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 DECEMBER 31, 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 DECEMBER 31, 1998:
13,127,989.
Part I: Financial Information Item 1:
Consolidated Financial Statements
Index to Consolidated Financial Statements Page
Consolidated Balance Sheets 3
Consolidated Statements of Operation 5
Consolidated Statements of Cash Flows 6
Consolidated Statements of Stockholders' Equity 9
Notes to Consolidated Financial Statements 11
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31 March 31
1998 1998
(unaudited) (audited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 73,861 $ 25,786
Accounts Receivable - Trade 840,606 150,851
Inventory 312,300 285,023
Short-Term Investment - restricted 1,350,000 1,350,000
Other Receivables - Advances 171,647 86,961
--------- ---------
Total Current Assets 2,748,414 1,898,621
Property, Plant, and Equipment
(at cost) net 1,487,640 800,831
--------- ---------
TOTAL ASSETS $ 4,236,054 $ 2,699,452
========= =========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - continued
December 31 March 31
1998 1998
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts Payable - Trade $ 1,194,655 $ 300,035
Bank Line of Credit 1,600,000 1,228,966
Other Accrued Expenses 97,314 169,336
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 3,298,570 2,090,701
--------- ---------
Long Term Notes
Notes Payable 178,678 367,522
Obligations under Capital
Leases For Equipment 290,605 149,560
--------- ---------
Total Long Term Notes 469,283 517,082
--------- ---------
Total Liabilities 3,767,853 2,607,783
--------- ---------
Stockholders Equity
Preferred stock Series B; $5.30
stated value; 400,000 shares
authorized, issued & outstanding 2,120,000 2,597,000
Preferred stock Series C; $10.60
stated value; 9,340 shares
authorized, issued & outstanding 1,000,004 1,050,004
Preferred stock Series D; $10.60
stated value; 266,340 shares
authorized, issued & outstanding 2,823,204 -
Preferred stock Series E; $30.00
stated value; 105,000 shares
authorized, 51,975 issued &
outstanding 1,559,250
Common stock at $.10 par value;
50,000,000 authorized; 13,127,989
and 11,518,571 shares issued
and outstanding, respectively 1,312,799 1,150,685
Additional paid-in capital 3,770,387 2,666,099
Accumulated Deficit (12,117,443) (7,372,119)
--------- ---------
Total Stockholders Equity 468,201 91,669
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 4,236,054 $ 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 Three Months For the Nine Months
Ended December 31 Ended December 31
1998 1997 1998 1997
Revenues:
Hardware, Software & Peripherals $ 249,156 $ 212,013 $1,431,352 $1,350,810
Service, Support & Integration 155,519 188,298 394,486 702,915
Network Installation 940,958 319,950 1,115,704 685,771
--------- --------- --------- ---------
Net revenues 1,345,633 720,261 2,941,542 2,739,496
--------- --------- --------- ---------
Cost of Goods Sold
Hardware, Software & Peripherals 239,419 204,926 1,376,870 885,989
Service, Support & Integration 59,393 122,394 150,511 456,896
Network Installation 916,821 255,301 1,080,747 509,415
--------- --------- --------- ---------
Total cost of goods sold 1,215,633 582,621 2,608,128 1,852,300
--------- --------- --------- ---------
Gross Margin 130,000 137,640 333,414 887,196
Selling, General & Administrative
Salaries & benefits 729,243 576,512 2,139,673 1,304,833
Professional fees and consultants 562,359 164,392 973,699 328,451
Occupancy 127,158 70,345 325,369 158,845
Depreciation 65,000 49,720 171,991 149,160
Vehicle expense 50,995 30,210 125,427 109,061
Other expense 196,124 414,649 538,482 708,865
Interest expense, net 11,642 165,835 41,035 202,342
Provision for uncollectable - 20,000 ( 35,000) 21,284
--------- --------- --------- ---------
Total selling, general and
Administrative expenses 1,742,521 1,491,663 4,280,676 2,982,841
--------- --------- --------- ---------
Net Loss (1,612,521) (1,354,023) (3,947,262)(2,095,645)
Plus preferred stock dividends ( 104,140) - ( 798,062) -
--------- --------- --------- ---------
Net Loss available to
common stockholders (1,716,661) (1,354,023) (4,745,324)(2,095,645)
========= ========= ========= =========
Basic and diluted
net loss per share $ (0.14) $ (0.13) $ (0.39) $ (0.20)
========= ========= ========= =========
Basic and diluted weighted
average number of shares
Outstanding 12,051,893 10,764,733 12,051,893 10,764,733
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES (page 1 of 3)
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 1998 (Audited) and
For the Nine Months Ended December 31, 1998 (unaudited)
Preferred Stock
Series B Series C Series D
Shares Amount Shares Amount Shares Amount
Balance
March 31, 1997 - - - - - -
Common stock issued:
Interest - - - - - -
Compensation - - - - - -
Preferred
stock dividend - - - - - -
Preferred stock issued:
Private
Placement 420,000 2,226,000 99,057 1,050,004 - -
Senior Debt 70,000 371,000 - - - -
Preferred stock
dividend discount - - - - - -
Stock option for:
compensation - - - - - -
Placement agent - - - - - -
Cash received
for uncertificated
stock - - - - - -
Common stock-
Uncertificated
Issued for note
Receivable - - - - - -
Note receivable
Offset against
Common stock
Subscribed - - - - - -
Net loss - - - - - -
------- --------- ------ --------- ------- ---------
Balance
March 31, 1998 490,000 $2,597,000 99,057 $1,050,004
Preferred stock issued:
Private
Placement - - - - 279,657 $2,964,364
Common stock issued for:
Rule 144 Stock
Compensation - - - - - -
Preferred
stock dividend - - - - - -
Class A Warrants
Preferred stock
conversion (90,000)( 477,000)(4,717)( 50,000)(13,317)( 141,160)
Stock options for
Placement agents - - - - - -
Net loss - - - - - -
Balance ------- --------- ------ --------- ------- ---------
December 31,1998 400,000 $2,120,000 94,340 $1,000,004 266,340 2,823,204
======= ========= ====== ========= ======= =========
The accompanying notes are an integral part of these financial Statements.
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARIES (page 2 of 3)
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited), and
For the Nine Months Ended December 31, 1998 (Unaudited)
Common Stock
Preferred Stock Common Stock Subscribed
Shares Amount 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 51,975 1,559,250 - - - -
Common stock issued for:
Rule 144 stock 50,000 5,000 - -
Compensation 31,000 3,100 - -
Preferred
stock dividend 39,803 3,980 - -
Class A Warrants 420,000 42,000 - -
Preferred stock
conversion - - 1,080,340 108,034
Stock options for
Placement agents - - - -
Net loss - - - - - -
Balance --------- --------- ---------- --------- ------ -------
December 31,1998 51,975 1,559,250 13,127,989 1,312,799 - -
========= ========= ========== ========= ====== =======
The accompanying notes are an integral part of these financial Statements.
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARIES (page 3 of 3)
Consolidated Statements of Stockholders' Equity - continued
For the Year Ended March 31, 1998 (Audited), and
For the Nine Months Ended December 31, 1998 (Unaudited)
Additional
(Discount on) Accumulated
Paid-in Capital Deficit Total
Balance
March 31, 1997 $(1,046,058) $( 133,999) $( 103,584)
Common stock issued:
Interest 4,114 - 5,143
Compensation 250,367 - 291,857
Preferred
stock dividend 56,294 ( 58,668) -
Preferred stock issued:
Private
Placement ( 975,641) - 2,300,363
Senior Debt - - 371,000
Preferred stock
dividend discount 3,412,502 (3,412,502) -
Stock option for:
compensation 93,750 - 93,750
Placement agent 387,641 - 387,641
Cash received
for uncertificated
stock 483,130 - 512,449
Common stock-
Uncertificated
Issued for note
Receivable - - 407,250
Note receivable
Offset against
Common stock
Subscribed - - ( 407,250)
Net loss - (3,766,950) (3,766,950)
---------- --------- ---------
Balance
March 31, 1998 2,666,099 (7,372,119) 91,669
Preferred stock issued:
Private
Placement (1,402,631) - 3,120,983
Common stock issued for:
Rule 144 stock 582,500 ( 534,500) 53,000
Compensation 163,087 - 166,187
Preferred
stock dividend 259,582 ( 263,562) -
Class A Warrants 291,900 333,900
Preferred stock
conversion 560,126
Stock options for
Placement agents 649,724 649,724
Net loss - (3,947,262) (3,947,262)
Balance --------- --------- ---------
December 31,1998 3,770,387 (12,117,443) 468,201
========= ========= =========
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended March 31, 1998 (Audited) and
For the Nine Months Ended December 31, 1998 (unaudited)
December 31, March 31,
1998 1998
Cash Flows from Operating
Activities:
Net (Loss) $(3,947,262) $(3,766,950)
Adjustments to reconcile net income
to net cash, provided by operating
activities:
Depreciation expense 171,991 178,892
Stock issued for compensation 166,187 291,857
Stock options issued for compensation - 93,750
Stock issued for interest - 5,143
Change in accounts receivable ( 689,755) 832,062
Change in inventory ( 27,277) ( 19,569)
Change in accounts payable 894,633 ( 577,325)
Change in accrued expenses ( 72,022) 57,775
Net Cash Provided by (used by) --------- ---------
Operating Activities (3,503,505) (2,904,365)
--------- ---------
Cash Flows from Investment Activities:
Investment in property & equipment ( 604,238) ( 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 ( 84,686) ( 121,341)
Net Cash provided by (Used by) --------- ---------
Investing Activities ( 688,924) (1,168,853)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from Line of Credit 371,034 504,076
Proceeds from other notes payable 200,000
Change in long term debt ( 227,515) ( 162,153)
Payments in capital lease obligations ( 60,609) ( 32,485)
Proceeds from Private Placement 3,770,694 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 4,240,504 4,080,892
--------- ---------
Net Increase in Cash 48,075 7,674
Cash at Beginning of Period 25,786 18,112
--------- ---------
Cash at End of Period $ 73,861 $ 25,786
========== ==========
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - continued
For the Year Ended March 31, 1998 (Audited) and
For the Nine Months Ended December 31, 1998 (unaudited)
December 31, March 31,
1998 1998
Supplemental disclosures:
Cash paid for interest $ 85,750 $ 232,578
Supplemental schedule of non-cash investing and financing activities:
Preferred stock issued for:
Placement agent fees $ -- $ 156,000
Stock options:
Compensation -- 93,750
Placement agent fees 649,724 387,641
Common stock issued for:
Compensation 166,187 291,857
Interest on debt -- 5,143
Preferred stock dividends 263,562 58,668
Common stock subscribed for
Note receivable -- 407,250
Debt converted to preferred stock -- 371,000
Inventory received for notes -- 84,394
Inventory converted to equipment 44,021 --
Discount on preferred stock 543,500 3,412,502
Capital lease obligations 254,562 --
The accompanying notes are an integral part of these financial Statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 nine months ended December 31, 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.), was organized under the laws of the State of Utah on April 15, 1969.
On October 14, 1998, Micro-Media Solutions, Inc. changed its name to MSI
Holdings, Inc. The Company has two wholly-owned subsidiaries, Micro-Media
Solutions, Inc., a Texas corporation("MSI") and TeleVista, Inc., a Texas
corporation, doing business as High Power.Net, ("TVI"). TVI was incorporated
in August 1998 and has not yet commenced operations. The Company is publicly
traded on the OTC Bulletin Board under the symbol "MSIA".
MSI is an Austin, Texas, based technology corporation formed to provide
computer hardware, software programming, system support, maintenance, media
duplication, kitting to the public and private sectors and to be a business
solutions technology integrator with infrastructure design and implementation
services. In addition, MSI provides computer networking services including
system integration and local wide-area networks. MSI is certified by
the State of Texas as a Historically Underutilized Business (HUB).
Going concern:
As shown in the accompanying consolidated financial statements, the Company
has incurred net losses of $3,947,262 for the nine month period ending December
31, 1998.As of December 31, 1998 the Company's current liabilities exceeded its
current assets by $550,156. These factors create a substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company
to continue as a going concern is dependent on the Company obtaining additional
financing to fund the expenses related to operations and capital improvements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 (unaudited)
In November 1998 through February 1999, the Company received approximately
$2 million in partial completion of a private placement agreement of a newly
created series of preferred stock (Series E), which proceeds have been used
by the Company for operating expenses and remodeling the existing facility.
Additional proceeds of approximately $1 million from the completion of the
Series E private placement are expected by the end of March 1999. The closing
of the Series E private placement will enable the Company to have sufficient
funds to meet the its working capital and capital expenditures needs.
Management has identified and closed substantial contracts with GTE and
Siemens Nixdorf during the nine months ending December 31, 1998, and believes
it can produce the level of revenue necessary to return the Company to a
positive earnings trend.
The Company is also negotiating with several investment banks for an
additional $20 million private offering of the Company's securities to take
place before the end of April 1999. These funds will be used to satisfy
additional capital needs for expansion opportunities associated with the
contracts identified above. In the event the Company is unable to complete
the contemplated private placement, the Company will forego the Contract's
expansion opportunities, reduce the number of employees and overhead expenses
and concentrate its efforts on the Austin operations.
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 nine months ended December 31,
1998 and 1997 and as of March 31, 1998, include the accounts and transactions
of the Company and MSI. 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.
Cash and Cash Equivalents:
Cash equivalents consist primarily of funds invested in short-term interest-
bearing accounts. The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
Accounts Receivable:
The Company follows the allowance method of expensing accounts receivable when
considered uncollectable. As of December 31, 1998 and March 31, 1998,
management believes all accounts are collectible; and therefore, no allowance
has been recorded. The financial statements include 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
December 31, 1998 (unaudited)
Property, Plant, and Equipment:
Property and equipment are stated at cost. For financial statement purposes,
depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the term of the
related lease or the useful life of the leasehold improvements. Accelerated
depreciation methods are used for tax purposes. Depreciation and amortization
are calculated over the following useful lives stated in years:
Useful
Lives
Vehicles 5
Furniture and fixtures 5
Equipment 5
Leasehold improvements 20
Revenue and cost recognition:
Hardware and peripherals sales consist of computers and related electronic
equipment. Software sales consist of the resale of prepackaged
software and operating systems from Microsoft and other vendors to the end
user. Revenue is recognized when persuasive evidence of an arrangement exist,
delivery has occurred, the customer fee is fixed and collectibility is
probable. Most hardware, software and peripherals sales are made without the
right of return. Product returns, which are minimal, are recorded as a
reduction of sales upon receipts of the product. Service, support and
integration sales are recognized upon completion of the service and is not
subject to warranty.
Revenue from fixed priced contracts is recognized on the percentage-of-
completion method of accounting, measured by the cost-to-cost method. This
method is used because management considers total costs incurred to be the
best available measure of progress on contracts.
Contract costs include all direct costs and those indirect costs related to
contract performance. Changes in job performance, job conditions, and
estimated profitability and final contract settlements may result in
revisions to costs and revenue and are recognized in the period in which the
revisions are determined.
The asset, "Costs and Estimated Earnings in Excess of Billings Uncompleted
Contracts", represents revenue earned in excess of amounts billed. The
liability "Billings in Excess of Costs and Estimated Earnings on Uncompleted
Contracts" represents billings in excess of amounts earned.
Revenue and contract costs from fixed priced contracts are included in the
various categories of revenue and cost of goods sold in the accompanying
financial statements.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 (unaudited)
Federal Income Tax:
The Company uses the liability method of accounting for income taxes as
prescribed by the Financial Accounting Standard Board Statement No. 109.
Deferred tax liabilities and assets are determined based on differences
between the financial statement and tax basis of assets and liabilities using
enacted tax rates expected to be in effect for the year in which the
differences are expected to reverse. The net change in deferred tax assets
and liabilities is reflected in the statement of operations.
Use of Estimates and Certain Concentrations:
Management of the Company has made a number of estimates and assumptions
relating to the valuation and reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Although actual results could differ from those estimates,
management believes its estimates are reasonable. Certain components,
subassemblies and software included in the Company's computer systems are
obtained from sole suppliers or a limited number of suppliers. The Company
relies, to a certain extent, upon the ability of its suppliers' to enhance
existing products in a timely and cost-effective manner, to develop new
products to meet changing customer needs and to respond to emerging standards
and other technological developments in the computer industry. The Company's
reliance on a limited number of suppliers involves several risks, including
the possibility of shortages and/or increases in costs of components and
subassemblies, and the risk of reduced control over delivery schedules.
Financial Instruments:
Cash equivalents include highly liquid short-term investments with original
maturities of three months or less, readily convertible to known amounts of
cash. The amounts reported as cash equivalents, receivables, other assets,
accounts payable and accrued expenses and debt are considered by the Company
to be reasonable approximations of their fair values, based on market
information available to management as of December 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.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 (unaudited)
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. The Agreement states that conversion of the
preferred stock will not occur to the extent that the HUB status of the
Company is compromised.
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.
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.
Phase III of the Agreement was funded in May through July 1998. The Company
received $2,923,204 in exchange for 266,340 shares of series D preferred stock
(6% cumulative, convertible, non-voting, stated value, $10.60), (the "Series D
Stock"). Each share of preferred stock is initially convertible into 10
shares of the Company's common stock, subject to adjustment. The Company paid
$349,318 and issued 13,317 shares of series D preferred stock for placement
agent fees. Also options to purchase 250,850 shares of common stock at $1.59
per share were issued as a part of the agreement. The common stock had a fair
value of $1.65 to $2.86 per share at the grant date resulting in $487,880 in
placement agent fees.
During the nine months ended December 31, 1998 the Company received $53,000
for 5,000 shares of Series D preferred stock at 10.60 per share. Due to the
Series D preferred stock being over subscribed, the company converted the
5,000 preferred shares to 50,000 shares of Rule 144 common stock. The
discount on the 50,000 shares in the amount of $534,500 has been included as
a dividend in the accompanying financial statements.
The Series D preferred stock can be converted to common stock. Therefore, a
discount in the amount of $4,843,296 at December 31, 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 $4,843,296 will be recorded if and when
the preferred stock is converted or the HUB status changes.
During the nine months ended December 31, 1998, Class A warrants were
exercised for 420,000 shares of common stock at $0.795 per share in the
amount of $333,900.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 (unaudited)
NOTE 2 - STOCKHOLDERS' EQUITY
In October 1998 the Company completed a private placement agreement with a
group of accredited investors for the placement of 100,000 shares of Series E
preferred stock, stock (6% cumulative, convertible, non-voting, stated value,
$10.60), (the "Series E Stock). Each share of preferred stock is initially
convertible into 10 shares of the Company's common stock, subject to
adjustment. Also options to purchase 50,000 shares of common stock at $4.50
per share were issued as a part of the agreement.
In November 1998 the Company received $1,485,000 in exchange for 49,500 shares
of Series E Stock. The Company paid $188,600 and issued 2,475 shares of
Series E Stock for placement agent fees. The common stock had a fair value of
$6.375 to $6.75 per share at the grant dates resulting in $161,844 in
placement agent fees.
Through February 1999, the Company had received $600,000 in exchange for
20,000 shares of Series E Stock. The Company paid $72,000 and issued 1,000
shares of Series E Stock for placement agent fees. The remaining 30,000
shares of Series E Stock will be funded by March 31, 1999.
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:
COMMON
SHARES AMOUNT
------ --------
March 31, 1998 23,742 $ 58,668
June 30, 1998 10,224 $ 66,743
September 30, 1998 14,151 $ 92,679
December 31, 1998 15,428 $104,140
NOTE 3 - CONTINGENCY
On December 18, 1997, Argus Management, Inc. filed Plaintiff's Original
Petition in the 216th District Court of Kerr County, Texas. Argus claims the
Company and Mr. Jose G. Chavez, as joint obligors, defaulted on their
obligation to Argus pursuant to two promissory notes for $100,000 each, both
dated June 2, 1997. Argus is seeking a judgment for $200,000, together with
interest on the notes at the rate of 20% per annum from June 2, 1997, through
the date the notes are satisfied. As of March 31, 1998, $65,000 had been
disbursed to third parties in satisfaction of obligations of Argus Management,
Inc. The $65,000 has been recorded in other receivables in the accompanying
financial statements.
On February 6, 1998, the Company filed Plaintiff's Original Petition in the
above-referenced case. The Company asserts breach of contract, fraud,
defamation, usury, and civil conspiracy claims against Argus Management, Inc.
The Company strongly disagrees with Argus' contentions and denies liability to
Argus under the notes and plans to oppose vigorously Argus' claims and recover
the amounts disbursed to third parties.
MSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 (unaudited)
NOTE 3 - CONTINGENCY
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 CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW.
Overview
========
Micro-Media Solutions, Inc. ("MSI"), the operating subsidiary of MSI Holdings,
Inc. 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").
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. The Company's operating results may be subject to
fluctuations on a quarterly and annual basis as a result of various factors,
including, but not limited to, fluctuating market pricing for computer and
semiconductor memory products, industry competition, seasonal government
purchasing cycles, and working capital restrictions on manufacturing and
production. Therefore, the operating results for any particular period are
not necessarily indicative of the results that may occur in any future period.
The Company's revenues consist of hardware sales, prepackaged software sales
and the delivery of technical services, including installing and maintaining
network systems. The technical service sales of the Company typically yield a
higher margin than the hardware and software sales of the Company. This is
due, in part, to the intense competition in the hardware and software sales
sector from Original Equipment Manufactures ("OEM's") and distributors. As
a result, the Company, is attempting to strategically reposition itself from
emphasizing hardware and software sales to intensifying sales of technical
services.
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 (the "Connection
Service")(the Sublease and Connection Service are collectively referred to
as the "GTE Agreement"). GTE's establishment, management and monitoring of
multiple domains on behalf of MSI 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 at its Austin, Texas facilities.
These rack spaces will be used to host the network 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
The Company's revenues over the term of the Connection Service. The GTE
Agreements provide the potential for The Company to increase revenue by
selling Internet access to various high Internet demand entities for such
activities as commerce and academics. The Company has remodeled a portion of
its east Austin facility in preparation of supplying the Collocation service.
It is anticipated that the requisite hardware will be operational in February
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 will charge Siemens-Nixdorf for various systems integration services.
This arrangement provides The Company with a revenue stream without a
significant working capital commitment.
The Company formed TeleVista, Inc., a wholly owned subsidiary ("TVI") in
September of 1998 to run the electronic commerce business for the on-line sale
of hardware and software over the Internet through the use of a secure server.
Secure servers allow for the accelerated receipt of funds through credit card
payments for hardware and software purchases made through their web sites
operated by it. TVI had no operations at December 31, 1998.
Results of Operations
=====================
Three Months Ended December 31, 1998 Compared with December 31, 1997
======================================================================
Revenues for the quarter ended December 31, 1998 of $1,345,633 increased
$625,372 or 86.8% from the $720,261 recorded in the quarter ended December 31,
1997. This increase is a combination of an increase of $37,143 in Hardware,
Software & Peripherals (HSP) revenues; decrease of $32,779 in Service, Support
& Integration (SSI) revenues; and an increase of $621,008 in Network
Installation (NI) revenues.
The 17.5% increase in HSP revenues of $37,143 is a reflection of the normal
fluctuations in sales of HSP products.
The 17.4% decrease in SSI revenues of $32,779 is a of a reduction in the scope
of work on a several contracts. New revenue sources for SSI are being
developed to replace the reduction in revenues. As described in the "Recent
Developments" section above, the Company has signed a contract with Siemens-
Nixdorf to supplement its SSI revenues. Other decreases in SSI revenues
relate to normal fluctuations in service requests from customers that occur
throughout the year.
The 94% increase in NI revenues of $621,008 relates to specific significant
school district network installation contracts that were in place during
each quarter. During the quarter ended December 31, 1997 MSI was finishing
a contract for Hereford ISD. During the quarter ended December 31, 1998,
MSI completed a major portion of the work for an installation of a network
system under a contract with San Felipe Del Rio CISD.
Cost of goods sold, (COGS), for the quarter ended December 31, 1998 increased
$633,012 or 108.6% to $1,215,633 compared to the quarter ended December 31,
1997 representing 90.3% of revenue resulting in a margin of 9.7%. Cost of
Goods Sold for the quarter ended December 31, 1997 was $582,621 or 80.9% of
revenue resulting in a margin of 19.1%. The decrease in margins is a
combination of an increase in COGS for HSP in the amount of $34.493 and a
decrease in COGS for SSI in the amount of $63,001 and an increase in COGS for
NI in the amount of $661,520.
COGS as a percentage of revenues for HSP was 96.1% for the quarter ended
December 31, 1998 resulting in a margin of 4.9% compared to a margin
of 3.3% for the quarter ended December 31, 1997. The low margins on HSP
revenues is due to market pressure to lower prices on HSP products from the
Company's competitors and customers including the result of the competitive
bidding process required for sales to public entities.
COGS as a percentage of revenues for SSI was 38.2% for the quarter ended
December 31, 1998 resulting in a margin of 61.8% compared to a margin of 35.0%
for the quarter ended December 31, 1997. The increase in margins is a result
of MSI obtaining an SSI contract with Siemens Nixdorf for system integration.
This contract requires that Siemens Nixdorf supply all hardware and software
products to be integrated into the systems. Additional increases in margins
are a result of a contract to install Texas State Lottery vending machines in
retail businesses. This contract requires the lottery contractor to supply all
hardware cost.
COGS as a percentage of revenues for NI was 97.4% for the quarter ended
December 31, 1998 resulting in a margin of 2.6% compared to a margin of 20.2%
for the quarter ended December 31, 1997. The decrease in margins relate to
specific significant school district network installation contracts that were
in place during each quarter. During the nine months ending December 31, 1998
MSI received a contract of approximately $700,000 with San Felipe Del Rio CISD
(Del Rio) for network system installation. The margin on this contract was
less due to competitive bidding required by public entities. Additional
contracts with Del Rio were received, subsequently, that allow the
opportunity for increased overall margins. Aggregate contracts and purchase
orders with Del Rio are now in excess of $1 million.
Selling, General and Administrative Expenses for the quarter ended December
31, 1998 of $1,742,521 represents 129.5% of Revenues. The 1998 amount
represents an increase over the quarter ended December 31, 1997 of $250,858
or 16.8%. Approximately $153,000 of the increase represents the increase in
staff salaries and benefits. Staff additions include technical staff, sales
staff, accounting staff and middle management. These increases are needed as
the Company prepares to offer collocation services at its Austin, Texas
facility and will also enable the Company to work on larger service
contracts. Increases in professional fees of $398,000 is largely attributable
the reporting requirements associated with being a public company and fees
paid for technical consulting related to the design and implementation of the
Collocation services described in the "Recent Developments" section above.
Occupancy expense increased approximately $57,000 due to facility expansion
and increased staffing. Interest expense decreases of $154,000 is a result of
a reduction in late fees and interest charged on past due invoices and
decrease line of credit usage.
Nine Months Ended December 31, 1998 Compared with December 31, 1997
====================================================================
Revenues for the nine months ended December 31, 1998 of $2,941,542 increased
$202,046 or 7.4% from the $2,739,496 recorded in the nine months ended
December 31, 1997. This increase is a combination of an increase of $80,542 in
HSP revenues; a decrease of $308,429 in SSI revenues and an increase of
$429,933 in NI revenues.
The nominal increase of $80,542 in HSP revenues reflects normal fluctuations
in sale of HSP products.
The $308,429 decrease in SSI revenues relates to a reduction in the scope of
work on two contracts. Revenues on a contract for the installation and
servicing of lottery machines decreased approximately $328,000 from the nine
months ended December 31, 1997 compared to the December 31, 1998 period. Other
decreases in revenues were on a contract for the City of Austin of
approximately $64,000 from the nine months ended December 31, 1997 compared
to December 31, 1998 period. Increases in SSI revenues of approximately
$84,000 are attributed to new contracts received from Siemens Nixdorf and the
State of Texas lottery contractor.
The $429,933 decrease in NI revenues relates to specific significant school
district network installation contracts that were in place during each period.
During the nine months ended December 31, 1997 MSI was finishing on a
contract for Hereford ISD which started in April 1997. During the nine months
ended December 31, 1998, MSI began the installation of a network system
under a contract with San Felipe Del Rio CISD. This contract was executed in
July 1998 with installation beginning in August 1998.
Cost of goods sold for the nine months ended December 31, 1998 increased
$755,828 or40.8% to $2,608,128 compared to the nine months ended December 31,
1997 representing 88.7% of revenue resulting in a margin of 11.7%. Cost of
goods sold for the nine months ended December 31, 1997 was $1,852,300 or 67.6%
of revenue resulting in a margin of 32.4%. The decrease in margins is a
combination of an increase in COGS for HSP in the amount of $490,881 and
decrease in COGS for SSI in the amount of $306,385 and an increase in COGS for
NI in the amount of $571,332.
COGS as a percentage of revenues for HSP was 96.2% for the nine months ended
December 31, 1998 resulting in a margin of 3.8% compared to a margin of 65.6%
for the nine months ended December 31, 1997. The decreasing margins are due to
market pressure to lower prices on HSP products from the Company's competitors
and customers including the result of the competitive bidding process required
for sales to public entities. Contributing to the lower margins for 1998 were
sales made below cost as a result of poor estimating of cost by MSI.
Procedures are now in place to insure profitable margins on HSP sales.
COGS as a percentage of revenues for SSI was 38.2% for the nine months ended
December 31, 1998 resulting in a margin of 61.8% compared to a margin of 35.0%
for the nine months ended December 31, 1997. The increase in margins is a
result of MSI obtaining an SSI contract with Siemens Nixdorf for system
integration. This contract requires that Siemens Nixdorf supply all hardware
and software products to be integrated into the systems. Additional decreases
in COGS are a result of a contract to install Texas State Lottery vending
machines in retail businesses. This contract requires the lottery contractor
to supply all hardware cost.
COGS as a percentage of revenues for NI was 96.9% for the nine months ended
December 31, 1998 resulting in a margin of 3.1% compared to a margin of 25.7%
for the nine months ended December 31, 1997. The decrease in margins relate to
specific significant school district network installation contracts that were
in place during each quarter. During the quarter ending December 31, 1998 MSI
received a contract of approximately $700,000 with San Felipe Del Rio CISD
for network system installation. The margin on this contract was less due to
competitive bidding required by public entities. Additional contracts with Del
Rio were received, subsequent to December 31, 1998, that allow the opportunity
for increased overall margins. Aggregate contracts and purchase orders with
Del Rio are now in excess of $1 million.
Selling, General and Administrative Expenses for the nine months ended
December 31, 1998 of $4,280,676 represents 145.5% of Revenues. The 1998
amount represents an increase over the nine months ended December 31, 1997 of
$1,297,835 or 43.5%. Approximately $835,000 of the increase represents the
increase in staff salaries and benefits. Staff additions include technical
staff, sales staff, accounting staff and middle management. These increases
are needed as the Company prepares to offer collocation services at its
Austin, Texas facility and will also enable the Company to work on larger
service contracts. Increases in professional fees of $645,000 is attributable
to the reporting requirements associated with being a public company and fees
paid for technical consulting related to the design and implementation of the
Collocation services described in the "Recent Developments" section above.
Occupancy expense increased approximately $167,000 due to facility expansion
and increased staffing. Interest expense decreases of $154,000 is a result of
a reduction in late fees and interest charged on past due invoices and
decrease line of credit usage.
Going Concern Issues
====================
The Company's significant historical losses raise a doubt as to the Company's
ability to continue as a going concern. The Company plans to address the
going concern issues described in the notes to the financial statements
through an additional private placement of series E preferred stock and from
substantial contracts signed during fiscal year ending March 31, 1999, which
will provide sufficient working capital and cash flows for the next twelve
month period. However, there can be no assurance that the Company will be able
to secure such additional capital or that the contracts will generate
sufficient cash flows or working capital. Subsequent to March 31, 1998, the
Company received $2.8 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. The Company has completed arrangements with
a private investment group for a private placement of a newly created series E
of preferred stock with net proceeds to the Company of approximately $2.6
million to take place in November 1998 through March 1999. Approximately 1.3
million was received in November 1998 on the Series E private placement with
the balance to be received through March 1999.
Management, based upon expressions of interest, estimated growth and facility
capacities, believes that its contracts with GTE and Siemens Nixdorf (the
"Contracts") have the possibility of producing revenues of approximately
$8 million during the next twelve month period. Management further anticipates
the contracts to yield approximately 10% of revenues as net income. The Company
has purchased the required equipment with capital leases as of September 30,
1998, and will begin operations under the contracts by February 1999. The
proceeds from the Series E Preferred will allow the Company to remodel the
existing facility and continue operations through the end of the current fiscal
year, by which point it is anticipated that the contracts will be generating
positive cash flow and adequate working capital.
The Company is also negotiating with investment bankers for an additional $20
million private placement to be completed before the end of April 1999. These
funds will be used to satisfy additional capital needs for expansion
opportunities associated with the Contracts. In the event the Company is unable
to complete the contemplated $20 million private placement, the Company will
forego the Contracts' expansion opportunities, reduce the number of employees
and overhead expenses and concentrate its efforts on the Austin operations.
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. 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. 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. In November 1998 the Company received $1,485,000 in exchange for 49,500
shares of Series E Stock. The Company paid $188,600 and issued 2,475 shares of
Series E Stock for placement agent fees. Through February 1999, the Company
had received $600,000 in exchange for 20,000 shares of Series E Stock. The
Company paid $72,000 and issued 1,000 shares of Series E Stock for placement
agent fees. The remaining 30,000 shares of Series E Stock will be funded by
March 31, 1999.
For the nine months ended December 31, 1998 and the year ended March 31,1998,
the Company's total assets were $4,236,054 and $2,699,452 respectively, with
liabilities of $3,767,853 and $2,607,783, respectively. Current assets of
$2,748,414 and $1,898,621 represent 120.0% and 90.8% of current liabilities of
$3,298,570 and $2,090,701. Deterioration of the Company's cash position is a
result of the Company's continuing operating losses. See "Going Concern" in
Note 1 to the financial statements above. The Company's liabilities of
$3,767,853 at December 31,1998 consist of $1,600,000 of a fully secured credit
line, $1,698,570 of current liabilities and $469,283 of long-term liabilities.
Net shareholders equity as of December 31, 1998 and
March 31, 1998 was $468,201 and $91,669, respectively. During the year ended
March 31, 1998, and the nine months ended December 31, 1998, the Company
completed private placements of Series B Stock, Series C Stock and Series D
Stock. The Series E Stock private placement was partially completed through
December 31, 1998 with the Company receiving $1,485,000 in exchange for 49,500
shares of Series E Stock. Receipt of these funds enabled the Company to fund
its operations, reduce its outstanding debt and pay off past due accounts
payable.
Subsequent to December 31, 1998, the Company received an additional $600,000
in exchange for 20,000 shares of Series E Stock. The Company expects to
receive an additional $900,000 in exchange for 30,000 shares of Series E
Stock by March 31, 1999 to complete the Series E placement.
During the nine months ended December 31, 1998, working capital decreased
$358,076 from March 31, 1998. The balances of its accounts payables, accrued
expenses and accounts receivables were increased as a result increased sales
and the resulting increase in related accounts. At December 31, 1998, the
Company had a working capital deficit of ($550,156) compared to a working
capital deficit of ($192,080) at March 31, 1998. The Company was current on
all significant accounts payable at December 31, 1998. As of March 31, 1998
the Company was more than 30 days past due on $170,000 or 57% of its accounts
payable. The Company's account receivables at December 31, 1998 include
approximately $465,000 from the Del Rio Consolidated School District. This
amount was subsequently collected.
The Company has a critical need for additional working capital to meet
contractual obligations under the GTE Agreements. Management believes that the
GTE Agreements with Siemens Nixdorf Agreements have the potential to increase
revenue levels, provided that sufficient working capital is obtained. See
Management's Discussion and Analysis of Financial Conditions and Results of
Operations and Going Concern Issues.
Year 2000 Issues
================
As with other companies, the Company has initiated a program to study the
impact on its computer system in order to be Year 2000 compliant. This study
involved identifying any modifications or replacements of certain hardware and
software maintained by the Company. The study has been completed. The
company has identified the computer systems that will require either
modification, upgrade or replacement. Implementation of the Company's Year
2000 plan should be completed by June 30, 1999. The Company anticipates that
in-house personnel will be primarily responsible for completing these tasks
and that the costs will be insignificant. As such, the Company believes that
the planned modifications, upgrades and replacements of existing systems will
be completed in a timely fashion to assure Year 2000 compliance, and any
related cost will not have a material impact on the Company's results of
operations, cash flows, or financial conditions in future periods. The
Company has budgeted for $25,000 to address these expenses. In addition,
the Company is also taking actions to assure that its customers and vendors
are taking steps to remedy their Year 2000 issues. The Company is not
incurring any unique risks in connection with Year 2000 issues. It is however
subject to the risk that information and financial resources may be
temporarily unavailable. This societal risk may temporarily disrupt cash
flows worldwide. The Company believes that by becoming, and assisting its
clients and vendors to become, Year 2000 compliant it is likely to circumvent
that threat. The Company expects to be Year 2000 compliant March 31, 1999. If
compliance is not achieved by that date, the Company will reallocate
resources, as necessary, to ensure compliance within six months, thereafter.
Inflation
=========
Management does not believe that inflation will have a material impact on the
Company's pricing of goods or services since the Company, generally, has the
ability to adjust prices to meet the current market conditions.
PART II: Other Information
ITEM 1: LEGAL PROCEEDINGS
=========================
For a discussion of Legal Proceedings, refer to Note 3, Contingencies, in the
Notes to Consolidated Financial Statements in Part I
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
=================================================
For a discussion of Changes in Securities and Use of Proceeds, refer to
Note 2, Stockholders' Equity, in the Notes to Consolidated Financial
Statements in Part I
ITEM 3: DEFAULT UPON SENIOR SECURITIES
======================================
NONE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
===========================================================
NONE
Item 5. OTHER INFORMATION
=========================
A shareholder who wishes to make a proposal at the 1999 Annual Meeting of
Shareholders without complying with the requirements of the SEC's Rule 14a-8
(and therefore without including the proposal in the Company's proxy
materials) should notify the Company's Secretary, at the Company's principal
executive offices, of that proposal by July 1, 1999. If a shareholder fails
to give notice by that date, then the persons named as proxies in the proxy
cards solicited by the Company's Board of Directors for that meeting will be
entitled to vote the proxy cards held by them regarding that proposal, if
properly raised at the meeting, as directed by the Company's management.
The Company's former Chief Financial Officer, David Hill, is no longer employed
by the Company and is pursuing other business interests.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
========================================
(B) REPORTS ON FORM 8-K
None
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 02/15/1999 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 02/15/1999
Jose G. Chavez Chairman of the Board of
Directors and President
/s/ Mitchell Kettrick 02/15/1999
Mitchell Kettrick Vice-President and Director
/s/ Ernesto Chavarria 02/15/1999
Ernesto Chavarria Director
/s/ Daniel Dornier 02/15/1999
Daniel Dornier Director
/s/ Blandina Cardenas 02/15/1999
Blandina Cardenas Director
/s/ Stephen Hoelscher 02/15/1999
Stephen Hoelscher Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 73,861 73,861
<SECURITIES> 1,350,000 1,350,000
<RECEIVABLES> 840,606 840,606
<ALLOWANCES> 0 0
<INVENTORY> 312,300 312,300
<CURRENT-ASSETS> 2,748,414 2,748,414
<PP&E> 2,032,979 2,032,979
<DEPRECIATION> (545,339) (545,339)
<TOTAL-ASSETS> 4,236,054 4,236,054
<CURRENT-LIABILITIES> 3,298,570 3,298,570
<BONDS> 0 0
0 0
7,502,458 7,502,458
<COMMON> 1,312,799 1,312,799
<OTHER-SE> (8,347,056) (8,347,056)
<TOTAL-LIABILITY-AND-EQUITY> 4,236,054 4,236,054
<SALES> 1,345,633 2,941,542
<TOTAL-REVENUES> 1,345,633 2,941,542
<CGS> 1,215,633 2,608,128
<TOTAL-COSTS> 1,742,521 4,280,676
<OTHER-EXPENSES> 104,140 798,062
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,642 41,035
<INCOME-PRETAX> (1,716,661) (4,745,324)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,716,661) (4,745,324)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,716,661) (4,745,324)
<EPS-PRIMARY> (0.14) (0.39)
<EPS-DILUTED> (0.14) (0.39)
</TABLE>
