UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period _________ to _________.
Commission file Number 0-9940
THE FINX GROUP, INC.
(Name of small business issuer as specified in its charter)
(Formerly Known as Fingermatrix, Inc.)
New York 13-2854686
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
249 Saw Mill River Road, Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (914) 592-5930
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per share
Check whether the issuer (1) 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 ___
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended December 31, 2001 were
$1.678 million.
The aggregate market value of the common equity held by non-affiliates
of the Registrant as of April 10, 2002 was approximately $1.783 million computed
on the basis of the reported sale price per share ($0.065) of such stock on
the National Association of Securities Dealers, Inc.'s Over the Counter Bulletin
Board. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of April 10, 2002, the Registrant has 42,656,545 shares of its par
value $0.01 Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes ___ No X
1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING WITHOUT LIMITATION THE STATEMENTS
UNDER "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" ARE, OR MAY BE, FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT").
WITHOUT LIMITING THE FOREGOING, (I) THE WORDS "BELIEVES,"
"ANTICIPATES," "PLANS," "EXPECTS," "INTENDS," "ESTIMATES" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS AND (II)
FORWARD-LOOKING STATEMENTS INCLUDE ANY STATEMENTS WITH RESPECT TO THE POSSIBLE
FUTURE RESULTS OF THE COMPANY, INCLUDING ANY PROJECTIONS OR DESCRIPTIONS OF
ANTICIPATED REVENUE ENHANCEMENTS OR COST SAVINGS. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS,
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY,
OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS.
SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: 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 MAY USE A SIGNIFICANT PORTION OF THE
PROCEEDS FROM ANY FINANCING OFFERING TO FUND NEW BUSINESSES; WE HAVE GRANTED
SIGNIFICANT BENEFITS UNDER CERTAIN EXISTING AND PROPOSED EMPLOYMENT AGREEMENTS
THE PROPOSED ACTIVITIES OF FMX CORP. WILL BE DEPENDENT UPON PATENT PROTECTION;
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; E-COMMERCE PRODUCTS AND SERVICES MAY BECOME SUBJECT TO
GOVERNMENT REGULATION; 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; OUR SUBSIDIARIES HAVE
OUTSTANDING SIGNIFICANT DELINQUENT PAYROLL TAXES DUE; THE LIABILITY OF OUR
OFFICERS AND DIRECTORS TO US AND OUR SHAREHOLDERS IS LIMITED; DEPENDENCE ON KEY
SUPPLIERS; RELIANCE ON MANAGEMENT; DEPENDENCE ON KEY PERSONNEL; COMPUTER
VIRUSES; STARNE365.COM, INC. WILL BE SUBJECT TO REGULATORY SCRUTINY OF NETWORK
MARKETING SYSTEMS; WE COULD BE SUBJECT TO POTENTIAL UNINSURED LIABILITY, THE
RISKS RELATING TO LEGAL PROCEEDINGS AND OTHER FACTORS BOTH REFERENCED AND NOT
REFERENCED IN THIS ANNUAL REPORT ON FORM 10-KSB, 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 CONTAINED THROUGHOUT
THIS ANNUAL REPORT ON FORM 10-KSB.
2
PART I
Item 1. Description of Business.
Throughout this document our Company and its subsidiaries may be
collectively referred to as "We", "Our", "Us", "The Finx Group", the "Company"
or the "Registrant".
Business Developments
On May 12, 1976 we were organized as a New York corporation under the
name of Fingermatrix, Inc. As of April 28, 1999, we had no operating activities
and on such date we entered into an agreement to acquire SES Acquisition Corp.
from Trinity Group-I, Inc. Trinity Group-I, Inc. is owned by Lewis S. Schiller
who is the chairman of our board of directors and our chief executive officer.
On April 28, 1999, SES Acquisition Corp. owned all of the equity of two
operating entities, Sequential Electronic Systems, Inc and S-Tech, Inc. and,
effectively controlled a third entity, FMX Corp. In exchange for all of the
capital stock of SES Acquisition Corp. we issued, to The Trinity Group-I, Inc.
and its designees, 85% of Fingermatrix Inc.'s equity and voting power consisting
of 10,571,607 shares of Fingermatrix, Inc.'s common stock (on July 14, 2000 such
shares were exchanged for 1,057,161 shares of The Finx Group, Inc.'s common
stock) and 93,654 shares of Fingermatrix, Inc.'s Series A preferred stock,
convertible into 69,566,934 shares of Fingermatrix, Inc.'s common stock (on July
14, 2000, such shares were exchanged for 6,956,693 shares of The Finx Group,
Inc.'s common stock). Fingermatrix, Inc.'s remaining equity, consisting of
9,428,393 shares of common stock (which on July 14, 2000, were exchanged for
942,839 shares of The Finx Group, Inc.'s common stock), were retained by those
who held such shares prior to the acquisition of SES Acquisition Corp.
SES Acquisition Corp. subsequently ceded its 100% equity ownership in
Sequential Electronic Systems, Inc. and S-Tech, Inc. and its 39.1% equity
ownership in FMX Corp. to Fingermatrix, Inc. Sequential Electronic Systems, Inc.
is a Delaware company that was incorporated on December 19, 1985 and is 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. S-Tech, Inc. is a Delaware company that
was incorporated on May 5, 1992 and is engaged in the design and manufacture of
two product lines consisting of vending machines and avionics equipment. FMX
Corp. is a Delaware Company that was incorporated on June 12, 1996 and is
engaged in the design and development of fingerprint identification hardware and
software systems.
On August 11, 1999, we organized Secured Portal Systems, Inc. as a
Delaware company. We own 89% of Secured Portal Systems, Inc.'s common stock,
Lewis S. Schiller and his designees own 9% of Secured Portal Systems, Inc.'s
common stock and Grazyna B. Wnuk owns 2% of Secured Portal Systems, Inc.'s
common stock. Grazyna B. Wnuk is a member of our board of directors and is our
secretary and vice-president. We also own all of Secured Portal Systems, Inc.'s
preferred stock, which gives us the right to elect a majority of Secured Portal
Systems, Inc.'s board of directors. On September 13, 1999, Secured Portal
Systems, Inc. entered into an exclusive distribution agreement with GIL Security
Systems, Inc. GIL Security Systems, Inc. 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. GIL Security Systems, Inc. is a subsidiary of Georal International,
Ltd. 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
Security Systems, Inc. and Georal International, Ltd. The exclusive distribution
agreement gives Secured Portal Systems, Inc. distribution rights for the sale of
GIL Security Systems, Inc.'s security entrance systems to certain categories of
customers. The products covered by the exclusive distribution agreement includes
all of GIL Security Systems, Inc.'s products that existed on September 13, 1999
and all products developed during the term of the exclusive distribution
agreement including all models of the GIL-2001 security door. The categories of
customers covered by the exclusive distribution agreement 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 exclusive distribution agreement commenced on
September 1, 1999 and had an initial expiration date of August 31, 2004 which
was later extended to August 31, 2009.
As an inducement to obtain the exclusive distribution agreement and in
exchange for 1,000,000 common stock shares of GIL Security Systems, Inc., we
issued 14,134 shares of Fingermatrix, Inc.'s Series A preferred stock,
convertible into 10,498,735 shares of Fingermatrix, Inc.'s common stock (on July
14, 2000, such shares were
3
exchanged for 1,049,874 shares of The Finx Group, Inc.'s common stock) to Alan
J. Risi. On December 11, 2001, the GIL 2001 security door received certification
by the U.S. State Department. On February 21, 2002, the exclusive licensing
agreement was amended to expand the categories of customers under the exclusive
license to include all financial institutions around the world. The February 21,
2002 amendment also gives Secured Portals 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 exclusive licensing agreement. As consideration
for entering into the amendment on February 21, 2002, we issued to Alan Risi
40,000 shares of a newly created Series D preferred stock that is convertible
into 4,000,000 million shares of our common stock, which were valued at $680,000
using the Black-Scholes option valuation formula.
On September 22, 1999, we issued 1,000 of Fingermatrix, Inc.'s Series
B, 4% preferred stock to The Trinity Group-I, Inc. The Series B preferred stock
entitles The Trinity Group-I, Inc. to receive dividends at the annual rate of 4%
and gave The Trinity Group-I, Inc the right to vote upon all matters upon which
the holders of the Fingermatrix, Inc.'s common stock have the right to vote and,
in addition, gave Trinity Group-I, Inc. the right to elect (i) three directors
if the number of directors is five or less, (ii) four directors if the number of
directors if six or seven, and (iii) a majority of the directors if the number
of directors is more than seven.
On April 20, 2000, The Trinity Group-I, Inc. organized Cue365.com, Inc.
as a Delaware company. On May 25, 2000, Trinity Group-I, Inc. changed
Cue365.com, Inc.'s name to Starnet365.com, Inc. and effected a spin-off of
Starnet365.com, Inc. as a result of which we acquired, for no consideration, a
controlling interest in Starnet365.com, Inc.'s issued and outstanding common
stock. On October 13, 2000, Starnet365.com, Inc. commenced a private placement
offering under an exemption provided by Regulation D of the Securities and
Exchange Commission to which it sold 338,500 shares of its common stock. We
currently own 53% of Starnet365.com, Inc.'s common stock and all of its
preferred stock, which gives us the right to elect a majority of its board of
directors. Lewis S. Schiller and his designees own 23% of Starnet365.com, Inc.'s
common stock, Grazyna B. Wnuk owns 6% of Starnet365.com, Inc.'s common stock,
former employees own 17% of Starnet365.com, Inc.'s common stock and the private
placement shareholders own the remaining 1% of Starnet365.com, Inc.'s common
stock. Starnet365.com, Inc. is an Internet marketing company.
On June 6, 2000 Fingermatrix, Inc. incorporated The Finx Group, Inc. as
a Delaware company. On June 23, 2000, the Fingermatrix, Inc. board of directors
approved the merger of Fingermatrix, Inc. into The Finx Group, Inc. On July 14,
2000, the merger became effective upon the written consent of The Trinity
Group-I, Inc., Fingermatrix, Inc.'s controlling shareholder. Our board of
directors established June 30, 2000 as the date of record for consummating the
terms of the merger of Fingermatrix, Inc. into The Finx Group, Inc. We reported
the merger in an Information Statement under Section 14 of the Securities and
Exchange Act of 1934 and on or about July 14, 2000, we sent the Information
Statement to the shareholders of record as of June 30, 2000. On June 30, 2000,
Fingermatrix, Inc. had outstanding 20,000,000 shares of common stock, 114,403
shares of Series A 2% voting convertible preferred stock (convertible into
84,978,548 shares of common stock) and 1,000 shares of Series B 4% preferred
stock. On June 30, 2000, The Finx Group, Inc. had authorized capital stock
consisting of 50,000,000 shares of common stock, par value $.01 per share, of
which no shares were issued or outstanding and 1,000,000 shares of preferred
stock of which 1,000 preferred shares were designated as Series A 4% preferred
stock, par value $.01 per share. Each outstanding ten shares of Fingermatrix,
Inc. common stock was automatically converted into the right to receive one
share of The Finx Group Inc.'s fully paid and non-assessable common stock. Each
outstanding share of Fingermatrix, Inc. Series A 2% voting convertible preferred
stock was automatically converted into 742.8 shares of Fingermatrix, Inc. common
stock and then each outstanding ten shares of such Fingermatrix, Inc. common
stock was automatically converted into the right to receive one share of The
Finx Group Inc.'s fully paid and non-assessable common stock. Each outstanding
share of Fingermatrix Series B 4% preferred stock automatically converted into
the right to receive one share of The Finx Group Inc.'s fully paid and
non-assessable Series A 4% preferred stock. All of The Finx Group, Inc.'s Series
A preferred shares are held by The Trinity Group-I, Inc. and entitle The Trinity
Group-I, Inc. to annual dividends of 4% per share, the right to vote upon all
matters as The Finx Group, Inc. common stockholders and the right to elect a
majority of the board of directors of The Finx Group, Inc. The by-laws of
Fingermatrix, Inc. continued in force as the by-laws of The Finx Group, Inc. and
the directors and officers of The Finx Group, Inc. remained the same as those of
Fingermatrix, Inc.
On July 27, 2000, we issued 1,000,030 shares of our common stock, to
acquire a controlling interest in Shopclue.com, Inc.; a Delaware Company
organized in July 1999. We acquired our equity interest in Shopclue.com, Inc.
from family members of Lewis S. Schiller. On the date of the acquisition,
Shopclue.com, Inc. had an excess of liabilities over assets of $768,000 and the
common shares issued to acquire Shopclue.com, Inc. were valued at $4 million,
resulting in a purchase price that was in excess of net assets by $4.8 million.
This $4.8 million approximates the value assigned to research and development
projects of Shopclue.com, Inc. 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
4
and development must be charged to expense at the date of the acquisition.
Accordingly, we charged approximately $4.8 million to expense in 2000 for
in-process research and development. We own 34.24% of Shopclue.com, Inc.'s
common stock and all of its issued and outstanding preferred stock which gives
us the right to elect a majority of the Shopclue.com, Inc. board of directors.
Shopclue.com, Inc. is included as a part of our consolidated statements of
operations and consolidated statement of financial position due to the effective
control as evidenced by interlocking management and our ownership of a series of
Shopclue.com, Inc.'s preferred stock that gives us the right to elect a majority
of the Shopclue.com, Inc. board of directors. Shopclue.com, Inc. was an
application service provider that developed programs that would enable small-
and medium-sized businesses to establish an online presence. During the fourth
quarter of 2001, Shopclue.com, Inc. ceased operations and is presented in the
consolidated financial statements as a discontinued segment.
On July 27, 2000, we acquired from Trinity Group-I, Inc., a 23.42%
equity interest in Biz Chase, Inc., a Delaware company organized in July 2000.
Bizchase, Inc. is included as a part of our consolidated statements of
operations and consolidated statement of financial position due to the effective
control as evidenced by interlocking management and our ownership of a series of
Bizchase, Inc.'s preferred stock that gives us the right to elect a majority of
the Biz Chase, Inc. board of directors. Biz Chase, Inc.'s concept was developed
by Blake Schiller, the founder of Shopclue.com, Inc., and provided Shopclue.com,
Inc. with its software under a licensing agreement. Effective September 30,
2000, Biz Chase, Inc. received common stock shares of Shopclue.com, Inc.
representing 19% of Shopclue.com, Inc.'s outstanding common stock shares in
exchange for the assumption of $897,000 of notes payable that Shopclue.com, Inc.
owed to related parties. Bizchase, Inc. had developed a wholesale web based
development solution that was intended to provide an online solution for small
businesses. During the fourth quarter of 2001, Bizchase, Inc. ceased operations
and is presented in the financial statements as a discontinued segment.
On May 7, 2001, The Trinity Group-I, Inc. 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 and converted an
additional $2 million of related party debt into shares of a newly created
Series B preferred stock. The cumulative Series B Preferred Stock entitles
Trinity Group-I, Inc. to annual dividends at the rate of $8 per share and is
convertible into shares of common stock as calculated by dividing $2 million by
the lowest price that our shares of common stock have traded during the period
that the Series B Preferred Stock has been outstanding. As of April 10, 2002,
the Series B preferred stock could be converted into approximately 67.0 million
shares of common stock. Such conversion would require an increase in our common
shares authorization. The Series B preferred stock is redeemable by us in whole
or in part, at the option of our board of directors, with Lewis S. Schiller,
abstaining from any such vote. The Series B preferred stock votes alongside of
common stockholders on an if converted basis.
On August 31, 2001, we entered into a non-binding letter of intent with
NeoMedia Technologies, Inc. to purchase from them, all assets related to the
NeoMedia-Qode Software and Service Business of NeoMedia, Inc., which business
consists of the ownership and operation of a comprehensive universal Internet
database of consumer product information accessible through the scanning or
searching of Universal Product Codes including the delivery of targeted
promotions, coupons and special offers through a proprietary database and
software. As of December 31, 2001, the acquisition has not been consummated;
however, from the date of the letter of intent through December 31, 2001, we
made certain payments related to the NeoMedia-Qode Software and Service Business
of NeoMedia, Inc. in the amount of $76,000.
On September 19, 2001, we consummated the acquisition of Granite
Technologies, Inc., a Delaware company, through our newly created and wholly
owned subsidiary, Granite Technology Acquisition Corp., a Delaware company. On
September 19, 2001 we purchased 95.87% of Granite Technologies Inc.'s common
stock upon the issuance of 3,000,000 shares of our common stock. Grazyna B. Wnuk
received 124,031 shares of our common stock for her ownership interest in
Granite Technologies, Inc.; and immediate family members of Lewis S. Schiller,
received 397,934 of our common shares for their ownership interest in Granite
Technologies, Inc. In anticipation of our acquisition of Granite Technologies,
Inc., we entered into a Settlement and Release Agreement with Rock Partners
Ltd., SSMI Corp. and Bruno Kordich, on September 15, 2001. Pursuant to the
Settlement and Release Agreement (i) we received 250,000 shares, or 4.13%, of
Granite Technologies Inc.'s common stock then owned by Rock Partners Ltd. and
SSMI Corp.; (ii) we received a General Release and a Dismissal with Prejudice on
any past disputes by and among Granite Technologies, Inc. and Rock Partners
Ltd., SSMI Corp. and Bruno Kordich; (iii) all past agreements between Granite
Technologies, Inc. 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 our common stock in consideration for items (i), (ii)
and (iii); (v) we 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) we issued 160,000 shares of our common stock in
consideration for all remaining claims aggregating $80,000.
5
On November 11, 2001, we entered into an agreement to acquire 5,000,000
shares of Trans Global Services, Inc.'s common stock in exchange for 2,500,000
shares of our common stock. We also had committed to obtain funding of $1
million for Trans Global Services, Inc. for which we would have received
preferred stock that would convert into a maximum of 3,000,000 shares of Trans
Global Services Inc.'s common stock. As of December 31, 2001, we had provided
Trans Global Services, Inc. with $250,000 of funding. Subsequent to December 31,
2001, we had not obtained additional funding and determined that it was not in
our best interest to expend additional time and resources pursuing the funding
of Trans Global Services, Inc. On March 7, 2002, we entered into a mutual
termination agreement with Trans Global Services, Inc. whereby all 2,500,000
shares of our common stock was returned by Trans Global Services, Inc. to us and
4,000,000 of the 5,000,000 shares of Trans Global Services, Inc.'s common stock
was returned to them by us. In consideration of the $250,000 funding that we
provided to Trans Global Services, Inc., the remaining 1,000,000 shares of Trans
Global Services, Inc. common stock were retained by our designees. We used the
remaining 1,000,000 shares of Trans Global Services, Inc. common stock to repay
$250,000 of related party debt owed by us to The Trinity Group-I, Inc. by
designating the ownership of such shares to Lewis S. Schiller, members of Mr.
Schiller's immediate family, and Grazyna B. Wnuk.
On November 30, 2001, we executed an agreement with Orion Telecom
Operating Corporation, pursuant to which The Trinity Group-I, Inc. provided
Orion Telecom with 1,875,000 of its shares of our common stock as a collateral
escrow deposit to enable Orion Telecom Operating Corporation to obtain a
$250,000 working capital loan. As consideration for providing the collateral for
its loan, Orion Telecom Operating Corporation agrees to pay us and The Trinity
Group-I, Inc. a sum equal to $0.00125 per each minute of certain
telecommunication services intended to be provided by Orion Telecom Operating
Corporation. We and The Trinity Group-I, Inc. will receive 50% each of any
monies generated and earned pursuant to this agreement with Orion Telecom
Operating Corporation. Upon repayment of the loan, 875,000 shares will be
returned to The Trinity Group-I, Inc. and the remaining 1,000,000 shares will be
turned over to Orion Telecom in exchange for 1% of Orion Holdings, Inc.'s common
stock. The Trinity Group-I, Inc. will also receive 1% of Orion Holdings, Inc.'s
common stock.
Our Business
Our business is conducted by Mr. Lewis S. Schiller, who is employed
as our Chief Executive Officer and President, and Grazyna B. Wnuk, who is
employed as our Vice-President. Both Lewis S. Schiller and Grazyna B. Wnuk are
members of the our Board of Directors on which Lewis S. Schiller serves as our
Chairman and Grazyna B. Wnuk serves as our Secretary.
Lewis S. Schiller and Grazyna B. Wnuk, along with strategically
assigned consultants, provide our subsidiaries with management, financial, legal
and administrative services. Commencing July 1, 2000, we began charging our
subsidiaries, a monthly consulting fee for the services provided to them. Such
inter segment consulting fees for the years ended December 31, 2001 and 2000
aggregated $900,000 and $450,000, respectively.
We hold controlling investments in our subsidiaries that operate, or
intend to operate, in distinct business segments. As of December 31, 2000 we had
seven separate identifiable business segments. On September 19, 2001 we acquired
Granite Technologies, Inc. which is identified as the Software Development
segment. During the fourth quarter of 2001 we determined that it was more
appropriate to report the Fingerprint Identification Technologies and Secured
Entrance Systems (Ingress/Egress) segments as one segment which is identified as
the Security Systems segment for 2001. During the fourth quarter of 2001,
Shopclue.com, Inc. and Bizchase, Inc., formerly the Application Service Provider
and Web Based Development Solutions segments, respectively, ceased operations
and are presented in the accompanying financial statements as discontinued
operations. As a result of the above, we report five separate segments as of
December 31, 2001 as follows:
-Electro-Mechanical and Electro-Optical Products
-Specialized Vending Machines and Avionics Equipment
-Security Systems
-Internet Marketing
-Software Development
Electro-Mechanical and Electro-Optical Products
Electro-Mechanical and Electro-Optical Products reflects the activities
of Sequential Electronic Systems, Inc. During 2001 and 2000 the revenues of
Sequential Electronic Systems, Inc. were $1.287 million and $2.406 million,
respectively. Sequential Electronic Systems, Inc. is 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. Optical encoders are utilized by
manufacturers whose manufacturing processes require
6
highly accurate positioning of manufactured components. Encoders are also used
as position sensors on computer controlled machinery and equipment, in packaging
machinery for industries such as food packaging and paper products manufacturing
and as measurement devices on certain medical equipment. The encoders
manufactured by Sequential Electronic Systems, Inc. are also sold to the U.S.
Government for a variety of military uses including position transducers for the
Multi-Launch Rocket System and the Patriot Missile Defense System. Sequential
Electronic Systems, Inc.'s encoders are also utilized in the NEXRAD weather
system as position transducers on the system's radar antennas. Sequential
Electronic Systems, Inc.'s high-resolution encoders provide azimuth and
elevation data on the National Aeronautics and Space Administration's telemetry
tracking antennas that are located around the world and used to track missiles,
rockets and satellites.
Sequential Electronic Systems, Inc.'s optical encoders and encoded
motors are sold to the U.S. Government for military applications as well as to
other industrial customers for a variety of control applications. The encoded
motors that are manufactured by Sequential Electronic Systems, Inc. are used as
a capstan drive in weather map recorders and state of the art instrumentation
tape recorders for the purpose of providing precise speed control in order to
reduce distortion in recording. These recorders have many applications including
use in anti-submarine warfare detection systems and in seismic measurement
recording systems purchased by the U.S. Government. Sequential Electronic
Systems, Inc. is a sole source for an instrumentation-encoded motor used by the
U.S. Navy. Commercial applications of encoders fall into the category of
designing units with unique form factors or operating characteristics. In
addition, Sequential Electronic Systems, Inc. markets a standard line of
encoders for commercial applications.
Because both the government and commercial applications of the
technology in Sequential Electronic Systems, Inc.'s products are highly
specialized, there are a limited number of competitors for Sequential Electronic
Systems, Inc.'s high-resolution encoders, which utilize a highly specialized
technology. However, many of the competitors of Sequential Electronic Systems,
Inc. have greater financial, technical, manufacturing, marketing and other
resources. Sequential Electronic Systems, Inc. faces competition from numerous
companies engaged in the manufacture and sale of encoders, including BEI Sensors
and Systems Co., Computer Optical Products, Inc., Danpher Controls, Dynamics
Research Corp. and Encoder Products Co.
Specialized Vending Machines and Avionics Equipment
Specialized Vending Machines and Avionics Equipment reflects the
activities of S-Tech, Inc. During 2001 and 2000 the revenues of S-Tech, Inc.
were $190,000 and $410,000, respectively. S-Tech, Inc. 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, Inc. are prepaid telephone
debit card machines, bill payment kiosks, information kiosks, and stamp vending
machines. S-Tech, Inc. has supplied such vending machines to a variety of
customers, including Con Edison, Netsmart Technologies, Inc. (as a
sub-contractor for San Diego Gas & Electric Co.), Objectsoft Corp. (as a
subcontractor for New York City), NYNEX, Kuwait Telecard, Pace Communications
Corp., Cable and Wireless, and Kinko's.
The avionics equipment designed and manufactured by S-Tech, Inc. is
marketed principally to the U.S. Government. These products consist of synchro
repeater cockpit instruments and oil pressure transmitters. In addition, S-Tech,
Inc. bids from time to time for the supply of products in connection with U.S.
Department of Defense contracts, which products are manufactured to the
technical specifications provided by the Department of Defense. The majority of
the avionics products manufactured by S-Tech, Inc. require S-Tech, Inc. to have
a qualified products list designation, which is a designation granted to
government suppliers who comply with the U.S. Government's system requirements.
These products must obtain a qualified products list designation before such
products are eligible for sale to the U.S. Government. S-Tech, Inc. is currently
attempting to expand the number of its products, which are qualified products
list designated.
Many of S-Tech, Inc.'s competitors have far greater financial,
technical, manufacturing, marketing and other resources. While the majority of
avionics products sold by S-Tech, Inc. require vendors to qualify and obtain a
qualified products list designation before they are eligible to bid and sell
such products, S-Tech, Inc. faces competition from several companies engaged in
this business, among which are Allied Signal Corp., Amatek Corp. and Aircraft
Instrumentation Corp. The vending products manufactured and sold by S-Tech, Inc.
face competition from numerous competitors inasmuch as the vending machine
industry is highly competitive. Among such competitors are Opal Manufacturing
Ltd., Advanced Games & Engineering, Inc., Vendtek Industries, Inc., and Technik
Manufacturing, Inc. S-Tech, Inc. seeks to diminish the impact of such
competition by supplying products that are custom designed to suit the needs of
its customers.
7
Security Systems
Security Systems reflects the activities of Secured Portal Systems,
Inc. and FMX, Corp. Neither Secured Portal Systems, Inc. nor FMX, Corp. have
generated any revenues since their organization.
Secured Portal Systems, Inc.
Secured Portals Systems, Inc. is the exclusive distributor of all of
the security products of GIL Security Systems, Inc. GIL Security Systems, Inc.
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.
Secured Portal Systems, Inc.'s original marketing strategy was solely
focused on sales of the GIL-2001 security door to the U.S. State Department.
Starting in February 2002, we have expanding our marketing effort to include all
customers under the exclusive distribution agreement and we are in the process
of building a sales team for such purpose. Secured Portal Systems, Inc. faces
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
any revenues using our exclusive license.
FMX Corp.
FMX Corp. is engaged in the design and development of state-of-the-art
fingerprint identification hardware and software systems with a threefold target
market of Internet access, law enforcement identification and commercial and
governmental access control. Potential 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. In addition a miniaturized variation of the
fingerprint scanner is being developed which can be integrated with security
access systems for the Internet. FMX Corp. also believes that its fingerprint
identification system that could be used in conjunction with the GIL-2001
security door.
The products and systems being developed by FMX Corp. consist of both
hardware and software components. Hardware components are comprised of a
scanner, computer, printer and controls. Some of these components are or will be
manufactured by FMX Corp. FMX Corp. intends to acquire some of the hardware
components to be utilized in its systems from independent suppliers and
manufacturers. FMX Corp. intends to assemble these components in its facility at
such time, if any, as it develops commercially viable systems utilizing its
fingerprint identification technology. The software to be utilized in these
systems includes proprietary computer programs, which are designed to enhance
recognition identification with a greater degree of accuracy than existing
technologies.
FMX Corp. intends to complete the development of certain systems, which
have been partially engineered and tested. Among these systems are electronic
fingerprint identification systems known as "CHECK/ONE," "CHECK/TEN" and the
"Booking Station." The "CHECK/ONE" system is being developed as a single
fingerprint access system intended for use in access control and other
identification verification applications. This application is designed to allow
for the enrollment of the fingerprints of individuals, assignment of a PIN or
other identifying characteristic to enrollees and use of the combination of PIN
and fingerprints to gain access to certain areas or privileges. This system is
intended for commercial, industrial and governmental applications where secure
control of access is required. The "CHECK/TEN' system is being developed as a
live scanning "kiosk" system designed specifically for use by law enforcement
agencies. This system is designed to quickly scan, record and generate ten-print
cards for use with suspects and other subjects. This system is designed for
quick and easy integration into existing computer network operations and
utilizes industry-standard PC's, which are linked to a scanning module. FMX
Corp. intends to market the "CHECK/TEN" system to law enforcement agencies. The
"Booking Station" is also being developed for law enforcement agencies. This
system will be required to comply with applicable Federal Bureau of
Investigation specifications and standards relating to accuracy, repeatability,
grey scale analysis and speed of operation.
To date, several prototypes of these systems have been produced. In the
event we are able to provide FMX Corp. with sufficient additional funding, FMX
Corp. intends to complete the development of these systems and "beta-test" these
systems with the FBI and other law enforcement agencies. While FMX Corp.
anticipates that it would complete the engineering, development and testing of
these systems within a few months after it receives sufficient funding, the
Company cannot provide any assurances as to whether FMX Corp. will be provided
with a
8
sufficient amount of funding or, if so, whether or when such developmental,
engineering and testing activities would be completed, whether the test results
would be successful, or whether or when any revenues or profits from sales of
such products would be derived.
To the extent that FMX Corp. develops commercially viable systems or
products utilizing such proprietary fingerprint identification technology, it
intends to market any such product or system initially for law enforcement and
access control applications. FMX Corp. intends to engage sales representatives
and distributors to assist with the marketing of any such product or system, to
participate in trade shows and to seek to market such products or systems in
partnership with major law enforcement system original equipment manufacturers.
Inasmuch as FMX Corp. has not developed any such product or system, which may be
marketed, the Company cannot provide any assurance as to the success of any such
marketing efforts or the degree of acceptability that any such product or system
may achieve in the marketplace.
The fingerprint identification technology being developed by FMX Corp.
is the subject of several United States patents issued to the Company, including
a broad patent awarded in March 2001 covering significant advances in electronic
finger printing. While the Company believes that patent and other intellectual
property protection is important to the proposed activities of FMX Corp., no
assurance is provided as to the scope or validity of any existing or future
patents or other intellectual property rights of FMX Corp. If and when FMX Corp.
develops commercially viable products or systems, it will face competition from
many companies with other types of biometric or other fingerprint identification
products or systems, most of whom have far greater financial, technical,
manufacturing, marketing and other resources than FMX Corp.
Internet Marketing
Internet Marketing reflects the activities of Starnet365.com, Inc.
During 2001 and 2000, Starnet365.com, Inc.'s revenues were $182,000 and
$382,000, respectively. Starnet365.com, Inc. is an internet multi-level
marketing company. Starnet365.com, Inc.'s most significant revenue source in
2001 consisted of web hosting fees and in 2000 consisted of on-line tutorials.
The web hosting fees are generated from replicated web sites, which
Starnet365.com, Inc. maintains for it independent representatives. The on-line
training programs consisted of a series of integrated on-line 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, Inc.'s initial
launch, which started in November 2000, has been stalled due to a lack of
funding which has prevented Starnet365.com, Inc. from providing additional
products and marketing support to its independent representatives.
If we are able to obtain appropriate levels of funding Starnet365.com,
Inc believes that it may be able to capitalize on a market based on the Qode
search engine. On August 31, 2001, we entered into a non-binding letter of
intent with NeoMedia Technologies, Inc. to purchase from them, all assets
related to the NeoMedia-Qode Software and Service Business of NeoMedia, Inc.,
which business consists of the ownership and operation of a comprehensive
universal Internet database of consumer product information accessible through
the scanning or searching of Universal Product Codes including the delivery of
targeted promotions, coupons and special offers through a proprietary database
and software. Starnet365.com, Inc. has an inventory of Qode scanning units which
may be used with the Qode search engine. However, we do not have access to the
Qode scanners which are being held by Startnet365.com, Inc.'s order fulfillment
company until such time as we make payment on approximately $60,000 owed to such
vendor.
Starnet365.com, Inc.'s primary competition is comes from E-commerce
companies and other network marketing companies. Starnet365.com, Inc. believes
that most network marketing companies have an Internet presence. However, the
majority of such presence, exists in two forms: (1) advertising where ultimate
marketing is still face-to-face, and (2) the sale of link sites whereby blank
sites are sold and the purchaser must build the site and link other companies'
products to the site. Starnet365.com, Inc. faces competition from companies
which have far greater financial, technical and market resources and which have
established a presence in the multi-level marketing and e-commerce sector. It is
likely that Starnet365.com, Inc. will have to initiate a new launch when and if
adequate funds are available to support such efforts and until such time it is
not expected that Starnet365.com, Inc. will generate meaningful revenues.
Software Development
Software Development reflects the activities of Granite Technologies,
Inc. Granite Technologies, Inc was acquired on September 19, 2001 and revenues
generated since September 19, 2001 were $19,000. Granite Technologies, Inc.
develops and sells software programs for Smart Card applications. Granite
Technologies, Inc. has also developed a software program that is used in
e-commerce kiosks that are designed to operate like an ATM machine but for
commercial applications other than just banking. Granite Technologies, Inc. has
a contract with
9
Virginia Commonwealth University and has provided them with two software
solutions which we call "The Card Office Solution" and "Recreational Sports
Solution"
The Card Office Solution serves the Virginia Commonwealth University
community and Medical College of Virginia Hospitals with a standardized,
comprehensive, and convenient solution for approximately 43,000 card accounts.
This system functions as the University identification card and key to access a
variety of university systems and services.
The Virginia Commonwealth University card utilizes Granite Technologies
Inc.'s application software to bring together all university identification
information from areas such as human resources and the registrar into a single
application. These individual records for students, faculty and staff are
updated daily and a sixteen-digit International Standards Organization number is
randomly assigned to all new records. The Virginia Commonwealth University card
application exports these newly assigned and updated records for various
university needs such as campus access systems, transaction processing and
privilege verification.
This expandable system is capable of being used to support other
Virginia Commonwealth University department membership programs and carding
needs. The Card Office Solution is also utilized to provide web form
integration, color photograph class composites to faculty and other departments
and will provide a cardholder with digital images of their Virginia Commonwealth
University card photograph for use on the web. The Card Office Solution is a
scalable platform that provides a high level of integration, robust reporting,
and ease of use in one package.
The Recreational Sports Solution serves Virginia Commonwealth
University from three locations all offering a variety of fitness, aquatics and
intramurals. The activities are offered to all students, faculty, and university
and hospital employees. The Recreational Sports Solution's database is
integrated with the Virginia Commonwealth University card database for single
university identification. The solution will handle all check-in of members,
locker assignment and equipment check-in and check-out. It will also keep track
of member billing and payroll deduction. Further, it will handle member
suspensions and automatic emailing of special events. This application is
written using the new Microsoft .NET architecture.
Granite Technologies, Inc. faces completion from numerous companies
that have financial, technical, marketing and administrative resources that is
far greater than ours and we give no assurances that it will be able to ever
generate meaningful revenues.
Research and Development
During 2001 and 2000 our identified research and development expenses
were $2.596 million and $4.853 million, respectively, all of which was charged
to operations in the period in which it was incurred. During 2001 $2.371 million
of such research and development expense was purchased, in-process research and
development costs resulting from the Granite Technologies, Inc. acquisition.
During 2000, $4.768 million of such research and development expense was
purchased, in-process research and development costs resulting from the
Shopclue.com, Inc. acquisition.
Employees
The Finx Group, Inc. holding company currently employs two individuals
who are its executive officers. Sequential Electronic Systems, Inc. currently
employs approximately 25 individuals. S-Tech Corp. currently employs 5
individuals. Our remaining subsidiaries have utilized the services of
consultants and have no employees. None of our employees are represented by a
union and we believe our employee relations to be good.
RISK FACTORS
We Have a History of Losses and Cash Flow Deficit
Operating losses have increased during each of the two years ended
December 2001 and as of December 31, 2001 we have a capital deficiency of $7
million. We expect to incur additional losses during the time period in which we
are developing products and markets for our subsidiaries and we cannot be
assured of when, if ever, our operations will become profitable or the extent of
any future profitability. We also cannot be assured that the current trends of
negative cash flow and increased losses and expenses (including compensation
expense charges that may result from the issuance of our securities in the
future) will not continue or, if so, for how long.
10
The Market for Our Common Stock is Limited
Currently, our Common Stock trades on the National Association of
Securities Dealers Automated Quotation System Over-the-Counter Bulletin Board
(the "NASDAQ Bulletin Board"). By its nature, the NASDAQ Bulletin Board is a
limited market and investors may find it more difficult to dispose of our
securities, which are owned by them. Currently, we do not meet the financial and
other requirements for a NASDAQ SmallCap, listing. Apart from specific financial
criteria that we would have to comply with in order to obtain such listing,
there are other corporate governance criteria that must be satisfied in order to
obtain any such listing. Among such corporate governance requirements is the
requirement that there be no disparity in the voting rights of the holders of
the Common Stock. At the present time, The Trinity Group-I, Inc. owns all of the
outstanding shares of our Series A preferred stock preferred stock. The holder
of our Series A Preferred Stock has the right to elect a majority of the Board
of Directors. The NASDAQ may consider the issuance of the Series A Preferred
Stock as a violation of their voting rights rules and policy. The failure to
comply with NASDAQ's voting rights rules or policy or any of its other
applicable regulations relating to transactions engaged in by us may result in
sanctions. Any such actions by NASDAQ could further limit the market for our
Common Stock.
Trading in Our Securities May Be Restricted Due to Compliance with Applicable
Penny Stock Regulations
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by certain penny stock rules and regulations adopted by
the SEC. Penny stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on NASDAQ provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
risks in the penny stock market. These rules also impose additional sales
practice requirements on broker-dealers which sell such securities to persons
other than established customers or institutional accredited investors. For
transactions covered by this rule, broker-dealers must also make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to a sale. Consequently, the application of
this rule to the trading of our Common Stock may affect the ability or
willingness of broker-dealers to sell our securities and adversely affect market
liquidity for such securities.
Our Company is Subject to Control by a Principal Stockholder
Trinity Group-I, Inc. has advanced significant funds to us and our
subsidiaries and owns a controlling interest in our equity. The Trinity Group-I,
Inc. is solely owned by Lewis S. Schiller, our Chairman of the Board and Chief
Executive Officer. All of the shares of The Trinity Group-I, Inc. owned by Lewis
S. Schiller are pledged to an entity controlled by Carol Schiller, the wife of
Lewis S. Schiller. In addition, Carol Schiller, Douglas Schiller, Linda Schiller
and Blake Schiller, the adult children of Lewis S. and Carol Schiller, own
interests in our outstanding common stock. In addition, The Trinity Group-I,
Inc. owns all of our outstanding Series B Preferred Stock, which as of April 10,
2002, is convertible into approximately 67.0 million shares of our common stock.
The Trinity Group-I, Inc. also owns all of our Series A preferred stock which
gives it the right to elect a majority of our Board of Directors. This
concentration of ownership and voting rights could delay or prevent a change of
control. In addition, Lewis S. Schiller could elect to sell all, or a
substantial portion, of his equity interest in The Trinity Group-I, Inc. to a
third party. In the event of such a sale by Mr. Lewis S. Schiller, such third
party may be able to control our affairs in the same manner that Lewis S.
Schiller is able to do so by virtue of his ownership of The Trinity Group-I,
Inc. Any such sale may adversely affect the market price of our common stock and
could adversely affect our business, financial condition or results of
operations.
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
The Trinity Group-I, Inc., Lewis S. Schiller, Grazyna B. Wnuk, E. Gerry
Kaye (a former director), Carol Schiller and Universal International, Inc. (a
company controlled by Grazyna B. Wnuk) have advanced significant funds to us and
our subsidiaries. Also, Lewis S. Schiller and Grazyna B. Wnuk are owed accrued
salaries as of December 31, 2001 of $1.25 million. A portion of the proceeds of
any potential financing may be used to repay some or all of the amounts owed to
these related parties. In addition, it is possible that a substantial portion of
the proceeds from any potential financing would be allocated for general
corporate purposes, including working capital, would be used to pay the salaries
of certain of our officers and other key personnel and consultants.
11
We Require Additional Financing for Our Business Activities
We currently have limited operating capital and our inability to obtain
a significant financing may adversely affect our business and no assurances are
made that any such financing will occur, or that if any financing is completed,
that additional financing will not be required.
We May Use a Significant Portion of the Proceeds from Any Financing Offering to
Fund New Businesses
A significant portion of the proceeds received from any financing would
be expended on companies which have little or no current operating history. We
cannot provide assurances that, despite the expenditure of a substantial portion
of the net proceeds of any potential financing for the future operations of
these entities, that their operations will prove successful.
We Have Granted Significant Benefits Under Certain Existing and Proposed
Employment Agreements
Lewis S. Schiller, our Chairman of the Board and Chief Executive
Officer has an employment agreement with us and Grazyna B. Wnuk, our Vice
President, Secretary and a Director have substantially agreed to the terms of a
proposed employment agreement. These executed and proposed employment agreements
provide significant benefits to each of them. The terms of these agreements were
determined by our management, who are also parties to these agreements.
The Proposed Activities of FMX Corp. Will Be Dependent Upon Patent Protection
We believe that patent protection of the fingerprint identification
technology being developed by FMX Corp. will be essential to its planned future
business operations. The success of FMX Corp.'s future operations will also
depend, in part, upon our ability to maintain its trade secrets, not infringing
upon the intellectual property or proprietary rights of others and preventing
others from infringing upon FMX Corp.'s intellectual property and proprietary
rights. We will only be able to protect FMX Corp.'s intellectual property and
proprietary rights from unauthorized use by others to the extent that FMX
Corp.'s intellectual property and proprietary rights are valid and enforceable
under patents that FMX Corp. has or may obtain in the future or are otherwise
effectively maintained as trade secrets.
Presently, such technology is the subject of six United States patents
including a broad patent awarded in March 2001 covering significant advances in
electronic finger printing. We have not filed for and do not have patent
protection for such technology in any foreign country. We cannot be assured that
others have not already obtained, or will not in the future obtain, patent
protection for fingerprint identification technologies which are the same as or
substantially similar to the fingerprint identification technology of FMX Corp..
We also cannot be assured that the pending United States and foreign patent
applications, or any future United States or foreign patent applications which
we may file in connection with such technology, will result in issued patents or
that if any such patents issue, that the scope or validity of such patents, or
the existing United States patents referred to above, will not be challenged in
the future (or that the scope of any such patents will prevent third parties
from developing competing products).
In addition, we cannot be assured that litigation which may be
commenced by others to challenge our existing or any future patents relating to
our fingerprint identification technology can be successfully defended by us.
The expenses involved in litigation regarding patent protection, and the length
of time that may be spent in attempting to resolve the claims in any such
litigation, can be significant and we cannot estimate any such future defense,
enforcement or licensing costs regarding patent infringement claims. Any such
costs could materially adversely affect FMX Corp.'s planned operations. FMX
Corp. will, therefore, be subject to the risks of adverse claims in litigation
alleging infringement of the intellectual property rights of others by any
patents relating to its fingerprint identification technology. In addition, the
costs of prosecuting and maintaining FMX Corp.'s current patents and patent
applications, as well as the costs of seeking to enforce any of such patents
against third party infringers, are substantial. If FMX Corp. is unsuccessful in
obtaining patent protection or if claims of infringement are made against it
which it is unable to successfully defend or obtain licenses for, or if FMX
Corp. is not able to prevent third parties from infringing its patent or other
intellectual property rights, our proposed business will be materially adversely
affected. FMX Corp. will also rely on maintaining the confidentiality of certain
trade secrets and other proprietary know-how relating to its fingerprint
identification technology. FMX Corp. will try to protect this information by
entering into confidentiality agreements with others who may be required to have
access to such information. Any person or entity that is a party to any such
confidentiality agreement could breach such agreement and improperly disclose
such information to FMX Corp.'s competitors or our competitors could learn of
such information independently. If any material trade secret, know-how or other
proprietary information relating to FMX
12
Corp.'s fingerprint identification technology were to be improperly disclosed or
otherwise obtained by a competitor, FMX Corp.'s planned business operations
could be materially adversely affected.
Rapid Technological Change Could Render Certain of Our Products and Proposed
Products Obsolete or Non-Competitive
Major technological changes can occur rapidly in the security,
fingerprint identification and E-commerce industries. It is entirely possible
that newer technologies, techniques or products will be developed with more
capabilities and better performance than our present and proposed products. The
development by competitors of new or improved technologies, techniques or
products may make our present or planned products obsolete or non-competitive.
We Cannot Predict Market Acceptance for Our Proposed Products
Any products that we may develop in the future utilizing the security,
fingerprint identification and website marketing ideas, techniques or
technologies which are the subject of the proposed activities of Secured Portals
Inc., FMX Corp. or Starnet365.com, Inc. may not gain market acceptance. The
degree of acceptance of any such products that we may develop in the future will
depend upon numerous factors, including demonstration of the advantages,
uniqueness and reliability of such products, their cost effectiveness, the
potential barriers to market entry by alternative products, marketing and
distribution support and the financial ability and credibility of such entities.
The Business in Which We Intend to Engage in is Subject to Intense Competition
We will face intense competition from numerous companies which are
developing, producing and marketing products for securing access to buildings
and facilities, products incorporating fingerprint identification technologies
for law enforcement and other secure access purposes and products for website
marketing which will directly compete with the proposed products of Secured
Portal Systems, Inc., FMX Corp., Starnet365.com, Inc. and Granite Technologies,
Inc. We currently face competition from other companies engaged in the
manufacture and sale of products similar to those manufactured and sold by
Sequential Electronic Systems, Inc. and S- Tech.
We intend to distribute a security access or entrance system to
customers which include government and other institutional purchasers who have
been serviced by vendors, which have established and tested security products
and systems that have become recognized and accepted in this industry. The type
of security system that we will offer to our customers is subject to
technological change and compliance with product specifications established by
our intended customers. Likewise, products utilizing biometrics or fingerprint
technologies for identification, access control and security face similar
problems from law enforcement agencies and other institutional customers to whom
our proposed products utilizing our fingerprint identification technology will
be marketed. New entrants in this industry must establish product reliability
through testing and use in order to gain widespread commercial acceptance of
such products. Products and services which are designed to be marketed through
the use of the Internet will depend upon the widespread acceptance and use of
the Internet as an effective medium of commerce by consumers. The rapid growth
of commercial on-line business is a recent phenomenon and the demand for new
products and services offered over the Internet is subject to a high level of
uncertainty and a number of factors, including concerns about transaction
security, continued development of the necessary technological infrastructure
and the development of complimentary services and products. Competitors in the
area of website marketing will include, among others, established Internet
companies such as Amazon.com, E-Bay, Imall.com, ShopNow and Yahoo.
Most of our competitors have far greater financial, technical,
personnel and other resources than we do and that we expect to have in the
foreseeable future. We cannot provide any assurances that we will be able to
compete effectively with any of such competitors.
E-commerce Products and Services May Become Subject to Government Regulation
On-line commerce is new and rapidly changing and Federal and state
regulations relating to the Internet and on-line commerce is evolving.
Currently, there are few laws or regulations directly applicable to the Internet
or on-line commerce on the Internet and the laws governing the Internet that
exist remain largely unsettled. The Federal Trade Commission and other
governmental authorities have proposed regulations to govern the collection and
use of personal information that may be obtained from customers or visitors to
websites. Inasmuch as the marketing of products and services over the Internet
is relatively new, we cannot be assured that any proposed product or service
offered by us to Internet users will comply with existing or future Federal or
state government regulations. In addition, the secure transmission of
confidential information over the Internet will be essential in
13
maintaining consumer confidence in certain of our proposed products and systems
that will be marketed to Internet users. Any breach of security or other
misappropriation or misuse of the personal information of the users of any of
our proposed Internet products or services could significantly harm our proposed
business and subject us to liability, including liability for claims based on
unauthorized purchases, impersonation or other similar fraud claims. It is
possible that advances in computer capabilities, new discoveries or other
developments could result in a compromise or breach of the technologies proposed
to be utilized by us to protect customer transaction data. We cannot provide any
assurances that we will be able to comply with any future governmental
regulations which may apply to our proposed Internet businesses.
The Board of Directors May Issue Additional Preferred Stock in the Future
We are authorized to issue up to 1,000,000 shares of preferred stock,
$.01 par value (the "Preferred Stock"). The Preferred Stock may be issued in one
or more series, the terms of which may be determined at the discretion of our
Board of Directors, without further approval of the stockholders. Among the
rights of the holders of any additional Preferred Stock that may be authorized
by the Board of Directors are rates of dividends, voting rights, terms of
redemption, amounts payable upon liquidation, sinking fund provisions and
conversion rights. One of the effects of any such additional Preferred Stock
that may be issued in the future may be to enable the Board of Directors to
render more difficult or to discourage an attempt to obtain control of the
Company by means of a tender offer, proxy contest, merger or otherwise and
thereby protect the continuity of our current management. The terms of any such
additional Preferred Stock that may be issued in the future could adversely
affect the rights of the holders of Common Stock. Accordingly, the issuance of
any such shares of Preferred Stock may discourage bids for the Common Stock or
adversely affect the market price of the Common Stock.
A Substantial Number of Our Shares of Common Stock Will Be Available for Future
Sale in the Public Market
As of April 10, 2002, 18,996,647 shares of our outstanding Common Stock
are "restricted securities" as that term is defined in Rule 144 promulgated
under the Securities Act and in the future may be sold only pursuant to an
effective Registration Statement under the Securities Act, in compliance with
the exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. Furthermore, any shares that are issued upon the exercise of any
outstanding warrants or options will be eligible for sale, without registration
under Rule 144 (subject to the aforementioned volume restrictions of the Rule)
following the expiration of two years from the date of issuance. We have granted
"piggy-back" registration rights with respect to 3,000,000 shares of Common
Stock issued acquire Granite Technologies, Inc. Upon registration, all shares,
which are registered will become fully tradable without restriction.
We Do Not Intend to Pay Any Dividends on the Common Stock in the Foreseeable
Future
We currently intend to retain all future earnings, if any, to finance
our current and proposed business operations and we do not anticipate paying any
cash dividends on our Common Stock in the foreseeable future. The holder of our
Preferred Stock have rights senior to the holders of Common Stock with respect
to any dividends. We may also incur indebtedness in the future that may prohibit
or effectively restrict the payment of cash dividends on our Common Stock.
Our Subsidiaries Have Outstanding Significant Delinquent Payroll Taxes Due
Sequential Electronic Systems, Inc., S-Tech, Inc., Granite
Technologies, Inc., Shopclue.com, Inc. and Bizchase, Inc. have aggregate
delinquent payroll taxes of $1.244 million. Such delinquencies could have an
adverse impact on our ability to obtain additional financing.
The Liability of Our Officers and Directors to Us and Our Shareholders is
Limited
The applicable provisions of the Delaware Business Corporation Law and
our Certificate of Incorporation limit the liability of our officers and
directors to us or our shareholders for monetary damages for breaches of their
fiduciary duties to us, with certain exceptions, and for other specified acts or
omissions of such persons. In addition, the applicable provisions of the
Delaware Business Corporation Law and of our Certificate of Incorporation and
By-Laws provide for indemnification of such persons under certain circumstances.
As a result of these provisions, shareholders may be unable to recover damages
against our officers and directors for actions taken by them which constitute
negligence, gross negligence or a violation of their fiduciary duties and may
otherwise discourage or deter our shareholders from suing our officers or
directors even though such actions, if successful, might otherwise benefit us
and our shareholders.
14
Dependence on Key Suppliers
Should any of our key suppliers experience difficulty in providing
product in a timely manner, this could adversely affect the Company's revenues
and reputation in the market. Additionally, the failure on the part of these
suppliers to develop and manufacture or supply new or enhanced products or
software that meet or anticipate technological changes on a timely and
cost-competitive basis could have a materially adverse effect on our financial
condition and results of operations.
Reliance on Management
While investors have voting rights, they will not be able to take a
direct role in the management of our operations. Our success is contingent on
the judgment and expertise of our directors and officers and on our being able
to attract and retain a senior management team, some of who are approaching
retirement age.
Dependence on Key Personnel
Our success will also depend to a significant extent upon the skills of
certain key personnel. Our failure to attract replacement or additional
qualified employees or to retain the services of key personnel could adversely
affect our business.
Computer Viruses
The growth of the Internet has also seen the unwelcome growth of
computer viruses. While many of these viruses inflict nuisance value when
attacking there are a growing number of malicious viruses that can bring down
whole computer systems. There is no guarantee that we will not fall victim to
viruses or that our business will not be severely affected or prevent the
services from operating completely.
Starne365.com, Inc. Will Be Subject to Regulatory Scrutiny of Network Marketing
Systems
Our proposed network marketing model is subject to a variety of
governmental laws and regulations generally directed at ensuring that product
sales are made to consumers of the products and that compensation and
advancement within a marketing organization is based on sales of products rather
than investment in the organization. These laws and Federal Trade Commission
regulations include the Federal securities laws, matters administered by the
Federal Trade Commission and various state anti-pyramid and business opportunity
laws. Although we believe that our proposed business has been designed to be in
compliance with all such laws and regulations, our proposed business will be
subject to the risk that, in one or more of our future markets, our marketing
system or the conduct of certain independent representatives could be found not
to be in compliance with applicable laws or regulations. Failure by our business
or independent representatives to comply with these laws and regulations could
have a material adverse effect on our business in a particular market or in
general. The cost of compliance, in any event, is likely to be significant and
could impact adversely on our profits, if any. As of the date of this Memorandum
we have not received an opinion of counsel affirming the legality of our network
marketing model and no assurance is given that we will receive such opinion in
the future.
We Could Be Subject to Potential Uninsured Liability
The network marketing business as well as electronic commerce involve
potentially significant risks of statutory, contractual and common law
liability. We intend to obtain liability, property and business interruption
insurance. We may not have sufficient funds with which to purchase and/or
maintain such insurance. We plan to operate in a professional and prudent manner
to reduce potential liability. Nevertheless, an uninsured claim against us, if
successful and of sufficient magnitude, could have a material adverse effect on
us. In addition, the lack of or the inability to obtain insurance of the type
and in the amounts required could impair our ability to enter into certain
contracts, which may be, in certain instances, conditioned upon the availability
of adequate insurance coverage.
Item 2. Description of Properties.
Sequential Electronic Systems, Inc. manufactures its products in a
15,000 square foot facility located in Elmsford, New York which is leased from
an independent third party pursuant to a month to month lease. Our principal
executive offices are also located at these premises. S-Tech, Inc. manufactures
its products in a 3,000 square foot facility located in West Babylon, New York
which is leased from an independent third party pursuant to a month to month
lease. We believe that the manufacturing facilities of Sequential Electronic
Systems, Inc. and S-Tech, Inc. are adequate for their activities in the
foreseeable future. Both Sequential Electronic Systems, Inc. and S-
15
Tech, Inc. utilize subcontractors in connection with certain of the design and
production activities associated with the manufacture of their products.
FMX Corp. currently occupies approximately 2,000 square feet of
Sequential Electronic Systems, Inc.'s Elmsford, New York facility. It utilizes
this facility for purposes of its current research and development activities.
At such time, if any, as FMX Corp. develops any commercially viable products or
systems, FMX Corp. intends to subcontract the manufacture of its products.
Nonetheless, FMX Corp. may be required to expand and/or relocate its facilities.
Secured Portal Systems, Inc. conducts its activities at Sequential
Electronic Systems, Inc.'s Elmsford, New York facilities in space provided by
Lewis S. Schiller.
The Finx Group, Inc., Starnet365.com, Inc. and Granite Technologies,
Inc. conduct their business in Boca Raton, Florida in space provided by Lewis S.
Schiller.
All of our subsidiaries utilize independent consultants who perform
work for us out of their own offices located throughout the United States.
Item 3. Legal Proceedings.
We are not involved in any material legal proceedings that management
believes would adversely affect our business, results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 2001 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the National Association of
Securities Dealers, Inc.'s Over the Counter Bulletin Board ("OTC Bulletin
Board") under the symbol "FXGP". The following table sets forth, for the periods
indicated, the quarterly range of the high and low closing bid prices per share
of our Common Stock as reported by the OTC Bulletin Board Trading and market
services. Such bid quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Bid Prices
----------
Current period from High Low
---- ---
January 1, 2002 to
April 10, 2002 $1.00 $0.03
Quarter ended
March 31, 2001 $1.95 $0.53
June 30, 2001 $1.00 $0.18
September 30, 2001 $0.87 $0.26
December 31, 2001 $0.72 $0.38
Quarter ended
March 31, 2000 $10.00 $3.10
June 30, 2000 $5.60 $1.88
September 30, 2000 $6.25 $2.25
December 31, 2000 $2.63 $0.63
The closing price of common stock on April 10, 2002 was $0.065.
We have authorized 50,000,000 of our $0.01 par value common stock. As
of April 10, 2002, there were approximately 4,000 holders of record of our
common stock. The Company has not paid dividends on common stock and does not
anticipate paying dividends in the foreseeable future. The Company intends to
retain future earnings, if any, to finance the expansion of its operations and
for general corporate purposes, including future acquisitions.
16
On July 14, 2000, The Trinity Group-I, Inc. received 1,000 shares of
our Series A preferred stock. The Series A preferred stockholders are entitled
to annual dividends of 4% per share, currently $40 per annum. The Series A
preferred stock has the right to vote upon all matters as the common
stockholders and gives The Trinity Group-I, Inc. the right to elect a majority
of the Board of Directors of the Registrant. On May 7, 2001, The Trinity
Group-I, Inc. converted $2 million of related party debt into 20,000 shares of
Series B preferred stock. The Series B cumulative Preferred Stock entitles The
Trinity Group-I, Inc. to annual dividends at the rate of $8 per share and is
convertible into shares of common stock as calculated by dividing $2 million by
the lowest price that the Company's common stock has traded during the period
that the Series B Preferred Stock has been outstanding. As of April 9, 2002, the
Series B Preferred Stock could be converted into approximately 67.0 million
shares of common stock. Such conversion would require an increase in the
authorized capital related to the common shares of the Company. In addition, 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, The Trinity
Group-I, Inc.'s owner, abstaining. Both the Series A and Series B Preferred
stocks vote alongside of common stockholders on an if converted basis. Accrued
dividends on the issued and outstanding shares of the Series A and Series B
Preferred Stock as of December 31, 2001 were $178,000.
As of April 10, 2002, 10,877,957 shares of the Company's Common Stock
are eligible for sale under Rule 144 promulgated under the Securities Act of
1933, as amended, subject to certain limitations included in said Rule. In
general, under Rule 144, a person (or persons whose shares are aggregated), who
has satisfied a one-year holding period, under certain circumstances, may sell
within any three-month period, a number of shares which does not exceed the
greater of one percent of the then outstanding Common Stock or the average
weekly trading volume during the four calendar weeks prior to such sale. Rule
144 also permits, under certain circumstances, the sale of shares without any
quantity limitation by a person who has satisfied a two-year holding period and
who is not, and has not been for the preceding three months, an affiliate of the
Company.
17
Item 6. 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")
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 MAY
USE A SIGNIFICANT PORTION OF THE PROCEEDS FROM ANY FINANCING OFFERING TO FUND
NEW BUSINESSES; WE HAVE GRANTED SIGNIFICANT BENEFITS UNDER CERTAIN EXISTING AND
PROPOSED EMPLOYMENT AGREEMENTS THE PROPOSED ACTIVITIES OF FMX CORP. WILL BE
DEPENDENT UPON PATENT PROTECTION; 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; E-COMMERCE
PRODUCTS AND SERVICES MAY BECOME SUBJECT TO GOVERNMENT REGULATION; 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; OUR SUBSIDIARIES HAVE OUTSTANDING SIGNIFICANT DELINQUENT
PAYROLL TAXES DUE; THE LIABILITY OF OUR OFFICERS AND DIRECTORS TO US AND OUR
SHAREHOLDERS IS LIMITED; DEPENDENCE ON KEY SUPPLIERS; RELIANCE ON MANAGEMENT;
DEPENDENCE ON KEY PERSONNEL; COMPUTER VIRUSES; STARNE365.COM, INC. WILL BE
SUBJECT TO REGULATORY SCRUTINY OF NETWORK MARKETING SYSTEMS; WE COULD BE SUBJECT
TO POTENTIAL UNINSURED LIABILITY, THE RISKS RELATING TO LEGAL PROCEEDINGS, AS
WELL AS OTHER RISKS REFERENCED FORM 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.
18
Results of Operations
As more fully disclosed in the footnotes to the financial statements,
we have five identifiable business segments. The following table sets forth the
results of operations of these segments for 2001 and 2001. The operations of
each of the business segments is discussed separately as follows:
For the years ended December 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro-Optical Products 1,287,000 2,406,000
Specialized Vending Machines and Avionics Equipment 190,000 401,000
Software Development 19,000 -
Internet marketing 182,000 382,000
--------------------------------------------------------------------------------------------------------------------
1,678,000 3,189,000
Corporate 720,000 450,000
Inter segment charges (720,000) (450,000)
--------------------------------------------------------------------------------------------------------------------
Total revenues 1,678,000 3,189,000
====================================================================================================================
For the years ended December 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
Cost of Goods Sold:
Electro-Mechanical and Electro-Optical Products 939,000 1,673,000
Specialized Vending Machines and Avionics Equipment 251,000 320,000
Internet marketing 45,000 105,000
--------------------------------------------------------------------------------------------------------------------
Total cost of goods sold 1,235,000 2,098,000
====================================================================================================================
For the years ended December 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
Reserve for Slow Moving Inventory:
Electro-Mechanical and Electro-Optical Products (391,000) -
Specialized Vending Machines and Avionics Equipment (51,000) (359,000)
--------------------------------------------------------------------------------------------------------------------
Total Reserve for Slow Moving Inventory (442,000) (359,000)
====================================================================================================================
For the years ended December 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
Gross Profit:
Electro-Mechanical and Electro-Optical Products (42,000) 734,000
Specialized Vending Machines and Avionics Equipment (113,000) (278,000)
Software Development 19,000 -
Internet marketing 137,000 277,000
--------------------------------------------------------------------------------------------------------------------
1,000 733,000
Corporate 720,000 450,000
Inter segment charges (720,000) (450,000)
--------------------------------------------------------------------------------------------------------------------
Total Gross Profit 1,000 733,000
====================================================================================================================
19
For the years ended December 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Electro-Mechanical and Electro-Optical Products 825,000 781,000
Specialized Vending Machines and Avionics Equipment 80,000 180,000
Security Systems 682,000 497,000
Software Development 2,746,000 -
Internet marketing 809,000 1,007,000
--------------------------------------------------------------------------------------------------------------------
5,142,000 2,465,000
Corporate 6,196,000 1,282,000
Intersegment charges (720,000) (450,000)
--------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 10,618,000 3,297,000
====================================================================================================================
For the years ended December 31, 2001 2000
--------------------------------------------------------------------------------------------------------------------
Operating Loss:
Electro-Mechanical and Electro-Optical Products (867,000) (47,000)
Specialized Vending Machines and Avionics Equipment (193,000) (457,000)
Security Systems (682,000) (497,000)
Software Development (2,727,000) -
Internet marketing (672,000) (729,000)
--------------------------------------------------------------------------------------------------------------------
(5,141,000) (1,730,000)
Corporate (5,476,000) (835,000)
--------------------------------------------------------------------------------------------------------------------
Total Operating Loss (10,617,000) (2,565,000)
====================================================================================================================
Electro-Mechanical and Electro-Optical Products
The Electro-Mechanical and Electro-Optical Products segment comprises
the activities of Sequential Electronic Systems, Inc., 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.
2001 Compared to 2000
Sequential Electronic Systems, Inc.'s revenues for 2001 decreased
$1.119 million, or 47%, from $2.406 million for 2000 to $1.287 million for 2001.
Sequential Electronic Systems, Inc.'s 2001 gross margin was a loss of $42,000.
Sequential Electronic Systems, Inc.'s 2000 gross profit was $734,000, or 30.5%.
For 2001, the gross profit includes a charge of $391,000 for reserves for slow
moving inventory and no such charge was taken in 2000. In addition, during 2000,
Sequential Electronic Systems, Inc.'s revenues and gross profit included amounts
earned from a higher margin government contract and no such amounts were earned
in 2001. Sequential Electronic Systems, Inc.'s operating expenses remained
relatively level increasing $44,000, or 6% from $781,000 for 2000 to $825,000
for 2001. The 2001 and 2000 operating expense includes $180,000 and $90,000,
respectively, of management fees charged by The Finx Group. Sequential
Electronic Systems, Inc.'s operating loss increased by $820,000 from $47,000 for
2000 to $867,000 for 2001.
20
2000 Compared to 1999
Sequential Electronic Systems, Inc.'s revenues for 2000 increased
$350,000, or 17%, from $2.056 million for 1999 to $2.406 million for 2000.
Sequential Electronic Systems, Inc.'s 2000 gross profit was $733,000, or 31%.
Sequential Electronic Systems, Inc.'s 1999 gross profit was $546,000, or 27% of
sales. Sequential Electronic Systems, Inc.'s gross profit improved by 4% because
in 2000, Sequential Electronic Systems, Inc. generated a greater portion of its
revenues from government contracts which had greater margins than the revenue
sources in 1999. For 1999, Sequential Electronic Systems, Inc.'s operating loss
includes a $971,000 charge for uninsured inventory losses, which were the result
of a flood and no such charges for 2000. Sequential Electronic Systems, Inc.'s
other operating expenses decreased $219,000, or 22% from $1 million for 1999 to
$781,000 for 2000. The 2000 operating expense includes $90,000 of management
fees charged by The Finx Group. Sequential Electronic Systems, Inc.'s operations
improved by $1.4 million, or 96.7%, from an operating loss of $1.427 million for
1999 to $47,000 for 2000.
Specialized Vending and Avionics Equipment
The Specialized Vending and Avionics Equipment comprises the activities
of S-Tech, Inc., 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, Inc. are prepaid telephone debit card machines, bill
payment kiosks, information kiosks, and stamp vending machines.
2001 Compared to 2000
S-Tech, Inc.'s revenues for 2001 decreased $211,000, or 53%, from
$401,000 for 2000 to $190,000 for 2001. S-Tech, Inc.'s gross profit was a
negative $113,000, or 60% of sales for 2001 and a negative $278,000, or 69% of
sales for 2000. S-Tech, Inc.'s cost of sales included reserves for slow moving
inventory of $51,000, or 27% of sales, for 2001 and $359,000, or 89.5% of sales,
for 2000. S-Tech, Inc.'s sales over the last three years have not been
significant which has resulted in unfavorable labor and overhead production
variances related to under utilized capacity. S-Tech, Inc.'s operating expense
decreased $100,000, or 56% from $180,000 for 2000 to $80,000 for 2001. S-Tech,
Inc.'s operating expense included $3,000 of research and development costs for
2000. S-Tech, Inc.'s operating loss decreased by $264,000 from $457,000 for 2000
to $193,000 for 2001.
2000 Compared to 1999
S-Tech, Inc.'s revenues for 2000 decreased $166,000,or 29.3%, from
$567,000 for 1999 to $401,000 for 2000. S-Tech, Inc.'s gross profit was a
negative $278,000, or 69% of sales for 2000 and $101,000, or 18% of sales, for
1999. S-Tech, Inc.'s cost of sales included reserves for slow moving inventory
of $359,000, or 90% of sales, for 2000 and $258,000, or 46% of sales, for 1999.
Excluding the effects of the reserves for slow moving inventory, S-Tech, Inc.'s
gross profit decreased by 7.7% as a result of unfavorable labor and overhead
production variances related to under utilized capacity. S-Tech, Inc.'s
operating expense decreased $176,000, or 50% from $356,000 for 1999 to $180,000
for 2000. S-Tech, Inc.'s operating expense included $3,000 of research and
development costs. S-Tech, Inc.'s operating loss increased by $1,000 from
$456,000 for 1999 to $457,000 for 2000.
Security Systems
The Security Systems segment comprises the activities of Secured Portal
Systems, Inc. and FMX Corp. Secured Portal Systems, Inc. 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 rights. Many of the customers to whom Secured Portal
Systems, Inc. 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. an abroad. FMX
Corp. is developing products and systems utilizing a proprietary and patented
electronic fingerprint identification technology The fingerprint identification
technology being developed and utilized by FMX Corp. 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.
21
Secured Portal Systems, Inc.'s original marketing strategy was solely
focused on sales of the GIL-2001 security door to the U.S. State Department.
Starting in February 2002, we have expanding our marketing effort to include all
customers under the exclusive distribution agreement and we are in the process
of building a sales team for such purpose. Secured Portal Systems, Inc. faces
competitions 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 any revenues using our exclusive license. FMX Corp. has
developed a fingerprint identification system that could be used in conjunction
with the Georal Security System and may generate revenues in coordination with
sales, if any, of the Georal Security Systems.
2001 Compared to 2000
The Security Systems operating expense and therefore is net operating
losses increased $185,000, or 37%, from $497,000 for 2000 to $682,000 for 2001.
During 2001 and 2000, the Security Systems segment's operating expense included
$180,000 and $90,000 of management fees charged by The Finx Group for the years
2001 and 2000, respectively.
2000 Compared to 1999
The Security Systems operating expense and therefore is net operating
losses increased $201,000, or 68%, from $296,000 for 1999 to $497,000 for 2000.
During 2000, the Security Systems segment's operating expense included $90,000
of management fees charged by The Finx Group.
Internet Marketing
Starnet365.com, Inc. is an internet multi-level marketing company.
Starnet365.com, Inc.'s most significant revenue source in 2001 consisted of web
hosting fees and in 2000 consisted of on-line tutorials. The web hosting fees
are generated from replicated web sites, which Starnet365.com, Inc. maintains
for it independent representatives. The on-line training programs consisted of a
series of integrated on-line 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, Inc.'s initial launch, which started in
November 2000, has been stalled due to a lack of funding which has prevented
Starnet365.com, Inc. from providing additional products and marketing support to
its independent representatives.
If we are able to obtain appropriate levels of funding Starnet365.com,
Inc.'s management believes that it may be able to capitalize on a market based
on the Qode search engine. On August 31, 2001, we entered into a non-binding
letter of intent with NeoMedia Technologies, Inc. to purchase from them, all
assets related to the NeoMedia-Qode Software and Service Business of NeoMedia,
Inc., which business consists of the ownership and operation of a comprehensive
universal Internet database of consumer product information accessible through
the scanning or searching of Universal Product Codes including the delivery of
targeted promotions, coupons and special offers through a proprietary database
and software. Starnet365.com, Inc. has an inventory of Qode scanning units which
may be used with the Qode search engine. However, we do not have access to the
Qode scanners which are being held by Startnet365.com, Inc.'s order fulfillment
company until such time as we make payment on certain debts owed to such vendor.
2001 Compared to 2000
Starnet365.com, Inc.'s revenues decreased $200,000, or 52%, from
$382,000 for 2000 to $182,000 for 2001. Starnet365.com, Inc.'s gross profits for
2001 were $137,000, or 75% of sales , and for 2000 were $277,000, or 72% of
sales. A significant portion of Starnet365.com, Inc.'s revenues in 2001 was from
web hosting fees and for 2000 were sales of tutorials, both of which have a low
cost of sales component. Other revenues were from the sale of logo items. The
operating expenses of Starnet365.com, Inc. decreased $198,000, or 20%, from
$1.007 million for 2000 to $809,000 for 2001. Significant expenses were incurred
leading to the November 2000 initial launch which were not incurred during 2001,
including reduced consulting fees and reduced legal fees. During 2001 and 2000,
Starnet365.com, Inc.'s operating expenses includes $180,000 and $90,000 of
management fees charged by The Finx Group. Starnet365.com, Inc.'s operating loss
decreased $57,000, or 8%, from $729,000 for 2000 to $672,000 for 2001.
2000 Compared to 1999
During 2000, Starnet365.com, Inc. generated revenues of $382,000
resulting in gross profits of $277,000, or 72%. A significant portion of
Starnet365.com, Inc.'s revenues in 2000 were sales of tutorials which have a low
22
cost of sales component. Other revenues were from the sale of logo items.
Operating expenses of Starnet365.com for 2000 were $1.006 million which included
$82,000 of research and development related to web design and development,
$303,000 of selling expense, primarily commissions on product sales, $90,000 of
management fees charged by The Finx Group and $523,000 of other general and
administrative costs, which were primarily legal and consulting fees required to
establish the marketing plan. Starnet365.com, Inc. incurred an operating loss of
$729,000 for 2000.
Software Development
Software Development reflects the activities of Granite
Technologies, Inc. Granite Technologies, Inc was acquired on September 19, 2001
and revenues generated since September 19, 2001 were $19,000 from a contract
with Virginia Commonwealth University. Granite Technologies, Inc. develops and
sells software programs for Smart Card applications. Granite Technologies, Inc.
has also developed a software program that is used in e-commerce kiosks that are
designed to operate like an ATM machine but for commercial applications other
than just banking. Granite Technologies, Inc. has provided Virginia Commonwealth
University with two software solutions which we call "the Card Office Solution"
and "the Recreational Sports Solution".
For the period from September 19, 2001 through December 31, 2001,
Granite Technologies, Inc.'s expenses were $2.727 million, including $2.371
million of purchased in-process research and development expense. We issued
3,542,636 shares of common stock valued at $1.435 million to acquire Granite
Technologies, Inc. and as of the date of the acquisition, Granite Technologies,
Inc. had an excess of liabilities over assets of $936,000, resulting in a
purchase price that was in excess of net assets by $2.371 million. This $2.371
million approximates the value assigned to research and development projects of
Granite Technologies, Inc. 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, Granite Technologies, Inc.'s operations
were charged $2.371 million for in-process research and development.
Corporate costs and expenses
Corporate costs and expenses comprise the expenses of The Finx Group,
the holding company.
2001 Compared to 2000
During 2001, The Finx Group recorded $720,000 of management fees
charged to its subsidiaries compared to $450,000 in 2000. All of such management
fees are eliminated in the consolidated results of operations. The Finx Group's
operating expense increased $4.914 million from $1.282 million in 2000 to $6.196
for 2001. The operating expenses for 2001 include non cash expense of $4.671
million from the issuance of stock options to employees and consultants.
Salaries expense during 2001 for Lewis S. Schiller and Grazyna B. Wnuk was
$500,000 and $150,000, respectively and during 2000 was $250,000 and $150,000,
respectively. Neither Lewis S. Schiller nor Grazyna B. Wnuk have received
payment of any of their salaries and as of December 31, 2001, they are owed
$875,000 and $375,000, respectively.
2000 Compared to 1999
During 2000, The Finx Group recorded $450,000 of management fees
charged to its subsidiaries. All of such management fees are eliminated in the
consolidated results of operations. The Finx Group's 2000 operating expense
amounted to $1.282 million. Significant operating expense items included
$148,000 from the write-off of deferred offering costs related to an
unconsummated private placement offering of The Finx Group's preferred stock,
$400,000 in accrued and unpaid salaries owed to Lewis Schiller and Grazyna Wnuk,
The Finx Group's officers, $124,000 of legal fees, $150,000 of accounting and
auditing fees, $114,000 of consulting fees and $66,000 of public relations
costs. As a result of the 1999 reverse acquisition, all of the activities of the
predecessor company, prior to the April 28, 1999 were recapitalized into equity
and are not reflected in the results of operations. As a result, the 1999
operating expense, and therefore the operating loss, of the holding company, of
$967,000 reflect only the expense and costs incurred from April 28, 1999 through
December 31, 1999. Significant operating expense for 1999 includes accrued and
unpaid salaries of $200,000 owed to Lewis Schiller and Grazyna B. Wnuk, $188,000
of legal fees and $181,000 of consulting fees.
23
Significant Non-Operating Components of Net Loss
Interest Expense and Financing Fees
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. Subsequent to December 31, 2000, the Company determined that FINOVA
declared bankruptcy. In November 2001, the Company was notified that the FINOVA
line-of-credit would not be extended beyond November 30, 2001. Subsequent to
November 30, 2001, the Company utilized a $522,500 cash collateral deposit
provided by The Trinity Group-I, Inc. to satisfy all but $7,000 of the balance
owed under the line-of-credit and such funds are now owed by the Company to The
Trinity Group-I, Inc. During the first quarter of 2002 the $7,000 balance on the
revolving line of credit was repaid by The Trinity Group-I, Inc. Interest
expense and factoring fees on Sequential Electronic Systems, Inc.'s revolving
line of credit line of credit for 2001 and 2000 were $157,000 and $163,000,
respectively. Interest related to the delinquent and unpaid payroll taxes of our
subsidiaries was $65,000 and $45,000, respectively, for 2001 and 2000.
Interest Expense and Factoring Fees, Related Parties
The Company and its subsidiaries incur interest expense on advances
from Lewis S. Schiller advances from Trinity, advances from Universal
International, Inc., a company owned by Grazyna Wnuk, , advances from Grazyna B.
Wnuk, a loan from E. Gerald Kay, a former director, and advances from Blake
Schiller and Carol Schiller, both immediate family members of Lewis 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 S. Schiller. Total unpaid and outstanding advances from such related
parties as of December 31, 2001 aggregated approximately $1.367million. Interest
accrued on such notes is generally calculated at 9% (which is the weighted
average interest rate at the balance sheet date) and as of December 31, 2001
$473,000 of such interest remains unpaid. Interest expense and financing fees on
related party notes was $313,000 and $290,000 for 2001 and 2000, respectively.
Minority Interest in Loss of Consolidated Subsidiaries
The minority interest represents the losses of its subsidiaries that
have been apportioned to the minority interest holders. The amount of loss
apportioned to the minority interest holders is limited to the amount of
investment that such minority holders have made into the subsidiaries. For 2000
the minority interest portion of such losses was $113,000 and as of December 31,
2001, cumulative amounts of minority interest in the losses of consolidated
subsidiaries in excess of minority equity interests approximated $1 million.
Discontinued Operations
During the fourth quarter of 2001 both Shopclue.com, Inc. and Bizchase,
Inc. ceased operations and during 2001 such entities incurred aggregate losses
of $648,000 and in 2000 aggregate losses of $5.566 million. In 2000, we
purchased Shopclue.com, Inc. from family members of Lewis S. Schiller, our Chief
Executive Officer and Chairman of our Board of Directors. As of the date of the
acquisition, Shopclue.com, Inc. had an excess of liabilities over assets of
$768,000 and the common shares issued to acquire Shopclue.com, Inc. were valued
at $4 million, resulting in a purchase price that was in excess of net assets by
$4.8 million. This $4.8 million approximates the value assigned to research and
development projects of Shopclue.com, Inc. 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 $4.8 million to expense in 2000 for in-process research
and development.
Financial Condition - Liquidity and Capital Resources
As of December 31, 2001 the Company had a working capital deficiency
of $7.3 million. Approximately $3.09 million of such deficiency relates to
amounts owed to related parties, including accrued and unpaid salaries of $1.25
million owed to Lewis Schiller and Grazyna Wnuk, $1.84 million owed in the
aggregate to related parties for advances and loans made to fund the operations
of the Company. The delinquent payroll taxes of Sequential Electronic Systems,
Inc., S-Tech, Inc., Granite Technologies, Inc., Shopclue.com, Inc. and Bizchase,
Inc. in the
24
aggregate, represents an additional $1.244 million of the working capital
deficiency. Such delinquencies could have an adverse impact on our ability to
obtain additional financing.
During 2001, we used $1.2 million for continuing operations and
$332,000 for discontinued operations. Historically, we have funded our
operations with advances from The Trinity Group-I, Inc., our controlling
shareholder. During 2001 we used stock options to compensate our employees and
to fund our operations. During 2001 net advances from related parties was
$851,000, of which $670,000 was used to repay Sequential Electronic Systems,
Inc.'s line-of credit. Proceeds from the exercise of stock options during 2001
was $1.504 million which was used primarily for the payment of existing
obligations, including amounts owed to the consultants that exercised such stock
options.
The accompanying 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 for the two years ended December 31, 2001
and as of December 31, 2001 has a working capital deficiency approximating $7.3
million and a capital deficiency approximating $7 million. During 2001 and 2000
the Company has relied on financial support from its controlling stockholder,
Trinity and other related parties and since September 25, 2001 has compensated
its employees and key consultants with stock options 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. 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.
Item 7. Financial Statements and Supplementary Data.
The information required by Item 7. is included as Exhibit 99.1 to this Form
10-KSB/A.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
25
PART III
Item 9. Directors and Executive Officers of the Registrant.
Directors and Management
Officers are elected by, and serve at the pleasure of, the board of
directors. Set forth below is information concerning the directors and executive
officers of the registrant as of the date hereof.
Name Age Position with the Company
-------------------- --- --------------------------------------
Lewis S. Schiller 71 Chief Executive Officer, President and
Chairman of the Board
Grazyna B. Wnuk 38 Secretary, Vice-President and Director
Lewis S. Schiller was appointed Chairman of the Board, Chief Executive
Officer and President of the Company on April 28, 1999. Mr. Schiller is also
Chairman of the Board and a director of Sequential Electronic Systems, Inc.,
S-Tech, Inc., FMX Corp., Secured Portal Systems, Inc., Starnet365.com, Inc.,
Shopclue.com, Inc. and Bizchase, Inc and is Chief Executive Officer of Secured
Portal Systems, Inc., Starnet365.com, Inc., Shopclue.com, Inc. and Bizchase,
Inc. Lewis S. Schiller also serves as Chairman of the Board and Chief Executive
Officer of Trinity Group-I, Inc. For more than five years prior to his
resignation on April 2, 1998, Lewis S. Schiller served as Chairman of the Board,
Chief Executive Officer and a director of The Sagemark Companies, Ltd., a public
company, and as Chairman of the Board, Chief Executive Officer and a director of
The Sagemark Companies, Ltd.'s public and privately held subsidiaries
Grazyna B. Wnuk ("Ms. Wnuk") was appointed Vice-President and Secretary
of the Company on April 28, 1999. Ms. Wnuk was appointed a Director of the
Company on November 19, 1999. Ms. Wnuk also serves as an officer and/or director
of FMX Corp., Secured Portal Systems, Inc., Shopclue.com, Inc., Bizchase, Inc.,
and Trinity-I Group-I, Inc. For more than five years prior to her resignation on
April 2, 1998, Ms. Wnuk served as Secretary and a director of The Sagemark
Companies, Ltd. and all of its public and privately held subsidiaries.
Lewis S. Schiller, Ms. Wnuk and E, Gerald Kay received appointments
to the board upon the resignations of Thomas T. Harding, Gordon R. Molesworth,
Seth M. Lukash and Fred I. Sonnenfeld on April 28, 1999. During the 4th Quarter
of 2000, Jay Miller and Sy Flug were appointed to the Board of Directors. In the
1st Quarter of 2001, Messrs. Kay, Miller and Flug resigned from the Company's
board of directors. The Company was informed by Messrs. Kay, Miller and Flug
that they would not be able to provide attention to the Company's affairs due to
other business requirements.
26
Item 10. Executive Compensation
Set forth below is information concerning the Company's Chief Executive
Officer and other executive officers who received or accrued compensation from
the Company and its subsidiaries in excess of $100,000 (on an annualized basis)
during 2001 and 2000.
Long-term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Securities
Name and Restricted Underlying LTIP
Principal Other Annual Stock Options/SARs Payouts All Other
Position Year Salary Bonus Compensation Awards (#) ($) Compensation
-------------- ------ -------------- --------- ---------------- ----------- ---------------- --------- -------------
Lewis S.
Schiller,
Chief
Executive
Officer and
President 2001 $500,000(1) -- -- -- 750,000 -- --
since April 2000 $250,000(1) -- -- -- -- -- --
28, 1999 1999 $125,000(1)
Grazyna B. 2001 $150,000(2) -- -- -- 375,000 -- --
since April 2000 $150,000(2) --
28, 1999 1999 $75,000(2) -- -- -- -- -- --
(1) Mr. Lewis S. Schiller's annual salary for 2001 is pursuant to his employment
agreement which was executed in 2001. His annual salary for years prior to 2001
was accrued at $250,000 which was approved by the Board of Directors effective
July 1, 1999. The compensation listed for 2000 represents a full years salary
and the compensation listed for 1999, represents such salary from July 1, 1999
through December 31, 1999. None of Lewis S. Schiller's salary was paid to him
during 2001, 2000 or 1999 and all such unpaid amounts were accrued as an expense
in the Company's consolidated financial statements.
(2) Ms. Wnuk's annual salary of $150,000 was approved by the Board of Directors
effective July 1, 1999. The compensation listed for 2001 and 2000 represents a
full years salary and the compensation listed for 1999, represents such salary
from July 1, 1999 through December 31, 1999. None of Ms. Wnuk's salary was paid
to her during 2001, 2000 or 1999 and all such unpaid amounts were accrued as an
expense in the Company's consolidated financial statements.
27
Option/SAR Grants in 2001
The following table presents information regarding the options and
stock appreciation rights to purchase shares of our common stock issued to our
executive officers who are included in the preceding summary compensation table
for 2001.
-----------------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options/SARs Exercise
Options/ Granted to or Base
SARs Employees in Price Expiration
Name Granted (#) 2001 ($/Share) Date
-----------------------------------------------------------------------------------------------------------------
Lewis S. Schiller, Chief Executive
Officer and President 750,000 67% $0.15 July 1, 2004
Grazyna B. Wnuk, Secretary 375,000 33% $0.15 July 1, 2004
-----------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in Last Year and Year-end Option/SAR Values
The following table presents information regarding the unexercised
options and stock appreciation rights to purchase shares of our common stock
held by our executive officers who are included in the preceding summary
compensation table as of December 31, 2001.
-----------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs at
Options/SARs at Year End (#) Year End ($)
Shares Value
Acquired on Realized Unexer
Name Exercise (#) ($) Exercisable cisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------------------------
Lewis S. Schiller,
Chief Executive
Officer and
President 500,000 $75,000 250,000 - $105,000 -
Grazyna B. Wnuk, 250,000 $37,500 125,000 - $52,500 -
-----------------------------------------------------------------------------------------------------------------
Employment Agreements
The Company and Lewis S. Schiller have entered into an employment
agreement 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 annual compensation of $500,000. Mr. Schiller's
contract may be extended an additional five years and commencing 2002 his annual
compensation shall be increased by 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.
As of December 31, 2001, the Company has not entered into an employment
agreement with Grazyna B. Wnuk. The Company anticipates that it will negotiate
terms and conditions for a contract with Ms. Wnuk at a future date.
28
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of December 31, 2001 by: (i) each of
our executive officers and directors; (ii) each person whom we know to be the
beneficial owner of more than 5% of our outstanding Common Stock; and (iii) all
of our officers and directors as a group.
Unless otherwise indicated, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of Common
Stock, except to the extent applicable law gives spouses shared authority. Any
shares of Common Stock that an individual or group has the right to acquire
within sixty (60) days after December 31, 2000 pursuant to the exercise of
warrants or options are deemed to be outstanding for the purpose of computing
the percentage ownership of such person or group, but are not deemed outstanding
for the purpose of calculating the percentage owned by any other person listed
below.
Amount and Nature Common Stock
of Beneficial Outstanding(1)
Name and address of Beneficial Owner Ownership
------------------------------------------------------------------------- --------------------- -----------------
Officers and Directors
Lewis S. Schiller 78,259,697 66%(2)
Grazyna B. Wnuk 1,701,466 4%(3)
Officer and directors as a group (2 persons) 79,961,163 68%(2)(3)
Other Beneficial Owners
The Trinity Group I, Inc 77,509,697 72%(4)
(1) The "Percent of Common Stock Outstanding" is based on the 11,507,885 shares
of Common Stock outstanding as of December 31, 2001 and the assumption that the
related beneficial owner had converted or exercised all potential common stock
related to that beneficial owner if such beneficial owner had a right to do so
within 60 days after December 31, 2001.
(2) Includes 500,000 shares directly owned, 250,000 shares related to
exercisable options and 107,023,212 shares beneficially owned by The Trinity
Group-I, Inc., a company wholly-owned by Lewis S. Schiller.
(3) Grazyna B. Wnuk's percentage of beneficial common stock owned does not
include shares of Common Stock owned by Trinity-I, of which Ms. Wnuk is an
officer and director, as to which she disclaims beneficial ownership.
(4) Includes 10,843,030 shares directly owned and approximately 67.0 million
from the assumed conversion of the Series B preferred stock. The Trinity
Group-I, Inc. exchanged $2,000,000 of debt for 20,000 shares of Series B
preferred stock. The Series B preferred stock is convertible into such shares as
calculated by dividing $2,000,000 by the lowest price that the common stock
trades during the period that the Series B preferred stock is outstanding which
is $0.03 as of April 10, 2002 [$2,000,000 / $0.03 = 66,666,667]. Excludes
875,000 shares that were transferred by The Trinity Group-I, Inc. to be used as
collateral by Orion Telecom Operating Corporation, an unrelated company.
Item 12. Certain Relationships and Related Transactions.
We and our subsidiaries incur interest expense on advances from Lewis
S. Schiller advances from The Trinity Group-I, Inc., advances from Universal
International, Inc., a company owned by Grazyna B. Wnuk, advances from Grazyna
B. Wnuk, a loan from E. Gerald Kay, a former director, and advances from Blake
Schiller and Carol Schiller, both immediate family members of Lewis Schiller. In
addition S-Tech, Inc. incurs interest
29
expense and factoring fees pursuant to a factoring agreement with Trinity
Factoring Corp., a financing company owned by Lewis S. Schiller. Total unpaid
and outstanding advances from such related parties as of December 31, 2001
aggregated approximately $1.367million. Interest accrued on such notes are
generally calculated at 9% (which is the weighted average interest rate at the
balance sheet date) and as of December 31, 2001 $473,000 of such interest
remains unpaid. Interest expense and financing fees on related party notes was
$313,000 and $290,000 for 2001 and 2000, respectively.
On July 27, 2000, we concluded an agreement to acquire a controlling
interest in Shopclue.com, Inc. in exchange for 1,000,030 shares of our Common
Stock. We purchased the Shopclue.com, Inc. common shares from family members of
Lewis S. Schiller, the Company's Chief Executive Officer and Chairman of its
Board of Directors. During the fourth quarter of 2001, Shopclue.com, Inc. ceased
operations and is presented in the consolidated financial statements as a
discontinued segment.
On July 27, 2000, we acquired a 23.42% equity interest in Biz Chase,
Inc., from The Trinity Group-I, Inc. Biz Chase, Inc.'s concept was developed by
Blake Schiller, the founder of Shopclue.com, Inc., and provided Shopclue.com,
Inc. with its software under a licensing agreement. Effective September 30,
2000, Biz Chase, Inc. received common stock shares of Shopclue.com, Inc.
representing 19% of Shopclue.com, Inc.'s outstanding common stock shares in
exchange for the assumption of $897,000 of notes payable that Shopclue.com, Inc.
owed to related parties. Bizchase, Inc. had developed a wholesale web based
development solution that was intended to provide an online solution for small
businesses. During the fourth quarter of 2001, Bizchase ceased operations and is
presented in the consolidated financial statements as a discontinued segment.
On May 7, 2001, The Trinity Group-I, Inc. 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,
The Trinity Group-I, Inc. converted an additional $2 million of related party
debt into shares of a newly created series of preferred stock, the Series B
Preferred Stock. On July 13, 2001, Carol Schiller, the wife of Lewis S.
Schiller, received 1,000,000 shares of restricted common stock as repayment for
a $100,000 loan.
On September 19, 2001 we acquired 95.87% of Granite Technologies,
Inc.'s common stock upon the issuance of 3,000,000 shares of our common stock.
Grazyna B. Wnuk received 124,031 shares of our common stock for her ownership
interest in Granite Technologies, Inc.; and immediate family members of Lewis S.
Schiller, received 397,934 of our common shares for their ownership interest in
Granite Technologies, Inc. In accordance with the terms of the Stock Purchase
Agreement, the selling shareholders hold certain demand and "piggyback"
registration rights with respect to the shares received by them in connection
with the acquisition on terms specified in the Stock Purchase Agreement.
In November 2001, we were notified that the FINOVA line-of-credit would
not be extended beyond November 30, 2001. Subsequent to November 30, 2001, the
Company utilized a $522,500 cash collateral deposit provided by The Trinity
Group-I, Inc. to satisfy all but $7,000 of the balance owed under the
line-of-credit and such funds are now owed to The Trinity Group-I, Inc.
On November 11, 2001, we entered into an agreement to acquire 5,000,000
shares of Trans Global Services, Inc.'s common stock in exchange for 2,500,000
shares of our common stock. We also had committed to obtain funding of $1
million for Trans Global Services, Inc. for which it would have received
preferred stock that would convert into a maximum of 3,000,000 shares of Trans
Global Services, Inc.'s common stock. As of December 31, 2001, we had provided
Trans Global Services, Inc. with $250,000 of funding. Subsequent to December 31,
2001, we had not obtained additional funding and determined that it was not in
its best interest to expend additional time and resources pursuing the funding
of Trans Global Services, Inc. On March 7, 2002, we entered into a mutual
termination agreement with Trans Global Services, Inc. whereby all 2,500,000
shares of our common stock was returned by Trans Global Services, Inc. to us and
we returned 4,000,000 of the 5,000,000 shares of Trans Global Services, Inc.'s
common stock to them. In consideration of the $250,000 funding that we provided
to Trans Global Services, Inc., the remaining 1,000,000 shares of Trans Global
Services, Inc. common stock were retained by our designee's, who were Lewis S.
Schiller, members of his immediate family, and Grazyna B. Wnuk. Such designation
was for the payment of $250,000 of related party debt we owed to The Trinity
Group-I, Inc.
On November 30, 2001, we executed an agreement with Orion Telecom
Operating Corporation, pursuant to which The Trinity Group-I, Inc. provided
Orion Telecom with 1,875,000 of its shares of our common stock as a collateral
escrow deposit to enable Orion Telecom Operating Corporation to obtain a
$250,000 working capital loan. As consideration for providing the collateral for
its loan, Orion Telecom Operating Corporation agrees to pay us and The Trinity
Group-I, Inc. a sum equal to $0.00125 per each minute of certain
telecommunication services intended to be provided by Orion Telecom Operating
Corporation. We and The Trinity Group-I, Inc. will receive 50% each of any
monies generated and earned pursuant to this agreement with Orion Telecom
Operating Corporation. Upon
30
repayment of the loan, 875,000 shares will be returned to The Trinity Group-I,
Inc. and the remaining 1,000,000 shares will be turned over to Orion Telecom in
exchange for 1% of Orion Holdings, Inc.'s common stock. The Trinity Group-I,
Inc. will also receive 1% of Orion Holdings, Inc.'s common stock.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits - See Exhibit Index for the Exhibits filed as part of or
incorporated by reference into this Report.
(b) Reports on Form 8-K
(i) None.
31
SIGNATURES
In accordance with Section 13 or 15(d) 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/ Lewis S. Schiller,
Chief Executive Officer
April 10, 2002
In accordance with the Exchange Act, this report has been signed below by the
following person on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Lewis S. Schiller,
Chief Executive Officer,
Chairman of the Board,
President,
Director and
Chief Accounting Officer
April 10, 2002
/s/ Grazyna B. Wnuk,
Secretary, Vice-President and Director
April 10, 2002
32
Index to Exhibits
Exhibit No. Description of Document
----------- -----------------------
(3)(i) Amended and Restated Certificate of Incorporation (1)
(3)(ii) By-laws (1)
(21) Subsidiaries of the registrant
(99.1) Financial Statements
(1) Incorporated by reference to Form 8-K dated April 28, 1999.
33
Exhibit (21)
Subsidiaries of the Registrant
1. Sequential Electronic Systems, Inc., a Delaware company organized in 1985.
2. S-Tech, Inc., a Delaware company organized in 1992.
3. FMX Corp., a Delaware company organized in 1996.
4. Secured Portal Systems, Inc., a Delaware company organized in 1999.
5. Starnet365.com, Inc., a Delaware company organized in 2000.
6. Shopclue.com, Inc., a Delaware company organized in 1999. (1)
7. Bizchase, Inc., a Delaware company organized in 2000. (1)
8. Granite Technologies, Inc., a Delaware company organized in 1998.
9. Granite Technologies Acquisition Corp., a Delaware organized in 2001.
10. Qode Acquisition Corp., a Delaware organized in 2001.
(1) - Ceased operations during the fourth quarter of 2001.
34
Exhibit (99.1)
Financial Statements and Supplementary Data
The following exhibit comprises the Financial Statements and Supplementary Data
as specified by Item 7 of Part II of Form 10-KSB.
35
Exhibit 99.1
The Finx Group, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2001
F-1
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
The Finx Group, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of The Finx
Group, Inc., and its subsidiaries, as of December 31, 2001, and the related
consolidated statements of operations, changes in capital deficiency, and cash
flows for each of the two years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Finx Group, Inc and its subsidiaries as of December 31, 2001, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
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; (1) the Company has a history of net
losses for the two years ended December 31, 2001, (2) as of December 31, 2001
the Company has a working capital deficiency of $7.3 million and a capital
deficiency of $7 million and (3) the Company has relied on continuing financial
support from its controlling stockholder. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans regarding these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Moore Stephens, PC
Certified Public Accountants
Cranford, New Jersey
April 3, 2002
F-2
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Balance Sheet
As of December 31, 2001
--------------------------------------------------------------------------------
Current assets:
Cash $ 35,000
Accounts receivable, net 102,000
Inventories, net 949,000
Prepaid expenses and other 18,000
--------------------------------------------------------------------------------
Total current assets 1,104,000
--------------------------------------------------------------------------------
Property, plant and equipment and software costs:
Property, plant and equipment 2,472,000
Software costs 98,000
Less accumulated depreciation and amortization (2,470,000)
--------------------------------------------------------------------------------
Net property, plant and equipment and software costs 100,000
--------------------------------------------------------------------------------
Other assets:
Security deposits 22,000
Investment in Qode.com (see footnote 5) 76,000
Patents 10,000
Net long-term assets of discontinued segments 36,000
--------------------------------------------------------------------------------
Total other assets 144,000
--------------------------------------------------------------------------------
Total assets $ 1,348,000
================================================================================
Current liabilities:
Accounts payable $ 2,622,000
Accrued payroll 1,639,000
Accrued payroll taxes 1,244,000
Revolving line of credit 7,000
Other 420,000
Notes payable, related parties, including accrued interest 1,840,000
Net current liabilities of discontinued segments 604,000
--------------------------------------------------------------------------------
Total current liabilities 8,376,000
--------------------------------------------------------------------------------
Commitments and contingencies (see footnote 12)
Capital deficiency:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 1,000 Series A preferred shares issued
and outstanding; 20,000 Series B preferred shares
issued and outstanding, No Series D preferred shares
issued and outstanding as of December 31, 2001 (see
footnotes 8 and 16) 2,000,000
Common stock, $.01 par value; 50,000,000 shares
authorized; 40,356,545 shares issued and outstanding 405,000
Additional paid in capital, common stock 21,862,000
Accumulated deficit (31,033,000)
--------------------------------------------------------------------------------
(6,766,000)
Subscriptions receivable (262,000)
--------------------------------------------------------------------------------
Capital deficiency (7,028,000)
--------------------------------------------------------------------------------
Total liabilities and capital deficiency $ 1,348,000
================================================================================
See notes to consolidated financial statements.
F-3
--------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended December 31, 2001 2000
--------------------------------------------------------------------------------------------
Sales $ 1,678,000 $ 3,189,000
Cost of goods sold 1,235,000 2,097,000
--------------------------------------------------------------------------------------------
443,000 1,092,000
Changes in reserve for obsolete and slow moving inventory (442,000) (359,000)
--------------------------------------------------------------------------------------------
Gross profit 1,000 733,000
--------------------------------------------------------------------------------------------
Non cash expense from issuance of stock options 4,671,000 -
Other general and administrative expenses 2,779,000 2,500,000
Research and development 2,596,000 85,000
Non cash expense for stock issued to pay obligations 306,000 28,000
Selling expense 266,000 537,000
Write-off deferred offering costs - 148,000
--------------------------------------------------------------------------------------------
Operating expenses 10,618,000 3,298,000
--------------------------------------------------------------------------------------------
Operating loss (10,617,000) (2,565,000)
Other income (expense) (24,000) 37,000
Interest expense and financing fees, related parties (313,000) (290,000)
Interest expense and financing fees (222,000) (208,000)
Minority interest in loss of consolidated subsidiaries - 113,000
--------------------------------------------------------------------------------------------
Loss from continuing operations (11,176,000) (2,913,000)
Loss from operations of discontinued segments (648,000) (5,566,000)
--------------------------------------------------------------------------------------------
Net loss $(11,824,000) $ (8,478,000)
============================================================================================
Loss per share computation - basic and diluted:
Loss from continuing operations $(11,176,000) $ (2,913,000)
Less dividends on preferred shares (160,000) (7,000)
Loss from continuing operations attributable to
common stockholders (11,336,000) (2,920,000)
Loss from operations of discontinued segments (648,000) (5,566,000)
--------------------------------------------------------------------------------------------
Net loss available to common stockholders $(11,984,000) $ (8,486,000)
============================================================================================
Weighted average shares outstanding 21,838,625 6,745,089
============================================================================================
Loss per common share - basic and diluted:
Loss from continuing operations ($0.52) ($0.43)
Loss from operations of discontinued segments (0.03) (0.83)
--------------------------------------------------------------------------------------------
Net loss ($0.55) ($1.26)
============================================================================================
See notes to consolidated financial statements.
F-4
--------------------------------------------------------------------------------------------
The Finx Group, Inc. and Consolidated Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended December 31, 2001 2000
--------------------------------------------------------------------------------------------
Loss from continuing operations $(11,176,000) $(2,912,000)
Adjustments to reconcile loss from continuing
operations to net cash used in continuing operations:
Non cash expense from issuance of stock options 4,671,000 -
Acquired in-process research and development costs 2,371,000 -
Changes in the reserve for obsolete and slow moving
inventory 442,000 359,000
Non cash expense for stock issued to pay obligations 306,000 28,000
Depreciation and amortization 64,000 40,000
Provision for bad debts 26,000 36,000
Other (6,000) 49,000
Changes in assets and liabilities:
Accounts receivable, net 130,000 189,000
Inventories, net (270,000) (203,000)
Other assets - 28,000
Accounts payable 718,000 556,000
Accrued payroll 850,000 312,000
Accrued payroll taxes 413,000 154,000
Other liabilities (48,000) 81,000
Accrued interest expense, related parties 305,000 292,000
--------------------------------------------------------------------------------------------
Cash used in continuing operations (1,204,000) (991,000)
--------------------------------------------------------------------------------------------
Loss from operations of discontinued segments (648,000) (5,566,000)
Adjustments to reconcile loss from operations of
discontinued segments to net cash used in
discontinued operations:
Acquired in-process research and development costs - 2,371,000
Depreciation and amortization 116,000 58,000
Write-off impaired asset 47,000 -
Bad debt expense 9,000 17,000
Net change in assets and liabilities 144,000 88,000
--------------------------------------------------------------------------------------------
Net cash used in discontinued operations (332,000) (635,000)
--------------------------------------------------------------------------------------------
Cash used in operating activities (1,536,000) (1,626,000)
============================================================================================
Continued
See notes to consolidated financial statements
F-5
--------------------------------------------------------------------------------------------
The Finx Group, Inc. and Consolidated Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended December 31, 2001 2000
--------------------------------------------------------------------------------------------
Investing activities:
Cash of acquired subsidiary 31,000 8,000
Advances to related parties (91,000) -
Investment in Qode.com (76,000) -
Patent costs - (10,000)
Software development costs - (98,000)
Other 2,000 8,000
--------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities (134,000) (92,000)
--------------------------------------------------------------------------------------------
Financing activities:
Deferred offering costs - (148,000)
Advances from related parties 2,025,000 2,211,000
Repayments to related parties (1,174,000) (400,000)
Net proceeds from subsidiaries private placement
offering - 112,000
Proceeds from exercise of stock options 1,504,000 -
Proceeds from exercise of stock purchase warrants 14,000 -
Net advances (repayments) on revolving line of credit (670,000) (103,000)
Other 4,000 (20,000)
--------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 1,703,000 1,652,000
--------------------------------------------------------------------------------------------
Increase (decrease) in cash 33,000 (66,000)
Cash at beginning of period 2,000 68,000
--------------------------------------------------------------------------------------------
Cash at end of period $ 35,000 $ 2,000
============================================================================================
See notes to consolidated financial statements.
--------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 2001 2000
--------------------------------------------------------------------------------------------
Interest $227,000 $210,000
Income taxes - -
F-6
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
For the year ended December 31, 2001
The Company consummated the Granite Technologies, Inc.("Granite")
acquisition whereby certain assets and liabilities, for which there was no
cash flow impact, were consolidated into the balance sheet, including
$31,000 of cash, $4,000 of net computer equipment, $437,000 of accounts
payable, $428,000 of payroll taxes payable and $78,000 of notes payable.
The Company issued 3,542,636 shares of common stock valued at
$1.435 million to acquire Granite and as of the date of the acquisition,
Granite had an excess of liabilities over assets of $936,000, resulting in
a purchase price that was in excess of net assets by $2.371 million. This
$2.371 million approximates 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 $2.371 million to expense in 2001 for in-process research and
development.
The Company issued an aggregate of 8,500,000 shares of common
stock and 20,000 shares of series B preferred stock in payment of an
aggregate of $3.6 million of related party debt
The Company issued 526,024 shares of common stock to settle
$263,000 of obligations of Granite and issued 75,000 shares valued at
$43,000 to settle obligations owed to a former consultant.
The Company issued stock options for services rendered having a
value using the Black-Scholes option valuation formula of $4.671 million,
which was charged to operations as a non cash expense.
For the year ended December 31, 2000
The Company consummated the Shopclue.com, Inc. ("Shopclue.com")
acquisition whereby certain assets and liabilities, for which there was no
cash flow impact, were consolidated into the balance sheet, including
$18,000 of accounts receivable, $2,000 of prepaid expenses, $14,000 of net
property, plant and equipment, $13,000 of security deposits, $27,000 of
accounts payable, $167,000 of accrued expenses, $585,000 of notes payable,
related party and $44,000 of other current liabilities.
The Company issued 1,000,030 shares of common stock valued at $4
million to acquire Shopclue.com and as of the date of the acquisition,
Shopclue.com had an excess of liabilities over assets of $768,000,
resulting in a purchase price that was in excess of net assets by $4.8
million. This $4.8 million approximates 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 $4.8 million to expense in
2000 for in-process research and development, which is included in the loss
from discontinued operations.
The Company issued 10,000 shares of common stock in order to
settle an obligation of Sequential Electronic Systems, Inc., its wholly
owned subsidiary. Such shares, using the Black-Scholes option valuation
formula, had a value of $28,000.
The Company converted 114,403 shares of Series A 2% Voting
Convertible Preferred Stock into 8,497,855 shares of Common stock.
See notes to consolidated financial statements.
F-7
------------------------------------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2001 and 2000
------------------------------------------------------------------------------------------------------------------------------------
Preferred
Stock in Additional
Preferred Common Preferred Excess of Common Paid-in
Shares Shares Par par Par Capital
------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 1999 115,402 20,000,000 $1,000 $1,130,000 $200,000 $7,116,000
Convert Series A
Preferred Stock
to Common (114,402) 84,978,548 (1,000) (1,130,000) 850,000 281,000
Share exchange upon
reorganization - (94,480,693) - - (945,000) 945,000
------------------------------------------------------------------------------------------------------------------------------
1,000 10,497,855 - * - 105,000 8,342,000
Stock issued for
payment of a
Sequential Electronic
Systems, Inc. obligations - 10,000 - - - * 28,000
Stock issued to acquire
Shopclue.com, Inc. - 1,000,030 - - 10,000 3,990,000
Accrued dividends on
preferred stock - - - - - -
Net loss for the year
ended December 31, 2000 - - - - - -
------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2000 1,000 11,507,885 - * - $115,000 $12,360,000
------------------------------------------------------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
Accumulated
Deficit Total
--------------------------------------------------------------------------------
Balance at December
31, 1999 ($10,564,000) ($2,117,000)
Convert Series A
Preferred Stock
to Common - -
Share exchange upon
reorganization - -
--------------------------------------------------------------------------------
(10,564,000) (2,117,000)
Stock issued for
payment of a
Sequential Electronic
Systems, Inc. obligations - 28,000
Stock issued to acquire
Shopclue.com, Inc. - 4,000,000
Accrued dividends on
preferred stock (7,000) (7,000)
Net loss for the year
ended December 31, 2000 (8,478,000) (8,478,000)
--------------------------------------------------------------------------------
Balance at December
31, 2000 ($19,049,000) ($6,574,000)
--------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
continued
F-8
------------------------------------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2001 and 2000
------------------------------------------------------------------------------------------------------------------------------------
Preferred Additional
Preferred Common Preferred Stock in Paid-in
Shares Shares Par Excess of par Common Par Capital
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2000 1,000 11,507,885 - * - $115,000 $12,360,000
Issuance of stock
options - - - - - 4,671,000
Stock issued for
repayment of a loan
from Carol Schiller - 1,000,000 - - 10,000 90,000
Stock issued for payment
of Granite Technologies,
Inc. obligations - 526,024 - - 5,000 258,000
Stock issued to acquire
Granite Technologies, Inc. - 3,542,636 - - 36,000 1,399,000
Exercise of stock purchase
warrants - 1,430,000 - - 14,000 -
Exercise of stock options - 14,775,000 - - 149,000 1,617,000
Stock issued for a
settlement with a former
consultant - 75,000 - - 1,000 42,000
Conversion of related
party debt into
preferred stock 20,000 - - * 2,000,000 - -
Conversion of related
party debt into
common stock - 7,500,000 - - 75,000 1,425,000
Accrued dividends on
preferred stock - - - - - -
Net loss for the year
ended December 31, 2001 - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2001 21,000 40,356,545 $ - * $2,000,000 $405,000 $21,862,000
------------------------------------------------------------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
-----------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2001 and 2000
-----------------------------------------------------------------------------------------------------
Accumulated Subscriptions
Deficit Receivable Total
-----------------------------------------------------------------------------------------------------
Balance at December
31, 2000 ($19,049,000) ($6,574,000) - ($6,574,000)
Issuance of stock
options - 4,671,000 - 4,671,000
Stock issued for
repayment of a loan
from Carol Schiller - 100,000 - 100,000
Stock issued for payment
of Granite Technologies,
Inc. obligations - 263,000 - 263,000
Stock issued to acquire
Granite Technologies, Inc. - 1,435,000 - 1,435,000
Exercise of stock purchase
warrants - 14,000 - 14,000
Exercise of stock options - 1,766,000 ($262,000) 1,504,000
Stock issued for a
settlement with a former
consultant - 43,000 - 43,000
Conversion of related
party debt into
preferred stock - 2,000,000 - 2,000,000
Conversion of related
party debt into
common stock - 1,500,000 - 1,500,000
Accrued dividends on
preferred stock (160,000) (160,000) - (160,000)
Net loss for the year
ended December 31, 2001 (11,824,000) (11,824,000) - (11,824,000)
-----------------------------------------------------------------------------------------------------
Balance at December
31, 2001 ($31,033,000) ($6,766,000) ($262,000) ($7,028,000)
-----------------------------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
F-9
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
The Board of Directors of Fingermatrix, Inc. ("Fingermatrix"), a New
York Corporation formed on May 12, 1976, determined that it would be in the best
interests of Fingermatrix to reincorporate Fingermatrix in Delaware and that
such reincorporation would be accomplished through the merger of Fingermatrix
with and into its wholly-owned subsidiary, The Finx Group, Inc. ("The Finx
Group", the "Company" or the "Registrant"), a Delaware Corporation formed on
June 6, 2000 ("The 2000 Finx Group Merger"). On June 23, 2000, the Fingermatrix
Board of Directors approved a merger agreement between Fingermatrix and The Finx
Group (the "2000 Finx Group Merger Agreement"), which became effective as of
July 14, 2000 upon the written consent of a majority of the Fingermatrix
shareholders consisting of The Trinity Group, Inc. ("Trinity"), a privately
owned Delaware corporation owned by The Trinity Group-I, Inc. ("Trinity-I") and
five other shareholders. Trinity-I is owned by Lewis S. Schiller (Mr. Lewis
Schiller), Fingermatrix's and The Finx Group's Chairman and Chief Executive
Officer.
The Board of Directors fixed the close of business on June 30, 2000 as
the record date for purposes of consummating the terms of the 2000 Finx Group
Merger Agreement. Fingermatrix reported the 2000 Finx Group Merger in an
Information Statement under Section 14 of the Securities and Exchange Act of
1934 and on or about July 14, 2000, such Information Statement was sent to the
shareholders of record as of June 30, 2000.
On June 30, 2000, Fingermatrix had 20,000,000 shares of Common Stock,
114,403 shares of Series A 2% Voting Convertible Preferred Stock (convertible
into 84,978,548 shares of Common stock) and 1,000 shares of Series B 4%
Preferred Stock issued and outstanding. On June 30, 2000, The Finx Group had
authorized capital stock consisting of 50,000,000 shares of Common Stock, par
value $.01 per share, of which no shares were issued or outstanding and
1,000,000 shares of Series A 4% Preferred Stock, par value $.01 per share, of
which 1,000 shares were issued and outstanding and were owned by Trinity.
Pursuant to the 2000 Finx Group Merger Agreement, each outstanding ten
shares of Fingermatrix Common Stock was automatically converted into the right
to receive one share of The Finx Group's fully paid and non-assessable common
stock. Each outstanding share of Fingermatrix Series A 2% Voting Convertible
Preferred Stock was automatically converted into 742.8 shares of Fingermatrix
Common Stock and then each outstanding ten shares of such Fingermatrix Common
Stock was automatically converted into the right to receive one share of The
Finx Group's fully paid and non-assessable common stock. Each outstanding share
of Fingermatrix Series B 4% Preferred Stock automatically converted into the
right to receive one share of The Finx Group's fully paid and non-assessable
Series A 4% Preferred Stock. Each outstanding option or warrant to purchase ten
shares of Fingermatrix Common Stock was converted into an option to purchase one
share of The Finx Group's Common Stock. The By-Laws of Fingermatrix continued in
force as the By-Laws of The Finx Group and the directors and officers of The
Finx Group are the same as those of Fingermatrix. Additionally, each share of
Fingermatrix Series B preferred stock then outstanding and held by Trinity was
exchanged for 1,000 shares of The Finx Group's Series A preferred stock.
Business
The Finx Group's business is conducted by Mr. Lewis Schiller, who is
employed as the Company's Chief Executive Officer and President, and Grazyna B.
Wnuk ("Ms. Wnuk"), who is employed as the Company's Vice-President. Both Mr.
Schiller and Ms. Wnuk are members of the Company's Board of Directors on which
Mr. Schiller serves as its Chairman and Ms. Wnuk serves as its Secretary. In
addition, Mr. Schiller and Ms. Wnuk serve as executive officers and or as
directors for the subsidiaries of The Finx Group.
Mr. Schiller and Ms. Wnuk, along with strategically assigned
consultants, provide The Finx Group's subsidiaries with management, financial,
legal and administrative services. Commencing July 1, 2000, The Finx Group
charges its subsidiaries, a monthly consulting fee for the services provided to
them. Such intersegment consulting fees for the years ended December 31, 2001
and 2000 aggregated $900,000 and $450,000, respectively.
The Finx Group holds controlling investments in its subsidiaries that
operate, or intend to operate, in distinct business segments. As of December 31,
2000 The Finx Group had seven separate identifiable business segments. On
September 19, 2001 the Company acquired Granite Technologies, Inc. ("Granite")
which is identified as the Software Development segment. During the fourth
quarter of 2001 the Company determined that it was more
F-10
appropriate to report the Fingerprint Identification Technologies and Secured
Entrance Systems (Ingress/Egress) segments as one segment which is identified as
the Security Systems segment. During the fourth quarter of 2001, Shopclue.com,
Inc. ("Shopclue.com") and Bizchase, Inc. ("Bizchase"), formerly the Application
Service Provider and Web Based Development Solutions segments, respectively,
ceased operations and are presented in the accompanying consolidated financial
statements as discontinued operations. As a result of the above, The Finx Group
reports five separate segments as of December 31, 2001 as follows:
-Electro-Mechanical and Electro-Optical Products
-Specialized Vending Machines and Avionics Equipment
-Security Systems
-Internet Marketing
-Software Development
Electro-Mechanical and Electro-Optical Products
Electro-Mechanical and Electro-Optical Products reflects the activities
of Sequential Electronic Systems, Inc. ("Sequential"), a Delaware Company formed
in 1985. The Finx Group owns all of Sequential's issued and outstanding common
stock. The Finx Group also owns all of Sequential's issued and outstanding
preferred stock, which gives The Finx Group the right to elect a majority of
Sequential's board of directors. Sequential is 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.
Specialized Vending Machines and Avionics Equipment
Specialized Vending Machines and Avionics Equipment reflects the
activities of S-Tech, Inc. ("S-Tech"), a Delaware Company formed in 1992. The
Finx Group owns all of S-Tech's issued and outstanding common stock. The Finx
Group also owns all of S-Tech's issued and outstanding preferred stock, which
gives The Finx Group the right to elect a majority of S-Tech's board of
directors. S-Tech 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.
Security Systems
The Security Systems segment reflects the activities of Secured Portal
Systems, Inc. ("Secured Portals") and FMX, Corp. ("FMX").
Secured Portals was formed on August 11, 1999, whereby The Finx Group
own 89% of Secured Portal's common stock, Lewis S. Schiller and his designees
own 9% of Secured Portal's common stock and Grazyna B. Wnuk owns 2% of Secured
Portal's common stock. The Company also own all of Secured Portal's preferred
stock, which gives us the right to elect a majority of Secured Portal's board of
directors.
On September 13, 1999, Secured Portals entered into an exclusive
distribution agreement with GIL Security Systems, Inc. ("GIL"). 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. 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. The exclusive distribution agreement gives Secured Portals
distribution rights for the sale of GIL's security entrance systems to certain
categories of customers. The products covered by the exclusive distribution
agreement includes all of GIL's products that existed on September 13, 1999 and
all products developed during the term of the exclusive distribution agreement
including all models of the GIL-2001 security door. The categories of customers
covered by the exclusive distribution agreement 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 exclusive distribution
F-11
agreement commenced on September 1, 1999 and had an initial expiration date of
August 31, 2004 which was later extended to August 31, 2009.
As an inducement to obtain the exclusive distribution agreement and in
exchange for 1,000,000 common stock shares of GIL, we issued 14,134 shares of
Fingermatrix, Inc.'s Series A preferred stock, convertible into 10,498,735
shares of Fingermatrix, Inc.'s common stock (on July 14, 2000, such shares were
exchanged for 1,049,874 shares of The Finx Group, Inc.'s common stock) to Alan
J. Risi.
On December 11, 2001, the GIL 2001 security door received certification
by the U.S. State Department.
On February 21, 2002, the exclusive licensing agreement was amended
whereby the categories of customers was expanded to include all financial
institutions around the world and whereby Secured Portals 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 exclusive licensing
agreement 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 Preferred Stock that is convertible into 4,000,000
million shares of the Company's common stock, which have a value of $680,000.
FMX is a Delaware Company formed in 1996. The Finx Group owns 39.1% of
FMX's issued and outstanding common stock. Michael Schiller, FMX's Chief
Technical Officer and brother to Mr. Lewis Schiller owns 49.9%. Mr. Lewis
Schiller owns 4%. Ms. Wnuk owns 2% and members of Mr. Lewis Schiller's family
own the remaining 5%. The Finx Group also owns all of FMX's issued and
outstanding preferred stock, which gives The Finx Group the right to elect a
majority of FMX's board of directors. FMX is engaged in the design and
development of state-of-the-art fingerprint identification hardware and software
systems with a threefold target market of Internet access, law enforcement
identification and commercial and governmental access control. FMX has developed
a fingerprint identification system that could be used in conjunction with the
Georal Security System and FMX does not expect that it will have meaningful
revenues, if any, until the Georal Security System generates meaningful
revenues.
Internet Marketing
Internet Marketing reflects the activities of Starnet365.com, Inc.
("Starnet365.com"). Starnet365.com is a Delaware company that was originally
organized as Cue 365.com, Inc. on April 20, 2000 by Trinity. On May 25, 2000,
Trinity changed Cue365.com, Inc.'s name to Starnet365.com, Inc. and effected a
spin-off of Starnet365.com as a result of which The Finx Group owns 53.14% of
Starnet365.com's issued and outstanding common stock, Starnet365.com's
executives and employees own 35.26% (including 12.26% and 6.13% owned
respectively by Mr. Lewis Schiller and Ms. Wnuk), members of Mr. Lewis
Schiller's family own 10.22% and the remaining 1.38% is owned by outside
shareholders. The Finx Group also owns all of Starnet365.com's issued and
outstanding preferred stock, which gives The Finx Group the right to elect a
majority of Starnet365.com's board of directors. 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
enables its users to comparative shop 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.
Software Development
Software Development reflects the activities of Granite. On September
19, 2001, we consummated the acquisition of Granite, a Delaware company, through
our newly created and wholly owned subsidiary, Granite Technology Acquisition
Corp., a Delaware Company. On September 19, 2001 the Company acquired 95.87% of
Granite's common stock from its various shareholders upon the issuance of
3,000,000 shares of its unregistered Common Stock (the "Acquisition Shares"). Of
the Selling Shareholders, Grazyna B. Wnuk received 124,031 Acquisition Shares
for her ownership interest in Granite; and immediate family members of Lewis S.
Schiller, 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. In anticipation
of the Company's acquisition of Granite, on September 15, 2001 the Company and
Granite Technology Acquisition Corp. entered into a Settlement and Release
Agreement with Rock
F-12
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. As of April 10, 2002, the Company has
not made the monthly payments of $10,000 which were due to begin in January of
2002.
The Company issued a total of 3,542,636 shares of common stock valued
at $1.435 million to acquire Granite and as of the date of the acquisition,
Granite had an excess of liabilities over assets of $936,000, resulting in a
purchase price that was in excess of net assets by $2.371 million. This $2.371
million approximates 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 $2.371 million
to expense in 2001 for in-process research and development.
Granite develops and sells software programs for Smart Card
applications. Granite has a contract with Virginia Commonwealth University to
write and maintain software related student athlete identification cards. The
cards have information on them that identify the student by use of a card reader
and the related software. Granite has also developed a software program that is
used in e-commerce kiosks that are designed to operate like an ATM machine but
for commercial applications other than just banking. The consolidated financial
statements include only the operations of Granite from the date of the
acquisition.
Discontinued Operations
Application Service Provider
On July 27, 2000, the Company concluded an agreement to acquire a
controlling interest in Shopclue.com in exchange for 1,000,030 shares of the
Company's Common Stock. Shopclue.com is a Delaware Company organized in July
1999. The Company purchased the Shopclue.com common shares from family members
of Lewis S. Schiller, the Company's Chief Executive Officer and Chairman of its
Board of Directors. As of the date of the acquisition, Shopclue.com had an
excess of liabilities over assets of $768,000 and the common shares issued to
acquire Shopclue.com were valued at $4 million, resulting in a purchase price
that was in excess of net assets by $4.8 million. This $4.8 million approximates
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 $4.8 million to expense in 2000
for in-process research and development, which is included in the 2000 loss from
discontinued operations. As of December 31, 2000, the Company owned 34.24% of
Shopclue.com's common stock and all of its issued and outstanding preferred
stock which gives the Company the right to elect a majority of the Shopclue.com
board of directors. Shopclue.com is included as a part of the Company's
consolidated statements of operations and consolidated statement of financial
position due to the effective control as evidenced by interlocking management
and The Finx Group's ownership of a series of Shopclue.com's preferred stock
that gives the Company the right to elect a majority of the Shopclue.com board
of directors. Shopclue.com was an Application Service Provider that developed
programs that would enable small- and medium-sized businesses to establish an
online presence. The consolidated financial statements include only the
operations of Shopclue.com from the date of acquisition. Shopclue.com's
operating activities prior to the acquisition were not significant. During the
fourth quarter of 2001, Shopclue.com ceased operations and is presented in the
consolidated financial statements as a discontinued segment.
Web Based Development Solutions
On July 27, 2000, the Company acquired a 23.42% equity interest in Biz
Chase, from Trinity. Biz Chase, a Delaware company organized in July 2000, is
included as a part of the Company's consolidated statements of operations and
consolidated statement of financial position due to the effective control as
evidenced by interlocking management and The Finx Group's ownership of a series
of Bizchase's preferred stock that gives the Company the right to elect a
majority of the Biz Chase board of directors. Biz Chase's concept was developed
by the adult son of Lewis S. Schiller, Blake Schiller, the founder of
Shopclue.com, and provided Shopclue.com with its software under
F-13
a licensing agreement. Effective September 30, 2000, Biz Chase received common
stock shares of Shopclue.com representing 19% of Shopclue.com's outstanding
common stock shares in exchange for the assumption of $897,000 of notes payable
that Shopclue.com owed to related parties. Bizchase had developed a wholesale
web based development solution that was intended to provide an online solution
for small businesses. During the fourth quarter of 2001, Bizchase ceased
operations and is presented in the consolidated financial statements as a
discontinued segment.
Basis of Presentation
The accompanying 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 for the two years ended December 31, 2001
and as of December 31, 2001 has a working capital deficiency approximating $7.3
million and a capital deficiency approximating $7 million. During 2001 and 2000
the Company has relied on financial support from its controlling stockholder,
Trinity and other related parties and since September 25, 2001 has compensated
its employees and key consultants with stock options 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. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of The Finx
Group, Inc. and its subsidiaries for which it has direct voting control or
effective control. Intercompany balances and transactions are eliminated in
consolidation.
Use of Estimates
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 inventory
valuation reserve, the allowance for doubtful accounts and depreciation and
amortization of long-lived assets.
Cash
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
has no such investment at December 31, 2001.
Inventories
Inventories are stated at the lower of cost or estimated net realizable
value.
Property, Plant and Equipment and Software Costs
Property, plant and equipment are recorded at cost. Depreciation is
provided on the straight-line basis over the useful lives of the assets, which
range from three to seven years. Improvements that extend the useful lives of
the assets are capitalized while costs of repairs and maintenance are charged to
expense as incurred.
Software costs are recorded at cost and include expenses incurred by
the Company to maintain, monitor and manage the Company's website. The Company
recognizes website development costs in accordance with Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." As such, the Company expenses all costs incurred
that relate to the planning and post implementation phases of development. Costs
incurred in the development phase are capitalized and recognized over the
product's estimated useful life if the product is expected to have a useful life
beyond one year. Costs associated with repair or maintenance of the existing
site or the development of website content are included in product development
expense in the statement of operations. The software development costs are
amortized using the straight-line method over two years. Amortization of
software development costs for the Company's continuing operations was $33,000
and $8,000 for 2001 and 2000, respectively.
F-14
Patents
Patents are carried at cost less accumulated amortization, which is
calculated on a straight-line basis over the assets estimated useful life of 17
years. During a review of possible impairment of long-lived assets, it was
determined that the recoverability of the costs associated with the patents
acquired in 1999 was unlikely and $5,000 of such costs were written-off in 2000.
The existing patent costs are related to a new broad patent, issued in 2001 and
amortization expense related this patents was $459 and nil for 2001 and 2000,
respectively.
Long-Lived Assets
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. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." 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 December 31,
2001, management expects those assets related to its continuing operations to be
fully recoverable.
Revenue Recognition
The Company recognizes revenues when a product is shipped, and from
services when performed.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
costs of the Company's continuing operations were $52,000 and $161,000 for 2001
and 2000, respectively, and are included as part of selling expenses in the
consolidated statement of operations.
Purchased In-Process Research and Development
Purchased in-process research and development ("IPR&D") represents the
value assigned in a purchase business combination to research and development
projects of the acquired business 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 IPR&D must be charged to expense at the date of consummation of the
purchase business combination. Accordingly, the Company charged approximately
$2.4 million to expense during 2001 for IPR&D related to the Granite acquisition
and $4.8 million to expense during 2000 for IPR&D related to the Shopclue.com
acquisition, which is being reported as part of discontinued operations. The
IPR&D projects of Granite are principally related to the development of its
Smartcard software programs. The IPR&D projects of Shopclue.com were principally
the development of web based software that enabled small- and medium-sized
businesses to establish an online presence.
Income Taxes
The Company accounts for income taxes using the asset and liability
approach. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, management
does not expect to be realized.
Minority Interest
Minority interest represents the losses of its subsidiaries that have
been apportioned to the minority interest holders. The amount of loss
apportioned to the minority interest holders is limited to the amount of
investment that such minority shareholders have made into the subsidiaries. For
2001 and 2000, the minority interest portion of such losses was nil and
$113,000, respectively. As of December 31, 2001, cumulative amounts of minority
interest in the losses of consolidated subsidiaries in excess of minority equity
interests approximated $1 million.
Basic and Diluted Loss Per Share
Basic loss per share reflects the amount of loss for the period
attributable to each share of common stock outstanding during the reporting
period. Diluted loss per share reflects basic loss per share, while giving
effect to all dilutive potential common shares that were outstanding during the
period, such as common shares that could result
F-15
from the potential exercise or conversion of securities into common stock. The
computation of diluted loss per share does not assume conversion, exercise, or
contingent issuance of securities that would have an anti-dilutive effect on
loss per share (i.e. reducing loss per share). The dilutive effect, if any, of
outstanding options and warrants and their equivalents would be reflected in
dilutive earnings 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 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 all of 2000 and through March 30,
2001, the company had outstanding warrants to purchase 1,280,000 shares of
common stock at $0.01 per share, for all of 2000 and through May 4, 2001, the
company had outstanding warrants to purchase 135,000 shares of common stock at
$10 per share. For the period from July 2, 2001 through September 25, 2001 the
Company had outstanding options to purchase 6,700,000 shares of common stock at
$0.15 per share, for the period from July 2, 2001 through October 15, 2001 the
Company had outstanding options to purchase 300,000 at $0.15 per share, for the
period from July 2, 2001 through November 2, 2001 the Company had outstanding
options to purchase 500,000 at $0.15 per share, for the period from July 2, 2001
through November 5, 2001 the Company had outstanding options to purchase 200,000
at $0.15 per share, for the period from July 2, 2001 through November 12, 2001
the Company had outstanding options to purchase 4,200,000 at $0.15 per share,
for the period from December 12, 2001 through December 15, 2001 the Company had
outstanding options to purchase 3,000,000 at $0.30 per share, and for the period
from July 2, 2001 through December 31, 2001 the Company had outstanding options
to purchase 2,225,000 at $0.15 per share. For 2001 and 2000, all of the
Company's potential common shares were anti-dilutive and a dual presentation of
loss per share is not presented. As of December 31, 2001 the Company had
outstanding options to purchase 2,225,000 shares of common stock at $0.15 per
share and such options may dilute earnings per share in the future.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair value of Financial Instruments,"
requires certain disclosures regarding the fair value of financial instruments.
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
considerations and risks existing at the time. All instruments, including cash,
accounts receivable, accounts payable and accrued liabilities and amounts due to
related parties are reflected at fair value in the financial statements because
of the short term maturity of these instruments.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and
accounts receivable. The Company places its cash with high quality financial
institutions and as of December 2001 does not have any deposits with financial
institutions in excess of federally insured limits. The Company does not require
collateral or other security to support financial instruments subject to credit
risk. The Company's sales to the U.S. Governmental Agencies approximated
$199,000, or 12% of total sales for 2001 and $1.279 million, or 40% of total
sales for 2000. U.S. Government Agencies sales generated by the
Electro-Mechanical and Electro-Optical Products for 2001 and 2000 were $56,000
and $996,000, respectively, and by the Specialized Vending Machines and Avionics
Equipment segment for 2001 and 2000 were $142,000 and $283,000, respectively.
Accounts receivable on such sales as of December 31, 2001 approximated $24,000,
or 21% of total net accounts receivable, all of which were related to the
Specialized Vending Machines and Avionics Equipment segment.
2. Inventories
A summary of inventories as of December 31, 2001 is as follows:
Raw materials $1,368,000
Work-in-process 375,000
Finished goods 525,000
-----------------------------------------------------------------
Cost 2,268,000
Reserve for obsolete and slow moving inventory (1,319,000)
--------------------------------------------------------------------
Net $949,000
====================================================================
A portion of the raw material inventory is being held for the
manufacture of certain products not produced by the Company in recent years. The
inventory is recorded at net realizable value, which is less than its cost.
Management is seeking contracts for these products as the Company re-enters
these markets. However, since the outcome of these efforts is not certain, it is
at least reasonably possible that the Company's estimates could change in
F-16
the future and additional inventory reductions would be required. The Company's
charge to income for the write-down of inventory for 2001 and 2000 was $442,000
and $359,000, respectively.
3. Accounts Receivable
A summary of trade accounts receivable as of December 31, 2001 is as follows:
U.S. Government Agencies $24,000
Other 88,000
--------------------------------------------------------------
Gross receivables 112,000
Allowance for doubtful accounts (10,000)
--------------------------------------------------------------
Net $102,000
==============================================================
For the Company's segments which are reported as continuing operations, the
changes in the allowance for doubtful accounts for 2001 are as follows:
Balance at beginning of year $34,000
Current year provision 26,000
Write-offs (50,000)
Recoveries -
--------------------------------------------------------------
Balance at end of year $10,000
==============================================================
4. Property, Plant and Equipment and Software Costs
A summary of property, plant and equipment and software costs for the segments
which are reported as continuing operations as of December 31, 2001 is as
follows:
Machinery and equipment $2,167,000
Furniture and fixtures 229,000
Tools and dies 38,000
Leasehold improvements 14,000
Computer equipment 24,000
--------------------------------------------------------------
Total costs for property plant and equipment 2,472,000
Software costs 98,000
--------------------------------------------------------------
2,570,000
Accumulated depreciation and amortization (2,470,000)
--------------------------------------------------------------
Net $100,000
==============================================================
Depreciation and amortization on property, plant and equipment and
software costs for the Company's continuing operations for 2001 and 2000 was
$64,000 and $40,000, respectively.
5. Investment in Qode.com
On August 31, 2001, the Company entered into a non-binding letter of
intent with NeoMedia Technologies, Inc. to purchase from them, all assets
related to NeoMedia-Qode Software and Service Business of NeoMedia, Inc., which
business consists of the ownership and operation of a comprehensive universal
Internet database of consumer product information accessible through the
scanning or searching of Universal Product Codes including the delivery of
targeted promotions, coupons and special offers through a proprietary database
and software. As of December 31, 2001, the acquisition has not been consummated
however, from the date of the letter of intent through December 31, 2001, the
Company has made certain payments related to the NeoMedia-Qode Software and
Service Business of NeoMedia, Inc. in the amount of $76,000.
6. Notes Payable, Related Party
The Company and its subsidiaries incur interest expense on advances
from Lewis S. Schiller advances from Trinity, advances from Universal
International, Inc., a company owned by Grazyna Wnuk, advances from Grazyna B.
Wnuk, a loan from E. Gerald Kay, a former director, and advances from Blake
Schiller and Carol Schiller, both immediate family members of Lewis 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 S. Schiller.
F-17
Total unpaid and outstanding advances from such related parties as of December
31, 2001 aggregated approximately $1.367million. Interest accrued on such notes
are generally calculated at 9% (which is the weighted average interest rate at
the balance sheet date) and as of December 31, 2001 $473,000 of such interest
remains unpaid. Interest expense and financing fees on related party notes was
$313,000 and $290,000 for 2001 and 2000, respectively.
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. On July 13,
2001, Carol Schiller, the wife of Lewis S. Schiller, received 1,000,000 shares
of restricted common stock as repayment of a $100,000 loan to the Company.
7. 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. Subsequent to December 31, 2000, the Company determined that FINOVA
declared bankruptcy and the Company is attempting to establish a replacement
line of credit. In November 2001, the Company was notified that the FINOVA
line-of-credit would not be extended beyond November 30, 2001. Subsequent to
November 30, 2001, the Company utilized a $522,500 cash collateral deposit
provided by Trinity to satisfy all but $7,000 of the balance owed under the
line-of-credit and such funds are now owed by the Company to Trinity. During the
first quarter of 2002 the $7,000 balance on the revolving line of credit was
repaid by Trinity. Interest expense and factoring fees on the line of credit for
2001 and 2000 were $157,000 and $163,000.
8. Capital Stock
The Company has authorized 50,000,000 shares of $.01 par value Common
Stock. As of December 31, 2001, the Company has 40,356,545 shares issued and
outstanding. The Company has not declared dividends on its Common Stock.
The Company has authorized 1,000,000 of preferred stock. As of December
31, 2001, the Company has designated and issued 1,000 as the Series A Preferred
Stock and 20,000 as the Series B Preferred Stock. All of the Series A Preferred
Stock is owned by Trinity and such shares give Trinity the right to elect a
majority of the Company's Board of Directors. Each share of the Series A
Preferred Stock entitles the holder to annual dividends at the rate of 4%. All
of the Series B Preferred Stock is owned by Trinity for its exchange of related
party debt of $2 million. The cumulative Series B Preferred Stock entitles
Trinity to annual dividends at the rate of $8 per share and is convertible into
shares of common stock as calculated by dividing $2 million by the lowest price
that the Company's common stock has traded during the period that the Series B
Preferred Stock has been outstanding. As of April 9, 2002, the Series B
Preferred Stock could be converted into approximately 67 million shares of
common stock. Such conversion would require an increase in the authorized
capital related to the common shares of the Company. In addition, 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.
Both the Series A and Series B Preferred stocks vote alongside of common
stockholders on an if converted basis. Accrued dividends on the issued and
outstanding shares of the Series A and Series B Preferred Stock as and for the
year ended December 31, 2001 were $178,000.
9. Stock Options and Warrants
Stock Purchase Warrants
For all of 2000 and as of the beginning of 2001 the Company had
outstanding warrants to purchase 1,430,000 shares of common stock for $0.01 per
share and a warrant to purchase 135,000 shares of common stock for $10 per
share. On March 30, 2001, warrants to purchase 1,280,000 shares of common stock
were exercised for $0.01 per share. On May 4, 2001, a warrant to purchase
150,000 shares of common stock was exercised for $0.01. In July 2001, the
warrant to purchase 135,000 shares of common stock for $10 per share expired and
was not exercised.
F-18
Stock Options
On January 2, 2001 the Board of Directors adopted The Finx Group, Inc.
2001 Employee Stock Option Plan for the issuance of options to purchase a
maximum of 12,000,000 shares. On July 2, 2001, the Board of Directors adopted an
amendment to the plan increasing the maximum number of shares to 17,000,000 and
on the same date the Company granted to consultants, options to purchase
12,610,000 shares of common stock for $0.15 per share to consultants, granted to
Lewis S. Schiller, options to purchase 750,000 shares for $0.15 per share and
granted to Grazyna B. Wnuk options to purchase 375,000 shares of common stock
for $0.15 per share. On October 15, 2001 the Company granted to a consultant an
option to purchase 300,000 shares of common stock for $0.15 per share. On
November 7, 2001 the Company granted to consultants an option to purchase 90,000
shares of common stock for $0.15 per share. On December 12, 2001 the Company
granted to consultants, options to purchase 3,000,000 shares of common stock for
$0.30 per share, the exercise price, which was subsequently reduced to $0 per
share. On September 14, 2001, the Company registered 12,000,000 common shares on
Form S-8 and on December 12, 2001 registered an additional 5,000,000 shares on
Form S-8, whereby all of such shares were reserved for the exercise of the
aforementioned options. During 2001, options to purchase 14,775,000 shares of
common stock were exercised and as of December 31, 2001 options to purchase
2,350,000 shares of common stock at $0.15 per share remain outstanding.
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued and is effective for financial statements for fiscal
years beginning after December 15, 1995. As permitted by the statement, the
Company continues to measure compensation cost for stock option plans in
accordance with APB No. 25, "Accounting for Stock Issued to Employees"; however,
options issued to non-employees is valued using the Black-Sholes option-pricing
model
For purposes of calculating the pro forma expense under SFAS No. 123,
the fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used during
2001 to estimate the fair value of options granted:
Dividend yield 0.0%
Expected volatility 144.34%
Risk-free interest rate 6.0%
Expected life of options 3 years
The Company valued the options issued to consultants using the
Black-Scholes option-pricing model and recorded stock compensation expense of
$4.547 million. The Company valued the options issued to Lewis S. Schiller and
Grazyna B. Wnuk using the intrinsic value method and recorded stock compensation
expense of $127,000, representing the difference between the exercise price of
such options and the fair value of the underlying common shares.
Had compensation cost for the Company's stock options issued to
employees been determined consistent with the fair value method outlined in SFAS
No. 123, the impact on the Company's net income and earnings per common share
would have been as follows:
--------------------------------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------------------------------------
Net loss:
As reported $ (11,824,000) $ (8,478,000)
Pro forma under SFAS No. 123 $ (11,951,000) $ (8,478,000)
Basic and diluted net loss per common share:
As reported ($0.55) ($1.26)
Pro forma under SFAS No. 123 ($0.56) ($1.26)
F-19
The following table summarizes the Company's fixed stock purchase
warrants and options for 2001 and 2000.
--------------------------------------------------------------------------------------------------------------------
2001
Weighted 2000 Weighted
2001 Average 2000 Average
Shares Exercise Price Shares Exercise Price
--------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,565,000 $0.87 1,565,000 $0.87
Granted 17,125,000 $0.12 - -
Exercised (16,205,000) $0.12 - -
Forfeited/Expired (135,000) $10.00 - -
--------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,350,000 $0.15 1,565,000 $0.87
====================================================================================================================
Options exercisable at year end 2,350,000 $0.15 1,565,000 -
====================================================================================================================
Weighted-average fair value of options granted
during the year $0.28 $0.01
====================================================================================================================
As of December 31, 2001, the Company has outstanding options to
purchase 2,350,000 shares of common stock for $0.15 per share having a
weighted-average remaining contractual life of 2.51.
10. Related Party Transactions
The Company and its subsidiaries incur interest expense on advances
from Lewis S. Schiller advances from Trinity, advances from Universal
International, Inc., a company owned by Grazyna Wnuk, , advances from Grazyna B.
Wnuk, a loan from E. Gerald Kay, a former director, and advances from Blake
Schiller and Carol Schiller, both immediate family members of Lewis 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 S. Schiller. Total unpaid and outstanding advances from such related
parties as of December 31, 2001 aggregated approximately $1.367million. Interest
accrued on such notes are generally calculated at 9% (which is the weighted
average interest rate at the balance sheet date) and as of December 31, 2001
$473,000 of such interest remains unpaid. Interest expense and financing fees on
related party notes was $313,000 and $290,000 for 2001 and 2000, respectively.
On July 27, 2000, the Company concluded an agreement to acquire a
controlling interest in Shopclue.com in exchange for 1,000,030 shares of the
Company's Common Stock. The Company purchased the Shopclue.com common shares
from family members of Lewis S. Schiller, the Company's Chief Executive Officer
and Chairman of its Board of Directors. During the fourth quarter of 2001,
Shopclue.com ceased operations and is presented in the consolidated financial
statements as a discontinued segment.
On July 27, 2000, the Company acquired a 23.42% equity interest in Biz
Chase, from Trinity. Biz Chase's concept was developed by Lewis S. Schiller's
adult son, Blake Schiller, the founder of Shopclue.com, and provided
Shopclue.com with its software under a licensing agreement. Effective September
30, 2000, Biz Chase received common stock shares of Shopclue.com representing
19% of Shopclue.com's outstanding common stock shares in exchange for the
assumption of $897,000 of notes payable that Shopclue.com owed to related
parties. Bizchase had developed a wholesale web based development solution that
was intended to provide an online solution for small businesses. During the
fourth quarter of 2001, Bizchase ceased operations and is presented in the
consolidated financial statements as a discontinued segment.
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 20,000 shares of a
newly created series of preferred stock, the Series B Preferred Stock. On July
13, 2001, Carol Schiller, the wife of Lewis S. Schiller, received 1,000,000
shares of restricted common stock as repayment of a $100,000 loan to the
Company.
On September 19, 2001 the Company acquired 95.87% of Granite's common
stock upon the issuance of 3,000,000 shares of its unregistered Common Stock
(the "Acquisition Shares"). Of the Selling Shareholders, Grazyna B. Wnuk
received 124,031 Acquisition Shares for her ownership interest in Granite; and
immediate family members of Lewis S. Schiller, 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
F-20
"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.
In November 2001, the Company was notified that the FINOVA
line-of-credit would not be extended beyond November 30, 2001. Subsequent to
November 30, 2001, the Company utilized a cash collateral deposit provided by
Trinity to satisfy all but $7,000 of the balance owed under the line-of-credit
and such funds are now owed by the Company to Trinity.
On November 11, 2001, the Company entered into an agreement to acquire
5,000,000 shares of Trans Global Services, Inc.'s (Trans Global) common stock in
exchange for 2,500,000 shares of our common stock. The Company also had
committed to obtain funding of $1 million for Trans Global for which it would
have received preferred stock that would convert into a maximum of 3,000,000
shares of Trans Global's common stock. As of December 31, 2001, the Company had
provided Trans Global with $250,000 of funding. Subsequent to December 31, 2001,
the Company had not obtained additional funding and determined that it was not
in its best interest to expend additional time and resources pursuing the
funding of Trans Global. On March 7, 2002, the Company entered into a mutual
termination agreement with Trans Global whereby all 2,500,000 shares of the
Company's common stock was returned by Trans Global Services, Inc. to the
Company and 4,000,000 of the 5,000,000 shares of Trans Global's common stock was
returned to them by the Company. In consideration of the $250,000 funding that
the Company provided to Trans Global, the remaining 1,000,000 shares of Trans
Global common stock were retained by designee's of the Company's. The designees
included Lewis S. Schiller, members of Mr. Schiller's immediate family, and
Grazyna B. Wnuk and such designation was for the payment of $250,000 of related
party debt owed by the Company to Trinity (see footnote 16).
On November 30, 2001, we executed an agreement with Orion Telecom
Operating Corporation ("PRion Telecom"), pursuant to which Trinity provided
Orion Telecom with 1,875,000 of its shares of our common stock as a collateral
escrow deposit to enable Orion Telecom to obtain a $250,000 working capital
loan. As consideration for providing the collateral for its loan, Orion Telecom
Operating Corporation agrees to pay the Company and Trinity a sum equal to
$0.00125 per each minute of certain telecommunication services intended to be
provided by Orion Telecom. The Company and Trinity will receive 50% each of any
monies generated and earned pursuant to this agreement with Orion Telecom. Upon
repayment of the loan, 875,000 shares will be returned to Trinity and the
remaining 1,000,000 shares will be turned over to Orion Telecom in exchange for
1% of Orion Holdings, Inc.'s common stock. Trinity will also receive 1% of Orion
Holdings, Inc.'s common stock.
11. Income Taxes
The Company, as of December 31, 2001, has available approximately
$55.683 million of net operating loss carry forwards to reduce future Federal
and state income taxes, representing a net deferred tax asset of approximately
$22.3 million. Based upon the level of historical tax losses, the Company has
established a valuation allowance against the entire net deferred tax asset.
This represents an increase in the valuation allowance of approximately $2.9
million from December 31, 2001. In addition, the Company has available
investment tax credit and research tax credit carry forwards in excess of
$500,000. However, it is not currently probable that the related deferred tax
assets will be realized by reducing future taxable income during the carry
forward period and as such, a valuation allowance has been computed to offset in
its entirety the deferred tax asset attributable to the net operating loss and
tax credits. The net operating loss carry forwards expire as follows:
-------------------------------------------------------------------------
Year of expiration Net operating loss carry forward
-------------------------------------------------------------------------
2002 5,384,000
2003 5,163,000
2004 5,616,000
2005 2,207,000
2006 3,144,000
2007 3,023,000
2008 2,044,000
2009 1,851,000
2010 2,050,000
2011 3,171,000
2012 194,000
2018 1,080,000
2019 1,319,000
2020 8,261,000
2021 11,176,000
-------------------------------------------------------------------------
$55,683,000
-------------------------------------------------------------------------
F-21
Pursuant to section 382 of the Internal Revenue Code, the annual utilization of
these loss carry forwards is limited as a result of the changes in stock
ownership, which have occurred during 2001 and 2000, and may be further limited
if substantial changes in the Company ownership were to occur.
12. Commitments and Contingencies
Operating Leases
As of December 31, 2001, the Company does not have any operating leases
with firm commitments extending beyond one year. All of its current premises are
leased on a month to month basis and as of December 31, 2001 such monthly lease
payments approximated $15,000 per month.
Employment Agreements
The Company and Lewis S. Schiller have entered into an employment
agreement 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 annual compensation of $500,000. Mr. Schiller's
contract may be extended an additional five years and commencing 2002 his annual
compensation shall be increased by 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.
As of December 31, 2001, the Company has not entered into an employment
agreement with Grazyna B. Wnuk, the Company's Vice-President, Director and
Secretary. The Company anticipates that it will negotiate terms and conditions
for a contract with Ms. Wnuk at a future date.
Legal Proceedings
The Company is not involved in any legal proceedings of a material
nature that management believes would adversely affect our business, results of
operations or financial condition.
13. 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 five
separate reportable business segments as follows:
(1) Electro-Mechanical and Electro-Optical Products
(2) Specialized Vending Machines and Avionics Equipment
(3) Security Systems
(4) Internet Marketing
(5) Software Development
The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. There are no
intersegment sales but there are intersegment advances and related interest
charges, and management fees charged by The Finx Group, all of which are
eliminated in the consolidated financial statements. All of the Company's
segments are beyond their development stages and have developed commercially
viable products and or services. However, as of December 31, 2001, only the
Electro-Mechanical and Electro-Optical Products segment has generated meaningful
revenues. The remaining segments require additional funding to enable them to
either produce their products or provide their services and to market such
products and
F-22
services to their target consumers. Until such funding is obtained, if ever, no
assurances can be given that the Company's segments will ever produce meaningful
revenues.
For the years ended December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro-Optical Products $1,287,000 $2,406,000
Specialized Vending Machines and Avionics Equipment 190,000 401,000
Software Development 19,000 -
Internet marketing 182,000 382,000
-------------------------------------------------------------------------------------------------------------------
1,678,000 3,189,000
Corporate 720,000 450,000
Inter segment charges (720,000) (450,000)
-------------------------------------------------------------------------------------------------------------------
Total revenues $1,678,000 $3,189,000
===================================================================================================================
For the years ended December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
Operating Loss:
Electro-Mechanical and Electro-Optical Products ($ 867,000) ($ 47,000)
Specialized Vending Machines and Avionics Equipment (193,000) (457,000)
Security Systems (682,000) (497,000)
Software Development (2,727,000) -
Internet marketing (672,000) (729,000)
-------------------------------------------------------------------------------------------------------------------
(5,141,000) (1,730,000)
Corporate (5,476,000) (835,000)
-------------------------------------------------------------------------------------------------------------------
Total Operating Loss ($10,617,000) ($2,565,000)
===================================================================================================================
For the years ended December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
Interest Expense:
Electro-Mechanical and Electro-Optical Products ($ 334,000) ($ 335,000)
Specialized Vending Machines and Avionics Equipment (80,000) (84,000)
Security Systems (60,000) (40,000)
Software Development (10,000) -
Internet marketing (74,000) (20,000)
-------------------------------------------------------------------------------------------------------------------
(558,000) (479,000)
Corporate (86,000) (67,000)
Intersegment charges 109,000 48,000
-------------------------------------------------------------------------------------------------------------------
Total Interest Expense ($ 535,000) ($ 498,000)
===================================================================================================================
F-23
13. Segment Information (continued)
For the years ended December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
Net Loss:
Electro-Mechanical and Electro-Optical Products ($ 1,184,000) ($ 331,000)
Specialized Vending Machines and Avionics Equipment (266,000) (530,000)
Security Systems (742,000) (536,000)
Software Development (2,734,000) -
Internet marketing (732,000) (749,000)
-------------------------------------------------------------------------------------------------------------------
(5,658,000) (2,146,000)
Corporate (5,518,000) (879,000)
Minority interest in loss of subsidiaries - 113,000
-------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (11,176,000) (2,912,000)
Loss from Discontinued Operations (648,000) (5,566,000)
-------------------------------------------------------------------------------------------------------------------
Total Net Loss ($11,824,000) ($8,478,000)
===================================================================================================================
For the years ended December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization:
Electro-Mechanical and Electro-Optical Products $ 5,000 $ 8,000
Internet marketing 35,000 9,000
-------------------------------------------------------------------------------------------------------------------
40,000 17,000
Corporate 24,000 23,000
-------------------------------------------------------------------------------------------------------------------
Depreciation and amortization, continuing operations 64,000 40,000
Depreciation and amortization, discontinued operations 116,000 58,000
-------------------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 180,000 $ 98,000
===================================================================================================================
For the years ended December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
Assets:
Electro-Mechanical and Electro-Optical Products $ 1,564,000 $1,827,000
Specialized Vending Machines and Avionics Equipment 310,000 372,000
Security Systems 10,000 10,000
Software Development 12,000 -
Internet marketing 195,000 274,000
-------------------------------------------------------------------------------------------------------------------
2,091,000 2,483,000
Corporate 18,496,000 12,505,000
Intersegment investments (13,443,000) (12,008,000)
Intersegment receivables (5,832,000) (1,392,000)
-------------------------------------------------------------------------------------------------------------------
Assets, continuing operations 1,312,000 1,588,000
Net assets of discontinued operations 36,000 207,000
-------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,348,000 $1,795,000
===================================================================================================================
F-24
14. Discontinued Operations
During the forth quarter of 2001, the operations of Shopclue.com and Bizchase
ceased and as such their operations during 2001 and 2000 are presented as
discontinued. The information regarding the Company's discontinued operations is
summarized as follows:
Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------------
Net long-term assets of Discontinued Segments:
Property, plant and equipment and software costs:
Property, plant and equipment $ 25,000 $ 45,000 $ 70,000
Less accumulated depreciation and amortization (14,000) (20,000) (34,000)
-------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment and software costs 11,000 25,000 36,000
Other assets:
Investment in consolidated subsidiaries - 897,000 897,000
Eliminated intercompany assets - (897,000) (897,000)
-------------------------------------------------------------------------------------------------------------------
Net long-term assets of discontinued segments 11,000 25,000 36,000
===================================================================================================================
Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------------
Net Current Liabilities of Discontinued Segments:
Accounts payable $ 31,000 $ 29,000 $ 60,000
Accrued payroll $ 132,000 $ 130,000 262,000
Accrued payroll taxes $ 154,000 $ 91,000 245,000
Capital lease obligations $ - $ 37,000 37,000
Accrued management fees, related parties $ - $ 270,000 270,000
Accrued interest expense, related parties $ - $ 188,000 188,000
Notes payable, related parties $ 18,000 $ 1,640,000 1,658,000
Eliminated inter segment liabilities $ (18,000) $(2,098,000) (2,116,000)
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 317,000 287,000 604,000
-------------------------------------------------------------------------------------------------------------------
Interest income receivable, related parties 20,000 - 20,000
Notes receivable, related party 135,000 - 135,000
Eliminated inter segment assets (155,000) - (155,000)
-------------------------------------------------------------------------------------------------------------------
Total current assets - - -
-------------------------------------------------------------------------------------------------------------------
Net current liabilities of discontinued segments $ 317,000 $ 287,000 $ 604,000
===================================================================================================================
F-25
14. Discontinued Operations (continued)
Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------------
Loss form Operations of Discontinued Segments:
Year Ended December 31, 2001:
Sales $ 20,000 $ - $ 20,000
Cost of goods sold - - -
-------------------------------------------------------------------------------------------------------------------
Gross profit 20,000 - 20,000
-------------------------------------------------------------------------------------------------------------------
Write-off impaired assets - 47,000 47,000
Depreciation and amortization 8,000 108,000 116,000
Bad debt expense 9,000 - 9,000
Other general and administrative expense 22,000 487,000 509,000
Related party management fees - 180,000 180,000
-------------------------------------------------------------------------------------------------------------------
Operating expenses 39,000 822,000 861,000
-------------------------------------------------------------------------------------------------------------------
Operating loss (19,000) (822,000) (841,000)
Interest income, related parties 13,000 - 13,000
Interest expense and financing fees, related parties - (136,000) (136,000)
Elimination of inter segment transactions - 316,000 316,000
-------------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued segments $ (6,000) $ (642,000) $ (648,000)
===================================================================================================================
Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000:
Sales $ 44,000 $ - $ 44,000
Cost of goods sold $ 39,000 - $ - 39,000
-------------------------------------------------------------------------------------------------------------------
Gross profit 5,000 - 5,000
-------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 6,000 52,000 58,000
Bad debt expense 17,000 - 17,000
Research and development 4,840,000 - 4,840,000
Selling expense 157,000 - 157,000
Other general and administrative expense 146,000 393,000 539,000
Related party management fees - 90,000 90,000
-------------------------------------------------------------------------------------------------------------------
Operating expenses 5,166,000 535,000 5,701,000
-------------------------------------------------------------------------------------------------------------------
Operating loss (5,161,000) (535,000) (5,696,000)
Interest income, related parties 7,000 - 7,000
Interest expense and financing fees, related parties (13,000) (60,000) (73,000)
Elimination of inter segment transactions 106,000 90,000 196,000
-------------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued segments $ (5,061,000) $ (505,000) $(5,566,000)
===================================================================================================================
15. 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.
F-26
The FASB has issued Statement No. 143, "Accounting for Asset Retirement
Obligations" in June 2001. Statement No. 143 will change the accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs in four significant ways.
First, Statement 143 requires that the amount initially recognized for an asset
retirement obligation be measured at fair value and not under the current
practice of using a cost-accumulation measurement approach. Second, Statement
143 requires that the retirement obligation liability is discounted and
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. Prior practice did
not require discounting of the retirement obligation liability and therefore no
accretion was recorded in periods subsequent to the initial recognition period.
Third, under prior practice, dismantlement and restoration costs were taken into
account in determining amortization and depreciation rates and often the
recognized asset retirement obligation was recorded as a contra-asset. Under
Statement 143, recognized asset retirement obligations are recognized as a
liability. Fourth, under prior practice, the asset retirement obligation was
recognized over the useful life of the related asset and under Statement 143 the
obligation is recognized when the liability is incurred. The effective date for
Statement No. 143 is for fiscal years beginning after June 15, 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 consolidated financial statements. It is not
possible to quantify the impact until the newly issued statement has been
studied.
16. Subsequent Events
On January 15, 2002, options to purchase 2,525,000 shares of common
stock were exercised for $0.15 per share.
On February 21, 2002, the exclusive licensing agreement for the Georal
security systems was amended whereby the categories of customers was expanded to
include all financial institutions around the world and whereby Secured Portals
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
exclusive licensing agreement 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 Preferred Stock that is convertible
into 4,000,000 million shares of the Company's common stock, which have a value
of $680,000.
On March 7, 2002, the Company entered into a mutual termination
agreement with Trans Global whereby all 2,500,000 shares of the Company's common
stock was returned by Trans Global Services, Inc. to the Company and 4,000,000
of the 5,000,000 shares of Trans Global's common stock was returned to them by
the Company. In consideration of the $250,000 funding that the Company provided
to Trans Global, the remaining 1,000,000 shares of Trans Global common stock
were retained by designee's of the Company. The designees included Lewis S.
Schiller, members of Mr. Schiller's immediate family, and Grazyna B. Wnuk and
such designation was for the payment of $250,000 of related party debt owed by
the Company to Trinity (see footnote 10).
F-27