U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 0-9358
3Si Holdings, Inc.
(Exact Name of Registrant as specified in its charter)
Wyoming 83-0245581
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6886 S. Yosemite Street
Englewood, Colorado 80112
(Address of principal executive offices) (Zip Code)
(303) 741-9123
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
At October 31, 1998, 33,934,298 shares of the Registrant's $.01 par value
common stock were outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Attached.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
Subsequent to September 30, 1998, the Company's revolving line of credit
lender gave the Company notice of its intent to terminate the Company's
revolving line. The Company currently has until January 16, 1999 to replace
the facility or repay the line. The Company is currently negotiating with
other lenders. The Company's management believes it will replace the revolving
line within the termination deadline with another financial institution although
there is no assurance that such line will be obtained or if obtained, under the
same terms of the current line.
With the replacement of its revolving line, the Company believes it has the
financial resources to meet the Company's financial needs for its operations
during the next fiscal year.
As of September 30, 1998, the Company had a working capital deficit of
approximately $490,000 but positive cash flows from operating activities of
approximately $264,000 for the quarter ended September 30, 1998. This reflects
the Company's continued investment into its proprietary software products and
implementation of its new management information software.
The Company is actively seeking additional capital whether in the form of
subordinated debt or equity to improve its working capital deficit as well as
permit marketing of its new proprietary products into the Internet
marketplace.
Results of Operations
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Overview
The Company realized net earnings from operations of $90,996 versus $26,112
during the quarters ended September 30, 1998 and 1997, respectively. The net
earnings is created by 3Si's success in generating increased sales of
approximately $1.1 million between the quarters, primarily in product sales as
discussed further below and its expense savings through the reduction of its
Internet security workforce and the sale of its field services division at the
end of FY1998.
Comparative Analysis
Sales were approximately $8,426,000 and $7,302,000 during the quarters ended
September 30, 1998 and 1997, respectively. Total sales increased by
approximately $1,125,000 or 15.4%. This increase is primarily the result of
the Company's success in increasing product sales between the quarters.
Product sales increased approximately $1,109,000, or 66.2%. The rest of the
increase was due to increases in USPS sub-contract sales due to increases in
billable rates between periods. Employment on the USPS sub-contract remained
relatively stable with 79 employees in September 1998 verus 80 in September
1997.
The Company's gross margin declined overall between quarters changing from
30.4% of sales in 1997 to 23.4% in 1998 due to lower product sales margins.
Gross margins on product sales declined from 9.9% in 1997 to 7.9% in 1998 due
to the competitive nature of selling to government agencies during the quarter
ended September 30, 1998.
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Selling and administrative expenses decreased approximately $312,000, or 14.2%
due primarily to the reduction of expenses through the reduction of its
Internet security workforce and the sale of its field services division at the
end of FY1998.
The reduction in expenses between the quarters ended September 30, 1998 versus
1997 was approximately $148,000 for Internet security expenses and
approximately $120,000 related to the field services business. The remaining
decrease in selling and administrative expenses of approximately $44,000
relates to decreased commissions paid during the quarter on decreased gross
margin derived.
Interest expense increased due to the Company's increased borrowings on its
revolving line of credit to support the increase in product sales. Interest
income decreased due to the Company's decrease in its excess cash balances
between quarters. The Company expended approximately $1,851,000 in December
1997 of its excess cash balances to complete its self-tender offer in
completion of the terms of the Tyrex merger.
Cash flow provided by operating activities of approximately $264,000 remained
relatively consistent with the same quarter in the previous fiscal year of
approximately $255,000 as the Company managed cash paid to vendors.
Cash used for investing activities in the quarter ended September 30, 1998
includes software development costs relating to the Company's proprietary
products of approximately $177,000 and costs associated with its acquisition
and implementation of a new information management software of approximately
$170,000. For the quarter ended September 30, 1998, capitalized acquisition and
implementation costs include $94,566 of costs paid to outside consultants and
$30,503 of internal costs.
Cash provided (used) for financing activities differs between the quarters
ended September 30, 1998 and 1997 due primarily to the completion of the
refinancing of its notes payable with a bank in September 1997.
At September 30, 1998, the Company had 118 employees, including 79 servicing
the USPS sub-contract in Raleigh, NC and 2 in Wyoming versus having had 141 in
total at September 30, 1997 including 80 servicing the USPS sub-contract.
Part II - OTHER INFORMATION
Item 1. Litigation
During the quarter ended September 30, 1997, the Company entered into a
Federal Master Assignment Agreement with a leasing company to effect the
government's leasing of certain equipment. Under the terms of the assignment
agreement, if the government terminated the lease for any reason other than
"Termination for Convenience or Non-appropriation" the Company would be liable
for the present value of the discounted cash flows then owed under the lease.
On July 31, 1998, the Federal government terminated the lease for convenience.
The leasing company has filed suit to recover the present value of the
discounted cash flows under the lease from the Company, which are
approximately $385,000, plus attorneys fees and interest. The Company has
documentation from the Federal government indicating its "Termination for
Convenience".
The Company intends to vigorously defend against this action. Although it is
not possible to predict with certainty the outcome of any litigation,
management believes it is unlikely that the ultimate disposition of the matter
above will have a material adverse effect on the Company's consolidated
financial position, liquidity, cash flows or results of operations for any
year.
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Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable.
(b) A Form 8-K was not required to be filed in the period covered by
this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
3Si Holdings, Inc.
(Registrant)
Date: November 14, 1998 By: /s/ Felipe L. Valdez
Felipe L. Valdez,
Chief Executive Officer
and Chairman of the Board
Date: November 14, 1998 By: /s/ Paul F. Kaufhold
Paul F. Kaufhold,
Chief Financial Officer
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3Si Holdings, Inc.
Index to Financial Statements
Consolidated Balance Sheets, at September 30, 1998(Unaudited)
and June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Statements of Operations for the quarter ended
September 30, 1998 and 1997 (Unaudited) . . . . . . . . . . . . . . . F-2
Consolidated Statements of Cash Flows for the quarter ended
September 30, 1998 and 1997 (Unaudited) . . . . . . . . . . . . . . . F-3
Notes to Consolidated Interim Financial Statements(Unaudited) . . . . F-4
5
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Item 1
CONSOLIDATED FINANCIAL STATEMENTS
3Si Holdings, Inc.
September 30, 1998
<PAGE>
3Si Holdings, Inc.
Consolidated Balance Sheets
September 30, 1998 (Unaudited) and June 30, 1998
<TABLE>
<S> <C> <C>
ASSETS September 30,1998
(Unaudited) June 30, 1998
CURRENT ASSETS
Cash and cash equivalents $ 57,234 13,843
Accounts receivable - trade 8,222,350 6,142,390
Inventory 224,186 225,741
Deferred income taxes 171,000 171,000
Other current assets 257,448 193,029
Total current assets 8,932,218 6,746,003
PROPERTY AND EQUIPMENT, AT COST
Computer systems (note 1) 844,159 674,118
Furniture and fixtures 169,178 169,178
Leasehold improvements 92,034 92,034
Total property and equipment 1,105,371 935,330
Less accumulated depreciation and
amortization (393,259) (366,258)
Net property and equipment 712,112 569,011
OTHER ASSETS
Deposits 31,330 31,330
Software development costs (note 2) 415,853 239,082
Goodwill 583,333 591,146
Total other assets 1,030,517 861,558
Total assets $10,674,847 8,176,572
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit (note 3) $3,016,744 2,858,337
Current portion of capital lease 26,037 25,340
Accounts payable - trade 6,109,806 3,742,603
Customer deposits 107,874 98,185
Income taxes payable 15,000 15,000
Accrued liabilities 147,179 203,756
Total current liabilities 9,422,640 6,943,221
LONG-TERM DEBT 34,171 40,948
DEFFERED INCOME TAXES 102,000 102,000
CONTINGENCIES (note 7) - -
STOCKHOLDERS' EQUITY (note 4)
Common stock - authorized 50,000,000
shares of $.01 par value;
39,984,924 shares issued and
33,934,298 shares outstanding 399,849 399,849
Additional paid in capital 2,380,044 2,380,044
Retained earnings 193,496 167,863
Treasury stock, at cost,
6,050,626 shares (1,857,353) (1,857,353)
Total stockholders' equity 1,116,036 1,090,403
Total liabilities and
stockholders' equity $10,674,847 8,176,572
</TABLE>
See accompanying notes to interim consolidated financial statements.
F-1
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3Si Holdings, Inc.
Consolidated Statements of Operations
For the Quarters Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<S> <C> <C>
1998 1997
Product sales $6,425,054 $5,316,431
Consulting and other service revenue 2,001,305 1,985,211
Net sales 8,426,359 7,301,642
Cost of products sold 5,918,989 4,787,522
Costs of contract labor 535,508 294,955
Total cost of sales 6,454,497 5,082,477
Gross profit 1,971,862 2,219,165
Selling and administrative expenses 1,880,866 2,193,054
Earnings from operations 90,996 26,112
Other income (expense):
Interest income 1,044 41,199
Interest expense (70,661) (26,735)
Miscellaneous income 4,254 4,573
Total other income (expense) (65,363) 19,036
Earnings before income taxes 25,633 45,148
Income taxes (Note 6) - -
Net earnings $ 25,633 45,148
Earnings per common share $ 0.00 $ 0.00
Weighted average shares outstanding
(note 5) 39,984,924 39,293,424
</TABLE>
See accompanying notes to interim consolidated financial statements.
F-2
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3Si Holdings, Inc.
Consolidated Statements of Cash Flows
For the Quarters Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<S> <C> <C>
1998 1997
Operating activities:
Net earnings $ 25,633 45,148
Reconciling adjustments:
Depreciation and amortization 34,753 34,753
Change in operating assets and
liabilities:
Accounts receivable (2,079,960) (258,671)
Inventory 1,555 300,993
Other assets (37,860) (23,845)
Accounts payable 2,367,203 37,487
Other liabilities (46,888) 118,859
Total adjustments 238,803 174,824
Net cash provided by operating
activities 264,436 254,724
Investing activities:
Purchases of equipment (170,041) (74,156)
Software development costs (176,771) -
Loans to stockholders (26,559) -
Merger costs - (16,277)
Net cash used in investing
activities (373,371) (90,433)
Financing activities:
Revolving line of credit, net 158,406 795,856
Payments on notes payable - (1,060,919)
Payments on capital lease (6,080) (5,374)
Net cash provided (used) by
financing activities 152,326 (270,437)
Net change in cash and cash equivalents 43,391 (106,145)
Cash and cash equivalents, beginning 13,843 2,219,145
Cash and cash equivalents, ending $ 57,234 2,113,000
Supplemental disclosures of cash flow
information:
Interest paid $ 50,148 35,171
Income tax paid $ - -
</TABLE>
See accompanying notes to interim consolidated financial statements.
F-3
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3Si Holdings, Inc.
Notes to Interim Consolidated Financial Statements
(Unaudited)
The unaudited historical interim consolidated financial statements
reflect, in the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation. The accounting
policies followed by the Company are set forth in Note 1 to the Company's
financial statements in the Company's report on Form 10-K.
Operating results for the quarter ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1999.
Presentation
On June 18, 1998, the stockholders approved a change to the Company's name.
Effective September 15, 1998, the Company's name changed from Tyrex Oil Company
to 3Si Holdings, Inc. (3SiH or the Company).
On May 28, 1997, Tyrex Oil Company ("Tyrex") acquired 100% of the common stock
of 3Si Inc. ("3Si"). Under the terms of the merger, 3Si is a wholly owned
subsidiary of Tyrex (now 3SiH). The merger has been accounted for as a purchase
of Tyrex by 3Si, since the merger resulted in 72% of the outstanding stock of
Tyrex being held by the 3Si stockholders.
All intercompany balances and transactions have been eliminated in the financial
statements.
The principal markets for 3Si's sales and services have been the U.S. Postal
Service and large corporations located in Colorado and New Mexico. 3Si is
concentrating on expanding its sales base throughout the United States. The
corporate offices are located in Englewood, Colorado. 3Si also maintains
offices in Albuquerque, New Mexico; Raleigh, North Carolina; and Colorado
Springs, Colorado.
Note 1 - Computer Software Costs
Expenditures related to the Company's acquisition and implementation of a new
information management software have been capitalized as computer systems. For
the quarter ended September 30, 1998, capitalized costs include $94,566 of costs
paid to outside consultants and $30,503 of internal costs. Capitalized
implementation costs will be amortized using the straight-line method over the
remaining estimated useful life of the system. The software had not been placed
in service as of September 30, 1998.
Note 2 - Software Development Costs
During the fiscal year ended June 30, 1998, the Company completed research and
development on its first two proprietary software products - a contact
management database program and a help desk management and call avoidance
system (called "KEWi"). Both programs operate via the Internet. During the
quarter ended September 30, 1998, the Company capitalized $176,771 as software
development costs relative to its proprietary products. The Company will
begin amortization of the software development costs when significant revenues
commence in FY1999.
F-4
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3Si Holdings, Inc.
Notes to Interim Consolidated Financial Statements (continued)
(Unaudited)
Note 3 - Revolving Line of Credit
As of September 30, 1997, the Company replaced its note payable with a bank
with a revolving line of credit facility with another financial institution.
The new revolving line of credit is at the prime rate of interest and permits
the Company to borrow up to $5 million based on 85% of the Company's eligible
accounts receivable balance and inventory computed under the terms of the
agreement. The line is collateralized by substantially all of the assets of
the Company. Distributions to stockholders, acquisitions of assets and
incurrence of additional debt are not allowed without prior consent of the
financial institution. The revolving line may be terminated by the financial
institution upon sixty days written notice to the Company. The Company is
currently not in compliance with its financial covenants to maintain $1.5
million of tangible net worth; a debt-equity ratio of less than 5:1; and, a
current ratio of 1.1:1.
Subsequent to September 30, 1998, the lender gave the Company notice of its
intent to terminate the line. The Company currently has until January 16,
1999 to replace the facility or repay the line. The Company is currently
negotiating with other lenders. The Company's management believes it will
replace the revolving line within the termination deadline with another
financial institution although there is no assurance that such line will be
obtained or if obtained, under the same terms of the current line.
Note 4 - Stock Options and Warrants
On June 18, 1998, the Company's stockholders approved the Company's 1998 Stock
Option Plan (the "1998 Plan"). Under the terms of the 1998 Plan, the Company
may grant options to acquire up to 5,000,000 shares of the Company's $.01 par
value common stock to employees and directors of the Company. No options were
granted prior to June 30, 1998. Subsequent to June 30, 1998, the Company issued
options to acquire up to 1,545,800 shares of the Company's stock at prices
ranging from $.10 to $.133 per share to employees of the Company. The options
vest over a period of 4 years except 1,345,000 shares which vested immediately
upon grant to two officers of 3Si, Inc.
No compensation expense was recognized related to these options in these
financial statements.
On May 28, 1997, Tyrex granted warrants to purchase 750,000 shares of the
Company's common stock at a price of $.30 per share. These warrants became
exercisable 90 days after May 28, 1997 and are effective until August 27, 1999.
On October 22, 1997, the Company granted warrants to purchase up to 350,000
shares of the Company's common stock at a price of $.16 per share. These
warrants became exercisable 90 days after October 22, 1997 and are effective
until June 30, 1999. The Company also extended the exercise date on warrants
previously issued to purchase up to 400,000 shares of the Company's common stock
at $.255 per share from December 31, 1998 to December 31, 1999.
Note 5 - Income Per Share
Net income per share for the quarters ended September 30, 1998 and 1997 was
computed on the basis of the weighted average number of common stock shares
only, as shares subject to warrants and stock options would have an
anti-dilutive effect.
F-5
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3Si Holdings, Inc.
Notes to Interim Consolidated Financial Statements (continued)
(Unaudited)
Note 6 - Income Taxes
At September 30, 1998, the Company has net operating loss carryforwards
sufficient to offset any tax liability arising during the period.
Note 7 - Litigation
During the quarter ended September 30, 1997, the Company entered into a
Federal Master Assignment Agreement with a leasing company to effect the
government's leasing of equipment. Under the terms of the assignment
agreement, if the government terminated the lease for any reason other than
"Termination for Convenience or Non-appropriation" the Company would be liable
for the present value of the discounted cash flows yet owed under the lease.
On July 31, 1998, the Federal government terminated the lease for convenience.
The leasing company has filed suit to recover the present value of the
discounted cash flows under the lease from the Company, which are
approximately $385,000, plus attorneys fees and interest. The Company has
documentation from the Federal government indicating its "Termination for
Convenience".
The Company intends to vigorously defend against this action. Although it is
not possible to predict with certainty the outcome of any litigation,
management believes it is unlikely that the ultimate disposition of the matter
above will have a material adverse effect on the Company's consolidated
financial position, liquidity, cash flows or results of operations for any
year. The Company has not accrued any estimate for settlement or resolution
of this matter in these financial statements; however, this is a significant
estimate which could potentially change within the next year.
F-6
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