Filed On 5/23/02 ˇ SEC File 0-30266 ˇ Accession Number 1025894-2-358
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
5/23/02 Gsociety Inc 8-K{2,4,5,6 5/22/02 4:73 Kupel Fred J
Document/Exhibit Description Pages Size
1: 8-K Current Report 28 148K
2: EX-2.1 Agreement and Plan of Share Exchange 40 166K
3: EX-3.(I) Amended Articles of Incorporation 2 14K
4: EX-99.1 Articles of Merger 3 11K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 15, 2002
Commission File Number: 0-25974
CAPITAL DEVELOPMENT GROUP, INC.
(Name of small business issuer in its charter)
OREGON 93-1113777
---------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
555 NE 5th Street Miami, Florida 33156
---------------------------------------- ----------------------------
(Address of principal administrative (City, State, Zip Code)
offices)
(305) 762-6262
-----------------------------------
(Registrants telephone number)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 17, 2002 the registrant, CAPITAL DEVELOPMENT GROUP, INC.
completed a share exchange with GSociety, Inc., a Florida corporation. As a
result of this share exchange, the registrant will acquire a significant amount
of new assets. The essential terms of the Share Exchange are:
a. The registrant will be the surviving corporation with the target
initially being a subsidiary of the registrant; and
b. The target shareholders (of GSociety, Inc.) will exchange 100% of
the issued and outstanding shares of GSociety, Inc. for 15,690,523
shares of the registrant, on a pro rata basis.
c. The target, GSociety, Inc. a Florida corporation, will continue as
a corporation in Florida after the share exchange; and
d. The target shareholders will, after the completion of the
transaction, control a majority of the voting rights of the
registrant; and
e. The registrant is not subject to control share restrictions; and
f. The Shareholders of both the registrant and the target voted in
favor of the Share Exchange; and
A copy of the Plan of Share Exchange is attached to this Form 8-K
as Exhibit 2.1, appended to this Form.
ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANTS
At the annual meeting of the shareholder's of the registrant, the
accounting firm of Squar, Milner Reehl & Williamson, LLP, the registrant's
auditors for 2001, did not stand for reappointment. The Directors recommended to
the shareholders that the firm of Garcia, Espinosa, Miyares & Company, LLC whose
address is 100 Almeria Avenue, Suite 230 Coral Gables, Florida 33134 be
appointed as auditors. The shareholders approved of the appointment of the new
auditors. There were no disagreements with Squar, Milner Reehl & Williamson,
LLP; as the registrant is moving its operations to Florida, the Board felt it in
the best interest of the registrant to retain a local auditing firm and the
shareholders agreed.
ITEM 5. OTHER EVENTS
Share Reversal:
On March 28, 2002 the registrant adopted a resolution which caused a
reverse split of the company's issued and outstanding common shares. As a result
of this action, on April 1, 2002, the registrant filed with the Secretary of
State of Oregon, an amendment to its Articles of Incorporation reflecting the
reverse split of the company's shares. (See Exhibit 3.1)
Share Exchange:
On May 17, 2002 the registrant, Capital Development Group, Inc. completed a
share exchange with GSociety, Inc., a Florida corporation. All of the terms and
conditions of the share exchange were approved by the shareholders of the
registrant, upon the recommendations of the Board of Directors. At the time of
the Share Exchange, the registrant, for all practical purposes, was not a "going
concern." The registrant had no remaining customers for its services, had no
revenues, and no account receivables.
Matters Presented at the Annual Meeting of Shareholders, held on May
16, 2002:
The Shareholders of the registrant have voted to change the
corporation's name to GSociety, Inc. Additionally, the shareholders have voted
to change the domicile of the company from Oregon to Florida. The new corporate
address for the registrant is 555 NE 5th Street, Suite 15-CU, Miami, Florida
33156. In order to effectuate the vote of the shareholders, the registrant filed
a "Short Form Merger" in order to complete a parent/subsidiary merger. The
effect is that the domicile of the registrant has been changed from Oregon to
Florida and the name of the registrant has been change from Capital Development
Group, Inc., an Oregon corporation to GSociety, Inc., a Florida corporation. A
copy of the Articles of Merger, as filed with the Florida Secretary of State are
attached as Exhibit 99.1. The registrant has made application to the NASD for a
symbol change as a result of the change of its name. The NASD has assigned the
new symbol of "GSOC" to the registrant.
ITEM 6. RESIGNATION OF REGISTRANT'S DIRECTORS
The entire Board of Directors of the registrant did not stand for
reelection at the annual meeting held on May 16, 2002. There were no
disagreements with the previous directors. The shareholders elected a new board
of directors, to serve until the next regular annual meeting of the
shareholders, or until otherwise removed.
The new directors are:
Paul Yates, Ph.D:
Mr. Yates has served as President CEO of GSociety, Inc. since 2000. Mr. Yates
has also served as President of PM Entertainment since 1995. PM Entertainment is
a holding Company for several businesses which include nightclubs targeting the
gay and lesbian communities, which operates nightclubs and restaurants, a
marketing and promotions Company which provides marketing and consulting
services for nightclubs, restaurants and entertainment businesses and a
promotions Company which produce events primarily for non-profit organizations.
From 1985 to present, Mr. Yates was President of The Hunter Group. The Hunter
Group owns and operates a group of small market radio properties. Mr. Yates
provides consulting services to broadcast companies particularly in the areas of
minority recruitment, human resources and labor relations. From 1979 to 1985 Mr.
Yates was employed with Westinghouse Broadcasting as a Vice President General
Manager with several of their television properties. Mr. Yates had also served
as the President and COO of Sheridan Broadcasting and the Mutual Black Network
from 1972 to 1978. He has served on the Board of Directors of several key
organizations including Whitman-Walker in Washington, D. C., a health and
services provider, Us Helping Us, The National Minority Aids Council, The Haven
House, The South Beach Restaurant and Hotel Association, The National
Association for the advancement of Colored People and the King Center. Mr. Yates
received his Ph.D. in Psychology and Human Behavior from Harvard University in
1970.
Brian Chase:
Mr. Chase has been is an associate at the law firm of King, LeBlanc & Bland
located in New Orleans, Louisiana from 1999 to present and from 1995 to 1997
King, LeBlanc & Bland is a mid-size commercial litigation firm, specializing in
admiralty, bankruptcy, entertainment, merger/acquisitions and general commercial
litigation. He has personally supervised defense of suits through trial, argued
hearings before bankruptcy, federal and state courts, drafted and reviewed
contracts for entertainment events, including live concerts and web simulcasts
and assisted in the preparation of contracts for a web-based media company. From
1997 to 1999 Mr. Chase was an associate with Barrett, Gravante, Carpinello &
Stern (n/k/a Bois, Schiller & Flexner) located in Ft. Lauderdale, Florida.
Barrett is specializes in commercial litigation and entertainment law. His
responsibilities included copyright and trademark registrations and providing
advice on intellectual property matters. He also tried cases and attended
numerous hearings on motions in both state and federal courts.
Matthew Skallerud:
From 2000 to 2001, Mr. Skallerud was Chief Operating Officer and VP of the
GSupport Services division of GSociety, Inc. From 1995 to 2000, Mr. Skallerud
was the founder, owner and CEO of Gaywired.com, one of the top 3 Portal sites
targeting the gay and lesbian market. From 1990 to 1995, Mr. Skallerud was in
the laser-engineering field, first in lab research, then in the marketing field.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of GSociety, Inc, a Florida corporation, are
included in this 8-K filing, and attached as Exhibit FS at the end of this
report.
Index to Exhibits
Exhibit 2.1 "Agreement and Plan of Share Exchange"
Exhibit 3.1 Amended Articles of Incorporation
Exhibit 99.1 Articles of Merger
Exhibit FS Financial Statements of GSociety, Inc
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Capital Development Group, Inc.
May 23, 2002 By:/s/ Paul Yates
----------------------------------------
Paul Yates, President/CEO
EXHIBIT FS
GSOCIETY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.................1
CONSOLIDATED BALANCE SHEETS........................................2
CONSOLIDATED STATEMENTS OF OPERATIONS..............................3
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)....................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS..............................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................6 - 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Stockholders
GSOCIETY, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of GSociety, Inc.
and Subsidiaries (the "Company") as of December 31, 2001 and December 31, 2000,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the two years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 GSociety, Inc. and
Subsidiaries at December 31, 2001, and December 31, 2000, and the results of
their operations and their cash flows for the two years then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that GSociety, Inc. and Subsidiaries will continue as a going concern. As more
fully described in Note 1 to the financial statements, the Company has incurred
losses since inception and is dependent upon its ability to raise additional
capital and to successfully market and sell its services. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects of the recoverability and classification of assets or the amounts
and classification of liabilities that may result from this uncertainty.
/s/ GARCIA, ESPINOSA, MIYARES & CO., LLP
Coral Gables, Florida
February 28, 2002
Except to Note 13 as to which the
date is March 19, 2002
1
GSOCIETY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000
[Enlarge/Download Table]
ASSETS
CURRENT ASSETS 2001 2000
------------ ------------
Cash $ 335,412 254,349
Accounts receivable 102,564 138,177
Inventory 38,142 -
Other current assets 326,606 50,042
------------ ------------
TOTAL CURRENT ASSETS 802,724 442,568
PROPERTY AND EQUIPMENT, net 380,972 530,514
GOODWILL AND INTANGIBLE ASSETS, net 313,473 167,498
OTHER ASSETS 44,474 32,310
------------ ------------
TOTAL ASSETS $ 1,541,643 $ 1,172,890
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,212,691 $ 609,103
Other current liabilities 216,889 6,260
Payroll taxes payable 928,444 224,140
Loans and notes payable 1,693,712 1,037,128
------------ ------------
TOTAL CURRENT LIABILITIES 4,051,736 1,876,631
MINORITY INTEREST (3,841) -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value; 10,000,000 shares
authorized, 1,080,000 and 540,000 shares issued and
outstanding at December 31, 2001 and 2000, respectively 1,080 540
Common stock, $.001 par value; 100,000,000 shares
authorized, 14,579,304 and 11,241,300 shares issued and
outstanding at December 31, 2001 and 2000, respectively 14,579 11,241
Additional paid in capital 13,318,084 10,616,122
Accumulated deficit (15,839,995) (11,331,644)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (2,506,252) (703,741)
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 1,541,643 $ 1,172,890
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
GSOCIETY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2000
[Enlarge/Download Table]
2001 2000
------------- -------------
REVENUES $ 788,907 $ 643,521
COST OF REVENUES 433,208 275,425
------------- -------------
GROSS PROFIT 355,699 368,096
------------- -------------
EXPENSES
Selling, general and administrative 4,267,039 4,842,230
Depreciation and amortization 288,614 213,829
------------- -------------
Total expenses 4,555,653 5,056,059
LOSS FROM OPERATIONS (4,199,954) (4,687,963)
OTHER INCOME (EXPENSE)
Interest income 7,030 2,125
Interest expense (319,267) (92,667)
Impairment of goodwill - (4,510,883)
------------- -------------
Total other income (expense) (312,237) (4,601,425)
------------- -------------
NET LOSS BEFORE MINORITY INTEREST (4,512,191) (9,289,388)
MINORITY INTEREST 3,841 -
------------- -------------
LOSS FROM CONTINUING OPERATIONS (4,508,350) (9,289,388)
DISCONTINUED OPERATIONS - (284,708)
------------- -------------
NET LOSS $ (4,508,350) $ (9,574,096)
============= =============
BASIC AND DILUTED NET LOSS PER SHARE FROM CONTINUING OPERATIONS $ (0.36) $ (0.95)
============= =============
BASIC AND DILUTED NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS $ - $ (0.03)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.36) $ (0.98)
============= =============
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING USED IN
COMPUTING BASIC AND DILUTED NET LOSS PER SHARE 12,613,635 9,801,207
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
GSOCIETY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2000
[Enlarge/Download Table]
Common stock Preferred stock Additional
---------------------- ------------------ Paid-in Unearned Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
---------- ----------- ------------------ ---------- ----------- ------------- -----------
Balances - January 1, 2000 5,909,781 $ 5,910 - $ - $ 990,885 - $ (1,757,548) $ (760,753)
Issuance of common stock 1,834,000 1,834 - - 3,661,741 - - 3,663,575
Issuance of preferred stock - - 540,000 540 1,349,460 - - 1,350,000
Issuance of common stock in
connection with business
acquisitions 2,255,000 2,255 - - 4,597,745 - - 4,600,000
Issuance of common stock in
connection with the exercise
of stock options and warrants 1,236,000 1,236 - - - - - 1,236
Issuance of common stock for
services 6,519 6 - - 16,291 - - 16,297
Net loss - - - - - - (9,574,096) (9,574,096)
---------- ----------- --------- -------- ---------- ----------- ------------- -------------
Balance - December 31, 2000 11,241,300 11,241 540,000 540 10,616,122 - (11,331,644) (703,741)
---------- ----------- --------- -------- ---------- ------------------------- -------------
Issuance of common stock 3,244,889 3,245 - - 1,324,755 - - 1,328,000
Issuance of common stock in
connection with the exercise
of stock options 3 0 - - 15 - - 15
Issuance of preferred stock - - 540,000 540 1,349,460 - - 1,350,000
Issuance of common stock in
connection with strategic
agreement 68,112 68 - - 15,257 - - 15,325
Issuance of common stock for
compensation 25,000 25 - - 12,475 - - 12,500
Net loss - - - - - - (4,508,350) (4,508,350)
---------- ----------- --------- -------- ---------- ------------------------- -------------
Balance - December 31, 2001 14,579,304 $ 14,579 1,080,000 $ 1,080 13,318,084 $ $(15,839,995) $(2,506,252)
========== =========== ========= ======== ========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
GSOCIETY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2000
[Enlarge/Download Table]
2001 2000
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,508,350) (9,574,096)
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation 185,589 127,888
Amortization 103,025 85,942
Goodwill - 4,510,883
Loss of discontinued operations - 26,926
Issuance of stock for services 12,500 16,297
Minority interest (3,841) -
(Increase) decrease in accounts receivable 35,613 (138,177)
(Increase) in employee receivable (4,129) (50,042)
(Increase) in inventory (38,142) -
(Increase) in prepaid expenses (5,935) -
(Increase) decrease in other assets 3,160 (32,310)
Decrease (increase) in deposits (266,500) 35,000
Increase in accounts payable and accrued expenses 604,588 315,249
Increse in payroll taxes payable 704,304 224,140
(Decrease) increase in other current liabilities 216,889 (190)
------------ ------------
Total adjustments 1,547,121 5,121,606
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,961,229) (4,452,490)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (36,047) (78,461)
Purchase of intangible (50,000) -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (86,047) (78,461)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 1,350,000 1,350,000
Proceeds from issuance of common stock, net 1,328,015 3,663,575
Proceeds from borrowings, net of payments 450,324 (129,132)
Repayment of line of credit - (25,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,128,339 4,859,443
------------ ------------
Net increase in cash 81,063 328,492
Cash, beginning of year 254,349 (74,143)
------------ ------------
Cash, end of year $ 335,412 $ 254,349
============ ============
SUPPLEMENTAL DISCLOSURE
Cash paid during the periods for interest $ 117,737 $ 86,407
Cash paid during the periods for income taxes $ - $ -
============ ============
Supplemental disclosure of non-cash investing and financing activities:
During 2001 and 2000, the Company acquired several businesses and their
respective assets through the issuance of stock and loans payable. (See Note 6)
The accompanying notes are an integral part of these consolidated financial
statements.
5
GSOCIETY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and December 31, 2000
Note 1 -- Organization and Basis of Presentation
GSociety, Inc. and Subsidiaries ("GSociety" or the "Company") is a
media and entertainment company in the global gay and lesbian
marketplace. GSociety offers advertisers online and offline marketing
opportunities to reach the millions of members of the gay and lesbian
community. The Company was originally incorporated under the laws of
the State of Florida and began operations as Outonthenet.com, Inc. in
March 1999. In March 2000, Outonthenet.com, Inc. merged into a newly
formed Florida corporation, GSociety, Inc. resulting in GSociety, Inc.
as the parent and Outonthenet.com, Inc. as a wholly owned subsidiary.
GSociety includes Gaywired.com, Lesbianation.com, DANCE1, GHighway,
QTMagazine.com, and Miamigo Magazine. GayWired.com is an online
destination specifically targeting gay men providing online news,
entertainment, interactivity and retail services. Lesbianation.com is a
leading online destination specifically targeting the lesbian market
providing online news, entertainment, interactivity and retail
services. DANCE1 produces dance music videos for gay and lesbian video
bars and nightclubs. GHighway offers travel information and resources
tied into a Pocket Guide and Co-Op advertising supporting gay friendly
tourist destinations. QTMagazine.com is an interactive, personalized
and e-commerce enabled site complete with a full-service online travel
agency. The site publishes unique and informative articles offering
information through web links and relationships with other well-managed
professional gay travel and non-travel sites. Miamigo is a South
Florida entertainment and fashion magazine.
Going Concern
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company is severely past due on
most of its current obligations. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its
ability to achieve profitable operations and/or raise additional
financing through private or public equity financings, collaborative or
other arrangements with corporate sources, or other sources of
financing to fund operations. Although the Company believes that there
are a number of parties interested in participating in such financing,
there is no assurance that the Company will achieve profitable
operations or that it will be able to raise adequate financing. The
Company's continued existence is dependent upon its ability to raise
capital and to market and sell its services successfully. The financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the
outcome of this uncertainty.
Note 2 -- Significant Accounting Policies and Procedures
Principles of Consolidation
The consolidated financial statements include the accounts of GSociety,
Inc. and its subsidiaries. Intercompany balances and transactions have
been eliminated. As more fully discussed in Note 6, during the two year
period ended December 31, 2001, the company acquired four businesses in
separate transactions. These acquisitions were accounted for using the
purchase method of accounting.
6
Revenue Recognition
To date, the Company's revenues have been derived from online
advertising sales for banner ads and sponsorships within the GSociety
websites, co-op advertising and guide book advertising, ecommerce,
entertainment advertising, event marketing, and technology related
services.
Online advertising sales typically include the delivery of impressions
on GSociety's Web sites. An impression is the viewing of promotional
material on a Web page, which may include banner advertisements, links,
buttons, or other text or images. Online advertising revenues are
derived principally from short-term advertising contracts in which the
Company typically guarantees a minimum number of impressions or pages
to be delivered to users over a specified period of time for a fixed
fee. Online advertising revenues are recognized ratably over the period
in which the advertisement is displayed, provided that the Company has
no continuing obligations and collection of the receivable is
reasonably assured, at the lesser of the ratio of impressions delivered
over total guaranteed impressions or the straight-line basis over the
term of the contract. To the extent that minimum guaranteed impressions
are not met, GSociety defers recognition of the corresponding revenues
until the guaranteed impressions are achieved.
GSociety's co-op advertising and guide book advertising are facilitated
through its regional marketing organization, GHighway. Co-op
advertising consists of tourist destination businesses that are sold
individual advertising space which the company compiles and places in
gay and lesbian specific publications on behalf of the customers.
GHighway produces a tourist guide book on behalf of the Palm Springs
area that is distributed to the gay and lesbian tourist. Revenues from
the guide book are generated through the sale of advertising space in
the book. Co-op and guide book revenues are recognized when the
advertisements are displayed or ratably over the period in which the
advertisement is placed, depending on the contract.
Revenues from e-commerce are derived specifically from the sale of a
number of different products to visitors of the gaywired.com,
lesbianation.com and dance1.net websites. The Company recognizes
revenues from e-commerce product sales, net of any discounts, when
products are shipped to customers and the collection of the receivable
is reasonably assured.
Entertainment revenues are generated specifically from the company's
DANCE1 network. Dance1 produces dance music videos for gay and lesbian
video bars and nightclubs. The DANCE1 video product is the nationwide
leader in this genre and distributes to over 450 venues with an
estimated 2 million viewers monthly delivering 15 million impressions.
Revenues are generated from advertisers and club locations featured in
each volume.
Event marketing revenues were specifically associated with the
company's co-marketing contract with Showtime. The company facilitated
the marketing of Showtime's, "Queer as Folk" 2nd season directly to the
gay and lesbian community at a number of events held throughout the
United States from May 2001 to September 2001.
In 2001, one customer, Viacom (through its affiliate "Showtime"),
accounted for approximately 14% of total revenues and no one other
customer accounted for more than 10% of total revenues.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts. The Company
maintains its cash and cash equivalents in highly rated financial
institutions.
7
Restricted Cash
Included in cash at December 31, 2001 are funds in the amount of
$297,500 designated for the completion of a merger into a public
company and related costs.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate fair value because of their short
maturities.
Property and Equipment, net
Property and equipment are recorded at cost, less accumulated
depreciation. Depreciation of equipment, furniture, fixtures and
computer software is provided for by the straight-line method over
their estimated useful lives ranging from three to seven years.
Amortization of leasehold improvements is provided for over the lesser
of the term of the related lease or the estimated useful life of the
improvement. The cost of additions, and expenditures which extend the
useful lives of existing assets, are capitalized, and repairs and
maintenance costs are charged to operations as incurred. The Company
continually evaluates whether current events or circumstances warrant
adjustments to the carrying value or estimated useful lives of fixed
assets and intangible assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets" ("SFAS 121"). The company
capitalizes software development costs in accordance with SOP 98-1.
Goodwill and Intangible Assets
Goodwill and intangible assets consist primarily of the excess of the
purchase price paid over the identified intangible and tangible net
assets of acquired companies. The Company assesses the recoverability
of its goodwill and intangible assets by determining whether the
unamortized balance over its remaining life can be recovered through
forecasted cash flows. If undiscounted forecasted cash flows indicate
that the unamortized amounts will not be recovered, an adjustment is
made to reduce the net amounts to an amount consistent with forecasted
future cash flows discounted at a rate commensurate with the risk
associated when estimating future discounted cash flows. Future cash
flows are based on trends of historical performance and management's
estimate of future performance, giving consideration to existing and
anticipated competitive and economic conditions. (See Note
2--Significant Accounting Policies and Procedures-- Recent Accounting
Pronouncements and Note 4--Goodwill and Intangible Assets)
Gaywired.com
In March 2000, GSociety paid $275,000 in notes payable and issued
2,075,000 shares of common stock valued at $4,150,000 for gaywired.com
and its affiliates. This transaction resulted in a goodwill entry of
approximately $4.1 million. During 2001, the approximately $4.1 million
in goodwill was written down completely due to a decline in value
deemed to be other than temporary.
JW Marketing
In June 30, 2000, GSociety paid $45,000 in cash and note payable for JW
Marketing Concepts. This transaction resulted in a goodwill entry of
approximately $47,390.
8
QT Magazine.com
In October 2000, GSociety paid $50,000 in notes payable and issued
180,000 shares of common stock valued at $450,000 for QT Magazine.com.
This transaction resulted in a goodwill entry of approximately
$400,000. During 2001, the approximately $400,000 in goodwill was
written down completely due to a decline in value deemed to be other
than temporary.
Miamigo Magazine
In November 2001, GSociety paid $250,000 in cash and notes payable for
the assets used by or in connection with the businesses operating a
magazine publication under the name "Miamigo". This transaction
resulted in a goodwill entry of approximately $249,000.
Advertising Costs
Advertising costs are expensed as incurred and are included in the
sales and marketing lines in the accompanying consolidated statements
of operations. Advertising costs included in sales and marketing were
approximately $190,000 for the year ended December 31, 2001 and
approximately $450,000 in 2000.
Web Site Development Costs
During 2000, the Company adopted the consensus in the Financial
Accounting Standards Board ("FASB") Emerging Issues Task Force (EITF)
Issue No. 00-2, Accounting for Web Site Development Costs, which
requires that certain costs to develop Web sites be capitalized or
expensed, depending on the nature of the costs. Approximately $17,000
in 2001 and $29,000 in 2000 of development costs were capitalized.
Income Taxes
The Company recognizes deferred taxes by the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for differences between the
financial statement and tax bases of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences
are expected to reverse. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the
enactment date. In addition, valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amount of
assets and liabilities, 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 could
differ from these estimates. Significant estimates and assumptions made
by the Company include those related to the useful lives of fixed
assets and the recoverability of fixed assets, goodwill and deferred
tax assets.
Net Loss Per Share
Basic net loss per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net loss per
share is computed using the weighted-average number of common and
common stock equivalent shares outstanding during the period. Common
stock equivalent shares are excluded from the computation if their
effect is anti-dilutive.
9
Stock options and warrants in the amount of 0 shares and 1,562,556
shares for the years ended December 31, 2001 and 2000, respectively,
were not included in the computation of diluted earnings per share as
they are anti-dilutive as a result of net losses during the periods
presented.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement requires companies to classify
items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position. The Company
has had no other comprehensive income items to report.
Stock Compensation
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. In accordance with APB
Opinion No. 25, compensation expense, if any, is generally based on the
difference between the exercise price of an option, or the amount paid
for an award, and the market price or fair value of the underlying
common stock at the date of the award or at the measurement date for
variable awards. Stock-based compensation arrangement involving
non-employees are accounted for under Statement of Financial Accounting
Standards Board ("SFAS") No. 123, Accounting for Stock Based
Compensation, under which such arrangements are accounted for based on
the fair value of the option as required. As required by SFAS No. 123,
the Company discloses pro forma net income (loss) and net income (loss)
per share information reflecting the effect of applying SFAS No. 123
fair value measurement to employee arrangements.
Segment Reporting
The Company engages in business activities in one operating segment,
which provides complete marketing solutions for the gay and lesbian
community.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting
Standard No. 141, "Business Combinations" ("SFAS 141") and Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142").
SFAS 141 establishes accounting and reporting for business combinations
by requiring that all business combinations be accounted for under the
purchase method. Use of the pooling-of-interests method is no longer
permitted. SFAS 141 also provides guidance on purchase accounting
related to the recognition of intangible assets and accounting for
negative goodwill. SFAS 141 requires that the purchase method be used
for business combinations initiated after June 30, 2001. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Effective January 1, 2002, amortization of
goodwill recorded for business combinations consummated prior to July
1, 2001 will cease, and intangible assets acquired prior to July 1,
2001 that do not meet the criteria for recognition under SFAS 141 will
be reclassified to goodwill. Goodwill will be subject to an annual
impairment test, including a transitional impairment test required upon
adoption, which must be completed by December 31, 2002. GSociety has
implemented early adoption of SFAS 141 and 142 for its fiscal years
ending December 31, 2001 and December 31, 2000.
10
In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 143, "Accounting for Obligations Associated with the
Retirement of Long- Lived Assets" ("SFAS 143"). The objective of SFAS
143 is to provide accounting guidance for legal obligations associated
with the retirement of long-lived assets. The retirement obligations
included within the scope of this project are those that an entity
cannot avoid as a result of either the acquisition, construction or
normal operation of a long-lived asset. Components of larger systems
also fall under this project, as well as tangible long-lived assets
with indeterminable lives. The provisions of SFAS 143 are effective for
financial statements issued for fiscal years beginning after June 15,
2002. GSociety has not yet evaluated the expected impact of the
adoption of SFAS 143 on its financial condition, cash flows and results
of operations and will adopt SFAS 143 in fiscal 2002.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). The objectives of SFAS 144 are to
address significant issues relating to the implementation of SFAS 121
and to develop a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. The
provisions of SFAS 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company does
not expect the adoption of this statement to have a material impact on
the Company's results of operations or financial position.
Note 3 - Property and Equipment, net
Fixed assets consist of the following:
December 31,
2001 2000
---- ----
Computer equipment $ 55,464 $ 46,100
Capitalized software and development 487,746 470,063
Leasehold improvements 105,144 105,144
Furniture and equipment 58,896 49,896
------- -------
707,250 671,203
Less, accumulated depreciation and amortization (326,278) (140,689)
--------- ---------
$ 380,972 $ 530,514
========= =========
Depreciation and amortization of property and equipment assets from continuing
operations was approximately $185,589 for the year ended December 31, 2001 and
$127,888 for the year ended December 31, 2000.
Note 4 -- Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, 2001 and 2000 consisted of the
following:
December 31,
Lives 2001 2000
----- ---- ----
Trademarks and domain names 2-3 years $ 206,050 $ 206,050
Goodwill - 296,390 47,390
------- ------- -------
502,440 253,440
Less: accumulated amortization (188,967) (85,942)
--------- --------
$ 313,473 $ 167,498
========== ==========
11
The net increase in goodwill during 2001 was due to the acquisition of Miamigo
Magazine. The net increase in goodwill during 2000 was primarily due to the
acquisition of JW Marketing. (See Note 6 - Business Acquisitions and
Dispositions)
During 2000, the Company recorded a charge of approximately $4.5 million for the
impairment of goodwill relating to certain acquisitions. (See Note 6--Business
Acquisitions and Dispositions) This non-cash charge represents the difference
between the historical book value of the goodwill and the discounted estimated
future cash flows expected from the related operations. GSociety estimated
future cash flows based upon historical results, sales backlog and sales targets
and detailed expense projections. In addition, when developing these future
projections GSociety considers business trends, prospects and market and
economic conditions.
Amortization expense for intangible assets from continuing operations for the
years ended December 31, 2001 and December 31, 2000 was approximately $103,025
and $85,941, respectively. (See Note 2--Significant Accounting Policies and
Procedures--Recent Accounting Pronouncements)
Note 5 -- Related-Party Transactions
Officer Loan Receivable
In February 2000, the Company accepted a non-negotiable promissory note
in the principal amount of $30,000 (the "Note") from its chairman and
then chief executive officer ("Chairman"). The Note is collateralized
by 500,000 shares of the Company's common stock and was due and payable
on February 28, 2001. Interest is payable at the end of the term at the
rate of 8.50%. As of December 31, 2001, no payments were received for
principal or interest and the company had not exercised its right to
the collateral. The chairman also has a carry forward balance of
$12,417.39 due to the company for personal expenses paid on his behalf
in 1999 which remains unpaid at December 31, 2001.
Consulting Agreement
During 2001 the Company entered into a month to month consulting
arrangement with a shareholder of the company and former member of
management for services. The amounts paid vary depending on the work
performed.
Officer's Salary
In September 2001, the Company's President and CEO decided to
temporarily forgo his compensation in order to help the Company's
financial situation.
Note 6 -- Business Acquisitions and Dispositions
GSociety, Inc.
In March 2000, Outonthenet.com, Inc. merged into a newly formed Florida
corporation, GSociety, Inc. resulting in GSociety, Inc. as the parent
and Outonthenet.com, Inc. as a wholly owned subsidiary of GSociety. For
accounting purposes the acquisition has been treated as a
recapitalization of Outonthenet.com, Inc. with Outonthenet.com, Inc. as
the acquirer (reverse acquisition). The historical financial statements
prior to March 2000 are those of Outonthenet.com, Inc. The financial
statements as of December 31, 2001 and December 31, 2000 are presented
as if the merger took place January 1, 2000. No pro forma information
is shown because GSociety, Inc. was a newly formed corporation with no
material previous activity.
12
Gaywired.com and affiliates
On March 31, 2000, the Company completed its acquisition of the
business and assets of GayWired, an Internet portal site targeting the
gay/lesbian/bi-sexual audience, and Dance 1, producer of dance videos
sold to gay nightclubs from GayWired's owners. The aggregate purchase
price was approximately $4,425,000, consisting of $275,000 in cash
payable over one year in twelve equal installments and 2,075,000 shares
of Common Stock. The difference between the purchase price and the fair
value of the acquired net assets was recorded as goodwill. The company
also issued to the owners warrants to purchase 750,000 shares of Common
Stock at $3.75 per share. During 2000, the company determined, based
upon discounted estimated future cash flows, the remaining $4.1 million
of goodwill was fully impaired and as such was written off. (See Note 4
- Goodwill and Intangible Assets).
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
Working capital $ (205,983)
Fixed assets 320,100
Intangible assets 200,000
Goodwill 4,110,883
---------
$ 4,425,000
=========
JW Marketing
On June 30, 2000, the Company completed its acquisition of the business
and assets of JW Marketing Concepts and Pentrack Marketing Strategies,
a local/regional advertising and marketing business targeting the
gay/lesbian/bi-sexual audience. The aggregate purchase price was
$45,000 payable $10,000 in cash and the balance of $35,000 payable over
one year in twelve equal monthly installments . The company also issued
to the owners warrants to purchase 50,000 shares of Common Stock at
$5.00 per share.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
Working capital $ (8,590)
Fixed assets 4,200
Intangible assets 2,000
Goodwill 47,390
------
$ 45,000
======
QTMagazine.com
On October 24, 2000 the Company acquired the business and assets of
QTmagazine.com, an online travel magazine directed at the gay and
lesbian community into QTMagazine.com, Inc, a wholly owned subsidiary
of GSociety. The aggregate purchase price was approximately $500,000,
consisting of $50,000 payable in varying cash installments over a three
month period and 180,000 shares of Common Stock. The difference between
the purchase price and the fair value of the acquired net assets was
recorded as goodwill. During 2000, the company determined, based upon
discounted estimated future cash flows, the remaining $400,000 was
fully impaired and as such was written off. (See Note 4 - Goodwill and
Intangible Assets).
13
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
Fixed assets $100,000
Goodwill 400,000
-------
$ 500,000
=======
EZ Source
On November 1, 2000 the Company discontinued the operations of EZ
Source.com, the Company's online electronic retail business. The
Company recorded a loss on sale of assets of $26,926 and a loss from
operations of $257,782. Results of these operations and loss on sale of
assets have been classified as discontinued operations.
In early November the Company sold the assets of EZ Source to
Cellsandpcs.com, Inc. The company received a convertible note for
$100,000 payable in a lump sum in one year at an interest rate of 15%
per annum convertible at any time at $1.00 per common share in exchange
for the business and assets of EZ Source. The Company also received
150,000 shares of common stock of the acquirer and 100,000 purchase
warrants convertible at $1.00 per share.
The loss on sale of discontinued assets was calculated as follows:
Value of convertible promissory note........ $ 100,000
Estimated write down on note (100,000)
Fixed assets, net ( 23,660)
Intangible assets, net ( 3,266)
----------
Loss on sale of EZ Source.com assets $( 26,926)
==========
Net revenue and loss from discontinued operations for 2001
and 2000 were as follows:
2001 2000
Net revenue........................ $ - $ 700,314
Loss from discontinued operations.. $ - $(257,782)
Net current liabilities from discontinued operations as of December 31,
2001 and 2000 were not material.
Miamigo Magazine
On November 1, 2001, the Company completed its acquisition of the
business and assets of Miamigo Magazine, a South Florida
entertainment/fashion magazine. The aggregate purchase price was
$250,000 payable $50,000 in cash upon closing and $200,000 payable in
varying installments over a period of 27 months. The difference between
the purchase price and the fair value of the acquired net assets was
recorded as goodwill. The prior owner of Miamigo Magazine received a
10% interest in GPublications, Inc., a subsidiary of GSociety under
which the magazine was acquired.
14
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
Working capital $ 1,000
Goodwill 249,000
-------
$ 250,000
=======
Note 7 - Loans and Notes Payable
On January 1, 2000, the company renegotiated various promissory notes
in the total principal amount of $750,000 which became due and payable
on December 31, 2002. Interest only payments are payable monthly at a
rate of 9.50% per annum. The principal is convertible into shares of
common stock of the company at a rate of $2.50 per share at any time up
to maturity. At December 31, 2001, the principal balance on the note
was $750,000 and $11,875 of unpaid interest was due and payable.
On March 31, 2000, the company entered into an agreement to pay
$137,500 with one of the owners of gaywired.com in connection with the
acquisition of gaywired.com. (See Note 6 - Business Acquisitions and
Dispositions) The principal amount of $137,500 was due and payable on
February 28, 2001. Payments of $11,458 were due and payable monthly for
12 months. At December 31, 2001, the principal balance on the note was
$42,580.
On March 31, 2000, the company entered into an agreement to pay
$137,500 with one of the owners of gaywired.com in connection with the
acquisition of gaywired.com. (See Note 6 - Business Acquisitions and
Dispositions) The principal amount of $137,500 was due and payable on
February 28, 2001. Payments of $11,458.33 were due and payable monthly
for 12 months. At December 31, 2001, the principal balance on the note
was $60,252.
On June 30, 2000, the company entered into an agreement to pay $35,000
with the owners of JW Marketing in connection with the acquisition of
JW Marketing. (See Note 6 - Business Acquisitions and Dispositions) The
principal amount of $35,000 was due and payable on June 30, 2001.
Payments of $2,916 were due and payable monthly for 12 months. At
December 31, 2001, the principal balance on the note was $11,666.
On September 26, 2000, the company entered into a non-negotiable
promissory note in the principal amount of $100,000 which was due and
payable on September 25, 2001. Interest is payable monthly at a rate of
11.00% per annum. The principal is convertible into shares of common
stock of the company at a rate of $2.50 per share at any time up to
maturity. At December 31, 2001, the principal balance on the note was
$50,000 and $8,250 of unpaid interest was due and payable. The note
holder was issued 4,500 warrants to purchase common stock at $3.75 per
share in consideration for the loan.
On October 24, 2000, the company entered into an agreement to pay
$50,000 with the owners of QT Magazine in connection with the
acquisition of qtmagazine.com. (See Note 6 - Business Acquisitions and
Dispositions) The principal amount of $50,000 was due and payable on
January 31, 2001. At December 31, 2001, the principal balance on the
note was $40,000.
On October 31, 2000, the company entered into a non-negotiable
promissory note with a director of the Company in the principal amount
of $39,212 which was due and payable on December 15, 2000. The
principal is convertible into shares of common stock of the company at
a rate of $2.50 per share at any time up to maturity. At December 31,
2001, the principal balance on the note was $39,212.
15
On February 28, 2001, the company entered into a non-negotiable
promissory note in the principal amount of $250,000 which was due and
payable on March 30, 2001. Interest is payable monthly at the rate of
12% per annum. At December 31, 2001, the principal balance on the note
was $250,000 and $25,000 of unpaid interest was due and payable. The
borrower was issued 50,000 warrants to purchase common stock at $5.00
per share in consideration for the loan.
On March 30, 2001, the company entered into a non-negotiable promissory
note in the principal amount of $100,000 which is due and payable on
July 28, 2001. Interest was payable at maturity at a rate of 10.00% per
annum. At December 31, 2001, the principal balance on the note was
$100,000 and $7,500 of unpaid interest was due and payable.
On April 12, 2001, the company entered into a non-negotiable promissory
note in the principal amount of $100,000 which was due and payable on
August 10, 2001. Interest is payable at maturity at a rate of 10.00%
per annum. At December 31, 2001, the principal balance on the note was
$100,000 and $7,167 of unpaid interest was due and payable.
On May 24, 2001, the company entered into a non-negotiable promissory
note in the principal amount of $100,000 which was due and payable on
November 20, 2001. Interest is payable at maturity at a rate of 10.00%
per annum. The principal is convertible into shares of common stock of
the company at a rate of $2.50 per share at any time up to maturity. At
December 31, 2001, the principal balance on the note was $100,000 and
$6,000 of unpaid interest was due and payable. The note holder was
issued 45,000 warrants to purchase common stock at $2.50 per share in
consideration for the loan.
On November 30, 2001 the company entered into an agreement to pay
$200,000 with the owner of Miamigo Magazine in connection with the
acquisition of the business of Miamigo Magazine (See Note 6 - Business
Acquisitions and Dispositions). The principal amount of $200,000 was
due and payable over a period of 27 months. At December 31, 2001, the
principal balance on the note was $150,000. Interest is imputed at 6%.
At December 31, 2001 and December 31, 2000 all loans outstanding had
current maturities and as such are included under current liabilities.
At December 31, 2001 interest payable to preferred shareholders was
approximately $136,000 and is included in other current liabilities
under the line interest payable.
Note 8 -- Detail of Certain Balance Sheet Accounts
2001 2000
Other current assets:
Due from employees $ 54,171 $ 50,042
Prepaid expenses 5,935
Deposit in escrow 266,500
--------------- -------------
$ 326,606 $ 50,042
=============== =============
Other current liabilities:
Deferred revenue $ 12,064 $ -
Sales taxes payable 3,295 -
Interest payable 201,530 6,260
--------------- -------------
$ 216,889 $ 6,260
=============== =============
16
Deposits in escrow in the amount of $266,500, at December 31, 2001 were amounts
paid pursuant to letter of intent to exchange shares and merge into a public
company. The merger was not consummated and said funds were subsequently
returned to G Society in February 2002. $266,500 was included in Other Assets at
December 31, 2001.
Included under Accounts Payable and Accrued expenses as of December 31, 2001 and
December 31, 2000, respectively, is approximately $535,728 and $112,708 of back
payroll payable to the officers of the Company.
Payroll Taxes Payable
Since October 2000, the Company has been delinquent on all federal, state and
local payroll tax filings. Respective remittances on payroll tax payments for
federal, state and local employee withholding as well as employer match
contributions have not been made and continue to accrue penalties and interest.
The financial statements include additional accruals of $179,067 and $23,324,
respectively for the years ended December 31, 2001 and December 31, 2000 for
estimated penalties and interest for both failure to file and failure to pay.
These amounts are included in the payroll taxes payable line of the financial
statements.
Note 9 -- Commitments and Contingencies
Leases
The Company leases office and equipment under non-cancelable operating leases
expiring at various dates through May 2005. The following is a schedule of
future minimum lease payments under non-cancelable operating leases as of
December 31, 2001 for the next five years:
Year Ending December 31:
-------------------------
2002................................... $ 188,239
2003................................... 121,318
2004................................... 115,440
2005................................... 32,374
2006................................... -
----------
$ 457,371
==========
In June 2000, GSociety entered into a five-year lease for approximately
8,975 square feet at 7060 Hollywood Boulevard, Hollywood, California.
In July 2001, the Company amended its lease located at 7060 Hollywood
Boulevard. The amended lease reduces the amount of square footage to
3,953. The Company's yearly financial commitment was reduced by
approximately $106,103 and approximately $353,678 over the remaining
life of the lease.
In November 2001, the Company entered into a three-year lease for
approximately 1700 square at 555 NE 15th Street, Miami, Florida.
In October 2001 the company broke its lease agreement for its original
office space in Miami Florida due to the fact that it had become cost
prohibitive. Said lease was to expire in June 2002. Approximately
$20,527 remaining at December 31, 2001 has been included in the future
lease obligations schedule above. Management does not expect any
additional contingencies to arise from this situation.
17
Rent expense from continuing operations was approximately $228,364 for
the year ended December 31, 2001 and $24,475 for the year ended
December 31, 2000.
Strategic Partnership Agreement
In December 2001, GSociety entered into a strategic partnership
agreement with TLA Entertainment Group. GSociety and TLA have jointly
developed a new ecommerce web site hosted and maintained by TLA. TLA
has agreed to process all the backend processing of orders for products
sold on the site in exchange for GS receiving a percentage of the
revenues generated. GS has agreed to link related ecommerce associated
throughout its web sites to the new site. GS and TLA have also agreed
to co-promote and co-brand each other in its advertising, web sites,
events and event sponsorships. As further incentive to the transaction
GSociety issued 68,112 shares of common stock to TLA recorded at a
value of $15,325 in exchange for 0.005% of TLA common stock. The
$15,325 investment in TLA is included in Other Assets as of December
31, 2001.
Risks and Uncertainties
The Company is subject to the risks, expenses and uncertainties
frequently encountered by companies in the new and rapidly evolving
markets for technology products and services. These risks include the
failure to develop and extend the Company's online service brands, the
non acceptance or rejection of the Company's services by Web consumers,
vendors, sponsors and/or advertisers and the inability of the Company
to maintain and increase the levels of traffic on its online services,
as well as other risks and uncertainties. In the event the Company does
not successfully implement its business plan, certain assets may not be
recoverable.
Note 10 - Stockholders' Equity
Employee Stock Options
In April 1999, GSociety's Board of Directors adopted a Non Qualified
Stock Option Plan (the Plan). The Plan provides for the granting, at
the discretion of the Board of Directors, of options to employees,
officers, and directors. Options vest and become exercisable as
determined by the Board of Directors generally ranging from zero to
sixty months. The plan provides for the issuance of up to three million
shares of common stock. Options may generally be exercised at any time
after they vest and before the expiration date. However, no option may
be exercised more than five years after the grant date. The exercise
price of options granted under the Plan range from $1.00 to $5.00 per
share which was determined by the Board of Directors.
Pro forma information regarding net income or loss is required by SFAS
No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that
statement. The fair value of options granted was estimated at the date
of grant using the minimum value method of the Black-Scholes option
pricing model which assumes no volatility with the following additional
assumptions: expected life of the options of 4 years, risk free
interest rates ranging from 4.5% to 5.5% and no expected dividends.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense of the options' vesting period. The
effect of applying the fair value method prescribed by SFAS No. 123 to
the Company's options results in no change between actual and pro forma
net loss and net loss per share due to the fact that the fair value of
the options granted during 2001 and 2000 is $0 under the Black-Scholes
pricing model discussed above. Because the determination of the fair
value of all options is based on the assumptions described in the
preceding paragraph, and because additional option grants are expected
to be made in future periods,
18
this pro forma information in not likely to be representative of the
pro forma effects on reported net income or loss of future years.
A summary of the Company's stock option activity and related
information is as follows
Weighted Average Exercise Price
Options Per Share
-------
Before Repricing*
-----------------
Outstanding, January 1, 2000 2,510,000 $1.48
Granted 1,789,600 $3.43
Exercised (400,000) $1.00
Expired/Canceled 0 $0
---------- ------
Outstanding, December 31, 2000 3,899,600 $2.42
---------- ------
Granted 88,000 $5.00
Exercised (3) $5.00
Expired/Canceled (97,347) $5.00
---------- ------
Outstanding, December 31, 2001 3,890,250 $2.42
========== ======
*On June 30, 2001, the Company amended stock options for employees
employed on that date as follows: all outstanding options with an
exercise price in excess of $1 per share were amended to an exercise
price of $0.62 per share. Per APB No. 25, this modification to reduce
the exercise price of these options causes variable accounting for
these options for the remainder of their life.
Information about options outstanding at December 31, 2001 is as
follows:
Options
Options Outstanding Exercisable
Weighted Average
Remaining
Contractual Life
(Years)
Exercise Price Shares Shares
$0.62 3,793,750 3.0 3,793,750
$1.00 96,500 4.3 0
3,890,250 3,793,750
Capital Stock
During 2000, the Company raised $3,663,575 in capital through the
issuance of 1,834,000 shares of common stock in connection with private
placement offerings to non-existing shareholders. Additionally, during
the year ended December 31, 2000, the company issued 2,255,000 shares
of common stock in connection with business acquisition and 1,236,000
shares of common stock in connection with the exercise of stock options
and warrants. Also during 2001 the company issued 2,519 shares of
common stock for services rendered in the amount of $6,298 and 4,000
shares of common stock for services rendered in the amount of $10,000.
During 2001, the Company raised $1,328,000 in capital through the
issuance of 3,244,889 shares of common stock in connection with private
placement offerings to existing shareholders. Additionally, during the
year ended December 31, 2001, the company issued 3 shares of common
stock in connection with the exercise of stock options, 68,112 shares
of common stock in connection with a partnership agreement and 25,000
shares of common stock for compensation in the amount of $12,500.
19
GSociety has 10 million shares of preferred stock authorized and
1,080,000 shares of Series A Preferred Stock issued and outstanding.
Each share of Series A Preferred stock are convertible into one share
of common stock at $2.50 per share. The Holders of the Series A
Preferred Stock shall be entitled to receive cumulative dividends of 8%
per annum, payable in cash, accruing from the initial date of issuance.
Upon any Liquidation, the Holders of record of the Series A Preferred
Stock shall be entitled to receive, out of the assets of the
Corporation and in preference to the holders of any Junior Securities,
for each share of Series A Preferred Stock, an amount per share equal
to two times the Purchase Price paid by the Holders, plus any declared
but unpaid dividends.
On June 30, 2001 the board of directors authorized a re-pricing of all
outstanding options and warrants with an exercise price of $1.00 or
more to be re-priced to $0.62 per share. This new exercise price was
approximately 25% above the established value of common shares at the
time of the re-pricing. At December 31, 2001, the company had a total
of 7,320,250 warrants with a weighted average exercise price of $0.59
per share. During the fiscal year ended December 31, 2001, the Company
issued 2,205,000 warrants with a weighted average exercise price of
$0.70 per share prior to the re-pricing. During the fiscal year ended
December 31, 2000, the Company issued 1,836,250 warrants with a
weighted average exercise price of $4.14 per share.
At December 31, 2001, the Company had reserved common stock for future
issuance as follows:
Employee stock options outstanding 3,890,250
Ungranted stock options 109,750
Warrants outstanding 3,279,000
Warrants issued with convertible notes 101,500
Warrants issued for acquisitions 800,000
Warrants issued for investment incentive 2,720,000
Warrants issued for services, vested 359,750
Warrants issued for services, non-vested 60,000
----------
11,320,250
==========
Note 11 -- Benefit Plan
The Company maintains a 401(k) plan covering all of the eligible
employees. Eligible participants may contribute up to the maximum
percentage allowable not to exceed the limits of Internal Revenue Code
401(k) of their base salary to the Plan. The Company's matching
contributions are discretionary. The Company did not contribute to the
Plan for the periods ended December 31, 2001 and December 31, 2000.
Note 12 -- Income Taxes
The significant components of the Company's net deferred income taxes for the
years ended December 31, 2001 and 2000 are as follows:
2001 2000
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 5,834,233 $ 4,210,519
Allowance for doubtful accounts 14,800 0
------------ ------------
5,849,033 4,210,519
20
Valuation allowance ( 5,804,781) ( 4,185,309)
------------ ------------
44,252 25,210
Deferred income tax liabilities
Depreciation and amortization ( 44,252) ( 25,210)
------------ ------------
Net deferred income tax asset $ 0 $ 0
============= ============
The Company has incurred net losses since its inception. At December
31, 2001 and December 31, 2000, the Company had approximately
$15,768,195 and $11,379,780 in net operating loss carryforwards for
U.S. federal income tax purposes that expire in various amounts through
2021. Realization of the resulting deferred tax assets, and the
Company's other net deferred tax assets, is not reasonably assured;
therefore they are fully reserved with a valuation allowance.
The change in the valuation allowances for the years ended December 31,
2001 and December 31, 2000 were increases of $1,619,472 and $3,535,016,
respectively, resulting primarily from net operating losses generated
during the periods. The difference between the benefit for income taxes
and the amount which results from applying the federal statutory rate
of 34% is primarily due to the increase in the valuation allowances
during the years ended December 31, 2001 and December 31, 2000,
resulting in no tax benefit reported in that period.
Note 13 -- Subsequent Events
Capital Development Group, Inc.
On March 19, 2002, the Company received written consents from a
majority of shareholders to authorize the Agreement and Plan of Share
Exchange with Capital Development Group, Inc. ("Capital"), wherein
GSociety, Inc.'s shareholders will exchange 100% of the issued and
outstanding shares of GSociety, Inc. for 15,690,523 shares of Capital
Development Group, Inc.'s common shares pursuant to Section 368(a) of
the Internal Revenue Code of 1968. GSociety will become a wholly owned
subsidiary of Capital Development Group, Inc. The agreement further
provides that the business combination will become effective when all
conditions precedent have been complied with by both companies. It is
estimated that the effective date will be on or before June 1, 2002.
Capital Development Group, Inc. is a publicly traded company on the
OTC-BB.
Additional Issuance of Common Stock
In March 2002, the Company issued 2,000,000 of common stock for
proceeds of $285,000.
Note 14 - Valuation and Qualifying Accounts and Reserves
Allowance for Doubtful Accounts
Balance, January 1, 2000 $ -
Charge to expense -
Write-offs -
---------
Balance, December 31, 2000 $ -
=========
Balance, January 1, 2001 $ -
21
Charge to expense 40,000
Write-offs -
---------
Balance, December 31, 2001 $ 40,000
=========
Note 15 - Litigation
On August 31, 2001, a vendor filed a claim for non-payment of services
with the superior court of Los Angeles. The claim is for approximately
$40,000 and is reflected in the financial statements under accounts
payable and accrued expenses as of December 31, 2001. As of the date of
this audit, there has been no final judgment entered.
On February 14, 2002, a Miami-Dade county circuit court entered a
default judgment against a subsidiary of the company in the amount of
approximately $42,000 stemming from the early cancellation of a copier
lease. The judgment payable is reflected in the financial statements
under accounts payable and accrued expenses as of December 31, 2001.
On February 25, 2002, an Illinois circuit court entered a default
judgment against a subsidiary of the company in the amount of $5,000.
The judgment payable is reflected in the financial statements under
accounts payable and accrued expenses as of December 31, 2001.
On March 28, 2002, a vendor of the company filed a claim for
non-payment of services in a small claims court in California. The
claim of approximately $5,000 has been accrued by the company and is
reflected in the financial statements under accounts payable and
accrued expenses as of December 31, 2001.
22
Dates Referenced Herein and Documents Incorporated By Reference
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