UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1998
Commission File Number 0-8146
MSI HOLDINGS, INC. f/k/a MICRO-MEDIA SOLUTIONS, INC.
(Exact name of registrant as specified in charter)
UTAH 87-0280886
State or other jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or organization
501 Waller St., Austin, Texas 78702
(Address of principal executive offices)
Issuer's telephone number, including area code (512) 476-6925
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, None
Par Value $.10
Check whether the Issuer (1) filed all reports required to be filed
by section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes ( ) No (X) (2) Yes (X) No ( )
Number of shares of common stock outstanding at September 30, 1998:
12,002,721.
Part I: Financial Information Item 1:
Consolidated Financial Statements
Index to Consolidated Financial Statements Page
Consolidated Balance Sheets 3
Consolidated Statements of Operation 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30 March 31
1998 1998
(unaudited) (audited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 7,748 $ 25,786
Accounts Receivable - Trade 774,834 150,851
Inventory 397,832 285,023
Short-Term Investment 1,350,000 1,350,000
Other Receivables - Advances 174,530 86,961
--------- ---------
Total Current Assets 2,704,944 1,898,621
Property, Plant, and Equipment
(at cost) net 1,175,967 800,831
--------- ---------
TOTAL ASSETS $ 3,880,911 $ 2,514,308
========= =========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - continued
September 30 March 31
1998 1998
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts Payable - Trade $ 841,414 $ 300,035
Bank Line of Credit 1,230,000 1,228,966
Other Accrued Expenses 96,988 169,336
Current Maturities of
Long-term Debt 112,596 151,267
Current Portion of Obligations
Under Capital Leases 94,005 41,097
Other Notes Payable 200,000 200,000
--------- ---------
Total Current Liabilities 2,575,003 2,090,701
--------- ---------
Long Term Notes
Notes Payable 206,493 367,522
Obligations under Capital
Leases For Equipment 302,780 149,560
--------- ---------
Total Long Term Notes 509,273 517,082
--------- ---------
Total Liabilities 3,084,276 2,607,783
--------- ---------
Stockholders Equity
Preferred stock Series B; $5.30
stated value; 490,000 shares
authorized, issued & outstanding 2,597,000 2,597,000
Preferred stock Series C; $10.60
stated value; 99,057 shares
authorized, issued & outstanding 1,050,004 1,050,004
Preferred stock Series D; $10.60
stated value; 279,656 shares
authorized, issued & outstanding 2,964,364 -
Common stock at $.10 par value;
50,000,000 authorized; 12,002,721
and 11,518,571 shares issued
and outstanding, respectively 1,200,272 1,150,685
Additional paid-in capital 2,613,637 2,819,646
Accumulated Deficit (9,628,642) (7,525,666)
--------- ---------
Total Stockholders Equity 796,635 91,669
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 3,880,911 $ 2,699,452
========= =========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operation - (UNAUDITED)
For the Six Months For the Three Months
Ended September 30 Ended September 30
1998 1997 1998 1997
Net Revenues:
Hardware, Software & Peripherals $1,182,196 $1,138,797 $ 678,564 $ 212,771
Service, Support & Integration 238,967 514,617 164,868 221,470
Network Installation 174,746 365,821 150,848 247,818
--------- --------- --------- ---------
Net revenues 1,595,909 2,019,235 994,280 789,451
--------- --------- --------- ---------
Cost of Goods Sold
Hardware, Software & Peripherals 1,137,451 681,063 718,247 278,859
Service, Support & Integration 91,118 334,502 26,383 143,956
Network Installation 163,926 254,104 146,719 173,779
--------- --------- --------- ---------
Total cost of goods sold 1,292,495 1,269,669 891,349 596,594
--------- --------- --------- ---------
Gross Margin 203,414 749,556 102,931 192,857
Selling, General & Administrative
Salaries & benefits 1,239,533 728,321 686,326 421,252
Professional fees and consultants 411,340 164,059 225,398 112,069
Occupancy 198,211 88,500 108,532 31,842
Depreciation 106,991 99,440 54,000 69,694
Vehicle expense 74,432 78,851 39,822 43,481
Other expense 307,358 294,216 207,983 230,923
Interest expense, net 29,393 36,507 8,757 14,377
Provision for bad debts - 1,284 - -
--------- --------- --------- ---------
Total selling, general and
Administrative 2,367,258 1,491,178 1,330,818 929,638
--------- --------- --------- ---------
Operating Income (Loss) (2,163,844) ( 741,622) (1,227,887) ( 736,791)
Plus preferred stock dividends ( 159,422) - ( 92,679) -
--------- --------- --------- ---------
Net Loss available to
common stockholders (2,323,266) ( 741,622) (1,320,566) ( 736,791)
========= ========= ========= ========
Earnings (Loss) Per Share $ (0.200) $ (0.069) $ (0.112) $ (0.069)
========= ========= ========= ========
Weighted average number of shares
Outstanding used in earnings
(loss) per share calculation 11,630,458 10,764,733 11,753,571 10,764,733
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 1998 (Audited) and
For the Six Months Ended September 30, 1998 (unaudited)
(page 1 of 3)
Preferred Stock
Series B Series C Series D
Shares Amount Shares Amount Shares Amount
Balance
March 31, 1997 - - - - - -
Common stock issued:
Interest - - - - - -
Compensation - - - - - -
Preferred
stock dividend - - - - - -
Preferred stock
issued:
Private
Placement 420,000 2,226,000 99,057 1,050,004 - -
Senior Debt 70,000 371,000 - - - -
Preferred stock
dividend discount - - - - - -
Stock option for:
compensation - - - - - -
Placement agent - - - - - -
Cash received
for uncertificated
stock - - - - - -
Common stock-
Uncertificated
Issued for note
Receivable - - - - - -
Note receivable
Offset against
Common stock
Subscribed - - - - - -
Net loss - - - - - -
------- --------- ------ --------- ------- ---------
Balance
March 31, 1998 490,000 $2,597,000 99,057 $1,050,004
Preferred stock
issued:
Private
Placement - - - - 279,657 $2,964,364
Common stock issued for:
Rulee 144 Stock
Compensation - - - - - -
Preferred
stock dividend - - - - - -
Class A Warrants
Stock options for
Placement agents - - - - - -
Net loss - - - - - -
Balance ------- --------- ------ --------- ------- ---------
September 30,1998 490,000 $2,597,000 99,057 $1,050,004 279,657 2,964,364
======= ========= ====== ========= ======= =========
The accompanying notes are an integral part of these financial Statements.
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited), and
For the Three Months Ended June 30, 1998 (Unaudited)
(page 2 of 3)
Common Stock
Common Stock Subscribed
Shares Amount Shares Amount
Balance
March 31, 1997 10,764,733 $1,076,473 - -
Common stock issued:
Interest 10,286 1,029 - -
Compensation 414,900 41,490 - -
Preferred
stock dividend 23,742 2,374 - -
Preferred stock
issued:
Private
Placement
Senior Debt - - - -
Preferred stock
dividend discount - - - -
Stock option for:
compensation - - - -
Placement agent - - - -
Cash received
for uncertificated
stock 293,185 29,319 - -
Common stock-
Uncertificated
Issued for note
Receivable - - 543,000 407,250
Note receivable
Offset against
Common stock
Subscribed - - (543,000) (407,250)
Net loss - - - -
---------- --------- ------- -------
Balance
March 31, 1998 11,506,846 1,150,685 - -
Preferred stock
issued:
Private
Placement - - - -
Common stock issued for:
Rule 144 stock 50,000 5,000 - -
Compensation 1,500 150 - -
Preferred
stock dividend 24,375 2,437 - -
Class A Warrants 420,000 42,000 - -
Stock options for
Placement agents - - - -
Net loss - - - -
Balance ---------- --------- ------- -------
September 30,1998 12,002,721 1,200,272 - -
========== ========= ======= =======
The accompanying notes are an integral part of these financial Statements.
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited), and
For the Three Months Ended June 30, 1998 (Unaudited)
(page 3 of 3)
Additional
(Discount on) Accumulated
Paid-in Capital Deficit Total
Balance
March 31, 1997 $(1,046,058) $( 133,999) $( 103,584)
Common stock issued:
Interest 4,114 - 5,143
Compensation 250,367 - 291,857
Preferred
stock dividend 56,294 ( 58,668) -
Preferred stock
issued:
Private
Placement ( 841,547) - 2,434,457
Senior Debt - - 371,000
Preferred stock
dividend discount 3,412,502 (3,412,502) -
Stock option for:
compensation 93,750 - 93,750
Placement agent 253,547 - 253,547
Cash received
for uncertificated
stock 483,130 - 512,449
Common stock-
Uncertificated
Issued for note
Receivable - - 407,250
Note receivable
Offset against
Common stock
Subscribed - - ( 407,250)
Net loss - (3,766,950) (3,766,950)
---------- --------- ---------
Balance
March 31, 1998 2,666,099 (7,372,119) 91,669
Preferred stock
issued:
Private
Placement (1,022,800) - 1,941,564
Common stock issued for:
Rule 144 stock 48,000 - 53,000
Compensation 7,853 - 8,003
Preferred
stock dividend 90,242 ( 92,679) -
Class A Warrants 291,900 333,900
Stock options for
Placement agents 532,343 532,343
Net loss - (2,163,844) (2,163,844)
Balance --------- --------- ---------
September 30,1998 2,613,637 (9,628,642) 796,635
========= ========= =========
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 1998 (Audited) and
For the Six Months Ended September 30, 1998 (unaudited)
September 30, March 31,
1998 1998
Cash Flows from Operating
Activities:
Net (Loss) $(2,367,258) $(3,766,950)
Adjustments to reconcile net income
to net cash, provided by operating
activities:
Depreciation expense 106,991 178,892
Stock issued for compensation 8,002 291,857
Stock options issued foe compensation - 93,750
Stock issued for interest - 5,143
Change in accounts receivable ( 623,983) 832,062
Change in inventory ( 112,809) ( 19,569)
Change in accounts payable 541,397 ( 577,325)
Change in accrued expenses ( 72,348) 57,775
Net Cash Provided by (used by) --------- ---------
Operating Activities (2,520,008) (2,904,365)
--------- ---------
Cash Flows from Investment Activities:
Investment in property & equipment ( 482,127) ( 195,685)
Purchase of short-term investment (1,350,000)
Additional notes receivables ( 142,265)
Proceeds from notes receivables 477,645
Proceeds from other receivables 162,793
Additional other receivables ( 87,569) ( 121,341)
Net Cash provided by (Used by) --------- ---------
Investing Activities ( 569,696) (1,168,853)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from Line of Credit 1,034 504,076
Proceeds from other notes payable 200,000
Change in long term debt ( 199,700) ( 162,153)
Proceeds from lease obligations 254,562 -
Payments in capital lease obligations ( 48,434) ( 32,485)
Proceeds from Private Placement 2,677,304 2,688,004
Proceeds from issuance of common stock 53,000 512,450
Proceeds from exercise of warrants 333,900 -
Proceeds from Senior Convertible Debt - 371,000
Net Cash Provided by (Used by) --------- ---------
Financing Activities 3,071,666 4,080,892
--------- ---------
Net Increase in Cash ( 18,038) 7,674
Cash at Beginning of Period 25,786 18,112
--------- ---------
Cash at End of Period $ 7,748 $ 25,786
========== ==========
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited) and
For the Six Months Ended September 30, 1998 (unaudited)
September 30, March 31,
1998 1998
Supplemental disclosures:
Cash paid for interest $ 37,293 $ 232,578
Supplemental schedule of non-cash investing and financing activities:
Preferred stock issued for:
Placement agent fees $ $ 156,000
Stock options:
Compensation 8,003 93,750
Common stock issued for:
Compensation 291,857
Interest on debt 5,143
Preferred stock dividends 92,679 58,668
Common stock subscribed for
Note receivable 407,250
Debt converted to preferred stock 371,000
Inventory received for notes 84,394
Discount on preferred stock 3,412,502
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principals and the rules of the
Securities and Exchange Commission (the SEC), and should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's latest annual Report filed with the SEC on Form 10-KSB/A on November
12, 1998 and the latest quarterly report filed with the SEC on form 10QSB/A on
November 12, 1998. In the opinion of management, all adjustments consisting of
normal recurring adjustments, necessary for the fair presentation of financial
position and the results of operations for the interim periods presented have
been reflected here in. The results of operation are not necessarily indicative
of the results to be expected for the full year. Notes to the financial
statements which would substantially duplicate the disclosure contained in the
audited financial statements for the year ended March 31, 1998 and the three
months ended June 30, 1998, as reported in the Form 10-KSB/A and Form 10QSB/A
have been omitted.
Nature of Business and Organization:
MSI Holdings, Inc., (the Company),(formerly known as Micro-Media Solutions,
Inc., and Mountain States Resources Corporation, ("MSRC")), was organized under
the laws of the State of Utah on April 15, 1969. MSRC began operations April
15, 1969, as a mining, mineral extraction and oil and gas exploration company.
MSRC discontinued its operations on 1993 and became a development stage company
as described in the Statement of Financial Accounting Standards No.7,
"Accounting and Reporting by Development Stage Enterprises". On June 23, 1997,
MSRC entered into an agreement and plan of reorganization with the shareholders
of Micro-Media Solutions, Inc. (a Texas Corporation), ("MSI-Texas"), in which
MSRC acquired 100% of the common stock of MSI-Texas. As part of the
reorganization, MSRC changed its name to Micro-Media Solutions, Inc.,(a Utah
Corporation), ("MSI"). On October 14, 1998, MSI changed its name to MSI
Holdings, Inc. The transaction was accounted for as a recapitalization.
MSI-Texas is an Austin, Texas, based technology corporation formed to provide
Computer hardware, software programming, system support, maintenance, media
duplication, and kitting to the public and private sectors. In addition, MSI-
Texas is certified by the State of Texas as a Historically Underutilized
Business (HUB).
MSI-Texas is a business solutions technology integrator with infrastructure
design and implementation services. In addition, MSI-Texas' computer
networking services includes system integration and local wide-area networks.
Going concern:
As shown in the accompanying consolidated financial statements, the Company has
incurred net losses of $2,323,266 for six months ended September 30, 1998. As
of September 30, 1998, the Company's current assets exceeded its current
liabilities by $129,941. These factors create a substantial doubt about the
Companys ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company's obtaining additional
financing to fund the expenses related to operations and capital improvements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
In May through July 1998, the Company received approximately $2.9 million in
completion of phase III of a private placement agreement, which was used to
retire debt, decrease past due accounts payable and for operating expenses. In
addition, the Company has completed arrangements with a private investment
groups for a private placement of a newly created series E of preferred stock
with net proceeds to the Company of approximately $2.6 million to take place in
November 1998, and plans a public offering in the year ending March 31, 1999.
Management identified and closed substantial contracts during the year ended
March 31, 1999, and believes it can produce the level of revenue necessary to
return the Company to a positive earnings trend. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Principles of Consolidation:
The consolidated financial statements for the six months ended September 30,
1998 and 1997 and as of March 31, 1998, include the accounts and transactions
of the Company and MSI-Texas. All significant inter-company accounts and
transactions have been eliminated in the accompanying consolidated financial
statements. The Company, however, did not have any material asset or liability
accounts or account balances. With the exception of the Company's equity
accounts and a deficit retained earnings, the significant account balances
belong to MSI-Texas.
Cash and Cash Equivalents:
Cash equivalents consist primarily of funds invested in short-term interest-
bearing accounts. The Company considers all highly liquid investment purchased
with initial maturities of three months or less to be cash equivalents.
Accounts Receivable:
The Company follows the allowance method of expensing accounts receivable when
considered uncollectible. As of September 30, 1998 and March 31, 1998,
management believes all accounts are collectible; and therefore, no allowance
has been recorded. Included in other expenses is a $35,000 recovery of a
previously written-off bad debt.
Inventory:
Inventory is valued at lower of cost, using the FIFO method
(first-in/first-out), or market. Inventory consists principally of hardware
and software needed for maintaining and building network technology for
customers.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
Property, Plant, and Equipment:
Property and equipment are stated at cost. For financial statement purposes,
depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the term of the
related lease or the useful life of the leasehold improvements. Accelerated
depreciation methods are used for tax purposes. Depreciation and amortization
are calculated over the following useful lives stated in years:
Useful
Lives
Vehicles 5
Furniture and fixtures 5
Equipment 5
Leasehold improvements 20
Revenue and cost recognition:
Revenue from sales of hardware, software and peripherals is recognized upon
shipment to the customer. Most hardware, software and peripherals sales are
made without the right of return. Product returns which are minimal are
recorded as a reduction of sales upon receipts of the product. Service,
support and integration sales are recognized upon completion of the service and
is not subject to warranty.
Revenue from fixed priced contracts is recognized on the percentage-of-
completion method of accounting, measured by the cost-to-cost method. This
method is used because management considers total costs incurred to be the best
available measure of progress on contracts.
Contract costs include all direct costs and those indirect costs related to
contract performance. Changes in job performance, conditions, and estimated
profitability and final contract settlements may result in revisions to costs
and revenue and are recognized in the period in which the revisions are
determined.
The asset, "Costs and Estimated Earnings in Excess of Billings Uncompleted
Contracts", represents revenue earned in excess of amounts billed. The
liability "Billings in Excess of Costs and Estimated Earnings on Uncompleted
Contracts" represents billings in excess of amounts earned.
Revenue and contract costs from fixed priced contracts are included in the
various categories of revenue and cost of goods sold in the accompanying
financial statements.
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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
New Accounting Pronouncements:
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees". The
Company follows FASB Statement 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") for financial statement disclosure purposes and issuance of
options and warrants to non-employees for services rendered.
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", management reviews
long-lived assets and intangible assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
fully recoverable. As part of this assessment, management prepares an analysis
of the undiscounted cash flows for each product that has significant long-lived
or intangible asset values associated with it. This analysis for the asset
values as of September 30, 1998 and March 31, 1998, indicated there was no
impairment to the carrying value of these assets.
SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The Company has
addressed the requirements of SFAS No. 130 and there is no material impact on
the financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. Generally, certain financial information is required to be
reported on the basis that is used internally for evaluating performance or an
allocation of resources to operating segments. The Company has adopted the
requirements of SFAS No. 131 and there is no material impact on the financial
statements.
Use of Estimates and Certain Concentrations:
Management of the Company has made a number of estimates and assumptions
relating to the valuation and reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Although actual results could differ from those estimates,
management believes its estimates are reasonable. Certain components,
subassemblies and software included in the Company's computer systems are
obtained from sole suppliers or a limited number of suppliers. The Company
relies, to a certain extent, upon the ability of its suppliers' to enhance
existing products in a timely and cost-effective manner, 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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
Financial Instruments:
Cash equivalents include highly liquid short-term investments with original
maturities of three months or less, readily convertible to known amounts of
cash. The amounts reported as cash equivalents, receivables, other assets,
accounts payable and accrued expenses and debt are considered by the Company to
be reasonable approximations of their fair values, based on market information
available to management as of September 30, 1998 and March 31, 998. The use of
different market assumptions and estimation methodologies could have a material
effect on the estimated fair value amounts. The reported fair values do not
take into consideration potential taxes or expenses that would be incurred
in an actual settlement.
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. A concentration of credit risk may exist with respect to trade
receivables, as many of the Company's customers are in the computer and
telecommunications industries. The Company has a large number of customers on
which it performs ongoing credit evaluations and generally does not require
collateral from its customers. Historically, the Company has not experienced
significant losses related to receivables from individual customers or groups
of customers in any particular industry or geographic area.
NOTE 2 - STOCKHOLDERS' EQUITY
In October 1997, the Company completed a Private Placement Agreement, (the
"Agreement") with a group of accredited investors. The Agreement provides
for three "Phases" of financing.
Phase I of the Agreement was funded in November 1997. The Company received
$2,120,000 in exchange for 400,000 shares of series B preferred stock (5%
cumulative, convertible, non-voting, stated value $5.30) ,(the "Series B
Stock"). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock subject to adjustment and six warrants, (the
"Warrants") for the purchase of six shares of common stock at $1.50 per share.
The Company paid $302,000 and issued 20,000 shares of series B preferred stock
for placement agent fees in Phase I. Also options to purchase 400,000 shares
of common stock at $1.50 per share were issued as a part of the agreement. The
common stock had a fair value of $0.57 per share at the grant date of the
options resulting in $226,800 in placement agent fees. The Agreement states
that conversion of the preferred stock will not occur to the extent that the
HUB status of the Company is compromised. An additional 4,348,738 shares could
be converted before the HUB status would be lost.
The series B preferred stock can be converted to common stock. Therefore, a
discount in the amount of $6,151,978 has been realized. The discount is the
difference in the intrinsic value of the common stock and warrants less the net
proceeds from the series B preferred stock. The discount is accreted from the
date of issuance of the preferred stock to the date the stock can be converted.
Due to the limitation on the number of shares of stock that can be issued to
retain the HUB status, $3,412,502 has been recorded as dividends and as an
increase in additional paid-in capital in the accompanying financial statement.
The unrecognized portion of the discount in the amount of $2,796,524 will be
recorded if and when the preferred stock is converted or the HUB status changes.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
Phase II of the Agreement was funded in February 1998. The Company received
$1,000,004 in exchange for 94,340 shares of series C preferred stock (6%
cumulative, convertible, non-voting, stated value, $10.60), (the "Series C
Stock). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock, subject to adjustment. The Company paid $130,000
and issued 4,717 shares of series C preferred stock for placement agent fees.
Also options to purchase 47,170 shares of common stock at $4.00 per share were
issued as a part of the agreement. The common stock had a fair value of $0.57
per share at the grant date resulting in $26,745 in placement agent fees. The
Agreement states that conversion of the preferred stock will not occur to the
extent that the HUB status of the Company is compromised.
The series C preferred stock can be converted to common stock. Therefore, a
discount in the amount of $615,851 has been realized. The discount is the
difference in the intrinsic value of the common stock less net proceeds from
the series C preferred stock. Due to the limitation on the number of shares of
stock that can be issued to retain the HUB status, the unrecognized discount in
the amount of $615,851 will be recorded if and when the preferred stock is
converted or the HUB status changes.
Phase III of the Agreement was funded in May through July 1998. The Company
received $2,923,204 in exchange for 266,340 shares of series D preferred stock
(6% cumulative, convertible, non-voting, stated value, $10.60), (the "Series D
Stock"). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock, subject to adjustment. The Company paid $349,318
and issued 13,317 shares of series D preferred stock for placement agent fees.
Also options to purchase 250,850 shares of common stock at $1.59 per share were
issued as a part of the agreement. The common stock had a fair value of $1.81
to $3.05 per share at the grant date resulting in $532,343 in placement agent
fees. The Agreement states that conversion of the preferred stock will not
occur to the extent that the HUB status of the Company is compromised.
The Series D preferred stock can be converted to common stock. Therefore, a
discount in the amount of $4,781,739 at September 30, 1998 has been realized.
The discount is the difference in the intrinsic value of the common stock less
the net proceeds from the series D preferred stock. Due to the limitation on
the number of shares of stock that can be issued to retain the HUB status, the
unrecognized discount in the amount of $4,781,739 will be recorded if and when
the preferred stock is converted or the HUB status changes.
Senior convertible debt in the amount of $371,000 was issued for cash in
November 1997. This debt was converted to 70,000 shares of series B preferred
stock(5% cumulative, convertible, non-voting, stated value, $5.30), in February
1998. Accrued interest in the amount of $5,143 was paid with the issuance of
10,286 shares of common stock. The discount on this issue of series B preferred
stock is included in the total series B discount detailed above.
Preferred stock dividends were paid with the issuance of common stock valued at
the previous thirty day average closing bid price per share of common stock as
follows: SHARES AMOUNT
------ --------
June 30, 1998 10,224 $ 66,743
September 30, 1998 14,150 $ 92,679
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited)
NOTE 3 - CONTINGENCY
On December 18, 1997, Argus Management, Inc. filed Plaintiffs Original Petition
in the 216th District Court of Kerr County, Texas. Argus claims the Company and
Mr. Jose G. Chavez, as joint obligors, defaulted on their obligation to Argus
pursuant to two promissory notes for $100,000 each, both dated June 2, 1997.
Argus is seeking a judgment for $200,000, together with interest on the notes
at the rate of 20% per annum from June 2, 1997, through the date the notes are
satisfied. As of March 31, 1998, $65,000 had been disbursed to third parties in
satisfaction of obligations of Argus Management, Inc. The $65,000 has been
recorded in other receivables in the accompanying financial statements.
On February 6, 1998, the Company filed Plaintiff's Original Petition in the
above-referenced case. The Company asserts breach of contract, fraud,
defamation, usury, and civil conspiracy claims against Argus Management, Inc.
The Company strongly disagrees with Argus' contentions and denies liability to
Argus under the notes and plans to oppose vigorously Argus' claims and recover
the amounts disbursed to third parties.
On January 22, 1998, the Company filed a lawsuit against Bits Technical
Corporation for damages attributable to a breach of commitment. This matter is
still pending. On August 17, 1998, Bits Technical Corporation ("BTC") filed a
counterclaim against the Company in connection with the above case. In the
counterclaim, BTC asserts the Company fraudulently induced BTC to promise to
loan money to the Company. In particular, BTC claims the Company promised
certain contracts and business opportunities to BTC that the Company was
unwilling or unable to deliver.
On November 20, 1996, MCA Communications, Inc. ("MCA") filed a lawsuit against
the Company in County Court at Law No. 2 in Harris County, Texas. MCA claims
the Company owes $12,485 for certain goods and services that MCA claims to have
provided to MSI in connection with various projects for the Texas Department of
Health. MCA also seeks interest, costs, and attorneys' fees. On January 6,
1997, the Company filed its answer and denied the above-referenced claim in its
entirety.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW AND IN "RISK FACTORS" AND "BUSINESS."
Overview
Micro-Media Solutions, Inc. ("MSI"), the operating subsidiary of MSHI was
created in 1993 in Austin, Texas, to provide computer hardware, software
programming, system installation and support, maintenance and media duplication
to the public and private sectors. MSI maintains certification as a minority-
owned business enterprise and status as a Historically Underutilized Business
("HUB"). On June 23, 1997, the then shareholders of MSI entered into an
agreement and plan of reorganization ("Combination Agreement") with Mountain
States Resources Corporation (now known as MSI Holdings, Inc.), whereby the
Company acquired all of the issued and outstanding stock of MSI in exchange for
9,310,000 shares of the Common Stock of the Company (the "Combination"). The
Combination was accounted for as a recapitalization.
Among the principal costs to market and sell the Company's products are
advertising and promotion costs, salaries and commissions, and general and
administrative expenses. MSHI's operating results may be subject to
fluctuations on a quarterly and an annual basis as a result of various factors,
including, but not limited to, fluctuating market pricing for computer and
semiconductor memory products, industry competition, seasonal government
purchasing cycles, and working capital restrictions on manufacturing and
production. Therefore, the operating results for any particular period are not
necessarily indicative of the results that may occur in any future period.
The Company's revenues consist of hardware sales, software sales and the
delivery of technical services, including installing and maintaining networks
system. The technical service sales of the Company typically yield a higher
gross margin than the hardware and software sales of the Company. This is due,
in part, to the intense competition in the hardware and software sales sector
from Original Equipment Manufactures ("OEM's") and distributors. As a result,
the Company, is attempting to strategically reposition itself from emphasizing
hardware sales to intensifying sales of technical services. See Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Results of Operations.
Recent Developments
On July 27, 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their east Austin facilities to GTE for installation of GTE's Point
of Presence ("POP") equipment (the "Sublease"). On May 29, 1998, MSI entered
into a 3 year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP ("Connection Service")(the Sublease
and Connection Service are collectively referred to as the "GTE Agreement").
GTE's establishment, management and monitoring of multiple domains on behalf of
MSI is included in the Connection Service. The Connection Service was upgraded
to GTE's Internet Advantage version 6.0 on September 29, 1998. MSI will lease
connections to the POP for access to the GTE Internet network to other
businesses. MSI will target companies that need direct, high-speed access to
the Internet through turn-key collocation services for high volume (known as
bandwidth) Internet web applications. Collocation is a service that provides a
high speed, high bandwidth connection to the Internet backbone using various
backup systems to increase the connection's fault tolerance. By connecting
directly to Internet via the POP, MSI is able to eliminate the local loop, the
weakest component in localized Internet connections. MSI will have the capacity
to support over four thousand collocation rack spaces. These rack spaces will
be used to host the net servers for MSI clients and provide those clients with
direct access to the Internet. When fully implemented, these collocation
services are expected to significantly increase MSHI's revenues over the term
of the Connection Service. The GTE Agreements provide the potential for MSHI
to increase revenue by selling Internet access to various high Internet demand
entities for such activities as commerce and academics. It is anticipated that
the requisite hardware will be operational in January 1999.
In July 1998, MSI began providing systems integration, warehousing, systems
configuration and other fulfillment services for Siemens-Nixdorf Information
Systems, Inc. ("Siemens-Nixdorf") for Point of Sale ("POS") systems and
Automated Teller Machines for Siemens-Nixdorf's customers such as Sears-Roebuck
,and Bealls department stores (the "Siemens-Nixdorf Agreement"). This agreement
provides that Siemens-Nixdorf will store its inventory at MSI, and MSI will
charge Siemens-Nixdorf for various systems integration services. This
arrangement provides MSHI with a revenue stream without a significant working
capital commitment.
MSHI formed TeleVista, Inc., a wholly owned subsidiary ("TVI") in September of
1998 to run the electronic commerce business for the on-line sale of hardware
and software over the Internet through the use of a secure server. Secure
servers allow for the accelerated receipt of funds through credit card payments
for hardware and software purchases made through their web sites operated by it.
Results of Operations
Three Months Ended September 30, 1998 Compared with the Three Months Ended
September 30, 1997
Revenues for the quarter ended September 30, 1998 of $994,280 increased
$204,829 or 25.9% from the $789,451 recorded in the quarter ended September 30,
1997.
Cost of goods sold for the quarter ended September 30, 1998 increased $294,755
or 49.4% to $891,349 from the quarter ended September 30, 1997 representing
89.7% of revenue. The gross margin for the quarter ended September 30, 1997 was
$596,594 or 75.6% of revenue.
Selling, General and Administrative Expenses the quarter ended September 30,
1998 of $1,330,818 represents 133.85% of Revenues. The 1998 figure represents
an increase over the quarter ended September 30, 1997 of $401,170 or 43.2%.
Approximately $265,000 of the increase represent the increase in staff salaries
and benefits. Staff additions include service technicians, sales staff,
accounting staff and middle management to enable the Company to work on larger
service contracts. The majority of the remaining increase in expenses is
attributable to facility expansion, professional fees, marketing cost
associated with new service contracts, and other expenses associated with the
start up of new service contracts.
Six Months Ended September 30, 1998 Compared with the Six Months Ended
September 30, 1997
Revenues for the six months ended September 30, 1998 of $1,595,909 decreased
$423,326 or (20.96%) from the $2,019,235 recorded in the six months ended
September 30, 1997.
Cost of goods sold for the six months ended September 30, 1998 increased
$22,826 or 1.8% to $1,292,495 from the six months ended September 30, 1997
representing 80.99% of revenue. The gross margin for the six months ended
September 30, 1997 was $1,269,669 or 62.88% of revenue.
Selling, General and Administrative Expenses the six months ended September 30,
1998 of $2,367,258 represents 148.33% of Revenues. The 1998 figure represents
an increase over the six months ended September 30, 1997 of $876,080 or
58.75%. Approximately $511,000 of the increase represents the increase in staff
salaries and benefits. Staff additions include service technicians, sales
staff, accounting staff and middle management to enable the Company to work on
larger service contracts. The majority of the remaining increase in expenses is
attributable to facility expansion, professional fees, marketing cost
associated with new service contracts, and other expenses associated with the
start up of new service contracts.
Going Concern Issues
The Company's significant historical losses raise a doubt as to the Company's
ability to continue as a going concern. The Company plans to address the going
concern issues described elsewhere in this Prospectus through an additional
private placement and a possible $20 million debt issue. However, there can be
no assurance that the Company will be able to secure such additional capital.
Subsequent to March 31, 1998, the Company received $2 million dollars in
proceeds from Private Placement Phase III (as defined) that have been used to
retire debt, decrease past due accounts payable and for operating expenses. As
a result, the Company's current ratio has improved and its cash position has
increased The Company is in the process of consummating a private placement of
a newly created series of preferred stock with net proceeds to the Company of
approximately $2.6 million (the "Proposed Private Placement"). In the event the
Proposed Private Placement is not consummated in the near future, the Company
will experience significant cash flow and working capital restraints sufficient
to create a likelihood that the Company will not continue as a going concern.
Management believes that its contracts with GTE and Siemens Nixdorf have the
possibility of producing revenues of approximately $3 million in 1999. The
Company's ability to fulfill its obligations under the Switching Agreement is
contingent upon the successful consummation of the Proposed Private Placement
and obtaining the working capital contemplated by the debt issue described in
the preceding paragraph.
Potential Loss of Hub Status
MSI is currently qualified in Texas as a "Historically Underutilized Business"
("HUB"). As long as MSI maintains its status as a HUB, it will continue to
receive favorable treatment by certain governmental entities in their granting
of contracts. The Company generated revenues of approximately $414,000 and
$919,000 during the years ended March 31,1998 and 1997, respectively, from HUB
related contracts, or 15% and 20% of its gross revenues, respectively. MSI will
graduate from its HUB status upon the happening of any of the following events:
(i) less than 51% of the Company's voting stock is owned by minorities; (ii)
such minority owners are not active participants in the day-to-day operations
and management of the business; (iii) the four year average of gross revenue of
MSI exceed certain levels based on the MSI's Standard Industrial Classification
Code ("SIC Code"); or (iv) the four year average of total employment levels of
MSI exceeds the Small Business Administration established levels for businesses
with a similar four-digit SIC Code. Under the current SIC Code applicable to
MSI, MSI must not exceed 500 employees, it currently has 79 employees. The
current SIC Code class does not impose a revenue ceiling, however, some
SIC Code classifications under which MSI operated placed a three year or a four
year average of gross revenue limitation. The potential loss of HUB status may
also be contingent upon the SIC Code under which MSI operates in the future.
Future changes in operations may require the MSI to change its SIC Code, which
could alter the employee ceiling and impose revenue restrictions as low as $5
million per year, averaged over periods as short as three years. There can be
no assurance that MSI will continue to qualify for HUB status. Further, there
is no assurance that HUB-type programs will not be eliminated by the state or
federal governments. If MSI's HUB status is lost, the Company anticipates a
significant loss of revenues.
Liquidity and Capital Resources
On November 18, 1997, the Company received $2,120,000 upon completion of a
private placement whereby 400,000 of Series B Preferred were sold to
Entrepreneurial Investors, Ltd. ("EIL") for $5.30 per share ("Private Placement
Phase I"). The Company also issued 20,000 shares of Series B Preferred to
Equity Services, Ltd. ("ESL") as a commission for the completion of Private
Placement Phase I. The Company received $371,000 in October 1997 from two
individuals pursuant to two senior convertible notes (the "Notes"), which are
secured by an aggregate of 1,050,000 shares of Common Stock of the Company. The
Notes were subsequently converted into an aggregate of 70,000 shares of Series
B Preferred. On February 4, 1998, the Company received $1,000,000 completing a
second private placement whereby 94,340 shares of Series C Preferred were sold
to EIL for a purchase price of $10.60 per share ("Private Placement Phase II").
As commission for the completion of Private Placement Phase II, the Company
issued 4,717 shares of Series C Preferred to ESL. By July, 1998, the Company
received $2,964,364 completing a third private placement, whereby 279,657
shares of Series D Preferred were sold to fourteen investors for a purchase
price of $10.60 per share ("Private Placement Phase III"). The expenses for
Private Placement Phase I, Private Placement Phase II, and Private Placement
Phase III, including broker fees, commissions and legal and accounting expenses
totaled $408,000, $180,000, and $490,478, respectively.
For the six months ended September 30, 1998 and the year ended March 31,1998,
the Company's total assets were $3,880,911 and $2,514,308 respectively, with
liabilities of $3,084,276 and $2,607,783, respectively. Current assets of
$2,704,944 and $1,898,621 represent 105.0% and 79.9% of current liabilities of
$2,575,003 and $2,090,701. Improvements in the Company's cash position are a
result of the collection of accounts receivable and funds from increases in
shareholder equity resulting from the previously consummated private placements
more particularly described above. Reductions in accounts receivable between
1998 and 1997 are a direct reflection of the reduced level of sales experienced
in 1998. The Company's liabilities of $3,084,276 at September 30,1998 consist
of $1,230,000 of a fully secured credit line, $1,345,003 of current liabilities
and $509,273 of long-term liabilities.
The Company, subsequent to the end of March 31, 1998, paid its Bank One Texas,
NA loans in full and substantially reduced the borrowings under its fully
secured line of credit. Net shareholders equity as of September 30, 1998 and
March 31, 1998 was $796,635 and $91,669, respectively. During the year ended
March 31, 1998, and the six months ended September 30, 1998, the Company
completed Private Placement Phase I, Private Placement Phase II and Private
Placement Phase III. Receipt of these funds enabled the Company to reduce its
outstanding debt and pay off the past due accounts payable.
Subsequent to September 30, 1998, the Company made arrangements for an
additional private placement of $3,000,000. The Company will issue 100,000
shares of Series E preferred stock, at a stated value of $30 per share.
During the six months ended September 30, 1998, working capital increased
$322,021 from March 31, 1998. The balances of its accounts payables, accrued
expenses and accounts receivable were increased as a result increased sales and
the resulting increase in related accounts. At September 30, 1998, the Company
had a working capital of $129,941 compared to a working capital deficit of
($192,080) at March 31, 1998.
The Company has a critical need for additional working capital to meet
contractual obligations under the GTE Agreements. Management believes that the
GTE Agreements with Siemens Nixdorf Agreements have the potential to increase
revenue levels, provided that sufficient working capital is obtained. See
Management's Discussion and Analysis of Financial Conditions and Results of
Operations and Going Concern Issues.
Year 2000 Issues.
As with other companies, the Company has started a program to study the impact
on its computer system in order to be Year 2000 compliant. This study involved
identifying any modifications or replacements of certain hardware and software
maintained by the Company. The study has been completed. The company has
identified the computer systems that will require either modification, upgrade
or replacement. Implementation of the Company's Year 2000 plan should be
completed by March 31, 1999. The Company anticipates that in-house personnel
will be primarily responsible for completing the tasks and that the costs will
be insignificant. As such, the Company believes that the planned modifications,
upgrades and replacements of existing systems will be completed in a timely
fashion to assure Year 2000 compliance, and any related cost will not have a
material impact on the Companys results of operations, cash flows, or financial
conditions in future periods. The Company has budgeted for $25,000 to address
these expenses. In addition, the Company is also taking actions to assure that
its customers and vendors are taking steps to remedy their Year 2000 issues.
The Company is not incurring any unique risks in connection with Year 2000
issues. It is however subject to the risk that information and financial
resources may be temporarily unavailable. This societal risk may temporarily
disrupt cash flows worldwide. The Company believes that by becoming, and
assisting its clients and vendors to become, Year 2000 compliant its likely to
circumvent that threat. The Company expects to be Year 2000 compliant March 31,
1999. If compliance is not achieved by that date, the Company will reallocate
resources, as necessary, to ensure compliance within six months, thereafter.
Inflation.
Management does not believe that inflation will have a material impact on the
Company's pricing of goods or services since the Company, generally, has the
ability to adjust prices to meet the current market conditions.
PART II: Other Information
ITEM 1: LEGAL PROCEEDINGS
For a discussion of Legal Proceedings, refer to Note 3, Contingencies, in the
Notes to Consolidated Financial Statements in Part I
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
For a discussion of Changes in Securities and Use of Proceeds, refer to Note 2,
Stockholders' Equity, in the Notes to Consolidated Financial Statements in Part
I
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(B) REPORTS ON FORM 8-K
16.1 FORM 8-K/A, FILED SEPTEMBER 25, 1998
16.2 FORM 8-K, FILED SEPTEMBER 17, 1998
16.3 FORM 8-K, FILED SEPTEMBER 17, 199
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date 11/16/1998 By: /s/ Jose G Chavez
Jose G. Chavez, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of this
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Jose G Chavez 11/16/1998
Jose G. Chavez Chairman of the Board of
Directors and President
/s/ Mitchell Kettrick 11/16/1998
Mitchell Kettrick Vice-President and Director
/s/ David Hill 11/16/1998
David Hill Chief Financial Officer
/s/ Ernesto Chavarria 11/16/1998
Ernesto Chavarria Director
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