SCHEDULE 14C INFORMATION
Proxy Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
[ X ] Filed by the Company
[ ] Filed by a party other than the Company
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
GLOBALMEDIA.COM
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(Name of Company as Specified in Its Charter)
Payment of filing fee (Check the appropriate box):
[ X ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
GLOBALMEDIA.COM
PROXY STATEMENT
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held June 30, 2000
TO THE SHAREHOLDERS OF GLOBALMEDIA.COM
NOTICE HEREBY IS GIVEN that a Special Meeting of Shareholders of
GLOBALMEDIA.COM, a Nevada corporation (the "Company"), will be held at the
Company's office, 400 Robson Street, Vancouver, British Columbia, on June 30,
2000, at 10:00 a.m., Pacific Standard Time, and at any and all adjournments
thereof, for the purpose of considering and acting upon the following Proposals:
Proposal No. 1. APPROVAL OF THE POTENTIAL ISSUANCE OF IN EXCESS OF TWENTY
PERCENT OF THE OUTSTANDING COMMON STOCK
This Special Meeting is called as provided for by Nevada law and the Company's
By-laws.
Only holders of the outstanding Common Stock of the Company of record at the
close of business on June 2, 2000 will be entitled to notice of and to vote at
the Meeting or at any adjournment or adjournments thereof.
All shareholders, whether or not they expect to attend the Special Meeting of
Shareholders in person, are urged to sign and date the enclosed Proxy and return
it promptly in the enclosed postage-paid envelope which requires no additional
postage if mailed in the United States. The giving of a proxy will not affect
your right to vote in person if you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS.
L. James Porter
SECRETARY
<PAGE>
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 30, 2000
GENERAL INFORMATION
The enclosed Proxy is solicited by and on behalf of the Board of Directors of
GLOBALMEDIA.COM, a Nevada corporation (the "Company"), for use at the Company's
Special Meeting of Shareholders (the "Meeting") to be held at the Company's
office, 400 Robson Street, Vancouver, British Columbia, on the 30th day of June,
2000 at 10:00 a.m. Pacific Standard Time, and at any adjournment thereof. It is
anticipated that this Proxy Statement and the accompanying Proxy will be mailed
to the Company's shareholders on or before June 9, 2000.
Any person signing and returning the enclosed Proxy may revoke it at any time
before it is voted by giving written notice of such revocation to the Company,
or by voting in person at the Meeting. The expense of soliciting proxies,
including the cost of preparing, assembling and mailing this proxy material to
shareholders, will be borne by the Company. It is anticipated that solicitations
of proxies for the Meeting will be made only by use of the mails; however, the
Company may use the services of its Directors, Officers and employees to solicit
proxies personally or by telephone without additional salary or compensation to
them. Brokerage houses, custodians, nominees and fiduciaries will be requested
to forward the proxy soliciting materials to the beneficial owners of the
Company's shares held of record by such persons, and the Company will reimburse
such persons for their reasonable out-of-pocket expenses incurred by them in
that connection.
All shares represented by valid proxies will be voted in accordance therewith at
the Meeting. Shares not voting as a result of a proxy marked to abstain will be
counted as part of total shares voting in order to determine whether or not a
quorum has been achieved at the Meeting. Shares registered in the name of a
broker-dealer or similar institution for beneficial owners to whom the
broker-dealer distributed notice of the Special Meeting and proxy information
and which such beneficial owners have not returned proxies or otherwise
instructed the broker-dealer as to voting of their shares, will be counted as
part of the total shares voting in order to determine whether or not a quorum
has been achieved at the Meeting. Abstaining proxies and broker-dealer non-votes
will not be counted as part of the vote on any business at the Meeting on which
the shareholder has abstained.
SHARES OUTSTANDING AND VOTING RIGHTS
All voting rights are vested exclusively in the holders of the Company's Common
Stock with each common share entitled to one vote. Only shareholders of record
at the close of business on June 2, 2000 are entitled to notice of and to vote
at the Meeting or any adjournment thereof. On June 2, 2000 the Company had
23,569,986 shares of its Common Stock outstanding, each of which is entitled to
one vote on all matters to be voted upon at the Meeting. No fractional shares
are presently outstanding. Thirtythree and one half percent of the Company's
outstanding voting stock represented in person or by proxy shall constitute a
quorum at the Meeting. The affirmative vote of a majority of the votes cast,
providing a quorum is present, is necessary to approve the matter to be voted
upon at the Special Meeting.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the persons known to the Company as beneficially
owning more than five percent (5%) of the outstanding shares of the Company
(23,569,986 as of May 26, 2000 and 25,532,242 when adjusted for currently
exercisable options), the directors and officers and number of shares of the
Company's Common Stock beneficially owned, by individual directors and executive
officers and by all directors and executive officers of the Company as a group.
Name and Address (1) Amount and Nature % of
of Beneficial Owner of Beneficial Owner(2) Class (2)
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Michael Metcalfe 14,017,170 (3) 55.6%
Robert Fuller 2,005,170 (4) 7.9%
Winston V. Barta 299,000 (5) 1.2%
Jack MacDonald 55,000 (6) *
Barr Potter 125,000 (7) *
L. James Porter 184,000 (8) *
Monte Walls-Burris 255,667 (9) 1.0%
Jeffrey Mandelbaum 640,000 (10) 2.5%
Gary Slaight 10,416 (11) *
Paul Sullivan 0 *
All Officers and 17,581,423 (2) 68.9%
Directors as
a Group(9 persons)
(1) The address for the listed officers and directors is GlobalMedia.com, 400
Robson Street Vancouver, BC V6B 2B4
(2) 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. * denotes holdings of less than 1%.
(3) Includes currently exercisable options to purchase 417,170 shares of common
stock.
(4) Includes (a) currently exercisable options to purchase 417,170 shares of
common stock owned by Mr. Fuller, and (b) 200,000 shares owned by Mr.
Fuller's spouse.
(5) Includes currently exercisable options to purchase 250,000 shares of common
stock.
(6) Includes currently exercisable options to purchase 25,000 shares of common
stock.
(7) Includes of currently exercisable options to purchase 115,000 shares of
common stock.
(8) Consists of 16,500 shares directly owned and currently exercisable options
to purchase 167,500 shares of common stock.
(9) Includes currently exercisable options to purchase 250,000 shares of common
stock.
(10) Includes currently exercisable options to purchase 70,000 shares of common
stock..
(11) Consists of currently exercisable options to purchase 10,416 shares of
common stock.. Mr. Slaight also disclaims beneficial ownership in the
338,983 shares held by Standard Radio, Inc., of which Mr. Slaight is
President.
Michael Metcalfe, our Chairman and majority shareholder, 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.
PROPOSAL NO. 1. APPROVAL OF THE POTENTIAL ISSUANCE OF IN EXCESS OF TWENTY
PERCENT OF THE OUTSTANDING COMMON STOCK
On April 28, 2000, the Company and RGC International Investors, LDC (the
"Investor") entered into a Securities Purchase Agreement which provides for the
sale and issuance in two separate closings of two new series of convertible
preferred stock of the Company. In the first closing pursuant to the Securities
Purchase Agreement, which occurred on April 28, 2000, the Company issued and
sold to the Investor, for an aggregate purchase price of $5,000,000, 5,000
shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock")
and five year warrants to purchase an aggregate of 388,500 shares of Common
Stock at a purchase price of $7.0785 per share (the "Series B Warrants")
(collectively, the "First Closing"). The Series B Preferred Stock and Series B
Warrants were sold in a private placement pursuant to Regulation D under the
Securities Act of 1933, as amended.
The Securities Purchase Agreement also provides for the issuance and sale to the
Investor of 5,000 shares of the Company's Series C Convertible Preferred Stock
(the "Series C Preferred Stock" and, together with the Series B Preferred Stock,
the "Preferred Stock"), and the issuance to the Investor of warrants to purchase
additional shares of Common Stock in connection therewith (the "Series C
Warrants" and, together with the Series B Warrants, the "Warrants")
(collectively, the "Second Closing"), subject to certain conditions being
satisfied, none of which are within the control of the Investor. The price of
the Series C Preferred Stock and Series C Warrants will be based on the market
price of the Common Stock at the time of the Second Closing.
The Series B Preferred Stock is convertible from time to time at the option of
the Investor into shares of the Company's Common Stock based upon the lesser of
a fixed conversion price of $6.435 or a variable conversion price based on the
future market price of the Common Stock. As described in the Certificate of
Designations, Preferences and Rights of the Series B Preferred Stock (the
"Series B Certificate of Designations"), the variable conversion price is equal
to 100% (or 80% in the event the Company's Common Stock is delisted from the
Nasdaq Stock Market) of the average of the seven consecutive lowest closing bid
prices during the 35 trading day period immediately prior to conversion.
The Series C Preferred Stock will be convertible from time to time at the option
of the Investor into shares of the Company's Common Stock based upon the lesser
of a fixed conversion price of $7.40 or a variable conversion price based on the
future market price of the Common Stock. As described in the Certificate of
Designations, Preferences and Rights of the Series C Preferred Stock (the
"Series B Certificate of Designations"), the variable conversion price is equal
to 100% (or 80% in the event the Company's Common Stock is delisted from the
Nasdaq Stock Market) of the average of the seven consecutive lowest closing bid
prices during the 35 trading day period immediately prior to conversion.
At the time of conversion of each share of Series B Preferred Stock and the
Series C Preferred Stock, the Investor has and will have the option to purchase,
at a per share price equal to the conversion price in effect at the time of
conversion, a number of additional shares of Common Stock equal to the number of
shares into which the Series B Preferred Stock or the Series C Preferred Stock
is being converted (the "Investment Options"). The exercise in full of the
Investment Options could result in an additional $5,000,000 being invested by
the Investor, for a total of $10,000,000 for the Series B Preferred Stock and an
additional $5,000,000 being invested by the Investor, for a total of $10,000,000
for the Series C Preferred Stock. To the extent not previously converted and
subject to certain conditions and limitations as set forth in the Series B
Certificate of Designations, the Series B Preferred Stock will automatically
convert into Common Stock on April 28, 2003 and the Series C Preferred Stock
will automatically convert into Common Stock on the third anniversary of the
Second Closing.
The Company intends to use the proceeds from the Second Closing of approximately
$5,000,000 for working capital and general corporate purposes.
The Series B Preferred Stock does not have voting rights and the Series C
Preferred Stock will not have voting rights, except that the holders of each
such class will have voting rights with regard to issues directly affecting the
class.
Pursuant to a Registration Rights Agreement entered into between the Company and
the Investor, the Company is obligated to file with the Securities and Exchange
Commission, no later than June 14, 2000, a Registration Statement to register
for resale the shares of the Company's Common Stock which may be acquired upon
conversion of, and exercise of the Investment Options relating to, the Preferred
Stock and upon exercise of the Warrants.
Notwithstanding certain limitations in the Certificate of Designations on the
number of shares into which the Series B Preferred Stock and the Series C
Preferred Stock could be converted at any one time, the aggregate number of
shares of Common Stock issuable in connection with the RGC International
Investors Transaction is potentially more than 19.99% of the number of shares of
Common Stock outstanding. Consequently, for the reasons described below, the
Board of Directors determined to submit to the shareholders of the Corporation
for their approval the potential issuance of Common Stock in excess of 19.99% of
the outstanding Common Stock pursuant to the conversion of Series B Preferred
Stock, the Series C Preferred Stock, the Investment Options and the exercise of
the B and C Warrants (the "Potential 20% Common Stock Issuance").
The Board of Directors recommended shareholder approval of the Potential 20%
Common Stock Issuance for several reasons. First, approval is expected to
satisfy Nasdaq Stock Market Rule 4310(25)(H)(the "Nasdaq 20% Rule"), which
obligates a company with securities listed on the Nasdaq Stock Market to obtain
shareholder approval prior to the issuance in a private transaction of common
stock (or securities convertible into or exercisable for common stock) equal to
twenty percent of the company's outstanding shares of Common Stock. Second, the
Corporation agreed under the Securities Purchase Agreement to use its best
efforts to secure such approval. Finally, obtaining shareholder approval of the
Potential 20% Common Stock Issuance will enable the Corporation to close on the
Sale of the Series C Preferred Stock thereby obtaining not less than an
additional $5,000,000.
NUMBER OF SHARES REQUIRED FOR APPROVAL OF PROPOSAL NO. 1
The affirmative vote of the holders of a majority of the shares represented at
the meeting and entitled to vote (11,784,994 shares of 23,569,986 if all shares
outstanding as of June 2, 2000 are represented at the meeting) is required to
approve Proposal No. 2.
RISK FACTORS
We have a limited operating history with minimal operating revenues to date. We
anticipate operating losses and negative operating cash flow for fiscal 2000,
and anticipate achieving cash flow breakeven in fourth quarter fiscal 2001 and
profitability during fiscal 2002. The success of our Internet operations will
depend on the continued growth of broadband access to the Internet, the
viability of our unproven business model, the continued implementation of our
Network Associate Programs, continuing existing and developing new relationships
with strategic partners and key vendors, and the availability of additional
capital as required. Our business is subject to intense competition, rapid
technological change, government regulation and legal uncertainties associated
with the Internet, e-commerce, systems interruptions and security risks.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 1999
--------------------------------------------------------------------------------
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."
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OVERVIEW
We were incorporated in April 1997 and acquired Westcoast Wireless Cable Ltd. in
May 1997 from our controlling shareholder. We discontinued Westcoast's
historical operations, the sale and servicing of direct-to-home satellite
broadcast hardware and programming services, in the fourth quarter of fiscal
1998, and discontinued our other historical operations, the operation of an
investor relations call center, in the third quarter of fiscal 1999. SEE "
Discontinued Operations." We launched our main e-commerce site in May 1999. We
have entered into our first network associate contracts for private label
e-commerce sites, and we do not anticipate launching our Broadcast Network until
December 1999.
Since our inception, we have incurred significant losses, including losses from
our discontinued operations. Since refocusing our business on the online
merchandising of entertainment products and the offering of streaming media
services, 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, and have generated minimal revenues from our new operations. We expect
to continue incurring net losses for the foreseeable future, as we plan to
invest heavily in:
- promoting our Network Associate program;
- completing, launching and marketing our 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.
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. However, 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 revenues for the foreseeable future will depend primarily on the number of
visitors that we are able to attract to our site and that our network associates
are able to attract to their sites, and on how many of those visitors purchase
our products. Our Broadcast Network revenues will also depend to a significant
extent on our ability to attract customers (such as radio and television
stations) for these streaming media services. We cannot forecast with any degree
of certainty the number of visitors to our online 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.
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
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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."
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YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
NET REVENUES. We had $7,091 in revenues from our e-commerce operations
in fiscal 1999, and none in fiscal 1998, as our internet-focused business did
not begin generating revenue until after the end of fiscal 1999. SEE " - Recent
Events."
OPERATING EXPENSES. Our operating expenses increased 658% to $2,312,426
in fiscal 1999, from $304,919 in fiscal 1998. This increase was due primarily to
compensation expense relating to stock option grants to our employees and
directors, increased legal, accounting and other expense related to being a
public reporting company, expenses related to our new facility, and development
and launch of our internet sites and our network associate programs, as follows:
- - Advertising and marketing expenses increased 911% to $67,672 in fiscal
1999, from $6,691 in fiscal 1998, due to investigations regarding
development of the e-commerce model, marketing of the network associate
program, and related press releases.
- - Amortization increased 893% to $297,655 in fiscal 1999, from $29,973 in
fiscal 1998, due primarily to our acquisition of additional capital assets
and the amortization of costs associated with our financing activities.
- - Professional fees increased 57% to $146,367 in fiscal 1999, from $93,505
in fiscal 1998, due primarily to the issuance of stock options in lieu of
consulting fees.
- - Shareholder communication expenses increased 306% to $218,969 in fiscal
1999, from $53,995 in fiscal 1998, due primarily to press releases and
other costs of becoming a publicly-traded company.
- - Technical operations and development expense were $203,420 in fiscal
1999, as compared and zero in fiscal 1998. These expenses were primarily
due to non-software related costs of developing our e-commerce and
streaming media technology.
- - Travel expense increased 772% to $184,572 in fiscal 1999, from $21,174 in
fiscal 1998, due primarily to travel relating to development of strategic
alliances, working with web site designers and developers, attending
industry related conferences, and meeting with potential financing sources.
- -We incurred stock option compensation expenses of $548,800 in fiscal 1999,
compared to none in fiscal 1998, as the result of issuing stock options to
certain officers and employees of Global Media for less than the market
trading price of our common stock on the date we began trading on the OTC
Bulletin Board. SEE "Certain Transactions."
INTEREST. We earned $76,842 in interest income in fiscal 1999, compared
to zero in fiscal 1998, on the funds received in our Convertible Debenture and
Warrant Offering. We incurred interest expense of $210,855 in fiscal 1999,
compared to $1,298 in fiscal 1998. This increase was due primarily to interest
accruing on the Rolling Oaks Enterprises, LLC loan, the Convertible Debenture
and the Shareholder loans. SEE "- Liquidity and Capital Resources" and "Certain
Transactions."
NET LOSS FROM CONTINUING OPERATIONS. We experienced a $2,228,493 net
loss from continuing operations for fiscal 1999, up 631% from our $304,919 net
loss from continuing operations for fiscal 1998, due primarily to the increase
in operating expenses and the lack of revenues from continuing operations.
NET LOSS FROM ALL OPERATIONS. We experienced a $2,231,074 net loss from
all operations for fiscal 1999, up 393% from our $452,828 net loss from all
operations for fiscal 1999. SEE " - Discontinued Operations."
LIQUIDITY AND CAPITAL RESOURCES
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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.
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YEAR ENDED JULY 31, 1999 COMPARED TO YEAR ENDED JULY 31, 1998
FINANCING ACTIVITIES. We financed our operations and capital
expenditures in fiscal 1999 primarily from the proceeds of common stock sales
and loans from stockholders and third-party lenders.
COMMON STOCK. Cash received upon the exercise of stock options
was $393,250 in fiscal 1999, due to the exercise of 769,500 options. No stock
options were exercised in fiscal 1998. However, cash received from sales of
common stock was $221,267 in fiscal 1998.
LOANS. In fiscal 1999, we obtained cash from three loans. The
loans consisted of (a) a one-year loan of $500,000, with a 24% interest rate,
from Rolling Oaks Enterprises, LLC, (b) $299,549 in net short-term loans from
stockholders and affiliates, as compared to $48,176 in fiscal 1998, and (c) $8.5
million from our May 1999 convertible debenture offering which was offset by a
finder's fee of $510,000. The Rolling Oak loan was paid off from the proceeds of
the convertible debenture offering. We have entered into agreements with the
stockholders to convert 50% of the loans into common stock and the remaining 50%
into notes that will be repaid with interest within the next year. The
convertible debenture was converted into 8,500 shares of our Series A preferred
stock on July 19, 1999. SEE " - Recent Events." In addition, we obtained lines
of credit from three of our suppliers, which are secured by $170,000 in term
deposits funded from the proceeds of our convertible debenture offering. These
lines of credit expire on either May 12, 2000 or June 14, 2000.
CAPITAL EXPENDITURES AND COMMITMENTS. Our capital expenditures
increased 682% to $1,483,360 in fiscal 1999, from $189,706 in fiscal 1998,
primarily as the result of capitalized development costs for our Web sites and
computer hardware and software purchases. As of July 31, 1999, we had no
material commitments outstanding for purchases of additional capital assets,
except for our April 20, 1999 engagement of RealNetworks to perform consulting
services in connection with the design and development of our Broadcast Network.
Under the terms of the agreement, as amended on June 4, 1999, we are required to
make payments totaling $3,655,000 over the duration of the project with the
final payment date projected to be December 21, 1999.
WORKING CAPITAL (DEFICIENCY). At July 31, 1999, we had working capital
of $5,289,038 and a working capital ratio of 8.32. At July 31, 1998, we had a
working capital deficiency of $279,214 and a working capital ratio of .26.
RECENT EVENTS
OFFERING TO RGC INTERNATIONAL INVESTORS LDC.
CONVERTIBLE DEBENTURE. In May 1999, we raised $8.5 million through the
sale of a convertible debenture, in the original principal amount of $8.5
million to RGC International Investors LDC. 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.
WARRANTS. In connection with the issuance of the convertible debenture,
we issued RGC a five-year warrant to purchase 680,000 shares of Common Stock.
These 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). In addition, we issued warrants to
purchase 62,769 shares of Common Stock to the placement agents in that offering,
for an exercise price of $8.125 per share. The placement agent warrants contain
piggyback registration rights provisions.
CONVERSION INTO PREFERRED STOCK. The debenture was convertible at our
option into shares of Series A preferred stock pending satisfaction of certain
conditions, including stockholder approval of an amendment to our articles of
incorporation creating 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
and certain corporate filings with the Nevada Secretary of State. On July 19,
1999, having satisfied those conditions, we exercised our right to convert the
debenture into 8,500 shares of Series A preferred stock.
TERMS OF PREFERRED STOCK. The stated value of each share of Series A
preferred stock ($1,000), plus an amount accruing thereon at the rate of 5% per
annum, is convertible from time to time into shares of our common stock based
upon the lesser (a) a fixed conversion price of $8.125, which is 130% of the
three-day average ending April 30, 1999, the date RGC committed to the
investment, or (b) a variable conversion price equal to 100% of the future
market price of the common stock at the time of conversion. The Series A
preferred stock has no voting rights, except that the holders of the Series A
preferred stock have the right to vote on issues directly affecting the Series A
preferred stock as a class. Under certain circumstances, Global Media may be
required to redeem the Series A preferred stock upon the occurrence of certain
events that are within the control of Global Media.
NASDAQ LISTING. The fixed conversion price and the applicable
percentage of the future market price used in the variable conversion price
calculation are subject to downward adjustment if our common stock is not listed
on the Nasdaq National Market or the Nasdaq SmallCap Market by November 6, 1999.
We have requested RGC to consider extending this date for a period sufficient to
prepare and file an application that includes this Form 10-KSB and for that
application to be processed by Nasdaq. However, there is no assurance that an
extension of the filing date will be granted or that our Nasdaq listing will be
approved. If either of these events occurs, the decrease in the fixed and
variable conversion prices will increase the number of shares of Common Stock
issuable upon conversion, which could cause substantial dilution to other
holders of our Common Stock.
RELATED INVESTMENT OPTIONS. 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.
REGISTRATION OF UNDERLYING COMMON SHARES. Effective as of August 26,
1999, Global Media registered, on a Form SB-2 Registration Statement, 7,443,153
shares of our common stock which the selling holders of those shares may acquire
on conversion or exercise of shares of the outstanding Series A convertible
preferred stock, related warrants and related investment options. As of October
25, 1999, none of our Series A preferred stock or related warrants had been
converted into shares of Common Stock. SEE "Market for Common Equity - Recent
Sales of Unregistered Securities - Convertible Debenture Offering and Conversion
to Preferred Stock."
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 described above.
LAUNCH OF E-COMMERCE SITE.
We launched a beta version of our online store in May 1999 and commercially
launched it under the name "store.globalmedia.com" in October 1999. We adopted
an initial pricing policy intended to result in a small initial volume of
transactions while site development and systems integration was fully completed.
We reduced prices during the first quarter of fiscal 2000. We intend to continue
reducing prices during fiscal 2000, which we expect to result in increased
sales. We do not anticipate earning significant revenues until we implement the
pricing changes and launch a substantial number of private label online stores
for associates participating in our Network Associate program.
SHAREHOLDER LOAN RESTRUCTURE.
Effective July 26, 1999, we completed a restructure of loans received from
Bennett Metcalfe, and from a company affiliated with Robert Fuller. SEE "Certain
Transactions." In that restructure, we issued the following shares of common
stock and promissory notes pursuant to the exemption from registration contained
in Section 4(2) of the Securities Act:
- - 20,320 shares of common stock and a promissory note for $127,000 in
initial principal balance to Bennett Metcalfe; and
- - 12,215 shares of common stock and a promissory note for $74,886 in
initial principal balance to Sandcastle Inn Ltd.
STRATEGIC RELATIONSHIP WITH STANDARD RADIO, INC.
In first quarter fiscal 2000, we entered into a letter of intent for a strategic
relationship with Standard Radio, Inc., which is expected to close by the end of
October 1999. In that letter of intent (a) Standard agrees to invest $2,000,000
into Global Media in exchange for 338,983 shares of Common Stock at a purchase
price of $5.90 per share, (b) Standard's president, Gary Slaight, will be
appointed to a seat on our Board of Directors and granted options to purchase
125,000 shares of Common Stock, (c) eight members of Standard's management team
would form a marketing advisory committee of Global Media, for which each would
receive unvested options to purchase up to 20,000 shares of Common Stock, (d)
each of the radio stations owned and controlled by Standard now and for the next
three years agrees to become e-commerce and broadcast associates of Global
Media, and (e) Standard will have the right to approve agreements between Global
Media and radio stations which compete in the same genre and locale as each of
Standard's stations in Canada. Global Media expects this relationship to provide
significant opportunities for future revenues and growth, in addition to the
initial cash investment. SEE "Business - Strategic Relationships - Standard
Radio, Inc." Our business may be negatively affected if the transactions
described in the Standard Letter of Intent do not close.
FUTURE CAPITAL REQUIREMENTS
We expect negative cash flow from operations to continue for fiscal 2000, as we
continue to develop and market our internet-focused operations, and anticipate
achieving breakeven in fiscal 2001 and profitability during fiscal 2002.
However, we currently anticipate that our available funds will be sufficient to
meet our anticipated needs for working capital, capital expenditures and
business expansion through fiscal 2000.
We may need to raise additional funds sooner in order to fund more rapid
expansion, to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced, stockholders may experience additional dilution and such securities
may have rights, preferences and privileges senior to those of our common stock.
There can be no assurance that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to develop or enhance services
or products, respond to competitive pressures, fund expansion or take advantage
of unanticipated acquisition opportunities. Such inability could negatively
impact our business.
SEASONALITY
We expect our operating results to fluctuate significantly from period to
period. Both seasonal fluctuations in internet usage and traditional retail
seasonality may affect our business. Internet usage generally declines during
the summer. Sales in the traditional retail book and music industries usually
increase significantly in the fourth calendar quarter of each year and are
correspondingly lower in other quarters. If similar seasonal patterns emerge in
e-commerce, our revenues may vary significantly from period to period.
FOREIGN CURRENCY TRANSLATION
We have translated our monetary assets and liabilities which are denominated in
a foreign currency into U.S. dollars at the period-end exchange rate, and have
translated other balances at the rates in effect on the dates of the
transaction. We have translated our income and expense items at the average
exchange rates prevailing during the fiscal period. Exchange gains and losses
arising on translation are reflected in net income for the period.
DISCONTINUED OPERATIONS
CALL CENTER BUSINESS.
Our discontinued call center business provided small U.S. and Canadian public
companies with investor relations and information dissemination services in
various industries, using its customized contact management software and contact
database. This database was based in part on the customer list from our home
satellite business. SEE "-Home Satellite Business." We began our call center
business in the first quarter of fiscal 1998 and discontinued it in the third
quarter of fiscal 1999, due to the difficulty of replacing a terminated key
employee and our decision to focus on e-commerce activities. We have accounted
for the call center business as a discontinued operation, and accordingly, its
operations have been segregated in the accompanying consolidated statements of
operations. The following chart summarizes Global Media's revenue and expenses
from the call center business:
Years Ended
July 31,
------------------------------------
1998 1999
------------------------------------
Total revenue $326,279 $20,130
General and administrative expenses 217,666 $20,130
-------- -------
Net profit (loss) $108,613 $0
======== ==
HOME SATELLITE BUSINESS.
Westcoast Wireless Cable Ltd., one of our wholly-owned subsidiaries, was in the
business of direct marketing of home satellite programming and hardware since
May 1994. Our president, Michael Metcalfe, was originally the sole owner of
Westcoast. Global Media acquired all of the stock of Westcoast from Mr. Metcalfe
in May 1997, in exchange for 8,000,000 shares of Global Media'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. Westcoast has been
accounted for as a discontinued operation, and accordingly, its operations have
been segregated in the accompanying consolidated statements of operations. The
following chart summarizes Westcoast's revenue and expenses:
Year Ended
July 31, 1998
----------------
Total revenue $591,938
Cost of sales 418,167
Commission paid 133,934
----------------
Gross profit 39,837
General and administrative expenses 305,041
Income tax recovery 8,682
----------------
Net profit (loss) $(256,522)
================
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE SIX MONTH PERIOD ENDED JANUARY 31, 2000
OVERVIEW
QUARTER ENDED JANUARY 31, 2000
During the quarter ended January 31, 2000, our management structure was
substantially enhanced by the addition of several senior executives, including
the addition of Jeff Mandelbaum as President. Mr. Mandelbaum comes to us from
RealNetworks, Inc. where he was Vice President of Media Systems Sales. In that
position, he had line responsibility for sales and services in the Americas
regions and drove strategic opportunities worldwide. Mr. Mandelbaum was brought
on to support the shift in our focus from development to sales.
During the quarter we continued to refine our e-commerce and streaming
infrastructure while expanding our clientele of network and broadcast
associates. Included in this development was the successful design and testing
of our video broadcasting solution which will be commercially implemented in
thethird quarter of fiscal 2000. As of January 31, 2000, we had signed up 77
network associates (representing 161 unique e-commerce sites and 27 broadcast
associates). Of these, 134 e-commerce sites were online and 4 broadcasting
associates were streaming by quarter end. This compares to 59 network associates
(representing 104 unique e-commerce sites and 12 broadcasting associates) signed
up as of October 31, 1999, of which 68 e-commerce sites and 3 broadcasting
associates were implemented at that time.
Also during the second quarter of fiscal 2000, nine of our proprietary simulated
live internet only radio stations were added to the station directory of the
RealPlayer 7 streaming media player, which was launched by RealNetworks on
November 8, 1999.
<PAGE>
We commenced the quarter with 81 full time staff and ended the quarter with 101.
We currently employ 108 full time staff members.
We have continued to experience significant growth subsequent to quarter end. As
of March 10, 2000, we had signed up 101 network associates (representing 173
unique e-commerce sites and 36 broadcast associates).
OUR BUSINESS
We offer an award winning streaming media broadcasting solution to radio and
television stations and internet sites through our Global Media Broadcast
Network program. The centerpiece of our Broadcast Network solution is the Global
Media Player, a streaming media player developed in conjunction with
RealNetworks, Inc. The Global Media Player is private-label branded for our
broadcasting associates and enables listeners to stream live and simulated live
audio, video and other multimedia content such as radio feeds from our 10
proprietary music stations and from the stations of each of our broadcast
associates.
Our broadcasting solutions are integrated into an e-commerce backend. Through
this e-commerce facility, we sell music CDs and cassettes, home videos and
digital video discs (DVDs), books and other entertainment products. Sales are
made through our own online store and through the private-label storefronts
which we create for the network associates in our Global Media Network program.
Visitors to those storefronts can place merchandise orders from the storefront
on our network associates' Web sites, which we then process through our
e-commerce backend solution and fulfill through our fulfillment partners.
We commercially launched our Broadcast Network program with the alpha version of
the Global Media Player in January 2000, and expect to incorporate our streaming
video solution into the Broadcast Network during the third quarter of fiscal
2000. When our Broadcast Network is fully integrated with our e-commerce
solution, our network associates can offer their customers a tightly integrated
entertainment and online shopping experience. For example, accessing our
Broadcast Network will enable a network associate's customers to listen to live
music programming through the Global Media Player and purchase CDs of the
featured artists at the same time.
We launched a beta version of our own e-commerce site in May 1999 to demonstrate
our e-commerce solution, and commercially launched our own online store in
September 1999, which was significantly revised on November 29, 1999 to offer
greater functionality and ease of use. Our online store combines an extensive
catalogue of music, books, videos and other entertainment products, with
easy-to-use navigation and search capabilities and entertainment-focused
content. Additionally, visitors can download the Global Media Player for free.
We are continuing the further development of our online store and e-commerce
backend to provide additional features and content and expect that these
enhancements will improve the revenue generating potential of our own store and
the stores of our network associates.
Since inception of our internet-focused business plan, we have incurred
significant 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, and have generated
minimal revenues from our operations. We expect to continue incurring net losses
for the foreseeable future, as we plan to invest in:
- promoting our Network Associate program;
- enhancing our e-commerce site and improving its reliability and
functionality;
- developing our infrastructure and applications; and
- hiring additional employees.
<PAGE>
Our revenues for the foreseeable future will likely derive primarily from
advertising, product sales and broadcasting related fees and will depend
primarily on the number of network and broadcast associates that we sign up, the
number of listeners on our simulated live stations and the live stations of our
network associates, the number of visitors that we are able to attract to our
online store and that our network associates are able to attract to their
stores, and on how many of those visitors purchase products we offer for sale.
Our Broadcast Network revenues will also depend to a significant extent on our
ability to attract customers (such as radio and television stations) for these
streaming media services. We have initiated a program to market streaming media
consulting and development services and expect that over time this service line
could become a significant revenue contributor. We cannot forecast with any
degree of certainty the number of visitors to our online store or the stores of
our network associates, the number of visitors that will become customers or the
number of customers we will be able to secure for our streaming media services.
If our revenue growth is slower than anticipated or our operating expenses
exceed our expectations, our losses will be significantly greater than
anticipated. We may never achieve or sustain profitability.
Because of the development stage of our business and the seasonality inherent in
a retail business, our results of operations discussed below are not necessarily
indicative of the results you should expect for any future comparable period.
SEE " Seasonality". Inflation has not historically had any material effect on
our operations
We were incorporated in April 1997 and acquired Westcoast Wireless Cable Ltd. In
May 1997 from our controlling shareholder. We discontinued Westcoast's
historical operations, the sale and servicing of direct-to-home satellite
broadcast hardware and programming services, in the fourth quarter of fiscal
1998, and discontinued our other historical operations, the operation of a call
center, in the third quarter of fiscal 1999.
RESULTS OF CONTINUING OPERATIONS
NOTE: The financial results contained in the following discussion exclude
results of our discontinued call center and home satellite Businesses. For
summary financial results from those operations, SEE " - Note 3 to the
Consolidated Financial Statements."
QUARTER ENDED JANUARY 31, 2000 COMPARED TO QUARTER ENDED JANUARY 31, 1999
SALES. Revenues of $58,635 were generated from the Company's e-commerce
and broadcasting operations in the second quarter of fiscal 2000, compared to
none in the second quarter of fiscal 1999. The Company's internet-focused
business did not commence until the third quarter of fiscal 1999.
COST OF SALES. Expenditures of $57,923 were recorded in the second
quarter of fiscal 2000, compared to none in the second quarter of fiscal 1999,
due primarily from incurring minimum contractual broadcasting related charges
that were payable as we continued to develop our network.
OPERATING EXPENSES. Our operating expenses increased to $2,508,217 in
the second quarter of fiscal 2000, from $213,680 in the second quarter of fiscal
1999. This increase was due primarily to increased marketing expenditures,
professional fees and other expenses related to being a public reporting
company, and personnel, capital assets and other costs associated with the
development and launch of our internet sites and our network associate programs,
as follows:
- Amortization increased to $256,267 in the second quarter of fiscal 2000,
from $22,230 in the second quarter of fiscal 1999, due primarily to the
significant acquisition of additional capital assets.
<PAGE>
- General and administrative expenses increased to $500,701 in the second
quarter of fiscal 2000, from $113,868 in the second quarter of fiscal 1999, due
primarily to the costs associated with multiple office locations and the
administration required for a significantly larger organization.
- Sales and marketing expenses increased to $1,114,037 in the second
quarter of fiscal 2000, compared to $25,265 in the second quarter of
fiscal 1999. The increase was primarily due to payments of $596,000 to
RealNetworks, Inc. under various marketing agreements, the costs
associated with attending industry related conferences, marketing of the
Network Associate program and expenses of the developing sales force.
- Shareholder communication expenses increased 14% to $59,395 in the
second quarter of fiscal 2000, from $52,317 in the second quarter of
fiscal 1999, due primarily to the costs of improving the communications
with, and materials provided to our shareholders.
- Technical operations and development expenses were $577,817 in the
second quarter of fiscal 2000, as compared to none in the second quarter
of fiscal 1999. These expenses were primarily due to the costs of
developing our e-commerce and streaming media technologies.
NET LOSS FROM CONTINUING OPERATIONS. We experienced a $2,507,505 net
loss from continuing operations for the second quarter of fiscal 2000, up from
our $213,680 net loss from continuing operations for the second quarter of
fiscal 1999, due primarily to the increase in operating expenses as we continue
to implement our internet-focused business plan.
INTEREST. We earned $64,353 in interest income in the second quarter of
fiscal 2000, compared to none in the second quarter of fiscal 1999, due to
higher bank balances.
NET LOSS FROM ALL OPERATIONS. We experienced a $2,508,390 net loss from
all operations for the second quarter of fiscal 2000, up from our $219,762 net
loss from all operations for the second quarter of fiscal 1999.
6 MONTHS ENDED JANUARY 31, 2000 COMPARED TO 6 MONTHS ENDED JANUARY 31, 1999
SALES. Revenues of $72,280 were generated from the Company's e-commerce
and broadcasting operations in the 6 months ended January 31, 2000, compared to
none in the 6 months ended January 31, 1999. The Company's internet-focused
business did not commence until the third quarter of fiscal 1999.
COST OF SALES. Expenditures of $130,713 were recorded in the 6 months
ended January 31, 2000, compared to none in the 6 months ended January 31, 1999,
due primarily from incurring minimum contractual broadcasting related charges
that were payable as we continued to develop our network.
OPERATING EXPENSES. Our operating expenses increased to $4,011,982 in
the 6 months ended January 31, 2000, from $914,599 in the 6 months ended January
31, 1999. This increase was due primarily to increased marketing expenditures,
professional fees and other expenses related to being a public reporting
company, and personnel, capital assets and other costs associated with the
development and launch of our internet sites and our network associate programs,
as follows:
- Amortization increased to $347,851 in the 6 months ended January 31, 2000,
from $35,277 in the 6 months ended January 31, 1999, due primarily to the
significant acquisition of additional capital assets.
- General and administrative expenses increased to $790,792 in the 6 months
ended January 31, 2000, from $203,269 in the 6 months ended January 31,
1999, due primarily to the costs associated with multiple office locations
and the administration required for a significantly larger organization.
<PAGE>
- Sales and marketing expenses increased to $1,661,171 in the 6 months ended
January 31, 2000, compared to $33,967 in the 6 months ended January
31,1999. The increase was primarily due to payments of $596,000 to
RealNetworks, Inc. under various marketing agreements, the costs associated
with attending industry related conferences, marketing of the Network
Associate program and expenses of the developing sales force.
- Shareholder communication expenses increased 36% to $126,595 in the 6
months ended January 31, 2000, from $93,286 in the 6 months ended January
31, 1999, due primarily to the costs of improving the communications with,
and materials provided to our shareholders.
- Technical operations and development expenses were $1,085,573 in the 6
months ended January 31, 2000, as compared to none in the 6 months ended
January 31, 1999. These expenses were primarily due to the costs of
developing our e-commerce and streaming media technologies.
- We incurred no stock option compensation expense in the 6 months ended
January 31, 2000, compared to $548,800 in the 6 months ended January 31,
1999. SEE " - Note 6 to the Consolidated Financial Statements."
NET LOSS FROM CONTINUING OPERATIONS. We experienced a $4,070,415 net
loss from continuing operations for the 6 months ended January 31, 2000, up from
our $914,599 net loss from continuing operations for the 6 months ended January
31, 1999, due primarily to the increase in operating expenses as we continue to
implement our internet focused business plan.
INTEREST. We earned $76,626 in interest income in the 6 months ended
January 31, 2000, compared to none in the 6 months ended January 31, 1999, due
to higher bank balances.
NET LOSS FROM ALL OPERATIONS. We experienced a $4,063,622 net loss from
all operations for the 6 months ended January 31, 2000, up from our $931,911 net
loss from all operations for the 6 months ended January 31, 1999.
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.
See " - Note 3 to the Consolidated Financial Statements."
QUARTER ENDED JANUARY 31, 2000 COMPARED TO QUARTER ENDED JANUARY 31, 1999
FINANCING ACTIVITIES. We financed our operations and capital
expenditures in second quarter fiscal 2000 primarily from the exercise of stock
options and the sale of shares of common stock in a private transaction. Cash
received upon the exercise of stock options including exercises by RGC of
investment options for 495,426 shares, was $2,194,320 in second quarter fiscal
2000. We also issued 338,983 restricted common shares to Standard Radio Inc. for
net proceeds of $1,999,995.
CAPITAL EXPENDITURES AND COMMITMENTS. Our capital expenditures increased to
$1,151,082 in second quarter fiscal 2000, from $147,016 in second quarter fiscal
1999, primarily as the result of capitalized development costs for our Broadcast
Network and Global Media Player, and computer hardware, software and operating
equipment purchases.
WORKING CAPITAL (DEFICIENCY). At January 31, 2000, we had positive working
capital of $2,397,438 and a working capital ratio of 4.94. This represents an
improvement from our January 31, 1999 working capital deficiency of $419,640 and
working capital ratio of 0.60.
<PAGE>
FUTURE CAPITAL REQUIREMENTS. We expect negative cash flow from operations
to continue for fiscal 2000, as we continue to develop and market our
internet-focused operations, and anticipate achieving cash flow breakeven in the
fourth quarter of fiscal 2001 and accounting profitability during fiscal 2002.
We currently anticipate rapidly expanding our sales, marketing and technical
teams in conjunction with raising new equity financing over the next five
months. We are in discussions with a number of potential strategic and financial
investors to obtain additional financing to fund our operating and capital
expenditure needs. If we are able to secure such additional financing, we expect
that such financing, together with proceeds from the exercise of existing
options and warrants, will enable us to meet all of our existing operating and
capital expenditure needs, including financial obligations to RealNetworks, Inc.
under the agreements we recently entered into with them, until the fourth fiscal
quarter of 2001. However, 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, this could negatively impact
our business. In particular, we would be unlikely to meet our payment
obligations to RealNetworks, Inc. under the contracts recently entered into.
Default on these payments would negatively impact our business.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our current 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.
RECENT EVENTS
NASDAQ LISTING
We filed a listing application with Nasdaq on November 15, 1999, for inclusion
on its Small Cap market. In April 2000 our common stock became listed for
trading on the Nasdaq National Market System.
STRATEGIC RELATIONSHIP WITH STANDARD RADIO INC.
On December 7, 1999, we entered into a strategic relationship with Standard
Radio Inc. We expect this relationship to provide significant opportunities for
future revenues and growth, in addition to the initial cash investment. In that
transaction (a) Standard invested $2,000,000 into Global Media in exchange for
338,983 shares of common stock at a purchase price of $5.90 per share, (b)
Standard's president and chief executive officer, Gary Slaight, was appointed to
a seat on our Board of Directors and granted options to purchase 125,000 shares
of common stock, (c) eight members of Standard's management team formed a
marketing advisory committee to Global Media, for which each will receive
unvested options to purchase up to 20,000 shares of common stock, (d) Standard
agrees to cause each of the radio stations owned and controlled by it now and
for the next three years to become e-commerce and broadcast associates of Global
Media, and (e) Standard received the right to approve agreements between Global
Media and radio stations which compete in the same genre and locale as each of
Standard's stations in Canada.
<PAGE>
REAL NETWORKS, INC.
Recently, we signed several material contracts with RealNetworks which
furtherdefine and extend our strategic relationship with them:
STREAMING MEDIA SERVICES AGREEMENT. We signed a new Streaming Media
Services Agreement with RealNetworks under which they will continue to develop
our Global Media Player. We will continue to 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. Among
other things, the new Streaming Media Services Agreement extends the term of our
existing Streaming Media Services Agreement to five years and provides for
increased payments for such services. Similar to the provisions in the 1999
Streaming Media Services Agreement, we agreed that RealNetworks will be our
exclusive provider of streaming media services.
REALCHANNELS AGREEMENT. We entered into a one-year RealChannels
Agreement with RealNetworks under which they will promote and distribute linksto
our media content and headlines as part of their RealChannels program using
their RealPlayer software.
LIVESTATIONS AGREEMENT. We entered into a one-year LiveStations
Agreement with RealNetworks under which the promote and distribute links to our
RealMedia content as part of RealNetworks' LiveStations program. As part of this
agreement, RealNetworks agreed to include five of our LiveStations in the
appropriate genres on RealNetworks' LiveStations Guide Page. At the time we
entered into the new Streaming Media Services Agreement and RealChannels
Agreement described above, we amended the LiveStations Agreement to extend it to
ten additional LiveStations (for a total of 15), for additional consideration.
ADDENDUM: CUSTOM SOFTWARE UPGRADE AND SUPPORT TERMS AND CONDITIONS.
This Addendum amends the Consulting Agreement between us and RealNetworks, Inc.
dated April 20, 1999. This Addendum further defines our obligations and the
obligations of RealNetworks in providing support services.
Together, these agreements require us to make aggregate payments of
approximately $5 million to RealNetworks over an approximately five-month period
ending June 15, 2000, of which $500,000 has been paid to date.
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 rates. We have
translated our income and expense items at the average exchange rates prevailing
during the fiscal period. Exchange gains and losses arising on translation are
reflected in net income for the period.
<PAGE>
CHANGES IN THE COMPANY'S CERTIFYING ACCOUNTANTS
Effective January 26, 2000, Ernst & Young LLP, Chartered Accountants, the
Company's independent accountants, for the period from August 1, 1998 to July
31, 1999 were dismissed. The dismissal of Ernst & Young LLP was approved by the
Company's Board of Directors on January 26, 2000. The Company has engaged Arthur
Anderson LLP as its new auditors on the same date. No consultation regarding
accounting policy or procedures with new auditors occurred prior to their
engagement.
Ernst & Young's report for the period from August 1, 1998 to July 31, 1999 did
not contained an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
Nor has there been any disagreement with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure or reportable events during the Company's most recent fiscal
year through October 18, 1999 which if not resolved to the satisfaction of Ernst
& Young LLP would have caused them to make reference thereto in their report on
the financial statements for such period.
REQUEST FOR COPY OF FORM 10KSB
Shareholders may request a copy of the Form 10KSB by writing to the Company's
offices, 400 Robson St., Vancouver, British Columbia V6B 2B4.
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL MEDIA CORP.
JULY 31, 1999
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
GLOBAL MEDIA CORP.
We have audited the accompanying consolidated balance sheets of GLOBAL MEDIA
CORP. as of July 31, 1999 and 1998 and the related consolidated statements of
loss and comprehensive loss, shareholders' equity (deficiency) and cash flows
for the years then ended. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of Global Media Corp. of July 31, 1999 and 1998
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Vancouver, Canada,
September 23, 1999 (except as to
Notes 9[i] and 12[i] which are
as at October 19, 1999). Chartered Accountants
3
<PAGE>
GLOBAL MEDIA CORP.
CONSOLIDATED BALANCE SHEETS
As at July 31 (in US dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 5,649,073 14,996
Short-term investments [NOTE 4] 240,000 --
Other receivable 84,336 2,645
Prepaid expenses 37,760 10,221
Due from affiliated companies -- 71,065
---------------------------------------------------------------------------------------------------
6,011,169 98,927
Capital assets [NOTES 3 AND 5] 1,537,434 172,635
---------------------------------------------------------------------------------------------------
7,548,603 271,562
---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable and accrued liabilities [NOTE 6] 368,094 252,588
Due to affiliated company [NOTE 6] 132,946 46,284
Due to shareholders [NOTE 6] 221,091 79,269
---------------------------------------------------------------------------------------------------
722,131 378,141
---------------------------------------------------------------------------------------------------
Commitments and contingencies [NOTE 9]
Convertible preferred shares [NOTE 8] 7,089,775 --
100,000,000 authorized, 8,500 issued and outstanding
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common shares, par value $0.001 each, 200,000,000 authorized, 20,656,331 and
19,890,831 issued and outstanding [NOTE 7]
Share capital 12,658 11,892
Additional paid in capital [NOTE 8] 2,617,109 543,525
Deficit (2,893,070) (661,996)
---------------------------------------------------------------------------------------------------
(263,303) (106,579)
---------------------------------------------------------------------------------------------------
7,548,603 271,562
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF LOSS
AND COMPREHENSIVE LOSS
Years ended July 31 (in US dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
---------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Sales 7,091 --
Interest income 76,842 --
--------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising and marketing 67,672 6,691
Amortization [NOTE 8] 297,655 29,973
Bank charges and interest [NOTES 6 AND 8] 210,855 1,298
Foreign exchange 29,975 12,222
Office and miscellaneous 76,670 18,288
Professional fees [NOTE 7] 146,367 93,505
Rent and maintenance 72,436 50,114
Shareholder communications 218,969 53,995
Stock options compensation [NOTE 7] 548,800 --
Technical operations and development 203,420 --
Travel 184,572 21,174
Wages and benefits 255,035 17,659
--------------------------------------------------------------------------------------------------
2,312,426 304,919
---------------------------------------------------------------------------------------------------
Loss and comprehensive loss from continuing operations (2,228,493) (304,919)
---------------------------------------------------------------------------------------------------
Discontinued operations [NOTES 1 AND 3]
Call center -- 108,613
Satellite (2,581) (256,522)
---------------------------------------------------------------------------------------------------
Loss and comprehensive loss from discontinued operations (2,581) (147,909)
---------------------------------------------------------------------------------------------------
LOSS AND COMPREHENSIVE LOSS FOR THE YEAR (2,231,074) (452,828)
---------------------------------------------------------------------------------------------------
Loss per common share from continuing operations (0.11) (0.02)
Loss per common share from discontinued operations (0.00) (0.00)
---------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE (0.11) (0.02)
---------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES USED IN THE COMPUTATION
OF LOSS PER SHARE 20,245,889 19,554,402
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIENCY)
Years ended July 31 (in US dollars)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL UNISSUED RETAINED
--------------- --------------------- PAID-IN SHARE EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL CAPITAL (DEFICIT)
# $ # $ $ $ $
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1997 -- -- 11,059,400 11,059 128,641 144,001 (209,168)
Common shares issued for cash -- -- 730,533 731 364,536 (144,000) --
Common shares issued for other than
cash consideration:
Consideration for shares in
Westcoast Wireless [NOTE 1] -- -- 8,000,000 1 -- (1) --
In kind services -- -- 100,898 101 50,348 -- --
Loss for the year -- -- -- -- -- -- (452,828)
-----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1998 -- -- 19,890,831 11,892 543,525 -- (661,996)
Preferred shares issued [NOTE 8] 8,500 7,089,775 -- -- -- -- --
Warrants issued on financing [NOTE 8] -- -- -- -- 1,000,000 -- --
Stock options exercised -- -- 765,500 766 392,484 -- --
Compensatory stock options -- -- -- -- 681,100 -- --
Loss for the year -- -- -- -- -- -- (2,231,074)
-----------------------------------------------------------------------------------------------------------------
BALANCE, JULY 31, 1999 8,500 7,089,775 20,656,331 12,658 2,617,109 -- (2,893,070)
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
6
<PAGE>
GLOBAL MEDIA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31 (in US dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the year (2,231,074) (452,828)
Items not requiring an outlay of funds
Interest on convertible debentures 101,528 --
Interest on related party loans [NOTE 6] 26,682 --
Share option compensation expense [NOTE 7] 548,800 --
Share option professional fees expense [NOTE 7] 37,300 --
Amortization 297,655 38,658
Services settled through share issuance -- 50,449
---------------------------------------------------------------------------------------------------
(1,219,109) (363,721)
Changes in non-cash operating working capital
Other receivable (81,691) 56,193
Prepaid expenses (27,539) 6,165
Accounts payable and accrued liabilities 8,078 127,815
Deferred revenue -- (12,062)
---------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,320,261) (185,610)
---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (1,483,360) (189,706)
Purchase of short-term investments [NOTE 4] (240,000) --
- --------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (1,723,360) (189,706)
---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from (to) shareholder 141,822 (4,821)
Advances from affiliated companies 157,727 52,997
Common share subscriptions -- 221,267
Stock options exercised 393,250 --
Preferred share subscriptions and warrants [NOTE 8] 8,500,000 --
Deferred financing costs [NOTE 8] (510,000) --
---------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 8,682,799 269,443
---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (5,101) (1,021)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR 5,634,077 (106,894)
Cash and cash equivalents, beginning of year 14,996 121,890
---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 5,649,073 14,996
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest - paid 184,173 9,180
Income taxes paid (recovered) -- (6,783)
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
7
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (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 Vancouver, B.C., Canada. The Company
(through its subsidiary Westcoast Wireless Cable Ltd. ("Westcoast Wireless"))
was originally engaged in the marketing of satellite programming and hardware
and later was engaged in the business of providing call center services [see
note 3]. The Company discontinued its satellite line of business by the end of
fiscal 1998, and the call center business during the third quarter of fiscal
1999. During the third quarter of fiscal 1999, the company adopted an
internet-focused business plan and was engaged primarily in the development of
an electronic commerce web site, the development of a broadcast network over the
internet, and the development of templates for the application of the e-commerce
back-end system to multiple sites on the internet. A beta version of the
e-commerce web site, globalmedia.com, was launched on May 18, 1999.
On May 20, 1997 the Company issued 8,000,000 common shares and paid $100,000 in
cash for all of the outstanding shares of Westcoast Wireless. Since the
companies were under common control, this transaction was accounted for in a
manner similar to a pooling of interests.
In August 1998, the Company incorporated a new subsidiary, Global Media (Canada)
Entertainment Corp.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all its subsidiaries.
8
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost. Amortization has been calculated using the
following methods and rates, except in the year of acquisition when one half of
the rate is used.
Communications infrastructure 3 year straight line
Computer hardware 30% declining balance
Leasehold improvements 5 year straight line
Office furniture and equipment 20% declining balance
Software 30% declining balance
Web site development 3 year straight line
ADVERTISING AND MARKETING COSTS
Advertising and marketing costs are expensed as incurred.
FOREIGN CURRENCY TRANSLATION
All transactions in currencies other than the United States dollar during the
year are translated at the exchange rates on the transaction dates. Monetary
assets and liabilities denominated in a foreign currency are translated at the
prevailing year end rates of exchange. Non-monetary assets and liabilities
denominated in foreign currencies are translated into United States dollars at
the rates of exchange in effect at the date of the transaction. Exchange gains
or losses are included in the consolidated statements of income (loss).
WEBSITE DEVELOPMENT COSTS
Website development costs incurred subsequent to establishing technological
feasibility are capitalized. Capitalized costs are amortized using straight line
method over three years. Capitalization ceases and amortization commences on the
date that the software is ready for use.
The recoverability of the website costs is dependent upon realization of
sufficient undiscounted future revenues from this product.
9
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
BROADCAST NETWORK DEVELOPMENT COSTS
Broadcast network development costs incurred subsequent to establishing
technological feasibility are capitalized. Capital costs are amortized using the
straight line method over three years. Capitalization ceases and amortization
commences on the date that the network is ready for use.
The recoverability of the network development costs is dependent upon
realization of sufficient undiscounted future revenues from this product.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25") for stock based compensation for employees.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company's management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes to the financial statements.
Actual results may differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments approximate fair
values due to their short term nature, except as otherwise disclosed in the
financial statements.
LOSS PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding. No dilutive potential common share is included in the
computation of per share amounts because the effect would be anti-dilutive due
to the Company's loss from operations.
10
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash includes cash equivalents, which are investments that are held to maturity
and have terms to maturity of three months or less when acquired. Cash
equivalents consist of term deposits with a Canadian chartered bank. Cash and
cash equivalents are carried at cost, which approximates their fair value.
Short-term investments are investments that are held to maturity and have terms
greater than three months. Short-term investments consist of term deposits with
a Canadian chartered bank. Short-term investments are carried at cost, which
approximates their fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS 133, `Accounting for
Derivative Instruments and Hedging Activities'. SFAS 133 is effective for
financial statements for fiscal years beginning after June 15, 2000. The Company
has not yet determined the impact of SFAS 133.
3. DISCONTINUED OPERATIONS
In November 1997, a decision was made by the Canadian Federal Court of Appeal,
ruling that the sale of US satellite and programming services in Canada was not
permitted. Following a period of trading in Canadian satellite and programming
services the management of Westcoast Wireless decided to withdraw completely
from the home satellite business in late fiscal 1998. The home satellite
business included all operations of Westcoast Wireless.
This subsidiary company has been accounted for as a discontinued operation, and
accordingly, its operations have been segregated in the accompanying
consolidated statements of operations.
11
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
3. DISCONTINUED OPERATIONS (CONT'D.)
Revenues of the discontinued satellite operations for the year ended July 31,
1999 were $nil [1998 - $591,938]. At July 31, 1999, net current liabilities of
the discontinued satellite operations were $23,086 [1998 - $130,076] consisting
principally of accounts payable and balances due to shareholder. Net non-current
assets at July 31, 1999 were $nil [1998 - $15,352].
The Company was engaged in providing call center services until the third
quarter of fiscal 1999. The Company elected to abandon the business during the
third quarter of fiscal 1999 and focus its efforts on its internet-focused
business plan. Accordingly, the call center operations have been segregated and
accounted for as a discontinued operation in the accompanying consolidated
statements of loss and comprehensive loss.
Revenues of the discontinued call center operations for the year ended July 31,
1999 were $20,130 [1998- $326,279]. At July 31, 1999, net current liabilities of
the discontinued call center operations were $nil [1998 - $19,484] consisting
principally of accounts payable.
4. SHORT-TERM INVESTMENTS
The Company has assigned $170,000 of its term deposits in order to establish
lines of credit with three suppliers. The letters of credit have terms of 2.25%
interest and expire on either May 12, 2000 or June 14, 2000.
12
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JULY 31, 1999
Broadcast network development 704,803 -- 704,803
Communications infrastructure 89,391 44,463 44,928
Computer hardware 295,417 59,834 235,583
Leasehold improvements 14,925 2,269 12,656
Office furniture and equipment 50,661 6,477 44,184
Software 73,450 15,484 57,966
Web site development [NOTE 7] 525,859 88,545 437,314
---------------------------------------------------------------------------------------------------
1,754,506 217,072 1,537,434
---------------------------------------------------------------------------------------------------
JULY 31, 1998
Communications infrastructure 91,575 17,325 74,250
Computer hardware 70,107 13,117 56,990
Leasehold improvements 8,594 4,905 3,689
Office furniture and equipment 18,859 4,842 14,018
Software 27,209 3,520 23,689
---------------------------------------------------------------------------------------------------
216,344 43,702 172,635
---------------------------------------------------------------------------------------------------
</TABLE>
6. RELATED PARTY TRANSACTIONS
[i] AMOUNTS DUE TO SHAREHOLDERS
The Company was advanced $263,000 by shareholders during the period of October
1998 through December 1998. At July 31, 1999, a balance of $221,091 was
outstanding.
As part of the Securities Purchase Agreement with RGC International Investors
LDC ("RGC") [see note 8], the Company agreed to restructure the amounts due
to shareholder. The agreement provided that any restructuring of amounts due
to shareholders in common stock be at the conversion price of $6.25, which
was the average closing bid prices of the common shares reported on the OTC
Bulletin Board for the three consecutive days ended April 30, 1999.
13
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
6. RELATED PARTY TRANSACTIONS (CONT'D).
On July 26, 1999, the Company entered into an agreement with the
shareholders to convert 50% of the amount due plus interest of $16,455
($127,000) into common stock. The remaining $110,545 will be repaid in four
quarterly instalments of $31,750 beginning October 31, 1999 and ending on
July 31, 2000.
As of July 31, 1999, the shares had not been issued.
[ii] AMOUNTS DUE TO AFFILIATED COMPANY
The Company was advanced $187,000 by an affiliated company, wholly-owned by
a shareholder, during the period of November 1998 through March 1999. At
July 31, 1999, a balance of $132,946 was outstanding.
As part of the Securities Purchase Agreement with RGC International
Investors LDC ("RGC") [see note 8], the Company agreed to restructure the
amounts due to the affiliated company. The agreement provided that any
restructuring of amounts due to the affiliated company in common stock be
at the conversion price of $6.25, which as the average closing bid prices
of the common shares reported on the OTC Bulletin Board for the three
consecutive days ended April 30, 1999.
On July 26, 1999 the Company entered into an agreement with the affiliated
company to convert 50% of the amount due plus interest of $8,413 ($74,886)
into common stock. The remaining $66,473 will be repaid in four quarterly
instalments of $18,722 beginning October 31, 1999 and ending on July 31,
2000.
As of July 31, 1999, the shares had not been issued.
14
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
7. SHARE CAPITAL
STOCK OPTION PLANS
As of July 31, 1999, the Company had stock options outstanding under two plans:
237,500 pertain to the 1998 Stock Option Plan and 3,019,500 pertain to the 1999
Stock Option Plan. All the plans are administered by the Board of Directors who
have sole discretion and authority to determine individuals eligible for awards.
The conditions of exercise of each grant are determined individually by the
Board at the time of the grant.
The 1997 plan, which became effective on April 8, 1997, provides for the
issuance of 1,000,000 options within a period of 10 years from the effective
date. No options have been granted under the 1997 plan.
The 1998 plan, which became effective on August 21, 1998, provides for the
issuance of 1,000,000 options within a period of 10 years from the effective
date. All 1,000,000 options were granted during 1999 at an exercise price of
$0.50 per share of which 980,000 were granted to employees and 20,000 were
granted to independent contractors. All options vested immediately. Of the
1,000,000 options, 400,000 have a life of 2 years and the remaining 600,000 have
no expiry date. During 1999, 762,500 of these options were exercised.
At the time of granting options under the 1998 plan, the Company's shares were
not yet publicly trading. On the first day of public trading, the Company's
shares had a market price of $1.06 per share. The Company has recognized
compensation expense in 1999 of $548,800 for the granting of these options to
employees in accordance with APB 25. In addition, the Company has recognized
compensation expense of $12,600 in 1999 for the granting of 20,000 options to
independent contractors in accordance with SFAS 123.
The 1999 plan, which became effective on March 24, 1999, provides for the
issuance of a total of 4,000,000 options, within a period of 10 years from the
effective date. During 1999, 2,933,000 options at an exercise price of $4.00 and
89,500 options at an exercise price of $6.25 were granted of which 35,000
options were granted to independent contractors. Of these 3,022,500 options,
2,025,000 options vest immediately and 997,500 options vest on a quarterly basis
over one year. The options expire five years from the date of grant. During
1999, 3,000 of the $4.00 options were exercised. The Company has recognized
compensation expense in 1999 of $24,700 for granting 10,000 options to
independent contractors in accordance with SFAS 123.
15
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
7. SHARE CAPITAL (CONT'D.)
In addition in 1999, the Company issued 25,000 options to third parties for the
acquisition of the domain name for its website. The Company has capitalized the
fair value of these options in the amount of $95,000.
Activity in the stock option plans for 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
# $ # $
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year -- -- -- --
Granted 4,022,500 3.18 -- --
Exercised (765,500) 0.51 -- --
---------------------------------------------------------------------------------------------------
Outstanding, end of year 3,257,000 3.81 -- --
- --------------------------------------------------------------------------------------------------
Options exercisable at year end 2,497,167
---------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes significant ranges of outstanding and exercisable
options as of July 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE OF ---------------------------------------------------- ---------------------------------
EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
PRICES OPTIONS REMAINING EXERCISE PRICE OPTIONS EXERCISE PRICE
$ # LIFE $ # $
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0.50 237,500 1.1 years 0.50 237,500 0.50
4.00 2,930,000 4.8 years 4.00 2,259,667 4.00
6.35 89,500 5 years 6.25 -- --
--------------------------------------------------------------------------------------------------------
3,257,000 3.25 2,497,167 3.67
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies APB 25 in accounting for its stock option plans for grants
to employees. Where the exercise price is equal to or greater than the fair
value of the stock, no compensation is recorded. When the exercise price is less
than the fair value, compensation expense for each option granted is recorded to
the extent that the fair value exceeds the exercise price.
16
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
7. SHARE CAPITAL (CONT'D.)
If the fair values of the options granted had been recognized as compensation
expense on a straight line basis over the vesting period of the grant
(consistent with the method prescribed by SFAS 123), stock based compensation
costs would have increased the net loss as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss as reported (2,231,074) (452,828)
Pro forma net loss under FAS 123 (8,446,922) (452,828)
Net loss per share - basic, as reported (0.11) (0.02)
Pro forma net loss per share - basic, under FAS 123 (0.42) (0.02)
---------------------------------------------------------------------------------------------------
</TABLE>
The fair value of option grants is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1999
---------------------------------------------------------------
Dividend yield 0%
Expected volatility 105%
Risk-free interest rate 5.6%
Expected life of the option 3 years
---------------------------------------------------------------
The fair value of stock options granted during 1999 was $0.63 for the options
under the 1998 plan and $3.52 for the options under the 1999 plan.
17
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31,1999 (in US dollars)
8. CONVERTIBLE PREFERRED SHARES
On May 6, 1999, the Company entered into a Securities Purchase Agreement and
ancillary agreements with RGC International Investors LDC ("RGC") pursuant to
which the Company issued, for cash, a convertible debenture to RGC in the
aggregate principal amount of $8,500,000 at an interest rate of 5%. The
financing was arranged by Broadmark Capital which received a fee of $510,000. An
amendment to the Company's articles of incorporation was approved by the
majority shareholder on July 18, 1999 to allow the issuance of preferred shares
in the Company. On July 19, 1999, the debenture was converted into 8,500
convertible preferred shares with a dividend rate of 5%.
The convertible preferred shares are convertible from time to time at RGC's
option into shares of the Company at the lesser of a fixed conversion price or a
variable conversion price based on the market price of the common shares at the
time of conversion.
The fixed conversion price was determined to be $8.125 per common share, which
represented 130% of the average closing bid prices of the common shares reported
on the OTC Bulletin Board for the three consecutive trading days ended April 30,
1999.
The variable conversion price will be based on 100% of the average of the seven
consecutive lowest closing bid prices of the common shares reported on the OTC
Bulletin Board during the 35 trading days ending one day prior to the date that
RGC exercises its right to convert.
If the Company's common shares are not approved for trading on the NASDAQ Stock
Market by November 6, 1999, the conversion terms of the preferred shares change.
The conversion term would be the lessor of:
[a] the fixed conversion price of $8.125 per common share;
[b] 80% of the average of the seven consecutive lowest closing bid prices of
the common shares reported on the OTC Bulletin Board during the 35 trading
days ending one day prior to the date that RGC exercises its right to
convert; or
[c] 110% of the average closing bid price of the common shares reported on the
OTC Bulletin Board over the ten trading days ending on November 6, 1999.
18
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31,1999 (in US dollars)
8. CONVERTIBLE PREFERRED SHARES (CONT'D.)
The amount of preferred shares which are convertible into common shares includes
accrued interest on the convertible debenture prior to its conversion to
convertible preferred shares.
The preferred shares include an investment option, exercisable by RGC at the
time of conversion, to acquire a number of additional common shares equal to the
number of common shares with respect to which RGC is converting the preferred
shares, at an exercise price equal to the conversion price then in effect. This
investment option has a three year term.
The preferred shares have a three year term, after which any previously
unconverted portion is converted automatically into common shares under the same
conversion terms.
In connection with the financing, RGC also received warrants to purchase
680,000 common shares of the Company at an exercise price of $8.3475. The
warrants have a five year term.
The proceeds from RGC have been allocated to the underlying instruments in
accordance with their fair values at the date of issuance such that $7,500,000
was allocated to the preferred shares and its investment option and $1,000,000
was allocated to the warrants and included in additional paid in capital.
Total financing costs of $621,322 were incurred in respect of this arrangement.
In addition, the Company agreed to provide the agents warrants to purchase
62,769 of common shares at an exercise price of $8.125 which expire in five
years. During 1999, $41,989 of these finance costs were expensed. The remaining
unamoritzed finance costs are presented as a reduction of the carrying value of
the preferred shares.
19
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31,1999 (in US dollars)
8. CONVERTIBLE PREFERRED SHARES (CONT'D.)
During 1999, amortization expense of $67,580 was recorded in the statement of
loss, as the proceeds allocated to additional paid in capital were considered a
discount to be amortized over the term of the financing. During 1999, interest
expense of $101,528 was recorded in the statement of loss as the financing was
classified as debt at the date of issuance. As at July 31, 1999, the carrying
value of the convertible preferred shares comprises the following:
$
----------------------------------------------------------------------
Fair value upon issuance 7,500,000
Accrued interest on debenture 101,528
Amortization of discount 67,580
Less: deferred financing costs (579,333)
----------------------------------------------------------------------
7,089,775
----------------------------------------------------------------------
----------------------------------------------------------------------
As at July 31, 1999, there existed a mandatory liquidation event with respect to
this financing which was outside of the control of the Company. This mandatory
liquidation event was that the preferred shares would be mandatorily redeemed
should the Company fail to obtain effectiveness with the Securities and Exchange
Commission (SEC) of their registration statement on form SB-2 which registered
for resale the common shares issuable upon exercise of the preferred shares. As
a result, the convertible preferred shares were required to be classified as
mezzanine equity as there was a potential mandatory redemption event at July 31,
1999.
On August 26, 1999, the Company's form SB-2 registration statement was declared
effective by the SEC. As a result, the preferred shares from this date onwards
will be classified as equity. The accompanying pro forma shareholders' equity
gives effect to the discharge of the mandatory redemption event discussed above:
PRO FORMA
JULY 31,
1999
$
----------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Convertible preferred shares, net of financing costs 7,089,775
Share capital 12,658
Additional paid in capital 2,617,109
Deficit (2,893,070)
----------------------------------------------------------------------
6,826,472
----------------------------------------------------------------------
----------------------------------------------------------------------
20
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
9. COMMITMENTS AND CONTINGENCIES
[i] The Company received notice from an interested party on September 27, 1999
that it believes the Company to be in violation of certain registered
trademarks which it possesses. While no legal proceedings have been
initiated by the other party, the notice represents an asserted claim that
is reasonably possible of assertion.
Management is of the opinion that an estimate of any potential liability,
if any, can not be determined at this time.
[ii] During 1999, the Company has entered into website content agreements with
two companies requiring combined monthly payments of $13,500 for a term of
one year.
[iii] By agreement dated April 20, 1999, as amended on June 4, 1999, the Company
entered into an arrangement to engage RealNetworks, Inc. to perform
consulting services in connection with the Global Media Broadcast Network
project which is for the development of internet-use software. Under the
terms of the agreement, the Company is required to make payments totaling
$3,655,000 over the duration of the project with the final payment date
projected to be December 21, 1999.
At July 31, 1999, the balance of the commitment is $2,970,000. Subsequent
to year end, the Company has made payments with respect to this agreement
aggregating to $2,145,000.
[iv] The Company holds operating leases in respect of office premises in both
Vancouver and Nanaimo. Minimum payments under these lease commitments over
the next five years are represented in the table below.
NANAIMO VANCOUVER
OFFICE OFFICE
$ $
-------------------------------------------------------
2000 78,078 72,000
2001 80,609 94,500
2002 80,609 112,500
2003 -- 120,500
2004 -- 130,500
-------------------------------------------------------
239,296 530,000
-------------------------------------------------------
-------------------------------------------------------
21
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
9. COMMITMENTS AND CONTINGENCIES (CONT'D.)
In addition to the basic rent costs identified above for the Vancouver
office, the Company is also responsible for other costs including any
applicable taxes, operating costs, maintenance costs, and any other
additional rents as defined in the lease agreement.
[v] On June 9, 1999, the Company entered into a three year Frame Relay Service
Agreement with MCI WorldCom. The agreement requires a monthly variable
charge based on usage with a minimum monthly commitment of $25,000 per
month.
[vi] YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties will be fully resolved.
10. INCOME TAXES
At July 31, 1999, the Company had total net operating loss carryforwards of
$2,588,114 comprised of United States net operating loss carryforwards of
$1,451,591 [1998 - $240,407] which will begin to expire in 2012, and Canadian
net operating loss carryforwards of $1,136,522 [1998 - $250,671] which will
begin to expire in 2006. Utilization of these carryforwards depends on the
recognition of future taxable income.
For financial reporting purposes, a valuation allowance has been established for
all deferred tax assets due to the uncertainty of realization. As a result of
certain stock transactions, utilization of the Company's net operating loss
carryforwards may be subject to certain limitations in the event that a change
in ownership has occurred, as defined in Section 382 of the Internal Revenue
Code of 1986, as amended.
22
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
10. INCOME TAXES (CONT'D.)
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:
<TABLE>
<CAPTION>
1999 1998
$ $
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards 1,161,912 196,094
Tax vs. accounting value in fixed assets -- 5,431
Foreign exchange loss 14,346 4,155
---------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,176,258 205,680
Less valuation allowance (1,176,258) (205,680)
---------------------------------------------------------------------------------------------------
Net deferred tax assets -- --
- --------------------------------------------------------------------------------------------------
Excess book value over tax basis of capital assets (2,314) --
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
11. COMPARATIVE FIGURES
Certain amounts for 1998 have been reclassified to conform with the current
year's presentation.
23
<PAGE>
GLOBAL MEDIA CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
July 31, 1999 (in US dollars)
12. SUBSEQUENT EVENTS
[i] CO-MARKETING AND SALES AGREEMENT
On October 7, 1999, the Company entered into a letter of intent for a
strategic relationship with Standard Radio Inc. ("Standard"). Standard
will invest $2 million into the Company and receive 338,983 common shares
of the Company. In return, Standard would cause all radio stations owned
by it now or during the three years following, to become network
associates in the Global Media E-Commerce Network and in the Global Media
Broadcast Network.
In connection with the agreement, the Company will be required to nominate
a Standard representative to the Company's Board of Directors. The
nominee, upon accepting a position on the Board, will receive 125,000
options pursuant to the 1999 Stock Option Plan at an exercise price equal
to the closing price of the common stock on the OTC Bulletin Board on the
date of the grant. The options will vest over a three year period on a
quarterly basis from the date of grant and will expire five years from the
grant date.
Furthermore, the Company and each of the six general managers of the
Standard radio stations, Standard's national program director and the
general manger of Standard's syndication division will enter into a
consulting agreement. In exchange for future services granted, the Company
will grant each individual up to 20,000 options pursuant to the 1999 Stock
Option Plan at an exercise price equal to the closing price of the common
stock on the OTC Bulletin Board on the date of the grant. The options will
vest over a one year period from the date of grant and will expire five
years from the grant date.
[ii] OPERATING EVENTS
On August 31, 1999, the Company began the implementation of its Network
Associate program services including the launch of e-commerce sites.
[iii] OPTIONS
During August 1999, the Company granted 85,000 additional options under
the 1999 stock option plan at exercise prices of $6.63 and $7.00. The
options expire five years from the date of grant.
24
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in US dollars)
<TABLE>
<CAPTION>
JANUARY 31 JULY 31
2000 1999
$ $
---------- ---------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 2,542,833 5,649,073
Short-term investments 240,000 240,000
Trade and other receivables 182,200 84,336
Prepaid expenses 40,384 37,760
------------ ----------
3,005,417 6,011,169
Capital assets [NOTE 4] 4,849,440 1,537,434
------------ ----------
7,854,857 7,548,603
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities 395,359 368,094
Due to affiliated company [NOTE 5] 52,091 132,946
Due to shareholders [NOTE 5] 94,349 221,091
Current portion of long-term debt 66,180 --
------------ ----------
607,979 722,131
LONG-TERM DEBT
Lease payable 86,407 --
------------ ----------
694,386 722,131
------------ ----------
Commitments and contingencies [NOTE 9]
Convertible preferred shares [NOTE 7] -- 7,089,775
SHAREHOLDERS' EQUITY
Convertible preferred shares [NOTE 7] 5,709,104 --
100,000,000 authorized, 6,625 issued and outstanding
Common shares, par value $0.001 each, 200,000,000 authorized, 14,131 12,658
22,128,826 and 20,656,331 issued and outstanding [NOTE 6]
------------ ----------
5,723,235 12,658
Additional paid in capital [NOTE 7] 8,639,002 2,617,109
Deficit (7,201,766) (2,893,070)
------------ ----------
7,160,471 (263,303)
------------ ----------
7,854,857 7,548,603
============ ==========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
CONSOLIDATED STATEMENTS OF LOSS
AND COMPREHENSIVE LOSS
(Unaudited)
(in US dollars)
<TABLE>
<CAPTION>
FOR 3 MONTHS FOR 6 MONTHS
ENDED JANUARY 31 ENDED JANUARY 31
2000 1999 2000 1999
$ $ $ $
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
SALES 58,635 -- 72,280 --
COST OF SALES 57,923 130,713
----------- --------- --------- ----------
GROSS PROFIT (LOSS) 712 -- (58,433) --
----------- --------- --------- ----------
OPERATING EXPENSES
Depreciation and amortization 256,267 22,230 347,851 35,277
General and administrative 500,701 113,868 790,792 203,269
Sales and marketing 1,114,037 25,265 1,661,171 33,967
Shareholder communications 59,395 52,317 126,595 93,286
Stock options compensation [NOTE 6] -- -- -- 548,800
Technical operations and development 577,817 -- 1,085,573 --
----------- --------- --------- ----------
2,508,217 213,680 4,011,982 914,599
LOSS FROM CONTINUING OPERATIONS AND
BEFORE OTHER ITEMS (2,507,505) (213,680) (4,070,415) (914,599)
----------- --------- --------- ----------
OTHER ITEMS
Interest 64,353 -- 76,626 --
Financing (74,517) (9,905) (74,517) (10,873)
Foreign exchange 9,279 (1,161) 4,644 (4,374)
----------- --------- --------- ----------
LOSS AND COMPREHENSIVE LOSS BEFORE
DISCONTINUED OPERATIONS (2,508,390) (224,746) (4,063,662) (929,846)
DISCONTINUED OPERATIONS [NOTE 3] -- 4,984 -- (2,065)
----------- --------- --------- ----------
LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD
(2,508,390) (219,762) (4,063,662) (931,911)
=========== ========== =========== ==========
LOSS PER COMMON SHARE (0.11) (0.01) (0.19) (0.05)
=========== ========== =========== ==========
WEIGHTED AVERAGE SHARES USED IN THE
COMPUTATION OF LOSS PER SHARE 22,104,264 20,108,698 21,772,984 19,999,764
=========== ========== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
(in US dollars)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
# $ # $ $ $
--------- ----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1998 -- -- 19,890,831 11,892 543,525 (661,996)
Preferred shares issued [NOTE 7] 8,500 7,089,775 -- -- -- --
Warrants issued on financing [NOTE 7} -- -- -- -- 1,000,000 --
Stock options exercised -- -- 765,500 766 392,484 --
Compensatory stock options -- -- -- -- 681,100 --
Loss for the year -- -- -- -- -- (2,231,074)
--------- ----------- ----------- ---------- ----------- -------------
BALANCE, JULY 31, 1999 8,500 7,089,775 20,656,331 12,658 2,617,109 (2,893,070)
Stock options exercised -- -- 605,551 606 2,193,714 --
Conversion of preferred shares (1,875) (1,625,705) 495,426 495 1,625,210 __
[NOTE 7]
Conversion of amounts due to __ __ 32,535 33 203,313 __
shareholder __ __ 338,983 339 1,999,656 __
and affiliated company [NOTE 5]
Issue of restricted shares [NOTE 8]
Loss for the quarter -- __ -- -- --(4,063,662)
Accrued preferred share premium -- 245,034 -- -- -- (245,034)
--------- ----------- ----------- ---------- ----------- -------------
BALANCE, JANUARY 31, 2000 6,625 5,709,104 22,128,826 14,131 8,639,002 (7,201,766)
========= =========== =========== ========== =========== =============
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in US dollars)
<TABLE>
<CAPTION>
FOR 6 MONTHS
ENDED JANUARY 31
2000 1999
$ $
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period (4,063,662) (931,911)
Items not requiring an outlay of cash
Share option compensation expense [NOTE 6] -- 548,800
Share option professional fees expense [NOTE 6] -- 12,600
Amortization 347,851 50,508
----------- ----------
(3,715,811) (320,003)
Changes in non-cash operating working capital
Trade and other receivables (97,864) --
Inventory -- 1,992
Prepaid expenses (2,624) 4,466
Accounts payable and accrued liabilities 27,265 (74,887)
----------- ----------
CASH USED IN OPERATING ACTIVITIES (3,789,034) (388,432)
----------- ----------
INVESTING ACTIVITIES
Capitalized development costs (2,970,337) --
Purchase of capital assets (728,014) (147,016)
----------- ----------
CASH USED IN INVESTING ACTIVITIES (3,698,351) (147,016)
----------- ----------
FINANCING ACTIVITIES
Advances (to) from shareholders (16,466) 150,131
Advances (to) from affiliated company (14,467) 154,104
Note payable -- 500,000
Lease payable 152,587 --
Issue of restricted shares 1,999,995 --
Stock options exercised 2,194,320 326,800
----------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 4,315,969 1,131,035
----------- ----------
Effect of exchange rate changes on cash 65,176 (207)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE (3,106,240) 595,380
QUARTER
Cash and cash equivalents, beginning of period 5,649,073 14,996
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 2,542,833 610,376
=========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest - paid 6,728 11,610
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
The following notes are to be read in conjunction with the notes to our audited
financial statements above.
1. NATURE OF BUSINESS
Global Media Corp. (the "Company") was incorporated on April 8, 1997 in the
State of Nevada and is headquartered in Vancouver, B.C., Canada. During the
third quarter of fiscal 1999, the company adopted an internet-focused business
plan. Since then, it has been engaged primarily in the development of an
electronic commerce web site, the development of a broadcast network over the
internet, including streaming services, a customized media player and simulated
live internet only radio stations, and the development of templates for the
application of the e-commerce back-end system to multiple sites on the internet.
On May 18, 1999 a beta version of the e-commerce web site was launched and in
September 1999, trial implementations were started for network associate
e-commerce storefronts. On August 31, 1999, the beta implementation of the
Global Media Broadcast Network began with the launch of three live network
associate stations. In October 1999, ten simulated live internet-only stations
were launched by the Company and integrated into the Global Media Player, at
that time in beta form. In November 1999, nine of the simulated live stations
were added to the stations directory presets of the RealPlayer. Also in November
1999, a revised version of the online store was launched. In January 2000, the
Global Media Player was commercially launched.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
COMPARATIVE FIGURES
Certain amounts for 1999 have been reclassified to conform with the
currentquarter's presentation.
LOSS PER SHARE
Basic and fully diluted earnings per share has been computed using the weighted
average number of common shares outstanding during the applicable period. The
effect of common stock options and warrants would be anti-dilutive and therefore
is not included in the calculation of fully diluted earnings per share.
3. DISCONTINUED OPERATIONS
The Company withdrew from the home satellite business in late fiscal 1998 and
the call center business during the third quarter of fiscal 1999, and has
therefore accounted for these businesses as discontinued operations, segregated
in the accompanying consolidated statements of loss and comprehensive loss.
<PAGE>
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
--------- ------------- -----------
<S> <C> <C> <C>
JANUARY 31, 2000
Broadcast network development 3,675,140 102,299 3,572,841
Communications infrastructure 91,787 64,075 27,712
Computer hardware 878,708 154,044 724,664
Leasehold improvements 43,993 9,838 34,155
Office furniture and equipment 124,971 25,767 99,204
Software 107,936 33,908 74,028
Web site development 530,322 213,486 316,836
--------- ------------- -----------
5,452,857 603,417 4,849,440
========= ============= ===========
JULY 31, 1999
Broadcast network development 704,803 -- 704,803
Communications infrastructure 89,391 44,463 44,928
Computer hardware 295,417 59,834 235,583
Leasehold improvements 14,925 2,269 12,656
Office furniture and equipment 50,661 6,477 44,184
Software 73,450 15,484 57,966
Web site development 525,859 88,545 437,314
--------- ------------- -----------
1,754,506 217,072 1,537,434
========= ============= ===========
</TABLE>
5. RELATED PARTY TRANSACTIONS
[i] AMOUNTS DUE TO SHAREHOLDER AND AFFILIATED COMPANY
As part of the Securities Purchase Agreement with RGC International Investors
LDC ("RGC") [see note 7], the Company agreed to restructure the amounts due to a
shareholder and an affiliated company of a shareholder. The agreement provided
that one half of the amounts due to the shareholder and affiliated company will
be repaid by the issue of common stock at a conversion price of $6.25 per share.
In furtherance of this agreement, on July 26, 1999 the Company entered into an
agreement with the shareholder to convert 50% of the amount due plus interest of
$16,455 (for a total of $127,000) into common stock at $6.25 per share and to
repay the remaining $127,000 in four quarterly installments of $31,750. The
first payment was made in November 1999.
On July 26, 1999 the Company entered into an agreement with the affiliated
company of a shareholder to convert 50% of the amount due plus interest of
$8,413 (for a total of $74,886) into common stock at $6.25 per share and to
repay the remaining $74,886 in four quarterly installments of $18,722. The first
payment was made in November 1999. 6. SHARE CAPITAL
STOCK OPTION PLANS
As of January 31, 2000, the Company had stock options outstanding under two
plans: 180,500 pertain to the 1998 Stock Option Plan and 3,758,535 pertain to
the 1999 Stock Option Plan. All the plans are administered by the Board of
Directors who have sole discretion and authority to determine awards including
the conditions of exercise.
The 1998 plan, which became effective on August 21, 1998, provided for the
issuance of 1,000,000 options within a period of 10 years from the effective
date. All 1,000,000 options were granted during the 1999 fiscal year at an
exercise price of $0.50 per share, of which 980,000 were granted to employees
and 20,000 were granted to outside contractors. All options were vested on
grant. During the most recent quarter, 13,500 of these options were exercised.
The 180,500 outstanding options have a remaining life of approximately six
months.
At the time of granting options under the 1998 plan, the Company's shares were
not yet publicly traded. On the first day of public trading, the Company's
shares had a closing market price of $1.06 per share. The Company recognized
compensation expense in the first quarter of the 1999 fiscal year of $548,800
for the granting of these options to employees in accordance with APB 25. In
addition, the Company recognized compensation expense of $12,600 in the first
quarter of the 1999 fiscal year for the granting of 20,000 options to outside
contractors in accordance with SFAS 123.
The 1999 plan, which became effective on March 24, 1999, provides for the
issuance of a total of 4,000,000 options within a period of 10 years from the
effective date. During the most recent quarter, 285,000 options at an exercise
price of $5.13, and 418,210 at an exercise price of $6.25 were granted. Of the
3,812,660 options granted in total, 2,071,910 options vest immediately and
1,740,750 vest on a quarterly basis over one year. The options expire five years
from the date of grant. During the current quarter, 45,500 options were
exercised providing proceeds of $198,480.
Activity in the stock option plans for the current period and prior year is as
follows:
<TABLE>
<CAPTION>
FOR 6 MONTHS FOR THE FISCAL YEAR
ENDED JANUARY 31, 2000 ENDED JULY 31, 1999
------------------------------ -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
# $ # $
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 3,257,000 3.81 -- --
Granted 784,535 6.02 4,022,500 3.18
Exercised (102,500) 2.21 (765,500) 0.51
------------- ------------ ------------- --------------
Outstanding, end of period 3,939,035 4.29 3,257,000 3.81
============= ============ ============= ==============
Options exercisable at the end of the
period 3,069,785 3.92 2,497,167 3.67
============= ============ ============= ==============
</TABLE>
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies APB 25 in accounting for its stock option plans for grants
to employees. Where the exercise price is equal to or greater than the fair
value of the stock at the date of the grant, no compensation is recorded. When
the exercise price is less than the fair value, compensation expense for each
option granted is recorded to the extent that the fair value exceeds the
exercise price.
7. CONVERTIBLE PREFERRED SHARES
On May 6, 1999, the Company entered into a Securities Purchase Agreement and
ancillary agreements with RGC International Investors LDC ("RGC") pursuant to
which the Company issued, for cash, a 5% convertible debenture to RGC in the
aggregate principal amount of $8,500,000. On July 19, 1999, the debenture was
converted into 8,500 convertible preferred shares having a stated value of
$1,000 per share. The convertible preferred shares are convertible from time to
time at RGC's option into shares of common stock of the Company as follows: the
stated value of each share of preferred stock together with a premium thereon
accruing at a per annum rate of 5%, is convertible at the lesser of a fixed
conversion price or a variable conversion price based on the market price of the
common shares at the time of conversion. During the quarter, 1,875 preferred
shares were converted to 495,426 common shares, leaving 6,625 convertible
preferred shares outstanding at quarter end. The conversion price of the
preferred shares is the lesser of:
[a] 80% of the average of the seven consecutive lowest closing bid prices of
the common shares reported on the OTC Bulletin Board (or Nasdaq Stock Market)
during the 35 trading days ending one day prior to the date that RGC exercises
its right to convert; or
[b] $6.435.
Upon conversion of preferred shares by RGC, RGC has an investment option to
acquire a number of additional common shares equal to the number of common
shares with respect to which RGC is converting the preferred shares, at an
exercise price equal to the conversion price. During the quarter, RGC exercised
options to purchase 495,426 common shares for net proceeds of $1,936,804. To the
extent any preferred shares are not converted prior to May 6, 2002, any
previously unconverted portion is converted automatically into common shares
under the same conversion terms described above.
In connection with the financing, RGC received warrants to purchase 680,000
common shares of the Company at an exercise price of $8.3475. The warrants have
a five-year term. In addition, the Company agreed to provide the financing
agents warrants to purchase 62,769 common shares at an exercise price of $8.125
which expire in five years.
The proceeds from RGC were allocated to the underlying instruments in accordance
with their fair values at the date of issuance such that $7,500,000 was
allocated to the preferred shares and the related investment options and
$1,000,000 was allocated to the warrants and included in additional paid in
capital. The unamoritzed finance costs are presented as a reduction of the
carrying value of the preferred shares.
At July 31, 1999, the convertible preferred shares were required to be
classified as mezzanine equity as there was a potential mandatory redemption
event relating to the Company's obligation to register the common shares
issuable upon conversion of the preferred shares and upon exercise of the
related investment options and warrants for public resale. On August 26, 1999,
the Company's Form SB-2 registration statement registering the underlying shares
was declared effective by the SEC. As a result, the preferred shares from this
date onwards have been classified as shareholders' equity.
8. STRATEGIC RELATIONSHIP AGREEMENT
On December 7, 1999, the Company entered into a strategic relationship with
Standard Radio Inc. ("Standard"). Under the terms of this transaction, Standard
invested $2 million into the Company and received 338,983 restricted common
shares of the Company with customary piggy-back registration rights. Standard
also committed to cause all radio stations owned by it at the time or during the
three years following, to become network associates in the Global Media
E-Commerce Network and Broadcast Network.
In connection with the agreement, on December 7, 1999 Standard's Chief Executive
Officer was appointed to the Company's Board of Directors. Upon accepting his
position on the Board, Standard's CEO received 125,000 options in his capacity
as a director pursuant to the 1999 Stock Option Plan, at an exercise price equal
to the closing price of the common stock on the OTC Bulletin Board on the date
of the grant. The options vest over a three-year period on a quarterly basis
from the date of grant and will expire five years from the grant date.
Furthermore, effective December 7, 1999 the Company and each of the six general
managers of the Standard radio stations, Standard's national program director
and the general manager of Standard's syndication division entered into
consulting agreements. In exchange for future services granted, the Company
granted each individual up to 20,000 options pursuant to the 1999 Stock Option
Plan at an exercise price equal to the closing price of the common stock on the
OTC Bulletin Board on the date of the grant. The options vest over a one year
period from the date of grant depending on certain performance criteria being
met, and will expire five years from the grant date.
9. COMMITMENTS AND CONTINGENCIES
[i] The Company received notice from an interested party on September 27, 1999
that it believes the Company to be in violation of certain registered trademarks
which it possesses in certain Canadian provinces. While no legal proceedings
have been initiated by this party, the notice represents a claim that is
reasonably possible of assertion. Management believes the claim is without merit
and if asserted, will not be successful. However, Management believes that if
successfully asserted, the impact of the claim will be immaterial.
[ii] No commitments outside of the regular course of business were entered into
during the quarter.
[iii]During the quarter, the Company entered into support and upgrade and
marketing agreements with RealNetworks, Inc. Combined, the agreements
represented total commitments of $5,320,000, of which $596,000 has been paid by
the Company to date. The remaining commitment will be paid as follows: $596,000
in the third quarter of fiscal 2000; $4,096,000 in the fourth quarter of fiscal
2000; and $32,000 in the first quarter of fiscal 2001.
10. INCOME TAXES
For financial reporting purposes, a valuation allowance has been established for
all deferred tax assets due to the uncertainty of realization.
11. SUBSEQUENT EVENTS
[i] OPTIONS
Subsequent to quarter end, RGC International Investors LDC ("RGC") exercised
investment options to purchase 596,630 common shares of the Company, in
conjunction with an equivalent conversion of preferred shares. The Company
received net proceeds of $2,551,355 from the option exercises.
<PAGE>
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF GLOBALMEDIA.COM
The undersigned appoints Michael Metcalfe (and Robert Fuller, if Mr. Metcalfe is
unable to serve), as the undersigned's lawful attorney and proxy, with full
power of substitution and appointment, to act for and in the stead of the
undersigned to attend and vote all of the undersigned's shares of the Common
Stock of GLOBALMEDIA.COM, a Nevada corporation, at the Special Meeting of
Shareholders to be held at the Company's office, 400 Robson Street, Vancouver,
British Columbia, at 10:00 am. Pacific Standard Time, on June 2, 2000, and any
and all adjournments thereof, for the following purpose:
PROPOSAL NO. 1. APPROVAL OF THE POTENTIAL ISSUANCE OF IN EXCESS OF TWENTY
PERCENT OF THE OUTSTANDING COMMON STOCK
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IF THE SHAREHOLDER DOES NOT INDICATE A PREFERENCE, MANAGEMENT INTENDS TO VOTE
FOR THE PROPOSAL.
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT THE MEETING IN ACCORDANCE WITH
THE SHAREHOLDER'S SPECIFICATION ABOVE. THIS PROXY CONFERS DISCRETIONARY
AUTHORITY IN RESPECT TO MATTERS FOR WHICH THE SHAREHOLDER HAS NOT INDICATED A
PREFERENCE OR IN RESPECT TO MATTERS NOT KNOWN OR DETERMINED AT THE TIME OF THE
MAILING OF THE NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS TO THE UNDERSIGNED.
In the Shareholder's discretion the Proxy is authorized to vote on such other
business as may properly be brought before the meeting or any adjournment or
postponement thereof.
The undersigned revokes any proxies heretofore given by the undersigned and
acknowledges receipt of the Notice of Special Meeting of Shareholders and Proxy
Statement furnished herewith and the Annual Report to Shareholders previously
provided.
Dated: , 2000 --------------------------------
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Signature(s) should agree with the name(s) hereon. Executors, administrators,
trustees, guardians and attorneys should indicate when signing. Attorneys should
submit powers of attorney.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GLOBALMEDIA.COM
PLEASE SIGN AND RETURN THIS PROXY TO DENNIS BROVARONE, ATTORNEY AT LAW, 18
MOUNTAIN LAUREL DRIVE, LITTLETON CO 80127. THE GIVING OF A PROXY WILL NOT AFFECT
YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
