UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Amendment No. 1
(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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period _________ to _________.
Commission file Number 0-9940
THE FINX GROUP, INC.
(Name of small business issuer as specified in its charter)
Delaware 13-2854686
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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, 2003 were
$36,000.
The aggregate market value of the common equity held by non-affiliates
of the Registrant as of April 13, 2004 was approximately $5.5 million computed
on the basis of the reported closing price per share ($0.0085) 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 November 18, 2004, the Registrant has 749,715,948 shares of its
par value $0.01 common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes ____ No _X_
1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING WITHOUT LIMITATION THE STATEMENTS
UNDER "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" ARE, OR MAY BE, FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT").
WITHOUT LIMITING THE FOREGOING, (I) THE WORDS "BELIEVES,"
"ANTICIPATES," "PLANS," "EXPECTS," "INTENDS," "ESTIMATES" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS AND (II)
FORWARD-LOOKING STATEMENTS INCLUDE ANY STATEMENTS WITH RESPECT TO THE POSSIBLE
FUTURE RESULTS OF THE COMPANY, INCLUDING ANY PROJECTIONS OR DESCRIPTIONS OF
ANTICIPATED REVENUE ENHANCEMENTS OR COST SAVINGS. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS,
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY,
OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS.
SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: WE HAVE A HISTORY OF
LOSSES AND CASH FLOW DEFICITS; THE MARKET FOR OUR COMMON STOCK IS LIMITED;
TRADING IN OUR SECURITIES MAY BE RESTRICTED DUE TO COMPLIANCE WITH APPLICABLE
PENNY STOCK REGULATIONS; OUR COMPANY IS SUBJECT TO CONTROL BY A PRINCIPAL
STOCKHOLDER; A SIGNIFICANT PORTION OF THE NET PROCEEDS OF ANY POTENTIAL
FINANCING MAY BE USED FOR THE PAYMENT OF RELATED PARTY AND OTHER INDEBTEDNESS
AND FOR SALARIES OF EXECUTIVES AND KEY PERSONNEL; WE REQUIRE ADDITIONAL
FINANCING FOR OUR BUSINESS ACTIVITIES; WE HAVE GRANTED SIGNIFICANT BENEFITS
UNDER CERTAIN EXISTING AND PROPOSED EMPLOYMENT AGREEMENTS; RAPID TECHNOLOGICAL
CHANGE COULD RENDER CERTAIN OF OUR PRODUCTS AND PROPOSED PRODUCTS OBSOLETE OR
NON-COMPETITIVE; WE CANNOT PREDICT MARKET ACCEPTANCE FOR OUR PROPOSED PRODUCTS;
THE BUSINESS IN WHICH WE INTEND TO ENGAGE IN IS SUBJECT TO INTENSE COMPETITION;
THE BOARD OF DIRECTORS MAY ISSUE ADDITIONAL PREFERRED STOCK IN THE FUTURE; A
SUBSTANTIAL NUMBER OF OUR SHARES OF COMMON STOCK WILL BE AVAILABLE FOR FUTURE
SALE IN THE PUBLIC MARKET; WE DO NOT INTEND TO PAY ANY DIVIDENDS ON THE COMMON
STOCK IN THE FORESEEABLE FUTURE; THE LIABILITY OF OUR OFFICERS AND DIRECTORS TO
US AND OUR SHAREHOLDERS IS LIMITED; DEPENDENCE ON KEY SUPPLIER; RELIANCE ON
MANAGEMENT, KEY PERSONNEL AND CONSULTANTS; WE COULD BE SUBJECT TO POTENTIAL
UNINSURED LIABILITY, THE RISKS RELATING TO LEGAL PROCEEDINGS AND OTHER FACTORS
BOTH REFERENCED AND NOT REFERENCED IN THIS ANNUAL REPORT ON FORM 10-KSB,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS
CONTAINED THROUGHOUT THIS ANNUAL REPORT ON FORM 10-KSB.
2
PART I
Item 1. Description of Business.
Organization
On June 6, 2000 The Finx Group, Inc. was organized as a Delaware
corporation. Effective June 30, 2000, Fingermatrix, Inc., our predecessor
company was merged into The Finx Group, Inc. We have 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", "The Finx
Group", the "Company" or the "Registrant".
Our Business
Products
Since September 30, 2002, our business has solely focused on the
marketing and sale of our two primary security products: the GIL 2001 Portal
Control System and the Secured Card Solutions Software Program. During 2003 and
2002, we generated revenues of $36,000 and $6,000 from our Secured Card
Solutions.
The GIL 2001 Portal Control System is state of the art for security
processing and human flow management and is built on step-by-step security
processor logic using automated, structural, portal barriers for executing
positive/authorized or negative/unauthorized access commands. This system
includes embedded defensive countermeasures for piggybacked entry, weapons or
credentials pass back, run back breeches and protection against forced entry.
Standard subsystem capabilities include metal detection for weapon and asset
detection, and this system's processing capabilities include execution of access
commands from any access control, detection sensor or digital imaging subsystem.
With the full physical separation and step-by-step logistics provided by GIL
2001 Portal Control Systems, access control at key checkpoints can be configured
in a way to completely secure a facility. The GIL 2001 Portal Control System is
designed to create a Secure Physical Firewall that creates a Safe Work Area for
employees, visitors, and customers who must pass through our firewall into a
secure area. One of the many advantages of this firewall is that it reduces
day-to-day confrontational situations.
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 GIL 2001 Portal Control System directly through sales
consultants and through channel marketing relationships that we have recently
secured. We have resale agreements with Northrop Grumman Mission Systems and
Lockheed Martin Mission Systems, which give us significant access and existing
in-roads for the department of defense and other governmental customers. Georal
International, Ltd. has installed the GIL-2001 at the Department of Justice in
Washington, DC, Rikers Island Prison, Citi Corp.'s Data Center and Exodus
Communications Corp.
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.
3
Competition
Although there are two direct competitors (Tonali and Secure Access
Portals, Inc.), we believe that our product has the following key advantages:
(1) significantly higher throughput, meaning more people can use the system per
hour than our competitors; (2) U.S. State Department Certification; (3) it is
domestically manufactured; and, (4) we have broad patent protection on the
Georal portal.
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
The Finx Group, Inc. holding company currently employs two individuals
who are its 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 2003 and as of December 31, 2003 we have a capital
deficiency of $5.158 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 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.
4
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 is
convertible into approximately 739,450,000 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, 2003 of approximately $2.7 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.
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 have
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
5
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 1,000,000 shares of preferred stock,
$.01 par value (the "Preferred Stock"). The Preferred Stock may be issued in one
or more series, the terms of which may be determined at the discretion of our
Board of Directors, without further approval of the stockholders. Among the
rights of the holders of any additional Preferred Stock that may be authorized
by the Board of Directors are rates of dividends, voting rights, terms of
redemption, amounts payable upon liquidation, sinking fund provisions and
conversion rights. One of the effects of any such additional Preferred Stock
that may be issued in the future may be to enable the Board of Directors to
render more difficult or to discourage an attempt to obtain control of the
Company by means of a tender offer, proxy contest, merger or otherwise and
thereby protect the continuity of our current management. The terms of any such
additional Preferred Stock that may be issued in the future could adversely
affect the rights of the holders of common stock. Accordingly, the issuance of
any such shares of Preferred Stock may discourage bids for the common stock or
adversely affect the market price of the common stock.
A Substantial Number of Our Shares of Common Stock Will Be Available for Future
Sale in the Public Market
As of April 13, 2003, approximately 114 million shares of our
outstanding common stock are "restricted securities" as that term is defined in
Rule 144 promulgated under the Securities Act and in the future may be sold only
pursuant to an effective Registration Statement under the Securities Act, in
compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Furthermore, any shares that are issued upon
the exercise of any outstanding warrants or options will be eligible for sale,
without registration under Rule 144 (subject to the aforementioned volume
restrictions of the Rule) following the expiration of two years from the date of
issuance.
We 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.
Dependence on a Key Supplier
Georal International, Ltd. is the sole supplier of our primary security
product pursuant to a license which expires on August 31, 2014. Should Georal
International, Ltd. experience difficulty in providing product in a timely
manner, this could adversely affect our revenues and reputation in the market.
Additionally, the failure on the part of Georal International, Ltd. to develop
and manufacture or supply new or enhanced products that meet or anticipate
technological changes on a timely and cost-competitive basis could have a
materially adverse effect on our financial condition and results of operations.
6
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 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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the National Association of
Securities Dealers, Inc.'s Over the Counter Bulletin Board ("OTC Bulletin
Board") under the symbol "FXGP". The following table sets forth, for the periods
indicated, the quarterly range of the high and low closing bid prices per share
of our common stock as reported by the OTC Bulletin Board Trading and market
services. Such bid quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Bid Prices
Quarter ended High Low
---- ---
March 31, 2003 $0.0340 $0.0040
June 30, 2003 $0.0260 $0.0035
September 30, 2003 $0.0080 $0.0021
December 31, 2003 $0.0065 $0.0025
Quarter ended
March 31, 2002 $0.81 $0.08
June 30, 2002 $0.23 $0.042
September 30, 2002 $0.12 $0.029
December 31, 2002 $0.095 $0.019
The closing price of common stock on April 13, 2004 was $0.0085.
We have authorized 750,000,000 shares of our $0.01 par value common
stock. As of April 13, 2004, there were approximately 4,000 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.
7
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS MAY BE DEEMED TO INCLUDE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISK AND UNCERTAINTY. ALTHOUGH MANAGEMENT BELIEVES THAT ITS EXPECTATIONS ARE
BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO ASSURANCE THAT ITS EXPECTATIONS
WILL BE ACHIEVED.
THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS HEREIN (THE "CAUTIONARY STATEMENTS")
INCLUDE, WITHOUT LIMITATION: WE HAVE A HISTORY OF LOSSES AND CASH FLOW DEFICITS;
THE MARKET FOR OUR COMMON STOCK IS LIMITED; TRADING IN OUR SECURITIES MAY BE
RESTRICTED DUE TO COMPLIANCE WITH APPLICABLE PENNY STOCK REGULATIONS; OUR
COMPANY IS SUBJECT TO CONTROL BY A PRINCIPAL STOCKHOLDER; A SIGNIFICANT PORTION
OF THE NET PROCEEDS OF ANY POTENTIAL FINANCING MAY BE USED FOR THE PAYMENT OF
RELATED PARTY AND OTHER INDEBTEDNESS AND FOR SALARIES OF EXECUTIVES AND KEY
PERSONNEL; WE REQUIRE ADDITIONAL FINANCING FOR OUR BUSINESS ACTIVITIES; WE HAVE
GRANTED SIGNIFICANT BENEFITS UNDER CERTAIN EXISTING AND PROPOSED EMPLOYMENT
AGREEMENTS; RAPID TECHNOLOGICAL CHANGE COULD RENDER CERTAIN OF OUR PRODUCTS AND
PROPOSED PRODUCTS OBSOLETE OR NON-COMPETITIVE; WE CANNOT PREDICT MARKET
ACCEPTANCE FOR OUR PROPOSED PRODUCTS; THE BUSINESS IN WHICH WE INTEND TO ENGAGE
IN IS SUBJECT TO INTENSE COMPETITION; THE BOARD OF DIRECTORS MAY ISSUE
ADDITIONAL PREFERRED STOCK IN THE FUTURE; A SUBSTANTIAL NUMBER OF OUR SHARES OF
COMMON STOCK WILL BE AVAILABLE FOR FUTURE SALE IN THE PUBLIC MARKET; WE DO NOT
INTEND TO PAY ANY DIVIDENDS ON THE COMMON STOCK IN THE FORESEEABLE FUTURE; THE
LIABILITY OF OUR OFFICERS AND DIRECTORS TO US AND OUR SHAREHOLDERS IS LIMITED;
DEPENDENCE ON KEY SUPPLIER; RELIANCE ON MANAGEMENT, KEY PERSONNEL AND
CONSULTANTS; WE COULD BE SUBJECT TO POTENTIAL UNINSURED LIABILITY, THE RISKS
RELATING TO LEGAL PROCEEDINGS AND OTHER FACTORS BOTH REFERENCED AND NOT
REFERENCED IN THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY DOES NOT
UNDERTAKE ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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
Revenues
In September 2002 we made a decision to focus our business exclusively
on our Security Systems business and on October 18, 2002 we disposed of all non
security system segments. Currently, our primary source of future revenues, if
any, will be generated under our Georal license for the sale of Georal security
products, including the
8
GIL-2001 security door. Potential revenues may be generated from the marketing
and distribution of the Georal security products to both those customers for
which we have exclusive distribution rights and to others as to which we have
non-exclusive rights. In December of 2002 TRW, Inc., now operating as Northrop
Grumman Mission Systems, agreed to market and distribute the Georal security
products. In March of 2003, Lockheed Martin Mission Systems also agreed to
market and distribute the Georal security products. In April 2003, we entered
into reciprocal marketing agreements with Advanced Biometric Security, Inc.
("ABS") which provide both us and ABS with non-exclusive marketing rights for
each others security product lines. In July 2003, we entered into a
representation agreement with Thacher Associates, LLC, who will market our
security products. Many of the customers to whom we will seek to market the
Georal security systems will be domestic and foreign government purchasers or
commercial users. On December 11, 2001, the GIL-2001 security door received
certification from the U.S. State Department necessary for its possible
procurement for use in U.S. embassies, consulates and other governmental
installations both in the U.S. and abroad. In October 2002, Georal
International, Ltd. received broad patent approval for its security entrance
system from the United States Patent Trademark Office (Patent 6,472,984). The
patent received by Georal International, Ltd. covers the secured portal which is
the subject of the Georal license and may provide barriers to entry and possibly
eliminate competition from other portal manufacturers.
Our original marketing strategy was focused solely on sales of the
GIL-2001 security door to the U.S. State Department. In 2002, we expanded our
marketing efforts to include all customers under the exclusive distribution
agreement and have built a sales team for such purpose. We recognize that on our
own, we face competition from companies which have far greater financial
resources and personnel which is why we made the strategic decision to establish
our marketing channel relationships with large organizations, including Northrop
Grumman Mission Systems and Lock Martin Mission Systems. Although we believe
that we have a unique product and that the GIL-2001 security door is the only
product of its type that is certified by the U.S. State Department, we give no
assurances that we will be able to generate meaningful revenues using our Georal
license.
We also offer Secured Card Solutions from our development and sale of
software programs for Device Management and Smart Card applications. We have
provided Virginia Commonwealth University with two of our Secured Card software
solutions - the "Secured Recreational Sports Solution" and "The Secured Card
Solution". "The Secured Recreational Sports Solution" which currently serves
Virginia Commonwealth University from three locations offering a variety of
fitness, aquatics and intramurals. The activities are offered to all students,
faculty, and university and hospital employees. The Secured Recreational Sports
Solution's database is integrated with the VCU card database for single
university identification. The Secured Recreational Sports Solution handles all
check-in of members, locker assignment and equipment check-in and check-out. It
also keeps track of member billing and payroll deduction. Further, it handles
member suspensions and automatic emailing of special events. The Secured Sports
Recreation Solution application is written using the new Microsoft.NET
architecture. We have also entered into a services and support agreement with
Florida International University for the installation, support and use of our
Secured Recreational Sports Solution. During 2003 and 2002, we generated
revenues of $36,000 and $6,000, respectively, from Secured Card Solutions
contracts.
Operating Expenses
For both 2003 and 2002 our significant operating expenses were
executive payroll, and marketing expense and professional fees. Executive
payroll is currently $723,000 annually. As of December 31, 2003, none of the
salary owed to Lewis S. Schiller, our chief executive officer, has been paid and
he is owed cumulative salary of $2 million. As of December 31, 2003, $66,000 of
salary owed to Grazyna B. Wnuk, our vice-president, has been paid and she is
owed cumulative salary of $727,000. 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 $3 million
was incurred in 2002 and is being amortized over of the life of the Georal
License resulting in ongoing annual amortization expense of $245,000. Such
amortization for 2003 and 2002 was $245,000 and $130,000, respectively.
During 2003 and 2002, we have compensated our employees and consultants
with stock options and stock grants that have been registered on Form S-8 and
unregistered stock purchase warrants. During 2003 and 2002 stock based
compensation was $4.042 million and $2.264 million, respectively.
We incur interest expense at an annual rate of 9% on related party
notes payable. For 2003 and 2002 interest expenses on related party notes
payable was $107,000 and $119,000, respectively.
As a result of our decision to focus our business exclusively on our
Security Systems business we disposed of all non security system segments
resulting in a loss on disposal of $9,000 for 2003 and a gain on disposal of
$1.4
9
million for 2002. The income (loss) from the operations of discontinued segments
was $13,000 for 2003 and $(367,000) for 2002.
Financial Condition - Liquidity and Capital Resources
As of December 31, 2003, our working capital deficiency approximates
$7.8 million, representing an increase of $1.1 million from December 31, 2002.
Effective September 30, 2002, Lewis S. Schiller, the Company's chief executive
officer and chairman of the board, agreed to defer payment of his salary until
January 1, 2004, and Trinity, the Company's largest stockholder which is wholly
owned by Mr. Schiller, agreed to defer, until January 1, 2004, payment of
accrued interest on notes payable to Trinity and payment of accrued dividends on
preferred stock held by Trinity. Such amounts were presented as long-term
liabilities as of December 31, 2002. As of December 31, 2003, the remaining
deferral period is less than twelve months and such amounts are presented as
current liabilities. During 2003 we used $849,000 for our continuing operating
activities. Sources of funds for 2003 were net advances from related parties of
$489,000 and proceeds from the exercise of stock options of $352,000.
Since April 1999, our primary source of funding has been Trinity. 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 47,619 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 237,190,476
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.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 9,006,976 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.
Pursuant to the terms of the September 30, 2002 stock purchase
agreement to sell Sequential Electronic Systems, Inc. and S-Tech, Inc., we have
agreed to indemnify Lewis S. Schiller for any claims made against him regarding
$1.1 million of delinquent payroll taxes owed by Sequential Electronic Systems,
Inc. and S-Tech, Inc. at the time of their disposal. A reserve of $550,000 has
been recorded by management based upon our best estimate of the ultimate
liability. 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.
The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
However, we have generated nominal revenues and we have a history of operating
losses and as of December 31, 2003 have a working capital deficiency of $7.8
million and a capital deficiency of $5.2 million. Management is currently
seeking additional financing; however we can give no assurance that such
financing will be consummated or that any financing which we receive will be
adequate. Further, in view of our stock price, any financing is likely to result
in substantial dilution to our stockholders. Our continuation in business is
dependent upon our ability to obtain financing, and to use the proceeds from any
such financing to increase our business to achieve profitable operations. The
accompanying consolidated financial statements do not include any adjustments
that would result should we be unable to continue as a going concern.
Item 7. Financial Statements and Supplementary Data.
The information required by Item 7. is included as Exhibit 99.1 to this
Form 10-KSB.
10
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, 2003. 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 73 Chief Executive Officer, President and
Chairman of the Board
Grazyna B. Wnuk 40 Secretary, Vice-President and Director
Lewis S. Schiller was appointed our Chairman of the Board, Chief
Executive Officer and President of The Finx 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.
11
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 $100,000 (on an annualized basis)
during 2003 and 2002.
Long-term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Securities
Name and Restricted Underlying LTIP
Principal Other Annual Stock Options/SARs Payouts All Other
Position Year Salary Bonus Compensation Awards (#) ($) Compensation
-------------- ------ -------------- --------- ---------------- ----------- ---------------- --------- ----------------
Lewis S.
Schiller,
CEO and 2003 $551,000(1) -- -- -- 370,000,000 -- --
Chairman 2002 $525,000(1) -- -- -- 24,500,000 -- --
Grazyna B.
Wnuk, VP and 2003 $220,500(2) -- -- -- 151,499,998 -- --
Secretary 2002 $197,500(2) -- -- -- 12,500,000 -- --
(1) Mr. Lewis S. Schiller's salary for 2003 and 2002 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 2003 and 2002 is pursuant to her employment agreement
which was executed in 2002. Approximately $66,000 of Ms. Wnuk's salary has been
paid to her since April of 1999 and all such unpaid amounts are accrued as an
expense in our consolidated financial statements.
Option/SAR Grants in 2003
The following table presents information regarding the options to
purchase shares of our common stock issued to our executive officers who are
included in the preceding summary compensation table for 2003.
------------------------------------ ---------------- --------------------- --------------- ---------------------
Number of
Securities % of Total
Underlying Options/SARs Exercise
Options/ Granted to or Base
SARs Employees in Price Expiration
Name Granted (#) 2003 ($/Share) Date
------------------------------------ ---------------- --------------------- --------------- ---------------------
Lewis S. Schiller, CEO and Chairman 350,000,000 67% $0.01 November 17, 2007
10,000,000 2% $0.00 July 24, 2006
10,000,000 2% $0.00 August 26, 2006
------------------------------------ ---------------- --------------------- --------------- ---------------------
370,000,000
------------------------------------ ---------------- --------------------- --------------- ---------------------
Grazyna B. Wnuk, VP and Secretary 125,000,000 24% $0.01 November 17, 2007
12,000,000 2% $0.00 July 24, 2006
14,499,998 2% $0.00 March 17, 2006
------------------------------------ ---------------- --------------------- --------------- ---------------------
12,500,000
------------------------------------ ---------------- --------------------- --------------- ---------------------
12
Aggregated Option/SAR Exercises in Last Year and Year-end Option/SAR Values
The following table presents information regarding the unexercised
options to purchase shares of our common stock held by our executive officers
who are included in the preceding summary compensation table as of December 31,
2003.
-------------------- --------------- ------------ ------------------------------ --------------------------------
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options/SARs at Year
Options/SARs at Year End End ($)
Shares Value (#)
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexer-cisable Exercisable Unexercisable
-------------------- --------------- ------------ -------------- --------------- -------------- -----------------
Lewis S. Schiller,
CEO and Chairman 20,000,000 $80,000 350,000,000 - - -
Grazyna B. Wnuk, 26,499,998 $136,200 125,000,000 - - -
VP and Secretary
-------------------- --------------- ------------ -------------- --------------- -------------- -----------------
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.
13
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, 2003 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, 2002 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 Common
Beneficial Stock
Name and address of Beneficial Owner Ownership Outstanding(1)
------------------------------------------------------------------------- --------------------- -----------------
Officers and Directors
----------------------
Lewis S. Schiller
21634 Club Villa Circle
Boca Raton, FL 33433 740,949,651 50%(2)
Grazyna B. Wnuk
21634 Club Villa Circle
Boca Raton, FL 33433 70,926,865 9%(3)
Officer and directors as a group (2 persons) 777,352,706 51%(2)(3)
Other Beneficial Owners
-----------------------
The Trinity Group I, Inc.
21634 Club Villa Circle
Boca Raton, FL 33433 715,489,701 49%(4)
Alan Risi
150-38 12th Avenue
Whitestone, NY 11357 50,049,874 7%
(1) The "Percent of Common Stock Outstanding" is based on the 749,715,948 shares
of common stock outstanding as of December 31, 2003 and the assumption that the
related beneficial owner had converted or exercised all potential common stock
related to that beneficial owner if such beneficial owner had a right to do so
within 60 days after December 31, 2003.
(2) Includes 5,459,950 shares directly owned by Lewis S. Schiller, 20,000,000
shares underlying warrants to purchase shares and 715,489,701 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 is the natural
person considered 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, 16,375 shares of Series B. Preferred Stock and 715,489,701
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.
None of the shares of Series A Preferred Stock, Series B Preferred Stock or
Common Stock are held jointly by The Trinity Group-I, Inc and Mr. Schiller. It
does not include 350,000,000 shares subject to a warrant issued in November 2003
as such there were not sufficient shares to exercise the warrant within 60 days
after year end.
(3) Includes 26,403,055 shares directly owned by Grazyna B. Wnuk, 10,000,000
shares underlying a warrant to purchase shares and 34,523,810 shares from the
assumed conversion of shares of Series B preferred stock. Each share 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 ($0.0021 as of April 13, 2004). It does
not include 125,000,000 shares subject to a warrant issued in November 2003 as
such there were not sufficient shares to exercise the warrant within 60 days
after year end.
14
(4) Includes 10,013,500 shares directly owned by The Trinity Group-I, Inc. and
705,476,191 shares from the assumed conversion of the Series B preferred stock.
Each share 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 ($0.0021 as
of April 13, 2004). 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 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 or Common Stock are
held jointly by The Trinity Group-I, Inc and Mr. Schiller.
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, 2003 aggregated
approximately $$713,000. 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, 2003 $780,000 of such interest remains unpaid. Interest
expense on related party notes was $107,000 for 2003 and $119,000 for 2002.
On October 31, 2002, Carol Schiller, the wife of Lewis S. Schiller,
agreed to convert $400,000 of related party debt owed to her into 10,000,000
shares of The Finx Group common stock at the rate of $.04 per share, the fair
value of the common stock on the date of the conversion.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Starnet365.com, Inc., Lewis S. Schiller, The
Finx Group Chief Executive Officer and Chairman of the Board, Grazyna B. Wnuk,
The Finx Group Vice-President and Secretary, members of Lewis S. Schiller's
immediate family (collectively, the "Starnet Sellers") and Thomas Banks Ltd.,
(the "Starnet Stock Purchase Agreement"), Thomas Banks Ltd. agreed to purchase
98.05% of the issued and outstanding capital stock of Starnet365.com, Inc. from
the Starnet Sellers for one dollar ($1) and the Company agreed to cancel
approximately $1.3 million of principal and interest owed by Starnet365.com,
Inc. to the Company. As of the date of the Starnet Stock Purchase Agreement,
Starnet365.com, Inc. had an excess of liabilities over assets of approximately
$1.7 million, including the $1.3 million owed to the Company, resulting in
remaining liabilities of approximately $444,000. The Company believes that it
may be required to pay approximately $132,000 of such remaining liabilities
based on the existence of corporate guarantees previously made on such amounts
by the Company. As a result of the disposal of Starnet365.com, Inc., the net
reduction in the Company's liabilities approximated $268,000 and the gain on
disposal approximated $312,000.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Shopclue.com, Inc., Lewis S. Schiller, the
Company's Chief Executive Officer and Chairman of the Board, Grazyna B. Wnuk,
the Company's Vice-President and Secretary, members of Lewis S. Schiller's
immediate family (collectively, the "Shopclue Sellers") and Thomas Banks Ltd.
dated as of September 30, 2002, (the "Shopclue Stock Purchase Agreement"),
Thomas Banks agreed to purchase 100% of the issued and outstanding capital stock
of Shopclue.com, Inc. from the Shopclue Sellers for one dollar ($1) and we
agreed to cancel approximately $8,000 of principal and interest owed by
Shopclue.com, Inc. to the Company. As of the date of the Shopclue Stock Purchase
Agreement, Shopclue.com, Inc. had an excess of liabilities over assets of
approximately $340,000, including the $8,000 owed to the Company, resulting in
remaining liabilities of approximately $332,000. The Company believes that it
may be required to pay approximately $169,000 of such remaining liabilities
which represent delinquent payroll taxes. As a result of the disposal of
Shopclue.com, Inc., the net reduction in the Company's liabilities and the
corresponding gain on disposal approximated $163,000.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Bizchase, Inc., Lewis S. Schiller, the Company's
Chief Executive Officer and Chairman of the Board, Grazyna B. Wnuk, the
Company's Vice-President and Secretary, members of Lewis S. Schiller's immediate
family (collectively, the "Bizchase Sellers") and Thomas Banks Ltd. dated as of
September 30, 2002, (the "Bizchase Stock Purchase Agreement"), Thomas Banks Ltd.
agreed to purchase 100% of the issued and outstanding capital stock of Bizchase,
Inc. from the Bizchase Sellers for one dollar ($1) and we agreed to cancel
approximately $2 million of principal and interest owed by Bizchase, Inc. to the
Company. As of the date of the Bizchase Stock Purchase Agreement, Bizchase, Inc.
had an excess of liabilities over assets of approximately $2.3 million,
including the $2 million owed to the Company, resulting in remaining liabilities
of approximately $296,000. The Company believes that it may be required pay
approximately $136,000 of such remaining liabilities of which $99,000 relates to
15
delinquent payroll taxes and $37,000 relates to corporate guarantees. As a
result of the disposal of Bizchase, Inc., the net reduction in the Company's
liabilities and the corresponding gain on disposal approximated $160,000.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Sequential Electronic Systems, Inc., S-Tech,
Inc., Defense Manufacturing and Systems, Inc. and Trinity Group Acquisition
Corp. dated as of September 30, 2002 (the "Sequential and S-Tech Stock Purchase
Agreement"), Trinity Group Acquisition Corp. agreed to purchase 100% of the
issued and outstanding capital of Sequential Electronic Systems, Inc., S-Tech,
Inc., Defense Manufacturing and Systems, Inc. from The Finx Group for one dollar
($1) and The Finx Group agreed to cancel approximately $2.3 million of principal
and interest owed by Sequential Electronic Systems, Inc. and S-Tech, Inc. to The
Finx Group. Defense Manufacturing Systems, Inc. was wholly owned by The Finx
Group but had no operating activities since its organization. Trinity Group
Acquisition Corp. is wholly owned by Lewis S. Schiller, the Company's Chief
Executive Officer and Chairman of the Board. As of the date of the Sequential
and S-Tech Stock Purchase Agreement, Sequential Electronic Systems, Inc. and
S-Tech, Inc. had aggregate assets of $1.2 million and aggregate liabilities of
$2.4 million, excluding the $3.1 million owed to the Company. The aggregate
liabilities included $1.1 million of delinquent payroll taxes and we have agreed
to indemnify Lewis S. Schiller for any claims made against him regarding such
delinquent payroll taxes and in connection therewith have reserved $550,000 of
such payroll taxes against the gain on disposal of Sequential Electronic
Systems, Inc. and S-Tech, Inc. The Trinity Group-I, Inc. is the Company's
controlling shareholder and both The Trinity Group-I, Inc. and Trinity Group
Acquisition Corp. are wholly owned by Lewis S. Schiller, and the Sequential and
S-Tech Stock Purchase Agreement was not consummated at arms-length. However, we
believe that because the transaction will reduce the Company's liabilities by
approximately $1.8 million that such transaction is in the Company's best
interests. As a result of the disposal of Sequential Electronic Systems, Inc.,
S-Tech, Inc., Defense Manufacturing and Systems, Inc., the net reduction in the
Company's liabilities approximated $1.8 million and the gain on disposal which
approximated $458,000 was recorded as an addition to paid-in capital because the
transaction was consummated with the controlling stockholder of the Company.
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 7,500,000 shares of Common Stock,
representing $0.20 per share, the fair market value of the Common Stock on May
7, 2001 and 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 47,619
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 237,190,476 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 the nine months ended September 30, 2003, Trinity
converted an aggregate of 1,560 shares of Series B Preferred Stock into an
aggregate of 39,000,000 shares of common stock.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 9,006,976 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.
16
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 2003 and 2002, we were billed the following fees by MOORE
STEPHENS, P.C.:
2003 2002
------ -------
Audit Fees $16,000 $50,000
Tax Fees - -
Other Fees - -
------ ------
$16,000 $50,000
====== ======
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.
17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE FINX GROUP, INC.
/S/ Lewis S. Schiller,
Chief Executive Officer
November 19, 2004
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
November 19, 2004
18
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.
19
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.
20
Exhibit 31.1
THE FINX 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 The Finx
Group, Inc. for the year ended December 31, 2003, I, Lewis S. Schiller, Chief
Executive Officer and Chief Accounting Officer of The Finx 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, 2003
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, 2003 fairly presents, in all material
respects, the financial condition and results of
operations of The FInx.
/s/ Lewis S. Schiller,
Chief Executive Officer and Chief Accounting Officer
November 19, 2004
21
Exhibit 31.2
THE FINX 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 The Finx 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
November 19, 2004
22
Exhibit (99.1)
Financial Statements and Supplementary Data
The following exhibit comprises the Financial Statements and Supplementary Data
as specified by Item 7 of Part II of Form 10-KSB.
23
The Finx Group, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2003
F-1
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
The Finx Group, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheet of The Finx
Group, Inc., and its subsidiaries, as of December 31, 2003, and the related
consolidated statements of operations, changes in capital deficiency, and cash
flows for each of the two years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Finx Group, Inc and its subsidiaries as of December 31, 2003, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2003, in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements; (1) the Company has a history of net
losses for the two years ended December 31, 2003, (2) as of December 31, 2003
the Company has a working capital deficiency of $7.8 million and a capital
deficiency of $5.2 million and (3) the Company has relied on continuing
financial support from its controlling stockholder. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Moore Stephens, PC
Certified Public Accountants
Cranford, New Jersey
November 11, 2004
F-2
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Balance Sheet
--------------------------------------------------------------------------------
As of December 31, 2003
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment, cost $ 90,000
Less accumulated depreciation (90,000)
--------------------------------------------------------------------------------
Net furniture, fixtures and equipment -
--------------------------------------------------------------------------------
Other assets:
Exclusive license agreement, net (see Note 2) 2,627,000
--------------------------------------------------------------------------------
Total other assets 2,627,000
--------------------------------------------------------------------------------
TOTAL ASSETS $ 2,627,000
--------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICIENCY
--------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,474,000
Accrued payroll and payroll taxes, executive officers 2,740,000
Notes payable executive officers, including interest 1,583,000
Notes payable, related parties, including accrued interest 301,000
Other current liabilities 476,000
Current liabilities of discontinued segments 1,211,000
--------------------------------------------------------------------------------
Total current liabilities 7,785,000
--------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
--------------------------------------------------------------------------------
CAPITAL DEFICIENCY
--------------------------------------------------------------------------------
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 1,000 Series A preferred shares issued
and outstanding; 15,540 Series B preferred shares
issued and outstanding as of December 31, 2003 (see
Note 6) 1,554,000
Common stock, $.01 par value; 750,000,000 shares
authorized; 749,715,948 shares issued and outstanding
as of December 31, 2003 (see Note 6 and 7) 7,497,000
Additional paid-in capital, common stock 27,567,000
Accumulated deficit (41,775,000)
--------------------------------------------------------------------------------
Capital deficiency (5,157,000)
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,628,000
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-3
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statements of Operations
--------------------------------------------------------------------------------
Year Ended December 31, 2003 2002
-----------------------------------------------------------------------------------------------------------
Revenues $ 36,000 $ 6,000
-----------------------------------------------------------------------------------------------------------
General and administrative expenses 2,062,000 3,022,000
Compensation expense from issuance of stock options 4,042,000 2,264,000
-----------------------------------------------------------------------------------------------------------
Total operating expenses 6,104,000 5,286,000
-----------------------------------------------------------------------------------------------------------
Operating loss (6,068,000) (5,280,000)
Other income 19,000 89,000
Interest expense, related parties (107,000) (119,000)
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations (6,156,000) (5,310,000)
Discontinued Operations: (See Note 11)
(Loss) gain on disposal of discontinued segments (9,000) 1,371,000
Gain (loss) from operations of discontinued segments 13,000 (367,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (6,152,000) $ (4,306,000)
-----------------------------------------------------------------------------------------------------------
Loss per share computation- basic and diluted:
Loss from continuing operations $ (6,156,000) $ (5,310,000)
Less dividends on preferred shares (127,000) (157,000)
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
stockholders (6,283,000) (5,467,000)
(Loss) gain on disposal of discontinued segments (9,000) 1,371,000
Income (loss) from operations of discontinued segments 13,000 (367,000)
-----------------------------------------------------------------------------------------------------------
Net loss available to common stockholders $ (6,279,000) $ (4,463,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 63,528,683 63,528,683
-----------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted:
Loss from continuing operations ($0.01) ($0.09)
(Loss) gain on disposal of discontinued segments (0.00) 0.02
Income (loss) from operations of discontinued segments 0.00 (0.01)
-----------------------------------------------------------------------------------------------------------
Net loss ($0.01) ($0.08)
-----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-4
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Year Ended December 31, 2003 2002
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Loss from continuing operations $ (6,156,000) $ (5,310,000)
(Loss) gain on disposal of discontinued segments (9,000) 1,371,000
-----------------------------------------------------------------------------------------------------------
(6,165,000) (3,939,000)
Adjustments to reconcile loss from continuing operations to net cash -
continuing operations:
Loss (gain) on disposal of segments 9,000 (1,370,000)
Depreciation and amortization 245,000 130,000
Non cash expense from issuance of stock options and
stock purchase warrants 4,042,000 2,264,000
Other adjustments - 120,000
Changes in assets and liabilities:
Other assets - -
Accounts payable 178,000 395,000
Accrued payroll 772,000 723,000
Accrued interest expense, related parties 97,000 (22,000)
Other current liabilities (27,000) (7,000)
-----------------------------------------------------------------------------------------------------------
Net cash-continuing operations (849,000) (1,706,000)
-----------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations 13,000 (367,000)
Adjustments to reconcile loss from operations of discontinued
segments to net cash - discontinued operations:
Changes in the reserve for obsolete and slow moving inventory - 117,000
Depreciation and amortization - 16,000
Non cash expense from issuance of stock options - 39,000
Impairment charge - 191,000
Bad debt expense - 14,000
Net change in other assets and liabilities (5,000) 185,000
-----------------------------------------------------------------------------------------------------------
Net cash-discontinued operations 8,000 195,000
-----------------------------------------------------------------------------------------------------------
Net cash - operating activities (841,000) (1,511,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Other investing activities - (43,000)
-----------------------------------------------------------------------------------------------------------
Net cash - investing activities - (43,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 718,000 500,000
Repayments on related party loans (229,000) (442,000)
Proceeds from exercise of stock options 352,000 1,495,000
Other financing activities - 1,000
-----------------------------------------------------------------------------------------------------------
Net cash - financing activities 841,000 1,554,000
-----------------------------------------------------------------------------------------------------------
Net change in cash - -
Cash - Beginning of period - -
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ - $ -
-----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 10,000 $ 141,000
Income Taxes $ - $ -
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
continued
F-5
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Year Ended December 31, 2003 and 2002
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the 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, 9,006,976 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.
During the year ended December 31, 2002
During 2002, the Company obtained four separate expansions to its
exclusive license agreement with GIL Security Systems, Inc. for which it issued
preferred stock convertible into an aggregate of 45,000,000 shares of common
stock, par value $.01 (the "Common Stock"). Using the Black-Scholes option
valuation formula, the convertible preferred stock was valued at $2.98 million,
the amount included in other assets as "Exclusive License Agreement" All such
preferred stock was converted into Common Stock during 2002.
On May 17, 2002, the Company settled its $17,000 note payable
obligations upon the issuance of 353,844 shares of Common Stock. The value of
the shares remitted to the creditor approximated $17,000.
On various dates during 2002, the Company issued options and warrants
to purchase an aggregate of 93,000,165 shares of Common Stock to its employees
and consultants. Such options and warrants, using the Black-Scholes option
valuation formula, were valued at $2.3 million of which $2.264 million was
charged to operations as a non cash expense in 2002 and $39,000 represented fees
to a consultant who assisted the Company in disposing of its discontinued
segments and was charged against the 2002 gain on disposal of such discontinued
operations.
On October 31, 2002, Carol Schiller, the wife of Lewis S. Schiller, the
Company's Chief Executive Officer and Chairman of the Board, agreed to convert
$400,000 of related party debt owed to her into 10,000,000 Common Shares at the
rate of $.04 per share, the fair value of the Common Stock on the date of the
conversion.
See Note 11 for non-cash activity in relation to discontinued
operations.
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-6
------------------------------------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Capital Deficiency
For the Years Ended December 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
Preferred
Preferred Common Preferred Stock in Common
Shares Shares Par Excess of par Par
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2002 18,100 153,915,329 - (*) $1,710,000 $1,539,000
Issuance of stock options
and warrants - - - - -
Stock issued for repayment
of notes payable - 9,006,976 - - 90,000
Issuance of stock grants - 292,998,999 - - 2,930,000
Exercise of stock options - 17,604,168 - - 176,000
Conversion of related party
debt into shares of series
B preferred stock 5,747 - - (*) 575,000 -
Conversion of series B
preferred stock (7,307) 276,190,476 - (*) (731,000) 2,762,000
Accrued dividends on
preferred stock - - - - -
Net loss for the year
ended December 31, 2003 - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2003 16,540 749,715,948 $ - (*) $1,554,000 $7,497,000
------------------------------------------------------------------------------------------------------------------------------------
(*) - Less than $1,000
------------------------------------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
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 $29,186,000 ($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 (58,000) - 32,000 - 32,000
Issuance of stock grants (1,362,000) - 1,568,000 - 1,568,000
Exercise of stock options 176,000 - 352,000 - 352,000
Conversion of related party
debt into shares of series
B preferred stock 240,000 - 335,000 - 335,000
Conversion of series B
preferred stock (2,031,000) - - - -
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 $27,567,000 ($41,776,000) ($5,158,000) $ - ($5,158,000)
------------------------------------------------------------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
F-7
------------------------------------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Capital Deficiency
For the Year Ended December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
Preferred
Preferred Common Preferred Stock in Common
Shares Shares Par Excess of par Par
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2001 21,000 40,356,545 - (*) 2,000,000 $405,000
Issuance of stock options - - - - -
Stock issued for repayment
of a loan from Carol
Schiller - 10,000,000 - - 100,000
Stock issued for repayment of
notes payable - 353,844 - - 3,000
Fractional share exchange - 64,775 - - 1,000
Exercise of stock purchase
warrants - 148,500 - - 1,000
Exercise of stock options - 47,991,665 - - 479,000
Issuance of series C and D
preferred stock for
exclusive license 450,000 - 4,000 2,976,000 -
Conversion of series B
preferred stock (2,900) 10,000,000 - (*) (290,000) 100,000
Conversion of series C and D
preferred stock (450,000) 45,000,000 (4,000) (2,976,000) 450,000
Accrued dividends on
preferred stock - - - - -
Gain on disposal of
discontinued business
segment to a related party - - - - -
Net loss for the year
ended December 31, 2002 - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2002 18,100 153,915,329 $ - (*) $1,710,000 $1,539,000
------------------------------------------------------------------------------------------------------------------------------------
* - Less than $1,000
------------------------------------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Consolidated Statement of Changes in Capital Deficiency
For the Year Ended December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-in Accumulated Subscriptions
Capital Deficit sub-total Receivable Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2001 $21,862,000 ($31,033,000) ($6,766,000) ($262,000) ($7,028,000)
Issuance of stock options 2,303,000 - 2,303,000 - 2,303,000
Stock issued for repayment
of a loan from Carol
Schiller 300,000 - 400,000 - 400,000
Stock issued for repayment of
notes payable 14,000 - 17,000 - 17,000
Fractional share exchange (1,000) - - - -
Exercise of stock purchase
warrants - - 1,000 - 1,000
Exercise of stock options 1,528,000 - 2,007,000 ($513,000) 1,494,000
Issuance of series C and D
preferred stock for
exclusive license - - 2,980,000 - 2,980,000
Conversion of series B
preferred stock 190,000 - - - -
Conversion of series C and D
preferred stock 2,530,000 - - - -
Accrued dividends on
preferred stock - (157,000) (157,000) - (157,000)
Gain on disposal of
discontinued business
segment to a related party 460,000 - 460,000 - 460,000
Net loss for the year
ended December 31, 2002 - (4,307,000) (4,307,000) - (4,307,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 2002 $29,186,000 ($35,497,000) ($3,062,000) ($775,000) ($3,837,000)
------------------------------------------------------------------------------------------------------------------------------------
* - Less than $1,000
See notes to consolidated financial statements.
F-8
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization
On June 6, 2000 The Finx Group, Inc. was organized as a Delaware corporation.
Effective June 30, 2000, Fingermatrix, Inc., the predecessor company was merged
into The Finx Group, Inc. The Finx Group, 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 The Finx Group, Inc. and its
subsidiaries may be collectively referred to as "The Finx Group", the "Company"
or the "Registrant".
Nature of Operations
In September 2002, the Company's Board of Directors approved a plan to
focus the Company's business exclusively on its security systems business and on
October 18, 2002 the Company disposed of all non security system business
segments. The Company's primary source of future revenues, if any, is expected
to be generated under its exclusive license agreement (the "Georal License")
with GIL Security Systems, Inc. ("GIL"). GIL is a subsidiary of Georal
International, Ltd. ("Georal") and holds all world-wide rights related to the
intellectual property related to the GIL security systems, including trademarks,
patents and technology, as licensed to it by Alan J. Risi, the controlling owner
of both GIL and Georal. GIL is engaged in the manufacture and sale of security
entrance systems for use as a security device by a variety of customers at
airports, federal buildings, court houses, embassies, correctional facilities,
schools, governmental operations, department stores and other retail outlets
(the "Georal Security Products"). The Georal License gives us distribution
rights for the sale of all of the Georal Security Products, including all models
of the GIL-2001 security door, to specified categories of customers. The Company
may market and distribute the Georal Security Products to both those customers
for which it has exclusive distribution rights and to others as to which it has
non-exclusive rights.
On December 13, 2002 the Company entered into a memorandum of
understanding incorporating a reseller agreement with TRW, Inc., which has been
acquired by Northrop Grumman Corp. and is now operating as Northrop Grumman
Mission Systems. The agreement gives Northrop Grumman Mission Systems the right
to market Georal Security Products to the Federal Government and other
significant commercial opportunities. On March 26, 2003, the Company entered
into a distribution and marketing agreement with Lockheed Martin. The agreement
gives Lockheed Martin worldwide rights to market the Georal Security Products.
In April 2003, the Company entered into reciprocal marketing agreements with
Advanced Biometric Security, Inc. ("ABS") which provide both the Company and ABS
with non-exclusive marketing rights for each others security product lines. ABS
provides enterprise software and services related to identity management and the
security of physical and logical assets. Many of the customers to whom the
Company will seek to market the Georal Security Systems will be domestic and
foreign government purchasers as well as commercial users. On December 11, 2001,
the GIL-2001 security door received certification from the U.S. State Department
necessary for its possible procurement for use in U.S. embassies, consulates and
other governmental installations both in the U.S. and abroad. In October 2002,
Georal received broad patent approval for its security entrance system from the
United States Patent Trademark Office (Patent 6,472,984). The patent received by
Georal covers the secured portal which is the subject of the Georal License.
The Company 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.
During 2002, the Company generated revenues of $6,000 from its sales of Secured
Card Solutions.
F-9
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, 2003
and as of December 31, 2003 has a working capital deficiency of $7.785 million
and a capital deficiency of $5.158 million. During 2003 and 2002 the Company has
relied on financial support from its controlling stockholder, Trinity Group-I,
Inc. ("Trinity") and other related parties and 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 The Finx
Group, Inc. 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, 2003.
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, 2003, the Company's furniture, fixtures
and equipment, having a cost basis of $90,000 are fully depreciated.
Depreciation expense during 2002 was $22,000.
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, 2003, management expects
those assets related to its continuing operations to be fully recoverable.
Revenue Recognition
The Company recognizes revenues when a product is shipped, and from
services when performed.
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.
F-10
Basic and Diluted Loss Per Share
Basic and diluted per share results for all periods presented were
computed based on the net earnings or loss for the respective periods. The
weighted average number of common shares outstanding during the period was used
in the calculation of basic earnings (loss) per share. In accordance with FAS
128, "Earnings Per Share," the weighted average number of common shares used in
the calculation of diluted per share amounts is adjusted for the dilutive
effects of stock options based on the treasury stock method and the assumed
conversion of convertible preferred stock only if an entity records earnings
from continuing operations (i.e., before discontinued operations), as such
adjustments would otherwise be anti-dilutive to earnings per share from
continuing operations. As a result of the Company recording a loss from
continuing operations, the average number of common shares used in the
calculation of diluted loss per share have not been adjusted for the effects of
1,462,361 potential common shares from unexercised stock options and warrants
and 739,542,000 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 2003 does
not have any deposits with financial institutions in excess of federally insured
limits.
2. Exclusive License Agreement
On September 13, 1999, the Company obtained the Georal license which
gives the Company distribution rights for the sale of Georal security products
to 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 1,049,874 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 4,000,000 million 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 6,000,000 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 10,000,000 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
F-11
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.
3. Executive Debt Deferrals
Effective September 30, 2002, Lewis S. Schiller, the Company's chief
executive officer and chairman of the board, agreed to defer payment of his
salary until January 1, 2004, and Trinity, the Company's largest stockholder
which is wholly owned by Mr. Schiller, agreed to defer, until January 1, 2004,
payment of accrued interest on notes payable to Trinity and payment of accrued
dividends on preferred stock held by Trinity. As of December 31, 2003, such
amounts are presented as current liabilities.
4. 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 7,500,000 shares of Common Stock,
representing $0.20 per share, the fair market value of the Common Stock on May
7, 2001 and 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 47,619
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 237,190,476 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 39,000,000 shares of
common stock.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 9,006,976 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.
Total unpaid and outstanding advances from such related parties as of
December 31, 2003 aggregated $713,000. 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, 2003 $780,000 of such interest remains
unpaid. Interest expense on related party notes was $107,000 and $119,000 for
2003 and 2002, respectively.
F-12
5. Notes Payable, Other
On April 8, 2002, the Company entered into a settlement agreement to
repay its $17,000 note payable obligations. On April 8, 2002 the Company placed
500,000 shares of its Common Stock into escrow and on May 17, 2002, in final
settlement, 353,844 shares of Common Stock held in escrow were remitted to the
creditor and 146,156 shares of Common Stock were returned to the Company. The
value of the shares remitted to the creditor approximated $17,000.
6. Capital Stock
The Company has authorized 750,000,000 shares of $.01 par value Common
Stock. As of December 31, 2003, the Company has 749,715,948 shares issued and
outstanding. The Company has not declared dividends on its Common Stock. On
September 4, 2002, the Company filed a definitive information statement in order
to increase its authorized shares of Common Stock from 50,000,000 shares to
750,000,000 shares which was authorized by the written consent of the holders of
a majority of the voting power of the outstanding shares of the Common Stock.
The Company has authorized 1,000,000 of preferred stock. Dividends
accrued on the Company's preferred stock aggregated $462,000 as of December 31,
2003 of which $127,000 was accrued during 2003 and $157,000 was accrued during
2002.
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 7,500,000 shares of Common Stock,
representing $0.20 per share, the fair market value of the Common Stock on May
7, 2001 and 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 47,619
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 237,190,476 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, 2003, 16,540 shares of Series B
preferred stock are outstanding which can be converted into an aggregate
of739,542,000 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-13
Series C 2% Convertible Preferred Stock
During 2002, the Company issued 410,000 shares of Series C Preferred
Stock in order to obtain expansions to the Georal License. Each share of Series
C Preferred Stock is convertible into 100 shares of Common Stock entitles the
holder to annual dividends at the rate of 2% per share. During 2002 all of the
Series C Preferred Stock was converted into 41,000,000 shares of Common Stock
(See Note 2).
Series D 2% Convertible Preferred Stock
During 2002, the Company issued 40,000 shares of Series D Preferred
Stock in order to obtain an expansion to the Georal License. Each share of
Series D Preferred Stock is convertible into 100 shares of Common Stock entitles
the holder to annual dividends at the rate of 2% per share. During 2002, all of
the Series D Preferred Stock was converted into 4,000,000 shares of Common Stock
(See Note 2).
7. Stock Options and Warrants
On January 2, 2003, the Company issued to a non-affiliated consultant,
a warrant to purchase 5,000,000 shares of common stock at an exercise price of
$.04 per share resulting in stock compensation expense of $100,000. The fair
value of the Company's common stock at the date of issuance of the warrant was
$.021 per share.
On January 17, 2003, the Company issued to non-affiliated consultants,
stock options to purchase 17,604,168 shares of common stock at an exercise price
of $.02 per share resulting in stock compensation expense of $366,000. All of
such options were exercised on January 17, 2003. The fair value of the Company's
common stock at the date of issuance of the options was $.024 per share.
On February 28, 2003, the Company issued to a non-affiliated consultant
a warrant to purchase 2,200,000 shares of common stock at an exercise price of
$.04 per share and warrant to purchase 2,800,000 shares of common stock at an
exercise price of $.01 per share. The fair value of the Company's common stock
at the date of issuance of the warrants was $.01 per share and the stock
compensation expense resulting from the issuance of such warrants was $46,000.
On March 17, 2003, the Company granted 100,000,000 shares of common
stock of which 85,000,002 shares were issued to non-affiliated consultants,
resulting in stock compensation expense of $425,000, and 14,999,998 shares were
issued to Grazyna B. Wnuk, the Company's vice-president and a director,
resulting in stock compensation expense of $75,000.
On June 1, 2003, the Company issued to a non-affiliated consultant, a
warrant to purchase 100,000,000 shares of common stock at an exercise price of
$.01 per share resulting in stock compensation expense of $271,000. The fair
value of the Company's common stock at the date of issuance of the warrant was
$.006 per share.
On June 2, 2003, the Company issued to an investor for $5,000, a
warrant to purchase 50,000,000 shares of common stock at an exercise price of
$.01 per share resulting in stock compensation expense of $135,000. The fair
value of the Company's common stock at the date of issuance of the warrant was
$.006 per share.
On July 25, 2003, the Company issued 138,500,000 shares of its common
stock pursuant to stock grant rights of which 116,500,000 shares were issued to
non-affiliated consultants, resulting in stock compensation expense of $594,000,
10,000,000 shares were issued to Lewis S. Schiller, resulting in stock
compensation expense of $51,000, and 12,000,000 shares were issued to Grazyna B.
Wnuk, resulting in stock compensation expense of $61,000.
On August 27, 2003 the Company issued 47,499,000 shares of its common
stock pursuant to stock grant rights of which 37,499,000 were issued to
non-affiliated consultants resulting in stock compensation expense of $109,000
and 10,000,000 shares of Common Stock was issued to Lewis S. Schiller, resulting
in stock compensation expense of $28,000.
On October 14, 2003 the Company issued 7,000,000 shares of its common
stock pursuant to stock grant right to a non-affiliated consultants resulting in
stock compensation expense of $29,000.
On November 17, 2003, the Company issued warrants to purchase an
aggregate of 1,257,500,000 shares of Common Stock at an exercise price of $0.01
per share resulting in stock compensation expense of $977,000.
F-14
In April 2002, the Company issued options and warrants to purchase an
aggregate of 5,300,000 shares of common stock to non-affiliated consultants,
resulting in stock compensation expense of $157,000.
In April of 2002, the Company (a) issued to Lewis S. Schiller, its
chief executive officer a director and controlling shareholder, a warrant to
purchase 20,000,000 million shares of common stock at $0.043 per share, the fair
market value at date of issuance and (b) issued to Grazyna B. Wnuk, its
Vice-President and director, a warrant to purchase 10,000,000 shares of common
stock at $0.043 per share, the fair market value at date of issuance.
Originally, these warrants issued to Lewis S. Schiller provided for an exercise
price of $0.001 per share with regards to 10,000,000 shares and such exercise
price was subsequently increased to $0.043 per share. These warrants issued to
Lewis S. Schiller and Grazyna B. Wnuk provided for cashless exercise provisions
which required the Company to calculate stock compensation expense on the
underlying shares for each reporting period that the warrants or any portion
thereof were outstanding. As of June 30, 2002, the fair value per share was
greater than the exercise price and the resulting stock compensation expense of
$2,010,000 was charged to operations in the second quarter of 2002. As of
September 30, 2002, the fair value per share was less than the exercise price
and as a result the $2,010,000 stock compensation expense charged in the second
quarter of 2002 was reversed in the third quarter of 2002. On October 31, 2002,
Lewis S. Schiller and Grazyna B. Wnuk agreed to remove the cashless exercise
provisions from these warrants and as a result there will be no future stock
compensation expense related to such warrants. On November 17, 2003, all of such
warrants exercise price was reset to $.01 per share.
In May 2002, the Company issued to Lewis S. Schiller an option to
purchase 1,500,000 shares of common stock at an exercise price of $.04 per share
resulting in stock compensation expense of $15,000.
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 during
2002 to estimate the fair value of options granted:
-------------------------------- ---------------- ---------------------
2003 2002
---- ----
-------------------------------- ---------------- ---------------------
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,
2003 and 2002 is as follows:
2003 2002
-----------------------------------------------------------------------------------------------------------
Net loss as reported $ (6,152,000) $ (4,306,000)
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) (1,287,000)
-----------------------------------------------------------------------------------------------------------
Pro forma net loss under FAS No. 123 $ (6,745,000) $ (5,593,000)
-----------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share:
As reported (0.01) (0.08)
Pro forma under SFAS No. 123 (0.01) (0.06)
-----------------------------------------------------------------------------------------------------------
F-15
The following table summarizes the Company's fixed stock purchase
warrants and options for 2003 and 2002.
---------------------------------------------------- -------------- ----------------- -------------- -----------------
2003 2002
Weighted Weighted
2003 Average 2002 Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Outstanding at beginning of year 44,861,500 $0.15 2,350,000 $0.15
Granted 1,728,103,168 $0.05 90,701,665 $0.05
Exercised (310,603,168) $0.04 (48,140,165) $0.04
Forfeited/Expired (50,000) $0.15 (50,000) $0.15
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Outstanding at end of year 1,462,361,500 $0.05 44,861,500 $0.05
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Options exercisable at year end 1,460,161,500 $0.05 44,861,500 $0.15
---------------------------------------------------- -------------- ----------------- -------------- -----------------
Weighted-average fair value of options granted
during the year $0.002 $0.04
---------------------------------------------------- -------------- ----------------- -------------- -----------------
As of December 31, 2003, the Company has outstanding warrants to
purchase 1,460,161,500 shares of Common Stock at prices ranging from $.01 to
$0.15 per share having a weighted-average remaining contractual life of 4.176
years.
8. 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, 2003 aggregated
approximately $$713,000. 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, 2003 $780,000 of such interest remains unpaid. Interest
expense on related party notes was $107,000 for 2003 and $119,000 for 2002.
On October 31, 2002, Carol Schiller, the wife of Lewis S. Schiller,
agreed to convert $400,000 of related party debt owed to her into 10,000,000
shares of The Finx Group common stock at the rate of $.04 per share, the fair
value of the common stock on the date of the conversion.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Starnet365.com, Inc., Lewis S. Schiller, The
Finx Group Chief Executive Officer and Chairman of the Board, Grazyna B. Wnuk,
The Finx Group Vice-President and Secretary, members of Lewis S. Schiller's
immediate family (collectively, the "Starnet Sellers") and Thomas Banks Ltd.,
(the "Starnet Stock Purchase Agreement"), Thomas Banks Ltd. agreed to purchase
98.05% of the issued and outstanding capital stock of Starnet365.com, Inc. from
the Starnet Sellers for one dollar ($1) and the Company agreed to cancel
approximately $1.3 million of principal and interest owed by Starnet365.com,
Inc. to the Company. As of the date of the Starnet Stock Purchase Agreement,
Starnet365.com, Inc. had an excess of liabilities over assets of approximately
$1.7 million, including the $1.3 million owed to the Company, resulting in
remaining liabilities of approximately $444,000. The Company believes that it
may be required to pay approximately $132,000 of such remaining liabilities
based on the existence of corporate guarantees previously made on such amounts
by the Company. As a result of the disposal of Starnet365.com, Inc., the net
reduction in the Company's liabilities approximated $268,000 and the gain on
disposal approximated $312,000.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Shopclue.com, Inc., Lewis S. Schiller, the
Company's Chief Executive Officer and Chairman of the Board, Grazyna B. Wnuk,
the Company's Vice-President and Secretary, members of Lewis S. Schiller's
immediate family (collectively, the "Shopclue Sellers") and Thomas Banks Ltd.
dated as of September 30, 2002, (the "Shopclue Stock Purchase Agreement"),
Thomas Banks agreed to purchase 100% of the issued and outstanding capital stock
of Shopclue.com, Inc. from the Shopclue Sellers for one dollar ($1) and we
agreed to cancel approximately $8,000 of principal and interest owed by
Shopclue.com, Inc. to the Company. As of the date of the Shopclue Stock Purchase
Agreement, Shopclue.com, Inc. had an excess of liabilities over assets of
approximately $340,000, including the $8,000 owed to the Company, resulting in
remaining liabilities of approximately $332,000. The Company believes
F-16
that it may be required to pay approximately $169,000 of such remaining
liabilities which represent delinquent payroll taxes. As a result of the
disposal of Shopclue.com, Inc., the net reduction in the Company's liabilities
and the corresponding gain on disposal approximated $163,000.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Bizchase, Inc., Lewis S. Schiller, the Company's
Chief Executive Officer and Chairman of the Board, Grazyna B. Wnuk, the
Company's Vice-President and Secretary, members of Lewis S. Schiller's immediate
family (collectively, the "Bizchase Sellers") and Thomas Banks Ltd. dated as of
September 30, 2002, (the "Bizchase Stock Purchase Agreement"), Thomas Banks Ltd.
agreed to purchase 100% of the issued and outstanding capital stock of Bizchase,
Inc. from the Bizchase Sellers for one dollar ($1) and we agreed to cancel
approximately $2 million of principal and interest owed by Bizchase, Inc. to the
Company. As of the date of the Bizchase Stock Purchase Agreement, Bizchase, Inc.
had an excess of liabilities over assets of approximately $2.3 million,
including the $2 million owed to the Company, resulting in remaining liabilities
of approximately $296,000. The Company believes that it may be required pay
approximately $136,000 of such remaining liabilities of which $99,000 relates to
delinquent payroll taxes and $37,000 relates to corporate guarantees. As a
result of the disposal of Bizchase, Inc., the net reduction in the Company's
liabilities and the corresponding gain on disposal approximated $160,000.
On October 18, 2002, pursuant to the terms of a stock purchase
agreement among The Finx Group, Sequential Electronic Systems, Inc., S-Tech,
Inc., Defense Manufacturing and Systems, Inc. and Trinity Group Acquisition
Corp. dated as of September 30, 2002 (the "Sequential and S-Tech Stock Purchase
Agreement"), Trinity Group Acquisition Corp. agreed to purchase 100% of the
issued and outstanding capital of Sequential Electronic Systems, Inc., S-Tech,
Inc., Defense Manufacturing and Systems, Inc. from The Finx Group for one dollar
($1) and The Finx Group agreed to cancel approximately $2.3 million of principal
and interest owed by Sequential Electronic Systems, Inc. and S-Tech, Inc. to The
Finx Group. Defense Manufacturing Systems, Inc. was wholly owned by The Finx
Group but had no operating activities since its organization. Trinity Group
Acquisition Corp. is wholly owned by Lewis S. Schiller, the Company's Chief
Executive Officer and Chairman of the Board. As of the date of the Sequential
and S-Tech Stock Purchase Agreement, Sequential Electronic Systems, Inc. and
S-Tech, Inc. had aggregate assets of $1.2 million and aggregate liabilities of
$2.4 million, excluding the $3.1 million owed to the Company. The aggregate
liabilities included $1.1 million of delinquent payroll taxes and we have agreed
to indemnify Lewis S. Schiller for any claims made against him regarding such
delinquent payroll taxes and in connection therewith have reserved $550,000 of
such payroll taxes against the gain on disposal of Sequential Electronic
Systems, Inc. and S-Tech, Inc. The Trinity Group-I, Inc. is the Company's
controlling shareholder and both The Trinity Group-I, Inc. and Trinity Group
Acquisition Corp. are wholly owned by Lewis S. Schiller, and the Sequential and
S-Tech Stock Purchase Agreement was not consummated at arms-length. However, we
believe that because the transaction will reduce the Company's liabilities by
approximately $1.8 million that such transaction is in the Company's best
interests. As a result of the disposal of Sequential Electronic Systems, Inc.,
S-Tech, Inc., Defense Manufacturing and Systems, Inc., the net reduction in the
Company's liabilities approximated $1.8 million and the gain on disposal which
approximated $458,000 was recorded as an addition to paid-in capital because the
transaction was consummated with the controlling stockholder of the Company.
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 7,500,000 shares of Common Stock,
representing $0.20 per share, the fair market value of the Common Stock on May
7, 2001 and 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 47,619
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 237,190,476 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
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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 the nine months ended September 30, 2003, Trinity
converted an aggregate of 1,560 shares of Series B Preferred Stock into an
aggregate of 39,000,000 shares of common stock.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 9,006,976 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.
9. Income Taxes
The Company, as of December 31, 2003, has available approximately $55.5
million of net operating loss carry forwards to reduce future Federal and state
income taxes, representing a net deferred tax asset of approximately $19.4
million. Based upon the level of historical tax losses, the Company has
established a valuation allowance against the entire net deferred tax asset.
This represents an increase in the valuation allowance of approximately $.4
million from December 31, 2002. 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
------------------------------------------------------------------------
2004 5,616,000
2005 2,207,000
2006 3,144,000
2007 3,023,000
2008 2,044,000
2009 1,851,000
2010 2,050,000
2011 3,171,000
2012 194,000
2018 1,080,000
2019 1,319,000
2020 8,261,000
2021 11,176,000
2022 4,177,000
2023 6,152,000
------------------------------------------------------------------------
$55,465,000
------------------------------------------------------------------------
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 2003 and 2002, and may be further limited
if substantial changes in the Company ownership were to occur.
10. Commitments and Contingencies
Operating Leases
As of December 31, 2003, 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, 2003 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.
11. Discontinued Operations
During 2002, the Company sold its operations which were not related to
the security systems business for nominal consideration. The discontinued
operations were conducted by the following subsidiaries: Sequential Electronic
Systems, Inc. ("Sequential"), S-Tech, Inc. ("S-Tech"), Granite Technologies,
Inc. ("Granite Technologies"), Shopclue.com, Inc. ("Shopclue"), Bizchase, Inc.
("Bizchase") and Starnet365.com, Inc. ("Starnet").
Except for the sale of Sequential and S-Tech, all of the discontinued
operations were sold to nonaffiliated parties. Sequential and S-Tech were sold
to a corporation owned by Lewis S. Schiller, the Company's president, chief
executive officer and controlling stockholder. Since the liabilities of the
subsidiaries that were transferred exceeded their respective assets, the Company
recognized, during the third quarter of 2002, a gain from the disposition of
discontinued operations of $1,330,000. 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. In certain cases, the Company retained
intellectual property rights; however, those rights have been fully expensed.
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 the second quarter of 2003.
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The loss from operations of discontinued operations for the years ended
December 31, 2003 and 2002 are summarized as follows:
Income (Loss) from Operations of
Discontinued Segments
The Year Ended December 31,
2003 2002
--------------------------------------------------------------------------------
Bizchase $ - $ (46,000)
Shopclue - (26,000)
Granite Technologies - (223,000)
Starnet - (346,000)
S-Tech - (15,000)
Sequential - (200,000)
FMX (99,000) (133,000)
Less intercompany transactions 112,000 622,000
--------------------------------------------------------------------------------
$ 13,000 $ (367,000)
--------------------------------------------------------------------------------
12. 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
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 Company does not
expect the adoption of FIN 46 or FIN 46R to have a material effect on its
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.
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.
F-20
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.
The Company expects that the adoption of the new statements will not
have a significant impact on its financial statements.
F-21