<PAGE> 1
As Filed with the Securities and Exchange Commission on November 12, 1998
Registration No. 333-60051
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MSI HOLDINGS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
UTAH 3590 87-0280886
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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MSI HOLDINGS, INC. JOSE G. CHAVEZ
501 WALLER STREET 501 WALLER STREET
AUSTIN, TEXAS 78702 AUSTIN, TEXAS 78702
(512) 476-6925 (512) 476-6925
(Address and telephone number of (Name, address and telephone
number of principal executive offices) number of agent for service)
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COPY TO:
GARY L. WOOLFOLK
VIAL, HAMILTON, KOCH & KNOX, L.L.P.
1717 MAIN STREET, SUITE 4400
DALLAS, TEXAS 75201
(214) 712-4400
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended, check the following box. [[root]]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement of the same offering. [ ]
<PAGE> 2
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Title of each class Number of Amount of
of securities to be shares to be Proposed maximum Proposed maximum registration
registered registered offering price per share aggregate offering price fee
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<S> <C> <C> <C> <C>
Common Stock,
$0.10 par value(1) 13,697,531(2) $6.75(3) $116,199,552.(4) $33,588(5)
</TABLE>
(1) Such securities have been registered for issuance by the Registrant on
a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, as amended (the "Act").
(2) Consists of 7,683,242 shares previously covered by the original filing
and 6,014,289 shares added pursuant to this Amendment No. 1.
(3) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) promulgated under the
Act for purposes of the 6,014,289 shares added by this Amendment No. 1.
(4) Consists of $75,603,101 previously set forth in the original filing
plus $40,596,450 calculated for purposes of this Amendment No. 1 at
$6.75 (the closing share price on November 9, 1998).
(5) A wire transfer of $22,303 was previously submitted in connection with
the original filing. Remittance for the balance of $11,285.81 has been
sent by wire transfer.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1998
PROSPECTUS
MSI HOLDINGS, INC.
13,697,531 Shares
Common Stock
THE 13,697,531 SHARES (THE "SHARES") OF COMMON STOCK (THE "COMMON
STOCK") OF MSI HOLDINGS, INC., A UTAH CORPORATION (THE "COMPANY" or "MSHI")
COVERED BY THIS PROSPECTUS INCLUDE SHARES OF COMMON STOCK OF THE COMPANY THAT
ARE OFFERED BY SHAREHOLDERS OF THE COMPANY, THAT ARE OR MAY BE ISSUABLE UPON
CONVERSION OF SOME OR ALL OF THE SHARES OF THE COMPANY'S SERIES B PREFERRED
STOCK (THE "SERIES B PREFERRED"), SERIES C PREFERRED STOCK ("SERIES C
PREFERRED"), SERIES D PREFERRED STOCK ("SERIES D PREFERRED"), UPON EXERCISE OF
CERTAIN CLASS A WARRANTS OF THE COMPANY (THE "WARRANTS") AND CERTAIN OPTIONS
GRANTED BY THE COMPANY (THE "OPTIONS") AS WELL AS CERTAIN OTHER SHARES OF COMMON
THAT HAVE BEEN ISSUED TO EMPLOYEES OF THE COMPANY AND CERTAIN OTHERS. THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE ISSUANCE OF THE SHARES
UPON CONVERSION OF THE SERIES B PREFERRED, THE SERIES C PREFERRED OR THE SERIES
D PREFERRED NOR WILL THE COMPANY RECEIVE ANY PROCEEDS FROM THE SHARES OFFERED BY
THE SELLING SHAREHOLDERS.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Registration of the Shares of Common Stock contemplated herein, will
allow certain shareholders to sell all or part of their equity interests in the
Company. The shareholders receiving, or whose shares will become, freely
tradeable shares under this Registration Statement are identified herein. See
Selling Shareholders.
The Company will bear all of the cost of preparing and printing the
Registration Statement, Prospectus and any Prospectus Supplements and all filing
fees and legal and accounting expenses associated with registration under
federal and state securities laws, which are estimated at $174,000.
On November 9, 1998, the last sale price of the Company's Common Stock,
as reported on the OTC Bulletin Board under the symbol "MSIA," was $6.75.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission. In addition, registration statements and
certain other documents filed with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
HTTP://WWW.SEC.GOV. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR. Copies
of such material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Company's Common Stock is quoted on the OTC Electronic Bulletin Board
under the symbol "MSIA."
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or otherwise filed with the
Commission, each statement being qualified in all respects by such reference.
The Registration Statement may be inspected without charge at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from such office upon the payment of the
fees prescribed by the Commission.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and Notes
thereto, appearing elsewhere in this prospectus. Each prospective investor is
urged to read this prospectus in its entirety. This prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors in "Risk Factors" and
elsewhere in this prospectus. All references to the "Company" or "MSHI" mean MSI
Holdings, Inc., and its subsidiaries.
THE COMPANY
The Company, headquartered in Austin, Texas, is a communications
services company specializing in turnkey solutions for high-speed Internet
connectivity, communication infrastructure design and installation, and network
system integration for customers in both the private and public sectors. MSHI
has two wholly-owned subsidiaries, Micro-Media Solutions, Inc., a Texas
corporation ("MSI") and TeleVista, Inc., a Texas corporation, doing business as
High Power.Net, ("TVI"). TVI was incorporated in August, 1998 and has not yet
commenced operations. The Company is publicly traded on the OTC Bulletin Board
under the symbol "MSIA".
MSI was formed in 1993 to provide computer hardware, software
programming, system installation and support, maintenance, and media duplication
to the public and private sectors. MSI maintains certification as a
minority-owned business enterprise and status as a Historically Underutilized
Business ("HUB").
MSHI's facilities in east Austin, Texas are designed for final
assembly-type production, system integration services, depot repair (pick-up,
repair and return service), warehousing of computer equipment and collocation
(remote site Internet access by companies). Currently, the Company is not
providing collocation services, but is expected to be able to provide this
service in January 1999. These facilities are located in an economically
challenged area of Austin to introduce a non-traditional business into the area,
to provide high-tech employment skills to the typically underprivileged area
residents, and to access a loyal, under-utilized and readily available
workforce. In the years since its inception, the Company has grown from a 2
person operation to over 70 employees.
The Company has focused on systems design and system implementation
services and is a certified installer of copper and fiber optic cabling for use
in local area and wide area networks supporting data, voice, and video
applications. MSHI's computer networking services include system integration and
design installation as well as maintenance of local and wide area networks
("LAN/WAN"). In this context the Company also provides hardware and software
sales related to its systems designs and implementation services.
INDUSTRY OVERVIEW
The Company, through its collocation services, intends to enter the
Internet access market in January 1999. According to Hoover's Online industry
review of the Internet/Online industry, the Internet access market is currently
a $3 billion industry and online services are predicted to generate revenues of
$15 billion per year by the year 2003. The telecommunications industry growth is
attributable to increasing demand for data services and Internet connectivity.
Provider and consumer hardware and software technology have been rapidly
advancing. In this evolving climate, global access to information has become
increasingly important. The Internet has evolved as the preferred medium to
handle the demand for increased data transmissions speeds. The Company believes
companies in the forefront of developing bandwidth capacity, transmission and
processing speeds, and Internet access are best positioned to capitalize on the
growth potential in this area of the telecommunications industry. Modem
manufacturers are developing faster modems, phone companies are seeking to
transmit more data bits through their lines and even direct-broadcast satellite
companies, like DIRECT TV, are entering the industry, including Microsoft's
recent $1 billion investment in Comcast. One of the main impediments to Internet
growth is data transmission speed. The Company believes that, absent increased
bandwidth to handle the increasing traffic on the Internet, delays during
downloads will continue to be costly and turn away users.
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SERVICES AND PRODUCTS
MSHI is a communications services company specializing in turnkey
solutions for high-speed Internet connectivity, communication infrastructure
design and installation, and network system integration in the private and
public sectors. The Company has plans to implement collocation services in
January 1999.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's HUB status.
However, in 1997, the Company decided to change its direction to concentrate on
communications technology services. The Company intends to invest in the
development of core infrastructure to support collocation and Internet
connectivity services. By being able to provide high-speed bandwidth and coupled
with its current ability to provide wide-area fiber optic network installations
MSHI should be in a position to satisfy a broad range of current market demands.
MSHI's offers World Wide Web design, development, hosting, and Internet
connectivity services, and will provide collocation services (including on-site
services and support). Its system integration services include the certified
design and installation of advanced copper and fiber optic lines for both intra-
and inter-plant cabling projects in the private and public sectors. The Company
also evaluates, installs, maintains, and administers LAN/WAN systems. Its full
service system integration services include the procurement, installation,
configuration, and testing of key components. Further, the Company's service and
support team currently provides service and repair for wireless, data, and voice
technology networks throughout the State of Texas.
STRATEGIC OPPORTUNITY
In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their facilities to GTE for installation of GTE's Point of Presence
("POP") equipment (the "Sublease"). MSI entered into a 3 year subscription to
GTE's Internet Advantage version 5.1 Connection Service granting MSI access to
GTE's POP (the "Connection Service"). MSI has also subscribed to GTE's DiaLinx
Service for 36 consecutive months, allowing for the resale of Internet access to
end-users (the "DiaLinx Service")(the Sublease, Connection Service and DiaLinx
Service are collectively referred to as the "GTE Agreement"). GTE's
establishment, management and monitoring of multiple domains on behalf of MSI is
included in the Connection Service. The Connection Service was upgraded to GTE's
Internet Advantage version 6.0 in September 1998. MSI will lease connections to
the POP for access to the GTE Internet network to other businesses. MSI will
target companies that need direct, high-speed access to the Internet through
collocation services for high volume (known as bandwidth) Internet web
applications. Collocation is a service that provides a high speed, high
bandwidth connection to the Internet backbone using various backup systems to
increase the connection's fault tolerance. By connecting directly to Internet
via the POP, the local link is eliminated, the weakest component in an Internet
connection. MSI will have the capacity to support over five thousand collocation
rack spaces. These rack spaces will be used to host the net servers for MSI
clients and provide those clients with direct access to the Internet. When fully
implemented, these collocation services are expected to significantly increase
MSHI's revenues over the term of the Connection Service. The GTE Agreements
provide the potential for MSHI to increase revenue by selling Internet access to
various high Internet demand entities for such activities as commerce and
academics. It is anticipated that the requisite hardware will be operational in
January 1999.
Currently MSHI's operations have been limited to within Texas. However,
MSHI plans to continue developing its marketing efforts to expand the Company's
licenses beyond its home state. The Company's strategic alliances are also being
utilized to promote this objective. The GTE Agreements allow MSHI to satisfy the
market's current dynamic demands and have the potential of quickly moving the
Company into other geographic markets.
BACKGROUND
MSHI (formerly Mountain States Resources Corporation ("MSRC")) was
organized under the laws of the state of Utah on April 15, 1969. The operating
subsidiary of the Company was organized in 1993, in Austin, Texas. On June 23,
1997, MSRC, entered into an agreement and plan of reorganization with the
shareholders of MSI, whereby MSRC acquired the operating company in exchange for
the Common Stock of MSRC (the "Combination
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<PAGE> 7
Agreement"). Pursuant to the Combination Agreement, MSRC issued 9,310,000 shares
of its Common Stock for all of the outstanding shares of MSI. As part of the
reorganization, the Company changed its name to Micro-Media Solutions, Inc. on
September 29, 1997. On October 13, 1998, the Company changed its name to MSI
Holding, Inc. The transaction was accounted for as a recapitalization.
MSHI's principal executive offices are located at 501 Waller Street,
Austin, Texas 78702 and its telephone number is (512) 476-6925.
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<PAGE> 8
SUMMARY FINANCIAL DATA
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<CAPTION>
QUARTER ENDED YEAR ENDED
JUNE 30 MARCH 31
STATEMENT OF OPERATIONS DATA: 1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenue 601,629 1,229,784 $ 2,740,821 $ 4,655,749
Gross profit (loss) 100,483 556,709 (319,813) 1,667,514
Net income (loss) (945,957) (4,831) (3,766,950) (482,385)
Preferred Stock dividends (66,743) -- (3,471,170) 0.00
Net Income (loss) available to common (1,012,700) (4,831) (7,238,120) (482,385)
Basic and diluted net loss per share (1) (.09) 0.00 (.66) (.05)
Shares used to compute net loss per share (1) 11,507,002 10,764,733 10,998,874 10,026,400
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30 MARCH 31
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BALANCE SHEET DATA: 1998 1998 1997
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<S> <C> <C> <C>
Cash and cash equivalents 8,084 $ 25,786 $ 18,112
Working capital (deficit) 336,497 (192,080) (618,547)
Total assets 2,995,406 2,699,452 2,514,308
Accumulated deficit (8,384,818) (7,372,119) (133,999)
Total shareholders' equity (deficit) 919,379 91,669 (103,584)
</TABLE>
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(1) For an explanation of the number of shares used to compute basic and diluted
loss per share, see Note 12 of Notes to Financial Statements.
THE OFFERING
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<S> <C> <C>
Common Stock offered by this Prospectus............................ 13,697,531 shares (1)
Common Stock outstanding as of October 31, 1998 ................... 11,518,571 shares (2)
OTC Electronic Bulletin Board Ticker Symbol........................ MSIA
</TABLE>
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(1) Represents the (i) 4,900,000 shares of Common Stock issuable upon
conversion of 490,000 shares of Series B Preferred, (ii) 2,520,000
shares of Common Stock issuable upon the exercise of Class A Warrants
granted in conjunction with Private Placement Phase I (as defined),
(iii) 420,000 shares of Common Stock issuable upon the exercise of
Class A Warrants granted in conjunction with the Notes (as defined),
(iv) 400,000 share of Common Stock issuable upon the exercise of the
Options issued in conjunction with the Notes, (v) 10,286
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<PAGE> 9
shares of Common Stock representing the unpaid accrued interest on the
Notes, (vi) 990,570 shares of Common Stock issuable upon conversion of
99,057 shares of Series C Preferred, (vii) 47,170 shares of Common
Stock issuable upon the exercise of Options granted in conjunction with
Private Placement Phase II (as defined), (viii) 2,796,570 shares of
Common Stock issuable upon conversion of 279,657 shares of Series D
Preferred, (ix) 250,850 shares of Common Stock issuable upon the
exercise of Options granted in conjunction with Private Placement Phase
III (as defined), (x) 543,000 shares of Common Stock issued to acquire
certain intellectual property rights, (xi) 475,900 shares of Common
Stock issued for services rendered,(xii) 50,000 shares of Common Stock
issuable as dividends to the Series B, C and D Preferred holders, and
(xiii) 293,185 shares of Common Stock disputed in litigation. See
"Management, Discussion and Analysis of Financial Condition and Results
of Operation -- Legal Proceedings."
(2) Includes the following Common Stock offered by this Prospectus: (i)
700,000 shares of Common Stock issued upon conversion of 70,000 shares
Series B Preferred issued in connection with the payment of the Notes
on December 31, 1997, (ii) 10,286 shares of Common Stock representing
the unpaid accrued interest on the Notes, and (iii) 293,185 shares of
Common Stock subject to transfer between holders and disputed in
litigation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Legal Proceedings."
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON
STOCK OFFERED HEREBY. NO INVESTOR SHOULD PARTICIPATE IN THE OFFERING UNLESS SUCH
INVESTOR CAN AFFORD A COMPLETE LOSS OF HIS OR HER INVESTMENT. THE DISCUSSION IN
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS."
RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT; GOING CONCERN
ASSUMPTIONS; FLUCTUATIONS IN PERFORMANCE. The Company incurred a net loss, after
dividends, of $7,238,120 for the year ended March 31, 1998, and a net loss of
$482,385 for the year ended March 31, 1997 and had an accumulated deficit of
($7,372,119) as of March 31, 1998 and an accumulated defect of $133,999 as of
March 31, 1997. The Company expects to incur losses for at least the next six
months, and perhaps longer. There can be no assurance that the Company will not
incur significant additional losses.
The Company's independent auditor's report on MSHI's financial
statements as of and for the years ended March 31, 1998 and 1997 contains an
explanatory paragraph indicating that the Company's accumulated deficit and
historical operating losses raise substantial doubts about its ability to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent on the Company's attaining additional financing to fund the
expenses related to operations and capital improvements. The Company received a
net $1,818,000 from the Private Placement of Series B Preferred in November
1997, a net $870,000 from the Private Placement of Series C Preferred in
February 1998, a net $2,473,886 from the Private Placement of Series D Preferred
through July 1998 and a net $2,690,000 from the Private Placement of Series E
Preferred through November 1998. In addition, the Company plans a primary
offering during fiscal 1999, however no specific plans have been finalized.
Among the principal costs to market and sell the Company's products are
advertising and promotion costs, salaries and commissions, and general and
administrative expenses. MSHI's operating results may be subject to fluctuations
on a quarterly and an annual basis as a result of various factors, including,
but not limited to, fluctuating market pricing for computer and semiconductor
memory products, industry competition, seasonal government purchasing cycles,
and working capital restrictions on manufacturing and production. Therefore, the
operating results for any particular period are not necessarily indicative of
the results that may occur in any future period. See "Risk Factors" and
"Business."
CRITICAL NEED FOR ADDITIONAL CAPITAL; NO ASSURANCE OF FUTURE FINANCING.
The Company has a critical need for additional capital. As of March 31, 1998,
the Company's cash, cash equivalents and short term investments totaled
approximately $1,376,000. The Company's actual capital needs will depend upon
numerous factors, including ability to borrow and ability to attract equity
capital. The inability to obtain significant financing would have a material
adverse effect on the Company's business, financial condition and results of
operation. In order to continue as a going concern, without an additional
capital infusion, the Company would be required to significantly reduce the
level of its operations, seek a merger partner or sell assets. There can be no
assurance that the Company would be able to accomplish any of such actions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the "Financial Statements."
REVENUE DECLINE AND CHANGE IN BUSINESS FOCUS. Revenues for 1998 were
$2,740,821 as compared to revenues for 1997 of $4,665,749. Revenues for 1998
decreased $1,924,928 or (41.3%) from 1997. This reduction in revenues in 1998
occurred primarily as a result of the completion of a large network installation
project without any new projects queued to follow, coupled with a leveling off
of hardware sales.
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<PAGE> 11
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's HUB status.
However, in 1997, the Company elected to change its direction to concentrate on
communications technology services. The Company intends to invest in the
development of core infrastructure to support collocation and Internet
connectivity services by increasing personnel. Without access to additional
working capital, it is unlikely that the Company will be able to retain the
increased personnel necessary to complete this change in direction to
communication technology service.
LOSS OF HUB STATUS. MSI is currently qualified in Texas as a
"Historically Underutilized Business" ("HUB"). As long as MSI maintains its
status as a HUB, it will continue to receive favorable treatment by certain
governmental entities in their granting of contracts. The Company generated
revenues of approximately $414,000 and $919,000 during 1998 and 1997,
respectively, from HUB related contracts, or 15% and 20% of its gross revenues,
respectively. MSI will graduate from its HUB status upon the happening of any of
the following events: (i) less than 51% of the Company's voting stock is owned
by minorities; (ii) such minority owners are not active participants in the
day-to-day operations and management of the business; (iii) the four year
average of gross revenues of MSI exceeds certain levels based on the MSI's
Standard Industrial Classification Code ("SIC Code"); or (iv) the four year
average of total employment levels of MSI exceeds the Small Business
Administration established levels for businesses with a similar four-digit SIC
Code. Equity Investors Ltd. ("EIL") has acquired a sufficient number of
convertible preferred shares that if converted would disqualify MSI from HUB
status based upon the minority ownership criteria. Nonetheless, EIL covenanted,
in the respective placement agreements, not to exercise its conversion rights in
a manner that would compromise MSI's HUB status. Moreover, under the current SIC
Code applicable to MSI, MSI must not exceed 500 employees, it currently has 79
employees. The current SIC Code classification does not impose a revenue
ceiling, however, some SIC Code classifications under which MSI has operated
placed a three year or a four year average of gross revenue limitation. The
potential loss of HUB status may also be contingent upon the SIC Code under
which MSI operates in the future. Future changes in operations may require MSI
to change its SIC Code, which could alter the employee ceiling and impose
revenue restrictions as low as $5 million per year, averaged over periods as
short as three years. There can be no assurance that MSI will continue to
qualify for HUB status. Further, there is no assurance that HUB-type programs
will not be eliminated by the state or federal governments. If MSI's HUB status
is lost, the Company anticipates a significant loss of revenues.
RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DELAYS; RISK OF PRODUCT
DEFECTS. The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends upon its ability on a timely
basis to enhance its existing products, introduce new products that address the
changing requirements of its customers and anticipate or respond to
technological advances, emerging industry standards and practices in a timely,
cost-effective manner. There can be no assurance that the Company will be
successful in developing, introducing and marketing new products or enhancements
to existing products or will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of these products,
or that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree of commercial
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements of existing products in a
timely manner or if new versions of existing products contain unacceptable
levels of product defects or do not achieve a significant degree of market
acceptance, or any of the above situations occur there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION. The computer and information access markets are
characterized by rapidly changing technology and evolving industry standards.
Future developments in technology could replace or curtail the sales of used
computer equipment which could have a material adverse effect on the Company's
business. The Company experiences significant competition from other network
computer manufacturers, suppliers of personal computers and workstations, and
software developers. Several of such competitors are larger than the Company,
with greater capital resources and larger research and development staffs and
facilities. However, due in part to the Company's change in direction to
concentrate on communication technology services, the Company will be seeking a
significant capital
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<PAGE> 12
infusion. Without this capital infusion it is likely that the Company will be
unable to compete with those entities that have greater capital. See "Business
- -- Competition."
GOVERNMENT FUNDING. The Telecommunications Infrastructure Fund ("TIF")
was created and the Telecommunications Act of 1996 was passed to provide funds
to school districts in Texas to purchase telecommunications services, including
Internet access. The Company currently benefits from such legislation as the
goal of TIF is that all students and teachers in Texas will have daily access to
computer and information technology by 2003. However, there can be no assurance
that TIF and similar funding programs will not be eliminated by future
legislation. The Company had revenues attributable to TIF of approximately
$100,000 during 1998 and none during 1997.
RELIANCE ON KEY MANAGEMENT. The Company's business depends upon the
availability of Jose Chavez, Chairman of the Board of Directors, President and
Chief Executive Officer, and Mitchell Kettrick, Vice President and Secretary.
The loss of either of their services would likely have a material adverse effect
on the Company. There is no assurance that such individuals will continue to be
available, although the Company has entered into employment agreements with both
of them until March 31, 2001. The future success of the Company's business will
depend, in part, upon attracting and retaining additional qualified personnel.
There can be no assurance that the Company will be able to attract and hire such
personnel or retain the services of said people.
LACK OF DIVIDEND HISTORY; NO DIVIDENDS CONTEMPLATED. Since its
inception, the Company has not paid any cash dividends, and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
Company plans to retain its future earnings, if any, to finance the growth and
development of its operations. See "Dividend Policy."
LIMITED MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Since the middle
of 1997, the Common Stock of the Company has been traded on the over-the-counter
market, and there can be no assurance that a more active trading market for the
Common Stock will develop or continue. From time to time, there may be
significant volatility in the market price of the Common Stock. Over the last 90
days the price for Common Stock of the Company on the over-the-counter market
has ranged from a high of $12.87 on August 11, 1998 to a low of $4.06 on
September 8, 1998. Operating results of the Company or of its competitors,
changes in general conditions in the economy (national or regional), the
financial markets or the hardware and technology industry or other developments
affecting the Company or its competitors could cause the market price of the
Common Stock to fluctuate substantially.
CONCENTRATION OF SHARE OWNERSHIP. As of June 30, 1998 and March 31,
1998, the executive officers and directors of the Company and their affiliates,
as a group, owned or controlled approximately 80% of the outstanding capital
stock of the Company. As a result, such persons and entities will continue to
exert significant influence over the business and affairs of the Company. See
"Principal Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE. Sales in the public market of
substantial amounts of Common Stock (including sales in connection with an
exercise of certain registration rights relating to shares of Common Stock) or
the perception that such sales could occur could depress the prevailing market
prices for the Common Stock. As of June 30, 1998, the Company had 11,518,571
shares of Common Stock issued and outstanding. If all of the shares of
convertible preferred stock were converted to Common Stock, as of June 30, 1998
the Company would have had 24,212,631 shares of Common Stock issued and
outstanding , of which 6,285,831or 26% would have been eligible for future sale.
The remaining 17,926,800 shares would have been subject to the Rule 144
restrictions on sales of securities by affiliates of the issuer. See "Shares
Eligible for Future Sale -- Registration Rights."
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<PAGE> 13
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded over-the-counter and is quoted on
the OTC Bulletin Board under the symbol "MSIA." The table below sets forth the
high and low closing sale price of the Common Stock for the periods indicated,
as reported by the OTC Bulletin Board.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
December 31, 1996.................................................................. $2.00 $0.0625
March 31, 1997..................................................................... 2.00 0.25
June 30, 1997...................................................................... 2.00 0.125
September 30, 1997................................................................. 2.25 0.50
December 31, 1997.................................................................. 3.50 0.50
March 31, 1998..................................................................... 2.56 1.75
June 30, 1998...................................................................... 9.03 2.37
September 30, 1998................................................................. 12.87 4.06
</TABLE>
On November 9, 1998, the closing sale price for a share of the
Company's Common Stock, as reported on the OTC Bulletin Board, was $6.75. See
"Risk Factors - Limited Market and Possible Volatility of Stock Price."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares
of Common Stock offered hereby until the Warrants and Options are exercised. If
all the Warrants and Options are exercised the Company will receive net proceeds
of $5,301,432. The exercise price received by the Company from issuance of the
shares of Common Stock underlying the Warrants and Options will be used for
general corporate purposes. In addition, the Company will not receive any
proceeds from the sale of certain shares of Common Stock which were issued to
employees and consultants for services rendered or the certain shares of Common
Stock which were issued as compensation for certain intellectual property rights
acquired by the Company. See "Selling Shareholders."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and the Company currently intends to retain any future earnings to fund
the development of its business and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. Future declaration
and payment of dividends on its Common Stock, if any, will be determined in
light of the then-current conditions, including the Company's earnings,
operations, capital requirements, financial conditions, restrictions in
financing agreements, and other factors deemed relevant by the Board of
Directors. However, the Company is obligated to pay cumulative dividends on a
quarterly basis with respect to all Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred shares outstanding.
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<PAGE> 14
CAPITALIZATION
The following table sets forth the debt and the capitalization of the
Company as of March 31, 1998. The table should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
June 30 March 31,
1998 1998
----------- -----------
<S> <C> <C>
Bank line of credit $ 1,070,000 $ 1,226,966
Current maturities of long-term debt 112,596 151,267
Current portion of obligations under existed leases 45,517 41,097
Other notes payable 200,000 200,000
Long-term debt 235,293 367,522
Obligations under capital leases 122,736 149,560
----------- -----------
$ 1,786,142 $ 2,138,412
=========== ===========
Shareholders' equity (deficit):
Series B 5% Cumulative Non-Voting
Preferred stock, $5.30 stated value, 490,000
authorized, 490,000 issued and outstanding $ 2,597,000 $ 2,597,000
Series C 6% Cumulative Non-Voting
Preferred stock, $10.60 stated value, 99,057
authorized, 99,057 issued and outstanding 1,050,004 1,050,004
Common Stock, $.10 par value, authorized
50,000,000 shares, 11,506,846 shares issued
and outstanding (1) 1,150,685 1,150,685
Additional paid-in capital 2,397,982 2,666,099
Accumulated deficit (8,384,818) (7,372,119)
----------- -----------
Total shareholders' equity 919,379 91,669
----------- -----------
Total capitalization $ 919,379 $ 91,669
=========== ===========
</TABLE>
(1) Includes the following Common Stock offered by this Prospectus: (i)
700,000 shares of Common Stock issued upon conversion of 70,000 shares
Series B Preferred issued in connection with the payment of the Notes
on December 31, 1997, (ii) 10,286 shares of Common Stock representing
the unpaid accrued interest on the Notes, and (iii) 293,185 shares of
Common Stock subject to transfer between holders and disputed in
litigation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Legal Proceedings."
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<PAGE> 15
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
consolidated financial statements and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein and the consolidated financial statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
JUNE 30 MARCH 31
STATEMENT OF OPERATIONS DATA: 1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenue 601,229 1,229,784 $ 2,740,821 $ 4,655,749
Cost of revenues 501,146 673,075 3,060,634 2,998,235
Gross profit (loss) 100,483 556,709 (319,813) 1,667,514
Selling, General and Administrative Expenses 1,046,440 561,540 3,447,137 2,149,899
Net income (loss) (945,957) (4,831) (3,766,950) (482,385)
Preferred Stock dividends (66,743) -- (3,471,170) 0.00
Net Income (loss) available to common (1,012,700) (4,831) (7,238,120) (482,385)
Basic and diluted net loss per share (1) (.09) -- (.66) (.05)
Shares used to compute net loss per share (1) 11507,002 10,764,733 10,998,874 10,026,400
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30 MARCH 31
------------ ------------------------------
BALANCE SHEET DATA: 1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Working capital (deficit) 336,497 (192,080) (618,547)
Total assets 2,995,406 2,699,452 2,514,308
Current liabilities 1,717,998 2,090,701 1,929,042
Total shareholders' equity (deficit) 919,379 91,669 (103,584)
</TABLE>
- -------------------
(1) For an explanation of the number of shares used to compute basic and diluted
loss per share, see Note 12 of the Notes to Financial Statements.
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<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW AND IN "RISK FACTORS" AND "BUSINESS."
OVERVIEW
Micro-Media Solutions, Inc. ("MSI"), the operating subsidiary of MSHI was
created in 1993 in Austin, Texas, to provide computer hardware, software
programming, system installation and support, maintenance, and media duplication
to the public and private sectors. MSI maintains certification as a
minority-owned business enterprise and status as a Historically Underutilized
Business ("HUB"). On June 23, 1997, the then shareholders of MSI entered into an
agreement and plan of reorganization (the "Combination Agreement") with Mountain
States Resources Corporation (now known as MSI Holdings, Inc.), whereby the
Company acquired all of the issued and outstanding stock of MSI in exchange for
9,310,000 shares of the Common Stock of the Company (the "Combination"). The
Combination was accounted for as a recapitalization.
Among the principal costs to market and sell the Company's products are
advertising and promotion costs, salaries and commissions, and general and
administrative expenses. MSHI's operating results may be subject to fluctuations
on a quarterly and an annual basis as a result of various factors, including,
but not limited to, fluctuating market pricing for computer and semiconductor
memory products, industry competition, seasonal government purchasing cycles,
and working capital restrictions on manufacturing and production. Therefore, the
operating results for any particular period are not necessarily indicative of
the results that may occur in any future period. See "Risk Factors" and
"Business."
The Company's revenues consist of hardware sales, software sales and the
delivery of technical services, including installing and maintaining networks
system. The technical service sales of the Company typically yield a higher
gross margin than the hardware and software sales of the Company. This is due,
in part, to the intense competition in the hardware and software sales sector
from Original Equipment Manufactures ("OEM's") and distributors. As a result,
the Company, is attempting to strategically reposition itself from emphasizing
hardware sales to intensifying sales of technical services. See Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Results of Operations.
RECENT DEVELOPMENTS
In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their east Austin facilities to GTE for installation of GTE's Point
of Presence ("POP") equipment (the "Sublease"). On May 29, 1998, MSI entered
into a 3 year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP (the "Connection Service"). MSI has
also subscribed to GTE's DiaLinx Service for 36 consecutive months, allowing for
the resale of Internet access to end-users (the "DiaLinx Service")(the Sublease,
Connection Service and DiaLinx Service are collectively referred to as the "GTE
Agreement"). GTE's establishment, management and monitoring of multiple domains
on behalf of MSI is included in the Connection Service. The Connection Service
was upgraded to GTE's Internet Advantage version 6.0 on September 29, 1998. MSI
will lease connections to the POP for access to the GTE Internet network to
other businesses. MSI will target companies that need direct, high-speed access
to the Internet through turn-key collocation services for high volume (known as
bandwidth) Internet web applications. Collocation is a service that provides a
high speed, high bandwidth connection to the Internet backbone using various
backup systems to increase the connection's fault tolerance. By connecting
directly to Internet via the POP, MSI is able to eliminate the local loop, the
weakest component in localized Internet connections. MSI will have the capacity
to support over
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<PAGE> 17
four thousand collocation rack spaces. These rack spaces will be used to host
the net servers for MSI clients and provide those clients with direct access to
the Internet. When fully implemented, these collocation services are expected to
significantly increase MSHI's revenues over the term of the Connection and
DiaLinx Services. The GTE Agreements provide the potential for MSHI to increase
revenue by selling Internet access to various high Internet demand entities for
such activities as commerce and academics. It is anticipated that the requisite
hardware will be operational in January 1999.
In July 1998, MSI began providing systems integration, warehousing, systems
configuration and other fulfillment services for Siemens-Nixdorf Information
Systems, Inc. ("Siemens-Nixdorf") for Point of Sale ("POS") systems and
Automated Teller Machines for Siemens-Nixdorf's customers such as Sears-Roebuck
,and Bealls department stores (the "Siemens-Nixdorf Agreement"). This agreement
provides that Siemens-Nixdorf will store its inventory at MSI, and MSI will
charge Siemens-Nixdorf for various systems integration services. This
arrangement provides MSHI with a revenue stream without a significant working
capital commitment.
MSHI formed TeleVista, Inc., a wholly owned subsidiary ("TVI") in September
of 1998 to run the electronic commerce business for the on-line sale of hardware
and software over the Internet through the use of a secure server. Secure
servers allow for the accelerated receipt of funds through credit card payments
for hardware and software purchases made through their web sites operated by it.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998, Compared with the Three Months Ended June 30,
1997.
Revenues for the quarter ended June 30, 1998, were $601,629 as compared to
revenues for the same quarter 1997 of $1,229,784. Revenues for the quarter ended
June 30, 1998 decreased $628,155 or (51.1%) from the same period in 1997. This
reduction occurred in as a result of management's attention being focused on
seeking a stable source for financing the Company's expansion, conversion to a
publicly traded company, development of longer term service contracts, expansion
of the technical staff to service the expanded service Contracts and
identification of appropriate investors for the company.
Cost of goods sold for the quarter ended June 30, 1998 declined $171,929 or
(25.5%) from the same quarter in 1997. The cost of goods sold for the quarter
ended June 30, 1998 of $501,146 or 83.3% of the gross revenue was
extraordinarily high, resulting in a gross margin of $100,483 or 16.7% of
revenues for the quarter. The gross margin for the same quarter in 1997 was
$556,709 or 45.3% of revenues. The gross margin experienced in the quarter ended
June 30, 1997, more closely represent the margins management is working to
attain.
Selling, general and administrative expenses in the quarter ended June 30,
1998 of $1,046,440 represent 173.9% of revenues. The selling, general and
administrative expenses for the quarter ending June 30, 1998 represent an
increase of $484,900 or 86.4% over the same quarter 1997. Approximately
$246,000 of the increase represents the increase in staff salaries and benefits.
Staff additions include service technicians, sales staff, accounting staff and
middle management to enable the Company to work on larger service contracts.
Professional fees and consultants fees increased in the quarter ended June 30,
1998, by approximately $133,952, from the same quarter in 1997. The increase in
professional and consulting fees is largely attributable to the Combination and
the reporting requirements associated with being a publicly traded company. The
majority of the remaining increase in expenses is attributable to training for
expansion, marketing and other expenses associated with starting up new service
contracts
Year Ended March 31, 1998 Compared with the Year Ended March 31, 1997.
Revenues for 1998 were $2,740,821 as compared to revenues for 1997 of
$4,665,749. Revenues for 1998 decreased $1,924,928 or (41.3%) from 1997. This
reduction in revenues in 1998 occurred primarily as a result of the completion
of a large network installation project without any new projects queued to
follow coupled with a leveling off of hardware sales.
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<PAGE> 18
Cost of goods sold for 1998 increased $62,399 or 2.1% from 1997. This
increase in cost of goods sold was primarily the result of increased costs of
hardware and services, partially offset by decreases in the costs associated
with the Company's network services. Costs of goods sold for 1998 as a
percentage of revenue was 111.7%. This percentage is extraordinarily high and
resulted in a negative gross margin of ($319,813) or (11.7%) of revenues for the
year as compared to a gross margin of $1,667,514 for 1997. The gross margin as a
percentage of revenues for 1997 was 35.7%. The gross margin percentage
experienced in 1997 more closely represents the gross margins Management is
working to attain. Extraordinary items experienced in cost of goods sold for
1998 include a cost overrun of approximately $500,000 on a large cabling project
for a Texas school district. The project was a lump sum contract and the overrun
was absorbed by the Company. Problems experienced with the substantial cost
overrun situation have been addressed with better controls, new middle
management and improved accounting. Management does not anticipate significant
cost overruns in the future.
Selling, general and administrative expenses in 1998 of $3,447,137 represent
125.8% of revenues. The 1998 selling, general and administrative expenses
represent an increase over 1997 of $1,297,238 or 60.3%. Approximately 50% of the
expense increase, or approximately $623,000, represents the expenses associated
with the hiring of increased marketing and technical staff to enable the Company
to work on larger service contracts. Other increases include professional fees,
which increased approximately $314,923 due to additional legal, accounting and
other consultants associated with the Combination and the reporting requirements
attendant to being a publically traded company. Interest expense also increased
$194,000 due to increased line of credit usage and late fees on overdue
accounts.
GOING CONCERN ISSUES
The Company's significant historical losses raise a doubt as to the Company's
ability to continue as a going concern. The Company plans to address the going
concern issues described elsewhere in this Prospectus through an additional
private placement and a possible $20 million debt issue. However, there can be
no assurance that the Company will be able to secure such additional capital.
Subsequent to March 31, 1998, the Company received $2.6 million dollars in
proceeds from Private Placement Phase III (as defined) that have been used to
retire debt, decrease past due accounts payable and for operating expenses. As a
result, the Company's current ratio has improved and its cash position has
increased. The Company is currently consummating the private placement of the
newly created Series E Preferred shares of stock (the "Series E Preferred"). The
Series E Preferred will yield net proceeds of approximately $2.6 million to the
Company and is expected to be completed by the time of this filing.
Management believes that its contracts with GTE and Siemens Nixdorf have the
possibility of producing revenues of approximately $3 million in 1999. The
proceeds from the Series E Preferred will allow the Company to continue
operations until the anticipated completion of the contemplated debt offering.
The Company's ability to fulfill its obligations under the GTE Agreement is
contingent upon successfully obtaining the working capital contemplated by the
debt issue described in the preceding paragraph.
POTENTIAL LOSS OF HUB STATUS
MSI is currently qualified in Texas as a "Historically Underutilized
Business" ("HUB"). As long as MSI maintains its status as a HUB, it will
continue to receive favorable treatment by certain governmental entities in
their granting of contracts. The Company generated revenues of approximately
$414,000 and $919,000 during 1998 and 1997, respectively, from HUB related
contracts, or 15% and 20% of its gross revenues, respectively. MSI will graduate
from its HUB status upon the happening of any of the following events: (i) less
than 51% of the Company's voting stock is owned by minorities; (ii) such
minority owners are not active participants in the day-to-day operations and
management of the business; (iii) the four year average of gross revenues of MSI
exceeds certain levels based on the MSI's Standard Industrial Classification
Code ("SIC Code"); or (iv) the four year average of total employment levels of
MSI exceeds the Small Business Administration established levels for businesses
with a similar four-digit SIC Code. Equity Investors Ltd. ("EIL") has acquired a
sufficient number of convertible preferred shares that if converted would
disqualify MSI from HUB status based upon the minority ownership criteria.
Nonetheless, EIL covenanted, in the respective placement agreements, not to
exercise its conversion rights in a manner that would compromise MSI's HUB
status. Moreover, under the current SIC Code applicable to MSI, MSI must not
exceed 500 employees,
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<PAGE> 19
it currently has 79 employees. The current SIC Code classification does not
impose a revenue ceiling, however, some SIC Code classifications under which MSI
operated placed a three year or a four year average of gross revenue limitation.
The potential loss of HUB status may also be contingent upon the SIC Code under
which MSI operates in the future. Future changes in operations may require the
MSI to change its SIC Code, which could alter the employee ceiling and impose
revenue restrictions as low as $5 million per year, averaged over periods as
short as three years. There can be no assurance that MSI will continue to
qualify for HUB status. Further, there is no assurance that HUB-type programs
will not be eliminated by the state or federal governments. If MSI's HUB status
is lost, the Company anticipates a significant loss of revenues.
LIQUIDITY AND CAPITAL RESOURCES
On November 18, 1997, the Company received $2,120,000 upon completion of a
private placement whereby 400,000 of Series B Preferred were sold to
Entrepreneurial Investors, Ltd. ("EIL") for $5.30 per share ("Private Placement
Phase I"). The Company also issued 20,000 shares of Series B Preferred to Equity
Services, Ltd. ("ESL") as a commission for the completion of Private Placement
Phase I. The Company received $371,000 in October 1997 from two individuals
pursuant to two senior convertible notes (the "Notes"), which are secured by an
aggregate of 1,050,000 shares of Common Stock of the Company. The Notes were
subsequently converted into an aggregate of 70,000 shares of Series B Preferred.
On February 4, 1998, the Company received $1,000,000 completing a second private
placement whereby 94,340 shares of Series C Preferred were sold to EIL for a
purchase price of $10.60 per share ("Private Placement Phase II"). As private
placement fee for the completion of Private Placement Phase II, the Company
issued 4,717 shares of Series C Preferred to ESL. By July, 1998, the Company
received $2,823,204 completing a third private placement, whereby 266,340 shares
of Series D Preferred were sold to fourteen investors for a purchase price of
$10.60 per share ("Private Placement Phase III"). The Company also issued 13,317
shares of Series D Preferred to Equity Services, Ltd. ("ESL") as a private
placement fee for the completion of Private Placement Phase III. As of November
9, 1998, the Company received $3,000,000 completing the private placement of the
Series E Preferred which were sold for a purchase price of $30.00 per share (the
"Series E Preferred"). The expenses for Private Placement Phase I, Private
Placement Phase II, Private Placement Phase III, and the placement of the Series
E Preferred including broker fees, private placement fee and legal and
accounting expenses totaled $634,800, $206,747, $1,022,821 and $460,000
respectively.
For the years ended March 31, 1998 and 1997, the Company's total assets were
$2,699,452 and $2,514,308, respectively, with liabilities of $2,607,783 and
$2,617,892, respectively. Current assets of $1,898,621 and $1,310,495 represent
90.8% and 67.9% of current liabilities of $2,090,701 and $1,929,042.
Improvements in the Company's cash position are a result of the collection of
accounts receivable and funds from increases in shareholders equity resulting
from the previously consummated private placements more particularly described
above. Reductions in accounts receivable between 1998 and 1997 are a direct
reflection of the reduced level of sales experienced in 1998. Accounts
receivable balances at March 31, 1998 and 1997 reflect the charge off of $73,252
and $4,249, respectively, of uncollectible accounts receivable. The Company's
liabilities of $2,607,783 at March 31,1998, consist of $1,228,966 of a fully
secured credit line, $861,734 of current liabilities and $517,082 of long-term
liabilities.
The Company, subsequent to March 31, 1998, paid its Bank One Texas, N.A.
loans in full and substantially reduced the borrowings under its fully secured
line of credit (see Notes 4, 5 and 13 to the consolidated financial statements
for the year ended March 31, 1998). Net shareholders equity (deficit) as of
March 31, 1998 and 1997 was $91,669 and ($103,584), respectively. During the
year ended March 31, 1998, the Company completed Private Placement Phase I and
Private Placement Phase II (See Note 10 to the financial statements for the year
ended March 31, 1998). Subsequent to June 30, 1998, the Company finalized
funding of Private Placement Phase III with proceeds totaling $857,010. Receipt
of these funds enabled the Company to reduce its outstanding debt and pay off
the past due accounts payable.
During the year ended March 31, 1998, working capital increased $426,467 from
the prior year and the balances of its bank lines of credit were reduced as a
result of the application of the proceeds from the completion of Private
Placement Phase I and Private Placement Phase II. At March 31, 1998, the Company
had a working capital deficit of ($192,080) compared to a working capital
deficit of ($618,547) at March 31, 1997. At March 31, 1998 the Company's
accounts payable decreased by $575,699 or 65.7% a compared to March 31, 1997. As
of March 31,
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<PAGE> 20
1998, MSI was more than 30 days past due on $170,000 or 57% of its accounts
payable. Subsequent to March 31, 1998, all of the accounts payable over thirty
days past due were paid.
The Company has a critical need for additional working capital to meet
contractual obligations under the GTE Agreements. Management believes that the
GTE Agreements along with the Siemens Nixdorf Agreements have the potential to
increase revenue levels, provided that sufficient working capital is obtained.
See Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Going Concern Issues.
YEAR 2000 ISSUES.
As with other companies, the Company has initiated a program to study the
impact on its computer system in order to be Year 2000 compliant. This study
involved identifying any modifications or replacements of certain hardware and
software maintained by the Company. The study has been completed. The Company
has identified the computer systems that will require either modification,
upgrade or replacement. Implementation of the Company's Year 2000 plan should be
completed by March 31, 1999. The Company anticipates that in-house personnel
will be primarily responsible for completing these tasks and that the costs will
be insignificant. As such, the Company believes that the planned modifications,
upgrades and replacements of existing systems will be completed in a timely
fashion to assure Year 2000 compliance, and any related cost will not have a
material impact on the Company's results of operations, cash flows, or financial
conditions in future periods. The Company has budgeted for $25,000 to address
these expenses. In addition, the Company is also taking actions to assure that
its customers and vendors are taking steps to remedy their Year 2000 issues.
The Company is not incurring any unique risks in connection with Year 2000
issues. It is however subject to the risk that information and financial
resources may be temporarily unavailable. This societal risk may temporarily
disrupt cash flows worldwide. The Company believes that by becoming, and
assisting its clients and vendors to become, Year 2000 compliant it is likely to
circumvent that threat. The Company expects to be Year 2000 compliant March 31,
1999. If compliance is not achieved by that date, the Company will reallocate
resources, as necessary, to ensure compliance within six months, thereafter.
INFLATION.
Management does not believe that inflation will have a material impact on the
Company's pricing of goods or services since the Company, generally, has the
ability to adjust prices to meet the current market conditions.
-18-
<PAGE> 21
BUSINESS
BACKGROUND
MSI Holdings, Inc., a Utah corporation ("MSHI" or the "Company"),
headquartered in Austin, Texas, is a communications services company
specializing in turnkey solutions for high-speed Internet connectivity,
communication infrastructure design and installation, and network system
integration for customers in both the private and public sectors. MSHI has two
wholly-owned subsidiaries, Micro-Media Solutions, Inc., a Texas corporation
("MSI") and TeleVista, Inc., a Texas corporation, doing business as High
Power.Net, ("TVI"). TVI was incorporated in August, 1998 and has not yet
commenced operations. The Company is publicly traded on the OTC Bulletin Board
under the symbol "MSIA".
MSI was created in 1993 to provide computer hardware, software programming,
system installation and support, maintenance, and media duplication to the
public and private sectors. MSI maintains certification as a minority-owned
business enterprise and status as a Historically Underutilized Business ("HUB").
On June 23, 1997, the then shareholders of MSI entered into an agreement and
plan of reorganization (the "Combination Agreement") with Mountain States
Resources Corporation (now known as MSI Holdings, Inc.), whereby the Company
acquired all of the issued and outstanding stock of MSI in exchange for
9,310,000 shares of the Common Stock of the Company (the "Combination"). The
Combination was accounted for as a recapitalization. Mountain State Resources
changed its name to Micro Media Solutions, Inc. and in October 1998, changed its
name to MSI Holdings, Inc.
MSHI's facilities in east Austin, Texas are designed for final assembly- type
production, system integration services, depot repair (pick-up, repair and
return service), warehousing of computer equipment and collocation (remote site
Internet access by companies). Currently, the Company is not providing
collocation services, but is expected to be able to provide this service in
early 1999. These facilities are located in an economically challenged area of
Austin to introduce a non-traditional business into the area, to provide
high-tech employment skills to the typically underprivileged area residents, and
to access a loyal, under-utilized and readily available workforce. In the years
since its inception, the Company has grown from a 2 person operation to over 70
employees.
The Company has focused on systems design and system implementation services
and is a certified installer of copper and fiber optic cabling for use in local
area and wide area networks supporting data, voice, and video applications.
MSHI's computer networking services include system integration and design
installation as well as maintenance of local and wide area networks ("LAN/WAN").
In this context the Company also provides hardware and software sales related to
its systems designs and implementation services.
INDUSTRY OVERVIEW
The Company, through its collocation services, intends to enter the Internet
access market in early 1999. According to Hoover's Online industry review of the
Internet/Online industry, the Internet access market is currently a $3 billion
industry and online services are predicted to generate revenues of $15 billion
per year by the year 2003. The significant growth in the telecommunications
industry is driven by increasing demand for data services and Internet
connectivity. Provider and consumer hardware and software technology have been
rapidly advancing. In this evolving climate, global access to information has
become increasingly important. The Internet has evolved as the preferred medium
to handle the demand for increased data transmissions speeds. The Company
believes companies in the forefront of developing bandwidth capacity,
transmission and processing speeds, and Internet access are best positioned to
capitalize on the growth potential in this area of the telecommunications
industry. Modem manufacturers are developing faster modems, phone companies are
seeking to transmit more data bits through their lines and even direct-broadcast
satellite companies, like DIRECT TV, are entering the industry, including
Microsoft's recent $1 billion investment in Comcast.
One of the main impediments to Internet growth is data transmission speed.
The Company believes that, absent increased bandwidth to handle the increasing
traffic on the Internet, delays during downloads will continue to be costly and
turn away users. By offering bundled services, the Company will provide the
market with turn-key solutions to bridge the technology gap. The Company's
ability to provide comprehensive information technology solutions,
-19-
<PAGE> 22
including wider bandwidths, will enhance, in the opinion of management, its
ability to provide competitive customer service and generate increasing
revenues.
SERVICES AND PRODUCTS
MSHI is a communications services company specializing in turnkey solutions
for high-speed Internet connectivity, communication infrastructure design and
installation, and network system integration in the private and public sectors.
The company has plans to implement collocation services in early 1999.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's HUB status.
However, in 1997, the Company decided to change its direction to concentrate on
communications technology services. The Company intends to invest in the
development of core infrastructure to support collocation and Internet
connectivity services. By being able to provide high-speed bandwidth and coupled
with its current ability to provide wide-area fiber optic network installations
MSHI should be in a position to satisfy a broad range of current market demands.
MSHI's offers design, development, hosting, and high speed Internet
connectivity services, and will provide turn-key collocation services (including
on-site services and support). Its system integration services include the
certified design and installation of advanced copper and fiber optic lines for
both intra- and inter-plant cabling projects in the private and public sectors.
The Company also evaluates, installs, maintains, and administers advanced
LAN/WAN systems. Its full service system integration services include the
procurement, installation, configuration, and testing of key components.
Further, the Company's service and support team currently provides service and
repair for wireless, data, and voice technology networks throughout the State of
Texas.
MSI's principle product is its technical expertise. The Company has taken a
pro-active approach to developing a skilled labor force while decreasing its
requirements for carrying inventories of computer hardware. In addition the
Company's facilities are located in Austin, which has been attracting technology
driven industries. The inventory necessary to carry for the Company to provide
its technical services is readily available within the region or, alternatively,
from domestic suppliers.
STRATEGIC OPPORTUNITY
In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their east Austin facilities to GTE for installation of GTE's Point
of Presence ("POP") equipment (the "Sublease"). In May 1998, MSI entered into a
three year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP (the "Connection Service"). MSI has
also subscribed to GTE's DiaLinx Service for 36 consecutive months, allowing for
the resale of Internet access to end-users (the "DiaLinx Service")(the Sublease,
Connection Service and DiaLinx Service are collectively referred to as the "GTE
Agreement"). GTE's establishment, management and monitoring of multiple domains
on behalf of MSI is included in the Connection Service. The Connection Service
was upgraded to GTE's Internet Advantage version 6.0 on September 29, 1998. MSI
will lease connections to the POP for access to the GTE Internet network to
other businesses. MSI will target companies that need direct, high-speed access
to the Internet through collocation services for high volume (known as
bandwidth) Internet web applications. Collocation is a service that provides a
high speed, high bandwidth connection to the Internet backbone using various
backup systems to increase the connection's fault tolerance. By connecting
directly to Internet via the POP, MSI is able to eliminate the local link, the
weakest component in an Internet connection. MSI will have the capacity to
support over five thousand collocation rack spaces. These rack spaces will be
used to host the net servers for MSI clients and provide those clients with
direct access to the Internet. When fully implemented, these collocation
services are expected to significantly increase MSHI's revenues over the term of
the Connection Service. The GTE Agreements provide the potential for MSHI to
increase revenue by selling Internet access to various high Internet demand
entities for such activities as commerce and academics. It is anticipated that
the requisite hardware will be operational in January 1999.
MSHI intends to develop critical business services, including high-speed
high-bandwidth Internet connectivity, and network design and installations,
allowing MSHI to address a broad-range of the dynamic demands in the
marketplace.
-20-
<PAGE> 23
Currently MSHI's operations have been limited to within Texas. However, MSHI
plans to continue developing its marketing efforts to expand the Company's
licenses beyond its home state. The Company's strategic alliances are also being
utilized to promote this objective. The GTE Agreements allow MSHI to satisfy the
market's current dynamic demands and have the potential of quickly moving the
Company into other geographic markets.
MSHI's depot service operations and state-wide service networks allow MSHI to
provide inside /outside plant cable installations, development of data
processing and network technology and provide MSHI the opportunity to add
additional bundled-services to its product mix. MSHI is expanding its current
lines of depot services to include on-site service and depot operations for
maintaining computer equipment related to the Texas State Lottery. MSHI's
current depot services clients also include: GTECH Corporation, Transactive
Corporation, the State of Texas, CompUSA, Southwestern Bell Corporation and
various Texas school districts and University systems.
The Company's Internet expertise also affords it the opportunity to provide
certain, non-traditional information technology services, such as maintaining
"virtual" retail distribution centers. MSHI currently maintains the exclusive
Hewlett Packard online storefront, which provides web site access to Fortune 100
companies, federal, state and local governmental agencies. Hoover's Online
industry review estimates this market sector, with participants like Amazon.com,
as a $500 million annual business.
COMPETITION
The telecommunications industry is highly competitive and the capital
requirements for entry are relatively low. The computer and information access
markets are characterized by rapidly changing technology and evolving industry
standards. Competition exists in both the processing and retail levels and is
based primarily on price, product features, reputation for service and quality,
sales promotions, merchandising terms, and availability of processing capacity.
The Company experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations, and software
developers. Major competitors of the Company include Original Equipment
Manufacturers ("OEMs") and distributers, smaller niche-market installers, and
information technology providers including system consultants. The size and
capitalization of the Company's competitors range from small local companies to
multi-national providers such as IBM, DELL and America Online. However, due in
part to the Company's change in direction to concentrate on communication
technology services, the Company is seeking a significant capital infusion.
Without this capital infusion it is likely that the Company will be unable to
compete with those entities that have greater capital. See Management's
Discussion and Analysis of Financial Condition and Results of Operation - Going
Concern Issues.
GOVERNMENT REGULATIONS
The Company has been dependant on its status as a HUB to develop is
reputation and business. It is currently well within the revenue and employee
limits for its SIC Code classification to maintain its HUB status. However, as
the Company continues to grow and develop, its revenue and employee
characteristics and SIC Code designation may change. In addition, for reasons
beyond the Company's control, the state and federal HUB programs may cease to
exist. Though no such event is anticipated, the potential loss of HUB status may
have a material adverse effect on the Company's revenue generating abilities.
See Management's Discussion and Analysis of Financial Condition and Results of
Operation - Potential Loss of HUB Status.
FACILITIES
MSI's two facilities in east Austin consist of approximately 39,5000 square
feet and 20,000 square feet, respectively, of leased office and warehouse space
with the leases expiring in July 31, 2008, and August 31, 2005, respectively.
The facilities are designed for collocation, production, system integration
services, depot repair, and warehousing.
-21-
<PAGE> 24
EMPLOYEES
At March 31, 1998, MSI had a total of 60 employees, of which 53 are full-time
employees. None of MSI's employees are subject to a collective bargaining
agreement, and the Company believes its relations with its employees are good.
As of November 1, 1998, the company's total number of employees had increased to
79.
LEGAL PROCEEDINGS
The Company is currently involved in two material lawsuits, both of which
relate to the Company's relationship with a former consultant, Kenneth O'Neal
("O'Neal") and a firm which he controls, Argus Management, Inc. ("Argus"). On
December 18, 1997 Argus filed a lawsuit in Kerr County, Texas, 216th Judicial
District, to collect on two promissory notes in the aggregate principal amount
of $200,000. The Company is vigorously defending this lawsuit and it filed a
related suit against O'Neal and Argus in Travis County, Texas on February 6,
1998, alleging fraud, usury in connection with the promissory notes, and seeking
an order from the Court demanding that Argus transfer 293,185 shares of Common
Stock of MSI, held by Argus, to various shareholders who have previously
purchased such shares (the "Argus Related Shares"). The Company's defenses are
based upon O'Neal's and Argus' attempts to unilaterally modify the parties'
contract and charge an usurious interest rate and other compensation before
fulfilling their contractual obligation.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
As of October 26, 1998, MSHI's current executive officers and directors,
their titles, ages and tenure are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NAME AGE POSITION WHICH SERVED
---- --- -------- ------------
<S> <C> <C> <C>
Jose G. Chavez 46 Chairman of the Board Of Directors, June 23, 1997
President and Chief Executive Officer
David W. Hill 32 Chief Financial Officer August 10, 1998
Mitchell C. Kettrick 32 Vice-President, Secretary and Director June 23, 1997
Tom M. Upton 41 Vice-President Sales September 9, 1998
Jaime Munoz 37 Vice-President of Operations November 15, 1997
Ernesto M. Chavarria 43 Director February 16, 1998
Blandina Cardenas 43 Director February 16, 1998
Daniel Dornier 36 Director July 21, 1998
</TABLE>
The Company has no knowledge of any arrangement or understanding in existence
between any executive officer named above and any other person pursuant to which
any such executive officer was or is to be elected to such office or offices.
All officers of the Company serve at the pleasure of the Board of Directors. All
Officers of the Company will hold office until the next annual meeting of the
Company.
BIOGRAPHICAL INFORMATION
Jose Chavez, the President and Chief Executive Officer of the Company, has
over 25 years' experience in manufacturing, engineering, system design and
development, energy engineering, and computer technology management. As
co-founder of MSI in 1993, Mr. Chavez has led the development of MSI from a
two-person start-up in 1993 to a multi-million dollar business enterprise. Mr.
Chavez was Plant Manager for HDS, a division of Hart Graphics, Inc., a computer
disk manufacturer for 1991 to 1993, and Manufacturing Manager for CompuAdd
-22-
<PAGE> 25
Corporation, a personal computer manufacturer from 1989 to 1991. Prior to
working at CompuAdd, Mr. Chavez was a section head at Hughes Aircraft for nine
years. Mr. Chavez obtained a Master of Administrative Management from the
University of Redlands Business School in 1981 and a Bachelor of Science in
Electrical Engineering from the University of Texas at El Paso in 1975. Mr.
Chavez has been a director of the Company since June, 1997.
David W. Hill, Chief Financial Officer, brings over 10 years of experience in
executive financial management, mergers & acquisitions, investment development,
and strategic planning. Mr. Hill served as a Finance Manager for Dell Computer's
Home and Small Business Group from 1997 to 1998. Mr. Hill served with Applied
Materials, Inc. in 1997. Additionally, Mr. Hill was President and Chief
Financial Officer of Discovery Technologies, Inc. from 1993 to 1997. Mr. Hill
filed for protection from creditors under Chapter VII of the Bankruptcy Code in
1998. He received his Master of Business Administration from Baylor University
in 1989 and a Bachelor of Science in International Trade from Texas Tech
University in 1987.
Mitchell Kettrick, Vice-President of Technical Operations, has over 12 years
of experience in manufacturing, test diagnostics and networking. As MSI's
co-founder and Chief Technology Officer, he oversees technical services, systems
design, and information services. Mr. Kettrick was the Quality Assurance Manager
for Hart Distribution Service, a computer disk manufacturer, in 1992 and the
Manufacturing Systems Test Manager for CompuAdd Corporation, a personal computer
manufacturer, from 1987 to 1991. Mr. Kettrick received an Associate Degree in
Computer Maintenance Technology from Texas State Technical College in 1987. Mr.
Kettrick has been a director of the Company since June, 1997.
Thomas M. Upton, Vice-President of Sales, has 17 years high-tech sales
experience. From 1996 to 1998, Mr. Upton worked for Boundless Technologies,
Inc.,as their Vice President of the Global Distribution Division , Senior
Director of Worldwide Sales, and Director of North American Sales . Mr. Upton
was previously a Regional Manager of Major Accounts and served as National
Support Manager responsible for worldwide system support with Applied Digital
Data Systems, a subsidiary of AT&T, from 1981 to 1994. Mr. Upton has a Bachelor
of Science in Electrical Engineering degree from New York Institute of
Technology.
Jaime Munoz, Vice President of Operations, has over 10 years of direct
experience in project management implementation. Mr. Munoz manages MSI's
purchasing, warehouse operations, facilities, on-site production, security, and
human resources. His background includes extensive experience with strategic
planning, market assessment, new business development and operations management.
Prior to joining MSI, Mr. Munoz worked as a consultant for the American
Residential Services from 1997 to 1998, and served as Vice President/Chief
Marketing Officer for Infrastructure Services, Inc., in Houston, Texas from 1987
to 1997. Mr. Munoz obtained a Bachelor of Science in Mechanical Engineering from
The University of Texas at El Paso.
Ernesto M. Chavarria, Director, has over 25 years' experience providing
consulting services in the area of international business development and public
affairs to Fortune 500 Companies. Mr. Chavarria has been the President of ITBR,
Inc., an international overseas consulting company since 1990. Mr. Chavarria has
been a Director of the Company since November 1997.
Blandina Cardenas, Director, has been a Professor at the LBJ Institute for
Teaching and Learning since 1993 and has served as a Director of the Office of
Minorities in Higher Education. She has also served as the Commissioner of
Presidential Appointments to the U.S. Commission of Civil Rights. Ms. Cardenas
has also been an Associate Professor at the University of Texas at San Antonio
for over 14 years. Ms. Cardenas has been a Director of the Company since
November 1997.
Daniel Dornier, Director, brings over a decade's worth of investment banking
experience to the Company. Since 1995, Mr. Dornier has been the President of
Dornier Capital Advisers, where he manages investment portfolios for high net
worth in the U.S. and Europe. Between 1993 and 1995, Mr. Dornier was a private
investment manager for various companies owned by the Dornier family. He was
previously an investment banker at SBC Warburg, Dillon, Reed from 1991 to 1993.
In 1989, he obtained his Master of Business Administration from the City
University of Bellevue, Washington, the Zurich, Switzerland campus, and in 1984
he received a Bachelor of Business Administration from the University of
Nuertingen, Germany.
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<PAGE> 26
BOARD COMMITTEES
Pursuant to Private Placement Phase I and Private Placement Phase II, the
Company is required to establish (i) a Compensation Committee, consisting of
three Board Members, one of which to be designated by the holders of the Series
B Preferred and (ii) an Audit Committee consisting of three Board Members, one
of which to be designated by the holders of the Series C Preferred.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company (the "Outside Directors")
will be paid the sum of $1,000 for each meeting of the Board of Directors
attended by them. Additionally, they will be reimbursed for expenses incurred in
attending meetings of the Board of Directors and related committees. As of July
28 1998, MSI has the following three Outside Directors: Ernesto M. Chavarria,
Blandina Cardenas and Daniel Dornier.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by the Utah Business Corporation Act, as amended, the Company
has included in its Revised Articles of Incorporation a provision that the
Company may indemnify its officers, directors, employees and agents under
certain circumstances, including those circumstances in which indemnification
would otherwise be discretionary, and the Company is required to advance
expenses to its officers and directors as incurred in connection with proceeding
against them for which they may be indemnified.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE.
The following table sets forth compensation for the Chief Executive Officer
("CEO"), and the four most highly compensated other executive officers whose
salary and bonus for 1998 and was $100,000 or greater (collectively, the "Named
Executives"). Only the CEO and one other executive officer of MSI received
salaries and bonuses in excess of $100,000 in fiscal 1998. Consequently, only
the CEO and one other executive officer appear in this table.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
===================================================================================================================
Long Term Compensation
=================================
Annual Compensation Awards Payouts
===================================================================================================================
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Restricted Underlying
Name and Other Annual Stock Option/ LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) SAR's(#) Payouts Compensation
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JOSE G CHAVEZ 1998 $105,500 $ 0 $0 $0 $62,500 $0 $0
(President & CEO) 1997 50,500 34,000 0 0 0 0 0
1996 87,000 13,000 0 0 0 0 0
MITCHELL KETTRICK 1998 $ 75,000 $ 0 $0 $0 $31,250 $0 $0
(V.P. & Secretary) 1997 5,200 0 0 0 0 0 0
1996 45,000 0 0 0 0 0 0
===================================================================================================================
</TABLE>
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<PAGE> 27
EMPLOYMENT CONTRACTS
On June 15, 1997, the Company entered into employment agreements with
Jose Chavez, President and CEO (the "Chavez Agreement"), and Mitchell Kettrick,
Vice President (the "Kettrick Agreement"). Both of these agreements terminate on
March 31, 2001, subject to two one-year extensions.
The Chavez Agreement provides for an annual salary of $100,000 and
reimbursement of all reasonable out-of-pocket expenses. The Chavez Agreement
also provides for a grant dated March 31, 1998, of an option to purchase up to
100,000 shares of Common Stock at a price of $1.50 per share exercisable for a
period of five (5) years commencing on March 31, 1998. In addition, during the
term of the Chavez Agreement, Chavez is entitled to a bonus, at the discretion
of the Board of Directors, consisting of cash and common stock, calculated as
follows: (1) for each ten percent (10%) increase in revenues, from year to year,
above the base of $10,000,000 in fiscal 1998, Chavez shall be issued 100,000
shares of Common Stock at fifty percent (50%) of the then current market value,
not to exceed $1.70 per share; and (2) for each $1.00 increase in the Common
Stock value above the base value of $3.00 per share in fiscal 1998, calculated
on the last ninety (90) day average, the Company shall pay Chavez a cash bonus
of $100,000 due no later than June 30 of each fiscal year. Chavez also is
entitled to an automobile allowance of up to $650.00 per month. Mr. Chavez did
not receive a bonus for fiscal year ended March 31, 1998. Mr. Chavez has agreed
to renegotiate the Chavez Agreement's option terms, which negotiations are
expected to be concluded in November 1998.
The Kettrick Agreement provides for an annual salary of $75,000 per
year and reimbursement of all reasonable out-of-pocket expenses. Moreover, the
Kettrick Agreement provides for a grant, dated March 31, 1998, of a five-year
option to purchase up to 50,000 shares of Common Stock at a price of $1.50 per
share exercisable beginning July 1, 1998. Kettrick also has a second option,
dated March 31, 1998, for 25,000 shares at $2.25 per share exercisable for a
period of two (2) years. The Kettrick Agreement also provides for a bonus, at
the discretion of the Board of Directors, consisting of cash and Common Stock,
calculated as follows: (1) for each ten percent (10%) increase in revenues above
the base of $10,000,000 in fiscal 1998, Kettrick shall be issued 50,000 shares
of Common Stock at fifty percent (50%) of the then current market value, not to
exceed $1.70 per share; and (2) for each $1.00 increase in the Common Stock
value above the base value of $3.00 per share in fiscal 1998, calculated on the
last ninety (90) day average, the Company shall pay Kettrick a cash bonus of
$50,000 due no later than June 30 of each fiscal year. Kettrick is also entitled
to an automobile allowance of up to $500.00 per month. Mr. Kettrick did not
receive a bonus for fiscal year ended March 31, 1998. Mr. Kettrick has agreed to
renegotiate the Kettrick Agreement's option terms, which negotiations are
expected to be concluded in November 1998.
David W. Hill, Chief Financial Officer, and the Company are negotiating
certain terms of an employment agreement.
CERTAIN TRANSACTIONS
Certain officers, directors, stockholders and employees of the Company
have ownership interests in entities to which the Company has advanced monies
for working capital and expenses. The advances have been converted to notes and
are personally guaranteed by the shareholders of the related entities. The
schedule below lists the name of the stockholder and their percentage of
ownership.
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<PAGE> 28
<TABLE>
<CAPTION>
Prima
Development & Quality Salas
Construction, Inc. Communications, Inc. Concessions, Inc.
Name of Stockholder (Percentage of Ownership)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jose G. Chavez (1) 26 28 33
Frank Rodriguez (2) 15 5 -
Andrew Ramirez (2) 26 27 35
George Villalva (2) 15 5 4
Mitchell C. Kettrick (1) 18 10 13
Bruce Funderburk - 20 -
Laurel Funderburk - 5 -
Tammie Delaney - - 15
--- --- ---
TOTALS 100 100 100
=== === ===
</TABLE>
- ------------------------
(1) Officers of MSHI.
(2) Former officers of MSHI
Certain officers and directors of the Company serve as officers,
directors and advisors to these related companies on an as needed basis and
their involvement is minimal.
As of March 31, 1998 and 1997, the Company had amounts due from the
following related entities:
10% NOTE RECEIVABLE FROM RELATED PARTIES
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Prima Development & Construction, Inc. $ -0- $337,597
Quality Communications, Inc. -0- 84,394
Salas Concessions, Inc. -0- 140,048
----- --------
TOTAL $ -0- $562,039
===== ========
</TABLE>
The referenced loans were made by MSI to the named entities for the
operating working capital purposes of their respective businesses. MSHI has
never entered into a contract with any of the referenced entities for the
provision of goods or services. As of March 31, 1998, no amounts were owed to
the Company by any of the entities listed above. In addition, the Company does
not intend to loan any additional funds to the above named entities in the
future.
The shareholders of MSHI set forth above signed personal guarantees for
all the notes and leases. Prima Development & Construction, Inc. ("Prima"), a
construction and fiber optics cabling firm, executed the original loan agreement
during the year ended March 31, 1997, with the principal amount of the loan of
$185,000. Interest is due and payable monthly as it accrues, commencing on April
10, 1997 and continuing on the same day of each month thereafter during the term
of the note. Principal and interest are payable in monthly installments of
$2,444.79. The annual interest rate on the note is 10%. An amendment to the loan
agreement with Prima was executed to incorporate funds advanced from MSI. The
principal amount of the amendment is $66,983. Throughout the year ended March
31, 1998, MSI loaned an additional $85,614 to Prima on an as needed basis.
Interest is due and payable monthly as it accrues, commencing on January 2, 1998
and continuing on the same day of each month thereafter during the term of the
note. Principal and interest are payable in monthly installments of $885. The
annual interest rate on the note
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<PAGE> 29
is 10%. The loan, as amended, was repaid in full during the year ended March 31,
1998. The ownership of Prima include owners of MSHI and other outside investors.
Quality Communications, Inc. ("QCI"), a telecommunications corporation,
executed a loan agreement during the year ended March 31, 1997, in the principal
amount of $84,394. Interest is due and payable monthly as it accrues, commencing
on April 10, 1997 and continuing on the same day of each month thereafter during
the term of the note. Principal and interest are payable in monthly installments
of $1,025. The annual interest rate on the note is 10%. The loan was repaid
during the year ended March 31, 1998. The shareholders of QCI include officers,
directors and shareholders of MSHI and other outside investors.
Salas Concessions, Inc. ("Salas"), a food service corporation, executed
a loan agreement during the year ended March 31, 1997, in the principal amount
of $133,700. Interest is due and payable monthly as it accrues, commencing on
April 10, 1997 and continuing on the same day of each month thereafter during
the term of the note. Principal and interest are payable in monthly installments
of $1,767. The annual interest rate on the note is 10%. The loan was
subsequently amended and MSI loaned Salas an additional $6,348. The full loan,
as amended, was repaid during the year ended March 31, 1998. The shareholders of
Salas include officers, directors and shareholders of MSHI and other outside
investors.
During the years ended March 31, 1997 and 1998, the above listed
entities did not pay interest to the Company. During the same periods, no other
income or expense was received from or paid to the above listed entities.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 1, 1998, by (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the Company's Common Stock, (ii) each director of the Company, (iii)
each Named Executive, and (iv) all directors and officers of the Company as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have investment and voting power with respect to such shares, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF PERCENT OF PERCENT OF FULLY
SHARES OUTSTANDING SHARES (1) DILUTED SHARES (2)
========================================================================================================
<S> <C> <C> <C>
Jose Chavez (3) 7,225,000 61.85% 29.84%
501 Waller Street
Austin, Texas 78702
Mitchell Kettrick (4) 1,500,000 12.37% 6.20%
501 Waller Street
Austin, Texas 78702
George Villalva 475,000 4.12% 1.96%
501 Waller Street
Austin, Texas 78702
Jaime Munoz (5) 80,000 N/A 0.33%
501 Waller Street
Austin, Texas 78702
Ernesto Chavarria (5) 75,000 N/A 0.31%
501 Waller Street
Austin, Texas 78702
Blandina Cardenas (5) 5,000 N/A 0.02%
501 Waller Street
Austin, Texas 78702
Daniel Dornier (6) 280,000 N/A 1.16%
501 Waller Street
Austin, Texas 78702
Entrepreneurial Investors Ltd.(7) 8,286,800 N/A 34.23%
P.O. Box 40643
Freeport, Bahamas
All Directors and 9,640,000 78.34% 39.81%
Officers as a Group (8)
- --------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE> 30
(1) Calculations are based on 11,518,531 outstanding shares of Common
Stock as of June 30, 1998. All common shares held by the Officers and
Directors listed above are "restricted securities" and as such are
subject to limitations on resale. The shares held by the officers and
directors may be sold pursuant to Rule 144 under certain circumstances,
subject to certain Lock-Up Agreements. See "Shares Eligible for Future
Sale - Lock-Up Agreements."
(2) Assumes conversion of all options and warrants held by the above
named group. Calculations of fully diluted ownership are based on
24,212,631 shares of Common Stock which would be issued and outstanding
if all of the Series B, Series C and Series D Preferred shares were
converted and all the of the Warrants and Options were exercised.
(3) Includes 7,125,000 shares of Common Stock outstanding and 100,000
shares of Common Stock issuable upon exercise of Mr. Chavez's Options.
(4) Includes 1,425,000 shares of common Stock outstanding and 75,000
shares of Common Stock issuable upon the exercise of Mr. Kettrick's
Options.
(5) These officers and or directors are the beneficial owners of shares
not yet issued. The Company has a contractual obligation to issue the
reflected shares and they are contained within the shares being
registered hereunder. These officers and directors are included in this
table for disclosure purposes only. Their shares are included in the
9,640,000 shares attributable to officers and directors as a group, on
a fully diluted basis.
(6) Various members of the Dornier family own a total of 28,000 shares
of Series D Preferred shares which are convertible to 280,000 shares of
Common Stock. If the Dornier family were deemed a group, Mr. Dornier, a
Company director, may have beneficial ownership of the Dornier family's
shares. The other members of the Dornier family are not reflected in
this tabulation since they are not officers, directors or beneficial
owners of more than 5 percent of the Company's outstanding shares.
(7) Entrepreneurial Investors Ltd.("EIL") is the beneficial owner of an
aggregate 828,680 shares of Series B, Series C and Series D Preferred
shares, which are convertible into a total of 8,286,800 shares of
Common Stock. Notwithstanding EIL's beneficial ownership of
approximately 35 percent of the Company's common stock, EIL has
covenanted not to exercise the preferred shares' conversion features in
such a way as to disqualify the Company from HUB status.
(8) Includes 9,025,000 shares of Common Stock outstanding and 615,000
shares issuable to officers and directors for services rendered and
upon the exercise of Messrs. Chavez's and Kettrick's options.
-28-
<PAGE> 31
Rule 13d-3 under the Securities Exchange Act of 1934, involving the
determination of beneficial owners of securities, includes as beneficial owners
of securities, among others, any person who directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise has, or shares,
voting power and/or investment power with respect to such securities; and, any
person who has the right to acquire beneficial ownership of such security within
sixty days through means, including, by notice of any option, warrant or
conversion of a security. Any securities not outstanding which are subject to
such options, warrants or conversion privileges shall be deemed to be
outstanding securities of the class owned by such person, but shall not be
deemed to be outstanding for the purpose of computing the percentage of the
class by any other person.
There are no contractual arrangements or pledges of the Registrant's
securities, known to the Registrant, which may at a subsequent date result in a
change of control of the Registrant.
SELLING SHAREHOLDERS
The following table sets forth the ownership of the Common Stock
assuming conversion of the Series B Preferred, Series C Preferred, Series D
Preferred, the exercise of the Warrants and assuming the exercise of the
Placement Agent's Option, the Placement Agent's Option II, and the Placement
Agent's Option III.
<TABLE>
<CAPTION>
RELATION
NAME TO MSHI TOTAL SHARES PERCENT(+)
---- ------- ------------ ----------
<S> <C> <C> <C>
Beatrice Schaefer (1) 324,089 1.34%
Heinz C. Winzeler (2) 961,089 3.97%
Entrepreneurial Investors, Ltd.(3) 8,320,682 34.37%
Equity Services, Ltd.(4) 1,200,549 4.96%
C. J. and Florence Adams (5) 100 0.00%
Gerald and Gay Adams (5) 500 0.00%
Mark and Patricia Adams (5) 250 0.00%
Luana Pearce, Trustee of Luana Pearce Trust (5)(12) 15,000 0.06%
Mary Dietze (5) 5,000 0.02%
Jim Pearce (5) 3,000 0.01%
Beula Mae Pearce (5) 2,500 0.01%
C. W. Cupp (5) 10,000 0.04%
Dave Pistorius (5) 7,000 0.03%
Luana Pearce (5) 768,000 3.17%
John Stockton (5) 13,335 0.06%
Fred Shelton (5) 1,500 0.01%
Floyd Tate (5) 2,667 0.01%
Fred Kettrick (5) 1,333 0.01%
Norm Mendeke (5) 3,000 0.01%
Mike Batson (5) 3,000 0.01%
Michael Jahr (6) 100,576 0.42%
Rainier Bischoff (6) 100,576 0.42%
Helmut Heinzel (6) 100,576 0.42%
Thomas Heinzel (6) 100,576 0.42%
Heinz Schmitz (6) 100,576 0.42%
Cornelius Dornier (7) 150,863 0.62%
David Dornier (8) 30,173 0.12%
Matthia Dornier (6) 100,576 0.42%
Gabriele Dornier (7) 150,863 0.62%
Peter Widenmann (9) 10,058 0.04%
Stephen Pampush (9) 10,058 0.04%
Silvius Dornier (10) 382,187 1.58%
Herman Ebel (11) 191,094 0.79%
Penninsular Corp 50,288 0.21%
Martina Rodriguez (13) Employee 3,250 0.01%
</TABLE>
-29-
<PAGE> 32
<TABLE>
<CAPTION>
RELATION
NAME TO MSHI TOTAL SHARES PERCENT(+)
---- ------- ------------ ----------
<S> <C> <C> <C>
Roy Barrientes (13) Employee 5,000 0.02%
Amador DeLeon (13) Employee 31,000 0.13%
Trisha Truong (13) Employee 8,000 0.03%
Michael A. Chavez (13) Employee 11,500 0.05%
Heidi Sellman (13) Employee 3,000 0.01%
Antonia Ramirez (13) Employee 1,000 0.00%
Abel Herrerra (13) Employee 1,500 0.01%
Lauro Bustamante (13) Employee 1,500 0.01%
Robert Loera (13) Employee 5,000 0.02%
Oziel Rios (13) Employee 500 0.00%
Gary Salbeck (13) Employee 3,000 0.01%
Maria Lopez (13) Employee 1,000 0.00%
Matt Evans (13) Employee 8,000 0.03%
Kenneth Miller (13) Employee 3,000 0.01%
Jim Heron (13) Employee 1,500 0.01%
Paul Sarnaripa (13) Employee 6,000 0.02%
Emma Barrientos (13) Employee 1,000 0.00%
Tamara Shiplet (13) Employee 2,500 0.01%
Dana Hall (13) Employee 2,500 0.01%
Richard Ray (13) Employee 2,500 0.01%
Iona Smith (13) Employee 2,000 0.01%
Larry Awalt (13) Employee 1,500 0.01%
Ann Jun (13) Employee 3,500 0.01%
Mary K. Marlatt (13) Employee 3,500 0.01%
Randy Barber (13) Employee 41,000 0.17%
John Miller (13) Employee 1,500 0.01%
Stephen Hoelscher (13) Employee 25,000 0.10%
Jose A. Lara (13) Employee 1,500 0.01%
Duffy Hobbs (13) Employee 3,000 0.01%
Lisa Nieri (13) Employee 4,500 0.02%
Jaime Munoz (13) Officer 80,000 0.33%
Scott Cannon (13) Employee 1,000 0.00%
Linda Wolf (13) Employee 500 0.00%
Bryan Coller (13) Employee 3,500 0.01%
Melissa Toney (13) Employee 1,000 0.00%
Rafael Andrada (13) Employee 1,500 0.01%
Michele Schulte (13) Employee 1,000 0.00%
Stephanie Moya (13) Employee 1,000 0.00%
Dick Young (13) Employee 2,000 0.01%
Sandra Boesch (13) Employee 3,000 0.01%
Linda Garrett (13) Employee 1,800 0.01%
Anabella Ferris (13) Employee 2,500 0.01%
John Roam (13) Employee 1,500 0.01%
Peter Cantu (13) Employee 1,000 0.00%
Jason Ross (13) Employee 1,500 0.01%
Jesus Martines (13) Employee 1,000 0.00%
Steve Laird (13) Employee 1,000 0.00%
Pete Gutierrez (13) Employee 1,000 0.00%
Gigi Edwards (13) Employee 3,000 0.01%
Susan Cloutier (13) Employee 3,000 0.01%
Carlos Baca (13) Employee 1,000 0.00%
Joseph Rodrigues (13) Employee 2,500 0.01%
</TABLE>
-30-
<PAGE> 33
<TABLE>
<CAPTION>
RELATION
NAME TO MSHI TOTAL SHARES PERCENT(+)
---- ------- ------------ ----------
<S> <C> <C> <C>
Neil Edwards (13) Employee 3,500 0.01%
Todd Wagner (13) Employee 2,000 0.01%
Shane Black (13) Employee 500 0.00%
Mark Peevey (13) Employee 500 0.00%
Richard Woods (13) Employee 500 0.00%
Ricardo Martinez (13) Employee 500 0.00%
Vivian Torres (13) Employee 500 0.00%
Ken Wilson (13) Employee 500 0.00%
Jaimison Clark (13) Employee 1,000 0.00%
David Painter (13) Employee 1,500 0.01%
Nydia Rojas (13) Employee 1,000 0.00%
Chrisitina deLeon (13) Employee 750 0.00%
Laura Chavez (13) Employee 9,600 0.04%
Tammie Delaney (13) Employee 3,500 0.01%
Katina Kettrick (13) Employee 12,000 0.05%
Marie Louissaint (14) Consultant 2,000 0.01%
Lilia I. Mena (14) Consultant 7,500 0.03%
Blandina Cardenas (14) Director 5,000 0.02%
Donna Gandy (14) Consultant 14,000 0.06%
Ernesto Chavarria (14) Director 75,000 0.31%
Captial Partners Consultant 30,000 0.12%
</TABLE>
- ----------
(+) The calculations used to drive the percentages assume exercise and
conversion of all warrants and conversion rights into the underlying shares of
Common Stock. Consequently, the percentages were based on an aggregate of
24,212,631 shares of Common Stock outstanding.
(1) Consists of 20,000 shares of Series B Preferred convertible into 200,000
shares of Common Stock, Class A Warrants covering 120,000 shares of Common
Stock, and 2,938 shares of Common Stock for payment of interest by the Company,
all of which were received in connection with a Senior Convertible Note, dated
September 30, 1997, and converted on December 31, 1997.
(2) Consists of 50,000 shares of Series B Preferred convertible into 500,000
shares of Common Stock, Class A Warrants covering 300,000 shares of Common
Stock, 7,348 shares of Common Stock for payment of interest by the Company, all
of which were received in connection with a Senior Convertible Note, dated
September 30, 1997, and converted on December 31, 1997, and 15,000 shares of
Series D Preferred convertible into 150,000 shares of Common Stock.
(3) Entrepreneurial Investors, Ltd. ("EIL") is a widely held company. EIL's
shares consist of 400,000 shares of Series B Preferred convertible into
4,000,000 shares of Common Stock, Class A Warrants covering 2,400,000 shares of
Common Stock, 94,340 shares of Series C Preferred convertible into 943,400
shares of Common Stock, and 94,340 shares of Series D Preferred convertible into
943,400 shares of Common Stock.
(4) Equity Service Ltd. ("ESL") is owned by four foreign corporations. The
shares attributed to ESL consist of 20,000 shares of Series B Preferred
convertible into 200,000 shares of Common Stock, Class A Warrants covering
420,000 shares of Common Stock, 400,000 shares of Common Stock issuable upon
exercise of the Placement Agent's Option, 47,170 shares of Common Stock issuable
upon exercise of the Placement Agent's Option II, 250,850 shares of Common Stock
issuable upon exercise of the Placement Agent's Option III, and 12,543 shares of
Series D Preferred convertible into 125,430 shares of Common Stock.
-31-
<PAGE> 34
(5) The shares are being issued to shareholders who have previously paid for
these shares, although such shares are subject to litigation. See "Management,
Discussion and Analysis of Financial Condition and Results of Operation -- Legal
Proceedings."
(6) This number consists of 10,000 shares of Series D Preferred Stock
convertible into 100,000 shares of Common Stock.
(7) This number consists of 15,000 shares of Series D Preferred Stock
convertible into 150,000 shares of Common Stock.
(8) This number consists of 3,000 shares of Series D Preferred Stock convertible
into 30,000 shares of Common Stock.
(9) This number consists of 1,000 shares of Series D Preferred Stock convertible
into 10,000 shares of Common Stock.
(10) This number consists of 38,000 shares of Series D Preferred Stock
convertible into 380,000 shares of Common Stock.
(11) This number consists of 19,000 shares of Series D Preferred Stock
convertible into 190,000 shares of Common Stock.
(12) This number includes 543,000 shares of Common Stock issuable in connection
with the Company's acquisition of certain intellectual property rights from
Monterey Trading Company.
(13) These shares are issuable to the Company's employees as compensation.
(14) These shares are issuable to the Company's consultants for services
rendered.
PLAN OF DISTRIBUTION
The Shares of Common Stock may be offered and sold from time to time by
the Selling Shareholders, or by pledges, donees, transferees or other successors
in interest. The Selling Shareholders will act independently of the Company in
making decisions with respect to the offer, sale or transfer of their Shares at
prices related to the then current market price or in negotiated transactions.
The Shares may be sold by the Selling Shareholders in one or more transactions
on the OTC Bulletin Board or otherwise at market prices then prevailing or in
privately negotiated transactions. The Shares may be sold by one or more of the
following: (i) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; (ii) purchases and resale by a broker-dealer for its
account pursuant to this Prospectus, and (iii) a block trade in which the
broker-dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction. The Company has not been advised by the Selling Shareholders that
they have, as of the date hereof, made any arrangements relating to the
distribution of the Shares covered by this Prospectus. In effecting sales,
broker-dealers engaged by the Selling Shareholders may arrange for other
broker-dealers to participate, and, in such case, broker-dealers may receive
commissions or discounts from the Selling Shareholders in amounts to be
negotiated immediately prior to sale.
In offering the Shares, the Selling Shareholders and any broker-dealers
and any other participating broker-dealers who execute sales for the Selling
Shareholders may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. Accordingly, any profits realized
by the Selling Shareholders and the compensation of such broker-dealer may be
deemed to be underwriting discounts and commissions. Any Shares covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this Prospectus.
-32-
<PAGE> 35
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.10 par value, and 10,000,000 shares of Preferred Stock, $2.00
par value.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each
share held of record on matters to be voted on by the shareholders of the
Company. Subject to the prior rights of holders of Preferred Stock, holders of
shares of Common Stock are entitled to receive dividends when, as, and if
declared by the Company's Board of Directors, out of funds legally available to
the Company. The Company currently intends to retain all future earnings for the
use in the operation of its business and therefore does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future. See "Dividend
Policy." The Common Stock has no preemptive or other subscription rights and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All of the outstanding shares of Common Stock are fully
paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue
without further vote or action by the shareholders, up to 10,000,000 shares of
Preferred Stock, in one or more series, and to designate the number of shares
constituting any series, and to fix the rights, preferences, privileges and
restrictions thereof. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders. The issuance of Preferred Stock with
conversion rights may adversely affect the voting power of the holders of Common
Stock, including the loss of voting control.
Although the Company had at one time designated 50,000 shares of Series
A Preferred Stock, all such shares have been canceled in connection with the
Combination Agreement.
On November 12, 1997, the Company filed with the Utah Secretary of
State a Certificate of Designation, Preferences, Rights and Limitations of
Series B Cumulative Preferred Stock, authorizing 420,000 shares of Series B 5%
Cumulative Convertible Non-Voting Preferred Stock (the "Series B Certificate").
All 420,000 shares were issued on November 12, 1997 in connection with the
Private Placement Phase I. The Series B Certificate was subsequently amended on
January 29, 1998, to increase the number of Series B Preferred authorized to
490,000. The additional 70,000 shares of Series B Preferred were issued on
February 11, 1998, upon conversion of the Notes. Each share of Series B
Preferred Stock is convertible, at any time, at the option of the holder, into
the number of shares of the Company's Common Stock determined by dividing (i)
the sum of $5.30 and the amount of any accrued and unpaid dividends with respect
to such share on such date (the "Liquidation Amount"), by (ii) the Conversion
Price per share initially set at $0.53, subject to adjustment upon certain
events. The holders of all of the 490,000 Series B Preferred shares covenanted
with the Company to abstain from converting their preferred shares if such
conversion would compromise MSI's HUB status. The holders of Series B Preferred
Stock are entitled to cumulative dividends at an annual rate of 5% of the
Liquidation Amount per share, payable quarterly. Such dividends are payable in
cash or in Common Stock based on its current market price, determined by the
average of the daily sales prices for the thirty (30) consecutive trading days
preceding the payment date.
On January 29, 1998, the Company filed with the Utah Secretary of State
a Certificate of the Designation, Preferences, Rights and Limitations of Series
C Cumulative Preferred Stock, authorizing 99,057 shares of Series C 6%
Cumulative Convertible Non-Voting Preferred Stock. All 99,057 shares of Series C
Preferred were issued on January 30, 1998 in connection with the Private
Placement Phase II. Each share of Series C Preferred Stock is convertible, at
any time, at the option of the holder, into the number of shares of the
Company's Common Stock determined by dividing (i) the sum of $10.60 and the
amount of any accrued and unpaid dividends with respect to such share on such
date (the "Liquidation Amount"), by (ii) the Conversion Price per share
initially set at $1.06, subject to adjustment upon certain events. The holders
of Series C Preferred Stock are entitled to cumulative dividends at an annual
rate of 6% of the Liquidation Amount per share, payable quarterly. Such
dividends are payable in cash or in Common Stock based on its current market
price, determined by the average of the daily sales prices for the
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<PAGE> 36
thirty (30) consecutive trading days preceding the payment date. The Series C
Preferred holders have liquidation rights in parity with the Series B Preferred
holders.
On April 22, 1998, the Company filed with the Utah Secretary of State a
Certificate of the Designation, Preferences, Rights and Limitations of Series D
Cumulative Preferred Stock, authorizing 247,642 shares of Series D 6% Cumulative
Convertible Non-Voting Participating Preferred Stock (the "Series D
Certificate"). The Series D Certificate was subsequently amended on May 14,
1998, May 21, 1998, and June 26, 1998, to increase the number of Series D
Preferred authorized to 258,657, 274,407 and 279,657, respectively. A total of
279,657 shares of Series D Preferred were issued in three phases which were
completed on July 8, 1998 in connection with the Private Placement Phase III.
Each share of Series D Preferred Stock is convertible, at any time, at the
option of the holder, into the number of shares of the Company's Common Stock
determined by dividing (i) the sum of $10.60 and the amount of any accrued and
unpaid dividends with respect to such share on such date (the "Liquidation
Amount"), by (ii) the Conversion Price per share initially set at $1.06, subject
to adjustment upon certain events. The holders of all of the 279,657 Series D
Preferred shares covenanted with the Company to abstain from converting their
preferred shares if such conversion would compromise MSI's HUB status. The
holders of Series D Preferred Stock are entitled to cumulative dividends at an
annual rate of 6% of the Liquidation Amount per share, payable quarterly. Such
dividends are payable in cash or in Common Stock based on its current market
price, determined by the average of the daily sales prices for the thirty (30)
consecutive trading days preceding the payment date. The Series D Preferred
holders have liquidation rights in parity with the Series B and Series C
Preferred holders.
On October 26, 1998, the Company filed with the Utah Secretary of State
a Certificate of the Designation, Preferences, Rights and Limitations of Series
E Cumulative Preferred Stock, authorizing 105,000 shares of Series E 6%
Cumulative Convertible Non-Voting Participating Preferred Stock (the "Series E
Certificate"). One Hundred Five Thousand shares of Series E Preferred were
issued by November 9, 1998. Each share of Series E Preferred stock is
convertible, at any time, at the option of the holder, into ten shares of the
Company's Common Stock determined by dividing (i) the sum of $30 and the amount
of any accrued and unpaid dividends with respect to such share on such date (the
"Liquidation Amount"), by (ii) the Conversion Price per share initially set at
$3.00, subject to adjustment upon certain events. The holders of Series E
Preferred Stock are entitled to cumulative dividends at an annual rate of 6% of
the Liquidation Amount per share, payable quarterly. Such dividends are payable
in cash or in Common Stock based on its current market price, determined by the
average of the daily sales prices for the thirty (30) consecutive trading days
preceding the payment date. The Series E Preferred holders have liquidation
rights in parity with the Series B, Series C and Series D Preferred holders.
For five years from the date of issuance of the Series B Preferred and
Series C Preferred, respectively, the holders of Series B Preferred have the
right to nominate one (1) member to the slate of nominees to the Board of
Directors, the holders of the Series C Preferred have the right to nominate one
(1) member to the slate of nominees to the Board of Directors. The holders of
Common Stock will suffer immediate and significant dilution to their percentage
ownership of the Common Stock upon conversion of the Series B Preferred, the
Series C Preferred, the Series D Preferred and/or the Series E Preferred.
WARRANTS AND PLACEMENT OPTIONS
The Company issued Class A Warrants to purchase an aggregate of
2,520,000 shares of Common Stock on November 11, 1997 in connection with Private
Placement Phase I. The Warrants are exercisable for a two (2) year period
commencing on January 3, 1998 and ending on January 31, 2000. The exercise price
of the Warrants is $1.50 and the Warrants contain anti-dilution provisions
providing adjustment in the event of any recapitalization, stock dividend, stock
split or similar transaction. The Warrants do not entitle the holder thereof to
any rights as a shareholder of the Company until the Warrants are exercised and
shares are purchased thereunder. The Warrant holders agreed that as long as MSI
remains certified as a HUB, they will not exercise their Warrants in such a
manner to cause MSI to lose its HUB status. The Warrants and the shares of
Common Stock issuable upon exercise thereof may not be offered for sale except
in compliance with the applicable provisions of the Securities Act. The
Registration Statement of which this Prospectus forms a part covers those of
such Warrants that remain outstanding and the shares of Common Stock issuable
upon the exercise of the Warrants issued in connection with Private Placement
Phase I.
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<PAGE> 37
Also in connection with Private Placement Phase I, the Company issued
to the placement agent a Placement Agent's Option Certificate ("Option
Certificate I"), dated November 11, 1997. The Option Certificate I entitles the
placement agent to purchase 400,000 shares of Common Stock at a purchase price
of $1.50. The option commenced on January 31, 1998 and expires on January 31,
2003.
With respect to Private Placement Phase II, the Company issued a second
Placement Agent's Option Certificate ("Option Certificate II"), dated January
31, 1998. The Option Certificate II entitles the same placement agent to
purchase 47,170 shares of Common Stock at a purchase price of $4.00 per share.
The option under Option Certificate II is exercisable beginning on January 31,
1999 and ending on January 31, 2004. Both the Option Certificate I and the
Option Certificate II contain customary anti-dilution provisions with respect to
stock dividends, stock splits and recapitalization in favor of the holder.
With respect to Private Placement Phase III, the Company issued a third
Placement Agent's Option Certificate ("Option Certificate III"), dated July 8,
1998. The Option Certificate III entitles the same placement agent to purchase
250,850 shares of Common Stock at a purchase price of $1.59 per share. The
option under Option Certificate III is exercisable beginning on June 30, 1999
and ending on June 30, 2004. The Option Certificate III contains customary
anti-dilution provisions with respect to stock dividends, stock splits and
recapitalization in favor of the holder.
CONVERTIBLE NOTES
On September 30, 1997, the Company executed two Senior Convertible
Notes for an aggregate principal amount of $371,000 (the "Notes"). The holders
of the Notes gave written notice of their intent to convert the Notes on
December 31, 1997. Consequently, the Company issued a total of 70,000 shares of
Series B Preferred, Class A Warrants to purchase 420,000 shares of Common Stock,
and a total of 10,286 shares of Common Stock, representing the interest (the
"Securities"). The Securities were issued to the holders of the Notes on
February 11, 1998, and the Registration Statement of which this Prospectus is a
part covers those Securities. The holders of Common Stock will suffer immediate
dilution to their percentage ownership of the Common Stock upon the conversion
of the Series B Preferred and upon exercise of the Warrants.
INDEMNIFICATION
The Revised Articles of Incorporation state that the Company may
indemnify each director, officer, employee, or agent of the Company to the full
extent permitted by the laws of the state of Utah. Section 16-10a-901 through
909 of the Utah Revised Business Corporation Act, as amended (the "Corporation
Act"), permits a Utah corporation to indemnify its directors and officers for
certain of their acts. More specifically, Sections 16-10a-902 and 16-10a-907 of
the Corporation Act grant authority to any corporation to indemnify directors
and officers against any judgments, fines, amounts paid in settlement and
reasonable expenses, including attorney's fees, by reason of his or her having
been a corporate director or officer. Such provision is limited to instances
where the director or officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, or, in criminal proceedings, he or she had no reasonable cause to
believe his or her conduct was unlawful. Such sections confer on the director or
officer an absolute right to indemnification for expenses, including attorney's
fees, actually and reasonably incurred by him or her to the extent he or she is
successful on the merits or otherwise defense of any claim, issue, or matter.
The corporation may not indemnify a director if the director is adjudged liable
to the corporation or deemed to have derived an improper personal benefit in an
action in which the director is adjudged liable. Section 16-10a-906 of the
Corporation Act expressly makes indemnification contingent upon a determination
that indemnification is proper in the circumstances. Such determination must be
made by the board of directors acting through a quorum of disinterested
directors, or by the board of directors acting on the advice of independent
legal counsel, or by the shareholders. Further, Section 16-10a-904 of the
Corporation Act permits a corporation to pay attorney's fees and other
litigation expenses on behalf of a director or office in advance of the final
disposition of the action upon receipt of an undertaking by or on behalf of such
director or officer to repay such expenses to the corporation if it is
ultimately determined that he or she is not entitled to be indemnified by the
corporation to the extent the expenses so advanced by the corporation exceed the
indemnification to which he or she is entitled. Such indemnification provisions
do not exclude other indemnification rights to which a director or officer
-35-
<PAGE> 38
may be entitled under the corporation's certificate or articles of
incorporation, bylaws, an agreement, a vote of shareholders, or otherwise. The
corporation may also purchase and maintain insurance to provide indemnification.
The foregoing discussion of indemnification merely summarizes certain
aspects of the indemnification provisions of the Corporation Act and is limited
by reference to the above discussed section of the Corporation Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to members of the board of directors, officers, employees,
or person controlling the Company pursuant to the foregoing provisions, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ANTI-TAKEOVER PROVISIONS
The Company's Revised Articles of Incorporation and By-Laws include
certain provisions which may have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a shareholder might consider
in its best interests, including attempts that might result in a premium over
the market price for the shares held by the shareholders and could make it more
difficult to remove incumbent management. The Company's Revised Articles of
Incorporation or By-Laws provide that: (i) directors may authorize the issuance
of preferred stock having rights and preferences established by the Board of
Directors without further approval by the shareholders; and (ii) except as
otherwise required by law, vacancies in the Board of Directors may be filled
only by the remaining directors.
SHARES ELIGIBLE FOR FUTURE SALE
Shares of substantial amounts of the Company's Common Stock in the
public market or the prospect of such sales could materially adversely affect
the market price of the Common Stock. Upon issuance of the common stock
registered hereunder, 13,697,531 shares will be freely tradable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), by persons other than "affiliates of the Company," as
defined under the Securities Act. The remaining shares of Common Stock
outstanding are deemed "restricted securities" as defined by Rule 144 under the
Securities Act and may not be sold in the absence of registration unless an
exemption from registration is available, including the exemption provided by
Rule 144. The shares currently held by the officers and directors of the Company
are restricted securities that are also subject to contractual "lock-up"
restrictions described below.
REGISTRATION RIGHTS
The Company has granted certain demand and "piggyback" registration
rights with respect to (i) 2,940,000 shares of Common Stock issuable upon
exercise of the Class A Warrants issued in connection with the Notes and Private
Placement Phase I, (ii) 698,020 shares of Common Stock issuable upon exercise of
Placement Agent's Option, Placement Agent's Option II, and Placement Agent's
Option III(the "Certificates"). Subject to certain conditions and limitations,
the registration rights granted to such holders give such holders the right to
register all or any portion of the Common Stock held by them or issuable upon
the exercise of the Class A Warrants or the Certificates. Moreover, the Company
has granted registrations rights to the holders of 490,000 shares of Series
Preferred B pursuant to Private Placement Phase I, 99,057 shares of Series C
Preferred under Private Placement Phase II, and 279,657 shares of Series D
Preferred pursuant to Private Placement Phase III. The holder of all of the
Preferred Shares , Warrants and Options, itemized herein, have exercised their
registration rights and such shares are included hereunder.
LOCK-UP AGREEMENTS
Jose Chavez, Mitchell Kettrick and George Villalva, the Company's
principal shareholders who are also officers and directors, executed Lock-Up
Agreements (collectively, the "Lock-Up Agreements") with Equity Services, Ltd.
on October 31, 1997 in connection with Private Placement Phase I.
-36-
<PAGE> 39
Under these Lock-Up Agreements, the shareholders have agreed not to
sell or otherwise dispose of 9,025,000 shares their collective 9,200,000 shares
until March 31, 2002 unless one of the following events occurs: (a) MSHI's net
income before provision for income taxes and exclusive of any extraordinary
earnings (the "Minimum Pretax Income") amounts to at least One Million Dollars
($1,000,000) during the fiscal year ending on March 31, 1999 or March 31, 2000;
or (b) the Minimum Pretax Income amounts to at least Two Million Dollars
($2,000,000) during the fiscal year ending on March 31, 2001; or (c) commencing
at the effective date of a registration statement (the "Effective Date")
covering a subsequent public offering of the Company's securities and ending
eighteen (18) months after the Effective Date, the average closing bid price of
the Company's common stock shall average in excess of Four Dollars ($4.00) per
share for thirty (30) consecutive business days.
LEGAL MATTERS
The validity of the shares offered hereby has been passed upon for the
Company by Vial, Hamilton, Koch & Knox, L.L.P., Dallas, Texas.
EXPERTS
The financial statements of the Company for the three months ended June
30, 1998, and year ended March 31, 1998, appearing in this Prospectus and
Registration Statement have been audited by Brown, Graham & Company, P.C.,
independent auditors, as set forth in its report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern, as
described in Note 1 to the financial statements), and they are included in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
CHANGE IN INDEPENDENT AUDITORS
On September 14, 1998, the Company's auditors, Jones, Jensen & Company,
LLC, Salt Lake City, Utah, were dismissed as independent accountants to the
Company. The former accountants were unofficially dismissed on June 11, 1997 but
the Company inadvertently neglected to obtain official dismissal until September
14, 1998.
The former accountants' reports for the fiscal years ended March 31,
1996 and March 31, 1995 did not contain an adverse opinion or a disclaimer of
opinion, nor were such reports qualified or modified as to audit scope or
accounting principles. The reports were modified as to uncertainty concerning
the Company's ability to continue as a going concern. During the Company's two
most recent fiscal years audited by Jones, Jensen & Company, LLC and subsequent
interim periods preceding the dismissal of Jones, Jensen & Company, LLC, the
Company had no disagreements with Jones, Jensen & Company, LLC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
The Company engaged Salazar & associates, Austin, Texas, as its
independent accountants on June 11, 1997. The decision to engage Salazar &
Associates was approved by the board of directors of the Company. On August 15,
1997, Salazar & Associates, Austin, Texas, reigned as the Company's principal
accountants.
The former accountants' reports for the fiscal years ended
March 31, 1997, did not contain an adverse opinion or a disclaimer of opinion,
nor were such reports qualified or modified as to audit scope or accounting
principles. The reports were modified as to uncertainty concerning the Company's
ability to continue as a going concern as stated in Salazar & Associates report.
During the Company's most recent fiscal year and subsequent interim periods
preceding the resignation of Salazar & Associates, the Company had no
disagreements with Salazar & Associates on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
-37-
<PAGE> 40
The Company has engaged Brown, Graham & Company, P.C. , Georgetown,
Texas as its independent accountant on May 11, 1998. The decisions to engage
Brown, Graham & Company, P.C. was approved by the board of directors of the
Company.
The Company nor anyone on the Company's behalf, consulted the engaged
accountants on any matter prior to the engagement dates..
-38-
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report - Brown Graham & Company, P.C.......................................................F-2
Independent Auditors' Report - Salazar & Associates..............................................................F-3
Consolidated Balance Sheet as of June 30, 1998, and March 31,1998................................................F-4
Consolidated Statements of Operations for the three months ended June 30, 1998 and 1997 and
for the years ended March 31, 1998 and 1997.............................................................F-5
Consolidated Statements of Shareholders Equity for the three months ended June 30, 1998 and
for the year ended March 31, 1998 and 1997..............................................................F-6
Consolidated Statements of Cash Flows for the three months ended June 30, 1998 and
for the year ended March 31, 1998.......................................................................F-7
Notes to Consolidated Financial Statements.......................................................................F-9
</TABLE>
F-1
<PAGE> 42
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Micro-Media Solutions, Inc.,
We have audited the accompanying consolidated balance sheets of Micro-Media
Solutions, Inc. and Subsidiary (the "Company") as of June 30, 1998 and March 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the three months ended June 30, 1998 and year ended
March 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we 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 presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micro-Media
Solutions, Inc. and Subsidiary as of June 30, 1998 and March 31, 1998, and the
results of their operations and cash flows for the periods then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a working capital deficit at
March 31, 1998, and has suffered losses from operations for the three months
ended June 30, 1998 and the years ended March 31, 1998 and 1997, which raise
substantial doubt about its ability to continue as a going concern. Management's
plan regarding these matters is presented in Note 1 of these consolidated
financial statements.
Georgetown, Texas
October 14, 1998
F-2
<PAGE> 43
SALAZAR & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
JOSE SALAZAR, CPA FRANCES ORTIZ-
SALAZAR, CPA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Mountain States Resources Corporation
We have audited the accompanying consolidated statements of operations,
stockholders equity and cash flows of Mountain States Resources Corporation and
subsidiary (the "Company") for the year ended March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain a
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 presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Mountain State Resources Corporation for the year ended March 31,
1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has suffered losses from
operations and has a working capital deficiency, which raises substantial doubt
about its ability to continue as a going concern. Management's plan regarding
these matters is presented in Note 10 of these financial statements.
As more fully described in Note 11 and 12, subsequent to the issuance of the
Company's March 31, 1997 financial statements and our report thereon dated June
22, 1997, we became aware that those financial statements did not reflect
certain adjustments as described in Notes 11 and 12. In our original report we
expressed an unqualified opinion on the March 31, 1997, financial statements as
described in paragraph three above, and our opinion on the revised statements,
as expressed herein, remains unqualified.
Salazar and Associates,
Austin, Texas
June 22, 1997, except as to the fifth paragraph above and Notes 11 and 12, which
are as of June 10, 1998
F-3
<PAGE> 44
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Balance Sheets (Restated)
June 30, 1998 and March 31, 1998
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 8,084 $ 25,786
Accounts Receivable - Trade 332,738 150,851
Inventory 185,572 285,023
Short-Term Investment (Note 4) 1,350,000 1,350,000
Other Receivables - Advances (Note 2) 178,101 86,961
----------- -----------
Total Current Assets 2,054,495 1,898,621
Property, Plant, and Equipment,
net (Note 3) 940,911 800,831
----------- -----------
TOTAL ASSETS $ 2,995,406 $ 2,699,452
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 189,238 $ 300,035
Other Accrued Expenses 100,647 169,336
Bank Line of Credit (Note 4) 1,070,000 1,228,966
Current Maturities of Notes
payable (Note 5) 112,596 151,267
Current Portion of Obligations Under
Capital Leases (Note 6) 45,517 41,097
Other Notes Payable (Note 14) 200,000 200,000
----------- -----------
Total Current Liabilities 1,717,998 2,090,701
----------- -----------
Long-Term Liabilities
Notes Payable (Note 5) 235,293 367,522
Obligations under Capital
Leases (Note 6) 122,736 149,560
----------- -----------
Total Long-Term Notes 358,029 517,082
----------- -----------
Commitments and Contingencies
(Notes 8, 10 & 14) -- --
----------- -----------
Total liabilities 2,076,027 2,607,783
----------- -----------
Stockholders' Equity (Note 11)
Preferred stock Series B; $5.30
stated value; 490,000 shares
authorized, issued & outstanding 2,597,000 2,597,000
Preferred Stock Series C; $10.60
stated value; 99,057 shares
authorized, issued & outstanding 1,050,004 1,050,004
Preferred Stock Series D; $10.60
stated value; 198,807 shares
authorized, issued & outstanding 2,107,354 --
Common stock at $.10 par value;
50,000,000 authorized, 11,518,571
and 11,506,846 shares issued and
outstanding, respectively 1,151,857 1,150,685
Additional Paid-in Capital 2,397,982 2,666,099
Accumulated Deficit (8,384,818) (7,372,119)
----------- -----------
Total Stockholders' Deficit 919,379 91,669
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,995,406 $ 2,699,452
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 45
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Operation (Restated)
Three Months Ended June 30, 1998 and 1997, and Years Ended March 31, 1998 and
1997
<TABLE>
<CAPTION>
June 30 March 31
------------------------------ -----------------------------
Unaudited
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Hardware, software and peripherals $ 503,632 $ 818,634 $ 1,350,869 $ 1,440,725
Service, support and integration 74,099 293,147 704,241 457,572
Networks, LAN/WAN 23,898 118,003 685,711 2,767,452
------------ ------------ ------------ ------------
Net revenue 601,629 1,229,784 2,740,821 4,665,749
------------ ------------ ------------ ------------
Cost of goods sold:
Hardware, software and peripherals 419,204 402,204 1,406,612 1,109,354
Service, support and integration 64,735 190,546 656,625 283,724
Networks, LAN/WAN 17,207 80,325 997,397 1,605,157
------------ ------------ ------------ ------------
Total cost of goods sold 501,146 673,075 3,060,634 2,998,235
------------ ------------ ------------ ------------
Gross margin (deficit) 100,483 556,709 (319,813) 1,667,514
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Salaries and benefits 553,207 307,069 1,825,590 1,202,791
Professional fees and consultants 185,942 51,990 357,174 42,251
Occupancy 89,679 56,658 212,843 185,516
Depreciation 52,991 29,746 178,892 139,443
Vehicle expense 34,610 35,370 126,131 158,765
Other expense 109,375 57,293 379,059 316,820
Interest expense 20,636 22,130 294,198 100,064
Provision for uncollectible accounts -- 1,284 73,252 4,249
------------ ------------ ------------ ------------
Total selling, general and
administrative expenses 1,046,440 561,540 3,447,137 2,149,899
------------ ------------ ------------ ------------
Net loss (945,957) (4,831) (3,766,950) (482,385)
Total cost of goods sold 501,146 673,075 3,060,634 2,998,235
Plus preferred stock dividends (66,743) -- (3,471,170) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (1,012,700) $ (4,831) $ (7,238,120) $ (482,385)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.09) $ (0.00) $ (0.66) $ (0.05)
============ ============ ============ ============
Basic and diluted weighted average
shares outstanding 11,507,002 10,764,733 10,998,874 10,026,400
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 46
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series B Series C Series D
--------------------------------------- ------------------------------------- ---------------
Shares Amount Shares Amount Shares
------------------ ------------------ ----------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance March 31, 1996 $ $
Common stock
issued for services
Common stock options
exercised
Net loss
------------------ ------------------ ----------------- ------------------ ---------------
Balance March 31, 1997
Common stock issued:
Interest
Compensation
Preferred stock dividend
Preferred stock issued:
Private Placement 420,000 2,226,000 99,057 1,050,004
Senior Debt 70,000 371,000
Preferred stock dividend
discount
Stock option for:
Compensation
Placement agents
Cash received for
uncertificated stock
Common stock-uncertificated
issued for note receivable
Note receivable offset against
common stock subscribed
Net loss
------------------ ------------------ ----------------- ------------------ ---------------
Balance March 31, 1998 490,000 2,597,000 99,057 1,050,004
Preferred stock issued:
Private Placement 198,807
Common stock issued:
Compensation
Preferred
Preferred stock dividend
Stock options:
Placement Agents
Net loss
------------------ ------------------ ----------------- ------------------ ---------------
Balance June 30, 1998 490,000 $ 2,597,000 99,057 $ 1,050,004 198,807
================== ================== ================= ================== ===============
<CAPTION>
Common Stock
---------------------------------------
Series D Common Stock Subscribed
------------------ ----------------------------------- ---------------------------------------
Amount Shares Amount Shares Amount
------------------ ---------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Balance March 31, 1996 9,784,733 $ 978,473 $
Common stock
issued for services 480,000 48,000
Common stock options
exercised 500,000 50,000
Net loss
----------------- --------------- ---------------- ------------------ ------------------
10,764,733 1,076,473
Balance March 31, 1997
Common stock issued:
Interest 10,286 1,029
Compensation 414,900 41,490
Preferred stock dividend 23,742 2,374
Preferred stock issued:
Private Placement
Senior Debt
Preferred stock dividend
discount
Stock option for:
Compensation
Placement agents
Cash received for
uncertificated stock 293,185 29,319
Common stock-uncertificated
issued for note receivable 543,000 407,250
Note receivable offset against
common stock subscribed (543,000) (407,250)
Net loss
----------------- --------------- ---------------- ------------------ ------------------
11,506,846 1,150,685
Balance March 31, 1998
Preferred stock issued:
Private Placement 2,107,354
Common stock issued:
Compensation 1,500 150
Preferred
Preferred stock dividend 10,225 1,022
Stock options:
Placement Agents
Net loss
----------------- --------------- ---------------- ------------------ ------------------
Balance June 30, 1998 $ 2,107,354 11,518,571 $ 1,151,857 $
================= =============== ================ ================== ==================
<CAPTION>
Additional
(Discount on) Accum-
Paid - In ulated
Capital Deficit Total
--------------------- ---------------- ---------------------
<S> <C> <C> <C>
Balance March 31, 1996 (1,046,058) 348,386 $ 280,801
Common stock
issued for services 48,000
Common stock options
exercised 50,000
Net loss (482,385) (482,385)
--------------------- ---------------- ---------------------
Balance March 31, 1997 (1,046,058) (133,999) (103,584)
Common stock issued:
Interest 4,114 5,143
Compensation 250,367 291,857
Preferred
Preferred stock dividend 56,294 (58,668)
Preferred stock issued:
Private Placement (841,547) 2,434,457
Senior Debt 371,000
Preferred stock dividend
discount 3,412,502 (3,412,502)
Stock option for:
Compensation 93,750 93,750
Placement agents 253,547 253,547
Cash received for
uncertificated stock 483,130 512,449
Common stock-uncertificated
issued for note receivable 407,250
Note receivable offset against
common stock subscribed (407,250)
Net loss (3,766,950) (3,766,950)
--------------------- ---------------- ---------------------
Balance March 31, 1998 2,666,099 (7,372,119) 91,669
Preferred stock issued:
Private Placement (874,033) 1,233,321
Common stock issued:
Compensation 7,853 8,003
Preferred
Preferred stock dividend 65,720 (66,742)
Stock options:
Placement Agents (532,343) (532,343)
Net loss (945,957) (945,957)
---------- ----------- --------------- ---------------------
Balance June 30, 1998 $ 2,397,982 $ (8,384,818) $ 919,379
===================== ================ =====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 47
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (945,957) $ (3,766,950)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 52,991 178,892
Stock issued for compensation 8,002 291,857
Stock options issued for compensation 93,750
Stock issued for interest -- 5,143
Change in trade receivables (181,887) 832,062
Change in inventory 55,430 (19,569)
Change in accounts payable (110,798) (577,325)
Change in accrued expenses (68,689) 57,775
------------ ------------
Net cash provided by (used by) operating activities
activities (1,190,908) (2,904,365)
Cash flows from investment activities:
Purchase of property & equipment (149,050) (195,685)
Purchase of short term investment -- (1,350,000)
Additional notes receivable -- (142,265)
Proceeds from notes receivables -- 477,645
Proceeds from other receivables -- 162,793
Additional other receivables (91,140) (121,341)
------------ ------------
Net cash used by investing activities (240,190) (1,168,853)
Cash flows from financing activities:
Proceeds from line of credit (net) -- 504,076
Proceeds from other notes payable -- 200,000
Payments on long-term debt (329,866) (162,153)
Payments on capital lease obligations (22,401) (32,485)
Proceeds from private placement 1,765,664 2,688,004
Proceeds from issuance of common stock -- 512,450
Proceeds from senior convertible debt and other capital transactions -- 371,000
------------ ------------
Net cash provided by financing activities 1,413,397 4,080,892
------------ ------------
Net increase in cash (17,701) 7,674
Cash at beginning of period 25,785 18,112
------------ ------------
Cash at end of period $ 8,084 $ 25,786
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 48
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
---------- ----------
<S> <C> <C>
Supplemental disclosure:
Cash paid during the year for:
Interest $ 35,789 $ 232,578
========== ==========
Supplemental schedule of non-cash investing
financing activities:
Preferred stock issued for placement $ -- $ --
agent fees -- 156,000
Stock options:
Compensation -- 93,750
Common stock issued for:
Compensation 8,002 291,857
Interest on debt -- 5,143
Preferred stock dividends 66,743 58,668
Common stock subscribed for
note receivable -- 407,250
Debt converted to preferred stock -- 371,000
Inventory received for other notes -- 84,394
Discount on preferred stock issued for -- 3,412,502
Inventory converted to equipment 44,021 --
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 49
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION:
Micro-Media Solutions, Inc. (formerly Mountain States Resources Corporation,
("MSRC"), was organized under the laws of the State of Utah on April 15, 1969.
MSRC began operations April 15, 1969, as a mining, mineral extraction and oil
and gas exploration company. MSRC discontinued its operations on 1993 and became
a development stage company as described in the Statement of Financial
Accounting Standards No.7, "Accounting and Reporting by Development Stage
Enterprises". On June 23, 1997, MSRC entered into an agreement and plan of
reorganization with the shareholders of Micro-Media Solutions, Inc. (a Texas
Corporation), ("MSI-Texas"), in which MSRC acquired 100% of the common stock of
MSI-Texas. As part of the reorganization, MSRC changed its name to Micro-Media
Solutions, Inc., (a Utah Corporation), ("MSI"). Subsequent to June 30, 1998, MSI
changed its name to MSI Holdings, Inc. The transaction was accounted for as a
recapitalization.
MSI-Texas is an Austin, Texas, based technology corporation formed to provide
Computer hardware, software programming, system support, maintenance, media
duplication, and kitting to the public and private sectors. In addition,
MSI-Texas is certified by the State of Texas as a Historically Underutilized
Business (HUB).
MSI-Texas is a business solutions technology integrator with infrastructure
design and implementation services. In addition, MSI-Texas' computer networking
services includes system integration and local wide-area networks.
GOING CONCERN:
As shown in the accompanying consolidated financial statements, the Company has
incurred net losses of $945,957 and $3,766,950 for three months ended June 30,
1998, and the year ended March 31, 1998, respectively. As of March 31, 1998, the
Company's current liabilities exceeded its current assets by $192,080 and the
Company owed accounts payable with dates due in excess of thirty (30) days in
the approximates amount of $170,000. These factors create a substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent on the Company's obtaining
additional financing to fund the expenses related to operations and capital
improvements.
In May 1998, the Company received $2 million in phase III of a private placement
agreement, (see Note 10), which has been used to retire debt, decrease past due
accounts payable and for operating expenses. In addition, the Company is
continuing discussions with private investment groups for a private placement of
a newly created series of preferred stock with net proceeds to the Company of
approximately $2.6 million, and plans a public offering in the year ending March
31, 1999. Management has identified and closed substantial contracts during the
year ended March 31, 1999, and believes it can produce the level of revenue
necessary to return the Company to a positive earnings trend. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements for the three months ended June 30, 1998
and 1997, and years ended March 31, 1998 and 1997, include the accounts and
transactions of the Company and MSI-Texas. All significant inter-company
accounts and transactions have been eliminated in the accompanying consolidated
financial statements. The Company, however, did not have any material asset or
liability accounts or account balances. With the exception of the Company's
equity accounts and a deficit retained earnings, the significant account
balances belong to MSI-Texas.
CASH AND CASH EQUIVALENTS:
Cash equivalents consist primarily of funds invested in short-term
interest-bearing accounts. The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE:
The Company follows the allowance method of expensing accounts receivable when
considered uncollectible. As of June 30, 1998 and March 31, 1998, management
believes all accounts are collectible; and therefore, no allowance has been
recorded.
F-9
<PAGE> 50
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVENTORY:
Inventory is valued at lower of cost, using the FIFO method(first-in/first-out),
or market. Inventory consists principally of hardware and software needed for
maintaining and building network technology for customers.
PROPERTY, PLANT, AND EQUIPMENT:
Property and equipment are stated at cost. For financial statement purposes,
depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the term of the
related lease or the useful life of the leasehold improvements. Accelerated
depreciation methods are used for tax purposes. Depreciation and amortization
are calculated over the following useful lives stated in years:
<TABLE>
<CAPTION>
Useful
Lives
-----
<S> <C>
Vehicles 5
Furniture and fixtures 5
Equipment 5
Leasehold improvements 20
</TABLE>
REVENUE AND COST RECOGNITION:
Revenue from sales of hardware, software and peripherals is recognized upon
shipment to the customer. Most hardware, software and peripherals sales are made
without the right of return. Product returns which are minimal are recorded as a
reduction of sales upon receipts of the product. Service, support and
integration sales are recognized upon completion of the service and is not
subject to warranty.
Revenue from fixed priced contracts is recognized on the percentage-of-
completion method of accounting, measured by the cost-to-cost method. This
method is used because management considers total costs incurred to be the best
available measure of progress on contracts.
Contract costs include all direct costs and those indirect costs related to
contract performance. Changes in job performance, job conditions, and estimated
profitability and final contract settlements may result in revisions to costs
and revenue and are recognized in the period in which the revisions are
determined.
The asset, "Costs and Estimated Earnings in Excess of Billings Uncompleted
Contracts", represents revenue earned in excess of amounts billed. The liability
"Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts"
represents billings in excess of amounts earned.
Revenue and contract costs from fixed priced contracts are included in the
various categories of revenue and cost of goods sold in the accompanying
financial statements. As of June 30, 1998 and March 31, 1998, there were no
contracts in progress.
FEDERAL INCOME TAX:
The Company uses the liability method of accounting for income taxes as
prescribed by the Financial Accounting Standard Board Statement No. 109.
Deferred tax liabilities and assets are determined based on differences between
the financial statement and tax basis of assets and liabilities using enacted
tax rates expected to be in effect for the year in which the differences are
expected to reverse. The net change in deferred tax assets and liabilities is
reflected in the statement of operations.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees". The Company
follows FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123") for financial statement disclosure purposes and issuance of options and
warrants to non-employees for services rendered.
F-10
<PAGE> 51
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", management reviews long-lived
assets and intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be fully
recoverable. As part of this assessment, management prepares an analysis of the
undiscounted cash flows for each product that has significant long-lived or
intangible asset values associated with it. This analysis for the asset values
as of June 30, 1998 and March 31, 1998, indicated there was no impairment to the
carrying value of these assets.
SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company has addressed the
requirements of SFAS No. 130 and there is no material impact on the financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. Generally, certain financial information is required to be
reported on the basis that is used internally for evaluating performance or an
allocation of resources to operating segments. The Company has adopted the
requirements of SFAS No. 131 and there is no material impact on the financial
statements.
USE OF ESTIMATES AND CERTAIN CONCENTRATIONS:
Management of the Company has made a number of estimates and assumptions
relating to the valuation and reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Although actual results could differ from those estimates,
management believes its estimates are reasonable. Certain components,
subassemblies and software included in the Company's computer systems are
obtained from sole suppliers or a limited number of suppliers. The Company
relies, to a certain extent, upon the ability of its suppliers' to enhance
existing products in a timely and cost-effective manner, to develop new products
to meet changing customer needs and to respond to emerging standards and other
technological developments in the computer industry. The Company's reliance on a
limited number of suppliers involves several risks, including the possibility of
shortages and/or increases in costs of components and subassemblies, and the
risk of reduced control over delivery schedules.
FINANCIAL INSTRUMENTS:
Cash equivalents include highly liquid short-term investments with original
maturities of three months or less, readily convertible to known amounts of
cash. The amounts reported as cash equivalents, receivables, other assets,
accounts payable and accrued expenses and debt are considered by the Company to
be reasonable approximations of their fair values, based on market information
available to management as of June 30, 1998 and March 31, 998. The use of
different market assumptions and estimation methodologies could have a material
effect on the estimated fair value amounts. The reported fair values do not take
into consideration potential taxes or other expenses that would be incurred in
an actual settlement.
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. A concentration of credit risk may exist with respect to trade
receivables, as many of the Company's customers are in the computer and
telecommunications industries. The Company has a large number of customers on
which it performs ongoing credit evaluations and generally does not require
collateral from its customers. Historically, the Company has not experienced
significant losses related to receivables from individual customers or groups of
customers in any particular industry or geographic area.
F-11
<PAGE> 52
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 2 - OTHER RECEIVABLES
Other receivables include employee advances for travel and lodging for out of
town projects in the amount of $30,000 as well as $65,000 of cost paid by the
Company to the third parties in satisfaction of obligations of Argus Management,
Inc. Also included is a deposit to Exceptional Services in the amount of
$64,082, lease prepayment of $14,940, and accrued interest receivable of $4,079.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
A summary of the Company's investment in property, plant and equipment at June
30, 1998, and March 31, 1998, is as follows (see Note 6):
<TABLE>
<CAPTION>
June 30 March 31
----------- -----------
<S> <C> <C>
Equipment, Furniture and Fixtures $ 802,714 $ 613,184
Transportation Equipment 253,204 253,204
Leasehold Improvements 311,331 307,790
----------- -----------
1,367,249 1,174,178
Less Accumulated Depreciation 426,338 373,347
----------- -----------
Net Property, Plant and Equipment $ 940,911 $ 800,831
=========== ===========
</TABLE>
Depreciation charged against income for the three months ended June 30, 1998 and
1997, was $52,991 and $29,746, respectively. Depreciation charged against income
for the years ended March 31, 1998 and 1997, was $178,892 and 139,443,
respectively.
NOTE 4 - BANK LINE OF CREDIT
The Company was in default on a secured line of credit agreement with Bank One
Texas, N.A. providing for borrowings of up to $725,000 based on the amount of
the Company's eligible receivables. As of March 31, 1998, the Company owed
$208,966 plus accrued interest at 18% in the amount of $19,219 secured by
accounts receivable. This amount was paid in full in April 1998 and was not
renewed. Under the agreement, the Company was subject to covenants including
certain financial ratios.
The Company has a secured line of credit agreement maturing February 5, 1999,
with Compass Bank for $1,350,000 secured by two certificates of deposit
aggregating $1,350,000 held in the Company's name by Compass Bank and payable in
monthly installments of interest only. The balance at June 30, 1998 and March
31, 1998, was $1,070,000 and $1,020,000, respectively, plus accrued interest at
7.25% and 8% per annum in the amount of $3,573 and $4,893, respectively. There
are no additional loan covenants associated with this line of credit.
NOTE 5 - NOTES PAYABLE
Long-term notes payable consists of the following amounts at June 30, 1998 and
March 31, 1998:
<TABLE>
<CAPTION>
June 30 March 31
-------- --------
<S> <C> <C>
Austin Community Development Corporation, $100,000 equipment loan dated May 29,
1996, secured by equipment and accounts receivable. Loan requires interest
payments at 9% for the first six months, principal and interest payments
thereafter of $2,224 beginning in February 1997. Loan will mature
over a 60 month period ending January 2002. $ 77,062 $ 81,327
Austin Community Development Corporation, $100,000 working capital loan dated
June 14, 1995, secured by equipment and accounts receivable. Loan is due in 48
monthly principal installments of $2,083 along with interest of 9%
beginning in July 1996. Loan will mature in June 2000. 52,330 56,497
</TABLE>
F-12
<PAGE> 53
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 5 - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
June 30 March 31
--------- ---------
<S> <C> <C>
Neighborhood Commercial Management Program, $75,000 loan from City of Austin
dated June 8, 1995, secured by second lien on equipment and accounts receivable
Loan is due in 60 monthly installments of principal and interest of $1,347
beginning January 1996. Interest rate of 0% until December 1995, thereafter 3%
rate to maturity. Loan will mature over a 60 month period ending December 2000 39,375 43,104
Neighborhood Commercial Management Program, $250,000 loan from City of Austin
dated August 12, 1996, secured by second lien on equipment and accounts
receivable. Loan is due in 60 monthly installments of principal and interest of
$4,492 beginning January 1997. Interest rate of 0% until December 1996,
thereafter 3% rate to maturity. Loan will mature over a 60 month period
ending December 2001 179,122 191,194
Bank One Texas, N.A., $200,000 loan dated June 26, 1996, secured by a first lien
on equipment and leasehold improvements, loan is due in 60 monthly installments
of $3,333 along with interest equal to the Bank One Texas, N.A., base rate plus
2%, loan was paid in full during quarter ended June 30, 1998 -- 146,667
--------- ---------
347,889 518,789
Less current portion (112,596) (151,267)
--------- ---------
$ 235,293 $ 367,522
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next five years:
<TABLE>
<CAPTION>
Period ended: June 30 March 31
--------- ---------
<S> <C> <C>
1999 $ 112,596 $ 151,267
2000 114,061 153,067
2001 85,074 134,348
2002 33,932 80,107
Thereafter 2,226 --
========= =========
</TABLE>
Certain officers of the Company have personally guaranteed all notes.
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES
The Company is lessee of transportation and telephone equipment under capital
leases expiring in various years through September 2001. The asset and
liabilities under capital leases are recorded at the lower of the present value
of the minimum lease payments or the fair value of the assets. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases is included in
depreciation expense (see Note 3).
Following is a summary of property held under capital leases:
<TABLE>
<CAPTION>
June 30 March 31
--------- ---------
<S> <C> <C>
Transportation Equipment $ 234,456 $ 218,055
Communication Equipment 56,014 56,014
</TABLE>
F-13
<PAGE> 54
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 6 OBLIGATIONS UNDER CAPITAL LEASES - CONTINUED
Minimum future lease payments under capital leases as of June 30, 1998 and March
31, 1998, for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
Period ended: June 30 March 31
--------- ---------
<S> <C> <C>
1999 $ 61,924 $ 68,077
2000 60,343 60,343
2001 87,600 74,985
--------- ---------
Total minimum lease payments 209,867 203,405
Less: Amount representing interest (41,614) (12,748)
--------- ---------
168,253 190,657
Less current portion (45,517) (41,097)
--------- ---------
Long-term obligations under capital leases $ 122,736 $ 149,560
========= =========
</TABLE>
NOTE 7 - FEDERAL INCOME TAXES
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
<TABLE>
<CAPTION>
June 30 March 31
----------- -----------
<S> <C> <C>
Computed at the expected statutory rate $ (322,000) $(1,281,000)
Non-deductible items 3,000 40,000
Valuation allowance 319,000 1,241,000
----------- -----------
Income tax $ -- $ --
=========== ===========
Deferred tax assets are as follows:
Deferred tax asset $ 1,394,000 $ 1,285,000
Valuation allowance (1,394,000) (1,285,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has available at March 31, 1998, $3,782,000 of unused operating loss
carryforwards that may be applied against future taxable income and that expire
in various years through 2013.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company had notes receivable from certain related parties at March 31,1997,
in the amount of $419,774. These related parties are owned and controlled by
majority stockholders of the Company. During the year ended March 31, 1998, the
Company loaned an additional $142,265 to these related entities and received
payments in the amount of $562,039. At June 30, 1998 and March 31, 1998, the
Company did not have any notes receivables or payables to related parties. The
Company did not have sales or purchases with the related parties for the three
months ended June 30, 1998 or 1997 or the years ended March 31, 1998 or 1997.
NOTE 9 - COMMITMENTS
The Company leases its principal general offices and warehouse facilities. The
leases expire at May 31, 2008. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
<S> <C>
1999 $ 133,296
2000 142,464
2001 149,340
2002 168,480
2003 179,010
2004 189,540
2005 200,070
2006 210,600
2007 221,070
2008 231,660
2009 40,365
----------
TOTAL $1,865,895
==========
</TABLE>
The total rental obligation under the above contract for the quarters ended June
30, 1998 and 1997, was $32,364 and $27,495, respectively and for the years ended
March 31, 1998 and 1997 was $109,980 and $82,255, respectively.
F-14
<PAGE> 55
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 10 - STOCKHOLDERS' EQUITY
In October 1997, the Company completed a Private Placement Agreement, (the
"Agreement") with a group of accredited investors. The Agreement provides for
three "Phases" of financing.
Phase I of the Agreement was funded in November 1997. The Company received
$2,120,000 in exchange for 400,000 shares of series B preferred stock (5%
cumulative, convertible, non-voting, stated value $5.30) ,(the "Series B
Stock"). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock subject to adjustment and six warrants, (the
"Warrants") for the purchase of six shares of common stock at $1.50 per share.
The Company paid $302,000 and issued 20,000 shares of series B preferred stock
for placement agent fees in Phase I. Also options to purchase 400,000 shares of
common stock at $1.50 per share were issued as a part of the agreement. The
common stock had a fair value of $0.57 per share at the grant date of the
options resulting in $226,800 in placement agent fees. The Agreement states that
conversion of the preferred stock will not occur to the extent that the HUB
status of the Company is compromised. An additional 4,348,738 shares could be
converted before the HUB status would be lost.
The series B preferred stock can be converted to common stock. Therefore, a
discount in the amount of $6,151,978 has been realized. The discount is the
difference in the intrinsic value of the common stock and warrants less the net
proceeds from the series B preferred stock. The discount is accreted from the
date of issuance of the preferred stock to the date the stock can be converted.
Due to the limitation on the number of shares of stock that can be issued to
retain the HUB status, $3,412,502 has been recorded as dividends and as an
increase in additional paid-in capital in the accompanying financial statements.
The unrecognized portion of the discount in the amount of $2,796,524 will be
recorded if and when the preferred stock is converted or the HUB status changes.
Phase II of the Agreement was funded in February 1998. The Company received
$1,000,004 in exchange for 94,340 shares of series C preferred stock (6%
cumulative, convertible, non-voting, stated value, $10.60), (the "Series C
Stock). Each share of preferred stock is initially convertible into 10 shares of
the Company's common stock, subject to adjustment. The Company paid $130,000 and
issued 4,717 shares of series C preferred stock for placement agent fees. Also
options to purchase 47,170 shares of common stock at $4.00 per share were issued
as a part of the agreement. The common stock had a fair value of $0.57 per share
at the grant date resulting in $26,747 in placement agent fees. The Agreement
states that conversion of the preferred stock will not occur to the extent that
the HUB status of the Company is compromised.
The series C preferred stock can be converted to common stock. Therefore, a
discount in the amount of $615,851 has been realized. The discount is the
difference in the intrinsic value of the common stock less the net proceeds from
the series C preferred stock. Due to the limitation on the number of shares of
stock that can be issued to retain the HUB status, the unrecognized discount in
the amount of $615,851 will be recorded if and when the preferred stock is
converted or the HUB status changes.
Phase III of the Agreement was funded in May through July 1998. The Company
received $2,923,204 in exchange for 266,340 shares of series D preferred stock
(6% cumulative, convertible, non-voting, stated value, $10.60), (the "Series D
Stock"). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock, subject to adjustment. The Company paid $349,318
and issued 13,317 shares of series D preferred stock for placement agent fees.
Also options to purchase 250,850 shares of common stock at $1.59 per share were
issued as a part of the agreement. The common stock had a fair value of $1.81 to
$3.05 per share at the grant date resulting in $532,343 in placement agent fees.
The Agreement states that conversion of the preferred stock will not occur to
the extent that the HUB status of the Company is compromised.
The Series D preferred stock can be converted to common stock. Therefore, a
discount in the amount of $4,781,739 at June 30, 1998 has been realized. The
discount is the difference in the intrinsic value of the common stock less the
net proceeds from the series D preferred stock. Due to the limitation on the
number of shares of stock that can be issued to retain the HUB status, the
unrecognized discount in the amount of $4,781,739 will be recorded if and when
the preferred stock is converted or the HUB status changes.
F-15
<PAGE> 56
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED
Senior convertible debt in the amount of $371,000 was issued for cash in
November 1997. This debt was converted to 70,000 shares of series B preferred
stock (5% cumulative, convertible, non-voting, stated value, $5.30), in February
1998. Accrued interest in the amount of $5,143 was paid with the issuance of
10,286 shares of common stock. The discount on this issue of series B preferred
stock is included in the total series B discount detailed above.
Preferred stock dividends were paid with the issuance of common stock valued at
the previous thirty day average closing bid price per share of common stock as
follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
June 30, 1998 10,224 $ 66,743
March 31, 1998 23,742 58,668
</TABLE>
NOTE 11 - STOCK OPTIONS AND WARRANTS
A summary of the status of the Company's stock options as of June 30, 1998 and
March 31, 1998, is presented below:
<TABLE>
<CAPTION>
June 30 March 31
------- -------
<S> <C> <C>
Options outstanding at beginning of period 622,170 --
Options granted 250,850 622,710
Options exercised -- --
Options canceled -- --
Less: options not exercisable at end of period 473,020 222,710
------- -------
Options outstanding and
exercisable 400,000 400,000
======= =======
Weighted Average Exercise Price per Share $ 1.50 $ 1.50
======= =======
</TABLE>
The following table summarizes the information about the stock options as of
June 30, 1998, and March 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
- --------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstand- Remaining Exercise Exercisable Exercise
Exercise ing at Contractual Price At Price
Price June 30 Life (Total Shares) June 30 (Exer. Shares)
- -------- ------------- --------------- -------------- ----------- --------------
<C> <C> <C> <C> <C> <C> <C>
$ 1.50 50,000 (1) 5 years $ 1.50 - $ 1.50
2.25 25,000 (1) 5 years 2.25 - 2.25
1.50 100,000 (1) 5 years 1.50 - 1.50
1.50 400,000 (2) 5 years 1.50 400,000 1.50
4.00 47,170 (2) 6 years 4.00 - 4.00
1.59 250,850 (2) 5 years 1.59 - 1.59
- -------- ------------- --------------- -------- ---------- ---------
$ 4.00 873,020 5 years $ 1.68 400,000 $ 1.50
======== ============= =============== ======== ========== =========
</TABLE>
(1) Options to employees for past services.
(2) Options granted for placement agent fees (Note 10).
F-16
<PAGE> 57
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 11 - STOCK OPTIONS AND WARRANTS - CONTINUED
<TABLE>
<CAPTION>
MARCH 31, 1998
- --------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstand- Remaining Exercise Exercisable Exercise
Exercise ing at Contractual Price At Price
Price June 30 Life (Total Shares) June 30 (Exer. Shares)
- -------- ------------- --------------- -------------- ----------- --------------
<C> <C> <C> <C> <C> <C> <C>
$ 1.50 50,000 (1) 5 years $ 1.50 - $ 1.50
2.25 25,000 (1) 2 years 2.25 - 2.25
1.50 100,000 (1) 5 years 1.50 - 1.50
1.50 400,000 (2) 5 years 1.50 400,000 1.50
4.50 47,170 (2) 6 years 4.00 - 4.00
- -------- ------------- --------------- -------- ---------- ---------
1.50-
$ 4.00 622,170 5 years $ 1.68 400,000 $ 1.50
======== ============= =============== ======== ========== =========
</TABLE>
(1) Options issued to employees for past services.
(2) Options granted for placement agency fees (Note 10).
Stock options to employees for the year ended March 31, 1998, have been recorded
as compensation as applied under APB No. 25 in the amount of $93,750.
SFAS No. 123 requires the Company to provide pro forma information regarding net
income (loss) applicable to common stockholders and income (loss) per share as
if compensation cost for the Company's stock options granted to employees had
been determined in accordance with the fair value based method prescribed in
that Statement.
The Company estimated the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants as follows:
<TABLE>
<CAPTION>
March 31
-------------
<S> <C>
Dividend yield 0%
Expected volatility 16.46%
Risk-free interest rate 8.54%
Expected lives 5 Years
Net (loss) applicable to common stockholders:
As reported $ (7,238,120)
=============
Pro forma $ (7,142,870)
=============
Net (loss) per share:
As reported $ (.66)
=============
Pro forma $ (.65)
=============
</TABLE>
At March 31, 1998 and June 30, 1998, the Company had warrants outstanding to
acquire 2,940,000 shares of common stock. All of the warrants were eligible to
be exercised at year end. The following table summarizes the information about
the warrants:
<TABLE>
<CAPTION>
Number
Outstanding
Exercise Mar. 31 Expiration
Price and June 30 Date
<S> <C> <C> <C>
$1.50 120,000 1/31/2000
$1.50 2,400,000 1/31/2000
$0.795 300,000 1/31/2000
$0.795 120,000 1/31/2000
---------
2,940,000
=========
</TABLE>
F-17
<PAGE> 58
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 11 - STOCK OPTIONS AND WARRANTS - CONTINUED
In addition, all of the warrant contracts prohibit exercise of the warrants if
the HUB status of the Company is compromised upon such exercise.
NOTE 12 - EARNINGS PER SHARE
The following data details the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted average number of shares of
dilutive potential common stock.
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------------ ------------
<S> <C> <C>
Loss from continuing operations $ (945,957) $ (3,766,950)
Less: Preferred dividends (66,743) (3,471,170)
------------ ------------
Loss available to common shareholders
used in basic EPS $ (1,012,700) $ (7,238,120)
============ ============
Weighted average number of common shares
used in basic EPS 11,507,002 10,998,874
Effect of dilutive securities:
Stock options -- --
Warrants -- --
------------ ------------
Weighted number of common shares and
dilutive potential common stock used
in diluted EPS 11,507,002 10,998,874
============ ============
</TABLE>
In addition, options on 873,020 shares of common stock and warrants on 2,940,000
shares of common stock were not included in computing diluted EPS for the three
months ended June 30, 1998, because their effects were antidilutive. Options on
622,170 shares of common stock and warrants on 2,940,000 shares of common stock
were not included in computing diluted EPS for the year ended March 31, 1998,
because their effects were antidilutive.
NOTE 13 - CONTINGENCY
On December 18, 1997, Argus Management, Inc. filed Plaintiff's Original Petition
in the 216th District Court of Kerr County, Texas. Argus claims the Company and
Mr. Jose G. Chavez, as joint obligors, defaulted on their obligation to Argus
pursuant to two promissory notes for $100,000 each, both dated June 2, 1997.
Argus is seeking a judgment for $200,000, together with interest on the notes at
the rate of 20% per annum from June 2, 1997, through the date the notes are
satisfied. As of March 31, 1998, $65,000 had been disbursed to third parties in
satisfaction of obligations of Argus Management, Inc. The $65,000 has been
recorded in other receivables in the accompanying financial statements.
On February 6, 1998, the Company filed Plaintiff's Original Petition in the
above-referenced case. The Company asserts breach of contract, fraud,
defamation, usury, and civil conspiracy claims against Argus Management, Inc.
The Company strongly disagrees with Argus' contentions and denies liability to
Argus under the notes and plans to oppose vigorously Argus' claims and recover
the amounts disbursed to third parties.
A lawsuit was filed by Manpower, Inc. to preserve its claims for certain
delinquent obligations that were reduced to approximately $38,000 which is
included in accounts payable at March 31, 1998. The full amount of the principal
and interest was paid on April 29, 1998, and a Notice of Dismissal was filed on
May 8, 1998.
On January 22, 1998, the Company filed a lawsuit against Bits Technical
Corporation for damages attributable to a breach of commitment. This matter is
still pending. On August 17, 1998, Bits Technical Corporation ("BTC") filed a
counterclaim against the Company in connection with the above case. In the
counterclaim, BTC asserts the Company fraudulently induced BTC to promise to
loan money to the Company. In particular, BTC claims the Company promised
certain contracts and business opportunities to BTC that the Company was
unwilling or unable to deliver.
F-18
<PAGE> 59
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
THREE MONTHS ENDED JUNE 30, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
NOTE 13 - CONTINGENCY - CONTINUED
Bank One, Texas, NA filed a lawsuit against the Company for the collection of
approximately $355,633 of principal plus interest $29,289 as well as attorney
fees and court costs $10,000. The bank was paid in full in April 1998. The bank
then executed a Notice of Nonsuit to dismiss with prejudice the lawsuit on April
29, 1998.
On November 20, 1996, MCA Communications, Inc. ("MCA") filed a lawsuit against
the Company in County Court at Law No. 2 in Harris County, Texas. MCA claims the
Company owes $12,485 for certain goods and services that MCA claims to have
provided to MSI in connection with various projects for the Texas Department of
Health. MCA also seeks interest, costs, and attorneys' fees. On January 6, 1997,
the Company filed its answer and denied the above-referenced claim in its
entirety.
F-19
<PAGE> 60
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information 2
Prospectus Summary 3
Summary of Financial Data 6
Risk Factors 8
Price Range for Common Stock 11
Use of Proceeds 11
Dividend Policy 11
Capitalization 12
Selected Financial Data 12
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 14
Business 19
Management 22
Executive Compensation 24
Certain Transactions 25
Principal Holders of Securities 27
Selling Shareholders 29
Plan of Distribution 32
Description of Capital Stock 33
Shares Eligible for Future Sale 36
Legal Matters 39
Experts 37
Change in Independent Auditors 37
Index to Financial Statements F-1
</TABLE>
13,697,531 Shares
MSI HOLDINGS, INC.
Common Stock
---------------
PROSPECTUS
---------------
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. Indemnification of Directors and Officers.
The Registrant's Revised Articles of Incorporation and By-Laws permit
the Registrant to indemnify its directors and officers to the fullest extent
authorized under the Utah Business Corporation Act ("UBCA"). In general, a Utah
corporation may indemnify a director or officer who was, is or is threatened to
be made, a named defendant or respondent in a proceeding by virtue of his
position in the corporation if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, in the case of criminal proceedings, had no reasonable cause
to believe his conduct was unlawful. A Utah corporation may indemnify a
director, officer, employee, or agent ("fiduciary") in an action brought by or
in the right of the corporation only if such fiduciary was not found liable to
the corporation, unless or only to the extent that a court finds him to be
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
ITEM 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses payable by the
Company in connection with the sale and distribution of the securities being
registered. All amounts are estimates except the SEC registration fee.
<TABLE>
<S> <C>
Filing Fee-Securities and Exchange Commission..............................................$ 33,589
Accountants' Fees and Expenses.............................................................$ 40,000
Fees and Expenses of Counsel for the Registrant............................................$ 30,000
Printing and Communication Expenses........................................................$ 50,000
Blue Sky Fees and Expenses.................................................................$ 10,000
Miscellaneous Expenses.....................................................................$ 10,000
--------
Total................................................................................$173,589
========
</TABLE>
- -----------------
The selling security holders are bearing no portion of the expenses of
the offering pursuant to agreement.
ITEM 26. Recent Sales of Unregistered Securities.
During the past three years the Registrant has sold the following
securities, which were not registered under the Securities Act of 1933:
(i) In connection with the Merger on June 23, 1997, the Registrant
issued 9,310,000 shares of Common Stock for all of the outstanding
shares of Micro-Media Solutions, Inc., a Texas corporation.
(ii) On November 12, 1997, Registrant received $2,120,000 from
accredited investors for 400,000 shares of Series B Preferred and
related securities. The Company issued an additional 5 percent, 20,000
shares, of Series B Preferred to the placement agent.
(iii) On January 31, 1998, Registrant received $1,000,000 from
accredited investors for 94,340 shares of Series C Preferred and
related securities. The Company issued an additional 5 percent, 4,717
shares, of Series C Preferred to the placement agent and granted the
placement agent an Option to purchase 47,170 shares of Common Stock
executable at $4 per share.
(iv) Commencing in May 1998 and ending in July 1998, Registrant
received $2,823,204 from accredited investors for 266,340 shares of
Series D Preferred and related securities. The Company issued an
additional 5 percent, 13,317 shares, of Series D Preferred to the
placement agent and granted the placement agent an option to purchase
250,850 shares of Common Stock at $1.59 per share.
II-1
<PAGE> 62
(v) On February 11, 1998, the Company issued 70,000 shares of Series B
Preferred, Warrrants to purchase 420,000 shares of Common Stock and
10,286 shares of Common Stock, representing the unpaid interest, to the
holders of two senior convertible notes with face values totaling
$371,000.
(vi) Commencing in October 1998 and ending in November 1998, Registrant
received $3,000,000 from accredited investors for 100,000 shares of
Series E Preferred and related securities. The Company issued an
additional 5 percent, 5,000 shares, of Series E Preferred to the
placement agent.
In connection with said sales, the Registrant relied on the exemption
from registration under the Securities Act of 1933, as amended, provided by
Section 4 thereof and Regulations D and S promulgated thereunder, based on
representations made to the Registrant by the purchasers of the common stock.
ITEM 27. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<C> <C> <C>
2 Agreement and Plan of Reorganization(1) Incorporated by reference to Form 8-K dated
August 12, 1992
3.1 Articles of Incorporation and Bylaws(1) Incorporated by reference to Exhibit No. 3 to the
Registrant's Registration (#33-24265-LA)
3.2 Amended Articles of Incorporation(1) Incorporated by reference to Exhibit No. 2B of
Registrant's Form 8-A Registration Statement (File
#0-8146).
3.3 Article of Amendment(1) Incorporated by reference to Form 10-QSB/A filed
November 10, 1998,for the period ended June 30,
1998.
4 Specimen of Securities(1) Incorporated by reference to Exhibit Nos. 1A and 1B
of Registrant's Form 8-A Registration Statement (File
#0-8146)
4.1 Certificate of Designation for Series B Preferred Incorporated by reference to Form 10-QSB/A filed
Shares(1) November 12, 1998 for the period ended June 30,
1998.
4.2 First Amendment to the Certificate of Designation for Incorporated by reference to Form 10-QSB/A filed
Series B Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.3 Certificate of Designation for Series C Preferred Incorporated by reference to Form 10-QSB/A filed
Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.4 Certificate of Designation for Series D Preferred Incorporated by reference to Form 10-QSB/A filed
Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.5 First Amendment to the Certificate of Designation for Incorporated by reference to Form 10-QSB/A filed
Series D Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.6 Second Amendment to the Certificate of Designation Incorporated by reference to Form 10-QSB/A filed
for Series D Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
</TABLE>
II-2
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<S> <C> <C>
4.7 Third Amendment to the Certificate of Designation Incorporated by reference to Form 10-QSB/A filed
for Series D Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.8 Designation of Rights and Preferences of Series E Incorporated by reference to Form 10-QSB/A filed
November 12, 1998, 1998 for the period ended June
30, 1998.
5 Legal Opinion of Vial, Hamilton, Koch'& Knox,
L.L.P.(3)
10.1 Texas Lottery Installation and Service Contract Incorporated by reference to Form 10-KSB filed July 2,
between GTECH and Micro-Media Solutions Inc., a 1998 for the period ended March 31, 1998.
Texas corporation ("MSI")(1)
10.2 Agreement for Construction, Installation and/or Incorporated by reference to Form 10-KSB, as
Maintenance, dated as of April 9, 1997, between GTE amended, filed July 2, 1998 for the period ended
and MSI(1) March 31, 1998.
10.3 Contract, dated November 16, 1997, between San Incorporated by reference to Form 10-KSB, as
Antonio Independent School District and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.4 Contract, dated August 25, 1997, between Education Incorporated by reference to Form 10-KSB, as
Service Center 1 and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.5 Contract, dated August 28, 1997, between Education Incorporated by reference to Form 10-KSB, as
Service Center 18 and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.6 Contract, dated June 26, 1997, between Education Incorporated by reference to Form 10-KSB, as
Service Center 5 and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.7 Field Trial Agreement, dated October 1, 1997, Incorporated by reference to Form 10-KSB, as
between Southwestern Bell Telephone and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.8 Subcontractor Agreement, dated July 23, 1997, Incorporated by reference to Form 10-KSB, as
between Southwestern Bell Telephone and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.9 Field Trial Agreement, dated October 1, 1997, Incorporated by reference to Form 10-KSB, as
between Southwestern Bell Telephone and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.10 City Wide Contract for Personal Computers, dated Incorporated by reference to Form 10-KSB, as
May 23, 1997, between the City of Austin and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.11 Wide Area Network Contract, between Texas Migrant Incorporated by reference to Form 10-KSB, as
Counsel and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
</TABLE>
II-3
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<S> <C> <C>
10.12 Machine Installation Contract, between Transactive, Incorporated by reference to Form 10-KSB, as
Inc. and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.13 Contract, between the Texas Department of Incorporated by reference to Form 10-KSB, as
Transportation and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.14 Contract, between the Texas Department of Health Incorporated by reference to Form 10-KSB, as
and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.15 Employment Agreement, dated June 15, 1997, Incorporated by reference to Form 10-KSB, as
between Jose Chavez and Micro-Media Solutions Inc., amended, filed July 2, 1998 for the period ended
a Utah corporation ("MSHI")(1) March 31, 1998.
10.16 Employment Agreement, dated June 15, 1997, Incorporated by reference to Form 10-KSB, as
between Mitchell Kettrick and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.17 Sublease dated July 23, 1998 between GTE Intelligent Incorporated by reference to Form 10-QSB/A filed
Network Services, Inc. and MSI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.18 MSI's Purchase Order dated May 29, 1998, for GTE Incorporated by reference to Form 10-QSB/A filed
Internetworking's Internet Advantage version 5.1 November 12, 1998, 1998 for the period ended June
(Quote Number 38561.9719.1)(1) 30, 1998.
10.19 MSI's Purchase Order dated September 30, 1998, for Incorporated by reference to Form 10-QSB/A filed
GTE Internetworking's Internet Advantage version November 12, 1998, 1998 for the period ended June
6.0 (Quote Number 76512.9719.1)(1) 30, 1998.
10.20 Basic Agreement dated September 18, 1998, between Incorporated by reference to Form 10-QSB/A filed
Siemens Nixdorf Informations Systems, Inc. and November 12, 1998, 1998 for the period ended June
MSI.(1) 30, 1998.
10.21 Placement Agreement dated November 11, 1997, by Incorporated by reference to Form 10-QSB/A filed
and between Equity Services, Ltd. and MSHI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.22 Placement Agreement dated January 31 1998, by and Incorporated by reference to Form 10-QSB/A filed
between Equity Services, Ltd. and MSHI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.23 Placement Agreement dated April 30, 1998, by and Incorporated by reference to Form 10-QSB/A filed
between Equity Services, Ltd. and MSHI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.24 First Amendment to the Placement Agreement dated Incorporated by reference to Form 10-QSB/A filed
May 30, 1998, by and between Equity Services, Ltd. November 12, 1998, 1998 for the period ended June
and MSHI(1) 30, 1998.
</TABLE>
II-4
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<S> <C> <C>
10.25 Value Added Reseller's agreement between MSI and Incorporated by reference to Form 10-QSB/A filed
Hewlett-Packard, Inc. dated June 1, 1995 November 12, 1998, 1998 for the period ended June
30, 1998.
10.26 DiaLinx Service Agreement by and between MSHI Incorporated by reference to Form 10-QSB/A filed
and GTE Internetworking dated October 28, 1998. November 12, 1998, 1998 for the period ended June
30, 1998.
10.27 Placement Agreement dated October 13,1998, by and Incorporated by reference to Form 10-QSB/A filed
between Equity Services, Ltd. and MSHI November 12, 1998, 1998 for the period ended June
30, 1998.
16 Letter of change in Certifying Accountant To be filed supplementally by the prior certifying
accountant.
21 List of Subsidiaries(2) Exhibit 21.1
23.1 Consent of Salazar & Associates(2) Exhibit 23.1
23.2 Consent of Brown, Graham & Company, P.C.(2) Exhibit 23.2
23.3 Consent of Vial, Hamilton, Koch & Knox, L.L.P.(2) Exhibit 23.3
</TABLE>
- ----------------
(1) Previously filed with the Securities and Exchange Commission and
incorporated by reference pursuant to Rule 12b-32 of the Securities
Exchange Act of 1934.
(2) Filed herewith.
(3) To be filed by amendment.
ITEM 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions (set forth in Item 14
above), or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The Undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
II-5
<PAGE> 66
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-6
<PAGE> 67
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Austin,
State of Texas, on November 10, 1998.
MSI HOLDINGS, INC.
By /s/ JOSE CHAVEZ
-----------------------------------
Jose Chavez, President & CEO
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOSE CHAVEZ
- ---------------------
Jose Chavez President, CEO and Director November 10, 1998
/s/ MITCHELL KETTRICK
- ---------------------
Mitchell Kettrick Vice President, Secretary November 10, 1998
and Director
/s/ ERNESTO CHAVARRIA
- ---------------------
Ernesto Chavarria Director November 10, 1998
/s/ DAVID W. HILL
- ---------------------
David W. Hill Chief Financial Officer November 10, 1998
- ---------------------
Blandina Cardenas Director
- ---------------------
Daniel Dornier Director
</TABLE>
II-7
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<C> <C> <C>
2 Agreement and Plan of Reorganization(1) Incorporated by reference to Form 8-K dated
August 12, 1992
3.1 Articles of Incorporation and Bylaws(1) Incorporated by reference to Exhibit No. 3 to the
Registrant's Registration (#33-24265-LA)
3.2 Amended Articles of Incorporation(1) Incorporated by reference to Exhibit No. 2B of
Registrant's Form 8-A Registration Statement (File
#0-8146).
3.3 Article of Amendment(1) Incorporated by reference to Form 10-QSB/A filed
November 10, 1998,for the period ended June 30,
1998.
4 Specimen of Securities(1) Incorporated by reference to Exhibit Nos. 1A and 1B
of Registrant's Form 8-A Registration Statement (File
#0-8146)
4.1 Certificate of Designation for Series B Preferred Incorporated by reference to Form 10-QSB/A filed
Shares(1) November 12, 1998 for the period ended June 30,
1998.
4.2 First Amendment to the Certificate of Designation for Incorporated by reference to Form 10-QSB/A filed
Series B Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.3 Certificate of Designation for Series C Preferred Incorporated by reference to Form 10-QSB/A filed
Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.4 Certificate of Designation for Series D Preferred Incorporated by reference to Form 10-QSB/A filed
Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.5 First Amendment to the Certificate of Designation for Incorporated by reference to Form 10-QSB/A filed
Series D Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.6 Second Amendment to the Certificate of Designation Incorporated by reference to Form 10-QSB/A filed
for Series D Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<C> <C> <C>
4.7 Third Amendment to the Certificate of Designation Incorporated by reference to Form 10-QSB/A filed
for Series D Preferred Shares(1) November 12, 1998, 1998 for the period ended June
30, 1998.
4.8 Designation of Rights and Preferences of Series E Incorporated by reference to Form 10-QSB/A filed
November 12, 1998, 1998 for the period ended June
30, 1998.
5 Legal Opinion of Vial, Hamilton, Koch & Knox,
L.L.P.(3)
10.1 Texas Lottery Installation and Service Contract Incorporated by reference to Form 10-KSB filed July 2,
between GTECH and Micro-Media Solutions Inc., a 1998 for the period ended March 31, 1998.
Texas corporation ("MSI")(1)
10.2 Agreement for Construction, Installation and/or Incorporated by reference to Form 10-KSB, as
Maintenance, dated as of April 9, 1997, between GTE amended, filed July 2, 1998 for the period ended
and MSI(1) March 31, 1998.
10.3 Contract, dated November 16, 1997, between San Incorporated by reference to Form 10-KSB, as
Antonio Independent School District and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.4 Contract, dated August 25, 1997, between Education Incorporated by reference to Form 10-KSB, as
Service Center 1 and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.5 Contract, dated August 28, 1997, between Education Incorporated by reference to Form 10-KSB, as
Service Center 18 and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.6 Contract, dated June 26, 1997, between Education Incorporated by reference to Form 10-KSB, as
Service Center 5 and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.7 Field Trial Agreement, dated October 1, 1997, Incorporated by reference to Form 10-KSB, as
between Southwestern Bell Telephone and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.8 Subcontractor Agreement, dated July 23, 1997, Incorporated by reference to Form 10-KSB, as
between Southwestern Bell Telephone and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.9 Field Trial Agreement, dated October 1, 1997, Incorporated by reference to Form 10-KSB, as
between Southwestern Bell Telephone and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.10 City Wide Contract for Personal Computers, dated Incorporated by reference to Form 10-KSB, as
May 23, 1997, between the City of Austin and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.11 Wide Area Network Contract, between Texas Migrant Incorporated by reference to Form 10-KSB, as
Counsel and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<S> <C> <C>
10.12 Machine Installation Contract, between Transactive, Incorporated by reference to Form 10-KSB, as
Inc. and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.13 Contract, between the Texas Department of Incorporated by reference to Form 10-KSB, as
Transportation and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.14 Contract, between the Texas Department of Health Incorporated by reference to Form 10-KSB, as
and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.15 Employment Agreement, dated June 15, 1997, Incorporated by reference to Form 10-KSB, as
between Jose Chavez and Micro-Media Solutions Inc., amended, filed July 2, 1998 for the period ended
a Utah corporation ("MSHI")(1) March 31, 1998.
10.16 Employment Agreement, dated June 15, 1997, Incorporated by reference to Form 10-KSB, as
between Mitchell Kettrick and MSI(1) amended, filed July 2, 1998 for the period ended
March 31, 1998.
10.17 Sublease dated July 23, 1998 between GTE Intelligent Incorporated by reference to Form 10-QSB/A filed
Network Services, Inc. and MSI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.18 MSI's Purchase Order dated May 29, 1998, for GTE Incorporated by reference to Form 10-QSB/A filed
Internetworking's Internet Advantage version 5.1 November 12, 1998, 1998 for the period ended June
(Quote Number 38561.9719.1)(1) 30, 1998.
10.19 MSI's Purchase Order dated September 30, 1998, for Incorporated by reference to Form 10-QSB/A filed
GTE Internetworking's Internet Advantage version November 12, 1998, 1998 for the period ended June
6.0 (Quote Number 76512.9719.1)(1) 30, 1998.
10.20 Basic Agreement dated September 18, 1998, between Incorporated by reference to Form 10-QSB/A filed
Siemens Nixdorf Informations Systems, Inc. and November 12, 1998, 1998 for the period ended June
MSI.(1) 30, 1998.
10.21 Placement Agreement dated November 11, 1997, by Incorporated by reference to Form 10-QSB/A filed
and between Equity Services, Ltd. and MSHI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.22 Placement Agreement dated January 31 1998, by and Incorporated by reference to Form 10-QSB/A filed
between Equity Services, Ltd. and MSHI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.23 Placement Agreement dated April 30, 1998, by and Incorporated by reference to Form 10-QSB/A filed
between Equity Services, Ltd. and MSHI(1) November 12, 1998, 1998 for the period ended June
30, 1998.
10.24 First Amendment to the Placement Agreement dated Incorporated by reference to Form 10-QSB/A filed
May 30, 1998, by and between Equity Services, Ltd. November 12, 1998, 1998 for the period ended June
and MSHI(1) 30, 1998.
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION LOCATION
--- ------------------- --------
<S> <C> <C>
10.25 Value Added Reseller's agreement between MSI and Incorporated by reference to Form 10-QSB/A filed
Hewlett-Packard, Inc. dated June 1, 1995 November 12, 1998, 1998 for the period ended June
30, 1998.
10.26 DiaLinx Service Agreement by and between MSHI Incorporated by reference to Form 10-QSB/A filed
and GTE Internetworking dated October 28, 1998. November 12, 1998, 1998 for the period ended June
30, 1998.
10.27 Placement Agreement dated October 13,1998, by and Incorporated by reference to Form 10-QSB/A filed
between Equity Services, Ltd. and MSHI November 12, 1998, 1998 for the period ended June
30, 1998.
16 Letter of change in Certifying Accountant To be filed supplementally by the prior certifying
accountant.
21 List of Subsidiaries(2) Exhibit 21.1
23.1 Consent of Salazar & Associates(2) Exhibit 23.1
23.2 Consent of Brown, Graham & Company, P.C.(2) Exhibit 23.2
23.3 Consent of Vial, Hamilton, Koch & Knox, L.L.P.(2) Exhibit 23.3
</TABLE>
- ----------------
(1) Previously filed with the Securities and Exchange Commission and
incorporated by reference pursuant to Rule 12b-32 of the Securities
Exchange Act of 1934.
(2) Filed herewith.
(3) To be filed by amendment.
<PAGE> 1
Exhibit 21.1
List of MSHI Subsidiaries
(1) Micro Media Solutions, Inc, a Texas corporation; and
(2) TeleVista, Inc., a Texas corporation.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of MSI Holdings, Inc., a Utah corporation:
We consent to the use of our report included herein, dated June 22, 1997 and
June 10, 1998, and to the reference to our firm under the heading "Experts" in
the Registration Statement on Form SB-2/A for the above named company.
/s/ SALAXAR & ASSOCIATES
Salazar & Associates
Austin, Texas
November 6, 1998
<PAGE> 1
Exhibit 23.2
[BROWN, GRAHAM & COMPANY LETTERHEAD]
To the Board of Directors of Micro-Media Solutions, Inc., a Utah corporation:
We consent to the use of our reports included herein, dated October 14, 1998,
and to the reference to our firm under the heading "Experts" in the Registration
Statement on Form SB-2 for the above named company.
/s/ BROWN, GRAHAM & COMPANY P.C.
Georgetown, Texas
November 10, 1998
<PAGE> 1
Exhibit 23.3
To the Board of Directors of MSI Holdings, Inc.
We consent to the use of our name under the heading Legal Matters in
the Registration Statement on form SB-2 for the above named company.
Vial, Hamilton, Koch & Knox, L.L.P.
Dallas, Texas
November 9, 1998
