UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1998
Commission File Number 0-8146
MSI HOLDINGS, INC. f/k/a MICRO-MEDIA SOLUTIONS, INC.
(Exact name of registrant as specified in charter)
UTAH 87-0280886
State or other jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or organization
501 Waller St., Austin, Texas 78702
(Address of principal executive offices)
Issuer's telephone number, including area code (512) 476-6925
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, None
Par Value $.10
Check whether the Issuer (1) filed all reports required to be filed
by section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes ( ) No (X) (2) Yes (X) No ( )
Number of shares of common stock outstanding at September 30, 1998:
12,032,221.
Part I: Financial Information Item 1:
Consolidated Financial Statements
Index to Consolidated Financial Statements Page
Consolidated Balance Sheets 3
Consolidated Statements of Operation 5
Consolidated Statements of Cash Flows 6
Consolidated Statements of Stockholders' Equity 9
Notes to Consolidated Financial Statements 11
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30 March 31
1998 1998
(unaudited) (audited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 7,748 $ 25,786
Accounts Receivable - Trade 774,834 150,851
Inventory 397,832 285,023
Short-Term Investment - restricted 1,350,000 1,350,000
Other Receivables - Advances 174,530 86,961
--------- ---------
Total Current Assets 2,704,944 1,898,621
Property, Plant, and Equipment
(at cost) net 1,175,967 800,831
--------- ---------
TOTAL ASSETS $ 3,880,911 $ 2,699,452
========= =========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - continued
September 30 March 31
1998 1998
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts Payable - Trade $ 841,414 $ 300,035
Bank Line of Credit 1,230,000 1,228,966
Other Accrued Expenses 109,701 169,336
Current Maturities of
Long-term Debt 112,596 151,267
Current Portion of Obligations
Under Capital Leases 94,005 41,097
Other Notes Payable 200,000 200,000
--------- ---------
Total Current Liabilities 2,587,716 2,090,701
--------- ---------
Long Term Notes
Notes Payable 206,493 367,522
Obligations under Capital
Leases For Equipment 302,780 149,560
--------- ---------
Total Long Term Notes 509,273 517,082
--------- ---------
Total Liabilities 3,096,989 2,607,783
--------- ---------
Stockholders Equity
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; 279,656 shares
authorized, issued & outstanding 2,964,364 -
Common stock at $.10 par value;
50,000,000 authorized; 12,032,221
and 11,518,571 shares issued
and outstanding, respectively 1,203,222 1,150,685
Additional paid-in capital 3,370,114 2,666,099
Accumulated Deficit (10,400,782) (7,372,119)
--------- ---------
Total Stockholders Equity 783,922 91,669
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 3,880,911 $ 2,699,452
========= =========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operation - (UNAUDITED)
For the Six Months For the Three Months
Ended September 30 Ended September 30
1998 1997 1998 1997
Revenues:
Hardware, Software & Peripherals $1,182,196 $1,138,797 $ 678,564 $ 320,163
Service, Support & Integration 238,967 514,617 164,868 221,470
Network Installation 174,746 365,821 150,848 247,818
--------- --------- --------- ---------
Net revenues 1,595,909 2,019,235 994,280 789,451
--------- --------- --------- ---------
Cost of Goods Sold
Hardware, Software & Peripherals 1,137,451 681,063 718,247 278,859
Service, Support & Integration 91,118 334,502 26,383 143,956
Network Installation 163,926 254,114 146,719 173,779
--------- --------- --------- ---------
Total cost of goods sold 1,392,495 1,269,679 891,349 596,594
--------- --------- --------- ---------
Gross Margin 203,414 749,556 102,931 192,857
Selling, General & Administrative
Salaries & benefits 1,410,430 728,321 741,497 421,252
Professional fees and consultants 411,340 164,059 225,398 112,069
Occupancy 198,211 88,500 108,532 31,842
Depreciation 106,991 99,440 54,000 69,694
Vehicle expense 74,432 78,851 39,822 43,481
Other expense 307,358 294,216 207,983 236,923
Interest expense, net 29,393 36,507 8,757 14,377
Provision for uncollectible - 1,284 - -
--------- --------- --------- ---------
Total selling, general and
Administrative expenses 2,538,155 1,491,178 1,385,989 929,638
--------- --------- --------- ---------
Net Loss (2,334,741) ( 741,622) (1,283,058) ( 736,781)
Plus preferred stock dividends ( 693,922) - ( 92,679) -
--------- --------- --------- ---------
Net Loss available to
common stockholders (3,028,663) ( 741,622) (1,375,737) ( 736,781)
========= ========= ========= ========
Basic and diluted
net loss per share $ (0.26) $ (0.07) $ (0.12) $ (0.07)
========= ========= ========= ========
Basic and diluted weighted
average number of shares
Outstanding 11,638,166 10,764,733 11,753,571 10,764,733
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 1998 (Audited) and
For the Six Months Ended September 30, 1998 (unaudited)
(page 1 of 3)
Preferred Stock
Series B Series C Series D
Shares Amount Shares Amount Shares Amount
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 agent - - - - - -
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 - - - - 279,657 $2,964,364
Common stock issued for:
Rule 144 Stock
Compensation - - - - - -
Preferred
stock dividend - - - - - -
Class A Warrants
Stock options for
Placement agents - - - - - -
Net loss - - - - - -
Balance ------- --------- ------ --------- ------- ---------
September 30,1998 490,000 $2,597,000 99,057 $1,050,004 279,657 2,964,364
======= ========= ====== ========= ======= =========
The accompanying notes are an integral part of these financial Statements.
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited), and
For the Six Months Ended September 30, 1998 (Unaudited)
(page 2 of 3)
Common Stock
Common Stock Subscribed
Shares Amount Shares Amount
Balance
March 31, 1997 10,764,733 $1,076,473 - -
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 agent - - - -
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 - - - -
---------- --------- ------- -------
Balance
March 31, 1998 11,506,846 1,150,685 - -
Preferred stock
issued:
Private
Placement - - - -
Common stock issued for:
Rule 144 stock 50,000 5,000 - -
Compensation 31,000 3,100 - -
Preferred
stock dividend 24,375 2,437 - -
Class A Warrants 420,000 42,000 - -
Stock options for
Placement agents - - - -
Net loss - - - -
Balance ---------- --------- ------- -------
September 30,1998 12,032,221 1,203,222 - -
========== ========= ======= =======
The accompanying notes are an integral part of these financial Statements.
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited), and
For the Six Months Ended September 30, 1998 (Unaudited)
(page 3 of 3)
Additional
(Discount on) Accumulated
Paid-in Capital Deficit Total
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
stock dividend 56,294 ( 58,668) -
Preferred stock
issued:
Private
Placement ( 975,641) - 2,300,363
Senior Debt - - 371,000
Preferred stock
dividend discount 3,412,502 (3,412,502) -
Stock option for:
compensation 93,750 - 93,750
Placement agent 387,641 - 387,641
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 ( 978,337) - 1,986,027
Common stock issued for:
Rule 144 stock 582,500 ( 534,500) 53,000
Compensation 163,087 - 166,187
Preferred
stock dividend 156,985 ( 159,422) -
Class A Warrants 291,900 333,900
Stock options for
Placement agents 487,880 487,880
Net loss - (2,334,741) (2,334,741)
Balance --------- --------- ---------
September 30,1998 3,370,114 (10,400,782) 783,922
========= ========= =========
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 1998 (Audited) and
For the Six Months Ended September 30, 1998 (unaudited)
September 30, March 31,
1998 1998
Cash Flows from Operating
Activities:
Net (Loss) $(2,334,741) $(3,766,950)
Adjustments to reconcile net income
to net cash, provided by operating
activities:
Depreciation expense 106,991 178,892
Stock issued for compensation 178,900 291,857
Stock options issued for compensation - 93,750
Stock issued for interest - 5,143
Change in accounts receivable ( 623,983) 832,062
Change in inventory ( 112,809) ( 19,569)
Change in accounts payable 541,379 ( 577,325)
Change in accrued expenses ( 72,348) 57,775
Net Cash Provided by (used by) --------- ---------
Operating Activities (2,316,611) (2,904,365)
--------- ---------
Cash Flows from Investment Activities:
Investment in property & equipment ( 227,565) ( 195,685)
Purchase of short-term investment (1,350,000)
Additional notes receivables ( 142,265)
Proceeds from notes receivables 477,645
Proceeds from other receivables 162,793
Additional other receivables ( 87,569) ( 121,341)
Net Cash provided by (Used by) --------- ---------
Investing Activities ( 315,134) (1,168,853)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from Line of Credit 1,034 504,076
Proceeds from other notes payable 200,000
Change in long term debt ( 199,700) ( 162,153)
Payments in capital lease obligations ( 48,434) ( 32,485)
Proceeds from Private Placement 2,473,907 2,688,004
Proceeds from issuance of common stock 53,000 512,450
Proceeds from exercise of warrants 333,900 -
Proceeds from Senior Convertible Debt - 371,000
Net Cash Provided by (Used by) --------- ---------
Financing Activities 2,613,707 4,080,892
--------- ---------
Net Increase in Cash ( 18,038) 7,674
Cash at Beginning of Period 25,786 18,112
--------- ---------
Cash at End of Period $ 7,748 $ 25,786
========== ==========
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited) and
For the Six Months Ended September 30, 1998 (unaudited)
September 30, March 31,
1998 1998
Supplemental disclosures:
Cash paid for interest $ 44,546 $ 232,578
Supplemental schedule of non-cash investing and financing activities:
Preferred stock issued for:
Placement agent fees $ -- $ 156,000
Stock options:
Compensation -- 93,750
Placement agent fees 487,880 --
Common stock issued for:
Compensation 178,900 291,857
Interest on debt -- 5,143
Preferred stock dividends 159,422 58,668
Common stock subscribed for
Note receivable -- 407,250
Debt converted to preferred stock -- 371,000
Inventory received for notes -- 84,394
Inventory converted to equipment 44,021 --
Discount on preferred stock 543,500 3,412,502
Capital lease obligations 254,562 --
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principals and the rules of the
Securities and Exchange Commission (the SEC), and should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's latest annual Report filed with the SEC on Form 10-KSB/A on November
12, 1998 and the latest quarterly report filed with the SEC on form 10QSB/A on
November 12, 1998. In the opinion of management, all adjustments consisting of
normal recurring adjustments, necessary for the fair presentation of financial
position and the results of operations for the interim periods presented have
been reflected here in. The results of operation are not necessarily indicative
of the results to be expected for the full year. Notes to the financial
statements which would substantially duplicate the disclosure contained in the
audited financial statements for the year ended March 31, 1998 and the three
months ended June 30, 1998, as reported in the Form 10-KSB/A and Form 10QSB/A
have been omitted.
Nature of Business and Organization:
MSI Holdings, Inc., (the Company),(formerly known as Micro-Media Solutions,
Inc., and 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), ("MSHI"). On October 14, 1998, MSHI 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 $2,334,741 for six months ended September 30, 1998.
This factor creates 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 obtaining additional financing to fund the expenses
related to operations and capital improvements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
In May through July 1998, the Company received approximately $2.9 million in
completion of phase III of a private placement agreement, which has been used
to retire debt, decrease past due accounts payable and for operating expenses.
In addition, the Company has completed arrangements with a private investment
group for a private placement of a newly created series of preferred stock
(Series E),with net proceeds to the Company of approximately $2.7 million to
take place in November and December 1998. In November 1998, approximately 1.3
million was received on the Series E placement with the balance to be received
in December 1998. The closing of the Series E private placement will enable MSI
to have sufficient funds to meet the Company's working capital and capital
expenditures needs. MSI is also negotiating with an investment bank for an
additional private offering before the fiscal year end of 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 six months ended September 30,
1998 and 1997 and as of March 31, 1998, 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 uncollectable. As of September 30, 1998 and March 31, 1998,
management believes all accounts are collectible; and therefore, no allowance
has been recorded. Included in other expenses is a $35,000 recovery of a
previously written-off bad debt.
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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
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:
Useful
Lives
Vehicles 5
Furniture and fixtures 5
Equipment 5
Leasehold improvements 20
Revenue and cost recognition:
Hardware and peripherals sales consist of computers and related electronic
equipment. Software sales consist of the resale of prepackaged
software and operating systems from Microsoft and other vendors to the end
user. Revenue is recognized when persuasive evidence of an arrangement exist,
delivery has occurred, the customer fee is fixed and collectibility is
probable. 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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
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.
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 September 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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
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 September 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.
NOTE 2 - 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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
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 $0.92 per share at the grant date of the
options resulting in $367,350 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 statement.
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 $0.43
per share at the grant date resulting in $20,291 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 $1.65
to $2.86 per share at the grant date resulting in $487,880 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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
During the six months ended September 30, 1998 the Company received $53,000 for
5,000 shares of Series D preferred stock at 10.60 per share. Due to the Series
D preferred stock being over subscribed, the company converted the 5,000
preferred shares to 50,000 shares of Rule 144 common stock. The discount on the
50,000 shares in the amount of 534,500 has been included as a dividend in the
accompanying financial statements.
The Series D preferred stock can be converted to common stock. Therefore, a
discount in the amount of $4,843,296 at September 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 $4,43,296 will be recorded if and when
the preferred stock is converted or the HUB status changes.
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: SHARES AMOUNT
------ --------
March 31, 1998 23,742 $ 58,668
June 30, 1998 10,224 $ 66,743
September 30, 1998 14,151 $ 92,679
NOTE 3 - 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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
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.
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-Texas 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.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION 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.
Overview
========
Micro-Media Solutions, Inc. ("MSI-Texas"), 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-Texas maintains
certification as a minority-owned business enterprise and status as a
Historically Underutilized Business ("HUB").
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.
The Company's revenues consist of hardware sales, prepackaged software sales
and the delivery of technical services, including installing and maintaining
network systems. The technical service sales of the Company typically yield a
higher 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 and software 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
===================
On July 27, 1998, MSI-Texas entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc ("GTE") under which MSI-TEXAS 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-TEXAS
entered into a 3 year subscription to GTE's Internet Advantage version 5.1
Connection Service granting MSI-TEXAS access to GTE's POP (the "Connection
Service")(the Sublease and Connection Service are collectively referred to as
the "GTE Agreement"). GTE's establishment, management and monitoring of
multiple domains on behalf of MSI-TEXAS is included in the Connection Service.
The Connection Service was upgraded to GTE's Internet Advantage version 6.0 on
September 29, 1998. MSI-TEXAS will lease connections to the POP for access to
the GTE Internet network to other businesses. MSI-TEXAS 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-TEXAS is able to eliminate the local loop, the weakest component in
localized Internet connections. MSI-TEXAS will have the capacity to support
over four thousand collocation rack spaces at its Austin, Texas facilities.
These rack spaces will be used to host the network servers for MSI-TEXAS 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.
In July 1998, MSI-TEXAS 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-TEXAS,
and 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. TVI had no operations at September 30, 1998.
Results of Operations
=====================
Three Months Ended September 30, 1998 Compared with September 30, 1997
======================================================================
Revenues for the quarter ended September 30, 1998 of $994,280 increased $204,829
or 25.9% from the $789,451 recorded in the quarter ended September 30, 1997.
This increase is a combination of an increase of $358,401 in Hardware, Software
& Peripherals (HSP) revenues and decreases of $56,602 in Service, Support &
Integration (SSI) revenues and $96,970 in Network Installation (NI) revenues.
The increase in HSP revenues of $358,401 is attributed to a hardware order for
the State of Texas of $413,314 that was fulfilled in the quarter ending
September 30, 1998. Other changes in HSP revenue reflect normal fluctuations in
sales of HSP products.
The decrease in SSI revenues of $56,602 relates to a reduction in the scope of
work on a contract for the City of Austin. The decrease in revenues on this
contract was approximately $42,000 from the amount recorded in the quarter ended
September 30, 1997 compared to the September 30, 1998 quarter. Other decreases
in SSI revenues relate to normal fluctuations in service requests from customers
that occur throughout the year.
The decrease in NI revenues of $96,970 relates to specific significant school
district network installation contracts that were in place during each quarter.
During the quarter ended September 30, 1997 MSI-TEXAS was performing on a
contract for Hereford ISD. During the quarter ended September 30, 1998, MSI-
TEXAS began installation of a network system under a contract with San Felipe
Del Rio CISD.
Cost of goods sold, (COGS), for the quarter ended September 30, 1998 increased
$294,755 or 49.4% to $891,349 compared to the quarter ended September 30, 1997
representing 89.7% of revenue resulting in a margin of 10.3%. Cost of Goods Sold
for the quarter ended September 30, 1997 was $596,594 or 75.6% of revenue
resulting in a margin of 24.4%. The decrease in margins is a combination of an
increase in COGS for HSP in the amount of $439,388 and decreases in COGS for SSI
in the amount of $117,573 and NI in the amount of $27,060.
COGS as a percentage of revenues for HSP was 105.8% for the quarter ended
September 30, 1998 resulting in a negative margin of (5.8%) compared to a margin
of 12.9% for the quarter ended September 30, 1997. The decrease in margins is
due to market pressure to lower prices on HSP products from the Company's
competitors and customers including the result of the competitive bidding
process required for sales to public entities. Contributing to the negative
margins for 1998 were sales made below cost as a result of poor estimating of
cost by the Company. Procedures are now in place to insure profitable margins on
HSP sales.
COGS as a percentage of revenues for SSI was 16.0% for the quarter ended
September 30, 1998 resulting in a margin of 84.0% compared to a margin of 35.0%
for the quarter ended September 30, 1997. The increase in margins is a result of
MSI-TEXAS obtaining an SSI contract with Siemens Nixdorf for system integration.
This contract requires that Siemens Nixdorf supply all hardware and software
products to be integrated into the systems. Additional increases in margins are
a result of a contract to install Texas State Lottery vending machines in retail
businesses. This contract requires the lottery contractor to supply all
hardware cost.
COGS as a percentage of revenues for NI was 97.3% for the quarter ended
September 30, 1998 resulting in a margin of 2.7% compared to a margin of 29.9%
for the quarter ended September 30, 1997. The decrease in margins relate to
specific significant school district network installation contracts that were in
place during each quarter. During the quarter ending September 30, 1998 MSI-
TEXAS received a contract of approximately $700,000 with San Felipe Del Rio CISD
(Del Rio) for network system installation. The margin on this contract was less
due to competitive bidding required by public entities. Additional contracts
with Del Rio were received, subsequent to September 30, 1998, that allow the
opportunity for increased overall margins. Aggregate contracts and purchase
orders with Del Rio are now in excess of $1 million.
Selling, General and Administrative Expenses for the quarter ended September 30,
1998 of $1,385,989 represents 139.40% of Revenues. The 1998 amount represents
an increase over the quarter ended September 30, 1997 of $456,351 or 49.1%.
Approximately $320,000 of the increase represents the increase in staff salaries
and benefits. Staff additions include technical staff, sales staff, accounting
staff and middle management. These increases are needed as the Company prepares
to offer collocation services at its Austin, Texas facility and will also enable
the Company to work on larger service contracts. Increases in professional fees
of $113,000 is largely attributable the reporting requirements associated with
being a public company. Occupancy expense increased approximately $77,000 due to
facility expansion and increased staffing.
Six Months Ended September 30, 1998 Compared with September 30, 1997
====================================================================
Revenues for the six months ended September 30, 1998 of $1,595,909 decreased
$423,326 or (20.96%) from the $2,019,235 recorded in the six months ended
September 30, 1997. This decrease is a combination of an increase of $43,399 in
HSP revenues and decreases of $275,650 in SSI revenues and $191,075 in NI
revenues.
The nominal increase of $43,399 in HSP revenues reflects normal fluctuations in
sale of HSP products.
The $275,650 decrease in SSI revenues relates to a reduction in the scope of
work on two contracts. Revenues on a contract for the installation and servicing
of lottery machines decreased approximately $300,000 from the six months ended
September 30, 1997 compared to the September 30, 1998 period. Other decreases in
revenues were on a contract for the City of Austin of approximately $56,000 from
the six months ended September 30, 1997 compared to September 30, 1998 period.
Increases in SSI revenues of approximately $77,000 are attributed to new
contracts received from Siemens Nixdorf and the State of Texas lottery
contractor.
The $191,075 decrease in NI revenues relates to specific significant school
district network installation contracts that were in place during each period.
During the six months ended September 30, 1997 MSI-TEXAS was performing on a
contract for Hereford ISD which started in April 1997. During the six months
ended September 30, 1998, MSI-TEXAS began the installation of a network system
under a contract with San Felipe Del Rio CISD. This contract was executed in
July 1998 with installation beginning in August 1998.
Cost of goods sold for the six months ended September 30, 1998 increased
$122,816 or 9.7% to $1,392,495 compared to the six months ended September 30,
1997 representing 87.25% of revenue resulting in a margin of 12.75%. Cost of
goods sold for the six months ended September 30, 1997 was $1,269,679 or 62.88%
of revenue resulting in a margin of 37.12%. The decrease in margins is a
combination of an increase in COGS for HSP in the amount of $456,388 and
decreases in COGS for SSI in the amount of $243,384 and in NI in the amount of
$90,188.
COGS as a percentage of revenues for HSP was 96.2% for the six months ended
September 30, 1998 resulting in a margin of 3.8% compared to a margin of 40.2%
for the six months ended September 30, 1997. The decreasing margins are due to
market pressure to lower prices on HSP products from the Company's competitors
and customers including the result of the competitive bidding process required
for sales to public entities. Contributing to the lower margins for 1998 were
sales made below cost as a result of poor estimating of cost by MSI-TEXAS.
Procedures are now in place to insure profitable margins on HSP sales.
COGS as a percentage of revenues for SSI was 38.1% for the six months ended
September 30, 1998 resulting in a margin of 61.9% compared to a margin of 35.0%
for the six months ended September 30, 1997. The increase in margins is a result
of MSI-TEXAS obtaining an SSI contract with Siemens Nixdorf for system
integration. This contract requires that Siemens Nixdorf supply all hardware and
software products to be integrated into the systems. Additional decreases in
COGS are a result of a contract to install Texas State Lottery vending machines
in retail businesses. This contract requires the lottery contractor to supply
all hardware cost.
COGS as a percentage of revenues for NI was 93.8% for the six months ended
September 30, 1998 resulting in a margin of 6.2% compared to a margin of 30.5%
for the six months ended September 30, 1997. The decrease in margins relate to
specific significant school district network installation contracts that were in
place during each quarter. During the quarter ending September 30, 1998 MSI-
TEXAS received a contract of approximately $700,000 with San Felipe Del Rio CISD
for network system installation. The margin on this contract was less due to
competitive bidding required by public entities. Additional contracts with Del
Rio were received, subsequent to September 30, 1998, that allow the opportunity
for increased overall margins. Aggregate contracts and purchase orders with Del
Rio are now in excess of $1 million.
Selling, General and Administrative Expenses for the six months ended September
30, 1998 of $2,538,155 represents 159.04% of Revenues. The 1998 amount
represents an increase over the six months ended September 30, 1997 of
$1,046,977 or 70.21%. Approximately $682,000 of the increase represents the
increase in staff salaries and benefits. Staff additions include technical
staff, sales staff, accounting staff and middle management. These increases are
needed as the Company prepares to offer collocation services at its Austin,
Texas facility and will also enable the Company to work on larger service
contracts. Increases in professional fees of $247,000 is largely attributable to
the reporting requirements associated with being a public company. Occupancy
expense increased approximately $110,000 due to facility expansion and increased
staffing.
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 in the notes to the financial statements through an
additional private placement of series E preferred stock and a possible $20
million private placement 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 $2.9 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 has completed arrangements with a private investment group for a private
placement of a newly created series E of preferred stock with net proceeds to
the Company of approximately $2.7 million to take place in November and December
1998. Approximately 1.3 million was received in November 1998 on the Series E
private placement with the balance to be received in December 1998. The closing
of the Series E private placement should enable the Company to have sufficient
funds to meet the Company's working capital and capital expenditures needs for
the next twelve months.
Management believes that its contracts with GTE and Siemens Nixdorf have the
possibility of producing revenues of approximately $3 million in 1999. The
Company's ability to fulfill its obligations under the Switching Agreement is
contingent upon the successful consummation of the Proposed Private Placement
and obtaining the working capital contemplated by the debt issue described in
the preceding paragraph. If the Proposed Private Placement is not consummated,
the Company will scale back its expansion plans until such time that additional
funds for expansion are available. Management believes that the Company can
become profitable without the proceeds from the Proposed Private Placement by
utilizing the portion of the proceeds from the Series E private placement that
has been set aside for funding the expansion of its Austin facility for the GTE
and Siemens Nixdorf contracts.
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 commission 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 $2,964,364 completing a third private placement, whereby 279,657 shares
of Series D Preferred were sold to fourteen investors for a purchase price of
$10.60 per share ("Private Placement Phase III"). The expenses for Private
Placement Phase I, Private Placement Phase II, and Private Placement Phase III,
including broker fees, commissions and legal and accounting expenses totaled
$408,000, $180,000, and $490,457, respectively.
For the six months ended September 30, 1998 and the year ended March 31,1998,
the Company's total assets were $3,880,911 and $2,699,452 respectively, with
liabilities of $3,096,989 and $2,607,783, respectively. Current assets of
$2,704,944 and $1,898,621 represent 104.5% and 90.8% of current liabilities of
$2,587,716 and $2,090,701. 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. The Company's liabilities of $3,096,989 at September 30,1998 consist
of $1,230,000 of a fully secured credit line, $1,357,716 of current liabilities
and $509,273 of long-term liabilities.
The Company, subsequent to the end of March 31, 1998, paid its Bank One Texas,
NA loans in full and substantially reduced the borrowings under its fully
secured line of credit. Net shareholders equity as of September 30, 1998 and
March 31, 1998 was $783,922 and $91,669, respectively. During the year ended
March 31, 1998, and the six months ended September 30, 1998, the Company
completed Private Placement Phase I, Private Placement Phase II and Private
Placement Phase III. Receipt of these funds enabled the Company to reduce its
outstanding debt and pay off the past due accounts payable.
Subsequent to September 30, 1998, the Company made arrangements for an
additional private placement of $3,000,000. The Company will issue 100,000
shares of Series E preferred stock, at a stated value of $30 per share.
During the six months ended September 30, 1998, working capital increased
$309,308 from March 31, 1998. The balances of its accounts payables, accrued
expenses and accounts receivables were increased as a result increased sales and
the resulting increase in related accounts. At September 30, 1998, the Company
had a working capital of $117,228 compared to a working capital deficit of
($192,080) at March 31, 1998. The Company was current on all significant
accounts payable at September 30, 1998. As of March 31, 1998 the Company was
more than 30 days past due on $170,000 or 57% of its accounts payable. The
Company's account receivables at September 30, 1998 include approximately
$443,000 from the State of Texas for a sale of computer hardware in September
1998. This amount was subsequently collected.
The Company has a critical need for additional working capital to meet
contractual obligations under the GTE Agreements. Management believes that the
GTE Agreements with 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 and 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.
PART II: Other Information
ITEM 1: LEGAL PROCEEDINGS
=========================
For a discussion of Legal Proceedings, refer to Note 3, Contingencies, in the
Notes to Consolidated Financial Statements in Part I
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
=================================================
For a discussion of Changes in Securities and Use of Proceeds, refer to Note 2,
Stockholders' Equity, in the Notes to Consolidated Financial Statements
in Part I
ITEM 3: DEFAULT UPON SENIOR SECURITIES
======================================
NONE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
===========================================================
NONE
Item 5. OTHER INFORMATION
=========================
A shareholder who wishes to make a proposal at the 1999 Annual Meeting of
Shareholders without complying with the requirements of the SEC's Rule 14a-8
(and therefore without including the proposal in the Company's proxy materials)
should notify the Company's Secretary, at the Company's principal executive
offices, of that proposal by July 1, 1999. If a shareholder fails to give
notice by that date, then the persons named as proxies in the proxy cards
solicited by the Company's Board of Directors for that meeting will be entitled
to vote the proxy cards held by them regarding that proposal, if properly raised
at the meeting, as directed by the Company's management.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
========================================
(B) REPORTS ON FORM 8-K
16.1 FORM 8-K/A, FILED SEPTEMBER 25, 1998
16.2 FORM 8-K, FILED SEPTEMBER 17, 1998
16.3 FORM 8-K, FILED SEPTEMBER 17, 199
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date 12/11/1998 By: /s/ Jose G Chavez
Jose G. Chavez, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of this Registrant
and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Jose G Chavez 12/11/1998
Jose G. Chavez Chairman of the Board of
Directors and President
/s/ Mitchell Kettrick 12/11/1998
Mitchell Kettrick Vice-President and Director
/s/ David Hill 12/11/1998
David Hill Chief Financial Officer
/s/ Ernesto Chavarria 12/11/1998
Ernesto Chavarria Director
