U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB/A
Amendment No. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTON 13 OR 15(d) OF THE EXCHANGE ACT for the
transition period from ___________________ to ________________________.
Commission File Number 0-9940
THE FINX GROUP, INC.
(Exact name of small business issuer as specified in its charter)
(Formerly known as Fingermatrix, Inc.
Delaware 13-2854686
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
249 Saw Mill River Road, Elmsford, NY 10523
(Address of principal executive offices) (Zip Code)
(914) 592-5930
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 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 ___
As of February 22, 2001, there were 45,636,090 shares of the par value
$.01 common stock outstanding.
Purpose of Amendment:
The Form 10QSB for the quarterly period ended September 30, 2001 is amended to
include the effects of financial statement adjustments that were made to the
amended Form 10KSB/A for the year ended December 31, 2000, the amended Form
10QSB/A for the quarter ended March 31, 2001, the amended Form 10QSB/A for the
quarter ended June 30, 2001 and to include the independent accountant's review
report.
1
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders of
The Finx Group, Inc.
Elmsford, New York
We have reviewed the accompanying consolidated balance
sheet of The Finx Group, Inc. and its subsidiaries as of September 30,
2001 and the related consolidated statements of operations and cash flows
for the three and nine month periods ended September 30, 2001 and 2000.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less
in scope than an audit conducted in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements referred to above for them to be in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the
Company has suffered a net loss of $7,841,000 for the nine month period
ended September 30, 2001 and has a working capital deficiency of
$6,533,000 and a capital deficiency of $6,287,000 as of September 30,
2001. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any
adjustments which might arise from the outcome of these uncertainties,
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 15, 2002
2
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------
Three months ended September 30, 2001 2000
-----------------------------------------------------------------------------------------------------------
Sales $ 421,000 $ 584,000
Cost of goods sold 320,000 379,000
-----------------------------------------------------------------------------------------------------------
101,000 205,000
Reserve for slow moving inventory (90,000) (400,000)
-----------------------------------------------------------------------------------------------------------
Gross profit 11,000 (195,000)
Operating expenses 5,898,000 6,095,000
-----------------------------------------------------------------------------------------------------------
Operating loss (5,887,000) (6,290,000)
Interest expense and financing fees, related parties (67,000) (37,000)
Interest expense and financing fees, other (46,000) (61,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (6,000,000) $ (6,388,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 22,206,489 11,225,268
-----------------------------------------------------------------------------------------------------------
Net loss per common share: Basic and fully diluted $ (0.27) $ (0.57)
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
3
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------
2000
As
Nine months ended September 30, 2001 Restated
-----------------------------------------------------------------------------------------------------------
Sales $ 1,349,000 $ 2,017,000
Cost of goods sold 803,000 1,135,000
-----------------------------------------------------------------------------------------------------------
546,000 882,000
Reserve for slow moving inventory (340,000) (400,000)
-----------------------------------------------------------------------------------------------------------
Gross profit 206,000 482,000
Operating expenses 7,590,000 7,441,000
-----------------------------------------------------------------------------------------------------------
Operating loss (7,384,000) (6,959,000)
Other income 9,000 --
Interest expense and financing fees, related parties (288,000) (168,000)
Interest expense and financing fees, other (178,000) (159,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (7,841,000) $ (7,286,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 17,115,509 5,140,045
-----------------------------------------------------------------------------------------------------------
Net loss per common share: Basic and fully diluted $ (0.46) $ (1.42)
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
4
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
-----------------------------------------------------------------------------------------------------------
As of September 30, 2001
-----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSSETS:
Cash $ 68,000
Accounts receivable, net 106,000
Inventories, net 1,140,000
Prepaid expense and other current assets 19,000
-----------------------------------------------------------------------------------------------------------
Total current assets 1,333,000
-----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Property, plant and equipment, cost 2,542,000
Software costs 285,000
Less accumulated depreciation and amortization (2,611,000)
-----------------------------------------------------------------------------------------------------------
Net property plant and equipment 216,000
-----------------------------------------------------------------------------------------------------------
Other assets:
Security deposits 20,000
Patents, net 10,000
-----------------------------------------------------------------------------------------------------------
Total other assets 30,000
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,579,000
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,702,000
Accrued payroll 1,757,000
Accrued payroll taxes 963,000
Notes payable, related parties 1,670,000
Revolving line of credit 572,000
Customer deposits 56,000
Other current liabilities 146,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities 7,866,000
-----------------------------------------------------------------------------------------------------------
CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value; 1,000,000 shares authorized; 21,000
shares issued and outstanding 2,000,000
Common stock, $.01 par value; 50,000,000 shares authorized; 31,680,521
shares issued and outstanding 317,000
Additional paid-in capital 19,291,000
Accumulated deficit (26,890,000)
-----------------------------------------------------------------------------------------------------------
(5,282,000)
Subscriptions receivable (1,005,000)
-----------------------------------------------------------------------------------------------------------
Total capital deficiency (6,287,000)
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 1,579,000
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
5
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
2000
As
Nine Months ended September 30, 2001 Restated
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
-----------------------------------------------------------------------------------------------------------
Net loss $ (7,841,000) $ (7,286,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non cash expense from the issuance of stock options 3,060,000 --
Non cash expense from the issuance of common stock to settle -- 28,000
Acquired in-process research and development costs 2,044,000 4,768,000
Reserve for slow moving inventory 340,000 400,000
Expense deferred offering costs -- 148,000
Depreciation and amortization 150,000 26,000
Bad debt expense 30,000 5,000
Other operating activities (24,000) 2,000
Changes in assets and liabilities:
Inventories (360,000) (481,000)
Accounts receivable, net 125,000 197,000
Prepaid expense and other current assets 2,000 17,000
Other assets 10,000 (3,000)
Accounts payable 775,000 359,000
Accrued payroll 761,000 67,000
Accrued payroll taxes 416,000 178,000
Accrued interest expense, related parties 287,000 182,000
Customer deposits (16,000) (2,000)
Other current liabilities (77,000) 80,000
-----------------------------------------------------------------------------------------------------------
Net cash used for operating activities (318,000) (1,315,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Software development costs -- (82,000)
Patent costs -- (10,000)
Capital expenditures -- (16,000)
Cash of acquired subsidiary 31,000 8,000
Other investing activities 1,000 --
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities 32,000 (100,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 792,000 1,995,000
Repayments on related party loans (339,000) (123,000)
Net payments under revolving lines of credit (105,000) (128,000)
Deferred offering costs -- (210,000)
Other financing activities 4,000 (25,000)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 352,000 1,510,000
-----------------------------------------------------------------------------------------------------------
Net increase in cash 66,000 95,000
Cash - Beginning of period 2,000 80,000
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ 68,000 $ 175,000
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
(continued)
6
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2001 2000
-----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 148,000 $ 98,000
Income Taxes -- --
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
(concluded)
7
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The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three and Nine Months Ended September, 30, 2001 and 2000
--------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of The
Finx Group, Inc. ("The Finx Group" or, the "Company") have been prepared in
accordance with Regulation S-B promulgated by the Securities and Exchange
Commission and do not include all of the information and footnotes required by
generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, these interim financial
statements include all adjustments necessary in order to make the financial
statements not misleading. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year. The
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto of the Company
and management's discussion and analysis of financial condition and results of
operations included in the Annual Report on Form 10-KSB/A for the year ended
December 31, 2000. Certain reclassifications were made to prior year amounts to
conform to the current year presentation.
The accompanying unaudited interim financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the liquidation of liabilities in the normal course of business. However,
the Company has a history of net losses and as of September 30, 2001 has a
working capital deficiency of $6.533 million and capital deficiency of $6.287
million. Since April of 1999 the Company has relied on financial support from
its controlling stockholder, The Trinity Group-I, Inc. ("Trinity"), and other
related parties. Management is currently seeking additional financing; however
no assurances can be made that such financing will be consummated. The
continuation of the Company as a going concern is dependent upon its ability to
obtain financing, and to use the proceeds from any such financing to increase
its business to achieve profitable operations. The accompanying financial
statements do not include any adjustments that would result should the Company
be unable to continue as a going concern.
2. Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the December 31, 2000 Form 10-KSB/A.
3. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share reflect the amount of earnings or loss
for the period available to each share of common stock outstanding during the
reporting period. Diluted earnings (loss) per share reflects basic earnings
(loss) per share, while giving effect to all dilutive potential common shares
that were outstanding during the period, such as common shares that could be
issued upon the exercise or conversion of outstanding securities into common
stock. The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an anti-dilutive
effect on earnings per share (i.e. increasing earnings per share or reducing
loss per share).
The Company's Board of Directors approved the 2001 Employee Stock
Option Plan. The purpose of the 2001 Employee Stock Option Plan is to secure
long-term relationships for the Company and its stockholders, from the benefits
arising from capital stock ownership by the Company's Consultants, Advisors,
Employees and Directors, who can help in the company's growth and success and to
provide an effective means of compensation for such persons and entities
providing services to the Company in lieu of cash payments therefor. The 2001
Employee Stock Option Plan, as amended, provides for the issuance of up to
17,000,000 shares of the Company's Common Stock and all such shares have been
registered on Form S-8. As of September 30, 2001 options to acquire 13,735,000
shares were issued resulting in $3.06 million of compensation expense as
determined using the Black-Scholes option valuation formula. As of
8
September 30, 2001 options to purchase 6,700,000 shares were exercised at $0.15
per share for which the Company received non-recourse notes receivable of $1.005
million, which is presented as a separate component of capital deficiency
entitled subscriptions receivable.
Subsequent to September 30, 2001 additional options to acquire
3,265,000 shares of common stock were issued resulting in compensation expense
of $1.462 million in the 4th quarter of 2001. Subsequent to September 30, 2001,
options to purchase 3,100,000 shares were exercised at $0.30 per share and
options to purchase 7,200,000 shares were exercised at $0.15 per share.
The dilutive effect of outstanding options and warrants and their
equivalents are reflected in dilutive earnings (loss) per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon the exercise of options and warrants in computing
diluted earnings (loss) per share. It assumes that any proceeds would be used to
purchase common stock at the average market price of the common stock during the
period. For the three and nine months ended September 30, 2001 and 2000, all of
the Company's potential common shares were anti-dilutive and a dual presentation
of earnings (loss) per share is not presented. Such items may dilute earnings
per share in the future.
4. Related Party Debt Conversion
On May 7, 2001, Trinity converted $1.5 million of related party debt
into 7,500,000 shares of Common Stock, representing $0.20 per share, the fair
market value of the Common Stock on May 7, 2001. On May 7, 2001, Trinity
converted an additional $2 million of related party debt into shares of a newly
created series of preferred stock, the "Series "B" Preferred Stock. The Series
"B" Preferred Stock is redeemable by the Company in whole or in part, at the
option of the board of directors with Lewis S. Schiller, Trinity's owner,
abstaining, and votes alongside of common stock. The Series "B" Preferred Stock
is convertible in whole or in part, at the option of the holder or its
designees, over a two year period beginning May 7, 2002, into common stock at a
rate representing the lowest price that the common stock has traded at over the
period for which the preferred stock has been outstanding. Such conversion may
require an increase in the number of authorized common shares. Dividends on the
Series "B" Preferred stock are payable semi-annually at a rate of 8%.
During the 3rd Quarter of 2001, Carol Schiller, the wife of Lewis S.
Schiller, loaned the Company $100,000. In payment of the loan, the Company
issued to Ms. Schiller, 1,000,000 shares of restricted common stock.
5. Acquisition of Granite Technologies, Inc.
On September 19, 2001, the Company consummated its acquisition (the
"Acquisition") of Granite Technologies, Inc. ("Granite") through its newly
created and wholly owned subsidiary, Granite Technology Acquisition Corp.
pursuant to the terms of a Stock Purchase Agreement dated as of September 19,
2001, as amended, the Company purchased 95.87% of Granite's common stock from
such holders of the Granite's common stock (the "Selling Shareholders") upon the
issuance of 3,000,000 shares of its unregistered Common Stock (the "Acquisition
Shares"). Granite has two significant proprietary software packages which have
wide application in the retail and financial markets. Granite's principal
products are the SmartCAT application Framework and the SmartCAT IO Subsystem.
SmartCAT is a set of JAVA middleware that provides both the client (kiosk) and
server (central system mainframe) platform for rapid development of self-service
applications over the Internet. SmartCAT IO Subsystem, also a set of JAVA
applications, provides powerful but simple-to-use interfaces to serial devices
found in kiosks and in various retail delivery applications, such as
point-of-sale and bank branch automation. It may be used together with the
SmartCAT Application Framework or with other applications such as Eontec's
BankFrame to deliver complete client specific solutions.
Of the Selling Shareholders, Grazyna B. Wnuk, the Company's Corporate
Secretary, a Director and Vice-President, received 124,031 Acquisition Shares
for her ownership interest in Granite; and immediate family members of Lewis S.
Schiller, the Company's Chairman of the Board, a Director and
9
Chief Executive Officer, received 397,934 Acquisition Shares for their ownership
interest in Granite. In accordance with the terms of the Stock Purchase
Agreement, the Selling Shareholders hold certain demand and "piggyback"
registration rights with respect to the Acquisition Shares received by them in
connection with the Acquisition on terms specified in the Stock Purchase
Agreement.
On September 15, 2001 the Company and Granite Technology Acquisition
Corp. entered into a Settlement and Release Agreement with Rock Partners Ltd.,
SSMI Corp. and Bruno Kordich. Pursuant to the Settlement and Release Agreement
(i) the Company received 250,000 shares, or 4.13%, of Granite's common stock
then owned by Rock Partners Ltd. and SSMI Corp.; (ii) the Company and Granite
received a General Release and a Dismissal with Prejudice on any past disputes
by and among Granite and Rock Partners Ltd., SSMI Corp. and Bruno Kordich; (iii)
all past agreements between Granite and Rock Partners Ltd., SSMI Corp. and Bruno
Kordich became void and cancelled; (iv) Rock Partners Ltd., SSMI Corp. and Bruno
Kordich received 542,636 shares of the Company's Common Stock in consideration
for (i), (ii) and (iii); (v) the Company and Granite acknowledged outstanding
notes and liabilities in the aggregate of $77,000 for which payments will begin
in January of 2002 at $10,000 per month; and (vi) the Company issued 160,000
shares of the Company's Common Stock in consideration for all remaining claims
aggregating $80,000.
Based on the fair value of the consideration paid, the Company recorded
a purchase price in excess of net assets acquired of approximately $2 million
which was expensed as part of acquired in-process research and development
expense on the date of acquisition. For accounting purposes, the balance sheet
of Granite is included in the consolidated balance sheet as of September 30,
2001 and the statement of operations and cash flows will be included for periods
subsequent to September 30, 2001 (see Note 9).
6. Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" established standards for the
reporting of information about operating segments and defines operating segments
as components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision maker is Lewis S. Schiller, the Company's Chief
Executive Officer, who evaluates the Company's businesses based upon the
separate financial statements and information of the underlying subsidiaries of
the Company. Based on the above evaluation, the Company has identified seven
reportable business segments as follows: (1) Electro-Mechanical and
Electro-Optical Products, which is an operating business segment reflecting the
activities of Sequential Electronic Systems, Inc. ("Sequential"); (2)
Specialized Vending Machines and Avionics Equipment, which is an operating
business segment reflecting the activities of S-Tech, Inc. ("S-Tech"); (3)
Fingerprint Identification Technologies, which is a development stage business
segment reflecting the activities of FMX Corp. ("FMX"); (4) Secured Entrance
Systems, which is a development stage business segment reflecting the activities
of Secured Portal Systems, Inc. ("SPS"), (5) Internet Marketing, which is a
development stage business reflecting the activities of Starnet365.com, Inc.
("Starnet365.com"), (6) Web Based Development Solutions, which is a development
stage business reflecting the activities of Biz Chase, Inc. and Granite and (7)
Application Service Provider, which is an operating business segment reflecting
the operations of Shopclue.com. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
10
There are intersegment consulting fees and intersegment advances and
related interest charges, all of which are eliminated in the consolidated
financial statements.
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Three Months Ended September 30, 2001 2000
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 361,000 $ 462,000
Specialized Vending Machines and Avionics Equipment 7,000 94,000
Internet Marketing 53,000 --
Application Service Provider -- 28,000
-------------------------------------------------------------------------------------------------------------
421,000 584,000
Corporate consulting fees 225,000 270,000
Intersegment consulting fees (225,000) (270,000)
-------------------------------------------------------------------------------------------------------------
Total revenues $ 421,000 $ 584,000
-------------------------------------------------------------------------------------------------------------
Operating loss:
Electro-Mechanical and Electro- Optical Products $ (139,000) $ (67,000)
Specialized Vending Machines and Avionics Equipment (89,000) (402,000)
Fingerprint Identification Technologies (87,000) (90,000)
Secured Entrance Systems (76,000) (52,000)
Internet Marketing (379,000) (254,000)
Web Based Development Solutions (2,155,000) (269,000)
Application Service Provider (3,000) (5,009,000)
-------------------------------------------------------------------------------------------------------------
(2,928,000) (6,143,000)
Corporate costs and expenses (2,983,000) (147,000)
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (5,911,000) $ (6,290,000)
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11
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Three Months Ended September 30, 2001 2000
-------------------------------------------------------------------------------------------------------------
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 82,000 $ 62,000
Specialized Vending Machines and Avionics Equipment 10,000 --
Fingerprint Identification Technologies 11,000 7,000
Secured Entrance Systems 5,000 2,000
Internet Marketing 19,000 3,000
Web Based Development Solutions 35,000 18,000
-------------------------------------------------------------------------------------------------------------
162,000 92,000
Corporate costs and expenses 29,000 19,000
Intersegment charges (78,000) (13,000)
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 113,000 $ 98,000
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Net income (loss):
Electro-Mechanical and Electro- Optical Products $ (200,000) $ (120,000)
Specialized Vending Machines and Avionics Equipment (100,000) (396,000)
Fingerprint Identification Technologies (98,000) (97,000)
Secured Entrance Systems (81,000) (55,000)
Internet Marketing (398,000) (258,000)
Web Based Development Solutions (2,190,000) (302,000)
Application Service Provider -- (4,990,000)
-------------------------------------------------------------------------------------------------------------
(3,067,000) (6,218,000)
Corporate costs and expenses (2,933,000) (170,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (6,000,000) $ (6,388,000)
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 4,000 $ 1,000
Internet Marketing 12,000 --
Web Based Development Solutions 28,000 1,000
Application Service Provider 2,000 1,000
-------------------------------------------------------------------------------------------------------------
46,000 3,000
Corporate 5,000 6,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 51,000 $ 9,000
-------------------------------------------------------------------------------------------------------------
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2000
As
Nine Months Ended June 30, 2001 Restated
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 995,000 $ 1,714,000
Specialized Vending Machines and Avionics Equipment 137,000 275,000
Internet Marketing 199,000 --
Application Service Provider 18,000 28,000
-------------------------------------------------------------------------------------------------------------
1,349,000 2,017,000
Corporate consulting fees 675,000 270,000
Intersegment consulting fees (675,000) (270,000)
-------------------------------------------------------------------------------------------------------------
Total revenues $ 1,349,000 $ 2,017,000
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12
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2000
As
Nine Months Ended September 30, 2001 Restated
-------------------------------------------------------------------------------------------------------------
Operating loss:
Electro-Mechanical and Electro- Optical Products $ (362,000) $ 316,000
Specialized Vending Machines and Avionics Equipment (70,000) (496,000)
Fingerprint Identification Technologies (288,000) (196,000)
Secured Entrance Systems (247,000) (140,000)
Internet Marketing (1,007,000) (334,000)
Web Based Development Solutions (2,621,000) (269,000)
Application Service Provider (6,000) (5,009,000)
-------------------------------------------------------------------------------------------------------------
(4,601,000) (6,128,000)
Corporate costs and expenses 2,807,000 (831,000)
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (7,408,000) $ (6,959,000)
-------------------------------------------------------------------------------------------------------------
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 286,000 $ 219,000
Specialized Vending Machines and Avionics Equipment 55,000 43,000
Fingerprint Identification Technologies 31,000 18,000
Secured Entrance Systems 13,000 7,000
Internet Marketing 53,000 5,000
Web Based Development Solutions 101,000 18,000
-------------------------------------------------------------------------------------------------------------
539,000 310,000
Corporate costs and expenses 72,000 46,000
Intersegment charges (145,000) (29,000)
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 466,000 $ 327,000
-------------------------------------------------------------------------------------------------------------
Net income (loss):
Electro-Mechanical and Electro- Optical Products $ (605,000) $ 122,000
Specialized Vending Machines and Avionics Equipment (123,000) (533,000)
Fingerprint Identification Technologies (320,000) (215,000)
Secured Entrance Systems (261,000) (148,000)
Internet Marketing (1,046,000) (340,000)
Web Based Development Solutions (2,723,000) (302,000)
Application Service Provider 4,000 (4,990,000)
-------------------------------------------------------------------------------------------------------------
(5,074,000) (6,406,000)
Corporate costs and expenses (2,767,000) (880,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (7,841,000) $ (7,286,000)
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 6,000 $ 6,000
Internet Marketing 38,000 --
Web Based Development Solutions 82,000 1,000
Application Service Provider 6,000 1,000
-------------------------------------------------------------------------------------------------------------
132,000 8,000
Corporate 18,000 18,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 150,000 $ 26,000
-------------------------------------------------------------------------------------------------------------
13
-------------------------------------------------------------------------------------------------------------
September December
30, 31,
2001 2000
-------------------------------------------------------------------------------------------------------------
Assets:
Electro-Mechanical and Electro- Optical Products $ 1,808,000 $ 1,828,000
Specialized Vending Machines and Avionics Equipment 302,000 372,000
Fingerprint Identification Technologies 10,000 10,000
Secured Entrance Systems -- --
Internet Marketing 268,000 274,000
Web Based Development Solutions 1,036,000 1,080,000
Application Service Provider 166,000 207,000
-------------------------------------------------------------------------------------------------------------
3,590,000 3,771,000
Corporate 17,131,000 12,505,000
Intersegment investments (14,320,000) (12,906,000)
Intersegment advances (4,822,000) (1,565,000)
-------------------------------------------------------------------------------------------------------------
Total assets $ 1,579,000 $ 1,805,000
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7. New Authoritative Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement
No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets" in June 2001. Those statements will change the accounting for
business combinations and goodwill in two significant ways. First, Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interest
method will be prohibited. Second, Statement 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. Thus
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of that Statement, which for companies
with calendar year ends, will be January 1, 2002.
The FASB has issued Statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" in August 2001. Statement No. 144 changes the
accounting for long-lived assets to be held and used by eliminating the
requirement to allocate goodwill to long-lived assets to be tested for
impairment, by providing a probability-weighted cash flow estimation approach to
deal with situations in which alternative courses of action to recover the
carrying amount of possible future cash flows and by establishing a
"primary-asset" approach to determine the cash flow estimation period for a
group of assets and liabilities that represents the unit of accounting for a
long-lived asset to be held and used. Statement No. 144 changes the accounting
for long-lived assets to be disposed of other than by sale by requiring that the
depreciable life of a long-lived asset to be abandoned be revised to reflect a
shortened useful life and by requiring that an impairment loss be recognized at
the date a long-lived asset is exchanged for a similar productive asset or
distributed to owners in a spin-off if the carrying amount of the asset exceeds
its fair value. Statement No. 144 changes the accounting for long-lived assets
to be disposed of by sale by requiring that discontinued operations no longer be
measured on a net realizable value basis (but at the lower of carrying amount or
fair value less costs to sell), by eliminating the recognition of future
operating losses of discontinued components before they occur and by broadening
the presentation of discontinued operations in the income statement to include a
component of an entity rather than a segment of a business. A component of an
entity comprises operations and cash flows that can be clearly distinguished,
operationally, and for financial reporting purposes, from the rest of the
entity. The effective date for Statement No. 144 is for fiscal years beginning
after December 15, 2001.
The Company expects that the adoption of the new statements will not
have a significant impact on its financial statements. It is not possible to
quantify the impact until the newly issued statement has been studied.
14
8. Subsequent Event
On November 11, 2001, the Company entered into a binding letter of
intent to acquire an equity interest in Trans Global Services, Inc. ("Trans
Global"). Pursuant to the letter of intent, the Company would receive 5,000,000
shares of Trans Global's common stock in exchange for 2,500,000 shares of the
Company's common stock. In addition, the Company would purchase preferred
equity, convertible into a maximum of 3,000,000 shares of Trans Global's common
stock, for $1 million. Further, the letter of intent requires immediate election
of the Company's appointees to the Trans Global board of directors including the
appointment of Lewis S. Schiller as Trans Global's Chairman of the Board, after
which, the Company's appointees would represent a majority of the Trans Global
board of directors. Lewis S. Schiller is the Chief Executive Officer and
Chairman of the Board of the Company (see Note 9).
9. Pro Forma Financial Information
The following pro forma unaudited results assume the acquisitions of
Granite and Trans Global had occurred at the beginning of the three and nine
month periods ended September 30, 2001 and 2000.
Three Months Ended September30, Nine Months Ended September 30,
2001 2000 2001 2000
---- ---- ----- ----
Sales $ 7,526,000 $ 6,041,000 $ 22,468,000 $ 19,512,000
Net Loss $ (6,267,000) $ (7,160,000) $ (8,923,000) $ (8,973,000)
Net Loss per Share $ (0.21) $ (0.37) $ (0.36) $ (0.68)
The pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the acquisition been effective at the
beginning of the indicated periods or of the future results of operations.
10. Restatement of Prior Period
During June 2000, the Company had plans to issue non employee stock
options to purchase 737,500 shares of common stock. Using the Black-Scholes
option valuation formula, such shares had a value of $1.766 million, and such
value was recorded as an operating expense for the nine months ended September
30, 2000. The Company did not issue these options and as such, the statement of
operations for the nine months ended September 30, 2000 has been restated herein
as follows:
As Originally
Reported Restatement As Restated
-------- ----------- -----------
Non cash stock option expense $ 1,766,000 $ (1,766,000) --
Operating expenses $ 9,207,000 $ (1,766,000) 7,441,000
Operating Loss $ (8,725,000) $ 1,766,000 (6,959,000)
Net loss $ (9,052,000) $ 1,766,000 (7,286,000)
Loss per share ($1.76) $0.34 ($1.42)
The statement of cash flows for the nine months ended September 30,
2000 was restated whereby it includes the restated net loss and no longer
includes the $1,766,000 non cash stock option expense as an item to reconcile
net loss to net cash used in operations.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty. Although management believes that its expectations are based on
reasonable assumptions, it can give no assurance that its expectations will be
achieved.
The important factors that could cause actual results to differ from
those in the forward-looking statements herein (the "Cautionary Statements") are
more fully described in the Company's December 31, 2000 Form 10-KSB/A and
include, without limitation: the Company's history of losses and cash flow
deficits; need for additional financing to fund our present and proposed
business activities; dependence on present executive officers and key personnel
to manage our present and proposed business operations and our ability to
integrate new officers and key personnel; dependence upon an exclusive
distribution agreement for the future operations of SPS; dependence upon patent
protection for the proposed activities of FMX; threat that technological change
could render certain of our products and proposed products obsolete or
non-competitive; inability to predict market acceptance for our proposed
products; intense competition of the business in which we intend to engage;
threat that E-commerce products and services may become subject to government
regulation; the risks relating to legal proceedings, as well as other risks
referenced from time to time in the Company's filings with the SEC. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
As more fully disclosed in the footnotes to the unaudited interim
financial statements, The Finx Group has seven identifiable business segments.
The operations of each of the business segments is discussed separately as
follows:
Electro-Mechanical and Electro-Optical Products
The Electro-Mechanical and Electro-Optical Products segment comprises
the activities of Sequential, which is primarily engaged in the design,
manufacture and assembly of precision electro-mechanical and electro-optical
products and devices for sale to commercial and governmental customers
throughout the United States. Among such products and devices are optical
encoders, encoded motors and limit programmers. Sequential's revenues decreased
$101,000, or 22%, from $462,000 for three months ended September 30, 2000 (the
"2000 3rd Quarter") to $361,000 for the three months ended September 30, 2001
(the "2001 3rd Quarter"). Sequential's 2001 and 2000 3rd Quarter gross profit
was $25,000, or 7% of sales, and $186,000, or 40% of sales, respectively.
Sequential's gross profit for the 2001 3rd Quarter included a deduction of
$60,000, or 17% of sales, for a reserve for obsolete and slow moving inventory.
Sequential's revenues decreased $719,000, or 42%, from $1.714 million for nine
months ended September 30, 2000 (the "2000 Nine Month Period") to $995,000 for
the nine months ended September 30, 2001 (the "2001 Nine Month Period").
Sequential's 2001 and 2000 Nine Month Period gross profit was $45,000, or 5% of
sales, and $817,000, or 48% of sales, respectively. Sequential's gross profit
for the 2001 Nine Month Period included a deduction of $310,000, 31% of sales,
for a reserve for obsolete and slow moving inventory. Sequential's decline in
revenue is primarily attributed to its inability to pay for the materials
necessary to build the products included in its backlog. This inability to
manufacture product has resulted in excessive downtime and idle capacity
resulting in significantly reduced margins. Sequential's operating
16
expenses decreased $90,000, or 35% from $254,000 for the 2000 3rd Quarter to
$164,000 for the 2001 3rd Quarter. Sequential's operating expenses decreased
$94,000, or 19% from $501,000 for the 2000 Nine Month Period to $407,000 for the
2001 Nine Month Period. As a result of the above, Sequential's operating loss
increased by $72,000, or 106%, from $67,000 for the 2000 3rd Quarter to $139,000
for the 2001 3rd Quarter and its operating results decreased by $678,000, or
215%, from operating income of $316,000 for the 2000 Nine Month Period to an
operating loss of $362,000 for the 2001 Nine Month Period. During the 2001 and
2000 3rd Quarters and the 2001 Nine Month Period, Sequential's operating
expenses included $45,000 and $135,000, respectively, of management fees charged
by The Finx Group.
Specialized Vending and Avionics Equipment
The Specialized Vending and Avionics Equipment comprise the activities
of S-Tech, which designs and manufactures two specialized product lines
consisting of specialized vending machines and avionics equipment. "Specialized
Vending" is an industry term used to describe a vending product that utilizes
electronic circuitry and/or computer software. Among the vending machines
manufactured by S-Tech are prepaid telephone debit card machines, bill payment
kiosks, information kiosks, and stamp vending machines. S-Tech's revenues for
the 2001 3rd Quarter decreased $87,000, or 92%, from $94,000 for the 2000 3rd
Quarter to $7,000 for the 2001 3rd Quarter. S-Tech's gross profit was a negative
$67,000 for the 2001 3rd Quarter and was a negative $371,000 for the 2000 3rd
Quarter. S-Tech's revenues for the 2001 Nine Month Period decreased $137,000, or
50%, from $275,000 for the 2000 Nine Month Period to $138,000 for the 2001 Nine
Month Period. S-Tech's gross profit was a negative $22,000, or (16%) of sales,
for the 2001 Nine Month Period and was a negative $324,000, or (118%) of sales,
for the 2000 Nine Month Period. S-Tech's gross margin for the 2001 3rd Quarter
and Nine Month Period both included a deduction of $30,000 for a reserve on
obsolete and slow moving inventory. S-Tech's gross profits have been negatively
impacted as a result of non-variable overhead and indirect labor costs being
allocated to a relatively minimal sales volume. In addition, the 2000 3rd
Quarter and Nine Month Period include a reserve for slow moving inventory of
$400,000. S-Tech's operating expenses decreased $8,000, or 26% from $31,000 for
the 2000 3rd Quarter to $23,000 for the 2001 3rd Quarter. S-Tech's operating
expenses decreased $80,000, or 47% from $172,000 for the 2000 Nine Month Period
to $92,000 for the 2001 Nine Month Period. As a result of the above, S-Tech's
operating loss decreased $313,000, or 78%, from $402,000 for the 2000 3rd
Quarter to $89,000 for the 2001 3rd Quarter and decreased $426,000, or 86%, from
$496,000 for the 2000 Nine Month Period to $70,000 for the 2001 Nine Month
Period.
Fingerprint Identification Technologies
The Fingerprint Identification Technologies segment comprises the
activities of FMX, which was formed in 1996 to continue with the development of
products and systems utilizing a proprietary and patented electronic fingerprint
identification technology originally conceived by the Company. The fingerprint
identification technology being developed and utilized by FMX is a fingerprint
identification scanning technology utilized for a variety of access control and
law enforcement purposes. Applications for this technology include access
control systems for banks, airports and industrial and government facilities,
voter registration and electoral anti-fraud systems, welfare and social program
identification systems, immigration control, suspect booking, prisoner and
detainee movement and release control systems, and sensitive employment
authorization systems. FMX did not have any revenues or gross profits for the
2001 and 2000 3rd Quarters or Nine Month Periods. FMX incurred operating
expenses of $87,000 for the 2001 3rd Quarter and $90,000 for the 2000 3rd
Quarter and therefore its operating losses, decreased $3,000. FMX incurred
operating expenses of $288,000 for the 2001 Nine Month Period and $196,000 for
the 2000 Nine Month Period and therefore its operating losses increased $92,000.
During the 2001 and 2000 3rd Quarters and the 2001 Nine Month Period, FMX's
operating expenses included $45,000 and $135,000, respectively, of management
fees charged by The Finx Group.
Secured Entrance Systems
The Secured Entrance Systems segment comprises the activities of
Secured Portals. Secured Portal's proposed activities consist of the marketing
and distribution of the Georal Security Systems to both those customers for
which it has exclusive distribution rights and to others as to which it has
non-exclusive
17
rights to distribute the Georal Security Systems. Many of the customers to whom
Secured Portals will seek to market the Georal Security Systems will be domestic
and foreign government purchasers as well as commercial users. In March 2001,
the Georal Security System passed preliminary U.S. State Department forced entry
ballistics tests. Subsequent to September 30, 2001 the systems received final
certification for possible procurement for use in U.S. embassies, consulates and
other governmental installations both in the U.S. and abroad. Secured Portals
did not have any revenues or gross profits during the 2001 and 2000 3rd Quarters
or Nine Month Periods. Secured Portals operating expenses, and therefore its net
operating loss increased $24,000, or 46%, from $52,000 for the 2000 3rd Quarter
to $76,000 for the 2001 3rd Quarter. Secured Portals operating expenses, and
therefore its net operating loss increased $107,000, or 76%, from $140,000 for
the 2000 Nine Month Period to $247,000 for the 2001 Nine Month Period. During
the 2001 and 2000 3rd Quarters and the Nine Month Period, Secured Portal's
operating expenses included $45,000 and $135,000, respectively, of management
fees charged by The Finx Group.
Internet Marketing
Internet Marketing reflects the activities of Starnet365.com.
Starnet365.com is an Internet multi-level marketing company whose most
significant product is the Qode engine, a web based software component
comprising the largest UPC coded data base, which pays commissions and which
enables its users to comparative shop in excess of 7 million products related to
the UPC codes. Starnet365.com also sells a series of on-line training programs
consisting of a series of integrated "Earn While You Learn", on-line training
programs that are intended to teach marketing and recruiting techniques as well
as certain tax and legal aspects of running a home-based business.
Starnet365.com also markets replicated web sites, which Starnet365.com intends
to load with non-branded merchandise, enabling individuals quickly and
inexpensively to own their own on-line E-Commerce website. In addition,
Starnet365.com generates revenues from web site enrollment fees, monthly web
hosting fees, and transaction-processing fees related to the sale of merchandise
on the websites. Starnet365.com was established in April 2000 and did not have
any operating activity until the 2000 3rd Quarter.
During the 2001 3rd Quarter, Starnet365.com generated revenues of
$53,000 resulting in gross profits of $52,000, or 99%. Operating expenses of
Starnet 365.com for the 2001 3rd Quarter were $431,000 and included $171,000 of
software development and maintenance costs, $45,000 of management fees charged
by The Finx Group, $13,000 of amortization and deprecation and $203,000 of other
operating costs. Starnet 365.com did not generate revenues during the 2000 3rd
Quarter and incurred $253,000 of general and administrative operating expense,
including $45,000 of management fees charged by The Finx Group. As a result of
the above, Starnet365.com incurred operating losses of $379,000 and $254,000,
respectively, for the 2001 and 2000 3rd Quarters.
During the 2001 Nine Month Period Starnet365.com generated revenues of
$199,000 resulting in gross profits of $164,000, or 82%. Operating expenses of
Starnet 365.com for the 2001 Nine Month Period were $1.171 million and included
$226,000 of web design and development, $210,000 of selling expense, including
commissions on product sales, $135,000 of management fees charged by The Finx
Group, $38,000 of depreciation and amortization and $762,000 of other operating
costs. Operating expenses of Starnet 365.com for the 2000 Nine Month Period were
$334,000 and included $45,000 of management fees charged by The Finx Group and
$289,000 of other operating costs. As a result of the above, Starnet365.com
incurred operating losses of $1.007 million and $334,000, respectively, for the
2001 and 2000 Nine Month Periods.
Application Service Provider
Application Service Provider reflects the activities of Shopclue.com.
Shopclue.com is an Application Service Provider that enables small- and
medium-sized businesses to establish an advanced online presence rapidly and
inexpensively using Shopclue.com's software through its interactive Internet
mall known as Retail Drive. The software used by Shopclue.com allows its
customers to create, edit and maintain advanced, interactive websites without
having any prior knowledge of web-based programming languages. Shopclue.com's
Retail Drive interactive website is presently utilized by more than 350
merchants. During the 2001 3rd Quarter Shopclue.com had no revenues and during
the Nine Month
18
Period revenues were $18,000. Shopclue.com's total operating expense for the
2001 3rd Quarter and Nine Month Period was $3,000 and $24,000, respectively,
resulting in operating losses of $3,000 and $6,000, respectively. The
consolidated statement of operations for the 2000 1st and 2nd Quarters does not
include Shopclue.com's operating activities, which were prior to the date of
acquisition. During the 2000 3rd Quarter and Nine Month Period revenues were
$28,000 and operating expenses were $5.037 million. Operating expenses for the
2000 3rd Quarter and Nine Month Period includes $4.768 million of in-process
research and development expense representing the value assigned to research and
development projects of Shopclue.com that were commenced but not yet completed
at the date of the acquisition, and which, if unsuccessful, have no alternative
future use in research and development activities or otherwise. Amounts assigned
to purchased in-process research and development must be charged to expense at
the date of the acquisition. Accordingly, the Company charged approximately
$4.768 million to expense for the three and nine month period ended September
30, 2000. As a result of the above, Shopclue.com's operating loss was $5 million
for the 2000 3rd Quarter and the 2000 Nine Month Period.
Web Based Development Solutions
Web Based Development Solutions reflects the activities of Bizchase and
Granite. Bizchase has developed a wholesale web based development solution that
provides a simple, affordable and feature rich online solution for small
businesses. In March 2001, Bizchase granted a license to Starnet365.com giving
Starnet365.com the right to sell software developed by Bizchase to the
multi-level marketing industry. The Bizchase software was developed and also
licensed to Retail Drive. Revenues are generated through activation and hosting
fees. Bizchase was organized and acquired in July 2000 and to date has not
generated any revenues or gross profits. Granite was acquired in September 2001
and the operations of Granite are not included in the consolidated statements of
operations for 2001 for periods prior to September 18, 2001, the date of the
acquisition. Web Based Development Solutions operating expenses, and therefore
its net operating losses for the 2001 3rd Quarter and Nine Month Period was
$2.155, million and $2.622 million, respectively. The Web Based Development
Solutions segment includes $2.044 million of in-process research and development
expense representing the value assigned to research and development projects of
Granite that were commenced but not yet completed at the date of the
acquisition, and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. Amounts assigned to purchased
in-process research and development must be charged to expense at the date of
the acquisition. Accordingly, the Company charged approximately $2.044 million
to expense for the three and nine month period ended September 30, 2001. Web
Based Development Solution's other operating expenses are primarily salaries and
consulting fees paid to software developers. Operating expense for the 2001 3rd
Quarter and Nine Month Period included $45,000 and $135,000, respectively, of
management fees charged by The Finx Group.
Corporate costs and expenses
Corporate costs and expenses comprise the expenses of The Finx Group,
the holding company. During the 2001 3rd Quarter and Nine Month Period The Finx
Group recorded $225,000 and $675,000, respectively, of management fees charged
to its subsidiaries. All of such management fees are eliminated in the
consolidated results of operations. The Finx Group's operating expenses for the
2001 3rd Quarter and Nine Month Period includes $3.060 million of non cash
expense from the issuance of options to consultants. As of September 30, 2001,
Mr. Lewis S. Schiller and Ms. Grazyna B. Wnuk are owed an aggregate of $900,000
for unpaid salaries of which $100,000 is included in both the 2001 and 2000 3rd
Quarters operating expenses and $300,000 is included in both the 2001 and 2000
Nine Month Periods. Other significant corporate costs include consulting fees
and legal and accounting fees.
Significant Non-Operating Components of Net Loss
Interest Expense and Financing Fees, Other
Interest expense and financing fees, other than that owed to related
parties, amounted to $46,000 and $61,000, respectively, for the 2001 and 2000
3rd Quarters and amounted to $178,000 and $159,000, respectively, for the 2001
and 2000 Nine Month Periods. During the 2001 3rd Quarter and Nine Month
19
Period $9,000 and $62,000, respectively, of such amounts relates to interest
owed on Sequential's delinquent payroll taxes. The remainder for all periods
presented relates to Sequential's revolving line of credit. On July 28, 1997,
Sequential entered into a revolving line of credit from FINOVA Capital
Corporation, formerly United Credit Corporation (the "FINOVA Line of Credit").
The FINOVA Line of Credit provides for a borrowing base equal to the lesser of
80% of eligible accounts receivable or $400,000, required payment of a 1% annual
facility fee, a 1% monthly commitment fee, against which monthly interest,
exclusive of interest on any over advances, is applied. The annual monthly
interest rate on the FINOVA Line of Credit is the greater of 18.5% or the prime
rate in effect in New York City plus 10%, and is payable monthly. The FINOVA
Line of Credit is collateralized by all of the assets of Sequential. FINOVA
declared bankruptcy and the Company is attempting to establish a replacement
line of credit. The Company has been notified that the FINOVA line-of-credit
will not be extended beyond November 30, 2001. Subsequent to November 30, 2001,
the Company utilized a cash collateral deposit provided by Trinity to satisfy
the balance owed under the line-of-credit and such funds are now owed by the
Company to Trinity.
Interest Expense and Factoring Fees, Related Parties
Interest expense and financing fees on related party notes increased
$30,000 from $37,000 for the 2000 3rd Quarter to $67,000 for the 2001 3rd
Quarter and increased $120,000 from $168,000 for the 2000 Nine Month Period to
$288,000 for the 2001 Nine Month Period. The Company and its subsidiaries incur
interest expense on advances from Trinity, advances from Universal
International, Inc., a company owned by Grazyna Wnuk, an officer of the Company,
a loan from E. Gerald Kay, a former director, advances and expenses paid by
Lewis S. Schiller and Grazyna B. Wnuk, officers of the company, and advances
from Blake Schiller and Carol Schiller, both immediate family members of Lewis
S. Schiller. In addition S-Tech incurs interest expense and factoring fees
pursuant to a factoring agreement with Trinity Factoring Corp., a financing
company owned by Lewis Schiller. On May 7, 2001, the Company converted $1.5
million of related party notes owed to Trinity in exchange for 7,500,000 shares
of common stock and converted an additional $2 million of notes owed to Trinity
into a newly created Series C Preferred Stock. Interest accrued on such notes
are generally calculated at 9% and as of September 30, 2001 $496,000 of such
interest remains unpaid.
Net Loss
As a result of the above, the Company incurred a consolidated net loss
of $6 million, or $0.27 per common share, for the 2001 3rd Quarter and $6.388
million, or $0.57 per common share, for the 2000 3rd Quarter and incurred a
consolidated net loss of $7.841 million, or $0.46 per common share, for the 2001
Nine Month Period and $7.286 million, or $1.42 per common share, for the 2000
Nine Month Period.
Financial Condition - Liquidity and Capital Resources
As of September 30, 2001 the Company had a working capital deficiency
of $6.533 million. Approximately $2.57 million of such deficiency relates to
amounts owed to related parties, including accrued and unpaid salaries of
$900,000 owed to Lewis S. Schiller and Grazyna B. Wnuk and $1.67 million owed to
Trinity, its controlling stockholder, and other related parties, for loans and
advances made to fund the operations of the Company. On May 7, 2001, Trinity
converted $1.5 million of related party debt into 7,500,000 shares of Common
Stock, representing $0.20 per share, the fair market value of the Common Stock
on May 7, 2001. On May 7, 2001, Trinity converted an additional $2 million of
related party debt into shares of a newly created series of preferred stock, the
"Series "B" Preferred Stock. The Series "B" Preferred Stock is redeemable by the
Company in whole or in part, at the option of the board of directors with Lewis
S. Schiller, Trinity's owner, abstaining, and votes alongside of common stock.
The Series "B" Preferred Stock is convertible in whole or in part, at the option
of the holder or its designees, over a two year period beginning May 7, 2002,
into common stock at a rate representing the lowest price that the common stock
has traded at over the period for which the preferred stock has been
outstanding. Such conversion may require an increase in the number of authorized
common shares. Dividends on the Series "B" Preferred stock are payable
semi-annually at a rate of 8%.
20
During the 2001 Nine Month Period, the Company used $318,000 for
operating activities and generated $32,000 and $352,000, respectively, from
investing and financing activities. As of September 30, 2001 the Company's
subsidiaries are delinquent on payment of payroll taxes approximating $963,000.
The Company's Board of Directors approved the 2001 Employee Stock Option Plan.
The purpose of the 2001 Employee Stock Option Plan is to secure long-term
relationships for the Company and its stockholders, from the benefits arising
from capital stock ownership by the Company's Consultants, Advisors, Employees
and Directors, who can help in the company's growth and success and to provide
an effective means of compensation for such persons and entities providing
services to the Company in lieu of cash payments therefor. The 2001 Employee
Stock Option Plan provides for the issuance of up to 17,000,000 shares of the
Company's Common Stock and all such shares have been registered on Form S-8. As
of September 30, 2001 options to acquire 13,735,000 shares were issued resulting
in $3.060 million of compensation expense. As of September 30, 2001 options to
purchase 6,700,000 shares were exercised at $0.15 per share for which the
Company received non-recourse notes receivable of $1.005 million, which is
presented as a separate component of capital deficiency entitled subscriptions
receivable. Subsequent to September 30, 2001 additional options to acquire
3,265,000 shares of common stock were issued resulting in compensation expense
of $1.462 million in the 4th quarter of 2001. Subsequent to September 30, 2001,
options to purchase 3,100,000 shares were exercised at $0.30 per share and
options to purchase 7,200,000 shares were exercised at $0.15 per share.
The accompanying unaudited interim financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the liquidation of liabilities in the normal course of business. However,
the Company has a history of net losses and as of September 30, 2001 has a
working capital deficiency of $6.533 million and capital deficiency of $6.287
million. Since April of 1999 the Company has relied on financial support from
its controlling stockholder, Trinity and other related parties. Management is
currently seeking additional financing; however no assurances can be made to
what extent any such financing will be consummated. The continuation of the
Company as a going concern is dependent upon its ability to obtain financing,
and to use the proceeds from any such financing to increase its business to
achieve profitable operations. The accompanying financial statements do not
include any adjustments that would result should the Company be unable to
continue as a going concern.
21
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.
The FINX GROUP, INC.
/S/ Chief Executive Officer and Director February 22, 2002
Lewis S. Schiller (Principal Executive and Accounting Officer)
22