<PAGE> 1
As Filed with the Securities and Exchange Commission on July 28, 1998
Registration No. 333-___________
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MICRO-MEDIA SOLUTIONS, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
Utah 3571 87-0280886
<S> <C> <C>
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
-----------------------------
</TABLE>
Micro-Media Solutions, 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)
-----------------------------
COPY TO:
Gary L. Woolfolk
Vial, Hamilton, Koch & Knox, L.L.P.
1717 Main Street, Suite 4400
Dallas, Texas 75201
(214) 712-4400
-----------------------------
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. [X]
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Title of each Number of Amount of
class of securities shares to be Proposed maximum Proposed Maximum registration
to be registered offering price per share aggregate offering price fee
- -----------------------------------------------------------------------------------------------------------------
Common Stock,
$0.10 par value(1) 7,683,242 $9.84(2) $75,603,101 $22,303
</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) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(c) promulgated under the
Act.
<PAGE> 3
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.
SUBJECT TO COMPLETION, DATED JULY 28, 1998
PROSPECTUS
MICRO-MEDIA SOLUTIONS, INC.
7,683,242 Shares
Common Stock
THE 7,683,242 SHARES (THE "SHARES") OF COMMON STOCK (THE "COMMON STOCK") OF
MICRO-MEDIA SOLUTIONS, INC., A UTAH CORPORATION (THE "COMPANY" or "MSI") COVERED
BY THIS PROSPECTUS INCLUDE SHARES OF COMMON STOCK 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") AND UPON EXERCISE OF CERTAIN CLASS A WARRANTS OF THE COMPANY (THE
"WARRANTS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE ISSUANCE
OF THE SHARES UPON CONVERSION OF THE SERIES B PREFERRED AND THE SERIES C
PREFERRED.
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.
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 $162,303.
On July 24, 1998, the last sale price of the Company's Common Stock, as
reported on the NASDAQ OTC Electronic Bulletin Board under the symbol MSIA, was
$9.84.
--------------------------
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 7 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 OF 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 JULY 28, 1998
<PAGE> 4
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 located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. 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 Nasdaq 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.
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 "MSI" MEAN
MICRO-MEDIA SOLUTIONS, INC., A UTAH CORPORATION, AND ITS SUBSIDIARY, MICRO-MEDIA
SOLUTIONS, INC., A TEXAS CORPORATION.
THE COMPANY
MSI is a technology corporation formed to provide computer hardware and
peripherals, Internet Services, service and support, maintenance, installation
services, Network Systems Integration, LAN/WAN distribution services, and
related turnkey services to the public and private sectors. MSI maintains
certification as a minority-owned business enterprise and status as a
Historically Underutilized Business ("HUB").
MSI is Texas' only minority-owned company and HUB that provides a full
service computer and communications solution ranging from hardware, software,
installation, field support, and depot repair services. As such, MSI is
qualified by the General Services Group of the State of Texas, City of Austin,
Capital Metro Transit Authority (Austin) and other city, state and Federal
agencies. The principal officers of MSI collectively have over 80 years of
associated computer hardware experience.
MSI's facility is located in East Austin, a primarily economically
disadvantaged community. MSI intentionally located in East Austin in order to
bring a non-traditional form of business to the area. The Company
2
<PAGE> 5
has contributed to the community through the training and hiring of minorities
in high-tech jobs. MSI has invested in the area's schools by donating time and
funding in computer networking. In addition, MSI has been working with the
Hispanic Chamber of Commerce to develop a web site and the principals of the
Company are active in committees and as Chamber Board members.
MSI is ranked as the fifth highest computer reseller in Austin, Texas based
on 1997 sales of brand name, factory-manufactured computers. In addition to
reselling, the Company has focused on infrastructure design and implementation
services. MSI's computer networking services include system integration, and
local and wide area networks. Since 1993, MSI has installed local area network
and wide area networks throughout Texas utilizing an aggregate of over 6,000
workstations and 350 servers. MSI delivers complete solutions to clients
offering the latest technical development in the design, installation, and
support of client/server systems. MSI is continuing to carry out depot repair
services, and management believes the Company is positioned due to its physical
location and strategic positioning to become a leader in the depot maintenance
and repair market. MSI has capabilities for fiber optics through in-plant and
out-plant installation services. MSI's personnel are certified in copper and
fiber optic premises wiring systems for data, voice, and video applications.
MSI's principal executive offices are located at 501 Waller Street, Austin,
Texas 78702 and its telephone number is (512) 476-6925.
HISTORY
Micro-Media Solutions, Inc., a Utah corporation ( formerly Mountain States
Resources Corporation) 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, Mountain States Resources Corporation, a Utah
corporation ("MSRC"), entered into an agreement and plan of reorganization with
the shareholders of Micro Media Solutions, Inc., a Texas corporation, whereby
the MSRC acquired the operating company in exchange for the Common Stock of MSRC
(the "Combination Agreement"). Pursuant to the Combination Agreement, MSRC
issued 9,310,000 shares of its Common Stock for all of the outstanding shares of
Micro-Media Solutions, Inc., a Texas corporation. As part of the reorganization,
the Company changed its name to Micro-Media Solutions, Inc. on September 29,
1997. The transaction was accounted for as a recapitalization.
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------------------
1998 1997
------------ ----------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Net revenues .................................... $ 2,740,822 4,665,802
Gross profit (loss) ............................. (319,811) 1,359,312
Net income (loss) ............................... (3,510,653) (482,385)
Basic and diluted net loss per share (1) ........ (.65) (.05)
Shares used to compute net loss per share (1) ... 10,785,717 10,026,400
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ................ $ 25,785 $ 18,112
Working capital (deficit) ................ (175,983) (618,547)
Total assets ............................. 2,699,452 2,514,308
Accumulated deficit ...................... (7,115,822) (133,999)
Total shareholders' equity (deficit)...... 107,766 (103,584)
</TABLE>
- ------------------
(1) For an explanation of the number of shares used to compute basic and
diluted loss per share, see Note 13 of Notes to Financial Statements.
THE OFFERING
Common Stock offered by the Company ..............7,683,242 shares (1)
Common Stock outstanding as of March 31, 1998 ....10,851,261 shares (2)
OTC Electronic Bulletin Board ....................MSIA
- ------------------
(1) Represents the (i) 4,000,000 shares of Common Stock issuable upon
conversion of 400,000 shares of Series B Preferred, (ii) 2,400,000 shares
of Common Stock issuable upon the exercise of Class A Warrants purchased
in conjunction with Private Placement Phase I (as defined), (iii) 990,057
shares of Common Stock issuable upon conversion of 99,570 shares of Series
C Preferred, and (iv) 293,185 shares disputed in litigation. See
"Management, Discussion and Analysis of Financial Condition and Results of
Operation - Legal Proceedings."
(2) Excludes (i) 700,000 shares of Common Stock issuable upon conversion of
the 70,000 shares Series B Preferred issued upon the conversion of the
Notes on December 31, 1997, (ii) 2,400,000 shares of Common Stock issuable
upon exercise of the Class A Warrants, (iii) 400,000 shares of Common
Stock issuable upon exercise of a placement agent's option certificate
(the "Placement Agent's Option") issued in the Private Placement Phase I
(as defined), (iv) 200,000 shares of Common Stock issuable upon conversion
of 20,000 shares of Series B 5% Cumulative Convertible Non-Voting
Preferred Stock, stated value $5.30 per share, by the placement agent in
the Private Placement Phase I, (v) 4,000,000 shares of Common Stock
issuable upon conversion of 400,000 shares of Series B Preferred, (vi)
1,305,300 shares of Common Stock, 980,300 of which the Company is
obligated to issue to employees and consultants and 325,000 of which the
Company plans to register to cover the exercise of certain options
previously granted or to be granted, all of which will be registered
pursuant to a Registration Statement on Form S-8 to be filed as soon as
practicable after the filing of the Registration Statement of which this
Prospectus is a part, (vii) 990,057 shares of Common Stock issuable upon
conversion of 99,570 shares of Series C 6% Cumulative Non-Voting Preferred
Stock of the Company ("Series C Preferred") issued in connection with
Private Placement Phase II (as defined), (viii) 47,170 shares of Common
Stock issuable upon exercise of a placement agent's option certificate
(the "Placement Agent's Option II") issued in the Private Placement Phase
II, (ix) 2,796,570 shares of Common Stock issuable upon the conversion of
279,657 shares of Series D 6% Cumulative Convertible Non-Voting
Participating Preferred Stock of the Company ("Series D Preferred") issued
in connection with Private Placement Phase III (defined below), (x)
279,657 shares of Common Stock issuable upon exercise of a placement
agent's option certificate (the "Placement Agent's Option III"), and (xi)
293,185 shares of Common Stock subject to transfer between holders and
disputed in litigation. See "Management, Discussion and Analysis of
Financial Condition and Results of Operation - Legal Proceedings."
RISK FACTORS
4
<PAGE> 7
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;
QUARTERLY FLUCTUATIONS IN PERFORMANCE. The Company incurred a net loss of
$482,385 for the year ended March 31, 1997, and a net loss of $3,510,653 for the
year ended March 31, 1998 and had an accumulated deficit of ($7,115,822) as of
March 31, 1998. 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 accountants' report on its financial statements
as of and for the year ended March 31, 1997 and 1998 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 Shares in November
1997 and it received a net $870,000 from the Private Placement of Series C
Preferred Shares in February 1998. The Company has also received a net
$2,473,886 from the Private Placement of Series D Preferred shares through July
1998. In addition, the Company plans a primary offering during fiscal 1999
however no specific plans have been finalized.
MSI's past operating results have been, and its future operating results
may be, subject to seasonality and other fluctuations, on a quarterly and an
annual basis, as a result of a wide variety of factors, including, but not
limited to, critical component availability, the timing of new product
introductions by MSI and its competitors, fluctuating market pricing for
computer and semiconductor memory products, industry competition, fluctuating
component costs, inventory obsolescence, seasonal cycles common in the computer
industry, seasonal government purchasing cycles, the effect of product reviews
and industry awards, manufacturing and production constraints, changes in
product mix and the timing of orders from and shipments to OEM customers. As a
result, the operating results for any particular period are not necessarily
indicative of the results that may occur in any future period.
CRITICAL NEED FOR ADDITIONAL CAPITAL; NO ASSURANCE OF FUTURE FINANCING. 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 Company has a critical need for additional 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, 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 Financial Statements.
LOSS OF HUB STATUS. As long as the Company maintains its status as a HUB,
it receives favorable treatment by certain governmental entities in bidding for
long-term contracts. However, the Company will lose its HUB status once it has
at least 125 employees or an average of $50 million in revenues over a three
year period. Although management estimates that the Company will maintain its
HUB status for at least eighteen more months, there can be no assurance that the
Company will not lose it earlier. Moreover, there is no assurance that HUB-type
programs will not be eliminated by the federal government.
5
<PAGE> 8
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. 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.
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 after this offering. From time to time
after this offering, there may be significant volatility in the market price of
the Common Stock. 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 March 31, 1998, the executive
officers and directors of the Company and their affiliates, as a group, owned or
controlled approximately 83% 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."
6
<PAGE> 9
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. The Company will file a registration statement on
Form S-8 as soon as practicable after the filing of the Registration Statement
of which this Prospectus is a part, covering 1,305,300 additional shares of
Common Stock to be issued to certain employees and consultants of the Company.
See "Shares Eligible for Future Sale - Registration Rights."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded over-the-counter and is quoted on the
Nasdaq OTC Electronic 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 Nasdaq OTC Electronic 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 2.56
June 30, 1998 ............................... 8.25 2.25
</TABLE>
On July 24, 1998, the closing sale price for a share of the Company's
Common Stock, as reported on the OTC Electronic Bulletin Board, was $9.84. 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 are exercised. The exercise price
received by the Company from issuance of the shares of common stock underlying
the warrants will be used for general corporate purposes.
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 and
Series D Preferred shares outstanding.
CAPITALIZATION
The following table sets forth the short-term 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.
7
<PAGE> 10
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Current portion of long-term debt $ 192,364
Short-term debt 1,428,966
--------------
$ 1,621,330
==============
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
Series C 6% Cumulative Non-Voting
Preferred stock, $10.60 stated value, 99,057
authorized, 99,057 issued and outstanding 1,050,004
Common Stock, $.10 par value, authorized
50,000,000 shares, 10,851,261 shares issued
and outstanding (1) $ 1,085,126
Additional paid-in capital $ 2,491,459
Accumulated deficit ($ 7,115,822)
--------------
Total shareholders' equity $ 107,766
--------------
Total capitalization $ 107,766
==============
</TABLE>
(1) Excludes (i) 700,000 shares of Common Stock issuable upon conversion of the
70,000 shares Series B Preferred issued upon the conversion of the Notes on
December 31, 1997, (ii) 2,400,000 shares of Common Stock issuable upon
exercise of the Class A Warrants, (iii) 400,000 shares of Common Stock
issuable upon exercise of a placement agent's option certificate (the
"Placement Agent's Option") issued in the Private Placement Phase I (as
defined), (iv) 200,000 shares of Common Stock issuable upon conversion of
20,000 shares of Series B 5% Cumulative Convertible Non-Voting Preferred
Stock, stated value $5.30 per share, by the placement agent in the Private
Placement Phase I, (v) 4,000,000 shares of Common Stock issuable upon
conversion of 400,000 shares of Series B Preferred, (vi) 1,305,300 shares
of Common Stock, 980,300 of which the Company is obligated to issue to
employees and consultants which shall be registered pursuant to a
Registration Statement on Form S-8 to be filed as soon as practicable after
the filing of the Registration Statement of which this Prospectus is a
part, (vii) 990,057 shares of Common Stock issuable upon conversion of
99,570 shares of Series C 6% Cumulative Non-Voting Preferred Stock of the
Company ("Series C Preferred") issued in connection with Private Placement
Phase II (as defined), (viii) 47,170 shares of Common Stock issuable upon
exercise of a placement agent's option certificate (the "Placement Agent's
Option II") issued in the Private Placement Phase II, (ix) 2,769,570 shares
of Common Stock issuable upon the conversion of 279,657 shares of Series D
Preferred, (x) 279,657 shares of Common Stock issuable upon exercise of a
placement agent's option certificate (the "Placement Agent's Option III"),
and (xi) 293,185 shares of Common Stock subject to transfer between
holders. See "Management, Discussion and Analysis of Financial Condition
and Results of Operation - Legal and Disputed in Litigation Proceedings."
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.
8
<PAGE> 11
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ..................................... $ 2,740,822 $ 4,665,802
Cost of revenues ................................. 3,060,633 3,306,490
Gross profit (loss) ......................... (319,811) 1,359,312
Selling, General and Administrative Expenses ..... 3,190,842 1,841,697
Net income (loss) ................................ $(3,510,653) $ (482,385)
Basic and Diluted Net (loss) per share (1) ....... $ (.65) $ (.05)
Shares used in per share calculations (1) ........ 10,785,717 10,026,400
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $(175,983) $(618,547)
Total assets 2,699,452 2,514,308
Current liabilities 2,074,603 1,929,042
Total shareholders' equity (deficit) 107,776 (103,584)
</TABLE>
- -------------------
(1) For an explanation of the number of shares used to compute basic and
diluted loss per share, see Note 13 of Notes to Financial Statements.
9
<PAGE> 12
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
The operating company of MSI was created in 1993 in Austin, Texas to
provide computer hardware, software programming, system support, maintenance,
media duplication and kitting to the public and private sectors. MSI maintains
certification as a minority-owned business enterprise and status as a
Historically Underutilized Business. On June 23, 1997, the shareholders of Micro
Media Solutions, Inc., a Texas corporation entered into an agreement and plan of
reorganization with Mountain States Resources Corporation, a Utah corporation
(now known as Micro Media Solutions, Inc.), whereby the Company acquired the
operating company in exchange for the common stock of the Company (the
"Combination Agreement"). Pursuant to the Combination Agreement, Mountain States
Resources Corporation issued 9,310,000 shares of its Common Stock for all of the
outstanding shares of Micro-Media Solutions, Inc., a Texas corporation (the
"Combination"). The Combination was accounted for as a recapitalization.
The Company is considered a leading computer networking service provider to
commercial and government markets. Revenue is recognized by the Company when
services are performed. Research and development costs are charged to expenses
as incurred. Among the principal costs to market and sell the Company's products
are advertising and promotion costs, sales, salaries and commissions, and
general and administrative expenses.
MSI's past operating results have been, and its future operating results
may be, subject to seasonality and other fluctuations, on a quarterly and an
annual basis, as a result of a wide variety of factors, including, but not
limited to, critical component availability, the timing of new product
introductions by MSI and its competitors, fluctuating market pricing for
computer and semiconductor memory products, industry competition, fluctuating
component costs, inventory obsolescence, seasonal cycles common in the computer
industry, seasonal government purchasing cycles, the effect of product reviews
and industry awards, manufacturing and production constraints, changes in
product mix and the timing of orders from and shipments to OEM customers. As a
result, the operating results for any particular period are not necessarily
indicative of the results that may occur in any future period.
The Company's sales consist of hardware sales and delivery of technical
services. During the year ended March 31, 1997, the sales mix consisted of a
significant concentration in hardware sales with hardware deliveries to one
public entity representing over half of the sales for that period. Fiscal year
1998 reflects a more normal sales mix, although the hardware sales production
has decreased somewhat as a result of the declining hardware profit margins
attributable to the increase competition for pure hardware sales.
RESULTS OF OPERATIONS
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 $2,591,686 and
$2,617,892, respectively. Current assets of $1,898,620 and $1,310,495 represent
91.5% and 67.9% of current liabilities of $2,074,603 and $1,929,042.
Improvements in cash and cash equivalents are a result of collection of accounts
receivable and funds from increases in shareholders equity. Reductions in
accounts receivable from fiscal 1997 to fiscal 1998 are a direct reflection of
the reduced level of sales from the prior year. Accounts receivable balances at
March 31, 1998 and 1997 reflect the charge off of $73,252 and $96,190,
respectively, of accounts receivable that the Company feels are uncollectible.
Company liabilities include a cash secured line of credit that was instituted in
1998 and certain other Company obligations.
The Company, subsequent to the end of fiscal 1998, paid certain loans in
full and substantially reduced the borrowings under the cash secured line of
credit (see Notes 4 and 14 to the consolidated financial statements for the
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<PAGE> 13
year ended March 31, 1998). Net shareholders equity (deficit) as of March
31, 1998 and 1997 was $107,766 and ($103,584), respectively. During the fiscal
year ended March 31, 1998, the Company completed Phase I and Phase II of the
private placement of preferred stock (see Note 11 to the financial statements
for the year ended March 31, 1998). Subsequent to March 31, 1998, the Company
funded Phase III of the private placement. Receipt of these funds enabled the
Company to reduce its outstanding debt and pay delinquent accounts receivable.
Company expansion will be funded with the funds from Phase III of the private
placement, a possible debt offering and a possible public offering in 1999.
Revenues for 1998 of $2,740,822 reflect the Company's sales efforts in its
markets. Revenues for 1998 decreased $1,924,980 or (41.3%) from the $ 4,665,802
recorded in 1997. This reduction in 1998 occurred 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.
These goals have been accomplished and management believes the Company is poised
to attain a more appropriate level of revenue for 1999. Sales efforts for the
year ending March 31,1999, from the larger service contracts are expected to
produce revenue levels that could return the Company to a more positive earnings
trend.
Cost of goods sold for fiscal 1998 declined $245,857 or 7.4% from fiscal
1997. Cost of goods sold for fiscal 1998 of $3,060,633 or 111.7% of net revenue
is extraordinarily high resulting in a negative gross margin of ($319,811) or
(11.7%) of revenues for the year. The gross margin in fiscal 1997 was $1,359,312
or 29.1% of fiscal 1997 revenues compared to a gross margin of (11.7%) for
fiscal 1998. Gross margin percentages experienced in fiscal 1997 more closely
represent the margins management is working to attain. Extraordinary items
experienced in cost of goods sold for fiscal 1998 includes a cost overrun of
approximately $500,000 on a large cabling project for a North Texas school
district. Reductions in revenues and reduced profit margins on hardware sales
account for the remainder of the changes in cost of goods sold. Problems
experienced with the substantial cost overrun situation have been addressed with
better controls, new middle management and improved accounting. Management does
not anticipate those problems to continue in the future. Gross margins are
expected to improve in 1999.
Selling, general and administrative expenses in fiscal 1998 of $2,816,263
represents 102.8% of revenues. The fiscal 1998 figure represents an increase
over fiscal 1997 of $1,173,177 or 41.7%. The majority of the expense increase,
approximately $716,000, represents the increased staff that has been identified
to enable the Company to work on larger service contracts and accomplish
increased marketing of Company products. Staff additions included service
technicians, sales staff, accounting staff and middle management. The majority
of the remaining increase in expenses is attributable to training for expansion,
marketing cost associated with new service contracts and other expenses
associated with the ramp-up for new service contracts.
For fiscal 1998, the Company experienced an operating loss of $3,510,653 as
compared to a loss of $480,385 in 1997. A substantial portion of fiscal 1998's
loss is directly attributable to the substantial expansion of additional Company
infrastructure to address larger service opportunities and should position the
Company to take advantage of new business opportunities in 1999 and future
years.
Other expenses of $1,167,499 for fiscal 1998 reflect an increase in
occupancy and related expenses for company operations. The majority of the
expenses are represented by interest cost. The Company increased its leased
warehouse space in late 1997 with the resulting increase reflected in 1998. The
Company incurred additional expenses for professional fees and consultants
related to the Combination Agreement and private placement
Company results have been, and its future operating results may be, subject
to some seasonality or fluctuations resulting from significant contracts with
independent school districts. These institutions normally concentrate their
technology revisions or additions into the summer months or the time surrounding
certain school vacations.
GOING CONCERN ISSUE
11
<PAGE> 14
The Company's large historical losses been accumulated deficit raise a
doubt as to the Company's ability to continue as a going concern. Although the
Company plans to address the going concern issues described in the financial
statements appearing elsewhere in this Prospectus through further reliance upon
private placements, debt issues and public offerings, there can be no assurance
that the Company will be able to secure additional capital through such public
or private offerings. Subsequent to March 31, 1998, the Company received $2
million dollars in Private Placement Phase III the proceeds from this private
placement have been used to retire debt and decrease accounts payable. The
Company's current ratio has improved as a result the retirement of short-term
debt and accounts payable and increased cash position. In addition, the Company
anticipates debt offering and a public offering in the year ending March 31,
1999
The Company made significant investments in service related infrastructure
in fiscal 1998 and does not anticipate additional expenses of that nature in
fiscal 1999. In addition, the Company is working to improve its internal
controls through conversion to a new accounting system, continuing efforts
toward efficiency in operations and development of marketing budgets. Management
has identified and closed substantial contracts in 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.
LOSS OF HUB STATUS
As long as the Company maintains its status as a "historically
underutilized business" (HUB) it receives favorable treatment by certain
governmental entities in bidding for long-term contracts. As the Company's size
and revenues grow, the Company may surpass limits on size and revenue set for
HUB companies. Although management estimates that the Company will maintain its
HUB status for least 18 months, there can be no assurance that the Company will
continue to qualify for HUB status during this period. Further, there is no
assurance that HUB-type programs will not be eliminated by the state or federal
governments.
LIQUIDITY AND CAPITAL RESOURCES
During the twelve months ended March 31, 1998, working capital increased
$442,564 from the prior year as a result of the completion of two private
placements of the Company's preferred stock and reduction of the Company's bank
lines of credit. At March 31, 1998, the Company had a working capital deficit of
($175,983) compared to a working capital deficit of ($618,547) at March 31,
1997. During this period the Company's accounts payable decreased $575,701 or
65.7%. As of March 31, 1998, MSI was more than 30 days past due on a portion of
its accounts payable. Subsequent to March 31, 1998, the majority of the accounts
payable over thirty days past due were paid. The Company has a critical need for
additional capital. The inability to obtain significant additional financing
would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to obtain such additional capital.
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. On February 4,
1998, the Company received $1,000,000 completing a second private placement
whereby 94,430 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 six investors for a purchase price of $10.60 per share
("Private Placement Phase III"). The total expenses of 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, $108,000,
and $409, 488, respectively.
12
<PAGE> 15
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.
If the Company is unable to enhance its existing products or introduce new
products that address changing customer requirements, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
Year 2000 Issues. As with other companies, the Company has initiated a
program to study the impact on its computer systems in order to be Year 2000
compliant. This study involves identifying any modifications or replacements of
certain hardware and software maintained by the Company. In addition, the
Company is also taking actions to assure that its customers are taking steps to
remedy their Year 2000 issues. The Company has identified the computer systems
that will require either modification, upgrade or replacement. The Company
anticipates that in-house personnel will be primarily responsible for completing
these tasks and that the cost will not be significant. As such, the Company
believes that the planned modifications, upgrades and replacement 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
operation, cash flows or financial condition in future periods.
Inflation. The Company does not believe that national or local
inflation will have a material impact on Company's future product pricing since
the Company has the ability to adjust prices to meet the current market.
Inflation may have a direct effect on the Company's ability to deliver products
pursuant to agreed contracts. This is attributable to a wide variety of factors,
including, but not limited to, critical component availability, the timing of
new product introductions by the Company and its competitors, fluctuating market
pricing for computer and semiconductor memory products, industry competition and
fluctuating component costs. Additionally, inventory obsolescence, seasonal
cycles common in the computer industry, seasonal government purchasing cycles,
the effect of product reviews and industry awards, manufacturing and production
constraints, changes in product mix and the timing of orders from and shipments
to original equipment manufacturing customers could affect operating
performance. Consequently, the operating results for any particular period are
not necessarily indicative of the results that may occur in any future period.
This Prospectus contains forward looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. The
statements are generally identified by use of the words such as "anticipate,"
"expect," "estimate," "believe," "intend," and words with similar meanings.
Although the Company believes that the current views and expectations reflected
in those forward-looking statements are reasonable, those views, expectations,
and related statements are inherently subject to risks and other factors, many
of which are not under the Company's control or may not be predictable. Those
risks, uncertainties, and other factors could cause the actual results to differ
materially from those in the forward-looking statements. Those risks,
uncertainties and other factors include, but are not limited to, many of the
matters described in this Prospectus: the Company's accumulated deficit and
historical operating losses; the Company's critical need for additional capital;
and the loss of the Company's status as a "historically underutilized business";
rapid changes in technology; and competition.
BUSINESS
BACKGROUND
The Company is a technology corporation formed to provide computer hardware
and peripherals, Internet Services, service and support, maintenance,
installation services, Network Systems Integration, LAN/WAN distribution
services, and related turnkey services to the public and private sectors. MSI
maintains certification as a minority-owned business enterprise and status as a
Historically Underutilized Business ("HUB").
MSI is Texas' only minority-owned company and HUB that provides a full
service computer and communications solution ranging from hardware, software,
installation, field support, and depot repair services. As such, MSI is
qualified by the General Services Group of the State of Texas, City of Austin,
Capital Metro Transit
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<PAGE> 16
Authority (Austin) and other city, state and federal agencies. The principal
officers at MSI collectively have over 80 years of associated computer
hardware experience.
MSI's facility is approximately 36,000 square feet and is located in East
Austin, a primarily economically disadvantaged community. MSI has intentionally
located in East Austin in order to bring a non-traditional form of business to
the area. MSI has contributed to the community through the training and hiring
of minorities in high-tech jobs. MSI has invested in the area's schools by
donating time and funding in computer networking. MSI has also been working with
the Hispanic Chamber of Commerce to develop a web site and the principals are
active in committees and Chamber Board members.
The Company is ranked as the fifth highest computer reseller in Austin,
Texas based on 1997 sales of brand-name, factory-manufactured computers. In
addition to reselling, the Company has focused on infrastructure design and
implementation services. MSI's computer networking services includes system
integration, local and wide area networks. Since 1993, MSI has installed local
area network and wide area networks throughout Texas utilizing an aggregate of
over 6,000 workstations and 350 servers. MSI delivers complete solutions to
clients offering the latest technical development in the design, installation,
and support of client/server systems. MSI is continuing to carry out depot
repair services. Due to its physical location and strategic positioning, the
Company is positioned to become a leader in the depot maintenance and repair
market. MSI has capabilities for fiber optics through in-plant and out-plant
installation services, and MSI personnel are certified in copper and fiber optic
premises wiring systems for data, voice, and video applications.
Current long-term contract agreements exist with several Fortune 500
companies. Over the span of a few short years since its inception, MSI has grown
from a 2 person operation to 60 employees.
SERVICES AND PRODUCTS
From the inception of MSI through the end of 1996, the Company's emphasis
has been on equipment sales with a concentration in contracts that relied on the
prospective customer's need to do business with a HUB certified company.
However, during fiscal year 1997, the Company made the decision to change the
Company's direction from concentrating on hardware sales to services.
The Company provides eight primary areas of services and products:
o Network Systems Integration - systems integration, local and wide area
network.
o Computer Hardware and Peripherals - sales and refurbishing.
o Internet Services - web page design and hosting, Internet application
and Internet access.
o Service, Support and Maintenance of Hardware and Software -
installation, support and consulting services.
o Field Installation and Support Services - statewide installations of
equipment.
o Distribution Services - turnkey distribution of product.
o Depot Repair Services - complete equipment repair center.
o Communications Technologies - copper and fiber optics installation.
STRATEGIC OPPORTUNITY
As a value-added reseller, MSI provides computer services and systems to
end users. As a system integrator, MSI provides turnkey systems integration
ranging from cabling to hardware and software installation, as well as
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<PAGE> 17
maintenance and technical support. The Company provides depot services for
several large statewide services companies. MSI is qualified and certified to
maintain and service most of the largest personal computer manufacturers.
Additionally, MSI provides communication services through its fiber optic
cabling capabilities.
The Company covers the urban areas of Texas with full-time field support
technicians for clients with long-term contracts. These clients include GTECH
Corporation, Transactive Corporation, the State of Texas, CompUSA, Southwestern
Bell Telephone Company, and various Texas school districts and university
systems.
MSI is expanding its current service line and expanding into new service
lines. The new service lines the Company is adding include on-site service and
depot operations for maintaining computer equipment related to the Texas State
Lottery and the major personal computer manufacturers as well as peripheral
equipment for other computer sellers.
Among the priorities for MSI in 1998 is the continued building and
maintenance of strong vendor relationships, including, but not limited to, CISCO
Systems, Inc. ("CISCO") and Hewlett Packard Company ("Hewlett Packard"). MSI
became a CISCO premiere reseller in 1997. This allowed the Company the
opportunity to gain substantial discounts on products, thus making the Company
more competitive in the networking marketplace. MSI has been awarded three
exclusive contracts with Hewlett Packard. These contracts served to strengthen
the relationship with the local Hewlett Packard sales team and ensured greater
volume discounts.
MSI launched an exclusive Hewlett Packard online storefront in March 1998
to compete with Dell's online storefront, which has $3 million per day in
transactions. MSI registered the domain name www.hp-online.com in January 1998
and will continue to market this web site to Fortune 100 companies, federal,
state and local governmental agencies. This new venture with Hewlett Packard
includes an offering of national on-site service for Hewlett Packard products.
MSI has also implemented a new product line: a new type of desktop
computer, MSI's version of the network computer ("NC") that is carrying MSI's
product name of "TeleVista". The TeleVista is designed for use with the Internet
and corporate intranets. The TeleVista provides inexpensive Internet/world wide
web access and applications for a wide range of users in businesses and
educational institutions, as well as consumers. The TeleVista is small,
inexpensive, easy to use, without the complexity and cost associated with
today's personal computers. MSI will resell the NC through future partnerships
with manufacturers and distributors.
STRATEGIC ALLIANCES/PARTNER RELATIONSHIPS
MSI has developed and entered into important strategic relationships in
LAN/WAN computer networking services, fiber cabling, and computer service with
such companies as: CISCO, Hewlett Packard, International Business Machines
Corp., UNISYS Corporation, Central and Southwest Communications Corporation,
Southwestern Bell Telephone Company, Electronic Data Systems Corporation,
CRYPTOCard Corp., Alcatel, General Telephone Exchange Communications Corp.
("GTE"), and Allied Telesyne International Corp.
MARKET ANALYSIS SUMMARY
Networking Systems. In the mid-to-late 1980's, networks were centrally
managed with a much smaller number of intelligent end points (work stations).
Local Area Networks ("LAN") allow employees in small departments or work groups
to share files or expensive peripherals such as printers, CD ROM juke boxes and
modems. These LANs increased network complexity but network design still
involved relatively few choices such as whether to use either Ethernet or Token
Ring topologies to connect users. In today's increasingly connected world,
networks are more distributed, complex, and pervasive.
Network technology has evolved to support a broader group from employee
communications to suppliers and clients. In addition, an increasing number of
remote users may be accessing what once was local data. Distinctions between
LANs, enterprise networks, and inter-enterprise networks have blurred in recent
years.
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<PAGE> 18
Networks are no longer limited to simple data exchange or the sharing of
peripherals. Client/server, imaging, multimedia, Internet access, and video
conferencing applications are now common in many organizations. These data and
graphically intensive applications often require increased network bandwidth to
ensure that users experience adequate response times.
New technologies include Asynchronous Transfer Mode ("ATM"), Fast Ethernet,
Fiber Distributed Data Interface ("FDDI"), Asymmetrical Digital Subscriber Line
("ADSL"), cable modems, 100-MB Ethernet, and Gigabits technology. These
technologies can increase bandwidth at least tenfold over traditional 10-Mbps
Ethernet and offer a growth path and new application opportunities for
customers. Bridges, modems, remote access devices, routers, or switches can
connect different work groups into enterprise networks, and a variety of
protocols can move information from location to location.
Transmission media and wiring types have evolved from copper to
combinations of twisted-pair copper, coaxial cable, fiber optic, and leased
lines; satellite and wireless based service options. [Purchasing decisions now
focus primarily on media choices. Organizations either upgraded to Category 5
twisted-pair for the desktop connection and fiber optic cable for the backbone,
and more on how to incorporate new technologies using existing media]. Vendors
have found ways to use ATM and FDDI with existing infrastructure to boost
performance, rather than force people to bear the expense of ripping out and
replacing old wiring.
All of these developments described above involve making a series of
trade-offs. The products that offer the most bandwidth and the most
sophisticated features are the most expensive and often are not compatible with
the existing network infrastructures.
Most companies tend to be conservative in their selections. Once one type
of equipment has been installed, companies are slow to replace it. Extending the
time that networking equipment remains compatible minimizes disruptions of daily
business functions and the costs associated with retraining. Consequently,
well-known technologies are positioned to remain the focal point of many
corporate networks due to the wide availability of products, and the relatively
painless growth path for greater bandwidth, and price.
Telecommunication Services. The telecommunications industry worldwide is
undergoing significant change from deregulation and the adoption of new
technologies. New network components and protocols that permit more data traffic
at higher speeds have made buying decisions more complex. Asynchronous Transfer
Mode or ATM and Switched Multimegabit Data Services ("SMDS") are being
incorporated into networking equipment. Improvements in fiber optic technology
promise to bring significant increases in fiber cable capacity. The availability
of a greater number of faster transmission media choices will lower the costs of
some services and enable the creation of others.
Deregulation and demand for new services has created a need for more
network-carrying capacity or bandwidth. In response, current technologies are
being improved and new technologies are being introduced to satisfy this need.
For example, copper cable remains the predominant transmission medium at the
local loop level. Fiber optic systems have replaced copper in network backbones.
Digital transmission methods have been used to provide higher bandwidth
services over copper wires for a number of years. However, implementation of
digital transmission equipment is only economical for large networks where the
rewiring costs exceed the cost of the equipment. Other technologies that permit
wideband transmission over twisted pair copper wiring include HDSL and ADSL.
More robust communications standards to carry mixed types of communications
(voice, data, and video) have prompted development of higher bit rates. To meet
this need, SDH-SONET was developed. SONET provides an electronic solution for
encoding higher bit rates over a single beam of light. It is expected that SONET
will continue to be deployed rapidly as part of an overall strategy for
upgrading network capacity.
Depot Repair Services. The Company estimates the market for depot services
to be $100 million at the end-user level in 1998 for the Central Texas region.
It is expected to grow as the lottery market increases and other major computer
companies move into Central Texas.
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<PAGE> 19
Internet Market. The Internet market is about sharing information and
related services among millions of people around the world. The nature of the
Internet opens up the possibility of redefining the desktop paradigm into one
that uses more affordable, easier to use, and easier to maintain platforms.
Bulky PCs will be replaced with a new type of desktop computer, the Network
Computer - that is designed specifically for use with the Internet and corporate
Intranets. Latest surveys estimate that over 20 million individuals are
currently using the Internet. Most organizations have either implemented or are
planning to implement Internet ("INET") applications. At least 60% of U.S.
consumers have not purchased a home personal computer ("PC") and are therefore
potential purchasers of NC's.
SERVICE AND SUPPORT STRATEGY
Support is very important to the Company's overall corporate strategy. NC
customers require a high level of support services. Services will be partially
handled by MSI and other service providers.
COMPETITION
The computer and information access markets are characterized by rapidly
changing technology and evolving industry standards. The Company experiences
significant competition from other network computer manufacturers, suppliers of
personal computers and workstations, and software developers.
The primary features that distinguish MSI and its products and services
from its competitors are MSI's past and present performance as a HUB, and its
continued status as a certified Minority Business Enterprise (MBE) by City of
Austin, state and federal agencies.
Field Installation Services. MSI is carrying out state-wide field
installation services for key clients for the installation of lottery equipment
and electronic benefit transfer equipment. MSI is positioned to increase the
service base with its statewide coverage of 35 technicians working throughout
the state of Texas. MSI's strategic positioning has become a leader in the field
installation and maintenance services market.
Network Computers (NCs). MSI has positioned itself as a technology leader
in NCs and INET services. MSI is positioned in its physical location and is
strategically positioned to become a leader in this market. There are no
identified competitors at this time. In addition, there are no minority owned
NCs OEMs identified in all of Central Texas.
The Company's strategy has been based on serving niche markets well.
Specifically, NCs and INET services will be a key to MSI's growth and business
stability. The specific education niche is relevant to MSI's sales growth.
Education markets require a heavy investment of resources for computer
networking, servers, and computer work stations. MSI is geared to provide these
services and offer the TelaVista, MSI's version of he network computer as an
affordable alternative to PC purchases.
Cabling Services. As a minority owned company, MSI is positioned to enlarge
its market presence in the communications area. MSI currently has capabilities
in fiber optic cabling through installation services, and MSI's extensive
expertise in cable types, splicing, connectors/terminations, and testing. MSI's
personnel are certified in copper and fiber optic wiring systems for data,
voice, and video applications.
FACILITIES
The Company leases approximately 36,000 square feet of executive office,
manufacturing and distribution space in Austin, Texas. If MSI were to require
more space, it believes that such additional space is readily available for
lease. MSI leases field offices, storage facilities and equipment yards in
Dallas, Texas and San Antonio, Texas.
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.
17
<PAGE> 20
LEGAL PROCEEDINGS
The Company is currently involved in two material lawsuits, both of which
relate to the Company's relationship with a former consultant of the Company,
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, Austin,
Texas on February 6, 1998 alleging fraud, usury related to the $200,000 of
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").
Due to the lengthy nature of such lawsuits, the Company is registering
under this Prospectus and Registration Statement an additional 293,185 shares to
be issued to the Argus Related Shareholders. In the event the Company is
successful in transferring the shares held by Argus to the Shareholders, such
293,185 additional shares shall be canceled.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of the Company, and their ages
as of March 31, 1998 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 June 23, 1997
Directors, President and Chief Executive
Officer
Mitchell C. Ketterick 30 Vice-President, Secretary and Director June 23, 1997
George Villalva 61 Vice-President and Director June 23, 1997
Jaime Munoz 37 Director of Operations November 15, 1997
Stephen Hoelscher 39 Controller October 27, 1997
Ernesto M. Chavarria 43 Director February 16, 1998
Blandida Cardenas 43 Director February 16, 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 Registrant 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.
The following sets forth biographical information as to the business
experience of each Officer and Director of the Company for at least the past
five years.
Jose G. Chavez, President, 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, he has overseen the
development of a start-up to a multi-million dollar business enterprise. He
previously was plant manager
18
<PAGE> 21
for HDS, a division of Hart Graphics, Inc. from 1991 to 1993, and manufacturing
manager for Compuadd Corporation from 1989 to 1991. Mr. Chavez holds an
electrical engineering degree from University of Texas at El Paso and a
business degree from the University of Redlands, Redlands, California.
Mitchell C. Kettrick, Vice-President of Technical Operations has over 10
years experience in manufacturing, test diagnostics, and networking. As
co-founder of MSI in 1993, and MSI's Chief Technology Officer, he oversees
technical services, system design, and information services. Previously, he was
manager for quality assurance for Hart Distributions Services during 1992, and
manufacturing systems test manager for Compuadd Corporation from 1987 to 1991.
Mr. Kettrick holds an Associate of Applied Science in Computer Technology from
Texas State Technical College.
George Villalva, Vice-President of Operations, is a registered architect
and has designed and planned many projects of distinguished value. A
Vice-President of MSI since 1993, he oversees MSI's building expansion and space
planning. He carries out important strategic marketing tasks for MSI with public
and private sector clients. Prior to working with MSI, Mr. Villalva operated an
architectural for 35 years. Mr. Villalva currently splits is time equally
between MSI and his architectural interest.
Jaime Munoz, Director of Operations, has over 10 years direct experience in
all related Project Management implementation. His background includes extensive
experience with strategic planning, market assessment, new business development,
preparing organizations for public offerings and mergers/acquisitions. Mr. Munoz
manages the day-to-day operations including approval of all financial
requirements and maintaining stockholder relations. Most recently, in 1997, he
worked as a consultant for American Residential Services and assisted with the
acquisition of several businesses. From 1987 to early 1997, Mr. Munoz served as
Vice President/Chief Marketing Officer for a service company in Houston, Texas
being responsible for $7.5 million in contracts with the Department of Defense.
Mr. Munoz has a B.S. in Mechanical Engineering.
Stephen Hoelscher, Controller, brings 17 years experience in accounting and
auditing as a Certified Public Accountant. His background includes work with
public companies, banks and government. His responsibilities include managing
the Accounting Department, establishing banking and external audit relationships
and managing the company's overall financial position. Prior to coming to MSI,
Mr. Hoelscher was controller for a software development company in Georgetown,
Texas for a period of two years. Mr. Hoelscher was employed as an office and
audit manager for a multi-office CPA firm for six years prior to that. Mr.
Hoelscher has a BBA in accounting.
Ernesto M. Chavarria, Director, has 25 years experience in international
business development. Mr. Chavarria has served as a lobbyist for NAFTA, and
for over five years has served as the President of ITBR, Inc., an
international overseas consulting company.
Blandida Cardenas, Director, has been a Professor at the LBJ Institute for
Teaching and Learning 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. She has served for over 14
years as Associate Professor to the University of Texas at San Antonio.
During the past five years, there have been no petitions under the
Bankruptcy Act or any state insolvency law filed by or against, nor have there
been any receivers, fiscal agents, or similar officers appointed by any court
for the business or property of any of the Company's incumbent directors or
executive officers, or any partnership in which any such person was a general
partner within two years before the time of such filing, or any corporation or
business association of which any such director or executive officer was an
executive officer within two years before the time of such filing.
During the past five years, no incumbent director or executive officer of
the Company has been convicted of any criminal proceeding (excluding traffic
violations and other minor offenses) and no such person is the subject of a
criminal prosecution, which is presently pending.
BOARD COMMITTEES
19
<PAGE> 22
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 will and and and and, 1998, MSI has the following two Outside
Directors: Ernesto M. Chavarria and Blandida Cardenas.
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.
20
<PAGE> 23
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"). There were only two executive officers
of MSI whose salary and bonus was $100,000 or greater in fiscal 1998.
Consequently, only the CEO and one other executive officer appear in this table.
<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
=================================================================================================
Long Term Compensation
Annual Compensation Awards Payouts
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securi-
Other ties All
Name and Annual Restricted Under- Other
Principal Compen- Stock lying LTIP Compen-
Position Year Salary Bonus sation Award(s) Options/ Payouts sation
SAR's(#)
- -------------------------------------------------------------------------------------------------
Jose G. 1998 $105,500 $ -0- $ -0- $ -0- 62,100 $-0- $-0-
Chavez, 1997 50,500 -0- -0- -0- -0- -0-
CEO 1996 87,000 34,000 -0- -0- -0- -0- -0-
13,000
Mitchell 1998 $ 75,000 $ -0- $ -0- $ -0- 31,250 -0- -0-
Kittrick, 1997 52,000 -0- -0- -0- -0- -0- -0-
Vice- 1996 45,000 -0- -0- -0- -0- -0- -0-
President
and
Secretary
=================================================================================================
</TABLE>
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 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, 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 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,
21
<PAGE> 24
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.
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 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 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.
COMMON STOCK TO EMPLOYEES AND CONSULTANTS
As soon as practicable subsequent to the filing of this Prospectus and
Registration Statement the Company intends to file a registration statement on
Form S-8 to register 1,305,300 shares of common stock of the Company to be
issued to certain employees and consultants of the Company.
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.
<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 26 28 33
Frank Rodriguez 15 5 -
Andrew Ramirez 26 27 35
George Villalva 15 5 4
Mitchell C. Kettrick 18 10 13
Bruce Funderburk - 20 -
Laurel Funderburk - 5 -
Tammie Delaney - - 15
100 100 100
--- --- ---
</TABLE>
22
<PAGE> 25
The Company's officers and directors 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 advanced funds to the
following entities:
<TABLE>
<CAPTION>
1998 1997
---- --------
<S> <C> <C>
Prima Development & Construction, Inc. $ -0- $251,983
(10% Note Receivable from a related party)
Quality Communications, Inc. -0- 84,394
(10% Note Receivable from a related party)
Salas Concessions, Inc. -0- 83,397
(10% Note Receivable from a related party) ----- --------
TOTAL $ -0- $476,425
===== ========
</TABLE>
As of July 28, 1998 there were no amounts owing 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 MSI 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
April 1, 1997 and the principal amount of this loan is $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%. Prima has the right to prepayment without
penalties.
An amendment to the loan agreement with Prima was executed on April 15,
1997 to incorporate funds advanced to MSI for the period January 1, 1997 through
March 31, 1997. The principal amount of this loan is $66,983. 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 is 10%. Prima has the right to prepayment without penalties.
The ownership of Prima include owners of MSI and other outside investors.
The primary purpose of establishing Prima was to enable MSI to sub-contract
critical services relevant to MSI's service mix. By setting up a company to
exclusively provide support services for MSI reduces the overhead to MSI and
avoids carrying expenses that vary with seasonality such as outside fiber optic
cabling and related construction. MSI contracts with Prima on a project to
project basis. Currently, Prima has under contract several projects which will
provide the basis for the loan repayment to MSI.
Quality Communications, Inc. ("QCI"), a telecommunications corporation,
executed a loan agreement on April 1, 1997 in the principal amount of $71,600.
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%. Quality Communications, Inc. has the
right to prepayment without penalties.
The ownership of QCI includes owners of MSI and other outside investors.
The primary purpose of establishing QCI was to enable MSI to sub-contract
critical services relevant to MSI's service mix. By setting up a company to
exclusively provide support services for MSI reduces the overhead to MSI and
avoids carrying expenses. MSI contracts with QCI on a project to project basis.
QCI has under contract several significant cabling projects that will provide
funds for pay-off of MSI's loan.
23
<PAGE> 26
Salas Concessions, Inc. ("Salas"), a food services corporation, executed a
loan agreement dated on April 1, 1997. The principal amount of this loan is
$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%. Salas has the right to
prepayment without penalties.
This investment loan was extended when MSI was expanding. Salas, located at
Robert Mueller Airport, offered a unique opportunity to show MSI's point of sale
and telecommunications services and equipment in a commercial environment. MSI
also planned to use an $80,000 carry-over loss write-off to offset MSI's
1995-1996 operating profits. Subsequently, MSI went into a state-wide expansion
and headquarter expansion that eliminated the need for taking over Salas.
Salas entered into an agreement to pay-off initial capital and operating
expense for funds advanced by MSI. The concessions are growing in by 6% annually
and beginning to show profit; therefore, there is less risk regarding Salas'
ability to pay back the loan from MSI.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 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>
Percent of
Name and Address Number of Shares Outstanding Shares(1)
- ------------------------------------------------------------------------------
<S> <C> <C>
Jose Chavez 7,225,000 65.53%
501 Waller Street
Austin, Texas 78702
- ------------------------------------------------------------------------------
Mitchell Kettrick
501 Waller Street
Austin, Texas 78702 1,500,000 13.60%
- ------------------------------------------------------------------------------
George Villalva
501 Waller Street
Austin, Texas 78702 475,000 4.31%
- ------------------------------------------------------------------------------
All Directors and
Officers as a Group (3 persons) 9,200,000 83.44%
- ------------------------------------------------------------------------------
</TABLE>
- ------------
(1) Calculations are based on 10,851,261 outstanding shares of Common Stock
as of March 31, 1998 and the assumed conversion of all options and warrants held
by the above named group. 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."
24
<PAGE> 27
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, but 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.
25
<PAGE> 28
SELLING SHAREHOLDERS
The following table sets forth the ownership of the Common Stock assuming
conversion of the Series B Preferred and Series C Preferred registered
hereunder, as well as the conversion of the Series D Preferred, the exercise of
the Warrants registered hereunder, and assuming the exercise of the Placement
Agent's Option, the Placement Agent's Option II, and the Placement Agent's
Option III. None of such shares will be sold in this offering.
<TABLE>
<CAPTION>
Name Number Percentage+
- ------------------------------ ------------ -----------
<S> <C> <C>
Beatrice Schaefer 322,938(1) 1.8%
Heinz C. Winzeler 907,348(2) 4.4%
Entrepreneurial Investors, Ltd. 8,286,800(3) 39.8%
Equity Services, Ltd. 1,443,450(4) 5.8%
C. J. and Florence Adams 100(5) *
Gerald and Gay Adams 500(5) *
Mark and Patricia Adams 250(5) *
Luana Pearce, Trustee
of Luana Pearce Trust 15,000(5) *
Mary Dietze 5,000(5) *
Jim Pearce 3,000(5) *
Beula Mae Pearce 2,500(5) *
C. W. Cupp 10,000(5) *
Dave Pistorius 7,000(5) *
Luana Pearce 225,000(5) 1.2%
John Stockton 13,335(5) *
Fred Shelton 1,500(5) *
Floyd Tate 2,667(5) *
Fred Kettrick 1,333(5) *
Norm Mendeke 3,000(5) *
Mike Batson 3,000(5) *
</TABLE>
- ----------
Footnote on following page
+ Unless stated otherwise, calculations 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 23,545,271 shares
outstanding.
26
<PAGE> 29
* Less than 1%.
(1) Consists of 20,000 shares of Series B Preferred convertible into 200,000
shares of Common Stock, Class A Warrants represents 120,000 shares, and 2,938
shares representing interest, all of which were received upon conversion of 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 representing 300,000 shares, 7,348
shares representing interest, all of which were received upon conversion of a
Senior Convertible Note, dated September 30, 1997, and converted on December
31, 1997, and 10,000 shares of Series D Preferred convertible into 100,000
shares of Common Stock.
(3) Consists of 400,000 shares of Series B Preferred convertible into 4,000,000
shares of Common Stock, Class A Warrants representing 2,400,000 shares of
Common Stock purchased in Private placement Phase I, 943,400 shares issuable
upon conversion of 94,340 shares of Series C Preferred purchased in Private
Placement Phase II, and 943,400 shares issuable upon conversion of 94,340
shares of Series D Preferred.
(4) Consists of 20,000 shares of Series B Preferred convertible into 200,000
shares of Common Stock, Class A Warrants representing 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.
(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."
27
<PAGE> 30
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 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 days 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 thirty (30) consecutive days trading days preceding
the payment date. The Series C Preferred holders have liquidation rights in
parity with the Series B Preferred holders.
28
<PAGE> 31
For five years from the date of issuance of the Series B Preferred and the
Series C Preferred, respectively, the holders of the Series B Preferred have the
right to nominate one (1) member to the slate of nominees to the Board of
Directors and 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 and/or THE Series D Preferred.
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
to increase the number of Series D Preferred authorized to 258,657, and such
Series D Certificate was further amended on May 21, 1998 to increase the total
number of Series D Preferred to 274,407. 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 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 days trading days preceding the payment
date.
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 exercised and shares are purchased
thereunder. The warrant holders agreed that as long as the Company remains
certified as a HUB, they will not exercise their warrants in such a manner to
cause the Company 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.
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.
29
<PAGE> 32
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
61,510 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 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
30
<PAGE> 33
the board of directors, officers, employees, or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed 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.
31
<PAGE> 34
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 as well as the shares to be registered on Form S-8, 7,858,242 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, and (ii) 508,680 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 420,000 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 400,000 shares
of Series B Preferred and the holders of 99,057 shares of Series C Preferred
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.
32
<PAGE> 35
Under these Lock-Up Agreements, the shareholders have agreed not to sell or
otherwise dispose of their collective 9,025,000 shares until March 31, 2002
unless one of the following events occurs: (a) MSI'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 period 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 8 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 June 11, 1997, the Company's board of directors replaced Jones & Jensen,
Salt Lake City, Utah as its principal accountant with Salazar & Associates,
Austin, Texas.
The report of Jones & Jensen on the Company's financial statements for the
previous two fiscal years did not contain an adverse opinion or a disclaimer of
opinion, nor was such opinion qualified or modified as to certainty, audit
scope, or accounting principles. During the Company's two most recent fiscal
years and subsequent interim periods preceding the replacement of Jones, Jensen
& Company had no disagreements with Jones & Jensen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. During the Company's fiscal years ended March 31, 1996 and March 31,
1997 and subsequent interim periods preceding the retention of Salazar &
Associates, neither the Company nor anyone on the Company's behalf, consulted
Salazar & Associates regarding any matter.
In May 1998, the Company's management made arrangements to replace Salazar
& Associates, Austin, Texas, as its principal accountant with Brown, Graham &
Company, P.C., Georgetown, Texas.
During the Company's most recent fiscal year and subsequent interim periods
preceding the replacement 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.
During the Company's most recent fiscal year and subsequent interim periods
preceding the retention of Brown, Graham & Company, P.C. neither the Company nor
anyone on the Company's behalf, consulted Brown, Graham & Company, P.C.
regarding any matter.
33
<PAGE> 36
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report - Brown Graham & Company, P.C. ............. F-2
Independent Auditors' Report - Salazar & Associates ..................... F-3
Consolidated Balance Sheet as of March 31,1998 .......................... F-4
Consolidated Statements of Operations for the Years ended March 31,
1998 and 1997 .......................................................... F-5
Consolidated Statements of Shareholders Equity for the Years ended
March 31, 1998 and 1997 ................................................ F-6
Consolidated Statements of Cash Flows for the Years ended March 31,
1998 and 1997 .......................................................... F-9
Notes to Consolidated Financial Statements .............................. F-11
</TABLE>
F-1
<PAGE> 37
Brown, Graham & Company, PC
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Micro-Media Solutions, Inc.,
We have audited the accompanying consolidated balance sheet of Micro-Media
Solutions, Inc. and Subsidiary (the "Company") as of March 31, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 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 financial position of Micro-Media
Solutions, Inc. and Subsidiary as of March 31, 1998, and the results of their
operations and cash flows for the year 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 8 to the
consolidated financial statements, current liabilities exceed current assets by
$175,983 and has suffered losses from operations for the years ended March 31,
1998 and 1997 which raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
/s/ Brown, Graham & Company, PC
Georgetown, Texas
June 9, 1998
F-2
<PAGE> 38
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 of Mountain
States Resources Corporation and subsidiary (the "Company") for the year ended
March 31, 1997. This consolidated financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statement 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 statement of operations referred to above
presents fairly, in all material respects, the consolidated results of their
operation for the year ended March 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statement have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statement, 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 plans regarding
these matters are presented in Note 10 of this financial statement.
As more fully described in Notes 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 statement as
described in paragraph four above, and our opinion on the revised statements, as
expressed herein, remains unqualified with respect to paragraph four above.
/s/ 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> 39
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
March 31, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 25,785
Accounts Receivable - Trade 150,851
Inventory 285,023
Short-Term Investment (Note 4) 1,350,000
Other Receivables - Advances (Note 2) 86,961
Total Current Assets 1,898,620
Property, Plant, and Equipment, net (Note 3) 800,832
TOTAL ASSETS $ 2,699,452
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 300,033
Other Accrued Expenses 153,240
Bank Line of Credit (Note 4) 1,228,966
Current Maturities of Long-term Debt (Note 6) 151,267
Current Portion of Obligations Under
Capital Leases (Note 7) 41,097
Other Notes Payable (Note 14) 200,000
Total Current Liabilities 2,074,603
Long-Term Liabilities
Notes Payable (Note 6) 367,522
Obligations under Capital Leases (Note 7) 149,561
Total Long-Term Notes 517,083
Commitments and Contingencies (Notes 8, 10 & 14)
Stockholders' Equity
Preferred stock Series B; $5.30
stated value; 490,000 shares
authorized, issued & outstanding (Note 11) 2,597,000
Preferred Stock Series C; $10.60
stated value; 99,057 shares
authorized, issued & outstanding (Note 11) 1,050,004
Common stock at $.10 par value;
50,000,000 authorized,
10,851,261 shares issued & outstanding 1,085,126
Additional Paid-in Capital (Note 11) 2,491,458
Accumulated Deficit (Note 11) (7,115,822)
Total Stockholders' Deficit 107,766
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,699,452
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 40
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Operation
For the Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Revenues $ 2,740,822 $ 4,665,802
Cost of Goods Sold 3,060,633 3,306,490
Gross Margin (Deficit) (319,811) 1,359,312
Selling, General and Administrative Expenses:
Salaries, Benefits & Related 1,650,764 1,202,790
Other expense 1,165,499 440,296
Interest expense 299,327 102,421
Provision for
Uncollectable Accounts 75,252 96,190
3,190,842 1,841,697
Net Loss $ (3,510,653) $ (482,385)
Basic and Diluted Net Loss
Per Share (Note 13) $ (0.65) $ (0.05)
Basic and Diluted weighted
average shares outstanding 10,785,717 10,026,400
(Note 13)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 41
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended March 31, 1998 and 1997
(page 1 of 3)
<TABLE>
<CAPTION>
Preferred Stock
Series B Series C
Shares Amount Shares Amount
<S> <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
Stock option for
compensation
Cash received
from stock
Net loss
Balance
March 31, 1998 490,000 $2,597,000 99,057 $1,050,004
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 42
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended March 31, 1998 and 1997
(page 2 of 3)
<TABLE>
<CAPTION>
Additional
(Discount on)
Common Stock Paid-In
Shares Amount Capital
<S> <C> <C> <C>
Balance
March 31, 1996 9,784,733 $ 978,473 $(1,046,058)
Common stock
issued for
services 480,000 48,000
Common stock
options exercised 500,000 50,000
Net loss
Balance
March 31, 1997 10,764,733 1,076,473 (1,046,058)
Common stock issued:
Interest 10,286 1,029 4,114
Compensation 52,500 5,250 46,407
Preferred
stock dividend 23,742 2,374 56,294
Preferred stock
issued:
Private
Placement (688,000)
Senior Debt
Preferred stock
dividend 3,412,502
Stock option for
compensation 193,750
Cash received
from stock 512,449
Net loss
Balance
March 31, 1998 10,851,261 $1,085,126 $2,491,458
</TABLE>
The accompanying notes are an integral part of these financial Statements.
F-7
<PAGE> 43
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the Years Ended March 31, 1998 and 1997
(page 3 of 3)
<TABLE>
<CAPTION>
Accumulated
Deficit Total
<S> <C> <C>
Balance
March 31, $ 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 (133,999) (103,584)
Common stock issued:
Interest 5,143
Compensation 51,657
Preferred
stock dividend (58,668)
Preferred stock
issued:
Private
Placement 2,588,004
Senior Debt 371,000
Preferred stock
dividend (3,412,502)
Stock option for
compensation 193,750
Cash received
from stock 512,449
Net loss (3,510,653) (3,510,653)
Balance
March 31, 1998 $(7,115,822) $ 107,766
</TABLE>
The accompanying notes are an integral part of these financial Statements.
F-8
<PAGE> 44
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flow
For the years ended March 31, 1998 and 1997
(page 1 of 2)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(3,510,653) $(482,385)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation expense 178,895 116,628
Stock issued for compensation 145,407
Stock issued for interest 5,143
Change in trade receivables 938,505 (165,619)
Change in inventory (19,569) 189,040
Change in accounts payable (575,700) 351,644
Change in accrued expenses 40,057 395,989
Net cash provided by (used by)
operating activities (2,797,915) 405,297
Cash Flows from Investment Activities:
Purchase of property & equipment (195,685) (632,900)
Purchase of short term investment (1,350,000)
Proceeds from notes receivables 335,380
Additional receivables (65,000) (19,370)
Net cash provided by (used by)
investing activities (1,275,305) (652,270)
Cash Flows from Financing Activities:
Proceeds from (payments on)
line of credit (net) 504,076 (398,331)
Proceeds from other notes payable 200,000
Proceed from (payments on)
long term debt (162,153) 501,302
Proceeds from (payments on)
capital lease obligations (32,483) 160,565
Proceeds from private placement of
Preferred Stock 2,688,000
Proceeds from Senior Convertible
Debt & other capital transactions 883,453
Net cash provided by
financing activities 4,080,893 263,536
Net increase in cash 7,673 16,563
Cash at beginning of period 18,112 1,549
Cash at end of period $ 25,785 $ 18,112
Supplemental disclosure:
Cash paid during the year for:
Interest $ 232,578 $ 97,143
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 45
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flow (continued)
For the years ended March 31, 1998 and 1997
(page 2 of 2)
Supplemental schedule of non-cash investing and financing activities:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Preferred stock issued for
underwriting fees $ 156,000
Inventory received on other
notes receivable 84,394
Common stock issued for:
compensation 145,407
interest on debt 5,143
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 46
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMEMTS
FOR THE 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 in April 15, 1969, as a mining, mineral extraction and oil
and gas exploration company. MSRC discontinued its operations in 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 a reverse merger 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") (the "Company"). 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 and wide-area networks.
Principles of Consolidation
The consolidated financial statements the years ended March 31, 1998 and 1997,
include the accounts and transactions of MSI and MSI-Texas. All significant
inter-company accounts and transactions have been eliminated in the accompanying
consolidated financial statements. MSI, however, did not have any material asset
or liability accounts or account balances. With the exception of MSI's equity
accounts, 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.
F-11
<PAGE> 47
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
Accounts Receivable
The Company follows the allowance method of expensing accounts receivable when
considered uncollectable. As of March 31, 1998, management believes all accounts
are collectible; and therefore, no allowance has been recorded.
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:
Useful Lives
Vehicles 5
Furniture and fixtures 5
Equipment 5
Leasehold improvements 31.5
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 FAS 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 March 31, 1998, indicated there was no impairment to the carrying value of
these assets.
F-12
<PAGE> 48
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
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 no material impact on the financial statements
is expected.
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 not yet
determined to what extent the standard will impact its financial statements.
Revenue Recognition
For financial reporting purposes, revenues are recognized in the accounting
period that corresponds with the performance of the service to the customer. The
related costs and expenses are recognized when incurred. Revenues are derived
from local and state government contracts and contracts with local businesses.
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.
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
F-13
<PAGE> 49
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
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 March 31, 1998. 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. OTHER RECEIVABLES
Other receivables include employee advances for travel and lodging for out of
town projects in the amount of $21,961. Also included in other receivables is
$65,000 of cost paid by the Company to third parties in satisfaction of
obligations of Argus Management, Inc., (see Note 14).
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
A summary of the Company's investment in property, plant and equipment at March
31, 1998, is as follows (see Note 7):
F-14
<PAGE> 50
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
<TABLE>
<S> <C>
Equipment, Furniture and Fixtures $ 613,185
Transportation Equipment 253,204
Leasehold Improvements 307,790
1,174,179
Less Accumulated Depreciation 373,347
Net Property, Plant and Equipment $ 800,832
</TABLE>
Depreciation charged against income for the years ended March 31, 1998 and 1997,
was $178,892 and $116,628, respectively.
NOTE 4. SHORT-TERM BORROWINGS
The Company has a secured line of credit agreement with Bank One 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. 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 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 as of March 31, 1998, was $1,020,000. Subsequent to
March 31, 1998, the outstanding balance of the line of credit was reduced to
$750,000 using subsequent funding (see note 11) and matures February 5, 1999.
NOTE 5. FEDERAL INCOME TAXES
A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:
<TABLE>
<S> <C>
Computed at the expected statutory rate $(1,193,600)
Non-deductible items 8,500
Valuation allowance 1,185,100
Income tax $ -
Deferred tax assets are as follows:
Deferred tax asset $ 1,257,246
Valuation allowance (1,257,246)
$ -
</TABLE>
The Company has available at March 31, 1998, $3,700,000 of unused operating loss
carryforwards that may be applied against future taxable income and that expire
in various years through 2013.
F-15
<PAGE> 51
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 6. NOTES PAYABLE
Long-term notes payable consists of the following amounts at March 31, 1998:
<TABLE>
<S> <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. $ 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. 56,497
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, hereafter 3% rate to maturity. Loan will
mature over a 60 month period ending December 2000.
43,104
Neighborhood Commercial Management Program, $250,000
loan from City of Austin dated August 12, 1996, secured
by second lien one 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, hereafter 3% rate to maturity. Loan will
mature over a 60 month period ending December 2001. 191,194
Bank One, $200,000 loan dated June 26, 1996, secured by
a first lien equipment and leasehold improvements of the
Company. Loan is due in 60 monthly principal installments
of $3,333 along with interest equal to the Bank One Texas
base rate plus %.Subsequent to March 31, 1998, loan was
paid in full. 146,667
518,789
Less current portion (151,267)
$ 367,522
</TABLE>
F-16
<PAGE> 52
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
Following are maturities of long-term debt for each of the next five years:
<TABLE>
<S> <C>
Year Ended March 31,
1999 $ 151,267
2000 153,067
2001 134,348
2002 80,107
</TABLE>
The officers of the Company have personally guaranteed all notes.
Note 7. 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>
<S> <C>
Transportation Equipment $ 218,055
Communication Equipment 56,014
</TABLE>
Minimum future lease payments under capital leases as of March 31, 1998, for
each of the next five years and in the aggregate are:
<TABLE>
<S> <C>
Year Ended March 31,
1999 $ 68,077
2000 60,343
2001 74,985
Total minimum lease payments 203,405
Less: Amount representing interest ( 12,747)
190,658
Less current portion ( 41,097)
$149,561
</TABLE>
F-17
<PAGE> 53
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 8. GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, the Company has
incurred a net loss in the current year of $3,510,653. As of that date, the
Company's current liabilities exceeded its current assets by $175,983. At March
31, 1998, the Company owes accounts payable with dates due in excess of thirty
(30) days in the approximate 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
obtaining additional financing to fund the expenses related to operations and
capital improvements.
Subsequent to March 31, 1998, the Company completed Phase III of a private
placement agreement, (see Note 11). The proceeds from this private placement
have been used to retire debt and decrease accounts payable. In addition, the
Company anticipates the completion of Phase III in the summer of 1998 and plans
a public offering in the year ended March 31, 1999.
In addition, the Company is working to improve its internal controls through
conversion to a new accounting system, continuing efforts toward efficiency in
operations and development of marketing budgets. Management has identified and
closed substantial contracts in 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.
NOTE 9. 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 March 31, 1998, the Company did not have
any notes receivables or payables to related parties.
F-18
<PAGE> 54
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 10. 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>
<S> <C> <C>
Year Ended March 31,
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 year ended March
31, 1998, was $109,980.
NOTE 11: 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 immediately convertible into 10 shares
of the Company's common stock 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 underwriting
fees in Phase I. 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.
F-19
<PAGE> 55
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
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 convertible into 10 shares of the
Company's common stock. The Company paid $130,000 and issued 4,717 shares of
series C preferred stock for underwriting 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 partially funded in April and May 1998 with the
completion of the funding planned in July 1998. The Company has received
$2,000,000 in the partial funding of Phase III.
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.
F-20
<PAGE> 56
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
Preferred stock dividends were accrued and paid through March 31, 1998, in the
amount of $58,667 by the issuance of 23,742 shares of common stock.
NOTE 12: STOCK OPTIONS AND WARRANTS
A summary of the status of the Company's stock options as of March 31, 1998, is
presented below:
<TABLE>
<S> <C>
Options outstanding at March 31, 1997 -
Options granted 622,710
Options exercised -
Options cancelled -
Less: options not exercisable at year end 222,710
Options outstanding and
exercisable at March 31 400,000
Weighted Average Exercise Price per Share $ 1.50
</TABLE>
The following table summarizes the information about the stock options as of
March 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstand- Remaining Exercise Exercisable Exercise
Exercise ing at Contractual Price At Price
Price Mar. 31 Life (Total Shares) Mar.31 (Exer. Shares)
<S> <C> <C> <C> <C> <C>
$ 1.50 50,000(1) 5 years $ 1.50 -0- $ 1.50
2.25 25,000(1) 5 years 2.25 -0- 2.25
1.50 100,000(1) 5 years 1.50 -0- 1.50
1.50 400,000 5 years 1.50 400,000 1.50
4.00 47,170 6 years 4.00 -0- 4.00
1.50-
$ 4.00 622,170 5 years $ 1.72 400,000 $ 1.50
</TABLE>
(1) Options issued for compensation.
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 had been determined
in accordance with the fair value based method prescribed in that Statement.
F-21
<PAGE> 57
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
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:
Dividend yield 0%
Expected volatility 16.46%
Risk-free interest rate 8.54%
Expected lives 5 Years
The weighted fair value of options granted for compensation during the year
ended March 31, 1998, was $1.08.
Under the accounting provisions of SFAS No 123, the Company's net loss
applicable to common stockholders and loss pro forma amounts are indicated as
follows:
<TABLE>
<S> <C>
Net (loss) applicable to common stockholders:
As reported $(6,981,823)
Pro forma $(7,170,823)
Net (loss) per share:
As reported $(0.65)
Pro forma $(0.66)
</TABLE>
At March 31, 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 as
of March 31, 1998:
Number
<TABLE>
<CAPTION>
Exercise Outstanding Expiration
Price Mar. 31 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>
In addition, all of the warrant contracts prohibit exercise of the warrants if
the HUB status of the Company is compromised upon such exercise.
F-22
<PAGE> 58
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
NOTE 13: 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>
1998 1997
<S> <C> <C>
Loss from continuing operations $ (3,510,653) $ (482,385)
Less: Preferred stock dividends (3,471,170)
Loss available to common shareholders
used in basic EPS $ (6,981,823) $ (482,385)
Weighted average number of common shares
used in basic EPS 10,785,717 10,026,400
Effect of dilutive securities:
Stock options -- --
Warrants -- --
Weighted number of common shares and
dilutive potential common stock used
in diluted EPS 10,785,717 10,026,400
</TABLE>
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 14: 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.
F-23
<PAGE> 59
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Continued)
A lawsuit was filed by Manpower, Inc. to preserve its claims for certain
delinquent obligations that were reduced to approximately $38,000. 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.
Bank One, Texas, NA filed a lawsuit against the Company for the collection of
approximately $378,000 of principal plus interest as well as attorney fees and
court costs. The bank was paid in full in April 1998. The bank then executed a
Notice of Nonsuit to dismiss the lawsuit on April 29, 1998.
F-24
<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>
<CAPTION>
Table of Contents
Page
----
<S> <C>
Available Information 1
Prospectus Summary 2
Summary 3
Risk Factors 4
Price Range for Common Stock 7
Use of Proceeds 7
Dividend Policy 7
Capitalization 7
Selected Financial Data 8
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10
Business 13
Management 18
Certain Transactions 22
Principal Shareholders 24
Selling Shareholders 26
Description of Capital Stock 28
Shares Eligible for Future Sale 32
Legal Matters 33
Experts 33
Change in Independent Auditors 33
Index to Financial Statements F-1
</TABLE>
<PAGE> 61
7,683,242 Shares
MICRO-MEDIA SOLUTIONS,
INC.
Common Stock
----------
PROSPECTUS
----------
<PAGE> 62
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 ....... $ 22,303
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 ......................................... $162,303
</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, 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) In November 1997, Registrant sold $2,120,000 of Series B
Preferred and related securities to accredited investors. See Private
Placement Phase I.
(iii) On January 31, 1998, Registrant sold $1,000,000 of Series C
Preferred and related securities to accredited investors. See Private
Placement Phase II.
(iv) Commencing in May 1998 and ending in July 1998, Registrant sold
$2,964,364 of Series D Preferred and related securities to accredited
investors. See Private Placement Phase III.
II-1
<PAGE> 63
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
- ------- ------------------- --------
<S> <C> <C>
2 Agreement and Plan of Reorganization(1) Incorporated by reference to Form 8-K dated
August 12, 1992
3A Articles of Incorporation and Bylaws(1) Incorporated by reference to Exhibit No. 3 to
the Registrant's Registration (#33-24265-LA)
3B Amended Articles of Incorporation(1) Incorporated by reference to Exhibit No. 2B of
Registrant's Form 8-A Registration Statement
(File #0-20760)
4 Specimen of Securities(1) Incorporated by reference to Exhibit Nos. 1A
and 1B of Registrant's Form 8-A Registration
Statement (File #0-20760)
5 Legal Opinion of Vial, Hamilton, Koch &
Knox, L.L.P.(3)
</TABLE>
II-2
<PAGE> 64
<TABLE>
<S> <C> <C>
10.1 Texas Lottery Installation and Service Contract Incorporated by reference to Form 10-KSB
between GTECH and Micro-Media Solutions filed July 2, 1998 for the period ended March
Inc., a Texas corporation(1) 31, 1998.
10.2 Agreement for Construction, Installation Incorporated by reference to Form 10-KSB
and/or Maintenance, dated as of April 9, 1997, filed July 2, 1998 for the period ended
between GTE and Micro-Media Solutions Inc., March 31, 1998.
a Texas corporation(1)
10.3 Contract, dated November 16, 1997, Incorporated by reference to Form 10-KSB
between San Antonio Independent School filed July 2, 1998 for the period ended
District and Micro-Media Solutions Inc., March 31, 1998
a Texas corporation(1)
10.4 Contract, dated August 25, 1997, between Incorporated by reference to Form 10-KSB
Education Service Center 1 and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998
corporation(1)
10.5 Contract, dated August 28, 1997, between Incorporated by reference to Form 10-KSB
Education Service Center 18 and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998
corporation(1)
10.6 Contract, dated June 26, 1997, between Incorporated by reference to Form 10-KSB
Education Service Center 5 and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998
corporation(1)
10.7 Field Trial Agreement, dated October 1, Incorporated by reference to Form 10-KSB
1997, between Southwestern Bell filed July 2, 1998 for the period ended
Telephone and Micro-Media Solutions March 31, 1998
Inc., a Texas corporation(1)
10.8 Subcontractor Agreement, dated July 23, Incorporated by reference to Form 10-KSB
1997, between Southwestern Bell filed July 2, 1998 for the period ended
Telephone and Micro-Media Solutions March 31, 1998
Inc., a Texas corporation(1)
10.9 Field Trial Agreement, dated October 1, Incorporated by reference to Form 10-KSB
1997, between Southwestern Bell filed July 2, 1998 for the period ended
Telephone and Micro-Media Solutions March 31, 1998
Inc., a Texas corporation(1)
10.10 City Wide Contract for Personal Incorporated by reference to Form 10-KSB
Computers, dated May 23, 1997, between filed July 2, 1998 for the period ended
the City of Austin and Micro-Media March 31, 1998
Solutions Inc., a Texas corporation(1)
10.11 Wide Area Network Contract, between Incorporated by reference to Form 10-KSB
Texas Migrant Counsel and Micro-Media filed July 2, 1998 for the period ended
Solutions Inc., a Texas corporation(1) March 31, 1998
10.12 Machine Installation Contract, between Incorporated by reference to Form 10-KSB
Transactive, Inc. and Micro-Media filed July 2, 1998 for the period ended
Solutions Inc., a Texas corporation(1) March 31, 1998
</TABLE>
II-3
<PAGE> 65
<TABLE>
<S> <C> <C>
10.13 Contract, between the Texas Department Incorporated by reference to Form 10-KSB
of Transportation and Micro-Media filed July 2, 1998 for the period ended
Solutions Inc., a Texas corporation(1) March 31, 1998.
10.14 Contract, between the Texas Department Incorporated by reference to Form 10-KSB
of Health and Micro-Media Solutions filed July 2, 1998 for the period ended
Inc., a Texas corporation(1) March 31, 1998.
10.15 Employment Agreement, dated June 15, Incorporated by reference to Form 10-KSB
1997, between Jose Chavez and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Utah March 31, 1998.
corporation(1)
10.16 Employment Agreement, dated June 15, Incorporated by reference to Form 10-KSB
1997, between Mitchell Kettrick and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998.
corporation(1)
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:
II-4
<PAGE> 66
(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.
(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-5
<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 July 28, 1998.
MICRO-MEDIA SOLUTIONS, 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.
II-6
<PAGE> 68
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JOSE CHAVEZ
-------------------------
Jose Chavez President, CEO and Director July 28 , 1998
---------------
/s/ MITCHELL KETTRICK
-------------------------
Mitchell Kettrick Vice President, Secretary July 28 , 1998
and Director ---------------
/s/ ERNESTO CHAVARRIA
------------------------- Director Ju;y 28 , 1998
Ernesto Chavarria ---------------
/s/ STEPHEN HOELSCHER
-------------------------
Stephen Hoelscher Controller July 28 , 1998
---------------
-------------------------
Blandida Cardenas Director July 28 , 1998
---------------
</TABLE>
II-7
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description Location
- ------- ------------------- --------
<S> <C> <C>
2 Agreement and Plan of Reorganization(1) Incorporated by reference to Form 8-K dated
August 12, 1992
3A Articles of Incorporation and Bylaws(1) Incorporated by reference to Exhibit No. 3 to
the Registrant's Registration (#33-24265-LA)
3B Amended Articles of Incorporation(1) Incorporated by reference to Exhibit No. 2B of
Registrant's Form 8-A Registration Statement
(File #0-20760)
4 Specimen of Securities(1) Incorporated by reference to Exhibit Nos. 1A
and 1B of Registrant's Form 8-A Registration
Statement (File #0-20760)
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
between GTECH and Micro-Media Solutions filed July 2, 1998 for the period ended March
Inc., a Texas corporation(1) 31, 1998.
10.2 Agreement for Construction, Installation Incorporated by reference to Form 10-KSB
and/or Maintenance, dated as of April 9, 1997, filed July 2, 1998 for the period ended
between GTE and Micro-Media Solutions Inc., March 31, 1998.
a Texas corporation(1)
10.3 Contract, dated November 16, 1997, Incorporated by reference to Form 10-KSB
between San Antonio Independent School filed July 2, 1998 for the period ended
District and Micro-Media Solutions Inc., March 31, 1998
a Texas corporation(1)
10.4 Contract, dated August 25, 1997, between Incorporated by reference to Form 10-KSB
Education Service Center 1 and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998
corporation(1)
10.5 Contract, dated August 28, 1997, between Incorporated by reference to Form 10-KSB
Education Service Center 18 and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998
corporation(1)
10.6 Contract, dated June 26, 1997, between Incorporated by reference to Form 10-KSB
Education Service Center 5 and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998
corporation(1)
10.7 Field Trial Agreement, dated October 1, Incorporated by reference to Form 10-KSB
1997, between Southwestern Bell filed July 2, 1998 for the period ended
Telephone and Micro-Media Solutions March 31, 1998
Inc., a Texas corporation(1)
</TABLE>
<PAGE> 70
<TABLE>
<S> <C> <C>
10.8 Subcontractor Agreement, dated July 23, Incorporated by reference to Form 10-KSB
1997, between Southwestern Bell filed July 2, 1998 for the period ended
Telephone and Micro-Media Solutions March 31, 1998
Inc., a Texas corporation(1)
10.9 Field Trial Agreement, dated October 1, Incorporated by reference to Form 10-KSB
1997, between Southwestern Bell filed July 2, 1998 for the period ended
Telephone and Micro-Media Solutions March 31, 1998
Inc., a Texas corporation(1)
10.10 City Wide Contract for Personal Incorporated by reference to Form 10-KSB
Computers, dated May 23, 1997, between filed July 2, 1998 for the period ended
the City of Austin and Micro-Media March 31, 1998
Solutions Inc., a Texas corporation(1)
10.11 Wide Area Network Contract, between Incorporated by reference to Form 10-KSB
Texas Migrant Counsel and Micro-Media filed July 2, 1998 for the period ended
Solutions Inc., a Texas corporation(1) March 31, 1998
10.12 Machine Installation Contract, between Incorporated by reference to Form 10-KSB
Transactive, Inc. and Micro-Media filed July 2, 1998 for the period ended
Solutions Inc., a Texas corporation(1) March 31, 1998
10.13 Contract, between the Texas Department Incorporated by reference to Form 10-KSB
of Transportation and Micro-Media filed July 2, 1998 for the period ended
Solutions Inc., a Texas corporation(1) March 31, 1998.
10.14 Contract, between the Texas Department Incorporated by reference to Form 10-KSB
of Health and Micro-Media Solutions filed July 2, 1998 for the period ended
Inc., a Texas corporation(1) March 31, 1998.
10.15 Employment Agreement, dated June 15, Incorporated by reference to Form 10-KSB
1997, between Jose Chavez and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Utah March 31, 1998.
corporation(1)
10.16 Employment Agreement, dated June 15, Incorporated by reference to Form 10-KSB
1997, between Mitchell Kettrick and filed July 2, 1998 for the period ended
Micro-Media Solutions Inc., a Texas March 31, 1998.
corporation(1)
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 SUBSIDIARIES
Micro-Media Solutions, Inc., a Texas corporation
<PAGE> 1
EXHIBIT 23.1
To the Board of Directors of Micro-Media Solutions, Inc., a Utah corporation:
We hereby consent to the use in this Registration Statement on Form SB-2
of our report dated June 22, 1997 and June 10, 1998, relating to the
consolidated financial statements and schedules of Mountain States Resources
Corporation and Subsidiary for the year ended March 31, 1997.
Salazar & Associates
Austin, Texas
June 11, 1998
<PAGE> 1
EXHIBIT 23.2
To the Board of Directors of Micro-Media Solutions, Inc., a Utah corporation:
We consent to use of our reports included herein, dated June 9, 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.
Brown , Graham & Company, P.C.
Georgetown, Texas
July 27, 1998
<PAGE> 1
EXHIBIT 23.3
To the Board of Directors of Micro-Media Solutions, Inc., a Utah corporation:
We consent to 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
July 27, 1998
