SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSBA-2
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(For the Quarter ended September 30, 1998)
Commission File Number 1-12689
Genisys Reservation Systems, Inc. And Subsidiaries
_______________________
(Exact Name of registrant as specified in its charter)
New Jersey 22-2719541
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification no.)
2401 Morris Avenue, Union, New Jersey 07083
(Address of principal executive offices) (Zip Code)
(908) 810-8767
Issuer's Telephone Number including Area Code
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter periods 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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after
the distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of September 30, 1998: 5,655,594
shares of Common Stock
Transitional Small Business Disclosure Format (check one)
Yes X No
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GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
Development Stage Companies
CONSOLIDATED BALANCE SHEETS
September September December
30, 1998 30, 1998 31, 1997
--------------- --------------- ---------------
(Proforma) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $431,121 $606,121 $2,207,841
Accounts receivable 32,615 32,615 8,784
Prepaid expenses 5,029 12,448 5,127
---------------
Total Current Assets 468,765 651,184 2,221,752
--------------- --------------- ---------------
EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION 71,708 285,918 261,643
--------------- --------------- ---------------
INVESTMENT IN AND ADVANCES TO GEN02, INC. 962,390 - -
OTHER ASSETS:
Computer software costs, less accumulated
amortization 1,417,964 1,992,376 581,193
Debt issue costs, less accumulated amortization 12,521 12,521 26,609
Deposits and Other 56,555 56,555 61,669
Licenses and Intellectual Property, less
accumulated amortization 975,000 975,000 -
--------------- --------------- ---------------
2,462,040 3,036,452 669,471
=============== =============== ===============
$3,964,903 $3,973,554 $3,152,866
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $103,114 $103,114 $114,957
Accounts payable and accrued expenses 214,872 223,523 189,712
Accrued interest payable - related party 177,006 177,006 163,296
Accrued consulting fees - related party 3,000 3,000 3,000
--------------- --------------- ---------------
Total current liabilities 497,992 506,643 470,965
LONG-TERM DEBT:
Long-term debt, less current maturities 63,542 63,542 982,742
--------------- --------------- ---------------
Total Liabilities 561,534 570,185 1,453,707
--------------- --------------- ---------------
COMMITMENTS
STOCKHOLDERS EQUITY (DEFICIENCY):
Preferred Stock, $.0001 par value: 25,000,000 shares
authorized - - -
Series A preferred stock, 706,000 shares
authorized 381,177 issued and outstanding 38 38 -
Common Stock, $.0001 par value; 75,000,000 shares
authrized:;6,755,5944sharessandd4,365,5944 shares
issued and outstanding 676 676 436
Additional paid in capital 8,281,073 8,281,073 4,933,851
Deficit Accumulated During the Development Stage (4,878,418) (4,878,418) (3,235,128)
--------------- --------------- ---------------
Total Stockholders Equity 3,403,369 3,403,369 1,699,159
--------------- --------------- ---------------
$3,964,903 $3,973,554 $3,152,866
=============== =============== ===============
See Accompanying Notes to Financial Statements
2
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
DEVELOPMENT STAGE COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
DURING THE DEVELOPMENT STAGE
(Unaudited)
From Inception
Nine Months Nine Months Three Months Three Months March 7, 1994
Ended Ended Ended Ended Through
Sept. 30,1998 Sept. 30,1997 Sept. 30,1998 Sept. 30,1997 Sept. 30,1998
SERVICE REVENUE $ 52,002 $ 2,225 $ 22,128 $ 2,225 $77,865
EXPENSES:
Cost of Service 111,490 6,800 64,276 6,800 136,482
General and Administrative 1,205,173 927,670 421,330 454,432 3,881,071
Depreciation and Amortization 397,091 128,230 201,014 64,174 730,985
Interest Expense (Income), net (18,462) 52,648 (15,461) (2,102) 207,745
1,695,292 1,115,348 671,159 523,304 4,956,283
NET (LOSS) INCURRED DURING
THE DEVELOPMENT STAGE ($1,643,290) ($1,113,123) ($649,031) ($521,079) ($4,878,418)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,961,089 4,042,041 5,655,594 4,355,594 3,091,315
BASIC AND DILUTED LOSS PER
COMMON SHARE ($0.33) ($0.28) ($0.11) ($0.12) ($1.58)
See Accompanying Notes to Financial Statements
3
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
DEVELOPMENT STAGE COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY
(Unaudited)
Deficit
Accumulated
Additional During the
Common Stock Series A Preferred Stock Paid-in Development
Shares Par Value Shares Par Value Capital Stage Total
BALANCE - DECEMBER 31, 1997 4,355,594 $436 - - $4,933,851 ($3,235,128) $1,699,159
CONVERSION OF LONG-TERM
DEBT INTO SERIES A PREFERRED
STOCK AT $2.125 PER SHARE
IN MARCH 1998 - - 381,177 38 809,962 - 810,000
CONVERSION OF NOTES PAYABLE
INTO COMMON STOCK AT
$0.09375 PER SHARE IN MARCH 1998 400,000 40 - - 37,460 - 37,500
ISSUANCE OF COMMON STOCK
AT $1.25 PER SHARE
FOR ACQUISITION OF UNITED
LEISURE INTERAINTERACTIVE'S ASSETS
AS OF JUNE 30, 1998 2,000,000* 200 - - 2,499,800 - $2,500,000
NET LOSS - - - - - (1,643,290) ($1,643,290)
BALANCE AT SEPTEMBER 30, 1998 6,755,594 $676 381,177 $38 $8,281,073 ($4,878,418) $3,403,369
*2,000,000 SHARES ISSUED ARE SUBJECT TO SHAREHOLDER APPROVAL (NOTE 4).
See Accompanying Notes to Financial Statements
4
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
Development Stage Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period From
March 7, 1994
(Commencement of
Development Stage
Nine Months Ended Nine Months Ended Activities to
Sept. 30,1998 Sept. 30,1997 Sept. 30,1998
------------------ ------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (1,643,290) (1,113,123) (4,878,418)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amoritization 397,091 128,230 730,985
Contribution to capital of services rendered - - 49,600
Changes in operating assets and liabilities
Accounts receivable (23,831) 0 (32,615)
Prepaid expenses (7,321) (1,729) (12,448)
Deposits and other 4,934 - (58,703)
Accounts payable and accrued expenses 47,521 (256,069) 403,529
------------------ ------------------ -------------------
Net cash flows from operating acctivities (1,224,896) (1,242,691) (3,798,070)
------------------ ------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and software (293,281) (333,232) (1,611,207)
Acquisition of Prosoft, Inc. 0 (34,602) (34,602)
------------------ ------------------ -------------------
Net cash flows from investing activities (293,281) (367,834) (1,645,809)
------------------ ------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 9,652 70,000 14,652
Payments on long-term debt - (65,000) (925,840)
Proceeds from public offering of common stock
and warrants net of deferred offering costs 4,661,124 4,705,915
Conversion of convertible notes payable
to common stock - - 67,500
Conversion of long-term debt to Series A
Preferred Stock 810,000 - 810,000
Issuance of common stock upon exercise of option - 15,000 15,000
Loans and advances from related parties -(14,518) -
Proceeds from issuance of notes payable - - 955,000
Payments under computer equipment leases (93,195) (71,260) (156,271)
Proceeds from sale and lease-back - - 294,644
Proceeds from issuance of common stock - - 110,000
Contribution to capital - stockholder/officer -128,700 205,400
Proceeds from issuance of 10% promissory notes
and related warrants, less related costs (563,500) 517,500
Payments on 10% promissory notes and related
warrants - -(563,500)
-------------------
Net cash flows from financing activities (83,543) 4,160,546 6,050,000
------------------ ------------------ -------------------
NET CHANGE IN CASH AND EQUIVALENTS (1,601,720) 2,550,021 606,121
CASH AND EQUIVALENTS, BEGINNING OF YEAR 2,207,841 91,548 -
------------------ ------------------ -------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 606,121 $ 2,641,569 $ 606,121
------------------ ------------------ -------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 29,000 $ 65,699 $ 169,498
------------------ ------------------ -------------------
Net liabilities assumed in reverse acquisition $ $ - - $ 14,087
------------------ ------------------ -------------------
Conversion of related party debt to common stock $ $ - - $ 20,109
------------------ ------------------ -------------------
Conversion of long-term debt to Series A Preferred
Stock $ 847,500 $ - $ 847,500
------------------ ------------------ -------------------
Conversion of notes payable to common stock $ 37,500 $ 30,000 $ 67,500
------------------ ------------------ -------------------
Issuance of common stock and preferred stock
to acquire travel related assets $ 2,500,000 $ $-2,500,000
------------------ ------------------ -------------------
See Accompanying Notes to Financial Statements
5
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
DEVELOPMENT STAGE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 Basis of Presentation
The consolidated balance sheet at the end of the preceding
fiscal year has been derived from the audited consolidated balance sheet
contained in the Company's Form 10-KSB and is presented for comparative
purposes. All other financial statements are unaudited. In the opinion of
management, all adjustments which include only normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows of all periods presented have been made. The results of operations
for interim periods are not necessarily indicative of the operating results for
the full year.
Footnote disclosures normally included in financial statements
prepared in accordance with the generally accepted accounting principles have
been omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-KSB for the most recent fiscal year.
In accordance with AICPA Statement of Position 98-1, the
Company capitalizes the direct cost of materials, services and interest consumed
in the development of computer software. Such costs, as well as the cost of
acquired technology licenses and related assets, are being amortized over five
years, subject to periodic evaluation for impairment.
Note 2 Activities of the Company
Through June, 1998 the principal activity of the Company has
been the development of a computerized limousine reservation and payment system
for the business traveler. The Company's proprietary software enables a system
of limousine reservations to be completely computerized and operate without
human intervention, except for the initial inputting of travel information.
Although planned operation of this system has commenced, revenues to date have
not been significant; accordingly, the Company and its subsidiaries continue to
be in development stage.
Pursuant to an Asset Purchase Agreement dated as of June 30,
1998, NetCruise Interactive, Inc. ("NetCruise") (a wholly owned subsidiary of
the Company formed on July 21, 1998 for the purpose of operating an internet
travel agency) acquired a technology license and certain related assets from
United Leisure Interactive Inc. ("UIT") in consideration of 2,000,000 shares of
the Company's Common Stock and two warrants ("Warrants"), each entitling the
holder to purchase 800,000 shares of the Common Stock of the Company (the "UIT
Transaction"). One warrant is exercisable for 800,000 shares at $2.50 per share
and may be exercised between April 1, 2002 and June 30, 2002, but only if
NetCruise achieves profits equal to or exceeding $5,000,000 for the years 1999,
2000 and 2001. The other Warrant is exercisable for 800,000 shares at $6.00 per
share and may be exercised between April 1, 2002 and June 30, 2002, but only if
NetCruise achieves profits equal to or exceeding $10,000,000 for the years 1999,
2000 and 2001. No value has been placed on the warrants since the warrants are
each contingent upon future earnings.
As a result of the transaction, the Company acquired the
internet travel web site called " NetCruise" and a perpetual, world-wide
technology license for "Parallel Addressing Video Technology" for all travel
related applications, along with all of the related software, computer systems
and intellectual properties. No royalty payments are required under the
licensing agreement for the "Parallel Addressing Video
Technology" and the license is exclusive as it relates to the technology as
applied to the travel industry. UIT has retained the right to the technology for
all other uses outside of the travel industry. The intellectual property
acquired consists of a license for the "Parallel Addressing Video Technology"
which includes the NetCruise name, logo, trade-marks and service-marks. The
Company did not acquire the patent to the "Parallel Addressing Video
Technology." Also included as part of the intellectual property was an agreement
between UIT and Internet Travel Network (ITN), of Palo Alto, CA which UIT
transferred to the Company. This agreement provides for a "private label" site
on the ITN "booking engine". The agreement expires in April, 1999 and
automatically renews for successive one year periods unless either party gives
notice, no later than 30 days prior to the end of the period, of its intent not
to renew. The Company has renewed this agreement under the terms and conditions
of the original agreement. The ITN "booking engine" is essentially a world wide
web based graphical user interface to the airline owned Apollo computerized
reservation system. This technology allows a layperson with access to the
internet to access the databases and pricing systems used by travel agents to
research and procure air, car rental and hotel reservations. By "private
labeling" this functionality, the Company is able to offer its travel
consultants access to a leading travel system, while not having to expend the
Company's capital resources which would be required to create its own access.
The custom software acquired by the Company consists of a video player program
(called a ULI player) that permits the end user to view video files, a cruise
database, a CD-ROM video disc database containing video images of travel-related
information and miscellaneous commercially purchased software. The technological
feasibility of the custom software was established at the time of the
acquisition, as a working model had been completed at that time. The Company
formed NetCruise as a wholly owned subsidiary for the purpose of operating an
internet travel business featuring the technology obtained through this
acquisition.
The purchase of these assets has been recorded as of the date of purchase
at the total purchase price of $2,500,000, which represents the fair value of
the assets acquired. The purchase price allocated to the individual assets
acquired, based on the estimated fair value at the date of the
acquisition, is as follows: (i) $1,450,000 of computer software; (ii) $1,000,000
for the license to the "Parallel Addressing Video Technology"; (iii) $10,000 for
the agreement between ITN and UIT and (iv) $40,000 for computer equipment. The
purchase price consisted of 2,000,000 shares of the Company's Common Stock,
which at the time of the purchase was trading at approximately $2.50 per share
on The Nasdaq SmallCap Market. For accounting purposes the Company estimated the
fair value of the shares at $2,500,000 since the shares were restricted. No
goodwill resulted from this transaction, as no business was acquired.
Although the Company only has a limited number of individuals
who have subscribed to be independent travel consultants and therefore few
customers, the Company intends to launch, through television advertising, an
aggressive marketing campaign inviting the general public, along with existing
travel agents, to become NetCruise travel consultants . The goal of the
Company's marketing campaign is to encourage individuals to enroll as
independent travel consultants by paying an annual fee to the Company. Each new
independent travel consultant will receive a start-up kit consisting of a CD ROM
library of video destinations; a marketing kit which includes a guide to
marketing an at-home business, a training manual describing the travel industry,
a welcome letter containing a password for the web site and an outline of
NetCruise policies and procedures and full-service support from the Company's
live travel agents. The independent travel consultants will then be able to make
reservations either through the password protected section of the NetCruise web
site or via telephone conversations with travel agents who work directly for
NetCruise. Non-members who visit the non-password protected section of the
NetCruise web-site (the "Visitor's Section") shall have access to a portion of
the site which contains general information about the Company, describes the
independent travel consultant program and allows the public to request
information or enroll as an independent travel consultant.
The internet web-site is currently operational , although
management expects web-site development to continue through mid-1999.
Independent travel consultants, through the password protected
section of the site, can currently book car, air and hotel reservations directly
through the web-site, as well as research vacation packages and cruise
itineraries. At the present time the Company's independent travel consultants
are not able to book vacation and cruise packages in an automated fashion
through the web-site. In order to make these types of reservations, the
independent travel consultant is instructed to contact the Company's service
center, (operated through Sammy's Travel World, a wholly owned subsidiary of the
Company) via toll-free telephone, fax or e-mail, whereby a live NetCruise travel
agent will then make the cruise or vacation reservation. The Company intends to
continually enhance its technology to automate the booking process for cruise
and vacation reservations through its website. There can be no assurance that
the Company will to be able to achieve the necessary technological advancements.
To date, the Visitor's Section of the web-site is being used for demonstration
to potential travel consultants. The password protected section is only
accessible by company personnel and independent travel consultants using a
password. See Note 4.
The Company has budgeted approximately $198,000 to complete
the web-site. Additional costs of bringing the internet travel business
operational are expected to be approximately $1,144,000, which includes
producing a television video infomercial and purchasing media time. The Company
believes it will be able to finance such development substantially from proceeds
of a recent private placement, but there can be no assurance that such funds
will be sufficient. In the event the Company decides to purchase significant
amounts of media time for the television infomercial, it will need to raise
additional funds. No assurance can be made that the Company will be able to
raise such funds.
<PAGE>
In order to concentrate its resources and efforts on its
NetCruise internet travel business, in November, 1998 the Company agreed to sell
the assets of its computerized limousine reservation and payment system to Gen
O2, Inc., a company newly formed by a management group lead by Mark A. Kenny, a
former director and founder of the Company. The Company owns a minority interest
in the new company and will receive royalties on transactions processed by the
new company for a period of five years. See Note 6.
The Company is conducting a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and has developed an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 which could cause a system failure or
other computer errors, leading to a disruption in operations. No easy
technological "quick fix" has yet been developed for this problem. This Year
2000 problem creates risk for the Company from unforeseen problems in its own
computer systems and from third parties with whom the Company deals on financial
transactions. Such failures of the Company's and/or third parties computer
systems could have a material impact on the Company's ability to conduct its
business, and especially to process and account for the transfer of funds
electronically.
With the goal of making the Company Year 2000 compliant, the Company
has developed a four phase implementation plan as follows:
Inventory phase
Vendor contact phase
Reintegration phase
Testing phase
The Company has budgeted approximately $15,000 to implement this plan
and has assigned overall responsibility for the project to its Systems Manager.
All software currently being developed by the Company or through third party
contractors is being written to be Year 2000 compliant. The Company, with the
assistance of outside software contractors, is in the process of changing its
accounting system from non- compliant MAS-90 software to a compliant software
system. Final implementation of fully tested and operational Year 2000 compliant
systems is projected to be completed by the end of the second quarter of 1999.
The Company's banks and lenders have communicated that they will be Year 2000
compliant by the end of 1999. No other third party's Year 2000 compliance is
expected to have a material impact on the operations of the Company.
Note 3 Stockholders Equity
Preferred Stock - The Company's Certificate of Incorporation authorizes the
issuance of up to 25,000,000 shares of Preferred Stock. On March 10, 1998, the
Board of Directors designated 706,000 shares of Series A Preferred Stock which
are convertible, in whole or in part, into fully paid and nonassessable Common
Shares on a one-for-one basis at the option of the respective holders thereof.
Holders of Series A Preferred Stock are entitled to receive dividends on a pari
passu basis with the holders of the Company's Common Stock. The Company, at its
sole option, has the right to redeem all or, from time to time, any number of
the then outstanding shares of Series A Preferred Stock at a redemption price of
$2.125 per share plus a 10% per year increase in the redemption rate.
In March 1998, the holder of two Term Promissory Convertible
Notes in the principal amounts of $475,000 and $237,500 converted $400,000 of
the principal amount of the former note and $200,000 of the principal amount of
the latter note into 188,235 shares and 94,118 shares respectively of the Series
A Preferred Stock of the Company at a price of $2.125 per share.
In March 1998, the holder of four eighteen month Convertible
Promissory Notes aggregating $210,000, converted the total principal amount of
the four notes ($210,000) into 98,824 shares of the Series A Preferred Stock of
the Company at a price of $2.125 per share.
Note 4 Asset Acquisition
Pursuant to an Asset Purchase Agreement dated as of June 30,
1998, NetCruise Interactive, Inc. (" NetCruise") (a wholly owned subsidiary of
the Company formed on July 21, 1998 for the purpose of operating an internet
travel agency) acquired a technology license and certain related assets from UIT
in consideration of 2,000,000 shares of the Company's Common Stock and two
warrants ("Warrants"), each entitling the holder to purchase 800,000 shares of
the Common Stock of the Company (the "UIT Transaction"). One warrant is
exercisable for 800,000 shares at $2.50 per share and may be exercised between
April 1, 2002 and June 30, 2002, but only if NetCruise achieves profits equal to
or exceeding $5,000,000 for the years 1999, 2000 and 2001. The other Warrant is
exercisable for 800,000 shares at $6.00 per share and may be exercised between
April 1, 2002 and June 30, 2002, but only if NetCruise achieves profits equal to
or exceeding $10,000,000 for the years 1999, 2000 and 2001. No value has been
placed on the warrants since the warrants are each contingent upon future
earnings.
As a result of the transaction, the Company acquired the
internet travel web site called " NetCruise" and a perpetual, world-wide
technology license for "Parallel Addressing Video Technology" for all travel
related applications, along with all of the related software, computer systems
and intellectual properties. No royalty payments are required under the
licensing agreement for the "Parallel Addressing Video Technology" and the
license is exclusive as it relates to the technology as applied to the travel
industry. UIT has retained the right to the technology for all other uses
outside of the travel industry. The intellectual property acquired consists of a
license for the "Parallel Addressing Video Technology" which includes the
NetCruise name, logo, trade-marks and service-marks. The Company did not acquire
the patent to the "Parallel Addressing Video Technology." Also included as part
of the intellectual property was an agreement between UIT and Internet Travel
Network (ITN), of Palo Alto, CA which UIT transferred to the Company. This
agreement provides for a "private label" site on the ITN "booking engine". The
agreement expires in April, 1999 and automatically renews for successive one
year periods unless either party gives notice, no later than 30 days prior to
the end of the period, of its intent not to renew. The Company has renewed this
agreement under the terms and conditions of the original agreement. The ITN
"booking engine" is essentially a world wide web based graphical user interface
to the airline owned Apollo computerized reservation system. This technology
allows a layperson with access to the internet to access the databases and
pricing systems used by travel agents to research and procure air, car rental
and hotel reservations. By "private labeling" this functionality, the Company is
able to offer its travel consultants access to a leading travel system, while
not having to expend the Company's capital resources which would be required to
create its own access. The custom software acquired by the Company consists of a
video player program (called a ULI player) that permits the end user to view
video files, a cruise database, a CD-ROM video disc database containing video
images of travel-related information and miscellaneous commercially purchased
software. The technological feasibility of the custom software was established
at the time of the acquisition, as a working model had been completed at that
time. The Company formed NetCruise as a wholly owned subsidiary for the purpose
of operating an internet travel business featuring the technology obtained
through this acquisition.
Although the Company only has a limited number of individuals
who have subscribed to be independent travel consultants and therefore a limited
number of customers, the Company intends to launch, through television
advertising, an aggressive marketing campaign inviting the general public, along
with existing travel agents, to become NetCruise travel consultants . The goal
of the Company's marketing campaign is to encourage individuals to enroll as
independent travel consultants by paying an annual fee to the Company. Each new
independent travel consultant will receive a start-up kit consisting of a CD ROM
library of video destinations; a marketing kit which includes a guide to
marketing an at-home business, a training manual describing the travel industry,
a welcome letter containing a password for the web site and an outline of
NetCruise policies and procedures and full-service support from the Company's
live travel agents. The independent travel consultants will then be able to make
reservations either through the password protected section of the NetCruise web
site or via telephone conversations with travel agents who work directly for
NetCruise. Non-members who visit the non-password protected section of the
NetCruise web-site (the "Visitor's Section") shall have access to a portion of
the site which contains general information about the Company, describes the
independent travel consultant program and allows the public to request
information or enroll as an independent travel consultant.
The internet web-site is currently operational, although
management expects web-site development to continue through mid-1999.
Independent travel consultants, through the password protected
section of the site, can currently book car, air and hotel reservations directly
through the web-site, as well as research vacation packages and cruise
itineraries. At the present time the Company's independent travel consultants
are not able to book vacation and cruise packages in an automated fashion
through the web-site. In order to make these types of reservations, the
independent travel consultant is instructed to contact the Company's service
center, (operated through Sammy's Travel World, a wholly owned subsidiary of the
Company) via toll-free telephone, fax or e-mail, whereby a live NetCruise travel
agent will then make the cruise or vacation reservation. The Company intends to
continually enhance its technology to automate the booking process for cruise
and vacation reservations through its web-site. There can be no assurance,
though, that the Company will be able to achieve the technological advancements
necessary to automate the booking of cruise and vacation reservations. To date,
the Visitor's Section of the web-site is being used for demonstration to
potential travel consultants. The password protected section is only accessible
by company personnel and independent travel consultants using a password.
The purchase of these assets has been recorded as of the date of purchase
at the total purchase price of $2,500,000, which represents the fair value of
the assets acquired. The purchase price allocated to the individual assets
acquired, based on the estimated fair value at the date of the
acquisition, is as follows: (i) $1,450,000 of computer software; (ii) $1,000,000
for the license to the "Parallel Addressing Video Technology"; (iii) $10,000 for
the agreement between ITN and UIT and (iv) $40,000 for computer equipment. The
purchase price consisted of 2,000,000 shares of the Company's Common Stock,
which at the time of the purchase was trading at approximately $2.50 per share
on The Nasdaq SmallCap Market. For accounting purposes the Company estimated the
fair value of the shares at $2,500,000 since the shares were restricted. No
goodwill resulted from this transaction, as no business was acquired.
The budgeted cost of the internet travel business becoming operational is
expected to be approximately $1,342,000. Of such amount, approximately
$198,000 was allocated to complete the development of the web site. The
remainder will be used to produce a television video infomercial and
purchase media time. The Company believes it will be able to finance such
development substantially from proceeds of a recent private placement in
the amount of $1,500,000, but there can be no assurance that such funds
will be sufficient. In the event the Company decides to purchase
significant amounts of media time for the television infomercial, it will
need to raise additional funds. No assurance can be made that the Company
will be able to raise such funds.
Harry Shuster has been appointed Chairman and Brian Shuster
the President of NetCruise. Pursuant to the acquisition agreement, Mr. Brian
Shuster will receive $5,000 per month for his services as a consultant to the
Company. In addition, Messrs. Harry Shuster and Brian Shuster have been serving
as directors of the Company since the transaction closed and both have been
nominated for election as directors of the Company. Brian Shuster has been
issued two warrants to purchase restricted common shares of the Company,
exercisable between April 2, 2002 and June 30, 2002, if NetCruise achieves
certain profit levels, as defined in the warrants. One warrant is exercisable
for 200,000 shares at $2.50 per share and the other warrant is exercisable for
200,000 shares at $6.00 per share. The Company's wholly owned subsidiary,
NetCruise Interactive, has assumed UIT's lease of approximately 1,617 square
feet (including tenant's pro rata share of common area) at 1990 Westwood Blvd.,
Penthouse, Los Angeles, CA 90025. The term of this lease is for 5 years
commencing on March 1, 1996 and ending on February 28, 2001. During the first
through 2nd year of the term of the lease, the rent is $2,587 per month and
during the 3rd through 5th year of the term of the lease the rent is $2,846 per
month.
Note 5 Contingencies
On April 17, 1997, a former officer of the Company filed an
action in the United States District Court, District of New jersey, against the
Company, Travel Link, the officers of both companies and various related and
unrelated parties seeking, among other things, a declaratory judgment that the
former officer is the owner of 333,216 shares of Common Stock of the Company
which had been issued to him at the inception of Travel Link for services he was
to have provided and for unspecified compensatory and punitive damages. The
Company believes that the plaintiff's claims are without merit and intends to
vigorously defend the action and to assert numerous defenses and counterclaims
in its answer.
On December 23, 1997, an individual filed an action in the Superior
Court of New Jersey against the Company and the former President of the Company,
alleging that the former President of the Company induced such person to leave
her place of employment to assume employment with the Company. The claim seeks
monetary damages based upon an oral promise of employment allegedly made by the
same officer of the Company. The Company believes that the plaintiff's claim is
without merit and intends to vigorously defend the action and to assert numerous
defenses in its answer. The same officer has agreed to hold the Company harmless
and indemnify the Company from any and all claims. Management believes that
there will be no material effects on the Company as a result of this action.
Note 6 Subsequent Events
At the beginning of the third quarter 1998, Management of the
Company set revenue objectives for the limousine reservation business and made
the decision to review the operation at the end of the third quarter to
determine the best approach to maximize utilization of the Company's resources.
The limousine reservation business did not meet its revenue objectives and in
early September 1998, the Company decided to seek a buyer or joint venture
partner for its limousine reservation business.
On November 6, 1998 the Company entered into an Acquisition
Agreement (the "Sales Agreement") by and between the Company and Corporate
Travel Link, Inc. ("Travel Link"), a wholly owned subsidiary of the Company (the
sellers in the transaction) and TranspoNet (a non-affiliated company), Mark A.
Kenny, Paul Murray and Gen 02, Inc. ("Purchaser"), a newly organized corporation
formed by Mark A. Kenny, a former director and founder of the Company. This sale
will allow the Company to concentrate its resources and efforts on the continued
build-up of its internet travel business.
Under the terms of the Sale Agreement, the sellers sold and
transferred certain contractual rights and obligations of the Company, all of
the assets of Travel Link which are utilized in connection with the ownership,
operation and marketing of Genisys Reservation System and its entire ownership
interest in ProSoft to the purchaser in the transaction, constituting
approximately 20% of the total assets of the Company. ProSoft is an 80% owned
subsidiary of the Company which was acquired by the Company in June, 1997.
ProSoft is a software development company which developed the software for the
Company's computerized limousine reservation and payment system. Paul Murray, a
former employee of the Company and President and Shareholder of ProSoft, is also
a shareholder of Gen O2, Inc.
The Company sold these assets, which had a book value of
$744,122 at November 6, 1998, net of $83,000 of indebtedness assumed by Gen O2,
Inc. for (i) 2,450 shares of Series A Convertible Preferred Stock of Gen O2,
Inc., constituting a 32.66% interest in Gen O2, Inc.; and (ii) certain
contingent payments payable until December 10, 2003, totaling $1,080,000 if all
payments to the Company are realized, however, since there are no minimum
contingent payments, it is possible that the Company will receive no significant
contingent payments from GEN 02, Inc. The terms are as follows:
a. For each completed limousine transaction through the current system
from corporate users, a payment of $0.20 per transaction with a
$100,000 maximum payment per year. b. For each completed limousine
transaction through the Almost Real Time System (the "ART System")
which was under development by the sellers prior to the execution of
the sale
agreement and is to be completed by GEN 02, Inc. that will be
directed toward leisure customers, a payment of $0.20 per
transaction with a $100,000 maximum payment in the first year
and a $0.30 payment per transaction with a $120,000 maximum
payment per year thereafter.
c. If the system and the ART System are merged at any time in the future,
the sellers shall receive a payment of $0.25 per completed transaction with
a $200,000 maximum payment in the first year and a $220,000 maximum payment
per year thereafter.
d. If the payments are not reached in a particular year, the payments
defined in letters a-c above will have a carry-over to the following
year.
e. In no event shall any payments defined in letters a-c above be
due to the sellers for transactions completed after December 10, 2003.
f. For the transfer of the assets by the sellers and the assumption of
certain liabilities of the sellers by the purchaser as described above
along with the agreement by the sellers to
provide the purchaser with a series of loans, the purchaser
granted an equity interest to the sellers in GEN O2, Inc.
equal to 32.66% of the equity of GEN O2, Inc. The loans
provided by the sellers will include a ninety day secured
bridge loan in the amount of $40,000 secured by 22,857 shares
of Common Stock of the Company owned by Mr. Kenny, a secured
loan of $135,000 payable commencing in the second year and
secured by 77,143 shares of Common Stock of the Company owned
by Mr. Kenny. Mr. Kenny has also pledged 23,428 shares of the
Company's Common Stock owned by him to secure the return of a
security deposit to the Company and 68,000 shares of the
Company's Common Stock to secure minimum payments which are
required to be made by the Company under certain contracts
which were transferred to the purchaser in connection with the
sale.
g. A second 32.66% shareholder of GEN O2, Inc., TranspoNet has
committed to provide funding for the purchaser of up to $240,000 in
the form of a series of loans. TranspoNet has a right to convert the
unpaid principal of the loans at any time into a maximum number of
shares of common stock of the purchaser not to exceed an additional 6%
equity interest in the purchaser.
This transaction is being reported as an exchange of assets
for a non-controlling interest in a new company; accordingly for financial
reporting purposes it is being treated as a change from being consolidated to
being reported on the equity method requiring restatement of prior years
statements of operations. No gain or loss was recognized since the investment is
in an equity method investment in a non-public entity. The accompanying proforma
balance sheet at September 30, 1998 assumes that the exchange of the Company's
assets in exchange for common stock of GEN O2, Inc. had occurred on that date,
and reflects an anticipated $175,000 loan by the Company to GEN O2, Inc. The
effects on the historical consolidated statement of operations would be to
reclassify all service revenue and cost of service, as well as a significant
portion of general and administrative expenses and depreciation and amortization
to a separate line item, as the Company will report GEN O2, Inc. on the equity
basis. There would be no impact on net income, as the Company will absorb all
losses to the extent of assets transferred since the only other capitalization
of GEN O2, Inc. was $50.00. (See proforma Statement of Operations elsewhere
herein.)
The Series A Preferred Stock issued to the Company and TranspoNet in
accordance with the transaction are part of a class of preferred stock
of GEN O2, Inc. designated as "Series A Preferred Convertible Stock"
and the number of shares of preferred stock constituting such class is
4,900. The shares of Series A Preferred Stock issued to the Company
together with the shares of Series A Preferred Stock issued to
TranspoNet constitute all of the authorized shares of the Series A
Preferred Stock of GEN O2, Inc. So long as any share of Series A
Preferred Stock remains outstanding, GEN O2, Inc. shall not authorize
the issuance or issue any additional shares of Series A Preferred
Stock or any shares of any series or class of stock ranking senior to,
or on a parity with, the Series A Preferred Stock as to rights upon
liquidation, dissolution or winding up of GEN O2, Inc. without the
prior written consent of at least a majority of the holders of the
Series A Preferred Stock.
The par value of the Series A Preferred Stock is $0.0001 per
share and no dividends shall be declared or paid on the Series A Preferred
Stock. In the event of a voluntary or involuntary liquidation, dissolution or
winding up of GEN O2, Inc., the holders of the Series A Preferred Stock shall be
entitled to receive out of the assets of GEN O2, Inc. available for distribution
to stockholders, before any distribution of assets is made to the holders of any
other series or class of stock of GEN O2, Inc., a liquidating preferential
distribution in an amount equal to $400.00 per share of Series A Preferred
Stock. The holders of the Series A Preferred Stock shall be entitled to vote on
all matters submitted to a vote of the shareholders of GEN O2, Inc. and shall be
entitled to one vote for each share of Series A Preferred Stock. The holders of
the Series A Preferred Stock shall not have cumulative voting rights. At any
time and from time to time, upon notice to GEN O2, Inc., the holders of the
Series A Preferred Stock shall be entitled to convert each share of Series A
Preferred Stock into one fully paid and non-assessable share of common stock of
GEN O2, Inc. subject to adjustments for any stock splits, stock dividends,
reverse stock splits or recapitalization.
Upon conversion of the Series A Preferred Stock into common
stock of GEN O2, Inc., the Company and TranspoNet will each own 2,450 shares or
32.66% of the issued and outstanding common stock of GEN O2, Inc. It is
anticipated that the Purchaser will issue an additional 2,500 shares of common
stock in the near future, thereby diluting the ownership interest of the Company
and TranspoNet in GEN O2, Inc. to 24.5%. The Company's influence in GEN O2, Inc.
is limited to the right to elect one member of a five (5) member Board of
Directors.
The primary capitalization of GEN 02, Inc. is being provided by the
loans from the Company and TranspoNet. In addition, the sole asset of
GEN 02, Inc. is the limousine reservation business. As a result, the
Company will absorb all losses to the extent of the assets
transferred. Since there are no minimum contingent payments, it is
possible that the Company will receive no significant contingent
payments from GEN O2, Inc.
On November 5 , 1998, in order to augment the Company's entry
into the internet travel business, the Company entered into an Asset Purchase
Agreement with Sterling AKG Corp. d/b/a Sterling Travel ("Sterling") , in which
the Company purchased all the assets relating to Sterling's network of
independent travel consultants ("Sterling Travel Consultants") for a total
purchase price of 25,000 shares of the Company's Common Stock which, for
accounting purposes, is being valued at $1.50 per share for an aggregate of
$37,500. An additional 17,500 shares ("Escrow Shares") will be held in escrow by
counsel to the Company. If the Company does not achieve $3,000,000 of gross
sales from the sale of travel services, including renewal fees, from the
Sterling Travel Consultants over the initial twelve month period beginning on
November 1, 1998 and ending on October 31, 1999, the Escrow Shares shall
immediately be returned to the Company. If the Company achieves $3,000,000 of
gross sales from Sterling Travel Consultants over the initial twelve month
period as described herein, the Escrow Shares will be released by the Company.
Included in the assets purchased by the Company was a list of Sterling
Travel Consultants (both active and inactive) that had done or were doing
business with Sterling. Also included in the assets purchased were contracts,
files, correspondence, earning records, a data base of former and current
customers of Sterling estimated at approximately 20,000 entries, property and
equipment, including desks, chairs, fax and copy machines, filing cabinets,
computers and miscellaneous office supplies. The data base of former and current
customers also included the Sterling Travel Consultants, as they were considered
customers, not employees of Sterling and the names of travel agents who had done
business with Sterling as Sterling Travel Consultants. In addition, included
were agreements with such Sterling Travel Consultants setting forth the
commissions they could earn and operational matters relating to their position
as an independent travel consultant.
The Company's current independent travel consultants are all
former Sterling Travel Consultants whose contracts were assigned to the Company
from Sterling as part of the acquisition and who paid their subscription fee to
Sterling. In the event the independent travel consultants (formerly the Sterling
Travel Consultants) desire to renew their contracts, a renewal subscription fee
will be paid to the Company.
6
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
The following statements are based upon the historical statements of operations
appearing elsewhere herein and in the Company's Form 10-KSB for the year ended
December 31, 1997 to show the effect on the Company's statement of operations as
if the sale of the limousine reservation business occurred as of the beginning
of the periods indicated (reference should be made to Note 6 appearing elsewhere
herein). These statements should be read in conjunction with the Company's
financial statements and notes thereto appearing, or referred to, elsewhere
herein.
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
-------------------------------------------
Historical Reclassifications Pro Forma Historical Reclassifications Pro Forma
(Note A) (Note A)
SERVICE REVENUE $ 52,002 $ (52,002) $ - $ 25,863 $ (25,863) $ -
------------ ----------- --------------- ------------ ------------- ---------
EXPENSES:
Cost of service 111,490 (111,490) - 24,992 (24,992) -
General and administrative 1,205,173 (607,285) 597,888 1,318,203 (736,858) 581,345
Depreciation and amortization 397,091 (287,589) 109,502 217,386 (195,700) 21,686
Interest expense (income), net (18,462) - (18,462) 55,407 - 55,407
------- ----- ------- ------ ----- ------
1,695,292 (1,006,364) 688,928 1,615,988 (957,550) 658,438
--------- ----------- ------- --------- --------- -------
LOSS BEFORE EQUITY IN GEN O2, INC.
(1,643,290) (954,362) (688,928) (1,590,125) (931,687) (658,438)
EQUITY IN LOSS OF GEN O2, INC. - 954,362 (954,362) - 931,687 (931,687)
------ ------- -------- ----- ------- --------
NET LOSS INCURRED DURING THE DEVELOPMENT STAGE
$(1,643,290) $ - $(1,643,290) $(1,590,125) $ - $(1,590,125)
=========== ================== =========== =========== ============== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
4,961,089 4,961,089 4,121,000 4,121,000
=========== =========== =========== ==========
BASIC AND DILUTED LOSS PER COMMON SHARE
$(.33) $(.33) $(.39) $(.39)
===== ===== ===== =====
</TABLE>
Note A - The proforma statements reflect the reclassification of
balances applicable to the operations of the limousine
reservation business and ProSoft to reflect the change from
majority ownership to minority ownership. There will be a change
from consolidation to equity basis reporting. There will be no
impact on net income, as the Company will absorb all losses to
the extent of the carrying amount of the assets transferred since
the only other capital being contributed to GEN O2, Inc. is $50.
The proforma amounts reflect the Company's corporate expenses
(officers' and office compensation, professional fees, rent and
similar costs) and, since June 30, 1998, the operations of its
Internet travel business. Such general and administrative
expenses were incurred during the periods indicated and relate to
all of its business activities. Common expenses have been
allocated to the limousine reservation and ProSoft business on an
incremental basis and all other ongoing corporate expenses are
reflected in proforma amounts. In the opinion of management, this
allocation approximates costs which would have been incurred on a
stand alone basis. However, proforma operating results are not
necessarily indicative of results which would have occurred had
the Company's operations been conducted as a separate and
independent company.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Through September 30, 1998, the principal activity of
the Company has been the development of a computerized limousine
reservation and payment system for the business traveler.
Although planned operation of this system commenced in August
1997, revenues to date have not been significant; accordingly,
the Company and its subsidiaries continue to be in the
development stage. The Company has been unprofitable since
inception and expects to incur additional operational losses. As
reflected in the accompanying financial statements, the Company
has incurred losses totaling $4,878,418 since inception and at
September 30, 1998, had working capital of $144,541.
Revenues for the three and nine month periods ended
September 30, 1998, for the limousine reservation business were
$22,128 and $52,002, as compared to $2,225 and $2,225 for the
1997 periods. The corresponding cost of service for the three
and nine month periods ending September 30, 1998 were $64,276
and $111,490 as compared to $6,800 and $6,800 for the 1997
periods. To date the Company has not yet commenced generating
revenues from its internet travel business, however, as of
November 1998, the Company has begun to generate revenues from
shared commissions earned by the network of Sterling Travel
Consultants recently acquired.
General and administrative expenses were $1,205,173
for the nine months ended September 30, 1998, as compared to
$927,670 during the nine months ended September 30, 1997. Cost
increases during the 1998 period consist of payroll and payroll
related costs ($175,000), professional fees ($57,200), travel
costs ($5,600), insurance costs ($8,200), marketing costs
($28,300) and other administrative costs ($72,100). Consulting
costs decreased $68,900 during the 1998 period. The increase of
approximately $175,000 in payroll cost for the nine months ended
September 30, 1998 was due in large part to the fact that the
three highest paid employees of the Company, Thomas Gregory and
Paul Murray, President and Vice President respectively of
Prosoft and Lawrence E. Burk the Company's President were on the
payroll for the full nine months of the 1998 period, but were
only on the payroll for less than four months of the 1997
period. The $28,300 increase in marketing activities is
primarily due to sales and marketing costs incurred by the
limousine reservation business in an attempt to meet its revenue
objectives.
General and administrative expenses were $421,330 for
the three months ended September 30,1998, as compared to
$454,432 during the three months ended September 30, 1997. Cost
increases during the 1998 period consist of marketing costs
($3,600) and other administrative costs ($25,700). Cost
decreases during the 1998 period consist of payroll and payroll
related costs ($16,200), consulting fees ($10,000), professional
fees ($27,000), travel costs ($8,700) and insurance costs
($500).
On November 6, 1998 the Company entered into an
Acquisition Agreement (the "Sales Agreement") by and between the
Company and Corporate Travel Link, Inc. ("Travel Link"), a
wholly owned subsidiary of the Company (the sellers in the
transaction) and TranspoNet (a non-affiliated company), Mark A.
Kenny, Paul Murray and GEN 02, Inc. (the purchaser in the
transaction), a newly organized corporation formed by Mark A.
Kenny, a former director and founder of the Company. This sale
will allow the Company to concentrate
its resources and efforts on the continued build-up of its
internet travel business. Under the terms of the Sale Agreement,
the sellers sold and transferred certain contractual rights and
obligations of the Company, all of the assets of Travel Link
which are utilized in connection with the ownership, operation
and marketing of Genisys Reservation System and its entire
ownership interest in ProSoft to the purchaser in the
transaction, constituting approximately 20% of the total assets
of the Company. ProSoft is an 80% owned subsidiary of the
Company which was acquired by the Company in June, 1997. ProSoft
is a software development company which developed the software
for the Company's computerized limousine reservation and payment
system. Paul Murray, a former employee of the Company and
President and Shareholder of ProSoft, is also a shareholder of
GEN O2, Inc.
The Company sold these assets, which had a book value
of $744,122 at November 6, 1998, net of $83,000 of indebtedness
assumed by GEN O2, Inc. for (i) 2,450 shares of Series A
Convertible Preferred Stock of GEN O2, Inc., constituting a
32.66% interest in GEN O2, Inc.; and (ii) certain contingent
payments, totaling $1,080,000 if all payments payable until
December 10, 2003 to the Company are realized, however, since
there are no minimum contingent payments, it is possible that
the Company will not receive significant contingent payments
from GEN 02, Inc. The terms are as follows:
a. For each completed limousine transaction through the current
system from corporate users, a payment of $0.20 per transaction
with a $100,000 maximum payment per year.
b. For each completed limousine transaction through the
Almost Real Time System (the "ART System") which was
under development by the sellers prior to the
execution of the sale agreement and is to be
completed by GEN 02, Inc. that will be directed
toward leisure customers, a payment of $0.20 per
transaction with a $100,000 maximum payment in the
first year and a $0.30 payment per transaction with a
$120,000 maximum payment per year thereafter.
c. If the system and the ART System are merged at any time in the future,
the sellers shall receive a payment of $0.25 per completed transaction with a
$200,000 maximum payment in the first year and a $220,000 maximum payment per
year thereafter.
d. If the payments are not reached in a particular year, the
payments defined in letters a-c above will have a carry-over
to the following year. e. In no event shall any payments
defined in letters a-c above be due to the sellers for
transactions completed after December 10, 2003. f. For the
transfer of the assets by the sellers and the assumption of
certain liabilities of the sellers by the purchaser as
described above along with the agreement by the
sellers to provide the purchaser with a series of
loans, the purchaser granted an equity interest to
the sellers in GEN O2, Inc. equal to 32.66% of the
equity of GEN O2, Inc. The loans provided by the
sellers will include a ninety day secured bridge loan
in the amount of $40,000 secured by 22,857 shares of
Common Stock of the Company owned by Mr. Kenny, a
secured loan of $135,000 payable commencing in the
second year and secured by 77,143 shares of Common
Stock of the Company owned by Mr. Kenny. Mr. Kenny
has also pledged 23,428 shares of the Company's
Common Stock owned by him to secure the return of a
security deposit to the Company and 68,000 shares of
the Company's Common Stock to secure minimum payments
which are required to be made by the Company under
certain contracts which were transferred to the
purchaser in connection with the sale.
g. A second 32.66% shareholder of GEN O2, Inc., TranspoNet has
committed to provide funding for the purchaser of up to $240,000
in the form of a series of loans.
TranspoNet has a right to convert the unpaid principal of the
loans at any time into a maximum number of shares of common stock
of the purchaser not to exceed an additional 6% equity interest
in the purchaser. The Series A Preferred Stock issued to the
Company and TranspoNet in accordance with the transaction are
part of a class of preferred stock of GEN O2, Inc. designated as
"Series A Preferred Convertible Stock" and the number of shares
of preferred stock constituting such class is 4,900. The shares
of Series A Preferred Stock issued to the Company together with
the shares of Series A Preferred Stock issued to TranspoNet
constitute all of the authorized shares of the Series A Preferred
Stock of GEN O2, Inc. So long as any share of Series A Preferred
Stock remains outstanding, GEN O2, Inc. shall not authorize the
issuance or issue any additional shares of Series A Preferred
Stock or any shares of any series or class of stock ranking
senior to, or on a parity with, the Series A Preferred Stock as
to rights upon liquidation, dissolution or winding up of GEN O2,
Inc. without the prior written consent of at least a majority of
the holders of the Series A Preferred Stock.
The par value of the Series A Preferred Stock is
$0.0001 per share and no dividends shall be declared or paid on
the Series A Preferred Stock. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of GEN O2,
Inc., the holders of the Series A Preferred Stock shall be
entitled to receive out of the assets of GEN O2, Inc. available
for distribution to stockholders, before any distribution of
assets is made to the holders of any other series or class of
stock of GEN O2, Inc., a liquidating preferential distribution
in an amount equal to $400.00 per share of Series A Preferred
Stock. The holders of the Series A Preferred Stock shall be
entitled to vote on all matters submitted to a vote of the
shareholders of GEN O2, Inc. and shall be entitled to one vote
for each share of Series A Preferred Stock. The holders of the
Series A Preferred Stock shall not have cumulative voting
rights. At any time and from time to time, upon notice to GEN
O2, Inc., the holders of the Series A Preferred Stock shall be
entitled to convert each share of Series A Preferred Stock into
one fully paid and non-assessable share of common stock of GEN
O2, Inc. subject to adjustments for any stock splits, stock
dividends, reverse stock splits or recapitalization.
Upon conversion of the Series A Preferred Stock into
common stock of GEN O2 , Inc. the Company and TranspoNet will
each own 2,450 shares or 32.66% of the issued and outstanding
common stock of GEN O2, Inc. It is anticipated that the
Purchaser will issue an additional 2,500 shares of common stock
in the near future, thereby diluting the ownership interest of
the Company and TranspoNet in GEN O2, Inc. to 24.5%. The
Company's influence in GEN O2, Inc. is limited to the right to
elect one member of a five (5) member Board of Directors.
Although the Company only has a limited number of
individuals who have subscribed to be independent travel
consultants and therefore a limited number of customers, the
Company intends to launch, through television advertising, an
aggressive marketing campaign inviting the general public, along
with existing travel agents, to become NetCruise travel
consultants . The goal of the Company's marketing campaign is to
encourage individuals to enroll as independent travel
consultants by paying an annual fee to the Company. Each new
independent travel consultant will receive a start-up kit
consisting of a CD ROM library of video destinations; a
marketing kit which includes a guide to marketing an at-home
business, a training manual describing the travel industry, a
welcome letter containing a password for the web site and an
outline of NetCruise policies and procedures and full-service
support from the Company's live travel agents. The independent
travel consultants will then be able to make reservations either
through the password protected section of the NetCruise web site
or via telephone conversations with travel agents who work
directly for NetCruise. Non-members who visit the non-password
protected section of the NetCruise web-site (the "Visitor's
Section") shall have access to a portion of the site which
contains general information about the Company, describes the
independent travel consultant program and allows the public to
request information or enroll as an independent travel
consultant.
The internet web-site is currently operational ,
although management expects web- site development to continue
through mid-1999. Independent travel consultants, through the
password protected section of the site, can currently book car,
air and hotel reservations
directly through the web-site, as well as research vacation
packages and cruise itineraries. At the present time the
Company's independent travel consultants are not able to book
vacation and cruise packages in an automated fashion through the
web-site. In order to make these types of reservations, the
independent travel consultant is instructed to contact the
Company's service center, (operated through Sammy's Travel
World, a wholly owned subsidiary of the Company) via toll-free
telephone, fax or e-mail, whereby a live NetCruise travel agent
will then make the cruise or vacation reservation. The Company
intends to continually enhance its technology to automate the
booking process for cruise and vacation reservations through its
web-site. There can be no assurance, though, that the Company
will be able to achieve the technological advancements necessary
to automate the booking of cruise and vacation reservations. To
date, the Visitor's Section of the web-site is being used for
demonstration to potential travel consultants. The password
protected section is only accessible by company personnel and
independent travel consultants using a password. See Note 4.
Liquidity and Capital Resources
The Company's funds have principally been provided
from Loeb Holding Corp. as escrow agent, Loeb Holding Corp., LTI
Ventures Leasing Corporation, two private offerings and a public
offering.
In March 1998, Loeb Holding Corp., as escrow agent
for Warren D. Bagatelle, Managing Director of Loeb Partners,
Corp., HSB Capital, trusts for the benefit of families of two
principals of Loeb Holding Corporation and three unaffiliated
individuals of two Term Promissory Convertible Notes in the
principal amounts of $475,000 and $237,500 converted $400,000 of
the principal amount of the former note and $200,000 of the
principal amount of the latter note into 188,235 shares and
94,118 shares respectively of the Series A Preferred Stock of
the Company at a price of $2.125 per share.
In March 1998, Loeb Holding Corp., as escrow agent
for Warren D. Bagatelle, Managing Director of Loeb Partners,
Corp., HSB Capital, trusts for the benefit of families of two
principals of Loeb Holding Corporation and three unaffiliated
individuals of four eighteen month Convertible Promissory Notes
aggregating $210,000, converted the total principal amount of
the four notes ($210,000) into 98,824 shares of the Series A
Preferred Stock of the Company at a price of $2.125 per share.
In March 1998, Loeb Holding Corp., as escrow agent
for Warren D. Bagatelle, Managing Director of Loeb Partners,
Corp., HSB Capital, trusts for the benefit of families of two
principals of Loeb Holding Corporation and three unaffiliated
individuals of two Term Promissory Convertible Notes aggregating
$37,500, converted the total principal amount of the notes
($37,500) into 400,000 shares of the Common Stock of the Company
at a price of $0.09375 per share.
In September 1995, January 1996 and December 1996,
the Company entered into sale and lease-back arrangements
whereby the Company sold the bulk of its computer hardware and
commercially purchased software to a lessor for amounts totaling
$295,000 and agreed to lease back such equipment for initial
terms ranging from 24 to 30 months. Pursuant to the November
1998 Sales Agreement, GEN 02 has assumed all obligations under
these sale and lease-back arrangements.
The financing of Loeb Holding Corp. and the sale and lease-back
arrangements entered into by the Company contributed to the
original capitalization of the Company.
Pursuant to an Asset Purchase Agreement, NetCruise (a
wholly owned subsidiary of the Company formed on July 21, 1998
for the purpose of operating an internet travel agency) acquired
a technology license and certain related assets from UIT in
consideration of 2,000,000 shares of the Company's Common Stock
and two warrants ("Warrants"), each entitling the holder to
purchase 800,000 shares of the Common Stock of the Company (the
"UIT Transaction"). One warrant is exercisable for 800,000
shares at $2.50 per share and may be exercised between April 1,
2002 and June 30, 2002, but only if NetCruise achieves profits
equal to or exceeding $5,000,000 for the years 1999, 2000 and
2001. The other Warrant is exercisable for 800,000 shares at
$6.00 per share and may be exercised between April 1, 2002 and
June 30, 2002, but only if NetCruise achieves profits equal to
or exceeding $10,000,000 for the years 1999, 2000 and 2001. No
value has been placed on the warrants since the warrants are
each contingent upon future earnings.
The Company has since been advised that the issuance
of such securities has caused the Company to inadvertently be in
violation of a Nasdaq MarketPlace Rule because the issuance of
the 2,000,000 shares and Warrants amounted to more than 20% of
the issued and outstanding shares of the Company and were not
approved by Shareholders as required by such Rule. Nasdaq
advised the Company that the Company's Common Stock would be
delisted as a result of such violation. The Company requested a
hearing on the delisting which was held on November 20, 1998.
Nasdaq issued its written determination on January 12, 1999 to
continue listing the Company's securities on The Nasdaq SmallCap
Market pursuant to the following conditions: (i) the UIT
Transaction must be unwound in the event shareholders do not
ratify the acquisition of the technology license and certain
related assets from UIT and approve the issuance of 1,100,00
shares of Common Stock and two Stock Purchase Warrants to UIT;
(ii) the Company must file a Definitive Proxy Statement with the
Securities and Exchange Commission and Nasdaq on or before
February 15, 1999; and (iii) the Company must submit
documentation to Nasdaq on or before April 15, 1999 evidencing
either the receipt of shareholder approval of the issuance of
additional shares to UIT or the unwinding of the issuance of
additional shares to UIT and purchase of a technology license
and certain related assets from UIT. The Company received an
extension to April 15, 1999 for filing the Definitive Proxy
Statement. The Company has requested a further extension to July
31, 1999 and is awaiting a response from Nasdaq.
The Company and UIT have restructured the transaction
so that UIT will return to the Company 1,100,000 shares of the
Company's Common Stock (retaining 900,000 shares that are not in
violation of the Nasdaq MarketPlace Rule) and the Warrants. The
Company will issue to UIT 1,100,000 shares of Convertible Series
B Preferred Stock (the "Series B Preferred Stock"), which Series
B Preferred Stock is automatically convertible into 1,100,000
shares of the Company's Common Stock upon Shareholder approval
of the issuance of the 1,100,000 shares of Common Stock and the
Warrants. The Series B Preferred Stock is non-voting stock and
carries a mandatory dividend of $275,000, payable on September
30, 1999 and a mandatory quarterly dividend at the rate of
$68,750 commencing with the quarter ended December 31, 1999. No
dividend will be payable if the Shareholders approve the
issuance of the 1,100,000 shares Common Stock and Warrants prior
to the time that the dividend is payable. Therefore, the total
purchase price in the UIT Transaction is 900,000 shares of the
Company's Common Stock and 1,100,000 shares of the Company's
Series B Convertible Preferred Stock. If shareholders ratify the
acquisition, the Series B Preferred Stock will automatically be
converted into 1,100,000 shares of the Company's Common Stock
and the Company will issue two warrants, each to purchase
800,000 shares of Common Stock, as outlined above.
In the event shareholders do not ratify the
acquisition of the assets and approve the issuance, the
transaction will be unwound. In such event the Company estimates
that the cost to undo the transaction will not exceed $50,000.
This estimate includes accounting fees, legal fees, recording
fees and employee termination fees. In the event that the UIT
Transaction must be undone, the following shall occur: (i) the
Company shall reassign the technology license and return the
related assets to UIT; (ii) UIT will return to the Company all
stock certificates received pursuant to the UIT Transaction and
(iii) Mr. Brian Shuster will return the warrants issued to him
by the Company; and (iv) Messrs. Brian and Harry Shuster will
resign from any officer or director position held by them. In
addition, Mr. Brian Shuster's consulting fee shall be pro-rated
to the date of his resignation and shall cease as of such date.
Reference should be made to Pro Forma Condensed Consolidated
Financial Statements as of September 30, 1998 and for the nine
months then ended for the effect of undoing the UIT Transaction.
As a result of the transaction, the Company acquired
the internet travel web site called " NetCruise" and a
perpetual, world-wide technology license for "Parallel
Addressing Video Technology" for all travel related
applications, along with all of the related software, computer
systems and intellectual properties. No royalty payments are
required under the licensing agreement for the "Parallel
Addressing Video Technology" and the license is exclusive as it
relates to the technology as applied to the travel industry. UIT
has retained the right to the technology for all other uses
outside of the travel industry. The intellectual property
acquired consists of a license for the "Parallel Addressing
Video Technology" which includes the NetCruise name, logo,
trade-marks and service-marks. The Company did not acquire the
patent to the "Parallel Addressing Video Technology." Also
included as part of the intellectual property was an agreement
between UIT and Internet Travel Network (ITN), of Palo Alto, CA
which UIT transferred to the Company. This agreement provides
for a "private label" site on the ITN "booking engine". The
agreement expires in April, 1999 and automatically renews for
successive one year periods unless either party gives notice, no
later than 30 days prior to the end of the period, of its intent
not to renew. The Company has renewed this agreement under the
terms and conditions of the original agreement. The ITN "booking
engine" is essentially a world wide web based graphical user
interface to the airline owned Apollo computerized reservation
system. This technology allows a layperson with access to the
internet to access the databases and pricing systems used by
travel agents to research and procure air, car rental and hotel
reservations. By "private labeling" this functionality, the
Company is able to offer its travel consultants access to a
leading travel system, while not having to expend the Company's
capital resources which would be required to create its own
access. The custom software acquired by the Company consists of
a video player program (called a ULI player) that permits the
end user to view video files, a cruise database, a CD-ROM video
disc database containing video images of travel-related
information and miscellaneous commercially purchased software.
The technological feasibility of the custom software was
established at the time of the acquisition, as a working model
had been completed at that time. The Company formed NetCruise as
a wholly owned subsidiary for the purpose of operating an
internet travel business featuring the technology obtained
through this acquisition.
Although the Company only has a limited number of
individuals who have subscribed to be independent travel
consultants and therefore few customers, the Company intends to
launch, through television advertising, an aggressive marketing
campaign inviting the general public, along with existing travel
agents, to become NetCruise travel consultants . The goal of the
Company's marketing campaign is to encourage individuals to
enroll as independent travel consultants by paying an annual fee
to the Company. Each new independent travel consultant will
receive a start-up kit consisting of a CD ROM library of video
destinations; a marketing kit which includes a guide to
marketing an at-home business, a training manual describing the
travel industry, a welcome letter containing a password for the
web site and an outline of NetCruise policies and procedures and
full-service support from the Company's live travel agents. The
independent travel consultants will then be able to make
reservations either through the password protected section of
the NetCruise web site or via telephone conversations with
travel agents who work directly for NetCruise. Non-members who
visit the non-password protected section of the NetCruise
web-site (the "Visitor's Section") shall have access to a
portion of the site which contains general information about the
Company, describes the independent travel consultant program and
allows the public to request information or enroll as an
independent travel consultant.
The internet web-site is currently operational ,
although management expects web- site development to continue
through mid-1999. Independent travel consultants, through the
password protected section of the site, can currently book car,
air and hotel reservations
directly through the web-site, as well as research vacation
packages and cruise itineraries. At the present time the
Company's independent travel consultants are not able to book
vacation and cruise packages in an automated fashion through the
web-site. In order to make these types of reservations, the
independent travel consultant is instructed to contact the
Company's service center, (operated through Sammy's Travel
World, a wholly owned subsidiary of the Company) via toll-free
telephone, fax or e-mail, whereby a live NetCruise travel agent
will then make the cruise or vacation reservation. The Company
intends to continually enhance its technology to automate the
booking process for cruise and vacation reservations through its
web-site. There can be no assurance, though, that the Company
will be able to achieve the technological advancements necessary
to automate the booking of cruise and vacation reservations. To
date, the Visitor's Section of the web-site is being used for
demonstration to potential travel consultants. The password
protected section is only accessible by company personnel and
independent travel consultants using a password. See Note 4.
The budgeted cost of the internet travel business
becoming operational is expected to be approximately $1,342,000.
Of such amount, approximately $198,000 was allocated to complete
the web-site. The remainder will be used to produce a television
video infomercial and purchase media time. The Company believes
it will be able to finance such development substantially from
proceeds of a recent private placement, but there can be no
assurance that such funds will be sufficient. In the event the
Company decides to purchase significant amounts of media time
for the television infomercial, it will need to raise additional
funds. No assurance can be made that the Company will be able to
raise such funds.
On September 30, 1998, the Company had cash of $606,121 and
working capital of $144,541. As of November 1, 1998, the Company
has begun to generate revenues from shared commissions earned by
the network of Sterling Travel Consultants recently acquired,
although these revenues are not expected to be significant for
the balance of the fourth fiscal quarter ending December 31,
1998. Management of the Company expects the internet travel
business to be fully operational in mid 1999 and is planning to
begin television marketing of the Company's products in mid
1999. These efforts are expected to significantly increase
revenues. The Company plans to continue the aggressive marketing
campaign as well as expand its network of travel consultants
throughout 1999. The Company expects its operations to achieve
break-even by the end of fiscal 1999. The Company completed a
private placement of common stock in January 1999 whereby it
sold 1,000,000 shares of common stock for an aggregate of
$1,500,000. Therefore including anticipated cash to be received
from revenues, the Company estimates that it will have
sufficient resources to provide for its planned operations for
the next twelve months. At the present time the Company does not
have any alternative plans to raise additional funds needed to
market or complete development of the web site.
8
<PAGE>
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Report on Form 8-K dated October 29, 1998
SIGNATURES
Pursuant to 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.
GENISYS RESERVATION SYSTEMS, INC.
Date May 17, 1999 ____________________________________
Lawrence E. Burk
President and Chief Executive Officer
Date May 17, 1999 ____________________________________
John H. Wasko
Secretary, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the three months ended September 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 606
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 651
<PP&E> 479
<DEPRECIATION> 193
<TOTAL-ASSETS> 3,974
<CURRENT-LIABILITIES> 507
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,403
<TOTAL-LIABILITY-AND-EQUITY> 3,974
<SALES> 52
<TOTAL-REVENUES> 111
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (18)
<INCOME-PRETAX> (1,643)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,643)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> 0
</TABLE>
