AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 2004
Registration No. 333-________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
______________________
GENESIS TECHNOLOGY GROUP, INC.
(Name of small business issuer in its charter)
Florida 7373 65-1130026
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
777 Yamato Road
Suite 130
Boca Raton, Florida 33431
561-988-8228
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
______________________
Mr. Gary Wolfson
Chief Executive Officer
Genesis Technology Group, Inc.
777 Yamato Road
Suite 130
Boca Raton, Florida 33431
561-988-9880
(Name, Address and Telephone Number of Agent For Service)
______________________
Copies of all communications to:
James M. Schneider, Esq.
Schneider Weinberger LLP
2499 Glades Road
Suite 108
Boca Raton, Florida 33431
Telephone: 561-362-9595
Facsimile No: 561-361-9612
Approximate Date of Proposed Sale to the Public: As soon as practicable after
the effective date of this registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of each Dollar maximum maximum
class of securities Amount to be offering price aggregate Amount of
to be registered registered per security offering price(1) registration fee
-------------------- ------------ -------------- ----------------- ----------------
Common stock, par value 21,850,000 $ 0.31 $ 6,773,500 $ 860
$.001 per share(2)
Total Registration Fee
_________
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933 based on the
average of the high and low sale price of the common stock as reported
on the OTC Bulletin Board on March 4, 2004.
(2) For purposes of estimating the number of shares of the registrant's
common stock to be included in this registration statement, the
registrant included 17,240,000 shares of common stock which represents
200% of the shares of common stock issuable upon the conversion of
200,000 shares of Series A 6% Cumulative Convertible Preferred Stock
and 4,610,000 shares of common stock underlying common stock purchase
warrants. The additional shares of common stock underlying the Series A
6% Cumulative Convertible Preferred Stock were included pursuant to the
subscription agreement for the sale of the shares. Pursuant to Rule
416, there are also being registered such additional number of shares
as may be issuable as a result of the anti-dilution provisions of the
warrants.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
ii
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion dated March 8, 2004
PROSPECTUS
GENESIS TECHNOLOGY GROUP, INC.
21,850,000 Shares of Common Stock
This is an offering of common stock of Genesis Technology Group, Inc.
All of the shares are being offered by the selling security holders listed in
the section of this prospectus entitled "Selling Security Holders." We will not
receive any of the proceeds from the sale of the shares being offered by the
selling security holders.
For a description of the plan of distribution of the shares, please see
page 50 of this prospectus.
Our common stock is traded on the OTC Bulletin Board under the trading
symbol "GTEC." On March 4, 2004 the last sale price for our common stock was
$0.31.
__________________________
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS TO READ ABOUT RISKS OF
INVESTING IN OUR COMMON STOCK.
__________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ________________ , 2004
1
PROSPECTUS SUMMARY
We are an international company with operations in the United States
and the People's Republic of China. Our computer equipment and accessories
division, which represents approximately 96% of our consolidated revenues, is an
information technology enterprise with its principal offices in China . Our
consulting services division, which represents approximately 4% our consolidated
revenues, provides consulting and advisory services to small and mid-sized
companies interested in entering the Chinese market. We are a member of the
Shanghai United Assets and Equity Exchange (SUAEE), an organization that
promotes the influx of technology into China. We believe that the computer and
equipment accessories division of our business will become a less significant
phase of our operations in future periods as we expand our consulting services
segment.
Our principal executive offices are located at 777 Yamato Road, Suite
130, Boca Raton, Florida 33431, and our telephone number is 561-988-9880. Our
fiscal year is September 30.
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary financial information has been derived from the
financial statements that are included in this prospectus.
STATEMENT OF OPERATIONS DATA:
Three months ended Year ended
December 31, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Revenues ............................... $ 6,565,377 $ 5,276,670 $ 23,596,878 $ 14,325,651
Cost of Sales .............................. 6,181,525 5,151,953 22,770,207 13,153,326
(Loss) income from operations .............. (333,866) (403,189) (1,489,973) (279,396)
Total other income (expense) ............... 196,077 (15,163) (1,593,525) (32,593)
(Loss) income from discontinued operations . 0 16 (3,890) 485,483
Net income (loss) .......................... $ (138,752) $ (418,336) $ (3,089,370) $ (193,645)
Basic and diluted earnings (loss) per share $ 0.00 $ (0.02) $ (0.09) $ (0.01)
Weighted common shares outstanding ......... 39,572,570 28,528,875 32,504,629 24,943,991
BALANCE SHEET DATA:
December 31, 2003 September 30, 2003
----------------- ------------------
(unaudited)
Working capital ............................ $ 433,983 $ 117,245
Cash and cash equivalents .................. $ 661,694 $ 184,798
Total current assets ....................... $1,327,414 $1,150,114
Total assets ............................... $1,755,458 $1,323,738
Total current liabilities .................. $ 893,431 $1,032,869
Total liabilities .......................... $ 893,431 $1,032,869
Minority interest .......................... $ 36,024 $ 35,061
Total stockholders' equity ................. $ 826,003 $ 255,808
2
When used in this prospectus, the terms "Genesis," " we," "our," and
"us" refers to Genesis Technology Group, Inc., a Florida corporation, and our
subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this prospectus contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to implement our strategic
initiatives, economic, political and market conditions and fluctuations,
government and industry regulation, interest rate risk, U.S. and global
competition, and other factors. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should consider the areas
of risk described in connection with any forward-looking statements that may be
made herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this prospectus
in its entirety, including the risks described in "Risk Factors." Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions to
any forward-looking statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only as of the date
of this prospectus, and you should not rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business.
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks. Additional risks and uncertainties not presently known to us or
that we currently believe to be immaterial may also adversely affect our
business. You should consider carefully these risk factors, together with all of
the other information included in this prospectus before you decide to purchase
our securities. If any of the following risks and uncertainties develop into
actual events, our business, financial condition or results of operations could
be materially adversely affected and you could lose all of your investment in
our company.
WE HAVE A HISTORY OF LOSSES, A SUBSTANTIAL ACCUMULATED DEFICIT AND WE CANNOT
ASSURE YOU THAT WE WILL OBTAIN PROFITABILITY IN THE FUTURE. AS A RESULT, YOU
COULD LOSE YOUR ENTIRE INVESTMENT IN OUR COMPANY.
For the fiscal years ended September 30, 2003 and 2002, we had net
consolidated revenues of $23,596,878 and $14,325,651, respectively, net losses
of $3,089,370 and $193,645, respectively. For the three months ended December
31, 2003 we reported net consolidated revenues of $6,565,377 and a net loss of
$138,752. In addition, at December 31, 2003, we had an accumulated deficit of
$13,710,742. Our operating results for future periods will include significant
expenses, including product development expenses, sales and marketing costs,
programming and administrative expenses, and will be subject to numerous
uncertainties including but not limited to the risks of doing business in China
as described elsewhere in this prospectus. As a result, we are unable to predict
whether we will achieve profitability in the future. While we
3
recently raised additional working capital as described elsewhere in this
prospectus, our failure to profitable operations in future periods will
adversely effect our working capital which would in turn limit our ability to
grow our company and increase revenues. In this event, you could lose all of
your investment in our company.
WE ARE MATERIALLY RELIANT ON REVENUES FROM OUR OPERATIONS IN THE PRC. THERE ARE
SIGNIFICANT RISKS ASSOCIATED WITH DOING BUSINESS IN THE PRC WHICH MAY CAUSE YOU
TO LOSE YOUR ENTIRE INVESTMENT IN OUR COMPANY.
Currently, approximately 96% of our consolidated our revenues are
derived from sale of computer equipment and accessories to customers in the
Peoples Republic of China (PRC). While our goal is to both expand our operations
to countries outside the PRC and diversify our sources of revenues, our business
model remains centered on exploiting the ongoing economic reforms taking place
in China. In the foreseeable future, our growth and success will remain tied to
our existing operations in the PRC as well as expanding our business to
incorporate additional sources of revenues which may derived from our experience
in operating in the PRC. Therefore, a downturn or stagnation in the economic
environment of the PRC could have a material adverse effect on our financial
condition which could result in a significant loss of revenues and liquidity in
future periods. Lastly, the recent SARS outbreak in China may have a material
ongoing impact on the PRC's business climate which could further adversely
effect our future results of operations and our ability to sustain our
operations at current levels.
WE CANNOT ASSURE YOU THAT THE CURRENT CHINESE POLICIES OF ECONOMIC REFORM WILL
CONTINUE. BECAUSE OF THIS UNCERTAINTY, THERE ARE SIGNIFICANT ECONOMIC RISKS
ASSOCIATED WITH DOING BUSINESS IN CHINA.
Although the majority of productive assets in China are owned by the
Chinese government, in the past several years the government has implemented
economic reform measures that emphasize decentralization and encourage private
economic activity. In keeping with these economic reform policies, the PRC has
been openly promoting business development in order to bring more business into
the PRC. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
* the Chinese government will continue its pursuit of economic reform
policies;
* the economic policies, even if pursued, will be successful;
* economic policies will not be significantly altered from time to
time; and
* business operations in China will not become subject to the risk of
nationalization.
EVEN IF THE CHINESE GOVERNMENT CONTINUES ITS POLICIES OF ECONOMIC REFORM, WE MAY
BE UNABLE TO TAKE ADVANTAGE OF THESE OPPORTUNITIES IN A FASHION THAT WILL
PROVIDE FINANCIAL BENEFIT TO OUR COMPANY. OUR INABILITY TO SUSTAIN OUR
OPERATIONS IN CHINA AT CURRENT LEVELS COULD RESULT IN A SIGNIFICANT REDUCTION IN
OUR REVENUES WHICH WOULD RESULT IN ESCALATING LOSSES AND LIQUIDITY CONCERNS
China's economy has experienced significant growth in the past decade,
but such growth has been uneven across geographic and economic sectors and has
recently been slowing. There can be no assurance that such growth will not
continue to decrease or that any slow down will not have a negative effect on
our business. The Chinese economy is also
4
experiencing deflation which may continue in the future. We cannot assure you
that we will be able to capitalize on these economic reforms, assuming the
reforms continue. Given our material reliance on our operations in the PRC, any
failure on part to continue to take advance of the growth in the Chinese economy
will have a materially adverse effect on our results of operations and liquidity
in future periods.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE CONVERSION OF CHINESE RMB INTO U.S.
DOLLARS.
We generate revenue and incur expenses and liabilities in both Chinese
renminbi (RMB) and U.S. dollars. Since 1994, the official exchange rate for the
conversion of Chinese RMB to U.S. dollars has generally been stable and the
Chinese RMB has appreciated slightly against the U.S. dollar. We have not
entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future. Our results of operations and
financial condition may be affected by changes in the value of Chinese RMB and
other currencies in which are earnings and obligations are denominated.
WE WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON
ACCEPTABLE TERMS.
Historically, our operations have been financed primarily through the
issuance of debt and equity. Capital is typically needed not only for the
acquisition of additional companies, but also for the effective integration,
operation and expansion of these businesses. Capital is also necessary to fund
our ongoing operations. Our future capital requirements, however, depend on a
number of factors, including our ability to grow our revenues, manage our
business and control our expenses. While we recently raised additional working
capital as described elsewhere in this prospectus which provides us sufficient
working capital for the present, in the future we may need to raise additional
capital to fund our ongoing operations. We cannot assure you that if we need
additional working capital in the future that we will be able to raise it on
terms acceptable to us, if at all. If we do not raise funds as needed, our
ability to continue our business and operations is in jeopardy.
ADDITIONAL CAPITAL RAISING EFFORTS IN FUTURE PERIODS MAY BE DILUTIVE TO OUR THEN
CURRENT SHAREHOLDERS OR RESULT IN INCREASED INTEREST EXPENSE IN FUTURE PERIODS.
In our future capital raising efforts we may seek to raise additional
capital through the sale of equity and debt securities or a combination thereof.
If we raise additional capital through the issuance of debt, this will result in
increased interest expense. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our company
held by existing shareholders will be reduced and those shareholders may
experience significant dilution. In addition, new securities may contain certain
rights, preferences or privileges that are senior to those of our common stock.
WE ARE DEPENDENT ON CRITICAL SUPPLIERS FOR PRODUCT SALES, WHICH PRODUCE THE BULK
OF OUR REVENUES. A DECREASE IN TECHNOLOGY SPENDING COULD ADVERSELY AFFECT OUR
FINANCIAL RESULTS.
Our largest subsidiary, Chorry, is dependent upon the ability of
network hardware manufacturers, such as Epson, Canon and Samsung to provide them
with product for resale on a regular and recurring basis. If the supply of
product were to be interrupted for a significant
5
amount of time, it could have a material adverse effect on our business,
financial condition and results of operations. In addition, the market for
technology products and services has been growing at a steady pace in China.
There can be no assurance that this trend will continue. A decrease in the
demand for these products could have a material adverse effect on our business,
financial condition and results of operations.
OUR DETERMINATION NOT TO BECOME AN INVESTMENT COMPANY COULD LIMIT OUR ABILITY TO
ACCEPT EQUITY POSITIONS IN OUR CLIENT COMPANIES OR TO ACCEPT EQUITY FROM OUR
CLIENT COMPANIES AS COMPENSATION FOR OUR SERVICES.
The Investment Company Act of 1940 restricts the operations of
companies that are deemed to be "investment companies." On a limited basis we
have from time to time accepted equity in one of our client companies as
compensation for our services. In addition, under existing contracts with client
companies we are entitled to receive equity in a joint venture entered into by
one of our client companies. We do not, however, intend to become an investment
company and thereby be subject to the Investment Company Act of 1940. Because of
this, in the future our abilities to accept engagements from clients who wish to
compensate us for our services in equity may be limited. In addition, at such
time, if ever, that one of our client companies establishes the type of joint
venture which would result in our company being issued equity in that venture,
our ability to accept such an interest may be limited or we may be required to
structure the transaction in such a fashion that it does not fall within the
definition of an "investment" which could limit our future financial benefits.
We do not believe these restrictions will materially adversely effect our
results of operations in the near future. If, however, we should inadvertently
become subject to the Investment Company Act of 1940 and if we should fail to
comply with the requirements of that act, we would be prohibited from engaging
in business or selling our securities, and could be subject to civil and
criminal actions for doing so. Any failure to comply with the Investment Company
Act would therefore seriously harm our business.
THE VALUE OF THE EQUITY SECURITIES WE OCCASIONALLY ACCEPT AS COMPENSATION ARE
SUBJECT TO ADJUSTMENT WHICH COULD RESULT IN LOSSES TO US IN FUTURE PERIODS.
From time to time we accept equity securities of one of our client
companies as compensation for our services. These securities are reflected on
our balance sheet as either "marketable equity securities" or "marketable equity
securities - restricted." We evaluate quarterly the carrying value of each
investment for a possible increase or decrease in value. Because we do not want
to be considered an investment company, it is to our benefit to keep the
carrying values of these securities as low as possible. This review may result
in an adjustment to their carrying value which could adversely affect our
operating results for the corresponding quarters in that we might be required to
reduce our carrying value of the investments. In addition, if we are unable to
liquidate these securities, we will be required to write off the investments
which would adversely affect our financial position.
THE EXERCISE OF OPTIONS AND WARRANTS AND THE CONVERSION OF SHARES OF OUR SERIES
A 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING
SHAREHOLDERS.
As of December 31, 2003 we had outstanding options and warrants to
purchase a total of 7,797,000 shares of our common stock with a weighted average
exercise price of $0.18 per share. Since December 31, 2003 we have issued common
stock purchase warrants to
6
purchase an aggregate of 2,305,000 shares of our common stock at an exercise
price of $0.3045 per share, and we will issue common stock purchase warrants to
purchase an additional 2,305,000 shares of our common stock at an exercise price
of $0.3045 per share immediately following the date of this prospectus. In
addition, as of the date of this prospectus, we had 100,000 shares of Series A
6% Cumulative Convertible Preferred Stock which is convertible into 4,310,000
shares of our common stock issued and outstanding and we will issue an
additional 100,000 shares of Series A 6% Cumulative Convertible Preferred Stock
which will be convertible into 4,310,000 shares of our common stock immediately
following the date of this prospectus. This prospectus covers the possible
resale of up to 21,850,000 shares of our common stock issuable upon the
conversion of shares of our Series A 6% Cumulative Convertible Preferred Stock
and outstanding warrants ,which includes 17,240,000 shares of common stock
issuable upon the conversion of the Series A 6% Cumulative Convertible Preferred
Stock calculated at 200% of the conversion amount according to the requirement
of the terms of the subscription agreement covering the sale of those shares.
The conversion of the Series A 6% Cumulative Convertible Preferred Stock and the
exercise of outstanding options and warrants may materially adversely affect the
market price of our common stock and will have a dilutive effect on our existing
shareholders.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A
TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR SHAREHOLDERS.
Provisions of our articles of incorporation and bylaws may be deemed to
have anti- takeover effects, which include when and by whom special meetings of
our shareholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Florida Business Corporation Act
also may be deemed to have certain anti-takeover effects which include that
control of shares acquired in excess of certain specified thresholds will not
possess any voting rights unless these voting rights are approved by a majority
of a corporation's disinterested shareholders.
In addition, our articles of incorporation authorize the issuance of up
to 20,000,000 shares of preferred stock with such rights and preferences as may
be determined from time to time by our board of directors, of which 200,000
shares of Series A 6% Cumulative Convertible Preferred Stock are issued and
outstanding as of the date of this prospectus or will be issued and outstanding
following the date of this prospectus as describe later in under "Selling
Security Holders." Our board of directors may, without shareholder approval,
issue preferred stock with dividends, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of our common stock.
IF THE SELLING SECURITY HOLDERS ALL ELECT TO SELL THEIR SHARES OF OUR COMMON
STOCK AT THE SAME TIME, THE MARKET PRICE OF OUR SHARES MAY DECREASE.
It is possible that the selling security holders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time hereunder, the sales, or the possibility
thereof, may have a depressive effect on the market price of our common stock.
7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTCBB under the symbol GTEC. The
reported high and low bid prices for the common stock as reported on the OTCBB
are shown below for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.
High Low
FISCAL 2002
First quarter ended December 31, 2001 ................. $0.63 $0.053
Second quarter ended March 31, 2002 ................... $0.56 $0.27
Third quarter ended June 30, 2002 ..................... $0.34 $0.15
Fourth quarter ended September 30, 2002 ............... $0.19 $0.08
FISCAL 2003
First quarter ended December 31, 2003 ................. $0.19 $0.07
Second quarter ended March 31, 2003 ................... $0.25 $0.08
Third quarter ended June 30, 2003 ..................... $0.17 $0.08
Fourth quarter ended September 30, 2003 ............... $0.17 $0.12
FISCAL 2004
First quarter ended December 31, 2003 ................. $0.52 $0.13
On March 4, 2004 the last sale price of our common stock as reported on
the OTCBB was $0.31. As of February 29, 2004 there were approximately 2,500
record owners of our common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We intend to
keep future earnings, if any, to finance the expansion of our business. We do
not anticipate that any cash dividends will be paid in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
equity compensation plans, including individual compensation arrangements, by us
under our 2002 Stock Option Plan, our 2003 Stock Option and any compensation
plans not previously approved by our stockholders as of December 31, 2003.
Number of Weighted Number of
securities to be average securities remaining
issued upon exercise available for future
exercise of price of issuance under equity
of outstanding outstanding compensation plans
options, warrants options, (excluding securities
and rights (a) warrants reflected in column (a))
and rights (b)
PLAN CATEGORY
2002 Stock Option Plan and
2003 Stock Option 7,797,000 $0.186 none
Equity compensation plans
not approved by stockholders none none none
8
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
2003. This table gives no effect to:
* the issuance by us in January 2004 of $1,000,000 principal amount
Series A 6% Cumulative Convertible Preferred Stock, which totaled 100,000
shares, and common stock purchase warrants or the applicable of the proceeds
therefrom, or
* the issuance by us immediately following the date of this prospectus
of an additional $1,000,000 principal amount Series A 6% Cumulative Convertible
Preferred Stock and common stock purchase warrants or the application of the
proceeds therefrom; or
* the conversion of the Series A 6% Cumulative Convertible Preferred
Stock into shares of our common stock, or the issuance of shares of our common
stock upon the exercise of outstanding warrants or options.
The table should be read in conjunction with the financial statements
and related notes included elsewhere in this prospectus.
December 31, 2003
(unaudited)
Long-term liabilities ................................... $ -
Minority interest ....................................... 36,024
Stockholder's equity:
Preferred stock, $.001 par value,
20,000,000 shares authorized,
no shares issued and outstanding ...................... -
Common stock, $.001 par value,
200,000,000 shares authorized,
40,079,325 shares issued and
outstanding ........................................... 40,079
Common stock issuable (381,000 shares) .................. 381
Additional paid-in capital .............................. 14,863,875
Accumulated deficit ..................................... (13,710,742)
Less: deferred compensation ............................. (234,056)
Less: subscriptions receivable .......................... (118,767)
Accumulated other comprehensive income .................. (14,767)
------------
Total stockholders' equity ......................... $ 826,003
Total capitalization ................................... $ $862,027
9
USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
security holders. Any proceeds that we receive from the exercise of outstanding
warrants will be used by us for general working capital. The actual allocation
of proceeds realized from the exercise of these securities will depend upon the
amount and timing of such exercises, our operating revenues and cash position at
such time and our working capital requirements. There can be no assurances that
any of the outstanding warrants will be exercised. Pending utilization of the
proceeds as described above, the net proceeds of the offering will be deposited
in interest bearing accounts or invested in money market instruments, government
obligations, certificates of deposits or similar short-term investment grade
interest bearing investments.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
OVERVIEW
We are an international company with operations in the United States
and the People's Republic of China. Our computer equipment and accessories
division represented approximately 96% of our consolidated revenues for the
three months ended December 31, 2003 and approximately 98% of our consolidated
revenues for the fiscal year ended September 30, 2003. Our consulting services
division represented approximately 4% our consolidated revenues for the three
months ended December 31, 2003 and approximately 2% of our consolidated revenues
for the fiscal year ended September 30, 2003.
We believe that the computer and equipment accessories division of our
business will become a less significant phase of our operations in future
periods as we expand our consulting services segment. We believe that as we
further develop our consulting services segment, more opportunities to expand
our operations through acquisitions will also be presented to us. It is critical
to our long-term business model to both increase our revenues from the
consulting services segment of our existing business, as well as to diversify
our revenue base. By virtue of the nature of our consulting services and the
professional experience of our management and directors, we interact with a
number of both U.S. and Chinese companies. Through this broadening of our
relationship base, we believe that we will be able to not only provide better
services to our client companies, but we will have certain advantages over other
companies our size when it comes to identifying and closing acquisitions.
Our computer equipment and accessories division is an established
business which can grow internally without significant additional capital. The
fee-based structure of our consulting services division is such that if our
client company is successful in its particular venture, we can earn additional
fees. These fees could range from a flat cash fee, to a fee which includes a
combination of equity in our client and a success fee payable upon the
completion of transactions such as acquisitions, formations of joint ventures,
or licensing or selling technologies in China, to a solely performance based fee
upon the completion of the project. As described elsewhere in this prospectus,
we do not intent to operate as an investment company or become subject to the
Investment Company Act of 1940. However, in order to materially grow our
business we will need to raise additional working capital. Capital will
typically be needed
10
not only for the acquisition of additional companies, but also for the effective
integration, operation and expansion of these businesses. As described elsewhere
in this prospectus, there are no assurances we will be able to raise additional
capital. If we are unable to secure additional capital as need, this inability
will in all likelihood hamper or restrict our ability to acquire and integrate
additional companies and to otherwise increase our revenues in future periods.
FOREIGN EXCHANGE CONSIDERATIONS
Because revenues from our operations in the PRC accounted for
approximately 96% and approximately 98% of our consolidated net revenues for the
three months ended December 31, 2003 and the fiscal year ended September 30,
2003, respectively, how we report net revenues from our PRC-based companies is
of particular importance to understanding our financial statements. Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation," and are included in determining
net income or loss. For foreign operations with the local currency as the
functional currency, assets and liabilities are translated from the local
currencies into U.S. dollars at the exchange rate prevailing at the respective
balance sheet date. Revenues and expenses are translated at weighted average
exchange rates for the period to approximate translation at the exchange rates
prevailing at the dates those elements are recognized in the financial
statements. Translation adjustments resulting from the process of translating
the local currency financial statements into U.S. dollars are included in
determining comprehensive loss.
The functional currency of our Chinese subsidiaries, Chorry and
Yastock, is the Chinese RMB, the local currency. The financial statements of the
subsidiaries are translated to U.S. dollars using year-end rates of exchange for
assets and liabilities, and average rates of exchange for the period for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not material during the periods presented. The cumulative translation
adjustment and effect of exchange rate changes on cash at each of December 31,
2003 and September 30, 2003 was not material.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements:
* In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except as specified and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have any material impact on the
balance sheet or statement of operations.
* In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 requires that certain
11
financial instruments, which under previous guidance were accounted for as
equity, must now be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. SFAS 150 is effective for all financial instruments
entered into or modified after May 31, 2003. Otherwise it will become effective
at the beginning of the first interim period beginning after June 15, 2003. The
adoption of this statement did not have any material impact on the balance sheet
or statement of operations.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements included in this prospectus.
Management believes that the application of these policies on a consistent basis
enables us to provide useful and reliable financial information about our
operating results and financial condition.
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 may differ from those estimates.
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
-Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair- valued based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
Our revenues from the sale of products are recorded when the goods are
shipped. Consulting income is recognized on a straight-line basis over the
period of the service agreement. Deferred revenues relates to consulting
revenues that is being recognized over the period of the service agreement.
Marketable equity securities consist of investments in equity of
publicly traded and non- public domestic companies and are stated at market
value based on the most recently traded price of these securities at December
31, 2003. All marketable securities are classified as available for sale at
December 31, 2003. Unrealized gains and losses, determined by the difference
between historical purchase price and the market value at each balance sheet
date, are recorded as a component of Accumulated Other Comprehensive Income in
Stockholders' Equity. Realized gains and losses are determined by the difference
between historical purchase price and gross proceeds received when the
marketable securities are sold.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 AS COMPARED WITH THE THREE
MONTHS ENDED DECEMBER 31, 2002
CONSOLIDATED RESULTS:
The following discussion relates to our consolidated results of
operations. Further discussion and analysis of operating results follows and is
discussed by segment.
Revenues
For the three months ended December 31, 2003, we had consolidated
revenues of $6,565,377 as compared to $5,276,670 for the three months ended
December 31, 2002. This increase resulted substantially from increased revenues
from our computer hardware and accessories segment and is discussed below.
Cost of Sales
For the three months ended December 31, 2003, cost of sales was
directly related to our computer equipment and accessories segment and amounted
to $6,181,525 as compared to $5,151,953 for the three months ended December 31,
2002. This increase resulted substantially from increased revenue from our
computer segment and is outlined below.
Operating Expenses
For the three months ended December 31, 2003, operating expenses which
include consulting fees, rent, salaries and non-cash compensation, depreciation
expense and other selling, general and administrative, were $717,718 as compared
to $527,906 for the three months ended December 31, 2002.
Loss from sale/disposal of marketable securities
For the three months ended December 31, 2003, we recorded a gain from
the sale of marketable securities of $1,924 as compared to a loss of $(12,667)
for the three months ended December 31, 2002.
Settlement income
On December 31, 2003, we settled our litigation against Hy-Tech
Technology Group, Inc. ("HYTT"). The Settlement Agreement resulted in us
accepting 3,750,000 common shares of restricted Hy-Tech Technology Group, Inc.
stock (OTCBB: HYTT). In a related matter, we conveyed 300,000 of those shares to
Elite Financial Communications Group, which had initially introduced us to key
principals among the HYTT parties. In connection with the settlement, we
recorded settlement income of $196,650 based on the fair market value of
3,450,000 net shares that we received.
13
Interest expense
Interest expense was $2,497 for the three months ended December 31,
2003 as compared to $2,496 for the three months ended December 31, 2002.
OVERALL
We reported a net loss for the three months ended December 31, 2003 of
$(138,752) compared to a net loss for the three months ended December 31, 2002
of $(418,336). This translates to an overall per-share loss of ($.00) for the
three months ended December 31, 2003 compared to per-share loss of ($.02) for
the three months ended December 31, 2002.
RESULTS OF OPERATIONS BY SEGMENT:
COMPUTER EQUIPMENT AND ACCESSORIES SEGMENT
Revenues for the three months ended December 31, 2003 were $6,310,368
as compared to $5,223,480 for the three months ended December 31, 2002 from our
subsidiary Chorry, a Chinese company. This revenue was generated from sales of
printers, copiers, network equipment and software licensing fees. The increase
in sales mainly resulted from increasing demand from the market, as the Chinese
government required all companies by July 1, 2003 to issue all transaction
receipts and invoices by using a printer and a computer in order to smooth its
tax collections. We believe that this governmental requirement we will continue
to result in additional revenues for us during the balance of fiscal 2004.
Cost of sales for Chorry for the three months ended December 31, 2003
amounted to $6,181,525 or 97.9% of net sales as compared to $5,151,953 or 97.6%
of net sales for the three months ended December 31, 2002. We continue to
experience low gross profit margins on our products sales.
For the three months ended December 31, 2003, operating expenses
consisted of salaries of $36,370, rent expense of $39,049, and other selling,
general and administrative expenses amounted to $48,611 as compared to salaries
expense of $9,014, rent expense of $25,158, and other selling, general and
administrative expenses of $34,995 for the three months ended December 31, 2002.
In fiscal 2003, we incurred additional rent due our growing need for warehouse
space. Additionally, due to increased net revenues, we increased our workforce.
During the balance of fiscal 2004 Chorry anticipates opening between four to six
additional locations in China. These additional locations will result in
increased operating expenses, however, we anticipate that those additional
expenses will be offset by revenues generated from those new locations.
CONSULTING SERVICES SEGMENT
Revenue for the three months ended December 31, 2003 was $255,009 as
compared to $53,190 for the three months ended December 31, 2002. This revenue
was generated from business development services. The increase in revenues was
attributable to the fact that during fiscal 2003 and in the first quarter in
fiscal 2004, we entered into business development contracts to assist companies
in introducing their products into the Chinese marketplace. We have been
aggressively marketing our business development services through round-table
meetings and through our referral sources. We anticipate that it takes between
12 to 36 months for companies we are assisting entering the Chinese marketplace
14
to conclude their projects. As described elsewhere in this prospectus, upon the
successful conclusion of our client company's efforts, we are entitled to earn
additional fees. We believe that some of our client company's projects will
reach stage during the balance of fiscal 2004 that enables us to earn these
additional fees, which should increase our revenues during future quarters.
For the three months ended December 31, 2003, we incurred operating
expenses of $593,688 as compared to $458,739 for the three months ended December
31, 2002. For the three months ended December 31, 2003, operating expenses
consisted of rent of $24,859, consulting fees of $180,822, salaries and non-cash
compensation of $294,831 and other selling, general and administrative expenses
of $93,176. For the three months ended December 31, 2002, operating expenses
consisted of rent of $20,352, consulting fees of $235,251, salaries and non-cash
compensation of $115,678 and other selling, general and administrative expenses
of $87,458. The increase in operating expenses was primarily attributable to the
following:
* During fiscal 2002, we relocated our administrative offices into
larger leased space. Accordingly, our rent expense increased in fiscal 2003
compared to fiscal 2002.
* Our consulting expense decreased to $180,822 for the three months
ended December 31, 2003 from $235,251 for the three months ended December 31,
2002. The decrease was due to decreased non-cash consulting expenses recorded
during the three months ended December 31, 2003 in connection with the grant of
stock options to consultants for services rendered.
* Salaries and non-cash compensation expense increased to $294,831 for
the three months ended December 31, 2003 from $115,678 for the three months
ended December 31, 2002. In fiscal 2003, we increased our marketing and
administrative staff by two persons. The remaining increase in salaries and
non-cash compensation expense was attributable to the recording of non-cash
compensation in connection with the granting of stock options to officers,
employees, and directors and the issuance of common shares in December 2003 for
bonuses amounting to $71,610. We anticipate that non-cash expenses related to
the issuance of equity for services will decrease during the balance of fiscal
2004.
* Other selling, general and administrative expenses increased to
$93,176 for the three months ended December 31, 2003 from $87,458 for the three
months ended December 31, 2002, an increase of $5,718.
For the three months ended December 31, 2003 and 2002, we incurred
interest expense of $2,500 and $2,500, respectively.
YEAR ENDED SEPTEMBER 30, 2003 AS COMPARED WITH THE YEAR ENDED
SEPTEMBER 30, 2002
CONSOLIDATED RESULTS OF OPERATIONS
Revenues
For the year ended September 30, 2003, we had consolidated revenues of
$23,596,878 as compared to $14,325,651 for the year ended September 30, 2002.
15
This increase resulted substantially from increased revenues from our computer
hardware and accessories segment and is discussed below.
Cost of Sales
For the year ended September 30, 2003, cost of sales directly related
to our computer equipment and accessories segment and amounted to $22,770,207 as
compared to $13,153,326 for the year ended September 30, 2002. This increase
resulted substantially from increased revenue from our computer segment and is
outlined below.
Operating Expenses
For the year ended September 30, 2003, operating expenses which include
consulting fees, rent, salaries and non-cash compensation, depreciation expense
and other selling, general and administrative, were $2,316,644 as compared to $
1,451,721 for the year ended September 30, 2002.
Loss from sale/disposal of marketable securities
For the year ended September 30, 2003, we recorded a loss from the
sale/disposal of marketable securities of $1,563,525 as compared to $16,352 for
the year ended September 30, 2002. In Fiscal 2003, we wrote off the value of our
common stock holdings in NetDigest.com, Inc. ("NET") of $1,325,872 due the
impairment in the value of these our common shares they are currently deemed to
have little or no value. Additionally, we wrote off an investment on our Yastock
subsidiary of $191,052 due to the impairment in the value of this investment.
Interest Expense
Interest expense was $30,000 for the year ended September 30, 2003 as
compared to $16,241 for the year ended September 30, 2002, an increase of $
13,759.
Discontinued Operations
During the year ended September 30, 2002, we concluded the sale of one
of our Chinese subsidiaries. As a result of this sale, we recorded a $475,304
gain from the sale of our G-Choice subsidiary for the year ended September 30,
2002. For the year ended September 30, 2003 we had a loss from discontinued
operations of $(3,890) and compared to income from discontinued operations of
$10,170 for the year ended September 30, 2002.
Overall
We reported a net loss for the year ended September 30, 2003 of
$(3,089,370) compared to a net loss for the year ended September 30, 2002 of
$(193,645). This translates to an overall per-share loss of ($.09) for the year
ended September 30, 2003 compared to per-share loss of ($.01) for the year ended
September 30, 2002.
16
RESULTS OF OPERATIONS BY SEGMENT
COMPUTER EQUIPMENT AND ACCESSORIES SEGMENT
Revenues for the year ended September 30, 2003 were $23,197,829 as
compared to $13,373,246 to September 30, 2002 from our Chorry subsidiary. This
revenue was generated from sales of printers, copiers, network equipment and
software licensing fees. The increase in sales mainly resulted from increasing
demand from the market, as the Chinese government required all companies by July
1, 2003 to issue all transaction receipts and invoices by using a printer and a
computer in order to smooth its tax collections.
Cost of sales for Chorry for the year ended September 30, 2003 amounted
to $22,770,207 or 98.2% of net sales as compared to $13,153,326 or 98.4% of net
sales for the year ended September 30, 2002. We continue to experience low gross
profit margins on our products sales.
For the year ended September 30, 2003, operating expenses consisted on
salaries and non-cash compensation of $75,704, rent expense of $144,968, and
other selling, general and administrative expenses amounted to $197,038 as
compared to salaries expense of $81,003, rent expense of $81,003, and other
selling, general and administrative expenses of $103,104 for the year ended
September 30, 2002. In fiscal 2003, we incurred additional rent due our growing
need for warehouse space. Additionally, due to increased net revenues, we
increased our workforce.
CONSULTING SERVICES SEGMENT
Revenue for the year ended September 30, 2003 was $399,049 as compared
to $952,405 for the year ended September 30, 2002. This revenue was generated
from business development services The decrease in revenues was attributable to
the fact that during fiscal 2002, we entered into an agreement to provide
operational and managerial assistance to the NETdigest.com for a total of
526,316 shares of the NETdigest.com common stock (post a one for 19 reverse
split, effective May 31, 2002). In connection with this consulting agreement, we
recognized consulting revenues of $0 and $521,053 for the year ended September
30, 2003 and 2002, respectively.
For the year ended September 30, 2003, we incurred operating expenses
of $1,898,934 as compared to $1,238,681 for the year ended September 30, 2002.
For the year ended September 30, 2003, operating expenses consisted of rent of
$69,018, consulting fees of $652,566, salaries and non-cash compensation of
$728,250 and other selling, general and administrative expenses of $434,712. For
the year ended September 30, 2002, operating expenses consisted of rent of
$41,207, consulting fees of $504,223, salaries and non-cash compensation of
$333,121 and other selling, general and administrative expenses of $348,223. The
increase in operating expenses was primarily attributable to the following:
* During fiscal 2002, we relocated our administrative offices into
larger leased space. Accordingly, our rent expense increased in fiscal 2003
compared to fiscal 2002.
* Our consulting expense increased to $652,566 in fiscal 2003 from
$504,223 in fiscal 2002. The increase was due increased non-cash consulting
expenses recorded in fiscal 2003 in connection with the grant of stock options
to consultants for services rendered.
* Salaries and non-cash compensation expense increased to $625,764 for
fiscal 2003 from $333,121 for fiscal 2002. In fiscal 2003, we increased our
marketing and
17
administrative staff by two persons. The remaining increase in salaries and
non-cash compensation expense was attributable to the recording of non-cash
compensation in connection with the granting of stock options to officers and
employees.
* Other selling, general and administrative expenses increased to
$434,712 for fiscal 2003 from $348,223 for fiscal 2002, an increase of $86,489.
In fiscal 2003, we incurred additional insurance expense of approximately
$27,000 attributable to increased health insurance premiums paid for our
employees. Additionally, we acquired our Chinese subsidiary, Yastock, on
December 1, 2002. Accordingly, our other selling, general and administrative
expense only includes 10 months of expenses in fiscal 2002 as compared to 12
months in fiscal 2003.
For the year ended September 30, 2003, we incurred interest expense of
$30,018 as compared to $16,467 for the year ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had a cash balance of $661,694. As of December
31, 2003, our cash position by geographic area is as follows:
Cash
----
United States $ 373,816
China 287,878
---------
Total $ 661,694
=========
Net cash used in operations was $(6,694) for the three months ended
December 31, 2003 as compared to net cash used in operations of $(42,349) for
the three months ended December 31, 2002. The difference is due to increased
cash flow generated by our business development services which has given us
additional cash flows from operations.
Net cash provided by investing activities for the three months ended
December 31, 2003 was $169,960 as compared to net cash provided by investing
activities for the three months ended December 31, 2002 of $8,479. For the three
months ended December 31, 2003, we received $176,008 from the sale of marketable
securities offset by cash used for capital expenditures of $(6,048). For the
three months ended December 31, 2002, we received cash from the sale of
marketable securities of $13,713 offset by cash used for capital expenditures of
$(5,234).
Net cash provided by financing activities were $314,197 for the three
months ended December 31, 2003 as compared to $67,708 for the three months ended
December 31, 2002. For the three months ended December 31, 2003, net cash
provided by financing activities related primarily to proceeds from the exercise
of stock options and related party loans of $ 300,000 and $14,197, respectively.
For the three months ended December 31, 2002, net cash provided by financing
activities related to proceeds from related party loans of $7,808 and proceeds
from the exercise of stock options of $59,900. Chorry has a bank loan in the
principal amount of $120,773 which is due on March 25, 2004. We anticipate that
this loan will either be renewed or that Chorry will pay it in full when due
from its available working capital.
18
At December 31, 2003 we had working capital of $433,983. On January 16,
2004, we closed a securities purchase agreement under which we agreed to issue
$2,000,000 stated value of our newly created Series A 6% Cumulative Convertible
Preferred Stock and warrants to purchase an aggregate of 4,310,000 shares of our
common stock to several institutional investors . Of this amount, we received
gross proceeds of $1,000,000 from the first tranche which included the sale of
100,000 shares of Series A 6% Cumulative Convertible Preferred Stock and
warrants to purchase 2,155,000 shares of our common stock at an exercise price
of $0.3045 per share. Under the terms of the securities purchase agreement, upon
the effectiveness of the registration statement of which this prospectus is a
part, we will sell an additional 100,000 shares of Series A 6% Cumulative
Preferred Stock and common stock purchase warrants for an additional 2,155,000
shares of our common stock with a strike price of $0.3045 pr share, representing
gross proceeds of $1,000,000. Other than internal sources of working capital,
loans to Chorry from commercial financial institutions in China and the proceeds
from sales of our securities described above, we do not have any other sources
of working capital.
Our future growth is dependent on our ability to raise capital for
expansion, and to seek additional revenue sources. Chorry's operating plan
provides that it will open an additional four to six locations in China during
the balance of fiscal 2004. We estimate that each location will cost between
$15,000 and $25,000, depending upon the square footage of the location. We
anticipate that we will fund this expansion at Chorry from our current working
capital. We will need additional working capital, however, to undertake any
significant expansion of our business and for acquisitions. Our future capital
requirements, however, depend on a number of factors, including our ability to
grow our revenues and manage our business. We cannot assure you that acceptable
financing for future acquisitions or for the integration and expansion of
existing operations can be obtained by us on suitable terms, if at all.
OUR BUSINESS
OUR BUSINESS, PRODUCTS AND SERVICES
Our operations are comprised in two operating groups, including:
* Computer equipment and accessories, and
* Consulting services.
Products and services provided by each of the groups are:
COMPUTER EQUIPMENT AND ACCESSORIES
Our majority-owned subsidiary, Shanghai Chorry Technology Development
Co., Limited ("Chorry"), is an information technology enterprise that integrates
sales and technology with services. Chorry was formerly known as Shanghai Zhaoli
Technology Development Company Ltd. Chorry provides innovative technology
solutions to enhance its customer's businesses. Its customers include:
* financial institutions,
* telecommunication companies,
19
* hospitals,
* supermarkets,
* airports,
* railway stations, and
* other government departments.
Chorry is an authorized general agent and distributor for a wide array
of manufacturers, including Epson, Cannon, Hewlett Packard Ricoh, Brother, Star
and Samsung. Chorry has a wide-spread sales channel, with a headquarters and a
customer service center on Wukang Road in Shanghai and nine additional branch
locations in Shanghai. The locations range from an approximate 50 square foot
mall location in the southwestern central business district to an approximately
330 square foot mall location near People's Square. Each of these branch
locations is staffed with from five to six employees.
From each of the locations, Chorry sells:
* laser printers,
* copiers,
* scanners,
* facsimile machines,
* multi-functional (MFP) office equipment,
* module routers,
* switches,
* video telephones,
* computers supplies, and
* network products and network integration.
Chorry obtains these products directly from the manufacturer. Chorry is
also qualified as a technical service center for Epson, Canon, Hewlett-Packard
and OKI products and provides equipment repair services for its customers.
We own 80% of Chorry. Chorry is incorporated under the laws of
Shanghai. The company has approximately 68 employees. For the year ended
September 30, 2003, net revenues from this operating segment represented
approximately 98% of our consolidated revenues. For the three months ended
December 31, 2003, net revenues from this operating segment represented
approximately 96% of our consolidated revenues.
CONSULTING SERVICES
In recent periods, we have been expanding our cross-pacific consulting
business. We believe that China's entrance into the World Trade Organization
(WTO) offers a unique opportunity for our company to secure itself a position as
a leader in the growing market for cross-pacific products, technology, capital,
and property exchange. Our consulting services division seeks to foster
bilateral commerce between companies in the West with those in China. We
specialize in assisting Western companies in entering the Chinese market for
business development , and act as a resource for companies that desire expertise
in marketing, distribution, manufacturing, forming joint ventures, or
establishing a base in China. For the fiscal year ended September 30, 2003 net
20
revenues from our consulting services segment represented approximately 2% of
our consolidated net revenues. For the three months ended December 31, 2003 net
revenues from our consulting services segment represented approximately 4% of
our consolidated net revenues.
A key area of competency and focus is the life and health science arena
in China. Life and health science is compromised of different but related
industries such as pharmaceuticals, environmental science, biotechnology, and
healthcare development. These industries range from water, soil, and air testing
and remediation to hospital facility development and management. These are new
and robust areas in China. Our consulting services division currently has
approximately 37 clients under contract. We are assisting these clients in
penetrating the Chinese market for the purposes of product and solutions sales,
distribution, manufacturing, and/or research and development.
Our management has been responsible for successfully negotiating
contracts in China for 11 years. We are able to bring experience in the areas of
marketing, finance and business development to our clients, and to help guide
those companies in marketing their products and services in China. We have
staffed offices in the United States, Germany, and China. We have established
working relationships with various governmental agencies, public institutions,
and private industries in China at both national and provincial levels. In
addition, we will also seek to assist small to mid-size Chinese private
companies that desire growth to expand their business with our operational
support.
In order to market our services to prospective clients, we hold monthly
roundtable conferences discussing the Chinese marketplace and providing a
networking opportunity for U.S. and Chinese business interests. We also utilize
direct contacts, referrals and media promotions to market our company. In
January 2004 we entered into a collaboration agreement with Global Boardroom
Solutions, a Latin American liaison group and a division of Custage, Inc. Under
the terms of this agreement we have each agreed to use our connections,
experience and abilities with a view towards promoting economic and commercial
projects, joint ventures and other commercial transactions. We believe this
relationship will assist us in expanding our Chinese network to the lucrative
Latin American markets. In December 2003 we announced that we were selected to
lead a trade mission to China, sponsored by Broward County, Florida, with the
International Business Council, and support provided by Enterprise Florida of
the State of Florida. In concert with Broward County, Florida and Enterprise
Florida of the State of Florida, 12 to15 south Florida companies will travel to
China in late May.
The scope of the agreements with our clients fall within two
categories. Generally, our clients enter into a representation agreement under
which we are contracted to assist the client in business development in China,
including such activities as exporting its products to China, establishing joint
ventures in China or making acquisitions of complementary Chinese businesses,
establishing marketing and distribution channels and partners, introductions to
financing sources for the Chinese operations and similar business opportunities.
The representation agreement is typically for a term of 12 months. We are paid a
monthly retainer of $5,000 to $10,000, a small portion of which goes to the
Shanghai United Assets and Equity Exchange (SUAEE). If our efforts for our
client are successful, we will receive a percentage of the cash flow from the
ventures, generally 5%, as well as a success fee of generally 2.5% for our
efforts which will be adjusted downward or eliminated if this fee exceeds $1
million. Our standard representation agreement also provides that if our efforts
on our client's behalf lead to the establishment of a joint venture with a
21
Chinese company, we are entitled to receive a our client's ownership interest in
the venture, ranging from 5% to 15% depending upon the business terms of the
particular engagement. For other clients, we may enter into a short-term,
generally three to 12 months, consulting agreement to provide certain specified
services. Our compensation under these types of agreements can run from a flat
cash fee, to a fee which includes a combination of equity in our client and a
success fee (in cash or equity) of approximately 5% payable to us upon the
successful completion of transactions such as acquisitions, formations of joint
ventures, or licensing or selling technologies in China to a solely performance
based fee of ranging from 3% to 5% of the value of the transaction upon the
completion of the project. However, as described elsewhere in this prospectus,
we do not intent to operate as an investment company or become subject to the
Investment Company Act of 1940.
We anticipate that it will take between 12 to 36 months for client
companies to conclude their projects. Approximately one-third of our current
roster of client companies are just beginning the process of being introduced to
the Chinese marketplace, approximately one-third are in the most active stage of
discussions in China and the remaining one-third are in the final stages of a
transaction. While this represents our best analysis of the progress of our
client companies, we do not know if any of these companies will ultimately be
successful in their Chinese ventures or that we will earn any success fees from
our work.
Our consulting services division includes Yastock Investment Consulting
Company, Limited ("Yastock") located in Shanghai, China and Genesis Systems,
Inc. ("Genesis Systems") located in Boca Raton, Florida. Yastock is incorporated
under the laws of Shanghai. In addition to its ongoing business, Yastock's
management oversees all of our operations in China. Genesis Systems is
incorporated under the laws of the State of Minnesota. Our consulting services
division has 16 employees worldwide.
THE SHANGHAI UNITED ASSETS AND EQUITY EXCHANGE (SUAEE)
In 2002 we acquired a seat as a U.S. representative on the Shanghai
Technology Stock (Property Rights) Exchange (STSE). In 2004 the STSE has merged
with the Shanghai Property Exchange to form the SUAEE of which we remain a
member. The SUAEE supports the advancement of technological innovation, and
brings optimal allocation of hi-tech and social resources, as well as the
combination of talented people and tremendous networks. The SUAEE is essentially
a vehicle for the transfer of technology and property rights into China, and is
sponsored by the Shanghai Municipal Government with independent corporate
qualifications. It can provide flexible and convenient financing and investment
services for various enterprises by means of technology rights and ownership
using its own resources or relationships it has with financial institutions
which participate with the SUAEE. As a representative of the SUAEE, we can
directly introduce American companies and individuals who would like to sell or
license intellectual property to a Chinese partner, or use technology to form a
joint venture in China, to the SUAEE for purposes of listing their technologies
or intellectual properties.
We initially paid 200,000 RMB (or approximately U.S. $24,000 ) for our
seat on the STSE, and our annual membership fee on the SUAEE is 30,000 RMB, or
approximately U.S. $2,400. We are not required to make any additional capital
commitments to maintain our membership, other than payment of our annual dues.
22
OUR OTHER ACTIVITIES
In addition to our computer equipment and accessories division and our
consulting services division, we are also pursuing other business opportunities
in China which we believe will add to our overall operations.
We have formed a new joint venture with CIIC Investment Corporation
Limited, a wholly owned subsidiary of China International Intellectech
Corporation (CIIC), a leading state-owned enterprise that has been funded solely
by the State Council. Professor Shan Tingting, a member of our Board of
Directors, is Executive Vice General Manager of CIIC Investment Corporation
Limited. Two private U.S. capital firms have joined the joint venture as
partners. The joint venture will be named CIIC Investment Banking Advisor
Company, Limited. It will be operated by staff from both CIIC and our offices in
Shanghai. We will own 10% of this joint venture. This new venture will provide
investment banking services in China, asset management, capital raising in China
via private placement or the public market, and help Chinese companies penetrate
the U.S. markets, as well as help state-owned companies undergo management
buyout program. We will work with CIIC from the firm's new Shanghai facility. We
presently believe that formation and registration of the venture will be
completed during our second fiscal quarter of 2004 and at that time we will make
our capital contribution of $20,000. In March 2004 we will co-sponsor, along
with the China Ministry of Science and Technology, China International
Intellectech Corporation and the SUAEE, conferences in Shanghai, PRC,
highlighting how Chinese companies could enter the U.S. capital markets.
In October 2003 we signed contracts with SMS.ac Corporation, a
U.S.-based short message service (SMS) company, for marketing of text messaging
applications in China. Under these agreements, we are entitled to receive a
per-message fee for each completed communication. As a result of these contracts
we created a web site at www.zc8888.com which provides gaming and lottery
information via SMS. This is a subscription based service with services average
approximately U.S. $3.00 per month. In December 2003 Yastock received a license
to operate as a wireless content provider, aggregator and mobile marketing
provider in Shanghai. This license will enable us to expand our market of
services. We are presently in the final stages of testing our server which is
hosted by Shanghai Mobile, a subsidiary of China Mobile. Upon completion of the
test phase, we will launch an SMS portal at www.yastandsms.com which will
feature a variety of content for SMS . In addition to the content currently
available, we intend to expand the content to include areas such as
entertainment, music, real estate, dating services and chat rooms. We have also
signed agreements with FilmFestivals Entertainment Group and IC Star MMS to
distribute their content through our portal. We have invested approximately
$50,000 in capital during the past year in this venture. While this venture is
still in its infancy, we are committing additional resources to this business as
SMS is now the fifth largest media in China, the country with the world's
largest mobile phone ownership. We have six engineers at Yastock working on this
project.
OUR EXPANSION STRATEGY
We have initially grown our company primarily through acquisitions and
we believe that acquisitions and mergers will continue to be a significant piece
of our growth model in the future. These relationships will be built around
consolidating key resources, financial and physical assets, brand names, and
human resources. We pay attention to integration strategies and also pay
attention to core competencies, including best practices, skills, knowledge
bases, and routines.
23
Companies that we will seek for merger or acquisition opportunities
will meet the following criteria:
* Strong cash flow and growing revenue
* Position as market sector leader
* Customers in a growth market
* Weak competition
* Strong management
* Strong niche position
OUR HISTORY; ACQUISITIONS AND DIVESTITURES
We were formed under the laws of the State of Idaho on January 29, 1999
originally under the name Psychicnet.Com, Inc. to provide "new age" services and
products on the Internet. On April 6, 1999 we entered into an Agreement and Plan
of Reorganization with Virginia City Gold Mines, Inc. The transaction was
accounted for as a reverse acquisition under the purchase method for business
combinations. Accordingly, the combination of the two companies was recorded as
a recapitalization of our company, pursuant to which our company was treated as
the continuing entity. Subsequent to the share exchange, we changed our name to
Newagecities.com, Inc.
On August 1, 2001, we completed the Agreement and Plan of
Reorganization and Stock Purchase Agreement entered into on July 23, 2001 with
Genesis Systems, Inc., a Minnesota corporation and the shareholders of Genesis,
Yongwen Zhuang, Fugen Li and Master Financial Group, Inc. As a result of the
acquisition, we issued 10,312,500 shares of our common stock with a fair market
value of $701,250 in exchange for all of the capital stock of Genesis Systems.
We accounted for this acquisition using the purchase method of accounting. The
purchase price exceeded the fair value of net assets acquired by $359,379. The
excess was applied to goodwill.
On August 14, 2001, we entered into a Stock Purchase Agreement with
PropaMedia, Inc. and the shareholders of PropaMedia. Under this agreement, we
acquired all of the issued and outstanding capital stock of PropaMedia in
exchange for all of the shares of Member Net, Inc., a wholly-owned subsidiary of
our company. Upon effectiveness of the Stock Purchase Agreement, PropaMedia
became a wholly-owned subsidiary of our company and the former shareholders of
PropaMedia acquired a wholly-owned interest in Member Net, Inc. from us. We
accounted for this acquisition using the purchase method of accounting. In
September 2002, we decided to discontinue the operations of PropaMedia.
On August 22, 2001, we entered into a Stock Purchase Agreement with
Shanghai G-Choice Science and Technology Development Company Ltd. ("G-Choice")
and the shareholders of G-Choice. G-Choice is a Chinese company with principal
offices in Shanghai, China. Under this agreement, the shareholders of G-Choice
exchanged 80% of the issued and outstanding capital stock of G-Choice in
exchange for 800,000 shares of our common stock. Effective June 30, 2002, we
sold our 80% interest in G-Choice to the NETdigest.com, Inc. in exchange for
1,549,791 shares of its common stock. As a part of this transaction, G-Choice's
executive management received a total of 8,155,474 shares of the NETdigest.com's
common stock and received from G-Choice an additional 210,526 shares of the
NETdigest.com's common stock in exchange for 400,000 shares of our common stock.
24
As a result of the sale of G-Choice, we recorded a $475,304 gain from the sale
of G-Choice in the quarter ended June 30, 2002.
On October 12, 2001 our shareholders approved an Agreement and Plan of
Merger providing for the merger of our company with and into Genesis Technology
Group, Inc., a Florida corporation, which was a wholly-owned subsidiary. The
purpose of the merger was to change our corporate domicile from Idaho to
Florida. In addition, our name was changed to Genesis Technology Group, Inc., to
better reflect our current business plan.
In October 2001 we formed Biosystems Technologies, Inc. for the purpose
of commercialization, marketing and distribution of biomedical products and
technologies used to diagnose and treat HIV/AIDS, cancer and other
immune-related diseases. We own 85% of Biosystems Technologies, with the
remaining 15% owned by Dr. Ronald Watson, a noted immunology professor and
researcher. Unlike traditional biotechnology companies which can spend millions
of dollars on research and development of new products, Biosystems Technologies'
business model was to operate as a "virtual" company, seeking unique products
that are fully developed or in the final stages of development. Biosystems
Technologies would then attempt to commercialize and market these products via
licensing agreements, with particular emphasis on introducing these products to
China and the Pacific Rim.
In November 2001, Biosystems Technologies signed an agreement for
exclusive distribution rights to a Rapid Assay HIV test in China. The test,
originally developed by the Program for Appropriate Technology in Health
(www.path.org) and successfully evaluated by the World Health Organization, is
an inexpensive method for the detection of antibodies to HIV, the virus
responsible for causing AIDS. This exclusive distribution agreement was
terminated in April 2002 as the distribution firm in Thailand did not have any
rights to distribute in China.
In November 2001 Biosystems Technologies also entered into an exclusive
agreement with Logizan Holdings Company Limited of Cyprus for clinical trials
and distribution of a new herbal product believed to be effective in the
treatment of viral hepatitis. Logizan Holdings Company Limited had worldwide
marketing rights to distribute this herbal formula. Under the terms of the
agreement, Biosystems Technologies and Logizan Holdings were to co-sponsor a
clinical trial of the product in China. Upon successful completion of these
trials, Biosystems Technologies would have been the exclusive distributor for
the product in Mainland China, Hong Kong and Taiwan. In October 2002 we
determined not to proceed with the clinical trials as a result of lack of
sufficient funding on our part to fulfill our obligations under the agreement.
Currently, Biosystems Technologies has no revenues and is inactive.
On November 15, 2001, we entered into a Stock Purchase Agreement with
Shanghai Chorry Technology Development Company, Limited and Wang Wuzhang,
Chorry's then sole shareholder. Chorry, a Chinese company with principal offices
in Shanghai, China, was an information technology company that integrates sales
and technology with services. As a result of the acquisition, we issued 400,000
shares of our common stock with a fair market value of $220,000 in exchange for
80% of the capital stock of Chorry. We accounted for this acquisition using the
purchase method of accounting. The purchase price exceeded the fair value of net
assets acquired by $5,651. The excess was been applied to goodwill. Mr. Wang,
who is not related to Dr. Wang, has remained as CEO of Chorry and owns the
minority interest in that company.
25
In May 2001 we had acquired 20% of Yastock Investment Consulting
Company, Limited for $18,000. On December 1, 2001, we entered into a Stock
Purchase Agreement with Yastock and Messrs. Robert Zhuang and Lawrence Wang, the
majority shareholders of Yastock. Yastock was an investment consulting firm
located in Shanghai, China that specializes in raising capital and consulting in
a number of areas, including trading information, public relations, corporate
management, corporate strategic evaluations and human resources. Mr. Zhuang is
Dr. Wang's brother and a member of our board of directors and Mr. Lawrence Wang
is Dr. Wang's brother. As a result of the acquisition, we issued 92,000 shares
of our common stock with a fair market value of $48,760 in exchange for 80% of
the capital stock of Yastock. We accounted for this acquisition using the
purchase method of accounting. The purchase price exceeded the fair value of net
assets acquired by $4,889. The excess was been applied to goodwill.
COMPETITION
We potentially face competition from a variety of sources. Each of our
subsidiaries faces competition from other companies sharing their market niche.
Our computer equipment and accessories division faces competition from similar
computer equipment distributors such as Shanghai Zhong Fang Electron System Co.,
Ltd., Shanghai Da Tong Printer and Computer Company. Our consulting services
division faces competition from a variety of U.S. and international firms as
well as niche companies specializing in the Chinese marketplace. Almost all of
the companies with which we and our subsidiaries compete are substantially
larger, have more substantial histories, backgrounds, experience and records of
successful operations, greater financial, technical, marketing and other
resources, more employees and more extensive facilities than our company now
has, or will have in the foreseeable future. There is not a significant barrier
to entry in either segment of our operations. In addition to competing with
other computer and electronics equipment companies, we may also compete with
larger U.S. companies who have greater funds available for expansion, marketing,
research and development and the ability to attract more qualified personnel if
access is allowed into the PRC market. If U.S. companies do gain access to the
PRC markets, these companies may be able to offer products at a lower price than
we can. There can be no assurance that we will remain competitive should this
occur. With China's recent entrance into the WTO, it is also likely that other
competitors will emerge in the near future. There is no assurance that we will
compete successfully with other competing companies.
GOVERNMENTAL REGULATION OF OUR OPERATIONS IN CHINA
The most significant portion of our operations are conducted from
facilities that are located in the People's Republic of China. Accordingly, our
operations must conform to the governmental regulations and rules of China.
PRC LEGAL SYSTEM
Since 1979, many laws and regulations addressing economic matters in
general have been promulgated in the PRC. Despite development of its legal
system, the PRC does not have a comprehensive system of laws. In addition,
enforcement of existing laws may be uncertain and sporadic, and implementation
and interpretation thereof inconsistent. The PRC judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher than usual
degree of uncertainty as to the outcome of any litigation. Even where adequate
26
law exists in the PRC, it may be difficult to obtain swift and equitable
enforcement of such law, or to obtain enforcement of a judgment by a court of
another jurisdiction. The PRC's legal system is based on written statutes and,
therefore, decided legal cases are without binding legal effect, although they
are often followed by judges as guidance. The interpretation of PRC laws may be
subject to policy changes reflecting domestic political changes. As the PRC
legal system develops, the promulgation of new laws, changes to existing laws
and the preemption of local regulations by national laws may adversely affect
foreign investors. The trend of legislation over the past 20 years has, however,
significantly enhanced the protection afforded foreign investors in enterprises
in the PRC. However, there can be no assurance that changes in such legislation
or interpretation thereof will not have an adverse effect upon our business
operations or prospects.
ECONOMIC REFORM ISSUES
Since 1979, the Chinese government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. We cannot
predict if this refining and readjustment process may negatively affect our
operations in future periods.
Over the last few years, China's economy has registered a high growth
rate. Recently, there have been indications that rates of inflation have
increased. In response, the Chinese government recently has taken measures to
curb this excessively expansive economy. These measures have included
devaluations of the Chinese currency, the RMB, restrictions on the availability
of domestic credit, reducing the purchasing capability of certain of its
customers, and limited re-centralization of the approval process for purchases
of some foreign products. These austerity measures alone may not succeed in
slowing down the economy's excessive expansion or control inflation, and may
result in severe dislocations in the Chinese economy. The Chinese government may
adopt additional measures to further combat inflation, including the
establishment of freezes or restraints on certain projects or markets.
To date reforms to China's economic system have not adversely impacted
our operations and are not expected to adversely impact operations in the
foreseeable future; however, there can be no assurance that the reforms to
China's economic system will continue or that we will not be adversely affected
by changes in China's political, economic, and social conditions and by changes
in policies of the Chinese government, such as changes in laws and regulations,
measures which may be introduced to control inflation, changes in the rate or
method of taxation, imposition of additional restrictions on currency conversion
and remittance abroad, and reduction in tariff protection and other import
restrictions.
(1) It was recently reported that China's government plans to sell
shares in state companies worth $380 billion on domestic stock markets to raise
money for a national pension system and improve the management of firms. China
_________
(1) WASHINGTON POST, February 26, 2004.
27
has also announced plans to sell shares in the biggest state-owned bank, the
Industrial & Commercial Bank of China, in 2006. Taken together, the two reports
underscore China's continued implementation of its economic reforms.
CHINA'S ACCESSION INTO THE WTO
On November 11, 2001, China signed an agreement to become a member of
the World Trade Organization (WTO), the international body that sets most trade
rules, further integrating China into the global economy and significantly
reducing the barriers to international commerce. China's membership in the WTO
was effective on December 11, 2001. China has agreed upon its accession to the
WTO to reduce tariffs and non-tariff barriers, remove investment restrictions,
provide trading and distribution rights for foreign firms, and open various
service sectors to foreign competition. China's accession to the WTO may
favorably affect our business in that reduced market barriers and a more
transparent investment environment will facilitate increased investment
opportunities in China, while tariff rate reductions and other enhancements will
enable us to develop better investment strategies for our clients. In addition,
the WTO's dispute settlement mechanism provides a credible and effective tool to
enforce members' commercial rights.
FOREIGN CURRENCY EXCHANGE ISSUES
We generate revenue and incur expenses and liabilities in both Chinese
RMB and U.S. dollars. As a result, we are subject to the effects of exchange
rate fluctuations with respect to any of these currencies. For example, the
value of the Chinese RMB depends to a large extent on the PRC's domestic and
international economic and political developments, as well as supply and demand
in the local market. Since 1994, the official exchange rate for the conversion
of Chinese RMB to U.S. dollars has generally been stable and the Chinese RMB has
appreciated slightly against the U.S. dollar. However, given recent economic
instability and currency fluctuations, we can offer no assurance that the
Chinese RMB will continue to remain stable against the U.S. dollar or any other
foreign currency.
Although Chinese governmental policies were introduced in 1996 to allow
the convertibility of Chinese RMB into foreign currency for current account
items, conversion of Chinese RMB into foreign exchange for capital items, such
as foreign direct investment, loans or security, requires the approval of the
State Administration of Foreign Exchange, or SAFE, which is under the authority
of the People's Bank of China. These approvals, however, do not guarantee the
availability of foreign currency. We cannot be sure that Chinese regulatory
authorities will not impose greater restrictions on the convertibility of the
Chinese RMB in the future. Because a significant amount of our revenues are in
the form of Chinese RMB, any future restrictions on currency exchanges will
limit our ability to utilize revenue generated in Chinese RMB to fund our
business activities outside the PRC.
INTELLECTUAL PROPERTY
To protect our proprietary rights, we rely generally on trade secret
laws, confidentiality agreements with employees and third parties, and
agreements with consultants, vendors and customers, although we have not signed
such agreements in every case. We can give no assurance that our agreements with
employees, consultants and others who participate in our business activities
will not be breached, or that we will have adequate remedies for any breach, or
that our trade secrets will not otherwise become known or independently
28
developed by competitors. Our failure or inability to protect our proprietary
rights could materially adversely affect our business, financial condition and
results of operations.
EMPLOYEES
We currently have approximately 100 employees worldwide. None of our
employees are covered by a collective bargaining agreement nor are they
represented by a labor union. We consider our employee relations to be good.
PROPERTY
We lease approximately 2,496 square feet of office space in Boca Raton,
Florida which serves as our principal executive offices, under a three year
lease which commenced January 1, 2003. The lease provides for monthly rental
payments of $3,536.00, escalating to $3,744.00 per month for the final year term
of the lease. In addition, we pay a prorated amount of the building's operating
expenses equal to approximately $1,830 per month.
All of the foregoing facilities are in good condition and are adequate
for currently anticipated needs. We believe that in the event that the leases
with respect to any of the aforementioned facilities should not be renewed,
alternative space will be available at comparable rates.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Positions
Gary Wolfson 55 CEO and Director
Dr. James Wang 41 Chairman of the Board,
President, and Director
Adam C. Wasserman 39 Chief Financial Officer
Kenneth Clinton 34 COO and Director
Dr. Li Shaoqing 41 Director
Robert Zhuang 46 Director, CEO of Yastock
Professor Shan Tingting 54 Director
GARY WOLFSON. Mr. Wolfson was appointed Chief Executive Officer in
August, 2002. From 1992 until joining our company, Mr. Wolfson was President and
a director of Pacific Rim Consultants, a private Sino-American liaison
consulting firm. In this capacity, he served as Director of China Operations for
four U.S. companies, including Walt Disney Memorial Cancer Institutes (1997 to
1998), CMI Power/Kansas City Power & Light (1993 to1995), Nanjing
Valley/Atlantic Gulf Communities (1995 to1997) and Shanghai Travel & Business
Bureau (1994 to 1999). In addition, he served as Director of U.S. Operations for
three Chinese companies, including Motorola China (1994 to 1996), China Academy
29
of Sciences (1995 to 1998) and World Trade Center - Jiangsu Province (1995 to
1997). Mr. Wolfson is a member of the Board of Directors of Ayiko Europe,
Munich, Germany. From 1971 to 1991 Mr. Wolfson was an owner of a thoroughbred
horse breeding and racing enterprise.
DR. JAMES WANG. Dr. Wang has served as President and Chairman of the
Board of Directors from August 1, 2001. From 2000 until 2001 Dr. Wang was
President, Chief Operating Officer and director of China Net & Technologies,
Inc., a technology firm. From 2000 until 2001 Dr. Wang was Vice President and
Chief Operating Officer of Tensleep Corporation, a California based integrated
Internet company that acquired and licensed technology, identified, acquired,
and developed development-stage technology and service companies and focused on
the Internet infrastructure market-PC, application-ready devices. From 1998
until August 2001 Dr. Wang was President of Master Financial Group, Inc., a St.
Paul, Minnesota based company which was a wholly-owned subsidiary of Tensleep
Corporation that provided consulting services for small private and public
companies in the area of corporate finance, investor relations and business
management. From 1994 to 1999 he was the President of International Trading
System Company, a marketing company. Between 1997 and 2000 Dr. Wang was a
research scientist and Assistant Professor, Lab Director at the University of
Minnesota School of Medicine. D. Wang received a Bachelor of Science degree from
the University of Science and Technology in Hefei, China in 1985, a Master of
Science Degree from the Shanghai Second Medical Immunology University, Shanghai,
China in 1988, and his Ph.D. degree from the University of Arizona in 1994.
ADAM C. WASSERMAN. Mr. Wasserman has served as our Chief Financial
Officer since October, 2001. Mr. Wasserman devotes approximately 20% of his time
to our company. As our business grows, we will either seek to increase the
amount of time Mr. Wasserman devotes to our company or hire a full-time chief
financial officer. Since November 1999 Mr. Wasserman has been CEO of CFO Oncall,
Inc., Weston, Florida based provider of consultant accounting services
specializing in financial reporting, budgeting and planning, mergers and
acquisitions, auditing, accounting, automated systems, banking relations and
internal controls. Mr. Wasserman has also served as the Chief Financial Officer
of Explorations Group Inc. since January 2002 and the Chief Financial Officer of
Colmena Corp. since May 2003. From June 1991 to November 1999 he was Senior
Audit Manager, American Express Tax and, Business Services, in Fort Lauderdale,
Florida where his responsibilities included supervising, training and evaluating
senior staff members, work paper review, auditing, maintaining positive client
relations, preparation of tax returns and preparation of financial statements
and the related footnotes. From September 1986 to May 1991 Mr. Wasserman was
employed by Deloitte & Touche, LLP. During his employment his significant
assignments included audits of public (SEC reporting) and private companies, tax
preparation and planning, management consulting, systems design, staff
instruction, and recruiting. Mr. Wasserman holds a Bachelor of Administration
from the State University of New York at Albany. He is a CPA and a member of The
American Institute of Certified Public Accountants and is the treasurer of Gold
Coast Venture Capital Club.
KENNETH CLINTON. Mr. Clinton has been Chief Operating Officer and a
member of the board of directors since May 2003. Mr. Clinton initially joined
our company in January 2002, serving as marketing director until August 2002
when he was made a vice president. He held the position of vice president until
being named COO in May 2003. Mr. Clinton has more than a decade of journalism,
public relations, and marketing expertise. From 1998 to 2002, Mr. Clinton
30
was Vice President of Marketing for Leapfrog, Inc., software and hardware
technology company concentrating in the Pacific Rim.
DR. LI SHAOQING. Dr. Li has been a member of the board of directors
since May 2003. Dr. Li brings competent and qualified Asian/Pacific leadership
to our company. Since January 2002 Dr. Li has been General Manager for Shenda
Kobond New Materials Co. in Shanghai, China and since February 2003 he has been
Chairman of Shanghai Capitalmill Business Development Co. Dr. Li formerly served
as Executive Vice President and Director of the world conglomerate the Top
Group, China. Dr. Li was also President for Topsoft Limited and President for
Top International (USA). Dr. Li has also been a noteworthy visiting
scholar/Assistant Lecturer as the University of New South Wales, Australia where
he completed his PhD.
ROBERT ZHUANG. Mr. Zhuang has been a member of our board of directors
since May 2003. Since October 2001 Mr. Zhuang is also President of Era Capital
Management, Inc., a Shanghai-based advisory firm. Mr. Zhuang has been a
consultant located in Shanghai, China specializing in raising capital and
consulting in a number of areas, including trading information, public
relations, corporate management, corporate strategic evaluations and human
resources. Mr. Zhuang is an expert on Sino-American business strategies and he
is dedicated to supporting the development of the Chinese capital market and
providing medium and small enterprises with consulting services for marketing
management, human resource management, stock investment, fund-raising,
financing, and public offerings in the United States.
PROFESSOR SHAN TINGTING. Professor Shan has been a member of our Board
of Directors since February 2004. Since 1995 he has been Executive Vice General
Manager of CIIC Investment Corporation Limited in Shanghai , a leading
state-owned enterprise that has been funded solely by the State Council. Since
1995 he has also been Executive Vice General Manager of Property Rights Agency
Ltd. of Shanghai CIIC. Professor Shan has over 30 years of practice in
enterprise management. While at CIIC Investment Corporation he has headed four
merger projects for various enterprises as well as creating the strategic
development plan for the Yangtze River Delta. Using the goodwill of CIIC
Investment Corporation this project resulted in the establishment of Yangtze
River Delta Investment & Development, Ltd. From 1993 to 1993 Professor Shan was
Chief Economist, Commercial Consultancy Center of Pudong New Area of Shanghai
where he was responsible for making strategy and investment decisions for
foreign investors and processing management projects. From 1983 to 1992 he was
Supervisor in Planing and Budget Industry Division of the Shanghai Bureau of
Public Utility Management and Manager (Chief Economist) of Investment and
Management Department of the Shanghai Business Manufacturing Corporation. Since
2000 he has been a professor for the MBA program at the Training Center of
Shanghai Personnel Bureau and a professor for the MBA program at Commercial
College of East China Normal University. Since 1986 Professor Shan has served as
Executive Director of the Association of Shanghai Marketing and Researching and
professor for the Senior Manager Training Class of Shanghai Association of
Enterprise Management. Since 1996 he has been a professor at the MIT Sloan
Training Center, Shanghai Science and Technology University.
Dr. Wang and Mr. Zhuang are brothers. Other than this relationship,
there are no family relationship between any of the executive officers and
directors. Directors are elected at our annual meeting of shareholders and hold
office for two years or until his or her successor is elected and qualified.
31
KEY EMPLOYEES
WANG WUZHANG. Mr. Wang, 37, is CEO and General Manager of Chorry, a
company he founded in 1998. He is also its minority shareholder. Mr. Wang holds
overall management responsibilities with respect to Chorry, including developing
and implementing strategic plans and initiatives at this subsidiary. From 1993
until 1998, Mr. Wang worked for China Textile University Corp. as a researcher
and from 1989 to 1992 he worked for Shanghai Computer Technology Institute as a
scientist. Mr. Wang graduated with a bachelors degree from Shanghai Engineering
Technology Institute in 1989 with a major in computer application.
GOVERNANCE PRINCIPLES FOR THE BOARD OF DIRECTORS
At the 2003 Annual Shareholders' Meeting held on May 30, 2003 we
adopted a set of corporate governance principles for our board of directors
which are set forth below:
ROLE OF BOARD AND MANAGEMENT. Our business is conducted by our
employees, managers and officers, under the direction of the CEO and the
oversight of the board, to enhance the long-term value of the company for its
shareholders. The board of directors is elected by the shareholders to oversee
management and to assure that the long-term interests of the shareholders are
being served. Both the board of directors and management recognize that the
long-term interests of shareholders are advanced by responsibly addressing the
concerns of other shareholders and interested parties including employees,
recruits, customers, suppliers, our communities, government officials and the
public at large.
FUNCTIONS OF BOARD. The board of directors has four scheduled meetings
a year at which it reviews and discusses reports by management on the
performance of the company, its plans and prospects, as well as immediate issues
facing the company. Directors are expected to attend all scheduled board and
committee meetings. Because of the international makeup of the board, directors
may attend telephonically, although, at least once annually, it is intended that
the entire board conduct a centrally-located meeting, with all directors being
present. In addition to its general oversight of management, the board also
performs a number of specific functions, including:
* selecting, evaluating and compensating the CEO and overseeing CEO
succession planning;
* providing counsel and oversight on the selection, evaluation,
development and compensation of senior management;
* reviewing, approving and monitoring fundamental financial and
business strategies and major corporate actions;
* assessing major risks facing the company-and reviewing options for
their mitigation; and
* ensuring processes are in place for maintaining the integrity of the
company-the integrity of the financial statements, the integrity of
compliance with law and ethics, the integrity of relationships with
customers and suppliers, and the integrity of relationships with
other shareholders.
QUALIFICATIONS. Directors should possess the highest personal and
professional ethics, integrity and values, and be committed to representing the
long-term interests of the shareholders. They must also have an inquisitive and
32
objective perspective, practical wisdom and mature judgment. We endeavor to have
a board representing diverse experience at policy-making levels in business,
government, education and technology, and in areas that are relevant to the
company's global activities. Directors must be willing to devote sufficient time
to carrying out their duties and responsibilities effectively, and should be
committed to serve on the board for an extended period of time. Directors should
offer their resignation in the event of any significant change in their personal
circumstances. The board does not believe that arbitrary term limits on
directors' service are appropriate, nor does it believe that directors should
expect to be re-nominated biennially until they reach the mandatory retirement
age. The board self-evaluation process described below will be an important
determinant for board tenure. Directors will not be nominated for election to
the board after their 73rd birthday, although the full board may nominate
candidates over age 73 for special circumstances.
COMPOSITION OF THE BOARD AND RELATED MATTERS . The board shall be
comprised of no fewer than five and no more than nine directors. The directors
serve for a period of two years, with the termination date 24 months following
his/her election. Directors may run for additional two-year terms in succession.
In the event that any director fails to attend two successive board meetings,
then the board may ask for the resignation of that director and immediately
conduct a search and selection of a replacement.
SETTING BOARD AGENDA. The CEO shall be responsible for its agenda.
Before the board meeting, the CEO will propose for the board's approval key
issues of strategy, risk and integrity to be scheduled and discussed during the
course the next meeting. Before that meeting, the board will be invited to offer
its suggestions. As a result of this process, a schedule of major discussion
items for the meeting will be established. Prior to each board meeting, the CEO
will discuss the other specific agenda items for the meeting with the presiding
director. The CEO and the presiding director, or committee chair as appropriate,
shall determine the nature and extent of information that shall be provided
regularly to the directors before each scheduled board or committee meeting.
Directors are urged to make suggestions for agenda items, or additional
pre-meeting materials, to the CEO, the presiding director, or appropriate
committee chair at any time.
ETHICS AND CONFLICTS OF INTEREST. The board expects our directors, as
well as officers and employees, to act ethically at all times and to acknowledge
their adherence to the policies comprising our code of conduct set forth in the
company's handbook. The board will not permit any waiver of any ethics policy
for any director or executive officer. If an actual or potential conflict of
interest arises for a director, the director shall promptly inform the CEO and
the presiding director. If a significant conflict exists and cannot be resolved,
the director should resign. All directors will recluse themselves from any
discussion or decision affecting their personal, business or professional
interests. The board shall resolve any conflict of interest question involving
the CEO, a vice chairman or a senior vice president, and the CEO shall resolve
any conflict of interest issue involving any other officer of the company. The
current membership of the board includes residents of both the United States of
America and the People's Republic of China. We are firmly dedicated to upholding
a high standard of ethical conduct and pronounces that it "operates in the
sunshine" in every area of its business endeavors. We adhere to all equal
opportunity and non-discriminatory practices.
REPORTING OF CONCERNS TO NON-EMPLOYEE DIRECTORS OR THE AUDIT COMMITTEE.
Anyone who has a concern about our conduct, or about the company's accounting,
internal accounting controls or auditing matters, may communicate that concern
33
directly to the presiding director, to the non-employee directors, or to the
Audit Committee. Such communications may be confidential or anonymous, and may
be e-mailed, submitted in writing, or reported by phone to special addresses and
a toll-free phone number that are published on the company's website. Concerns
relating to accounting, internal controls, auditing or officer conduct shall be
sent immediately to the presiding director and to the chair of the audit
committee and will be simultaneously reviewed and addressed.
ETHICS AND STEERING COMMITTEE. All contracts, agreements, prospects of
mergers and acquisitions, granting of options, and publication of information
pertaining to our company shall have the approval of the Ethics and Steering
Committee. The Committee includes the CFO, legal counsel, an independent
director, the CEO, and the Chairman of the Board. In each case, the final
document must have the majority approval to be acted upon. Because of existing
agreements and those already in negotiation, the effective date of this
provision shall be August 1, 2003. As we grow and have the wherewithal, this
Committee also shall have the responsibility of establishing a formal Audit
Committee, complying with guidelines furnished by the Securities and Exchange
Commission.
COMPENSATION OF BOARD. The Nominating and Corporate Governance
Committee shall have the responsibility for recommending to the board
compensation and benefits for non-employee directors. In discharging this duty,
the committee shall be guided by three goals:
* compensation should fairly pay directors for work required in a
company of our size and scope;
* compensation should align directors' interests with the long-term
interests of shareholders; and
* the structure of the compensation should be simple, transparent and
easy for shareholders to understand.
As discussed more fully in the key practices of the Nominating and
Corporate Governance Committee, the committee believes these goals will be
served by providing 50% of director compensation in options and 50% in
restricted stock units starting in 2003 to 2004. At the end of each year, the
Nominating and Corporate Governance Committee shall review non-employee director
compensation and benefits.
For each term of one year, our independent board members shall each be
entitled to 75,000 options. The Compensation Committee will determine the strike
price. The board member shall also be entitled to 75,000 shares in restricted
(144) stock. Also, for each meeting that board member participates, that person
will receive 10,000 options at the price of day of meeting. We will be
responsible for any expenses incurred for the purpose of meeting on behalf of
our shareholders. Members of our board who are our employees are not entitled to
any additional compensation for their board service.
SUCCESSION PLAN. The board shall approve and maintain a succession plan
for the CEO and senior executives, based upon recommendations from the
management development and compensation committee. The Chairman of the Board of
Directors shall be elected by the directors and serve for a period of two years.
This election shall be conducted in odd numbered years, commencing in 2005, with
the selection of a new chairman. In the event that the
34
presiding chairman should resign or become unable to serve, a special election
among current directors shall be conducted.
ANNUAL COMPENSATION REVIEW OF SENIOR MANAGEMENT. The Management
Development and Compensation Committee shall annually approve the goals and
objectives for compensating the CEO. That committee shall evaluate the CEO's
performance in light of these goals before setting the CEO's salary, bonus and
other incentive and equity compensation. The committee shall also annually
approve the compensation structure for the company's officers, and shall
evaluate the performance of the company's senior executive officers before
approving their salary, bonus and other incentive and equity compensation.
ACCESS TO SENIOR MANAGEMENT. Non-employee directors are encouraged to
contact senior managers of the company without senior corporate management
present.
ACCESS TO INDEPENDENT ADVISORS. The board and its committees shall have
the right at any time to retain independent outside financial, legal or other
advisors.
DIRECTOR ORIENTATION. The general counsel and the executive vice
president shall be responsible for providing an orientation for new directors,
and for periodically providing materials or briefing sessions for all directors
on subjects that would assist them in discharging their duties. Each new
director shall, be receive personal briefing by senior management on the
company's strategic plans, its financial statements, and its key policies and
practices.
COMMITTEE OF THE BOARD OF DIRECTORS
Our Board of Directors has currently established two committees, an
Ethics and Steering Committee and a Compensation Committee. Messrs. Wolfson and
Clinton and Dr. Li are members of the Ethics and Steering Committee, with Dr. Li
serving as the independent member, and Dr. Wang, Mr. Zhuang and Professor Shan
are members of the Compensation Committee, with Professor Shan serving as the
independent member. We have yet to establish a Nominating and Corporate
Governance Committee or an Audit Committee as envisioned by the foregoing
governance principles. The functions of those committees are being undertaken by
the entire board as a whole. No member of our board is a financial expert. As we
expand our board in the future we will seek to add one or more members who are
financial experts.
EMPLOYMENT AGREEMENTS
Effective July 31, 2002, we entered into an employment agreement with
Dr. Wang. The agreement is for a term of one year, with renewal thereafter from
year to year unless either party terminates the agreement, and contains
confidentiality clauses. As consideration for the Dr. Wang's services, we agreed
to a base salary of $108,000 per annum, for time actually devoted to duties on
our behalf. On each successive anniversary date of this agreement, his annual
salary is adjusted upwardly by 5%. In addition, Dr. Wang was granted stock
options to purchase 500,000 shares of our common stock at a price of $0.10 per
share. After one year of service, in June 2003, Dr. Wang was granted an
additional 500,000 options at a 60% discount to market price, defined as the
average closing price for the 20 trading days prior to the exercise date. On
August 1, 2003, we renewed our employment agreement with Dr. Wang and amended
the employment agreement. The amendment to the employment agreement granted Dr.
Wang 1,250,000 options, including options to purchase 625,000 shares of our
35
common stock at $.10 per share and options to purchase 625,000 shares of our
common stock at $.056 per share. All other terms of the employment agreement
remained the same.
Effective July 31, 2002, we entered into an employment agreement with
Mr. Wolfson. The agreement is for a term of one year, with renewal thereafter
from year to year unless either party terminates the agreement, and contains
confidentiality clauses. As consideration for the Mr. Wolfson's services, we
agreed to a base salary of $120,000 per annum, for time actually devoted to
duties on our behalf. On each successive anniversary date of this agreement, his
annual salary is adjusted upwardly by 5%. In addition, Mr. Wolfson was granted
stock options to purchase 500,000 shares of our common stock at a price of $0.10
per share. After one year of service, in June 2003, Mr. Wolfson was granted an
additional 500,000 options at a 60% discount to market price, defined as the
average closing price for the 20 trading days prior to the exercise date. On
August 1, 2003, we renewed our employment agreement with Mr. Wolfson and amended
the employment agreement. The amendment to the employment agreement granted Mr.
Wolfson 1,250,000 options, including options to purchase 625,000 shares of our
common stock at $.10 per share and options to purchase 625,000 shares of common
stock at $.056 per share. All other terms of the employment agreement remained
the same.
Effective July 31, 2002, we entered into an employment agreement with
an Mr. Clinton. The agreement is for a term of one year, with renewal thereafter
from year to year unless either party terminates the agreement, and contains
confidentiality clauses. As consideration for the Mr. Clinton's services, we
agreed to a base salary of $96,000 per annum, for time actually devoted to
duties on our behalf . On each successive anniversary date of this agreement,
his annual salary is adjusted upwardly by 5%. In addition, Mr. Clinton was
granted stock options to purchase 500,000 shares of our common stock at a price
of $0.10 per share. After one year of service, in June 2003, Mr. Clinton was
granted an additional 500,000 options at a 60% discount to market price, defined
as the average closing price for the 20 trading days prior to the exercise date.
On August 1, 2003, we renewed our employment agreement with Mr. Clinton and
amended the employment agreement. The amendment to the employment agreement
granted to Mr. Clinton 1,250,000 options, including options to purchase 625,000
shares of our common stock at $.10 per share and options to purchase 625,000
shares of common stock at $.056 per share. All other terms of the employment
agreement remained the same.
EXECUTIVE COMPENSATION
Cash Compensation
The following table summarizes all compensation recorded by us in each
of the last three fiscal years for our Chief Executive Officer and each other
executive officers serving as such whose annual compensation exceeded $100,000.
Annual Compensation Long-Term Compensation
-------------------------------------------------- -------------------------------------------
Restricted Securities
Other Annual Stock Underlying
Name and Principal Fiscal Salary Bonus Compensation Awards Options All Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
--------------------- ------ ----------- ----- ------------ ----------- ---------- ------------
Gary Wolfson 2003 $121,000(4) $ - $ - $160,000(1) 1,750,000 -0-
Chief Executive 2002 $ 20,000 $ - $ - $ 50,000(2) 500,000 -0-
Officer 2001 $ - $ - $ - $ - - -0-
Dr, James Wang 2003 $108.900(5) $ - $ - $212,000(3) 2,400,000 -0-
Chairman of the Board 2002 $ 78,000 $ - $ - $ 50,000(2) 500,000 -0-
and President 2001 $ 12,000 $ - $ - $ - - -0-
Kenneth Clinton 2003 $ 96,800(6) $ - $ - $160,000(1) 1,750,000 -0-
Director and employee 2002 $ 16,000 $ - $ - $ 50,000(2) 500,000 -0-
Officer 2001 $ - $ - $ - $ - - -0-
36
__________
(1) Represents the estimated value of an aggregate of 1,750,000 stock
options granted to each individual, respectively, of which 500,000 options have
an exercise price of $0.52 per share, 625,000 options have an exercise price of
$0.10 per share and 625,000 options have an exercise price of $0.056 per share.
(2) Represents the estimated value of 500,000 stock options granted to
each individual, respectively, at an exercise price of $0.10 per share.
(3) Represents the estimated value of an aggregate of 1,750,000 stock
options granted to individual for other annual compensation of $160,000, with
500,000 options exercisable at $0.050 per share, 625,000 options exercisable at
$0.10 per share and 625,000 options exercisable at $0.056 per share. Also
includes the estimated value of 650,000 stock options granted to individual at
an exercise price of $0.10 based on repricing for an annual compensation of
$52,000. See Note 9 to our audited financial statements for the year ended
September 30, 2003 appearing elsewhere in this prospectus.
(4) Includes the value of 582,226 stock options granted and exercised
to individual.
(5) Includes the value of 438,750 stock options granted and exercised
to individual.
(6) Includes the value of 435,495 stock options granted and exercised
to individual.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants
of options made during fiscal 2003 to the Named Executive Officers.
% of Total
Number of Shares Options Granted Exercise or
Underlying Options to Employees in Base Price Expiration
Granted (#) Fiscal Year ($/Sh) Date
------------------ --------------- ----------- ----------
Gary Wolfson 2,332,226 30.1% (1) (1)
James Wang 2,838,750 28.3% (2) (2)
Ken Clinton 2,185,495 28.2% (3) (3)
_________
(1) Includes options to purchase:
* 500,000 shares of common stock with an exercise price of $0.052 per
share which expire in June 2008,
* 625,000 shares of common stock with an exercise price of $0.100 per
share which expire in August 2008.
* 625,000 shares of common stock with an exercise price of $0.056 per
share which expire in August 2008,
* 282,226 shares of common stock with an exercise price of $0.14 per share
which expire in August 2008, and
* 300,000 shares of common stock with an exercise price of $0.05 per share
which expire in August 2008.
(2) Includes options to purchase:
* 500,000 shares of common stock with an exercise price of $0.052 per
share which expire in June 2008,
* 625,000 shares of common stock with an exercise price of $0.100 per
share which expire in August 2008.
* 625,000 shares of common stock with an exercise price of $0.056 per
share which expire in August 2008,
* 300,000 shares of common stock with an exercise price of $0.05 per share
which expire in August 2008,
37
* 138,750 shares of common stock with an exercise price of $0.14 per share
which expire in August 2008, and
* 650,000 shares of common stock with an exercise price of $0.10 per share
which expire in May 2008.
(3) Includes options to purchase:
* 500,000 shares of common stock with an exercise price of $0.052 per
share which expire in June 2008,
* 625,000 shares of common stock with an exercise price of $0.100 per
share which expire in August 2008.
* 625,000 shares of common stock with an exercise price of $0.056 per
share which expire in August 2008,
* 200,000 shares of common stock with an exercise price of $0.05 per share
which expire in August 2008, and
* 235,495 shares of common stock with an exercise price of $0.14 per share
which expire in August 2008.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table indicates each exercise of stock options (or tandem
SARS) and freestanding SARS during the last fiscal year by each of the named
executive officers and the fiscal year end value of unexercised options and
SARs.
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Option/ SARs
Shares Value Year End (#) at Fiscal Year End (#)(1)
Acquired on Realized --------------------------- ---------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ------------ -------- ----------- ------------- ----------- -------------
Gary Wolfson 1,082,226 $ 80,512 1,250,000 - $ 265,000 $ -
James Wang 438,750 $ 34,425 1,250,000 - $ 265,000 $ -
Ken Clinton 935,495 $ 68,969 1,250,000 - $ 265,000 $ -
_________
(1) Based on the last sales price for our common stock on December 26, 2003 of
$0.29 per common share as reported on the OTC Bulletin Board versus exercise
price.
STOCK OPTION PLANS
On October 31, 2001, our board of directors authorized, and holders of
a majority of our outstanding common stock adopted our 2002 Stock Option Plan
(the "2002 Plan"). We have reserved 2,555,000 of our authorized but unissued
shares of common stock for issuance under the Plan. On May 30, 2003, our board
of directors and holders of a majority of our outstanding common stock approved
and adopted, our 2003 Stock Option Plan (the "2003 Plan") covering 7,000,000
shares of common stock. As of December 31, 2003, options for an aggregate of
7,797,000 shares at exercise prices ranging from $0.052 to $2.25 remain
outstanding under the 2002 Plan and the 2003 Plan.
INFORMATION APPLICABLE TO THE 2002 PLAN AND THE 2003 PLAN
The purpose of both the 2002 Plan and the 2003 Plan is to encourage
stock ownership by our officers, directors, key employees and consultants, and
to give such persons a greater personal interest in the success of our business
and an added incentive to continue to advance and contribute to us. Our
officers, directors, key employees and consultants are eligible to receive stock
grants and non-qualified options under each of the plans. Only our employees are
eligible to receive incentive options.
38
Each plan is administered by our board of directors or an underlying
committee. The board of directors or the committee determines from time to time
those of our officers, directors, key employees and consultants to whom plan
options are to be granted, the terms and provisions of the respective option
agreements, the time or times at which such options shall be granted, the type
of options to be granted, the dates such plan options become exercisable, the
number of shares subject to each option, the purchase price of such shares and
the form of payment of such purchase price. All other questions relating to the
administration of the plan, and the interpretation of the provisions thereof and
of the related option agreements, are resolved by the board or committee.
Subject to the limitation on the aggregate number of shares issuable
under the plan, there is no maximum or minimum number of shares as to which a
stock grant or plan option may be granted to any person. Shares used for stock
grants and plan options may be authorized and unissued shares or shares
reacquired by us, including shares purchased in the open market. Shares covered
by plan options which terminate unexercised will again become available for
grant as additional options, without decreasing the maximum number of shares
issuable under the plan, although such shares may also be used by us for other
purposes.
Plan options may either be options qualifying as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified options. In addition, each of the plans allow for the inclusion of
a reload option provision, which permits an eligible person to pay the exercise
price of the option with shares of common stock owned by the eligible person and
receive a new option to purchase shares of common stock equal in number to the
tendered shares. Any incentive option granted under the plan must provide for an
exercise price of not less than 100% of the fair market value of the underlying
shares on the date of grant, but the exercise price of any incentive option
granted to an eligible employee owning more than 10% of our outstanding common
stock must not be less than 110% of fair market value on the date of the grant.
Each plan provides that, with respect to incentive stock options, the aggregate
fair market value (determined as of the time the option is granted) of the
shares of common stock, with respect to which incentive stock options are first
exercisable by any option holder during any calendar year cannot exceed
$100,000. The exercise price of non-qualified options cannot be less than the
par value of our common stock on the date the option is granted. The term of
each plan option and the manner in which it may be exercised is determined by
the board of directors or the committee, provided that no option may be
exercisable more than 10 years after the date of its grant and, in the case of
an incentive option granted to an eligible employee owning more than 10% of the
common stock, no more than five years after the date of the grant.
The board of directors or the committee may grant stock appreciation
rights to persons who have been, or are being granted, plan options as a means
of allowing such participants to exercise their plan options without the need to
pay the exercise price in cash. In the case of a non-qualified option, a stock
appreciation right may be granted either at or after the time of the grant of
the non-qualified option. In the case of an incentive option, a stock
appreciation right may be granted only at the time of the grant of the incentive
option. Shares of restricted stock may also be awarded either alone or in
addition to other awards granted under the plan. The board of directors or the
committee determines the eligible persons to whom, and the time or times at
which, grants of restricted stock will be awarded, the number of shares to be
awarded, the price (if any) to be paid by the holder, the time or times within
which such awards may be subject to forfeiture, the vesting schedule and rights
to acceleration thereof, and all other terms
39
and conditions of the awards. Shares of deferred stock may be awarded either
alone or in addition to other awards granted under the plan. The board of
directors or committee determines the eligible persons to whom and the time or
times at which grants of deferred stock will be awarded, the number of shares of
deferred stock to be awarded to any person, the duration of the period during
which, and the conditions under which, receipt of the shares will be deferred,
and all the other terms and conditions of the awards.
Each plan provides that, if our outstanding shares are increased,
decreased, exchanged or otherwise adjusted due to a share dividend, forward or
reverse share split, recapitalization, reorganization, merger, consolidation,
combination or exchange of shares, an appropriate and proportionate adjustment
shall be made in the number or kind of shares subject to the plan or subject to
unexercised options and in the purchase price per share under such options. Any
adjustment, however, does not change the total purchase price payable for the
shares subject to outstanding options. In the event of our proposed dissolution
or liquidation, a proposed sale of all or substantially all of our assets, a
merger or tender offer for our shares of common stock, the board of directors
may declare that each option granted under a plan shall terminate as of a date
to be fixed by the board of directors; provided that not less than 30 days
written notice of the date so fixed shall be given to each participant holding
an option, and each such participant shall have the right, during the period of
30 days preceding such termination, to exercise the participant's option, in
whole or in part, including as to options not otherwise exercisable.
All plan options are non-assignable and non-transferable, except by
will or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. The board of directors may
amend, suspend or terminate either plan at any time, except that no amendment
shall be made which:
* increases the total number of shares subject to the plan or changes
the minimum purchase price thereof (except in either case in the
event of adjustments due to changes in our capitalization),
* affects outstanding plan options or any exercise right thereunder,
* extends the term of any plan option beyond 10 years, or
* extends the termination date of the plan.
Unless the plan has been suspended or terminated by the board of
directors, each plan will terminate on 10 years from the date of the respective
plan's adoption. Any such termination of the plan will not affect the validity
of any plan options previously granted thereunder.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the Florida Business Corporation Law, our articles of
incorporation provide that none of our directors shall be personally liable to
us or our shareholders for monetary damages for breach of fiduciary duty as a
director, except liability for:
* any breach of the director's duty of loyalty to our company or its
shareholders;
* acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
40
* unlawful payments of dividends or unlawful stock redemptions or
repurchases; and
* any transaction from which the director derived an improper personal
benefit.
This provision limits our rights and the rights of our shareholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any shareholder to seek injunctive relief or rescission
if a director breaches his duty of care. These provisions will not alter the
liability of directors under federal securities laws. Our by-laws require us to
indemnify directors and officers against, to the fullest extent permitted by
law, liabilities which they may incur under the circumstances described above.
Our articles of incorporation further provide for the indemnification
of any and all persons who serve as our director, officer, employee or agent to
the fullest extent permitted under Florida law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
according to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2001 we issued a total of 2,602,195 shares of our common stock
to then officers of our company in satisfaction of payroll through July, 2001.
We recognized an expense of approximately $104,088 based upon a price of $.04
per share.
From time to time, Mr. Wang Wuzhang, the minority shareholder and CEO
of our Chorry subsidiary, advanced funds to this subsidiary which are used for
working capital purposes. Mr. Wang Wuzhang is not related to Dr. Wang. At
December 31, 2003 we owed Mr. Wang $363,309. These advances are non-interest
bearing and are payable on demand.
On April 1, 2002, we borrowed $80,000 from Fugen Li, an individual who
is Dr. Wang's father-in-law. The loan bears interest at 10% per annum and is
unsecured. All unpaid principal and accrued interest was payable on April 1,
2003. As of December 31, 2003, this loan remains unpaid, however, the lender had
not provided us with notice of default. Principal and accrued interest due at
December 31, 2003 was $92,000. In the event of default, the lender is entitled
receive shares of our common stock, valued at a 25% discount to the average
closing price of the previous 20 trading days, in an amount equal to the total
amount due to the lender. In connection with this unpaid loan, we recorded a
beneficial conversion feature of $20,000, which was recorded as interest expense
for the year ended September 30, 2003. We did not recognize any similar expense
during the three months ended December 31, 2003.
On July 31, 2002, we borrowed $20,000 from Yongwen Zhuang, Dr. Wang's
mother. The loan bears interest at 10% per annum and is unsecured. All unpaid
principal and accrued interest was payable on January 1, 2003. The loan remains
unpaid and at December 31, 2003 we owed the lender an aggregate of $22,800 in
principal and accrued interest. At the option of the lender, the entire
obligation may be repaid through the issuance of shares of our common stock
calculated by dividing the amount due by the average closing price for 10 days
41
prior to the repayment, discounted by 40%, with a maximum price of $0.13 per
share. The beneficial conversion feature present in the issuance of this note
payable as determined on the date funds were received under the loan agreement
totaled $12,500 and was recorded as interest expense and additional paid-in
capital for the fiscal year ended September 30, 2003. We did not record any
similar expenses related to this note during the three months ended December 31,
2003.
During fiscal 2003 and the first quarter of fiscal 2004 we issued an
aggregate of 1,122,501 shares of our common stock relating to exercise of
options held by Dr. Wang and Messrs. Wolfson and Clinton. We reduced accrued
salaries due these individuals by $116,423, reduced an amount due to Dr. Wang by
$44,627, reduced accounts payable due Mr. Clinton by $1,908 and have a
subscription receivable of $53,617 related to these shares issuances from Dr.
Wang and Messrs. Wolfson and Clinton.
In December 2003 we issued 231,000 shares of our common stock to
employees and officers for services rendered. We valued these shares at $0.31
per share and record stock- based compensation expense related to this issuance
of $71,610. Included in this amount were 60,000 shares of our common stock
issued to each of Dr. Wang and Messrs. Wolfson and Clinton.
On January 5, 2004 we entered into a consulting agreement with Sense
Holdings, Inc, an unaffiliated third party, whereby we are to provide assistance
to Sense Holdings in developing its business in China. Sense Holdings was
introduced to us by Era Capital Management, Inc., a privately held company of
which Mr. Zhuang is an officer. Era Capital Management, Inc. has introduced
clients to us in the past. Under the terms of the agreement with Sense Holdings,
our retainer in the amount of $15,000 was paid to us directly by Era Capital
Management, Inc.
In March 2004 we issued each of Dr. Li and Professor Shan 75,000 shares
of our common stock, for an aggregate issuance of 150,000 shares, as
compensation for their services on our Board of Directors. We valued these
shares at fair market value on the date of issuance and will recognize an
expense in our quarter ending March 31, 2004.
PRINCIPAL SHAREHOLDERS
At March 4, 2004 there were 40,950,325 shares of our common stock
issued and outstanding. Our common stock is the only class of our voting
securities. The following table sets forth, as of March 4, 2004, information
known to us relating to the beneficial ownership of these shares by:
- each person who is the beneficial owner of more than 5% of the
outstanding shares of common stock;
- each director;
- each executive officer; and
- all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of 777 Yamato Road, Suite 130, Boca Raton, Florida
33431.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of beneficially owned by them.
42
Under securities laws, a person is considered to be the beneficial owner of
securities he owns and that can be acquired by him within 60 days from the date
of this prospectus upon the exercise of options, warrants, convertible
securities or other understandings. We determine a beneficial owner's percentage
ownership by assuming that options, warrants or convertible securities that are
held by him, but not those held by any other person and which are exercisable
within 60 days of March 4, 2004, have been exercised or converted.
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
--------------------------------------- -------------------- ----------
Gary Wolfson(1) 1,416,000 3.3%
James Wang(2) 1,466,000 3.5%
Kenneth Clinton(3) 1,416,000 3.3%
Adam C. Wasserman(4) 200,000 *
Dr. Li Shaoqing(5) 160,000 *
Robert Zhuang(6) 160,000 *
Professor Shan Tingting(7) 75,000 *
All executive officers and
directors as a group (seven persons)(8) 4,893,000 10.7%
_________
* represents less than 1%
(1) Mr. Wolfson's holdings include options to purchase 1,350,000 shares of
common stock at exercise prices ranging from $0.056 to $0.10 per share.
(2) Dr. Wang's holdings include options to purchase 1,400,000 shares of common
stock at exercise prices ranging from $0.056 to $0.10 per share.
(3) Mr .Clinton's holdings include options to purchase 1,350,000 shares of
common stock at exercise prices ranging from $0.056 to $0.10 per share.
(4) Mr. Wasserman's holdings include options to purchase 200,000 shares of
common stock at $0.10 per share.
(5) Dr. Li's holdings include options to purchase 160,000 shares of common stock
at exercise prices ranging from $0.125 to $0.34 per shares.
(6) Mr. Zhuang's holdings include options to purchase 85,000 shares of common
stock at exercise prices ranging from $0.15 to $0.34 per share.
(7) Professor Shan's holdings include options to purchase 75,000 shares of
common stock at $0.15 per share
(8) See footnotes 1 through 7 above.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 200,000,000 shares of common
stock, $.001 par value per share, and 20,000,000 shares of preferred stock, par
value $.001 per share, of which 218,000 shares have been designated as Series A
6% Cumulative Convertible Preferred Stock. The remaining 19,782,000 shares of
our preferred stock remain without designation. As of the date of this
prospectus, there are 40,950,325 shares of common stock and 200,000 shares of
Series A 6% Cumulative Convertible Preferred Stock issued and outstanding or to
be issued and outstanding following the date of this prospectus.
43
COMMON STOCK
Holders of common stock are entitled to one vote for each share on all
matters submitted to a shareholder vote. Holders of common stock do not have
cumulative voting rights. Holders of common stock are entitled to share in all
dividends that the board of directors, in its discretion, declares from legally
available funds. In the event of our liquidation, dissolution or winding up,
subject to the preferences of the Series A 6% Cumulative Convertible Preferred
Stockholders, each outstanding share entitles its holder to participate in all
assets that remain after payment of liabilities and after providing for each
class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions for the common
stock. The rights of the holders of common stock are subject to any rights that
may be fixed for holders of preferred stock, when and if any preferred stock is
authorized and issued. All outstanding shares of common stock are duly
authorized, validly issued, fully paid and non-assessable.
PREFERRED STOCK
Our board of directors, without further shareholder approval, may issue
preferred stock in one or more series from time to time and fix or alter the
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions of the shares of each series. The rights,
preferences, limitations and restrictions of different series of preferred stock
may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters. Our board of directors may authorize the issuance of
preferred stock which ranks senior to our common stock for the payment of
dividends and the distribution of assets on liquidation. In addition, our board
of directors can fix limitations and restrictions, if any, upon the payment of
dividends on our common stock to be effective while any shares of preferred
stock are outstanding.
The rights granted to the holders of any series of preferred stock
could adversely affect the voting power of the holders of common stock and
issuance of preferred stock may delay, defer or prevent a change in our control.
SERIES A 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
In January 2004 our board of directors created a series of 218,000
shares of our preferred stock and designated that series as Series A 6%
Cumulative Convertible Preferred Stock. The designations, rights and preferences
of the Series A 6% Cumulative Convertible Preferred Stock include:
* the stated value of each share is $10.00,
* the shares of Series A 6% Cumulative Convertible Preferred Stock
have no voting rights,
* the outstanding shares are entitled to receive preferential
cumulative dividends in cash out of any our funds legally available
at the time for declaration of dividends before any dividend or
other distribution is paid or declared and set apart for
44
payment on any shares of our common stock, or other class of stock
which is authorized in the future, at the rate of 6% simple interest
per annum on the stated value per share, payable quarterly
commencing with the period ending March 31, 2004. At the holder's
option, declared dividend payments may be made in additional fully
paid and non assessable shares of Series A 6% Cumulative Convertible
Preferred Stock at a rate of one share for each $10 of declared
dividend not paid in cash,
* upon the dissolution, liquidation or winding up of our company, the
shares of Series A 6% Cumulative Convertible Preferred Stock carry a
liquidation preference of $10.00 per share plus any accrued but
unpaid dividends,
* the shares of Series A 6% Cumulative Convertible Preferred Stock are
convertible into such number of shares of our common stock as equal
(i) the sum of (A) the stated value of $10.00 per share and (B) at
the holder's election accrued and unpaid dividends on such share,
divided by (ii) the conversion price of $0.232 per share. The right
of the holder to convert the shares of Series A 6% Cumulative
Convertible Preferred Stock into shares of our common stock is
limited if such conversion would result in the holder having
beneficial ownership of more than 9.99% of the outstanding shares of
our common stock. The holder is not be limited to successive
exercises which would result in the aggregate issuance of more than
9.99%,
* so long as the shares of Series A 6% Cumulative Convertible
Preferred Stock are outstanding, we cannot amend our articles of
incorporation without the approval of the holders of a majority of
the issued and outstanding shares of Series A 6% Cumulative
Convertible Preferred Stock if such amendment would have the effect
of:
- changing the seniority rights of the holders of the Series A 6%
Cumulative Convertible Preferred Stock as to the payment of
dividends,
- reducing the liquidation preference, or
- canceling or modifying the conversion rights.
* the dividend rate of the shares of Series A 6% Cumulative
Convertible Preferred Stock is subject to increase from 6% per annum
to 15% per annum upon the occurrences of certain events, including:
- failure to pay a dividend,
- breach of any material covenant, term or condition of the
designations of the Series A 6% Cumulative Convertible Preferred
Stock or the subscription agreement related to its sale,
- bankruptcy, insolvency, reorganization, liquidation or an
assignment of a substantial part of our property or business for
the benefit of our creditors, or the appointment of a trustee or
receiver for a substantial party of our properties or business,
- a judgement or similar process against us in excess of $50,000,
- failure to timely deliver a stock certificate upon the conversion
of shares of Series A 6% Cumulative Convertible Preferred Stock
into common stock,
45
- if our common stock is no longer quoted on the OTC Bulletin Board
or the principal exchange on which it is traded,
- if we effect a reverse stock split without the consent of the
holders of the Series A 6% Cumulative Convertible Preferred
Stock, or
- a default by us under any agreement to which we are a party
WARRANTS
In January 2004 we issued five year common stock warrants to purchase
an aggregate of 2,305,000 shares of our common stock in connection with the
initial closing of the private offering described later in this prospectus under
"Selling Security Holders". We will issue five year common stock purchase
warrants to purchase an additional 2,305,000 shares of our common stock at the
second closing of this offering as described below. Each of these warrants is
exercisable at $0.3045 per share which is payable in cash, delivery of common
stock issuable upon the exercise of the warrants, also known as cashless
exercise, or a combination. These warrants contain anti-dilution protection for
the holders in the event of reorganization, consolidation or merger. If we
should issue any shares of common stock prior to the complete exercise of the
warrants for a consideration less than the exercise price then the exercise
price will be reduced to such lower amount. These warrants carry certain
registration rights. We have included 4,610,000 shares of our common stock
issuable upon the exercise of these warrants in the registration statement of
which this prospectus is a part.
TRANSFER AGENT
Our transfer agent is Computershare Trust Company, 350 Indiana St.,
#800, Golden, Colorado 80401, and its telephone number is (303) 984-4100.
SELLING SECURITY HOLDERS
On January 16, 2004, we closed a securities purchase agreement under
which we sold an aggregate of $2,000,000 stated value of our newly created
Series A 6% Cumulative Convertible Preferred Stock and common stock purchase
warrants to several institutional investors. This offering was made pursuant to
exemptions from the registration requirements of the Securities Act of 1933
available to us under Section 4(2) of the Securities Act of 1933 and Regulation
D of that act. On the initial closing date, we issued the investors 100,000
shares of our Series A 6% Cumulative Convertible Preferred Stock and five year
common stock purchase warrants to purchase an additional 2,155,000 shares of our
common stock, with an exercise price of $0.3045 per share, for aggregate gross
consideration of $1,000,000. Following the effectiveness of the registration
statement of which this prospectus is a part, we will issue the institutional
investors an additional 100,000 shares of our Series A 6% Cumulative Convertible
Preferred Stock and five year common stock purchase warrants to purchase an
additional 2,155,000 shares of our common stock, with an exercise price of
$0.3045 per share, for aggregate gross consideration of $1,000,000. This second
closing, which is to occur on the fifth business date following the date the
Securities and Exchange Commission declares the registration statement of which
this prospectus forms a part effective, is also subject to our certification of
the absence of any default under the provisions of the subscription agreement.
46
A second closing may not take place in connection with that amount of
shares of Series A 6% Cumulative Convertible Preferred Stock to be issued and
sold at that closing which would be in excess of the sum of (y) the number of
shares of common stock beneficially owned by a holder on the second closing
date, and (z) the number of shares of our common stock issuable upon the
conversion of the shares of Series A 6% Cumulative Convertible Preferred Stock
issuable on the second closing if the Series A 6% Cumulative Convertible
Preferred Stock which would result in beneficial ownership by a holder of more
than 9.99% of the outstanding shares of our common stock on the second closing
date. For the purposes of the proviso, beneficial ownership shall be determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13d-3 thereunder. This limitation is contractual in
nature and is not the result of any legal or regulatory requirement to which we
are bound. The holder may revoke the restriction described in this paragraph
upon and effective after 61 days prior notice to us. The holder shall have the
right to determine which of our equity deemed beneficially owned by such holder
shall be included in the 9.99% described above and which shall be allocated to
the excess above 9.99%.
On the initial closing date we paid a broker's fee to Coastline Capital
Partners, an institutional finance division of Western International Securities,
Inc., of $50,000 (5% of the purchase price) and issued common stock purchase
warrants to purchase a total of 150,000 shares of our common stock exercisable
at $0.3045. On the second closing date we will pay Coastline Capital Partners a
broker's fee of $40,000 and issue that firm common stock purchase warrant to
purchase an additional 150,000 shares of our common stock at an exercise price
of $0.3045 per share. We granted the purchasers certain registration rights and
in connection therewith we agreed to file a registration statement with the
Securities and Exchange Commission within 45 days from the initial closing
which, when effective, will permit the public resale of the shares of common
stock issuable upon the conversion of the shares Series A 6% Cumulative
Convertible Preferred Stock and the common stock purchase warrants, including
those issued to Coastline Capital Partners. We agreed to register a number of
shares equal to 200% of the shares issuable upon the conversion of the Series A
6% Cumulative Convertible Preferred Stock and 100% of the shares issuable upon
the exercise of the common stock purchase warrants. This prospectus forms a part
of that registration statement.
The following table sets forth
* the name of each selling security holder,
* the number of shares owned, and
* the number of shares being registered for resale by each selling
security holder.
We may amend or supplement this prospectus from time to time to update
the disclosure set forth in this prospectus. All of the shares owned by the
selling security holders may be offered hereby. Because the selling security
holders may sell some or all of the shares owned by them, and because there are
currently no agreements, arrangements or understandings with respect to the sale
of any of the shares, no estimate can be given as to the number of shares that
will be held by the selling security holders upon termination of any offering
made hereby. If all the shares offered hereby are sold, the selling security
holders will not own any shares after the offering.
47
Number Percentage Shares Shares to Percentage
of shares owned before to be be owned owned after
Name of selling security holder owned offering offered after offering offering
------------------------------- --------- ------------ --------- -------------- -----------
Alpha Capital Aktiengeselleschaft(1) 1,293,000 3.1% 4,310,000 0 -
Gamma Opportunity Capital Partners, LP(2) 969,750 2.3% 3,232,500 0 -
Bristol Investment Fund, Ltd. (3) 2,101,125 4.9% 7,003,750 0 -
Longview Fund, L.P. (4) 969,750 2.3% 3,232,500 0 -
Palisades Master Fund, LP (5) 1,131,375 2.7% 3,771,250 0 -
Coastline Capital Partners (6) 150,000 * 300,000 0 -
_________
* represents less than 1%
(1) Konrad Ackerman is the control person of Alpha Capital Aktiengesellschaft.
The number of shares owned includes 862,000 shares of common stock issuable upon
the conversion of 20,000 shares of Series A 6% Cumulative Convertible Preferred
Stock and 431,000 shares issuable upon the exercise of common stock which are
presently outstanding. The number of shares offered also includes an additional
862,000 shares of common stock issuable upon the conversion of an additional
20,000 shares of Series A 6% Cumulative Convertible Preferred Stock and an
additional 431,000 shares of common stock issuable upon the exercise of
additional common stock purchase warrants, all of which will be issued
immediately following the date of this prospectus, plus an additional 1,724,000
shares of common stock underlying the Series A 6% Cumulative Convertible
Preferred Stock which we are required to include in the registration statement
which is a part of this prospectus in accordance with the terms of the
subscription agreement for the sale of these securities. Alpha Capital
Aktiengesellschaft's address is Pradafant 7, 9490 Furstentums, Vaduz,
Liechtenstein.
(2) Gamma Capital Partners, Ltd. is the investment manager to Gamma Opportunity
Capital Partners, LP. The number of shares owned includes 646,500 shares of
common stock issuable upon the conversion of 15,000 shares of Series A 6%
Cumulative Convertible Preferred Stock and 323,250 shares issuable upon the
exercise of common stock which are presently outstanding. The number of shares
offered also includes an additional 646,500 shares of common stock issuable upon
the conversion of an additional 15,000 shares of Series A 6% Cumulative
Convertible Preferred Stock and an additional 323,250 shares of common stock
issuable upon the exercise of additional common stock purchase warrants which
will be issued immediately following the date of this prospectus, plus an
additional 1,293,000 shares of common stock underlying the Series A 6%
Cumulative Convertible Preferred Stock which we are required to include in the
registration statement which is a part of this prospectus in accordance with the
terms of the subscription agreement for the sale of these securities. Mr.
Jonathan Knight is the control person of Gamma Capital Partners, Ltd. Gamma
Opportunity Capital Partners LP's address is British Colonial Centre of
Commerce, One Bay Street, Suite 401, Nassau (NP), The Bahamas.
48
(3) Mr. Paul Kessler is a control person of Bristol Investment Fund, Ltd.. The
number of shares owned includes 1,400,750 shares of common stock issuable upon
the conversion of 32,500 shares of Series A 6% Cumulative Convertible Preferred
Stock and 700,375 shares issuable upon the exercise of common stock which are
presently outstanding. The number of shares offered also includes an additional
1,400,750 shares of common stock issuable upon the conversion of an additional
32,500 shares of Series A 6% Cumulative Convertible Preferred Stock and an
additional 700,375 shares of common stock issuable upon the exercise of
additional common stock purchase warrants which will be issued immediately
following the date of this prospectus, plus an additional 2,801,500 shares of
common stock underlying the Series A 6% Cumulative Convertible Preferred Stock
which we are required to include in the registration statement which is a part
of this prospectus in accordance with the terms of the subscription agreement
for the sale of these securities. Bristol Investment Fund, Ltd.'s address is
Caledonia House, Jannett Street, Georgetown, Grand Cayman.
(4) Viking Asset Management, LLC is the general partner of Longview Fund, L.P.
Mr. Peter Benz is the control person of Viking Asset Management, LLC. The number
of shares owned includes 646,500 shares of common stock issuable upon the
conversion of 15,000 shares of Series A 6% Cumulative Convertible Preferred
Stock and 323,250 shares issuable upon the exercise of common stock which are
presently outstanding. The number of shares offered also includes an additional
646,500 shares of common stock issuable upon the conversion of an additional
15,000 shares of Series A 6% Cumulative Convertible Preferred Stock and an
additional 323,250 shares of common stock issuable upon the exercise of
additional common stock purchase warrants which will be issued immediately
following the date of this prospectus, plus an additional 1,293,000 shares of
common stock underlying the Series A 6% Cumulative Convertible Preferred Stock
which we are required to include in the registration statement which is a part
of this prospectus in accordance with the terms of the subscription agreement
for the sale of these securities. Longview Fund, L.P.'s address is 1325 Howard
Avenue, Suite 422, Burlinghame, CA 94010.
(5) PEF Advisors, LLC serves as investment manager to Palisades Master Fund L.P.
Mr. Andrew Reckles, is a managing member of PEF Advisors, LLC. The number of
shares owned includes 754,250 shares of common stock issuable upon the
conversion of 17,500 shares of Series A 6% Cumulative Convertible Preferred
Stock and 377,125 shares issuable upon the exercise of common stock which are
presently outstanding. The number of shares offered also includes an additional
754,250 shares of common stock issuable upon the conversion of an additional
17,500 shares of Series A 6% Cumulative Convertible Preferred Stock and an
additional 377,125 shares of common stock issuable upon the exercise of
additional common stock purchase warrants which will be issued immediately
following the date of this prospectus, plus an additional 1,508,500 shares of
common stock underlying the Series A 6% Cumulative Convertible Preferred Stock
which we are required to include in the registration statement which is a part
of this prospectus in accordance with the terms of the subscription agreement
for the sale of these securities. Palisades Master Fund, L.P.'s address is c/o
Beacon Fund Advisors, Harbor House, Waterfort Drive, Roadtown, Tortola, BVI.
(6) The number of shares owned includes 150,000 shares of common stock issuable
upon the conversion o f outstanding common stock purchase warrants. The number
of shares offered also Includes an additional 150,000 shares of common stock
issuable upon the exercise of common stock purchase warrants which will be
issued immediately following the date of this prospectus.
49
None of the selling security holders are broker-dealers or affiliates
of broker-dealers, other than Coastline Capital Partners which is an affiliate
of Western International Securities, Inc. None of the selling security holders
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates, other
than as described previously in this section.
We have agreed to pay full costs and expenses, incentives to the
issuance, offer, sale and delivery of the shares, including all fees and
expenses in preparing, filing and printing the registration statement and
prospectus and related exhibits, amendments and supplements thereto and mailing
of those items. We will not pay selling commissions and expenses associated with
any sale by the selling security holders.
PLAN OF DISTRIBUTION
The shares offered hereby by the selling security holders may be sold
from time to time by the selling security holders, or by pledgees, donees,
transferees or other successors in interest. These sales may be made on one or
more exchanges or in the over-the-counter market, or otherwise at prices and at
terms then prevailing or at prices related to the then current market price, or
in negotiated transactions. The shares may be sold by one or more of the
following methods, including, without limitation:
- a block trade in which the broker-dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by a broker
or dealer for its account under this prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
- face-to-face or other direct transactions between the selling
security holders and purchasers without a broker-dealer or other
intermediary; and
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
In effecting sales, brokers or dealers engaged by the selling security
holders may arrange for other brokers or dealers to participate in the resales.
Brokers, dealers or agents may receive compensation in the form of commissions,
discounts or concessions from selling security holders in amounts to be
negotiated in connection with the sale. The selling security holders and these
broker-dealers and agents and any other participating broker-dealers, or agents
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, in connection with the sales. In addition, any securities covered by this
prospectus that qualify for sale under Rule 144 might be sold under Rule 144
rather than under this prospectus.
50
In connection with distributions of the shares or otherwise, the
selling security holders may enter into hedging transactions with
broker-dealers. In connection with the transactions, broker-dealers may engage
in short sales of the shares registered hereunder in the course of hedging the
positions they assume with selling security holders. The selling security
holders may also sell shares short and deliver the shares to close out the
positions. We have been advised by each of the selling security holders that
they do not have any open short positions in our common stock as of the date of
this prospectus. The selling security holders may enter into option or other
transactions with broker-dealers which require the delivery to the broker-dealer
of the shares registered hereunder, which the broker-dealer may resell under
this prospectus. The selling security holders may also pledge the shares
registered hereunder to a broker or dealer and upon a default, the broker or
dealer may effect sales of the pledged shares under this prospectus.
Information as to whether an underwriter(s) who may be selected by the
selling security holders, or any other broker-dealer, is acting as principal or
agent for the selling security holders, the compensation to be received by
underwriters who may be selected by the selling security holders, or any
broker-dealer, acting as principal or agent for the selling security holders and
the compensation to be received by other broker-dealers, in the event the
compensation of other broker-dealers is in excess of usual and customary
commissions, will, to the extent required, be set forth in a supplement to this
prospectus. Any dealer or broker participating in any distribution of the shares
may be required to deliver a copy of this prospectus, including the supplement,
if any, to any person who purchases any of the shares from or through a dealer
or broker.
We have advised the selling security holders that during the time as
they may be engaged in a distribution of the shares included herein they are
required to comply with Regulation M of the Securities Exchange Act of 1934, as
amended. With certain exceptions, Regulation M precludes any selling security
holders, any affiliated purchasers and any broker-dealer or other person who
participates in the distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase any security which is the subject of
the distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchase made in order to stabilize the price of a
security in connection with an at the market offering such as this offering. All
of the foregoing may affect the marketability of our common stock.
SPECIAL CONSIDERATIONS RELATED TO PENNY STOCK RULES
Shares of our common stock may be subject to rules adopted by the SEC
that regulate broker-dealer practices in connection with transactions in "penny
stocks". Penny stocks are generally equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the Nasdaq Stock Market, provided that current price and volume
information with respect to transactions in those securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from those rules, to deliver a
standardized risk disclosure document which contains the following:
* a description of the nature and level of risk in the market for
penny stocks in both public offerings and secondary trading;
51
* a description of the broker's or dealer's duties to the customer and
of the rights and remedies available to the customer with respect to
violation to these duties or other requirements of securities laws;
* a brief, clear, narrative description of a dealer market, including
"bid" and "ask" prices for penny stocks and the significance of the
spread between the "bid" and "ask" price;
* a toll-free telephone number for inquiries on disciplinary actions;
* definitions of significant terms in the disclosure document or in
the conduct of trading in penny stocks; and
* other information as the SEC may require by rule or regulation.
Prior to effecting any transaction in a penny stock, the broker-dealer
also must provide the customer the following:
* the bid and offer quotations for the penny stock;
* the compensation of the broker-dealer and its salesperson in the
transaction;
* the number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity of
the market for such stock; and
* monthly account statements showing the market value of each penny
stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement to
transactions involving penny stocks, and a signed and dated copy of a written
statement. These disclosure requirements may have the effect of reducing the
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. Holders of shares of our common stock may have difficulty
selling those shares because our common stock may be subject to the penny stock
rules.
SHARES ELIGIBLE FOR FUTURE SALE
At the date of this prospectus, we have 40,950,325 shares of common
stock issued and outstanding, of which 1,509,850 are restricted securities. In
general, Rule 144 permits a shareholder who has owned restricted shares for at
least one year, to sell without registration, within a three month period, up to
one percent of our then outstanding common stock. In addition, shareholders
other than our officers, directors or 5% or greater shareholders who have owned
their shares for at least two years, may sell them without volume limitation or
the need for our reports to be current.
52
We cannot predict the effect, if any, that market sales of common stock
or the availability of these shares for sale will have on the market price of
the shares from time to time. Nevertheless, the possibility that substantial
amounts of common stock may be sold in the public market could adversely affect
market prices for the common stock and could damage our ability to raise capital
through the sale of our equity securities.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be
passed upon for us by Schneider Weinberger LLP, 2499 Glades Road, Suite 108,
Boca Raton, Florida 33431.
EXPERTS
Our financial statements as of and for the years ended September 30,
2003 and 2002 included in this prospectus have been audited by Sherb & Co., LLP,
independent certified public accountants, as indicated in their report with
respect thereto, and have been so included in reliance upon the report of such
firm given on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2
under the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement.
We file annual and special reports and other information with the SEC.
Certain of our SEC filings are available over the Internet at the SEC's web site
at http://www.sec.gov. You may also read and copy any document we file with the
SEC at its public reference facilities:
Public Reference Room Office
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Callers in the United States can also call
1-800-732-0330 for further information on the operations of the public reference
facilities.
53
GENESIS TECHNOLOGY GROUP, INC.AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Certified Public Accountants...........................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet...............................................F-3
Consolidated Statements of Operations....................................F-4
Consolidated Statement of Stockholders' Equity...........................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...........................F-7 to F-37
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Genesis Technology Group, Inc
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of Genesis
Technology Group, Inc. and Subsidiaries as of September 30, 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended September 30, 2003 and 2002. 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 financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amount 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 Genesis
Technology Group, Inc. and Subsidiaries as of September 30, 2003, and the
results of their operations and their cash flows for the years ended September
30, 2003 and 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/Sherb & Co., LLP
Certified Public Accountants
New York, New York
December 23, 2003
F-2
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2003 2003
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 184,798 $ 661,694
Marketable equity securities ................... 180,851 59,136
Accounts receivable (net of allowance for
doubtful accounts of $17,000 and $7,700,
respectively) ................................ 266,927 266,028
Inventories .................................... 246,914 128,196
Prepaid expenses and other ..................... 270,624 212,360
------------ ------------
Total Current Assets ......................... 1,150,114 1,327,414
------------ ------------
PROPERTY AND EQUIPMENT - Net ..................... 116,589 116,748
------------ ------------
OTHER ASSETS:
Goodwill ....................................... 10,540 10,540
Marketable equity securities - restricted ...... - 196,650
Other assets ................................... 46,495 104,106
------------ ------------
Total Other Assets ........................... 57,035 311,296
------------ ------------
Total Assets ................................. $ 1,323,738 $ 1,755,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable .................................. $ 220,919 $ 220,773
Accounts payable and accrued expenses .......... 302,378 261,016
Deferred revenue ............................... 115,833 48,333
Due to related parties ......................... 393,739 363,309
------------ ------------
Total Current Liabilities .................... 1,032,869 893,431
------------ ------------
MINORITY INTEREST ................................ 35,061 36,024
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value;
20,000,000 Shares Authorized;
no shares issued and outstanding) ............ - -
Common stock ($.001 Par Value;
200,000,000 Shares Authorized;
36,323,824 and 40,079,325 shares
issued and outstanding, respectively) ........ 36,324 40,079
Common stock issuable (381,000 shares) ......... - 381
Additional paid-in capital ..................... 14,203,424 14,863,875
Accumulated deficit ............................ (13,571,990) (13,710,742)
Less: Deferred compensation .................... (252,417) (234,056)
Less: Subscriptions receivable ................. (120,150) (118,767)
Accumulated other comprehensive loss ........... (39,383) (14,767)
------------ ------------
Total Stockholders' Equity ....................... 255,808 826,003
------------ ------------
Total Liabilities and Stockholders' Equity ... $ 1,323,738 $ 1,755,458
============ ============
See notes to consolidated financial statements
F-3
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended For the Three Months Ended
September 30, December 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
NET REVENUES ........................................................ $ 23,596,878 $ 14,325,651 $ 6,565,377 $ 5,276,670
COST OF SALES ....................................................... 22,770,207 13,153,326 6,181,525 5,151,953
------------ ------------ ------------ ------------
GROSS PROFIT ........................................................ 826,671 1,172,325 383,852 124,717
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Consulting ....................................................... 652,566 504,223 180,822 235,251
Salaries and non-cash compensation ............................... 803,954 307,420 331,201 107,770
Selling, general and administrative .............................. 860,124 640,078 205,695 184,885
------------ ------------ ------------ ------------
Total Operating Expenses ...................................... 2,316,644 1,451,721 717,718 527,906
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ................................................ (1,489,973) (279,396) (333,866) (403,189)
OTHER INCOME (EXPENSE):
(Loss) gain from sale of marketable securities ................... (16,601) (16,352) 1,924 (12,667)
Settlement income ................................................ - - 196,650 -
Loss on impairment of marketable securities ...................... (1,546,924) - - -
Interest expense, net ............................................ (30,000) (16,241) (2,497) (2,496)
------------ ------------ ------------ ------------
Total Other Income (Expense) .................................. (1,593,525) (32,593) 196,077 (15,163)
------------ ------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND MINORITY INTEREST ........... (3,083,498) (311,989) (137,789) (418,352)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Gain from sale of subsidiary ..................................... - 475,304 - -
(Loss) income from discontinued operations ....................... (3,890) 10,179 - 16
------------ ------------ ------------ ------------
Total (Loss) Income from Discontinued Operations .............. (3,890) 485,483 - 16
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE ............................................. (3,087,388) 173,494 (137,789) (418,336)
MINORITY INTEREST IN INCOME OF SUBSIDIARY ........................... (1,982) (7,760) (963) -
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE ............................................... (3,089,370) 165,734 (138,752) (418,336)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ............................................ - (359,379) - -
------------ ------------ ------------ ------------
NET LOSS ............................................................ $ (3,089,370) $ (193,645) $ (138,752) $ (418,336)
============ ============ ============ ============
(LOSS) INCOME PER COMMON SHARE: - BASIC AND DILUTED
Income (loss) from continuing operations ......................... $ (0.09) $ (0.02) $ (0.00) $ (0.02)
Income (loss) from discontinued operations ....................... (0.00) 0.02 - 0.00
Cumulative effect of accounting change ........................... - (0.01) - -
------------ ------------ ------------ ------------
Net loss) per common share - basic and diluted ................... $ (0.09) $ (0.01) $ (0.00) $ (0.02)
============ ============ ============ ============
Weighted Common Shares Outstanding - Basic and Diluted ........ 32,504,629 24,943,991 39,572,570 28,528,875
============ ============ ============ ============
See notes to consolidated financial statements
F-4
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 2002 and 2003 and
For the Three Months Ended December 31, 2003 (Unaudited)
Common Stock, Common Stock
$.001 Par Value Issuable
----------------------- ---------------- Additional
Number of Number of Paid-in
Shares Amount Shares Amount Capital
----------- -------- ------- ------ ------------
Balance, September 30, 2001 ....................................... 23,614,353 $ 23,615 - $ - $ 11,234,183
Common shares issued in connection with acquisitions .............. 492,000 492 - - 268,268
Stock options granted to consultants and employees ................ - - - - 466,402
Common stock issued for services .................................. 750,000 750 - - 87,000
Shares issued from exercise of stock options ..................... 2,553,000 2,553 - - 387,447
Common stock issued for debt ...................................... 263,000 263 - - 24,722
Common stock retired in connection with sale of subsidiary ........ (400,000) (400) - - (67,600)
Beneficial interest on convertible note payable ................... - - - - 12,500
Other comprehesive income:
Net loss ........................................................ - - - - -
Comprehensive loss - unrealized loss on
marketable equity secuirities-net of taxes of $0 .............. - - - - -
Total comprehensive loss ........................................ - - - - -
----------- -------- ------- ------ ------------
Balance, September 30, 2002 ....................................... 27,272,353 27,273 - - 12,412,922
Stock options granted to consultants and employees ................ - - - - 990,618
Common stock issued for services .................................. 1,580,000 1,580 - - 180,620
Shares issued from exercise of stock options ..................... 8,176,471 8,176 - - 713,821
Common stock returned for cancellation of subscription
receivable ...................................................... (705,000) (705) - - (114,557)
Amortization of deferred consulting fees .......................... - - - - -
Beneficial conversion feature - default on note ................... - - - - 20,000
Other comprehesive income:
Net loss ........................................................ - - - - -
Comprehensive loss - change in unrealized loss on
marketable equity secuirities-net of taxes of $0 .............. - - - - -
Total comprehensive loss ........................................ - - - - -
----------- -------- ------- ------ ------------
Balance, September 30, 2003 ....................................... 36,323,824 36,324 - - 14,203,424
Unaudited as to the three months ended December 31, 2003:
Stock options granted to consultants and employees ................ - - - - 80,403
Common stock issued for services .................................. 472,501 472 381,000 381 183,181
Shares issued from exercise of stock options ..................... 3,283,000 3,283 - - 396,867
Amortization of deferred consulting fees .......................... - - - - -
Other comprehesive income:
Net loss ........................................................ - - - - -
Comprehensive loss - change in unrealized loss on
marketable equity secuirities-net of taxes of $0 .............. - - - - -
Total comprehensive loss ........................................ - - - - -
----------- -------- ------- ------ ------------
Balance, December 31, 2003 (Unaudited) ............................ 40,079,325 $ 40,079 381,000 $ 381 $ 14,863,875
=========== ======== ======= ====== ============
(continued)
See notes to consolidated financial statements.
F-5A
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 2002 and 2003 and
For the Three Months Ended December 31, 2003 (Unaudited)
(continued)
Total
Stockholders'
Accumulated Deferred Subscriptions Comprehensive Equity
Deficit Compensation Receivable Income (Loss) (Deficit)
------------ ------------ ------------- ------------- -----------
Balance, September 30, 2001 .............................. $(10,288,975) $ - $ - $ 13,020 $ 981,843
Common shares issued in connection with acquisitions ..... - - - - 268,760
Stock options granted to consultants and employees ....... - - - - 466,402
Common stock issued for services ......................... - - - - 87,750
Shares issued from exercise of stock options ............ - - (178,000) - 212,000
Common stock issued for debt ............................. - - - - 24,985
Common stock retired in connection with sale of subsidiary - - - - (68,000)
Beneficial interest on convertible note payable .......... - - - - 12,500
Other comprehesive income:
Net loss ............................................... (193,645) - - - (193,645)
Comprehensive loss - unrealized loss on
marketable equity secuirities-net of taxes of $0 ..... - - - (1,104,957) (1,104,957)
-----------
Total comprehensive loss ............................... - - - - (1,298,602)
------------ --------- --------- ----------- -----------
Balance, September 30, 2002 .............................. (10,482,620) - (178,000) (1,091,937) 687,638
Stock options granted to consultants and employees ....... - (529,869) - - 460,749
Common stock issued for services ......................... - - - - 182,200
Shares issued from exercise of stock options ............ - - (84,311) - 637,686
Common stock returned for cancellation of subscription
receivable ............................................. - - 142,161 - 26,899
Amortization of deferred consulting fees ................. - 277,452 - - 277,452
Beneficial conversion feature - default on note .......... - - - - 20,000
Other comprehesive income:
Net loss ............................................... (3,089,370) - - - (3,089,370)
Comprehensive loss - change in unrealized loss on
marketable equity secuirities-net of taxes of $0 ..... - - - 1,052,554 1,052,554
-----------
Total comprehensive loss ............................... - - - - (2,036,816)
------------ --------- --------- ----------- -----------
Balance, September 30, 2003 .............................. (13,571,990) (252,417) (120,150) (39,383) 255,808
Unaudited as to the three months ended December 31, 2003:
Stock options granted to consultants and employees ....... - (80,403) - - -
Common stock issued for services ......................... - (51,000) - - 133,034
Shares issued from exercise of stock options ............ - - 1,383 - 401,533
Amortization of deferred consulting fees ................. - 149,764 - - 149,764
Other comprehesive income:
Net loss ............................................... (138,752) - - - (138,752)
Comprehensive loss - change in unrealized loss on
marketable equity secuirities-net of taxes of $0 ..... - - - 24,616 24,616
-----------
Total comprehensive loss ............................... - - - - (114,136)
------------ --------- --------- ----------- -----------
Balance, December 31, 2003 (Unaudited) ................... $(13,710,742) $(234,056) $(118,767) $ (14,767) $ 826,003
============ ========= ========= =========== ===========
See notes to consolidated financial statements.
F-5B
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended For the Three Months
September 30, Ended December 31,
------------------------ ----------------------
2003 2002 2003 2002
----------- --------- --------- ---------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ......................................... $(3,085,480) $(679,128) $(138,752) $(418,352)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization ......................................... 21,783 17,098 6,306 5,894
(Gain) loss on sale of marketable securities .......................... 16,601 16,352 (1,924) 12,667
Settlement income ..................................................... - - (196,650) -
Loss from impairment of marketable securities ......................... 1,546,924 - - -
Grant and exercise of stock options to consultants and employees ...... 738,375 553,902 - -
Common stock issued for services ...................................... 182,200 87,750 282,798 233,418
Minority interest ..................................................... 1,982 (31,476) 963 -
Marketable equity securities received for consulting services ......... (254,000) (745,978) (27,332) (4,000)
Loss from impairment of goodwill ...................................... - 359,379 - -
Beneficial interest on convertible debt ............................... 20,000 12,500 - -
Write off of subscription receivable .................................. 26,899 - - -
Increase in allowance for doubtful accounts ........................... 17,000 - - -
Changes in assets and liabilities:
Accounts receivable ................................................... (200,606) 165,423 899 (69,571)
Inventories ........................................................... (59,868) 40,201 118,718 82,475
Prepaid and other current assets ...................................... (120,969) 83,110 13,403 (67,505)
Due from related party ................................................ - 18,023 - -
Other assets .......................................................... (42,550) (4,722) (13,167) (6,009)
Accrued payable and accrued expenses .................................. 518,146 (343,259) 15,544 199,884
Due to related party .................................................. - 26,759 - -
Deferred revenues ..................................................... (6,667) (61,500) (67,500) (11,250)
----------- --------- --------- ---------
NET CASH USED IN CONTINUING OPERATING ACTIVITIES .......................... (680,230) (485,566) (6,694) (42,349)
----------- --------- --------- ---------
(Loss) income from discontinued operations .............................. (3,890) 485,483 - 16
Adjustments to reconcile (loss) income from discontinued operations to
net cash provided by (used in) discontinued operating activities:
Gain on sale of subsidiary ............................................ - (475,304) - -
Net increase (decrease) in net liabilities from
discontinued operations .............................................. 4,772 (17,279) - (16)
----------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATING ACTIVITIES .......... 882 (7,100) - -
----------- --------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES ..................................... (679,348) (492,666) (6,694) (42,349)
----------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition ............................................ - 106,790 - -
Proceeds from sale of marketable securities ............................. 44,650 57,088 176,008 13,713
Increase in marketable securities ....................................... (5,868) - - -
Capital expenditures .................................................... (12,279) (73,831) (6,048) (5,234)
----------- --------- --------- ---------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES ........................... 26,503 90,047 169,960 8,479
----------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable ............................................. - 270,919 - -
Decrease in subscription receivable ..................................... - - - 10,000
Due to related party .................................................... 359,980 - 14,197 7,808
Proceeds from exercise of stock options ................................. 420,089 124,500 300,000 49,900
----------- --------- --------- ---------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES ........................... 780,069 395,419 314,197 67,708
----------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES IN CASH ................................... - - (567) -
----------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUILALENTS ...................... 127,224 (7,200) 476,896 33,838
CASH AND CASH EQUIVALENTS - beginning of year ............................. 57,574 64,774 184,798 57,574
----------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - end of year ................................... $ 184,798 $ 57,574 $ 661,694 $ 91,412
=========== ========= ========= =========
(continued)
See notes to consolidated financial statements.
F-6A
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Year Ended For the Three Months
September 30, Ended December 31,
------------------------ ----------------------
2003 2002 2003 2002
----------- --------- --------- ---------
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Marketable securities exchanged for debt .............................. $ - $ - $ - $ 51,000
=========== ========= ========= =========
Common stock issued for debt .......................................... $ 217,597 $ 24,985 $ 101,533 $ 140,000
=========== ========= ========= =========
Common stcok and subscriptions receivable canceled .................... $ - $ - $ - $ 70,000
=========== ========= ========= =========
Common stock retired in connection with sale of subsidiary ............ $ - $ 68,000 $ - $ -
=========== ========= ========= =========
Common stock issued for subscription receivable ....................... $ 308,233 $ 178,000 $ - $ 190,000
=========== ========= ========= =========
Acquisition details:
Fair value of assets acquired ......................................... $ - $ 813,452 $ - $ -
=========== ========= ========= =========
Liabilities assumed ................................................... $ - $(544,692) $ - $ -
=========== ========= ========= =========
Common stock issued for acquisitions .................................. $ - $(268,760) $ - $ -
=========== ========= ========= =========
Goodwill .............................................................. $ - $ 10,540 $ - $ -
=========== ========= ========= =========
See notes to consolidated financial statements.
F-6B
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Genesis Technology Group, Inc. (the "Company" or "Genesis") is a business
development firm that specializes in assisting small and mid-sized companies in
entering the Chinese market. The Company's strategy includes marketing itself as
a resource for these companies in marketing, distribution, manufacturing,
forming joint ventures, or establishing a base in China. As a part of that
strategy, the Company has become a member of the Shanghai Technology Stock
(Property Rights) Exchange, an organization that promotes the influx of
technology into China. The Company also has acquired companies in the U.S. and
China for the purposes of further developing these companies, with operational,
managerial and financial support. The strategy also envisions and promotes
opportunities for synergistic business relationships among all of the companies
that Genesis works with, both clients and subsidiaries.
Genesis Technology Group, Inc., formerly Psychicnet.Com, Inc. ("Psychic"), was
formed on January 29, 1999 to provide "New Age" services and products on the
Internet. On April 6, 1999, Psychic was acquired by Virginia City Gold Mines,
Inc. ("VCGM"), an Idaho corporation, for 2,200,000 shares of VCGM stock (the
"Exchange"). The Exchange was completed pursuant to the Agreement and Plan of
Reorganization between Psychic and VCGM. The Exchange had been accounted for as
a reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies was recorded as a
recapitalization of Psychic, pursuant to which Psychic is treated as the
continuing entity. Subsequent to the Exchange, with the approval of the Board of
Directors, VCGM changed its name to Newagecities.com, Inc ("Newage").
On August 1, 2001, Newage completed the Agreement and Plan of Reorganization and
Stock Purchase Agreement entered into on July 23, 2001 with Genesis Systems,
Inc., a Minnesota corporation and the shareholders of Genesis, Yongwen Zhuang,
Fugen Li and Master Financial Group, Inc. As a result of the acquisition, the
Company issued 10,312,500 shares of its common stock in exchange for all of the
capital stock of Genesis Systems. In connection with the transaction, Yongwen
Zhuang and Fugen Li each received 5,000,000 shares of Common Stock and Master
Financial Group, Inc. received 312,500 shares of Common Stock of the Company.
Genesis Systems has been in existence since August 2000 and has earned revenues
by providing consulting services for small public and private companies
regarding public relations, corporate financing, mergers and acquisitions,
e-commerce, business operations support and marketing. Genesis' strategy
includes the internal development and operation of subsidiaries within the
Company family, as well as investment in other technology companies either
directly by the Company, or through other venture capital arrangements. Genesis
will not operate as an investment company.
F-7
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THE COMPANY (CONTINUED)
On August 22, 2001, Newage entered into a Stock Purchase Agreement with Shanghai
G-Choice Science and Technology Development Company Ltd. ("G-Choice") and the
shareholders of G-Choice. G-Choice is a Chinese company with principal offices
in Shanghai, China. Under this agreement, the shareholders of G-Choice exchanged
80% of the issued and outstanding capital stock of G-Choice in exchange for
800,000 shares of the Company's common stock. Effective June 30, 2002, the
Company sold this subsidiary.
On October 12, 2001 the shareholders of Newage voted upon and approved an
Agreement and Plan of Merger providing for the merger of the Company with and
into Genesis Technology Group, Inc., a Florida corporation, wholly-owned by the
Company. The purpose of the merger was to change the Company's domicile from
Idaho to Florida. In addition, the Company's name has changed to Genesis
Technology Group, Inc., which better reflects the Company's current business
plan.
On November 15, 2001, the Company entered into a Stock Purchase Agreement with
Shanghai Zhaoli Technology Development Company, Limited ("Zhaoli") and Zhaoli's
shareholder. Zhaoli is a Chinese company with principal offices in Shanghai,
China. Zhaoli is an information technology company that integrates sales and
technology with services. Currently, its sales cover printer, copier, scanner
and network products, as well as network integration. Zhaoli also develops
proprietary software systems, such as its e-learning software for K-12 education
in China. Currently, approximately 98% of consolidated revenues for the year
ended September 30, 2003 were derived from this subsidiary.
On December 1, 2001, the Company entered into a Stock Purchase Agreement with
Yastock Investment Consulting Company, Limited ("Yastock") and the shareholders
of Yastock. Yastock is an investment consulting firm located in Shanghai, China
that specializes in raising capital and consulting in a number of areas,
including trading information, public relations, corporate management, corporate
strategic evaluations and human resources.
BASIS OF PRESENTATION
The consolidated statements include the accounts of Genesis Technology Group,
Inc. and its wholly and partially owned subsidiaries. All significant
inter-company balances and transactions have been eliminated.
F-8
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of December 31, 2003, the statements of
operations and of cash flows for the three-month periods ended December 31, 2003
and 2002, and the statement of stockholders' equity for the three months ended
December 31, 2003, are unaudited. In the opinion of management, such information
is not misleading and includes all adjustments consisting of normal recurring
adjustments necessary for a fair presentation of this interim information when
read in conjunction with the audited financial statements and notes hereto.
Results for the three months ended December 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2004.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid instruments purchased with a maturity of three months or less
and money market accounts to be cash equivalents.
INVENTORY
Inventories, consisting of computer equipment and accessories, are stated at the
lower of cost or market utilizing the first-in, first-out method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, loans
and amounts due to related parties approximate their fair market value based on
the short-term maturity of these instruments.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
F-9
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE EQUITY SECURITIES
Marketable equity securities consist of investments in equity of publicly traded
and non-public domestic companies and are stated at market value based on the
most recently traded price of these securities at September 30, 2003 and
December 31, 2003. All marketable securities are classified as available for
sale at September 30, 2003 and December 31, 2003. Unrealized gains and losses,
determined by the difference between historical purchase price and the market
value at each balance sheet date, are recorded as a component of Accumulated
Other Comprehensive Income in Stockholders' Equity. Realized gains and losses
are determined by the difference between historical purchase price and gross
proceeds received when the marketable securities are sold.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to seven years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
ESTIMATES
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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
F-10
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The functional currency of the Company's Chinese subsidiaries, Zhaoli and
Yastock, is the local currency. The financial statements of the subsidiaries are
translated to United States dollars using year-end rates of exchange for assets
and liabilities, and average rates of exchange for the period for revenues,
costs, and expenses. Net gains and losses resulting from foreign exchange
transactions are included in the consolidated statements of operations and were
not material during the periods presented. The cumulative translation adjustment
and effect of exchange rate changes on cash at September 30, 2003 was not
material. As of December 31, 2003, the exchange rate for the Chinese Renminbi
(RMB) was $1 US for 8.27 RMB.
COMPREHENSIVE LOSS
The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income". Comprehensive income is comprised of net loss
and all changes to the statements of stockholders' equity, except those due to
investments by stockholders', changes in paid-in capital and distributions to
stockholders. Comprehensive loss for the years ended September 30, 2003 and 2002
amounted to $(2,036,816) and $(1,298,602), respectively
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions. Almost
all of the Company's sales are credit sales which are primarily to customers
whose ability to pay is dependent upon the industry economics prevailing in
these areas; however, concentrations of credit risk with respect to trade
accounts receivables is limited due to generally short payment terms. The
Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk.
STOCK BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
F-11
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Had compensation cost for the stock option plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
123, "Accounting for Stock Based Compensation", the Company's net loss and loss
per share would have been changed to the pro forma amounts indicated below for
the years ended September 30, 2003 and 2002:
2003 2002
----------- ----------
Net earnings
As reported $(3,089,370) $(193,645)
Pro forma $(3,108,705) $(504,053)
Basic earnings per share
As reported $(.09) $(.01)
Pro forma $(.10) $(.02)
Pro forma amounts indicated below for the three months ended December 31, 2003
and 2002:
2003 2002
----------- ----------
Net earnings
As reported $(138,752) $(418,336)
Pro forma $(187,097) $(418,336)
Basic earnings per share
As reported $(.01) $(.02)
Pro forma $(.01) $(.02)
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
REVENUE RECOGNITION
The Company's revenues from the sale of products are recorded when the goods are
shipped. Consulting income is recognized on a straight-line basis over the
period of the service agreement. Deferred revenues relates to consulting
revenues that is being recognized over the period of the service agreement.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses for the years ended
September 30, 2003 and 2002 totaled approximately $21,000 and $48,000,
respectively.
F-12
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except as specified and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have any material impact on the
balance sheet or statement of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. Otherwise it will
become effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement did not have any material impact
on the balance sheet or statement of operations.
RECLASSIFICATIONS
Certain prior periods' balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' equity.
NOTE 2 - PROPERTY AND EQUIPMENT
At September 30, 2003, property and equipment consisted of the following:
Estimated Life
Office Furniture 7 Years $ 56,600
Computer Equipment 5 Years 18,104
Office Equipment 5 Years 105,400
---------
180,104
Less: Accumulated Depreciation (63,515)
---------
$ 116,589
=========
For the year ended September 30, 2003 and 2002, depreciation expense amounted to
$21,783 and $17,098, respectively.
F-13
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 3 - ACQUISITIONS AND DIVESTITURES
On August 1, 2001, the Company completed the Agreement and Plan of
Reorganization and Stock Purchase Agreement entered into on July 23, 2001 with
Genesis Systems, Inc., a Minnesota corporation and the shareholders of Genesis,
Yongwen Zhuang, Fugen Li and Masterfinancial Group, Inc. As a result of the
acquisition, the Company issued 10,312,500 shares of its common stock with a
fair market value of $701,250 in exchange for all of the capital stock of
Genesis Systems. The Company accounted for this acquisition using the purchase
method of accounting. The purchase price exceeded the fair value of net assets
acquired by $359,379. The excess has been applied to goodwill. The results of
operations of Genesis Systems, Inc. are included in the accompanying financial
statements from August 1, 2001 (effective date of acquisition) to September 30,
2001 and for the year ended September 30, 2002. As of September 30, 2002, the
Company determined that the carrying value of its goodwill was impaired due to
continuing losses. Also, future positive cash flows could not be estimated. Upon
adoption of SFAS 142, the Company recorded a one-time, non-cash charge of
$359,379 to write off the carrying value of Genesis System, Inc.'s goodwill.
Such charge is non-operational in nature and is reflected as a cumulative effect
of an accounting change in the accompanying consolidated statement of
operations.
On August 14, 2001, the Company entered into a Stock Purchase Agreement with
PropaMedia, Inc. ("PropaMedia") and the shareholders of PropaMedia. Under this
agreement, the Company acquired all of the issued and outstanding capital stock
of PropaMedia in exchange for all of the shares of Member Net, Inc., a
wholly-owned subsidiary of the Company. Upon effectiveness of the Stock Purchase
Agreement, PropaMedia became a wholly-owned subsidiary of the Company and the
former shareholders of PropaMedia acquired a wholly-owned interest in Member
Net, Inc. from the Company. The Company accounted for this acquisition using the
purchase method of accounting. Propamedia began operations in July 2001. In
September 2002, the Company decided to discontinue the operations of Propamedia.
Propamedia is reported as a discontinued operation, and prior periods have been
restated in the Company's financial statements and related footnotes to conform
to this presentation.
On November 15, 2001, the Company entered into a Stock Purchase Agreement with
Shanghai Zhaoli Technology Development Company, Limited ("Zhaoli") and Zhaoli's
shareholder. Zhaoli is a Chinese company with principal offices in Shanghai,
China. Zhaoli is an information technology company that integrates sales and
technology with services. Currently, its sales cover printer, copier, scanner
and network products, as well as network integration. Zhaoli also develops
proprietary software systems, such as its e-learning software for K-12 education
in China. As a result of the acquisition, the Company issued 400,000 shares of
its common stock with a fair market value of $220,000 in exchange for 80% of the
capital stock of Zhaoli. The Company accounted for this acquisition using the
purchase method of accounting. The purchase price exceeded the fair value of net
assets acquired by $5,651. The excess has been applied to goodwill. The results
of operations of Zhaoli are included in the accompanying financial statements
from November 15, 2001 (effective date of acquisition) to September 30, 2002 and
for the year ended September 30, 2003.
F-14
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 3 - ACQUISITIONS AND DIVESTITURES (CONTINUED)
On December 1, 2001, the Company entered into a Stock Purchase Agreement with
Yastock Investment Consulting Company, Limited ("Yastock") and the shareholders
of Yastock. Yastock is an investment consulting firm located in Shanghai, China
that specializes in raising capital and consulting in a number of areas,
including trading information, public relations, corporate management, corporate
strategic evaluations and human resources. As a result of the acquisition, the
Company issued 92,000 shares of its common stock with a fair market value of
$48,760 in exchange for 80% of the capital stock of Yastock. The Company
accounted for this acquisition using the purchase method of accounting. The
purchase price exceeded the fair value of net assets acquired by $4,889. The
excess has been applied to goodwill. Subsequently, the Company acquired the
remaining 20% of Yastock for $18,000. The results of operations of Yastock are
included in the accompanying financial statements from December 1, 2001
(effective date of acquisition) to September 30, 2002 and for the year ended
September 30, 2003.
ACQUISITION AND SALE OF SUBSIDIARY
Effective June 30, 2002, the Company sold its 80% interest in its subsidiary
Shanghai G-Choice Science and Technology Development Company Ltd. ("G-Choice")
for 1,549,791 common shares of the NETdigest.com, Inc. ("NET"). As a part of
this transaction, G-Choice executive management, which is unaffiliated with
Genesis received a total of 8,155,474 shares of NET stock and received from
G-Choice an additional 210,526 shares of NET stock in exchange for 400,000
shares of the Company's stock. G-Choice is a Chinese company with principal
offices in Shanghai, China. The Company concluded the sale of G-Choice as of
June 30, 2002. As a result of the sale of G-Choice, the Company recorded a
$475,304 gain from the sale of G-Choice in the quarter ended June 30, 2002.
G-Choice is reported separately as a discontinued operation, and prior periods
have been restated in the Company's financial statements, related footnotes and
the management's discussion and analysis to conform to this presentation.
Additionally, on March 26, 2002, Genesis entered into an agreement to provide
operational and managerial assistance to the theNETdigest.com for a total of
526,316 shares of the theNETdigest.com, Inc common stock (post a 1 for 19
reverse split, effective May 31, 2002). Prior to completing this transaction,
theNETdigest.com, Inc., whose stock trades on the Pink Sheets, had limited
business operations and activities. In connection with this consulting
agreement, which was entered into by the Company prior to the sale of G-Choice,
for the year ended September 30, 2002, the Company recognized consulting revenue
of $521,053.
F-15
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of Genesis Systems, Inc., Zhaoli and Yastock had
occurred as of the following period:
Year Ended
September 30, 2002
------------------
Net Revenues ................................................. $ 15,946,000
Net Loss from continuing operations .......................... $ (257,000)
Net Loss per Share from continuing operations ................ $ (.01)
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented and is not intended to be a projection of future results.
NOTE 4 - LOANS PAYABLE
On April 1, 2002, the Company borrowed $80,000 from an individual related to an
officer of the Company. The loan bears interest at 10% per annum and is
unsecured. All unpaid principal and accrued interest was payable on April 1,
2003. In the event of default of the loan agreement, the Lender is to receive
common shares of the Company at a 25% discount to the average closing price of
the previous 20 trading days free trading shares of the Company's common stock
equal to the total amount due to the lender. As of September 30, 2003, this loan
is in default and remains unpaid. In connection with this default, the Company
has recorded a beneficial conversion feature of $20,000, which was recorded as
interest expense for the year ended September 30, 2003. As of December 31, 2003,
this loan remains unpaid. The lender has not provided the Company with a notice
of default.
On May 29, 2002, the Company borrowed $50,000 from an individual. The loan bears
interest at 10% per annum and was secured by certain marketable securities held
by the Company and 200,000 shares of the Company's common stock. All unpaid
principal and accrued interest was payable on September 30, 2002. In the event
of default of the loan agreement, the Lender is to receive 200,000 common
shares. In fiscal 2003, the Company repaid this loan by giving 100,000 shares of
Sense Holdings, Inc. common stock owned by the Company and 200,000 shares of the
Company's common stock.
On July 31, 2002, the Company borrowed $20,000 from an individual related to an
officer of the Company. The loan bears interest at 10% per annum and is
unsecured. All unpaid principal and accrued interest was payable on January 1,
2003. At the option of the lender, the entire obligation may be repaid with
common stock calculated by dividing the amount due by the average closing common
stock price for ten days prior to the repayment discounted by 40%, with a
maximum price of $0.13 per share. The beneficial conversion feature present in
the issuance of this note payable as determined on the date funds were received
under the loan agreement totaled $12,500 and was recorded as interest expense
and additional paid-in capital. As of December 31, 2003, no conversion had
occurred and the loan remains unpaid.
The Company's Chinese subsidiary, Zhaoli, entered into a loan agreement with a
Chinese bank to borrow $120,919. The loan bears interest at a rate of 5.85% per
annum and is payable prior to March 25, 2004.
F-16
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 5 - DISCONTINUED OPERATIONS
Effective June 30, 2002, the Company sold its 80% interest in its subsidiary
Shanghai G-Choice Science and Technology Development Company Ltd. ("G-Choice")
and in September 2002, the Company decided to discontinue the operations of
Propamedia. The following financial data reflects a summary of operating results
for the Company's discontinued operations for the year ended September 30, 2003
and 2002.
Summary of Operating Results of Discontinued Operations (approximate):
Year Ended Year Ended
------------- -------------
September 30, September 30,
2003 2002
------------- -------------
Revenues ................................... $ 2,404,200 $ 14,021,000
Cost of sales............................... 2,333,800 13,668,000
------------- -------------
Gross profit ............................... 70,400 353,000
Selling, general and administrative expenses 74,300 343,000
------------- -------------
Income (loss) from discontinued operations.. $ (3,900) $ 10,000
============= =============
At September 30, 2003, net assets from discontinued operations consisted of cash
of $428,000, accounts receivable of $211,000, other assets of $3,000 and
accounts payable of $641,000.
NOTE 6 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
F-17
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 6 - INCOME TAXES (CONTINUED)
The Company has a net operating loss carryforward for tax purposes totaling
approximately $3,116,000 and a capital loss carryforward of approximately
$1,000,000 at September 30, 2003 expiring through the year 2023. Internal
Revenue Code Section 382 places a limitation on the amount of taxable income
that can be offset by carryforwards after a change in control (generally greater
than a 50% change in ownership). Temporary differences, which give rise to a net
deferred tax asset, are as follows:
2003 2002
---- ----
Deferred tax benefits (liability) - current
Allowance for doubtful accounts ............. $ 6,400 $ -
Deferred tax benefits - noncurrent
Net operating loss carryforward ............. 1,184,000 742,000
Capital loss carryforward ................... 380,000 -
----------- ---------
Total deferred tax assets ............... 1,570,400 742,000
Less: Valuation allowance ....................... (1,570,400) (742,000)
----------- ---------
$ - $ -
=========== =========
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for fiscal 2003 and 2002:
2003 2002
---- ----
Computed "expected" tax expense (benefit) ........ (34.0)% 34.0 %
State income taxes ............................... (4.0)% 4.0 %
Other permanent differences ...................... 10.0 % 108.0 %
Change in valuation allowance .................... 28.0 % (146.0)%
------- --------
Effective tax rate ............................... 0.0 % 0.0 %
======= ========
The valuation allowance at September 30, 2003 was $1,570,400. The increase
during fiscal 2003 was $828,400.
NOTE 7 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In the year
ended September 30, 2003 and 2002, the Company operated in two reportable
business segments - (1) sale of computer equipment and accessories and (2)
consulting services for small public and private companies regarding public
relations, corporate financing, mergers and acquisitions, e-commerce, business
operations support and marketing. The Company's reportable segments are
strategic business units that offer different products. They are managed
separately based on the fundamental differences in their operations.
F-18
Information with respect to these reportable business segments for the year
ended September 30, 2003 and 2002 is as follows:
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
NET REVENUES:
Computer Equipment and Accessories $ 23,197,829 $ 13,373,246
Consulting Services 399,049 952,405
------------ ------------
Consolidated Net Revenue 23,596,878 14,325,651
------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Computer Equipment and Accessories 23,180,522 13,361,175
Consulting Services 1,884,546 1,226,774
DEPRECIATION:
Computer Equipment and Accessories 7,395 5,191
Consulting Services 14,388 11,907
INTEREST EXPENSE:
Computer Equipment and Accessories - -
Consulting Services 30,018 16,467
INCOME (LOSS):
Computer Equipment and Accessories $ 7,930 $ 4,632
Consulting Services (3,097,300) (198,277)
------------ ------------
NET LOSS $ (3,089,370) $ (193,645)
============ ============
TOTAL ASSETS AT
SEPTEMBER 30, 2003 AND 2002:
Computer Equipment and Accessories $ 915,196 $ 428,003
Consulting Services 408,542 724,560
------------ ------------
Consolidated Asset Total $ 1,323,738 $ 1,152,563
============ ============
For the year ended September 30, 2003 and 2002, the Company derived
approximately 98% and 96% of its revenue from its subsidiaries located in the
People's Republic of China, respectively. Sales and identifiable assets by
geographic areas for the years ended September 30, 2003 and 2002, and as of
September 30, 2003, respectively, were as follows:
Revenues
--------------------------------
For the Year Ended Identifiable Assets
September 30, at September 30,
2003 2002 2003
----------- ----------- ----------
United States ....... $ 372,784 $ 622,803 $ 300,926
China ............... 23,224,094 13,702,848 1,022,812
----------- ----------- ----------
Total ........... $23,596,878 $14,325,651 $1,323,738
=========== =========== ==========
F-18
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 7 - SEGMENT INFORMATION (CONTINUED)
Information with respect to these reportable business segments for the three
months ended December 31, 2003 and 2002 is as follows:
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
NET REVENUES:
Computer Equipment and Accessories $ 6,310,368 $ 5,223,480
Consulting Services 255,009 53,190
------------ ------------
Consolidated Net Revenue 6,565,377 5,276,670
------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Computer Equipment and Accessories 6,303,394 5,221,120
Consulting Services 589,543 456,989
DEPRECIATION:
Computer Equipment and Accessories 2,161 -
Consulting Services 4,145 1,750
INTEREST EXPENSE:
Computer Equipment and Accessories - -
Consulting Services 2,500 2,500
INCOME (LOSS):
Computer Equipment and Accessories $ 3,850 $ 2,360
Consulting Services (142,602) (420,696)
------------ ------------
NET LOSS $ (138,752) $ (418,336)
============ ============
TOTAL ASSETS AT
DECEMBER 31, 2003 AND 2002:
Computer Equipment and Accessories $ 959,987 $ 484,334
Consulting Services 795,471 707,555
------------ ------------
Consolidated Asset Total $ 1,755,458 $ 1,191,889
============ ============
F-19
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 7 - SEGMENT INFORMATION (CONTINUED)
For the three months ended December 31, 2003 and 2002, the Company derived
approximately 96% and 99% of its revenue from its subsidiaries located in the
People's Republic of China, respectively. Sales and identifiable assets by
geographic areas for the three months ended December 31, 2003 and 2002, and as
of December 31, 2003, respectively, were as follows:
Revenues
--------------------------------
For the Year Ended Identifiable Assets
December 31, at December 31,
2003 2002 2003
----------- ----------- ----------
United States ....... $ 278,344 $ 49,750 $ 712,777
China ............... 6,287,033 5,226,920 1,042,681
----------- ----------- ----------
Total ........... $ 6,565,377 $ 5,276,670 $1,755,458
=========== =========== ==========
NOTE 8 - RELATED PARTY TRANSACTIONS
DUE FROM RELATED PARTY
An officer of the Company advanced funds to the Company for working capital
purposes. The advances are non-interest bearing and are payable on demand. At
September 30, 2003, the Company owed this related party $44,627. Additionally, a
minority shareholder of the Company's Zhaoli subsidiary, advanced $349,112 to
this subsidiary for working capital purposes. These advances are non-interest
bearing and are payable on demand. At December 31, 2003, the Company did not owe
this officer any funds. Additionally, a minority shareholder of the Company's
Zhaoli subsidiary, advanced $363,309 to this subsidiary for working capital
purposes. These advances are non-interest bearing and are payable on demand.
NOTE 9 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock, par
value $.001, with such designations, rights and preferences as may be determined
from time to time by the Board of Directors.
COMMON STOCK
On October 1, 2001, the Company entered into a one year consulting agreement
with a third party for business development services. In connection with this
consulting agreement, the Company issued 263,000 shares of common stock for
debt. The Company valued these shares at their market value on the date of
issuance of $.095 per share and reduced accrued expenses by $24,985 related to
these consulting services.
F-20
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
On October 12, 2001, the Company changed it capital structure to increase the
authorized number of shares which the corporation shall have authority to issue
to (i) 200,000,000 shares of common stock, par value $.001 per share and (ii)
20,000,000 shares of Preferred stock, par value $.001.
In October 2001, the Company issued 250,000 shares of common stock to a
consultant for investor relations. Such shares were valued at their market value
on the date of issuance of $.095 per share. The Company recorded consulting
expense of $23,750 related to the consulting services.
On November 15, 2001 and December 1, 2001, the Company issued 400,000 and 92,000
shares of common stock in connection with the acquisition of Zhaoli and Yastock,
respectively(see note 2).
In March 2002, the Company issued 300,000 and 141,000 shares of common stock to
an officer and a consultant, respectively, in connection with exercise of
441,000 stock options for net proceeds of $124,500.
In April 2002, in connection with the exercise of stock options, the Company
issued 592,000 shares of common stock to two former employees for promissory
notes in the amount of $133,000, which is shown in stockholders' equity as a
subscription receivable. In October 2002, one of the former employees returned
200,000 shares of common stock for the cancellation of a subscription receivable
related to these shares in amount of $70,000. In connection with this
transaction, the Company recorded additional consulting expense of $21,388.
In July 2002, in connection with the exercise of stock options, the Company
issued 240,000 shares of common stock to a consultant for services rendered.
Since the Company did not receive any cash for the exercise of these options,
the Company recorded professional fees of $38,400 based on the exercise price of
the underlying stock option granted.
On August 5, 2002, the Company entered into a five-month consulting agreement
with a third party for business development services. In connection with this
consulting agreement, the Company agreed to issue an aggregate of 1,000,000
shares of common stock for services rendered over the contract period unless
terminated earlier. During September 2002, the Company terminated this
agreement. Accordingly, in connection with this agreement, the Company issued
200,000 shares of common stock for services rendered prior to termination. The
Company valued these shares at their market value on the date of issuance of
$.16 per share and recorded consulting expense of $32,000 related to the
consulting services.
F-21
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK - CONTINUED
In connection with the sale of a subsidiary, the Company received and cancelled
400,000 shares of the Company's common stock.
In August 2002, in connection with the exercise of 200,000 stock options, the
Company issued 200,000 shares of common stock for a promissory note in the
amount of $45,000. In November 2002, the Company received net proceeds of
$10,000 related to these shares. The remaining balance of $35,000 has not been
collected as of September 30, 2003, and is shown in stockholders' equity as a
subscription receivable. The Company has initiated legal action against this
individual related to the collection of this balance.
In August and September 2002, in connection with consulting agreements, the
Company issued 400,000 restricted shares of common stock for services rendered.
The Company valued these shares at their market value on the date of issuance of
$.12 per share and recorded consulting expense of $48,000, which was amortized
over the service period.
On September 20, 2002, in connection with the exercise of stock options, the
Company issued 980,000 shares of common stock to employees for services
rendered. Since the Company did not receive any cash for the exercise of these
options, the Company reduced accrued salaries by $49,000 based on the exercise
price of the underlying stock options granted.
On October 3, 2002, in connection the settlement of debt with a third party, the
Company issued 200,000 shares of common stock for services rendered. The Company
valued these shares at their market value on the date of issuance of $.10 per
share and recorded consulting expense of $20,000.
On October 7, 2002, in connection with a consulting agreement with a third
party, the Company issued 600,000 restricted shares of common stock for services
rendered. The Company valued these shares at their market value on the date of
issuance of $.095 per share and recorded consulting expense of $57,000 related
to the consulting services.
On October 31, 2002, in connection with the exercise of stock options, the
Company issued 720,000 shares of common stock to a consultant for net proceeds
of $49,900.
In November 2002, in connection with a consulting agreement with a third party,
the Company issued 180,000 restricted shares of common stock for services
rendered. The Company valued these shares at their market value on the date of
issuance of $.14 per share and recorded consulting expense of $25,200 related to
the consulting services.
F-22
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK - CONTINUED
On December 19, 2002, in connection with the exercise of stock options, the
Company issued 750,000 shares of common stock to a consultant for a subscription
receivable of $100,000. On February 6, 2003, the consultant returned 505,000
shares of the Company's common stock due to the cancellation of this agreement,
thus reducing the subscription receivable balance by $67,317. The Company
collected net proceeds of $27,839 related to these shares and wrote off the
remaining subscription receivable balance of $4,844 to consulting fees.
On December 24, 2002, in connection with the exercise of stock options, the
Company issued 600,000 shares of common stock to a consultant for net proceeds
of $49,000 and a subscription receivable of $41,000, which was paid subsequent
to September 30, 2003.
On December 31, 2002, in connection with the exercise of stock options, the
Company issued 1,000,000 shares of common stock to employees for services
rendered. Since the Company did not receive any cash for the exercise of these
options, the Company reduced accrued salaries by $68,000 based on the exercise
price of the underlying stock options granted.
On January 3, 2003, the Company entered into an agreement with a public
relations company. The term of this agreement was for forty-five (45) days; the
Company issued such consultant 400,000 shares of its common stock for these
services. The Company valued these shares at the fair market value on the date
of the agreement or $0.14 per share and recorded consulting expense of $56,000.
On January 7, 2003, the Company issued 800,000 shares of its common stock
relating to the exercise of options held by certain employees and consultants
for net proceeds of $50,000, the reduction of debt of $13,688, and compensation
expense of $26,312.
On February 19, 2003, the Company issued 700,000 shares of its common stock
relating to the exercise of stock options. The Company received proceeds of
$79,100.
On May 8, 2003, the Company issued 500,000 shares of its common stock relating
to the exercise of options held by a certain executive.
On May 8, 2003, the Company issued 200,000 shares of its common stock relating
to the exercise of options held by a consultant. The Company received proceeds
of $20,000 related to this share issuance.
On June 8, 2003, the Company issued 1,123,000 and 915,000 shares of its common
stock relating to the exercise of options held by certain executives and
consultants, respectively. The Company received proceeds of $104,250, reduced
accrued salaries by $41,050, recorded consulting fees of $15,990, and has a
subscription receivable of $27,350 related to these share issuances.
F-23
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK - CONTINUED
On July 21, 2003, in connection with consulting agreements, the Company issued
200,000 restricted shares of common stock for services rendered. The Company
valued these shares at their market value on the date of issuance of $.12 per
share and recorded consulting expense of $24,000 related to these consulting
services.
On July 15, 2003, the Company issued 120,000 shares of its common stock relating
to the exercise of stock options for a promissory note in the amount of $16,800,
which is shown in stockholders' equity as a subscription receivable.
In August and September 2003, in connection with the exercise of stock options,
the Company issued 748,471 shares of common stock to employees for services
rendered. Since the Company did not receive any cash for the exercise of these
options, the Company reduced accrued salaries and accounts payable by $89,725
and $11,960, respectively, based on the exercise price of the underlying stock
options granted.
In October 2003, the Company issued 3,283,000 shares of its common stock
relating to the exercise of options held by executives, employees and
consultants, respectively. The Company received proceeds of $245,000, reduced
accrued salaries by $54,998, reduced to related party of $44,627, reduced
accounts payable by $1,908, and has a subscription receivable of $53,617 related
to these share issuances.
On November 13, 2003, the Company was to issue an aggregate of 150,000 shares of
its common stock to directors for services rendered and to be rendered in the
future. The Company valued these shares at $51,000 or $0.34 per share and
recorded compensation expense relating to this issuance of $29,750 and deferred
compensation expense of $21,250 to be amortized over the service period. As of
December 31, 2003, these shares had not been issued and are reflected as common
stock issuable on the accompanying consolidated balance sheet.
On December 15, 2003, the Company was to issue an aggregate of 231,000 shares of
its common stock to employees and officers for services rendered. The Company
valued these shares at $0.31 per share and recorded stock-based compensation
expense relating to this issuance of $71,610. As of December 31, 2003, these
shares had not been issued and are reflected as common stock issuable on the
accompanying consolidated balance sheet.
F-24
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
On October 31, 2002, the Board of Directors adopted the Company's 2002 Stock
Option Plan (the "2002 Plan"). The stated purpose of the 2002 Plan is to provide
directors, officers and employees of, and consultants to the Company and its
subsidiaries, if any, with additional incentives by increasing their ownership
interests in the Company. Directors, officers and other employees of the Company
and its subsidiaries are eligible to participate in the 2002 Plan. Options may
also be granted to directors who are not employed by the Company and consultants
providing valuable services to the Company and its subsidiaries. In addition,
individuals who have agreed to become an employee of, director of or a
consultant to the Company and its subsidiaries are eligible for option grants,
conditional in each case on actual employment, directorship or consultant
status. Any incentive option granted under the Plan must provide for an exercise
price of not less than 100% of the fair market value of the underlying shares on
the date of grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our outstanding common stock must not
be less than 110% of fair market value on the date of the grant. The term of
each Plan option and the manner in which it may be exercised is determined by
the Board of Directors or the committee, provided that no option may be
exercisable more than ten years after the date of its grant and, in the case of
an incentive option granted to an eligible employee owning more than 10% of the
common stock, no more than five years after the date of the grant.
In October, 2001, 950,000 options were granted to James Wang with an exercise
price of $.29 per share, 1,000,000 options were granted to Kenneth Shenkman with
an exercise price of $.21, 240,000 options were granted to Adam Wasserman with
an exercise price of $.35 and 200,000 were granted to an employee of the Company
with an exercise price of $.16. The Company accounts for stock options issued to
employees in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. Since the exercise price was greater than the current market value at the
date of grant, no compensation expense has been recognized.
On October 1, 2001, the Company issued 500,000 stock options to a consultant for
investor relations services. 250,000 of the options were granted with an
exercise price of $.25 per shares and 250,000 options were granted at $.50. The
options expired on October 1, 2003. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: dividend yield of -0- percent;
expected volatility of 131 percent; risk-free interest rate of 4.50 percent and
an expected holding period of 6 months. In connection with these options, the
company recorded non-cash compensation of $4,000.
F-25
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
On January 25, 2002, the Company entered into a one year consulting agreement
with a third party for business development and marketing services. In
connection with this consulting agreement which commenced on February 1, 2002,
the Company was granted 50,000 options per month to purchase shares of common
stock for services rendered for an aggregate of 600,000 options. The options had
an exercise price of $.35 per share and expire five years from grant date. For
the year ended September 30, 2003 and 2002, the Company granted 400,000 and
200,000 options under the agreement, respectively. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: dividend yield of -0-
percent; expected volatility of 77 to 108 percent; risk-free interest rate of
4.50 percent and an expected holding period of 5 years. For the years ended
September 30, 2003 and 2002, in connection with these options, the Company
recorded consulting expense amounting to $67,050 and $14,839, respectively. In
September 2003, the Company re-priced these options to a new exercise price of
$.085. In connection with this re-pricing, the Company recorded additional
consulting fees of $51,600 for the year ended September 30, 2003.
In March 2002, 92,000 options were granted to an employee with an exercise price
of $.35 per share. The Company accounts for stock options issued to employees in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Since the
exercise price was greater than the current market value at the date of grant,
no compensation expense has been recognized.
In March 2002, the Company entered into 12 month consulting agreements and
granted an aggregate of 2,000,000 stock options (1,000,000 each) to two
consultants for business development and marketing services. These options were
granted with an exercise price of $.33 per shares and expired on September 30,
2002. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of -0- percent; expected volatility of 108 percent;
risk-free interest rate of 5.00 percent and an expected holding period of
one-half year. In connection with these options, the company recorded consulting
fees of $176,000, which was amortized into consulting expense over the term of
the option.
On April 29, 2002, the Company entered into a consulting agreement with a third
party for business development and marketing services. In connection with this
consulting agreement, the Company granted an aggregate of 300,000 options to
purchase shares of common stock for services rendered. The options have an
exercise price ranging from $.23 to $.36 per share and expire two years after
the registration of the underlying shares. The fair value of each option grant
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: dividend yield of -0- percent;
expected volatility of 75 percent; risk-free interest rate of 5.00 percent and
an expected holding period of 5 years. In connection with these options, the
Company recorded consulting expense of $25,500 for the year ended September 30,
2002.
F-26
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
On July 31, 2002, in connection with employment agreements, the Company granted
500,000 options each to four employees for an aggregate of 2,000,000 options to
acquire 2,000,000 shares of the Company's common stock. The options have an
exercise price of $.10 and expire five years from date of grant. In connection
with these options, the Company recorded non-cash compensation of $60,000 for
the year ended September 30, 2002 under the intrinsic value method of APB 25.
In August 2002, the Company entered into a consulting agreement and granted an
aggregate of 400,000 stock options to a consultant for business development and
marketing services. These options were granted with an exercise price of $.30
(200,000 options) and $.60 (200,000 options) per share and expire two years
after the registration of the underlying shares. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: dividend yield of -0-
percent; expected volatility of 77 percent; risk-free interest rate of 4.00
percent and an expected holding period of one year. In connection with these
options, the company recorded consulting fees of $29,000.
On September 5, 2002, the Company entered into a consulting agreement and
granted and immediately exercised 200,000 stock options to a consultant for
business development and marketing services. These options were granted with an
exercise price of $.20 (100,000 options) and $.25 (100,000 options) per share.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of -0- percent; expected volatility of 89 percent;
risk-free interest rate of 4.00 percent and an expected holding period of five
years. In connection with these options, the company recorded consulting fees of
$16,200.
On September 20, 2002, the Company granted and immediately exercised stock
options for 980,000 shares of common stock to employees for services rendered.
The options had an exercise price of $.05 and expired five years from date of
grant. In connection with these options, the Company recorded non-cash
compensation of $53,900 for the year ended September 30, 2002 under the
intrinsic value method of APB 25.
During October 2002, the Company entered into a consulting agreement with a
third party for business development services. In connection with this
consulting agreement, the Company granted 720,000 stock options to purchase
720,000 shares of the Company's common stock at $.07 per share. The fair value
of each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions dividend
yield of -0- percent; expected volatility of 77 percent; risk-free interest rate
of 4.50 percent and an expected holding periods of 5.00 years. In connection
with these options, the Company recorded consulting expense of $80,880 during
the year ended September 30, 2003.
F-27
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
On December 2, 2002, the Company entered into a one-year consulting agreement
with a third party for business development services. In connection with this
consulting agreement, the Company granted an aggregate of 1,000,000 options to
purchase shares of common stock for services rendered. The options have an
exercise price of $.15. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of -0- percent; expected volatility
of 96 percent; risk-free interest rate of 4.50 percent and an expected holding
period of 2 years. In connection with these options, the Company recorded
consulting expense of $44,333 for the year ended September 30, 2003 and deferred
compensation of $31,667 at September 30, 2003, which will be amortized over the
service period.
On December 18, 2002, the Company entered into a consulting agreement with a
third party for business development services. In connection with this
consulting agreement, the Company granted 750,000 options to purchase shares of
common stock for services rendered. The options have an exercise price of $.15
per share and expire in 45 days. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: dividend yield of -0- percent;
expected volatility of 96 percent; risk-free interest rate of 4.50 percent and
an expected holding period of 0.50 years. The Company valued these options based
on the above factors at $34,500. On December 19, 2002, these options were
exercised and the Company issued 750,000 shares of its common stock. In
connection with these options, on February 6, 2003, the consultant returned
505,000 shares of the Company's common stock due to the cancellation of this
agreement. Through the date of cancellation the Company had expensed $11,500 as
consulting expense. The Company expensed the remaining balance of its deferred
expense related to this agreement of $23,000 to consulting expense.
Additionally, the Company wrote off the remaining subscription receivable from
this consultant of $4,848 to consulting expense.
In December 2002, 1,000,000 options were granted to officers and employees of
the Company with an exercise price of $.05. The Company accounts for stock
options issued to employees in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. In connection with these options, the Company
recorded non-cash compensation of $72,000 for the year ended September 30, 2003
under the intrinsic value method of APB 25.
On December 31, 2002, the Company entered into a six-month consulting agreement
with a third party for business development services. In connection with this
consulting agreement, the Company granted 500,000 stock options to purchase
500,000 shares of the Company's common stock at $.10 per share. The fair value
of each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions dividend
yield of -0- percent; expected volatility of 96 percent; risk-free interest rate
of 4.50 percent and an expected holding periods of 0.10 years. In connection
with these options, the Company recorded consulting expense of $26,000 for the
year ended September 30, 2003, which was amortized over the service period. In
January 2003, the consultant exercised these options for net proceeds of
$50,000.
F-28
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
On January 7, 2003, the Company granted 50,000 options to an employee for
services rendered, these options were immediately exercised. The Company
recorded $5,000 in compensation expense relating to this issuance of these
options.
On January 7, 2003, the Company granted 250,000 options to a consultant for debt
and services rendered. The Company recorded compensation of $21,312 and offset
$13,688 of debt against the exercise price of these options.
On January 23, 2003, the Company entered into a one-year agreement with a
consultant. The consultant received 1,000,000 options to purchase shares of the
Company's common stock at an exercise price of $0.11 per share. The Company
valued these shares at approximately $0.09 per share and recorded consulting
expense relating to this issuance of options of $91,870. This consultant
exercised 700,000 of these options on February 19, 2003 (see Common stock).
On May 8, 2003, the Company exchanged options with an officer of the Company
(650,000 option) and a former officer (1,000,000) under which these individuals
exchanged 1,650,000 of their existing options to purchase the Company's common
stock for new options, with a new exercise price of $.10. In accordance with
FASB Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation (an Interpretation of APB Opinion No. 25)", this option
exchange was deemed an option repricing and therefore, variable plan accounting
is being applied. For each interim period, the Company will determine the change
in fair value of the options that have not been exercised, cancelled or expired,
and will record a charge based on the vesting schedule of the options. If there
is a reduction in the market value of the options, the Company will record a
reduction in the stock compensation charge, but not in excess of what had been
recognized to date. For the year ended September 30, 2003, the Company
recognized a non-cash compensation of $72,000 relating to the option exchange.
In June 2003, the Company granted 243,000 options to employees for services
rendered. Of these options, 123,000 were immediately exercised. The Company
recorded $15,990 in compensation expense relating to this issuance of these
options.
In June 2003, in connection with employment agreements, the Company granted
1,500,000 options to employees for services rendered. Of these options,
1,000,000 were immediately exercised. The Company recorded $117,000 in
compensation expense relating to this issuance of these options.
On June 16, 2003, the Company entered into a one-year agreement with a
consultant. The consultant received 750,000 options to purchase shares of the
Company's common stock at an exercise price of $0.13 per share. The Company
valued these shares at approximately $0.03 per share and recorded consulting
expense relating to this issuance of options of $21,000. This consultant
exercised 750,000 of these options on February 19, 2003 (see Common stock).
F-29
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
On August 1, 2003, 3,750,000 options were granted to officers and employees of
the Company with an exercise price of $.10 (1,875,000 options) and $.056
(1,875,000 options). The Company accounts for stock options issued to employees
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. In
connection with these options, the Company recorded non-cash compensation of
$38,750 for the year ended September 30, 2003 and deferred compensation of
$303,125 under the intrinsic value method of APB 25. The deferred compensation
will be amortized over the service period of one year.
In August and September 2003, 748,471 options were granted to officers and
employees of the Company with an exercise price of $.14 (535,317 options) and
$.13 (213,154 options) for accrued salary. The Company accounts for stock
options issued to employees in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. Since the current market price equaled the
exercise price, no compensation expense was recognized in connection with these
options under the intrinsic value method of APB 25.
On September 19, 2003, the Company entered into a one-year agreement with a
consultant. The consultant received 1,000,000 options to purchase shares of the
Company's common stock at an exercise price of $0.22 per share. The fair value
of this option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions dividend
yield of -0- percent; expected volatility of 54 percent; risk-free interest rate
of 4.50 percent and an expected holding periods of 5.00 years. In connection
with these options, the Company recorded deferred consulting expense of $2,000
for the year ended September 30, 2003 and deferred compensation of $46,000,
which will be amortized over the service period.
On September 30, 2003, the Company granted to a consultant 50,000 options to
purchase shares of the Company's common stock at an exercise price of $0.085 per
share. The fair value of this option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions dividend yield of -0- percent; expected volatility of 55 percent;
risk-free interest rate of 4.50 percent and an expected holding periods of 5.00
years. In connection with these options, the Company recorded consulting expense
of $4,300 for the year ended September 30, 2003.
F-30
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
A summary of the options issued under the employment and consulting agreements
as of September 30, 2003 and 2002 and changes during the periods is presented
below:
Year Ended September 30, 2003 Year Ended September 30, 2002
--------------------------------------- --------------------------------------
Number of Weighted Number of Weighted
Options and Average Options and Average
Warrants Exercise Price Warrants Exercise Price
--------------- ---------------- --------------- ----------------
Stock Options
-------------
Balance at beginning of period . 5,645,000 $0.33 695,000 $1.09
Granted ........................ 15,661,471 0.10 9,362,000 0.17
Exercised ...................... (8,176,471) 0.11 (2,553,000) 0.18
Forfeited ...................... (2,220,000) 0.31 (1,859,000) 0.33
--------------- ---------------- --------------- ----------------
Balance at end of period ....... 10,910,000 $0.18 5,645,000 $0.33
=============== ================ =============== ================
Options exercisable at end of
period ......................... 10,910,000 $0.18 5,645,000 $0.33
=============== ================ =============== ================
Weighted average fair value of
options granted during the period $0.10 $0.17
The following table summarizes information about employee stock options and
consultant warrants outstanding at September 30, 2003:
Options and Warrants Outstanding Options and Warrants Exercisable
--------------------------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise September 30, Contractual Exercise September 30, Exercise
Price 2003 Life Price 2003 Price
------------ ------------------ --------------- ------------ ------------------ ------------
$0.50-2.25 700,000 1.80 Years $1.16 700,000 $1.16
0.23-0.36 925,000 2.40 Years 0.28 925,000 0.28
0.22 1,000,000 4.98 Years 0.22 1,000,000 0.22
0.05-0.15 8,285,000 4.57 Years 0.09 8,285,000 0.09
------------------ ------------ ------------------ ------------
10,910,000 $0.18 10,910,000 $0.18
================== ============ ================== ============
F-31
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
In October 2003, 472,501 options were granted to officers and employees of the
Company with an exercise price of $.13 for accrued salary. The Company accounts
for stock options issued to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. As such, compensation cost is
measured on the date of grant as the excess of the current market price of the
underlying stock over the exercise price. Since the current market price equaled
the exercise price, no compensation expense was recognized in connection with
these options under the intrinsic value method of APB 25.
On October 7, 2003, the Company entered into a six month agreement with a
consultant. The consultant received 500,000 options to purchase shares of the
Company's common stock at an exercise price of $0.05 per share. The Company
valued these shares at approximately $0.096 per share and recorded consulting
expense relating to this issuance of options of $24,076 and deferred consulting
expenses of $24,077. This consultant exercised 483,000 of these options in
October 2003 (see Common stock).
On November 13, 2003, 150,000 options were granted to directors of the Company
with an exercise price of $.125. The Company accounts for stock options issued
to employees in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. In connection with these options, the Company recorded non-cash
compensation of $18,813 for the three months ended December 31, 2003 and
deferred compensation of $13,437 under the intrinsic value method of APB 25. The
deferred compensation will be amortized over the service period,
On November 13, 20,000 options were granted to directors of the Company with an
exercise price of $.34 for services provided. The Company accounts for stock
options issued to employees in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. Since the current market price equaled the
exercise price, no compensation expense was recognized in connection with these
options under the intrinsic value method of APB 25.
F-32
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
A summary of outstanding options and warrants at December 31, 2003 are as
follows:
Number of Weighted
Options and Average
Warrants Exercise Price
----------- --------------
Stock Options
-------------
Balance at beginning of period ............ 10,910,000 $0.18
Granted ................................... 1,142,501 0.10
Exercised ................................. (3,755,501) 0.14
Forfeited ................................. (500,000) 0.37
Balance at end of period .................. 7,797,000 $0.19
========== =====
Options exercisable at end of period ...... 7,797,000 $0.19
========== =====
Weighted average fair value of options
granted during the period ................. $0.10
The following table summarizes information about employee stock options and
consultant warrants outstanding at December 31, 2003:
Options and Warrants Outstanding Options and Warrants Exercisable
--------------------------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2003 Life Price 2003 Price
------------ ------------------ --------------- ------------ ------------------ ------------
$0.60-2.25 450,000 1.50 Years $1.52 450,000 $1.52
0.23-0.36 695,000 2.10 Years 0.29 695,000 0.29
0.05-0.15 6,652,000 4.27 Years 0.09 6,652,000 0.09
---------- ----- ---------- -----
7,797,000 $0.18 7,797,000 $0.18
========== ===== ========== =====
F-33
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 10 - CONSULTING AGREEMENT
On March 26, 2002, the Company entered into a consulting agreement with the
NETdigest.com, Inc., a publicly-traded company ("Netdigest"), to provide
Netdigest with financial assistance in obtaining a suitable merger candidate for
Netdigest to acquire and to facilitate reorganization thereafter. As
consideration, the Company was paid a consulting fee in the form of 1,052,632
restricted common shares (post split) of Netdigest's publicly traded common
stock. In connection with these shares, for the year ended September 30, 2002,
the Company recorded consulting income of $521,053.
NOTE 11 - COMMITMENTS
OPERATING LEASES
The Company leases office and residential space under leases that expire through
January 2006. Additionally, the Company leases space for its Chinese
subsidiaries in Shanghai, China. Certain office lease agreements have certain
escalation clauses and renewal options. Future minimum rental payments required
under these operating leases are as follows:
Period Ended September 30, 2004 $108,150
Period Ended September 30, 2005 $ 44,928
Period Ended September 30, 2006 $ 11,232
Rent expense for the years ended September 30, 2003 and 2002 was $213,986 and
$122,210, respectively.
EMPLOYMENT AGREEMENTS
Effective July 31, 2002, the Company entered into an employment agreement with
its chairman and former president. The agreement is for a term of one year, with
renewal thereafter from year to year unless either the Company or the Chairman
terminates the agreement, and contains confidentiality clauses. As consideration
for the Chairman's services, the Company has agreed to a base salary of $108,000
per annum, for time actually devoted to duties on behalf of the Company. On each
successive anniversary date of this agreement, the annual salary shall be
adjusted upwardly by 5%. In addition, the Chairman was granted stock options to
purchase 500,000 shares of the Company's common stock at a price of $0.10 per
share. After one year of service, in June 2003, the Chairman was granted an
additional 500,000 options at a 60% discount to market price, defined as the
average closing price for the 20 trading days prior to the exercise date. On
August 1, 2003, the Company renewed its employment agreement with this officer
and amended the employment agreement. The amendment to the employment agreement
granted to this officer 1,250,000 options to purchase 625,000 shares of the
Company's common stock at $.10 per share and 625,000 shares of common stock at
$.056 per share. All other terms of the employment agreement remained the same.
F-34
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 11 - COMMITMENTS (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
Effective July 31, 2002, the Company entered into an employment agreement with
its chief executive officer ("CEO"). The agreement is for a term of one year,
with renewal thereafter from year to year unless either the Company or the CEO
terminates the agreement, and contains confidentiality clauses. As consideration
for the CEO's services, the Company has agreed to a base salary of $120,000 per
annum, for time actually devoted to duties on behalf of the Company. On each
successive anniversary date of this agreement, the annual salary shall be
adjusted upwardly by 5%. In addition, the CEO was granted stock options to
purchase 500,000 shares of the Company's common stock at a price of $0.10 per
share. After one year of service, in June 2003, the CEO was granted an
additional 500,000 options at a 60% discount to market price, defined as the
average closing price for the 20 trading days prior to the exercise date. On
August 1, 2003, the Company renewed its employment agreement with this officer
and amended the employment agreement. The amendment to the employment agreement
granted to this officer 1,250,000 options to purchase 625,000 shares of the
Company's common stock at $.10 per share and 625,000 shares of common stock at
$.056 per share. All other terms of the employment agreement remained the same.
Effective July 31, 2002, the Company entered into an employment agreement with a
former director/officer. The agreement was for a term of one year, with renewal
thereafter from year to year unless either the Company or the director
terminates the agreement, and contains confidentiality clauses. As consideration
for the former director/officer, the Company had agreed to a base salary of
$84,000 per annum, for time actually devoted to duties on behalf of the Company.
In addition, the former director/officer was granted stock options to purchase
500,000 shares of the Company's common stock at a price of $0.10 per share. This
employment agreement was terminated in February 2003.
Effective July 31, 2002, the Company entered into an employment agreement with
an employee. The agreement is for a term of one year, with renewal thereafter
from year to year unless either the Company or the employee terminates the
agreement, and contains confidentiality clauses. As consideration for the
employees' services, the Company has agreed to a base salary of $96,000 per
annum, for time actually devoted to duties on behalf of the Company. On each
successive anniversary date of this agreement, the annual salary shall be
adjusted upwardly by 5%. In addition, the employee was granted stock options to
purchase 500,000 shares of the Company's common stock at a price of $0.10 per
share. After one year of service, in June 2003, the employee was granted an
additional 500,000 options at a 60% discount to market price, defined as the
average closing price for the 20 trading days prior to the exercise date. On
August 1, 2003, the Company renewed its employment agreement with this officer
and amended the employment agreement. The amendment to the employment agreement
granted to this officer 1,250,000 options to purchase 625,000 shares of the
Company's common stock at $.10 per share and 625,000 shares of common stock at
$.056 per share. All other terms of the employment agreement remained the same.
F-35
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 12 - LEGAL PROCEEDINGS
Master Financial Group, Inc. v Genesis Systems, Inc. (Court File No.
62-C7-01-000832) was filed on February 14, 2001, against Genesis Systems, Inc.,
a subsidiary of Genesis Technology Group, in the County of Ramsey, Minnesota,
seeking to rescind a stock subscription agreement made with Genesis Systems,
Inc. In October 2002, this lawsuit was dismissed without prejudice. The
dismissal of the lawsuit did not have any material impact on the Company's
business and financial performance. Other than that, the Company is not a party
to any material legal proceeding, nor are any of the Company's officers,
directors or affiliates, a party adverse to us in any legal or regulatory
proceeding.
NOTE 13 - OPERATING RISK
(a) Country risk
Currently, the Company's revenues are primarily derived from the sale of
computer equipment and accessories to customers in the Peoples Republic of China
(PRC). The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
(b) Products risk
In addition to competing with other computer and electronics equipment
companies, the Company could have to compete with larger US companies who have
greater funds available for expansion, marketing, research and development and
the ability to attract more qualified personnel if access is allowed into the
PRC market. If US companies do gain access to the PRC markets, they may be able
to offer products at a lower price. There can be no assurance that the Company
will remain competitive should this occur.
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Remnibi
converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
F-36
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and December 31, 2003 (Unaudited)
NOTE 14 - SETTLEMENT INCOME
On December 31, 2003, the Company settled its litigation against Hy-Tech
Technology Group, Inc. ("HYTT"). The Settlement Agreement resulted in the
Company accepting 3,750,000 common shares of restricted Hy-Tech Technology
Group, Inc. stock (OTCBB: HYTT). In a related matter, the Company conveyed
300,000 of those shares to Elite Financial Communications Group, which had
initially introduced the Company to key principals among the HYTT parties. In
connection with the settlement, the Company recorded settlement income of
$196,650 based on the fair market value of 3,450,000 net shares that the Company
received.
NOTE 15 - SUBSEQUENT EVENTS
On January 16, 2004, the Company consummated a securities purchase agreement
under which the Company agreed to issue $2,000,000 stated value of its newly
created Series A 6% Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") to several institutional investors. The stated value of the
Series A Preferred Stock is $10.00 per share. Of this amount, the Company
received gross proceeds of $1,000,000 from the sale of 100,000 shares of Series
A Preferred Stock. The Series A Preferred Stock is convertible into common
shares at $0.232 per share. In addition, Genesis issued warrants to purchase
215,517 shares of its common stock at $0.3045 on the initial closing and a
similar amount will be issued at the time of the second issuance, subject to
adjustment in the event accrued and unpaid dividends are elected to be converted
into common stock. In connection with this issuance, the Company recorded
beneficial interest of $250,000.
The Company will pay a broker's fee to Coastline Capital Partners, an
institutional finance division of Western International Securities, Inc., of
$90,000 and will issue warrants to purchase a total of 300,000 shares of its
common stock exercisable at $0.3045. Genesis has agreed to file a registration
statement covering the shares issued and issuable under the Subscription
Agreement within 45 days following the above closing.
F-37
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the company or any of the
underwriters. This prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
Until _________, 2004 (45 days after the date of this prospectus), all dealers
that effect transactions these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
Page
----
Prospectus Summary.......................................................... 2
Cautionary Statements Regarding
Forward-Looking Information ................................................ 3
Risk Factors................................................................ 3
Market for Common Equity and Related Stockholder Matters.................... 8
Capitalization.............................................................. 9
Use of Proceeds............................................................. 10
Management's Discussion and Analysis or Plan of Operation................... 10
Our Business................................................................ 19
Management.................................................................. 29
Certain Relationships and Related Transactions.............................. 41
Principal Shareholders...................................................... 42
Description of Securities................................................... 43
Selling Security Holders.................................................... 46
Plan of Distribution ....................................................... 50
Shares Eligible for Future Sale............................................. 52
Legal Matters............................................................... 53
Experts..................................................................... 53
Additional Information...................................................... 53
Financial Statements........................................................ F-1
GENESIS TECHNOLOGY GROUP, INC.
PROSPECTUS
________________, 2004
21,850,000 SHARES
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act allows us to indemnify each of our
officers and directors who are made a party to a proceeding if:
(a) the officer or director conducted himself or herself in good faith;
(b) his or her conduct was in our best interests, or if the conduct was
not in an official capacity, that the conduct was not opposed to our best
interests; and
(c) in the case of a criminal proceeding, he or she had no reasonable
cause to believe that his or her conduct was unlawful. We may not indemnify our
officers or directors in connection with a proceeding by or in our right, where
the officer or director was adjudged liable to us, or in any other proceeding,
where our officer or director are found to have derived an improper personal
benefit.
Our by-laws require us to indemnify directors and officers against, to
the fullest extent permitted by law, liabilities which they may incur under the
circumstances described above.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the registrant has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as express in the act and is therefore
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by us in connection with the
distribution of the securities being registered are as follows:
SEC Registration and Filing Fee..........................................$ 860
Legal Fees and Expenses*................................................. 25,000
Accounting Fees and Expenses*............................................ 10,000
Financial Printing*...................................................... 5,000
Transfer Agent Fees*..................................................... 1,000
Blue Sky Fees and Expenses*.............................................. 2,500
Miscellaneous*........................................................... 640
-------
TOTAL..........................................................$45,000
* Estimated
None of the foregoing expenses are being paid by the selling security holders.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In November 2001 we issued 400,000 shares of our common stock to Mr.
Wang Wuzhang, the then sole shareholder of Shanghai Chorry Technology
Development Company Limited as consideration for our acquisition of 80% of the
stock of that entity.
In November 2001 we also issued 92,000 shares of our common stock to
Messrs. Robert Zhuang and Lawrence Wang, the then sole shareholders of Yastock
Investment Consulting Company, Limited as consideration for our acquisition of
80% of that entity.
Between August 2002 and July 2003 we issued an aggregate of 1,880,000
shares of our common stock to five individuals or entities as compensation for
consulting services rendered to us.
We relied on an exemption from the registration requirements of the
Securities Act of 1933 which is available to us under Section 4(2) of that act
in each of the foregoing instances. In all of the foregoing instances, the
certificates evidencing the shares that were issued contained a legend
restricting their transferability absent registration under the Securities Act
of 1933 or the availability of an applicable exemption therefrom. The recipients
each had access to business and financial information concerning our company. We
had reasonable grounds to believe that each purchaser was an accredited
investor, as defined by Rule 501 of Regulation D, and the purchaser represented
that he/she/it was acquiring the shares for investment purposes only, and not
with a view towards distribution or resale except in compliance with applicable
securities laws.
In January 2004, we executed a securities purchase agreement under
which we sold an aggregate of 200,000 shares of our Series A 6% Cumulative
Convertible Preferred Stock and common stock purchase warrants to purchase an
aggregate of 4,310,000 shares of our common stock to five institutional
investors. This offering was made pursuant to exemptions from the registration
requirements of the Securities Act of 1933 available to us under Section 4(2) of
the Securities Act of 1933 and Regulation D of that act. On the initial closing
date, we issued the purchasers 100,000 shares of our Series A 6% Cumulative
Convertible Preferred Stock and five year common stock purchase warrants to
purchase an additional 2,155,000 shares of our common stock, with an exercise
price of $0.3045 per share, for aggregate gross consideration of $1,000,000.
Immediately following the effectiveness of the registration statement of which
this prospectus is a part, we will issue the investors an additional 100,000
shares of our Series A 6% Cumulative Convertible Preferred Stock and five year
common stock purchase warrants to purchase an additional 2,155,000 shares of our
common stock, with an exercise price of $0.3045 per share, for aggregate gross
consideration of $1,000,000. On the initial closing date we paid a broker's fee
to Coastline Capital Partners, an institutional finance division of Western
International Securities, Inc., of $50,000 and issued common stock purchase
warrants to purchase a total of 150,000 shares of our common stock exercisable
at $0.3045. On the second closing date we will pay Coastline Capital Partners a
broker's fee of $40,000 and issue that firm common stock purchase warrant to
purchase an additional 150,000 shares of our common stock at an exercise price
of $0.3045 per share. No general solicitation or advertising was used in
connection with this transaction, and the certificates evidencing the securities
that were issued contained a legend restricting their transferability absent
registration under the Securities Act of 1933 or the availability of an
applicable exemption therefrom. The participants had access to business and
financial information concerning our company and they each represented to us
that they were acquiring the shares for investment purposes only, and not with a
view towards distribution or resale except in compliance with applicable
securities laws.
II-2
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
2 Agreement and Plan of Reorganization between Virginia City Gold
Mines, Inc. and Psychicnet.com, Inc. dated March 8, 1999 (1)
2.1 Agreement and Plan of Merger between Newagecities.com, Inc., New
Leaf Distributing Company and Al-Wali Corporation, dated April 6,
2001 (2)
2.2 Agreement and Plan of Reorganization and Stock Purchase Agreement
between Newagecities.com, Inc. and Genesis Systems, Inc. (3)
2.3 Stock Purchase Agreement by and Among Newagecities.com and
PropaMedia (4)
2.4 Stock Purchase Agreement by and Among Newagecities.com and G-Choice
(4)
2.5 Stock Purchase Agreement dated November 15, 2001 by and between
Genesis Technology Group, Inc., Zhaoli Science and Technology
Development Company, Limited and the Majority Shareholder of Zhaoli
Science and Technology Development Company, Limited. (5)
2.6 Stock Purchase Agreement dated December 1, 2001 by and between
Genesis Technology Group, Inc, Yastock Investment Consulting
Company, Limited and the majority shareholders of Yastock Investment
Consulting Company, Limited. (5)
2.7 Agreement and Plan of Merger And Reorganization by and among
theNETdigest.Com, Inc. as Acquiror, Shanghai G-Choice Science &
Technology Company Ltd as Acquiree and the Shareholders of Shanghai
G-Choice Science & Technology Company Ltd. (7)
3.1 Articles of Incorporation (1)
3.2 Articles of Amendment to the Articles of Incorporation (1)
3.3 Articles of Amendment to the Articles of Incorporation (1)
3.4 Articles of Amendment to the Articles of Incorporation (11)
3.5 Bylaws (1)
4.1 Form of Common Stock Purchase Warrant (11)
5 Opinion of Schneider Weinberger LLP **
10.1 Merger Agreement and Plan of Reorganization (1)
10.2 Genesis Technology Group, Inc. 2002 Stock Option Plan (6)
10.3 Genesis Technology Group, Inc. 2003 Stock Option Plan (10)
10.4 Genesis Technology Group Amendment No.1 to 2002 Stock Option Plan
(8)
10.5 Genesis Technology Group 2003 Stock Option Plan (9)
10.6 Employment Agreement with James Wang **
10.7 Addendum to Employment Agreement with James Wang *
10.8 Employment Agreement with Gary Wolfson **
10.9 Addendum to Employment Agreement with Gary Wolfson *
10.10 Employment Agreement with Ken Clinton **
10.11 Addendum to Employment Agreement with Ken Clinton *
10.12 Form of Representation Agreement *
10.13 Form of Consulting Agreement *
10.14 Lease for principal executive offices **
10.15 Subscription Agreement (11)
22 Subsidiary of the Registrant **
23.1 Consent of Sherb & Co., LLP *
23.2 Consent of Schneider Weinberger (contained in such firm's opinion
filed as Exhibit 5)
_________
(1) Incorporated by reference to exhibits filed with our registration statement
on form SB-2 filed on September 1, 1999.
(2) Incorporated by reference to exhibits filed with Form 8-K filed on April
23, 2001.
(3) Incorporated by reference to exhibits filed with Form 8-K filed on August
16, 2001.
II-3
(4) Incorporated by reference to exhibits filed with Form 8-K filed on
September 12, 2001.
(5) Incorporated by reference to exhibits filed with Form 8-K filed on January
4, 2002.
(6) Incorporated by reference to exhibits filed with Form S-8 filed on March
26, 2002.
(7) Incorporated by reference to exhibits filed with Form 8-K filed on July 15,
2002.
(8) Incorporated by reference to exhibits filed with Form S-8 filed on December
17, 2002.
(9) Incorporated by reference to exhibits filed with Form S-8 filed on June 5,
2003.
(10) Incorporated by reference to exhibits filed with our registration statement
on Form S-8, SEC file number 333-105839, as filed on June 15, 2003.
(11) Incorporated by reference to the exhibits filed with the Form 8-K as filed
with the SEC on January 22, 2004
* Filed herewith
** To be filed by amendment
ITEM 28. UNDERTAKINGS
The undersigned registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material information
on the plan of distribution.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or preceding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in City of Boca Raton, State of Florida on March 8, 2004.
GENESIS TECHNOLOGY GROUP, INC.
By: /s/ Gary Wolfson
---------------------------
Gary Wolfson, CEO and
Principal Executive Officer
By: /s/ Adam C. Wasserman
---------------------
Adam C. Wasserman, CFO and
Principal Accounting and Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary Wolfson as his or her
attorney-in-fact, with the power of substitution, for him or her in any and all
capacities, to sign any amendment or post-effective amendment to this
registration statement on Form SB-2 or abbreviated registration statement
(including, without limitation, any additional registration filed pursuant to
Rule 462 under the Securities Act of 1933) with respect hereto and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Signature Title Date
/s/ Gary Wolfson CEO and director March 8, 2004
----------------
Gary Wolfson
/s/ James Wang Chairman of the Board March 8, 2004
-------------- and President
Dr. James Wang
/s/ Adam C. Wasserman CFO March 8, 2004
---------------------
Adam C. Wasserman
/s/ Kenneth Clinton Director March 8, 2004
-------------------
Kenneth Clinton
/s/ Li Shaoqing Director March 8, 2004
----------------
Dr. Li Shaoqing
/s/ Robert Zhuang Director March 8, 2004
-----------------
Robert Zhuang
/s/Shan Tingting Director March 8, 2004
----------------
Shan Tingting
II-5
EXHIBIT INDEX
Exhibit No. Description of Document
10.7 Addendum to Employment Agreement with James Wang
10.9 Addendum to Employment Agreement with Gary Wolfson
10.11 Addendum to Employment Agreement with Ken Clinton
10.12 Form of Representation Agreement
10.13 Form of Consulting Agreement
23.1 Consent of Sherb & Co., LLP
II-6