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, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
EXCHANGE ACT OF 1934
For the transition period from...............to.....................
Commission file Number 0-9940
SECURE TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
Delaware 13-2854686
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
21634 Club Villa Terrace, Boca Raton, Florida 33433
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 447-6612
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
stock, $.01 par value
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, 2004 were
$26,000.
The aggregate market value of the common equity held by non-affiliates
of the Registrant as of April 13, 2005 was approximately $1.645 million computed
on the basis of the reported closing price per share ($0.38) 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 13, 2005, the Registrant has 8,730,000 shares of its par
value $0.0001 common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes ____ No _X_
1
Statement Regarding Forward Looking Disclosure
Statements in this Form 10-KSB annual report may be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations, strategies, predictions or
any other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and are likely to, differ materially
from what is expressed or forecasted in the forward-looking statements due to
numerous factors, including those described above and those risks discussed from
time to time in this Form 10-KSB annual report, including the risks described
under "Risk Factors," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in other documents which we file with
the Securities and Exchange Commission. In addition, such statements could be
affected by risks and uncertainties related to our ability to acquire new
security technologies or companies with security technologies and successfully
market the products, market and customer acceptance, competition, government
regulations and requirements, pricing and development difficulties, our ability
to make acquisitions and successfully integrate those acquisitions with our
business, as well as general industry and market conditions and growth rates,
and general economic conditions. Any forward-looking statements speak only as of
the date on which they are made, and we do not undertake any obligation to
update any forward-looking statement to reflect events or circumstances after
the date of this Form 10-KSB.
The success of recent or contemplated future acquisitions will depend
on the effective integration of newly-acquired businesses, products or services
into the Company's current operations. Important factors for integration include
realization of anticipated synergies and cost savings and the ability to retain
and attract new personnel and clients.
Investors should evaluate any statements made by the Company in light
of these important factors.
Available Information
Information regarding the Company's annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K, and any
amendments to these reports, are available to the public from the SEC's website
at http://www.sec.gov as soon as reasonably practicable after the Company
electronically files such reports with the Securities and Exchange Commission.
Any document that the Company files with the SEC may also be read and copied at
the SEC's public reference room located at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room.
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PART I
Item 1. Description of Business.
Organization
On June 6, 2000 Secure Technology Group, Inc. (formerly The Finx Group,
Inc.) was organized as a Delaware corporation. Effective June 30, 2000,
Fingermatrix, Inc., the predecessor company was merged into Secure Technologies,
Inc. Secure Technologies, Inc. has controlling interests in Secured Portal
Systems, Inc., which was incorporated in Delaware on August 11, 1999, and
Granite Technologies Acquisition Corp., which was incorporated in Delaware on
May 15, 2001. Throughout this document our Company and its subsidiaries may be
collectively referred to as "We", "Our", "Us", "Secure Technologies", the
"Company" or the "Registrant".
Our Business
Products
Since September 30, 2002, our business has solely focused on the
marketing and sale of security systems.
On September 13, 1999, we obtained the Georal license which gives us
distribution rights for the sale of Georal security products to a broad range of
customers. The Georal security products' include all models of the Georal
security door. The categories of customers covered by the Georal license
includes the United States Treasury Department, the United States Central
Intelligence Agency and all other United States Government intelligence
agencies, the United States National Security Agency, the United States Defense
Intelligence Agency, the United States Department of the Navy, the United States
Air Force, the United States Army, all United States Federal Courts and all
United States Embassies, all department stores and retail stores located in the
United States (including all retail stores located in foreign countries which
are part of a retail store chain which is based in the United States), the
Government of Israel, and certain corporations. The Georal license commenced on
September 1, 1999 and, as amended, expires on August 31, 2014.
As an inducement to obtain the Georal license and in exchange for
1,000,000 common stock shares of GIL, in September 1999, we issued to Alan J.
Risi preferred shares which were converted into 4,200 shares of common stock in
July of 2002.
On December 11, 2001, the GIL 2001 security door received certification
by the U.S. State Department. On February 21, 2002, the Georal license was
amended to expand the categories of customers for which we has the exclusive
marketing right to include all financial institutions around the world with we
also receiving a right of first refusal to be the exclusive distributor for
sales to any governmental body which we does not have exclusive marketing
rights. As consideration for the amendment entered into on February 21, 2002, we
issued to Alan Risi 40,000 shares of series D 2% convertible preferred stock
that was converted into 16,000 shares of common stock. On May 16, 2002, the
Georal license for the Georal security systems was further amended whereby the
exclusive distribution agreement was expanded to give we additional exclusive
world wide sales and marketing rights. As consideration for the amendment
entered into on May 16, 2002, we issued to Alan Risi 60,000 shares of its series
C 2% convertible preferred stock which were converted into 24,000 shares of
common stock. On September 9, 2002, the Georal license was further expanded to
provide us with additional exclusive marketing rights. As consideration for this
amendment, we issued to Alan Risi 100,000 shares of its series C preferred stock
which were converted into 40,000 shares of common stock. On October 16, 2002, we
issued to Alan Risi an additional 250,000 shares of its series C preferred stock
for an amendment to the Georal license which provided us with participation
rights in certain maintenance revenue generated by Georal and extended the term
of the agreement an additional five years, to September 18, 2014. Using the
Black-Scholes option valuation formula, the convertible preferred stock was
valued at $2.98 million.
On December 10, 2003, we, its wholly-owned subsidiary, Secured
Portal Systems, Inc., Alan J. Risi ("Risi"), GIL Security Systems, Inc.("GIL"),
and Georal International, Ltd., entered into a amended and restated worldwide
exclusive distribution agreement covering all security entrance systems created,
developed, manufactured and/or distributed or otherwise sold by GIL, Georal or
their successors. The restated agreement expanded our exclusivity and gave us
certain other rights. The agreement provided for certain payments by we and, if
the payments were not made, GIL, Georal and Risi have the right to terminate the
restated agreement, in which event, the relationship among the parties would be
governed by the prior agreement.
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On or about April 28, 2004, we received a notice from GIL stating
that the agreement was terminated for failure of us to pay the amount provided
in the restated agreement. The notice further stated GIL's position that all
agreements between GIL and we and its subsidiary are terminated.
We are considering its legal rights and believe that its subsidiary
will continue to be able to exercise its right to market the security portals in
major markets groups; however, we can give no assurance as to its ability to
protect such rights or, if litigation is necessary, that it will prevail in any
legal action it may commence.
As of December 31, 2004, we have written-off the value of the
license agreement and the value of its investment in the GIL shares.
The Secured Card Solutions Software Program enables colleges and
universities to link access control of their recreation facilities with the
university ID card, process memberships, issue recreation equipment and obtain
utilization reports for multiple recreation facilities. The system is
cost-effective to implement and is user-friendly for employees and provides
accurate and timely information for recreation administrators. We have provided
Virginia Commonwealth University with two of our Secured Card software solutions
- the "Secured Recreational Sports Solution" and "The Secured Card Solution".
"The Secured Recreational Sports Solution" which currently serves Virginia
Commonwealth University from three locations offering a variety of fitness,
aquatics and intramurals. The activities are offered to all students, faculty,
and university and hospital employees. The Secured Recreational Sports
Solution's database is integrated with the Virginia Commonwealth University card
database for single university identification. The Secured Recreational Sports
Solution handles all check-in of members, locker assignment and equipment
check-in and check-out. It also keeps track of member billing and payroll
deduction and handles member suspensions and automatic emailing of special
events. The Secured Sports Recreation Solution application is written using the
new Microsoft.NET architecture. We have also entered into a services and support
agreement with Florida International University for the installation, support
and use of our Secured Recreational Sports Solution.
Marketing
We are marketing our security systems directly through sales
consultants and through channel marketing relationships. We are marketing the
Secured Card Solutions Software Program directly to universities across the
United States. We have installed our Secured Recreational Sports Management
Solution at Virginia Commonwealth University and at Florida International
University.
Competition
Although there are many product offerings for Card Control Access, we
believe that we are developing a niche industry by focusing on the colleges and
universities sports recreation facilities. Our upcoming WEB Based Secured
Recreational Sports Management Solution will mimic the existing program's
capabilities on an internet browser using Microsoft.NET architecture and will
further solidify our leadership role in our market niche.
Employees
We currently employ two individuals who are our executive officers. Our
remaining functions are provided by independent consultants
RISK FACTORS
We Have a History of Losses and Cash Flow Deficits
We have incurred significant operating losses during each of the two
years ended December 2004 and as of December 31, 2004 we have a capital
deficiency of $9.34 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.
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
4
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. 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, 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. and Grazyna
B. Wnuk owns all of our outstanding Series B preferred stock, which as of
December 31, 2004 were convertible into approximately 3,885,000 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. and Lewis S. Schiller have advanced
significant funds to us. Also, Lewis S. Schiller and Grazyna B. Wnuk are owed
accrued salaries as of December 31, 2004 of approximately $3.5 million. A
portion of the proceeds of any potential financing may be used to repay some or
all of the amounts owe 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.
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.
5
We Have Granted Significant Benefits Under Certain Existing and Proposed
Employment Agreements
Lewis S. Schiller, our Chairman of the Board and Chief Executive
Officer, and Grazyna B. Wnuk, our Vice President, Secretary and a Director has
employment agreements with us. These 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.
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
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
All of our security products that we currently offer and may develop in
the future may not gain market acceptance. The degree of acceptance of our
existing security products and any security 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 Are Engage in May Be Subject to Intense Competition
We may face intense competition from numerous companies which are
developing, producing and marketing products for securing access to buildings
and facilities which will directly compete with our products. 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. New entrants
in this industry must establish product reliability through testing and use in
order to gain widespread commercial acceptance of such products. Many of our
potential competitors may have 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.
The Board of Directors May Issue Additional Preferred Stock in the Future
We are authorized to issue up to 5,000,000 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 13, 2004, approximately 338,000 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 exercise.
6
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.
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.
Reliance on Management and Key Personnel and Consultants
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. Our success will also depend to a significant extent upon the
skills of certain key personnel and consultants. Our failure to attract
replacement or additional qualified employees or to retain the services of key
personnel or consultants could adversely affect our business.
We Could Be Subject to Potential Uninsured 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.
Our executive offices are located in Boca Raton, Florida in space
provided by an executive officer. Our independent consultants perform work for
us out of their own offices located throughout the United States.
Item 3. Legal Proceedings.
Although the Company is a party to certain legal proceedings that have
occurred in the ordinary course of business, it does not believe such
proceedings to be of a material nature with the exception of the following item.
On or about April 8, 2002, a complaint styled "Law Offices of Jerold K. Levien,
against Secure Technologies Group, Inc. f/k/a Fingermatrix, Inc., The Trinity
Group-I, Inc." was filed in the Supreme Court of the State of New York County of
New York, and the plaintiff has received a judgment for $334,595, such amount
having been accrued on the Company's books, plus interest.
7
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 "SCTC". 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
Quarter ended High Low
---- ---
March 31, 2004 $4.23 $1.00
June 30, 2004 $2.40 $1.30
September 30, 2004 $1.70 $0.93
December 31, 2004 $1.25 $0.80
Quarter ended High Low
---- ---
March 31, 2003 $8.50 $1.00
June 30, 2003 $6.50 $0.88
September 30, 2003 $2.00 $0.53
December 31, 2003 $1.63 $0.63
The closing price of common stock on April 13, 2005 was $0.38.
We have authorized 150,000,000 shares of our $0.0001 par value common
stock. As of April 13, 2005, there were approximately 10,000 holders of record
of our common stock. We have not paid dividends on common stock and do not
anticipate paying dividends in the foreseeable future. We intend to retain
future earnings, if any, to finance the expansion of our operations and for
general corporate purposes.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of our financial statements, including the
following: impairment of long-lived assets, including the valuation of the
exclusive license agreement; accounting for expenses in connection with stock
options and warrants; and accounting for income taxes. Our management relies on
historical experience and on other assumptions believed to be reasonable under
the circumstances in making its judgment and estimates. Actual results could
differ materially from those estimates. There have been no significant changes
in assumptions, estimates and judgments in the preparation of these financial
statements from the assumptions, estimates and judgments used in the preparation
of our prior year's audited financial statements.
Results of Operations
During 2004 and 2003 our revenues were $26,000 and $36,000,
respectively and were earned from sales of our Secured Card Solutions Software
Program
For all of 2004 and 2003 our significant on-going operating expenses
were executive payroll, and marketing expense and professional fees. Executive
payroll is currently $850,000 annually. Expenses associated with our marketing,
which currently are $1.1 million on an annual basis, represent consulting fees
for the consultants who perform such functions. Professional fees for legal and
accounting services currently approximate $500,000 annually.
The value assigned to the Georal License of approximately $2.5
million was written-off during 2004. Previously, the license was being amortized
over the life of the Georal License. Such amortization for 2004 and 2003 was
$184,000 and $245,000, respectively.
8
During 2004 and 2003 we compensated our employees and consultants
with stock options and stock grants that have been registered on Form S-8 and
unregistered stock purchase warrants. During 2004 and 2003 stock based
compensation was $595,000 and $4.042 million, respectively.
We incur interest expense at an annual rate of 9% on related party
notes payable. For 2004 and 2003 interest expenses on related party notes
payable was $98,000 and $107,000, respectively.
Financial Condition - Liquidity and Capital Resources
As of December 31, 2004, our working capital deficiency approximates
$4.2 million, representing a $5.2 million improvement in our working capital
position from December 31, 2003. Lewis S. Schiller has agreed to defer the
payment of $3.5 million of accrued and unpaid salaries and $1 million of
principal and interest due to him until January 1, 2006. These deferrals
resulted in a decrease in our working capital deficiency. Since April 1999, our
primary source of funding has been Trinity, our controlling shareholder. On July
29, 2004, Lewis S. Schiller and The Trinity Group-I, Inc. converted $500,000 of
debt obligations into 50,000 shares of Series D Convertible Preferred Stock.
Each share of Series D Convertible Preferred Stock is convertible into 40 shares
of common stock. Grazyna B. Wnuk converted $75,000 of accrued salary into 7,500
shares of Series D Convertible Preferred Stock. The Series D Convertible
Preferred Stock votes alongside of common stock on an if converted basis
regardless of whether there is common shares available for conversion at the
time of any vote. During 2004 we received $96,000 from Trinity and $385,000 from
unaffiliated lenders, all of which was used for our operations. We are
attempting to obtain outside equity financing; however, we make no assurances
that we will be successful in obtaining such financing.
On December 10, 2003, the Company, its wholly-owned subsidiary,
Secured Portal Systems, Inc., Alan J. Risi ("Risi"), GIL Security Systems,
Inc.("GIL"), and Georal International, Ltd., entered into a amended and restated
worldwide exclusive distribution agreement covering all security entrance
systems created, developed, manufactured and/or distributed or otherwise sold by
GIL, Georal or their successors. The restated agreement expanded the Company's
exclusivity and gave the Company certain other rights. The agreement provided
for certain payments by the Company and, if the payments were not made, GIL,
Georal and Risi have the right to terminate the restated agreement, in which
event, the relationship among the parties would be governed by the prior
agreement.
On or about April 28, 2004, the Company received a notice from GIL
stating that the agreement was terminated for failure of the Company to pay the
amount provided in the restated agreement. The notice further stated GIL's
position that all agreements between GIL and the Company and its subsidiary are
terminated.
The Company is considering its legal rights and believes that its
subsidiary will continue to be able to exercise its right to market the security
portals in major markets groups; however, the Company can give no assurance as
to its ability to protect such rights or, if litigation is necessary, that it
will prevail in any legal action it may commence.
As of December 31, 2004, the Company wrote-off the value of the
licensing agreement.
The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
However, the Company has generated only nominal revenue from continuing
operations and has a history of net losses and as of December 31, 2004 has a
working capital deficiency of $4.19 million and a capital deficiency of $9.34
million. Historically, the Company has been dependent on financial support from
its controlling stockholder, Trinity Group-I, Inc. ("Trinity"), and other
related parties. Management is currently seeking additional financing; however,
the Company can give no assurances such financing will be consummated, that the
terms of any financing will be reasonable or that the amount raised will be
adequate to meet the Company's current and ongoing obligations. The continuation
of the Company as a going concern is dependent upon its ability both to obtain
financing and to generate revenues. The accompanying consolidated 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.
9
Item 8A. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
we carried out an evaluation of the effectiveness of the design and operation of
our company's disclosure controls and procedures as of December 31, 2004. This
evaluation was carried out under the supervision and with the participation of
our company's management, including our company's Chief Executive Officer/Chief
Accounting Officer at that time. Based upon that evaluation, our company's Chief
Executive Officer/Chief Accounting Officer concluded that our company's
disclosure controls and procedures are effective. There have been no significant
changes in our company's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date we carried out our
evaluation.
Disclosure controls and procedures and other procedures are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time period specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is accumulated and communicated to management including our
Chief Executive Officer/Chief Accounting Officer as appropriate, to allow timely
decisions regarding required disclosure.
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 74 Chief Executive Officer, President and
Chairman of the Board
Grazyna B. Wnuk 41 Secretary, Vice-President and Director
Lewis S. Schiller was appointed our Chairman of the Board, Chief
Executive Officer and President of Secure Technologies Group and its
subsidiaries on April 28, 1999. Mr. Schiller is also Chairman of the Board and a
director of The 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. 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.
10
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 $100,000 (on an annualized basis)
during 2004 and 2003.
Long-term Compensation
Annual Compensation Awards Payouts
Securities
Name and Restricted Underlying LTIP
Principal Other Annual Stock Options/SARs Payouts All Other
Position Year Salary Bonus Compensation Awards (#) ($) Compensation
-------------- ------ -------------- --------- ---------------- ----------- ---------------- --------- ----------------
Lewis S.
Schiller,
CEO and 2003 $579,000(1) -- -- -- -- -- --
Chairman 2003 $551,000(1) -- -- -- 1,480,000 -- --
Grazyna B.
Wnuk, VP and 2003 $232,000(2) -- -- -- -- -- --
Secretary 2003 $220,500(2) -- -- -- 606,000 -- --
(1) Mr. Lewis S. Schiller's salary for 2004 and 2003 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. None of Lewis S. Schiller's salary has been
paid to him since April of 1999 and all such unpaid amounts are accrued as an
expense in our consolidated financial statements.
(2) Ms. Wnuk's salary for 2004 and 2003 is pursuant to her employment agreement
which was executed in 2002. Approximately $66,000 of Ms. Wnuk's salary has been
paid to her since April of 1999 and all such unpaid amounts are accrued as an
expense in our consolidated financial statements.
Option/SAR Grants in 2004
-------------------------
None of our officers received options during 2004.
Aggregated Option/SAR Exercises in Last Year and Year-end Option/SAR Values
---------------------------------------------------------------------------
The following table presents information regarding the unexercised
options to purchase shares of our common stock held by our executive officers
who are included in the preceding summary compensation table as of December 31,
2003.
-------------------- --------------- ------------ ------------------------------ --------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs at
Options/SARs at Year End (#) Year End ($)
Shares Value
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Un-exercisable
-------------------- --------------- ------------ -------------- --------------- -------------- -----------------
Lewis S. Schiller,
CEO and Chairman - - 800,000 - - -
Grazyna B. Wnuk,
VP and Secretary - - 800,000 - - -
-------------------- --------------- ------------ -------------- --------------- -------------- -----------------
11
Employment Agreements
Lewis S. Schiller has an employment agreement with us whereby he is
employed as our Chief Executive Officer. Mr. Schiller's contract is for an
initial term commencing April 29, 1999 through April 28, 2009 and provides for
annual compensation of $500,000. Mr. Schiller's contract may be extended an
additional five years and also provides for an annual increase as calculated as
the greater of 5% or the increase in the cost of living index. Mr. Schiller's
contract provides him with a bonus for each year of the term equal to 10% of the
amount by which the greater of consolidated net income before income taxes or
consolidated net cash flow exceeds $600,000. Mr. Schiller's contract entitles
him to 20% of the gross profit on the sale of any of the Company's, or its
subsidiaries, investments securities. Mr. Schiller's contract provides him the
opportunity to participate in the future expansion of the Company whereby he is
entitled, at his option, to purchase up to 25% of the authorized securities of
any subsidiary which is organized for any purpose. Mr. Schiller's contract
provides him with certain fringe benefits including a vehicle, health insurance
and life insurance. In the event of a change of control, Mr. Schiller's contract
provides him with severance equal to all amounts owed to him for the full term
of the employment agreement.
Grazyna B. Wnuk has an employment agreement with us whereby she is
employed as our Vice-President. Ms. Wnuk's contract was executed in 2002 and was
negotiated pursuant to a board authorization dated April 29, 1999. Ms, Wnuk's
contract's initial expiration is April 28, 2009 and provides for annual
compensation of $200,000 per year. Ms. Wnuk's contract may be extended an
additional five years and for an annual increase as calculated as the greater of
5% or the increase in the cost of living index. Ms. Wnuk's contract provides her
with a bonus for each year of the term equal to 1% of the amount by which the
greater of consolidated net income before income taxes or consolidated net cash
flow exceeds $600,000. Ms. Wnuk's contract entitles her to 1% of the gross
profit on the sale of any of the Company's, or its subsidiaries, investments
securities. Ms. Wnuk's contract provides her the opportunity to participate in
the future expansion of the Company whereby she is entitled, at her option, to
purchase up to1% of the authorized securities of any subsidiary which is
organized for any purpose. Ms. Wnuk's contract provides her with certain fringe
benefits including a vehicle, health insurance and life insurance. In the event
of a change of control, Ms. Wnuk's contract provides her with severance equal to
all amounts owed to her for the full term of the employment agreement.
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, 2004 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, 2004 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 of
Title of Class Name and address of Beneficial Owner Beneficial Ownership(1) Percent of Class
---------------------------------- -------------------------------------- ----------------------- -----------------
Common Stock(2) Lewis S. Schiller 6,703,844 64%
21634 Club Villa Terrace
Boca Raton, FL 33433
Common Stock(4) Grazyna B. Wnuk 481,746 5%
21634 Club Villa Terrace
Boca Raton, FL 33433
Common Stock Officer and directors as a group 7,185,590 69%
(2 persons)
Common Stock(3) The Trinity Group-I, Inc. 6,703,804 64%
21634 Club Villa Terrace
Boca Raton, FL 33433
---------------------------------- -------------------------------------- ----------------------- -----------------
12
-----------
(1) Unless otherwise indicated, to the Company's knowledge, all persons and
entities listed above have sole voting and investment power with respect to
their voting shares, except to the extent applicable law gives spouses
shared authority.
(2) Includes 40 shares directly owned by Lewis S. Schiller, and 6,703,804
shares beneficially owned by The Trinity Group-I, Inc. The Trinity Group-I,
Inc. is wholly owned by Lewis S. Schiller and, accordingly, Mr. Schiller
may be deemed to be the beneficial owner of The Trinity Group-I, Inc. As a
result, Mr. Schiller's beneficial ownership includes 1,000 shares of Series
A Preferred Stock, 14,815 shares of Series B. Preferred Stock, 75,000
shares of Series D Preferred Stock and 5,703,804 shares of Common Stock
owned by The Trinity Group-I, Inc. which are the same shares presented in
the table as beneficially owned by The Trinity Group-I, Inc. It does not
include the effect of a warrant to purchase 800,000 shares of Common Stock
for $2.50 per share which as of December 31, 2004 the exercise price of
which is considerably above the market price for the Common Stock. None of
the shares of Series A Preferred Stock, Series B Preferred Stock or Common
Stock is held jointly by The Trinity Group-I, Inc and Mr. Schiller.
(3) Includes 54 shares directly owned by The Trinity Group-I, Inc., 3,703,750
shares from the assumed conversion of the Series B Preferred Stock and
3,000,000 shares from the assumed conversion of the Series D Preferred
stock. The Trinity Group-I, Inc. holds 14,815 shares of Series B Preferred
Stock. Each shares of Series B Preferred Stock is convertible into such
shares as calculated by dividing $100 by the lowest price that the Common
Stock trades during the period that the Series B Preferred Stock is
outstanding which as of December 31, 2004 was $0.40. As of December 31,
2004 the Series B Preferred Stock held by The Trinity Group-I, Inc. is
convertible into 3,703,750 shares of Common Stock [(100 / $0.0016) * 14,815
= 3,703,750]. The Trinity Group-I, Inc. holds 75,000 shares of Series D
Preferred Stock of which each share is convertible into 40 shares of Common
Stock. The Trinity Group-I, Inc. is wholly owned by Lewis S. Schiller and
accordingly, Mr. Schiller is the natural person considered to be the
beneficial owner of The Trinity Group-I, Inc. As a result, all of the
shares of Series A Preferred Stock, Series B Preferred Stock, Series D
Preferred Stock and Common Stock presented in the table as beneficially
owned by The Trinity Group-I, Inc. are also included in the table as shares
beneficially owned by Mr. Schiller. None of the shares of Series A
Preferred Stock, Series B Preferred Stock, Series D Preferred Stock or
Common Stock IS held jointly by The Trinity Group-I, Inc and Mr. Schiller.
(4) Includes 496 shares directly owned by Grazyna B. Wnuk, 181,250 shares from
the assumed conversion of the Series B Preferred Stock and 300,000 shares
from the assumed conversion of the Series D Preferred Stock. The Grazyna B.
Wnuk holds 725 shares of Series B Preferred Stock. Each shares of Series B
Preferred Stock is convertible into such shares as calculated by dividing
$100 by the lowest price that the Common Stock trades during the period
that the Series B Preferred Stock is outstanding which as of December 31,
2004 was $0.40. As of December 31, 2004 the Series B Preferred Stock held
by Grazyna B. Wnuk is convertible into 181,250 shares of Common Stock [(100
/ $0.40) * 725 = 181,250]. Grazyna B. Wnuk holds 7,500 shares of Series D
Preferred Stock of which each share is convertible into 40 shares of Common
Stock. It does not include the effect of a warrant to purchase 800,000
shares of Common Stock for $2.50 per share which as of December 31, 2004
the exercise price of which is considerably above the market price for the
Common Stock.
Item 12. Certain Relationships and Related Transactions.
The Company and its 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
Carol Schiller, the wife of Lewis S. Schiller. Total unpaid and outstanding
advances from such related parties as of December 31, 2004 aggregated
approximately $701,000. 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, 2004 $878,000 of such interest remains unpaid. Interest
expense on related party notes was $98,000 for 2004 and $107,000 for 2003.
As of May 7, 2001, Trinity had advanced the Company approximately $3.7
million in order to fund its operations. On May 7, 2001, Trinity exchanged $1.5
million of such related party debt for 30,000 shares of Common Stock,
representing $50 per share, the fair market value of the Common Stock on May 7,
2001 and exchanged an additional $2 million of related party debt into 20,000
shares of Series B 8% Voting Redeemable Convertible Preferred Stock (the "Series
B Preferred Stock") whereby each share of Series B Preferred Stock represents
$100 of exchanged related party debt and each share of Series B Preferred Stock
is convertible into shares of Common Stock as calculated by dividing $100 by the
lowest price that the Company's shares of Common Stock have traded during the
period that the Series B Preferred Stock has been outstanding.
From April 7, 2003 through August 4, 2003, Trinity entered into four
separate loan agreements pursuant to which it received loans of $335,000 from
nonaffiliated lenders. Substantially all of such funds were advanced by Trinity
to the Company. Pursuant to the loan agreements, Trinity pledged an aggregate of
5,747 shares of the Company's series B 8% voting redeemable convertible
preferred stock owned by Trinity. Each share of Series B preferred stock is
convertible into shares
13
of common stock as calculated by dividing $100 by the lowest price that the
Company's shares of Common Stock have traded during the period that the series B
preferred stock has been outstanding. As of September 3, 2003 each share of
series B preferred stock was convertible into 190 shares of common stock.
Trinity defaulted on all of such loans and the 5,747 shares of pledged series B
preferred stock held by the lenders were converted into 948,762 shares of common
stock and were transferred to the lenders.
At the time of each of the loans to Trinity by the non-affiliated
lenders, Trinity lent the Company a substantial portion of the principal amount
of the loan at 9% interest. Trinity defaulted on its loans to the lenders as a
result of the Company's default on its loan to Trinity. When the lenders called
the note and foreclosed on the collateral, Trinity cancelled the Company's note
to it in exchange for shares of series B preferred stock equal to the number of
such shares as Trinity transferred to the lenders. As a result of the defaults
by the Company and Trinity, the Company issued to Trinity 5,747 shares of series
B preferred stock, which is the same number of shares as Trinity converted and
transferred to the lenders.
In addition, during 2003, Trinity converted an aggregate of 1,560
shares of Series B Preferred Stock into an aggregate of 156,000 shares of common
stock.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 36,028 shares of its common stock in payment for expenses of
$34,000, which she paid on behalf of the Company, the approximate value of the
shares issued.
On July 29, 2004, Lewis S. Schiller and The Trinity Group-I, Inc.
converted $500,000 of debt obligations into 50,000 shares of Series D
Convertible Preferred Stock. Each share of Series D Convertible Preferred Stock
is convertible into 40 shares of common stock. Grazyna B. Wnuk converted $75,000
of accrued salary into 7,500 shares of Series D Convertible Preferred Stock.
Item 13. Exhibits and Reports on Form 8-K.
See Exhibit Index for the Exhibits filed as part of or incorporated by
reference into this Report.
Item 14. Principal Accountants Fees and Services.
During 2004 and 2003, we were billed the following fees by MOORE
STEPHENS, P.C.:
2004 2003
------ ------
Audit Fees $50,000 $16,000
Tax Fees - -
Other Fees - -
------ ------
$50,000 $16,000
====== ======
We do not have an audit committee. Our Board of Directors approves the
engagement of an accountant to render all audit and non-audit services prior to
the engagement of the accountant based upon a proposal by the accountant of
estimated fees and scope of the engagement.
14
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.
SECURE TECHNOLOGIES GROUP, INC.
/S/ Lewis S. Schiller,
Chief Executive Officer
April 13, 2005
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 13, 2005
/S/ Grazyna B. Wnuk,
Secretary, Vice-President and Director
April 13, 2005
15
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
(31.1) Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(31.2) Chief Executive Officer and Chief Accounting Officer
Certification.
(99.1) Financial Statements
(1) Incorporated by reference to Form 8-K dated April 28, 1999.
16
Exhibit (21)
Subsidiaries of the Registrant
1. Secured Portal Systems, Inc., a Delaware company organized in 1999.
2. Granite Technologies Acquisition Corp., a Delaware company organized
in 2001.
3. Secured Systems Group, Inc., a Delaware company organized in 2001 and
currently inactive.
17
Exhibit 31.1
SECURE TECHNOLOGIES GROUP, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER
In connection with this annual report on Form 10-KSB of Secure
Technologies Group, Inc. for the year ended December 31, 2004, I, Lewis S.
Schiller, Chief Executive Officer and Chief Accounting Officer of Secure
Technologies Group, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on
my knowledge:
1. this Form 10-KSB for the year ended December 31, 2004
fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in this Form 10-KSB for the year
ended December 31, 2004 fairly presents, in all material
respects, the financial condition and results of
operations of Secure Technologies Group, Inc..
/S/ Lewis S. Schiller,
Chief Executive Officer and Chief Accounting Officer
April 13, 2005
18
Exhibit 31.2
SECURE TECHNOLOGIES GROUP, INC.
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION
CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER
I, Lewis S. Schiller, certify that:
1. I have reviewed this annual report on Form 10-KSB of Secure
Technologies Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the small business issuer as of,
and for, the periods presented in this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the small business issuer and have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the small business
issuer, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this report
is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of the end of
the period prior to the filing date of this annual
report (the "Evaluation Date"); and
c. Evaluated the effectiveness of the small business
issuer's disclosure controls and procedures and
presented in this report our conclusions about the
effectiveness of the disclosure controls and
procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any changes in the small
business issuer's internal control over financial
reporting that occurred during the small business
issuer's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual
report) that has materially affected, or is
reasonably likely to materially affect, the small
business issuer's internal control over financial
reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the small business issuer's
auditors and the audit committee of the small business issuer's
board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the small business issuer's ability
to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the small business issuer's internal control
over financial reporting.
/S/ Lewis S. Schiller,
Chief Executive Officer and Chief Accounting Officer
April 13, 2005
19
Exhibit (99.3)
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.
20
--------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
--------------------------------------------------------------------------------
As of December 31, 2004
-----------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 10,000
-----------------------------------------------------------------------------------------------------------
Total current assets 10,000
-----------------------------------------------------------------------------------------------------------
Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment, cost 90,000
Less accumulated depreciation (90,000)
-----------------------------------------------------------------------------------------------------------
Net furniture, fixtures and equipment -
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,000
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,075,000
Accrued payroll and payroll taxes, executive officers 250,000
Notes payable 385,000
Notes payable executive officers, including interest 243,000
Notes payable, related parties, including accrued interest 336,000
Other current liabilities 655,000
Current liabilities of discontinued segments (see Note 10) 1,211,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities 5,155,000
-----------------------------------------------------------------------------------------------------------
Deferred executive salaries 3,196,000
Notes payable executive officers, including interest 1,000,000
-----------------------------------------------------------------------------------------------------------
Total long-term debt 4,196,000
-----------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 9 and 10)
CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value; 5,000,000 shares authorized; 1,000
Series A preferred shares issued, outstanding; 15,540 Series B
preferred shares issued and outstanding and 72,500 shares of Series D
preferred stock as of December 31, 2004 2,128,000
Common stock, $.01 par value; 750,000,000 shares authorized;
749,715,948 shares issued and outstanding as of December 31, 2004 -*
Additional paid-in capital, common stock 35,659,000
Accumulated deficit (47,128,000)
-----------------------------------------------------------------------------------------------------------
Capital deficiency (9,341,000)
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 10,000
-----------------------------------------------------------------------------------------------------------
* - Less than $1,000
See Notes to Unaudited Consolidated Interim Financial Statements.
F-2
--------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------
Year Ended December 31, 2004 2003
-----------------------------------------------------------------------------------------------------------
Revenues $ 26,000 $ 36,000
-----------------------------------------------------------------------------------------------------------
Write-off impaired assets 2,451,000 -
General and administrative expenses 2,114,000 2,062,000
Compensation expense from issuance of stock options 595,000 4,042,000
-----------------------------------------------------------------------------------------------------------
Total operating expenses 5,160,000 6,104,000
-----------------------------------------------------------------------------------------------------------
Operating loss (5,134,000) (6,068,000)
Other income - 19,000
Interest expense, related parties (98,000) (107,000)
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations (5,232,000) (6,156,000)
Discontinued Operations: (See Note 10)
(Loss) gain on disposal of discontinued segments - (9,000)
Gain (loss) from operations of discontinued segments - 13,000
-----------------------------------------------------------------------------------------------------------
Net loss $ (5,232,000) $ (6,152,000)
-----------------------------------------------------------------------------------------------------------
Loss per share computation- basic and diluted:
Loss from continuing operations $ (5,232,000) $ (6,156,000)
Less dividends on preferred shares (120,000) (127,000)
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
stockholders (5,352,000) (6,283,000)
(Loss) gain on disposal of discontinued segments - (9,000)
Income (loss) from operations of discontinued segments - 13,000
-----------------------------------------------------------------------------------------------------------
Net loss available to common stockholders $ (5,352,000) $ (6,279,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 2,998,864 2,432,316
-----------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted:
Loss from continuing operations ($1.78) ($2.59)
(Loss) gain on disposal of discontinued segments - (0.01)
Income (loss) from operations of discontinued segments - 0.01
-----------------------------------------------------------------------------------------------------------
Net loss ($1.78) ($2.59)
-----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-3
--------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
Year Ended December 31, 2004 2003
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Loss from continuing operations $ (5,232,000) $ (6,156,000)
(Loss) gain on disposal of discontinued segments - (9,000)
-----------------------------------------------------------------------------------------------------------
(5,232,000) (6,165,000)
Adjustments to reconcile loss from continuing operations to
net cash - continuing operations:
Loss (gain) on disposal of segments - 9,000
Depreciation and amortization 184,000 245,000
Write-off impaired assets 2,451,000 -
Non cash expense from issuance of stock options and
stock purchase warrants 595,000 4,042,000
Other adjustments - -
Changes in assets and liabilities:
Other assets - -
Accounts payable 597,000 178,000
Accrued payroll 780,000 772,000
Accrued interest expense, related parties 98,000 97,000
Other current liabilities 64,000 (27,000)
-----------------------------------------------------------------------------------------------------------
Net cash-continuing operations (463,000) (849,000)
-----------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations - 13,000
Adjustments to reconcile loss from operations of discontinued
segments to net cash - discontinued operations:
Changes in the reserve for obsolete and slow moving
inventory - -
Depreciation and amortization - -
Non cash expense from issuance of stock options - -
Impairment charge - -
Bad debt expense - -
Net change in other assets and liabilities - (5,000)
-----------------------------------------------------------------------------------------------------------
Net cash-discontinued operations - 8,000
-----------------------------------------------------------------------------------------------------------
Net cash - operating activities (463,000) (841,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Other investing activities (8,000) -
-----------------------------------------------------------------------------------------------------------
Net cash - investing activities (8,000) -
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 96,000 718,000
Repayments on related party loans - (229,000)
Proceeds from exercise of stock options - 352,000
Issuance of notes payable 385,000 -
-----------------------------------------------------------------------------------------------------------
Net cash - financing activities 481,000 841,000
-----------------------------------------------------------------------------------------------------------
Net change in cash 10,000 -
Cash - Beginning of period - -
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ 10,000 $ -
-----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ - $ 10,000
Income Taxes $ - $ -
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
continued
F-4
--------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Year Ended December 31, 2004 and 2003
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Year Ended December 31, 2004
----------------------------
On July 29, 2004, Lewis S. Schiller and The Trinity Group-I, Inc.
converted $500,000 of debt obligations into 50,000 shares of Series D
Convertible Preferred Stock. Each share of Series D Convertible Preferred Stock
is convertible into 10,000 shares of common stock. Grayzna B. Wnuk converted
$75,000 of accrued salary into 7,500 shares of Series D Convertible Preferred
Stock and a consultant to the Company converted $150,000 of accrued consulting
fees 15,000 shares of Series D Convertible Preferred Stock. The Series D
Convertible Preferred Stock votes alongside of common stock on an if converted
basis regardless of whether there is common shares available for conversion at
the time of any vote.
On July 29, 2004, the Company issued additional warrants to purchase an
aggregate of 584,860,000 shares of Common Stock at an exercise price of $0.01
per share resulting in stock compensation expense of $594,984.
Year Ended December 31, 2003
----------------------------
On various dates during 2003, the Company issued stock options, stock
purchase warrants and stock grants resulting in non cash stock compensation
expense of $4,042,000.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 36,028 shares of its common stock in payment for expenses of
$34,000, which she paid on behalf of the Company, the approximate value of the
shares issued.
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-5
------------------------------------------------------------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Preferred Additional
Preferred Preferred Stock in Common Paid-in Accumulated
Shares Common Shares Par Excess of par Par Capital Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2003 16,540 2,998,864 $ - * $1,554,000 $ - $35,064,000 ($41,776,000) ($5,158,000)
Issuance of stock
purchase warrants - - - - - 595,000 - 595,000
Issuance of Series
D Preferred stock
in wxchange for
related party debt
and salaries 82,500 - - * 574,000 - - - 574,000
Issuance of Series
D Preferred stock for
related to debt issuance 8,250 - - * - - - - -
Accrued dividends on
preferred stock - - - - - - (120,000) (120,000)
Net loss for the year
ended December 31, 2004 - - - - - - (5,232,000) (5,232,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
2004 114,040 2,998,864 $ - * $2,128,000 $ - $35,659,000 ($47,128,000) ($9,341,000)
------------------------------------------------------------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
F-6
-------------------------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2003
-------------------------------------------------------------------------------------------------
Preferred
Preferred Preferred Stock in
Shares Common Shares Par Excess of par Common Par
-------------------------------------------------------------------------------------------------
Balance at December 31,
2002 18,100 615,661 $ - * $1,710,000 $ -*
Issuance of stock options
and warrants - - - - -
Stock issued for repayment
of notes payable - 36,028 - - -*
Issuance of stock grants - 1,171,996 - - -*
Exercise of stock options - 70,417 - - -*
Conversion of related
party debt into shares
of series B preferred
stock 5,747 - - * 575,000 -
Conversion of series B
preferred stock (7,307) 1,104,762 - * (731,000) -
Accrued dividends on
preferred stock - - - - -
Net loss for the year
ended December 31, 2003 - - - - -
-------------------------------------------------------------------------------------------------
Balance at December 31,
2003 16,540 2,998,864 $ - * $1,554,000 $ -
-------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2003
--------------------------------------------------------------------------------------------------------------
Additional
Paid-in Accumulated Subscriptions
Capital Deficit sub-total Receivable Total
--------------------------------------------------------------------------------------------------------------
Balance at December 31,
2002 $30,725,000 ($35,497,000) ($3,062,000) ($775,000) ($3,837,000)
Issuance of stock options
and warrants 1,896,000 - 1,896,000 775,000 2,671,000
Stock issued for repayment
of notes payable 32,000 - 32,000 - 32,000
Issuance of stock grants 1,568,000 - 1,568,000 - 1,568,000
Exercise of stock options 352,000 - 352,000 - 352,000
Conversion of related
party debt into shares
of series B preffered
stock (240,000) - 335,000 - 335,000
Conversion of series B
preferred stock 731,000 - - - -
Accrued dividends on
preferred stock - (127,000) (127,000) - (127,000)
Net loss for the year
ended December 31, 2003 - (6,152,000) (6,152,000) - (6,152,000)
--------------------------------------------------------------------------------------------------------------
Balance at December 31,
2003 $35,064,000 ($41,776,000) ($5,158,000) $ - ($5,158,000)
--------------------------------------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
F-7
--------------------------------------------------------------------------------
Secure Technologies Group, Inc. and Subsidiaries
Unaudited Notes to Consolidated Financial Statements
December 31, 2004 and 2003
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
On June 6, 2000 secure technology Group, Inc. (formerly The Finx Group,
Inc.) was organized as a Delaware corporation. Effective June 30, 2000,
Fingermatrix, Inc., the predecessor company was merged into Secure Technologies,
Inc. Secure Technologies, Inc. has controlling interests in Secured Portal
Systems, Inc., which was incorporated in Delaware on August 11, 1999, and
Granite Technologies Acquisition Corp., which was incorporated in Delaware on
May 15, 2001. Throughout this document Secure Technologies Group, Inc. and its
subsidiaries may be collectively referred to as "Secure Technologies", the
"Company" or the "Registrant".
Nature of Operations
On September 13, 1999, the Company obtained the Georal license which
gives the Company distribution rights for the sale of Georal security products
to a broad range of customers. The Georal security products' include all models
of the Georal security door. The categories of customers covered by the Georal
license includes the United States Treasury Department, the United States
Central Intelligence Agency and all other United States Government intelligence
agencies, the United States National Security Agency, the United States Defense
Intelligence Agency, the United States Department of the Navy, the United States
Air Force, the United States Army, all United States Federal Courts and all
United States Embassies, all department stores and retail stores located in the
United States (including all retail stores located in foreign countries which
are part of a retail store chain which is based in the United States), the
Government of Israel, and certain corporations. The Georal license commenced on
September 1, 1999 and, as amended, expires on August 31, 2014.
As an inducement to obtain the Georal license and in exchange for
1,000,000 common stock shares of GIL, in September 1999, the Company issued to
Alan J. Risi preferred shares which were converted into 4,200 shares of common
stock in July of 2002.
On December 11, 2001, the GIL 2001 security door received certification
by the U.S. State Department. On February 21, 2002, the Georal license was
amended to expand the categories of customers for which the Company has the
exclusive marketing right to include all financial institutions around the world
with the Company also receiving a right of first refusal to be the exclusive
distributor for sales to any governmental body which the Company does not have
exclusive marketing rights. As consideration for the amendment entered into on
February 21, 2002, the Company issued to Alan Risi 40,000 shares of series D 2%
convertible preferred stock that was converted into 16,000 shares of common
stock. On May 16, 2002, the Georal license for the Georal security systems was
further amended whereby the exclusive distribution agreement was expanded to
give the Company additional exclusive world wide sales and marketing rights. As
consideration for the amendment entered into on May 16, 2002, the Company issued
to Alan Risi 60,000 shares of its series C 2% convertible preferred stock which
were converted into 24,000 shares of common stock. On September 9, 2002, the
Georal license was further expanded to provide the Company with additional
exclusive marketing rights. As consideration for this amendment, the Company
issued to Alan Risi 100,000 shares of its series C preferred stock which were
converted into 40,000 shares of common stock. On October 16, 2002, the Company
issued to Alan Risi an additional 250,000 shares of its series C preferred stock
for an amendment to the Georal license which provided the Company with
participation rights in certain maintenance revenue generated by Georal and
extended the term of the agreement an additional five years, to September 18,
2014. Using the Black-Scholes option valuation formula, the convertible
preferred stock was valued at $2.98 million.
On December 10, 2003, the Company, its wholly-owned subsidiary,
Secured Portal Systems, Inc., Alan J. Risi ("Risi"), GIL Security Systems,
Inc.("GIL"), and Georal International, Ltd., entered into a amended and restated
worldwide exclusive distribution agreement covering all security entrance
systems created, developed, manufactured and/or distributed or otherwise sold by
GIL, Georal or their successors. The restated agreement expanded the Company's
exclusivity and gave the Company certain other rights. The agreement provided
for certain payments by the Company and, if the payments were not made, GIL,
Georal and Risi have the right to terminate the restated agreement, in which
event, the relationship among the parties would be governed by the prior
agreement.
F-8
On or about April 28, 2004, the Company received a notice from GIL
stating that the agreement was terminated for failure of the Company to pay the
amount provided in the restated agreement. The notice further stated GIL's
position that all agreements between GIL and the Company and its subsidiary are
terminated.
The Company is considering its legal rights and believes that its
subsidiary will continue to be able to exercise its right to market the security
portals in major markets groups; however, the Company can give no assurance as
to its ability to protect such rights or, if litigation is necessary, that it
will prevail in any legal action it may commence.
As of December 31, 2004, the Company has written-off the value of
the license agreement and the value of its investment in the the GIL shares.
The Company also sells from its sale of software programs for device
management and smart card applications ("Secured Card Solutions"). The Company
has provided Virginia Commonwealth University with two of its Secured Card
Solutions - the "Secured Recreational Sports Solution" and "The Secured Card
Solution". The Secured Recreational Sports Solution, which currently serves
Virginia Commonwealth University ("VCU") from three locations offering a variety
of fitness, aquatics and intramurals. The activities are offered to all
students, faculty, and university and hospital employees. The Secured
Recreational Sports Solution's database is integrated with the VCU card database
for single university identification. The Secured Recreational Sports Solution
handles all check-in of members, locker assignment and equipment check-in and
check-out. It also keeps track of member billing and payroll deduction. Further,
it handles member suspensions and automatic emailing of special events. The
Secured Sports Recreation Solution application is written using the new
Microsoft.NET architecture. The Company has also entered into a services and
support agreement with Florida International University ("FIU") for the
installation, support and use of our Secured Recreational Sports Solution.
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, 2004
and as of December 31, 2004 has a working capital deficiency of $4.19 million
and a capital deficiency of $9.34 million. During 2004 and 2003 the Company has
relied on financial support from its controlling stockholder, Trinity Group-I,
Inc. ("Trinity") and other related parties and since September 25, 2001 has
compensated its employees and key consultants with stock options of which some
were registered on Form S-8. Management is currently seeking additional
financing; however no assurances can be made that such financing will be
consummated. The continuation of the Company as a going concern is dependent
upon its ability to obtain financing, and to use the proceeds from any such
financing to increase its business to achieve profitable operations. The
accompanying consolidated financial statements do not include any adjustments
that would result should the Company be unable to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of Secure
Technologies and its subsidiaries for which it has direct voting control or
effective control. All material 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 carrying value of
the Company's exclusive license, and patents and their amortization.
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, 2004.
F-9
Furniture, Fixtures and Equipment
Furniture, fixtures 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. As of December 31, 2004, the Company's furniture, fixtures
and equipment, having a cost basis of $90,000 are fully depreciated.
Impairment
Certain long-term assets of the Company are reviewed when changes in
circumstances require as to whether their carrying value has become impaired,
pursuant to guidance established in Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations [undiscounted
and without interest charges]. If impairment is deemed to exist, the asset will
be written down to fair value. Management also reevaluates the period of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of December 31, 2004, the Company
wrote-off the value of its exclusive license and the value of certain restricted
securities.
Revenue Recognition
The Company recognizes revenues when a product is shipped, and from
services when performed.
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.
Basic and Diluted Loss Per Share
Basic and diluted per share results for all periods presented were
computed based on the net earnings or loss allocated to the common stock for the
respective periods. The weighted average number of shares of common stock
outstanding during the period was used in the calculation of basic earnings
(loss) per share. In accordance with FAS 128, "Earnings Per Share," the weighted
average number of shares of common stock used in the calculation of diluted per
share amounts is adjusted for the dilutive effects of stock options based on the
treasury stock method and the assumed conversion of convertible preferred stock
only if an entity records earnings from continuing operations (i.e., before
discontinued operations), as such adjustments would otherwise be anti-dilutive
to earnings per share from continuing operations. As a result of the Company
recording a loss from continuing operations for 2004 and 2003, the average
number of common shares used in the calculation of diluted loss per share have
not been adjusted for the effects of 7,369,440 potential common shares from
unexercised stock options and warrants and 7,515,000 potential common shares
from unconverted preferred shares. Such warrants, options, and shares of
convertible preferred stock 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
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. The fair value of long-term liabilities also
approximate their carrying value.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist of cash. The Company places
its cash with high quality financial institutions and as of December 2004 does
not have any deposits with financial institutions in excess of federally insured
limits.
F-10
2. Notes Payable, Related Party
On April 28, 1999, Trinity acquired voting control of the Company and
since that date has been the Company's only significant source of funding.
Trinity is owned by Lewis S. Schiller, The Finx Group's Chief Executive Officer
and Chairman of the Board. Other related parties who have advanced funds to the
Company are Lewis S. Schiller, Grazyna B. Wnuk, The Finx Group's Vice President
and Board Secretary, Universal International, Inc., a company owned by Grazyna
B. Wnuk, E. Gerald Kay, a former director, and Carol Schiller, the wife of Lewis
S. Schiller.
As of May 7, 2001, Trinity had advanced the Company approximately $3.7
million in order to fund its operations. On May 7, 2001, Trinity exchanged $1.5
million of such related party debt for 30,000 shares of Common Stock,
representing $50 per share, the fair market value of the Common Stock on May 7,
2001 and exchanged an additional $2 million of related party debt into 20,000
shares of Series B 8% Voting Redeemable Convertible Preferred Stock (the "Series
B Preferred Stock") whereby each share of Series B Preferred Stock represents
$100 of exchanged related party debt and each share of Series B Preferred Stock
is convertible into shares of Common Stock as calculated by dividing $100 by the
lowest price that the Company's shares of Common Stock have traded during the
period that the Series B Preferred Stock has been outstanding.
From April 7, 2003 through August 4, 2003, Trinity entered into four
separate loan agreements pursuant to which it received loans of $335,000 from
nonaffiliated lenders. Substantially all of such funds were advanced by Trinity
to the Company. Pursuant to the loan agreements, Trinity pledged an aggregate of
5,747 shares of the Company's series B 8% voting redeemable convertible
preferred stock owned by Trinity. Each share of Series B preferred stock is
convertible into shares of common stock as calculated by dividing $100 by the
lowest price that the Company's shares of Common Stock have traded during the
period that the series B preferred stock has been outstanding. As of September
3, 2003 each share of series B preferred stock was convertible into 190 shares
of common stock. Trinity defaulted on all of such loans and the 5,747 shares of
pledged series B preferred stock held by the lenders were converted into 948,762
shares of common stock and were transferred to the lenders.
At the time of each of the loans to Trinity by the non-affiliated
lenders, Trinity lent the Company a substantial portion of the principal amount
of the loan at 9% interest. Trinity defaulted on its loans to the lenders as a
result of the Company's default on its loan to Trinity. When the lenders called
the note and foreclosed on the collateral, Trinity cancelled the Company's note
to it in exchange for shares of series B preferred stock equal to the number of
such shares as Trinity transferred to the lenders. As a result of the defaults
by the Company and Trinity, the Company issued to Trinity 5,747 shares of series
B preferred stock, which is the same number of shares as Trinity converted and
transferred to the lenders.
In addition, during 2003, Trinity converted an aggregate of 1,560
shares of Series B Preferred Stock into an aggregate of 156,000 shares of common
stock.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 36,028 shares of its common stock in payment for expenses of
$34,000, which she paid on behalf of the Company, the approximate value of the
shares issued.
On July 29, 2004, Lewis S. Schiller and The Trinity Group-I, Inc.
converted $500,000 of debt obligations into 50,000 shares of Series D
Convertible Preferred Stock. Each share of Series D Convertible Preferred Stock
is convertible into 40 shares of common stock.
Total unpaid and outstanding advances from such related parties as of
December 31, 2004 aggregated $701,000. Interest accrued on all such notes is
calculated at 9% (which is the weighted average interest rate at the balance
sheet date) and as of December 31, 2004 $878,000 of such interest remains
unpaid. Interest expense on related party notes was $98,000 and $107,000 for
2004 and 2003, respectively. The Company's chief executive officer has deferred
payment of $1,000,000 of such amounts until January 1, 2006 and accordingly,
such amount is classified as long-term debt as of December 31, 2004.
3. Notes Payable, Other
During 2004, the Company received a loans totaling $385,000. The loans
are demand notes and total payments including principal and imputed interest are
$$493,000 as of December 31, 2004. In connection with the issuance of the loans
the Company issued to the note holders warrants to purchase an aggregate of
1,020,000 shares of common stock at a price of $2.50 per share and 8,250 shares
of Series D Preferred Stock convertible into 300,000 shares of common stock.
F-11
4. Deferred Executive Salaries
The Company's chief executive officer has agreed to defer his accrued
and unpaid salary until January 1, 2006 and as a result $3,196,000 of such
salaries are classified as long-term liability
5. Capital Stock
The Company has authorized 150,000,000 shares of $.0001 par value
Common Stock. As of December 31, 2004, the Company has 2,998,864 shares issued
and outstanding. The Company has not declared dividends on its Common Stock.
The Company has authorized 5,000,000 of preferred stock. Dividends
accrued on the Company's preferred stock aggregated $582,000 as of December 31,
2004 of which $120,000 was accrued during 2004 and $127,000 was accrued during
2003.
Series A 4% Preferred Stock
In 1999, the Company issued to Trinity 1,000 shares of Series A 4%
Preferred Stock (the Series A Preferred Stock"). Each share of the Series A
Preferred Stock entitles the holder to annual dividends at the rate of 4%. 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% per share and votes alongside of Common Stock holders.
Series B 8% Voting Redeemable Convertible Preferred Stock
As of May 7, 2001, Trinity had advanced the Company approximately $3.7
million in order to fund its operations. On May 7, 2001, Trinity exchanged $1.5
million of such related party debt for 30,000 shares of Common Stock,
representing $50 per share, the fair market value of the Common Stock on May 7,
2001 and exchanged an additional $2 million of related party debt into 20,000
shares of Series B 8% Voting Redeemable Convertible Preferred Stock (the "Series
B Preferred Stock") whereby each share of Series B Preferred Stock represents
$100 of exchanged related party debt and each share of Series B Preferred Stock
is convertible into shares of Common Stock as calculated by dividing $100 by the
lowest price that the Company's shares of Common Stock have traded during the
period that the Series B Preferred Stock has been outstanding.
From April 7, 2003 through August 4, 2003, Trinity entered into four
separate loan agreements pursuant to which it received loans of $335,000 from
nonaffiliated lenders. Substantially all of such funds were advanced by Trinity
to the Company. Pursuant to the loan agreements, Trinity pledged an aggregate of
5,747 shares of the Company's series B 8% voting redeemable convertible
preferred stock owned by Trinity. Each share of Series B preferred stock is
convertible into shares of common stock as calculated by dividing $100 by the
lowest price that the Company's shares of Common Stock have traded during the
period that the series B preferred stock has been outstanding. As of September
3, 2003 each share of series B preferred stock was convertible into 190 shares
of common stock. Trinity defaulted on all of such loans and the 5,747 shares of
pledged series B preferred stock held by the lenders were converted into 948,762
shares of common stock and were transferred to the lenders.
At the time of each of the loans to Trinity by the non-affiliated
lenders, Trinity lent the Company a substantial portion of the principal amount
of the loan at 9% interest. Trinity defaulted on its loans to the lenders as a
result of the Company's default on its loan to Trinity. When the lenders called
the note and foreclosed on the collateral, Trinity cancelled the Company's note
to it in exchange for shares of series B preferred stock equal to the number of
such shares as Trinity transferred to the lenders. As a result of the defaults
by the Company and Trinity, the Company issued to Trinity 5,747 shares of series
B preferred stock, which is the same number of shares as Trinity converted and
transferred to the lenders. As of December 31, 2004, 15,540 shares of Series B
preferred stock are outstanding which can be converted into an aggregate of
3,885,000 shares of common stock. Each share of Series B Preferred Stock
entitles the holder to annual dividends at the rate of 8% of $100 per share.
F-12
Series D Convertible Preferred Stock
On July 29, 2004, Lewis S. Schiller and The Trinity Group-I, Inc.
converted $500,000 of debt obligations into 50,000 shares of Series D
Convertible Preferred Stock. Each share of Series D Convertible Preferred Stock
is convertible into 40 shares of common stock. Grazyna B. Wnuk converted $75,000
of accrued salary into 7,500 shares of Series D Convertible Preferred Stock. In
October 2004, in connection with a loan to the Company, the Company issued to
the note holder 8,250 shares of shares of Series D Convertible Preferred Stock
that are convertible into an aggregate of 300,000 shares of Common Stock. In
connection with the transaction, the Company issued shares of Series D
Convertible Preferred Stock that are convertible into 30,000 shares of Common
Stock in payment of a finder's fee. The Series D Convertible Preferred Stock
votes alongside of common stock on an if converted basis regardless of whether
there is common shares available for conversion at the time of any vote. As of
December 31, 2004 the series D Preferred Stock is convertible into 2,630,000
shares of common stock. The conversion period for the Series D Convertible
Preferred stock does not have an expiration date.
6. Warrants
On November 17, 2003, the Company issued warrants to purchase an
aggregate of 5,030,000 shares of Common Stock at an exercise price of $2.50 per
share resulting in stock compensation expense of $977,000. On July 29, 2004, the
Company issued additional warrants to purchase an aggregate of 2,339,440 shares
of Common Stock at an exercise price of $2.50 per share resulting in stock
compensation expense of $594,984. As of December 31, 2004, there are warrants
outstanding to purchase an aggregate of 7,369,440 shares of common stock at an
exercise price of $2.50 per share.
The Company has elected to use the intrinsic value method of accounting
for stock options in accordance with APB Opinion No. 25 and related
interpretations issued to employees under its stock option plans whereby the
amount of stock-based compensation expense is calculated as the difference
between the fair market value and the exercise price on the date of issuance.
For purposes of pro forma disclosures the amount of stock-based compensation as
calculated using the fair value method of accounting for stock options issued to
employees is amortized over the options' vesting period.
For 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 to
estimate the fair value of options granted:
-------------------------------- ---------------- ---------------------
2004 2003
---- ----
Dividend yield 0.0% 0.0%
-------------------------------- ---------------- ---------------------
Expected volatility 144.34% 144.34%
-------------------------------- ---------------- ---------------------
Risk-free interest rate 6.0% 6.0%
-------------------------------- ---------------- ---------------------
Expected life of options 3 years 3 years
-------------------------------- ---------------- ---------------------
The Company's pro forma information for the years ended December 31,
2004 and 2003 is as follows:
2004 2003
-----------------------------------------------------------------------------------------------------------
Net loss as reported $ (5,352,000) $ (6,152,000)
Deduct: Amount by which stock- based employee compensation
as determined under fair value based method for all
awards exceeds the compensation as determined under the
intrinsic value method - (593,000)
-----------------------------------------------------------------------------------------------------------
Pro forma net loss under FAS No. 123 $ (5,352,000) $ (6,745,000)
-----------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share:
As reported (1.78) (2.59)
Pro forma under SFAS No. 123 (1.78) (2.84)
-----------------------------------------------------------------------------------------------------------
F-13
The following table summarizes the Company's fixed stock purchase
warrants and options for 2004 and 2003.
---------------------------------------------------- -------------- ----------------- -------------- -----------------
2004 2003
Weighted Weighted
2004 Average 2003 Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Outstanding at beginning of year 5,030,000 $2.50 179,446 $37.50
Granted 2,339,440 $2.50 6,912,413 $2.50
Exercised - - (1,242,413) $10.00
Forfeited/Expired - - (200) $37.50
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Outstanding at end of year 7,369,440 $2.50 5,849,246 $2.50
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Options exercisable at year end 7,369,440 $2.50 5,849,246 $0.05
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Weighted-average fair value of options granted
during the year $0.25 $10
---------------------------------------------------- -------------- ----------------- -------------- -----------------
As of December 31, 2004, the Company has outstanding warrants to
purchase 7,369,440 shares of Common Stock at a price of $2.50 per share having a
weighted-average remaining contractual life of 3.176 years.
7. Related Party Transactions
The Company and its 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
Carol Schiller, the wife of Lewis S. Schiller. Total unpaid and outstanding
advances from such related parties as of December 31, 2004 aggregated
approximately $701,000. 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, 2004 $878,000 of such interest remains unpaid. Interest
expense on related party notes was $98,000 for 2004 and $107,000 for 2003.
As of May 7, 2001, Trinity had advanced the Company approximately $3.7
million in order to fund its operations. On May 7, 2001, Trinity exchanged $1.5
million of such related party debt for 30,000 shares of Common Stock,
representing $50 per share, the fair market value of the Common Stock on May 7,
2001 and exchanged an additional $2 million of related party debt into 20,000
shares of Series B 8% Voting Redeemable Convertible Preferred Stock (the "Series
B Preferred Stock") whereby each share of Series B Preferred Stock represents
$100 of exchanged related party debt and each share of Series B Preferred Stock
is convertible into shares of Common Stock as calculated by dividing $100 by the
lowest price that the Company's shares of Common Stock have traded during the
period that the Series B Preferred Stock has been outstanding.
From April 7, 2003 through August 4, 2003, Trinity entered into four
separate loan agreements pursuant to which it received loans of $335,000 from
nonaffiliated lenders. Substantially all of such funds were advanced by Trinity
to the Company. Pursuant to the loan agreements, Trinity pledged an aggregate of
5,747 shares of the Company's series B 8% voting redeemable convertible
preferred stock owned by Trinity. Each share of Series B preferred stock is
convertible into shares of common stock as calculated by dividing $100 by the
lowest price that the Company's shares of Common Stock have traded during the
period that the series B preferred stock has been outstanding. As of September
3, 2003 each share of series B preferred stock was convertible into 190 shares
of common stock. Trinity defaulted on all of such loans and the 5,747 shares of
pledged series B preferred stock held by the lenders were converted into 948,762
shares of common stock and were transferred to the lenders.
At the time of each of the loans to Trinity by the non-affiliated
lenders, Trinity lent the Company a substantial portion of the principal amount
of the loan at 9% interest. Trinity defaulted on its loans to the lenders as a
result of the Company's default on its loan to Trinity. When the lenders called
the note and foreclosed on the collateral, Trinity cancelled the Company's note
to it in exchange for shares of series B preferred stock equal to the number of
such shares as Trinity transferred to the lenders. As a result of the defaults
by the Company and Trinity, the Company issued to Trinity 5,747 shares of series
B preferred stock, which is the same number of shares as Trinity converted and
transferred to the lenders.
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In addition, during 2003, Trinity converted an aggregate of 1,560
shares of Series B Preferred Stock into an aggregate of 156,000 shares of common
stock.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 36,028 shares of its common stock in payment for expenses of
$34,000, which she paid on behalf of the Company, the approximate value of the
shares issued.
On July 29, 2004, Lewis S. Schiller and The Trinity Group-I, Inc.
converted $500,000 of debt obligations into 50,000 shares of Series D
Convertible Preferred Stock. Each share of Series D Convertible Preferred Stock
is convertible into 40 shares of common stock. Grazyna B. Wnuk converted $75,000
of accrued salary into 7,500 shares of Series D Convertible Preferred Stock.
8. Income Taxes
The Company, as of December 31, 2004, has available approximately $55.1
million of net operating loss carry forwards to reduce future Federal and state
income taxes, representing a net deferred tax asset of approximately $19.3
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 a decrease in the valuation allowance of approximately $100,000
from December 31, 2003. 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
------------------------------------- -----------------------------------
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
2022 4,177,000
2023 6,152,000
2024 5,232,000
------------------------------------- -----------------------------------
$55,081,000
------------------------------------- -----------------------------------
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 2004 and 2003, and may be further limited
if substantial changes in the Company ownership were to occur.
9. Commitments and Contingencies
Operating Leases
As of December 31, 2004, 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, 2004 such monthly lease
payments approximated $500 per month.
Employment Agreements
Lewis S. Schiller has an employment agreement with the Company whereby
he is employed as the Company's chief executive officer. Mr. Schiller's contract
is for an initial term commencing April 29, 1999 through April 28, 2009 and
provides for annual compensation of $500,000. Mr. Schiller's contract may be
extended an additional five years and also provides for an annual increase as
calculated as the greater of 5% or the increase in the cost of living index. Mr.
Schiller's contract provides him with a bonus for each year of the term equal to
10% of the amount by which the greater of consolidated net income before income
taxes or consolidated net operating cash flow
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exceeds $600,000. Mr. Schiller's contract entitles him to 20% of the gross
profit on the sale of any of the Company's, or its subsidiaries, investments
securities. Mr. Schiller's contract provides him the opportunity to participate
in the future expansion of the Company whereby he is entitled, at his option, to
purchase up to 25% of the authorized securities of any subsidiary which is
organized for any purpose. Mr. Schiller's contract provides him with certain
fringe benefits including a vehicle, health insurance and life insurance. In the
event of a change of control, Mr. Schiller's contract provides him with
severance equal to all amounts owed to him for the full term of the employment
agreement.
Grazyna B. Wnuk has an employment agreement with the Company whereby
she is employed as the Company's vice-president. Ms. Wnuk's contract was
executed in 2002. Ms. Wnuk's contract's initial expiration is April 28, 2009 and
provides for annual compensation of $200,000 per year. Ms. Wnuk's contract may
be extended an additional five years and for an annual increase as calculated as
the greater of 5% or the increase in the cost of living index. Ms. Wnuk's
contract provides her with a bonus for each year of the term equal to 1% of the
amount by which the greater of consolidated net income before income taxes or
consolidated net operating cash flow exceeds $600,000. Ms. Wnuk's contract
entitles her to 1% of the gross profit on the sale of any of the Company's, or
its subsidiaries, investments securities. Ms. Wnuk's contract provides her the
opportunity to participate in the future expansion of the Company whereby she is
entitled, at her option, to purchase up to 1% of the authorized securities of
any subsidiary which is organized for any purpose. Ms. Wnuk's contract provides
her with certain fringe benefits including a vehicle, health insurance and life
insurance. In the event of a change of control, Ms. Wnuk's contract provides her
with severance equal to all amounts owed to her for the full term of the
employment agreement.
Indemnifications
Pursuant to the terms of the stock purchase agreement to sell
Sequential and S-Tech, the Company agreed to indemnify Lewis S. Schiller for any
claims made against him regarding $1.1 million of delinquent payroll taxes owed
by Sequential and S-Tech at the time of their disposal and as of September 30,
2003, the Company has reserved $550,000 against such potential claims. In
addition, pursuant to separate indemnification agreements, the Company has
agreed to indemnify Grazyna B. Wnuk and the former president of S-Tech for any
claims made against them regarding the delinquent payroll taxes.
Legal Proceedings
Although the Company is a party to certain legal proceedings that have
occurred in the ordinary course of business, it does not believe such
proceedings to be of a material nature with the exception of the following item.
On or about April 8, 2002, a complaint styled "Law Offices of Jerold K. Levien,
against The Finx Group, Inc. f/k/a Fingermatrix, Inc., The Trinity Group-I,
Inc." was filed in the Supreme Court of the State of New York County of New
York, and the plaintiff has received a judgment for $334,595, such amount having
been accrued on the Company's books, plus interest.
10. Discontinued Operations
On June 30, 2003, the Company transferred its 51.1% ownership in FMX
Corp. ("FMX") to Michael Schiller, who owned the remaining 49.9% of FMX. Michael
Schiller is the brother of Lewis S. Schiller; however, Lewis S. Schiller has no
direct or indirect equity interest in FMX. Since its inception, FMX has had no
operating activities and all but $25,000 of its liabilities was a note payable
to the Company. As a result of the disposal of FMX, the Company recorded a loss
on disposal of $9,000 during 2003. The Company continues to have contingent
obligations relating to the discontinued operations, principally withholding tax
liabilities of an aggregate of $1,211,000, of which $550,000 related to the
operations of Sequential and S-Tech which were sold in 2002.. In certain cases,
the Company retained intellectual property rights; however, those rights have
been fully expensed.
11. New Authoritative Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after December 15, 2003. In December 2003, the FASB issued
Interpretation No. 46(R) ("FIN 46R") which revised certain provisions of FIN 46.
Publicly reporting entities that are small business issuers must apply FIN 46R
to all entities subject to FIN 46R no later than the end of the first reporting
period that ends after December 15, 2004 (as of December 31, 2004, for a
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calendar year enterprise). The effective date includes those entities to which
FIN 46 had previously been applied. However, prior to the application of FIN
46R, a public entity that is a small business issuer shall apply FIN 46 or FIN
46R to those entities that are considered special-purpose entities no later than
as of the end of the first reporting period that ends after December 15, 2003
(as of December 31, 2003 for a calendar year enterprise). The adoption of FIN 46
or FIN 46R did not have a material effect on the Company's consolidated
financial position or results of operations.
In April 2003, SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149") was issued. SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities". This statement is effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS 149 did not have a material
effect on the Company's consolidated financial position or results of
operations.
During 2003, SFAS 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS 150") was issued.
SFAS 150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain cases). The provisions of SFAS 150 are
effective for instruments entered into or modified after May 31, 2003 and
pre-existing instruments as of July 1, 2003. On October 29, 2003, the FASB voted
to indefinitely defer the effective date of SFAS 150 for mandatorily redeemable
instruments as they relate to minority interests in consolidated finite-lived
entities through the issuance of FASB Staff Position 150-3.
In December 2003, a revision of SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" was issued, revising disclosures
about pension plans and other post retirements benefits plans and requiring
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of Accounting Research Bulletin No. 43, Chapter 4 - Inventory
Pricing". The amendments made by Statement 151 clarify that abnormal amounts of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and require the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No.153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" ("SFAS 153"). The amendments made by SFAS 153 are
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. Opinion
29 provided an exception to its basic measurement principle (fair value) for
exchanges of similar productive assets. The Board believes that exception
required that some nonmonetary exchanges, although commercially substantive, be
recorded on a carryover basis. By focusing the exception on exchanges that lack
commercial substance, the Board believes this Statement produces financial
reporting that more faithfully represents the economics of the transactions. The
Statement is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after the date
of issuance. The provisions of this Statement shall be applied prospectively.
The Company expects that the adoption of the new statements will not
have a significant impact on its financial statements.
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment" Statement 123(R) will provide investors and other users of
financial statements with more complete financial information by requiring that
the compensation cost relating to share-based payment transactions be recognized
in financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. Statement 123(R) covers a wide range
of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and employee
share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB
F-17
Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as
originally issued in 1995, established as preferable a fair-value-based method
of accounting for share-based payment transactions with employees. However, that
Statement permitted entities the option of continuing to apply the guidance in
Opinion 25, as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair-value-based method been used.
Public entities that are small business issuers will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. Currently the Company recognizes the expense of
options, or similar instruments, issued to employees using the intrinsic value
based method. The Company is evaluating the impact this statement may have on
its financial statements.
F-18