U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTON 13 OR 15(d) OF THE EXCHANGE ACT for
the transition period from ___________________ to __________________.
Commission File Number 0-9940
The Finx Group, Inc.
(Exact name of small business issuer as specified in its charter)
(Formerly known as Fingermatrix, Inc.)
Delaware 13-2854686
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
21634 Club Villa Terrace, Boca Raton, Florida 33433
(Address of principal executive offices) (Zip Code)
(561) 447-6612
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months, (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
As of May 20, 2004, there are 749,715,948 shares of the par value $.01
common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Indicate by checkmark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934. Yes [ ] No [X]
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
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Three Months Ended March 31, 2004 2003
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Revenues $ - $ 10,000
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General and administrative expenses 464,000 627,000
Compensation expense from stock grants and the issuance of
stock options and stock purchase warrants - 965,000
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Total operating expenses 464,000 1,592,000
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Operating loss (464,000) (1,582,000)
Other income - 1,000
Interest expense, related parties (25,000) (26,000)
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Net loss $ (489,000) $ (1,607,000)
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Loss per share computation- basic and diluted:
Net loss $ (489,000) $ (1,607,000)
Less dividends on preferred shares (30,000) (34,000)
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Net loss available to common stockholders $ (519,000) $ (1,641,000)
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Weighted average shares outstanding 749,715,948 163,389,867
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Loss per common share - basic and diluted:
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Net loss ($0.00) ($0.01)
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See Notes to Unaudited Consolidated Interim Financial Statements.
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
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As of March 31, 2004
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ASSETS
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Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment, cost 90,000
Less accumulated depreciation (90,000)
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Net furniture, fixtures and equipment -
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Other assets:
Exclusive license agreement, net (see Note 4) 2,566,000
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TOTAL ASSETS $ 2,566,000
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LIABILITIES AND CAPITAL DEFICIENCY
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CURRENT LIABILITIES:
Accounts payable $ 1,624,000
Accrued payroll and payroll taxes, executive officers 2,943,000
Notes payable executive officers, including interest 1,649,000
Notes payable, related parties, including accrued interest 310,000
Other current liabilities 506,000
Current liabilities of discontinued segments (see Note 8) 1,211,000
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Total current liabilities 8,243,000
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Commitments and contingencies (see Note 9)
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CAPITAL DEFICIENCY
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Preferred stock, $.01 par value; 1,000,000 shares authorized; 1,000
Series A preferred shares issued and outstanding; 15,540 Series B
preferred shares issued and outstanding as of March 31, 2004 1,554,000
Common stock, $.01 par value; 750,000,000 shares authorized;
749,715,948 shares issued and outstanding as of March 31, 2004 7,497,000
Additional paid-in capital, common stock 27,567,000
Accumulated deficit (42,295,000)
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Capital deficiency (5,677,000)
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TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,566,000
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See Notes to Unaudited Consolidated Interim Financial Statements.
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
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Three Months Ended March 31, 2004 2003
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CASH FLOWS - OPERATING ACTIVITIES:
Net loss $ (489,000) $ (1,607,000)
Adjustments to reconcile net loss to net cash - continuing
Depreciation and amortization 61,000 61,000
Non cash expense from stock grants and the issuance of
stock options and stock purchase warrants - 965,000
Changes in assets and liabilities:
Accounts payable 150,000 (103,000)
Accrued payroll 203,000 193,000
Accrued interest expense, related parties 25,000 26,000
Other current liabilities - 12,000
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Net cash - operating activities (50,000) (453,000)
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CASH FLOWS - INVESTING ACTIVITIES:
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Net cash - investing activities - -
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CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 50,000 178,000
Repayments on related party loans - (76,000)
Proceeds from exercise of stock options - 352,000
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Net cash - financing activities 50,000 454,000
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Net change in cash - 1,000
Cash - Beginning of period - -
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Cash - End of period $ - $ 1,000
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the year for:
Interest $ - $ -
Income Taxes $ - $ -
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See Notes to Unaudited Consolidated Interim Financial Statements.
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The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three Months Ended March 31, 2004 and 2003
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1. Basis of Presentation
The accompanying unaudited consolidated financial statements of The
Finx Group, Inc. and its subsidiaries consisting of Secured Portal Systems,
Inc., and Granite Acquisition Corp., (collectively the "Company") have been
prepared in accordance with Regulation S-B promulgated by the Securities and
Exchange Commission and do not include all of the information and footnotes
required by generally accepted accounting principles in the United States of
America for complete financial statements. In the opinion of management, these
interim financial statements include all adjustments necessary in order to make
the financial statements not misleading. The results of operations for such
interim periods are not necessarily indicative of results of operations for a
full year. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
of the Company and Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Annual Report on Form 10-KSB for the
year ended December 31, 2003. Certain reclassifications were made to prior year
amounts to conform to the current year presentation.
The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
However, the Company has generated only nominal revenue from continuing
operations and has a history of net losses and as of March 31, 2004 has a
working capital deficiency of $8.2 million and a capital deficiency of $5.7
million. Historically, the Company has been dependent on financial support from
its controlling stockholder, Trinity Group-I, Inc. ("Trinity"), and other
related parties. Management is currently seeking additional financing; however,
the Company can give no assurances such financing will be consummated, that the
terms of any financing will be reasonable or that the amount raised will be
adequate to meet the Company's current and ongoing obligations. The continuation
of the Company as a going concern is dependent upon its ability both to obtain
financing and to generate revenues. The accompanying consolidated financial
statements do not include any adjustments that would result should the Company
be unable to continue as a going concern
2. Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the December 31, 2003 Form 10-KSB as
amended.
In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates. Some of the more significant estimates include the carrying value of
the Company's exclusive license and its amortization.
Certain long-term assets of the Company are reviewed when changes in
circumstances require as to whether their carrying value has become impaired,
pursuant to guidance established in Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations [undiscounted
and without interest charges]. If impairment is deemed to exist, the asset will
be written down to fair value. Management also reevaluates the period of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of March 31, 2004, management expects
those assets related to its continuing operations to be fully recoverable.
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3. Supplemental Disclosure of Non Cash Investing and Financing Activities
On January 2, 2003, a warrant to purchase 5,000,000 shares of Common
Stock for $0.04 per share was issued to a consultant resulting in stock
compensation expense of $99,000.
On January 17, 2003, options to purchase 17,604,168 shares of Common
Stock for $0.02 per share were granted and exercised resulting in stock
compensation expense of $366,000.
On March 17, 2003 stock grants for 85,000,002 shares of Common Stock
were issued to consultants resulting in stock compensation expense of $425,000
and a stock grant for 14,999,998 shares of Common Stock was issued to Grazyna B.
Wnuk, an officer and director of The Finx Group, Inc., resulting in stock
compensation expense of $75,000.
4. Exclusive License Agreement
On September 13, 1999, the Company obtained the Georal license which
gives the Company distribution rights for the sale of Georal security products
to a broad range of customers. The Georal security products' include all models
of the Georal security door. The categories of customers covered by the Georal
license includes the United States Treasury Department, the United States
Central Intelligence Agency and all other United States Government intelligence
agencies, the United States National Security Agency, the United States Defense
Intelligence Agency, the United States Department of the Navy, the United States
Air Force, the United States Army, all United States Federal Courts and all
United States Embassies, all department stores and retail stores located in the
United States (including all retail stores located in foreign countries which
are part of a retail store chain which is based in the United States), the
Government of Israel, and certain corporations. The Georal license commenced on
September 1, 1999 and, as amended, expires on August 31, 2014.
As an inducement to obtain the Georal license and in exchange for
1,000,000 common stock shares of GIL, in September 1999, the Company issued to
Alan J. Risi preferred shares which were converted into 1,049,874 shares of
common stock in July of 2002.
On December 11, 2001, the GIL 2001 security door received certification
by the U.S. State Department. On February 21, 2002, the Georal license was
amended to expand the categories of customers for which the Company has the
exclusive marketing right to include all financial institutions around the world
with the Company also receiving a right of first refusal to be the exclusive
distributor for sales to any governmental body which the Company does not have
exclusive marketing rights. As consideration for the amendment entered into on
February 21, 2002, the Company issued to Alan Risi 40,000 shares of series D 2%
convertible preferred stock that was converted into 4,000,000 million shares of
common stock. On May 16, 2002, the Georal license for the Georal security
systems was further amended whereby the exclusive distribution agreement was
expanded to give the Company additional exclusive world wide sales and marketing
rights. As consideration for the amendment entered into on May 16, 2002, the
Company issued to Alan Risi 60,000 shares of its series C 2% convertible
preferred stock which were converted into 6,000,000 shares of common stock. On
September 9, 2002, the Georal license was further expanded to provide the
Company with additional exclusive marketing rights. As consideration for this
amendment, the Company issued to Alan Risi 100,000 shares of its series C
preferred stock which were converted into 10,000,000 shares of common stock. On
October 16, 2002, the Company issued to Alan Risi an additional 250,000 shares
of its series C preferred stock for an amendment to the Georal license which
provided the Company with participation rights in certain maintenance revenue
generated by Georal and extended the term of the agreement an additional five
years, to September 18, 2014. Using the Black-Scholes option valuation formula,
the convertible preferred stock was valued at $2.98 million.
On December 10, 2003, the Company, its wholly-owned subsidiary,
Secured Portal Systems, Inc., Alan J. Risi ("Risi"), GIL Security Systems,
Inc.("GIL"), and Georal International, Ltd., entered into a amended and restated
worldwide exclusive distribution agreement covering all security entrance
systems created, developed, manufactured and/or distributed or otherwise sold by
GIL, Georal or their successors. The restated agreement expanded the Company's
exclusivity and gave the Company certain other rights. The agreement provided
for certain payments by the Company and, if the payments were not made, GIL,
Georal and Risi have the right to terminate the restated agreement, in which
event, the relationship among the parties would be governed by the prior
agreement.
On or about April 28, 2004, the Company received a notice from GIL
stating that the agreement was terminated for failure of the Company to pay the
amount provided in the restated agreement. The notice further stated GIL's
position that all agreements between GIL and the Company and its subsidiary are
terminated.
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The Company is considering its legal rights and believes that its
subsidiary will continue to be able to exercise its right to market the security
portals in major markets groups; however, the Company can give no assurance as
to its ability to protect such rights or, if litigation is necessary, that it
will prevail in any legal action it may commence.
As of March 31, 2004, the Company has not recorded any impairment
adjustments with regards to the exclusive license.
5. Basic and Diluted Loss Per Share
Basic and diluted per share results for all periods presented were
computed based on the net earnings or loss allocated to the common stock for the
respective periods. The weighted average number of shares of common stock
outstanding during the period was used in the calculation of basic earnings
(loss) per share. In accordance with FAS 128, "Earnings Per Share," the weighted
average number of shares of common stock used in the calculation of diluted per
share amounts is adjusted for the dilutive effects of stock options based on the
treasury stock method and the assumed conversion of convertible preferred stock
only if an entity records earnings from continuing operations (i.e., before
discontinued operations), as such adjustments would otherwise be anti-dilutive
to earnings per share from continuing operations. As a result of the Company
recording a loss from continuing operations for the three months ended March 31,
2004, the average number of common shares used in the calculation of diluted
loss per share have not been adjusted for the effects of 204,861,500 potential
common shares from unexercised stock options and warrants and 740,000,000
potential common shares from unconverted preferred shares. Such warrants,
options, and shares of convertible preferred stock may dilute earnings per share
in the future.
6. Commitments and Contingencies
Employment Agreements
Lewis S. Schiller has an employment agreement with the Company whereby
he is employed as the Company's Chief Executive Officer. Mr. Schiller's contract
is for an initial term commencing April 29, 1999 through April 28, 2009 and
provides for annual compensation of $500,000. Mr. Schiller's contract may be
extended an additional five years and also provides for an annual increase as
calculated as the greater of 5% or the increase in the cost of living index. Mr.
Schiller's contract provides him with a bonus for each year of the term equal to
10% of the amount by which the greater of consolidated net income before income
taxes or consolidated net cash flow exceeds $600,000. Mr. Schiller's contract
entitles him to 20% of the gross profit on the sale of any of the Company's, or
its subsidiaries, investments securities. Mr. Schiller's contract provides him
the opportunity to participate in the future expansion of the Company whereby he
is entitled, at his option, to purchase up to 25% of the authorized securities
of any subsidiary which is organized for any purpose. Mr. Schiller's contract
provides him with certain fringe benefits including a vehicle, health insurance
and life insurance. In the event of a change of control, Mr. Schiller's contract
provides him with severance equal to all amounts owed to him for the full term
of the employment agreement.
Grazyna B. Wnuk has an employment agreement with the Company whereby
she is employed as the Company's Vice-President. Ms. Wnuk's contract was
executed in 2002 and was negotiated pursuant to a board authorization dated
April 29, 1999. Ms, Wnuk's contract's initial expiration is April 28, 2009 and
provides for annual compensation of $200,000 per year. Ms. Wnuk's contract may
be extended an additional five years and for an annual increase as calculated as
the greater of 5% or the increase in the cost of living index. Ms. Wnuk's
contract provides her with a bonus for each year of the term equal to 1% of the
amount by which the greater of consolidated net income before income taxes or
consolidated net cash flow exceeds $600,000. Ms. Wnuk's contract entitles her to
1% of the gross profit on the sale of any of the Company's, or its subsidiaries,
investments securities. Ms. Wnuk's contract provides her the opportunity to
participate in the future expansion of the Company whereby she is entitled, at
her option, to purchase up to 1% of the authorized securities of any subsidiary
which is organized for any purpose. Ms. Wnuk's contract provides her with
certain fringe benefits including a vehicle, health insurance and life
insurance. In the event of a change of control, Ms. Wnuk's contract provides her
with severance equal to all amounts owed to her for the full term of the
employment agreement.
Indemnifications
Pursuant to the terms of the stock purchase agreement to sell
Sequential and S-Tech, the Company agreed to indemnify Lewis S. Schiller for any
claims made against him regarding $1.1 million of delinquent payroll taxes owed
by Sequential and S-Tech at the time of their disposal and as of March 31, 2004,
the Company has reserved $550,000 against such potential claims.
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Legal Proceedings
Although the Company is a party to certain legal proceedings that
have occurred in the ordinary course of business, it does not believe such
proceedings to be of a material nature with the exception of the following item.
On or about April 8, 2002, a complaint styled "Law Offices of Jerold K. Levien,
against The Finx Group, Inc. f/k/a Fingermatrix, Inc., The Trinity Group-I,
Inc." was filed in the Supreme Court of the State of New York County of New
York, and the plaintiff has received a judgment for $334,595, such amount having
been accrued on the Company's books, plus interest.
10. Subsequent Events
On December 10, 2003, the Company, its wholly-owned subsidiary,
Secured Portal Systems, Inc., Alan J. Risi ("Risi"), GIL Security Systems,
Inc.("GIL"), and Georal International, Ltd., entered into a amended and restated
worldwide exclusive distribution agreement covering all security entrance
systems created, developed, manufactured and/or distributed or otherwise sold by
GIL, Georal or their successors. The restated agreement expanded the Company's
exclusivity and gave the Company certain other rights. The agreement provided
for certain payments by the Company and, if the payments were not made, GIL,
Georal and Risi have the right to terminate the restated agreement, in which
event, the relationship among the parties would be governed by the prior
agreement.
On or about April 28, 2004, the Company received a notice from GIL
stating that the agreement was terminated for failure of the Company to pay the
amount provided in the restated agreement. The notice further stated GIL's
position that all agreements between GIL and the Company and its subsidiary are
terminated.
The Company is considering its legal rights and believes that its
subsidiary will continue to be able to exercise its right to market the security
portals in major markets groups; however, the Company can give no assurance as
to its ability to protect such rights or, if litigation is necessary, that it
will prevail in any legal action it may commence.
As of March 31, 2004, the Company has not recorded any impairment
adjustments with regards to the exclusive license.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS MAY BE DEEMED TO INCLUDE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISK AND UNCERTAINTY. ALTHOUGH MANAGEMENT BELIEVES THAT ITS EXPECTATIONS ARE
BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO ASSURANCE THAT ITS EXPECTATIONS
WILL BE ACHIEVED.
THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS HEREIN (THE "CAUTIONARY STATEMENTS") ARE
MORE FULLY DESCRIBED IN THE COMPANY'S DECEMBER 31, 2002 FORM 10-KSB, AS AMENDED,
INCLUDE, WITHOUT LIMITATION: WE HAVE A HISTORY OF LOSSES AND CASH FLOW DEFICITS;
THE MARKET FOR OUR COMMON STOCK IS LIMITED; TRADING IN OUR SECURITIES MAY BE
RESTRICTED DUE TO COMPLIANCE WITH APPLICABLE PENNY STOCK REGULATIONS; OUR
COMPANY IS SUBJECT TO CONTROL BY A PRINCIPAL STOCKHOLDER; A SIGNIFICANT PORTION
OF THE NET PROCEEDS OF ANY POTENTIAL FINANCING MAY BE USED FOR THE PAYMENT OF
RELATED PARTY AND OTHER INDEBTEDNESS AND FOR SALARIES OF EXECUTIVES AND KEY
PERSONNEL; WE REQUIRE ADDITIONAL FINANCING FOR OUR BUSINESS ACTIVITIES; WE HAVE
GRANTED SIGNIFICANT BENEFITS UNDER CERTAIN EXISTING AND PROPOSED EMPLOYMENT
AGREEMENTS; RAPID TECHNOLOGICAL CHANGE COULD RENDER CERTAIN OF OUR PRODUCTS AND
PROPOSED PRODUCTS OBSOLETE OR NON-COMPETITIVE; WE CANNOT PREDICT MARKET
ACCEPTANCE FOR OUR PROPOSED PRODUCTS; THE BUSINESS IN WHICH WE INTEND TO ENGAGE
IN IS SUBJECT TO INTENSE COMPETITION; THE BOARD OF DIRECTORS MAY ISSUE
ADDITIONAL PREFERRED STOCK IN THE FUTURE; A SUBSTANTIAL NUMBER OF OUR SHARES OF
COMMON STOCK WILL BE AVAILABLE FOR FUTURE SALE IN THE PUBLIC MARKET; WE DO NOT
INTEND TO PAY ANY DIVIDENDS ON THE COMMON STOCK IN THE FORESEEABLE FUTURE; THE
LIABILITY OF OUR OFFICERS AND DIRECTORS TO US AND OUR SHAREHOLDERS IS LIMITED;
DEPENDENCE ON KEY SUPPLIER; RELIANCE ON MANAGEMENT, KEY PERSONNEL AND
CONSULTANTS; WE COULD BE SUBJECT TO POTENTIAL UNINSURED LIABILITY, THE RISKS
RELATING TO LEGAL PROCEEDINGS AND OTHER FACTORS BOTH REFERENCED AND NOT
REFERENCED IN THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING THOSE SET FORTH
UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY DOES NOT
UNDERTAKE ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of our financial statements, including the
following: impairment of long-lived assets, including the valuation of the
exclusive license agreement; accounting for expenses in connection with stock
options and warrants; and accounting for income taxes. Our management relies on
historical experience and on other assumptions believed to be reasonable under
the circumstances in making its judgment and estimates. Actual results could
differ materially from those estimates. There have been no significant changes
in assumptions, estimates and judgments in the preparation of these financial
statements from the assumptions, estimates and judgments used in the preparation
of our prior year's audited financial statements.
Results of Operations
For both the first quarters of 2004 and 2003 our significant
operating expenses were executive payroll, and marketing expense and
professional fees. Executive payroll is currently $810,000 annually. As of March
31, 2004, none of the salary owed to Lewis S. Schiller, our chief executive
officer, has been paid and he is owed cumulative salary of $2.145 million. As of
March 31, 2004 Grazyna B. Wnuk, our vice-president, is owed cumulative salary of
$785,000. Expenses associated with our marketing, which currently are $1.1
million on an annual basis, represent consulting fees for the
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consultants who perform such functions. Professional fees for legal and
accounting services currently approximate $500,000 annually.
The value assigned to the Georal License of approximately $3 million
is being amortized over the life of the Georal License resulting in ongoing
annual amortization expense of $245,000. Such amortization for both of the first
quarters of 2004 and 2003 was $61,000.
During 2003 we compensated our employees and consultants with stock
options and stock grants that have been registered on Form S-8 and unregistered
stock purchase warrants. During the three months ended March 31, 2003 stock
based compensation was $965,000.
We incur interest expense at an annual rate of 9% on related party
notes payable. For 2003 and 2002 interest expenses on related party notes
payable was $25,000 and $26,000, respectively.
Financial Condition - Liquidity and Capital Resources
As of December 31, 2003, our working capital deficiency approximates
$8.2 million, representing an increase of $.4 million from December 31, 2003.
Since April 1999, our primary source of funding has been Trinity, our
controlling shareholder. During the quarter ended March 31, 2004 we received
$50,000 from Trinity which was used for our operations. We are attempting to
obtain outside equity financing; however, we make no assurances that we will be
successful in obtaining such financing.
On December 10, 2003, the Company, its wholly-owned subsidiary,
Secured Portal Systems, Inc., Alan J. Risi ("Risi"), GIL Security Systems,
Inc.("GIL"), and Georal International, Ltd., entered into a amended and restated
worldwide exclusive distribution agreement covering all security entrance
systems created, developed, manufactured and/or distributed or otherwise sold by
GIL, Georal or their successors. The restated agreement expanded the Company's
exclusivity and gave the Company certain other rights. The agreement provided
for certain payments by the Company and, if the payments were not made, GIL,
Georal and Risi have the right to terminate the restated agreement, in which
event, the relationship among the parties would be governed by the prior
agreement.
On or about April 28, 2004, the Company received a notice from GIL
stating that the agreement was terminated for failure of the Company to pay the
amount provided in the restated agreement. The notice further stated GIL's
position that all agreements between GIL and the Company and its subsidiary are
terminated.
The Company is considering its legal rights and believes that its
subsidiary will continue to be able to exercise its right to market the security
portals in major markets groups; however, the Company can give no assurance as
to its ability to protect such rights or, if litigation is necessary, that it
will prevail in any legal action it may commence.
As of March 31, 2004, the Company has not recorded any impairment
adjustments with regards to the exclusive license.
The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
However, we have generated nominal revenues and we have a history of operating
losses and as of March 31, 2004 have a working capital deficiency of $8.2
million and a capital deficiency of $5.7 million. Management is currently
seeking additional financing; however we can give no assurance that such
financing will be consummated or that any financing which we receive will be
adequate. Further, in view of our stock price, any financing is likely to result
in substantial dilution to our stockholders. Our continuation in business is
dependent upon our ability to obtain financing, and to use the proceeds from any
such financing to increase our business to achieve profitable operations. The
accompanying consolidated financial statements do not include any adjustments
that would result should we be unable to continue as a going concern.
PART II OTHER INFORMATION
Item 3. Controls and Procedures
Our Chief Executive Officer, who is also our Chief Accounting Officer,
has supervised and participated in an evaluation of the effectiveness of our
disclosure controls and procedures as of a date within 90 days of the date of
this report, and, based on his evaluation, he believes that our disclosure
controls and procedures, as defined in Rule 13a-14(c) of the Securities Exchange
Act of 1934, as amended, are designed to ensure that information required to be
disclosed by us in the
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reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. As a result of the evaluation, there were
no significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Amended and Restated Worldwide Exclusive Distribution Agreement
31 Chief Executive Officer and Chief Accounting Officer
Certification.
32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The FINX GROUP, INC.
/S/ Chief Executive Officer and Director May 21, 2004
Lewis S. Schiller (Principal Executive and Accounting Officer)
-12-
Exhibit 10
AMENDED AND RESTATED WORLDWIDE EXCLUSIVE DISTRIBUTION AGREEMENT
Agreement (this "Agreement"), made this 10th day of December, 2003, by
and among The Finx Group, Inc., a Delaware corporation ("Finx"), Secured Portal
Systems, Inc., a Delaware corporation and wholly-owned subsidiary of Finx
("Distributor"), Alan J. Risi ("Risi"), GIL Security Systems, Inc., a Delaware
corporation ("GIL"), and Georal International, Ltd., a Delaware corporation
("Georal").
W I T N E S S E T H:
WHEREAS, GIL has granted Distributor distribution rights to the
Products, as hereinafter defined, including the secured portal system developed
by GIL using the Patents, as hereinafter defined, pursuant to an Exclusive
Distribution Agreement dated September 13, 1999, between GIL and Distributor, as
amended on August , 2000, February 21, 2002, May 16, 2002, September 4, 2002,
and October 16, 2002, which agreement, as so amended, is referred to as the
"Original Agreement"; and
WHEREAS, Risi is the sole owner of the Patents; and
WHEREAS, Risi has granted GIL the Exclusive License, as hereinafter
defined; and
WHEREAS, Risi is the sole stockholder of GIL; and
WHEREAS, Fingermatrix, Inc. was merged into Finx, and, as a result,
Distributor is a wholly-owned subsidiary of Finx; and
WHEREAS, the parties desire to amend and restate the Original Agreement
and the relationship among the parties; and
WHEREAS, in consideration of the changes from the Original Agreement as
reflected in this Agreement, Finx is willing to issue to Risi shares of a newly
created series of preferred stock;
WHEREFORE, in consideration of the foregoing and the mutual benefits to
be derived from this Agreement, the parties hereto do hereby agree as follows:
Defined Terms. For purposes of this Agreement, the following terms
shall have the following meanings:
"Agreement" shall mean this Amended and Restated Exclusive
Distribution Agreement among Finx, Distributor, Risi, GIL and Distributor.
"Applicable Percentage" shall mean twenty percent (20%) until such
time as Distributor has actually sold one thousand (1,000) units of Product, at
which time the Applicable Percentage shall be thirty percent (30%).
"Customer's Prepared Site" shall mean the area or site of
Distributor's customer in which the Product will be installed, which site has
been prepared by such customer to accommodate the installation of the Product in
accordance with the Product specifications.
"Designated Shipper" shall have the meaning provided in Section
4.1 hereof.
"Events of Default" shall have the meaning provided in Section
11.1 hereof.
"Exclusive License" shall mean that certain exclusive license
agreement dated September 13, 1999, as amended, between Risi and GIL pursuant to
which Risi exclusively licensed exclusive rights in and to the GIL Intellectual
Property for a term commencing on September 13, 1999 and terminating on August
31, 2019, a true, correct and complete executed copy of which is included as
Exhibit A to this Agreement."
"GIL Intellectual Property" shall mean the GIL Marks, the GIL
Patents and the GIL Technology.
Exhibit 10 - Page 1
"GIL Marks" shall mean all copyrights, trademarks and trade names
owned by, licensed to, or under the exclusive control of GIL relating to the
Products, whether registered or unregistered, including, without limitation, the
trademark "GIL 2001 Security Doors."
"GIL Patents" or "Patents" shall mean (i) United States patent no.
6,472,982, which was granted to Risi on October 29, 2002, which covers the
technology relating to the secured portal presently marketed by GIL (the
"Initial Patent"), (ii) any other patents in the United States or elsewhere
which are the same as or based on the Initial Patent or the underlying invention
or technology or are improvements or enhancements thereof and all divisions,
continuations, continuations in part, reissues, substitutes and extensions of
any of the foregoing which are owned by Risi, GIL, Georal or any of their
affiliates, and (iii) any other patents, patent applications or other patent
rights which are acquired by Risi, GIL, Georal or any of their affiliates
subsequent to the date of this Agreement.
"GIL Technology" shall mean all processes, methods, trade secrets,
ideas, techniques, information, Know-how and other technology exclusively
licensed to GIL relating to the Products in any way.
"Know-how" shall include, but not be limited to, any proprietary
know-how, use and applications know-how, technical information, product formulae
and formulations, inventions, manufacturing processes, data, techniques,
technology, toxicological and ecological data and information, trade secrets and
similar information and materials recording or evidencing GIL's proprietary
expertise relating to a Product, regardless of whether such information is
patentable; any information or other information contained in any patent
application, regardless of whether a patent is ever issued with respect to such
application, results of studies and surveys, in any stage of development,
including, without limitation, modifications, enhancements, designs, concepts,
techniques, methods, ideas, flow charts and all other information relating to
any Product developed or to be developed by or for a party or otherwise owned by
a party.
"Know-how Documentation" shall mean all software, including source
codes and object codes, all designs, manuals and materials, all trade secrets,
all applications for copyrights or patents and all patent, trademark, copyright
or other intellectual property rights relating to GIL's proprietary rights,
whether such information is in oral, written, tangible, graphic or electronic
form, and whether such information is copyrighted or categorized as a trade
secret or know-how, and including notes and summaries of any of the foregoing
which are made by either party.
"List Price" or "List Prices" for any Product shall be the lowest
of (i) the retail price for such Product as set by GIL from time to time, (ii)
the price set by GIL for sales to government agencies (the "GSA Price"), or
(iii) such other price as may be agreed upon by GIL and Distributor. The current
retail prices and GSA Prices are set forth on Exhibit C to this Agreement. In
the event that Distributor desires to provide a client with a quantity discount
from the retail price or GSA Price, GIL will not unreasonably withhold its
consent to such discount. Except as otherwise expressly provided in Agreement,
the List Price shall not include freight, insurance, customs duties and taxes,
sales, VAT or other taxes, and all other costs necessary to deliver the Product
to the Prepared Site as specified in Distributor's purchase order, all of which
will be payable by the customer.
"Manufacturing License" shall have the meaning provided in Section
12.1 hereof.
"Most Favored Nations Price" shall have the meaning provided in
Section 5.4 hereof.
"Permitted Transferee" shall mean (i) Risi's wife or children
(which term includes his children-in-law and grandchildren) or trusts for the
benefit of his wife or children, and (ii) an individual to whom stock is
transferred or issued in connection with his or her employment as a senior
executive officer of GIL, Georal or their affiliates if the affiliates are
engaged in a business relating to the manufacture of Products.
"Product" or "Products" shall mean (i) all security entrance
systems created, developed, manufactured and/or distributed or otherwise sold by
GIL, Georal or their successors, subsidiaries or affiliates, including any
entity owned or controlled by Risi, whether now existing or otherwise developed
during the Term hereof, including all models of the GIL-2001 security door
series; (ii) any other security products developed by Risi, GIL, Georal or their
affiliates, and (iii) any other products covered by the Patents, unless, in any
instance or instances, Distributor advises GIL in writing that Distributor does
not wish to include such additional product within the scope of the definition
of Product.
"Protected Customers" shall mean the persons listed on Exhibit B
under the heading "Protected Customers" to this Agreement, together with their
affiliates, wherever located. Any references in Exhibit B to any governments
shall include any subdivisions, regulatory agencies or bodies and cabinet
agencies, as well as state, canton, province, regional, local, municipal or
other subdivisions and any governmental or quasi-governmental or administrative
bodies, whether
Exhibit 10 - Page 2
executive, legislative or judicial. An affiliate of any person is a person who
controls, is controlled by or is under common control with such person.
"Purchase Price" shall have the meaning provided in Section 5.1
hereof.
"Qualified Financing" shall mean the private placement or public
offering by Finx of its equity securities pursuant to which Finx raises net
proceeds, determined after payment of all underwriting, brokers', finders' and
similar fees incurred by Finx, of not less than five million dollars
($5,000,000).
"Term" shall have the meaning provided in Section 3 hereof.
Appointment of Distributor.
Subject to the terms and conditions set forth in this Agreement,
GIL hereby grants Distributor, during the Term, the sole and exclusive right to
sell, market, lease, license, distribute and otherwise deal in commerce with the
Products to Protected Customers, including the right to appoint resellers and
subdistributors, and Distributor hereby accepts such appointment. Distributor
shall purchase all Products solely from GIL or Georal. Distributor may market,
sell, lease, license or otherwise deal in commerce with Products either directly
or through resellers or subdistributors. GIL also hereby grants Distributor (and
all resellers, subdistributors, sublicensees and customers to which Distributor
and its resellers, subdistributors and sublicensees sell Products) a use license
to the GIL Intellectual Property for the use and operation of the Products for
all periods during or after the Term hereof that such Products are in use.
As a result of the grant pursuant to Section 2.1(a) of this
Agreement, neither Risi nor GIL nor Georal nor any of their affiliates shall
have any right to market, distribute, sell, lease, license or otherwise deal in
commerce with the Products or to appoint or grant any other person any such
rights with respect to Protected Customers. Any leads for Products which GIL,
Risi or any of their affiliates or distributors shall develop relating directly
or indirectly to Protected Customers shall be forwarded to Distributor. In the
event that, notwithstanding the provisions of this Agreement, GIL, Georal or any
affiliate sells any Product to a Protected Customer, such sale shall be deemed a
sale by Distributor. Any such sales shall also be deemed sales by Distributor
for purposes of computing the Applicable Percentage.
If GIL proposes to sell, market, lease or distribute Products
directly to, or to grant any person other than Distributor the right to sell,
market, lease or distribute Products directly to, any customer other than a
Protected Customer, GIL shall give Distributor sixty (60) days advance notice
and shall give Distributor the right, in its sole discretion, to include such
Customer within the definition of Protected Customer. If, during such sixty (60)
day period, Distributor advises GIL in writing that it elects to have such
Customer be classified as a Protected Customer, the Customer shall be deemed a
Protected Customer with the same effect as if the Customer were listed on
Exhibit B under the heading "Protected Customers." If Distributor does not give
such notice during the sixty (60) day period, GIL shall have the right, in its
sole discretion, to sell directly to such customer or to grant others the right
to sell to such customer; provided, however, that Distributor shall have the
non-exclusive right to sell to such customer pursuant to Section 2.3 of this
Agreement.
Distributor shall have the non-exclusive right, during the Term
hereof, to sell, market, lease and distribute Products to customers other than
Protected Customers.
Distributor shall also have the right to lease Products to
Protected Customers during the Term hereof, provided that, other than with
respect to Products held by Distributor in inventory, Distributor pays GIL the
Purchase Price therefor in accordance with the terms of this Agreement.
GIL will service all products sold or leased by Distributor
whether to Protected Customers or to other customers on such commercially
reasonable terms as are determined by GIL from time to time during the Term
hereof. Distributor shall receive twenty percent (20%) of all net service
revenues received by GIL. Net service revenue shall mean service revenue less
all actual direct costs and bad debts incurred by GIL in providing such service,
determined in accordance with generally accepted accounting principles
consistently applied. The payments pursuant to this Section 2.5 shall continue
subsequent to the Term as long as GIL or its designee is providing service or
maintenance with respect to Products placed by Distributor but in no event for
more than one year after termination. GIL shall make the payment to Distributor
pursuant to this Section 2.5 on an annual basis, with payment being made not
later that the twentieth (20th) day of January with respect to collections
during the preceding calendar year. Each payment shall be accompanied by a
statement setting forth in reasonable detail the computation of the payment due
to Distributor.
Exhibit 10 - Page 3
Distributor hereby recognizes GIL's exclusive worldwide license
rights to the GIL Intellectual Property and agrees that it will not, during the
Term of this Agreement or thereafter, attack the validity or any rights of GIL
in and to the GIL Intellectual Property, including the GIL Marks or the GIL
Patents, or do or suffer to be done any act or thing which might in any way
impair the rights of GIL in and to the GIL Intellectual Property. GIL shall, at
all times during the Term hereof and at its sole cost and expense, prosecute,
maintain and defend all patents, trademarks, trade names and copyrights relating
to the Products, and all pending and future applications therefor. GIL will
notify Distributor of all issued patents, trademarks, trade names and copyrights
and of the status of all pending applications therefor. To the extent required
by applicable law and at no cost to Distributor, Distributor will cooperate with
GIL, upon GIL's reasonable request, with any such pending or future applications
for any of the foregoing intellectual property during the Term of this
Agreement.
Upon the reasonable request of GIL, Georal or Risi, Finx and
Distributor will provide Georal with information as to Finx' and Distributor's
marketing budget for Products.
Term of the Agreement. The term of this Agreement commenced as of
September 1, 1999 and shall expire on August 31, 2019, subject to earlier
termination as provided in Section 11 hereof (the "Term").
Purchase and Delivery; Specifications.
GIL will supply all Products sold or leased by Distributor under
this Agreement in accordance with written purchase orders placed by Distributor.
Distributor shall place purchase orders for all Products with GIL at 150-38 12th
Avenue, Whitestone, New York or such other address as to which GIL shall advise
Distributor. Each purchase order shall specify the number of Products being
purchased, the carrier or shipper to be utilized to ship such Products to
Distributor's customers (the "Designated Shipper"), the required delivery and
installation dates, and the installation site. GIL will make the Products
available to the Designated Shipper pursuant to each such purchase order within
the time period specified therein.
All Products will conform to the specifications therefor which are
established by GIL (and as may be modified by GIL from time to time), and will
operate in accordance with such specifications.
GIL will provide not less than ninety (90) days advance notice to
Distributor of any change or modification in the specifications of the Products;
provided, however, that any change or modification which in necessary to correct
a major problem with the Products shall be implemented as promptly as possible.
A major problem shall mean a software or hardware failure as a result of which
the Product is unable to perform significant functions required to be performed
by it. Further, GIL shall promptly provide necessary updates for all Products
held by Distributor in inventory, and the cost of installing such shall be borne
80% by GIL and 20% by Distributor.
GIL will install the Products at the Customer's Prepared Site
within the time period specified in any such purchase order, the cost of which
will be included in the List Price for any of such Products, and will notify
Distributor upon the completion of the installation. Distributor's customers
shall be solely responsible for all costs incurred in connection with the
creation and preparation of the Customer's Prepared Site and will provide access
to GIL at such site sufficient to enable GIL's delivery and installation of the
Products.
Distributor shall have the right prior to shipment, upon prior
notice to GIL and during normal business hours, to inspect the Products to be
delivered by GIL hereunder, at Distributor's sole expense, at the facilities
where such Products are being produced and at any warehouse at which such
Products are being stored, for purposes of quality control.
All risk of loss to the Products shall be borne by GIL until the
installation of the Products at Customer's Prepared Site as specified in
Distributor's purchase order. Except with respect to Products held by
Distributor in inventory, all title and ownership rights to the Products shall
pass to customer upon delivery to the Customer's Prepared Site.
Distributor shall have the right to sell the Products to the
Protected Customers at any price determined by it at retail or above.
If Finx shall complete a Qualified Financing, Finx shall
contribute to Distributor such funds as are necessary to enable Distributor to
purchase, and Distributor shall purchase, Products having a Purchase Price,
determined in accordance with Section 5.1 of this Agreement, of three million
dollars ($3,000,000), less the Purchase Price to Distributor of any Products
theretofore purchased by Distributor. For purposes of this Section 4.8, the
Purchase Price shall include shipping to and installation at the Customer's
Prepared Site. Such Products shall be delivered in accordance with Distributor's
reasonable instructions. If such Products are being delivered to Distributor's
warehouse, GIL shall also be responsible for freight to Distributor's warehouse.
All of such Products sold to Distributor pursuant to this Section 4.8 shall
Exhibit 10 - Page 4
be owned by Distributor upon delivery to the carrier and held by Distributor as
inventory. To the extent that Distributor has Products in inventory, Distributor
shall sell such Products prior to selling new Products. Distributor shall have
no further payment obligations with respect to the units delivered pursuant to
this Section 4.8. Except as provided in this Section 4.8, Distributor shall have
no obligation to maintain an inventory. If GIL has an order to sell Products to
a customer that is not a Protected Customer at a time when Distributor has in
inventory Products purchased pursuant to this Section 4.8, GIL shall purchase
such Products from Distributor at an amount equal to the Purchase Price paid by
Distributor, and Distributor shall sell such Product to GIL. GIL shall be
responsible for any freight charges for moving such Products from Distributor's
warehouse to the Customer's Prepared Site. The Purchase Price payable pursuant
to this Section 4.8 is based on a projected sale by Distributor at the retail
price. If any of such Products are sold by Distributor at the GSA Price to a
customer eligible for the GSA Price, GIL shall promptly pay Distributor an
amount equal to the excess of Distributor's Purchase Price for a retail sale and
over Distributor's Purchase Price for a GSA sale.
In the event that the payment of the three million dollars
($3,000,000) to be made pursuant to Section 4.8 of this Agreement is not
received by Georal by 5:30 P.M., New York City time on December 18, 2003, GIL,
Georal and Risi shall have the right to terminate this Agreement immediately on
written notice to Finx and Distributor. Finx and Distributor will not wire funds
subsequent to 5:30 P.M., New York City time on December 18, 2003 without the
consent of GIL, Georal, Risi or their counsel. In the event of such termination,
the relationship among the parties shall be governed by the Original Agreement.
As an additional license fee, Distributor shall pay to GIL or
Georal, as they may instruct Distributor, the sum of five hundred thousand
dollars ($500,000) not later than January 15, 2004 and a second payment of five
hundred thousand dollars ($500,000) not later than February 15, 2004. Finx shall
provide Distributor with the fund necessary to make this payment.
Payment Terms.
Distributor shall pay GIL for each Product purchased under this
Agreement, an amount equal to the List Price for such Products, less the
Applicable Percentage (the "Purchase Price"). Exhibit C to this Agreement sets
forth the List Prices which are effective as of the date of this Agreement. The
Purchase Price shall not, except as provided in Section 4.8 of this Agreement or
as otherwise agreed by the parties, include the costs of freight, insurance and
sales taxes, if any, and all other costs necessary to deliver the Products to
the Customer's Prepared Site as specified in Distributor's purchase order, all
of which costs shall be borne solely by Distributor or its customer.
Except as provided in Section 4.8 of this Agreement, Distributor
shall pay the Purchase Price for all Products purchased from GIL hereunder not
later than the thirty (30) days after receipt by Distributor of payment from its
customer. All payments shall be made in United States dollars.
GIL shall promptly notify Distributor, in writing, of any change
in the List Prices during the Term of this Agreement and any such change in List
Prices shall only be effective with respect to purchase orders issued by
Distributor sixty (60) or more days after the date of any such notification;
provided, however, than any reduction in List Price shall become effective
immediately and shall apply to pending orders.
Notwithstanding the foregoing or any other provision of this
Agreement to the contrary, in the event that GIL sells Products to any customer
at a price less than the List Prices, Distributor shall be entitled to purchase
such Products from GIL at any such lower price (the "Most Favored Nations
Price"). Notwithstanding the foregoing, the Most Favored Nations Price shall
only be available to Distributor with respect to purchase orders placed by
Distributor which are identical in quantity and kind to the purchase order of
the customer of GIL which was entitled to a purchase price less than the List
Prices. GIL will promptly notify Distributor of any circumstance in which it
sells Products at purchase prices less than the List Prices therefor.
In the event that Distributor receives a deposit in connection
with the order of any Product (other than a Product to be shipped by Distributor
from its inventory that has already been paid for), Distributor shall pay to GIL
two-thirds (2/3) of the deposit received by Distributor. Such payment will be
made within fifteen (15) days after Distributor's receipt of the deposit.
Representations and Warranties of the Parties.
GIL hereby represents and warrants to Distributor the following:
Exhibit 10 - Page 5
GIL is a corporation, duly organized, validly existing, and
in good standing under the laws of the State of Delaware and has all requisite
power and authority to own or lease its properties and carry on its business as
now conducted. GIL is an affiliate of Georal by virtue of the ownership and/or
control of both GIL and Georal by Risi.
All action on the part of GIL necessary for the
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, has been properly taken
and obtained by it and this Agreement constitutes a valid and legally binding
obligation of GIL enforceable in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency, reorganization, moratorium, or other
laws affecting generally the enforcement of creditors' rights and by general
principles of equity.
There is no action, suit, proceeding, or investigation
pending or, to the knowledge of GIL, threatened against GIL or Georal which in
any way relates to the validity of this Agreement or the right of GIL to enter
into, to consummate this Agreement and the transactions contemplated hereby.
The authorization, execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby will
not result in any violation or be in conflict with or constitute, with or
without the passage of time or giving of notice, a default under GIL's
certificate of incorporation or by-laws or any instrument, judgment, order,
writ, decree or agreement to which GIL, Risi or Georal is a party or by which
GIL, Risi or Georal is bound.
No consent, approval, order, authorization, registration,
qualification, license, permit, designation or declaration of, or other filing
with or notification to, any foreign and/or domestic federal, state or local
governmental authority or agency or any third party (including Georal) is
required in connection with the authorization, execution, delivery and
performance of this Agreement or the sale and distribution of the Products as
contemplated hereby.
By virtue of the Exclusive License, GIL is the sole and
exclusive world-wide licensee of all of the GIL Intellectual Property. To the
best of its knowledge, the GIL Intellectual Property does not infringe upon the
rights of any third party. All rights to the GIL Intellectual Property have been
transferred and assigned by Risi to GIL or Georal. On the date of the execution
of the Exclusive License, Risi was not insolvent and exclusively licensed such
rights to GIL, free and clear of all liens, claims and encumbrances whatsoever.
All rights to modifications, improvements, alterations or new products hereafter
created to, or with respect to, the Products, will be exclusively licensed to
GIL under the Exclusive License and no third party (other than Risi), shall have
any rights thereto. The Exclusive License, a copy of which is annexed hereto as
Exhibit A, shall be in full force and effect and not in default by either party
thereto, nor is there any event existing which, with or without the passage of
time, will constitute any default thereunder.
Neither Risi nor GIL has granted any third party any
distribution rights for the Products for any of the Protected Customers.
Except as set forth in this Section 6.1 or as otherwise
expressly provided in this Agreement, GIL has made no other representations or
warranties to Distributor in connection with this Agreement or the transactions
contemplated by this Agreement.
Finx and Distributor hereby jointly and severally represent and
warrant to GIL the following:
Each of Finx and Distributor is a corporation, duly
organized, validly existing, and in good standing under the laws of Delaware and
has all requisite power and authority to own or lease its properties and carry
on its business as now conducted.
All action on the part of each of Finx and Distributor
necessary for the authorization, execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby, has been
properly taken and obtained by it and this Agreement constitutes a valid and
legally binding obligation of Finx and Distributor enforceable in accordance
with its terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium, or other laws affecting generally the enforcement of
creditors' rights and by general principles of equity.
There is no action, suit, proceeding, or investigation
pending or, to the knowledge of Finx or Distributor, threatened against the Finx
or Distributor which in any way relates to the validity of this Agreement or the
right of Finx or Distributor to enter into or to consummate this Agreement and
the transactions contemplated hereby.
Exhibit 10 - Page 6
The authorization, execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby will
not result in any violation or be in conflict with or constitute, with or
without the passage of time or giving of notice, a default under Finx' or
Distributor's certificate of incorporation or by-laws or any instrument,
judgment, order, writ, decree or agreement to which Finx or Distributor is a
party.
Except as set forth in this Section 6.2 or as otherwise
expressly provided in this Agreement, neither Finx nor Distributor has made any
other representations or warranties to GIL in connection with this Agreement or
the transactions contemplated by this Agreement.
Finx and Distributor covenant that Distributor has and will
continue to have the ability to market the Products.
Risi hereby represents and warrants to Finx and Distributor as
follows:
Risi is the sole owner of the Patents and the other GIL
Intellectual Property, and has not and will not grant any right, title or
interest in, or grant any pledge, security interest or other encumbrance with
respect to, any of the Patents or other GIL Intellectual Property to any person
except the license to GIL pursuant to the Exclusive License or as otherwise
provided in this Agreement
All of the representations and warranties of GIL pursuant to
Section 6.1 of this Agreement are true and correct in all material respects.
Risi is the sole record and beneficial owner of all of the
capital stock of GIL and Georal, and no options, warrants, rights, convertible
securities or other instruments upon the exercise or conversion of which or
pursuant to the terms of which any class of equity security of GIL may be
issued.
Finx covenants that it will provide all funds necessary to enable
Distributor to carry out its obligations under this Agreement.
Books and Records, Inspection.
Each of GIL and Distributor shall maintain complete and accurate
books of account and records containing all information relating to purchases
and sales of Products and the List Prices thereof and service and maintenance
thereof. Such books and records shall be maintained at each of the parties'
principal place of business, or at such other location as each of the parties
shall notify the other. Finx and Distributor, on the one hand, and GIL, Georal
and Risi, on the other hand, shall have the right to inspect, examine and copy
and otherwise audit all books and records of the other party in order to verify
compliance with financial obligations under this Agreement. Such audit or
investigation may be conducted by the parties or their outside accounting or
consulting firm. Any such inspection shall be conducted at the expense of the
party conducting such inspection; provided, however, that if the inspection, it
is determined that the inspecting party is entitled to at least ten percent
(10%) more that the other party reported, the other party shall reimburse the
inspecting party for its expenses.
If the parties are not able to resolve the dispute relating to the
amount of money due one party from the other party within thirty (30) days after
the date a party gives the other party notice, or such longer period as they may
agree upon, the matter shall be submitted to binding arbitration in New York
City under the rules then obtaining of the American Arbitration Association. The
decision of the arbitrator(s) shall be final, binding and conclusive on all
parties and may be entered in any court having jurisdiction. The arbitrator(s)
shall have no power or authority to modify or amend any provisions of this
Agreement. The arbitrator(s) may, in his or their discretion, award costs and
fees and shall have the power to grant injunctive relief.
Product Warranties.
GIL represents and warrants to Distributor and to any customer
that Distributor or its resellers or subdistributors place Products, whether as
a sale or lease or otherwise, that the Products will operate in accordance with
the specifications for a period of one year from the date of installation of the
Products at the Customer's Prepared Site.
GIL will maintain in force and effect during the Term hereof, at
its cost, product liability insurance covering the Products sold or leased by
Distributor hereunder, in such amounts as GIL shall reasonably determine based
on
Exhibit 10 - Page 7
the nature of the risks. Any such insurance policy shall name Distributor and
the Protected Customer, as applicable, as loss payees. Upon request by
Distributor, GIL will furnish Distributor with a certificate of insurance or
other evidence of such insurance being in force and effect.
Infringement.
GIL will defend, at its expense, any action or proceeding (or
portion thereof) brought against Distributor based on an Indemnification Claim.
An Indemnification Claim shall mean any claim, action or proceeding (or portion
thereof) brought against Distributor or Finx based solely on a claim that the
Product, infringes on the proprietary rights of others. GIL will indemnify and
hold harmless Distributor, Finx and Distributor's customers from and against any
damages which are awarded by a judgment or court order, final beyond right of
review, against Distributor and any of its customers in such action which are
attributable to such an Indemnification Claim. GIL shall have the sole right to
control the defense of the action and to compromise or settle any claim.
If an Indemnification Claim is made against Distributor or Finx,
GIL shall have the right, in its discretion and at its sole cost and expense,
either to (a) make such modifications so that the infringing Product is not
infringing or (b) obtain for Distributor and its customer the right to continue
to use the Product.
In the event that Distributor or Finx shall receive notice of any
claimed infringement by any Product on the proprietary rights of any other
person or in the event that an action is commenced against the Distributor
alleging an Infringement Claim, Distributor or Finx shall give prompt written
notice thereof (promptness being based on the time when such party has actual
notice of any such claim or action) to GIL, and GIL shall defend the action as
provided in Section 9.1 of this Agreement. GIL shall not accept any settlement
that imposes liability not covered by this Section 9 or restrictions on
Distributor, without Distributor's prior written consent, which consent shall
not be unreasonably withheld or delayed. GIL will not be responsible for any
settlement it does not approve in writing. Distributor or Finx may participate
in the defense of any claim through its own counsel, and at its own expense.
The obligations of GIL pursuant to Section 9.1 of this Agreement
shall not apply if Distributor or any other person, including any customer,
shall have modified or caused the modification of the Product without the prior
written approval of GIL.
If Distributor shall become aware of an infringement by any person
on the proprietary rights of GIL, Distributor shall promptly advise GIL, and GIL
shall take such action, if any, against the alleged infringing party, as it, in
its sole discretion, deems appropriate. GIL shall pay all costs in prosecuting
such claim and shall be entitled to any awards which are granted or negotiated.
Issuance of Preferred Stock.
In consideration of the agreements of Risi and GIL and Georal,
which are owned by Risi, contained in this Agreement and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Finx will issue to Risi, on or as soon as practical after the
payment by Distributor pursuant to Section 4.8(a) of this Agreement, 5141.69
shares of Finx' Series C $1 Convertible Preferred Stock (the "Shares"), on
substantially the terms set forth on Exhibit C to this Agreement. Such shares
have been duly and validly authorized and, when issued pursuant to this
Agreement, will be duly and validly authorized and issued, fully paid and
non-assessable.
Risi understands that the issuance of the Shares is being made
only by means of this Agreement. Risi understands that Finx has not authorized
the use of, and Risi confirms that he is not relying upon, any other
information, written or oral, other than material contained in this Agreement
and the material which Finx has filed with the Securities and Exchange
Commission (the "Commission"). Risi has read and understands Finx' financial
statements which are included in Finx' filings with the Commission, is aware of
Finx' continuing losses, significant working capital deficiency, deficiency in
stockholders' equity and negative cash flow from operations, and that the
purchase of the Shares involves a high degree of risk. Furthermore, Risi
acknowledges that Finx has not made, and Risi is not relying in any manner upon,
any projections or forecasts of future operations.
Risi represents to Finx that he is an accredited investor within
the meaning of Rule 501 of the Commission under the Securities Act of 1933, as
amended (the "Securities Act") and he understands, and has been advised by
counsel as to, the meaning of the term "accredited investor." Risi further
represents that he has such knowledge and experience in financial and business
matters as to enable him to understand the nature and extent of the risks
involved in acquiring the Shares. Risi is fully aware that such investments can
and sometimes do result in the loss of the entire investment. Risi has
Exhibit 10 - Page 8
engaged his own counsel and accountants to the extent that he deems it
necessary. Risi is aware that Finx does not have sufficient shares of its common
stock, par value $.01 per share ("Finx Common Stock") available for issuance
upon conversion of the Shares, and that the ability of Risi to convert the
Shares into Finx Common Stock is subject to an amendment to Finx' certificate of
incorporation, all as set forth in Section 4 of the Statement of Designations
for the Series C Preferred Stock, which is attached as Exhibit D to this
Agreement. The Statement of Designation, when filed with the Secretary of State
of Delaware, will be in substantially the form of said Exhibit D.
Risi is acquiring the Shares pursuant to this Agreement for
investment and not with a view to the sale or distribution thereof, for his own
account and not on behalf of others; has not granted any other person any
interest or participation in or right or option to purchase all or any portion
of the Shares; is aware that the Shares are restricted securities within the
meaning of Rule 144 of the Commission under the Securities Act, and may not be
sold or otherwise transferred other than pursuant to an effective registration
statement or an exemption from registration; and understands and agrees that the
certificates for the Shares shall bear Finx' standard investment legend. Risi
understands that he has no registration rights with respect to the Shares. Risi
understands the meaning of these restrictions.
Risi will not transfer any Shares except in compliance with all
applicable federal and state securities laws and regulations, and, in such
connection, Finx may request an opinion of counsel reasonably acceptable to Finx
as to the availability of any exemption.
Risi represents and warrants that no broker or finder was involved
directly or indirectly in connection with Risi's acquisition of the Shares
pursuant to this Agreement. Risi shall indemnify Finx and hold it harmless from
and against any manner of loss, liability, damage or expense, including fees and
expenses of counsel, resulting from a breach of Risi's warranty contained in
this Section 10.6.
Risi shall have the registration rights set forth on Exhibit E to
this Agreement.
Finx covenants that it will solicit stockholder vote to approve
the amendment to its certificate of incorporation which will enable the Shares
to be converted into Finx Common Stock.
Finx covenants that it will not issue Series C Convertible
Preferred Stock to any person other than Risi without Risi's consent..
Events of Default and Termination.
The following occurrences shall constitute events of default under
this Agreement ("Events of Default"):
The failure of Distributor to pay the Purchase Price for all
Products purchased by Distributor under this Agreement, when due in accordance
with the provisions of this Agreement; provided that Distributor receives notice
thereof from GIL and does not cure such failure within thirty (30) business days
after receipt of such notice.
The breach by GIL or Distributor, as the case may be, of any
of their respective material representations, warranties, covenants or
obligations under this Agreement (other than as provided in Section 11.1(a) of
this Agreement), provided that the breaching party receives notice thereof from
the party claiming such breach and fails to cure any such breach within thirty
(30) days after such notice.
In the event of the occurrence of an Event of Default, GIL or
Distributor, as the case may be, shall have the right to institute an action to
recover any damages which may result therefrom and/or to exercise any other
legal or equitable rights or remedies provided for hereunder or otherwise
available under applicable law. Notwithstanding the foregoing, neither GIL nor
Distributor shall have the right to terminate this Agreement upon the occurrence
of any Event of Default, the sole right of either party to terminate this
Agreement being based upon and subject to the consummation of a written
instrument signed by both GIL and Distributor agreeing to such termination,
except for an Event of Default by Distributor relating to the failure by
Distributor to make payment required under this Agreement.
In the event of any termination of this Agreement, whether upon
the expiration of the Term or pursuant to this Section 11, Distributor shall
immediately discontinue all marketing, sales and promotional activities in
connection with Products, as well as all distribution and sale of Products and
all use of the GIL Intellectual Property, except that Distributor shall have a
period of up to nine (9) months after any such termination to market and sell or
lease all inventory of Products and to fulfill all purchase orders therefor
which were issued to Distributor on or prior to the date of any such
termination,
Exhibit 10 - Page 9
provided that Distributor fully pays the Purchase Price for such
Products as provided in this Agreement. Distributor will furnish GIL with
reports of all such sales.
If Finx fails to amend its certificate of incorporation in a
manner to enable the Shares to be converted into Finx Common Stock, Risi shall
have the right to terminate this Agreement and any other agreements between the
parties.
Manufacturing License.
GIL hereby grants to Distributor the full right and license to
manufacture (the "Manufacturing License"), including the right to sublicense the
manufacture of, Products, on and subject to the terms of this Section 12, and to
use the Patents in connection therewith; and Risi consents to the grant of the
Manufacturing License. The Manufacturing License shall include the right to
modify any Product and manufacture or have manufactured any Product so modified.
GIL agrees to provide to Distributor, as and when requested by
Distributor, with such Know-how and Know-how Documentation as GIL may deem
appropriate or as Distributor may, from time to time, reasonably request, in
order to enable Distributor or a sublicensee to manufacture Products. Such
material shall include the source code for the software incorporated in the
Product magnetically or optically stored and such supporting know-how
documentation as is necessary for a reasonably competent programmer to routinely
maintain such software. All drawings, blueprints, specifications, operating data
and other written information constituting know-how documentation shall be in
the English language and shall be copies of current drawings, blueprints,
specifications, operating data and other written information, and GIL shall, on
an ongoing basis, update the material required to be delivered pursuant to this
Section 12.2.
If requested by Distributor, GIL shall provide without charge up
to two days of training to Distributor or a sublicensee. Distributor or the
sublicensee shall pay GIL for its actual out of pocket cost for any training in
excess of the two days referred to in the preceding sentence.
At Distributor's request, GIL and Risi shall place the source code
for the software in escrow with GIL's attorney pursuant to an escrow agreement.
The escrow agreement shall be in a standard form of software escrow agreement.
If software is held in escrow pursuant to this Section 12.4, GIL shall update
the software as and when necessary to insure that the copy of the source code
which is held in escrow is the current source code for the software.
Notwithstanding any other provisions of this Section 12, the
Manufacturing License shall not become effective and GIL's obligations with
respect to the Manufacturing License shall not take effect until any one or more
of the following events occurs:
Distributor shall have placed orders for more than five thousand
(5,000) units of Product in any calendar year and GIL shall have failed to meet
this demand.
GIL shall have advised Distributor that it is unable to meet the
delivery schedule set forth on Distributor's purchase orders; provided that
Distributor shall have requested delivery dates which are reasonable based on
its existing and expected orders or commitments.
GIL shall have discontinued production of any Product or advised
Distributor or announced its intention to discontinue such production; provided,
however that the Product shall be a then-current Product for which Distributor
has a demand.
Any Product shall have failed to meet the specifications for such
Product, regardless of GIL's compliance with its warranty obligations and such
failure shall have continued on more than an isolated case basis.
If GIL, Risi or Georal shall consent to the appointment of a
receiver, trustee or liquidator of itself or of a substantial part of its or his
property, or shall admit in writing its or his inability to pay its or his debts
generally as they become due, or shall make a general assignment for the benefit
of creditors, or shall file a voluntary petition in bankruptcy, or an answer
seeking reorganization in a proceeding under any bankruptcy law (as now or
hereafter in effect) or an answer admitting the material allegations of a
petition filed against it or him in any such proceeding, or shall by voluntary
petition, answer or consent, seek relief under the provisions of any other now
existing or future bankruptcy or other similar law providing for the
reorganization or winding up of corporations, or an arrangement, composition,
extension or adjustment with its or their creditors, or shall, in a petition in
bankruptcy filed against it, him or them be adjudicated a bankrupt, or GIL or
Georal or their directors or a majority of its stockholders shall vote to
dissolve or liquidate such corporation.
Exhibit 10 - Page 10
If an involuntary petition shall be filed against the GIL,
Risi or Georal seeking relief against it or him under any now existing or future
bankruptcy, insolvency or other similar law providing for the reorganization or
winding up of corporations, or an arrangement, composition, extension or
adjustment with its or their creditors, and such petition shall not be vacated
or set aside within ninety (90) days from the filing thereof.
If a court of competent jurisdiction shall enter an order,
judgment or decree appointing, without consent of GIL, Risi or Georal, a
receiver, trustee or liquidator of it or him or of all or any substantial part
of its or his property or approving a petition filed against it or him seeking a
reorganization or arrangement under the federal bankruptcy laws or any other
applicable law or statute of the United States of America or any state thereof,
or any substantial part of its or his property shall be sequestered; and such
order, judgment or decree shall not be vacated or set aside within ninety (90)
days from the date of the entry thereof.
If, under the provisions of any law for the relief or aid of
debtors, any court of competent jurisdiction shall assume custody or control of
the GIL, Risi or Georal or of all or any substantial part of its or his property
and such custody or control shall not be terminated within thirty (30) days from
the date of assumption of such custody or control.
In the event that Distributor shall sell any Products
manufactured pursuant to the Manufacturing License, Distributor shall pay GIL a
royalty (the "Manufacturing Royalty") equal to twenty percent (20%) of the
applicable List Price on all such Products, based on collections by Distributor.
The Manufacturing Royalty shall be paid on a quarterly basis, based on
collections by Distributor during a calendar quarter, with payment being made
not later than the twentieth (20th) day following the end of each calendar
quarter. Each payment of the Manufacturing Royalty shall be accompanied by a
schedule setting forth the receipts during the quarter and the computation of
the Manufacturing Royalty.
No Manufacturing Royalty shall be paid on any sale until
Distributor shall have received payment of the full purchase price; provided,
however, that if Distributor shall have been unable to collect the full amount
of the sales price for the Product, the Manufacturing Royalty shall be a
fraction of the retail or GSA price, as the case may be, that the amount
collected bears to the retail or GSA price.
Financing.
In the event that Finx or Distributor introduces GIL or Georal to
a financing source(s) and the financing source provides equity or debt
financing, including equipment financing, to GIL or Georal which is accepted by
it during the Term of this Agreement, Finx shall receive a fee in an amount
mutually agreed upon between GIL and Finx, based on customary fees payable to
medium size investment banking firms, but in no event shall the fee be greater
than five percent (5%) of the first one million dollars ($1,000,000), four
percent (4%) of the second one million dollars ($1,000,000), three percent (3%)
of the third one million dollars ($1,000,000), two percent (2%) of the fourth
one million dollars ($1,000,000), and one percent (1%) of any consideration in
excess of four million dollars ($4,000,000),. Any such fee will be paid to Finx
simultaneously with GIL's or Georal's receipt of such financing proceeds. This
Section 13 shall apply to any affiliates of GIL, Georal or Risi that are engaged
in a business relating to the Products.
In the event that GIL undertakes an initial public offering of its
securities at any time during the Term of this Agreement, Finx shall have the
right, for a period of thirty (30) days from the date it receives notice of
GIL's intention to undertake such offering to introduce GIL to an underwriter on
terms acceptable to GIL.
Any financial consulting or similar services to be performed by
Finx or Distributor shall be performed pursuant to a separate agreement between
Finx and/or Distributor and GIL. The failure of the parties to enter into an
agreement pursuant to this Section 13 shall not be deemed a breach of this
Agreement.
Force Majeure. Neither party shall be liable for any failure or delays
to perform its obligations under this Agreement when such failure or delay,
directly or indirectly, is caused by or in any manner arises from circumstances
outside such party's control, including, without limitation, fires, floods,
accidents, riots, acts of God, war, acts of public enemies, governmental
interference, labor difficulties, industrial disputes, shortages of fuel, power,
materials or supplies or transportation delays; provided, however, that the
party failing to perform or delayed in its performance shall notify the other
party of such cause as soon as practicable.
Independent Contractors. In all matters relating to this Agreement,
Finx and Distributor, on the one hand, and Risi, GIL and Georal, on the other
hand, shall act as independent contractors, neither shall be the employee, joint
venturer, partner or agent of the other, and each shall assume any and all
liability for its own acts. Neither Finx and Distributor, on the one
Exhibit 10 - Page 11
hand, and Risi, GIL and Georal, on the other hand, shall have any authority to
assume or create obligations, express or implied, on behalf of the other party
or any subsidiary or affiliate of the other party, and neither party shall have
any authority to represent the other party as its agent, employee, partner or in
any other capacity.
Public Statements. Neither Finx and Distributor, on the one hand, and Risi,
GIL and Georal, on the other hand, shall release any information concerning this
Agreement or the transactions contemplated hereby which is intended for or may
result in the public dissemination thereof, without first obtaining the other
party's written consent prior to the release thereof. Nothing contained in this
Section 16 shall prohibit Finx from releasing any such information to the extent
required by applicable law or issuing any press release announcing this
Agreement or the transaction contemplated hereby.
Confidentiality.
Unless and to the extent required by applicable law, Distributor shall
not disclose any of the GIL Intellectual Property which is conspicuously marked
or otherwise designated in writing by GIL as "Confidential and Proprietary
Information," except as required in connection with Distributor's activities
under and in connection with this Agreement. Notwithstanding the foregoing,
Distributor shall not be under any such prohibition with respect to any
information or documentation concerning the GIL Intellectual Property which is
published or otherwise in the public domain other than as a result of
Distributor's breach of the aforementioned confidentiality covenant or which is
disclosed to Distributor by a person not having an obligation of confidentiality
to GIL or which is developed by Distributor independently of any GIL
Intellectual Property or which is disclosed by GIL without a confidentiality
restriction.
In the event that Distributor is, pursuant to, or required by,
applicable law, regulation or legal process, to disclose any of GIL's
Intellectual Property, Distributor will notify GIL promptly so that GIL may, at
its cost, seek a protective order or other appropriate remedy or, its sole
discretion, waive compliance with the terms of this Agreement. Distributor shall
not disclose any GIL Intellectual Property until the court has made a ruling. In
the event that no such protective order or other remedy is obtained, or in the
event that the disclosing party waives compliance with the terms of this Section
17, Distributor will furnish only that portion of the Confidential Information
which it is advised by counsel is legally required.
Right of First Refusal.
Risi agrees that he will not transfer any of the GIL Intellectual
Property or any shares of any class of capital stock of GIL or Georal (whether
presently owned by him or subsequently acquired by him) and GIL or Georal will
not issue shares of their capital stock except in compliance with this Section
18. Each of GIL and Georal agrees that it will not transfer all or substantially
all of its business and assets or merge or consolidate with or into any
corporation or other entity or transfer any of its rights relating directly or
indirectly to the GIL Intellectual Property or the Products or permit any
transfer of its capital stock except in compliance with this Section 18. The
provisions of this Section 18 will also apply to any affiliate of Risi, GIL or
Georal that is engaged in a business related to the Products.
As used in this Section 18:
The term "transfer," when used as a verb, shall mean to transfer,
convey, assign, license (other than pursuant to the Exclusive License or this
Agreement), encumber or otherwise dispose of in any manner, whether voluntarily
or involuntarily, and whether for consideration or for no consideration. The
word "transfer," when used as a noun, shall have the related meaning.
The term "Covered Transfer" shall mean a transfer described in
Section 18.1 of this Agreement other than a transfer or issuance to a Permitted
Transferee; provided, however, the Permitted Transferee agrees in writing, prior
to his or her receipt of the securities, to be subject to the provisions of this
Section 18 with the same force and effect as if the Permitted Transferee were a
signatory to this Agreement whose obligations were limited to this Section 18
and the definition of Permitted Transferee.
The term "Subject Assets" shall mean the GIL Intellectual
Property, the stock of GIL or Georal, all or part of the assets of GIL or
Georal, or the rights relating to the Products, as the case may be. With respect
to a proposed merger or consolidation, the Subject Assets shall mean the
business and assets of GIL and/or Georal, as the case may be.
A merger shall include an acquisition or disposition of all or
substantially all of the assets of an entity, whether structured as a merger,
consolidation or purchase or sale of assets or otherwise.
Exhibit 10 - Page 12
In the event that Risi, GIL or Georal or any of their affiliates
whose business related to the Products, as the case may be (the "Transferor"),
proposes to effect or engage in a Covered Transfer, the Transferor shall give
Finx notice of the terms of the proposed Covered Transfer, which notice shall be
accompanied by a copy of a bona fide offer which sets forth the terms of the
proposed Covered Transfer, shall identify the proposed transferee and include
such information concerning the proposed transferee's background and financial
condition as Finx may reasonably request. Finx shall have the option, (the "Finx
Option") exercisable during the sixty (60) day period (the "Finx Option Period")
following the date on which such notice is received by Finx, to purchase all,
and not less than all, of the Subject Assets, on same terms as are set forth in
the bona fide offer, except as provided in Section 18.4 of this Agreement. The
Finx Option may be exercised by Finx or by an affiliate of Finx prior to the
expiration of the Finx Option Period and shall be exercisable by notice to the
Transferor stating that Finx or such affiliate elects to purchase all of the
Subject Assets. Payment or, if the bona fide offer contemplates an installment
transfer, the initial payment, if any, for the Subject Assets shall be made at a
closing to be held within twenty (20) business days after the expiration of the
Finx Option Period or such later date as is specified in the bona fide offer. If
the bona fide offer provides for payment in installments, the balance of the
purchase price shall be paid in installments as provided in the bona fide offer.
In the event that Finx or its affiliate fails to exercise the
Finx option by 5:30 P.M., New York City time, on the last day of the Finx Option
Period, the Transferor may, during the one hundred twenty (120) day period
commencing on the day following the earlier of (x) the last day of the Finx
Option Period or (y) the date that Finx advises the Transferor that it does not
intend to exercise the Finx Option, transfer the Subject Assets to the
transferee named in the bona fide offer at a price and on terms which are not
more favorable to the transferee than those set forth in the bona fide offer. If
the Transferor proposes to change the price or terms of the Covered Transfer to
a price or terms that are more favorable to the transferee or if the Transferor
shall not have completed the Covered Transfer prior to the expiration of such
one hundred twenty (120) day period, the Transferor shall reoffer the Subject
Assets to Finx on the revised terms in accordance with the provision of this
Section 18.
In any transfer to Finx or its affiliate upon exercise of the Finx
Option, the Transferor shall make representations and warranties with respect to
his or its ownership of the Subject Assets, the absence of liens or other
encumbrances on the Subject Assets, the valid, binding and enforceable nature of
the agreement, that all necessary corporate or other approval necessary to
effect the transfer to Finx or its affiliate has been taken and any other
representations and warranties as are contained in the bona fide offer.
If the Covered Transfer is a merger or consolidation or other
transaction pursuant to which the stockholders of GIL or Georal are to receive
shares of capital stock of another corporation or equity interests of another
entity, and if Finx or its affiliate exercises the Finx Option, it may deliver
to the stockholders of GIL or Georal, as the case may be, either cash or shares
of Finx Common Stock, in either case having a value equal to the value of the
securities to be delivered to the stockholders of GIL or Georal, as the case may
be, pursuant to the bona fide offer. GIL or Georal shall have the right to
determine whether payment pursuant to this Section 18.5 and Section 18.7 of this
Agreement shall be in cash or shares of Finx Common Stock, provided, however,
that if GIL or Georal elects that payment be made in cash, Finx shall have the
right to revoke is exercise of its right of first refusal.
The value of the Finx Common Stock shall be the average closing
bid price for the Finx Common Stock for the twenty (20) trading days ending on
the second day prior to the date that Finx or its affiliate exercises the Finx
Option. The value of the any publicly-traded securities to be received by any
Transferor in any proposed Covered Transfer shall be the average closing bid
price for such securities for the twenty (20) trading days ending on the second
day prior to the date that the Transferor gives Finx notice of the proposed
Covered Transfer pursuant to Section 18.3 of this Agreement. The value of any
securities which are not publicly traded shall, for purposes of this Section
18.6 and Section 18.7 of this Agreement, be determined by agreement of the
parties; provided, that if the parties shall be unable to agree, the valuation
shall be determined by as follows: Each party shall appoint one qualified
appraiser and the two appraisers shall appoint a third. The value shall be the
average of the three valuations provided that no valuation is more than ten
percent (10%) more or less than the valuation by at least one other appraiser. A
qualified appraiser shall be a persons having experience in valuing privately
owned companies. Each party shall pay the fees and expenses of its appraiser and
the parties shall each pay fifty percent (50%) of the fees and expense of the
third appraiser.
If the proposed Transfer is a merger in which GIL or Georal is the
surviving entity, the purchase price payable by Finx or its affiliate upon
exercise of the Finx Option, shall be the value of the entity which is being
merged into GIL or Georal, determined as provided in Section 18.6 of this
Agreement, which may be paid in cash or in shares of Finx Common Stock, as GIL
or Georal shall determine.
Exhibit 10 - Page 13
The stock certificates representing the shares of capital stock of
GIL and Georal (other than shares of GIL which are owned by Finx) shall bear the
following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL IN FAVOR OF THE FINX GROUP, INC. PURSUANT TO AN
AMENDED AND RESTATED EXCLUSIVE DISTRIBUTION AGREEMENT DATED DECEMBER , 2003,
BY AND AMONG THE FINX GROUP, INC., SECURED PORTAL SYSTEMS, INC., ALAN J.
RISI, GIL SECURITY SYSTEMS, INC., AND GEORAL INTERNATIONAL, LTD., A COPY OF
WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE ISSUING CORPORATION.
Risi, GIL and Georal jointly and severally represent and warrant
that, except for shares of GIL owned by Finx, Risi is the only holder of any
class of capital stock of either GIL or Georal and that there are not
outstanding any options, warrants, rights or convertible debt or equity
securities or agreements or understandings upon the exercise or conversion of
which or pursuant to the terms of which additional shares of any class of
capital stock of GIL or Georal may be issued.
Neither GIL nor Georal shall issue or transfer any shares of any
class of capital stock except in compliance with this Section 18.
Miscellaneous.
Sole and Entire Agreement. This Agreement, including the Exhibits
hereto, constitutes the sole and entire agreement between the parties hereto
with respect to the subject matter hereof and supersedes all prior agreements,
representations, warranties, statements, promises, information, arrangements and
understandings, whether oral or written, express or implied, between the parties
hereto with respect to the subject matter hereof and may not be changed or
modified except by an instrument in writing signed by the party to be bound
thereby which expressly refers to this Agreement and states that it is a
modification or waiver. No course of conduct or dealing or trade usage or custom
or course of performance by the parties hereto shall constitute or be relied
upon as a modification, supplement, or waiver of any provision of this
Agreement. This Agreement has been subject to the mutual consultation,
negotiation and agreement of the parties hereto and shall not be construed for
or against any party hereto on the basis of such party having drafted this
Agreement.
Brokers. The parties hereto each agree and represent and warrant
to the other that no broker or finder was in any way instrumental or had any
part in bringing about this transaction. Each of the parties hereto hereby
agrees to defend, indemnify and hold the other harmless from and against any
loss, liability, claim, cost or expense (including reasonable counsel fees)
resulting from any claim that may be made against the other by any broker,
finder or other person or entity claiming a commission, fee, or other
compensation by reason of this transaction based upon such indemnifying party's
acts or omissions.
Notices. All notices provided for in this Agreement shall be in
writing signed by the party (or his counsel named below) giving such notice, and
delivered personally or sent by overnight courier, mail or messenger against
receipt thereof or sent by registered or certified mail, return receipt
requested, or by facsimile transmission or similar means of communication if
receipt is confirmed by the recipient or if transmission of such notice is
confirmed by mail as provided in this Section 19.3. Notices shall be deemed to
have been received on the date of personal delivery or receipt of telecopy.
Notices shall be sent to the parties at the following addresses:
If to Risi, GIL or Georal: If to Distributor or Finx:
------------------------- -------------------------
c/o GIL Security Systems, Inc. c/o The Finx Group, Inc.
150-38 12th Avenue 21634 Club Villa Terrace
Whitestone, NY 11357 Boca Raton, FL 33433
Attn: Mr. Alan J. Risi Attn: Mr. Lewis S. Schiller,
Fax: (718) 767-7909 President and CEO
Fax: (561) 447-9896
with a copy to: with a copy to:
-------------- --------------
Edmond J. Pryor, Esq. Esanu Katsky Korins & Siger, LLP
1925 Williamsbridge Road 605 Third Avenue
Bronx, New York 10461 New York, NY 10158
Fax: (718) 829-0032 Attn: Asher S. Levitsky P.C.
Fax: (212) 716-3338
Exhibit 10 - Page 14
Any party may, by like notice, change the address, person or fax
number to which notice shall be sent and the name of counsel to such party.
Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this Agreement is intended to confer upon any
person or entity, any rights, benefits, obligations, remedies or liabilities
under or by reason of this Agreement.
Waiver. No waiver of any provision of this Agreement or of any
breach thereof shall be effective unless in writing and signed by the party to
be bound thereby. The waiver by either party hereto of a breach of any provision
of this Agreement, or of any representation, warranty, obligation or covenant in
this Agreement by the other party hereto, shall not be construed as a waiver of
any subsequent breach or of any other provision, representation, warranty,
obligation or covenant of such other party, unless the instrument of waiver
expressly so provides.
Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be performed entirely within such State without regard to principles
of conflict of laws. Each party hereby (a) irrevocably consents and agrees that
any legal or equitable action or proceeding arising under or in connection with
this Agreement or any document or instrument delivered with respect to this
Agreement, including an action to compel arbitration pursuant to Section 7.2
hereof or to enforce any arbitration award, shall be brought exclusively in any
federal or state court in the County of New York, State of New York, (b) agrees
that any process in any action commenced in such court under this Agreement may
be served upon him either (i) personally, by certified or registered mail,
return receipt requested, or by an overnight courier service which obtains
evidence of delivery, with the same full force and effect as if personally
served upon him in New York City or (ii) any other method of service permitted
by law, and (c) waives any claim that the jurisdiction of any such tribunal is
not a convenient forum for any such action and any defense of lack of in
personam jurisdiction with respect thereto.
Assignment. This Agreement shall not be assigned by any party
without the prior consent of GIL or Distributor, as the case may be, except in
connection with a merger or consolidation of a party or the sale by a party of
all or substantially all of its business and assets. Any assignment contrary to
the terms hereof shall be null and void and will not confer any rights or
benefits upon the assignee thereof.
Exclusive License. The Exclusive License will not be amended,
modified, transferred or assigned, nor will any rights of Risi or GIL thereunder
be encumbered at any time during the Term of this Agreement without the written
consent of Distributor.
Further Assurances. The parties hereto hereby agree that, at any
time and from time to time after the date hereof upon the reasonable request of
the other party hereto, they shall do, execute, acknowledge and deliver, or
cause to be done, executed, acknowledged and delivered, such further acts,
deeds, assignments, transfers, conveyances, and assurances as may be reasonably
required to more effectively consummate this Agreement and the transactions
contemplated thereby or to confirm or otherwise effectuate the provisions of
this Agreement.
Expenses. Each party hereto represents and warrants to the other
that it has been represented by counsel in connection with the negotiation,
preparation, and consummation of this Agreement. Except as expressly provided in
this Agreement, each of the parties hereto shall bear all of its respective
costs and expenses incurred in connection with the negotiation, preparation,
execution, consummation, performance and/or enforcement of this Agreement,
including, without limitation, the fees and disbursements of their respective
counsel, financial advisors and accountants. Notwithstanding the foregoing, in
the event of any action or proceeding instituted by either party hereto to
enforce the provisions of this Agreement and one party prevails on substantially
all of the matters in dispute, the court may, in its discretion, award the party
prevailing therein reimbursement by the other party of the legal costs and
expenses incurred by the prevailing party in connection therewith.
Counterparts. This Agreement may be executed in one or more
counterparts, each of which, when executed and delivered, shall be deemed an
original, but all of which when taken together, shall constitute one and the
same instrument.
Headings. The headings used in this Agreement have been used for
convenience of reference only and are not to be considered in construing or
interpreting this Agreement.
Partial Invalidity. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision(s) shall be
excluded from this Agreement and the balance of this Agreement shall remain in
full force and effect.
Exhibit 10 - Page 15
Cumulative Remedies. Unless expressly provided to the contrary, no
remedy set forth in this Agreement is exclusive of any other available remedy or
remedies, whether legal or equitable, but each remedy is cumulative and in
addition to every other right or remedy provided under this Agreement or now or
hereafter existing at law or in equity. Either party hereto may pursue its
rights and remedies concurrently or in any sequence and no exercise of one right
or remedy shall be deemed to be an election of remedies.
Grammar. Unless the context of this Agreement clearly requires
otherwise, the plural includes the singular, the singular includes the plural,
the part includes the whole, "including" is not limiting, and "or" has the
inclusive meaning of the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder" and other similar terms in this Agreement refer to this
Agreement as a whole and not exclusively to any particular provision of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE FINX GROUP, INC.
By: ____________________________________
Lewis S. Schiller, President and CEO
SECURED PORTAL SYSTEMS, INC.
By: ____________________________________
Lewis S. Schiller, President and CEO
------------------------------------
Alan J. Risi
GIL SECURITY SYSTEMS, INC.
By: ____________________________________
Alan J. Risi, President and CEO
GEORAL INTERNATIONAL, LTD.
By: ____________________________________
Alan J. Risi, President and CEO
Exhibit 10 - Page 16
Exhibit A
Exclusive License
[to be supplied]
Exhibit 10 - Page 17
Exhibit B
Protected Customers
Government Agencies
United States Treasury Department, including the Federal Reserve Bank and all
branches thereof
United States Immigration and Naturalization Service and all customs facilities
United States Department of Home Land Security and any division of
United States Central Intelligence Agency and all other United States Government
intelligence agencies, including but not limited to the United States National
Security Agency, United States Defense Intelligence Agency
United States Department of Defense, including the Navy, Air Force, Army and
Marines and all defense and military facilities, bases and equipment, and all
defense contractors and subcontractors.
United States Justice Department, including the Federal Bureau of Investigation
and all United States Federal Courts, and all state and local courts US Marshals
United States Department of State, including all United States Embassies.
United States Department of Energy, including all laboratories and other
facilities managed by such department
All other departments, agencies and commissions of the United States and
legislative and judicial bodies, departments, agencies or commissions.
The Government of Israel and all cities, regions, departments, agencies,
committees, cities, including all military and defense organizations,
facilities, bases and equipment and all defense contractors and subcontractors
All other foreign governments and all cities, regions, departments, agencies,
committees, cities, including all military and defense organizations,
facilities, bases and equipment and all defense contractors and subcontractors
Classes of Customers
All department stores and retail stores located in the United States, including
retail and department stores located outside of the United States if the chain
has a significant presence in the United States (i.e., stores in at least two
major cities in the United States).
All convenience stores that are associated with the National Association of
Convenience Stores ("NACS").
All domestic and foreign casinos
All domestic and foreign banks, insurance companies, brokerage and investment
banking firms, mutual funds organizations and other financial institutions
(other than (i) Deutsche Bank, Paine Weber, Citibank, State Street Bank, and UBS
Warburg and (ii) affiliates of the financial institutions named in (i),
including affiliates that are banks, insurance companies, brokerage and
investment banking firms and mutual funds organizations)
All domestic and foreign malls
All domestic and foreign energy departments and utilities, including power
plants, powered by any energy source
All domestic and foreign telephone, long-distance, wireless and other
communications companies and their lines and facilities
All domestic and foreign stadiums and other athletic facilities or arenas and
concert or music halls and theaters and entertainment facilities
All domestic and foreign office buildings, manufacturing plants, hotels and high
rise buildings
All domestic and foreign airports and airport or transportation authorities and
manufactures of aircraft and aircraft equipment
Exhibit 10 - Page 18
All domestic and foreign schools, universities or other education centers and
facilities
All foreign courts, prisons, jails and prison systems or any correctional
facility
All domestic and foreign ground, air, rail, sea or other transportation centers,
facilities, terminals, stations or systems, including the authorities, whether
governmental, quasi-governmental, private or otherwise, that operate or manage
any of the foregoing and the equipment, including planes, trains, boats, ships,
busses, used by them.
Corporations and other Entities
NCR Corp.
Sun Microsystems
Northrop Grumman
Lockheed
Boeing
Unisys
Bechtel
Mitre Corp.
Raytheon
Diebold
Hersh Electronics
Curtis Wright
Any domestic and foreign corporation or other business entity whose revenue is
in excess of seven hundred fifty million dollars ($750,000,000), including any
affiliates of any such entities
Exhibit 10 - Page 19
Exhibit C
Retail Prices and GSA Prices
Exhibit 10 - Page 20
Exhibit D
Statement of Designation for Series C $1 Convertible Preferred Stock
The designation of, the number of shares constituting, and the rights,
preferences, privileges and restrictions relating to, the Series C $1
Convertible Preferred Stock are as follows:
1. Designation and Number of Shares. The designation of this series of
five thousand one hundred forty two (5,142) shares of preferred stock, par value
$.01 per share ("Preferred Stock"), created by the Board of Directors of the
Corporation pursuant to the authority granted to it by the certificate of
incorporation of the Corporation is "Series C $1 Convertible Preferred Stock,"
which is hereinafter referred to as the "Series C Preferred Stock." In the event
of the conversion of shares of Series C Preferred Stock into this Corporation's
common stock, par value $.01 per share ("Common Stock"), pursuant to Section 4
of this Statement of Designations, or in the event that the Corporation shall
acquire and cancel any shares of Series C Preferred Stock, the shares of Series
C Preferred Stock so converted or otherwise acquired and canceled shall have the
status of authorized but unissued shares of Preferred Stock, without designation
as to series until such stock is once more designated as part of a particular
series by the Corporation's Board of Directors, and the number of authorized
shares of Series C Preferred Stock shall be reduced by the number of shares so
converted or otherwise acquired and canceled. In addition, if the Corporation
does not issue the maximum number of shares of Series C Preferred Stock, the
Corporation may, from time to time, by resolution of the Board of Directors,
reduce the number of shares of Series C Preferred Stock authorized, provided,
that no such reduction shall reduce the number of authorized shares to a number
which is less than the number of shares of Series C Preferred Stock then issued
or reserved for issuance. The number of shares by which the Series C Preferred
Stock is reduced shall have the status of authorized but unissued shares of
Preferred Stock, without designation as to series, until such stock is once more
designated as part of a particular series by the Corporation's Board of
Directors. The Board of Directors shall cause to be filed with the Secretary of
State of the State of Delaware such certificate as shall be necessary to reflect
any reduction in the number of shares constituting the Series C Preferred Stock,
and, at such time as all of the shares of Series C Preferred Stock have been
converted or otherwise acquired by the Corporation, a certificate reflecting the
termination of the Series C Preferred Stock as a separate series of Preferred
Stock. The Series C Preferred Stock is on a parity with the Company's Series A
4% Preferred Stock and the Series B $8 Voting Convertible Redeemable Preferred
Stock as to dividends and upon voluntary or involuntary liquidation, dissolution
or winding up.
2. Dividend Rights. The holders of the Series C Preferred Stock shall
be entitled to receive, out of funds of this Corporation legally available
therefor, a dividend per share of Series C Preferred Stock equal to $1.00 (the
"Annual Dividend") before dividends are payable with respect to any shares of
Common Stock or any shares of any other class or series of capital stock of the
Corporation which is junior to the Series C Preferred Stock as to dividends. The
Annual Dividend shall be payable on December 31 of each year, commencing
December 31, 2004 (the "Dividend Payment Date"), to holders of Series C
Preferred Stock of record on December 15th of such year. Notwithstanding the
foregoing, if, on the Dividend Payment Date, the Corporation does not have
sufficient cash to enable it to pay the Annual Dividend, after establishing such
reserves as the Board of Directors deems necessary for the Corporation's
business, the Corporation shall defer payment of such dividend until it has
sufficient available cash to enable it to make such payment and to pay any
dividends on any other class or series of capital stock which is on a parity
with the Series C Preferred Stock as to dividends. The Corporation shall not be
required to incur debt in order to pay the Annual Dividend. The full amount of
the Annual Dividend shall be deemed to accrue on the applicable Dividend Payment
Date.
3. Voting Rights.
(a) Except as otherwise provided by law or this Statement of
Designations, the holder of each share of Series C Preferred Stock shall have no
voting rights.
(b) The vote of the holders of a majority of the outstanding
shares of Series C Preferred Stock shall be required for any amendment to this
Statement of Designations.
Exhibit 10 - Page 21
(c) If the vote of the holders of the Series C Preferred Stock is
required in connection with any merger or consolidation or a sale of all or
substantially all of the Corporation's business and assets, the holders of the
Series C Preferred Stock shall vote with the holders of the Common Stock (and
any other classes or series of capital stock that have similar voting rights) on
an "as-if converted" basis.
(d) The separate vote of the holders of the Series C Preferred
Stock shall not be required to increase or decrease the number of authorized
shares of Preferred Stock.
(e) If the holders of the Series C Preferred Stock shall be
entitled to vote as a class, each share of Series C Preferred Stock shall be
entitled to one vote, and the consent of the holders of the Series C Preferred
Stock may be given at a meeting of the holders of the Series C Preferred Stock
or by a written consent of the holders of a majority of the outstanding shares
of Series C Preferred Stock.
(f) The Corporation may create other series of Preferred Stock or
capital stock which may be senior to, junior to or on a parity with the Series C
Preferred Stock as to dividends or on voluntary or involuntary dissolution,
liquidation or winding up without the consent of the holders of the Series C
Preferred Stock.
4. Conversion into Common Stock.
(a) (i) Each holder of the Series C Preferred Stock will have
the right, at any time and from time to time from and after, but not before, the
Availability Date, as hereinafter defined, to convert any shares of Series C
Preferred Stock into shares of Common Stock at the Conversion Rate, as
hereinafter defined.
(ii) The "Availability Date" shall mean the date on which a
certificate of amendment to the Company's certificate of incorporation is filed
with the Secretary of State of the State of Delaware provided that such
certificate of amendment either
(A) increases the number of authorized shares of
Common Stock to a number which is not less than the total number of
Fully-Diluted Shares, as hereinafter defined, and the par value per share is
reduced to $.001 per share, or
(B) effects a combination of shares or otherwise
effects a reverse split as a result of which the number of authorized shares of
Common Stock is not less than total number of Fully-Diluted Shares (after giving
effect to such combination of shares) and the par value per share of Common
Stock is not increased as a result thereof.
(iii) The number of "Fully-Diluted Shares" shall be the
sum of:
(A) The number of issued and outstanding shares if
Common Stock; plus
(B) All shares of Common Stock which are issuable upon
the exercise or conversion of all outstanding rights, warrants, convertible debt
or equity securities or other securities, including the shares issuable upon
conversion of the Series C Preferred Stock, plus
(C) All shares authorized for issuable pursuant to any
equity incentive plan, excluding any shares of Common Stock included pursuant to
clause (B); plus
(D) Any shares of Common Stock which are issuable
pursuant to any agreements not otherwise covered in Sections 4(a)(iii)(A), (B)
and (C) of this Statement of Designations.
(iv) The "Conversion Rate" shall mean the number of shares
of Common Stock issuable upon conversion of one (1) share of Series C Preferred
Stock. The Conversion Rate shall be one hundred thousand (100,000), subject to
adjustment as provided in Section 4(c) of this Statement of Designations.
Exhibit 10 - Page 22
(v) The Company shall prepare and file with the Securities
and Exchange Commission an information statement or proxy statement relating to
an amendment to the Company's certificate of incorporation which effects one of
the changes described in Section 4(a)(ii)(B) of this Statement of Designations,
and use its commercially reasonable efforts to obtain stockholder approval
thereof.
(b) Conversion of the Series C Preferred Stock shall be effected
by surrender of the certificate representing the shares of Series C Preferred
Stock being converted to the Corporation's transfer agent, or, if none shall
have been appointed, to the Corporation, together with the form of notice of
election to convert as may be provided from time to time by the Corporation.
Shares of Series C Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of the surrender for
conversion of the certificate therefor, together with the form of notice of
election provided by the Corporation duly signed by the holder thereof, and the
person or persons entitled to receive shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock as of such time. As promptly as practicable on or after the
conversion date, the Corporation or its transfer agent shall issue and shall
deliver a certificate or certificates for the number of shares of Common Stock
issuable upon such conversion to the person or persons entitled to receive the
same.
(c) The Conversion Rate shall be subject to adjustment as follows:
(i) In case the Corporation shall, after the date the
Certificate of Designation of which this Statement of Designations is a part is
filed with the Secretary of State of the State of Delaware, (A) pay a dividend
or make a distribution on its shares of Common Stock in shares of Common Stock,
(B) subdivide, split or reclassify its outstanding Common Stock into a greater
number of shares, (C) effect a reverse split or otherwise combine or reclassify
its outstanding Common Stock into a smaller number of shares, or (D) issue any
shares by reclassification of its shares of Common Stock, the Conversion Rate in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted to reflect, in accordance with generally accepted
accounting principles, such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any event
listed in this Section 4(c)(i) shall occur.
(ii) The Corporation may retain a firm of independent
public accountants of recognized standing selected by the Board of Directors
(who may be the regular accountants employed by the Corporation) to make any
computation required by Section 4(c)(i) of this Statement of Designations, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
(iii) In the event that at any time, as a result of an
adjustment made pursuant to Section 4(c)(i) of this Statement of Designations,
the holder of shares of Series C Preferred Stock thereafter shall become
entitled to receive any shares of the Corporation, other than Common Stock,
thereafter the number of such other shares so receivable upon conversion of
shares of Series C Preferred Stock shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section 4.
(iv) In addition to the adjustments provided for in Section
4(c)(i) of this Statement of Designations, the Corporation may modify the
Conversion Rate in a manner which will increase the number of shares of Common
Stock issuable upon conversion of the Series C Preferred Stock if the
Corporation believes that such adjustment is necessary or desirable in order to
avoid adverse federal income tax consequences to the holders of the Common
Stock.
(v) Whenever any adjustment is required by the provisions
of Section 4(c)(i) of this Statement of Designations, the Corporation shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjustment and the adjusted Conversion Rate, setting
forth in reasonable detail the facts requiring such adjustment. Each such
officer's certificate shall be made available at all reasonable times for
inspection by any holder of shares of Series C Preferred Stock, and the
Corporation shall,
Exhibit 10 - Page 23
forthwith after each such adjustment, mail a copy of such certificate by first
class mail to the holder of Series C Preferred Stock at such holders' addresses
set forth in the Corporation's books and records.
(d) In case:
(i) the Corporation shall pay any dividend or make any
distribution upon Common Stock (other than a regular cash dividend payable out
of retained earnings or cash surplus); or
(ii) the Corporation shall offer to the holders of Common
Stock for subscription or purchase by them any shares of any class or any other
rights, or
(iii) any reclassification of the capital stock of the
Corporation, consolidation or merger of the Corporation with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Corporation to another corporation, or voluntary or
involuntary dissolution, liquidation or winding up of the Corporation shall be
effected;
then in any such case, the Corporation shall cause to be mailed by first class
mail to the record holders of Series C Preferred Stock at least ten (10) days
prior to the date specified in (A) and (B) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (A) a record is to be taken for the purpose of such dividend, distribution
or rights, or (B) such reclassification, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(e) In case of any consolidation or merger of the Corporation into
another corporation (other than (i) a merger in which merger the Corporation is
the continuing corporation or (ii) a merger intended primarily to change the
Corporation's jurisdiction of incorporation), each share of Series C Preferred
Stock shall, immediately prior to the effective time of such merger or
consolidation, automatically be converted into the number of shares of Common
Stock as are issuable upon such conversion based on the Conversion Rate in
effect immediately prior to the effective time of such transaction.
(f) No fractional shares or script representing fractional shares
shall be issued upon the conversion of shares of Series C Preferred Stock. If,
upon conversion of any shares of Series C Preferred Stock, any holder would,
except for the provisions of this Section 4(f), be entitled to receive a
fractional share of Common Stock, then the number of shares of Common Stock
issuable upon such conversion shall be rounded up to the next higher whole
number of shares.
(g) From and after the Availability Date, the Corporation shall at
all times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock the full number of shares of Common Stock
then issuable upon the conversion of all shares of Series C Preferred Stock then
outstanding.
(h) The Common Stock issuable upon conversion of the Series C
Preferred Stock shall, when so issued, be duly and validly authorized and
issued, fully paid and non-assessable.
5. No Right of Redemption. The Corporation shall have no right to redeem
the Series C Preferred Stock.
6. Liquidation Rights.
(a) In the event of the Liquidation of the Corporation, as
hereinafter defined, whether voluntary or involuntary, holders of the Series C
Preferred Stock shall be entitled to receive out of the assets of the
Corporation, after payment of any preferences which are payable to the holders
of any class or series of capital stock which is senior to the Preferred Stock
upon liquidation, dissolution or winding up, an amount equal to $.01 per share
plus all accrued and unpaid dividends, before any payment or distribution upon
dissolution, liquidation or winding up shall be made with respect to the Common
Stock
Exhibit 10 - Page 24
and any other class or series of capital stock ranking junior to Series C
Preferred Stock as to such payment or distribution, and after all such payments
or distributions have been made on any series or class of capital stock ranking
senior to the Series C Preferred Stock as to such payment or distribution. After
payment of the preference set forth in this Section 6(a), the holders of the
Common Stock shall be entitled to one cent ($.01) per share (the "Common
Payment"). After payment of the Common Payment, the holders of the Series C
Preferred Stock shall participate with the holders of the Common Stock and any
other classes or series of capital stock that have similar participation rights,
as if the Series C Preferred Stock, such other classes or series of capital
stock and the Common Stock were a single class of capital stock with each share
of Series C Preferred Stock being deemed to be the number of shares of Common
Stock issuable upon conversion of the Series C Preferred Stock on the date of
the Liquidation and each share of each of such other classes or series of
capital stock being deemed to be the number of shares of Common Stock issuable
upon conversion of such class or series on the date of Liquidation.
(b) The term "Liquidation" shall mean any liquidation, dissolution
or winding-up of the Corporation or sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property and assets of the Corporation, except that a
Liquidation shall not include (i) any sale, conveyance, exchange or transfer if
the vote of the holders of the Series C Preferred Stock is either not required
or is required and the transaction is approved as provided in Section 3(c) of
this Statement of Designations, (ii) a merger or consolidation regardless of
whether the Corporation is the surviving entity.
(c) In the event the assets of the Corporation available for
distribution to the holders of shares of Series C Preferred Stock upon
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to Section 6(a) of this Statement of Designations,
no such distribution shall be made on account of any shares of any other class
or series of capital stock of the Corporation ranking on a parity with the
shares of Series C Preferred Stock upon such dissolution, liquidation or winding
up unless proportionate distributive amounts shall be paid on account of the
shares of Series C Preferred Stock and such other parity shares, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
7. Notice. The Corporation shall treat the registered holder of any
shares of Series C Preferred Stock as the absolute owner thereof
(notwithstanding any notations of ownership or writing thereon made by anyone
other than a duly authorized officer of the Corporation or its transfer agent,
if any) for all purposes and shall not be affected by any notice to the
contrary, and the Corporation shall not incur any liability as a result of its
compliance with the provisions of this Section 7. Notice to a holder of Series C
Preferred Stock shall be sent by first class mail, postage prepaid, to the
addresses of the registered holders set forth on the Corporation's stock
records.
8. Rank of Series. For purposes of this Statement of Designations, any
stock of any series or class of the Corporation shall be deemed to rank:
(a) prior to the shares of Series C Preferred Stock, as to
dividends or upon liquidation, dissolution or winding up, as the case may be, if
the holders of such class or classes shall be entitled to the receipt of
dividends or of amounts distributable upon dissolution, liquidation or winding
up of the Corporation, as the case may be, in preference or priority to the
holders of shares of Series C Preferred Stock;
(b) on a parity with shares of Series C Preferred Stock, as to
dividends or upon liquidation, dissolution or winding up, as the case may be,
whether or not the dividend rates, dividend payment dates or redemption or
liquidation prices per share or sinking fund provisions, if any, be different
from those of Series C Preferred Stock, if the holders of such stock shall be
entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as the case may be,
in proportion to their respective dividend rates or liquidation prices, without
preference or priority, one over the other, as between the holders of such stock
and the holders of shares of Series C Preferred Stock;
Exhibit 10 - Page 25
(c) junior to shares of Series C Preferred Stock as to dividends
or upon liquidation, dissolution or winding up, as the case may be, if such
class shall be Common Stock or if the holders of shares of Series C Preferred
Stock shall be entitled to receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as the case may be,
in preference or priority to the holders of shares of such class or classes.
9. Transfer Agent and Registrar. The Corporation may appoint a transfer
agent and registrar for the issuance, transfer and conversion of the Series C
Preferred Stock and for the payment of dividends to the holders of the Series C
Preferred Stock.
Exhibit 10 - Page 26
Exhibit E
Registration Rights Provisions
Exhibit 10 - Page 27
Exhibit 31
CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER CERTIFICATION
I, Lewis S. Schiller, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The Finx Group,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of this registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) significant deficiencies in the design or operation of internal
controls which could adversely affect our ability to record,
process, summarize and report financial data and we have identified
no material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 21, 2004
By /s/ Lewis S. Schiller
Chief Executive Officer and
Chief Accounting Officer
Exhibit 31 - Page 1
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report of The Finx Group, Inc. on Form
10QSB for the period ending March 31, 2004, as filed with the Securities and
Exchange Commission on the date hereof (the "Report") the undersigned Chief
Executive Officer and Chief Financial Officer of the Company hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 that (based on his knowledge): 1) the Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934, and 2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company as of and for the periods covered in the Report.
/S/ Lewis S. Schiller
Chief Executive Officer and
Chief Financial Officer
May 21, 2004
Exhibit 32 - Page 1