UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2001
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number: 000-26421
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Milinx Business Group, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 91-1954074
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(State or other jurisdiction of (I.R.S. Employer
organization) Identification No.)
1037 Yorkshire Pl.
Danville, California 94506
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(Address of principal executive offices) (Zip Code)
(925) 736-7111
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date: As of December 20, 2001, the
Issuer had 26,318,067 shares of common stock, par value $0.001, issued and
outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS............................................ 1
Balance Sheets.................................................. 1
Statements of Operations........................................ 2
Statements of Cash Flows........................................ 3
Notes to Financial Statements................................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...............................................11
ITEM 2(C). CHANGES IN SECURITIES AND USE OF PROCEEDS....................12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................12
ITEM 5. OTHER INFORMATION...............................................12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................12
SIGNATURES .......................................................................14
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MILINX BUSINESS GROUP, INC. and SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2001 June 30, 2001
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 38,523 $ 33,680
Receivables-Goods and services tax 33,629 35,039
Security deposits -- 75
Prepaid rent and other 50,725 5,355
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Total current assets 122,877 74,149
PROPERTY AND EQUIPMENT, net 883,575 1,100,226
OTHER ASSETS
Capital lease deposits 10,146 10,571
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$ 1,016,598 $ 1,184,946
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,061,860 $ 1,582,188
Accrued liabilities 1,537,334 1,456,368
Due to Milinx Management Corporation 3,586 3,586
Capital lease obligations -- current portion 1,588,678 1,588,678
Notes payable, net of unamortized discount 488,621 444,444
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Total current liabilities 4,680,079 5,075,264
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON SHARES 480,551 --
STOCKHOLDERS' EQUITY
Series A preferred stock 3,675 3,675
Series C preferred stock 117 1,016
Common stock 23,977 23,078
Shares subscribed 161,304 10,000
Additional paid in capital 21,926,229 21,803,465
Accumulated deficit (26,020,840) (25,492,701)
Accumulated other comprehensive deficit (147,953) (238,851)
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(4,144,032) (3,890,318)
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$ 1,016,598 $ 1,184,946
============ ============
The accompanying notes are an integral part of these statements.
1
MILINX BUSINESS GROUP, INC. and SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three months ended
September 30
2001 2000
(Unaudited) (Unaudited)
Net Sales $ -- $ 87,689
Cost of Sales -- 148,237
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Gross Profit (loss) -- (60,548)
Selling, General and Administrative expenses 511,545 3,373,528
Other expenses (income)
Interest 66,548 50,173
Gain on sale of property and equipment (49,954) 339
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16,594 50,512
Net Loss $ 528,139 $ 3,484,588
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Net Loss per Common Share - Basis and Diluted $ 0.02 $ 0.27
============ =============
Weighted average common shares outstanding 25,370,902 12,801,315
============ =============
The accompanying notes are an integral part of these statements.
2
MILINX BUSINESS GROUP, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three months ended
September 30
2001 2000
(Unaudited) (Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (528,139) $(3,484,588)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 162,755 388,660
Loss on property and equipment disposal 48,894 --
Amortization of beneficial conversion feature 5,481 --
Stock option issued for employee and consulting services 32,223 --
Shares issued for services 31,377 --
Employee stock option compensation -- 263,136
Changes in assets and liabilities
Receivables 1,410 (150,545)
Security deposits and prepaid expenses (4,247) (84,026)
Accounts payable, accrued liabilities and customer deposits 41,189 1,850
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Net cash used in operating activities (209,057) (3,065,513)
CASH FLOWS FROM INVESTING ACTIVITIES
Disposal (purchase) of property and equipment, net 5,002 (788,961)
Acquisition of licenses and trademarks -- (217,752)
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Net cash provided (used) in investing activities 5,002 (1,006,713)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 181,788
Proceeds from conversion of D warrants -- 3,499,748
Proceeds from issuance of notes payable 118,000 --
Proceeds from conversion of Class D Units -- 325,970
Proceeds from exercise of stock options -- 2,798
Payments on capital lease obligations -- (219,394)
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Net cash provided by financing activities 118,000 3,790,910
Effect of the exchange rate changes on cash 90,898 (66,748)
Net increase (decrease) in cash and cash equivalents 4,843 (348,064)
Cash and cash equivalents at beginning of the period 33,680 2,162,430
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Cash and cash equivalents at end of the period $ 38,523 $ 1,814,366
============ ============
SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Reduction of liabilities in exchange for redeemable
common shares 480,551 --
Property acquired under capital leases -- 334,863
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$ 480,551 $ 334,863
============ ============
The accompanying notes are an integral part of these statements.
3
MILINX BUSINESS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. FINANCIAL STATEMENTS
The unaudited, consolidated financial statements of Milinx Business Group,
Inc.(the "Company" or "Milinx"), and its subsidiaries, have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles (GAAP) have been condensed or omitted pursuant to such rules and
regulations. The unaudited consolidated financial statements of the Company
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire fiscal year ending June 30, 2002. The Company was
incorporated on December 10, 1998 and commenced its operations on February 10,
1999. This Form 10-Q should be read in conjunction with the Form 10-K, as
amended, that includes consolidated financial statements for the year ended June
30, 2001, 2000 and the six months ended June 30, 1999.
NOTE 2. LOSS PER SHARE
Basic and diluted 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 three months ended September 30, 2001 and
2000, was 25,370,902 and 12,801,315, respectively. Diluted loss per share
includes the effect of all potentially dilutive common stock equivalents.
Diluted loss per share for the three months ended September 30, 2001 and 2000,
equaled basic loss per share due to the anti-dilutive effect of the common stock
equivalents.
NOTE 3. COMPREHENSIVE INCOME
The Company has adopted SFAS 130, Reporting Comprehensive Income. The statement
requires inclusion of foreign currency adjustments, reported separately in
stockholder's equity as other comprehensive income. The Company's total
comprehensive loss for the three months ended September 30, 2001 and 2000 was
$528,139 and $3,484,588, respectively.
NOTE 4. MANAGEMENT PLANS
The Company's negative cash flow from operations is expected to continue through
at least the third quarter of the 2002 calendar year. Until subscription and
product revenues exceed cash operating expenditures, substantial additional
equity capital will have to be raised to fund capital expenditures and
operations.
For the quarter ended September 30, 2001, the Company raised, in a private
offering, a total of $118,000 in debt which included the promise to issue
791,000 shares of the Company's common stock. This offering provided for
repayment terms in 120 days and had interest of twelve percent. In addition the
Company must issue another 27,000 shares of the Company's common stock due to
non repayment of one of the borrowings by December 15, 2001.
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.
4
The Company plans to conduct a private equity offering to raise $5 million.
Based on management's estimates this amount of funding could allow the Company
to conduct its operations until achieving positive cash flow from operations by
the fourth quarter of calendar 2002. There is no assurance, however, that these
funds will be available or will be available on terms acceptable to the Company.
NOTE 5. CONTINGENCIES
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. The basic terms for settlement of the included
forgiveness of $200,000 in outstanding liabilities, cash payments to the Company
of $242,000, return of certain equipment, a restructuring of the leases
resulting in monthly payments of $50,000 starting March 2002, and cash payments
of $50,000 payable over six months starting February 2002.
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 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
$740,000, 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.
To the knowledge of the officers and directors of Milinx, there are no other
pending legal proceedings or litigation 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.
From December 2000 to June 2001, the Company conducted an offering of its
Millenium offering (see 2001 Form 10-K) 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 $306,000,
plus statutory interest. The Company would vigorously defend any assertion by
investors that it had not complied with the exemption and would seek
contribution from third parties the Company believes to be responsible for the
potential violations.
5
NOTE 6. OTHER
As of the date of this filing, Milinx Business Services, Inc. is not current on
its capital lease payments. The leases were between seven and ten months past
due as of September 30, 2001. As of the date of this filing, the past due amount
reflects from nine to twelve months of past due payments. Due to the
aforementioned events of default, the Company classified all capital lease
liabilities as current for financial statement presentation purposes.
On August 27, 2001, the Company issued 3,203,670 common shares to various trade
creditors of the Company as tentative payment of the liabilities due to them as
of the date of this issuance. The Company has a right to redeem these shares and
pay off the underlying liabilities. In addition, if proceeds from the sale of
the stock is less than the indebtedness of the Company or if such stock remains
unsold and the Company has funds to pay such indebtedness, it may complete such
payments and cancel the remaining shares. If any shares are sold at or below
$.15, then reduction of indebtedness shall be calculated at $.15 per share sold.
If shares are sold at greater than $.15 per share, the actual proceeds will be
applied toward the original liability amount. The Company recorded shares issued
on connection with this transaction outside of its permanent stockholders equity
at the amount equal to the original liabilities to be satisfied with these
shares. In addition, on August 19, 2001, the Company granted 2,500,000 options
to an employee and two consultants. In connection with these grants, the Company
recognized $32,223 in compensation expense on options vested through September
30, 2001. The options vest over a one year period with 40% vesting after the
first two months and the remaining options vesting ratably over a one year
period starting with the date of grant. All options were granted with a strike
price below fair value of the underlying stock on the date of grant.
On July 2, 2001, and September 26, 2001, the Company entered into contracts to
grant a total of 500,000 shares to two consultants as compensation for services
to be performed over a two month period commencing on the date of each grant. In
connection with these transactions, the Company recognized $31,377 in consulting
fees earned through September 30, 2001. These issuances are subject to Board
approval.
NOTE 7. SUBSEQUENT EVENTS
Subsequent to September 30, 2001 and through the date of this filing, the
Company received an additional $115,000 in proceeds from the issuance of
Convertible Notes which included the issuance of five shares of common stock for
each dollar loaned and the ability to convert the debt for an additional five
shares per dollar converted. These Notes have an interest rate of twelve per
cent for the first 120 days which will increase, retroactively, to fifteen per
cent for an additional 300 days.
The Company currently engaging in a private equity offering in the amount of
$400,000 to provide funding for operations. This offering will offer common
stock at $.08 per share for investments of $50,000 or more and include 50%
warrant coverage at an exercise price of $.08 per share. Subsequent to September
30, 2001, the Company received $135,000 under the terms of this offering.
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 have been negotiated outside the formal plan filed with the court (see
6
Note 5), as secured creditors are not bound by a plan of reorganization approved
by the general unsecured creditors and the court.
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 $156,000, which is broken down into approximately $114,000 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.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for the historical information presented in this document, the matters
discussed in this Form 10-Q, and specifically in "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 Company. 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 " contained in our Form 10-K, as amended, for
the year ended June 30, 2001. 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 Company in this Quarterly Report on Form 10-Q and in the Company's other
reports filed with the Securities and Exchange Commission that advise interested
parties of the risks and factors that may affect the Company's business.
The following discussion and analysis should be read in conjunction with the
financial information contained in Item 1 and the Company's audited financial
statements contained in its Form 10-K, as amended, for the year ended June 30,
2001.
7
Overview
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.
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., a British
Columbia corporation dba Milinx Business Services, Inc., 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.
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 580880BC Ltd. 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
court must also approve the plan. 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.
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.
Results of Operations
Revenues decreased to zero for the three months ended September 30, 2001 from
approximately $88,000 for the same period in 2000 due to the Company halting all
operations of 580880 BC Ltd. in connection with the pending reorganization
proceeding. Assuming 580880BC Ltd. successfully reorganizes and the Company
subsequently succeeds in launching the unified messaging service, 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 decreased to approximately $511,500
for the three months ended September 30, 2001 from approximately $3,374,000 for
the same period in 2000. This decrease is due to the layoff of the Company's
employees in June 2001 offset by the hiring of a new management team in August
2001. Assuming 580880BC Ltd. successfully reorganizes and the Company
subsequently succeeds in launching the unified messaging service, management
expects that selling, general and administrative expenses will be significant,
but not nearly of the magnitude seen in prior periods.
Liquidity and Capital Resources
During the quarter ended September 30, 2001, the Company used approximately
$118,000 in its operating activities. The Company's use of cash in operating
activities of approximately $209,000 consisted of a use of $118,000 of actual
cash and approximately $91,000 due to the effect of exchange rate changes. The
Company funded its operations primarily through the sale of approximately
$118,000 in notes payable. The Company's net working capital shortfall of
8
$5,001,000 at June 30, 2001, decreased to a deficit of approximately $4,557,000
at September 30, 2001, due primarily to issuances of common stock in lieu of
certain creditor liabilities.
During October 2001 the Company commenced a new private placement of convertible
debentures. 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 5,000 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 has been extended until December
30, 2001, and it seeks to raise up to $400,000. As of the filing of this report,
the Company had raised approximately $193,000 in this offering, with $86,000
being converted to a subsequent offering. The proceeds have been 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
$107,000, plus statutory interest.
In December 2001 the Company commenced an additional private equity placement.
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
minimum investments of $50,000. The offering consists of common stock at $.08
per share plus 50% warrant coverage with an exercise price of $.08 per share.
The offering is open until January 31, 2002. As of the filing of this report,
the Company had raised approximately $136,000 in this offering. Of this amount,
$86,000 was converted from the October 2001 offering. The proceeds will be used
to pay operating expenses and complete the Company's first quarter 10-Q 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.
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. The plan 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
plan could combine these approaches. The plan may also include payments over
time. The critical consideration, however, is that the plan must be attractive
enough to the claimants that it secures the necessary votes for approval.
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 have been 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. The basic terms for settlement of the
secured claims include forgiveness of $200,000 in outstanding liabilities, cash
payments to the Company of $42,000, return of certain equipment, a restructuring
of the leases resulting in monthly payments of approximately $50,000 starting
March 2002, and cash payments of $50,000 payable over six months starting
February 2002.
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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 $156,000, which is broken down into approximately $114,000 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. 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 finalizing 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 entail.
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 bankruptcy.
While the Company proceeds with 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 an August and September 2001 offering in the amount of
$118,000 have begun to come due in December 2001. As of the filing of this
report, $54,000 had come due. Additional amounts up to the $118,000 raised will
come due by January 2002. No demand for payment has been made yet by a
noteholder.
Assuming 580880BC Ltd.'s plan of reorganization is approved, the Company will
immediately need to pay approximately $163,000 in preferred claims. 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. The Company believes this
will include monthly payments of approximately $50,000 plus an additional
$50,000 paid over six months. The Company believes the equipment included in
these renegotiated leases will be sufficient to launch its products.
Any deferred payments under the reorganization plan will have to be paid
according to its terms, and approximately $131,000 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 offerings
that commenced in October and December 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
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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.
ITEM 3. 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. The basic terms of the settlement include
forgiveness of $200,000 in outstanding liabilities, cash payments to the Company
of $242,000, return of certain equipment, a restructuring of the leases
resulting in monthly payments of $50,000 starting March 2002 and continuing for
36 months, and cash payments of $50,000 payable over six months starting
February 2002.
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 $740,000 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.
The Company expects the reorganization plan to result in a significant reduction
in liabilities, however, it will require cash payments of approximately $163,000
in January 2002 and an additional $131,000 in July 2002. In addition, the
Company will offer one share of stock for every dollar in debt. In return, debt
would be reduced by approximately $1,500,000. There is no assurance, however,
that the Company's proposal will be acceptable to its creditors.
To the knowledge of the officers and directors of Milinx, there are no other
pending legal proceedings or litigation 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.
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ITEM 2 (C). CHANGES IN SECURITIES AND USE OF PROCEEDS
Set forth below is information regarding the issuance and sales of our
securities without registration during the quarter ending September 30, 2001. No
such sales involved the use of an underwriter, and no commissions were paid in
connection with the sale of any securities.
During the three months ended September 30, 2001, the Company issued 1,015,611
shares of its voting common stock pursuant to the conversion of 1,015,611 shares
of previously issued Series C preferred stock.
In August 2001, the Company issued 3,203,670 shares of its voting common stock
to trade creditors and consultants of the Company in settlement of outstanding
liabilities. The issuance of the shares to the consultants was exempt from
registration under Rule 506 of Regulation D under the Securities Act of 1933, as
amended (the "Securities Act") and under Regulation S under the Securities Act.
The Company issued $118,000 in notes and convertible debentures and 791,000
shares of its voting common stock to three accredited investors during the three
months ended September 30, 2001. The issuance of the notes and convertible
debentures and shares was exempt from registration under Rule 506 of Regulation
D under the Securities Act.
In August and September 2001, the Company granted a total of 2,500,000 stock
options to its president and two executive officers. The issuance of the options
was exempt from registration under Rule 506 of Regulation D under the Securities
Act, and Section 4(2) under the Securities Act.
In July and September 2001, the Company entered into contracts to grant a total
of 500,000 shares of its voting common stock to two consultants as compensations
for services to be performed, however, the Board has not yet authorized the
issuance of the shares. The issuance of the shares, when authorized by the
Board, will be exempt from registration under Rule 506 of Regulation D under the
Securities Act and under Regulation S under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Some of the notes that the Company sold in August and September 2001 are due in
December 2001, and the rest are due in January 2002. If the Company does not pay
these notes upon demand after they come due, it will be in default. Out of the
$118,000 of notes, $54,000 have matured as of the date of this report. None of
the noteholders have made a demand for payment. The Company will owe one of the
investors holding matured notes an additional 27,000 shares of additional common
stock, which represents 1,000 shares of common stock for each $1000 increment of
his notes.
ITEM 5. OTHER INFORMATION
On November 16, 2001, Maynard Dokken, the Company's Chief Executive Officer and
Chairman of the Board, transferred 450,000 of his Series A Preferred Stock to
Collaborative Business Management, the company that employs the Company's new
team of management that was brought on board in September 2001. The transfer of
the shares to Collaborative Business Management was made in consideration of its
management services conducted on behalf of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit Number Description
- -------------- ------------
3.1* Certificate of Incorporation
3.3* By-laws
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4.1* Specimen Stock Certificate
10.1* Employment Agreement between Milinx Business Group
and Thomas Loker
* Incorporated by reference from the Form 10-K of the Company filed with the
Securities and Exchange Commission on October 13, 2000.
REPORTS ON FORM 8-K
On July 12, 2001, the Company filed a report on Form 8-K dated July 12, 2001,
which included an Item 5 disclosing Other Events and an Item 6 disclosing the
resignation of a director.
On August 24, 2001, the Company filed a report on Form 8-K dated August 23,
2001, which included an Item 5 disclosing Other Events and an Item 6 disclosing
the resignation of a director.
On August 30, 2001, the Company filed a report on Form 8-K dated August 30,
2001, which included an Item 5 disclosing Other Events.
On September 5, 2001, the Company filed a report on Form 8-K dated September 5,
2001, which included an Item 5 disclosing Other Events.
On September 18, 2001, the Company filed a report on Form 8-K dated September
18, 2001, which included an Item 5 disclosing Other Events.
On September 20, 2001, the Company filed a report on Form 8-K dated September
19, 2001, which included an Item 5 disclosing Other Events and an Item 6
disclosing the resignation of a director.
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SIGNATURES
Pursuant to the requirements of the Securities 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.
Date: December 21, 2001 By: /s/ Steven Price
--------------------- ----------------------------------------
Name: Steven Price
Title: Chief Financial Officer and Principal
Accounting Officer
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