U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE
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
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X].
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of July 30, 2000: common stock,
par value $0.001 per share -- $1,057,284. As of July 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.
PAGE
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTY 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION TO MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II.
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 10
ITEM 6. PLAN OF OPERATION 11
ITEM 7. FINANCIAL STATEMENTS 22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 22
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT 22
ITEM 10. EXECUTIVE COMPENSATION 24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development.
3Si Holdings, Inc., a Wyoming corporation ("Registrant") has
developed and deployed Internet-based solutions to help
businesses excel in the delivery of customer support through
technologies that allow ease of distribution.
The Registrant is comprised of two entities: KEWi.net, Inc.
("KEWi"), a Colorado corporation, with 69% owned by the
Registrant, which was formed to provide Internet-based knowledge
management, community portal and support capabilities, commonly
known as iSupport. 3Si, Inc. ("3Si"), a Colorado corporation and
wholly-owned subsidiary of the C, serves as a master reseller and
Application Service Provider (ASP) for the Registrant KEWi family
of products. 3Si Holdings, Inc. is a Wyoming corporation formed
in 1979. The Registrant's principal executive offices are
located at 6886 South Yosemite St., Englewood, Colorado 80112;
the telephone number is (303) 749-0210.
Business of the Registrant.
(a) Registrant Overview.
Through its KEWi family of products, the Registrant and its
subsidiaries are in the unique position to enhance and expand the
way users create, manage and exchange information as they
participate and compete in the global marketplace. The
Registrant's mission is to refine and provide the technology to
capture the knowledge base and experience of the user, empower
the user to deliver this information in a meaningful way through
the Internet to audiences, and do so whenever and wherever
needed, in a simple, streamlined process. The KEWi family of
products is suited for any business organization, internal or
independent, that must communicate different messages to
different audiences expediently through the Internet.
(b) Industry Background.
As more and more businesses compete using the Internet as a tool,
it becomes increasingly critical to retain existing customers.
Businesses can be very selective in choosing software solutions
that are available from a growing number of companies competing
for the online customer support market.
With over 90 million people accessing the Internet today, and
estimates of an additional 1 million new Internet users per
month, clearly the Internet provides an ideal vehicle for
manufacturers and service providers. Companies and organizations
of all sizes are looking to technology to provide business-rich
applications for their customers to access 24 hours a day, 7 days
a week. The Internet has emerged as the premier method of
delivery.
Explosive growth and countless new technologies have
characterized support applications in recent years. Now, users
are in search of ways to maximize and streamline their online
experience. The challenge resides in providing a robust
application that can meet the demands of many concurrent users
and can be distributed geographically around the world.
According to Boston-based AMR Research, Inc., a highly respected
industry trend-spotting source, Internet-based support strategies
". . . are becoming the hub of many companies' marketing
strategies." AMR predicts that the total Customer Relations
Management (CRM) will jump to $16.8 billion by 2003 from $2.3
billion in 1998.
Datamonitor expects this market to grow from $150 million in 1998
to $2 billion by 2003. While new technologies may reduce the
manpower costs, they often increase technical development
expenses. Exceptional customer service is what time and again
makes the difference between loyal customers and abandoned
shopping carts and businesses are in search of new and more
efficient ways to offer that customer service.
Global dependence on the Internet has exploded in sufficient
volume for the type of applications needed to bring about a
natural, logical redefinition of business communication and
distribution. By the year 2000, according to Forrester Research
Inc., a leading independent research firm that analyzes the
future of technology change and its impact on businesses,
consumers and society, Internet-based call center solutions may
reduce labor costs by 43 percent as compared to an estimated
labor cost increase of 3 percent without Internet-based
solutions.
Organizational Infrastructure Support Market
Information Technology ("IT") groups comprise the organizational
infrastructure support market. Internal support issues range
from supporting desktop and shared hardware, third party software
applications, corporate information systems, corporate networks
and central data center functions. IT departments, regardless of
size of audience or organization served, are becoming overwhelmed
by the proliferation of services and personnel required to
support internal infrastructures. Rather than having to support
more hardware and/or software, the IT industry is seeking more
efficient ways to manage the information and data they are tasked
to coordinate and distribute to a variety of audiences (including
associates, vendors and customers). They are seeking to place as
much power into the hands of the end user as possible.
Proprietary Product Support Market
The proprietary product support market is characterized as an
end-user customer support function. External support markets
include product support, installation/configuration support,
account information, and call center management.
Gartner Group, a world leader in providing business technology
research, consumer and market intelligence, consulting,
conferences and decision-making tools, estimates that revenues
from software applications including sales management, telesales,
and customer service solutions, will grow from $900 million in
1997 to $4 billion in 2002 (an annual growth rate of 35 percent).
Proprietary software products provide a clear value-add to
computer hardware manufacturers, which has led to the current
trend of major tier-1 manufacturers aggressively seeking value-
added partners with industry specific products and services.
Looking specifically at the help-desk market, IDC, a global
leader in providing technology intelligence, industry analysis,
market data, and strategic and tactical guidance to the builders,
providers and users of information technology, has estimated that
this market will grow to approximately $2.5 billion in the year
2000 and $3.5 billion by the year 2002.
Person-to-Person Internet Support Market
Frustrated by long wait times on phone support lines, users in
increasing numbers are migrating to a more convenient and diverse
form of help: newsgroups. Person-to-person "chat" and
unregulated Internet newsgroups define this market. For almost
any topic imaginable, a user can ask questions and get
information from others registered in the newsgroup. Newsgroups
are one of the most useful, information-rich parts of the
Internet. They are also the most unpredictable and can be
unreliable.
Unlike typical help desk environments where a user has
interaction with a single phone support person, a newsgroup
allows interactions with many people each with their own skill
set, expertise and perspective. For that reason, some groups are
officially sponsored; others are not. Microsoft has gone as far
as to certify and compensate some independent support engineers
to monitor and provide quality support to certain newsgroup
forums.
The Paging Market
More data is sent over the paging infrastructure than by all
other forms of mobile data communications combined. Today, the
paging industry is making a move that will change the way the
public thinks about paging and impact the way people communicate
for years to come. The advent of two-way paging technology will
open an entirely new arena for the development and expansion of
wireless messaging. The term "paging" as it is used today will
practically become obsolete.
One out of every seven people will carry a wireless device by the
year 2000, which translates into nearly 70 million subscribers.
Demand for word messaging is growing at twice the rate of numeric
paging. Demand for wide-area coverage is growing at twice the
rate as local coverage. Nearly 75 percent of United States
professionals now spend more than 20 percent of their time away
from the office. There are more than 600 wireless messaging
companies operating in the United States, of which the top 30
companies constitute 95 percent of the business.
(c) Strategy.
The KEWi family of products has been designed to provide maximum
distribution, ease of use, accessibility, immediate response
time, scalability, and a rapid development cycle. Through the
integration of the KEWi family of products and services, a
complete web presence can be created and deployed in less time
for less money and less manpower, and can offer more
functionality than can more traditional approaches.
The Registrant's strategy is to continue to expand the KEWi
family of products and includes the following key points:
Leverage technical expertise in software support over the
Internet. The Registrant has designed its products to provide
immediate access support to Internet-based customers and to
provide a self-help knowledge management solutions.
Expand product offering to a broader customer base. By
partnering with companies to market the Registrant's products to
government agencies and companies with large distribution
channels, the Registrant intends to increase the Registrant's
penetration into the Internet-based support market. The
agreements with Qwest Cyber.Solutions, Mobilitylink, and SMI
International are examples of this strategy.
Utilize network of two-way wireless messaging. We intend to
integrate business applications with a two-way paging system.
(d) Products And Services.
Each product in the KEWi family can be sold independently,
distributed through an ASP model, or integrated with the others
to provide a complete Internet business strategy:
Knowledge Management
Customer Support (iSupport)
Wireless Device Management
Crack The Books
Comprehensive integration of these components results in a
capability labeled Internet Management for the Enterprise.
Knowledge Management
The term "at the speed of business" has taken on a new meaning in
this world of instantaneous communication. Those with access to
knowledge in real time have a distinct competitive advantage.
KEWi's knowledge management capability captures knowledge at the
source of expertise allowing controlled distribution and access
by anyone, anywhere, and at anytime. KEWi's search capability
is a unique combination of natural language, key words,
proprietary algorithms, and techniques allowing each customer to
define their own language.
Each business uses a unique language to communicate with
customers and employees. KEWi's Knowledge Management has the
ability to incorporate the unique language of each business to
provide fast, reliable information and answers to user requests.
KEWi thus becomes a system capable of providing information at
the speed of thought.
Customer Support
The Internet has opened the door to a new dimension in delivering
customer support. Customers today expect and demand to have
access to information, answers and support 24 hours a day, 7 days
a week. KEWi integrates capabilities directly targeted at
meeting and, in many cases, exceeding these customer
expectations. Unlike other customer support products on the
market, KEWi has been designed from the ground up to be delivered
over the Internet and through wireless devices. The most
inefficient use of call centers resources is the "status call."
Requests for status information on the resolution of a previous
inquiry can be as high as 15 percent to 20 percent of the total
call volume. KEWi has a call status feature allowing the
customer to access status information instantaneously from the
Internet.
Wireless Paging Management
With a two-way pager and KEWi's Wireless Paging Management, an
organization can easily and conveniently manage and track
critical pager communications interfacing business applications
with a nationwide paging network. Immediate benefits include:
Maximizing support personnel productivity
Confirmation that the page was received and when
Sending and managing pages through a browser interface
Allocation of support personnel dynamically
Interaction with business applications through a pager
Greater control of paging expenses
Wireless Paging Management allows a user's business
application(s) to interact electronically with a paging network.
The service includes two primary interfaces (a) a 3Si developed
generic application interface that allows communication between
the customer network and the 3Si service; and (b) a site-specific
interface that passes two-way paging data to the business
application. The site-specific interface may be developed by 3Si
or other systems integrator as is deemed most appropriate. Two-
way paging management allows users to increase customer
satisfaction and reduce overall support costs.
CrackThe BooksT
CrackTheBooksT is a scheduling and support service for schools
and other similarly-run organizations. It facilitates and
streamlines sharing of knowledge and support to students, their
families, and other user groups. Some of the information shared
through CrackTheBooksT is homework, testing schedules, sporting
events, questions for teachers, daily cafeteria menus, practice
schedules and many other options.
Internet Management for the Enterprise
Internet Management for the Enterprise comprehensively integrates
all the components in the KEWi family of support products,
providing the following capabilities: search engine, portal
management, access control, content filtering, content creation
and management, press releases, news articles, product and
services information, sales tools, careers and job postings,
self-help knowledge, sales lead routing, customer support system,
and integration with business applications.
(e) Sales And Marketing.
The KEWi suite of Internet-based customer support products is
based on three fundamental philosophies:
capturing the creation of knowledge at the source;
aggregating that knowledge; and
controlled and systematic distribution through the Internet and
wireless devices.
3Si Application Service Provider
In this subscription-based environment, the customer is billed
monthly for access to the KEWi service. All of the software,
hardware and networking systems are maintained from the
Registrant's data center. This business model has the advantage
of minimal startup expense time and does not require any
expertise from the customer. Currently over 500 customers access
KEWi products and services through the ASP business model. These
users include SMI International, Evolving Systems and Cable Labs.
Customer Installed
KEWi software and hardware may also be implemented directly on
the customer's network. The software is licensed to customers
and an annual maintenance fee is charged for software support and
updates. The KEWi family of products can be deployed in both
Intranet and Internet environments. Currently, Qwest
Cyber.Solutions uses KEWi technology as the infrastructure behind
their new corporate web site. The United States Air Force has
selected KEWi as a problem and status tracking tool for the
support of satellites.
Rebranding and Distribution
Rebranding of KEWi products and services will produce the most
dramatic impact on gaining market share. This distribution model
is an ideal model for companies that would like to get into the
web services and knowledge delivery market quickly and
efficiently. The "Powered by KEWi" branding will generate
recurring revenue for the Registrant through royalty licensing.
A Joint Marketing and Warrant Agreement between KEWi.net and
Qwest Cyber.Solutions ("QCS") has been signed with the goal of
developing a QCS branded suite of KEWi-based products. In
addition to rebranding the KEWi products and services, SMI
International has exclusive rights to the sale of KEWi to the
United States government market. MobilityLink is in the process
of creating a rebranded version of the KEWi products and
services.
Wireless Paging Management
Wireless Paging Management has the ability to generate revenue by
developing customer specific business application interface, sale
of the pager devices, reselling the paging service, and service
fees for access through the KEWi data center to the wireless
paging network.
(f) Strategic Alliances.
KEWi.net is at a crossroads in company growth. As the Registrant
identifies qualified individuals with the skills, expertise and
vision to expand the organization, it relies on several
significant partnerships to guide us along the way as the
Registrant transitions from utilizing outsourcing to building a
solid infrastructure. At this time, KEWi's wireless product
interfaces with SkyTelr network. The Registrant has also signed
a technology alliance agreement with Weblink Wirelessr to
integrate business applications and has agreements with
Mobilitylink, SMI International and Qwest Cyber.Solutions.
In August 1999, the Registrant partnered with SMI International
("SMI"), a Colorado Springs-based management group (formerly
Space Mark Inc.), by signing a Master Reseller Agreement. The
agreement gives SMI exclusive rights to market KEWi.net products
to all local, state and federal government agencies in the United
States, including the State of Alaska, as well as all government
and commercial customers in Australia, New Zealand.
(g) Competition
With the proliferation of Internet-based customer support
systems, the competition, at first glance, may look intimidating.
For the most part, these companies have done a terrific job of
raising money and creating a presence in the financial markets.
However, the products are focused primarily on a small segment of
the overall requirements. Most of the Internet-based support
products require the purchase of new servers, related software
and integration services in order to deploy the system over the
Internet.
The Registrant believes there are significant opportunities
for differentiation of the KEWi products and services due to its
focus on the entire enterprise: knowledge management,
distribution and support requirements. Competitors in this
market are: Silknet, Ask Jeeves, Inc., Brightware, and Motive.
Employees.
As of September 15, 2000, the Registrant had six employees, 5 of
whom are in the area of sales and marketing and software
development and customer service, and 1 of whom is in
administration.
ITEM 2. DESCRIPTION OF PROPERTY.
From May 1, 1999 to June 30, 2000, the Registrant was
provided a small amount of space at its Englewood location by the
purchaser of its systems integration business. The Registrant
currently has no agreement for the continued use of this space.
The Registrant believes that its facilities are adequate for the
present level of business during the remainder of fiscal year
2000.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information.
The Registrant's Shares are traded in the Over-the-Counter
Bulletin Board (symbol "TSIH"), having commenced trading on
January 2, 1987 (on September 16, 1998, the name of the
Registrant was changed from Tyrex Oil Company). The range of
closing bid prices shown below is as reported by this market.
The quotations shown reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent
actual transactions.
Per Share Common Stock Prices by Quarter
For the Fiscal Year Ended on June 30, 2000
High Low
Quarter Ended September 30, 1999 0.20 0.10
Quarter Ended December 31, 1999 0.18 0.07
Quarter Ended March 31, 2000 0.94 0.12
Quarter Ended June 30, 2000 0.50 0.19
Per Share Common Stock Prices by Quarter
For the Fiscal Year Ended June 30, 1999
High Low
Quarter Ended September 30, 1998 0.41 0.06
Quarter Ended December 31, 1998 0.31 0.15
Quarter Ended March 31, 1999 0.31 0.19
Quarter Ended June 30, 1999 0.25 0.12
Holders of Common Equity.
As of July 30, 2000, there were approximately 1,700 shareholders
of record of the Registrant's common stock.
Dividend Information.
The Registrant has not declared or paid a cash dividend to
stockholders since it was incorporated. The Board of Directors
presently intends to retain any earnings to finance Registrant
operations and does not expect to authorize cash dividends in the
foreseeable future. Any payment of cash dividends in the future
will depend upon the Registrant's earnings, capital requirements
and other factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
financial statements of the Registrant and notes thereto
contained elsewhere in this report.
Financial Condition.
(a) General.
As of June 30, 2000, the Registrant had a working capital
deficit of approximately $138,000, and had negative working
capital from operations of $784,000 for the year then ended. The
overall decreases in both current assets and liabilities reflect
the down-sizing of the Registrant subsequent to the May 1999 sale
of the systems integration business.
(b) Vendor Settlements.
As of June 30, 1999, accounts payable balances owed to two
vendors were approximately $650,000 and $2,200,000. The
Registrant has made payments throughout the current year, and
made the final payment on the $650,000 balance as of August 2000.
A settlement was reached with the other vendor, Storage Area
Network ("SAN"), whereby SAN received 6,460,137 shares ("the SAN
Shares") of the Registrant's common stock and the liability was
discharged. The SAN shares will be subject to redemption at a
predetermined price under the following terms. All contingent
proceeds received after August 2000, from the May 1999 sale of
the systems integration business will be used to redeem the SAN
shares. In addition, the Registrant will use 50% of any capital
investment or loans, and 50% of net income, realized after August
2000, to redeem SAN shares. At the point SAN has received
redemption payment totaling $2,200,000, the Registrant will have
the right, but not the obligation, to continue purchasing the SAN
Shares.
(c) Contingent Sales Proceeds.
The agreement for the May 1999, sale of the systems integration
business provides for contingent payments to the Registrant 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).
Contract renewal payments of $302,000 and $250,000 were received
in June 1999 and March 2000, respectively. Profits from the sold
business have not exceeded $552,000 through April 2000 and no
additional contingent payments are due to the Registrant through
April 2000.
The final contract renewal payment of $75,000 was received by the
Registrant in August 2000. The Registrant will share in 50% of
the profits in excess of $75,000 for the year ended April 2000.
The first $158,000 of additional contingent payments earned by
the Registrant will be retained by the buyer to pay for
compensated absences for former 3SI employees.
(d) Credit Facilities.
The Registrant currently has no line of credit facility in place.
The provision in the SAN settlement 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) Financial Condition Summary.
All trade payables are current as of June 30, 2000, with the
exception of the one significant vendor balance, which was paid
off in August 2000. The working capital deficit has been reduced
substantially, down to $138,000 at June 30, 2000. This $138,000
deficit includes $158,000 of accrued compensation payable that is
being deferred, and is anticipated to be offset against
additional contingent sales proceeds. The Registrant can now
move forward without the debt burdens of the prior years.
Management believes that, with the agreements in place to provide
services to customers for FY 2001, (see discussion below) it has
the ability to generate sufficient cash to support its operations
for the next twelve months.
Results of Operations.
(a) Overview
In May 1999, 3Si sold its computer reseller, consulting, and
government sales divisions for the purpose of focusing its
efforts on the marketing, sales, and integration of KEWi.net
products.
The Registrant's principal services provided during FY 2000 were
web site development using the KEWi.net products, and the
licensing of the KEWi.net Internet-based customer support system.
The Registrant has also entered into an agreement to develop and
maintain a web site for a large Colorado corporation. Revenues
of $80,000 under this agreement were reported in FY 2000.
Completion of the first two phases of this project, and all of
the training, would provide $545,000 of revenue during FY 2001.
The Registrant has also entered into an agreement to
maintain and operate the Internet-based customer support system
for FY 2001, for the entity that owns the 26% minority interest
in KEWi. The $129,600 fee for the annual agreement was received
in July 2000.
(b) Year Ended June 30, 2000 with Comparison to Year Ended June
30, 1999
The operations reported for FY 1999 included net revenues
and net loss attributable to both the Registrant's new KEWi
product focus and the systems integration business that was sold
in May 1999 as follows:
Old Systems New KEWi
Integration Products
Business Focus Total
(000's) (000's) (000's)
Net revenues $ 16,445 $ 33 $ 16,478
Cost of operations 18,527 630 19,157
(Loss) from operations (2,082) (597) (2,679)
Other (454) 4 (450)
Net loss before taxes (2,536) (593) (3,129)
Income tax (69) - (69)
Net loss $ (2,605) $ (593) $ (3,198)
The FY 2000 loss is $444,742. The FY 1999 loss (exclusive of the
$2,605,000 from the systems integration business) was $593,000.
This $593,000 FY 1999 loss represented two months of operations
under the Registrant's new focus.
The operations reported for FY 2000 reflect the Registrant's new
focus, with $104,000 of revenues from consulting and services
related to the KEWi.net products. The FY 2000 operations also
reported $28,000 of revenues from the licensing of the KEWi.net
Internet-based customer support system. Revenues of $33,000 were
reported related to the KEWi.net products in FY 1999. Operating
costs (exclusive of the systems integration business) have been
significantly reduced in FY 2000. Operating costs (cost of
revenue and selling and administrative expense) of $795,000 were
reported for FY 2000. Operating costs (exclusive of the systems
integration business) of $630,000 were reported for FY 1999.
This included only two months of operations in FY 1999 under its
new KEWi.net products focus. Compensation costs of $371,000 are
reflected in the FY 2000 results of operations. A significant
portion of the Registrant's FY 2000 compensation costs was
related to non-billable functions. The technical staff devoted
significant time to research, its "Crack-the-Books" promotional
software, and the unsuccessful development of paging system
software. A significant portion of management's time during FY
2000 was also diverted from revenue producing functions to legal
issues that are now settled.
Legal expenses of $86,000, related to the settlement of two
lawsuits against the Registrant, are also reflected in the FY
2000 results of operations. Interest expense of $183,000 was
incurred and paid to SAN in FY 2000 prior to the settlement
agreement reached on the $2.2 million debt owed by the
Registrant. The Registrant's only debt subject to interest at
June 30, 2000, is a $17,000 capital lease.
The FY 2000 operations include a $27,000 write-off of paging
system software and $32,000 amortization of other software
development costs. All capitalized software has been fully
amortized at June 30, 2000.
(c) Year Ended June 30, 1999 with Comparison to Year Ended June
30, 1998
During FY 1999 the Registrant exited out of the computer
selling and consulting business. The Registrant sold its field
services division just prior to FY 1999. The Registrant assigned
its government sales contract effective January 1, 1999, and sold
the balance of its computer selling and consulting business as of
May 1, 1999.
The FY 1999 loss is due to the decline in sales (as the
Registrant exited out of the computer selling and consulting
business) combined with declining margins. The Registrant
incurred a net loss of $3,197,545 in FY 1999 compared to a net
loss of $62,918 in FY 1998.
Net sales decreased approximately $12.9 million, or 44.0% in
FY 1999 compared to FY 1998. This change is primarily the result
of the Registrant exiting out of the computer selling and
consulting business. Revenue from consulting and services
(excluding the United States Postal Service ("USPS") sub-
contract) decreased approximately $2.1 million. Revenues from the
"USPS" sub-contract (which was part of the May 1, 1999 sale)
decreased approximately $700,000. Revenues from the licensing of
the KEWi.net Internet-based customer support system were
approximately $8,000 in FY 1999.
Cost of goods sold in total decreased approximately $9.6
million or 39% in FY 1999 compared to FY 1998. The Registrant's
gross profit percent on product sales dropped dramatically in FY
1999. The gross profit on product sales dropped to 4.9% in FY
1999. This decrease is attributed to declining margins on
commercial sales due primarily to stiff competition and extremely
low margins on sales under its government contract. The direct
costs of consulting and Internet security assessments
approximately equaled the revenues due in part to customer
dissatisfaction with these services.
(d) Year Ended June 30, 1999 with Comparison to Year Ended June
30, 1998
Selling and administrative expenses decreased approximately
$700,000 or 13% in FY 1999 compared to FY 1998. This decrease is
due to $1.4 million in reductions in compensation costs as the
Registrant exited out of the computer selling and consulting
business. Other selling and administrative costs increased, as
the Registrant was unable to start reducing these costs until
after the May 1, 1999, sale. Bad debts, depreciation,
amortization, and lease costs associated with an unsuccessful
conversion of the internal accounting system all increased in FY
1999 compared to FY 1998.
Interest expense increased as a result of increased use of
the Registrant's revolving line of credit to finance its working
capital needs.
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 implement 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 after the
termination of such agreements. 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 is 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, 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 our 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 depend 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 retail and 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 retail and 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 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 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 specificlaly 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 informatino 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 our business. In
addition, goods to users worldwide, foreign jurisdictions may
claim that the Registrant is required to comply with their laws.
In some jurisdictions, the Registrant will be required to collect
value-added taxes on the Registrant's fees. Our 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."
ITEM 7. FINANCIAL STATEMENTS.
Financial statements as of and for the year ended June 30,
2000, and for the year ended
June 30, 1999 are presented in a separate section of this report
following Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors and Executive Officers.
The names, ages, and respective positions of the directors and
executive officers of the Registrant are set forth below; there
are no promoter and control persons of the Registrant. The
Directors named below will serve until the next annual meeting of
the Registrant's stockholders or until their successors are duly
elected and have qualified. Directors are elected for a one-year
term at the annual stockholders' meeting. Officers will hold
their positions at the will of the Board of Directors, absent any
employment agreement, of which none currently exist or are
contemplated. There are no arrangements, agreements or
understandings between non-management shareholders and management
under which non-management shareholders may directly or
indirectly participate in or influence the management of the
Registrant's affairs. The Directors and Executive Officers of
the Registrant are not a party to any material pending legal
proceedings and, to the best of their knowledge, no such action
by or against them has been threatened.
(a) Frank W. Backes, President/Chief Executive Officer/Director.
Mr. Backes, age 39, was appointed President and Chief
Executive Officer of 3Si Holdings, Inc. in June 1999. Mr. Backes
previously served as Executive Vice President and Chief
Technologist of 3Si since August 1993. Prior to 1993, he served
as a computer industry analyst with Digital Equipment
Corporation. Mr. Backes also serves as a Director of 3Si
Holdings, Inc.
(b) Frederick J. Slack, Executive Vice President/Director.
Mr. Slack, age 45, was appointed Executive Vice President in
June 1999 of KEWi.net and is responsible for sales and marketing.
From 1993 to June 1999, he served as President and Chief
Executive Officer of 3Si. Prior to joining 3Si in 1993, Mr.
Slack served as project manager for government customers at
Digital Equipment Corporation. Mr. Slack also serves as a
Director of 3Si Holdings, Inc.
(c) Felipe L. Valdez, Secretary/Director.
Felipe L. Valdez, 47, was appointed Secretary of 3Si
Holdings, Inc. in June 1999. From August 1993 to June 1999, he
served as Chief Operating Officer of 3Si. Prior to 1993, Mr.
Valdez spent 17 years as a manager with Digital Equipment
Corporation. Mr. Valdez also serves as a Director of 3Si
Holdings, Inc.
(d) Tom N. Richardson, Director.
Mr. Richardson, age 50, has served as a Director of 3Si
Holdings, Inc. since July 1986. Mr. Richardson has been an
independent oil operator since December 1997. From March 1994 to
December 1997, he served as President and Chief Financial Officer
of Tyrex Oil Co. Mr. Richardson joined Tyrex Oil Co. in 1980 as
Land Manager.
(e) Doris K. Backus, Director.
Doris K. Backus, 46, has served as a Director of 3Si
Holdings, Inc. since December 1991. She previously served as
Secretary of the Registrant and was employed by the Registrant
from 1983 to 1999.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires
executive officers and directors, and persons who beneficially
own more than 10% of any class of the Registrant's equity
securities to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission
("SEC"). Executive officers, directors and beneficial owners of
more than 10% of any class of the Registrant's equity securities
are required by SEC regulations to furnish the Registrant with
copies of all Section 16(a) forms they file.
Based solely on a review of the Forms 3 with respect to the
fiscal year ended June 30, 2000 and subsequently, the Registrant
is unaware that any required reports were not timely filed.
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
Summary Compensation Table
Annual compensation Long-term
compensation
Awards Payouts
Other Securi All
Annual ties other
Name and compen Restrict under compen
Principal Year Salary Bonus sation stock lying LTIP sation
Position award options payouts
SARs (2)
($) ($) ($)(1) ($) (#) ($) ($)
Frank W. 2000 $114,800 0 0 0 0 0 0
Backes, 1999 $110,000 0 0 0 0 0 0
President/ 1998 $110,000 0 0 0 0 0 0
CEO
Frederick 2000 $110,000 0 0 0 0 0 0
J. Slack, 1999 $110,000 0 0 0 0 0 0
Ex. Vice 1998 $110,000 0 0 0 0 0 0
President
Felipe L. 2000 $ 4,230 0 0 0 0 0 0
Valdez, 1999 $ 91,667 0 0 0 0 0 0
Secretary 1998 $110,000 0 0 0 0 0 0
(1) Perquisites and other personal benefits or property did not, in
aggregate, exceed $50,000 or 10% of the total compensation.
(2) 3Si was a subchapter S corporation prior to its acquisition by
Tyrex. Amounts indicated are distributions to the three officers
of 3Si named above, made to them in their capacities as
shareholders.
(3) Advances to officers/stockholders of $162,395 that were fully
reserved and recorded as an expense as of June 30, 1999, are not
considered compensation.
(4) There were no stock options granted to officers or directors
during the fiscal year ended June 30, 2000.
Other Compensation.
(a) There are no annuity, pension or retirement benefits
proposed to be paid to officers, directors, or employees of the
Registrant in the event of retirement at normal retirement date
as there was no existing plan provided for or contributed to by
the Registrant.
(b) No remuneration is proposed to be paid in the future
directly or indirectly by the Registrant to any officer or
director since there was no existing plan which provides for such
payment, including a stock option plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information regarding the
beneficial ownership of shares of the Registrant's common stock
as of July 30, 2000 (41,541,467 issued and outstanding) by (i)
all stockholders known to the Registrant to be beneficial owners
of more than 5% of the outstanding common stock; and (ii) all
officers and directors of the Registrant, individually and as a
group (each person has sole voting power and sole dispositive
power as to all of the shares shown as beneficially owned by
them):
Title of Name and Address of Amount of Percent
Class Beneficial Owner Beneficial of
Ownership(1) class
Common Felipe L. Valdez, 8,970,545 21.59%
Stock 6886 South Yosemite Street
Englewood, Colorado 80112
Common Frederick J. Slack 8,932,444 21.50%
Stock 6886 South Yosemite Street
Englewood, Colorado 80112
Common Frank W. Backes 8,477,777 20.41%
Stock 6886 South Yosemite Street
Englewood, Colorado 80112
Common Storage Area Network 6,460,137 15.51%
Stock 10691 East Tomich Drive
Franktown, Colorado 80116
Common Tom Richardson 188,721 0.45%
Stock 777 North Overland Trail, #101
Casper, Wyoming 82601
Common Doris K. Backus, 53,570 0.13%
Stock 777 North Overland Trail, #101
Casper, Wyoming 82601
Common Shares of all directors and 26,623,057 64.09%
Stock executive officers
as a group (5 persons)
(1) None of these security holders has the right to acquire any
amount of the shares within sixty days from options, warrants,
rights, conversion privilege, or similar obligations.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since the beginning of the Registrant's last fiscal year, there
have not been any transaction that have occurred between the
Registrant and its officers, directors, and five percent or
greater shareholders, except as follows:
Amounts due from the Registrant stockholders are $162,395 at June
30, 2000 and 1999, respectively. Due to the uncollateralized
nature of these receivables and the going concern consideration,
the June 30, 1999 balance of $162,395 has been fully reserved and
recorded as an expense.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits.
Exhibits included or incorporated by reference herein are set
forth under the Exhibit Index.
Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter
of the fiscal year covered by this report.
Index to Financial Statements and Schedules Page
Report of Independent Auditor 28
Consolidated Balance Sheets as of June 30, 2000 and June 30, 1999 29
Consolidated Statements of Operations for the years
ended June 30, 2000, June 30, 1999, and June 30, 1998 31
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2000, June 30, 1999, and June 30, 1998 32
Consolidated Statements of Cash Flows for the years
ended June 30, 2000, June 30, 1999, and June 30, 1998 33
Notes to Consolidated Financial Statements 35
SIGNATURES
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: October 12, 2000 By: /s/ Frank W. Backes
Frank W. Backes
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date
indicated:
Signature Title Date
/s/ Frank W. Backes President/Chief Executive October 12, 2000
Frank W. Backes Officer/Director
/s/ Frederick J. Slack Executive Vice President/ October 12, 2000
Frederick J. Slack Director
/s/ Felipe L. Valdez Secretary/Treasurer October 12, 2000
Felipe L. Valdez (principal financial and
accounting officer)/Director
INDEPENDENT AUDITORS' REPORT
Board of Directors
3Si Holdings, Inc.
We have audited the accompanying consolidated balance sheets
of 3Si Holdings, Inc. as of June 30, 2000 and 1999, and the
related consolidated statements of operations, changes in
stockholders' (deficit), and cash flows for the years ended June
30, 2000, 1999, and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that the
Company plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentations. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of 3Si Holdings, Inc. as of June 30, 2000 and 1999, and the
results of its operations and its cash flows for the years ended
June 30, 2000, 1999, and 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. At June 30,
2000, current liabilities exceed current assets by $138,282.
Also at June 30, 2000, the Company had a deficit in stockholders'
equity of $2,255,186. These factors, discussed at Note R, raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities
that might be necessary in the event the Company cannot continue
in existence.
/s/ Balogh and Tjornehoj, LLP
Balogh and Tjornehoj, LLP
September 15, 2000
Denver, Colorado
3SI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30
2000 1999
Current Assets
Cash and cash equivalents (Note B) $137,698 $1,372,293
Accounts receivable - trade (Note D) 54,605 437,221
Other current assets 1,216 11,000
Total current assets 193,519 1,820,514
Property and Equipment at Cost (Notes B And G)
Computer systems and software 82,647 28,575
Accumulated depreciation and amortization (15,217) (7,500)
Net equipment 67,430 21,075
Other Assets
Software development costs (Notes B and K) - 42,827
Deposit - 50,000
Escrow account (Note G) 50,000 -
Total other assets 50,000 92,827
Total assets $310,949 $1,934,416
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Current portion of long-term debt (Note G) $ 7,622 $ -
Accounts payable - trade (Note G) 157,075 3,301,354
Customer deposits 9,396 -
Accrued liabilities (Notes F and G) 157,708 427,845
Total current liabilities 331,801 3,729,199
Non-Current Liabilities
Long-term debt (Note G) 17,264 -
Commitments and Contingencies (Note G) - -
Minority Interest (Note I) 6,022 149,932
Common Stock Subject To Redemption (Notes B
and G) 6,460,137 shares issued at June 30, 2000 2,211,048 -
Stockholders' (Deficit) (Note J)
Common stock - authorized 50,000,000
shares of $.01 par value; 41,756,467 issued
at June 30, 2000; 40,084,156 issued at
June 30, 1999 417,565 400,842
Additional paid-in capital 3,282,963 2,773,536
Accumulated (deficit) (3,706,482) (3,261,740)
Treasury stock at cost - 215,000 shares at
June 30, 2000, and 6,050,626 shares at
June 30, 1999 (38,184) (1,857,353)
Common stock subject to redemption (2,211,048) -
Total stockholders' (deficit) (2,255,186) (1,944,715)
Total liabilities and stockholders' (deficit) $ 310,949 $1,934,416
The accompanying notes are an integral part of these statement
3Si HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, 2000 1999 1998
Product sales $ - $10,741,248 $20,816,550
Consulting and other service revenue 131,708 5,737,080 8,567,957
Net revenues 131,708 16,478,328 29,384,507
Cost of revenues 172,293 14,729,567 24,267,452
Gross profit (40,585) 1,748,761 5,117,055
Selling and administrative expenses 622,400 4,428,157 5,138,499
(Loss) from operations (662,985) (2,679,396) (21,444)
Other income (expense)
Miscellaneous income 33,665 19,021 74,815
Settlement of litigation (Note G) - (224,688) -
Interest expense (182,749) (230,424) (180,124)
Net gain (loss) on disposition of
assets (Note P) 223,417 (71,867) 9,835
Total other income (expense) 74,333 (507,958) (95,474)
Net (loss) before minority interest (588,652) (3,187,354) (116,918)
Minority interest (Note I) 143,910 58,809 -
Net (loss) before income taxes (444,742) (3,128,545) (116,918)
Income tax (expense) benefit (Note L) - (69,000) 54,000
Net (loss) (444,742) (3,197,545) (62,918)
Basic and diluted (loss) per common share
Net (loss) $(.01) $(.09) $nil
Weighted average shares outstanding
(Note B) 36,553,493 33,944,332 36,571,766
The accompanying notes are an integral part of these statement
3Si HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
# Add'l Accumu Trea Common Total
Common Common Paid In lated sury Stock Stock
Shares Stock Capital (Deficit) Stock Subject holders
To (Deficit)
Redemp Equity
Tion
Balance
June 30, 1997 39,293,424 392,934 2,322,902 (1,277) (5,987) - 2,708,572
Merger costs - - (8,278) - - - (8,278)
Exercise of
options at $.14
per share 469,000 4,690 60,970 - - - 65,660
Shares acquired
in self-tender;
6,005,626 at $.30
per share (net of
offering costs of
$49,678) - - - - (1,851,366) - (1,851,366)
Shares issued for
compensation at $.03
per share 222,500 2,225 4,450 - - - 6,675
Net loss for the
year ended
June 30, 1998 -
Restated - - - (62,918) - - (62,918)
Balance
June 30, 1998 39,984,924 399,849 2,380,044 (64,195) (1,857,353)- 858,345
Shares issued
for services at
$.16 per share 99,232 993 14,507 - - - 15,500
Stock option
grants and
revisions - - 52,726 - - - 52,726
Minority interest
proceeds in excess
of carrying value - - 326,259 - - - 326,259
Net loss for the
year ended
June 30, 1999 - - - (3,197,545) - - (3,197,545)
Balance
June 30, 1999 40,084,156 400,842 2,773,536 (3,261,740) (1,857,353)-(1,944,715)
Shares
reacquired;
60,000 at
$.186 per
share - - - - (11,169)- (11,169)
Shares
reacquired;
110,000 at
$.191 per
share - - - - (21,028)- (21,028)
Common stock
subject to
redemption;
6,460,137
shares issued
in
settlement
of litigation
net of
6,005,626
shares from
treasury 454,511 4,545 355,137 - 1,851,366 (2,211,048) -
Exercise of
options at
$.10 per
share 117,800 1,178 10,602 - - - 11,780
Shares
issued in
settlement
of
litigation
(Note G) 1,100,000 11,000 143,688 - - - 154,688
Net loss
for the
year ended
June 30, 2000 - - - (444,742) - - (444,742)
Balance
June 30,
2000 41,756,467 417,565 3,282,963 (3,706,482) (38,184) (2,211,048)(2,255,186)
See Note G related to 6,460,137 shares of common stock, subject to redemption,
which are presented separately from stockholders' deficit on the balance sheet.
The accompanying notes are an integral part of these statement
3Si HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, 2000 1999 1998
Operating activities:
Net (loss) (444,742) (3,197,545) (62,918)
Reconciling adjustments:
Depreciation and amortization 39,717 228,242 161,498
Software impairment - 57,400 -
(Recovery of) provision for doubtful
accounts (11,169) 272,615 106,435
Reserve for stockholders' loans
(Note M) - 162,395 -
Stock option compensation - 52,726 -
Net (gain) loss on disposition of
assets (Note P) (223,417) 71,867 (9,835)
Loss attributable to minority
Interest (143,910) (58,809) -
Stock issued for services - 15,500 6,675
Changes in operating assets
and liabilities:
Accounts receivable 382,616 5,432,554 (2,917,257)
Inventory - 18,098 417,733
Other assets 59,784 51,403 (62,841)
Accounts payable and accrued
Liabilities (1,039,718) (451,298) 976,751
Income tax payable - (15,000) 15,000
Deferred taxes - 69,000 (69,000)
Total adjustments (936,097) 5,906,693 (1,374,841)
Net cash (used for) provided by
operating activities (1,380,839) 2,709,148 (1,437,759)
Investing activities:
Proceeds from sale of assets 250,000 802,167 12,500
Proceeds from assignment of
government contracts - 500,000 -
Purchases of equipment (26,949) (215,263) (243,075)
Software development costs (15,756) (10,827) (239,082)
Loans to stockholders - (82,513) (77,020)
Cost of merger - - (8,278)
Escrow account (50,000) - -
Net cash provided by (used for)
investing activities 157,295 993,564 (554,955)
Financing activities:
(Payments on) note payable - (2,858,337) (1,264,271)
Revolving line of credit, net - - 2,858,337
Payments on notes payable and
capital lease (1,803) (20,925) (20,948)
Proceeds from exercise of options
(Note J) 11,780 - 65,660
Minority interest investment
(Note I) - 535,000 -
Purchase of treasury stock (21,028) - (1,851,366)
Net cash (used for) financing
activities (11,051) (2,344,262) (212,588)
Net change in cash and cash
Equivalents (1,234,595) 1,358,450 (2,205,302)
Cash and cash equivalents at
beginning of period 1,372,293 13,843 2,219,145
Cash and cash equivalents at
end of period 137,698 1,372,293 13,843
Summary of noncash investing and financing activity:
3Si sold substantially all of its assets effective as of May 1,
1999 (See Note P).
The Company issued 1,100,000 shares of its common stock to settle
litigation with a leasing company in the year ended June 30, 2000
(See Note G).
The Company issued 6,460,137 shares of its common stock, subject
to redemption, in settlement of a liability to a vendor (See Note G).
The Company reacquired 60,000 shares of its common stock in
satisfaction of an obligation from a former employee.
The Company also entered into a capital lease agreement in the
year ended June 30, 2000 (See Note G).
Interest paid $ 182,749 $ 230,424 $ 180,124
Income tax paid $ - $ 15,000 $ -
The accompanying notes are an integral part of these statement
3Si HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
3Si, Inc.
3Si, Inc. ("3Si") was incorporated in Colorado in 1979. 3Si is a
wholly owned subsidiary of 3Si Holdings, Inc., a publicly traded
company ("TSIH" or the "Company"), with a controlling ownership
in KEWi.net, Inc. In May 1999, 3Si sold its interest in its
computer reseller, consulting, and government sales divisions
(See Note P) for the purpose of focusing its efforts on the
marketing, sales, and integration of KEWi.net products. 3Si is
an integration partner and master reseller for KEWi.net.
3Si focuses on the sales, marketing, integration and distribution
of KEWi.net products. While KEWi.net focuses its efforts on the
development of Internet-based customer support products, 3Si
specializes in the business application of these products.
3Si's principal services provided during the year ended June 30,
2000, were web site development using the KEWi.net products, and
the licensing of the KEWi.net Internet-based customer support
system. The principal markets for 3Si's services are large
corporations located in Colorado.
The corporate offices are located in Englewood, Colorado.
KEWi.net, Inc.
KEWi.net, Inc. ("KEWi") was incorporated as a TSIH subsidiary in
Colorado in February 1999. TSIH owns 69% of the outstanding
common stock of KEWi as of June 30, 2000 and 1999.
Principals of Consolidation
The accounts of 3Si and KEWi are consolidated into the TSIH
financial statements. All intercompany balances and transactions
have been eliminated. A minority interest is presented in the
TSIH financial statements for the 31% interest of KEWi not owned
by TSIH (See Note I).
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prior Period Adjustments
The accompanying financial statements for the year ended June 30,
1998, have been restated to correct an error in not recording all
accounts payable at that date. The effect of the restatement was
to decrease net earnings for the year ended June 30, 1998, by
$232,058 ($.00 per share). The 1998 current income tax effect of
this correction was offset by an increase in the 1998 deferred
tax valuation allowance.
Business Segments
The Company operated in only one business segment as a systems
integrator until May 1999. Subsequently TSIH operated in only
one business segment related to its KEWi.net products. Revenues
are all attributed to operations within the United States. Long-
lived assets are all located within the United States. See Note
O for information on major customers.
Use of Estimates
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Depreciation and Amortization
Depreciation and amortization have been provided in amounts
sufficient to allocate the costs of depreciable assets to
operations over their estimated useful lives of five to seven
years using the straight-line method. Equipment acquired under
capital leases is amortized on a straight-line basis over the
lease period. Amortization of capitalized software development
costs has been provided over a period of two years.
Depreciation and amortization expense is as follows:
Year ended Equipment Software
and Capital Development
Leases Costs Goodwill
6/30/98 $ 130,248 $ - $ 31,250
6/30/99 $ 112,800 $ 89,400 $ 26,042
6/30/00 $ 7,717 $ 32,000 $ -
Revenue Recognition
The Company's revenue recognition policies are in compliance with
all applicable accounting regulations, including American
Institute of Certified Public Accountants ("AICPA") Statements of
Position ("SOP") 97-2 and 98-4, "Software Revenue Recognition".
These statements provide criteria to be met in order for revenue
to be recognized. The criteria applicable to web site
development include determinability of the amount of revenue,
measuring progress-to-completion, and probability of collection.
Maintenance and support revenues are recognized ratably over the
term of the related agreements. Revenues from other contract
services are generally recognized under the percentage-of-
completion method, as measured by achievement of the milestones
specified in the agreements. The KEWi software is licensed to
the user on a monthly subscription basis. License revenue is
recognized monthly as the service is provided.
Advertising Costs
Advertising costs are charged to operations as incurred.
Advertising expense is as follows:
Year ended
6/30/98 $ 58,000
6/30/99 $ 38,000
6/30/00 $ 1,000
(Loss) Earnings Per Share
The basic (loss) earnings per share (EPS) is computed by dividing
income available to common stockholders by the weighted-average
number of common shares outstanding for the year. Diluted EPS,
if any, reflects the potential dilution that could occur if
dilutive securities were exercised or converted into common stock
that then shared in the earnings.
Net loss per share for the years ended June 30, 2000, 1999, and
1998, was computed on the basis of the weighted average number of
common shares outstanding, which includes common stock subject to
redemption. Shares subject to warrants and stock options would
have an anti-dilutive effect.
Fair Value of Financial Instruments
Estimated fair values of the Company's financial instruments (all
of which are held for non-trading purposes) are as follows:
2000 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $137,698 $137,698 $1,372,293 $1,372,293
Capital lease obligations (24,886) (24,886) - -
The fair value of debt is based on current rates at which the
Company could borrow funds with similar remaining maturities.
The carrying amounts approximate fair value.
Statements of Financial Accounting Standards ("SFAS") No. 133,
137, and 138, "Accounting for Derivative Instruments and Hedging
Activities" will become effective during the year ended June 30,
2001. These statements require that entities recognize all
derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value provided certain
conditions are met. The new standards are expected to have no
effect on the financial statements of TSIH. The Company
currently has no derivative instruments, and does not expect to
engage in hedging activities.
Computer Software Costs Developed For Internal Use Only
Expenditures related to the Company's acquisition and
implementation of a new information management software were
capitalized as computer systems during the years ended June 30,
1999 and 1998, in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Capitalized costs as of
June 30, 1998, included $187,514 paid to outside consultants and
$35,301 of internal costs.
Long-Lived Assets Including Software Costs
Software costs are subject to impairment evaluation in accordance
with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of".
The information management software was never placed in service,
and a loss of $222,815 was reported for the year ended June 30,
1999 (See Note P).
Computer Software Costs Developed For Sale to Customers
The Company capitalizes certain software development and
implementation costs. Development and implementation costs are
expensed as research costs until the Company has determined that
the software has achieved technological feasibility, will result
in probable future economic benefits, and management has
committed to funding the project. Thereafter, the costs to
develop the software are capitalized and amortized using the
straight-line method over the remaining estimated useful lives
(See Note K).
Common Stock Subject to Redemption
Common stock subject to redemption (See Note G) is presented
separately from stockholders' deficit since the Company does not
control the redemption. These securities are initially recorded
at their fair value. No accretion to the redemption amount is
recorded at the balance sheet date, since the date of future
redemptions is not determinable at this time. Future redemptions
for consideration that exceeds the carrying amount of the
security will be treated as a reduction of income applicable to
common shareholders.
NOTE C - BUSINESS COMBINATIONS
3Si executed a License and Royalty Agreement in 1993 with former
stockholders of 3Si. Under the terms of the agreement, 3Si was
obligated to pay 1.5% of the gross revenues as a royalty expense
to the former stockholders through July 1999. As part of a
merger in May 1997, the Company satisfied this royalty agreement
with a payment of $625,000. The buy out of this agreement was
recorded as goodwill and was being amortized using the straight-
line method over twenty years, until April 30, 1999. Upon the
sale of substantially all assets of 3Si effective May 1, 1999
(See Note A), the remaining $565,104 balance of goodwill (which
was associated with the systems integration business) was written
off and grouped with other income (expense) (See Note P).
NOTE D - ACCOUNTS RECEIVABLE
The detail of accounts receivable is as follows:
2000 1999
Trade receivables $ 54,605 $437,221
Allowance for doubtful accounts -
Net $ 54,605 $437,221
NOTE E - SHORT-TERM BORROWING
The Company used a revolving line of credit facility with a
financial institution from September 1997 to June 1999. The
weighted average interest rate on the credit facility for the
years ended June 30, 1999 and 1998 was 10.28% and 9.82% respectively.
The weighted average interest rate on vendor debt (Note G) was
11.75% for both years ended June 30, 2000 and 1999.
NOTE F - ACCRUED LIABILITIES
3Si entered into commitments for monthly lease and training
payments related to a new information management software system
(See Note B). The software was never placed in service. The
future commitments through September 2000 of $95,108 were
reported as an accrued liability as of June 30, 1999, and a loss
recorded. These lease and training commitments were paid off
early during the year ended June 30, 2000.
The detail of accrued liabilities is as follows:
2000 1999
Legal settlement (Note G) $ - $224,688
Compensation (Note G) 157,708 103,323
Loss on software lease commitments - 95,108
Other - 4,726
Total $157,708 $427,845
NOTE G - COMMITMENTS AND CONTINGENCIES
Leases
The Company had operating leases for office space in Englewood
and Colorado Springs, Colorado and Albuquerque, New Mexico until
May 1, 1999. The rent expense was net of sublease income for the
Englewood office. From May 1, 1999 to June 30, 2000, the Company
was provided a small amount of space at its Englewood location by
the purchaser of its systems integration business. TSIH
currently has no agreement for the continued use of this space.
Net Rent Sublease
Year ended Expense Income
6/30/98 $114,000 $87,000
6/30/99 $ 98,000 $63,500
6/30/00 $ 14,000 $ -
During 1995, 3Si acquired $120,332 of furniture and fixtures
under a capital lease. Accumulated amortization was $62,172 at
June 30, 1998. The capital lease was assumed by the purchaser of
substantially all assets of 3Si (See Note A). The Company has a
contingent liability for the $45,363 of minimum lease payments
through October 2000 should the purchaser fail to make the
required lease payments. Management currently believes the
Company will incur no liability for these payments; however, the
ultimate outcome of this matter cannot be determined at this
time.
In June 2000, 3Si acquired $27,123 of computer equipment under a
capital lease. The equipment was not placed in service until
July 2000.
2000 1999
Minimum capital lease payments of $901
per month through April 2003; net of
deferred interest $5,760 at June 30, 2000 $24,886 $ -
Less current portion 7,622 -
Long-term debt $17,264 $ -
Long-term debt matures as follows:
Second year $ 8,835
Third year 8,429
Subsequent years -
Long-term debt $17,264
Self-Insured Medical Program
3Si adopted a self-insured medical program for its employees and
their dependents in 1998. The Company was liable for annual
medical expenses up to $35,000 for each individual. The Plan was
discontinued upon the sale of substantially all assets of 3Si
(See Note A). No significant future liability is anticipated.
Litigation - Leasing Company
During the year ended June 30, 1999, a leasing company filed suit
against 3Si to recover damages under a government lease
agreement. A settlement was reached in September 1999. 3Si paid
the plaintiffs $75,000, and issued 1,100,000 shares of TSIH
restricted common stock (valued at $154,688, the remaining amount
of debt) to the plaintiffs during the year ended June 30, 2000.
The $224,688 combined amount of settlement (which is net of the
$5,000 value of inventory recovered) was accrued as a loss at
June 30, 1999.
Litigation - Vendor / Common Stock Subject to Redemption
A vendor, Storage Area Network ("SAN"), who was owed $2,211,048
at June 30, 1999, had filed suit to attempt to attach the
Company's assets for the collection of that liability. A
settlement agreement was reached in March 2000. SAN received
6,460,137 shares ("the SAN shares") of TSIH common stock, and the
liability to SAN was discharged. No gain or loss was recorded
upon this settlement.
After 3Si pays off another vendor in August 2000, the SAN shares
will be subject to redemption under the following terms. All
subsequent contingent receipts from the May 1999 sale of the
systems integration business (See Contingent Sales Proceeds
below) 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 through September 2000, the SAN shares shall be
transferred back to TSIH at $.35 per share. For subsequent
redemption payments, 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.
A $50,000 escrow account was established by TSIH under the
settlement agreement for TSIH to use to cover the expenses of
registering the SAN shares during the year ended June 30, 2001.
Interest expense of $182,749 and $19,603 for the years ended June
30, 2000 and 1999, respectively, was incurred and paid to SAN
prior to the settlement.
Contingent Sales Proceeds
3Si received $500,000 for asset sales, and $302,167 contract
renewal payment, upon the sale of its systems integration
business effective as of May 1, 1999. 3Si will also be able to
earn up to an additional $2,198,000 over a three-year period
based upon the contingencies set forth in the agreement. The
agreement provided for additional contingent payments to 3Si of
$325,000 when key contracts were renewed. A contract renewal
payment of $250,000 was received in March 2000 (See Note P), and
a contract renewal payment of $75,000 was received in September
2000. The $75,000 payment will be recorded as revenue in the
year ended June 30, 2001.
The asset purchase agreement also provided for contingent
payments to 3Si 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 of $552,167 through April 2000, and no additional
contingent payments are due to 3Si at this time. 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
3Si will be retained by the buyer to pay for compensated absences
for former 3Si employees. This amount is included under accrued
liabilities in the June 30, 2000 balance sheet.
Other Commitments
See Note I related to commitment for additional ownership
interest in KEWi.
NOTE H - PROFIT SHARING PLAN
3Si established a 401(k) profit-sharing plan during 1995. The
Company contributions were at the discretion of the Board of
Directors. The plan was discontinued as of May 1999. For the
years ended June 30, 1999 and 1998, no Company contributions were
made to the plan.
NOTE I - MINORITY INTEREST
TSIH owns a 69% interest in KEWi.net, Inc. (See Note A)
summarized as follows:
2000 1999
Minority interest beginning of year $149,932 $ -
Net proceeds from sale of stock in KEWi
subsidiary attributable to minority interest - 208,741
(Loss) attributable to minority interest (143,910) (58,809)
Minority interest end of year $ 6,022 $149,932
KEWi raised $535,000 (net of expenses) through a private offering
for 26% of KEWi's common stock during the year ended June 30,
1999. Net proceeds, in excess of TSIH's carrying value of the
interest sold, of $326,259 were accounted for as additional paid
in capital in the consolidated balance sheet. KEWi also issued
5% of its common stock to an entity that assisted in the private
offering. As of June 30, 2000 and 1999, TSIH owns 69% of the
outstanding common stock of KEWi.
TSIH has agreed to give an additional 5% ownership interest in
KEWi to a consulting firm if KEWi sales and earnings in the years
ended March 2000, 2001 or 2002 meet certain goals. No additional
ownership interest has been earned through June 30, 2000. If
additional ownership interests in the KEWi subsidiary are
subsequently issued, they will be accounted for as an operating
expense and additional minority interest.
In connection with a web-site development agreement, KEWi has
granted its customer the irrevocable right for ten years to
acquire 211,212 common shares of KEWi stock (10% of the current
shares outstanding) at $1.89 per share.
NOTE J - STOCK OPTIONS AND WARRANTS
Tyrex Stock Option Plan
TSIH had a previous option plan for former employees (the "Tyrex
Plan"). Changes in the status of options outstanding under the
Tyrex Plan for the year ended June 30, 1998, were as follows:
End of period, June 30, 1997 469,000
Granted -
Terminated -
Exercised (469,000)
End of period, June 30, 1998 -
Option price $ .14
TSIH Stock Option Plan
On June 18, 1998, the TSIH stockholders approved the Company's
1998 Stock Option Plan (the "1998 Plan"). Under the terms of the
1998 Plan, the Company may grant options for employees and
directors of the Company to acquire up to 5,000,000 shares of
TSIH's common stock. No options were granted prior to June 30,
1998. The options vested over a period of four years except
1,345,000 shares granted during the year ended June 30, 1999,
which vested immediately upon grant to two officers of TSIH.
Upon the sale of substantially all assets of the Company (See
Note A), a) the exercise period for terminated employees became
one year from date of termination, and b) the options held by
terminated employees became 100% vested.
# Shares Exercise
Under Option Price*
End of period, June 30, 1998 - $ -
Granted 1,910,100 .125
Forfeited (647,600) .125
Exercised - -
End of period, June 30, 1999 1,262,500 .125
Granted 1,000,000 .128
Forfeited (1,045,700) .131
Exercised (117,800) .100
End of period, June 30, 2000
(all exercisable) 1,099,000 .126
Option price $ .10 - $ .156
* weighted average
The Company continues to account for stock-based compensation
using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Compensation cost for stock options, if any, is
measured as the excess of the quoted market price of the
Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based
employee compensation plans. The Company has elected to remain
on its current method of accounting as described above, and has
adopted the disclosure requirements of SFAS No. 123.
Compensation cost charged to operations was $0 and $52,726 for
the years ended June 30, 2000 and 1999, respectively. No
additional compensation cost was recorded during the year ended
June 30 1999, related to the change in terms for the options upon
the sale of substantially all assets of the Company.
Had compensation cost been determined on the basis of fair value
pursuant to SFAS No. 123, net loss would have increased as
follows:
2000 1999 1998
Net (loss)
As reported $(444,742) $(3,197,545) $(62,918)
Pro forma (495,328) (3,246,683) (62,918)
Basic and diluted (loss) per share
As reported (.01) (.09) -
Pro forma (.01) (.10) -
The weighted average fair value of options granted during the
years ended June 30, 2000 and 1999, is $.125 and $.149
respectively.
The fair value of each option granted is estimated on the date of
the grant or modification of the plan terms using the Black
Scholes model. The following assumptions were made in estimating
fair value:
Assumption 2000 1999
Dividend yield 0% 0%
Risk-free interest rate 6% 6%
Expected life 3 years 1 year
Expected volatility 212.63% 94.09%
Warrants
On May 28, 1997, TSIH 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
were 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 were 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 $.225 per share from December 31, 1998, to December 31,
1999.
No compensation expense has been recognized related to warrants.
All warrants have expired unexercised as of June 30, 2000.
NOTE K - RESEARCH AND DEVELOPMENT/SOFTWARE DEVELOPMENT COSTS
During the year ended June 30, 1998, 3Si conducted research and
development on its first two proprietary software products - a
contact management data base program and automated help desk
services. Both programs operate via the Internet. During the
years ended June 30, 2000 and 1999, KEWi conducted research and
development on an upgraded version of its automated help desk
services software and a new paging software system.
The contact management database program was deemed not to be
commercially viable and capitalized costs were written off as a
loss during the year ended June 30, 1999. The original paging
software system was deemed to be inadequate and written off as a
loss in the year ended June 30, 2000. (See Note P).
As of June 30, 1999, the automated help desk services software
was deemed to be impaired and written down to its fair value.
Fair value, which was determined by reference to the present
value of the estimated future cash inflows of such asset,
exceeded their carrying value by $57,400. An impairment loss of
that amount (included in selling and administrative expenses) was
charged to operations in the year ended June 30, 1999.
Software Development Costs
2000 1999
Beginning of year $42,827 $239,082
Costs capitalized 15,756 10,827
58,583 249,909
Contact management
database loss - (60,282)
Paging system loss (26,583) -
32,000 189,627
Amortization (32,000) (89,400)
Net cost before impairment - 100,227
Impairment - (57,400)
End of year $ - $ 42,827
Research Costs Expensed
Year Ended
6/30/98 $ 70,000
6/30/99 13,000
6/30/00 19,000
NOTE L - INCOME TAXES
The Company provides for income taxes under the provisions of
SFAS No. 109 "Accounting for Income Taxes". SFAS No. 109
requires an asset and liability based approach in accounting for
income taxes. Deferred income tax assets and liabilities are
recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial
statement and income tax purposes. Valuation allowances are
provided against deferred tax assets which are not likely to be
realized.
The 1999 distribution of assets to KEWi was accomplished in a
tax-free transaction.
KEWi is excluded from the filing of a consolidated income tax
return. Net operating loss carryforwards are available at June
30, 2000, expiring as follows:
TSIH/3Si KEWi
2012 $ 111,000 $ -
2013 509,000 -
2019 1,886,000 109,000
2020 196,000 420,000
$2,702,000 $529,000
The Company's deferred tax assets and liabilities are comprised
of the following:
2000 1999
Non-current:
Tax benefit of net operating loss carryforward $1,130,000 $ 954,000
Deferral of tax deduction for goodwill 197,000 209,000
Acceleration of tax deductions for software costs - (16,000)
Other 120,000 136,000
1,447,000 1,283,000
Valuation allowance (1,447,000) (1,283,000)
Net non-current - -
Net deferred tax assets $ - $ -
The Company may not have sufficient taxable income in future
years to obtain the benefits of the net operating loss
carryforward and reversal of timing differences. Valuation
allowances of $1,447,000 and $1,283,000 are provided at June 30,
2000 and 1999 respectively, for the benefits which the Company
may not be able to use.
The provision for income taxes consists of the following:
2000 1999 1998
Current expense $ - $ - $ 15,000
Deferred expense (credit) - 69,000 (69,000)
Income tax expense (benefit) $ - $69,000 $(54,000)
Reconciliation of income taxes to Federal statutory rates is as
follows:
2000 1999 1998
Income taxes (benefit) at statutory rates $(151,000) $(1,064,000)$(40,000)
Non-deductible expenses - - 11,000
Minimum tax - - 15,000
State taxes and other (13,000) (111,000) (4,000)
Valuation allowance 164,000 1,244,000 (36,000)
Income tax expense (benefit) $ - $ 69,000 $(54,000)
NOTE M - RELATED PARTY TRANSACTIONS
Amounts due to TSIH from TSIH stockholders are $162,395 at June
30, 2000 and 1999. Due to the uncollateralized nature of these
receivables and the going concern considerations at June 1999,
the $162,395 balance was fully reserved and recorded as an
expense during the year ended June 30, 1999.
See Note R also.
NOTE N - DISCONTINUED OPERATIONS
The sale of substantially all assets effective as of May 1, 1999,
is not considered the discontinuation of a business segment.
NOTE O - MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
With the sale of its systems integration business effective as of
May 1, 1999 (See Note A), 3Si also transferred its agreement to
provide information systems support to the U.S. Postal Service
(USPS), which was a major customer. For the year ended June 30,
2000, two customers accounted for 79% of the consulting and
service revenue. Net revenues (in thousands) are summarized as
follows:
2000 1999 1998
Product sales $ - $10,741 $20,817
USPS agreement - 4,810 5,550
KEWi license fees 28 8 -
Other consulting and service revenue 104 919 3,018
Net revenues $ 132 $16,478 $29,385
Financial instruments, which potentially subject the Company to
credit risk, consist primarily of cash, cash equivalents, and
trade receivables.
Generally, the Company does not require collateral or other
security to support customer receivables. At June 30, 2000, two
customers owed approximately 98% of the trade receivables. At
June 30, 1999, one customer owed approximately 52% of the trade
receivables.
NOTE P - SALE OF ASSETS
Net gain (loss) on disposition of assets is summarized as
follows:
2000 1999 1998
Gain on assignment of government contracts $ - $500,000 $ -
Gain on sale of substantially all assets
(Note G) 250,000 276,334 -
Capitalized internal software costs not
placed into service (Note B) - (222,815) -
Capitalized software development costs
Written off (Note K) (26,583) (60,282) -
Goodwill charged against earnings
(Note C) - (565,104) -
Other - - 9,835
Net gain (loss) on disposition of assets $223,417 $(71,867) $ 9,835
3Si sold substantially all of its assets effective as of May 1,
1999. The following is a summary of this sale:
Sales proceeds $802,167
Net property and equipment sold 331,480
Inventory and other assets sold 239,716
Capital lease obligation assumed by
purchaser (45,363)
525,833
Gain on sale $276,334
See Note G also related to contingent sales proceeds.
NOTE Q -OPERATIONS OF PORTION OF BUSINESS SOLD
Effective as of May 1, 1999, 3Si sold its systems integration
business. The Company's continuing business is the marketing,
sales and integration of KEWi.net products. The following are
the summarized pro forma (unaudited) results of operations of the
sold systems integration business for the year ended June 30,
1999:
Unaudited
Net revenues $16,445,000
Cost of revenues 14,590,000
Gross profit 1,855,000
Selling and administrative expenses 3,937,000
(Loss) from operations (2,082,000)
Other income expense (454,000)
Net (loss) before taxes (2,536,000)
Income taxes (69,000)
Net (loss) (2,605,000)
Basic and diluted (loss) per share (.08)
NOTE R - GOING CONCERN
Financial Condition at June 30, 2000
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. At June 30,
2000, the Company has a deficit in stockholders' equity of
$2,255,186. At June 30, 2000, the Company also has a deficit in
working capital (current assets minus current liabilities) of
$138,282. The working capital deficit was substantially reduced
during the year ended June 30, 2000, upon the conversion of $2.2
million of trade payables to common stock subject to redemption
(See Note G). These deficits raise substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
Operations for the Subsequent Year (Unaudited)
KEWi has entered into an agreement to maintain and operate the
Internet-based customer support system for the year ended June
30, 2001, for the entity that owns the 26% minority interest in
KEWi. The $129,600 fee for the annual agreement was received in
July 2000. KEWi has also entered into an agreement to develop
and maintain a web site for a large Colorado corporation.
Revenues of $80,000 under this agreement were reported in the
year ended June 30, 2000. Completion of the first two phases of
this project, and all of the training, would provide KEWi with
$545,000 of revenue during the year ended June 30, 2001. The
customer has the right to cancel the project at any point. There
is currently no assurance that the entire amount of fees under
this agreement will be earned. Fees totaling $150,000 have been
collected on this agreement from June 30, 2000 to September 15,
2000.
NOTE S - FOURTH QUARTER RESULTS
Aggregate year-end adjustments, which increased the net loss by
$34,000 were recorded in the quarter ended June 30, 2000. These
adjustments were attributable to prior quarters.
In addition, unusual or infrequent items recognized in the
quarter ended June 30, 2000, are as follows:
Loss recorded on paging system software $26,583
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 (see below).
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3.2
of the filed Registration Statement on Form S-2).
10 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).
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).
