<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-QSB
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
----------
Commission File Number 0-8164
MSI HOLDINGS, INC.
(herein referred to as "Registrant", "Company", "MSHI", "we", "us", and "our")
(Exact name of registrant as specified in charter)
UTAH 87-0280886
(State of incorporation or organization) (IRS Employer I.D. No.)
501 WALLER STREET AUSTIN, TEXAS 78702
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code) 512-476-6925
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: COMMON STOCK,
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 (X) NO ( )
(2) Yes (X) No ( )
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-QSB or any amendment to
this Form 10-QSB.9
As of November 11, 1999 the Registrant had 23,240,983 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes (X) NO ( )
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1
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MSI HOLDINGS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults on Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Matters 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 14
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MSI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1999
------------------
<S> <C>
ASSETS
Current assets
Cash $ 469,418
Accounts receivable - trade 352,537
Prepaid debt issuance costs 337,833
Other receivables - advances 182,406
Other current assets 44,229
------------
Total current assets 1,386,423
Property, plant, and equipment, net 1,982,635
------------
TOTAL ASSETS $ 3,369,058
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable - trade $ 809,983
Other accrued expenses 572,693
Short-term notes payable 828,000
Current maturities of notes payable 172,548
Current portion of obligations under capital leases 118,736
------------
Total current liabilities 2,501,960
Long-term liabilities
Notes payable 34,617
Obligations under capital leases 639,699
Deferred rent 212,195
------------
Total long-term liabilities 886,511
Commitments and Contingencies --
------------
Total liabilities 3,388,471
------------
Stockholders' equity (deficit)
Preferred stock; 10,000,000 shares authorized:
Convertible preferred stock Series B; $5.30 stated value;
490,000 authorized, 5 shares issued and outstanding 27
Convertible preferred stock Series D; $10.60 stated value;
279,657 authorized, 19,005 shares issued and outstanding 201,453
Convertible preferred stock Series E; $30.00 stated value;
157,500 authorized, 6,005 shares issued and outstanding 180,150
Common stock at $.10 par value; 50,000,000 authorized, 23,135,083
shares (excluding 200,250 shares held in treasury) issued and
outstanding 2,313,508
Additional paid-in-capital 24,400,410
Accumulated deficit (27,114,961)
------------
Total stockholders' equity (deficit) (19,413)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,369,058
============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 4
MSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Hardware, software and peripherals $ 2,117 $ 678,564 $ 122,404 $ 1,182,196
Networks, LAN/WAN 251,351 150,848 310,341 174,746
Service, support and integration 101,742 164,868 362,531 238,967
Broadband Internet services 85,650 -- 94,727 --
------------ ------------ ------------ ------------
440,860 994,280 890,003 1,595,909
------------ ------------ ------------ ------------
Cost of goods sold:
Hardware, software and peripherals 2,011 718,247 187,923 1,137,451
Networks, LAN/WAN 180,844 146,719 375,326 163,926
Service, support and integration 82,368 26,383 163,754 91,118
Broadband Internet services 40,060 -- 85,726 --
------------ ------------ ------------ ------------
305,283 891,349 812,729 1,392,495
------------ ------------ ------------ ------------
Gross margin 135,577 102,931 77,274 203,414
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Salaries and benefits 810,109 891,962 1,506,323 1,560,895
Professional fees and consultants 1,366,743 172,790 1,777,103 453,865
Advertising and marketing 138,072 52,608 142,209 66,975
Occupancy 157,415 108,532 251,975 198,211
Depreciation and amortization 88,470 54,000 186,056 106,991
Vehicle expense 24,417 39,822 31,646 74,432
Other expense 307,607 207,983 407,783 307,358
------------ ------------ ------------ ------------
Total selling, general and administrative expenses 2,892,833 1,527,697 4,303,095 2,768,727
Interest expense, net 210,786 8,757 259,342 400,393
------------ ------------ ------------ ------------
Total expenses 3,103,619 1,536,454 4,562,437 3,169,120
------------ ------------ ------------ ------------
Net loss $ (2,968,042) $ (1,433,523) $ (4,485,163) $ (2,965,706)
============ ============ ============ ============
Preferred stock dividends and discounts (6,550) (949,654) (675,563) (4,955,295)
------------ ------------ ------------ ------------
Net loss to common stockholders $ (2,974,592) $ (2,383,177) $ (5,160,726) $ (7,921,001)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.13) $ (0.20) $ (0.25) $ (0.68)
============ ============ ============ ============
Basic and diluted weighted average shares outstanding 23,014,620 11,753,571 20,746,749 11,638,166
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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MSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,485,163) $ (2,965,706)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 186,056 106,991
Amortization of debt discount 131,068 371,000
Disposal of property, plant and equipment 176,175 --
Amortization of deferred rent 19,911 --
Common stock and options issued for compensation 102,375 412,871
Changes in operating assets and liabilities:
Accounts receivable - trade 222,693 (610,716)
Inventory -- (112,809)
Other receivables - advances (102,707) (87,569)
Other current assets 13,287 --
Accounts payable - trade (963,228) 541,379
Other accrued expenses 429,208 (59,635)
------------ ------------
Net cash used in operating activities (4,270,325) (2,404,194)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (189,526) (227,565)
------------ ------------
Net cash used in investing activities (189,526) (227,565)
------------ ------------
Cash flows from financing activities:
Net draws (payments) on bank line of credit (200,000) 1,034
Payments on obligations under capital leases (41,230) (48,434)
Payments on notes payable (87,760) (199,700)
Proceeds - notes payable 1,087,500 --
Proceeds - private placement of preferred stock, net of
offering costs 526,800 2,473,921
Proceeds - exercise of warrants 120,500 333,900
Proceeds - issuance of restricted common stock 3,514,988 53,000
------------ ------------
Net provided by financing activities 4,920,798 2,613,721
------------ ------------
Net change in cash 460,947 (18,038)
Cash at beginning of period 8,471 25,786
------------ ------------
Cash at end of period $ 469,418 $ 7,748
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
MSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure:
Cash paid during the period for:
Interest $ 110,506 $ 29,393
Supplemental schedule of non-cash investing and financing activities;
Preferred
stock issued for:
Placement agent fees $ -- $ 141,160
Stock options or warrants issued for:
Placement agent fees 236,400 1,061,723
Debt issuance fees 486,000 --
Common stock issued for:
Preferred stock dividends 75,563 159,422
Discount on preferred stock issued 600,000 4,795,873
Purchase of equipment with long-term leases -- 254,562
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
MSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SEPTEMBER 30, 1999 (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, as amended. In
the opinion of management all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of financial position and
results of operations for the interim periods presented have been reflected
herein. 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, 1999, as reported in the Form 10-KSB as
amended have been omitted.
GOING CONCERN:
As shown in the accompanying consolidated financial statements, the Company has
incurred a net loss of $4,485,163 for the six months ended September 30, 1999.
The ability of the Company to continue as a going concern is dependent on the
Company obtaining additional financing to fund operations and capital
acquisitions.
At March 31, 1999, the Company had completed arrangements with a private
investment group for the private placement of up to 1.5 million shares of the
Company's Common Stock to raise approximately $4.5 million in capital. The
Company received approximately $3.5 million in this private placement. The
Company received $526,800 in net proceeds from the private placement of 20,000
shares of the Company's Series E Preferred Stock, $30 stated value (the "Series
E Preferred") during the six months ended September 30, 1999.
In September and October 1999, the Company received a total of $1,759,000 in
bridge loans from twenty accredited individuals. These promissory notes bear
interest of 8 1/4% per annum and mature in March 2000 or upon consummation of a
secondary public offering, whichever is sooner. In connection with these loans,
stock warrants were issued to purchase an aggregate of 175,900 shares of our
common stock with an exercise price of $0.10 per share. The shares of common
stock into which these warrants are exercisable as "restricted" securities and
are subject to the provisions of Rule 144 under the Securities Act. These funds
have been used to retire debt, decrease past due accounts payable and pay
operating expenses.
In addition, management closed a substantial contract with GTE during the year
ended March 31, 1999. During the six months ended September 30, 1999, the
Company established affiliations with Southwestern Bell and Covad Communications
to become a Digital Subscriber Line ("xDSL") service reseller which fosters its
ability to provide state-of-the-art connectivity services.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
COMPREHENSIVE INCOME:
There were no differences between net loss and comprehensive loss for the
periods presented.
NOTE 2 - NOTES PAYABLE
In September 1999, the Company received a total of $1,250,000 in bridge loans
from three accredited individuals. These promissory notes bear interest of
8 1/4% per annum and mature in March 2000 or upon consummation of a secondary
public offering, whichever is sooner. In connection with these loans, stock
warrants were issued to purchase an aggregate of 125,000 shares of our common
stock with an exercise price of $0.10 per share.
The Company was in violation of debt covenants on certain notes payable as of
September 30, 1999 concerning liquidity ratios and reporting requirements.
Amounts outstanding related to these notes have been classified as current
liabilities.
NOTE 3 - STOCKHOLDERS' EQUITY
During the six months ended September 30, 1999, the Company received gross
proceeds of $600,000 from the Private Placement of 20,000 shares of Series E, 6%
Cumulative Convertible Non-Voting Preferred Stock, Stated value $30.00 per
share. The Company paid $73,200 in cash for payment of commission fees of the
Private Placement. Each share of Preferred E stock is initially convertible into
ten shares of the Company's Common Stock.
7
<PAGE> 8
At the time of issuance the Series E Preferred Stock was convertible to Common
Stock at an amount that was "in-the-money". This beneficial conversion feature
was limited to the proceeds of the offering and was accounted for as an increase
to additional paid in capital and an in-substance dividend to the related
preferred stockholders. The beneficial conversion feature resulted in the
recognition of a discount of $600,000 in the quarter ended June 30, 1999, which
is equivalent to the gross proceeds of the offering.
During the six months ended September 30, 1999, 399,995 shares of Series B,
177,335 shares of Series D, and 140,247 shares of Series E Preferred Stock were
collectively converted to 7,175,770 shares of Common Stock.
During the six months ended September 30, 1999, the Company issued 1,196,761
shares of Common Stock in a private placement resulting in net proceeds of
$3,514,988.
During the six months ended September 30, 1999, 18,000 shares of common stock
were issued for compensation to a consulting firm and were recorded as
professional fees in the amount of $102,375.
During the six months ended September 30, 1999, 13,200 shares of common stock
were issued as preferred stock dividends and were recorded as an increase in
retained deficit in the amount of $75,563.
During the six months ended September 30, 1999, the Company issued 113,000
shares of common stock and received proceeds of $120,500 from the exercise of
113,000 common stock warrants.
NOTE 4 - CONTINGENCIES AND LEGAL MATTERS
During the quarter ended September 30, 1999, the Company entered into settlement
discussions regarding a previous business obligation with a consulting firm,
whose principal is an officer of the Company, and an individual, who is a
Director of the Company. The consulting firm also has a financial arrangement
with another Director of the Company. The consulting firm is claiming
compensation of 250,000 shares of the Company's common stock for services
allegedly performed. The Company disputes the validity of the claim. Without
accepting validity of the claim, the Company has offered to compromise the
disputed claim in an effort to avoid costly litigation. The Company has reserved
100,000 shares of its common stock for settlement of this claim. This reserve
has been recorded as professional fees in the amount of $525,000 in the quarter
ended September 30, 1999. No compromise of this claim has been reached.
On July 28, 1999, the Company was sued by its former President and its Chief
Technology Officer seeking more than $50,000, excluding costs and attorneys'
fees. A settlement was reached during mediation on September 20, 1999. Formal
settlement documents have been executed by the parties in the lawsuit. The terms
of the settlement are confidential, but there is no material adverse effect on
the Company's results of operations or financial condition from the settlement
terms.
NOTE 5 - SUBSEQUENT EVENTS
In October 1999, the Company was notified by its Service, Support, and
Integration ("SSI") customers that as of October 31, 1999, the contracts for SSI
would not be renewed. The cancellation of these contracts will affect fifteen
current employees of the Company. This change is not expected to have a material
adverse effect on the Company's results of operations or financial condition as
the Company's future revenues will result primarily from Broadband Internet
Services.
In October 1999, the Company received $509,000 in bridge loans from seventeen
accredited individuals. These promissory notes bear interest of 8 1/4% per annum
and mature in March 2000 or upon the consummation of a secondary public
offering, whichever is sooner. In connection with these loans, stock warrants
were issued to purchase an aggregate of 50,900 shares of our common stock with
an exercise price of $0.10 per share. The shares of common stock into which
these warrants are exercisable as "restricted" securities and are subject to the
provisions of Rule 144 under the Securities Act.
8
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This quarterly report on Form 10-QSB contains forward-looking statements, which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. Words used in this report such as
"believe", "anticipate", "expect", "may", "will" and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. The Company does not undertake any
obligation to update or revise these forward-looking statements to reflect any
future events or circumstances. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report, including
those under the section entitled "OTHER FACTORS THAT MAY AFFECT OPERATING
RESULTS," which consist primarily of a brief discussion of certain risks which
are in their entirety forward-looking statements, and those included in the
Company's other reports previously filed with the commission, including the
disclosures in the "RISK FACTORS" section appearing in the Form 10-KSB, as
amended, for the fiscal year ended March 31, 1999.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with (i) the financial
statements and accompanying notes appearing in this Quarterly Report, and
(ii) the Company's financial statements and accompanying notes appearing in the
Company's Form 10-KSB, as amended, for the fiscal year ended March 31, 1999, as
filed with the Commission.
RESULTS OF OPERATIONS
COMPARISON TABLE
<TABLE>
<CAPTION>
HARDWARE, SERVICE,
BROADBAND SOFTWARE AND NETWORKS SUPPORT AND
INTERNET PERIPHERALS LAN/WAN INTEGRATION TOTAL
--------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1999
Revenues 85,650 2,117 251,351 101,742 440,860
Cost of goods sold 40,060 2,011 180,844 82,368 305,283
Gross profit (loss)($) 45,590 106 70,507 19,374 135,577
Gross profit (loss)(%) 53.2% 5.0% 28.1% 19.0% 30.8%
QUARTER ENDED SEPTEMBER 30, 1998
Revenues -- 678,564 150,848 164,868 994,280
Cost of goods sold -- 718,247 146,719 26,383 891,349
Gross profit (loss)($) -- (39,683) 4,129 138,485 102,931
Gross profit (loss)(%) -- (5.8%) 2.7% 84.0% 10.4%
INCREASE/(DECREASE)
Revenues 85,650 (676,447) 100,503 (63,126) (553,420)
Cost of goods sold 40,060 (716,236) 34,125 55,985 (586,066)
Gross profit (loss)($) 45,590 39,789 66,378 (119,111) 32,646
Gross profit (loss)(%) 53.2% 10.8% 25.4% (65.0%) 20.4%
</TABLE>
Total revenues for the quarter ended September 30, 1999 decreased
$553,420, or 55.7%, from the total revenues recorded for the same period in the
prior year. This was caused by a decrease of $676,447 in hardware, software and
peripherals revenue, which was partially offset by increases in revenues from
networks LAN/WAN and the addition of Broadband Internet services. The decrease
in hardware, software and peripherals reflects a reduction in large one-time
sales to governmental agencies. This is a direct result of our shift in focus
from hardware, software and peripherals to Broadband Internet services. The
increase of $100,503 in network LAN/WAN revenues was due to normal fluctuations
in installation projects that were in place during each period.
9
<PAGE> 10
Cost of goods sold for the quarter ended September 30, 1999 decreased
$586,066, or 65.8%, from the same period in the prior year. The total cost of
goods sold includes $40,060 related to Broadband Internet services that were not
offered in 1998. The cost of goods sold related to network LAN/WAN increased
$34,125, and the cost of goods sold related to service, support, and integration
increased $55,985. There was a decrease of $716,236 in cost of goods sold for
hardware, software and peripherals due to the corresponding reduction in
revenues of $676,447.
The gross profit for the quarter ended September 30, 1999 was $135,577,
or 30.8% of total revenue, compared to a gross profit of $102,931, or 10.4% of
total revenue, for the same period in the prior year. The gross profit for
hardware, software and peripherals for the quarter ended September 30, 1999, was
5.0%, compared to a gross loss of 5.8% in the quarter ended September 30, 1998.
The gross profit for network LAN/WAN was 28.1% for the quarter ended September
30, 1999, compared to a gross profit of 2.7% for the same period in the prior
year. The increase in margin is the result of increasing our services on an
existing contract and being able to earn a higher profit margin for these
additional services. The gross profit for service, support and integration was
19.0% for the quarter ended September 30, 1999, compared to a gross profit of
84.0% for the quarter ended September 30, 1998. The decrease is a result of
decreased revenues combined with fixed costs associated with service contracts.
Selling, general and administrative expenses, excluding interest
expense, for the quarter ended September 30, 1999 were $2,892,833 or 656.2% of
revenue, compared with $1,527,697, or 153.6% of revenue for the quarter ended
September 30, 1998. This is an increase of $1,365,136, or 89.4%. Increases in
advertising and marketing account for $85,464. This increase is a direct result
of the Company's recent move into the Broadband Internet services market.
Increases in professional fees and consultants were $1,193,953. This increase is
a result of additional accounting fees, legal fees, printing fees, and other
fees associated with the move into the Broadband Internet services market. As
described in Note 4 to the consolidated financial statements, the Company has
accrued $525,000 representing 100,000 shares of common stock potentially payable
to a consulting firm for settlement of a business obligation.
Interest expense for the quarter ended September 30, 1999, was
$210,786. Interest expense for the quarter ended September 30, 1998, was $8,757.
Interest expense increased $202,029 from 1998 to 1999, due to the amortization
of debt issuance costs and debt discounts in the amount of $131,068 and the
increase in capital lease obligations at September 30, 1999 as compared to
September 30, 1998.
SIX MONTHS ENDED SEPTEMBER 30, 1999, COMPARED WITH THE SIX MONTHS ENDED
SEPTEMBER 30, 1998:
COMPARISON TABLE
<TABLE>
<CAPTION>
Hardware, Service,
Broadband Software and Networks Support and
Internet Peripherals LAN/WAN Integration Total
--------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED SEPTEMBER 30, 1999
Revenues 94,727 122,404 310,341 362,531 890,003
Cost of goods sold 85,726 187,923 375,326 163,754 812,729
Gross profit (loss)($) 9,001 (65,519) (64,985) 198,777 77,274
Gross profit (loss)(%) 9.5% (53.5)% (20.9)% 54.8% 8.7%
SIX MONTHS ENDED SEPTEMBER 30, 1998
Revenues -- 1,182,196 238,967 174,746 1,595,909
Cost of goods sold -- 1,137,451 91,118 163,926 1,392,495
Gross profit (loss)($) -- 44,745 147,849 10,820 203,414
Gross profit (loss)(%) -- 3.8% 61.9% 6.2% 12.7%
INCREASE/(DECREASE)
Revenues 94,727 (1,059,792) 71,374 187,785 (705,906)
Cost of goods sold 85,726 (949,528) 284,208 (172) (579,766)
Gross profit (loss)($) 9,001 (110,264) (212,834) 187,957 (126,140)
Gross profit (loss)(%) 9.5% (57.3)% (82.8)% 48.6% (4.0)%
</TABLE>
10
<PAGE> 11
Total revenues for the six months ended September 30, 1999, decreased
$705,906 or 44.2%, from the total revenues recorded for the same period in the
prior year. This was caused by a decrease of $1,059,792 in hardware, software
and peripherals revenue, which was partially offset by increases in revenues
from network LAN/WAN of $71,374 and service, support and integration of $187,785
and the addition of Broadband Internet services. The decrease in hardware,
software and peripherals reflects a reduction in large one-time sales to
governmental agencies. This is a direct result of our shift in focus from
hardware, software and peripherals to Broadband Internet services. The increase
in network LAN/WAN revenues was due to normal fluctuations in installation
projects that were in place during each period.
Cost of goods sold for the six months ended September 30, 1999,
decreased $579,766 or 41.6%, from the same period in the prior year. The total
cost of goods sold includes $85,726 related to Broadband Internet services that
were not offered in 1998. The cost of goods sold related to network LAN/WAN
increased $284,208. There was a decrease of $949,528 in cost of goods sold for
hardware, software and peripherals due to the corresponding reduction in
revenues of $1,059,528.
The gross profit for the six months ended September 30, 1999, was
$77,274 or 8.7% of total revenue, compared to a gross profit of $203,414 or
12.7% of total revenue, for the same period in the prior year. The gross loss
for hardware, software and peripherals for the six months ended September 30,
1999, was 53.5%, compared to a gross profit of 3.8% in the six months ended
September 30, 1998. This decrease is the result of fixed costs and decreasing
revenues. The gross loss for network LAN/WAN was 20.9% for the six months ended
September 30, 1999, compared to a gross profit of 61.9% for the same period in
the prior year. The decrease in margin is the result of fixed costs and
increased salaries related to network LAN/WAN installations. The gross profit
for service, support and integration was 54.8% for the six months ended
September 30, 1999, compared to a gross profit of 6.2% for the six months ended
September 30, 1998. The increase is a result of increased revenues and lower
fixed costs associated with service contracts.
Selling, general and administrative expenses, excluding interest
expense, for the six months ended September 30, 1999, were $4,303,095 or 483.4%
of revenue, compared with $2,768,727 or 173.5% of revenue for the six months
ended September 30, 1998. This is an increase of $1,534,368 or 55.4%. Increases
in advertising and marketing account for $75,234. This increase is a direct
result of the Company's recent move into the Broadband Internet services market.
Increases in professional fees and consultants were $1,323,238. This increase is
a result of additional accounting fees, legal fees, printing fees, and other
fees associated with the move into the Broadband Internet services market. As
described in Note 4 to the consolidated financial statements, the Company has
accrued $525,000 representing 100,000 share of common stock potentially payable
to a consulting firm for settlement of a business obligation.
Interest expense for the six months ended September 30, 1999, was
$259,342 which includes amortization of debt issuance costs and debt discounts
in the amount of $131,068. Interest expense for the six months ended September
30, 1998, was $400,393 and includes discounts on senior convertible debt of
$371,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a critical need for additional working capital to meet
obligations under lease agreements with GTE relating to the GTE POP located in
our primary facility in Austin, Texas. Management believes that its relationship
with GTE has the potential to substantially increase revenue if sufficient
working capital is obtained.
As of September 30, 1999, MSI had a working capital deficit of
$1,115,537. This was a decrease of $634,399 from the working capital deficit of
$1,749,936 on March 31, 1999. Accounts payable and accrued expenses decreased as
a result of the private placement of our Series E preferred stock, the common
stock private placement that was completed during the six months ended September
30, 1999 and the bridge debt issuance. In addition, accounts receivable
decreased $222,693 during the six months ended September 30, 1999.
We used $4,270,325 and $2,404,194 in our operating activities for the
six month period ended September 30, 1999, and September 30, 1998, respectively.
This was mainly the result of losses of $4,485,163 and $2,965,706 for the six
month period ended September 30, 1999, and September 30, 1998, respectively. We
used $189,526 and $227,565 in investing activities for the six month period
ended September 30, 1999, and September 30, 1998, respectively. Our financing
activities for the six month ended September 30, 1999, and September 30, 1998,
provided $4,920,798 and $2,613,721, respectively, from the private placement of
our securities, the exercise of warrants, and the issuance of bridge debt.
11
<PAGE> 12
In April 1999, we paid our loans with Compass Bank, N.A. in full and
eliminated the borrowing under our fully secured line of credit. Net
stockholders' deficit as of March 31, 1999, was $521,313 and net stockholders'
deficit was $19,413 as of September 30, 1999.
In September and October 1999, we received $1,759,000 in bridge loans
from twenty accredited individuals. These promissory notes bear interest of
8 1/4% per annum and mature in March 2000 or upon consummation of a secondary
public offering, whichever is sooner. In connection with these loans, we also
include issued warrants to purchase an aggregate of 175,900 shares of our common
stock with an exercise price of $0.10 per share. The shares of common stock into
which these warrants are exercisable are "restricted" securities and are subject
to the provisions of Rule 144 under the Securities Act.
The auditors' reports relating to our audited balance sheets as of
March 31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended each
contain an explanatory paragraph as to our ability to continue as a going
concern. Such going concern explanation relates only to our financial statements
covered by the auditors' report.
Management is consulting with investment bankers concerning the
Company's additional financing alteratives.
12
<PAGE> 13
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 28, 1999, the Company was sued by its former President and its
former Chief Technology Officer seeking more than $50,000, excluding cost and
attorneys' fees. A settlement has been reached during mediation on September 20,
1999. Formal settlement documents have been executed by the parties in the
lawsuit. The terms of the settlement are confidential, but there was no material
adverse effect on the Company's results of operations or financial condition
from the settlement terms.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For a discussion of Changes in Securities and Use of Proceeds, refer to
Note 3, Stockholders' Equity, in the Notes to Consolidated Financial Statements
in Part I, Item 1.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
NEW DIRECTORS:
On August 26, 1999, Stephen J. Metzger was elected to the Board of
Directors of the Company. On October 8, 1999, Chris Brickler was elected to the
Board of Directors of the Company.
ADDITIONAL FACILITIES:
On October 29, 1999, the Company signed a lease for a second data center in
Dallas, Texas. The Company is also negotiating with landlords for additional
data center locations throughout the country to enable service offerings from
multiple locations to a broader customer base.
LEASE FINANCING:
In October 1999, the Company was approved for lease financing with Cisco
Systems. This financing will be used to purchase equipment for the data center
expansion plans of the Company.
LOCATION CHANGE OF CORPORATE OFFICE:
The Company has signed a lease relocating its corporate headquarters to
1121 East 7th Street, Austin, Texas 78702. The Company plans to move its
executive and administrative offices to the new location in December 1999.
CONNECTIVITY CONTRACTS:
During September 1999, the Company signed 3-year agreements with GTE
Internetworking for their Internet Advantage connectivity service for the cities
of Austin, Tampa, Philadelphia, Phoenix, Atlanta, and Denver. This will provide
the Company with direct connections to the GTE POP in each of the above cities
when the Company completes its construction of new data centers within those
cities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
Form 8-K filed with the Commission on August 10, 1999 with reference
to changes in registrants certifying accountants.
13
<PAGE> 14
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.
MSI HOLDINGS, INC.
Date: November 15, 1999 By: /s/ Robert Gibbs
------------------------------------
Robert Gibbs, President and
Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen J. Metzger Director November 15, 1999
- -----------------------------
Stephen J. Metzger
/s/ Davinder Sethi Director November 15, 1999
- -----------------------------
Davinder Sethi
/s/ Ernesto Chavarria Director November 15, 1999
- -----------------------------
Ernesto Chavarria
/s/ Blandina Cardenas Director November 15, 1999
- -----------------------------
Blandina Cardenas
/s/ Daniel Dornier Director November 15, 1999
- -----------------------------
Daniel Dornier
/s/ Humbert Powell, III Director November 15, 1999
- -----------------------------
Humbert Powell, III
/s/ Chris Brickler Director November 15, 1999
- -----------------------------
Chris Brickler
/s/ Robert Gibbs President and
- ----------------------------- Chief Executive
Robert Gibbs Officer November 15, 1999
/s/ Douglas W. Banister Chief Financial Officer November 15, 1999
- -----------------------------
Douglas W. Banister
/s/ Stephen Hoelscher Secretary, Controller November 15, 1999
- -----------------------------
Stephen Hoelscher
</TABLE>
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MSI
HOLDINGS, INC. FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 469,418
<SECURITIES> 0
<RECEIVABLES> 352,537
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,386,423
<PP&E> 2,805,347
<DEPRECIATION> 822,712
<TOTAL-ASSETS> 3,369,058
<CURRENT-LIABILITIES> 2,501,960
<BONDS> 0
0
381,630
<COMMON> 2,313,508
<OTHER-SE> (2,714,551)
<TOTAL-LIABILITY-AND-EQUITY> 3,369,058
<SALES> 890,003
<TOTAL-REVENUES> 890,003
<CGS> 812,729
<TOTAL-COSTS> 812,729
<OTHER-EXPENSES> 4,303,095
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259,342
<INCOME-PRETAX> (4,485,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,485,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,485,163)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
