U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 2003
[ ] 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)
21634 Club Villa Terrace, Boca Raton, Florida 33433
(Address of principal executive offices) (Zip Code)
(561) 447-6612
(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 May 14, 2003, there are 330,526,473 shares of the par value $.01
common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Indicate by checkmark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934.
Yes [ ] No [X]
Page 1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Shareholders of
The Finx Group, Inc.
Boca Raton, Florida
We have reviewed the accompanying consolidated balance sheet of The
Finx Group, Inc. and its subsidiaries as of March 31, 2003 and the related
consolidated statements of operations and cash flows for the three month periods
ended March 31, 2003 and 2002. These interim 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 accounting principles
generally accepted in the United States of America.
Note 1 of the Company's audited consolidated financial statements as of
December 31, 2002, and for each of the two years in the period ended December
31, 2002 discloses that the Company has; (1) a history of net losses for the two
years ended December 31, 2002, (2) as of December 31, 2002 the Company has a
working capital deficiency of $4.4 million and a capital deficiency of $3.8
million and (3) the Company has relied on continuing financial support from its
controlling stockholder. Our auditor's report on those financial statements
includes an explanatory paragraph referring to the matters in Note 1 of those
financial statements indicating that these matters raise substantial doubt about
the Company's ability to continue as a going concern. As indicated in Note 1 of
the Company's unaudited interim consolidated financial statements as of March
31, 2003, and for the three months then ended, the Company continues to have
these certain conditions. Management's plans in regard to these matters are also
described in Note 1. The accompanying interim consolidated financial statements
do not include any adjustments which might result from the outcome of these
uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 16, 2003
Page 2
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
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Three Months Ended March 31, 2003 2002
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Revenues $ 10,000 $ -
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General and administrative expenses 627,000 641,000
Compensation expense from stock grants and the issuance of
stock options and stock purchase warrants 965,000 -
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Total operating expenses 1,592,000 641,000
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Operating loss (1,582,000) (641,000)
Other income 1,000 -
Interest expense, related parties (26,000) (44,000)
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Loss from continuing operations (1,607,000) (685,000)
Discontinued Operations: (See Note 8)
Loss from operations of discontinued segments - (200,000)
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Net loss $ (1,607,000) $ (885,000)
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Loss per share computation- basic and diluted:
Loss from continuing operations $ (1,607,000) $ (685,000)
Less dividends on preferred shares (34,000) (40,000)
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Loss from continuing operations attributable to common
stockholders (1,641,000) (725,000)
Loss from operations of discontinued segments - (200,000)
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Net loss available to common stockholders $ (1,641,000) $ (925,000)
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Weighted average shares outstanding 168,389,867 42,298,767
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Loss per common share - basic and diluted:
Loss from continuing operations ($0.01) ($0.02)
Loss from operations of discontinued segments - (0.00)
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Net loss ($0.01) ($0.02)
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See Notes to Unaudited Consolidated Interim Financial Statements.
Page 3
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
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As of March 31, 2003
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ASSETS
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CURRENT ASSETS
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Cash $ 1,000
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Total current assets 1,000
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Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment, cost 90,000
Less accumulated depreciation (90,000)
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Net furniture, fixtures and equipment -
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Other assets:
Exclusive license agreement, net (see Note 4) 2,811,000
Patents, net 9,000
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Total other assets 2,820,000
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TOTAL ASSETS $ 2,821,000
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LIABILITIES AND CAPITAL DEFICIENCY
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CURRENT LIABILITIES:
Accounts payable $ 1,236,000
Accrued payroll and payroll taxes, executive officers 2,227,000
Notes payable executive officers, including interest 1,577,000
Notes payable, related parties, including accrued interest 333,000
Other current liabilities 422,000
Current liabilities of discontinued segments (see Note 8) 1,187,000
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Total current liabilities 6,982,000
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Commitments and contingencies (see Note 9)
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CAPITAL DEFICIENCY
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Preferred stock, $.01 par value; 1,000,000 shares authorized; 1,000
Series A preferred shares issued and outstanding; 17,100 Series B
preferred shares issued and outstanding as of March 31, 2003 1,710,000
Common stock, $.01 par value; 750,000,000 shares authorized;
171,519,497 shares issued and outstanding as of March 31, 2003 1,715,000
Additional paid-in capital, common stock 30,327,000
Accumulated deficit (37,138,000)
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(3,386,000)
Subscriptions receivable (775,000)
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Capital deficiency (4,161,000)
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TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,821,000
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See Notes to Unaudited Consolidated Interim Financial Statements.
Page 4
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
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Three Months Ended March 31, 2003 2002
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CASH FLOWS - OPERATING ACTIVITIES:
Loss from continuing operations $ (1,607,000) $ (685,000)
Adjustments to reconcile loss from continuing operations to
net cash - continuing operations:
Depreciation and amortization 61,000 28,000
Non cash expense from stock grants and the issuance of
stock options and purchase warrants 965,000 -
Changes in assets and liabilities:
Other assets - -
Accounts payable (103,000) (42,000)
Accrued payroll 193,000 163,000
Accrued interest expense, related parties 26,000 152,000
Other current liabilities 12,000 72,000
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Net cash-continuing operations (453,000) (312,000)
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Loss from discontinued operations - (200,000)
Adjustments to reconcile loss from operations of discontinued
segments to net cash - discontinued operations:
Depreciation and amortization - 12,000
Impairment charge - 36,000
Bad debt expense - 5,000
Net change in other assets and liabilities - (9,000)
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Net cash-discontinued operations - (156,000)
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Net cash - operating activities (453,000) (468,000)
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CASH FLOWS - INVESTING ACTIVITIES:
Other investing activities - (26,000)
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Net cash - investing activities - (26,000)
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CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 178,000 58,000
Repayments on related party loans (76,000) (107,000)
Proceeds from exercise of stock options 352,000 543,000
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Net cash - financing activities 454,000 494,000
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Net change in cash 1,000 -
Cash - Beginning of period - -
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Cash - End of period $ 1,000 $ -
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the year for:
Interest $ - $ -
Income Taxes $ - $ -
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See Notes to Unaudited Consolidated Interim Financial Statements.
continued
Page 5
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the Three Months Ended March 31, 2003
On January 2, 2003, a warrant to purchase 5,000,000 shares of Common
Stock for $0.04 per share was issued to a consultant resulting in stock
compensation expense of $99,000.
On January 17, 2003, options to purchase 17,604,168 shares of Common
Stock for $0.02 per share were granted and exercised resulting in stock
compensation expense of $366,000.
On March 17, 2003 stock grants for 85,000,002 shares of Common Stock
were issued to consultants resulting in stock compensation expense of $425,000
and a stock grant for 14,999,998 shares of Common Stock was issued to Grazyna B.
Wnuk, an officer and director of The Finx Group, Inc., resulting in stock
compensation expense of $75,000.
During the Three Months Ended March 31, 2002
On February 21, 2002, the Company issued 40,000 shares of its series D
preferred stock, convertible into 4,000,000 shares of its common stock in
consideration for an expansions of its exclusive licensing agreement with GIL
Security Systems, Inc. The convertible preferred stock was valued at $680,000,
the amount by which the Exclusive License Agreement increased during the three
months ended March 31, 2002.
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 6
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The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three Months Ended March 31, 2003 and 2002
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1. Basis of Presentation
The accompanying unaudited consolidated financial statements of The
Finx Group, Inc. and its subsidiaries consisting of Secured Portal Systems,
Inc., FMX Corp. and Granite Acquisition Corp., (collectively "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 of America 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 as amended for the year ended
December 31, 2002. Certain reclassifications were made to prior year amounts to
conform to the current year presentation.
The accompanying unaudited interim consolidated 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 March 31, 2003 has a
working capital deficiency of $7 million and a capital deficiency of $4.2
million. During 2003 and 2002 the Company has relied on financial support from
its controlling stockholder, Trinity Group-I, Inc. ("Trinity") and other related
parties and during 2003 and 2002 has compensated its employees and key
consultants with stock options and stock grants of which some were registered on
Form S-8. 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 consolidated
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, 2002 Form 10-KSB as
amended.
In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates. Some of the more significant estimates include the carrying value of
the Company's exclusive license, and patents and their amortization.
Certain long-term assets of the Company are reviewed when changes in
circumstances require as to whether their carrying value has become impaired,
pursuant to guidance established in Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations [undiscounted
and without interest charges]. If impairment is deemed to exist, the asset will
be written down to fair value. Management also reevaluates the period of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of March 31 31, 2003, management expects
those assets related to its continuing operations to be fully recoverable.
Page 7
In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Company expects that the adoption of SFAS 149 will not have a
significant impact on its financial statements.
3. Recent Business Developments
In September 2002, the Company's Board of Directors approved a plan to
focus the Company's business exclusively on its security systems business and on
October 18, 2002 the Company disposed of all non security system business
segments. The Company's primary source of future revenues, if any, is expected
to be generated under its exclusive license agreement (the "Georal License")
with GIL Security Systems, Inc. ("GIL"). GIL is a subsidiary of Georal
International, Ltd. ("Georal") and holds all world-wide rights related to the
intellectual property related to the GIL security systems, including trademarks,
patents and technology, as licensed to it by Alan J. Risi, the controlling owner
of both GIL and Georal. GIL is engaged in the manufacture and sale of security
entrance systems for use as a security device by a variety of customers at
airports, federal buildings, court houses, embassies, correctional facilities,
schools, governmental operations, department stores and other retail outlets
(the "Georal Security Products"). The Georal License gives us distribution
rights for the sale of all of the Georal Security Products, including all models
of the GIL-2001 security door, to specified categories of customers. The Company
may market and distribute the Georal Security Products to both those customers
for which it has exclusive distribution rights and to others as to which it has
non-exclusive rights.
On December 13, 2002 the Company entered into a memorandum of
understanding incorporating a reseller agreement with TRW, Inc., which has been
acquired by Northrop Grumman Corp. and is now operating as Northrop Grumman
Mission Systems. The agreement gives Northrop Grumman Mission Systems the right
to market Georal Security Products to the Federal Government and other
significant commercial opportunities. On March 26, 2003, the Company entered
into a distribution and marketing agreement with Lockheed Martin. The agreement
gives Lockheed Martin worldwide rights to market the Georal Security Products.
In April 2003, the Company entered into reciprocal marketing agreements with
Advanced Biometric Security, Inc. ("ABS") which provide both the Company and ABS
with non-exclusive marketing rights for each others security product lines. ABS
provides enterprise software and services related to identity management and the
security of physical and logical assets. Many of the customers to whom the
Company will seek to market the Georal Security Systems will be domestic and
foreign government purchasers as well as commercial users. On December 11, 2001,
the GIL-2001 security door received certification from the U.S. State Department
necessary for its possible procurement for use in U.S. embassies, consulates and
other governmental installations both in the U.S. and abroad. In October 2002,
Georal received broad patent approval for its security entrance system from the
United States Patent Trademark Office (Patent 6,472,984). The patent received by
Georal covers the secured portal which is the subject of the Georal License.
The Company may also generate revenue from its sale of software
programs for device management and smart card applications ("Secured Card
Solutions"). The Company has provided Virginia Commonwealth University with two
of its Secured Card Solutions - the "Secured Recreational Sports Solution" and
"The Secured Card Solution". The Secured Recreational Sports Solution, which
currently serves Virginia Commonwealth University ("VCU") from three locations
offering a variety of fitness, aquatics and intramurals. The activities are
offered to all students, faculty, and university and hospital employees. The
Secured Recreational Sports Solution's database is integrated with the VCU card
database for single university identification. The Secured Recreational Sports
Solution handles all check-in of members, locker assignment and equipment
check-in and check-out. It also keeps track of member billing and payroll
deduction. Further, it handles member suspensions and automatic emailing of
special events. The Secured Sports Recreation Solution application is written
using the new Microsoft.NET architecture. The Company has also entered into a
services and support agreement with Florida International University
Page 8
("FIU") for the installation, support and use of the Secured Recreational Sports
Solution. During 2003 and 2002, all of the Company's revenues were generated
from sales of its Secured Card Solutions.
4. Exclusive License Agreement
On September 13, 1999, the Company obtained the Georal License which
gives the Company distribution rights for the sale of Georal Security Products
to certain categories of customers. The Georal Security Products covered by the
Georal License includes all of GIL's products that existed on September 13, 1999
and all products developed during the term of the Georal License including all
models of the GIL-2001 security door. The categories of customers covered by the
Georal License includes the United States Treasury Department, the United States
Central Intelligence Agency and all other United States Government intelligence
agencies, the United States National Security Agency, the United States Defense
Intelligence Agency, the United States Department of the Navy, the United States
Air Force, the United States Army, all United States Federal Courts and all
United States Embassies, all department stores and retail stores located in the
United States (including all retail stores located in foreign countries which
are part of a retail store chain which is based in the United States), the
Government of Israel, NCR Corp. and Sun Microsystems, Inc. The Georal License
commenced on September 1, 1999 and, as amended, expires on August 31, 2014.
As an inducement to obtain the Georal License and in exchange for
1,000,000 common stock shares of GIL, the Company issued to Alan J. Risi
preferred shares which were exchanged for 1,049,874 shares of the Company's
Common Stock in July of 2002. On the initial date that the Georal License was
entered into, the GIL 2001 security door had not been certified by the U.S.
State Department and no sales channel pipeline had been developed and the
underlying costs of the shares issued were not capitalized.
On December 11, 2001, the GIL 2001 security door received certification
by the U.S. State Department. On February 21, 2002, the Georal License was
amended whereby the categories of customers was expanded to include all
financial institutions around the world and whereby the Company received a right
of first refusal to be the exclusive distributor for sales to any governmental
body in the world which is not currently included in the Georal License as a
protected customer. As consideration for the amendment entered into on February
21, 2002, the Company issued to Alan Risi 40,000 shares of a newly created
Series D 2% Convertible Preferred Stock (the "Series D Preferred Stock") that is
convertible into 4,000,000 million shares of the Company's Common Stock. On May
16, 2002, the Georal License for the Georal security systems was further amended
whereby the exclusive distribution agreement was expanded to give the Company
exclusive world wide sales and marketing rights, for the term of the agreement
extending to all casinos, malls, stadiums, office buildings and high rises. As
consideration for the amendment entered into on May 16, 2002, the Company issued
to Alan Risi 60,000 shares of its Series C 2% Convertible Preferred Stock (the
"Series C Preferred Stock") which are convertible into 6,000,000 shares of the
Company's Common Stock. On September 9, 2002, the Georal License was expanded to
include World Wide rights to all Airports, Airport Authorities, Schools and
Education Centers. As consideration for the amendment entered into on September
9, 2002, the Company issued to Alan Risi 100,000 shares of its Series C
Preferred Stock which are convertible into 10,000,000 shares of the Company's
Common Stock. On October 16, 2002, the Company issued to Alan Risi 250,000
shares of its Series C Preferred Stock for an amendment to the Georal License
which provided the Company with the following: (i) the right to receive forty
percent of all maintenance revenues generated from service contracts obtained
from the Company's protected customer base; (ii) the right to share with Georal,
any leasing revenues generated from leasing contracts related to the GIL-2001
security door; (iii) the right to renegotiate the discount received by the
Company from its licensor at such time as the gross sales generated under the
licensing agreement reaches $5 million; and (iv) extended the term of the
agreement an additional five years, to September 18, 2014. Using the
Black-Scholes option valuation formula, the convertible preferred stock was
valued at $2.98 million, the amount included in other assets as "Exclusive
License Agreement". During 2002, all of the Series C and Series D Preferred
Stock issued pursuant to the Georal License was converted into shares of Common
Stock. Beginning 2002, the Georal License is being amortized on the
straight-line method over the remaining life of the exclusive license and during
the three months ended March 31, 2003 and 2002, such amortization expense was
$61,000 and $28,000, respectively.
Page 9
5. Executive Debt Deferrals
Effective September 30, 2002, Lewis S. Schiller, the Company's Chief
Executive Officer and Chairman of the Board, agreed to defer payment of his
salary until January 1, 2004, payment of accrued interest on notes payable to
Trinity, which is wholly owned by him until January 1, 2004 and payment of
accrued dividends on preferred stock held by Trinity until January 1, 2004. Such
amounts were presented as long-term liabilities as of December 31, 2002. As of
March 31, 2003, the remaining deferral period is less than twelve months and
such amounts are presented as current liabilities.
6. Basic and Diluted Loss Per Share
Basic and diluted per share results for all periods presented were
computed based on the net earnings or loss for the respective periods. The
weighted average number of common shares outstanding during the period was used
in the calculation of basic earnings (loss) per share. In accordance with FAS
128, "Earnings Per Share," the weighted average number of common shares used in
the calculation of diluted per share amounts is adjusted for the dilutive
effects of stock options based on the treasury stock method and the assumed
conversion of convertible preferred stock only if an entity records earnings
from continuing operations (i.e., before discontinued operations), as such
adjustments would otherwise be anti-dilutive to earnings per share from
continuing operations. As a result of the Company recording a loss from
continuing operations, the average number of common shares used in the
calculation of diluted loss per share have not been adjusted for the effects of
49,861,500 potential common shares from unexercised stock options and warrants,
100,000,000 potential common shares from stock grant rights and 427,513,510
potential common shares from unconverted preferred shares. Such warrants,
options, stock grants and shares of convertible preferred stock may dilute
earnings per share in the future (see Note 10.).
7. Stock-based Compensation
The Company has elected to use the intrinsic value method of accounting
for stock options issued to employees under its stock option plans whereby the
amount of stock-based compensation expense is calculated as the difference
between the fair market value and the exercise price on the date of issuance.
For purposes of pro forma disclosures the amount of stock-based compensation as
calculated using the fair value method of accounting for stock options issued to
employees is amortized over the options' vesting period. For the three month
periods ended March 31, 2003 and 2002, there were no differences in the amount
of stock-based compensation expense as calculated under the intrinsic method or
the fair value method and as such, no pro forma information is presented.
8. Discontinued Operations
On October 18, 2002, the Company consummated a plan to dispose of
certain of its subsidiaries. In September 2002, the Board of Directors of the
Company approved a plan whereby it was determined to be in the best interests of
the Company to focus all of its resources on the Security Systems business
segment, whereby all business segments other than the Security Systems business
segment would be disposed. The decision to dispose of all businesses unrelated
to the Security Systems segment was based on management's evaluation of its
capability to support multiple and diverse business segments. Management's
evaluation was confirmed in a business assessment report received from vFinance
Investments, Inc. ("vFinance"), who is performing management and investment
banking services for the Company. The business assessment report received from
vFinance, among other things, recommended that the Company streamline its
operating activities to focus on its Security Systems business segment. The
Company's management investigated various possible venues to undertake the
disposal of the non Security System segments which include Sequential Electronic
Systems, Inc. ("Sequential"), S-Tech, Inc. ("S-Tech"), Granite Technologies,
Inc. ("Granite Technologies"), Shopclue.com, Inc. ("Shopclue"), Bizchase, Inc.
("Bizchase") and Starnet365.com, Inc. ("Starnet").
The Company engaged a consultant, pursuant to a consulting agreement,
to assist in developing an exit strategy for the disposal of Granite
Technologies, Shopclue, Bizchase and Starnet for which the consultant received
an option to purchase 1,000,000 shares of its Common Stock at an exercise price
of $.04 per share, the fair market value on the date of grant. Through the
efforts of the consultant, the
Page 10
Company found a purchaser who agreed to acquire Granite Technologies, Shopclue,
Bizchase and Starnet for nominal consideration subject to the forgiveness of the
amounts owed by such subsidiaries to the Company and the retention by the
Company of certain rights to the assets of Granite Technologies. As a result,
the Company entered into the following purchase agreements with Thomas Banks
Ltd. ("Thomas Banks").
Granite Technologies
Granite Technologies Acquisition Corp. ("Granite Acquisition") is
wholly owned by The Company and Granite Technologies is wholly owned by Granite
Acquisition. Pursuant to the terms of a stock purchase agreement among Granite
Acquisition, Granite Technologies and Thomas Banks dated as of September 30,
2002, (the "Granite Stock Purchase Agreement"), Thomas Banks agreed to purchase
all of the issued and outstanding capital stock of Granite Technologies from
Granite Acquisition for one dollar ($1) and the Company agreed to cancel
approximately $600,000 of principal and interest owed by Granite Technologies to
the Company. In addition, pursuant to the Granite Stock Purchase Agreement,
Granite Acquisition retained the rights to all Intellectual Property of Granite
Technologies, Inc. including (i) patents, pending patent applications and patent
applications in process but not yet filed, owned by or assignable to Granite
Technologies (the "Patents"); registered trademarks and service marks and
pending applications therefor and trade names owned by Granite Technologies; and
copyright registrations and pending applications therefor owned by Granite
Technologies and used by Granite Technologies in the conduct of its business
(the "Marks"); (ii) written licenses and other agreements relating to the
Patents, Marks and Copyrights, and (iii) manufacturing, process, and other
technology transfer and license agreements which are material to the conduct of
such business and retained all rights and benefits inured from any and all
contracts between Granite Technologies and Virginia Commonwealth University. As
of the date of the Granite Stock Purchase Agreement, Granite Technologies had an
excess of liabilities over assets of approximately $1.45 million, including
$435,000 owed to the Company. The Company believes that it may be required to
pay approximately $200,000 of such remaining liabilities which represent
delinquent payroll taxes. As a result of the disposal of Granite Technologies,
the net reduction in the liabilities of the Company and the corresponding gain
on disposal approximated $815,000. Such gain was recognized in the third quarter
of 2002.
Starnet
Pursuant to the terms of a stock purchase agreement among the Company,
Starnet, Lewis S. Schiller, the Company's Chief Executive Officer and Chairman
of the Board, Grazyna B. Wnuk, the Company's Vice-President and Secretary,
members of Lewis S. Schiller's immediate family (collectively, the "Starnet
Sellers") and Thomas Banks dated as of September 30, 2002, (the "Starnet Stock
Purchase Agreement"), Thomas Banks agreed to purchase 98.05% of the issued and
outstanding capital stock of Starnet from the Starnet Sellers for one dollar
($1) and the Company agreed to cancel approximately $1.3 million of principal
and interest owed by Starnet to the Company. As of the date of the Starnet Stock
Purchase Agreement, Starnet had an excess of liabilities over assets of
approximately $1.7 million, including the $1.3 million owed to the Company,
resulting in remaining liabilities of approximately $444,000. The Company
believes that it may be required to pay approximately $132,000 of such remaining
liabilities based on the existence of corporate guarantees previously made on
such amounts by the Company. As a result of the disposal of Starnet, the net
reduction in the liabilities of the Company approximated $268,000 and a gain on
disposal approximating $312,000 was recorded in the third quarter of 2002.
Shopclue
Pursuant to the terms of a stock purchase agreement among the Company,
Shopclue, Lewis S. Schiller, the Company's Chief Executive Officer and Chairman
of the Board, Grazyna B. Wnuk, the Company's Vice-President and Secretary,
members of Lewis S. Schiller's immediate family (collectively, the "Shopclue
Sellers") and Thomas Banks dated as of September 30, 2002, (the "Shopclue Stock
Purchase Agreement"), Thomas Banks agreed to purchase 100% of the issued and
outstanding capital stock of Shopclue from the Shopclue Sellers for one dollar
($1) and the Company agreed to cancel approximately $8,000 of principal and
interest owed by Shopclue to the Company. As of the date of the Shopclue Stock
Purchase Agreement, Shopclue had an excess of liabilities over assets of
approximately $340,000,
Page 11
including the $8,000 owed to the Company, resulting in remaining liabilities of
approximately $332,000. The Company believes that it may be required to pay
approximately $169,000 of such remaining liabilities which represent delinquent
payroll taxes. As a result of the disposal of Shopclue, the net reduction in the
liabilities of the Company and the corresponding gain on disposal approximated
$163,000. Such gain was recognized in the third quarter of 2002.
Bizchase
Pursuant to the terms of a stock purchase agreement among the Company,
Bizchase, Lewis S. Schiller, the Company's Chief Executive Officer and Chairman
of the Board, Grazyna B. Wnuk, the Company's Vice-President and Secretary,
members of Lewis S. Schiller's immediate family (collectively, the "Bizchase
Sellers") and Thomas Banks dated as of September 30, 2002, (the "Bizchase Stock
Purchase Agreement"), Thomas Banks agreed to purchase 100% of the issued and
outstanding capital stock of Bizchase from the Bizchase Sellers for one dollar
($1) and the Company agreed to cancel approximately $2 million of principal and
interest owed by Bizchase to the Company. As of the date of the Bizchase Stock
Purchase Agreement, Bizchase had an excess of liabilities over assets of
approximately $2.3 million, including the $2 million owed to the Company,
resulting in remaining liabilities of approximately $296,000. The Company
believes that it may be required to pay approximately $136,000 of such remaining
liabilities of which $99,000 relates to delinquent payroll taxes and $37,000
relates to corporate guarantees. As a result of the disposal of Bizchase, the
net reduction in the liabilities of the Company and the corresponding gain on
disposal approximated $160,000. Such gain was recognized in the third quarter of
2002.
Sequential and S-Tech
Pursuant to the terms of a stock purchase agreement among the Company,
Sequential, S-Tech, Defense Manufacturing and Systems, Inc. ("Defense
Manufacturing") and Trinity Group Acquisition Corp. ("Trinity Acquisition")
dated as of September 30, 2002 (the "Sequential and S-Tech Stock Purchase
Agreement"), Trinity Acquisition agreed to purchase 100% of the issued and
outstanding capital stock of Sequential, S-Tech and Defense Manufacturing from
the Company for one dollar ($1) and the Company agreed to cancel approximately
$2.3 million of principal and interest owed by Sequential and S-Tech to the
Company. Defense Manufacturing is wholly owned by the Company but has had no
operating activities since its organization. Trinity Acquisition is wholly owned
by Lewis S. Schiller, the Company's Chief Executive Officer and Chairman of the
Board. As of the date of the Sequential and S-Tech Stock Purchase Agreement,
Sequential and S-Tech had aggregate assets of $1.2 million and aggregate
liabilities of $2.4 million, excluding the $3.1 million owed to the Company. The
aggregate liabilities include $1.1 million of delinquent payroll taxes and the
Company has agreed to indemnify Lewis S. Schiller for any claims made against
him regarding such delinquent payroll taxes and in connection therewith have
reserved $550,000 of such payroll taxes against the gain on disposal of
Sequential Electronic Systems, Inc. and S-Tech, Inc. The Trinity Group-I, Inc.
is the Company's controlling shareholder and both The Trinity Group-I, Inc. and
Trinity Acquisition are wholly owned by Lewis S. Schiller, and the Sequential
and S-Tech Stock Purchase Agreement was not consummated at arms-length. However,
the Company believes that because the transaction will reduce the Company's
liabilities by approximately $1.8 million that such transaction is in its best
interests. As a result of the disposal of Sequential, S-Tech and Defense
Manufacturing, the net reduction in the liabilities of the Company approximated
$1.8 million and the gain on disposal which approximated $458,000 was recorded,
in the third quarter of 2002, as an addition to paid-in capital because the
transaction was consummated with the controlling stockholder of the Company.
Page 12
The loss from operations of discontinued operations for the three
months ended March 31, 2002 are summarized as follows:
Bizchase $ (28,000)
Shopclue (16,000)
Granite (50,000)
Starnet (122,000)
S-Tech (42,000)
Sequential (120,000)
Less intercompany transactions 178,000
------------------------------------------------------------------------
Loss from operations of discontinued segments $ (200,000)
------------------------------------------------------------------------
9. Commitments and Contingencies
Employment Agreements
Lewis S. Schiller has an employment agreement with the Company whereby
he is employed as the Company's Chief Executive Officer. Mr. Schiller's contract
is for an initial term commencing April 29, 1999 through April 28, 2009 and
provides for annual compensation of $500,000. Mr. Schiller's contract may be
extended an additional five years and also provides for an annual increase as
calculated as the greater of 5% or the increase in the cost of living index. Mr.
Schiller's contract provides him with a bonus for each year of the term equal to
10% of the amount by which the greater of consolidated net income before income
taxes or consolidated net cash flow exceeds $600,000. Mr. Schiller's contract
entitles him to 20% of the gross profit on the sale of any of the Company's, or
its subsidiaries, investments securities. Mr. Schiller's contract provides him
the opportunity to participate in the future expansion of the Company whereby he
is entitled, at his option, to purchase up to 25% of the authorized securities
of any subsidiary which is organized for any purpose. Mr. Schiller's contract
provides him with certain fringe benefits including a vehicle, health insurance
and life insurance. In the event of a change of control, Mr. Schiller's contract
provides him with severance equal to all amounts owed to him for the full term
of the employment agreement.
Grazyna B. Wnuk has an employment agreement with the Company whereby
she is employed as the Company's Vice-President. Ms. Wnuk's contract was
executed in 2002 and was negotiated pursuant to a board authorization dated
April 29, 1999. Ms, Wnuk's contract's initial expiration is April 28, 2009 and
provides for annual compensation of $200,000 per year. Ms. Wnuk's contract may
be extended an additional five years and for an annual increase as calculated as
the greater of 5% or the increase in the cost of living index. Ms. Wnuk's
contract provides her with a bonus for each year of the term equal to 1% of the
amount by which the greater of consolidated net income before income taxes or
consolidated net cash flow exceeds $600,000. Ms. Wnuk's contract entitles her to
1% of the gross profit on the sale of any of the Company's, or its subsidiaries,
investments securities. Ms. Wnuk's contract provides her the opportunity to
participate in the future expansion of the Company whereby she is entitled, at
her option, to purchase up to 1% of the authorized securities of any subsidiary
which is organized for any purpose. Ms. Wnuk's contract provides her with
certain fringe benefits including a vehicle, health insurance and life
insurance. In the event of a change of control, Ms. Wnuk's contract provides her
with severance equal to all amounts owed to her for the full term of the
employment agreement.
Page 13
Indemnifications
Pursuant to the terms of the stock purchase agreement to sell
Sequential and S-Tech, the Company agreed to indemnify Lewis S. Schiller for any
claims made against him regarding $1.1 million of delinquent payroll taxes owed
by Sequential and S-Tech at the time of their disposal and as of March 31, 2003,
the Company has reserved $550,000 against such potential claims.
Legal Proceedings
Although the Company is a party to certain legal proceedings that have
occurred in the ordinary course of business, it does not believe such
proceedings to be of a material nature with the exception of the following item.
On or about April 8, 2002, a complaint styled "Law Offices of Jerold K. Levien,
against The Finx Group, Inc. f/k/a Fingermatrix, Inc., The Trinity Group-I,
Inc." was filed in the Supreme Court of the State of New York County of New
York. The nature of the action is for breach of contract with regard to the
non-payment of legal invoices for services purported to have been rendered by
the plaintiff, and the relief sought is $334,595, such amount having been
accrued on our books. The Company believes it has meritorious defenses to the
complaint and intends to vigorously contest this complaint. Due to uncertainties
in the legal process, it is at least reasonably possible that the Company's
opinion of the outcome will change in the near term and there exists the
possibility that there could be a material adverse impact on its operations.
10. Subsequent Events
In April 2003, the Company issued 100,000,000 shares of its common
stock pursuant to stock grant rights issued on March 17, 2003 of which
85,000,002 shares were issued to consultants, resulting in stock-based
compensation of $425,000, and 14,999,998 shares were issued to Grazyna B. Wnuk,
resulting in stock-based compensation of $75,000.
In April 2003, the Company issued to Grazyna B. Wnuk, 9,006,976 shares
of its common stock in exchange for expenses she paid on behalf of the Company
amounting to $34,000, the approximate value of the shares issued. Such issuance
was pursuant to the March 17, 2003 approval of the board of directors.
In April 2003, an aggregate of 2,000 shares of the Company's Series B
8% Voting Redeemable Convertible Preferred Stock was converted by Trinity into
50,000,000 shares of Common Stock.
In May 2003, the Board of Directors authorized the conversion by
Trinity of an aggregate of 600 shares of the Company's Series B 8% Voting
Redeemable Convertible Preferred Stock into 15,000,000 shares of Common Stock.
Page 14
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, 2002 FORM 10-KSB, AS AMENDED,
INCLUDE, WITHOUT LIMITATION: WE HAVE A HISTORY OF LOSSES AND CASH FLOW DEFICITS;
THE MARKET FOR OUR COMMON STOCK IS LIMITED; TRADING IN OUR SECURITIES MAY BE
RESTRICTED DUE TO COMPLIANCE WITH APPLICABLE PENNY STOCK REGULATIONS; OUR
COMPANY IS SUBJECT TO CONTROL BY A PRINCIPAL STOCKHOLDER; A SIGNIFICANT PORTION
OF THE NET PROCEEDS OF ANY POTENTIAL FINANCING MAY BE USED FOR THE PAYMENT OF
RELATED PARTY AND OTHER INDEBTEDNESS AND FOR SALARIES OF EXECUTIVES AND KEY
PERSONNEL; WE REQUIRE ADDITIONAL FINANCING FOR OUR BUSINESS ACTIVITIES; WE HAVE
GRANTED SIGNIFICANT BENEFITS UNDER CERTAIN EXISTING AND PROPOSED EMPLOYMENT
AGREEMENTS; RAPID TECHNOLOGICAL CHANGE COULD RENDER CERTAIN OF OUR PRODUCTS AND
PROPOSED PRODUCTS OBSOLETE OR NON-COMPETITIVE; WE CANNOT PREDICT MARKET
ACCEPTANCE FOR OUR PROPOSED PRODUCTS; THE BUSINESS IN WHICH WE INTEND TO ENGAGE
IN IS SUBJECT TO INTENSE COMPETITION; THE BOARD OF DIRECTORS MAY ISSUE
ADDITIONAL PREFERRED STOCK IN THE FUTURE; A SUBSTANTIAL NUMBER OF OUR SHARES OF
COMMON STOCK WILL BE AVAILABLE FOR FUTURE SALE IN THE PUBLIC MARKET; WE DO NOT
INTEND TO PAY ANY DIVIDENDS ON THE COMMON STOCK IN THE FORESEEABLE FUTURE; THE
LIABILITY OF OUR OFFICERS AND DIRECTORS TO US AND OUR SHAREHOLDERS IS LIMITED;
DEPENDENCE ON KEY SUPPLIER; RELIANCE ON MANAGEMENT, KEY PERSONNEL AND
CONSULTANTS; WE COULD BE SUBJECT TO POTENTIAL UNINSURED LIABILITY, THE RISKS
RELATING TO LEGAL PROCEEDINGS AND OTHER FACTORS BOTH REFERENCED AND NOT
REFERENCED IN THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING THOSE SET FORTH
UNDER "RISK FACTORS." 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.
Phase Out of the OTC Bulletin Board
Our common stock currently trades on the OTC Bulletin Board ("OTCBB"),
which is operated by the Nasdaq Stock Market, Inc. ("NSM"). NSM has advised us
that the OTCBB will be phased out in 2004 and will be replaced by the Bulletin
Board Exchange ("BBX"). The BBX will be a listed marketplace, with qualitative
listing standards but with no minimum share price, income, or asset
requirements. BBX Listing Standards includes Public Interest Standards, Public
Float/Shareholder Requirements, and Corporate Governance Standards. The Public
Interest Standard will allow the BBX to deny listing or de-list an issuer to
protect investors. Imposition of this standard will include a review of all
directors, officers, and major shareholders for past regulatory or legal issues.
The BBX listing standards will require issuers to demonstrate the existence of
one hundred round-lot shareholders and two hundred thousand shares in the public
float. Corporate Governance Standards will require us to have an annual
shareholders' meeting to be held within twelve months of the end of the first
fiscal year after we become listed. The BBX will require the appointment of at
least one independent director and the creation of an Audit Committee, a
Page 15
majority of the members of which must be independent directors. Related party
transactions and potential conflict of interest situations will also be subject
to review by the Audit Committee or a comparable body of the Board of Directors.
The BBX will also prohibit the disenfranchisement of the voting rights of
existing shareholders and require shareholder approval of transactions that
involve: the grant of stock options to officers and directors, below-market
issuances of stock, acquisitions, and changes of control. We will be required to
distribute our annual report on Form 10KSB to our shareholders and engage only
auditors that are subject to peer review consistent with the American Institute
of Certified Public Accountants ("AICPA") procedures. If the BBX accepts a
listing application filed by us, the initial listing fee will be approximately
$10,000 and we will also be subject to an annual renewal fee of approximately
$4,000. If a listing application filed by us is not accepted by the BBX, our
common stock will trade on the Pink Sheets which will likely provide holders of
our common stock with less liquidity than either the OTCBB or the BBX.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of our financial statements, including the
following: impairment of long-lived assets, including the valuation of the
exclusive license agreement; accounting for expenses in connection with stock
options and warrants; and accounting for income taxes. Our management relies on
historical experience and on other assumptions believed to be reasonable under
the circumstances in making its judgment and estimates. Actual results could
differ materially from those estimates. There have been no significant changes
in assumptions, estimates and judgments in the preparation of these financial
statements from the assumptions, estimates and judgments used in the preparation
of our prior year's audited financial statements.
Results of Operations
In September 2002 we made a decision to focus our business exclusively
on our Security Systems business and on October 18, 2002 we disposed of all non
security system segments. Currently, our primary source of future revenues, if
any, will be generated under our Georal License for the sale of Georal Security
Products, including the GIL-2001 security door. Potential revenues may be
generated from the marketing and distribution of the Georal Security Products to
both those customers for which we have exclusive distribution rights and to
others as to which we have non-exclusive rights. In December of 2002 TRW, Inc.,
now operating as Northrop Grumman Mission Systems, agreed to market and
distribute the Georal Security Products. In March of 2003, Lockheed Martin
Missions Systems also agreed to market and distribute the Georal Security
Products. Many of the customers to whom we will seek to market the Georal
Security Systems will be domestic and foreign government purchasers or
commercial users. On December 11, 2001, the GIL-2001 security door received
certification from the U.S. State Department necessary for its possible
procurement for use in U.S. embassies, consulates and other governmental
installations both in the U.S. and abroad. In October 2002, Georal
International, Ltd. received broad patent approval for its security entrance
system from the United States Patent Trademark Office (Patent 6,472,984). The
patent received by Georal International, Ltd. covers the secured portal which is
the subject of the Georal License and may provide barriers to entry and possibly
eliminate competition from other portal manufacturers.
Our original marketing strategy was focused solely on sales of the
GIL-2001 security door to the U.S. State Department. In 2002, we expanded our
marketing efforts to include all customers under the exclusive distribution
agreement and have built a sales team for such purpose. We face competition from
companies which have far greater financial resources, personnel and experience.
Although we believe that we have a unique product and that the GIL-2001 security
door is the only product of its type that is certified by the U.S. State
Department, we give no assurances that we will be able to generate meaningful
revenues using our Georal License.
We also offer Secured Card Solutions from our development and sale of
software programs for Device Management and Smart Card applications. We have
provided Virginia Commonwealth University with two of our Secured Card software
solutions - the "Secured Recreational Sports Solution" and "The
Page 16
Secured Card Solution". "The Secured Recreational Sports Solution" which
currently serves Virginia Commonwealth University from three locations offering
a variety of fitness, aquatics and intramurals. The activities are offered to
all students, faculty, and university and hospital employees. The Secured
Recreational Sports Solution's database is integrated with the VCU card database
for single university identification. The Secured Recreational Sports Solution
handles all check-in of members, locker assignment and equipment check-in and
check-out. It also keeps track of member billing and payroll deduction. Further,
it handles member suspensions and automatic emailing of special events. The
Secured Sports Recreation Solution application is written using the new
Microsoft.NET architecture. We have also entered into a services and support
agreement with Florida International University for the installation, support
and use of our Secured Recreational Sports Solution. During the three months
ended March 31, 2003, we generated revenues of $10,000 from the contracts with
Virginia Commonwealth University and Florida International University.
Our operating expenses include executive payroll which is currently
$723,000 annually and was $193,000 and $163,000 for the respective three month
periods ended March 31, 2003 and 2002. None of the executive salaries have been
paid, and as of March 31, 2003 Lewis S. Schiller, our Chief Executive Officer,
is owed cumulative salaries of $1.5 million and Grazyna B. Wnuk, our
Vice-President, is owed cumulative salaries of $628,000. Expenses associated
with our sales and marketing, which currently are $1 million on an annual basis,
represent consulting fees for the consultants who perform such functions and
approximated $250,000 for both the three month periods ended March 31, 2003 and
2002. Professional fees for legal and accounting services currently approximate
$250,000 annually. The value assigned to the Georal License of approximately $3
million was incurred in 2002 and is being amortized over of the life of the
Georal License resulting in ongoing annual amortization expense of $244,000.
Such amortization for the three months ended March 3,1 2003 and 2002 was $61,000
and $68,000, respectively.
During 2003 and 2002, we have compensated our employees and consultants
with stock options and stock grants that have been registered on Form S-8 and
unregistered stock purchase warrants. In January 2003, we issued options and
warrants to purchase an aggregate of 22,604,168 shares of common stock and in
March 2003 we issued stock grant rights for 100,000,000 shares of common stock
to employees and consultants. Such options, warrants and stock grant rights were
valued at an aggregate of $965,000 which was charged to operations as a non cash
expense for the three month period ended March 31, 2003.
We incur interest expense at an annual rate of 9% on related party
notes payable. For the three month periods ended March 31, 2003 and 2002, such
interest was $26,000 and $44,000, respectively. The related party notes payable
are the result of advances from Trinity Group-I, Inc., our controlling
shareholder, advances from Lewis S. Schiller, our Chief Executive Officer and
Chairman of the Board, advances from Grazyna B. Wnuk, an officer and director of
the Company, a loan from E. Gerald Kay, a former director, and advances from
Blake Schiller and Carol Schiller, both immediate family members of Lewis S.
Schiller. Total notes payable owed to related parties as of March 31, 2003
approximated $1.2 million on which accrued and unpaid interest approximates
$708,000. All of the related party notes and interest are payable upon demand.
As a result of our decision to focus our business exclusively on our
Security Systems business we disposed of all non security system segments
resulting in a gain on disposal of $1.4 million recorded in the third quarter of
2002. The loss from the operations of discontinued segments was $200,000 for the
three months ended March 31, 2002.
Financial Condition - Liquidity and Capital Resources
As of March 31, 2003 our working capital deficiency approximates $7
million, representing an increase of $2.5 million from December 31, 2002.
Effective September 30, 2002, Lewis S. Schiller, the Company's Chief Executive
Officer and Chairman of the Board, agreed to defer payment of his salary until
January 1, 2004, payment of accrued interest on notes payable to Trinity, which
is wholly owned by him until January 1, 2004 and payment of accrued dividends on
preferred stock held by Trinity until January 1, 2004. Such amounts were
presented as long-term liabilities as of December 31, 2002. As of March 31,
2003, the remaining deferral period is less than twelve months and such amounts
are presented as current liabilities. During the three months ended March 31,
2003 we used $453,000 for our continuing operations.
Page 17
Since April 1999, our primary source of funding has been The Trinity Group-I,
Inc. and during the three months ended March 31, 2003 net advances from related
parties were $102,000. During 2003 and 2002, we have used stock options to
compensate our employees and key consultants. The proceeds from the exercise of
stock options was $352,000 during the three months ended March 31, 2003.
Pursuant to the terms of the stock purchase agreement to sell
Sequential Electronic Systems, Inc. and S-Tech, Inc., we have agreed to
indemnify Lewis S. Schiller for any claims made against him regarding $1.1
million of delinquent payroll taxes owed by Sequential Electronic Systems, Inc.
and S-Tech, Inc. at the time of their disposal. A reserve of $550,000 has been
recorded by management based upon our best estimate of the ultimate liability.
The accompanying unaudited interim consolidated 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, we have a history of operating losses and as of March 31, 2003 have a
working capital deficiency of $7 million and a capital deficiency of $4 million.
Since April of 1999 we have relied on financial support from our controlling
stockholder, The Trinity Group-I, Inc. and other related parties and since
September 25, 2001 have compensated our employees and key consultants with stock
and stock options some of which were registered on Form S-8. Management is
currently seeking additional financing; however no assurances can be made that
such financing will be consummated. Our continuation as a going concern is
dependent upon our ability to obtain financing, and to use the proceeds from any
such financing to increase our business to achieve profitable operations. The
accompanying consolidated financial statements do not include any adjustments
that would result should we be unable to continue as a going concern.
PART II OTHER INFORMATION
Item 3. Controls and Procedures
Our Chief Executive Officer, who is also our Chief Accounting Officer,
has supervised and participated in an evaluation of the effectiveness of our
disclosure controls and procedures as of a date within 90 days of the date of
this report, and, based on his evaluation, he believes that our disclosure
controls and procedures, as defined in Rule 13a-14(c) of the Securities Exchange
Act of 1934, as amended, are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. As a result of the
evaluation, there were no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Executive Officer and Chief Accounting Officer
Certification.
Page 18
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 May 19, 2003
Lewis S. Schiller (Principal Executive and Accounting Officer)
Page 19
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report of The Finx Group, Inc. on Form
10QSB for the period ending March 31, 2003, as filed with the Securities and
Exchange Commission on the date hereof (the "Report") the undersigned Chief
Executive Officer and Chief Financial Officer of the Company hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 that (based on his knowledge): 1) the Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934, and 2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company as of and for the periods covered in the Report.
/S/ Lewis S. Schiller
Chief Executive Officer and
Chief Financial Officer
May 19, 2003
Page 20
Exhibit 99.2
CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER CERTIFICATION
I, Lewis S. Schiller, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The Finx Group,
Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of this registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) significant deficiencies in the design or operation of internal
controls which could adversely affect our ability to record,
process, summarize and report financial data and we have identified
no material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 19, 2003
By /S/ Lewis S. Schiller
Chief Executive Officer and
Chief Accounting Officer
Page 21