SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 28, 2000
IVG CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 33-19196-A 59-2919648
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
13135 DAIRY ASHFORD, SUITE 525
SUGAR LAND, TEXAS 77478
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (281) 295-8400
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
This Form 8-K/A is an amendment to the Form 8-K filed on October 13, 2000 and
the Form 8-K/A filed on May 9, 2001, relating to the acquisition by IVG Corp., a
Delaware corporation (the "Company"), of Swan Magnetics, Inc., a California
corporation ("Swan"). The purpose of this amendment is to file historical
financial statements of Swan and unaudited pro forma condensed financial data of
the Company, which give effect to the Swan acquisition.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. Filed as Exhibit 99.1
hereto.
(b) PRO FORMA FINANCIAL INFORMATION. Filed as Exhibit 99.2 hereto.
(c) EXHIBITS.
Exhibit No. Description.
----------- -----------
10.1 Agreement and Plan of Exchange by and between Internet Venture Group,
Inc. and Swan Magnetics, Inc., dated June 28, 2000, previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed on
July 18, 2000.
10.2 Amended and Restated Agreement and Plan of Exchange by and among
Internet Venture Group, Inc., Swan Magnetics, Inc., and certain
shareholders of Swan Magnetics, Inc., effective as of June 28, 2000,
previously filed as Exhibit 10.2 to the Company's Current Report on
Form 8-K filed on October 13, 2000.
99.1 Financial Statements of Swan Magnetics, Inc.*
99.2 Unaudited Pro Forma Condensed Financial Data of IVG Corp.*
----------------
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IVG CORP.
Date: November 1, 2001 By: /s/ Elorian Landers
-------------------------------
Elorian Landers
EXHIBIT INDEX
Exhibit No. Description.
----------- -----------
10.1 Agreement and Plan of Exchange by and between Internet Venture Group,
Inc. and Swan Magnetics, Inc., dated June 28, 2000, previously filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed on
July 18, 2000.
10.2 Amended and Restated Agreement and Plan of Exchange by and among
Internet Venture Group, Inc., Swan Magnetics, Inc., and certain
shareholders of Swan Magnetics, Inc., effective as of June 28, 2000,
previously filed as Exhibit 10.2 to the Company's Current Report on
Form 8-K filed on October 13, 2000.
99.1 Financial Statements of Swan Magnetics, Inc.*
99.2 Unaudited Pro Forma Condensed Financial Data of IVG Corp.*
-------------------
* Filed herewith
EXHIBIT 99.1
SWAN MAGNETICS, INC.
(A Subsidiary of Internet Venture Group, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
-----------------
To the Board of Directors and Shareholders of Swan Magnetics, Inc.
(A subsidiary of Internet Venture Group, Inc.)
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
We have audited the accompanying consolidated balance sheet of Swan Magnetics,
Inc. (a subsidiary of Internet Venture Group, Inc.) as of December 31, 1999, and
the related consolidated statements of operations, shareholders' deficit and
cash flows for the year then ended. These consolidated 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Swan
Magnetics, Inc. as of December 31, 1999, and the results of its operations and
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, a majority of
the Company was acquired by Internet Venture Group, Inc., effective June 28,
2000.
/s/ MOHLER, NIXON & WILLIAMS
----------------------------
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
Campbell, California
April 12, 2001
1
SWAN MAGNETICS, INC.
(A SUBSIDIARY OF INTERNET VENTURE GROUP, INC.)
Consolidated balance sheet as of December 31, 1999
--------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,800
--------------------------------------------------------------------------------
Total current assets 1,800
--------------------------------------------------------------------------------
Total assets $ 1,800
================================================================================
Liabilities and shareholders' equity (deficit)
Notes payable $ 7,884,485
Notes payable to lenders of the Legal Defense Fund 816,628
Accrued interest 2,220,556
Accounts payable 2,456,395
Accrued compensation and employee benefits 1,559,263
Other accrued expenses 29,000
--------------------------------------------------------------------------------
Total current liabilities 14,966,327
--------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 6)
Shareholders' deficit
Convertible preferred stock, no par value;
40,000,000 shares authorized;
11,136,018 shares issued and outstanding
(liquidation value of $30,118,640) 16,941,468
Common stock, no par value;
100,000,000 shares authorized;
33,754,112 shares issued and outstanding 2,226,974
Additional paid-in capital 177,137
Accumulated deficit (34,310,106)
--------------------------------------------------------------------------------
Total shareholders' deficit (14,964,527)
--------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 1,800
================================================================================
See independent accountants' report and accompanying notes to consolidated
financial statements.
2
SWAN MAGNETICS, INC.
(A SUBSIDIARY OF INTERNET VENTURE GROUP, INC.)
Consolidated statement of operations for the year ended December 31, 1999
--------------------------------------------------------------------------------
General and administrative costs $ 110,249
Engineering and development 24,000
--------------------------------------------------------------------------------
Operating loss 134,249
Lawsuit legal costs 760,200
Interest expense 840,346
--------------------------------------------------------------------------------
Net loss $1,734,795
================================================================================
See independent accountants' report and accompanying notes to consolidated
financial statements.
3
SWAN MAGNETICS, INC.
(A SUBSIDIARY OF INTERNET VENTURE GROUP, INC.)
Consolidated statement of shareholders' deficit for the year ended December 31, 1999
------------------------------------------------------------------------------------
Convertible preferred stock Common stock Additional Total
------------------------------ --------------------------- paid-in Accumulated shareholders'
Shares Amount Shares Amount capital deficit deficit
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 11,136,018 $16,941,468 23,554,112 $2,124,974 $177,137 ($32,575,311) ($13,331,732)
Issuance of shares at
$0.01 per share from
conversion of notes
payable 10,200,000 102,000 102,000
Net loss (1,734,795) (1,734,795)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 11,136,018 $16,941,468 33,754,112 $2,226,974 $177,137 ($34,310,106) ($14,964,527)
===================================================================================================================================
See independent accountants' report and
accompanying notes to consolidated financial statements.
4
SWAN MAGNETICS, INC.
(A SUBSIDIARY OF INTERNET VENTURE GROUP, INC.)
Consolidated statement of cash flows for the year ended December 31, 1999
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($1,734,795)
Adjustments to reconcile net loss
to net cash used by operating activities:
Changes in assets and liabilities:
Accrued interest 817,167
Other accrued expenses 29,000
--------------------------------------------------------------------------------
Net cash used by operating activities (888,628)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under notes payable 888,628
--------------------------------------------------------------------------------
Net cash provided by financing activities 888,628
--------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents -
Cash and cash equivalents at beginning of year 1,800
--------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,800
================================================================================
Noncash investing and financing activities:
Note converted to common stock $ 102,000
See independent accountants' report and accompanying notes to consolidated
financial statements.
5
SWAN MAGNETICS, INC.
(A Subsidiary of Internet Venture Group, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
-----------------
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Swan Magnetics, Inc. (the Company) was incorporated in California in 1984. The
Company was formed to develop, manufacture and distribute advanced test
equipment used in the design and production of rigid disk drives, recording
heads and recording media used in computer systems in both domestic and
international markets. The Company began in 1996 to develop a removable mass
storage flexible disk drive and entered into a strategic alliance to market,
manufacture and distribute this drive. Also in 1996, the Company 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 the Company in December
1998 in an attempt to gain exclusive rights to the technology. As a result of
this activity, it became impossible for the Company to complete and
commercialize the technology and in late 1998, the Company ceased normal
operations. In May 1999, the Board of Directors formally suspended its remaining
activities except for two contractors who remained to preserve the Company's
technology and maintain corporate records.
In May 1999, all of the shareholders of the Company were invited to participate
in providing loans to the Company to be used in establishing the Swan Legal
Defense Fund (LDF) in order to pursue litigation against the Japanese company.
Certain of the Company's shareholders elected to participate in the LDF and
provided loans to the Company to pay for the costs of litigation. These loans
aggregated approximately $817,000 through December 31, 1999 (see note 6). As a
result of this litigation, effective April 12, 2000, the Company 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 the Company and the
Japanese company and surrender of the Series F preferred stock that had been
acquired by the Japanese company. In addition, the Company granted to the
Japanese company a worldwide, non-transferable, fully paid-up, royalty-free
(except as provided for under the agreement), nonexclusive license under the
Company's rights in and to all technology owned by the Company 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 the
Company 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.
6
Subsequent to the completion of the litigation, the Company entered into a
research and development arrangement (see Note 6) and is involved in completing
documentation of its disk drive and media manufacturing process and development
of a related pilot production line. It is the Company's intention to sell or
license this technology to a buyer.
Shareholders of the Company representing approximately 88% of the Company's
common stock, and all preferred stock as if converted to common stock, have
entered into a Private Exchange Memorandum with Internet Venture Group, Inc.
(IVG) effective June 28, 2000 for the sale of their shares to IVG. The
transaction closed on September 28, 2000. IVG is a public Internet holding
company whose mission is to acquire, develop and launch business-to-business and
business-to-consumer Internet properties and e-commerce suitable
brick-and-mortar companies transitioning to the Internet, into stand alone
public companies through stock exchange acquisition transactions, private equity
financing and initial public offerings of target company securities. This
acquisition by IVG will be accounted for as a purchase.
A decision related to the future business direction of the Company has not yet
been determined.
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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany transactions and
balances have been eliminated.
CASH EQUIVALENTS -
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of deposits in a single bank.
7
STOCK-BASED COMPENSATION -
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board (APB) Opinion No. 25
"Accounting for Stock Issued to Employees," and Financial Accounting Standards
Board Interpretation No. 28 (FIN No. 28), "Accounting or Stock Appreciation
Rights and Other Variable Stock Option or Award Plans," and complies with the
disclosure provisions of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation." The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force (EITF) No. 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
NOTE 2 - NOTES PAYABLE:
At December 31, 1999, the Company had a total of $7,884,485 in notes payable
outstanding, all of which was in default and due on demand. Of this amount,
$1,462,985 bears interest at 10% per year, $705,000 bears interest at 9% per
year $2,000,000 bears interest at 8.5% per year, $1,690,000 bears interest at
8.0% per year, $465,000 bears interest at 6% per year and $1,561,500 bears
interest at 1.5% per year.
NOTE 3 - SHAREHOLDERS' DEFICIT:
CONVERTIBLE PREFERRED STOCK -
The Company is authorized to issue up to 40,000,000 shares of convertible
preferred stock, which is designated and outstanding at December 31, 1999 as
follows:
Shares
------------------------------
Designated Outstanding Amount
Series A 900,000 900,000 $ 120,000
Series B 891,141 891,141 322,000
Series C 927,000 927,000 596,440
Series D 4,500,000 3,666,000 2,595,935
Series E 2,400,000 2,400,000 1,856,956
Series F 5,000,000 1,337,000 6,403,502
Series G 2,000,000 1,014,877 5,046,635
------------ ------------ ------------
16,618,141 11,136,018 $16,941,468
============ ============ ============
8
The rights, preferences and privileges of the Series A, B, C, D, E, F and G
preferred stockholders are as follows:
DIVIDEND RIGHTS -
Dividends are noncumulative and payable only upon declaration by the Board of
Directors at a rate of $0.046 per share for Series A preferred stock, $0.132 per
share for Series B preferred stock, $0.14 per share for Series C preferred
stock, $0.05 per share of Series D preferred stock, $0.05 per share for Series E
preferred stock, no dividend rights for the Series F holders unless declared by
the Board of Directors and $0.05 per share for Series G preferred stock. No
distributions will be made on any share of Series A preferred stock until
holders of Series B preferred stock have been paid. No distributions will be
made on any share of Series C preferred stock until holders of Series A and B
preferred stock have been paid. No distributions will be made on any share of
Series D preferred stock until holders of Series A, B and C preferred stock have
been paid. No distribution will be paid on any Series E preferred stock until
holders of Series A, B, C, and D stock have been paid. No distribution will be
paid on any Series F preferred stock until holders of Series A, B, C, D and E
stock have been paid. No distribution will be paid on any Series G preferred
stock until holders of Series A, B, C, D, and E stock have been paid.
LIQUIDATION PREFERENCE -
Holders of Series A shares have a liquidation preference of $0.40 per share plus
any declared but unpaid dividends over Series C and common shareholders. Holders
of Series B shares have a liquidation preference of $1.10 per share plus any
declared but unpaid dividends over Series A and C and common shareholders.
Holders of Series C shares have a liquidation preference of $2.00 per share plus
any declared but unpaid dividends over Series D and common shareholders. Holders
of Series D shares have a liquidation preference of $2.50 per share plus any
declared but unpaid dividends over that of common shareholders. Holders of
Series E shares have a liquidation preference of $2.50 per share plus any
declared but unpaid dividends over that of common shareholders. Holders of
Series F shares have a liquidation preference of $5.00 per share plus any
declared and unpaid dividends over that of common stockholders and after payment
of distributions to the holders of Series A, B, C, D and E preferred stock.
Holders of Series G shares have a liquidation preference of $5.00 per share plus
any declared and unpaid dividends over that of common stockholders and after
payment of distributions to the holders of Series A, B, C, D, E, and F preferred
stock.
9
CONVERSION RIGHTS -
Each share of preferred stock is convertible into one share of common stock at
the option of the holder, subject to adjustment to protect against dilution.
Preferred stock automatically converts upon 1) the effectiveness of a public
offering in which the gross offering proceeds exceed $1,000,000 and the offering
price exceeds $1.00 per share (except that Series E, F and G preferred stock
automatically convert upon the effectiveness of a public offering in which the
gross proceeds exceed $1,000,000 and the offering price exceeds $2.00 per share)
or 2) upon the vote or written consent of at least two-thirds of the number of
outstanding shares of each series of preferred stock (voting separately as a
class), approving the conversion of the preferred stock into common stock
(except that Series A and B do not have this feature).
In connection with the acquisition by IVG, all of the Series A and more than
two-thirds of the Series C, E and F preferred stock were converted to common
and, therefore, all preferred stock in these series have been converted. For
Series B, D and G preferred stockholders, only those holders who tendered their
shares for IVG shares have been converted.
The preferred shareholders have voting rights equal to common shares on an "as
converted" basis. In addition, notwithstanding the above, Series G preferred
stockholders may exclusively elect one director to the Board of Directors.
Series F preferred stockholders will have no voting rights except as otherwise
required by law.
COMMON STOCK RESERVED -
The Company is authorized to issue up to 100,000,000 shares of common stock.
Common stock reserved at December 31, 1999 consists of the following:
Conversion of preferred stock 11,136,018
Exercise of warrants 3,141,143
--------------
14,277,161
==============
10
WARRANTS -
Warrants issued and outstanding at December 31, 1999 consist of the following:
Common Series D Series G
stock preferred stock preferred stock
----- --------------- ---------------
Balance at December 31, 1998 2,762,518 150,000 265,375
Expired (36,750)
---------- ---------- ---------------
Balance at December 31, 1999 2,762,518 150,000 228,625
========== ========== ===============
The outstanding common stock warrants at December 31, 1999 are substantially
exercisable at $1.67 per share, except for 150,000 shares, which are exercisable
at $0.17 per share. None of the warrants have been exercised through of December
31, 1999. The warrants expire through 2003.
The Series D preferred stock warrants outstanding at December 31, 1999 were
surrendered at the time of the IVG acquisition. In return, the Company agreed to
provide the warrant holder with 20,000 restricted shares of common stock of IVG.
The outstanding Series G preferred stock warrants are exercisable at $0.03 per
share. None of the warrants have been exercised through December 31, 1999. The
warrants expire through 2006.
STOCK OPTIONS -
In August 1997, the Board of Directors authorized the adoption of the 1997 Stock
Option Plan (the 1997 Plan) and reserved 3,000,000 shares of common stock for
issuance there under. The 1997 Plan replaced the 1994 Incentive Stock Option
Plan 1994 and a nonqualified stock option plan (the 1994 Plans). Upon adoption
of the 1997 Plan, no additional options were granted under the 1994 plans.
As a result of the drastic reduction and eventual suspension of the Company's
operations, all previously granted and outstanding options issued under the 1997
Plan and the 1994 Plans were cancelled by December 31, 1999.
Under the 1997 Plan, options may be granted at prices not less than the fair
market value of the Company's stock (as determined by the Board of Directors) at
the grant date. Options generally vest at a rate of 25% per six-month period and
terminate the earlier of five years from date of issuance or 60 days after
employment termination. Options that terminate without being exercised may be
reissued.
11
NOTE 4 - INCOME TAXES:
There is no income tax benefit for 1999 as a result of the net loss for that
period and a full valuation allowance on deferred tax assets.
As of December 31, 1999, the Company had remaining federal net operating loss
carryforwards of approximately $26.5 million. The net operating loss
carryforwards will expire at various dates from 2012 through 2023, if not
utilized.
As a result of an ownership change at the time of the IVG acquisition,
utilization of the net operating losses will be subject to an annual limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986.
As of December 31, 1999, the Company had deferred tax assets of approximately
$11.2 million. Due to the Company's lack of earnings history and uncertainty of
the nature of future operations, the net deferred tax assets have been fully
offset by a valuation allowance. Deferred tax assets relate primarily to net
operating loss carryforwards.
NOTE 5 - COMMITMENTS AND CONTINGENCY:
The Company occupies a facility which is leased on a month to month basis at
$5,000 per month. The lease is with a company controlled by a relative of the
Company's president.
In addition to the facility, the Company leases a storage facility for $3,000
per month on a month-to-month basis.
Total rent expense for the Company's facilities was approximately $96,000 in
1999.
In connection with the settlement with the Japanese company, a shareholder of
the Company has asserted that he has a claim against the settlement in the
amount of approximately $1 million for services he asserts were rendered to the
Company during the litigation process. The Company believes that this potential
claim is without merit and whatever services might have been rendered were not
at the request of the Company. No amount has been accrued in the financial
statements related to this matter.
12
NOTE 6 - SUBSEQUENT EVENTS:
SWAN LEGAL DEFENSE FUND AND SETTLEMENT OF LITIGATION -
In order to provide funds to continue the litigation with a Japanese company, as
described in Note 1, the Company established the LDF. Certain shareholders of
the Company, who agreed to participate in the LDF, entered into a loan and
security agreement with the Company. The loans were initially contributed to a
separate bank account which was subject to an agency agreement. Under the agency
agreement, payments were made by the LDF but were restricted to payment of the
Company's legal costs and fees related to the litigation and, in addition, costs
associated with preserving the Company's technology and its corporate standing.
Contributions to the LDF remained the property of the lender until the funds
were paid by the agent on behalf of the Company. At the time of the disbursement
by the agent, the contributions were then deemed to be a loan to the Company in
the same amount as the disbursements. The secured promissory note agreements
were for one year, with a due date of May 14, 2000, and bore interest at 8% on
the amounts that became deemed loans. Under this agreement, a total of
approximately $817,000 was deemed loans at December 31, 1999 and approximately
an additional $683,000 during 2000.
The loan agreements also contained provisions for the allocation of proceeds
from the settlement of the litigation, as follows:
a. First, to pay any and all unpaid attorneys' fees, costs and other expenses of
litigating the lawsuit, including any fees that were calculated on a contingency
basis;
b. Next, to reimburse the loans made to the Company through the LDF, including
all unpaid principal and accrued interest, from any award of attorneys' fees and
costs, to the extent that any payments had been made from the proceeds of the
loans for attorneys' fees and costs;
c. Next, to repay the loans made to the Company, including all unpaid principal
and accrued interest, for any other payments made from the loans pursuant to the
agency agreement; and
d. Next, of the remaining amount, 25% was paid to the lenders and the balance
was paid to the Company.
13
Based on these settlement terms, the $25 million from the settlement was
allocated approximately $5.4 million to pay for additional legal fees and costs,
approximately $1.6 million for repayment of the loans and accrued interest and
approximately $4.5 million for the lenders share of the remaining proceeds. In
addition, a liability to the Japanese company at the time of the settlement in
the amount of approximately $86,000 and the amount paid by them for Series F
preferred stock in the amount of $3 million, were also included in the
settlement proceeds.
A summary of the net settlement proceeds from the litigation is approximately as
follows:
Settlement cash $ 25,000,000
Series F preferred stock 3,000,000
Liability to Japanese company 86,000
Total legal and litigation costs (6,154,000)
Additional payments to note
holders on litigation settlement (4,523,000)
-------------
$ 17,409,000
=============
EXTINGUISHMENT OF DEBT AND LONG-TERM NOTE PAYABLE -
The Company negotiated settlements of certain loans and accounts payable and
related accrued interest during 2000 in connection with the distribution of
funds received from the settlement of its litigation with a Japanese company. As
a result, the Company will reduce operating expenses by approximately $4.5
million in 2000 as a result of settling these obligations. Certain accounts
payable were settled by the Company's payment of an amount less than the full
liability with an agreement that if the check was cashed by the vendor, it would
constitute payment in full of the obligation. Where such checks have been
cashed, the Company will reduce operating expenses by the remaining liability.
The Company has also been successful in negotiating repayment of all but one
note payable at less than their face amount. The amount of the debt and related
accrued interest forgiven will also reduce operating expenses in the 2000
statement of operations. Loans from one company were settled in June 2000 by
payment of a stipulated amount and forgiveness of all the remaining balance and
accrued interest, except for $1,500,000. The Company entered into a new loan
agreement for this remaining amount, all payable on or before June 8, 2003 with
interest at 8% per annum. The loan requires that the principle amount of the
note be deposited in a segregated interest bearing account on behalf of the note
holder.
14
Also, the one note not settled at less than its face amount is a $1 million
convertible secured promissory note payable. This note is collateralized by all
tangible and intangible assets of the Company, and bears interest at 10% per
annum. The Company is currently attempting to negotiate a settlement with the
note holder in an amount that would be less than the principal and accrued
interest. There can be no assurance that the Company will be successful in these
negotiations. The conversion feature of the note expired at its maturity date.
RELATED PARTY NOTES RECEIVABLE -
During 2000 and 2001, the Company loaned IVG a total of $2.2 million. Each note
bears interest at 8% per annum and is due three years from the date of the note.
One of the notes for $1 million is convertible, at the option of the Company,
into 500,000 shares of common stock of IVG at any time after July 18, 2001. The
note also allows the accrued interest to be converted to common stock of IVG.
RESEARCH AND DEVELOPMENT AGREEMENT -
In November 2000, the Company 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 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 the Company 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 additional 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 the Company. The
Company exercised its conversion rights related to the $750,000 funding and
received 3 million shares of stock of iTVR in February 2001. The additional $2
million financing, if acquired, will also be convertible into 2.5 million shares
of common stock of iTVR by the lender.
15
SWAN MAGNETICS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30,
2000
----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,443,733
----------------
Total current assets 7,443,733
NON-CURRENT ASSETS
Restricted cash 1,500,000
----------------
Total non-current assets 1,500,000
----------------
Total assets $ 8,943,733
================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $ 3,255,000
Accrued interest 809,101
Accounts payable 1,480,756
Income taxes payable 150,000
Other accrued expenses 139,953
----------------
Total current liabilities 5,834,810
LONG-TERM DEBT 1,500,000
----------------
Total liabilities 7,334,810
SHAREHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, no par value; 40,000,000 shares authorized
10,536,018 shares issued and outstanding 13,941,468
Common stock, no par value; 100,000,000 shares authorized
33,754,112 shares issued and outstanding 2,226,974
Additional paid in capital 177,137
Accumulated deficit (14,736,656)
----------------
Total shareholders' equity (deficit) 1,608,923
----------------
Total liabilities and shareholders' equity (deficit) $ 8,943,733
================
See accompanying note.
16
SWAN MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
Six Months
Ended June 30,
2000
---------------
General and administrative costs $ (37,565)
Legal and litigation costs (3,442,412)
Additional payments to note holders on litigation settlement (4,522,873)
Settlement of lawsuit, net of costs 28,085,796
Interest expense (445,491)
Interest income 85,995
---------------
Income before provision for income taxes 19,723,450
Income taxes (150,000)
---------------
Net income 19,573,450
Accumulated deficit at beginning of period (34,310,106)
---------------
Accumulated deficit at end of period $ (14,736,656)
===============
See accompanying note.
17
SWAN MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
2000
-------------
OPERATING ACTIVITIES
Net (loss) income $ 19,573,450
Adjustments to reconcile net income to net cash
provided by operating activities:
Accounts payable (975,639)
Accrued interest (1,411,655)
Income taxes payable 150,000
Other accrued expenses 110,953
Accrued compensation and employee benefits (1,559,263)
-------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,888,046
FINANCING ACTIVITIES
Restricted cash (1,500,000)
Payments on borrowings (6,946,113)
-------------
NET CASH PROVIDED BY [(USED IN)] FINANCING ACTIVITIES (8,446,113)
-------------
INCREASE IN CASH 7,441,933
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,800
-------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 7,443,733
=============
See accompanying note.
18
SWAN MAGNETICS. INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Six Months Ended June 30, 2000 (Unaudited)
Convertible preferred stock Common stock Additional
-------------------------- ------------------------ paid-in Accumulated
Total Shares Amount Shares Amount capital Deficit
---------------------------------------------------------------------------------------------
December 31, 1999 (14,964,527) 11,136,018 16,941,468 33,754,112 2,226,974 177,137 (34,310,106)
Shares retired in connection with
settlement with Japanese company (3,000,000) (600,000) (3,000,000)
Net income for six months ended
June 30, 2000 19,573,450 19,573,450
---------------------------------------------------------------------------------------------
June 30, 2000 $ 1,608,923 10,536,018 $ 13,941,468 33,754,112 $ 2,226,974 $ 177,137 $(14,736,656)
=============================================================================================
See accompanying note.
19
NOTE 1 - INTERIM PERIOD REPORTING:
While the information presented in the accompanying consolidated financial
statements is unaudited, it includes all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are necessary to
present fairly the financial position, cash flows, results of operations, and
changes in financial position of Swan Magnetics, Inc. as of the date and for the
period indicated.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements of
Swan Magnetics, Inc. contained in the Company's Form 8-K/A for the year ended
December 31, 1999 filed on October 13, 2000. The results of operations for the
interim period presented is not necessarily indicative of the operating results
of the full year.
20
EXHIBIT 99.2
IVG CORP.
COMBINED PROFORMA BALANCE SHEET - UNAUDITED
JUNE 30, 2000
PRO FORMA PRO FORMA
JUNE 30, 2000 ADJUSTMENTS JUNE 30, 2000
------------- ----------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,651,934 $ $ 7,651,934
Accounts receivable 10,934 10,934
Inventories 91,198 91,198
----------------- ------------------ ------------------
Total current assets 7,754,066 0 7,754,066
PROPERTY AND EQUIPMENT, NET 57,845 57,845
RESTRICTED CASH 1,500,000 1,500,000
OTHER ASSETS 269,427 269,427
----------------- ------------------ ------------------
$ 9,581,338 $ 0 $ 9,581,338
================= ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses $ 1,022,331 $ $ 1,022,331
Accounts payable 1,678,294 1,678,294
Notes payable 3,559,496 3,559,496
Income taxes payable 150,000 150,000
----------------- ------------------ ------------------
Total current liabilities 6,410,121 0 6,410,121
LONG-TERM DEBT 1,500,000 1,500,000
PREFERRED STOCK 13,941,468 (11,759,649)(a) 2,181,819
MINORITY INTEREST 0 (25,117)(b) (25,117)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 2,230,107 (1,948,602)(c) 281,505
Additional paid in capital 2,706,451 31,772,959 (d) 34,479,410
Accumulated deficit (17,206,809) (18,039,591)(e) (35,246,400)
----------------- ------------------ ------------------
Total shareholders' equity (deficit) (12,270,251) 11,784,766 (485,485)
----------------- ------------------ ------------------
$ 9,581,338 $ 0 $ 9,581,338
================= ================== ==================
See accompanying notes. 1
1
IVG CORP.
COMBINED PROFORMA STATEMENTS OF EARNINGS - UNAUDITED
PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, PRO FORMA DECEMBER 31,
1999 Adjustments 1999
------------------ ------------------- ------------------
Revenues $ 464,740 $ $ 464,740
Interest income 0 0
------------------ ------------------- ------------------
Total revenues 464,740 0 464,740
Costs and expenses:
Cost of goods sold 181,303 181,303
General and administrative 685,517 685,517
Engineering and development 24,000 24,000
In process technology 0 18,039,591 (f) 18,039,591
Settlement of lawsuit 760,200 760,200
Interest expense 840,346 840,346
Legal and litigation costs 0 0
Additional payments to note holders 0 0
------------------ ------------------- ------------------
2,491,366 18,039,591 20,530,957
------------------ ------------------- ------------------
Net earnings before taxes (2,026,626) (18,039,591) (20,066,217)
Income taxes 0 0
------------------ ------------------- ------------------
Net earnings $ (2,026,626) $ (18,039,591) $ (20,066,217)
================== =================== ==================
See accompanying notes. 2
2
IVG CORP.
COMBINED PROFORMA STATEMENTS OF EARNINGS - UNAUDITED
SIX MONTHS
ENDED JUNE 30, 2000
-------------------
Revenues $ 175,996
-------------------
Total revenues 175,996
Costs and expenses:
Cost of goods sold 147,967
General and administrative 441,182
Interest expense 445,491
Legal and litigation costs 6,135,444
Additional payments to note holders 4,522,873
-------------------
11,692,957
-------------------
Other income (expense):
Interest income 85,995
Settlement of lawsuit, net 28,085,796
-------------------
28,171,791
-------------------
Net earnings before extraordinary items 16,654,830
Extraordinary item:
Extinguishment of debt 2,693,032
-------------------
Net earnings before taxes 19,347,862
Income taxes (150,000)
-------------------
Net earnings $ 19,197,862
===================
See accompanying notes. 3
3
IVG CORP.
NOTES TO PRO FORMA FINANCIAL INFORMATION - Unaudited
NOTE 1 - GENERAL INFORMATION
On September 28, 2000, IVG Corp. (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 20,000,000 shares of restricted common stock for approximately 88.5%
of the outstanding common shares of Swan. 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 $1.75. Stockholders exchanged an aggregate of 9,091,793 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 $19,005,131. 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.
The accompanying unaudited combined pro forma statements of earnings for the
year ended December 31, 1999 and for the six months ended June 30, 2000 are
based on historical results of operations and give effect to the transaction as
if it had occurred on January 1, 1999. The unaudited combined pro forma balance
sheet as of June 30, 2000 gives effect to the transaction as if it had occurred
as of that date. The unaudited combined pro forma balance sheet and statements
of earnings and these accompanying notes should be read in conjunction with, and
are qualified by, the historical financial statements of the Company and the
notes thereto. This pro forma financial information is for informational
purposes only and is not necessarily indicative of the future financial position
or results of operations of the Company, or of the financial position or results
of operations of the Company that would have actually occurred had the
transaction described been effected as of the dates indicated above.
NOTE 2 - PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(a) Adjustment to reduce preferred stock to liquidation value based on net
assets acquired in transaction.
(b) Adjustment to reflect minority interest of 12.5% of earnings as of June
30, 2000.
(c) Adjustment to record the exchange of 88.5% of the outstanding common
shares of Swan that occurred in September 2000 for IVG Corp. common
shares.
(d) Adjustment to reflect the effect of the transaction described in Note 1
on additional paid in capital as of June 30, 2000.
(e) Adjustment to reflect the write off of in process technology assuming a
June 30, 2000 transaction date.
(f) Adjustment to write off in process technology assuming a January 1,
1999 transaction date.
24