UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to section 13 or 15(d)Of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2000 - Commission File #000-26421
Milinx Business Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 91-1954074
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 3827 - 1001 4th Avenue, Seattle, WA, 98154
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(Address of principal executive offices) (Zip Code)
(206) 621.7032 & (604) 647.7600
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
[X]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of September 30, 2000:
Number of shares of common stock outstanding as of September 30, 2000:
16,600,644
Documents incorporated by reference: None
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Table of Contents
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Item 1. Business..................................................................................................3
Item 2. Properties................................................................................................9
Item 3. Legal Proceedings........................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders......................................................10
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........
Item 6. Selected Financial Data........................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................
Item 8. Financial Statements and Supplementary Data....................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 10. Directors and Executive Officers of the Registrant............................
Item 11. Executive Compensation........................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management................
Item 13. Certain Relationships and Related Transactions................................
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............
Item 15. Signatures....................................................................
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PART I
Item 1.Business.
EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DESCRIPTION OF OUR BUSINESS
CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON OUR PRESENT EXPECTATIONS AND
PROJECTIONS, WHICH INVOLVE CONSIDERABLE RISK AND UNCERTAINTY. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF A MULTITUDE OF FACTORS INCLUDING THOSE SET FORTH IN THIS ANNUAL
REPORT. UNLESS SPECIFIED OTHERWISE AS USED HEREIN, THE TERMS "WE"," US", OR
"OUR" REFER TO MILINX BUSINESS GROUP, INC. AND ITS WHOLLY OWNED SUBSIDIARIES.
About Milinx
The Company was incorporated in the State of Delaware on December 10, 1998 and
commenced active operations in February 1999. Milinx is an Application Service
Provider (ASP) whose market focus principally encompasses the SOHO (Small
Office/Home Office), SME (Small/Medium Enterprise), and various Reseller market
sectors in North America. The term ASP did not even exist until 1998, when Clare
Gillan, an IT Industry analyst with International Data Corporation, defined this
term to describe this new software rental model. The term ASP as used in this
document is a company that is remotely hosting a software application and
providing access and use of it to clients over a secure network on a recurring
fee or subscription basis. These services are delivered over a Wide Area Network
(WAN) or a secure Virtual Private Network (VPN) in both cases usually over the
Internet.
On December 9, 1999, Milinx entered into a Stock Exchange Agreement with
Forestay Corporation, a public reporting company registered in Delaware, to
acquire all assets and liabilities of that Company in exchange for 250,000
shares of our common stock. As a consequence of that acquisition, we then
elected successor status under the Exchange Act 12g-3. The terms and conditions
of that Agreement are set forth in detail in our Form 8-K filed on January 15,
2000, and Form 8-KA filed on February 15,2000.
Our Firm is headquartered in Seattle, Washington but our primary business
operations are presently conducted by our wholly owned British Columbia
subsidiary, Milinx Business Services, Inc., in Vancouver, BC. Our first Data
Center is domiciled in Vancouver, along with all of our 106 employees including
15 in Administration, 2 in Corporate Finance, 11 in Accounting 29 in Business
Development, Marketing, and Customer Support, 28 in IT and Web Development
Services, 9 in Research and Advanced Technology, 6 in Data Center Security and
Management, and 5 in Investor Relations.
The Company expects to relocate its Administration and Marketing activities to
Seattle, Washington by June 30, 2001 but intends to continue to maintain
significant operations in British Columbia to service our clientele and to
continue to enjoy what we perceive to be the benefits of the lower cost of doing
our business in that Province as compared with most metropolitan areas in the
United States. Also, in that all of the Company's revenues are collected in US
Dollars and most of its recurring expenditures are paid in Canadian Dollars,
Milinx presently enjoys a favorable exchange rate financial benefit. While the
Data Center in Vancouver can service up to 1,000,000 subscribers, we intend to
establish similar facilities in the United States and then expand to serve
markets in Europe and Asia.
<PAGE>
The ASP Business Opportunity
We believe that the ASP delivery model of Information Technology Services (IT)
is very well positioned to become the dominant global business computing model
of the 21st Century, based upon forecasts of market penetration from leading
technology research analysts expanding from US $6 billion dollars in 2001
(Forrester), US $23 billion dollars in 2003, to US $44 billion dollars in 2004
(Ovum). According to International Data Corporation "...the ASP Model will
function like a `disruptive innovation', threatening to encroach upon and
displace existing ways of doing business for all sorts of IT vendors".
To the customer, the ASP model appears to offer the following distinct
advantages:
o Lower Total Cost of Ownership.
o The latest software is readily available and more affordable.
o Applications can be deployed much more expeditiously.
o Focus can be on the customer's core competency rather than supporting
and implementing expensive IT applications.
o Changing to newer and more productive software and hardware is much
more rapid and less expensive.
o Scalability is insured as the right solutions are put in place and
then expanded.
o Capital can be freed to invest in the business.
o No IT Staff or consultants need to be retained by the customer.
The Milinx Approach
We intend to utilize our core competency as a full-service Application Service
Provider to become a leading firm in the middle ground of the ASP Market with
our focus encompassing both the customers sought and the applications delivered
to them. It is not the intention of Milinx to initially compete with other ASPs
in providing complex applications to large corporations. There are many ASPs in
that market segment who, in our opinion, are finding acceptance by prospective
clients difficult as those firms have already invested in extensive and
expensive IT solutions that they will only slowly abandon. We believe that
initial market penetration is much more likely to occur through an entry level
suite of products targeting smaller and medium sized businesses which tend to be
more adaptable, open to new innovations, and lack the capital resources for
technology infrastructure and qualified IT personnel.
The strategic plan is to focus our initial efforts on providing our customers
with an integrated application solution set that addresses the core needs of
businesses, expands presence, increases productivity, and builds lasting
relationships. Our Customer Sales and Support Center is available for all levels
of assistance and is staffed by competent personnel on a twenty four hours a day
seven days a week (24/7) basis. We believe that our extensive investment and
total commitment to this effort will greatly enhance our ability to acquire and
retain subscribers and facilitate the sale of our existing and new offerings to
them.
<PAGE>
SOFTWARE APPLICATIONS AND PATENTS PENDING
-----------------------------------------
The Company has purchased software licenses for Virtual Office and Unified
Messaging from iPlanet (a Sun/Netscape Alliance) and Uforce Inc. to accommodate
500,000 subscribers with additional payments required to reach 1,000,000
subscribers. In addition, we purchased BillerXpert, which provides Internet bill
presentment and payment solutions to our customers.
Many of our competitors base their business model on reselling third party
applications, which rapidly leads to lower commoditization pricing. At Milinx,
however, we are focused on developing innovative proprietary technology that is
either unique to us or enhances the third party applications that we deliver to
customers. We believe this business strategy will create our sustainable
competitive advantage, so critical to short and long-term success. The Company
has eight patent-pending applications, which are under review in both Canada and
the United States. If these patents are granted to us, they have an expiration
date of twenty (20) years from date of filing. In our opinion, this approach
will distinguish us dramatically in the marketplace by adding value to our
services along with the avoidance of expensive licensing agreements with third
party vendors.
PRODUCT OVERVIEW
----------------
Milinx is now and will be making our initial offering to customers in three
increments that began in June 2000 and will conclude in April 2001. However, as
market conditions dictate and the results of our Research and Development
efforts come to fruition, new services may be added to supplement present
offerings and continually expand our product line. Initially, our two primary
target markets for Milinx's services will be the Small Office/Home Office (SOHO)
market (under 10 employees) and the Small to Medium Enterprises (SME) market
(under 500 employees).
Already available are the following services:
miOffice: Servicing both the SOHO and SME markets, this suite of applications
currently includes collaboration and file-sharing applications as
well as e-mail and calendaring solutions.
miMessaging: This Unified Messaging solution includes the ability to have all
voice, paging, fax and e-mail messages sent to one mailbox for
dissemination to the customer, as well as expanded functions to
include "follow-me messaging", voice recognition and text-to speech
conversion.
<PAGE>
October to December 2000
The fourth quarter of 2000 is expected by us to see the following new services
added to the Milinx suite of offerings:
miTraining: Focused primarily to the SOHO market, this Internet based
application suite provides online training for our clientele.
miBilling: Expected to be deployed by the end of 2000,this application is
targeted at SOHO and SME organizations that want to avail
themselves of, web centric business billing techniques and
procedures to properly control and monitor their accounts
receivables with the latest technology available.
miCommerce: This website-creation solution is aimed at the SOHO and SME
businesses that seek to establish an online catalogue and sell
their products securely over the Internet with instant credit card
billing and transaction remittances. Currently, in the final stage
of development, it is expected to be ready for deployment during
the fourth quarter of 2000.
January to March 2001
miOffice VO: Aimed at the SOHO and SME markets, this next stage of MiOffice
will include word processing, presentation and spreadsheet
solutions. This suite of products is currently in the developmental
stage, and with integration into our suite of services by March
2001.
miCRM: Customer Relationship Management (CRM) solutions are by definition
intended to centralize and organize all customer information for
any company. Milinx's solution is expected to be available in early
2001 to service a primary target market of SMEs along with a
secondary market of SOHOs.
miPortal: This application creates a secure, customized online environment
that allows our customers to bring employees, partners, suppliers
and customers together onto the same web centric environment. This
development-stage solution is expected to deploy late in the first
quarter of 2001.
miCast: This application increases the versatility and utility of e-mail,
allowing our customers to add voiceover functionality to their
e-mails without significantly increasing the size of the e-mail
file. In the development stage, this solution is expected to be
available by April 2001.
MARKETING AND SALES CHANNELS
----------------------------
With the completion of our first Data Center in August 2000, the implementation
of our Marketing Plan began in earnest. We researched our known and perceived
competitors along with identifying the initial suite of offerings that would be
most appealing to the marketplace.
<PAGE>
Initially, we are offering our products through three distinct, but
complementary, sales channels:
o Direct Corporate Sales Force: Targeting businesses of sufficient
existing or potential size to justify the deployment of Milinx Sales
Personnel, supplemented by IT Professionals, to address technical
challenges and issues. Usually, this is a firm of 100+ employees that
would greatly benefit from outsourcing some or all of its
applications.
o Direct Sales Network: An independent targeted group of 5,000 business
professionals who contract with our wholly owned subsidiary, ASP
Technology One, Inc., to resell Milinx products for a commission,
specifically oriented to the SOHO and SME markets.
o Internet Service Providers (ISPs) and Telcos: Offering Milinx Products
to the existing customer base of these firms in a revenue sharing
model. As an example, in September 2000, we successfully concluded a
Strategic Marketing Alliance with AOL Canada to offer our services to
that firm's subscribers. We expect that this marketing opportunity
will expand and allow us valuable entree into a very wide spectrum of
geographic locations. By leveraging these alliances we expect to be
able to introduce our services to millions of users in a very cost
effective and timely manner.
We believe that the timing is very opportune for this business model for the
following reasons:
o Rapidly increasing awareness and acceptance of web based software
solutions.
o The exponential growth that has occurred and we expect to continue to
occur of E-Commerce and Internet usage (according to CommerceNet
Research Center, projected users will number 490 million in 2002).
o The availability of web based software products.
o The expanding demands of small and medium sized businesses for cost
effective, robust, and the latest IT Solutions along with a profitable
and facile Internet presence.
collectively, in our opinion, the offerings with which Milinx has entered the
ASP market represent a suite of products encompassing depth, functionality and
comprehensiveness for our key target sectors, and positions the Company to score
rapid penetration gains that we believe necessary to achieve a significant
market share.
Competition
-----------
The markets for our services are now, and will continue to be, extremely
competitive. To obtain customers, we are and will be are expending considerable
financial resources on marketing our services. These payments include
advertising, commissions, share warrants and options and other financial
inducements. In that many of our competition have substantially more capital
resources than Milinx, our ability to compete may be impaired now and in the
future.
<PAGE>
There are over 600 firms that classify all or a significant portion of their
business to be functionally ASP in nature and many more that provide IT services
over the Internet. However, the two principal differentiating factors are the
comprehensiveness of the product offerings and competitiveness of the pricing
structure to our customers.
First, Milinx is a "pure play" ASP which purposely does not now offer ancillary
Internet services. We believe that our concentrated focus on our core business
is the most expedient route to positive cash flow and profitability. In our
opinion, new web centric business applications will significantly dilute
revenues currently being derived through high margin consulting services.
Second, our market focus is, by design, targeted to the SMEs and SOHOs rather
than on being an Enterprise Resource Provider ("ERP") to Fortune 2000 Companies,
which, in our opinion, is the most difficult market segment to penetrate and
unquestionably is the most competitive. We believe that the strategy of many of
our competitors is fallacious in that reselling standardized third party
applications through restrictive licensing agreements will quickly lead to
intense price competition and low profit margins. The development of proprietary
applications and less expensive indirect sales channels will, in our opinion,
give Milinx a distinct cost advantage although third party applications would be
expeditious to implement.
Our present and prospective competitors include other ASPs, systems integrators,
ISPs, software companies, and telecommunication companies ("Telcos"). Unlike
Milinx, many of these firms have long established operating histories and
substantial financial resources. However, we believe the Company can secure a
profitable and long term market niche by providing the following services:
o A comprehensive suite of services that is secure, scaleable,
functional, and reliable.
o Proprietary applications, which do not merely resell other third party
applications. o Competitive subscription fees.
o Customized web sites unique to that customer.
o All basic IT business services for our target market.
o Total quality 24/7 customer service.
o Strategic relationships to build customer base through indirect
channels.
ASPs. We compete with other companies whose stated core business is providing
ASP services. These competitors include USinternetworking, FutureLink, Corio,
Applicast, Interliant, Interpath, NaviSite, Telecomputing, and Breakaway.
SYSTEMS INTEGRATORS. We compete with many well established commercial systems
integrators who bundle their consulting services with hardware and software
providers to provide outsourcing for the customer. Examples of these include
Andersen Consulting, Breakaway Solutions, iXL, Enterprises, EDS, KPMG,
PricewaterhouseCoopers, and MCI Systemhouse.
<PAGE>
ISPs AND WEB HOSTING COMPANIES. We expect that business oriented North American
ISPs and Web Hosting firms will begin to expand their product line to include
service offerings with Internet and Web Hosting on a subscription basis. Among
these are AOL, Concentric Networks, Frontier Corporation, MindSpring
Enterprises, NETCOM On-Line Communications Services, Verio, Exodus, UUNet
Technologies, Verizon, PSINet, and Digex.
SOFTWARE COMPANIES. Many of the established and significant software application
companies either now have or will in the near future offer application solutions
for rent over the Internet. Some that already do include SAP, Oracle, IBM, JD
Edwards, Microsoft, Siebel Systems, and PeopleSoft. In June 2000, Microsoft
announced a new .Net Strategy that will be implemented by subscriptions over the
Internet within the next two years, offering their world-renowned existing and
expanded product line.
TELCOS. Many long distance companies, regional Bell operating companies, and
competitive local exchange carriers now offer Internet services to their
clientele. Although these firms have traditionally not been nimble in
identifying and serving new markets, the expansive size of their networks and
abundant financial resources make them potentially formidable adversaries.
ALTHOUGH MILINX BELIEVES THAT ITS CURRENT AND FUTURE AVAILABLE SERVICE OFFERINGS
DO OR WILL COMPETE FAVORABLY, WE MIGHT NOT BE ABLE TO MAINTAIN OUR COMPETITIVE
POSITION AGAINST PRESENT AND FUTURE COMPETITORS. MANY HAVE LONGER OPERATING
HISTORIES AND SIGNIFICANTLY GREATER FINANCIAL, TECHNICAL, MARKETING AND OTHER
RESOURCES THAN US. THESE COMPANIES MAY WELL BE ABLE TO RESPOND MORE QUICKLY TO
NEW OR CHANGING OPPORTUNITIES, CHALLENGES, TECHNOLOGIES, STANDARDS OR CUSTOMER
REQUIREMENTS.
Item 2. Properties.
Seattle Head Office:
2 offices at 3827-1001 Fourth Avenue.
Vancouver Administration Offices:
13,000 square feet at 1080 Howe Street houses our Administration
functions, including Accounting, Business Development and Marketing,
Research & Development, Communications, Legal, Human Resources,
Investor Relations and Intellectual Property Departments, as well as a
few members of our corporate IT department.
Vancouver Data Center:
14, 005 square feet at 1045 Howe Street houses our Data Centre, Client
Services, Web Team and the remainder of our IT department.
New Location for Vancouver Administration Offices:
Beginning December 1st, 2000, we will be leasing 23,226 square feet at
595 Burrard Street. Our administrative departments will begin moving
on January 15th.
Item 3. Legal Proceedings.
(a) On January 11, 2000, Interactive Intelligence, Inc. ("Interactive")
advanced a claim through the American Arbitration Association for
$3,900,000.00 US funds for an alleged breach of a Software License
Agreement. Interactive is the owner of a software program designed to
handle intra company telecommunications and small answering services.
The Company had responded to Interactive's Arbitration claim by
denying any amount was owing and counterclaiming against Interactive
for damages stemming from Interactive's failure to deliver a workable
system. On February 2, 2000, the Company commenced suit in the Supreme
Court of British Columbia, (the "British Columbia Lawsuit"), naming as
defendants, Interactive and others. This matter was ultimately settled
with neither party receiving any payment from the other. Each party
bore their own costs. Milinx's legal expenses incurred in the fiscal
year ending June 30, 2000 amounted to $106,393.49
(b) On October 4, 2000, two former employees of the Company's subsidiary,
Milinx Business Services, Inc., ("Services"), Don Williams and Reza
Bazargan advanced separate actions in British Columbia Supreme Court
against Services alleging breach of their employment severance
agreements and claiming unspecified damages. Services will be
vigorously defending these actions and counterclaiming against the
respective individuals for breach of employment and severance
agreements and claiming return of funds paid out under their
respective severance agreements and damages for wrongful breach.
PART II
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders in fiscal year 2000.
<PAGE>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
MARKET INFORMATION
On June 8, 2000 our common stock began trading, under Rule 211, on the
NASD Over the Counter Bulletin Board National Quotation System, under
the trading symbol "MIXBA". The following sets forth the average
closing prices for high and low bid information for the quarterly
periods indicated:
2000 High Low
---- ----- ------
Quarter ended June 30/00 $8 $5.625
Quarter ended September 30/00 $7.375 $4.125
The above market quotations were taken directly from the NASDAQ
website and reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not accurately represent actual
transactions.
HOLDERS
a) Common Equity.
As of September 30, 2000 there were approximately nine hundred
eighty two (982) registered shareholders of record of common
stock.
b) Preferred Convertible to Common Equity.
As of September 30, 2000 there were approximately four (4)
shareholders of record of Series A Preferred shares.
As of September 30, 2000 there were approximately sixteen (16)
shareholders of record of Series C Preferred shares.
DIVIDENDS
No dividends have been declared since inception.
RECENT SALES OF UNREGISTERED SECURITIES
During the period from inception to June 30, 1999, the Company issued
the following unregistered securities. Unless indicated, cash and net
proceeds are the same. Also unless indicated, sales under Rule 506
were to persons believed to be accredited investors, as defined in
Regulation D:
On February 12, 1999 the Company completed a placement under Rule 504
of Regulation D, selling 4,300,000 shares of its voting common stock
for total cash proceeds of $100,000.00.
Also on February 12, 1999 under Regulation S, Rule 506, the Company
completed a private placement, issuing 2,925,000 Series A Preferred
shares to two of the Company's directors, including the President, and
to its legal counsel for total cash proceeds of $2,925.00; also at
that time, the Company issued 45,000 shares of its voting common stock
to an officer of the Company for total cash proceeds of $45.00.
<PAGE>
Each share of Series A Preferred stock is entitled to 2 times voting
rights of the common shares to which they may be converted on all
matters on which shareholders are entitled to vote and can be
converted into shares of common stock at a ratio of 3 shares of common
stock for each share of Series A Preferred stock. Series A Preferred
stock has a preference on dividends, liquidation and merger at $0.32
per share.
On March 15, 1999 under Regulation S, the Company issued to Credit
Assure International Inc. an option to purchase 750,000 shares of the
Company's Preferred A stock for $27,000 total cash proceeds. Options
were granted on March 15, 1999 and exercised on April 6, 1999. Due to
the absence of any market for the Company's preferred stock, value of
the option, if any, at the date of grant was considered negligible.
On March 19, 1999 the Company completed a placement under Rule 504 of
Regulation D selling 1,300,000 shares of its voting common stock for
total proceeds of $130,000.00.
On March 26, 1999, under Regulation S, Credit Assure International
Inc. exercised its option on 750,000 Series A Preferred shares for
total cash proceeds of $27,000.00.
On April 2, 1999 the Company completed a private placement under Rule
701 of Regulation D, selling 675,000 shares of its voting common stock
for total cash proceeds of $33,750.00 to directors, including the
President, officers and consultants of the Company.
On April 5, 1999 the Company completed a placement under Rule 504 of
Regulation D, selling 1,800,000 shares of its voting common stock for
total proceeds of $320,000.00.
On April 20, 1999 200,000 options were granted under Rule 701 to four
of the Company's sales associates permitting the purchase of common
shares at $2.00 per share effective July 15, 1999 and expiring on
March 31, 2001. Using an option valuation model, fair value of the
options at the date of grant was determined to be negligible due to
low stock volatility and options being "out of the money" at the date
of the grant.
On May 25, 1999 the Company completed a private placement under
Regulation S, Rule 701, selling 350,000 shares of its voting common
stock for total proceeds of $17,500 to an officer of the Company. The
proceeds were collected in full prior to the issuance of the financial
statements; however, the proceeds were included in total accounts
receivable at June 30, 1999.
<PAGE>
On May 25, 1999, under Rule 506, 900,000 1999 Internal Warrant A were
privately issued to a director and the Company's legal counsel. These
warrants are exercisable at $ 4.00 per common share until January 31,
2001. The warrants were issued for cash proceeds of $200.00.
From June 19, 1999 through to December 31, 1999 the Company sold
1,681,250 Class A units at $2.00 per unit for total cash proceeds of
$3,362,500. In May 2000, unit holders exercised their right to convert
these units into Series B Preferred shares and all outstanding Class A
units were converted into 1,681,250 Series B Preferred shares and
840,625 International A Warrants, as more specifically stated below.
On June 30, 1999, under Regulation S, the Company privately issued
295,000 Class A units at $2.00 per unit to Trans Research
International Ltd. for total cash proceeds of $590,000.00.
Subsequent to June 30, 1999, the Company issued the following:
On July 25, 1999 under Regulation S, 650,000 1999 Internal Warrant B
were issued to two directors. These warrants are exercisable at $6.00
per Series A Preferred share until March 31, 2005.
On September 30, 1999, also under Regulation S, the Company issued
613,750 1999 Class A units at $2.00 per unit to North American Funding
Limited for total cash proceeds of $1,227,500.
On October 15, 1999 under Regulation S, the Company issued 375,000 of
its common shares to Milinx International Inc., (Cayman), as
consideration for intellectual property. Also on October 15, 1999 the
Company issued 50,000 common shares to Credit Assure International
Inc. as consideration for intellectual property and trademarks.
On October 31, 1999 the Company issued privately under Regulation S,
163,500 1999 Class A units at $2.00 per unit for total cash proceeds
of $327,000.00 to Millennium Three Holdings Ltd.
On November 11, 1999 the Company allotted 71,000 common shares for
issuance to employees of its subsidiary, Milinx Business Services,
Inc. under Regulation S, Rule 701. The shares were issued at $0.05 per
common share for total cash proceeds of $3,550.00.
On November 30, 1999 under Regulation S, the Company issued privately
212,500 1999 Class A units at $2.00 per unit for total cash proceeds
of $425,000.00 to Millennium Three Holdings Ltd.
As of December 9, 1999 James Medley, a new member of the Board of
Directors was awarded 180,000 common warrants under Rule 506, at an
exercise price of $4.00 per share. These Warrants expire on January
31, 2001.
<PAGE>
Also on December 9, 1999 the outstanding shares of Forestay
Corporation, a Delaware Corporation, were exchanged for 250,000 shares
of common stock of the Company, under Rule 506, in a transaction in
which Forestay became a wholly owned subsidiary of the Company.
On December 31, 1999 under Regulation S, the Company issued to
Millennium Three Holdings Ltd. 396,500 1999 Class A Units at $2.00 per
unit for total cash proceeds of $793,000.00.
From January 1, 2000 to June 30, 2000 the Company issued privately,
under Regulation S, Rule 506, 4,986,923 Class D Units for cash
proceeds net of commissions of $9,097,662. During this same period,
2,624,412 Class D Units were converted to 2,624,412 Preferred C Series
shares and 1,312,206 D Warrants for total cash proceeds to the Company
of $2,625.00.
On January 31, 2000, under Regulation S, the Company issued privately
325,500 1999 Class A Units at $2.00 per unit for total cash proceeds
of $651,000.00.
As of May 10, 2000, the Company awarded a grant of 39,000 shares each,
in escrow, to two of its executives. The shares are to be granted
subsequent to the Company completing a Form S-8 registration of its
common stock. Due to price volatility of the Company's stock, the
Company is unable to determine the amount of additional compensation
that will be recorded at the time such shares are issued.
In May 2000, under Reg. S, 1,681,250 Class A Units were converted to
1,681,250 Series B Preferred shares and 840,625 1999 International A
Warrants netting total cash proceeds to the Company of $1,682.00.
From May to June 2000, under Rule 506, 417,000 shares of Series C
preferred stock were converted to 417,000 shares of the Company's
voting stock at shareholder's request.
Also from May to June 2000, under Rule 506, 2,624,412 Class D Units
were converted into 2,624,412 shares of Series C Preferred stock and
1,312,206 Class D Warrants.
In June 2000, under Rule 506, 417,000 shares of Series C Preferred
shares were converted into 417,000 common stock shares at the
stockholder's request.
In June 2000, under Rule 506, 37,500 Class D Warrants were converted
into 37,500 common stock shares of the Company's voting common stock
for total cash proceeds of $75,000.00.
Subsequent to June 30, 2000, under Regulation S, the Company has sold
89,997 common shares at $4.50 per share for total cash proceeds of
$404,986.00.
<PAGE>
Also subsequent to June 30, 2000, 448,187 Class D Warrant were
converted to 448,157 common shares for total cash proceeds to the
Company of $896,374.
Subsequent to June 30, 2000, investors converted 906,912 Unit D to
906,912 Series C Preferred shares and 453,456 Warrant D for total cash
proceeds to the Company of $907.00. Since, investors converted 906,912
Series C Preferred shares to 906,912 common shares.
Subsequent to June 30, 2000, 38,989 common shares were awarded to
legal counsel in settlement for legal fees and future legal fees of
$77,985, under Rule 506. Counsel was further awarded a Warrant as of
October 12, 2000 for a term ending June 30, 2002, to purchase up to
100,000 common shares, warrant consideration set at $250.00 with an
exercise price being the lowest closing share price on either October
12 or 13, 2000. The warrant was otherwise in the same terms and
conditions as the warrant issued to James Medley, Director.
All above proceeds were used for general working capital and operating
purposes, including the lease and rental of equipment, legal,
accounting and transfer agent fees, construction of the Company's data
center, as well salaries to employees, directors and officers of the
Company.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Milinx Business Group, Inc. and Subsidiaries
Reg. 229.301. Item 301
June 30, 2000 and 1999
Year ended Six months ended
June 30, 2000 June 30, 2000
----------------- -----------------
<S> <C> <C>
Operating revenues 197,193 43,424
(Loss) continuing operations (6,636,452) (844,250)
(Loss) continuing operations per common share - basic and diluted
(.74) (.32)
Cash 2,162,430 4,522
Property and equipment, net of accumulated depreciation 3,572,168 714,232
Other assets - software licenses 2,036,985 261,250
Total assets 8,993,249 1,107,537
Capital lease obligations, long term 927,808 -
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion and analysis should be read together with the
financial statements and related notes of Milinx included in this
filing. The discussion contains forward-looking statements involving
risks and uncertainties, such as our future plans, projections,
objectives, expectations and intentions. Our actual results could
differ materially from those anticipated in such forward-looking
statements wherever they appear in this filing. Significant factors
that could cause or contribute to differences include those discussed
in "Risk Factors" as well as those set forth throughout this filing
and other filings previously made by the Company. The forward-looking
statements contained herein are made as of the date of this filing and
we assume no obligation to update these forward-looking statements or
to update the reasons actual results could differ materially from
those anticipated in these forward-looking statements. See Risk
Factors.
Our View of the Economy
The United States is now in the tenth year of the strongest economic
expansion in its history with exceptional uninterrupted growth in
Gross Domestic Product ("GDP"), low unemployment, real income growth,
high job creation, acceptable levels of inflation, a strong currency
and record levels of capital expenditures. The Technology Sector of
the economy has unquestionably been the most significant contributor
to this record expansion providing increases to business productivity,
thereby abating an increase in inflation, high paying jobs, and
capital formation. Canada just began its recovery in 1995 and there is
empirical evidence to suggest that its economic growth in relative
terms will meet or exceed those of the United States in the next two
years.
However, oil prices have recently escalated dramatically to the
highest levels seen since the Persian Gulf War in 1990 and the trade
deficit with the rest of the world may well set a record of over $300
billion dollars in 2000. While petroleum products now account for less
than 3% of GDP, dramatic oil price escalation in the past has
contributed significantly to economic recessions and, therefore, we
cannot be completely sanguine that the economic expansion will not be
retarded by this occurrence. In addition, if the US dollar begins to
weaken, the Federal Reserve Board may well be forced to increase
interest rates to support the currency, which could also have negative
effects on the economy.
In recent months, there has been a noticeable slowing in technology
expenditures as individuals and businesses have retrenched purchases
of personal computers and software. We think this trend is temporary
as both evaluate the most advantageous and inexpensive venue to access
the Internet for e-commerce, business-to-business transactions and
communication.
<PAGE>
Since the first quarter of 2000, the US stock markets have been in
some turmoil. In particular, the shares of many technology firms have
significantly declined as investors seem well to have returned to
fundamentals seeking investment opportunities that promise near term
positive cash flow and profitability in their business plans. There is
no question that achievement of performance has now replaced
"concepts" in the mind of individual and institutional investors. We
see this as a positive trend for those firms that can meet or exceed
expectations. Alternatively, the share prices of companies that do not
achieve forecasted results will suffer significant losses.
Milinx Overview
Our Company was incorporated in the State of Delaware in December 1998
and commenced active operations on February 10, 1999. Since that time,
we have invested substantial financial resources in computer hardware,
software, integration technology, proprietary applications, and
skilled, experienced personnel with the objective to become a leading
Application Service Provider ("ASP") targeting our services
principally to the SME (small and medium sized enterprises) and SOHO
(small office and home office) markets on a subscription basis. Since
1998, we provided IT services under the trade name "Business Builder
Toolbox"(BBT) but the system discontinued services on June 30,2000.
In August 2000, we opened our first Data Center in a 14,000 square
feet floor of an office building in Vancouver, BC. Milinx has formed
an alliance among Sun Microsystems, Inc., Netscape Communications
Corporation, and their affiliate, iPlanet, to potentially provide a
wide array of services in a secure environment. Although our Data
Center can service up to 1,000,000 customers, Milinx intends to expand
into the United States which can be accomplished rapidly with either
"mini" data centers or co-located facilities with other companies.
We propose to set standards of excellent service within the context of
a "Total Customer Experience" by providing application implementation,
integration, and management.
This value proposition enables our customers to:
Gain access to integrated applications that automate their internal
processes and their exchanges with suppliers, partners, and customers.
Minimize the considerable upfront costs of licensing enterprise
software and implementing them on their existing systems allowing
businesses to expend valuable resources on their core competencies.
Reduce considerably the time and expenditures of constantly upgrading
and integrating computer software and hardware.
Outsource their IT requirements and be provided with total Customer
Sales and Support on a 24/7 basis.
<PAGE>
We believe that our sustainable competitive advantage will be the
ultimate comprehensiveness of our services, the reliability and
scalability of our industry leading hardware and software, and
proprietary applications unique to and totally owned by Milinx.
Results of Operations
Revenue: Fiscal year 2000 was a one of investment, development and
recruitment of personnel to be able to achieve our goal of becoming a
leading ASP service provider. For the year, we had total net sales of
$197,193 as compared with $43,424 in 1999. All revenue was generated
from the BBT suite of services which was discontinued on June 30,2000.
All future revenue will be generated from present and future offerings
of ASP services to customers.
Cost of Sales: Milinx had cost of sales of $48,112 and $365,449 for
fiscal years 1999 and 2000 respectively. All costs were attributed to
the services provided to customers of the BBT. These were principally
phone lines and service ($195,395), commissions paid ($51,912), and
marketing ($94,371).
With the ASP business model, these expenses will increase
significantly in the future. In September 2000, we concluded a 24
month branding, promotional, and marketing Agreement with AOL Canada
(AOL) that provided, among other terms and conditions, for a $237,793
payment by Milinx in four quarterly installments and all revenue to be
shared 80% to us and 20% to AOL. As the Company aggressively expands
marketing our services, it is highly likely that we will be entering
into similar agreements, paying commissions, bonuses, and other sales
inducements, including options or warrants to purchase Milinx's common
stock.
Gross Profit (Loss): The gross loss from providing services for the
BBT increased from $4,688 in 1999 to$168,256 in fiscal year 2000.
Selling, General, and Administrative Expenses: These expenses
increased significantly to $6,442,914 in 2000 from $839,192 in 1999.
This increase of $5,603,722 between 1999 and 2000 was principally a
result of the following:
o Amortization of computer hardware, software, and licenses
increased $412,212 to $454, 244 as the Company acquired the
assets integral to its ASP business. This expense is likely
to increase in future years.
o Licensing and software write-downs were $304,500 as the
Company expenses discontinued or unusable software. In 1999,
there was no such expense and is not likely to recur in the
future years.
o Consulting fees increased $589,858 to $652,498 due to
necessity of retaining third parties for systems integration
and others to advise the firm on its business operations. By
expanding operations geographically and outsourcing the
development of proprietary technology, this expense is
likely to further increase.
<PAGE>
o Office expenses increased from $15,633 to $202,816 or
$187,183. As the Company completes occupancy of its
relocated. Administrative Offices and opens new offices,
this expense will increase significantly.
o Legal expenditures increased $365,525 to $482,441. In that
Milinx will have to continue to raise significant equity
capital and expand its business operations, this expense
will continue to increase in future years.
o Rent increased from $24,466 to $208,937 or $184,495. In
2000, this expense included occupancy costs for the Data
Center and expanded administrative office space. The Company
is committed to occupy new office space at 595 Burrard
Street, Vancouver, BC. which, commencing December 1,2000,
will increase our monthly rental expense by $49,833. With
our planned geographic expansion, this expense will increase
substantially in 2001.
o Travel and entertainment of $298,587 increased $259,025 from
$39,562.As we continue to grow, these expenses will increase
commensurately.
o Wages, salaries, and benefits of $2,972,149 increased
significantly from $322,172 as new personnel was rapidly
added in fiscal year 2000 to administrate, develop, market,
and service its ASP product line. With the planned expansion
of Milinx, additional personnel will have to be hired
further increasing this expenditure in the future.
o Payment of compensation through the issuance of stock
totaled $318,835. There was no such expense for this item in
1999 as the shares of the common stock were not trading.
Presuming the share price Milinx stock increases in the
future, there will be a commensurate increase in this
expense.
Net Loss from Operations
The net loss from operations increased from $844,250 to $6,636,452
or $5,792,180.
Liquidity and Capital Resources
As of June 30, 2000, we had cash resources of $2,162,445 on hand which
was an increase of $2,157,923 from June 30,1999. Working capital was
$1,579,629 as compared with a working capital deficit of $443,669 in
1999.
<PAGE>
During the year, the Company raised $11,573,951 from equity security
financing. Principally, these funds were used to fund operations and
acquire computer hardware, software, and licenses incident and
necessary to its ASP service offerings to customers. Subsequent to
June 30,2000, the Company received $3,584,748 by the exercise of D
Unit Investor Warrants for 1,792,374 shares of common stock at an
exercise price of $2.00 per share. In addition, we financed our
computer hardware purchases by the use of lease obligations
aggregating $1,463,869.
In August 2000, the Company began offering to accredited investors
2,500,000 common shares of Milinx stock at a price of $4.50 a share or
$11,250,000. As of the date of this filing, $404,990 had been received
from this offering.
We believe that the proceeds of this offering combined with the
revenue derived from operations will be sufficient to fund our
operations for the next twelve months.
However, if the common stock offering is not successful and the
revenues from operations do not meet projections, the Company will not
be able to fund present or planned operations. Were either or both of
these events to occur, Milinx would have to significantly curtail
operations and seek other sources of financing that may or may not be
available.
Risk Factors
Investing in our Company involves risk. You should carefully consider
the risks and uncertainties described in this filing before making an
investment decision. These risks and uncertainties are not the only
ones that we face or that may adversely affect our business. If any of
the following risks or uncertainties actually occur, our business,
financial condition, or results of operations could be materially
adversely affected. This report also contains forward-looking
statements that inherently involve risk and uncertainty. Our actual
results could differ materially from those described in the
forward-looking statements. This could occur because of the risks
described in this filing or other unanticipated events and occurrences
not now foreseen.
The Application Service Provider (ASP) Business Model has not yet been
proven.
Of the 600 firms that classify all or a portion of their business as
ASP in nature. Currently, we not aware of any that are presently
profitable.
Our success depends upon the acceptance and increased use of Internet
based business software solutions and we cannot be sure that this will
happen.
Our business model is based upon the market acceptance of Internet
based software solutions by our potential customers. The marketing of
software over the Internet has only begun to evolve and could be
adversely effected by a number of factors including, but not limited
to, security concerns, inadequate network delivery, and inconsistent
performance by the Internet.
<PAGE>
We are competing with Companies with much greater capital resources
and longer operating histories
The ASP market is now and will continue to be extremely competitive.
Many of these firms either have on hand available considerable
financial resources not available to us.
Milinx is presently operating at a loss and experiencing negative cash
flow.
While we began operating in February 1999, our Data Center was not
opened until August 2000 enabling us to market our services. Starting
our Company involved substantial capital and other expenditures.
Developing and marketing our services will involve considerable
additional capital and expenditures.
Our present monthly cash flow deficit is $1,500,000 and could increase
to $2,000,000 in December 2000 if revenue projections are not met.
Milinx continues to operate at a substantial monthly cash flow deficit
that has only been funded by equity capital to date. While we
anticipate recurring revenue to increase monthly, there is no
assurance that this will occur.
The Company will need significant additional financing to complete
development of its product line and proprietary applications that we
may not be able to obtain either on terms acceptable to us or at all.
Since its inception, we have relied almost exclusively on equity
capital to fund our operations and capital expenditures. In the fiscal
year ending June 30,2000 Milinx spent $3,626,184 for fixed assets,
property, and equipment. While we have received $16,380,119 in equity
funding, the Company has raised these funds itself and there is no
assurance that this can occur in the future.
The marketing of services just began in August 2000 and there is no
assurance that the product line or pricing will be successful.
As of the date of this filing, the Company has two services to offer
to customers with the remainder to be available late in 2000 or the
first quarter of 2001. Presently, we do not have a sufficient number
of subscribers to ratify either our products or pricing.
None of our proprietary applications is now in service and none are
commercially proven.
At the core of our Business Model is the development and market
acceptance of our proprietary applications only one of which is now in
service. If we are unable to complete our proprietary applications, we
will have to rent or purchase applications, which will substantially
increase the amount of financing required and increase the expenses of
the Company.
<PAGE>
The marketing of our services has just commenced and will involve
considerable funding which is not now available.
Initially, the Company intends to market its services through licensed
Resellers, our Direct Sales Force, and Internet Service Providers. To
date, we have only begun to expend significant funds on marketing but
equity funding and revenue, which is by no means assured, can only
meet future planned expenditures.
Additional key personnel will need to be hired and existing personnel
retained to fulfill the Company's Business Plan which will be
challenging and increase expenditures.
Although we have built our staff with experienced and qualified
professional staff, additional personnel will need to be hired in a
very competitive workplace environment. We have certain of our key
personnel under management contracts and are expanding our efforts to
include them all.
The Company presently enjoys lower costs of doing business by its
principal operations being domiciled in Vancouver, BC. However, these
cost advantages in the future are not assured.
Presently, we operate most of our business through our wholly owned
subsidiary, Milinx Business Services, Inc. The costs of doing business
in British Columbia are significantly lower than major metropolitan
areas in the United States. Also, in that most of our expenditures are
dominated in Canadian dollar while projected revenues are to be in US
dollars, a significant exchange benefit accrues to our benefit.
However, these advantages may not continue at present levels or at
all.
The trading price of our common stock could be subject to significant
fluctuations.
The common shares of Milinx began trading on the NASD Over the Counter
Bulletin Board ("OTCBB") on June 8, 2000. While to date our share
price has fluctuated between a high of $7.50 and a low of $4.125,
stock trading on the OTCBB is generally more susceptible to
considerably wider price changes, there is no assurance this could not
happen to us.
The substantial number of future shares available for sale could
adversely effect the market price of our common stock.
As of August 31,2000, Milinx had 15,926,915 shares outstanding but if
all of the preferred shares convertible to common and options and
warrants are exercised, that would increase the number of shares to
approximately 35,000,000. We cannot predict the effect, if any, that
future sales of common stock would have on our share price.
<PAGE>
Item 10. Directors and Executive Officers of the Registrant.
(a) Listing and biographies
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Maynard Dokken 37 President and Chief Executive Officer
Mikiko Fujisawa 33 Corporate Secretary, Treasurer & Director
John Burns 59 Director
James Medley 59 Director
Barry Phillips 61 Director
James W Summers 55 Chief Financial Officer
Douglas A. Hicks 36 Executive Vice President of Business Development
Clare Cremer 58 Senior Vice President of IT
Edwin Mark 33 Senior Vice president, Legal and Corporate Counsel
Jonathan Myers 53 Senior Vice President of Client Operations
Grenfell Featherstone 50 Vice President of Intellectual Property
Lance Drozda 29 Vice President Emerging Technologies
Gary MacDonald 32 Vice President of Investor Relations
Rafeh Hulays 43 Vice president of R&D/Advanced Services
Bill J. Bilic 40 Chief Software Architect
James B. Maedel 38 Manager of Human Resources
Rudi Epp 49 Director of Web Development
Allan Wong 31 Manager of Infrastructure Applications
Pamela Oram 52 Manager of the Client Contact Center
David G. Libby 50 Group Controller
Eric B. Westra 40 Project Manager and Presales Engineer
</TABLE>
Maynard L. Dokken, President, CEO, and Corporate Director
He is the founder of the Company and was experienced in the real estate
development business prior to his interest in Internet related businesses. He
commenced researching the feasibility of introducing a new unique credit card
product in 1994. After spending in excess of US$1,000,000 on the project, here
engineered the idea of offering another consumer card to the general public in
1997. He turned his energies to the Internet and telecommunications industries.
He is currently the majority shareholder of Milinx Business Group, Inc. He also
controls two Companies that have licenses or other arrangements with Milinx:
Milinx International and Credit Assure International, Inc. He is married to
Mikiko Fujisawa, Director, Secretary, and Treasurer.
Mikiko Fujisawa, Corporate Director, Secretary, and Treasurer
After four years of experience as an executive assistant at Lapine Corporation
and Osaka Gas Co. Ltd, Ms. Fujisawa returned to college for a brief period of
study. After her graduation in 1996, she worked briefly at the daily newspaper
Chugoku Shinbun-Sya before moving to North America in 1997 and becoming a
Director of 545731 BC Ltd, She was responsible for most of the day-to-day
management of that company. She has been a Director and the Corporate Secretary
of Milinx Business Group since its incorporation in 1998, and as of May 10, 2000
has added the duties of Treasurer. She has been a Director and the Corporate
Secretary of Milinx Business Services since its incorporation in 1999, and
Corporate Secretary of Credit Assure International, Inc. since incorporation in
1999. She is the wife of Maynard L. Dokken.
John S. Burns, Director
John S. Burns Q.C., a Director since June 2000, has been a partner of the law
firm Bennett Jones in Calgary, Alberta since October 1990. His areas of practice
are principally corporate, corporate finance and securities law. Mr. Burns acts
for public and private corporations, securities issuers and underwriters. His
practice focuses on mergers and acquisitions, public and private offerings,
corporate restructurings, cross-border financings and oil, gas and banking
transactions. He has participated in conferences and panels and has authored a
number of papers and articles with respect to these areas of law. Mr. Burns
served as a Public Governor of the Alberta Stock Exchange from 1983 to 1998. He
has also served as a member of the Board of Governors of the Olympic Trust of
Canada, Strathcona-Tweedsmuir School and is a member of the law societies of
Alberta and Upper Canada and the Calgary and Canadian Bar Associations. Mr.
Burns graduated for the University of Alberta with a Bachelor of Arts degree in
1963 and a law degree from Dalhousie Law School in 1966. He is a board member of
the following publicly held companies: AdvantEDGE International Inc., Canadian
88 Energy Corp., Crispin Resources Limited, Fossil Bay Resources Ltd., Glacier
Ventures International Corporation , Gulfstream Resources Canada Limited,
International Utility Structures Inc., JAWS Technologies Inc., Milinx Business
Group, Inc., PetroSantander Inc., Superior Propane Income Fund, World Wide
Warranty Inc., and Xentel Interactive Inc.
James R. Medley, Chairman of the Audit Committee and Director
A Director since December 1999, Mr. Medley is the founder and president of Laux
Medley Norris, Inc., investment advisors and business counselors since 1976. He
currently serves as Director, Treasurer and CFO for Leading-Edge Earth Products,
Inc., a publicly traded development stage company. Mr. Medley has 25 years of
experience in diverse areas of financial management and analysis, managing
portfolios including precious metals, securities and real estate. He develops
financial plans and strategies, proformas, financial analysis and cash flow
forecasting for businesses, advises companies on Securities Exchange Commission
reporting matters and produces financial proformas for start-up companies. Mr.
Medley graduated from Naval Air Training Command, Maintenance Management
Information Systems at Ohio University, University of Washington Graduate School
of Business Administration, and Wentworth Institute as a Mechanical Engineer in
Machine Design. He spent ten years in the United States Navy becoming a
Standardization Officer in Naval Air advance Training Command and as a Carrier
Aircraft Commander before starting Laux Medley Norris, Inc. in Seattle, WA. Mr.
Medley is President, Investment Advisor and Director of Leading Edge Earth
Products, and Treasurer/Director of Laux Medley Norris
Barry W. Phillips, Director
Mr. Phillips was employed with the Canadian Imperial Bank of Commerce both in
Canada and internationally, from 1956 to 1977 and his experience included:
operations, human resource management, executive training, corporate lending,
branch management, corporate marketing and international money management. He
has been working at his own management consulting firm since it was established
in 1977 in Winnipeg, Manitoba, specializing in corporate finance and
reorganizations, mergers and acquisitions, succession planning and sale of
businesses and the implementation of financial and management information
systems. He is on the advisory board of five private companies, a director of
three private mining companies and has retired from the Boards of two public
companies. Mr. Phillips was a Director, Treasurer, and CFO of the Company since
its inception in February 1999 until April 2000. He retired as Treasurer and CFO
in April 2000 but remains as a Director. Mr. Phillips is a Director of Sterling
Resources, Inc., Baker Lake Gold Mines, Inc., Mirador Mining Ltd., and Global
Games, Ltd.
James W. Summers, Chief Financial Officer
Prior to joining Milinx in April 2000, Mr. Summers career spanned than 28 years
of experience as a CEO, CFO, and director and senior officer of substantial real
estate investment, development, and construction firms and was one of the
founders of two financial institutions in the State of Washington. In 1997, as
Executive Vice President of First Wellington Crown Corporation (a subsidiary of
The Triple Five Group), he established the Washington State office of a major
multinational real estate development firm. Prior to that, he was General
Manager of the real estate operations of Sundquist Homes, Inc from 1993 to 1997.
Mr. Summers was President/Owner of Pennhill Corporation, a management consulting
and real estate development firm. From 1974 to 1990, he was Chairman, CEO and
CFO of the largest residential builder/developer based in the Pacific Northwest.
He graduated from the University of Scranton with dual majors in Accounting and
English, and studied finance at The Stern School of Business at New York
University.
Douglas R. Hicks, Executive Vice President of Business Development
Mr. Hicks came to Milinx in July 2000 after two years as a Regional Business
Manager for iPlanet E-Commerce Solutions, a Sun-Netscape Alliance. He handled a
broad portfolio of Internet infrastructure and e-commerce applications software
and services, helping Fortune 2000 and well-funded startup firms grow by
leveraging the Internet. His specialty is addressing the needs of business
through the enabling of innovative technology solutions and building markets for
technology-oriented companies. Before his sojourn at iPlanet, Mr. Hicks was
Manager, Western Region at Rogers from 1996 to 1998. From 1994-1996, he was
Strategic Accounts Manager at AT&T. Clarence C. Cremer, Senior Vice President of
Information Technology Mr. Cremer joined Milinx in June 2000 after an extensive
career in Information Technology management and implementation. From 1989 to
1998, he was the Regional Vice President of the Internet consulting firm of LGS
Group, Inc. From 1998 to 2000, he was President of C-Log Business Solutions
Inc., an independent consulting company in Winnipeg, Manitoba.
Edwin Mark, Senior Vice President, Legal and Corporate Counsel
Specializing in corporate and commercial law, Mr. Mark came to Milinx in July
1999 after seven years with the law firm of Mair, Jensen and Blair. He also
brings with him experience as a co-founder of the Entrepreneurs Business Group,
and has held the position of Legal Chair with the United Way (Kamloops, B.C.) as
well as directorships with the University College of the Cariboo Sports Task
Force and the Kamloops Foundation.
Jonathan Myers, Senior Vice President of Client Operations
In addition to his Master's Certificate in Project Management from George
Washington University, Mr. Myers brings a wealth of experience to Milinx. He
joined the Company in 1999 after 30 years experience with BC Telecom (now
Telus). In his 18 years there as a Regional and National Service Manager, he was
responsible for the Western Canadian Data Network of the Royal Bank Financial
Group, the National Network of the Hong Kong Bank (HSBC), and the Year 2000
conversion program for the Insurance Corporation of B.C.
Grenfell Featherstone, Vice President of Intellectual Property
With an extensive academic background, Mr. Featherstone taught English, History
of Ideas and Debating for 20 years before retiring in 1996. He has considerable
experience in academic administration and spent the years since his teaching
career as a consultant specializing in Board/CEO policy, strategic planning and
communications, before joining Milinx in 1999.
Lance Drozda, Vice President of Emerging Technologies
Before joining Milinx Mr. Drozda worked for two years at
iPlanet E-Commerce Solutions, a Sun/Netscape Alliance, where he was a System
Engineer and post-sales Account Manager specializing in Internet e-commerce
technologies. He was involved with selling and implementing iPlanet products and
services with telecommunications companies, Internet Service Providers and ASPs.
Prior to iPlanet , he spent four years with EDS Systemhouse as a Senior Systems
Analyst and Project Manager for multiple initiatives, including
two-and-three-tier client/server based applications.
Gary MacDonald, Vice President of Investor Relations
Gary MacDonald possesses an extensive background in both the securities and
entertainment industries, with more than 12 years experience as a securities
trader on the Vancouver and New York Stock Exchanges and as a partner in Dimac
Capital Corp. (financings, acquisitions and local and foreign market
management/compliances). Since 1993, Mr. MacDonald has worked for, and currently
serves on the boards of, a number of online companies, while his previous
investor relations experience includes senior positions with a number of
publicly traded companies. He has also consulted extensively in the areas of
financing, investor, corporate, and exchange relations, and marketing. Mr.
MacDonald has six years experience in the film and television industries, from
full production of his own programs to executive producing, with more than 70
film and television productions to his credit. He received a Bachelor of
Commerce Degree, with an economics major, from the University of British
Columbia.
Mr. MacDonald is a Director of the following companies: Authenticorp.com,
Boomerama.com, Eye2buy.com, World Best Buy.com, Valley High Ventures, Metallex
Ventures, Sovereign Chief Ventures, Consolidated AGX Corp., and Dimac Capital
Corporation.
Rafeh Hulays, Vice President of Research and Development/Advanced Services
Doctor Rafeh Hulays is the R&D/Advance Services Vice President, responsible for
next generation services and products. He received his Ph.D. in Electrical and
Computer Engineering from the University of British Columbia. At the University,
Dr. Hulays had a leading role in the Advanced Communications Technology
Satellite (ACTS) propagation experiment (A NASA-JPL-CRC project). Dr. Hulays
also worked as a prime Research Assistant on several contracts funded by the
Communications Research Center to study the effect of precipitation on broadband
wireless communication systems. From 1995 to 1997 Dr. Hulays worked at PCS
Wireless, Inc. - initially as a Systems Design Engineer, and later as Technology
and Advanced R&D Manager. He was involved in an electronics commerce startup
(MediaLink Communications Limited) from 1997 to 1999, where he acted as the
Managing Director. His responsibilities also included business development and
project management. As a Program Manager at Elcombe Systems Limited (A Newbridge
networks spin-off) from 1999 until joining Milinx in June 2000, Dr. Hulays was
responsible for the overall development of the company's new generation product.
Dr. Hulays has nine scientific papers published in Journals and conferences, a
patent application and his research was the basis of a Canadian recommendation
to the International Telecommunications Union.
Rudi Epp, Director of Web Development
Mr. Epp brings 25 years of varied experience in technical management in numerous
roles, specializing in Applications Development and Applications Management.
Before joining Milinx in February 2000, he spent 3 years at Information Systems
Management (ISM-BC), where he worked as a Business Systems Analyst and Project
Manager for initiatives that included a web-based Contract Management system.
Before his years at ISM-BC, Mr. Epp worked at BC Telecom (now Telus) from 1989
to 1995. He has a Diploma in Computer Programming with a Business Systems
Option.
James B. Maedel, Manager of Human Resources
Prior to joining Milinx in March 1999, Mr. Maedel has 12 years of senior
management experience specializing in human resources, operations, sales,
business development, and call center.. After graduating from the University of
Waterloo, he spent 1 year managing the Call Centre for Future Shop, handling
issues from over 100 stores throughout Canada and the US. He spent 5 years as a
Regional Manager with Interactive Media Corporation, during which time he was
responsible for the operation of 9 branch offices, primarily handling HR issues.
Before coming to Milinx, Mr. Maedel spent 6 years at Agency Rent A Car in
various business development roles from both a sales and operational
perspective.
Bill J. Bilic,
Prior to joining Milinx in October 2000, Mr. Bilic was a Technical Director at
Blast Radius Inc. since 1999.. He specialized in the software development
management, software architecture and deployment of e-business solutions. In
addition to establishing and maintaining technical direction of the company, he
has been instrumental in designing and building global brands online presence to
enable their business and services over the Internet, such as Nintendo, Kenwood,
Nike, etc. Before Blast Radius, Mr. Bilic was with United Nations until 1995,
Kellogg's from 1995 to 1996, NBTel from 1996 to 1998, and Irving Oil from 1998
to 1999.
Allan Wong, Manager of Infrastructure Applications
Mr. Wong joined Milinx in July 2000 after two years with iPlanet E-Commerce
solutions, a Sun/Netscape Alliance. He was a Senior Consultant for Worldwide
Professional Services and specialized in the architecture and deployment of
infrastructure and e-commerce solutions. He has helped global Internet Service
Providers, telecommunications companies and major financial enterprises enable
their business and services over the Internet. As a solution expert, he believes
the key to infrastructure deployment is the easy integration of software and
hardware. His focus is on security, reliability, scalability and efficiency.
Before his stint at iPlanet, he worked at InfoNet from 1994 to 1998.
Pamela Oram, Manager of the Client Sales and Contact Center
Ms. Orem has more than 20 years experience in management including business
development, operations, sales and marketing, customer service, call center and
help desk. As call center manager for Multiactive Software from 1998 to 1999,
she presided over an eight-fold expansion of the center. As President of her own
consulting firm from 1979 until coming to Milinx in September 2000, Pamela
assisted several small, medium and large companies develop client services,
inside sales, after-sales implementation and customer service.
David G. Libby, Group Controller
Prior to joining Milinx in August 1999, Mr. Libby was Controller of Surfwood
Supply Ltd. since 1995 with full responsibilities for all accounting matters and
the audited financial statements. He implemented a new financial control
software system including inventory control and detailed tracking of services
and rentals. He is a graduate of the University of British Columbia with a
Bachelor of Commerce.
Eric. B. Westra, Project Manager and Presales Engineer
A 1995 graduate in Computer Information Systems from Okanagan University
College, Mr. Westra's technical background includes working as a Systems Analyst
for BC Trade Development Corporation and the Vancouver office of the BC Premier
from 1995 to 1996, as well as Network Support Analyst for a leading network
solutions provider from 1996 to 1997. In 1997, he returned to work in the media
as a journalist and news anchor until joining Milinx in 1999. His broadcasting
experience includes radio and television hosting, program direction, news
anchoring, and acting as corporate spokesperson for various clients over a
15-year period. (b) Beneficial Ownership Reporting Compliance
Maynard Dokken, President, Forms 3 and 5, one transaction filed late.
Mikiko Fujisawa, Corporate Secretary, Forms 3 and 5, one transaction filed late.
James Medley, Director, Forms 3 and 5, one transaction filed late.
Barry Phillips, Director, Forms 3 and 5, one transaction filed late.
James W. Summers, Chief Financial Officer, Forms 3 and 5, one transaction
filed late.
Edwin Mark, Vice President & Corporate Counsel, Forms 3 and 5, one
transaction filed late.
Clare Cremer, Forms 3 and 5, one transaction filed late.
Doug Hicks, Forms 3 and 5, one transaction filed late.
Max W. Tomaszewski, Form 3.
all persons above are now believed by the Company to be current as of the date
of this filing.
<PAGE>
Item 11. Executive Compensation.
(b) Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Fiscal Securities
Year Other Annual Underlying All Other
Name and Principal Position Salary ($) Bonus ($) Compensation Options Compensation
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maynard L. Dokken 2000 $ 118,367
President, CEO, and Director 1999 $ 29,554
Douglas A. Hicks 2000 $ 17,006
Executive Vice President (1)
James W. Summers 2000 $ 21,400 39,000 (2) 39,000 Shares
Chief Financial Officer (2) of common stock
Clarence C. Cremer 2000 $ 6,216 $ 21,839 80,000
Senior Vice President(3)
Mikiko Fujisawa 2000 $ 85,714
Secretary, Treasurer, and Director 1999 $ 19,702
Edwin Mark 2000 $ 73,376 (4)39,000 shares
Senior Vice President(4) of common stock
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.
</TABLE>
OPTIONS GRANTED IN THE LAST FISCAL YEAR
In the fiscal year ended June 30,2000, the Company granted options under the
1997-9 Option Plan or Resolutions of the Board of Directors totaling 4,905,250
common shares of Milinx stock.
<TABLE>
<CAPTION>
% of Total Options
Granted to
# of Securities Employees in Exercise Expiration
Name Underlying Options Fiscal Year Price Date
---------------------------------- -------------------------- ----------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Maynard L. Dokken 250000 5% $2.00 1/31/02
Douglas A. Hicks 108000 2% $2.00 5/31/04
Douglas A. Hicks 650000 13% $3.00 6/30/03
James W. Summers (1) 100000 2% $4.50 12/31/01
Clarence C. Cremer 150000 3% $2.00 5/31/03
Clarence C. Cremer 10000 0% $2.00 5/31/02
Mikiko Fujisawa 150000 3% $2.00 1/31/02
Edwin Mark 50000 1% $2.00 5/31/01
200000 4% $0.001 5/31/05
</TABLE>
TOTAL EMPLOYEE OPTIONS ISSUED IN FISCAL 2000: 4,905,250
<PAGE>
Closing Share Price At October 12,2000: 4.75
(1) James W. Summers is the Beneficiary of a Trust administered by an
Independent trustee.
(g) Compensation of Directors.
The Company has three outside Directors, Barry W. Phillips, and James R.
Medley, and John S. Burns. The compensation for each is different
reflecting tenure with Milinx, prior services to us or the time the
Director has been able to devote in advising Management on its ongoing
operations.
For his services to Milinx as a consultant in the fiscal year ended June
30,2000, Mr. Phillips was paid $38,682. No cash payments to him since his
retirement as CFO and Treasurer in April 2000. He has 70,000 shares of
common stock, 250,000 Employee Options at $2.00, and 500,000 Internal A
warrants exchangeable at $4.00 per share and expiring on January 31,2001.
Mr. Medley is paid $3,000 monthly for his advice to the Company and has
Warrants for 180,000 fully vested shares at a price of $4.50 per common
share expiring on January 31,2002. Mr. Burns is to be granted Warrants on
180,000 shares of common stock at the market price on date of grant
expiring on January 31,2002. During the fiscal year ended June 30,2000, the
law firm of which Mr. Burns is a partner was paid $70,734 for services
rendered the Company.
(h) Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. We have entered into employment agreements with each of our
named executive officers. Each agreement has a fixed base salary and
bonuses or stock grants that were approved by our Board of Directors. Among
other terms and conditions, each employee agrees that title to all
intellectual property while in the employ of Milinx is the sole property of
the Company. There are restrictive covenants in the agreements ranging from
six months to two years during which time the employee cannot solicit any
business from any present or former customers of the Company, solicit the
services of anyone in the employ of Milinx, or compete with us in any
respect.
Our Employment Agreements with our Executive Officers can be summarized as
follows:
Maynard L. Dokken---A new employment agreement is being negotiated between
Mr. Dokken and the Board of Directors. The terms and conditions of this
agreement will be fully disclosed in our next regular filing. His present
salary is $118,367 per annum.
Douglas A. Hicks---A signing bonus of $17,006 plus an annual salary and
monthly cash bonuses aggregating $316,898. An option to purchase up to
108,000 shares of common stock at $2.00 per share vesting equally over 36
months with an expiration of May 31,2004. These shares will continue to
vest whether or not he is an employee of Milinx. An option to purchase up
to 650,000 shares of common stock at a price of $3.00 vesting quarterly in
12 equal installments commencing July 1,2000. James W. Summers---An annual
salary of $192,000 plus 3,250 shares of common stock at par value for 12
months commencing June 1,2000. Also,
Mr. Summers is the beneficiary of a Support Trust administered by an
Independent Trustee with an option to purchase up to 100,000 of Milinx
common shares at a price of $4.50 vesting quarterly in equal installments
over 6 quarters.
Clarence C. Cremer---An annual salary of $146,041. He has an option to
purchase up to 150,000 shares of common stock at a price of $2.00 per share
vesting quarterly in 12 equal installments and an additional option to
purchase up to 10,000 common shares at $2.00 per share expiring May 31,
2002.
Mikiko Fujisawa---A new employment agreement is being negotiated between
Ms. Fujisawa and the Board of Directors. The terms and conditions of this
agreement will be fully disclosed in our next regular filing. Her present
salary is $85,714 per annum. Edwin Mark---An annual salary of $112,245. Mr.
Mark also has an option to purchase up to 50,000 common shares vesting
equally over 4 quarters through June 1,2001 and an option to purchase up to
200,000 shares at a price of $.001 per share through March 31,2005 which
will fully vested as of March 31,2001.
(i) Additional Information with Respect to Compensation Committee Interlocks
and Insider Participation in Compensation Decisions. At time of filing,
Milinx Business Group, Inc. has not formed a compensation committee. Until
such a committee can be formed, the duties traditionally considered to
belong to the compensation committee have been undertaken by Maynard
Dokken, President and CEO, and James W. Summers, Chief Financial Officer,
neither of whom sit on any compensation committee.
(k) Performance Graph
<PAGE>
CARIO PERFORMANCE GRAPH
[GRAPHIC OMITTED]
USINTERNETWORKING PERFORMANCE GRAPH
[GRAPHIC OMITTED]
<PAGE>
FUTURELINK PERFORMANCE GRAPH
[GRAPHIC OMITTED]
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Beneficial Ownership
The following table sets forth information regarding the beneficial ownership of
our common stock as of September 30, 2000 for the following:
o each person who is known to us to be the beneficial owner of more than 5%
of the outstanding common stock;
o each of our Directors;
o each of our named Executive Officers;
o all of our Directors and Executive Officers as a group.
Shares of common stock that a person has the right to acquire under options,
warrants or other arrangements within 60 days of September 30, 2000 are deemed
outstanding for purposes of computing the percentage ownership of the person who
has the right to acquire the shares but are not deemed outstanding for computing
the percentage ownership of any other person. Except as provided for under
applicable community property laws or as indicated in the footnotes to the
table, each stockholder identified in the table possesses sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by that stockholder.
The number and percentage of shares beneficially owned are based on 16,600,644
shares of common stock outstanding as of September 30, 2000.
Beneficial ownership is determined in general, as a person who has voting power
or investment power with respect to securities and is treated as a beneficial
owner of those securities.
Unless otherwise indicated, addresses for the beneficial owners of 5% or more of
the Company's voting securities are in care of the registrant at Suite 3827,
1001 Fourth Avenue, Seattle, Washington, 98154.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership (1)(2) Class (3)
--------------- ------------------------------------------ ------------------------------- -----------------
<S> <C> <C> <C>
Common Maynard Dokken 8,250,000 (4) 34%
Common Mikiko Fujisawa 3,600,000 (5) 18%
Common Dr. Bruce Butcher 913,989 (6) 5%
Common Credit Assure International Inc. 2.300,000 (7) 12%
Common Millennium Three Holdings Ltd. 1,158,750 (8) 7%
Common Trans Research International Ltd. 935,250 (9) 6%
Common North American Funding Limited 920,625 (10) 6%
Common Bountiful Prosperity Limited 409,342 (11) 2%
<PAGE>
<FN>
Notes:
(1) Includes Warrants, Options and Preferred as converted to common.
(2) Preferred shares Series A vote two times the common shares into which they
may be converted on all matters.
(3) Based on 16,600,644 common shares. Where beneficial shares are included,
beneficial shares are added to the common to calculate the % of class.
(4) Maynard Dokken owns 2,250,000 Series A Preferred shares and 300,000 common
shares, and is married to Mikiko Fujisawa; and he controls Credit Assure
International Ltd, which owns 750,000 Series A Preferred shares and 50,000
common shares. He also has 400,000 1999 Internal B warrants, exchangeable
at $6.00 per share for 400,000 Series A Preferred shares. Shares include
600,000 preferred series A shares in Trust for Ms. Fujisawa. All but
300,000 shares are beneficially owned.
(5) Mikiko Fujisawa owns 850,000 Series A Preferred shares and 300,000 common
shares and is married to Maynard Dokken; and she has a minor interest in
Credit Assure International Ltd. Mikiko also has 250,000 1999 Internal B
warrants, exchangeable at $6.00 per share for 250,000 Series A Preferred
shares; all but 300,000 shares are beneficially owned. Shares include
600,000 preferred series A shares held in Trust for Mr. Dokken.
(6) Dr. Butcher owns 75,000 Series A Preferred Shares, 88,989 common shares,
500,000 1999 Internal A Warrants @ $/share, expiring 1/31/2001, and 100,000
2000 Warrants @ approx. $4.7/share, expiring 6/30/2002. All but 88,989
shares are beneficially owned.
(7) Credit Assure International Ltd. owns 750,000 Preferred A shares and 50,000
common shares. All but 50,000 shares are beneficially owned. May be
considered beneficially owned by Maynard Dokken and Mikiko Fujisawa.
(8) Millennium Three Holdings Ltd. owns 386,250 1999 International Class A
Warrants and 772,500 common shares. 386,250 shares are beneficially owned.
May be affiliate of other shareholders (10-11 below) but unable to
determine if affiliated.
(9) Trans Research International Ltd. owns 620,000 common shares and 147,500
1999 International Class A Warrants, and 167,750 Class D Warrants. See Note
(9). 315,250 shares are beneficially owned.
(10) North American Funding Ltd. owns 306,875 1999 International Class A
Warrants and 613,750 common shares. See note (9) above. 306,875 shares are
beneficially owned.
(11) Bountiful Prosperity has 409,342 Class E Warrants convertible to 409,342
common shares at $2.00 per share. All are beneficially owned. Affiliate
status is unknown.
(b) Management Ownership.
</FN>
</TABLE>
Unless otherwise indicated, addresses for Management owning the Company's voting
securities are in care of the registrant at Suite 3827, 1001 Fourth Avenue,
Seattle, Washington, 98154.
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Ownership Percent of
Title of Class Beneficial Owner (1)(2) Class (3)
--------------- ---------------------------------------------- --------------------------- ----------------
<S> <C> <C> <C>
Common Maynard Dokken See (a) above 34%
Common Mikiko Fujisawa See (a) above 18%
Common Douglas Martin 180,000 (1)
Common Barry W. Phillips 720,000 (2) 4%
Common John Burns (3) --
Common James Medley 180,000 (4) 01%
Common James W. Summers 139,000 (5) 01%
Common Doug Hicks 758,000 (6) 04%
Common Clare Cremer 160,000 (7) 01%
Common Edwin Mark 289,000 (8) 02%
Common All Officers and Directors as a Group 14,276,000 (10) 47%
<FN>
Notes:
(1) Mr. Martin is a Director nominee and has not accepted the position as
of October 12, 2000. All would be beneficially owned, and exercisable
as warrant for a period of three years from issuance. Exercise price
approximately $4.50 per share.
(2) Barry Phillips has 70,000 common shares, 250,000 Employee Options at
$2.00 per share, and 400,000 1999 Internal A Warrants at $4.00 per
share, expiring 1/31/2001. All but 70,000 shares are beneficially
owned.
(3) Mr. Burns has not yet been awarded Warrants, but is expected to be
awarded Warrants on the same basis as
Mr. Martin. Not included in total.
(4) Mr. Medley has Warrants at $4.50 per share expiring January 1, 2001.
All are beneficially owned. Warrants have a cashless exercise feature.
(5) Mr. Summer has 100,000 Warrants vesting equally over 18 months,
cashless or exercisable under Form S-8 at $4.50 per share, and 39,000
common shares awarded to be registered under Form S-8, held in escrow
and released ratably over one year. Common Shares have not yet been
issued. All but 39,000 shares are beneficially owned.
(6) Mr. Hicks has 108,000 options at $2.00 per share, and 650,000 options
at $3.00 per share, vesting over time. All are beneficially owned.
(7) Mr.Cremer has 10,000 options at $2.00 per share expiring May 31, 2002,
and 150,000 options at $2.00 per share expiring May 31, 2005. All
shares are beneficially owned.
(8) Mr. Mark has 200,000 employee options exercisable over time at a
nominal amount, and 50,000 options at $2.00 per share expiring May 31,
2002; he also has 39,000 shares awarded under S-8 Registration which
are to be held in escrow and released ratably over one year. None of
the common shares have been issued. All but the 39,000 shares are
beneficially owned.
(9) Totals are based on those listed above.
<PAGE>
(10) Does not include Credit Assure shares which is an affiliate of Mr.
Dokken and Ms Fujisawa
</FN>
</TABLE>
(c) Changes in Control of Registrant
There are no arrangements that would result in a change of control.
<PAGE>
Item 13. Certain Relationships and Related Transactions.
The Company's majority stockholder and President has controlling interest in the
following companies: Milinx Marketing Group, Inc. (Texas), Milinx Marketing
Group, Inc. (British Columbia), Milinx Management Corporation, Credit Assure
International, Inc., and Assured Card Corporation (currently inactive).
Effective April 1, 1999, Milinx Marketing Group, Inc. (British Columbia) sold
all of its tangible and intangible assets to Milinx - BC, in exchange for
$96,948 (CND) or approximately $65,900 (US) promissory note that bears interest
at 10% per annum. The full amount was repaid to Milinx Marketing Group prior to
June 30, 2000.
On February 12, 1999, the Company entered into a management agreement with
Milinx Management Corporation ("Milinx Management"). Under the terms of the
agreement Milinx Management was to provide management, administrative and
marketing services to the Company in consideration for payment of all of the
associated expenses to be incurred by Milinx Management in connection with
providing the services, including personnel costs. In addition, Milinx
Management was entitled to a management fee equal to fifteen percent of the
expenses to be billed to the Company. Before this agreement was terminated on
April 1, 1999, the Company received services from Milinx Management, totaling
approximately $44,800. By June 30, 2000, the Company paid all but $3,586 of
these fees. The balance bears no interest and is due on demand.
On October 15, 1999 the Company acquired substantially all assets of Milinx
International, Inc. for consideration of 375,000 of the Company's common shares.
Due to unavailability of the information related to the cost of assets acquired,
the Company valued shares exchanged based on the present value of the future
payments due under the original license agreement (see note E). The value of the
consideration paid and the unamortized book value of the original license
agreement were written off at the time of acquisition.
On October 15, 1999, Credit Assure International, Inc. received 50,000 common
shares from Milinx Business Group in exchange for intellectual property and
trademarks. Due to unavailability of the cost information related to the
intangibles acquired, the Company valued transaction using estimated fair value
of the shares exchanged of $25,000. Acquisition costs were immediately written
off as an expense.
During the year ended June 30, 2000, Milinx - BC also incurred various expenses
on behalf of Milinx Marketing Group, Inc. (Milinx Marketing) totaling $82,644.
At June 30, 2000, the entire balance was recorded as a receivable from Milinx
Marketing.
During the year ended June 30, 2000, the Company entered into a management and
financial consulting services agreement with a company controlled by a director.
The agreement expired March 31, 2000 and required up to $1,200 in weekly
payments for services rendered by this director. The Company incurred $48,800
under this agreement during the year ended June 30, 2000. The entire balance was
paid in full prior to June 30, 2000.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(k) List the following documents filed as a part of the report:
<TABLE>
<CAPTION>
Exhibit
Number Description
-------------- ---------------------------------------------------------------------------------------------------
<S> <C>
2.1 Stock exchange agreement between Forestay and Milinx Business Group, Inc.
3.1 Articles of incorporation of Milinx Business Group, Inc.
3.2 Corporate by-laws of Milinx Business Group, Inc.
3.3 Instruments defining the Rights of Security Holders
10.1 Lease agreement between 356535 B.C. LTD and Milinx Marketing Group, Inc.
10.2 Lease agreement between 356535 B.C. LTD and Milinx Marketing Group, Inc.
10.3 Lease agreement between Chung Ping Cheng and Milinx Marketing Group, Inc.
10.4 Lease agreement between Great Northwest Inc. and Milinx Business Services, Inc.
10.5 Lease agreement between 1045 Howe Street ??? Inc. .? Ltd.? and Milinx Business Services, Inc.
10.6 Addendum to lease agreement between 1045 Howe Street ??? Inc.? Ltd.? and Milinx Business
Services, Inc.
10.7 Offer to sublease between Bema Gold Corp. and Milinx Business Services, Inc. (To Be Added By Amendment)
10.8 Offer to lease between Bentall Properties and Milinx Business Services, Inc. (To Be Added By Amendment)
10.9 Schedule B - attachment to 10.8 above - Three Bentall Centre Sample Lease (To Be Added By Amendment)
10.10 Agreement between AOL Inc. and Milinx Business Services, Inc. (To Be Added By Amendment)
10.11 Private Label Partnership Agreement between Tornado, Inc. and Milinx Business Services, Inc.
(To Be Added By Amendment)
10.12 Executive Services Agreement between Milinx Business Services Inc. and Clare Cremer (To Be Added By Amendment)
10.13 Executive Services Agreement between Milinx Business Services Inc. and James W. Summers (To Be Added By Amendment)
10.14 Executive Services Agreement between Milinx Business Services Inc. and Doug Hicks (To Be Added By Amendment)
10.15 Employment Agreement between Milinx Business Services Inc. and Edwin Mark (To Be Added By Amendment)
10.16 Compensatory Contract (Options) - Maynard Dokken (To Be Added By Amendment)
10.17 Compensatory Contract (Options) - Mikiko Fujisawa (To Be Added By Amendment)
10.18 Compensatory Contract (Options) - Doug Hicks(To Be Added By Amendment)
10.19 Compensatory Contract (Options) - Edwin Mark (To Be Added By Amendment)
10.20 Compensatory Contract (Options) - Barry Phillips (To Be Added By Amendment)
10.21 Compensatory Contract (Options) - James W. Summers (To Be Added By Amendment)
10.22 Compensatory Contract (Options) - Clare Cremer (To Be Added By Amendment)
10.23 Compensatory Contract (Warrants) - Bruce Butcher (To Be Added By Amendment)
10.24 Compensatory Contract (Warrants) - James Medley (To Be Added By Amendment)
10.25 Compensatory Contract (Warrants) - Maynard Dokken (To Be Added By Amendment)
10.26 Compensatory Contract (Warrants) - Mikiko Fujisawa (To Be Added By Amendment)
10.27 Compensatory Contract (Warrants) - TPG Capital Corporation (To Be Added By Amendment)
10.28 Compensatory Contract (Warrants) - Barry Phillips (To Be Added By Amendment)
10.30 Compensatory Contract (Warrants) - Frank Birkholz (To Be Added By Amendment)
10.31 Compensatory Contract (Warrants) - Jim Summers (To Be Added By Amendment)
21.1 Subsidiary List(To Be Added By Amendment)
23.1 Consent by Grant Thornton(To Be Added By Amendment)
27.1 Financial Data Schedule
</TABLE>
Item 15. Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report 10K to be signed
on its behalf by the undersigned, thereunto duly authorized on the 12 day of
October, 2000.
Milinx Business Group, Inc.
By: /s/ Maynard Dokken
--------------------------------------
Maynard Dokken,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Maynard Dokken
Maynard Dokken,
President and Chief Executive Officer
October 12, 2000
/s/ Mikiko Fujisawa
Mikiko Fujisawa,
Corporate Secretary, Treasurer and Director
October 12, 2000
/s/ Jim Summers
Jim Summers,
Chief Financial Officer
October 12, 2000
/s/ Dave Libby
Dave Libby,
Controller
October 12, 2000
/s/ Barry Phillips
Barry Phillips,
Director
October 12, 2000
/s/ James Medley
James Medley,
Director
October 12, 2000
<PAGE>
Consolidated Financial Statements and Report of
Independent Certified Public Accountants
MILINX BUSINESS GROUP, INC. AND SUBSIDIARIES
June 30, 2000 and 1999
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Milinx Business Group, Inc.
We have audited the accompanying consolidated balance sheet of Milinx Business
Group, Inc. (a Delaware corporation) and its Subsidiaries, (the Company) as of
June 30, 2000 and 1999 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended June 30, 2000 and the
six months ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Milinx Business
Group, Inc. and its Subsidiaries, as of June 30, 2000 and 1999, and the results
of their consolidated operations and their cash flows for the year ended June
30, 2000 and the six months ended June 30, 1999, in conformity with accounting
principles generally accepted in the United States of America.
GRANT THORNTON LLP
Seattle, Washington
August 29, 2000
3
<PAGE>
<TABLE>
<CAPTION>
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
2000 1999
------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,162,430 $ 4,522
Receivables
Trade 9,334 17,151
Subscriptions 323,721 -
Goods and services tax 327,149 -
Employee and stockholders 20,692 -
Other - 50,675
------------- ---------------
Total receivables 680,896 67,826
Due from Milinx Marketing Group 82,644 -
Security deposits 209,362 -
Prepaid rent and other 43,549 34,873
------------- ---------------
Total current assets 3,178,881 107,221
PROPERTY AND EQUIPMENT-AT COST, net of accumulated depreciation 3,572,168 714,232
OTHER ASSETS
Licenses 2,036,985 261,250
Capital lease deposits 203,915 -
Security deposits 1,300 24,834
------------- ---------------
$ 8,993,249 $ 1,107,537
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 981,233 $ 391,412
Accrued liabilities 279,758 105,079
Due to Milinx Marketing Group, Inc. - 25,813
Due to Milinx Management Corporation 3,586 3,586
Due to Milinx International, Inc. - current portion - 25,000
Capital lease obligations - current portion 536,061 -
Customer deposits 2,529 -
------------ ---------------
Total current liabilities 1,803,167 550,890
CAPITAL LEASE OBLIGATIONS, net of current portion 927,808 -
DUE TO MILINX INTERNATIONAL, INC., less current portion - 200,000
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Series A 10% non-cumulative, voting convertible preferred stock, liquidation 3,675 3,675
value of $1,176,000
Series B 10% non-cumulative, voting convertible preferred stock, liquidation 1,681 -
value of $3,362,500
Series C 10% non-cumulative, voting convertible preferred stock, liquidation 2,207 -
value of $2,207,412
Common stock 9,671 8,470
Additional paid in capital 14,908,291 1,209,275
Unearned compensation (1,102,626) -
Accumulated deficit (7,480,702) (844,250)
Accumulated other comprehensive deficit (79,923) (20,523)
------------ ---------------
6,262,274 356,647
------------ ---------------
$ 8,993,249 $ 1,107,537
============ ===============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Six months ended
June 30, 2000 June 30, 1999
------------------ ----------------------
<S> <C> <C>
Net sales $ 197,193 $ 43,424
Cost of sales 365,449 48,112
------------------ ----------------------
Gross profit (loss) (168,256) (4,688)
------------------ ----------------------
Selling, general and administrative expenses 6,442,914 839,192
Other expenses (income)
Interest 31,515 -
Miscellaneous (6,233) 370
------------------ ----------------------
25,282 370
Net loss $ (6,636,452) $ (844,250)
================== ======================
Net loss per common share - basic and diluted $ (0.74) $ (0.32)
================== ======================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999 and the year ended June 30, 2000
Common Stock Additional
Series A Preferred Series B Preferred Series C Preferred Paid in
Stock Stock Stock Capital
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, - $ - - $ - - $ - $ - $ -
1999
Issuance of common
stock through series
of private placements 8,470,000 $ 8,470 592,825
Issuance of Series A
preferred stock to
officers and legal
counsel 2,925,000 2,925
Issuance of Series A
preferred stock
through exercise of
stock options by 26,250
Credit Assure 750,000 750
Issuance of Internal
Warrants A to a
director and legal 200
counsel
Issuance of Class A
units to various 590,000
investors
Foreign currency
translation adjustment
Net loss for the six
months ended June 30,
1999
---------- -------- --------- -------- --------- -------- ----------- -------- -----------
Balance at June 30, 3,675,000 3,675 - - - - 8,470,000 8,470 1,209,275
1999
Issuance of common
stock in asset
purchase transactions - - - - - - 425,000 425 174,700
Issuance of common
stock as part of
reverse acquisition - - - - - - 250,000 250 250
Issuance of Class A
units to various - - - - - - - - 2,772,500
investors
Issuance of Class D
units to various - - - - - - - - 9,097,662
investors
Issuance of Series C
preferred stock and
Class D Warrants to
various investors
through a conversion - - - - 2,624,412 2,624 - - 1
of Class D units
Issuance of common
stock to investors
through a conversion
of Series C preferred - - - - (417,000) (417) 417,000 417 -
Issuance of common
stock to an investor
through a conversion
of Class D warrants - - - - - - 37,500 38 74,962
Issuance of Series B
preferred stock and
1999 International A
warrants to various
investors through a - - 1,681,250 1,681 - - - - 1
conversion of Class A
Units
Issuance of common
stock to employees - - - - - - 71,000 71 35,479
Grant of warrants for
legal services - - - - - - - - 122,000
Grant of stock options
to employees - - - - - - - - 1,421,461
Current year
amortization of - - - - - - - - -
deferred compensation
Change in cumulative
translation adjustment - - - - - - - - -
Net loss for year
ended June 30, 2000 - - - - - - - - -
---------- -------- --------- -------- --------- -------- --------- -------- -----------
Balance at June 30,
2000 3,675,000 $ 3,675 1,681,250 $ 1,681 2,207,412 $ 2,207 9,670,500 $ 9,671 $14,908,291
========== ========= ========= ======== ========== ======== ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999 and the year ended June 30, 2000
(CONTINUED)
<TABLE>
<CAPTION>
Unearned Accumulated Accumulated Total
Compensation Deficit Other
Comprehensive
Deficit
<S> <C> <C> <C> <C>
Balance at Jan. 1, 1999 $ - $ - $ - $ -
Issuance of common
stock through series
of private placements 601,295
Issuance of Series A
preferred stock to
officers and legal
counsel 2,925
Issuance of Series A
Preferred stock through
Exercise of stock options
By Credit Assure 27,000
Issuance of Internal
Warrants A to a
director and legal
counsel 200
Issuance of Class A
units to various
investors 590,000
Foreign currency
Translation adjustment (20,523) (20,523)
Net loss for the
Six months ended
June 30, 1999 (844,250) (844,250)
----------------- -------------- ----------- ------------
Balance at
June 30, 1999 (844,250) (20,52) 356,647
Issuance of common
Stock in asset
Purchase transactions - - - 175,125
Issuance of common
Stock as part of
Reverse acquisition - - - 500
Issuance of Class A
Units to various
Investors - - - 2,772,500
Issuance of Class D
Units to various
Investors - - - 9,097,662
Issuance of Series C
Preferred stock and
Class D Warrants to
Various investors
Through a conversion
Of Class D units - - - 2,625
Issuance of common stock
To an investor through a
Conversion of Class C
Preferred - - - -
Issuance of common stock
To an investor through
Conversion of Class D
Warrants - - - 75,000
Issuance of Series B
Preferred stock and 1999
International A warrants
To various investors
Through a conversion of
Class A units - - - 1,682
Issuance of common
Stock to employees - 35,550
Grant of warrants
For legal services - - 122,000
Grant of stock options
To employees (1,421,461) - - -
Current year amortization
Of deferred compensation 318,835 - - 318,835
Change in cumulative
Translation adjustment - - (59,400) (59,400)
Net loss for year ended
June 30, 2000 - (6,636,452) - (6,636,452)
----------------- -------------- ----------- ------------
Balance at (1,102,626) $ (7,480,702) $ (79,923) $ 6,262,27
June 30, 2000 ================= ============== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
7
<PAGE>
<TABLE>
<CAPTION>
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Six months ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Increase (Decrease) in cash
Cash flows from operating activities
Net loss $ (6,636,452) $ (844,250)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 450,814 42,362
Write off of license and trademark costs 304,500 -
Employee stock and stock option compensation 350,835 -
Warrants issued for services 122,000 -
Changes in assets and liabilities
Receivables (289,349) (67,826)
Security deposits and prepaid expenses (194,504) (34,873)
Accounts payable, accrued liabilities and customer 447,756 496,491
deposits
Related party receivables (82,644) (36,282)
-------------- ----------------------
Net cash used in operating activities (5,527,044) (444,378)
Cash flows from investing activities
Acquisition of fixed assets (1,782,659) (677,163)
Increase in licenses (1,843,525) (50,000)
Cash acquired through Forestay 500 -
Capital lease deposits (203,915) (24,834)
-------------- ----------------------
Net cash used in investing activities (3,829,599) (751,997)
Cash flows from financing activities
Proceeds from issuance of common stock 75,000 601,295
Proceeds from issuance of preferred stock 4,307 2,925
Proceeds from issuance of Class A Units 2,772,500 590,000
Proceeds from issuance of Class D Units 8,773,941 -
Proceeds form issuance of 1999 Internal Warrants A - 200
Proceeds from exercise of stock options - 27,000
Proceeds from sale of common stock to employees 3,550 -
Payments on capital lease obligations (55,347) -
-------------- ----------------------
Net cash provided by financing activities 11,573,951 1,221,420
Effect of the exchange rate changes on cash (59,400) (20,523)
-------------- ----------------------
Net increase in cash and cash equivalents 2,157,908 4,522
Cash and cash equivalents at beginning of year 4,522 -
-------------- ----------------------
Cash and cash equivalents at end of year $ 2,162,430 $ 4,522
============== ======================
Cash paid for
Interest $ 8,272 $ 1,652
Taxes - -
Non-cash disclosures:
Equipment under capital lease $ 2,016,198 -
Note issued in connection with asset acquisition $ - 65,681
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Milinx Business Group, Inc. (Milinx - Delaware) was incorporated on December 10,
1998 in the state of Delaware as Milinx Marketing Group, Inc. and commenced its
operations on February 10, 1999. Effective April 1, 1999, the Company formed a
wholly-owned Canadian subsidiary, Milinx Business Services, Inc. (Milinx - BC)
to develop and market its product in Canada. Both companies have adopted June 30
fiscal year ends. Effective May 5, 1999, Milinx - Delaware changed its name to
Milinx Business Group, Inc.
On December 9, 1999, through a transaction structured as a reverse acquisition,
Milinx - Delaware acquired Forestay Corporation, a reporting company registered
in Delaware. The Company elected successor status under Exchange Act Rule
12g-3(a) and became a reporting company effective February 15, 2000. The Company
began trading in the OTC market on June 8, 2000.
Milinx Business Group, Inc. and its subsidiaries (collectively referred thereto
as "the Company") are developing and marketing business application products
including Unified Messaging, Virtual Office Systems, and supplying communication
productivity, and e-commerce functionality. The Company is targeting Small and
Medium Enterprises (SMEs) in the business Application Service Provider (ASP)
market in North America.
1. Principles of Consolidation
---------------------------
The financial statements include the accounts of the Milinx - Delaware and its
wholly owned Subsidiaries. All significant intercompany balances and
transactions have been eliminated.
2. Revenue Recognition
-------------------
Revenue from month-to-month subscriber contracts is recognized monthly as
earned.
3. Property and Equipment
----------------------
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful life ranging as follows:
Computer hardware and telecommunication
equipment 2 - 3 years
Computer software 3 years
Furniture and fixtures 2 - 3 years
Leasehold improvements The lesser of the lease term or the
estimated useful life of the asset
9
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Licenses
--------
The Company capitalizes costs of software licenses acquired from third party
vendors. Amortization is computed using the ratio of current users over the
estimated total number of users during estimated useful life of each license.
The estimated useful life is determined as the lesser of the license term or
estimated life of the license and generally ranges from 2 to 3 years. The
Company evaluates capitalized licensing costs quarterly to determine potential
impairment.
5. Loss per share
--------------
Basic loss per share is based on the weighted average number of common shares
outstanding during the period. The weighted average number of common shares
outstanding during the year ended June 30, 2000 and the six months ended June
30, 1999 was 8,972,958 and 2,656,040, respectively. Diluted loss per share
includes the effect of all potentially dilutive common stock equivalents.
Diluted loss per share for the year ended June 30, 2000 and the six months ended
June 30, 1999 equaled basic loss per share due to antidilutive effect of the
common stock equivalents.
6. Translation Adjustments
-----------------------
The Company considers the U.S. dollar its functional currency. Milinx - BC's
functional currency is the Canadian dollar. Translation adjustments resulting
from the process of translating the subsidiaries financial statements into U.S.
dollars for consolidation purposes is reported as a separate component of
stockholders' equity.
7. Comprehensive Income
--------------------
The Company adopted SFAS 130, Reporting Comprehensive Income. The statement
requires inclusion of foreign currency translation adjustments, reported
separately in stockholders' equity, in other comprehensive income. The Company
had no other comprehensive income items for the year ended June 30, 2000 and the
six months ended June 30, 1999. The Company's total comprehensive loss for the
year ended June 30, 2000 and the six months ended June 30, 1999 was $6,695,852
and $864,773, respectively.
8. Accounting Estimates
--------------------
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
9. New Accounting Pronouncements
-----------------------------
In December 1999, The Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101
provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company has not assessed
the effect that such adoption may have on its consolidated results of operations
and financial position.
10
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In March 2000, Financial Accounting Board of Standards issued Financial
Interpretation No. 44 (FIN 44) Accounting for Certain Transactions involving
Stock Compensation. The provisions of FIN 44 are effective July 1, 2000, and,
except for certain types of modifications, will be applied prospectively to new
awards, exchanges of awards in business combinations, modifications of
outstanding awards, and changes in grantee status that occur on or after that
date. The adoption of FIN 44 could have a material effect on the future
consolidated results of its operations and financial position.
10. Reclassifications
-----------------
Certain reclassifications have been made to prior period numbers to conform to
current year classifications.
NOTE B - MANAGEMENT PLANS
The Company's negative cash flow from operations is expected to continue through
the first two quarters of fiscal year 2001. Until subscription revenue exceeds
cash operating expenditures, which the Company expects to occur by the first
calendar quarter of 2001, substantial additional equity capital will have to be
raised to fund capital expenditures and operations.
In the year ending June 30, 2000, the Company raised $11,573,951 in equity
capital without the benefit of an operating Data Center, software applications
or an ability to market any of its services.
Subsequent to June 30, 2000, the Company raised $1,326,920 (unaudited) from the
conversion of 663,460 in Class D Warrants to common shares prior to August 29,
2000.
The Company is in the process of completing a private placement of 2,500,000
shares of common stock at a price of $4.50 per share for a total of $11,250,000.
While certain expressions of interest have been received, no significant amounts
have been raised prior to August 29, 2000.
Management believes that completion of the private placement along with the
ability since only August, 2000 to solicit subscribers and build recurring
revenue, there will be more than sufficient funding for current operations
through June 30, 2001. If the private placement is not successful and projected
revenues do not materialize as forecasted, the Company will immediately reduce
operating expenses as much as necessary and defer or cancel planned geographic
expansion and capital expenditures. In addition, the Company will pursue
aggressively direct and intermediary third party equity funding sources that
were not required in raising the equity funding to date.
11
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE C - PROPERTY AND EQUIPMENT
June 30, June 30,
2000 1999
------------ ------------
Computer hardware and telecommunication equipment
$ 2,763,822 $ 248,137
Computer software 395,461 340,296
Furniture and fixtures 259,707 75,476
Leasehold improvements 625,729 78,935
------------ ------------
4,044,719 742,844
Accumulated depreciation and amortization 472,551 28,612
------------ ------------
$ 3,572,168 $ 714,232
============ ============
NOTE D - RELATED PARTY TRANSACTIONS
The Company's majority stockholder and President has controlling interest in the
following companies: Milinx Marketing Group, Inc. (Texas), Milinx Marketing
Group, Inc. (British Columbia), Milinx Management Corporation, Credit Assure
International, Inc., Assured Card Corporation (currently inactive).
Effective April 1, 1999, Milinx Marketing Group, Inc. (British Columbia) sold
all of its tangible and intangible assets to Milinx - BC, in exchange for a
$96,948 (CND) or approximately $65,900 (US) promissory note that bears interest
at 10% per annum. The full amount was repaid to Milinx Marketing Group prior to
June 30, 2000.
On February 12, 1999, the Company entered into a management agreement with
Milinx Management Corporation ("Milinx Management"). Under the terms of the
agreement Milinx Management was to provide management, administrative and
marketing services to the Company in consideration for payment of all of the
associated expenses to be incurred by the Milinx Management in connection with
providing the services, including personnel costs. In addition, Milinx
Management was entitled to a management fee equal to fifteen percent of the
expenses to be billed to the Company. Before this agreement was terminated on
April 1, 1999, the Company received services from Milinx Management, totaling
approximately $44,800. By June 30, 2000, the Company paid all but $3,586 of
these fees. The balance bears no interest and is due on demand.
On October 15, 1999 the Company acquired substantially all assets of Milinx
International, Inc. for consideration of 375,000 of the Company's common shares.
Due to unavailability of the information related to the cost of assets acquired,
the Company valued shares exchanged based on the present value of the future
payments due under the original license agreement (see note E). The value of the
consideration paid and the unamortized book value of the original license
agreement were written off at the time of acquisition.
12
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
On October 15, 1999, Credit Assure International, Inc. received 50,000 common
shares from Milinx Business Group in exchange for intellectual property and
trademarks. Due to unavailability of the cost information related to the
intangibles acquired, the Company valued transaction using estimated fair value
of the shares exchanged of $25,000. Acquisition costs were immediately written
off as an expense.
During the year ended June 30, 2000, Milinx - BC also incurred various expenses
on behalf of Milinx Marketing Group, Inc. (Milinx Marketing) totaling $82,644.
At June 30, 2000, the entire balance was recorded as a receivable from Milinx
Marketing.
During the year ended June 30, 2000, the Company entered into a management and
financial consulting services agreement with a company controlled by a director.
The agreement expired March 31, 2000 and required up to $1,200 in weekly
payments for services rendered by this director. The Company incurred $48,800
under this agreement during the year ended June 30, 2000. The entire balance was
paid in full prior to June 30, 2000.
NOTE E - LICENSES
On February 12, 1999, the Company signed a ten-year license agreement with
Milinx International, Inc. ("Milinx International"), an affiliated company (see
note D). The agreement granted the Company an exclusive right to use Internet
and communication technologies, software, trade secrets and marketing systems
for Milinx products in North America. The agreement called for $50,000 to be
paid by August 12, 1999, and nine yearly payments of $25,000 commencing February
12, 2000. On October 15, 1999 the Company acquired substantially all of the
assets of Milinx International for consideration of 375,000 of the Company's
common shares. In connection with the acquisition, the
NOTE E - LICENSES - continued
unamortized value of the license was written off (see note D). During the year
ended June 30, 2000 and the six months ended June 30, 1999, amortization expense
on the license was $6,875 and $13,750, respectively.
The Company entered into a licensing agreement with Intraware, a partner of the
SUN/Netscape Alliance (iPlanet) on April 27, 2000. This licensing provides for
500,000 seats of SUN/Netscape Alliance software for Virtual Office and Unified
Messaging and 500,000 seats of U-Force Unified Messaging. The total cost of
$1,695,115 for this licensing was paid prior to June 30, 2000, except for two
payments of $146,730, which are included in the accounts payable at June 30,
2000. The licensing will be amortized based on the number of seats in use. As of
June 30, 2000, the Data Center was not fully operational and, thus, no
amortization was recognized in the consolidated financial statements.
The Company, in June 2000, entered into several other licensing agreements for
use in its new Data Center, at a total cost of $341,870. Some of the features of
these licenses are to enable subscribers to view and to "drill down" into their
statement detail via the Internet. As of June 30, 2000, the Data Center was not
fully operational and, thus, no amortization was recognized in the consolidated
financial statements.
13
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE F - TRADEMARKS
On March 15, 1999, the Company entered into an agreement with Credit Assure
International, Inc. ("Credit Assure"), an affiliated company (see note D). Under
the agreement, the Company was granted an exclusive right to use the
"CreditAssure" trademark and serve as its exclusive distributor and marketer in
the United States and Canada. In consideration of the rights received, the
Company granted Credit Assure an option to purchase 750,000 shares of the
Company's Preferred A Stock for $27,000. Options were granted on March 15, 1999
and exercised on April 6, 1999. Due to the absence of any market for the
Company's preferred stock, value of the option, if any, at the date of grant was
considered negligible. On October 15, 1999, the Company acquired substantially
all assets of Credit Assure for consideration of 50,000 shares of the Company's
common stock (see note D).
NOTE G - STOCKHOLDERS' EQUITY
The Company has the following types of securities authorized and outstanding:
Common Stock - $0.001 par value, 210,000,000 shares authorized, 9,670,500 shares
outstanding. On June 12, 1999, the Board of directors resolved to increase the
authorized shares to 210,000,000 from 45,000,000 and approved a two for one
stock split on the Company's common stock to facilitate proposed financing
plans. However, on November 4, 1999, the Board of Directors voted to reverse the
foregoing stock split and to consolidate the issued and outstanding shares of
common stock at a ratio of one for two, thus, effectively, negating the June 12,
1999 stock split. The number of authorized shares remained at 210,000,000.
Preferred Stock - 100,000,000 shares of preferred stock authorized and
designated into series as follows: Series A $0.001 par value, 10%
non-cumulative, voting, convertible preferred stock - 15,000,000 shares
authorized, 3,675,000 shares issued and outstanding. Series A preferred
stockholders are entitled to a non-cumulative 10% cash dividend. Each share has
a $.32 liquidation preference in addition to any declared and unpaid dividends
outstanding at the time of liquidation (up to $.32 of accumulated dividends per
each Series A preferred share). Each preferred stockholder is entitled to a
number of votes that equals twice the number of common shares into which said
Series A preferred stock may be converted but no less than six votes for each
Series A preferred share. General conversion provisions entitle each preferred
share to be converted into three common stock shares. The agreement also has
variable conversion
provisions designed to prevent dilution of the preferred stockholders' position.
No shares can be converted during the twelve months following issuance. The
agreement also contains automatic conversion provisions at the election of the
Company. At June 30, 2000, the conversion ratio of Series A preferred stock into
common stock was 1:3.
Series B no par value voting, convertible preferred stock - 10,000,000 shares
authorized, 1,681,250 shares issued and outstanding. Each share of Series B
preferred stock has a $2.00 liquidation preference. Each preferred stockholder
is entitled to a number of votes that equals the number of common shares into
which said Series B preferred stock may be converted. General conversion
provisions entitle each preferred share to be converted into one common stock
share. The agreement also has variable conversion provisions designed to prevent
dilution of the preferred stockholders' position. No shares can be converted
until after December 31, 1999. The agreement also contains automatic conversion
provisions at the election of the Company. At June 30, 2000, the conversion
ratio of Series B preferred stock into common stock was 1:1.
14
<PAGE>
NOTE G - STOCKHOLDERS' EQUITY - continued
Series C $0.001 par value, 10% non-cumulative, voting, convertible preferred
stock - 10,000,000 shares authorized, 2,207,412 shares issued and outstanding.
Series C preferred stockholders are entitled to a non-cumulative 10% cash
dividend. Each share of Series C preferred stock has a $1.00 liquidation
preference less accumulated total dividends paid up to the time of liquidation.
Each preferred stockholder is entitled to a number of votes that equals the
number of common shares into which said Series C preferred stock may be
converted. General conversion provisions entitle each preferred share to be
converted into one common stock share. The agreement also has variable
conversion provisions designed to prevent dilution of the preferred
stockholders' position. The agreement also contains automatic conversion
provisions at election of the Company. At June 30, 2000, the conversion ratio
Series C preferred stock to common was 1:1.
Of the authorized preferred stock, 65,000,000 shares have not yet been
designated to a Series.
Warrants - As of June 30, 2000 the Company has authorized the following
warrants:
1999 Internal Warrant A, 900,000 warrants authorized
These warrants are exchangeable for common shares at $4.50 per share
until January 31, 2002. As of June 30, 2000, 900,000 1999 Internal
Warrants A were issued and outstanding.
1999 International Warrant A, 840,625 warrants authorized
These warrants are exchangeable for common shares at $2.00 per common
share until September 30, 2000. As of June 30, 2000 there were 840,625
1999 International Warrants A issued and outstanding. The Company, at a
nominal sum, may repurchase these warrants if the common shares of the
Company trade at $2.40 for five consecutive trading days and the
warrant is not exercised. None of the warrants have been repurchased by
the Company.
1999 Internal Warrant B, 650,000 warrants authorized
These warrants are exchangeable for Series A Preferred shares at $6.00
per share until March 31, 2005. At June 30, 2000, there were 650,000
1999 Internal Warrant B issued and outstanding.
15
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and1999
NOTE G - STOCKHOLDERS' EQUITY - Continued
Class A Warrants, 500,000 warrants authorized
These warrants are exchangeable for common shares at $5.00 per common
share until September 30, 2000. The Company, at a nominal sum, may
repurchase these warrants if the common shares of the Company trade at
$7.50 for five consecutive trading days and the warrant is not
exercised. At June 30, 2000, there were no Class A Warrants issued.
Class B Warrants, 500,000 warrants authorized
These warrants are exchangeable for common shares at $7.50 per common
share until September 30, 2000. The Company, at a nominal sum, may
repurchase these warrants if the common shares of the Company trade at
$10.00 for five consecutive trading days and the warrant is not
exercised. At June 30, 2000, there were no Class B Warrants issued.
Class D Warrants, 5,000,000 warrants authorized
These warrants are exchangeable for common shares at $2.00 per common
share until November 15, 2000. The Company, at a nominal sum, may
repurchase these warrants if the common shares of the Company trade at
$2.80 for five consecutive trading days and the warrant is not
exercised. During the year ended June 30, 2000, 1,312,206 Class D
warrants were issued through a conversion of Class D units. After
conversion of 37,500 Class D warrants into 37,500 common shares,
1,274,706 Class D warrants remained outstanding at June 30, 2000.
Class E Warrants, 1,000,000 warrants authorized
These warrants are exchangeable for common shares at $2.00 per common
share until December 31, 2000. At June 30, 2000 there were no Class E
Warrants issued.
Units - the Company authorized the following types of hybrid securities:
1999 Class A Units, 1,681,250 authorized
Each unit has a right to purchase one Series B preferred share and 1/2
1999 International Warrant A at a nominal amount of $0.001001. At June
30, 2000, there were no Class A units outstanding.
1999 Class C Units, 10,000,000 authorized
These units have a right to purchase one Series B preferred share, 1/2
Class A Warrant, and 1/2 Class B Warrant at a nominal amount at
$0.001002. At June 30, 2000 there were no Class C Units issued.
1999 Class D Units, 10,000,000 authorized
These units have a right to purchase one Series C preferred share and
1/2 Class D Warrant at a nominal amount of $0.001001. At June 30, 2000,
there were 2,362,511 Class D units outstanding.
Issuances
At June 30, 2000, the Company recorded $323,721 in subscriptions receivable
related to equity sales transactions further described. This amount was
collected in full subsequent to June 30, 2000.
16
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE G - STOCKHOLDERS' EQUITY - Continued
The Company has issued the following types of securities.
Common Stock
During the six months ended June 30, 1999, the Company sold 8,470,000
shares of its voting common stock through several rounds of placements
under Rules 504 and 701 of Regulation D with prices ranging from $0.001
to $0.18 for total proceeds of $601,295.
On October 15, 1999, the Company issued 375,000 to Milinx
International, Inc. in exchange for intellectual property (see note D).
On the same date, the Company issued 50,000 shares to Credit Assure
International, Inc. in exchange for intellectual trademark and other
intellectual property (see note D).
On November 11, 1999 the Company allotted 71,000 common shares for
issuance to employees of the subsidiaries. The shares were issued at
$0.05 per common share for total cash proceeds of $3,550. In connection
with the issuance, the Company recorded compensation expense of $32,000
representing the excess of fair value of the Company's common stock on
the date of grant over the employee purchase price.
On December 9, 1999, the Company issued 250,000 shares to stockholders
of Forestay Corporation in a reverse merger transaction (see note A).
On May 10, 2000, the Company authorized grant of 39,000 shares each to
two of its executives. The shares are to be granted subsequent to the
Company's completing S-2 filing necessary to register its common stock
shares.
From May to June 2000, 417,000 shares of Series C preferred stock were
converted in 417,000 shares of the Company's voting common stock at
stockholders' request.
In June 2000, 37,500 Class D warrants were converted into 37,500 common
stock shares of the Company's voting common stock for total cash
proceeds of $75,000.
Preferred Stock
On February 12, 1999, the Company issued 2,925,000 Series A preferred
shares (as a private placement) to two of the Company's directors and
to its legal counsel for cash proceeds of $2,925.
On March 26, 1999, Credit Assure exercised its previously granted
option to purchase 750,000 Series A preferred shares for total cash
proceeds to the Company of $27,000.
In May 2000, 1,681,250 Class A Units were converted to 1,681,250 Series
B preferred shares and 840,625 1999 International A Warrants resulting
in cash proceeds to the Company of $1,682.
17
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE G - STOCKHOLDERS' EQUITY - Continued
From May to June 2000, 2,624,412 Class D Units were converted into
2,624,412 shares of Series C preferred stock and 1,312,206 Class D
Warrants. In June 2000, 417,000 shares of Series C preferred were
converted into 417,000 common stock shares at the stockholders'
request.
Units
From June 1999 through December 31, 1999, the Company sold 1,681,250
Class A Units at $2.00 per unit for total proceeds of $3,362,500. In
May 2000 unit holders exercised their right to convert these units into
Series B preferred shares and all outstanding Class A Units were
converted into 1,681,250 Series B preferred shares and 840,625
International A Warrants.
From January 1, 2000 to June 30, 2000, the Company issued privately
4,986,923 1999 Class D units for cash proceeds (net of commissions) of
$9,097,662. During this same period, 2,624,412 Class D units were
converted to 2,624,412 Preferred C Series shares and 1,312,206 Class D
Warrants for total proceeds to the Company of $2,625.
Warrants
On May 25, 1999, 900,000 1999 Internal Warrant A were privately issued
to a consultant and the Company's legal counsel. These warrants were
exercisable immediately at $7.50 per common share until January 31,
2003. The warrants were issued for cash proceeds of $200. On May 10,
2000, the Board authorized reduction of the warrant's exercise price to
$4.50 and amended the expiration date to January 31, 2002. In
connection with this modification, the Company recorded $108,000 in
additional consulting and legal expenses. The amount was computed using
the Black-Scholes pricing model with a risk free rate of 5.67%, 83%
volatility, 0% dividend rate and estimated remaining life of 1.6 years.
On July 25, 1999, 650,000 1999 Internal Warrant B were issued to two
directors. These warrants are vested immediately and exercisable at
$6.00 per Series A preferred share until March 31, 2005.
On December 9, 1999, a new director was awarded 90,000 common stock
warrants to be vested quarterly over a two year period and exchangeable
into common shares at an exercise price of $7.50 per share until
December 31, 2002. On May 10, 2000, the Board authorized the reduction
of the warrant's exercise price to $4.50, the increase of the number of
warrants to 180,000 and to decrease the exercise period to January 31,
2002. Due to the May 10, 2000 modification, the warrants will be
subject to quarterly remeasurement with adjustments in value being
recorded as an increase or reduction in compensation expense in
subsequent financial statements due to the implementation of FIN 44.
On May 10, 2000, the Company granted 100,000 fully vested common stock
warrants, with an exercise price of $4.50 as an additional compensation
for legal services performed. The warrants expire January 31, 2001 and
were valued using the Black - Scholes pricing model with a risk free
rate of 5.67%, 83% and 0% volatility and dividend rate, respectively,
and estimated life of approximately 0.7 years. In connection with this
transaction the Company recorded $14,000 in additional legal fees.
18
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE H- STOCK OPTIONS
Employee-Associates Incentive Warrant Plan
On March 15, 1999, the Company's Board of Directors approved the 1999
Employee-Associates Incentive Warrant Plan. The plan was established as
compensation incentive for retention and motivation of employees and independent
contractors. A total of up to 780,000 warrants could be authorized to be issued
(Rule 701) under this plan. The warrants could be purchased by qualified
employees at $0.05 per warrant. Each warrant entitled a warrant holder to
purchase one share of the Company's voting common stock at a maximum exercise
price of $2 per share. The exercise price varies based on the underlying stock
performance. No warrants were issued under the plan through the period ending
June 30, 1999, and this plan was subsequently replaced with the 1999-7 Employee
Stock Option Plan.
1999-7 Employee Stock Option Plan
On July 14, 1999, the Directors approved the creation of the 1999-7 Employee
Stock Option Plan (the Plan) to replace the Employee-Associates Incentive
Warrant Plan. Under this plan, the Company may grant up to 4,000,000 options
(Rule 701) to employees to acquire one common share per option of the
Subsidiaries at an exercise price of $0.002 to $2.00 per share commencing
December 31, 1999 and expiring March 31, 2005. After November 4, 1999 reverse
stock split (see note G), each option is now convertible into 1/2 share of the
Company's common stock. On November 10, 1999, the number of options under this
plan was increased to 6,000,000.
The options granted under the Plan have both time and performance vesting
components. Time vested shares vest in increments through March 31, 2001 and
have a set exercise price of $0.002 per share. Performance vested shares have a
exercise price of $2.00 and vest upon achievement of predetermined milestones
through January 1, 2001.
On December 3, 1999, the Board of Directors modified the options granted under
the Plan to time vest 60% of the original performance vested shares. The
modification had no effect on the June 30, 2000 consolidated results of
operations due to the exercise price exceeding the fair value of the underlying
common stock on the date of the modification. Upon adoption of FIN 44, modified
options will be remeasured quarterly with adjustments in value being recorded as
increase or decrease in employee compensation expense.
Due to the exercise price of the time vested options being below fair value of
the Company's stock on the date of grant, in accordance with Accounting
Principle Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, the Company recorded $1,421,461 in deferred compensation. This
deferred compensation is to be amortized over the vesting period of the
underlying options. During the year ended June 30, 2000, the Company recorded
$318,835 in amortization related to the options vested through June 30, 2000.
Director and Executive Stock Option Plan
On July 25, 1999, the Directors authorized 1,000,000 options for directors and
executives. Each option would entitle its holder to acquire one share of the
Company's common stock per each option granted. These options are exercisable
for the period from July 25, 1999 to March 31, 2005.
Option prices are generally equal to the fair market value of the shares of the
Company's common stock on the date of grant. Options, generally, vest over a
three-year period and expire three to five years from the date of the grant.
19
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE H - STOCK OPTIONS - Continued
Summary of stock option activities
The following is a summary of the employee stock option information for the year
ended June 30, 2000 (all option information has been adjusted for the November
1999 reverse stock split).
Weighted Average
Shares Exercise Price
------------- -----------------
Options outstanding at June 30, 1999 - $ -
Options granted 4,666,250 1.81
Options forfeitured 218,000 0.66
Options exercised - -
------------- -----------------
Options outstanding at June 30, 2000 4,448,250 $ 1.87
Number of options available for grants 2,551,750
The following table summarizes information about options granted during the year
ended June 30, 2000.
<TABLE>
<CAPTION>
Weighted Average Weighted Average Fair
Exercise Price value
<S> <C> <C>
Exercise price exceeds market price at grant date $2.54 $0.85
Exercise price equals market price at grant date $2.89 $1.82
Exercise price is below market price at grant date $0.002 $1.24
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about options outstanding at June 30,
2000.
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Range of Number Exercise Price Remaining Number Weighted Average
Exercise Prices Outstanding Price Contractual Life Exercisable Exercise Price
-------------------- --------------- ---------------- --------------------- ------------- ----------------------
<S> <C> <C> <C> <C> <C>
$0.002-$1.00 1,400,125 $0.002 4.75 280,025 $0.002
$ 1.01-$2.00 1,776,125 $2.00 3.94 643,656 $2.00
$ 2.01-$3.00 650,000 $3.00 4.75 - -
$ 4.00-$5.00 622,000 $4.50 4.18 15,550 4.50
--------------- -------------
4,448,250 939,231 $1.45
=============== =============
The weighted average fair value of the options granted during the year ended
June 30, 2000 was $1.28.
</TABLE>
20
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE H - STOCK OPTIONS - Continued
The Company accounts for its stock-based compensation plan in accordance with
APB Opinion No. 25, under which no compensation is recognized in connection with
options granted to employees except if options are granted with a strike price
below fair value of the underlying stock. The Company adopted the disclosure
requirements SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly,
the Company is required to calculate and present the pro forma effect of all
awards granted. For disclosure purposes, the fair value of each option granted
to an employee has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 5.67%, dividend yield 0%, volatility of 83%, and expected lives
of approximately 4 to 5 years. Based on the computed option values and the
number of the options issued, had the Company recognized compensation expense,
the following would have been its effect on the Company's net loss:
Year ended
June 30, 2000
-----------------
Net loss
---------------------
As reported $ 6,636,452
Pro forma 8,033,231
Loss per share
---------------------
As reported $ (0.74)
Pro forma (0.90)
On April 20, 1999, 200,000 options were granted (under Rule 701) to four of the
Company's non-employee sales associates permitting the purchase of common shares
at $2.00 per share effective July 15, 1999 and expiring on March 31, 2001. Using
an option valuation model, fair value of the options at the date of grant was
determined to be negligible due to low stock volatility and options being "out
of the money" at the date of grant.
NOTE I - INCOME TAXES
The Company accounts for income taxes on the liability method, as provided by
Statement of Financial Accounting Standards 109, Accounting for Income Taxes
(SFAS No. 109). Milinx - Delaware is primarily a United States taxpayer, while
Milinx - BC primarily files in Canada. The income tax provisions reconciled to
the tax computed at the statutory federal rate for the year ended June 30, 2000
and the six months ended June 30, 1999 were:
<TABLE>
<CAPTION>
2000 1999 2000 1999
Milinx - Delaware Milinx - Delaware Milinx - BC Milinx - BC
--------------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Tax benefit at statutory rate $ (483,640) $ (93,766) $ (1,772,753) $ (197,589)
Permanent differences 627 - 10,834 -
Canadian tax rate differences - - (669,691) -
Increase in valuation
allowance 483,013 93,766 2,431,610 197,589
--------------------- --------------------- --------------------- ----------------------
Total $ - $ - $ - $ -
===================== ===================== ===================== ======================
</TABLE>
21
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE I - INCOME TAXES - continued
<TABLE>
<CAPTION>
The components of deferred taxes are as follows at June 30, 2000 and 1999:
2000 1999 2000 1999
Milinx - Delaware Milinx - Delaware Milinx - BC Milinx - BC
--------------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Deferred tax asset:
Net operating loss 210,532
carryforward $ 396,082 $ 64,186 $ 2,792,551 $
Depreciation - - (169,085) (12,943)
Stock options and
warrants 149,884 - - -
Organization costs 29,087 29,580 - -
Other 1,726 - 5,734 -
Valuation allowance (576,779) (93,766) (2,629,200) (197,589)
--------------------- --------------------- --------------------- ----------------------
$ - $ - $ - $ -
===================== ===================== ===================== ======================
</TABLE>
The Company has established the above valuation allowances as of June 30, 2000
and 1999 due to uncertainty of future realization of deferred tax assets. Total
valuation allowance increased by $2,914,624 from June 30, 1999 to June 30, 2000,
primarily due to current year temporary differences. At June 30, 2000, the
Company has $6,841,074 in net operating loss carryforwards for federal income
tax purposes available to offset future income which expire in 2020. Included in
this amount is $6,121,329 of net operating loss for Canadian income tax purposes
which, if utilized before expiring in the next seven years, will result in
additional tax savings of approximately $711,000. Potential changes, if any, in
the company's ownership could result in limitations on the use of its net
operating loss carryforwards.
NOTE J - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
The Company has obligations under long term, non-cancelable operating leases for
premises and equipment. Lease terms range from 4 to 5 years. The future minimum
payments are as follows:
Year ending June 30,
2001 $ 208,755
2002 197,085
2003 200,640
2004 193,853
2005 36,332
----------------------
Total minimum lease payments $ 836,666
======================
22
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE J - COMMITMENTS AND CONTINGENCIES - continued
Consolidated rent expenses for the year ended June 30, 2000 and the six months
ended June 30, 1999, were approximately $287,000 and $32,000, respectively.
2. Capital Leases
In connection with the opening of new Data Center, the Company entered into
several capital lease agreements ranging in duration from two to three years. As
of June 30, 2000, the future minimum lease payments under these agreements are
as follows.
Year ending June 30,
2001 $ 680,256
2002 649,912
2003 377,578
------------------
1,707,746
Less: interest (at 12%) (243,877)
------------------
Present value of capital lease obligations
1,463,869
Current portion of capital lease obligations
536,061
------------------
Long term portion of capital lease
obligations $ 927,808
==================
As of June 30, 2000, the capitalized cost of equipment under capital leases was
$2,016,200. During the year ended June 30, 2000, the Company recorded $114,865
in amortization expense on equipment under capital leases.
In June 2000, the Company entered into three other capital lease agreement and
made downpayments on two of them totaling $203,915. Due to equipment not being
delivered until subsequent to June 30, 2000, no capital lease obligation was
recorded as it relates to these arrangements and, thus, future payments are not
included in capital lease obligation schedule. The downpayments made were shown
as other current assets on June 30, 2000 consolidated balance sheet. New leases
range in duration from 2 to three years and require monthly payments ranging
from $1,540 to $31,870.
23
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE J - COMMITMENTS AND CONTINGENCIES - continued
3. Employment Agreements
At June 30, 2000, the Company has employment contracts with two of its
officers/directors requiring monthly compensation payments of $17,250 in
aggregate and expiring on December 9, 2002. Total payments due are as follows.
Year ending June 30,
2001 $ 207,000
2002 207,000
2003 86,250
-------------
$ 500,250
=============
Total unpaid compensation under contracts as of June 30, 2000 and 1999, were
$7,590 and $51,750, respectively and was included in accrued liabilities in the
accompanying consolidated balance sheet.
4. Legal
Two related claims or potential claims involving computer software licensing
were asserted against the Company. KRP Communications, Ltd. ("KRP") claimed the
sum of $210,048 Canadian funds for an alleged failure to pay timely license fees
for computer software. On January 11, 2000, Interactive Intelligence, Inc.
("Interactive") advanced a claim through the American Arbitration association
for $3,900,000 U.S. funds for an alleged breach of a Software License Agreement.
KRP was Interactive's reseller. Interactive was the owner of a software program
designed to handle intra company telecommunications and small answering
services. The Company responded to Interactive's Arbitration claim by denying
any liability and counterclaimed against Interactive for damages stemming from
Interactive's failure to deliver a workable system. On February 2, 2000, the
Company commenced suit in the Supreme Court of British Columbia, (the "British
Columbia Lawsuit"), naming as defendants KRP, Interactive and others. During
March, 2000, both claims were completely dismissed at no cost to the Company.
From time to time, the Company is a party to various legal proceedings
incidental to its business. The Company believes that none of the other
presently pending legal proceedings will have a material adverse effect upon its
consolidated financial position, results of operations, or liquidity.
NOTE K - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year ended June 30, 2000 Quarter
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Net sales $ 45,971 $ 53,839 $ 56,926 $ 40,457
Gross profit (54,686) (5,936) (56,277) (51,357)
Net loss from operations (1,126,559) (1,550,732) (1,580,343) (2,378,818)
Net loss per common share - basic and
diluted $ (0.13) $ (0.17) $ (0.17) $ ( 0.25)
</TABLE>
24
<PAGE>
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE K - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - continued
<TABLE>
<CAPTION>
Year ended June 30, 1999 Quarter
1st 2nd 3rd 4th
<S> <C> <C> <C> <C>
Net sales N/A N/A $ 16,740 $ 26,684
Gross profit N/A N/A (870) (3,818)
Net loss N/A N/A 153,316 690,934
Net loss per common share - basic and
diluted N/A N/A $ (0.02) $ (0.08)
</TABLE>
NOTE L - SUBSEQUENT EVENTS
Subsequent to June 30, 2000, investors converted 1,829,111 Class D Units to
1,829,111 Series C preferred shares and 914,555 Class D Warrants for total
proceeds to the Company of $1,829.
Subsequent to June 30, 2000, investors converted 2,207,412 Series C preferred
shares to 2,207,412 common shares.
Subsequent to June 30, 2000, 663,460 Class D Warrants were converted to 663,460
common shares for total cash proceeds to the Company of $1,326,920.
25
