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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
THAT HAVE BEEN ISSUED TO EMPLOYEES OF THE COMPANY AND CERTAIN OTHERS. 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 January 7, 1999, the last sale price of the Company's Common Stock,
as reported on the OTC Bulletin Board under the symbol "MSIA," was $6.94.
-------------------------------------------
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 JANUARY 13, 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 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 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. MSI maintains certification as a
minority-owned business enterprise and status as a Historically Underutilized
Business ("HUB").
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 in January 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 over 70 employees.
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.
INDUSTRY OVERVIEW
The Company, through its collocation services, intends to enter the
Internet access market in January 1999. 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 telecommunications industry growth is
attributable to increasing demand for data services and Internet connectivity.
Provider and consumer hardware and software technology have been rapidly
advancing. In this evolving climate, 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
January 1999.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's HUB status.
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 high-speed bandwidth and 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 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 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 facilities to GTE for installation of GTE's Point of Presence
("POP") equipment (the "Sublease"). 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 in September 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
collocation services for high volume (known as bandwidth) Internet web
applications. Collocation is a service that provides a high speed, high
bandwidth connection to the Internet backbone using various backup systems to
increase the connection's fault tolerance. By connecting directly to Internet
via the POP, the local link is eliminated, the weakest component in an Internet
connection. MSI will have the capacity to support over five thousand collocation
rack spaces. These rack spaces will be used to host the net servers for MSI
clients and provide those clients with direct access to the Internet. When fully
implemented, these collocation services are expected to significantly increase
MSHI's revenues over the term of the Connection Service. The GTE Agreements
provide the potential for MSHI to increase revenue by selling Internet access to
various high Internet demand entities for such activities as commerce and
academics. It is anticipated that the requisite hardware will be operational in
January 1999.
Currently MSHI's operations have been limited to within Texas. However,
MSHI plans to continue developing its marketing efforts to expand the Company's
licenses beyond its home state. The Company's strategic alliances are also being
utilized to promote this objective. The GTE Agreements allow MSHI to satisfy the
market's current dynamic demands and have the potential of quickly moving the
Company into other geographic markets.
BACKGROUND
MSHI (formerly Mountain States Resources Corporation ("MSRC")) was
organized under the laws of the state of Utah on April 15, 1969. 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
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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>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30 MARCH 31
(unaudited)
------------------------------- -------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1998 1997
- ----------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Revenue 1,595,909 2,019,235 $ 2,740,821 $ 4,665,749
Gross margin (loss) 203,414 749,556 (319,813) 1,667,514
Net income (loss) (2,334,741) (741,622) (3,766,950) (482,385)
Preferred Stock dividends (693,922) -- (3,471,170) --
Net Income (loss) available to common (3,028,663) (741,622) (7,238,120) (482,385)
Basic and diluted net loss per share (1) (0.26) (0.07) (0.66) (0.05)
Shares used to compute net loss per share (1) 11,638,166 10,764,733 10,998,874 10,026,400
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
SEPT. 30 MARCH 31
(unaudited)
--------------- ---------------------------
BALANCE SHEET DATA: 1998 1998 1997
- ------------------- --------------- ------------ -----------
<S> <C> <C> <C>
Cash and cash equivalents 7,748 $ 25,786 $ 18,112
Working capital (deficit) 117,228 (192,080) (618,547)
Total assets 3,880,911 2,699,452 2,514,308
Accumulated deficit (10,400,782) (7,372,119) (133,999)
Total shareholders' equity (deficit) 783,922 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.
THE OFFERING
Common Stock offered by this Prospectus...................13,697,531 shares (1)
Common Stock outstanding as of November 30, 1998 .........12,032,221 shares (2)
OTC Electronic Bulletin Board Ticker Symbol...............MSIA
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(1) Represents the (i) 4,900,000 shares of Common Stock issuable upon
conversion of 490,000 shares of Series B Preferred, (ii) 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),
(iii) 420,000 shares of Common Stock issuable upon
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the exercise of Class A Warrants granted in conjunction with the Notes
(as defined), (iv) 400,000 shares of Common Stock issuable upon the
exercise of the Options issued in conjunction with the Notes, (v)
10,286 shares of Common Stock representing the unpaid accrued interest
on the Notes, (vi) 990,570 shares of Common Stock issuable upon
conversion of 99,057 shares of Series C Preferred, (vii) 47,170 shares
of Common Stock issuable upon the exercise of Options granted in
conjunction with Private Placement Phase II (as defined), (viii)
2,796,570 shares of Common Stock issuable upon conversion of 279,657
shares of Series D Preferred, (ix) 250,850 shares of Common Stock
issuable upon the exercise of Options granted in conjunction with
Private Placement Phase III (as defined), (x) 543,000 shares of Common
Stock issuable upon satisfaction of a note receivable payable in cash
or certain intellectual property rights, See Note 10 to the financial
statements, (xi) 475,900 shares of Common Stock issued for services
rendered,(xii) 50,000 shares of Common Stock issuable as dividends to
the Series B, C and D Preferred holders, and (xiii) 293,185 shares of
Common Stock disputed in litigation. See "Management, Discussion and
Analysis of Financial Condition and Results of Operation -Legal
Proceedings."
(2) Includes the following Common Stock offered by this Prospectus: (i)
10,286 shares of Common Stock representing the unpaid accrued interest
on the Notes, (ii) 293,185 shares of Common Stock subject to transfer
between holders and disputed in litigation, (iii) 445,900 shares of
Common Stock issued as compensation to employees and consultants, (iv)
48,117 shares of Common Stock issued as dividends to the Holders of
Series B, C & D Preferred Shares, and (v) 420,000 shares of Common
Stock issued upon conversion of Class A Warrants granted in conjunction
with Private Placement Phase I . See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- 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 $3,028,663 for the six months ended September 30, 1998, and a net
loss of $741,622 for the six months ended September 30, 1997 and had an
accumulated deficit of $10,400,782 as of September 30, 1998 and an accumulated
deficit of $875,621 as of September 30, 1997. The financial statements for
September 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. The Company's current liabilities exceeded its current assets by
approximately $192,000 as of March 31, 1998. The Company failed to generate cash
from operations for the six months ended September 30, 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 attaining 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 $1,296,800 from the Private Placement of Series E
Preferred through December 18, 1998. An additional net proceeds of approximately
$1,300,000 from the private placement of Series E Preferred is expected to be
finalized by January 31, 1999. In addition, the Company plans a private offering
during fiscal 1999, however no specific plans have been finalized.
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."
CRITICAL NEED FOR ADDITIONAL CAPITAL; NO ASSURANCE OF FUTURE FINANCING.
The Company has a critical need for additional capital. As of September 30, 1998
(unaudited ) and March 31, 1998, the Company's cash, cash equivalents and short
term investments totaled approximately $,1358,000 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 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."
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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. This 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.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's HUB status.
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. MSI is currently qualified in Texas as a
"Historically Underutilized Business" ("HUB"). As long as MSI maintains its
status as a HUB, it will continue to receive favorable treatment by certain
governmental entities in their granting of contracts. The Company generated
revenues of approximately $414,000 and $919,000 during 1998 and 1997,
respectively, from HUB related contracts, or 15% and 20% of its gross revenues,
respectively. MSI will graduate from its HUB status upon the happening of any of
the following events: (i) less than 51% of the Company's voting stock is owned
by minorities; (ii) such minority owners are not active participants in the
day-to-day operations and management of the business; (iii) the four year
average of gross revenues of MSI exceeds certain levels based on the MSI's
Standard Industrial Classification Code ("SIC Code"); or (iv) the four year
average of total employment levels of MSI exceeds the Small Business
Administration established levels for businesses with a similar four-digit SIC
Code. Entrepreneurial Investors Ltd. ("EIL") has acquired a sufficient number of
convertible preferred shares that if converted would disqualify MSI from HUB
status based upon the minority ownership criteria. Nonetheless, EIL covenanted,
in the respective placement agreements, not to exercise its conversion rights in
a manner that would compromise MSI's HUB status. Moreover, under the current SIC
Code applicable to MSI, MSI must not exceed 500 employees, it currently has 79
employees. The current SIC Code classification does not impose a revenue
ceiling, however, some SIC Code classifications under which MSI has operated
placed a three year or a four year average of gross revenue limitation. The
potential loss of HUB status may also be contingent upon the SIC Code under
which MSI operates in the future. Future changes in operations may require MSI
to change its SIC Code, which could alter the employee ceiling and impose
revenue restrictions as low as $5 million per year, averaged over periods as
short as three years. There can be no assurance that MSI will continue to
qualify for HUB status. Further, there is no assurance that HUB-type programs
will not be eliminated by the state or federal governments. If MSI's HUB status
is lost, the Company anticipates a significant loss of revenues.
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.
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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 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 1998 and none during 1997.
RELIANCE ON KEY MANAGEMENT. The Company's business depends upon the
availability of Jose Chavez, Chairman of the Board of Directors, President and
Chief Executive Officer, and Mitchell Kettrick, Vice President and Secretary.
The loss of either of their services would likely have a material adverse effect
on the Company. There is no assurance that such individuals will continue to be
available, although the Company has entered into employment agreements with both
of them until March 31, 2001. 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 $12.87 on August 11, 1998 to a low of $4.06 on
September 8, 1998. 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 September 30, 1998 and
March 31, 1998, the executive officers and directors of the Company and their
affiliates, as a group, owned or controlled approximately 80% of the outstanding
capital stock of the Company. As a result, such persons and entities will
continue to exert significant influence over the business and affairs of the
Company. See "Principal Shareholders."
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 September 30, 1998, the Company had
12,032,221 shares of Common Stock issued and outstanding. If all of the shares
of convertible preferred stock were converted to Common Stock, as of September
30, 1998 the Company would have had 24,512,264 shares of Common Stock issued and
outstanding, of which 6,585,464 or 27% would have been eligible for future sale.
The remaining 17,926,800 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."
-10-
<PAGE> 11
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
</TABLE>
On January 7, 1999, the closing sale price for a share of the Company's
Common Stock, as reported on the OTC Bulletin Board, was $6.94. 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. If
all the Warrants and Options are exercised the Company will receive net proceeds
of $5,248,782. 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 which were issued to
employees and consultants for services rendered or the certain shares of Common
Stock which were issued for a note which will be paid in cash or certain
intellectual property rights. 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 September 30, 1998 and as adjusted for a
subsequent sale of Series E Preferred stock as of December 18, 1998 (unaudited).
The table should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Sept. 30 1998 Adjustment (2) As Adjusted
------------- ----------- -----------
<S> <C> <C> <C>
Long-term debt $ 206,493 $ $ 206,493
Obligations under capital leases 302,780 -- 302,780
------------ ----------- ----------
509,273 -- 509,273
------------ ----------- ----------
Shareholders' equity (deficit):
Series B 5% Cumulative Non-Voting Preferred
stock, $5.30 stated value, 490,000 authorized,
490,000 issued and outstanding 2,597,000 -- 2,597,000
Series C 6% Cumulative Non-Voting Preferred stock,
$10.60 stated value,
99,057 authorized,
99,057 issued and outstanding 1,050,004 -- 1,050,004
Series D 6% Cumulative Non-Voting Preferred stock,
$10.60 stated value,
279,657 authorized,
279,657 issued and outstanding 2,964,364 -- 2,964,364
Series E 6% Cumulative Non-Voting Preferred stock,
$30.00 stated value,
105,000 authorized,
51,975 issued and outstanding -- 1,559,250 1,559,250
Common Stock, $.10 par value, authorized
50,000,000 shares, 12,032,221 and 11,506,846
shares issued and outstanding, respectively. (1) 1,203,222 -- 1,203,222
Additional paid-in capital 3,370,114 (262,450) 3,107,664
Accumulated deficit (10,400,782) -- (10,400,782)
------------ ----------- ----------
Total shareholders' equity 783,922 1,296,800 2,080,722
------------ ----------- ----------
Total capitalization $1,293,195 $ 1,296,800 $2,589,995
============ =========== ==========
</TABLE>
(1) Includes the following Common Stock offered by this Prospectus: (i)
10,286 shares of Common Stock representing the unpaid accrued interest
on the Notes, (ii) 293,185 shares of Common Stock subject to transfer
between holders and disputed in litigation, (iii) 445,900 shares of
Common Stock issued as compensation to employees and consultants, (iv)
48,117 shares of Common Stock issued as dividends to the Holders of
Series B, C & D Preferred Shares, and (v) 420,000 shares of Common
Stock issued upon conversion of Class A Warrants granted in conjunction
with Private Placement Phase I . See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Legal
Proceedings."
(2) Includes the private placement of 51,975 shares of Series E Preferred
Stock through December 18, 1998, including 2,475 shares issued for
placement agent fees in the amount of $74,250. Also commissions and
issuance cost of $188,200 have been deducted from the proceeds.
-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>
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30 MARCH 31
(unaudited)
------------------------------ -------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1998 1997
- ----------------------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Net Revenue 1,595,909 2,019,235 $ 2,740,821 $ 4,665,749
Cost of revenues 1,392,495 1,269,679 3,060,634 2,998,235
Gross profit (loss) 203,414 749,556 (319,813) 1,667,514
Selling, General and Administrative Expenses 2,538,155 1,491,178 3,447,137 2,149,899
Net income (loss) (2,334,741) (741,622) (3,766,950) (482,385)
Preferred Stock dividends (693,922) -- (3,471,170) --
Net Income (loss) available to
common stockholders (3,028,663) (741,622) (7,238,120) (482,385)
Basic and diluted net loss per share (1) (0.26) (0.07) (.66) (.05)
Shares used to compute net loss per share (1) 11,638,166 10,764,733 10,998,874 10,026,400
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
SEPT. 30 MARCH 31
(unaudited)
--------------- -----------------------------
BALANCE SHEET DATA: 1998 1998 1997
- ------------------- --------------- ------------- ------------
<S> <C> <C> <C>
Working capital (deficit) 117,228 (192,080) (618,547)
Total assets 3,880,911 2,699,452 2,514,308
Current liabilities 2,587,716 2,090,701 1,929,042
Total shareholders' equity (deficit) 783,922 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
created in 1993 in Austin, Texas, to provide computer hardware, software
programming, system installation and support, maintenance, and media duplication
to the public and private sectors. MSI maintains certification as a
minority-owned business enterprise and status as a Historically Underutilized
Business ("HUB"). On June 23, 1997, the then shareholders of MSI entered into an
agreement and plan of reorganization (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 plans to address
the going concern issues described elsewhere in this Prospectus through the
Series E Preferred private placement and from substantial contracts signed
during fiscal year ending March 31, 1999, which will provide sufficient working
capital and cash flows for the next twelve month period. However, there can be
no assurance that the Company will be able to secure such additional capital or
that the contracts will generate sufficient cash flows or working capital.
Subsequent to March 31, 1998, the Company received $2.8 million dollars 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 initiated a private placement of the newly created Series E
Preferred shares of stock (the "Series E Preferred"). The Series E Preferred
will yield aggregate net proceeds of approximately $2.6 million to the Company
and is expected to be completed by January 31, 1999. As of December 18, 1998,
the Company had received $1,296,800 of net proceeds in partial settlement of the
Series E private placement.
Management, based upon expressions of interest, estimated growth and
facility capacities, believes that its contracts with GTE and Siemens Nixdorf
(the "Contracts") have the possibility of producing revenues of approximately $8
million during the next twelve month period. Management further anticipates the
contracts to yield approximately 10% of revenues as net income. The company has
purchased the required equipment with capital leases as of September 30, 1998,
and will begin operations under the contracts by January 1999. The proceeds from
the Series E Preferred will allow the Company to remodel the existing facility
and continue operations through the end of the current fiscal year, by which
point it is anticipated that the contracts will be generating positive cash flow
and adequate working capital.
The Company is also negotiating with investment bankers for an additional
$20 million private placement to be completed before the fiscal year end of
March 31, 1999. These funds will be used to satisfy additional capital needs for
expansion opportunities associated with the Contracts. In the event the Company
is unable to complete the contemplated $20 million private placement, the
Company will forego the Contracts' expansion opportunities, reduce the number of
employees and overhead expenses and concentrate its efforts on the Austin
operations.
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."
-14-
<PAGE> 15
The Company's revenues consist of hardware sales, software sales and the
delivery of technical services, including installing and maintaining networks
system. The technical service sales of the Company typically yield a higher
gross margin than the hardware and software sales of the Company. This is due,
in part, to the intense competition in the hardware and software sales sector
from Original Equipment Manufactures ("OEM's") and distributors. As a result,
the Company, is attempting to strategically reposition itself from emphasizing
hardware sales to intensifying sales of technical services. 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 purchasing new equipment. The Company anticipates hiring
approximately 20 new employees by fiscal year end and is remodeling its existing
facilities to accommodate the increase. The losses being incurred because of the
strategic repositioning are expected to continue for the balance of the fiscal
year. However, the GTE and Siemens Nixdorf contracts are expected to begin
generating revenues by the last quarter of fiscal year ending March 31, 1999,
and those revenues are expected to exceed the associated expenses by the first
quarter of the next fiscal year. See Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Results of Operations.
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 Internet via the POP, MSI is able to eliminate the local loop, the
weakest component in localized Internet connections. MSI will have the capacity
to support over four thousand collocation rack spaces. These rack spaces will be
used to host the net servers for MSI clients and provide those clients with
direct access to the Internet. When fully implemented, these collocation
services are expected to significantly increase MSHI's revenues over the term of
the Connection and DiaLinx Services. The GTE Agreements provide the potential
for MSHI to increase revenue by selling Internet access to various high Internet
demand entities for such activities as commerce and academics. It is anticipated
that the requisite hardware will be operational in January 1999.
In July 1998, MSI began providing systems integration, warehousing, systems
configuration and other fulfillment services for Siemens-Nixdorf Information
Systems, Inc. ("Siemens-Nixdorf") for Point of Sale ("POS") systems and
Automated Teller Machines for Siemens-Nixdorf's customers such as Sears-Roebuck
,and Bealls department stores (the "Siemens-Nixdorf Agreement"). This agreement
provides that Siemens-Nixdorf will store its inventory at MSI, and MSI will
charge Siemens-Nixdorf for various systems integration services. This
arrangement provides MSHI with a revenue stream without a significant working
capital commitment.
MSHI formed TeleVista, Inc., a wholly owned subsidiary ("TVI") in September
of 1998 to run the electronic commerce business for the on-line sale of hardware
and software over the Internet through the use of a secure server. Secure
servers allow for the accelerated receipt of funds through credit card payments
for hardware and software purchases made through their web sites operated by it.
-15-
<PAGE> 16
RESULTS OF OPERATIONS
Six Months Ended September 30, 1998 Compared with September 30, 1997 (unaudited)
Revenues for the six months ended September 30, 1998 of $1,595,909
decreased $423,326 or (20.96%) from the $2,019,235 recorded in the six months
ended September 30, 1997. This decrease is a combination of an increase of
$43,399 in hardware, software and peripherals revenues and decreases of $275,650
in service, support and integration revenues and $191,075 in network
installation revenues. The nominal increase of $43,399 in hardware, software and
peripherals revenues reflects normal fluctuations in sale of hardware, software
and peripherals products.
The $275,650 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
$300,000 from the six months ended September 30, 1997 compared to the September
30, 1998 period. Other decreases in revenues were on a contract for the City of
Austin of approximately $56,000 from the six months ended September 30, 1997
compared to September 30, 1998 period. Increases in service, support and
integration revenues of approximately $77,000 are attributed to new contracts
received from Siemens Nixdorf and the State of Texas lottery contractor.
The $191,075 decrease in network installation revenues relates to specific
significant school district network installation contracts that were in place
during each period. During the six months ended September 30, 1997 MSI- TEXAS
was performing on a contract for Hereford Independent School District which
started in April 1997. During the six months ended September 30, 1998, MSI-TEXAS
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.
Cost of goods sold ("COGS") for the six months ended September 30, 1998
increased $122,816 or 9.7% to $1,392,495 compared to the six months ended
September 30, 1997 representing 87.25% of revenue resulting in a margin of
12.75%. Cost of goods sold for the six months ended September 30, 1997 was
$1,269,679 or 62.88% of revenue resulting in a margin of 37.12%. The decrease in
margins is a combination of an increase in COGS for hardware, software and
peripherals in the amount of $456,388 and decreases in COGS for service, support
and integration in the amount of $243,384 and in network installation in the
amount of $90,188.
COGS as a percentage of revenues for hardware, software and peripherals was
96.2% for the six months ended September 30, 1998 resulting in a margin of 3.8%
compared to a margin of 40.2% for the six months ended September 30, 1997. The
decreasing margins are due to market pressure 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 cost as a result of poor estimating of cost by MSI-TEXAS. Procedures are
now in place to insure profitable margins on hardware, software and peripherals
sales.
COGS as a percentage of revenues for service, support and integration was
38.1% for the six months ended September 30, 1998 resulting in a margin of 61.9%
compared to a margin of 35.0% for the six months ended September 30, 1997. The
increase in margins is a result of MSI-TEXAS obtaining an 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 COGS are a result of a
contract to install Texas State Lottery vending machines in retail businesses.
This contract requires the lottery contractor to supply all hardware cost.
COGS as a percentage of revenues for network installation was 93.8% for the
six months ended September 30, 1998 resulting in a margin of 6.2% compared to a
margin of 30.5% for the six months ended September 30, 1997. The decrease in
margins relate to specific significant school district network installation
contracts that were in place during each quarter. During the quarter ending
September 30, 1998 MSI-TEXAS received a contract of approximately $700,000 with
San Felipe Del Rio Consolidated Independent School District for network system
installation. The margin on this contract was less due to competitive bidding
required by public entities. Additional contracts with Del Rio were received,
subsequent to September 30, 1998, that allow the opportunity for increased
overall margins. Aggregate contracts and purchase orders with Del Rio are now in
excess of $1 million.
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<PAGE> 17
Selling, General and Administrative Expenses for the six months ended
September 30, 1998 of $2,538,155 represents 159.04% of Revenues. The 1998 amount
represents an increase over the six months ended September 30, 1997 of
$1,046,977 or 70.21%. Approximately $682,000 of the increase represents the
increase in staff salaries and benefits. Staff additions include technical
staff, sales staff, accounting staff and middle management. These increases are
needed as the Company prepares to offer collocation services at its Austin,
Texas facility and will also enable the Company to work on larger service
contracts. Increases in professional fees of $247,000 is largely attributable to
the reporting requirements associated with being a public company. Occupancy
expense increased approximately $110,000 due to facility expansion and increased
staffing.
Year Ended March 31, 1998 Compared with the Year Ended March 31, 1997.
Revenues for 1998 were $2,740,821 as compared to revenues for 1997 of
$4,665,749. Revenues for 1998 decreased $1,924,928 or (41.3%) from 1997. This
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.
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 percentage is extraordinarily high and
resulted in a negative gross margin of ($319,813) or (11.7%) of revenues 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 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 publicly traded company. Interest
expense also increased $194,000 due to increased line of credit usage and late
fees on overdue accounts.
POTENTIAL LOSS OF HUB STATUS
MSI is currently qualified in Texas as a "Historically Underutilized
Business" ("HUB"). As long as MSI maintains its status as a HUB, it will
continue to receive favorable treatment by certain governmental entities in
their granting of contracts. The Company generated revenues of approximately
$414,000 and $919,000 during 1998 and 1997, respectively, from HUB related
contracts, or 15% and 20% of its gross revenues, respectively. MSI will graduate
from its HUB status upon the happening of any of the following events: (i) less
than 51% of the Company's voting stock is owned by minorities; (ii) such
minority owners are not active participants in the day-to-day operations and
management of the business; (iii) the four year average of gross revenues of MSI
exceeds certain levels based on the MSI's Standard Industrial Classification
Code ("SIC Code"); or (iv) the four year average of total employment levels of
MSI exceeds the Small Business Administration established levels for businesses
with a similar four-digit SIC Code. Equity Investors Ltd. ("EIL") has acquired a
sufficient number of convertible preferred shares that if converted would
disqualify MSI from HUB status based upon the minority ownership criteria.
Nonetheless, EIL covenanted, in the respective placement agreements, not to
exercise its conversion rights in a manner that would compromise
-17-
<PAGE> 18
MSI's HUB status. Moreover, under the current SIC Code applicable to MSI, MSI
must not exceed 500 employees, it currently has 79 employees. The current SIC
Code classification does not impose a revenue ceiling, however, some SIC Code
classifications under which MSI operated placed a three year or a four year
average of gross revenue limitation. The potential loss of HUB status may also
be contingent upon the SIC Code under which MSI operates in the future. Future
changes in operations may require the MSI to change its SIC Code, which could
alter the employee ceiling and impose revenue restrictions as low as $5 million
per year, averaged over periods as short as three years. A change in MSHI's SIC
code would have no effect on the operating subsidiary's HUB status. Though not
currently anticipated, MSI, the operating subsidiary, may be required to change
its SIC code, if its operations diversify into activities better described by an
alternative classification. There can be no assurance that MSI will continue to
qualify for HUB status. Further, there is no assurance that HUB-type programs
will not be eliminated by the state or federal governments. If MSI's HUB status
is lost, the Company does not anticipates a negative effect on existing
contracts, since the preference is given at the contracting stage. Conversely,
the loss of HUB status may impede the Company's ability to attract contracts
from a market sector which has historically provided up to 20% of the Company's
revenues.
LIQUIDITY AND CAPITAL RESOURCES
On November 18, 1997, the Company received $2,120,000 upon completion of a
private placement whereby 400,000 of Series B Preferred were sold to
Entrepreneurial Investors, Ltd. ("EIL") for $5.30 per share ("Private Placement
Phase I"). The Company also issued 20,000 shares of Series B Preferred to Equity
Services, Ltd. ("ESL") as a commission for the completion of Private Placement
Phase I. The Company received $371,000 in October 1997 from two individuals
pursuant to two senior convertible notes (the "Notes"), which are secured by an
aggregate of 1,050,000 shares of Common Stock of the Company. The Notes were
subsequently converted into an aggregate of 70,000 shares of Series B Preferred.
On February 4, 1998, the Company received $1,000,004 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 private
placement fee 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 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 private placement fee for the
completion of Private Placement Phase III. 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 (the
"Series E Preferred"). As a private placement fee for partial completion of the
Series E Preferred, the Company issued 2,475 shares of Series E Preferred to
ESL. The remaining 50,500 shares of the Series E is anticipated to be placed by
January 31, 1999. The expenses for Private Placement Phase I, Private Placement
Phase II, and Private Placement Phase III, including broker fees, private
placement fee (including stock for the private placement fee) and legal and
accounting expenses totaled $775,350, $201,291 and $978,358 respectively. 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 $262,450 through December 18, 1998 and are expected
to total $525,000 through January 1999.
As of September 30, 1998 and March 31,1998, the Company's total assets were
$3,880,911 and $2,699,452 respectively, with liabilities of $3,096,989 and
$2,607,783, respectively. Current assets of $2,704,944 and $1,898,621 represent
104.5% and 90.8% of current liabilities of $2,587,716 and $2,090,701.
Improvements in the Company's cash position are a result of the collection of
accounts receivable and funds from increases in 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 $3,096,989 at September 30,1998 consist of $1,230,000 of a fully
secured credit line, $1,357,716 of current liabilities and $509,273 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 the collection of
accounts receivable and funds from increases in shareholders equity resulting
from the previously consummated private placements more particularly described
above. Reductions
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<PAGE> 19
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. Net shareholders equity as of September 30, 1998 and
March 31, 1998 was $783,922 and $91,669, respectively. During the year ended
March 31, 1998, and the six months ended September 30, 1998, the Company
completed Private Placement Phase I, Private Placement Phase II and Private
Placement Phase III. Receipt of these funds enabled the Company to reduce its
outstanding debt and pay off the past due accounts payable.
During the six months ended September 30, 1998, working capital increased
$309,308 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
increased sales and the resulting increase in related accounts. At September 30,
1998, the Company had a working capital of $117,228 compared to a working
capital deficit of ($192,080) and ($618,547) at March 31, 1998 and 1997. The
Company was current on all significant accounts payable at September 30, 1998.
As of March 31, 1998 the Company was more than 30 days past due on $170,000 or
57% of its accounts payable. The Company's account receivables at September 30,
1998 include approximately $443,000 from the State of Texas for a sale of
computer hardware in September 1998. This amount and all other material accounts
were subsequently collected.
Subsequent to September 30, 1998, the Company made arrangements for an
additional private placement of $3,000,000. The Company will issue 100,000
shares of Series E preferred stock, at a stated value of $30 per share. As of
December 18, 1998, the Company had received $1,296,800 of net proceeds in
partial settlement of the Series E private placement. The Series E placement is
expected to be completed by January 31, 1999.
The Company has a critical need for additional working capital to meet
contractual obligations under the GTE Agreements. Management believes that the
GTE Agreements along with the Siemens Nixdorf Agreements (the "Contracts") have
the potential to increase revenue levels, provided that sufficient working
capital is obtained. The Company anticipates utilizing the $2.6 million in net
proceeds from the Series E Preferred placement to satisfy its capital
requirements for the balance of fiscal year ended March 31, 1999, by which point
it is anticipated that the contracts will be generating positive cash flow and
adequate working capital.
In addition the Company is contemplating a $20 million private placement,
to be completed by fiscal year-end. These funds will be used to satisfy
additional capital needs for expansion opportunities associated with the
Contracts. In the event the Company is unable to complete the contemplated $20
million private placement, the Company will forego the Contracts' expansion
opportunities, reduce the number of employees and overhead expenses and
concentrate its efforts on the Austin operations. See Management's Discussion
and Analysis of Financial Conditions and Results of Operations - 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 March 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.
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<PAGE> 20
The Company is not incurring any unique risks in connection with Year 2000
issues. It is however subject to the risk that information and financial
resources may be temporarily unavailable. This societal risk may temporarily
disrupt cash flows worldwide. The Company believes that by becoming, and
assisting its clients and vendors to become, Year 2000 compliant it is likely to
circumvent that threat. The Company expects to be Year 2000 compliant March 31,
1999. If compliance is not achieved by that date, the Company will reallocate
resources, as necessary, to ensure compliance within six months, thereafter.
INFLATION.
Management does not believe that inflation will have a material impact on
the Company's pricing of goods or services since the Company, generally, has the
ability to adjust prices to meet the current market conditions.
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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 created in 1993 to provide computer hardware, software programming,
system installation and support, maintenance, and media duplication to the
public and private sectors. MSI maintains certification as a minority-owned
business enterprise and status as a Historically Underutilized Business ("HUB").
On June 23, 1997, the then shareholders of MSI entered into an agreement and
plan of reorganization (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
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 in
early 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 over 70
employees.
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.
INDUSTRY OVERVIEW
The Company, through its collocation services, intends to enter the
Internet access market in early 1999. 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 significant growth in the
telecommunications industry is driven by increasing demand for data services and
Internet connectivity. Provider and consumer hardware and software technology
have been rapidly advancing. In this evolving climate, 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. By offering bundled services, the Company will 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.
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<PAGE> 22
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 January 1999.
Until the end of 1996, the Company emphasized the sale of electronics
equipment with a concentration in contracts that relied on MSI's HUB status.
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 high-speed bandwidth and 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 market demands.
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.
MSI's principle product is its technical expertise. The Company has taken a
pro-active approach to developing a skilled labor force while decreasing its
requirements for carrying inventories of computer hardware. In addition the
Company's facilities are located in Austin, which has been attracting technology
driven industries. The inventory necessary to carry for the Company to provide
its technical services is readily available within the region or, alternatively,
from domestic suppliers.
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"). In May 1998, MSI entered into a
three 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 collocation services for high volume (known as
bandwidth) Internet web applications. Collocation is a service that provides a
high speed, high bandwidth connection to the Internet backbone using various
backup systems to increase the connection's fault tolerance. By connecting
directly to Internet via the POP, MSI is able to eliminate the local link, the
weakest component in an Internet connection. MSI will have the capacity to
support over five thousand collocation rack spaces. These rack spaces will be
used to host the net servers for MSI clients and provide those clients with
direct access to the Internet. When fully implemented, these collocation
services are expected to significantly increase MSHI's revenues over the term of
the Connection Service. The GTE Agreements provide the potential for MSHI to
increase revenue by selling Internet access to various high Internet demand
entities for such activities as commerce and academics. It is anticipated that
the requisite hardware will be operational in January 1999.
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<PAGE> 23
MSHI intends to develop critical business services, including high-speed
high-bandwidth Internet connectivity, and network design and installations,
allowing MSHI to address a broad-range of the dynamic demands in the
marketplace. Currently MSHI's operations have been limited to within Texas.
However, MSHI plans to continue developing its marketing efforts to expand the
Company's licenses beyond its home state. The Company's strategic alliances are
also being utilized to promote this objective. The GTE Agreements allow MSHI to
satisfy the market's current dynamic demands and have the potential of quickly
moving the Company into other geographic markets.
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, CompUSA, 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. 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 distributers, 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 that have greater capital. See Management's
Discussion and Analysis of Financial Condition and Results of Operation - Going
Concern Issues.
GOVERNMENT REGULATIONS
The Company has been dependant on its status as a HUB to develop is
reputation and business. It is currently well within the revenue and employee
limits for its SIC Code classification to maintain its HUB status. However, as
the Company continues to grow and develop, its revenue and employee
characteristics and SIC Code designation may change. In addition, for reasons
beyond the Company's control, the state and federal HUB programs may cease to
exist. Though no such event is anticipated, the potential loss of HUB status may
have a material adverse effect on the Company's revenue generating abilities.
See Management's Discussion and Analysis of Financial Condition and Results of
Operation - Potential 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
facilities are designed for collocation, production, system integration
services, depot repair, and warehousing.
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<PAGE> 24
EMPLOYEES
At March 31, 1998, MSI had a total of 60 employees, of which 53 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. As of November 1, 1998, the company's total number of employees had
increased to 79. The total number of employees is expected to continue growing
at a rate of approximately 10% per month for the remainder of the fiscal year.
LEGAL PROCEEDINGS
The Company is currently involved in two material lawsuits, both of which
relate 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 is vigorously defending this lawsuit and it 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 Company's defenses are
based upon O'Neal's and Argus' attempts to unilaterally modify the parties'
contract and charge an usurious interest rate and other compensation before
fulfilling their contractual obligation.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
As of January 7, 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>
Jose G. Chavez 48 Chairman of the Board Of Directors, President June 23, 1997
and Chief Executive Officer
David W. Hill 32 Chief Financial Officer August 10, 1998
Mitchell C. Kettrick 32 Vice-President, Secretary and Director June 23, 1997
Tom M. Upton 41 Vice-President Sales September 9, 1998
Jaime Munoz 37 Vice-President of Operations November 15, 1997
Ernesto M. Chavarria (1) 43 Director February 16, 1998
Blandina Cardenas (1) 43 Director February 16, 1998
Daniel Dornier (1) 36 Director July 21, 1998
</TABLE>
(1) Members of the audit 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 Company.
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<PAGE> 25
BIOGRAPHICAL INFORMATION
Jose Chavez, the President and Chief Executive Officer of the Company, has
over 25 years' experience in manufacturing, engineering, system design and
development, energy engineering, and computer technology management. As
co-founder of MSI in 1993, Mr. Chavez has led the development of MSI from a
two-person start-up in 1993 to a multi-million dollar business enterprise. 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 from the
University of Redlands Business School in 1981 and a Bachelor of Science in
Electrical Engineering from the University of Texas at El Paso in 1975. Mr.
Chavez has been a director of the Company since June, 1997.
David W. Hill, Chief Financial Officer, brings over 10 years of experience
in executive financial management, mergers & acquisitions, investment
development, and strategic planning. Mr. Hill served as a Finance Manager for
Dell Computer's Home and Small Business Group from 1997 to 1998. Mr. Hill served
with Applied Materials, Inc. in 1997. Additionally, Mr. Hill was President and
Chief Financial Officer of Discovery Technologies, Inc. from 1993 to 1997. Mr.
Hill filed for protection from creditors under Chapter VII of the Bankruptcy
Code in 1998. He received his Master of Business Administration from Baylor
University in 1989 and a Bachelor of Science in International Trade from Texas
Tech University in 1987.
Mitchell Kettrick, Vice-President of Technical Operations, has over 12
years of experience in manufacturing, test diagnostics and networking. As MSI's
co-founder and Chief Technology Officer, he oversees 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.
Thomas M. Upton, Vice-President of Sales, has 17 years high-tech sales
experience. From 1996 to 1998, Mr. Upton worked for Boundless Technologies,
Inc., as their President of the Global Distribution Division, Senior Director of
Worldwide Sales, and Director of North American Sales . Mr. Upton was previously
a Regional Manager of Major Accounts and served as National Support Manager
responsible for worldwide system support with Applied Digital Data Systems, a
subsidiary of AT&T, from 1981 to 1994. Mr. Upton has a Bachelor of Science in
Electrical Engineering degree from New York Institute of Technology.
Jaime Munoz, Vice President of Operations, has over 10 years of direct
experience in project management implementation. Mr. Munoz manages MSI's
purchasing, warehouse operations, facilities, on-site production, security, and
human resources. His background includes extensive experience with strategic
planning, market assessment, new business development and operations management.
Prior to joining MSI, Mr. Munoz worked as a consultant for the American
Residential Services from 1997 to 1998, and served as Vice President/Chief
Marketing Officer for Infrastructure Services, Inc., in Houston, Texas from 1987
to 1997. Mr. Munoz obtained a Bachelor of Science in Mechanical Engineering from
The University of Texas at El Paso.
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.
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.
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<PAGE> 26
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 from the University of
Nuertingen, Germany.
BOARD COMMITTEES
Pursuant to Private Placement Phase I and Private Placement Phase II, the
Company is required to establish (i) a Compensation Committee, consisting of
three Board Members, one of which to be designated by the holders of the Series
B Preferred and (ii) an Audit Committee consisting of three Board Members, one
of which to be designated by the holders of the Series C Preferred.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company (the "Outside
Directors") will be paid the sum of $1,000 for each meeting of the Board of
Directors attended by them. Additionally, they will be reimbursed for expenses
incurred in attending meetings of the Board of Directors and related committees.
As of July 28 1998, MSI has the following three Outside Directors: Ernesto M.
Chavarria, Blandina Cardenas and Daniel Dornier.
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.
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 1998 and was $100,000 or greater (collectively, the "Named
Executives"). Only the CEO and one other executive officer of MSI received
salaries and bonuses in excess of $100,000 in fiscal 1998. Consequently, only
the CEO and one other executive officer appear in this table.
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<PAGE> 27
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 RAward(s) SAR's(#) Payouts Compensation
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JOSE G CHAVEZ 1998 $105,500 $ 0 $ 0 $ 0 $62,500 $ 0 $ 0
(President & CEO) 1997 50,500 34,000 0 0 0 0 0
1996 87,000 13,000 0 0 0 0 0
MITCHELL KETTRICK 1998 $ 75,000 $ 0 $ 0 $ 0 $31,250 $ 0 $ 0
(V.P. & Secretary) 1997 5,200 0 0 0 0 0 0
1996 45,000 0 0 0 0 0 0
=====================================================================================================================
</TABLE>
EMPLOYMENT CONTRACTS
On June 15, 1997, the Company entered into employment agreements with Jose
Chavez, President and CEO (the "Chavez Agreement"), and Mitchell Kettrick, Vice
President (the "Kettrick Agreement"). Both of these agreements terminate on
March 31, 2001, subject to two one-year extensions.
The Chavez Agreement provides for an annual salary of $100,000 and
reimbursement of all reasonable out-of-pocket expenses. The Chavez Agreement
also provides for a grant dated March 31, 1998, of an option to purchase up to
100,000 shares of Common Stock at a price of $1.50 per share exercisable for a
period of five (5) years commencing on March 31, 1998. In addition, during the
term of the Chavez Agreement, Chavez is entitled to a bonus, at the discretion
of the Board of Directors, consisting of cash and common stock, calculated as
follows: (1) for each ten percent (10%) increase in revenues, from year to year,
above the base of $10,000,000 in fiscal 1998, Chavez shall be issued 100,000
shares of Common Stock at fifty percent (50%) of the then current market value,
not to exceed $1.70 per share; and (2) for each $1.00 increase in the Common
Stock value above the base value of $3.00 per share in fiscal 1998, calculated
on the last ninety (90) day average, the Company shall pay Chavez a cash bonus
of $100,000 due no later than June 30 of each fiscal year. Chavez also is
entitled to an automobile allowance of up to $650.00 per month. Mr. Chavez did
not receive a bonus for fiscal year ended March 31, 1998. Mr. Chavez has agreed
to renegotiate the Chavez Agreement's option terms, which negotiations are
expected to be concluded in January 1999.
The Kettrick Agreement provides for an annual salary of $75,000 per year
and reimbursement of all reasonable out-of-pocket expenses. Moreover, the
Kettrick Agreement provides for a grant, dated March 31, 1998, of a five-year
option to purchase up to 50,000 shares of Common Stock at a price of $1.50 per
share exercisable beginning July 1, 1998. Kettrick also has a second option,
dated March 31, 1998, for 25,000 shares at $2.25 per share exercisable for a
period of two (2) years. The Kettrick Agreement also provides for a bonus, at
the discretion of the Board of Directors, consisting of cash and Common Stock,
calculated as follows: (1) for each ten percent (10%) increase in revenues above
the base of $10,000,000 in fiscal 1998, Kettrick shall be issued 50,000 shares
of Common Stock at fifty percent (50%) of the then current market value, not to
exceed $1.70 per share; and (2) for each $1.00 increase in the Common Stock
value above the base value of $3.00 per share in fiscal 1998, calculated on the
last ninety (90) day average, the Company shall pay Kettrick a cash bonus of
$50,000 due no later than June 30 of each fiscal year. Kettrick is also entitled
to an automobile allowance of up to $500.00 per month. Mr. Kettrick did not
receive a bonus for fiscal year ended March 31, 1998. Mr. Kettrick has agreed to
renegotiate the Kettrick Agreement's option terms, which negotiations are
expected to be concluded in January 1999.
David W. Hill, Chief Financial Officer, and the Company are negotiating
certain terms of an employment agreement.
-27-
<PAGE> 28
CERTAIN TRANSACTIONS
Certain officers, directors, stockholders and employees of the Company
have ownership interests in entities to which the Company has advanced monies
for working capital and expenses. The advances have been converted to notes and
are personally guaranteed by the shareholders of the related entities. The
schedule below lists the name of the stockholder 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) 26 28 33
Frank Rodriguez (2) 15 5 --
Andrew Ramirez (2) 26 27 35
George Villalva (2) 15 5 4
Mitchell C. Kettrick (1) 18 10 13
Bruce Funderburk -- 20 --
Laurel Funderburk -- 5 --
Tammie Delaney -- -- 15
- --- ---
TOTALS 100 100 100
=== === ===
</TABLE>
- ------------------------
(1) Officers of MSHI.
(2) Former officers of MSHI
Certain officers and 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
-28-
<PAGE> 29
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 is 10%. The loan, as amended, was repaid in full during the year ended
March 31, 1998. The ownership of Prima include owners of MSHI and 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 and 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 and 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 December 1, 1998, 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.
-29-
<PAGE> 30
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF PERCENT OF PERCENT OF FULLY
SHARES OUTSTANDING SHARES (1) DILUTED SHARES (2)
=========================== =============== ====================== =================
<S> <C> <C> <C>
Jose Chavez (3) 7,225,000 59.21% 29.48%
501 Waller Street
Austin, Texas 78702
Mitchell Kettrick (4) 1,500,000 11.84% 6.12%
501 Waller Street
Austin, Texas 78702
Luana Pearce (5) 1,243,000 10.33% 5.07%
4545 Golf Vista Dr.
Austin, Texas 78730
Jaime Munoz (6) 80,000 0.66% 0.33%
501 Waller Street
Austin, Texas 78702
Ernesto Chavarria (6) 75,000 0.62% 0.31%
501 Waller Street
Austin, Texas 78702
Blandina Cardenas (6) 5,000 0.04% 0.02%
501 Waller Street
Austin, Texas 78702
Daniel Dornier (7) 280,000 2.33% 1.14%
501 Waller Street
Austin, Texas 78702
Entrepreneurial Investors Ltd.(8) 8,286,800 N/A 33.81%
P.O. Box 40643
Freeport, Bahamas
All Directors and 9,165,000 74.72% 37.39%
Officers as a Group (9)
</TABLE>
(1) Calculations are based on 12,032,221 outstanding shares of Common
Stock as of September 30, 1998. 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
24,512,264 shares of Common Stock which would be issued and outstanding
if all of the Series B, Series C and Series D Preferred shares were
converted and all the of the Warrants and Options were exercised.
(3) Includes 7,125,000 shares of Common Stock outstanding and 100,000
shares of Common Stock issuable upon exercise of Mr. Chavez's Options.
(4) 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.
(5) Includes 543,000 shares of Common Stock issuable to Monterrey
Trading Inc., upon satisfaction of a note receivable payable in cash or
certain intellectual property rights, 475,000 shares of Common Stock
acquired from George Villalva, an employee of MSI, and 225,000 shares
of Common Stock currently subject litigation. See "Management,
Discussion and Analysis of Financial Condition and Results of Operation
Legal Proceedings."
(6) These officers and or 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.
-30-
<PAGE> 31
(7) Various members of the Dornier family own a total of 28,000 shares
of Series D Preferred shares which are convertible to 280,000 shares of
Common Stock. If the Dornier family were deemed a group, Mr. Dornier, a
Company director, may have beneficial ownership of the Dornier family's
shares. The other members of the Dornier family are not reflected in
this tabulation since they are not officers, directors or beneficial
owners of more than 5 percent of the Company's outstanding shares.
(8) Entrepreneurial Investors, Ltd.("EIL") is the beneficial owner of
an aggregate 828,680 shares of Series B, Series C and Series D
Preferred shares, which are convertible into a total of 8,286,800
shares of Common Stock. Notwithstanding EIL's beneficial ownership of
approximately 35 percent of the Company's common stock, EIL has
covenanted not to exercise the preferred shares' conversion features in
such a way as to disqualify the Company from HUB status.
(9) Includes 8,990,000 shares of Common Stock outstanding and 175,000
shares issuable upon the exercise of Messrs. Chavez's and 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 Registrant's
securities, known to the Registrant, which may at a subsequent date result in a
change of control of the Registrant.
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
NAME TO MSHI TOTAL SHARES PERCENT(+)
---- ------- ------------ ----------
<S> <C> <C> <C>
Beatrice Schaefer (1) 324,089 1.32%
Heinz C. Winzeler (2) 961,089 3.92%
Entrepreneurial Investors, Ltd.(3) 8,320,682 33.94%
Equity Services, Ltd.(4) 382,529 1.56%
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)(12) 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)(12) 768,000 3.13%
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 0.01%
Norm Mendeke (5) 3,000 0.01%
Mike Batson (5) 3,000 0.01%
Michael Jahr (6) 100,576 0.41%
</TABLE>
-31-
<PAGE> 32
<TABLE>
<CAPTION>
RELATION
NAME TO MSHI TOTAL SHARES PERCENT(+)
---- ------- ------------ ----------
<S> <C> <C> <C>
Rainier Bischoff (6) 100,576 0.41%
Helmut Heinzel (6) 100,576 0.41%
Thomas Heinzel (6) 100,576 0.41%
Heinz Schmitz (6) 100,576 0.41%
Cornelius Dornier (7) 150,863 0.62%
David Dornier (8) 30,173 0.12%
Matthia Dornier (6) 100,576 0.41%
Gabriele Dornier (7) 150,863 0.62%
Peter Widenmann (9) 10,058 0.04%
Stephen Pampush (9) 10,058 0.04%
Silvius Dornier (10) 382,187 1.56%
Herman Ebel (11) 191,094 0.78%
Penninsular Corp 50,288 0.21%
Martina Rodriguez (13) Employee 3,250 0.01%
Roy Barrientes (13) Employee 5,000 0.02%
Amador DeLeon (13) Employee 31,000 0.13%
Trisha Truong (13) Employee 8,000 0.03%
Michael A. Chavez (13) Employee 11,500 0.05%
Heidi Sellman (13) Employee 3,000 0.01%
Antonia Ramirez (13) Employee 1,000 0.00%
Abel Herrerra (13) Employee 1,500 0.01%
Lauro Bustamante (13) Employee 1,500 0.01%
Robert Loera (13) Employee 5,000 0.02%
Oziel Rios (13) Employee 500 0.00%
Gary Salbeck (13) Employee 3,000 0.01%
Maria Lopez (13) Employee 1,000 0.00%
Matt Evans (13) Employee 8,000 0.03%
Kenneth Miller (13) Employee 3,000 0.01%
Jim Heron (13) Employee 1,500 0.01%
Paul Samaripa (13) Employee 6,000 0.02%
Emma Barrientos (13) Employee 1,000 0.00%
Tamara Shiplet (13) Employee 2,500 0.01%
Dana Hall (13) Employee 2,500 0.01%
Richard Ray (13) Employee 2,500 0.01%
Iona Smith (13) Employee 2,000 0.01%
Larry Awalt (13) Employee 1,500 0.01%
Ann Jun (13) Employee 3,500 0.01%
Mary K. Marlatt (13) Employee 3,500 0.01%
Randy Barber (13) Employee 41,000 0.17%
John Miller (13) Employee 1,500 0.01%
Stephen Hoelscher (13) Employee 25,000 0.10%
Jose A. Lara (13) Employee 1,500 0.01%
Duffy Hobbs (13) Employee 3,000 0.01%
Lisa Nieri (13) Employee 4,500 0.02%
Jaime Munoz (13) Officer 80,000 0.33%
Scott Cannon (13) Employee 1,000 0.00%
Linda Wolf (13) Employee 500 0.00%
Bryan Cotter (13) Employee 3,500 0.01%
Melissa Toney (13) Employee 1,000 0.00%
Rafael Andrada (13) Employee 1,500 0.01%
Michele Schulte (13) Employee 1,000 0.00%
Stephanie Moya (13) Employee 1,000 0.00%
</TABLE>
-32-
<PAGE> 33
<TABLE>
<CAPTION>
RELATION
NAME TO MSHI TOTAL SHARES PERCENT(+)
---- ------- ------------ ----------
<S> <C> <C> <C>
Dick Young (13) Employee 2,000 0.01%
Sandra Boesch (13) Employee 3,000 0.01%
Linda Garrett (13) Employee 1,800 0.01%
Anabella Ferris (13) Employee 2,500 0.01%
John Roam (13) Employee 1,500 0.01%
Peter Cantu (13) Employee 1,000 0.00%
Jason Ross (13) Employee 1,500 0.01%
Jesus Martines (13) Employee 1,000 0.00%
Steve Laird (13) Employee 1,000 0.00%
Pete Gutierrez (13) Employee 1,000 0.00%
Gigi Edwards (13) Employee 3,000 0.01%
Susan Cloutier (13) Employee 3,000 0.01%
Carlos Baca (13) Employee 1,000 0.00%
Joseph Rodrigues (13) Employee 2,500 0.01%
Neil Edwards (13) Employee 3,500 0.01%
Todd Wagner (13) Employee 2,000 0.01%
Shane Black (13) Employee 500 0.00%
Mark Peevey (13) Employee 500 0.00%
Richard Woods (13) Employee 500 0.00%
Ricardo Martinez (13) Employee 500 0.00%
Vivian Torres (13) Employee 500 0.00%
Ken Wilson (13) Employee 500 0.00%
Jaimison Clark (13) Employee 1,000 0.00%
David Painter (13) Employee 1,500 0.01%
Nydia Rojas (13) Employee 1,000 0.00%
Christina DeLeon (13) Employee 750 0.00%
Laura Chavez (13) Employee 9,600 0.04%
Tammie Delaney (13) Employee 3,500 0.01%
Katina Kettrick (13) Employee 12,000 0.05%
Marie Louissaint (14) Consultant 2,000 0.01%
Lilia I. Mena (14) Consultant 7,500 0.03%
Blandina Cardenas (14) Director 5,000 0.02%
Donna Gandy (14) Consultant 14,000 0.06%
Ernesto Chavarria (14) Director 75,000 0.31%
Capital Partners (14) Consultant 30,000 0.12%
Panther Consulting, Inc (15) 400,000 1.63%
Pinecrest Associates, Inc (16) 418,020 1.71%
</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
24,512,264 shares of Common Stock outstanding.
(1) Consists of 20,000 shares of Series B Preferred convertible into 200,000
shares of Common Stock, Class A Warrants covering 120,000 shares of Common
Stock, and 2,938 shares of Common Stock 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 50,000 shares of Series B Preferred convertible into 500,000
shares of Common Stock, Class A Warrants covering 300,000 shares of Common
Stock, 7,348 shares of Common Stock 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.
-33-
<PAGE> 34
(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 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, 94,340 shares of Series C Preferred convertible into 943,400
shares of Common Stock, and 94,340 shares of Series D Preferred convertible into
943,400 shares of Common Stock.
(4) Equity Service Ltd. ("ESL") is owned by four foreign corporations. Ms. Lynn
Turnquist is ESL's managing Director. The shares attributed to ESL consist of
20,000 shares of Series B Preferred convertible into 200,000 shares of Common
Stock, 4,717 shares of Series C Preferred convertible into 47,170 shares of
Common Stock, and 13,317 shares of Series D Preferred convertible into 133,170
shares of Common Stock.
(5) The shares are being issued to shareholders who have previously paid for
these shares, although such shares are subject to litigation. 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) This number includes 543,000 shares of Common Stock issuable upon
satisfaction of a note receivable from Monterey Trading Company payable in cash
or certain intellectual property rights.
(13) These shares are issuable to the Company's employees as compensation.
(14) These shares are issuable to the Company's consultants for services
rendered.
(15) 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.
(16) 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.
-34-
<PAGE> 35
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.
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.
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
-35-
<PAGE> 36
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 all of the
490,000 Series B Preferred shares covenanted with the Company to abstain from
converting their preferred shares if such conversion would compromise MSI's HUB
status. 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 all of the 279,657 Series D
Preferred shares covenanted with the Company to abstain from converting their
preferred shares if such conversion would compromise MSI's HUB status. 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"). Fifty One Thousand Nine Hundred Seventy Five shares of Series E
Preferred were issued in November 1998. 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
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.
-36-
<PAGE> 37
For five years from the date of issuance of the Series B Preferred and
Series C Preferred, respectively, the holders of Series B Preferred have the
right to nominate one (1) member to the slate of nominees to the Board of
Directors, the holders of the Series C Preferred have the right to nominate one
(1) member to the slate of nominees to 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 Warrant holders agreed that as long as MSI
remains certified as a HUB, they will not exercise their Warrants in such a
manner to cause MSI to lose its HUB status. 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.
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 Warrants to purchase 420,000 shares of Common Stock,
and a total of 10,286 shares of Common Stock, representing the interest (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 holders of Common Stock will suffer immediate
dilution to their percentage ownership of the Common Stock upon the conversion
of the Series B Preferred and upon exercise of the Warrants.
-37-
<PAGE> 38
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.
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, 13,697,531 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
-38-
<PAGE> 39
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 holder of all of the
Preferred Shares , Warrants and Options, itemized herein, have exercised their
registration rights and such shares are included hereunder.
LOCK-UP AGREEMENTS
Jose Chavez, Mitchell Kettrick and George Villalva, the Company's
principal shareholders who are also officers and directors, executed Lock-Up
Agreements (collectively, the "Lock-Up Agreements") with Equity Services, Ltd.
on October 31, 1997 in connection with Private Placement Phase I.
Under these Lock-Up Agreements, the shareholders have agreed not to
sell or otherwise dispose of 9,025,000 shares 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.
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.
-39-
<PAGE> 40
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 has engaged Brown, Graham and Company, P.C. , Georgetown,
Texas as its independent countant 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..
-40-
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report - Brown Graham and Company, P.C.....................................................F-2
Independent Auditors' Report - Salazar & Associates..............................................................F-3
Consolidated Balance Sheet as of September 30, 1998, and March 31,1998...........................................F-4
Consolidated Statements of Operations for the six months ended September 30, 1998 and 1997 and
for the years ended March 31, 1998 and 1997.............................................................F-5
Consolidated Statements of Shareholders Equity for the six months ended September 30, 1998 and
for the year ended March 31, 1998 and 1997..............................................................F-6
Consolidated Statements of Cash Flows for the six months ended September 30, 1998 and
for the year ended March 31, 1998.......................................................................F-7
Notes to Consolidated Financial Statements.......................................................................F-9
</TABLE>
F-1
<PAGE> 42
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
October 14, 1998
F-2
<PAGE> 43
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> 44
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Balance Sheets (Restated)
September 30, 1998 and March 31, 1998
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
Unaudited
ASSETS ---------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 7,748 $ 25,786
Accounts Receivable - Trade 774,834 150,851
Inventory 397,832 285,023
Short-Term Investment
- restricted (Note 4) 1,350,000 1,350,000
Other Receivables - Advances (Note 2) 174,530 86,961
------------ ------------
Total Current Assets 2,704,944 1,898,621
Property, Plant, and Equipment,
net (Note 3) 1,175,967 800,831
------------ ------------
TOTAL ASSETS $ 3,880,911 $ 2,699,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable - Trade $ 841,414 $ 300,035
Other Accrued Expenses 109,701 169,336
Bank Line of Credit (Note 4) 1,230,000 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 2,587,716 2,090,701
------------ ------------
Long-Term Liabilities
Notes Payable (Note 5) 206,493 367,522
Obligations under Capital
Leases (Note 6) 302,780 149,560
------------ ------------
Total Long-Term Notes 509,273 517,082
------------ ------------
Commitments and Contingencies
(Notes 8, 10 & 14) -- --
------------ ------------
Total liabilities 3,096,989 2,607,783
------------ ------------
Stockholders' Equity (Note 11)
Preferred stock Series B; $5.30
stated value; 490,000 shares
authorized, issued & outstanding 2,597,000 2,597,000
Preferred Stock Series C; $10.60
stated value; 99,057 shares
authorized, issued & outstanding 1,050,004 1,050,004
Preferred Stock Series D; $10.60
stated value; 279,657 shares
authorized, issued & outstanding 2,964,364 --
Common stock at $.10 par value;
50,000,000 authorized, 12,032,221
and 11,506,846 shares issued and
outstanding, respectively 1,203,222 1,150,685
Additional Paid-in Capital 3,370,114 2,666,099
Accumulated Deficit (10,400,782) (7,372,119)
------------ ------------
Total Stockholders' Equity 783,922 91,669
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,880,911 $ 2,699,452
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 45
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
Consolidated Statements of Operation (Restated)
Six Months Ended September 30, 1998 and 1997, Years Ended March 31, 1998 and
1997
<TABLE>
<CAPTION>
September 30 (unaudited) March 31
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Hardware, software and peripherals $ 1,182,196 $ 1,138,797 $ 1,350,869 $ 1,440,725
Service, support and integration 238,967 514,617 704,241 457,572
Networks, LAN/WAN 174,746 365,821 685,711 2,767,452
------------ ------------ ------------ ------------
Net revenue 1,595,909 2,019,235 2,740,821 4,665,749
------------ ------------ ------------ ------------
Cost of goods sold:
Hardware, software and peripherals 1,137,451 681,063 1,406,612 1,109,354
Service, support and integration 91,118 334,502 656,625 283,724
Networks, LAN/WAN 163,926 254,114 997,397 1,605,157
------------ ------------ ------------ ------------
Total cost of goods sold 1,392,495 1,269,679 3,060,634 2,998,235
------------ ------------ ------------ ------------
Gross margin (deficit) 203,414 749,556 (319,813) 1,667,514
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Salaries and benefits 1,410,430 728,321 1,825,590 1,202,791
Professional fees and consultants 411,340 164,059 357,174 42,251
Occupancy 198,211 88,500 212,843 185,516
Depreciation 106,991 99,440 178,892 139,443
Vehicle expense 74,432 78,851 126,131 158,765
Other expense 307,358 294,216 379,057 316,820
Interest expense 29,393 36,507 294,198 100,064
Provision for uncollectible -- 1,284 73,252 4,249
------------ ------------ ------------ ------------
Total selling, general and
administrative expenses 2,538,155 1,491,178 3,447,137 2,149,899
------------ ------------ ------------ ------------
Net loss (2,334,741) (741,622) (3,766,950) (482,385)
Plus preferred stock dividends (693,922) -- (3,471,170) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (3,028,663) (741,622) $ (7,238,120) $ (482,385)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.26) (0.07) $ (0.66) $ (0.05)
============ ============ ============ ============
Basic and diluted weighted average
shares outstanding 11,638,166 10,764,733 10,998,874 10,026,400
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 46
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND
YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Series B Series C Series D Common Stock
-------------------- ------------------- -------------------- -------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ---------- ------ ---------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 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 293,185 29,319
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 11,506,846 1,150,685
Preferred stock issued:
Private Placement 279,657 2,964,364
Common stock issued:
Rule 144 Stock 50,000 5,000
Compensation 31,000 3,100
Preferred stock dividend 24,375 2,437
Class A Warrants 420,000 42,000
Stock options for placement agents
Net loss
------- ---------- ------ ---------- ------- ---------- ----------- -----------
Balance September 30, 1998 490,000 $2,597,000 99,057 $1,050,004 279,657 $2,964,364 12,032,221 $ 1,203,222
======= ========== ====== ========== ======= ========== =========== ===========
<CAPTION>
Common Stock
------------------- Additional
Subscribed (Discount on)
------------------- Paid - In Accumulated
Shares Amount Capital Deficit Total
-------- -------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
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 (841,547) 2,434,457
Senior Debt 371,000
Preferred stock dividend
discount 3,412,502 (3,412,502)
Stock option for:
Compensation 93,750 93,750
Placement agents 253,547 253,547
Cash received for
uncertificated stock 483,130 512,449
Common stock-uncertificated
issued for note receivable 543,000 407,250 407,250
Note receivable offset against
common stock subscribed (543,000) (407,250) (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 (978,337) 1,986,027
Common stock issued:
Rule 144 Stock 582,500 (534,500) 53,000
Compensation 163,087 166,187
Preferred stock dividend 156,985 (159,422)
Class A Warrants 291,900 333,900
Stock options for placement agents 487,880 487,880
Net loss (2,334,741) (2,334,741)
-------- -------- ----------- ------------- -----------
Balance September 30, 1998 $ $ 3,370,114 $ (10,400,782) $ 783,922
======== ======== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 47
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
September September
1998 1997 March 31, March 31,
Unaudited Unaudited 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,334,741) $ (741,622) $ (3,766,950) $ (482,385)
Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation expense 106,991 99,440 178,892 139,443
Stock issued for compensation 178,900 -- 291,857 48,000
Options issued for compensation -- -- 93,750 --
Stock issued for interest -- -- 5,143 --
Change in trade receivables (623,983) (9,125) 832,062 (166,383)
Change in inventory (112,809) (261,250) (19,569) 189,040
Change in accounts payable 541,379 664,735 (577,325) 307,855
Change in accrued expenses (72,348) 452,315 57,775 60,875
------------ ------------ ------------ ------------
Net cash provided by (used by)
operating activities (2,316,611) 204,493 (2,904,365) 96,445
------------ ------------ ------------ ------------
Cash flows from investment activities:
Purchase of property & equipment (227,565) (35,438) (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 (87,569) (3,413) (121,341) (389,963)
------------ ------------ ------------ ------------
Net cash used by investing (315,134) (38,851) (1,168,853) (1,045,677)
activities
Cash flows from financing activities:
Proceeds-line of credit (net) 1,034 (16,034) 504,076 275,000
Proceeds-other notes payable -- -- 200,000 --
Payments on long-term debt (199,700) (91,014) (162,153) 467,654
Payments on capital lease (48,434) (20,089) (32,485) 223,141
obligations
Proceeds-private placement 2,473,907 -- 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 2,613,707 (127,137) 4,080,892 965,795
------------ ------------ ------------ ------------
Net increase in cash (18,038) 38,505 7,674 16,563
Cash at beginning of period 25,786 18,112 18,112 1,549
------------ ------------ ------------ ------------
Cash at end of period $ 7,748 $ 56,617 $ 25,786 $ 18,112
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 48
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
September September
Unaudited Unaudited March 31, March 31,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Supplemental disclosure:
Cash paid during the year for:
Interest $ 44,546 $ 54,594 $ 232,578 $ 97,193
============== ============== ============== ==============
Supplemental schedule of non-cash
investing
and
financing activities:
Preferred stock issued for
placement
agent
fees
agent fees $ -- $ -- $ 156,000 $ --
Stock options:
Compensation -- -- 93,750 --
Placement agent fees 487,880 -- 387,641 --
Common stock issued for:
Compensation 178,900 -- 291,857 48,000
Interest on debt -- -- 5,143 --
Preferred stock dividends 159,422 -- 58,668 --
Common stock subscribed for
note receivable -- -- 407,250 --
Debt converted to preferred stock -- -- 371,000 --
Inventory received for notes -- -- 84,394 --
not other
notes
receivablees
Inventory converted to equipment 44,021 -- -- --
Discount on preferred stock 543,500 -- 3,412,502 --
issued
for
dividend
Equipment received for
Capital lease obligations 254,562 -- -- --
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 49
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 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 $2,334,741 (unaudited) and $3,766,950 for six months
ended September 30, 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
$2.6 million (unaudited) to take place in November 1998 through January 1999. In
November 1998, $1,296,800 (unaudited) was received for the Series E placement
with the balance to be received by January 1999. The closing of Series E private
placement will enable MSI to have sufficient funds to meet the Company's working
capital and capital expenditure needs through March 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.
The Company is also negotiating with investment bankers for an additional $20
million private placement to be completed before the fiscal year end of March
31, 1999. These funds will be used to satisfy additional capital needs for
expansion opportunities associated with the contracts identified above. In the
event the Company is unable to complete the contemplated $20 million private
placement, the Company will forego the Contracts' expansion opportunities,
reduce the number of employees and overhead expenses and concentrate its efforts
on the Austin operations.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
F-9
<PAGE> 50
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements for the six months ended September 30,
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 September 30, 1998 and March 31, 1998,
management believes all accounts are collectible; and therefore, no allowance
has been recorded.
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>
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 exist, 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 which are minimal are recorded as a reduction of sales upon receipts of
the product. Service, support and integration sales are recognized upon
completion of the service and is not subject to warranty.
Revenue from fixed priced contracts is recognized on the
percentage-of-completion method of accounting, measured by the cost-to-cost
method. This method is used because management considers total costs incurred to
be the best available measure of progress on contracts.
Contract costs include all direct costs and those indirect costs related to
contract performance. Changes in job performance, job conditions, and estimated
profitability and final contract settlements may result in revisions to costs
and revenue and are recognized
F-10
<PAGE> 51
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
in the period in which the revisions are determined. Losses on uncompleted
contracts is 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 September 30, 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 September 30, 1998 and March 31, 1998, indicated there was no impairment
to the carrying value of these assets.
SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company has addressed the
requirements of SFAS No. 130.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. Generally, certain financial information is required to be
reported on the basis that is used internally for evaluating performance or an
allocation of resources to operating segments. The Company has adopted the
requirements of SFAS No. 131 and there is no material impact on the financial
statements.
USE OF ESTIMATES AND CERTAIN CONCENTRATIONS:
Management of the Company has made a number of estimates and assumptions
relating to the valuation and reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Although actual results could differ from those estimates,
management believes its estimates are reasonable. Certain components,
subassemblies and software included in the Company's computer systems are
obtained from sole suppliers or a
F-11
<PAGE> 52
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 September 30, 1998 and March 31, 998. The use of
different market assumptions and estimation methodologies could have a material
effect on the estimated fair value amounts. The reported fair values do not take
into consideration potential taxes or 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>
September 30, 1998 March 31,1998
------------------ -------------
(Unaudited)
<S> <C> <C>
Employee advances $ 26,429 $ 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 $ 174,530 $ 86,961
=========== ==========
</TABLE>
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
A summary of the Company's investment in property, plant and equipment at
September 30, 1998, and March 31, 1998, is as follows (see Note 6):
<TABLE>
<CAPTION>
September 30 March 31
------------ ----------
(Unaudited)
<S> <C> <C>
Equipment, Furniture and Fixtures $1,010,947 $ 613,184
Transportation Equipment 333,957 253,204
Leasehold Improvements 311,331 307,790
---------- ----------
1,656,235 1,174,178
Less Accumulated Depreciation 480,268 373,347
---------- ----------
Net Property, Plant and Equipment $1,175,967 $ 800,831
========== ==========
</TABLE>
Depreciation charged against income for the six months ended September 30, 1998
and 1997, was $106,991 and $99,440, respectively (unaudited). Depreciation
charged against income for the years ended March 31, 1998 and 1997, was $178,892
and 139,443, respectively.
F-12
<PAGE> 53
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
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 $1,350,000 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 September 30, 1998 and
March 31, 1998, was $1,230,000 (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 September 30, 1998
and March 31, 1998:
<TABLE>
<CAPTION>
September 30 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 $ 70,540 $ 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 46,081 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 35,564 43,104
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 166,904 191,194
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 September 30, 1998 -- 146,667
------------ ------------
319,089 518,789
Less current portion (112,596) (151,267)
------------ ------------
$ 206,493 $ 367,522
============ ============
</TABLE>
Following are maturities of long-term debt for each of the next five years:
F-13
<PAGE> 54
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 5 - NOTES PAYABLE - CONTINUED
<TABLE>
<CAPTION>
Period ended: September 30 March 31
------------ ------------
(Unaudited)
<S> <C> <C>
1999 $ 112,596 $ 151,267
2000 114,061 153,067
2001 85,074 134,348
2002 7,358 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>
September 30 March 31
------------ ------------
(Unaudited)
<S> <C> <C>
Transportation Equipment $ 315,209 $ 218,055
Communication Equipment 56,014 56,014
Equipment 173,809 --
</TABLE>
Minimum future lease payments under capital leases as of September 30, 1998 and
March 31, 1998, for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
September 30 March 31
------------ ------------
PERIOD ENDED: (Unaudited)
<S> <C> <C>
1999 $ 108,490 $ 68,077
2000 171,475 60,343
2001 198,732 74,985
2002 111,132 --
2003 111,132 --
Thereafter 83,349 --
------------ ------------
Total minimum lease payments 784,310 203,405
Less: Amount representing interest (387,525) (12,748)
------------ ------------
396,785 190,657
Less current portion ( 94,005) ( 41,097)
------------ ------------
Long-term obligations under capital leases $ 302,780 $ 149,560
============ ============
</TABLE>
NOTE 7 - FEDERAL INCOME TAXES
A reconciliation of income tax at the statutory rate to the Company's effective
rate follows:
<TABLE>
<CAPTION>
September 30 (Unaudited) March 31
------------------------ --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed at the expected $ (794,000) $ (252,200) $ (1,281,000) $ (164,000)
statutory rate
Non-deductible items 5,000 3,000 15,600 7,800
Valuation allowance 789,000 249,200 1,265,200 156,200
---------- ---------- ------------ -----------
Income tax $ -- $ -- $ -- $ --
========== ========== ============ ===========
</TABLE>
F-14
<PAGE> 55
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 7 - FEDERAL INCOME TAXES - CONTINUED
<TABLE>
<CAPTION>
September 30 (Unaudited) March 31
------------------------ --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss $ 2,230,400 $ 406,400 $ 1,441,400 $ 156,200
carryforward
Deferred tax liabilities:
Depreciation (45,900) (10,500) (32,300) (8,500)
Valuation allowance (2,184,500) (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 September 30, 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 six
months ended September 30, 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:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, (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
2009 40,365
----------
TOTAL $1,865,895
==========
</TABLE>
F-15
<PAGE> 56
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 9 - COMMITMENTS - CONTINUED
The total rental obligation under the above contract for the six months ended
September 30, 1998 and 1997, was $64,728 and $54,990, 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 states that
conversion of the preferred stock will not occur to the extent that the HUB
status of the Company is compromised. An additional 4,348,738 shares could be
converted before the HUB status would be lost.
The series B preferred stock can be converted to common stock. Therefore, a
discount in the amount of $6,151,978 has been realized. The discount is the
difference in the intrinsic value of the common stock and warrants less the net
proceeds from the series B preferred stock. The discount is accreted from the
date of issuance of the preferred stock to the date the stock can be converted.
Due to the limitation on the number of shares of stock that can be issued to
retain the HUB status, $3,412,502 has been recorded as dividends and as an
increase in additional paid-in capital in the accompanying financial statements.
The unrecognized portion of the discount in the amount of $2,796,524 will be
recorded if and when the preferred stock is converted or the HUB status changes.
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
states that conversion of the preferred stock will not occur to the extent that
the HUB status of the Company is compromised.
The series C preferred stock can be converted to common stock. Therefore, a
discount in the amount of $615,851 has been realized. The discount is the
difference in the intrinsic value of the common stock less the net proceeds from
the series C preferred stock. Due to the limitation on the number of shares of
stock that can be issued to retain the HUB status, the unrecognized discount in
the amount of $615,851 will be recorded if and when the preferred stock is
converted or the HUB status changes.
Phase III of the Agreement was funded in May through July 1998. The Company
received $2,823,204 (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 states
that conversion of the preferred stock will not occur to the extent that the HUB
status of the Company is compromised.
F-16
<PAGE> 57
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED
preferred stock will not occur to the extent that the HUB status of the Company
is compromised.
During the six months ended September 30, 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 $4,843,296 (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 $4,843,296 (unaudited) will
be recorded if and when the preferred stock is converted or the HUB status
changes.
The Company has initiated the private placement of 100,000 shares of the newly
created 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 anticipate paying
approximately $300,000 and issuing 5,000 shares of the series E Preferred stock
for placement agent fees. The series E Preferred will yield an aggregate net
proceeds of approximately $2.6 million to the Company and is expected to be
completed by January 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. As private placement
fee for partial completion of the Series E Preferred, the Company issued 2,475
shares of Series E Preferred to ESL. The remaining 50,500 shares of the Series E
is anticipated to be placed by January 31, 1999. 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 $262,450 through December 18, 1998 and are expected to total
$525,000 through January 1999. The proceeds of the Series E Preferred will be
used for working capital and capital expenditure needs.
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 intellectual
property the Company will receive consist of rights to market medical and
security software which utilizes the Internet for transmission of voice and
video data from various locations. The Company anticipates that its current
sales staff will market the products to medical and security professionals. The
note remains outstanding and the shares are not deliverable until the note is
satisfied. The note receivable has been offset against the Common Stock
Subscribed in the accompanying Statement of Stockholders' Equity.
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:
F-17
<PAGE> 58
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
Shares Amount
------ --------
<S> <C> <C>
Six Months ending September 30, 1998 (unaudited) 24,375 $159,422
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 September 30, 1998
and March 31, 1998, is presented below:
<TABLE>
<CAPTION>
September 30 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
September 30, 1998, and March 31, 1998:
SEPTEMBER 30, 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> <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
4.00 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.
F-18
<PAGE> 59
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 11 - STOCK OPTIONS AND WARRANTS - CONTINUED
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> <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 six months ended September 30, 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:
<TABLE>
<CAPTION>
Risk Free Estimated Total
Number Dividend Expected Interest Expected Fair Value Fair
of 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>
F-19
<PAGE> 60
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 11 - STOCK OPTIONS AND WARRANTS - CONTINUED
Stock options granted for placement agent fees for the six months ended
September 30, 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:
<TABLE>
<CAPTION>
September 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Risk Free Estimated Total
Number Dividend Expected Interest Expected Fair Value Fair
of 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>
<TABLE>
<CAPTION>
March 31, 1998
- --------------------------------------------------------------------------------
Risk Free Estimated Total
Number Dividend Expected Interest Expected Fair Value Fair
of 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>
The following table summarizes the information about the warrants:
<TABLE>
<CAPTION>
Exercised
During Six Number
Months Ended Outstanding
Number September 30, September 30,
Exercise Expiration Outstanding 1998 1998
Price Date March 31, 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).
F-20
<PAGE> 61
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
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>
September 30, (unaudited) March 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loss from continuing
operations $ (2,334,741) $ (741,622) $ (3,766,950) $ (482,385)
Less: Preferred dividends (693,922) -- (3,471,170) --
------------ ------------ ------------ ------------
Loss available to common
shareholders used in basic
EPS $ (3,028,663) $ (741,622) $ (7,238,120) $ (482,385)
============ ============ ============ ============
Weighted average number of
common shares used in basic
EPS 11,638,166 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 11,638,166 10,764,733 10,998,874 10,026,400
============ ============ ============ ============
</TABLE>
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 six months ended September 30, 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
F-21
<PAGE> 62
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
NOTE 13 - CONTINGENCY - CONTINUED
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 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 six months ended September 30, 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.
F-22
<PAGE> 63
MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, AND YEARS ENDED
MARCH 31, 1998 AND 1997
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 decrease in income $ (0.09)
============
</TABLE>
F-23
<PAGE> 64
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 of Financial Data 6
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 26
Certain Transactions 28
Principal Holders of Securities 29
Selling Shareholders 31
Plan of Distribution 35
Description of Capital Stock 35
Shares Eligible for Future Sale 38
Legal Matters 39
Experts 39
Change in Independent Auditors 39
Index to Financial Statements F-1
</TABLE>
13,697,531 Shares
MSI HOLDINGS, INC.
Common Stock
--------------
PROSPECTUS
--------------
