UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 000-32635
GROUP MANAGEMENT CORP.
(Name of Small Business Issuer in its Charter)
DELAWARE 59-2919648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13135 DAIRY ASHFORD
SUITE 525
SUGAR LAND, TEXAS 77478
(Address of principal (Zip Code)
Executive offices)
(281) 295-8400
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No []
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $574,826 for the
year ended December 31, 2001
As of March 31, 2002, the aggregate market value of the common stock of the
issuer held by non-affiliates, based on the average bid and asked price of the
common stock as quoted on the OTC Bulletin Board, was $6,109,583. As of March
31, 2002, 4,699,679 shares of common stock of the issuer were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
GROUP MANAGEMENT CORP.
FORM 10-KSB
TABLE OF CONTENTS
PART I 2
ITEM 1. DESCRIPTION OF BUSINESS. 2
OVERVIEW 2
PORTFOLIO COMPANIES 2
PENDING ACQUISITIONS 4
BUSINESS STRATEGY 5
EVALUATION OF POTENTIAL ACQUISITIONS 6
COMPETITION 6
INTELLECTUAL PROPERTY 7
EMPLOYEES 8
FORWARD-LOOKING STATEMENTS 8
ITEM 2 DESCRIPTION OF PROPERTY 8
ITEM 3. LEGAL PROCEEDINGS 8
CONVERTIBLE NOTE HOLDERS 8
SWAN MAGNETICS, INC.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II 11
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 11
MARKET PRICE INFORMATION 11
DIVIDENDS 11
RECENT SALES OF UNREGISTERED SECURITIES 11
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 13
OVERVIEW 13
RESULTS OF OPERATIONS 14
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND
DECEMBER 31, 2000 14
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 14
LIQUIDITY AND CAPITAL RESOURCES 14
GOING CONCERN CONSIDERATION 16
RISK FACTORS 17
RISKS ASSOCIATED WITH OUR BUSINESS 17
ITEM 7. FINANCIAL STATEMENTS 18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
19
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT. 19
DIRECTORS AND EXECUTIVE OFFICERS 19
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 19
ITEM 10. EXECUTIVE COMPENSATION 20
SUMMARY COMPENSATION TABLE 20
EMPLOYMENT AGREEMENTS 20
2000 OMNIBUS SECURITIES PLAN 21
OPTION GRANTS 21
OPTION EXERCISES AND OPTION VALUES 22
COMPENSATION OF DIRECTORS 22
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 22
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. 25
INDEX TO FINANCIAL STATMENTS F1
INDEPENDENT AUDITORS' REPORT F2
CONSOLIDATED BALANCE SHEET F3
CONSOLODATED STATEMENTS OF OPERATIONS F4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY F5
CONSOLIDATED STATEMENTS OF CASH FLOWS F6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F7
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
We were incorporated in Florida in 1987 under the name Sci Tech Ventures, Inc.
We changed our name to Strategic Ventures, Inc. in May 1991 and to Internet
Venture Group, Inc. in October 1999. In March 2001, we were merged into IVG
Corp., a Delaware corporation. As a result of the merger, we were
reincorporated in Delaware and our name was changed to IVG Corp. In December
2001 we changed our name to Group Management Corp.
We are a holding company that intends to acquire companies and assist them by
providing financial guidance, business model creation and implementation, access
to equity resources, and technology. Group Management Corp provides a
value-added corporate structure within its two business units, Creative Products
and Business Services, enabling these groups to leverage their competencies and
deploy their business strategies through the Company's corporate resources. The
Company expands its business model through selective acquisitions and business
development.
Within our Business Services Group, we are currently focused consolidating
companies in the Human Resource Services Industry. The Company intends to roll
up several HR Service firms into a Competitive Services Organization (CSO) under
the brand name PeopleCorp.
GeeWhizUSA.com, is a manufacturer and distributor of proprietary novelty, gift
and branded products that light up.
CyberCoupons.com, Inc., a development stage company that intended to create an
internet based solution to increase the speed at which coupon transaction are
processed between the coupon vendor and the retail store. Management no longer
intends to pursue this business venture.
Swan Magnetics, Inc., developer of a proprietary ultra-high capacity floppy disk
drive technology and the owner of 46% of the common stock of iTVr, Inc., which
is developing next generation digital video recording technology. As of March
2002, we have sold our interest in Swan to concentrate on our business services
model.
As used in this report, the words "we," "us," "our" and "the company" refer to
Group Management Corp.; our subsidiary CyberCoupons.com, Inc.; and our division,
GeeWhizUSA.com.
PORTFOLIO COMPANIES
GEEWHIZ.
GeeWhiz, which is based in Houston, Texas, manufactures and distributes
proprietary novelty, gift and branded products that light up. To date, GeeWhiz
has principally been engaged in the sale of its proprietary Starglas(R) line of
fiber optic illuminated drinking containers. GeeWhiz is rapidly expanding its
product line to include a wide variety of promotional, gift and souvenir items
which will be sold over its website and through traditional distribution
channels. GeeWhiz introduced LightArt(TM) in September 2000, which is a line of
illuminated gifts and merchandise primarily aimed at the promotional product
channel and secondarily at the retail gift channel. LightArt(TM) includes
illuminated keychains, awards and wearable products. GeeWhiz intends to expand
its product line from its proprietary Starglas(R) and LightArt(TM) lines of
fiber optic illuminated products to include other promotional, gift and souvenir
items for sale through both the GeeWhiz website and traditional reseller and
specialty distribution channels.
GeeWhiz operates a business e-commerce website designed to access and service
the promotional products, gifts and souvenir markets. Through this website,
GeeWhiz plans to bring together the customers, distributors, merchandisers,
concessionaires and resellers of this highly fragmented industry to meet and
transact business on-line via an electronic promotional products, gifts and
souvenir bazaar.
2
We acquired GeeWhizUSA.com, in a two-step transaction. In the first step, which
became effective as of December 31, 1999, 37 shareholders of GeeWhiz acquired
control of approximately 87% of our common stock pursuant to a share exchange
agreement in which we exchanged 1,195,269 shares of our common stock for the
5,312,053 shares of GeeWhiz common stock held by the participating shareholders.
In July 2000, the second step of this acquisition was completed with the merger
of GeeWhiz into IVG, following which GeeWhiz ceased to exist as a separate
entity and became our promotional products division. Neither party obtained a
fairness opinion in connection with these transactions. Shareholder approval was
not required with respect to the share exchange. A majority of the shareholders
of both parties approved the merger. The terms of the transactions were the
result of arm's length negotiations between the parties. Elorian Landers, who is
now our Chief Executive Officer and a director, was GeeWhiz's Chief Executive
Officer and principal stockholder at the time of these transactions. Thomas L.
McCrimmon, who is now one of our directors, was our President and principal
stockholder at the time of these transactions. GeeWhiz engaged in these
transactions for the principal purpose of becoming a publicly traded company and
acquiring the access to capital and liquidity associated with being publicly
traded. IVG, which was a public shell company prior to these transactions,
elected to be acquired by GeeWhiz in order to become an operating e-commerce
business.
On January 23, 2002, the Company announced the signing of an Alliance agreement
with UTEK Corporation. The goal of the Alliance is to have UTEK identify
suitable technology acquisition opportunities for GeeWhiz. UTEK is an
innovative technology transfer company dedicated to building bridges between
university-developed technologies and commercial organizations. UTEK
identifies, licenses and finances the further development of new technologies
and the transfers them to growing companies.
On January 24, 2002, the Company announced that GeeWhiz has appointed Kenneth
Simpson as its new Vice President of Sales. Mr. Simpson will oversee the entire
marketing and sales strategy at GeeWhiz.
SWAN MAGNETICS
On September 28, 2000, we acquired approximately 88.5% of Swan Magnetics, Inc.,
a Santa Clara, California-based developer of proprietary ultra-high capacity
floppy disk drive technology. As part of a two-step purchase transaction, we
first exchanged 1,000,000 shares of our common stock for approximately 88.5% of
the common stock of Swan Magnetics. We then offered to exchange the common stock
received by those stockholders for warrants to purchase our common stock at an
exercise price equal to $1.75. This permitted us to reduce the number of shares
we were issuing in the Swan acquisition. Stockholders exchanged an aggregate of
454,590 shares of common stock for warrants to purchase our common stock. A
vote of our shareholders was not required to effect this acquisition. Neither
party obtained a fairness opinion in connection with this transaction. Eden Kim
was the principal shareholder and President of Swan Magnetics at the time of the
transaction. During this time, Mr. Kim was also our Chairman and Secretary.
Elorian Landers, our Chief Executive Officer and director, and Thomas L.
McCrimmon, our director, were principal shareholders at the time of this
acquisition. We believe the Swan Magnetics shareholders engaged in these
transactions principally because of the economic terms, the additional liquidity
offered by becoming shareholders of a publicly-traded company, and the
opportunity to participate in a broader business. We approved these transactions
primarily because Swan Magnetics possessed $5.4 million in cash that could
assist us in financing our business strategy, and because we intended to market
Swan Magnetics' proprietary technology. We initially intended to pursue
strategic alliances with manufacturers of similar products and services in order
to bring the Swan Magnetics' technology to market. Subsequent to the closing of
our acquisition, however, we determined to pursue other revenue-producing
activities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In February 2001, Swan Magnetics entered into a research and development
agreement with iTVr, Inc., a company based in Santa Clara, California. iTVr is
developing next generation digital video recording technology intended to
record, play back and time shift certain broadband electronic transmission
events. iTVr has developed a high performance, low cost, multi-function personal
video recorder for a variety of applications, including time shift television
recording, digital imaging and manipulation, distance education, HDTV, karaoke,
videoconferencing, music videos, video e-mails and home gateway applications.
Pursuant to the agreement, Swan Magnetics has invested $750,000 in iTVr to date
and acquired 46% of iTVr's common stock.
On March 6, 2002 we sold our 88.5% interest in Swan Magnetics, Inc. to Lumar
Worldwide Industries, Inc.
3
CYBERCOUPONS
CyberCoupons was formed to employ the infrastructure of the Internet to allow
manufacturers to offer coupons, consumers to retrieve the offers and merchants
to redeem the coupons virtually in real time. Much of the advertiser expense on
coupons consists of the printing, distribution and logistics associated with
coupon-based marketing activities. CyberCoupons believes that the
disintermediation of coupon distribution and redemption can result in a
significant savings to the billions of dollars spent by manufacturers and
merchants to print, distribute and redeem paper coupons for grocery, household,
beauty and other products. CyberCoupons intends to allow shoppers to select
specific grocery coupons from the manufacturer's website or a merchant's website
for use at retail outlets nationwide. CyberCoupons has tested its virtual coupon
delivery and redemption process with a regional grocery store for point-of-sale
redemption of electronically downloaded coupons. CyberCoupons intends to enter
into alliances with national manufacturers and merchants and test its process on
a large scale. CyberCoupons does not have any preliminary plans, proposals,
arrangements or understandings to enter into alliances with any national
manufacturers or merchants at this time.
On January 9, 2001, we executed a Reorganization Agreement and Plan of Exchange
pursuant to which we exchanged 118,631 shares of our common stock for
approximately 35% of the common stock of CyberCoupons, Inc., a Houston,
Texas-based company. CyberCoupons is a development stage company that intends to
be a source for consumers to obtain coupons for grocery, household and beauty
products via the Internet. The terms of the transaction were the result of arm's
length negotiations between the parties and were not required to be approved by
our shareholders. Neither party obtained a fairness opinion in connection with
this transaction. Rodney Hamp was the principal shareholder and President of
CyberCoupons at the time of the transaction, and continues to serve in that
capacity. Elorian Landers, our Chief Executive Officer and director, Thomas L.
McCrimmon, our director, and Eden Kim, our former Chairman and Secretary, were
principal shareholders at the time of this acquisition. We believe the
CyberCoupons shareholders engaged in the transaction principally because of the
economic terms, the additional liquidity offered by becoming shareholders of a
publicly-traded company, and the opportunity to participate in a broader
business. We approved these transactions primarily because of CyberCoupons'
business strategy to distribute coupons over the Internet.
Our investment in CyberCoupons was diluted immediately, in the sense that the
CyberCoupons shares acquired in exchange for our common stock have a book value
that was far less than the trading price of our common stock at January 9, 2001.
No assurance can be given that our investment in CyberCoupons will appreciate in
value, or that it will appreciate to a value comparable to the value of the
shares of our common stock that were delivered to the CyberCoupons stockholders.
Management does not intend to pursue this business venture.
PENDING ACQUISITION
BESTSTAFF SERVICES, INC.
On February 29,2002, the Company announced that it has signed a Letter of Intent
to acquire a 45% of the common stock BestStaff Services, Inc. Together we will
form PeopleCorp to launch our new business services model.
BestStaff is a provider of temporary staffing personnel, contract staffing,
managed staffing and HR services for regional and national clients BestStaff has
secured major contracts with Fortune 500 and large corporations. BestStaff
recorded unaudited revenues of approximately $10 Million in 2001.
STRATEGIC ALLIANCE
APPLIED BEHAVIORAL SCIENCE, LLC.
On January 29, 2002, the Company announced that it has signed a strategic
alliance agreement with Applied Behavioral Science LLC (ABS). The company's
objective is to strengthen the positioning of GPMT in the consolidation of the
HR Services Industry. Applied Behavioral Science LLC will assist GPMT in its
strategy to integrate and deliver a bundle of services that business customers
will use to extend their competitiveness.
4
Founded in 1978, ABS's expertise is employee selection and development. Using
state-of-the-art, Internet-based diagnostics, ABS advises its clients on the
selection and hiring of the best applicants to meet the specific requirements of
the position. ABS also provides programs in the prevention of workplace
violence (through recognition of employees who pose risk), analysis of key
players in acquisitions and mergers, and employee development and training. Dr.
Moser has appeared on Bloomberg Television News and USA Radio Network, as well
as in USA Today. His articles and case studies have appeared in may
professional publications, as well as in over 40 management textbooks.
BUSINESS STRATEGY
We have decided to focus our acquisition activity on two industries - the human
resources services industry and the creative products industry. Based on our
experience, we believe that these industries are highly fragmented and represent
profitable business models that can be enhanced through consolidation. During
2002, the Company intends to devote most of its time and resources to principals
of the human resources services industry.
We plan to acquire companies that our management believes can become profitable
market leaders in their respective industry segment by virtue of a compelling
business model, technology and/or proprietary service. We plan to help these
portfolio companies by providing corporate and strategic development resources
and financial support and by leveraging the collective knowledge, experience,
industry relationships and other resources of our management, board of advisors,
strategic corporate partners and portfolio companies. We intend to build value
in our portfolio companies by leveraging their corporate assets through
cross-marketing and affinity marketing programs with our other portfolio
companies.
We intend to devote significant resources to the development of our subsidiaries
and the acquisition of additional businesses. Additionally, we intend to
continue to evaluate new opportunities to further our investment in our other
portfolio companies and seek out opportunities to increase stockholder value.
For instance, we may consider selling selected investments or having separate
subsidiaries sell a minority interest to outsiders, either privately or by means
of a spin-off initial public offering of one or more of our portfolio companies.
THE HUMAN RESOURCES MARKET. We intend to focus on accumulating a significant
revenue base in the professional employer organization (PEO), staff leasing, and
human resources consulting industries. Professional employer organizations
typically provide employee payroll, human resource and benefit services on an
outsourced basis. Unlike temporary employment agencies, professional employer
organizations carry client companies' full-time employees on the professional
employer organization payroll and bill the client a surcharge each payroll
period. Because professional employer organizations provide employee-related
services to a large number of employees, they can achieve economies of scale as
a professional employer and perform employment-related functions at a level
typically available only to large corporations with substantial resources.
We believe we can apply our resources to increase the profit margins of
professional employer organizations by helping them transition from a
paper-centric human intensive operation to a paper-less, web-centric electronic
operation. We also hope to leverage the employee base of PEOs by creating cross
marketing and affinity marketing programs between the professional employer
organizations and our other portfolio companies and strategic partners.
Furthermore, we intend to expand upon the services presently provided by PEOs by
introducing new services for the small and medium-sized businesses they serve.
THE CREATIVE PRODUCTS MARKET. We intend to explore opportunities to increase the
value of Gee Whiz, including the possible additional acquisition and strategic
alliance with related businesses. This market consists of a consumer element and
a business element. The consumer segment of the industry is comprised of
companies that produce consumer art and gift products, such as posters and
prints, calendars, greeting cards, stationary and gift items. The business
segment of the industry includes companies that market business promotional
products, such as our GeeWhizUSA.com division, which manufactures a variety of
illuminated logo merchandise.
5
EVALUATION OF POTENTIAL ACQUISITIONS
DEVELOPING A SUCCESSFUL BUSINESS MODEL. Any new company must develop a business
model that eventually makes money and provides a return on investment. Some
companies have focused on gaining market share or revenues without regard to
profitability. Until recently, some of these companies were able to sustain this
approach due, in large part, to the tremendous run-up in their stock prices as
investors flocked to scoop up the newest Internet public offering. This high
valuation provided these companies with an Internet currency that allowed them
to grow through the acquisition of other Internet companies or to raise working
capital by issuing new securities to the Internet-starved financial community.
However, our management does not believe that this approach equates to a
sustainable, successful business model. The recent decline in stock prices for
the technology sector also lends support to the view that focusing on market
share or revenues without regard to profit may not be successful over the long
term. Our mission is to find businesses that can obtain a leadership position
within their market segment and to help them capitalize on their position by
implementing a successful earnings business model.
FINDING THE BEST PEOPLE. The single most important resource for any new company
is the people that manage, operate and execute the business and strategy of the
company. Therefore, we will look for companies that are led by entrepreneurs
with the vision to guide a new business to its market space to satisfy its
market demand. To facilitate our success, we intend to augment management with
professionals who have expertise in the applicable market, the ability to manage
rapid growth and the flexibility to adapt to the changing marketplace. Such
people are highly sought after and are few in number. To be successful, each
venture must be able to attract and retain such people.
When evaluating a potential portfolio company, we consider whether we believe
the particular company can meet the foregoing challenges. Management also
evaluates a variety of other factors, including the following:
o MARKET POSITION. Is the company well positioned within the segment
compared to competitors? Is the company first in its space? Does the company
have some other market advantage?
o INDUSTRY LEADERSHIP. Does the company have the products, services and
skills necessary to become an industry leader in the market segment?
o PROPRIETARY TECHNOLOGY. Does the company possess some proprietary
technology or other technical competitive edge?
o MANAGEMENT TEAM. Does the management team exhibit the traits or potential
necessary to recognize and quickly exploit a market opportunity and focus the
company to seize market share?
o BUSINESS MODEL. Does the company have, or is it open to adopting, a
business model and strategy that will allow the company to mature and eventually
generate earnings per share that result in a return on investment?
o NETWORK SYNERGY. Does the company contribute to, or will it benefit from,
relationships with our other portfolio companies?
COMPETITION
COMPETITION IN THE PROFESSIONAL EMPLOYER ORGANIZATION INDUSTRY. Competition
within the professional employer organization industry generally focuses on the
quality and breadth of services, choice and quality of benefits packages,
reputation and price. We believe leading professional employer organizations
will be distinguished by reputation, national presence, regulatory expertise,
financial resources, risk management and information technology capabilities.
6
The professional employer organization industry is highly fragmented, and many
professional employer organizations have limited operations that serve fewer
than 1,000 worksite employees. We believe that companies we may acquire in the
industry will face competition from the traditional in-house provision of
employee-related services, regional and national professional employer
organizations and fee-for-service providers such as payroll processing firms and
human resource consultants. National competitors in the professional employer
organization industry include Administaff, Inc. and Staff Leasing, Inc. and the
professional employer organization divisions of large business services
companies such as Automatic Data Processing, Inc. and Paychex, Inc. As
professional employer organizations expand nationally, competition will likely
intensify in the industry.
COMPETITION IN THE PROMOTIONAL PRODUCTS INDUSTRY. Competition within the
promotional products industry is highly fragmented and competitive, and some of
our competitors have substantially greater financial and other resources than we
do. Our promotional products compete with the services of in-house advertising,
promotional products and purchasing departments and with designers and vendors
of single or multiple product lines. Our promotional products also compete for
advertising dollars with other media such as television, radio, newspapers,
magazines and billboards. Entry into the promotional products industry is not
difficult and new competitors are continually commencing operations.
The primary methods of competition are creativity in product design, quality and
style of products, prompt delivery, customer service, price and financial
strength. While some of our competitors may enjoy an advantage in one or more of
these areas, we are unique in the production of our patented illuminated
drinking containers and do not compete with others in the industry for customers
who wish to market their company, product or brand on drinking glasses that
light up. In the promotional products industry in general, major competitors
include Cyrk, Inc. and Ha-Lo, Industries, Inc.
INTELLECTUAL PROPERTY
Our success and ability to compete may be dependent on our ability to develop
and maintain the proprietary aspects of technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright law and contractual restrictions
to protect the proprietary aspects of our technology. We hold a license under US
Patent Numbers 5,211,699 and 5,575,553 on proprietary fiber optic illuminated
drinking containers, as well as registered trademarks on Starglas(R) (Reg. No.
2,216,216) and Fyrglas(R) (Reg. No. 1,995,482). In addition, Fyrglas(R) is also
a registered trademark in Canada. We also have a patent pending with the United
States Patent and Trademark Office (Application No. 09/842,701). We have no
reason to believe that this patent application will not be granted. These legal
protections afford only limited protection for our technology.
Despite efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or obtain and use information regarded
as proprietary. Litigation may be necessary in the future to enforce our
intellectual property rights, protect our trade secrets, determine the validity
and scope of the proprietary rights of others or defend against claims of
infringement or invalidity. Any such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our
business, results of operations and financial condition. There can be no
assurance that our means of protecting our proprietary rights will be adequate
or that competitors will not independently develop similar technology. Any
failure by us to meaningfully protect our property could have a material adverse
effect on our business, results of operations and financial condition.
To date, we have not been notified that our products or services infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement with respect to our current or future
products and services. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements may
not be available on terms acceptable to us or at all. A successful claim of
product infringement against us and our failure or inability to license the
infringed technology or develop or license technology with comparable
functionality could have a material adverse effect on our business, results of
operations and financial condition.
7
EMPLOYEES
As of March 31, 2002, we had 6 employees, of which 3 were employed by our
GeeWhiz Division. We believe our relationship with our employees is good. None
of our employees are a party to a collective bargaining agreement.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by (or on behalf of) us. You can sometimes
identify these statements by the use of forward-looking words such as "may,"
"will," "expect," "anticipate," "estimate," "continue" or other similar words,
although such words are not used in every sentence in which we present
anticipated future outcomes or occurrences. Except for historical information
contained in this report, the statements included in the Business section,
Management's Discussion and Analysis or Plan of Operations, including the risk
factors, and elsewhere in this report contain forward-looking statements that
are dependent upon a number of risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. The
factors listed under "Risk Factors" in Item 6, as well as cautionary language in
this report, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. We do not intend to provide updated information
about the matters referred to in these forward-looking statements, other than in
the context of Management's Discussion and Analysis or Plan of Operations
contained in this report and other disclosures in the filings we make with the
Securities and Exchange Commission (the "SEC").
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive offices are located in approximately 4,994 square feet
in Sugar Land, Texas. Our monthly rental payments for this space are $10,668.
The lease for this space expires on November 30, 2005. We also lease
approximately 7,000 square feet of warehouse space in Sugar Land, Texas. Our
monthly rental payments for this space are $4,712.00 per month pursuant to a
lease expiring March 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
CONVERTIBLE NOTE HOLDERS. On February 2, 2001 we issued $1.1 million of
convertible notes to four investors in a private placement. The convertible
notes mature on January 1, 2003 and bear interest at the rate of 6% per year.
The events of default under the notes are described in this report under the
section captioned "Convertible Notes".
As part of the financing transactions involving the convertible notes, we agreed
to file a registration statement for the resale by the note holders of the
common stock underlying the convertible notes and to have the registration
statement declared effective by June 17, 2001. The registration statement was
not declared effective by June 17, 2001 and has not been declared effective as
of the time of the filing of this report.
On September 10, 2001 we entered into a Security Agreement with the noteholders
and certain of our shareholders, including Elorian Landers, our Chief Executive
Officer and a director, and Thomas L. McCrimmon, a director. Under the Security
Agreement, Mr. Landers and his wife pledged 150,000 shares of our common stock,
Mr. McCrimmon pledged 10,900 shares of our common stock and other shareholders
pledged 89,250 shares of our common stock, all as security for our obligations
under the financing agreements with the noteholders. As part of this agreement,
the note holders waived the default and penalties under the convertible notes
for failure to make the registration statement effective by June 17, 2001,
provided that we file an amendment to the registration statement by October 20,
2001 and cause the registration statement to be declared effective by December
10, 2001. The note holders also lent us an additional $55,000 and we signed a
promissory note agreeing to repay this amount by the earlier of December, 2001
or the occurrence of an event of default under the Security Agreement.
On February 7, 2002, the convertible note holders declared a default on the
notes for failure to have the registration statement declared effective and made
demand for payment of the convertible notes and promissory notes. In addition,
the collateral agent under the Security Agreement released 239,400 shares of our
stock to the convertible note holders. The note holders further requested that
we deliver an opinion to our transfer agent so that they would be able to sell
in the public markets under Rule 144 the shares released by the collateral agent
and have the shares reissued in the note holders' names. One of the note holders
has also submitted a notice to convert a portion of its notes into our common
stock. Because of certain disputes with the note holders, we have not complied
with these requests.
8
On or about March 21, 2002, Alpha Capital Aktiengesellschaft, Amro
International, S. A., Markham Holdings, LTD, and Stonestreet Limited
Partnership, the holders of the convertible notes, filed a complaint in United
States District Court for the Southern District of New York naming us, Elorian
Landers and his wife as defendants. In their complaint, the note holders allege,
among other things, the following:
o fraud in connection with the sale of the convertible notes resulting from
alleged misrepresentations as to our cash position;
o breach of contract on the notes for failure to have an effective
registration statement covering the resale of the common stock underlying the
notes;
o failure to honor conversion requests;
o failure to repay the convertible notes and promissory notes and ;
o anticipatory breach of contract on the notes.
In their complaint, the noteholders assert monetary damages and seek relief (i)
in the amount of $1,155,000 plus interest, liquidated damages and attorneys fees
and other costs of enforcement for the breach of contract on the notes, (ii)
unspecified monetary damages for failure to cause the registration statement to
be effective and failure to take the steps necessary for the noteholders to sell
the shares under the Security Agreement pursuant to Rule 144, and (iii)
unspecified damages for failure to honor conversion notices. In addition, the
noteholders are seeking an order directing us to (i) cause the registration
statement to be effective, (ii) to enforce conversion of the notes into common
stock, and (iii) to have us and the Landers take necessary actions to permit
plaintiffs to sell the common stock received from the collateral agent under
Rule 144.
SWAN MAGNETICS, INC.
In March 2002, the Company was served with a lawsuit brought by Swan Magnetics,
Inc. in the Superior Court of the State of California, County of Santa Clara.
The only defendant in the action is the Company.
The Complaint alleges, among other things, that the Company breached its
obligations under a promissory note in the principal amount of $2,843,017, that
the Company has breached its obligations under a series of settlement documents
entered into between Swan and the Company, and that the Company has interfered
with contractual relationships between Swan and certain third parties. The
total relief sought by Swan is $3,040,000, plus interests, costs, and punitive
damages.
In separate correspondence, Mr. Eden Kim has alleged that the Company never
owned a majority interest in Swan Magnetics, Inc.
The Company is vigorously defending this lawsuit although the Company believes
that the action lacks merit. The case is at a stage where no discovery has been
taken and no prediction can be made as to the outcome of this case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Board of Directors of the Company called a Special Meeting of Shareholders
on December 3, 2001. There were three matters submitted to a vote. A majority of
the shareholders voted as follows:
9
1. A proposal to approve an amendment to Article IV of the Company's
Certificate of Incorporating and effect a one-for-twenty reverse stock split and
a decrease in the Company's authorized common stock from 300,000,000 to
150,000,000 shares
For 35,438,213 Against 98,628 Abstain 0
2. A proposal to approve a further amendment to Article IV of the Company's
Certificate of Incorporation to authorize 10,000,000 shares of preferred stock
and to permit such shares of preferred stock to be designated and issued from
time to time, and the rights of such preferred stock to be fixed from time to
time, by the Board of Directors without shareholder approval.
For 35,113,367 Against 423,474 Abstain 0
3. A proposal to approve an amendment to Article I of the Company's
Certificate of Incorporation to effect a change in the Company's name from IVG
Corp. to Group Management Corp.
For 35,536,841 Against 0 Abstain 0
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE INFORMATION
Trading of our common stock commenced on the OTC Bulletin Board on July 13,
2000. Our common stock is traded on the OTC Bulletin Board under the symbol
"GPMT." The reported high and low bid prices for our common stock, as reported
by the OTC Bulletin Board, are shown below for the third quarter of 2000 through
the fourth quarter of 2001. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
BID PRICE
----------
LOW HIGH
----------
2000
---------------------------
Third Quarter (pre split) . $ 1.50 $7.00
Fourth Quarter (pre split). $ 1.00 $2.31
2001
---------------------------
First Quarter (pre split) . $ 1.06 $2.00
Second Quarter (pre split). $ 1.02 $1.69
Third Quarter (pre split) . $ 0.08 $1.03
Fourth Quarter (post split) $ 0.75 $3.20
2002
---------------------------
First Quarter . . . . . . . $ 0.46 $3.10
As of March 31, 2002, there were approximately 720 holders of record of our
common stock.
DIVIDENDS
We have not paid any cash dividends to date and have no intention to pay any
cash dividends on our common stock in the foreseeable future. The declaration
and payment of dividends on our common stock is subject to the discretion of our
board of directors and to certain limitations imposed under the General
Corporation Law of the State of Delaware. The timing, amount and form of
dividends, if any, will depend on our results of operations, financial
condition, cash requirements and other factors deemed relevant by our board of
directors.
RECENT SALES OF UNREGISTERED SECURITIES
On March 30, 2000, we sold to one investor 6,250 shares of our common stock, at
a price of $2.00 per share, for gross proceeds of $12,500. The investor
qualified as an "accredited investor" within the meaning of Rule 501(a) of
Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On April 2, 2000, we sold to one investor a total of 2,500 shares of our common
stock, at a price of $1.90 per share, for gross proceeds of $4,750. The investor
qualified as a "accredited investor" within the meaning of Rule 501(a) of
Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
11
On April 5, 2000, we sold to two investors a total of 12,500 shares of our
common stock, at a price of $2.00 per share, for gross proceeds of $25,000. The
investors qualified as "accredited investors" within the meaning of Rule 501(a)
of Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On June 5, 2000, we sold to one investor 50,000 shares of our common stock, at a
price of $2.00 per share, for gross proceeds of $100,000. The investor qualified
as an "accredited investor" within the meaning of Rule 501(a) of Regulation D
under the Securities Act. The securities, which were taken for investment and
were subject to appropriate transfer restrictions, were issued without
registration under the Securities Act in reliance upon the exemption provided in
Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On June 12, 2000, we sold to three investors a total of 125,000 shares of our
common stock, at a price of $2.00 per share, for gross proceeds of $250,000. The
investors qualified as "accredited investors" within the meaning of Rule 501(a)
of Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On July 7, 2000, we merged with GeeWhiz.com, Inc. and issued 2,939,526 shares of
our common stock to minority shareholders of GeeWhiz. The securities, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act.
On September 28, 2000, we exchanged 1,000,000 shares of our common stock for
approximately 88.5% of Swan Magnetics, Inc., pursuant to a share exchange
agreement with 84 shareholders of Swan. No more than 35 of the Swan shareholders
were not "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act. This share exchange was followed by an offer made to
the accredited investors who participated in the original exchange to exchange
the shares received in the share exchange for warrants to purchase our common
stock at an exercise price of $1.75 per share. The shareholders exchanged an
aggregate 454,590 shares of common stock for warrants to purchase our common
stock. The securities, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon the exemption provided in Section 4(2) of the
Securities Act and Rule 506 of Regulation D.
On October 2, 2000, we issued to two persons 20,000 shares of our common stock
as repayment for loans provided to the company by such persons. We valued the
shares at $1.00 per share. The two persons qualified as "accredited investors"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided in Section 4(2) of the Securities Act
and Rule 506 of Regulation D.
On December 15, 2000, we issued to three persons 139,500 shares of our common
stock as repayment for loans provided to the company by such persons. We valued
the shares at $1.00 per share. The three persons qualified as "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act. The securities, which were taken for investment and were subject
to appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon the exemption provided in Section 4(2) of the
Securities Act and Rule 506 of Regulation D.
On October 25, 2001, we sold to six investor 25,750 shares of our common stock,
at a price of $1.08 per share, for gross proceeds of $28,000. The investors
qualified as an "accredited investor" within the meaning of Rule 501(a) of
Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
12
On November 9, 2001, we issued 117,500 shares of our common stock as
compensation for consultants, at a price of $.50 per share, for gross proceeds
of $58,750. The investor qualified as an "accredited investor" within the
meaning of Rule 501(a) of Regulation D under the Securities Act. The securities,
which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act and
Rule 506 of Regulation D.
On December 6, 2001 we sold to six investors 24,150 shares of our common stock,
at a price of $0.95 per share, for gross proceeds of $22,900. The investor
qualified as an "accredited investor" within the meaning of Rule 501(a) of
Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
We were incorporated in Florida in 1987 under the name Sci Tech Ventures, Inc.,
and changed our name to Strategic Ventures, Inc. in May 1991 and Internet
Venture Group, Inc. in October 1999 and to IVG Corp. in March 2002. Effective
December 31, 1999, control of Internet Venture Group, Inc. was acquired by
shareholders of GeeWhiz.com, Inc., a Texas corporation. We changed our name to
Group Management Corp in December 2001.
We have expanded our business into other areas during 2000 and 2001 through a
series of acquisitions. In September 2000, we acquired 88.5% of the common stock
of Swan Magnetics, Inc., developer of a proprietary ultra-high capacity floppy
disk drive technology (which we sold in March 2002). During 2001, Swan Magnetics
acquired 46% of the common stock of iTVr, Inc., which is developing next
generation digital video recording technology. In January 2001, we acquired 35%
of the common stock of CyberCoupons, Inc., a development stage company that
intends to be a source for consumers to obtain coupons for grocery, health and
beauty products over the Internet. We sold our interests in Swan Magnetics in
March 2002.
In April 2001, we acquired SES-Corp., Inc., a professional employer organization
pursuant to an Amended and Restated Asset Purchase Agreement and Agreement and
Plan of Merger (the "Merger Agreement"). In the merger SES became a wholly owned
subsidiary of ours. The shares of SES common stock outstanding immediately prior
to the effective time of the merger were converted into the right to receive
590,964 shares of our common stock. 500,000 shares of our common stock were to
be placed in an escrow account (the "Escrow Shares") to secure certain
indemnification obligations set forth in the Merger Agreement.
Subsequent to our acquisition of SES, we became aware that SES was the subject
of an investigation by the Internal Revenue Service relating to its actions
prior to our acquisition of the company. SES also had some of its bank accounts
frozen by a bank that claimed the accounts were overdrawn by over $30 million,
and subsequently filed for bankruptcy protection. In light of these
developments, we entered into an agreement with the two former shareholders of
SES in August 2001 in which we disposed of SES by exchanging all of the issued
and outstanding shares of SES for the Escrow Shares. Pursuant to the terms of
the Agreement, these shareholders each retained 45,482 shares of our common
stock issued to them under the Merger Agreement.
The cost of our acquisition and subsequent disposition of SES was approximately
$522,000. Additionally, we recorded stock based compensation expense of
approximately $2,300,000, related to the approximately 90,000 shares of stock
currently held by the former shareholders of SES. While no claims against us are
pending or threatened related to our former ownership of SES, in the future we
could incur additional expenses related to such claims.
Our financial condition and results of operations for 1999 are based solely upon
the business activities of GeeWhiz.com. Our financial condition and results of
operations for 2000 and 2001 are based upon the business activities of our
GeeWhiz division and our Swan Magnetics, Inc. subsidiary. During these periods,
we also incurred expenses relating to our corporate overhead, our investment in
CyberCoupons, and Swan Magnetics' investment in iTVr. All of our revenues to
date have been derived from product sales by our GeeWhiz division.
13
At December 31, 2001, we had current assets of approximately $239,642 and total
assets of approximately $944,370.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
Revenues increased to $574,826 for the year ended December 31, 2001, compared to
$396,300 for the comparable period in 2000. The increase was attributable
principally to increased product sales. Cost of goods sold increased to
$356,071 from $298,742 for the same periods. This increase was primarily due to
increased product sales resulting from our participation in a major trade show
during this period.
General and administrative expenses increased to $14,642,133 from $5,443,807.
This increase was due primarily to expenses for shares issued in acquisitions,
increased stock-based compensation and increased costs due to acquisitions and
expansion of our operations. We also recorded interest expense of $28,872 and a
depreciation of $147,679 during 2001.
Our net loss for the year ended December 31, 2001 was $14,599,929, compared to a
net loss of $21,146,513 for the year ended December 31, 2000. The loss in 2001
is related primarily to expenses for shares issued in acquisitions, increased
consulting, legal and accounting fees incurred in connection with acquisition
activity and increased costs due to expansion of Company operations. The larger
loss in 2000 was primarily related to the $18,039,591 expenses associated with
the shares issued in our acquisition of Swan Magnetics, which was recorded as an
expense for purchased in-process technology on our statement of operations.
The in-process technology consisted of a proprietary floppy disk drive
technology that had reached prototype form. Our initial intent was to take this
technology to market via strategic alliances with other companies providing
parallel products and services to customers. We also believed the acquisition
would provide us with needed cash and consolidate our common shareholders into
one company. Initially, an Asian company expressed interest in acquiring Swan's
technology. However, it was later determined that the technology has been
replaced by inexpensive portable computer hard drives that have the capacity to
store more information than Swan Magnetic's proprietary high-capacity floppy
disk drive. Because we were unable to complete the sale of the technology prior
to the development of more sophisticated technology by competitors, it was
determined post-acquisition that we would be better served pursuing other
revenue producing activities.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2,847,396 for the year ended December
31, 2001 and $1,092,008 for the comparable period of 2000. We had approximately
$98,000 in cash at December 31, 2001.
Operations for the year ended December 31, 2001 were financed principally
through loans from institutional investors, SES-Corp., Inc., which was our
subsidiary until August 8, 2001, and our Swan Magnetics, Inc. subsidiary. The
loan proceeds totaled approximately $3.1 million. In addition, we obtained
services or paid expenses through the issuance of common stock.
Our loan from SES-Corp., Inc. in the principal amount of $1 million was due in
September 2001. Our $1.1 million convertible notes are due on January 1, 2003,
and our note from Swan Magnetics in the principal amount of approximately $2.8
million. In addition, we obtained services or paid expenses through the
issuance of common stock.
Our acquisition of Swan Magnetics in September 2000 generated cash of
approximately $5,4000,000, of which $1,500,000 was restricted for payment of a
promissory note to a vendor. Prior to obtaining funding from Swan Magnetics and
subsequently acquiring Swan Magnetics in September 2000, we financed our losses
from operations in 2001 and 2000 principally through the issuance of our common
stock in private transactions and borrowings from our management and
stockholders.
14
In addition, in both 2001 and 2000, we obtained services or paid expenses
through the issuance of common stock.
Our loan from SES-Corp., Inc. in the principal amount of $1 million was due in
September 2001. Our $1.1 million convertible notes are due on January 1,
2003,and our note from Swan Magnetics in the principal amount of approximately
$2.8 million is due on August 1, 2003. We need to raise additional capital in
order to satisfy these obligations. See "Certain Relationships and Related
Transactions" and "Financing Agreements" for descriptions of the convertible
notes and Swan Magnetics note.
On February 2, 2001 we issued $1.1 million of convertible notes to four
investors in a private placement. The convertible notes mature on January 1,
2003 and bear interest at the rate of 6% per year. If we do not pay amounts on
the notes when due, the outstanding amounts will bear interest at the rate of
20% per year. At the noteholders option, all principal and interest due on the
notes becomes immediately due and payable upon an event of default as set forth
in the notes. The events of default under the notes are described in this report
under the section captioned "Convertible Notes". Among the events of default
specified in the notes are the failure to pay any amounts when due under a note
and the continuation of such nonpayment for 10 days. We did not make the
interest payments due on the notes on December 1, 2001.
As part of the financing transactions involving the convertible notes, we agreed
to file a registration statement for the resale by the note holders of the
common stock underlying the convertible notes and to have the registration
statement declared effective by June 17, 2001. Further, we agreed that if the
registration statement was not declared effective by June 17, 2001, we would pay
the note holders liquidated damages in the amount of 1% per month of the
principal of the notes for the first 30 days and 2% per month thereafter. The
registration statement was not declared effective by June 17, 2001 and has not
been declared effective as of the time of the filing of this report.
On September 10, 2001 we entered into a Security Agreement with the note holders
and certain of our shareholders, including Elorian Landers, our Chief Executive
Officer and a director, and Thomas L. McCrimmon, a director. Under the Security
Agreement, Mr. Landers and his wife pledged 3 million shares of our common
stock, Mr. McCrimmon pledged 218,000 shares of our common stock and other
shareholders pledged 1,785,000 shares of our common stock, all as security for
our obligations under the financing agreements with the note holders. As part of
this agreement, the note holders waived the default and penalties under the
convertible note relating to the failure to make the registration statement
effective by June 17, 2001, provided that we file an amendment to the
registration statement by October 20, 2001 and cause the registration statement
to be declared effective by December 10, 2001. In addition, the convertible note
holders lent us an additional $55,000 for which we executed a promissory note
agreeing to repay the $55,000 on the earlier of December 20, 2001 or on event of
default under the Security Agreement. The promissory note has not yet been
repaid.
On February 7, 2002, the convertible note holders declared a default on the
notes for failure to have the registration statement declared effective and made
demand for payment of the convertible notes and promissory notes. In addition,
the collateral agent under the Security Agreement released 4,788,000 shares of
our stock to the convertible note holders. The note holders further requested
that we deliver an opinion to our transfer agent so that they would be able to
sell in the public markets under SEC Rule 144 the shares released by the
collateral agent and have the shares reissued in the note holders' names. One of
the note holders has also submitted a notice to convert a portion of its notes
into our common stock. Because of certain disputes with the note holders, we
have not complied with these requests.
On or about March 21, 2002, the note holders filed a complaint in federal court
naming Elorian Landers, his wife and us as defendants. In their complaint, the
note holders allege, among other things, the following: breach of contract on
the notes for failure to have an effective registration statement covering the
resale of the common stock underlying the notes, failure to honor conversion
requests and failure to repay the convertible notes and promissory notes. In
their complaint, the note holders assert monetary damages and seek relief in the
amount of $1,155,000 plus interest, liquidated damages and attorneys fees and
other costs of enforcement for the breach of contract on the notes, unspecified
monetary damages for failure to cause the registration statement to be effective
and failure to take the steps necessary for the note holders to sell the shares
under the Security Agreement pursuant to Rule 144, and unspecified damages for
failure to honor conversion notices. In addition, the note holders are seeking
an order directing us to cause the registration statement to be declared
effective. The note holders have also alleged fraud in connection with the sale
of the convertible notes.
15
We are presently seeking to obtain alternative financing to repay the
convertible notes and to work out an arrangement with the note holders for
resolution of these matters. If we are not able to obtain alternative financing
and the note holders are successful in their action to collect on the notes, we
would be unable to make payment in full on the notes and would consider all
strategic alternatives available to us, possibly including a bankruptcy,
insolvency, reorganization or liquidation proceeding or other proceeding under
bankruptcy law or laws providing for relief of debtors. It is also possible that
one of these types of proceedings could be instituted against us. In any event,
the convertible notes must be repaid or refinanced by the original maturity date
of January 1, 2003.
Management has taken steps to revise our operating and financial requirements to
accommodate our available cash flow, including the temporary suspension of
management and certain employee salaries. As a result of these efforts,
management believes funds on hand, cash flow from operations and additional
issuance of common equity will enable us to meet our liquidity needs for at
least the foreseeable future. We need to raise additional cash, however, in
order to satisfy our proposed business plan, to meet obligations, and expand our
operations. Management is presently investigating potential financing
transactions and acquisitions that management believes can provide additional
cash for our operations and be profitable long-term. Management also intends to
attempt to raise funds through private sales of our common stock. Although
management believes that these efforts will enable us to meet our liquidity
needs in the future, there can be no assurance that these efforts will be
successful. In addition any adverse outcome under either of the legal actions
pending against the Company could result in a material adverse effect on the
Company financial position and its ability to fund obligations and operations
and to raise additional capital.
GOING CONCERN CONSIDERATION
We have continued losses from operations, negative cash flow and liquidity
problems. These conditions raise substantial doubt about our ability to continue
as a going concern. The accompanying financial statements do not include any
adjustments relating to the recoverability of reported assets or liabilities
should we be unable to continue as a going concern.
We have been able to continue based upon loans from institutional investors and
our subsidiaries, and the financial support of certain of our stockholders.
Management believes that actions presently being taken to revise our operating
and financial requirements provide the opportunity for us to continue as a going
concern. Management is presently investigating potential financing transactions
and acquisitions that management believes can provide additional cash for the
operations and be profitable in both the short and long-term. Management also
intends to attempt to raise funds through private sales of our common stock.
Although management believes that these efforts will enable us to meet our
liquidity needs in the future, there can be no assurance that these efforts will
be successful.
16
RISK FACTORS
RISKS ASSOCIATED WITH OUR BUSINESS
IF WE ARE UNABLE TO IDENTIFY AND PURCHASE INTERESTS IN COMPANIES THAT FIT WITHIN
OUR BUSINESS PLAN, OUR BUSINESS STRATEGY WILL NOT BE SUCCESSFUL. Our success
depends upon the ability of our managers to identify and close the acquisition
of equity interests in companies that compliment our overall strategy and
business plan. No assurances can be given that we will be able to identify
complimentary companies that are interested in completing transactions with us.
Even if such prospects are successfully identified, any number of factors could
preclude us from successfully completing the transactions, including the failure
to agree on terms, incompatibility of management teams, competitive bids from
other companies, lack of capital to complete the transactions or unwillingness
on the part of the prospects. If we cannot acquire substantial equity interests
in attractive companies that fit within our business strategy, we may not be
successful.
WE FACE SUBSTANTIAL COMPETITION AND, IN MANY CASES, BETTER-FINANCED COMPETITORS,
WHICH MAY RESULT IN OUR INABILITY TO CLOSE ACQUISITIONS. The business of
developing, acquiring and capitalizing companies is highly competitive. Our
competitors include existing holding companies that have a longer operating
history, existing portfolios of professional employer organizations,
substantially greater financial resources and an established market for their
publicly traded securities. We also face competition from venture capital
companies, investment banks, Internet holding companies and large capitalization
industrial companies with active investment and venture capital divisions. There
is no assurance that we will be successful in finding suitable portfolio
companies or that such companies will want to be acquired by us. If we cannot
acquire suitable portfolio companies, we will not be able to implement our
business plan.
BECAUSE WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FURTHER LOSSES, WE MAY
BE UNABLE TO CONTINUE AS A GOING CONCERN. Historically, we have incurred losses
from operations, and accumulated a deficit of $37,840,807 through December 31,
2001. Our stockholders' deficit at December 31, 2001 was ($4,952,242). We
incurred losses of $14,599,929 and $21,146,313 for the years ended December 31,
2001 and 2000, respectively. Our independent accountants have included an
explanatory paragraph in their report on our financial statements stating that
our financial statements have been prepared assuming that we will continue as a
going concern, but a substantial doubt exists as to our ability to do so because
of these recurring losses from operations and our net capital deficiency.
WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND WILL BE
REQUIRED TO CHANGE THE WAY WE OPERATE IF WE ARE DEEMED TO BE AN INVESTMENT
COMPANY AT SOME POINT IN THE FUTURE. We may incur significant costs to avoid
investment company status and may suffer other adverse consequences if we are
deemed to be an investment company under the Investment Company Act of 1940 (the
"1940 Act"). Some of our equity investments in other businesses may constitute
investment securities under the 1940 Act. A company may be deemed to be an
investment company if it owns investment securities with a value exceeding 40%
of its total assets, subject to certain exclusions. Investment companies are
subject to registration under, and compliance with, the 1940 Act unless a
particular exclusion or SEC safe harbor applies. If we were to be deemed an
investment company, we would become subject to the requirements of the 1940 Act.
As a consequence, we would be prohibited from engaging in business or issuing
our securities as we have in the past. We might also be subject to civil and
criminal penalties for noncompliance. In addition, certain of our contracts
might be voidable, and a court-appointed receiver could take control of us and
liquidate our business.
Although management anticipates that our investment securities will comprise
less than 40% of our total assets, fluctuations in the value of these securities
or of our other assets may cause this limit to be exceeded. Unless an exclusion
or safe harbor was available to us, we would have to attempt to reduce our
investment securities as a percentage of our total assets. This reduction can be
attempted in a number of ways, including the disposition of investment
securities and the acquisition of non-investment security assets. If we were
required to sell investment securities, we may have to sell some sooner than we
otherwise would. These sales may be at depressed prices and we may never realize
the anticipated benefits from, or may incur losses on, these investments. We may
not be able to sell some investments due to contractual or legal restrictions or
the inability to locate a suitable buyer. Moreover, we may incur tax liabilities
when we sell assets. We may also be unable to purchase additional investment
securities that may be important to our operating strategy. If we are required
or decide to acquire non-investment security assets, we may not be able to
identify and acquire suitable assets and businesses.
17
OUR WORKING CAPITAL REQUIREMENTS MAY CAUSE US TO SEEK ADDITIONAL FINANCING IN
THE NEAR-TERM, AND, IF SUCH FINANCING IS UNAVAILABLE, WE MAY NOT BE ABLE TO
IMPLEMENT OUR BUSINESS PLAN. Our working capital requirements and the cash flow
provided by future operating activities, if any, will vary greatly from quarter
to quarter, depending on the volume of business during the period and payment
terms with our customers. There can be no assurance that adequate levels of
additional financing, whether through additional equity financing, debt
financing or other sources, will be available, or will be available when needed
or on terms favorable to us. Additional financings could result in significant
dilution to our existing stockholders or the issuance of securities with rights
superior to our current outstanding securities. If adequate capital is not
available or is not available on acceptable terms, we may be unable to fully
implement our business plan, develop or enhance our services, take advantage of
future opportunities or respond to competitive pressures on a timely basis, if
at all. If we are unable to obtain additional financing as needed, we may be
required to reduce the scope of our operations or our anticipated expansion.
OUR STRATEGY OF EXPANDING OUR BUSINESS THROUGH ACQUISITIONS OF OTHER BUSINESSES
AND TECHNOLOGIES PRESENTS SPECIAL RISKS. We intend to continue to expand through
the acquisition of businesses, technologies, products and services from other
companies. Acquisitions involve a number of special problems, which we may not
be capable of handling. Those problems include, but are not limited to, the
following:
o difficulty integrating acquired technologies, operations and personnel
with our existing business;
o diversion of management's attention in connection with both negotiating
the acquisitions and integrating the businesses and assets;
o potential issuance of securities in connection with the acquisition, which
securities dilute the current holders of our outstanding securities;
o strain on managerial and operational resources as management tries to
oversee larger operations;
o exposure of unforeseen liabilities of acquired companies; and
o the requirement to record additional future operating costs for the
amortization of goodwill and other intangible assets, which amounts could be
significant.
ITEM 7. FINANCIAL STATEMENTS
Our audited Consolidated Financial Statements as of and for the years ended
December 31, 2000 and 2001 are included on pages F-1 through F-21 of this
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and position of our executive officers and directors are as
follows:
NAME . . . . . . AGE POSITION
---------------- --- -------------------------------------------------
Elorian Landers. 53 Chief Executive Officer and Director
Thomas McCrimmon 58 Director
Clay Border. . . 36 Chief Development Officer, Secretary and Director
Our directors serve until the next annual meeting of our shareholders and until
their respective successors are elected and qualified. Our officers serve at the
pleasure of our board of directors.
ELORIAN LANDERS has served as our Chief Executive Officer and as a director of
the company since December 1999. He has also served as a consultant to and
director of GeeWhiz since February 1996, and as the President of GeeWhiz since
October 1998. Mr. Landers holds a B.A. in Advertising from Art Center College in
Pasadena, California. He also attended Texas A&M University, where he studied
architecture.
THOMAS MCCRIMMON has served as a director of the company since 1987. Mr.
McCrimmon was involved in merger and acquisition work, SEC and management
consulting to private and public companies from 1976 through 1983 as the founder
and owner of Bay Business Consultants, a business brokerage and consulting firm.
Mr. McCrimmon has been the President and founder of Florida Hi-Tech Capital,
Inc., Tampa, Florida, a privately held financial management consulting firm
since 1984. From 1988 to 1990, Mr. McCrimmon was president of Paragon
Acquisitions Group, Inc., a public company which acquired Sun Up Foods, Inc.,
Benton, Kentucky, a processor of citrus juice concentrate for resale to dairies
nationwide. Mr. McCrimmon was President of Baystar Capital, Inc., a public shell
company which merged with American Clinical Laboratories, Tampa, Florida, from
1988 to 1991. Mr. McCrimmon also serves as the President and a director of
Global Assets & Services, Inc., a public shell company.
CLAY BORDER has served as our Chief Development Officer and Secretary since July
2001. He became one of our directors on October 3, 2001. From October 1999 until
joining IVG, Mr. Border was Vice President of Business Development for EC
Outlook, a developer of business to business software. From 1993 until early
2000, Mr. Border was employed by UBS Paine Webber, where he served as a First
Vice President. While at Paine Webber, Mr. Border served as an investment
advisor to corporations and high net worth individuals. Mr. Border received his
Bachelors of Business Administration from the University of Texas at Austin in
1989.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, none of the required parties are delinquent in their
16(a) filings.
19
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the summary of compensation paid to our named
executive officers and directors in fiscal years 2000 through 2001. The "named
executive officers" are our chief executive officer, regardless of compensation,
and our only other executive officer who was serving as an executive officer at
December 31, 2001 and whose annual salary and bonus exceeded $100,000.
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
--------------- -------------------
SECURITIES
UNDERLYING ($)
NAME AND PRINCIPAL POSITION YEAR SALARY Bonus OPTIONS (#)
--------------------------- ---- ------ ----- ---------------
Elorian Landers,
Chief Executive Officer
and Director 2001 $220,000 25,000 175,000
2000 $210,000 - -
Eden Kim,
Chairman of the Board
and Secretary (1) 2001 $105,000 - 18,750
2000 $200,000 - -
Tom McCrimmon, Director 2001 - 25,000 231,250
2000 - -
Clay Border, Secretary
and Director 2001 $ 87,500 25,000 206,250
2000 - - -
EMPLOYMENT AGREEMENTS
On October 8, 2001, we entered into employment agreements with Elorian Landers,
our Chief Executive Officer, and Clay Border, our Chief Development Officer. Mr.
Lander's employment agreement provides for an annual base salary of $250,000 and
Mr. Border's employment agreement provides for an annual base salary of
$150,000. Each of the agreements also grants each of the employees a stock
option giving them each the right to purchase up to 150,000 shares of our common
stock at an exercise price of $.56 per share. The stock options expire on
October 8, 2006. The option exercise price was 70% of the closing price of the
common stock on the grant date, and was determined by the Board to be equal to
fair market value because the common stock underlying the option is subject to
transfer restrictions under applicable securities laws. One half of the stock
options vested on the date of grant and the remaining 75,000 shares will vest
over one year at a rate of 18,750 shares per quarter. The employment agreements
also provide for reimbursement of certain expenses of each of the employees,
including a car allowance of $800 per month, payment of cellular phone service
and a health club membership.
In addition, pursuant to their respective agreements, we may terminate Mr.
Landers and Mr. Border at any time for "cause," as defined in the agreement. In
the event Mr. Landers or Mr. Border is terminated "without cause" or leaves his
employment with us for "good reason," each as defined in the agreement, then
upon termination he will receive a severance payment equal to his salary for the
remainder of his term of employment. If Mr. Landers or Mr. Border is terminated
without cause or with good reason within one year of a "change of control," as
defined in the agreement, then upon such termination he will receive a severance
package equal to two times the sum of his salary at the time of his termination
plus any annual bonus he would have received for such period.
________________________________
(1) Mr. Kim resigned from these positions in July 2001
(2) Mr. Border joined the Company June 1, 2001
20
2000 OMNIBUS SECURITIES PLAN
Our board of directors adopted our 2000 Omnibus Securities Plan in October 2000.
Under the plan, our employees, directors and consultants may be awarded options
to purchase our common stock. We may also make awards of restricted common
stock and grant stock appreciation rights under the plan. The maximum number of
shares of common stock reserved and available for issuance under the plan is
500,000, subject to certain adjustments. We believe that the award of options,
restricted stock and stock appreciation rights will provide incentive to key
personnel as well as offer an attractive benefit for the new managers that we
must recruit. To date, 500,000 shares of our common stock have been issued under
the plan. The plan will be presented to stockholders for approval at our next
annual meeting of stockholders. Awards that are made under the plan prior to it
being approved by our stockholders are subject to such stockholder approval.
2002 OMNIBUS SECURITIES PLAN
Our board of directors adopted our 2002 Omnibus Securities Plan in March 2002.
Under the plan, our employees, directors and consultants may be awarded options
to purchase our common stock. We may also make awards of restricted common
stock and grant stock appreciation rights under the plan. The maximum number of
shares of common stock reserved and available for issuance under the plan during
the first plan year is 500,000, subject to certain adjustments, and will
increase to ten percent (10%) of the outstanding common stock in subsequent
years. We believe that the award of options, restricted stock and stock
appreciation rights will provide incentive to key personnel as well as offer an
attractive benefit for the new managers that we must recruit. As of March 31,
2002, no shares of stock or options have been granted under the plan.
OPTION GRANTS
The following table sets forth certain information concerning individual grants
of stock options made during the last completed fiscal year to each of the named
executive officers.
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE
GRANTED FISCAL YEAR PRICE EXPIRATION DATE
----------- -------------- --------- ---------------
NAME
----
Elorian Landers 156,250 24% $ .56 (1)
Clay Border 206,250 35% .56 (1)
Tom McCrimmon 231,250 39% .56 (1)
21
OPTION EXERCISES AND OPTION VALUES
The following table sets forth certain information concerning the exercise of
options during the last completed fiscal year by each of the named executive
officers and the fiscal year-end value of such named executive officers'
unexercised options on an aggregated basis.
NUMBER OF VALUE OF
SECURITIES UNEXERCISED IN-
UNDERLYING THE-MONEY
UNEXERCISED OPTIONS AT YEAR-
OPTIONS END ($)(1)
AT YEAR-END (#) ----------------
----------------
SHARES VALUE
ACQUIRED ON REALIZED UNEXERCISABLE/ UNEXERCISABLE/
NAME EXERCISE (#) ($) EXERCISABLE EXERCISABLE
---- ------------ -------- ------------------ -------------------
Elorian Landers 85,250 $ 20,460 56,250/119,750 $ 47,250/83,125
Clay Border 85,250 $ 20,460 56,250/168,750 $ 47,250/118,925
Tom McCrimmon 85,250 $ 20,460 56,250/197,750 $ 47,250/135,625
(1) The value of unexercised options is determined by calculating the difference
between the fair market value of the securities underlying the options at fiscal
year end and the exercise price of the options.
COMPENSATION OF DIRECTORS
Other than being reimbursed for the expenses incurred in attending meetings of
the board of directors, members of our board of directors do not receive cash
compensation for their services as a director. On July 14, 2000, we granted each
of our outside directors an option to purchase 15,000 shares of our common stock
at an exercise price of $15.00 per share. On the date of grant, 12,500 shares
vested; the remaining shares vest at the rate of 25,000 shares per quarter over
three years. Each vested portion of options expires three years after the date
of vesting. An outside director will forfeit any unvested options upon his
ceasing to serve as a director. As of October 10, 2001, 16,250 shares were
vested under these options and 20,000 were forfeited because two of the outside
directors granted options ceased to serve as directors of the Company.
On February 5, 2000, we granted Mr. McCrimmon an option to purchase 75,000
shares of our common stock at an exercise price of $5.00 per share. Twenty-five
percent of the option vested on the date of grant, and 25% vests each six months
thereafter. The option expires on August 5, 2004. We also paid Mr. McCrimmon
$40,000 for consulting services he provided to the company in 2000. On October
8, 2001, we entered into a consulting agreement with Mr. McCrimmon, in which he
agreed to provide us with consulting services in connection with the
identification, analysis and evaluation of possible merger and acquisition
opportunities. In consideration of Mr. McCrimmon's services, we granted him the
option to purchase up to 150,000 shares of our common stock at an exercise price
of $.56 per share. 75,000 shares vested on the date of grant and the remaining
75,000 vest over a one year period at a rate of 18,750 shares per quarter. The
option exercise price was 70% of the closing price of the common stock on the
grant date, and was determined by the Board to be fair market value because the
common stock underlying the option is subject to transfer restrictions under
applicable securities laws. The option expires on October 8, 2006.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2002, for the following: (1) each
person who is known by us to own beneficially five percent or more of our
outstanding common stock, (2) each of our directors and officers who
beneficially own such shares and (3) our officers and directors as a group.
22
SHARES OF COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED
--------------------------- -------------------------
NUMBER (1) PERCENT (2)
---------- -----------
Elorian Landers (3) 796,924 20.2%
Eden Kim 460,282 14.9%
Clay Border 362,500 2.5%
Thomas L. McCrimmon (4) 430,164 8.6%
Executive officers and directors
as a group (3 persons) 1,589,588 31.3%
Alpha Capital Aktiengesellschaft 267,139 7.9%
AMRO International, S.A. 222,616 6.7%
Markham Holdings Ltd 311,662 9.2%
Stonestreet Limited Partnership 178,092 5.5%
(1) Pursuant to Rule 13d-3 under the Exchange Act of 1934, as amended, a
person has beneficial ownership of any securities as to which such person,
directly or indirectly, through any contract, arrangement, undertaking,
relationship or otherwise, has or shares voting power and/or investment power as
to which such person has the right to acquire such voting and/or investment
power within 60 days. Percentage of beneficial ownership as to any person as of
a particular date is calculated by dividing the number of shares beneficially
owned by such person by the sum of the number of shares outstanding as of such
date and the number of unissued shares as to which such person has the right to
acquire voting and/or investment control within 60 days. The number of shares
shown includes outstanding shares owned as of March 31, 2002, by the person
indicated and shares underlying warrants and/or options owned by such person on
March 31, 2002, that were exercisable within 60 days of that date.
(2) Based on 4,699,679BALBrian A. Lebrecht Update to as of 3/31/02. shares
of common stock issued and outstanding as of the close of business on March 31,
2002.
(3) Includes 118,750 shares subject to options exercisable within 60 days of
March 31, 2002.
(4) Includes 193,750 shares subject to options exercisable within 60 days of
March 31, 2002. Mr. McCrimmon's address is 3816 West Linebaugh Avenue, Suite
200, Tampa, Florida 33624.
(5) Includes 168,750 shares subject to options exercisable within 60 days of
March 31, 2002.
(6) Includes 263,389 shares of common stock issuable on conversion of
convertible notes at an assumed conversion price of $1.13 per share, and 3,750
shares of common stock issuable on the exercise of immediately exercisable
warrants. Alpha Capital Aktiengesellschaft's address is Pradafant 7, 9490
Furstentums, Vaduz, Lichtenstein.
(7) Includes 219,491 shares of common stock issuable on conversion of
convertible notes at an assumed conversion price of $1.13 per share, and 3,125
shares of common stock issuable on the exercise of immediately exercisable
warrants. Amro International's address is care of Ultra Finanz,
Grossmuensterplatz 6, Zurich, Switzerland CH8022.
(8) Includes 307,287 shares of common stock issuable on conversion of
convertible notes at an assumed conversion price of $1.13 per share, and 4,375
shares of common stock issuable on the exercise of immediately exercisable
warrants. Markham Holdings Ltd.'s address is care of Mr. David Hassan, 50 Town
Range, P.O. Box 472, Gibraltar.
(9) Includes 175,592 shares of common stock issuable on conversion of
convertible notes at an assumed conversion price of $1.13 per share, and 2,500
shares of common stock issuable on the exercise of immediately exercisable
warrants. Stonestreet Limited Partnership's address is care of Carol
Harrop/Michael Finkelstein, 260 Town Center Blvd., Suite 201, Markham, ON, L3R
8H8.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 28, 2000, we acquired approximately 88.5% of the outstanding common
stock of Swan Magnetics, Inc. Eden Kim, the beneficial owner of 17.3% of our
common stock and, until July 1, 2001, our Chairman of the Board and Secretary,
is the Chairman of the Board and Chief Executive Officer of Swan Magnetics.
Prior to the acquisition of our majority interest in Swan, we issued a secured
convertible promissory note in the original principal amount of $1,000,000 to
Swan Magnetics in connection with a loan by Swan Magnetics to us. Following the
acquisition of our majority interest in Swan Magnetics, we borrowed additional
funds from Swan Magnetics on several occasions, some of which were evidenced by
promissory notes. These borrowings are secured by all of the capital stock and
holdings of the company in any other entity, collateral and equipment, accounts
receivable and other intangibles and intellectual property of the company as
evidenced by a Security Agreement, dated July 18, 2000, between Swan Magnetics
and the company. In August 2001, all prior notes and advances from Swan
Magnetics, and an additional loan of $150,000, were memorialized in a new note
in the principal amount of $2,843,017.33. This note is due on August 1, 2003,
bears interest at 8% per year, and is subject to the July 18, 2000 Security
Agreement. Up to $1,000,000 of the principal on the note is convertible into our
common stock at a price of $2.00 per share.
23
In August 2001, we entered into a Voting Agreement with Swan Magnetics, pursuant
to which we agreed to amend the bylaws of Swan to provide:
o for a four person board of directors,
o that the affirmative vote of three directors is required to approve any
board action,
o that a 95% shareholder vote or a board action is required to amend the
bylaws, and
o that the CEO could take certain actions without board approval.
We further agreed to vote all shares of stock of Swan Magnetics we own in favor
of two directors nominated by us, the CEO of Swan Magnetics, and one person
nominated by the CEO of Swan Magnetics. We agreed to cause our nominees to the
Swan board to approve an employment agreement with Eden Kim as CEO of Swan
Magnetics.
In August 2001, we also entered into a Settlement and General Release Agreement
with Swan Magnetics, pursuant to which we agreed to enter into the note and
Voting Agreement described above. We also agreed to a mutual release of claims
with Swan Magnetics. Until February 2002, we agreed to permit any former Swan
Magnetics shareholder who received IVG common stock or warrants in the
transactions through which IVG acquired its interest in Swan Magnetics to
exchange his IVG shares and warrants for Swan shares. We also agreed to use our
best efforts to register the common stock underlying the warrants issued to the
former Swan Magnetics shareholders in the above-referenced transactions. On
October 23, 2001, we received requests on behalf of eleven former Swan Magnetics
shareholders to exchange their IVG shares and warrants for Swan Magnetics shares
held by us. We requested further documentation from the requesting parties
(including evidence of their authority to act for the shareholders listed in the
request letters and surrender of their IVG stock certificates and warrant
certificates). If all of the shareholders listed in the request letters exchange
all of their IVG shares and warrants, our outstanding shares would be reduced by
approximately 6.2 million shares, and our ownership of Swan Magnetics common
stock would be reduced from approximately 88.5% to approximately 33.3%.
A dispute has arisen between the Company and Eden Kim arising out of Kim's
refusal to produce adequate financial statements, books, and records of Swan to
the Company and its auditors. The Company believes these actions are a breach
of the Voting Agreement and the Settlement Agreement and General Release
Agreement, and as a result removed all of the Directors and Officers of Swan in
February 2002, replacing them with Elorian Landers, Clay Border, and Thomas L.
McCrimmon. As of the date of this filing, Mr. Kim has refused to acknowledge
his removal as a Swan Director and Officers, and has refused to relinquish any
of Swan's books and records.
We paid Thomas McCrimmon, one of our outside directors, $40,000 for consulting
services provided to the company in 2000.
During 2000, Elorian Landers, our Chief Executive Officer and a director,
advanced us an aggregate of $160,000, of which $93,000 has been repaid to date.
These advances bear interest at six percent per year.
In September 2001, Mr. Landers and Mr. McCrimmon pledged 150,000 and 10,900
shares of our common stock, respectively, to a collateral agent for investors
that purchased an aggregate of $1.1 million of our convertible notes due 2003.
These stock pledges, and similar pledges of an aggregate of 1.785 million shares
by four other shareholders, secure our obligations under financing agreements
with the investors. See "Management's Discussion and Analysis - Subsequent
Events -- Financing." In consideration of these stock pledges, which led the
investors to waive an event of default and penalties under the notes, we entered
into a Common Stock Issuance Agreement with each of these shareholders. Under
this agreement, the shareholders agreed to pledge their shares as collateral for
the notes, and we agreed to issue to each shareholder a number of shares of our
common stock equal to 46% of the shares pledged by such shareholder. We also
agreed to issue shares to each shareholder in the future equal to the number of
his pledged shares that are foreclosed upon by the investors, if any.
24
On October 8, 2001, we entered into employment agreements with Elorian Landers
and Clay Border, see "Employment Agreements" and a consulting agreement with Tom
McCrimmon, one of our directors. See "Compensation of Directors."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--- --------
EXHIBIT NO. TITLE
----------- -----
2.1(1) Agreement and Plan of Reorganization between GeeWhizUSA.com,
Inc. and the company
2.2(2) Agreement and Plan of Exchange between Swan Magnetics, Inc. and
the company
2.3(3 Agreement and Plan of Exchange, dated June 28, 2000, between
Swan Magnetics, Inc. and the company
2.4(4) Amended and Restated Agreement and Plan of Exchange, dated June 28,
2000, among Swan Magnetics, Inc., certain stockholders of Swan
Magnetics, Inc. and the company
2.5(5) Form of Warrant Certificate issued to former stockholders of
Swan Magnetics, Inc.
2.6(5) Reorganization Agreement and Plan of Exchange, dated July 15,2000,
among CyberCoupons.com, Inc., certain stockholders of
CyberCoupons.com, Inc. and the company
2.7(6) Amended and Restated Asset Purchase Agreement and Agreement and of
Merger, dated March 31, 2001, among SES Acquisition 2001, Inc.,
Cheyenne Management Company, Inc., SES-Corp., Inc., certain other
persons and the company
2.8(7) Agreement, dated as of August 8, 2001 among the company, Dennis
Lambka and Ronald Bray
2.9(11) Asset and Stock Purchase Agreement, dated October 24, 2001, by and
among GMS Acquisition LLC, Group Management Services, Inc.,
E. Michael Kahoe, James Kahoe and the company
3.1(5) Certificate of Incorporation
3.2(5) Bylaws
4.1(5) Specimen Certificate of Common Stock
4.2(8) 2000 Omnibus Securities Plan
10.1(5) Office Lease between G.P.I. Development, Ltd. and the company
10.2(5) Lease Agreement, dated December 2, 1997, between Southwest Beltway
Limited Partnership and Fyrglas, Inc.
10.3(5) Inventory Credit Line Agreement, effective as of January 22, 2001,
between Swan Magnetics, Inc. and the company
10.4(5) Security Agreement, dated July 18, 2000, between Swan
Magnetics, Inc. and the company
10.5(5) Secured Convertible Promissory Note issued by the company to Swan
Magnetics, Inc. on July 18, 2000
10.6(5) Secured Promissory Note issued by the company to Swan
Magnetics, Inc. on October 31, 2000
10.7(5) Secured Promissory Note issued by the company to Swan
Magnetics, Inc. on December 12, 2000
10.8(5) Subscription Agreement, dated February 2, 2001, among AlphaCapital
Aktiengesellschaft, AMRO International, S.A., MarkhamHoldings Ltd.,
Stonestreet Limited Partnership and the company
10.9(5) Form of Convertible Note issued by the company to Alpha Capital
Aktiengesellschaft, AMRO International, S.A., Markham Holdings Ltd.
and Stonestreet Limited Partnership on February 2, 2001
25
10.10(5) Form of Common Stock Purchase Warrant issued by the company toAlpha
Capital Aktiengesellschaft, AMRO International, S.A., Markham
Holdings Ltd. and Stonestreet Limited Partnership on
February 2, 2001
10.11(5) Research and Development Agreement, dated November 15, 2000,
between iTVr, Inc. and Swan Magnetics, Inc.
10.12(5) Promissory Note issued by the company to SES-Corp., Inc. on
March 30, 2001
10.13(10) Warrant, dated April 30, 2001, issued by the company to Union
Atlantic Capital, L.C.
10.14(9) Secured Promissory Note issued by the company to Swan
Magnetics, Inc. on August 1, 2001
10.15(9) Voting Agreement, dated August 1, 2000, between the company
and Swan Magnetics, Inc.
10.16(9) Settlement Agreement and General Release, dated August 1, 2000,
between the company and Swan Magnetics, Inc.
10.17(9) Security Agreement, dated September 10, 2001, among Alpha Capital
Aktiengesellschaft, AMRO International, S.A., Markham Holdings,
Ltd., Stonestreet Limited Partnership, the Collateral Agent
(as defined therein), the Shareholders (as defined therein) and
the company
10.18(9) Common Stock Issuance Agreement, dated September 10, 2001, among
the company and the Shareholders (as defined therein)
10.19(11) Employment Agreement, effective as of October 8, 2001, by and
between Elorian Landers and the company
10.20(11) Employment Agreement, effective as of October 8, 2001, by and
between Clay Border and the company
10.21(11) Consulting Agreement, effective as of October 8, 2001, by and
between Thomas L. McCrimmon and the company
21.1(11) Subsidiaries
23.1(11) Consent of Wrinkle, Gardner and Company, P.C.
----------------
(1) Incorporated by reference from the company's Current Report on Form
8-Kdated April 14, 2000, as filed with the SEC on April 17, 2000.
(2) Incorporated by reference from the company's Current Report on Form 8-K
dated July 10, 2000, as filed with the SEC on July 11, 2000.
(3) Incorporated by reference from the company's Current Report on Form
8-K/A dated July 17, 2000, as filed with the SEC on July 18, 2000.
(4) Incorporated by reference from the company's Current Report on Form 8-K
dated September 28, 2000, as filed with the SEC on October 13, 2000.
(5) Incorporated by reference from the company's Annual Report on Form
10-KSB, as filed with the SEC on April 18, 2001.
(6) Incorporated by reference from the company's Current Report on Form 8-K
dated April 1, 2001, as filed with the SEC on April 16, 2001.
(7) Incorporated by reference from the company's Current Report on Form 8-K
dated August 30, 2001.
(8) Incorporated by reference from the company's Registration Statement on
Form S-8, SEC File No. 333-48792, as filed with the SEC on
October 27, 2000.
(9) Incorporated by reference from the company's Registration Statement on
Form SB-2/A dated October 10, 2001.
(10) Incorporated by reference from the company's Registration Statement on
Form SB-2 dated May 2, 2001.
(11) Filed herewith.
26
(b) Reports on Form 8-K
--- ------------------------
On November 1, 2001, the Company filed an Amended Current Report on Form 8-K/A,
which amended an 8-K filed on October 13, 2000 and further amended on May 9,
2001. The purpose of the amendment was to file historical financial statements
of Swan and unaudited pro forma condensed financial data of the Company, which
give effect to the Swan acquisition.
On August 30, 2001, the Company filed a Current Report on Form 8-K describing
the disposition of its interest in SES-Corp., Inc.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GROUP MANAGEMENT CORP.
Date: April 8, 2002 By: /s/ Elorian Landers
----------------------------
Elorian Landers, Chief Executive
Officer and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Elorian Landers
-----------------------------------------------------------
Elorian Landers, Chief Executive Officer and Director
(Principal Executive Officer and Principal Financial
Officer and Principal Accounting Officer)
/s/ Thomas McCrimmon
-------------------------------
Thomas McCrimmon, Director
/s/ Clay Border
---------------------------------------------------------
Clay Border, Chief Development Officer and Director
27
FINANCIAL STATEMENTS
GROUP MANAGEMENT CORP.
INDEX TO FINANCIAL STATEMENTS
For the years ended December 31, 2001 and 2000
INDEX TO FINANCIAL STATEMENTS F-1
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-21
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Group Management Corp.
We have audited the accompanying consolidated balance sheet of Group Management
Corp (a Delaware corporation) as of December 31, 2001, and the related
consolidated statements of operations, cash flows, and changes in stockholders'
equity for the two year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with U. S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2001 financial statements referred to above present fairly,
in all material respects, the financial position of Group Management Corp. as of
December 31, 2001, and the results of its operations and its cash flows for the
two years then ended in conformity with U. S. generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 10 to
the financial statements, conditions exist which raise substantial doubt about
the Company's ability to continue as a going concern unless it is able to
generate sufficient cash flows to meet its obligations and sustain its
operations. Those conditions raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
April 10, 2002
Friendswood, Texas
F-2
GROUP MANAGEMENT CORP.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
ASSETS
CURRENT ASSETS:
Cash $ 97,911
Accounts receivable - net 6,545
Inventory 89,186
Due from shareholders 46,000
-------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 239,642
PROPERTY AND EQUIPMENT - NET 411,990
OTHER ASSETS - NET 292,738
--------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 944,370
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . $ 865,619
Notes payable and capital lease obligations 5,030,993
-------------
Total current liabilities 5,896,612
STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT:
Common Stock, par value $.002, 150,000,000 shares authorized, 3,553,258
issued and outstanding
7,107
Additional paid-in capital 32,881,458
Accumulated deficit (37,840,807)
-------------
Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . . (4,952,242)
------------
$944,370
========
See accompanying summary of accounting policies and notes to financial statements.
F-3
GROUP MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------- -------------
REVENUES:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 574,826 $ 396,300
COST OF GOODS SOLD 356,071 298,742
------------- -------------
GROSS PROFIT 218,755 97,558
OPERATING EXPENSES:
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,642,133 5,443,807
Purchased in-process technology . . . . . . . . . . . . . . . . . . . . . . . . . - 18,039,591
Depreciation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,679 28,271
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,872 58,716
----------- -------------
14,818,684 23,570,385
------------- -------------
OTHER INCOME:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 108,789
Gain on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8,000
----------- -------------
- 116,789
MINORITY INTEREST - (2,209,725)
------------- -------------
NET LOSS $(14,699,929) $(21,146,313)
============= =============
Basic and fully diluted net (loss) per share $ (.25) $ (.57)
Weighted average shares outstanding pre-split on December 17, 2001 (59,293,697) (37,705,300)
============= =============
See accompanying summary of accounting policies and notes to financial statements.
F-4
GROUP MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Stock
-------------
Number of Additional Paid in Accumulated
Shares Amount Capital Deficit Total
----------- ------- ------------------- ------------ -----------
Balance,
December 31, 1999 30,537,402 $ 3,054 $ 1,969,035 $ (2,094,565) $ (122,476)
Shares issued for services 2,414,200 241 3,005,992 - 3,006,233
Shares issued in acquisitions 20,000,000 2,000 21,185,859 - 21,187,859
Shares exchanged for warrants (9,091,855) (909) - - (909)
Shares issued for cash 213,450 21 434,079 - 434,110
Warrants issued for services - - 71,860 - 71,860
Net loss - - - (21,146,313) (21,146,313)
Balance,
December 31, 2000 44,073,197 4,407 26,666,825 (23,240,878) 3,430,354
Shares issued for services 21,603,100 43,206 5,322,966 5,366,172
Shares issued in acquisitions,
net of 10,000,000 cancelled
shares 4,320,862 8,642 5,372,826 5,381,468
Shares issued for cash 214,900 430 43,468 43,898
Beneficial interest on
convertible debt 468,258 468,258
Net loss (14,599,929) (14,599,929)
Effect of unconsolidated
subsidiary (4,992,885) (4,992,885)
Effect of 20 to 1
reverse stock split (66,658,801) (49,578) (49,578)
------------ -------- -------------- ------------ ------------
Balance,
December 31, 2001 3,553,258 $ 7,107 $ 32,881,458 $ (37,840,807) $(4,952,242)
============ ============== ================ =============== =============
F-5
GROUP MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (14,599,929) $(21,146,313)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2,209,725)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,879 28,271
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,800 12,650
Purchased in process technology. . . . . . . . . . . . . . . . . . . . . . . . . - 18,039,591
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,698,062 3,078,093
Beneficial interest on convertible debt. . . . . . . . . . . . . . . . . . . . . 468,258 -
Changes in operating assets & liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,489 (12,889)
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,247) 1,649
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,876) (217,467)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . 485,168 1,334,132
------------------ -------------
Net cash (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . (2,847,396) (1,092,008)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired through purchase of subsidiary . . . . . . . . . . . . . . . . . . . - 5,404,338
Purchase of equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (490,328) (13,266)
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,200 (148,200)
------------------ -------------
Net cash provided by (used in ) investing activities. . . . . . . . . . . . . . . . (388,128) 5,242,872
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,898 434,100
Proceeds from notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,127,890 49,785
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (126,793) (254,045)
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,500,000)
------------------ -------------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . 3,044,995 (1,270,160)
------------------ -------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . (190,529) 2,880,704
Cash and cash equivalents - beginning of year . . . . . . . . . . . . . . . . . . . 288,440 6,006
------------------ -------------
Cash and cash equivalents - end of year . . . . . . . . . . . . . . . . . . . . . . $ 97,911 $ 2,886,710
================== =============
Supplemental cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 3,562
================== =============
See accompanying summary of accounting policies and notes to financial statements.
F-6
GROUP MANAGEMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - ORGANIZATION AND PRESENTATION
On March 9, 2001, IVG Corp changed its name from Internet Venture Group, Inc. to
IVG Corp. and its state of incorporation from Florida to Delaware. The name
change and reincorporation were accomplished by merging Internet Venture Group,
Inc., a Florida corporation, into IVG Corp., a Delaware corporation formed for
the purpose of these transactions. Each issued and outstanding share of common
stock of Internet Venture Group, Inc. was automatically converted in the merger
into one share of common stock of IVG Corp. The Company was incorporated in the
state of Florida on March 19, 1987 under the name Sci Tech Ventures, Inc. and
changed its name to Strategic Ventures, Inc. in May 1991. On October 18, 1999,
Strategic Ventures, Inc. changed its name to Internet Venture Group, Inc.
Effective December 31, 1999, the Company acquired all issued and outstanding
shares of GeeWhiz.com, Inc. (a Texas Corporation) for 1,326,870 shares of the
Company's stock by the purchase method. For accounting purposes, the acquisition
was treated as a reverse acquisition (a recapitalization of GeeWhiz.com), with
GeeWhiz.com, Inc. as the acquirer and Strategic Ventures, Inc. as the acquiree.
The acquisition qualified as a reverse acquisition because the officers and
directors of GeeWhiz.com assumed management control of the resulting entity and
the value and ownership interest received by current GeeWhiz.com, Inc.
stockholders exceeded that received by Strategic Ventures, Inc. In December
2001, the company changed its name to Group Management Corp (the Company)
The Company is a Houston-based human resource and technology company that
focuses on the acquisition, development and operation of promising
revenue-generating companies. The Company's business strategy is to acquire,
develop and operate unique companies that are leaders in their commercial niche
by virtue of a compelling business model, technology and/or proprietary service.
The Company provides a value-added corporate structure intended to enable its
portfolio companies to quickly leverage their expertise and deploy their
business strategy by utilizing the management, financial and corporate resources
of the Company. On September 28, 2000, the Company acquired ownership of
approximately 88.5% of the issued and outstanding common stock of Swan
Magnetics, Inc. (a California corporation), for shares of the Company's stock.
Swan Magnetics, Inc., (Swan) which operates as a majority-owned subsidiary of
the Company, is involved in the development of a proprietary ultra-high
capacity, floppy disk drive technology.The transaction was accounted for under
the purchase method. See Note 11. The Company sold its 88.5% interest in Swan
in March 2002. See Note 15
The primary business of GeeWhiz.com, which now operates as a division of the
Company, is the development, acquisition, marketing and distribution of
proprietary products as specialty products and items for the worldwide gift,
novelty and souvenir industries.
The Company's fiscal year-end is December 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements are presented on the accrual method of accounting in
accordance with generally accepted accounting principles. Significant
principles followed by the Company and the methods of applying those principles,
which materially affect the determination of financial position and cash flows,
are summarized below:
F-7
Principles of Consolidation
---------------------------
The Company's consolidated financial statements as of and for the year ended
December 31, 2001 and 2000 reflect its operations on a consolidated basis and
include the accounts of the Company, including its divisions, and its
majority-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated. Swan Magnetics, Inc has not been
consolidated for 2001 as the Company lacks control due to Swan's former CEO
withholding financial records, making control impractible. Litigation has been
initiated to gain control of the books and records.
Cash and Cash Equivalents
-------------------------
The Company considers all highly-liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
-----------
Inventories are stated at cost, determined using the first-in, first-out (FIFO)
method, which is not in excess of market. Finished products comprise all of the
Company's inventories.
Property and Equipment
----------------------
Property and equipment is stated at cost. The cost of ordinary maintenance and
repairs is charged to operations while renewals and replacements are
capitalized. Depreciation is computed on the straight-line method over the
following estimated useful lives:
Automobiles 4 years
Manufacturing Equipment 2 - 5 years
Furniture and Equipment 5 years
Leasehold Improvements 5 years
Patents, Trademarks, and Licenses
---------------------------------
The Company capitalizes certain legal costs and acquisition costs related to
patents, trademarks, and licenses. Accumulated costs are amortized over the
lesser of the legal lives or the estimated economic lives of the proprietary
rights, generally seven to ten years, using the straight-line method and
commencing at the time the patents are issued, trademarks are registered or the
license is acquired.
Revenue Recognition
-------------------
Product sales are sales of on-line products and specialty items. Revenue is
recognized at the time products are shipped, as this is the point at which
customers are liable to the Company for products ordered. The customer may
return items if they are found to be defective. Returns are usually minimal.
Other revenue and commission income is recognized when the earnings process has
been completed.
F-8
Income Taxes
------------
The Company accounts for income taxes under SFAS No. 109, which requires the
asset and liability approach to accounting for income taxes. Under this method,
deferred tax assets and liabilities are measured based on differences between
financial reporting and tax bases of assets and liabilities using enacted tax
rates and laws that are expected to be in effect when the differences are
expected to reverse.
Net Earnings (Loss) Per Share
-----------------------------
Basic and diluted net loss per share information is presented under the
requirements of SFAS No. 128, Earnings Per Share. Basic net loss per share is
computed by dividing net loss by the weighted average number of shares of common
stock outstanding for the period, less shares subject to repurchase. Diluted net
loss per share reflects the potential dilution of securities by adding other
common stock equivalents, including stock options, shares subject to repurchase,
warrants and convertible preferred stock, in the weighted-average number of
common shares outstanding for a period, if dilutive. All potentially dilutive
securities have been excluded from the computation, as their effect is
anti-dilutive.
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash, accounts receivable, accounts payable and accrued
expenses are considered to be representative of their respective fair values
because of the short-term nature of these financial instruments. The carrying
amount of the notes payable are reasonable estimates of fair value as the loans
bear interest based on market rates currently available for debt with similar
terms.
Use of 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 the 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 these estimates.
Recent Accounting Pronouncements
------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Under these new standards, all acquisitions subsequent to June 30,
2001 must be accounted for under the purchase method of accounting, and
purchased goodwill is no longer amortized over its useful life. Rather,
goodwill will be subject to a periodic impairment test based on its fair value.
SFAS 142 is effective for fiscal years beginning after December 15, 2001,
although earlier adoption is permitted. The company does not expect that the
adoption of these standards will have a material impact on its financial
statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144
supersedes SFAS 121. SFAS 144 primarily addresses significant issues relating
to the implementation of SFAS 121 and develops a single model for long-lived
assets to be disposed of, whether primarily held, used or newly acquired. The
provisions of SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. We will apply this standard beginning in 2002. The Company
does not expect that the adoption of this standard will have a material impact
on its financial statements.
F-9
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, 2001
-----------------
Furniture and equipment $ 308,407
Manufacturing equipment 109,670
Leasehold improvements 170,381
Automobiles 41,857
-----------------
630,315
Less accumulated depreciation (218,325)
-----------------
Net Property, Plant and Equipment $ 411,990
=================
NOTE 4 - OTHER ASSETS
At December 31, 2001, other assets consisted of the following:
Accumulated
Historical Cost Amortization Book Value
----------------- ------------ ----------
Licensing, patents, trademarks $ 364,846 $ 127,984 $ 236,862
Other assets (note receivable)
55,876 - 55,876
------------ ----------- ----------
$ 420,722 $ 127,984 $ 292,738
============ =========== ==========
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following:
December 31,
2001
-------------
Borrowings against a $50,000 line-of-credit agreement with a financial institution $ 49,158
Secured by a general security agreement covering substantially all assets of
the Company, bearing an interest rate of 6.75% due on demand or May 2002 if no
demand is made
Note payable to an individual stockholder, interest at 8%, due on demand 84,947
Notes payable on two stockholders, interest at 10.5%, payable on demand 15,000
6% convertible notes to institutional investors (see Note 13) 1,100,000
Note payable to finacing company, secured by 2001 GMC Yukon bearing 3.9%
interest, requiring monthly principle and interest payments of $895, due
December 2005 39,395
Note payable to financial institution, secured by company held certificate of
deposit, bearing interest at 7.5%, due on demand or May 2002 if no demand is
made 99,000
Note payable to a company, interest at 8%, due on demand 2,625,000
Capital lease obligated (see Note 9) 18,493
Note payable to a company, interest at 10%, payable on demand 1,000,000
-----------
$ 5,030,993
===========
F-10
NOTE 6 - INCOME TAXES
There has been no provision for U.S. federal, state, or foreign income taxes for
any period because the Company has incurred losses in all periods and for all
jurisdictions.
Deferred income taxes reflect the net tax affects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets are as follows:
December 31, 2001
-----------------
Deferred tax assets
Net operating loss carryforwards $ 37,840,807
Valuation allowance for deferred tax assets (37,840,807)
--------------
Net deferred tax assets -
==============
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The Company had net
operating loss carryforwards for federal income tax purposes of approximately
$37,840,807 and $23,240,878 as of December 31, 2001 and 2000, respectively.
These carryforwards, if not utilized to offset taxable income begin to expire in
2003. Utilization of the net operating loss may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. The annual limitation could result in
the expiration of the net operating loss before utilization.
NOTE 7 - CONVERTIBLE PREFERRED STOCK
After the acquisition of Swan Magnetics, Inc., there remained Swan convertible
preferred stock outstanding, which had not been converted to Swan common stock
or IVG common stock. After the acquisition of Swan, there were 612,957 shares of
Series B outstanding with a historical cost of $221,000, 2,010,000 shares of
Series D outstanding with a historical cost of $1,423,303 and 706,000 shares of
Series G shares outstanding with a historical cost of $3,512,000. Upon
acquisition, the preferred stock has been valued at $2,191,819, the liquidation
preference value, due to the going concern question of Group Management Corp.
The rights, preferences and privileges of the Swan Series B, D and G preferred
stock holders are as follows:
Dividend Rights
---------------
Dividends are non-cumulative and payable only upon declaration of the Board of
Directors at a rate of $0.132 per share for Series B preferred stock, $0.05 per
share for Series D preferred stock and $0.05 per share for Series G preferred
stock. No distributions will be made on any share of Series D preferred stock
until holders of Series B preferred stock have been paid. No distribution will
be paid on any Series G preferred stock until holders of Series B and D have
been paid.
Liquidation Preference
----------------------
Holders of Series B shares have a liquidation preference over Series D and G and
common shareholders of $1.10 per share plus any declared but unpaid dividends,
holders of Series D shares have a liquidation preference over Series G and
common shareholders of $2.50 per share plus any declared but unpaid dividends,
and holders of Series G shares have a liquidation preference over common
shareholders of $5.00 per share plus any declared but unpaid dividends.
F-11
Conversion Rights
-----------------
Each share of preferred stock is convertible into one share of common stock at
the option of the holder, subject to protection against dilution. Preferred
stock automatically converts upon an effective initial public offering or upon
the vote or written consent of at least two-thirds of the number of outstanding
shares of the preferred stock into common stock (except Series B which does not
have this feature).
Warrants
--------
There are outstanding common stock warrants attached to Series D and Series G
preferred stock. The Series D preferred stock warrants give the warrant holder
the right to purchase one share of Swan common stock at $0.83 per share. The
Series G preferred stock warrants give the warrant holder the right to purchase
shares of Swan common stock. The Series D warrants expired in 2001 and the
Series G warrants expire in 2006.
Voting Rights
-------------
Each holder of Series B, D, and G preferred stock is entitled to vote on matters
presented to the common stockholders of Swan as if the holder had converted such
shares of preferred stock into common stock. In addition, the Series G
preferred stockholders also have the right to elect one director to the Swan
Board of Directors.
NOTE 8 - STOCK COMPENSATION PLANS
Stock Option Plan
-----------------
The Company has granted options to purchase shares of common stock to employees,
directors, consultants, and investors at prices as determined by the Board of
Directors, at date of grant. A summary of Company's stock options granted is
presented below:
Number of Shares Weighted Average Exercise
---------------- Price per Share
---------------
Balance, December 31, 1999 365,681 $ 9.40
Granted 218,750 5.40
Exercised - -
Canceled - -
------------ ------------
Balance, December 31, 2000 584,431 7.80
Granted 1,162,500 .56
Exercised 281,750 .56
Canceled - -
------------ ------------
-
Balance December 31, 2001 1,465,181 $ 3.46
============ ============
The fair value of each stock option was estimated on the date of grant using the
Black-Schoales option-pricing model with the following weighted-average
assumption on stock options issued on or before June 30, 2000: an expected life
of four (4) years, expected volatility of 87%, and a dividend yield of 0% and on
stock options issued after June 30, 2000: an expected life of 18 months,
expected volatility of 90%, and a dividend yield of 0%.
F-12
2000 Omnibus Securities Plan
----------------------------
The 2000 Omnibus Securities Plan ("2000 Plan") was adopted in October 2000 and
reserved 500,000 shares of Group Management Corp. common stock for stock
options, including incentive and non-qualified stock options, restrictive stock
awards, unrestricted stock awards, performance stock awards, dividend equivalent
rights, and stock appreciation rights to directors, officers, and key employees
of the company and certain consultants.
The following summary presents information with regard to the securities issued
under the 2000 Plan as of December 31, 2001:
Balance, December 31, 2001 Number of Shares
-------------------------- ----------------
Unrestricted stock awards: 54,010
Restricted stock awards: 11,975
Shares available under the 2000 Plan as of December 31, 2001 totaled 7,937,800.
In accordance with APB 25, non-cash stock-based compensation expense of
$1,066,607 has been recognized in the accompanying statements of operations for
the year ended December 31, 2000 related to these stock awards. An equal amount
has been recognized in shareholders' equity.
2002 Omnibus Securities Plan
----------------------------
The Board of Directors adopted the 2002 Ominbus Securities Plan in March 2002.
Under the plan, our employees, directors and consultants may be awarded options
to purchase common stock. The Company may also make awards of restricted common
stock and grant stock appreciation rights under the plan. The maximum number of
common stock reserved and available for issuance under the plan during the first
plan year is 500,000, subject to certain adjustments, and will increase to ten
percent (10%) of the outstanding common stock in subsequent years. As of March
31, 2002, no shares of stock or options have been granted under the plan.
Non-Employee Directors Stock Option Plan
----------------------------------------
The Non-Employee Directors Stock Option Plan adopted in July 2000 permitted the
issuance of up to 45,000 shares of common stock to directors who are not
employees of Group Management Corp. Under the plan, options to purchase 5000
shares of common stock at the fair market value on the date of grant are granted
to each non-employee director annually. As of December 31, 2000, options for
15,000 shares had been granted to three non-employee directors under this plan,
of which 7,500 shares are available for exercise. The exercise price of these
options is $15.00 per share. The exercise price was deemed fair value by the
Company's Board of Directors due to the uncertain public market for the shares,
the vesting schedule of the shares and the restricted nature of the shares
issuable upon exercise of the option.
On February 5, 2000, an option to purchase 3750 shares of common stock was
granted to a member of the Board of Advisors as consideration for additional
services he rendered to the Company. The option has an exercise price of $5.00
per share. On the date of grant, 100% of the shares were vested. The option
expires August 5, 2004. Compensation expense was not recorded because the stock
was not trading on the date of grant. The exercise price was deemed fair value
by the Company's Board of Directors in light of the lack of public market for
the shares, the vesting schedule of the shares and the restricted nature of the
shares issuable upon exercise of the option.
F-13
Accounting Issues Relating to All Stock Compensation Plans
----------------------------------------------------------
The Company accounts for these plans under APB Opinion No. 25 and related
interpretations. Had compensation cost for these plans been determined using the
fair value method of SFAS No. 123, pro forma net earnings and diluted earnings
per share would have been $(35,215,000) and $(.94), respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases
-----------------
The Company is involved in several operating leases including leases for office
and warehouse space, telecommunication services, and screen printers. The lease
commitments are as follows:
o Office facilities are leased for a minimum monthly payment of $9,988. The
lease expires November 2002.
o Another office and warehouse facilities are leased for a minimum monthly
payment of $6,719. The lease expires November 2005.
o The company leases two screen printers. One lease requires a minimum
monthly payment of $130 and expires August 2002 and the other requires minimum
monthly payments of $600 and expires August 2004.
o The Company also has a lease commitment for telecommunication services
that require a minimum monthly lease of $1,306 with the lease expiring in
December 2003.
The rent expense for the years ended December 31, 2001 and 2000 were $179,074
and $84,777, respectively.
The minimum future lease payments are summarized in the following table for the
years ended December 31:
2002 $ 212,679
2003 142,732
2003 124,659
2004 109,868
2005 0
Thereafter 0
Capital Leases
---------------
The Company entered into a capital lease agreement for telephone equipment
during 2001. As required by the Financial Accounting Standards Board and GAAP,
the Company recorded the telephone system obtained through this capital lease as
a fixed asset in the accompanying financial statements. The telephone system
was recorded at a cost of $57,801 along with the related capital lease
obligation in the same amount. During 2001 the Company recognized depreciation
expense in the amount of $28,901. The capital lease requires minimum monthly
principal and interest payments of $1363 and expires in November 2002. At the
end of the lease the Company has the option to purchase the equipment at fair
market value. The minimum principal payments due during the year ended December
31, 2002 are $18,493, and there are no commitments to make payments after 2002
under this agreement.
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NOTE 10 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with U.
S. generally accepted accounting principles, which contemplates continuation of
the Company as a going concern. The Company has incurred substantial operating
losses. As shown in the financial statements, the Company incurred net losses of
$14,599,929, on gross sales of $574,826 for the year ended December 31, 2001.
These factors indicate there is substantial doubt about the Company's ability to
continue as a going concern. The future success of the Company is likely
dependent on its ability to obtain additional capital to develop its proposed
products and ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be successful in
obtaining such financing, or that it will attain positive cash flow from
operations.
NOTE 11 - ACQUISITION OF SUBSIDIARY
On September 28, 2000, the Company acquired ownership of approximately 88.5% of
the common stock of Swan Magnetics, Inc. Swan is a hardware development company
specializing in ultra high capacity floppy disk drives and media. As part of a
two step purchase transaction, the Company exchanged 1,000,000 shares of
restricted common stock for approximately 88.5% of the outstanding common shares
of Swan. These shares were valued at $19,005,000 based upon the market value of
shares issued, discounted for restrictions. The Company then offered, to those
stockholders, an exchange of restricted common stock for warrants to purchase
common stock at an exercise price equal to the market value on September 28,
2000, or $35.00. The warrants expire August 1, 2004. Stockholders exchanged an
aggregate of 454,590 shares of restricted common stock of the Company for common
stock warrants. The fair value of the common stock warrants was estimated on
September 28, 2000 using the Black-Schoales option-pricing model with the
following weighted-average assumption on stock warrants issued: an expected life
of 18 months, expected volatility of 90%, and a dividend yield of 0%. This
transaction adjusted the purchase price to approximately $21,188,000. The
acquisition was accounted for using the purchase method. The assets and
liabilities of Swan were recorded at fair market value, which approximates net
book value on the date of acquisition. Upon consummation of the Swan
acquisition, the Company expensed $18,040,000 representing purchased in-process
technology that had not reached technological feasibility and had no alternative
future use. The Company's statement of income includes the income and expenses
of Swan for the three months ended December 31, 2000, in accordance with the
purchase method of accounting.
Prior to the acquisition of its majority interest in Swan, the company issued a
secured convertible promissory note in the original principal amount of
$1,000,000 to Swan in connection with a loan by Swan to the company. Following
the acquisition of its majority interest in Swan, the company borrowed
additional funds from Swan on several occasions, some of which were evidenced
by promissory notes. These borrowings are secured by all of the capital stock
and holdings of the company in any other entity, collateral and equipment,
accounts receivable and other intangibles and intellectual property of the
company as evidenced by a Security Agreement, dated July 18, 2000, between Swan
and the company. In August 2001, all prior notes and advances from Swan, and an
additional loan of $150,000, were memorialized in a new note in the principal
amount of $2,843,017.33. This note is due on August 1, 2003, and bears interest
at 8% per year, and is subject to the July 18, 2000 Security Agreement. Up to
$1,000,000 of the principal on the note is convertible into the company's common
stock at a price of $2.00 per share.
These loans did not affect the terms of the Swan acquisition.
In 1996, Swan entered into a joint development agreement with a Japanese company
and in 1997 entered into a letter of intent for a joint venture with a U.S.
company. In the subsequent months, the Japanese company began to assert that it
had rights to the technology that was being developed and filed a lawsuit
against Swan in December 1998 in an attempt to gain exclusive rights to the
technology. As a result of this activity, it became impossible for Swan to
complete and commercialize the technology, and in late 1998, Swan ceased normal
operations. In May 1999, the Board of Directors formally suspended its remaining
activities except for two contractors who remained to preserve Swan's technology
and maintain corporate records.
F-15
As a result of this litigation, effective April 12, 2000, Swan entered into a
Settlement Agreement and Release with the Japanese company that resulted in a
payment by the Japanese company of $25 million, termination of the joint
development agreement, release of all obligations between Swan and the Japanese
company and surrender of the Series F preferred stock that had been acquired by
the Japanese company. In addition, Swan granted to the Japanese company a
worldwide, non-transferable, fully paid-up, royalty-free (except as provided for
under the agreement), nonexclusive license under Swan's rights in and to all
technology owned by Swan as of April 12, 2000 to develop, make, have made, use,
import, market, sell, offer to sell and distribute high-capacity flexible-media
magnetic storage drives, media and components using the technology. The Japanese
company also granted to Swan a similar license for any technology that it owned
related to specific products. Royalty payments are required by the Japanese
company for any products shipped by them prior to April 14, 2001. No amounts
have been received to date.
NOTE 12 - ACQUISITIONS
SES-CORP, INC./CHEYENNE MANAGEMENT COMPANY, INC. On April 1, 2001, the Company
acquired SES-Corp., Inc., a Delaware corporation, pursuant to an Amended and
Restated Asset Purchase Agreement and Agreement and Plan of Merger (the "Merger
Agreement"), dated as of March 30, 2001, by and among the Company, SES, Cheyenne
Management Company, Inc., a Michigan corporation, SES Acquisition 2001, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company ("Sub"), and
Dennis Lambka and Ronald Bray, shareholders of SES (the "Shareholders"). Under
the terms of the Merger Agreement, Sub merged with and into SES and SES became a
wholly owned subsidiary of the Company (the "Merger"). The shares of SES common
stock outstanding immediately prior to the effective time of the merger were
converted into the right to receive 11,819,22 shares of the Company's common
stock. Ten million shares of the Company's common stock were to be placed in an
escrow account (the "Escrow Shares") to secure certain indemnification
obligations set forth in the Merger Agreement.
On August 8, 2001, the Company entered into a share exchange agreement with the
Shareholders (the "Share Exchange Agreement"), in which the Company disposed of
SES by exchanging all of the issued and outstanding shares of SES for the Escrow
Shares. As a result, the Company received 100% of the Escrow Shares and the
Shareholders received 100% of SES. The Shareholders also released the Company
from any obligations to issue additional shares of the Company to the
Shareholders under the Merger Agreement. Pursuant to the terms of the Share
Exchange Agreement, the Shareholders each retained 909,631 shares of the
Company's Common Stock issued to them under the Merger Agreement.
The cost of the acquisition and subsequent disposition of SES was approximately
$522,000. Additionally, the Company recorded stock based compensation expense of
approximately $2,300,000, related to the approximately 1,800,000 shares of stock
currently held by the former shareholders of SES. While no claims against the
Company are pending or threatened related to its former ownership of SES, in the
future the Company could incur additional expenses related to such claims.
CYBERCOUPONS. On January 9, 2001, the Company executed a Reorganization
Agreement and Plan of Exchange pursuant to which the Company exchanged up to
2,372,625 shares of its common stock for approximately 35% of the issued and
outstanding common stock of CyberCoupons.com, Inc., a Houston, Texas-based
company. The Company's investment in CyberCoupons was diluted immediately, in
the sense that the CyberCoupons shares acquired in exchange for IVG common stock
have a book value that is far less than the trading price of IVG common stock at
January 9, 2001. No assurances can be given that the Company's investment in
CyberCoupons will appreciate in value, or that it will appreciate to a value
comparable to the value of IVG shares that were delivered to the CyberCoupons
stockholders.
CyberCoupons was formed to be an Internet source for consumers to obtain
on-line-printable manufacturer coupons for grocery, household and beauty
products. The Company does not intend to pursue this business venture.
ITVR. In November 2000, Swan entered into a Research and Development Agreement
with iTVr, Inc. to further develop technology intended to record, play back and
time-shift certain broadband electronic transmission events such as live
television, video email, and music videos. The initial development fee of
$250,000 was paid and expensed in 2000. The agreement required iTVr to provide
certain deliverables prior to December 31, 2000 and, upon completion of an
evaluation of those deliverables, to determine whether to provide additional
funding. As a result of this evaluation, an additional development fee of
$500,000 was made to iTVr in January 2001. The agreement also requires Swan to
use its best efforts to pursue additional financing for iTVr of up to $2
million. The initial funding of $250,000 was convertible into 2 million shares
of common stock of iTVR within 60 days of the completion of the initial
development phase. In addition, The initial development fee of $500,000 was
convertible into $1 million shares of common stock of iTVR and a cashless
warrant to acquire an additional 1 million shares of common stock at no
additional cost if an additional investment of at least $2 million is arranged
for by Swan. Swan exercised its conversion rights related to the $750,000
funding and received 3 million shares of common stock of iTVr in February 2001.
This represents a 46% ownership in iTVr. The additional $2 million financing, if
acquired, will also be convertible into 2.5 million shares of common stock of
iTVr by the lender.
F-16
iTVr has developed a high performance, multi-function, low cost personal video
recorder for a variety of applications including time shift television
recording, digital imaging and manipulation, distance education, HDTV, karaoke,
video conferencing, music videos, video emails and home gateway applications.
iTVr's business model is to provide cost effective multi-function solutions at
affordable prices without requiring ongoing service charges. iTVr expects to
begin shipments of its first product in China in the fourth quarter of 2001.
NOTE 13 - CONVERTIBLE NOTES
On February 2, 2001, Alpha Capital Aktiengesellschaft, AMRO International, S.A.,
Markham Holdings Ltd. and Stonestreet Limited Partnership (the "investors")
purchased from the company an aggregate $1,100,000 of its 6% convertible notes
due 2003. The notes are secured by 250,150 shares of the company's com on stock
that has been pledged by six of its shareholders, including two of its
directors.
Until a note is paid in full, the holder of a note may convert the outstanding
principal and interest due on the note into shares of the company's common stock
at a conversion price equal to the lower of (1) $1.5825 and (2) 85% of the
average of the three lowest closing bid prices for our common stock on the
principal market on which it is trading for the 22 trading days prior to but not
including the date of conversion of the note. As of October 8, 2001, and at an
assumed conversion price of $1.13 per share, the notes would have been
convertible into 965,759 shares of the company's common stock. This number of
shares could be significantly higher in the event of a decrease in the closing
bid price of the company's common stock. The notes are payable on January 1,
2003.
The Company is also obligated to issue additional shares of common stock to the
investors if the closing bid price of its common stock is not equal to or
greater than $2.374 for 10 consecutive trading days during the 180-day period
beginning on the effective date of the registration statement filed to register
the shares underlying the convertible notes.
In consideration for their investment, the Company issued the investors warrants
to purchase an aggregate of 13,750 shares of common stock at an exercise price
of $32.94. These warrants expire on February 2, 2006. In partial consideration
for serving as the Company's financial advisor and private placement agent in
connection with the issuance of the notes, the Company issued Union Atlantic
Capital, L.C. a warrant to purchase 50,000 shares of common stock at an exercise
price of $1.647. This warrant expires April 30, 2005. The exercise price of
$1.647 represents 120% of the average closing price of the company's common
stock for the five trading days prior to February 2, 2001, the date of issuance
of the notes.
In connection with the financing, the Company agreed to file a registration
statement for the shares underlying the notes and warrants. The Company was
originally required to make the registration statement effective by June 17,
2001. The investors waived this default and penalties under the convertible
notes relating to the failure to make the registration statement effective by
June 17, 2001, provided that the company file an amendment to the registration
statement by October 10, 2001 and cause the registration statement to be
declared effective by December 10, 2001. If the registration statement is not
declared effective within the required time periods or ceases to be effective
for a period of time exceeding 30 days in the aggregate per year but not more
than 20 consecutive calendar days, the company must pay damages equal to one
percent of the principal of the notes per month for the first 30 days and two
percent of the principal of the notes per month for each subsequent 30-day
period. The Company also must pay these damages if 120% of all shares of common
stock underlying the convertible notes and warrants are not included in an
effective registration statement as of and after December 10, 2001, as
determined using the conversion price in effect on the effective date of the
registration statement.
F-17
NOTE 14 - SUBSEQUENT EVENTS - FINANCING AGREEMENT
On April 2, 2002 the Company announced that it has engaged Roger Shelley and The
Shelley Group LLC to provide the capital foundation for its plan to acquire a
range of human resource services firms and blend them into a consolidated
business model.
The Company has engaged with The Shelley Group because it believes Shelley can
successfully drive its capital formation needs, assist in the alignment of its
plan with the needs of investors, and help increase investor awareness of its HR
rollup. The funding objective to successfully execute its plan consists of
raising $6.0 million, primarily through the issuance of common stock.
The Shelley Group LLC provides strategic senior management counseling and
financing to early and mezzanine stage companies. The company also provides
value-added services in the areas of capital formation; development of strategic
alliances; corporate and investor relations and venture development. The
Shelley Group works closely with its client's senior management to assist in the
development of their business plans, sales and marketing projections, and growth
targets.
NOTE 15 - SUBSEQUENT EVENTS - SALE OF A SUBSIDARY
On March 6, 2002, the Company sold its entire ownership in Swan Magnetics to
Lumar Worldwide Industries, Inc, for $2.5 million to be paid by a promissory
note payable in seven years. The transaction is in line with a strategic
decision to focus on its consolidation of the business services industry, and
its equity in Swan no longer fits with its business plan.
A key asset of Swan Magnetics is its interest in iTVr technology, which is used
in the manufacture of set-top boxes. Swan had previously acquired a 46% equity
interest in iTVr Inc. Swan is also the developer of its UHC ("ultra
high-capacity") removable disk drive that combines high performance and high
capacity in a standard floppy-disk form-factor.
Lumar Worldwide Industries, Inc. and its strategic partners develop software
applications for digital technologies, which fit with Swan's iTVr technology.
NOTE 16 - RELATED PARTY TRANSACTIONS - 2000
The Company paid $110,918 in legal fees to a law firm owned by an outside
director. The Company also issued the firm 300,000 shares of common stock in
lieu of a cash retainer and director fees. These shares were valued at $75,000,
which the board determined was the fair market value of the shares.
The Company paid $55,000 to two related parties, one an outside director and one
a current employee. These payments were for consulting services.
F-18
The Company granted a member of the board of advisors an option to purchase 3750
shares of common stock as consideration for services rendered to the Company.
The option has an exercise price of $5.00 and expires on August 5, 2004. On the
grant date, February 5, 2000, 25% of the shares vested. The remaining shares
vest at the rate of 25% each six months thereafter. The Company's Board of
Directors deemed the exercise price fair value in light of the lack of public
market for the shares, the vesting schedule of shares and the restricted nature
of the shares upon exercise of the option.
NOTE 17 - LEGAL PROCEEDINGS
CONVERTIBLE NOTE HOLDERS. On February 2, 2001 we issued $1.1 million of
convertible notes to four investors in a private placement. The convertible
notes mature on January 1, 2003 and bear interest at the rate of 6% per year.
As part of the financing transactions involving the convertible notes, the
Company agreed to file a registration statement for the resale by the note
holders of the common stock underlying the convertible notes and to have the
registration statement declared effective by June 17, 2001. The registration
statement was not declared effective by June 17, 2001 and has not been declared
effective as of the time of the filing of this report.
On September 10, 2001 the Company entered into a Security Agreement with the
noteholders and certain shareholders, including Elorian Landers, Chief Executive
Officer and a director, and Thomas L. McCrimmon, a director. Under the Security
Agreement, Mr. Landers and his wife pledged 150,000 shares of common stock, Mr.
McCrimmon pledged 10,900 shares of common stock and other shareholders pledged
89,250 shares of common stock, all as security for the obligations under the
financing agreements with the noteholders. As part of this agreement, the note
holders waived the default and penalties under the convertible notes for failure
to make the registration statement effective by June 17, 2001, provided that the
Company file an amendment to the registration statement by October 20, 2001 and
cause the registration statement to be declared effective by December 10, 2001.
The note holders also lent the Company an additional $55,000 and the Company
signed a promissory note agreeing to repay this amount by the earlier of
December 2001 or the occurrence of an event of default under the Security
Agreement.
On February 7, 2002, the convertible note holders declared a default on the
notes for failure to have the registration statement declared effective and made
demand for payment of the convertible notes and promissory notes. In addition,
the collateral agent under the Security Agreement released 239,400 shares of
stock to the convertible note holders. The note holders further requested that
the Company deliver an opinion to the transfer agent so that they would be able
to sell in the public markets under SEC Rule 144 the shares released by the
collateral agent and have the shares reissued in the note holders' names. One of
the note holders has also submitted a notice to convert a portion of its notes
into common stock. Because of certain disputes with the note holders, the
Company have not complied with these requests.
On or about March 21, 2002, Alpha Capital Aktiengesellschaft, Amro
International, S. A., Markham Holdings, LTD, and Stonestreet Limited
Partnership, the holders of the convertible notes, filed a complaint in United
States District Court for the Southern District of New York naming the Company,
Elorian Landers and his wife as defendants. In their complaint, the note holders
allege, among other things, the following:
o fraud in connection with the sale of the convertible notes resulting from
alleged misrepresentations as to the Company's cash position;
o breach of contract on the notes for failure to have an effective
registration statement covering the resale of the common stock underlying the
notes;
o failure to honor conversion requests;
o failure to repay the convertible notes and promissory notes and ;
o anticipatory breach of contract on the notes.
F-19
In their complaint, the noteholders assert monetary damages and seek relief (i)
in the amount of $1,155,000 plus interest, liquidated damages and attorneys fees
and other costs of enforcement for the breach of contract on the notes, (ii)
unspecified monetary damages for failure to cause the registration statement to
be effective and failure to take the steps necessary for the noteholders to sell
the shares under the Security Agreement pursuant to Rule 144, and (iii)
unspecified damages for failure to honor conversion notices. In addition, the
noteholders are seeking an order directing the Company to (i) cause the
registration statement to be effective, (ii) to enforce conversion of the notes
into common stock, and (iii) to have the Company and the Landers take necessary
actions to permit plaintiffs to sell the common stock received from the
collateral agent under Rule 144.
SWAN
In March 2002, the Company was served with a lawsuit brought by Swan Magnetics,
Inc. in the Superior Court of the state of California, County of Santa Clara.
The only defendant in the action is the Company.
The Complaint alleges, among other things, that the Company breached its
obligations under a promissory note in the principal amount of $2,843,017, that
the Company has breached its obligations under a series of settlement documents
entered into between Swan and the Company, and that the Company has interfered
with contractual relationships between Swan and certain third parties. The
total relief sought by Swan is $3,040,000, plus interest, costs and punitive
damages.
The Company is vigorously defending this lawsuit although the Company believes
that the actions lack merit. The cases are at a stage where no discovery has
been taken and no prediction can be made as to the outcome of these cases.
F-20