SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSB
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
X Annual Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of
1934
For the fiscal year ended December 31, 1998
or
Transitional Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from to
Commission File Number 033-19522-NY
GENISYS RESERVATION SYSTEMS, INC.
(formerly Robotic Lasers, Inc.)
(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)
Registrant's telephone number, including area code: (908) 810-8767 Securities
registered pursuant to Section 12(b) of the Act: NONE Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
Class A Redeemable Warrants
Class B Redeemable Warrants
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes - X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
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State Issuers revenues for its most recent fiscal year. $33,290
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
$10,630,069.22 as of the close of business on March 25, 1999
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. The number of shares
outstanding of the registrant's Common Stock as of March 26, 1999 was 6,734,694
shares.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) any annual report to security-holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes.
1. Rule 424(b) Prospectus dated March 20, 1997 is incorporated by reference into
Parts I, II and III
3.1* Registrant's Articles of Incorporation
3.2* Registrant's By-Laws
4.1* Form of Common Stock Certificate
4.2** Redeemable Warrant Agreement with Form of Class A and Class B
Warrant 4.3** Redeemable Class X and Class Y Warrant issued to Brian
Shuster to purchase up to
200,00 shares of the Company's Common Stock.
4.4** Redeemable Class V and Class W Warrant issued to United
Internet Technologies, Inc. to purchase up to 800,00 shares of
the Company's Common Stock.
10.1** Copy of Agreement dated June 30, 1998 between the Company and
United Internet Technologies, Inc., formerly known as United
Leisure Interactive, Inc. relating to the purchase of a technology
license and certain related assets.
All of the above referenced documents marked with an (*) are incorporated herein
by reference to the Exhibit bearing the same number in the Registrant's
Registration Statement on Form SB-2, File No. 333- 15011.
All of the above referenced documents marked with an (**) are incorporated
herein by reference to the Exhibit the Company's Form 8-K dated March 26, 1998.
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Part I
Item 1. Business
History
Until June 1998, the principal business activity of the Company has been the
operation of a computerized limousine reservation and payment system for the
business traveler. The proprietary software that the Company developed enables
limousine reservations to be completely computerized i.e., be entirely automatic
and operate without human intervention except for the initial inputting of
travel information.
Prior to the sale of the limousine reservation business and the acquisition of
the technology license and certain related assets from UIT, which is discussed
below, the Company worked with travel agents and corporate travel departments by
providing a computerized system for securing limousine reservations. The Company
had created its own computerized system which was linked with the SABRE and
Apollo computer reservation systems, two of the four major airline reservation
systems. Limousine reservations made through the SABRE and Apollo computer
reservation systems were relayed instantaneously to the Company's computer and
then to a service provider of the clients choice--all without human
intervention--and an immediate limousine reservation is confirmed.
As of June 30, 1998, the Company, through Netcruise Interactive, Inc.
("Netcruise"), entered into an Asset Purchase Agreement with United Internet
Technologies f/k/a United Leisure Interactive, Inc., in which the Company
acquired a technology license and certain related assets from United Internet
Technology in exchange for 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.
On November 5 , 1998, the Company entered into an Asset Purchase Agreement with
Sterling AKG Corp. d/b/a Sterling Travel, in which the Company purchased all the
assets relating to Sterling's network of independent 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 of the Company's Common Stock ("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 describe herein, the Escrow Shares will be
released by the Company.
On November 6, 1998 the Company entered into an Acquisition Agreement by and
between the Company and Corporate Travel Link, Inc., 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. The Company sold all of the assets of
Corporate Travel Link which are utilized in connection with the ownership,
operation and marketing of the computerized limousine reservation and payment
system which had a net book value of $744,122, for (i) 2,450 shares of Series A
Convertible Preferred Stock of Gen O2, Inc., constituting a 32.66% interest in
Gen O2, Inc., which the Company carries on its balance sheet as December 31,
1998 at an asset value of $624,204; (ii) certain contingent payments over a
period of 5 years, 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.
On February 1, 1999 the Company acquired Sammy's Travel World, Inc., a
full-service travel agency specializing in leisure and corporate travel and
serving the New York City and northern New Jersey area ("Sammy's"), with annual
gross bookings of approximately $1,800,000. The purchase price for the
acquisition was 36,600 shares of the Company's Common Stock which, for
accounting purposes, is being valued at $1.50 per share or an aggregate of
$54,900.
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General
As of June 30, 1998 NetCruise, Inc., (a wholly owned subsidiary of the
Company formed on July 21, 1998 for the purpose of operating an internet travel
business) entered into an agreement to purchase a technology license and certain
related assets from United Internet Technology, Inc. The Company determined to
expand into the internet travel business for several reasons. Although the
Company had begun to generate revenues, the Company found that many limousine
providers were resisting the payment of commissions or fees in connection with
bookings on the Company's system resulting in a much slower development of
revenues for the Company than was originally anticipated. Management evaluated
the cost of operations for a more extended period of time and determined that
the Company's available funds would be better spent in other areas of the travel
business and therefore determined to expand into the internet travel business.
Pursuant to the Asset Purchase Agreement, NetCruise 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 has
requested an extension from Nasdaq with respect to the deadlines to July 31,
1999.
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 of
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1,100,000 shares of Common Stock and two stock purchase warrants, the UIT
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 unwound, 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 December 31, 1998
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 custom 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" and a business plan premised on the
idea of creating and establishing a network of independent travel consultants
which is to be marketed to consumers and travel agents and 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 of Palo Alto, CA which UIT transferred to the Company. This agreement
provides for a "private label" site on the Internet Travel Network "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 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 of the custom software 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 internet web-site is still in the development stage and
the Company only has a limited number of individuals (280) who have subscribed
to be independent travel consultants and does not yet have any internet travel
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 a fee to the Company. 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. To
date, the Visitor's Section of the web-site is being used for demonstration to
potential travel consultants. The password protected section will allow
independent travel consultants to see destinations in full motion video and
stereo audio and to make hotel, air and car reservations. The password protected
section is only accessible by company personnel and independent travel
consultants using a password. The Company expects that the
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web site will not be fully integrated to support the independent travel
consultants until mid- 1999. 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 that 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.
The Company believes it will be successful in encouraging people to pay
the subscription fee and sign up as independent travel consultants because as an
independent travel consultant individuals will have an opportunity to earn a
commission on all reservations made by them. Airlines, hotels, car rental
companies, cruise lines, tour operators and other travel vendors will pay the
Company commissions for all sales generated by the Company. Such commissions
will be shared with the independent travel consultants. The Company hopes to
enroll both the general public and existing travel agents. The Company believes
that there is an emerging trend in the travel industry, whereby individuals who
are presently travel agents are leaving their salaried positions and moving into
positions similar to that of an independent travel consultant with their own
home based travel business. The Company believes that existing travel agents
will be drawn to the opportunity to earn commissions, create their own flexible
hours, maintain their client base and utilize their existing skills. Other
advantages of a home based travel business are no commuting to an office, low
overhead, no need to rent expensive airline owned computer reservation system
equipment and personal travel benefits. However, there can be no assurance that
the Company's marketing strategy directed to existing travel agents will be
successful. The Company plans to offer, through a combination of direct response
TV, print, radio, and web- based advertising, 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.
"Parallel Addressing Video Technology" will allow the independent
travel consultants to see a destination in full motion video and stereo audio
never before available on the internet, without waiting for a lengthy file
download. Utilizing this proprietary technology the NetCruise web site will
interact with the individual's PC, find the requested video clip on its CD ROM,
and plays it locally in a clear, full screen mode. Included in the assets
acquired by NetCruise is an extensive library of video clips complete with music
and narratives in stereo, which will bring views of cruise ships, hotels, and
destinations from around the world to the user in seconds. When the travel
consultant is ready, airline, hotel, car rental and cruise bookings will all be
made quickly and easily via NetCruise's reservation web site.
When the Company's web-site is fully operational the "Parallel
Addressing Video Technology" will provide zero-wait time, full motion video and
stereo audio to the independent travel consultants interacting with the
web-site. Unlike various forms of streaming video, live media and internet video
broadcasts, this technology does not rely on bandwidth as the medium for
delivery of video. UIT and its parent, ULC, developed this technology and filed
for patents in July 1997. Although the "Parallel Addressing Video Technology" is
fully operational, the internet web-site utilizing this technology is currently
still in development. Management expects the web-site to be fully operational by
mid-1999. Although the general public will be able to access much of the site to
obtain information and enroll as an independent travel consultant, the Company
intends that only participating travel consultants who have paid a fee to the
Company and received a password will be able to access the reservation area of
the site.
If at any point the individual requires additional expertise, a
personal NetCruise travel agent will be available by phone to guide them through
the process. On February 1, 1999 the Company acquired Sammy's Travel World,
Inc., a full-service travel agency specializing in leisure and corporate travel
and serving the New York City and northern New Jersey area ("Sammy's"), with
annual gross bookings of approximately $1,800,000. "Bookings" consists of the
total dollar amount of airline tickets sold, cruises sold, and hotel and car
reservations made. Sammy's will provide, when necessary, full service support
via telephone to the Company's independent travel consultants. Sammy's is now a
wholly owned subsidiary of the Company and has five (5) employees. The purchase
price for the acquisition was 36,600 shares of the Company's common stock which,
for accounting purposes, is being valued at $1.50 per
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share or an aggregate of $54,900. The Company acquired the following assets from
Sammy's: telephones, desks, chairs, fax and copy machines, filing cabinets,
safe, shelves, typewriters and computers.
Mr. Harry Shuster has been appointed Chairman and Brian Shuster the President of
NetCruise Interactive, Inc. Pursuant to the Asset Purchase 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.
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. The valuation of the Company's stock at $1.50 per share
was a negotiated price based upon the value of the stock at the time of the
negotiation. It differs from the valuation given to the Company's Common Stock
in the UIT transaction because the valuation was negotiated at a time when the
Common Stock was trading at a lower price. 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.
Since on-line transactions can be faster, less expensive and more
convenient than transactions conducted via traditional means, a growing number
of consumers are transacting business over the World Wide Web. Examples of such
transactions include buying consumer goods, trading securities, purchasing
airline tickets and paying bills. Based upon its research and discussions with
individuals knowledgeable in electronic commerce on the World Wide Web,
management believes that 27% of adult World Wide Web users made on-line
purchases in 1997 and that 50% of adult World Wide Web users will make on-line
purchases in 2000. Management believes that as electronic commerce expands,
advertisers and direct marketers will increasingly seek to use the World Wide
Web to locate customers, advertise their products and services and facilitate
transactions.
The Company also believes that lodging and airline travel will be a
major leader in this market with total on-line travel revenues possibly reaching
over $50 billion by 2001. With travel taking such a large portion of on-line
sales, management of the Company expects that the enhanced travel services
offered by NetCruise will attract a wide range of internet using consumers
enabling NetCruise to become a significant participant in
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internet travel. In the event shareholders do not approve this acquisition of a
technology license and certain related assets, the Company intends to continue
its entry into the internet travel business either by negotiating a licensing
agreement with UIT for the use of its technology license and certain related
assets or by utilizing alternative technologies.
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.
Management is of the opinion that the costs in developing the new line
of business is less than the costs required to maintain the limousine
reservation business until such time as revenues will be able to cover the costs
of operation. Further, it is management's opinion that the internet travel
business, which is not compatible with the limousine reservation business, can
be brought to market sooner and will provide, on a long term basis, a greater
return to shareholders.
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, which is subject to shareholder
approval, the sellers will sell and transfer 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 the 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. (At September 30, 1998 the Company had total assets of $3,964,903, of
which $744,122 were sold to Gen O2, Inc. ) 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 net book value of $744,122,
for (i) 2,450 shares of Series A Convertible Preferred Stock of Gen O2, Inc.,
constituting a 32.66% interest in Gen O2, Inc., which the Company carries
on its balance sheet as of December 31, 1998 at an asset value of $624,204;
(ii) certain contingent payments over a period of 5 years, 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. and (iii) other
significant terms as described below:
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") under development by the sellers
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.
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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 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 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. As part of the sale, the Company is loaning to GEN 02, Inc. a
$135,000 installment loan and a $40,000 bridge loan. The TranspoNet is
providing, commencing December 10, 1998, $20,000 per month to GEN 02, Inc., for
an aggregate of $240,000. TranspoNet is not affiliated with the Company or any
of its shareholders. 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. Although
there are no minimum contingent payments, the Company has begun to receive
minimal contingent payments from GEN 02, Inc., consisting of two payments
totaling $3,656.20. However, it is possible that the Company will not receive
significant contingent payments from GEN 02, Inc. over the 5 year period.
Shareholders should note that they
9
<PAGE>
are being asked to ratify the sale of the limousine business to GEN 02, Inc., a
company organized by Mark A. Kenny, who is a former director of the Company. The
sale of the limousine reservation business was negotiated with GEN 02, Inc.
while Mr. Kenny was still a director of the Company, although he did not
participate in the directors analysis and decision to sell the business to GEN
02, Inc.
In the event that Shareholders do not approve the sale of the limousine
reservation business, the Company will be required to raise additional capital
to bring the limousine reservation business to full operation. No assurance can
be given that the Company will be able to raise such funds. In the event
shareholders do not ratify the acquisition of a technology license and certain
related assets from UIT the Company intends to continue to expand into the
internet travel business either by negotiating a licensing agreement with UIT
for the use of its technology license and certain related assets or by utilizing
alternative technologies. In the event that the purchase of the technology
license and certain related assets is not approved by the Shareholders and the
sale of the limousine reservation business is approved, the Company will not own
the limousine reservation business or the internet travel business but will
continue to expand into the internet travel business.
Management of the Company is confident that there were no conflicts of
interest in negotiating the acquisition of the internet travel business and that
all negotiations with UIT were at "arms length".
If the shareholders approve the acquisition of the technology license and
certain related assets and the sale of the limousine reservation business, the
effect to shareholders is a change in the nature of the business of the Company
from the limousine reservation business to an internet travel business.
Employees
The Company presently has 2 executive officers and 11 non-executive
employees, including 5 employees of the Company's wholly-owned subsidiary.
None of these employees is covered by a collective bargaining agreement. The
Company utilizes several software and marketing consultants on a part-time
basis. The company believes its personnel relations to be satisfactory.
Item 2. Properties
The Company and its subsidiaries presently lease approximately 2,380
square feet of office space at 2401 Morris Avenue, Union, New Jersey, 07083, and
1,000 square feet of office space at 6 Wall Street, Rockaway, New Jersey, 07866.
The five-year Union lease expires in March 2002 and provides for a monthly
rental of $3,731.53. The Rockaway lease expires in August 2000 and provides for
a monthly rental of $850.
The properties have been leased from unaffiliated third parties and
adequately satisfy the present needs of the Company and its subsidiaries.
10
<PAGE>
Item 3. Legal Proceedings
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 unrealted 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. A former officer and director 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
11
<PAGE>
Market Information
Prior to 1998, the Company's Common Stock was eligible to trade in the
over-the counter market, however, the Company was unable to locate a quoted
price for its stock. The Following table indicates the quarterly high and low
bid prices for the last two years for the Company's Common Stock.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Bid Price Bid Price
1998 1997
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 3.5 2.125 6.5 5.75
June 30 3.937 2.375 9 5.75
September 30 3.5 2.25 9 3.875
December 31 4.125 2.75 5.375 2.75
</TABLE>
The foregoing prices were provided by National Quotation Bureau.
The Company's Common Stock, Class A Redeemable Warrants and Class B
Redeemable Warrants trade on The NASDAQ Stock MarketSM under the symbols, NETC,
NETCW and NETCZ respectively.
Approximate Number of Equity Security Holders
Approximate Number of
Holders of Record as
Title of Class of March 25, 1999
-------------- ----------------------
Common Stock,
$.0001 par value 1,100
Included in the number of stockholders of record are shares held in
"nominee" or "street" name.
Dividends
The Company has never paid any cash dividends. The Company presently
intends to retain any future earnings for use in its operations and, therefore,
does not expect to pay cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Comparison of Fiscal 1998 to Fiscal 1997
Revenues
The principal business activity of the Company has been the operation
of a computerized limousine reservation and payment system for the business
traveler. The proprietary software that the Company developed enables limousine
reservations to be completely computerized i.e., be entirely automatic and
operate without human intervention except for the initial inputting of travel
information.
Prior to the sale of the limousine reservation business and the acquisition
of the technology license and certain related assets from UIT, which is
discussed below, the Company worked with travel agents and corporate
travel departments by providing a computerized system for securing limousine
reservations (collectively the "CRS's"). The
12
<PAGE>
Company had created its own computerized system which was linked with the SABRE
and Apollo computer reservation systems, two of the four major airline
reservation systems. Limousine reservations made through the SABRE and Apollo
computer reservation systems were relayed instantaneously to the Company's
computer and then to a service provider of the clients choice -- all without
human intervention -- and an immediate limousine reservation is confirmed.
As of June 30, 1998, NetCruise, Inc. ( a wholly owned subsidiary of the
Company formed on July 21, 1998 for the purpose of operating an internet travel
business) entered into an Agreement to purchase a technology license and certain
related assets from United Internet Technology, Inc. The Company determined to
expand into the internet travel business for several reasons. Although the
Company had begun to generate revenues, the Company found that many limousine
providers were resisting the payment of commissions or fees in connection with
bookings on the Company's system resulting in a much slower development of
revenues for the Company than was originally anticipated. Management evaluated
the cost of operations for a more extended period of time and determined that
the Company's available funds would be better spent in other areas of the travel
business and therefore determined to expand into the internet travel business.
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, in which the Company purchased
all the assets relating to Sterling's network of independent travel consultants.
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, former
director and founder of the Company. The Company owns a minority interests in
the new company and will receive royalties on transactions processed by the new
company for a period of five years.
The Company's internet travel business generates revenues from people
who have paid a subscription fee and signed up as independent travel
consultants. In addition, airlines, hotels, car rental companies, cruise lines,
tour operators and other travel vendors will pay the Company commissions for all
sales generated by the Company's network of independent travel consultants. Such
commissions are then shared with the independent travel consultants.
The Company has also begun to receive limited contingent payments from Gen O2
pursuant to the November 6, 1998 Acquisition Agreement whereby the
Company sold all of the assets of its computerized limousine reservation
and payment system to Gen O2.
The Company's revenues to date have not been significant. Accordingly,
the Company and its subsidiaries continue to be in the development stage.
13
<PAGE>
Expenses
The most significant component of cost of service for the internet
travel business is the portion of the commissions received by the Company that
are shared with the independent travel consultants. Another component is the
cost of the implementation or start-up kits, including CDROM, provided to each
new independent travel consultant.
General and administrative expenses include salaries, commissions and
benefits, travel costs, professional fees, rent, telephone and other operating
costs of the Company. The only internal expenditures capitalized with respect to
the costs of developing and implementing the Genisys Reservation and Payment
Systems have been $200,181 of salaries paid to Prosoft employees in fiscal
1998.
Results of Operations
The Company has been in the development stage and has only generated
limited revenues. The Company has been unprofitable since inception and expects
to incur additional operating losses over the next several fiscal quarters.
Total revenues for the year ended December 31, 1998 were $33,290 compared to
no revenues for the years ended December 31, 1997 and December 31, 1996.
The corresponding cost of sales for fiscal 1998 was $19,306 compared to no costs
of sales for fiscal 1997. The net loss for the year ended December 31, 1998 was
$2,344,485 or $.42 cents a share compared to a loss of $1,590,125 or $.39 cents
a share for the year ended December 31, 1997 and $1,051,203 or $.36 cents a
share for the year ended December 31, 1996. As reflected in the accompanying
financial statements, the Company has incurred losses totaling $5,579,617 since
inception and at December 31, 1998, had a working capital deficiency of
$196,212.
General and administrative expenses were $963,122 for the year ended December
31, 1998 as compared to $581,345 for the year ended December 31, 1997. The
primary reasons for the difference between the two years ended December 31, 1998
and December 31, 1997 are increased payroll costs due to staff increases for
web site development and increases in legal expenses related to litigations.
Payroll and payroll-related costs increased approximately $177,000
during the fiscal year ended December 31, 1998. Other approximate cost increases
during fiscal 1998 consist of professional fees ($105,000), insurance ($8,000),
and other administrative costs ($134,150) while consulting fees decreased
$46,500. Professional and consulting fees for the year ended December 31, 1998
total $248,000. Such amount consisted of attorneys' fees of $151,000, accounting
fees of $18,000, outside bookkeeping fees of $17,500, consulting fees of $36,000
payable to Loeb Partners and miscellaneous fees of $25,000.
Prior to 1997 all expenses were related to the limousine business
and therefore are included in the equity loss of GEN 02, Inc.
The Company is conducting a comprehensive review of its computer systems to
identify the systems
14
<PAGE>
that could be affected by the "Year 2000" issue and is developing 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.
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 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 exchange of assets
for a 32.7% interest in Gen O2, Inc., the obligations under the sale and
lease-back arrangements were assumed by Gen O2, Inc.
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.
15
<PAGE>
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.
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.
The budgeted cost of becoming operational is expected to be
approximately $1,342,000. Of such amount, approximately $198,000 is needed to
complete the web-site. The remainder will be used to produce a television video
commercial and purchase media time. The Company believes that 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.
On December 31, 1998, the Company had cash of $145,921 and a working capital
deficit of $196,212. As of November 5, 1998, the Company has begun to
generate revenues from shared commissions earned by the network of Sterling
Travel Consultants recently acquired, although these revenues were not expected
to be significant for the balance of the fourth fiscal quarter ended 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.
Although the Company has also begun to receive contingent payments from Gen O2,
these revenues were not significant for the fourth fiscal quarter ended December
31, 1998. 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. The Company estimates, including anticipated cash to be received
from revenues, 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.
Inflation is not expected to have any material effect on the Company.
Item 7. Financial Statements and Supplementary Data.
See Pages F-1 through F-18.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable
16
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to each
of the Company's directors and executive officers.
Name Age Position
Lawrence E. Burk 57 President, Chief Executive Officer
and Director
John H. Wasko 60 Chief Financial Officer, Secretary, Treasurer
and Director
David W. Sass 63 Director
S. Charles Tabak 66 Director
Warren D. Bagatelle 60 Chairman
Harry Shuster 63 Director
Brian Shuster 40 Director
The Company's Audit and Compensation Committees consist of Messrs. Warren D.
Bagatelle, S. Charles Tabak and David W. Sass. All officers of the Company
devote their full time to the Company's business.
Lawrence E. Burk joined the Company on June 23, 1997, as President,
Chief Executive Officer, and Director following a 27 year career with Alexander
& Alexander Services. From 1993 to early 1996, Mr. Burk served as Chairman and
CEO of Alexander & Alexander, Inc., the U.S. Retail Subsidiary of A & A
Services, and from early 1996 until the company's acquisition by AON Corporation
in late 1996, Mr. Burk served as President and Chief Operating Officer of A & A
International, the company's global retail operation. Mr. Burk served on the
company's Global Retail Board from 1985; on A & A Services Operations Board from
1989; and on A & A Inc.s' Executive Committee and Operations Board from 1989. A
& A was a NYSE listed Financial Services firm with revenues of over $1.3
billion. Mr. Burk has a B.A. degree in Economics from Southern Illinois
University and is a member of the schools' Advisory Board.
John H. Wasko has served the Company as a Director since April, 1986,
as Secretary since September 1995, and as Treasurer and Chief Financial Officer
since April 1996. Mr. Wasko has also served the Company as President and
Chairman of the Board since its inception to August 1995, and as Treasurer from
April 1986 to September 1987 and from May 1988 to August 1995. Mr. Wasko has
also served as Chairman of the Board, President and Director of JEC Lasers,
Inc., presently an inactive company, since it was organized in September 1977.
He was awarded a bachelor of science degree in physics in 1963 and a master of
science degree in physics (summa cum laude) in 1965 from Fairleigh Dickinson
University.
David W. Sass has been a Director since April, 1997 and has been a
practicing attorney in New York City for the past 38 years and is currently a
senior partner in the law firm of McLaughlin & Stern, LLP, securities counsel to
the Company. Mr. Sass is also a director of Pallet Management Systems, Inc., a
company engaged in the manufacture and repair of wooden pallets and other
packaging services and a director of The Harmat Organization, Inc., a New York
based construction company and a member and Vice Chairman of the Board of
Trustees of Ithaca College. Mr. Sass earned a B.A. from Ithaca College, a J.D.
from Temple University School of Law and an L.L.M. (in taxation) from New York
University School of Law.
17
<PAGE>
S. Charles Tabak has been a Director since April, 1997. Since 1991 he
has been the Chief Executive Officer of Arc Medical & Professional, Inc., an
employment agency specializing in placement of scientific, medical and office
personnel. From 1969 to 1990, he was the Executive Vice President and General
Counsel for Channel Home Centers Inc. From 1967 to 1969, he was the Director of
Finance of J.J. Newbury Co. Mr. Tabak is a past member of the Board of Directors
of Channel Home Centers, Inc. and Charge A Plate Group of Greater New York. He
is a graduate of both NYU School of Business and School of Law, and is admitted
to practice law in New York state and before the U.S. Supreme Court.
Warren D. Bagatelle has been a Director and Chairman of the Board of the Company
since August, 1995. He served as Chief Executive Officer of the Company from
December 1996 through June, 1997. Since 1988, he has been a Managing Director at
Loeb Partners Corporation, a New York City investment banking firm. Mr.
Bagatelle is also a director of Energy Research Corporation, a company engaged
in the development and commercialization of electrical storage and power
generation equipment, principally fuel cells and rechargeable storage batteries
and a director of Evercell, Inc., a company engaged in the development and
commercialization of batteries. Mr. Bagatelle has a B.A. in economics from Union
College and an M.B.A. from Rutgers University.
Harry Shuster has been Chairman of the Board of NetCruise Interactive,
Inc., a wholly owned subsidiary of the Company and a Director of the Company
since July, 1998. Mr. Shuster has served as Chairman of the Board, President and
Chief Executive Officer of United Leisure Corporation ("ULC"), a public company
engaged in children's recreational activities and interactive technology
development, since April, 1975. Mr. Shuster is also the Chairman of the Board,
President and Chief Executive Officer of Grand Havana Enterprises, Inc., a
public company primarily engaged in the business of ownership and operation of
private membership restaurants and cigar clubs. Mr. Shuster is also the Chairman
of the Board of United Film Distributors, Inc., a privately held independent
motion picture production corporation and the General Partner of HEP II, Inc., a
limited partnership engaged in the motion picture production business. Mr.
Shuster is the father of Mr. Brian Shuster.
Brian Shuster has been President of NetCruise Interactive, Inc. and a Director
of the Company since July, 1998. He has served as Chief Executive Officer,
President and a director of United Film Distributors, Inc. since its inception
in May, 1995. Since he has been with United Film Distributors, Inc. he has
served as the producer of seven films. Prior to joining United Film
Distributors, Inc., he served as President of Beverly Hills Producers Group, a
private production company, where he produced one motion picture, served as
executive producer of another motion picture, and oversaw production of three
other films. From 1990 until 1993 Mr. Shuster served as Vice President of
Worldwide Entertainment Group, where he also produced three motion pictures. He
is also currently a director of ULC and President of UIT. Mr. Shuster is the son
of Mr. Harry Shuster.
Messrs. Harry Shuster and Brian Shuster are currently directors of UIT.
The Company recently acquired a technology license and certain related assets
from UIT, which is a wholly owned subsidiary of ULC, as more fully described in
Item 1. Messrs. Harry Shuster and Brian Shuster were elected as directors of the
Company following this transaction pursuant to the acquisition agreement and
will so serve for three (3) years, if so elected. In connection with this
transaction, Mr. Brian Shuster received two warrants, each entitling him to
purchase 200,000 shares of the Common Stock of the Company. One warrant is
exercisable for 200,000 shares at $2.50 per share and may be exercised between
April 1, 2002 and June 30, 2002, but only if NetCruise Interactive, Inc.
("NetCruise") achieves profits equal to or exceeding $5,000,000 for the years
1999, 2000 and 2001. The other Warrant is exercisable for 200,000 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.
18
<PAGE>
Item 10. Executive Compensation
The following tabulation shows the total compensation paid by the
Company for services in all capacities during the years ended December 31, 1998,
1997 and 1996 to the officers of the Company and total compensation for all
Officers as a group for such period:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Annual Compensation Long Term Compensation
Awards Payout
Other Restricted All
Annual Stock Options LTIP Other
Name and Year Salary Bonus Compensation Awards /SAR's Payout Compensation
- -------- ---- ------ ----- ------------ ------ ------ ------ ------------
Principal
- ---------
Position (Mgmt. Fee)
Lawrence E. Burk 1998 $147,500 $0 $0 $0 $0 $0 $0
President, & Chief 1997 $75,000(1) $0 $0 $0 $0 $0 $0
Executive Officer 1996 $0 $0 $0 $0 $0 $0 $0
Joseph Cutrona(2) 1998 $0 $0 $0 $0 $0 $0 $0
1997 $41,631 $0 $6,667 $0 $0 $0 $0
1996 $73,500 $0 $5,000 $0 $0 $0 $0
Mark A. Kenny (3) 1998 $88,462 $0 $0 $0 $0 $0 $0
1997 $64,231 $0 $28,967 $0 $0 $0 $0
1995 $42,000 $0 $16,250 $0 $0 $0 $0
John H. Wasko 1998 $80,000 $0 $0 $0 $0 $0 $0
Chief Financial Officer, 1997 $81,247 $0 $20,000 $0 $0 $0 $0
Secretary & Treasurer 1996 $10,000 $0 $49,500 $0 $0 $0 $0
Warren D. Bagatelle 1998 $0 $0 $39,000(6) $0 $0 $0 $0
Chairman 1997 $0 $0 $59,500(4) $0 $0 $0 $0
1996 $0 $0 $36,000(5) $0 $0 $0 $0
</TABLE>
(1) Salary paid to Mr. Burk for the period June 23, 1997 thru December 31, 1997.
Mr. Burk's annual salary is $150,000.
(2) As of May 12, 1997, Mr. Cutrona is no longer an employee, officer or
Director of the Company.
(3) Mr. Kenny formerly was the Company's Executive Vice President. He resigned
as an employee and a Director of the Company as of November 6, 1998.
(4) Includes $51,000 of consulting fees paid to Loeb Partners Corporation of
which Warren D. Bagatelle is Managing Director.
(5) Represents consulting fees paid to Loeb Partners Corporation.
(6) Includes $36,000 of consulting fees paid to Loeb Partners Corporation of
which Warren D. Bagatelle is managing director.
19
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following tabulation shows the security ownership as of February
22, 1999 of (i) each person known to the Company to be the beneficial owner of
more than 5% of the Company's outstanding Common Stock, (ii) each Director and
officer of the Company and (iii) all Directors and Officers as a group.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF PERCENT
NAME & ADDRESS SHARES OWNED OF CLASS
Loeb Holding Corporation
As Escrow Agent (1)
61 Broadway
New York, NY 10006 1,188,973 17.6%
Loeb Holding Corporation (2)
61 Broadway
New York, NY 10006 98,824 1.46%
United Internet Technologies, Inc. (3)(7)
18081 Magnolia Avenue
Fountain Valley, CA 92708 900,000 13.3%
Warren D. Bagatelle (1)(2)
Loeb Partners Corporation
61 Broadway
New York, NY 10006 1,287,797 19.1%
Mark A. Kenny
Gen O2, Inc.
15 Clyde Road, Suite 201
Somerset, NJ 08873 324,175 4.8%
John H. Wasko (4)
Genisys Reservation Systems
2401 Morris Avenue
Union, NJ 07083 137,046 2%
Lawrence E. Burk (5)
Genisys Reservation Systems
2401 Morris Avenue
Union, NJ 07083 205,000 3%
S. Charles Tabak (6)
ARC Medical Professional Personnel
36 Route 10W, Suite D
East Hanover, NJ 07936 22,000 *
David W. Sass (6)
McLaughlin & Stern, LLP
260 Madison Ave. 18th Fl.
New York, NY 10016 20,000 *
20
<PAGE>
Harry Shuster(3)(7)(8)
United Internet Technologies, Inc.
18081 Magnolia Avenue
Fountain Valley, CA 92708 900,000 13.3%
Brian Shuster (3)(8)
United Internet Technologies, Inc.
18081 Magnolia Avenue
Fountain Valley, CA 92708 0 *
Yeshiva Beth Hillel of Krasner, Inc. 400,000 5.9%
1371 42nd Street
Brooklyn, New York 11219
All Officers and Directors
as a group (7 persons) 2,571,843(9) 38%
- ---------------------
* less than 1%
</TABLE>
(1) Includes 853,679 shares of Common Stock purchased by Loeb Holding
Corporation, as escrow agent for Warren D. Bagatelle, Managing Director of Loeb
Partners Corp., HSB Capital (of which Mr. Bagatelle is a partner), trusts for
the benefit of families of two principals of Loeb Holding Corporation and three
unaffiliated persons, 282,353 shares of Common Stock issuable upon conversion of
282,353 shares of Series A Preferred Stock of the Company and 52,941 shares of
Common Stock issuable upon conversion of two Convertible Notes aggregating
$112,500. Loeb Holding Corporation disclaims any beneficial interest in these
shares.
(2) Includes 98,824 shares of Common Stock issuable upon conversion of
98,824 shares of Series A Preferred Stock of the Company.
(3) UIT will also receive 1,100,000 shares of Series B Preferred Stock,
convertible into 1,100,000 shares of Common Stock if Shareholders approve the
issuance of 1,100,000 shares of Common Stock and two Warrants, each entitling
the holder to purchase 800,000 shares of Common Stock. 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.
(4) Includes 14,362 shares of Common Stock owned of record by Joan E.
Wasko, John Wasko's wife, of which Mr. Wasko disclaims beneficial ownership, but
of which he may be deemed beneficial owner, a five (5) year option to purchase
35,000 shares of the Company's Common Stock at a price of $2.00 per share
granted to Mr. Wasko by the Company on November 1, 1996, a five (5) year option
to purchase an aggregate of 25,000 shares of Common Stock at a price of $4.75
per share granted on March 12, 1999 and 5,333 shares of Common Stock issuable
upon conversion of Mr. Wasko's prorata share of a Convertible Note in the
principal amount of $12,500.
(5) Includes a five (5) year option to purchase an aggregate of 200,000
shares of Common Stock at a price of $4.75 per share granted on March 12, 1999
(6) Includes a five (5) year option to purchase 15,000 shares of Common
Stock at a price of $4.75 per share granted on March 12, 1999.
21
<PAGE>
(7) Includes the 900,000 shares of the Company's Common Stock owned
by UIT. Mr. Harry Shuster is a significant shareholder, director and the
Chairman of the Board of UIT and may be deemed the beneficial owner of these
shares.
(8) Does not include two warrants issued in connection with the
acquisition of assets from UIT, each entitling Mr. Shuster to purchase 200,000
shares of the Company's Common Stock. One warrant is exercisable for 200,000
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 200,000 shares at $6.00 per share an 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.
(9) Includes all of the options granted to certain officers and
directors pursuant to the foot notes numbered (1) through (7) above.
Item 12. Certain Relationships and Related Transactions
In February 1995, Loeb Holding Corporation, as escrow agent
("Loeb"), for Warren D. Bagatelle, HSB Capital, trusts for the benefit of
families of two principals of Loeb Holding Corporation and three unaffiliated
individuals, agreed to loan the Company $500,000 evidenced by a series of
Convertible Promissory Notes ("Convertible Promissory Notes"). In September,
1995, Loeb converted the Convertible Promissory Notes into 841,455 common shares
of the Company and two Term Promissory Notes, one in the principal amount of
$475,000 and the other in the principal amount of $25,000.
On August 11, 1995, Robotic Lasers, Inc. acquired Travel Link by
issuing 1,682,924 shares of restricted new Common Stock of the Company in
exchange for the shares of the common stock of Travel Link owned by Joseph
Cutrona, Mark A. Kenny and Steven E. Pollan, which represented all the issued
and outstanding shares of common stock of Travel Link.
In August 1995 the Company granted Mr. Wasko a five (5) year option to
purchase 25,000 shares of Common Stock at a price of $0.60 per share, which
option has been exercised. In November, 1996 the Company granted Mr. Wasko a
five (5) year option to purchase 35,000 shares of Common Stock at a price of
$2.00 per share, and in March 1999 the Company granted Mr. Wasko a five (5)
year option to purchase an aggregate of 25,000 shares of Common Stock at a price
of $4.75 per share.
On September 5, 1995 the Company entered into a three year consulting
and investment banking agreement with Loeb Partners Corporation. Under the terms
of the agreement the Company pays Loeb Partners Corporation $3,000 per month.
Loeb Partners Corporation will also receive a fee for arranging private
financing and acquisitions. This banking agreement has been extended by the
Company for three (3) years on the same terms. Mr. Warren D. Bagatelle, a
Director and Chairman of the Company, is a Managing Director of Loeb Partners
Corporation.
During December 1995, Loeb agreed to loan the Company $250,000
evidenced by a series of Convertible Promissory Notes. In November 1996, Loeb
converted the Convertible Promissory Notes into (i) two Term Promissory Notes,
one in the principal amount of $237,500 and the other in the principal amount of
$12,500 issued in December 1995 and discussed below and (ii) 420,728 shares of
Common Stock of the Company, of which 420,000 shares of Common Stock are owned
by four unaffiliated parties. Loeb Holding Corporation did not receive any
shares of Common Stock in this transaction.
In March 1998 the holder of two Term Convertible Promissory 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.
22
<PAGE>
The holder of the term promissory notes is Loeb Holding Corporation, as
escrow agent for Warren D. Bagatelle, Managing Director of Loeb Partners Corp.,
HSB Capital (of which Mr. Bagatelle is a partner), trusts for the benefit of
families of two principals of Loeb Holding Corporation and three unaffiliated
persons. Loeb Holding Corporation disclaims any beneficial interest in these
shares. Warren D. Bagatelle is Chairman of the Company.
The Term Promissory Note in the amount of $25,000 and the Term
Promissory Note in the amount of $12,500 issued in December 1995 were converted
in March 1998 into 400,000 shares of the Common Stock of the Company at a price
of $0.09375 per share.
In August 1996, the Company gave notice to Mr. Pollan that it was
canceling the 333,216 shares of Common Stock which had been issued to him in
August of 1995. It is the Company's position that the Common Stock should be
canceled because, among other reasons, Mr. Pollan failed to provide the services
to the Company which were to be the consideration for the issuance of the
shares. Mr. Pollan has commenced an action against the Company and others in the
New Jersey Federal Court which contests the Company's effort to cancel the
shares issued to him, and which seeks monetary damages and other relief. The
action is in its preliminary stages, and no assurance can be given as to its
ultimate outcome.
During November and December 1996, the Company and Loeb Holding
Corporation signed four eighteen (18) month Convertible Promissory Notes whereby
Loeb Holding Corporation loaned the Company the sums of $75,000, $30,000,
$10,000 and $95,000 (totaling $210,00). The Promissory Notes which bear interest
at 10%, matured on May 11, 1998, May 25, 1998, June 2, 1998 and June 9, 1998. In
March 1998, Loeb, converted the total principal amount of the four Convertible
Promissory 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 connection with the acquisition of the technology license and the
assets from UIT by NetCruise, Mr. Brian Shuster received two warrants, each
entitling him to purchase 200,000 shares of the Common Stock of the Company. One
warrant is exercisable for 200,000 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 200,000 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.
In November 1998 the Company entered into an Acquisition Agreement with
a company newly formed by a management group led by Mark A. Kenny, a Company
founder and former director. This new company was organized for the purpose of
this acquisition. Mr. Kenny is still a shareholder of the Company.
For the year ended December 31, 1997 the Company paid to the firm of
McLaughlin & Stern, LLP the sum of $145,762 for legal services. Mr. Sass, a
director of the Company, is a member of said firm.
The Company believes that each of these transactions was entered into
on terms at least as favorable to the Company as could have been obtained from
unaffiliated third parties.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-k
(a) (1) Financial Statements
Included in Part II of this report:
23
<PAGE>
Balance Sheets - December 31, 1998 and 1997.
Statements of Operations During the Development Stage - For the
Period from Inception through December 31, 1998 and the Years
Ended December 31, 1998 and December 31, 1997.
Statements of Cash Flows - For the Period from Inception through
December 31, 1998 and for the Years Ended December 31, 1998 and
December 31, 1997.
Statement of Changes in Stockholders' Equity - For the Years Ended
December 31, 1998 and December 31, 1997.
Notes to Financial Statements
(2) Exhibits
3.1* Registrant's Articles of Incorporation
3.2* Registrant's By-Laws
4.1* Form of Common Stock Certificate
4.2** Redeemable Warrant Agreement with Form of Class A and
Class B Warrant
4.3** Redeemable Class X and Class Y Warrant issued to Brian
Shuster to purchase up to
200,00 shares of the Company's Common Stock.
4.4** Redeemable Class V and Class W Warrant issued to United
Internet Technologies, Inc. to purchase up to 800,00 shares of
the Company's Common Stock.
10.1** Copy of Agreement dated June 30, 1999 between the Company and
United Internet Technologies, Inc., formerly known as United
Leisure Interactive, Inc. relating to the purchase of a
technology license and certain related assets.
10.2 Copy of Agreement dated November 6, 1998 between the Company
and Corporate Travel Link, Inc., a wholly owned subsidiary of
the Company, TranspoNet, Mark A. Kenny, Paul Murray and Gen
02, Inc., relating to the sale of the Genisys Reservation
Systems business.
All of the above referenced documents marked with an (*) are incorporated herein
by reference to the Exhibit bearing the same number in the Registrant's
Registration Statement on Form SB-2, File No. 333-15011.
All of the above referenced documents marked with an (**) are incorporated
herein by reference to the Exhibit the Company's Form 8-K dated March 26, 1998.
(b) (1) Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1998
and 1997 and the Period From March 7, 1994 (commencement of development
stage activities) to December 31, 1998
F-4
Consolidated Statements of Changes in Stockholders' Equity
from inception to December 31, 1996 and for the Years Ended December 31, 1998 and 1997
F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998
and 1997, and the Period From March 7, 1994 (commencement of development
stage activities) to December 31 ,1998
F-6
Notes to Consolidated Financial Statements F-7 to F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Genisys Reservation Systems, Inc.
(A Development Stage Company)
We have audited the accompanying consolidated balance sheets of Genisys
Reservation Systems, Inc. and Subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended December 31, 1998 and 1997, and for
the period from March 7, 1994 (commencement of development stage activities) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Genisys Reservation
Systems, Inc. and Subsidiaries at December 31, 1998 and 1997 and the results of
their operations and their cash flows for the years ended December 31, 1998 and
1997, and for the period from March 7, 1994 (commencement of development stage
activities) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage company and has
suffered recurring losses from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WISS & COMPANY, LLP
Livingston, New Jersey
March 9, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Development Stage Companies
CONSOLIDATED BALANCE SHEETS
December 31,
1998 1997
Cash and equivalents $ 145,921 $2,207,841
Accounts receivable, less allowance for doubtful
accounts of $15,000 (1998) 67,174 8,784
Prepaid expenses 835 5,127
---- -----
Total Current Assets 213,930 2,221,752
664,204 -
91,400 261,643
RELATED ASSETS, LESS ACCUMULATED AMORTIZATION 2,376,265 581,193
94,638 88,278
------- ------
$ 3,440,437 $3,152,866
============ ==========
Current maturities of long-term debt $ 21,875 $ 114,957
Accounts payable and accrued expenses 208,509 192,712
Accrued interest payable - related parties 179,758 163,296
-------- -------
Total Current Liabilities 410,142 470,965
-------- -------
90,625 982,742
------- -------
Preferred stock, $.0001 par value: 24,294,000 shares
authorized, none outstanding - -
Series A preferred stock, $.0001 par value, 706,000 shares
authorized; issued and outstanding 381,177 shares (1998) 38 -
Common stock, $.0001 par value: 75,000,000 shares
authorized; issued and outstanding 6,913,965* shares
(1998) and 4,355,594 shares (1997) 691 436
Additional paid-in capital 8,518,558 4,933,851
Deficit accumulated during development stage (5,579,617) (3,235,128)
----------- -----------
Total Stockholders' Equity 2,939,670 1,699,159
---------- ---------
$ 3,440,437 $3,152,866
============ ==========
F-3
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
Development Stage Companies
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
March 7, 1994
(Commencement of
Development
Stage Activities) to
Year Ended December 31, December 31,
1998 1997 1998
----- ---- ----
SERVICE REVENUES $ 33,290 $ - $ 33,290
--------- ---- --------
Cost of services 19,306 - 19,306
General and administrative 963,122 581,345 1,544,467
Depreciation and amortization 228,563 21,686 250,249
Interest expense (income), net (20,507) 55,407 205,699
-------- ------- -------
1,190,484 658,438 2,019,721
---------- -------- ---------
LOSS BEFORE EQUITY IN GEN 02, INC. (1,157,194) (658,438) (1,986,431)
EQUITY IN LOSS OF GEN 02, INC. (1,187,295) (931,687) (3,593,186)
----------- --------- -----------
NET LOSS INCURRED DURING THE
DEVELOPMENT STAGE $(2,344,489) $ (1,590,125) $ (5,579,617)
============ ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,561,000 4,121,000 3,313,000
========== ========== =========
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (.42) $ (.39) $ (1.69)
======= ======= ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
Development Stage Companies
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Deficit
Accumulated
Amount Series A Preferred Additional During the
Per Stock Common Stock Paid-in Development
Share Shares Par Value Shares Par Value Capital Stage
INCEPTION TO DECEMBER 31, 1996:
Issuance of common stock in August 1995 for
for services received in 1996 and 1995 $ .01 - $ - 1,682,924 $ 168 $ 19,432 $ -
Net liabilities (principally accounts payable)
assumed in reverse acquisition in
August 1995 (.05) - - 280,487 28 (14,115) -
Conversion of related party debt into
common stock .02 - - 841,455 84 13,322 -
Issuance of common stock in 1996 for:
Cash 2.00 - - 55,000 6 109,994 -
Conversion of stockholder note .02 - - 420,766 42 6,661 -
Contributions to capital in 1996 - - - - - 106,700 -
Issuance of warrants - - - - - 10,350 -
Losses incurred during the development
stage - - - - - - (1,645,003)
-- -- -- -- -- -----------
BALANCES, DECEMBER 31, 1996 - - 3,280,632 328 252,344 (1,645,003)
YEAR ENDED DECEMBER 31, 1997:
Contribution to capital by
stockholder/officer - - - - 128,700 -
Proceeds from public offering
of common stock and
warrants, less related costs 5.00 - - 1,035,000 103 4,507,812 -
Conversion of convertible
notes into common stock 2.00 - - 15,000 2 29,998 -
Issuance of common stock
upon exercise of option .60 - - 25,000 3 14,997 -
Net loss - - - - - (1,590,125)
== == == == == ===========
BALANCES, DECEMBER 31, 1997 - - 4,355,632 436 4,933,851 (3,235,128)
Issuance of stock upon Sterling acquisition 1.50 - - 25,000 3 37,498 -
Issuance of common stock upon
acquisition of UIT assets 1.53 - - 2,000,000 200 2,499,800 *
Conversion of convertible
notes into:
Common stock .09 - - 400,000 40 37,460 -
Series A preferred stock 2.125 381,177 38 809,962
Issuance of common stock for cash 133,333 13 199,987 -
Net loss 1.50 - - - - - (2,344,489)
== == == == == ===========
BALANCES, DECEMBER 31, 1998 381,177 $ 38 6,913,965 $ 691 $ 8,518,558 $ (5,579,617)
======== ===== ========== ====== =========================
*2,000,000 shares issued are subject to shareholder aproval (Note 3).
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Development Stage Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
March 7, 1994
(Commencement of
Development
Stage Activities) to
Year Ended December 31, December 31,
1998 1997 1998
----- ----- ----- ----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,344,489) $ (1,590,125) $ (5,579,617)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Equity in loss of GEN 02, Inc. since its inception 119,918 - 119,918
Depreciation and amortization 534,503 217,387 868,397
Contribution to capital for services rendered - - 49,600
Changes in operating assets and liabilities:
Accounts receivable (59,296) (8,784) (68,080)
Prepaid expenses (7,478) (4,286) (12,845)
Deposits and other (6,360) 3,241 (68,683)
Accounts payable and accrued expenses 41,775 (147,669) 381,757
------- --------- -------
Net cash flows from operating activities (1,721,427) (1,530,236) (4,309,553)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and software (445,007) (457,202) (1,549,982)
Acquisition of Prosoft, Inc. - (34,602) (34,601)
Advances to GEN 02 (40,000) - (40,000)
-------- -- --------
Net cash flows from investing activities (485,007) (491,804) - (1,624,583)
--------- --------- -- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (92,986) (78,340) (171,326)
Proceeds from public offering of common
stock and warrants net of deferred offering costs - 4,661,125 4,507,915
Issuance of common stock for business acquisitions 37,500 - 37,500
Contribution to capital - stockholder/officer - 128,700 205,400
Proceeds from issuance of notes payable - - 955,000
Payments under computer equipment leases - - (63,076)
Proceeds from sale and lease-back - - 294,644
Proceeds from sale of common stock 200,000 - 310,000
Proceeds from issuance of 10% promissory
notes and related warrants, less related costs - - 517,500
Payments of 10% promissory notes - (563,500) (563,500)
Other - (9,652) 50,000
-- ------- ------
Net cash flows from financing activities 144,514 4,138,333 - 6,080,057
-------- ---------- -- ---------
NET CHANGE IN CASH AND EQUIVALENTS (2,061,920) 2,116,293 145,921
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,207,841 91,548 -
---------- ------- -
CASH AND EQUIVALENTS, END OF PERIOD $ 145,921 $ 2,207,841 $ 145,921
========== ============ =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 27,824 $ 94,822 $ 168,322
========= ========= =========
Issuance of common stock for UIT assets $ 2,500,000 $ - $ 2,500,000
============ ==== ===========
Conversion of related party debt into common
stock $ 37,500 $ - $ 57,609
========= ==== ========
Conversion of convertible notes payable
to common stock $ - $ 30,000 $ 30,000
==== ========= ========
Conversion of related party debt into Series A preferred stock $ 810,000 $ - $ 810,000
========== ==== =========
Net assets exchanged for investment in GEN 02, Inc. $ 744,122 $ - $ 744,122
========== ==== =========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
Development Stage Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
Development Stage Activities - Although planned principal
operations have commenced, revenues to date have not been
significant; accordingly, the Company and its subsidiaries
continue to be in the development stage.
Estimates and Uncertainties - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results, as
determined at a later date, could differ from those estimates.
Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Financial Instruments - Financial instruments include cash and
equivalents, other assets, accounts payable, accrued expenses
and long-term debt. The amounts reported for financial
instruments are generally considered to be reasonable
approximations of their fair values, based on market information
available to management; the difference is not considered
significant.
Cash and Equivalents - The Company considers all highly liquid
debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Concentration of Credit Risk - The Company maintains its cash
balances in several financial institutions. The accounts at each
institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 1997, the Company
had no uninsured cash balances, as approximately $90,000 was
invested in an insured money market fund.
Investment in and Advances to Gen 02, Inc. - The Company is
reporting contingent payments received from Gen 02, Inc. on the
cost recovery method. Although any earnings will be reported on
the equity method, all losses incurred by Gen 02, Inc. to the
extent of the Company's carrying amount of the assets
transferred plus advances will be reported in full by the
Company, since the only other capital being contributed to Gen
02, Inc. was $50. To the extent not recovered through contingent
payments, the difference is being amortized on a straight-line
basis over the remaining lives of the assets transferred and
will be further written down for any impairment. It is
reasonably possible that the remaining economic life of these
assets could be reduced significantly in the near term due to
future developments. As a result, the carrying amounts may be
reduced materially in the near term.
F-7
<PAGE>
Property and Equipment - Property and equipment are stated at
cost and depreciation is provided using the straight-line method
over an estimated useful life of 5 years.
Computer Software Costs and Technology Licenses- The Company
capitalizes the direct costs of materials, services and interest
consumed in software development and the cost of acquired
technology licenses and related assets. Such costs are being
amortized on a straight-line basis over three to five years,
subject to periodic evaluation for impairment. It is reasonably
possible that the remaining economic life of these assets could
be reduced significantly in the near term due to future
developments. As a result, the carrying amounts may be reduced
materially in the near term.
Adoption of Statement of Position 98-1 had no material effect on
the Company, as its prior policies substantially conformed.
Debt Issue Costs - Costs related to the issuance of debt are
capitalized and amortized over the term of the related debt as
an adjustment to interest expense.
Income Taxes - Deferred tax assets and liabilities are computed
for temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future, based on enacted tax laws
and rates applicable to the periods in which the temporary
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Stock Based Compensation - Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation,"
("FAS 123") encourages, but does not require, companies to
record compensation cost at fair value for stock-based employee
compensation plans. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for options
granted by the Company is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
Since the exercise price equaled or exceeded the estimated fair
value of the underlying shares at the date of grant, no
compensation was recognized in 1998 and 1997.
F-8
<PAGE>
Had compensation cost been based upon the fair value of the
options on the date of grant, as prescribed by FAS 123, the
Company's proforma net loss and net loss per share would have
been approximately $(2,681,000) or $0.48 per share in 1998 and
approximately $(2,801,000) or $.68 per share in 1997. The fair
value of the options were estimated at the date of grant using
the Black-Scholes option pricing model with the following
weighted-average assumptions, risk-free interest rates of 5.0%,
dividend yield of 0.0%, volatility factor equal to 70.4% (1998)
and 59.2% (1997) and an expected life equaling the options
exercise periods.
Net Loss Per Common Share -Basic loss per share is based upon
the weighted average number of outstanding common shares. The
shares issuable upon the exercise of outstanding warrants and
options or upon conversion of outstanding debt have been
excluded since the effect would be antidilutive, due to net
losses for all periods presented; accordingly, diluted loss per
share is the same as basic loss per share for all periods
reported. Common shares and warrants issuable upon contingencies
described in Note 7 are being excluded from basic and diluted
earnings (loss) per share until the beginning of the year if and
when the contingencies are met.
Note 2 - Operating and Liquidity Difficulties and Management's Plans to
Overcome:
The accompanying financial statements of the Company have been
presented on the basis that it is a going concern, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has
reported net losses since inception and expects to incur
additional operating losses over the next several quarters. The
Company has also experienced liquidity difficulties since
inception, and in order to continue the marketing and sales
efforts of the Company's internet travel business may need
additional financing. The Company has financed its operations
since inception with the proceeds from the issuance of long-term
debt, with the proceeds from its public and private offerings
and loans from a related party.
From inception to November 6, 1998, the operations of the
Company were devoted to market research and developing a
software and hardware system for computerizing the limousine
reservation and payment system.
Upon completion, the Company commenced generating limited
revenues.
As of November 5, 1998, the Company began generating revenues
from shared commissions earned by the network of Sterling Travel
Consultants recently acquired, although these revenues were not
significant for the fourth fiscal quarter ended December 31,
1998. Management of the Company expects the internet travel
business to be fully operational in mid-1999 and is planning to
F-9
<PAGE>
begin television marketing of the Company's products in
mid-1999. These efforts are expected to significantly increase
revenues in 1999. The Company plans to continue an 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 has
also begun to receive contingent payments from GEN 02 although
these payments were not significant for the fourth fiscal
quarter ended December 31, 1998. The Company completed a private
placement of common stock in January 1999 and received gross
proceeds of $1,500,000 of which $200,000 was received in 1998.
With these proceeds and anticipated cash to be received from
revenues, the Company believes 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 its web site or to fund cash
shortfalls should anticipated revenues not be achieved.
Reference should be made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
included elsewhere herein for additional information.
Note 3 - Acquisitions, Exchange of Assets for Interest in Non Majority Owned
Entity and Business Segments:
Acquisitions - In June 1997, the Company acquired 80% of the
outstanding common stock of Prosoft, Inc. ("Prosoft") for an
aggregate purchase price of $34,602. This transaction has been
accounted for as purchase and is included in the Company's
consolidated financial statements as of the date of acquisition.
The assets acquired consist principally of equipment.
Net Cruise - As of June 30, 1998, the Company's, newly formed
subsidiary, Net Cruise Interactive, Inc. ("Net Cruise") acquired
computer software, a technology license and related assets from
United Leisure Interactive, Inc. ("UIT") in exchange for
2,000,000 shares of the Company's stock and two warrants
("Warrants"). Subsequently, the Company was advised that because
the issuance of 2,000,000 shares and warrants exceeded 20% of
the issued and outstanding shares, shareholder approval was
required by a NASDAQ rule. NASDAQ has agreed to continue listing
the Company's securities on the NASDAQ Small Cap Market pursuant
to the following conditions: (i) the UIT Transaction must be
unwound in the event shareholders do not ratify the acquisition
of the software, technology license and certain related assets
from UIT and approve the issuance of 1,100,000 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 the technology license and certain related assets
from UIT. The Company has requested an extension from NASDAQ
with respect to the deadline to July 31, 1999.
F-10
<PAGE>
The Company and UIT have restructured the transactions 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 Market Place 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 Series B Preferred
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 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 issues two
warrants, each to purchase 800,000 shares of Common Stock, as
outlined above (See Note 7).
In the event shareholders do not ratify the acquisition of the
assets and approve the issuance of 1,100,000 shares of Common
Stock and two stock purchase warrants, the UIT 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 unwound, (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 and warrants
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.
Other - On November 5, 1998, the Company acquired Sterling AKG
Corp. d/b/a Sterling Travel ("Sterling") for 25,000 shares of
common stock and contingent shares (See Note 7).
In February 1999, the Company acquired Sammy's Travel World,
Inc., a travel agency for 36,600 shares of common stock valued
at $1.50 per share ($54,900).
F-11
<PAGE>
In the event these transactions are not approved, these
transactions would be rescinded and the shares issued for
Sammy's described above can be sold back to the Company for
$109,800 at Sammy's option.
Accounting - For accounting purposes, the fair value of the
shares has been allocated to the assets acquired based upon
management's estimate of the relative fair values. No value has
been placed on the warrants issued UIT or on the contingent
shares issuable to Sterling, as the value is contingent upon
future earnings. When the contingency is resolved, the fair
value of the warrants and shares will be treated as an
additional cost of the acquisitions.
Pro forma results assuming the acquisitions had occurred as of
January 1, 1997 have not been presented, as the acquisitions of
Pro Soft, Sterling and Sammy's were not deemed significant and
the acquisition of assets from UIT was not of a business.
Exchange of Assets - In November 1998, the Company decided to
exchange the assets of its computerized limousine reservation
and payment system for a 32.7% interest in Gen O2, Inc., a
Company newly formed by a former director and founder of the
Company, and contingent payments for a period of five years (up
to a maximum total of $1,080,000). For financial reporting
purposes, this exchange resulted in a change in reporting to the
equity basis whereby the operating results of the business
exchanged in 1998 have been reclassified to the equity basis of
reporting in 1997; there was no effect on net income.
The Company is also obligated to lend $175,000 in 1998 and 1999
of which $40,000 has been loaned at December 31, 1998. These
loans are payable $10,000 in 1999 and $30,000 in 2000. (See
"Item 1, Business - General" for additional information.)
Costs and expenses incurred prior to the exchange for 1998 and
1997 were allocated between Gen 02, Inc.'s business and the
remaining business of the Company. The latter represents the
Company's corporate expenses (officers' and office compensation,
professional fees, rent and similar costs) and, since June 30,
1998, the operation of its Internet travel business. Such
general and administrative expenses relate to all of its
business activities. Common expenses have been allocated to the
limousine reservation and ProSoft business (Gen 02, Inc.) on an
incremental basis and all other ongoing corporate expenses are
reported as costs of the remaining business. In the opinion of
management, this allocation approximates costs which would have
been incurred on a stand alone basis. However, 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. For years prior to 1997, all
activities were attributed to the limousine reservation
business.
F-12
<PAGE>
Business Segment - The Company is presently engaged in one
business segment, computerized applications for travel. This
business presently includes the operations of Sterling and
development stage activities from UIT. Gen 02, Inc., including
ProSoft, which is 32.7% owned is engaged in the marketing of a
computerized limousine reservation and payment system. There are
no activities between GEN 02, Inc. and the Company, other than
allocated expenses noted above.
Summarized information on Gen 02, Inc. is as follows:
Year Ended December 31,
1998 1997
Revenues from external domestic customers $ 96,680 $ 25,863
------------ ------------
Expenses:
Cost of services 136,766 24,992
General and administrative 755,067 736,858
Depreciation and amortization 392,142 195,700
------------- ------------
Net loss 1,283,975 975,550
----------- ------------
Net loss $(1,187,295) $ (931,687)
=========== ===========
Capital expenditures $ 221,697 $ 457,202
============ ===========
December 31,
1998
Current assets $ 34,229
Property and equipment 198,098
Computer software costs 520,986
Other assets 7,420
$ 760,733
Current liabilities $ 74,529
Due to Company and Transponet 62,000
Equity 624,204
$ 760,733
Pro Forma Statements -The acquisition of assets from UIT and the
exchange of assets for a non-controlling equity interest in Gen
02, Inc. are subject to ratification by the shareholders.
(Reference should be made to "Pro Forma Financial Statements"
and "Item 1, Business - General" appearing elsewhere herein for
description of the effects of either or both recissions.
F-13
<PAGE>
Note 4 - Property and Equipment:
Property and equipment at December 31, 1998 and 1997 are summarized as follows:
December 31,
1998 1997
Computer equipment $ 98,925 $349,075
Furniture and fixtures 6,509 46,392
----------- ----------
105,434 395,467
Less: Accumulated depreciation 14,034 133,824
---------- ---------
$ 91,400 $261,643
========= ========
Note 5 - Long-term Debt:
Notes Payable - Related Party - Term Promissory Notes in the
amount of $712,500 provided for accrued interest at the rate of
9% per annum payable quarterly commencing September 1997 and
unless previously converted, the principal amount of each note
was to be repaid in twelve quarterly installments, commencing
September 1, 1998, or on such earlier date as such notes
provide. The notes and the unpaid interest accrued thereon, are
convertible at the sole option of the holder into shares of
Series A Preferred Stock of the Company at a conversion price of
$2.125 per share. In March 1998, $600,000 of the notes were
converted into 282,353 shares of Series A Preferred Stock of the
Company.
Term Promissory Notes in the amount of $37,500 provided for
accrued interest at the rate of 9% per annum payable quarterly
commencing September 1997 and, unless previously converted, the
principal amount of each note was to be repaid in twelve equal
quarterly installments, commencing September 1, 1998, or on such
earlier date as such notes provide. In March 1998 the notes were
converted into an aggregate of 400,000 common shares of the
Company.
During November and December 1996, the Company and Loeb Holding
Corporation signed four eighteen (18) month Promissory Notes
totalling $210,000 which bore interest at 10%. The Promissory
Notes were converted in 1998 into 98,824 shares of Series A
Preferred Stock of the Company at a conversion price of $2.125
per share.
Interest paid under these loan agreements to date has been
immaterial.
Capital Leases - The Company had sale/lease-back arrangements
relating to computer hardware and commercially purchased
software for its limousine reservation operations. The net book
F-14
<PAGE>
value of capitalized equipment at December 31, 1997 was
approximately $230,000. Pursuant to the November 1998 exchange
of assets (see Note 3), this obligation was assumed by GEN 02,
Inc.
Summary of long-term debt:
December 31,
1998 1997
Notes payable - stockholder, less unamortized debt discount of
$8,179 and $9,654 and 1998 and 1997, respectively
$ 112,500 $ 740,346
Notes payable - related party - 610,000
Capital leases - 147,353
------------------ ------------
112,500 1,497,699
Less: Current maturities 21,875 514,957
------------- ------------
$ 90,625 $ 982,742
============ ===========
Future maturities of long-term debt are $37,500 (2000), $37,500
(2001) and $15,625 (2002).:
Note 6 - Income Taxes:
Deferred income taxes reflect the net effects of temporary
differences between the amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The principal temporary difference arises from net
operating loss carryforwards and results in a deferred tax asset
of approximately $2,400,000 at December 31, 1998.
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. The Company has determined, based on its recurring net
losses, and it being a development stage company, that a full
valuation allowance is appropriate at December 31, 1998.
A reconciliation of the provision (benefit) for income taxes
computed at the federal statutory rate of 34% and the effective
tax rate of income (loss) before income taxes is as follows:
Year Ended December 31,
1998 1997
Computed tax benefit on net loss at federal statutory
rate $(800,000) $ (550,000)
State income tax benefit, net of federal income tax
effect (140,000) (100,000)
Tax effect of net operating losses not currently usable
940,000 650,000
---------- -----------
Provision (benefit) for income taxes $ - $ -
=============== ===========
F-15
<PAGE>
At December 31, 1998, the Company had net operating loss
carryforwards of approximately $6,000,000 expiring through 2013.
Current tax law limits the use of net operating loss
carryforwards after there has been a substantial change in
ownership (as defined) during a three year period. Because of
the possible future changes in common stock ownership, the use
of the Company's net operating loss carryforwards may be subject
to an annual limitation. To the extent amounts available under
the annual limitation are not used, they may be carried forward
for the remainder of 15 years from the year the losses were
originally incurred.
Note 7 - 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. The Series A Preferred Stock
holders are not entitled to the payment of dividends. 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.
The Board of Directors is authorized to issue additional shares
of Preferred Stock from time to time in one or more series and
to establish and designate any such series and to fix the number
of shares and the relative conversion rights, voting rights,
terms of redemption and liquidation.
Public Offering - On March 26, 1997, the Company consummated a
public offering of its securities consisting of 1,035,000 shares
of common stock, 1,725,000 Class A Redeemable Warrants and
1,035,000 Class B Redeemable Warrants. Each redeemable warrant
is exercisable for a period of 48 months, commencing September
20, 1997 and entitles the holder to acquire one share of common
stock at $5.75 (Class A) or $6.75 (Class B) per share.
Commencing March 20, 1998, the Company has had the right at any
time to redeem all, but not less than all, of the Class A or
Class B warrants at a price equal to $.20 per Class A warrant
and $.10 per Class B warrant, provided that the closing bid
price of the common stock equals or exceeds $6.25 (Class A) or
$7.25 (Class B)
per share.
Cancellation of Shares - In August 1996, the Company gave notice
to a former officer and director of the Company that it was
cancelling the 333,216 shares of its common stock which had been
F-16
<PAGE>
issued to the former officer in connection with services to be
provided at the inception of Travel Link. Such cancellation
relates to various claims made by the Company against the former
officer and failure to provide services to the Company. The
former officer has contested the attempt by the Company to
cancel his shares. Pending return of the shares, they are
considered outstanding for all periods presented herein. (See
Note 8 for information concerning litigation commenced by the
former officer.)
Warrants - Pursuant to a private offering in May and June 1996,
Class A Redeemable Warrants entitling the holders to purchase
287,500 shares of the Company's common stock through August 2001
were issued.
Subject to shareholder approval, warrants were issued in
connection with the UIT transaction described in Note 3. One
warrant is exercisable for 800,000 shares at $2.50 per share
between April 1, 2002 and June 30, 2002, but only if Net Cruise
achieves net income (as defined) of at least $5,000,000 for
1999, 2000 and 2001. The other Warrant is exercisable for
800,000 shares at $6 per share between April 1, 2002 and June
30, 2002, but only if Net Cruise achieves net income (as
defined) of at least $10,000,000 for 1999, 2000 and 2001.
Subsequent to the acquisition of UIT's assets, two of UIT's
executives became consultants and directors of the Company. One
of the directors received two warrants to purchase 200,000
shares each under the same terms as those issued for UIT's
assets. No value has been placed on these Warrants, as the value
is contingent upon future earnings. When the contingency is
resolved, the fair value of the warrants issued for UIT's assets
will be treated as an additional cost of the acquisition and,
those to the director, as compensation expense.
Contingent Shares - In connection with the Sterling acquisition
described in Note 3, an additional 17,500 shares were placed in
escrow and will be released in the event the Company achieves
$3,000,000 of gross sales during the twelve months ended October
31, 1999.
Non-incentive Options - In August 1995, the Company granted an
option to purchase 25,000 shares of its common stock to an
officer, exercisable at $.60 per share through August 2000. On
May 29, 1997, these options were exercised. In November 1995,
the Company granted an option to purchase 35,000 shares of its
common stock to the same officer exercisable at $2 per share
through November 2001.
In connection with the leases described in Note 5, the Company
granted to the lessor warrants to purchase 22,098 shares of
common stock at an exercise price of $2 per share.
In May 1997, the Company granted to each of the two minority
owners of ProSoft, non-incentive stock options to purchase
40,000 shares of common stock. The options expire five years
F-17
<PAGE>
from the date of grant and are immediately exercisable at
$8.625. In December 1997, the Company's Board of Directors
resolved to modify the options to purchase 80,000 shares of the
Company's common stock granted in May 1997 to an exercise price
of $6.00 per share with three year vesting through September
2000.
Incentive Options - Effective May 12, 1997, the Company's Board
of Directors approved the Genisys Reservation Systems, Inc. 1997
Stock Incentive Plan, (the "Plan"). Information on incentive
stock options activity for this Plan is as follows:
Year Ended December 31,
1998 1997
Weighted - Weighted -
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Balance, beginning of year 354,000 $6.14 - $ -
Options granted 122,000 4.44 354,000 6.14
Options exercised - - - -
Options cancelled 121,500 - - -
--------- ------------
Balance, end of year 354,500 $5.55 354,000 $6.14
======= ===== ======= =====
Exercisable 135,422 $5.77 96,500 $6.68
======= ===== ======== =====
Contribution to Capital - In February 1997, the former President
of the Company sold shares of the Company's common stock owned
by him and simultaneously remitted the proceeds of $19,700 to
the Company in the form of a capital contribution. The Company's
former Executive Vice President, using his own shares of common
stock of the Company, has reimbursed the Company's former
President for one-half of the number of shares he sold.
On July 28, 1997, the Company's former President and former
Executive Vice-President each contributed 14,553 shares of the
Company's common stock, valued at a total of $109,000, to
ProSoft in payment for computer software design and other
consulting services provided to the Company. The Company has
agreed to issue an equal number of new shares of common stock to
such stockholders in six equal installments, if the Company
meets certain performance criteria on six specified dates. Five
of such performance criteria have not been met on the specified
due dates and, accordingly, no new shares will be issued for
five of the targets. The sixth target was met and, accordingly,
4,851 shares will be issued in 1999.
F-18
<PAGE>
Note 8 - Commitments and Contingencies:
Leases - The Company leases its administrative facilities under
a five-year lease expiring in March 2002. The lease provides for
annual rent of approximately $45,000. The Company also has an
office lease expiring in August 2000 which provides for annual
rent of approximately $10,200.
Rent expense totalled $79,747 and $52,900 for the year ended
December 31, 1998 and 1997, respectively.
Consulting and Employment Agreements - In September 1995, the
Company entered into a three year consulting agreement with an
investment banking firm whose managing director is a stockholder
and the Chairman of the Board of Directors of the Company. The
agreement provides for a consulting fee of $3,000 per month and
has been extended by the Company for an additional three year
period (aggregate commitment at December 31, 1998 - $96,000).
In connection with the acquisition of Sammy's (Note 3), the
Company agreed to pay an executive $50,000 per year for two
years and granted options to purchase 10,000 shares of common
stock at fair market value.
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 the 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
(see Note 6) 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. (See
note 7 Cancellation of Shares.)
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.
A former officer and director has agreed to hold the Company
harmless and indemnify the Company from any and all claims.
Management believes that there will be no material effect on the
Company as a result of this action.
F-19
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
(Development Stage Companies)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998
(Unaudited)
The following statements are based upon the historical balance sheet of the
Company appearing elsewhere herein to show the effect on the Company's balance
sheet if the shareholders approve or do not approve (1) the issuance of
1,100,000 shares of Series B Convertible Preferred Stock which automatically
converts into 1,100,000 shares of Common Stock and the related ratification of
the Acquisition of software, a technology license and related assets from United
Internet Technologies, Inc. ("UIT Transaction") and (2) the ratification of the
exchange of the Company's limousine reservation business for a noncontrolling
interest in Gen 02, Inc. ("Gen 02 Transaction"). Reference should be made to
Note 3 to the Company's financial statements appearing elsewhere herein for
additional information. These statements should be read in conjunction with the
Company's financial statements and notes thereto appearing elsewhere herein.
Assuming
Assuming Shareholders
Shareholders Approve Assuming
Approve UIT Gen 02 Shareholders
Assuming Transaction Transaction Do Not
Shareholders But Not the But Not the Approve
Approve Both Gen 02 UIT Either
ASSETS Transactions Transaction Transaction Transaction
(Note A) (Note B) (Note C) (Note D)
Current assets $ 213,930 $ 248,159 $ 213,930 $ 248,159
Investment in, and advances to, Gen 02, Inc. 664,204 - 664,204 -
Property and equipment 91,400 289,498 91,400 289,498
Computer software and related assets 2,376,265 2,897,251 101,265 622,251
Other assets 94,638 102,058 94,638 102,058
------------- ------------ ------------- ------------
$3,440,437 $3,536,966 $1,165,437 $1,261,966
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 410,142 $ 484,671 $ 460,142 $ 534,671
Long-term debt 90,625 112,625 90,625 112,625
Stockholders' equity 2,939,670 2,939,670 614,670 614,670
----------- ----------- ------------ ------------
$3,440,437 $3,536,966 $1,165,437 $1,261,966
========== ========== ========== ==========
Note A - Represents the historical balance sheet at December 31, 1998, as both
transactions were recorded as completed transactions.
Note B - Reflects the consolidation of Gen 02, Inc.'s balance sheet (as reported
in Note 3 to the Company's financial statements appearing elsewhere herein) and
the elimination of intercompany balances.
Note C - Reflects the elimination of the $2,275,000 book value of the assets
acquired from UIT at December 31, 1998, the related $2,500,000 value ascribed to
the common stock issued and accumulated depreciation and amortization of
$225,000. In addition, the estimated costs of $50,000 to unwind the UIT
transaction have been accrued.
Note D - Reflects both the consolidation and elimination entries described in
Notes B and C.
F-20
<PAGE>
GENISYS RESERVATION SYSTEMS, INC. AND SUBSIDIARIES
(Development Stage Companies)
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
The following statements are based upon the historical consolidated statement of
operations of the Company appearing elsewhere herein to show the effect on the
Company's statement of operations if the shareholders approve or do not approve
(1) the issuance of 1,100,000 shares of Series B Convertible Preferred Stock
which automatically converts into 1,100,000 shares of Common Stock and the
related ratification of the acquisition of software, a technology license and
related assets from United Internet Technologies, Inc. ("UIT Transaction") and
(2) the ratification of the exchange of the Company's limousine reservation
business for a noncontrolling interest in Gen 02, Inc. ("Gen 02 Transaction").
Reference should be made to Note 3 to the Company's financial statements
appearing elsewhere herein for additional information. These statements should
be read in conjunction with the Company's financial statements and notes thereto
appearing elsewhere herein.
Assuming
Assuming Shareholders
Shareholders Approve Assuming
Approve UIT Gen 02 Shareholders
Assuming Transaction Transaction Do Not
Shareholders But Not the But Not the Approve
Approve Both Gen 02 UIT Either
Transactions Transaction Transaction Transaction
(Note A) (Note B) (Note C) (Note D)
SERVICE REVENUES $ 33,290 $ 129,970 $ 33,290 $ 129,970
------------ ----------- ------------ -----------
EXPENSES:
Cost of services 19,306 156,072 19,306 156,072
General and administrative 963,122 1,718,189 963,122 1,718,189
Depreciation and amortization 228,563 620,705 3,563 395,705
Interest expense (income), net (20,507) (20,507) (20,507) (20,507)
------------- ------------- ------------- ------------
1,190,484 2,474,459 965,484 2,249,459
----------- ----------- ------------ -----------
LOSS BEFORE EQUITY IN GEN 02, INC. (1,157,194) (2,344,489) $ (932,194) (2,119,489)
EQUITY IN LOSS OF GEN 02, INC. (1,187,295) - (1,187,295) -
----------- ---------------- ----------- -----------
NET LOSS INCURRED DURING THE
DEVELOPMENT STAGE $(2,344,489) $(2,344,489) $(2,119,489) $(2,119,489)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
5,561,000 5,561,000 4,561,000 4,561,000
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (.42) $ (.42) $ (.46) $ (.46)
=============== =============== ================ ===============
Note A - Represents the historical statement of operations for the year ended at
December 31, 1998, as both transactions were recorded as completed transactions.
Note B - Reflects the consolidation of Gen 02, Inc.'s statement of operations
(as reported in Note 3 to the Company's financial statements appearing elsewhere
herein).
Note C - Reflects the elimination of the $225,000 of amortization on the assets
acquired from UIT during the year ended December 31, 1998 and the weighted
average number of shares of common stock issued to UIT.
Note D - Reflects both the consolidation and elimination entries described in
Note B and C.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
March 30, 1999 By:___/s/ Lawrence E. Burk_______
Lawrence E. Burk
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Lawrence E. Burk President, Chief Executive Officer, March 30, 1999
Lawrence E. Burk and Director
/s/ John H. Wasko Secretary, Treasurer, Chief Financial March 30, 1999
John H. Wasko Officer and Director
/s/ Warren D. Bagatelle Chairman and Director March 30, 1999
Warren D. Bagatelle
/s/ Brian Shuster Director March 30, 1999
Brian Shuster
/s/ David W. Sass Director March 30, 1999
David W. Sass
/s/ S. Charles Tabak Director March 30, 1999
S. Charles Tabak
/s/ Harry Shuster Director March 30, 1999
Harry Shuster
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the year ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 146
<SECURITIES> 0
<RECEIVABLES> 82
<ALLOWANCES> 15
<INVENTORY> 0
<CURRENT-ASSETS> 214
<PP&E> 105
<DEPRECIATION> 14
<TOTAL-ASSETS> 3,440
<CURRENT-LIABILITIES> 410
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,940
<TOTAL-LIABILITY-AND-EQUITY> 3,440
<SALES> 33
<TOTAL-REVENUES> 19
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,157)
<DISCONTINUED> (1,187)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,344)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> 0
</TABLE>
