------------------------------------------
REVENUE
Sales -- --
- --------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES [NOTE 4]
Advertising and marketing 6,691 --
Amortization 29,973 --
Bad debts -- --
Bank charges, interest and financing fees 1,298 445
Foreign exchange 12,222 (920)
Professional fees 147,500 49,386
Office and miscellaneous 68,402 21,842
Travel 21,174 --
Wages and benefits 17,659 1,461
- --------------------------------------------------------------------------------------------------
304,919 72,214
- --------------------------------------------------------------------------------------------------
Loss from continuing operations (304,919) (72,214)
- --------------------------------------------------------------------------------------------------
Discontinued operations [NOTES 1 AND 3]
call center 108,613 --
satellite (276,368) (36,785)
- --------------------------------------------------------------------------------------------------
Loss from discontinued operations (167,755) (36,785)
- --------------------------------------------------------------------------------------------------
LOSS FOR THE YEAR (472,674) (108,999)
- --------------------------------------------------------------------------------------------------
Loss per common share from continuing operations (0.02) (0.01)
Loss per common share from discontinued operations (0.01) (0.00)
- --------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE (0.03) (0.01)
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-4
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIENCY)
Year ended July 31 (in US dollars)
COMMON STOCK ADDITIONAL UNISSUED RETAINED CUMULATIVE
----------------- PAID-IN SHARE EARNINGS TRANSLATION
SHARES AMOUNT CAPITAL CAPITAL (DEFICIT) ADJUSTMENT
# $ $ $ $ $
- ----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1996 [NOTE 7] -- -- -- 1 14,486 (408)
Common shares issued for cash 11,059,400 11,059 128,641 -- -- --
Unissued common shares [NOTE 7] -- -- -- 144,000 -- --
Movement on cumulative translation -- -- -- -- -- 385
Loss for the year -- -- -- -- (108,999) --
Dividends declared and paid -- -- -- -- (114,632) --
- ----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1997 11,059,400 11,059 128,641 144,001 (209,145) (23)
Common shares issued for cash [NOTE 7] 730,533 731 364,536 (144,000) -- --
Common shares issued for other than
cash consideration:
Consideration for shares in
Westcoast Wireless [NOTES 1 AND 7] 8,000,000 1 -- (1) -- --
In kind services 100,898 101 50,348 -- -- --
Movement on cumulative translation -- -- -- -- -- 19,846
Loss for the year -- -- -- -- (472,674) --
- ----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1998 19,890,831 11,892 543,525 -- (681,819) 19,823
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-5
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31 (in US dollars)
1998 1997
$ $
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the year (472,674) (108,999)
Items not requiring an outlay of funds
Amortization 38,658 3,957
Services settled through share issuance 50,449 --
Deferred revenue (12,062) 12,062
- --------------------------------------------------------------------------------------------------
(395,629) (92,980)
Changes in non-cash operating working capital
Accounts receivable 58,632 47,216
Inventory 13,477 20,233
Prepaid expenses (7,312) 599
Income taxes recoverable (2,439) --
Accounts payable and accrued liabilities 106,585 11,090
Accrued wages payable -- (58,527)
Taxes payable 21,230 5,034
Advances from (to) shareholder (4,821) 79,266
Advances from (to) affiliated companies 52,997 (80,309)
- --------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (157,280) (68,378)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (189,706) (13,209)
Decrease in loan receivable from shareholder -- 18,306
- --------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (189,706) 5,097
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends -- (114,632)
Share subscriptions 221,267 283,700
- --------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 221,267 169,068
- --------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 18,825 198
INCREASE (DECREASE) IN CASH DURING THE YEAR (106,894) 105,985
Cash, beginning of year 121,890 15,905
- --------------------------------------------------------------------------------------------------
CASH, END OF YEAR 14,996 121,890
- --------------------------------------------------------------------------------------------------
Interest - paid 9,180 357
Income taxes paid (recovered) (6,783) 10,354
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-6
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
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 Nanaimo, B.C., Canada. The Company
(through its now-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 first quarter of fiscal
1999. During the first quarter of fiscal 1999, the company adopted an
internet-focused business plan. As of April 30, 1999, the Company had not yet
commenced revenue generating activities 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. Subsequent
to the quarter ended April 30, 1999, the e-commerce web site, globalmedia.com,
was launched on May 18, 1999.
Subsequent to the issuance of the Company's financial statements for the year
ended July 31, 1998, the Company discontinued its call center business. As a
result, the Company has restated its financial statements for the year ended
July 31, 1998 in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations Reporting the Effects of Disposal of a
Segment of a Business". These financial statements reflect this restatement.
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 Cable Ltd.
("Westcoast Wireless"), a company which markets direct to home satellite
hardware and programming services.
Westcoast Wireless contracted for the sales of certain satellite hardware and
programming services, therefore the majority of the purchases were sourced from
a single supplier.
These financial statements reflect the continuity of interests of the former
shareholder of Westcoast Wireless, due to the continuation of common control.
The consolidated statements of operations, shareholders' equity (deficiency),
and cash flows for the period from August 1, 1996 to May 20, 1997 (included in
the results for the year ended July 31, 1997) represent the results of
operations and cash flows of Westcoast Wireless during those periods.
References to "the Company" in these financial statements include Westcoast
Wireless (for events occurring prior to May 20, 1997).
F-7
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONT'D.)
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America.
The Company has not yet achieved a profitable level of operations. The Company's
continued operation is dependent upon achieving a profitable level of operations
from its electronic commerce web site, scheduled to commence operations in March
1999, and upon obtaining additional financing and the continued support of the
Company's shareholders [note 10], to fund both current operations, and web site
construction.
2. SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory is recorded at the lower of cost, using the first in, first out
method, and net realizable value.
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.
Call center infrastructure 3 year straight line
Office furniture and equipment 20% declining balance
Software 20% declining balance
Computer equipment 30% declining balance
Leasehold improvements 5 year straight line
ADVERTISING AND MARKETING COSTS
Advertising and marketing costs are expensed as incurred.
F-8
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiary, Westcoast
Wireless, are translated into US dollars at fiscal period end exchange rates.
Income and expense items are translated at average exchange rates prevailing
during the fiscal period. The resulting translation adjustments are recorded as
a separate component of shareholders' equity.
Monetary assets and liabilities of the Company denominated in a foreign currency
are translated at period end exchange rates. Other balances are recorded at
rates in effect on the dates of the transaction. Exchange gains and losses
arising are reflected in net income for the period.
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, except as otherwise disclosed in the financial statements.
LOSS PER SHARE
The Company has adopted SFAS128, `Earnings per share' in the current year on a
retroactive basis. There is no impact on previously reported loss per share
amounts.
F-9
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS130, `Reporting
comprehensive income', SFAS131, `Disclosures about segments of an enterprise and
related information', SFAS132 `Employers' Disclosures about pensions and other
postretirement benefits' and SFAS133 `Accounting for derivative instruments and
hedging activities'. SFAS130, SFAS131 and SFAS132 are effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS133 is
effective for financial statements for fiscal years beginning after June 15,
1999.
SFAS130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS131, SFAS132 and SFAS133 currently have no impact on the Company.
3. DISCONTINUED OPERATIONS
In November 1997, a decision was made by the Canadian Federal Court of Appeal
of, ruling that 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 includes 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,
1998 were $591,938 [1997 - $1,617,528]. At July 31, 1998, net current
liabilities of the discontinued satellite operations were $130,076 [1997 -
$31,578] consisting principally of accounts payable and balances due to
shareholder. Net non-current assets at July 31, 1998 were $15,352 [1997 -
$8,504].
F-10
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
3. DISCONTINUED OPERATIONS (CONT'D.)
The Company was engaged in providing call center services until the third
quarter of fiscal 1999. The Company elected to abandon the business 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 statement of operations.
Revenues of the discontinued call center operations for the year ended July 31,
1998 were $326,279 [1997-nil]. At July 31, 1998, net current liabilities of the
discontinued call center operations were $19,484 [1997 - nil] consisting
principally of accounts payable.
4. RELATED PARTY TRANSACTIONS
All related party balances as disclosed in the balance sheet are non-interest
bearing and without specific terms of repayment.
The affiliated companies are related to Global Media Corp. by virtue of control
by officers of the Company. The fair values of the balances are not determinable
since they have no fixed repayment terms.
The Company's consolidated statement of operations for the year ended July 31,
1998 includes the following related party transactions:
- - wages and benefits expense of $81,747 [1997 - $45,565], to a shareholder
and spouse.
- - income from recharge of wages of $nil [1997 - $72,610], to a company
related by virtue of control by an officer of the Company.
During the year ended July 31, 1998 the following capital asset additions were
purchased from related parties:
- - $32,909 [1997 - $nil] for call center development from shareholders of
the Company.
- - $2,454 [1997 - $nil] for call center development from an officer of
the Company.
- - $5,709 [1997 - $nil] for office equipment, $4,171 [1997 - $nil] for
leasehold improvements and $12,170 [1997 - $nil] for call center
development from a company controlled by an officer of the Company.
F-11
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
5. INCOME TAXES
At July 31, 1998, the Company had a domestic net operating loss of $240,407
which will begin to expire in 2011, and foreign net operating loss carryforwards
of $250,671 which will expire in 2005. 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:
JULY 31,
1998
$
- ------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards 196,094
Tax vs. accounting value in fixed assets 5,431
Unrealized foreign exchange loss 4,155
- ------------------------------------------------------------------
Total gross deferred tax assets 205,680
Less valuation allowance (205,680)
Deferred tax liability --
- ------------------------------------------------------------------
NET DEFERRED TAX ASSETS --
- ------------------------------------------------------------------
F-12
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
6. CAPITAL ASSETS
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
- ---------------------------------------------------------------------------------------------------
JULY 31, 1998
Office furniture and equipment 18,859 4,842 14,018
Computer equipment 70,107 13,117 56,990
Leasehold improvements 8,594 4,905 3,689
Call center infrastructure 91,575 17,325 74,250
Software 27,209 3,520 23,689
- ---------------------------------------------------------------------------------------------------
216,344 43,702 172,635
- ---------------------------------------------------------------------------------------------------
JULY 31, 1997
Office furniture and equipment 9,794 2,576 7,218
Computer equipment 8,814 2,187 6,627
Leasehold improvements 2,029 709 1,320
Software 6,001 600 5,401
- ---------------------------------------------------------------------------------------------------
26,638 6,072 20,566
- ---------------------------------------------------------------------------------------------------
7. SHARE CAPITAL
1998 1997
# #
- ---------------------------------------------------------------------------------------------------
AUTHORIZED
Common shares, par value $0.001 each 200,000,000 200,000,000
ISSUED
Common shares 19,890,831 11,059,400
Unissued common shares -- 8,288,000
- ---------------------------------------------------------------------------------------------------
As at July 31, 1997, 8,000,000 shares issued in consideration for the shares in
Westcoast Wireless and 288,000 of the shares issued for cash had not been
issued; however, legal agreements for the issue of these shares were in place at
July 31, 1997. The amounts were recorded as unissued share capital of $1 and
$144,000 respectively as at July 31, 1997. All of these shares were issued in
the year ended July 31, 1998.
F-13
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
7. SHARE CAPITAL (CONT'D.)
Effective April 8, 1997, the Company adopted the 1997 Directors and Officers
Stock Option Plan (the "Plan"). The Plan is administered by the Board of
Directors who have sole discretion and authority to determine individuals
eligible for awards under the Plan. The Plan provides for issuance of a total of
500,000 options, within a period of 10 years from the effective date. The
conditions of exercise of each grant are determined individually by the Board at
the time of the grant. During the current year, this plan was amended to
increase the number of options from 500,000 to 1,000,000 shares.
At July 31, 1998, no options were outstanding under the Plan.
8. SEGMENTED INFORMATION
The Company's business segment which derived revenue from the marketing of
direct to home satellite hardware and programming services, has been presented
as a discontinued operation in the current year [note 3].
The remaining segment of the business related to call center services which was
discontinued during the 3rd quarter of fiscal 1999 [note 3]. The Global Media
call center provided internet integrated call center services to US based
clients from its location in Nanaimo, Canada.
9. COMMITMENTS AND CONTINGENCIES
Global Media entered into a commercial lease for office space effective October
1, 1997, and will pay a total of $52,939 per year until July 31, 2002.
10. SUBSEQUENT EVENTS
On November 5, 1998, the Company entered into a loan agreement with Rolling Oaks
Enterprises, LLC allowing the Company to draw on a line of credit of up to
$500,000, repayable within one year. The interest rate on the credit facility is
24% per annum, with an origination fee of 1% payable on the receipt of funds.
F-14
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Year ended July 31 (in US dollars)
10. SUBSEQUENT EVENTS (CONT'D.)
The loan is collateralized by a first charge on all available fixed assets of
the Company, and 1,000,000 of common shares in the Company at a price of $1 per
share currently in issue.
Since July 31, 1998, two principal shareholders of the Company have advanced
funds of $218,000 to the Company. The shareholder loans at July 31, 1998, and
advanced since the balance sheet date, have no fixed terms of repayment and
therefore are classified as current liabilities in the balance sheet. However,
the shareholders have indicated their intent to continue to support the
operations of the Company, and to not request repayment of the loans until a
profitable level of operations have been achieved.
Effective 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 and warrants to purchase 680,000 shares
of the Company's common stock at an exercise price of $8.3475 per share. The
convertible debenture is convertible from time to time at RGC's option into
shares of Common Stock of the Company at the lesser of a fixed conversion price
or a variable conversion price based on the market price of the Common Stock at
the time of conversion. The debenture includes an investment option, exercisable
by RGC at the time of conversion, to acquire a number of additional shares of
Common Stock equal to the number of shares with respect to which RGC is
converting the debenture, at an exercise price equal to the conversion price
then in effect. The debenture has a three year term, after which any previously
unconverted portion is converted automatically into Common Stock. The debenture
may be converted at the option of the Company into convertible preferred shares
of the Company (having the same basic terms as the convertible debenture) once
the Company's articles of incorporation have been amended to allow for the
issuance of the preferred shares. On or about June 9, 1999, the Company mailed
to its shareholders an Information Statement concerning this matter, and as
majority shareholder approval has already been obtained for the amendment of the
Company's articles of incorporation to allow for the issuance of the preferred
shares, the Company expects that the convertible debentures will have been
converted into convertible preferred shares of the Company by July 31, 1999, the
Company's fiscal year-end. Further details on this matter are also available by
referring to the Company's Form 8-K filing made May 20, 1999.
On May 18, 1999, the Company fully repaid its $500,000 line of credit, and
$48,200 of accrued interest, to Rolling Oaks Enterprises, LLC.
F-15
GLOBAL MEDIA CORP.
CONSOLIDATED BALANCE SHEETS
Unaudited
(in US dollars)
April 30 July 31
1999 1998
$ $
- --------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash 85,299 14,996
Accounts receivable 28,993 206
Inventory -- 1,992
Prepaid expenses 3,891 8,229
Due from affiliated companies [NOTE 4] -- 71,065
Income tax recoverable 2,531 2,439
- --------------------------------------------------------------------------------------
120,714 98,927
Capital assets [NOTE 6] 621,942 172,635
- --------------------------------------------------------------------------------------
742,656 271,562
- --------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 158,704 201,234
Employee withholdings 24,747 51,354
Due to affiliated company [NOTE 4] 137,703 46,284
Note Payable [NOTE 9] 548,200 --
Due to shareholders [NOTE 4] 242,536 79,269
- --------------------------------------------------------------------------------------
1,111,890 378,141
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share capital [NOTE 7] 12,546 11,892
Additional paid in capital [NOTE 7] 1,550,771 543,525
Deficit (1,941,221) (681,819)
Cumulative translation adjustment 8,670 19,823
- --------------------------------------------------------------------------------------
(369,234) (106,579)
- --------------------------------------------------------------------------------------
742,656 271,562
- --------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-16
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Unaudited
(in US dollars)
For the 3 Months For the 9 Months
Ended April 30 Ended April 30
---------------- ----------------
1999 1998 1999 1998
$ $ $ $
- ----------------------------------------------------------------------------------------------------
REVENUE -- -- -- --
- -----------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising, marketing and investor
relations 51,361 505 144,648 3,529
Amortization 54,783 5,645 90,060 16,678
Foreign exchange 2,921 (3,923) 7,280 7,403
Professional fees 61,597 19,112 159,114 86,586
Office and miscellaneous 51,831 17,703 114,740 41,708
Travel 41,583 6,655 75,549 15,590
Wages and benefits 26,604 -- 69,848 --
Stock option compensation expense -- -- 548,800 --
- -----------------------------------------------------------------------------------------------------
290,680 45,697 1,210,039 171,494
Net interest expense and financing fees 36,814 209 47,283 346
- -----------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (327,494) (45,906) (1,257,322) (171,840)
- -----------------------------------------------------------------------------------------------------
Income (Loss) from operations of discontinued
call center and satellite businesses
[NOTE 3]
Call center -- 82,631 -- 146,497
Satellite -- (27,401) (2,080) (204,458)
- -----------------------------------------------------------------------------------------------------
INCOME (LOSS) RECOVERY FROM DISCONTINUED OPERATIONS -- 55,230 (2,080) (57,961)
- -----------------------------------------------------------------------------------------------------
NET AND COMPREHENSIVE INCOME (LOSS) FOR PERIOD (327,494) 9,324 (1,259,402) (229,801)
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Loss per common share from continuing operations (0.02) (0.00) (0.06) (0.01)
Loss per common share from discontinued operations (0.00) (0.00) (0.00) (0.00)
- -----------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE (0.02) (0.00) (0.06) (0.01)
- -----------------------------------------------------------------------------------------------------
Shares used in the computation of loss per share 20,544,431 19,890,831 20,253,942 19,619,116
SEE ACCOMPANYING NOTES
F-17
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIENCY)
Unaudited
(in US dollars)
ADDITIONAL UNISSUED RETAINED CUMULATIVE
COMMON STOCK PAID-IN SHARE EARNINGS TRANSLATION
SHARES AMOUNT CAPITAL CAPITAL (DEFICIT) ADJUSTMENT
# $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1996 [NOTE 7] -- -- -- 1 14,486 (408)
Common shares issued for cash 11,059,400 11,059 128,641 -- -- --
Unissued common shares [NOTE 7] -- -- -- 144,000 -- --
Movement on cumulative translation -- -- -- -- -- 385
Loss for the year -- -- -- -- (108,999) --
Dividends declared and paid -- -- -- -- (114,632) --
- -----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1997 11,059,400 11,059 128,641 144,001 (209,145) (23)
Common shares issued for cash [NOTE 7] 730,533 731 364,536 (144,000) -- --
Common shares issued for other than
cash consideration:
Consideration for shares in
Westcoast Wireless [NOTES 1 AND 7] 8,000,000 1 -- (1) -- --
In kind services 100,898 101 50,348 -- -- --
Movement on cumulative translation -- -- -- -- -- 19,846
Loss for the year -- -- -- -- (472,674) --
- -----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1998 19,890,831 11,892 543,525 -- (681,819) 19,823
Stock options exercised 653,600 654 326,146
Stock options compensation 681,100
Movement on cumulative translation (11,153)
Loss for the Period (1,259,402)
- -----------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1999 20,544,431 12,546 1,550,771 -- (1,941,221) 8,670
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-18
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(in US dollars)
For the 9 Months Ended
----------------------
April 30 April 30
1999 1998
$ $
- ----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the period (1,259,402) (229,801)
Items not requiring an outlay of funds
Interest expense accrued on bridge loan 48,200 --
Share option compensation expense 548,800 --
Share option professional fees expense 37,300 --
Amortization 90,060 16,678
Services settled through share issuance -- 50,449
Deferred revenue -- (12,062)
- ----------------------------------------------------------------------------------------------------
(535,042) (174,736)
Changes in non-cash operating working capital
Accounts receivable (28,787) (2,124)
Inventory 1,992 9,275
Prepaid expenses 4,338 (11,000)
Income tax recoverable (92) --
Accounts payable and accrued liabilities (42,530) 34,387
Employee withholdings (26,607) 11,576
Advances from (to) shareholder 163,267 (39,026)
Advances from affiliated companies 162,484 2,329
- ----------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (300,977) (169,319)
- ----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (462,463) (165,414)
- ----------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (462,463) (165,414)
- ----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Bridge loan 500,000 --
Share subscriptions 326,800 221,267
- ----------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 826,800 221,267
- ----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 6,973 4,422
INCREASE (DECREASE) IN CASH DURING THE PERIOD 70,303 (109,044)
Cash, beginning of period 14,996 121,890
- ----------------------------------------------------------------------------------------------------
CASH, END OF PERIOD 85,299 12,846
- ----------------------------------------------------------------------------------------------------
Interest - paid 4,190 4,470
- ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-19
NOTES TO RESTATED FINANCIAL STATEMENTS
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 Nanaimo, B.C., Canada. The Company
(through its now-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, both of which lines of business are now discontinued (SEE note 3). In
the first quarter of fiscal 1999, the Company adopted an internet-focused
business plan. As of April 30, 1999 the Company had not yet commenced revenue
generating activities 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. Subsequent to quarter-end,
the e-commerce web site, globalmedia.com, was launched on May 18, 1999.
The accompanying unaudited interim consolidated financial statements have been
prepared in conformity with generally accepted accounting principles in the
United States of America ("GAAP"). All significant intercompany amounts have
been eliminated in the consolidation process. The preparation of financial
statements in conformity with GAAP requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and related notes. Actual results may differ from these estimates. In
the opinion of management, all adjustments necessary to fairly state the results
for the quarters and nine months ended April 30, 1999 and April 30, 1998 have
been made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. These unaudited interim consolidated financial statements should
therefore be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended July 31, 1998.
The results of operations for the quarters and nine months ended April 30, 1999
and 1998 are not necessarily indicative of the results to be expected or
anticipated for the full fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
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
Office furniture and equipment 20% declining balance
Purchased software, other than for
web site development 20% declining balance
Capitalized development costs
and purchased software for web
site development 3 year straight line
Computer equipment 30% declining balance
Leasehold improvements 5 year straight line
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's wholly-owned Canadian subsidiaries
Westcoast Wireless and Global Media Entertainment Corp. are translated into
US dollars at the period-end exchange rate. Income and expense items are
translated at average exchange rates prevailing during the fiscal period. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.
Monetary assets and liabilities of the Company denominated in a foreign currency
are translated into US dollars at period end exchange rates. Other balances are
recorded at rates in effect on the dates of the transaction. Exchange gains and
losses arising on translation are reflected in net income for the period.
LOSS PER SHARE
F-20
The Company has adopted SFAS128, "Earnings per share", in the current year on a
retroactive basis. In accordance with Statement 128, basic earnings per share is
computed using the weighted average number of common shares outstanding. Diluted
earnings per share is computed using the weighted average number of common
shares per dilutive common share equivalents outstanding during the period using
the treasury stock method. Due to the net loss during the quarter and nine
months ended April 30, 1999, the same number of shares were used to compute both
basic and fully diluted earnings per share.
3. DISCONTINUED OPERATIONS
The Company was engaged in providing call center services until the third
quarter of fiscal 1999, and Westcoast Wireless was engaged in the marketing of
direct-to-home satellite hardware and programming services until the fourth
quarter of 1998.
4. RELATED PARTY TRANSACTIONS
The affiliated companies are related to the Company by virtue of control by an
officer of the Company. No related party transactions occurred during the nine
months ending April 30, 1999 with the exception of:
(i) A partial repayment ($71,065) of a shareholder loan, which was
used to repay a receivable owed to the Company by an affiliate
owned by the same shareholder;
(ii) Advances from an affiliated company in the amount of $ 162,484;
and,
(iii) Shareholder loans of $ 242,536.
5. INCOME TAXES
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 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.
6. CAPITAL ASSETS
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
- ----------------------------------------------------------------------------------------------------
APRIL 30, 1999
Office furniture and equipment 22,431 2,696 19,735
Computer equipment 134,028 30,728 103,300
Leasehold improvements 3,832 762 3,070
Communications infrastructure 91,146 33,887 57,259
Web site development costs 402,393 38,420 363,973
Web site purchased software 24,550 3,068 21,482
Other purchased software 65,250 12,127 53,123
- ----------------------------------------------------------------------------------------------------
743,630 121,688 621,942
- ----------------------------------------------------------------------------------------------------
JULY 31, 1998
Office furniture and equipment 18,859 4,842 14,018
Computer equipment 70,107 13,117 56,990
Leasehold improvements 8,594 4,905 3,689
Communications infrastructure 91,575 17,325 74,250
Web site development costs -- -- --
Web site purchased software -- -- --
Other purchased software 27,209 3,520 23,689
- ----------------------------------------------------------------------------------------------------
216,344 43,709 172,635
- ----------------------------------------------------------------------------------------------------
F-21
7. SHARE CAPITAL
QUARTER ENDED APRIL 30 YEAR ENDED JULY 31
---------------------- ------------------
1999 1998
# #
- --------------------------------------------------------------------------------------------
AUTHORIZED
Common shares, par value $0.001 each 200,000,000 200,000,000
ISSUED
Common shares 20,544,431 19,890,831
- --------------------------------------------------------------------------------------------
STOCK OPTION PLANS
Effective April 8, 1997 the Company adopted the 1997 Directors and Officers
Stock Option Plan (the "1997 Plan"). The 1997 Plan is administered by the Board
of Directors who have sole discretion and authority to determine individuals
eligible for awards under the 1997 Plan. The 1997 Plan provides for issuance of
a total of 500,000 options, within a period of 10 years from the effective date.
The conditions of exercise of each grant are determined individually by the
Board at the time of the grant. No options have been granted under this plan.
Effective August 21, 1998 the Company adopted the 1998 Directors and Officers
Stock Option Plan (the "1998 Plan"). The Plan is administered by the Board of
Directors who have sole discretion and authority to determine individuals
eligible for awards under the 1998 Plan. The 1998 Plan provides for issuance of
a total of 1,000,000 options, within a period of 10 years from the effective
date. The conditions of exercise of each grant are determined individually by
the Board at the time of the grant. 1,000,000 options at an exercise price of
$0.50 per share have been granted under this plan. No grants occurred in the
quarter ended April 30, 1999. Of these options, 980,000 were granted to
directors, officers, employees and inside consultants, and the $548,800 imputed
value thereof as calculated pursuant to APB 25 has been charged to compensation
expense. The remaining 20,000 were granted to an outside consultant and the
$12,600 imputed value thereof as calculated pursuant to FAS 123 has been charged
to professional fees expense. SEE Note 12.
Effective March 24, 1999 the Company adopted the 1999 Directors and Officers
Stock Option Plan (the "1999 Plan"). The 1999 Plan is administered by the
Board of Directors who have sole discretion and authority to determine
individuals eligible for awards under the 1999 Plan. The 1999 Plan provides
for issuance of a total of 4,000,000 options, within a period of 10 years
from the effective date. The conditions of exercise of each grant are
determined individually by the Board at the time of the grant. 2,933,000
options at exercise prices of $4.00 have been granted under this plan and all
of these grants occurred in the quarter ended April 30, 1999. Of these
options, 25,000 were issued to acquire the globalmedia.com domain name and
the $95,000 imputed value thereof has been capitalized to web site
development costs. Additionally, 10,000 options were issued to an outside
consultant and the $24,700 imputed value thereof, as calculated pursuant to
FAS 123, has been charged to professional fees expense. SEE Note 12.
As of April 30, 1999, 653,600 options had been exercised under the 1998 Plan and
no options had been exercised under the 1999 Plan.
8. COMMITMENTS AND CONTINGENCIES
The Company entered into a commercial lease for office space effective October
1, 1997 and will pay a total of $52,939 per year until July 31, 2002.
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 Global Media Broadcast Network project. 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.
F-22
9. NOTE PAYABLE AND DUE TO SHAREHOLDERS
On November 5, 1998, the Company entered into a bridge loan agreement with
Rolling Oaks Enterprises, LLC allowing the Company to draw on a line of credit
of up to $500,000, repayable within one year. The interest rate on the credit
facility was 24% per annum, with an origination fee of 1% payable on receipt of
the funds.
The shareholder loans as of April 30, 1999 had no fixed terms of repayment and
therefore are classified as current liabilities on the balance sheet. Subsequent
to quarter-end, the Company and the shareholders agreed to settle the loans by
way of the issuance of shares, partial repayment and partial conversion to new
promissory notes.
10. SUBSEQUENT EVENTS
Effective 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 Rose Glen in
the aggregate principal amount of $8,500,000 and warrants to purchase 680,000
shares of the Company's common stock at an exercise price of $8.4375 per share.
The convertible debenture is convertible from time to time at RGC's option into
shares of Common Stock of the Company at the lesser of a fixed conversion price
or a variable conversion price based on the market price of the Common Stock at
the time of conversion. The debenture includes an investment option, exercisable
by RGC at the time of conversion, to acquire a number of additional shares of
Common Stock equal to the number of shares with respect to which RGC is
converting the debenture, at an exercise price equal to the conversion price
then in effect. The debenture has a three year term, after which any previously
unconverted portion is converted automatically into Common Stock. The debenture
may be converted at the option of the Company into convertible preferred shares
of the Company (having the same basic terms as the convertible debenture) once
the Company's articles of incorporation have been amended to allow for the
issuance of the preferred shares. On or about June 9, 1999 the Company mailed to
its shareholders an Information Statement concerning this matter, and as
majority shareholder approval has already been obtained for the amendment of the
Company's articles of incorporation to allow for the issuance of the preferred
shares, the Company expects that the convertible debentures will have been
converted into convertible preferred shares of the Company by July 31, 1999, the
Company's fiscal year-end. Further details on this matter are also available by
referring to the Company's Form 8-K filing made May 20, 1999.
On May 18, 1999 the Company fully repaid its $500,000 line of credit, and
$48,200 of accrued interest, to Rolling Oaks Enterprises, LLC.
The Company launched its main e-commerce internet site, globalmedia.com, on May
18, 1999.
11. 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 temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own information systems since its existing systems
correctly define the Year 2000. The Company is in the process of inquiring as to
the extent to which its major suppliers' systems (insofar as they relate to the
Company's business) are subject to the Year 2000 issue. The Company is currently
unable to predict the extent to which the Year 2000 issue will affect its
suppliers, or the extent to which it would be vulnerable to its 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 the Company's systems could have
a material adverse effect on the Company. In addition, historically most of the
purchases from the Company will be made with credit cards and the Company's
operations may be materially adversely affected to the extent its customers are
unable to use their credit cards due to Year 2000 issues that are not rectified
by their 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 the Company's ability to generate
sales.
F-23
12. RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the quarter
ended April 30, 1999, the Company identified accounting issues with regard to
its treatment of stock options granted during the first and third quarters of
fiscal 1999. SEE Note 7. As a result, the Company has restated its financial
statements for the three and nine months ended April 30, 1999. The effects of
such restatement, and of the Company's discontinuance of its call center
operation (SEE Note 3) are summarized as follows:
Three months ended Nine months ended
April 30, 1999 April 30, 1999
$ $
--------------------- -------------------
Net sales before restatement - -
Net sales after restatement - -
General and administrative expenses before restatement 265,980 623,939
General and administrative expenses after restatement 290,680 1,210,039
Net loss before restatement (302,794) (673,302)
Net loss after restatement (327,494) (1,259,402)
Net loss per common share before restatement (0.01) (0.03)
Net loss per common share after restatement (0.02) (0.06)
At April 30, 1999
$
------------------------
Capital assets before restatement 526,942
Capital assets after restatement 621,942
Total stockholders' deficit before restatement (464,234)
Total stockholders' deficit after restatement (369,234)
F-24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
LIMITATIONS ON DIRECTORS' LIABILITIES UNDER NEVADA LAW.
The General Corporation Law of Nevada (the "GCL") permits a corporation
organized thereunder to indemnify its directors and officers for certain of
their acts. Article 11 of the Bylaws of Global Media Corp., Inc. provides that:
(a) to the full extent of Section 78.751 of the GCL, the Company shall
indemnify all persons who may be indemnified pursuant thereto, and that every
person who was or is a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or a person of
whom he is the legal representative is or was a director or officer of the
corporation or is or was serving at the request of the corporation or for its
benefit as a director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other enterprise, shall
be indemnified and held harmless to the fullest extent legally permissible under
the GCL from time to time against all expenses, liability and loss (including
attorneys' fees, judgments, fines and amounts paid or to be paid in settlement)
reasonably incurred or suffered by him in connection therewith; and
(b) the Company shall pay any expenses of officers and directors incurred
in defending a civil or criminal action, suit or proceeding as they are incurred
and in advance of the final disposition of the action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director or officer to repay
the amount if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by the Company; and
(c) this right of indemnification is a contract right which may be enforced
in any manner desired by such person, and is not be exclusive of any other right
which such directors, officers or representatives may have or hereafter acquire
and, without limiting the generality of such statement, they shall be entitled
to their respective rights of indemnification under any bylaw, agreement, vote
of stockholders, provisions of law or otherwise, as well as their rights under
Article 11 of the Bylaws of Global Media Corp., Inc.
Should the indemnified person be successful on the merits, Section 78.751
provides that such person shall be indemnified against expenses incurred by him.
In a suit, action or proceeding against such person brought by or on behalf of
the corporation in which such person was found to be liable to the corporation,
any indemnification must be approved by the court in which such action is
brought. Section 78.752 of the GCL empowers corporations to purchase and
maintain insurance on behalf of an officer or director of the corporation
against any liability, regardless of whether the corporation could indemnify
such person against such liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses incurred in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the SEC registration fee.
II-1
SEC registration fee..................................... $16,825
Transfer agent fee....................................... 500
Printing expenses........................................ 8,000
Legal fees and expenses.................................. 125,000
Accounting fees and expenses............................. 30,000
Blue sky fees and expenses, including legal fees......... 15,000
Miscellaneous............................................ 500
--------
TOTAL.............................................. $195,825
--------
--------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
RULE 504 OFFERINGS.
The Company conducted the following offerings of its common stock to
Canadian investors:
- - 11,000,000 shares of common stock at $.01 per share in April and May 1997,
for $110,000 total offering proceeds, less a commission of $11,000 to the
placement agent, and
- - 12,000 shares of common stock at $.25 per share in April 1997, for $3,000
total offering proceeds less a commission of $30 to the placement agent, and
- - 890,831 shares of common stock at $.50 per share from June to November,
1997, for $415,527 total offering proceeds less a commission of $4,155 to
the placement agent.
Each of these offerings were exempt from registration under the Securities
Act in reliance upon Rule 504 of Regulation D as transactions by an issuer not
involving a public offering. The recipients of securities in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or sale in connection with any distribution. All recipients
either received adequate information about the Company or had access, through
employment or other relationships, to such information. The placement agent in
each of these offerings was Pacific Rim Investment Inc., a corporation organized
under the law of the Pacific island nation Vanuatu.
SHARE EXCHANGE.
The Company issued 8 million shares of its common stock to Michael
Metcalfe, a Canadian resident, in exchange for all of the outstanding shares of
Westcoast Wireless Cable Ltd., pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act. See "Certain Transactions."
No commissions were paid in connection with the transaction.
CONVERTIBLE DEBENTURE OFFERING.
In May 1999, the Company issued a convertible debenture for $8.5 million in
principal amount, and warrants to purchase an aggregate of 680,000 shares of
common stock to the selling stockholder named in the registration statement.
This sale was exempt from registration under Section 4(2) of, or Regulation D
under, the Securities Act, and the purchasers represented their intention to
acquire the securities for investment only and not with a view to distribution.
Appropriate legends disclosing the restricted nature of such securities were
affixed to the debenture and warrant certificate. The selling stockholder
certified that it is an accredited investor and received adequate information
about the Company to make an informed investment decision. The Company paid a
$510,000 commission to Broadmark Capital Corporation in connection with this
offering.
In July 1999, the Company exercised its right to convert the debenture into
shares of Series A Convertible Preferred Stock and issued the holder of the
debenture 8,500 of such shares. Such issuance was exempt from registration
under Section 3(a)(9) of the Securities Act. Appropriate legends disclosing the
restricted nature of such securities were affixed to the certificate evidencing
the shares of Series A Convertible Preferred Stock.
II-2
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation of the Company as filed on April 8, 1997,
with the Secretary of State of the State of Nevada. (1)
3.2 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing the issuance of preferred stock, as filed on
June 30, 1999, with the Secretary of State of the State of
Nevada. (8)
3.3 Certificate of Designation, designating Series A preferred stock,
as filed on June 30, 1999, with the Secretary of State of the State
of Nevada. (8)
3.4 Bylaws of the Company. (1)
4.1 Form of specimen certificate for common stock. (8)
4.2 Registration Rights Agreement, dated May 6, 1999, between the
Company and RGC International Investors, LDC. (4)
5.1 Opinion of Dennis Brovarone, Esq. (8)
10.1 1997 Stock Option Plan. (1)
10.2 1998 Stock Option Plan. (2)
10.3 1999 Stock Option Plan. (3)
10.4 Offering Sales Agency Agreement, dated April 25, 1997, between the
Company and Pacific Rim Investment, Inc. (1)
10.5 Plan of Reorganization, dated May 20, 1997, between the Company and
Westcoast Wireless Cable, Ltd. (1)
10.6 Secured Promissory Note, dated November, 1998, from the Company to
Rolling Oaks Enterprises, LLC. (5)
10.7 Security Agreement, dated November 30, 1998 from the Company to
Rolling Oaks Enterprises, LLC. (5)
10.8 Securities Purchase Agreement dated May 6, 1999, between the
Company and RGC International Investors, LDC. (4)
10.9 Convertible Debenture, dated May 6, 1999, from the Company to RGC
International Investors, LDC. (4)
10.10 Stock Purchase Warrant dated May 6, 1999 from the Company to RGC
International Investors, LDC. (4)
10.11 Streaming Media Services Agreement, dated April 19, 1999, between
the Company and RealNetworks, Inc. (5) (6)
10.12 Letter Agreement for consulting services from RealNetworks, Inc. to
the Company, dated and accepted on April 20, 1999. (7) (6)
10.13 Letter from RealNetworks, Inc. to the Company, dated and accepted
on June 4, 1999, amending the April 20, 1999 letter
agreement. (7) (6)
10.14 Order Fulfillment Agreement, dated May 15, 1999, between the
Company and i.FILL (a division of Valley Media, Inc.). (8) (6)
10.15 Drop Ship Agreement, dated May 14, 1999, between the Company and
Baker & Taylor, Inc. (8) (6)
10.16 Distribution Agreement, dated May 14, 1999, between the Company and
Baker & Taylor, Inc. (8) (6)
10.17 License Agreement, dated August 7, 1998, between the Company and
Muze Inc. (8) (6)
21 List of Subsidiaries. (8)
23.1 Consent of Ernst & Young, LLP. (8)
23.2 Consent of Dennis Brovarone, Esq. (included in opinion filed as
Exhibit 5.1). (8)
24 Power of Attorney (included on signature page). (8)
27 Financial Data Schedule. (8)
- ---------------------------------
(1) Incorporated by reference to the Company's Form 10-SB Registration
Statement filed on December 11, 1997.
(2) Incorporated by reference to the Company's Form S-8 Registration Statement
filed on August 21, 1998.
(3) Incorporated by reference to the Company's Form S-8 Registration Statement
filed on March 24, 1999.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on May 19, 1999.
(5) Incorporated by reference to the Company's Form 10-QSB filed June 14, 1999.
(6) Subject to a request for confidential treatment.
(7) Incorporated by reference to the Company's Form 10-QSB/A for the quarter
ended April 30, 1999, filed June 30, 1999.
(8) Filed with this Form SB-2 Registration Statement.
II-3
ITEM 28. UNDERTAKINGS.
RULE 415 OFFERINGS.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement; and
(iii) include any additional or changed material information on
the plan of distribution.
2. That, for determining liability under the Securities Act, it will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
3. To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
REQUEST FOR ACCELERATION OF EFFECTIVE DATE UNDER RULE 461 OF THE
SECURITIES ACT.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 24, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, GLOBAL MEDIA CORP. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Nanaimo, British Columbia, Canada on July 28,
1999.
GLOBAL MEDIA CORP.
By /s/ Robert Fuller
--------------------------------------
Name: Robert Fuller
Title: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below hereby authorizes and appoints Robert Fuller and L. James Porter, and each
of them, with full power of substitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this registration statement, including any and all post-effective
amendments.
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities indicated on July 28, 1999.
SIGNATURE TITLE
----------------------------
Michael Metcalfe Chairman of the Board and President
/s/ Robert Fuller
----------------------------
Robert Fuller Director and Chief Executive Officer
(Principal Executive Officer)
----------------------------
Winston V. Barta Director, Vice President of Marketing
and Business Development, and Secretary
/s/ L. James Porter
----------------------------
L. James Porter Chief Financial Officer (Principal
Accounting Officer)
/s/ Jack MacDonald
----------------------------
Jack MacDonald Director
/s/ Barr Potter
----------------------------
Barr Potter Director
II-5
INDEX TO EXHIBITS
3.1 Articles of Incorporation of the Company as filed on April 8, 1997,
with the Secretary of State of the State of Nevada. (1)
3.2 Articles of Amendment to the Articles of Incorporation of the
Company, authorizing the issuance of preferred stock, as filed on
June 30, 1999, with the Secretary of State of the State of
Nevada. (8)
3.3 Certificate of Designation, designating Series A preferred stock,
as filed on June 30, 1999, with the Secretary of State of the State
of Nevada. (8)
3.4 Bylaws of the Company. (1)
4.1 Form of specimen certificate for common stock. (8)
4.2 Registration Rights Agreement, dated May 6, 1999, between the
Company and RGC International Investors, LDC. (4)
5.1 Opinion of Dennis Brovarone, Esq. (8)
10.1 1997 Stock Option Plan. (1)
10.2 1998 Stock Option Plan. (2)
10.3 1999 Stock Option Plan. (3)
10.4 Offering Sales Agency Agreement, dated April 25, 1997, between the
Company and Pacific Rim Investment, Inc. (1)
10.5 Plan of Reorganization, dated May 20, 1997, between the Company and
Westcoast Wireless Cable, Ltd. (1)
10.6 Secured Promissory Note, dated November, 1998, from the Company to
Rolling Oaks Enterprises, LLC. (5)
10.7 Security Agreement, dated November 30, 1998 from the Company to
Rolling Oaks Enterprises, LLC. (5)
10.8 Securities Purchase Agreement dated May 6, 1999, between the
Company and RGC International Investors, LDC. (4)
10.9 Convertible Debenture, dated May 6, 1999, from the Company to RGC
International Investors, LDC. (4)
10.10 Stock Purchase Warrant dated May 6, 1999 from the Company to RGC
International Investors, LDC. (4)
10.11 Streaming Media Services Agreement, dated April 19, 1999, between
the Company and RealNetworks, Inc. (5) (6)
10.12 Letter Agreement for consulting services from RealNetworks, Inc. to
the Company, dated and accepted on April 20, 1999. (7) (6)
10.13 Letter from RealNetworks, Inc. to the Company, dated and accepted
on June 4, 1999, amending the April 20, 1999 letter
agreement. (7) (6)
10.14 Order Fulfillment Agreement, dated May 15, 1999, between the
Company and i.FILL (a division of Valley Media, Inc.). (8) (6)
10.15 Drop Ship Agreement, dated May 14, 1999, between the Company and
Baker & Taylor, Inc. (8) (6)
10.16 Distribution Agreement, dated May 14, 1999, between the Company and
Baker & Taylor, Inc. (8) (6)
10.17 License Agreement, dated August 7, 1998, between the Company and
Muze Inc. (8) (6)
21 List of Subsidiaries. (8)
23.1 Consent of Ernst & Young, LLP. (8)
23.2 Consent of Dennis Brovarone, Esq. (included in opinion filed as
Exhibit 5.1). (8)
24 Power of Attorney (included on signature page). (8)
27 Financial Data Schedule. (8)
- ------------------------------
(1) Incorporated by reference to the Company's Form 10-SB Registration
Statement filed on December 11, 1997.
(2) Incorporated by reference to the Company's Form S-8 Registration
Statement filed on August 21, 1998.
(3) Incorporated by reference to the Company's Form S-8 Registration
Statement filed on March 24, 1999.
(4) Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 19, 1999.
(5) Incorporated by reference to the Company's Form 10-QSB filed June 14,
1999.
(6) Subject to a request for confidential treatment.
(7) Incorporated by reference to the Company's Form 10-QSB/A for the quarter
ended April 30, 1999, filed June 30, 1999.
(8) Filed with this Form SB-2 Registration Statement.
II-6