SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] 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
(Exact name of registrant as specified 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 33181
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 295-8400
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter 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.
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No.
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of May 22, 2002, there
were 5,732,045 shares of common stock issued and outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(check one):
Yes _____ No X .
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GROUP MANAGEMENT CORP
TABLE OF CONTENTS
-----------------
PART I
Item 1 Financial Statements
Item 2 Management's Discussion and Analysis or Plan of Operations
PART II
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
PART I
EXPLANATORY NOTE
Included in this Quarterly Report on Form 10-QSB is a consolidated balance sheet
of Group Management Corp as of March 31, 2002, and the related consolidated
statements of operations and cash flows for the quarters ended March 31, 2002
and 2001.
The Company elected to list its 88.5% owned subsidiary, Swan Magnetics, Inc.
(Swan) as an unconsolidated affiliate because it was precluded from obtaining
the necessary information to allow a consolidated financial filing due to Swan's
former CEO withholding financial records, making control impractical.
Litigation has been initiated to gain control of the books and records. On
February 26, 2002, the Company terminated Kim as the President and Chairman of
the Board of Swan. In March 2002 the Company sold its interest in Swan to Lumar
Worldwide, Inc.
This Quarterly Report includes forward-looking statements within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are
based on management's beliefs and assumptions, and on information currently
available to management. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set
forth under the heading "Management's Discussion and Analysis of Financial
Condition or Plan of Operation." Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.
ITEM 1 FINANCIAL STATEMENTS
GROUP MANAGEMENT CORP.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 2002
ASSETS
CURRENT ASSETS
Cash $ 107,825
Accounts receivable - net 1,278
Inventory 88,802
Due from shareholders 46,000
------------
Total current assets 243,905
PROPERTY AND EQUIPMENT, NET 374,590
NOTE RECEIVABLE -LUMAR WORLDWIDE 2,500,000
OTHER ASSETS, NET 292,738
------------
$ 3,411,233
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 897,636
Notes payable 5,044,615
------------
Total current liabilities 5,942,251
DEFERRED REVENUE 2,500,000
STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT
Common stock: par value $.002, 150,000,000 shares
authorized, 4,699,679 issued and outstanding 9,399
Additional paid in capital 34,792,278
Accumulated deficit (39,832,695)
------------
Total stockholders' deficit (5,031,018)
------------
$ 3,411,233
============
See accompanying notes.
GROUP MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31
2002 2001
(UNAUDITED) (UNAUDITED)
------------ ------------
REVENUES:
Sales $ 44,342 $ 181,499
------------ ------------
181,499
Total revenues 44,342 120,913
COSTS AND EXPENSES:
Cost of goods sold 25,472 120,913
General and administrative 1,344,508 2,589,280
Research and development - 60,000
Equity interest in iTVr - 373,687
Depreciation expense 37,500 13,829
Interest expense 10,000 525,440
------------ ------------
Total costs and expenses 1,417,480 3,683,149
------------ ------------
OTHER INCOME:
Interest income - 94,124
MINORITY INTEREST - (56,303)
------------ ------------
NET INCOME (LOSS) $(1,373,138) $(3,351,233)
============ ============
Basic and fully diluted net loss per share $ (.33) $ (.06)
Weighted average number of common shares
outstanding for basic and diluted net loss per share 4,126,469 51,741,003
See accompanying notes.
GROUP MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31
2002 2001
(UNAUDITED) (UNAUDITED)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) . . . . . . . . . . . . . . . . . . . . $(1,373,138) $(3,351,223)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Minority interest. . . . . . . . . . . . . . . . - (56,303)
Depreciation . . . . . . . . . . . . . . . . . . 37,500 7,068
Amortization . . . . . . . . . . . . . . . . . . - 6,761
Stock based compensation . . . . . . . . . . . . 1,044,362 1,555,835
Equity interest in loss of iTVr. . . . . . . . . - 373,687
Beneficial interest on convertible debt. . . . . - 468,258
Changes on operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . 5,267 (33,126)
Inventory. . . . . . . . . . . . . . . . . . . . 384 (2,783)
Other assets . . . . . . . . . . . . . . . . . . - 190,477
Accounts payable and accrued expenses. . . . . . 32,017 25,691
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. (253,608) (815,658)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in iTVr . . . . . . . . . . . . . . . . - (500,000)
Purchases of equipment . . . . . . . . . . . . . . (100) (144,436)
Notes receivable . . . . . . . . . . . . . . . . . - (125,743)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. (100) (770,179)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock. . . . . . . . . . 250,000 22,500
Proceeds from notes payable. . . . . . . . . . . . 13,622 1,409,212
Payments on notes payable. . . . . . . . . . . . . - (179,012)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. 263,622 1,252,700
------------ ------------
Increase (decrease) in cash and cash equivalents. . 9,914 (333,137)
Cash at beginning of period. . . . . . . . . . . . . 97,911 2,886,710
------------ ------------
Cash at end of period. . . . . . . . . . . . . . . . $ 107,825 $ 2,553,573
============ ============
See accompanying notes.
GROUP MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE PERIOD FROM DECEMBER 31, 1999 TO MARCH 31, 2002
Common Stock Additional
-------------
Number of 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 for cash. . . . . . . . . 213,450 21 434,079 - 434,100
Acquisition of subsidiary . . . . . . . 10,908,145 1,091 21,185,859 - 21,186,950
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 5,941,716 5,984,922
Shares issued in acquisitions, net. . . 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
Effect of unconsolidated subsidiary (4,992,885) (4,992,885)
Effect of 1 to 20 reverse stock split . (66,658,801) (49,578) (49,578)
Net loss (15,218,679) (15,218,679)
------------- -------------
Balance December 31, 2001 . . . . . . . 3,553,258 7,107 33,500,208 (38,459,557) (4,952,242)
Shares issued for services. . . . . . . 673,782 1,347 1,043,015 1,044,362
Shares issued for cash. . . . . . . . . 472,639 945 249,055 250,000
Net loss (1,373,138) (1,373,138)
------------- -------------
Balance March 31, 2002. . . . . . . . . 4,699,679 $ 9,399 $34,792,278 $(39,832,695) $ (5,031,018)
============= ========= ============ ============= =============
See accompanying notes.
GROUP MANAGEMENT CORP
FORM 10-QSB
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with U. S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by U. S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2002 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2002. These
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the annual report on Form
10K-SB for the year ended December 31, 2001.
NOTE 2 - EARNINGS PER SHARE DATA
Basic and fully diluted net earnings (loss) per share information is presented
under the requirements of Statement of Financial Accounting Standards No. 128
(SFAS 128), "EARNINGS PER SHARE". Basic net earnings (loss) per share is
computed by dividing net earnings (loss) by the weighted average number of
shares of common stock outstanding for the period, less shares subject to
repurchase. Fully diluted net earnings (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 shares of common stock for a period, if
dilutive. All potentially dilutive securities have been excluded from the
computation, as their effect is anti-dilutive.
NOTE 3 - SALE OF SWAN MAGNETICS, INC.
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.
The accompanying unaudited balance sheet includes a long-term receivable and
deferred revenue as a result of this transaction. Revenue will be recognized
when monies are received from Lumar Worldwide Industries, Inc. in the next seven
years.
NOTE 4 - LEGAL PROCEEDINGS
CONVERTIBLE NOTE HOLDERS
On February 2, 2001, the Company 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, 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 of its shareholders, including Elorian Landers, the
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
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
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, and we have complied
with this request. One of the note holders has also submitted a notice to
convert a portion of its notes into our common stock, and the Company has
complied with this request. The note holders may continue converting portions
of the notes into our common stock, and any proceeds from the sales of the
common stock will be held in a court-monitored escrow account pending resolution
of this dispute.
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 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 the defendants take necessary actions to permit
plaintiffs to sell the common stock received from the collateral agent under
Rule 144.
A trial date of September 30, 2002 has been set.
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. 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.
The Company intends to request that the court in the above-referenced case order
Kim and Swan to turn over to the Company necessary books and records for a full
and accurate review as necessary for the Company to include Swan as a
consolidated subsidiary. At such time, the Company will amend its Annual Report
on Form 10-KSB and this Quarterly Report on Form 10-QSB to include financial
statements reflecting the consolidation. Management of the Company is unable to
determine what the exact effect of Swan's operations will be on the Company's
consolidated financial statements, or when the necessary financial information
might be made available.
NOTE 5 - PENDING ACQUISITION - BESTSTAFF SERVICES, INC.
On February 28, 2002, the Company announced that it had signed a Letter of
Intent to acquire 45% of the outstanding common stock of BestStaff Services,
Inc. in exchange for cash and common stock of the Company. Terms of the
agreement have not been finalized as of the date of this report.
NOTE 6 - COMMON STOCK
During the quarter ended March 31, 2002, the Company issued 673,782 shares of
its common stock in exchange for services. Expense of $1,044,362 has been
recognized in the accompanying statements of operations related to these shares.
The Company also sold 472,639 shares of its common stock for $250,000 in several
private placements during the quarter ended March 31, 2002.
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Our independent accountant included an explanatory paragraph in their
report, stating that the audited financial statements of Group Management Corp
for the year ending December 31, 2001 have been prepared assuming the company
will continue as a going concern. They note that the Company's continued
existence is dependent upon its ability to generate sufficient cash flows from
operations to support its daily operations as well as provide sufficient
resources to retire existing liabilities and obligations on a timely basis. 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.
RESULTS OF OPERATIONS
Revenue
Total revenues for the three months ended March 31, 2002 were $44,342 as
compared to $181,499 for the three months ended March 31, 2001. This decrease
of over 75% was due to a decrease in product sales in the Company's GeeWhiz
division, which constituted substantially all of the revenues for the three
months ended March 31, 2001, and further a result of management's change in
focus to the human resource services industry.
Costs and Expenses
Cost of goods sold was $25,472, or approximately 57% of sales, for the
three months ended March 31, 2002, as compared to $120,913, or approximately 67%
of sales, for the three months ended March 31, 2001. The decrease in cost of
goods sold reflects lower sales for the period, while the cost of goods sold as
a percentage of sales remained relatively consistent, reflecting a slight
increase in gross margin.
General and administrative expenses were $1,344,508 for the three months
ended March 31, 2002, a decrease of approximately 48% as compared to $2,589,280
for the three months ended March 31, 2001. This decrease was attributable to a
decrease of over $510,000 in stock based compensation, and our overall decreased
sales activity.
Total costs and expenses were $1,417,480 for the three months ended March
31, 2002, as compared to $3,683,149 for the three months ended March 31, 2001.
This decrease of over 60% reflects a decreased cost of goods sold and general
and administrative expenses, as discussed above. It also reflects a decrease in
research and development costs from $60,000 to zero, a decrease in the expensed
equity interest in iTVr from $373,687 to zero, and a decrease in interest
expense from $525,440 to $10,000. These changes reflect the Company's sale of
its interest in Swan Magnetics and the corresponding expenses that were
associated with Swan, as well as a decrease in the beneficial interest expense.
Net Losses
The net loss for the three months ended March 31, 2002 was $1,373,138 as
compared to $3,351,223 for the three months ended March 31, 2001. The primary
cause of this approximately 59% decrease is the decrease in total costs and
expenses, discussed above.
LIQUIDITY AND CAPITAL REQUIREMENTS
Net cash used in operating activities was $253,608 for the three months
ended March 31, 2002, as compared to $815,658 for the three months ended March
31, 2001, a decrease of over 68%. We had $107,825 in cash at March 31, 2002, on
increase of $9,914 during the quarter.
Our net cash provided by financing activities was $263,622 for the three
months ended March 31, 2002. This represents $250,000 in proceeds from the sale
of our stock, and $13,622 in proceeds from notes payable. These two activities
were the primary source of operating capital during the period.
At March 31, 2002, our current assets were $243,905, while our current
liabilities were $5,942,251. Total current liabilities consists of $897,636 in
accounts payable and accrued expenses, and $5,044,615 in notes payable.
We are presently seeking to obtain alternative financing to repay the
outstanding note hodlers. 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.
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 short-term 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 the opinion of the Company's management, lawsuits currently pending or
threatened against the Company, unless dismissed or settled within a short
period of time, will have a material adverse effect on the financial position
and results of operations of the Company because the Company does not have the
cash flow to continue to fund defense costs. Management is currently reviewing
several strategies for continuing to fund defense costs while at the same time
funding the development of the Company. Such strategies may include selling some
or all of the Company's current assets, acquiring one or more businesses with
positive cash flow, or filing for bankruptcy protection. No decisions have been
made as of this time.
PART II
ITEM 1 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, 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, and we have complied
with this request. One of the note holders has also submitted a notice to
convert a portion of its notes into our common stock, and the Company has
complied with this request. The note holders may continue converting portions of
the notes into our common stock, and any proceeds from the sales of the common
stock will be held in a court-monitored escrow account pending resolution of
this dispute.
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 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 the defendants take necessary actions to
permit plaintiffs to sell the common stock received from the collateral agent
under Rule 144.
A trial date of September 30, 2002 has been set.
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. 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.
The Company intends to request that the court in the above-referenced case
order Kim and Swan to turn over to the Company necessary books and records for a
full and accurate review as necessary for the Company to include Swan as a
consolidated subsidiary. At such time, the Company will amend its Annual Report
on Form 10-KSB and this Quarterly Report on Form 10-QSB to include financial
statements reflecting the consolidation. Management of the Company is unable to
determine what the exact effect of Swan's operations will be on the Company's
consolidated financial statements, or when the necessary financial information
might be made available.
Management's Discussion
------------------------
In the ordinary course of business, the Company is from time to time
involved in various pending or threatened legal actions. The litigation process
is inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon the financial condition and/or results
of operations of the Company.
In the opinion of the Company's management, matters currently pending or
threatened against the Company, unless dismissed or settled within a short
period of time, will have a material adverse effect on the financial position
and results of operations of the Company because the Company does not have the
cash flow to continue to fund defense costs. Management is currently reviewing
several strategies for continuing to fund defense costs while at the same time
funding the development of the Company. Such strategies may include selling
some or all of the Company's current assets, acquiring one or more businesses
with positive cash flow, or filing for bankruptcy protection. No decisions have
been made as of this time.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2002, the Company issued 189,250 shares to ten individuals as
consideration for services rendered, including 33,750 shares to Elorian Landers,
15,000 shares to Clay Border, 33,750 shares to Richard Twardowski, 18,750 shares
to Thomas McCrimmon, and 42,000 shares to Dean Ayres. The issuances were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, and
all of the stock was issued with a restrictive legend in accordance with Rule
144. All of the issuances were valued at $0.50 per share, for a total valuation
of $94,625.
In January 2002, the Company issued 25,000 shares to Thomas McCrimmon as
consideration for services rendered. The issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, was issued with a
restrictive legend in accordance with Rule 144, and was valued at $0.28 per
share, or an aggregate valuation of $7,000.
In January 2002, the Company issued 3,750 shares to Serve Inter Min as a
gift valued at $0.50 per share, 114,276 shares to UTEK as consideration for a
credit of $137,131 on a contract with UTEK, and 123,530 shares to John Weaver as
consideration for a credit of $123,530 on a contract with Weaver for services
rendered. The issuances were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, and all of the stock was issued with a
restrictive legend in accordance with Rule 144.
In January 2002, the Company sold, in a private placement to six
individuals exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, an aggregate of 171,667 shares of common stock, issued with a
restrictive legend in accordance with Rule 144 as follows: 1,667 shares at
$0.60 per share, 6,250 shares at $0.80 per share, 13,750 shares to Dean Ayres at
$0.50 per share, 27,397 shares at $0.73 per share, and 122,603 shares at $0.73
per share.
In March 2002, the Company issued 185,050 shares to seven individuals as
consideration for services rendered, including 18,750 shares to Elorian Landers,
18,750 shares to Clay Border, 15,000 shares to Richard Twardowski, 18,750 shares
to Thomas McCrimmon, and 18,000 shares to Dean Ayres. The issuances were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, and
all of the stock was issued with a restrictive legend in accordance with Rule
144. All of the issuances were valued at $0.50 per share, for a total valuation
of $92,525.
In March 2002, the Company issued 25,000 shares to Thomas McCrimmon for
service rendered. The issuance was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, was issued with a restrictive legend in
accordance with Rule 144, and was valued at $0.28 per share, or an aggregate
valuation of $7,000.
In March 2002, the Company sold, in a private placement to three
individuals exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, 300,000 shares at $0.50 per share, and 8,889 shares at $1.00 per
share. All of the shares were issued with a restrictive legend in accordance
with Rule 144.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this
Item.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no events which are required to be reported under this
Item.
ITEM 5 OTHER INFORMATION
On March 13, 2002, the Board of Directors of the Company approved the
Agreement dated March 6, 2002 (the "Agreement") by and between the Company, Swan
Magnetics, Inc., ("Swan"), and Lumar Worldwide Industries, Inc. ("LWI") for the
sale of the Company's interest in Swan to LWI.
Under the terms of the Agreement, the Company agreed to sell its entire
interest in Swan, consisting of 41,773,157 shares of Swan common stock (the
"Swan Shares"), to LWI. The Company believes that the Swan Shares represent
approximately 88.5% of the issued and outstanding stock of Swan. As
consideration for the purchase, the Company (i) received a promissory note from
LWI in the principal amount of $2,500,000, bearing interest at the rate of prime
plus one percent (1%), with payments of $122,500 due annually beginning on April
30, 2005 and a final balloon payment of $2,622,500 due on April 30, 2009; (ii)
received a commitment from Swan and LWI to extinguish and/or assume any debts
owing from the Company to Swan; and (iii) entered into a Royalty Agreement with
LWI whereby the Company will receive a royalty equal to four percent (4%) of the
gross sales on any products sold by or through Swan for a period of seven (7)
years from the date of the Agreement. There was no material relationship
between the Company and LWI, or any of their respective officers, directors or
shareholders, prior to the execution of the Agreement.
Despite numerous requests to Swan's former director and officer, Eden Kim,
the Company has not had access to the books and records of Swan, nor has the
Company been able to audit the Swan financial statements. As a result, the
Company took action on February 14, 2002 to remove Mr. Kim as an officer and
director of Swan, and terminated his employment for cause. Mr. Kim has refused
to acknowledge his removal, and further refused to turn over any of the books,
records, financial statements, assets, or other property of Swan. After
considering all of the facts and circumstances, management of the Company felt
it was in the Company's best interest to sell its interest in Swan rather than
continue to pursue remedies against Swan and Mr. Kim.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement dated March 6, 2002 by and between Group Management, Inc.,
Swan Magnetics, Inc., and Lumar Worldwide Industries, Inc.
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 22, 2002 Group Management Corp
/s/ Elorian Landers
______________________________
By: Elorian Landers
Its: Chief Executive Officer