UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition Period from_______to_______
Commission file number: 000-26421
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MILINX BUSINESS GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 91-1954074
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1037 Yorkshire Pl.
Danville, California 94506
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 736-7111
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1001 Fourth Avenue Plaza, Suite 3827, Seattle, WA 98154
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(Former name or former address, if changed since last report.)
Securities registered under Section 12(b) of the Act:
Title of Class Name of exchange on which registered
None None
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Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No _X__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of September 28, 2001, the aggregate market value of the voting common equity
held by non-affiliates of the registrant was $4,424,000, based on the closing
trade reported on the NASD Over the Counter Bulletin Board National Quotation
System. Shares of common stock held by each officer and director and by each
person who owns five percent or more of the outstanding common stock have been
excluded from this calculation as such persons may be considered to be
affiliated with the Company.
As of September 28, 2001, the registrant's outstanding common stock consisted of
27,010,067 shares, $0.01 par value per share.
Documents incorporated by reference: None
2
TABLE OF CONTENTS
Part Item(s) Page No.
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I 1 Business ...................................................................... 4
2 Properties .................................................................... 8
3 Legal Proceedings ............................................................. 8
4 Submission of Matters to a Vote of Security Holders ........................... 9
II 5 Market for Registrant's Common Equity and Related Stockholder Matters ........ 9
6 Selected Financial Data ...................................................... 10
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................... 11
7A Quantitative and Qualitative Disclosure About Market Risk .................... 14
8 Financial Statements and Supplementary Data .................................. 15
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................... 15
III 10 Directors and Officers of the Registrant ..................................... 15
11 Executive Compensation ....................................................... 18
12 Security Ownership of Certain Beneficial Owners and Management ............... 20
13 Certain Relationships and Related Transactions ............................... 21
IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 23
Signatures ................................................................... 24
Index to Consolidated Financial Statements ................................... 25
PART I
FORWARD -LOOKING STATEMENTS
Except for the historical information presented in this document, the matters
discussed in this Form 10-K, and specifically in the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," or otherwise incorporated by reference into this
document contain "forward-looking statements" (as such term is defined in the
Private Securities Litigation Reform Act of 1995). These statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. The safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, apply to forward-looking statements
made by the Registrant. You should not place undue reliance on forward-looking
statements. Forward-looking statements involve risks and uncertainties,
including those identified within the section entitled "Outlook: Issues and
Uncertainties " and elsewhere in, or incorporated by reference into, this Form
10-K. The actual results that the Company achieves may differ materially from
any forward-looking statements due to such risks and uncertainties. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. Readers are urged to carefully
review and consider the various disclosures made by the Registrant in this
Annual Report on Form 10-K and in the Registrant's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Registrant's business.
OTHER MATTERS OF NOTE
Unless otherwise indicated or the context otherwise requires, all references
herein to "Milinx" "MBG" or the "Company" are to Milinx Business Group, Inc., a
Delaware corporation, and its consolidated wholly-owned subsidiaries: 580880BC
Ltd. (dba Milinx Business Services, Inc.) ("MBS"), a British Columbia
corporation; Milinx Business Systems Inc., a Nevada coropration; ASP Technology
One Inc., a Nevada corporation; Credit Assure Financial Corp., a British
Columbia corporation; and Milinx ASP Inc., a Delaware corporation. In addition,
MBG is the majority shareholder in Milinx Wireless Inc.
ITEM 1: BUSINESS
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CORPORATE BACKGROUND
Milinx Business Group, Inc. was incorporated under the laws of the State of
Delaware on December 10, 1998. On December 9, 1999, Milinx entered into a stock
exchange agreement with Forestay Corporation, a public company incorporated in
Delaware. Under the agreement, Forestay became a wholly owned subsidiary of
Milinx, and Milinx elected successor status under the Securities and Exchange
Act of 1934 Rule 12g-3.
INITIAL OPERATIONS
Milinx initially functioned as an application service provider ("ASP") for the
Small Office/Home Office ("SOHO") and Small/Medium Enterprise ("SME") markets in
North America. ASPs are companies that remotely host software applications and
provide access and use of those applications to clients over a secure network on
a recurring fee or subscription basis. These services are delivered over a Wide
Area Network or Virtual Private Network, usually over the Internet.
Milinx conducted its principal operations as an ASP through its wholly owned
subsidiary, 580880BC Ltd. (formerly Milinx Business Services, Inc.), a British
Columbia corporation. Milinx's primary asset, a data center located in
Vancouver, British Columbia, houses Sun Microsystems servers, Cisco routers,
Oracle software and proprietary company-created middleware in a fire protected,
electronically secure operations center that is backed up by ancillary
generators. Milinx invested significant capital in the development of its data
center and other software applications in anticipation of a market launch.
4
In June 2001, due, in part, to a general economic downturn in the technology
industry, Milinx was unable to obtain the additional capital it required to
launch its products. In an attempt to reduce operating expenses and conserve
capital, Milinx laid off substantially all of its workforce and ceased
operations of its data center.
REORGANIZATION OF MATERIAL SUBSIDIARY
In September 2001, Milinx's current management team took over as part of a
turnaround initiative. This management team assessed the business and financial
position of the Company and determined that the only viable alternative was to
attempt to reorganize through a voluntary reorganization filing in British
Columbia, Canada by its subsidiary, 580880BC Ltd., dba Milinx Business Services,
Inc. 580880BC Ltd.'s proposed plan of reorganization will ultimately need to
receive the support of its secured creditors and its unsecured creditors, who
will meet to approve the plan. The plan must also be approved by the court.
Milinx bases its turnaround initiative on obtaining approval of a plan of
reorganization, because its business model contemplates using two material
assets of 580880BC Ltd.
On October 12, 2001, Milinx's subsidiary, 580880BC Ltd., filed with the Office
of the Superintendent of Bankruptcy ("OSOB") in British Columbia, Canada, a
Notice of Intention. 580880BC Ltd. has until December 24, 2001, to file a plan
of reorganization with the court. If the court accepts the plan of
reorganization, the OSOB and 580880BC Ltd.'s unsecured creditors are notified of
a meeting to consider the plan of reorganization. The meeting is to occur within
21 days of the filing of the plan of reorganization. If the plan receives
approval by the unsecured creditors (which occurs if the plan receives the vote
of a majority in number of the creditors filing a proof of claim and the vote of
66% of the dollar value of the claims), then the plan will be submitted to the
court for its approval, which is to occur within 15 days. If 580880BC Ltd.'s
general unsecured creditors and the court approve the plan, it becomes a
contract between 580880BC Ltd. and its general unsecured creditors, and the
balance of general unsecured debt is extinguished if 580880 BC Ltd. performs
according to the plan.
580880BC Ltd.'s plan of reorganization will have to ultimately address three
discrete groups of creditors: secured creditors, preferred creditors and general
unsecured creditors.
580880BC Ltd.'s two major secured creditors are Cisco Systems and Sun
Microsystems. These secured claims amount to approximately $1,600,000. These
claims must be negotiated outside the formal plan filed with the court, as
secured creditors are not bound by a plan of reorganization approved by the
general unsecured creditors and the court. 580880BC Ltd. is currently
negotiating with these secured creditors to arrange for a plan of payment on the
secured claims.
580880BC Ltd.'s preferred creditors include its landlord for the data center and
several former employees with wage claims. The amount of the preferred
creditors' claims that must be paid immediately upon court approval of the plan
is approximately $117,000, which is broken down into approximately $75,000 of
unpaid wage claims and $42,000 of rental arrears claims. Within six months after
court approval of the plan, 580880BC Ltd. must pay an additional $140,000 in
back withholding taxes. The amount of the preferred claims is not negotiable.
580880BC Ltd.'s general unsecured creditors have claims of approximately $1.8
million. This amount excludes any indebtedness of 580880BC Ltd. to its parent,
Milinx. In crafting the plan of reorganization it will file with the court on
December 24, 2001, 580880BC Ltd. must fashion a proposal that will attract the
votes of a majority in number and more than 66% in dollars of valid general
unsecured claims. The proposal must treat all claimants equally. In some
instances equal treatment could consist of an equal per claim payment. In
others, it could consist of a pro-rata payment based on the amount of a claim. A
proposal could combine these approaches. The proposal may also include payments
over time. The critical consideration, however, is that the proposal must be
attractive enough to the claimants that it secures the necessary votes for
approval. The final amount of the claims that 580880BC Ltd. will pay to its
unsecured creditors will ultimately be determined if the creditors approve the
plan of reorganization. Milinx's efforts are currently focused on developing the
plan of reorganization. The opposing constraints on the plan are the resources
available for payment of claims versus what enough claimants will find
acceptable to approve the plan. Because of the uncertainty associated with both
of these variables, Milinx cannot predict at this time the level of payments
that the plan of reorganization will ultimately propose.
5
During the course of the reorganization, Milinx has been and will continue to
pay expenses of approximately $15,000 per month for the lease of the data
center, in addition to other general and administrative costs. If the plan of
reorganization is approved by the creditors and accepted by the court, Milinx
will need to fund the balance of the debt under the plan of reorganization.
There can be no assurance that Milinx's plan of reorganization will be approved
by the creditors or by the court or that Milinx will be able to fund the debt.
To obtain approval, Milinx will need to demonstrate to the creditors and the
court that its plan is viable. If the plan is not approved or if it is approved
and 580880BC Ltd. does not perform according to its terms, 580880 Ltd. will be
forced into a deemed bankrutpcy.
PLANNED FUTURE OPERATIONS
If 580880BC Ltd.'s plan of reorganization is approved and if 580880BC Ltd.
performs according to the plan's terms, 580880BC Ltd.'s two major assets will be
free and clear, which will allow Milinx the opportunity to reestablish its
operations, assuming it can obtain adequate capital. These two assets consist of
unified messaging software and 580880BC Ltd.'s data center.
Unified Messaging Software through SOHO or SME Portal
Milinx's turnaround initiative contemplates using unified messaging software
through a SOHO or SME Portal as the initial core product from which it derives
revenues. Unified messaging software is designed to combine and organize
messages received via a variety of media, including fax, voice mail, e-mail and
pagers, into a universal inbox that customers may access through a dedicated
link on the world wide web that launches the SOHO or SME portal. The unified
messaging software is designed to provide customers with secure access and
control over all communications through a single-point provider, accessible to
the customer over the Internet from anywhere in the world. The new management
team has retained software experts to examine 580880BC Ltd.'s existing unified
messaging software and SOHO or SME portal, and they have concluded that the core
coding forms the basis for a good product. Additional coding is required,
however, and a graphical user interface will need to be developed and integrated
into the hosted operating system.
Data Center
The data center is an integral part of running the unified messaging software,
portal and hosted operating system, as it is designed to automatically receive
and digitize messages, organize, store, relate, display and transmit digital
information on a fully hosted operating system. The Company occupies 14,000
square feet of highly improved space specially suited for a robust, reliable and
secure data center. The data center is fire protected, electronically secure and
backed up by ancillary generators. It houses state of the art Sun Microsystems
servers, Cisco routers and Oracle software, along with proprietary
company-created middleware. It will be run twenty four hours a day, seven days a
week.
Acquisition of Distressed Companies
In the long-term, Milinx's goal is to add additional software technologies to
its product mix, principally through the acquisition of distresssed software
companies. Milinx feels the benefit of this strategy will be the acquisition of
target companies at highly discounted bases. By acquiring distressed software
companies, Milinx believes it will be able to grow its technology base and
derive revenue without incurring significant development costs. Additionally,
Milinx hopes that this growth will open new doors of distribution, as the
companies these products are purchased from may conceivably bring target and/or
existing customers with them. The products that Milinx envisions bringing to
market under this strategy will focus first on the SOHO market, followed by the
SME market, both of which Milinx considers underserved by larger existing data
management software providers such as SAP and Oracle.
6
MARKETING AND SALES
Milinx intends to initially target the SOHO market and will off its products
through various reseller distribution channels and/or strategic alliances.
Milinx perceives the need for specific products within the SOHO segment, which
Milinx will create, acquire and/or strategically license in an effort to address
this target market.
More specifically, the following are some of the ways Milinx anticipates being
able reach the SOHO target market with its unified messaging software offering:
(1) Sell its products to strategic alliances, which can tap directly into the
data center and sell directly or indirectly Milinx's branded or re-branded
products and services; (2) Indirectly sell products to individual users through
reseller networks; (3) Indirectly sell products and services to large user bases
such as clubs, associations and affiliations; and (4) Sell directly and/or take
orders via a small call center.
COMPETITION
Milinx will face substantial competition in most of the areas in which it
intends to offer its services. Many of the competitors are well-funded and
well-staffed. There is no assurance Milinx will be able to effectively compete
with these companies, which include:
|_| Systems Integrators. Milinx will compete with many well established
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commercial systems integrators who bundle their consulting services
with hardware and software providers to provide outsourcing for the
customer. Examples of these include Andersen Consulting, iXL
Enterprises, EDS, KPMG, PricewaterhouseCoopers, and MCI Systemhouse.
|_| ISPs and Web Hosting Companies. Milinx expects that business-oriented
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North American ISPs and web hosting companies have begun to expand
their product line to include service offerings with Internet and Web
Hosting on a subscription basis. Among these are AOL, Concentric
Networks, Frontier Corporation, MindSpring Enterprises, NETCOM On-Line
Communications Services, Verio, Exodus, UUNet Technologies, Verizon,
PSINet, and Digex.
|_| Software Companies. Many of the established and significant software
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application companies either now have or will in the near future offer
application solutions for rent over the Internet. Some that already do
include SAP, Oracle, IBM, JD Edwards, Microsoft, Siebel Systems, and
PeopleSoft. In June 2000, Microsoft announced a new Net Strategy that
will be implemented by subscriptions over the Internet within the next
two years, offering their world-renowned existing and expanded product
line.
|_| Telcos. Many long distance companies, regional Bell operating
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companies, and competitive local exchange carriers now offer Internet
services to their clientele. Although these firms have traditionally
not been nimble in identifying and serving new markets, the expansive
size of their networks and abundant financial resources make them
potentially formidable adversaries.
As a company effectively trying to emerge from a reorganization, Milinx
obviously faces high hurdles competing with such formidable and well-funded
competition. Milinx believes its competitive advantage lies in its pursuit of
market segments not yet pursued by many of these competitors, including the SME
and the SOHO markets. Milinx sees the SME as a market segment that is not well
attended to. Most large software companies ignore this segment, instead
targeting large enterprises such as the Fortune 2000 as they attempt to land
large accounts with large fees for their services. Milinx believes that the SOHO
market is typically addressed by competitors with low-priced, low-value turnkey
solutions with no flexibility. Milinx believes its competitive advantage in the
SOHO market lies in the fact that it will offer the SOHO market a high-value
solution at a competitive price. Milinx believes its competitive advantage in
the SME market lies in the fact that it will offer the SME market an enterprise
solution with flexibility at an affordable price that the competition does not
currently offer.
RESEARCH AND DEVELOPMENT
Milinx has incurred no research and development expenses in the last three
fiscal years.
7
EMPLOYEES
In September 2001, the Company brought a new management team on board headed by
Thomas Loker. Mr. Loker's team consists of professionals and technical experts
capable of evaluating a distressed business and formulating a turnaround
initiative. At present, the Company's only full time employee is Mr. Loker. The
Company has a written agreement with Mr. Loker and oral understandings with his
management team, the members of which are currently acting as consultants to the
Company. The Company intends to reduce these oral understandings to writing in
the near future. The Company expects to pay its officers at market rate,
although initially, much of their salary will most likely be deferred. The
Company has tentatively agreed to issue options on 500,000 shares of common
stock to each officer. For more information on the backgrounds of key members of
the new management team, please see the biographies in the "Directors and
Executive Officers" Section.
ITEM 2: PROPERTIES
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Milinx leases the data center, which is a secure 14,005 square foot facility in
Vancouver, B.C., Canada at 1045 Howe Street. The monthly rent under this lease
is approximately $15,000. This facility houses Milinx's data center operations,
client services, web team and IT department. Milinx has vacated its offices
located at 1080 Howe Street and the lease is no longer in effect. The 1045 Howe
Street lease has certain payments in arrears which will be addressed in the
reorganization proceeding.
ITEM 3: LEGAL PROCEEDINGS
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On April 6, 2001 Milinx Business Group and Milinx Business Services filed a Writ
of Summons in the Supreme Court of British Columbia against Sun Microsystems,
Inc., Netscape Communications Canada, Inc., Netergy Networks, Inc. Intraware
Canada, Inc. and Burntsand Inc. claiming for damages in excess of 10,000,000
Canadian dollars for misrepresentations and breach of contract. Sunrise
International Leasing Corporation (with all correspondence under the SUN
Microsystems letterhead) filed a Summons and Complaint in the State of
Minnesota, County of Hennepin against Milinx Business Group and Milinx Business
Services, for two Counts, Breach of Equipment Lease by Services: in excess of
$50,000 in damages and immediate possession of equipment and Breach of Lease
Guaranty by Group: in excess of $50,000 damages and seizure of equipment. Milinx
takes the position that this is in reaction to the Writ of Summons issued in the
Supreme Court of British Columbia and therefore the jurisdiction and claim
should be part of and in the same jurisdiction of British Columbia. These suits
have been settled pending payment of certain sums by the defendants with mutual
releases executed by all parties.
After reaching an out of court settlement with Milinx Business Services on April
18, 2001, Tantalus Communications Inc. filed a Notice of Discontinuance,
releasing Milinx Business Services from further action. Milinx Business Services
was not required to pay any more than the invoices outstanding before their
claim.
On October 4, 2000, three former employees of Milinx Business Services advanced
separate actions in the British Columbia Supreme Court against Milinx Business
Services alleging breach of their employment severance agreements and claiming
unspecified damages. One of the claimants has since discontinued the action
against Milinx Business Services and Employment Standards has dismissed a
vacation wage claim of one of the two remaining employees. The proposed plan of
reorganization will address these remaining claims.
There are numerous unsecured creditors of Milinx Business Services who have
filed suit or threatened actions against Milinx Business Services. These matters
will be resolved in the reorganization plan to be approved by the court.
On August 15, 2001, the Government of Canada, through the divisions of Revenue
Canada and Employment Standards have filed superpriority liens against the
Company and certain directors and officers for unpaid employee wages, accrued
vacation, payroll taxes and severance pay. The Company has recorded these
claims, totaling $782,930 in accrued liabilities. The amount in question is in
dispute, and the Company has filed an appeal to determine the correct amount
owing. The claims will be addressed in the pending reorganization, and it is the
intention of the Company to meet its obligations as confirmed by the plan. If
the Company cannot confirm the plan, the superpriority claim would allow the
Government to execute on its lien against the assets of the Company.
8
To the knowledge of the officers and directors of Milinx, there are no other
pending legal proceedings or litigiation and none of its property is the subject
of a pending legal proceeding. Further, except as discussed above, Milinx's
officers and directors know of no legal proceedings against Milinx or its
property contemplated by any governmental authority.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders in fiscal year 2001.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
On June 8, 2000, Milinx's common stock began trading on the NASD Over the
Counter Bulletin Board National Quotation System, under the trading symbol
"MIXBA." The following sets forth the average closing prices for high and low
bid information for the quarterly periods indicated:
Price Range of Common Stock
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High/Bid Low/Bid
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Fiscal Year Ended June 30, 2001
First Quarter ...................................... $ 7.38 $ 4.13
Second Quarter ..................................... $ 5.63 $ 0.69
Third Quarter....................................... $ 1.50 $ 0.75
Fourth Quarter ..................................... $ 1.00 $ 0.15
Fiscal Year Ended June 30, 2000
Fourth Quarter..................................... $ 8.00 $ 5.62
The above over-the counter market quotations were taken from Nomura Research
Institute, Ltd. and FT Interactive Data Corporation. They reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Holders
Common Stock:
On September 28, 2001, the Company's issued and outstanding common stock totaled
27,010,067 shares and was held by approximately 950 shareholders of record and
by an undetermined number of additional shareholders through nominee or street
name accounts with brokers.
Preferred Convertible Stock:
As at September 28, 2001, there were four (4) shareholders of record of Series A
Preferred shares.
9
Dividends
Milinx has not declared any cash dividends on its common stock since inception
and does not intend to pay cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended June 30, 2001, the Company sold unregistered securities as
follows:
From August 2000 through June 2001, the Company issued 558,500
shares of its voting common stock for total cash proceeds of $32,000 pursuant to
the exercise of stock options previously granted under the Company's Employee
Stock Option Plan.
From July 2000 through May 2001, the Company issued 3,556,312 shares
of its voting common stock pursuant to the conversion of 3,556,312 shares of
previously issued Series C preferred stock.
From July 2000 to September 2000, the Company issued 2,364,511
shares of Series C preferred stock and 1,172,256 Class D warrants pursuant to
conversion of the Company's previously issued Class D units.
From August 2000 through November 2000, the Company issued 1,782,857
shares of its voting common stock pursuant to the conversion of 1,782,857
previously issued Class D warrants, for total cash proceeds of $3,566,000.
In August 2000, the Company issued 1,681,250 shares of the Company's
voting common stock pursuant to the conversion of 1,681,250 shares of previously
issued Series B preferred stock.
In October 2000, the Company issued 1,000 shares of its voting common
stock to an employee as an incentive bonus. The issuance was exempt under
Section 4(2) of the Securities Act of 1933 (the "Securities Act").
From December 2000 through June 2001, the Company completed a
private placement of 4,639,617 shares of the Company's voting common stock for
total cash proceeds of $2,259,000. The issuance was exempt under Rule 506 of the
Securities Act.
From May 2001 to June 2001, the Company issued 300,000 shares of its
voting common stock to a consultant in lieu of consulting expenses. The issuance
was exempt under Rule 506 of the Securities Act.
In June 2001, the Company issued 20,000 shares of its voting common
stock for total proceeds of $10,000. The issuance was exempt under Rule 506 of
the Securities Act.
ITEM 6: SELECTED FINANCIAL DATA
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6 mos
Year ending ending
June 30, June 30, June 30,
2001 2000 1999
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Net Sales
126,462 197,193 43,424
Loss - continuing operations
16,781,172 6,636,452 844,250
Loss per share - continuing operations
1.04 0.74 0.32
Total assets 1,107,537
1,184,946 8,993,249
Capital lease obligations, long term
-- 927,808 --
10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Overview
Milinx is effectively a company trying to emerge from a bankruptcy
reorganization. The major assets that form the basis for the Company's
turnaround initiative are owned by its subsidiary, 580880BC Ltd., which is in a
court-supervised reorganization proceeding in British Columbia, Canada.
Management's discussion will focus on the capital resources needed to obtain
approval of 580880BC Ltd.'s plan of reorganization.
During fiscal year 2000 and the first half of fiscal year 2001, Milinx was
engaged in developing and hosting proprietary business application software that
could be delivered over a network, such as the Internet. As a part of this
strategy, during fiscal year 2001 the Company placed in service a Data Center in
Vancouver, British Columbia. Due to economic conditions, funding constraints and
other factors, the Company was not able to effectively launch its application
software service during the second half of fiscal year 2001. By the end of
fiscal year 2001, the Company had lost all of its employees but two, and it
required substantial capital infusions merely to sustain the lease and other
financial commitments it had undertaken in anticipation of its product launch.
The Company was unable to obtain these capital infusions and as a result was
driven to the solution of putting its subsidiary 580880BC Ltd. into
reorganization. The proprietary software and the Data Center are owned by
580880BC Ltd.
Results of Operations
Revenues decreased to approximately $126,000 in fiscal year 2001 from
approximately $197,000 in fiscal year 2000. In both years costs of sales
exceeded revenues and the Company had negative gross margins. Assuming 580880BC
Ltd. successfully reorganizes and the Company subsequently succeeds in launching
the unified messaging service discussed in the Business section, management does
not anticipate that the products and services that provided revenues in fiscal
years 2001 and 2000 will contribute to post-reorganization revenues.
Selling, general and administrative expenses increased to approximately $12.1
million in fiscal year 2001 from approximately $6.4 million in fiscal year 2000.
Increased amortization expense from the Data Center and increased headcount
accounted for the majority of the increase. Assuming 580880BC Ltd. successfully
reorganizes and the Company subsequently succeeds in launching the unified
messaging service discussed in the Business section, management expects that
selling, general and administrative expenses will be significant, but not nearly
of the magnitude seen in fiscal years 2001 and 2000.
Liquidity and Capital Resources
Despite the institution of measures to attempt to rein in costs beginning in
December 2000, by the end of the third quarter of fiscal year 2001 the Company's
liquidity problems had reached a crisis point. By May the Company was regularly
missing payroll and by the end of fiscal year 2001 all employees were gone,
except two. During the course of fiscal year 2001, the Company used
approximately $7.3 million of cash in its operating activities and approximately
$1.4 million in the acquisition of fixed assets (including capital lease
payments), net of disposals, and intangible assets. These uses of cash were
supplied by opening cash balances of approximately $2.1 million and proceeds
from sales of equity and debt securities of approximately $6.8 million. In
addition, the Company's net working capital position--excluding cash on hand of
approximately $2.1 million at June 30, 2000--ballooned to a deficit of
approximately $5.0 million at June 30, 2001 from a deficit of approximately $0.8
million at June 30, 2000, resulting in a severe liquidity crunch.
During August 2001 the Company conducted a private placement of units. The
securities offered were not registered under the Securities Act of 1933 (the
"Act") and were offered and sold pursuant to applicable exemptions from
registration requirements. The offering was based on $1000 increments, with each
increment entitling the purchaser to a note for the full value of the increment,
with 12% interest, due in 120 days, and 2000 restricted common shares. If a
purchaser invested $20,000 or more, the purchaser received 3000 restricted
common shares for each $1000 increment instead of 2000. The offering raised
$100,000. The proceeds were used to pay operating expenses and hire the new
management team.
11
During October 2001 the Company commenced a new private placement of units. The
securities offered have not been and will not be registered under the Act and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The offering is based on
$1000 increments, with each increment entitling the purchaser to a note for the
full value of the increment, with 12% interest, callable by the Company in 120
days, and 5000 restricted common shares. If the Company does not call the notes,
they are due in 300 days but they bear 15% interest from the date of issue. The
offering will be open until November 30, 2001, and it seeks to raise up to
$450,000. As of the filing of this report, the Company had raised approximately
$180,000 in this offering. The proceeds will be used to pay operating expenses
and complete the Company's audit and Form 10-K filing. This disclosure is not an
offer of securities or a solicitation of an offer to buy securities. Sales will
be made only to investors with preexisting contacts with the Company and its
authorized representatives. Some of the sales may have been made in violation of
the Act, creating liability under the Act. The Company believed that the sales
were exempt from registration under the Act, but facts recently coming to its
attention created uncertainty whether the exemption was fully complied with. If
a court were to determine that the exemption had not been fully complied with,
the Company's maximum possible liability would be $180,000, plus statutory
interest.
While the Company proceeds with preparing the plan of reorganization for
580880BC Ltd. it has monthly expenses of approximately $200,000 that it must
meet. In addition, it has professional expenses associated with the
reorganization and its public company status that must be met from time to time.
The notes issued in the August 2001 offering in the amount of $100,000 come due
in December 2001.
Assuming 580880BC Ltd.'s plan of reorganization is approved, the Company will
immediately need to pay approximately $117,000 in preferred claims plus whatever
immediate cash payments the plan calls for. Management anticipates that these
payments would occur sometime in late January 2002.
The Company will also need to begin paying its secured creditors according to
whatever negotiated schedule it works out with them.
Any deferred payments under the reorganization plan will have to be paid
according to its terms, and approximately $140,000 of preferred claims will be
due no later than six months after plan approval (currently estimated to be July
2002).
Due to the negotiated nature of many of these payments, management is unable to
determine with reasonable certainty at this time the amount of capital that will
be needed to successfully complete the reorganization.
In addition to these reorganization-related cash requirements, management
believes that the Company will require a capital infusion of at least $1.7
million to launch the unified messaging service. Additional working capital will
likely be necessary to sustain the unified messaging service until break-even.
The Company is not committed to make any capital expenditures, although it may
need to acquire fixed assets from time to time.
The Company will need capital in addition to that being raised in the $450,000
offering in order to succeed in having 580880BC Ltd.'s reorganization approved
and the unified messaging service launched and supported to break-even. There
can be no assurance that adequate capital will be available on terms acceptable
to the Company, or at all. If the Company is unable to raise additional capital,
it may not be able to continue as a going concern, and it might have to
reorganize under bankruptcy laws, liquidate or enter into a business
combination. The Company has not presently identified any probable business
combination.
Outlook: Issues and Uncertainties
The Company May Not Raise Enough Capital to Permit 580880BC Ltd. to Emerge from
Insolvency, Which Would Prevent the Company from Implementing Its Turnaround
Initiative and Could Cause the Company's Stock to Become Worthless
12
Although the precise amount of capital the Company must raise to permit 580880BC
Ltd. to emerge from insolvency cannot be determined at this time, the Company
will clearly need to raise a significant amount of capital to complete the
reorganization. The Company may not be able to raise enough capital even to gain
approval of the plan of reorganization. Even if 580880BC Ltd. gains approval of
the plan, the Company may not raise enough capital to meet all of the payments
that may be due under the plan over time. In either case, 580880BC Ltd. would be
forced into a deemed bankruptcy, and the Company would not have access to the
major assets that form the basis for its turnaround initiative. Without access
to these assets the Company's common stock could be rendered worthless.
580880BC Ltd. May Not Be Able to Obtain all Necessary Approvals for a
Comprehensive Plan of Reorganization, Which Would Prevent the Company from
Implementing Its Turnaround Initiative and Could Cause the Company's Stock to
Become Worthless
580880BC Ltd. must reach accommodations with its secured creditors as well as
obtain the required votes for approval of the proposal being submitted to the
general unsecured creditors. If 580880BC Ltd. cannot reach all of these
accommodations and get its plan approved, it would be forced into a deemed
bankruptcy, and the Company would not have access to the major assets that form
the basis for its turnaround initiative. Without access to these assets the
Company's common stock could be rendered worthless.
Even if 580880BC Ltd. Successfully Emerges from Insolvency, the Company May Not
Be Able to Raise Enough Capital to Launch Its Unified Messaging Service, Which
Could Cause a New Liquidity Crisis for the Company and Severely Impair the Value
of the Company's Common Stock.
If 580880BC Ltd. successfully performs a reorganization plan approved by its
creditors, the Company will have access to the major assets that form the basis
for its turnaround initiative. Even if it gains such access, however, the
Company may not raise enough capital to meet its ongoing obligations and to
complete development of and launch the unified messaging service. If the Company
cannot launch the unified messaging service and begin to earn revenues, it could
experience a new liquidity crisis, which would in turn severely impair the value
of the Company's common stock.
The Company May Encounter Unforeseen Hurdles in the Development of the Unified
Messaging Service That Could Prevent Its Use as Contemplated by the Company's
Turnaround Initiative, Which Could Cause a New Liquidity Crisis for the Company
and Severely Impair the Value of the Company's Common Stock.
The Company has retained software development experts to examine the existing
code that will form the basis for the unified messaging service. Although these
experts have concluded that the core coding of existing software owned by
580880BC Ltd. will provide a platform for the unified messaging service,
software programs, and the Internet itself, are complex interrelated systems.
The Company could encounter unforeseen difficulties completing the development
of the unified messaging service that could prevent its use as contemplated by
the Company's turnaround initiative. If the Company cannot launch the unified
messaging service and begin to earn revenues, it could experience a new
liquidity crisis, which would in turn severely impair the value of the Company's
common stock.
Even if the Company Develops and Launches the Unified Messaging Service as
Contemplated by Its Turnaround Initiative, the Unified Messaging Service May Not
Gain Market Acceptance, Which Could Cause a New Liquidity Crisis for the Company
and Severely Impair the Value of the Company's Common Stock.
The Company's turnaround initiative is based on launching a unified messaging
service that the new management team believes will be accepted by the
marketplace. If the unified messaging service does not gain market acceptance,
whether due to competition, performance issues or some other reason, the Company
would not be able to earn the revenues it needs, and it could experience a new
liquidity crisis, which would in turn severely impair the value of the Company's
common stock.
The Company is Subject to all Manner of General Business and Economic Risks, any
of Which Could Create Operational or Financial Difficulties for the Company and
Lead to an Impairment in the Value of the Company's Common Stock.
13
Engaging in a business venture is inherently risky. In addition to the specific
risks set forth above, businesses face competition, management issues, resource
issues, asset protection issues and others, as well as the effects of broader
general economic conditions. These risks are not enumerated here, but investors
in equity securities should familiarize themselves with the business and
economic risks faced by businesses generally and within particular market
segments before investing. Any of these general business and economic risks
could lead to operational or financial difficulties for the Company, which could
in turn adversely affect the value of the Company's common stock.
The Company's shares are "penny stock", which is more difficult to sell than
exchange-traded stock.
The Company's securities are subject to the Securities and Exchange Commission
rule that imposes special sales practice requirements upon broker-dealers that
sell such securities to other than established customers or accredited
investors. For purposes of the rule, the phrase "accredited investors" means, in
general terms, institutions with assets exceeding $5,000,000 or individuals
having a net worth in excess of $1,000,000 or having an annual income that
exceeds $200,000 (or that, combined with a spouse's income, exceeds $300,000).
For transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of holders of the Company's securities to buy or sell them.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." (A "penny stock" is any equity security that
has a market price of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions). Such rules include
Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the
Securities and Exchange Act of 1934, as amended. The rules may further affect
the ability of owners of Company shares to sell their securities. Shareholders
should be aware that, according to Securities and Exchange Commission Release
No. 34-29093, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include:
o Control of the market for the security by one or a few broker dealers
that are often related to the promoter or issuer;
o Manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
o "boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
o excessive and undisclosed bid ask differentials and markups by selling
broker dealers; and
o the wholesale dumping of the same securities by promoters and broker
dealers after prices have been manipulated to a desired level, along
with the inevitable collapse of those prices with consequent investor
losses.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company believes its exposure to overall foreign currency risk is
immaterial. The Company does not manage or maintain market risk sensitive
instruments for trading or other purposes and is, therefore, not subject to
multiple foreign exchange rate exposures. The Company has no outstanding
long-term indebtedness for which the Company is subject to the risk of interest
rate fluctuations.
The Company reports its operations in US dollars and its currency exposure,
although considered by the Company as immaterial, is primarily between the US
and Canadian dollars. Exposure to the currencies of other countries is also
immaterial as international transactions are settled in US dollars. Any future
financing undertaken by the Company will be denominated in US dollars.
14
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Description Page
- ----------- ----
Independent Auditors' Report dated November 15, 2001 F-3
Consolidated Balance Sheets as of June 30, 2001 and 2000 F-4
Consolidated Statements of Operations for the years ended June 30, 2001,
2000 and the six months ended June 30, 1999 F-5
Consolidated Statement of Stockholders' Equity (deficit) for the
years ended June 30, 2001, 2000 and the six months ended June 30, 1999 F-6
Consolidated Statements of Cash Flows for the years ended June 30, 2001,
2000 and the six months ended June 30, 1999 F-8
Notes to Consolidated Financial Statements F-9
These financial statements may be found immediately following the signature page
of this report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
No changes in and disagreements with accountants are reportable pursuant to this
item.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
- -----------------------------------------
Identification of Directors and Executive Officers
The following table contains information regarding the members of the Board of
Directors and the Executive Officers of the Company:
- --------------------------- ----- ---------------------------------------------
Name Age Position(s)
- --------------------------- ----- ---------------------------------------------
Maynard L. Dokken (1) 39 Chairman of the Board of Directors, Chief
Executive Officer
- --------------------------- ----- ---------------------------------------------
Thomas Loker (2) 46 President, Chief Operating Officer, Director
- --------------------------- ----- ---------------------------------------------
Stanley Mazor (3) 60 Director
- --------------------------- ----- ---------------------------------------------
Michael Goldstein (4) 40 Director
- --------------------------- ----- ---------------------------------------------
Steven Price (5) 50 Chief Financial Officer
- --------------------------- ----- ---------------------------------------------
(1) Mr. Dokken was appointed as Chairman of the Board of Directors on August
28, 2001. He has a three-year term as Director. Mr. Dokken assumed his
position as Chief Executive Officer on December 8, 1999.
(2) Mr. Loker was appointed as President and Chief Operating Officer and was
elected to serve on the Board of Directors on August 16, 2001, for a term
of one year.
(3) Mr. Mazor was elected to serve on the Board of Directors on September 19,
2001, for a term of one year.
(4) Mr. Goldstein was elected to serve on the Board of Directors on September
19, 2001, for a term of one year.
15
(5) Mr. Price was appointed to serve as Chief Financial Officer on September 4,
2001.
(6) Mr. Shiffman was appointed Secretary and Legal Advisor on September 21,
2001.
There are no arrangements or understandings between the directors and officers
of Milinx and any other person pursuant to which any director or officer was or
is to be selected as a director or officer. In addition, there are no agreements
or understandings for the officers or directors to resign at the request of any
other person and the above-named officers and directors are not acting on behalf
of nor acting at the direction of any other person.
Maynard L. Dokken, Chairman, CEO, and Corporate Director
Mr. Dokken has worked for the Company and its subsidiaries since 1998. He has
served as a director of the Company since December, 1998, its president and
chief executive officer since February, 1999, and chairman of the board since
August 2001. His duties include oversight of legal, financial and corporate
governance matters. He currently serves as director, president and chief
executive officer of Milinx Business Systems, Inc., a Nevada corporation, a
position he has held since August, 2000. He currently serves as director,
president and chief executive officer of ASP Technology One, Inc., a Nevada
corporation, a position he has held since August, 2000. He currently serves as
director, president and chief executive officer of Credit Assure Financial
(Canada) Inc., a British Columbia corporation, a position he has held since
September, 2000. He currently serves as director, president and chief executive
officer of Milinx ASP, Inc., a Delaware corporation, a position he has held
since December, 2000. He currently serves as director, president and chief
executive officer of Milinx Wireless, Inc., a Delaware corporation, a position
he has held since December, 2000. He also served as director, president and
chief executive officer of 580880 BC Ltd. (formerly Milinx Business Services,
Inc., a British Columbia corporation) from March, 1999 to June, 2001. His duties
included developing applications for internet services. From 1995 to 1998, Mr.
Dokken served as president and chief executive officer of Milinx Marketing,
Inc., the Company's predecessor. His duties included oversight of legal,
financial and corporate governance matters.
Mr. Thomas Loker, President and Chief Operational Officer and Corporate
Director.
Mr. Loker has served as President, Chief Operating Officer, Director of the
Company since August, 2001. Prior to joining the Company, Mr. Loker served as
president and chief operating officer of SyberSay Communications. Mr. Loker
joined SyberSay as chief operating officer in February of 2000 with the goal of
establishing and structuring the company. Mr. Loker took the company from an
initial staff of 9 to a team of 43 members and by July the company had
developed, manufactured and released its first products into the market. Mr.
Loker was appointed President & COO in October. During this period the company
released 4 new products. Mr. Loker spearheaded raising $7 million of additional
capital during this time frame. He successfully recruited his replacement in
July 2001. During his tenure the company raised $11 million in financing,
released 9 products to the market, introduced new technologies in the Wireless
and Wired headset market area, obtained 1 patent and filed for 9 patents and had
an additional 12 inventions in disclosure. From February, 1992 to February,
2000, Mr. Loker was an independent consultant for Thomas Loker Consulting.
Stanley Mazor, Director
Mr. Mazor has served as a director of the Company since September, 2001. He is
also presently Director of Technical Services at Numerical Technology. Since
March 1998, Mr. Mazor has served as training manager for CADABRA, a position he
still holds. From March 1997 to March 1998, Mr. Mazor served as training manager
of BEA Systems. From February 1996 to February 1997, Mr. Mazor served as the
training manager for CATS, a software company supporting investment markets with
analysis tools for fixed income securities and their derivatives. Mr. Mazor is a
Senior Member in the IEEE.
16
Michael Goldstein, Director
Mr. Goldstein has served as a director of the Company since September, 2001. He
is co-founder and co-chief executive officer of TeamSearch Inc., a national IT
and Computer Contract Consultancy firm to Fortune 500 and Fortune 1000
companies, where he has worked since 1991. He is also co-founder of Goldstein &
Company, a privately held staffing firm in the computer, electronic publishing /
multi media arena. Michael holds a Bachelor of Science degree, majoring in
Business Administration and Economics with emphasis in Computer Science,
Psychology and Philosophy from The College of Notre Dame.
Steven Price - Chief Financial Officer
Mr. Price has served as the chief financial officer of the Company since
September, 2001. Prior to joining the Company, he was self-employed as a
financial consultant. From May 1997 to August 1998, he served as the chief
financial officer of Personic Software, Inc. From June 1996 to May 1997, he
served as the chief financial officer of Orbit Network, Inc. Mr. Price has
experience in both private and public companies and has been involved in
industries ranging from software and web based systems development to
telecommunications companies and banking. Mr. Price has participated in a number
of turn-arounds, mergers and acquisitions, as well as fundraising activities.
Mr. Price has experience in debt reduction and consolidation and negotiation of
asset based credit facilities. He also has significant experience in investor
relations and SEC relationship issues.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the directors or executive
officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's Directors, executive officers and persons who own more than 10% of a
registered class of the Company's securities to file with the SEC initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Directors, executive officers and
greater-than-10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes that during the year ended June 30,
2001, its Directors, Executive Officers and greater-than-10% stockholders
complied with all Section 16(a) filing requirements.
17
ITEM 11: EXECUTIVE COMPENSATION
- --------------------------------
Summary Compensation Table
The following table sets forth the compensation paid to the Named Executive
Officers of the Company during the past three fiscal years. The Company does not
currently have a long term compensation plan and does not grant any long term
compensation to its executive officers or employees. The table does not reflect
certain personal benefits, which in the aggregate are less than ten percent of
each Named Executive Officer's salary and bonus. No other compensation was
granted for the periods covered.
Long Term Compensation
--------------------------------------------------------
Annual Compensation Awards Payouts
- ------------------------ -------------------------------------- ---------------------------- ---------------------------
Name Other Restricted Securities
and Annual Stock Underlying All Other
Principal Compen- Award(s) Options/ LTIP Compen-sation
Position Year Salary ($) Bonus sation ($) ($) SARs (#) Payouts ($) ($)
($)
- ---------------- ------- --------------- --------- ------------ -------------- ------------- ------------- -------------
Maynard L. 2001 $ 194,750 (1) -0- -0- -0- -0- -0- -0-
Dokken (CEO 2000 $ 118,367 -0- -0- -0- 250,000 (2) -0- -0-
and Chairman) 1999 $ 29,554 -0- -0- -0- -0- -0- -0-
- ---------------- ------- --------------- --------- ------------ -------------- ------------- ------------- -------------
Mikiko 2001 $ 143,083 (3) -0- -0- -0- -0- -0- -0-
Fujisawa 2000 $ 85,714 -0- -0- -0- 150,000 (4) -0- -0-
(Secretary and 1999 $ 19,702 -0- -0- -0- -0- -0- -0-
Treasurer)
- ---------------- ------- --------------- --------- ------------ -------------- ------------- ------------- -------------
<FN>
(1) Mr. Dokken received $120,000 in salary in the form of cash. In addition, on
August 27, 2001, the Board approved the issuance of 325,000 shares of common
stock to Mr. Dokken as compensation for services rendered during the period from
April 1, 2001 through June 30, 2001. On August 27, 2001, the closing market
price of the Company's common stock was $0.23.
(2) On June 1, 2000, the Company granted Mr. Dokken an option to purchase
250,000 shares of common stock of the Company at $2.00 vesting in five equal
installments of 50,000 shares. The option will expire on January 31, 2002.
(3) Ms. Fujisawa received $87,500 in salary in the form of cash. In addition, on
August 27, 2001, the Board approved the issuance of 241,667 shares of common
stock to Ms. Fujisawa as compensation for services rendered during the period
from April 1, 2001 through June 30, 2001. On August 27, 2001, the closing market
price of the Company's common stock was $0.23.
(4) On June 1, 2000, the Company granted Ms. Fujisawa an option to purchase
150,000 shares of common stock of the Company at $2.00 vesting in five equal
quarterly installments of 30,000 shares. The option will expire on January 31,
2002.
</FN>
Option Grants
There were no stock option grants to the Named Executive Officers in fiscal year
2001.
18
Aggregated Option / SAR Exercises in Last Fiscal Year
and FY-End Option / SAR Values
The following table provides information on option exercises in fiscal 2001 by
the Named Executive Officers and the value of such officers' unexercised options
at June 30, 2001.
- -------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options / SARs Options / SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exercisable / Exercisable /
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable *
- -------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Dokken, Maynard -0- $0 200,000 / 50,000 $53,000 / $13,250
- -------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Fujisawa, Mikiko -0- $0 120,000 / 30,000 $31,800 / $7,950
- -------------------------- ---------------------- ---------------------- ---------------------- ----------------------
* On June 29, 2001, the average of the high and low sale price of the stock trading on the OTC BB was $0.265.
Mr. Dokken and Ms. Fujisawa have an exercise price of $2.00 on their exercisable stock options.
COMPENSATION OF DIRECTORS
Currently, directors are not compensated for their service as directors other
than with securities. In the past, directors were compensated for their service
as directors as follows: $3,000 to James Medley (former director). All directors
are reimbursed for any reasonable expenses incurred in the course of fulfilling
their duties as a director of the Company.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
Milinx entered into an employment agreement with its CEO Maynard Dokken on
October 16, 2000. Under the terms of the agreement, Mr. Dokken is to receive an
annual salary of $CN175,000 per year, with an annual bonus to be determined by
the Board of Directors. Under the terms of the agreement, Mr. Dokken received,
in lieu of an increase in salary or bonus for the fiscal year ended June 30,
2000, the option to purchase up to 250,000 shares of the company's common stock
at an exercise price of $2.00 per share.
The Company entered into an employment contract with its President and Chief
Operating Officer, Thomas W. Loker, on August 16, 2001. Under the agreement,
Milinx will pay Mr. Loker $40,000 for his first 60 days of employment. After Mr.
Loker's 60th day of employment, his annual salary will be set at $250,000,
$75,000 of which is to be deferred until the company can obtain further funding.
The agreement entitles Mr. Loker to a $150,000 performance bonus upon the
achievement of specific milestones within his first 60 days of employment. Mr.
Loker was also granted 1,500,000 stock options, which vest on three different
schedules over the course of a year.
The Company has oral understandings with certain members of its management team
that were recently brought in, and expects to commit these understandings to
writing in the near future. These understandings include the commitment to grant
500,000 options to two members of the management team.
1999-7 STOCK OPTION PLAN
For a summary of the terms of the Company's 1999-7 Stock Option Plan, see Note H
to the Company's Notes to Consolidated Financial Statements contained in this
Annual Report on Form 10-K and incorporated by reference herein.
19
REPORT ON REPRICING OF OPTIONS/SARs
At no time during the last fiscal year did the Company adjust or amend the
exercise price of stock options granted.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of September 28, 2001 by:
(i) each person or entity known by the Company to beneficially own more than 5%
of the common stock;
(ii) each Director of the Company;
(iii) each of the named Executive Officers of the Company; and
(iv) all Directors and executive officers as a group.
Except as noted below, the Company believes that the beneficial owners of the
common stock listed below, based on information furnished by such owners, have
sole voting and investment power with respect to such shares.
The number and percentage of shares beneficially owned are based on 27,010,067
shares of common stock outstanding as of September 28, 2001.
- ------------------ ------------------------------------------ --------------------------- -------------------
Title of Class Name and Address Amount of Beneficial Percent of Class
Of Beneficial Owner Ownership
- ------------------ ------------------------------------------ --------------------------- -------------------
Maynard Dokken, Chairman, CEO, Director
Common 300-1045 Howe Street, Vancouver, BC V6Z 14,190,000 35.5% (2)
(1) 2A9
- ------------------ ------------------------------------------ --------------------------- -------------------
Maynard Dokken, Chairman, CEO, Director
Series A 300-1045 Howe Street, Vancouver, BC V6Z 4,250,000 98.3%
Preferred (3) 2A9
- ------------------ ------------------------------------------ --------------------------- -------------------
Thomas Loker
Common President, Chief Operating Officer,
(4) Director 630,000 2.3%
P.O. Box 2156
Danville, California 94526
- ------------------ ------------------------------------------ --------------------------- -------------------
Stanley Mazor, Director
(5) 70 West Plumeria -- --
San Jose, CA 95134-2134
- ------------------ ------------------------------------------ --------------------------- -------------------
Michael Goldstein, Director
(6) 1700 North Broadway, Suite 307 -- --
Walnut Creek, CA 94596
- ------------------ ------------------------------------------ --------------------------- -------------------
Common and Mikiko Fujisawa
Series A 300-1045 Howe Street, Vancouver, BC V6Z
Preferred 2A9
(7)
- ------------------ ------------------------------------------ --------------------------- -------------------
Common and Credit Assure International Inc.
Series A 300-1045 Howe Street, Vancouver, BC V6Z
Preferred 2A9
(8)
- ------------------ ------------------------------------------ --------------------------- -------------------
All Executive Officers and Directors as
a Group (4 persons) 14,820,000 36.5%
- ------------------ ------------------------------------------ --------------------------- -------------------
20
<FN>
(1) Includes 1,650,000 Series A Preferred shares owned by Mr. Dokken, with each
Series A Preferred share convertible into 3 shares of common stock; 600,000
Series A Preferred Shares owned by Mr. Dokken in trust for the benefit of Mikiko
Fujisawa (Mr. Dokken's wife) with each Series A Preferred share convertible into
3 shares of common stock; 250,000 options owned by Mr. Dokken to purchase common
stock that are currently exercisable within 60 days; 400,000 1999 Internal B
Warrants owned by Mr. Dokken, exchangeable for 400,000 shares of Series A
Preferred shares, with each share of Series A Preferred convertible into 3
shares of common stock; 441,667 shares of common stock owned by Mikiko Fujisawa;
600,000 Series A Preferred shares owned by Mikiko Fujisawa in trust for the
benefit of Mr. Dokken, with each Series A Preferred share convertible into 3
shares of common stock; 250,000 1999 Internal B Warrants owned by Mikiko
Fujisawa, exchangeable for 250,000 Series A Preferred Shares, with each share of
Series A Preferred convertible into 3 shares of common stock; 50,000 shares of
common stock owned by Credit Assure International Inc., of which Mr. Dokken has
approximately 79% ownership and voting and dispositive control and Ms. Fujisawa
has approximately a 19% interest; 750,000 Series A Preferred shares owned by
Credit Assure International Inc., with each Series A Preferred share convertible
into 3 shares of common stock.
(2) For purposes of determining effective voting control, and, assuming the
conversion of all of Mr. Dokken's and Mikiko Fujisawa's 1999 Internal B
Warrants, Mr. Dokken and Mikiko Fujisawa would collectively have control over
approximately 51.1% of the Company's voting stock.
(3) Includes 1,650,000 Series A Preferred shares owned by Mr. Dokken; 600,000
Series A Preferred shares owned by Mr. Dokken in trust for the benefit of Mikiko
Fujisawa (Mr. Dokken's wife); 600,000 Series A Preferred shares owned by Mikiko
Fujisawa in trust for the benefit of Mr. Dokken; 750,000 Series A Preferred
Shares owned by Credit Assure International Inc., of which Mr. Dokken has
approximately 79% ownership and dispositive control and Ms. Fujisawa has
approximately a 19% interest; 400,000 1999 Internal B Warrants owned by Mr.
Dokken, convertible into 400,000 Series A Preferred shares; 250,000 1999
Internal B Warrants owned by Mikiko Fujisawa, convertible into 250,000 Series A
Preferred shares.
(4) Includes 630,000 options to purchase common stock owned by Mr. Loker that
are currently exercisable within 60 days.
(5) Mr. Stanley Mazor has an oral understanding with the Company to receive
options, but a definitive agreement with the Company has not yet been reached
and no corporate action has been taken to grant options. Please see Item 11,
"Executive Compensation - Employment Contracts and Termination of Employment and
Change-In-Control Arrangements" for further discussion.
(6) Mr. Michael Goldstein has an oral understanding with the Company to receive
warrants for common shares, but a definitive agreement with the Company has not
yet been reached and no corporate action has been taken to grant options. Please
see Item 13, "Certain Relationships and Related Transactions" for further
discussion.
(7) Mikiko Fujisawa is Mr. Dokken's wife. In order to avoid confusion and
duplication, please see Mr. Dokken's holdings described in footnotes (1) and (3)
above.
(8) Mr. Dokken has approximately 79% ownership and dispositive control of Credit
Assure International Inc. and Ms. Fujisawa has approximately a 19% interest. In
order to avoid confusion and duplication, please see Mr. Dokken's holdings
described in footnotes (1) and (3) above.
</FN>
There are no arrangements known to Milinx, the operation of which may result in
a change of control of the company.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Mr. Maynard Dokken, the Company's majority stockholder, Chief Executive Officer
and Director has controlling interest in the following companies: Milinx
Marketing Group, Inc. (Texas), Milinx Marketing Group, Inc. (British Columbia),
Milinx Management Corporation, Credit Assure International, Inc., Assured Card
Corporation (currently inactive).
21
Effective April 1, 1999, Milinx Marketing Group, Inc. (British Columbia) sold
all of its tangible and intangible assets to Milinx - BC, in exchange for a
$96,948 (CND) or approximately $65,900 (US) promissory note that bears interest
at 10% per annum. The full amount was repaid to Milinx Marketing Group prior to
June 30, 2000.
On February 12, 1999, the Company entered into a management agreement with
Milinx Management Corporation ("Milinx Management"). Under the terms of the
agreement Milinx Management was to provide management, administrative and
marketing services to the Company in consideration for payment of all of the
associated expenses to be incurred by the Milinx Management in connection with
providing the services, including personnel costs. In addition, Milinx
Management was entitled to a management fee equal to fifteen percent of the
expenses to be billed to the Company. Before this agreement was terminated on
April 1, 1999, the Company received services from Milinx Management, totaling
approximately $44,800. By June 30, 2000, the Company paid all but $3,586 of
these fees. The balance bears no interest and is due on demand.
On October 15, 1999 the Company acquired substantially all assets of Milinx
International, Inc. for consideration of 375,000 of the Company's common shares.
Due to unavailability of the information related to the cost of assets acquired,
the Company valued shares exchanged based on the present value of the future
payments due under the original license agreement (see note E). The value of the
consideration paid and the unamortized book value of the original license
agreement were written off at the time of acquisition.
On October 15, 1999, Credit Assure International, Inc. received 50,000 common
shares from Milinx Business Group in exchange for intellectual property and
trademarks. Due to unavailability of the cost information related to the
intangibles acquired, the Company valued transaction using estimated fair value
of the shares exchanged of $25,000. Acquisition costs were immediately written
off as an expense.
During the year ended June 30, 2000, Milinx - BC also incurred various expenses
on behalf of Milinx Marketing Group, Inc. (Milinx Marketing) totaling $82,644.
At June 30, 2000, the entire balance was recorded as a receivable from Milinx
Marketing.
During the year ended June 30, 2000, the Company entered into a management and
financial consulting services agreement with a company controlled by a former
director of the Company. The agreement expired March 31, 2000 and required up to
$1,200 in weekly payments for services rendered by this director. The Company
incurred $48,800 under this agreement during the year ended June 30, 2000. The
entire balance was paid in full prior to June 30, 2000.
Based on discussions taking place in August 2001, the Company has oral
understandings with Mike Goldstein (who would thereafter become a director of
the Company) and his wife to issue Mr. Goldstein and his wife warrants to each
purchase a 715,834 common shares (a total of 1,431,668) at $0.10 per share. The
warrants are immediately exercisable and were issued as part of an agreement in
which the Company engaged Mr. Goldstein's and his wife's company, Teamsearch,
Inc. to hire a president, chief executive officer and chief financial officer
for the Company.
No director, nominee for election as director or immediate family member of a
director or director nominee has been indebted to the Company in an amount in
excess of $60,000 during the last fiscal year.
22
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
1) FINANCIAL STATEMENTS
The following consolidated financial statements of Milinx and the notes thereto,
the related reports thereon of the independent certified public accountants, and
financial statement schedules, are filed pursuant to Item 8 of this Report:
Description Page
- ----------- ----
Independent Auditors' Report dated November 15, 2001 F-3
Consolidated Balance Sheets as of June 30, 2001 and 2000 F-4
Consolidated Statements of Operations for the years ended June 30, 2001,
2000 and the six months ended June 30, 1999 F-5
Consolidated Statement of Stockholders' Equity (deficit) for the
years ended June 30, 2001, 2000 and the six months ended June 30, 1999 F-6
Consolidated Statements of Cash Flows for the years ended June 30, 2001,
2000 and the six months ended June 30, 1999 F-8
Notes to Consolidated Financial Statements F-9
2) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Milinx during the fourth quarter of 2001.
3) LIST OF EXHIBITS
Exhibit
Number Description
------ -----------
3.1* Certificate of Incorporation
3.3* By-laws
4.1 Specimen Stock Certificate
10.1* Lease Agreement between 1045 Howe Street and Milinx Business
Services, Inc.
10.2* Addendum to Lease Agreement between 1045 Howe Street and
Milinx Business Services, Inc.
10.3 Employment Agreement between Milinx Business Group and
Maynard Dokken
10.4 Employment Agreement between Milinx Business Group and Thomas
Loker
21 List of Subsidiaries
* Incorporated by reference from the Form 10-K of the Registrant filed
with the Securities and Exchange Commission on October 13, 2000.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MILINX BUSINESS GROUP, INC.
By: /s/ Maynard L. Dokken
----------------------------------------
Name: Maynard L. Dokken
Title: Chief Executive Officer
Dated: November 16, 2001
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/ Maynard L. Dokken Chief Executive Officer, Chairman, Director November 16, 2001
------------------------------
Name: Maynard L. Dokken
By: /s/ Thomas Loker President, Chief Operating Officer, Director November 16, 2001
------------------------------
Name: Thomas Loker
By: /s/ Stanley Mazor Director November 16, 2001
------------------------------
Name: Stanley Mazor
By: /s/ Michael Goldstein Director November 16, 2001
------------------------------
Name: Michael Goldstein
By: /s/ Steven Price Chief Financial Officer/Principal Accounting November 16, 2001
------------------------------ Officer
Name: Steven Price
24
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1* Certificate of Incorporation
3.3* By-laws
4.1 Specimen Stock Certificate
10.1* Lease Agreement between 1045 Howe Street and Milinx Business
Services, Inc.
10.2* Addendum to Lease Agreement between 1045 Howe Street and
Milinx Business Services, Inc.
10.3 Employment Agreement between Milinx Business Group and
Maynard Dokken
10.4 Employment Agreement between Milinx Business Group and Thomas
Loker
21 List of Subsidiaries
* Incorporated by reference from the Form 10-K of the Registrant filed
with the Securities and Exchange Commission on October 13, 2000.
25
MILINX BUSINESS GROUP, INC. AND SUBSIDIARIES
June 30, 2001 and 2000
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Milinx Business Group, Inc.
We have audited the accompanying consolidated balance sheets of Milinx Business
Group, Inc. (a Delaware corporation) and its Subsidiaries, (the Company) as of
June 30, 2001 and 2000 and the related consolidated statements of operations,
stockholders' equity (deficit) , and cash flows for the years ended June 30,
2001 and 2000, and the six months ended June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Milinx
Business Group, Inc. and its Subsidiaries, as of June 30, 2001 and 2000, and the
results of their consolidated operations and their consolidated cash flows for
the year ended June 30, 2001 and 2000, and the six months ended June 30, 1999,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note B to the
financial statements, the Company has incurred recurring losses from operations
and a stockholders' deficit of $3,890,318. In addition, on October 12, 2001, the
Company's operating subsidiary filed a Notice of Intention with the Office of
the Superintendent of Bankruptcy in British Columbia, Canada. These matters,
among others, factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Seattle, Washington
November 15, 2001
F-3
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Year ended June 30,
ASSETS
2001 2000
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 33,680 $ 2,162,430
Receivables
Trade -- 9,334
Subscriptions -- 323,721
Goods and services tax 35,039 327,149
Employee and stockholders -- 20,692
------------ ------------
Total receivables 35,039 680,896
Due from Milinx Marketing Group -- 82,644
Security deposits 75 209,362
Prepaid rent and other 5,355 43,549
------------ ------------
Total current assets 74,149 3,178,881
PROPERTY AND EQUIPMENT - NET 1,100,226 3,572,168
OTHER ASSETS AND DEFERRED CHARGES
Licenses -- 2,036,985
Capital lease deposits 10,571 205,215
------------ ------------
$ 1,184,946 $ 8,993,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DECIFIT)
CURRENT LIABILITIES
Accounts payable $ 1,582,188 $ 981,233
Accrued liabilities 1,456,368 279,758
Due to Milinx Management Corporation 3,586 3,586
Capital lease obligations - current portion 1,588,678 536,061
Convertible note payable 444,444 --
Customer deposits -- 2,529
------------ ------------
Total current liabilities 5,075,264 1,803,167
CAPITAL LEASE OBLIGATIONS, net of current portion -- 927,808
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Series A 10% non-cumulative, voting convertible preferred stock - $0.001
par value, liquidation preference of $1,176,000
3,675 3,675
Series B voting convertible preferred stock - no par value,
liquidation preference of $0 and $5,043,000, respectively -- 1,681
Series C voting convertible preferred stock - no par value,
liquidation preference of $1,016,000 and $2,207,000, respectively 1,016 2,207
Common stock - $0.001 par value 23,078 9,671
Shares subscribed 10,000 --
Additional paid in capital 21,803,465 14,908,291
Unearned compensation -- (1,102,626)
Accumulated deficit (25,492,701) (7,480,702)
Cumulative translation adjustment (238,851) (79,923)
------------ ------------
(3,890,318) 6,262,274
------------ ------------
$ 1,184,946 $ 8,993,249
============ ============
The accompanying notes are an integral part of these statements.
4
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months
ended June
Year ended June 30, 30,
2001 2000 1999
------------ ------------ ------------
Net sales $ 126,462 $ 197,193 $ 43,424
Cost of sales 186,112 365,449 48,112
------------ ------------ ------------
Gross loss (59,650) (168,256) (4,688)
------------ ------------ ------------
Selling, general and administrative expenses 12,133,905 6,442,914 839,192
Losses due to impairment 3,361,048 -- --
------------ ------------ ------------
Net loss from operations 15,554,603 6,611,170 843,880
Other expenses (income)
Interest 535,614 31,515 --
Miscellaneous, net 220,989 (6,233) 370
------------ ------------ ------------
756,603 25,282 370
------------ ------------ ------------
Net loss (16,311,206) $ (6,636,452) $ (844,250)
Deemed preferred stock dividend (1,700,000) - -
------------ ------------ ------------
Net loss available to common stockholders $ (18,011,206) $ (6,36,452) (844,250)
NET LOSS PER COMMON SHARE $ (1.12) $ (0.74) $ (0.32)
AVAILABLE TO COMMON STOCKHOLDERS - ============ ============ ============
BASIC AND DILUTED
The accompanying notes are an integral part of these statements.
F-5
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the six months ended June 30, 1999 and the years
ended June 30, 2000 and 2001
Series A preferred stock Series B preferred stock Series C Preferred stock
Shares Amount Shares Amount Shares Amount
Balance at January 1, -- $ -- $ -- $ -- $ -- $ --
Issuances of common
stock through
series of
private -- -- -- -- -- --
placements
Issuance of Series A
preferred
stock to
officers and 2,925,000 2,925 -- -- -- --
legal counsel
Issuance of Series A
preferred
stock through
exercise of
stock options 750,000 750 -- -- -- --
by Credit
Assure
Issuance of Internal
Warrants A to
a director and
legal counsel -- -- -- -- -- --
Issuance of Class A
units to -- -- -- -- -- --
various
investors
Foreign currency
translation
adjustment -- -- -- -- -- --
Net loss for the six
months ended
June 30, 1999 -- -- -- -- -- --
Balance at June 30, 3,675,000 3,675 -- -- -- --
Issuances of common
stock in asset
purchase
transaction -- -- -- -- -- --
Issuance of common
stock as part
of reverse -- -- -- -- -- --
transaction
Issuance of Class A --
units to -- -- -- -- -- --
various
investors
Issuance of class D
units to -- -- -- -- -- --
various
investors
Issuance of Series C
preferred
stock and
Class D
Warrants to
various
investors
through a -- -- -- -- 2,624,412 2,624
conversion of
Class D units
Issuance of common
stock to
investors
through a
conversion of -- -- -- -- (417,000) (417)
Series C
preferred
Issuance of common
stock to an
investor
through a
conversion of -- -- -- -- -- --
Class D
warrants
Issuance of Series B
preferred stock
and 1999 International
A warrants to
various investors
through a conversion of -- -- 1,681,250 1,681 -- --
Class A Units
Issuance of common
stock to -- -- -- -- -- --
employees
Grant of warrants for
legal services -- -- -- -- -- --
Grant of stock options
to employees -- -- -- -- -- --
Current year
amortization
of deferred -- -- -- -- -- --
compensation
Change in cumulative
translation
adjustment -- -- -- -- -- --
Net loss for the year
ended
June 30, 2000 -- -- -- -- -- --
Balance at June
30, 2000 3,675,000 3,675 1,681,250 1,681 2,207,412 2,207
Exercise of
employee
stock
options -- -- -- -- -- --
Stock options
forfeited
by employees -- -- -- -- -- --
Amortization of
deferred
compensation
net of --
prior year
forfeitures , -- -- -- -- -- --
Issuance of common
stock to
employees -- -- -- -- -- --
Shares issued in
lieu of
cancellation
fees -- -- -- -- -- --
Sale of common
stock
shares at
$4.50 per
share -- -- -- -- -- --
Additional shares
issued to $4.50
subscribers
to roll
$4.50 offering
into
Millennium
offering -- -- -- -- -- --
Issuance of common
shares as --
part of
Millennium
units in
consideratio
for servicesn -- -- -- -- -- 300,000
Issuance of common
shares
through
Millennium
Units,
including
finder fees
paid in
units -- -- -- -- -- --
Issuance of Series C
preferred stock
and class D warrants
to investors
through a conversion
of Class D
Units -- -- -- -- 2,364,511 2,365
Issuance of common
stock to
investors
through a
conversion
of Series C
preferred -- -- -- -- (3,556,312) (3,556)
Issuance of common
stock to
investors
through a
conversion
of Class D
warrants -- -- -- -- -- --
Issuance of common
stock to
investors
through a
conversion
of Series B
preferred -- -- (1,681,250) (1,681) -- --
Change in
cumulative
translation
adjustment -- -- -- -- -- --
Net loss for the
year ended
Jun 30, 2001 -- -- -- -- -- --
Balance at June
30, 2001 3,675,000 $ 3,675 -- $ -- 1,015,611 $ 1,016
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Cumulative
Common stock Subscribed Stock Paid In Unearned Translation
Shares Amount Shares Amount Capital Compensation Adjustment
Balance at January 1, $ -- $ -- $
1999
Issuances of common
stock through
series of
private 8,470,000 8,470 -- -- 592,825 -- --
placements
Issuance of Series A
preferred
stock to
officers and -- -- -- -- -- -- --
legal counsel
Issuance of Series A
preferred
stock through
exercise of
stock options -- -- -- -- 26,250 -- --
by Credit
Assure
Issuance of Internal
Warrants A to
a director and
legal counsel -- -- -- -- 200 -- --
Issuance of Class A
units to -- -- -- -- 590,000 -- --
various
investors
Foreign currency
translation
adjustment -- -- -- -- -- -- (20,523)
Net loss for the six
months ended
June 30, 1999 -- -- -- -- -- -- --
Balance at June 30, 8,470,000 8,470 -- -- 1,209,275 -- (20,523)
1999
Issuances of common
stock in asset
purchase
transaction 425,000 425 -- -- 174,700 -- --
Issuance of common
stock as part
of reverse 250,000 250 -- -- 250 -- --
transaction
Issuance of Class A
units to -- -- -- 2,772,500 -- --
various
investors
Issuance of class D
units to -- -- -- -- 9,097,662 -- --
various
investors
Issuance of Series C
preferred
stock and
Class D
Warrants to
various
investors
through a -- -- -- -- -- -- --
conversion of
Class D units
Issuance of common
stock to
investors
through a
conversion of 417,000 417 -- -- -- -- --
Series C
preferred
Issuance of common
stock to an
investor
through a
conversion of 37,500 38 -- 74,962 -- --
Class D
warrants
Issuance of Series B
preferred stock
and 1999 International
A warrants to
various investors
through a conversion of -- -- -- -- -- -- --
Class A Units
Issuance of common
stock to 71,000 71 -- -- 35,479 -- --
employees
Grant of warrants for
legal services -- -- -- -- 122,000 -- --
Grant of stock options
to employees -- -- -- -- 1,421,461 (1,421,461) --
Current year
amortization
of deferred -- -- -- -- -- 318,835 --
compensation
Change in cumulative
translation
adjustment -- -- -- -- -- -- (59,400)
Net loss for the year
ended
June 30, 2000 -- -- -- -- -- -- (6,636,452)
Balance at June
30, 2000 9,670,500 9,671 -- -- 14,908,291 (1,102,626) (79,923)
Exercise of
employee
stock
options 558,500 558 -- -- 31,373 -- --
Stock options
forfeited
by employees -- -- -- -- -- 1,065,882 --
Amortization of
deferred
compensation
net of
prior year
forfeitures , -- -- -- -- 36,744 -- --
Issuance of common
stock to
employees 1,000 1 -- -- -- -- --
Shares issued in
lieu of
cancellation
fees 50,000 50 -- -- 79,950 -- --
Sale of common
stock
shares at
$4.50 per
share 44,886 45 -- -- 181,743 -- --
Additional shares
issued to $4.50
subscribers
to roll
$4.50 offering
into
Millennium
offering 792,864 793 -- -- -- -- --
Issuance of common
shares as
part of
Millennium
units in
consideratio
for servicesn 300 -- -- 149,700 -- -- --
Issuance of common
shares
through
Millennium
Units,
including
finder fees
paid in
units 4,639,617 4,640 20,000 10,000 2,254,359 -- --
Issuance of Series C
preferred stock
and class D warrants
to investors
through a conversion
of Class D
Units -- -- -- -- -- -- --
Issuance of common
stock to
investors
through a
conversion
of Series C
preferred 3,556,312 3,556 -- -- -- -- --
Issuance of common
stock to
investors
through a
conversion
of Class D
warrants 1,782,857 1,783 -- -- 3,563,931 -- --
Issuance of common
stock to
investors
through a
conversion
of Series B
preferred 1,681,250 1,681 -- -- -- -- --
Change in
cumulative
translation
adjustment -- -- -- -- -- -- (158,928)
Net loss for the
year ended
Jun 30, 2001 -- -- -- --
Balance at June
30, 2001 23,077,786 $ 23,078 20,000 $ 10,000 $ 20,103,465 $ -- $ (238,851)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Deficit Total
Balance at January 1, $ $
1999
Issuances of common
stock through
series of
private -- 601,295
placements
Issuance of Series A
preferred
stock to
officers and -- 2,925
legal counsel
Issuance of Series A
preferred
stock through
exercise of
stock options -- 27,000
by Credit
Assure
Issuance of Internal
Warrants A to
a director and
legal counsel -- 200
Issuance of Class A
units to -- 590,000
various
investors
Foreign currency
translation
adjustment -- (20,523)
Net loss for the six
months ended
June 30, 1999 (844,250) (844,250)
Balance at June 30, (844,250) 356,647
1999
Issuances of common
stock in asset
purchase
transaction -- 175,125
Issuance of common
stock as part
of reverse -- 500
transaction
Issuance of Class A
units to 2,772,500
various
investors
Issuance of class D
units to -- 9,097,662
various
investors
Issuance of Series C
preferred
stock and
Class D
Warrants to
various
investors
through a -- 2,625
conversion of
Class D units
Issuance of common
stock to
investors
through a
conversion of -- --
Series C
preferred
Issuance of common
stock to an
investor
through a
conversion of -- 75,000
Class D
warrants
Issuance of Series B
preferred stock
and 1999 International
A warrants to
various investors
through a conversion of -- 1,682
Class A Units
Issuance of common
stock to -- 35,550
employees
Grant of warrants for
legal services -- 122,000
Grant of stock options
to employees -- --
Current year
amortization
of deferred -- 318,835
compensation
Change in cumulative
translation (59,400)
Net loss for the year
ended (6,636,452) (6,636,452)
Balance at June
30, 2000 (7,480,702) 6,262,274
Exercise of
employee
stock
options -- 31,931
Stock options
forfeited
by employees -- --
Amortization of
deferred
compensation
net of
prior year
forfeitures , 36,744
Issuance of common
stock to
employees -- 1
Shares issued in
lieu of
cancellation
fees -- 80,000
Sale of common
stock
shares at
$4.50 per
share -- 181,788
Additional shares
issued to $4.50
subscribers
to roll
$4.50 offering
into
Millennium
offering (793) --
Issuance of common
shares as
part of
Millennium
units in
consideratio
for servicesn 150,000
Issuance of common
shares
through
Millennium
Units,
including
finder fees
paid in
units -- 2,268,999
Issuance of Series C
preferred stock
and class D warrants
to investors
through a conversion
of Class D
Units -- 2,365
Issuance of common
stock to
investors
through a
conversion
of Series C
preferred -- --
Issuance of common
stock to
investors
through a
conversion
of Class D
warrants -- 3,565,714
Issuance of common
stock to
investors
through a
conversion
of Series B
preferred -- --
Change in
cumulative
translation
adjustment -- (158,928)
Net loss for the
year ended (16,311,206) (16,311,206)
Balance at June
30, 2001 $(23,792,701) $ (3,890,318)
The accompanying notes are an integral part of this statement.
F-7
Milinx Business Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
Year ended June 30,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
<s> <c> <c> <c>
Increase (Decrease) in Cash and cash equivalents
Cash flows from operating activities
Net loss $(16,311,206) $ (6,636,452) $ (844,250)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,566,409 450,814 42,362
Losses due to impairment 3,361,048 -- --
Losses due to abandonment and theft 169,700 -- --
Write off of license and trademark costs -- 304,500 --
Write off of related party balances 32,705 -- --
Employee stock and stock option compensation 36,744 350,835 --
Warrants issued for services -- 122,000 --
Shares issued in lieu of cancellation fees 80,000 -- --
Millennium units issued for services 150,000 -- --
Changes in assets and liabilities
Receivable 322,000 (289,349) (67,826)
Security deposits and prepaid expenses 262,039 (194,504) (34,873)
Accounts payable, accrued liabilities and customer deposits
1,997,474 447,756 496,491
Related party receivables -- (82,644) (36,282)
------------ ------------ ------------
Net cash and cash equivalents used in operating activities (7,333,087) (5,527,044) (444,378)
Cash flows from investing activities
Acquisition of fixed assets, net of disposals (648,985) (1,782,659) (677,163)
Acquisition of intangible assets (218,507) (1,843,525) (50,000)
Cash acquired through Forestay -- 500 --
Capital lease deposits -- (203,915) (24,834)
------------ ------------ ------------
Net cash and cash equivalents used in investing activities (867,492) (3,829,599) (751,997)
Cash flows from financing activities
Proceeds from issuance of common stock -- 75,000 601,295
Proceeds of Millennium placement 2,450,787 4,307 --
Proceeds from issuance of preferred stock -- -- 2,925
Proceeds from issuance of 1999 Class A Units -- 2,772,500 590,000
Proceeds from issuance of 1999 Class D Units 326,086 8,773,941 --
Proceeds from conversion of Class D Warrants 3,565,714 -- --
Proceeds from issuance of 1999 Internal Warrants A
-- -- 200
Proceeds from exercise of stock options and sale of common stock to employees
31,932 3,550 27,000
Proceeds from issuance of convertible debenture 400,000 -- --
Payments on capital lease obligations (543,762) (55,347) --
------------ ------------ ------------
Net cash provided by financing activities 6,230,757 11,573,951 1,221,420
Effect of the exchange rate changes on cash (158,928) (59,400) (20,523)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (2,128,750) 2,157,908 4,522
Cash and cash equivalents at beginning of year 2,162,430 4,522 --
------------ ------------ ------------
Cash and cash equivalents at end of year $ 33,680 $ 2,162,430 $ 4,522
============ ============ ============
Cash paid for:
Interest $ 125,000 $ 8,272 $ 1,652
Taxes $ -- $ -- $ --
Non-cash disclosures:
Additions to capital leases $ 540,516 $ 2,016,198 $ --
Note issued in connection with asset acquisition $ -- $ -- $ 65,681
The accompanying notes are an integral part of these statements.
F-8
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Milinx Business Group, Inc. (Milinx - Delaware) was incorporated on December 10,
1998 in the state of Delaware as Milinx Marketing Group, Inc. and commenced its
operations on February 10, 1999. Effective April 1, 1999, the Company formed a
wholly-owned Canadian subsidiary, 580880BC Ltd. doing business as Milinx
Business Services, Inc. (Milinx - BC)to develop and market its product in
Canada. Both companies have adopted June 30 fiscal year ends. Effective May 5,
1999, Milinx - Delaware changed its name to Milinx Business Group, Inc.
On December 9, 1999, through a transaction structured as a reverse acquisition,
Milinx - Delaware acquired Forestay Corporation, a reporting company registered
in Delaware. The Company elected successor status under Exchange Act Rule
12g-3(a) and became a reporting company effective February 15, 2000. The Company
began trading in the OTC market on June 8, 2000.
Milinx Wireless, Inc. ("Milinx Wireless"), a subsidiary of Milinx, was
incorporated in the State of Delaware on December 6, 2000. Milinx Wireless, Inc.
was structured to facilitate the advancement of proprietary technology into
global wireless development. As further discussed, the Company sold shares of
Milinx Wireless as part of its Millennium units offering ("Millennium Offering")
which resulted in immaterial amount of minority interest. Due to immateriality,
it was not separately disclosed in the accompanying financial statements. Milinx
Wireless has not yet commenced its operations.
ASP Technology One, Inc. ("ASP Techone") was incorporated in the State of Nevada
on August 4, 2000, as a wholly owned subsidiary of Milinx Business Group, Inc.
for the purposes of facilitating the sign-up of Resellers to market Milinx
products and services and to act as the Application Service Provider (ASP)
subsidiary of Milinx. ASP Techone has not yet commenced its operations.
Milinx Business Group, Inc. and its subsidiaries (collectively referred thereto
as "the Company") are developing and marketing business application products
including Unified Messaging, Virtual Office Systems, and supplying communication
productivity, and e-commerce functionality. The Company is targeting Small and
Medium Enterprises (SMEs) in the business Application Service Provider (ASP)
market in North America.
1. Principles of Consolidation
---------------------------
The financial statements include the accounts of the Milinx - Delaware and its
wholly owned Subsidiaries. All significant intercompany balances and
transactions have been eliminated.
2. Revenue Recognition
-------------------
Revenue from month-to-month subscriber contracts is recognized monthly as
earned.
3. Property and Equipment
----------------------
Property and equipment are stated at cost, less accumulated depreciation and
amortization.
Depreciation and amortization were computed using the straight-line method over
the estimated useful life ranging as follows:
Computer hardware and telecommunication
equipment 2 - 3 years
Computer software 3 years
Furniture and fixtures 2 - 3 years
Leasehold improvements The lesser of the lease term or the
estimated useful life of the asset
F-9
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Licenses
--------
The Company capitalizes costs of software licenses acquired from third party
vendors. Periodically, the Company evaluates its intangibles in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, to
determine potential impairment.
Amortization was computed using the ratio of current users over the estimated
total number of users during estimated useful life of each license. The
estimated useful life was determined as the lesser of the license term or
estimated life of the license and and ranged from 2 to 3 years.
5. Loss per share
--------------
Basic loss per share is based on the weighted average number of common shares
outstanding during the period. The weighted average number of common shares
outstanding during the years ended June 30, 2001 and 2000, and the six months
ended June 30, 1999 was 16,013,405, 8,972,958 and 2,656,040, respectively.
Diluted loss per share includes the effect of all potentially issuable common
stock. Diluted loss per share for the years ended June 30, 2001 and 2000, and
the six months ended June 30, 1999 equaled basic loss per share due to
antidilutive effect of the potentially issuable common stock. As of June 30,
2001, there was no potentially issuable common stock.
6. Translation Adjustments
-----------------------
Milinx - BC's functional currency is the Canadian dollar. Translation
adjustments resulting from the process of translating the subsidiaries financial
statements into U.S. dollars for consolidation purposes is reported as a
separate component of stockholders' equity.
7. Comprehensive Loss
- --------------------
The Company has adopted SFAS 130, Reporting Comprehensive Income. The statement
requires inclusion of foreign currency translation adjustments, reported
separately in stockholders' equity, in other comprehensive income. The Company
had no other comprehensive loss items for the years ended June 30, 2001 and 2000
and the six months ended June 30, 1999. The Company's total comprehensive loss
for the years ended June 30, 2001 and 2000, and the six months ended June 30,
1999 were $16,237,100, $6,695,852, and $864,773, respectively.
8. Accounting Estimates
--------------------
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
9. New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS
141 applies to all business combinations initiated after June 30, 2001. The
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later. The
adoption of SFAS 141 will not have an impact on the Company's financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. The provisions of SFAS 142 are required to be applied starting with
fiscal years beginning after December 15, 2001 with earlier application
permitted for entities with fiscal years beginning after March 15, 2001 provided
that the first interim financial statements have not been previously issued. The
statement is required to be applied at the beginning of the entity's fiscal year
and to be applied to all goodwill and other intangible assets recognized in its
financial statements to that date. The adoption of SFAS 142 will not have an
impact on the Company's financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, and APB
Opinion 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for segments of a business to be disposed of.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 will not have an impact on the Company's financial
statements.
F-10
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
10. Reclassifications
-----------------
Certain reclassifications have been made to prior period numbers to conform to
current year classifications.
NOTE B - MANAGEMENT PLANS
The accompanying consolidated financial statements are prepared on a going
concern basis which contemplates continuity of operations, realization of
assets, and liquidation of liabilities in the ordinary course of business and do
not reflect adjustments that might result if the Company is unable to continue
as a going concern.
In September 2001, the Company's current management team took over as part of a
restructuring initiative. This management team assessed the business and
financial position of the company and determined that the only viable
alternative was to attempt to reorganize through a voluntary bankruptcy filing
by its subsidiary, Milinx - BC. The proposed plan of reorganization will
ultimately need to receive the support of its secured creditors and its
unsecured creditors, who will meet to approve the plan. The plan must also be
approved by the bankruptcy court. Milinx - BC bases its initiative on obtaining
approval of a plan of reorganization, because its business model contemplates
using two material assets of Milinx - BC.
On October 12, 2001, a Notice of Intention was filed with the Office of the
Superintendent of Bankruptcy ("OSOB") in British Columbia, Canada. Milinx - BC
has until December 24, 2001, to file a plan of reorganization with the OSOB. If
the court accepts the plan of reorganization, the OSOB and Milinx - BC's
unsecured creditors are notified of a meeting to consider the plan of
reorganization. The meeting is to occur within 21 days of the filing of the plan
of reorganization. If the plan receives approval by the creditors (which occurs
if the plan receives the vote of a majority in number of the creditors filing a
proof of claim and the vote of 66% of the dollar value of the claims), then the
plan will be submitted to the court for its approval, which is to occur within
15 days. If Milinx - BC's general unsecured creditors and the court approve the
plan, it becomes a contract between Milinx - BC and its general unsecured
creditors, and the balance of debt is extinguished if Milinx - BC performs
according to the plan.
The proposal must be attractive enough to the claimants that it secures the
necessary votes for approval. The final amount of the claims that Milinx - BC
will pay to its unsecured creditors will ultimately be determined if the
creditors approve the plan of reorganization. Milinx's efforts are currently
focused on developing the plan of reorganization. The opposing constraints on
the plan are the resources available for payment of claims versus what enough
claimants will find acceptable to approve the plan. Because of the uncertainty
associated with both of these variables, Milinx cannot predict at this time the
level of payments that the plan of reorganization will ultimately propose.
During the course of the reorganization, Milinx has been and will continue to
pay continuing expenses of approximately $15,000 per month for the lease of the
data center, in addition to other general and administrative costs. If the plan
of reorganization is approved by the creditors and accepted by the court, Milinx
will need to fund the balance of the debt under the plan of reorganization.
There can be no assurance that Milinx's plan of reorganization will be approved
by the creditors or by the court or that Milinx will be able to fund the debt.
To obtain approval, Milinx will need to demonstrate to the creditors and the
court that its plan is viable. If the plan is not approved or if it is approved
and Milinx - BC does not perform according to its terms, Milinx - BC will be
forced into an involuntary bankrutpcy.
During the year ended June 30, 2001, the Company raised an approximately
$6,775,500 in equity capital and debt financing. Subsequent to June 30, 2001,
the Company raised $300,000 through a series of private placements of
convertible debentures bearing 12% interest rate. Each debenture also had five
shares of the Company's voting common stock for each dollar loaned the Company.
The Company is currently in the process of raising additional funds through
similar financing arrangements.
The Company's negative cash flow from operations is expected to continue and
could accelerate in te foreseeable future. The Company does not expect that its
existing capital resources will be adequate to satisfy the requirements of its
current and planned operations during fiscal year 2002. The Company will need to
raise substantial additional capital to fund its operations and may seek such
additional funding through public or private equity or debt financing. There can
be no assurance that such additional funding will be available on acceptable
terms, if at all. The Company's continued existence as a going concern is
ultimately dependent upon its ability to secure additional funding for
completing and marketing its technology and the success of its future
operations.
Continuing as a going on a going concern basis is dependent upon, amongst other
things, Milinx - BC's formulation of an acceptable plan of reorganization, the
Company's success of future business operations, and the generation of
sufficient cash from operation and financing sources to meet its obligations.
Other than recognizing impairment losses of its long-lived assets, the Company's
consolidated financial statements do not reflect: (a) the realizable value if
assets on liquidation basis or their availability to satisfy liabilities;(b)
aggregate pre-petition liabilities amounts that may be allowed for claims or
contingencies, or their status and priority; (c)the effect of any changes to the
Company's capital structure or in its business operations as a result of the
proposed reorganization; or (d) adjustments to the carrying value of the assets
or liability amounts that may be necessary as the result of actions by the OSoB.
F-11
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE C - PROPERTY AND EQUIPMENT
As of June 30, the following is a composition of the Company's property and
equipment:
2001 2000
---------- -----------
Computer hardware and telecommunication equipment
$ 884,694 $2,763,822
Computer software 95,646 395,461
Furniture and fixtures 6,571 259,707
Leasehold improvements 113,315 625,729
---------- ----------
1,100,226 4,044,719
Accumulated depreciation and amortization
-- 472,551
---------- ----------
$1,100,226 $3,572,168
========== ==========
Continuous losses, failing business model and additional uncertainties triggered
by the general state of the economy indicated potential impairment of the
Company's property and equipment. In accordance with SFAS 121, the Company wrote
its property and equipment down to their fair value by utilizing an independent
third party appraiser who used the cost approach as the primary method in
estimating the fair market value of a 100 percent common stock interest in the
Company. The Cost approach is based on the principle that a buyer would not pay
more for the property and equipment than what it would cost to create an entity
of equivalent utility. The application of this approach involves estimating the
replacement cost of the entity. This is typically accomplished by adjusting all
assets and liabilities, tangible and intangible, to fair market value, with the
net asset value, assets minus the liabilities, serving to indicate the value of
the entity's equity. As a result of the valuation and its analysis, the Company
recorded an impairment loss of $2,042,261.
The Company also incurred an abandonment and theft losses of $169,700 related to
abandoned and misplaced office equipment and leasehold improvements originally
located at the Company's previous corporate headquarters that it was forced to
vacate in June 2001 due to the rent delinquency.
NOTE D - RELATED PARTY TRANSACTIONS
The Company's majority stockholder and President has a controlling interest in
the following companies: Milinx Marketing Group, Inc. (Texas), Milinx Marketing
Group, Inc. (British Columbia), Milinx Management Corporation, Credit Assure
International, Inc., Assured Card Corporation (currently inactive).
Effective April 1, 1999, Milinx Marketing Group, Inc. (British Columbia) sold
all of its tangible and intangible assets to Milinx - BC, in exchange for a
$96,948 (CND) or approximately $65,900 (US) promissory note that bears interest
at 10% per annum. The full amount was repaid to Milinx Marketing Group prior to
June 30, 2000.
On February 12, 1999, the Company entered into a management agreement with
Milinx Management Corporation ("Milinx Management"). Under the terms of the
agreement Milinx Management was to provide management, administrative and
marketing services to the Company in consideration for payment of all of the
associated expenses to be incurred by the Milinx Management in connection with
providing the services, including personnel costs. In addition, Milinx
Management was entitled to a management fee equal to fifteen percent of the
expenses to be billed to the Company. Before this agreement was terminated on
April 1, 1999, the Company received services from Milinx Management, totaling
approximately $44,800. By June 30, 2000, the Company paid all but $3,586 of
these fees. The balance bears no interest and is due on demand.
On October 15, 1999 the Company acquired substantially all assets of Milinx
International, Inc. for consideration of 375,000 of the Company's common shares.
Due to unavailability of the information related to the cost of assets acquired,
the Company valued shares exchanged based on the present value of the future
payments due under the original license agreement (see note E). The value of the
consideration paid and the unamortized book value of the original license
agreement were written off at the time of acquisition.
F-12
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
On October 15, 1999, Credit Assure International, Inc. received 50,000 common
shares from Milinx Business Group in exchange for intellectual property and
trademarks. Due to unavailability of the cost information related to the
intangibles acquired, the Company valued transaction using estimated fair value
of the shares exchanged of $25,000. Acquisition costs were immediately written
off as an expense.
During the year ended June 30, 2000, Milinx - BC also incurred various expenses
on behalf of Milinx Marketing Group, Inc. (Milinx Marketing) totaling $82,644.
At June 30, 2000, the entire balance was recorded as a receivable from Milinx
Marketing.
During the year ended June 30, 2000, the Company entered into a management and
financial consulting services agreement with a company controlled by a director.
The agreement expired March 31, 2000 and required up to $1,200 in weekly
payments for services rendered by this director. The Company incurred $48,800
under this agreement during the year ended June 30, 2000. The entire balance was
paid in full prior to June 30, 2000.
NOTE E - LICENSES
The Company entered into a licensing agreement with Intraware, a partner of the
SUN/Netscape Alliance (iPlanet) on April 27, 2000. This licensing provided for
500,000 seats of SUN/Netscape Alliance software for Virtual Office and Unified
Messaging and 500,000 seats of U-Force Unified Messaging. The total cost of
$1,695,115 for this licensing was paid prior to June 30, 2000, except for two
payments of $146,730, which were included in the accounts payable at June 30,
2000. In addition, during the year ended June 30, 2000, the Company entered into
several other licensing agreements for use in its Data Center, at a total cost
of $341,870. The licensing was to be amortized based on the number of seats in
use. As of June 30, 2000, the Data Center were not fully operational and, thus,
no amortization was recognized for the year ended June 30, 2000.
Continuous losses, failing business model and additional uncertainties triggered
by the general state of the economy indicated potential impairment of the
Company's licenses. At March 31,2001 and then June 30, 2001, the Company
conducted an impairment analysis in accordance with the SFAS No. 121 and wrote
off $1,318,787, representing the remaining an unamortized balance of the
capitalized license costs.
NOTE F - ACCRUED LIABILITIES
Accrued liabilities are comprised of the following as of June 30:
2001 2000
---------- ----------
Compensation $ 512,447 $ 14,029
Legal fee 387,544 --
Employee benefits and payroll taxes 260,369 70,848
Commissions -- 135,187
Others 296,008 59,694
---------- ----------
$1,456,368 $ 279,758
========== ==========
NOTE G - CONVERTIBLE DEBENTURE
On November 9, 2000, the Company sold a $444,4444 convertible debenture to a
unrelated third party for net proceeds of $400,000. The debenture was to mature
on March 31, 2001, with 12% interest and was convertible upon demand into shares
of the Company's common stock at $3.00 per share. Based on the November 9, 2001
opening price of the Company's stock, there was no value to the beneficial
conversion feature associated with the debenture. The $44,000 premium paid on
the debenture, was amortized as an additional interest expense.
On December 29, 2000 the holder of convertible debentures called the outstanding
principal balance by providing the Company with a thirty-day notice.
The Company is currently in a default on the debenture. As of June 30, 2001, the
outstanding principal balance was $444,444. In addition, accrued interest
expenses include $35,556 of unpaid interest.
F-13
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE H - STOCKHOLDERS' EQUITY
The Company has the following types of securities authorized and outstanding:
Common Stock - $0.001 par value, 210,000,000 shares authorized.
Preferred Stock - 100,000,000 shares of preferred stock authorized and
designated into series as follows: Series A $0.001 par value, 10%
non-cumulative, voting, convertible preferred stock - 15,000,000 shares
authorized. Series A preferred stockholders are entitled to a non-cumulative 10%
cash dividend. Each share has a $.32 liquidation preference in addition to any
declared and unpaid dividends outstanding at the time of liquidation (up to $.32
of accumulated dividends per each Series A preferred share). Each preferred
stockholder is entitled to a number of votes that equals twice the number of
common shares into which said Series A preferred stock may be converted but no
less than six votes for each Series A preferred share. General conversion
provisions entitle each preferred share to be converted into three common stock
shares. The agreement also has variable conversion provisions designed to
prevent dilution of the preferred stockholders' position. No shares can be
converted during the twelve months following issuance. The agreement also
contains automatic conversion provisions at the election of the Company. At June
30, 2001 and 2000, the conversion ratio of Series A preferred stock into common
stock was 1:3. See note M for subsequent amendments to Series A preferred.
Series B no par value voting, convertible preferred stock - 10,000,000 shares
authorized. Each share of Series B preferred stock has a $2.00 liquidation
preference. Each preferred stockholder is entitled to a number of votes that
equals the number of common shares into which said Series B preferred stock may
be converted. General conversion provisions entitle each preferred share to be
converted into one common stock share. The agreement also has variable
conversion provisions designed to prevent dilution of the preferred
stockholders' position. No shares can be converted until after December 31,
1999. The agreement also contains automatic conversion provisions at the
election of the Company. At June 30, 2000, the conversion ratio of Series B
preferred stock into common stock was 1:1. All Series B preferred shares were
converted into common shares during the year ended June 30, 2001.
F-14
NOTE G - STOCKHOLDERS' EQUITY - continued
Series C $0.001 par value, 10% non-cumulative, voting, convertible preferred
stock - 10,000,000 shares authorized. Series C preferred stockholders are
entitled to a non-cumulative 10% cash dividend. Each share of Series C preferred
stock has a $1.00 liquidation preference less accumulated total dividends paid
up to the time of liquidation. Each preferred stockholder is entitled to a
number of votes that equals the number of common shares into which said Series C
preferred stock may be converted. General conversion provisions entitle each
preferred share to be converted into one common stock share. The agreement also
has variable conversion provisions designed to prevent dilution of the preferred
stockholders' position. The agreement also contains automatic conversion
provisions at election of the Company. At June 30, 2001 and 2000, the conversion
ratio Series C preferred stock to common was 1:1.
In respect to the anti-dilution conversion provisions of the Series A and C
Convertible Preferred Stock, triggered by the sales of Millennium Units at $2
per share and non cash deemed dividends of $1.7 million was recongized for the
year ended June 30, 2001.
Of the authorized preferred stock, 65,000,000 shares have not yet been
designated to a Series.
Warrants - As of June 30, 2001 and 2000 the Company has authorized the following
warrants:
1999 Internal Warrant A, 900,000 warrants authorized These warrants are
exchangeable for common shares at $4.50 per share until January 31, 2002.
As of June 30, 2001 and 2000, 900,000 1999 Internal Warrants A were issued
and outstanding.
1999 International Warrant A, 840,625 warrants authorized These warrants
are exchangeable for common shares at $2.00 per common share until
September 30, 2000. As of June 30, 2000 there were 840,625 1999
International Warrants A issued and outstanding. All warrants were
converted into common shares during the year ended June 30, 2001.
1999 Internal Warrant B, 650,000 warrants authorized These warrants are
exchangeable for Series A Preferred shares at $6.00 per share until March
31, 2005. At June 30, 2000, there were 650,000 1999 Internal Warrant B
issued and outstanding.
F-15
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and1999
NOTE H - STOCKHOLDERS' EQUITY - Continued
Class D Warrants, 5,000,000 warrants authorized These warrants were
exchangeable for common shares at $2.00 per common share until November 15,
2000. During the years ended June 30, 2001 and 2000, 1,182,256 and
1,312,206 Class D warrants, respectively, were issued through a conversion
of Class D units. During the years ended June 30, 2001 and 2000, 1,782,857
and 37,500, respectively of Class D warrants were converted into common
shares. The remaining warrants expired unexercised on November 15, 2000.
Units - the Company authorized the following types of hybrid securities:
1999 Class C Units, 10,000,000 authorized These units have a right to
purchase one Series B preferred share, 1/2 Class A Warrant, and 1/2
Class B Warrant at a nominal amount at $0.001002. At June 30, 2000
there were no Class C Units issued.
1999 Class D Units, 10,000,000 authorized These units have a right to
purchase one Series C preferred share and 1/2 Class D Warrant at a
nominal amount of $0.001001. At June 30, 2000, there were 2,364,511
Class D units outstanding all of which were converted during the year
ended June 30, 2001.
Millennium Units
From January through June 2001 the Company sold 1,435,213 "Millennium"
units, consisting of four common shares of Milinx Business Group, Inc.
and Milinx Wireless, Inc. at a price of $2.00 per unit. Each unit
consists of four common shares of Milinx and 8 common shares of Milinx
Wireless. For the first $7,000,000 in gross proceeds received, an
additional bonus share of Milinx Wireless was be issued to each
subscriber.
16
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
Warrants
On May 25, 1999, 900,000 1999 Internal Warrant A were privately issued
to a consultant and the Company's legal counsel. These warrants were
exercisable immediately at $7.50 per common share until January 31,
2003. The warrants were issued for cash proceeds of $200. On May 10,
2000, the Board authorized reduction of the warrant's exercise price to
$4.50 and amended the expiration date to January 31, 2002. In
connection with this modification, the Company recorded $108,000 in
additional consulting and legal expenses. The amount was computed using
the Black-Scholes pricing model with a risk free rate of 5.67%, 83%
volatility, 0% dividend rate and estimated remaining life of 1.6 years.
As of June 30, 2001, none of the warrants have been exercised.
On July 25, 1999, 650,000 1999 Internal Warrant B were issued to two
directors. These warrants are vested immediately and exercisable at
$6.00 per Series A preferred share until March 31, 2005. As of June 30,
2001 and 2000, no warrants have been exercised.
On December 9, 1999, a new director was awarded 90,000 common stock
warrants to be vested quarterly over a two year period and
exchangeable into common shares at an exercise price of $7.50 per
share until December 31, 2002. On May 10, 2000, the Board authorized
the reduction of the warrant's exercise price to $4.50, the increase
of the number of warrants to 180,000 and to decrease the exercise
period to January 31, 2002. Due to value of the stock declining
substantially subsequent to May 10, 2000 remeasurement, variable
accounting required under FIN 44 had no effect on the accompanying
financial statements. As of June 30, 2001 and 2000, no warrants have
been exercised.
On May 10, 2000, the Company granted 100,000 fully vested common stock
warrants, with an exercise price of $4.50 as an additional
compensation for legal services performed. The warrants expire January
31, 2001 and were valued using the Black - Scholes pricing model with
a risk free rate of 5.67%, 83% and 0% volatility and dividend rate,
respectively, and estimated life of approximately 0.7 years. In
connection with this transaction the Company recorded $14,000 in
additional legal fees. As of June 30, 2001 and 2000, no warrants have
been exercised.
As of June 30, 2001 and 2000, there were 250,000 in outstanding common stock
warrants originally issued in December 1999 in connection with the Forestay
acquisition. The warrants are exercisable at $4.00 per share and expire on
December 9, 2004.
F-18
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE I- STOCK OPTIONS
1999-7 Employee Stock Option Plan
On July 14, 1999, the Directors approved the creation of the 1999-7 Employee
Stock Option Plan (the Plan) to replace the Employee-Associates Incentive
Warrant Plan. Under this plan, the Company may grant up to 4,000,000 options
(Rule 701) to employees to acquire one common share per option of the
Subsidiaries at an exercise price of $0.002 to $2.00 per share commencing
December 31, 1999 and expiring March 31, 2005. After November 4, 1999 reverse
stock split, each option is now convertible into 1/2 share of the Company's
common stock. On November 10, 1999, the number of options under this plan was
increased to 6,000,000.
The options granted under the Plan have both time and performance vesting
components. Time vested shares vest in increments through March 31, 2001 and
have a set exercise price of $0.002 per share. Performance vested shares have a
exercise price of $2.00 and vest upon achievement of predetermined milestones
through January 1, 2001.
On December 3, 1999, the Board of Directors modified the options granted under
the Plan to time vest 60% of the original performance vested shares. The
modification had no effect on the June 30, 2000 consolidated results of
operations due to the exercise price exceeding the fair value of the underlying
common stock on the date of the modification. Upon adoption of FIN 44, modified
options will be remeasured quarterly with adjustments in value being recorded as
increase or decrease in employee compensation expense.
Due to the exercise price of the time vested options being below fair value of
the Company's stock on the date of grant, in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, the Company recorded $1,421,461 in deferred compensation. This
deferred compensation is to be amortized over the vesting period of the
underlying options. During the year ended June 30, 2000, the Company recorded
$318,835 in amortization related to the options vested through June 30, 2000.
During the year ended June 30, 2001, employees exercised 558,500 options for
total proceeds to the Company of $31,931 and forfeitured all but 250,000 of the
remaining options (due to termination of all of the Company's workforce). The
net affect of APB 25 adjustments related to options vested and exercised during
the year ended June 30, 2001 and options forfeitured, was $36,744.
Director and Executive Stock Option Plan
On July 25, 1999, the Directors authorized 1,000,000 options for directors and
executives. Each option would entitle its holder to acquire one share of the
Company's common stock per each option granted. These options are exercisable
for the period from July 25, 1999 to March 31, 2005.
Option prices are generally equal to the fair market value of the shares of the
Company's common stock on the date of grant. Options, generally, vest over a
three-year period and expire three to five years from the date of the grant.
F-19
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE I - STOCK OPTIONS - Continued
Summary of stock option activities
The following is a summary of the employee stock option information for the year
ended June 30, 2001 and 2000 (all option information has been adjusted for the
November 1999 reverse stock split).
Weighted Average
Shares Exercise Price
------------- -----------------
Options outstanding at June 30, 2000 4,448,250 $ -
Options granted - 1.81
Options forfeitured (3,639,750) 1.81
Options exercised (408,500) 0.66
------------- -----------------
Options outstanding at June 30, 2001 400,000 $ 2.00
Number of options available for grants 2,551,750
The weighted-average fair value of the options granted during the year ended
June 30, 2000 was $1.28.
The Company granted no employee stock options during the year ended June 30,
2001.
The following table summarizes information about options outstanding at June 30,
2000.
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------
Weighted Weighted -
Average Average
Range of Number Exercise Price Remaining Number Weighted Average
Exercise Prices Outstanding Price Contractual Life Exercisable Exercise Price
- -------------------- --------------- ---------------- --------------------- ------------- ----------------------
$2.00 250,000 $2.00 0.58 250,000 $2.00
20
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE I - STOCK OPTIONS - Continued
The Company accounts for its stock-based compensation plan in accordance with
APB Opinion No. 25, under which no compensation is recognized in connection with
options granted to employees except if options are granted with a strike price
below fair value of the underlying stock. The Company adopted the disclosure
requirements SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly,
the Company is required to calculate and present the pro forma effect of all
awards granted. For disclosure purposes, the fair value of each option granted
to an employee during the year ended June 30, 2000, has been estimated as of the
date of grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.67%, dividend yield 0%, volatility of
83%, and expected lives of approximately 4 to 5 years. Based on the computed
option values and the number of the options issued, had the Company recognized
compensation expense, the following would have been its effect on the Company's
net loss:
Year ended
June 30, 2000
-----------------
Net loss
- ---------------------
As reported $ 6,636,452
Pro forma 8,033,231
Loss per share
- ---------------------
As reported $ (0.74)
Pro forma (0.90)
For the year ended June 30, 2001, there was no material pro forma effect of the
stock options on the consolidated financial statements due the offsetting effect
of forfeitures.
On April 20, 1999, 200,000 options were granted (under Rule 701) to four of the
Company's non-employee sales associates permitting the purchase of common shares
at $2.00 per share effective July 15, 1999 and expiring on March 31, 2001. Using
an option valuation model, fair value of the options at the date of grant was
determined to be negligible due to low stock volatility and options being "out
of the money" at the date of grant. All options were forfeitured during the year
ended June 30, 2001.
NOTE J - INCOME TAXES
The Company accounts for income taxes on the liability method, as provided by
Statement of Financial Accounting Standards 109, Accounting for Income Taxes
(SFAS No. 109). Milinx - Delaware is primarily a United States taxpayer, while
Milinx - BC primarily files in Canada. The income tax provisions reconciled to
the tax computed at the statutory federal rate for the year ended June 30, 2001
and 2000 were:
2001 2000
--------------------- ---------------------
Tax benefit at statutory rate $ (5,545,810) $ (2,256,393)
Permanent differences 11,148 11,461
Canadian tax rate differences - (669,691)
Increase in valuation (1,266,500)
allowance 6,801,162 2,914,623
--------------------- ---------------------
Total $ - $ -
===================== =====================
F-21
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE J - INCOME TAXES - continued
The components of deferred taxes are as follows at June 30, 2001 and 2000:
2001 2000
--------------------- ---------------------
Deferred tax asset:
Net operating loss
carryforward $ 8,191,498 $ 3,188,633
Depreciation 626,239 (169,085)
Stock options and
warrants 12,493 149,884
Organization costs - 29,087
Impairment of fixed assets 1,094,728
Loss on theft and
abandonment of fixed assets 57,698
Other 24,485 7,460
Valuation allowance (10,007,040) (3,205,979)
--------------------- ---------------------
$ - $ -
===================== =====================
The Company has established the above valuation allowances as of June 30, 2001
and 2000 and due to uncertainty of future realization of deferred tax assets.
Total valuation allowance increased by $6,801,162 from June 30, 2000 to June 30,
2001, primarily due to current year temporary differences. At June 30, 2001, the
Company has $24,100,000 in net operating loss carryforwards for federal income
tax purposes available to offset future income which expire in 10 to 20 years.
Potential changes, if any, in the company's ownership could result in
limitations on the use of its net operating loss carryforwards.
NOTE K - COMMITMENTS AND CONTINGENCIES
1. Operating Lease
The Company has obligations under a long term, non-cancelable operating lease
for premises. This lease expires October 2004. The aggregate future minimum
payments are as follows:
Year ending June 30,
2002 $ 152,000
2003 152,000
2004 152,000
2005 51,000
----------------------
Total minimum lease payments $ 507,000
======================
F-22
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE K- COMMITMENTS AND CONTINGENCIES - continued
Consolidated rent expenses for the years ended June 30, 2001 and 2000 and the
six months ended June 30, 1999, were approximately $569,000, $287,000 and
$32,000, respectively.
2. Capital Leases
In connection with the opening of its Data Center, the Company entered into
several capital lease agreements ranging in duration from two to three years. As
of June 30, 2001, the future minimum lease payments under these agreements are
as follows.
Year ending June 30,
2002 $ 1,781,093
Less: interest (at 12%) 222,415
------------------
Present value of capital lease obligations 1,558,678
Current portion of capital lease obligations 1,558,678
------------------
As of June 30, 2000, the capitalized cost of equipment under capital leases was
approximately $597,000, which represented its net realizable value computed in
accordance with SFAS 121 (see note C for additional information).
Subsequent to June 30, 2001, the Company entered into settlement agreements with
two lessors resulting in temporary deferral of principal payments on three
leases and cancellation of the other one. 23
F-23
Milinx Business Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and 2000
NOTE K - COMMITMENTS AND CONTINGENCIES - continued
3. Employment Agreements
At June 30, 2000, the Company has employment contracts with two of its
officers/directors requiring monthly compensation payments of $17,250 in
aggregate and expiring on December 9, 2002. Total payments due are as follows.
Year ending June 30,
2002 120,000
2003 30,000
-------------
$ 150,000
=============
Total unpaid compensation under contracts as of June 30, 2000 and 1999, were $
40,000 and $ 7,590, respectively and was included in accrued liabilities in the
accompanying consolidated balance sheet.
On August 16, 2001, the Company entered into an employment agreement with its
new officer and Board member. The agreement expires on August 17, 2003 and
entitles the executive to $40,000 in compensation on or prior to October 17,
2001, and then an annual compensation of $250,000. The agreement also calls for
a $150,000 performance bonus upon achievement of specific milestones. In
addition to the aforementioned compensation, fringe benefits, and expense
reimbursement, the employee was granted 1,000,000 stock options exercisable
through August 16, 2004 at $0.10 per share.
4.Legal
On April 6, 2001 Milinx Business Group and Milinx Business Services filed a
Writ of Summons in the Supreme Court of British Columbia against Sun
Microsystems, Inc., Netscape Communications Canada, Inc., Netergy Networks, Inc.
Intraware Canada, Inc. and Burntsand Inc. claiming for damages in excess of
$10,000,000 Canadian dollars for misrepresentations and breach of contract.
Sunrise International Leasing Corporation (with all correspondence under the SUN
Microsystems letterhead) filed a Summons and Complaint in the State of
Minnesota, County of Hennepin against Milinx Business Group and Milinx Business
Services, for two Counts, Breach of Equipment Lease by Services: in excess of
$50,000 in damages and immediate possession of equipment and Breach of Lease
Guaranty by Group: in excess of $50,000 damages and seizure of equipment. Milinx
takes the position that this is in reaction to the Writ of Summons issued in the
Supreme Court of British Columbia and therefore the jurisdiction and claim
should be part of and in the same jurisdiction of British Columbia. These suits
have been settled pending payment of certain sums by the defendants with mutual
releases executed by all parties.
After reaching an out of court settlement with Milinx Business Services on April
18, 2001, Tantalus Communications Inc. filed a Notice of Discontinuance,
releasing Milinx Business Services from further action. Milinx Business Services
was not required to pay any more than the invoices outstanding before their
claim.
On October 4, 2000, three former employees of Milinx Business Services advanced
separate actions in the British Columbia Supreme Court against Milinx Business
Services alleging breach of their employment severance agreements and claiming
unspecified damages. One of the claimants has since discontinued the action
against Milinx Business Services and Employment Standards has dismissed a
vacation wage claim of one of the two remaining employees. The proposed plan of
reorganization will address these remaining claims.
There are numerous unsecured creditors of Milinx Business Services who have
filed suit or threatened actions against Milinx Business Services. These matters
will be resolved in the reorganization plan to be approved by the court.
To the knowledge of the officers and directors of Milinx, there are no other
pending legal proceedings or litigiation and none of its property is the subject
of a pending legal proceeding. Further, Milinx's officers and directors know of
no legal proceedings against Milinx or its property contemplated by any
governmental authority other than the Canadian government's claim for wages,
payroll taxes and accrued vacation discussed under note L.
From time to time, the Company is a party to various legal proceedings
incidental to its business. The Company believes that none of the other
presently pending legal proceedings will have a material adverse effect upon its
consolidated financial position, results of operations, or liquidity.
NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Year ended June 30, 2001
Quarter
1st 2nd 3rd 4th
----------- ----------- ----------- -------------
Net sales $ 87,689 $ 23,794 $ 165,031 $ 14,979
Gross loss (60,548) (105,469) 52,362 106,367
Net loss from operations (3,484,588) (3,565,444) (3,529,870) (9,028,140)
Net loss per common share - basic
and diluted $ (0.27) $ (0.21) $ (0.18)
Year ended June 30, 2000
Quarter
1st 2nd 3rd 4th
----------- ----------- ----------- -------------
Net sales $ 45,971 $ 53,839 $ 56,926 $ 40,457
Gross profit (54,686) (5,936) (56,277) (51,357)
Net loss from operations (1,126,559) (1,550,732) (1,580,343) (2,378,818)
Net loss per common share - basic
and diluted -0.13 -0.17 $ (0.17) $ (0.25)
Six months ended June 30, 1999
Quarter
1st 2nd 3rd 4th
----------- ----------- ----------- -------------
Net sales N/A N/A $ 16,740 $ 26,684
Gross profit N/A N/A (870) (3,818)
Net loss from operations N/A N/A 153,316 690,934
Net loss per common share - basic
and diluted N/A N/A $ (0.02) $ (0.08)
NOTE M - SUBSEQUENT EVENTS
The Government of Canada through the divisions of Revenue Canada and Employment
Standards have filed superpriority liens against the Company and certain
directors and officers for unpaid employee wages, payroll taxes, accrued
vacation and severance pay. The Company has recorded these claims, totaling an
approximately $750,000, in accrued liabilities. The amount in question is in
dispute and the Company has an appeal filed to determine the correct amount
owing. The claims will be addressed in the pending reorganization and it is the
intention of the company to meet its obligations as confirmed by the plan. If
the Company cannot confirm the plan the superpriority claim would allow the
Government to execute on its lien against the assets of the Company.
F-24
On August 27, 2001, the Company approved the issuance pending a registration of
3,033,670 shares of its voting common stock to be issued to trade vendors (and
two of the Company's officers) in lieu of payments for services previously
rendered. The shares are to be issued subsequent to aplanned S-8 registration
with the Securities and Exchange Commission.
On September 29, 2001, the Company granted 2,500,000 stock options to its
president and two executive officers. The options are exercisable at $.10 per
share until September 29, 2004 and vest as follows: 40% of each grant - on
November 29, 2001 and then 60% equally over the next ten months.
F-25