SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the year ended June 30, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 0-09358
3Si HOLDINGS, INC.
------------------
(Exact name of Registrant as specified in its charter)
Wyoming 83-0245581
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6886 S. Yosemite St.
Englewood, Colorado 80112
-------------------------------------------------
(Address of principal executive offices and zip code)
(303) 749-0210
-----------------------------------------
(Registrant's Telephone Number, including Area Code)
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
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
|X| Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock of the Registrant, as of
September 15, 1999, computed by reference to the closing sale price of the
voting stock held by non-affiliates on such date, was approximately $0.125.
As of September 15, 1999, there were outstanding 34,033,530 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORTS
3Si HOLDINGS, INC.
JUNE 30, 1999
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORTS 3-4
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS 5-6
STATEMENTS OF OPERATIONS 7
STATEMENTS OF CASH FLOWS 8-9
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11-30
-2-
Board of Directors
3Si Holdings, Inc.
Independent Auditors' Report
----------------------------
We have audited the accompanying consolidated balance sheets of 3Si
Holdings, Inc. as of June 30, 1999 and 1998 and the related consolidated
statements of operations, changes in stockholders' (deficit) equity, and cash
flows for the years 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 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.
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, 1999 and 1998, and the results of its operations and its cash
flows for the years 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. At June 30, 1999, current
liabilities exceed current assets by $1,908,685. Also at June 30, 1999, the
Company has a deficit in stockholders' equity of $1,944,715. The Company has
sold its systems integration business as of May 1, 1999. Its remaining business
is the licensing of its software products. Through June 30, 1999, there has been
nominal license fee revenue generated from its software products. A vendor has
filed suit to attempt to attach the Company's assets for the collection of a
$2,200,000 liability. These factors, discussed at Note Q, 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.
As discussed in Note B to the financial statements, an error resulting
in understatement of previously reported accounts payable as of June 30, 1998,
was discovered by management of the Company during the current year.
Accordingly, the June 30, 1998 financial statements have been restated to
correct the error.
/s/ Balogh and Tjornehoj, LLP
Denver, Colorado
September 28, 1999
-3-
Board of Directors
3Si Holdings, Inc.
Independent Auditors' Report
----------------------------
We have audited the accompanying statements of operations, changes in
stockholders' equity, and cash flows of 3Si Holdings, Inc. (formerly Tyrex Oil
Company) for the period January 1, 1997 through June 30, 1997. 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 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 financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
3Si Holdings, Inc. (formerly Tyrex Oil Company) for the period January 1, 1997
through June 30, 1997 in conformity with generally accepted accounting
principles.
/s/ John M. Hanson & Company, PC
Denver, Colorado
September 22, 1997
-4-
3Si Holdings, Inc.
Statements of Balance Sheets (Page 1 of 2)
- --------------------------------------------------------------------------------
ASSETS
June 30, 1999 1998
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents (Note B) ........ $ 1,372,293 $ 13,843
Accounts receivable - trade (Note D) ...... 437,221 6,142,390
Inventory (Note B) ........................ -- 225,741
Deferred income taxes (Note L) ............ -- 171,000
Other current assets (Note M) ............. 11,000 193,029
- --------------------------------------------------------------------------------
Total current assets ................ 1,820,514 6,746,003
PROPERTY AND EQUIPMENT AT COST
Computer systems (Note B) ................. 28,575 674,118
Furniture and fixtures (Note G) ........... -- 169,178
Leasehold improvements .................... -- 92,034
- --------------------------------------------------------------------------------
Total property and equipment ............ 28,575 935,330
Less accumulated depreciation
and amortization (Note B) ............. (7,500) (366,319)
- --------------------------------------------------------------------------------
Net property and equipment .......... 21,075 569,011
OTHER ASSETS
Software development costs (Note K) ....... 42,827 239,082
Goodwill (Note C) ......................... -- 591,146
Other non-current assets .................. 50,000 31,330
- --------------------------------------------------------------------------------
Total other assets .................. 92,827 861,558
- --------------------------------------------------------------------------------
Total assets $ ............................... 1,934,416 $ 8,176,572
================================================================================
The accompanying notes are an integral part of these statements
-5-
3Si Holdings, Inc.
Balance Sheets (Page 2 of 2)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
June 30, 1999 1998
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit (Note E) ............... $ -- $ 2,858,337
Current portion of capital lease (Note G) ....... -- 25,340
Accounts payable - trade (Notes B and G) ........ 3,301,354 3,974,661
Customer deposits ............................... -- 98,185
Income taxes payable (Note L) ................... -- 15,000
Accrued liabilities (Notes F and G) ............. 427,845 203,756
- --------------------------------------------------------------------------------
Total current liabilities ................. 3,729,199 7,175,279
ON-CURRENT LIABILITIES
Long-term debt (Note G) ......................... -- 40,948
Deferred income taxes (Note L) .................. -- 102,000
- --------------------------------------------------------------------------------
Total non-current liabilities ............. -- 142,948
MINORITY INTEREST (NOTE I) ......................... 149,932 --
COMMITMENTS AND CONTINGENCIES (NOTE G) ............. -- --
STOCKHOLDERS' (DEFICIT) EQUITY (NOTE J)
Common stock - authorized 50,000,000
shares of $.01 par value; 40,084,156 issued
at June 30, 1999; 39,984,924 issued at
June 30, 1998 ................................. 400,842 399,849
Additional paid in capital ...................... 2,773,536 2,380,044
Accumulated (deficit) ........................... (3,261,740) (64,195)
Treasury stock at cost - 6,050,626 shares ....... (1,857,353) (1,857,353)
- --------------------------------------------------------------------------------
Total stockholders' (deficit) equity ...... (1,944,715) 858,345
- --------------------------------------------------------------------------------
Total liabilities and stockholders' (deficit) equity $ 1,934,416 $ 8,176,572
================================================================================
The accompanying notes are an integral part of these statements
-6-
3Si Holdings, Inc.
Statements of Operations
- -------------------------------------------------------------------------------------------------
Year Ended Year Ended Six Mo. Ended
6/30/99 6/30/98 6/30/97
- -------------------------------------------------------------------------------------------------
Product sales .................................... $ 10,741,248 $ 20,816,550 $ 6,984,752
Consulting and other service revenue ............. 5,737,080 8,567,957 2,991,784
- -------------------------------------------------------------------------------------------------
Net revenues ..................................... 16,478,328 29,384,507 9,976,536
Cost of revenues (Note B) ........................ 14,698,967 24,267,452 8,151,600
- -------------------------------------------------------------------------------------------------
Gross profit ............................ 1,779,361 5,117,055 1,824,936
Selling and administrative expenses .............. 4,458,757 5,138,499 2,014,999
- -------------------------------------------------------------------------------------------------
(Loss) from operations .................. (2,679,396) (21,444) (190,063)
Other income (expense)
Miscellaneous income .......................... 19,021 74,815 8,659
Settlement of litigation (Note G) ............. (224,688) -- --
Interest expense .............................. (230,424) (180,124) (93,794)
Net (loss) gain on disposition of
assets (Note P) ............................. (71,867) 9,835 --
- -------------------------------------------------------------------------------------------------
Total other income (expense) ................ (507,958) (95,474) (85,135)
- -------------------------------------------------------------------------------------------------
Net loss before minority interest ....... (3,187,354) (116,918) (275,198)
Minority interest (Note I) ....................... 58,809 -- --
- -------------------------------------------------------------------------------------------------
Net (loss) before income taxes .......... (3,128,545) (116,918) (275,198)
Income tax (expense) benefit (Note L) ............ (69,000) 54,000 --
- -------------------------------------------------------------------------------------------------
Net (loss) from continuing operations ... (3,197,545) (62,918) (275,198)
Discontinued operations - gain on disposal
of oil and gas properties (Note N) .......... -- -- 200,793
- -------------------------------------------------------------------------------------------------
Net (loss) ....................................... $ (3,197,545) $ (62,918) $ (74,405)
=================================================================================================
Basic and diluted earnings (loss) per common share
From continuing operations .................. $ (.09) $ -- $ (.04)
From discontinued operations ................ -- -- .03
- -------------------------------------------------------------------------------------------------
Net (loss) .................................. $ (.09) $ -- $ (.01)
=================================================================================================
Weighted average shares outstanding (Note B) ..... 33,944,332 36,571,766 6,541,654
=================================================================================================
The accompanying notes are an integral part of these statements
-7-
3Si Holdings, Inc.
Statements of Cash Flows (Page 1 of 2)
- ---------------------------------------------------------------------------------------------
Year Ended Year Ended Six Mo. Ended
6/30/99 6/30/98 6/30/97
- ---------------------------------------------------------------------------------------------
Operating activities:
Net (loss) ................................... $(3,197,545) $ (62,918) $ (74,405)
Reconciling adjustments:
Depreciation and amortization .............. 228,242 161,498 51,025
Software impairment ........................ 57,400 -- --
Provisions for doubtful accounts ........... 272,615 106,435 30,150
Reserve for stockholders' loans ............ 162,395 -- --
Stock option compensation .................. 52,726 -- --
Net loss (gain) on disposition of
assets (Notes N and P) ................. 71,867 (9,835) (536,700)
Loss attributable to minority interest ..... (58,809) -- --
Stock issued for services .................. 15,500 6,675 --
Changes in operating assets and liabilities:
Accounts receivable .................... 5,432,554 (2,917,257) 1,347,856
Inventory .............................. 18,098 417,733 (357,264)
Other assets ........................... 51,403 (62,841) 37,211
Accounts payable and accrued expenses .. (451,298) 976,751 (903,157)
Income tax payable ..................... (15,000) 15,000 --
Deferred taxes ......................... 69,000 (69,000) --
- ---------------------------------------------------------------------------------------------
Total adjustments ................. 5,906,693 (1,374,841) (330,879)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities .................. 2,709,148 (1,437,759) (405,284)
Investing activities:
Proceeds from sale of assets ................. 802,167 12,500 1,342,184
Proceeds from assignment of
government contracts ....................... 500,000 -- --
Purchases of equipment ....................... (215,263) (339,182) (41,414)
Software development costs ................... (10,827) (142,975) --
Loans to stockholders ........................ (82,513) (77,020) --
Cost of merger ............................... -- (8,278) (48,924)
Prepaid royalty (goodwill) ................... -- -- (625,000)
Cash acquired in merger ...................... -- -- 1,887,653
- ---------------------------------------------------------------------------------------------
Net cash provided by (used for)
investing activities ..................... $ 993,564 $ (554,955) $ 2,514,499
The accompanying notes are an integral part of these statements
-8-
3Si Holdings, Inc.
Statements of Cash Flows (Page 2 of 2)
- --------------------------------------------------------------------------------------------
Year Ended Year Ended Six Mo. Ended
6/30/99 6/30/98 6/30/97
- --------------------------------------------------------------------------------------------
Financing activities:
(Payments on) proceeds from note payable .... $(2,858,337) $(1,264,271) $ 499,783
Revolving line of credit, net ............... -- 2,858,337 --
Payments on notes payable and capital lease . (20,925) (20,948) (421,065)
Proceeds from exercise of options (Note J) .. -- 65,660 --
Minority interest investment (Note I) ....... 535,000 -- --
Payments on self-tender ..................... -- (1,851,366) --
Advances from owners ........................ -- -- 23,884
Dividends paid, prior to merger ............. -- -- (39,838)
- --------------------------------------------------------------------------------------------
Net cash (used for) provided by
financing activities .................. (2,344,262) (212,588) 62,764
- --------------------------------------------------------------------------------------------
Net change in cash and cash equivalents ........ 1,358,450 (2,205,302) 2,171,979
Cash and cash equivalents at beginning of period 13,843 2,219,145 47,166
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period ..... $ 1,372,293 $ 13,843 $ 2,219,145
============================================================================================
Summary of noncash investing and financing activity:
To complete the May 1997 merger of Tyrex (now, 3Si Holdings, Inc.) and 3Si,
Tyrex issued 28,333,333 of its $.01 par 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
==============
3SiH sold substantially all of its assets effective as of May 1, 1999
(See Note A). The following is a summary of this sale:
Sales proceeds $ 802,167
Net property and equipment sold $ 331,480
Inventory and other assets sold 239,716
Capital lease obligation assumed by purchaser (45,363) 525,833
----------- ---------
Gain on sale (See Note P) $ 276,334
=========
Interest paid $ 230,424 $ 180,124 $ 93,794
Income tax paid $ 15,000 $ - $ -
The accompanying notes are an integral part of these statements
-9-
3Si Holdings, Inc.
Statements of Changes in Stockholders' (Deficit) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
# Additional Retained Total
Common Common Paid-In Earnings Treasury Stockholders'
Shares Stock Capital (Deficit) Stock (Deficit)Equity
- -----------------------------------------------------------------------------------------------------------------------------------
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 (45,000 shares) .......... -- -- -- -- (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 2,322,902 (1,277) (5,987) 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 loss for the year ended
June 30, 1998 - restated ............... -- -- -- (62,918) -- (62,918)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1998 .................... 39,984,924 399,849 2,380,044 (64,195) (1,857,353) 858,345
Shares issued for services
at $.16 per share ...................... 99,232 993 14,507 -- -- 15,500
Stock option grants and revisions ........ -- -- 52,726 -- -- 52,726
Minority interest proceeds
in excess of carrying value ............ -- -- 326,259 -- -- 326,259
Net loss for the year ended
June 30, 1999 .......................... -- -- -- (3,197,545) -- (3,197,545)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 .................... 40,084,156 $ 400,842 $ 2,773,536 $(3,261,740) $(1,857,353) $(1,944,715)
===================================================================================================================================
The accompanying notes are an integral part of these statements
-10-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note A - Organization
Name Change
Effective September 15, 1998, the Company's name changed from Tyrex Oil Company
("Tyrex") to 3Si Holdings, Inc. ("3SiH" or the "Company").
Merger
On May 28, 1997, 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. 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.
There are no oil and gas activities included in these financial statements.
Operations through May 1, 1999
3Si was incorporated in Colorado in 1979. Until May 1, 1999, 3SiH operated one
business segment providing services as a systems integrator. The systems
integration business was sold as of May 1, 1999, and 3SiH's continuing business
is the licensing of its software products (See KEWi below).
The principal markets for 3SiH's sales and services had been the U.S. Postal
Service, government agencies, and large corporations located in Colorado and New
Mexico. The corporate offices were located in Englewood, Colorado. 3SiH also
maintained offices in Albuquerque, New Mexico, Raleigh, North Carolina, and
Colorado Springs, Colorado until May 1, 1999.
Sale of Substantially All Assets
Effective as of January 1, 1999, 3SiH assigned the contracts of its government
division to Storage Area Networks for total consideration of $500,000. A gain of
$500,000 was realized on this sale (See Note P).
On June 30, 1999, 3SiH consummated the sale of substantially all of its
remaining assets (excluding cash, accounts receivable, and its subsidiary,
Kewi.net, Inc.) to P.C. Specialists, Inc., a California corporation. A gain of
$276,334 was realized on this sale (See Notes P and R).
-11-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note A - Organization (continued)
Sale of Substantially All Assets (continued)
The effective date of the asset sale is May 1, 1999. 3SiH was paid $802,167 of
the purchase price at closing. 3SiH will also be able to earn up to an
additional $2,200,000 over a three-year period based upon the contingencies set
forth in the agreement. The agreement provides for contingent payments to 3SiH
of $325,000 when key contracts are renewed. The agreement also provides for
contingent payments to 3SiH of 75% of the profits in excess of contract renewal
payments from the sold business for the first year, and 50% of the profits in
excess of contract renewal payments for the second and third years. In no event
will the purchase price of the assets sold plus contingent payments exceed
$3,000,000. Revenue under this provision will be recognized when the
contingencies have been satisfied and payment is assured. There is currently no
assurance as to when or if any contingent payments will be received.
KEWi
KEWi.net, Inc. ("KEWi") was incorporated as a 3SiH subsidiary in Colorado in
February 1999. 3SiH contributed its KEWi product and technologies to KEWi
effective April 1, 1999.
KEWi raised $535,000 (net of expenses) through a private offering for 26% of
KEWi's common stock. KEWi also issued 5% of its common stock to an entity that
assisted in the private offering. As of June 30, 1999, 3SiH owns 69% of the
outstanding common stock of KEWi.
The accounts of KEWi are consolidated into the 3SiH financial statements. All
intercompany balances and transactions have been eliminated. A minority interest
is presented in the 3SiH financial statements for the 31% interest not owned by
3SiH (See Note I).
Through its proprietary software, KEWi can provide automated help desk products
and services to large customers as well as individual computer users.
Through June 30, 1999, there has been $8,000 of license fee revenue generated
from the sale of KEWi software services.
Development Stage
After the sale of substantially all of its assets, 3SiH may become a development
stage company if significant revenues are not generated from the KEWi software
services.
- --------------------------------------------------------------------------------
-12-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note B - Summary of Significant Accounting Policies
Prior Period Adjustments
The accompanying financial statements for the year ended June 30, 1998, have
been restated to correct an error in not recording all accounts payable at
year-end. The effect of the restatement was to decrease net earnings for the
year ended June 30, 1998, by $232,058 ($.00 per share). The 1998 current income
tax effect of this correction was offset by an increase in the 1998 deferred tax
valuation allowance.
Comparability of Financial Statements
Labor costs under the USPS agreement in the June 30, 1998 and 1997 financial
statements of $3.8 million and $1.4 million respectively, have been reclassified
to cost of revenues in order to make them comparable to the 1999 financial
statements. There is no effect on net loss.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" was adopted by the Company for the year ended June 30,
1999. The primary objective of this statement is to report and disclose a
measure of all changes in equity of an entity that result from transactions and
other economic events of the period other than transactions with owners. The
adoption of the new standard had no effect on the financial statements of 3SiH.
The Company currently has no components of other comprehensive income.
Business Segments
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" was adopted by the Company
during the year ended June 30, 1999. This statement establishes standards for
additional disclosure about operating segments. More specifically, it requires
financial information to be disclosed for segments whose operating results are
reviewed by the chief operating decision-maker for decisions on resource
allocation. It also requires related disclosures about products and services,
geographic areas and major customers. The adoption of the new standard had no
effect on the financial statements of 3SiH. Since the sale of all its oil and
gas properties in May 1997, the Company operated in only one business segment as
a systems integrator. Revenues are all attributed to operations within the
United States. Long-lived assets are all located within the United States. See
Note O for information on major customers.
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.
-13-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note B - Summary of Significant Accounting Policies (continued)
Inventory
Inventory was stated at lower of cost (weighted average method) or market and
consisted of computer system components and service parts.
Depreciation and Amortization
Depreciation and amortization have been provided in amounts sufficient to
allocate the costs of depreciable assets to operations over their estimated
useful lives of five to seven years using the straight-line method. Equipment
acquired under capital leases is amortized on a straight-line basis over the
lease period. Amortization of capitalized software development costs has been
provided over a period of two years.
Depreciation and amortization expense is as follows:
Equipment Software
And Capital Development
Leases Costs Goodwill
------ ----- --------
Period ended
------------
6 mo. 6/30/97 $ 48,421 $ - $ 2,604
12 mo. 6/30/98 $ 130,248 $ - $ 31,250
12 mo. 6/30/99 $ 112,800 $ 89,400 $ 26,042
Revenue Recognition
The Company's revenue recognition policies are in compliance with all applicable
accounting regulations, including American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition". This statement provided criteria to be met in order for revenue to
be recognized. The criteria include delivery, determinability of the amount of
revenue, and probability of collection. The KEWi software is licensed to the
user on a monthly subscription basis. Revenue is recognized monthly as the
service is provided.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising expense is
as follows:
Period ended
------------
6 mo. 6/30/97 $ 20,000
12 mo. 6/30/98 $ 58,000
12 mo. 6/30/99 $ 38,000
-14-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note B - Summary of Significant Accounting Policies (continued)
(Loss) Earnings Per Share
Basic (loss) earnings per share (EPS) is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the year. Diluted EPS, if any, reflects the potential dilution
that could occur if dilutive securities were exercised or converted into common
stock that then shared in the earnings.
Net loss per share for the years ended June 30, 1999 and 1998, was computed on
the basis of the weighted average number of common shares outstanding only, as
shares subject to warrants and stock options would have an anti-dilutive effect.
Treasury shares reacquired by the Company during the year ended June 30, 1998,
reduce outstanding common shares. 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.
Fair Value of Financial Instruments
Estimated fair values of the Company's financial instruments (all of which are
held for non-trading purposes) are as follows:
1999 1998
------ ------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------ ------------------------
Cash and cash equivalents $ 1,372,293 $ 1,372,293 $ 13,843 $ 13,843
Revolving line of credit -- -- (2,858,337) (2,858,337)
Capital lease obligations -- -- (66,288) (66,288)
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.
Statements of Financial Accounting Standards ("SFAS") No. 133 and 137,
"Accounting for Derivative Instruments and Hedging Activities" will become
effective during the year ended June 30, 2001. These statements require that
entities recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value provided certain
conditions are met. The new standards are expected to have no effect on the
financial statements of 3SiH. The Company currently has no derivative
instruments and does not expect to engage in hedging activities.
-15-
3Si Holdings, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
June 30, 1999
Note B - Summary of Significant Accounting Policies (continued)
Computer Software Costs Developed For Internal Use Only
Expenditures related to the Company's acquisition and implementation of a new
information management software have been capitalized as computer systems in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Capitalized costs include
$187,514 paid to outside consultants and $35,301 of internal costs. The software
was never placed in service, and a loss of $222,815 is reported in the year
ended June 30, 1999 (See Note P).
Computer Software Costs Developed For Sale to Customers
The Company capitalizes certain software development and implementation costs.
Development and implementation costs are expensed as research costs until the
Company has determined that the software has achieved technological feasibility,
will result in probable future economic benefits, and management has committed
to funding the project. Thereafter, the costs to develop the software are
capitalized and amortized using the straight-line method over the remaining
estimated useful lives (See Note K).
- --------------------------------------------------------------------------------
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.
The following summarized pro forma (unaudited) information assumes the May 30,
1997, Tyrex oil and gas disposition (See Note N) had occurred on January 1,
1997.
1997
---------------
Net revenues $ 9,976,536
===============
(Loss) from continuing operations $ (275,198)
Earnings from discontinued operations 436,915
--------------
Net earnings $ 161,717
===============
Earnings per share
Primary
(Loss) from continuing operations $ (.01)
Earnings from discontinued operations .01
---------------
Net earnings $ -
===============
-16-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note C - Business Combinations (continued)
The preceding amounts reflect adjustments for revaluation of the basis of the
oil and gas properties sold.
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 the gross revenues as a royalty expense to the former
stockholders through July 1999. As part of the merger in May 1997, Tyrex
satisfied this royalty agreement with a payment of $625,000. The buy out of this
agreement was recorded as goodwill and was being amortized using the
straight-line method over twenty years, until April 30, 1999. Upon the sale of
substantially all assets of 3SiH effective May 1, 1999 (See Note A), the
remaining $565,104 balance of goodwill (which was associated with the systems
integrator business) was written off and grouped with other income (expense)
(See Note P).
- --------------------------------------------------------------------------------
Note D - Accounts Receivable
The detail of accounts receivable is as follows:
1999 1998
------------- --------------
Trade receivables $ 437,221 $ 6,197,390
Allowance for doubtful accounts - (55,000)
------------- --------------
Net $ 437,221 $ 6,142,390
============= ==============
- --------------------------------------------------------------------------------
Note E - Revolving Line of Credit
As of September 30, 1997, the Company obtained a revolving line of credit
facility with a financial institution. The revolving line of credit was at the
prime rate of interest and permitted 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 agreement. This line of credit was paid off as
of June 1999.
The weighted average interest rate for the years ended June 30, 1999 and 1998
was 10.28% and 9.82% respectively.
The weighted average interest rate for the period January 1, 1997, through April
7, 1997, was 11.57%. The weighted average interest rate for a bank note payable
from April 8, 1997, through June 30, 1997, was 11.50%.
- --------------------------------------------------------------------------------
-17-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note F - Accrued Liabilities
3SiH entered into commitments for monthly lease and training payments related to
a new information management software system (See Note B). The software was
never placed in service. The future commitments through September 2000 of
$95,108 have been reported as an accrued liability as of June 30, 1999, and a
loss recorded.
The detail of accrued liabilities is as follows:
1999 1998
------------ -----------
Legal settlement (Note G) $ 224,688 $ -
Compensation 103,323 148,759
Loss on software lease commitments 95,108 -
Other 4,726 54,997
------------ -----------
Total $ 427,845 $ 203,756
============ ===========
- --------------------------------------------------------------------------------
Note G - Commitments and Contingencies
Leases
The Company had operating leases for office space in Englewood and Colorado
Springs, Colorado and Albuquerque, New Mexico until May 1, 1999. The rent
expense is net of sublease income for the Englewood office.
Net Rent Sublease
Period ended Expense Income
------------ ------- ------
6 mo. 6/30/97 $ 53,000 $ 23,500
12 mo. 6/30/98 $ 114,000 $ 87,000
12 mo. 6/30/99 $ 98,000 $ 63,500
During December 1995, 3Si acquired $120,332 of furniture and fixtures under a
capital lease. Accumulated amortization was $62,172 at June 30, 1998.
-18-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note G - Commitments and Contingencies (continued)
Leases (continued)
The capital lease was assumed by the purchaser of substantially all assets of
3SiH (See Note A). 3SiH has a contingent liability for the $45,363 of minimum
lease payments through October 2000 should the purchaser fail to make the
required lease payments. Management currently believes the Company will incur no
liability for these payments; however, the ultimate outcome of this matter
cannot be determined at this time.
1999 1998
------------ -----------
Capital lease obligations:
Current $ - $ 25,340
Long-term - 40,948
------------ -----------
Total $ - $ 66,288
============ ===========
Self-Insured Medical Program
3SiH adopted a self-insured medical program for its employees and their
dependents. The Company was liable for annual medical expenses up to $35,000 for
each individual. The Plan was discontinued upon the sale of substantially all
assets of the Company (See Note A). No significant future liability is
anticipated.
Sales Tax
A vendor has billed 3SiH for $56,000 of sales tax. The underlying transaction is
exempt from sales tax, and management believes the matter will be resolved
without any liability to the Company.
Litigation
During the year ended June 30, 1998, the Company entered into a Federal Master
Assignment Agreement with a leasing company to effect a government lease of
certain equipment. Under the terms of the assignment agreement, if the
government terminated the lease for any reason other than "Termination for
Convenience or Non-appropriation", 3SiH would be liable for the present value of
the discounted cash flows then owed under the lease. On July 31, 1998, the
lessee terminated the lease for convenience.
The leasing company filed suit against 3SiH to recover the present value of the
discounted cash flows. A settlement was reached in September 1999. 3SiH paid the
plaintiffs $75,000 and issued 1,100,000 shares of its restricted common stock
(valued at $154,688) to the plaintiffs. The $224,688 combined amount of the
settlement (which is net of the $5,000 value of inventory recovered) is accrued
as a loss at June 30, 1999.
-19-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note G - Commitments and Contingencies (continued)
Litigation (continued)
As of June 30, 1999, accounts payable balances owed to two vendors are
approximately $650,000 and $2,200,000. The Company has made semi-monthly
payments through September 28, 1999, totaling $90,000 on the $650,000 balance.
This vendor has not taken any legal action to pursue collection. The vendor who
is owed approximately $2,200,000 has filed suit to attempt to attach the
Company's assets for the collection of that liability. 3SiH does not believe
that this amount is due at this time so long as 3SiH is current on interest
payments as called for in the parties' written agreement. Counsel for 3SiH
believes that it is too early to express an opinion as to whether the court will
find the liability due at this time.
(See Note F also related to loss on future commitments. See Note I also related
to commitment for additional ownership interest in KEWi.)
- --------------------------------------------------------------------------------
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 years ended June 30, 1999 and 1998, and the period ended June 30, 1997, no
Company contributions were made to the plan.
- --------------------------------------------------------------------------------
Note I - Minority Interest
3SiH owns a 69% interest in KEWi.net, Inc. (See Note A) summarized as follows:
1999 1998
----------- ----------
Net proceeds from sale of stock in KEWi
subsidiary attributable to minority interest $ 208,741 $ -
(Loss) attributable to minority interest (58,809) -
----------- ----------
Net minority interest balance $ 149,932 $ -
=========== ==========
Net proceeds from the sale of stock in the KEWi subsidiary were $535,000. Net
proceeds, in excess of 3SiH's carrying value of the interest sold, of $326,259
are accounted for as additional paid in capital in the consolidated balance
sheet.
3SiH has agreed to give an additional 5% ownership interest in KEWi to a
consulting firm if KEWi sales and earnings in the years ended March 2000, 2001
or 2002 meet certain goals. If additional ownership interests in the KEWi
subsidiary are subsequently issued, they will be accounted for as an operating
expense and additional minority interest.
- --------------------------------------------------------------------------------
-20-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note J - Stock Options and Warrants
Tyrex Stock Option Plan
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
===========
3SiH Stock Option Plan
On June 18, 1998, the 3SiH stockholders approved the Company's 1998 Stock Option
Plan (the "1998 Plan"). Under the terms of the 1998 Plan, the Company may grant
options for employees and directors of the Company to acquire up to 5,000,000
shares of 3SiH's common stock. No options were granted prior to June 30, 1998.
The options vested over a period of four years except 1,345,000 shares, which
vested immediately upon grant to two officers of 3SiH.
Upon the sale of substantially all assets of the Company (See Note A), a) the
exercise period for terminated employees became one year from date of
termination, and b) the options held by terminated employees became 100% vested.
# Shares Exercise
Under Option Price*
End of period, June 30, 1998 - $ -
Granted 1,910,100 .125
Forfeited (647,600) .125
Exercised - -
---------------- -----------
End of period, June 30, 1999
(all exercisable) 1,262,500 $ .125
================ ===========
Option price $ .10 - $ .133
* weighted average
-21-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note J - Stock Options and Warrants (continued)
3SiH Stock Option Plan (continued)
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. The Company has elected to remain on its current
method of accounting as described above, and has adopted the disclosure
requirements of SFAS No. 123.
Compensation cost charged to operations was $52,726 for the year ended June 30,
1999. No additional compensation cost was recorded related to the change in
terms for the options upon the sale of substantially all assets of the Company.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, net loss would have increased as follows:
1999 1998 1997
------------ ---------- ----------
Net (loss)
As reported $ (3,197,545) $ (62,918) $ (74,405)
============ ========== ==========
Pro forma $ (3,246,683) $ (62,918) $ (74,405)
============ ========== ==========
Basic and diluted (loss) per share
As reported $ (.09) $ - $ (.01)
============ ========== ==========
Pro forma $ (.10) $ - $ (.01)
============ ========== ==========
The weighted average fair value of options granted during the year ended June
30, 1999, is $.149.
The fair value of each option granted is estimated on the date of the
modification of the plan terms using the Black Scholes model. The following
assumptions were made in estimating fair value:
Assumption
Dividend yield 0%
Risk-free interest rate 6%
Expected life 1 year
Expected volatility 94.09%
-22-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note J - Stock Options and Warrants (continued)
Warrants
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 were 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 $.225 per share from December 31, 1998, to December 31, 1999.
No compensation expense has been recognized related to warrants, and no warrants
have been exercised through June 30, 1999.
- --------------------------------------------------------------------------------
Note K - Research and Development/Software Development Costs
During the year ended June 30, 1998, 3SiH conducted research and development on
its first two proprietary software products - a contact management data base
program and automated help desk services. Both programs operate via the
Internet. During the year ended June 30, 1999, KEWi conducted research and
development on an upgraded version of its automated help desk services software
and a new paging software system.
The contact management database program was deemed not to be commercially viable
and capitalized costs were written off as a loss during the year ended June 30,
1999 (See Note P).
-23-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note K - Research and Development/Software Development Costs (continued)
As of June 30, 1999, the automated help desk services software was deemed to be
impaired and written down to its fair value. Fair value, which was determined by
reference to the present value of the estimated future cash inflows of such
asset, exceeded their carrying value by $57,400. An impairment loss of that
amount (included in other expenses) has been charged to operations in the year
ended June 30, 1999.
Development Research
Period ended Costs Capitalized Costs Expensed
------------ ----------------- --------------
6 mo. 6/30/97 $ - $ -
12 mo. 6/30/98 239,082 70,000
12 mo. 6/30/99 10,827 13,000
------------ -----------
249,909 $ 83,000
===========
Contact management
database loss
12 mo. 6/30/99 (60,282)
------------
189,627
Amortization
12 mo. 6/30/99 (89,400)
------------
Net cost before impairment 100,227
Impairment (57,400)
------------
Net book value $ 42,827
============
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 might 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.
- --------------------------------------------------------------------------------
Note L - Income Taxes
The Company provides for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial statement and
income tax purposes. Valuation allowances are provided against deferred tax
assets which are not likely to be realized.
The 1997 merger of Tyrex (now, 3SiH) and 3Si was accomplished through a tax-free
reorganization. The 1999 distribution of assets to KEWi was also accomplished in
a tax-free transaction.
-24-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note L - Income Taxes (continued)
Prior to the merger, 3Si was organized as an S Corporation. Net operating loss
carryforwards are available at June 30, 1999, expiring as follows:
3SiH KEWi
---- ----
2012 $ 111,000 $ -
2013 509,000 -
2014 1,886,000 109,000
-------------- ------------
$ 2,506,000 $ 109,000
============== ============
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 comprised of the
following:
1999 1998
----------- -----------
Current:
Deferral of tax deductions for compensation
and bad debt ............................... $ -- $ 33,000
Tax benefit of net operating loss carryforward .. -- 225,000
----------- -----------
-- 258,000
Valuation allowance .................................. -- (87,000)
----------- -----------
Net current ..................................... -- 171,000
Non-current:
Tax benefit on net operating loss carryforward .. 976,000 --
Deferral of tax deduction for goodwill .......... 209,000 --
Acceleration of tax deductions for software costs (16,000) (102,000)
Other ........................................... 154,000 --
----------- -----------
1,323,000 (102,000)
----------- -----------
Valuation allowance .................................. 1,323,000 --
----------- -----------
Net non-current ................................. -- (102,000)
----------- -----------
Net deferred tax assets .............................. $ -- $ 69,000
=========== ===========
-25-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note L - Income Taxes (continued)
The Company may not have sufficient taxable income in future years to obtain the
benefits of the net operating loss carryforward and reversal of timing
differences. Valuation allowances of $1,323,000 and $87,000 are provided at June
30, 1999 and 1998 respectively, for the benefits which the Company may not be
able to use.
The provision for income taxes consists of the following:
1999 1998 1997
----------- ----------- -----------
Current expense ......................... $ -- $ 15,000 $ --
Deferred expense (credit) ............... 69,000 (69,000) --
----------- ----------- -----------
Income tax expense (benefit) ..... $ 69,000 $ (54,000) $ --
=========== =========== ===========
Reconciliation of income taxes to Federal statutory rates is as follows:
1999 1998 1997
----------- ----------- -----------
Income taxes (benefit) at statutory rates $(1,064,000) $ (40,000) $ (25,000)
Non-deductible expenses ................. -- 11,000 --
Minimum tax ............................. -- 15,000 --
State taxes and other ................... (111,000) (4,000) (3,000)
Valuation allowance ..................... 1,244,000 (36,000) 28,000
----------- ----------- -----------
Income tax expense (benefit) ..... $ 69,000 $ (54,000) $ --
=========== =========== ===========
- --------------------------------------------------------------------------------
Note M - Related Party Transactions
Amounts due from 3SiH stockholders were $162,395 and $79,882 at June 30, 1999
and 1998, respectively. This June 30, 1998, amount is included in other current
assets. Due to the uncollateralized nature of these receivables and the going
concern consideration (See Note Q), the $162,395 June 30, 1999, balance has been
fully reserved and recorded as an expense.
Amounts due to two officers of Tyrex under a severance pay agreement of $89,198
at June 30, 1997, were paid in January 1998.
The May 30, 1997, 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 corporation. The terms of the sale to the officer did not differ from the
terms of the sale to unrelated third parties.
- --------------------------------------------------------------------------------
-26-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note N - Discontinued Operations
On May 30, 1997, Tyrex sold all of its oil and gas properties for $1,803,257 and
discontinued all of its oil and gas operating activities.
Tyrex incurred costs of $116,633 to provide severance pay for three employees
associated with the oil and gas operations. This amount was recorded as an
accrued liability at June 30, 1997, and was included in the direct costs
associated with the disposition of the oil and gas properties. The Company paid
all of this accrued severance by January 1998.
There was no tax effect from the sale of the oil and gas properties as Tyrex had
sufficient net operating loss carryforwards to offset any taxable gain on the
sale.
The gain from discontinued operations consisted 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
==============
The sale of substantially all assets effective as of May 1, 1999, is not
considered the discontinuation of a business segment.
- --------------------------------------------------------------------------------
Note O - Major Customers and Concentrations of Credit Risk
With the sale of substantially all of its assets effective as of May 1, 1999
(See Note A), 3SiH also sold its systems integration business including its
agreement to provide information systems support to the U.S. Postal Service
(USPS), which was a major customer. Net revenues (in thousands) are summarized
as follows:
1999 1998 1997
(6 mos.)
---------- --------- ----------
Product sales $ 10,741 $ 20,817 $ 6,985
USPS agreement 4,810 5,550 1,970
KEWi license fees 8 - -
Other consulting and service revenue 919 3,018 1,022
---------- --------- ----------
Net revenues $ 16,478 $ 29,385 $ 9,977
========== ========= ==========
Financial instruments, which potentially subject the Company to credit risk,
consist primarily of cash, cash equivalents, and trade receivables.
-27-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note O - Major Customers and Concentrations of Credit Risk (continued)
At June 30, 1999, the Company's bank balances were approximately $980,000 in
excess of the amount insured by the Federal Deposit Insurance Corporation.
Generally, the Company does not require collateral or other security to support
customer receivables. At June 30, 1999, one customer owed approximately 52% of
trade receivables. At June 30, 1998, three customers owed approximately 58% of
trade receivables.
- --------------------------------------------------------------------------------
Note P - Loss on Disposition of Assets
Net (loss) gain on disposition of assets are as follows:
1999 1998 1997
--------- -------- -------
Gain on assignment of government contracts
(Note A) ..................................... $ 500,000 $ -- $ --
Gain on sale of substantially all assets (Note A) 276,334 -- --
Capitalized internal software costs not placed
into service (Note B) ........................ (222,815) -- --
Capitalized software development costs deemed
not commercially viable (Note K) ............. (60,282) -- --
Goodwill charged against earnings (Note C) ...... (565,104) -- --
Other ........................................... -- 9,835 --
--------- --------- --------
Net (loss) gain on disposition of assets ........ $ (71,867) $ 9,835 $ --
========= ========= ========
- --------------------------------------------------------------------------------
Note Q - Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At June 30, 1999, current liabilities
exceed current assets by $1,908,685. Also at June 30, 1999, the Company has a
deficit in stockholders' equity of $1,944,715. The Company has sold its systems
integration business as of May 1, 1999. Its remaining business is the licensing
of its software products. Through June 30, 1999, there has been nominal license
fee revenue generated from its software products. A vendor has filed suit to
attempt to attach the Company's assets for the collection of a $2,200,000
liability (See Note G). 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.
-28-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note Q - Going Concern (continued)
Management is seeking to attract sponsors or investors to fund its continuing
software sales and development operations. The Company intends to make payments
to vendors as the contingent payments from the sale of substantially all of its
assets are received (See Note A). There is currently no assurance as to the
amount of the contingent payments, and to whether there will be sufficient funds
to pay all creditors.
- --------------------------------------------------------------------------------
Note R - Operations of Portion of Business Sold
Effective as of May 1, 1999, 3SiH sold its systems integration business. The
Company's continuing business is the licensing of its software products. The
following are the summarized pro forma (unaudited) results of operations of the
sold systems integration business for the year ended June 30, 1999:
UNAUDITED
Net revenues $ 16,445,000
Cost of revenues 14,590,000
----------------
Gross profit 1,855,000
Selling and administrative expenses 3,937,000
(Loss) from operations (2,082,000)
Other income expense (454,000)
Net (loss) before taxes (2,536,000)
Income taxes (69,000)
Net (loss) $ (2,605,000)
================
Basic and diluted (loss) per share $ (.08)
================
- --------------------------------------------------------------------------------
-29-
3Si Holdings, Inc.
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
Note S - Fourth Quarter Results
Aggregate year-end adjustments, which increased the net loss by $1.7 million,
were recorded in the quarter ended June 30, 1999. These adjustments were
attributable to prior quarters.
In addition, unusual or infrequent items recognized in the quarter ended June
30, 1999, are as follows:
Gain on sale of substantially all assets $ 276,334
===============
Legal settlement expense $ (224,688)
===============
- --------------------------------------------------------------------------------
-30-
Item 6. Selected Financial Data
Year Ended Year Ended Six Months Year Ended Year Ended
June 30, June 30, Ended June December 31, December 31,
1999 1998 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 16,478,328 $ 29,384,507 $ 9,976,536 $ 19,007,245 $ 21,774,221
======================================================================================
Earnings (loss) from
operations $ (2,679,396) $ (21,444) $ (190,063) $ 3,590 $ (109,477)
======================================================================================
Net earnings (loss) from
continuing operations $ (3,197,545) $ (62,918) $ (275,198) $ (195,315) $ (177,977)
Discontinued operations - - 200,793 - -
--------------------------------------------------------------------------------------
Net earnings (loss) $ (3,197,545) $ (62,918) $ (74,405) $ (195,315) $ (177,977)
======================================================================================
Earnings (loss) per common share:
From continuing operations $ (.09) $ - $ (.04) $ (651) $ (593)
From discontinued operations - - .03 - -
-------------------------------------------------------------------------------------
Net earnings (loss) $ (.09) $ - $ (.01) $ (651) $ (593)
======================================================================================
Dividends per share $ - $ - $ 133 $ 319 $ 715
======================================================================================
At end of period:
Total assets $ 1,934,416 $ 8,176,572 $ 7,263,823 $ 5,349,586 $ 5,221,723
Long-term obligations - 142,948 64,502 76,060 99,496
Working capital (deficit) (1,908,685) (429,276) 1,767,402 (168,223) 166,922
Stockholders' equity (deficit) (1,944,715) 858,345 2,708,572 142,966 433,893
Operations Included
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 is accounted for
financial statement purposes as a purchase of Tyrex by 3Si, since the merger
resulted in 72% of the subsequently outstanding common stock of Tyrex being
issued to the 3Si stockholders. The financial information for the period ended
June 30, 1997, contains 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 information for
the years prior to January 1, 1997, include the results of operations for 3Si
only.
Going Concern
The selected financial data has been prepared assuming that the Company will
continue as a going concern. At June 30, 1999, current liabilities exceed
current assets by $1,908,685. Also at June 30, 1999, the Company has a deficit
in stockholders' equity of $1,944,715. The Company has sold its systems
integration business as of May 1, 1999. Its remaining business is the licensing
of its software products. Through June 30, 1999, there has been nominal license
fee revenue generated from its software products. A vendor has filed suit to
attempt to attach the Company's assets for the collection of a $2,200,000
liability. 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.
Earnings Per Share
Net loss per share for the years ended June 30, 1999 and 1998, was computed on
the basis of the weighted average number of common shares outstanding only, as
shares subject to warrants and stock options would have an anti-dilutive effect.
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 years ended December
31, 1996 and 1995, the weighted average number of shares outstanding is 300.
31
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Financial Condition
As of June 30, 1999, the Company had a working capital deficit of approximately
$1.9 million, and had negative working capital from operations of $2.4 million
for the year then ended.
As of June 30, 1999, accounts payable balances owed to two vendors are
approximately $650,000 and $2,200,000. The Company has made semi-monthly
payments through September 28, 1999, totaling $90,000 on the $650,000 balance.
This vendor has not taken any legal action to pursue collection. The vendor who
is owed approximately $2,200,000 has filed suit to attempt to attach the
Company's assets for the collection of that liability. 3SiH does not believe
that this amount is due at this time so long as 3SiH is current on interest
payments as called for in the parties' written agreement. Counsel for 3SiH
believes that it is too early to express an opinion as to whether the court will
find the liability due at this time.
The Company has sold its computer selling and consulting business as of May 1,
1999. Its remaining business, KEWi.net (Internet-based customer support) has
generated nominal revenue though June 30, 1999. The Kewi.net subsidiary received
a net capital infusion of $535,000 during FY1999. The continuing operation of
KEWi.net will require significant amounts of working capital.
The Company intends to use proceeds from the earn-out agreement associated with
the May 1, 1999, sale to pay its major creditors. 3SiH was paid $802,167 of the
purchase price at June 30, 1999. 3SiH will also be able to earn up to an
additional $2,200,000 over a three-year period based upon the contingencies set
forth in the agreement. The agreement provides for contingent payments to 3SiH
of $325,000 when key contracts are renewed. The agreement also provides for
contingent payments to 3SiH of 75% of the profits in excess of contract renewal
payments from the sold business for the first year, and 50% of the profits in
excess of contract renewal payments for the second and third years. In no event
will the purchase price of the assets sold plus contingent payments exceed
$3,000,000. Contract renewal payments of $302,167 were included in the amount
received at June 30, 1999. Profits from the sold business have not exceeded
$302,167 through September 28, 1999, and no additional contingent payments are
due to 3SiH at September 28, 1999. There is currently no assurance as to when or
if any contingent payments will be received.
3SiH is seeking to attract sponsors or investors to fund its continuing KEWi.net
operations. There is no assurance that the Company will be able to raise these
additional funds.
The Company currently has no line of credit facility in place.
Results of Operations
Status of Proprietary Software Development
During the FY1998, 3SiH completed its research and development on its first two
proprietary software products - a contact management database program and an
Internet-based customer support system (KEWi.net). Both programs operate via the
Internet. The Company completed technological feasibility of the contact
management database program in November 1997, and the KEWi.net system in January
1998. 3SiH incurred approximately $70,000 of research expense, and $239,000 of
software development costs in FY1998.
KEWi.net was introduced into the marketplace in June, 1998. The contact
management database program was deemed not to be commercially viable at that
time.
3SiH completed technological feasibility on its two-way paging (wireless
messaging) software in April 1999, and is working on its development through
June 30, 1999. The Company is in the research stage for an upgrade of its
KEWi.net software. 3SiH incurred approximately $13,000 of research expense and
$11,000 of software development costs in FY1999.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Overview
The accompanying financial information for the year ended June 30, 1998, has
been restated to correct an error in not recording all accounts payable at
year-end. The effect of the restatement was to decrease net earnings for the
year ended June 30, 1998, by $232,058 ($.00 per share).
During FY1999 3SiH exited out of the computer selling and consulting business.
The Company sold its field services division just prior to FY1999. The Company
assigned its government sales contract effective January 1, 1999, and sold the
balance of its computer selling and consulting business as of May 1, 1999. Its
remaining business is the KEWi.net system.
The current year loss is due to the decline in sales (as the Company exited out
of the computer selling and consulting business) combined with declining
margins. The Company incurred a net loss of $3,197,545 in FY1999 compared to net
loss of $62,918 in FY1998.
32
Comparative Analysis
Net sales decreased approximately $12.9 million, or 44% from the previous year.
This change is primarily the result of 3SiH exiting out of the computer selling
and consulting business. The Company sold its field services division just prior
to FY1999. The Company assigned its government sales contract effective January
1, 1999, and sold the balance of its computer selling and consulting business as
of May 1, 1999. Product sales decreased approximately $10.1 million. Revenue
from consulting and services (excluding the United States Postal Service
("USPS") sub-contract) decreased approximately $2.1 million. Revenues from the
"USPS" sub-contract (which was part of the May 1, 1999, sale) decreased
approximately $700,000. Software sales for 3SiH's remaining business (KEWi.net)
are approximately $8,000 in FY1999.
Cost of goods sold in total decreased approximately $9.6 million or 39% from the
prior year. 3SiH's gross profit percent on product sales dropped dramatically in
FY1999. The gross profit on product sales dropped to 4.9% in FY 1999. This
decrease is attributed to declining margins on commercial sales due primarily to
stiff competition and extremely low margins on sales under its government
contract. The direct costs of consulting and Internet security assessments
approximately equaled the revenues due in part to customer dissatisfaction with
these services.
Selling and administrative expenses decreased approximately $700,000 or 13% from
the previous year. This decrease is due to $1.4 million in reductions in
compensation costs as 3SiH exited out of the computer selling and consulting
business. Other selling and administrative costs increased as the Company was
unable to start reducing these costs until after the May 1, 1999, sale. Bad
debts, depreciation, amortization, and lease costs associated with an
unsuccessful conversion of the internal accounting system all increased from the
prior year.
Interest expense increased as a result of increased use of the Company's
revolving line of credit to finance its working capital needs.
At June 30, 1999, the Company had three employees, all associated with KEWi.net.
Results of Operations
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997 (unaudited)
Overview
FY1998 was the first full year of operations of 3SiH (formerly, Tyrex Oil
Company) subsequent to the May 28, 1997, merger of Tyrex and 3Si, Inc. The
Company realized a net loss of $62,918 for FY1998, versus a net loss of $297,816
for FY1997. The Company's decreased loss for FY1998 is attributable primarily to
the significant increase in sales between the two years. The Company realized
sales of approximately $29.4 million in FY1998 versus $20.3 million in the
comparable period the year before.
Additionally, the loss incurred in FY1997 is attributable primarily due to the
Company's investment in its Internet security startup business, which began in
earnest in July 1996. The Internet security division lost approximately $324,000
in FY1997. The Company reduced its Internet security workforce in May 1998, due
to the continuing losses, which the Internet security division produced. For the
FY1998, the Internet security division had incurred losses of approximately
$235,000. The services, which had been performed by the separate Internet
security division, are now being performed by various consultants employed by
the Company or subcontracted when necessary.
The Company also sold its field services division at June 30, 1998. The division
had produced losses of approximately $133,000 in the FY1998. The Company sold
the field services division to a reputable Denver organization specializing in
the field services business for $12,500, and recognized a gain on the sale for
FY1998.
Comparative Analysis
Sales increased approximately $9.1 million, or 45% from the previous year. This
change is primarily the result of increased product sales and the USPS
sub-contract. Product sales increased approximately $5.3 million due to the
Company's implementation of its solution selling methodology and use of its
recently developed contact management software within its sales force. The USPS
sub-contract sales for the year increased approximately $2.2 million. The
balance of the increase was in the Company's services sector predominantly in
its integration services in relation to its product sales.
Gross margin on hardware sales decreased from 13.4% in FY1997 to 9.3% in FY1998
reflecting continuing competitive pressures on hardware sales.
33
Comparative Analysis (continued)
At June 30, 1998, the Company had 123 employees, including 77 servicing the USPS
sub-contract in Raleigh, NC versus having had 128 with 57 servicing the USPS
sub-contract at June 30, 1997.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
(unaudited)
Overview
The statements of operations and cash flows for the six months ended June 30,
1997, include the results of operations and cash flows for 3Si for the six
months ended June 30, 1997, and the 33 days from May 28, 1997, (the date of the
acquisition) to June 30, 1997, for Tyrex. Due to the nature of Tyrex's
operations during the 33 days ended June 30, 1997, (i.e. completing the sales of
its oil and gas properties and discontinuing its oil and gas operations) the
results of Tyrex's operations are disclosed as "discontinued operations".
Tyrex realized a gain on its final disposition of oil and gas properties of
$536,700 in this 33 day period. Included in Tyrex's gain from discontinued
operations for this 33 day period were costs attributable to the acquisition of
approximately $190,000 and severance costs relating to Tyrex's remaining
employees of approximately $117,000 including accrued payroll taxes. As of June
30, 1997, Tyrex had three full-time employees. No discontinued operations are
included in the December 31, 1996 and 1995 financial statements, which reflect
only the operations of 3Si.
3Si realized a net loss from continuing operations of $275,198 during the six
months ended June 30, 1997. This loss is attributable primarily to 3Si's
continued investment in its Internet security startup business and reduced
hardware sales. The Internet security division lost $150,180 during the first
six months of 1997 attributable to its startup nature whereby revenues generated
by the Internet security division did not yet cover expenses.
Comparative Analysis
Sales were approximately $10.0 million during the six months ended June 30,
1997. Total sales were up from the same period in the previous year by
approximately $1.3 million or 14.4%. This change is primarily the result of the
USPS sub-contract, which did not begin until May 1996; and, a decline in
hardware sales between periods. The USPS sub-contract sales for the first six
months of 1997 and 1996 were approximately $2.0 million and $400,000
respectively, accounting for an increase of approximately $1.6 million. The
decline in hardware sales, which was approximately $300,000, was directly
attributable to the three 3Si co-owners' attention in merger and financing
activities. The co-owners' involvement was diverted from usual sales activities
causing the lower hardware sales during the first six months of 1997 versus the
first six months of 1996.
At June 30, 1997, the Company had 128 employees, including 57 servicing the USPS
sub-contract in Raleigh, NC and three in Wyoming versus having had 84 in total
at June 30, 1996, including 29 servicing the USPS sub-contract.
34
ITEM 11. EXECUTIVE COMPENSATION
-----------------------
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------------------------
Other Annual SAR Options
Name and Principal Position Year Salary ($) Bonus ($) Compensation(1) (#) (#) (2)
- ------------------------------------------------------------------------------------------------------
Frank W. Backes 1999 $ 110,000 --- --- --- ---
President and Chief Executive 1998 110,000 --- --- --- ---
Officer 1997 37,500 --- --- --- 13,200
Frederick J. Slack 1999 $ 110,000 --- --- --- ---
Executive Vice President, 1998 110,000 --- --- --- ---
1997 37,500 --- --- --- 13,200
Felipe L. Valdez 1999 $ 91,667 --- --- --- ---
Secretary 1998 110,000 --- --- --- ---
1997 37,500 --- --- --- 13,200
<FN>
(1) Perquisites and other personal benefits or property did not, in aggregate,
exceed $50,000 or 10% of the total compensation.
(2) 3Si was a subchapter S corporation prior to its acquisition by Tyrex.
Amounts indicated are distributions to the three officers of 3Si named
above, made to them in their capacities as shareholders.
</FN>
Employment Agreements. Separate employment agreements have been signed with
each of the officers, Frank W. Backes and Frederick J. Slack. Pursuant to the
agreements, the Company compensated each of the individuals $110,000 in fiscal
1999. 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. Mr. Felipe L. Valdez since, May 1999, has been employed
by Technology Integration Group. He remains a director, and a principal
shareholder of the company.
Advances to officer/stockholders of $162,395 that were fully reserved and
recorded as an expense as of June 30, 1999 are not considered compensation.
Option/SAR Grants Table. There were no stock options granted to officers
during the fiscal year ended June 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
AND MANAGEMENT
--------------
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 Percent
Owned(1)
-------------------------------- --------------- ---------------
Frank W. Backes 9,387,777 27.7%
6886 S. Yosemite Street
Englewood, CO 80112
-------------------------------- --------------- ---------------
Frederick J. Slack 9,387,777 27.7%
6886 S. Yosemite Street
Englewood, CO 80112
-------------------------------- --------------- ---------------
Felipe L. Valdez 9,387,779 27.7%
6886 S. Yosemite Street
Englewood, CO 80112
-------------------------------- --------------- ---------------
Tom N. Richardson 188,721 Less than 1.0%
777 N. Overland Trail, #101
Casper, WY 82601
-------------------------------- --------------- ---------------
Doris K. Backus 53,570 Less than 1.0%
777 N. Overland Trail, #101
Casper, WY 82601
-------------------------------- --------------- ---------------
Directors and executive officers as a 28,405,624 (s) 83.5%
group (including those named above)
<FN>
(1) Beneficial ownership results in each case from the possession
of sole or shared voting and investment power with respect to
the shares.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Amounts due from 3Si Holdings, Inc. stockholders were $162,395 and
$79,882 at June 30, 1999 and 1998, respectively. This June 30, 1998 amount is
included in other current assets. Due to the uncollateralized nature of these
receivables and the going concern consideration, the June 30, 1999 balance of
$162,395 has been fully reserved and recorded as an expense.
Other than as set forth herein, no officer, director or principal
shareholder of 3Si has or proposes to have any direct or indirect material
interest by security holdings, contracts or otherwise in the Company or in any
assets proposed to be acquired by the Company or in any purchase, the value of
which will be affected by the operations of the Company.