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 March 31, 2000
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 (IRS 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 (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) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
At May 1, 2000, 41,593,667 shares of the Registrant's $.01 par value common
stock were outstanding.
<PAGE>
3Si Holdings, Inc.
Index
Part I: Financial Information
Item 1. Financial Statements
Accountants' Report 3
Consolidated Balance Sheets, at March 31, 2000
(unaudited) and June 30, 1999 4
Consolidated Statements of Operations for the quarter
and nine months ended March 31, 2000 and
1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2000 and
1999 (Unaudited) 6
Notes to Interim Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 9
Part II: Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 10
2
<PAGE>
Board of Directors
3Si Holdings, Inc.
The accompanying consolidated balance sheet of 3Si Holdings, Inc. as of
March 31, 2000, and the statements of operations and cash flows for the
periods ended March 31, 2000 and 1999, were not audited by us, and,
accordingly, we do not express an opinion on them.
The balance sheet as of June 30, 1999, was audited by us and we
expressed an unqualified opinion on it in our report dated September
28, 1999, but we have not performed any auditing procedures since that
date.
/s/ Balogh & Tjornehoj, LLP
Denver, Colorado
May 1, 2000
3
<PAGE>
3Si Holdings, Inc.
<TABLE>
<CAPTION>
Consolidated Balance Sheets
March 31, 2000 June 30, 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 410,677 $ 1,372,293
Accounts receivable - trade 55,554 437,221
Other current assets 11,975 11,000
----------- -----------
Total current assets 478,206 1,820,514
PROPERTY AND EQUIPMENT AT COST
Computer systems 39,107 28,575
Less accumulated depreciation and amortization (11,787) (7,500)
----------- -----------
Net property and equipment 27,320 21,075
OTHER ASSETS
Software development costs (net) 34,583 42,827
Other non-current assets 51,216 50,000
----------- -----------
Total other assets 85,799 92,827
----------- -----------
Total assets $ 591,325 $ 1,934,416
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 237,793 $ 3,301,354
Accrued liabilities 175,866 427,845
----------- -----------
Total current liabilities 413,659 3,729,199
MINORITY INTEREST 61,589 149,932
REDEEMABLE EQUITY SECURITIES 2,211,048 --
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock 411,842 400,842
Additional paid in capital 2,907,196 2,773,536
Accumulated (deficit) (3,556,656) (3,261,740)
Treasury stock (1,857,353) (1,857,353)
----------- -----------
Total stockholders' (deficit) equity (2,094,971) (1,944,715)
----------- -----------
Total liabilities and stockholders' (deficit) equity $ 591,325 $ 1,934,416
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
3Si Holdings, Inc.
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(Unaudited)
Quarter Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product sales $ -- $ 3,932,025 $ -- $ 13,589,550
Consulting, service, and license fees 77,830 1,511,447 126,041 5,109,828
------------ ------------ ------------ ------------
Net revenues 77,830 5,443,472 126,041 18,699,378
Cost of products sold -- 4,886,001 -- 14,075,540
Contract labor and other costs 17,268 1,096,262 49,219 3,847,327
------------ ------------ ------------ ------------
Total cost of revenues 17,268 5,982,263 49,219 17,922,867
------------ ------------ ------------ ------------
Gross profit 60,562 (538,791) 76,822 776,511
Selling and administrative expenses 181,023 506,919 560,887 3,223,492
------------ ------------ ------------ ------------
(Loss) earnings from operations (120,461) (1,045,710) (484,065) (2,446,981)
Other income (expense)
Interest income 2,931 500 20,976 4,755
Interest expense (54,807) (40,482) (182,749) (160,009)
Loss on disposition of assets -- (65,106) -- (348,203)
Miscellaneous income 251,500 -- 262,579 4,378
------------ ------------ ------------ ------------
Total other income (expense) 199,624 (105,088) 100,806 (499,079)
------------ ------------ ------------ ------------
Net earnings (loss) before
minority interest 79,163 (1,150,798) (383,259) (2,946,060)
Minority interest 24,365 -- 88,343 --
------------ ------------ ------------ ------------
Earnings (loss) before
income taxes 103,528 (1,150,798) (294,916) (2,946,060)
Income taxes -- -- -- (69,000)
------------ ------------ ------------ ------------
Net earnings (loss) $ 103,528 $ (1,150,798) $ (294,916) $ (3,015,060)
============ ============ ============ ============
(Loss) per common share $ -- $ (.03) $ (.01) $ (.09)
============ ============ ============ ============
Weighted average shares outstanding 35,417,492 33,934,298 35,414,617 33,934,298
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
3Si Holdings, Inc.
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
----------- -----------
<S> <C> <C>
Operating activities
Net (loss) $ (294,916) $(3,015,060)
Reconciling adjustments
Depreciation and amortization 28,287 173,860
Reserve for stockholders' loan -- 146,279
Stock option compensation -- 52,726
Net loss on disposition of assets -- 348,203
Loss attributable to minority interest (88,343) --
Change in operating assets and liabilities
Accounts receivable 330,963 595,443
Inventory -- 18,098
Other assets 53,513 113,147
Accounts payable (798,129) 3,028,315
Other liabilities (156,675) 250,780
Deferred taxes -- 69,000
----------- -----------
Total adjustments (630,384) 4,795,851
----------- -----------
Net cash (used for) provided by operating
activities (925,300) 1,780,791
Investing activities
Purchases of equipment (10,532) (164,493)
Software development costs (15,756) --
Loans to stockholders -- (66,397)
Proceeds from assignment of government contracts -- 500,000
----------- -----------
Net cash (used for) provided by investing activities (26,288) 269,110
Financing activities
Revolving line of credit, net -- (1,794,854)
Payments on capital lease -- (15,326)
Proceeds from stock issuance 11,500 --
Purchase of treasury shares (21,528) --
----------- -----------
Net cash (used for) financing activities (10,028) (1,810,180)
----------- -----------
Net change in cash and cash equivalents (961,616) 239,721
Cash and cash equivalents, beginning 1,372,293 13,843
----------- -----------
Cash and cash equivalents, ending $ 410,677 $ 253,564
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 182,749 $ 160,009
=========== ===========
Income tax paid $ -- $ 15,000
=========== ===========
</TABLE>
See Note 3 related to non-cash consideration in settlement of litigation.
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
3Si Holdings, Inc.
Notes to Interim Consolidated Financial Statements
March 31, 2000
(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. at
March 31, 2000 and June 30, 1999, and the results of operations and cash flows
for periods ended March 31, 2000, and March 31, 1999. The Notes to the
Consolidated Financial Statements which are contained in the June 30, 1999, Form
10-K should be read in conjunction with these Interim Consolidated Financial
Statements.
Note 2. (Loss) Earnings Per Share
Net (loss) earnings per share was computed on the basis of the weighted average
number of common shares only, as shares subject to warrants and stock options
would have an anti-dilutive effect.
Note 3 - Contingencies
Lease Agreement
During the year ended June 30, 1998, the Company entered into a Federal Master
Assignment Agreement with a leasing company to effect a government lease 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", 3SiH would be liable for the present value of
the discounted cash flows then owed under the lease. On July 31, 1998, the
lessee terminated the lease for convenience.
The leasing company filed suit against 3SiH to recover the present value of the
discounted cash flows. A settlement was reached in September 1999. 3SiH paid the
plaintiffs $75,000 and issued 1,100,000 shares of its restricted common stock
(valued at $154,688) to the plaintiffs. The $224,688 settlement (which is net of
the $5,000 value of inventory recovered) was accrued as a loss at June 30, 1999.
Vendor Litigation
On March 16, 2000, the Company entered into a settlement agreement with a
vendor, ("SAN"). SAN had filed suit to attempt to attach the Company's assets
for the collection of its liability.
Under the terms of the settlement, the entire $2,211,048 liability has been
converted into 6,460,137 shares of common stock. The Company has placed $50,000
in escrow to use in registering these SAN shares under certain future
conditions.
The Company is paying a minimum of $53,511 per month to another vendor until a
total of $535,105 has been paid from December 1, 1999 to September 1, 2000. Upon
payment in full of the liability to this other vendor, the stock redemption
provisions of the SAN settlement agreement will take effect.
7
<PAGE>
3Si Holdings, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2000
Vendor Litigation (continued)
Under the stock redemption provisions of the SAN agreement, all future
contingent payments from the May 1, 1999 sale of 3SiH's systems
integration business will be used to redeem SAN's shares. In addition,
50% of all net earnings (excluding the aforementioned contingent
payments) and 50% of any capital contributions or loans to 3SiH will be
used to redeem SAN's shares.
Redemptions made before September 28, 2000, will be redeemed at $.35
per share. Subsequent redemptions will be made at $.52 per share, or
the then current market price, which ever is higher. At the point SAN
has received $2,211,048, 3SiH will no longer be obligated to redeem
SAN shares.
Financial Condition
At March 31, 2000, the Company had positive working capital. Current
assets exceeded current liabilities by $64,547.
As of December 31, 1999, accounts payable balances owed to two vendors
were approximately $360,000 and $2,200,000. The Company has made
semi-monthly payments to, and has performed services for, one of the
vendors reducing the amount owed to approximately $188,000. The vendor
who was owed approximately $2,200,000 has accepted redeemable common
stock in satisfaction of that liability.
Management believes that with its improved financial position and new
sources of revenue, there is no longer doubt about the Company's
ability to continue as a going concern.
3SiH sold its systems integration business on May 1, 1999. The
agreement provides for contingent payments to 3SiH of 75% of the
profits in excess of contract renewal payments from the sold business
for the first year, and 50% of the profits in excess of contract
renewal payments for the second and third years. Profits from the sold
business have not exceeded contract renewal payments through March 31,
2000, and no contingent payments are due to 3SiH at March 31, 2000. The
first $158,000 of these contingent payments earned by 3SiH will be
retained by the buyer to pay for compensated absences for former 3SiH
employees. This amount is included under accrued liabilities in the
March 31, 2000, balance sheet.
Results of Operations
The Company has sold its systems integration business effective as of
May 1, 1999. Its remaining business is the licensing of its software
products and related services.
8
<PAGE>
3Si Holdings, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2000
Results of Operations (continued)
The Company reported a net loss of $294,916 for the nine months ended
March 31, 2000, while a net loss of $3,015,060 was reported for the
nine months ended March 31, 1999*.
The operations for the period ended March 31, 1999, include the
Company's systems integration business which was subsequently sold
effective as of May 1, 1999. The operations for the period ended March
31, 2000, only include the remaining business of licensing its software
products and revenue related to those products.
The Company reported net earnings of $103,528 for the three months
ended March 31, 2000. Miscellaneous income for this period includes a
$250,000 payment from the purchaser of the systems integration
business. Receipt of this payment was contingent upon the renewal of a
key contract.
On March 15, 2000 the Company's subsidiary entered into a $700,000
one-year contract to manage the day-to-day development, training and
data conversion for the Qwest Cyber.Solutions website. Revenues of
$50,000 have been earned under this contract during the three months
ended March 31, 2000.
Revenues for the three months and nine months ended March 31, 2000,
include $16,000 and $54,000, respectively, for consulting and services
to one customer. This customer is also a 3SiH vendor, who is owed a net
$188,000 at March 31, 2000. The revenues generated have reduced the
amount owed to this vendor.
The Company has five employees as of March 31, 2000.
Interest expense for the period ended March 31, 2000, represents
payments to a vendor as called for in the parties' written agreement.
These payments ended as of March 16, 2000, with the settlement of the
vendor's debt.
*Restatement
The statements of operations for the three months and nine
months ended March 31, 1999, have been restated to reflect
adjustments of $1.7 million applicable to these periods. These
adjustments were discovered in the fourth quarter of fiscal year
June 30, 1999.
9
<PAGE>
3Si Holdings, Inc.
Other Information
March 31, 2000
Item 1. Legal Proceedings
On March 16, 2000, the Company entered into a settlement
agreement with a vendor, ("SAN"). SAN had filed suit to attempt to
attach the Company's assets for the collection of its liability. Under
the terms of the settlement, the entire $2,211,048 liability has been
converted into 6,460,137 shares of redeemable common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Each exhibit identified below is filed as a part of this report.
EXHIBIT
NUMBER DESCRIPTION
2000-1 Storage Area Network settlement
agreement. Incorporated by reference
to the March 23, 2000 Form 8-K.
(b) Reports on Form 8-K
3Si Holdings, Inc. filed a current report on Form 8-K, dated
March 23, 2000, disclosing the Storage Area Network settlement
agreement and announcing the Qwest Cyber.Solutions contract.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
3Si Holdings, Inc.
(Registrant)
Date: May 1, 2000 By: /s/ Frank Backes
Frank Backes, CEO, CFO
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 410,677
<SECURITIES> 0
<RECEIVABLES> 55,554
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 478,206
<PP&E> 39,107
<DEPRECIATION> 11,787
<TOTAL-ASSETS> 591,325
<CURRENT-LIABILITIES> 413,659
<BONDS> 0
0
0
<COMMON> 411,842
<OTHER-SE> (2,506,813)
<TOTAL-LIABILITY-AND-EQUITY> 591,325
<SALES> 0
<TOTAL-REVENUES> 77,830
<CGS> 0
<TOTAL-COSTS> 17,268
<OTHER-EXPENSES> 181,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,807
<INCOME-PRETAX> 103,528
<INCOME-TAX> 0
<INCOME-CONTINUING> 103,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,528
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
