U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTON 13 OR 15(d) OF THE EXCHANGE ACT for the
transition period from ___________________ to ________________________.
Commission File Number 0-9940
THE FINX GROUP, INC.
(Exact name of small business issuer as specified in its charter)
(Formerly known as Fingermatrix, Inc.
Delaware 13-2854686
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
249 Saw Mill River Road, Elmsford, NY 10523
(Address of principal executive offices) (Zip Code)
(914) 592-5930
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months, (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X
No ___
As of August 10, 2000, there were 11,537,855 shares of the par value
$.01 common stock outstanding.
1
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------------------------------------------------------------------
Fingermatrix, Inc. and Subsidiaries
Unaudited Consolidated Interim Financial Statements
Table of Contents
--------------------------------------------------------------------------------
INDEPENDENT ACCUNTANT'S REPORT..............................................3
------------------------------
Unaudited Quarterly Consolidated Statements of Operations...................4
---------------------------------------------------------
Unaudited Year to Date Consolidated Statements of Operations................5
------------------------------------------------------------
Unaudited Consolidated Balance Sheet........................................6
------------------------------------
Unaudited Year to Date Consolidated Statements of Cash Flows................7
------------------------------------------------------------
Unaudited Year to Date Consolidated Statement of Changes in
Capital Deficiency.........................................................9
------------------
Footnotes to Unaudited Consolidated Interim Financial Statements...........10
----------------------------------------------------------------
2
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders of
The Finx Group, Inc.
Elmsford, New York
We have reviewed the accompanying consolidated balance
sheet of The Finx Group, Inc. and its subsidiaries as of June 30, 2000,
the related consolidated statements of operations for the three and six
month periods ended June 30, 2000 and 1999, the related consolidated
statement of capital deficiency for the six month period ended June 30,
2000 and the related consolidated statements of cash flows for the six
month periods ended June 30, 2000 and 1999. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less
in scope than an audit conducted in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements referred to above for them to be in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the
Company has suffered a net loss of $2,664,000 for the six month period
ended June 30, 2000 and has a working capital deficiency of $3,308,000 and
a capital deficiency of $2,994,000 as of June 30, 2000. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments which might arise from
the outcome of these uncertainties,
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 10, 2000
3
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Quarterly Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Three months ended June 30, 2000 1999
-----------------------------------------------------------------------------------------------------------
Sales $ 745,000 $ 558,000
Cost of goods sold 428,000 344,000
-----------------------------------------------------------------------------------------------------------
Gross profit 317,000 214,000
Non cash stock option expense 1,766,000 --
Selling, general and administrative expense 626,000 333,000
-----------------------------------------------------------------------------------------------------------
Operating loss (2,075,000) (119,000)
Interest expense and financing fees, related parties (74,000) (21,000)
Interest expense and financing fees, other (59,000) (40,000)
-----------------------------------------------------------------------------------------------------------
Loss before extraordinary items (2,208,000) (180,000)
Extraordinary loss on debt extinguishment -- (429,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (2,208,000) $ (609,000)
===========================================================================================================
Weighted average shares outstanding 2,093,493 1,686,337
Net loss per common share: Basic and fully diluted
Loss before extraordinary items $ (1.05) $ (0.11)
Extraordinary loss on debt extinguishment -- (0.25)
-----------------------------------------------------------------------------------------------------------
Net loss per common share $ (1.05) $ (0.36)
===========================================================================================================
</TABLE>
See Notes to Unaudited Consolidated Interim Financial Statements.
4
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Year to Date Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Six months ended June 30, 2000 1999
-----------------------------------------------------------------------------------------------------------
Sales $ 1,433,000 $ 1,103,000
Cost of goods sold 756,000 744,000
-----------------------------------------------------------------------------------------------------------
Gross profit 677,000 359,000
Non cash stock option expense 1,766,000 --
Selling, general and administrative expense 1,346,000 712,000
-----------------------------------------------------------------------------------------------------------
Operating loss (2,435,000) (353,000)
Interest expense and financing fees, related parties (131,000) (21,000)
Interest expense and financing fees, other (98,000) (80,000)
-----------------------------------------------------------------------------------------------------------
Loss before extraordinary items (2,664,000) (454,000)
Extraordinary loss on debt extinguishment -- (429,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (2,664,000) $ (883,000)
===========================================================================================================
Weighted average shares outstanding 2,047,004 1,316,642
Net loss per common share: Basic and fully diluted
Loss before extraordinary items $ (1.30) $ (0.34)
Extraordinary loss on debt extinguishment -- (0.33)
-----------------------------------------------------------------------------------------------------------
Net loss per common share $ (1.30) $ (0.67)
===========================================================================================================
</TABLE>
See Notes to Unaudited Consolidated Interim Financial Statements.
5
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
As of June 30, 2000
-----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSSETS:
Cash $ 14,000
Accounts receivable, net 314,000
Inventory 1,556,000
Prepaid expense and other current assets 7,000
-----------------------------------------------------------------------------------------------------------
Total current assets 1,891,000
-----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Property, plant and equipment, cost 2,459,000
Less accumulated depreciation and amortization (2,383,000)
-----------------------------------------------------------------------------------------------------------
Net property plant and equipment 76,000
-----------------------------------------------------------------------------------------------------------
Other assets:
Deferred offering costs 148,000
Capitalized software costs 46,000
Security deposits 44,000
-----------------------------------------------------------------------------------------------------------
Total other assets 238,000
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,205,000
===========================================================================================================
LIABILITIES AND CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable, related parties $ 2,346,000
Accounts payable 1,195,000
Revolving line of credit 705,000
Accrued expenses 643,000
Other current liabilities 310,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities 5,199,000
-----------------------------------------------------------------------------------------------------------
CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value; 1,000,000 shares authorized; 1,000
shares issued
Common stock, $.01 par value; 50,000,000 shares authorized; 10,507,855
shares issued and outstanding 105,000
Additional paid-in capital 10,136,000
Accumulated deficit (13,235,000)
-----------------------------------------------------------------------------------------------------------
Total capital deficiency (2,994,000)
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,205,000
===========================================================================================================
</TABLE>
See Notes to Unaudited Consolidated Interim Financial Statements.
6
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Year to Date Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months ended June 30, 2000 1999
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
-----------------------------------------------------------------------------------------------------------
Net loss $ (2,664,000) $ (883,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non cash stock option expense 1,766,000 --
Non cash expense for value of stock issued for payment of a
subsidiary's obligation 28,000 --
Depreciation and amortization 17,000 36,000
Bad debt expense 5,000 --
Write-off long-term assets 2,000 --
Extraordinary loss on debt extinguishment -- 429,000
Changes in assets and liabilities, net of reverse acquisition:
Inventory (280,000) (189,000)
Accounts receivable, net 146,000 110,000
Prepaid expense and other current assets 20,000 (7,000)
Accounts payable 246,000 119,000
Accrued expenses 78,000 (87,000)
Other current liabilities 69,000 36,000
-----------------------------------------------------------------------------------------------------------
Net cash used for operating activities (567,000) (436,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Capitalized software costs (43,000) --
Security deposits (18,000) (2,000)
-----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (61,000) (2,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 814,000 405,000
Deferred offering costs (148,000) --
Net advances (payments) under revolving lines of credit (75,000) 47,000
Other financing activities (20,000) (3,000)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 571,000 449,000
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (57,000) 11,000
Cash - Beginning of period 71,000 14,000
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ 14,000 $ 25,000
-----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 98,000 $ 59,000
Income Taxes -- --
-----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Unaudited Consolidated Interim Financial Statements.
continued
7
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Year to Date Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
--------------------------------------------------------------------------------
Six Months Ended June 30, 2000
--------------------------------------------------------------------------------
The Company granted an aggregate of 737,500 non employee stock options,
which, using the Black-Scholes option valuation formula, had a value of $1.766
million.
The Company issued 10,000 shares of common stock in order to settle an
obligation of Sequential Electronic Systems, Inc., its wholly owned subsidiary.
Such shares, using the Black-Scholes option valuation formula, had a value of
$28,000.
The Company granted an aggregate of 1,088,500 employee stock options.
As of June 30, 2000, such options did not result in any compensation expense.
Six Months Ended June 30, 1999
--------------------------------------------------------------------------------
The Company consummated a reverse acquisition whereby certain assets
and liabilities, for which there was no cash flow impact, were consolidated into
the balance sheet, including $90,000 of property, plant and equipment, $98,000
of patent costs, $344,000 of accounts payable, $109,000 of accrued expenses and
$425,000 of subordinated debt.
Certain creditors of the Company accepted 6,346 shares of Series A
Preferred Stock in exchange for their aggregate debt of $648,000. Using the
Black-Scholes option valuation formula, the 6,346 Series A Preferred shares were
valued at $1.077 million, resulting in a non cash extraordinary loss on debt
extinguishment of $429,000.
--------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
concluded
8
<PAGE>
--------------------------------------------------------------------------------
Fingermatrix, Inc. and Subsidiaries
Unaudited Year to Date Consolidated Statement of Changes in Capital Deficiency
Six Months Ended June 30 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred
Preferred Common Preferred Stock in Common Additional
Shares Shares Stock, Excess of Stock, Paid-in
Outstanding Outstanding Par Value Par Value Par Value Capital
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 115,402 20,000,000 $ 1,000 $ 1,130,000 $ 200,000 $ 7,116,000
Convert Series A preferred stock to
common stock (114,402) 84,978,548 (1,000) (1,130,000) 850,000 281,000
1 for 10 reverse split of common stock -- (94,480,693) -- -- (945,000) 945,000
------------------------------------------------------------------------------------------------------------------------------
1,000 10,497,855 *-- -- 105,000 8,342,000
Issuance of non-employee stock options -- -- -- -- -- 1,766,000
Stock issued for payment of
subsidiaries obligations -- 10,000 -- -- *-- 28,000
Accrued dividends on preferred stock -- -- -- -- -- --
Net loss - Six Months Ended June 30,
2000 -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 1,000 10,507,855 $ *-- $ -- $ 105,000 $ 10,136,000
==============================================================================================================================
</TABLE>
Continued
See Notes to Consolidated Financial Statements.
* - Amounts are less than $1,000.
<PAGE>
--------------------------------------------------------------------------------
Fingermatrix, Inc. and Subsidiaries
Unaudited Year to Date Consolidated Statement of Changes in Capital Deficiency
Six Months Ended June 30 2000
--------------------------------------------------------------------------------
Total
Stockholders'
Equity
Accumulated (Capital
Deficit Deficiency)
-----------------------------------------------------------------------
Balance at December 31, 1999 $ (10,564,000) $ (2,117,000
Convert Series A preferred stock to
common stock -- --
1 for 10 reverse split of common stock -- --
-----------------------------------------------------------------------
(10,564,000) (2,117,000)
Issuance of non-employee stock options -- 1,766,000
Stock issued for payment of
subsidiaries obligations -- 28,000
Accrued dividends on preferred stock (7,000) (7,000)
Net loss - Six Months Ended June 30,
2000 (2,664,000) (2,664,000)
-----------------------------------------------------------------------
Balance at June 30, 2000 $ (13,235,000) $ (2,994,000)
=======================================================================
Concluded
See Notes to Consolidated Financial Statements.
9
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Footnotes to Unaudited Consolidated Interim Financial Statements
Three and Six Months Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
1. Merger Authorized by a Majority of the Stockholders
The Board of Directors of Fingermatrix, Inc. ("Fingermatrix")
determined that the reincorporation of Fingermatrix in Delaware was in the best
interests of Fingermatrix and that such reincorporation would be accomplished
through the merger of Fingermatrix with and into its wholly-owned subsidiary,
The Finx Group, Inc., ("The Finx Group"), a Delaware Corporation. On June 23,
2000, the Fingermatrix Board of Directors approved a merger agreement between
Fingermatrix and The Finx Group (the "Merger Agreement"), which became effective
as of July 14, 2000 upon the written consent of a majority of the Fingermatrix
shareholders consisting of The Trinity Group, Inc. and five other shareholders.
Fingermatrix reported the Merger Agreement in an Information Statement under
Section 14 of the Securities and Exchange act of 1934 and on or about July 14,
2000, such Information Statement was sent to the shareholders of record as of
June 30, 2000.
The board of directors fixed the close of business on June 30, 2000 as
the record date for purposes of consummating the terms of the Merger Agreement.
On June 30, 2000, Fingermatrix had 20,000,000 shares of Common Stock, 114,403
shares of Series A 2% Voting Convertible Preferred Stock (convertible into
84,978,548 shares of Common stock) and 1,000 shares of Series B 4% Preferred
Stock issued and outstanding. On June 30, 2000, The Finx Group had authorized
capital stock consisting of 50,000,000 shares of Common Stock, par value $.01
per share, of which no shares were issued or outstanding and 1,000,000 shares of
Series A 4% Preferred Stock, par value $.01 per share, of which 1,000 shares
were issued and outstanding and were owned by The Trinity Group, Inc.
("Trinity").
Pursuant to the Merger Agreement, each outstanding ten shares of
Fingermatrix Common Stock was automatically converted into the right to receive
one share of The Finx Group's fully paid and non-assessable common stock. Each
outstanding share of Fingermatrix Series A 2% Voting Convertible Preferred Stock
was automatically converted into 742.8 shares of Fingermatrix Common Stock and
then each outstanding ten shares of such Fingermatrix Common Stock was
automatically converted into the right to receive one share of The Finx Group's
fully paid and non-assessable common stock. Each outstanding share of
Fingermatrix Series B 4% Preferred Stock automatically converted into the right
to receive one share of The Finx Group's fully paid and non-assessable Series A
4% Preferred Stock. Each outstanding option or warrant to purchase ten shares of
Fingermatrix Common Stock was converted into an option to purchase one share of
The Finx Group's Common Stock. The By-Laws of Fingermatrix continued in force as
the By-Laws of The Finx Group and the directors and officers of The Finx Group
are the same as those of Fingermatrix.
The Merger Agreement became effective prior to the issuance of the June
30, 2000 quarterly financial statements and, as such, the unaudited interim
financial statements as of and for the three and six months ended June 30, 2000
and 1999 reflect the consummation of the Merger Agreement whereby all capital
stock data have been restated to reflect the terms of the Merger Agreement.
2. Basis of Presentation
In the opinion of Management, the accompanying unaudited interim
consolidated financial statements contain all adjustments (consisting of only
normal, recurring accruals) which are necessary in order to make the Financial
statements not misleading.
10
<PAGE>
The accompanying unaudited interim financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the liquidation of liabilities in the normal course of business. At June 30,
2000, the Company had a working capital deficiency of $3.308 million and a
capital deficiency of $2.994 million. During the current interim period and for
all of 1999 and 1998, the Company has relied on financial support from its
controlling stockholder, Trinity. Management is currently seeking additional
financing; however no assurances can be made that such financing will be
consummated. The continuation of the Company as a going concern is dependent
upon its ability to obtain financing, and to use the proceeds from any such
financing to increase its business to achieve profitable operations. The
accompanying financial statements do not include any adjustments that would
result should the Company be unable to continue as a going concern.
The results of operations for the three and six months ended June 30,
2000 and 1999 are not necessarily indicative of the results to be expected for
the full year.
3. Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the December 31, 1999 Form 10-KSB.
4. Loss Per Share
All loss per share data have been restated to reflect the terms of the
Merger Agreement as more fully described in Footnote 1. Basic loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the year. Diluted loss per share is computed by adjusting
outstanding shares, assuming conversion of all dilutive potential common shares.
At June 30, 2000, the Company had outstanding options to purchase an aggregate
of 1,826,000 shares of common stock and warrants to purchase 59,000 shares of
common stock. The potential common shares from the exercise of all options and
warrants are not included for purposes of calculating fully diluted loss per
share because their inclusion would be anti-dilutive.
5. Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" established standards for the
reporting of information about operating segments and defines operating segments
as components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision maker is Lewis S. Schiller, the Company's Chief
Executive Officer and Vice-Chairman of the Board, who evaluates the Company's
businesses based upon the separate financial statements and information of the
underlying subsidiaries of the Company. Based on the above evaluation, the
Company has identified five reportable business segments as follows: (1)
Electro-Mechanical and Electro-Optical Products, which is an operating business
segment reflecting the activities of Sequential Electronic Systems, Inc.
("Sequential"); (2) Specialized Vending Machines and Avionics Equipment, which
is an operating business segment reflecting the activities of S-Tech, Inc.
("S-Tech"); (3) Fingerprint Identification Technologies, which is a development
stage business segment reflecting the activities of FMX Corp. ("FMX"); (4)
Secured Entrance Systems, which is a development stage business segment
reflecting the activities of Secured Portal Systems, Inc. ("SPS"), and (5)
Internet Viral Marketing, which is a development stage business reflecting the
activities of Starnet365.com, Inc. ("Starnet365.com"). The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies. There are no intersegment sales but there are
intersegment advances and related interest charges, all of which are eliminated
in the consolidated financial statements.
11
<PAGE>
5. Segment Information (continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended June 30, 2000 1999
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 608,000 $ 320,000
Specialized Vending Machines and Avionics Equipment 137,000 238,000
-------------------------------------------------------------------------------------------------------------
Total revenues $ 745,000 $ 558,000
=============================================================================================================
Operating income (loss):
Electro-Mechanical and Electro- Optical Products $ 238,000 $ (121,000)
Specialized Vending Machines and Avionics Equipment (41,000) 6,000
Fingerprint Identification Technologies (55,000) --
Secured Entrance Systems (22,000) --
Internet Viral Marketing (80,000) --
-------------------------------------------------------------------------------------------------------------
40,000 (115,000)
Corporate costs and expenses (2,115,000) (4,000)
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (2,075,000) $ (119,000)
=============================================================================================================
Interest income:
Electro-Mechanical and Electro- Optical Products $ 9,000 --
Intersegment charges (9,000) --
-------------------------------------------------------------------------------------------------------------
Total interest income $ -- --
=============================================================================================================
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 86,000 $ 57,000
Specialized Vending Machines and Avionics Equipment 30,000 --
Fingerprint Identification Technologies 6,000 --
Secured Entrance Systems 3,000 --
Internet Viral Marketing 2,000 --
-------------------------------------------------------------------------------------------------------------
127,000 57,000
Corporate costs and expenses 15,000 4,000
-------------------------------------------------------------------------------------------------------------
Intersegment charges (9,000) --
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 133,000 $ 61,000
=============================================================================================================
Net income (loss):
Electro-Mechanical and Electro- Optical Products $ 160,000 $ (178,000)
Specialized Vending Machines and Avionics Equipment (70,000) 6,000
Fingerprint Identification Technologies (61,000) --
Secured Entrance Systems (25,000) --
Internet Viral Marketing (82,000) --
-------------------------------------------------------------------------------------------------------------
(78,000) (172,000)
Corporate costs and expenses (2,130,000) (8,000)
-------------------------------------------------------------------------------------------------------------
Extraordinary loss on debt extinguishment -- (429,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (2,208,000) $ (609,000)
=============================================================================================================
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 1,000 $ 4,000
Specialized Vending Machines and Avionics Equipment -- 11,000
-------------------------------------------------------------------------------------------------------------
1,000 15,000
Corporate 6,000 4,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 7,000 $ 19,000
=============================================================================================================
</TABLE>
12
<PAGE>
5. Segment Information (continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended June 30, 2000 1999
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 1,252,000 $ 788,000
Specialized Vending Machines and Avionics Equipment 181,000 315,000
-------------------------------------------------------------------------------------------------------------
Total revenues $ 1,433,000 $ 1,103,000
=============================================================================================================
Operating income (loss):
Electro-Mechanical and Electro- Optical Products $ 383,000 $ (233,000)
Specialized Vending Machines and Avionics Equipment (94,000) (116,000)
Fingerprint Identification Technologies (106,000) --
Secured Entrance Systems (88,000) --
Internet Viral Marketing (80,000) --
-------------------------------------------------------------------------------------------------------------
15,000 (349,000)
Corporate costs and expenses (2,450,000) (4,000)
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (2,435,000) $ (353,000)
=============================================================================================================
Interest income:
Electro-Mechanical and Electro- Optical Products $ 16,000 --
Intersegment charges (16,000) --
-------------------------------------------------------------------------------------------------------------
Total interest income $ -- --
=============================================================================================================
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 157,000 $ 97,000
Specialized Vending Machines and Avionics Equipment 43,000 --
Fingerprint Identification Technologies 11,000 --
Secured Entrance Systems 5,000 --
Internet Viral Marketing 2,000 --
-------------------------------------------------------------------------------------------------------------
218,000 97,000
Corporate costs and expenses 27,000 4,000
-------------------------------------------------------------------------------------------------------------
Intersegment charges (16,000) --
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 229,000 $ 101,000
=============================================================================================================
Net income (loss):
Electro-Mechanical and Electro- Optical Products $ 242,000 $ (330,000)
Specialized Vending Machines and Avionics Equipment (137,000) (116,000)
Fingerprint Identification Technologies (118,000) --
Secured Entrance Systems (93,000) --
Internet Viral Marketing (82,000) --
-------------------------------------------------------------------------------------------------------------
(188,000) (446,000)
Corporate costs and expenses (2,476,000) (8,000)
-------------------------------------------------------------------------------------------------------------
Extraordinary loss on debt extinguishment -- (429,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (2,664,000) $ (883,000)
=============================================================================================================
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 5,000 $ 9,000
Specialized Vending Machines and Avionics Equipment -- 23,000
-------------------------------------------------------------------------------------------------------------
5,000 32,000
Corporate 12,000 4,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 17,000 $ 36,000
=============================================================================================================
</TABLE>
13
<PAGE>
5. Segment Information (continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------
Assets:
Electro-Mechanical and Electro- Optical Products $ 1,895,000 $ 1,702,000
Specialized Vending Machines and Avionics Equipment 627,000 582,000
Fingerprint Identification Technologies 3,000 5,000
Secured Entrance Systems -- 1,000
Internet Viral Marketing 60,000 --
-------------------------------------------------------------------------------------------------------------
2,585,000 2,290,000
Corporate 8,215,000 8,077,000
Intersegment investments (8,008,000) (8,007,000)
Intersegment advances (587,000) (397,000)
-------------------------------------------------------------------------------------------------------------
Total assets $ 2,205,000 $ 1,963,000
=============================================================================================================
</TABLE>
6. Subsequent Event
On July 27, 2000, the Company concluded an agreement to acquire a
controlling interest in Shopclue.com, Inc. ("Shopclue.com") in exchange for
1.030 million shares of the Company's common stock. Shopclue.com is an
Application Service Provider that enables small- and medium-sized businesses to
establish an online presence rapidly and inexpensively using Shopclue.com's
software. The software used by Shopclue.com allows its customers to create, edit
and maintain advanced, interactive websites without having any prior knowledge
of web-based programming languages. Shopclue.com has more than 30 employees and
is headquartered in Armonk, New York. Blake Schiller, the son of Lewis S.
Schiller, The Finx Group's chief executive officer and vice-chairman, developed
the Shopclue.com concept and will continue to serve as Shopclue.com's president
under an employment agreement having significant earn-up provisions.
On July 27, 2000, the Company acquired a minority equity interest in
Bizchase.com, Inc. ("Bizchase.com") from Trinity. Bizchase.com will be included
as a part of the Company's consolidated statements of operations and
consolidated statement of financial position due to the effective control as
evidenced by interlocking management and The Finx Group's ownership of a series
of Bizchase.com's preferred stock that gives the Company the right to elect a
majority of the Bizchase.com board of directors. Bizchase.com is a software
development company that provides comprehensive solutions for the online needs
of businesses. Bizchase.com's concept was developed by Blake Schiller, the
founder of Shopclue.com, and provides Shopclue.com with its software under a
licensing agreement.
...................................................................
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty. Although management believes that its expectations are based on
reasonable assumptions, it can give no assurance that its expectations will be
achieved.
The important factors that could cause actual results to differ from
those in the forward-looking statements herein (the "Cautionary Statements") are
more fully described in the Company's December 31, 1999 Form 10-KSB and include,
without limitation: the Company's history of losses and cash flow deficits; need
for additional financing to fund our present and proposed business activities;
dependence on present executive officers and key personnel to manage our present
and proposed business operations and our ability to integrate new officers and
key personnel; dependence upon an exclusive distribution agreement for the
future operations of SPS; dependence upon patent protection for the proposed
activities of FMX; threat that technological change could render certain of our
products and proposed products obsolete or non-competitive; inability to predict
market acceptance for our proposed products; intense competition of the business
in which we intend to engage; threat that E-commerce products and services may
become subject to government regulation; the risks relating to legal
proceedings, as well as other risks referenced form time to time in the
Company's filings with the SEC. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. The Company
does not undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Results of Operations
As more fully disclosed in the footnotes to the unaudited interim
financial statements, The Finx Group has five identifiable business segments.
The operations of each of the business segments is discussed separately as
follows:
Electro-Mechanical and Electro-Optical Products
The Electro-Mechanical and Electro-Optical Products segment comprises
the activities of Sequential, which is primarily engaged in the design,
manufacture and assembly of precision electro-mechanical and electro-optical
products and devices for sale to commercial and governmental customers
throughout the United States. Among such products and devices are optical
encoders, encoded motors and limit programmers.
Sequential's revenues increased $288,000,or 90%, from $320,000 for the
three months ended June 30, 1999 (the "1999 2nd Quarter") to $608,000 for the
three months ended June 30, 2000 (the "2000 2nd Quarter"). Sequential's 2000 2nd
Quarter gross profit was $279,000, or 46% of sales. Sequential's 1999 2nd
Quarter gross profit was $133,000, or 42% of sales. Sequential's revenues
increased $464,000,or 59%, from $788,000 for the six months ended June 30, 1999
(the "1999 Six Month Period") to $1,252,000 for the six months ended June 30,
2000 (the "2000 Six Month Period"). Sequential's 2000 Six Month Period gross
profit was $631,000, or 50% of sales. Sequential's 1999 Six Month Period gross
profit was $317,000, or 40% of sales. During the 2000 Six Month Period a
significant portion of Sequential's revenue was generated on a defense contract
that had a gross margin rate of approximately 50%. As a result, Sequential's
gross profits, as a percentage of revenue, for the 2000 comparative periods
increased significantly when compared to the 1999 comparative periods.
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Sequential's selling, general and administrative expenses decreased
$213,000, or 84%, from $254,000 for the 1999 2nd Quarter to $41,000 for the 2000
2nd Quarter. $135,000 of such decrease resulted from cost containment efforts by
management. The remaining $78,000 decrease comprises a write-off of previously
accrued expenses for which Sequential believes it will not have to pay.
Sequential's selling, general and administrative expenses decreased $302,000, or
55%, from $550,000 for the 1999 Six Month Period to $248,000 for the 2000 Six
Month Period. $224,000 of such decrease resulted from cost containment efforts
by management. The remaining $78,000 reduction relates to the aforementioned
accrued expense write-offs.
As a result of the above, Sequential's operating income increased by
$359,000, or 297%, from an operating loss of $121,000 for the 1999 2nd Quarter
to operating income of $238,000 for the 2000 2nd Quarter. Sequential's operating
income increased by $616,000, or 264%, from an operating loss of $233,000 for
the 1999 Six Month Period to operating income of $383,000 for the 2000 Six Month
Period.
Specialized Vending and Avionics Equipment
The Specialized Vending and Avionics Equipment comprises the activities
of S-Tech, which designs and manufactures two specialized product lines
consisting of specialized vending machines and avionics equipment. "Specialized
Vending" is an industry term used to describe a vending product that utilizes
electronic circuitry and/or computer software. Among the vending machines
manufactured by S-Tech are prepaid telephone debit card machines, bill payment
kiosks, information kiosks, and stamp vending machines.
S-Tech's revenues for the 2000 2nd Quarter decreased $101,000,or 42%,
from $238,000 for the 1999 2nd Quarter to $137,000 for the 2000 1st Quarter.
S-Tech's 2000 2nd Quarter gross profit was $38,000, or 28% of sales. S-Tech'
1999 2nd Quarter gross profit was $81,000, or 34% of sales. S-Tech's revenues
for the 2000 Six Month Period decreased $134,000,or 43%, from $315,000 for the
1999 Six Month Period to $181,000 for the 2000 1st Quarter. S-Tech's 2000 Six
Month Period gross profit was $46,000, or 25% of sales. S-Tech's 1999 Six Month
Period gross profit was $42,000, or 13% of sales. S-Tech's significantly lower
margins, as a percentage of sales, for the 1999 Six Month Period is due
primarily to the fact that during the 1999 1st Quarter, S-Tech incurred a
negative gross profit of $38,000, or 49% of sales, as a result of non-variable
overhead costs being allocated to a relatively minimal sales volume during such
quarter.
S-Tech's selling, general and administrative expenses remained
relatively level when comparing both the 2nd Quarter and Six Month comparable
periods. Selling, general and administrative costs approximated $79,000 and
$75,000, respectively, for the 2000 and 1999 2nd Quarters and approximated
$140,000 and $158,000, respectively, for the 2000 and 1999 Six Month Periods.
As a result of the above, S-Tech's operating loss increased by $47,000,
or 783%, from operating income of $6,000 for the 1999 2nd Quarter to an
operating loss of $41,000 for the 2000 2nd Quarter. S-Tech's operating loss
decreased by $22,000, or 19%, from $116,000 for the 1999 Six Month Period to
$94,000 for the 2000 Six Month Period.
Fingerprint Identification Technologies
The Fingerprint Identification Technologies segment comprises the
activities of FMX, which was formed in 1996 to continue with the development of
products and systems utilizing a proprietary and patented electronic fingerprint
identification technology originally conceived by The Finx Group. The
fingerprint identification technology being developed and utilized by FMX is a
fingerprint identification scanning technology utilized for a variety of access
control and law enforcement purposes. Applications for this technology include
access control systems for banks, airports and industrial and government
facilities, voter registration and electoral anti-fraud systems, welfare and
social program identification systems, immigration control, suspect booking,
prisoner and detainee movement and release control systems, and sensitive
employment authorization systems. On July 24, 2000, FMX delivered its
fingerprint scanning device to the U.S. State Department in Washington, D.C. for
evaluation for varied applications
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within the State Department including providing access control to the secured
portal delivered by its sister company, SPS, to the State Department on the same
date.
FMX did not have revenues or gross profits for the 2000 and 1999 2nd
Quarters or for the 2000 and 1999 Six Month Periods and as such, FMX's operating
losses for such periods consisted entirely of its operating expenses. FMX had no
activity or expenses during the 1999 2nd Quarter and the 1999 Six Month Period.
FMX incurred general and administrative expenses of $55,000 for the 2000 2nd
Quarter and $106,000 for the 2000 Six Month Period. FMX had nominal activity in
1998 and the first part of 1999 due to a lack of funding. During the later part
of 1999 and during the 2000 1st and 2nd Quarters, the development activity
increased as a result of funding received from Trinity.
Secured Entrance Systems
The Secured Entrance Systems segment comprises the activities of SPS,
which is a newly created subsidiary formed in 1999 for the purpose of entering
into an exclusive distribution agreement with GIL Security Systems, Inc.
pursuant to which SPS was engaged as the exclusive distributor for a certain
secured entrance system developed, manufactured and marketed by GIL (the
"Security Systems") for a term commencing as of September 1, 1999 and expiring
on August 31, 2009. SPS obtained the exclusive right to distribute the Security
Systems to certain categories of customers defined in the Distribution
Agreement, including certain agencies of the Federal Government, including U.S.
embassies, U.S. courthouses and U.S. government buildings, department stores and
retail stores located in the United States, the Government of Israel, NCR Corp.,
and Sun Microsystems. The Security Systems are currently in use in at various
locations, including the new American Airlines Terminal in Dallas, United
Airlines at O'Hare Airport in Chicago and the Port Authority Newark Airport;
Citicorp Computer Data Center (Ft. Lee, N.J.) and Rikers Island Detention Center
in New York. Further, on July 24, 2000, SPS delivered its ultra secure
unattended portal to the U.S. State Department in Washington, D.C. for
evaluation. SPS incurred general and administrative expenses, and therefore net
operating losses, of $22,000 and $88,000, respectively, for the 2000 2nd Quarter
and the 2000 Six Month Period.
Internet Viral Marketing
The Internet Viral Marketing segment comprises the activities of
Starnet365.com, which is a newly created subsidiary formed in 2000.
Starnet365.com is a development stage company and is nearing its pre-launch
stage for its web site. Starnet365.com combines the power of network marketing,
the power of the Internet and extensive marketing tools, coined "Viral
Marketing" by Starnet365.com. Starnet365.com enables individuals to own their
own online E-Commerce website rapidly and inexpensively, utilizing
Starnet365.com's software and Internet expertise. Starnet365.com incurred
general and administrative expenses, and therefore a net operating loss of
$80,000 for the 2000 2nd Quarter and the 2000 Six Month Period.
Corporate costs and expenses
Corporate costs and expenses comprise the expenses of The Finx Group,
the holding company. As a result of the SES Merger and its treatment as a
reverse acquisition, all of the activities of The Finx Group prior to the April
28, 1999 SES Merger were recapitalized into equity and are not reflected in the
results of operations. As a result, the holding company had no general and
administrative expenses, and therefore no operating loss for the 1999 1st
Quarter. The holding's company's general and administrative expense for the 2000
and 1999 2nd Quarters was $349,000 and $4,000, respectively, and for the 2000
and 1999 Six Month Periods was $684,000 and $4,000, respectively. As of June 30,
2000, Mr. Lewis S. Schiller and Ms. Grazyna B. Wnuk are owed an aggregate of
$400,000 for unpaid salaries of which $200,000 was accrued as of December 31,
1999 and $100,000 and $200,000,respectively, is included in the 2000 2nd Quarter
and 2000 Six Month Period corporate costs. Other significant corporate costs for
the 2000 2nd Quarter and the 2000 Six Month Period include audit fees,
consulting fees, legal and professional fees and public relation costs.
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Non Cash Stock Option Expense
The Company granted an aggregate of 737,500 non employee stock options,
which, using the Black-Scholes option valuation formula, had a value of $1.766
million, which was recorded as an operating expense for the 2000 2nd Quarter and
the 2000 Six Month Period.
Non-Operating Components of Net Loss
Interest Expense and Financing Fees, Other
The interest and maintenance fees on the on the revolving line of
credit amounted to $59,000 and $40,000, respectively for the 2000 and 1999 2nd
Quarters and $98,000 and $80,000, respectively, for the 2000 and 1999 Six Month
Periods. Pursuant to an amended revolving line of credit agreement between
Sequential and FINOVA Capital Corporation (the "FINOVA Line of Credit"),
Sequential is eligible to receive advances on up to 80% of its eligible accounts
receivable to a maximum of $400,000. The FINOVA Line of Credit requires payment
of a 1% annual facility fee and a 1% monthly commitment fee, against which
monthly interest, exclusive of interest on any over advances, is applied. The
annual monthly interest rate on the FINOVA Line of Credit is the greater of
18.5% or the prime rate in effect in New York City plus 10%, and is payable
monthly. The FINOVA Line of Credit is collateralized by all of the assets of
Sequential. The term of the FINOVA Line of Credit has an expiration date of July
31, 2000 but was extended to July 31, 2001 as a result of an automatic extension
provision whereby the agreement is automatically extended for one year terms
unless either party gives 30 days prior notice of intent to not extend the
agreement. Trinity has guaranteed Sequential's performance under the FINOVA Line
of Credit and provided FINOVA Capital Corporation with a collateral security
deposit of $522,500 on which Trinity receives from FINOVA a return on the cash
collateral in an amount equal to the greater of the prime rate of Citibank,
N.A., plus 6% or 14.5% per annum. As of June 30, 2000, Sequential had received
over advances on the FINOVA Line of Credit in the amount of $305,000.
Interest Expense, Related Parties
The Company incurs interest expense on loans and advances received from
Trinity. The interest expense incurred on the loans and advances from Trinity
was $74,000 and $21,000, respectively, for the 2000 and 1999 2nd Quarters and
$131,000 and $21,000, respectively, for the 2000 and 1999 Six Month Periods. As
of June 30, 2000, the Company owes Trinity in the aggregate approximately $2.346
million of which all but approximately $36,000 bears interest at 9%.
Extraordinary Loss
On April 28, 1999 certain creditors of the Company accepted 6,346
shares of Series A Preferred Stock in exchange for their aggregate debt of
$648,000. The 6,346 Series A Preferred shares are convertible into 471,381
common shares of the Company and using the Black-Scholes option valuation
formula, such shares were valued at $1.077 million, resulting in $429,000 of
expense from issuance of the stock. Effective June 30, 2000, all of such Series
A Preferred Shares were converted into common stock.
Net Loss
As a result of the above, the Company incurred a consolidated net loss
of $2.208 million, or $1.05 per common share, for the 2000 2nd Quarter and
$609,000, or $.36 per common share for the 1999 2nd Quarter and incurred a
consolidated net loss of $2.545 million, or $1.30 per common share, for the 2000
Six Month Period and $883,000, or $.67 per common share for the 1999 Six Month
Period.
Financial Condition - Liquidity and Capital Resources
As of June 30, 2000 the Company had a working capital deficiency of
$3.308 million. Approximately $2.746 million of such deficiency relates to
amounts owed to related parties, including accrued and unpaid salaries of
$400,000 owed to Lewis S. Schiller and Grazyna B. Wnuk and $2.346
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million owed to Trinity, its controlling stockholder, for loans and advances
made to fund the operations of the Company.
During the 2000 Six Month Period, the Company used $567,000 for
operating activities, used $61,000 for investing activities and generated
$571,000 from financing activities. As of June 30, 2000, Sequential and S-Tech
are delinquent on payment of payroll taxes approximating $241,000. The Company
has issued its capital stock in order to make its recent acquisitions and is
pursuing various financing sources with which to fund future operating
activities.
As of June 30, 2000, the Company has a working capital deficiency of
$3.308 million and a capital deficiency of $2.994 million. During the current
interim period and for all of 1999 and 1998, the Company has relied on financial
support from its controlling stockholder, The Trinity Group, Inc. ("Trinity").
Management is currently seeking additional financing; however no assurances can
be made that such financing will be obtained. The continuation of the Company as
a going concern is dependent upon the ability of Trinity to continue to provide
financing, and or, to obtain financing, and to use the proceeds from any such
financing to increase its business to achieve profitable operations. The
accompanying consolidated financial statements do not include any adjustments
that would result should the Company be unable to continue as a going concern.
PART II OTHER INFORMATION
Item 5. Other Information
On July 27, 2000, the Company concluded an agreement to acquire a
controlling interest in Shopclue.com, Inc. ("Shopclue.com") in exchange for
1.030 million shares of the Company's common stock. Shopclue.com is an
Application Service Provider that enables small- and medium-sized businesses to
establish an online presence rapidly and inexpensively using Shopclue.com's
software. The software used by Shopclue.com allows its customers to create, edit
and maintain advanced, interactive websites without having any prior knowledge
of web-based programming languages. Shopclue.com has more than 30 employees and
is headquartered in Armonk, New York. Blake Schiller, the son of Lewis S.
Schiller, The Finx Group's chief executive officer and vice-chairman, developed
the Shopclue.com concept and will continue to serve as Shopclue.com's president
under an employment agreement having significant earn-up provisions.
On July 27, 2000, the Company acquired a minority equity interest in
Bizchase.com, Inc. ("Bizchase.com") from Trinity. Bizchase.com will be included
as a part of the Company's consolidated statements of operations and
consolidated statement of financial position due to the effective control as
evidenced by interlocking management and The Finx Group's ownership of a series
of Bizchase.com's preferred stock that gives the Company the right to elect a
majority of the Bizchase.com board of directors. Bizchase.com is a software
development company that provides comprehensive solutions for the online needs
of businesses. Bizchase.com's concept was developed by Blake Schiller, the
founder of Shopclue.com, and provides Shopclue.com with its software under a
licensing agreement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule.(1)
(99.1) Purchase agreement to acquire a controlling interest in
Shopclue.com, Inc.
(1) Filed only with the SEC in electronic format.
(b) Reports on Form 8-K
Current report on Form 8-K reporting under Item 4 the change in the
Company's certifying accountant.
.............................
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE FINX GROUP, INC.
/S/______________ Chief Executive Officer and Director August 10, 2000
Lewis S. Schiller (Principal Executive and Accounting Officer)
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