U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-9358
3Si Holdings, Inc.
(formerly Tyrex Oil Company)
(Exact Name of Registrant as specified in its charter)
Wyoming 83-0245581
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6886 S Yosemite Street
Englewood, Colorado 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 741-9123
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 par value per share
(Title of class)
The Company is filing this Form 10-K/A to provide the required financial
statements for its fiscal year ended June 30, 1998 within the prescribed
120 days subsequent to its year-end. See below for an Index to
Financial Statements.
At September 15, 1998, 33,934,298 shares of the Registrant's $.01 par
value common stock were outstanding. The aggregate market value of the
Common Stock held by non-affiliates (5,468,674 shares) of the Registrant
as of September 15, 1998 was approximately $984,000. (Based on
multiplying the mean ($.18) of the closing bid and asked priced of the
common stock of the Registrant on the over-the-counter market as of
September 15, 1998 times the number of shares held by non-affiliates.)
Documents Incorporated by Reference: None
1
PART I
Item 1. Business.
Business Development
During the fiscal year ended June 30, 1998, the Company changed its name
from Tyrex Oil Company (Tyrex) to 3Si Holdings, Inc. (3SiH) The Company
has also changed its stock trading symbol from "TYRX" to "3SIH". The
Company's stock is traded on the over-the-counter market.
The fiscal year ended June 30, 1998 was the first full fiscal year
subsequent to the Company's merger with 3Si, Inc. (3Si). On May 28, 1997
Tyrex (now 3SiH) acquired 100% of the common stock of 3Si in a reverse
triangular merger accounted for as a purchase. Under the terms of the
merger, 3Si is a wholly owned subsidiary of 3SiH. The merger was
accounted for financial statement purposes as a purchase of Tyrex by
3Si, since the merger resulted in 83.1% of the now outstanding common
stock of Tyrex being issued to the 3Si stockholders. The financial
statements for the period ended June 30, 1997 contain the results of
operations of 3Si for the six months ended June 30, 1997, and the
results of operations for Tyrex from the date of acquisition (May 28,
1997) through June 30, 1997. The financial statements for the year
ended December 31, 1996 include the results of operations for 3Si
only.
The financial statements as of June 30, 1998 reflect the consolidated
results of operations for the 3SiH entity for the year then ended. The
only asset of 3SiH is its ownership of 3Si, Inc.
Item 8. Financial Statements or Supplemental Data.
The Company is filing this Form 10-K/A to provide the required financial
statements for its fiscal year ended June 30, 1998. See below for an
Index to Financial Statements.
Index
PAGE
INDEPENDENT AUDITORS' REPORTS F-3 F-4
FINANCIAL STATEMENTS
BALANCE SHEETS F-5 F-6
STATEMENTS OF OPERATIONS F-7
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY F-8
STATEMENTS OF CASH FLOWS F-9 F-10
NOTES TO FINANCIAL STATEMENTS F-11 to F-20
Item 12. Security Ownership of Certain Beneficial Owners and Mangement.
The following table sets forth the ownership of common stock by each officer and
director of the Company and by all officers and directors as a group.
Name and Address Shares beneficially
of beneficial owner owned (1) Percent
Frederick J. Slack
6886 S. Yosemite St.
Englewood, CO 80112 9,387,777 27.7%
Frank W. Backes
6886 S. Yosemite St.
Englewood, CO 80112 9,387,777 27.7%
Felip L. Valdez
6886 S. Yosemite St.
Englewood, CO 80112 9,387,779 27.7%
Tom N. Richardson
777 N. Overland Trail, Ste. 101
Casper, Wyoming 82601 188,721 <1.0%
Doris K. Backus
777 N. Overland Trail, Ste. 101
Casper, Wyoming 82601 53,570 <1.0%
Paul F. Kaufhold
6886 S. Yosemite St.
Englewood, CO 80112 60,000 <1.0%
All officers and Directors as
a group 28,465,624 84.0%
(1) Beneficial ownership results in each case from the possession of sole or
shared voting and investment power with respect to the shares.
2
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(1) Financial Statements. See index above.
(a) Exhibits.
3.1(a) Articles of Incorporation, as amended, filed as part of the Company's
Registration Statement on Form S-2 (file no. 2-68269), and
incorporated herein by this reference.
3.2 Bylaws, as amended, filed as part of the Company's Registration
Statement on Form S-2 (file no 2-68269), and incorporated herein
by reference.
98.16 Letter regarding certifying accountant
98.21 Subsidiaries of the Registrant
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
By: /s/ Paul F. Kaufhold .
Paul F. Kaufhold,
Chief Financial Officer
Date: October 28, 1998 .
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: October 28, 1998 By: /s/ Tom N. Richardson
Tom N. Richardson, Director
Date: October 28, 1998 By: /s/ Doris K. Backus
Doris K. Backus, Secretary and
Director
Date: October 28, 1998 By: /s/ Frederick J. Slack
Frederick J. Slack, Director
Date: October 28, 1998 By: /s/ Felipe L. Valdez
Felipe L. Valdez, Director
Date: October 28, 1998 By: /s/ Frank W. Backes
Frank W. Backes, Director
3
Exhibit 98.16
Letter Regarding Certifying Accountant
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read and agree with the comments to Item 4 of Form 8-K of Tyrex Oil
Company (Commission file number 0-9358) dated June 15, 1998. A copy of 8K is
enclosed.
/s/ John M. Hanson & Company, P.C.
Denver, Colorado
June 17, 1998
4
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORTS
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
June 30, 1998
F-1
C O N T E N T S
PAGE
INDEPENDENT AUDITORS' REPORTS F-3 F-4
FINANCIAL STATEMENTS
BALANCE SHEETS F-5 F-6
STATEMENTS OF OPERATIONS F-7
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY F-8
STATEMENTS OF CASH FLOWS F-9 F-10
NOTES TO FINANCIAL STATEMENTS F-11 to F-20
F-2
Board of Directors
3Si Holdings, Inc.
Independent Auditors' Report
We have audited the accompanying balance sheet of 3Si Holdings, Inc. as
of June 30, 1998, and the related statements of operations, changes in stock-
holders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 signifi-
cant 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 financial statements referred to above present fairly,
in all material respects, the financial position of 3Si Holdings, Inc. as of
June 30, 1998 and the results of its operations and its 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. The Company is currently not
in compliance with certain covenants of its revolving line of credit. The
lender has neither waived its rights nor taken any action relative to the
line at this time. If the lender were to not continue the line, such action
would have a material adverse impact to the Company. At June 30, 1998,
current liabilities exceed current assets by $199,393. These factors,
discussed at Note O, raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be neces-
sary in the event the Company cannot continue in existence.
/s/ Balogh & Tjornehoj, LLP
Denver, Colorado
September 18, 1998
F-3
Board of Directors
3Si Holdings, Inc.
Independent Auditors' Report
We have audited the accompanying balance sheet of 3Si Holdings, Inc.
(formerly, Tyrex Oil Company) as of June 30, 1997 and the related statements
of operations, changes in stockholders' equity, and cash flows for the period
January 1, 1997 through June 30, 1997 and the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
presentations. We believe that our audits provide a reasonable basis for our
opinion.
On May 28, 1997 Tyrex Oil Company ("Tyrex") acquired 100% of the common
stock of Kimbrough Computer Sales, Inc. d/b/a 3Si Inc. ("3Si") in a reverse
merger accounted for as a purchase. Under the terms of the merger, 3Si is a
wholly owned subsidiary of Tyrex (now, 3Si Holdings, Inc.). As discussed in
Note A, the merger is accounted for financial statement purposes as a purchase
of Tyrex by 3Si, since the merger resulted in 72% of the outstanding stock of
Tyrex being held by the 3Si stockholders. The financial statements for the
period ended June 30, 1997 contain the results of operations of 3Si for the
six months ended June 30, 1997, and the results of operations of Tyrex from the
date of acquisition (May 28, 1997) through June 30, 1997. The financial state-
ments for the year ended December 31, 1996 include the results of operations
for 3Si only.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 3Si Holdings, Inc.
(formerly, Tyrex Oil Company) as of June 30, 1997 and the results of its
operations and its cash flows for the period January 1, 1997 through June 30,
1997 and the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ John M. Hanson
Denver, Colorado
September 22, 1997, except for Note E as to which the date is October 6, 1997
F-4
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Balance Sheets (Page 1 of 2)
June 30, 1998 and 1997
ASSETS
1998 1997
CURRENT ASSETS (NOTE E)
Cash and cash equivalents (Note B) $ 13,843 $2,219,145
Accounts receivable - trade (Note D) 6,142,390 3,331,568
Inventory (Note B) 225,741 643,474
Deferred income taxes (Note K) 171,000 -
Other current assets (Note L) 193,029 63,964
Total current assets 6,746,003 6,258,151
PROPERTY AND EQUIPMENT - AT COST (NOTE E)
Computer systems (Note B) 674,118 358,438
Furniture and fixtures (Note G) 169,178 228,480
Leasehold improvements 92,034 73,082
Total property and equipment 935,330 660,000
Less accumulated depreciation and
amortization (Note B) (366,319) (297,258)
Net property and equipment 569,011 362,742
OTHER ASSETS (NOTE E)
Deposits 31,330 20,534
Software development costs (Note J) 239,082 -
Goodwill (Notes C and G) 591,146 622,396
Total other assets 861,558 642,930
Total assets $8,176,572 $7,263,82
The accompanying notes are an integral part of these statements.
F-5
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Balance Sheets (Page 2 of 2)
June 30, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
CURRENT LIABILITIES
Revolving line of credit (Note E) $2,858,337 $ -
Notes payable (Note F) - 1,264,271
Current portion of capital lease (Note G) 25,340 22,734
Accounts payable - trade 3,742,603 2,774,908
Customer deposits 98,185 120,498
Income taxes payable (Note K) 15,000 -
Accrued liabilities 203,756 308,338
Total current liabilities 6,943,221 4,490,749
LONG-TERM DEBT (NOTE G) 40,948 64,502
DEFERRED INCOME TAXES (NOTE K) 102,000 -
COMMITMENTS (NOTE G)
STOCKHOLDERS' EQUITY (NOTES C AND I)
Common stock - authorized 50,000,000
shares of $.01 par value; 39,984,924 shares issued
and 33,934,298 outstanding at June 30, 1998;
39,293,424 shares issued and 39,248,424 outstanding
at June 30, 1997 399,849 392,934
Additional paid in capital 2,380,044 2,322,902
Retained earnings (deficit) (Note E) 167,863 (1,277)
Treasury stock-at cost, 6,050,626 shares
at June 30, 1998; 45,000 shares
at June 30, 1997 (1,857,353) (5,987)
Total stockholders' equity 1,090,403 2,708,572
Total liabilities and stockholders' equity $8,176,572 $7,263,823
The accompanying notes are an integral part of these statements.
F-6
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Statements of Operations
For the Year Ended June 30, 1998,
The Period from January 1, 1997 to June 30, 1997
and the Year Ended December 31, 1996
1998 1997 1996
Product sales $20,816,550 $ 6,984,752 $15,612,000
Consulting and other service revenue 8,567,957 2,991,784 3,395,245
Net sales 29,384,507 9,976,536 19,007,245
Cost of products sold 18,786,327 6,202,716 13,204,231
Costs of contract labor 1,465,936 477,355 640,125
Royalty expense - 115,532 286,106
Total cost of goods sold 20,252,263 6,795,603 14,130,462
Gross profit 9,132,244 3,180,933 4,876,783
Selling and administrative expenses 8,921,630 3,370,996 4,873,193
Earnings (loss) from operations 210,614 (190,063) 3,590
Other income (expense)
Interest income 63,072 5,597 16,584
Miscellaneous income 11,743 3,062 2,616
Interest expense (180,124) (93,794) (170,413)
Offering costs - - (45,071)
Gain (loss) on disposition of assets 9,835 - (2,621)
Total other expense (95,474) (85,135) (198,905)
Net income(loss) before
income taxes 115,140 (275,198) (195,315)
Income tax benefit (Note K) 54,000 - -
Net income (loss) from
continuing operations 169,140 (275,198) (195,315)
Discontinued operations - Gain
on disposal of oil and
gas properties(Note M) - 200,793 -
Net income (loss) $ 169,140 $ (74,405) $ (195,315)
Net income (loss) from continuing operations
per common share $ - $ (.04) $ ( 651)
Net gain from discontinued operations
per common share $ - $ .03 $ -
Net income (loss) per common share $ - $ (.01) $ (651)
Weighted average shares
outstanding (Note B) 36,571,766 6,541,654 300
The accompanying notes are an integral part of these statements.
F-7
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Statements of Changes in Stockholders' Equity
For the Year Ended June 30, 1998,
The Period from January 1, 1997 to June 30, 1997
and the Year Ended December 31, 1996
Additional Retained Total
# Common Common Treasury Paid-In Earnings Stockholders'
Shares Stock Stock Capital (Deficit) Equity
Balance, December
31, 1995 300 $30,000 $ - $ - $403,893 $433,893
Net loss for the year ended
December 31, 1996 - - - - (195,315) (195,315)
Dividends declared - - - - (95,612) (95,612)
Balance, December 31,
1996 300 30,000 - - 112,966 142,966
Stock of 3Si acquired
by Tyrex (300)(30,000) - - - (30,000)
Stock of Tyrex
outstanding prior to
the merger with
3Si 10,960,091 109,601 - - - 109,601
Stock of Tyrex issued
to 3Si
stockholders 28,333,333 283,333 - - - 283,333
Treasury stock
of Tyrex prior
to the merger - - (5,987) - - (5,987)
Additional paid-in capital
of Tyrex - - - 2,322,902 - 2,322,902
Net loss for the period ended
June 30, 1997 - - - - (74,405) (74,405)
Dividends declared by 3Si prior to
the merger with Tyrex - - - - (39,838) (39,838)
Balance
June 30, 1997 39,293,424 392,934 (5,987) 2,322,902 (1,277) 2,708,572
Merger costs - - - (8,278) - (8,278)
Exercise of options at $.14
per share 469,000 4,690 - 60,970 - 65,660
Shares acquired in self-tender,
6,005,626 at $.30 per share
(net of offering costs
of $49,678) - -(1,851,366) - - (1,851,366)
Shares issued for
compensation (222,500 shares
at $.03 per share) 222,500 2,225 - 4,450 - 6,675
Net income for the year ended
June 30, 1998 - - - - 169,140 169,140
Balance
June 30, 1998 39,912,424 $399,84 ($1,857,353) $2,380,044 $167,863 $1,090,403
The accompanying notes are an integral part of these statements.
F-8
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Statements of Cash Flows (Page 1 of 2)
For the Year Ended June 30, 1998,
The Period from January 1, 1997 to June 30, 1997
and the Year Ended December 31, 1996
1998 1997 1996
Operating activities:
Net income (loss) $169,140 $ (74,405) $(195,315)
Reconciling adjustments:
Depreciation and amortization 161,498 51,025 91,765
Gain on sale of oil and gas
properties - (536,700) -
(Gain) loss on disposition of furniture
and fixtures and equipment (9,835) - 2,621
Deferred income taxes (69,000) - -
Stock issued for services 6,675 - -
Changes in operating assets and
liabilities:
Accounts receivable (2,810,822) 1,378,006 (426,212)
Inventory 417,733 (357,264) 138,981
Other assets (62,841) 37,211 (50,389)
Accounts payable 871,588 (1,010,200) 723,027
Other liabilities (111,895) 107,043 (108,211)
Total adjustments (1,606,899) (330,879) 371,582
Net cash (used for) provided by
operating activities (1,437,759) (405,284) 176,267
Investing activities:
Proceeds from sale of oil and gas
properties and
field services division 12,500 1,342,184 -
Purchases of equipment (339,182) (41,414) (129,088)
Software development costs (142,975) - -
Loans to stockholders (77,020) - -
Costs of merger (8,278) (48,924) -
Payment of royalty agreement - (625,000) -
Cash acquired in merger - 1,887,653 -
Net cash provided by (used for)
investing activities (554,955) 2,514,499 (129,088)
The accompanying notes are an integral part of these statements.
F-9
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Statements of Cash Flows (Page 2 of 2)
For the Year Ended June 30, 1998,
The Period from January 1, 1997 to June 30, 1997
and the Year Ended December 31, 1996
1998 1997 1996
Financing activities:
(Payments on) proceeds from
note payable $(1,264,271) $ 499,783 $ -
Payments on long term debt - - (21,026)
Revolving line of credit, net 2,858,337 - (175,000)
Payments on notes payable and capital
leases (20,948) (421,065) -
Proceeds from exercise of options
(Note I) 65,660 - -
Payments on self-tender (1,851,366) - -
Payments to (advances from) owners - 23,884 53,487
Dividends paid, prior to merger - (39,838) (95,612)
Net cash provided by (used for)
financing activities (212,588) 62,764 (238,151)
Net change in cash and
cash equivalents (2,205,302) 2,171,979 (190,972)
Cash and cash equivalents at
beginning of period 2,219,145 47,166 238,138
Cash and cash equivalents at end
of period $13,843 $2,219,145 $ 47,166
Summary of noncash investing and financing activity:
To complete the merger of Tyrex (now, 3Si Holdings, Inc.) and 3Si, Tyrex issued
28,333,333 of its $.01 par value common shares to the three owners of 3Si.
These shares were issued based on the value of the outstanding shares of Tyrex
on May 28, 1997. In connection with the merger, the following assets and
liabilities were acquired:
Cash $1,887,653
Oil and gas properties 1,001,867
Other assets 192,647
Liabilities (353,394)
Fair market value of stock issued $2,728,773
See Note M for noncash activities related to the sale of Tyrex's oil and gas
properties.
Interest paid $190,284 $ 93,794 $ 176,774
Income tax paid $ - $ - $ -
The accompanying notes are an integral part of these statements.
F-10
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note A - Organization
On June 18, 1998, the stockholders approved a change to the Company's name.
Effective September 15, 1998, the Company's name changed from Tyrex Oil
Company to 3Si Holdings, Inc. (3SiH or the Company).
On May 28, 1997, Tyrex Oil Company ("Tyrex") acquired 100% of the common stock
of Kimbrough Computer Sales, Inc. d/b/a 3Si Inc. ("3Si"). Under the terms of
the merger, 3Si is a wholly owned subsidiary of Tyrex. The merger has been
accounted for as a purchase of Tyrex by 3Si, since the merger resulted in 72%
of the outstanding stock of Tyrex being held by the 3Si stockholders.
The financial statements for the period ended June 30, 1997 contain the results
of operations of 3Si for the six months ended June 30, 1997, and the results
of operations of Tyrex from the date of acquisition (May 28, 1997) through
June 30, 1997. The financial statements for the year ended December 31, 1996
includes the results of operations for 3Si only. On May 30, 1997, Tyrex sold
all of its oil and gas properties and discontinued its operations. The gain
on the disposal of Tyrex's oil and gas properties is included in the financial
statements as discontinued operations. All intercompany balances and transac-
tions have been eliminated in the financial statements.
Tyrex was organized in Wyoming in 1979 and was engaged in oil and gas explora-
tion and development. There are no oil and gas activities included in these
financial statements.
3Si was incorporated in Colorado in 1979 and operates one business segment
providing services as a systems integrator.
The principal markets for 3Si's sales and services have been the U.S. Postal
Service and large corporations located in Colorado and New Mexico. 3Si is
concentrating on expanding its sales base throughout the United States. The
corporate offices are located in Englewood, Colorado. 3Si also maintains
offices in Albuquerque, New Mexico; Raleigh, North Carolina; and Colorado
Springs, Colorado.
Note B - Summary of Accounting Policies
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in these financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to
be cash equivalents. At June 30, 1998, the Company's bank balances were
approximately $400,000 in excess of the amount insured by the Federal Deposit
Insurance Corporation.
F-11
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note B - Summary of Accounting Policies (continued)
Inventory
Inventory is stated at lower of cost (weighted average method) or market and
consists of computer system components and service parts.
Depreciation and Amortization
Depreciation and amortization have been provided in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated use-
ful lives of 5 to 7 years using the straight-line method. Equipment acquired
under capital leases is amortized on a straight-line basis over the lease
period.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising expense
for the year ended June 30, 1998 was $57,816 and for the period ended June 30,
1997 was $19,750. For the year ended December 31, 1996 advertising expense was
$37,534.
Income (Loss) Per Share
Net income (loss) per share prior to the year ended June 30, 1998 was computed
on the basis of the weighted average number of common stock shares only, as
shares subject to warrants and stock options would have an anti-dilutive effect.
The weighted average number of shares for the year ended December 31, 1996 is
calculated using the 300 outstanding shares of 3Si only. For the period ended
June 30, 1997, the weighted average number of shares is based on 300 shares of
3Si being outstanding for five months and 39,248,424 shares of Tyrex being
outstanding for one month. For the year ended June 30, 1998, the weighted
average number of shares outstanding is 36,571,766 (basic) and 36,734,121
(diluted).
Fair Value of Financial Instruments
Estimated fair values of the Company's financial instruments (all of which are
held for nontrading purposes) are as follows:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $13,843 $13,843 $2,219,145 $2,219,145
Revolving line of credit (2,858,337) (2,858,337) - -
Notes payable - - (1,264,271)(1,264,271)
Capital lease obligations (66,288) (66,288) (87,236) (87,236)
The carrying amount approximates fair value of cash and cash equivalents. The
fair value of debt is based on current rates at which the Company could borrow
funds with similar remaining maturities. The carrying amounts approximate
fair value.
F-12
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note B - Summary of Accounting Policies (continued)
Computer Software Costs
Expenditures related to the Company's acquisition and implementation of a new
information management software have been capitalized as computer systems.
Capitalized costs include $118,360 of costs paid to outside consultants and
$35,301 of internal costs. Capitalized implementation costs will be amortized
using the straight-line method over the remaining estimated useful life of the
system. The software had not been placed in service as of June 30, 1998.
Costs and Expense Applicable to Sales and Revenues
Costs of contract labor associated with service revenue is shown separately in
the statement of operations. Other costs associated with service revenue are
included with selling and administrative expenses as the nature of these costs
make it impractical to separate them from selling and administrative expenses.
Note C - Business Combinations
On May 28, 1997, Tyrex acquired 3Si in a reverse merger. Tyrex issued
28,333,333 of its $.01 par value common shares to the three owners of 3Si for
100% of the outstanding stock of 3Si. These shares were issued based on the
value of the outstanding shares of Tyrex on May 28, 1997. The fair value of
Tyrex's outstanding shares was determined to be $2,728,773. The excess of the
net assets of Tyrex over the value of the shares was allocated to Tyrex's oil
and gas properties.
Tyrex also paid $625,000 to satisfy a License and Royalty Agreement with 3Si's
former stockholders in the period ended June 30, 1997. (See Note G) This pay-
ment has been capitalized as goodwill and is being amortized using the straight-
line method over 20 years.
The following summarized pro forma (unaudited) information assumes the acquisi-
tion had occurred on January 1, 1996.
1997 1996
Net sales $9,976,536 $19,007,245
Loss from continuing operations $ (275,198) $ (195,315)
Income from discontinued operations $ 436,915 $ 55,743
Net income (loss) $ 161,717 $ (139,572)
Earnings per share
Primary
Loss from continuing operations $ (.01) $ -
Income from discontinued operations $ .01 $ -
Net income (loss) $ - $ -
The above amounts reflect adjustments for revaluation of the basis of the oil
and gas properties sold.
F-13
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note D - Accounts Receivable
1998 1997
Trade receivables $6,197,390 $3,376,568
Allowance for doubtful accounts (55,000) (45,000)
Net $6,142,390 $3,331,568
Generally, the Company does not require collateral or other security to support
customer receivables.
Note E - Revolving Line of Credit
As of September 30, 1997, the Company replaced its note payable with a bank with
a revolving line of credit facility with another financial institution. The new
revolving line of credit is at the prime rate of interest and permits the
Company to borrow up to $5 million based on 85% of the Company's eligible
accounts receivable balance and inventory computed under the terms of the agree-
ment. The line is collateralized by substantially all of the assets of the
Company. Distributions to stockholders, acquisitions of assets and incurrence
of additional debt are not allowed without prior consent of the financial
institution. The revolving line may be terminated by the financial institution
upon sixty days written notice to the Company. The Company is currently not in
compliance with its financial covenants to maintain $1.5 million of tangible net
worth; a debt-equity ratio of less the 5:1; and, a current ratio of 1.1:1. The
lender has neither waived its right nor taken any action relative to the line at
this time. The weighted average interest rate for the year ended June 30, 1998
was 9.82%.
The weighted average interest rate for the year ended December 31, 1996 was
10.87%. The weighted average interest rate for the period January 1, 1997
through April 7, 1997 was 11.57%. The weighted average interest rate for the
bank note payable from April 8, 1997 through June 30, 1997 was 11.50%.
Note F - Notes Payable
1998 1997
Note payable to a bank with monthly
payments of$80,000 plus interest at
2.5% over prime rate,due September 2, 1997 $ - $ 946,285
Note payable to a financing company with
weeklypayments of $10,970 including
interest at 9.5%,due February, 1998 - 317,986
Notes payable - $1,264,271
F-14
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note G - Commitments
Leases
The Company currently has operating leases for office space in Englewood and
Colorado Springs, Colorado and Albuquerque, New Mexico. The rent expense is
net of sublease income in the Englewood office of $87,000, $23,500 and
$27,000 for the year ended June 30, 1998, the period ended June 30, 1997, and
the year ended December 31, 1996, respectively.
Rent expense was $114,178 for the year ended June 30, 1998, $53,137 for the
period ended June 30, 1997, and, $124,440 for the year ended December 31, 1996.
During December, 1995, 3Si acquired $120,332 of furniture and fixtures under a
capital lease. Accumulated amortization is $62,172 and $38,105 at June 30, 1998
and 1997, respectively.
Capital Capital Operating
Lease Lease Leases
Minimum Debt Minimum
Payment Maturity Payment
June 30, 1999 $31,324 25,340 169,625
June 30, 2000 31,324 30,516 141,602
June 30, 2001 10,442 10,432 139,752
June 30, 2002 - - 34,938
$73,090 66,288 $485,917
Less current portion (25,340)
Long term debt $40,948
Royalties
3Si executed a License and Royalty Agreement effective August 1, 1993 with
former stockholders of 3Si. Under the terms of the agreement, 3Si was
obligated to pay 1.5% of gross revenues as a royalty expense to the former
stockholders through July 1999. As a condition of the agreement with the former
stockholders, dividends payable to the new stockholders had been limited. As
part of the merger in May 1997, Tyrex satisfied this royalty agreement for a
payment of $625,000. The buy out of this agreement is recorded as goodwill and
is being amortized using the straight-line method over twenty years.
Employment Agreements
The Company entered into separate employment agreements with each of the co-
owners of 3Si -Fred Slack, Frank Backes and Larry Valdez. Pursuant to the
agreements, the Company compensated each of the individuals $110,000 in fiscal
1998. The individuals are eligible for increases in their annual compensation
subject to the profitability of the Company. The agreements expire May 31,
2000 unless terminated for cause by 3Si or early termination by the individual
with 90 days written notice.
F-15
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note H - Profit Sharing Plan
3Si established a 401(k) profit-sharing plan during the year ended December 31,
1995. Company contributions are at the discretion of the Board of Directors.
For the year ended June 30, 1998, period ended June 30, 1997 and the year ended
December 31, 1996, no Company contributions were made to the plan.
Note I - Stock Options and Warrants
On June 18, 1998, the Company's stockholders approved the Company's 1998 Stock
Option Plan (the "1998 Plan"). Under the terms of the 1998 Plan, the Company
may grant options to acquire up to 5,000,000 shares of the Company's $.01 par
value common stock to employees and directors of the Company. No options were
granted prior to June 30, 1998. Subsequent to June 30, 1998, the Company issued
options to acquire up to 1,545,800 shares of the Company's stock at prices
ranging from $.10 to $.133 per share to employees of the Company. The options
vest over a period of 4 years except 1,345,000 shares which vested immediately
upon grant to two officers of 3Si.
Tyrex Oil Company had a previous option plan for prior Tyrex employees (the
"Tyrex Plan"). Changes in the status of options outstanding under the Tyrex
Plan for year ended June 30, 1998 and the period from May 29, 1997 to June 30,
1997 were as follows:
Beginning of period, May 29, 1997 469,000
Granted -
Terminated -
End of period, June 30, 1997 469,000
Granted -
Terminated -
Exercised (469,000)
End of period, June 30, 1998 -
Option price $ .14
No compensation expense was recognized related to these options in these
financial statements.
On May 28, 1997, Tyrex granted warrants to purchase 750,000 shares of the
Company's common stock at a price of $.30 per share. These warrants became
exercisable 90 days after May 28, 1997 and are effective until August 27, 1999.
On October 22, 1997, the Company granted warrants to purchase up to 350,000
shares of the Company's common stock at a price of $.16 per share. These
warrants became exercisable 90 days after October 22, 1997 and are effective
until June 30, 1999. The Company also extended the exercise date on warrants
previously issued to purchase up to 400,000 shares of the Company's common
stock at $.255 per share from December 31, 1998 to December 31, 1999.
F-16
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note J - Research and Development/Software Development Costs
During the fiscal year ended June 30, 1998, the Company completed research and
development on its first two proprietary software products - a contact manage-
ment database program and a help desk management and call avoidance system
(called "KEWi"). Both programs operate via the Internet. The Company completed
technological feasibility of the contact management database program in November
1997 and the help desk management system in January 1998. The Company expensed
$70,366 in research and development costs and capitalized $239,082 as software
development costs relative to the two products as of June 30, 1998. The Company
will begin amortization of the software development costs when revenues commence
in FY1999. Because the Company has only recently commenced marketing its KEWi
product, it is reasonably possible that estimates of future anticipated revenues
and the estimated economic life of the software products may not be achieved.
As a result, the carrying amount of the capitalized software development costs
may be reduced materially in the near-term if the Company does not achieve its
anticipated revenues.
The KEWi product (standing for "Knowledge and Experience bringing you Wisdom
over the Internet") was introduced into the marketplace in July 1998.
Note K - Income Taxes
The merger of Tyrex (now, 3SiH) and 3Si was accomplished through a tax-free
reorganization.
Prior to the merger, 3Si was organized as an S Corporation. The Company has
available at June 30, 1998 net operating loss carryforwards expiring as follows:
2012 $111,000
2013 259,000
$370,000
The Company used $979,000 of Tyrex net operating loss carryforwards during the
year ended June 30, 1997. No other Tyrex loss carryforward from prior years is
available.
The Company's deferred tax assets and liabilities are compromised of the
following:
1998 1997
Current:
Deferral of tax deductions for compensation
and bad debt $ 33,000 $82,000
Tax benefit of net operating loss carryforward 138,000 41,000
171,000 123,000
Non-current:
Acceleration of tax deductions for software costs (102,000) -
69,000 123,000
Valuation allowance - (123,000)
Net deferred taxes $69,000 -
F-17
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note K - Income Taxes (continued)
Management believes the Company will have sufficient taxable income in future
years to obtain the entire benefit of the net operating loss carryforward and
reversal of timing differences. No valuation allowance is provided at
June 30, 1998.
The provision for income taxes consists of the following:
1998 1997
Current expense $15,000 $ -
Deferred credit (69,000) -
Income tax benefit $(54,000) -
Reconciliation of income taxes to Federal statutory rates is as follows:
1998 1997
Income taxes at statutory rates $ 39,000 $(25,000)
Non-deductible expenses 11,000 -
Minimum tax 15,000 -
State taxes and other 4,000 (3,000)
Valuation allowance (123,000) 28,000
Income tax benefit $ (54,000) $ -
Note L - Related Party Transactions
Amounts due from 3Si stockholders were $79,882 and $2,862 at June 30, 1998 and
1997, respectively. These amounts are included in other current assets.
Amounts due to two officers of Tyrex under a severance pay agreement of $89,198
at June 30, 1997 were paid in January 1998.
See Note G regarding employment agreements with three officers.
The sale of the oil and gas properties was made, in part, to a related party;
10% of the interest in these properties was sold to an officer of the corpora-
tion. The terms of the sale to the officer did not differ from the terms of the
sale to unrelated third parties.
F-18
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note M - Discontinued Operations
On May 30, 1997, Tyrex sold all of its oil and gas properties and discontinued
all of its oil and gas operating activities. The selling price was $1,803,257.
After adjusting for revenues received and expenses paid, net cash received was
$1,563,258. A deposit of $180,325 was received in a prior period.
At June 30, 1997, $40,749 was recorded as an account receivable. These oil and
gas operations were conducted by Tyrex Oil Company prior to the merger with 3Si.
No discontinued operations are included in the December 31, 1996 financial
statements which reflect only the operations of 3Si. Tyrex incurred costs of
$116,633, including payroll taxes, to provide severance pay for three employees
associated with the oil and gas operations. This amount was recorded an accrued
liability at June 30, 1997, and included in the direct costs associated with
the disposition of the oil and gas properties. All of this accrued severance
was paid by the Company by January 1998.
There is no tax effect from the sale of the oil and gas properties as Tyrex
has sufficient net operating loss carryforwards to offset any taxable gain on
the sale.
The gain from discontinued operations consists of the following:
Gain on sale of oil and gas properties $536,700
Direct cost associated with disposition of
oil and gas properties, including severance
package and merger costs incurred by Tyrex (335,907)
Gain on sale of discontinued operations $200,793
Note N - Concentrations of Credit Risk and Major Customers
In April 1996, 3Si entered into a sub-contract agreement to provide informa-
tion systems support to the U.S. Postal Service. Revenues for the year ended
June 30, 1998 were approximately $5.5 million which constituted greater than
10% of the total revenues of the Company for the period. The Company estimates
continuing revenue from this sub-contract agreement to be approximately $5
million per year for the next three years ending March 31, 2001, (which
includes anticipated renewals).
During the fiscal year ended June 30, 1998, one other significant customer
comprised more the 10% of net sales of the Company for the year (17.6% in
total). At June 30, 1998, approximately 58% of trade receivables were
owed by three customers. At June 30, 1997, approximately 48% of trade receiv-
ables were owed by nine customers.
3Si obtains substantial hardware for product sales from two vendors, but this
hardware can be readily obtained from other sources.
The Company has a revolving line of credit with a financial institution (See
Note E) and currently has no other source of funding. The Company is currently
not in compliance with certain of its financial ratio covenants with the lender.
The lender has neither waived its right nor taken any action relative to the
line at this time.
F-19
3Si Holdings, Inc.
(formerly, Tyrex Oil Company)
Notes to Financial Statements
June 30, 1998
Note O - Current Business Operations
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is currently not in
compliance with certain covenants of its revolving line of credit. The
lender has neither waived its rights nor taken any action relative to the line
at this time. If the lender were to not continue the line, such action would
have a material adverse impact to the Company. At June 30, 1998, current
liabilities exceed current assets by $199,393. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue
in existence.
The Company's management believes it could replace the revolving line with
another financial institution although there is no assurance that such line
could be obtained or if obtained, under the same terms of the current line.
The Company is actively seeking private equity financing to assist with its
current working capital deficit.
F-20