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Filed pursuant to RULE 424(b)(3)
Registration No. 333-60051
PROSPECTUS
MSI HOLDINGS, INC.
13,697,531 Shares
Common Stock
THE 13,697,531 SHARES (THE "SHARES") OF COMMON STOCK (THE "COMMON
STOCK") OF MSI HOLDINGS, INC., A UTAH CORPORATION (THE "COMPANY" or "MSHI")
COVERED BY THIS PROSPECTUS INCLUDE SHARES OF COMMON STOCK OF THE COMPANY THAT
ARE OFFERED BY SHAREHOLDERS OF THE COMPANY, THAT ARE OR MAY BE ISSUABLE UPON
CONVERSION OF SOME OR ALL OF THE SHARES OF THE COMPANY'S SERIES B PREFERRED
STOCK (THE "SERIES B PREFERRED"), SERIES C PREFERRED STOCK ("SERIES C
PREFERRED"), SERIES D PREFERRED STOCK ("SERIES D PREFERRED"), UPON EXERCISE OF
CERTAIN CLASS A WARRANTS OF THE COMPANY (THE "WARRANTS") AND CERTAIN OPTIONS
GRANTED BY THE COMPANY (THE "OPTIONS") AS WELL AS CERTAIN OTHER SHARES OF COMMON
STOCK THAT HAVE BEEN ISSUED TO EMPLOYEES OF THE COMPANY AND CERTAIN OTHERS (THE
"SELLING SHAREHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM
THE ISSUANCE OF THE SHARES UPON CONVERSION OF THE SERIES B PREFERRED, THE SERIES
C PREFERRED OR THE SERIES D PREFERRED NOR WILL THE COMPANY RECEIVE ANY PROCEEDS
FROM THE SHARES OFFERED BY THE SELLING SHAREHOLDERS.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Registration of the Shares of Common Stock contemplated herein, will
allow certain shareholders to sell all or part of their equity interests in the
Company. The shareholders receiving, or whose shares will become, freely
tradeable shares under this Registration Statement are identified herein. See
"Selling Shareholders."
The Company will bear all of the cost of preparing and printing the
Registration Statement, Prospectus and any Prospectus Supplements and all filing
fees and legal and accounting expenses associated with registration under
federal and state securities laws, which are estimated at $174,000.
On May 28, 1999, the last sale price of the Company's Common Stock, as
reported on the OTC Bulletin Board under the symbol "MSIA," was $5.375.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JUNE 14, 1999
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission. In addition, registration statements and
certain other documents filed with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
HTTP://WWW.SEC.GOV. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR. Copies
of such material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Company's Common Stock is quoted on the OTC Electronic Bulletin Board
under the symbol "MSIA."
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or otherwise filed with the
Commission, each statement being qualified in all respects by such reference.
The Registration Statement may be inspected without charge at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from such office upon the payment of the
fees prescribed by the Commission.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and Notes
thereto, appearing elsewhere in this prospectus. Each prospective investor is
urged to read this prospectus in its entirety. This prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors described in "Risk
Factors" and elsewhere in this prospectus. All references to the "Company" or
"MSHI" mean MSI Holdings, Inc., and its subsidiaries.
THE COMPANY
The Company, headquartered in Austin, Texas, is a computer
communications services company specializing in turnkey solutions for high-speed
Internet connectivity, communication infrastructure design and installation, and
network system integration for customers in both the private and public sectors,
primarily in the State of Texas. MSHI has two wholly-owned subsidiaries,
Micro-Media Solutions, Inc., a Texas corporation ("MSI") and TeleVista, Inc., a
Texas corporation, doing business as High Power.Net, ("TVI"). TVI was
incorporated in August, 1998 and has not yet commenced operations. The Company
is publicly traded on the OTC Bulletin Board under the symbol "MSIA".
MSI was formed in 1993 to provide computer hardware, software
programming, system installation and support, maintenance, and media duplication
to the public and private sectors. MSHI's facilities in east Austin, Texas are
designed for final assembly-type production, system integration services, depot
repair (pick-up, repair and return service), warehousing of computer equipment
and collocation (remote site Internet access provided to customers). Currently,
the Company is not providing collocation services, but is expected to be able to
provide this service by June 1999. These facilities are located in an
economically challenged area of Austin to introduce a non-traditional business
into the area, to provide high-tech employment skills to the typically
underprivileged area residents, and to access a loyal, under-utilized and
readily available workforce. In the six years since its inception, the Company
has grown from a 2 person operation to 71 employees as of May 31, 1999.
The Company has focused on systems design and system implementation
services and is a certified installer of copper and fiber optic cabling for use
in local area and wide area networks supporting data, voice, and video
applications. MSHI's computer networking services include system integration and
design installation as well as maintenance of local and wide area networks
("LAN/WAN"). In this context the Company also provides hardware and software
sales related to its systems designs and implementation services. As of 1997,
the Company has been realigning its long-term business strategy to focus on
Internet-centric business opportunities including collocation, web-casting (live
video and audio feed broadcast over the Internet) and private portal services.
INDUSTRY OVERVIEW
The Company, through its collocation services, intends to enter the
Internet access market in June 1999. This implementation date has been revised
from March 1999 to accommodate construction delays and permitting difficulties.
According to Hoover's Online industry review of the Internet/Online industry,
the Internet access market is currently a $3 billion industry and online
services are predicted to generate revenues of $15 billion per year by the year
2003. The increasing demand for data services and Internet connectivity is
causing considerable growth in the telecommunications industry. Provider and
consumer hardware and software technology have been rapidly advancing. In this
evolving market, global access to information has become increasingly important.
The Internet has evolved as the preferred medium to handle the demand for
increased data transmissions speeds. The Company believes companies in the
forefront of developing bandwidth capacity, transmission and processing speeds,
and Internet access are best positioned to capitalize on the growth potential in
this area of the telecommunications industry. Modem manufacturers are developing
faster modems, phone companies are seeking to transmit more data bits through
their lines and even direct-broadcast satellite companies, like DIRECT TV, are
entering the industry, including Microsoft's recent $1 billion investment in
Comcast. One of the main impediments to Internet growth is data transmission
speed. The Company believes that, absent increased bandwidth to handle the
increasing traffic on the Internet, delays during downloads will continue to be
costly and turn away users.
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SERVICES AND PRODUCTS
MSHI is a communications services company specializing in turnkey
solutions for high-speed Internet connectivity, communication infrastructure
design and installation, and network system integration in the private and
public sectors. The Company has plans to implement collocation services in June
1999.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's status as a
Historically Underutilized Business ("HUB"). However, in 1997, the Company
decided to change its direction to concentrate on communications technology
services. The Company intends to invest in the development of core
infrastructure to support collocation and Internet connectivity services. By
being able to provide increased bandwidth coupled with its current ability to
provide wide-area fiber optic network installations, MSHI should be in a
position to satisfy a broad range of current Internet market demands.
MSHI's offers World Wide Web design, development, hosting, and Internet
connectivity services, and will provide collocation services (including on-site
services and support). Its system integration services include the certified
design and installation of advanced copper and fiber optic lines for both intra-
and inter-plant cabling projects in the private and public sectors. The Company
also evaluates, installs, maintains, and administers LAN/WAN systems. Its system
integration services include the procurement, installation, configuration, and
testing of key components. Further, the Company's service and support team
currently provides service and repair for wireless, data, and voice technology
networks throughout the State of Texas.
STRATEGIC OPPORTUNITY
In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their east Austin facilities to GTE for installation of GTE's Point
of Presence ("POP") equipment (the "Sublease"). On May 29, 1998, MSI entered
into a 3 year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP (the "Connection Service"). MSI has
also subscribed to GTE's DiaLinx Service for 36 consecutive months, allowing for
the resale of Internet access to end-users (the "DiaLinx Service")(the Sublease,
Connection Service and DiaLinx Service are collectively referred to as the "GTE
Agreement"). GTE's establishment, management and monitoring of multiple domains
on behalf of MSI is included in the Connection Service. The Connection Service
was upgraded to GTE's Internet Advantage version 6.0 on September 29, 1998. MSI
will lease connections to the POP for access to the GTE Internet network to
other businesses. MSI will target companies that need direct, high-speed access
to the Internet through turn-key collocation services for high volume (known as
bandwidth) Internet web applications. Collocation is a service that provides a
high speed, high bandwidth connection to the Internet backbone using various
backup systems to increase the connection's fault tolerance. By connecting
directly to the Internet via the POP, MSI is able to eliminate the local loop,
the weakest component in localized Internet connections. The local loop is the
wired connection, usually a pair of copper wires called twisted pair, from the
telephone company's central office in a locality to its customers' telephones.
The local loop was originally designed for voice transmission only using analog
transmission technology on a single voice channel. Currently, the user's
computer modem converts analog signals in to digital signals. With the Digital
Subscriber Line ("DSL") technology, the local loop can carry digital signals
directly and at a much higher bandwidth than they do for voice only. MSI will
have the capacity to support over four thousand collocation rack spaces. These
rack spaces will be used to host the net servers for MSI clients and provide
those clients with direct access to the Internet, further avoiding the local
loop. When fully implemented, these collocation services are expected to
significantly increase MSHI's revenues over the term of the Connection Service
and DiaLinx Service. The GTE Agreements provide the potential for MSHI to
increase revenue by selling Internet access to various high Internet demand
entities for such activities as commerce and academics. It is anticipated that
the requisite hardware will be operational on a commercial basis in June 1999.
As of March 23, 1999, MSI has been certified by GTE's BBN Professional
Services as meeting their technology and service quality standards for network
architecture, security architecture and facilities design. MSI is the first
company to receive this certification. Throughout the last half of fiscal year
1999, MSI, in conjunction with GTE's BBN Professional Services consultants
designed and implemented the Internet Accelerator Portal
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("IAP(TM)"). The IAP(TM) accelerates end-to-end Internet connectivity,
increasing the user's proximity and access speed to the Internet's content
through direct connection via the POP. This allows direct access to virtually
unlimited bandwidth on demand and eliminates the need for costly local loop
circuits. End-users access high speed connectivity services by taking advantage
of DSL technology. In May 1999, MSI formed an alliance with Southwestern Bell to
provide Southwestern Bell's DSL service ("the Southwestern Bell DSL Reseller's
Agreement"). As an authorized reseller of Southwestern Bell's DSL service, MSI
will offer its customers (Internet Service Providers ("ISPs") and other
resellers) the opportunity to leverage Southwestern Bell's broadband technology
and provide them with high speed links, increased bandwidth and Asynchronous
Transfer Mode, a cell-based switching technology designed for broadband
transmission of voice, data and video. The combined IAP(TM), BBN Certification
and DSL Agreement, when operational, will enable MSI's customers to access the
Internet or corporate networks up to 200 times faster than conventional analog
modems.
Currently MSHI's operations have been limited primarily to Texas.
However, MSHI plans to continue developing its marketing efforts to expand the
Company's operations beyond its home state. The Company's strategic alliances
with GTE and Southwestern Bell are also being utilized to promote this
objective. These agreements allow MSHI to satisfy the market's dynamic demands
for connectivity speed and have the potential of quickly moving the Company into
other geographic markets by adding additional POPs in other locations and
marketing Southwestern Bell's DSL service to ISPs and other bandwidth resellers
in states other than Texas.
BACKGROUND
MSHI (formerly Mountain States Resources Corporation ("MSRC")) was
organized under the laws of the State of Utah on April 15, 1969. MSI, the
operating subsidiary of the Company, was organized in 1993, in Austin, Texas. On
June 23, 1997, MSRC, entered into an agreement and plan of reorganization with
the shareholders of MSI, whereby MSRC acquired the operating company in exchange
for the Common Stock of MSRC (the "Combination Agreement"). Pursuant to the
Combination Agreement, MSRC issued 9,310,000 shares of its Common Stock for all
of the outstanding shares of MSI. As part of the reorganization, the Company
changed its name to Micro-Media Solutions, Inc. on September 29, 1997. On
October 13, 1998, the Company changed its name to MSI Holdings, Inc.
The transaction was accounted for as a recapitalization.
MSHI's principal executive offices are located at 501 Waller Street,
Austin, Texas 78702 and its telephone number is (512) 476-6925.
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SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31 YEAR ENDED
(unaudited) MARCH 31
------------------------------ ------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1998 1997
- ----------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Revenue $ 2,941,542 $ 2,739,496 $ 2,740,821 $ 4,665,749
Gross margin (loss) 333,414 887,196 (319,813) 1,667,514
Net income (loss) (3,947,262) (2,095,645) (3,766,950) (482,385)
Preferred Stock dividends (798,062) -- (3,471,170) --
Net Income (loss) available to common (4,745,324) (2,095,645) (7,238,120) (482,385)
SHARE DATA:
Basic and diluted net loss per share (1) $ (0.39) $ (0.20) $ (0.66) $ (0.05)
Shares used to compute net loss per share (1) 12,051,893 10,764,733 10,998,874 10,026,400
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31 AS OF
(unaudited) MARCH 31
------------ ------------------------------
BALANCE SHEET DATA: 1998 1998 1997
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents $ 73,861 $ 25,786 $ 18,112
Working capital (deficit) (550,156) (192,080) (618,547)
Total assets 4,236,054 2,699,452 2,514,308
Accumulated deficit (12,117,443) (7,372,119) (133,999)
Total shareholders' equity (deficit) 468,201 91,669 (103,584)
</TABLE>
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(1) For an explanation of the number of shares used to compute basic and
diluted loss per share, see Note 12 of Notes to Financial Statements.
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by this Prospectus.............................13,697,531 shares (1)
Common Stock outstanding as of March 31, 1999 ......................14,794,416 shares (2)
OTC Electronic Bulletin Board Ticker Symbol.........................MSIA
</TABLE>
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(1) As of the date of this prospectus, this number represents the (i) 50 shares
of Common Stock issuable upon conversion of 5 shares of Series B Preferred,
(ii) 4,900,000 shares of Common Stock issued upon conversion of 490,000
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) 200,050 shares of Common Stock
issuable upon conversion of 20,005 shares of Series D Preferred, (x)
2,596,520 shares of Common Stock issued upon conversion of 259,652 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 recission, See Note 10 to the
financial statements, (xiii) 445,900 shares of Common Stock issued for
services rendered, (xiv) 30,000 shares of common stock issuable upon the
exercise of options granted to a consultant for services rendered; (xv)
50,000 shares of Common Stock issuable 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) 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 Private Placement Phase I,
(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."
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON
STOCK OFFERED HEREBY. NO INVESTOR SHOULD PARTICIPATE IN THE OFFERING UNLESS SUCH
INVESTOR CAN AFFORD A COMPLETE LOSS OF HIS OR HER INVESTMENT. THE DISCUSSION IN
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS."
RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT; GOING CONCERN
ASSUMPTIONS; FLUCTUATIONS IN PERFORMANCE. The Company incurred a net loss, after
dividends, of $4,745,324 for the nine months ended December 31, 1998, and a net
loss of $2,095,645 for the nine months ended December 31, 1997 and had an
accumulated deficit of $12,117,443 as of December 31, 1998 and an accumulated
deficit of $8,576,833 as of December 31, 1997. As of December 31, 1998, the
Company's current liabilities exceeded its current assets by approximately
$550,000. The financial statements for December 1998 or 1997 have not been
audited. The Company incurred a net loss, after dividends, of $7,238,120 for the
year ended March 31, 1998, and a net loss of $482,385 for the year ended March
31, 1997 and had an accumulated deficit of $7,372,119 as of March 31, 1998 and
an accumulated deficit of $133,999 as of March 31, 1997. As of March 31, 1998,
the Company's current liabilities exceeded its current assets by approximately
$192,000. The Company failed to generate cash from operations for the nine
months ended December 31, 1998, and for the year ended March 31, 1998. The
Company expects to incur losses for at least the next six months, and perhaps
longer. There can be no assurance that the Company will not incur significant
additional losses.
The Company's independent auditor's report on MSHI's financial
statements as of and for the years ended March 31, 1998 and 1997 contains an
explanatory paragraph indicating that the Company's accumulated deficit and
historical operating losses raise substantial doubts about its ability to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent on the Company's obtaining additional financing to fund the
expenses related to operations and capital improvements. The Company received a
net $1,818,000 from the Private Placement of Series B Preferred in November
1997, a net $870,000 from the Private Placement of Series C Preferred in
February 1998, a net $2,473,886 from the Private Placement of Series D Preferred
through July 1998 and a net $3,687,235 from the Private Placement of Series E
Preferred through March 31, 1999. Prior to the close of fiscal year 1999, the
Company received commitments for the purchase of Common Stock for $4.5 million.
In addition, the Company is currently consulting with investment bankers to
conduct a $25 million public offering by the end of the second quarter of fiscal
year 2000. There can be no assurances that the Company will be able to
successfully complete such an offering.
Among the principal costs to market and sell the Company's products are
advertising and promotion costs, salaries and commissions, and general and
administrative expenses. MSHI's operating results may be subject to fluctuations
on a quarterly and an annual basis as a result of various factors, including,
but not limited to, fluctuating market pricing for computer and semiconductor
memory products, industry competition, seasonal government purchasing cycles,
and working capital restrictions on manufacturing and production. Therefore, the
operating results for any particular period are not necessarily indicative of
the results that may occur in any future period. See "Business."
CRITICAL NEED FOR ADDITIONAL CAPITAL; NO ASSURANCE OF FUTURE FINANCING.
The Company has a critical need for additional capital. As of December 31, 1998
(unaudited) and March 31, 1998, the Company's cash, cash equivalents and short
term investments totaled approximately $1,424,000 and $1,376,000, respectively.
The Company's actual capital needs will depend upon numerous factors, including
ability to borrow and ability to attract equity capital. The inability to obtain
significant financing would have a material adverse effect on the Company's
business, financial condition and results of operation. In order to continue as
a going concern, without an additional
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<PAGE> 9
capital infusion, the Company would be required to significantly reduce the
level of its operations, seek a merger partner or sell assets. There can be no
assurance that the Company would be able to accomplish any of such actions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the "Financial Statements."
REVENUE DECLINE AND CHANGE IN BUSINESS FOCUS. Revenues for the year
ended March 31, 1998, were $2,740,821 as compared to revenues for the year ended
March 31, 1997, of $4,665,749. Revenues for 1998 decreased $1,924,928 or (41.3%)
from 1997. The reduction in revenues in 1998 occurred primarily as a result of
the completion of a large network installation project without any new projects
queued to follow, coupled with a leveling off of hardware sales.
Revenues for the nine months ended December 31, 1998, were $2,941,542
as compared to revenues for the nine months ended December 31, 1997, of
$2,739,496. Revenues for the nine months ended December 31, 1998, increased
$202,046 or 7.4% from the nine months ended December 31, 1997. The revenue
increase consisted of a 6% increase in hardware, software and peripherals
revenue, a (64%) decrease in service, support and integration revenues and a 63%
increase in Network and LAN/WAN revenues.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's status as a
Historically Underutilized Business. However, in 1997, the Company elected to
change its direction to concentrate on communications technology services. The
Company intends to invest in the development of core infrastructure to support
collocation and Internet connectivity services by increasing personnel. Without
access to additional working capital, it is unlikely that the Company will be
able to retain the increased personnel necessary to complete this change in
direction to communication technology service.
LOSS OF HUB STATUS. Until the end of 1996, the Company emphasized the
sale of electronics equipment with a concentration in contracts that relied on
MSI's status as a "Historically Underutilized Business" ("HUB"). However, in
1997, the Company changed its direction to concentrate on communications
technology services. As a HUB, MSI received favorable treatment by certain
governmental entities in their granting of contracts. The Company generated
revenues of approximately $478,000, $414,000 and $919,000 during fiscal years
1999, 1998 and 1997, respectively, from HUB related contracts, or 13%, 15% and
20% of its gross revenues, respectively. With the departure of certain minority
officers, the Company has determined not to seek re-certification of MSI's HUB
status.
RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DELAYS; RISK OF PRODUCT
DEFECTS. The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends upon its ability on a timely
basis to enhance its existing products, introduce new products that address the
changing requirements of its customers and anticipate or respond to
technological advances, emerging industry standards and practices in a timely,
cost-effective manner. There can be no assurance that the Company will be
successful in developing, introducing and marketing new products or enhancements
to existing products or will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of these products,
or that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree of commercial
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements of existing products in a
timely manner or if new versions of existing products contain unacceptable
levels of product defects or do not achieve a significant degree of market
acceptance, or any of the above situations occur there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION. The computer and information access markets are
characterized by rapidly changing technology and evolving industry standards.
Future developments in technology could replace or curtail the sales of used
computer equipment which could have a material adverse effect on the Company's
business. The Company experiences significant competition from other network
computer manufacturers, suppliers of personal computers and workstations, and
software developers. Several of such competitors are larger than the Company,
with greater capital
-9-
<PAGE> 10
resources and larger research and development staffs and facilities. However,
due in part to the Company's change in direction to concentrate on communication
technology services, the Company will be seeking a significant capital infusion.
Without this capital infusion it is likely that the Company will be unable to
compete with those entities that have greater capital. See "Business --
Competition."
GOVERNMENT FUNDING. The Telecommunications Infrastructure Fund ("TIF")
was created and the Telecommunications Act of 1996 was passed to provide funds
to school districts in Texas to purchase telecommunications services, including
Internet access. The Company currently benefits from such legislation as the
goal of TIF is that all students and teachers in Texas will have daily access to
computer and information technology by 2003. However, there can be no assurance
that TIF and similar funding programs will not be eliminated by future
legislation. The Company had revenues attributable to TIF of approximately
$100,000 during fiscal year ending March 31, 1999 and none during fiscal year
ending March 31, 1998.
RELIANCE ON KEY MANAGEMENT. The Company's business depends upon the
availability of Roger Lane, its Chief Operating Officer. The loss of his
services would likely have a material adverse effect on the Company. Although
the Company has entered into an employment agreement with Mr. Lane, there can be
no assurance that he will continue to be available. The future success of the
Company's business will depend, in part, upon attracting and retaining
additional qualified personnel. There can be no assurance that the Company will
be able to attract and hire such personnel or retain the services of said
people.
LACK OF DIVIDEND HISTORY; NO DIVIDENDS CONTEMPLATED. Since its
inception, the Company has not paid any cash dividends, and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
Company plans to retain its future earnings, if any, to finance the growth and
development of its operations. See "Dividend Policy."
LIMITED MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Since the middle
of 1997, the Common Stock of the Company has been traded on the over-the-counter
market, and there can be no assurance that a more active trading market for the
Common Stock will develop or continue. From time to time, there may be
significant volatility in the market price of the Common Stock. Over the last
180 days the price for Common Stock of the Company on the over-the-counter
market has ranged from a high of $10.75 on April 9, 1999 to a low of $3.25 on
March 29, 1999. Operating results of the Company or of its competitors, changes
in general conditions in the economy (national or regional), the financial
markets or the hardware and technology industry or other developments affecting
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially.
CONCENTRATION OF SHARE OWNERSHIP. As of March 31, 1999, the executive
officers and directors of the Company, as a group, owned or controlled
approximately 56.91% of the outstanding capital stock of the Company. As a
result of the termination of Mr. Munoz and the conversion of certain shares of
the Series B, C, D and E Preferred Stock, the executive officers and directors
of the Company, as a group, owned or controlled approximately 38.62% of the
outstanding capital stock of the Company as of May 31, 1999. Messrs. Chavez,
Kettrick and Munoz, the officers terminated on April 20, 1999, hold an aggregate
of 8,080,000 shares Company's Common Stock or 37.06% of the outstanding shares
as of May 31, 1999. As a result, such persons and entities will continue to
exert significant influence over the business and affairs of the Company. See
"Principal Shareholders."
On June 2, 1999, a group of the Company's Common Stock shareholders
filed a Schedule 13-D for the sole purpose of acting as a group to exercise a
change in control of the Company's Board of Directors. The group filing the
Schedule 13-D consists of 25 shareholders with an aggregate of 10,324,499 shares
of the Company's Common Stock or 47.36% of the outstanding shares as of May 31,
1999.
SHARES ELIGIBLE FOR FUTURE SALE. Sales in the public market of
substantial amounts of Common Stock (including sales in connection with an
exercise of certain registration rights relating to shares of Common Stock) or
the perception that such sales could occur could depress the prevailing market
prices for the Common Stock. As of March 31, 1999, the Company had 14,794,416
shares of Common Stock issued and outstanding and a commitment to issue an
additional 1,500,000 shares of Common Stock. If all of the committed shares were
issued and the outstanding convertible preferred stock of the Company were
converted to Common Stock as of March 31, 1999, the
-10-
<PAGE> 11
Company would have had 27,259,190 shares of Common Stock issued and outstanding,
of which 10,297,390 or 37.78% would have been eligible for future sale. The
remaining 16,961,800 shares would have been subject to the Rule 144 restrictions
on sales of securities by affiliates of the issuer. See "Shares Eligible for
Future Sale -- Registration Rights." Subsequent to March 31, 1999, an additional
7,007,600 shares of Common Stock were issued due to the conversion of 399,995,
176,335, and 124,430 shares of Series B, D and E, respectively. As of May 31,
1999, the Company had 21,802,016 share of Common Stock issued and outstanding of
which 7,415,366 or 34% are eligible for future sale.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded over-the-counter and is quoted on
the OTC Bulletin Board under the symbol "MSIA." The table below sets forth the
high and low closing sale price of the Common Stock for the periods indicated,
as reported by the OTC Bulletin Board.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ------- --------
<S> <C> <C>
December 31, 1996 ..... $ 2.00 $ 0.0625
March 31, 1997 ........ 2.00 0.25
June 30, 1997 ......... 2.00 0.125
September 30, 1997 .... 2.25 0.50
December 31, 1997 ..... 3.50 0.50
March 31, 1998 ........ 2.56 1.75
June 30, 1998 ......... 9.03 2.37
September 30, 1998 .... 12.87 4.06
December 31, 1998 ..... 7.75 6.0625
March 31, 1999 ........ 10.75 3.25
</TABLE>
On May 28, 1999, the closing sale price for a share of the Company's
Common Stock, as reported on the OTC Bulletin Board, was $5.375. See "Risk
Factors - Limited Market and Possible Volatility of Stock Price."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares
of Common Stock offered hereby until the Warrants and Options are exercised. As
of March 31, 1999, the Company has received $333,900 from the exercise of
certain Warrants and Options. If all the remaining Warrants and Options are
exercised the Company will receive net proceeds of $6,016,035. The exercise
price received by the Company from issuance of the shares of Common Stock
underlying the Warrants and Options will be used for general corporate purposes.
In addition, the Company will not receive any proceeds from the sale of certain
shares of Common Stock that were issued to employees and consultants for
services rendered. See "Selling Shareholders."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and the Company currently intends to retain any future earnings to fund
the development of its business and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. Future declaration
and payment of dividends on its Common Stock, if any, will be determined in
light of the then-current conditions, including the Company's earnings,
operations, capital requirements, financial conditions, restrictions in
financing agreements, and other factors deemed relevant by the Board of
Directors. However, the Company is obligated to pay cumulative dividends on a
quarterly basis with respect to all Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred shares outstanding.
-11-
<PAGE> 12
CAPITALIZATION
The following table sets forth the debt and the capitalization
(unaudited) of the Company as of December 31, 1998 and as adjusted for a
subsequent sale of Series E Preferred stock, conversion of Series C and Series D
Preferred stock and issuance of dividends as of March 31, 1999 (unaudited). The
table should be read in conjunction with the consolidated financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Dec. 31, 1998 Adjustment (2) As Adjusted
------------- -------------- ------------
<S> <C> <C> <C>
LIABILITIES
Long-term debt $ 179,678 $ $ 179,678
Obligations under capital leases 290,605 -- 290,605
------------- ------------
$ 470,283 -- $ 470,283
============= ============
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 $ (2,119,974) $ 27
Series C 6% Cumulative Non-Voting Preferred stock,
$10.60 stated value, 99,057 authorized, 94,340 issued and
outstanding 1,000,004 (1,000,004) --
Series D 6% Cumulative Non-Voting Preferred stock,
$10.60 stated value, 279,657 authorized, 261,340 issued
and outstanding 2,770,204 (2,558,151) 212,053
Series E 6% Cumulative Non-Voting Preferred stock,
$30.00 stated value, 157,500 authorized, 51,975 issued
and outstanding 1,559,250 (904,590) 654,660
Common Stock, $.10 par value, authorized 50,000,000
shares, 13,177,989 shares issued and outstanding(1)
1,317,799 862,403 2,180,202
Additional paid-in capital 3,818,387 8,535,839 12,354,226
Accumulated deficit (12,117,443) -- (12,117,443)
------------- -------------- ------------
Total shareholders' equity $ 468,201 $ 2,815,523 $ 3,283,724
------------- -------------- ------------
Total capitalization $ 938,484 $ 2,815,523 $ 3,754,007
============= ============== ============
</TABLE>
- ----------------------
(1) Includes 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 Private
Placement Phase I, (iii) 10,286 shares of Common Stock representing the
unpaid accrued interest on the Notes, (iv) 47,170 shares of Common
Stock issued upon conversion of 4,717 shares of Series C Preferred, (v)
183,170 shares of Common Stock issued upon conversion of 18,317 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 and D
Preferred Shares, and (viii) 293,185 shares of Common Stock previously
disputed in litigation. See "Business -- Legal Proceedings."
(2) Includes: (i) the private placement of 94,277 shares of Series E
Preferred Stock through March 31, 1999, including 4,109 shares issued
for placement agent fees in the amount of $123,270; (ii) the conversion
of 399,995 shares of Series B Preferred to 3,999,950 shares of Common
Stock; (iii) the conversion of 94,340 shares of Series C Preferred to
943,400 shares of Common Stock; (iv) the conversion of 241,335 shares
of Series D Preferred to 2,413,350 shares of Common Stock; (v) the
conversion of 176,335 shares of Series E Preferred to 1,763,350 shares
of Common Stock; and (vi) the issuance of 23,027 shares of Common Stock
issued as dividends to the Holders of Series B, C, D and E Preferred
Shares.
-12-
<PAGE> 13
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
consolidated financial statements and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein and the consolidated financial statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31 YEAR ENDED
(unaudited) MARCH 31
------------------------------ ------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1998 1997
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenue $ 2,941,542 $ 2,739,496 $ 2,740,821 $ 4,665,749
Cost of revenues 2,608,128 1,852,300 3,060,634 2,998,235
Gross profit (loss) 333,414 887,196 (319,813) 1,667,514
Selling, General and Administrative Expenses 4,280,676 2,982,481 3,447,137 2,149,899
Net income (loss) (3,947,262) (2,095,645) (3,766,950) (482,385)
Preferred Stock dividends (798,062) -- (3,471,170) --
Net Income (loss) available to
common stockholders (4,745,324) (2,095,645) (7,238,120) (482,385)
SHARE DATA:
Basic and diluted net loss per share (1) $ (0.39) $ (0.20) $ (.66) $ (.05)
Shares used to compute net loss per share (1) 12,051,893 10,764,733 10,998,874 10,026,400
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31 AS OF
(unaudited) MARCH 31
------------ ------------------------------
BALANCE SHEET DATA: 1998 1998 1997
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Working capital (deficit) $ (550,156) $ (192,080) $ (618,547)
Total assets 4,236,054 2,699,452 2,514,308
Current liabilities 3,298,570 2,090,701 1,929,042
Total shareholders' equity (deficit) 468,201 91,669 (103,584)
</TABLE>
- -------------------
(1) For an explanation of the number of shares used to compute basic and
diluted loss per share, see Note 12 of the Notes to Financial Statements.
-13-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN "RISK FACTORS" AND
"BUSINESS."
OVERVIEW AND GOING CONCERN ISSUES
Micro-Media Solutions, Inc. ("MSI"), the operating subsidiary of MSHI, was
founded in 1993 in Austin, Texas, to provide computer hardware, software
programming, system installation and support, maintenance, and media duplication
to the public and private sectors. Through fiscal year 1999, MSI maintained
certification as a minority-owned business enterprise and status as a
Historically Underutilized Business ("HUB"). On June 23, 1997, the then
shareholders of MSI entered into an agreement and plan of reorganization (the
"Combination Agreement") with Mountain States Resources Corporation (now known
as MSI Holdings, Inc.), whereby the Company acquired all of the issued and
outstanding stock of MSI in exchange for 9,310,000 shares of the Common Stock of
the Company (the "Combination"). The Combination was accounted for as a
recapitalization.
The Company's significant historical losses raise a doubt as to the
Company's ability to continue as a going concern. The Company has temporarily
addressed the going concern issues described elsewhere in this Prospectus
through the private placement of Series E Preferred stock (the "Series E
Preferred"), which will provide sufficient working capital and cash flows until
the POP and DSL services generates additional working capital. The Company
anticipates additional working capital from the contracts signed during fiscal
year ended March 31, 1999, related to the POP and the DSL service agreement.
Moreover, the Company is currently consulting with investment bankers to conduct
a $25 million public offering of Common Stock. However, there can be no
assurance that the Company will be able to secure such additional capital or
that the contracts will generate sufficient cash flows or working capital.
Subsequent to March 31, 1998, the Company received $2.8 million dollars from
Private Placement Phase III (as defined) that have been used to retire debt,
decrease past due accounts payable and for operating expenses. As a result, the
Company's current ratio has improved and its cash position has increased. The
Company has concluded the private placement of the Company's Series E Preferred.
As of March 31, 1999, the Company had received $3,687,235 of net proceeds in
settlement of the Series E Preferred private placement.
Management, based upon expressions of interest and estimated growth and
facility capacities, believes that its contracts with GTE and Southwestern Bell
(the "Contracts") have the possibility of producing revenues of approximately
$16.7 million during the next twelve month period. The Company has obtained the
required equipment through capital leases as of September 30, 1998, and
anticipates it will begin commercial operations under the GTE contract by June
1999. The Company is receiving revenues from the Southwestern Bell DSL
Reseller's Agreement and expects the revenues therefrom to continue increasing.
It is currently performing under the Siemens-Nixdorf contract at a loss. The
proceeds from the Series E Preferred will allow the Company to continue
operations through August 1999, by which point it is anticipated that the GTE
and Southwestern Bell contracts will be generating positive cash flow and
adequate working capital.
Prior to the end of fiscal year 1999, the Company received commitments to
purchase an additional $4.5 million in Common Stock. These funds will be used to
satisfy additional capital needs for expansion opportunities associated with the
Contracts and satisfy operational cash flows until a public offering can be
completed. The Company is consulting with investment bankers to conduct a $25
million public offering. If successful, the public offering is expected to be
completed by the end of the second quarter of fiscal year 2000. In the event the
Company is unable to successfully conclude the public offering, the Company will
forego the Contracts' expansion opportunities, reduce its number of employees
and overhead expenses and concentrate its efforts on the Austin, Texas
operations.
-14-
<PAGE> 15
Among the principal costs to market and sell the Company's products are
advertising and promotion costs, salaries and commissions, and general and
administrative expenses. MSHI's operating results may be subject to fluctuations
on a quarterly and an annual basis as a result of various factors, including,
but not limited to, fluctuating market pricing for computer and semiconductor
memory products, industry competition, seasonal government purchasing cycles,
and working capital restrictions on manufacturing and production. Therefore, the
operating results for any particular period are not necessarily indicative of
the results that may occur in any future period. See "Risk Factors" and
"Business."
Historically, the Company's revenues were derived from hardware sales,
software sales and the delivery of technical services, including installing and
maintaining networks system. The technical service sales of the Company
typically yield a higher gross margin than the hardware and software sales of
the Company. In part due to the intense competition in the hardware and software
sales sector from Original Equipment Manufactures ("OEM's") and distributors,
the Company has repositioned itself from emphasizing hardware sales to
intensifying sales of technical services. Due to the strategic repositioning,
the Company's hardware sales are not growing and the Company is incurring
additional expenses in hiring personnel, remodeling existing facilities and
leasing new equipment in connection with the provision of broadband Internet
services. The losses being incurred because of the strategic repositioning are
expected to continue through the first half of the fiscal year ending March 31,
2000. However, the GTE contract is expected to begin generating revenues by the
second quarter of fiscal year ending March 31, 2000.
RECENT DEVELOPMENTS
In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their east Austin facilities to GTE for installation of GTE's Point
of Presence ("POP") equipment (the "Sublease"). On May 29, 1998, MSI entered
into a 3 year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP (the "Connection Service"). MSI has
also subscribed to GTE's DiaLinx Service for 36 consecutive months, allowing for
the resale of Internet access to end-users (the "DiaLinx Service")(the Sublease,
Connection Service and DiaLinx Service are collectively referred to as the "GTE
Agreement"). GTE's establishment, management and monitoring of multiple domains
on behalf of MSI is included in the Connection Service. The Connection Service
was upgraded to GTE's Internet Advantage version 6.0 on September 29, 1998. MSI
will lease connections to the POP for access to the GTE Internet network to
other businesses. MSI will target companies that need direct, high-speed access
to the Internet through turn-key collocation services for high volume (known as
bandwidth) Internet web applications. Collocation is a service that provides a
high speed, high bandwidth connection to the Internet backbone using various
backup systems to increase the connection's fault tolerance. By connecting
directly to the Internet via the POP, MSI is able to eliminate the local loop,
the weakest component in localized Internet connections. The local loop is the
wired connection, usually a pair of copper wires called twisted pair, from the
telephone company's central office in a locality to its customers' telephones.
The local loop was originally designed for voice transmission only using analog
transmission technology on a single voice channel. Currently, the user's
computer modem converts analog signals in to digital signals. With the Digital
Subscriber Line ("DSL") technology, the local loop can carry digital signals
directly and at a much higher bandwidth than they do for voice only. MSI will
have the capacity to support over four thousand collocation rack spaces. These
rack spaces will be used to host the net servers for MSI clients and provide
those clients with direct access to the Internet, further avoiding the local
loop. When fully implemented, these collocation services are expected to
significantly increase MSHI's revenues over the term of the Connection Service
and DiaLinx Service. The GTE Agreements provide the potential for MSHI to
increase revenue by selling Internet access to various high Internet demand
entities for such activities as commerce and academics. It is anticipated that
the requisite hardware will be operational on a commercial basis in June 1999.
As of March 23, 1999, MSI has been certified by GTE's BBN Professional
Services as meeting their technology and service quality standards for network
architecture, security architecture and facilities design. MSI is the first
company to receive this certification. Throughout the last half of fiscal year
1999, MSI, in conjunction with GTE's BBN Professional Services consultants
designed and implemented the Internet Accelerator Portal ("IAP(TM)"). The
IAP(TM) accelerates end-to-end Internet connectivity, increasing the user's
proximity and access speed to the Internet's content through direct connection
via the POP. This allows direct access to virtually unlimited bandwidth on
demand and eliminates the need for costly local loop circuits. End-users access
high speed connectivity services by taking
-15-
<PAGE> 16
advantage of DSL technology. In May 1999, MSI formed an alliance with
Southwestern Bell to provide Southwestern Bell's DSL service ("the Southwestern
Bell DSL Reseller's Agreement"). As an authorized reseller of Southwestern
Bell's DSL service, MSI will offer its customers (Internet Service Providers
("ISPs") and other resellers) the opportunity to leverage Southwestern Bell's
broadband technology and provide them with high speed links, increased bandwidth
and Asynchronous Transfer Mode, a cell-based switching technology designed for
broadband transmission of voice, data and video. The combined IAP(TM), BBN
Certification and DSL Agreement, when operational, will enable MSI's customers
to access the Internet or corporate networks up to 200 times faster than
conventional analog modems.
RESULTS OF OPERATIONS
Nine Months Ended December 31, 1998 Compared with December 31, 1997 (unaudited)
COMPARISON TABLE
Nine Months Ended December 31, 1998 and
Nine Months Ended December 31, 1997
<TABLE>
<CAPTION>
Hardware, Service,
Software and Network Support and
Peripherals Installations Integration Total
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
NINE MONTH ENDED DECEMBER 31, 1998
Revenues $ 1,431,352 $ 1,115,704 $ 394,486 $2,941,542
Cost of Goods Sold 1,376,870 1,080,747 150,511 2,608,128
Gross Margin $() $ 54,482 $ 34,957 $ 243,975 $333,414
Gross Margin (%) 3.81% 3.13% 61.85% 11.33%
NINE MONTH ENDED DECEMBER 31, 1997
Revenues $ 1,350,810 $ 685,771 $ 702,915 $2,739,496
Cost of Goods Sold 885,989 509,415 456,896 1,852,300
Gross Margin $() $ 464,821 $ 176,356 $ 246,019 $ 887,196
Gross Margin (%) 34.41% 25.72% 35.00% 32.39%
INCREASE/(DECREASE)
Revenues $ 80,542 $ 429,933 $ (308,429) $ 202,046
Cost of Goods Sold $ 490,881 $ 571,332 $ (306,385) $ 755,828
Gross Margin $() $ (410,339) $ (141,399) $ (2,044) $ (553,782)
Gross Margin (%) (30.60)% (22.58)% 26.85% (21.05)%
</TABLE>
Total revenues for the nine months ended December 31, 1998, increased
$202,046 or 7.4% from the total revenues recorded for the nine months ended
December 31, 1997. This increase is a combination of increases in hardware,
software and peripherals revenues and in network installation revenues and a
decrease in service, support and integration revenues. The nominal increase of
$80,542 in hardware, software and peripherals revenues reflects normal
fluctuations in sales of hardware, software and peripherals products. The
increase of $429,933 in network installation revenues relates to specific
significant school district network installation projects that were in place
during each period. During the nine months ended December 31, 1997, MSI was
performing a cabling and LAN/WAN installation for the Hereford Independent
School District which started in April 1997. During the nine months ended
December 31, 1998, MSI began the installation of a network system under a
contract with San Felipe Del Rio Consolidated Independent School District. This
contract was executed in July 1998 with installation beginning in August 1998.
The $308,429 decrease in service, support and integration revenues relates to a
reduction in the scope of work on two contracts. Revenues on a contract for the
installation and servicing of lottery machines decreased approximately $328,000
from the nine months ended December 31, 1997 compared to the December 31, 1998
period. Other decreases in revenues were on a contract for the City of Austin of
approximately $64,000 from the nine months ended December 31, 1997, compared to
December 31, 1998 period.
Total cost of goods sold for the nine months ended December 31, 1998,
increased $755,828 or 40.8% over the cost of goods sold for the nine months
ended December 31, 1997. The total cost of goods sold consists of an
-16-
<PAGE> 17
increase of $490,881 and $571,332 in the cost of goods sold associated with
hardware, software and peripherals and network installations, respectively, and
a decrease of $306,385 in cost of goods sold associated with service, support
and integration.
The total gross margin for the nine months ended December 31, 1998,
decreased 21.05 percentage points to 11.33% compared to the total gross margin
of 32.39% for the nine months ended December 31, 1997. The gross margin for
hardware, software and peripherals for the nine months ended December 31, 1998,
was 3.8% compared to a margin of 34.4% for the nine months ended December 31,
1997. The decrease of 30.6 percentage points is due to market pressures to lower
prices on hardware, software and peripherals products from the Company's
competitors and customers including the result of the competitive bidding
process required for sales to public entities. Contributing to the lower margins
for 1998 were sales made below costs as a result of inaccurate estimates of cost
by MSI. Procedures are now in place to ensure positive margins on hardware,
software and peripherals sales. The gross margin for network installation was
3.13% for the nine months ended December 31, 1998, compared to a gross margin of
25.72% for the nine months ended December 31, 1997. The decrease of 22.58
percentage points relates to increased costs associated with specific
significant school district network installation contracts that were in place
during each quarter. During the quarter ending September 31, 1998, MSI received
a contract of approximately $700,000 with San Felipe Del Rio Consolidated
Independent School District ("Del Rio") for network system installation. The
margin on this contract was depressed due to the competitive bidding process.
Subsequent to September 31, 1998, The Company received numerous purchase orders
from Del Rio to perform services beyond the scope of the original contract that
allow the opportunity for increased overall margins. As of May 31, 1999,
aggregate contracts and purchase orders with Del Rio exceed $1.4 million. The
gross margin for service, support and integration was 61.85% for the nine months
ended December 31, 1998 compared to a gross margin of 35.0% for the nine months
ended December 31, 1997. The increase of 26.85 percentage points is a result of
MSI obtaining a service, support and integration contract with Siemens-Nixdorf
for system integration. This contract requires that Siemens- Nixdorf supply all
hardware and software products to be integrated into the systems. Additional
decreases in cost of goods sold are a result of a contract to install Texas
State Lottery vending machines in retail businesses. This contract requires
GTECH, the Texas lottery contractor, to supply all hardware at cost.
Selling, general and administrative expenses for the nine months ended
December 31, 1998 were $4,280,676 which is 145.5% of revenues. The selling,
general and administrative expenses for the nine months ended December 31, 1998
represents an increase over the nine months ended December 31, 1997, of
$1,297,835 or 43.5%. Approximately $835,000 of the increase is attributable to
the increase in staff. Staff additions include technical staff, sales staff,
accounting staff and middle management. These increases are needed as the
Company prepares to offer collocation services at its Austin, Texas facility and
will also enable the Company to work on larger service contracts. The increases
in professional fees of $645,000 is largely attributable to $512,000 paid in
fees for technical consulting related to the design and implementation of the
collocation services described in the "Recent Developments" section above and
obtaining GTE's BBN certification. Occupancy expense increased approximately
$167,000 due to facility expansion and increased staffing. Interest expense
decreased by $154,000 as a result of a reduction in late fees and interest
charged on past due invoices and decreased borrowings.
Year Ended March 31, 1998 Compared with the Year Ended March 31, 1997.
COMPARISON TABLE
Year Ended March 31, 1998 and
Year Ended March 31, 1997
<TABLE>
<CAPTION>
Hardware, Service,
Software and Network Support and
Peripherals Installations Integration Total
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1998
Revenues $ 1,350,869 $ 685,711 $ 704,241 $2,740,821
Cost of Goods Sold 1,406,612 997,397 656,625 3,060,634
Gross Margin $() $ (55,743) $ (311,686) $ 47,616 $ (319,813)
Gross Margin (%) (4.13)% (45.45)% 6.76% (11.67)%
</TABLE>
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<PAGE> 18
<TABLE>
<CAPTION>
Hardware, Service,
Software and Network Support and
Peripherals Installations Integration Total
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997
Revenues $ 1,440,725 $ 2,767,452 $ 457,572 $ 4,665,749
Cost of Goods Sold 1,109,354 1,605,157 283,724 2,998,235
Gross Margin ($) $ 331,371 $ 1,162,295 $ 173,848 $ 1,667,514
Gross Margin (%) 23.00% 42.00% 37.99% 35.74%
INCREASE/(DECREASE)
Revenues $ (89,856) $ (2,081,741) $ 246,669 $(1,924,928)
Cost of Goods Sold $ 297,258 $ (607,760) $ 372,901 $ 62,399
Gross Margin ($) $ (387,114) $ (1,473,981) $ (126,232) $(1,987,327)
Gross Margin (%) (27.13)% (87.45)% (31.23)% (47.41)%
</TABLE>
Total revenues for the year ended March 31, 1998 decreased $1,924,928
or 41.3% from 1997. This reduction in revenues occurred primarily as a result of
the completion of a large network installation project without any new projects
queued to follow coupled with a leveling off of hardware sales.
Total cost of goods sold for 1998 increased $62,399 or 2.1% from 1997.
This increase in cost of goods sold was primarily the result of increased costs
of hardware and services, partially offset by decreases in the costs associated
with the Company's network services. Costs of goods sold for 1998 as a
percentage of revenue was 111.7%. This resulted in a gross margin of ($319,813)
or (11.7%) for the year as compared to a gross margin of $1,667,514 for 1997.
The gross margin as a percentage of revenues for 1997 was 35.7%. The gross
margin percentage experienced in 1997 more closely represents the gross margins
Management is working to attain. Extraordinary items experienced in cost of
goods sold for 1998 include a cost overrun of approximately $500,000 on a large
cabling project for a Texas school district. The project was a lump sum contract
and the overrun was absorbed by the Company. Problems experienced with the
substantial cost overrun situation have been addressed with better controls, new
middle management and improved accounting. Management does not anticipate
significant cost overruns in the future.
Selling, general and administrative expenses in 1998 of $3,447,137
represent 125.8% of revenues. The 1998 selling, general and administrative
expenses represent an increase over 1997 of $1,297,238 or 60.3%. Approximately
50% of the selling, general and administrative expense increase, or
approximately $623,000, represents the expenses associated with the hiring of
increased marketing and technical staff to enable the Company to work on larger
service contracts. Other increases include professional fees, which increased
approximately $314,923 due to additional legal, accounting and other consultants
associated with the Combination and the reporting requirements attendant to
being a public company. Interest expense also increased $194,000 due to
increased line of credit usage and late fees on overdue accounts.
LOSS OF HUB STATUS
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's status as a
"Historically Underutilized Business" ("HUB"). However, in 1997, the Company
decided to change its direction to concentrate on communications technology
services. As a HUB, MSI received favorable treatment by certain governmental
entities in their granting of contracts. The Company generated revenues of
approximately $478,000, $414,000 and $919,000 during fiscal years 1999, 1998 and
1997, respectively, from HUB related contracts, or 13%, 15% and 20% of its gross
revenues, respectively. With the departure of certain minority officers, MSI has
determined not to seek re-certification of its HUB status.
LIQUIDITY AND CAPITAL RESOURCES
On November 18, 1997, the Company received $2,120,000 upon completion
of a private placement whereby 400,000 shares of Series B Preferred were sold to
Entrepreneurial Investors, Ltd. ("EIL") for $5.30 per share ("Private Placement
Phase I"). The Company also issued 20,000 shares of Series B Preferred to Equity
Services, Ltd. ("ESL") as a commission for the completion of Private Placement
Phase I. The Company received $371,000 in
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<PAGE> 19
October 1997 from two individuals pursuant to two senior convertible notes (the
"Notes"), which were secured by an aggregate of 1,050,000 shares of Common Stock
of the Company. The Notes were subsequently converted into an aggregate of
70,000 shares of Series B Preferred. On February 4, 1998, the Company received
$1,000,004 completing a second private placement whereby 94,340 shares of Series
C Preferred were sold to EIL for a purchase price of $10.60 per share ("Private
Placement Phase II"). As a commission for the completion of Private Placement
Phase II, the Company issued 4,717 shares of Series C Preferred to ESL. By July,
1998, the Company received $2,823,204 completing a third private placement,
whereby 266,340 shares of Series D Preferred were sold to fourteen accredited
investors for a purchase price of $10.60 per share ("Private Placement Phase
III"). The Company also issued 13,317 shares of Series D Preferred to ESL as a
commission for the completion of Private Placement Phase III. As of March 31,
1999, the Company has received $4,190,040 in connection with the private
placement of the Series E Preferred, 139,668 shares of which were sold for a
purchase price of $30.00 per share (the "Series E Preferred"). As a private
placement fee for partial completion of the Series E Preferred, the Company
issued 6,584 shares of Series E Preferred to ESL. The expenses for Private
Placement Phase I, Private Placement Phase II, Private Placement Phase III and
the Series E Preferred private placement, including broker fees, commissions
(including stock for the private placement fee) and legal and accounting
expenses totaled $775,350, $201,291, $978,358 and $502,805 respectively.
As of December 31, 1998 and March 31,1998, the Company's total assets
were $4,236,054 and $2,699,452 respectively, with liabilities of $3,767,853 and
$2,607,783, respectively. Current assets of $2,748,414 at December 31, 1998, and
$1,898,621 at March 31, 1998, represent 83.3% and 90.8%, respectively, of
current liabilities of $3,298,570 at December 31, 1998, and $2,090,701 at March
31, 1998. Improvements in the Company's cash position are a result of improved
realization of accounts receivable and funds from increases in shareholders
equity resulting from the previously consummated private placements more
particularly described above. Reductions in accounts receivable between 1998 and
1997 are a direct reflection of the reduced level of sales experienced in 1998.
The Company's liabilities of $3,767,853 at December 31, 1998 consist of
$1,600,000 of a fully secured credit line, $1,698,570 of current liabilities and
$469,283 of long-term liabilities.
For the years ended March 31, 1998 and 1997, the Company's total assets
were $2,699,452 and $2,514,308, respectively, with liabilities of $2,607,783 and
$2,617,892, respectively. Current assets of $1,898,621 and $1,310,495 represent
90.8% and 67.9% of current liabilities of $2,090,701 and $1,929,042.
Improvements in the Company's cash position are a result of improved realization
of accounts receivable and funds from increases in shareholders equity resulting
from the previously consummated private placements more particularly described
above. Reductions in accounts receivable between 1998 and 1997 are a direct
reflection of the reduced level of sales experienced in 1998. Accounts
receivable balances at March 31, 1998 and 1997 reflect the charge off of $73,252
and $4,249, respectively, of uncollectible accounts receivable. The Company's
liabilities of $2,607,783 at March 31,1998, consist of $1,228,966 of a fully
secured credit line, $861,735 of current liabilities and $517,082 of long-term
liabilities.
The Company, subsequent to the end of March 31, 1998, paid its Bank One
Texas, NA loans in full and substantially reduced the borrowings under its fully
secured line of credit with Compass Bank. Net shareholders equity as of December
31, 1998 and March 31, 1998 was $783,922 and $91,669, respectively. During the
year ended March 31, 1998, and the nine months ended December 31, 1998, the
Company completed Private Placement Phase I, Private Placement Phase II and
Private Placement Phase III. Receipt of these funds enabled the Company to
reduce its outstanding debt and pay off the past due accounts payable.
At December 31, 1998, the Company had a working capital deficit of
$550,156 compared to a working capital deficit of $192,080 and $618,547 at March
31, 1998 and 1997, respectively. During the nine months ended December 31, 1998,
working capital decreased $358,076 from March 31, 1998. During the year ended
March 31, 1998, working capital increased $426,467 from March 31, 1997. The
balances of its accounts payables, accrued expenses and accounts receivables
were increased as a result of increased sales and the resulting increase in
related accounts. As of December 31, 1998, the Company was more than 30 days
past due on $794,601 or 67% of its accounts payable. As of March 31, 1998 the
Company was more than 30 days past due on $170,000 or 57% of its accounts
payable.
-19-
<PAGE> 20
The Company has a critical need for additional working capital to meet
contractual obligations under the GTE Agreements. Management believes that the
GTE Agreements, the Siemens-Nixdorf Agreements and the Southwestern Bell DSL
Reseller's Agreement (the "Contracts") have the potential to increase revenue
levels, provided that sufficient working capital is obtained. The Company
anticipates utilizing the $3.69 million in net proceeds from the Series E
Preferred placement and the private placement of 1.5 million shares of Common
Stock to satisfy its capital requirements through the second quarter of the
fiscal year ended March 31, 2000, by which point it is anticipated that the
Contracts will be generating positive cash flow and adequate working capital.
In addition, the Company is currently consulting with various
investment bankers to conduct a $25 million public offering in the second
quarter of fiscal year 2000. These funds will be used to satisfy additional
capital needs for expansion opportunities associated with the Contracts. In the
event the Company is unable to complete the contemplated public offering, the
Company will forego the Contracts' expansion opportunities, reduce the number of
employees and overhead expenses and concentrate its efforts on the Austin
operations. See "Overview" and "Going Concern Issues."
YEAR 2000 ISSUES
As with other companies, the Company has initiated a program to study
the impact on its computer system in order to be year 2000 compliant. This study
involved identifying any modifications or replacements of certain hardware and
software maintained by the Company. The study has been completed. The Company
has identified the computer systems that will require either modification,
upgrade or replacement. Implementation of the Company's year 2000 plan should be
completed by September 31, 1999. The Company anticipates that in-house personnel
will be primarily responsible for completing these tasks and that the costs will
be insignificant. As such, the Company believes that the planned modifications,
upgrades and replacements of existing systems will be completed in a timely
fashion to assure year 2000 compliance, and any related cost will not have a
material impact on the Company's results of operations, cash flows, or financial
conditions in future periods. The Company has budgeted for $25,000 to address
these expenses. In addition, the Company is also taking actions to assure that
its customers and vendors are taking steps to remedy their year 2000 issues.
The Company's BBN Certification is contingent upon the Company's year
2000 compliance. GTE's BBN division has provided a punch-list of issues
requiring attention and will continue to provide assistance to ensure the
Company's year 2000 readiness. The Company is not incurring any additional
unique risks in connection with year 2000 issues. It is however subject to the
risk that information and financial resources may be temporarily unavailable.
This societal risk may temporarily disrupt cash flows worldwide. The Company
believes that by becoming, and assisting its clients and vendors to become, year
2000 compliant it is likely to circumvent that threat. If year 2000 compliance
is not achieved by September 31, 1999, the Company will reallocate resources, as
necessary, to ensure compliance within three months, thereafter.
INFLATION
Management does not believe that inflation will have a material impact
on the Company's pricing of goods or services since the Company, generally, has
the ability to adjust prices for its technical services to meet the current
market conditions.
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<PAGE> 21
BUSINESS
BACKGROUND
MSI Holdings, Inc., a Utah corporation ("MSHI" or the "Company"),
headquartered in Austin, Texas, is a communications services company
specializing in turnkey solutions for high-speed Internet connectivity,
communication infrastructure design and installation, and network system
integration for customers in both the private and public sectors. MSHI has two
wholly-owned subsidiaries, Micro-Media Solutions, Inc., a Texas corporation
("MSI") and TeleVista, Inc., a Texas corporation, doing business as High
Power.Net, ("TVI"). TVI was incorporated in August, 1998 and has not yet
commenced operations. The Company is publicly traded on the OTC Bulletin Board
under the symbol "MSIA".
MSI was founded in 1993 to provide computer hardware, software
programming, system installation and support, maintenance, and media duplication
to the public and private sectors. On June 23, 1997, the then shareholders of
MSI entered into an agreement and plan of reorganization (the "Combination
Agreement") with Mountain States Resources Corporation (now known as MSI
Holdings, Inc.), whereby the Company acquired all of the issued and outstanding
stock of MSI in exchange for 9,310,000 shares of the Common Stock of the Company
(the "Combination"). The Combination was accounted for as a recapitalization.
Mountain State Resources Corporation changed its name to Micro Media Solutions,
Inc. and in October 1998, changed its name to MSI Holdings, Inc.
MSHI's facilities in east Austin, Texas are designed for final
assembly-type production, system integration services, depot repair (pick-up,
repair and return service), warehousing of computer equipment and collocation
(remote site Internet access by companies). Currently, the Company is not
providing collocation services, but is expected to be able to provide this
service by June 1999. These facilities are located in an economically challenged
area of Austin to introduce a non-traditional business into the area, to provide
high-tech employment skills to the typically underprivileged area residents, and
to access a loyal, under-utilized and readily available workforce. In the years
since its inception, the Company has grown from a 2 person operation to 71
employees as of May 31, 1999.
The Company has focused on systems design and system
implementation services and is a certified installer of copper and fiber optic
cabling for use in local area and wide area networks supporting data, voice, and
video applications. MSHI's computer networking services include system
integration and design installation as well as maintenance of local and wide
area networks ("LAN/WAN"). In this context the Company also provides hardware
and software sales related to its systems designs and implementation services.
As of 1997, the Company has been realigning its long-term business strategy to
focus on Internet-centric business opportunities including collocation,
web-casting (live video and audio feed broadcast over the Internet) and private
portal services.
INDUSTRY OVERVIEW
The Company, through its collocation services, intends to enter the
Internet access market in June 1999. This implementation date has been revised
from March 1999 to accommodate construction delays and permitting difficulties.
According to Hoover's Online industry review of the Internet/Online industry,
the Internet access market is currently a $3 billion industry and online
services are predicted to generate revenues of $15 billion per year by the year
2003. The increasing demand for data services and Internet connectivity is
causing considerable growth in the telecommunications industry. Provider and
consumer hardware and software technology have been rapidly advancing. In this
evolving market, global access to information has become increasingly important.
The Internet has evolved as the preferred medium to handle the demand for
increased data transmissions speeds. The Company believes companies in the
forefront of developing bandwidth capacity, transmission and processing speeds,
and Internet access are best positioned to capitalize on the growth potential in
this area of the telecommunications industry. Modem manufacturers are developing
faster modems, phone companies are seeking to transmit more data bits through
their lines and even direct-broadcast satellite companies, like DIRECT TV, are
entering the industry, including Microsoft's recent $1 billion investment in
Comcast. One of the main impediments to Internet growth is data transmission
speed. The Company believes that, absent increased bandwidth to handle the
increasing traffic on the Internet, delays during downloads will continue to be
costly and turn away users.
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<PAGE> 22
One of the main impediments to Internet growth is data transmission
speed. The Company believes that, absent increased bandwidth to handle the
increasing traffic on the Internet, delays during downloads will continue to
turn away users. By offering Internet bundled services, the Company plans to
provide the market with turn-key solutions to bridge the technology gap. The
Company's ability to provide comprehensive information technology solutions,
including wider bandwidths, will enhance, in the opinion of management, its
ability to provide competitive customer service and generate increasing
revenues.
SERVICES AND PRODUCTS
MSHI is a communications services company specializing in turnkey
solutions for high-speed Internet connectivity, communication infrastructure
design and installation, and network system integration in the private and
public sectors. The Company has plans to implement collocation services by June
1999.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's status as a
Historically Underutilized Business. However, in 1997, the Company elected to
change its direction to concentrate on communications technology services. The
Company intends to invest in the development of core infrastructure to support
collocation and Internet connectivity services by increasing personnel. Without
access to additional working capital, it is unlikely that the Company will be
able to retain the increased personnel necessary to complete this change in
direction to communication technology services.
MSHI's offers design, development, hosting, and high speed Internet
connectivity services, and will provide turn-key collocation services (including
on-site services and support). Its system integration services include the
certified design and installation of advanced copper and fiber optic lines for
both intra- and inter-plant cabling projects in the private and public sectors.
The Company also evaluates, installs, maintains, and administers advanced
LAN/WAN systems. Its full service system integration services include the
procurement, installation, configuration, and testing of key components.
Further, the Company's service and support team currently provides service and
repair for wireless, data, and voice technology networks throughout the State of
Texas.
STRATEGIC OPPORTUNITY
In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their east Austin facilities to GTE for installation of GTE's Point
of Presence ("POP") equipment (the "Sublease"). On May 29, 1998, MSI entered
into a 3 year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP (the "Connection Service"). MSI has
also subscribed to GTE's DiaLinx Service for 36 consecutive months, allowing for
the resale of Internet access to end-users (the "DiaLinx Service")(the Sublease,
Connection Service and DiaLinx Service are collectively referred to as the "GTE
Agreement"). GTE's establishment, management and monitoring of multiple domains
on behalf of MSI is included in the Connection Service. The Connection Service
was upgraded to GTE's Internet Advantage version 6.0 on September 29, 1998. MSI
will lease connections to the POP for access to the GTE Internet network to
other businesses. MSI will target companies that need direct, high-speed access
to the Internet through turn-key collocation services for high volume (known as
bandwidth) Internet web applications. Collocation is a service that provides a
high speed, high bandwidth connection to the Internet backbone using various
backup systems to increase the connection's fault tolerance. By connecting
directly to the Internet via the POP, MSI is able to eliminate the local loop,
the weakest component in localized Internet connections. The local loop is the
wired connection, usually a pair of copper wires called twisted pair, from the
telephone company's central office in a locality to its customers' telephones.
The local loop was originally designed for voice transmission only using analog
transmission technology on a single voice channel. Currently, the user's
computer modem converts analog signals in to digital signals. With the Digital
Subscriber Line ("DSL") technology, the local loop can carry digital signals
directly and at a much higher bandwidth than they do for voice only. MSI will
have the capacity to support over four thousand collocation rack spaces. These
rack spaces will be used to host the net servers for MSI clients and provide
those clients with direct access to the Internet, further avoiding the local
loop. When fully implemented, these collocation services are expected to
significantly increase MSHI's revenues over the term of the Connection Service
and DiaLinx Service. The GTE Agreements provide the potential for MSHI to
increase revenue by selling Internet
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<PAGE> 23
access to various high Internet demand entities for such activities as commerce
and academics. It is anticipated that the requisite hardware will be operational
on a commercial basis in June 1999.
As of March 23, 1999, MSI has been certified by GTE's BBN Professional
Services as meeting their technology and service quality standards for network
architecture, security architecture and facilities design. MSI is the first
company to receive this certification. Throughout the last half of fiscal year
1999, MSI, in conjunction with GTE's BBN Professional Services consultants
designed and implemented the Internet Accelerator Portal ("IAP(TM)"). The
IAP(TM) accelerates end-to-end Internet connectivity, increasing the user's
proximity and access speed to the Internet's content through direct connection
via the POP. This allows direct access to virtually unlimited bandwidth on
demand and eliminates the need for costly local loop circuits. End-users access
high speed connectivity services by taking advantage of DSL technology. In May
1999, MSI formed an alliance with Southwestern Bell to provide Southwestern
Bell's DSL service ("the Southwestern Bell DSL Reseller's Agreement"). As an
authorized reseller of Southwestern Bell's DSL service, MSI will offer its
customers (Internet Service Providers ("ISPs") and other resellers) the
opportunity to leverage Southwestern Bell's broadband technology and provide
them with high speed links, increased bandwidth and Asynchronous Transfer Mode,
a cell-based switching technology designed for broadband transmission of voice,
data and video. The combined IAP(TM), BBN Certification and DSL Agreement, when
operational, will enable MSI's customers to access the Internet or corporate
networks up to 200 times faster than conventional analog modems.
Currently MSHI's operations have been limited primarily to Texas.
However, MSHI plans to continue developing its marketing efforts to expand the
Company's operations beyond its home state. The Company's strategic alliances
with GTE and Southwestern Bell are also being utilized to promote this
objective. These agreements allow MSHI to satisfy the market's dynamic demands
for connectivity speed and have the potential of quickly moving the Company into
other geographic markets by adding additional POPs in other locations and
marketing Southwestern Bell's DSL service to ISPs and other bandwidth resellers.
MSHI's depot service operations and state-wide service networks allow
MSHI to provide inside /outside plant cable installations, development of data
processing and network technology and provide MSHI the opportunity to add
additional bundled-services to its product mix. MSHI is expanding its current
lines of depot services to include on-site service and depot operations for
maintaining computer equipment related to the Texas State Lottery. MSHI's
current depot services clients also include: GTECH Corporation, Transactive
Corporation, the State of Texas, Southwestern Bell Corporation and various Texas
school districts and university systems.
The Company's Internet expertise also affords it the opportunity to
provide certain, non-traditional information technology services, such as
maintaining "virtual" retail distribution centers. MSHI currently maintains the
exclusive Hewlett Packard online storefront, which provides web site access to
Fortune 100 companies, federal, state and local governmental agencies to
purchase Hewlett Packard equipment. Hoover's Online industry review estimates
this market sector, with participants like Amazon.com, as a $500 million annual
business.
COMPETITION
The telecommunications industry is highly competitive and the capital
requirements for entry are relatively low. The computer and information access
markets are characterized by rapidly changing technology and evolving industry
standards. Competition exists in both the processing and retail levels and is
based primarily on price, product features, reputation for service and quality,
sales promotions, merchandising terms, and availability of processing capacity.
The Company experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations, and software
developers. Major competitors of the Company include Original Equipment
Manufacturers ("OEMs") and distributors, smaller niche-market installers, and
information technology providers including system consultants. The size and
capitalization of the Company's competitors range from small local companies to
multi-national providers such as IBM, DELL and America Online. However, due in
part to the Company's change in direction to concentrate on communication
technology services, the Company is seeking a significant capital infusion.
Without this capital infusion it is likely that the Company will be unable to
compete with those entities all of whom have greater capital resources. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Overview" and "Going Concern Issues."
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<PAGE> 24
GOVERNMENT REGULATIONS
The Company previously relied on its status as a HUB to develop is
reputation and business. Subsequent to the departure of certain minority
officers, MSI has determined not to seek re-certification of its HUB status. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Loss of HUB Status."
FACILITIES
MSI's two facilities in east Austin consist of approximately 39,5000
square feet and 20,000 square feet, respectively, of leased office and warehouse
space with the leases expiring in July 31, 2008, and August 31, 2005,
respectively. Each lease contains an option for renewal for an additional 10
years. The larger of the two facilities is designed for collocation, production,
system integration services and depot repair while the smaller facility is used
as a warehouse.
EMPLOYEES
At May 31, 1999, MSI had a total of 71 employees, of which 66 are
full-time employees. None of MSI's employees are subject to a collective
bargaining agreement, and the Company believes its relations with its employees
are good.
LEGAL PROCEEDINGS
As of March 31, 1999, the Company has agreed to settle its lawsuits
related to the Company's 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. The Company 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 Common
Stock of MSI, held by Argus, to various shareholders who have previously
purchased such shares (the "Argus Related Shares"). The agreed upon settlement
provides that Argus return 200,250 shares of MSHI's Common Stock to MSHI, that
MSHI tender $250,000 to Argus and that MSHI issue the balance of 92,935 shares
of Common Stock as restricted shares. The parties have agreed to cancel the two
promissory notes from MSHI to Argus and release all other claims among the
parties.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
As of May 31, 1999, MSHI's current executive officers and directors,
their titles, ages and tenure are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NAME AGE POSITION WHICH SERVED
---- --- -------- ------------
<S> <C> <C> <C>
Roger M. Lane 51 Chief Operating Officer, President March 24, 1999
Glenn Birk 36 Vice President of Sales February 22, 1999
Stephen Hoelscher 40 Secretary April 22, 1999
Ernesto M. Chavarria (1)(2) 43 Chairman of the Board Of Directors February 16, 1998
Jose G. Chavez 48 Director June 23, 1997
Jon J. King 59 Director May 19, 1999
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
PERIOD FROM
NAME AGE POSITION WHICH SERVED
---- --- -------- ------------
<S> <C> <C> <C>
Blandina Cardenas (1)(2) 43 Director February 16, 1998
Daniel Dornier (1)(2) 36 Director July 21, 1998
Mitchell C. Kettrick 32 Director June 23, 1997
</TABLE>
- --------------------
(1) Members of the audit committee.
(2) Members 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 Shareholders of the Company.
BIOGRAPHICAL INFORMATION
Roger M. Lane, Chief Operating Officer, joined MSI in March 1999. He has
more than 20 years of experience in operations and logistics management in the
computer, copier, and software industries. Prior to joining MSI, Mr. Lane was
the Chief Operating Officer at Techworks, Inc. in Austin, Texas. Prior to that,
Mr. Lane was Vice- President of Operations at Ashton-Tate Corporation in
Torrance, California and Vice-President of Logistics at Intellogic Trace, Inc.
and Datapoint Corporation, both of San Antonio Texas. He holds a Bachelors of
Science degree in Mechanical Engineering from the University of Maine at Orono,
and a Masters of Science degree in Management (Inventory and Production
Control) from Rensselaer Polytechnic Institute, Troy, New York.
Glenn Birk, Vice President of Sales, has over 9 years of experience in
sales at NCR, AT&T, Lawson Software, and BBN/GTE. Prior to joining MSI in
February 1999, Mr. Birk was an Account Executive for BBN/GTE and was recognized
as the company's sixth leading sales representative for 1998. He is responsible
for leading MSI's sales force. He holds a Bachelors of Business Administration
degree in Marketing from the University of Texas at Austin.
Stephen Hoelscher, CPA, Secretary, and Chief Accounting Officer has 17
years of accounting and auditing experience. Mr. Hoelscher has served as MSI'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 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 University) in Canyon, Texas in 1981.
Ernesto M. Chavarria, Director, has over 25 years experience providing
consulting services in the area of international business development and public
affairs to Fortune 500 Companies. Mr. Chavarria has been the President of ITBR,
Inc., an international overseas consulting company since 1990. Mr. Chavarria has
been a Director of the Company since November 1997. Mr. Chavarria holds a
Bachelors of Business Administration degree from The University of Texas at
Austin.
Jose Chavez, Director, has over 25 years' experience in manufacturing,
engineering, system design and development, energy engineering, and computer
technology management. Mr. Chavez was Plant Manager for HDS, a division of Hart
Graphics, Inc., a computer disk manufacturer for 1991 to 1993, and Manufacturing
Manager for CompuAdd Corporation, a personal computer manufacturer from 1989 to
1991. Prior to working at CompuAdd, Mr. Chavez was a section head at Hughes
Aircraft for nine years. Mr. Chavez obtained a Master of Administrative
Management degree from the University of Redlands Business School in 1981 and a
Bachelor of Science degree in
-25-
<PAGE> 26
Electrical Engineering from the University of Texas at El Paso in 1975. Mr.
Chavez has been a director of the Company since June, 1997. Mr. Chavez was
terminated as the President and CEO of MSHI on April 20, 1999.
Jon J. King, Director, has over 20 years of experience as a private venture
capital investor. For the past three years Mr. King has served as the U.S.
investment manager for Entrepreneurial Investors Ltd., a European private equity
fund and beneficial owner of at least 10% the Company Common Stock. For the two
years before that, Mr. King served as a consultant to various private companies.
In 1962, Mr. King obtained a Bachelors of Science degree in Engineering from
Purdue University in West Lafayette, Indiana.
Blandina Cardenas, Director, has been a Professor at the LBJ Institute for
Teaching and Learning since 1993 and has served as a Director of the Office of
Minorities in Higher Education. She has also served as the Commissioner of
Presidential Appointments to the U.S. Commission of Civil Rights. Ms. Cardenas
has also been an Associate Professor at the University of Texas at San Antonio
for over 14 years. Ms. Cardenas has been a Director of the Company since
November 1997.
Daniel Dornier, Director, brings over a decade's worth of investment
banking experience to the Company. Since 1995, Mr. Dornier has been the
President of Dornier Capital Advisers, where he manages investment portfolios
for high net worth in the U.S. and Europe. Between 1993 and 1995, Mr. Dornier
was a private investment manager for various companies owned by the Dornier
family. He was previously an investment banker at SBC Warburg, Dillon, Reed from
1991 to 1993. In 1989, he obtained his Master of Business Administration from
the City University of Bellevue, Washington, the Zurich, Switzerland campus, and
in 1984 he received a Bachelor of Business Administration degree from the
University of Nuertingen, Germany.
Mitchell Kettrick, Director, has over 12 years of experience in
manufacturing, test diagnostics and networking. As MSI's co-founder and Chief
Technology Officer, he oversaw technical services, systems design, and
information services. Mr. Kettrick was the Quality Assurance Manager for Hart
Distribution Service, a computer disk manufacturer, in 1992 and the
Manufacturing Systems Test Manager for CompuAdd Corporation, a personal
computer manufacturer, from 1987 to 1991. Mr. Kettrick received an Associate
degree in Computer Maintenance Technology from Texas State Technical College in
1987. Mr. Kettrick has been a director of the Company since June 1997. Mr.
Kettrick was terminated as the Company's Vice-President and Secretary on April
20, 1999.
RECENT CHANGES
As of January 29, 1999, David W. Hill and Tom M. Upton, the former Chief
Financial Officer and Vice- President of Sales, respectively, resigned to pursue
other interests. On April 20, 1999, Jose Chavez, Mitchell Kettrick and Jaime
Munoz, the President and CEO, Secretary and Vice-President of Operations,
respectively, were terminated.
BOARD COMMITTEES
Currently, the Company maintains (i) a Compensation Committee, consisting
of three Board Members, one of which is to be designated by the holders of the
Series B Preferred and (ii) an Audit Committee consisting of three Board
Members. Currently the Compensation Committee and Audit Committee consist of
Ernesto M. Chavarria, Blandina Cardenas and Daniel Dornier.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company (the "Outside
Directors") are paid the sum of $1,000 for each meeting of the Board of
Directors attended by them. Additionally, they are reimbursed for expenses
incurred in attending meetings of the Board of Directors and related committees.
As of May 20, 1999, MSI has four Outside Directors: Ernesto M. Chavarria, Jon J.
King, Blandina Cardenas and Daniel Dornier.
-26-
<PAGE> 27
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by the Utah Business Corporation Act, as amended, the Company
has included in its Revised Articles of Incorporation a provision that the
Company may indemnify its officers, directors, employees and agents under
certain circumstances, including those circumstances in which indemnification
would otherwise be discretionary, and the Company is required to advance
expenses to its officers and directors as incurred in connection with proceeding
against them for which they may be indemnified.
-27-
<PAGE> 28
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE.
The following table sets forth compensation for the Chief Executive Officer
("CEO"), and the four most highly compensated other executive officers whose
salary and bonus for fiscal 1999 was $100,000 or greater (collectively, the
"Named Executives"). Only the former CEO and two other former executive officers
of MSI received salaries and bonuses in excess of $100,000 in fiscal 1999.
Consequently, only the former CEO and two other former executive officers appear
in this table.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
===================================================================================================================
Long Term Compensation
=================================
Annual Compensation Awards Payouts
===================================================================================================================
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Restricted Underlying
Name and Other Annual Stock Option/ LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) SAR's(#) Payouts Compensation
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JOSE G CHAVEZ 1999 $ 95,000 $ 0 $7,800 $0 $ 0 $0 $0
(former President & CEO) 1998 105,500 0 0 0 62,500 0 0
1997 50,500 34,000 0 0 0 0 0
1996 87,000 13,000 0 0 0 0 0
MITCHELL KETTRICK 1999 $ 68,000 $ 0 $ 0 $0 $ 0 $0 $0
(former V.P. & Secretary) 1998 75,000 0 0 0 31,250 0 0
1997 5,200 0 0 0 0 0 0
1996 45,000 0 0 0 0 0 0
DAVID W. HILL 1999 $ 47,000 $ 0 $ 0 $0 $151,000 $0 $0
(former CFO)
===================================================================================================================
</TABLE>
EMPLOYMENT CONTRACTS
As of March 24, 1999, the Company entered into an employment agreement
with Roger M. Lane, Chief Operating Officer (the "Lane Agreement"). The Lane
Agreement provides for an annual salary of $120,000 and reimbursement of
ordinary, necessary and documented business expenses. In addition, the Lane
Agreement provides for a stock option to purchase up to 450,000 shares of Common
Stock vesting as follows: (i) options to purchase 100,000 shares of Common Stock
will vest at six months after the grant date of March 24, 1999; (ii) options to
purchase an additional 110,000 shares of Common Stock will vest on the first
anniversary of the grant date; and (iii) options to purchase 120,000 shares will
vest on each of the second and third anniversary of the grant date. The
agreement is terminable by either party.
On June 15, 1997, the Company entered into employment agreements with
Jose Chavez, President and CEO (the "Chavez Agreement"), Mitchell Kettrick, Vice
President (the "Kettrick Agreement"). Messrs. Chavez and Kettrick had agreed to
renegotiate the option terms of the Chavez and Kettrick Agreements, The
re-negotiations were expected to be but were not concluded by January 1999. On
April 20, 1999, the Company terminated Messrs. Chavez and Kettrick.
CERTAIN TRANSACTIONS
Certain officers, directors, shareholders and employees of the Company
have ownership interests in entities to which the Company has advanced monies
for working capital and expenses. The advances were converted to notes
-28-
<PAGE> 29
and were personally guaranteed by the shareholders of the related entities. The
schedule below lists the names of the shareholders and their percentage of
ownership.
<TABLE>
<CAPTION>
Prima
Development & Quality Salas
Construction, Inc. Communications, Inc. Concessions, Inc.
Name of Stockholder (Percentage of Ownership)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jose G. Chavez (1)(2) 26 28 33
Frank Rodriguez (1) 15 5 -
Andrew Ramirez (1) 26 27 35
George Villalva (1) 15 5 4
Mitchell C. Kettrick (1)(2) 18 10 13
Bruce Funderburk - 20 -
Laurel Funderburk - 5 -
--- --- --
TOTALS 100 100 85
=== === ==
</TABLE>
- ------------------------
(1) Former officers of MSHI
(2) Director of MSHI
Certain directors of the Company serve as officers, directors and
advisors to these related companies on an as needed basis and their involvement
is minimal.
As of March 31, 1998 and 1997, the Company had amounts due from the
following related entities:
10% NOTE RECEIVABLE FROM RELATED PARTIES
<TABLE>
<CAPTION>
1998 1997
----- --------
<S> <C> <C>
Prima Development & Construction, Inc. $ -0- $337,597
Quality Communications, Inc. -0- 84,394
Salas Concessions, Inc. -0- 140,048
TOTAL $ -0- $562,039
===== ========
</TABLE>
The referenced loans were made by MSI to the named entities for the
operating working capital purposes of their respective businesses. MSHI has
never entered into a contract with any of the referenced entities for the
provision of goods or services. As of March 31, 1998, no amounts were owed to
the Company by any of the entities listed above. In addition, the Company does
not intend to loan any additional funds to the above named entities in the
future.
The shareholders of MSHI set forth above signed personal guarantees for
all the notes and leases. Prima Development & Construction, Inc. ("Prima"), a
construction and fiber optics cabling firm, executed the original loan agreement
during the year ended March 31, 1997, with the principal amount of the loan of
$185,000. Interest is due and payable monthly as it accrues, commencing on April
10, 1997 and continuing on the same day of each month thereafter during the term
of the note. Principal and interest are payable in monthly installments of
$2,444.79. The annual interest rate on the note is 10%. An amendment to the loan
agreement with Prima was executed to incorporate funds advanced from MSI. The
principal amount of the amendment is $66,983. Throughout the year ended March
31, 1998, MSI loaned an additional $85,614 to Prima on an as needed basis.
Interest is due and payable monthly as it accrues, commencing on January 2, 1998
and continuing on the same day of each month thereafter during the term of the
note. Principal and interest are payable in monthly installments of $885. The
annual interest rate on the note
-29-
<PAGE> 30
is 10%. The loan, as amended, was repaid in full during the year ended March 31,
1998. During the quarter ended December 31, 1998, Prima advanced $32,000 to
MSHI. The advance bore no interest and was repaid within 10 days of its
origination. The ownership of Prima includes owners of MSHI as well as other
outside investors.
Quality Communications, Inc. ("QCI"), a telecommunications corporation,
executed a loan agreement during the year ended March 31, 1997, in the principal
amount of $84,394. Interest is due and payable monthly as it accrues, commencing
on April 10, 1997 and continuing on the same day of each month thereafter during
the term of the note. Principal and interest are payable in monthly installments
of $1,025. The annual interest rate on the note is 10%. The loan was repaid
during the year ended March 31, 1998. The shareholders of QCI include officers,
directors and shareholders of MSHI as well as other outside investors.
Salas Concessions, Inc. ("Salas"), a food service corporation, executed
a loan agreement during the year ended March 31, 1997, in the principal amount
of $133,700. Interest is due and payable monthly as it accrues, commencing on
April 10, 1997 and continuing on the same day of each month thereafter during
the term of the note. Principal and interest are payable in monthly installments
of $1,767. The annual interest rate on the note is 10%. The loan was
subsequently amended and MSI loaned Salas an additional $6,348. The full loan,
as amended, was repaid during the year ended March 31, 1998. The shareholders of
Salas include officers, directors and shareholders of MSHI as well as other
outside investors.
During the years ended March 31, 1997 and 1998, the above listed
entities did not pay interest to the Company. During the same periods, no other
income or expense was received from or paid to the above listed entities.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 31, 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. 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 FULLY
SHARES OUTSTANDING SHARES (1) DILUTED SHARES (2)
======================================================================================================
<S> <C> <C> <C>
Blandina Cardenas (3) 5,000 0.02% 0.02%
501 Waller Street
Austin, Texas 78702
Ernesto Chavarria (3) 75,000 0.34% 0.28%
501 Waller Street
Austin, Texas 78702
Jose Chavez (4) 6,675,000 30.16% 24.49%
501 Waller Street
Austin, Texas 78702
Daniel Dornier (5) 340,000 1.56% 1.25%
501 Waller Street
Austin, Texas 78702
Entrepreneurial Investors Ltd.(6) 8,286,800 27.00% 30.40%
P.O. Box 40643
Freeport, Bahamas
</TABLE>
-30-
<PAGE> 31
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF PERCENT OF PERCENT OF FULLY
SHARES OUTSTANDING SHARES (1) DILUTED SHARES (2)
======================================================================================================
<S> <C> <C> <C>
Stephen Hoelscher (7) 22,000 0.10% 0.08%
501 Waller Street
Austin, Texas 78702
Mitchell Kettrick (8) 1,500,000 6.54% 5.50%
501 Waller Street
Austin, Texas 78702
Luana Pearce (9) 1,250,000 5.73% 4.59%
4545 Golf Vista Dr.
Austin, Texas 78730
All Directors and 8,617,000 38.72% 31.61%
Officers as a Group (10)
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculations are based on 21,802,016 outstanding shares of Common
Stock as of May 31, 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 Lock-Up 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
27,259,190 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 March 31, 1999 were exercised and all the 1,500,000 shares of
Common Stock the Company has received commitments for as of March 31,
1999, were issued.
(3) These directors are the beneficial owners of shares issued as
additional compensation. The reflected shares are contained within the
shares being registered hereunder. These officers and directors are
included in this table for disclosure purposes only.
(4) Includes 6,575,000 shares of Common Stock outstanding and 100,000
shares of Common Stock issuable upon exercise of Mr. Chavez's Options.
(5) 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
50,000 shares issuable upon conversion of 5,000 Shares of Series E
Preferred.
(6) Entrepreneurial Investors, Ltd.("EIL") is the beneficial owner of
an aggregate of 8,286,800 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 shares, (iii) 100 shares of Common Stock issuable
upon conversion of 5 shares of Series B and 5 shares of Series D
Preferred shares, and (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.
(7) 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.
(8) Includes 1,425,000 shares of common Stock outstanding and 75,000
shares of Common Stock issuable upon the exercise of Mr. Kettrick's
Options.
-31-
<PAGE> 32
(9) Includes 550,000 shares of Common Stock acquired from Jose Chavez,
the former President of MSHI, 475,000 shares of Common Stock acquired
from George Villalva, a former director of MSI, and 225,000 shares of
Common Stock acquired from Argus Management, Inc. See "Management,
Discussion and Analysis of Financial Condition and Results of Operation
-- Legal Proceedings."
(10) Includes 8,441,950 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 and 75,000 shares of
Common Stock issuable upon exercise of Mr. Kettrick's Options.
Rule 13d-3 under the Securities Exchange Act of 1934, involving the
determination of beneficial owners of securities, includes as beneficial owners
of securities, among others, any person who directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise has, or shares,
voting power and/or investment power with respect to such securities; and, any
person who has the right to acquire beneficial ownership of such security within
sixty days through means, including, by notice of any option, warrant or
conversion of a security. Any securities not outstanding which are subject to
such options, warrants or conversion privileges shall be deemed to be
outstanding securities of the class owned by such person, but shall not be
deemed to be outstanding for the purpose of computing the percentage of the
class by any other person.
There are no contractual arrangements or pledges of the Company's
securities, known to the Company, which may at a subsequent date result in a
change of control of the Company.
SELLING SHAREHOLDERS
The following table sets forth the ownership of the Common Stock
assuming conversion of the Series B Preferred, Series C Preferred, Series D
Preferred, the exercise of the Warrants and assuming the exercise of the
Placement Agent's Option, the Placement Agent's Option II, and the Placement
Agent's Option III.
<TABLE>
<CAPTION>
RELATION TO
NAME MSHI TOTAL SHARES PERCENT(+)
---- ---- ------------ ----------
<S> <C> <C>
Beatrice Schaefer (1) 324,089 1.19%
Heinz C. Winzeler (2) 961,089 3.53%
Entrepreneurial Investors, Ltd.(3) 8,320,682 30.52%
Equity Services, Ltd.(4) 382,529 1.40%
C. J. and Florence Adams (5) 100 0.00%
Gerald and Gay Adams (5) 500 0.00%
Mark and Patricia Adams (5) 250 0.00%
Luana Pearce, Trustee of Luana Pearce Trust (5) 15,000 0.06%
Mary Dietze (5) 5,000 0.02%
Jim Pearce (5) 3,000 0.01%
Beula Mae Pearce (5) 2,500 0.01%
C. W. Cupp (5) 10,000 0.04%
Dave Pistorius (5) 7,000 0.03%
Luana Pearce (5) 225,000 0.83%
John Stockton (5) 13,335 0.05%
Fred Shelton (5) 1,500 0.01%
Floyd Tate (5) 2,667 0.01%
Fred Kettrick (5) 1,333 0.00%
Norm Mendeke (5) 3,000 0.01%
Mike Batson (5) 3,000 0.01%
Michael Jahr (6) 100,576 0.37%
Rainier Bischoff (6) 100,576 0.37%
Helmut Heinzel (6) 100,576 0.37%
</TABLE>
-32-
<PAGE> 33
<TABLE>
<CAPTION>
RELATION TO
NAME MSHI TOTAL SHARES PERCENT(+)
---- ---- ------------ ----------
<S> <C> <C>
Thomas Heinzel (6) 100,576 0.37%
Heinz Schmitz (6) 100,576 0.37%
Cornelius Dornier (7) 150,863 0.55%
David Dornier (8) 30,173 0.11%
Matthia Dornier (6) 100,576 0.37%
Gabriele Dornier (7) 150,863 0.55%
Peter Widenmann (9) 10,058 0.04%
Stephen Pampush (9) 10,058 0.04%
Silvius Dornier (10) 382,187 1.40%
Herman Ebel (11) 191,094 0.70%
Penninsular Corp 50,288 0.18%
Martina Rodriguez (12) Employee 3,250 0.01%
Roy Barrientes (12) Employee 5,000 0.02%
Amador DeLeon (12) Employee 31,000 0.11%
Trisha Truong (12) Employee 8,000 0.03%
Michael A. Chavez (12) Employee 11,500 0.04%
Heidi Sellman (12) Employee 3,000 0.01%
Antonia Ramirez (12) Employee 1,000 0.00%
Abel Herrerra (12) Employee 1,500 0.01%
Lauro Bustamante (12) Employee 1,500 0.01%
Robert Loera (12) Employee 5,000 0.02%
Oziel Rios (12) Employee 500 0.00%
Gary Salbeck (12) Employee 3,000 0.01%
Maria Lopez (12) Employee 1,000 0.00%
Matt Evans (12) Employee 8,000 0.03%
Kenneth Miller (12) Employee 3,000 0.01%
Jim Heron (12) Employee 1,500 0.01%
Paul Samaripa (12) Employee 6,000 0.02%
Emma Barrientos (12) Employee 1,000 0.00%
Tamara Shiplet (12) Employee 2,500 0.01%
Dana Hall (12) Employee 2,500 0.01%
Richard Ray (12) Employee 2,500 0.01%
Iona Smith (12) Employee 2,000 0.01%
Larry Awalt (12) Employee 1,500 0.01%
Ann Jun (12) Employee 3,500 0.01%
Mary K. Marlatt (12) Employee 3,500 0.01%
Randy Barber (12) Employee 41,000 0.15%
John Miller (12) Employee 1,500 0.01%
Stephen Hoelscher (12) Employee 25,000 0.09%
Jose A. Lara (12) Employee 1,500 0.01%
Duffy Hobbs (12) Employee 3,000 0.01%
Lisa Nieri (12) Employee 4,500 0.02%
Jaime Munoz (12) Officer 80,000 0.29%
Scott Cannon (12) Employee 1,000 0.00%
Linda Wolf (12) Employee 500 0.00%
Bryan Cotter (12) Employee 3,500 0.01%
Melissa Toney (12) Employee 1,000 0.00%
Rafael Andrada (12) Employee 1,500 0.01%
Michele Schulte (12) Employee 1,000 0.00%
Stephanie Moya (12) Employee 1,000 0.00%
Dick Young (12) Employee 2,000 0.01%
Sandra Boesch (12) Employee 3,000 0.01%
</TABLE>
-33-
<PAGE> 34
<TABLE>
<CAPTION>
RELATION TO
NAME MSHI TOTAL SHARES PERCENT(+)
---- ---- ------------ ----------
<S> <C> <C>
Linda Garrett (12) Employee 1,800 0.01%
Anabella Ferris (12) Employee 2,500 0.01%
John Roam (12) Employee 1,500 0.01%
Peter Cantu (12) Employee 1,000 0.00%
Jason Ross (12) Employee 1,500 0.01%
Jesus Martines (12) Employee 1,000 0.00%
Steve Laird (12) Employee 1,000 0.00%
Pete Gutierrez (12) Employee 1,000 0.00%
Gigi Edwards (12) Employee 3,000 0.01%
Susan Cloutier (12) Employee 3,000 0.01%
Carlos Baca (12) Employee 1,000 0.00%
Joseph Rodrigues (12) Employee 2,500 0.01%
Neil Edwards (12) Employee 3,500 0.01%
Todd Wagner (12) Employee 2,000 0.01%
Shane Black (12) Employee 500 0.00%
Mark Peevey (12) Employee 500 0.00%
Richard Woods (12) Employee 500 0.00%
Ricardo Martinez (12) Employee 500 0.00%
Vivian Torres (12) Employee 500 0.00%
Ken Wilson (12) Employee 500 0.00%
Jaimison Clark (12) Employee 1,000 0.00%
David Painter (12) Employee 1,500 0.01%
Nydia Rojas (12) Employee 1,000 0.00%
Chrisitina DeLeon (12) Employee 750 0.00%
Marie Louissaint (13) Consultant 2,000 0.01%
Blandina Cardenas (13) Director 5,000 0.02%
Donna Gandy (13) Consultant 14,000 0.05%
Ernesto Chavarria (13) Director 75,000 0.28%
UniCorp, Inc. (13) Consultant 2,000 0.01%
Dr. Clifton Barnhart (13) 15,000 0.06%
Michael E. Austin (13) 13,000 0.05%
Panther Consulting, Inc (14) 400,000 1.47%
Pinecrest Associates, Inc (15) 418,020 1.53%
Adjustments (16) 575,600 2.11%
</TABLE>
- --------------
(+) The calculations used to drive the percentages assume exercise and
conversion of all warrants and conversion rights into the underlying shares of
Common Stock. Consequently, the percentages were based on an aggregate of
27,259,190 shares of Common Stock outstanding.
(1) Consists of 200,000 shares of Common Stock issued upon conversion of 20,000
shares of Series B Preferred, 120,000 shares of Common Stock issued upon
execution of Class A Warrants granted in conjunction with the Notes, and 2,938
shares of Common Stock issued for payment of interest by the Company, all of
which were received in connection with a Senior Convertible Note, dated
September 30, 1997, and converted on December 31, 1997.
(2) Consists of 500,000 shares of Common Stock issued upon conversion of 50,000
shares of Series B Preferred , 300,000 shares of Common Stock issued upon
execution of Class A Warrants granted in conjunction with the Notes, 7,348
shares of Common Stock issued for payment of interest by the Company, all of
which were received in connection with a Senior Convertible Note, dated
September 30, 1997, and converted on December 31, 1997, and 15,000 shares of
Series D Preferred convertible into 150,000 shares of Common Stock.
-34-
<PAGE> 35
(3) Entrepreneurial Investors, Ltd. ("EIL") is a widely held company with 15
shareholders and approximately $61,000,000 in assets as of June 30, 1998, the
date of its last audit. Robert E. Cordes is President and a director of EIL.
EIL's shares consist of 943,400 shares of Common Stock issued upon conversion of
94,340 shares of Series C Preferred, 400,000 shares of Series B Preferred
convertible into 4,000,000 shares of Common Stock, Class A Warrants covering
2,400,000 shares of Common Stock, and 94,340 shares of Series D Preferred
convertible into 943,400 shares of Common Stock.
(4) Equity Services Ltd. ("ESL") is owned by four foreign corporations. Ms. Lynn
Turnquest is ESL's managing Director. The shares attributed to ESL consist of
200,000 shares of Common Stock issued upon conversion of 20,000 shares of Series
B Preferred, 47,170 shares of Common Stock issued upon conversion of 4,717
shares of Series C Preferred, and 133,170 shares of Common Stock issued upon
conversion of 13,317 shares of Series D Preferred.
(5) The shares were issued to shareholders who previously paid for these shares,
although such shares were the subject of litigation, which has now been settled.
See "Management, Discussion and Analysis of Financial Condition and Results of
Operation -- Legal Proceedings."
(6) This number consists of 10,000 shares of Series D Preferred Stock
convertible into 100,000 shares of Common Stock.
(7) This number consists of 15,000 shares of Series D Preferred Stock
convertible into 150,000 shares of Common Stock.
(8) This number consists of 3,000 shares of Series D Preferred Stock convertible
into 30,000 shares of Common Stock.
(9) This number consists of 1,000 shares of Series D Preferred Stock convertible
into 10,000 shares of Common Stock.
(10) This number consists of 38,000 shares of Series D Preferred Stock
convertible into 380,000 shares of Common Stock.
(11) This number consists of 19,000 shares of Series D Preferred Stock
convertible into 190,000 shares of Common Stock.
(12) These shares are issuable to the Company's employees as compensation.
(13) These shares are issuable to the Company's consultants for services
rendered.
(14) This number consists of 400,000 shares of Common Stock issuable upon
exercise of the Placement Agent's Option. The options were purchased from ESL by
Panther Consulting, Inc. ("Panther"), effective November 23, 1998. D.A. Kent is
Panther's President.
(15) This number consists of: Class A Warrants covering 120,000 shares of Common
Stock, 47,170 shares of Common Stock issuable upon exercise of the Placement
Agent's Option II, 250,850 shares of Common Stock issuable upon exercise of the
Placement Agent's Option III., The options were purchased from ESL by Pinecrest
Associates, Inc. ("Pinecrest"), effective November 23, 1998. Sylvia Seymour is
Pinecrest's President.
(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.
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PLAN OF DISTRIBUTION
The Shares of Common Stock may be offered and sold from time to time by
the Selling Shareholders, or by pledges, donees, transferees or other successors
in interest. The Selling Shareholders will act independently of the Company in
making decisions with respect to the offer, sale or transfer of their Shares at
prices related to the then current market price or in negotiated transactions.
The Shares may be sold by the Selling Shareholders in one or more transactions
on the OTC Bulletin Board or otherwise at market prices then prevailing or in
privately negotiated transactions. The Shares may be sold by one or more of the
following: (i) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; (ii) purchases and resale by a broker-dealer for its
account pursuant to this Prospectus, and (iii) a block trade in which the
broker-dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction. The Company has not been advised by the Selling Shareholders that
they have, as of the date hereof, made any arrangements relating to the
distribution of the Shares covered by this Prospectus. In effecting sales,
broker-dealers engaged by the Selling Shareholders may arrange for other
broker-dealers to participate, and, in such case, broker-dealers may receive
commissions or discounts from the Selling Shareholders in amounts to be
negotiated immediately prior to sale.
In offering the Shares, the Selling Shareholders and any broker-dealers
and any other participating broker-dealers who execute sales for the Selling
Shareholders may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. Accordingly, any profits realized
by the Selling Shareholders and the compensation of such broker-dealer may be
deemed to be underwriting discounts and commissions. Any Shares covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this Prospectus.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.10 par value, and 10,000,000 shares of Preferred Stock, $2.00
par value.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each
share held of record on matters to be voted on by the shareholders of the
Company. Subject to the prior rights of holders of Preferred Stock, holders of
shares of Common Stock are entitled to receive dividends when, as, and if
declared by the Company's Board of Directors, out of funds legally available to
the Company. The Company currently intends to retain all future earnings for the
use in the operation of its business and therefore does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future. See "Dividend
Policy." The Common Stock has no preemptive or other subscription rights and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All of the outstanding shares of Common Stock are fully
paid and non-assessable except that the: (i) 9,600 shares issued to Laura
Chavez; (ii) 12,000 shares issued to Katina Kettrick; and (iii) 7,500 shares
issued to Lilia I. Mena may not be fully paid.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue
without further vote or action by the shareholders, up to 10,000,000 shares of
Preferred Stock, in one or more series, and to designate the number of shares
constituting any series, and to fix the rights, preferences, privileges and
restrictions thereof. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders. The issuance of Preferred Stock with
conversion rights may adversely affect the voting power of the holders of Common
Stock, including the loss of voting control.
Although the Company had at one time designated 50,000 shares of Series
A Preferred Stock, all such shares have been canceled in connection with the
Combination Agreement.
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<PAGE> 37
On November 12, 1997, the Company filed with the Utah Secretary of
State a Certificate of Designation, Preferences, Rights and Limitations of
Series B Cumulative Preferred Stock, authorizing 420,000 shares of Series B 5%
Cumulative Convertible Non-Voting Preferred Stock (the "Series B Certificate").
All 420,000 shares were issued on November 12, 1997 in connection with the
Private Placement Phase I. The Series B Certificate was subsequently amended on
January 29, 1998, to increase the number of Series B Preferred authorized to
490,000. The additional 70,000 shares of Series B Preferred were issued on
February 11, 1998, upon conversion of the Notes. Each share of Series B
Preferred Stock is convertible, at any time, at the option of the holder, into
the number of shares of the Company's Common Stock determined by dividing (i)
the sum of $5.30 and the amount of any accrued and unpaid dividends with respect
to such share on such date (the "Liquidation Amount"), by (ii) the Conversion
Price per share initially set at $0.53, subject to adjustment upon certain
events. The holders of Series B Preferred Stock are entitled to cumulative
dividends at an annual rate of 5% of the Liquidation Amount per share, payable
quarterly. Such dividends are payable in cash or in Common Stock based on its
current market price, determined by the average of the daily sales prices for
the thirty (30) consecutive trading days preceding the payment date.
On January 29, 1998, the Company filed with the Utah Secretary of State
a Certificate of the Designation, Preferences, Rights and Limitations of Series
C Cumulative Preferred Stock, authorizing 99,057 shares of Series C 6%
Cumulative Convertible Non-Voting Preferred Stock. All 99,057 shares of Series C
Preferred were issued on January 30, 1998 in connection with the Private
Placement Phase II. Each share of Series C Preferred Stock is convertible, at
any time, at the option of the holder, into the number of shares of the
Company's Common Stock determined by dividing (i) the sum of $10.60 and the
amount of any accrued and unpaid dividends with respect to such share on such
date (the "Liquidation Amount"), by (ii) the Conversion Price per share
initially set at $1.06, subject to adjustment upon certain events. The holders
of Series C Preferred Stock are entitled to cumulative dividends at an annual
rate of 6% of the Liquidation Amount per share, payable quarterly. Such
dividends are payable in cash or in Common Stock based on its current market
price, determined by the average of the daily sales prices for the thirty (30)
consecutive trading days preceding the payment date. The Series C Preferred
holders have liquidation rights in parity with the Series B Preferred holders.
On April 22, 1998, the Company filed with the Utah Secretary of State a
Certificate of the Designation, Preferences, Rights and Limitations of Series D
Cumulative Preferred Stock, authorizing 247,642 shares of Series D 6% Cumulative
Convertible Non-Voting Participating Preferred Stock (the "Series D
Certificate"). The Series D Certificate was subsequently amended on May 14,
1998, May 21, 1998, and June 26, 1998, to increase the number of Series D
Preferred authorized to 258,657, 274,407 and 279,657, respectively. A total of
279,657 shares of Series D Preferred were issued in three phases which were
completed on July 8, 1998 in connection with the Private Placement Phase III.
Each share of Series D Preferred Stock is convertible, at any time, at the
option of the holder, into the number of shares of the Company's Common Stock
determined by dividing (i) the sum of $10.60 and the amount of any accrued and
unpaid dividends with respect to such share on such date (the "Liquidation
Amount"), by (ii) the Conversion Price per share initially set at $1.06, subject
to adjustment upon certain events. The holders of Series D Preferred Stock are
entitled to cumulative dividends at an annual rate of 6% of the Liquidation
Amount per share, payable quarterly. Such dividends are payable in cash or in
Common Stock based on its current market price, determined by the average of the
daily sales prices for the thirty (30) consecutive trading days preceding the
payment date. The Series D Preferred holders have liquidation rights in parity
with the Series B and Series C Preferred holders.
On October 26, 1998, the Company filed with the Utah Secretary of State
a Certificate of the Designation, Preferences, Rights and Limitations of Series
E Cumulative Preferred Stock, authorizing 105,000 shares of Series E 6%
Cumulative Convertible Non-Voting Participating Preferred Stock (the "Series E
Certificate"). The Certificate of Designation was subsequently amended to
increase the number of Series E Preferred shares to a total of 157,500 shares. A
total of 146,252 shares of Series E Preferred were issued as of March 31, 1999.
The remaining 11,248 shares of Series E Preferred will be returned to authorized
but undesignated shares of preferred stock. Each share of Series E Preferred
stock is convertible, at any time, at the option of the holder, into ten shares
of the Company's Common Stock determined by dividing (i) the sum of $30 and the
amount of any accrued and unpaid dividends with respect to such share on such
date (the "Liquidation Amount"), by (ii) the Conversion Price per share
initially set at $3.00, subject to adjustment upon certain events. The holders
of Series E Preferred Stock are entitled to cumulative dividends at an annual
rate of 6% of the Liquidation Amount per share, payable quarterly. Such
dividends are payable
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<PAGE> 38
in cash or in Common Stock based on its current market price, determined by the
average of the daily sales prices for the thirty (30) consecutive trading days
preceding the payment date. The Series E Preferred holders have liquidation
rights in parity with the Series B, Series C and Series D Preferred holders.
For five years from the date of issuance of the Series B, C and D
Preferred, respectively, the holders of Series B Preferred have the right to
elect one (1) member of the Board of Directors, the holders of the Series C
Preferred have the right to elect one (1) member of the Board of Directors, and
the holders of the Series D Preferred have the right to elect one (1) member of
the Board of Directors. The holders of Common Stock will suffer immediate and
significant dilution to their percentage ownership of the Common Stock upon
conversion of the Series B Preferred, the Series C Preferred, the Series D
Preferred and/or the Series E Preferred.
WARRANTS AND PLACEMENT OPTIONS
The Company issued Class A Warrants to purchase an aggregate of
2,520,000 shares of Common Stock on November 11, 1997 in connection with Private
Placement Phase I. The Warrants are exercisable for a two (2) year period
commencing on January 3, 1998 and ending on January 31, 2000. The exercise price
of the Warrants is $1.50 and the Warrants contain anti-dilution provisions
providing adjustment in the event of any recapitalization, stock dividend, stock
split or similar transaction. The Warrants do not entitle the holder thereof to
any rights as a shareholder of the Company until the Warrants are exercised and
shares are purchased thereunder. The Warrants and the shares of Common Stock
issuable upon exercise thereof may not be offered for sale except in compliance
with the applicable provisions of the Securities Act. The Registration Statement
of which this Prospectus forms a part covers those of such Warrants that remain
outstanding and the shares of Common Stock issuable upon the exercise of the
Warrants issued in connection with Private Placement Phase I.
Also in connection with Private Placement Phase I, the Company issued
to the placement agent a Placement Agent's Option Certificate ("Option
Certificate I"), dated November 11, 1997. The Option Certificate I entitles the
placement agent to purchase 400,000 shares of Common Stock at a purchase price
of $1.50. The option commenced on January 31, 1998 and expires on January 31,
2003.
With respect to Private Placement Phase II, the Company issued a second
Placement Agent's Option Certificate ("Option Certificate II"), dated January
31, 1998. The Option Certificate II entitles the same placement agent to
purchase 47,170 shares of Common Stock at a purchase price of $4.00 per share.
The option under Option Certificate II is exercisable beginning on January 31,
1999 and ending on January 31, 2004. Both the Option Certificate I and the
Option Certificate II contain customary anti-dilution provisions with respect to
stock dividends, stock splits and recapitalization in favor of the holder.
With respect to Private Placement Phase III, the Company issued a third
Placement Agent's Option Certificate ("Option Certificate III"), dated July 8,
1998. The Option Certificate III entitles the same placement agent to purchase
250,850 shares of Common Stock at a purchase price of $1.59 per share. The
option under Option Certificate III is exercisable beginning on June 30, 1999
and ending on June 30, 2004. The Option Certificate III contains customary
anti-dilution provisions with respect to stock dividends, stock splits and
recapitalization in favor of the holder.
With respect to the Series E Placement, the Company issued Placement
Agent's Option Certificates ("Series E Option Certificates"), dated May 31,
1999. The Series E Option Certificates entitles the same placement agent to
purchase 65,834 shares of Common Stock at a purchase price of $4.50 per share.
The option under the Series E Option Certificates are exercisable beginning on
March 30, 2000 and ending on March 30, 2003. The Series E Option Certificates
contain customary anti-dilution provisions with respect to stock dividends,
stock splits and recapitalization in favor of the holder.
CONVERTIBLE NOTES
On September 30, 1997, the Company executed two Senior Convertible
Notes for an aggregate principal amount of $371,000 (the "Notes"). The holders
of the Notes gave written notice of their intent to convert the Notes on
December 31, 1997. Consequently, the Company issued a total of 70,000 shares of
Series B Preferred, Class A
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<PAGE> 39
Warrants to purchase 420,000 shares of Common Stock, and a total of 10,286
shares of Common Stock, representing the accrued interest on the Notes (the
"Securities"). The Securities were issued to the holders of the Notes on
February 11, 1998, and the Registration Statement of which this Prospectus is a
part covers those Securities. The Warrants were exercised during the six months
ended September 30, 1998 and the Series B Preferred were converted to Common
Shares on November 11, 1998.
INDEMNIFICATION
The Revised Articles of Incorporation state that the Company may
indemnify each director, officer, employee, or agent of the Company to the full
extent permitted by the laws of the state of Utah. Section 16-10a-901 through
909 of the Utah Revised Business Corporation Act, as amended (the "Corporation
Act"), permits a Utah corporation to indemnify its directors and officers for
certain of their acts. More specifically, Sections 16-10a-902 and 16-10a-907 of
the Corporation Act grant authority to any corporation to indemnify directors
and officers against any judgments, fines, amounts paid in settlement and
reasonable expenses, including attorney's fees, by reason of his or her having
been a corporate director or officer. Such provision is limited to instances
where the director or officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, or, in criminal proceedings, he or she had no reasonable cause to
believe his or her conduct was unlawful. Such sections confer on the director or
officer an absolute right to indemnification for expenses, including attorney's
fees, actually and reasonably incurred by him or her to the extent he or she is
successful on the merits or otherwise defense of any claim, issue, or matter.
The corporation may not indemnify a director if the director is adjudged liable
to the corporation or deemed to have derived an improper personal benefit in an
action in which the director is adjudged liable. Section 16-10a-906 of the
Corporation Act expressly makes indemnification contingent upon a determination
that indemnification is proper in the circumstances. Such determination must be
made by the board of directors acting through a quorum of disinterested
directors, or by the board of directors acting on the advice of independent
legal counsel, or by the shareholders. Further, Section 16-10a-904 of the
Corporation Act permits a corporation to pay attorney's fees and other
litigation expenses on behalf of a director or office in advance of the final
disposition of the action upon receipt of an undertaking by or on behalf of such
director or officer to repay such expenses to the corporation if it is
ultimately determined that he or she is not entitled to be indemnified by the
corporation to the extent the expenses so advanced by the corporation exceed the
indemnification to which he or she is entitled. Such indemnification provisions
do not exclude other indemnification rights to which a director or officer may
be entitled under the corporation's certificate or articles of incorporation,
bylaws, an agreement, a vote of shareholders, or otherwise. The corporation may
also purchase and maintain insurance to provide indemnification.
The foregoing discussion of indemnification merely summarizes certain
aspects of the indemnification provisions of the Corporation Act and is limited
by reference to the above discussed section of the Corporation Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to members of the board of directors, officers, employees,
or person controlling the Company pursuant to the foregoing provisions, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ANTI-TAKEOVER PROVISIONS
The Company's Revised Articles of Incorporation and By-Laws include
certain provisions which may have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a shareholder might consider
in its best interests, including attempts that might result in a premium over
the market price for the shares held by the shareholders and could make it more
difficult to remove incumbent management. The Company's Revised Articles of
Incorporation or By-Laws provide that: (i) directors may authorize the issuance
of preferred stock having rights and preferences established by the Board of
Directors without further approval by the shareholders; and (ii) except as
otherwise required by law, vacancies in the Board of Directors may be filled
only by the remaining directors.
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<PAGE> 40
SHARES ELIGIBLE FOR FUTURE SALE
Shares of substantial amounts of the Company's Common Stock in the
public market or the prospect of such sales could materially adversely affect
the market price of the Common Stock. Upon issuance of the common stock
registered hereunder, 10,297,390 shares will be freely tradable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), by persons other than "affiliates of the Company," as
defined under the Securities Act. The remaining shares of Common Stock
outstanding are deemed "restricted securities" as defined by Rule 144 under the
Securities Act and may not be sold in the absence of registration unless an
exemption from registration is available, including the exemption provided by
Rule 144. The shares currently held by the officers and directors of the Company
are restricted securities that are also subject to contractual "lock-up"
restrictions described below.
REGISTRATION RIGHTS
The Company has granted certain demand and "piggyback" registration
rights with respect to (i) 2,940,000 shares of Common Stock issuable upon
exercise of the Class A Warrants issued in connection with the Notes and Private
Placement Phase I, (ii) 698,020 shares of Common Stock issuable upon exercise of
Placement Agent's Option, Placement Agent's Option II, and Placement Agent's
Option III(the "Certificates"). Subject to certain conditions and limitations,
the registration rights granted to such holders give such holders the right to
register all or any portion of the Common Stock held by them or issuable upon
the exercise of the Class A Warrants or the Certificates. Moreover, the Company
has granted registrations rights to the holders of 490,000 shares of Series
Preferred B pursuant to Private Placement Phase I, 99,057 shares of Series C
Preferred under Private Placement Phase II, and 279,657 shares of Series D
Preferred pursuant to Private Placement Phase III. The holders of all of the
Preferred Shares , Warrants and Options, itemized herein, have exercised their
registration rights and such shares are included hereunder.
The Company has also granted demand and "piggyback" registration rights
with respect to (i) the holders of the Series E Preferred, 146,252 shares of
which are currently outstanding, and (ii) the 65,834 shares of Common Stock
issuable upon exercise of the Series E Preferred Placement Options. The
registration rights granted in connection with the Series E Preferred or the
Placement Options thereunder, have not been exercised.
LOCK-UP AGREEMENTS
Jose Chavez, Mitchell Kettrick, and George Villalva, the Company's
principal shareholders who were at the time also officers and directors,
executed Lock-Up Agreements (collectively, the "Lock-Up Agreements") with Equity
Services, Ltd. ("ESL") on October 31, 1997 in connection with Private Placement
Phase I. With ESL's consent, Luanna Pearce acquired 475,000 shares of Common
Stock from George Villalva, subject to the October 31, 1997 Lock-up Agreement.
Under these Lock-Up Agreements, the shareholders have agreed not to
sell or otherwise dispose of 9,025,000 shares of their collective 9,200,000
shares until March 31, 2002 unless one of the following events occurs: (a)
MSHI's net income before provision for income taxes and exclusive of any
extraordinary earnings (the "Minimum Pretax Income") amounts to at least One
Million Dollars ($1,000,000) during the fiscal year ending on March 31, 1999 or
March 31, 2000; or (b) the Minimum Pretax Income amounts to at least Two Million
Dollars ($2,000,000) during the fiscal year ending on March 31, 2001; or (c)
commencing at the effective date of a registration statement (the "Effective
Date") covering a subsequent public offering of the Company's securities and
ending eighteen (18) months after the Effective Date, the average closing bid
price of the Company's common stock shall average in excess of Four Dollars
($4.00) per share for thirty (30) consecutive business days.
LEGAL MATTERS
The validity of the shares offered hereby has been passed upon for the
Company by Vial, Hamilton, Koch & Knox, L.L.P., Dallas, Texas.
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<PAGE> 41
EXPERTS
The financial statements of the Company for the year ended March 31,
1998, appearing in this Prospectus and Registration Statement have been audited
by Brown, Graham and Company, P.C., independent auditors, as set forth in its
report (which contains an explanatory paragraph relating to the Company's
ability to continue as a going concern, as described in Note 1 to the financial
statements), and they are included in reliance upon such report given upon the
authority of said firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT AUDITORS
On September 14, 1998, the Company's auditors, Jones, Jensen & Company,
LLC, Salt Lake City, Utah, were dismissed as independent accountants to the
Company. The former accountants were unofficially dismissed on June 11, 1997 but
the Company inadvertently neglected to obtain official dismissal until September
14, 1998.
The former accountants' reports for the fiscal years ended March 31,
1996 and March 31, 1995 did not contain an adverse opinion or a disclaimer of
opinion, nor were such reports qualified or modified as to audit scope or
accounting principles. The reports were modified as to uncertainty concerning
the Company's ability to continue as a going concern. During the Company's two
most recent fiscal years audited by Jones, Jensen & Company, LLC and subsequent
interim periods preceding the dismissal of Jones, Jensen & Company, LLC, the
Company had no disagreements with Jones, Jensen & Company, LLC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
The Company engaged Salazar & Associates, Austin, Texas, as its
independent accountants on June 11, 1997. The decision to engage Salazar &
Associates was approved by the board of directors of the Company. On August 15,
1997, Salazar & Associates, Austin, Texas, resigned as the Company's principal
accountants.
The former accountants' reports for the fiscal years ended March 31,
1997, did not contain an adverse opinion or a disclaimer of opinion, nor were
such reports qualified or modified as to audit scope or accounting principles.
The reports were modified as to uncertainty concerning the Company's ability to
continue as a going concern as stated in Salazar & Associates report. During the
Company's most recent fiscal year and subsequent interim periods preceding the
resignation of Salazar & Associates, the Company had no disagreements with
Salazar & Associates on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
The Company engaged Brown, Graham and Company, P.C. , Georgetown,
Texas as its independent accountant on May 11, 1998. The decisions to engage
Brown, Graham and Company, P.C. was approved by the board of directors of the
Company.
The Company nor anyone on the Company's behalf, consulted the engaged
accountants on any matter prior to the engagement dates.
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<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report - Brown Graham and Company, P.C..........F-2
Independent Auditors' Report - Salazar & Associates...................F-3
Consolidated Balance Sheet as of December 31, 1998,
and March 31,1998............................................F-4
Consolidated Statements of Operations for the nine months ended
December 31, 1998 and 1997 and for the years ended March
31, 1998 and 1997............................................F-5
Consolidated Statements of Shareholders Equity for the nine months
ended December 31, 1998 and for the year ended March
31, 1998 and 1997............................................F-6
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1998 and for the year ended March 31, 1998......F-7
Notes to Consolidated Financial Statements............................F-9
F-1
<PAGE> 43
Brown, Graham and Company, P.C.
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Micro-Media Solutions, Inc.,
We have audited the accompanying consolidated balance sheet of Micro-Media
Solutions, Inc. and Subsidiary (the "Company") as of March 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micro-Media
Solutions, Inc. and Subsidiary as of March 31, 1998, and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a working capital deficit at
March 31, 1998, and has suffered losses from operations for the years ended
March 31, 1998 and 1997, which raise substantial doubt about its ability to
continue as a going concern. Management's plan regarding these matters is
presented in Note 1 of these consolidated financial statements.
/s/ Brown, Graham and Company, P.C.
Georgetown, Texas
May 27, 1999
F-2
<PAGE> 44
SALAZAR & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
JOSE SALAZAR, CPA FRANCES ORTIZ-
SALAZAR, CPA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Mountain States Resources Corporation
We have audited the accompanying consolidated statements of operations,
stockholders equity and cash flows of Mountain States Resources Corporation and
subsidiary (the "Company") for the year ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
a reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Mountain State Resources Corporation for the year ended March 31,
1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has suffered losses from
operations and has a working capital deficiency, which raises substantial doubt
about its ability to continue as a going concern. Management's plan regarding
these matters is presented in Note 10 of these financial statements.
As more fully described in Note 11 and 12, subsequent to the issuance of the
Company's March 31, 1997 financial statements and our report thereon dated June
22, 1997, we became aware that those financial statements did not reflect
certain adjustments as described in Notes 11 and 12. In our original report we
expressed an unqualified opinion on the March 31, 1997, financial statements as
described in paragraph three above, and our opinion on the revised statements,
as expressed herein, remains unqualified.
/s/ Salazar and Associates
Salazar and Associates,
Austin, Texas
June 22, 1997 except as to the Note 14, which is as of June 10, 1998
F-3
<PAGE> 45
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Balance Sheets (Restated)
December 31, 1998 and March 31, 1998
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
----------------- --------------
ASSETS Unaudited
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 73,861 $ 25,786
Accounts Receivable - Trade 840,606 150,851
Inventory 312,300 285,023
Short-Term Investment
- restricted (Note 4) 1,350,000 1,350,000
Other Receivables - Advances (Note 2) 171,647 86,961
------------ ------------
Total Current Assets 2,748,414 1,898,621
Property, Plant, and Equipment,
net (Note 3) 1,487,640 800,831
------------ ------------
TOTAL ASSETS $ 4,236,054 $ 2,699,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 1,194,655 $ 300,035
Other Accrued Expenses 97,314 169,336
Bank Line of Credit (Note 4) 1,600,000 1,228,966
Current Maturities of Notes
payable (Note 5) 112,596 151,267
Current Portion of Obligations Under
Capital Leases (Note 6) 94,005 41,097
Other Notes Payable (Note 14) 200,000 200,000
------------ ------------
Total Current Liabilities 3,298,570 2,090,701
------------ ------------
Long-Term Liabilities
Notes Payable (Note 5) 178,678 367,522
Obligations under Capital Leases
(Note 6) 290,605 149,560
------------ ------------
Total Long-Term Notes 469,283 517,082
------------ ------------
Commitments and Contingencies
(Notes 8, 10 & 14) -- --
------------ ------------
Total liabilities 3,767,853 2,607,783
------------ ------------
Stockholders' Equity (Note 11)
Preferred stock Series B; $5.30
stated value; 400,000 shares
authorized, issued & outstanding 2,120,000 2,597,000
Preferred stock Series C; $10.60
stated value; 94,340 shares
authorized, issued & outstanding 1,000,004 1,050,004
Preferred stock Series D; $10.60
stated value; 266,340 shares
authorized, issued & outstanding 2,823,204 --
Preferred stock Series E; $30.00
stated value; 157,500 shares
authorized, 51,975 issued &
outstanding 1,559,250
Common stock at $.10 par value;
50,000,000 authorized, 13,127,989
and 11,518,571 shares issued and
outstanding, respectively 1,312,799 1,150,685
Additional Paid-in Capital 3,770,387 2,666,099
Accumulated Deficit (12,117,443) (7,372,119)
------------ ------------
Total Stockholders' Equity 468,201 91,669
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,236,054 $ 2,699,452
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 46
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Operation (Restated)
Nine Months Ended December 31, 1998 and 1997, Years Ended March 31, 1998 and
1997
<TABLE>
<CAPTION>
December 31 (unaudited) March 31
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Hardware, software and peripherals $ 1,431,352 $ 1,350,810 $ 1,350,869 $ 1,440,725
Service, support and integration 394,486 702,915 704,241 457,572
Networks, LAN/WAN 1,115,704 685,771 685,711 2,767,452
------------ ------------ ------------ ------------
Net revenue 2,941,542 2,739,496 2,740,821 4,665,749
------------ ------------ ------------ ------------
Cost of goods sold:
Hardware, software and peripherals 1,376,870 885,989 1,406,612 1,109,354
Service, support and integration 150,511 456,896 656,625 283,724
Networks, LAN/WAN 1,080,747 509,415 997,397 1,605,157
------------ ------------ ------------ ------------
Total cost of goods sold 2,608,128 1,852,300 3,060,634 2,998,235
------------ ------------ ------------ ------------
Gross margin (deficit) 333,414 887,196 (319,813) 1,667,514
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Salaries and benefits 2,139,673 1,304,833 1,825,590 1,202,791
Professional fees and consultants 973,699 328,451 357,174 42,251
Occupancy 325,369 158,845 212,843 185,516
Depreciation 171,991 149,160 178,892 139,443
Vehicle expense 125,427 109,061 126,131 158,765
Other expense 538,482 708,865 379,057 316,820
Interest expense 41,035 202,342 294,198 100,064
Provision for uncollectible accounts (35,000) 21,284 73,252 4,249
------------ ------------ ------------ ------------
Total selling, general and
administrative expenses 4,280,676 2,982,841 3,447,137 2,149,899
------------ ------------ ------------ ------------
Net loss (3,947,262) (2,095,645) (3,766,950) (482,385)
Plus preferred stock dividends (798,062) -- (3,471,170) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (4,745,324) (2,095,645) $ (7,238,120) $ (482,385)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.39) (0.20) $ (0.66) $ (0.05)
============ ============ ============ ============
Basic and diluted weighted average
shares outstanding 12,051,893 10,764,733 10,998,874 10,026,400
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 47
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998, AND
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series B Series C
--------------------------------- ---------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance March 31, 1996 -- $ -- -- $ --
Common stock
issued for services -- -- -- --
Common stock options
exercised -- -- -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance March 31, 1997 -- -- -- --
Common stock issued:
Interest -- -- -- --
Compensation -- -- -- --
Preferred stock dividend -- -- -- --
Preferred stock issued:
Private Placement 420,000 2,226,000 99,057 1,050,004
Senior Debt 70,000 371,000 -- --
Preferred stock dividend
discount -- -- -- --
Stock option for:
Compensation -- -- -- --
Placement agents -- -- -- --
Cash received for
uncertificated stock -- -- -- --
Common stock-uncertificated
issued for note receivable -- -- -- --
Note receivable offset against
common stock subscribed -- -- -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance March 31, 1998 490,000 2,597,000 99,057 1,050,004
Preferred stock issued:
Private Placement -- -- -- --
Common stock issued:
Rule 144 stock -- -- -- --
Compensation -- -- -- --
Preferred stock dividend -- -- -- --
Class A warrants -- -- -- --
Preferred stock conversion (90,000) (477,000) (4,717) (50,000)
Stock options for placement agents
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance December 31, 1998 400,000 $ 2,120,000 94,340 $ 1,000,004
============== ============== ============== ==============
Series D Series E
--------------------------------- ---------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- --------------
Balance March 31, 1996 -- -- -- --
Common stock
issued for services -- -- -- --
Common stock options
exercised -- -- -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance March 31, 1997 -- -- -- --
Common stock issued:
Interest -- -- -- --
Compensation -- -- -- --
Preferred stock dividend -- -- -- --
Preferred stock issued:
Private Placement -- -- -- --
Senior Debt -- -- -- --
Preferred stock dividend
discount -- -- -- --
Stock option for:
Compensation -- -- -- --
Placement agents -- -- -- --
Cash received for
uncertificated stock -- -- -- --
Common stock-uncertificated
issued for note receivable -- -- -- --
Note receivable offset against
common stock subscribed -- -- -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance March 31, 1998 -- -- -- --
Preferred stock issued:
Private Placement 279,657 2,964,364 51,975 1,559,250
Common stock issued:
Rule 144 stock -- -- -- --
Compensation -- -- -- --
Preferred stock dividend -- -- -- --
Class A warrants -- -- -- --
Preferred stock conversion (18,317) (194,160) -- --
Stock options for placement agents
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance December 31, 1998 261,340 $ 2,770,204 51,975 $ 1,559,250
============== ============== ============== ==============
Common Stock
---------------------------------
Common Stock Subscribed
--------------------------------- ---------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- --------------
Balance March 31, 1996 9,784,733 $ 978,473 -- $ --
Common stock
issued for services 480,000 48,000 -- --
Common stock options
exercised 500,000 50,000 -- --
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance March 31, 1997 10,764,733 1,076,473 -- --
Common stock issued:
Interest 10,286 1,029 -- --
Compensation 414,900 41,490 -- --
Preferred stock dividend 23,742 2,374 -- --
Preferred stock issued:
Private Placement -- -- -- --
Senior Debt -- -- -- --
Preferred stock dividend
discount -- -- -- --
Stock option for:
Compensation -- -- -- --
Placement agents -- -- -- --
Cash received for
uncertificated stock 293,185 29,319 -- --
Common stock-uncertificated
issued for note receivable -- -- 543,000 407,250
Note receivable offset against
common stock subscribed -- -- (543,000) (407,250)
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance March 31, 1998 11,506,846 1,150,685 -- --
Preferred stock issued:
Private Placement -- -- -- --
Common stock issued:
Rule 144 stock 50,000 5,000 -- --
Compensation 31,000 3,100 -- --
Preferred stock dividend 39,803 3,980 -- --
Class A warrants 420,000 42,000 -- --
Preferred stock conversion 1,130,340 113,034 -- --
Stock options for placement agents
Net loss -- -- -- --
-------------- -------------- -------------- --------------
Balance December 31, 1998 13,177,989 $ 1,317,799 0 $ 0
============== ============== ============== ==============
Additional
(Discount on)
Paid - In Accumulated
Capital Deficit Total
-------------- -------------- --------------
Balance March 31, 1996 $ (1,046,058) 348,386 $ 280,801
Common stock
issued for services -- -- 48,000
Common stock options
exercised -- -- 50,000
Net loss -- (482,385) (482,385)
-------------- -------------- --------------
Balance March 31, 1997 (1,046,058) (133,999) (103,584)
Common stock issued:
Interest 4,114 -- 5,143
Compensation 250,367 -- 291,857
Preferred stock dividend 56,294 (58,668) --
Preferred stock issued:
Private Placement (975,641) -- 2,300,363
Senior Debt -- -- 371,000
Preferred stock dividend
discount 3,412,502 (3,412,502) --
Stock option for:
Compensation 93,750 -- 93,750
Placement agents 387,641 -- 387,641
Cash received for
uncertificated stock 483,130 -- 512,449
Common stock-uncertificated
issued for note receivable -- -- 407,250
Note receivable offset against
common stock subscribed -- -- (407,250)
Net loss -- (3,766,950) (3,766,950)
-------------- -------------- --------------
Balance March 31, 1998 2,666,099 (7,372,119) 91,669
Preferred stock issued:
Private Placement (1,402,631) -- 3,120,983
Common stock issued:
Rule 144 stock 582,500 (534,500) 53,000
Compensation 163,087 -- 166,187
Preferred stock dividend 259,582 (263,562) --
Class A warrants 291,900 -- 333,900
Preferred stock conversion 608,126 -- --
Stock options for placement agents 649,724 -- 649,724
Net loss -- (3,947,262) (3,947,262)
-------------- -------------- --------------
Balance December 31, 1998 $ 3,818,387 $ (12,117,443) $ 468,201
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 48
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997 March 31, March 31,
Unaudited Unaudited 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,947,262) $ (2,830,708) $ (3,766,950) $ (482,385)
Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation expense 171,991 148,587 178,892 139,443
Stock issued for compensation 166,187 -- 291,857 48,000
Options issued for compensation -- -- 93,750 --
Stock issued for interest -- -- 5,143 --
Change in trade receivables (689,755) 806,355 832,062 (166,383)
Change in inventory (27,277) (165,461) (19,569) 189,040
Change in accounts payable 894,633 (217,486) (577,325) 307,855
Change in accrued expenses (72,022) (229,554) 57,775 60,875
------------ ------------ ------------ ------------
Net cash provided by (used by)
operating activities (3,503,505) (2,488,267) (2,904,365) 96,445
------------ ------------ ------------ ------------
Cash flows from investment activities:
Purchase of property & equipment (604,238) (72,877) (195,685) (655,714)
Purchase of short term investment -- -- (1,350,000) --
Additional notes receivable -- -- (142,265) --
Proceeds from notes receivables -- -- 477,645 --
Proceeds from other receivables -- -- 162,793 --
Additional other receivables (84,686) 12,614 (121,341) (389,963)
------------ ------------ ------------ ------------
Net cash provided by (used by)
investing activities (688,924) (60,263) (1,168,853) (1,045,677)
Cash flows from financing activities:
Proceeds-line of credit (net) 371,034 (520,125) 504,076 275,000
Proceeds-other notes payable -- 685,450 200,000 --
Payments on long-term debt (227,515) 253,958 (162,153) 467,654
Payments on capital lease obligations (60,609) (83,897) (32,485) 223,141
Proceeds-private placement 3,770,694 2,226,000 2,688,004 --
Proceeds-issuance of common stock 53,000 -- 512,450 --
Proceeds-exercise of warrants 333,900 -- -- --
Proceeds-senior convertible debt -- -- 371,000 --
------------ ------------ ------------ ------------
Net cash provided by financing activities 4,240,504 2,561,386 4,080,892 965,795
------------ ------------ ------------ ------------
Net increase in cash 48,075 12,856 7,674 16,563
Cash at beginning of period 25,786 6,840 18,112 1,549
------------ ------------ ------------ ------------
Cash at end of period $ 73,861 $ 19,696 $ 25,786 $ 18,112
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 49
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998 AND
1997
<TABLE>
<CAPTION>
December 31 December 31
Unaudited Unaudited March 31, March 31,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Supplemental disclosure:
Cash paid during the year for:
Interest $ 85,750 $ -- $ 232,578 $ 97,193
================== ================== ================== ==================
Supplemental schedule of non-cash
financing activities:
Preferred stock issued for
agent fees $ -- $ -- $ 156,000 $ --
Stock options:
Compensation -- -- 93,750 --
Placement agent fees 649,724 -- 387,641 --
Common stock issued for:
Compensation 166,187 -- 291,857 48,000
Interest on debt -- -- 5,143 --
Preferred stock dividends 263,562 -- 58,668 --
Common stock subscribed for
note receivable -- -- 407,250 --
Debt converted to preferred stock -- -- 371,000 --
Inventory received for notes -- -- 84,394 --
Inventory converted to equipment 44,021 -- -- --
Discount on preferred stock issued 543,500 -- 3,412,502 --
Equipment received for
Capital lease obligations 254,562 -- -- --
================== ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 50
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION:
Micro-Media Solutions, Inc. (formerly Mountain States Resources Corporation,
("MSRC")), was organized under the laws of the State of Utah on April 15, 1969.
MSRC began operations April 15, 1969, as a mining, mineral extraction and oil
and gas exploration company. MSRC discontinued its operations in 1993 and
became a development stage company as described in the Statement of Financial
Accounting Standards No.7, "Accounting and Reporting by Development Stage
Enterprises". On June 23, 1997, MSRC entered into an agreement and plan of
reorganization with the shareholders of Micro-Media Solutions, Inc. (a Texas
Corporation), ("MSI-Texas"), in which MSRC acquired 100% of the common stock of
MSI-Texas. As part of the reorganization, MSRC changed its name to Micro-Media
Solutions, Inc., (a Utah Corporation), ("MSI"). Subsequent to September 30,
1998, MSI changed its name to MSI Holdings, Inc. The transaction was accounted
for as a recapitalization.
MSI-Texas is an Austin, Texas, based technology corporation formed to provide
computer hardware, software programming, system support, maintenance, media
duplication, and kitting to the public and private sectors, primarily in the
State of Texas. In addition, MSI-Texas is certified by the State of Texas as a
Historically Underutilized Business (HUB).
MSI-Texas is a business solutions technology integrator with infrastructure
design and implementation services. In addition, MSI-Texas' computer networking
services includes system integration and local wide-area networks. MSI-Texas
provides these services to customers and at sites throughout the State of
Texas.
GOING CONCERN:
As shown in the accompanying consolidated financial statements, the Company has
incurred net losses of $3,947,262 (unaudited) and $3,766,950 for nine months
ended December 31, 1998, and the year ended March 31, 1998, respectively. As of
March 31, 1998, the Company's current liabilities exceeded its current assets
by $192,080 and the Company owed accounts payable with dates due in excess of
thirty (30) days in the approximate amount of $170,000. These factors create a
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the
Company's obtaining additional financing to fund the expenses related to
operations and capital improvements.
In May through July 1998, the Company received approximately $2.8 million
(unaudited) in phase III of a private placement agreement, (see Note 10), which
has been used to retire debt, decrease past due accounts payable and for
operating expenses. In addition, the Company has completed arrangements with a
private investment group for a private placement of a newly created series of
preferred stock (Series E), with net proceeds to the Company of approximately
$3.7 million (unaudited) which took place from November 1998 through March
1999. In November 1998, $1,296,800 (unaudited) was received for partial
placement of the Series E Preferred shares. An additional $1,183,618
(unaudited) was received in February 1999 and 1,196,818 in March 1999. The
closing of the Series E private placement will enable MSI to have sufficient
funds to meet the Company's working capital and capital expenditure needs
through August 31, 1999. In addition, Management has identified and closed
substantial contracts with GTE and Siemens-Nixdorf during the year ended March
31, 1999. Management believes these contracts can produce a level of revenue
necessary to provide the Company with a positive cash flow, adequate working
capital and positive earnings for the next twelve months. In the first quarter
of fiscal year 2000, the Company established an affiliation with Southwestern
Bell as an Digital Subscriber Line ("DSL") service reseller fostering its
ability to provide state-of-the-art connectivity services.
The Company is also consulting with investment bankers for an additional $25
million public offering to be completed by the end of the second quarter of
fiscal year 2000. These funds will be used to satisfy additional capital needs
for expansion opportunities associated with the contracts identified above. In
the event the Company is unable to complete the contemplated $25 million public
offering, the Company will forego the Contracts' expansion opportunities,
reduce the number of employees and overhead expenses and concentrate its
efforts on the Austin operations.
F-9
<PAGE> 51
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements for the nine months ended December 31,
1998 and 1997, and years ended March 31, 1998 and 1997, include the accounts
and transactions of the Company and its wholly-owned subsidiaries, MSI-Texas
and Tele-Vista, Inc., (incorporated August 1998 and has not yet commenced
operations). All significant inter-company accounts and transactions have been
eliminated in the accompanying consolidated financial statements. The Company,
however, did not have any material asset or liability accounts or account
balances. With the exception of the Company's equity accounts and a deficit
retained earnings, the significant account balances belong to MSI-Texas.
CASH AND CASH EQUIVALENTS:
Cash equivalents consist primarily of funds invested in short-term
interest-bearing accounts. The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE:
The Company follows the allowance method of expensing accounts receivable when
considered uncollectible. As of December 31, 1998 and March 31, 1998,
management believes all accounts are collectible; and therefore, no allowance
has been recorded. The financial statements include a $35,000 recovery of a
previously written-off bad debt.
INVENTORY:
Inventory is valued at lower of cost, using the FIFO
method(first-in/first-out), or market. Inventory consists principally of
hardware and software needed for maintaining and building network technology
for customers.
PROPERTY, PLANT, AND EQUIPMENT:
Property and equipment are stated at cost. For financial statement purposes,
depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the term of the
related lease, including any expected renewable terms, or the useful life of
the leasehold improvements. Accelerated depreciation methods are used for tax
purposes. Depreciation and amortization are calculated over the following
useful lives stated in years:
<TABLE>
<CAPTION>
Useful
Lives
------
<S> <C>
Vehicles 5
Furniture and fixtures 5
Equipment 5
Leasehold improvements 20
</TABLE>
PROPERTIES HELD FOR SALE
Properties held for sale consist primarily of a 66,000 square foot facility in
El Paso, Texas. Management believes that the net realizable value of the
properties held for sale exceed their carrying value.
REVENUE AND COST RECOGNITION:
Hardware and peripheral sales consist of computers and related electronic
equipment. Software sales consist of the resale of prepackaged software and
operating systems from Microsoft and other vendors to the end user. Revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the customer fee is fixed and collection is probable. Most hardware,
software and peripherals sales are made without the right of return. Product
returns that are minimal are recorded as a reduction of sales upon receipts of
the
F-10
<PAGE> 52
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
product. Service, support and integration sales are recognized upon completion
of the service and are not subject to warranty.
Revenue from fixed priced contracts is recognized on the
percentage-of-completion method of accounting, measured by the cost-to-cost
method. This method is used because management considers total costs incurred
to be the best available measure of progress on contracts.
Contract costs include all direct costs and those indirect costs related to
contract performance. Changes in job performance, job conditions, and estimated
profitability and final contract settlements may result in revisions to costs
and revenue and are recognized in the period in which the revisions are
determined. Losses on uncompleted contracts are recognized in the period in
which the losses are determinable.
The asset, "Costs and Estimated Earnings in Excess of Billings Uncompleted
Contracts", represents revenue earned in excess of amounts billed. The
liability "Billings in Excess of Costs and Estimated Earnings on Uncompleted
Contracts" represents billings in excess of amounts earned.
Revenue and contract costs from fixed priced contracts are included in the
various categories of revenue and cost of goods sold in the accompanying
financial statements. As of December 31, 1998 and March 31, 1998, there were no
contracts in progress.
FEDERAL INCOME TAX:
The Company uses the liability method of accounting for income taxes as
prescribed by the Financial Accounting Standard Board Statement No. 109.
Deferred tax liabilities and assets are determined based on differences between
the financial statement and tax basis of assets and liabilities using enacted
tax rates expected to be in effect for the year in which the differences are
expected to reverse. The net change in deferred tax assets and liabilities is
reflected in the statement of operations.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees". The Company
follows FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") for financial statement disclosure purposes and issuance of options
and warrants to non-employees for services rendered.
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", management reviews
long-lived assets and intangible assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
fully recoverable. As part of this assessment, management prepares an analysis
of the undiscounted cash flows for each product that has significant long-lived
or intangible asset values associated with it. This analysis for the asset
values as of December 31, 1998 and March 31, 1998, indicated there was no
impairment to the carrying value of these assets.
SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The Company has
addressed the requirements of SFAS No. 130.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. Generally, certain financial information is required to be
reported on the basis that is used internally for evaluating performance or
F-11
<PAGE> 53
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
an allocation of resources to operating segments. The Company has adopted the
requirements of SFAS No. 131 and there is no material impact on the financial
statements.
USE OF ESTIMATES AND CERTAIN CONCENTRATIONS:
Management of the Company has made a number of estimates and assumptions
relating to the valuation and reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Although actual results could differ from those estimates,
management believes its estimates are reasonable. Certain components,
subassemblies and software included in the Company's computer systems are
obtained from sole suppliers or a limited number of suppliers. The Company
relies, to a certain extent, upon the ability of its suppliers' to enhance
existing products in a timely and cost-effective manner, to develop new
products to meet changing customer needs and to respond to emerging standards
and other technological developments in the computer industry. The Company's
reliance on a limited number of suppliers involves several risks, including the
possibility of shortages and/or increases in costs of components and
subassemblies, and the risk of reduced control over delivery schedules.
FINANCIAL INSTRUMENTS:
Cash equivalents include highly liquid short-term investments with original
maturities of three months or less, readily convertible to known amounts of
cash. The amounts reported as cash equivalents, receivables, other assets,
accounts payable and accrued expenses and debt are considered by the Company to
be reasonable approximations of their fair values, based on market information
available to management as of December 31, 1998 and March 31, 998. The use of
different market assumptions and estimation methodologies could have a material
effect on the estimated fair value amounts. The reported fair values do not
take into consideration potential taxes or other expenses that would be
incurred in an actual settlement.
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. A concentration of credit risk may exist with respect to trade
receivables, as many of the Company's customers are in the computer and
telecommunications industries. The Company has a large number of customers on
which it performs ongoing credit evaluations and generally does not require
collateral from its customers. Historically, the Company has not experienced
significant losses related to receivables from individual customers or groups
of customers in any particular industry or geographic area.
NOTE 2 - OTHER RECEIVABLES
Other receivables include costs paid by the Company to the third parties in
satisfaction of obligations of Argus Management, Inc. (See Note 13.) Also
included is a deposit to Exceptional Services, lease prepayment, employee
advances for travel and lodging for out of town projects and accrued interest
receivable as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31,1998
----------------- -------------
(Unaudited)
<S> <C> <C>
Employee advances $ 23,546 $ 12,001
Unreimbursed cost (See Note 13) 65,000 65,000
Deposits 64,082 --
Lease prepayments 14,940 9,960
Accrued interest 4,079 --
---------- ----------
Total $ 171,647 $ 86,961
========== ==========
</TABLE>
F-12
<PAGE> 54
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
A summary of the Company's investment in property, plant and equipment at
December 31, 1998, and March 31, 1998, is as follows (see Note 6):
<TABLE>
<CAPTION>
December 31 March 31
--------------- ---------------
(Unaudited)
<S> <C> <C>
Building $ 175,000 $ --
Equipment, Furniture and Fixtures 1,112,713 613,184
Transportation Equipment 433,864 253,204
Leasehold Improvements 311,331 307,790
--------------- ---------------
2,032,908 1,174,178
Less Accumulated Depreciation 545,268 373,347
--------------- ---------------
Net Property, Plant and Equipment $ 1,487,640 $ 800,831
=============== ===============
</TABLE>
Depreciation charged against income for the nine months ended December 31, 1998
and 1997, was $171,991 and $149,160, respectively (unaudited). Depreciation
charged against income for the years ended March 31, 1998 and 1997, was
$178,892 and 139,443, respectively.
NOTE 4 - BANK LINE OF CREDIT
The Company was in default on a secured line of credit agreement with Bank One
Texas, N.A. providing for borrowings of up to $725,000 based on the amount of
the Company's eligible receivables. As of March 31, 1998, the Company owed
$208,966 plus accrued interest at 18% in the amount of $19,219 secured by
accounts receivable. This amount was paid in full in April 1998 and was not
renewed. Under the agreement, the Company was subject to covenants including
certain financial ratios.
The Company has a secured line of credit agreement maturing February 5, 1999,
with Compass Bank for $1,600,000 secured by two certificates of deposit
aggregating $1,350,000 held in the Company's name by Compass Bank and payable
in monthly installments of interest only. The balance at December 31, 1998 and
March 31, 1998, was $1,600,000 (unaudited) and $1,020,000, respectively, plus
accrued interest at 7.25% and 8% per annum in the amount of $4,107 (unaudited)
and $4,893, respectively. There are no additional loan covenants associated
with this line of credit.
NOTE 5 - NOTES PAYABLE
Long-term notes payable consists of the following amounts at December 31, 1998
and March 31, 1998:
<TABLE>
<CAPTION>
December 31 March 31
----------- --------
<S> <C> <C>
Austin Community Development Corporation, $100,000 equipment (unaudited)
loan dated May 29, 1996, secured by equipment and accounts
receivable. Loan requires interest payments at 9% for the
first six months, principal and interest payments thereafter
of $2,224 beginning in February 1997. Loan will mature
over a 60 month period ending January 2002. $ 69,321 $ 81,327
Austin Community Development Corporation, $100,000 working capital loan dated
June 14, 1995, secured by equipment and accounts receivable. Loan is due in 48
monthly principal installments of $2,083 along with interest of 9%
beginning in July 1996. Loan will mature in June 2000. 35,417 56,497
Neighborhood Commercial Management Program, $75,000 loan from City of Austin
dated June 8, 1995, secured by second lien on equipment and accounts
receivable. Loan is due in 60 monthly installments of principal and interest of
$1,347 beginning January 1996. Interest rate of 0% until December 1995,
thereafter 3% rate to maturity. Loan will mature over a 60
month period ending December 2000. 31,833 43,104
</TABLE>
F-13
<PAGE> 55
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 5 - NOTES PAYABLE - CONTINUED
<TABLE>
<S> <C> <C>
Neighborhood Commercial Management Program, $250,000 loan from City of Austin
dated August 12, 1996, secured by second lien on equipment and accounts
receivable. Loan is due in 60 monthly installments of principal and interest of
$4,492 beginning January 1997. Interest rate of 0% until December 1996,
thereafter 3% rate to maturity. Loan will mature over a 60
month period ending December 2001. 154,703 191,194
Bank One Texas, N.A., $200,000 loan dated June 26, 1996, secured by a first
lien on equipment and leasehold improvements, loan is due in 60 monthly
installments of $3,333 along with interest equal to the Bank One Texas, N.A.,
base rate plus 2%, loan was
paid in full during quarter ended December 31, 1998 -- 146,667
--------- ---------
291,274 518,789
Less current portion (112,596) (151,267)
--------- ---------
$ 178,678 $ 367,522
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next five years:
<TABLE>
<CAPTION>
December 31 March 31
----------- --------
<S> <C> <C>
Period ended: (Unaudited)
1999 $ 112,596 $ 151,267
2000 114,061 153,067
2001 64,617 134,348
2002 -- 80,107
Thereafter -- --
======== =======
</TABLE>
Certain officers of the Company have personally guaranteed all notes.
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES
The Company is lessee of transportation and telephone equipment under capital
leases expiring in various years through September 2001. The asset and
liabilities under capital leases are recorded at the lower of the present value
of the minimum lease payments or the fair value of the assets. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases is included in
depreciation expense (see Note 3).
Following is a summary of property held under capital leases:
<TABLE>
<CAPTION>
December 31 March 31
----------- --------
(Unaudited)
<S> <C> <C>
Transportation Equipment $ 415,116 $ 218,055
Communication Equipment 56,014 56,014
Equipment 173,809 --
</TABLE>
Minimum future lease payments under capital leases as of December 31, 1998 and
March 31, 1998, for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
December 31 March 31
----------- ---------
<S> <C> <C>
PERIOD ENDED: (Unaudited)
1999 $ 173,338 $ 68,077
2000 204,385 60,343
2001 112,996 74,985
2002 112,996 --
2003 68,578 --
Thereafter -- --
----------- ---------
Total minimum lease payments 672,293 203,405
Less: Amount representing interest (288,683) (12,748)
---------
384,610 190,657
Less current portion (94,005) (41,097)
----------- ---------
Long-term obligations under capital leases $ 290,605 $ 149,560
=========== =========
</TABLE>
F-14
<PAGE> 56
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 7 - FEDERAL INCOME TAXES
A reconciliation of income tax at the statutory rate to the Company's effective
rate follows:
<TABLE>
<CAPTION>
December 31 (Unaudited) March 31
----------------------- --------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Computed at the expected
statutory rate $ (1,342,000) $ (252,200) $ (1,281,000) $ (164,000)
Non-deductible items 5,000 3,000 15,600 7,800
Valuation allowance 1,337,000 249,200 1,265,200 156,200
------------ ------------ ------------ ------------
Income tax $ -- $ -- $ -- $ --
============ ============ ============ ============
Deferred tax assets:
Net operating loss
carryforward $ 3,843,000 $ 406,400 $ 1,441,400 $ 156,200
Deferred tax liabilities:
Depreciation (45,900) (10,500) (32,300) (8,500)
Valuation allowance (3,797,100) (395,900) (1,409,100) (147,700)
------------ ------------ ------------ ------------
$ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
The Company has available at March 31, 1998, $4,334,000 of unused operating
loss carry forwards that may be applied against future taxable income and that
expire as follows:
<TABLE>
<CAPTION>
Expiration During Amount of Unused Operating
Year-Ended March 31 Loss Carryforward
------------------- --------------------------
<S> <C>
2011 $ 50,000
2012 487,000
2018 3,797,000
---------
Total $4,334,000
==========
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company had notes receivable from certain related parties at March 31,1997,
in the amount of $419,774. These related parties are owned and controlled by
majority stockholders of the Company. During the year ended March 31, 1998, the
Company loaned an additional $142,265 to these related entities and received
payments in the amount of $562,039. At December 31, 1998 and March 31, 1998,
the Company did not have any notes receivables or payables to related parties.
The Company did not have sales or purchases with the related parties for the
nine months ended December 31, 1998 or 1997 or the years ended March 31, 1998
or 1997.
NOTE 9 - COMMITMENTS
The Company leases its principal general offices and warehouse facilities. The
leases expire at August 31, 2005 and July 31, 2008, each with a 10 year
renewable option. Future minimum lease payments are as follows:
F-15
<PAGE> 57
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 9 - COMMITMENTS - CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, (unaudited)
<S> <C>
1999 $ 133,296
2000 142,464
2001 149,340
2002 168,480
2003 179,010
2004 189,540
2005 200,070
2006 210,600
2007 221,070
2008 231,660
------------
TOTAL $ 1,825,530
============
</TABLE>
The total rental obligation under the above contract for the nine months ended
December 31, 1998 and 1997, was $97,092 and $82,485, respectively (unaudited)
and for the years ended March 31, 1998 and 1997 was $109,980 and $82,255,
respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
The Company has 10,000,000 shares of Preferred stock authorized. In October
1997, the Company completed a Private Placement Agreement, (the "Agreement")
with a group of accredited investors. The Agreement provides for three "Phases"
of financing.
Phase I of the Agreement was funded in November 1997. The Company received
$2,120,000 in exchange for 400,000 shares of series B preferred stock (5%
cumulative, convertible, non-voting, stated value $5.30) ,(the "Series B
Stock"). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock subject to adjustment and six warrants, (the
"Warrants") for the purchase of six shares of common stock at $1.50 per share.
The Company paid $302,000 and issued 20,000 shares of series B preferred stock
for placement agent fees in Phase I. Also options to purchase 400,000 shares of
common stock at $1.50 per share were issued as a part of the agreement. The
common stock had a fair value of $0.92 per share at the grant date of the
options resulting in $367,350 in placement agent fees. The Agreement contained
a restrictive covenant that conversion of the preferred stock would not occur
to the extent that the HUB status of the Company would be compromised. However,
the Company has determined it will not seek re-certification as a HUB. During
the nine months ended December 31, 1998 the 20,000 shares of Series B Preferred
issued as placement agent fees were converted to 200,000 shares of the
Registrant's Common Stock.
The Series B Preferred Stock can be converted to common stock. Therefore, a
discount in the amount of $6,151,978 has been realized. The discount is the
difference in the intrinsic value of the common stock and warrants less the net
proceeds from the series B preferred stock. The discount is accreted from the
date of issuance of the preferred stock to the date the stock can be converted.
Due to the limitation on the number of shares of stock that could be issued
while retaining the HUB status, $3,412,502 was recorded as dividends and as an
increase in additional paid-in capital in the accompanying financial
statements. The unrecognized portion of the discount in the amount of
$2,796,524 was recorded as of the end of fiscal year 1999.
Phase II of the Agreement was funded in February 1998. The Company received
$1,000,004 in exchange for 94,340 shares of series C preferred stock (6%
cumulative, convertible, non-voting, stated value, $10.60), (the "Series C
Stock). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock, subject to adjustment. The Company paid $130,000
and issued 4,717 shares of series C preferred stock for placement agent fees.
Also options to purchase 47,170 shares of common stock at $4.00 per share were
issued as a part of the agreement. The common stock had a fair value of $0.43
per share at the grant date resulting in $20,291 in placement agent fees. The
Agreement contained a restrictive covenant that conversion of the preferred
stock would not occur to the extent that the HUB status of the Company would be
compromised. However, the Company has determined it will not seek
re-certification as a HUB. During the nine months ended December 31, 1998
F-16
<PAGE> 58
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED
the 4,717 shares of Series C Preferred issued as placement agent fees were
converted to 47,170 shares of the Registrant's Common Stock. The remaining
94,340 shares of Series C Preferred were converted to 943,400 share of Common
Stock during the last quarter of fiscal year ending March 31, 1999.
The series C preferred stock can be converted to common stock. Therefore, a
discount in the amount of $615,851 has been realized. The discount is the
difference in the intrinsic value of the common stock less the net proceeds
from the series C preferred stock. Due to the limitation on the number of
shares of stock that could be issued while retaining the HUB status, the
unrecognized discount in the amount of $615,851 was recorded as of the end of
fiscal year 1999.
Phase III of the Agreement was funded in May through July 1998. The Company
received $2,823,204 (unaudited) in exchange for 266,340 shares of series D
preferred stock (6% cumulative, convertible, non-voting, stated value, $10.60),
(the "Series D Stock"). Each share of preferred stock is initially convertible
into 10 shares of the Company's common stock, subject to adjustment. The
Company paid $349,318 (unaudited) and issued 13,317 shares of series D
preferred stock for placement agent fees. Also options to purchase 250,850
shares of common stock at $1.59 per share were issued as a part of the
agreement. The common stock had a fair value of $1.65 to $2.86 per share
(unaudited) at the grant date resulting in $487,880 (unaudited) in placement
agent fees. The Agreement contained a restrictive covenant that conversion of
the preferred stock would not occur to the extent that the HUB status of the
Company would be compromised. However, the Company has determined it will not
seek re-certification as a HUB. During the nine months ended December 31, 1998
the 13,317 shares of Series D Preferred issued as placement agent fees were
converted to 133,170 shares of the Registrant's Common Stock. Also during the
nine months ended December 31, 1998, 5,000 shares of Series D Preferred was
converted to 50,000 shares of the Registrant's Common Stock. During the last
quarter of Fiscal year ending March 31, 1999, an additional 65,000 shares of
Series D Preferred was converted to 650,000 shares of the Registrant's Common
Stock.
During the nine months ended December 31, 1998, the Company received $53,000
for 5,000 shares of Series D Preferred stock at $10.60 per share. Due to the
Series D being oversubscribed, the Company converted the 5,000 preferred shares
to 50,0000 shares of Common Stock subject to Rule 144 restrictions. The
discount on the 50,0000 shares of Common Stock, in the amount of $534.500, has
been included as a dividend in the accompanying financial statements.
The Series D preferred stock can be converted to common stock. Therefore, a
discount in the amount of $9,911,406 (unaudited) at September 30, 1998 has been
realized. The discount is the difference in the intrinsic value of the common
stock less the net proceeds from the series D preferred stock. Due to the
limitation on the number of shares of stock that can be issued to retain the
HUB status, the unrecognized discount in the amount of $9,911,406 (unaudited)
was recorded as of the end of fiscal year 1999.
The Company has concluded the private placement of 146,252 shares of the Series
E Preferred Stock, $30 stated value (the "Series E Preferred"). Each share of
the Series E Preferred is initial convertible into 10 shares of the Company's
common stock, subject to adjustment. The company paid approximately $502,805
and issued 6,584 shares of the series E Preferred stock for placement agent
fees. The series E Preferred will yielded an aggregate net proceeds of $3.7
million to the Company and was completed by March 31, 1999. In November 1998,
the Company received $1,485,000 commencing the private placement of the Series
E Preferred, 49,500 shares of which were sold for a purchase price of $30.00
per share. An additional $1,345,020 and $1,360,020 was received in February
1999 and March 1999, respectively, for 46,676 and 47,601 shares of Series E
Preferred, respectively. As private placement fee for completion of the Series
E Preferred, the Company issued 6,584 shares of Series E Preferred to ESL. The
expenses for the placement of the Series E Preferred including broker fees,
private placement fee (including stock for the private placement fee) and legal
and accounting expenses were $502,805 through March 1999. The proceeds of the
Series E Preferred will be used for working capital and capital expenditure
needs.
F-17
<PAGE> 59
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED
Senior convertible debt in the amount of $371,000 was issued for cash in
November 1997. This debt was converted to 70,000 shares of series B preferred
stock (5% cumulative, convertible, non-voting, stated value, $5.30), in
February 1998. Accrued interest in the amount of $5,143 was paid with the
issuance of 10,286 shares of common stock. The discount on this issue of series
B preferred stock including 420,000 warrants for the purchase of 420,000 shares
of common stock at $0.795 per share is included in the total series B discount
detailed above.
During the six months ended September 30, 1998, the warrants were exercised for
420,000 shares of common stock at $0.795 per share in the amount of $333,900
(unaudited).
On January 15, 1998, the Company received a subscription for 543,000 shares of
Common Stock which has been valued at market value (closing bid price of $0.75)
of the Common Stock on that date. The consideration for the shares was in the
form of a note in the amount of $407,250 bearing an interest rate of 12%
payable in cash or by delivery of certain intellectual property rights. The
note has since been canceled and the Subscription Agreement rescinded.
See Note 11 for details of options and warrants.
Preferred stock dividends were paid with the issuance of common stock valued at
the previous thirty day average closing bid price per share of common stock as
follows:
<TABLE>
<CAPTION>
Shares Amount
------ --------
<S> <C> <C>
Nine Months ending December 31, 1998 (unaudited) 39,803 $263,562
Year ending March 31, 1998 23,742 58,668
</TABLE>
NOTE 11 - STOCK OPTIONS AND WARRANTS
A summary of the status of the Company's stock options as of December 31, 1998
and March 31, 1998, is presented below:
<TABLE>
<CAPTION>
December 31 March 31
------------ ------------
(Unaudited)
<S> <C> <C>
Options outstanding at beginning of period 622,170 --
Options granted 250,850 622,710
Options exercised -- --
Options canceled -- --
Options outstanding at end of period 873,020 622,710
============ ============
Options exercisable at end of period 400,000 400,000
============ ============
Weighted Average Fair value of options
granted during the period $ 1.94 $ 0.99
============ ============
</TABLE>
The following table summarizes the information about the stock options as of
December 31, 1998, and March 31, 1998:
DECEMBER 31, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
Average Weighted Number Weighted
Range of Number Remaining Average Exercisable Average
Exercise outstanding Date Contractual Exercise Price at Exercise Price
Price at Sept 30 Granted Life(3) (Total Shares) Sept 30 (Exer. Shares)
-------- ----------- ------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.50 50,000(1) 3/31/98 5 years $ 1.50 -- $ 1.50
2.25 25,000(1) 3/31/98 5 years 2.25 -- 2.25
1.50 100,000(1) 3/31/98 5 years 1.50 -- 1.50
</TABLE>
F-18
<PAGE> 60
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
<TABLE>
<CAPTION>
Weighted
Average Weighted Number Weighted
Range of Number Remaining Average Exercisable Average
Exercise outstanding Date Contractual Exercise Price at Exercise Price
Price at Sept 30 Granted Life(3) (Total Shares) Sept 30 (Exer. Shares)
-------- ----------- ------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1.50 400,000(2) 1/31/98 5 years 1.50 400,000 1.50
4.00 47,170(2) 1/31/98 6 years 4.00 -- 4.00
1.59 189,340(2) 4/27/98 5 years 1.59 -- 1.59
1.59 61,510(2) 5/15/98 5 years 1.59 -- 1.59
- ------- -------- ----------- ------------- ----------- --------------
$ (1.50)
4.00 873,020 5 years $ 1.68 400,000 $ 1.50
======= ======== =========== ============= =========== ==============
</TABLE>
(1) Options granted to employees for past services.
(2) Options granted for placement agent fees (Note 10).
(3) Options expire in years 2003 through 2004.
MARCH 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
Average Weighted Number Weighted
Range of Number Remaining Average Exercisable Average
Exercise outstanding Date Contractual Exercise Price at Exercise Price
Price at March 31 Granted Life (3) (Total Shares) March 31 (Exer. Shares)
-------- ----------- ------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.50 50,000(1) 3/31/98 5 years $ 1.50 -- $ 1.50
2.25 25,000(1) 3/31/98 5 years 2.25 -- 2.25
1.50 100,000(1) 3/31/98 5 years 1.50 -- 1.50
1.50 400,000(2) 1/31/98 5 years 1.50 400,000 1.50
4.50 47,170(2) 1/31/98 6 years 4.00 -- 4.00
-------- ----------- ------- ----------- -------------- ----------- --------------
$ (1.50)
4.00 622,170 5 years $ 1.72 400,000 $ 1.50
======== =========== ======= =========== ============== =========== ==============
</TABLE>
(1) Options granted to employees for past services.
(2) Options granted for placement agency fees (Note 10).
(3) Options expire in years 2003 through 2004.
Each stock option granted can be exercised for one share of common stock.
Stock options to employees for the year ended March 31, 1998, have been
recorded as compensation as applied under APB No. 25 in the amount of $93,750.
There were no options granted to employees during the nine months ended
December 31, 1998.
SFAS No. 123 requires the Company to provide pro forma information regarding
net income (loss) applicable to common stockholders and income (loss) per share
as if compensation cost for the Company's stock options granted to employees
had been determined in accordance with the fair value based method prescribed
in that Statement.
During the year ended March 31, 1998, the Company estimated the fair value of
each stock option to employees at the grant date by using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants as follows:
F-19
<PAGE> 61
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 11 - STOCK OPTIONS AND WARRANTS - CONTINUED
<TABLE>
<CAPTION>
Risk
Number Free Estimated Total
of Dividend Expected Interest Expected Fair Value Fair
Shares Yield Volatility Rate Lives Per Share Value
---------- ------------ ---------- ---- ----- --------- --------
<S> <C> <C> <C> <C> <C> <C>
50,000 $ -- 45.26% 5.30% 5 years $ 1.22 $ 60,943
25,000 $ -- 45.26% 5.30% 5 years $ 0.96 47,846
100,000 $ -- 45.26% 5.30% 5 years $ 1.22 121,885
--------
$230,674
========
</TABLE>
Net (loss) applicable to common stockholders for the year ended March 31, 1998:
<TABLE>
<S> <C>
As reported $(7,238,120)
============
Pro forma $(7,375,044)
============
Net (loss) per share:
As reported $ (.66)
============
Pro forma $ (.67)
============
</TABLE>
Stock options granted for placement agent fees for the nine months ended
December 31, 1998 and during the year ended March 31, 1998 have been recorded
as a reduction of proceeds from the issuance of preferred stock in accordance
with SFAS No. 123 at the fair value of the options at the grant date as
determined by using the Black-Scholes option-pricing method as follows:
DECEMBER 31, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Risk
Number Free Estimated Total
of Dividend Expected Interest Expected Fair Value Fair
Shares Yield Volatility Rate Lives Per Share Value
---------- ------------ ---------- ---- ----- --------- --------
<S> <C> <C> <C> <C> <C> <C>
189,340 $ -- 47.75% 5.30% 5 years $ 1.65 $311,858
61,510 $ -- 47.75% 5.30% 5 years $ 2.86 176,022
--------
$487,880
========
</TABLE>
MARCH 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Risk
Number Free Estimated Total
of Dividend Expected Interest Expected Fair Value Fair
Shares Yield Volatility Rate Lives Per Share Value
---------- ------------ ---------- ---- ----- --------- --------
<S> <C> <C> <C> <C> <C> <C>
400,000 $ -- 45.26% 5.21% 5 years $ 0.92 $367,350
47,170 $ -- 45.26% 5.11% 6 years $ 0.43 20,291
--------
$387,641
========
</TABLE>
F-20
<PAGE> 62
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 11 - STOCK OPTIONS AND WARRANTS - CONTINUED
The following table summarizes the information about the warrants:
<TABLE>
<CAPTION>
Exercised
During Nine
Number Months Ended Outstanding
Outstanding December 31, December 31,
Exercise Expiration March 31, 1998 1998
Price Date 1998 (unaudited) (unaudited)
-------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
$ 1.50 1/31/2000 120,000 -- 120,000
$ 1.50 1/31/2000 2,400,000 -- 2,400,000
$ 0.795 300,000 300,000 --
$ 0.795 120,000 120,000 --
----------- ----------- ------------
2,940,000 420,000 2,520,000
=========== =========== ============
</TABLE>
In addition, all of the warrant contracts prohibit exercise of the warrants if
the HUB status of the Company is compromised upon such exercise (See Note 10).
NOTE 12 - EARNINGS PER SHARE
The following data details the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted average number of shares of
dilutive potential common stock.
<TABLE>
<CAPTION>
December 31, (unaudited) March 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loss from continuing
operations $ (3,947,262) $ (2,095,645) $ (3,766,950) $ (482,385)
Less: Preferred dividends (798,062) -- (3,471,170) --
------------ ------------ ------------ ------------
Loss available to common
shareholders used in basic EPS $ (4,745,324) $ (2,095,645) $ (7,238,120) $ (482,385)
============ ============ ============ ============
Weighted average number of
common shares used in basic
EPS 12,051,893 10,764,733 10,998,874 10,026,400
Effect of dilutive securities:
Preferred Stock - Series B -- -- -- --
Preferred Stock - Series C -- -- -- --
Preferred Stock - Series D -- -- -- --
Stock options -- -- -- --
Warrants -- -- -- --
Weighted number of common
shares and dilutive potential
common stock used in diluted
EPS 12,051,893 10,764,733 10,998,874 10,026,400
============ ============ ============ ============
</TABLE>
F-21
<PAGE> 63
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 12 - EARNINGS PER SHARE - CONTINUED
In addition, 490,000 shares of Series B Preferred stock, convertible into
4,900,000 shares of Common Stock, 99,057 shares of Series C Preferred stock
convertible into 990,570 shares of Common Stock, 279,657 shares of Series D
Preferred stock convertible into 2,796,570 (unaudited) shares of Common Stock,
options on 873,020 (unaudited) shares of common stock and warrants on 2,520,000
(unaudited) shares of common stock were not included in computing diluted EPS
for the nine months ended December 31, 1998, because their effects were
antidilutive. Series B Preferred stock in the amount of 490,000 shares
convertible into 4,900,000 shares of Common Stock, 99,057 shares of Series C
Preferred stock convertible into 990,570 shares of Common Stock, options on
622,170 shares of common stock and warrants on 2,940,000 shares of common stock
were not included in computing diluted EPS for the year ended March 31, 1998,
because their effects were antidilutive.
NOTE 13 - CONTINGENCY
On December 18, 1997, Argus Management, Inc. filed Plaintiff's Original
Petition in the 216th District Court of Kerr County, Texas. Argus claims the
Company and Mr. Jose G. Chavez, as joint obligors, defaulted on their
obligation to Argus pursuant to two promissory notes for $100,000 each, both
dated June 2, 1997. Argus is seeking a judgment for $200,000, together with
interest on the notes at the rate of 20% per annum from June 2, 1997, through
the date the notes are satisfied. As of March 31, 1998, $65,000 of costs in
connection with the reverse merger and the related promissory notes had been
disbursed to third parties in satisfaction of obligations of Argus Management,
Inc. The $65,000 has been recorded in other receivables in the accompanying
financial statements. (Seen Note 2)
On February 6, 1998, the Company filed Plaintiff's Original Petition in the
above-referenced case. The Company asserts breach of contract, fraud,
defamation, usury, and civil conspiracy claims against Argus Management, Inc.
The Company strongly disagrees with Argus' contentions and denies liability to
Argus under the notes and plans to oppose vigorously Argus' claims and recover
the amounts disbursed to third parties.
A lawsuit was filed by Manpower, Inc. to preserve its claims for certain
delinquent obligations that were reduced to approximately $38,000 which is
included in accounts payable at March 31, 1998. The full amount of the
principal and interest was paid on April 29, 1998, and a Notice of Dismissal
was filed on May 8, 1998.
On January 22, 1998, the Company filed a lawsuit against Bits Technical
Corporation for damages attributable to a breach of commitment. This matter is
still pending. On August 17, 1998, Bits Technical Corporation ("BTC") filed a
counterclaim against the Company in connection with the above case. In the
counterclaim, BTC asserts the Company fraudulently induced BTC to promise to
loan money to the Company. In particular, BTC claims the Company promised
certain contracts and business opportunities to BTC that the Company was
unwilling or unable to deliver.
Bank One, Texas, NA filed a lawsuit against the Company for the collection of
approximately $355,633 of principal plus interest $29,289 as well as attorney
fees and court costs $10,000. The bank was paid in full in April 1998. The bank
then executed a Notice of Nonsuit to dismiss with prejudice the lawsuit on
April 29, 1998.
On November 20, 1996, MCA Communications, Inc. ("MCA") filed a lawsuit against
the Company in County Court at Law No. 2 in Harris County, Texas. MCA claims
the Company owes $12,485 for certain goods and services that MCA claims to have
provided to MSI in connection with various projects for the Texas Department of
Health. MCA also seeks interest, costs, and attorneys' fees. On January 6,
1997, the Company filed its answer and denied the above-referenced claim in its
entirety.
Employment agreements for certain executive officers are being renegotiated
with the Board of Directors at the present time. These Agreements call for the
issuance of options to certain executive officers annually, upon meeting
certain benchmarks and as signing bonuses. Options granted that have not been
recorded in the financial statements are being mutually
F-22
<PAGE> 64
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND YEARS ENDED MARCH 31, 1998
AND 1997
NOTE 13 - CONTINGENCY - CONTINUED
renegotiated as to grant date, amount, price and other significant terms. No
options that are currently being negotiated are due, therefore, compensation
has not been recorded in these financial statements or included in the earnings
per share calculations and pro-forma information in Notes 11 and 12.
NOTE 14 - MARCH 31, 1997 RESTATED FINANCIAL STATEMENTS
- -------------------------------------------------------
Subsequent to issuing the March 31, 1997 audited financial statements and
accompanying auditor's report dated June 22, 1997, additional adjustments to
the financial statements were discovered. The restated financial statements
were filed on June 23, 1998 with the Securities & Exchange Commission on Form
10K/A. See Notes 10, 11 and 12 to the reissued March 31, 1997 financial
statements dated June 10, 1998 for a description of restated items and the
Going Concern discussion.
NOTE 15 - UNAUDITED FINANCIAL STATEMENTS
The financial statements for the nine months ended December 31, 1998 and 1997
are unaudited: however, in the opinion of management, such statements include
all adjustments, consisting of normal recurring adjustments, necessary for the
fair presentation of financial position, the results of operations and changes
in financial position for the interim periods presented have been reflected
herein. The results of operations are not necessarily indicative of the results
to be expected for a full year.
NOTE 16 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
The following significant adjustments were made during the fourth quarter of
1998:
<TABLE>
<CAPTION>
Description Amount
- ----------- ----------
<S> <C>
Bad Debt Expense $ (69,364)
Common stock and options
issued to employees and
consultants as compensation (463,170)
Loss on cabling contract (495,125)
----------
Net decrease in income $1,027,659
==========
Per share increase in income $ 0.09
==========
</TABLE>
NOTE 17 - SUBSEQUENT EVENTS
Subsequent to December 31, 1998 but prior to March 31, 1999, 94,340
shares of Series C Preferred and 65,000 shares of Series D Preferred were
converted to an aggregate of 1,593,400 shares of the Company's Common Stock. In
January 1999, in connection with the severance of David W. Hill, the Company's
former CFO, the Company granted Mr. Hill a three year option to purchase up to
50,000 shares of Common Stock at $7.02 per share, subject to the terms of his
employment and termination agreements. The Company has reason to believe Mr.
Hill has failed to comply with the terms of those agreements, constituting an
event of default and nullifying his options. As of March 31, 1999, the Company
also received commitments to purchase $4.5 million in Common Stock.
Subsequent to March 31, 1999, an additional 399,995, 120,335 and
11,995 shares of Series B Preferred, Series D Preferred and Series E Preferred,
respectively, were converted for an aggregate of 5,323,250 shares of the
Company's Common Stock.
F-23
<PAGE> 65
THIS PAGE
INTENTIONALLY LEFT BLANK
<PAGE> 66
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information 2
Prospectus Summary 3
Summary Financial Data 6
The Offering 7
Risk Factors 8
Price Range for Common Stock 11
Use of Proceeds 11
Dividend Policy 11
Capitalization 12
Selected Financial Data 13
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 14
Business 21
Management 24
Executive Compensation 28
Certain Transactions 28
Principal Shareholders 30
Selling Shareholders 32
Plan of Distribution 36
Description of Capital Stock 36
Shares Eligible for Future Sale 40
Legal Matters 40
Experts 41
Change in Independent Auditors 41
Index to Financial Statements F-1
</TABLE>
13,697,531 Shares
MSI HOLDINGS, INC.
Common Stock
---------------
PROSPECTUS
---------------
