<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1999
REGISTRATION NO. 333-66281
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM SB-2/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENESISINTERMEDIA.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7311 95-4710370
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
------------------------
13063 VENTURA BOULEVARD
STUDIO CITY, CALIFORNIA 91604-2238
(818) 464-7270
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------
RAMY EL-BATRAWI
13063 VENTURA BOULEVARD
STUDIO CITY, CALIFORNIA 91604-2238
(818) 464-7270
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
COPIES TO:
THEODORE R. MALONEY ASHER M. LEIDS
NIDA & MALONEY, P.C. DONAHUE, MESEREAU & LEIDS LLP
800 Anacapa Street 1900 Avenue of the Stars, Suite 2700
Santa Barbara, California 93101 Los Angeles, California 90067
(805) 568-1151 (310) 277-1441
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 17, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
, 1999
[LOGO]
[LOGO]
GENESISINTERMEDIA.COM, INC.
2,000,000 SHARES OF COMMON STOCK
We are a marketing company that markets our own products and our clients'
products utilizing conventional media and interactive multimedia technologies.
The underwriters named in this prospectus are initially offering the stock in
the United States and internationally on a firm commitment basis at a price we
currently estimate will be between $7 and $10 per share. All of the common stock
being offered is being sold by us.
This is our initial public offering and no public market currently exists
for our stock. Our stock has been approved for listing on the Pacific Exchange
under the symbol GNS. We have also applied to have our stock quoted on the
Nasdaq National Market under the symbol GENI.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK AND COULD RESULT IN A LOSS OF
YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
- - Price to the Public................................................................... $ $
- - Underwriting Discounts and Commissions................................................ $ $
- - Proceeds to Genesis................................................................... $ $
</TABLE>
- ------------------------
The table does not include a three percent (3%) non-accountable expense
allowance payable to the underwriters. The underwriters may purchase an
additional 300,000 shares solely to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MILLENNIUM FINANCIAL GROUP, INC.
HD BROUS & CO., INC.
AMERICAN FRONTEER FINANCIAL CORPORATION
<PAGE>
GenesisIntermedia.com, Genesis Intermedia, Genesis Media, Genesis Media
Group, Centerlinq, the Genesis Media logo and the Genesis Intermedia logo are
trademarks of GenesisIntermedia.com, Inc. Other trademarks referenced in this
prospectus are trademarks of their respective legal owners.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY AND YOU SHOULD REFER TO THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS.
GENESISINTERMEDIA.COM, INC.
We are a marketing company that has historically marketed and sold our own
products and those of our clients through conventional media channels. We have
more recently supplemented our marketing efforts with the interactive multimedia
technologies described below. We refer to this innovative blend of marketing
services as an integrated multimedia marketing solution.
As a marketing company, we sell our marketing services and we also may
market, advertise and sell a wide variety of products. The products that we have
marketed and sold or are currently marketing and selling include:
- audio and video cassette packages and accompanying materials based on the
book Men Are From Mars, Women Are From Venus, authored by John M. Gray,
Ph.D.;
- audio and video cassette packages and accompanying materials based on
stock, commodities and real estate investing programs; and
- consumer products, such as skin care and automotive products and exercise
equipment.
In general, interactive multimedia technologies allow businesses to convey a
combination of text, graphics, sound, video and animation content to consumers,
and these technologies permit consumers to actively manipulate this content. For
example, individuals using an interactive multimedia technology may choose to
play a game or to request specific information that is immediately delivered in
an entertaining and engaging format.
Interactive multimedia technologies include:
- compact discs, or CD-ROMs, and digital video discs, or DVDs, which
deliver audio and visual information stored on a disk through a
computer or other device, and
- the Internet, which allows individuals, businesses and governments
throughout the world to communicate with one another in a common
language and offers a wide array of resources to the general public.
The Internet allows any business to open its doors to the world, via an
electronic storefront, and to market its products and services to a group of
individuals who may never have had access to that business' products and
services in any other context. In addition, electronic commerce, or eCommerce,
and the Internet now allow that business to sell its products and services
directly to the customer over the Internet. With some audio, video and textual
content, this sale and the delivery of product can both be immediate.
Through our Centerlinq Network we utilize freestanding Internet access
portals known as kiosks to provide consumers with direct access to the Internet
and to marketing messages that are delivered in an interactive format and
targeted to consumers with a specific demographic profile. The Centerlinq kiosks
provide a window to the Internet via a touch screen computer terminal, which can
be installed in almost any location, such as shopping malls, grocery stores,
schools and city halls. The kiosks provide us and other businesses with
information regarding the preferences and interests of the consumers who utilize
them, which enables these businesses to more successfully target consumers
likely to purchase their products and services in the future.
In addition, we recently obtained the right to acquire a computerized travel
marketing system known as the Contour System. This hardware and software will
provide us with a new distribution channel tailored to the travel industry. With
this system, we will be able to concurrently market the Contour System services
to
3
<PAGE>
travel industry participants, such as travel wholesalers, consolidators and
agents, to assist them in the sale of their products and services, as well as
sell travel products directly to the consumer over the Internet or through our
Centerlinq kiosks. We acquired the rights to the Contour System as part of a
strategic alliance with Global Leisure Travel, Inc., under which we will be
their principal marketing and advertising agent and their exclusive Internet
marketing and advertising agent and eCommerce consultant and provider.
Our principal executive offices are located at 13063 Ventura Boulevard,
Studio City, California 91604-2238. Our telephone number at that location is
(818) 464-7270.
THE OFFERING
<TABLE>
<S> <C>
Total common stock offered.......... 2,000,000 shares
Assumed offering price.............. $8.50 per share
Outstanding common stock
Before offering................. 3,310,000 shares, exclusive of options
After offering.................. 5,310,000 shares, exclusive of options, including the
underwriters' over-allotment option.
Outstanding convertible preferred
stock............................. 142,858 shares, each convertible into one share of common
stock.
Use of proceeds..................... The net proceeds to be received by Genesis from the
offering are estimated to be approximately $14,330,000.
We intend to use the proceeds for expansion of operations,
acquisitions and for general corporate purposes, including
using $2 million of the proceeds over 18 months to develop
and deploy interactive multimedia kiosks in regional
shopping malls across the United States and other
entertainment centers and using approximately $2.5 million
of the proceeds to acquire a computerized travel-package
marketing system.
Proposed Pacific Exchange symbol.... GNS
Proposed Nasdaq symbol.............. GENI
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following tables set forth summary financial data to aid investors in
their analysis of this potential investment. The summary financial data should
be read in conjunction with our complete financial statements and notes included
elsewhere in this prospectus.
STATEMENT OF OPERATIONS DATA
Effective January 1, 1999, we terminated our S corporation status. Prior to
January 1, 1999, our taxable income was passed through to our individual
stockholders who were responsible for paying federal and state income taxes on
their portion of Genesis's taxable income. The pro forma information reflects
our net income (loss) and earnings per share as if we were taxed as a C
corporation for all periods presented. The income tax rate used is 40% which
approximates the federal and state income tax rates for the respective periods.
See note 12 to the financial statements.
The basis for the determination of stock used in computing net earnings
(loss) per share in the following table is described in note 1 to the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------------------------------- MARCH 31,
1995 1996 1997 1998 ----------------------------
------------- ----------- --------- --------- 1998 1999
(UNAUDITED) ------------- -------------
1994 (UNAUDITED) (UNAUDITED)
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total net revenue................ $ 332 $ 8,665 $ 14,342 $ 18,164 $ 14,906 $ 4,580 $ 7,798
Income (loss) from operations.... (149) 111 386 2,435 1,592 414 624
Net income (loss)................ $ (151) $ 93 $ 386 $ 2,367 $ 1,427 $ 394 $ 383
Basic earnings (loss) per
share.......................... $ (0.04) $ 0.02 $ 0.10 $ 0.61 $ 0.37 $ 0.10 $ 0.12
Diluted earnings (loss) per
share.......................... $ (0.04) $ 0.02 $ 0.10 $ 0.61 $ 0.37 $ 0.10 $ 0.12
Shares used in computing earnings
(loss) per share............... 3,883 3,883 3,883 3,884 3,847 4,000 3,241
Pro forma net income (loss)...... $ (151) $ 93 $ 232 $ 1,441 $ 874 $ 239
Pro forma basic earnings (loss)
per share...................... $ (0.04) $ 0.02 $ 0.06 $ 0.37 $ 0.23 $ 0.06
Pro forma diluted earnings (loss)
per share...................... $ (0.04) $ 0.02 $ 0.06 $ 0.37 $ 0.23 $ 0.06
</TABLE>
BALANCE SHEET DATA
The following pro forma balance sheet data are adjusted to give effect to
the private placement of 142,858 shares of convertible preferred stock in April
1999 at $7 per share, net of commissions and expenses of $115,000, and the
issuance of 75,000 additional shares of common stock for no additional
consideration in April 1999 to investors that had purchased 175,000 shares of
common stock in January 1999 at $10.00 per share. The second issuance was to
bring the effective purchase price of the total 250,000 shares of common stock
to $7 per share. See note 10 to the financial statements.
The pro forma as adjusted balance sheet data are also adjusted to give
effect to:
- the pro forma adjustments described in the preceding paragraph; and
- the sale of 2,000,000 shares of common stock in this offering at an
assumed initial public offering price of $8.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses
payable by Genesis.
5
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH
AS OF DECEMBER 31, 31, 1999
----------------------------------------------------------------- -------------
1995 1996 1997 1998
------------- ------------- --------- --------- ACTUAL
(UNAUDITED) (UNAUDITED) -------------
1994 (UNAUDITED)
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............. $ 58 $ (53) $ 334 $ 3,037 $ 2,449 $ 2,081
Current assets........................ 176 390 708 5,523 6,690 6,187
Total assets.......................... 226 409 726 6,714 9,988 9,845
Current liabilities................... 118 443 374 2,486 4,241 4,106
Long-term debt........................ 237 -- -- 609 1,056 1,044
Stockholders' equity (deficit)........ (129) (34) 352 3,619 4,691 4,623
<CAPTION>
PRO FORMA AS ADJUSTED
------------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............. $ 2,966 $ 17,296
Current assets........................ 7,072 21,402
Total assets.......................... 10,730 25,060
Current liabilities................... 4,106 4,106
Long-term debt........................ 1,044 1,044
Stockholders' equity (deficit)........ 5,508 19,838
</TABLE>
6
<PAGE>
RISK FACTORS
WE HAVE GENERATED LITTLE REVENUE TO DATE FROM OUR RECENT EXPANSION INTO NEW
INTERACTIVE MULTIMEDIA MARKETS
In 1998, we commenced expansion of our media offerings into interactive
multimedia technologies, including the Internet, interactive kiosks through our
Centerlinq Network, CD-ROMs and DVDs to businesses seeking to conduct electronic
commerce. The expansion included the formation of our Genesis Intermedia, Inc.
subsidiary. However, revenue generated by this subsidiary has not been
significant, nor have we generated revenue from our audio and video download and
streaming capabilities. We also expect to continue to invest in our
infrastructure and expansion and experience losses in these areas in 1999.
WE HAVE GENERATED MINIMAL REVENUE AND EXPECT TO CONTINUE EXPERIENCING OPERATING
LOSSES FROM OUR RECENT ACQUISITION OF VISION DIGITAL AND ANIMAGIC ASSETS
We recently acquired substantially all of the assets of Vision Digital
Communications, Inc. and AniMagic Corporation. Revenue generated from these new
operations has been minimal and we have experienced and expect to continue to
experience in 1999 operating losses in these start-up areas. See
"Business--Acquisitions and Alliances."
WE ARE HIGHLY DEPENDENT ON OUR CHIEF EXECUTIVE OFFICER TO EXECUTE ON OUR
BUSINESS PLAN
Our ability to maintain our competitive position is dependent on the
services of our senior management, in particular our chief executive officer,
Ramy El-Batrawi. Mr. El-Batrawi has been principally responsible for developing
our corporate vision and leading our product and personnel growth to date.
Although we have a $4 million key-man life insurance policy covering Mr.
El-Batrawi, $900,000 of which is allocated to payment of the mortgage on our
headquarters, and we are developing a strong management team around him, the
loss of Mr. El-Batrawi would be extremely damaging to us at our early stage of
growth.
OUR CONCENTRATION OF REVENUES IN A SMALL NUMBER OF PRODUCTS AND CLIENTS
INCREASES OUR DEPENDENCE ON EACH SINGLE PRODUCT'S SUCCESS AND OUR RELIANCE ON
THE SUCCESS OF OUR DIVERSIFICATION STRATEGY
A relatively small number of clients and products have historically
contributed significantly to our revenues. If there is a significant reduction
in product sales or in a large client's marketing expenditures or the loss of
one or more of our largest products or clients, and this is not replaced by new
products or client accounts or an increase in business from existing products or
clients, then it will have a significant adverse impact on us. In 1997, the two
largest products, Men Are From Mars, Women Are From Venus and Trade Your Way To
Riches, constituted approximately 89% of our total revenues. Selling media time
to Trade Your Way To Riches, Inc. and the Trade Your Way To Riches line of
products constituted approximately 41% of our revenue in 1997 and approximately
25% of our revenue in 1998. Our majority stockholder owns Trade Your Way To
Riches, Inc. In late 1998, we acquired the rights to 13 new products and revenue
from Trade products in the first quarter of 1999 declined to less than 1% of our
revenue and is expected to contribute little or none of our revenue in the
future. However, because we intend to continue to rely on broad-or multi-market
products like the Men From Mars and Trade product lines, it is possible that our
dependence on revenues from a limited number of products will continue in the
future. If we fail to diversify our product line and client base, we may
continue to be at risk that the loss or under performance of a single product or
client may materially affect us.
WE HAVE DERIVED A SUBSTANTIAL PORTION OF OUR REVENUE TO DATE FROM RELATED PARTY
TRANSACTIONS
Selling media time to Trade Your Way To Riches, Inc., a corporation owned by
our majority stockholder, represented none of our revenue in 1996, approximately
41% in 1997 and approximately 25% in 1998. In addition, in 1997 and
7
<PAGE>
1998, revenue from Trade represented approximately 90% and 78% of our revenue
from telemarketing for products owned by our clients. Although total revenue
related to Trade in the first quarter of 1999 had declined to less than 1% of
total revenue, and we anticipate that Trade-related revenue will continue to
represent less than 1% of future revenue, we have only since October 1998 begun
selling media time to a significant number of new clients and we have only
recently begun marketing the new products we acquired in the third quarter of
1998. Any inability to continue media sales to third parties or failure of our
new products could significantly and adversely affect us.
BECAUSE OF OUR UNIQUE BUSINESS STRUCTURE INVOLVING SALES AND MARKETING FOR OUR
OWN AND THIRD PARTIES' DIVERSE PRODUCTS AND SERVICES, OUR AMBITIOUS
ACQUISITION STRATEGY AND OUR NEW ENTRY INTO SIGNIFICANT NEW MARKETS, WE EXPECT
OUR QUARTERLY RESULTS TO FLUCTUATE, AND WE EXPECT THOSE FLUCTUATIONS TO RESULT
IN INCREASED VOLATILITY IN OUR STOCK PRICE
We believe that our business structure of offering integrated multimedia
marketing solutions for our own and third parties' disparate products and
services is unique. We believe the uniqueness of this structure, as well as the
inherent uncertainty of forecasting product sales generally, will make quarterly
forecasts difficult and quarterly results will fluctuate. These quarterly
fluctuations and resulting deviations from forecast results may cause volatility
in the price for the common stock that may not reflect long-term results or
prospects. We expect these fluctuations to be exaggerated as we execute on our
acquisition strategy, which will involve direct expenses, as well as new product
development and marketing expenses. The magnitude and timing of these expenses
will vary. Integration of disparate products, services and distribution channels
we may internally develop, acquire or contract with third parties to market,
will also contribute to the unpredictability of our quarterly results.
IF THE MARKETING CHANNELS OR TECHNOLOGIES WE SELECT OR IMPLEMENT DO NOT RECEIVE
SUFFICIENT MARKET ACCEPTANCE, WE MAY NOT BE COMPETITIVE
We are developing integrated multimedia marketing solutions that we believe
will be competitive. This development includes choices about the right marketing
channel--such as our Centerlinq Network kiosk program for deployment in regional
shopping malls and other public access areas--and the right technology to
exploit that channel--the Internet and the interface of the kiosks. A number of
factors related to those choices may adversely affect our competitiveness,
including:
- rapid technological changes that make these or future offerings of ours
obsolete;
- changes in or mistakes in gauging user and client requirements and
preferences; and
- frequent new product and service introductions by others or evolving
industry standards and practices in our emerging markets that may promote
adoption of technologies other than those we have chosen.
WE ARE DEPENDENT FOR OUR REVENUE ON ORAL AGREEMENTS THAT ARE TERMINABLE AT WILL
BY OTHER PARTIES AND WE MAY NOT BE ABLE TO TIMELY REPLACE THESE REVENUES
We frequently market products on the basis of oral agreements that may be
terminated by either party at any time, and we have no written contracts
relating to our sale of media time to clients. Because of those terminable
arrangements, any of our clients may discontinue utilizing us and our services
at any time in the future.
THE LIMITED EXPERIENCE OF THE LEAD MANAGING UNDERWRITER MAY ADVERSELY AFFECT THE
TRADING MARKET FOR THE COMMON STOCK
Although the co-managing underwriters have previously lead-managed public
offerings and have worked with the lead managing underwriter in prior public
offerings, the lead managing underwriter has never previously acted as the lead
managing underwriter of a public offering and has had limited experience in
acting as an
8
<PAGE>
underwriter in public offerings of securities. If the lead managing underwriter
and its co-managers are unable to effectively place the common stock in the
offering, the after-market for the common stock may be negatively affected. See
"Underwriting."
THE CONTINUING INFLUENCE OF MILLENNIUM OVER US MAY ADVERSELY AFFECT US OR LIMIT
OUR ABILITY TO OBTAIN NEEDED FINANCING
Millennium Financial Group, Inc., the lead managing underwriter, will
continue to have influence over us following the offering. This influence may
adversely affect our business or ability to obtain future financing. This
influence results from the following factors:
- Millennium will be able to appoint a member of the board of directors for
a five-year period;
- Millennium has the right to have an observer present at all meetings of
our board of directors;
- Millennium will receive warrants to purchase 200,000 shares of common
stock, for a nominal consideration, exclusive of the over-allotment
option;
- Millennium can refuse to allow us to sell or offer any securities over a
12-month period after the date of the prospectus; and
- Millennium has demand and piggyback registration rights with respect to
its Genesis securities.
A PENDING COMMODITY FUTURES TRADING COMMISSION INVESTIGATION MAY INVOLVE
ADDITIONAL EXPENSE, MANAGEMENT DIVERSION OR LIMITS ON OUR BUSINESS
We may also be subject to regulation by the Commodity Futures Trading
Commission, which regulates commodities trading. On November 14, 1997, the CFTC
issued an order authorizing the issuance of subpoenas and depositions in a
private investigation involving Jake Bernstein and MBH Commodity Advisors.
Although the order does not reference Genesis, its employees or affiliates, the
CFTC has nonetheless requested that we provide various documents arising out of
our involvement in the production and marketing of an infomercial titled Success
and You which promotes and markets a video series titled Trade Your Way To
Riches. The infomercial Success and You involves the marketing of videos which
provide instruction regarding trading strategies. The CFTC has contended that,
by virtue of our activities in producing and marketing the video, we may be
required to be registered in some capacity with the CFTC. In the event that the
CFTC brings an enforcement action against us by virtue of our failure to
register, or against Trade Your Way To Riches, Inc., with whom we have in the
past done significant business and which is owned by our majority stockholder,
any adverse determination or settlement could adversely affect us. The range of
possible sanctions available to the CFTC in enforcement actions generally
include a simple request to become registered, a cease and desist order-- which
may, if successfully applied to us or Trade, terminate sales of some Trade Your
Way To Riches products or services--and a possible order of disgorgement of
profits--which could, again if applied to us, result in substantial payments by
us. The CFTC may still bring an enforcement action against us or we may seek to
settle the matter. Based on our analysis of all of the facts and legal advice
from our regulatory counsel, we believe that the CFTC proceeding can be settled
on terms that will not materially adversely affect us, or that, if not settled,
the final resolution will not have a material adverse effect on us. See
"Business--Legal proceedings."
9
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of many factors, including those
set forth in the preceding "Risk Factors" section and elsewhere in this
prospectus. In evaluating our business, prospective investors should consider
carefully the factors presented in the "Risk Factors" section in addition to the
other information set forth in this prospectus.
USE OF PROCEEDS
The net proceeds to us from this offering, assuming an initial public
offering price of $8.50 per share and after deducting applicable underwriting
discounts and commissions, the non-accountable expense allowance and estimated
offering expenses payable by us, are estimated to be approximately $14.33
million. We intend to use the proceeds as set forth in the following table. All
amounts in the table are approximate and the actual uses may vary, depending on
a number of factors, including management determinations and business
developments.
<TABLE>
<CAPTION>
NET PERCENTAGE OF
USE PROCEEDS NET PROCEEDS
- ------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Centerlinq kiosk development/deployment............................................. $ 2,000,000 13.96%
Expansion of operations............................................................. 2,000,000 13.96
Development and acquisition of new products......................................... 1,000,000 6.98
Contour System computerized travel marketing system acquisition..................... 2,500,000 17.45
Acquisitions........................................................................ 2,525,000 17.62
General corporate purposes.......................................................... 4,305,000 30.03
------------- ------
Total........................................................................... $ 14,330,000 100.00%
------------- ------
------------- ------
</TABLE>
As of March 31, 1999, there was an aggregate of $737,903 outstanding under
our credit facilities, which bore interest at the lender's "prime rate" plus
2.90% per annum. We anticipate using the approximately $2 million for our
Centerlinq Network kiosk development and deployment over 18 months to develop
and deploy interactive multimedia kiosks in regional shopping malls across the
United States and other entertainment centers. We intend to expand our
operations in 1999 through the lease or acquisition of additional space for
telephone service representatives and supporting infrastructure. We expect other
expenditures for expansion of operations to include expenses associated with
technology enhancement and development and new employee hirings. Except for the
Contour System acquisition, we have not identified any other specific
acquisition targets. We intend to invest the proceeds of the offering in
short-term U.S. government obligations pending their ultimate use.
DIVIDEND POLICY
We have no current intention to declare or pay dividends on our common
stock. We currently anticipate that we will retain any future earnings for use
in our business. As a result, we do not anticipate paying any cash dividends in
the foreseeable future. Any determination to pay dividends in the future will be
at the discretion of our board of directors and will depend upon, among other
factors, our results of operations, financial condition, capital requirements
and contractual restrictions under our credit facilities.
10
<PAGE>
CAPITALIZATION
The table set forth below shows our capitalization as of March 31, 1999.
The adjustments for the pro forma presentation and for the adjusted pro
forma presentation are described in detail in the introductory narrative to the
Summary Financial Data on pages 5 and 6.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ -------------
<S> <C> <C> <C>
Long-term debt.................................... $ 1,044,303 $ 1,044,303 $ 1,044,303
------------ ------------ -------------
Stockholders' equity
Convertible preferred stock, $.001 par value,
5,000,000 shares authorized, 0, 142,858 and
142,858, respectively, shares issued and
outstanding................................... 0 143 143
Common stock, $.001 par value 25,000,000 shares
authorized 3,310,000, 3,310,000 and 5,310,000,
respectively, shares issued and outstanding... 3,310 3,310 5,310
Additional paid-in capital........................ 4,235,987 5,120,844 19,448,844
Retained earnings................................. 383,203 383,203 383,203
------------ ------------ -------------
Total stockholders' equity...................... 4,622,500 5,507,500 19,837,500
------------ ------------ -------------
Total capitalization............................ $ 5,666,803 $ 6,551,803 $ 20,881,803
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
11
<PAGE>
DILUTION
At March 31, 1999, there were 3,310,000 shares of our common stock
outstanding, having a net tangible book value per share of $1.29. Net tangible
book value per share represents the amount of our total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding.
After giving effect to the sale of the 2,000,000 shares of our common stock
under this offering at an assumed price of $8.50 per share and the application
of the net proceeds, there would be a total of 5,310,000 shares of common stock
outstanding with a net tangible book value of $3.50 per share. This would
represent an immediate increase in net tangible book value of $2.21 per share to
existing stockholders and an immediate dilution of $5.00 per share to new
investors. Dilution is determined by subtracting net tangible book value per
share from the amount paid by new investors per share of common stock. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $ 8.50
Net tangible book value per share as of March 31, 1999..... $ 1.29
Increase attributable to new investors..................... 2.21
---------
Pro forma net tangible book value per share after this
offering................................................... 3.50
---------
Dilution per share to new investors.......................... $ 5.00
---------
---------
</TABLE>
The following table summarizes as of March 31, 1999 the difference between
the existing stockholders and the new investors with respect to the number of
shares of common stock purchased in this offering, the total consideration paid
and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 3,310,000 62.34% $ 3,274,582 16.15% $ 0.99
New investors............... 2,000,000 37.66% 17,000,000 83.85% $ 8.50
---------- --------- ------------- ---------
Total..................... 5,310,000 100.00% $ 20,274,582 100.00%
---------- --------- ------------- ---------
---------- --------- ------------- ---------
</TABLE>
The preceding table assumes no exercise of any stock options outstanding as
of March 31, 1999. As of March 31, 1999, there were options and warrants
outstanding to purchase a total of 842,858 shares of common stock, with a
weighted average exercise price of $9.44 per share. If all options and warrants
outstanding as of March 31, 1999 had been exercised as of that date, the
dilution per share to new investors in the offering would be $4.18. On October
1, 1998, we adopted a stock incentive program under which 500,000 shares of
common stock were reserved for issuance. The number of shares of common stock
reserved for issuance under the program was increased in January 1999 to
600,000. Options with respect to 350,000 of these shares were granted and
outstanding as of March 31, 1999. To the extent options are granted and
subsequently exercised or shares are issued under the program, new investors may
experience further dilution.
The preceding dicussion gives effect to the issuance in April 1999 of 75,000
shares of common stock and warrants to purchase 250,000 shares of common stock
as if those issuances had occurred on March 31, 1999.
12
<PAGE>
SELECTED FINANCIAL DATA
We are providing the following selected financial data to aid investors in
their analysis of this potential investment. This information was derived from
(1) our 1998, 1997 and 1996 historical financial statements and (2) our
internally prepared unaudited financial statements for the years ended December
31, 1995 and 1994 and the three-month periods ended March 31, 1999 and 1998. Our
financial statements for the years ended December 31, 1998, 1997 and 1996 with
the accompanying notes and the related reports of Singer Lewak Greenbaum &
Goldstein LLP, independent certified public accountants, together with our
internally prepared unaudited financial statements for the three-month periods
ended March 31, 1999 and 1998, are included elsewhere in the prospectus. Our
unaudited financial statements, in the opinion of management, include all
adjustments, which consist of normal recurring adjustments, necessary for a fair
presentation of our financial position and results of operations for the
unaudited interim periods. The selected financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" at page 15 and our financial statements and
related notes included elsewhere in the prospectus. The basis for the
presentation of the following pro forma financial data and the adjustments to
the pro forma data are set forth on page 5.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE
MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------------------------------------- MARCH 31,
1995 1996 1997 1998 -----------
----------- --------- --------- --------- 1998
1994 (UNAUDITED) -----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net revenue
Media sales--affiliate............................ $ -- $ -- $ -- $ 7,412 $ 3,703 $ 1,222
Media sales....................................... -- -- -- -- 1,220 --
Product sales..................................... 149 8,268 13,152 8,252 6,326 1,853
Commissions and royalties--affiliate.............. -- -- -- 742 1,789 956
Commissions and royalties......................... 183 325 79 1,738 1,855 536
Other............................................. -- 72 1,111 20 13 13
----------- ----------- --------- --------- --------- -----------
Total net revenue............................... 332 8,665 14,342 18,164 14,906 4,580
Operating costs and expenses
Media purchases................................... -- -- -- 6,445 4,198 1,036
Direct costs...................................... 53 1,264 1,842 713 937 172
Selling, general and administrative............... 428 7,290 12,114 8,571 8,179 2,958
----------- ----------- --------- --------- --------- -----------
Total operating costs and expenses.............. 481 8,554 13,956 15,729 13,314 4,166
----------- ----------- --------- --------- --------- -----------
Income (loss) from operations....................... (149) 111 386 2,435 1,592 414
Interest expense.................................... 2 18 -- 33 135 15
----------- ----------- --------- --------- --------- -----------
Income before taxes................................. (151) 93 386 2,402 1,457 399
Income taxes........................................ -- -- -- 35 30 5
----------- ----------- --------- --------- --------- -----------
Net income (loss)................................... $ (151) $ 93 $ 386 $ 2,367 $ 1,427 $ 394
----------- ----------- --------- --------- --------- -----------
----------- ----------- --------- --------- --------- -----------
Basic earnings (loss) per share..................... $ (0.04) $ 0.02 $ 0.10 $ 0.61 $ 0.37 $ 0.10
----------- ----------- --------- --------- --------- -----------
----------- ----------- --------- --------- --------- -----------
Diluted earnings (loss) per share................... $ (0.04) $ 0.02 $ 0.10 $ 0.61 $ 0.37 $ 0.10
----------- ----------- --------- --------- --------- -----------
----------- ----------- --------- --------- --------- -----------
Weighted average shares outstanding................. 3,883 3,883 3,883 3,884 3,847 4,000
----------- ----------- --------- --------- --------- -----------
----------- ----------- --------- --------- --------- -----------
PRO FORMA
Income before taxes................................. $ (151) $ 93 $ 386 $ 2,402 $ 1,457 $ 399
Pro forma income taxes.............................. -- -- 154 961 583 160
----------- ----------- --------- --------- --------- -----------
Pro forma net income (loss)......................... $ (151) $ 93 $ 232 $ 1,441 $ 874 $ 239
----------- ----------- --------- --------- --------- -----------
----------- ----------- --------- --------- --------- -----------
Pro forma basic earnings (loss) per share........... $ (0.04) $ 0.02 $ 0.06 $ 0.37 $ 0.23 $ 0.06
----------- ----------- --------- --------- --------- -----------
----------- ----------- --------- --------- --------- -----------
Pro forma diluted earnings (loss) per share......... $ (0.04) $ 0.02 $ 0.06 $ 0.37 $ 0.23 $ 0.06
----------- ----------- --------- --------- --------- -----------
----------- ----------- --------- --------- --------- -----------
<CAPTION>
1999
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue
Media sales--affiliate............................ $ --
Media sales....................................... 3,938
Product sales..................................... 3,790
Commissions and royalties--affiliate.............. --
Commissions and royalties......................... 70
Other............................................. --
-----------
Total net revenue............................... 7,798
Operating costs and expenses
Media purchases................................... 3,501
Direct costs...................................... 373
Selling, general and administrative............... 3,300
-----------
Total operating costs and expenses.............. 7,174
-----------
Income (loss) from operations....................... 624
Interest expense.................................... 46
-----------
Income before taxes................................. 578
Income taxes........................................ 195
-----------
Net income (loss)................................... $ 383
-----------
-----------
Basic earnings (loss) per share..................... $ 0.12
-----------
-----------
Diluted earnings (loss) per share................... $ 0.12
-----------
-----------
Weighted average shares outstanding................. 3,241
-----------
-----------
PRO FORMA
Income before taxes.................................
Pro forma income taxes..............................
Pro forma net income (loss).........................
Pro forma basic earnings (loss) per share...........
Pro forma diluted earnings (loss) per share.........
</TABLE>
13
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------
1997 1998
--------- --------- AS OF MARCH 31, 1999
------------------------
1994 1995 1996 ACTUAL PRO FORMA
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)............ $ 58 $ (53) $ 334 $ 3,037 $ 2,449 $ 2,081 $ 2,966
Current assets....................... 176 390 708 5,523 6,690 6,187 7,072
Total assets......................... 226 409 726 6,714 9,988 9,845 10,730
Current liabilities.................. 118 443 374 2,486 4,241 4,106 4,106
Long-term debt....................... 237 -- -- 609 1,056 1,044 1,044
Stockholders' equity (deficit)....... (129) (34) 352 3,619 4,691 4,623 5,508
<CAPTION>
AS ADJUSTED
-----------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)............ $ 17,296
Current assets....................... 21,402
Total assets......................... 25,060
Current liabilities.................. 4,106
Long-term debt....................... 1,044
Stockholders' equity (deficit)....... 19,838
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS"
BEGINNING AT PAGE 7.
OVERVIEW
We are an integrated marketing company that utilizes conventional media and
emerging, interactive multimedia technologies to market our own products and our
clients' products. The interactive multimedia technologies we use include the
Internet, and CD-ROMs and DVDs. Incorporated on October 28, 1993, we did not
commence substantial operations until 1994. From inception until June 1997, we
devoted substantially all our resources to selling products we owned or had
purchased rights to sell through conventional marketing methods. We sold these
products to the general public through the use of infomercials, radio
advertisements, print media and retail outlets. A substantial portion of our
product revenue has come from our Men Are From Mars, Women Are From Venus
product series authored by John Gray, Ph.D. Prior to June 1997, we contracted
with an unrelated third party to administer our product sales, including buying
media time, managing inventory levels and contracting order fulfillment. For
these services, we paid the third party an administrative fee and a share of the
profits generated from the product sales.
In June 1997, we brought the operations of our product sales in-house, which
resulted in the hiring of additional personnel and buying an office building.
This allowed us to better manage the profitability of our product sales and also
gave us the resources to expand our products and services. Since moving into our
corporate office building in July 1997, we have:
- increased the number of products we sell;
- established outbound telemarketing services to sell our products, as well
as products of other companies;
- established a media sales department that sells media time to other
companies as well as buys media time for our own products at a 10-15%
discount; and
- focused our advertising on markets that yielded higher responses, which
significantly reduced advertising costs.
During the later part of 1997, after creating our infrastructure, we began
contracting with other companies to sell their products via our outbound
telemarketing capabilities. In performing these services we are typically given
a database of customer names and telephone numbers from the contracting company
and we receive a sales commission ranging from 35% to 70%. Through December 31,
1998, approximately $2.53 million or 41% of the commission and royalty revenue
generated from selling other companies' products has come from selling products
based on Jake Bernstein's Trade Your Way To Riches program. A company owned by
our majority stockholder owns the rights to this program. In the latter part of
1998 we discontinued selling this product for Trade Your Way To Riches, Inc.
We keep a database of customers who have purchased our products and then
sell additional related products to these customers through our outbound
telemarketing capabilities. We have also been able to generate revenue from the
sale of customer names in our database to unrelated third parties.
15
<PAGE>
In July 1998, we formed our Genesis Intermedia, Inc. subsidiary and hired
key personnel experienced in creating interactive multimedia merketing
solutions--marketing and sales plans and capabilities that allow businesses to
convey a combination of text, graphics, sound, video and animation content to
their customers in a way that the customers can actively manipulate or interact
with the content. Through our subsidiary we are exploiting digital media to
market and distribute our and our clients' products and services via the
Internet and other interactive delivery platforms, including interactive
publicly available kiosks through our Centerlinq Network, and CD-ROMs and DVDs.
We design these solutions to provide targeted consumers with an innovative
introduction to our client's products or services. The solutions are intended to
strengthen and broaden our customer base and significantly increase our Internet
presence. Each multimedia solution enables us and our clients to promote and
sell products or services to large target markets more efficiently and
effectively than is possible through conventional media. Through March 31, 1999,
cumulative revenue generated by our newly formed Genesis Intermedia subsidiary
was approximately $280,000.
Historically, our sales have generally been seasonal, reflecting the media
buying patterns of advertisers and are concentrated in the second and fourth
quarters. The third quarter has historically been the slowest quarter of the
year. Our historical revenues were also dependent on a small number of products.
During the latter part of 1998, we focused our efforts on identifying and
acquiring additional products we can sell during 1999. We were successful in
adding four new telemarketing campaigns and a total of 13 new products to our
existing product line. We have acquired the rights to distribute these products
and have agreed to pay royalties of approximately 5% of net sales to the
licensors of the products. These products include, for example, a memory
improvement program, a money management program, an educational line of DVDs and
the Hawaiian Tropic Swimwear line. Genesis will market these products using
integrated multimedia technology, as well as conventional media, such as
television and print advertisements, and through retail distribution outlets.
Each of the new telemarketing campaigns has also been market tested and is
currently generating revenue. While our revenue in the year ended December 31,
1998 was below 1997 our revenue for the first quarter of 1999 was approximately
43% of our total 1998 revenue. We expect our revenue to continue to increase
throughout 1999 from the sale of media time to third parties and from sales of
our new products.
We recently completed the acquisitions of assets of Vision Digital
Communications, Inc., a company that places interactive kiosks in shopping
malls, and AniMagic Corporation, an interactive technology company. In addition,
in April 1999 we entered into a strategic alliance with Global Liesure Travel,
Inc., a leading travel company, which grants us the right to be the exclusive
e-Commerce marketing and advertising agent for Global and grants us an option to
purchase all of the assets comprising its computerized Contour System
travel-package marketing system. Global's majority stockholder is a company that
is wholly owned by Mr. El-Batrawi. We will continue to evaluate acquisition
opportunities that will enable us to expand our core multimedia marketing
capabilities, our product offerings and the geographic scope of our operations.
We plan to acquire well-regarded niche companies or leaders in specific
marketing and communications disciplines as well as products or services which
we believe have strong earnings potential. We will also review joint venture and
strategic alliance possibilities.
Genesis has five primary potential revenue generating sources:
1. INTEGRATED MARKETING SOLUTIONS. We have historically utilized conventional
media to fulfill our and our clients' marketing needs. We have recently
expanded our distribution capability to include an Internet-based eCommerce
solution through which we can market and expand our product line. In
addition, we will offer Internet-based marketing and advertising to our
current clients as well as target new sources for Internet-based marketing
and advertising.
16
<PAGE>
2. CD-ROMS AND DVDS. We produce and sell CD-ROM- and DVD-based entertaining
educational programs known as edutainment.
3. PROPRIETARY PRODUCTS. We will continue to expand the products we sell
through infomercials, radio, print media and retail outlets. We also plan to
expand our outbound telemarketing capabilities to sell our products and
products of other companies.
4. PUBLIC ACCESS COMMUNICATIONS NETWORKS. Through our Centerlinq Network, we
have placed and we plan to continue to place interactive kiosks in regional
shopping malls throughout the United States and other entertainment centers.
The Centerlinq kiosks enable merchants to communicate directly with their
customers, to learn more about their customers and to deliver consistent
marketing messages in a variety of locations. In addition, these kiosks
expose retail shoppers to eCommerce and integrate the physical shopping
experience with interactive options. We earn revenue from the sale of
advertising space and a percentage of the merchandise sales made through the
kiosks. Based upon our negotiations with management companies managing
regional shopping malls in various regions in the United States and the
prospect for deploying a network of kiosks that may attract national
advertising revenue, we expect these kiosks to generate significant revenue
in the future.
5. AUDIO AND VISUAL STREAMING AND DOWNLOAD TECHNOLOGY. We have technology that
provides the structure for direct application on the Internet of interactive
multimedia technologies, such as music, movies and combined audio and visual
special effects. We will sell advertising space and will also receive
transactional fees from customers downloading the various products offered
by us. To date, we have not generated any revenue from this streaming and
downloading technology.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERCENTAGE OF NET
MARCH 31, REVENUE
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUE
Media sales--affiliate................................................... $ -- $ 1,222 0.0% 26.7%
Media sales.............................................................. 3,938 -- 50.5% 0.0%
Product sales............................................................ 3,790 1,853 48.6% 40.5%
Commissions and royalties--affiliate..................................... -- 956 0.0% 20.9%
Commissions and royalties................................................ 70 536 0.9% 11.7%
Other.................................................................... -- 13 0.0% 0.3%
--------- --------- --------- ---------
Total net revenue...................................................... 7,798 4,580 100.0% 100.0%
OPERATING COSTS AND EXPENSES
Media purchases.......................................................... 3,501 1,036 44.9% 22.6%
Direct costs............................................................. 373 172 4.8% 3.8%
Selling, general and administrative...................................... 3,300 2,958 42.3% 64.6%
--------- --------- --------- ---------
Total operating costs and expenses..................................... 7,174 4,166 92.0% 91.0%
INCOME FROM OPERATIONS..................................................... 624 414 8.0% 9.0%
Interest expense........................................................... 46 15 0.6% 0.3%
--------- --------- --------- ---------
INCOME BEFORE TAXES........................................................ 578 399 7.4% 8.7%
Income taxes............................................................... 195 5 2.5% 0.1%
--------- --------- --------- ---------
NET INCOME................................................................. $ 383 $ 394 4.9% 8.6%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
17
<PAGE>
Revenue for the three months ended March 31, 1999 increased by $3,218,000 or
70.3% from $4,580,000 for the three months ended March 31, 1998 to $7,798,000
for the same period in 1999. The increase in revenue was due to the following:
- Media sales to unrelated third parties increased from $0 in 1998 to
$3,938,000 in 1999 due to us hiring personnel with media buying experience
and contacts in the industry. We have been able to retain several large
customers who began purchasing media time through us in the latter part of
1998 and have increased their media buys in the first quarter of 1999. We
expect media sales to unrelated third parties to continue to increase for
the remainder of 1999 as we obtain additional capital with which to
purchase larger blocks of media time to resell;
- Media sales to a company owed by our majority stockholder decreased from
$1,222,000 for the three months ended March 31, 1998 to $0 for the same
period in 1999. Media sales to affiliates are expected to be minimal in
1999;
- Product sales increased $1,937,000 principally as a result of us beginning
to sell the new products we acquired the rights to sell in the latter half
of 1998. With the acquisition of new products, the new sources of income
that will result from our Genesis Intermedia subsidiary and the
availability of resources to market and advertise all of our old and new
products, we expect product sales to grow at a moderate rate throughout
1999;
- Commissions and royalties--affiliate decreased $1,956,000 principally from
commissions received from the sale of mentoring programs for the TradeYour
Way To Riches products during the three months ended March 31, 1998. There
were no Trade-related sales for the same period in 1999. During the fourth
quarter of 1998 we discontinued selling the mentoring programs for Trade
Your Way To Riches, Inc.; and
- Commissions and royalties decreased $466,000, principally due to names of
customers being sold to an unrelated third party during the three months
ended March 31, 1998. No similar sale occurred during the same period in
1999.
Media purchases for the three months ended March 31, 1999 increased by
$2,465,000 or 237.9% from $1,036,000 for the three months ended March 31, 1998
to $3,501,000 for the same period in 1999. The increase was due to more media
time sold to unrelated third parties during the first quarter of 1999.
Direct costs for the three months ended March 31, 1999 increased by $201,000
or 116.9% from $172,000 for the three months ended March 31, 1998 to $373,000
for the same period in 1999. The increase was due to increased product sales
during the first quarter of 1999. Direct costs as a percentage of product sales
increased from 9.3% for the first quarter of 1998 to 9.8% for the first quarter
of 1999. The increase is due to slightly higher product costs for the new
products we sold.
Selling, general and administrative expenses for the three months ended
March 31, 1999 increased by $342,000 or 11.5% from $2,958,000 for the three
months ended March 31, 1998 to $3,300,000 for the same period in 1999. The
increase was due principally to an increase in payroll and related benefits of
$577,000, an increase in royalties of $462,000 and a general increase in
facilities charges, office supplies and related expenses as a result of
expanding our operations and the operations of our subsidiary, Genesis
Intermedia, Inc. These increases were offset by a decrease in advertising
expenses of $1,166,000. As a result of expanding our operation and the creation
of our Genesis Intermedia subsidiary, our payroll costs have increased. Some of
the new products that we began selling in the latter part of 1998 require us to
pay royalties to the owner of the product. As a result, royalty expense for the
first quarter of 1999 increased over the royalty payment made during the same
period in 1998. The decrease in advertising expense is due to less media time
being purchased to advertise our products in January and February of 1999 as we
were test marketing our new products. We have recently increased our advertising
for products that had favorable results from our test marketing campaigns.
18
<PAGE>
Interest expense for the three months ended March 31, 1999 increased by
$31,000 or 206.7% from $15,000 for the three months ended March 31, 1998 to
$46,000 for the same period in 1999. The increase in interest expense was due to
the issuance of a note payable secured by our corporate office building, the
line of credit, and notes payable and capitalized lease obligations assumed as a
result of our purchase of Vision Digital assets.
Income taxes for the three months ended March 31, 1999 increased by $190,000
or 3,800% from $5,000 for the three months ended March 31, 1998 to $195,000 for
the same period in 1999. The significant increase is due to us revoking our S
corporation status effective January 1, 1999. The effective tax rate for the
first quarter of 1999 was 33.7%. The difference between this amount and the
expected combined federal and state income rate of 40% is due to a one time
deferred tax benefit of $38,000 recognized upon the implementation of SFAS No.
109. Prior to January 1, 1999, we were an S corporation resulting in our income
being reported on the personal income tax returns of our stockholders.
Net income for the three months ended March 31, 1999 decreased by $11,000 or
2.8% from $394,000 for the three months ended March 31, 1998 to $383,000 for the
same period in 1999. The decrease is principally due to higher sales offset by
higher selling, general and administrative expenses and the recognition of an
income tax provision since we are no longer taxed as an S corporation.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF NET
YEAR ENDED DECEMBER 31, REVENUE
------------------------ --------------------
1997 1998 1997 1998
----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUE
Media sales--affiliate............................................... $ 7,412 $ 3,703 40.8% 24.8%
Media sales.......................................................... -- 1,220 0.0% 8.2%
Product sales........................................................ 8,252 6,326 45.4% 42.4%
Commissions and royalties--affiliate................................. 742 1,789 4.1% 12.0%
Commissions and royalties............................................ 1,738 1,855 9.6% 12.5%
Other................................................................ 20 13 0.1% 0.1%
----------- ----------- --------- ---------
Total net revenue.................................................. 18,164 14,906 100.0% 100.0%
OPERATING COSTS AND EXPENSES
Media purchases...................................................... 6,445 4,198 35.5% 28.1%
Direct costs......................................................... 713 937 3.9% 6.3%
Selling, general and administrative.................................. 8,571 8,179 47.2% 54.9%
----------- ----------- --------- ---------
Total operating costs and expenses................................. 15,729 13,314 86.6% 89.3%
----------- ----------- --------- ---------
INCOME FROM OPERATIONS................................................. 2,435 1,592 13.4% 10.7%
Interest expense....................................................... 33 135 0.2% 0.9%
----------- ----------- --------- ---------
Income before taxes.................................................... 2,402 1,457 13.2% 9.8%
Income taxes........................................................... 35 30 0.2% 0.2%
----------- ----------- --------- ---------
Net Income............................................................. $ 2,367 $ 1,427 13.0% 9.6%
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
Revenue for the year ended December 31, 1998 decreased by $3,258,000 or
17.9% from $18,164,000 for the year ended December 31, 1997 to $14,906,000 for
the same period in 1998. The decrease in revenue was due to the following:
- Commissions and royalties--affiliate increased $1,047,000 principally from
commissions received from the sale of mentoring programs for the Trade
Your Way To Riches products. The increase in revenue is due to this
affiliate company purchasing names and phone numbers of potential
19
<PAGE>
customers and contracting with us to sell its products and mentoring
services through our outbound telemarketing capabilities. We receive a
commission ranging from 35% to 55% for the sale of these products and
mentoring programs. The mentoring programs give the customer unlimited
access during business hours for periods ranging from three to 12 months
to mentors who can help the customer understand and utilize the audio and
video tapes and materials sold by Trade Your Way To Riches, Inc. During
the fourth quarter of 1998 we discontinued selling of these mentoring
programs for Trade Your Way To Riches, Inc.;
- Media sales to unrelated third parties increased from $0 in 1997 to
$1,220,000 in 1998 due to our hiring of personnel with media buying
experience and contacts in the industry. We expect media sales to
unrelated third parties to increase significantly in 1999;
- Media sales to a company owed by our majority stockholder decreased
$3,709,000 as a result of this company purchasing less media time and
focusing more on outbound telemarketing sales. This affiliated company
that purchased media from us was able to purchase names and phone numbers
of potential buyers for its products and, therefore, used its resources on
outbound telemarketing to increase sales rather than purchasing media time
to advertise its products;
- Product sales decreased $1,926,000 principally as a result of focusing our
efforts in the latter part of 1998 to expand our product line by
identifying and acquiring new products to sell. Promoting our products
through the use of infomercials is capital intensive due to the need to
prepay for media airtime. During the latter part of 1998, we used more of
our resources to acquire new products and to create our Genesis
Intermedia, Inc. subsidiary. As a result, we spent less money on
advertising our current products that resulted in lower product sales.
Sales from our Men Are From Mars, Women Are From Venus product line
decreased by $5,176,000 in 1998, which was offset by an increase in sales
from our new products of $3,250,000.
Media purchases for the year ended December 31, 1998 decreased by $2,247,000
or 34.9% from $6,445,000 for the year ended December 31, 1997 to $4,198,000 for
the same period in 1998. The decrease was due to less media time sold to a
company owned by our majority stockholder. We sold media at a mark-up of
approximately 15%, the standard industry mark-up, for both periods.
Direct costs for the year ended December 31, 1998 increased by $224,000 or
31.4% from $713,000 for the year ended December 31, 1997 to $937,000 for the
same period in 1998. The increase was due to direct costs being approximately
15% of product sales for the year ended December 31, 1998 compared to 9% for the
same period in 1997. The increase is principally due to the change in product
mix. During the latter part of 1998 we began selling new products that had a
higher cost of goods sold. Direct costs in the future are expected to be 15%-20%
of product sales.
Selling, general and administrative expenses for the year ended December 31,
1998 decreased by $392,000 or 4.6% from $8,571,000 for the year ended December
31, 1997 to $8,179,000 for the same period in 1998. The decrease was due
principally to an increase in payroll and related benefits of $1,750,000 offset
by a decrease of $2,488,000 in advertising expenses. As a result of bringing the
operation of the product sales in-house, payroll costs increased significantly,
not only to staff the operations previously administered by a third party, but
also to staff our expanding operations. In June 1997, we began purchasing media
and other advertising for third parties, which allowed us to purchase media for
our own products at a 10-15% discount and reduced our advertising costs. In
addition, in the latter part of 1998 we focused our efforts on expanding our
product line by identifying and acquiring new products to sell that resulted in
less money being spent on advertising our older products. We also created our
Genesis Intermedia, Inc. subsidiary in July 1998. From inception to December 31,
1998, our subsidiary incurred $422,000 in selling, general and administrative
expenses.
Interest expense for the year ended December 31, 1998 increased by $102,000
or 309.1% from $33,000 for the year ended December 31, 1997 to $135,000 for the
same period in 1998. The increase
20
<PAGE>
in interest expense was due to the issuance of notes payable for the purchase of
an automobile and the corporate office building, the line of credit, and notes
payable and capitalized lease obligations assumed as a result of our purchase of
Vision Digital assets.
Income taxes for the year ended December 31, 1998 decreased by $5,000 or 15%
from $35,000 for the year ended December 31, 1997 to $30,000 for the same period
in 1998. We were an S corporation resulting in the income being reported on the
personal income tax returns of our stockholders. The income tax expense
represents a state franchise tax charged to S corporations in the State of
California.
Net income for the year ended December 31, 1998 decreased by $940,000 or
39.7% from $2,367,000 for the year ended December 31, 1997 to $1,427,000 for the
same period in 1998. The decrease is principally due to lower sales and
increased selling, general and administrative expenses incurred as a result of
the creation of our Genesis Intermedia, Inc. subsidiary.
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER PERCENTAGE OF NET
31, REVENUE
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NET REVENUE
Media sales--affiliate................................................... $ -- $ 7,412 0.0% 40.8%
Product sales............................................................ 13,152 8,252 91.7% 45.4%
Commissions and royalties--affiliate..................................... -- 742 -- 4.1%
Commissions and royalties................................................ 79 1,738 0.6% 9.6%
Other.................................................................... 1,111 20 7.7% 0.1%
--------- --------- --------- ---------
Total net revenue...................................................... 14,342 18,164 100.0% 100.0%
OPERATING COSTS AND EXPENSES
Media purchases.......................................................... -- 6,445 0.0% 35.5%
Direct costs............................................................. 1,842 713 12.8% 3.9%
Selling, general and administrative...................................... 12,114 8,571 84.5% 47.2%
--------- --------- --------- ---------
Total operating costs and expenses..................................... 13,956 15,729 97.3% 86.6%
--------- --------- --------- ---------
INCOME FROM OPERATIONS..................................................... 386 2,435 2.7% 13.4%
Interest expense........................................................... -- 33 0.0% 0.2%
--------- --------- --------- ---------
Income before taxes........................................................ 386 2,402 2.7% 13.2%
Income taxes............................................................... -- 35 0.0% 0.2%
--------- --------- --------- ---------
Net Income................................................................. $ 386 $ 2,367 2.7% 13.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Revenue for the year ended December 31, 1997 increased by $3,822,000 or
26.7% from $14,342,000 for the year ended December 31, 1996 to $18,164,000 for
the same period in 1997. The increase in revenue was due to the following:
- Media sales increased by $7,412,000 as a result of our beginning to resell
media purchased at a standardized industry mark-up to a company owned by
our majority stockholder. There were no similar media sales for the year
ended December 31, 1996;
- Commissions and royalties--affiliate increased $742,000 due to increased
commissions received from the sale of mentoring services for a company
owned by our majority stockholder;
- Commissions and royalties increased $1,656,000 principally from sales of
customer names to an unrelated third party totaling $689,000 and an
increase in royalty income totaling $880,000;
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- Product sales decreased by $4,900,000 or 37% due to the expansion of our
operations, including outbound telemarketing for and the sale of media to
third parties. The expansion of our operations caused us to focus more on
providing marketing solutions for other companies; and
- Other revenue decreased by $1,091,000 due to the discontinuance of joint
venture agreements that resulted in $1,111,000 of revenue for the year
ended December 31, 1996. We had entered into joint venture agreements
where we received a percentage of the operating profits from the sale of
products. These agreements were discontinued in early 1997.
Media purchases for the year ended December 31, 1997 increased by $6,445,000
from $0 for the year ended December 31, 1996 to $6,445,000 for the same period
in 1997. The increase was due to our beginning to sell media time to a company
owned by our majority stockholder in 1997. We sold media at a mark-up of
approximately 15%, the standard industry mark-up, for the year ended December
31, 1997.
Direct costs for the year ended December 31, 1997 decreased by $1,129,000 or
61.3% from $1,842,000 for the year ended December 31, 1996 to $713,000 for the
same period in 1997. The decrease was due to product sales decreasing by
approximately 37% as discussed above. Direct costs as a percentage of product
sales was approximately 14% for the year ended December 31, 1996 compared to
approximately 9% for the same period in 1997. Prior to June 1997, we contracted
the marketing, promotion, media purchases and administration of our product
sales with an unrelated third party. Beginning in June 1997, we brought these
functions in-house and we were able to reduce direct costs, among other things,
by better management of inventory, reducing the cost of the third-party
fulfillment houses and taking advantage of quantity purchases.
Selling, general and administrative expenses for the year ended December 31,
1997 decreased by $3,543,000 or 29.3% from $12,114,000 for the year ended
December 31, 1996 to $8,571,000 for the same period in 1997. The decrease was
due principally to a decrease in advertising costs of $3,283,000. In June 1997,
we began purchasing media and other advertising for third parties, which allowed
us to purchase media for our own products at a 10-15% discount. In addition, we
were better able to focus our media purchases on those markets and time slots
that yielded the maximum benefit. As a result of being able to purchase media at
a discount and purchasing media only in those markets that produce maximum
results, we were able to significantly reduce advertising costs.
Interest expense for the year ended December 31, 1997 increased by $33,000
from $0 for the year ended December 31, 1996 to $33,000 for the same period in
1997. The increase in interest expense was due to the issuance of two notes
payable in the third quarter of 1997 for the purchase of an automobile and our
corporate office building.
Income taxes for the year ended December 31, 1997 increased by $35,000 from
$0 for the year ended December 31, 1996 to $35,000 for the same period in 1997.
We are an S corporation, resulting in the income being reported on the personal
income tax returns of our stockholders. The income tax expense represents a
state franchise tax charged to S corporations in the State of California. We did
not have any operations in the State of California in 1996, and accordingly, we
were not subject to this franchise tax.
Net income for the year ended December 31, 1997 increased by $1,981,000 or
513.2% from $386,000 for the year ended December 31, 1996 to $2,367,000 for the
same period in 1997. The increase in net income was principally due to the
increased revenue, increased margins on the sale of our products and a decrease
in advertising expense.
LIQUIDITY AND CAPITAL RESOURCES
We financed our operations initially from cash generated from operations.
More recently, we have financed operations through the sale of common and
preferred stock, a long-term mortgage and a line
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of credit. In July 1997, we purchased an office building in Studio City,
California with cash and a Small Business Administration loan in the amount of
$583,000. This loan is being repaid with monthly payments of $5,823 over 25
years. In December 1997, we sold 116,504 (29,126 of which were surrendered on
November 1, 1998) shares of common stock to Dr. Gray for $900,000. In January
1998 and April 1998, we obtained two short-term loans from an unrelated third
party for $300,000 and $200,000, respectively. These loans bear interest at the
rate of 8% per annum and were repaid during the first quarter of 1999. In
addition, in June 1997, we obtained a $750,000 line of credit from a major
financial institution that is collateralized by substantially all our assets,
except our office building, and the loan is guaranteed by our majority
stockholder. As of March 31, 1999, we had $12,097 available to borrow under our
line of credit agreement. In August 1998, we obtained a working capital loan in
the amount of $300,000 collateralized by a second trust deed on our land and
office building. In January and April 1999, we sold a total of 250,000 shares of
common stock and warrants to purchase an additional 250,000 shares of common
stock in a private placement at $7 per share for an aggregate of $1,750,000,
with underwriting commissions and expenses of $201,250 and in April 1999 we sold
142,858 shares of convertible preferred stock and warrants to purchase 142,858
shares of common stock in a private placement at $7 per share for an aggregate
of $1,000,000 with underwriting commissions and expenses of $115,000.
At March 31, 1999, we had an accounts receivable from affiliate of
$1,550,804 which was a decrease of $125,415 from the balance at December 31,
1998. The decrease in accounts receivable from affiliate is due to us not
selling media to this affiliate in the first quarter of 1999 and discontinuing
the sale of this affiliate's mentoring program in the first quarter of 1999 for
which we received a commission. Generally, we are not paid our commission on
these sales for 90 to 120 days, which is longer than the payment cycle for media
sales to this affiliate. We believe the amounts due from affiliate are fully
collectible and these amounts are secured by a pledge of the affiliate's mailing
list and an option to purchase that list.
During the three months ended March 31, 1999 and the years ended December
31, 1998 and 1997, we spent $176,966, $345,554 and $1,210,846, respectively, on
capital expenditures and provided (used) $478,225, $2,373,582 and $(310,168),
respectively, in operations. In addition to capital expenditures, we spent a
significant amount of capital on the purchase of media. The purchase of media
time is capital intensive because media time, unavailable on an as-needed basis,
must be purchased in advance. We believe that media sales will become more
profitable when we have more capital available to purchase larger blocks of
time.
We expect to use a portion of the proceeds from this offering to expand our
product lines, expand our telemarketing division, make strategic acquisitions,
and repay short-term obligations, as well as for working capital and general
corporate purposes. We anticipate spending $2 million over the next 18 months to
develop and deploy interactive multimedia kiosks in regional shopping malls
across the United States and in other entertainment centers. Under our
employment agreements with Mr. El-Batrawi, as well as two employees retained as
a result of the acquisition of assets of Vision Digital Communications, Inc., we
are committed to paying annual salaries totalling $418,000 in each of the next
three years and $250,000 in the year 2002 and for the nine months ended
September 30, 2003.
We believe that the net proceeds of this offering, together with available
funds, existing credit facilities and the cash flow expected to be generated
from operations, will be adequate to satisfy our current and planned operations
through the middle of 2000.
SEASONALITY
Our revenues generally reflect the media buying patterns of advertisers and
are concentrated in the second and fourth quarters of the year.
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<PAGE>
YEAR 2000 COMPLIANCE
We have completed a comprehensive review of our computer systems to identify
all software applications that could be affected by the inability of many
existing computer systems to process time-sensitive data accurately beyond the
year 1999, referred to as the Year 2000 or Y2K issue. We are also continuing to
monitor our computer systems and monitoring the adequacy of the processes and
progress of third-party vendors of systems that may be affected by the Year 2000
issue. We are dependent on third-party computer systems and applications,
particularly with respect to critical tasks such as accounting, billing and
buying, planning and paying for media. We also rely on our own computer systems.
We expect to complete our Year 2000 compliance program by mid-1999 and
anticipate that our total expenditures on the program will not exceed $20,000.
However, we may experience cost overruns or delays in the future, which could
have a material adverse effect on us. While we believe our procedures are
designed to be successful, because of the complexity of the Year 2000 issue and
the interdependence of organizations using computer systems, our efforts, or
those of third parties with whom we interact, may not be satisfactorily
completed in a timely fashion or may cost substantially more to remedy than the
amount we anticipate. Failure to satisfactorily address the Year 2000 issue
could have a material adverse effect on us.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. For the year ended December 31, 1998, we adopted SFAS No.
130. Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on available-for-sale securities. Comprehensive
income is not presented in our financial statements since we did not have any
changes in equity from non-owner sources.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements. For the year ended
December 31, 1998 we adopted this statement which had no impact on our financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement is not
applicable to us.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts, and for hedging activities and is
effective for fiscal years beginning after June 15, 1999. Management believes
that SFAS No. 133 will not have an effect on our financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage--Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement is not
applicable to us.
In February 1999, the FASB issued SFAS No. 135, "Recession of FASB Statement
No. 75 and Technical Corrections." This statement is not applicable to us.
24
<PAGE>
BUSINESS
GENERAL
We market, advertise and sell our own products and those of our clients
utilizing conventional media and interactive multimedia technologies. We refer
to this innovative blend of marketing services as an integrated multimedia
marketing solution. While we have historically utilized conventional media to
fulfill our own and our clients' marketing needs, and will continue to do so, we
have focused more recently on providing innovative multimedia solutions to
businesses, including ourselves, seeking to conduct eCommerce through a variety
of interactive platforms. These interactive platforms include the Internet,
interactive kiosks through our Centerlinq Network, CD-ROMs and DVDs. Even though
we are entering emerging markets and have already generated revenue from our
interactive multimedia marketing channels, we will continue to rely on
traditional markets for a substantial part of our business. We expect that
conventional media solutions will continue to account for a significant
percentage of our revenues in the foreseeable future but that the percentage
will decline as eCommerce continues to develop.
Numerous businesses have begun to establish their own websites and e-mail
addresses and to advertise their products and services on the Internet. We
believe that many of these businesses, accustomed to marketing their products
and services through conventional media in local markets, will require
assistance to effectively adapt their marketing strategies to the emerging
eCommerce marketplace. The interactive multimedia marketing solutions offered by
us allow businesses that may be struggling with this transition to enhance their
traditional marketing strategies with new technologies and an element of
interactivity that Internet users find engaging.
For Internet-based strategies like ours to be successful, companies and
their marketing or advertising agencies who have only limited experience with
the Internet as a marketing or advertising medium and who have not historically
devoted a significant portion of their marketing or advertising expenditures to
Internet solutions must be persuaded to spend money on Internet solutions. To
continue using Internet-based solutions, these companies will need to find
Internet-based marketing and advertising as effective or more effective in
promoting their products and services than conventional print and broadcast
media. Acceptance of the Internet for the conduct of eCommerce, and not just
advertising, will also depend on the level of use of the Internet by consumers.
In addition, no standards have yet been widely accepted for the measurement
of the effectiveness of Internet-based marketing or advertising. However,
despite the lack of this type of empirical evidence that typically is necessary
to justify marketing or advertising expenditures in other media, we believe that
the significant increases in advertising volume on the Internet indicate that
the Internet is increasingly being accepted by advertisers as an advertising
medium. However, we believe that long-term acceptance of the Internet as an
advertising medium will depend on both:
- the advertising industry's ability to develop accepted standards of
measurement of the success of Internet advertising; and
- Internet advertising being proven effective under those standards.
Regardless of these open questions about the Internet as an advertising and
marketing medium, we believe our assessment of the importance of the Internet as
a new source of revenue for growing businesses is substantiated, as recently
reflected in a report published by the Internet Advertising Bureau in October
1998. The report indicates that Internet advertising expenditures grew to $423
million in the second quarter of 1998, a 97% increase over the second quarter of
1997.
The integrated marketing services offered by us that are designed to
maintain and enhance our and our clients' marketing efforts include:
- market analysis;
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<PAGE>
- an assessment of a client's business requirements;
- the development and deployment of an appropriate marketing strategy--which
may involve interactive multimedia solutions, conventional media
solutions, or both;
- ongoing solution maintenance; and
- media placement.
These services are available to our clients separately, on an as-needed basis,
or together, on a fully integrated basis.
We have two additional revenue generating capabilities:
- proprietary products we sell through our integrated marketing
capabilities, such as the audio and video tapes and companion material
products based on the book authored by John M. Gray, Ph.D., Men Are From
Mars, Women Are From Venus, Hawaiian Tropic Swimwear and the new products
acquired by us in late 1998; and
- non-proprietary audio and visual streaming and download technology, which
provides the structure for direct application on the Internet of
interactive multimedia technologies, such as music, movies and combined
audio and visual special effects.
By using our technical expertise, vision and creativity, we will leverage
our conventional media and interactive multimedia technologies to provide
integrated marketing solutions which will increase our and our clients' market
exposure and facilitate the distribution of our and our clients' products.
THE DEVELOPMENT OF THE INTEGRATED MARKETING SOLUTIONS INDUSTRY
Marketing solutions for business have evolved significantly over recent
years as new marketing channels and technologies have been developed.
Traditionally, marketing consultants worked to provide businesses with market
research and analysis, while independent advertising agencies created
advertising campaigns targeted to specific groups of consumers identified by
that market research and analysis. Businesses often relied on another vendor to
purchase desirable media time or space on its behalf. Advertising campaigns were
typically delivered to the public through conventional media, like television,
radio and print advertisements. Advertising spending tends to correlate to
trends in the overall economy and corporate profits. The media and
communications consulting firm Veronis, Suhler & Associates Inc. in its October
1998 Communications Industry Forecast reported that overall advertising spending
growth over the 1993 to 1997 period was driven by the growth in corporate
profits during the same period. Despite projecting reduced corporate profits,
Veronis, Suhler forecasts that overall advertising spending will continue to
grow at a compound annual growth rate of 8.3% over the 1997 to 2000 period.
In the 1980s and 1990s telemarketing services, infomercials and home
shopping networks emerged as additional marketing channels. These channels are
also known as direct response marketing, because they enable businesses to
deliver a marketing message to targeted consumers and to elicit an immediate
consumer response.
In recent years, the use of the Internet by businesses and consumers has
grown at a rapid rate. According to the United States Department of Commerce in
its April 1998 Emerging Digital Economy publication, the number of users of
Internet technology is estimated to double every 100 days. International Data
Corporation estimated in August 1998 that the amount of commerce conducted over
the Internet will reach more than $400 billion by the year 2002, reflecting a
compound annual growth rate of 103%. According to Veronis, Suhler, online
advertising spending is forecast to increase from $906 million in 1997 to $6.5
billion in 2002.
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The market for Internet advertising has recently begun to develop, is
rapidly evolving and is characterized by an increasing number of market
entrants. Still, banner-type Internet advertising continues to be dominated by
the larger web sites. Non-advertising marketing solutions utilizing the Internet
as a base, such as direct sales and on-line shopping, have also only recently
been developed.
We have entered this market through our acquisition-based expansion, the
development and acquisition of new technological capability and the hiring of
additional personnel. In particular, our Centerlinq Network kiosk program which
we commenced through our Vision Digital acquisition is designed around using the
Internet as an information medium to those kiosks. We have deployed Centerlinq
Network kiosks in one mall in each of California, Indiana and Pennsylvania. As
is typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty.
Our ability to generate increased revenue will depend on, among other
factors:
- the continued development of the Internet as an advertising medium;
- pricing of marketing and advertising services by other Internet
participants;
- our ability to develop new marketing solutions, like our Centerlinq
Network kiosks, that use the Internet and that appeal to both our clients
and their customers;
- our ability to achieve and demonstrate user demographic characteristics
that are attractive to clients;
- the development and expansion of our marketing and advertising sales
forces; and
- the establishment and maintenance of desirable marketing and advertising
sales agency relationships.
GENESIS BACKGROUND, PRODUCTS AND GROWTH
Genesis began by producing infomercials and performing telemarketing
services for our own products and for products owned by others. These products
included counseling programs and mentoring seminars on topics related primarily
to interpersonal relationships and financial planning. The counseling programs
and mentoring seminars are reproduced on audio and video cassettes and are
supplemented with printed materials, including workbooks and user manuals, which
assist consumers to learn to apply the principles discussed during the programs
to their own lives. The mentoring seminars are unique, as they include personal
tutorial services which are discussed below.
More recently, we undertook to diversify our product offerings and our
marketing channel capabilities. In late 1998, we acquired the right to market
and distribute 13 new consumer products developed by third parties, such as skin
care products, engine additives and exercise equipment. We concurrently
developed our eCommerce capabilities and developed our infrastructure. We now
utilize a mix of conventional media and interactive multimedia technology to
market and distribute all of these products. We were incorporated on October 28,
1993 under the name Genesis Media Group, Inc. and we changed our name to
GenesisIntermedia.com, Inc. on December 3, 1998.
In 1994, we acquired a license to produce, market and distribute a
counseling program based on the book Men Are From Mars, Women Are From Venus
authored by John M. Gray, Ph.D. Consumers who purchase this particular product
receive the book, several audio cassettes and a companion video series
concerning interpersonal relationships. During 1995 and 1996, we worked with Dr.
Gray to develop a continuing education and training program on this topic as
well. Although we currently produce infomercials and perform telemarketing to
sell these products to consumers, it is likely that these products and others
like them will be produced on CD-ROMs and DVDs and marketed through the Internet
in the future.
27
<PAGE>
In 1996, we also produced a mentoring program concerning trading strategies
on the commodity futures trading market. The program, Trade Your Way To Riches,
is hosted by Jake Bernstein. It was made available on audio and video cassette
and included a training manual and a workbook. Individuals who purchased this
product were assigned a mentor and participate in regularly scheduled, private
tutorials with their mentor. Each mentor is available to its pupil to answer
questions regarding the product and to provide continuing education with respect
to the trading strategies set forth in the program. The program was produced in
connection with a joint venture between Genesis and Positive Response
Television, Inc., which was succeeded by Trade Your Way To Riches, Inc. Trade
Your Way To Riches, Inc. is owned by Genesis's majority stockholder. In late
1998, we ceased marketing Trade Your Way To Riches products as a result of
insufficient profit margins on those products and higher available profit
margins on other products for which we acquired the rights to sell in late 1998.
Until 1997, some of our administrative functions, including media sales,
inventory management and order fulfillment were outsourced to third parties. In
1997, we purchased an office building and hired additional personnel, enabling
us to perform all of the administrative functions relevant to our business
in-house. Additionally, we strengthened our infrastructure by purchasing
sophisticated telemarketing and computer equipment, which enabled us to sell our
proprietary products and those of our customers to a greater number of
consumers. Late in the year, we added Larry Williams' Secrets to Stock Investing
mentoring program and Ted Thomas' Personal Fortune real estate investment
program to our product line. Each of these products is available in traditional
audio and video formats and includes training manuals and workbooks. The program
hosted by Larry Williams also includes mentoring services.
In late 1998, we obtained the exclusive right to market and distribute the
Hawaiian Tropic Swimwear line and added a total of 13 new programs and consumer
products to our line. Out of the 13 new programs and products, we have
successfully test marketed and launched six and we are in various stages of test
marketing for the other seven, all of which we expect to launch in the third and
fourth quarters of 1999. The products we have test marketed and launched
include:
- Money Mastery, a financial planning program;
- Theracel, a skin care product;
- Roladecor, an interior decorating product;
- Memory Power, a memory development program; and
- Mark McGwire's Gold Baseball Cards, a series of collectible baseball
cards.
The products we are currently test marketing and expect to launch in 1999
include:
- Pure Power EHP Lubricant, an engine additive; and
- John Beck's Tax Lien and Tax Deed program, a real estate, financial and
investment program.
We intend to continue to add new programs and products to our product line in
the future. These programs and products are integral to our strategy to
diversify our marketing approach and product offerings.
In 1998, we also formed our Genesis Intermedia, Inc. subsidiary and hired
approximately 20 persons experienced in multimedia technologies for this
subsidiary. To accelerate our multimedia technology capabilities, we acquired
substantially all of the assets of Vision Digital Communications, Inc. and
AniMagic Corporation and hired some of their experienced personnel. This
division has launched our Centerlinq Network kiosk initiative with the
deployment of kiosks in three regional malls in the United States in the first
quarter of 1999 and our Internet marketing initiatives. The purpose of these
initiatives is to target consumers utilizing interactive multimedia technologies
and to position Genesis to
28
<PAGE>
deliver integrated multimedia marketing solutions to our clients and for our own
products. This technology and eCommerce division has performed services for a
number of clients since its formation, including:
- Hallmark Entertainment--Developed and deployed an interactive kiosk system
that was utilized in MIPCOM, a television and radio syndication tradeshow.
The kiosk offered attendees film previews of major Hallmark film releases
using our interactive multimedia technologies.
- Lexus--Developed and maintained a kiosk system that is utilized in the
corporate headquarters of Lexus in Los Angeles that provides the ability
to search a comprehensive database of pre-owned Lexus automobiles. The
user can search the database by color, model, price or year. The database
is remotely updated with current information daily.
- Serena Software--Developed a website for this provider of computer
software that assists companies in assessing and controlling computer
software changes, including Y2K bug assessment. The site utilizes state of
the art web technologies such as Java and Flash animations.
- Legacy Interactive--Designed, produced and developed an interactive
edutainment CD-ROM for Legacy Interactive, Emergency Room 2, which is now
selling at major retail stores such as Target. This interactive program is
scheduled for consumer retail release on America Online in 1999.
All of the services for the clients listed above were performed pursuant to
written contracts, but we frequently also perform services on the basis of oral
contracts, generally depending on the size of the contract, the particular
tailoring of the technology and the time involved.
With our Centerlinq Network kiosk program we have developed a capability
that provides advertising opportunities for businesses in highly trafficked
malls across the United States. We have obtained clients for the Centerlinq
Network by:
- developing solid and credible relationships with major mall developers and
seeking and obtaining contracts to place our interactive kiosks in their
malls;
- establishing a sales and marketing department that is experienced in the
field of advertising sales; and
- making substantial investments in our collateral material, as well as
developing our corporate identity and product focus.
Our clients participate in the Centerlinq Network by agreeing to advertise
their products or services on our kiosks and related television monitors that
are placed in highly trafficked areas of the mall such as the food courts, and
agreeing to pay advertising fees published in our rate card. They may also
participate by including direct access through our interactive kiosks to their
website or conducting eCommerce directly through the kiosk. Customers
participating in the Centerlinq Network sign contracts with us and agree to pay
advertising fees published in our rate cards.
Through our Centerlinq Network, we have signed contracts with new clients to
participate in both the kiosk advertising and the interactive eCommerce
capabilities of the interactive kiosks. These clients include:
- Babbage's;
- Ben Bridge Jeweler;
- Carlson Wagonlit Travel;
- Frederick's of Hollywood;
- Gloria Jean's Coffees;
- McDonald's;
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- Mrs. Fields Cookies; and
- Sam Goody.
We intend to expand our client participation in interactive eCommerce and our
Centerlinq Network programs, particularly as the Centerlinq Network is rolled
out throughout regional shopping malls across the United States and into
additional public access areas. We are presently focusing our marketing efforts
on local or regional advertisers or local representatives of national
organizations, such as McDonald's. We intend to seek national advertisers and
participants in our Centerlinq Network once our deployment has sufficient
national scope, which we anticipate will occur when we have deployed the network
in more than 15 malls.
In late 1998 and early 1999, we significantly expanded our telemarketing of
third parties' products to replace and diversify from the prior Trade Your Way
To Riches product line. During this period, we signed seven new client contracts
to telemarket products, including contracts with:
- Global Investment Research Corporation;
- Fortune 21, Inc.;
- Diablo Associates LLC;
- Professional Farmers of America, Inc.; and
- Unified Precious Metals.
With each of our telemarketing clients we enter into contracts that allow us
to perform marketing services in either of two principal methods. We will
either:
- market the client's products to our own or third-party telemarketing
databases--such as Unified Precious Metals, from whom obtained the rights
to sell a collectible coin series--or
- take products to which we have rights and market them to the client's
targeted databases-- such as the Professional Farmers of America, to whose
members we market satellite information systems with real-time commodity
information.
These telemarketing arrangements can provide new value to both the company or
group that has a unique database of potential customers or the company with a
specialized or general interest product. In each instance, we can tailor the
marketing and cross-market varied products across numerous databases.
We also expanded our telemarketing capability in 1999 by hiring
approximately 20 new telemarketers and opening a call center in Utah. We
anticipate adding additional new clients to the telemarketing group to take
advantage of our significant infrastructure development in 1998 and early 1999.
In late 1998 and early 1999, we also significantly expanded our media group
by adding experienced industry personnel and focusing our media placement
services on third parties' products. Prior to this initiative, we placed media
exclusively for Trade Your Way To Riches products. During the first quarter of
1999, we increased our monthly media placement revenue over December 1998 by
approximately 500% and increased our client base with eight new clients. New
clients to our media group include:
- Allied Communications Corporation;
- WellQuest;
- Emson Incorporated;
- Ronco-Castle;
- Time-Life-Abacus;
- Custom Marketing;
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- Telebrands; and
- Interwood Marketing Group.
Depending on the availability of capital to acquire media time, we intend to
continue to increase activity in this media group in 1999.
MARKET OPPORTUNITY
The expansion of the market for conventional media solutions, the growing
demand for innovative multimedia solutions delivered through a variety of
interactive electronic platforms, like the Internet, and the complexity of the
global, digitized economy pose a significant challenge for many traditional
marketing companies. We believe this challenge represents an opportunity for
companies prepared to offer integrated marketing and business solutions.
INCREASED DEMAND FOR INTEGRATED MULTIMEDIA SOLUTIONS. Several factors have
fostered the development of new marketing approaches and delivery platforms.
These factors have included:
- the globalization of the economy; and
- advances in technology and the growth of the Internet as a popular medium
for eCommerce, entertainment and education.
Consequently, businesses demand integrated marketing and business solutions that
will enable them to effectively exploit these new media to compete in a diverse
global economy and improve their strategic market positions and business
processes.
CONTINUED EMPHASIS ON TARGETED MARKETING. The demand for targeted marketing
strategies has continued through the development of new marketing channels. We
believe that many businesses will be unable to ignore the competitive challenge
posed by the emerging eCommerce market and, as a result, will demand that their
marketing strategies target a generation accustomed to the fast-paced power of
the Internet and other interactive technologies, as well as those individuals
who continue to rely on conventional media for information and entertainment.
Multimedia solutions that enable a business to deliver customized messages to
customers in an interactive format and to instantaneously evaluate the success
of their promotional activities address that demand.
We believe that the demand for integrated multimedia solutions and targeted
marketing strategies represent compelling opportunities to expand our own
operations. We believe that, to be successful, a marketing solutions provider
must be capable of developing and deploying innovative multimedia solutions
using the Internet and other interactive platforms, as well as conventional
media solutions. A marketing solutions provider must also provide the support
services necessary to ensure the success of its clients' marketing and
distribution efforts.
THE GENESIS SOLUTION
We believe we are positioned to address the growing demand for integrated
multimedia marketing solutions by providing a uniquely integrated marketing
strategy of conventional media and newly developed multimedia technology. We can
use any combination of the marketing capabilities we have to create the specific
marketing solution that meets our and our clients' strategic requirements.
INITIAL ASSESSMENT
We work closely with each client and product to thoroughly assess the
strategic marketing position, business requirements and existing systems
capabilities to determine which marketing strategies and solutions will most
effectively accomplish the marketing goals. We utilize comprehensive market
research compiled by independent consultants to learn the demographics of the
customers and to determine what approach will meet the marketing needs. For
example, clients in the toy industry may
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find that a traditional board game offered to Internet users in an interactive
format for a fee revitalizes the life and popularity of the game and generates a
new revenue stream for the company that owns it. A client in the retail
industry, such as a major department store, may find that an interactive kiosk
in a central mall location that links consumers to the physical store in the
mall, as well as to an electronic catalogue on the Internet, facilitates
consumer access to the products and services offered by the department store and
increases average revenue per consumer. Other clients may find that a
conventional media solution, such as the distribution of a printed catalogue to
the general public, achieves their marketing objectives.
THE DEVELOPMENT AND DEPLOYMENT OF AN INTERACTIVE MULTIMEDIA SOLUTION
We use existing technologies available from third parties, proprietary
interactive multimedia technologies and our expertise in marketing to develop
and deploy creative solutions that are tailored to each client's and product's
marketing needs. Our graphic designers and marketing strategists work together
to create engaging audio/visual experiences for the user by employing a variety
of interactive delivery platforms, including the Internet, interactive publicly
accessible kiosks, CD-ROMs and DVDs.
We generally design our solutions to provide an innovative introduction to
the clients' products and services to targeted customers and to satisfy the
linguistic and cultural requirements of the markets in which the products and
services are offered. The solutions are intended to attract and hold the
attention of the client's target audience while at the same time conforming to
and strengthening the client's brand image, which adds value to the client's
products and services.
Multimedia solutions selected in consultation with the client can also
enable a client to improve its business processes--for instance through direct
sales through kiosks or the Internet--and to promote and sell its products or
services to large target markets more efficiently and effectively than is
possible using solely conventional media solutions.
Our unique characteristics provide us the capability to provide multimedia
solutions to our clients and for our own products. These characteristics
include:
- an infrastructure that provides strong marketing and branding
consultation;
- core competency in the development of system applications, systems
integration and data communications;
- expertise in the development of proprietary multimedia technology; and
- a management team focused on providing creative and functional solutions
to marketing and business needs.
For example, Hallmark Entertainment, a producer of films, situation comedies
and cable programming, recently hired us to develop an interactive multimedia
format for the delivery of its trade show presentations to film distributors and
representatives of television networks. We determined that distributors base the
price point for those products on the amount of advertising revenue the products
are likely to generate. Thus, we developed an interactive kiosk with a
high-resolution touchscreen and a link to the Internet, where the Nielsen
ratings are available in real-time, and we assisted Hallmark in producing a
sophisticated, interactive trade show presentation. This format also provided
Hallmark with the flexibility it needed to edit and revise its presentation
during the trade show.
Another example is a retail merchant or fast food chain participating in our
Centerlinq Network which may place long-term brand awareness advertising on the
exterior of our kiosks and also offer targeted or periodic promotions within the
interactive interface of the kiosks. These may include coupon promotions
serviced directly through the kiosks. That same retail merchant may also wish to
tie these promotions to an Internet site developed, enhanced or maintained by
us.
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THE DEVELOPMENT AND DEPLOYMENT OF CONVENTIONAL MEDIA SOLUTIONS
In addition to our ability to provide interactive multimedia marketing and
business solutions, we continue to provide solutions for our own products and
for the products of our clients through conventional media. These conventional
media solutions include the following:
- radio, television and print advertising;
- business-to-consumer and business-to-business outbound telemarketing
services, which consist primarily of direct sales activities initiated by
us; and
- inbound telemarketing services, which typically involve responding to
customer inquiries and electronic order processing.
Our success depends on our ability to rapidly develop positive customer
response to the products and services we market. Our future results in product
sales will be dependent upon our ability to rapidly generate positive customer
response to our and our clients' products and services. This is particularly the
case with directly marketed products. Customer response to direct marketing
depends on many variables, including
- the appeal of the products being marketed,
- the effectiveness of the marketing medium chosen and the marketing script,
- the availability of competing products, and
- the timing and frequency of consumer presence, phone contacts and
air-time.
RADIO, TELEVISION AND PRINT ADVERTISING. Radio, television and print
advertisements convey marketing information to a large number of consumers and
position a product within a broad market context. When the client's or product's
marketing strategy calls for coverage to the public at large, we will develop
and implement marketing solutions utilizing these traditional media.
TELEMARKETING SERVICES. Business-to-consumer and business-to-business
outbound telemarketing services involve the use of client-generated,
electronically transmitted lists of customers selected to match the demographic
profile of the targeted customer for the offered product or service. We
specialize in marketing products at price points which typically range from $100
to $5,000, with an average of approximately $2,000. Mentoring programs, such as
Ted Thomas' Personal Fortune real estate investment program and Jake Bernstein's
Trade Your Way To Riches program, are examples of the types of products we have
promoted using outbound telemarketing.
We recently acquired improved computer and telecommunications technology to
supplement our telemarketing business and to enable us to expand this segment of
our business. This technology assists telemarketers to more accurately identify
and contact potential customers, and provides telemarketing sales
representatives with more complete on-line guidance and support. Our
computerized call management systems use predictive dialers to:
- automatically dial telephone numbers;
- determine if a live connection is made; and
- present connected calls to a telephone sales representative who has been
specifically trained for the particular sales program.
Our ability to train and to retain our sales personnel is critical to our
success because of the need to develop an in-depth knowledge of the complex
products typically sold by us. We believe the complexity of our products, the
in-depth knowledge of our telemarketing personnel and our success in retaining
those personnel following training differentiate us from many of our competitors
in this field. Sales personnel are compensated by salary, commissions and
bonuses based on individual performance
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and overall profitability. As of March 31, 1999, there were a total of 104
full-time sales personnel employed in this division.
Inbound telemarketing services typically include:
- the electronic receipt and processing of all sales information;
- the communication of necessary sales information to our contracted order
fulfillment center; and
- the administration of customer order and service inquiries.
We continue to produce infomercials and to perform teleservices for our own
products. We also perform these services for products owned by other companies.
We typically retain a percentage of total sales revenue for these services. The
pricing for inbound teleservices may vary, depending upon several factors,
including the time spent, the number of calls received by our personnel and
sales-based performance fees. We will also work on a fee-for-service basis.
In the normal course of business, we have entered into various agreements
under which we are obligated to pay royalties on products we sell. The royalties
vary by agreement and are based on percentages of net revenue generally not to
exceed 25% or a percentage of the net profits of the venture generally not to
exceed 50%. Royalty expense for the three months ended March 31, 1999 and 1998
and the years ended December 31, 1998, 1997 and 1996, was $477,383, $15,685,
$454,997, $50,101 and $423,207, respectively.
Approximately 90% of our total revenue from telemarketing for others in 1997
was generated from the Trade Your Way To Riches product line and approximately
79% of third-party telemarketing revenue in 1998 was generated from Trade
products. During the first nine months of 1998 telemarketing revenue related to
Trade products was approximately $1.8 million, while in the last quarter of
1998, this had been reduced to $0, while we also sell our own products through
our telemarketing capabilities. In the last quarter of 1998, seven new products
and customer list data generated $1.2 million in revenue. See "Certain
Transactions." We did not generate more than 10% of our third-party
telemarketing revenue in 1997 from any other client and in 1998 18% of
third-party telemarketing revenue was generated from Ted Thomas' Personal
Fortune products.
ONGOING SOLUTIONS SUPPORT
Genesis provides ongoing support services to our clients. These include:
(1) content maintenance;
(2) sales support administration;
(3) customer support; and
(4) technical support.
Additionally, our systems and software engineers have the expertise to
provide intranet, extranet and web site hosting with enhanced bandwidth, faster
search capability, advanced audio/video streaming and secured transaction
technology. These enhancements facilitate ongoing management of the implemented
system and allow the customer to conduct secure eCommerce. In delivering these
solutions, we utilize hardware manufactured by independent third parties and
off-the-shelf and proprietary software.
MEDIA PLACEMENT
Our media planning, buying and placement services are conducted through a
team of media purchasers and sellers. We will place media for clients seeking
traditional media solutions and for those seeking integrated multimedia
marketing solutions. We typically purchase media time or space, hold it in
inventory for a relatively short period of time and then resell it to clients.
We also purchase media time for our own products and our direct marketing
efforts. We have historically been dependent on
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having access to media time to televise our infomercials on cable networks,
network affiliates and local stations. As a result of our successful media
purchasing and sales, we have established relationships with media sellers and
purchasers and developed a reputation for successfully committing for,
purchasing and selling media time. Because of these relationships, we believe
that we frequently receive more favorable access to desirable media time slots,
and have consequently been able to place time with our clients at greater
margins than less desirable time slots would support.
The placement of media time is a capital intensive segment of our business
because media time, unavailable on an as-needed basis, must be purchased in
advance and stored in our inventory. We typically take advantage of single time
or spot purchases, but intend to consider long-term purchases when prudent. We
purchase a significant amount of our media time from cable television and
satellite networks. These cable television and satellite networks assemble
programming for transmission to multiple and local cable system operators. These
cable system operators may not be required to carry all of the network's
programming. We currently do not pay and are not paid for the "privilege" of
being broadcast by these operators. If demand for air time grows, these
operators may begin to charge us to continue broadcasting our infomercials or
limit the amount of time available for broadcast. Recently, larger multiple
system operators have elected to change their operations by selling "dark"
time--the hours during which a station does not broadcast its own programming.
Our ability to manage our media time is vitally important to our success in
media sales. This media management function must also include a meaningful
coordination between available marketing and available media time. Whenever we
make advance purchases and commitments to purchase media time, the importance of
managing that time effectively is magnified. If we are unable to utilize all of
the media time we have acquired, we attempt to arrange to sell a portion of our
media time to others. However, we may not be able to use all of our media time
or sell it to others and, if we enter into long-term media contracts, we may not
be able to successfully negotiate extensions on terms favorable to us.
To date, our media purchases have been limited by our capital resources. We
believe that media sales will become more profitable when we have more capital
available to purchase larger blocks of time. In fiscal 1997 and 1998, we sold
approximately $7.4 million and $3.7 million, respectively, of media time to an
affiliate. See "Certain Transactions." In late 1998 and early 1999 we
significantly expanded our media placement capability through the hiring of
experienced personnel and in the first quarter of 1999 we added eight new media
placement clients.
GENESIS'S INDEPENDENT REVENUE STREAMS
In addition to revenue from our integrated multimedia solutions, our
marketing capabilities provide independent sources for revenue streams. These
sources include:
- offerings of proprietary products;
- media placement; and
- revenue streams from new technologies, including:
- public access networks, including our Centerlinq Network;
- the Contour System computerized travel marketing system; and
- audio/visual streaming and download technology.
PUBLIC ACCESS NETWORKS
Through our recent acquisition of assets of Vision Digital, we utilize
proprietary multimedia technologies to create engaging, interactive user
interfaces that are delivered through electronic platforms known as kiosks. For
regional shopping mall deployment we have developed the Centerlinq Network of
interactive kiosks. Centerlinq kiosks are presently located in three regional
shopping malls, located in
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California, Indiana and Pennsylvania, and began generating revenue in the first
quarter of 1999. We intend to expand the deployment of Centerlinq kiosks to
other malls throughout the United States, including three more in the second
quarter of 1999, two in California and one in Florida, and to deploy kiosks in
entertainment centers and other public environments in the future. The kiosks
enable merchants to communicate directly with their customers, to learn more
about their customers and to deliver consistent marketing messages in a variety
of locations. We believe that the kiosks also increase merchant visibility,
facilitate product sales and enhance customer service.
CONTOUR SYSTEM
Following the conclusion of our acquisition of the Contour System, a
computerized travel marketing system, we will be able to market the capability
of that system and market travel products to travel industry participants and
the consumer, using conventional electronic data interchange, our Centerlinq
kiosks and the Internet. See "--Acquisitions and Alliances" below.
AUDIO/VISUAL STREAMING AND DOWNLOAD TECHNOLOGY
We have the technological capability and expertise to enable our clients to
access disparate audio and visual segments from the Internet. A customer may
select audio or visual programming and can either listen to or view in real time
streaming audio or video or download and store the audio or visual programming
in digital form so it can be retrieved and utilized at any time or location the
user determines. This technology will enhance existing applications as well. We
believe that this non-proprietary technology has the potential to become a
popular source of entertainment and information to Internet users and a valuable
marketing tool for businesses conducting eCommerce.
STRATEGY
Our goal is to be recognized as a leading integrated marketing solutions
provider utilizing conventional and interactive multimedia technologies. Our
strategy is to:
- effectively utilize and leverage our conventional and multimedia
capabilities and our media access;
- develop and market innovative consumer products;
- expand our capabilities through strategic acquisitions and alliances;
- focus on higher profit margin segments of the marketing and advertising
business; and
- engineer the most efficient business model for the conduct of our targeted
multimedia business.
LEVERAGING CONVENTIONAL AND MULTIMEDIA CAPABILITIES AND MEDIA ACCESS. We
are positioned to become a leader in delivering integrated marketing solutions.
We are currently able to:
- concurrently market a given product or service through both conventional
and interactive multimedia technologies;
- make approximately 1,000,000 direct marketing calls per month, with direct
customer contacts of as many as 60,000 per month utilizing existing
computerized call management systems and predictive dialers;
- deliver infomercial or other television product programming/advertising to
over 100 million households in the United States utilizing our media
access and order fulfillment operations;
- develop new product marketing opportunities that are particularly suited
to new and newly emerging interactive multimedia channels; and
- develop creative methods of marketing these products through conventional
marketing channels.
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We intend to continue to explore new ways to effectively utilize and
leverage this cross-discipline capability and our media access by:
- taking advantage of the product/brand awareness created by our various
methods of distribution, including direct marketing, retail, Internet and
interactive multimedia, and leveraging it to other disciplines;
- continuing to offer our cross-discipline capability and media access to
other product and service distributors; and
- entering into alliances with or acquiring companies and developing or
acquiring technologies that provide expanded multimedia marketing
capabilities.
Additionally, we intend to more aggressively utilize our assets, such as our
customer lists, in order to realize their full value.
We will also seek to develop the strength of our brands to attract the
volume of business necessary to make our investments profitable. Because we are
new to many of our markets, including interactive multimedia marketing through
the Internet, our brand in this market will need to be strengthened. Like most
branded products, we believe that developing strong company and product brand
recognition will be an important aspect of our efforts to attract clients and
customers. We expect the importance of brand recognition to increase due to the
continuing number of companies purporting to offer integrated multimedia
marketing solutions to companies, including companies solely conducting
eCommerce.
CONTINUING TO DEVELOP AND MARKET INNOVATIVE PRODUCTS. We continually seek
out innovative consumer products which we can market and distribute profitably.
For example, in the third quarter of 1998 we added 13 new products that we will
sell directly. Six of these have been test marketed and launched, generating new
revenue in the last quarter of 1998 and the first quarter of 1999, and the other
seven are in various stages of test marketing, with launches scheduled during
1999. Our in-house product development and marketing department researches,
develops and analyzes products and product ideas. The development of
relationships with third parties and the active solicitation of new clients
seeking multi-disciplinary marketing opportunities augment the activities of the
product development and marketing department.
Our marketing operations are dependent on our continuing ability to develop
or obtain rights to new products to supplement or replace existing products as
they mature through their product life cycles. Historically, most products in
the direct marketing industry generate their most significant revenue in their
introductory year. We introduced our Men Are From Mars, Women Are From Venus
audio, video and companion materials products in 1994 and our Trade Your Way To
Riches audio, video and companion materials products in 1996. While we have
experienced continuing revenue from these products, we may not in the future,
particularly in the case of Trade products which we stopped marketing in late
1998. Other products we introduce may experience much shorter revenue lives. One
or more or all of the new products acquired in late 1998 or in the future may
also fail to achieve profitability or result in net loss to us.
Our future results of operations will also depend on our ability to spread
our revenue (sales) stream over a larger number of products in a given period
and to more effectively exploit the full revenue potential of each product we
introduce through all levels of consumer marketing, whether directly or through
third parties. The future revenues of the business will depend substantially on
our ability to:
- create and maintain an effective, integrated organization that develops,
introduces and markets products that address changing consumer needs on a
timely basis;
- establish and maintain effective delivery platforms for our products; and
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- develop new and expand established geographic markets.
We believe that the infrastructure investments we made in 1998 and the number of
new products we acquired in 1998 and are bringing to market in 1999 provide the
foundation for a solid, diversified revenue base.
GROWTH BY STRATEGIC ACQUISITIONS AND ALLIANCES. We regularly evaluate
acquisition opportunities that will enable us to expand our product offerings,
core multimedia marketing capabilities and the geographic scope of our
operations. To this end, we intend to acquire well-regarded niche companies or
leaders in specific marketing and communications disciplines. We will also seek
to acquire product lines or companies that have products that we believe we can
integrate into our product offerings and successfully market through our
marketing channels. We also review joint venture and strategic alliance
candidates. We will focus on acquiring or forming alliances with relatively
well-established, revenue producing, eCommerce businesses, or businesses we
believe can be marketed and sold effectively in eCommerce, which will complement
our existing capabilities. Key personnel who possess technical expertise will be
given incentives to remain with us on a long-term basis. We have made two
acquisitions to date and have recently entered into a strategic alliance that
gives us an option to acquire new marketing capability targeted to the travel
industry.
ACQUISITIONS AND ALLIANCES
In October 1998, we acquired substantially all of the assets of Vision
Digital Communications, Inc.,
a company that uses proprietary multimedia technologies to create engaging,
interactive user interfaces that are delivered through electronic platforms
known as kiosks. For the regional shopping mall market we have created the
Centerlinq Network kiosk program using this technology. The consideration for
the assets was 60,000 shares of common stock valued at $600,000 plus the
assumption of short-term obligations and long-term debt of $214,000 and
$238,000, respectively. We have also granted to the seller and a shareholder in
the seller options to purchase up to an additional 50,000 shares of common
stock. The options will become exercisable at a rate of 10,000 shares for each
$1,000,000 of total revenue generated by the acquired division during the
three-year period after the closing. The per share exercise prices of the
options issued to the shareholder and the seller are $8.50 and $10.00,
respectively. All of the options will expire at the end of the three-year
period. In connection with the acquisition, we entered into three-year
employment agreements with two of the executive officers of the seller, each of
which provides for an annual salary of $84,000. Under these employment
agreements, each of the employees will be eligible to receive options covering
up to an additional 75,000 shares upon the achievement of three Centerlinq
Network kiosk deployment goals. We have also agreed to make a $40,000
interest-free loan to both employees. We have not yet extended either of the
loans. Up to $30,000 of each loan is subject to forgiveness upon the achievement
of the same three kiosk deployment goals.
In the first quarter of 1999, we also acquired substantially all of the
assets of AniMagic Corporation, an interactive multimedia company that provided
audio and video download and streaming capability to clients, for $45,000. We
have hired two former employees of AniMagic. Prior to entering into the
acquisition agreements, there were no affiliations between us and either Vision
Digital or AniMagic.
In April 1999, we entered into a strategic alliance with Global Leisure
Travel, Inc. Global is a prominent participant in the consolidation of the
travel industry, consisting of the combination of brand names in the travel
industry, including:
- Maupintour;
- Sunmakers;
- Jetset Tours; and
- Regency Pacific.
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Maupintour, has been a travel industry award-winning and internationally
respected escorted tour operator for almost 50 years. It is based in Lawrence,
Kansas. Sunmakers, a strong competitor in the Northwest United States travel
wholesale industry for almost 30 years, is based in Seattle, Washington. Jetset,
an international wholesaler of discounted airline tickets, is based in Los
Angeles, California. Regency Pacific has been selling Asian travel packages
ranging from foreign independent travel packages to complex group itineraries
since 1983 and is based in Los Angeles, California. Global also maintains sales
offices in major cities throughout the U.S., and Jetset currently has eight fare
and ticketing branches, including Chicago, Houston, Los Angeles, New York, San
Diego, and San Francisco. All of the travel companies are grouped under the
umbrella of Global Leisure Travel, Inc., and consolidated annual revenue for the
companies in 1998 exceeded $200 million.
The transaction with Global followed the acquisition in December 1998 of a
controlling interest in Global by Genesis Diversified Investments, Inc., a
company that is wholly owned by Mr. El-Batrawi. Global presently uses
traditional means of distribution, predominantly selling through approximately
38,000 travel agencies across the United States, and also using private label
and sub-contracting to distribute its products. Following the acquisition in the
first quarter of 1999, Global reviewed its existing marketing and advertising
capabilities and arrangements and Global's planned eCommerce capabilities. These
included the Contour System hardware and the software Global had been developing
through its Newton Group subsidiary with Fourth Dimension Software, Inc. While
Global's strengths are in the travel industry, they are not in marketing,
advertising or eCommerce, where Genesis is focusing. The two companies began
analyzing the potential for a strategic alliance that would allow each company
to focus on its area of expertise.
The strategic alliance with Genesis was the result of this analysis. Under
the alliance, Genesis will become the principal marketing and advertising agent
and the exclusive Internet marketing and advertising agent and eCommerce
consultant and provider to Global and all of its subsidiaries and affiliates.
The companies believe that this will assist Global in further establishing its
brand image, while remaining focused on its strengths in designing and
delivering custom and wholesale travel packages. Concurrently, Genesis will
obtain significant new marketing and advertising business, with an emphasis on
exploiting Genesis's new eCommerce capabilities, including through our
Centerlinq Network kiosks.
In addition, a significant component of the strategic alliance is the
proposed transfer of the technology and assets comprising the computerized
travel marketing system known as the Contour System. This system, to be operated
by Genesis's technology and eCommerce division, will give Genesis in one
transaction an entirely new capability and a new industry distribution channel.
The Contour System is composed of hardware and custom developed software
designed for integrating multi-brand and multi-type travel products. In the
acquisition, Genesis will acquire the hardware and all of Global's rights to
Contour software. Contour provides a consistent high level of automation to
numerous functions within the travel enterprise, including centralizing
management information systems, accounting functions and researching, analyzing,
booking, invoicing and collection functions for travel products. Contour also
enables on-line communications with travel agencies, vendors and consumers.
Using Contour, a travel agent, travel service provider or a consumer can, with a
single interface, research, construct, book, account for, invoice, and track a
multi-vendor, multi-currency travel package.
Contour's common platform has a modular design which allows implementation
in parts or as a complete package to fully integrate all enterprise functions,
from reservations to general ledger, as well as to allow for cross-selling
across disparate travel products. The system allows for immediate booking and
reservation information for travel agents, while requiring fewer personnel to
handle these functions. The upgraded computerized reservation system contained
in Contour allows travel agents to book
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on-line, thereby encouraging the agents to use Contour participants, such as
Global Leisure's companies. Contour interfaces with all major airline
reservations systems, including Apollo, Sabre and Worldspan. Contour's back-end
reservations system also enables distribution of travel products electronically
via the Internet to the consumer.
The strategic alliance will initially comprise an Internet advertising
campaign, a mall kiosk development program and various e-Commerce marketing and
advertising initiatives. In addition, with the acquisition of the Contour
System, Genesis will market the capabilities of the system to other travel
industry participants, as well as directly to the consumer. We intend to do this
through the Centerlinq Network and over the Internet through eCommerce sites
tied to vendors, such as Global, or independent of particular vendors. We will
be paid base fees for our services plus transaction fees to be negotiated for
transactions effected though the new marketing channels we develop for Global.
The purchase price for Contour is the development cost for the system, and
we estimate that the price for these assets and technology will be between $2
million and $3 million, subject to an audit, which will be conducted within 30
days of the proposed acquisition. Consummation of the transaction is also
subject to the receipt by our audit committee of a fairness opinion. We intend
to exercise this option in the second quarter of 1999 and to complete the
development of the Contour System and begin to market it to Global and other
travel industry participants immediately.
Under the alliance, Global has committed to make specified minimum payments
to us for the use of Contour services and to pay transaction fees for services
actually used. These fees will be comparable to fees that will be charged to
third parties for similar services. Global also granted us a right of first
refusal, which expires on June 30, 2000, to purchase Global or all of its assets
at fair market value as determined by an independent appraisal.
Under the term sheet, Global also has granted us a five-year right of first
refusal on any new Global marketing or advertising. We have also agreed in the
term sheet to advance up to as much as $3 million to Global. However, any
advance will be subject to the prior negotiation and execution of definitive
documentation, and those documents and any advances will be subject to prior
Genesis audit committee approval. This condition was imposed in the board
approval process to ensure that Genesis is protected in any transaction with
Global, particularly one that would require us to make a loan of our funds. Our
audit committee is composed of a majority of outside directors.
The purpose of any advances will be to finance the development of Global's
marketing and advertising initiatives, as well as for general corporate
purposes. Because our income from the Global relationship will have two
sources--income from transaction fees on substantially all Global transactions
and income from their marketing and advertising expenditures under the
alliance--and we expect Global's expenditures from any possible advances to be
directed toward generating additional transactions for Global or additional
marketing or advertising expenditures, we expect to see a benefit from any of
these advances. We expect this benefit to be in the form of increased
transaction fees or additional payments to Genesis for marketing or advertising
services under our alliance.
Although we have made this loan commitment, we expect that Global will
receive its financing from third parties and will not ask us to make any
advances under the commitment. We do not anticipate that the proceeds of this
offering will be used to fund these loans but that any future advances that
might be made would be funded from borrowings or cash flow.
To keep Genesis profitable and successful, we will need to manage our
acquisition and non-acquisition growth effectively. Because internal and
external growth are critical elements of our business strategy, our ability to
manage that growth effectively will be critical to our success. In addition to
the specific risks associated with acquisition-based growth discussed in the
section of this prospectus entitled "Risk Factors," growth will require that we
continue to implement and improve our operational, administrative, and financial
and accounting systems. This will be further complicated by the fact
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that we anticipate integrating diverse product and distribution channel
companies and assets that may or may not have common administrative or other
support needs. Unlike companies proving single-industry "roll up" strategies,
because of the diverse nature of these potential acquisitions, we are not able
to fix a single acquisition model or anticipate precisely what issues we may
face in analyzing, closing or assimilating particular acquisitions. Future
acquisitions will involve a number of risks, including:
- increased management time devoted to unique or tailored acquisition types
and structures;
- the risks of acquiring undiscovered, undisclosed or undesired liabilities;
- integration difficulties or difficulties in achieving desired economies of
scale; and
- diffusion of management or marketing skills across diverse companies or
product lines.
If we cannot make desired acquisitions or integrate those acquisitions once
made, we will not be able to achieve our business objectives.
COMPETITION
The market for fully integrated multimedia marketing and business solutions
is relatively new, is intensely competitive and is subject to rapid
technological change. We expect competition to persist, intensify and increase
in the future. Our current competitors can be divided into several groups:
- advertising and media agencies, such as Foote, Cone & Belding, Young &
Rubicam, Inc. and Ogilvy & Mather;
- direct marketing companies, such as National Media Corporation,
Guthy-Renker Corporation and Xoom.com, Inc.;
- Internet integrators and Web content presence providers, such as iXL
Holding, Inc., Organic Online, Inc., Poppe Tyson, Proxicom, Inc.,
audiohighway.com and US Web, Inc;
- large information technology consulting service providers, such as
Andersen Consulting, Cambridge Technology Partners and Electronic Data
Systems Corporation; and
- Internet and online service providers, such as America Online
Incorporated, NETCOM On-Line Communications Services Inc. and UUNet
Technologies, Inc.
Each of these companies compete directly with particular segments of our
business. Although only a few of these competitors have to date offered a full
range of integrated marketing and business solutions to companies, several have
announced their intention to do so. Microsoft Corporation also recently
announced its acquisition of an Internet advertising concern.
There are relatively low barriers to entry into the multimedia marketing and
business solutions market. We rely heavily on the skill of our personnel and the
quality of our client service, and we have no patented technology that would
preclude or inhibit competitors from entering our market. We expect that we will
face additional competition from new entrants into the market in the future.
Principal competitive factors include:
- a company's creative reputation,
- knowledge of media,
- financial controls,
- geographical coverage and diversity,
- relationships with clients,
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- technological capability, and
- quality and breadth of services.
If existing or future competitors develop or offer services that provide
significant performance, price, creative or other advantages over those offered
by us, then our business, results of operations and financial condition would be
negatively affected.
Most of our current and potential competitors have longer operating
histories, larger installed customer bases, longer relationships with clients
and significantly greater financial, technical, marketing and public relations
resources than we do. These competitors could decide at any time to increase
their resource commitments to compete directly with us in markets we serve, such
as regional shopping malls with our kiosk program. In addition, the relatively
new market for eCommerce is subject to continuing definition, and, as a result,
may better position our competitors to compete in this market as it matures.
INTELLECTUAL PROPERTY
We regard our trademarks, trade secrets and similar intellectual property as
critical to our success. Although we currently have no registered copyrights,
trademarks or patents covering any of our proprietary technology, we currently
rely on a combination of common law copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements and contractual
provisions with our employees and with third parties to establish and protect
our proprietary rights. For the development of our marketing channel
capabilities and technologies, we intend to rely upon unpatented trade secrets
and know-how and on the expertise of our employees. These steps may not be
adequate.
We intend to pursue the registration of our copyrights and trademarks based
upon anticipated use internationally. We may not be able to secure copyright or
trademark registrations for all of our marks in the United States or other
countries. We have filed trademark claims for "Genesis Intermedia" and "Show
Super Star Interactive Video Presentation Systems," which is an interactive
media presentation software product developed for the entertainment industry.
Owners of other registered or unregistered copyrights, trademarks or
servicemarks could bring potential copyright or trademark infringement claims.
If our technology infringes on the rights of other companies, we may be required
to seek licenses from third parties. However, we may not be able to do so on
commercially reasonable terms, if at all. In addition, we may also be subject to
litigation to defend against claims of infringement of the rights of others or
to determine the scope and validity of the intellectual property rights of
others. Likewise, and particularly because of our acquisition and growth
strategy, disputes may arise with respect to ownership of technology developed
by employees who were previously employed by other companies.
If our competitors prepare and file applications in the United States that
claim trademarks used or registered by us, we may oppose those applications and
be required to participate in proceedings before the United States Patent and
Trademark Office to determine priority of rights to the trademark, which could
result in substantial costs to us. Similarly, actions could be brought by third
parties claiming that our products or technology infringe patents or copyrights
owned by others. An adverse outcome could require us to license disputed rights
from third parties or to cease using a trademark or infringing product or
technology. Any litigation regarding our proprietary rights could be costly and
divert management's attention, result in the loss of some of our proprietary
rights, require us to seek licenses from third parties and prevent us from
selling our products and services.
We generally license intellectual property from third parties. We license
the rights to John M. Gray, Ph.D.'s book Men Are From Mars, Women Are From Venus
for creation and marketing of the video and audio products directly marketed by
us. We also license the rights to produce and market other products, such as
Hawaiian Tropic Swimwear. We are dependent upon the protection of these
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intellectual properties by their licensors and are responsible for protecting
them as well. In addition, we anticipate in the future licensing our content
from third parties. As a result, our exposure to copyright infringement actions
may increase because we must rely upon those third parties for information as to
the origin and ownership of the licensed content. We intend to obtain
representations as to the origin and ownership of licensed content and to
indemnification to cover any breach of any representations. However, the
representations may not be accurate and the indemnification may not adequately
protect us.
REGULATION
Advertising is regulated by the government, by private organizations,
including self-regulatory bodies and trade associations, and by consumer groups.
THE FEDERAL TRADE COMMISSION ACT. The Federal Trade Commission may seek
cease and desist orders, impose monetary penalties, or pursue other remedies in
the event that an advertising company violates this Act's rules or regulations
pertaining to false, misleading and unfair advertising. We believe that we are
in compliance with the Act and the regulations promulgated under the Act.
THE FEDERAL TELEMARKETING AND CONSUMER FRAUD AND ABUSE PREVENTION ACT. A
variety of deceptive, unfair or abusive practices in telemarketing sales have
been prohibited under this Act. Generally, these rules prohibit
misrepresentations of the cost, quantity, terms, restrictions, performance or
characteristics of products or services offered by telephone solicitation or of
refund, cancellation or exchange policies. The regulations also regulate the use
of prize promotions in telemarketing to prevent deception and require that a
telemarketer identify promptly and clearly the seller on whose behalf the
telemarketer is calling, the purpose of the call, the nature of the goods or
services offered and, if applicable, that no purchase or payment is necessary to
win a prize. The regulations also require that telemarketers maintain records on
various aspects of their business. We believe that we are in compliance with the
Act and the regulations promulgated under the Act.
Violation of the rules and regulations applicable to telemarketing practices
may result in injunctions against violative operations, monetary penalties or
disgorgement of profits. Violations may also give rise to private actions for
damages.
THE FEDERAL TELEPHONE CONSUMER PROTECTION ACT OF 1991. This Act imposes
restrictions on unsolicited automated telephone calls to residential telephone
subscribers. Under the Act it is unlawful to initiate telephone solicitations to
residential telephone subscribers before 8:00 a.m. or after 9:00 p.m., local
time at the subscriber's location, or to use automated telephone dialing systems
or artificial or prerecorded voices to call specified subscribers. Additionally,
the Act requires teleservice firms to develop a written policy which
- clearly delineates the types of calls that the firms are prohibited from
making under the Act,
- lists specific individuals or groups of individuals that the firms are
prohibited from contacting under the Act, and
- prohibits its personnel from making the calls.
Our call management system has been modified to eliminate some of its
capabilities to help prevent violations of the Act. These modifications prevent
personnel from initiating telephone calls during restricted hours or to
individuals listed on our "do not call" list. We also educate our personnel on
the restrictions and prohibitions of the Act.
STATE REGULATION. Most states have enacted statutes similar to the Federal
Trade Commission Act prohibiting unfair or deceptive acts and practices. A
number of states have enacted legislation and other states are considering
enacting legislation to regulate telemarketing. For example, telephone sales
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in some states are not final until a written contract is delivered to and signed
by the buyer, and that contract may often be canceled within three business
days. At least one state also prohibits telemarketers from requiring credit card
payment, and several other states require some telemarketers to obtain licenses,
post bonds or submit sales scripts to the state's attorney general. State
regulation has not materially affected our operations as we currently conduct
them and we do not presently anticipate that state regulation will materially
and adversely affect our operations in the future.
INTERNATIONAL REGULATION. Advertising is subject to regulation in countries
other than the United States in which we may choose to do business. We will need
to review any of these regulations before conducting business in any other
country.
SELF-REGULATORY BODIES; TRADE ASSOCIATIONS; AND CONSUMER
GROUPS. Self-regulatory activities have become significant in the advertising
business. The Council of Better Business Bureaus has created the National
Advertising Division and the National Advertising Review Board. These are
private organizations that review and process allegations that a company has
violated state or federal rules or regulations pertaining to advertising.
Additionally,
- the national television networks and various other media have adopted
extensive regulations for advertising that is acceptable for broadcast or
publication,
- trade associations in some industries publish advertising guidelines for
their members, and
- various consumer groups have been and continue to be powerful advocates of
increased regulation of advertising.
INDUSTRY REGULATION. Some industries served by us are also subject to
government regulation. Our employees who complete the sale of insurance products
are required, for example, to be licensed by various state insurance commissions
and to participate in regular continuing education programs. We provide this
continuing education to our employees and believe that we have, in all material
respects, complied with this and other relevant industry regulations. We may
also be subject to regulation by the Commodity Futures Trading Commission, which
regulates commodities trading. The Commission has initiated an investigation
which may affect the infomercial titled Success and You based on Jake
Bernstein's Trade Your Way To Riches product. See "--Legal proceedings" below.
THE COMMUNICATION DECENCY ACT OF 1996. The Communications Decency Act of
1996 was enacted in 1996. Although those sections of this Act that, among other
things, proposed to impose criminal penalties on anyone distributing "indecent"
material to minors over the Internet were held to be unconstitutional by the
U.S. Supreme Court, similar laws may be proposed and adopted. Although we do not
currently distribute the types of materials that this Act may have deemed
illegal, the nature of this legislation and the manner in which it may be
interpreted and enforced cannot be fully determined, and legislation similar to
the Communications Decency Act could subject us to potential liability, which in
turn could have an adverse effect on our business. These types of laws could
also damage the growth of the Internet generally and decrease the demand for our
products and services.
REGULATORY COMPLIANCE. We have developed internal review procedures to help
ensure that our work product is accurate and fairly discloses the nature of the
products marketed and sold by us. We believe that we are in compliance with
federal, state and local laws and regulations pertaining to advertising and the
pre-clearance procedures of the broadcast media.
EMPLOYEES
As of March 31, 1999, we had 147 full-time employees, including 104
telemarketers, four systems engineers and three graphic designers. None of these
employees are covered by collective bargaining agreements and management
believes that our relations with our employees are good.
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PROPERTIES
We own our headquarters office building at 13063 Ventura Boulevard, Studio
City, California 91604-2238. The building consists of 6,300 square feet and is
entirely occupied by us. Most of our administrative, telemarketing and media
time operations are conducted at our headquarters. We lease production
facilities for the production of direct marketing programming on an as-needed
basis from third parties on commercially available terms. We also operate a call
center in Utah, in approximately 2,000 square feet of space under a lease ending
May 31, 2001. The lease provides for monthly rental payments of $6,720. Genesis
Intermedia, Inc. occupies approximately 4,000 square feet located at 3151 Airway
Avenue, Building T-3, Costa Mesa, California 92626. The lease for that space
provides for monthly rental payments of $8,175 and the term expires on August 1,
2000.
Our planned capital expenditures for 1999 include expenditures for expansion
of our telemarketing division, which will likely include lease or acquisition of
additional space for telephone service representatives and supporting
infrastructure. In addition, as we add new space we will consider relocating and
consolidating Genesis Intermedia, Inc.'s operations into that new space. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and capital resources."
LEGAL PROCEEDINGS
On November 14, 1997, the Commodity Futures Trading Commission issued an
order authorizing the issuance of subpoenas and depositions in a private
investigation involving Jake Bernstein and MBH Commodity Advisors, a company not
affiliated with Genesis. Although the order does not reference Genesis, its
employees or affiliates, the CFTC has nonetheless requested that we provide
various documents arising out of our involvement in the production and marketing
of an infomercial titled Success and You which promotes and markets a video
series titled Trade Your Way To Riches. To date, the CFTC has directed one
subpoena to Genesis. Various documents have been produced on our behalf in
response to the subpoena. Additionally, the CFTC has taken the deposition of
Ramy El-Batrawi, our president, in connection with its investigation. We have
not to date been required to discontinue sales of Trade Your Way To Riches
products or services as a result of the CFTC's actions.
Although the CFTC has articulated its belief that Genesis, by virtue of our
involvement in the production and marketing of the infomercial, may be required
to be registered in some capacity to continue to engage in our sales activities
related to the Trade products, we believe the CFTC's analysis and conclusions
are incorrect and are based on incomplete information. In October 1998, we
issued a written response to the CFTC's position setting forth the reasons why
we are not required to register in any capacity with the CFTC. The CFTC has
indicated that registration may be required. We have been advised by our counsel
that the initiation of a CFTC enforcement action against us requiring
registration or seeking the imposition of sanctions is unwarranted. As of the
date of this prospectus, there has been no indication that the CFTC seeks any
relief other than registration. To date, no complaint or enforcement action has
been asserted against Genesis, our officers, directors or employees.
If it is determined in the investigation or any resulting proceeding that
registration is required, we intend promptly to effect any required
registration. It is estimated that the cost of registering Genesis with the CFTC
will be less than $1,000. In the event that the CFTC were to bring an
enforcement action against Genesis by virtue of our failure to register, which
we believe would be unwarranted, any adverse determination or settlement in this
action could adversely affect us. The range of possible sanctions available to
the CFTC in enforcement actions generally include a simple request to become
registered, a cease and desist order--which could, if successfully applied to us
or Trade, terminate sales of some Trade Your Way To Riches products or
services--and a possible order of disgorgement of profits--which could, again if
applied to us, result in substantial payments by us. In February 1999, we
commenced negotiations with the CFTC to terminate the investigation and settle
all underlying claims against us and all other persons subject to the
investigation. Although we believe that a settlement can
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be reached that will not have a material adverse impact on us, we can not
predict whether any settlement proposal we may make will be accepted by the CFTC
or by what time. For the reasons discussed in the preceding paragraph, we
believe that if we are unable to reach agreement on a consensual resolution with
the CFTC, then the final resolution of the investigation or any ensuing action
or proceeding will not have a material adverse effect on us.
On February 5, 1999, the former chief executive officer of our Genesis
Intermedia, Inc. subsidiary commenced a suit for wrongful termination in
California Superior Court in Los Angeles County. The plaintiff is Sam Hassabo
and the principal defendants are Genesis, our Genesis Intermedia, Inc.
subsidiary and our chief executive officer, Mr. El-Batrawi. The complaint
alleges wrongful termination and breach of employment contract. The complaint
also alleges that the defendants engaged in fraud and negligent
misrepresentation in connection with the plaintiff's hiring and the termination
of his employment. Mr. Hassabo was terminated from his position as director and
chief executive officer of Genesis Intermedia, Inc. in December 1998. The
complaint primarily seeks monetary and punitive damages. We believe the suit is
frivolous and we intend to defend it vigorously. We carry employment practices
and general liability insurance which we believe is adequate to cover any
potential liability.
We may also be involved from time to time in various other claims and legal
actions incident to its operations, either as plaintiff or defendant. As an
advertiser, we may be exposed to unforeseen liability to consumers, competitors
or others, against which we are not insured. We from time to time may be, or may
be joined as, a defendant in litigation brought against us or our clients by
third parties. As we acquire the rights to diverse new products and increase our
client base, the likelihood of that type of suit will increase. These possible
claims include those brought by clients' competitors, regulatory bodies or
consumers alleging that advertising claims are false, deceptive or misleading,
that our clients' products are defective or injurious or that marketing and
communications materials infringe on the proprietary rights of third parties. We
do not maintain insurance designed specifically for advertising agency
liability. If we are not adequately insured or indemnified, then the damages,
costs, expenses or attorneys' fees could have an adverse effect on us.
In addition, the contracts we enter into with our clients sometimes require
us to indemnify clients for claims brought by competitors or others claiming
that advertisements or other communications infringe on intellectual property
rights. Although we maintain business insurance we believe is adequate for our
operations, adequate insurance coverage may not be available in the future or
the insurance held by us may not be sufficient if a significant adverse claim is
made.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information concerning the directors, executive officers
and other key employees of Genesis as of March 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------------------ --- --------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Ramy El-Batrawi........................... 37 Chairman of the Board and Chief Executive
Officer
Douglas E. Jacobson....................... 52 Director, Chief Financial Officer
Craig T. Dinkel........................... 40 Chief Operating Officer
Blair LaCorte............................. 36 Director
George W. Heyworth........................ 49 Director
KEY EMPLOYEES
Sam Elkholy............................... 41 Vice President, Technology
</TABLE>
RAMY EL-BATRAWI. Mr. El-Batrawi is the principal stockholder and chief
executive officer of Genesis. He has been a director and chairman of the board
of Genesis since its inception in October 1993. Mr. El-Batrawi's prior
experience has included international business marketing where he facilitated
and negotiated significant transactions between global industrial companies and
world governments. Firms with which he has been involved include Lockheed
Corporation, Carnival Cruise Lines Inc., Lonrho, Inc., McDonalds Corporation and
Eastern Airlines. Additionally, he is the sole shareholder, President and
Chairman of the Board of Directors of several other companies, including
International Futures Brokerage Company, Mars and Venus Counseling Centers,
Inc., Genesis Aviation, Inc., Genesis Aviation II, Inc., Genesis Diversified
Investments, Inc., Sentient, Inc. and Trade Your Way To Riches, Inc.
DOUGLAS E. JACOBSON. Mr. Jacobson has been a director of Genesis since
October 1998. Mr. Jacobson has been a certified public accountant for over 25
years and is a graduate of the College of William and Mary in Virginia. His
experience includes working for local public accounting firms and Coopers &
Lybrand where he audited privately held and SEC-registered public corporations.
He was responsible for supervising the financial audit staff of a major retail
drug chain, Eckerd Drugs in Clearwater, Florida for three years. Subsequent to
that position, he managed the internal audit functions for a highly diversified,
closely held family conglomerate, Lykes Bros. Inc., for four years. In that
position he was responsible for nationwide audits and reporting directly to the
Chairman. From 1983 to 1997, as a sole practitioner certified public accountant,
he performed accounting, audit and tax services for key family members and other
clients, including Genesis. As Genesis's chief financial officer, Mr. Jacobson's
responsibilities include overseeing and preparing the financial analysis of our
financial growth and reporting.
CRAIG T. DINKEL. Mr. Dinkel joined Genesis as its chief operating officer
in October 1998. Prior to joining Genesis, Mr. Dinkel served as chief operating
officer of Trade Your Way To Riches, Inc., a company owned by Genesis's majority
stockholder. Mr. Dinkel's responsibility is to manage and oversee the day-to-day
operations of Genesis, including the management of our core group of inbound and
outbound telemarketers. His principal responsibilities include effectuating
Genesis's marketing plans, business development, customer service and
fulfillment, and management of information systems. From April 1996 to April
1997, he was the manager of special projects reporting directly to Michael Levy,
president and chief executive officer of Positive Response Television, Inc., a
subsidiary of National Media Corporation. He managed that company's profit
center and was responsible for the delivery of customized, call center services
to inbound and outbound clients. Prior to April 1996, Mr. Dinkel acted
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as a licensed futures trader. He received his undergraduate degree from
California State University Northridge and is currently seeking a masters degree
from the Peter Drucker School of Executive Management in Claremont, California.
BLAIR LACORTE. Mr. LaCorte has been a director of Genesis since October
1998. Mr. LaCorte is an Entrepreneur in Residence at Internet Capital Group.
Prior to joining Internet Capital Group in 1998, Mr. LaCorte was the founder and
president of the Internet Technology Group at Cadis, Inc. Cadis, Inc. developed
and marketed parametric search technology used to enable electronic commerce
applications and offered a complete enterprise commodity and supplier management
software. Cadis, Inc. was sold to Aspect Development, Inc. in November 1997.
Prior to Cadis, Inc., Mr. LaCorte held several executive management roles at
Autodesk, maker of Autocad. Mr. LaCorte was the founder and general manager of
the data publishing division, a stand-alone unit, that grew to become the
world's largest provider of catalogs with two-dimensional CAD graphics on the
web. This unit was later sold to Thomas Publishing. Mr. LaCorte was also
director of worldwide product marketing where he developed and released three
new products. Prior to that, Mr. LaCorte served as manager of worldwide
strategic and market planning for Sun Microsystems and was a Senior Consultant
for Gemini Consulting. Mr. LaCorte graduated from the University of Maine with a
degree in Business Administration and graduated with honors from General
Electric's Financial Management Program and received a Masters of Business
Administration degree in strategy and marketing from the Tuck School at
Dartmouth College.
GEORGE W. HEYWORTH. Mr. Heyworth was elected a director of Genesis in
January 1999. From March 1998 to February 1999, Mr. Heyworth was the
vice-president of Intersolv/MicroFocus Inc., a software change management firm.
He is directly responsible for formulating business strategy, partnerships,
acquisitions and product direction for Intersolv/MicroFocus, Inc. Prior to
joining Intersolv, Mr. Heyworth was chief technology officer and vice president
of engineering at Cadis, Inc., where he was a key member of the senior
management team. Prior to joining Cadis, Inc. in March 1997, Mr. Heyworth held
several technical management positions at Perot Systems Corporation, which he
joined in April 1994. These positions included director of software development
and director of global technical training. Mr. Heyworth also served as chief
software engineer for NASA's Space Station Trainer from January to December
1993. Prior to this project, Mr. Heyworth worked as program manager of NASA's
Computer Services Programs. Mr. Heyworth received his Masters of Science degree
from the University of Oregon and is a graduate of the United States Military
Academy, where he received a Bachelor of Science degree in Civil Engineering.
SAM ELKHOLY. Mr. Elkholy has been the vice president, technology of Genesis
since September 1998. Mr. Elkholy has been a pioneer in the development of
multimedia and Internet solutions. Before joining Genesis, he served as
president and chief executive officer of AniMagic Corporation, a position he
held since 1993. In 1998, AniMagic filed for protection under Chapter 11 of the
United States Bankruptcy Code, which case was dismissed, and AniMagic then filed
for protection under Chapter 7 of the Code. Mr. Elkholy also served as MIS
director for Technicolor, Inc., Coca Cola Enterprise West, Republic Pictures and
MCA/Universal prior to joining AniMagic in 1993. Under his leadership, AniMagic
completed projects for Apple Computer, Inc., Microsoft Corporation, The Walt
Disney Company, Epson America, Inc., McDonnell Douglas Corporation, Sprint
Corporation, Warner Records and TRW, Inc. Mr. Elkholy was recognized as one of
the Top 100 Multimedia Producers in America in 1995 by Multimedia Producer
Magazine. In 1997, Epson America, Inc. selected AniMagic to develop an Internet
eCommerce website.
BOARD OF DIRECTORS
Our board of directors is currently composed of four members. We anticipate
expanding the board of directors to five members. Prior to 1999, we did not have
a compensation committee or an audit
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committee. Mr. LaCorte and Mr. Heyworth now serve on the audit committee and Mr.
El-Batrawi, Mr. LaCorte and Mr. Heyworth comprise the compensation committee.
Each director holds office until the next annual meeting of the stockholders or
until his or her successor is duly elected and qualified.
Our directors who are not employees each received stock options for 50,000
shares of common stock at an exercise price of $8.50 per share for their
services as directors. Directors who are employees will not be paid any fees or
additional compensation, other than expense reimbursement, for service as
members of the board of directors or any committee. We will enter into
arrangements with respect to fees and other compensation, including expense
reimbursement, for other directors who are not employees at the time they are
selected to serve on the board. In addition, directors who are not employees may
annually receive automatic grants of non-qualified stock options under our 1998
Stock Incentive Program. See "--Employee compensation programs--1998 stock
incentive program" below. We maintain directors' and officers' liability
insurance and our corporate bylaws provide for indemnification of directors and
officers to the fullest extent permitted by Delaware law. We have entered into
indemnification agreements with all of our directors. In addition, our
certificate of incorporation limits the personal liability of the directors to
Genesis or our stockholders for breaches of the directors' fiduciary duties to
the fullest extent currently permitted by Delaware law. See "Description of
Capital Stock--State law provisions."
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1998 decisions concerning compensation of
executive officers were made by the board of directors. No interlocking
relationship exists between Genesis's board of directors and the board of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned by our chief executive officer and each of the other most highly
compensated executive officers whose aggregate cash compensation exceeded
$100,000 for services rendered in all capacities during the fiscal year ended
December 31, 1998.
No executive officer named in the table below received perquisites or other
personal benefits, securities or property in an amount in excess of the lesser
of $50,000 or 10% of that officer's cash compensation, nor did all named
officers together receive that type of other compensation in excess of the
lesser of $50,000 times the number of named officers or 10% of those officers'
aggregate cash compensation. See, however, "Certain Transactions" for a
discussion of transactions between Genesis and Mr. El-Batrawi and his
affiliates. Of the options granted to Mr. Jacobson, 100,000 vested March 31,
1999 and 50,000 vest March 31, 2000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION -----------------------
----------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS/SARS(#)
- ------------------------------------------- ---------- ----------- -----------------------
<S> <C> <C> <C>
Ramy El-Batrawi, chairman of the board and
chief executive officer.................. $ 250,000 $ -- --
Douglas E. Jacobson, chief financial
officer.................................. 115,000 -- 150,000
</TABLE>
During 1998 Mr. El-Batrawi also received an additional $705,000 distribution
of undistributed S corporation earnings. Mr. Jacobson became our chief financial
officer in October 1998 and his salary is presented on the table on an
annualized basis.
49
<PAGE>
OPTION GRANTS
The following table sets forth information with respect to grants of stock
options to the named officers during 1998. We did not grant any stock
appreciation rights in 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES IN EXERCISE PRICE
NAME GRANTED (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE
- --------------------------------------------- ----------- ----------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Ramy El-Batrawi.............................. -- -- -- --
Douglas E. Jacobson.......................... 100,000 40% $ 8.50 September 30, 2005
Douglas E. Jacobson.......................... 50,000 20% $ 8.50 December 31, 2005
FISCAL YEAR-END OPTION VALUES
</TABLE>
The following table sets forth for the chief executive officer and the other
named executive officer information concerning the fiscal year-end value of
unexercised options based on the estimated initial public offering price of
$8.50. The exercise price of all options granted to the named officer is $8.50
per share. No options were exercised during the fiscal year ended December 31,
1998.
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
(#) ($)
--------------- ---------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------- --------------- ---------------------
<S> <C> <C>
Ramy El-Batrawi............................................................. --/-- --/--
Douglas E. Jacobson......................................................... --/150,000 --/--
</TABLE>
EMPLOYEE COMPENSATION PROGRAMS
1998 STOCK INCENTIVE PROGRAM
In October 1998, the board of directors adopted and the stockholders
approved our 1998 Stock Incentive Program. Under the 1998 program, the board of
directors, or its designated administrators, have the flexibility to determine
the type and amount of awards to be granted to eligible participants.
PURPOSE, STRUCTURE, AWARDS AND ELIGIBILITY. The 1998 program is intended to
secure for Genesis and our stockholders the benefits arising from ownership of
common stock by individuals employed or retained by us who will be responsible
for the future growth of the enterprise. The 1998 program is designed to help
attract and retain superior personnel for positions of substantial
responsibility, and to provide individuals with an additional incentive to
contribute to our success.
The 1998 program is composed of seven parts and the program administrators
may make the following types of awards under the 1998 program:
(1) incentive stock options under the Incentive Stock Option Plan;
(2) nonqualified stock options under the Nonqualified Stock Option Plan;
(3) restricted shares under the Restricted Shares Plan;
(4) rights to purchase stock under the Employee Stock Purchase Plan;
(5) stock appreciation rights under the Stock Appreciation Rights Plan;
(6) grants of options under the Non-Employee Director Stock Option Plan; and
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<PAGE>
(7) specified other stock rights under the Stock Rights Plan, which may
include the issuance of units representing the equivalent of shares of
common stock, payments of compensation in the form of shares of common
stock and rights to receive cash or shares of common stock based on the
value of dividends paid on a share of common stock.
Officers, key employees, employee directors, consultants and other independent
contractors or agents of Genesis or our subsidiaries who are responsible for or
contribute to the management, growth or profitability of our business will be
eligible for selection by the program administrators to participate in the 1998
program, provided, however, that incentive stock options may be granted under
the Incentive Stock Option Plan only to a person who is an employee of Genesis
or its subsidiaries.
SHARES SUBJECT TO 1998 PROGRAM. We have authorized and reserved for
issuance an aggregate of 600,000 shares of our common stock under the 1998
program. The aggregate number of shares of common stock which may be granted
through awards under the 1998 program, other than stock payments and the
purchase of stock under the Employee Stock Purchase Plan, to any employee in any
calendar year may not exceed three percent of the then-outstanding shares of
common stock. The shares of common stock issuable under the 1998 program may be
authorized but unissued shares, shares issued and reacquired by us or shares
purchased by us on the open market. If any of the awards granted under the 1998
program expire, terminate or are forfeited for any reason before they have been
exercised, vested or issued in full, the unused shares subject to those expired,
terminated or forfeited awards will again be available for purposes of the 1998
program.
EFFECTIVE DATE AND DURATION. All of the plans other than the Incentive
Stock Option Plan and the Employee Stock Purchase Plan, became effective upon
their adoption by the board of directors. The Incentive Stock Option Plan and
the Employee Stock Purchase Plan became effective upon their adoption by the
board of directors and approval of the 1998 program by a majority of the
stockholders. The 1998 program will continue in effect until September 30, 2008
unless sooner terminated under the general provisions of the 1998 program.
ADMINISTRATION. The 1998 program will be administered by the board of
directors or by a committee appointed by the board. That committee must consist
of not less than two directors who are:
- non-employee directors within the meaning of SEC Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, so long as non-employee
director administration is required under Rule 16b-3; and
- outside directors as defined in Section 162(m) of the Internal Revenue
Code of 1986, so long as outside directors are required by the Code.
Subject to these limitations, the board of directors may from time to time
remove members from the committee, fill all vacancies on the committee, however
caused, and may select one of the members of the committee as its chair. The
program administrators may hold meetings when and where they determine, will
keep minutes of their meetings, and may adopt, amend and revoke rules and
procedures in accordance with the terms of the 1998 program.
51
<PAGE>
STOCK OPTION GRANTS
On March 31, 1999, we had stock options outstanding with respect to 350,000
shares of common stock authorized under the 1998 program, all with exercise
prices of $8.50 per share. These options vest as follows:
- 200,000 on March 31, 1999
- 25,000 on July 31, 1999
- 25,000 on January 31, 2000
- 50,000 on March 31, 2000
- 25,000 on July 31, 2000
- 25,000 on January 31, 2001
We also had 100,000 additional options outstanding that were not granted under
the 1998 program with a weighted average exercise price of $9.79.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In September 1998, we entered into an employment agreement with Mr.
El-Batrawi which continues until September 30, 2003, unless terminated earlier
by us, either for cause, death or other specified circumstances. Under the terms
of the employment agreement, Mr. El-Batrawi is to be paid an annual salary of
$250,000. Mr. El-Batrawi is eligible to receive bonuses at the discretion of the
board of directors. We have obtained a $4 million term life insurance policy
covering Mr. El-Batrawi. We are the sole beneficiary on the policy, $900,000 of
which is allocated to payment of the mortgage on our headquarters.
In connection with its acquisition of substantially all of the assets of
Vision Digital Communications, Inc., we entered into employment agreements with
two former employees of Vision Digital, each providing for three-year terms and
annual salaries of $84,000. Each employee is also eligible to receive grants of
options to purchase an aggregate of 75,000 shares of common stock, upon the
achievement of three separate performance hurdles. The 25,000 options that may
be granted to each employee at each hurdle will have per share exercise prices
of $11.00, $13.00 and $15.00, respectively.
Effective December 7, 1998, the former chief executive officer of our
Genesis Intermedia, Inc. subsidiary ceased to hold that position and was removed
from the position of director of Genesis. In February 1999, this former employee
commenced a suit against Genesis for wrongful termination. See "Business--Legal
proceedings." In the event that there is a dispute with respect to the terms of
any Genesis employment agreement, a state court may determine not to enforce or
only to partially enforce some provisions of the employment agreements relating
to non-competition.
Effective December 31, 1998, Robert Kline resigned from his position as vice
president, business development, for personal reasons. Dr. Kline has agreed to
provide services that are similar to those he previously provided to us on a
part-time, as-needed basis.
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<PAGE>
CERTAIN TRANSACTIONS
We believe that the transactions set forth below were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans to and advances from affiliates, and
contracts with affiliates will be approved by a majority of the board of
directors, including a majority of the independent and disinterested directors,
and will continue to be on terms no less favorable to us than could be obtained
from unaffiliated third parties.
TRANSACTIONS WITH THE MAJORITY STOCKHOLDER
During the year ended December 31, 1998, Mr. El-Batrawi received a
distribution of $955,000 from S corporation earnings accrued through December
31, 1998. As a result of Genesis revoking its S Corporation status effective
January 1, 1999, in early 1999 we made an additional distribution to Genesis's S
corporation stockholders in the amount of $2,000,000 to pay federal and state
income taxes.
From time to time, Mr. El-Batrawi has lent money to Genesis. These advances
have generally been repaid at the stockholder's request. These advances are
non-interest bearing and have no scheduled repayment terms. At December 31,
1998, the amount owed to Mr. El-Batrawi was $15,495 and at March 31, 1999 the
balance was $12,214.
In June 1997, Genesis obtained a $750,000 line of credit from a financial
institution. The line of credit is collateralized by substantially all of our
assets, except our corporate office building, and is personally guaranteed by
Mr. El-Batrawi.
From time to time, Genesis has advanced money to business associates of Mr.
El-Batrawi. Mr. El-Batrawi has guaranteed repayment of all of these advances and
is obligated to repay the advances in the event of non-payment by the borrower.
At December 31, 1998, all of these loans had been repaid in full.
TRANSACTIONS WITH AFFILIATES
From time to time, we have advanced money to companies that are wholly-owned
by Mr. El-Batrawi or to companies in which Mr. El-Batrawi has an ownership
interest and exercises significant control. These advances to affiliates have
generally been repaid upon our request, are non-interest bearing and have no
scheduled repayment terms. Mr. El-Batrawi has guaranteed repayment of these
advances and is responsible for repayment of these advances in the event of
non-payment by the borrower. At December 31, 1998, all of these loans had been
repaid in full.
From time to time, companies owned by Mr. El-Batrawi or companies in which
Mr. El-Batrawi has an ownership interest have advanced money to Genesis. These
advances are non interest bearing and are repaid upon demand. At December 31,
1998, this loan had been repaid in full.
Genesis was also engaged in the following transactions with Trade Your Way
To Riches, Inc., a company that is wholly-owned by Mr. El-Batrawi. During the
years ended December 31, 1998 and 1997, we sold media time to Trade for
$3,702,731 and $7,412,038, respectively. In addition, during the years ended
December 31, 1998 and 1997, we earned commissions from the sale of Trade
products that amounted to $1,789,415 and $742,315, respectively. In the first
quarter of 1999 there were no media sales or commissions earned from Trade
products. Amounts due to us at March 31, 1999 and December 31, 1998 and 1997,
related to the sales of media to Trade and commissions earned were $1,550,804,
$1,676,219 and $2,383,663, respectively. Our accounts receivable from Trade are
on a revolving open account. Accounts are typically paid within 90 to 120 days,
based upon the anticipated sales and collection cycle for Trade's products,
which typically involves four equal monthly payments by Trade's customers.
53
<PAGE>
In April, 1999, we entered into a strategic alliance with Global Leisure
Travel, Inc., a leading provider of wholesale travel to travel agents and
consumers. Global's majority stockholder is a company that is wholly owned by
Mr. El-Batrawi. As part of the strategic alliance with Global, Global granted us
an option to acquire all of the technology and assets comprising its proprietary
computerized travel marketing system known as the Contour System. The agreed
purchase price is the actual cost of development and we estimate that the price
for these assets and technology will be between $2 million and $3 million,
subject to an audit, which will be conducted within 30 days of the proposed
acquisition. Global also granted us a right of first refusal to purchase Global
or all of its assets at fair market value as determined by an independent
appraisal. We have also agreed to advance up to $3 million to Global upon the
negotiation and execution of definitive documentation containing terms to be
negotiated to finance the development of its marketing and advertising
initiatives and for general corporate purposes. See "Business--Acquisitions and
Alliances."
During the year ended December 31, 1997, we reimbursed Genesis Aviation,
Inc., a company owned by Mr. El-Batrawi, $8,995 for travel expenses related to
the use of one of its airplanes.
TRANSACTIONS WITH JOHN M. GRAY, PH.D.
On December 31, 1997, we sold 116,504 shares of our common stock to Dr. Gray
for $900,000. Dr. Gray surrendered to Genesis 29,126 of these shares,
representing 25% of his shares, on November 1, 1998 concurrently with the
surrender by Mr. El-Batrawi of 970,874 of his shares, representing 25% of his
shares of common stock.
Royalties paid to Dr. Gray for the years ended December 31, 1998, 1997 and
1996 were $0, $50,101 and $423,207, respectively. No royalties were paid for the
three months ended March 31, 1999.
TRANSACTIONS WITH DOUGLAS E. JACOBSON
Between 1993 and 1997, Mr. Jacobson performed accounting and tax services
for us for which he was compensated based on his standard hourly rates ranging
from $100 to $125.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of March 31, 1999 and as adjusted to reflect the sale of
common stock offered in this prospectus, by
- each person who is known by us to own beneficially five percent or more of
our common stock prior to this offering,
- each of our directors and each of the officers named in
"Management--Executive compensation" section of this prospectus, and
- all current directors and executive officers as a group.
The address of each person is in care of Genesis at 13063 Ventura Boulevard,
Studio City, California 91604-2218.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or become exercisable within 60 days following the date of this
prospectus are deemed outstanding. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person. For Mr. Jacobson, this results in the 100,000 shares underlying his
option that vests March 31, 1999 being deemed held by him. Unless otherwise
indicated in the table, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the stockholder's name. All share numbers and percentages assume no exercise of
the underwriters' over-allotment option.
<TABLE>
<CAPTION>
PERCENTAGE PRIOR PERCENTAGE AFTER
SHARES TO THE OFFERING THE OFFERING
BENEFICIALLY IF GREATER THAN IF GREATER THAN ONE
NAME OF BENEFICIAL OWNER OWNED PERCENT ONE PERCENT PERCENT
- -------------------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Ramy El-Batrawi....................... 2,912,622 87.99% 54.85%
Douglas E. Jacobson................... 100,000 * *
Blair LaCorte......................... 0 * *
George W. Heyworth.................... 0 * *
All directors and executive officers
as a group (five persons)........... 3,012,622 88.35% 55.69%
</TABLE>
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of Genesis
will consist of 25,000,000 shares of common stock, par value $.001 per share,
and 5,000,000 shares of preferred stock, par value $.001 per share. As of March
31, 1999, there were 3,310,000 shares of common stock outstanding held by five
stockholders and 142,858 shares of preferred stock were outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote per share for the
election of directors and on all other matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive, when and
if declared by the board of directors, out of funds legally available for that
purpose, any dividends on a pro rata basis. In the event of liquidation,
dissolution or winding up of Genesis, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of any then outstanding preferred stock. The common
stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable, and the
shares of common stock offered by Genesis in this offering will, when issued, be
fully paid and non-assessable.
PREFERRED STOCK
The board of directors has the authority to issue the preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
of preferred stock, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, liquidation preferences and the
number of shares of stock constituting any series or the designation of the
series, without further vote or action by Genesis's stockholders. The issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of Genesis and may adversely affect the voting and other
rights of the holders of common stock.
The board has authorized the issuance of one series of preferred
stock--series A convertible preferred stock. There are 450,000 authorized shares
of series A. Of these, 142,858 are issued and outstanding as of the date of this
prospectus. The series A stock has a cash dividend of 8.75% per annum, payable
quarterly. Dividends on the series A stock are cumulative and are payable before
we may declare, pay or set aside dividends on our common stock. Upon a voluntary
or involuntary liquidation, dissolution or winding up of Genesis, the holders of
the series A stock are entitled to a preference of $7 per share plus any accrued
and unpaid dividends. Each share of series A stock may be converted at any time
by the holder into one share of common stock. No common stock received on
conversion may be transferred at any time prior to ninety (90) days following
the effective date of this offering. After that initial 90-day period, the
common stock underlying 25% of the series A stock will no longer be subject to
this transfer restriction and dividends cease to accrue or be payable as to
those shares of series A stock. On each of the 90th, 180th and 270th days
following the end of the initial 90-day period, the transfer restriction and
dividend accrual ends as to 25% more of the underlying common stock. Subject to
these restrictions, we have agreed to register the shares issuable upon
conversion of the series A stock within 90 days of this offering. The holders of
the series A stock have no voting rights.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
We estimate that following the completion of this offering we will have
approximately 19,690,000 shares of authorized but unissued common stock,
including an aggregate of 600,000 shares reserved for
56
<PAGE>
issuance upon the exercise of options under its stock incentive program, and
5,000,000 shares of authorized preferred stock, 450,000 of which have been
designated as series A convertible preferred stock, of which 142,858 will be
issued and outstanding. If the underwriters' over-allotment option is exercised
in full, we will have approximately 19,390,000 shares of authorized but unissued
common stock. Delaware law does not require stockholder approval for the
issuance of authorized shares. However, the listing requirements of the Pacific
Exchange and of The Nasdaq Stock Market, Inc., which apply so long as the common
stock remains listed on that exchange or included in that inter-dealer quotation
system, require prior stockholder approval of specified issuances, including
issuances of shares bearing voting power equal to or exceeding 20% of the
pre-issuance outstanding voting power or pre-issuance outstanding number of
shares of common stock. These additional shares could be used for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions. We currently do not have any
plans to issue additional shares of common stock or preferred stock, other than
in connection with employee compensation plans. See "Management--Executive
compensation." One of the effects of the existence of unissued and unreserved
common stock and preferred stock may be to enable the board to issue shares to
persons who may agree or be inclined to vote in concert with current management
on issues put to consideration of stockholders, which issuance could render more
difficult or discourage an attempt to obtain control of Genesis by means of a
merger, tender offer, proxy contest or otherwise, and protect the continuity of
our management and possibly deprive the stockholders of the opportunity to sell
their shares of common stock at prices higher than prevailing market prices.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation, Glendale, California.
STATE LAW PROVISIONS
The terms of section 203 of the Delaware General Corporations Law apply to
Genesis. Section 203 generally prohibits an "interested stockholder" from
engaging in a broad range of business combination transactions, including
mergers, consolidations and sales of 10% or more of a corporation's assets, with
a Delaware corporation for three years following the date on which the person
became an interested stockholder unless
- the transaction that results in the person becoming an interested
stockholder or the business combination is approved by the board of
directors of the corporation before the person becomes an interested
stockholder,
- upon consummation of the transaction which results in the stockholder
becoming an interested stockholder, the interested stockholder owns 85% or
more of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are directors
and also officers and shares owned by specified employee stock plans, or
- on or after the date the person becomes an interested stockholder, the
business combination is approved by the board of directors and by holders
of at least two-thirds of the outstanding voting stock, excluding shares
owned by the interested stockholder, at a meeting of stockholders.
Under section 203, an "interested stockholder" is generally defined as any
person and the affiliates and associates of that person, other than the
corporation and any direct or indirect majority-owned subsidiary, that is
- the owner of 15% or more of the outstanding voting stock of the
corporation or
57
<PAGE>
- an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within
the three-year period immediately prior to the date on which it is sought
to be determined whether the person is an interested stockholder.
The restrictions contained in section 203 do not apply to a corporation that
provides that the section will not apply in an amendment to its certificate of
incorporation or by-laws passed by a majority of its outstanding voting shares,
but that stockholder action generally does not become effective for 12 months
following its adoption and would not apply to persons who were already
interested stockholders at the time of the amendment. Our certificate of
incorporation and bylaws do not exclude us from the restrictions imposed under
section 203, but our certificate of incorporation provides that in no case shall
Mr. El-Batrawi or any person who is a transferee of Mr. El-Batrawi, regardless
of the total percentage of common stock or other voting stock owned by Mr.
El-Batrawi or those persons, be deemed an interested stockholder for any purpose
under section 203 whatsoever.
Under some circumstances, section 203 makes it more difficult for a person
who would be an interested stockholder to effect various business combinations
with a corporation for a three-year period. The provisions of section 203 may
encourage companies interested in acquiring us to negotiate in advance with our
board of directors, because the stockholder approval requirement would be
avoided if the board of directors approves either the business combination or
the transaction which results in the stockholder becoming an interested
stockholder. These provisions also may have the effect of preventing changes in
the board of directors. It is further possible that these provisions could make
it more difficult to accomplish transactions that stockholders may otherwise
deem to be in their best interests.
We may be subject to section 2115 of the California Corporations Code.
Section 2115 provides that, regardless of a company's legal domicile, specified
provisions of California corporate law will apply to that company if the company
meets requirements relating to its property, payroll and sales in California and
if more than one-half of its outstanding voting securities are held of record by
persons having addresses in California. Among other things, section 2115 may
limit the ability of Genesis to elect a classified board of directors and
requires cumulative voting in the election of directors. Cumulative voting is a
voting scheme which allows minority stockholders a greater opportunity to have
board representation by allowing those stockholders to have a number of votes
equal to the number of directors to be elected multiplied by the number of votes
to which the stockholder's shares are entitled and to "cumulate" those votes for
one or more director nominees. Generally, cumulative voting allows minority
stockholders the possibility of board representation on a percentage basis equal
to their stock holding, where under straight voting those stockholders may
receive less or no board representation.
Genesis will not be subject to section 2115:
- at the time Genesis is qualified for trading as a national market security
on the Nasdaq Stock Market and has at least 800 stockholders as of the
record date of its most recent annual meeting of stockholders; or
- at the end of any income year during which a certificate is filed showing
that less than one-half of its outstanding voting securities are held of
record by persons having addresses in California or that one of the other
tests of section 2115 is not met.
We expect that we will no longer be subject to section 2115 by the record
date of our 2000 annual meeting of stockholders because we anticipate that our
stock will be qualified for trading as a national market security on the Nasdaq
Stock Market and we will have more than 800 stockholders as calculated under
section 2115.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock and a
significant public market for the common stock may not develop or be sustained
after the offering. Sales of substantial amounts of common stock in the public
market following the offering could adversely affect the market price of the
common stock and could impair our future ability to raise capital through the
sale of our equity securities.
Upon the closing of the offering, we will have outstanding 5,310,000 shares
of common stock, 5,610,000 if the underwriters' over-allotment option is
exercised in full. We will also have outstanding 142,858 shares of series A
preferred stock and options and warrants to purchase 842,858 shares of common
stock. Of these shares, the 2,000,000 shares offered in this prospectus will be
freely tradable, without restriction under the Securities Act of 1933 unless
held by affiliates of Genesis. The remaining 3,310,000 shares of common stock
and all of the preferred stock, options and warrants will be restricted
securities within the meaning of rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption provided by
rule 144.
In general, under rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person or persons whose shares are aggregated,
including any affiliate of Genesis, who has beneficially owned restricted
securities for at least one year, including the holding period of any prior
owner other than an affiliate of Genesis, would be entitled to sell within any
three-month period, a number of shares that does not exceed the greater of:
(1) one percent of the number of shares of common stock then
outstanding--approximately 5,310,000 shares immediately after the
offering; or
(2) the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to the
sale.
Sales under rule 144 are also subject to restrictions on the manner of sale
and requiring notice and to the availability of current public information about
Genesis. Under rule 144(k), a person who is not deemed to have been an affiliate
of Genesis at any time during the three months preceding a sale, and who has
beneficially owned restricted securities for at least two years, including the
holding period of any prior owner other than an affiliate of Genesis, is
entitled to sell the shares without complying with the volume limitations or the
manner of sale, public information or notice requirements of rule 144. Sales of
shares by affiliates of Genesis will continue to be subject to the volume
limitations and the manner of sale, notice and public information requirements.
The directors, executive officers and other stockholders holding 3,250,000
outstanding shares of common stock, warrants to purchase 392,858 shares of
common stock and options to purchase 250,000 shares of common stock, have agreed
in lock-up agreements that, for a period of one-year from the date of this
prospectus, they will not, without the prior written consent of the
underwriters' representative, offer, sell, or otherwise dispose of any shares of
common stock or any related securities except in specified circumstances. The
underwriters' representative has informed us that it has no current intention to
release shares from the lock-up agreements until the one-year has passed. Any
request for release would be evaluated by the underwriters' representative, and
the decision whether or not to permit early release of stock would be made based
upon the facts and circumstances existing at the time of the request. We have
granted registration rights for the shares underlying the preferred stock and
the related warrants that are described above. The shares underlying the
preferred stock are subject to the resale restrictions described above under the
heading "Preferred stock" and the related warrants are generally not exercisable
for one year. Upon registration, these shares will be freely transferable.
59
<PAGE>
Beginning upon expiration of the lock-up agreements, the shares will be
eligible for sale under rule 144 or rule 701 under the Securities Act, subject
to the specific provisions of those rules and continued vesting for the options.
The remaining 60,000 restricted securities will be eligible for resale under
rule 144 in October 1999, subject to the volume limitations and the manner of
sale and notice restrictions of rule 144. In addition, we may file a
registration statement on Form S-8 under the Securities Act to register the
shares of common stock issuable upon the exercise of options and the sale by
employees of shares of common stock issuable upon the exercise of currently
outstanding options, which sales will be subject to the lock-up agreements
described above. We intend to file a registration statement on Form S-8 under
the Securities Act within 90 days after the date of consummation of the
offering.
U.S. TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of some United States federal income
and estate tax consequences of the ownership and disposition of common stock by
a person that, for United States federal income tax purposes, is not a U.S.
person. For purposes of this section a U.S. person means a citizen or resident
of the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
of the United States, an estate the income of which is subject to United States
federal income taxation regardless of its source or a trust if (1) a United
States court is able to exercise primary supervision over the trust's
administration and (2) one or more U.S. persons have the authority to control
all of the trust's substantial decisions. The discussion does not consider
specific facts and circumstances that may be relevant to a particular non-U.S.
person's tax position. Accordingly, each non-U.S. person is urged to consult its
own tax advisor with respect to the United States tax consequences of the
ownership and disposition of common stock, as well as any tax consequences that
may arise under the laws of any state, municipality, foreign country or other
taxing jurisdiction.
DIVIDENDS
Dividends paid to a holder of common stock who is not a U.S. person
ordinarily will be subject to withholding of United States federal income tax at
a 30 percent rate, or at a lower rate under an applicable income tax treaty that
provides for a reduced rate of withholding. However, if the dividends are
effectively connected with the conduct by the holder of a trade or business
within the United States, then the dividends will be exempt from the withholding
tax described above and instead will be subject to United States federal income
tax on a net income basis.
GAIN ON DISPOSITION OF COMMON STOCK
A holder who is not a U.S. person generally will not be subject to United
States federal income tax in respect of gain realized on a disposition of common
stock, provided that (a) the gain is not effectively connected with a trade or
business conducted by the non-U.S. person in the United States and (b) in the
case of a non-U.S. person who is an individual and who holds the common stock as
a capital asset, the holder is present in the United States for less than 183
days in the taxable year of the sale and other conditions are met.
FEDERAL ESTATE TAXES
Common stock owned or treated as being owned by a non-U.S. person at the
time of death will be included in the holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
60
<PAGE>
UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
United States information reporting requirements and backup withholding tax
will not apply to dividends paid on common stock to a non-U.S. person outside
the United States, except that with regard to payments made after December 31,
1998, a non-U.S. person will be entitled to that exemption only if it provides a
Form W-8, satisfies documentary evidence requirements for establishing that it
is a non-U.S. person or otherwise establishes an exemption. As a general matter,
information reporting and backup withholding also will not apply to a payment of
the proceeds of a sale of common stock effected outside the United States by a
foreign office of a foreign broker. However, information reporting requirements,
but not backup withholding, will apply to a payment of the proceeds of a sale of
common stock effected outside the United States by a foreign office of a broker
if the broker
- is a U.S. person,
- derives 50 percent or more of its gross income for specified periods from
the conduct of a trade or business in the United States,
- is a "controlled foreign corporation" as to the United States, or
- is a foreign partnership that, at any time during its taxable year is 50
percent or more owned by U.S. persons or is engaged in the conduct of a
United States trade or business, unless the broker has documentary
evidence in its records that the holder is a non-U.S. person and other
conditions are met, or the holder otherwise establishes an exemption.
Payment by a United States office of a broker of the proceeds of a sale of
common stock will be subject to both backup withholding and information
reporting unless the holder certifies its non-U.S. person status under penalties
of perjury or otherwise establishes an exemption.
61
<PAGE>
UNDERWRITING
The underwriters named below, for whom Millennium Financial Group, Inc. is
acting as representative, have severally agreed, subject to the terms and
conditions of the underwriting agreement to purchase from us and we have agreed
to sell to the underwriters on a firm commitment basis, the number of shares of
common stock set forth opposite their names:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Millennium Financial Group, Inc............................................
HD Brous & Co., Inc........................................................
American Fronteer Financial Corporation....................................
-----------------
Total.................................................................. 2,000,000
-----------------
-----------------
</TABLE>
The underwriters are committed to purchase all the shares of common stock
offered in this prospectus, if any shares of common stock are purchased.
However, the underwriting agreement provides that the obligations of the several
underwriters are subject to a number of conditions specified in the underwriting
agreement, including:
- delivery of the duly authorized certificates for the common stock to be
purchased and the underwriter's warrant;
- the continuing accuracy of our representations and warranties in the
underwriting agreement and the receipt by the underwriters of certificates
of Genesis officers confirming that;
- our performance of our covenants and obligations under the underwriting
agreement;
- the registration statement which contains this prospectus being declared
effective by the Commission, and there being no stop order or proceeding
to suspend that effectiveness;
- the receipt by the underwriters of opinions of our counsel and their
counsel regarding legal matters and letters from our accountants regarding
financial matters contained in this prospectus;
- the lack of material changes in our business, finances, structure,
ownership or prospectus, including defaults under agreements;
- due approved for listing or quotation of our common stock on Nasdaq or the
Pacific Exchange; and
- signing and delivery of lock-up agreements from stockholders and others if
requested by the underwriters.
Millennium anticipates that a significant portion or all of the 1,000,000 shares
of common stock to be sold by it will be sold in Europe, primarily to
institutional investors. The co-managing underwriters have agreed among
themselves to limit European sales to no more than 50% of the offering.
COMMISSIONS, DISCOUNTS AND COMPENSATION
The representative has advised us that the underwriters propose initially to
offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to selected dealers at
that price less concessions not in excess of $ per share. After the
commencement of this offering, the public offering price, concession and
reallowance may be changed by the representative, but only after the initial
distribution of the common stock has been completed.
The representative has informed us that it does not expect sales to
discretionary accounts by the underwriters to exceed five percent of the shares
of common stock offered.
62
<PAGE>
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
underwriters may be required to make. We have also agreed to pay to the
representative a non-accountable expense allowance equal to three percent of the
gross proceeds derived from the sale of the shares of common stock underwritten,
of which $35,000 has been paid to date.
We have granted to the underwriters an over-allotment option, exercisable
during the 45-day period from the date of this prospectus, to purchase up to
300,000 shares of common stock at the initial public offering price per share,
less underwriting discounts and the non-accountable expense allowance. This
option may be exercised only for the purpose of covering over-allotments, if
any, incurred in the sale of the shares of common stock offered in this
prospectus. To the extent the option is exercised, in whole or in part, each
underwriter will have a firm commitment, subject to specified conditions, to
purchase the number of the additional shares of common stock proportionate to
its initial commitment.
In connection with this offering, we have agreed to sell to the
representative, for nominal consideration, warrants to purchase from Genesis up
to 200,000 shares of common stock. The representative's warrants are initially
exercisable at a price equal to 165% of the initial public offering price per
share. The representative's warrants are restricted from sale, transfer,
assignment, pledge or hypothecation for a period of 12 months from the date of
this prospectus, except to the officers of the representative and may be
exercised for a period of four years, commencing one year from the date of this
prospectus. The representative's warrants provide for adjustment in the number
of shares of common stock issuable upon their exercise and in the exercise price
of the representative's warrants as a result of specified events, including
subdivisions and combinations of the common stock. The representative's warrants
grant to the holders demand and piggyback rights of registration for the
securities issuable upon exercise and also provide for cashless exercise.
NO SALES OF SIMILAR SECURITIES; OFFERING LIMITATIONS
All officers, directors and existing stockholders holding a total of
3,250,000 shares of common stock, all 142,858 shares of convertible preferred
stock and all holders of options granted under the 1998 program have agreed not
to, directly or indirectly, issue, offer, agree or offer to sell, sell,
transfer, assign, encumber, grant an option for the purchase or sale of, pledge,
hypothecate or otherwise dispose of any beneficial interest in those securities
until the expiration of 12 months following the date of this prospectus. An
appropriate legend shall be marked on the face of certificates representing all
of those securities.
We have agreed not to, directly or indirectly, without the prior written
consent of Millennium, issue, sell, agree or offer to sell, grant an option for
the purchase or sale of, or otherwise transfer or dispose of any of our
securities for a period of 12 months following the date of this prospectus,
except (x) upon the exercise of the representative's warrants or our 1998 stock
incentive program or (y) debt in connection with bona fide business acquisitions
and/or expansions consistent with our business plans as generally described in
this prospectus.
BOARD REPRESENTATION RIGHT
We have agreed for a period of five years after the date of this prospectus,
if requested by Millennium, to use our best efforts to nominate for election to
the board of directors one person designated by Millennium. In the event
Millennium elects not to exercise this right, Millennium may designate a person
to receive all notices of meetings of the board of directors and all other
correspondence and communications sent by us to our board of directors and to
attend all meetings of the board of directors. We have agreed to reimburse
designees of Millennium for their out-of-pocket expenses incurred in connection
with their attendance at meetings of the board of directors. Millennium has not
yet exercised its right to elect a board member or designate a person to receive
notice of and attend board meetings.
63
<PAGE>
LIMITED EXPERIENCE OF LEAD MANAGING UNDERWRITER
The lead managing underwriter, Millennium, has had limited experience in
acting as an underwriter in public offerings of securities. Commencing in
September 1996, the lead managing underwriter has acted as an underwriter or a
member of the selling group in seven public offerings. It acted as co-managing
underwriter in four of those offerings and participated in five private
offerings. The lead managing underwriter has never previously acted as the lead
managing underwriter of a public offering. This may adversely affect the
proposed public offering of the common stock and the subsequent development of a
trading market, if any, for the common stock.
STOCK EXCHANGE LISTING; INCLUSION ON NASDAQ/NMS
Prior to this offering, there has been no public market for the shares of
common stock. Our common stock has been approved for listing on the Pacific
Exchange. We have also submitted an application to have the common stock quoted
on The Nasdaq Stock Market, Inc.'s National Market System. On February 11, 1999,
the Nasdaq staff informed us that, based on the information received by them to
that date, they could not approve inclusion of our common stock in Nasdaq. We
subsequently supplied additional information to Nasdaq and, to accelerate the
review process, appealed the staff's decision to a Nasdaq appeal panel which is
currently reviewing the additional information. Trading of the common stock on
the Pacific Exchange and, if approved, Nasdaq is expected to begin promptly
following the issuance of the common stock. In order to meet all of the
requirements for listing of the common stock on the Pacific Exchange and
inclusion of the common stock in Nasdaq, the underwriters have agreed to sell
the common stock to a minimum of 400 beneficial holders. We can not give any
assurance about the liquidity of the trading market for the common stock. We
intend to conclude our public offering whether or not we receive approval from
Nasdaq and intend to maintain a dual listing if we are approved by both the
Pacific Exchange and Nasdaq.
DETERMINATION OF OFFERING PRICE
The initial public offering price of the shares of common stock will be
determined by negotiation between us and the representative and will not
necessarily bear any relationship to our asset value, net worth, or other
established criteria of value. The factors to be considered in these
negotiations, in addition to prevailing market conditions, are expected to
include the history of and prospects for the industry in which we compete, an
assessment of our management, our prospects, our capital structure, the market
for initial public offerings and other factors that are deemed relevant.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In connection with this offering, the underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the shares of common stock.
These transactions may include stabilization transactions effected in accordance
with rule 104 of Regulation M, under which those persons may bid for or purchase
shares of common stock for the purpose of stabilizing their respective market
prices. The underwriters also may create a short position for the account of the
underwriters by selling more shares of common stock in connection with this
offering than they are committed to purchase from us, and in that case may
purchase shares of common stock in the open market following completion of this
offering to cover all or a portion of that short position. The underwriters may
also cover all or a portion of this short position by exercising the
over-allotment option referred to above. In addition, the representative, on
behalf of the underwriters, may impose penalty bids under contractual
arrangements with the underwriters under which it may reclaim from an
underwriter or dealer participating in this offering for the account of other
underwriters the selling concession with respect to shares of common stock that
are distributed in this offering but subsequently purchased for the account of
the underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the shares of common
stock at a level above that which might otherwise prevail in the open market.
64
<PAGE>
None of the transactions described in this paragraph is required, and, if they
are undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above. Please refer to the complete copies of the agreements which are
filed as exhibits to the registration statement of which this prospectus is a
part.
LEGAL MATTERS
Nida & Maloney, a Professional Corporation, Santa Barbara, California will
pass upon the validity of the shares of common stock offered in this prospectus
for Genesis. Donahue, Mesereau & Leids, LLP, Los Angeles, California is advising
the underwriters in connection with the offering. Regulatory matters relating to
the CFTC contained in the sections of the prospectus captioned "Risk Factors,"
"Business--Regulation" and "Business--Legal proceedings" are set forth in
reliance upon the opinion of Henderson & Lyman, Chicago, Illinois.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus have been included in reliance on the report of Singer Lewak
Greenbaum & Goldstein LLP, independent accountants, given on authority of that
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC. This
prospectus forms a part of that registration statement. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits to the registration statement. Some of the items in the registration
statement are omitted from this prospectus as permitted by the rules and
regulations of the SEC. Statements made in this prospectus as to the contents of
any contract or other document are not necessarily complete and, in each
instance, we refer you to the copy of the contract or other document filed as an
exhibit to the registration statement. Each statement about those contracts is
qualified in its entirety by that reference.
Following the offering, we will become subject to the reporting requirements
of the Securities Exchange Act of 1934. In accordance with that law, we will be
required to file reports and other information with the SEC. The registration
statement and exhibits, as well as those reports and other information when so
filed, can be inspected without charge and copied, at prescribed rates, at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549; and at the regional offices of the SEC at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the material
may be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates or at the SEC's web site at
http://www.sec.gov. Those reports and other information may also be inspected at
the offices of the Pacific Exchange. 301 Pine Street, San Francisco, California
94104, The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington D.C.
20006-1500, once the common stock has been approved for listing or quotation on
each.
We will furnish our stockholders annual reports and unaudited quarterly
reports for the first three quarters of each fiscal year. Annual reports will
include audited consolidated financial statements prepared in accordance with
generally accepted accounting principles. The financial statements included in
the annual reports will be examined and reported upon, with an opinion
expressed, by our independent auditors.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and
March 31, 1999 (unaudited)............................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the three
months ended March 31, 1998 and 1999 (unaudited)......................................................... F-4
Consolidated Statement of Stockholders' Equity............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the three
months ended March 31, 1998 and 1999 (unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
GenesisIntermedia.com, Inc.
We have audited the accompanying consolidated balance sheets of
GenesisIntermedia.com, Inc. and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion of these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of
GenesisIntermedia.com, Inc. and subsidiary as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 8, 1999
F-2
<PAGE>
GENESISINTERMEDIA.COM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997 AND MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
MARCH 31 ----------- -----------
-----------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................................. $ 945,457 $ 1,841,562 $ 280,289
Accounts receivable--trade, net of allowance for doubtful accounts of
$175,000, $175,000 and $75,000....................................... 1,808,788 1,991,166 1,041,113
Accounts receivable--affiliates........................................ 1,550,804 1,676,219 2,383,663
Inventory.............................................................. 172,475 180,208 275,579
Prepaid advertising.................................................... 1,054,308 550,823 1,059,423
Deposits and other prepaid assets...................................... 575,006 450,440 355,835
Deferred tax asset..................................................... 80,000 -- --
Due from related parties............................................... -- -- 126,752
----------- ----------- -----------
Total current assets................................................. 6,186,838 6,690,418 5,522,654
PROPERTY AND EQUIPMENT, net.............................................. 2,162,448 2,054,100 1,191,554
DEFERRED OFFERING COSTS.................................................. 796,087 689,531 --
GOODWILL, net............................................................ 345,900 362,040 --
OTHER ASSETS............................................................. 354,168 192,229 --
----------- ----------- -----------
TOTAL ASSETS....................................................... $ 9,845,441 $ 9,988,318 $ 6,714,208
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable....................................... 72,716 $ 603,728 $ 52,734
Current portion of capital lease obligations........................... 33,795 32,934 --
Line of Credit......................................................... 737,903 670,035 --
Accounts payable....................................................... 1,975,141 2,026,151 1,800,506
Other accrued liabilities.............................................. 727,717 539,107 141,709
Income taxes payable................................................... 267,000 65,000 35,000
Deferred revenue....................................................... 279,152 288,963 267,500
Due to related parties................................................. 12,214 15,495 188,380
----------- ----------- -----------
Total current liabilities............................................ 4,105,638 4,241,413 2,485,829
NOTES PAYABLE, net of current portion.................................... 985,006 988,310 609,545
CAPITAL LEASE OBLIGATIONS, net of current portion........................ 59,297 68,048 --
DEFERRED TAX LIABILITY................................................... 73,000 -- --
----------- ----------- -----------
Total liabilities.................................................. 5,222,941 5,297,771 3,095,374
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value
25,000,000 shares authorized
3,310,000, 3,060,000 and 4,000,000 shares issued and outstanding..... 3,310 3,060 4,000
Additional paid-in capital............................................. 4,235,987 1,521,522 920,582
Retained earnings...................................................... 383,203 3,165,965 2,694,252
----------- ----------- -----------
Total stockholders' equity........................................... 4,622,500 4,690,547 3,618,834
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 9,845,441 $ 9,988,318 $ 6,714,208
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GENESISINTERMEDIA.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
THREE MONTHS ENDED ------------ ------------ ------------
MARCH 31,
------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE
Media sales--affiliate................... $ -- $ 1,221,500 $ 3,702,731 $ 7,412,038 $ --
Media sales.............................. 3,938,020 -- 1,219,977 -- --
Product sales............................ 3,789,988 1,853,209 6,325,887 8,251,628 13,152,158
Commissions and royalties--affiliate..... -- 956,114 1,789,415 742,315 --
Commissions and royalties................ 69,606 535,850 1,854,450 1,737,863 78,855
Other.................................... -- 13,157 13,264 20,322 1,110,707
----------- ----------- ------------ ------------ ------------
Total net revenue...................... 7,797,614 4,579,830 14,905,724 18,164,166 14,341,720
----------- ----------- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Media purchases.......................... 3,500,462 1,035,407 4,198,159 6,445,250 --
Direct costs............................. 373,054 171,722 936,567 713,311 1,841,704
Selling, general, and administrative
expenses............................... 3,299,688 2,958,478 8,179,150 8,570,739 12,113,838
----------- ----------- ------------ ------------ ------------
Total operating costs and expenses..... 7,173,204 4,165,607 13,313,876 15,729,300 13,955,542
----------- ----------- ------------ ------------ ------------
INCOME FROM OPERATIONS..................... 624,410 414,223 1,591,848 2,434,866 386,178
INTEREST EXPENSE........................... 46,207 15,428 135,135 33,247 45
----------- ----------- ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES... 578,203 398,795 1,456,713 2,401,619 386,133
PROVISION FOR INCOME TAXES................. 195,000 5,000 30,000 35,000 --
----------- ----------- ------------ ------------ ------------
NET INCOME................................. $ 383,203 $ 393,795 $ 1,426,713 $ 2,366,619 $ 386,133
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE............ $ 0.12 $ 0.10 $ 0.37 $ 0.61 $ 0.10
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE.......... $ 0.12 $ 0.10 $ 0.37 $ 0.61 $ 0.10
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING.............................. 3,240,556 4,000,000 3,847,452 3,883,814 3,883,495
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
UNAUDITED PRO FORMA INFORMATION (NOTE 12):
INCOME BEFORE PROVISION FOR INCOME TAXES... $ 398,795 $ 1,456,713 $ 2,401,619 $ 386,133
Income taxes assuming Sub-Chapter S
corporation election had not been
made................................... 160,000 583,000 961,000 154,000
----------- ------------ ------------ ------------
NET INCOME................................. $ 238,795 $ 873,713 $ 1,440,619 $ 232,133
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
PRO FORMA BASIC EARNINGS PER COMMON
SHARE.................................... $ 0.06 $ 0.23 $ 0.37 $ 0.06
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
PRO FORMA DILUTED EARNINGS PER COMMON
SHARE.................................... $ 0.06 $ 0.23 $ 0.37 $ 0.06
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING.............................. 4,000,000 3,847,452 3,883,814 3,883,495
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GENESISINTERMEDIA.COM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995...................... 3,883,496 $ 3,883 $ 20,699 $ (58,500) $ (33,918)
NET INCOME...................................... 386,133 386,133
----------- --------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996...................... 3,883,496 3,883 20,699 327,633 352,215
SALE OF COMMON STOCK TO RELATED PARTY........... 116,504 117 899,883 900,000
NET INCOME...................................... 2,366,619 2,366,619
----------- --------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997...................... 4,000,000 4,000 920,582 2,694,252 3,618,834
DISTRIBUTION TO STOCKHOLDERS.................... (955,000) (955,000)
SURRENDER OF SHARES OF COMMON STOCK............. (1,000,000) (1,000) 1,000 --
ISSUANCE OF COMMON STOCK FOR ACQUISITION........ 60,000 60 599,940 600,000
NET INCOME...................................... 1,426,713 1,426,713
----------- --------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998...................... 3,060,000 3,060 1,521,522 3,165,965 4,690,547
DISTRIBUTION TO STOCKHOLDERS (UNAUDITED)........ (2,000,000) (2,000,000)
TRANSFER OF S CORPORATION EARNINGS TO ADDITIONAL
PAID-IN CAPITAL (UNAUDITED)................... 1,165,965 (1,165,965) --
ISSUANCE OF COMMON STOCK IN A PRIVATE PLACEMENT
OFFERING (UNAUDITED).......................... 250,000 250 1,548,500 1,548,750
NET INCOME (UNAUDITED).......................... 383,203 383,203
----------- --------- ------------ ------------ ------------
BALANCE, MARCH 31, 1999 (UNAUDITED) 3,310,000 $ 3,310 $ 4,235,987 $ 383,203 $ 4,622,500
----------- --------- ------------ ------------ ------------
----------- --------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GENESISINTERMEDIA.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31,
31, ---------------------------------
------------------------ 1998 1997 1996
1998 ---------- ---------- ---------
-----------
1999 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 383,203 $ 393,795 $1,426,713 $2,366,619 $ 386,133
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization.................. 84,758 21,379 142,609 37,619 8,198
Deferred taxes................................... (7,000) -- -- -- --
(Increase) decrease in
Accounts receivable--trade....................... 182,378 (164,575) (887,269) (789,629) (62,417)
Accounts receivable--affiliates.................. 125,415 (969,977) 707,444 (2,358,626) (25,037)
Inventory........................................ 7,733 (30,433) 98,371 (142,258) (6,812)
Prepaid advertising.............................. (503,485) 313,105 508,600 (1,059,423) --
Deposits and other prepaid assets................ (124,566) (27,273) (83,478) (342,158) (1,264)
Increase (decrease) in
Accounts payable................................. (51,010) (278,292) 33,731 1,654,203 119,996
Other accrued liabilities........................ 188,610 140,346 390,031 20,985 (177,206)
Income taxes..................................... 202,000 5,000 30,000 35,000 --
Deferred revenue................................. (9,811) -- 6,830 267,500 --
----------- ----------- ---------- ---------- ---------
Net cash provided by (used in)
operating activities............................. 478,225 (596,925) 2,373,582 (310,168) 241,591
----------- ----------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............... (176,966) (122,618) (345,554) (1,210,846) (7,365)
Cash acquired in acquisition..................... -- -- 19,673 -- --
Other............................................ (161,939) -- (192,229) -- --
----------- ----------- ---------- ---------- ---------
Net cash used in investing activities............ (338,905) (122,618) (518,110) (1,210,846) (7,365)
----------- ----------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from related parties................ (3,281) 393,712 (46,133) 10,946 (68,276)
Net proceeds from line of credit................. 67,868 -- 670,035 -- --
Distribution to stockholder...................... (2,000,000) (375,000) (955,000) -- --
Proceeds from sale of common stock to related
party.......................................... -- -- -- 900,000 --
Proceeds from sale of common stock in a private
placement, net................................. 1,548,750 -- -- -- --
Proceeds from notes payable...................... -- 500,000 800,000 676,596 --
Payment of offering costs........................ (106,556) (10,000) (689,531) -- --
Payments on capital lease obligations............ (7,890) -- (8,745) -- --
Payments on notes payable........................ (534,316) (15,947) (64,825) (14,317) --
----------- ----------- ---------- ---------- ---------
Net cash provided by financing activities.......... (1,035,425) 492,765 (294,199) 1,573,225 (68,276)
----------- ----------- ---------- ---------- ---------
Increase (decrease) in cash and cash equivalents
during period.................................... (896,105) (226,778) 1,561,273 52,211 165,950
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD.............................. 1,841,562 280,289 280,289 228,078 62,128
----------- ----------- ---------- ---------- ---------
END OF PERIOD.................................... $ 945,457 $ 53,511 $1,841,562 $ 280,289 $ 228,078
----------- ----------- ---------- ---------- ---------
----------- ----------- ---------- ---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID.................................... $ 46,207 $ 15,428 $ 135,135 $ 33,247 $ 45
----------- ----------- ---------- ---------- ---------
----------- ----------- ---------- ---------- ---------
INCOME TAXES PAID................................ $ -- $ -- $ -- $ -- $ --
----------- ----------- ---------- ---------- ---------
----------- ----------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
GenesisIntermedia.com, Inc. was incorporated in the State of Florida on
October 28, 1993 under the name Genesis Media Group, Inc. On December 3, 1998,
Genesis amended its certificate of incorporation to change its name to
GenesisIntermedia.com, Inc. Genesis is an integrated marketing and business
solutions provider utilizing conventional, emerging and interactive multimedia
technologies. Genesis has devoted substantially all its resources to selling
products it owned or had purchased the rights to sell through conventional
marketing methods. Genesis sold these products to the general public through the
use of infomercials, radio advertisements, print media and retail outlets. A
substantial portion of Genesis's product revenue has come from its "Men Are From
Mars, Women Are From Venus" product series authored by John Gray, Ph.D.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Genesis and
its wholly owned subsidiary GenesisIntermedia, Inc. from its inception in August
1998. All intercompany accounts and transactions have been eliminated.
INTERIM FINANCIAL INFORMATION
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state Genesis's financial
position, the results of its operations, and cash flows for the periods
presented. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results for the entire fiscal year ending
December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Genesis measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For some of Genesis's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable, and other accrued liabilities, the carrying amounts approximate fair
value due to their short maturities. The amounts shown for notes payable and
capital lease obligations also approximate fair value because current interest
rates offered to Genesis for debt or leases of similar maturities are
substantially the same.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-7
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," establishes and encourages the use of the fair
value based method of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of stock-based
compensation determined as of the date of grant and is recognized over the
periods in which the related services are rendered. The statement also permits
companies to elect to continue using the current implicit value accounting
method specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. Genesis has elected to use the implicit value based method and has
disclosed the pro forma effect of using the fair value based method to account
for its stock-based compensation.
CASH AND CASH EQUIVALENTS
For purpose of the statement of cash flows, Genesis considers all
highly-liquid investments purchased with original maturities of three months or
less to be cash equivalents.
INVENTORY
Inventory consists principally of products purchased for resale and are
stated at the lower of cost (determined by the first-in, first-out method) or
market.
PRODUCTION COSTS
Costs related to the production of Genesis's direct response televised
advertising programs are capitalized and amortized over the estimated useful
life of the production, generally from 12 to 24 months. The estimated useful
life of each production is regularly evaluated and adjusted as sales response
becomes available. Included in other assets in the accompanying consolidated
balance sheets as of December 31, 1998 are capitalized production costs of
$137,784, net of accumulated amortization of $28,377. At March 31, 1999
capitalized production costs were $213,961, net of accumulated amortization of
$49,147.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided on a
straight-line basis over estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
7 to 39
Building and improvements..................................... years
Vehicles...................................................... 5 years
Furniture and equipment....................................... 5 to 7 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains and losses on
disposals are included in the results of operations.
F-8
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Product sales are recognized when the product is shipped. Generally, it is
Genesis's policy to refund unconditionally the total price of merchandise
returned within 30 days of the customer's receipt of the merchandise. Genesis
provides an allowance, based upon experience, for returned merchandise. Revenue
from media sales is recognized when the media time is aired. Commissions and
royalties are recognized when earned.
INCOME TAXES
From inception to December 31, 1998, Genesis elected to be taxed as an S
corporation; accordingly, the stockholders were liable for federal and state
income taxes on their respective shares of Genesis's taxable income. In
addition, there was a minimal franchise tax on Genesis's taxable income for
state purposes.
Effective January 1, 1999, Genesis revoked its S corporation status and
elected to be taxed as a C corporation. At that date, the retained earnings of
the S corporation of $1,165,965 were transferred to additional paid-in capital.
Effective January 1, 1999, the Company recorded a deferred tax asset and
deferred tax liability of $94,000 and $56,000, respectively, upon the
conversion. Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion of all of the deferred tax assets will not be realized. No
valuation allowance was established as of March 31, 1999 as full realization of
the future deductions is anticipated. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
ADVERTISING COSTS
Genesis expenses advertising costs when the advertisement takes place,
except for direct-response advertising costs that elicits a customer to respond
to a specific advertisement and that results in future benefits. These costs are
capitalized and amortized using an accelerated method over its expected period
of future benefit, not to exceed twelve months. Genesis is able to identify to
which advertisement a customer is responding by using a separate toll free
number for each ad. Genesis evaluates the probable future benefits of
direct-response advertising costs based on recent historical experience based on
the type of advertisement, the target audience and the product being sold.
Direct response advertising consists principally of television airtime
purchased to broadcast Genesis's infomercials and print media. At March 31,
1999, $1,054,308 of advertising was reported as an asset which consisted of
amounts paid for advertisements not taken place of $366,908 and the unamortized
portion of the capitalized direct response advertising of $687,400, net of
accumulated amortization of $1,150,648. At December 31, 1998, $550,823 of
advertising was reported as an asset
F-9
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which consisted of the unamortized portion of the capitalized direct response
advertising, net of accumulated amortization of $1,763,918. At December 31,
1997, $1,059,423 of advertising was reported as an asset which consisted of
amounts paid for advertisements not taken place of $342,949 and the unamortized
portion of the capitalized direct response advertising of $716,474, net of
accumulated amortization of $3,637,118. Genesis incurred $431,145, $1,597,542,
$2,808,716, $5,296,069 and $8,580,386 in advertising expense for three months
ended March 31, 1999 and 1998, and the years ended December 31, 1998, 1997 and
1996, respectively.
CONCENTRATION OF CREDIT RISK
Genesis places its cash with high-credit, quality financial institutions. At
times, these amounts may be in excess of the Federal Deposit Insurance
Corporation limit. As of December 31, 1998 and 1997, the uninsured portions of
the balances held at these financial institutions aggregated to $159,507 and
$361,125, respectively. Genesis has not experienced any losses in this type of
account and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
During three months ended March 31, 1999 and 1998, and the years ended
December 31, 1998 and 1997 approximately 0%, 27%, 41% and 25%, respectively, of
Genesis's revenue was derived from selling media time to a corporation owned by
Genesis's majority stockholder.
EARNINGS PER SHARE
Genesis reports earnings per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
available. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
GOODWILL
Genesis continually monitors its goodwill to determine whether any
impairment of this asset has occurred. In making this determination with respect
to goodwill, Genesis evaluates the performance, on an undiscounted cash flow
basis, of the underlying assets or group of assets that gave rise to this
amount. Goodwill is being amortized on the straight-line basis over 60 months.
As of March 31, 1999 and December 31, 1998, goodwill was $345,900 and $362,040,
net of accumulated amortization of $26,900 and $10,760, respectively.
RISKS AND UNCERTAINTIES
Genesis operates in an industry that is highly competitive. Genesis's
principal competitors are marketing and communication companies that operate in
the United States. In order to maintain its current sales levels, Genesis must
continue to maintain existing client relationships, and attract new clients by
demonstrating its creative reputation, knowledge of media and high quality
service.
F-10
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The majority of Genesis's revenue has come from selling media time to a
related party and from product sales from one group of products. Genesis must
continue to develop new sources of revenue and obtain new products to sell
because the majority of products generate their most significant revenue in
their introductory year.
Genesis also relies on third-party fulfillment facilities to store
inventory, process orders and ship products. The termination of or adverse
change in Genesis's relationship with these fulfillment facilities or the
partial or total loss of any of these facilities or Genesis's inventories stored
there may have a material adverse effect upon Genesis's business.
DEFERRED OFFERING COSTS
Amounts paid for costs associated with an anticipated initial public
offering ("IPO") are capitalized and will be recorded as a reduction to
additional paid in capital upon the completion of the IPO. In the event that the
IPO is not successful, the deferred offering costs will be charged to expense.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement requires companies to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. For the year ended December 31,
1998, Genesis adopted SFAS No. 130. Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner sources. Examples
of items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on available-for-sale
securities. Comprehensive income is not presented in Genesis's financial
statements since Genesis did not have any changes in equity from non-owner
sources.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements. For the year ended
December 31, 1998, Genesis adopted this statement which had no impact on
Genesis's financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement is not
applicable to Genesis.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities and is
effective for fiscal years beginning after June 15, 1999. Management believes
that SFAS No. 133 will not have an effect on Genesis's financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement is not
applicable to Genesis.
F-11
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1999, the FASB issued SFAS No. 135, "Recession of FASB Statement
No. 75 and Technical Corrections." This statement is not applicable to Genesis.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the 1998 presentation.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 and December 31, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
MARCH 31, ------------ ------------
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 87,750 $ 87,750 $ 87,750
Building and improvements........................... 857,715 857,527 791,329
Vehicles............................................ 113,269 113,269 113,269
Furniture and equipment............................. 1,350,649 1,173,871 245,886
------------ ------------ ------------
2,409,383 2,232,417 1,238,234
Less accumulated depreciation....................... 246,935 178,317 46,680
------------ ------------ ------------
TOTAL............................................. $ 2,162,448 $ 2,054,100 $ 1,191,554
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Depreciation expense for the three months ended March 31, 1999 and 1998 and
the years ended December 31, 1998, 1997 and 1996, was $68,618, $21,379,
$131,849, $37,619, and $8,198, respectively.
F-12
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 3--NOTES PAYABLE
Notes payable at March 31, 1999 and December 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
MARCH 31, ------------ ----------
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable--bank is collateralized by an automobile.
The note bears interest at 11.5%. Monthly principal
and interest payments are $4,405 with any unpaid
principal and interest due on September 4, 1998..... $ 19,444 $ 32,688 $ 79,279
Note payable--bank is collateralized by a 1st Trust
Deed on the land and building located in Studio
City, California and is guaranteed by Genesis's
majority stockholder. The note bears interest at
prime (7.75% at March 31, 1999 and December 31, 1998
and 8.50% at December 31, 1997) plus 2.75%. Monthly
principal and interest payments are $5,823 with any
unpaid principal and interest due on July 1, 2022... 575,100 576,986 583,000
Note payable--bank is collateralized by a 2nd Trust
Deed on the land and building located in Studio
City, California and is guaranteed by Genesis's
majority stockholder. The note bears interest at
prime (7.75% at March 31, 1999 and December 31, 1998
and 8.50% at December 31, 1997) plus 2.75%. Monthly
principal and interest payments are $5,217 with any
unpaid principal and interest due on August 1,
2005................................................ 282,424 290,435 --
Note payable--bank is collateralized by furniture and
equipment. The note bears interest at 8.5%. Monthly
principal and interest payments are $4,127 with any
unpaid principal and interest due in August 2003.... 180,754 191,929 --
Notes payable to an unrelated third party. The notes
are unsecured, bear interest at 8% and are due on
May 1, 1999......................................... -- 500,000 --
------------ ------------ ----------
$ 1,057,722 $ 1,592,038 $ 662,279
Current portion....................................... 72,716 603,728 52,734
------------ ------------ ----------
LONG-TERM PORTION................................... $ 985,006 $ 988,310 $ 609,545
------------
------------ ------------
------------ ----------
----------
</TABLE>
F-13
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 3--NOTES PAYABLE (CONTINUED)
The following is a schedule by years of future maturities of notes payable:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 603,728
2000............................................................................ 78,417
2001............................................................................ 86,583
2002............................................................................ 95,723
2003............................................................................ 91,378
Thereafter.................................................................... 636,209
------------
Total....................................................................... $ 1,592,038
------------
------------
</TABLE>
NOTE 4--LINE OF CREDIT
In June 1998, Genesis obtained a $750,000 line of credit from a financial
institution. The line of credit becomes due on June 30, 1999 and is renewable
for an additional year at the option of Genesis. The line of credit bears
interest at prime plus 2.90%, is collateralized by substantially all of
Genesis's assets, except real estate, and is guaranteed by Genesis's majority
stockholder.
NOTE 5--RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Due to related parties are principally amounts advanced to Genesis by its
majority stockholder. The advances are non-interest bearing with no repayments
terms. The amount outstanding is subordinate to all other debts of Genesis.
DUE FROM RELATED PARTIES
From time to time, Genesis lends funds to companies that are owned by
Genesis's majority stockholder. The amounts receivable from these companies are
non-interest bearing with no repayment terms.
MEDIA SALES AND ACCOUNTS RECEIVABLE--AFFILIATE
Genesis purchases media airtime and resells it to other companies. For three
months ended March 31, 1999 and 1998 and the years ended December 31, 1998, 1997
and 1996, media sold to a company owned by Genesis's majority stockholder
amounted to $0, $1,221,500, $3,702,731, $7,412,038, and $0, respectively. The
above mentioned media sales resulted in a gross profit of $0, $186,093,
$555,410, $966,788, and $0, respectively. The mark-up on the media sales was
approximately 15% which is the standard industry mark-up and consistent with
amounts that could be realized from sales to unrelated third parties. The amount
due from this affiliated company, principally related to media purchases and
commissions earned by selling this affiliated company's products, was
$1,550,804, $1,676,219 and $2,383,663 at March 31, 1999 and December 31, 1998
and 1997, respectively.
F-14
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 5--RELATED PARTY TRANSACTIONS (CONTINUED)
COMMISSION REVENUE
For the three months ended March 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996, Genesis earned $0, $956,114, $1,789,415,
$742,315, and $0, respectively, in commission from selling products for
companies owned by Genesis's majority stockholder. The commission received from
selling these products ranged from 35% to 55%.
TRANSACTIONS WITH DR. GRAY
On December 31, 1997, Genesis sold 116,504 shares of its common stock to Dr.
John Gray for $900,000. On November 1, 1998, 29,126 of those shares were
surrendered. Royalties paid to Dr. Gray for the years ended December 31, 1998,
1997 and 1996 were $0, $50,101, and $423,207, respectively. There were no
royalties paid to Dr. Gray during the three months ended March 31, 1999 and
1998.
NOTE 6--COMMITMENTS AND CONTINGENCIES
ROYALTIES
In the normal course of business, Genesis has entered into various
agreements under which it is obligated to pay royalties on products it sells.
The royalties vary by agreement and are based on percentages of net revenue
generally not to exceed 25% or a percentage of the net profits of the venture
generally not to exceed 50%. Royalty expense for three months ended March 31,
1999 and 1998 and the years ended December 31, 1998, 1997 and 1996 was $477,383,
$15,685, $454,997, $50,101, and $423,207, respectively.
LITIGATION
On November 14, 1997, the Commodity Futures Trading Commission issued an
Order authorizing the issuance of subpoenas and depositions in a private
investigation involving Jake Bernstein and MBH Commodity Advisors, a company not
affiliated with Genesis. Although the Order does not reference Genesis, its
employees or affiliates, the CFTC has nonetheless requested that Genesis provide
various documents arising out of Genesis's involvement in the production and
marketing of an infomercial titled Success and You which promotes and markets a
video series titled Trade Your Way To Riches. To date, the CFTC has directed one
subpoena to Genesis. Various documents have been produced on behalf of Genesis
in response to the subpoena. Additionally, the CFTC has taken the deposition of
Ramy El-Batrawi, president of Genesis, in connection with its investigation.
Genesis has not to date been requested to discontinue sales of Trade Your Way To
Riches products or services as a result of the CFTC's actions.
Although the CFTC has articulated its belief that Genesis, by virtue of its
involvement in the production and marketing of the infomercial, may be required
to be registered in some capacity to continue to engage in the referenced
activities, Genesis believes the CFTC's analysis and conclusions are incorrect
and are based on incomplete information. In October 1998, Genesis issued a
written response to the CFTC's position setting forth the reasons why Genesis is
not required to register in any capacity with the CFTC. The CFTC has indicated
that registration may be required. Genesis has been advised by its counsel that
the initiation of a CFTC enforcement action against Genesis requiring
registration or seeking the imposition of sanctions is unwarranted. As of the
date of this prospectus, there has been no indication that the CFTC seeks any
relief other than registration. To date, no
F-15
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
complaint or enforcement action has been asserted against Genesis, its officers,
directors or employees.
If it is determined in the investigation or any resulting proceeding that
registration is required, Genesis intends promptly to effect any required
registration. It is estimated that the cost of registering Genesis with the CFTC
will be less than $1,000.00. In the event that the CFTC brings an enforcement
action against Genesis by virtue of its failure to register, any adverse
determination or settlement in this action could adversely affect Genesis. The
range of possible sanctions available to the CFTC include a simple request to
become registered, a cease and desist order--which may terminate sales of Trade
Your Way To Riches products or services--and a possible order of disgorgement of
profits-- which could, if applied to Genesis, result in substantial payments by
Genesis.
On February 5, 1999, the former chief executive officer of Genesis
Intermedia, Inc. commenced a suit for wrongful termination in California
Superior Court in Los Angeles County. The plaintiff is Sam Hassabo and the
principal defendants are Genesis, Genesis Intermedia, Inc. and Genesis's chief
executive officer, Mr. El-Batrawi. The complaint alleges wrongful termination
and breach of employment contract. The complaint also alleges that the
defendants engaged in fraud and negligent misrepresentation in connection with
the plaintiff's hiring and the termination of his employment. Mr. Hassabo was
terminated from his position as director and chief executive officer of Genesis
Intermedia, Inc. in December 1998. The complaint primarily seeks monetary and
punitive damages. Genesis believes the suit is frivolous and intends to defend
it vigorously. Genesis carries employment practices and general liability
insurance which Genesis believes is adequate to cover any potential liability.
Genesis may also be involved from time to time in various other claims and
legal actions incident to its operations, either as plaintiff or defendant.
LEASES
Genesis leases office space and an automobile under a non-cancelable
operating lease expiring beginning in July 2000. Genesis also leases office
furniture and equipment under capitalized lease obligations. Future minimum
rental commitments under lease agreements with initial or remaining terms of one
year or more are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
1999.................................................................. $ 110,856 $ 43,091
2000.................................................................. 69,981 41,942
2001.................................................................. 9,567 28,233
2002.................................................................. -- 7,754
---------- ----------
$ 190,404 $ 121,020
----------
----------
Less amount representing interest..................................... 20,038
----------
100,982
Less current portion.................................................. 32,934
----------
$ 68,048
----------
----------
</TABLE>
F-16
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Included in property and equipment is capitalized lease equipment of
$114,897 with accumulated amortization of $11,490 and $5,745 at March 31, 1999
and December 31, 1998, respectively.
Rent expense for the three months ended March 31, 1999 and the year ended
December 31, 1998 was $24,525 and $24,405, respectively. There was no rent
expense for any other period presented in the statements of operations.
EMPLOYMENT AGREEMENTS
In September 1998, Genesis entered into an employment agreement with its
president which continues until September 30, 2003, unless terminated earlier by
Genesis, either for cause, death or other specified circumstances. Under the
employment agreement, the president is to be paid an annual salary of $250,000
and is eligible to receive bonuses at the discretion of the board of directors.
In October, 1998 Genesis entered into employment agreements with two
employees retained as a result of the acquisition of assets of Vision Digital
Communications, Inc. The term of each of the employment agreements commenced on
November 1, 1998 and will terminate on October 31, 2001, unless terminated
earlier by Genesis for cause, death or under other specified circumstances. The
employment agreements provide that each of the employees is to be paid an annual
salary of $84,000 and is eligible to receive an annual bonus at the discretion
of the board of directors.
NOTE 7--STOCKHOLDERS' EQUITY
On October 27, 1998, Genesis effected a 38,834.95-for-1 stock split of its
common stock, increased the number of authorized shares to 25,000,000 and
changed the par value of its common stock to $0.001. All share and per share
data have been retroactively restated to reflect this stock split, change in the
authorized shares and par value. In addition, Genesis authorized 5,000,000
shares of $0.001 par value preferred stock. No preferred shares were issued or
outstanding as of December 31, 1998.
On November 1, 1998, Genesis's two principal stockholders surrendered an
aggregate of 1,000,000 shares of Genesis's common stock.
In January 1999, Genesis completed a private placement of 175,000 shares of
common stock at $10 per share, net of commissions and expenses of $201,250.
Genesis subsequently issued an additional 75,000 shares to the same investors,
bringing the effective per share price to $7. The issuance of the 75,000 shares
has been retroactively reflected in the March 31, 1999 financial statements. See
note 10.
STOCK OPTION PLAN
In October 1998, the board of directors adopted and the stockholders
approved Genesis's 1998 Stock Incentive Program ("Stock Option Plan"). Under the
Stock Option Plan, the board of directors, or its designated administrators, has
the flexibility to determine the type and amount of awards to be granted to
eligible participants. The Stock Option Plan is intended to secure for Genesis
and its stockholders the benefits arising from ownership of Genesis's common
stock by individuals employed or retained by Genesis who will be responsible for
the future growth of Genesis. The Stock Option Plan is designed to help attract
and retain superior personnel for positions of substantial responsibility, and
to provide individuals with an additional incentive to contribute to Genesis's
success.
F-17
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
The Stock Option Plan is composed of seven parts and the program
administrators may make the following types of awards under the Stock Option
Plan: (1) incentive stock options under the Incentive Stock Option Plan; (2)
nonqualified stock options under the Nonqualified Stock Option Plan; (3)
restricted shares under the Restricted Shares Plan; (4) rights to purchase stock
under the Employee Stock Purchase Plan; (5) stock appreciation rights under the
Stock Appreciation Rights Plan; (6) grants of options under the Non-Employee
Director Stock Option Plan; and (7) other stock rights under the Stock Rights
Plan, which may include the issuance of units representing the equivalent of
shares of common stock, payments of compensation in the form of shares of common
stock and rights to receive cash or shares of common stock based on the value of
dividends paid with respect to a share of common stock.
Genesis has authorized and reserved for issuance an aggregate of 600,000
shares of common stock under the Stock Option Plan. The aggregate number of
shares of common stock which may be granted through awards under the Stock
Option Plan, other than stock payments and the purchase of stock under the
Employee Stock Purchase Plan, to any employee in any calendar year may not
exceed three percent of the then-outstanding shares of common stock. The shares
of common stock issuable under the Stock Option Plan may be authorized but
unissued shares, shares issued and reacquired by Genesis or shares purchased by
Genesis on the open market. If any of the awards granted under the Stock Option
Plan expire, terminate or are forfeited for any reason before they have been
exercised, vested or issued in full, the unused shares subject to those expired,
terminated or forfeited awards will again be available for purposes of the Stock
Option Plan.
Genesis has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its Stock Option Plan and does not
recognize compensation expense for its Stock Option Plan other than for
restricted stock and options issued to outside third parties. If Genesis had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under the Stock Option Plan consistent with the methodology
prescribed by SFAS No. 123, Genesis's net income and earnings per share would be
reduced to the pro forma amounts indicated below for the year ended December 31,
1998:
<TABLE>
<S> <C>
Net Income
As reported................................................... $1,426,713
Pro forma..................................................... $1,074,630
Basic earnings per common share
As reported................................................... $ 0.37
Pro forma..................................................... $ 0.28
Diluted earnings per common share
As reported................................................... $ 0.37
Pro forma..................................................... $ 0.28
</TABLE>
For purposes of computing the pro forma disclosures required by SFAS No.
123, the fair value of each option granted to employees and directors is
estimated using the Black-Scholes option-pricing model. The fair value is
computed as of the date of grant using the following assumptions: (i) dividend
F-18
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
yield of 0%, (ii) expected volatility of 65%, (iii) weighed-average risk-free
interest rate of approximately 5.5%, and (iv) expected life of 2 years.
<TABLE>
<CAPTION>
STOCK WEIGHTED AVERAGE OTHER WEIGHTED AVERAGE
OPTION PLAN EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997........................... -- -- -- --
Granted.............................................. 450,000 $ 8.50 50,000 $ 9.57
Exercised............................................ -- -- -- --
Canceled............................................. 200,000 8.50 -- --
----------- ----- --------- -----
Balance, December 31, 1998........................... 250,000 8.50 50,000 9.57
Granted.............................................. 100,000 8.50 -- --
Exercised............................................ -- -- -- --
-----------
Balance, March 31, 1999.............................. 350,000 $ 8.50 50,000 $ 9.57
----------- ----- --------- -----
----------- ----- --------- -----
</TABLE>
The weighted average remaining contractual life of options outstanding
issued under the Stock Option Plan and the other options is 4.75 and 2.83 years,
respectively, at December 31, 1998.
NOTE 8--ACQUISITIONS
On October 26, 1998, Genesis acquired assets of Vision Digital
Communications, Inc., ("Vision Digital") a company that places interactive
kiosks in shopping malls. Genesis purchased current assets, equipment and
intangible assets in exchange for 60,000 shares of Genesis's common stock valued
at $600,000 plus the assumption of specified liabilities. The common stock was
valued at $10 per share which approximates the per share price Genesis received
when it sold stock in December 1997. Genesis also issued to the seller options
to purchase up to an additional 50,000 shares of common stock at a weighted
average exercise price of $9.57 per share. The options will be exercisable if
the acquired division meets targeted levels of total revenue over a three-year
period. These options were issued outside the Stock Option Plan. These options
will expire at the end of this three-year period. Genesis entered into
employment agreements with two former employees of Vision Digital, each
providing for three-year terms and annual salaries of $84,000. Each of these
employees is also eligible to receive grants of options to purchase an aggregate
of 75,000 shares of common stock, upon the achievement of three separate
performance hurdles. The 25,000 options that may be granted to each employee at
each hurdle will have per share exercise prices of $11.00, $13.00 and $15.00,
respectively. In addition, each employee is to receive an interest free loan of
$40,000 of which $30,000 will be forgiven upon the achievement of performance
goals. These loans have not yet been extended by Genesis.
Listed below are the assets purchased from Vision Digital:
<TABLE>
<S> <C>
Cash............................................................ $ 19,673
Other current assets............................................ 76,911
Property and equipment.......................................... 582,895
Goodwill........................................................ 372,800
Current liabilities............................................. (213,914)
Long-term debt and Capital leases............................... (238,365)
-----------
Purchase price............................................ $ 600,000
-----------
-----------
</TABLE>
F-19
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 8--ACQUISITIONS (CONTINUED)
In March 1999, Genesis acquired substantially all the assets of AniMagic
Corporation, an interactive multimedia company that produces CD-ROMs for the
edutainment industry, for $45,000.
The following table presents the unaudited pro forma condensed consolidated
statements of operations for the years ended December 31, 1998 and 1997 and
reflects the results of operations of Genesis as if the acquisition of Vision
Digital had been effective January 1, 1997. The pro forma amounts are not
necessarily indicative of the combined results of operations had the acquisition
been effective as of that date, or of the anticipated results of operations, due
to cost reductions and operating efficiencies that are expected as a result of
the acquisition.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
YEAR ENDED -------------
DECEMBER 31,
1998 (UNAUDITED)
-------------
(UNAUDITED)
<S> <C> <C>
Total net revenue.............................................. $ 15,069,347 $ 18,363,980
Direct costs................................................... 998,057 859,001
Selling, general and administrative expenses................... 8,696,034 8,748,870
Income from operations......................................... 1,177,097 2,310,859
Net income..................................................... 1,011,162 2,241,812
Basic earnings per share....................................... 0.25 0.57
</TABLE>
NOTE 9 - PROVISION FOR INCOME TAXES
The following table presents the current and deferred income tax provision
(benefit) for federal and state income taxes for the three months ended March
31, 1999:
<TABLE>
<S> <C>
Current
Federal......................................................... $ 157,000
State........................................................... 45,000
---------
202,000
---------
Deferred
Federal......................................................... (5,500)
State........................................................... (1,500)
---------
(7,000)
---------
$ 195,000
---------
---------
</TABLE>
F-20
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 9 - PROVISION FOR INCOME TAXES (CONTINUED)
The tax effects of temporary differences which give rise to the deferred tax
provision (benefit) for the three months ended March 31, 1999 consisted of:
<TABLE>
<S> <C>
Net deferred tax asset recognized upon
conversion to C corporation..................................... $ (38,000)
Depreciation of property and equipment............................ 21,000
Amortization of intangible assets................................. (4,000)
Deferred revenue.................................................. 14,000
---------
Total....................................................... $ (7,000)
---------
---------
</TABLE>
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate for the three months ended March 31,
1999 as follows. No reconciliation is shown for the years ended December 31,
1998, 1997 and 1996 as the Company elected to be taxed as an S corporation until
December 31, 1998.
<TABLE>
<S> <C>
Statutory regular federal income tax rate............................. 34.0%
State income taxes, net of federal benefit............................ 5.8
Deferred taxes recognized upon conversion to C corporation............ (6.6)
Non-deductible expenses............................................... 0.5
---
Total............................................................. 33.7%
---
---
</TABLE>
The components of the deferred income tax assets and liability as of March
31, 1999 are as follows:
<TABLE>
<S> <C>
Deferred tax assets
Intangible assets................................................ $ 7,000
Accounts receivable.............................................. 70,000
Deferred revenue................................................. 10,000
---------
$ 87,000
---------
---------
Deferred tax liability
Property and equipment........................................... $ 80,000
---------
---------
</TABLE>
NOTE 10--SUBSEQUENT EVENT
In March 1999 the board of directors authorized the issuance of one series
of preferred stock-- series A convertible preferred stock. There are 450,000
authorized shares of series A convertible preferred stock. This stock has a cash
dividend of 8.75% per annum, payable quarterly. The holders of this stock have
no voting rights. In April 1999, Genesis sold 142,858 shares of convertible
preferred stock at $7 per share, net of commissions of $115,000, and warrants to
purchase 142,858 shares of common stock at 120% of the IPO price to the same
investors. In January 1999, the same investors had purchased 175,000 shares of
common stock at a price of $10.00 per share. In connection with the April 1999
transaction, Genesis issued 75,000 additional shares of common stock and
warrants to purchase an additional 250,000 shares of common stock at 120% of the
IPO price to the same investors. The issue
F-21
<PAGE>
GENESISINTERMEDIA.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTE 10--SUBSEQUENT EVENT (CONTINUED)
of the 75,000 additional shares brought the effective purchase price of the
shares issued in the private placement in January to $7 per share.
In April 1999, Genesis entered into a strategic alliance with Global Leisure
Travel, Inc., a leading provider of wholesale travel to travel agents and
consumers. Global's majority stockholder is a company that is wholly owned by
Genesis's majority stockholder. The strategic alliance provides that Genesis
will become the principal marketing and advertising agent and the exclusive
Internet marketing and advertising agent and eCommerce consultant and provider
to Global and all of its subsidiaries and affiliates. Subject to the negotiation
and execution of definitive documentation, Genesis has agreed to advance up to
$3 million to Global to finance the development of its marketing and advertising
initiatives, as well as for general corporate purposes.
Global also granted Genesis an option to acquire all of the technology and
assets comprising its proprietary computerized travel marketing system known as
the Contour System. The agreed purchase price is the actual cost of development
and Genesis estimates that the price for these assets and technology will be
between $2 million and $3 million, subject to an audit, which will be conducted
within 30 days of the proposed acquisition. Genesis intends to exercise this
option in the second quarter of 1999 and to complete the development of the
Contour System and market it to Global and other travel industry participants.
Under the term sheet, Global has agreed to minimum purchase commitments for
Contour System services. Global also granted Genesis a right of first refusal,
which expires on June 30, 2000, to purchase Global or all of its assets at fair
market value as determined by an independent appraisal.
NOTE 11--YEAR 2000 ISSUE
Genesis has completed a comprehensive review of its computer system to
identify all software applications that could be affected by the inability of
many existing computer systems to process time-sensitive data accurately beyond
the year 1999, referred to as the Year 2000 or Y2K issue. Genesis is also
continuing to monitor its computer systems and monitoring the adequacy of the
processes and progress of third-party vendors of systems that may be affected by
the Year 2000 issue. Genesis is dependent on third-party computer systems and
applications, particularly with respect to critical tasks such as accounting,
billing and buying, planning and paying for media. Genesis also relies on its
own computer systems. Genesis expects to complete its Year 2000 compliance
program by mid-1999 and anticipate that its total expenditures on the program
will not exceed $20,000. However, Genesis may experience cost overruns or delays
in the future, which could have a material adverse effect on Genesis. While
Genesis believes its procedures are designed to be successful, because of the
complexity of the Year 2000 issue and the interdependence of organizations using
computer systems, its efforts, or those of third parties with whom Genesis
interacts, may not be satisfactorily completed in a timely fashion or may cost
substantially more to remedy than the amount Genesis anticipates. Failure to
satisfactorily address the Year 2000 issues could have a material adverse effect
on Genesis.
NOTE 12--PRO FORMA INFORMATION (UNAUDITED)
For informational purposes, the accompanying statements of operations
include the unaudited pro forma adjustment for income taxes which would have
been recorded if Genesis had been a C corporation, based on a combined federal
and state income tax rate of 40% which approximates the federal and state income
tax rates in effect during the respective periods.
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, THAT INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY GENESIS, THE UNDERWRITERS OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE UNDER THIS PROSPECTUS SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Forward Looking Statements................................................ 10
Use of Proceeds........................................................... 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Dilution.................................................................. 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 15
Business.................................................................. 25
Management................................................................ 47
Certain Transactions...................................................... 53
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 56
Underwriting.............................................................. 62
Legal Matters............................................................. 65
Experts................................................................... 65
Available Information..................................................... 65
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 SHARES
GENESISINTERMEDIA.COM, INC.
[LOGO]
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MILLENNIUM FINANCIAL GROUP, INC.
HD BROUS & CO., INC.
AMERICAN FRONTEER FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the Common Stock being registered, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
Registration Fee.......................................................... $ 7,034
Pacific Exchange Filing fee............................................... 20,000
NASD Filing Fee........................................................... 3,294
Nasdaq Stock Market Listing Fees.......................................... 58,725
Printing and Engraving Expenses........................................... 175,000
Blue Sky Fees and Expenses................................................ 5,000
Legal Fees and Expenses................................................... 225,000
Accounting Fees and Expenses.............................................. 150,000
Transfer Agent Fees and Expenses.......................................... 10,000
Directors and Officers' Insurance......................................... 50,000
Miscellaneous............................................................. 95,947
---------
Total................................................................. $ 800,000
</TABLE>
- --------------------------
* All amounts are estimated except for the Registration Fee, the NASD Filing
Fee and the Nasdaq Stock Market Listing Fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Seventh of the Registrant's Certificate of Incorporation provides
substantially as follows:
Section A. Elimination of Certain Liability of Directors. A director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit.
Section B. Indemnification and Insurance.
(a) Right to indemnification. Each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended but, in the case of any such amendment, to the fullest
extent permitted by law, only to the extent that such amendment permits the
Company to provide broader indemnification rights than said law permitted the
Company to provide prior to such amendment), against all expense, liability and
loss (including, without limitation, attorneys' fees, judgments, fines, amounts
paid or to be paid in settlement, and excise taxes or penalties arising under
the Employee Retirement Income Security Act of 1974) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit
II-1
<PAGE>
of his or her heirs, executors and administrators; provided, however, that,
except as provided in paragraph (b) hereof, the Company shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Company. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Company the expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the General Corporation Law of the State of Delaware requires, the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Company of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section or
otherwise. The Company may, by action of the Board of Directors, provide
indemnification to employees and agents of the Company with the same scope and
effect as the foregoing indemnification of directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this
Section is not paid in full by the Company within thirty days after a written
claim has been received by the Company, the claimant may at any time thereafter
bring suit against the Company to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Company) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the Company to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Company. Neither the failure of the Company (including
its Board of Directors, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the Company
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, By-law, agreement, vote of stockholders or
disinterested directors or otherwise.
(d) Insurance. The Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Company would
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Law of the State of Delaware.
The 1998 Stock Incentive Program provides that no Program Administrator, as
that term is defined in the Program, or any officer or employee of the
Registrant or an affiliate acting at the direction or on behalf of the Program
Administrator shall be personally liable for any action or determination taken
or made in good faith with respect to the Program, and shall, to the extent
permitted by law, be fully indemnified and protected by the Registrant with
respect to any such action or determination.
The Registrant also carries liability insurance covering officers and
directors.
II-2
<PAGE>
Pursuant to the proposed form of Underwriting Agreement, the underwriters
have agreed to indemnify the directors and officers of the Registrant in certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order below is information regarding the number
of shares of capital stock issued and the number of options granted by the
Registrant since January 1, 1995. Further included is the consideration, if any,
received by the Registrant for such shares and options, and information relating
to the section of the Securities Act or rule of the Securities and Exchange
Commission under which exemption from registration was claimed. All awards of
options under the Registrant's 1998 Stock Incentive Program did not involve any
offer or sale under the Securities Act and therefore the issuance of such
options by the Registrant was not registered under the Securities Act.
In December 1997, the Registrant issued 116,504 shares (giving effect to the
subsequent stock split) of common stock to Dr. John M. Gray in consideration of
$900,000.
In October 1998, the Registrant issued 60,000 shares of common stock and
granted options to purchase 50,000 shares of common stock to Vision Digital
Communications, Inc., in partial consideration of the acquisition of
substantially all of the assets of such company. Vision Digital distributed
28.5% of such securities to one of its stockholders, Crown American Enterprises,
Inc. Such offers and sales of securities were made in reliance on the exemption
from registration under Section 4(2) of the Securities Act relating to offers
and sales not involving a public offering. Each recipient of such securities in
both transactions represented in such transaction that such investor was a
sophisticated investor (Dr. Gray is also an accredited investor) and such
recipient's intention to acquire the securities for investment only and not with
a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transaction. In each transaction the investor received access to and reviewed
full financial and business records of the Registrant and visited with the
Registrant's management and inspected the Registrant's facilities and
operations. Vision Digital and each of its stockholders also received
substantially all of the disclosure contained in the draft of the prospectus
contained in this Registration Statement, including all information contained in
the risk factor, business, management and financial statement sections.
In addition to the foregoing transactions, in October 1998, the Registrant
granted options to purchase an aggregate of 200,000 shares of common stock to
two employees under the Program and in December 1998, the Registrant granted
options to purchase an additional 50,000 shares of common stock to one employee
under the Program. In January 1999, the Registrant granted options to purchase
an aggregate of 100,000 shares of common stock to two board members and options
to purchase an aggregate of 50,000 shares of common stock to a consultant. The
securities underlying such options were offered in reliance upon the exemption
from registration under Rule 701 promulgated under the Securities Act relating
to certain offers and sales by an issuer to its employees under certain
compensatory benefit plans. In addition, in connection with the hiring of two
employees in October 1998, the Registrant agreed to issue options to purchase an
aggregate of 150,000 shares of common stock at an average exercise price of
$13.00 if certain business performance goals are met. To the extent such
agreement constituted an offer or sale of securities, it was made in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act relating to certain sales by an issuer to its employees under a
written compensation contract.
In January 1999, the Registrant issued 175,000 shares of its common stock to
two institutional investors that are not U.S. persons within the meaning of
Regulation S under the Securities Act in consideration of $1,750,000, with
aggregate underwriting commissions and discounts of $201,250. The offer and sale
of such securities were made in reliance on the exemption from registration
under Regulation S relating to non-United States offers and sales.
II-3
<PAGE>
In April 1999, the Registrant issued 142,858 shares of convertible preferred
stock and warrants to purchase 142,858 shares of common stock to the same
institutional investors for consideration of $1,000,000, with aggregate
underwriting commissions and discounts of $115,000. In connection with this
transaction, the Registrant issued 75,000 additional shares of common stock and
warrants to purchase an additional 250,000 shares of common stock to the
investors, bringing the effective purchase price of the shares issued in January
to $7 per share. The offer and sale of such securities was made in reliance upon
the exemption from registration under Regulation S relating to non-United States
offers and sales.
ITEM 16. EXHIBITS.
(a) Exhibits
See Exhibit Index at page II-6.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(b) (1) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery each to
purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 5 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, California, on May 12, 1999.
<TABLE>
<S> <C> <C>
GENESIS INTERMEDIA.COM, INC.
By: /s/ RAMY EL-BATRAWI
-----------------------------------------
Ramy El-Batrawi
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 5 to Registration Statement has been signed by the following
persons (which persons constitute a majority of the Board of Directors) in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board and
/s/ RAMY EL-BATRAWI Chief Executive Officer
- ------------------------------ (Principal Executive May 12, 1999
Ramy El-Batrawi Officer)
Director, Chief Financial
/s/ DOUGLAS E. JACOBSON Officer (Principal
- ------------------------------ Financial and Accounting May 12, 1999
Douglas E. Jacobson Officer)
/s/ BLAIR LACORTE*
- ------------------------------ Director May 12, 1999
Blair LaCorte
/s/ GEORGE W. HEYWORTH*
- ------------------------------ Director May 12, 1999
George W. Heyworth
</TABLE>
* By Douglas E. Jacobson, Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION FILED (F)
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement................................................................ *
2.1 Agreement and Plan of Merger between Genesis Media Group, Inc., a Florida corporation
("Genesis Florida") and GenesisIntermedia.com, Inc. (formerly Genesis Media Group, Inc.), a
Delaware corporation ("Genesis Delaware")................................................... *
2.2 Asset Purchase Agreement between the Registrant and Vision Digital Communications, Inc. dated
as of October 26, 1998...................................................................... *
2.3 Letter Agreement between the Registrant and AniMagic Corporation dated October 27, 1998....... *
2.4 Letter of Agreement between the Registrant and Crown American Enterprises, Inc. dated as of
November 17, 1998........................................................................... *
3.1 Articles of Incorporation of Genesis Florida filed with the Florida Secretary of State on
October 28, 1993............................................................................ *
3.2 Articles of Amendment of Genesis Florida filed on October 27, 1998............................ *
3.3 Certificate of Incorporation of Genesis Delaware filed with the Delaware Secretary of State on
October 26, 1998............................................................................ *
3.4 Bylaws of Genesis Florida..................................................................... *
3.5 Bylaws of Genesis Delaware.................................................................... *
3.6 Certificate of Amendment of Certificate of Incorporation of Genesis Delaware filed with the
Delaware Secretary of State on December 3, 1998............................................. *
3.7 Certificate of Merger of Genesis Florida into Genesis Delaware filed with the Delaware
Secretary of State on December 9, 1998...................................................... *
3.8 Certificate of Designation, Rights and Preferences of the Series A Convertible Preferred Stock
of Genesis Intermedia.com, Inc.............................................................. *
4.1 Specimen Stock Certificate.................................................................... *
5.1 Opinion of Nida & Maloney, a Professional Corporation......................................... *
10.1 Genesis Intermedia.com, Inc. Amended and Restated 1998 Stock Incentive Program................ *
10.2 Form of Indemnification Agreement with Directors and Executive Officers....................... *
10.3 Form of Representative's Warrant.............................................................. *
10.4 Form of Lock-Up Agreement..................................................................... *
10.5 Employment Agreement between the Registrant and Ramy El-Batrawi............................... *
10.6 Employment Agreement between the Registrant and Sam I. Hassabo................................ *
10.7 Deed of Trust (dated July 24, 1997)........................................................... *
10.8 Note U.S. Small Business Administration (dated July 24, 1997)................................. *
10.9 Promissory Note (dated January 1, 1998)....................................................... *
10.10 Promissory Note (dated April 23, 1998)........................................................ *
10.11 Note U.S. Small Business Administration (dated August 20, 1998)............................... *
10.12 Commercial Security Agreement (dated August 20, 1998)......................................... *
10.13 Lease Agreement (dated July 24, 1998)......................................................... *
10.14 WCMA Note, Loan and Security Agreement between the Registrant and Merrill Lynch Business
Financial Services, Inc. ................................................................... *
10.15 Addendum to that Lease dated July 24, 1998 between the Registrant and Southern California
Sunbelt Developers, Inc. ................................................................... *
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION FILED (F)
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.16 License Agreement between the Registrant (as assignee) and John Gray, Ph.D. dated September
29, 1993.................................................................................... *
10.17 Amendment to Agreement between the Registrant (as assignee) and John Gray, Ph.D. ............. *
10.18 Employment Agreement between Registrant and Michael F. Costa.................................. *
10.19 Employment Agreement between Registrant and Christopher Miglino............................... *
10.20 Assignment between Registrant (as Assignee) and Ramy El-Batrawi (as Assignor)................. *
10.21 Surrender and Cancellation Agreement among the Registrant, Ramy El-Batrawi and John M. Gray... *
10.22 Term Sheet between the Registrant and Global Leisure Travel, Inc.+ F
10.23 Letter Amendment to Employment Agreement between Registrant and Michael F. Costa dated as of
April 9, 1999............................................................................... *
10.24 Letter Amendment to Employment Agreement between Registrant and Christopher Miglino dated as
of April 9, 1999............................................................................ *
10.25 Lease Agreement between Winter Quarters Resort Properties Ltd. and Genesis Media Group, Inc.
dated April 29, 1999........................................................................ F
10.26 Registration Rights Agreement between Registrant and Purchases of Genesis Intermedia.com, Inc.
Series A Convertible Preferred Stock and Warrants........................................... F
21.1 Subsidiaries of the Registrant................................................................ *
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP............................................. F
23.2 Consent of Nida & Maloney, a Professional Corporation (included in Exhibit 5.1)............... *
23.3 Consent of Henderson & Lyman.................................................................. *
24.1 Power of Attorney............................................................................. *
24.2 Authorizing Resolutions....................................................................... *
27.1 Financial Data Schedule....................................................................... F
</TABLE>
- ------------------------
* Previously filed.
+ Portions of the exhibit containing confidential information have been
omitted pursuant to a request for confidential treatment and have been filed
separately with the Commission.
II-7
<PAGE>
PORTIONS OF THE EXHIBIT CONTAINING CONFIDENTIAL INFORMATION HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION.
TERM SHEET
This TERM SHEET (this "TERM SHEET") sets forth the basic terms of the
agreement in principle between GenesisIntermedia.com, Inc., a Delaware
corporation, on one part, and Global Leisure Travel, Inc., a Washington
corporation ("GLTI"), on another part, and is dated as of April 2, 1999. The
terms of the strategic alliance proposed hereunder must be submitted to the
Board of Directors of each of the parties hereto for approval.
I. STRATEGIC ALLIANCE.
GenesisIntermedia.com, Inc. in conjunction with its Genesis Intermedia,
Inc. subsidiary (collectively, "GENESIS") is entering into a strategic
alliance with GLTI, pursuant to which Genesis will become the principal
marketing and advertising agent and the exclusive Internet marketing and
advertising agent and e-commerce consultant and provider to GLTI and all of
its subsidiaries and affiliates (collectively, "GLOBAL"). In return,
Global provides to Genesis channel access options to acquire.
II. ALIGNMENT -- The opportunity to capitalize on one another's strengths:
GENESIS INTERMEDIA GLOBAL LEISURE
Marketing Know How Brand Name Recognition
New Channels Current Product Inventory
Technology Base Negotiated Contracts
Established Media Business Established Leisure Vacation Business
III. GENESIS' INITIATIVES.
The strategic alliance will initially comprise a number of initiatives to
be performed by Genesis for or in conjunction with Global and will be
embodied by such agreements as appropriate. The initiatives will include
the following:
A. INTERNET ADVERTISING CAMPAIGN. An Internet-based advertising campaign
to be prepared by Genesis for Global, which will include:
i. The creation of initial basic advertising campaign outlines for
each of the principal Global companies.
ii. The creation of initial Internet advertising layouts and features
to be mutually determined by the parties, taking into account the
short time line under which this project will be developed.
iii. The overhaul of the web sites for each of the principal Global
companies. Genesis has the right to display its logos and
appropriate "Powered by" language on the sites.
B. MALL DEVELOPMENT PROJECT. Development of basic graphical user
interfaces and advertising templates for Global for Genesis's mall
kiosk deployment program. Genesis has the right to display its logos
and appropriate "Powered by" language at the malls and kiosks.
<PAGE>
C. E-COMMERCE PROJECTS. The development of a fully functional e-commerce
business structure for all Global products and services to include:
i. Direct customer Internet access to Global product and service
inventory.
ii. On-line virtual tours.
iii. On-line real-time consultation and booking.
iv. Payment processing fees to be charged at Genesis's customary
fees in effect from time to time and to be incorporated in
Genesis's standard tariff schedule updated no less frequently
than quarterly.
v. Unlimited product and service listings, subject to price
adjustments at product/service number breaks.
vi. Unlimited cataloguing.
vii. Standard feature set described on the attached Exhibit A.
viii. Help Desk support.
ix. Subject to pricing/profit sharing structure set forth below.
D. PRICING.
i. The following monthly pricing will apply to the above-referenced
e-commerce project:
- Base Pricing: A monthly base fee to be calculated on the
basis of the number of unique product or service offerings
(including available combinations or packages of product and
service offerings). The Base Pricing will be based upon
the Genesis's budgeted fully allocated overhead associated
with the project.
- Charges for product and service offerings above Base Pricing
will be based on the standard pricing schedule as set forth
from time to time by Genesis.
- Prices subject to adjustment on a quarterly or more frequent
basis as determined by Genesis.
ii. PER TRANSACTION FEE: The parties will negotiate a per
transaction marketing and payment processing fee based on a
percentage of commission or income to Global, with a set dollar
minimum per transaction.
iii. Global will pay to Genesis mall advertising rent for all mall
advertising at a rate equal to one standard deviation above the
mean of all comparable third party mall advertising.
2
<PAGE>
iv. Global will pay to Genesis kiosk participation rent for all
kiosk participation at a rate equal to one standard deviation
above the mean of all comparable third party kiosk participant
rent.
v. Global shall pay to Genesis for all personnel training at
Genesis's standard hourly rates.
vi. Custom work to be performed at Genesis's standard hourly rates.
E. FUNDING COMMITMENT FOR INITIAL EFFORT. The parties acknowledge that
Global does not currently have the funds necessary to fully develop
its Internet and e-Commerce distribution channel. Genesis has agreed
to provide up to $3 million of senior secured debt to Global to
facilitate the development and deployment of its Internet and
e-Commerce capability and for general corporate purposes. The
obligation to advance any funds and the final terms and conditions of
such loans shall be subject to the negotiation and execution of and
shall be included in definitive documentation, which shall include, at
a minimum, a first priority security interest in all of the personal
property of each company comprising Global, and performance hurdles
for each agreed Tranche of funding.
IV. GLOBAL INITIATIVES.
The strategic alliance will initially comprise a number of initiatives to
be performed by Genesis for or in conjunction with Global and will be
embodied by such agreements as appropriate. The initiatives will include
the following:
A. NON-INTERNET MARKETING AND ADVERTISING; ADDITIONAL CHANNELS. The
parties acknowledge that Global currently has marketing and
advertising arrangements for non-Internet marketing and advertising.
Global hereby grants to Genesis a five-year right of first refusal on
any new marketing or advertising contracted for by Global, which shall
include any replacements or extensions of current marketing or
advertising. Global will not during the term of this right of first
refusal commence any in-house advertising or marketing initiatives
unless Genesis shall have been granted the right to bid on such
initiatives. The parties have also discussed that Genesis intends to
market Global products and services through various other new channels
and possibly through reseller relationships. Global hereby agrees
that Genesis shall have the exclusive right to develop and market such
new channels and to participate in any such reseller relationships
created or facilitated by Genesis and that the parties shall mutually
agree upon the compensation for such services.
B. CHANNEL. During the term of the agreement, Global shall use its
reasonable best efforts to enroll as many of its affiliated agents as
possible for Genesis's Internet distribution channel and to
continuously and prominently market and promote Genesis's Internet
channel to Global's customers.
3
<PAGE>
C. ACQUISITION OPTION GRANTED TO GENESIS.
i. OPTION 1 -- PURCHASE THE NEWTON GROUP. In consideration of
Genesis's initiatives as contained in this Term Sheet, Global
hereby grants to Genesis the option to purchase substantially all
of the operating and capital assets of Newton Group, including
all assets and intellectual property constituting the "Contour
System." This strategy is in keeping with Global's business
strategy of focusing on the travel business only and Genesis'
business strategy of building enhanced product delivery services,
especially as they directly relate to e-commerce.
- PRICE. The purchase price shall be $2.5 million + or - 20%
based on an agreed to audit to be conducted within 30 days
of said purchase. This payment acknowledges the Global's
current investment.
- TERM. The option shall expire on June 30, 1999.
- ASSUMPTION OF FUTURE DEVELOPMENT COSTS. In the event
Genesis exercises this option, Genesis shall assume the
obligation to pay for and complete and in process
technology development being conducted by Fourth Dimension
Systems.
- ASSUMPTION OF RELATIONSHIP WITH FOURTH DIMENSIONS SYSTEMS,
INC. In the event Genesis exercises this option, Genesis
will assume control of the Contour System Software License
issued by Fourth Dimension Software, Inc. Furthermore,
Genesis will honor the royalty payment to Fourth Dimensions
Software as prescribed in this System Software License.
- GLOBAL USE COMMITMENT. In the event Genesis exercises this
option, Global agrees to commit to subscribe to and use the
Contour System for a period of not less than * * *. For
the * * *, Global hereby commits to pay to Genesis a
transaction fee of $ * * * per transaction for such usage,
with a minimum fee of $ * * *, payable on * * *, commencing
on * * *. This contract will be re-negotiated for the
remaining * * *.
ii. OPTION 2 -- PURCHASE GLOBAL. In consideration of Genesis's
initiatives as contained in this Term Sheet, Global hereby grants
to Genesis a right of first refusal to purchase Global or all of
the assets of Global.
- PRICE. Price will be equal to the fair market value of
Global as determined by an independent valuation firm
selected by Genesis and GLTI. Such valuation shall be
incorporated herein by this reference.
- TERM. The option shall expire on June 30, 2000.
* * * These portions containing confidential information have been omitted
pursuant to a request for confidential treatment and have been filed
separately with the Commission.
[*] Indicates redacted text.
4
<PAGE>
V. COORDINATION.
The parties acknowledge that they anticipate a close alliance and ongoing
relationship. To this end, project owners form both organizations will be
appointed. It is anticipated that they will coordinate for periodic
project meetings to agree upon business objectives, scope, resource
commitment and schedule. Such meetings will be in person or by telephone
as appropriate. In order to establish the relationship, during the first
60 days, weekly project meetings will be scheduled (not to exceed 20 hours
per month) at such times or times as the parties agree. Thereafter
meetings will be scheduled as the parties determine to be necessary. Such
project meetings will also include, but not be limited to, discussion
concerning Global marketing efforts and success, implementation and use of
the electronic channel, design and functionality of the electronic channel.
VI. CLOSING.
While the parties intend to replace this Strategic Agreement with a more
formal set of documents, this agreement nonetheless intended to be a
binding agreement between the parties when signed by both of the parties in
the spaces provided below. This initial strategic agreement will govern
the relationship between the parties until a more formal set of documents
is executed and will not in any way be affected by the failure to complete
such formal set of documents.
ACCEPTED AND AGREED:
GLOBAL LEISURE TRAVEL, INC. GENESISINTERMEDIA.COM, INC.
By: By:
-------------------------------- -------------------------------
Name: Ravi Rao Name: Ramy El-Batrawi
Title: Chief Executive Officer Title: Chief Executive Officer
5
<PAGE>
EXHIBIT A
STANDARD FEATURE SET
CATALOGS
- - International Currencies
- - Weight Units: Kilograms, Grams, Pounds, and Ounces
- - Sending Methods: Internet, Fax/Mail, and Phone
- - Faxed Internet Orders
- - Payment Methods: VISA, MasterCard, American Express, Discover, Diners Club
and JCB
- - Custom Payment Methods
- - Standard Shipping Destinations: US States, Canadian Provinces, and World
Countries
- - Custom Shipping Destinations
- - Multiple Shipping Methods and Regions
- - Shipping Formula Variables: Quantities Ordered, Weight, and Subtotal
- - Shipping Formula Functions: Minimum, Maximum, and Range
- - Custom Tax Rates
- - Custom Survey Questions: Long Answer, Short Answer, Multiple Choice, and
Single Choice
- - Custom Subtotal Items: Fixed, User Enterable, and Optional
- - Users and Passwords
CATEGORIES
- - Unlimited Categories
- - Full Description
- - Image
PRODUCTS
- - Base Item Number
- - Description
- - Full Description
- - Image
- - Price
- - Sale Price
- - Unique Sale Price for Each Catalogue
- - Non-taxable products
- - Weight
- - Category
- - Multiple Product Options (i.e. Color, Size)
- - Multiple Product Option Items (i.e. Red, Green, Blue)
- - Custom Item Numbers based on Options
- - Custom Pricing based on Options
- - Option Conflicts
- - Quantity Discounts
- - Links to Related Items
- - Links to other URLs
- - Preview product pages
- - Generated HTML code to copy and paste into existing sites
- - Graphical pricing for easy integration into existing sites
- - Import product information from a test-delimited file
ORDERS
- - E-mail notification of new Orders
- - Order Status
- - Waybill Number and Shipper
- - Custom Notes
- - End-user Order Tracking
- - Export Order Information
POINT OF SALE
- - Multiple Merchant Numbers
- - Automatic Authorizations of orders sent over the Internet
- - Manual Authorizations
- - Credits
- - Automatic Settlement
E-COMMERCE HOSTING
- - Home Page builder
- - Unique URL
- - 10 MB Free
- - Virtual Hosting of existing domain names
- - Professionally Designed Templates
- - Customize your own Templates
E-COMMERCE SEARCH
- - Product Based Search Engine
- - Full Word Listing
- - Phrase or Boolean Searching
- - Re-index your site anytime
- - Integrate into existing sites
6
<PAGE>
LEASE AGREEMENT
This Lease Agreement is made this 29th day of April, 1999, by and between
Winter Quarters Resort Properties, Ltd., a Utah limited partnership ("Lessor"),
and Genesis Media Group, Inc., a Florida corporation ("Lessee").
RECITALS
A. Lessor is the owner of the shopping center building (the "building")
which is located at 144 W. Brigham Road, St. George, Utah, and desires to lease
office space in the building thereon to a suitable lessee for business purposes.
The building and surrounding real property owned by Lessor is sometimes referred
to herein as the "premises".
B. Lessee desires to lease the office space for conducting its marketing
business.
C. The parties desire to enter into a lease agreement defining their
rights, duties, and liabilities relating to the premises.
AGREEMENT
1. SUBJECT AND PURPOSES; RELATIONSHIP OF LESSEE.
a. Lessor leases to Lessee office space (the "office space") in the
building for use by Lessee in its marketing business. The office space consists
of unit numbers 20, 21, 22 and 23 and is shown on the drawing attached as
EXHIBIT A and incorporated herein. Prior to commencement of the lease term,
Lessor shall construct and install the improvements described on EXHIBIT B
attached hereto and incorporated herein.
b. Lessee shall be entitled to use jointly with Lessor and other
tenants of the building the adjacent parking lot, driveway, walk-ways and
landscaping areas (the "common areas"). The common areas are shown on EXHIBIT A
attached. Such joint use shall be subject to such reasonable rules and
regulations as shall be set by Lessor from time to time.
c. Lessee shall engage in no business or activity that will cause an
increase in insurance premiums for insurance coverage on the premises nor shall
Lessee engage in any activity that will cause or permit any hazardous substance
or material to be stored, used or disposed of on the premises.
d. The addendum attached hereto as EXHIBIT C is incorporated herein.
2. TERM AND RENT.
a. Lessor demises the office space for a term commencing June 1,
1999. The Lease term shall end on May 31, 2001. The rent under this Lease
shall be Six Thousand Seven Hundred Twenty Dollars ($6,720.00) per month,
commencing June 1, 1999. If Landlord completes the improvements described on
EXHIBIT B prior to June 1, 1999, Lessee may, at its
<PAGE>
option, occupy the office space prior to June 1 without the payment of
additional rent. Such early occupancy shall be subject to all other terms of
this Lease.
b. Each monthly installment is payable in advance on the first day
of each month. The last month's installment shall be deposited on the date of
this Lease.
c. All charges, costs and expenses that Lessee assumes or agrees to
pay hereunder, together with all interest and penalties that may accrue thereon
in the event of the failure of Lessee to pay those items, and all other damages,
costs, expenses, attorneys' fees and other sums that Lessor may suffer or incur,
or that may become due, by reason of any default of Lessee or failure by Lessee
to comply with the terms and conditions of this Lease shall be deemed to be
additional rent, and, in the event of nonpayment, Lessor shall have all the
rights and remedies against Lessee as herein provided for failure to pay rent.
d. At any time between May 31, 2000, and May 31, 2001, Lessee may
terminate the Lease term by prepaying to Lessor an amount equal to four months'
rent. On the date that payment is made, the Lease term shall end with the same
force and effect as if that date were the ending date scheduled above in
paragraph "a" of this Section 2.
3. UTILITIES AND MAINTENANCE. Lessor shall provide all water, sewer
services and solid waste removal services for the building and the common areas
and all janitorial and maintenance services for the common areas. Lessee shall
pay all costs of electricity and telephone services and janitorial services
provided to the office space.
4. REPAIRS.
a. Except as otherwise provided in Section 13, Lessor shall make all
repairs, structural or otherwise, to (1) the exterior of the building
(including, without limitation, the roof, foundation and structural supports and
walls), (2) all pipes, wires, conduits, sewers, drains and all other utility
facilities through which electricity, water and sewer services are supplied to
the building and the common areas, (3) the heating and air-conditioning system
and related ducts (except for those facilities installed by Lessee) and (4) the
common areas.
b. Except as otherwise provided in Section 13, Lessee shall make all
repairs to the interior walls of the office space, to the doors, ceiling and
floors of the same and to all improvements installed by Lessee and shall repair
all glass and windows in the walls of the office space.
c. All repairs and maintenance work done by Lessor and Lessee shall
be performed in such a manner as to maintain the premises in a clean condition
and in a good state of repair.
5. OPTION TO REQUIRE MOVE. At any time during the term of this Lease,
Lessor may require Lessee to vacate the office space under the following
conditions:
2
<PAGE>
a. Lessor shall provide immediately available replacement space in a
new building in the same shopping center.
b. The replacement space shall be approximately the same size and
have comparable improvements, equipment and facilities as that found in the
office space.
c. Lessor shall pay all costs incurred in moving Lessee and its
equipment and employees to the replacement space.
d. Upon completion of the move, the replacement space shall be
substituted for the office space for purposes of this Lease.
6. INTEREST. Rent, including additional rent payable under Section 2,
payable by Lessee shall bear interest at the rate of twelve percent (12%) per
annum from the date said sums are due until paid, before and after judgment.
7. INSURANCE.
a. Lessor shall furnish and carry fire and extended coverage
insurance on the building during the entire term of this Lease for the full
replacement cost of building. The policy shall be written in the name of and
for the benefit of Lessor. Lessee shall provide all fire and extended coverage
insurance on the personal property that Lessee moves into the office space and
on leasehold improvements made by Lessee.
b. Lessee shall furnish and maintain at all times during the term of
this Lease general liability insurance with a company authorized to do business
in the State of Utah. Such insurance shall have a combined single limit of One
Million Dollars ($1,000,000.00), shall name Lessor as an additional insured,
shall have a deductible not to exceed $5,000.00 and shall provide that Lessor
will be given thirty (30) days advance written notice of cancellation. Lessee
shall provide Lessor with a current certificate verifying this insurance
coverage. Insurance coverage obtained and maintained pursuant to this
requirements may not be brought into contribution with insurance purchased by
Lessor and shall contain a provision that Lessor, although named as an
additional insured, shall nevertheless be entitled to recover under the policy
for any loss occasioned to it, its agents, employees, guests, invitees,
contractors and licensees.
8. ALTERATIONS, ADDITIONS AND IMPROVEMENTS.
a. No alterations, changes, additions or improvements (including,
without limitation, the installation of trade fixtures and wiring and conduit)
may be made in and to the office space without Lessor's written consent, which
consent shall not be unreasonably withheld. All additions, changes, alterations
and other improvements (other than the installation of trade fixtures and wiring
and conduit) erected or placed at the office space at any time by Lessee shall
be done by a licensed contractor acceptable to Lessor and shall become the
property of Lessor as made. Any alterations, additions, changes or improvements
shall be made only upon the express condition that all such work shall be paid
for as made and this agreement shall not grant Lessee authority to bind or
obligate Lessor or encumber fee title to the office space or the building.
3
<PAGE>
b. Lessee shall attach an identification sign for Lessee to the
front entrance door of the office space. The sign shall be of the same material
as, and shall be comparable in design to, the other identification signs located
on the other building units. Lessee shall pay all costs of purchasing and
installing the identification sign.
9. INDEMNITY.
a. Lessee shall indemnify Lessor against all expenses, liabilities
and claims by or on behalf of any person or entity, including reasonably
attorneys' fees, arising out of either (1) a failure by Lessee to perform any of
the terms or conditions of this Lease, (2) any injury, death or damage happening
on or about any portion of the building or the common areas caused by the fault
or negligence of Lessee, its employee, agents, contractors, invitees, licensees
or guests, (3) a failure by Lessee to comply with any law of any governmental
authority, or (4) any mechanic's lien or security interest filed against the
building or common areas to the extent said mechanic's lien or security interest
did arise as a result of action by Lessee.
b. Lessor shall indemnify Lessee against all expenses, liabilities
and claims by or on behalf of any person or entity, including reasonable
attorneys' fees, arising out of either (1) a failure by Lessor to perform any of
the terms or conditions of this Lease, (2) any injury, death or damage happening
on or about any portion of the building or the common areas caused by the fault
or negligence of Lessor, its employees, agents, other tenants, contractors,
invitees, licensees or guests, or (3) a failure by Lessor to comply with any law
of any governmental authority.
10. ACCESS TO OFFICE SPACE; SIGNS POSTED BY LESSOR. Lessee shall permit
Lessor or its agents, upon reasonable notice, to enter the office space at all
reasonably hours to inspect the office space or make repairs that Lessee may
neglect or refuse to make in accordance with the provisions of this Lease, to
make repairs or perform maintenance required by Lessor, and also to show the
office space to prospective buyers. At any time within ninety (90) days prior
to expiration of the term. Lessor may show the office space to persons wishing
to rent the office space or post signs indicating their availability.
11. ENCUMBRANCES; SUBORDINATION. This Lease shall be subject and
subordinate to any mortgage or trust deed that is now on or affects the premises
or that any owner of the premises may hereafter at any time elect to place on
the premises, provided that the mortgagee named in such mortgage or the trustee
and beneficiary named in such deed of trust shall execute an appropriate non-
disturbance agreement by which it agrees to recognize this Lease in the event of
foreclosure. If Lessee is not then in default under the terms of this Lease.
Lessee shall, on request, hereafter execute any documents that Lessor may deem
necessary to accomplish such subordination of Lessee's interest.
12. QUIET ENJOYMENT. Except as otherwise specifically provided in this
Lease, Lessor warrants that Lessee shall be granted peaceable and quiet
enjoyment of the office space free from any eviction or interferences by Lessor
or any other person claiming title to, or an interest in, the
4
<PAGE>
premises if Lessee pays the rent provided herein, and otherwise performs the
terms and conditions of this Lease.
13. DESTRUCTION OF BUILDING OR COMMON AREAS.
a. If the building or common areas are damaged or destroyed by fire
or other casualty which is covered by the fire and extended coverage insurance
policy which Lessor is required to carry, Lessor shall proceed promptly and
with due diligence to remove any debris and to restore the building and the
common areas, as the case may be, to substantially the same condition as
immediately prior to such damage or destruction, excluding any improvements or
alterations made thereon by Lessee, which shall be the sole responsibility of
Lessee to restore. Provided, however, if Lessee is not able to maintain its
normal business operations with a minimum of disruption due to the damage or
destruction, Lessor shall not commence repairs and restoration until the parties
have determined if the repairs and restoration can be made by Lessor within
ninety (90) days of the date of destruction. If the repairs and restoration
cannot be made within ninety (90) days of the date of damage or destruction or
in event of a total destruction of the building, this Lease may be terminated at
the option of either party. In the event of any such termination, Lessor shall
retain all insurance proceeds it receives as a result of the damage or
destruction, rent shall be paid to the effective date of termination, and Lessee
shall be entitled to a refund of any rent paid for any period after such date.
Lessee shall not be entitled to a reduction of rent while repairs are being
made, which reduction shall be based on the extent to which the damage and
repairs interfere with the normal business operations of Lessee.
b. In the event any damage or destruction under this Section 13 is
caused by the intentional or negligent act or omission of Lessee, its employees,
agents, contractors, guests, licensees or invitees, Lessee shall pay to Lessor
the deductible amount of Lessor's fire and extended coverage insurance policy.
14. CONDEMNATION. Rights and duties in the event of condemnation are as
follows:
a. If the whole of the building shall be taken or condemned by any
competent authority for any public or quasi-public use or purpose, this Lease
shall case and terminate as of the date on which title shall vest thereby in
that authority, and the rent reserved hereunder shall be apportioned and paid up
to that date.
b. If only a portion of the building shall be taken or condemned,
Lessor shall supply within 60 days, replacement space of comparable size,
appearance, and function. If Lessor shall fail so to do, the lease term shall
terminate. During the period in which Lessee's use shall be diminished, rent
shall be proportionately reduced.
c. In the event of any taking or condemnation in whole or in part,
the entire resulting award of damages shall belong to Lessor without any
deduction therefrom for the value of the unexpired term of this Lease or for any
other estate or interest in any and all such awards. Provided, however, nothing
in this paragraph shall prevent Lessee from claiming, proving, collecting and
retaining any damages awarded for Lessee's fixtures or loss of business or for
any other damages compensable to Lessee under applicable laws.
5
<PAGE>
15. PROTECTION OF PREMISES. Lessee will not do or permit any act or thing
that may impair the value of the premises or any part thereof or that materially
increases the dangers, or poses an unreasonable risk of harm, to third parties
(on or off the premises) arising from activities thereon, or that constitutes a
public or private nuisance or waste to the premises or any part thereof. Lessee
shall not conduct any activity on the premises or use the premises in any manner
(i) which would cause the premises to become a hazardous waste treatment,
storage or disposal facility within the meaning of or otherwise bring the
premises within the ambit of, the Resource Conservation and Recovery Act of
1976, 42 U.S.C. Section 6091 ET SEQ., or any similar state law or local
ordinance, (ii) so as to cause a release of hazardous waste from the premises
within the meaning of, or otherwise bring the premises within the ambit of, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. Section 9601-9657, or any similar state law or local ordinance or any
other environmental law, or (iii) so as to cause a discharge of pollutants or
effluents into any water source or system, or the discharge into the air of any
emissions, which would require a permit under the Federal Water Pollution
Control Act, 33 U.S.C. Section 1251 ET SEQ., or the Clean Air Act, 42 U.S.C.
Section 741 ET SEQ., or any similar state law or local ordinance.
16. ACCEPTANCE BY LESSEE. Subject to Lessor's completion of the
improvements described on EXHIBIT B, Lessee accepts the office space, building
and common areas in their existing condition and state of repair, and Lessee
agrees that no representations, statements or warranties, express or implied,
have been made by or on behalf of Lessor in respect thereto except as contained
in the provisions of this Lease.
17. WAIVERS. The failure of either party to insist on a strict
performance of any of the terms and conditions hereof shall be deemed a waiver
of the rights or remedies that the party may have regarding that specific
instance only, and shall not be deemed a waiver of any subsequent breach or
default in any terms and conditions.
18. NOTICES. All notices or communications to be given under this Lease
shall be given in writing and shall be deemed given when deposited in the mail
to the address shown below of the party entitled to receive notice, postage
prepaid, registered or certified. The address of either party may be changed by
written notice to the other party. Nothing herein shall be construed to
preclude personal service of any notice in the manner prescribed for personal
service of a summons or other legal process.
19. HOLDOVERS. In the event Lessee maintains occupancy of the office
space past the term of this Lease, Lessee shall be a tenant at will, and in no
event shall Lessor and Lessee be deemed to have renewed this Lease for an
additional term, except as agreed to in writing by the parties.
20. ASSIGNMENT, MORTGAGE OR SUBLEASE. Lessee shall not assign, mortgage,
pledge, sublet or encumber this Lease or the office space in whole or in part,
nor permit the office space to be used or occupied by others, nor shall this
Lease be assigned or transferred by operation of law, without the prior consent
in writing of Lessor in such instance, which will not be unreasonably withheld.
6
<PAGE>
21. SURRENDER OF POSSESSION. Lessee shall, on the last day of the term,
or on earlier termination or forfeiture of the Lease, peaceably and quietly
surrender and deliver the demised office space (free of subtenancies) to Lessor,
including all additions, alterations, changes and improvements constructed or
placed therein by Lessee (other than trade fixtures and wiring and conduit
installed by Lessee), all in good repair, normal wear and tear excepted. Lessee
shall remove all trade fixtures and wiring and conduit installed by it and shall
repair all damage caused by that removal. Lessee shall repair and restore all
damage to the office space caused by the removal of equipment and personal
property. Any trade fixtures, equipment, wiring and conduit or personal
property belonging to Lessee, if not removed upon termination, shall at Lessor's
election, be deemed abandoned and become the property of the Lessor without
payment or offset therefor.
22. DEFAULT OR BREACH BY LESSEE. Each of the following events shall
constitute a default or breach of this Lease by Lessee:
a. If Lessee shall fail to pay Lessor any rent or late charge within
ten (10) days of the due date thereof.
b. If the office space shall be used for any purpose other than for
use in Lessee's marketing business, or for use in violation of any law or
regulation.
c. If Lessee shall become subject of bankruptcy, reorganization,
assignment for benefit of creditors or any other procedures with similar
purpose, whether voluntary or involuntary, or if Lessee's interest in this Lease
shall pass to or devolve on any other person or party.
d. If Lessee shall fail to perform or comply with any of the
conditions of this Lease and if the nonperformance shall continue for a period
of fifteen (15) days after notice thereof by Lessor to Lessee, or, if the
performance cannot be reasonably had within the fifteen (15) day period, Lessee
shall not in good faith have commenced performance within the fifteen (15) day
period and shall not diligently proceed to completion of performance.
e. If any claim for materials or labor shall arise or be claimed
against the building or office space or Lessor by reason of the acts of Lessee,
its assigns or agents. Notwithstanding the foregoing, Lessee shall not be in
default so long as Lessee, in good faith, disputes and defends against such
claim, provided, Lessee shall be required to pay or bond around the lien of such
claim (1) if the claim is established by the claimant in any court of competent
jurisdiction or (2) if the existence of such claim or the lien thereof would
cause Lessor to be in default of any obligation of Lessor to any third party
with respect to the building or the common areas.
23. REMEDIES OF LESSOR. In the event of any default hereunder (or
threatened default in the case of paragraph b of this Section) by Lessee, the
rights of Lessor shall be as follows:
7
<PAGE>
a. Lessor may elect, but shall not be obligated, to make any payment
required of Lessee herein or comply with any agreement, term or condition
required hereby to be performed by Lessee, and Lessor shall have the right if
permitted to applicable law, to enter the premises for the purpose of correcting
or remedying any such default and to remain until the default has been corrected
or remedied. However, any expenditure hereunder by Lessor shall not be deemed
to waive or release the default of Lessee or the right of Lessor to take any
action as may be otherwise permissible hereunder in the case of any default.
b. Lessor shall have the right of injunction to restrain Lessee and
the right to invoke any remedy allowed by law or in equity, as if the specific
remedies of indemnity or reimbursement were not provided herein.
c. Lessor shall have the right to cancel and terminate this Lease,
as well as all of the right, title and interest of Lessee hereunder, by giving
to Lessee not less than ten (10) days' notice of the cancellation and
termination. On expiration of the time fixed in the notice, this Lease and the
right, title and interest of Lessee hereunder shall terminate in the same manner
and with the same force and effect, except as to Lessee's liability for sums
accrued prior to the date of termination, as if the date fixed in the notice of
cancellation and termination were the end of the term herein originally
determined.
d. Lessor may, if permitted by applicable law, re-enter the premises
immediately without notice and take possession of Lessee's property and Lessee
hereby grants to Lessor a security interest in Lessee's fixtures, equipment and
inventory as now or hereafter on the premises and products, proceeds and
replacements thereof. Lessor may store the Lessee's property on the premises,
in a public warehouse or at a place selected by Lessor, at the expense of
Lessee. After re-entry Lessor may terminate the Lease as provided above.
Without the notice, re-entry will not terminate the Lease.
e. Lessor may, if permitted by applicable law, re-enter the premises
immediately without notice and secure the same against access by Lessee or any
third parties. After re-entry, Lessor may terminate the Lease as provided
above. Without notice, re-entry will not terminate the Lease.
f. Lessor may recover from Lessee all damages proximately resulting
from the default or breach, including, but not limited to, the cost of
recovering the premises or altering or remodeling the same for re-letting, the
cost of remedying any violation of Section 15 or the cost of exercising any of
the remedies provided herein or by law, and may further recover the unpaid rent
reserved under this Lease, the total amount of which shall be due and payable.
24. DEFAULT OR BREACH BY LESSOR. The following event shall constitute a
default or breach of this Lease by Lessor:
If Lessor shall fail to perform or comply with any of the terms or
conditions of this Lease and if the nonperformance shall continue for a
period of fifteen (15) days after written notice thereof by Lessee to
Lessor, or, if the performance cannot be reasonably had within the fifteen
(15) day period, Lessor shall not in good faith have commenced
8
<PAGE>
performance within the fifteen (15) day period and shall not diligently
proceed to completion of performance.
25. REMEDIES OF LESSEE. In the event of any default hereunder (or
threatened default in the case of paragraph a of this Section) by Lessor, the
rights of Lessee shall be as follows:
a. Lessee shall have the right of injunction to restrain Lessor and
the right to invoke any remedy allowed by law or in equity, as if the specific
remedies of indemnity or reimbursement were not provided herein.
b. Lessee shall have the right to cancel and terminate this Lease,
as well as all of the right, title and interest of Lessor hereunder, by giving
to Lessor not less than ten (10) days' notice of the cancellation and
termination. On expiration of the time fixed in the notice, this Lease and the
right title and interest of Lessor hereunder shall terminate in the same manner
and with the same force and effect, except as to Lessor's liability for sums
accrued prior to the date of termination, as if the date fixed in the notice of
cancellation and termination were the end of the term herein originally
determined.
c. Lessee may recover from Lessor all damages proximately resulting
from the default or breach.
26. APPLICATION OF REMEDIES. The rights and remedies given in this Lease
are distinct, separate and cumulative, and no one of them, whether or not
exercised, shall be deemed to be in exclusion of any of the other herein, by law
or equity provided.
27. ATTORNEYS' FEES. Should any party default in any of the covenants or
agreements herein contained, that defaulting party shall pay all costs and
expenses, including a reasonable attorneys' fee, which may arise or accrue from
enforcing this Lease or in pursuing any remedy provided hereunder or by
applicable law, whether such remedy is pursued by filling suit or otherwise.
The obligation of this Section to pay costs and expenses, including attorneys'
fees, shall apply in all legal proceedings, including, without limitation, all
proceedings in the Federal Bankruptcy Court, whether or not they are adversary
proceedings or contested matters.
28. TOTAL AGREEMENT APPLICABLE TO SUCCESSORS. This Lease contains the
entire agreement between the parties and cannot be changed or terminated except
by a written instrument subsequently executed by the parties hereto. This Lease
and the terms and conditions hereof apply to and are binding on the heirs, legal
representatives, successors and assigns of both parties.
29. APPLICABLE LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of Utah.
30. TIME OF THE ESSENCE. Time is of the essence in all provisions of this
Lease.
9
<PAGE>
31. SEVERABILITY. If any part, term or provision of this Lease is held by
a court to be illegal or in conflict with any law of the State of Utah, the
validity of the remaining portions or provisions shall not be affected, and the
rights and obligations of the parties shall be construed and enforced as of the
Lease did not contain the particular part, term or provision held to be invalid.
LESSOR:
Winter Quarters Resort Properties, Ltd.
By: /s/
--------------------------------
General Manager
LESSEE:
Genesis Media Group, Inc.
By: /s/ Ramy El-Batrawi
---------------------------------
Its: President
Address: 13063 Ventura Blvd.
Studio City, CA 91604
10
<PAGE>
Exhibit C
AGREEMENT
Winter Quarters Resort Properties, Ltd. ("Lessor") and Genesis Media Group,
Inc. ("Lessee"), agree to the following:
1. This Agreement will be an addendum to the Lease agreement for units 20, 21,
22, and 23 of the Bloomington Courtyard Shopping Center.
2. As incentive for leasing units 20, 21, 22 and 23 in the Bloomington
Courtyard Shopping Center, Lessor will waive any and all rents due from Lessee
for the months of June and July 1999.
LESSOR:
Winter Quarters Resort Properties, Ltd.
By: /s/ Date : 4/29/99
---------------------------- -------
General Manager
LESSEE:
Genesis Media Group, Inc.
By: /s/ Ramy El-Batrawi Date: 4/29/99
----------------------------- -------
Its: President
11
<PAGE>
April 23, 1999
To the Purchasers of GenesisIntermedia.com, Inc.
Series A Convertible Preferred Stock and Warrants
Re: Registration Rights
Ladies and Gentlemen:
This letter will confirm the agreement of GenesisIntermedia.com, Inc., a
Delaware corporation to register, within 90 days of the effective date of the
registration statement relating to its initial public offering of common
stock, the common stock issuable upon conversion or exercise of its Series A
Convertible Preferred Stock and the warrants issued in connection therewith.
Notwithstanding this registration, the shares of common stock issuable upon
conversion or exercise of the Series A Convertible Preferred Stock and the
related warrants will continue to be subject to the resale restrictions
contained in the Certificate of Designation, Rights and Preferences of the
Series A Convertible Preferred Stock and the warrant certificates.
Sincerely,
GENESISINTERMEDIA.COM, INC.
By: /s/ Ramy El-Batrawi
-----------------------------
Ramy El-Batrawi
Chairman
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 (No.
333-66281) of our report, dated April 8, 1999, relating to the consolidated
financial statements of GenesisIntermedia.com, Inc. and subsidiary. We also
consent to the reference to our Firm under the caption "Experts."
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 12, 1999
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 945,457
<SECURITIES> 0
<RECEIVABLES> 3,534,592
<ALLOWANCES> 175,000
<INVENTORY> 172,475
<CURRENT-ASSETS> 6,186,838
<PP&E> 2,409,383
<DEPRECIATION> (246,935)
<TOTAL-ASSETS> 9,845,441
<CURRENT-LIABILITIES> 4,105,638
<BONDS> 0
0
0
<COMMON> 3,310
<OTHER-SE> 4,619,190
<TOTAL-LIABILITY-AND-EQUITY> 9,845,441
<SALES> 7,797,614
<TOTAL-REVENUES> 7,797,614
<CGS> 3,873,516
<TOTAL-COSTS> 7,173,204
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 46,207
<INCOME-PRETAX> 578,203
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