U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______________ TO ______________
COMMISSION FILE NUMBER: 000-09358
3 Si HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Wyoming 83-0245581
(State or jurisdiction of incorporation I.R.S. Employer
or organization) Identification No.)
6886 South Yosemite Street, Englewood, Colorado 80112
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: (303)749-0210
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) been subject to such filing
requirements for the past 90 days. Yes X No .
As of September 30, 2000, the Registrant had 41,541,467
shares of common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2000 4
CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 7
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCAL STATEMENTS.
Independent Accountants' Report
Board of Directors
3Si Holdings, Inc.
We have reviewed the accompanying consolidated balance sheet of
3Si Holdings, Inc. as of September 30, 2000, and the related
statements of earnings, and cash flows for the quarter then
ended. These financial statements are the representation of the
management of 3Si Holdings, Inc.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
consolidated financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ Balogh and Tjornehoj, LLP
Balogh and Tjornehoj, LLP
October 31, 2000
Denver, Colorado
Independent Accountants' Report
Board of Directors
3Si Holdings, Inc.
The accompanying statements of earnings and cash flows of 3Si
Holdings, Inc. for the quarter ended September 30, 1999, were not
audited by us, and, accordingly, we do not express an opinion on
them.
/s/ Balogh and Tjornehoj, LLP
Balogh and Tjornehoj, LLP
November 17, 1999
Denver, Colorado
3Si HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 246,108
Accounts receivable - trade 104,821
Other current assets 12,536
Total current assets 363,465
Equipment At Cost
Computer systems and software 82,647
Less accumulated depreciation and amortization (20,172)
Net equipment 62,475
Other Assets 50,290
Total assets $ 476,230
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities
Current portion of long-term debt $ 7,696
Accounts payable - trade 60,031
Customer deposits 9,396
Accrued liabilities (Note 3) 157,708
Unearned revenue 97,200
Total current liabilities 332,031
Long-Term Debt 15,935
Minority Interest 27,592
Common Stock Subject To Redemption (Note 4) 2,211,048
Stockholders' (Deficit) Equity
Common stock 417,565
Additional paid in capital 3,282,963
Accumulated (deficit) (3,561,672)
Treasury stock (38,184)
Common stock subject to redemption (2,211,048)
Total stockholders' (deficit) equity (2,110,376)
Total liabilities and stockholders' (deficit) equity $ 476,230
See independent accountants' reports and notes to interim
consolidated financial statements
3Si HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
September 30, September 30,
2000 1999
Consulting, service, and license fees $ 293,346 $ 26,489
Contract labor and other costs 59,150 16,628
Gross profit 234,196 9,861
Selling and administrative expenses 143,704 212,985
Earnings (loss) from operations 90,492 (203,124)
Other income (expense)
Interest income 2,010 11,328
Interest expense (1,284) (63,171)
Miscellaneous income (Note 3) 75,162 -
Total other income (expense) 75,888 (51,843)
Net earnings (loss) before minority
Interest 166,380 (254,967)
Minority interest (21,570) 27,900
Earnings (loss) before income taxes 144,810 (227,067)
Income taxes (Note 5) - -
Net earnings (loss) 144,810 (227,067)
Basic and diluted earnings (loss) per
common share (Note 2) nil (.01)
Weighted average shares outstanding
Basic 41,541,467 34,216,845
Diluted 41,745,932 34,216,845
See independent accountants' reports and notes to interim
consolidated financial statements
3Si HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30, September 30,
2000 1999
Operating activities
Net earnings (loss) $ 144,810 $ (227,067)
Reconciling adjustments
Depreciation and amortization 4,955 9,429
Gain on disposition of assets (75,000) -
Income (loss) attributable to minority
Interest 21,570 (27,900)
Change in operating assets and liabilities
Accounts receivable (50,216) 319,697
Other assets (11,320) 93,032
Accounts payable (96,610) (361,703)
Unearned revenue 97,200 -
Other liabilities - (135,183)
Total adjustments (109,421) (102,628)
Net cash provided by (used for)
operating activities 35,389 (329,695)
Investing activities
Proceeds from sale of assets 75,000 -
Interest accrued on savings (290) -
Software development costs - (15,756)
Net cash provided by (used for)
investing activities 74,710 (15,756)
Financing activities
Payments on capital lease (1,689) -
Proceeds from exercise of stock options - 11,500
Net cash (used for) provided by
financing activities (1,689) 11,500
Net change in cash and cash equivalents 108,410 (333,951)
Cash and cash equivalents, beginning 137,698 1,372,293
Cash and cash equivalents, ending $ 246,108 $ 1,038,342
Supplemental disclosures of cash flow information
Interest paid $ 1,284 $ 63,171
Income tax paid $ - $ -
See independent accountants' reports and notes to interim
consolidated financial statements
3Si HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT'S STATEMENT
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the
financial position of 3Si Holdings, Inc. ("TSIH") at September
30, 2000, and the results of operations and cash flows for
quarters ended September 30, 2000, and September 30, 1999. The
Notes to the Consolidated Financial Statements which are
contained in the June 30, 2000, Form 10-KSB should be read in
conjunction with these Interim Consolidated Financial Statements.
NOTE 2. EARNINGS (LOSS) PER SHARE
Basic earnings per share for the quarter ended September 30,
2000, was calculated by dividing net earnings by the average
number of common shares outstanding during the year. Diluted
earnings per common share for the quarter ended September 30,
2000, was calculated by adjusting outstanding shares, assuming
conversion of all potentially dilutive stock options.
Net (loss) earnings per share for the quarter ended September 30,
1999, was computed on the basis of the weighted average number of
common shares only, as shares subject to stock options would have
an anti-dilutive effect.
NOTE 3. CONTINGENCIES
TSIH sold the assets of its systems integration business
effective as of May 1, 1999. The asset purchase agreement
provided for additional contingent payments to TSIH when key
contracts were renewed. The final contract renewal payment of
$75,000 was received in September 2000.
The asset purchase agreement also provided for contingent
payments to TSIH of 75% of the profits in excess of contract
renewal payments from the sold business for the first year (April
2000), and 50% of the profits in excess of contract renewal
payments for the second and third years (April 2001 and 2002).
Profits from the sold business did not exceed contract renewal
payments through April 2000. No additional contingent payments
are estimated to be due to TSIH at September 30, 2000. There is
currently no assurance as to when or if any contingent payments
will be earned.
The first $157,708 of additional contingent payments earned by
TSIH will be retained by the buyer to pay for compensated
absences for former TSIH employees. This amount is included
under accrued liabilities in the September 30, 2000 balance
sheet.
NOTE 4. COMMON STOCK SUBJECT TO REDEMPTION
TSIH has issued 6,460,137 shares of common stock ("the SAN
shares") that are subject to redemption under the following
terms. All contingent payments received after August 2000 from
the May 1999 sale of the systems integration business will be
used to redeem the SAN shares. In addition, TSIH will use 50% of
any capital investment or loans, and 50% of subsequent net
income, to redeem SAN shares. For redemption payments after
September 2000, the SAN shares shall be transferred back to TSIH
at $.52 per share, or the then current market price, whichever is
higher. At the point SAN has received redemption payment
totaling $2,211,048, TSIH will have the right, but not the
obligation, to continue purchasing the SAN shares.
TSIH has received a contingent payment of $75,000 in September
2000 (see Note 3) which must be used to redeem SAN shares under
the terms of the redemption agreement.
NOTE 5. INCOME TAXES
TSIH has sufficient net operating loss carryforward to offset the
current taxable income. There is no income tax liability as of
September 30, 2000.
NOTE 6. SUBSEQUENT EVENT
TSIH entered into an agreement with a law firm in October 2000.
The law firm has agreed to prepare registration statements with
the Securities and Exchange Commission in exchange for 207,373
shares of TSIH common stock, valued at $45,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Management's Discussion.
The Registrant's strategy is to continue to expand the offering
of the KEWi family of products to a broader customer base. By
partnering with Application Service Providers ("ASPs") and other
distribution partners, the Registrant intends to increase its
penetration into the Internet-based software market. The
agreements with Qwest Cyber.Solutions ("QCS") are an example of
this strategy (see Exhibits 10.2, 10.3, and 10.4 to this Form 10-
QSB).
The addition of document management and portal management to the
family of KEWi products, along with the expansion of capabilities
in the knowledge management and request tracking products, has
increased the size of the potential market for KEWi products and
services.
As of October 2000, the Registrant has expanded its agreement
with QCS to develop and maintain the QCS web site. Projected
revenues (net of subcontractor fees) for FY 2001 under this
expanded agreement are $805,000.
The Registrant has also entered into an agreement in 1999 in the
ordinary course of business with SMI International to maintain
and operate an Internet-based customer support system for FY
2001, for the U.S. Air Force Operational Space and Support
Program. The $129,600 fee for the annual agreement was received
in July 2000.
Financial Condition.
(a) Working Capital.
As of September 30, 2000, the Registrant had working capital of
approximately $31,000. Working capital provided by operations
was $96,000 for the quarter ended September 30, 2000.
(b) Commitments.
The Registrant has an obligation as of September 30, 2000,
to redeem $75,000 of its common stock subject to redemption.
(c) Other Sources of Working Capital.
Management is anticipating that the $50,000 escrow account
(held to register the common stock subject to redemption) will be
released since the Registrant has entered into an agreement with
a law firm to prepare the registration statements in exchange for
shares of the Registrant's stock.
The May 1999 sale of the systems integration business
provides for contingent payments based on subsequent profits of
the business sold. The Registrant will share in 50% of the
profits in excess of $75,000 for the year ended April 2001. The
first $158,000 of these contingent payments earned will be
retained by the buyer to pay for compensated absences for former
Registrant employees. Profits from the sold business (unaudited)
were $109,000 for the six months ended April 30, 2000. Similar
profits for the six months ended October 31, 2000, would be
shared by the Registrant, and reduce the liability for
compensated absences.
(d) Credit Facilities
The Registrant currently has no line of credit facility in
place. The provision in the SAN common stock redemption
agreement, requiring that 50% of loan proceeds will be used to
redeem the SAN shares, may impact the Registrant's ability to
obtain additional short-term financing.
(e) Cash Requirements
Management believes that, with the agreements already in
place to provide services for FY2001, it has the ability to
generate sufficient cash to support its operations for the next
twelve months.
Results of Operations.
Revenues increased by approximately $267,000 for the quarter
ended September 2000 compared to September 1999. This primarily
reflects the new agreements with QCS and SMI International.
The September 2000 revenues include a non-recurring $100,000
licensing fee for the use of KEWi software.
Selling and administrative expenses decreased by
approximately $69,000 for the quarter ended September 2000
compared to September 1999. This is primarily attributable to
decreased legal fees related to litigation settled in the prior
year. Salaries also decreased for these comparable periods
related to employees temporarily retained through September 1999
after the sale of the systems integration business.
Interest expense decreased by approximately $62,000 for the
quarter ended September 2000 compared to September 1999. The
September 1999 interest expense was related to debt to SAN. This
debt was settled in March 2000 in exchange for common stock
subject to redemption.
Miscellaneous income increased by $75,000 for the quarter
ended September 2000 compared to September 1999. This represents
the contingent contract renewal payment from the May 1999 sale of
the systems integration business.
Risk Factors.
The Registrant recognizes that with the trend toward Internet-
based software products, there is a short window of opportunity
where KEWi, a developed and available product, can capture a
market demanding Internet designed solutions. The risk of losing
this advantage exists. There is no assurance that the Registrant
will be able to capture and maintain enough market share to
compete successfully in the future. The Registrant sees the
following risk factors associated with the business of the
Registrant:
(a) Product Development.
There can be no assurance that the company will generate
significant revenues in the future from it developed products;
and there can be no assurance that the company will operate at a
profitable level. If the company is unable to obtain customers
and generate sufficient revenues so that it can profitably
operate, the company's business will not succeed. In such event,
investors in the shares of common stock of the Registrant may
lose their entire investment.
As a result of the fixed nature of many of the
company's expenses, the company may be unable to adjust spending
in a timely manner to compensate for any unexpected delays in the
marketing of the company's products or any capital raising or
revenue shortfall. Any such delays or shortfalls will have an
immediate adverse impact on the company's business, operations
and financial condition.
(b) Significant Working Capital Requirements.
The working capital requirements associated with the
plan of business of the Registrant will continue to be
significant. The Registrant anticipates, based on currently
proposed assumptions relating to its operations (including with
respect to costs and expenditures and projected cash flow from
operations), that it can generate sufficient cash flow to
continue its operations for an indefinite period at the current
level without requiring additional financing. However, the
Registrant will need to raise additional capital in the next six
months, through debt or equity, to fully implement its sales and
marketing strategy and grow. In the event that the Registrant's
plans change or its assumptions change or prove to be inaccurate
or if cash flow from operations proves to be insufficient to fund
operations (due to unanticipated expenses, technical
difficulties, problem or otherwise), the Registrant would be
required to seek additional financing sooner than currently
anticipated or may be required to significantly curtail or cease
its operations.
(c) Registrant Only Has Limited Assets.
The Registrant has only limited assets. As a result, there can
be no assurance that the Registrant will generate significant
revenues in the future; and there can be no assurance that the
Registrant will operate at a profitable level. If the Registrant
is unable to obtain customers and generate sufficient revenues so
that it can profitably operate, the Registrant's business will
not succeed.
(d) Success of Registrant Dependent on Management.
The Registrant's success is dependent upon the hiring of key
administrative personnel. None of the Registrant's officers,
directors, and key employees have an employment agreement with
the Registrant; therefore, there can be no assurance that these
personnel will remain employed by the Registrant. Should any of
these individuals cease to be affiliated with the Registrant for
any reason before qualified replacements could be found, there
could be material adverse effects on the Registrant's business
and prospects. In addition, management has no experience in
managing companies in the same business as the Registrant.
In addition, all decisions with respect to the management of
the Registrant will be made exclusively by the officers and
directors of the Registrant. Investors will only have rights
associated with ownership interests to make decisions which
effect the Registrant. The success of the Registrant, to a large
extent, will depend on the quality of the directors and officers
of the Registrant. Accordingly, no person should invest in the
shares unless he is willing to entrust all aspects of the
management of the Registrant to the officers and directors.
(e) Control of the Registrant by Officers and Directors.
The Registrant's officers and directors beneficially
own approximately 64% of the outstanding shares of the
Registrant's common stock. As a result, such persons, acting
together, have the ability to exercise significant influence over
all matters requiring stockholder approval. Accordingly, it
could be difficult for the investors hereunder to effectuate
control over the affairs of the Registrant. Therefore, it should
be assumed that the officers, directors, and principal common
shareholders who control the majority of voting rights will be
able, by virtue of their stock holdings, to control the affairs
and policies of the Registrant.
(f) Limitations on Liability, and Indemnification, of
Directors and Officers.
The articles of incorporation of the Registrant provide
for indemnification of officers and directors of the Registrant.
In addition, the Wyoming Business Corporation Act provides for
permissive indemnification of officers and directors and the
Registrant may provide indemnification under such provisions.
Any limitation on the liability of any director, or
indemnification of directors, officer, or employees, could result
in substantial expenditures being made by the Registrant in
covering any liability of such persons or in indemnifying them.
(g) Potential Conflicts of Interest Involving Management.
Currently, only two of the officers and directors of the
Registrant devote 100% of their time to the business of the
Registrant. However, conflicts of interest may arise in the area
of corporate opportunities which cannot be resolved through arm's
length negotiations. All of the potential conflicts of interest
will be resolved only through exercise by the directors of such
judgment as is consistent with their fiduciary duties to the
Registrant. It is the intention of management, so as to minimize
any potential conflicts of interest, to present first to the
board of directors to the Registrant, any proposed investments
for its evaluation.
(h) Product distribution and market acceptance.
The Registrant has developed a subscription-based distribution
model for its proprietary products. Although subscription-based
services are commonplace within the information technology
industry, this model represents a significant deviation for the
traditional knowledge management and support center industry.
Existing support center call management products are Windows-
based applications licensed on a per-user basis with an
associated annual maintenance fee. A subscription-based service
offers many advantages over traditional software distribution
models. This model has not yet been proven within the target
market.
(i) Changing Technologies.
The Registrant's business is subject to changes in technology and
new service introductions. Accordingly, the Registrant's ability
to compete will be dependent upon its ability to adapt to
technological changes in the industry and to develop services
based on those changes to satisfy evolving client requirements.
Technological changes may create new products or services that
are competitive with, superior to, or render obsolete the
services currently offered.
(j) Acceptance And Effectiveness Of Internet Electronic Commerce.
The Registrant's success in establishing an e-commerce
business web site will be dependent on consumer acceptance of e-
retailing and an increase in the use of the Internet for e-
commerce. If the markets for e-commerce do not develop or
develop more slowly than the Registrant expects, its e-commerce
business may be harmed. If Internet usage does not grow, the
Registrant may not be able to increase revenues from Internet
advertising and sponsorships which also may harm both the
Registrant's e-commerce business. Internet use by consumers is
in an early stage of development, and market acceptance of the
Internet as a medium for content, advertising and e-commerce is
uncertain. A number of factors may inhibit the growth of
Internet usage, including inadequate network infrastructure,
security concerns, inconsistent quality of service, and limited
availability of cost-effective, high-speed access. If these or
any other factors cause use of the Internet to slow or decline,
the Registrant's results of operations could be adversely
affected.
(k) Competition In Internet Commerce.
Increased competition from e-commerce could result in
reduced margins or loss of market share, any of which could harm
both the Registrant's e-commerce businesses. Competition is
likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of
the Registrant's present and potential competitors are likely to
enjoy substantial competitive advantages, including larger
numbers of users, more fully-developed e-commerce opportunities,
larger technical, production and editorial staffs, and
substantially greater financial, marketing, technical and other
resources. If the Registrant does not compete effectively or if
it experiences any pricing pressures, reduced margins or loss of
market share resulting from increased competition, the
Registrant's business could be adversely affected.
(l) Unreliability Of Internet Infrastructure.
If the Internet continues to experience increased numbers of
users, frequency of use or increased bandwidth requirements, the
Internet infrastructure may not be able to support these
increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and could face
additional outages and delays in the future. These outages and
delays could reduce the level of Internet usage and traffic on
the Registrant's website. In addition, the Internet could lose
its viability due to delays in the development or adoption of new
standards and protocols to handle increased levels of activity.
If the Internet infrastructure is not adequately developed or
maintained, use of the Registrant's website may be reduced. Even
if the Internet infrastructure is adequately developed, and
maintained, the Registrant may incur substantial expenditures in
order to adapt its services and products to changing Internet
technologies. Such additional expenses could severely harm the
Registrant's financial results.
(m) Transactional Security Concerns.
A significant barrier to Internet e-commerce is the secure
transmission of confidential information over public networks.
Any breach in the Registrant's security could cause interruptions
in the operation of the Registrant's website and have an adverse
effect on the Registrant's business.
(n) Governmental Regulation Of The Internet.
The Registrant is subject to the same federal, state and local
laws as other companies conducting business on the Internet.
Today, there are relatively few laws specifically directed
towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is
possible that laws and regulations will be adopted with respect
to the Internet or online services. These laws and regulations
could cover issues such as online contracts, user privacy,
freedom of expression, pricing, fraud, content and quality of
products and services, taxation, advertising, intellectual
property rights and information security. Applicability to the
Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain.
Several states have proposed legislation that would limit
the uses of personal user information gathered online or require
online services to establish privacy policies. The Federal Trade
Commission also has recently started a proceeding with one online
service regarding the manner in which personal information is
collected from users and provided to third parties. Changes to
existing laws or the passage of new laws intended to address
these issues could directly affect the way the Registrant does
business or could create uncertainty in the marketplace. This
could reduce demand for the Registrant's services or increase the
delivery costs, or could otherwise harm its business. In some
jurisdictions, the Registrant will be required to collect value-
added taxes on the Registrant's fees. The Registrant's failure
to comply with foreign laws could subject it to penalties ranging
from fines to bans on the Registrant's ability to offer its
services.
(o) Influence of Other External Factors on Prospects for Registrant.
The industry of the Registrant in general is a speculative
venture necessarily involving some substantial risk. There is no
certainty that the expenditures to be made by the Registrant will
result in a commercially profitable business. The marketability
of its products will be affected by numerous factors beyond the
control of the Registrant. These factors include market
fluctuations, and the general state of the economy (including the
rate of inflation, and local economic conditions), which can
affect companies' spending. Factors which leave less money in
the hands of potential customers of the Registrant will likely
have an adverse effect on the Registrant. The exact effect of
these factors cannot be accurately predicted, but the combination
of these factors may result in the Registrant not receiving an
adequate return on invested capital.
(p) No Cumulative Voting
Holders of the shares are not entitled to accumulate their votes
for the election of directors or otherwise. Accordingly, the
holders of a majority of the shares present at a meeting of
shareholders will be able to elect all of the directors of the
Registrant, and the minority shareholders will not be able to
elect a representative to the Registrant's board of directors.
(q) Absence of Cash Dividends
The board of directors does not anticipate paying cash dividends
on the shares for the foreseeable future and intends to retain
any future earnings to finance the growth of the Registrant's
business. Payment of dividends, if any, will depend, among other
factors, on earnings, capital requirements, and the general
operating and financial condition of the Registrant, and will be
subject to legal limitations on the payment of dividends out of
paid-in capital.
(r) Limited Public Market for Registrant's Securities.
There has been only a limited public market for the shares of
common stock of the Registrant. There can be no assurance that
an active trading market will develop or that purchasers of the
shares will be able to resell their securities at prices equal to
or greater than the respective initial public offering prices.
The market price of the shares may be affected significantly by
factors such as announcements by the Registrant or its
competitors, variations in the Registrant's results of
operations, and market conditions in the retail, electronic
commerce, and Internet industries in general. The market price
may also be affected by movements in prices of stock in general.
As a result of these factors, investors in the Registrant may not
be able to liquidate an investment in the shares readily, or at
all.
(s) No Assurance of Continued Public Trading Market; Risk
of Low Priced Securities.
There has been only a limited public market for the
common stock of the Registrant. The common stock of the
Registrant is currently quoted on the Over the Counter Bulletin
Board. As a result, an investor may find it difficult to dispose
of, or to obtain accurate quotations as to the market value of
the Registrant's securities. In addition, the common stock is
subject to the low-priced security or so called "penny stock"
rules that impose additional sales practice requirements on
broker-dealers who sell such securities. The Securities
Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with any trades involving a
stock defined as a penny stock (generally, according to recent
regulations adopted by the U.S. Securities and Exchange
Commission, any equity security that has a market price of less
than $5.00 per share, subject to certain exceptions), including
the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the
risks associated therewith. The regulations governing low-
priced or penny stocks sometimes limit the ability of broker-
dealers to sell the Registrant's common stock and thus,
ultimately, the ability of the investors to sell their securities
in the secondary market.
(t) Effects of Failure to Maintain Market Makers.
If the Registrant is unable to maintain a National
Association of Securities Dealers, Inc. member broker/dealers as
market makers, the liquidity of the common stock could be
impaired, not only in the number of shares of common stock which
could be bought and sold, but also through possible delays in the
timing of transactions, and lower prices for the common stock
than might otherwise prevail. Furthermore, the lack of market
makers could result in persons being unable to buy or sell shares
of the common stock on any secondary market. There can be no
assurance the Registrant will be able to maintain such market
makers.
(u) Shares Eligible For Future Sale.
All of the 26,623,057 shares of common stock which are currently
held, directly or indirectly, by management have been issued in
reliance on the private placement exemption under the Securities
Act of 1933. Such shares will not be available for sale in the
open market without separate registration except in reliance upon
Rule 144 under the Securities Act of 1933. In general, under
Rule 144 a person (or persons whose shares are aggregated) who
has beneficially owned shares acquired in a non-public
transaction for at least one year, including persons who may be
deemed affiliates of the Registrant (as that term is defined
under that rule) would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1%
of the then outstanding shares of common stock, or the average
weekly reported trading volume during the four calendar weeks
preceding such sale, provided that certain current public
information is then available. If a substantial number of the
shares owned by these shareholders were sold pursuant to Rule 144
or a registered offering, the market price of the common stock
could be adversely affected.
(v) Uncertainty Due to Year 2000 Problem.
The Year 2000 issue arises because many computerized systems
use two digits rather than four to identify a year. Date
sensitive systems may recognize the year 2000 as 1900 or some
other date, resulting in errors when information using the year
2000 date is processed. In addition, similar problems may arise
in some systems which use certain dates in 1999 to represent
something other than a date. The effects of the Year 2000 issue
may be experienced before, on, or after January 1, 2000, and if
not addressed, the impact on operations and financial reporting
may range from minor errors to significant system failure which
could affect the Registrant's ability to conduct normal business
operations. This creates potential risk for all companies, even
if their own computer systems are Year 2000 compliant. It is not
possible to be certain that all aspects of the Year 2000 issue
affecting the Registrant, including those related to the efforts
of customers, suppliers, or other third parties, will be fully
resolved.
The Registrant currently believes that its systems are Year 2000
compliant in all material respects. Although management is not
aware of any material operational issues or costs associated with
preparing its internal systems for the Year 2000, the Registrant
may experience serious unanticipated negative consequences (such
as significant downtime for one or more of its suppliers) or
material costs caused by undetected errors or defects in the
technology used in its internal systems. Furthermore, the
purchasing patterns of customers may be affected by Year 2000
issues. The Registrant does not currently have any information
about the Year 2000 status of its potential material suppliers.
The Registrant's Year 2000 plans are based on management's best
estimates.
Forward Looking Statements.
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operation contains "forward looking
statements" within the meaning of Rule 175 of the Securities Act
of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934,
as amended, including statements regarding, among other items,
the Registrant's business strategies, continued growth in the
Registrant's markets, projections, and anticipated trends in the
Registrant's business and the industry in which it operates. The
words "believe," "expect," "anticipate," "intends," "forecast,"
"project," and similar expressions identify forward-looking
statements. These forward-looking statements are based largely
on the Registrant's expectations and are subject to a number of
risks and uncertainties, certain of which are beyond the
Registrant's control. The Registrant cautions that these
statements are further qualified by important factors that could
cause actual results to differ materially from those in the
forward looking statements, including, among others, the
following: reduced or lack of increase in demand for the
Registrant's products, competitive pricing pressures, changes in
the market price of ingredients used in the Registrant's products
and the level of expenses incurred in the Registrant's
operations. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained
herein will in fact transpire or prove to be accurate. The
Registrant disclaims any intent or obligation to update "forward
looking statements."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Registrant is not a party to any material pending legal
proceedings and, to the best of its knowledge, no such action by
or against the Registrant has been threatened.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Reports on Form 8-K. No reports on Form 8-K were filed
during the second quarter of the fiscal year covered by this Form
10-QSB.
(b) Exhibits. Exhibits included or incorporated by reference herein:
See Exhibit Index.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: November 9, 2000 By: /s/ Frank W. Backes
Frank W. Backes, President
and Chief Executive Officer
EXHIBIT INDEX
Number Exhibit Description
2.1 Agreement and Plan of Reorganization between the company,
Kimbrough Computer Sales, Inc. d.b.a. 3Si, Inc., Fred Slack,
Frank Backes and Larry Valdez, dated May 28, 1997 (incorporated
by reference to Exhibit 10.1 of the Form 8-K filed on June 9, 1997).
2.2 Transition Agreement between the company, Kimbrough Computer
Sales, Inc. d.b.a. 3Si, Inc., Fred Slack, Frank Backes and Larry
Valdez, dated May 28, 1997 (incorporated by reference to Exhibit
10.2 of the Form 8-K filed on June 9, 1997).
3.1 Articles of Incorporation, and amendments thereto
(incorporated by reference to Exhibit 3.1 of the filed
Registration Statement on Form S-2).
3.2 Certificate of Amendment to Articles of Incorporation
(incorporated by reference to Form 10-KSB filed on October 13, 2000).
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3.2
of the filed Registration Statement on Form S-2).
10.1 Settlement Agreement between the Registrant and Storage Area
Network, Inc., dated March 16, 2000 (incorporated by reference to
Exhibit 99.1 of the Form 8-K filed on March 24, 2000).
10.2 License Agreement between KEWI.net, Inc. and Qwest
Cyber.Solutions LLC, dated May 22, 2000 (see below).
10.3 Joint Marketing and Warrant Agreement between KEWi.net, Inc.
and Qwest Cyber.Solutions LLC, dated May 22, 2000 (see below).
10.4 Production Agreement between KEWi.net, Inc., Qwest
Cyber.Solutions LLC, and BVP Media, Inc., dated May 22, 2000 (see below)
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 of the Form 10-K filed on October 13, 1999).
27 Financial Data Schedule (see below).
