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 September 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 November 17, 2000, there were 11,507,885 shares of the par value
$.01 common stock outstanding.
1
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Interim Financial Statements
Table of Contents
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INDEPENDENT ACCOUNTANT'S REPORT.............................................3
-------------------------------
Unaudited Quarterly Consolidated Statements of Operations...................4
---------------------------------------------------------
Unaudited Year to Date Consolidated Statements of Operations................5
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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 September 30, 2000, the
related consolidated statements of operations for the three and nine month
periods ended September 30, 2000, the related consolidated statement of capital
deficiency for the nine month period ended September 30, 2000 and the related
consolidated statement of cash flows for the nine month period ended September
30, 2000. 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 $9,052,000 for the nine month period ended September 30,
2000 and has a working capital deficiency of $5,723,000 and a capital deficiency
of $5,382,000 as of September 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,
We have not reviewed the accompanying consolidated
statements of operations for the three and nine month periods ended September
30, 1999 or the consolidated statement of cash flows for the nine months ended
September 30, 1999 and give no assurance on them.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
November 17, 2000
3
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Quarterly Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
-----------------------------------------------------------------------------------------------------------
Three months ended September 30, 2000 1999
-----------------------------------------------------------------------------------------------------------
Sales $ 584,000 $ 556,000
Cost of goods sold 379,000 313,000
-----------------------------------------------------------------------------------------------------------
205,000 243,000
Changes in reserve for slow moving inventory (400,000) --
-----------------------------------------------------------------------------------------------------------
Gross profit (195,000) 243,000
-----------------------------------------------------------------------------------------------------------
Non cash research and development expense 4,768,000 --
Selling, general and administrative expense 1,179,000 331,000
Write-off deferred offering costs 148,000 --
-----------------------------------------------------------------------------------------------------------
Total operating expenses 6,095,000 331,000
-----------------------------------------------------------------------------------------------------------
Operating loss (6,290,000) (88,000)
Interest expense and financing fees, other (61,000) (65,000)
Interest expense and financing fees, related parties (37,000) (18,000)
-----------------------------------------------------------------------------------------------------------
Loss before extraordinary items (6,388,000) (171,000)
Extraordinary loss on debt extinguishment -- (26,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (6,388,000) $ (197,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 11,225,268 2,000,000
Net loss per common share: Basic and fully diluted
Loss before extraordinary items $ (0.57) $ (0.09)
Extraordinary loss on debt extinguishment -- (0.01)
-----------------------------------------------------------------------------------------------------------
Net loss per common share $ (0.57) $ (0.10)
-----------------------------------------------------------------------------------------------------------
</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>
-----------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2000 1999
-----------------------------------------------------------------------------------------------------------
Sales $ 2,017,000 $ 1,659,000
Cost of goods sold 1,135,000 1,057,000
-----------------------------------------------------------------------------------------------------------
882,000 602,000
Changes in reserve for slow moving inventory (400,000) --
-----------------------------------------------------------------------------------------------------------
Gross profit 482,000 602,000
-----------------------------------------------------------------------------------------------------------
Non cash research and development expense 4,768,000 --
Selling, general and administrative expense 2,497,000 1,043,000
Non cash stock option expense 1,766,000 --
Write-off deferred offering costs 148,000 --
Non cash expense for stock issued to pay obligations 28,000 --
-----------------------------------------------------------------------------------------------------------
Total operating expenses 9,207,000 1,043,000
-----------------------------------------------------------------------------------------------------------
Operating loss (8,725,000) (441,000)
Interest expense and financing fees, related parties (168,000) (39,000)
Interest expense and financing fees, other (159,000) (145,000)
-----------------------------------------------------------------------------------------------------------
Loss before extraordinary items (9,052,000) (625,000)
Extraordinary loss on debt extinguishment -- (455,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (9,052,000) $ (1,080,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 5,140,045 1,546,931
Net loss per common share: Basic and fully diluted
Loss before extraordinary items $ (1.76) $ (0.41)
Extraordinary loss on debt extinguishment -- (0.29)
-----------------------------------------------------------------------------------------------------------
Net loss per common share $ (1.76) $ (0.70)
-----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Unaudited Consolidated Interim Financial Statements.
5
<PAGE>
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
-----------------------------------------------------------------------------------------------------------
As of September 30, 2000
-----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSSETS:
Cash $ 175,000
Accounts receivable, net 281,000
Inventory 1,357,000
Prepaid expense and other current assets 12,000
-----------------------------------------------------------------------------------------------------------
Total current assets 1,825,000
-----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Property, plant and equipment, cost 2,537,000
Less accumulated depreciation and amortization (2,395,000)
-----------------------------------------------------------------------------------------------------------
Net property plant and equipment 142,000
-----------------------------------------------------------------------------------------------------------
Other assets:
Capitalized software costs, net 85,000
Deferred offering costs 62,000
Security deposits 42,000
Patent costs, net 10,000
-----------------------------------------------------------------------------------------------------------
Total other assets 199,000
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,166,000
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,399,000
Revolving line of credit 652,000
Accrued expenses 1,107,000
Notes payable, related parties 3,999,000
Other current liabilities 391,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities 7,548,000
-----------------------------------------------------------------------------------------------------------
CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value; 1,000,000 shares authorized; 1,000
shares issued and outstanding
Common stock, $.01 par value; 50,000,000 shares authorized; 11,507,885
shares issued and outstanding 115,000
Additional paid-in capital 14,126,000
Accumulated deficit (19,623,000)
-----------------------------------------------------------------------------------------------------------
Total capital deficiency (5,382,000)
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,166,000
-----------------------------------------------------------------------------------------------------------
</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>
-----------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2000 1999
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
-----------------------------------------------------------------------------------------------------------
Net loss $ (9,052,000) $ (1,080,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non cash research and development expense 4,768,000 --
Non cash stock option expense 1,766,000 --
Changes in reserve for slow moving or obsolete inventory 400,000 --
Write-off deferred offering costs 148,000 --
Depreciation and amortization 26,000 68,000
Non cash expense for stock issued to pay obligations 28,000 --
Bad debt expense 5,000 --
Write-off long-term assets 2,000 --
Extraordinary loss on debt extinguishment -- 455,000
Changes in assets and liabilities, net of reverse acquisition:
Inventory (81,000) (259,000)
Accounts receivable, net 197,000 (59,000)
Prepaid expense and other current assets 17,000 22,000
Accounts payable 423,000 64,000
Accrued expenses 375,000 80,000
Other current liabilities 66,000 (31,000)
-----------------------------------------------------------------------------------------------------------
Net cash used for operating activities (1,312,000) (740,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Capitalized software costs (82,000) --
Capital expenditures (16,000) --
Capitalized patent costs (10,000) --
Cash of acquired subsidiary 8,000 --
Security deposits (3,000) (5,000)
-----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (103,000) (5,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 1,882,000 504,000
Deferred offering costs (210,000) --
Net advances (payments) under revolving lines of credit (128,000) 262,000
Payments on capital lease obligations (17,000) (5,000)
Repayment of notes payable (8,000) (5,000)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,519,000 756,000
-----------------------------------------------------------------------------------------------------------
Net increase in cash 104,000 11,000
Cash - Beginning of period 71,000 14,000
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ 175,000 $ 25,000
-----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 129,000 $ 141,000
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:
--------------------------------------------------------------------------------
Nine Months Ended September 30, 2000
--------------------------------------------------------------------------------
The Company consummated the Shopclue.com, Inc. acquisition whereby
certain assets and liabilities, for which there was no cash flow impact, were
consolidated into the balance sheet, including $18,000 of accounts receivable,
$2,000 of prepaid expenses, $14,000 of net property, plant and equipment,
$13,000 of security deposits, $27,000 of accounts payable, $167,000 of accrued
expenses, $585,000 of notes payable, related party and $44,000 of other current
liabilities.
The Company 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 1,000,030 shares of common stock to acquire
Shopclue.com, Inc. resulting in $4.768 million of non cash research and
development expense.
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 1,238,500 employee stock options.
As of September 30, 2000, such options did not result in any compensation
expense.
The Company acquired equipment under capital lease obligations with a
net present value of $45,000.
Nine Months Ended September 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.
The Company extinguished certain obligations with no cash flow impact.
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. Using
the Black-Scholes option valuation formula, the 6,346 Series A Preferred shares
were valued at $1.077 million, resulting in $429,000 of compensation expense. On
July 20, 1999, the Company settled amounts owed to the former landlord of the
Company by making cash payments of $70,000, issuing a note payable for $45,000
and issuing 268 Series A Preferred shares. Using the Black-Scholes option
valuation formula, the 268 Series A Preferred shares were valued at $46,000. The
total consideration given to the landlord, including the calculated value of the
Series A Preferred shares exceeded the amounts owed to the former landlord by
approximately $26,000. All of such excess is attributed to the valuation of the
Series A Preferred shares and was recorded as compensation expense from the
issuance of stock, and presented in the financial statements as an extraordinary
item. Effective September 30, 2000, all of such Series A Preferred Shares were
converted into common stock.
--------------------------------------------------------------------------------
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
Nine Months Ended September 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
Stock issued to acquire Shopclue.com,
Inc. -- 1,000,030 -- -- 10,000 3,990,000
Accrued dividends on preferred stock -- -- -- -- -- --
Net loss - Nine Months Ended September
30, 2000 -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 1,000 11,507,885 $ *-- $ -- $ 115,000 $ 14,126,000
==============================================================================================================================
</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
Nine Months Ended September 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
Stock issued to acquire Shopclue.com,
Inc. -- 4,000,000
Accrued dividends on preferred stock (7,000) (7,000)
Net loss - Nine Months Ended September
30, 2000 (9,052,000) (9,052,000)
-----------------------------------------------------------------------
Balance at September 30, 2000 $ (19,623,000) $ (5,382,000)
=======================================================================
Concluded
See Notes to Consolidated Financial Statements.
9
<PAGE>
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Footnotes to Unaudited Consolidated Interim Financial Statements
Three and Nine Months Ended September 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. ("Trinity") 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 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 unaudited interim financial statements as of and for the three and
nine months ended September 30, 2000 and 1999 reflect the consummation of the
Merger Agreement whereby all capital stock data reflects the 10 for 1 reverse
stock split.
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.
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
September 30, 2000, the Company had a working capital deficiency of $5.723
million and a capital deficiency of $5.382 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
10
<PAGE>
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 the ability of Trinity to continue to provide
financial support, and or, 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 nine months ended September
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 September 30, 2000, the Company had outstanding options to purchase an
aggregate of 1,976,000 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. Related Party Transactions
Acquisition of Shopclue.com, Inc.
On July 27, 2000, the Company concluded an agreement to acquire a
controlling interest in Shopclue.com, Inc. ("Shopclue.com") in exchange for
1,000,030 shares of the Company's Common Stock. The Company purchased the
Shopclue.com common shares from family members of Lewis S. Schiller, the
Company's Chief Executive Officer and Vice Chairman of its Board of Directors.
As of the date of the acquisition, Shopclue.com had an excess of liabilities
over assets of $768,000 and the common shares issued to acquire Shopclue.com
were valued at $4 million, resulting in a purchase price that was in excess of
net assets by $4.768 million. Because the acquisition was consummated between
related parties, the excess purchase price cannot be recorded as goodwill and
was recorded as non cash research and development expense. As of September 30,
2000, the Company owned 32.24% of Shopclue.com's common stock and all of its
issued and outstanding preferred stock which gives the Company the right to
elect a majority of the Shopclue.com board of directors. Shopclue.com is
included as a part of the Company's consolidated statements of operations and
consolidated statement of financial position due to the effective control as
evidenced by interlocking management and The Finx Group's ownership of a series
of Shopclue.com's preferred stock that gives the Company the right to elect a
majority of the Shopclue.com board of directors.
Shopclue.com 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
remains a significant shareholder of Shopclue.com and will continue to serve as
an executive of Shopclue.com.
11
<PAGE>
Acquisition of Biz Chase, Inc.
On July 27, 2000, the Company acquired a 23.42% equity interest in Biz
Chase, Inc. ("Biz Chase") from Trinity. Biz Chase is included as a part of the
Company's consolidated statements of operations and consolidated statement of
financial position due to the effective control as evidenced by interlocking
management and The Finx Group's ownership of a series of Biz Chase's preferred
stock that gives the Company the right to elect a majority of the Biz Chase
board of directors. Biz Chase has developed a wholesale web based development
solution that provides a simple, affordable and feature rich online solution for
small businesses. Biz Chase's concept was developed by Blake Schiller, the
founder of Shopclue.com, and provides Shopclue.com with its software under a
licensing agreement. Effective September 30, 2000, Biz Chase received common
stock shares of Shopclue.com representing 19% of Shopclue.com's outstanding
common stock shares in exchange for the assumption of $897,000 of notes payable
that Shopclue.com owed to related parties.
The following pro forma unaudited results assume the above two
acquisitions had occurred at the beginning of the indicated periods.
Three months ended September 30, 2000 1999
--------------------------------------------------------------------------------
Sales $ 584,000 $ 556,000
Net loss $ (6,500,000) $ (197,000)
Net loss per common share $ (0.58) $ (0.10)
--------------------------------------------------------------------------------
Nine months ended September 30, 2000 1999
--------------------------------------------------------------------------------
Sales $ 2,037,000 $ 1,659,000
Net loss $ (9,662,000) $ (1,080,000)
Net loss per common share $ (1.88) $ (0.70)
--------------------------------------------------------------------------------
The pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the acquisition been
effective at the beginning of the indicated periods or of the future results of
operations.
6. 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 seven 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"), (5) Internet
Viral Marketing, which is a development stage business reflecting the activities
of Starnet365.com, Inc. ("Starnet365.com"), (6) Web Based Development Solutions,
which is a development stage business reflecting the activities of Biz Chase,
Inc. and (7) Application Service Provider, which is an operating business
segment reflecting the operations of Shopclue.com. The
12
<PAGE>
6. Segment Information (continued)
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
There are intersegment consulting fees and intersegment advances and
related interest charges, all of which are eliminated in the consolidated
financial statements.
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 462,000 $ 450,000
Specialized Vending Machines and Avionics Equipment 94,000 106,000
Application Service Provider 28,000 --
-------------------------------------------------------------------------------------------------------------
584,000 556,000
Corporate consulting fees 270,000 --
Intersegment consulting fees (270,000 ) --
-------------------------------------------------------------------------------------------------------------
Total revenues $ 584,000 $ 556,000
-------------------------------------------------------------------------------------------------------------
Operating loss:
Electro-Mechanical and Electro- Optical Products $ (67,000) $ (22,000)
Specialized Vending Machines and Avionics Equipment (402,000) (48,000)
Fingerprint Identification Technologies (90,000) --
Secured Entrance Systems (52,000) --
Internet Viral Marketing (254,000) --
Web Based Development Solutions (269,000) --
Application Service Provider (5,009,000) --
-------------------------------------------------------------------------------------------------------------
(6,143,000 (70,000)
Corporate costs and expenses (150,000) (18,000)
Intersegment charges 3,000 --
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (6,290,000) $ (88,000)
-------------------------------------------------------------------------------------------------------------
Interest income:
Electro-Mechanical and Electro- Optical Products $ 9,000 --
Specialized Vending Machines and Avionics Equipment 3,000 --
Application Service Provider 4,000 --
-------------------------------------------------------------------------------------------------------------
16,000 --
Intersegment charges (16,000) --
-------------------------------------------------------------------------------------------------------------
Total interest income $ -- --
-------------------------------------------------------------------------------------------------------------
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 62,000 $ 82,000
Fingerprint Identification Technologies 7,000 --
Secured Entrance Systems 2,000 --
Internet Viral Marketing 3,000 --
Web Based Development Solutions 18,000 --
-------------------------------------------------------------------------------------------------------------
92,000 82,000
Corporate costs and expenses 19,000 1,000
-
Intersegment charges (13,000) --
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 98,000 $ 83,000
-------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
6. Segment Information (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------
Net income (loss):
Electro-Mechanical and Electro- Optical Products $ (120,000) $ (104,000)
Specialized Vending Machines and Avionics Equipment (396,000) (48,000)
Fingerprint Identification Technologies (97,000) --
Secured Entrance Systems (55,000) --
Internet Viral Marketing (258,000) --
Web Based Development Solutions (302,000) --
Application Service Provider (4,990,000)
-------------------------------------------------------------------------------------------------------------
(6,218,000) (152,000)
Corporate costs and expenses (170,000) (19,000)
Extraordinary loss on debt extinguishment -- (26,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (6,388,000) $ (197,000)
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 1,000 $ 4,000
Specialized Vending Machines and Avionics Equipment -- 11,000
Web Based Development Solutions 1,000 --
Application Service Provider 1,000 --
-------------------------------------------------------------------------------------------------------------
3,000 15,000
Corporate 6,000 17,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 9,000 $ 32,000
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 1,714,000 $ 1,238,000
Specialized Vending Machines and Avionics Equipment 275,000 421,000
Application Service Provider 28,000
-------------------------------------------------------------------------------------------------------------
2,017,000 1,659,000
Corporate consulting fees 270,000 --
Intersegment consulting fees (270,000 ) --
-------------------------------------------------------------------------------------------------------------
Total revenues $ 2,017,000 $ 1,659,000
-------------------------------------------------------------------------------------------------------------
Operating income (loss):
Electro-Mechanical and Electro- Optical Products $ 316,000 $ (255,000)
Specialized Vending Machines and Avionics Equipment (496,000) (164,000)
Fingerprint Identification Technologies (196,000) --
Secured Entrance Systems (140,000) --
Internet Viral Marketing (334,000) --
Web Based Development Solutions (269,000) --
Application Service Provider (5,009,000) --
-------------------------------------------------------------------------------------------------------------
(6,128,000) (419,000)
Corporate costs and expenses (2,600,000) (22,000)
-------------------------------------------------------------------------------------------------------------
3,000 --
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (8,725,000) $ (441,000)
-------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
6. Segment Information (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------
Interest income:
Electro-Mechanical and Electro- Optical Products $ 25,000 --
Specialized Vending Machines and Avionics Equipment 3,000 --
Application Service Provider 4,000 --
-------------------------------------------------------------------------------------------------------------
32,000 --
Intersegment charges (32,000) --
-------------------------------------------------------------------------------------------------------------
Total interest income $ -- --
-------------------------------------------------------------------------------------------------------------
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 219,000 $ 179,000
Specialized Vending Machines and Avionics Equipment 43,000 --
Fingerprint Identification Technologies 18,000 --
Secured Entrance Systems 7,000 --
Internet Viral Marketing 5,000 --
Web Based Development Solutions 18,000 --
-------------------------------------------------------------------------------------------------------------
310,000 179,000
Corporate costs and expenses 46,000 5,000
Intersegment charges (29,000) --
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 327,000 $ 184,000
-------------------------------------------------------------------------------------------------------------
Net income (loss):
Electro-Mechanical and Electro- Optical Products $ 122,000 $ (434,000)
Specialized Vending Machines and Avionics Equipment (533,000) (164,000)
Fingerprint Identification Technologies (215,000) --
Secured Entrance Systems (148,000) --
Internet Viral Marketing (340,000) --
Web Based Development Solutions (302,000) --
Application Service Provider (4,990,000) --
-------------------------------------------------------------------------------------------------------------
(6,406,000) (598,000)
Corporate costs and expenses (2,646,000) (27,000)
-------------------------------------------------------------------------------------------------------------
Extraordinary loss on debt extinguishment -- (455,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (9,052,000) $ (1,080,000)
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 6,000 $ 13,000
Specialized Vending Machines and Avionics Equipment -- 34,000
Web Based Development Solutions 1,000 --
Application Service Provider 1,000 --
-------------------------------------------------------------------------------------------------------------
8,000 47,000
Corporate 18,000 21,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 26,000 $ 68,000
-------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
6. Segment Information (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------
September December
30, 31,
2000 1999
-------------------------------------------------------------------------------------------------------------
Assets:
Electro-Mechanical and Electro- Optical Products $ 2,079,000 $ 1,702,000
Specialized Vending Machines and Avionics Equipment 282,000 582,000
Fingerprint Identification Technologies 14,000 5,000
Secured Entrance Systems -- 1,000
Internet Viral Marketing 350,000 --
Web Based Development Solutions 946,000 --
Application Service Provider 268,000 --
-------------------------------------------------------------------------------------------------------------
3,939,000 2,290,000
Corporate 12,331,000 8,077,000
Intersegment investments (12,906,000) (8,007,000)
Intersegment advances (1,198,000) (397,000)
-------------------------------------------------------------------------------------------------------------
Total assets $ 2,166,000 $ 1,963,000
-------------------------------------------------------------------------------------------------------------
</TABLE>
7. Subsequent Event
In October 2000, Starnet365.com initiated a private placement offering
of up to 2,000,000 of its unregistered common stock in reliance upon an
exemption from registration under Sections 4(2) and/or 3(b) of the Securities
Act of 1933, as amended, and upon compliance with the provisions of Rule 504 of
Regulation D thereunder. As of November 13, 2000, Starnet365.com has received
subscriptions to purchase 202,400 shares at $0.50 per share from forty
investors, representing gross proceeds of $101,200.
...................................................................
16
<PAGE>
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 from 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 seven 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 $12,000,or 3%, from $450,000 for the
three months ended September 30, 1999 (the "1999 3rd Quarter") to $462,000 for
the three months ended September 30, 2000 (the "2000 3rd Quarter"). Sequential's
2000 3rd Quarter gross profit was $186,000, or 40% of sales. Sequential's 1999
3rd Quarter gross profit was $227,000, or 50% of sales. Sequential's revenues
increased $476,000,or 38%, from $1,238,000 for the nine months ended September
30, 1999 (the "1999 Nine Month Period") to $1,714,000 for the nine months ended
September 30, 2000 (the "2000 Nine Month Period"). Sequential's 2000 Nine Month
Period gross profit was $817,000, or 48% of sales. Sequential's 1999 Nine Month
Period gross profit was $544,000, or 44% of sales. Starting in the 1999 Third
Quarter, a significant portion of Sequential's revenue was generated on a
defense contract that had a gross margin rate of approximately 50%, however,
during the 2000 3rd Quarter sales under such contract decreased. As a result,
Sequential's gross profits, as a percentage of revenue, for the 2000 Nine Month
period increased
17
<PAGE>
significantly when compared to the 1999 Nine Month Period and for the 2000 3rd
Quarter decreased significantly when compared to the 1999 3rd Quarter.
Sequential's selling, general and administrative expenses increased
$4,000, or 2%, from $249,000 for the 1999 3rd Quarter to $253,000 for the 2000
3rd Quarter. The 2000 3rd Quarter includes $45,000 of consulting fees charged by
The Finx Group that are not included in the 1999 3rd Quarter. The $45,000
increase is partially offset by a $41,000 decrease in expenses resulting from
cost containment efforts by management. Sequential's selling, general and
administrative expenses decreased $298,000, or 37%, from $799,000 for the 1999
Nine Month Period to $501,000 for the 2000 Nine Month Period. The 2000 Nine
Month Period includes $45,000 of consulting fees charged by The Finx Group that
are not included in the 1999 Nine Month Period. The $45,000 increase in expense
was more than offset by a $265,000 decrease in expenses resulting from cost
containment efforts by management and $78,000 resulting from the write-off of
previously accrued expenses for which Sequential believes it will not have to
pay.
As a result of the above, Sequential's operating loss increased by
$45,000, or 204%, from an operating loss of $22,000 for the 1999 3rd Quarter to
$67,000 for the 2000 3rd Quarter. Sequential's operating income increased by
$571,000, or 224%, from an operating loss of $255,000 for the 1999 Nine Month
Period to operating income of $316,000 for the 2000 Nine 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 3rd Quarter decreased $12,000,or 11%,
from $106,000 for the 1999 3rd Quarter to $94,000 for the 2000 1st Quarter.
S-Tech's 2000 3rd Quarter gross profit, including a $400,000 reserve for slow
moving inventory, was a negative $371,000, or 395% of sales. S-Tech's 1999 3rd
Quarter gross profit was $17,000, or 16% of sales. S-Tech's revenues for the
2000 Nine Month Period decreased $146,000,or 35%, from $421,000 for the 1999
Nine Month Period to $275,000 for the 2000 1st Quarter. S-Tech's 2000 Nine Month
Period gross profit, including a $400,000 reserve for slow moving inventory, was
a negative $324,000, or 118% of sales. S-Tech's 1999 Nine Month Period gross
profit was $59,000, or 14% of sales. S-Tech's significantly lower margins, as a
percentage of sales, for the 1999 Nine 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 3rd Quarter and Nine Month comparable
periods. Selling, general and administrative costs approximated $31,000 and
$65,000, respectively, for the 2000 and 1999 3rd Quarters and approximated
$172,000 and $223,000, respectively, for the 2000 and 1999 Nine Month Periods.
As a result of the above, S-Tech's operating loss increased by
$354,000, or 738%, from $48,000 for the 1999 3rd Quarter to $402,000 for the
2000 3rd Quarter. S-Tech's operating loss increased by $332,000, or 202%, from
$164,000 for the 1999 Nine Month Period to $496,000 for the 2000 Nine 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
18
<PAGE>
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 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 3rd
Quarters or for the 2000 and 1999 Nine 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 3rd Quarter and the 1999 Nine
Month Period. FMX incurred general and administrative expenses of $90,000 for
the 2000 3rd Quarter and $196,000 for the 2000 Nine 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 2000, 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 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 and is awaiting the results of such evaluation. .SPS incurred general
and administrative expenses, and therefore net operating losses, of $52,000 and
$140,000, respectively, for the 2000 3rd Quarter and the 2000 Nine Month Period.
Internet Viral Marketing
The Internet Viral Marketing segment comprises the activities of
Starnet365.com, which is a newly created subsidiary formed in April 2000.
Starnet365.com is a development stage company and is nearing its pre-launch
stage for its web site. Starnet365.com 's key product is a series of on-line
training programs, collectively called U&I University.com. U&I University.com is
an integrated "Earn While You Learn", on-line, training program that is intended
to teach marketing and recruiting techniques as well as certain tax and legal
aspects of running a home-based business. Starnet365.com also intends to provide
purchasers of the U&I university training programs with the opportunity to
become independent representatives who will receive at no charge replicated
websites that are intended to be pre-loaded with non-branded merchandise,
enabling individuals quickly and inexpensively to own their own on-line
E-Commerce website. It is further intended that Starnet365.com will offer other
products that may be sold in conjunction with its training programs.
Starnet365.com incurred general and administrative expenses, and therefore net
operating losses of $253,000 and $334,000, respectively, for the 2000 3rd
Quarter and the 2000 Nine Month Period.
Web Based Development Solutions
The Web Based Development Solutions segment comprises the activities of
Biz Chase, which is a subsidiary acquired in July 2000. Biz Chase has developed
a "Web Based Development Solution" providing small business with the ability to
dynamically create a Web presence as well as manage its
19
<PAGE>
surrounding complex issues. Biz Chase incurred general and administrative
expenses, and therefore net operating losses of $269,000 for both the 2000 3rd
Quarter and the 2000 Nine Month Period.
Application Service Provider
The Application Service Provider segment comprises the activities of
Shopclue.com, which is a subsidiary acquired in July 2000. 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. The 2000 3rd Quarter and the 2000 Nine Month
Period for Shopclue.com includes $4.768 million of non cash research and
development expense. As of the date that the Company acquired Shopclue.com it
had an excess of liabilities over assets of $768,000 and the common shares
issued to acquire Shopclue.com were valued at $4 million, resulting in a
purchase price that was in excess of net assets by $4.768. Because the
acquisition was consummated between related parties, the excess purchase price
cannot be recorded as goodwill and was recorded as non cash research and
development expense. Shopclue.com incurred general and administrative expenses
of $247,000 for the 2000 3rd Quarter and the 2000 Nine Month Period. As a result
of the above, Shopclue.com's operating loss was $5.009 million for the 2000 3rd
Quarter and the 2000 Nine 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 three months
ended March 31, 1999. The holding company's general and administrative expense
for the 2000 and 1999 3rd Quarters was $272,000 and $18,000, respectively, and
for the 2000 and 1999 Nine Month Periods was $928,000 and $22,000, respectively.
As of September 30, 2000, Mr. Lewis S. Schiller and Ms. Grazyna B. Wnuk are owed
an aggregate of $500,000 for unpaid salaries of which $200,000 was accrued as of
December 31, 1999 and $100,000 and $300,000,respectively, is included in the
2000 3rd Quarter and 2000 Nine Month Period corporate costs. Other significant
corporate costs for the 2000 3rd Quarter and the 2000 Nine Month Period include
audit fees, consulting fees, legal and professional fees and public relation
costs.
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 3rd Quarter and
the 2000 Nine Month Period.
Write-off of Deferred Offering Costs
During the 2000 3rd Quarter, the Company wrote-off $148,000 of deferred
offering costs related to an aborted private placement of the Company's
preferred stock.
Non Cash Expense for Stock Issued to Pay Obligations
During the 2000 Nine Month Period , 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.
20
<PAGE>
Non-Operating Components of Net Loss
Interest Expense and Financing Fees, Other
The interest and maintenance fees on the revolving line of credit
amounted to $43,000 and $65,000, respectively for the 2000 and 1999 3rd Quarters
and $128,000 and $145,000, respectively, for the 2000 and 1999 Nine 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 had 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 September 30, 2000, Sequential had
received over advances on the FINOVA Line of Credit in the amount of $252,000.
As of September 30, 2000, Sequential and S-Tech are delinquent on
payment of payroll taxes approximating $241,000. For the 2000 and 1999 3rd
Quarters interest expense on delinquent payroll taxes payable approximated
$18,000 and $30,000, respectively.
Interest Expense, Related Parties
The Company incurs interest expense on loans and advances received from
Trinity, Universal International, Inc. and members of the Schiller family. The
interest expense incurred on notes payable to related parties was $37,000 and
$18,000, respectively, for the 2000 and 1999 3rd Quarters and $168,000 and
$39,000, respectively, for the 2000 and 1999 Nine Month Periods. As of September
30, 2000, the Company has outstanding approximately $3.999 million of notes
payable to related parties of which substantially all amounts bear interest at
9%. As of September 30, 2000, none of the interest expense owed to related
parties had been paid.
Extraordinary Loss
The Company extinguished certain obligations with no cash flow impact.
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. Using
the Black-Scholes option valuation formula, the 6,346 Series A Preferred shares
were valued at $1.077 million, resulting in $429,000 of compensation expense. On
July 20, 1999, the Company settled amounts owed to the former landlord of the
Company by making cash payments of $70,000, issuing a note payable for $45,000
and issuing 268 Series A Preferred shares. Using the Black-Scholes option
valuation formula, the 268 Series A Preferred shares were valued at $46,000. The
total consideration given to the landlord, including the calculated value of the
Series A Preferred shares exceeded the amounts owed to the former landlord by
approximately $26,000. All of such excess is attributed to the valuation of the
Series A Preferred shares and was recorded as compensation expense from the
issuance of stock, and presented in the financial statements as an extraordinary
item. Effective September 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 $6.388 million, or $0.57 per common share, for the 2000 3rd Quarter and
$197,000, or $0.10 per common share for the 1999 3rd
21
<PAGE>
Quarter and incurred a consolidated net loss of $9.052 million, or $1.76 per
common share, for the 2000 Nine Month Period and $1.080 million, or $0.70 per
common share for the 1999 Nine Month Period.
Financial Condition - Liquidity and Capital Resources
As of September 30, 2000 the Company had a working capital deficiency
of $5.723 million. Approximately $4.499 million of such deficiency relates to
amounts owed to related parties, including accrued and unpaid salaries of
$500,000 owed to Lewis S. Schiller and Grazyna B. Wnuk and $3.999 million owed
to Trinity, Universal International, Inc. and members of the Schiller family for
loans made to fund the operations of the Company.
During the 2000 Nine Month Period, the Company used $1.312 million for
operating activities, used $103,000 for investing activities and generated
$1.519 million from financing activities. 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.
At September 30, 2000, the Company had a working capital deficiency of
$5.723 million and a capital deficiency of $5.382 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. In October 2000,
Starnet365.com initiated a private placement offering of up to 2,000,000 shares
of its unregistered common stock in reliance upon an exemption from registration
under Sections 4(2) and/or 3(b) of the Securities Act of 1933, as amended, and
upon compliance with the provisions of Rule 504 of Regulation D thereunder. As
of November 13, 2000, Starnet365.com has received subscriptions to purchase
202,400 shares at $0.50 per share from forty investors, representing gross
proceeds of $101,200. However, a substantial portion of any proceeds from the
Starnet365.com offering will be used to repay related party obligations and
there are no assurances that such offering will provide Starnet365.com with any
operating capital. Management is pursuing various financing alternatives for its
other segments; however no assurances can be made that any 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule.(1)
(1) Filed only with the SEC in electronic format.
.............................
22
<PAGE>
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/______________
Lewis S. Schiller Chief Executive Officer November 17, 2000
and Director
(Principal Executive and
Accounting Officer)
23
