SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the quarter ended July 31, 2004
Commission file number 033-20966
--------------------------------
Finotec Group, Inc.
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(Exact name of registrant as specified in Its charter)
Nevada 76-0251547
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
18 West 33rd Street, Second Floor NY, NY 10001
--------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code 866-243-0771
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock of $0.001 par value per share
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 twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date:
34,985,241 Common Series 0.001 par value
Documents incorporated by reference: None.
1
FINOTEC GROUP, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
July 31, 2004 and January 31, 2004.......... 5
Consolidated Statements of Operations
Three months ended July 31, 2004 and 2003... 6
Consolidated Statements of Cash Flows
Three months ended July 31, 2004 and 2003 .. 7
Notes to Consolidated Financial Statements . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......... 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk...........................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................... 16
Item 2. Changes in Securities and Use of Proceeds... 17
Item 3. Submission of Matters to a Vote of Security
Holders............................. 17
Item 4. Exhibits and Reports on Form 8-K............ 17
Signature..................................................... 17
2
FINOTEC GROUP, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE THREE AND SIX
MONTHS ENDED JULY 31, 2004
3
FINOTEC GROUP, INC. AND SUBSIDIARIES
CONTENTS
Consolidated Financial Statements:
Balance Sheets - July 31, 2004 (Unaudited)and
January 31, 2004 5
Statements of Operations - Three Months and
Six Months EndedJuly 31, 2004 and 2003 (Unaudited) 6
Statements of Cash Flows - Six Months Ended
July 31, 2004 and 2003 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8-10
4
FINOTEC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2004
(Unaudited) January 31, 2004
----------- ----------------
A S S E T S
Current Assets
Cash and cash equivalents $ 1,294,058 $ 673,884
Marketable securities 756,482 413,562
Prepaid and other current assets 26,466 35,315
------ ------
Total Current Assets 2,077,006 1,122,761
Property and equipment, net 109,544 116,068
Note receivable 30,001 90,403
------ ------
Total Assets 2,216,551 $1,329,232
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Loan payable, related party 30,000 30,000
Short term bank credit 10,250 -
Accrued expenses 225,260 222,714
Income taxes payable - 2,932
Due to stockholder 76,665 58,500
Customers' deposits 1,634,825 819,217
Loan payable, employee 70,000 85,000
Other current liabilities 19,285 13,460
------ ------
Total Liabilities, All Current 2,066,285 1,231,823
--------- ---------
Stockholders' Equity
Common stock, $.001 par value, 100,000,000 shares
authorized, 34,985,241 shares issued and outstanding 34,985 34,985
Additional paid-in-capital 1,545,378 1,545,378
Accumulated deficit (1,417,435) (1,465,466)
Accumulated other comprehensive (loss) income (12,662) (17,488)
Total Stockholders' Equity 150,266 97,409
------- ------
Total Liabilities and
Stockholders' Equity 2,216,551 $1,329,232
========= ==========
See accompanying notes to consolidated financial statements.
5
FINOTEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Revenues
Net gains from foreign currency
future operations 471,652 65,470 746,536 $427,189
------- --------- ------- --------
Total Revenues 471,652 65,470 746,536 427,189
------- --------- ------- --------
Operating Expenses
Selling, general and administrative 360,970 176,570 653,334 327,472
Research and development 20,579 17,919 41,263 47,344
------- --------- ------- --------
Total Operating Expenses 381,549 194,489 694,597 374,816
------- --------- ------- --------
Operating Income (Loss) 90,103 (129,019) 51,939 52,373
Other Income (Expense)
Interest income (expense), net 1,002 (60) 1,671 2,403
Financing income 46,799 10,613 (11,109) 30,071
Other expense
------- --------- ------- --------
Income (Loss) Before Income Taxes 137,904 (118,466) 42,501 84,847
Income tax refund 5,530 - 5,530 11,168
------- --------- ------- --------
Net Income (Loss) 143,434 ($118,466) 48,031 96,015
======= ========= ====== =========
Weighted average number of
common shares outstanding 34,985,241 34,985,241 34,985,241 34,985,241
========== ========== ========== ==========
Basic and diluted loss per common share * * * *
* Less than $.01 per share
See accompanying notes to consolidated financial statements.
6
FINOTEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2004 2003
- --------------------------------- ---- ----
Cash Flows from Operating Activities
Net income (loss) $ 48,031 $ 96,015
Adjustment to Reconcile Net Income (Loss) to
Net Cash Provided by (Used in) Operating Activities
Depreciation 23,693 24,851
Changes in Operating Assets and Liabilities
Increase in prepaid and other current assets 8,849 (24,650)
Increase (decrease) in accrued expenses (26,643) 7,435
Decrease in income taxes payable (2,932) (27,435)
Increase in customers' deposits 815,608 416,326
Compensation reserve 5,825 -
Increase (decrease) in other current liabilities 29,188 (1,600)
(Increase) in marketable securities (342,920) -
Increase (decrease) in due to stockholder 18,165 14,805
------ ------
Net Cash Provided by (Used in) Operating Activities 576,864 505,747
------- -------
Cash Flows from Investing Activities
Collection of note receivable 60,402 122,758
Acquisition of property and equipment (18,018) (37,981)
------- -------
Net Cash Provided by Investing Activities 42,384 84,777
------ ------
Cash Flows from Financing Activities
Proceeds (Repayment) from loan payable, related party (15,000) -
Short term bank Credit 10,250 -
------ ---
Net Cash (Used in) Provided by Financing Activities (4,750) -
Effect of Foreign Currency Translation 5,676 (65,867)
----- -------
Net Increase (Decrease) in
Cash and Cash Equivalents 620,174 524,657
Cash and Cash Equivalents - Beginning 673,884 695,859
------- -------
Cash and Cash Equivalents
- Ending $1,294,058 $1,220,516
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for income taxes $2,932 $27,435
====== =======
See accompanying notes to consolidated financial statements.
7
FINOTEC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Interim Financial
Information The accompanying unaudited consolidated
financial statements of the Company (as
defined below) should be read in
conjunction with the consolidated
financial statements and notes thereto
filed with the U.S. Securities and
Exchange Commission in the Company's
Annual Report on Form 10-KSB for the
fiscal year ended January 31, 2004. In
the opinion of management, the
accompanying consolidated financial
statements reflect all adjustments of a
normal recurring nature considered
necessary to present fairly the financial
position of the Company and its
consolidated subsidiaries at July 31,
2004, and the results of their operations
and their cash flows for the three and six
months ended July 31, 2004 and July 31,
2003. The results of interim periods are
not necessarily indicative of the results
that may be expected for the year ending
January 31, 2005.
Principles of
Consolidation The consolidated financial statements
include the accounts of Finotec Inc. and
its wholly-owned subsidiaries, Finotec
Trading, Finotec Ltd., and Finotec Ltd.'s
99.7% owned subsidiary, Forexcash
(collectively referred to as the
"Company", unless otherwise indicated).
All material intercompany transactions and
balances have been eliminated in
consolidation.
Since the liabilities of Forexcash exceed
its assets, and the owner of the 0.3%
minority interest has no obligation to
supply additional capital, no minority
interest has been recorded in the
consolidated financial statements.
Going Concern The accompanying consolidated financial
statements have been prepared on a going
concern basis, which contemplates the
realization of assets and the satisfaction
of liabilities in the normal course of
business. As shown in the financial
statements, since inception, the Company
incurred losses of $1,417,435, which
resulted mainly from research and
development and selling, general and
administrative expenses. In addition, the
Company has a working capital deficit and
still does not have significant revenues
from operations. These factors, among
others, raise substantial doubt about the
Company's ability to continue as a going
concern. The financial statements do not
include any adjustments that might result
from the outcome of this uncertainty.
8
FINOTEC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
(Continued)
Use of Estimates The preparation of financial statements in
conformity with accounting principles
generally accepted in the United States of
America requires management to make
estimates and assumptions that affect
certain reported amounts and disclosures.
Actual results could differ from those
estimates.
Earning Per Common
Share Basic earnings per share is based on the
weighted effect of all common shares
issued and outstanding, and is calculated
by dividing net income (loss) by the
weighted average shares outstanding during
the period. Diluted earnings per share is
calculated by dividing net income (loss)
by the weighted average number of common
shares used in the basic earnings per
share calculation plus the number of
common shares that would be issued
assuming exercise or conversion of all
stock options. The dilutive effect of
stock options was not assumed for the
three and six month periods ended July 31,
2004 and 2003, because the effect of these
securities is antidilutive.
Recent Accounting
Pronouncements In January, 2003, the Securities and
Exchange Commission ("SEC") issued a final
rule requiring enhanced disclosure of
material off-balance sheet transactions,
arrangements, and other relationships with
unconsolidated entities that may have a
material current or future effect on
financial condition, changes in financial
condition, results of operations,
liquidity, capital expenditures, capital
resources, or significant components of
revenue or expenses. The rule also
requires a tabular disclosure of future
payments due under contractual
commitments. The disclosure requirements
will become effective for the Company's
fiscal 2004 annual report on Form 10-K.
The Company does not expect this
pronouncement to have a material impact on
its consolidated results of operations or
financial position.
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FINOTEC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
---------------------------------------------------------------------------
2. Property and
Equipment
Property and equipment consist of the following:
Estimated Useful July 31, 2004 January 31,
Lives (Years) (Unaudited) 2004
------------- ----------- ----
Computer equipment 3 $ 76,985 70,077
Purchased software 3 132,433 124,932
Office furniture and
equipment 7 19,795 17,720
Leasehold improvements 10 57,710 58,135
-- ------ ------
Total Property and
Equipment at Cost 286,923 270,864
Less accumulated depreciation
and amortization 177,379 154,796
------- -------
Property and Equipment - Net $109,544 $116,068
======== ========
3. Comprehensive
Loss
The Company's comprehensive income (loss) is
comprised of net income (loss) and foreign
currency translation adjustments.
Comprehensive income (loss) for the three
and six month periods ended July 31, 2004
and 2003 was as follows:
Three Months Ended Six Months Ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Comprehensive loss
Net income (loss) 143,434 ($118,466) $48,031 $96,015
Foreign currency
translation (8,708) (19,286) (9,616) (58,049)
------ ------- ------ -------
Comprehensive
Income (loss) $134,726 ($137,752) $38,415 $37,966
======== ========= ======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements of
Finotec Group, Inc. and its subsidiaries contained herein. The results of
operations for an interim period are not necessarily indicative of results for
the year, or for any subsequent period.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JULY 31, 2003 AND 2002
REVENUES
NET GAINS FROM FOREIGN CURRENCY FUTURE OPERATIONS.
Net gains from foreign currency future operations are comprised primarily
of spread-based brokerage fees earned from our clients' brokerage transactions.
For the three months ended July 31, 2004, net gains from foreign currency future
operations were $471,652 as compared to $65,470 for the three months ended July
31, 2003. The increase of $406,182 is due to the increase in trading by
brokerage clients. For the six months ended July 31, 2004, revenues from foreign
currency future operations were $746,536 compared to $427,189 for the same
period last year. The increase of $319,347 is due to the increase in trading by
brokerage clients.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT.
Research and development expenses consist primarily of personnel costs
associated with product development and management of the brokerage products and
services Finotec offers to its clients. Research and development expenses
remained nearly unchanged. The amount for the three months ended July 31, 2004
was $20,579 and the amount for the three months ended July 31, 2003 was $17,919.
Research and development expenses also remained nearly unchanged for the
six month period ended July 31, 2004. Research and development expenses for the
six month period ended July 31, 2004 was $41,263 and $47,344 for the six month
period last year.
SELLING, GENERAL AND ADMINISTRATIVE.
Selling, general and administrative expenses for the three month period
ended July 31, 2004 increased by $184,400 from the three months ended July 31,
2003. This increase was due primarily to the costs associated with administering
and marketing the operations of Forexcash, the Company's online trading
platform. Selling, general and administrative expenses were $360,970 for the
three months ended July 31, 2004 and $176,570 for the three months ended July
31, 2003.
11
Selling, general and administrative expenses for the six month period ended
July 31, 2004 increased by $325,862from the same period last year. This increase
was due primarily to the costs associated with administering and marketing the
operations of Forexcash, the Company's online trading platform. Selling, general
and administrative expenses for the six month period ended July 31, 2004 was
$653,334 and $327,472 for the six month period last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $620,174 to $1,294,058 at July 31,
2004, from $673,884 at January 31, 2004. The increase is primarily attributable
to a significant increase in brokerage customers and trading using the Forexcash
trading platform.
Net cash provided by operating activities amounted to $576,864 for the six
months ended July 31, 2004, compared to $505,747 provided by operating
activities for the six months ended July 31, 2003, an increase of $71,117. The
increase primarily resulted from an increase in customers' deposits from
customers using the Forexcash trading platform.
Net cash provided by investing activities for the six months ended July 31,
2004, was $42,384 as compared to net cash provided by investing activities of
$84,772 for the six months ended July 31, 2003. The change was primarily
attributable to a decrease in the collection of the note receivable during the
six months ended July 31, 2004.
Future capital requirements and the adequacy of available funds will depend
on numerous factors, including the successful commercialization of our products,
competing technological and market developments, and the development of
strategic alliances for the development and marketing of our products. The
Company has sufficient funds to satisfy their cash requirements until July 2005
assuming the monthly expenses of the Company at $76,000. Of our $76,000 monthly
expense, we foresee $17,000 covering the salaries, management and administration
of the Company with $59,000 covering the activity and operation of the Company.
The Company intends to try to obtain additional funds when necessary through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. In the event Finotec's plans change or its
assumptions change or prove to be inaccurate or the funds available prove to be
insufficient to fund operations at the planned level (due to further
unanticipated expenses, delays, problems or otherwise), Finotec could be
required to obtain additional funds earlier than expected. Finotec does not have
any committed sources of additional financing, and there can be no assurance
that additional funding, if necessary, will be available on acceptable terms, if
at all. If adequate funds are not available, we may be required to further
delay, scale-back, or eliminate certain aspects of our operations or attempt to
obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies, product
candidates, products, or potential markets. If adequate funds are not available,
Finotec's business, financial condition, and results of operations will be
materially and adversely affected.
We have no off balance sheet assets or liabilities.
12
We anticipate that our available cash resources and cash flows from
operations will be sufficient to meet our presently anticipated working capital
and capital expenditure requirements through the second quarter of 2005.
ISSUES, UNCERTAINTIES AND RISK FACTORS
The Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations in this report should
be read and evaluated together with the issues, uncertainties and risk factors
relating to our business described below. While we have been and continue to be
confident in our business and business prospects, we believe it is very
important that anyone who reads this report consider the issues, uncertainties
and risk factors described below, which include business risks relevant both to
our industry and to us in particular. These issues, uncertainties and risk
factors are not intended to be exclusive. This report also contains statements
that are forward-looking within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When used in
this report, the words "believes," "plans," "estimates," "expects," "intends,"
"designed," "anticipates," "may," "will," "should," "could," "become,"
"upcoming," "potential," "pending," and similar expressions, if and to the
extent used, are intended to identify the forward-looking statements. All
forward-looking statements are based on current expectations and beliefs
concerning future events that are subject to risks and uncertainties. Actual
results may differ materially from the results suggested in this report. Factors
that may cause or contribute to such differences, and our business risks and
uncertainties generally, include, but are not limited to, the items described
below, as well as in other sections of this report and in our other public
filings and our press releases.
THERE ARE SEVERAL FACTORS THAT MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS, WHICH WOULD LIKELY RESULT IN SIGNIFICANT VOLATILITY IN OUR STOCK PRICE
Causes of such significant fluctuations may include, but are not limited to:
o cash flow problems that may occur;
o the quality and success of, and potential continuous changes in,
sales or marketing strategies (which have undergone significant change recently
and are expected to continue to evolve) and the costs allocated to marketing
campaigns and the timing of those campaigns;
o the timing, completion, cost and effect of our development and launch
of planned enhancements to the Finotec trading platform;
o the size and frequency of any trading errors for which we ultimately
suffer the economic burden, in whole or in part;
13
o changes in demand for our products and services due to the rapid pace
in which new technology is offered to customers in our industry;
o costs or adverse financial consequences that may occur with respect
to regulatory compliance or other regulatory issues, particularly relating to
laws, rules or regulations that may be enacted with a focus on the active trader
market; and
o general economic and market factors that affect active trading,
including changes in the securities and financial markets.
CONDITIONS IN THE SECURITIES AND FINANCIAL MARKETS MAY AFFECT OUR RATES OF
CUSTOMER ACQUISITION, RETENTION AND TRADING ACTIVITY
Our products and services are, and will continue to be, for customers who
trade actively in the securities and financial markets. There has been for the
past 2 1/2 years, and continues to be, unfavorable conditions in the securities
and financial markets. To the extent that interest in active trading has
decreased or in the future decreases due to low trading volumes, lack of
volatility, or significant downward movement in the securities or financial
markets, such as has recently occurred, or future tax law changes, recessions,
depressions, wars, terrorism (including "cyberterrorism"), or otherwise, our
business, financial condition, results of operations and prospects could be
materially adversely affected. Also, unfavorable market conditions may result in
more losses for our clients, which could result in increases in quantity and
size of errors or omissions claims that may be made against us by frustrated
clients. We do not currently carry any errors or omissions insurance that might
cover, in part, some of those kinds of potential claims.
Instability in the middle east region may adversely affect our business.
Political, economic and military conditions in Israel directly affect the
Company's operations. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its Arab
neighbors, and the continued state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel. Since October
2000, there has been a significant increase in violence, primarily in the West
Bank and Gaza Strip, and more recently Israel has experienced terrorist
incidents within its borders. As a result, negotiations between Israel and
representatives of the Palestinian Authority have been sporadic and have failed
to result in peace. The Company could be adversely affected by hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, or a significant downturn in the economic or financial
condition of Israel. In addition, the sale of products manufactured in Israel
may be adversely affected in certain countries by restrictive laws, policies or
practices directed toward Israel or companies having operations in Israel. The
continuation or exacerbation of violent conflicts involving Israel and other
nations may impede the Company's ability to sell its products in certain
countries. In addition, some of the Company's employees in Israel are subject to
being called upon to perform military service in Israel, and their absence may
14
have an adverse effect upon the Company's operations. Generally, unless exempt,
male adult citizens and permanent residents of Israel under the age of 54 are
obligated to perform up to 36 days of military reserve duty annually.
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. These conditions could disrupt the
Company's operations in Israel and its business, financial condition and results
of operations could be adversely affected.
The Company's costs of operations have at times been affected by changes in
the cost of its operations in Israel, resulting from changes in the value of the
Israeli shekel relative to the United States dollar, and from difficulties in
attracting and retaining qualified scientific, engineering and technical
personnel in Israel, where the availability of such personnel has at times been
severely limited. Changes in these cost factors have from time to time been
significant and difficult to predict, and could in the future have a material
adverse effect on the Company's results of operations.
OUR INDUSTRY IS INTENSELY COMPETITIVE, WHICH MAKES IT DIFFICULT TO ATTRACT AND
RETAIN CUSTOMERS
The markets for online brokerage services, client software and
Internet-based trading tools, and real-time market data services are intensely
competitive and rapidly evolving, and there has been substantial consolidation
of those three products and services occurring in the industry. We believe that
competition from large online brokerage firms and smaller brokerage firms
focused on active traders, as well as consolidation, will substantially increase
and intensify in the future. Competition may be further intensified by the size
of the active trader market, which is generally thought to be comprised of less
than 10% of all online brokerage accounts. We believe our ability to compete
will depend upon many factors both within and outside our control. These
include: price pressure; the timing and market acceptance of new products and
services and enhancements developed by us and our competitors; the development
and support of efficient, materially error-free Internet-based systems; product
and service functionality; data availability and cost; clearing costs; ease of
use; reliability; customer service and support; and sales and marketing
decisions and efforts.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR PRESERVE OUR RIGHTS IN INTELLECTUAL
PROPERTY
Our success is and will continue to be heavily dependent on proprietary
technology, including existing trading-tool, Internet, Web-site and
order-execution technology, and those types of technology currently in
development. We view our technology as proprietary, and rely, and will be
relying, on a combination of trade secret and trademark laws, nondisclosure
agreements and other contractual provisions and technical measures to protect
our proprietary rights. Policing unauthorized use of our products and services
is difficult, however, and we may be unable to prevent, or unsuccessful in
attempts to prevent, theft, copying or other unauthorized use or exploitation of
our product and service technologies. There can be no assurance that the steps
15
taken by us to protect (or defend) our proprietary rights will be adequate or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technologies or products and
services.
THE NATURE OF OUR BUSINESS RESULTS IN POTENTIAL LIABILITY TO CUSTOMERS
Many aspects of the securities brokerage business, including online trading
services, involve substantial risks of liability. In recent years there has been
an increasing incidence of litigation involving the securities brokerage
industry, including class action and other suits that generally seek substantial
damages, including in some cases punitive damages. In particular, our
proprietary order routing technology is designed to automatically locate, with
immediacy, the best available price in completing execution of a trade triggered
by programmed market entry and exit rules. There are risks that the electronic
communications and other systems upon which these products and services rely,
and will continue to rely, or our products and services themselves, as a result
of flaws or other imperfections in their designs or performance, may operate too
slowly, fail or cause confusion or uncertainty to the user. Major failures of
this kind may affect all customers who are online simultaneously. Any such
litigation could have a material adverse effect on our business, financial
condition, results of operations and prospects.
WE DO NOT HAVE A LONG OPERATING HISTORY AS AN ONLINE BROKERAGE FIRM.
We launched the Forexcash direct access online trading platform during the
2002 first quarter. Prior to that, our operations consisted mainly of developing
the software and technology. Accordingly, the online brokerage business, as
currently conducted, has a very short operating history. This lack of operating
history, and our lack of historical profitable results, should be taken into
account when evaluating our financial condition and results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May, 2004, the Tel-Aviv Stock Exchange Ltd. ("the Stock Exchange") submitted
a claim against the Company for a permanent and temporary restraining order to
prevent the Company from using the Tel-Aviv 25 Index and/or any other index
owned by the Stock Exchange as part of the Company's online trading at its
website. The Company claimed that the Stock Exchange does not have copyrights
regarding the indexes and that it did not mislead the public in any way.
The Company answered the claim for a temporary restraining order, and in June,
2004, the Court accepted the Company's claim. In August, 2005, the Stock
Exchange appealed to the Supreme Court, and thereafter the Company submitted its
response to the appeal. The Supreme Court has yet to make a determination with
regard to the appeal and has not set a date for a hearing.
16
Management does not expect this claim to have a material effect on the Company's
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) SALES OF UNREGISTERED SECURITIES
During the three months ended July 31, 2004, the Company did not issue any
shares or options.
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters voted on by the security holders of the Company
during this quarter.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
31.1 Section 302 certification
32.1 Section 906 certification
SIGNATURE
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.
Finotec Group, Inc.
Registrant
Date: July 14, 2005 By:/s/ Didier Essemini
----------------------------
Didier Essemini
Chief Executive Officer
17