UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
001-15029
(Commission file number)
GENESISINTERMEDIA.COM, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-4710370
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5805 SEPULVEDA BOULEVARD, VAN NUYS, CA 91411
(Address of principal executive offices) (Zip Code)
(818) 902-4100
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by referenced in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Revenue for the year ended December 31, 1999: $31,671,263
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant at March 31, 2000 was $43,223,872. The number
of shares outstanding of the registrant's Common Stock as of March 31, 2000 was
5,310,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
This Annual Report on Form 10-KSB contains statements that are
forward-looking, including statements relating to anticipated operating results,
growth, financial resources, the development of new markets, the development,
distribution, and commercial acceptance of new products and new applications for
GenesisIntermedia.com, Inc.'s existing product lines. Investors are cautioned
that, although Genesis believes that its expectations are based on reasonable
assumptions, forward-looking statements involve risks and uncertainties which
may affect Genesis 's business and prospects, including changes in economic and
market conditions, acceptance of Genesis 's products, maintenance of strategic
alliances and other factors discussed under the caption "Risk Factors" in the
Company's Registration Statement No. 333-66281 filed with the Securities and
Exchange Commission and declared effective on June 14, 1999.
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY AND BACKGROUND
GenesisIntermedia.com, Inc. ("The Company") was incorporated on October
28, 1993 under the name Genesis Media Group, Inc., and changed its name to
GenesisIntermedia.com, Inc. on December 3, 1998. It began operations in late
1993 by marketing its own products, and products owned by others, through
various platforms. These products included audio and videotapes and mentoring
services on topics related primarily to interpersonal relationships and
financial planning.
Until 1997, some of its operational and sales functions, including
media purchasing and sales, inventory management and customer service were
outsourced to third parties. In 1997, the Company purchased an office building
and hired additional personnel, enabling it to perform most of the functions
relevant to its business in-house. Additionally, its strengthened its
infrastructure by purchasing sophisticated outbound telemarketing and computer
equipment, enabling it to sell its own proprietary products and those of its
customers, who were by that time beginning to enter into contracts with the
Company for marketing services on an outsourced basis, to a greater number of
consumers. In July 1999, less than a month after its Initial Public Offering of
2,000,000 shares of Common stock, the Company purchased a larger office building
in Van Nuys, California to accommodate the significant growth in operations and
personnel.
GENERAL OVERVIEW
GenesisIntermedia.com, Inc. uses its core competencies to develop Internet
technologies and Internet companies. It owns distinct marketing channels, and
through CENTERLINQ, is a leading provider of public Internet access portals in
shopping malls. The Company has been building an infrastructure to build,
develop and nurture new Internet technology companies and businesses. The
company markets products and services, which it develops, licenses exclusively
or distributes for third parties, utilizing network and cable television, radio,
newspapers, magazines, the Internet and the company's CENTERLINQ network. As it
has done with CENTERLINQ, the Company leverages its strength in operations,
marketing and the deployment of traditional and new media to advance new and
innovative technologies within strategically identified market segments.
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Historically, the Company's operations have consisted of the marketing,
advertising and sales of its own products and those of its clients utilizing
traditional marketing channels. While it continues to utilize conventional media
to fulfill its marketing needs and those of its clients, the Company's focus
more recently has been on investing in and bringing to market innovative
technology-based concepts that center around use of the Internet.
The old generation of "incubators" offered startup companies space, but
little else. Then came the modern model of incubators, pioneered by idealab!,
Pasadena, California, that offer office and development space, money, skills,
people, and services. CMGI, Inc., a publicly-held entity based in Wilmington,
Massachusetts, also took the incubator concept and molded it into a scalable
business model that can be applied to various forms of e-commerce while keeping
the intention of creating shareholder value. GenesisIntermedia.com, Inc. adapted
the idealab! and CMGI concepts into its own business model of creating a
hands-on, direct interaction environment focused more on development of
business-to-business and business-to-consumer Internet networking and marketing
concepts, with an investment criteria that looks at businesses that are already
into their lifecycles as well as newer, as-of-yet unfinanced projects.
The GenesisIntermedia.com, Inc. acquisition of Vision Digital in 1998
and the asset known as the CENTERLINQ network was the first step taken toward
the development and deployment of a true Internet based business through the
newly adapted business model. In constructing a nurturing environment to support
the operations and growth of CENTERLINQ, the Company fortified its
infrastructure of networked systems and extended the scope of internal services
available within the Company.
CENTERLINQ is an Internet-based interactive network consisting of
public access kiosks, exclusively in shopping malls currently but adaptable to a
wide range of venues. CENTERLINQ is also accessible through the Internet at
www.CENTERLINQ.com. Advertising displayed on large screen monitors on and
adjacent to the public access kiosks enhances network usage and revenues.
Consistent with its development-oriented business model,
GenesisIntermedia.com, Inc. supplied CENTERLINQ with physical assets such as
office space, equipment, telephones; intellectual capital such as personnel,
management expertise, legal and accounting advice; and cash. It also gave
CENTERLINQ the marketing, creative, development and programming expertise to
bring the technology to critical mass. The Company invested heavily to support
the operational needs of CENTERLINQ and to attain a leadership position as a
network of public Internet portals. The initiatives include, but were not
limited to;
o Network architecture in software and hardware recreated to support a
centralized configuration for the entire network, versus the local one
that previously existed
o Information Services Department significantly expanded to include
network engineers
o Addition of an installation division, field maintenance teams and
client service specialists
o Complete tech support unit created to preserve customer relationships
o Hiring of Information Technology professionals, client service
specialists, and technical support managers
o Programming staff increased by 200%
o Metrics for support of future growth established
o R&D capabilities expanded to increase functionality of CENTERLINQ
o Delivery of next generation of interactive multi-media kiosks ahead of
schedule
o Quality assurance undertook measurement of unique requirements of each
mall environment containing CENTERLINQ
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o Built out office and technical workspace; telephony, electrical and
anti-static environment needs covered
o Invested significantly in software development resulting in
customization of shopping programs for mall developers
o Management tools for extracting data from rich CENTERLINQ demographic
databases created and packaged
o Online version of CENTERLINQ developed, tested and released via the
World Wide Web
In December 1999, GenesisIntermedia.com, Inc. announced that CENTERLINQ
had reached critical mass. By that time, the systems were installed in 20
shopping malls across the United States;
o The Beverly Center, Los Angeles, CA
o Galleria at South Bay, Redondo Beach, CA
o Galleria at Tyler, Riverside, CA
o Antelope Valley Mall, Palmdale, CA
o MainPlace, Santa Ana, CA
o Stonestown, San Francisco, CA
o Sun Valley Shopping Center, Concord, CA
o Stoneridge Shopping Center, Pleasanton, CA
o Hilltop Mall, Richmond, CA
o The Promenade at Temecula, Temecula, CA
o Galleria at Sunset, Henderson, NV
o Tucson Mall, Tucson, AZ
o Great Lakes Crossing, Auburn Hills, MI
o Twelve Oaks Mall, Novi, MI
o Logan Valley Mall, Altoona, PA
o Lycoming Mall, Williamsport, PA
o Nittany Mall, State College, PA
o Viewmont Mall, Wilkes-Barre, PA
o Wyoming Valley Mall, Scranton, PA
o Circle Centre, Indianapolis, IN
Traffic at these malls thus far enable CENTERLINQ to create approximately
22 million impressions on consumers per month. Consequently, while CENTERLINQ
continues to be developed under the Company's supervision, it has proven that
the GenesisIntermedia.com, Inc. process of business development is an effective
model.
The Company is currently in negotiations with mall developers to install
the CENTERLINQ Network in additional malls throughout North America, and with
interested parties to expand the CENTERLINQ concept into Europe and Latin
America.
With the CENTERLINQ experience not only proving successful, but teaching
the Company how to apply those same development standards and resources to other
businesses and technologies in order to achieve an effective roll out of
product, the Company's management now views its role as a creator of long-term
shareholder value more closely in alignment with its ability to propagate
additional Internet-based companies in accordance with its established
"incubation" process.
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The Company, therefore, seeks to identify acquisition candidates, whose
core competencies include the development of Internet technology (ies),
networking solutions, interactive concepts and a variety of other high-growth
areas that can be integrated into valuable business-to-business and
business-to-consumer companies.
Even though GenesisIntermedia.com, Inc. is entering emerging markets and
has begun to generate revenue from CENTERLINQ, it continues to rely on marketing
products for a substantial part of its revenues. The Company expects that
revenues from the marketing of products will continue to account for a major
percentage of its revenues in the foreseeable future but that while revenues are
expected to rise, the overall percentage of revenues that can be attributed to
the aforementioned marketing activities will decline as its refined business
plan that concentrates on the development of business-to-business and
business-to-consumer enterprises that utilize Internet technology continues
onward.
The need for resources that enable companies to effectively compete via
the Internet is growing, as direct marketing undergoes a rapid, fundamental
change. Interactive marketing has become the most prominent subset of direct
marketing, with much more flexibility and control on the consumer end, as he or
she has more power to tune out what is being presented. Recognizing this,
GenesisIntermedia.com, Inc. offers the capabilities of target advertising to
reach specific audiences, taken from the rich sources of demographic data that
have been gathered through its traditional and new media segments.
The Company believes that its assessment of the importance of the Internet
as a new source of revenue for growing businesses is substantiated, as recently
reflected in a report issued by eMarketer, a comprehensive, objective Internet
market research firm recognized worldwide as an authority on business online.
According to eMarketer's 1999 eAdvertising Report, Volume II, U.S. web
advertising spending will grow from $3.1 billion in 1999 to $4.82 billion in
2000 and to $13.3 billion by 2003.
Moving forward, GenesisIntermedia.com, Inc. expects to be a significant
Internet business and technologies developer, and expects to be on the leading
edge of testing and employing web tools for both significantly increased
customer fulfillment and revenue generation.
The Company's marketing segment, historically responsible for a
significant revenue stream, has of late been active in selling proprietary
products through integrated marketing capabilities, such as the audio and video
tapes and companion material products based on the book Men Are From Mars, Women
Are From Venus, by John M. Gray, Ph.D., the Money Mastery financial mentoring
products, and other new products recently acquired. The Company has also focused
on direct response telemarketing, utilizing sophisticated dialing technologies
to effectively sell high margin services related to prior product sales.
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.
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.
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GenesisIntermedia.com, Inc.'s strategy for increased penetration of this
market, and of the net-based interactive market is through acquisition-based
expansion, the development and acquisition of new technological capability and
the hiring of additional personnel.
Growth Opportunities
The Company believes that its ability to generate increased revenue
will depend on, among other factors:
o the continued development of the Internet as an advertising medium;
o pricing of marketing and advertising services by other Internet participants;
o its ability to develop new marketing solutions, like the CENTERLINQ kiosks,
that use the Internet and that appeal to both its clients and their
customers;
o its ability to achieve and demonstrate user demographic characteristics that
are attractive to clients;
o the development and expansion of marketing and advertising sales forces; and
o the establishment and maintenance of desirable marketing and advertising
sales agency relationships.
PRODUCTS AND GROWTH OPPORTUNITIES
Traditional Products
The Company began by producing infomercials and performing
telemarketing services for its own products and for products owned by others.
More recently, it diversified product offerings and marketing channel
capabilities through the acquisition of rights to market and distribute new
consumer products developed by third parties.
The Company also intends to further enhance its scope of its mentoring
capabilities, which it has traditionally offered either as an adjunct to, or
primary service of, some of the proprietary and third party products and
services it has offered. With GenesisIntermedia.com, Inc. positioned to
capitalize on the explosive growth associated with the need for experienced,
innovative web site developers and programmers, as well as the tools, resources
and marketing expertise that new and experienced webmasters desire, the Company
is forming a bridge between new media and the core competencies it continues to
maintain in its more traditional mentoring services. It is applying the
mentoring concept to new media development, in essence creating a hybrid between
what is traditional and what is evolving. Acting in the capacity of a mentor for
new media professionals and amateurs, the Company believes it will benefit from
opportunities to cross-sell additional products and services, including
advertising products. Furthermore, GenesisIntermedia.com, Inc. anticipates that
its mentoring capabilities will help it identify possible acquisition
candidates, fueling even additional future profit potential.
Depending on the availability of capital to acquire media time, the
Company intends to continue to increase activity in this media group in 2000.
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CENTERLINQ
In 1998, the Genesis Intermedia, Inc. subsidiary was formed, and the
Company hired approximately 20 persons experienced in multimedia technologies
for this subsidiary. To accelerate multimedia technology capabilities, the
Company 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 the CENTERLINQ kiosk
initiative with the deployment of kiosks in twenty regional malls in the United
States as of the end of 1999, as well as the Company's progress into Internet
marketing initiatives. The purpose of these initiatives is to target consumers
utilizing interactive multimedia technologies and to position
GenesisIntermedia.com, Inc. and subsidiaries to deliver multi-disciplinary
marketing to clients, and to augment sales for the Company's proprietary
products. This technology, and the resulting e-commerce division, has performed
services for a number of clients since its formation. Some of the Company's past
clients include Hallmark Entertainment, Lexus, Serena Software, and Legacy
Interactive.
All of the services for the clients listed above were performed
pursuant to contracts. The CENTERLINQ kiosk program provides the Company with
the competitive edge of boasting a capability that provides advertising
opportunities for businesses in highly trafficked malls across the United
States. The Company has obtained clients for the CENTERLINQ network by
developing solid and credible relationships with major mall developers,
establishing a sales and marketing department that is experienced in the field
of advertising sales, and making substantial investments in collateral material,
as well as developing a unified corporate identity and product focus.
Clients who participate in the CENTERLINQ network agree to advertise,
through contract(s), their products or services on the kiosks and accompanying
television monitors that are placed in highly trafficked areas of the mall such
as the food courts. They agree to pay the advertising fees published in the rate
card. They may also participate by including direct access through the
interactive kiosks to their website(s) or conducting e-commerce directly through
the kiosk. Through CENTERLINQ, the Company has signed contracts with new clients
to participate in both the kiosk advertising and the interactive e-commerce
capabilities of the interactive kiosks.
GenesisIntermedia.com, Inc. intends to expand client participation in
interactive e-commerce and the CENTERLINQ programs, particularly as CENTERLINQ
is rolled out throughout regional shopping malls across the United States and
into additional public access areas. Presently, the focus is on marketing
efforts with local or regional advertisers, or local representatives of national
organizations. The Company intends to seek additional national advertisers and
participants in CENTERLINQ once the deployment of the network has sufficient
national scope.
MARKET OPPORTUNITY:
Continued Emphasis on Targeted Marketing
The demand for targeted marketing strategies has continued through the
development of new marketing channels. The Company believes that many businesses
will be unable to ignore the competitive challenge posed by the emerging
e-commerce 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. Systems 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.
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As a creator and implementer of multi-disciplinary marketing, the
Company is pro-actively developing and deploying strategies that use the
Internet and other interactive platforms, as well as more traditional
marketing-based strategy. The Company also benefits from having the ancillary
support services necessary to ensure the success of its clients' marketing and
distribution efforts.
Conventional Media
The Company provides multi-disciplinary marketing for its proprietary
products and for those of its clients. These include radio, television and print
advertising, business-to-consumer and business-to-business outbound
telemarketing services, and inbound telemarketing services, which typically
involve responding to customer inquiries and electronic order processing.
The success of these campaigns depends on the ability to rapidly develop
positive customer response to the products and services marketed. Future results
in product sales will be dependent upon the Company's ability to rapidly
generate positive customer response to products and services. This is
particularly the case with directly marketed products. Customer response to
direct marketing depends on many variables, including
o the appeal of the products being marketed,
o the effectiveness of the marketing medium chosen and the marketing script,
o the availability of competing products, and
o the timing and frequency of consumer presence, phone contacts and airtime.
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, the
Company develops and implements marketing that use these forms of 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. The Company
is a specialist at marketing products at price points that typically range from
$100 to $5,000, with an average of approximately $2,000.
The Company invested in improved computer and telecommunications
technology to supplement its telemarketing business and to enable it to expand
this segment of the 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. The
computerized call management systems use predictive dialers to:
o automatically dial telephone numbers;
o determine if a live connection is made; and
o present connected calls to a telephone sales representative who has been
specifically trained for the particular sales program.
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The Company's ability to train and retain sales personnel is critical to
its success because of the need to develop an in-depth knowledge of the complex
products typically sold. Because of the complexity of its products, the in-depth
knowledge of its telemarketing personnel and its success in retaining those
personnel following training the Company believes that such factors serve to
differentiate it from many of its competitors. Sales personnel are compensated
by salary, commissions and bonuses based on individual performance and overall
profitability.
Inbound telemarketing services typically include:
o the electronic receipt and processing of all sales information;
o the communication of necessary sales information to a contracted order
fulfillment center; and
o the administration of customer order and service inquiries.
Infomercial production and teleservices for proprietary products are
still performed by the Company. It also performs these services for products
owned by other companies, and typically the Company is compensated by retention
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 personnel and sales-based performance fees. The Company
also works on a fee-for-service basis.
Per the Company's normal course of business, it enters into various
agreements under which it's obligated to pay royalties on the 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%.
Media Placement
Historically, a segment of GenesisIntermedia.com, Inc. has been engaged in
the planning, buying and placement of media through media purchasers and sellers
within the Company . The placement of media time is a capital-intensive segment
of the Company's business because media time, unavailable on an as-needed basis,
must be purchased in advance and stored in inventory. In accordance with the
Company's refined business model, it does not view media placement as a
cost-effective use of corporate resources moving forward, therefore it plans to
phase out this activity in the near future.
REVENUE STREAMS
o offerings of proprietary products
o telemarketing
o new technologies that include public access network, and CENTERLINQ
STRATEGY
Pioneering, Developing Technologies and New Internet Companies
The mission of GenesisIntermedia.com, Inc. is to develop Internet
technologies and Internet companies. The Company intends to position each of its
companies under development to become the leader within its respective market
niche. Factors that will lead to success, in the Company's estimation, include
understanding, developing and applying information technology to the interactive
media markets. Backing this up with data access and software tools, as well as
the focus on strategic alliances to complement product offerings will provide
strong bases of
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support for new products. The Company seeks to invest in strategic Internet and
interactive media while balancing its technology development with an acute
understanding of customer needs.
Thus far, the Company has invested significantly in products and services
that seek to capitalize on the growth of the Internet and interactive marketing.
The Company intends to continue to do so, and continue to pursue the growth and
development of its technologies and services, and to introduce its products
commercially. Concurrently, the Company will continue to identify, evaluate and
pursue new opportunities that further its mission and complement its investments
in Internet-related business, interactive media and innovative technologies.
An 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. This fuels the Company's objective
of creating additional profit centers by seeking out innovative consumer
products to market and distribute.
The Company's marketing operations are dependent on a 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. Men Are From Mars, Women Are From Venus
audio, video and companion materials products were introduced in 1994. While its
has experienced continuing revenue from these products, the Company is bringing
on additional products to supplant, supplement and eventually replace those that
are expected to experience slowdown in their lifecycles.
Future results of operations will also depend on the ability to spread
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 introduced
through all levels of consumer marketing, whether directly or through third
parties. The future revenues of the business will depend substantially on the
Company's ability to:
o create and maintain an effective, integrated organization that develops,
introduces and markets products that address changing consumer needs on a
timely basis;
o establish and maintain effective delivery platforms for products; and
o develop new and expand established geographic markets.
The Company believes that the infrastructure investments made in 1998 and
the number of new products acquired in 1998 and brought to market in 1999,
provide the foundation for a solid, diversified revenue base.
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Growth By Strategic Acquisitions and Alliances
In accordance with its development business model,
GenesisIntermedia.com, Inc. actively identifies acquisition opportunities that
will enable it to build a group of high-growth companies engaged in
Internet-related business-to-business and business-to-consumer commerce. It is
seeking to expand product offerings, core multimedia marketing capabilities, and
the geographic scope of its operations. To this end, it intends to acquire
well-regarded niche companies or leaders in specific marketing and
communications disciplines. The Company will also look at product lines, or
companies that have products that can be integrated into product offerings, and
successfully market through its marketing channels, for potential acquisition.
The Company also examines joint venture and strategic alliance candidates.
It will focus on acquiring or forming alliances with relatively
well-established, revenue producing, e-commerce businesses, or businesses that
can be marketed and sold effectively in e-commerce, which will complement
existing capabilities. Key personnel who possess technical expertise will be
encouraged to remain with the Company on a long-term basis. Thus far, two
acquisitions have been made to date, and the Company recently entered into a
strategic alliance that gives it an option to acquire new marketing capability
targeted to the travel industry.
Acquisition-oriented growth, as well as non-acquisition growth, will both
need to be managed effectively to keep the Company moving in its intended
direction. Because internal and external growth are critical elements of its
business strategy, the ability to manage that growth effectively will be
critical to the success of GenesisIntermedia.com, Inc. In addition to the
specific risks associated with acquisition-based growth, the Company is refining
systems that control operations, administration, and financial and accounting
processes. The potential for increased complication exists since the Company
will be 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, GenesisIntermedia.com, Inc. is
not able to fix a single acquisition model or anticipate precisely what issues
it could face in analyzing, closing or assimilating particular acquisitions.
Future acquisitions will involve a number of risks, including:
o increased management time devoted to unique or tailored acquisition types
and structures;
o the risks of acquiring undiscovered, undisclosed or undesired liabilities;
o integration difficulties or difficulties in achieving desired economies of
scale; and
o diffusion of management or marketing skills across diverse companies or
product lines.
COMPETITION
GenesisIntermedia.com, Inc.'s investments compete in the technology and
service segments of industry. These are comprised of numerous small and large
companies, some of which were founded as true Internet companies, some of which
migrated to a net-based infrastructure and some of which utilize the Internet in
some capacity and are seeking to increase their net- presence. Management
believes that the competition in its areas of concentration is highly
competitive. Although the Company believes that diverse segments of the Internet
market will provide opportunities for one supplier of products and services
similar to those of the Company, it is possible that a single supplier may
dominate one or more market segments. The
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Company believes that principal competition factors in this market are
recognition, performance, facility, variety of value-added service functionality
and features and level of support.
Competitors of GenesisIntermedia.com, Inc. would primarily include a wide
span of companies and organizations, including Internet software, content
providers, technology companies, telecommunication providers and developers,
cable companies, equipment suppliers, and quite possibly certain types of
e-commerce enterprises.
The Company believes that it may possibly be affected by competition from
licensees of interactive properties and technologies. There can be no assurances
that the Company's competition will not develop Internet products and services
that are superior to those of the Company, or that achieve greater market
acceptance than the Company's. Furthermore, some of the Company's current
advertising partners may have at some point or shall in the future establish
relationships with certain of the Company's existing and/or future competitors.
In addition, the Company competes with operators of web sites as well as
traditional off-line media, such as print and television for a share of the
advertisers' total advertising expenditures. There can be no assurances that the
Company will be able to compete sufficiently against its current or future
competitors or that competition will not have a material adverse effect on the
Company's business, results of operation or financial conditions.
Due to the market for "new media" being relatively new and subject to
rapid technological change, the Company anticipates that overall competition it
will face will persist, intensify and increase in the future. There are
relatively low barriers to entry into this market. The Company relies heavily on
the skill of its personnel and the quality of its client service, and there is
no patented technology that would preclude or inhibit competitors from entering
the market. The Company's management expects to face additional competition from
new entrants into the market in the future. Principal competitive factors
include:
o a company's creative reputation,
o knowledge of media,
o financial controls,
o geographical coverage and diversity,
o relationships with clients,
o technological capability, and
o 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 GenesisIntermedia.com, Inc., then the Company anticipates that its
business, results of operations and financial condition would be negatively
affected.
Some current and potential competitors have longer operating histories,
larger installed customer bases, and longer relationships with clients and
significantly greater financial, technical, marketing and public relations
resources than the Company does. These competitors could decide at any time to
increase their resource commitments to compete directly with the Company in
certain markets, such as shopping malls with a kiosk program. In addition, the
relatively new market for e-commerce is subject to continuing definition, and,
as a result, may better position the Company's competitors to compete in this
market as it matures.
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INTELLECTUAL PROPERTY
The Company's trademarks, trade secrets and similar intellectual
property are regarded as critical to its success. Although it currently has no
registered copyrights, trademarks or patents covering any of its proprietary
technology, the Company currently relies on a combination of common law
copyright and trademark laws, trade secret protection, confidentiality and
non-disclosure agreements and contractual provisions with employees and with
third parties to establish and protect its proprietary rights. For the
development of marketing channel capabilities and technologies, the Company
intends to rely upon unpatented trade secrets and know-how and on the expertise
of its employees. Possibly, these steps may not be adequate.
GenesisIntermedia.com, Inc. intends to pursue the registration of its
copyrights and trademarks based upon anticipated use internationally. It may not
be able to secure copyright or trademark registrations for all of its marks in
the United States or other countries. The Company 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
service marks could bring potential copyright or trademark infringement claims.
If the Company's technology infringes on the rights of other companies, it may
be required to seek licenses from third parties. However, it may not be able to
do so on commercially reasonable terms, if at all. In addition, the Company may
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 its acquisition and
growth strategy, disputes may arise with respect to ownership of technology
developed by current GenesisIntermedia.com, Inc. employees who were previously
employed by other companies.
If competitors prepare and file applications in the United States that
claim trademarks used or registered by the Company, it 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. Similarly, actions could be
brought by third parties claiming that the Company's products or technology
infringe patents or copyrights owned by others. An adverse outcome could require
the Company to license disputed rights from third parties or to cease using a
trademark or infringing product or technology. Any litigation regarding
proprietary rights could be costly and divert management's attention, result in
the loss of some of proprietary rights, require the Company to seek licenses
from third parties and prevent it from selling its products and services.
The Company generally licenses intellectual property from third
parties, such as 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
that it directly marketed. The Company had also licensed the rights to produce
and market other products, such as Hawaiian Tropic Swimwear.
GenesisIntermedia.com, Inc. is dependent upon the protection of these
intellectual properties by their licensors and is responsible for protecting
them as well. In addition, it is anticipated that the Company will license its
content, or a portion thereof, from third parties in the near future. As a
result, exposure to copyright infringement actions may increase because the
Company must rely upon those third parties for information as to the origin and
ownership of the licensed content. The Company intends 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 the Company.
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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. GenesisIntermedia.com, Inc. believes that it is 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. GenesisIntermedia.com, Inc. believes that it
is 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
o clearly delineates the types of calls that the firms are prohibited from
making under the Act,
o lists specific individuals or groups of individuals that the firms are
prohibited from contacting under the Act, and
o prohibits its personnel from making the calls.
The Company's 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 a "do not call" list. GenesisIntermedia.com, Inc. also
educates its personnel on the restrictions and prohibitions of the Act.
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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 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 the Company's operations as it currently conducts
them and it does not presently anticipate that state regulation will materially
and adversely affect its operations in the future.
International Regulation
Advertising is subject to regulation in countries other than the United
States in which the Company may choose to do business. It 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,
o the national television networks and various other media have adopted
extensive regulations for advertising that is acceptable for broadcast or
publication,
o trade associations in some industries publish advertising guidelines for
their members, and
o various consumer groups have been and continue to be powerful advocates of
increased regulation of advertising.
Industry Regulation
Some industries served by the Company are also subject to government
regulation. GenesisIntermedia.com, Inc. 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. GenesisIntermedia.com, Inc. provides this continuing education to its
employees and believes that it has, in all material respects, complied with this
and other relevant industry regulations. The Company may also be subject to
regulation by the Commodity Futures Trading Commission, which regulates
commodities trading. The Commission has initiated an investigation that may
affect the infomercial titled Success and You based on Jake Bernstein's Trade
Your Way To Riches product. See Item 3. Legal proceedings below.
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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 GenesisIntermedia.com, Inc. does 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 it to potential liability, which in
turn could have an adverse effect on its business. These types of laws could
also damage the growth of the Internet generally and decrease the demand for the
Company's products and services.
Regulatory Compliance
GenesisIntermedia.com, Inc. has developed internal review procedures
to help ensure that its work product is accurate and fairly discloses the nature
of the products marketed and sold by the Company. GenesisIntermedia.com, Inc.
believes it is in compliance with federal, state and local laws and regulations
pertaining to advertising and the pre-clearance procedures of the broadcast
media.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Recent expansion into new interactive multimedia markets has not yet
generated significant revenue.
In 1998, the Company expanded its media offerings to include
interactive multimedia technologies, including the Internet, and interactive
kiosks through the CENTERLINQ network to businesses seeking to conduct
electronic commerce. The expansion included the formation of Genesis Intermedia,
Inc. subsidiary. However, revenue generated by this subsidiary has not been
significant. It is also expected that the Company will continue to invest in the
building of its infrastructure, and expansion, thus probably experiencing losses
in these areas in the year 2000.
High dependence on the Chief Executive Officer to execute the business
plan
The Company's ability to maintain its competitive position is dependent on
the services of its senior management, in particular the chief executive
officer, Ramy El-Batrawi. Mr. El-Batrawi has been principally responsible for
developing the corporate vision and leading the product and personnel growth to
date. Although the Company has a $4 million key-man life insurance policy
covering Mr. El-Batrawi, and it is developing a strong management team around
him, the loss of Mr. El-Batrawi would be extremely damaging to
GenesisIntermedia.com, Inc. at its early stage of growth.
Dependence on a small number of clients and products
A relatively small number of clients and products have historically
contributed significantly to the Company's 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 its 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 the
Company. However, because it intends to continue to rely on broad-or
multi-market products like the Men From Mars, it is possible that the dependence
on revenues from a limited number of products will continue in the future. If
the Company does not diversify its product line and client base, it may put
itself in a position of risk that the loss or under-performance of a single
product or client may materially affect it.
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Related party transaction has historically generated a substantial
portion of its revenue
Selling media time to Trade Your Way To Riches, Inc., a corporation
owned by the Company's majority stockholder, represented none of its revenue in
1996, approximately 41% in 1997 and approximately 25% in 1998. In addition, in
1997 and 1998, revenue from Trade represented approximately 90% and 78% of the
Company's revenue from telemarketing for products owned by its clients. Although
total revenue related to Trade in 1999 had declined to less than 1% of total
revenue, and the Company anticipates that Trade-related revenue will continue to
represent less than 1% of future revenue, it has only since October 1998 begun
to sell media time to a significant number of new clients. In addition, the
Company has recently begun marketing the new products it acquired in the late
1998. Any inability to continue media sales to third parties or failure of the
Company's new products could significantly and adversely affect it.
Quarterly results can fluctuate
The Company's management believes that its business structure of offering
multi-disciplinary marketing for its own and third parties' disparate products
and services is unique. It believes 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. The Company expects these fluctuations to be exaggerated
as it executes its 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 that are developed internally, acquired or contracted with
third parties to market, will also contribute to the unpredictability of
quarterly results.
Acceptance of marketing channels and technologies are key to the Company's
ability to compete
The Company is developing multi-disciplinary marketing that it believes
will be competitive. This development includes choices about the right marketing
channel--such as CENTERLINQ and its versatile kiosk system 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
competitiveness, including:
o rapid technological changes that make these or future offerings obsolete;
o changes in, or mistakes in gauging user and client requirements and
preferences; and
o frequent new product and service introductions by others or evolving
industry standards and practices in emerging markets that may promote
adoption of technologies other than those chosen by the Company.
Oral agreements are terminable at will
The Company frequently markets products on the basis of oral agreements
that may be terminated by either party at any time, and there is no written
contracts relating to the sale of media time to clients. Because of those
terminable arrangements, any of the Company's clients may discontinue utilizing
its services at any time in the future.
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A Pending CFTC Investigation May Involve Additional Expense, Management
Diversion or Limits On Its Business
The Company 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 GenesisIntermedia.com, Inc., its employees
or affiliates, the CFTC has nonetheless requested that the Company provide
various documents arising from its 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 that provide instruction regarding trading strategies.
The CFTC has contended that, by virtue of the Company's activities in producing
and marketing the video, there may be a requirement to be registered in some
capacity with the CFTC. In the event that the CFTC brings an enforcement action
against the Company by virtue of its failure to register, or against Trade Your
Way To Riches, Inc., with whom the Company had done significant business in the
past, and which is owned by the Company's majority stockholder, any adverse
determination or settlement could adversely affect the Company. 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 the Company 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 the Company, result in
substantial payments by the Company. The CFTC may still bring an enforcement
action against the Company or it may seek to settle the matter. Based on
analysis of all of the facts and legal advice from the Company's regulatory
counsel, the Company believes that the CFTC proceeding can be settled on terms
that will not materially adversely affect it, or that, if not settled, the final
resolution will not have a material adverse effect on it.
Future Expansion is Dependent on Raising Additional Capital.
The Company is currently negotiating with certain lenders to obtain
additional financing for the expansion of CENTERLINQ. If the negotiations do not
materalize and the Company is unable to obtain additional financing, the future
expansion of CENTERLINQ will be slowed significantly and will adversely
affect the Company.
The Company is also seeking additional financing to expand its existing
business to purchase new products and purchase media time to advertise for
these products. If the Company is unable to obtain this financing its ability
to purchase media time to advertise its products will be significantly limited.
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EMPLOYEES
As of March 30, 2000, the Company had 240 full-time employees. None of
these employees are covered by collective bargaining agreements and management
believes that its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
Prior to September 1999, we owned an 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. In July 1999 to house our expanding
business, we purchased an 80,000 square foot building at 5805 Sepulveda
Boulevard, Van Nuys, California 91411 and sold our previous corporate office in
Studio City, California. The new office building gives us room to expand as
we continue to increase our workforce. We occupy approximately 60% of the new
building and sublease the remaining 40% under lease arrangements ranging from
one to four years. Most of our administrative, telemarketing and media time
operations are conducted at our office building in Van Nuys, California. 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 St. George, 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.
ITEM 3. 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 the Company
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. The
Company has 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, the Company believes the CFTC's analysis and
conclusions are incorrect and are based on incomplete information. In October
1998, the Company issued a written response to the CFTC's position setting forth
the reasons why the Company is not required to register in any capacity with the
CFTC. The CFTC has indicated that registration may be required. The Company has
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.
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If it is determined in the investigation or any resulting proceeding that
registration is required, the Company 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. In the event that the CFTC were to bring an
enforcement action against Genesis by virtue of our failure to register, which
the Company believes 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 includes a
simple request to become registered, a cease and desist order--which could, if
successfully applied to the Company or TYWR, 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, the Company 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 the Company believes that a
settlement can be reached that will not have a material adverse impact on us,
the Company can not predict whether any settlement proposal the Company may make
will be accepted by the CFTC or by what time. For the reasons discussed in the
preceding paragraph, the Company believes that if the Company is 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 the Company.
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. The Company believes
the suit is frivolous and the Company intends to defend it vigorously. The
Company carries employment practices and general liability insurance which the
Company believes is adequate to cover any potential liability.
The Company 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, the Company may be exposed to unforeseen liability to consumers,
competitors or others, against which the Company is not insured. The Company
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 the Company acquires the rights
to diverse new products and increases 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. The Company does not maintain
insurance designed specifically for advertising agency liability. If the Company
is not adequately insured or indemnified, then the damages, costs, expenses or
attorneys' fees could have an adverse effect on us.
We have been subject to claims of intellectual property infringement and may
increasingly be subject to these types of claims as the number of products and
services and competitors in our markets grows and the functionality of products
and services in other industry segments overlaps. Although we do not believe
that any of our products or services infringes upon the proprietary rights of
third parties, there can be no assurance that third parties will not claim
infringement by us with respect to current or future products or services. In
addition, we periodically acquire intellectual property from third parties,
including in connection with our acquisitions. In some instances this
intellectual property is prepared on a work-for-hire or similar basis, in some
instances we license the intellectual property and in others we acquire it. We
may in the future be party to disputes about ownership, license scope and
royalty or fee terms with respect to some of this intellectual property. Any
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product or service delays or require us to enter into royalty
or licensing agreements, any of which could have an adverse effect upon us. We
may also initiate claims or litigation against third parties for infringement of
our proprietary rights or to establish the validity of our proprietary rights,
which could result in significant expense to us and divert the efforts of our
technical and management personnel from productive tasks, whether or not the
litigation were determined in our favor.
In addition, the contracts the Company enters 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 the Company maintains business insurance the Company
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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ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
under the symbol "GENI" on June 14, 1999. The following table sets forth, for
the periods indicated, the high and low closing sales prices per share of Common
Stock on the Nasdaq National Market.
HIGH LOW
------------ ------------
For the quarter ended March 31, 2000 $28.00 $5.63
For the quarter ended December 31, 1999 $ 7.81 $4.00
For the quarter ended September 30, 1999 $ 8.81 $4.50
June 14, 1999 to June 30, 1999 $ 8.56 $5.75
RECORD HOLDERS
The last reported sale price of the Common Stock on the Nasdaq National
Market on March 31, 2000 was $18.20. As of March 31, 2000, there were
approximately 2700 stockholders of record of the Company's Common Stock.
DIVIDENDS
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain all available funds for use in
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future. Any future determination relating to dividend policy will be
made in the discretion of the Board of Directors of the Company and will depend
on a number of factors, including the future earnings, capital requirements,
financial condition and future prospects of the Company and such other factors
as the Board of Directors may deem relevant.
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ITEM 6. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and related footnotes for
the year ended December 31, 1999 included in this Annual Report on Form 10-KSB.
The discussion of results, causes and trends should not be construed to imply
any conclusion that such results or trends will necessarily continue in the
future.
OVERVIEW
GenesisIntermedia.com, Inc. uses its core competencies to develop Internet
technologies and Internet companies. It owns distinct marketing channels, and
through CENTERLINQ, is a leading provider of public Internet access portals in
shopping malls. The Company has been building an infrastructure to build,
develop and nurture new Internet technology companies and businesses. The
company markets products and services, which it develops, licenses exclusively
or distributes for third parties, utilizing network and cable television, radio,
newspapers, magazines, the Internet and the company's CENTERLINQ network. As it
has done with CENTERLINQ, the Company leverages its strength in operations,
marketing and the deployment of traditional and new media to advance new and
innovative technologies within strategically identified market segments.
Historically, the Company's operations have consisted of the marketing,
advertising and sales of its own products and those of its clients utilizing
traditional marketing channels. While it continues to utilize conventional media
to fulfill its marketing needs and those of its clients, the Company's focus
more recently has been on investing in and bringing to market innovative
technology-based concepts that center around use of the Internet.
CENTERLINQ is an Internet-based interactive network consisting of public
access kiosks, located exclusively in shopping malls currently but adaptable to
a wide range of venues. CENTERLINQ is also accessible through the Internet at
www.CENTERLINQ.com. Advertising displayed on large screen monitors on and
adjacent to the public access kiosks enhances network usage and revenues.
The Company invested heavily to support the operational needs of CENTERLINQ
and to attain a leadership position as a network of public Internet portals.
Investments in CENTERLINQ included those made in network architecture, expansion
of Information Services, installation, field maintenance and client service
personnel, programming and Information Technology professionals, research and
development, quality assurance, and the build out of physical space and
infrastructure to support the operations.
These investments enabled the Company to announce in December 1999 that
CENTERLINQ had reached critical mass. The systems were installed in 20 shopping
malls across the United States including those in California, Nevada, Arizona,
Michigan, Pennsylvania and Indiana. Traffic at these malls thus far enable
CENTERLINQ to create approximately 22 million impressions on consumers per
month. The Company foresees CENTERLINQ network expansion in additional malls
throughout North America, and is discussing expansion into Europe and Latin
America.
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With the CENTERLINQ experience not only proving successful, but teaching
the Company how to apply those same development standards and resources to other
businesses and technologies in order to achieve an effective rollout of product,
the Company's management now views its role as a creator of long-term
shareholder value more closely in alignment with its ability to propagate
additional Internet-based companies in accordance with its established
"incubation" process.
The Company, therefore, seeks to identify acquisition candidates whose
core competencies include the development of Internet technology,
networking solutions, interactive concepts and a variety of other high-growth
areas that can be integrated into valuable business-to-business and
business-to-consumer companies. GenesisIntermedia.com, Inc. intends to expand
client participation in interactive e-commerce and the CENTERLINQ programs,
particularly as CENTERLINQ is rolled out throughout regional shopping malls
across the United States and into additional public access areas. Presently, the
focus is on marketing efforts with local or regional advertisers, or local
representatives of national organizations. The Company intends to seek
additional national advertisers and participants in CENTERLINQ once the
deployment of the network has sufficient national scope.
Even though GenesisIntermedia.com, Inc. is entering emerging markets and
has begun to generate revenue from CENTERLINQ, it continues to rely on marketing
products for a substantial part of its revenues. Proprietary products sold by
the Company through integrated marketing capabilities include audio and video
tapes and companion material products based on the book Men Are From Mars, Women
Are From Venus, by John M. Gray, Ph.D., the Money Mastery financial mentoring
products, and other new products recently acquired. The Company expects that
revenues from the marketing of products will continue to account for a major
percentage of its revenues in the foreseeable future but that while revenues are
expected to rise, the overall percentage of revenues that can be attributed to
the aforementioned marketing activities will decline as its refined business
plan that concentrates on the development of business-to-business and
business-to-consumer enterprises that utilize Internet technology continues
onward.
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RESULTS OF OPERATIONS
Year Ended December 31, 1999 vs. Year Ended December 31, 1998
<TABLE>
<CAPTION>
YEAR
ENDED YEAR PERCENTAGE OF NET
DECEMBER ENDED REVENUE
31, DECEMBER 31, --------------------------
1999 1998 1999 1998
---------------- ----------------- ------------ ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net Revenue
Media sales - affiliate $ - $ 3,703 0.0% 24.8%
Media sales 5,793 1,220 18.3% 8.2%
Product sales 23,621 6,326 74.6% 42.4%
Commissions & royalties - affiliate - 1,789 0.0% 12.0%
Commissions & royalties 1,915 1,855 6.0% 12.5%
Other 342 13 1.1% 0.1%
---------------- ----------------- ------------ ------------
Total net revenue 31,671 14,906 100.0% 100.0%
Operating expenses
Media purchases 4,849 4,198 15.3% 28.1%
Direct costs 3,421 937 10.8% 6.3%
Selling, general and administrative 31,202 8,179 98.5% 54.9%
---------------- ----------------- ------------ ------------
Total operating expenses 39,472 13,314 124.6% 89.3%
---------------- ----------------- ------------ ------------
Income (loss) from operations (7,801) 1,592 (24.6%) 10.7%
(Gain) on sale of assets (282) - (0.9%) 0.0%
Interest expense 670 135 0.3% 0.9%
Financing costs 108 - 2.1% 0.0%
---------------- ----------------- ------------ ------------
Income (loss) before income taxes (8,297) 1,457 (26.2%) 9.8%
Provision (benefit) for income taxes - 30 0.0% 0.2%
================ ================= ============ ============
Net income (loss) $ (8,297) $ 1,427 (26.2%) 9.6%
================ ================= ============ ============
</TABLE>
Revenue for the year ended December 31, 1999 increased by $16,765,000 or 112.5%
from $14,906,000 for the year ended December 31, 1998 to $31,671,000 for the
same period in 1999. The, increase in revenue was due to the following:
o Product sales increased $17,295,000 or 273.4% principally as a result of
the Company's success in selling its new products and programs;
o Media sales to unrelated third parties increased from $1,220,000 in 1998 to
$5,793,000 in 1999 due to the Company hiring personnel with media buying
experience and contacts in the industry. The Company has been able to
retain several large customers who began purchasing media time in the
latter part of 1998 and have increased their media buys during 1999;
o Media sales to a company owed by the Company's majority stockholder
decreased from $3,703,000 for the year ended December 31, 1998 to $0 for
the same period in 1999. The Company has discontinued selling media to this
affiliate; and
23
<PAGE>
o Commissions and royalties--affiliate decreased from $1,789,000, for the
year ended December 31, 1998 to $0 for the same period in 1999. These
commissions are amounts received from the sale of mentoring programs for
the Trade Your Way To Riches products during the year ended December 31,
1998. There were no Trade-related sales for the same period in 1999. During
the fourth quarter of 1998 the Company discontinued selling the mentoring
programs for Trade Your Way To Riches, Inc.
Media purchases for the year ended December 31, 1999 increased by $651,000 or
15.5% from $4,198,000 for the year ended December 31, 1998 to $4,849,000 for the
same period in 1999. The increase was due to more media time sold in 1999. Media
purchases as a percentage of media sales decreased from 85.3% for the year ended
December 31, 1998 to 83.7% for the same period in 1999. The increase is in the
profit margin is due to the Company selling to unrelated third parties at higher
margins.
Direct costs for the year ended December 31, 1999 increased by $2,484,000 or
265.1% from $937,000 for the year ended December 31, 1998 to $3,421,000 for the
same period in 1999. The increase was due to significant increased product sales
during 1999, principally the sale of the Company's new products and programs.
Direct costs as a percentage of product sales decreased from 14.8% for the year
ended December 31, 1998 to 14.5% for the same period in 1999. The decrease is
due to lower product costs associated with the Company's new products and
programs when compared to the products sold by the Company during 1999.
Selling, general and administrative expenses for the year ended December 31,
1999 increased by $23,023,000 or 281.5% from $8,179,000 for the year ended
December 31, 1998 to $31,202,000 for the same period in 1999. The increase was
due principally to an increase in payroll and related benefits of $4,591,000 and
an increase in selling related expenses of $8,270,000. Selling related expenses
include the cost of acquiring customer names, purchasing media time for airing
of infomercials, royalties and telemarketing costs. The Company expensed
$9,867,000 in media airtime during 1999. As a result of expanding operations
through the creation of Genesis Intermedia, the Company's general and
administrative costs have increased. Most of the expenses incurred by Genesis
Intermedia to develop its Centerlinq Network are classified as general and
administrative expenses. The Company took steps to significantly expand its
Centerlinq Network of kiosks in shopping malls during the latter part of 1999.
By the end of 1999, the Company had installed its kiosks in 20 shopping malls.
During the third quarter of 1999, the Company sold its corporate office building
in Studio City, California that resulted in a gain on sale of $282,000. In July
1999, the Company purchased a new corporate office building in Van Nuys,
California.
Interest expense for the year ended December 31, 1999 increased by $535,000 or
396.3% from $135,000 for the year ended December 31, 1998 to $670,000 for the
same period in 1999. The increase in interest expense was due to the issuance of
a note payable secured by the Company's new corporate office building in Van
Nuys, California, an increase in the Company's line of credit, and notes payable
and capitalized lease obligations assumed as a result of the purchase of Vision
Digital assets and as part of the expansion of Centerlinq.
Financing costs for the year ended December 31, 1999 increased by $108,000 from
$0 for the year ended December 31, 1998 to $108,000 for the same period in 1999.
The increase is due to the amortization of commissions and other expenses paid
in connection with three notes payable the Company issued in May of 1999.
24
<PAGE>
Income taxes for the year ended December 31, 1999 decreased by $30,000 from
$30,000 for the year ended December 31, 1998 to $0 for the same period in 1999.
Due to the loss incurred in 1999, the current income tax expense recognized
during the first six months of 1999 was reduced to $0. Prior to January 1, 1999
the Company was taxed as an S corporation.
Net income for the year ended December 31, 1999 decreased by $9,724,000 or
681.4% from net income of $1,427,000 for the year ended December 31, 1998 to a
net loss of $8,297,000 for the same period in 1999. The decrease is principally
due to significantly higher sales offset by higher selling, general and
administrative expenses incurred to promote the Company's new products and
programs and to expand its Centerlinq Network of kiosks.
LIQUIDITY AND CAPITAL RESOURCES
We financed our operations initially from cash generated from operations. More
recently, we have financed our operations through the sale of common and
preferred stock in private placement offerings, sale of common stock in our
initial public offering, a long-term mortgage and a line 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 was
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 (increased to $1,500,000 during the third
quarter of 1999) from a major financial institution that is collateralized by
substantially all of our assets, except our office building, and the loan is
guaranteed by our majority stockholder. 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. In May 1999, we issued three notes payable in a private placement for
aggregate proceeds of $550,000 net of commissions and expenses of $108,000. In
connection with these three notes payable agreements, we also issued warrants to
purchase 78,571 shares of common stock. In June 1999 we sold 2,000,000 shares of
common stock in its initial public offering at $8.50 per share for an aggregate
of $17,000,000 with underwriting commissions and expenses of $1,870,000 and
offering expenses of $2,722,803. In July, we purchased an office building in Van
Nuys, California for $11,100,000 for which we issued a note payable in the
amount of $7,856,250. We also sold our old office building in Studio City,
California in September 1999 and repaid the original mortgage note in the amount
of $583,000 and the $300,000 working capital loan that were secured by the
building. During November 1999, the Company secured a $5 million debenture of
which $1,463,403 was drawn down in 1999. During the first quarter of 2000, we
received $5,135,000 from the same lender to whom we had the loan for $1,463,403
at December 31, 1999. In connection with this debenture we issued warrants to
the lender to purchase 750,000 shares of common stock with an exercise price of
$7.00. In February, 2000 the Company issued a convertible debenture in the
amount of $1 million along with a warrant to purchase 22,500 shares of the
Company's common stock at an exercise price of $12.00 and the issuance of 15,000
shares of the Company's common stock. The debenture is convertible into common
stock at $5.00 per share if it is held to maturity. The debenture was due on
April 7, 2000 and has been repaid. We will take a charge to earnings for the
15,000 shares of common stock issued in connection with this debenture.
25
<PAGE>
During the second quarter of 1999, and in connection with the termination of our
business relationship with Trade Your Way To Riches, Inc. ("TYWR"), a company
wholly owned by our majority stockholder, we exercised our option to purchase
the customer lists of TYWR, which option TYWR had granted to us prior to our
initial public offering. The purchase price of $3,821,134 for the customer lists
was approximately the fair market value, based on the projected revenues from
sales from the lists' use. The purchase price was paid through the exchange of
advances made by the Company to TYWR of $3,821,134, of which $2,270,330 of these
advances were made in 1999, for the customer lists. Under the terms of the
transaction, if the gross profit from use of the list during the first 18 months
does not meet or exceed the purchase price, then TYWR must refund to us the
difference between actual gross profit during such period and the purchase
price. We had the right to use the customer list during the second quarter of
1999 in consideration of the customary 25% commission for customer list use.
Under the terms of the option, we did not have to pay this commission if we
exercised the option to purchase prior to September 30, 1999. During the year
ended December 31, 1999 we generated sales from these customer lists which
resulted in gross profits of $2,645,459. Through the first quarter of 2000, the
gross profit generated from sales from these customer lists exceeded the
purchase price. None of the proceeds of our initial public offering were used to
fund this purchase. The foregoing transaction was approved by our audit
committee.
In June 1999, we acquired all of the assets comprising Global Leisure Travel,
Inc.'s ("Global") computerized Contour System travel-package marketing system
for $2,500,000. Global's majority stockholder is a company that is wholly owned
by Mr. El-Batrawi. In December 1999, we sold the Contour System back to Global
by transferring the asset and certain notes payable in the amount of $3,000,000
to Global. There was no gain or loss on this transaction as our basis in the
Contour System had increased by approximately $500,000 from additional
development costs we paid.
During the year ended December 31, 1999, we spent $15,943,742, on capital
expenditures including $11,865,935 on our new office building and building
improvements and used $5,274,022 in operations. In addition to capital
expenditures, we spent a significant amount of capital on the purchase of media
for our own use and for resale to others. The purchase of media time is capital
intensive because media time, unavailable on an as-needed basis, must be
purchased in advance. During 1999, we significantly increased the
amount of media purchased for our new products and programs. In 1999 we incurred
$9,866,824 in media airtime.
We expect to spend additional capital to expand our product lines, expand our
telemarketing division, and make strategic acquisitions. We anticipate spending
$15 - 20 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.
We believe that our current cash and cash equivalents on hand, together with
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 2001. However, we are currently seeking to acquire a bank
credit line or similar credit facility and seeking to refinance our mortgage on
our new office building to help finance future operations and acquisitions. We
are currently negotiating with certain lenders to obtain additional financing to
expand CENTERLINQ. If we are not successful, our ability to expand CENTERLINQ
will be adversely affected. The Company is also seeking additional financing to
expand its existing business to purchase new products and purchase media time to
advertise for those products. If the Company is unable to obtain this financing
its ability to purchase media time to advertise its products will be
significantly limited.
IMPACT OF YEAR 2000
The Company instituted a comprehensive program to address potential Year 2000
impacts and as a result, critical systems and infrastructure operated smoothly
through the arrival of Year 2000 and leap year boundaries. Additionally, the
Company experienced no Year 2000 related disruptions in the products and
services provided by its significant suppliers or other third-party business
relationships. Many of the improvements made in preparation for the Year 2000
are expected to provide the Company with long-term benefits.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of us to install new kiosks, general market conditions,
competition and pricing. Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the report will prove to be
accurate.
26
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
GENESISINTERMEDIA.COM, INC. AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 28
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 1999 29-30
Consolidated Statements of Operations for the Two Years
Ended December 31, 1999 31
Consolidated Statements of Stockholders' Equity for the Two
Years Ended December 31, 1999 32
Consolidated Statements of Cash Flows for the Two Years
Ended December 31, 1999 33-34
Notes to Consolidated Financial Statements 35-54
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
GenesisIntermedia.com, Inc.
We have audited the accompanying consolidated balance sheet of
GenesisIntermedia.com, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 subsidiaries as of December 31, 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 7, 2000
28
<PAGE>
GENESISINTERMEDIA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
1999
----------
CURRENT ASSETS
Cash and cash equivalents $ 589,745
Accounts receivable - trade, net of allowance for doubtful
accounts of $10,000 1,176,853
Inventory 888,546
Prepaid advertising 2,499,400
Advances receivable 1,190,532
Deposits and other prepaid assets 2,719,355
-----------
Total current assets 9,064,431
PROPERTY AND EQUIPMENT, net 16,694,510
CUSTOMER LISTS, net 2,865,851
GOODWILL, net 429,063
OTHER ASSETS 805,094
-----------
TOTAL ASSETS $29,858,949
===========
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
GENESISINTERMEDIA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1999
----------
CURRENT LIABILITIES
Current portion of notes payable $ 582,805
Current portion of capital lease obligations 77,158
Line of credit 1,505,406
Accounts payable 6,475,317
Accrued payroll taxes 1,313,913
Other accrued liabilities 899,608
Income taxes payable 65,000
-----------
Total current liabilities 10,919,207
NOTES PAYABLE, net of current portion 9,435,699
CAPITAL LEASE OBLIGATIONS, net of current portion 281,329
-----------
Total liabilities 20,636,235
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $0.001 par value
5,000,000 shares authorized
142,858 shares issued and outstanding
($7.00 per share liquidation preference,
dividends of $72,917 in arrears) 143
Common stock, $0.001 par value
25,000,000 shares authorized
5,310,000 shares issued and outstanding 5,310
Additional paid-in capital 17,591,041
Common stock committed 28,440
Accumulated deficit (8,296,550)
Treasury stock (105,670)
-----------
Total stockholders' equity 9,222,714
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,858,949
===========
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
GENESISINTERMEDIA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, AND 1998
- --------------------------------------------------------------------------------
1999 1998
------------- --------------
NET REVENUE
Media sales - affiliate $ - $ 3,702,731
Media sales 5,793,282 1,219,977
Product sales 23,621,061 6,325,887
Commissions and royalties - affiliate - 1,789,415
Commissions and royalties 1,915,392 1,854,450
Rental income and other 341,528 13,264
----------- -----------
Total net revenue 31,671,263 14,905,724
----------- -----------
OPERATING COSTS AND EXPENSES
Media purchases 4,849,008 4,198,159
Direct costs 3,420,833 936,567
Selling, general, and administrative expenses 31,202,137 8,179,150
----------- -----------
Total operating costs and expenses 39,471,978 13,313,876
----------- -----------
INCOME (LOSS) FROM OPERATIONS (7,800,715) 1,591,848
OTHER (INCOME) EXPENSES
Gain on sale of asset (282,491) -
Interest expense 670,120 135,135
Financing costs 108,206 -
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (8,296,550) 1,456,713
PROVISION FOR INCOME TAXES - 30,000
----------- -----------
NET INCOME (LOSS) $(8,296,550) $ 1,426,713
=========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE $ (1.89) $ 0.35
=========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (1.89) $ 0.35
=========== ===========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 4,383,464 4,082,746
=========== ===========
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
GENESISINTERMEDIA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Common
--------------- -------------- Paid-in Stock Accumulated Treasury
Shares Amount Shares Amount Capital Committed Deficit Stock Total
------ ------ ------ ------ ---------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 - $ - 4,000,000 $ 4,000 $ 920,582 $ - $2,694,252 $ - $ 3,618,834
DISTRIBUTION TO STOCKHOLDER (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
TRANSFER OF S CORPORATION EARNINGS 1,165,965 (1,165,965) -
DISTRIBUTION TO STOCKHOLDER (2,000,000) (2,000,000)
PRIVATE PLACEMENT OFFERINGS OF COMMON
STOCK, NET 250,000 250 1,548,500 1,548,750
PRIVATE PLACEMENT OFFERING OF PREFERRED
STOCK, NET 142,858 143 869,857 870,000
OPTIONS GRANTED TO CONSULTANTS 80,000 80,000
STOCK ISSUED FOR SERVICES RENDERED 28,440 28,440
PROCEEDS FROM INITIAL PUBLIC OFFERING,
NET 2,000,000 2,000 12,405,197 12,407,197
STOCK REPURCHASE (105,670) (105,670)
NET LOSS (8,296,550) (8,296,550)
------- ---- ---------- ------- ----------- ------- ------------ --------- -----------
BALANCE, DECEMBER 31, 1999 142,858 $143 5,310,000 $ 5,310 $17,591,041 $28,440 $(8,296,550) $(105,670) $ 9,222,714
======= ==== ========== ======= =========== ======= ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
GENESISINTERMEDIA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (8,296,550) $ 1,426,713
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 1,702,456 142,609
Options issued for services 80,000 -
Common stock issued for services 28,440 -
Gain on sale of building (284,491) -
(Increase) decrease in
Accounts receivable - trade 814,313 (887,269)
Accounts receivable - affiliates 125,415 707,444
Inventory (708,338) 98,371
Prepaid advertising (1,948,577) 508,600
Advance receivable (1,190,532) -
Deposits and other prepaid assets (1,432,775) (83,478)
Increase (decrease) in
Accounts payable 4,449,166 33,731
Other accrued liabilities 1,674,414 390,031
Income taxes - 30,000
Deferred revenue (288,963) 6,830
---------------- ----------------
Net cash provided by (used in) operating activities (5,274,022) 2,373,582
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (15,943,742) (345,554)
Cash acquired in acquisition - 19,673
Purchase of AniMagic (165,000) -
Purchase of customer list (2,270,330) -
Purchase and development of Contour system (3,000,000) -
Proceeds from sale of building 1,240,000 -
Other (612,865) (192,229)
---------------- ----------------
Net cash used in investing activities (20,751,937) (518,110)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments to) related parties (15,495) (46,133)
Net proceeds from line of credit 835,371 670,035
Distribution to stockholder (2,000,000) (955,000)
Proceeds from sale of common stock to related party - -
Proceeds from notes payable 12,810,217 800,000
Proceeds from sale of common and preferred stock 19,750,000 -
Payment of offering costs (4,234,522) (689,531)
Repurchase of common stock (105,670) -
Payments on capital lease obligations (45,868) (8,745)
Payments on notes payable (2,219,891) (64,825)
---------------- ----------------
Net cash provided by (used in) financing activities 24,774,142 (294,199)
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
GENESISINTERMEDIA.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (1,251,817) $ 1,561,273
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,841,562 280,289
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 589,745 $ 1,841,562
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 670,120 $ 135,135
=============== ================
INCOME TAXES PAID $ - $ -
=============== ================
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1999 the Company: (1) sold the Contour
system back to Global Leisure Travel, Inc. by transferring to Global the assets
and notes payable in the amount of $3,000,000; (2) issued a note payable in
connection with an insurance policy for $836,140; (3) entered into capital lease
obligations of $303,373; and (4) exchanged advances to a related party in the
amount of $3,821,134, of which advances of $2,270,330 were made in 1999, for
customer lists.
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
GenesisIntermedia.com, Inc. (the "Company") was incorporated in the
State of Florida on October 28, 1993 under the name Genesis Media
Group, Inc. The Company re-domesticated to Delaware in 1998. On
December 3, 1998, the Company amended its Certificate of Incorporation
to change its name to GenesisIntermedia.com, Inc. The Company is an
integrated marketing and business solutions provider utilizing
conventional, emerging and interactive multimedia technologies. The
Company has devoted substantially all its resources to selling products
it owned or had purchased the rights to sell through conventional
marketing methods. The Company sold these products to the general
public through the use of infomercials, radio advertisements, print
media and retail outlets.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiaries Genesis Intermedia, Inc. from
its inception in August 1998 and Genesis Properties, Inc. from its
inception in July 1999. All intercompany accounts and transactions have
been eliminated.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company'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 the Company 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.
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. The Company 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.
35
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
For purpose of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Advances Receivable
The balance represents advances to a third party that buys and sells
media time on behalf of the Company. The amount outstanding is
unsecured and will be repaid by commissions earned by the third party
on media transactions it processes for the Company.
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 the Company'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, 1999 are capitalized production costs of $438,813, net of
accumulated amortization of $252,328.
Deposits and Other Prepaid Assets
The balance consists primarily of deposits held by credit card
processing companies as security for future charge-backs and returns by
customers who have purchased the Company's products during the year.
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:
Building and improvements 7 to 39 years
Vehicles 5 years
Furniture and equipment 5 to 7 years
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.
Accrued Payroll Taxes
The balance consists of payroll taxes related to payroll paid to the
Company's employees during 1997, 1998 and 1999. Included in the balance
is an estimated amount for penalties and interest that will be due when
the payroll taxes are paid.
36
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Product sales are recognized when the product is shipped. Generally, it
is the Company's policy to refund unconditionally the total price of
merchandise returned within 30 days of the customer's receipt of the
merchandise. The Company provides an allowance, based upon experience,
for returned merchandise. Revenue from media sales is recognized when
the media time is aired. Commissions, royalties, and rental income are
recognized when earned.
Income Taxes
From inception to December 31, 1998, the Company 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 the Company's
taxable income for state purposes.
Effective January 1, 1999, the Company 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 began utilizing SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
37
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company 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. The Company is able to identify to which
advertisement a customer is responding by using a separate toll free
number for each ad. The Company 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 the Company's infomercials and print media. At
December 31, 1999, $2,499,400 of advertising was reported as an asset
which consisted of the unamortized portion of the capitalized direct
response advertising, net of accumulated amortization of $14,915,539.
The Company incurred $9,866,824 and $2,808,716 in advertising
expense for the years ended December 31, 1999 and 1998, respectively.
Concentration of Credit Risk
The Company places its cash with high-credit, quality financial
institutions. At times, such amounts may be in excess of the Federal
Deposit Insurance Corporation limit. As of December 31, 1999, the
uninsured portions of the balances held at these financial institutions
aggregated to $325,845. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
During the years ended December 31, 1999 and 1998, 0% and 41%,
respectively, of the Company's revenue was derived from selling media
time to a corporation owned by the Company's majority stockholder.
Earnings Per Share
The Company 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.
Impairment of Long-Lived Assets
The Company continually monitors its long-lived assets to determine
whether any impairment of these assets has occurred. In making such
determination, the Company evaluates the performance, on an
undiscounted cash flow basis, of the underlying assets or group of
assets that gave rise to this amount. To date, no such impairment
has occurred.
38
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
The Company continually monitors its goodwill to determine whether any
impairment of this asset has occurred. In making such determination
with respect to goodwill, the Company 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 December 31, 1999,
goodwill was $429,063, net of accumulated amortization of $108,737.
Software Development Costs
Software development costs are capitalized in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed."
Capitalization of software development costs begins upon the
establishment of technological feasibility and is discontinued when the
product is available for sale. The establishment of technological
feasibility and the ongoing assessment for recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross
revenues, estimated economic life, and changes in software and hardware
technologies. Capitalized software development costs are comprised
primarily of salaries and payroll costs.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated
economic life of the products (not to exceed three years). Management
periodically compares estimated net realizable value by product to the
amount of software development costs capitalized for that product to
ensure the amount capitalized is not in excess of the amount to be
recovered through revenues. Any such excess of capitalized software
development costs over expected net realizable value is expensed at
that time. Software development costs are included in Other Assets and
amount to $366,281, net of accumulated amortization of $33,299.
Risks and Uncertainties
The Company operates in an industry that is highly competitive. The
Company's principal competitors are marketing and communication
companies that operate in the United States. In order to maintain its
current sales levels, the Company must continue to maintain existing
client relationships, and attract new clients by demonstrating its
creative reputation, knowledge of media and high quality service.
The majority of the Company's revenue has come from selling media time
to a related party and from product sales from one group of products.
The Company 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.
The Company also relies on third party fulfillment facilities to store
inventory, process orders and ship products. The termination of or
adverse change in the Company's relationship with such fulfillment
facilities or the partial or total loss of any of these facilities or
the Company's inventories stored there may have a material adverse
effect upon the Company's business.
39
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
For the year ended December 31, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a financial
statement. 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 and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financial
statements since the Company did not have any of the items of
comprehensive income in any period presented.
Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 136, "Transfer of Assets to a Not-for-Profit Organization or
Charitable Trust that Raises or Holds Contributions for Others." This
statement is not applicable to the Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not expect
adoption of SFAS No. 137 to have a material impact, if any, on its
financial position or results of operations.
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified
to conform with the 1999 presentation.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consisted of the following:
Land $ 1,450,000
Building and improvements 10,415,935
Vehicles 113,269
Furniture and equipment 5,489,158
--------------
17,468,362
Less accumulated depreciation (773,852)
--------------
TOTAL $ 16,694,510
==============
Depreciation expense for the years ended December 31, 1999 and 1998 was
$649,196 and 131,849, respectively.
40
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 3 - NOTES PAYABLE
Notes payable at December 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Note payable - bank is collateralized by a 1st Trust Deed on
the land and building located in Van Nuys, California. The
note bears interest at prime (7.75% at December 31, 1999)
plus 2.75%. Monthly interest only payments with any unpaid
principal and interest due on July 20, 2004. $7,856,250
Note payable - investor is unsecured and bears interest at
11.5% per annum and is due on March 31, 2001. The note
permits the Company to borrow up to $5 million. The
Company also issued to the investor 750,000
warrants to purchase the Company's common stock at $7 per
share. This note is senior to any future borrowings. 1,463,403
Note payable - bank is collateralized by certain 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. This note was
called by the bank in April 1999 151,569
Notes payable to an insurance company. The note is unsecured
and bear interest at 6.99% Monthly principal and interest
payments, are $44,596 with any unpaid principal and interest
due December 10, 2000. The Company is three months in arrears on
its payment on this note. 547,282
-----------
10,018,504
Current portion 582,805
-----------
LONG-TERM PORTION $ 9,435,699
===========
</TABLE>
41
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 3 - NOTES PAYABLE (CONTINUED)
The following is a schedule by years of future maturities of notes
payable:
Year Ending
December 31,
------------
2000 $ 582,805
2001 1,504,613
2002 44,972
2003 29,864
2004 7,856,250
-----------
TOTAL $10,018,504
===========
In May 1999, the Company issued three notes payable in a private
placement for aggregate proceeds of $550,000 net of commissions and
expenses of $108,000. In connection with these three notes payable
agreements, the Company also issued warrants to purchase 78,571 shares
of common stock at 120% of the IPO price. The notes bear interest at
the rate of 8.75% per annum and are due the earlier of nine months from
the date of issuance or 30 days after the closing of the Company's
initial public offering. The Company repaid these notes in July 1999.
NOTE 4 - LINE OF CREDIT
The Company has a $1,750,000 line of credit with a financial
institution. The Company is currently in default. The Company has
obtained a forbearance from the financial institution allowing the
Company until May 1, 2000 to cure the default. Under the terms of
the forbearance the Company must make certain payments on specific
dates through May 1, 2000 at which time the balance owed is due in
full. The line of credit bears interest at prime, plus 2.9%, is
collateralized by substantially all of the Company's assets, except
real estate, and is guaranteed by the Company's majority stockholder.
NOTE 5 - RELATED PARTY TRANSACTIONS
Media Sales and Accounts Receivable - Affiliate
The Company purchases media airtime and resells it to other companies.
For the years ended December 31, 1999 and 1998, media sold to a company
owned by the Company's majority stockholder amounted to $0 and
$3,702,731, respectively. The above mentioned media sales resulted in a
gross profit of $0 and $555,410, 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.
42
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
Customer List
During the second quarter of 1999, and in connection with the
termination of its business relationship with Trade Your Way To Riches,
Inc. ("TYWR"), a company wholly owned by the Company's majority
stockholder, the Company exercised its option to purchase the customer
lists of TYWR, which option TYWR had granted to the Company prior to
the Company's initial public offering. The purchase price of $3,821,134
for the customer lists was the approximate fair market value, based on
the projected revenues from sales from the lists' use. The purchase
price was paid through the exchange of advances made by the Company to
TYWR of $3,821,134, of which $2,270,330 of these advances were made in
1999, for the customer list. Under the terms of the transaction, if the
gross profit to the Company from use of the list during the first 18
months does not meet or exceed the purchase price, then TYWR must
refund to the Company the difference between actual gross profit during
such period and the purchase price. The Company had the right to use
the customer list during the second quarter of 1999 in consideration of
the customary 25% commission for customer list use. Under the terms of
the option, the Company did not have to pay this commission if it
exercised the option to purchase prior to September 30, 1999. During
1999, (subsequent to the purchase of this list) the Company generated
sales from these customer lists which resulted in gross profits of
$2,645,459. In 2000, the gross profits generated from sales from these
customer lists exceeded the purchase price. The customer lists are
being amortized over 24 months. None of the proceeds of the Company's
initial public offering were used to fund this purchase.
Genesis Aviation
In connection with the sales efforts "road show" and visits to
regulatory agencies in connection with the Company's initial public
offering, the Company leased an airplane from Genesis Aviation, Inc.
("Aviation"), a company wholly owned by the Company's majority
stockholder. During 1999, the Company reimbursed Aviation for use of
the airplane in the amount of $510,593. The lease charges to the
Company by Aviation were below the lease charges by Aviation to third
parties for the same services.
Contour System
In April 1999, the Company entered into a strategic alliance with
Global Leisure Travel, Inc. ("Global"), a leading provider of wholesale
travel to travel agents and consumers. Global's majority stockholder is
a company that is wholly owned by the Company's majority stockholder.
The strategic alliance provided that the Company would 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.
Global also granted the Company 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. In June 1999, the Company exercised
this option and purchased the Contour System for $2.5 million.
In December 1999, the Company sold the Contour System back to Global by
transferring the Contour System and certain notes payable in the amount
of $3,000,000 to Global. There was no gain or loss on this transaction
as the Company's basis in the Contour System had increased by
approximately $500,000 from additional development cost paid by the
Company.
43
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
Commission Revenue
For the years ended December 31, 1999 and 1998, the Company earned $0
and $1,789,415, respectively, in commission from selling products for
companies owned by the Company's majority stockholder. The commission
received from selling these products ranged from 35% to 55%.
Transactions with Dr. Gray
On December 31, 1997, the Company 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, 1999 and 1998 were $0 and $0, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Royalties
In the normal course of business, the Company 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
the years ended December 31, 1999, and 1998 was $1,403,487 and
$454,997, and 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 the Company. Although the Order
does not reference the Company, its employees or affiliates, the CFTC
has nonetheless requested that the Company provide various documents
arising out of the Company'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 the Company. Various documents have
been produced on behalf of the Company in response to the subpoena.
Additionally, the CFTC has taken the deposition of Ramy El-Batrawi,
president of the Company, in connection with its investigation. The
Company 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 the Company, 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, the Company believes
the CFTC's analysis and conclusions are incorrect and are based on
incomplete information. In October 1998, the Company issued a written
response to the CFTC's position setting forth the reasons why the
Company is not required to register in any capacity with the CFTC. The
CFTC has indicated that registration may be required.
44
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (Continued)
The Company has been advised by its counsel that the initiation of a
CFTC enforcement action against the Company 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 the Company, its officers, directors
or employees.
If it is determined in the investigation or any resulting proceeding
that registration is required, the Company intends promptly to effect
any required registration. It is estimated that the cost of registering
the Company with the CFTC will be less than $1,000. In the event that
the CFTC brings an enforcement action against the Company by virtue of
its failure to register, any adverse determination or settlement in
this action could adversely affect the Company. 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
certain Trade Your Way To Riches products or services - and a possible
order of disgorgement of profits which could, if applied to the
Company, result in substantial payments by the Company. In February
1999, the Company 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 the Company believes
that a settlement can be reached that will not have a material adverse
impact on us, the Company can not predict whether any settlement
proposal the Company may make will be accepted by the CFTC or by what
time. For the reasons discussed in the preceding paragraph, the Company
believes that if the Company is 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 the Company.
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 the Company, Genesis
Intermedia, Inc. and the Company'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. The Company believes the
suit is frivolous and intends to defend it vigorously. The Company
carries employment practices and general liability insurance which the
Company believes is adequate to cover any potential liability.
The Company may also be involved from time to time in various other
claims and legal actions incident to its operations, either as
plaintiff or defendant.
45
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases
The Company leases certain office space, office equipment, an
automobile and mall space for its kiosks under a non-cancelable
operating lease. The Company also leases certain 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:
Year Ending Operating Capital
December 31, Leases Leases
------------ ---------- --------
2000 $ 471,276 $158,434
2001 422,110 149,343
2002 353,660 96,626
2003 232,560 18,600
2004 190,900
Thereafter 5,040
---------- --------
423,003
$1,675,546
==========
Less amount representing
interest (64,516)
--------
358,487
Less current portion 77,158
--------
$281,329
========
Included in property and equipment is capitalized lease equipment of
$418,271 with accumulated amortization of $54,284 at December
31, 1999.
Rent expense for the years ended December 31, 1999 and 1998 was
$226,852, and $24,405, respectively.
Employment Agreements
In September 1998, the Company entered into an employment agreement
with its President which continues until September 30, 2003, unless
terminated earlier by the Company, either for cause, death or certain
other circumstances. Pursuant to the terms of 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.
46
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements (Continued)
In October, 1998 the Company entered into employment agreements with
two employees retained as a result of the acquisition of certain of the
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 the Company for
cause, death or under certain other 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
Stock Split
On October 27, 1998, the Company 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, the Company authorized 5,000,000 shares of $0.001 par value
preferred stock. No preferred shares were issued or outstanding as of
December 31, 1999.
Stock Surrender
On November 1, 1998, the Company's two principal stockholders
surrendered an aggregate of 1,000,000 shares of the Company's common
stock.
Private Placement Offerings
In January, 1999, the Company completed a private placement of 175,000
shares of common stock at $10.00 per share, net of commissions and
expenses of approximately $201,250. 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, the Company sold 142,857
shares of convertible preferred stock at $7.00 per share, net of
commissions of $115,000, and warrants to purchase 142,857 shares of
common stock at 120% of the IPO price to the same investors.
In connection with this transaction, the Company 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 investors, which brought the effective purchase price of the shares
issued in connection with the private placement which occurred in
January to $7.00 per share.
Initial Public Offering
In June 1999 the Company sold 2,000,000 shares of common stock in its
initial public offering at $8.50 per share for an aggregate of
$17,000,000 with underwriting commissions and expenses of $1,870,000
and offering expenses of $2,722,803
Treasury Stock
During third and fourth quarters of 1999, the Company repurchased
22,400 shares of its common stock for $105,670.
47
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
Stock Option Plan
In October 1998, the board of directors adopted and the stockholders
approved the Company'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 the Company and its stockholders
the benefits arising from ownership of the Company's common stock by
individuals employed or retained by the Company who will be responsible
for the future growth of the Company. 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 the Company's success.
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) certain 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.
The Company 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 the Company or shares purchased
by the Company 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.
The Company 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 the Company 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, the Company's net income and earnings per
share would be reduced to the pro forma amounts indicated below for the
years ended December 31, 1999 and 1998:
48
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
1999 1998
---- ----
Net income (loss)
As reported $(8,296,550) ($1,426,713)
Pro forma $(8,986,973) ($1,074,630)
Basic earnings (loss) per common share
As reported $(1.89) $ (0.35)
Pro forma $(2.05) $ (0.26)
Diluted earnings (loss) per common share
As reported $(1.89) $ (0.35)
Pro forma $(2.05) $ (0.26)
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 yield of 0% and 0%, (ii) expected volatility
of 100% and 65%, (iii) weighed-average risk-free interest rate of
approximately 6.2% and 5.5%, and (iv) expected life of 2 and 2 years,
respectively.
The following is table summarizes the options and warrants outstanding:
<TABLE>
<CAPTION>
Weighted- Weighted-
Stock Average Other Average
Option Exercise Options/ Exercise
Plan Price Warrants Price
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Balance, December 31,
1997 - $ - - $ -
Granted 450,000 $ 8.05 50,000 $ 9.57
Exercised - $ - - $ -
Canceled 200,000 $ 8.50 - $ -
--------------- ---------------
Balance, December 31,
1998 250,000 $ 8.50 50,000 $ 9.57
Granted 231,220 $ 6.38 - $ -
Canceled (13,500) $ 6.38 - $ -
--------------- ---------------
BALANCE, DECEMBER 31,
1999 467,720 $ 7.96 50,000 $ 9.57
=============== ===============
Exercisable, December 31,
1999 302,044 $ 8.34 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 3.09 and
1.83 years, respectively, at December 31, 1999. The exercise price for
the options outstanding under the Stock Option Plan at December 31,
1999 ranged from $6.00 to $8.50
49
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 8 - ACQUISITIONS
On October 26, 1998, the Company acquired certain assets of Vision
Digital Communications, Inc., ("Vision Digital") a company that places
interactive kiosks in shopping malls. The Company purchased current
assets, equipment and intangible assets in exchange for 60,000 shares
of the Company's common stock valued at $600,000 plus the assumption of
certain liabilities. The common stock was valued at $10 per share which
approximates the per share price the Company received when it sold
stock in December 1997. The Company 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 certain targeted levels of
total revenue over a three-year period. These options were issued
outside the Stock Option Plan. Such options will expire at the end of
such three-year period.
The Company entered into employment agreements with two former
employees of Vision Digital, each providing for three-year terms and
annual salaries of $84,000. Each such 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 such 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 certain performance goals. These loans were made by
the Company during 1999.
Listed below are the assets purchased from Vision Digital:
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
=========
In March 1999, the Company acquired substantially all the assets of
AniMagic Corporation, an interactive multimedia company that produces
CD-ROMs for the edutainment industry, for $165,000. The operations of
AniMagic Corporation in 1998 and through the date of acquisition in
1999 were immaterial and not presented in the unaudited pro forma
information below.
50
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 8 - ACQUISITIONS (CONTINUED)
The following table presents the unaudited pro forma condensed
consolidated statements of operations for the year ended December 31,
1998 and reflects the results of operations of the Company as if the
acquisition of Vision Digital had been effective January 1, 1998. 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.
1998
-----------
(unaudited)
Total net revenue $15,069,347
Direct costs $ 998,057
Selling, general and administrative expenses $ 8,696,034
Income from operations $ 1,177,097
Net income $ 1,011,162
Basic earnings per share $ 0.25
NOTE 9 - PROVISION FOR INCOME TAXES
The following table presents the current and deferred income tax
provision for federal and state income taxes for the years ended
December 31, 1999 and 1998:
1999 1998
--------------- ---------------
Current
Federal $ - $ -
State - 30,000
--------------- ---------------
- 30,000
--------------- ---------------
Deferred
Federal - -
State - -
--------------- ---------------
- -
--------------- ---------------
PROVISION FOR INCOME TAXES $ - $ 30,000
=============== ===============
51
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 9 - PROVISION FOR INCOME TAXES
The provision for income taxes differs from the amount that would
result from applying the federal statutory rate as follows. No
reconciliation is shown for the years ended December 31, 1998 as the
Company elected to be taxed as an "S" corporation until December 31,
1998.
Year Ended
December 31,
1999
------------
Statutory regular federal income tax rate 34.0%
Effect of valuation allowance (34.0%)
------
TOTAL 0.0%
======
The components of the deferred income tax assets (liabilities) as of
December 31, 1999 are as follows:
Deferred tax assets
Amortization of goodwill $ 20,000
Accounts receivable allowance 4,000
Net operating loss carryforward 3,265,000
----------------
Total deferred tax assets 3,289,000
----------------
Deferred tax liabilities
Depreciation of property and equipment 380,000
----------------
Total deferred tax liabilities 380,000
----------------
Net deferred tax asset 2,909,000
Valuation allowance (2,909,000)
----------------
$ -
================
At December 31, 1999, the Company has provided a valuation allowance
for the deferred tax asset since management has not been able to
determine that the realization of that asset is more likely than not.
The net change in the valuation allowance for the year ended December
31, 1999, was an increase of $2,909,000. Net operating loss carry
forwards expire starting in 2014.
52
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 10 - SEGMENT INFORMATION
The Company has three business units that have separate management and
reporting infra-structures that offer different products and services.
The business units have been aggregated into three reportable segments:
Media, Intermedia, and Properties. The Media group conducts direct
response advertising campaigns and buys media time and either sells it
to third parties or uses it to market its own products. The Intermedia
group is deploying the CENTERLINQ network of public access Internet
kiosks in shopping malls within the United States. The Properties group
maintains the Company's building and generates revenue from the
building's tenants. Most corporate expenses, such as internal
administrative costs, legal expenses, and debt issuance costs, are
included in the Media group.
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of its
operating segments based on income from operations, before income
taxes, accounting changes, non-recurring items, and interest income and
expense.
Summarized financial information concerning the Company's reportable
segments is shown in the following table for the years ended December
31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------
Media Intermedia Properties Consolidated
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 31,060,083 $ 269,652 $ 341,528 $ 31,671,263
Operating loss $ (4,375,118) $ (3,218,351) $ (207,247) $ (7,800,715)
Depreciation and
amortization $ 1,268,630 $ 520,785 $ 126,212 $ 1,915,627
Interest expense $ 329,901 $ 23,159 $ 317,660 $ 670,120
Identifiable assets $ 12,741,652 $ 5,305,650 $ 11,811,647 $ 29,858,949
Capital expenditures $ 489,998 $ 3,830,258 $ 11,886,239 $ 16,206,495
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------
Media Intermedia Properties Consolidated
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 9,262,384 $ 151,214 $ - $ 9,413,598
Operating income (loss) $ 1,946,481 $ (354,633) $ - $ 1,591,848
Depreciation and
amortization $ 106,132 $ 36,477 $ - $ 142,609
Interest expense $ 125,500 $ 9,635 $ - $ 135,135
Identifiable assets $ 8,717,276 $ 1,271,042 $ - $ 9,988,318
Capital expenditures $ 264,856 $ 156,538 $ - $ 421,394
</TABLE>
53
<PAGE>
GENESIDINTERMEDIA.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 11 - SUBSEQUENT EVENT
In February 2000, the Company issued a $1 million convertible debenture
and warrants to purchase 22,500 shares of the Company's common stock at
an exercise price of $12.00 per share and 15,000 shares of the
Company's common stock. The debenture is convertible into the Company's
common stock at $5.00 per share if it is held to maturity. The
debenture was due on April 7, 2000 and repaid by the Company on April
14, 2000. The Company will take a charge to earnings for the issuance
of the 15,000 shares of Common Stock.
The Company granted 47,000 incentive stock option to employees under
the Company's stock option plan in February 2000.
During the first quarter of 2000, the Company received $5,135,000 from
the same lender to whom the Company had the unsecured note payable at
December 31, 1999 of $1,463,403. The payment terms for these funds are
the same as for the previous funds.
During the first quarter of 2000, the Company made payments totaling
$63,156 on the note payable that had been called by the bank.
54
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTER AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the name, age and position with the
Company of each officer and director of the Company as of the date of this
Report.
The current directors, executive officers and key employees of the Company
are as follows:
NAME AGE POSITION
Ramy El-Batrawi 38 Chairman of the Board and Chief
Executive Officer
Douglas E. Jacobson 53 Director, Chief Financial Officer
Craig T. Dinkel 41 Chief Operating Officer
George W. Heyworth 50 Director
Michael R. Fulger 51 Director
RAMY EL-BATRAWI. Mr. El-Batrawi is the principal stockholder and chief
executive officer of the Company. He has been a director and chairman of the
board of the Company 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.
DOUGLAS E. JACOBSON. Mr. Jacobson has been a director of the Company 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 the Company. As the Company's chief financial officer, Mr.
Jacobson's responsibilities include overseeing and preparing the financial
analysis of the Company's financial growth and reporting.
CRAIG T. DINKEL. Mr. Dinkel joined the Company as its chief operating
officer in October 1998. Prior to joining the Company, Mr. Dinkel served as
chief operating officer of Trade Your Way To Riches, Inc., a company owned by
Mr. El-Batrawi. Mr. Dinkel's responsibility is to manage and oversee the
day-to-day operations of the Company, including the management of our core group
of inbound and outbound telemarketers. His principal responsibilities include
effectuating the Company'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 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.
GEORGE W. HEYWORTH. Mr. Heyworth was elected a director of the Company 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.
55
<PAGE>
MICHAEL R. FUGLER. Mr. Fugler. was appointed as a Director in December
1999. Mr. Fugler is Managing Director Corporate Finance for I-Bankers
Securities, Inc., the lead underwriter for the Company's 1999 initial public
offering. After receiving his Juris Doctorate from Louisiana State University in
1972, Mr. Fugler embarked on a legal career that began with litigation and later
focused on international law, corporate law and finance. He became a leader and
active participant in the International Bar Association, The American Bar
Association, and The American Association of Trial Lawyers. In the past ten
years he has gained expertise in international investment and merchant banking.
Mr. Fugler currently holds Series 7, 24, and 63 securities licenses.
None of our directors, executive officers or key employees is related to any
other of our directors, executive officers or key employees.
Pursuant to Section 16 (a) of the Securities Exchange Act of 1934, and the
rules issued thereunder, the Company's directors and executive officers are
required to file with the Securities and Exchange Commission reports of
ownership and changes in ownership of Common Stock and other equity securities
of the Company. Copies of such reports are required to be furnished to the
Company. Based solely on a review of the copies of such reports furnished to the
Company, or written representations that no other reports were required, the
Company believes that, during the Company's fiscal year ended December 31, 1999,
all of its executive officers and directors complied with the requirements of
Section 16 (a) except that Mr. El-Batrawi filed late, a Form 4 related to a
disposition of common stock and rights to acquire common stock that occurred in
November 1999, and Mr. Fugler has not filed a Form 3 in connection with his
appointment to the board of directors in December 1999.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid to executive
officers of the Company for the fiscal year ended December 31, 1999, the year
in which the Company became a publicly reporting company and 1998.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- -----------------------------------------------------------
Awards Payouts
------------------------------- -----------
Other Restricted Securities Other All
Name and Annual Stock Underlying LTIP Other
Principal Position Year Salary ($) Bonus ($) Compensation ($) Award(s) ($) Options/SARs (#) Payouts ($) Compensation ($)
- ------------------------ ---- ---------- --------- ---------------- ------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ramy El-Batrawi 1999 250,018 - 2,000,000 (1) - - - 22,654 (3)
Chairman and 1998 62,500 - 955,000 (1) - - - 11,327 (3)
Chief Executive Officer
Douglas E. Jacobson 1999 120,023 - - - - - 13,253 (2)
Chief Financial Officer 1998 13,615 - - - - - 2,126 (2)
Craig T. Dinkel 1999 175,102 - - - - - -
Chief Operating Officer 1998 18,050 - - - - - -
</TABLE>
(1) Mr. El-Batrawi received distributions of undistributed S corporation
earnings of $2,000,000 and $955,000 in 1999 and 1998, respectively.
(2) Represents leasepayments made for Mr. Jacobson's automobile.
(3) Represents depreciation expense on a Company automobile used by
Mr. El-Batrawi.
56
<PAGE>
No options were granted to the named executive officers in 1999
The following table sets forth certain information with respect to the
unexercised options to purchase common stock held by the named executive
officers as of December 31, 1999 and options exercised by named executive
officers in the fiscal year ended December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/99(#) AT 12/31/99($)(1)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ramy El-Batrawi....... -- -- -- -- -- --
Douglas E. Jacobson... -- -- 150,000 -- 0 0
Craig T. Dinkel....... -- -- 100,000 -- 0 0
</TABLE>
(1) At December 31, 1999, the exercise price of the options were greater than
the market value of the Company's Common Stock.
57
<PAGE>
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 March 31, 2000 are
deemed outstanding. Those shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. 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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP STOCK
<S> <C> <C>
Ramy El-Batrawi
5805 Sepulveda Boulevard, Van Nuys, CA 91411 2,912,622 54.9%
Douglas E. Jacobson
5805 Sepulveda Boulevard, Van Nuys, CA 91411 150,000 2.7%
Craig T. Dinkel
5805 Sepulveda Boulevard, Van Nuys, CA 91411 100,000 1.8%
George Heyworth
5805 Sepulveda Boulevard, Van Nuys, CA 91411 25,000 *
Michael R. Fulger
5805 Sepulveda Boulevard, Van Nuys, CA 91411 -- --
All directors and executive officers as a group (five persons) 3,187,622 57.1%
</TABLE>
* less than 1%
58
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company purchases media airtime and resells it to other companies. For
the years ended December 31, 1999 and 1998, media sold to a company owned by Mr.
El-Batrawi amounted to $0 and $3,702,731, respectively.
During the second quarter of 1999, and in connection with the termination
of its business relationship with Trade Your Way To Riches, Inc. ("TYWR"), a
company wholly owned by Mr. El-Batrawi, the Company exercised its option to
purchase the customer lists of TYWR, which option TYWR had granted to the
Company prior to the Company's initial public offering. The purchase price of
$3,821,134 for the customer lists was the approximate fair market value, based
on the projected revenues from sales from the lists' use. The purchase price was
paid through the exchange of advanes made by the Company to TYWR of $3,821,134,
of which $2,270,330 of these advances were made in 1999, for the customer lists.
Under the terms of the transaction, if the gross profit to the Company from use
of the list during the first 18 months does not meet or exceed the purchase
price, then TYWR must refund to the Company the difference between actual gross
profit during such period and the purchase price. The Company had the right to
use the customer list during the second quarter of 1999 in consideration of the
customary 25% commission for customer list use. Under the terms of the option,
the Company did not have to pay this commission if it exercised the option to
purchase prior to September 30, 1999. During 1999 (subsequent to the purchase
of this list), the Company generated sales from these customer lists which
resulted in gross profits of $2,645,459. In 2000, the gross profits generated
from sales from these customer lists exceeded the purchase price. None of the
proceeds of the Company's initial public offering were used to fund this
purchase.
In connection with the sales efforts "road show" and visits to regulatory
agencies in connection with the Company's initial public offering, the Company
leased an airplane from Genesis Aviation, Inc. ("Aviation"), a company wholly
owned by Mr. El-Batrawi. During 1999, the Company reimbursed Aviation for use of
the airplane in the amount of $510,593.
In April 1999, the Company entered into a strategic alliance with Global
Leisure Travel, Inc. ("Global"), 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. The strategic alliance provided that the Company
would 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. Global also granted the
Company 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. In June 1999, the
Company exercised this option and purchased the Contour System for $2.5 million.
In December 1999, the Company sold the Contour System back to Global by
transferring the Contour System and certain notes payable in the amount of
$3,000,000 to Global. There was no gain or loss on this transaction as the
Company's basis in the Contour System had increased by approximately $500,000
from additional development costs paid by the Company.
For the years ended December 31, 1999 and 1998, the Company earned $0 and
$1,789,415, respectively, in commission from selling products for companies
owned by Mr. El-Batrawi. The commission received from selling these products
ranged from 35% to 55%.
59
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits, See Exhibit Index at page 62.
(b) Reports on Form 8-K
None.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Action of 1934, as amended, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
GENESISINTERMEDIA.COM, INC
By: /s/ RAMY EL-BATRAWI
-----------------------------
Ramy El-Batrawi
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ RAMY EL-BATRAWI
- -----------------------------------------
Ramy El-Batrawi Chairman of the Board and Chief Executive
Officer (Principal Executive Officer) April 28, 2000
/s/ DOUGLAS E. JACOBSON
- -----------------------------------------
Douglas E. Jacobson Director, Chief Financial Officer (Principal
Financial and Accounting Officer) April 28, 2000
/s/ GEORGE W. HEYWORTH
- -----------------------------------------
George W. Heyworth Director April 28, 2000
/s/ MICHAEL R. FUGLER
- -----------------------------------------
Michael R. Fugler Director April 28, 2000
</TABLE>
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EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form
10-KSB or are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION FILED
<S> <C> <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 *
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) *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION FILED
<S> <C> <C>
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. *
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. *
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 the
Registrant dated April 29, 1999 *
10.26 Registration Rights Agreement between Registrant and Purchases of Genesis
Intermedia.com, Inc. Series A Convertible Preferred Stock and Warrants *
10.27 Stock Purchase Agreement between Registrant and Global Leisure Travel, Inc.
dated June 1999 **
10.28 Stock Purchase Agreement between Registrant and Global Leisure Travel, Inc.
dated December 1999 **
10.29 Securities Purchase Agreement between Registrant and Ultimate Holding, Ltd., a
Bermuda Ltd. dated November 1999 **
10.30 Securities Purchase Agreement and Warrants dated November 25, 1999 with
Ultimate Holding, Ltd., a Bermuda Ltd. **
10.31 Securities Purchase Agreement for Convertible Debenture dated February 7, 2000 F
21.1 Subsidiaries of the Registrant F
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP F
27.1 Financial Data Schedule F
</TABLE>
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (Commission File No. 333-66281).
** Previously filed.
F Filed herewith
63
EXHIBIT 10.31
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED PURSUANT TO THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW, AND
SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF IN THE UNITED STATES OR TO U.S. PERSONS (OTHER THAN DISTRIBUTORS)
UNLESS THE SAME ARE REGISTERED AND QUALIFIED IN ACCORDANCE WITH
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN
EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION IS AVAILABLE.
HEDGING TRANSACTIONS INVOLVING THE SECURITIES OFFERED HEREBY MAY
NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (this "Agreement") is
entered into as of the 7th day of February, 2000 between Denmore Investments
Ltd., a British Virgin Islands company (the "Purchaser"), and
GenesisIntermedia.com, Inc., a Delaware corporation (the "Company").
WHEREAS the Company is in the business of conducting business
as an integrated marketing solutions provider utilizing conventional media and
interactive multimedia technologies as described in the Company's Registration
Statement on Form SB-2 and the other documents of the Company on file with the
United States Securities and Exchange Commission (together, the "SEC
Documents");
WHEREAS the Company desires to sell its newly authorized: (i)
Convertible Subordinated Debenture (the "Debenture"); (ii) a Warrant to purchase
shares of its common stock (the "Warrant"); and (iii) shares of its common
stock, par value $.001 per share (the "Common Stock") to the Purchaser pursuant
to the exemption from registration under the United States Securities Act of
1933, as amended (the "Securities Act") provided by Regulation S promulgated
thereunder ("Regulation S ") and the Purchaser desires to acquire the Debenture,
the Warrant and Common Stock, on the terms and conditions set forth herein and
in compliance with Regulation S.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:
Section 1. ISSUANCE OF THE DEBENTURE, THE WARRANT
AND THE SHARES.
1.1 PURCHASE AND SALE OF SECURITIES; THE CLOSING. In reliance
upon the representations of the Company contained in Section 1.2 hereof and
subject to the terms and conditions set forth herein, the Company shall sell to
the Purchaser and the Purchaser shall purchase from the Company: (i) the
Debenture in the form attached hereto as Exhibit A in the original principal
amount of US $1,000,000; (ii) 15,000 shares of Common Stock (the "Shares"); and
(iii) a Warrant to purchase 22,500 shares of Common Stock at $12.00 per share in
the form attached hereto as Exhibit B. (The Debenture, the Shares, the Warrant
and the Common Stock underlying the Debenture and the Warrant are referred to
herein collectively as the "Securities"). The Securities shall be sold to the
Purchaser in consideration of the payment by the Purchaser to the Company of One
Million United States Dollars (US$1,000,000) (the "Purchase Price"). The
Debenture shall have a conversion price of $5.00 per share; provided that the
Debenture shall not be convertible prior to its Maturity Date (as defined in the
Debenture). The closing (the "Closing") of the purchase and sale of the
Securities shall be held as of 10:00 a.m., Los Angeles time on February 7, 2000
(the "Closing Date"), at the principal executive offices of the Company or at
such other time or place or on such other date as the parties hereto may
mutually agree.
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<PAGE>
On the Closing Date, the Purchaser will deliver to the Company
immediately available funds in the amount of the Purchase Price by wire transfer
to such Company account as is designated by the Company in writing. On the
Closing Date, the Company will deliver to the Purchaser an executed Debenture,
an executed Warrant and certificates representing the Shares in proper legal
form.
The Company will file a registration statement (the
"Registration Statement") under the Act covering: (i) the shares of Common Stock
issuable upon conversion of the Debenture; (ii) the shares of Common Stock
issuable upon conversion of the Warrant; and (iii) the Shares as promptly as
practicable after the Closing Date and will use its best efforts to cause such
registration statement to be declared effective by the SEC no later than
September 14, 2000. The form of Registration Rights Agreement is attached hereto
as Exhibit C.
1.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Purchaser that on
the date hereof and as of the Closing Date:
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and is
duly qualified as a foreign corporation in each jurisdiction in which the
character of the properties owned or held under lease by it or the nature of the
business transacted by it requires such qualification. The Company has all
requisite power to transact the business it transacts and proposes to transact,
to execute and deliver this Agreement and all other documents and agreements
contemplated hereby and thereby, and to perform the provisions hereof and
thereof and to consummate the transactions contemplated hereby and thereby.
(b) The execution, delivery and performance of this
Agreement and all other documents and agreements contemplated hereby to be
executed, delivered and performed by the Company, and the consummation of the
transactions contemplated hereby or thereby, have been duly authorized and
approved by the Company. This Agreement and all other documents and agreements
contemplated hereby to be executed and delivered by the Company have each been
duly authorized, executed and delivered by, and each is the valid and binding
obligation of, the Company, enforceable against it in accordance with its terms,
except as may be limited by applicable bankruptcy, reorganization, insolvency,
moratorium or other similar laws or by legal or equitable principles relating to
or limiting creditors' rights generally.
(c) The authorized capital stock of the Company is
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. The Shares will, when
issued, be duly and validly issued, fully paid and nonassessable, the common
stock underlying the Debenture will, when issued upon conversion, be duly and
validly issued, fully paid and nonassessable and the Common Stock underlying the
Warrant will, when issued upon exercise, be duly and validly issued, fully paid
and nonassessable.
(d) The consummation of the transactions contemplated by
this Agreement and the performance of the terms and provisions of this Agreement
and the other documents and agreements contemplated hereby or thereby will not:
(i) contravene, result in any breach of, or constitute a default under any
indenture, mortgage, deed of trust, bank loan or credit agreement, corporate
charter, by-laws or other material agreement or instrument to which the Company
is a party or by which the Company or any of its properties is bound; (ii)
conflict with or result in a breach of any of the terms, conditions or
provisions of any order of any court, arbitrator or federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign (collectively, "Governmental Person")
applicable to the Company; (iii) violate any material provision of any statute
or other rule or regulation of any Governmental Person applicable to the
Company; (iv) will not violate or conflict with the terms of any "lockup" or
similar provision of any underwriting or similar agreement to which the Company
or its subsidiaries is a party; and (v) will not result in the creation or
imposition of any lien, claim or other encumbrance upon any of the assets of the
Company.
2
<PAGE>
(e) No consent, approval or authorization of, or
registration, filing or declaration with, any person or entity is required for
the transfer, sale or issuance of the Securities or the valid delivery of the
Securities or for the performance by the Company of this Agreement and the other
documents and agreements contemplated hereby, other than the filings,
registrations or qualifications under securities laws or that may be required to
be made or obtained in connection with the offers, transfer, sale or delivery of
the Securities or any interest therein.
(f) Upon issuance (including payment of the purchase or
exercise price therefor), the Purchaser shall acquire good and marketable title
to the Securities free and clear of all covenants, conditions, restrictions,
liens, pledges, charges, encumbrances, options and adverse claims or rights of
any kind whatsoever.
(g) The Debenture, the Warrant and the Shares have been
duly and validly authorized and are: (i) free and clear of any security
interests, liens, claims or other encumbrances; (ii) are duly and validly
issued; (iii) fully paid and nonassessable; (iv) not issued or sold in violation
of any preemptive or other similar rights of the holders of any securities of
the Company; and (v) do not subject the holders thereof to personal liability by
reason of being such holders.
(h) The Common Stock underlying the Debenture and the
Warrant have been duly and validly authorized and when issued: (i) will be free
and clear of any security interests, liens, claims or other encumbrances; (ii)
will be duly and validly issued; (iii) will be fully paid and nonassessable;
(iv) will not have been issued or sold in violation of any preemptive or other
similar rights of the holders of any securities of the Company; and (v) will not
subject the holders thereof to personal liability solely by reason of being such
holders.
(i) Except as set forth in the SEC Documents, there is no
pending or, to the best knowledge of the Company, threatened action, suit,
proceeding or investigation before any Governmental Person having jurisdiction
over the Company that would materially affect the results of the operations of
the Company or adversely affect the execution by the Company of, or adversely
affect the performance by the Company of its obligations under, this Agreement,
the Debenture, the Registration Rights Agreement, the Warrant or the
transactions contemplated hereby or thereby.
(j) Neither the Company, nor any authorized
representative of the Company, has made, at any time, any written or oral
communication in connection with the offer or sale of the securities offered
hereby which contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements, in the light
of the circumstances under which they were made, not misleading.
(k) The sale of the Securities are exempt from
registration under the Securities Act.
(l) The Purchase Price will be used solely to expand the
Company's "Centerlinq" system.
3
<PAGE>
1.3 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.
The Purchaser represents, warrants and covenants to the
Company that on the date hereof, as of the Closing Date and as of the date of
any conversion of the Debenture, exercise of the Warrant and any transfer of the
Securities by it:
(a) The Purchaser has all requisite power to execute and
deliver this Agreement and any Securities exercised or converted, and all other
documents and agreements contemplated hereby and thereby, and to perform the
provisions hereof and thereof and to consummate the transactions contemplated
hereby and thereby.
(b) The execution, delivery and performance of this
Agreement and any Securities converted, and all other documents and agreements
contemplated hereby and thereby, and the consummation of the transactions
contemplated hereby or thereby, have been duly authorized and approved by
Purchaser. This Agreement, and all other documents and agreements contemplated
hereby, including any Securities converted, have each been, or will be upon
conversion, duly authorized, executed and delivered by, and each is the valid
and binding obligation of, the Purchaser enforceable against the Purchaser in
accordance with its terms, except as may be limited by applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws or by legal or
equitable principles relating to or limiting creditors' rights generally.
(c) The Purchaser is a company organized under the laws of
the British Virgin Islands ("BVI") having its principal place of business in
Tortola, BVI. The Purchaser is not a U.S. Person within the meaning of
Regulation S.
(d) The Purchaser is an "accredited investor" within the
meaning of Regulation D under the Securities Act, and is acquiring the
Securities for investment for its own account, and not with a view to
distribution, subject, nevertheless, to any requirement of law that the
disposition of its property shall at all times be within its control. The
Purchaser has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of purchasing the
Securities. The Purchaser is aware that it may be required to bear the economic
risk of an investment in the Securities for an indefinite period, and it is able
to bear such risk for an indefinite period. The Purchaser acknowledges: (i) that
the Securities being and to be acquired by it are not being registered under the
Securities Act on the grounds that the issuance of such securities is exempt
from registration under Section 4(2) of the Securities Act as not involving any
public offering; (ii) that the Securities being and to be acquired by it are not
being registered under the Securities Act on the grounds that the issuance of
such securities is exempt from registration under Regulation S as being made in
an offshore transaction (as defined in such Regulation) not to a U.S. person (as
defined in such Regulation); and (iii) that the Company's reliance on such
exemption is predicated in part on the representations made to the Company by
the Purchaser in this Section 1.3.
(e) The Purchaser acknowledges and agrees that until one
year after the conclusion of the transactions contemplated hereby, an offer or
sale of the Securities within the United States may violate the registration
requirements of the Securities Act if such offer or sale is made otherwise than
in accordance with Rule 144A under the Securities Act. Purchaser agrees to
comply with the offering restrictions provided in Rule 902(g) of Regulation S
and that it will resell the Securities only in accordance with Rules 903 or 904
of Regulation S (copies of which have been provided to Purchaser and Purchaser
acknowledges having received), pursuant to registration under the Securities Act
or pursuant to an available exemption from such registration.
(f) The Purchaser has received and reviewed the SEC
Documents and has had an opportunity to make such inquiries of management of the
Company as the Purchaser has desired.
4
<PAGE>
(g) The Purchaser agrees to execute and deliver such market
stand-off or lock-up agreements as the managing underwriter(s) for the Company's
underwritten public offering(s) shall reasonably request in connection with such
offering(s), in such customary form and in such manner as shall be reasonably
requested by such managing underwriters. The agreement contained in this clause
(h) shall relate to all securities of the Company acquired by the Purchaser
pursuant to this Agreement.
(h) The Purchaser agrees not to enter into, directly or
indirectly, any short sale or similar transactions involving the Company's
common stock or any derivative security.
Section 2. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligation of
the Purchaser to purchase and pay for the Debenture, the Warrant and the Shares
on the Closing Date shall be subject to the satisfaction on or before the
Closing Date of the conditions hereinafter set forth:
2.1 PROCEEDINGS SATISFACTORY. All proceedings taken on or prior
to the Closing Date in connection with the issuance of the Debenture, the
Warrant and the Shares and the consummation of the transactions contemplated
hereby and all documents and papers relating thereto shall be satisfactory in
form and substance to Purchaser and its counsel.
2.2 REPRESENTATIONS TRUE. All representations and warranties of
the Company contained herein shall be true and correct in all respects on and as
of the Closing Date with the same effect as though such representations and
warranties had been made on and as of the Closing Date and the Company shall
have performed in all respects all agreements on its part required to be
performed under this Agreement on or prior to the Closing Date.
2.3 THE PURCHASE BY THE PURCHASER PERMITTED BY APPLICABLE LAWS.
The sale by the Company and the payment for the Debenture, the Warrant and the
Shares to be purchased by the Purchaser: (i) shall not be prohibited by any
applicable law or governmental regulation, release, interpretation or opinion;
(ii) shall not subject the Purchaser to any penalty under or pursuant to any
applicable law or governmental regulation; and (iii) shall be permitted by the
laws and regulations of the jurisdictions to which the Purchaser is subject.
2.4 EXECUTION AND DELIVERY OF DOCUMENTS. The Purchaser shall
have received the following, duly executed and delivered and in form and
substance satisfactory to Purchaser and its counsel: the Debenture, the Warrant,
the Registration Rights Agreement and certificates representing the Shares in
proper legal form and such other documents and information as Purchaser may
reasonably request in connection herewith.
Section 3. COVENANTS.
The Company covenants and agrees that:
3.1 CORPORATE EXISTENCE. The Company will do or cause to be
done all things necessary to preserve and keep in full force and effect the
Company's corporate existence in accordance with the rights (charter and
statutory), licenses and franchises of the Company; provided, however, that the
foregoing shall not restrict any merger involving the Company, whether or not it
is the surviving corporation.
3.2 TAXES. The Company shall pay, when and as due, all taxes,
assessments and governmental levies that may be imposed upon the Company, except
as contested in good faith and by appropriate proceedings.
3.3 COMPLIANCE WITH LAWS. The Company shall comply in all
respects with all applicable laws, statutes and regulations of any Governmental
Person, a violation of which would have a material adverse effect on the
financial condition, operations, business, profits, prospects or properties of
the Company or the validity or enforceability of this Agreement or any other
documents or agreements contemplated hereby or thereby or any of the
transactions contemplated hereby or thereby.
5
<PAGE>
3.4 PAYMENT OF EXPENSES. In the event the transactions
contemplated by this Agreement are consummated, the Company shall promptly pay
to the Purchaser all reasonable costs and out-of-pocket expenses of Purchaser,
including without limitation its reasonable attorneys' fees, incurred in
connection with the negotiation, preparation, execution and delivery of this
Agreement, the Debenture, the Warrants and the Shares, and defense or
enforcement costs related thereto.
3.5 TRANSFERS. The Company shall have the right to reasonably
refuse to register any transfer of any of the Securities not made in accordance
with the provisions of Regulation S (Rule 901 through 905, and Preliminary
Notes), pursuant to registration under the Securities Act, or pursuant to an
available exemption from registration.
3.6 PUBLIC INFORMATION. The Company shall make available to the
Purchaser at all times current public information with respect to the Company
within the meaning of Rule 144(c) under the Securities Act.
(a) NOTIFICATIONS. The Company shall notify the Purchaser
promptly if at any time during the period which the Purchaser holds any of the
Securities of any event that shall have occurred as a result of which any
written or oral communication made by the Company or any authorized person
representing the Company to the Purchaser, would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) ENCUMBRANCES. The Company shall cause the Securities to
be, upon delivery, conversion or exercise, as the case may be, fully paid,
nonassessable, free of preemptive rights and free from all taxes, liens,
charges, security interests or other encumbrances.
(c) AUTHORIZATION. The Company will have at all times
authorized and reserved for issuance, free from preemptive rights, a sufficient
number of shares of Common Stock to satisfy the conversion and exercise rights
of the Purchaser pursuant to the terms and conditions of the Debenture and the
Warrant and to satisfy the issuance of any other shares of Common Stock which
are reserved for issuance or which are issuable upon the exercise, conversion,
exchange or satisfaction of any outstanding securities or obligations or rights
of the Company.
(d) EXCHANGE LISTING. The Company shall use its best
efforts to promptly secure the listing of the Shares and the Common Stock
underlying the Securities upon each securities exchange or automated quotation
system, if any, upon which the shares of Common Stock are then listed or quoted.
Section 4. TAXES.
The Company will pay all taxes (including interest and
penalties), other than taxes imposed on the income of the Purchaser, which may
be payable in respect of the execution and delivery of this Agreement or of the
execution and delivery (but not the subsequent transfer) of any of the
Securities or of any amendment of, or waiver or consent under or with respect
to, this Agreement or of any of the Securities and will save the Purchaser and
all subsequent holders of the Securities harmless against any loss or liability
resulting from nonpayment or delay in payment of any such tax.
Section 5. MISCELLANEOUS.
(a) REGULATION S; PRIVATE PLACEMENT; LEGENDS. The Purchaser
acknowledges and agrees that none of the Securities have been registered under
the Securities Act and none of the Securities may be offered or sold in the
United States or to or for the benefit of U.S. Persons (as defined in Regulation
S) unless the Securities are registered under the Securities Act, or an
exemption from such registration requirements is available. Each instrument or
certificate evidencing or representing any Securities shall bear a legend in
substantially the following form:
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The securities [evidenced by this instrument/represented by
this certificate] are subject to a Securities Purchase
Agreement dated as of February 7, 2000, a copy of which is on
file at the principal office of the Company and will be
furnished to the holder on request to the Secretary of the
Company.
In addition, unless counsel to the Company shall have advised
the Company that such legend is no longer needed, each certificate representing
the Securities shall bear legends in substantially the following forms:
The securities [evidenced by this instrument/represented by
this certificate] have not been registered pursuant to the
Securities Act of 1933, as amended (the "Act"), or any state
securities law, and such securities may not be sold,
transferred or otherwise disposed of unless the same are
registered and qualified in accordance with the Act and any
applicable state securities laws, or in the opinion of counsel
reasonably satisfactory to the Company such registration and
qualification are not required (including under Regulation S)
under the Act. Transfer of such securities is prohibited
except in accordance with the provisions of Regulation S under
the Act (Rule 901 through 905, and Preliminary Notes),
pursuant to registration under the Act, or pursuant to an
available exemption from registration; and hedging
transactions involving such securities may not be conducted
unless in compliance with the Act.
Each distributor selling Securities to a distributor, a dealer
(as defined in section 2(a)(12) of the Securities Exchange Act of 1934, as
amended) or a person receiving a selling concession, fee or other remuneration,
prior to one year after the consummation of the transactions contemplated by
this Agreement, shall send a confirmation or other notice to the purchaser of
the Securities that the purchaser is subject to the same restrictions on offers
and sales that apply to a distributor under Regulation S.
(b) INDEMNIFICATION. The Company agrees to indemnify,
defend and hold harmless the Purchaser and its successors, assigns, heirs,
subsidiaries, affiliates and all of the officers, directors, employees, partners
and agents (including attorneys and accountants) of each of the aforementioned
persons or entities, and each of them, from and against any and all losses,
claims, damages, liabilities, expenses, demands, causes of action, suits, debts,
obligations, rights, promises, acts, agreements and damages of any kind or
nature whatsoever, whether at law or in equity, whether known or unknown,
foreseen or unforeseen, heretofore or hereafter arising out of, relating to,
connected with or incidental to the failure of any representation or warranty
made by the Company or in any other documents or agreements contemplated hereby
or the failure of the Company to comply in all material respects with the
covenants contained in this Agreement or in any other documents or agreements
contemplated hereby.
5.2 RELIANCE ON AND SURVIVAL OF REPRESENTATIONS. All
representations, warranties, covenants and agreements of the Company herein
shall be deemed to be material and to have been relied upon by the Purchaser and
shall survive the execution and delivery of this Agreement and of the
Securities.
7
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5.3 SURVIVAL OF THE REPRESENTATIONS, WARRANTIES, ETC. The
respective agreements, representations, warranties, indemnities and other
statements made by or on behalf of the Company and the Purchaser, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation made by or on behalf of the other party to this Agreement and
will survive delivery of any payment for the Securities.
5.4 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of and be enforceable by the Company, the Purchaser and
each of their respective successors and assigns. The Purchaser shall be
permitted to transfer the Securities in accordance with their terms and the
terms of this Agreement and in accordance with applicable restrictions under
applicable federal and state securities laws.
5.5 NOTICES. All notices and other communications provided for
in this Agreement shall be in writing and delivered by registered or certified
mail, postage prepaid, or delivered by overnight courier (for next business day
delivery) or telecopied, addressed as set forth on the signature page hereof, or
at such other address as any of the parties hereto may hereafter designate by
notice to the other parties given in accordance with this Section. Any such
notice or communication shall be deemed to have been duly given on the seventh
day after being so mailed, the next business day after delivery by overnight
courier, when received when transmitted by telecopy with confirmation of
transmission or upon receipt when delivered personally.
5.6 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. Signatures may be
exchanged by telecopy, with original signatures to follow. Each of the parties
hereto agrees that it will be bound by its own telecopied signature and that it
accepts the telecopied signatures of the other parties to this Agreement. The
original signature pages shall be forwarded to the Company or its counsel and
the Company or its counsel will provide all of the parties hereto with a copy of
the entire Agreement.
5.7 AMENDMENTS. This Agreement may only be amended by a
writing duly executed by the parties hereto.
5.8 SEVERABILITY. If any term or provision of this Agreement
or any other document executed in connection herewith shall be determined to be
illegal or unenforceable, all other terms and provisions hereof and thereof
shall nevertheless remain effective and shall be enforced to the fullest extent
permitted by applicable law.
5.9 GOVERNING LAW; SUBMISSION TO PROCESS. EXCEPT TO THE EXTENT
THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY SELECTED IN A DOCUMENT, THIS
AGREEMENT AND ALL AMENDMENTS, SUPPLEMENTS, WAIVERS AND CONSENTS RELATING HERETO
OR THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
5.10 ENTIRE AGREEMENT. This Agreement contains the entire
Agreement of the parties hereto with respect to the transactions contemplated
hereby and supersedes all previous oral and written, and all previous
contemporaneous oral negotiations, commitments and understandings.
5.11 FURTHER ASSURANCES. Each party agrees promptly to execute
and deliver such documents and to take such other acts as are reasonably
necessary to effectuate the purposes of this Agreement.
5.12 HEADINGS. The headings contained herein are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8
<PAGE>
5.13 WAIVER OF JURY TRIAL. EACH PARTY HEREBY AGREES TO WAIVE
ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF THIS AGREEMENT, THE SECURITIES OR ANY OTHER AGREEMENTS
RELATING TO THE SECURITIES OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT
MATTER OF THIS TRANSACTION. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN,
THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR
IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE SECURITIES OR ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE SECURITIES.
5.14 THIRD PARTY BENEFICIARY. Any permitted transferee of any
part of the Securities shall be a third party beneficiary of the Company's
obligations under this Agreement, the Debenture, the Warrant and the
Registration Rights Agreement, as applicable. Such person shall have all the
rights of a third party beneficiary with respect to the enforcement against the
Company of any provision of this Agreement, the Debenture, the Warrant or the
Registration Rights Agreement.
Section 6. LIQUIDATED DAMAGES.
6.1 LIQUIDATED DAMAGES FOR FAILURE TO DELIVER. The Company
understands that a delay beyond the deadline for delivery of Securities will
result in economic loss to the Purchaser. The deadline for delivery of
Securities is thirty days following their required issuance. As compensation to
the Purchaser for such loss, the Company agrees to pay late payments to the
Purchaser for late issuances and for deliveries of shares of Common Stock
issuable upon conversion or exercise of the Debenture or the Warrant,
respectively, in accordance with the following schedule, where "No. Days Late"
is defined as the number of days beyond thirty days after the deadline for
delivery.
<TABLE>
<CAPTION>
No. Business Days Late Late Payment
<S> <C>
30 10,000 shares of Common Stock
60 20,000 shares of Common Stock
90 30,000 shares of Common Stock
>90 1,000 additional shares of Common
Stock for each additional day late
beyond 90 days
</TABLE>
All liquidated damages payable to the Purchaser shall be paid to the
Purchaser within 10 days of the occurrence of the event that gives rise to such
liquidated damages.
[Signature Page Follows]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto execute this Agreement as of
the date first set forth above.
PURCHASER:
DENMORE INVESTMENTS, LTD.
By: __________________________________
Manfred Unger
Director
Address for Notices: With a copy of any notice to:
Denmore Investments Ltd. Manfred Unger
Citco Building 32 Quai des Sanbarbani
P.O. Box 662, Road Town MC 98000 Monaco
Tortola, British Virgin Islands Telephone: 011 377 9798 6303
Attn: Harriet Skalton Facsimile: 011 377 9205 3107
Telephone: 001 284 494 3217
Facsimile: 001 284 494 3917 and to:
Harter, Secrest & Emery, LLP
700 Midtown Tower
Rochester, NY 14604
ATTN: Daniel R. Kinel
Telephone: (716) 231-1186
Facsimile: (716) 232-2152
THE COMPANY:
GENESISINTERMEDIA.COM, INC.
By:________________________________
Ramy El-Batrawi
President
10
<PAGE>
Address for Notices: With a copy of any notice to:
GenesisIntermedia.com, Inc. Nida & Maloney, LLP
5805 Sepulveda Blvd., 4th Floor 800 Anacapa Street
Van Nuys, CA 91411 Santa Barbara, CA 93101
Attn: Ramy El-Batrawi Attn: Theodore R. Maloney
Telephone: (818) 902-4300 Telephone: (805) 568-1151
Facsimile: (818) 902-4301 Facsimile: (805) 568-1955
11
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF ARE SUBJECT TO A SECURITIES PURCHASE AGREEMENT DATED AS OF
FEBRUARY 7, 2000, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED TO THE HOLDER ON REQUEST TO THE SECRETARY OF THE
COMPANY. THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED PURSUANT TO THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW, AND
SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THE
SAME ARE REGISTERED AND QUALIFIED IN ACCORDANCE WITH THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS, OR IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED (INCLUDING
UNDER REGULATION S) UNDER THE ACT. TRANSFER OF SUCH SECURITIES IS PROHIBITED
EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S UNDER THE ACT (RULE 901
THROUGH 905, AND PRELIMINARY NOTES), PURSUANT TO THE REGISTRATION UNDER THE ACT,
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION; AND HEDGING
TRANSACTIONS INVOLVING SUCH SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE
WITH THE ACT.
No. WS-1 Dated: As of February 7, 2000
Warrant
GENESISINTERMEDIA.COM, INC.
This Warrant certifies that Denmore Investments Ltd., a British Virgin
Islands company, or registered assigns, is the registered holder of a warrant
(the "Warrant") to purchase 22,500 shares of common stock, par value $.001 per
share (the "Shares"), of GenesisIntermedia.com, Inc., a Delaware corporation
(the "Company"), at an exercise price of $12.00 per share (the "Exercise
Price").
Section 1. Exercise; Expiration; Redemption..
To exercise this Warrant, the Warrant holder must elect and sign the
exercise election form attached to this Warrant certificate and deliver to the
Company (i) this Warrant certificate and (ii) cash or a check payable to the
Company for the Exercise Price for the Warrant, unless exercised pursuant to
Section 2.
This Warrant may be exercised by any holder hereof at any time after
May 7,2000 until February 7, 2005, the date of expiration of this Warrant. To
the extent that this Warrant has not been exercised by the date of its
expiration, this Warrant shall become void and all rights hereunder and all
rights in respect hereof shall cease as of such time.
This Warrant shall be exercisable at the election of any holder hereof,
either in full or from time to time in part (but in no event for less than one
whole Share) and, in the event that a certificate evidencing this Warrant is
exercised in respect of fewer than all of the Warrant Shares issuable on such
exercise at any time prior to the date of expiration of this Warrant, a new
Warrant certificate evidencing the remaining Warrant with respect to whole
Shares issuable upon exercise will be issued. No adjustment shall be made for
any dividends on any Shares issuable upon exercise of this Warrant.
<PAGE>
The Company covenants that all Warrant Shares which may be issued upon
exercise of this Warrant will, upon issue, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issue thereof.
The Company will pay all documentary stamp taxes attributable to the
issuance of Warrant Shares upon the exercise of this Warrant; provided, however,
that the Company shall not be required to pay any tax or taxes which may be
payable in respect of any transfer involved in the issue of any Warrant
certificates or any certificates for Warrant Shares in a name other than that of
the registered holder of this Warrant certificate surrendered upon the exercise
of this Warrant, and the Company shall not be required to issue or deliver such
Warrant certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Company shall not be required to issue fractional Warrant Shares on
the exercise of this Warrant. If any fraction of a Warrant Share would be
issuable on the exercise of this Warrant (or specified portion hereof), the
Company shall pay an amount in cash equal to the Exercise Price on the day
immediately preceding the date this Warrant certificate is presented for
exercise, multiplied by such fraction.
Section 2. Cashless Exercise.
Notwithstanding the provisions of Section 1, the holder may elect to
exercise this Warrant, in whole or in part, by receiving Shares equal to the
value (as herein determined) of the portion of this Warrant then being
exercised, in which event the Company shall issue to the holder of this Warrant
the number of Shares determined by using the following formula:
X = Y(A-B)
------
A
Where: X = the number of Shares to be issued to the holder
under the provisions of this Section 2
Y = the number of Shares that would otherwise be
issued upon an exercise for cash
A = the Current Fair Market Value (as
hereinafter defined) of one Share calculated
as of the last trading day immediately
preceding such exercise
B = the Exercise Price
As used herein, the "Current Fair Market Value" of the Shares of a
specified date shall mean with respect to each Share, (i) the average of the
closing prices of Shares sold on all securities exchanges on which the Shares
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<PAGE>
may at the time be listed, or (ii) if there have been no sales on any such
exchange on such day, the average highest bid and lowest asked prices on all
such exchanges at the end of such day, or (iii) if on such day the Shares are
not so listed, the average of representative bid and asked prices quoted in the
NASDAQ System as of 4:00 p.m., New York time, or (iv) if on such day Shares are
not quoted in the NASDAQ System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Association of Securities Dealers, Inc. Over-the-Counter Bulletin Board
System or any similar successor organization, in each such case either (i)
calculated on the date which the form of exercise election specified in Section
1 herein is deemed to have been sent to the Company or (ii) averaged over a
period of five (5) days consisting of the day as of which the Current Fair
Market Value is being determined and the four (4) consecutive business days
prior to such day. The holder hereof shall determine in its sole discretion
which method of calculation to use. If on the date for which Current Fair Market
Value is to be determined Shares are not listed on any securities exchange or
quoted in the NASDAQ System or the over-the-counter market, then the Current
Fair Market Value of the Shares shall be the highest price per share which the
Company could then obtain from a willing buyer (not a current employee or
director) for Shares sold by the Company from authorized but unissued Shares, as
determined in good faith by the Board of Directors of the Company, unless prior
to such date the Company has become subject to a merger, consolidation,
reorganization, acquisition or other similar transaction pursuant to which the
Company is not the surviving entity, in which case the Current Fair Market Value
of the Shares shall be deemed to be the per share value received or to be
received in such transaction by the holders of Shares.
Section 3. Transfer or Exchange.
The Company shall from time to time register the transfer of this
Warrant certificate upon the records to be maintained by it for that purpose,
upon surrender hereof, accompanied (if so required by it) by a written
instrument or instruments of transfer in form satisfactory to the Company, duly
executed by the registered holder hereof or by the duly appointed legal
representative thereof or by a duly authorized attorney. Upon any such
registration of transfer, a new Warrant certificate(s) shall be issued to the
transferee(s) and the surrendered Warrant certificate shall be canceled by the
Company.
This Warrant certificate may be exchanged at the option of the holder
hereof, when surrendered to the Company at its office for another Warrant
certificate or other Warrant certificates of the like tenor and representing a
Warrant with respect to a like aggregate number of Warrant Shares. A Warrant
certificate surrendered for exchange shall be cancelled by the Company.
Subject to the payment of any taxes as provided herein, upon an
exercise of this Warrant, the Company shall issue and cause to be delivered with
all reasonable dispatch to or upon the written order of the holder and in such
name or names as the Warrant holder may designate, a certificate or certificates
for the number of full Warrant Shares issuable upon the exercise of this
Warrant. This Warrant shall be deemed to have been exercised and any person so
designated to be named therein shall be deemed to have become a holder of record
of such Warrant Shares as of the date of the surrender of this Warrant
certificate (and payment of the Exercise Price or exercise pursuant to Section
2).
- 3 -
<PAGE>
The Company may deem and treat the registered holder hereof as the
absolute owner of this Warrant (notwithstanding any notation of ownership or
other writing hereon made by anyone), for the purpose of any exercise hereof, of
any distribution to the holder hereof, and for all other purposes, and the
Company shall not be affected by any notice to the contrary. Nothing contained
in this Warrant certificate shall be construed prior to the date of surrender of
the Warrant certificate for exercise in accordance with the terms hereof as
conferring upon the holder hereof the right to vote or to consent or to receive
notice as members in respect of the meetings of stockholders or the election of
directors of the Company or any other matter, or rights whatsoever as
stockholders of the Company.
Section 4. Mutilated, Lost, Stolen or Destroyed Warrant Certificate.
In case this Warrant certificate shall be mutilated, lost, stolen or
destroyed, the Company may in its reasonable discretion issue in exchange and
substitution for and upon cancellation of the mutilated Warrant certificate, or
in lieu of and in substitution for the Warrant certificate lost, stolen or
destroyed, a new Warrant certificate of line tenor and representing an
equivalent Warrant, but only upon receipt of evidence satisfactory to the
Company of such loss, theft or destruction of such Warrant certificate and
indemnity, if requested, also satisfactory to the Company.
Section 5. Reservation of Shares for Issuance.
The Company will at all times reserve and keep available, free from
preemptive rights, out of the aggregate of its authorized but unissued Shares,
for the purpose of enabling it to satisfy any obligation to issue Warrant Shares
upon exercise of this Warrant, the maximum number of Shares which may then be
issuable upon the exercise of this Warrant. The Company or, if appointed, the
transfer agent for the Shares and every subsequent transfer agent for any of the
Company's capital securities issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized Shares as shall be required for such purpose.
The Company will keep a copy of this Warrant certificate on file with any such
transfer agent for any of the Company's capital securities issuable upon the
exercise of the rights of purchase represented by this Warrant certificate.
Section 6. Effect of Subdivision, Reclassification, Merger, Etc.
If the outstanding Shares shall be subdivided into a greater number of
Shares, the Exercise Price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall be
proportionately reduced, and, conversely, if the outstanding Shares shall be
combined into a smaller number of Shares, the Exercise Price in effect at the
opening of business on the day following the day upon which such combination
become effective shall be proportionately increased, such reduction or increase,
as the case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or combination
becomes effective.
If any of the following events occur: (i) any reclassification or
change of the outstanding Shares (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), (ii) any consolidation, merger or combination of
- 4 -
<PAGE>
the Company with another limited liability company or corporation as a result of
which holders of common membership interest Shares shall be entitled to receive
stock, securities or other property or assets (including cash) with respect to
or in exchange for such Shares, or (iii) any sale or conveyance of the
properties and assets of the Company as, or substantially as, an entirety to any
other company or corporation as a result of which holders of Shares shall be
entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for such Shares, then the Company or the
successor or purchasing company or corporation, as the case may be, shall
provide that this Warrant shall be convertible into the kind and amount of
shares of stock and other securities or property or assets (including cash)
receivable upon such reclassification, change, consolidation, merger,
combination, sale or conveyance by a holder of a number of Shares issuable upon
exercise of this Warrant (assuming, for such purposes, a sufficient number of
authorized Shares available to issue upon exercise of the entirety of this
Warrant) immediately prior to such reclassification, change, consolidation,
merger, combination, sale or conveyance assuming such holder of Shares did not
exercise his or her rights of election, if any, as to the kind or amount of
securities, cash or other property receivable upon such consolidation, merger,
statutory exchange, sale or conveyance (provided that, if the kind or amount of
securities, cash or other property receivable upon such consolidation, merger,
statutory exchange, sale or conveyance is not the same for each Share in respect
of which such rights of election have not been exercised ("non-electing Share"),
then, for the purposes of paragraph, the kind and amount of securities, cash or
other property receivable upon such consolidation, merger, statutory exchange,
sale or conveyance for such non-electing Share shall be deemed to be the kind
and amount so receivable per Share by a plurality of the non-electing Shares).
In any such case, the revenue calculation necessary for exercise of this Warrant
shall be calculated on the basis of the business entity or assets so
consolidated, merged, exchanged, sold or conveyed, whether in whole or
incorporated into another business entity, and it shall be the responsibility of
such successor or acquiror entity to perform such calculation, which calculation
shall be conclusive and binding on the holder of this Warrant. If, in the case
of any such reclassification, change, consolidation, merger, combination, sale
or conveyance, the stock or other securities and assets receivable thereupon by
a holder of Shares includes shares of stock or other securities and assets of a
corporation other than the successor or purchasing company or corporation, as
the case may be, in such reclassification, change, consolidation, merger,
combination, sale or conveyance, then an acknowledgement of the obligations
under this paragraph shall be executed by such other company or corporation. The
above provisions of this paragraph shall similarly apply to successive
reclassifications, changes, consolidations, mergers, combinations, sales and
conveyances.
Upon any adjustment of the Exercise Price pursuant hereto, the Company
promptly thereafter cause to be given to the registered holder of this Warrant
certificate at its address appearing on the Warrant register maintained by the
Company written notice of such adjustments by first-class mail, postage prepaid.
Failure to deliver such notice shall not affect the legality or validity of any
such adjustment.
Section 7. Miscellaneous.
This Warrant certificate and Warrant shall be deemed to be a contract
made under the law of the State of Delaware and for all purposes shall be
construed in accordance with the internal law of said State.
- 5 -
<PAGE>
Nothing in this Warrant certificate shall be construed to give to any
person or company other than the Company and the registered holder of this
Warrant certificate any legal or equitable right, remedy or claim under this
Warrant certificate; but this Warrant certificate shall be for the sole and
exclusive benefit of the Company and the registered holder of this Warrant.
[Signature Page Follows]
- 6 -
<PAGE>
IN WITNESS WHEREOF, GenesisIntermedia.com, Inc., a Delaware
corporation, has caused this Warrant certificate to be signed by its duly
authorized officer.
Dated: as of February 7, 2000 GENESISINTERMEDIA.COM, INC., a
Delaware Corporation
/s/ Ramy El-Batrawi
By: _______________________________
- 7 -
<PAGE>
EXERCISE ELECTION
To be Executed by the Holder
in Order to Exercise the Warrant
The undersigned holder of the foregoing Warrant hereby irrevocably
elects to exercise the purchase rights represented by such Warrant, and to
purchase thereunder, ________ shares of common stock, $.001 par value
("Shares"), and (i) herewith makes payment of an aggregate of $___________
therefor and/or (ii) pursuant to Section 2 of such Warrant hereby tenders the
right to exercise such Warrant to the extent of ___________ Shares of the
Company. The undersigned requests that the certificates for Shares to be issued
in the name(s) of, and delivered to, the person(s) whose name(s) and address(es)
are set forth below:
_____________________________________________________________
(Please type or print name and address)
_____________________________________________________________
(Social Security or tax identification number, if applicable)
and delivered to _____________________________________________________________
(Please type or print name and address)
and, if such number of Shares shall not be all the Shares evidenced by this
Warrant, that a new Warrant of like tenor for the balance of the Shares subject
to the Warrant be registered in the name of, and delivered to, the holder at the
address stated below.
In full payment of the purchase price with respect to the portion of
the Warrant exercised and transfer taxes, if any, the undersigned hereby tenders
payment of $_________ by check or money order payable in United States currency
to the order of GenesisIntermedia.com, Inc., or its successor.
Dated: ______________________ ___________________________________
___________________________________
(Address)
___________________________________
___________________________________
Signatures guaranteed by:
_____________________________
- 8 -
<PAGE>
THE SECURITIES REPRESENTED BY THIS DEBENTURE HAVE NOT BEEN REGISTERED PURSUANT
TO THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW, AND SUCH
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE UNITED
STATES OR TO U.S. PERSONS (OTHER THAN DISTRIBUTORS) UNLESS THE SAME ARE
REGISTERED AND QUALIFIED IN ACCORDANCE WITH THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAWS, OR AN EXEMPTION FROM SUCH REGISTRATION AND
QUALIFICATION IS AVAILABLE. HEDGING TRANSACTIONS INVOLVING THE SECURITIES
OFFERED HEREBY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES
ACT.
No. D-1 US$1,000,000
GENESISINTERMEDIA.COM, INC.
CONVERTIBLE SUBORDINATED DEBENTURE DUE APRIL 7, 2000
This DEBENTURE is a duly authorized debenture of GenesisIntermedia.com,
Inc., a Delaware corporation having a principal place of business at 5805
Sepulveda Blvd., Van Nuys, California 91411 (the "Company"), designated as its
Convertible Subordinated Debenture Due April 7, 2000 (the "Debenture"), in an
aggregate principal amount of US$1,000,000.
Terms not otherwise defined herein shall have the meanings given in
Section 5 below.
FOR VALUE RECEIVED, the Company promises to pay to Denmore Investments
Ltd., a British Virgin Islands company, or registered assigns (the "Holder"),
the principal sum of One Million Dollars (US $1,000,000), on demand on or after
April 7, 2000 (the "Maturity Date"). Interest on such sum shall accrue and be
payable at the rate of fifteen percent (15%) per year, beginning on the Maturity
Date if this Debenture is not repaid in full. Interest payments shall be made on
the first day of each month. The principal, and accrued but unpaid interest, of
this Debenture is payable in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts, at the address of the Holder last appearing on the records of the
Company regarding registration of transfer of the Debenture (the "Debenture
Register"). A transfer of the right to receive principal and accrued but unpaid
interest under this Debenture shall be transferable only through an appropriate
entry in the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
Section 1. Securities Purchase Agreement. This Debenture is the
Debenture issued pursuant to that certain Securities Purchase Agreement (the
"Agreement") between the Company and the Holder dated as of February 7, 2000.
This Debenture is subject to, and qualified by, all the terms and conditions set
forth in the Agreement.
Section 2. Events of Default. This Debenture shall become and be due
and payable upon written demand made by the Holder hereof if one or more of the
below events, hereinafter called Events of Default, shall happen and be
continuing. The Company agrees that notice of the occurrence of any event of
default will be promptly given to the Holder at its registered address by
certified mail. An event of default includes:
(a) a default in the payment of principal or interest on this Debenture
when and as the same shall become due and payable, whether by
acceleration or otherwise;
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<PAGE>
(b) a default in the due observance or performance of any material
covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to the terms hereof or the Agreement;
(c) any action pursuant to which the Company shall (1) commence any
proceeding or other action relating to it in bankruptcy or seek
reorganization, arrangement readjustment of its debts, receivership,
dissolution, liquidation, winding-up, composition or any other relief
under the Bankruptcy Act, as amended, or under any other insolvency,
reorganization, liquidation, dissolution, arrangement, composition,
readjustment of debt or any other similar act or law; of any
jurisdiction, domestic or foreign, now or hereafter existing; or (2)
admit the material allegations of any petition or pleading in
connection with any such proceeding; or (3) apply for, or consent or
acquiesce to, the appointment of a receiver, conservator, trustee or
similar officer for it or for all or a substantial part of its
property; or (4) make a general assignment for the benefit of
creditors;
(d) the commencement of any proceeding or the taking of any other action
against the Company in bankruptcy, or seeking reorganization,
arrangement, readjustment of its debts, liquidation, dissolution,
arrangement, composition, readjustment of debt or any other similar act
or law of any jurisdiction, domestic or foreign, now or hereafter
existing and the continuance of any such events for thirty (30) days
undismissed, unbonded or undischarged; or the appointment of a
receiver, conservator, trustee or similar officer of the Company or for
all or substantially all of its property and the continuance of any
such events for thirty (30) days undismissed, unbonded or undischarged;
or
(e) the merger by the Company or any subsidiary with or into another
business entity, other than for purposes of changing domicile, where
the Company is not the surviving entity.
2.1 Events of Default Defined; Acceleration of Maturity. If an Event of
Default has occurred then upon the occurrence of any such Event of Default, the
Holder may, by notice to the Company, declare the unpaid principal amount of the
Debenture to be, and the same shall forthwith become, due and payable, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company, together with the interest accrued thereon and all
other amounts payable by the Company hereunder and pursue all of Holder's rights
and remedies hereunder and under the Agreement and documents executed in
connection herewith and all other remedies available to Holder under applicable
law.
Section 3. Optional Conversion.
(a) The outstanding principal and all accrued and unpaid interest of
this Debenture shall be convertible at any time after the Maturity Date(subject
to the provisions of the paragraph below), at the option of the Holder, into
shares of the Company's Common Stock, par value $.001 per share (the "Common
Stock") at the Conversion Ratio, at the option of the Holder, in whole or in
- 10 -
<PAGE>
part at any time after the Original Issue Date. Any conversion under this
Section 3(a) shall be of a minimum principal amount of US$100,000. The Holder
shall effect conversions by surrendering the Debenture (or such portion hereof)
to be converted to the Company, together with the form of conversion notice
attached hereto (the "Conversion Notice") in the manner set forth in Section
3(h). Each Conversion Notice shall specify the principal amount of this
Debenture to be converted and the date on which such conversion is to be
effected (the "Conversion Date"). Subject to Section 3(b), each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture tendered by the Holder
with the Conversion Notice, the Company shall promptly deliver to the Holder a
new Debenture for such principal amount as has not been converted.
Notwithstanding the foregoing, the conversion shall not occur at any
time within a period which is less than 65 days from the date of the Conversion
Notice, by way of example only, if the Holder gives a Conversion Notice on April
8, 2000, the Debenture will not be convertible until 65 days thereafter.
(b) Not later than ten (10) Days after the Conversion Date, the Company
will deliver to the Holder (i) a certificate or certificates containing the
restrictive legends and trading restrictions required by law, if any,
representing the number of shares of Common Stock being acquired upon the
conversion of the Debenture and (ii) a Debenture in principal amount equal to
the principal amount of the Debenture not converted; provided, however that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon conversion of the Debenture, until the Debenture is
either delivered for conversion to the Company or any transfer Holder for the
Debenture or Common Stock, or the Holder notifies the Company that such
Debenture has been lost, stolen or destroyed. If such certificate or
certificates are not delivered by the date required under this Section 3(b), the
Holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
Debenture tendered for conversion.
(c) (i) The conversion price ("Conversion Price") for this Debenture in
effect on any Conversion Date shall be lower of $5.00 per share or an amount
which is equal to 80% of the average of the closing prices of the Company's
Common Stock on the Nasdaq market on the last five trading days prior to April
7, 2000, subject to adjustment as otherwise contemplated by this Section 3(c).
(ii) In case of any consolidation or merger of the Company with or into
another person, the sale or transfer of all or substantially all of the assets
of the Company or any compulsory share exchange pursuant to which the Common
Stock is converted into other securities, cash or property, then the Holder
shall have the right thereafter to convert the Debenture only into the shares of
stock and other securities and property receivable upon or deemed to be held by
holders of Common Stock following such consolidation, merger, sale, transfer or
share exchange, and the Holder shall be entitled upon such event to receive such
amount of securities or property as the shares of the Common Stock into which
the Debenture could have been converted immediately prior to such consolidation,
merger, sale, transfer or share exchange would have been entitled. The terms of
any such consolidation, merger, sale, transfer or share exchange shall include
such terms so as to continue to give to the Holder the right to receive the
securities or property set forth in this Section 3(c) upon any conversion
following such consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
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<PAGE>
(iii) The Conversion Price shall be subject to adjustment as follows:
(A) In case the Company shall (i) pay a dividend in shares of its
capital stock, (ii) subdivide its outstanding shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares,
or (iv) issue by reclassification of its shares of Common Stock any shares of
the Company, the Conversion Price in effect immediately prior thereto shall be
adjusted so that the Holder of this Debenture thereafter surrendered for
conversion shall be entitled to receive the number of shares of Common Stock
which he would have owned or have been entitled to receive after the happening
of any of the events described above, had this Debenture been converted
immediately prior to the happening of such event. Such adjustment shall be made
whenever any of the events listed above shall occur. An adjustment made pursuant
to this subdivision (A) shall become effective retroactively immediately after
the record date in the case of a dividend and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(B) If, at any time while this Debenture is outstanding, the Company
takes any voluntary action or any event occurs as to which the foregoing
subdivision (A) is not strictly applicable, but the failure to make an
adjustment in the Conversion Price hereunder would not fairly protect the
rights, without dilution, represented by this Debenture, then the Conversion
Price in effect immediately prior thereto shall be adjusted so that the Holder
of this Debenture shall be entitled to receive the number of shares of Common
Stock which he would have owned or been entitled to receive after the happening
of any such action or event, had this Debenture been converted immediately prior
to the happening of any such action or event.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of this Debenture as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holder of this Debenture, such number of shares of Common Stock
as shall be issuable upon the conversion of the aggregate principal amount of
this Debenture. The Company covenants that all shares of Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and
fully paid and nonassessable.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Conversion Price at such time.
(f) The issuance of certificates for shares of Common Stock on
conversion of the Debenture shall be made without charge to the Holder for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
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<PAGE>
(g) This Debenture, when fully converted into Common Stock as provided
for herein and where all accrued but unpaid interest has been paid, shall be
canceled.
(h) Each Conversion Notice shall be given by facsimile and by an
internationally recognized overnight courier, carriage prepaid, addressed to the
Chief Financial Officer of the Company at 5805 Sepulveda Blvd., 4th Floor, Van
Nuys, California 91444, Facsimile: (818) 902-4301. Any such notice shall be
deemed given and effective upon the earliest to occur of (i) receipt of such
facsimile at the facsimile telephone number specified in this Section 3(h), (ii)
two days after or (iii) upon actual receipt by the party to whom such notice is
required to be given, subject in each case to actual receipt of the original of
such notice.
Section 4. Payment of Principal and Redemption.
(a) The outstanding principal balance of this Debenture, plus accrued
but unpaid interest, shall be due and payable in full following demand therefor
by the Holder on or after the Maturity Date. The Company may at any time prepay
or repay in whole or in part the principal sum of this Debenture, without
penalty or premium.
(b) Nothing in this Section 4 shall impair the Holder's right to
convert this Debenture pursuant to Section 3 prior to repayment thereof.
Section 5. Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is the outstanding principal amount represented by any Debenture plus
accrued but unpaid interest, and of which the denominator is the Conversion
Price at such time.
"Original Issue Date" means the date of the first issuance of this
Debenture regardless of the number transfers hereof.
Section 6. Subordination.
(a) This Debenture shall, for all purposes, including those set forth
in this Section 6, be subordinated and subject in right of payment to the prior
payment in full of the principal of (and premium, if any) and interest on all
the Company's Senior Indebtedness up to an amount not to exceed $100,000,000.
"Senior Indebtedness" shall mean (i) all indebtedness of the Company to banks,
commercial finance lenders, insurance companies or other financial institutions
or institutional lenders regularly engaged in the business of lending money,
which is for money borrowed by the Company (whether or not secured) and (ii) any
such indebtedness or any debentures, notes or other evidence of indebtedness
issued in exchange for or to refinance such Senior Indebtedness described in the
foregoing clauses (i), or (iii), or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a guarantor, whether arising prior
to the date hereof or subsequent to the date hereof provided, however, that
payments on account of principal and accrued interest of this Debenture may be
made from time to time, subject to the specific limitations set forth in this
Section 6.
(b) If there shall have occurred a default in the payment of the
principal of, or interest on, any Senior Indebtedness, then, unless and until
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<PAGE>
such default or event of default shall have been cured or waived or shall have
ceased to exist, no payment shall be made by the Company on account of principal
of this Debenture. Upon any distribution of all or substantially all of the
assets of the Company, or upon any dissolution, winding up or liquidation of the
Company, whether voluntary or involuntary, and whether in bankruptcy, insolvency
or receivership proceedings or otherwise or upon any assignment by the Company
for the benefit of creditors, the principal of (and premium, if any) and
interest on all Senior Indebtedness shall first be paid in full, or provision
made of such payment, before any payment is made on account of the principal of
this Debenture.
(c) Nothing contained in this Section 6 or elsewhere in this Debenture
is intended to or shall alter or impair, as between the Company, its creditors
other than the holders of Senior Indebtedness, and the holder of this Debenture,
the obligation of the Company, which is absolute and unconditional, to pay to
the holder of this Debenture, the principal of this Debenture at the time and
place prescribed or to affect the relative rights of the holder of this
Debenture and creditors of the Company other than the holders of Senior
Indebtedness.
(d) The holder of this Debenture, by acceptance hereof, acknowledges
and agrees that the subordination provisions set forth herein are, and are
intended to be, an inducement and a consideration to each holder of any Senior
Indebtedness, whether such Senior Indebtedness was created or acquired before or
after the issuance of this Debenture, to acquire and continue to hold, or to
continue to hold, such Senior Indebtedness and such holder of such Senior
Indebtedness shall be deemed conclusively to have relied on such subordination
provisions in acquiring and continuing to hold such Senior Indebtedness.
(e) Anything contained in this Section 6 or in this Debenture to the
contrary notwithstanding, in the event the restrictions contained in this
Section 6 prevent payments of principal of, or interest on, this Debenture, such
payments will be deferred until such restrictions are removed or otherwise cease
to exist, and such deferral will not constitute an Event of Default hereunder,
so long as all deferred payments are made within thirty (30) days after the
removal of such restrictions.
Section 7. Stockholder Rights. This Debenture shall not entitle the
Holder to any of the rights of a stockholder of the Company, including without
limitation, the right to vote, to receive dividends and other distributions, or
to receive any notice of, or to attend, meetings of stockholders or any other
proceedings of the Company, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.
Section 8. Lost Debenture. If this Debenture shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof reasonably satisfactory to the
Company.
Section 9. Governing Law. This Debenture shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to conflicts of laws thereof.
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<PAGE>
Section 10. Notices. All notices, demands or other communications
hereunder shall be given, and shall be deemed duly given and received, if given,
in the manner set forth in Section 3(h).
Section 11. Waiver. Any waiver by the Company or the Holder a breach of
any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.
Section 12. Severability. If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is inapplicable to any person or circumstance, it
shall nevertheless remain applicable to all other persons and circumstances.
[Signature on following page]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized as of the date first above
indicated.
GENESISINTERMEDIA.COM, INC.,
a Delaware corporation
/s/ Ramy El-Batrawi
By: ______________________________
Name: Ramy El-Batrawi
Title: President
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<PAGE>
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(TO BE EXECUTED BY THE HOLDER OF RECORD ON THE DEBENTURE REGISTER IN ORDER TO
CONVERT THE DEBENTURE)
The undersigned hereby irrevocably elects to convert the above Debenture No. D-1
into shares of Common Stock, par value $.001 per share (the "Common Stock"), of
GenesisIntermedia.com, Inc. (the "Company") according to the conditions hereof,
as of the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
_____________________________________________
Date to Effect Conversion
_____________________________________________
Principal Amount of Debenture to be Converted
_____________________________________________
Applicable Conversion Price
_____________________________________________
Signature
_____________________________________________
Name:
_____________________________________________
Address
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement (this "Agreement") dated as of February
7, 2000, by and among GENESISINTERMEDIA.COM, INC., a Delaware corporation, with
offices located at 5805 Sepulveda Blvd., Van Nuys, California 91411 (the
"Company"), and DENMORE INVESTMENTS LTD., the undersigned purchaser of certain
of the securities of the Company (the "Purchaser").
WHEREAS, in connection with the Securities Purchase Agreement of even
date herewith (the "Securities Purchase Agreement") by and between the Company
and the Purchaser, the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Purchaser a Debenture
(the "Debenture") that may become convertible into shares of the Company's
common stock (the "Common Stock"), a Warrant that is exercisable to purchase
22,500 shares of the Company's Common Stock and 15,000 shares of the Company's
Common Stock. The shares of Common Stock, including the Common Stock underlying
the Debenture and the Warrant are referred to herein as the "Conversion Shares";
and
WHEREAS, to induce the Purchaser to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights to the Purchaser under the Securities Act of 1933, as amended, and the
rules and regulations thereunder, or any similar successor statute (collective,
the "1933 Act").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Purchaser hereby agrees as follows:
Section 13. Definitions.
(a) As used in this Agreement, the following terms shall have the
following meanings:
"Purchaser" means Denmore Investments Limited and any
transferees or assignees who agree to become bound by the provisions of
this Agreement in accordance with Section 9 hereof.
"Register," "registered" and "registration" refer to
a registration effected by preparing and filing a Registration
Statement or Statements in compliance with the Securities Act of 1933,
as amended (the "1933 Act") and pursuant to Rule 415 under the 1933 Act
or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of
such Registration Statement by the United States Securities and
Exchange Commission (the "SEC").
"Registrable Securities" means all of the Common
Stock held by the Purchaser and its affiliates or which the Purchaser
or its affiliates have the right to acquire through the exercise or
conversion of outstanding securities, including, but not limited to,
the Common Stock and the Conversion Shares issued pursuant to the
Securities Purchase Agreement. Registrable Securities also includes any
shares of capital stock issued or issuable as a dividend on or in
exchange for or otherwise with respect to any of the foregoing.
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<PAGE>
"Registration Statement" means a registration
statement of the Company under the 1933 Act.
(b) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
Section 14. Registration.
(a) Mandatory Registration. The Company shall, by July 14, 2000 file
with the SEC a Registration Statement on Form S-3 or as is then available to
effect a registration of the Registrable Securities, covering the resale of the
Registrable Securities. The Company shall use its best efforts to cause such
registration to become and remain effective (including the taking of such steps
as are necessary to obtain the removal of any stop orders); provided, that the
Purchaser shall furnish the Company with such appropriate information in
connection therewith as the Company shall reasonably request in writing. The
Registration Statement (and each amendment or supplement thereto, and each
request for acceleration of effectiveness thereof) shall be provided to (and
subject to the approval of) the Purchaser and its counsel prior to its filing or
other submission. The number of shares of Common Stock initially included in
such Registration Statement shall be no less than all of the Registrable
Securities. The Company further undertakes to take all steps necessary to ensure
that a Registration Statement is, or Registration Statements are, effective at
all times during the Registration Period (as defined below) with respect to all
Registrable Securities and the resale thereof.
(b) Certain Damages. The Company shall use its best efforts to obtain
effectiveness of the Registration Statement by September 14, 2000 so long as any
delay is not caused by reason of activity or inactivity on the part of the SEC.
If (i) the Registration Statement(s) covering the Registrable Securities
required to be filed by the Company pursuant to Section 2(a) hereof is not
declared effective by the SEC by September 14, 2000 (other than by reason of any
act or failure to act in a timely manner by the Purchaser or Purchaser's
counsel, or if extended due to any review and revisions contemplated under
Section 3(a) and (g)), then the Company will make payments to the Purchaser in
such amounts and at such times as shall be determined pursuant to this Section
2(b) as partial relief for the damages to the Purchaser by reason of any such
delay in or reduction of Purchaser's ability to sell the Registrable Securities
(which remedy shall not be exclusive of any other remedies available at law or
in equity). The Company shall pay additional shares of Common Stock equal to 3%
of the number of Registerable Securities required to be registered under this
Agreement every 30 days payable the day following the accrual of such penalties
(the "Penalties") to the Purchaser in the event that such Registration Statement
has not been declared effective by the SEC by September 14, 2000 (in which
event, the first Penalties would be payable on September 15, 2000). The
Penalties shall become Registrable Securities on the day next following their
required issuance. There shall be excluded from the periods described above any
delays which are solely attributable to changes required by the Purchaser, or
its counsel, in the Registration Statement with respect to information relating
to the Purchaser, or the form of the Registration Statement, including, without
limitation, changes to the plan of distribution, or to the failure of the
Purchaser to conduct a review of the Registration Statement pursuant to Section
2(a) above in a reasonably prompt manner.
(c) Eligibility for Form S-3. The Company represents, warrants and
covenants that it will meet the requirements for the use of Form S-3 for
registration of the sale by the Purchaser of the Registrable Securities on June
14, 2000 and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form S-3 following June 14, 2000.
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<PAGE>
Section 15. Obligations of the Company.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
(a) The Company shall by July 14, 2000 prepare and file promptly with
the SEC, a Registration Statement with respect to the number of Registrable
Securities provided in Section 2(a), and thereafter use its best efforts to
cause such Registration Statement relating to Registrable Securities to become
effective by September 14, 2000 (so long as any delay is not caused by reason of
activity or inactivity on the part of the SEC) and keep the Registration
Statement effective pursuant to Rule 415 at all times until such date as is the
earlier of (i) the date on which all of the Registrable Securities have been
sold and (ii) the date on which all of the Registrable Securities (in the
opinion of counsel to the Purchaser) may be immediately sold without
registration (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein and all documents incorporated by reference therein) shall not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein not
misleading. The Company shall furnish to the Purchaser copies of reasonably
complete drafts of all such documents proposed to be filed (including exhibits,
if any), and the Purchaser shall have the opportunity to object, within five
business days, to any information pertaining solely to the Purchaser that is
contained therein and the Company will make the corrections reasonably requested
by the Purchaser with respect to such information prior to filing any such
Registration Statement or amendment. Any period of review and revision resulting
from such review shall be added to the time in which the Registration Statement
is to be filed and no penalty shall be assessed with respect to such period.
(b) The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period. Without limiting any of the Company's
obligations under this Agreement, in the event the number of shares available
under a Registration Statement filed pursuant to this Agreement is insufficient
to cover all of the Registrable Securities, the Company shall amend the
Registration Statement, or file a new Registration Statement (on the short form
available therefore, if applicable), or both, so as to cover all of the
Registrable Securities, in each case, as soon as practicable. The Company shall
use its best efforts to cause such amendment and/or new Registration Statement
to become effective as soon as practicable following the filing thereof.
(c) The Company shall furnish to the Purchaser and its legal counsel
(i) promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC, and each material item of correspondence from the
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<PAGE>
SEC or the staff of the SEC, in each case relating to such Registration
Statement (other than any portion thereof that contains information for which
the Company has sought confidential treatment), and (ii) such number of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as the Purchaser may reasonably
request in order to facilitate the disposition of the Registrable Securities.
(d) The Company shall use its best efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statement under such
other securities or "blue sky" laws of such jurisdictions in the United States
as the Purchaser may reasonably request, (ii) prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto (a) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (b) subject itself
to general taxation in any such jurisdiction,(c) file a general consent to
service of process in any such jurisdiction, (d) provide any undertakings that
cause the Company undue expense or burden, or (e) make any change in its charter
or by-laws, which in each case the Board of Directors of the Company determines
to be contrary to the best interests of the Company and its stockholders. The
Company shall promptly notify the Purchaser of the receipt by the Company of any
notification with respect to the suspension of the registration or qualification
of any of the Registrable Securities for sale under the securities or "blue sky"
laws of any jurisdiction in the United States or its receipt of actual notice of
the initiation or threatening of any proceeding for such purpose.
(e) As promptly as practicable after becoming aware of such event, the
Company shall notify the Purchaser of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
(f) The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest possible moment and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof.
(g) The Company shall permit counsel designated by the Purchaser to
review the Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing with the SEC, and not file any
document in a form to which such counsel reasonably objects. Any period of
review and revision resulting from such review shall be added to the time in
which registration is required to be filed and effective, as appropriate, and no
Penalties shall be assessed with respect to such period.
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<PAGE>
(h) The Company shall make available for inspection by the Purchaser
all pertinent financial and other records, and pertinent corporate documents and
properties of the Company (collective, the "Records"), as shall be reasonably
deemed necessary by the Purchaser to exercise its due diligence responsibility,
and cause the Company's officers, directors and employees to supply all
information which the Purchaser may reasonably request for purposes of such due
diligence; provided, however, that the Purchaser shall hold in confidence and
shall not make any disclosure of any Records or other information which the
Company determines in good faith to be confidential, and of which determination
the Purchaser is so notified, unless: (i) the disclosure of such Records is
determined to be necessary by the Purchaser and the Company to avoid or correct
a misstatement or omission in any Registration Statement; (ii) the release of
such Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction; or (iii) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. Nothing herein shall be deemed to
limit the Purchaser's ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.
(i) The Company shall hold in confidence and not make any disclosure of
information concerning the Purchaser provided to the Company unless (i)
disclosure of such information is necessary to comply with Federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Purchaser prior to making such disclosure, and
allow the Purchaser, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
(j) The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by the Registration Statement to secure the
designation and quotation, of all the Registrable Securities covered by the
Registration Statement on the Nasdaq-NMS or, if not eligible for the Nasdaq-NMS
on the Nasdaq Small Cap, if the listing of such Registrable Securities is then
permitted under the applicable Nasdaq market, and, without limiting the
generality of the foregoing, to use its best efforts to arrange for or maintain
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities.
(k) The Company shall provide a transfer agent and registrar, which may
be a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.
(l) The Company shall cooperate with the Purchaser to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be sold pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts, as the case may be, as the managing underwriter or underwriters, if
any, or the Purchaser may reasonably request and registered in such names as the
managing underwriters or underwriters, if any, as the Purchaser may request.
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<PAGE>
(m) The Company shall use its best efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable each holder thereof to consummate disposition of Registrable
Securities.
Section 16. Obligations of the Purchaser.
In connection with the registration of the Registrable
Securities, the Purchaser shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities that the Purchaser shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request.
(b) The Purchaser agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder.
(c) The Purchaser agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(e), the
Purchaser will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until the Purchaser's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(e) and, if so directed by the Company, the
Purchaser shall deliver to the Company or destroy (and deliver to the Company a
certificate of destruction) all copies in the Purchaser's possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice.
(d) Without limiting the Purchaser's rights under Section 2(a), the
Purchaser (i) agrees to sell its Registrable Securities on the basis provided in
any underwriting arrangements in usual and customary form entered into by the
Company, (ii) agrees to complete and execute all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements, and (iii) agrees to
pay its pro rata share of all underwriting discounts and commissions and any
expenses in excess of those payable by the Company pursuant to Section 5 below.
(e) The Purchaser agrees to notify the Company promptly, but in any
event within 72 hours after the date on which all Registrable Securities owned
by the Purchaser have been sold, if such date is prior to the termination Date,
so that the Company may comply with its obligation to terminate the Registration
Statement in accordance with Item 512 of Regulation S-K or Regulation S-B, as
the case may be.
Section 17. Expenses of Registration.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company.
- 23 -
<PAGE>
Section 18. Indemnification.
(a) To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) the Purchaser and (ii) the directors, officers,
partners, employees, agents and each person who controls the Purchaser within
the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended
(the "1934 Act"), if any, (each, an "Indemnified Person"), against any joint or
several losses, claims, damages, liabilities or expenses (collectively, together
with actions, proceedings or inquiries by any regulatory or self-regulatory
organization, whether commenced or threatened, in respect thereof, "Claims") to
which any of them may become subject insofar as such Claims arise out of or are
based upon: (i) any untrue statement or alleged untrue statement of a material
fact in a Registration Statement or the omission or alleged omission to state
therein a material fact required to be stated or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, or (iii) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). The Company shall reimburse the Purchaser
promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person expressly for use
in connection with the preparation of the Registration Statement, preliminary
prospectus or final prospectus, or any amendment thereof or supplement thereto;
(ii) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld; and (iii) with respect to any
preliminary prospectus, shall not inure to the benefit of any Indemnified Person
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, if such corrected prospectus was timely made
available by the Company pursuant to Section 3(c) hereof, and the Indemnified
Person was promptly advised in writing not to use the incorrect prospectus prior
to the use giving rise to a Violation and such Indemnified Person,
notwithstanding such advice, used it. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Purchaser pursuant to Section 9.
(b) In connection with any Registration Statement in which the
Purchaser is participating, the Purchaser agrees to indemnify, hold harmless and
defend, to the same extent and in the same manner set forth in Section 6(a), the
Company, each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the 1933 Act or the 1934 Act, and any other stockholder selling securities
pursuant to the Registration Statement or any of its directors or officers or
any person who controls such stockholder within the meaning of the 1933 Act or
the 1934 Act (collectively, an "Indemnified Party"), against any Claim to which
- 24 -
<PAGE>
any of them may become subject, under the 1933 Act, the 1934 Act or otherwise,
insofar as such Claim arises out of or is based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon written information furnished to the Company by the Purchaser expressly for
use in connection with such Registration Statement, preliminary prospectus or
final prospectus, or any amendment or supplement thereto; and the Purchaser will
reimburse any legal or other expenses (promptly as such expenses are incurred
and are due and payable) reasonably incurred by them in connection with
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) shall not apply to amounts paid in settlement of
any Claim if such settlement is effected without the prior written consent of
the Purchaser, which consent shall not be unreasonably withheld; provided,
further, however, that the Purchaser shall be liable under this Agreement
(including this Section 6(b) and Section 7) for only that amount as does not
exceed the net proceeds to the Purchaser as a result of the sale of Registrable
Securities pursuant to such Registration Statement. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Purchaser pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payment of the amount thereof during the course of the investigation
or defense, as such expense, loss, damage or liability is incurred and is due
and payable.
Section 19. Contribution.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
- 25 -
<PAGE>
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation, and (iii) contribution (together with any indemnification or
other obligations under this Agreement) by any seller of Registrable Securities
shall be limited in amount to the amount of net proceeds received by such seller
from the sale of such Registrable Securities.
Section 20. Reports Under the 1934 Act.
With a view to making available to the Purchaser the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Purchaser to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the 1933 Act and the
1934 Act so long as the Company remains subject to such requirements and the
filing of such reports and other documents is required for the sale of the
Registrable Securities pursuant to Rule 144; and
(c) furnish to the Purchaser so long as the Purchaser owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Investors to
sell such securities pursuant to Rule 144 without registration.
Section 21. Assignment of Registration Rights.
The rights of the Purchaser hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by such Purchaser to any transferee of all or any
portion of the Registrable Securities if (i) the Purchaser agrees in writing
with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned, (iii) following such
transfer or assignment, the further disposition of such securities by the
transferee or assignee is restricted under the 1933 Act and applicable state
securities laws, (iv) at or before the time the Company receives the written
notice contemplated by clause (ii) of this sentence, the transferee or assignee
agrees in writing with the Company to be bound by all of the provisions
contained herein, (v) such transfer shall have been made in accordance with the
applicable requirements of the Securities Purchase Agreement, and (vi) such
transferee shall be an "accredited investor" as that term is defined in Rule 501
of Regulation D promulgated under the 1933 Act.
- 26 -
<PAGE>
Section 22. Miscellaneous.
Notices required or permitted to be given hereunder shall be deemed to
be sufficiently given when delivered pursuant to the terms of the Securities
Purchase Agreement.
(a) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(b) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(c) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(d) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(e) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
(f) Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
- 27 -
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
GENESISINTERMEDIA.COM, INC.
/s/ Ramy El-Batrawi
By: ________________________________
Name: Ramy El-Batrawi
Title: President
DENMORE INVESTMENTS LTD.
Feb. 14, 2000 /s/ Manfred Unger
By: ________________________________
Name: Manfred Unger
Title: Director
- 28 -
EXHIBIT 21.1
Subsidiaries of the Registrant
Genesis Intermedia, Inc., a Florida Corporation
Genesis Properties, Inc., a Florida Corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent the incorporation of our report, dated April 7, 2000,
included in this Form 10-KSB in the previously filed Registration
Statement of GenesisIntermedia.com Inc. and subsidiaries on Form S-8
(File No. 333-95417, effective January 26, 2000).
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN, LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN, LLP
Los Angeles, California
May 1, 2000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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