UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
001-15029
(Commission file number)
GENESISINTERMEDIA, INC.
(Exact name of registrant 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)
(818) 902-4100
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity. As of November 16, 2001 - 24,062,303 shares of Common Stock
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
GENESISINTERMEDIA, INC.
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2001
and December 31, 2000 2-3
Condensed Consolidated Statements of Operations for
the three months ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Operations for
the nine months ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 25-27
Item 2. Change in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 28
Part III. EXHIBITS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GENESISINTERMEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER, 2000
September 30 December 31,
2001 2000
(unaudited) (audited)
ASSETS
Current assets
Cash and cash equivalents $ 323,731 $ 747,633
Marketable securities at market 1,891,852 1,926,746
Accounts receivable, net 3,450,283 3,320,118
Inventories 784,258 1,383,620
Prepaid advertising 756,922 2,461,928
Advances receivable - 1,201,348
Deposits and other prepaid assets 1,621,755 1,791,610
Net assets of discontinued operations - 13,548,649
---------------- ----------------
Total current assets 8,828,801 26,381,652
Property and equipment, net 13,396,749 13,154,386
Customer lists - 955,287
Other assets 523,032 145,533
---------------- ----------------
Total assets $ 22,748,582 $ 40,636,858
================ ================
2
GENESISINTERMEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
AS OF SEPTEMBER 30, 2001 AND DECEMBER, 2000
September 30, December 31,
2001 2001
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of notes payable $ 182,678 $ -
Current portion of capital lease obligations - 72,408
Accounts payable 4,625,453 3,390,356
Accrued payroll taxes 525,020 859,833
Accrued interest - related party 111,629 2,053,490
Other accrued liabilities 1,026,918 731,201
Due to stockholder 662,567 2,693,993
Income taxes payable 65,000 65,000
Net liabilities of discontinued operations 10,244,064 -
---------------- ----------------
Total current liabilities 17,443,329 9,886,281
Notes payable, net of current portion 8,856,250 7,856,250
Note payable to related party 22,879,652 30,382,266
---------------- ----------------
Total liabilities 49,179,231 48,104,797
Commitments and contingencies
Stockholders' deficit
Convertible preferred stock, $0.001 par value, 5,000,000
authorized 0 and 71,429 shares issued and outstanding - 71
Common stock, $0.001 par value
75,000,000 shares authorized
24,062,303 and 20,971,560 shares issued and outstanding 24,062 20,972
Additional paid-in capital 153,190,337 35,752,544
Accumulated deficit (177,242,565) (41,827,177)
Treasury stock (2,402,483) (2,402,483)
Accumulated comprehensive income - 988,134
---------------- ----------------
Total stockholders' deficit (26,430,649) (7,467,939)
---------------- ----------------
Total liabilities and stockholders' deficit $ 22,748,582 $ 40,636,858
================ ================
See the accompanying notes
3
GENESISINTERMEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
3 Months 3 Months
Ended Ended
September 30, September 30,
2001 2000
--------------- --------------
(unaudited) (unaudited)
Revenue $ 10,782,812 $ 13,481,478
Cost of Revenue 2,250,771 1,523,333
--------------- --------------
Gross Profit 8,532,041 11,958,145
Operating expenses
Selling, general and administrative expenses 17,814,258 11,417,482
Depreciation and amortization 314,458 619,550
Loss from operations of DynaMedia - 127,721
--------------- --------------
Total operating expenses 18,128,716 12,164,753
--------------- --------------
Loss from operations (9,596,675) (206,608)
Other income (expenses)
Loss on sale of assets (3,216,348) -
Interest expense (1,146,702) (883,314)
Financing costs (89,374,221) (50,000)
--------------- --------------
Total other income (expenses) (93,737,271) (933,314)
--------------- --------------
Loss from continuing operations before provision for income (103,333,946) (1,139,922)
taxes
Provision (benefit) for income taxes - -
--------------- --------------
Loss from continuing operations (103,333,946) (1,139,922)
Discontinued operations
Loss from operations of discontinued operations (3,057,352) (3,106,812)
Loss on disposal of discontinued operations (13,351,041) -
--------------- --------------
Total discontinued operations (16,408,393) (3,106,812)
--------------- --------------
Net loss $(119,742,339) $(4,246,734)
=============== ==============
Basic and diluted loss per common share
Continuing operations $ (4.45) $ (0.06)
Discontinued operations (0.71) (0.17)
--------------- --------------
$ (5.16) $ (0.23)
=============== ==============
Weighted-average common shares outstanding 23,199,737 18,534,771
=============== ==============
See the accompanying notes
4
GENESISINTERMEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
9 Months 9 Months
Ended Ended
September 30, September 30,
2001 2000
--------------- --------------
(unaudited) (unaudited)
Revenue $ 31,402,734 $ 27,051,085
Cost of Revenue 5,393,531 5,243,233
--------------- --------------
Gross Profit 26,009,203 21,807,852
Operating expenses
Selling, general and administrative expenses 38,382,078 27,076,042
Depreciation and amortization 1,509,249 1,813,135
Loss from operations of DynaMedia - 58,360
--------------- --------------
Total operating expenses 39,891,327 28,947,537
--------------- --------------
Loss from operations (13,882,124) (7,139,685)
Other income (expenses)
Loss on sale of assets (3,038,403) -
Interest expense (3,604,363) (1,958,343)
Financing costs (91,097,472) (153,125)
--------------- --------------
Total other income (expenses) (97,740,238) (2,111,468)
--------------- --------------
Loss from continuing operations before provision for income (111,622,362) (9,251,153)
taxes
Provision (benefit) for income taxes - -
--------------- --------------
Loss from continuing operations (111,622,362) (9,251,153)
Discontinued operations
Loss from operations of discontinued operations (10,441,985) (7,468,911)
Loss on disposal of discontinued operations (13,351,041) -
--------------- --------------
Total discontinued operations (23,793,026) (7,468,911)
--------------- --------------
Net loss $(135,415,388) $(16,720,064)
=============== ==============
Basic and diluted loss per common share
Continuing operations $ (5.07) $ (0.54)
Discontinued operations (1.08) (0.43)
--------------- --------------
$ (6.15) $ (0.97)
=============== ==============
Weighted-average common shares outstanding 22,006,927 17,282,769
=============== ==============
See the accompanying notes
5
GENESISINTERMEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
9 Months 9 Months
Ended Ended
September 30, September 30,
2001 2000
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss from continuing operation $(111,622,362) $ (9,251,153)
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 1,509,249 1,813,135
Loss on sale of assets 3,038,403 -
Stock/warrants issued for financing costs 90,722,472 103,125
(Increase) decrease in operating assets 3,545,406 (5,767,480)
Increase (decrease) in operating liabilities (745,860) (2,282,222)
----------------- -----------------
Net cash used in operating activities (13,552,692) (15,384,595)
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (796,325) (806,027)
Proceeds from sale of marketable securities 1,116,557 -
Proceeds from sale of Car Rental Direct 11,600,000 -
Purchase of marketable securities (5,108,200) -
Other (377,499) (209,554)
----------------- -----------------
Net cash provided by (used in) investing
activities 6,434,533 (1,015,581)
----------------- -----------------
Cash flows from financing activities
Net proceeds from related parties (2,031,426) -
Net proceeds from line of credit - (1,505,406)
Proceeds from notes payable - related party 4,269,911 28,520,857
Proceeds from note payable 1,182,678 1,000,000
Proceeds from sale of stock, net - 3,798,035
Proceeds from convertible debentures 3,000,000 -
Proceeds from exercise of options and warrants 10,003,694 887,701
Repurchase of common stock - (2,296,813)
Payments on notes payable - related party (11,772,525) -
Payment on notes payable and capital leases (72,408) (1,314,814)
Disgorgement of short-swing profits generated
by stockholder 13,714,646 184,314
----------------- -----------------
Net cash provided by financing activities 18,294,570 29,273,874
----------------- -----------------
Cash used in discontinued operations (11,600,313) (12,013,665)
----------------- -----------------
Net increase (decrease) in cash and cash
equivalents during period (423,902) 860,033
Cash and cash equivalents, beginning of period 747,633 589,556
----------------- -----------------
Cash and cash equivalents, end of period $ 323,731 $ 1,449,589
================= =================
See the accompanying notes
6
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been prepared by
GenesisIntermedia, Inc. (the "Company" or "Genesis"), pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. The results of the nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2001. These financial statements should be read in conjunction with
the Company's consolidated audited financial statements and related footnotes
for the year ended December 31, 2000 included in the Company's annual report on
Form 10-K.
NOTE 2 - NASDAQ INQUIRY AND SEC INVESTIGATION
On May 24, 2001, the Nasdaq Stock Market opened an inquiry into whether to
disqualify the Company's stock from quotation based on certain matters relating
to the Company, Ramy El-Batrawi, and trading of the Company's securities. On
September 25, 2001, the Nasdaq Stock Market suspended trading in the Company's
stock. In addition, on August 10, 2001, the SEC commenced a formal investigation
into whether certain persons or entities employed schemes to conceal payments
from the Company to stock promoters, materially misstated or caused the material
misstatement of the Company's assets and liabilities, and illegally manipulated
the Company's stock price. Finally, the FBI interviewed two of the Company's
former employees in connection with related matters. These two employees were
not employed by the Company at the time of the interview. The Company is
cooperating fully with the Nasdaq Stock Market, SEC, and FBI inquiries. The
Company can provide no assurance that the Nasdaq Stock Market will lift the
suspension on trading of the Company's stock, and the Nasdaq Stock Market may
decide to permanently disqualify the Company's stock from quotation. The Company
can also provide no assurance that the SEC, or other law enforcement authority,
will not bring a legal proceeding against the Company that could lead to
financial penalties and other forms of relief. Continued suspension of trading
in the Company's stock, disqualification of the Company's stock from quotation,
or a successful enforcement proceeding against the Company, is likely to
seriously reduce the price and impair the liquidity of the Company's common
stock, and to harm the Company's business by making it difficult or impossible
to raise new capital through the sale of securities.
7
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 3 - LITIGATION
On October 31, 2001, a lawsuit claiming to be brought derivatively on the
Company's behalf was filed by Joseph Touchstone in the Court of Chancery for the
State of Delaware in and for New Castle County against the Company, and certain
individuals, including Ramy El-Batrawi, Douglas E. Jacobson, George W. Heyworth,
Michael R. Fugler and Stephen A. Weber, all current or former senior executive
officers and directors of the Company. The complaint alleges a breach of
fiduciary duties for insider trading and misappropriation of corporate
information against those defendants who sold the Company's securities. This
count alleges that the selling defendants knew or had reason to know of a scheme
to artificially inflate the price of the Company's shares, taking advantage of
material non-public information to gain profits in violation of their fiduciary
duties to the Company. The complaint also alleges against all individual
defendants for breaching their duties of good faith and loyalty. This count
alleges that these individuals, who are current and former officers and
directors of the Company, breached their duty of good faith and loyalty to the
Company by allegedly approving or acquiescing in a scheme to artificially
inflate the price of the Company's common stock. The Company intends to
vigorously defend itself against the aforementioned suit. However, an adverse
outcome in this litigation could materially harm the Company.
Following the announcement of the Nasdaq and SEC inquiries, several persons
claiming to be the Company's shareholders commenced securities fraud class
actions against the Company and individuals, including current and former senior
executive officers and directors. On October 18, 2001, one such class action was
filed in the United States District Court for the Central District of California
by David Osher, who claims to be a shareholder of record and be acting on behalf
of others similarly situated, against the Company, Ramy El-Batrawi, Douglas E.
Jacobson and Courtney Smith. The first count of the complaint alleges violations
under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by
the making of false and misleading statements and failing to disclose material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. This count also
alleges that the Company, the Company's former Chief Executive Officer and
Chairman of the Board of Directors Ramy El-Batrawi, the Company's Chief
Financial Officer Douglas E. Jacobson, and stock market analyst Courtney Smith
acted in a fraudulent scheme to artificially inflate the price of our common
stock. The second count alleges that both the Company and the individual
defendants named above, which includes former senior executive officers and
directors, caused the Company to engage in wrongful conduct in violation of
Section 20(a) of the Exchange Act. The Company intends to vigorously defend
against Mr. Osher's class action claim. However, an adverse outcome in this
litigation could materially harm the Company.
8
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 3 - LITIGATION, continued
On October 19, 2001, another class action suit was filed in the United States
District Court for the Central District of California Western Division by
William Tierno, Jr., who claims to be a shareholder of record and acting on
behalf of others similarly situated, against the Company, Ramy El-Batrawi,
Douglas E. Jacobson and Courtney Smith. The first count of the complaint alleges
violations under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder by the making of false and misleading statements and failing to
disclose material facts necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading. This count also
alleges that the Company, the Company's former Chief Executive Officer and
Chairman of the Board of Directors Ramy El-Batrawi, the Company's Chief
Financial Officer Douglas E. Jacobson, and stock market analyst Courtney Smith
acted in a fraudulent scheme to artificially inflate the price of the Company's
common stock. The second count alleges that both the Company and the individual
defendants named above, which includes former senior executive officers and
directors, caused the Company to engage in wrongful conduct in violation of
Section 20(a) of the Exchange Act. The Company intends to vigorously defend
against Mr. Tierno's class action claim; however, an adverse outcome in this
litigation could materially harm the Company.
On October 23, 2001, another such class action lawsuit was filed in the United
States District Court for the Central District of California by Jason Spiller,
who claims to be a shareholder of record and be acting on behalf of others
similarly situated, against the Company, Ramy El-Batrawi and Douglas E.
Jacobson. The complaint alleges violations under Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder by the making of false and misleading
statements and failing to disclose material facts necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading. This count also alleges that the Company, the Company's former Chief
Executive Officer and Chairman of the Board of Directors Ramy El-Batrawi, and
the Company's Chief Financial Officer Douglas E. Jacobson acted in a fraudulent
scheme to artificially inflate the price of the Company's common stock. In the
second count Mr. Spiller's suit alleges that both the Company and the individual
defendants named above, which includes former senior executive officers and
directors, engaged in wrongful conduct in violation of Section 20(a) of the
Exchange Act. The Company intends to vigorously defend against Mr. Spiller's
class action claim; however, an adverse outcome in this litigation could
materially harm the Company.
9
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 3 - LITIGATION, continued
On October 25, 2001, another such class action was filed in the United States
District Court for the Central District of California by James H. Coltrain, Jr.,
who claims to be a shareholder of record and be acting on behalf of others
similarly situated, against the Company, Ramy El-Batrawi, Douglas E. Jacobson,
Courtney Smith, Orbitex Management, Inc., Orbitex Global, Courtney Smith &
Company, Ultimate Holdings, Ltd. and Adnan Khashoggi. The complaint alleges
violations under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder by the making of false and misleading statements and failing to
disclose material facts necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading. This count also
alleges that the Company, the Company's former Chief Executive Officer and
Chairman of the Board of Directors Ramy El-Batrawi, the Company's Chief
Financial Officer Douglas E. Jacobson, stock market analyst Courtney Smith,
Orbitex Management, Inc., Orbitex Global, Courtney Smith & Company, Ultimate
Holding, Inc. and Adnan Khashoggi acted in a fraudulent scheme to artificially
inflate the price of the Company's common stock. In the second count Mr.
Coltrain's suit alleges that both the Company and the individual defendants
named above, which includes former senior executive officers and directors,
engaged in wrongful conduct in violation of Section 20(a) of the Exchange Act.
The Company intends to vigorously defend against Mr. Coltrain's class action
claim; however, an adverse outcome in this litigation could materially harm the
Company.
On October 25, 2001, another such class action was filed in the United States
District Court for the Central District of California by Suri Fingerer, who
claims to be a shareholder of record and be acting on behalf of others similarly
situated, against the Company, Ramy El-Batrawi, Douglas E. Jacobson and Courtney
Smith. The first count of the complaint alleges violations under Section 10(b)
of the Exchange Act and Rule 10b-5 promulgated thereunder by the making of false
and misleading statements and failing to disclose material facts necessary in
order to make the statements made, in light of the circumstances under which
they were made, not misleading. This count also alleges that the Company, the
Company's former Chief Executive Officer and Chairman of the Board of Directors
Ramy El-Batrawi, the Company's Chief Financial Officer Douglas E. Jacobson, and
stock market analyst Courtney Smith acted in a fraudulent scheme to artificially
inflate the price of the Company's common stock. The second count alleges that
both the Company and the individual defendants named above, which includes
former senior executive officers and directors, engaged in wrongful conduct in
violation of Section 20(a) of the Exchange Act. The Company intends to
vigorously defend against Mr. Fingerer's class action claim; however, an adverse
outcome in this litigation could materially harm the Company.
The Company has not been served notice of additional lawsuits arising from the
same subject matter as the class action lawsuits discussed above, and to the
Company's knowledge no such lawsuits exist, but it is possible other such
lawsuits may have been filed without our knowledge.
The Company cannot predict the ultimate outcome of the lawsuits and
investigations discussed above. Director and officer liability insurance against
certain liabilities, including liabilities under the securities laws, was in
force at the time the securities and derivative litigation was commenced. The
Company has not established any reserve for possible losses resulting from the
claims asserted in the securities and derivative litigation. The Company
believes that its liability insurance covers the claims asserted in the
securities and derivative litigation and that the Company may be able to resolve
those claims within the limits of its coverage. Because the insurers have denied
coverage for these claims, the Company recently commenced a lawsuit against
them. The Company intends to vigorously pursue the claim for its coverage
rights. However, an adverse outcome in this litigation could materially harm the
Company.
10
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 4 - DISCONTINUED OPERATIONS
In August 2001, the Company sold its Car Rental Direct subsidiary for
$10,600,000 resulting in a gain on the sale of $5,498,382. The initial purchase
price was $11,600,000 which was paid to the Company in cash at closing and was
subsequently reduced by $1,000,000. As repayment of the $1,000,000 reduction in
the purchase price, the Company issued the buyer a promissory note in the amount
of $1,000,000. The note accrues interest at 6% per annum and principal payments
of $500,000 plus unpaid accrued interest are due on November 1, 2002 and May 1,
2003. For the nine months ended September 30, 2000 and the period from January
1, 2001 to August 16, 2001, Car Rental Direct incurred losses from its
operations of $1,350,745 and $3,221,649. The operations of Car Rental Direct are
presented as a discontinued operation in the accompanying financial statements.
In September 2001, the Company decided to close its Centerlinq operations and
liquidate all its assets. As a result of closing the Centerlinq operations, the
Company has recognized a loss of $18,849,423 to sell all the Centerlinq assets
and close down the operations. For the nine months ended September 30, 2000 and
2001, Centerlinq incurred losses from its operations of $6,118,166 and
$7,220,336. The operations of Centerlinq are presented as a discontinued
operation in the accompanying financial statements.
The results of operations and cash flows for 2000 and the balance sheet as of
December 31, 2000 presented in these financial statements have been restated to
give effect to the discontinued operations described above.
NOTE 5 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. The following potential common shares have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been anti-dilutive:
11
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSsOLIDATED FINANCIAL STATEMENTS, continued
NOTE 5 - EARNINGS PER SHARE, Continued
For the nine months Ended
September 30,
-------------------------------
2001 2000
------------- -------------
(unaudited) (unaudited)
Options outstanding under
the Company's stock option plan 3,675,352 1,330,536
Options issued as part of the acquisition
of Vision Digital 150,000 150,000
Warrants issued in conjunction with
common stock 750,000 750,000
Warrants issued in conjunction with
Series A convertible preferred stock 214,284 764,571
Warrants issued in conjunction with
notes payable 64,287 726,963
Warrants issued in conjunction with
Note payable to affiliate 209,585 491,250
Warrants issued in conjunction with
convertible debentures - 67,500
Warrants issued as liquidating damages 150,000 -
Warrants issued as consideration for
leasing space 600,000 -
Series A Convertible Preferred Stock 214,287 756,990
Warrants issued as consideration for
future financing (1) 4,000,000 -
(1) The 4,000,000 shares do not reflect the concurrent issuance of the
3,000,000 offsetting options to be issued to the Company by two
stockholders, upon the exercise of the warrants, which should result
in only 1,000,000 new shares to be issued by the Company.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2001 consisted of the following:
Land $ 1,450,000
Building and improvements 13,089,375
Vehicles 113,269
Furniture and equipment 250,054
--------------
14,902,698
Less accumulated depreciation (1,505,949)
--------------
Total $ 13,396,749
==============
12
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 7 - CONVERTIBLE DEBENTURE
On March 14, 2001, the Company entered into a Securities Purchase Agreement
whereby the Company issued a 7% convertible debenture in the amount of
$3,000,000. The debenture was convertible into the Company's common stock at a
conversion price of $6.83 and was to be repaid either in cash or by conversion
to common stock as follows: $1,000,000 on each of April 15, May 15 and June 15,
2001, subject in the case of cash repayment to the effectiveness of a
registration statement covering resale of the shares. In addition, the Company
issued 300,000 warrants to purchase the Company's common stock at $7.67 per
share that expire on March 15, 2004. The Company has recognized an expense of
$1,623,251 related to these warrants during the nine months ended September 30,
2001.
On June 4, 2001, the debenture holder converted the $3,000,000 debenture into
445,534 shares of the Company's common stock and exercised 300,000 warrants
which resulted in gross proceeds to the Company of $2,300,000.
NOTE 8 - NOTE PAYABLE - RELATED PARTY
On January 5, 2001, the Company entered into a note payable agreement with
Ultimate Holdings, Ltd ("Ultimate"), a significant stockholder of the Company,
whereby Ultimate has agreed to loan the Company an additional $5,000,000 on
terms similar to the previous note payable agreements with Ultimate.
On April 16, 2001, the Company entered into another note payable agreement with
Ultimate whereby Ultimate has agreed to loan the Company an additional
$15,000,000 on terms similar to the previous note payable agreements with
Ultimate.
NOTE 9 - STOCKHOLDERS' DEFICIT
On March 22, 2001 the Company affected a 3-for-1 stock split of its common
stock. All share and per share data have been retroactively restated to reflect
this stock split. On September 5, 2001, the Company's board of directors
approved another 3-for-1 stock split to take effect on September 24, 2001. The
Company postponed this stock split on September 19, 2001.
In January 2001, warrants to purchase 64,287 shares of the Company's common
stock, issued in conjunction with the Series A Convertible Preferred Stock, were
exercised for proceeds of $218,576.
During the nine months ended September 30, 2001, the Company received $1,012,053
and $8,991,641 from the exercise of 299,888 employee stock options and 1,834,749
warrants, respectively. The Company also received $13,714,646 from Ultimate who
disgorged to the Company "short-swing" profits in such amount.
13
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 9 - STOCKHOLDERS' EQUITY, continued
In June 2000, the Company issued a warrant to purchase 20 shares of the common
stock of the Company's CENTERLINQ, Inc. subsidiary at an exercise price of
$250,000 per share. The subsidiary warrant vested immediately and was issued
pursuant to a securities purchase agreement as an incentive for Infinity Outdoor
to maximize its joint marketing efforts with the Company. At any time during the
term of the subsidiary warrant, if the Company has not completed a public
offering under an effective registration statement for the sale of shares of
common stock of CENTERLINQ, Inc. for at least $20,000,000, Infinity Outdoor has
the option to tender the subsidiary warrant in exchange for a warrant to
purchase 967,740 shares of the Company's common stock at an exercise price of
$5.17 per share. In July 2001, Infinity Outdoor tendered its subsidiary warrant
for a warrant to purchase 967,740 shares of the Company's common stock at $5.17
per share and exercised this warrant resulting in net proceeds to the Company of
$4,999,990.
On July 2, 2001, the Company entered into a conditional loan commitment letter
with Riverdale LLC ("Riverdale"), a company owned by Carl C. Icahn, the New
York-based financier, for a $100 million credit facility. In connection with the
loan commitment, on July 2, 2001 the Company issued to Riverdale warrants to
purchase an aggregate of 4 million shares of the Company's common stock at
exercise prices ranging from $2 to $9 per share and granted to Riverdale
registration rights with respect to the common stock issuable upon exercise of
the warrants. The warrants are exercisable any time after July 2, 2001 and
before July 1, 2005. Concurrently with the issuance of the warrants by the
Company, the Company's former CEO granted Riverdale an option to purchase 1.0
million and 500,000 shares of common stock held by him, at purchase prices of
$2.00 and $4.00 per share, respectively. In a related transaction, to reduce the
dilutive effect on existing stockholders of the exercise of the warrants, the
Company's former CEO and Ultimate granted options to the Company to acquire 3.0
million shares of common stock at exercise prices of $2.00 and $9.00 per share.
These options are exercisable if Riverdale exercises the corresponding series of
warrants issued by the Company. If Riverdale exercises all of the warrants
issued by the Company and the Company exercises all of the options issued to it,
the Company will issue a net of 1.0 million shares at $2.00 per share. In the
transaction, Riverdale agreed to lock-up their shares acquirable upon exercise
of the warrants and options for a period of one-year and the Company's former
CEO and Ultimate agreed to lock-up the shares presently held by them for the
same one-year period, and not to sell them without consent of the other parties,
subject to certain permissible resales to institutions and to certain
non-institutional purchasers who agree to lock-up their shares. The Company's
former CEO has reported sales of some of his shares of common stock since July
2, 2001. The Company is not aware whether these sales were made pursuant to an
exception to the lock-up agreement or the waiver or consent of the other parties
to the lock-up agreement. The Company is also not aware whether the lock-up
agreement remains in force and in effect among the parties regarding future
sales.
The Company used the Black Scholes model to determined the fair value of the 4
million warrants issued by the Company to Riverdale and the 1.5 million warrants
issued by the Company's former CEO to Riverdale and has taken a charge of
$89,099,221 in the accompanying statement of operations.
14
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 10 - MARKETABLE SECURITIES
Marketable securities at September 30, 2001 consist of equity securities in MAII
Holdings, Inc. The Company has classified this investment in marketable
securities as trading. For the three months ended September 30, 2001, the
Company recognized an unrealized loss in the accompanying statement of
operations of $3,216,348.
NOTE 11 - RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Bulletin ("APB") Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Pre-Acquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. The provisions of
this statement apply to all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001
or later.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the accounting and
reporting provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions," for the disposal
of a segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company does
not expect adoption of SFAS No. 144 to have a material impact, if any, on its
financial position or results of operations.
15
GENESISINTERMEDIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 12 - SEGMENT INFORMATION
The Company has two business units that have separate management and reporting
infrastructures that offer different products and services. The business units
have been aggregated into two reportable segments: Media 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
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 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 as of and for the nine months ended September 30,
2001:
Loss from
Continuing Total
Revenue Operations Assets
------------ -------------- -------------
Media $ 30,903,844 $(110,551,783) $ 10,427,365
Properties 498,890 (1,070,579) 12,321,217
------------ -------------- -----------
Total $ 31,402,734 $(111,622,362) $ 22,748,582
============ ============== ============
16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related footnotes for the year ended
December 31, 2000 included in our Annual Report on Form 10-K. 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
During the quarter ended September 30, 2001 and from that date until the filing
of this report on Form 10-Q, we have experienced significant changes and events
that may have a significant negative impact on our business. These changes and
events include:
o the Nasdaq halting the trading of our stock;
o the resignation of our Chief Executive Officer and the appointment of
an interim Chief Executive Officer;
o the filing of several class action lawsuits against us;
o the commencement of an SEC investigation;
o the disposal of our Centerlinq operations; and
o the sale of our Car Rental Direct subsidiary
We are currently taking steps to address the above events, but there can
be no assurance that we will be successful in commencing the trading of our
stock, resolving the class action lawsuits and SEC investigation brought against
us, and generating sufficient cash to continue our business.
In August 2001, we sold our Car Rental Direct subsidiary for $10,600,000
resulting in a gain on the sale of $5,498,382. The initial purchase price was
$11,600,000 which was paid to us in cash at closing and was subsequently reduced
by $1,000,000. As repayment of the $1,000,000 purchase price we issued the buyer
a promissory note in the amount of $1,000,000. The note accrues interest at 6%
per annum and principal payments of $500,000 are due on November 1, 2002 and May
1, 2003. For the nine months ended September 30, 2000 and the period from
January 1, 2001 to August 16, 2001, Car Rental Direct incurred losses from its
operations of $1,350,745 and $3,221,649. The operations of Car Rental Direct are
presented as a discontinued operation.
In September 2001, we decided to close our Centerlinq operations and liquidate
all its assets. As a result of closing the Centerlinq operations, we have
recognized a loss of $18,849,423 to sell all the Centerlinq assets and close
down the operations. For the nine months ended September 30, 2000 and 2001,
Centerlinq incurred losses from its operations of $6,118,166 and $7,220,336. The
operations of Centerlinq are presented as a discontinued operation.
The results of operations and cash flows for 2000 and the balance sheet at of
December 31, 2000 presented in these financial statements included in this
report on Form 10-Q have been restated to give effect to the discontinued
operations described above.
On May 24, 2001, the Nasdaq Stock Market opened an inquiry into whether to
disqualify our stock from quotation based on certain matters relating to us,
Ramy El-Batrawi, and trading of our securities. On September 25, 2001, the
Nasdaq Stock Market suspended trading in our stock. In addition, on August 10,
2001, the SEC commenced a formal investigation into whether certain
17
persons or entities employed schemes to conceal payments from us to stock
promoters, materially misstated or caused the material misstatement of our
assets and liabilities, and illegally manipulated our stock price. Finally, the
FBI interviewed two of our former employees in connection with related matters.
These two employees were not employed by us at the time of the interview. We are
cooperating fully with the Nasdaq Stock Market, SEC, and FBI inquiries. We can
provide no assurance that the Nasdaq Stock Market will lift the suspension on
trading of our stock, and the Nasdaq Stock Market may decide to permanently
disqualify our stock from quotation. We can also provide no assurance that the
SEC, or other law enforcement authority, will not bring a legal proceeding
against us that could lead to financial penalties and other forms of relief.
Continued suspension of trading in our stock, disqualification of our stock from
quotation, or a successful enforcement proceeding against us, is likely to
seriously reduce the price and impair the liquidity of our common stock, and to
harm our business by making it difficult or impossible to raise new capital
through the sale of securities.
In addition, several class action lawsuits have been filed against us. See Part
II, Item 1, Legal Proceedings.
18
Results of Operations
Three months Ended September 30, 2001 vs. September 30, 2000
------------------------------------------------------------
Three Three
Months Months % of % of
Ended Ended revenue revenue
9/30/2001 9/30/2000 2001 2000
(in thousands)
Revenue $ 10,783 13,481 100.0% 100.0%
Cost of Revenue 2,251 1,523 20.9% 11.3%
---------- ---------- ---------- ---------
Gross Profit 8,532 11,958 79.1% 88.7%
----------- ----------- ---------- ---------
Operating expenses
Selling, general andadministrative
expenses 17,815 11,418 65.2% 84.7%
Depreciation and amortization 314 619 2.9% 4.6%
Loss from operations of DynaMedia
- 128 0.0% 0.9%
----------- ---------- ---------- ---------
Total operating expenses 18,129 12,165 168.1% 90.2%
----------- ---------- ---------- ---------
Loss from operations (9,597) (207) -89.0% -1.5%
Other income (expenses)
Other income (expense) (3,217) - -29.8% 0.0%
Interest expense (1,146) (883) -10.6% -6.5%
Financing costs (89,374) (50) -828.8% -0.4%
----------- ---------- ---------- ---------
Total other income (expenses) (93,737) (933) -869.3% -6.9%
----------- ---------- ---------- ---------
Loss from continuing operations
before provision for income taxes (103,334) (1,140) -958.3% -8.5%
Provision (benefit) for income taxes - - 0.0% 0.0%
----------- ---------- ---------- ---------
Loss from continuing operations (103,334) (1,140) -958.3% -8.5%
----------- ---------- ---------- ---------
Discontinued operations
Loss from operations of
discontinued operations (3,057) (3,107) -28.4% -23.0%
Loss on disposal of discontinued
operations (13,351) - -123.8% 0.0%
----------- ---------- ---------- ---------
Total discontinued operations
(16,408) (3,107) -152.2% -23.0%
----------- ---------- ---------- ---------
Net loss $(119,742) $(4,247) -1110.5% -31.5%
=========== ========== ========== ==========
Revenue for the three months ended September 30, 2001 decreased by $2,698,000 or
20.0% from $13,481,000 for the three months ended September 30, 2000 to
$10,783,000 for the same period in 2001. The decrease in revenue was due to the
following:
o Product sales for the three months ended September 30, 2001 decreased by
$2,189,000 or 22.6% from $9,680,000 for the three months ended September 30,
2000 to $7,491,000 for the same period in 2001. The decrease is due to the
negative impact of the events surrounding September 11, 2001 and uncertainty
of consumers to purchase our products.
19
o Commissions and royalties for the three months ended September 30, 2001
decreased by $141,000 or 4.3% from $3,306,000 for the three months ended
September 30, 2000 to $3,165,000 for the same period in 2001. These
commissions are amounts received from the sale of other companies' products
primarily through our call center in St. George, Utah. We normally receive
commissions of 20% to 50%. The decrease is due to the negative impact of the
events surrounding September 11, 2001 and uncertainty of consumers to
purchase the products we sell for others.
Cost of revenue for the three months ended September 30, 2001 increased by
$728,000 or 47.8% from $1,523,000 for the three months ended September 30, 2000
to $2,251,000 for the same period in 2001. The direct product costs as a
percentage of product sales increased from 9.1% for the three months ended
September 30, 2000 to 26.6% for the same period in 2001. The increase is due to
higher product costs associated with our new products and programs when compared
to the products sold by us during 2000.
Selling, general and administrative expenses for the three months ended
September 30, 2001 increased by $6,397,000 or 56.0% from $11,418,000 for the
three months ended September 30, 2000 to $17,815,000 for the same period in
2001. The increase was due principally to an increase in payroll and related
benefits in our St. George, Utah location, higher commissions paid to employees
of our media division, higher legal and professional fees and much higher media
costs. We expensed $6,389,291 in media airtime during the three months ended
September 30, 2001 compared to $2,005,000 for the same period in 2000.
Depreciation and amortization expense for the three months ended September 30,
2001 decreased by $305,000 or 49.3% from $619,000 for the three months ended
September 30, 2000 to $314,000 for the same period in 2001. The decrease in
depreciation and amortization expense was a result of the customer lists being
fully amortized at June 30, 2001 resulting in no expense for the three months
ended September 30, 2001.
Effective January 1, 2000 we acquired DynaMedia and effective December 31, 2000,
we sold DynaMedia back to its original owner. For the three months ended
September 30, 2000, DynaMedia reported a net loss of $128,000 on revenues of
$311,000.
Other expense for the three months ended September 30, 2001 increased by
$3,217,000 from $0 for the three months ended September 30, 2000 to $3,217,000
for the same period in 2001. Other expense is the writedown we took on our
investments in common stock in MAII Holdings, Inc.
Interest expense for the three months ended September 30, 2001 increased by
$263,000 or 29.8% from $883,000 for the three months ended September 30, 2000 to
$1,146,000 for the same period in 2001. The increase in interest expense was due
to an increase in notes payable to a related party.
Financing costs for the three months ended September 30, 2001 increased by
$89,324,000 from $50,000 for the three months ended September 30, 2000 to
$89,374,000 for the same period in 2001. The financing cost for the three months
ended September 30, 2001 related to the fair value of warrants issued in
connection with a proposal to offer financing to us for future acquisitions
There were no such financing costs for the three months ended September 30,
2000.
Loss from operations of discontinued operations for the three months ended
September 30, 2001 consists of operating losses of Car Rental Direct and
Centerlinq of $649,739 and $2,407,613, respectively, compared to operating
losses of $820,200 and $2,286,612, respectively for the three months ended
September 30, 2000.
20
Loss on disposal of discontinued operations consists of a gain of $5,498,382
from the sale of Car Rental Direct and a loss on the closure of Centerlinq of
$18,849,423. Included in the loss on the closure of Centerlinq, are the
estimated costs over the next six months that will be required to fully
liquidate the Centerlinq assets and close the operations.
Nine months Ended September 30, 2001 vs. September 30, 2000
-----------------------------------------------------------
Nine Nine
Months Months % of % of
Ended Ended revenue revenue
9/30/2001 9/30/2000 2001 2000
(in thousands)
Revenue $ 31,403 $ 27,051 100.0% 100.0%
Cost of Revenue 5,394 5,243 17.2% 19.4%
----------- ----------- ------------ ----------
Gross Profit 26,009 21,808 82.8% 80.6%
----------- ----------- ------------ ----------
Operating expenses
Selling, general and
administrative expenses 38,382 27,076 122.2% 100.1%
Depreciation and amortization 1,509 1,813 4.8% 6.7%
Loss from operations of DynaMedia 59 0.0% 0.2%
----------- ------------ ----------- ----------
Total operating expences 39,891 28,948 127.0% 107.0%
----------- ------------ ----------- ----------
Loss from operations (13,882) (7,140) -44.2% -26.4%
Other income (expenses)
Other income (expense) (3,039) -9.7% 0.0%
Interest expense (3,604) (1,958) -11.5% -7.2%
Financing costs (91,097) (153) -290.1% -0.6%
----------- ------------ ----------- ----------
Total other income (expenses) (97,740) (2,111) -311.2% -7.8%
----------- ------------ ----------- ----------
Loss from continuing operations
before provision for income taxes (111,622) (9,251) -355.5% -34.2%
Provision (benefit) for income taxes - - 0.0% 0.0%
----------- ------------ ----------- ----------
Loss from continuing operations (111,622) (9,251) -355.5% -34.2%
----------- ------------ ----------- ----------
Discontinued operations
Loss from operations of
discontinued operations (10,442) (7,469) -33.3% -27.6%
Loss on disposal of discontinued
operations (13,351) - -42.5% 0.0%
----------- ------------ ----------- ----------
Total discontinued operations (23,793) (7,469) -75.8% -27.6%
----------- ----------- ----------- ----------
Net loss $ (135,415) $(16,720) -431.2% -61.8%
=========== ============ =========== ==========
Revenue for the nine months ended September 30, 2001 increased by $4,352,000 or
16.1% from $27,051,000 for the nine months ended September 30, 2000 to
$31,403,000 for the same period in 2001. The increase in revenue was due to the
following:
o Commissions and royalties for the nine months ended September 30, 2001
increased by $5,741,000 or 107.2% from $5,356,000 for the nine months ended
September 30, 2000 to $11,097,000 for the same period in 2001. These
commissions are amounts received from the sale of other companies' products
primarily through our call center in St. George, Utah. We normally receive
commissions of 20% to 50%. The increase occurred in the first half of 2001
and is due to the expansion of our staff in our St. George, Utah location
and obtaining new contracts to sell other companies' products. Commissions
and royalties actually decreased during the three months ended September
30, 2001 due to the negative impact of the events surrounding September 11,
2001 and uncertainty of consumers to purchase the products we sell for
others.
21
o Product sales for the nine months ended September 30, 2001 decreased by
$303,000 or 1.5% from $20,077,000 for the nine months ended September 30,
2000 to $19,774,000 for the same period in 2001. Product sales for the
first half of 2001 increase by 18% over the first half of 2000, but a
decrease in product sales took place in during the three months ended
September 30, 2001 and is principally due to the negative impact of the
events surrounding September 11, 2001 and uncertainty of consumers to
purchase our products.
Cost of revenue for the nine months ended September 30, 2001 increased by
$151,000 or 2.9% from $5,243,000 for the nine months ended September 30, 2000 to
$5,394,000 for the same period in 2001. The direct product costs as a percentage
of product sales increased from 17.4% for the nine months ended September 30,
2000 to 23.0% for the same period in 2001. The increase is due to higher product
costs associated with our new products and programs when compared to the
products sold by us during 2000.
Selling, general and administrative expenses for the nine months ended September
30, 2001 increased by $11,306,000 or 41.8% from $27,076,000 for the nine months
ended September 30, 2000 to $38,382,000 for the same period in 2001. The
increase was due principally to an increase in payroll and related benefits in
our St. George, Utah location, higher commissions paid to employees of our media
division, higher legal and professional fees and much higher media costs. We
expensed $12,394,291 in media airtime during the nine months ended September 30,
2001 compared to $7,975,000 for the same period in 2000.
Depreciation and amortization expense for the nine months ended September 30,
2001 decreased by $304,000 or 16.8% from $1,813,000 for the nine months ended
September 30, 2000 to $1,509,000 for the same period in 2001. The decrease in
depreciation and amortization expense was the result of the customer lists being
fully amortized at June 30, 2001 resulting in amortization expense for only six
months in 2001 compared to nine months in 2000.
Effective January 1, 2000 we acquired DynaMedia and effective December 31, 2000,
we sold DynaMedia back to its original owner. For the nine months ended
September 30, 2000, DynaMedia reported a net loss of $59,000 on revenues of
$1,044,000.
Other expense for the nine months ended September 30, 2001 increased by
$3,039,000 from $0 for the nine months ended September 30, 2000 to $3,039,000
for the same period in 2001. Other expense is the writedown we took on our
investments in common stock of MAII Holdings, Inc. and a realized gain of
$177,000 on a sales of our investment in Fashionmall.com, Inc. in the first
quarter of 2001.
Interest expense for the nine months ended September 30, 2001 increased by
$1,646,000 or 84.1% from $1,958,000 for the nine months ended September 30, 2000
to $3,604,000 for the same period in 2001. The increase in interest expense was
due to an increase in notes payable to a related party.
Financing costs for the nine months ended September 30, 2001 increased by
$90,944,000 from $153,000 for the nine months ended September 30, 2000 to
$91,097,000 for the same period in 2001. The financing cost for the nine months
ended September 30, 2001 related to the fair value of warrants issued in
connection with a convertible debenture and warrants issued in connection with a
proposal to offer financing to us for future acquisitions.
22
Loss from operations of discontinued operations for the nine months ended
September 30, 2001 consists of operating losses of Car Rental Direct and
Centerlinq of $3,221,649 and $7,220,336, respectively, compared to operating
losses of $1,350,745 and $6,118,166, respectively.
Loss on disposal of discontinued operations consists of a gain of $5,498,382
from the sale of Car Rental Direct and a loss on the closure of Centerlinq of
$18,849,423. Included in the loss on the closure of Centerlinq, are the
estimated costs over the next six months that will be required to fully
liquidate the Centerlinq assets and close the operations.
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, a line of credit, and borrowings.
From November 1999 we borrowed money from Ultimate through the issuance of
debentures. As of September 30, 2001, the balance due to Ultimate was
$21,155,023. Ultimate is a significant stockholder. In connection with the
debenture issued in November 1999, we issued warrants to purchase 2,100,000
shares of common stock with an exercise price of $2.33. The warrant for
2,100,000 was exercised in August 2000. The exercise price for these warrants of
$4,900,000 was paid via a reduction of the debenture.
In February 2000, we issued a convertible debenture in the amount of $1,000,000
along with a warrant to purchase 67,500 shares of common stock at an exercise
price of $4.00 and the issuance of 45,000 shares of our common stock. The
debenture is convertible into common stock at $1.67 per share if it is held to
maturity. The debenture was due on April 7, 2000 and has been repaid. We took a
charge to earnings for the 45,000 common shares issued in connection with this
debenture in the amount of $103,125. In April 2001, the 67,500 warrants were
exercised resulting in gross proceeds to us of $270,000.
On March 14, 2001, we entered into a Securities Purchase Agreement under which
we issued 7% convertible debentures in the amount of $3,000,000. The debenture
was convertible into our common stock at a conversion price of $6.83 and was to
be repaid either in cash or by conversion to common stock as follows: $1,000,000
on each of April 15, May 15 and June 15, 2001, subject in the case of cash
repayment to the effectiveness of a registration statement covering resale of
the shares. In addition, we issued warrants to purchase 300,000 shares of our
common stock at $7.67 per share that expire on March 15, 2004. On June 4, 2001,
the debenture holder converted the $3,000,000 debenture into 445,534 shares of
the Company's common stock and exercised 300,000 warrants which resulted in
gross proceeds to the Company of $2,300,000.
On January 5, 2001 and April 16, 2001, we entered into additional note payable
agreements with Ultimate whereby Ultimate has agreed to loan us an additional
$5,000,000 and $15,000,000, respectively, on terms similar to the previous note
payable agreements with Ultimate.
On July 2, 2001, we entered into a conditional loan commitment letter
with Riverdale LLC, a company owned by Carl C. Icahn, the New York-based
financier, for a $100 million credit facility. The credit facility will be used
to make strategic acquisitions that fit into our business model and that are
approved by Riverdale. In connection with the loan commitment, on July 2, 2001
we issued to Riverdale warrants to purchase an aggregate of 4 million shares of
our common stock at exercise prices ranging from $2 to $9 per share and granted
to Riverdale registration rights with respect to the common stock issuable upon
exercise of the warrants. The warrants are exercisable any time after July 2,
2001 and before July 1, 2005. Concurrently with the issuance of the warrants by
us, our former CEO granted Riverdale options to purchase 1.0 million and 500,000
shares of common stock held by him, at purchase prices of $2.00 and $4.00 per
share, respectively. In a related transaction, to reduce the dilutive effect on
existing stockholders of the exercise of the warrants, our former CEO and
Ultimate granted options to us to acquire 3.0 million shares of common stock at
exercise prices of $2.00 and $9.00 per share. These options are exercisable if
Riverdale exercises the corresponding series of warrants issued by us. If
Riverdale exercises all of the warrants issued by us and we exercise all of the
options issued to us, we will issue a net of 1.0 million shares at $2.00 per
share. In the transaction, Riverdale agreed to lock-up their shares acquirable
upon exercise of the warrants and options for a period of one-year and our
former CEO and Ultimate agreed to lock-up the shares presently held by them for
the same one-year period, and not to sell them without consent of the other
party, subject to certain permissible resales to institutions and to certain
non-institutional purchasers who agree to lock-up their shares. Our former CEO
has reported sales of some of his shares of common stock since July 2, 2001. We
are not aware whether these sales were made pursuant to an exception to the
lock-up agreement or the waiver or consent of the other parties to the lock-up
agreement. We are also not aware whether the lock-up agreement remains in force
and in effect among the parties regarding future sales.
23
Riverdale has stated it does not intend to fund the credit facility. We have
been in discussions with Riverdale, but because of a number of changes in the
business since the signing of the commitment letter, including the sale of Car
Rental Direct and the sale of the Centerlinq assets, the Nasdaq inquiry and the
SEC investigation, we do not believe we will have the ability to borrow against
the credit facility
In June 2000, we issued a warrant to purchase 20 shares of the common stock of
our CENTERLINQ, Inc. subsidiary at an exercise price of $250,000 per share. The
subsidiary warrant vested immediately and was issued pursuant to a securities
purchase agreement as an incentive for Infinity Outdoor to maximize its joint
marketing efforts with us. At any time during the term of the subsidiary
warrant, if we have not completed a public offering under an effective
registration statement for the sale of shares of common stock of CENTERLINQ,
Inc. for at least $20,000,000, Infinity Outdoor has the option to tender the
subsidiary warrant in exchange for a warrant to purchase 967,740 shares of
GenesisIntermedia common stock at an exercise price of $5.17 per share. In July
2001, Infinity Outdoor tendered its subsidiary warrant for a warrant to purchase
967,740 shares of GenesisIntermedia common stock at $5.17 per share and
exercised this warrant resulting in net proceeds to us of $4,999,990.
We expect to receive cash proceeds from the sale of Centerlinq assets and other
company assets and the future sale of our office building. This will provide us
with needed cash for us to invest in our core media business. We plan to focus
our resources on our media business and to return it to profitability in the
near future at the same time we look for acquisitions that will complement our
core business.
However, there can be no assurance that we will be successful in commencing the
trading of our stock, resolving the class action lawsuits and SEC investigation
brought against us, and generating sufficient cash to continue our business.
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, our ability to sell the Centerlinq assets and other company assets,
the outcome of the Nasdaq inquiry, the SEC investigation and litigation against
us and current and former officers and directors, 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.
24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 31, 2001, a lawsuit claiming to be brought derivatively on our behalf
was filed by Joseph Touchstone in the Court of Chancery for the State of
Delaware in and for New Castle County against us, and certain individuals,
including Ramy El-Batrawi, Douglas E. Jacobson, George W. Heyworth, Michael R.
Fugler and Stephen A. Weber, all current or former senior executive officers and
directors of our company. The complaint alleges a breach of fiduciary duties for
insider trading and misappropriation of corporate information against those
defendants who sold our securities. This count alleges that the selling
defendants knew or had reason to know of a scheme to artificially inflate the
price of our shares, taking advantage of material non-public information to gain
profits in violation of their fiduciary duties to us. The complaint also alleges
against all individual defendants for breaching their duties of good faith and
loyalty. This count alleges that these individuals, who are current and former
officers and directors of our company, breached their duty of good faith and
loyalty to us by allegedly approving or acquiescing in a scheme to artificially
inflate the price of our common stock. We intend to vigorously defend ourselves
against the aforementioned suit. However, an adverse outcome in this litigation
could materially harm our company.
Following the announcement of the Nasdaq and SEC inquiries, several persons
claiming to be our shareholders commenced securities fraud class actions against
us and individuals, including current and former senior executive officers and
directors. On October 18, 2001, one such class action was filed in the United
States District Court for the Central District of California by David Osher, who
claims to be a shareholder of record and be acting on behalf of others similarly
situated, against us, Ramy El-Batrawi, Douglas E. Jacobson and Courtney Smith.
The first count of the complaint alleges violations under Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder by the making of false and
misleading statements and failing to disclose material facts necessary in order
to make the statements made, in light of the circumstances under which they were
made, not misleading. This count also alleges that we, our former Chief
Executive Officer and Chairman of the Board of Directors Ramy El-Batrawi, our
Chief Financial Officer Douglas E. Jacobson, and stock market analyst Courtney
Smith acted in a fraudulent scheme to artificially inflate the price of our
common stock. The second count alleges that both our company and the individual
defendants named above, which includes former senior executive officers and
directors, caused us to engage in wrongful conduct in violation of Section 20(a)
of the Exchange Act. We intend to vigorously defend against Mr. Osher's class
action claim. However, an adverse outcome in this litigation could materially
harm our company.
On October 19, 2001, another class action suit was filed in the United States
District Court for the Central District of California Western Division by
William Tierno, Jr., who claims to be a shareholder of record and acting on
behalf of others similarly situated, against us, Ramy El-Batrawi, Douglas E.
Jacobson and Courtney Smith. The first count of the complaint alleges violations
under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by
the making of false and misleading statements and failing to disclose material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. This count also
alleges that we, our former Chief Executive Officer and Chairman of the Board of
Directors Ramy El-Batrawi, our Chief Financial Officer Douglas E. Jacobson, and
stock market analyst Courtney Smith acted in a fraudulent scheme to artificially
inflate the price of our common stock. The second count alleges that both the
company and the individual defendants named above, which includes former senior
executive officers and directors, caused us to engage in wrongful conduct in
violation of Section 20(a) of the Exchange Act. We intend to vigorously defend
against Mr. Tierno's class action claim; however, an adverse outcome in this
litigation could materially harm our company.
25
On October 23, 2001, another such class action lawsuit was filed in the United
States District Court for the Central District of California by Jason Spiller,
who claims to be a shareholder of record and be acting on behalf of others
similarly situated, against our company, Ramy El-Batrawi and Douglas E.
Jacobson. The complaint alleges violations under Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder by the making of false and misleading
statements and failing to disclose material facts necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading. This count also alleges that we, our former Chief Executive Officer
and Chairman of the Board of Directors Ramy El-Batrawi, and our Chief Financial
Officer Douglas E. Jacobson acted in a fraudulent scheme to artificially inflate
the price of our common stock. In the second count Mr. Spiller's suit alleges
that both we and the individual defendants named above, which includes former
senior executive officers and directors, engaged in wrongful conduct in
violation of Section 20(a) of the Exchange Act. We intend to vigorously defend
against Mr. Spiller's class action claim; however, an adverse outcome in this
litigation could materially harm our company.
On October 25, 2001, another such class action was filed in the United States
District Court for the Central District of California by James H. Coltrain, Jr.,
who claims to be a shareholder of record and be acting on behalf of others
similarly situated, against us, Ramy El-Batrawi, Douglas E. Jacobson, Courtney
Smith, Orbitex Management, Inc., Orbitex Global, Courtney Smith & Company,
Ultimate Holdings, Ltd. and Adnan Khashoggi. The complaint alleges violations
under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by
the making of false and misleading statements and failing to disclose material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. This count also
alleges that we, our former Chief Executive Officer and Chairman of the Board of
Directors Ramy El-Batrawi, our Chief Financial Officer Douglas E. Jacobson,
stock market analyst Courtney Smith, Orbitex Management, Inc., Orbitex Global,
Courtney Smith & Company, Ultimate Holding, Inc. and Adnan Khashoggi acted in a
fraudulent scheme to artificially inflate the price of our common stock. In the
second count Mr. Coltrain's suit alleges that both our company and the
individual defendants named above, which includes former senior executive
officers and directors, engaged in wrongful conduct in violation of Section
20(a) of the Exchange Act. We intend to vigorously defend against Mr. Coltrain's
class action claim; however, an adverse outcome in this litigation could
materially harm our company.
On October 25, 2001, another such class action was filed in the United States
District Court for the Central District of California by Suri Fingerer, who
claims to be a shareholder of record and be acting on behalf of others similarly
situated, against us, Ramy El-Batrawi, Douglas E. Jacobson and Courtney Smith.
The first count of the complaint alleges violations under Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder by the making of false and
misleading statements and failing to disclose material facts necessary in order
to make the statements made, in light of the circumstances under which they were
made, not misleading. This count also alleges that we, our former Chief
Executive Officer and Chairman of the Board of Directors Ramy El-Batrawi, our
Chief Financial Officer Douglas E. Jacobson, and stock market analyst Courtney
Smith acted in a fraudulent scheme to artificially inflate the price of our
common stock. The second count alleges that both the company and the individual
defendants named above, which includes former senior executive officers and
directors, engaged in wrongful conduct in violation of Section 20(a) of the
Exchange Act. We intend to vigorously defend against Mr. Fingerer's class action
claim; however, an adverse outcome in this litigation could materially harm our
company.
26
We have not been served notice of additional lawsuits arising from the same
subject matter as the class action lawsuits discussed above, and to our
knowledge no such lawsuits exist, but it is possible other such lawsuits may
have been filed without our knowledge.
We cannot predict the ultimate outcome of the lawsuits and investigations
discussed above. Director and officer liability insurance against certain
liabilities, including liabilities under the securities laws, was in force at
the time the securities and derivative litigation was commenced. We have not
established any reserve for possible losses resulting from the claims asserted
in the securities and derivative litigation. We believe that our liability
insurance covers the claims asserted in the securities and derivative litigation
and that we may be able to resolve those claims within the limits of our
coverage. Because the insurers have denied coverage for these claims, we
recently commenced a lawsuit against them. We intend to vigorously pursue the
claim for our coverage rights. However, an adverse outcome in this litigation
could materially harm our company.
We are also involved from time to time in various claims and legal actions
incident to our operations, either as plaintiff or defendant. We vigorously
defend ourselves against all lawsuits filed by plaintiffs. Other than the
litigation described above we are not aware of any other litigation that we
believe would have a material impact on our financial position or our results of
operations.
Item 2. Changes in Securities and Use of Proceeds
In July 2001, the Company issued a warrant to Infinity Outdoor to purchase
967,740 shares of common stock at $5.17 per share. Infinity Outdoor exercised
this warrant resulting in net proceeds to the Company of $4,999,990. The sale of
the securities were exempt under the Securities Act of 1933, as amended, in
reliance on Section 4(2) or Regulation D promulgated thereunder as a transaction
by an issuer not involving a public offering.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(1) Current Report on Form 8-K dated June 29, 2001 filed with the
Securities and Exchange Commission on July 2, 2001.
(2) Current Report on Form 8-K dated June 29, 2001 filed with the
Securities and Exchange Commission on July 2, 2001.
(3) Current Report on Form 8-K/A dated June 29, 2001 filed with the
Securities and Exchange Commission on July 5, 2001.
(4) Current Report on Form 8-K dated August 30, 2001 filed with the
Securities and Exchange Commission on August 31, 2001.
(5) Current Report on Form 8-K dated October 8, 2001 filed with the
Securities and Exchange Commission on October 11, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENESISINTERMEDIA, INC.
By:/s/ Douglas E. Jacobson
---------------------------
Douglas E. Jacobson
Chief Financial and Principal
Accounting Officer
Date: November 19, 2001