<PAGE> 1
Filed Pursuant to Rule 424(b)(3) Registration No. 333-60051
PROSPECTUS SUPPLEMENT
(To Prospectus Dated January 13, 1999, as Amended)
MSI HOLDINGS, INC.
13,697,531 SHARES OF COMMON STOCK
This prospectus supplement includes the attached Quarterly Report on Form
10-QSB/A of MSI Holdings, Inc. for the quarter ended June 30, 1999, filed by us
with the Securities and Exchange Commission on November 12 1999, and relates to
the prospectus dated January 13, 1999, as amended on June 14, 1999, and November
18, 1999, covering the offer and sale of:
o 9,683,814 shares of our common stock held by some of our current
stockholders;
o 190,100 shares of our common stock that are issuable upon conversion
of our Series B and Series D convertible preferred stock;
o 2,550,000 shares of our common stock that are issuable upon the
exercise of some of our warrants;
o 698,020 shares of our common stock that are issuable upon the exercise
of some of our options; and
The remaining 575,597 shares of common stock which were registered with the
above have been removed from the Selling Shareholders table and are not covered
by this prospectus supplement. See "Selling Shareholder" and footnote 16
thereto, beginning on page 32 of the Prospectus, as amended on June 14, 1999.
This prospectus supplement should be read in conjunction with the
prospectus dated January 13, 1999, as amended on June 14, 1999, and November 18,
1999, which is to be delivered with this prospectus supplement. All capitalized
terms used but not defined in this prospectus supplement shall have the meanings
given them in the prospectus, as amended.
-----------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAVE APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of This Prospectus Supplement Is November 18, 1999
<PAGE> 2
The information in the table appearing on page 7 under the heading "The
Offering" in the prospectus is superseded by the information appearing in the
table below:
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by this Prospectus.............................13,697,531 shares(1)
Common Stock outstanding as of June 30, 1999 .......................22,650,212 shares(2)
OTC Electronic Bulletin Board Ticker Symbol.........................MSIA
</TABLE>
- ------------------
(1) As of the date of this prospectus supplement, this number represents the (i)
50 shares of Common Stock issuable upon conversion of 5 shares of Series B
Preferred; (ii) 4,899,950 shares of Common Stock issued upon conversion of
489,995 shares of Series B Preferred; (iii) 2,520,000 shares of Common Stock
issuable upon the exercise of Class A Warrants granted in conjunction with
Private Placement Phase I (as defined); (iv) 420,000 shares of Common Stock
issued upon the exercise of Class A Warrants granted in conjunction with the
Notes (as defined); (v) 400,000 shares of Common Stock issuable upon the
exercise of the Options issued in conjunction with the Notes; (vi) 10,286
shares of Common Stock issued representing the accrued interest on the
Notes; (vii) 990,570 shares of Common Stock issued upon conversion of 99,057
shares of Series C Preferred; (viii) 47,170 shares of Common Stock issuable
upon the exercise of Options granted in conjunction with Private Placement
Phase II (as defined); (ix) 190,050 shares of Common Stock issuable upon
conversion of 19,005 shares of Series D Preferred; (x) 2,606,520 shares of
Common Stock issued upon conversion of 260,652 shares of Series D Preferred;
(xi) 250,850 shares of Common Stock issuable upon the exercise of Options
granted in conjunction with Private Placement Phase III (as defined); (xii)
543,000 shares of Common Stock that were issuable upon satisfaction of a
note receivable payable in cash or certain intellectual property rights,
said Note having since been canceled and the underlying Subscription
Agreement rescinded, and said shares will not be issued as a result of the
cancellation and rescission; (xiii) 445,900 shares of Common Stock issued as
compensation to employees and consultants; (xiv) 30,000 shares of Common
Stock issuable upon the exercise of warrants granted to a consultant for
services rendered; (xv) 50,000 shares of Common Stock issued as dividends to
the Series B, C and D Preferred holders; and (xvi) 293,185 shares of Common
Stock previously disputed in litigation. See "Business -- Legal
Proceedings."
(2) Includes the following Common Stock offered by this Prospectus: (i)
4,899,950 shares of Common Stock issued upon conversion of 489,995 shares of
Series B Preferred; (ii) 420,000 shares of Common Stock issued upon exercise
of Class A Warrants granted in conjunction with the Notes ;(iii) 10,286
shares of Common Stock representing the unpaid accrued interest on the
Notes; (iv) 990,570 shares of Common Stock issued upon conversion of 99,057
shares of Series C Preferred; (v) 2,606,520 shares of Common Stock issued
upon conversion of 263,652 shares of Series D Preferred; (vi) 445,900 shares
of Common Stock issued as compensation to employees and consultants; (vii)
50,000 shares of Common Stock issued as dividends to the Holders of Series
B, C & D Preferred Shares; and (viii) 293,185 shares of Common Stock
previously disputed in litigation. See "Business -- Legal Proceedings."
The information contained on page 10 under the heading "Concentration of
Share Ownership" is supplemented by the following:
As of June 30, 1999, our executive officers and directors, as a group,
owned or controlled approximately 37.16% of our outstanding capital stock.
Messrs. Chavez, Kettrick and Munoz,
<PAGE> 3
the officers terminated on April 20, 1999, held an aggregate of 8,124,000 shares
or 35.87% of our outstanding shares of the Common Stock as of June 30, 1999.
These persons and entities will continue to exert significant influence over the
business and affairs of the Company.
The information contained on page 10 under the heading "Shares Eligible for
Future Sale" is superseded by the following:
Sales in the public market of substantial amounts of Common Stock
(including sales related to the exercise of certain registration rights relating
to the Common Stock) or the perception that such sales could occur might depress
the market price of the stock. As of June 30, 1999, we had 22,650,212 shares of
Common Stock issued and outstanding. If all the outstanding preferred shares
were converted into Common Stock as of June 30, 1999, and if all of the
outstanding options and warrants are exercised we would have had 28,650,166
shares of Common Stock issued and outstanding. Of these shares, 11,616,366
(40.55%) would have been eligible for future sale. The remaining 17,033,800
shares would have been subject to the Rule 144 restrictions on sales of
securities by affiliates of the issuer.
The information contained in the table on page 11 under the heading "Price
Range of Common Stock" is supplemented by the following:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
June 30, 1999.................................... 10.75 4.187
</TABLE>
The information contained in the table appearing on page 12 under the
heading "Capitalization" in the prospectus is superseded by the information
appearing in the table below:
CAPITALIZATION
The following table sets forth our debt and capitalization as of March 31,
1999. The table further reflects unaudited adjustments for subsequent events
through June 30, 1999, including: the conversion of 399,995 shares of Series B
Preferred; the conversion of 177,335 shares of Series D Preferred; the
conversion of 130,247 shares of Series E Preferred; the consummation of the sale
of 20,000 shares of Series E Preferred subscribed to in the last quarter of
fiscal year 1999; the sale of Common Stock in connection with the private
placement of up to 1,500,000 shares of Common Stock (the "Private Placement");
the issuance of 52,200 shares of Common Stock as compensation to consultants and
a former officer of ours; the return of 8,500 shares of Common Stock to
authorized but unissued shares and the issuance of 12,057 shares of Common Stock
as dividends on Preferred Stock as of June 30, 1999 (unaudited). The table
should be read in conjunction with the consolidated financial statements and
notes for the year ended March 31, 1999, on Form 10-KSB/A incorporated into this
Prospectus on November 18, 1999 and the consolidated financial statements and
notes for the quarter ended June 30, 1999, filed with the Commission on Form
10-QSB/A.
-3-
<PAGE> 4
<TABLE>
<CAPTION>
March 31, 1999 Adjustment(2) As Adjusted
-------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES
Long-term debt $ 53,505 ($ 11,281) $ 42,224
Obligations under capital leases 680,928 (13,481) 667,447
Deferred Rent 192,284 10,135 202,419
------------- ------------- -------------
$ 926,717 ($ 14,627) $ 912,090
============= ============= =============
SHAREHOLDERS' EQUITY (DEFICIT):
Series B 5% Cumulative Non-Voting
Preferred stock, $5.30 stated value,
490,000 authorized, 400,000 issued and
outstanding $ 2,120,000 $ (2,119,973) $ 27
Series D 6% Cumulative Non-Voting
Preferred stock, $10.60 stated value,
279,657 authorized, 196,340 issued and
outstanding 2,081,204 (1,879,751) 201,453
Series E 6% Cumulative Non-Voting
Preferred stock, $30.00 stated value,
157,500 authorized, 126,252 issued and
outstanding (excluding 20,000 shares
subscribed for) 3,787,560 (3,307,410) 480,150
Common Stock, $.10 par value,
50,000,000 shares authorized,
14,618,352 shares issued and
outstanding.(1) 1,461,835 803,186 2,265,021
Additional paid-in capital 11,982,324 10,519,371 24,665,369
Accumulated deficit (21,954,236) (2,186,133) (22,501,695)
------------- ------------- -------------
Total shareholders' equity (521,313) 1,829,290 1,307,977
------------- ------------- -------------
TOTAL CAPITALIZATION ($ 405,404) $ 1,814,663 $ 2,220,067
============= ============= =============
</TABLE>
(1) Shares reflected as issued and outstanding excludes 200,250 shares of Common
Stock held in treasury. As of March 31, 1999, the shares of Common Stock issued
and outstanding included the following Common Stock offered by this Prospectus:
(i) 900,000 shares of Common Stock issued upon conversion of 90,000 shares of
Series B Preferred; (ii) 420,000 shares of Common Stock issued upon conversion
of Class A Warrants granted in conjunction with the Notes; (iii) 10,286 shares
of Common Stock representing the unpaid accrued interest on the Notes; (iv)
990,570 shares of Common Stock issued upon conversion of 99,057 shares of Series
C Preferred; (v) 833,170 shares of Common Stock issued upon conversion of 83,317
shares of Series D Preferred; (vi) 445,900 shares of Common Stock issued as
compensation to employees and consultants; (vii) 50,000 shares of Common Stock
issued as dividends to the Holders of Series B, C & D Preferred Shares; and
(viii) 293,185 shares of Common Stock previously disputed in litigation. See
"Business -- Legal Proceedings."
(2) Includes: (1) the conversion of 399,995 shares of Series B Preferred into
3,999,950 shares of Common Stock; (2) the conversion of 177,335 shares of Series
D Preferred into 1,773,350 shares of Common Stock; (3) the issuance of an
additional 20,000 shares of Series E Preferred; (4) the conversion of 130,247
shares of Series E Preferred into 1,302,470 shares of Common Stock; (5) 900,333
shares of Common Stock sold through the Private Placement; (6) 52,200 shares of
Common Stock issued as compensation; (7) 12,057 shares of Common Stock issued as
dividends to the Holders of the Series B, D and E Preferred shares; and (8)
8,500 shares of Common Stock returned to authorized but unissued. An adjustment
for 743,250 shares of Common Stock returned to authorized but unissued was
previously recorded and reflected in the Capitalization Table as of March 31,
1999.
<PAGE> 5
The information contained on page 24 under the heading "Business - Legal
Proceedings" is supplemented by the following:
We have agreed to settle lawsuits related to our relationship with a former
consultant, Kenneth O'Neal (O'Neal) and a firm which he controls, Argus
Management, Inc. (Argus). On December 18, 1997, Argus filed a lawsuit in Kerr
County, Texas, 216th Judicial District, to collect on two promissory notes in
the aggregate principal amount of $200,000. We vigorously defended this lawsuit
and filed a related suit against O'Neal and Argus in Travis County, Texas on
February 6, 1998, alleging fraud, usury in connection with the promissory notes,
and seeking an order from the Court demanding that Argus transfer 293,185 shares
of our common stock, held by Argus, to various stockholders who have previously
purchased such shares (the Argus Related Shares). The agreed upon settlement
provides that Argus return 200,250 shares of our common stock to us, that we
tender $250,000 to Argus and that we issue the balance of 92,935 shares of
common stock as restricted shares. The parties have agreed to cancel the two
promissory notes from us to Argus and release all other claims among the
parties.
In July 1999, we were sued by our former president and 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 are being prepared for execution by the parties to the lawsuit. The
terms of the settlement are confidential, but we believe that the performance of
our obligations under the settlement agreement will not have a material adverse
effect on the Company's results of operations or financial condition.
The information contained in the table on page 24 under the heading
"Management - Executive Officers and Directors" is superseded by the following:
As of October 30, 1999, MSHI's current executive officers and directors,
their ages, titles and tenure are:
<TABLE>
<CAPTION>
PERIOD FROM
NAME AGE POSITION WHICH SERVED
---- --- -------- ------------
<S> <C> <C> <C>
Robert J. Gibbs 44 President, Chief Executive Officer, and Director June 14, 1999
Dr. Robert Frank 48 Executive Vice President and Chief Operating August 9, 1999
Officer
Douglas W. Banister 37 Vice President and Chief Financial Officer August 9, 1999
Glenn Birk 30 Vice President of Sales February 22, 1999
Gary Fortin 37 Vice President of Marketing August 9, 1999
Stephen Hoelscher 40 Secretary and Chief Accounting Officer April 20, 1999
Robert Hersch 32 Vice President of Corporate Finance August 9, 1999
Patricia V. Hrabina 50 Vice President of Human Resources August 9, 1999
Cliff Luckey 40 Vice President and Chief Technology Officer August 9, 1999
Chris Brickler 28 Director October 8, 1999
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
Blandina Cardenas(1) 43 Director February 16, 1998
Ernesto M. Chavarria(1) 43 Director February 16, 1998
Daniel Dornier(1) 36 Director July 21, 1998
Steve Metzger(2) 47 Director August 26, 1999
Humbert Powell, III(2) 61 Director August 9, 1999
Dr. Davinder Sethi(2) 52 Director August 9, 1999
</TABLE>
(1) Member of the audit committee.
(2) Member of the compensation committee
The Company has no knowledge of any arrangement or understanding in
existence between any executive officer named above and any other person
pursuant to which any such executive officer was or is to be elected to such
office or offices. All officers of the Company serve at the pleasure of the
Board of Directors. All Officers of the Company will hold office until the next
annual meeting of the Stockholders of the Company.
The information contained on page 25 under the heading "Management -
Biographical Information" is superseded by the following:
Robert J. Gibbs joined the Company in June 1999 as President and Chief
Executive Officer. From 1997 to 1999, Mr. Gibbs founded and served as a
consultant with Sigma Solutions Group, which provides executive management
services for high tech startup companies. From 1990 to 1997, Mr. Gibbs served as
President, Executive Vice President and Chief Financial Officer of Uniden
America Corporation, a wireless products and services company. He received a
Bachelor of Science in Finance from the University of Colorado and received a
Master of Business Administration from Southern Methodist University.
Dr. Robert Frank, Executive Vice President and Chief Operating Officer,
joined the Company in August 1999. From 1993 to 1998, Dr. Frank founded and
managed CORSEARCH, Inc., a trademark research firm. He serves as a member of the
Board of Governors for the Brand Names Education Foundation and a member of the
University of Missouri Development Council. He received his Doctorate from the
University of Missouri-Columbia.
Douglas W. Banister, Vice President of Finance and Chief Financial Officer,
joined the Company in June 1999. From 1990 to 1999, Mr. Banister served as
Accounting Manager, Vice President and Chief Financial Officer of Uniden America
Corporation. From 1987 to 1990, Mr. Banister served as Controller for D.R.
Horton Custom Homes, a national home builder. From 1983 to 1987, he served as a
Senior Auditor with Ernst & Young, L.L.P. in its audit department. He received a
Bachelor of Business Administration in Accounting from Texas Wesleyan
University. He has been a Certified Public Accountant since 1986.
Glenn Birk joined the Company in February 1999 as Vice President of Sales.
From 1997 to 1999, Mr. Birk served as an Account Executive with GTE/BBN. From
1996 to 1997, he served as an Account Executive with Lawson Software. From 1994
to 1996, he served as an Account Executive with AT&T Corp. From 1990 to 1994, he
served as an Account Executive with NCR Comten. He received a Bachelor of
Business Administration in Marketing from the University of Texas at Austin.
<PAGE> 7
Gary Fortin, Vice President of Marketing, joined the Company in September
1998. In 1998, he was an Account Executive with GTE Communications Corporation.
In 1997, he was a Digital Network Account Executive with AT&T Corp. For the
previous ten years, Mr. Fortin was a principal in Team Alpha Marketing and
Photografique Productions. Mr. Fortin received a Bachelor of Arts degree in
Marketing from the University of Maryland.
Stephen Hoelscher, CPA, Secretary, and Chief Accounting Officer, has 18
years of accounting and auditing experience. Mr. Hoelscher has served as MSHI's
Controller since 1997. Prior to joining the Company, Mr. Hoelscher was the
Controller for Protos Software Company in Georgetown, Texas for two years. Mr.
Hoelscher was an Audit Manager with Brown, Graham and Company, P.C. for the
seven years immediately preceding his time at Protos. His background includes
work with public companies, banks, and government entities. His responsibilities
include managing the accounting department, establishing banking and external
audit relationships, and meeting SEC requirements. Mr. Hoelscher received a
Bachelors of Business Administration in Accounting from West Texas A&M
University (formerly West Texas State University) in Canyon, Texas in 1981.
Robert Hersch, Vice President of Corporate Finance, joined the Company in
August 1999. From 1996 to 1999, he was an independent consultant in the areas of
corporate finance, investor relations, and mergers and acquisitions. From 1994
to 1996, he was Chief Accounting Officer, Executive Vice President, and a
Director of American Bingo & Gaming Corp.
Patricia V. Hrabina, Vice President of Human Resources, joined the Company
in July 1999. From 1998 to 1999, Ms. Hrabina was an independent consultant. From
1997 to 1998, Ms. Hrabina was the Vice President of Human Resources for AMBAC
Connect, Inc. From 1988 to 1997, Ms. Hrabina was the Vice President of Human
Resources of Prime II Management, Inc. She received a Bachelor of Business
Administration degree from the University of St. Thomas in Houston, Texas.
Cliff Luckey, Vice President of Technology and Solutions and Chief
Technology Officer, joined the Company in August 1999. From 1996 to 1999, Mr.
Luckey served as Director of GTE's Enterprise Management Center, which provided
applications resolution support, network management and network design. From
1995 to 1996, Mr. Luckey was a Staff Manager managing engineers for Motorola.
Mr. Luckey received his technological training as a Hawk Missile Engineer from
the United States Army Air Defense School.
Chris Brickler has been a director of the Company since October 8, 1999.
Since December 1998, Mr. Brickler has served as Vice-President - Marketing, BT
Global Business Markets based in London. From 1994 through 1998, Mr. Brickler
served in various positions with GTE, where he led many aspects of the
development of Internet technology within GTE and the industry. Mr. Brickler
holds a B.B.A. in Marketing from the University of Texas at Austin.
Blandina Cardenas has been a Director of the Company since November 1997.
Since 1995, Dr. Cardenas has been an Associate Professor of Education Leadership
at the University of Texas at San Antonio. From 1992 to 1995, she was a
Professor at Southwest Texas State University. She received a Doctorate in
Educational Leadership from the University of Massachusetts at Amherst and a
Bachelor in Journalism from the University of Texas at Austin.
<PAGE> 8
Ernesto M. Chavarria has been a director of the Company since November
1997. Mr. Chavarria has been with ITBR, Inc., an international consulting
company, since 1978 and has served as its President since 1990.
Daniel Dornier has been a director of the Company since July 1998. Since
1995, Mr. Dornier has been the president of Dornier Capital Advisers, an
investment-portfolio management company. From 1993 and 1995, Mr. Dornier was a
private investment manager for various companies owned by the Dornier family.
From 1991 to 1993, he was an investment banker at SBC Warburg, Dillon, Reed. He
received a Master of Business Administration from the City University of
Bellevue, Washington (the Zurich, Switzerland campus). He received a Bachelor of
Business Administration degree from the University of Nuertingen, Germany.
Stephen J. Metzger has been a director of the Company since August 1999.
From 1998 to 1999, he was the chief executive officer of Waller Creek
Communications, an Austin, Texas based competitive local exchange carrier. From
1994 to present, Mr. Metzger founded and manages Manchester International
Incorporated, a company which provides interim management, strategy, business
development, specialized training and investment consulting to
telecommunications carriers, computer companies and network equipment providers.
From 1991 to 1993, Mr. Metzger was president and chief executive officer of
NetCommand, a consulting firm specializing in the development of Internet
services, EDI and electronic commerce strategy, products and organizations for
global corporations, international carriers and value added networks.
Humbert Powell has been a director of the Company since August 1999. Since
1997, he has been a Managing Director of Sanders Morris Mundy, a NASD-member
investment banking firm. From 1995 to 1997, Mr. Powell was Vice Chairman and
Director of Marleau, Lemire, Securities, Inc. and Chairman of the Board of
Marleau, Lemire USA. From 1988 through February 1995, Mr. Powell served as a
Senior Managing Director in the Corporate Finance Department of Bear Stearns &
Co. Mr. Powell currently serves as a director for Bikers Dream Inc., Evolve,
Lawman Corp., Millennium Vue Inc. and Osicom Technologies Inc., and as a trustee
of Salem-Teikyo University. Mr. Powell received degrees in Business and
Economics from the University of Florida and Salem University.
Dr. Davinder Sethi has been a Director of the Company since August 1999.
Since 1996, he has been an independent advisor and investor in the fields of
information technologies and finance. From 1990 to 1996, he served as Director
and Senior Advisor to Barclays de Zoete Wedd. Dr. Sethi currently serves as a
director of Pamet Systems, Inc., where he also serves on the Audit and
Compensation Committees. Dr. Sethi received a Doctorate and a Master degree in
Operations Research, Economics and Statistics from the University of California
at Berkeley and is a graduate of the Executive Management Program from
Pennsylvania State University.
<PAGE> 9
The information contained on page 26 under the heading "Management - Recent
Changes" is supplemented by the following:
In June 1999, we hired Robert Gibbs, our President and Chief Executive
Officer, and Douglas W. Banister, our Chief Financial Officer and Vice President
of Finance. In July 1999, Roger M. Lane, our previous Chief Operating Officer
was terminated, and we hired Patricia Hrabina, our Vice President of Human
Resources. In August 1999, we hired Cliff Luckey, our Chief Technology Officer
and Vice President of Technology and Solutions, Robert Frank, our Chief
Operating Officer and Executive Vice President, and Robert Hersch, our Vice
President of Corporate Finance. This new management team has not had the
opportunity to work together in the past and there is no assurance they will be
able to successfully lead the company into profitability.
On August 9, 1999, our shareholders voted to and did thereby elect Ernesto
M. Chavarria, Blandina Cardenas, Daniel Dornier, Robert J. Gibbs, Humbert
Powell, III, and Davinder Sethi to the Board of Directors. Jose Chavez, Mitchell
Kettrick and Jon J. King did not stand for re-election. The information
contained in our Definitive Proxy Statement filed with the SEC on Form DEF 14A
on July 8, 1999, is hereby incorporated by reference. On August 26, 1999,
Stephen J. Metzger was elected to the Board to fill a vacancy.
The information contained in the table appearing on page 30 under the
heading "Principal Shareholders" in the prospectus is supplemented by the
information appearing in the table below:
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1999, by (i) each person
who is known by the Company to own beneficially more than five percent (5%) of
the Company's Common Stock, (ii) each director of the Company, (iii) each Named
Executive, and (iv) all directors and officers of the Company as a group. The
tabulation further reflects an adjustment divesting Jose Chavez, one of our
former officers and directors, of 3,562,500 shares of Common Stock pursuant to
the settlement agreement between the parties in the matter of Andrew Ramirez
versus Jose Chavez. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have investment and voting power with respect to such
shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF PERCENT OF PERCENT OF
SHARES OUTSTANDING FULLY DILUTED
SHARES(1) SHARES(2)
========================================= ================= ====================== ======================
<S> <C> <C> <C>
Glenn Birk(3) 1,500 0.01% 0.01%
501 Waller Street
Austin, Texas 78702
Blandina Cardenas(3) 5,000 0.02% 0.02%
501 Waller Street
Austin, Texas 78702
Ernesto Chavarria(3)(4) 150,000 0.33% 0.52%
501 Waller Street
Austin, Texas 78702
Jose Chavez(5) 3,112,500 13.30% 10.86%
8021 Bottle Brush
Austin, Texas 78750
</TABLE>
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
Daniel Dornier(6) 340,000 1.50% 1.19%
501 Waller Street
Austin, Texas 78702
Entrepreneurial Investors Ltd.(7) 8,266,221 25.90% 28.85%
P.O. Box 40643
Freeport, G.B., Bahamas
Stephen Hoelscher (8) 22,000 0.10% 0.08%
501 Waller Street
Austin, Texas 78702
Mitchell Kettrick(9) 1,475,000 6.29% 5.15%
210 N. Park St.
Brenham, Texas 77833
Andrew Reyes Ramirez(10) 3,562,500 15.73% 12.43%
40 North IH 35, TH-6
Austin, Texas 78701
All Directors and 5,104,500 21.54% 17.82%
Officers as a Group(11)
</TABLE>
(1) Calculations are based on 22,650,212 outstanding shares of Common Stock
as of June 30, 1999. All common shares held by the Officers and Directors
listed above are "restricted securities" and as such are subject to
limitations on resale. The shares held by the officers and directors may be
sold pursuant to Rule 144 under certain circumstances, subject to certain
LockUp Agreements. See "Shares Eligible for Future Sale - Lock-Up
Agreements."
(2) Assumes conversion of all options and warrants held by the above named
group. Calculations of fully diluted ownership are based on 28,650,166
shares of Common Stock which would be issued and outstanding if all of the
Series B, Series C, Series D, and Series E Preferred shares were converted,
all the of the Warrants and Options outstanding as of June 30, 1999 were
exercised.
(3) These directors are the beneficial owners of shares issued as
additional compensation. The outstanding shares reflected are contained
within the shares being registered hereunder. These officers and directors
are included in this table for disclosure purposes only.
(4) Includes 75,000 shares of Common Stock outstanding and 75,000 shares
issuable upon the exercise of options granted to ITBR, Inc., a consulting
company controlled by Mr. Chavarria, for services rendered.
(5) Includes 3,012,500 shares of Common Stock outstanding and 100,000
shares of Common Stock issuable upon exercise of Mr. Chavez's Options.
(6) Includes 339,950 shares of Common Stock, 79,950 of which were issued
upon the conversion of 7,995 shares of Series E Preferred, and 50 shares
issuable upon conversion of 5 Shares of Series E Preferred.
(7) Entrepreneurial Investors, Ltd.("EIL") is the beneficial owner of an
aggregate of 8,266,221 shares of Common Stock consisting of: (i) 943,400
shares of Common Stock issued upon conversion of 94,340 shares of Series C
Preferred, (ii) 4,943,300 shares of Common Stock issued upon conversion of
399,995 shares of Series B and 94,335 shares of Series D Preferred, (iii)
100 shares of Common Stock issuable upon conversion of 5 shares of Series B
<PAGE> 11
and 5 shares of Series D Preferred, (iv) 2,400,000 shares of Common Stock
issuable upon the exercise of Class A Warrants granted in conjunction with
the Private Placement Phase I, and (v) 56,521 shares of Common Stock issued
as dividends on the Series B, C, and D Preferred, less (vi) 77,100 shares
transferred to Global Securities Company in the first quarter of our fiscal
year 2000.
(8) Includes 19,000 shares of Common Stock held by Mr. Hoelscher and 3,000
shares of Common Stock held by Mr. Hoelscher's three children, 1,000 shares
each.
(9) Includes 1,425,000 shares of Common Stock outstanding and 50,000 shares
of Common Stock issuable upon the exercise of Mr. Kettrick's Options.
(10) Includes 3,562,500 shares of Common Stock divested from Jose Chavez
and vested in Mr. Ramirez pursuant to the parties' settlement of Ramirez v.
Chavez. See "Business - Legal Proceedings."
(11) Includes 4,879,450 shares of Common Stock outstanding, 50 shares of
Common Stock issuable upon the conversion of 5 shares of the Series E
Preferred held by Mr. Dornier, 100,000 shares of Common Stock issuable upon
exercise of Mr. Chavez's Options, 50,000 shares of Common Stock issuable
upon exercise of Mr. Kettrick's Options and 75,000 shares of Common Stock
issuable upon the exercise of Options granted to Ernesto Chavarria.
The information contained in footnote 16, and the text associated
therewith, of the table appearing on pages 32 through 35 under the heading
"Selling Shareholders" in the prospectus is superseded by the following:
<TABLE>
<CAPTION>
RELATION
NAME TO MSHI TOTAL SHARES PERCENT(+)
- ---- ------- ------------ ----------
<S> <C>
Adjustments(16) 575,597
</TABLE>
(16) This number includes 575,600 shares of Common Stock previously registered
but no longer included in the Selling Shareholders table, including: (i) 543,000
shares of Common Stock that were issuable upon satisfaction of a note receivable
payable in cash or certain intellectual property rights, said Note having since
been canceled and the underlying Subscription Agreement rescinded, See Note 10
to the financial statements; (ii) 9,600 shares of Common Stock issued to Laura
Chavez; (iii) 3,500 shares of Common Stock issued to Tammie Delaney; (iv) 12,000
shares of Common Stock issued to Katina Kettrick; and (v) 7,500 shares of Common
Stock issued to Lilia I. Mena. This number further reflects an adjustment of
three (3) shares which were included in the "Selling Shareholder" table due to a
rounding error at the time of the initial filing in the 50,000 shares of Common
Stock issuable as dividends to the Series B, C and D Preferred Holders.
<PAGE> 12
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB/A
[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 JUNE 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. [ ]
As of June 30, 1999 the Registrant had 22,650,212 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one): Yes (X) NO ( )
- --------------------------------------------------------------------------------
<PAGE> 13
MSI HOLDINGS, INC.
FORM 10-QSB/A
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
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 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults on Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Matters 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE PAGE 13
</TABLE>
2
<PAGE> 14
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MSI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS June 30,
Current assets 1999
------------
(restated)
<S> <C>
Cash $ 385,132
Accounts receivable - trade 403,169
Inventory 14,742
Other receivables - advances 78,377
Other current assets 57,516
------------
Total current assets 938,936
Property, plant, and equipment, net 2,047,785
------------
TOTAL ASSETS $ 2,986,721
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 309,748
Other accrued expenses 141,442
Current maturities of notes payable 196,728
Current portion of obligations under capital leases 118,736
------------
Total current liabilities 766,654
Long-term liabilities
Notes payable 42,224
Obligations under capital leases 667,447
Deferred rent 202,419
------------
Total long-term liabilities 912,090
Commitments and contingencies --
------------
Total liabilities 1,678,744
------------
Stockholders' equity
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,
16,005 shares issued and outstanding 480,150
Common stock at $.10 par value; 50,000,000 authorized, 22,650,212
shares (excluding 200,250 shares held in treasury) issued and outstanding 2,265,021
Additional paid-in capital 22,501,695
Accumulated deficit (24,140,369)
------------
Total stockholders' equity 1,307,977
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,986,721
============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 15
MSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenues: (restated)
Hardware, software and peripherals $ 120,287 $ 503,632
Networks, LAN/WAN 58,990 23,898
Service, support and integration 260,789 74,099
Broadband Internet services 9,077 --
------------ ------------
449,143 601,629
------------ ------------
Cost of Goods Sold:
Hardware, software and peripherals 185,912 419,204
Networks, LAN/WAN 194,482 17,207
Service, support and integration 81,386 64,735
Broadband Internet services 45,666 --
------------ ------------
507,446 501,146
------------ ------------
Gross margin (58,303) 100,483
------------ ------------
Selling, General and Administrative Expenses:
Salaries and benefits 696,214 668,933
Professional fees and consultants 414,497 295,442
Occupancy 94,560 89,679
Depreciation and amortization 97,586 52,991
Vehicle expense 7,229 34,610
Other Expense 100,176 99,375
------------ ------------
Total Selling, General and Administrative Expenses 1,410,262 1,241,030
Interest expense, net 48,556 391,636
------------ ------------
Net Loss $ (1,517,121) $ (1,532,183)
============ ============
Preferred stock dividends and discounts (669,013) (4,005,641)
------------ ------------
Net loss to Common stockholders $ (2,186,134) $ (5,537,824)
============ ============
Basic and diluted net loss per share $ (0.12) $ (0.48)
============ ============
Basic and diluted weighted average shares outstanding 18,453,956 11,507,002
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 16
MSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998
----------- -----------
Cash flows from operating activities: (restated)
<S> <C> <C>
Net loss $(1,517,121) $(1,532,183)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization expense 97,586 52,991
Amortization of debt discount -- 371,000
Amortization of deferred rent 10,135 --
Common stock and options issued for compensation -- 109,500
Changes in operating assets and liabilities:
Accounts receivable - trade 172,062 (154,314)
Inventory (14,742) 99,451
Other receivables - advances 1,322 (91,140)
Accounts payable - trade (1,463,463) (110,797)
Other accrued expenses (2,043) 37,037
----------- -----------
Net cash used in operating activities (2,716,264) (1,218,455)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant, and equipment (117,716) (193,071)
Proceeds from sales leaseback transaction 127,685 --
----------- -----------
Net cash used in investing activities 9,969 (193,071)
----------- -----------
Cash flows from financing activities:
Payments on bank line of credit (200,000) (158,966)
Payments on notes payable (49,973) (170,900)
Payments on obligations under capital leases (13,481) (22,404)
Proceeds - private placement of preferred stock 526,800 1,746,094
Proceeds - issuance of restricted common stock 2,819,610 --
----------- -----------
Net cash provided by financing activities 3,082,956 1,393,824
----------- -----------
NET CHANGE IN CASH 376,661 (17,702)
CASH AT BEGINNING OF PERIOD 8,471 25,786
=========== ===========
CASH AT END OF PERIOD $ 385,132 $ 8,084
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 17
MSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998
---------- ----------
<S> <C> <C>
Supplemental disclosure: (restated)
Cash paid during the year for:
Interest $ 44,491 $ 20,636
Supplemental schedule of non-cash investing and financing activities: Preferred
stock issued for :
Placement agent fees $ -- $ 100,350
Stock options or warrants issued for:
Placement agent fees -- 539,619
Common stock issued for:
Preferred stock dividends 69,013 66,743
Discount on preferred stock issued 600,000 3,938,898
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 18
MSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
JUNE 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. 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 $1,517,121 for the three months ended June 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
improvements.
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. From
April through July 15, 1999, the Company received approximately $3.2 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 three months ended June
30, 1999. 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. In the first quarter of
fiscal year 2000, the Company established an affiliation with Southwestern Bell
as a Digital Subscriber Line ("xDSL") service reseller which will foster 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:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. The Company adopted SFAS No. 130 during 1998.
There was no impact to the Company as a result of the adoption of SFAS No. 130,
as there were no differences between net loss and comprehensive loss for the
periods presented.
NOTE 2 - BANK LINE OF CREDIT
The Company had a secured line of credit agreement with a bank which was paid in
full at April 30, 1999 and was not renewed.
NOTE 3 - NOTES PAYABLE
The Company was out of compliance with debt covenants on certain notes payable
as of June 30, 1999. Amounts outstanding related to these notes have been
classified as current liabilities.
NOTE 4 - STOCKHOLDERS' EQUITY
During the three months ended June 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> 19
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 quarter ended June 30, 1999, 399,995 shares of Series B, 177,335
shares of Series D, and 130,247 shares of Series E Preferred Stock were
collectively converted to 7,075,770 shares of Common Stock.
During the quarter ended June 30, 1999, the Company issued 944,033 shares of
common stock in a private placement resulting in net proceeds of $2,819,610. The
Company paid $115,000 in cash and issued 15,000 shares of common stock for
payment of commission fees of the private placement.
During the quarter ended June 30, 1999, 12,057 shares of common stock were
issued as preferred stock dividends and were recorded as a reduction of retained
earnings in the amount of $69,013.
NOTE 5 - RESTATEMENT OF EARNINGS
The Company has restated earnings for the period ended June 30, 1999 primarily
to effect for the limitation of dividend recognition related to the beneficial
conversion features on the convertible preferred stock issuances. Previously,
the Company did not limit the recognition of a discount and the related dividend
to the proceeds raised in the issuance. The following table shows the restated
results of operations for the period compared to previously reported results:
<TABLE>
<CAPTION>
As Restated Previously Reported
-------------- -----------------------
<S> <C> <C>
Net loss $ (1,517,121) $ (1,799,857)
Preferred stock dividends and discounts (669,013) (69,013)
Net loss applicable to common stockholders (2,186,134) (1,868,870)
Basic and diluted net loss per share (0.12) (0.09)
</TABLE>
NOTE 6 - CONTINGENCIES AND LEGAL MATTERS
During the year ended March 31, 1999, the Company incurred a 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. As
of September 28, 1999, no compromise of this claim has been reached.
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to June 30, 1999, an additional 8,000 shares of the Company's Series
E Preferred Stock were converted into 80,000 shares of the Company's Common
Stock.
On July 28, 1999, the Company was sued by its former President seeking more than
$50,000, excluding costs and attorneys' fees. A settlement was reached during
mediation on September 20, 1999. Formal settlement documents are being prepared
for execution by the parties to the lawsuit. The terms of settlement are
confidential, but there is no material adverse effect on the Company's results
of operations or financial condition from the settlement terms.
On August 9, 1999, the stockholders approved an amendment to the 1998 Stock
Option Plan to increase the number of common shares reserved for future issuance
from 1,500,000 to 4,500,000 shares.
On August 9, 1999, the stockholders approved the Non-Employee Directors Stock
Option Plan. The Plan provides for the grant of nonqualified options, as defined
by the Internal Revenue Code, to directors who are not employees of the Company.
8
<PAGE> 20
In September 1999, we received $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 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.
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
Quarter Ended June 30, 1999, compared with the Quarter Ended June 30, 1998:
Comparison Table
<TABLE>
<CAPTION>
HARDWARE
SOFTWARE SERVICE,
BROADBAND AND NETWORKS SUPPORT AND
INTERNET PERIPHERALS LAN/WAN INTEGRATION TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, 1999
Revenues $ 9,077 $ 120,287 $ 58,990 $ 260,789 $ 449,143
Cost of goods sold 45,666 185,912 194,482 81,386 507,446
Gross profit (loss)($) (36,589) (65,625) (135,492) 179,403 (58,303)
Gross profit (loss)(%) (403.10) (54.6) (229.7) 68.8 (13.0)
QUARTER ENDED JUNE 30, 1998
Revenues $ -- $ 503,632 $ 23,898 $ 74,099 $ 601,629
Cost of goods sold -- 419,204 17,207 64,735 501,146
Gross profit (loss)($) -- 84,428 6,691 9,364 100,483
Gross profit (loss)(%) -- 16.8 28.0 12.6 16.7
INCREASE/(DECREASE)
Revenues $ 9,077 $ (383,345) $ 35,092 $ 186,690 $ (152,486)
Cost of goods sold 45,666 (233,292) 177,275 16,651 6,300
Gross profit (loss)($) (36,589) (150,053) (142,183) 170,039 (158,786)
Gross profit (loss)(%) (403.1) (71.4) (257.7) 56.2 (29.7)
</TABLE>
9
<PAGE> 21
Total revenues for the quarter ended June 30, 1999, decreased $152,486,
or 25.3%, from the total revenues recorded for the same period in the prior
year. This was caused by a decrease of $383,345 in hardware, software and
peripherals revenue, which was partially offset by increases in revenues from
network LAN/ WAN and service, support and integration, and the addition of
broadband Internet services. The revenue from broadband Internet services was
$9,077 and only represents revenues from the initiation of the service in late
June 1999 through the end of the quarter. 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 $35,092 in
network LAN/ WAN revenues was due to normal fluctuations in installation
projects that were in place during each period. The $186,690 increase in
service, support and integration revenues is due to increased activity on our
service contract with Siemens Nixdorf.
Cost of goods sold for the quarter ended June 30, 1999, increased
$6,300, or 1.3%, from the same period in the prior year. The total cost of goods
sold includes $45,666 related to broadband Internet services that were not
offered in 1998. The cost of goods sold related to network LAN/ WAN increased
$177,275, and the cost of goods sold related to service, support, and
integration increased $16,651. There was a decrease of $233,292 in cost of goods
sold for hardware, software and peripherals due to the corresponding reduction
in revenues.
The gross margin for the quarter ended June 30, 1999, was ($58,303), or
(13.0%) of total revenue, compared to a gross margin of $100,483, or 16.7% of
total revenue, for the same period in the prior year. The gross margin for
hardware, software and peripherals for the quarter ended June 30, 1999, was
(54.6%), compared to a gross margin of 16.8% in the quarter ended June 30, 1998.
This 71.4% decrease is the result of fixed costs and decreasing revenue. In
addition, profits are decreasing due to price declines, competitive bidding and
other industry conditions. The gross margin for network LAN/WAN was (229.7%) for
the quarter ended June 30, 1999, compared to a gross margin of 28.0% for the
same period in the prior year. The decrease in margin of 257.7% is the result of
fixed costs and increased salaries related to network LAN/WAN installations. The
gross margin for service, support and integration was 68.8% for the quarter
ended June 30, 1999, compared to a gross margin of 12.6% for the quarter ended
June 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 quarter ended June 30, 1999, were $1,410,262 or 314.0% of
revenue, compared with $1,241,030, or 206.3% of revenue for the quarter ended
June 30, 1998. This is an increase of $169,232, or 13.6%. Increases in salaries
and benefits account for $27,281. Staff additions include technical, sales and
accounting staff and project management personnel. Additional personnel were
required to enable the Company to enter the broadband Internet services market.
Depreciation and amortization expense increased $44,595. This increase was due
to the first full quarter of depreciation expense being recorded on equipment
acquired for the build-out of data center at our Austin, Texas facility.
Increases in professional fees and consultants were $119,055.
Interest expense for the quarter ended June 30, 1999, was $48,556,
which was 10.8% of revenues. Interest expense for the quarter ended June 30,
1998, was $391,636, which was 65.1% of revenues. Interest expense decreased
$343,080 from 1998 to 1999, which was due to a discount charge in 1998 to
interest for senior convertible debt issued for cash.
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 June 30, 1999, MSI had working capital of $172,282. This was an
increase of $1,922,218 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 and the common stock private
placement during the quarter. In addition, accounts receivable decreased
$172,061 during the quarter ended June 30, 1999. As of June 30, 1999, we were
more than 30 days past due on approximately $170,000 of accounts payable trade.
We used $2,716,264 and $1,218,455 in our operating activities for the
three month period ended June 30, 1999 and June 30, 1998, respectively. This was
mainly the result of losses of $1,517,121 and $1,532,183 for the three month
period ended June 30, 1999 and June 30, 1998, respectively. We provided $9,969
and used $193,071 in investing activities for the three month period ended June
30, 1999 and June 30, 1998, respectively. Our financing activities for the three
month period ended June 30, 1999 and June 30, 1998, provided $3,082,956 and
$1,393,824, respectively, from the private placement of our securities.
10
<PAGE> 22
Subsequent to March 31, 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'
equity was $1,307,977 as of June 30, 1999. During the year ended March 31, 1999,
we completed three phases of the Series D preferred stock private placement and
the Series E preferred stock private placement. Receipt of these funds enabled
us to purchase property, plant, and equipment, retire debt, decrease past due
accounts payable and pay for operating expenses.
In September 1999, we received $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 the consummation of a secondary public
offering, whichever is sooner. In connection with these loans, we also issued
warrants to purchase an aggregate of 125,000 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.
Management is consulting with investment bankers and plans a private
placement or secondary public offering in the near future.
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 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.
We believe that funds generated from operations and the net proceeds of
a proposed offering will be sufficient to finance our current and anticipated
operations for at least 12 months after a proposed offering. Our long-term
capital requirements beyond this proposed period will depend on numerous
factors, including, but not limited to, the following:
o The rate of market acceptance of our products and services
o The ability to expand our customer base
o The level of expenditures for sales and marketing and other factors
If the funds from a proposed offering and our revenues are insufficient
to fund the activities in the short or long term, we would need to raise
additional funds by incurring debt or through public or private offerings of our
stock. We may not be able to do either on terms favorable to us, if at all.
11
<PAGE> 23
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 28, 1999, the Company was sued by its former President and
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 are being prepared for execution by the
parties to the lawsuit. The terms of settlement are confidential, but there is
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 4, 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
On April 20, 1999, Jose Chavez, President & CEO, Mitchell Kettrick,
Secretary, and Jaime Munoz, Vice-President of Operations, respectively, were
terminated.
Robert Gibbs joined the company as President and Chief Executive
Officer in June 1999. In July 1999, Roger M. Lane, Chief Operating Officer, was
terminated from the Company. In addition, Patricia Hrabina, Vice President of
Human Resources, Cliff Luckey, Vice President of Technology & Solutions, and
Robert Frank, Executive Vice President of New Business Development were hired
subsequent to June 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Registrant filed no Reports on Form 8-K during the quarter covered
by this Report on Form 10-QSB.
12
<PAGE> 24
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 12, 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 12, 1999
Stephen J. Metzger
/s/ Davinder Sethi
- ------------------------- Director November 12, 1999
Davinder Sethi
/s/ Ernesto Chavarria
- ------------------------- Director November 12, 1999
Ernesto Chavarria
/s/ Blandina Cardenas
- ------------------------- Director November 12, 1999
Blandina Cardenas
/s/ Daniel Dornier
- ------------------------- Director November 12, 1999
Daniel Dornier
/s/ Humbert Powell, III
- ------------------------- Director November 12, 1999
Humbert Powell, III
/s/ Robert Gibbs President and
- ------------------------- Chief Executive Officer November 12, 1999
Robert Gibbs
/s/ Douglas W. Banister
- ------------------------- Chief Financial Officer November 12, 1999
Douglas W. Banister
/s/ Stephen Hoelscher Secretary, Controller November 12, 1999
- -------------------------
Stephen Hoelscher
</TABLE>
13
