<PAGE>
Amendment No. 2 as Filed with the
Securities and Exchange Commission on June 17, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
LANSTAR SEMICONDUCTOR INC.
UTAH 87-0365672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Maxie R. Smith
Chairman and Chief Executive Officer
13707 Gamma Road
Dallas, Texas 75244
(Address of principal executive offices) (Zip Code)
Lanstar Semiconductor Inc.'s telephone number, including area code, is
(972) 980-2131
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
- - ------------------------ ------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK .001 PAR VALUE
(Title of Class)
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TABLE OF CONTENTS
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Page No.
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ITEM 1. BUSINESS................................... 1
ITEM 2. FINANCIAL INFORMATION...................... 12
ITEM 3. PROPERTIES................................. 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................... 23
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS........... 25
ITEM 6. EXECUTIVE COMPENSATION..................... 29
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................... 34
ITEM 8. LEGAL PROCEEDINGS.......................... 35
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON LSI'S
COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................... 35
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.... 36
ITEM 11. DESCRIPTION OF LSI'S SECURITIES TO BE
REGISTERED................................. 40
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.. 41
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 42
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................. 42
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.......... 42
SIGNATURE PAGE............................. 44
</TABLE>
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PART I
ITEM 1. BUSINESS
SUMMARY OF BUSINESS
Lanstar Semiconductor Inc. ("LSI"), through its subsidiaries, assembles
and/or purchases and distributes a full product line of personal computer ("PC")
memory components, central processing units ("CPUs"), subsystems, peripherals,
integrated circuits ("IC's") and PC systems to small computer retailers, value-
added resellers ("VARs"), system integrators, memory and computer product
distributors, corporations, and consumers.
LSI is also developing semiconductor integrated circuit ("IC")
products. LSI has expanded its design effort from memory products to include
ASIC and linear product design. These products are currently targeted
specifically for the PC computer market. All semiconductor products are planned
to be sold as packaged devices. LSI anticipates eventually incorporating its
designed memory device products into its PC subsystems and complete PC systems
to further enhance brand name quality and reliability while reducing product
cost.
GENERAL DEVELOPMENT
The following discussion outlines the development of and principal
products and services provided by LSI, its predecessors and its current and
former subsidiaries.
Lanstar Semiconductor Inc. ("LSI")
- - ----------------------------------
LSI is a holding company organized functionally with each subsidiary
specializing in the marketing, distribution, design and/or assembling of PC
components, CPUs, subsystems, peripherals and complete PC systems.
Lanstar Semiconductor Inc.'s predecessor, Lanstar Computer Corporation,
("LCC") was organized by Jenalong Holdings, Ltd., a British Virgin Islands
Corporation, owned by Mr. Maxie R. Smith, LSI's President, Chairman, and Chief
Executive Officer, and Mr. Dennis V. Poole, a former Director of LCC and former
Managing Director of Lanstar Hong Kong Limited ("LHK"), as a Texas corporation
in September 1993 for the purpose of distributing PC workstations, memory, and
subsystems.
In November 1994, LCC organized Simmco Memory Products, Inc.
("Simmco"), a Texas corporation, for the purpose of creating a subsidiary
focusing on the distribution of SIMM and other memory products.
In June 1995, LCC organized Lanstar Semiconductor Corporation ("LSC"),
a Texas corporation, as a wholly-owned subsidiary, to design, develop, and
eventually manufacture and distribute proprietary semiconductor memory DRAM, IC,
and SIMM components.
During 1995, LCC sold additional securities to outside investors.
In September 1995, LCC spun-off LSC. This spin-off was accomplished
through a dividend of 5,183,333 shares of LSC stock. The transaction resulted in
LCC's shareholders receiving, as a dividend, LSC common stock. This resulted in
LCC shareholders holding common stock in LCC, which had little to no assets, as
well as common stock of LSC.
Back in October 1980, Kazmir Kliffs, Inc. was organized as a Utah
corporation. During November 1995, Kazmir Kliffs, Inc. changed its name to
Lanstar Semiconductor Inc. and entered into an agreement with LSC to issue up to
8,500,000 common shares of LSI to the stockholders of LSC and debenture holders
of debentures that were convertible into LSC common stock in exchange for all
the outstanding common shares and all the outstanding convertible rights to
common shares of LSC. By virtue of this transaction, LSC became a wholly-owned
subsidiary of LSI. Until its purchase of LSC in 1995, Kazmir Kliffs, Inc. had no
activity.
Originally, the management and shareholders of LCC intended to dissolve
LCC; however, this never took place. By December 31, 1995, LCC was essentially a
dormant corporation.
LCC and its wholly-owned subsidiary, Simmco, lost a great deal of money
and, as resources were depleted, LCC and Simmco's operations dwindled down to
nothing. Eventually no business at all was being conducted and these companies
became dormant. Prior to 1995, there was not a clear delineation between the
operations of, or in the financial accounting for, LCC and LSC. As investing
funds went into LSC/LSI, these entities became more active and fulfilled the
operational roles that were previously fulfilled by LCC and Simmco. LCC and
Simmco remained separate entities from LSI/LSC and were never legally combined
in any type of merger or reorganization, although they were under common
control.
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CURRENT SUBSIDIARIES
Lanstar Semiconductor Corporation ("LSC")
- - -----------------------------------------
LSC was organized in June 1995 as a Texas corporation and a wholly-
owned subsidiary of LCC. Various intangible assets with no historical cost were
distributed from LCC to LSC. LCC then spun out the common shares of LSC to the
shareholders of LCC. Both LCC and LSC were controlled by the following:
LCC SHAREHOLDERS BEFORE AND AFTER SPIN-OFF
Shareholder Name Shares Owned
-------------------------------------
*Jenalong Holdings, Ltd. 3,900,000
Maxie Smith 500,000
Steve Porter 100,000
Henry A. Schwartz 68,513
Barry Schwartz 68,512
Marty Clare 68,513
Barry Clare 68,512
Outside Investors 409,283
---------
5,183,333
=========
LSC SHAREHOLDERS AFTER SPIN-OFF
Shareholder Name Shares Owned
-------------------------------------
*Jenalong Holdings, Ltd. 3,900,000
Maxie Smith 500,000
Steve Porter 100,000
Henry A. Schwartz 68,513
Barry Schwartz 68,512
Marty Clare 68,513
Barry Clare 68,512
Outside Investors 409,283
---------
5,183,333
=========
*Jenalong Holdings, Ltd. is owned by Mr. Maxie R. Smith and Mr.
Dennis V. Poole
During November 1995, LSI entered into an agreement with LSC to issue
up to 8,500,000 common shares of LSI to the stockholders of LSC and debenture
holders of debentures that were convertible into LSC common stock in exchange
for all the outstanding common shares and all the outstanding convertible rights
to common shares of LSC. By virtue of this transaction, LSC became a wholly-
owned subsidiary of LSI.
Immediately after the transaction merging LSI and LSC the shareholders
of LSI were as follows:
STOCKHOLDER GROUP SHARES OWNED
----------------- ------------
Former LSI Stockholders 1,500,000
(This group consisted of approximately
335 shareholders.)
Former LSC Stockholders 5,183,333
(See table above)
LSI has recently restructured such that LSC is now the technology
design and assembling subsidiary. As a result, LSC is currently responsible for
design, development and assembling of, SIMM memory products, computer
components, computer subsystems, ICs and finished PC computer systems. LSC will
eventually manufacture and subcontract manufacture all PC component products it
designs internally.
Lanstar Hong Kong Limited ("LHK")
- - ---------------------------------
During December 1996, LSI acquired all the outstanding stock of LHK
from Jenalong Holdings, Ltd., an affiliate owned by Mr. Maxie R. Smith,
President, Chairman, and Chief Executive Officer of LSI, and Mr. Dennis V.
Poole, a former Managing Director of LHK and former Director of LCC. During May
1998, LSI sold Twenty Percent of LHK's issued and outstanding common stock to
Mrs. Hsien Chih Chang, the wife of Mr. David Chang, Managing Director and
Director of LHK, in consideration for establishing term lines of credit for
procurement of PC components from OEM suppliers in mainland China. LHK will be
responsible for procuring raw materials necessary for LSC's eventual IC/SIMM
manufacturing operations. Future plans include expanding procurement to source
primarily PC related components including subsystems and peripherals to further
support the assembling and sales operations of LCP, CTI and LSC.
Lanstar Computer Products, Inc. ("LCP")
- - ---------------------------------------
LCP was organized by its parent, LSI, as a Texas corporation in August
1997 and is a wholly-owned subsidiary of LSI. Prior to incorporation, the
business activities of LCP were performed as a division of LSI. LCP is a full
line PC memory, CPU, subsystem, peripherals and complete PC systems wholesale
distributor with limited distribution of software. LCP markets its products
primarily in the U.S. domestic market to small computer retailers, VARs, System
Integrators and other memory and computer products distributors. LCP is in the
process of developing an international sales program targeted to the Pacific
Rim, European and South American markets.
Lanstar Systems Technology, Inc. ("LST")
- - ----------------------------------------
LST was organized by its parent, LSI, as a Texas corporation in October
1997 and is a wholly-owned subsidiary of LSI. LST was originally organized to
assemble and distribute nonbranded, private label and Lanstar brand name PC
computers
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to wholesalers, computer retailers, corporations and consumers. LST also
provided ongoing repair and customer services.
LST has ceased all activities which previously consisted of assembling
and distribution operations. LST's assembling functions have been transferred to
LSC and LST's distribution functions have been transferred to Celex Technology,
Inc. LST has not been dissolved because LSI plans to possibly use it, in the
future, as a systems business for specialty electronics applications. For the
forseeable future, LST will exist purely as a shell with no operating assets,
capital, or products.
LST is considered a current subsidiary because LSI holds 100% of LST's
issued and outstanding common stock.
Celex Technology, Inc. ("CTI")
- - ------------------------------
CTI was organized March 19, 1998, as a Texas corporation and is a
wholly-owned subsidiary of LSI. CTI distributes a broad base of PC computer
related products and systems primarily to consumer markets through direct sales
with increasing focus on the internet as the primary medium.
PREDECESSOR
Lanstar Computer Corporation ("LCC")
- - ------------------------------------
LCC was organized by Jenalong Holdings, Ltd., a British Virgin Islands
Corporation, owned by Mr. Maxie R. Smith, LSI's President, Chairman, and Chief
Executive Officer, and Mr. Dennis V. Poole, a former Director of LCC and former
Managing Director of Lanstar Hong Kong Limited ("LHK"), as a Texas corporation
in September 1993 for the purpose of distributing PC workstations, memory, and
subsystems.
Simmco was organized as a wholly-owned subsidiary of LCC in November
1994. The organization was accounted for as a purchase. The purchase price was
nominal and no assets or liabilities were transferred from LCC to Simmco. At the
time of formation of Simmco, the major stockholder of LCC was Jenalong Holdings,
Ltd.
In June 1995, LCC organized LSC as a wholly-owned subsidiary, to
design, develop, and eventually manufacture and distribute proprietary
semiconductor memory DRAM, IC, and SIMM components.
During 1995, LCC sold additional securities to outside investors.
In September 1995, LCC spun-off LSC. This spin-off was accomplished
through a dividend of 5,183,333 shares of LSC stock. The transaction resulted
in LCC's shareholders receiving, as a dividend, LSC common stock. This resulted
in LCC shareholders holding common stock in LCC, which had little to no assets,
as well as common stock of LSC. Originally, the management and shareholders of
LCC intended to dissolve LCC; however, this never took place. By December 31,
1995, LCC was essentially a dormant corporation.
LCC and its wholly-owned subsidiary, Simmco, lost a great deal of money
and, as resources were depleted, LCC and Simmco's operations dwindled down to
nothing. Eventually no business at all was being conducted and these companies
became dormant. Prior to 1995, there was not a clear delineation between the
operations of, or in the financial accounting for, LCC and LSC. As investing
funds went into LSC/LSI, these entities became more active and fulfilled the
operational roles that were previously fulfilled by LCC and Simmco. LCC and
Simmco remained separate entities from LSI/LSC and were never legally combined
in any type of merger or reorganization, although they were under common
control.
FORMER SUBSIDIARIES
Southwest Memory International, Inc. ("SMI")
- - --------------------------------------------
SMI was organized as a Texas corporation in January 1996. During
November 1996, LSI acquired all the outstanding stock of SMI from World Data
Limited, a Cayman Islands corporation, and accounted for the acquisition as a
purchase. LSI retained SMI's previous management in order to secure a smooth
transition of management and to retain the advantage of its expertise and
experience in operating SMI. Due to differences of opinion relating to operating
methods which, in the opinion of LSI's management could not be reconciled, SMI
was subsequently resold, effective October 13, 1997, to its original
shareholder. There was no gain or loss reflected on the purchase of SMI and
subsequent resale.
While owned by LSI, SMI served as major distributor of semiconductor
SIMMs and CPUs to a customer base of approximately 3,517 computer retailers,
VARs and systems integrators. SMI distributed approximately 90% of its products
in the United States market with the remaining 10% of sales in European and
select South American countries.
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PRODUCTS
Initially LSI was primarily a computer memory products wholesaler to
VARs, system integrators, wholesale distributors and small computer retailers.
However, in mid-1996, LSI began an ongoing expansion of its product line and now
distributes a full line of PC components, subsystems, ICs, peripherals, and
DRAMs, as well as complete PC systems in addition to CPUs and memory products.
Prior to mid-1996, semiconductor CPU's and memory products dominated
LSI's product mix, generating upwards of 95% of all revenues. Historically,
LSI's revenues were generated approximately as follows:
95% Distribution of non-Lanstar PC memory, CPUs, PC subsystems and
peripherals
5% Distribution of LSI manufactured memory components
LSI's revenues in the fiscal year ended December 31, 1997 were generated
approximately as follows:
75% Distribution of non-LSI PC memory, CPUs, PC subsystems and peripherals
25% Distribution of complete PC systems
For the period January 1, 1998 through the date of this filing, LSI's revenues
were generated approximately as follows:
43% Distibution of non-LSI PC memory, CPUs, PC subsystems and peripherals
57% Distribution of complete PC systems
LSI DRAMs/OTHER IC's
- - --------------------
The initial 4 Meg (1X4) DRAM, which was acquired from Mosaid Technology
in July 1995 for a fee of $500,000, was redesigned by LSI and put into
preproduction at Sony Semiconductor Company of America, LSI's subcontract
foundry. During the course of this development cycle, the market for 4 Meg (1X4)
DRAM product declined to a point where LSI's management chose not to proceed to
production with this product. The principal reason for the decline in the market
for the 4 Meg (1x4) DRAM product was that the product was completing its life
cycle relative to computer applications. LSI completed the development of its 16
Meg (4X4) DRAM which was originally scheduled for production and distribution in
early 1998. Management has chosen not to proceed to production with this product
for the same reason Management decided not to proceed with the 4 Meg (1X4) DRAM.
The product's lifecycle was nearing completion due to ever increasing PC memory
demands. Consequently, the PC market is increasing its demand for 64 Meg and 256
K product with declining demand for 16 Meg product. In addition, SDRAM products
are increasingly demanded because they meet higher speed requirements needed to
support faster (CPU) microprocessor requirements.
Management intends to license a 64 Meg DRAM design and produce 64 Meg
SDRAM for distribution and incorporation into LSI's PC systems. In addition,
Management is now directing all-engineering efforts to LSI's 256 K SDRAM product
line and other, less complex PC related ICs.
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LSI is also currently developing product lines for both standard and
proprietary SIMMs designed primarily for PC applications. The developed
products, designed for high quality, reliability and low cost, are now scheduled
for production and distribution in the second half of 1998. The Lanstar-designed
SIMM products are directed toward two specific market segments. The first and
largest potential market is for computer memory upgrades and OEM PC
manufacturing applications. The second product line is for proprietary memory
products directed primarily for computer applications. These products will be
sold for factory replacement or upgrades for major original equipment
manufacturers ("OEM") such as Compaq, HP, Packard Bell, etc. Production of
proprietary SIMM products is now planned for second quarter by subcontract
manufacturing in the United States and mainland China. Plans are currently being
formalized to produce SIMM products in the company's new facility in Dallas,
Texas. Production will entail mounting DRAMS and/or SDRAMS and other small
supportive components on printed circuit boards which will be tested to meet
specific electrical specifications and then packaged for United States and
international distribution.
Subcontract SIMM production is currently scheduled to commence in
August, 1998. Internal production at the Dallas facility is currently scheduled
for September, 1998.
PC Memory Devices, CPUs, Subsystems and Peripherals
- - ---------------------------------------------------
Currently, most of these products are purchased domestically from
qualified high volume, low cost vendors. LSI is expanding its supplier base in
the Pacific Rim through the development of strategic verbal alliances. LSI
received its first shipment of computer mother boards in April 1998 from its
prime supplier in mainland China.
PC Systems
- - ----------
LSI is currently producing standard and multimedia PCs for home and
office applications. PCs, including work stations, low and high-end systems and
file servers, are sold as stand-alone or networked systems as determined by
customer needs. LSI is currently purchasing all PC components and completing the
assembly, test, burn-in and required quality control inspection required to
produce high quality computer systems.
PC computer production has now been shifted to the Company's new
facility in Dallas, Texas. Production entails purchasing all PC components,
subsystems and completing the assembly, test, burn-in, and required quality
control inspections needed to produce high quality computer systems. Specific
cost reduction programs are planned to reduce component and system costs
throughout calendar 1998 and 1999 by integrating Lanstar developed SIMM memory
products and other PC related integrated circuits into finished PC component
and subsystems products. Management anticipates integration of these Lanstar
developed components will result in reduced component count and increased
quality and reliability of PC systems and subsystem products.
RAW MATERIALS
LSI ICs and SIMM Products
- - --------------------------
Raw materials utilized by LSI's semiconductor subcontract silicon wafer
manufacturer must meet exacting product specifications. Semiconductor wafer
subcontractors (foundries) generally use multiple sources of supply but there
are only a limited number of suppliers capable of delivering certain raw
materials that meet LSI's specifications. The availability of critical raw
materials, such as silicon wafers are currently sourced by Sony Semiconductor
Company of America, LSI's subcontract foundry.
Photo masks of LSI's future IC products are normally purchased directly
by LSI from its mask vendor. Management anticipates that these photo masks
should be in adequate supply and not present any shortages in the near future.
Conventional SIMM and COB SIMM products could be affected due to possible
shortages in the supply of DRAM die and standard DRAM packaged devices. Any
shortage would be due to the lack of multiple sourcing from critical vendors by
LSI rather than overall industry-wide raw material shortages.
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PC Memory, CPUs, Subsystems and Peripherals
- - -------------------------------------------
The majority of these products are sourced from critical domestic high
volume, low cost vendors. Although strategic plans to expand critical vendors
in the Pacific Rim are on schedule, adequate suppliers may not be successfully
developed in a timely fashion to meet current growth plans. Management does not
believe that there will be an industry-wide raw material shortage relative to
these products.
Currently, the company sources significant products from a large
variety of available major United States wholesalers. Management anticipates
that new direct factory sources of supply, primarily from mainland China, will
be developed formally, and thereby reduce, the need to make purchases from
United States wholesalers. In addition, subcontract long term relationships are
being sought and negotiated to support semiconductor manufacturing in the United
States, Korea, and Japan. Management anticipates these subcontract manufacturing
programs combined with direct factory/OEM procurement will strengthen sources of
supply and reduce product costs. The loss of any major United States wholesaler
will not have a material impact on the Company's results of operations and
financial condition. The current market has adequate sources of wholesale
computer electronics. In the event LSI loses a primary source, other sources
could fill the need although cost could be higher until relationships are
established.
RESEARCH AND DEVELOPMENT/INTELLECTUAL PROPERTY
LSI DRAM and SIMM Products
- - --------------------------
Rapid technological change and intense price competition place a
premium on both new product and process development efforts. LSI's continued
ability to compete in the semiconductor memory market will depend in part on its
ability to continue to develop technologically advanced products and processes,
of which there can be no assurance.
LSI's research and development efforts are focused principally on
completing the design of its 64 Meg SDRAM and initial PC related ICs. Future
process development efforts will be directed toward developing .25 and .12
micron manufacturing technology, as required. Product development efforts will
also be directed toward 64 Meg SDRAM and Rambus design architecture for
potential application to LSI's 64, 256 and 1,024 Meg devices.
LSI's initial 4 Meg DRAM design was purchased from Mosaid Technologies
Incorporated on July 27, 1995. The decision to purchase a production proven
design helped LSI develop its own internal semiconductor product design
capability in a more timely fashion. This design capability is now established.
LSI has completed the redesign of MOSAIDS 4 Meg DRAM and the original design of
its 16 Meg DRAM and is currently designing future memory 1,256K SDRAM, ASIC and
Linear products. LSI plans to start production on selected designs during the
second half of 1998.
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LSI plans to continue development of its Chip-on-Board ("COB")
technology during the first half of 1999. This emerging technology in low-cost
packaging will also be utilized, if successfully developed, for packaging of
high pin count ICs and subsystem modules.
Research and development expenses vary primarily with the number of
wafers and personnel dedicated to new product and process development. Total
research and development (R&D) expenditures for LSI from inception through 1995
were $655,704. R&D expenses for Fiscal Year 1996 were $476,055 and expenses
for fiscal year 1997 increased to $1,886,811. R & D expenses for the period
ended March 31, 1998, were $137,411.
Lanstar PC Systems
- - ------------------
LSC currently acquires all pc components and sub systems from
wholesalers and OEM suppliers. To date, the Company has not developed
intellectual property rights in this area.
PATENTS AND COPYRIGHTS
Patents and copyrights are of great importance in the PC electronics
industry (especially for memory products) due to the technical nature and short
life cycles of the products. The semiconductor industry has experienced a
substantial amount of litigation regarding patent and other intellectual
property rights. Litigation may be necessary to enforce any future patents
issued to LSI or to protect trade secrets or intellectual property owned by LSI.
LSI may, in the future, receive communications alleging that the technology used
by LSI in the manufacture of some or all of its products infringes on product or
process technology rights held by others.
LSI currently does not own any product or process patents. However, two
potential semiconductor processes and one SIMM test procedure developed by LSI
are in various stages of development and LSI anticipates filing related patent
applications by the end of 1998.
LSI intends to pursue patent and mask work copyright protection for its
semiconductor process technologies and product designs. The process of seeking
patent protection can be long and expensive, and there is no assurance that
patents will be issued from future applications or that, if patents are issued,
they will be of sufficient scope or strength to provide meaningful protection or
any commercial advantage to LSI. In
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particular, there can be no assurance that any future patents held by LSI will
not be challenged, invalidated or circumvented.
LSI also relies on trade secret protection for its technology, in part
through confidentiality agreements. There can be no assurance that these
agreements will not be breached, that LSI will have adequate remedies for any
breach or that LSI's trade secrets will not otherwise become known to or
independently developed by others. In addition, the laws of certain other
countries in which LSI's products are or may be developed, manufactured or sold
may not protect LSI's products and intellectual property rights to the same
extent as do the laws of the United States.
TECHNOLOGY AGREEMENTS
LSI has entered into two cross-licensing agreements. On November 17,
1995, LSC entered into a non-exclusive licensing agreement with Texas
Instruments Incorporated for the right to manufacture and distribute ICs
commonly recognized in the industry by any of the following acronyms: DRAMs
(including Dynamic Random Access Memory Devices, Synchronous Dynamic Random
Access Memory Devices, Video RAMs and Field or Frame memories commonly referred
to as FRAMs); SRAMs; ROMs; PROMs; EPROMs; Flash EPROMs; or EEPROMs for a 10%
royalty on net sales billed for DRAMs and 5% of net sales billed for SRAMs,
ROMs, PROMs, EPROMs, Flash EPROMs or EEPROMs sold in the United States, Japan or
any European country. The license with Texas Instruments Incorporated expires
on December 31, 2000, but the contract provides that both parties are bound to
enter into good faith negotiations to renew the license upon request of either
party. Management believes that a renewal of the license is likely.
On July 27, 1995, LSC entered into an agreement with Mosaid
Technologies Incorporated for a $500,000 fee where Mosaid Technologies
Incorporated agreed to provide an engineering design for a 4 Meg DRAM in x1 and
x4 format. The Mosaid agreement also granted a non-exclusive license to use the
design to the extent necessary to manufacture and distribute the product in
exchange for an annually graduated percent of net sales of the product beginning
with 1.5% in the 12-month period commencing on the date LSC achieves production
volume and ending at 4% of net sales six years after production volume commences
and thereafter.
Management decided not to proceed with the Mosaid 4 Meg DRAM to
production which had a significant impact on sales revenue for 1997 and 1998,
year-to-date. In retrospect, the decision not to produce the product was correct
due to the continued erosion of the 4 Meg market. LSI could not have achieved
profitability on the product line even though its cost was competitive. This
technology or a variation will continue to be an important factor in the
development of the 64 Meg and 256K DRAM scheduled for future development and
production.
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Notwithstanding Management's beliefs that the above licenses will be
renewed, Management is unable to predict with 100% accuracy whether these
licenses can be renewed on terms acceptable to LSI.
LSI entered into a Foundry Production Agreement with Sony Semiconductor
Company of America dated June 27, 1996, which terminates on June 27, 1999, or
earlier on three months prior written notice from Sony Semiconductor Company of
America. Sony Semiconductor Company of America agreed to manufacture
semiconductor wafers designed by LSI. In addition, Sony Semiconductor Company of
America agreed to purchase Silicon substances necessary for the manufacture of
wafers.
LSI entered into a Semiconductor Process Development Agreement
with Sony Semiconductor Company of America which commenced April 15, 1997, and
terminated December 31, 1997. This agreement was based on the companies jointly
developing 0.35 micron processes for DRAM production for both 4 and 16 Meg DRAM
products which has now been successfully developed. As a result of achieving
this critical technology objective, LSI plans to continue its process
development as a function of semiconductor sales.
As of April 1998, LSI has chosen not to renew the Development agreement
with Sony Semiconductor. LSI's engineering staff believes that its current
developed process technology which was co-developed with Sony is adequate to
support planned future DRAM/SDRAM production. In the event that LSI is not
successful in negotiating a long-term technology relationship with Sony, LSI
believes that it will be able to establish a similar process development
activity with another semiconductor subcontractor.
EMPLOYEES
As of June 16, 1998, LSI had 48 full-time & 1 part-time employees.
Employment levels vary depending on market conditions and the amount of research
and development activities pursued. LSI is dependent upon a limited number of
key management and technical personnel. A number of LSI's employees are highly
technically skilled engineers and LSI's continued success will depend in large
part upon its ability to retain and attract other such employees. None of LSI's
employees are represented by labor organizations; LSI has never had a work
stoppage or slowdown as a result of labor issues; and LSI considers relations
with employees to be good. The addition of the 1997 Stock Option Plan, along
with other company benefits, has enhanced employees' interest in remaining with
LSI. In the future, LSI is planning to add further incentives to attract and
retain high quality personnel.
COMPETITION
LSI Memory Products
- - -------------------
LSI's semiconductor memory products will experience intense competition
from a number of substantially larger foreign and domestic companies including:
Fujitsu, Ltd.; Hitachi, Ltd.; Hyundai; Micron Technology, Inc.; Mitsubishi
Electric Corp.; Motorola, Inc.; NEC Corp.; Samsung Semiconductor, Inc.; LG
Semicon; Texas Instruments Incorporated; and Toshiba Corporation. LSI will be at
a disadvantage in competing against larger manufacturers with significantly
greater capital resources or manufacturing capacities, larger engineer and
employee bases, larger portfolios of intellectual property and more diverse
product lines. LSI's larger competitors may also have long-term advantages in
Page 9
<PAGE>
research and new product development and in their ability to withstand current
or future downturns in the semiconductor memory market. In addition, LSI
believes its competitors have sufficient resources and manufacturing capacity to
influence market pricing.
LSI's semiconductor memory products are commodity products, the price
and profitability of which are highly dependent on overall supply-demand
dynamics in the industry. Historically, the semiconductor memory industry has
experienced decline in average selling prices commensurate with the industry's
ability to reduce cost per megabit.
Personal Computer Systems
- - -------------------------
Competition in the PC industry is based upon performance, price,
reliability, service and support. The PC industry is highly competitive and has
been characterized by intense pricing pressure, rapid technological advances in
hardware and software, frequent introduction of new products, low gross margin
percentages and rapidly declining component costs.
Any general decline in demand, or a decline in the rate of increase of
demand, for PC systems could increase price competition which would have a
material adverse effect on LSI's business and results of operations. To remain
competitive, LSI must introduce new products, price its products and offer
customers lead times comparable to its competitors. LSI's ability to continue
to produce competitively priced products and to establish and maintain
acceptable gross margin percentages will depend on LSI's ability to establish
high levels of sales and contain and reduce assembling and component costs
through volume manufacturing and/or vertical integration of LSI memory products,
subsystems and other miscellaneous components. Any failure by LSI to transition
to new products effectively or to accurately forecast demand for its products
may adversely affect LSI's business and result of operations.
LSI competes with a number of PC manufacturers which market their
products directly to consumers, including Dell Computer, Inc. and Gateway 2000,
Inc. LSI also competes with PC manufacturers, such as Apple Computer, Inc.;
Compaq Computer Corporation; Hewlett Packard Company; International Business
Machines Corporation; and Toshiba Corporation, which have traditionally sold
their products through national and regional distributors, dealers, VARs, retail
stores and direct sales. Many of LSI's PC product competitors offer broader
product lines,
Page 10
<PAGE>
have substantially greater financial, technical, marketing and other resources
than LSI and may enjoy access to more favorable component volume purchasing
arrangements than does LSI.
PC Memory, CPUs, Subsystems and Peripherals
- - -------------------------------------------
The PC industry is characterized by rapid technological change,
relatively short product life cycles, frequent product introductions and
enhancements, difficult product transitions and volatile market conditions.
LSI targets small to medium size wholesalers and small PC retailers in
the domestic PC industry. As LSI expands its target market to include mid-size
wholesale and retail distributors, LSI may be at a disadvantage in competing
against larger distributors such as Ingram Micro, TechData, Merisel and
Gates/Arrow. These larger distributors typically buy directly from major
manufacturers and, as a result, bring very competitive pricing and payment terms
to the marketplace.
CUSTOMERS
LSI does not have any customer which in the aggregate purchases
products equal to or greater than 10% of LSI's revenues.
WORKING CAPITAL PRACTICES
LSI's inventory needs are financed through private sources of capital
net terms with selected vendors and proceeds from the sale of products. LSI
currently does not have a line of credit with a financial institution.
BACKLOG ORDERS
LSI does not have any material backlog orders. LSC plans to assemble
new Lanstar IC and SIMM products by the second half of 1998. Consequently, LSC
does not currently have any material backlog orders. LCP does not have any
material backlog orders due to the nature of the business. Orders are received
via telephone and fax on a daily basis and maximum effort is made to fill them
within 24 to 48 hours. LST operations have ceased and been transferred to LSC
and CTI. CTI averages a turnaround of approximately 5-6 days on customer orders
for its personal computer products. Consequently, it does not have any material
backlog orders.
Page 11
<PAGE>
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Government regulations impose various environmental controls on the
discharge of chemicals and gases used in LSI's semiconductor subcontract
manufacturing processes. LSI currently subcontracts all semiconductor
manufacturing demands to Sony Semiconductor Company of America. To management's
knowledge, compliance with federal, state and local provisions enacted or
adopted for protection of the environment has had no material effect upon LSI's
operations.
ITEM 2. FINANCIAL INFORMATION
Selected Financial Data
- - -----------------------
The following selected financial data for the periods ended March 31,
1998, and March 31, 1997 is derived from reviewed financial statements of LSI.
The following selected financial data for the year ended December 31, 1997, is
derived from audited consolidated and combined financial statements of LSI. The
following selected financial data for the years ended December 31, 1993,
December 31, 1994, and December 31, 1995 is derived from unaudited financial
statements of LSI.
The selected financial data for LSI and subsidiaries is combined with
the selected financial data for LCC and subsidiary as financial statements of
enterprises under common control/management.
The data should be read in conjunction with the consolidated and
combined financial statements and selected notes attached as exhibits in Item 15
and the following Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Page 12
<PAGE>
FINANCIAL INFORMATION
OF LSI/LCC
CONSOLIDATED AND COMBINED
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 655 $ 2,432 $ 3,067
Cost of goods sold (631) (2,351) (3,033)
-------- -------- -----------
Gross profit 24 81 34
Selling, general and administrative (152) (356) (508)
Research and development -0- -0- (656)
Bad debt expense (13) (29) (43)
Other income (expense) (2) (2) (12)
-------- -------- -----------
Net loss from continuing operations
before income tax (143) (306) (1,185)
Provision for income tax -0- -0- -0-
-------- -------- -----------
Net loss from continuing operations (143) (306) (1,185)
Income from discontinued operations (SMI) -0- -0- -0-
-------- -------- -----------
Net Loss $ (143) $ (306) $(1,185)
======== ======== ===========
Allocated to LCC $ (143) $ (306) $ 3
======== ======== ===========
Allocated to LSI $ -0- $ -0- $(1,188)
======== ======== ===========
LSI loss per share from
continuing operations $ (0.16)
===========
LSI income per share from discontinued
operations (SMI) $ -0-
===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance sheet
Current assets $ 16 $ 22 $ 51
Total assets 88 132 335
Current liabilities 116 365 1,565
Long-term liabilities -0- -0- -0-
Stockholders' equity (28) (233) (1,230)
</TABLE>
Page 13
<PAGE>
FINANCIAL INFORMATION
OF LSI/LCC
CONSOLIDATED AND COMBINED
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31, March 31, March 31,
1996 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 5,765 $ 7,442 $ 2,239 $ 1,236
Cost of goods sold (5,507) (6,964) 1,977 998
------- ------- ------- -------
Gross profit 258 478 262 238
Selling, general and administrative (1,019) (2,240) (858) (398)
Research and development (476) (1,887) (137) (122)
Bad debt expense -0- (60) (1) -0-
Other income (expense) (7) (76) -0- (2)
------- ------- ------- -------
Net loss from continuing operations
before income tax (1,244) (3,785) (734) (284)
Provision for income tax -0- -0- -0- -0-
------- ------- ------- -------
Net loss from continuing operations (1,244) (3,785) (734) (284)
Income from discontinued operations (SWMI) (31) (74) -0- 364
------- ------- ------- -------
Net Loss $(1,213) $(3,859) (734) 80
======= ======= ======= =======
Allocated to LCC $ (9) $ -0- -0- -0-
======= ======= ======= =======
Allocated to LSI $(1,204) $(3,859) (734) 80
======= ======= ======= =======
LSI loss per share from
continuing operations $ (0.09) $ (0.09) $ (.01) $ (.01)
======= ======= ======= =======
LSI income per share from discontinued
operations (SWMI) $ 0.00 $ 0.00 $ -0- $ .01
======= ======= ======= =======
<CAPTION>
DECEMBER 31,
1996
------------
WITH DECEMBER 31, MARCH 31 MARCH 31
SMI 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance sheet
Current assets $ 7,020 $ 623 $ 1,082 $ 6,807
Total assets 30,152 1,252 1,867 29,610
Current liabilities 1,851 1,176 1,210 1,370
Long-term liabilities 750 -0- -0- 750
Stockholders' equity 27,551 76 657 27,490
</TABLE>
Page 14
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. LSI's
actual future results could differ materially from its historical results of
operations and those discussed in the forward-looking statements. All period
references are from inception through December 31, 1995, and to LSI's fiscal
years ended December 1996, December 1997 and to periods ending March 31, 1998
and 1997. References to financial information for the period of inception
through December 31, 1995 are derived from the audited consolidated and combined
financial statements for LSI. Inception is defined to be the date of
organization of LCC, LSI's predecessor, in September 1993.
GENERAL
The following presentation sets forth Management's Discussion and Analysis
of Financial Condition and Results of Operations from inception through December
31, 1995, fiscal period ended December 31, 1996, fiscal period ended December
31, 1997, and for the interim periods ended March 31, 1998 and 1997.
OVERVIEW
LSI, through its subsidiaries, assembles and/or purchases and distributes a
full product line of PC memory components, CPUs, subsystems, peripherals, ICs
and PC systems to small computer retailers, VARs, system integrators, memory and
computer product distributors, corporations, and consumers.
Page 15
<PAGE>
The financial position of LSI was materially affected by the acquisition and
resale of SMI, expansion of the PC components product line and the development
of the PC product line.
Acquisition and Sale of SMI
- - ---------------------------
In November of 1996, LSI acquired SMI, a major distributor of semiconductor
SIMMs and CPUs, to computer retailers, VARs and systems integrators. The
acquisition of SMI significantly impacted every determinative factor of LSI's
financial position.
During 1996 and 1997, LSI and SMI operated independently of one another.
Each had its own management team, location and capital structure. During 1997,
management discovered material differences of opinion relating to operating
methods which, in their opinion, could not be reconciled. Consequently, LSI
resold SMI to its original shareholder.
In the financial information set forth on pages 13 and 14, the net income
earned by SMI subsequent to its acquisition by LSI has been segregated as net
income from discontinued operations.
Development of a New Product Line
- - ---------------------------------
LSI incorporated LST in October 1997 to assemble and distribute personal
computers. Subsequently, LSI transferred LST's assembling and distribution
operations to LSC and CTI respectively.
Expansion of PC Components Distribution
- - ---------------------------------------
In mid-1996, LSI expanded its product line from distribution of DRAMs and
memory products, computer memory and CPU products to include all PC components,
subsystems and peripherals. LSI is further expanding its product line to
assemble and distribute a variety of PC related ICs. Refer to Item 1 for a more
complete discussion of the product line expansion.
Page 16
<PAGE>
RESULTS OF OPERATIONS
Comparison of Periods Ended
March 31, 1998 and March 31, 1997
NET SALES
LSI consolidated sales increased from $1,235,841 to $2,239,027 (81%) by
strengthening the overall sales and marketing organization. Specifically, a new
Vice President of Sales was hired as well as additional salespersons.
GROSS PROFIT MARGIN
Consolidated gross profit margins decreased from 19.3% to 11.7%. This
decrease was primarily attributable to the purchase of contract manufacturing
"Chip on Board" ("COB") products. Gross profit margin decreased because LSI
ceased shipments of the higher margin COB products during the first half of
1997.
SELLING, GENERAL, AND ADMINISTRATIVE
Consolidated selling, general, and administrative expenses increased from
32.2% to 38.3% of sales primarily due to increased legal and accounting costs
and losses incurred in the LST startup expansion of the engineering department
and increases due to sales expansion.
RESEARCH AND DEVELOPMENT
Consolidated expenses decreased from 9.8% to 6.2% of sales due to LSI's
better utilization of its existing facilities, equipment, and software in
support of continued process and product development of its 16 Meg product as
well as a function of increased sales.
TOTAL ASSETS
Consolidated total assets decreased from $26,609,921 to $1,866,636. This
was primarily caused by the sale of the assets of SMI.
CURRENT LIABILITIES
Consolidated current liabilities decreased from $1,370,427 to $1,210,077
as a result of the sale of SMI. Trade account payables increased significantly
due to the establishment of net terms from offshore vendors.
EQUITY
Consolidated stockholders' equity decreased from $27,489,494 to $656,559
due to the sale of SMI.
Comparison of Years Ended
December 31, 1997 and December 31, 1996.
NET SALES
The consolidated increase in sales from $5,765,629 to $7,442,038 is
primarily attributable to expanding LCP's product line and strengthening LCP's
overall sales organization. This 29.1% increase in sales during 1997 is further
supported by realizing a 22.0% increase in sales in the fourth quarter of 1997
as compared to the fourth quarter of 1996.
GROSS PROFIT MARGIN
The consolidated gross profit margin of $258,364 or 4.5% of Net Sales
increased to $478,061 or 6.4% of Net Sales for the period ending December 31,
1997. These improvements were realized due to expanding LCP's product line, and
strengthening sales staff combined with improved purchasing practices.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
This increase in expenses from 17.7% to 30.1% of sales resulted from higher
than planned legal and accounting expenses in the sale of SMI and ongoing
efforts to get the company's stock relisted.
RESEARCH AND DEVELOPMENT COSTS
Consolidated research and development expenses increased from 8.3% through
December 31, 1996 to 25.3% of sales for the period ending December 31, 1997, due
to increasing the design staff in semiconductor design to support the 16 Meg
DRAM design and completing the DRAM 0.35u Semiconductor Process Technology
Development Program at Sony Semiconductor in San Antonio, Texas. Additional
development costs were incurred in developing a high volume, low cost COB
manufacturing process for SIMM memory products.
Page 17
<PAGE>
TOTAL ASSETS
Consolidated total assets decreased from $30,151,695 to $1,251,721 due to
the sale of SMI. The further reduction in assets reflected the use of cash to
expand the semiconductor 16 Meg DRAM design effort and the completion of the
0.35 micron semiconductor process development activity at Sony Semiconductor
Company of America.
CURRENT LIABILITIES
Consolidated current liabilities decreased from $1,850,821 to $1,175,842
primarily due to the sale of SMI. Liabilities were further reduced by the
conversion of $750,000 of debt into equity.
EQUITY
Stockholders' equity decreased from $27,550,874 at the end of December 31,
1996 to $75,879. This decrease in stockholders' equity was due mostly to the
divestiture of SMI but also was attributable to the conversion of outstanding
debentures to equity, the exercise of certain warrants and the reduction in
accounts payable.
ANTICIPATED TRENDS
While management can provide no assurance, LSI anticipates that LCP's sales
will continue to increase in its computer components distribution business
during 1998. Management derives this expectation from the development of
increased market share by expansion of LCP's production and sales force.
Furthermore, IC sales are anticipated in the third quarter with the planned
development and production of several custom IC's specifically designed for PC
computer motherboard applications.
Page 18
<PAGE>
TRENDS
In addition to the factors discussed elsewhere in the Form 10, the
following are important factors which could cause actual results or events to
differ materially from those contained in any forward-looking statement made by
or on behalf of LSI.
State Taxation
- - --------------
Several states have enacted legislation which requires out of state direct
marketers to collect and remit sales and use taxes based on certain limited
contacts with the state. LSI and its subsidiaries could be required to pay
sales and use taxes and income and franchise taxes related to LSI's sales in
states other than Texas.
Volatility of the Semiconductor Memory Industry
- - -----------------------------------------------
The semiconductor memory industry is characterized by rapid technological
change, frequent product introductions and enhancements, difficult product
transitions, relatively short product life cycles, rapid changes in market
prices and volatile market conditions. Historically, this industry has been
highly cyclical, particularly regarding the market for DRAM products, which is
currently LSI's primary semiconductor memory product.
The selling prices for semiconductor memory products fluctuate
significantly with changes in the balance of supply and demand for these
commodity products. The amount of capacity placed into production and future
yield improvements by LSI's competitors could dramatically increase worldwide
supply of semiconductor memory and continue
Page 19
<PAGE>
downward pressure on pricing. LSI's business plan assumes declining prices for
its products and, accordingly, requires actions to increase die count and lower
direct and overhead costs per product.
There can be no assurance that the rate of decline of average sales prices
will lessen or that market conditions will improve in the foreseeable future.
These declines have had a material adverse effect on LSI's business and results
of operations. Further declines in average sales prices for LSI's memory based
products could have a material adverse effect on LSI's business and results of
operations.
Year 2000 Compliance
- - --------------------
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. Most but
not all of LSI's approximately 50 internal computers utilized in operations and
financial reporting are Year 2000 compliant. Approximately 15 of the 50
computers are older and may not be in compliance. Management estimates the
purchase and installation of Year 2000 compliant mainboards in the 15 computers
will cost a total of approximately $2,000.
LSC's engineering and design group currently utilizes five UNIX-based Sun
Microsystem computers for semiconductor circuit design. These systems have
Solarus Version 2.6 software installed and are in full Year 2000 compliance.
CTI's and LCP's PC products are being manufactured with Year 2000
compliant computer mainboards. LSC has incorporated the necessary incoming
quality control and production test procedures to ensure 100% Year 2000
compliance with all its products. LCP has also established the necessary
incoming quality control test procedures to ensure their vendors of computer
mainboards are in 100% Year 2000 compliance.
Prior to December 1997, shipments of computer mainboards were not inspected
and tested as noted above. Therefore, LSI could potentially have product in the
marketplace that is not Year 2000 compliant, but management believes that the
exposure is minimal.
Page 20
<PAGE>
Fluctuations in Operating Results
- - ---------------------------------
LSI's past operating results have been, and its future operating results
may be, subject to annual and quarterly fluctuations as a result of a wide
variety of factors, including, without limitation, the cyclical nature of the
semiconductor memory and PC industry, the introduction and announcement of new
products and process technologies by LSI or its competitors, pricing pressures,
the speed in which LSI reduces costs for any particular new or existing product,
fluctuations in subcontracted manufacturing yields, changes in product mix, the
cost and availability of raw materials and general worldwide economic
conditions.
Impact of Recently Issued Accounting Standard
- - ---------------------------------------------
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." Loss per share has
been reflected under those provisions for all periods presented. The effect of
this change was immaterial.
LIQUIDITY AND CAPITAL RESOURCES
LSI's capital resources were met during 1996 and 1997 by equity and
convertible debt financing. The company received $1,777,749 in 1996 and
$2,286,980 in 1997 from private sales and placements of convertible debt and
equity. During the period from January 1, 1998 through March 31, 1998, LSI
received an additional $1,251,663 from private equity sales.
As of December 1997, LSI had no material commitments for capital
expenditures.
Subsequently, LSI has expended $75,000 in leasehold improvements and
capital expenses to facilitate is distribution facility. LSI anticipates
spending an additional $325,000 during the remainder of 1998 to finish out the
balance of its Gamma Road facility which includes its Corporate headquarters
and semi-automated PC assembly capability. LSI anticipates funding these capital
expenditures primarily through the sale of securities to overseas investors.
As of the first quarter of 1998, all capital expenditure commitments have
been met by capital procurement of approximately $1,252,000 through the
generation of equity funding as explained in Note 13 on page F-31.
Pursuant to the agreement to reduce the exercise price of warrants for
17,000,040 shares from $1.50 per share to $0.75 per share as explained in Note 9
on page F-26, the Company received $1,251,662 via the exercise of warrants
during the period from January 1, 1998, through March 25, 1998.
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<PAGE>
During 1997, LSI along with their respective subsidiaries incurred a net
loss of $3,784,880 exclusive of net income earned by SMI. From their inceptions
through December 31, 1997, LCC and LSI incurred combined losses of $6,662,912
exclusive of net income earned by SMI. As of December 31, 1997, LSI had a
working capital deficit of approximately $553,122. LSI's auditors have expressed
substantial doubt about its ability to continue as a going concern.
Management anticipates the primary source of funds for such commitments to
be the additional private sales of equity and/or exercise of outstanding
warrants to acquire common stock before the end of 1998. In addition, management
anticipates the generation of cash flow through operations.
LSI is attempting to improve its operating cash flows through increased
sales by its subsidiaries. Management has also committed to a continuing
expansion of its distribution network for all subsidiaries through increasing
the number of active dealers and focusing on increasing the average monthly
sales from each long term dealer.
Management intends to continue increasing sales by LCP in 1998 through
improving market share in the U.S. domestic marketplace via expansion of its
sales through the internet. In addition, management intends to establish a more
formalized international personal computer components distribution program in
the Pacific Rim and then expand it into Europe and certain South American
countries throughout 1998, 1999, and the year 2000. Management anticipates
international distribution of PC components (primarily CPUs and memory) via LHK
by the third quarter of 1998.
Approximately 10 to 15 additional SIMM products are planned to be designed
by LSC and introduced to the marketplace throughout 1998.
Management is attempting to achieve profitability of CTI no later than the
third quarter of 1998. Management is attempting to increase market share by
expanding marketing efforts on the internet toward consumer customers.
There are no assurances that management will be successful in its efforts.
In the event that LSI, as currently structured, cannot generate additional
funds internally from operations or from external sources, LSI's management will
re-prioritize capital expenditures away from research and development of more
complex products and toward simpler integrated circuits and the purchase of a
larger number of PC components and subsystems for immediate distribution.
In the event that sufficient operating capital cannot be generated by these
actions, LSI's management will explore the possibility of selling LSI and its
subsidiaries as a going concern. In the event that LSI is unable to negotiate a
sale of LSI and its subsidiaries as a going concern that would generate more
value per share than a liquidation of assets, management will liquidate its
assets and distribute them on a pro rata basis to LSI's shareholders.
SAFE HARBOR STATEMENT
Forward-looking statements contained in this Form 10 involve risks and
uncertainties, including, without limitation, the following: (i) LSI's plans,
strategies, objectives, expectations and intentions are subject to change at any
time at the discretion of management and the Board of Directors; (ii) LSI's
plans and results of operations will be affected by LSI's ability to manage its
growth and working capital; and (iii) LSI's business is highly competitive and
the entrance of new competitors or the expansion of the operations by existing
competitors in LSI's markets could adversely affect LSI's plans and results of
operations.
ITEM 3. PROPERTIES
LSI consolidated its operations to a new 38,000 square foot facility
consisting of two halves of a building located at 13703 and 13707 Gamma Road,
respectively, in Dallas, Texas. This facility is subject to a lease which
expires in 2003. The new facility houses LCP's distribution center, LSI's
corporate headquarters, LSC's IC and system design center and LSI's PC
assembling functions. Eventually, the new location will house planned SIMM
surface mount production. LSI has an option to purchase the property which
expires at the end of 1998. LSI has the right to purchase both halves of the
facility for $2,000,000.
LSI also has an approximately 7,000 square feet facility located at 2501
Avenue J in Arlington, Texas. The facility is subject to two leases. A lease for
approximately 3,500 square feet expired in April 1998. LSI continued in this
location on a month-to-month basis for the period April 98 to May 1, 1998. As of
May 1, 1998, CTI entered into a lease agreement for the above-mentioned 3,500
square feet. The current lease expires on April 30, 2001.
LST previously had a manufacturing center of approximately 3,288 square
feet located in Arlington, Texas. This lease was terminated in February, 1998.
Page 22
<PAGE>
LSI believes that its existing facilities are suitable and adequate for PC
and PC component assembling distribution and research and development operations
and that productive capacity is being utilized. Management's intention to fully
develop a semiconductor manufacturing center will ultimately entail the purchase
of a fabrication plant although short-term manufacturing needs in the future
will be provided by third party vendors under a private label and/or joint
venture agreement.
LHK historically utilized, at no charge, facilities located in Hong Kong
provided by Whitways Enterprises Limited. These facilities are no longer
utilized by LSI or its subsidiaries.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to any
person known to LSI to be the beneficial owner of more than 5% of the
outstanding shares of LSI's Common Stock as of the date of this filing. Unless
otherwise indicated, each of the following persons has sole voting and
investment power with respect to the shares of Common Stock which he
beneficially owns:
Page 23
<PAGE>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
- - ------------------- -------------------- -----------
Lewis D. Rowe 2,900,000 8.0%
Zephyr International Limited
Zephyr House - Fifth Floor
Mary Street
Grand Cayman, Cayman
Islands, British West Indies
(1) Determined on the basis of 36,099,709 shares of Common Stock outstanding.
The following table sets forth certain information concerning the
beneficial ownership of LSI's Common Stock as of the date of this filing, with
respect to each Director, Executive Officer and Directors and Executive Officers
as a group:
Page 24
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership of Class
- - ------------------------ -------------------- ----------
<S> <C> <C>
Maxie R. Smith(2) 1,027,000 2.8%
Steven L. Porter 200,000 less than
1%
Wilton Workman 150,000 less than
1%
All Directors and Executive
Officers as a group
(3 persons) 1,377,000 3.8%
</TABLE>
(2) Mr. Maxie Smith owns 227,000 shares directly. Mr. Smith, along with Mr.
Dennis Poole, controls an additional 800,000 shares through beneficial
ownership of Jenalong Holdings, Ltd., a British Virgin Islands Corporation.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors,
executive officers and certain significant employees of LSI as of the date of
this filing. Except as otherwise stated below, the directors will serve until
the next annual meeting of stockholders or until their successors are elected or
appointed and the executive officers will serve until their successors are
appointed by the Board of Directors.
<TABLE>
<CAPTION>
Name Age Positions
- - ---- --- ---------
<S> <C> <C>
Maxie R. Smith 57 Chairman of the Board, President and Chief Executive Officer of LSI
Gerald F. Brunton 62 Director, Vice President of Finance and Chief Financial Officer of LSI
Steven L. Porter 42 Director, Secretary and Treasurer of LSI
Wilton Workman 65 Vice President of Technology of LSI
</TABLE>
Page 25
<PAGE>
<TABLE>
<CAPTION>
Name Age Positions
- - ---- --- ---------
<S> <C> <C>
Lynn Mahanay 47 Corporate Controller of LSI
James W. Osmun, Ph.D. 50 Vice President of Process and Development for LSC
Dean Salem 27 Vice President of Sales and Marketing for LCP and Director of CTI
Tian-Shen Tang, Ph.D. 40 Design Team Leader of LSC
Yu (David) Chang 37 Director of LHK
</TABLE>
Maxie R. Smith. Mr. Smith is a founder of LSI and each of its
subsidiaries. Mr. Smith began his career with Texas Instruments in Dallas,
Texas, holding positions in the semiconductor materials and sensor group. He
joined Harris Semiconductor in Melbourne, Florida, where he was responsible for
developing proprietary semiconductor processes, equipment and products.
Subsequently, he joined Litronix Corporation in Cupertino, California, and was
instrumental in developing the company's Gallium Arsenide Phosphide
semiconductor materials capability, along with directing the operations of the
company's acquired MOS semiconductor company. In addition, Mr. Smith was
division manager of the newly developed digital watch manufacturing division.
Maxie R. Smith is currently Chairman of the Board, President, and Chief
Executive Officer ("CEO") of Lanstar Semiconductor Inc. He has held these
positions since November, 1995.
From September, 1993, to-date, Mr. Smith continues as Chairman, President,
and CEO of Lanstar Computer Corporation. From September, 1991 to September,
1993, Mr. Smith was Chairman, President, and CEO of Comset International, Inc.
In July 1978, Mr. Smith joined Commodore Business Machines, Inc. where he
was responsible for developing Commodore's early computer manufacturing
capability. As the director of offshore manufacturing, Mr. Smith was
instrumental in establishing Hong Kong production of over one million
semiconductor and LCD watch kits per month. He then joined Eagle Computer as
Vice President of Operations in January 1983. In January 1984, Mr. Smith joined
Anchron Corporation as President and Chief Executive Officer for approximately
three and one-half years. The company developed and marketed on-board computer
systems and software for the transportation industry.
Mr. Smith joined Alpha International, Inc., as interim-President, in early
1988 for approximately a six-month period.
From 1988 to 1991, Mr. Smith was involved in the transportation industry in
various consulting capacities.
Page 26
<PAGE>
Mr. Smith joined Atari in 1991 as Vice President of Quality Assurance and
worked in Taiwan, Hong Kong and China for approximately one year establishing
the necessary subcontracting manufacturers to successfully produce the company's
consumer and computer products.
Mr. Smith is the Chairman of the Board, Chief Executive Officer, Secretary
and Treasurer of LSC; Director, Chairman and Chief Executive Officer of LCP;
Chairman of the Board, President, Secretary, Treasurer and Chief Executive
Officer of LCC; and Chairman of the Board and Chief Executive Officer of LST and
Chairman and Chief Executive Officer of CTI.
Gerald F. Brunton. Mr. Brunton joined LSI in March 1997. Mr. Brunton has
been in the electronic and telecommunications industries for the past 35 years,
holding positions in marketing, finance and general management as well as
various executive offices, including Chief Executive Officer. Mr. Brunton was a
Vice President of International Communications, Inc. of Fort Worth, Texas from
September 1994 to March 1997. Prior to this, Mr. Brunton was President of
Armiger, a division of Woodhead Industries, Inc. from April 1989 to September
1994. He has held key management and executive positions with Harvey Hubbell,
Crouse Hinds, Charles Industries, Telephone and Data Systems, Woodhead
Industries and International Communications. He is a graduate of the University
of Illinois, with a Bachelor of Arts in Business Administration and holds two
Masters of Business Administration in Marketing and Finance.
Mr. Brunton is a Director, Vice President of Finance and Chief Financial
Officer of LSI; Director, President, Secretary and Treasurer of LCP; and
Director, Vice President of Finance, Secretary and Treasurer of LST.
Steven Porter. Mr. Porter joined LSI in June 1994 and has spent most of his
time in marketing and sales. Mr. Porter joined Tandy's Radio Shack in November
1989. Mr. Porter was in Retail Management at Radio Shack/Tandy Corporation from
January 1993 to June 1994. Mr. Porter joined LSI in June 1994 and is currently
President and Chief Operating Officer of CTI.
Mr. Porter is a Director, Secretary, and Treasurer of LSI; Director of LSC;
Director, President and Chief Operating Officer of LCP; Director of LCC;
Director and President of LST and Director and President of CTI.
Wilton Workman. Mr. Workman has been President of LSC, the semiconductor
memory products design and assembling subsidiary, since May 30, 1995. From
September 27, 1993 to May 30, 1995, Mr. Workman was the sole owner of a
consulting company called ICT. Mr. Workman has led teams in the site selection
and construction of semiconductor facilities, as well as been responsible for
managing these facilities. Mr. Workman has a Bachelor of Science and Master of
Science in Physics from Texas A&M University. Mr. Workman has coordinated the
development and manufacture of LSI's
Page 27
<PAGE>
semiconductor products and the joint venture between LSC and Sony Semiconductor
Company of America. Mr. Workman is Vice President of Technology for LSI; and
Director, President and Chief Operating Officer of LSC.
Lynn Mahanay. Mr. Mahanay joined LSI in March 1997. Mr. Mahanay is a CPA
and graduate of Texas University in Arlington. He has 15 years of experience in
large corporate environments within the consumer and oil and gas industries.
Mr. Mahanay is responsible for coordinating the comptroller, internal auditing
and bookkeeping operations for LSI.
Prior to joining Lanstar, he was a contract employee for Brown & Mahanay,
CPA from November, 1996, to March, 1997, and an internal auditor for Fin &
Feather Sports in Fort Worth, Texas, from December 1995 to November 1996. From
January 1993 to December 1995, he was an accountant for Brown & Mahanay, CPAs in
Fort Worth, Texas.
Dr. James W. "Bill" Osmun. Mr. Osmun has been with LSI for two years and
has had 27 years of experience in the manufacturing and process development of
semiconductor products. Dr. Osmun was formerly Manager of Process Development
and Transfer for Advanced Micro Devices and Vice President of Technology with
Thermco Division of Silicon Group. Dr. Osmun holds a Bachelor of Science in
Physics from Stanford University and a Masters and Doctorate of Physics from the
University of Chicago.
Dr. Osmun is currently Vice President of Technology for LSC. He joined LSI
in September 1995. From October 1993 to September 1995, he was self-employed
primarily developing an educational software product. Dr. Osmun was Vice
President of Technology of Silicon Valley Group, Thermco Division, from March
1992 to October 1993.
Dean Salem. Mr. Salem joined LSI in August 1997. Mr. Salem brings with
him a highly successful background in sales of memory and associated
semiconductor products. Formerly a Vice President of Southwest Memory, Inc., a
distributor of semiconductor memory products and a predecessor to one of LSI's
former subsidiaries, he was consistently one of the top producers of sales. He
is a co-founder of Memory Masters, Inc. where he developed a team of personnel
that averaged $4-5 million in sales monthly. Mr. Salem is a graduate of the
University of Cincinnati, with a Bachelor of Arts in English. Mr. Salem is
currently a Director of CTI.
Mr. Salem is currently Vice President Sales and Marketing for LCP. He is
also Director of CTI. Mr. Salem joined LSI in August 1997. From January 1996 to
July 1997, he was a start-up partner in Memory Masters, Inc. From October 1992
to December 1995 he was in sales and sales management positions for Southwest
Memory, Inc./Southwest Memory International, Inc.
Dr. Tian-Shen Tang. Dr. Tang joined LSI in 1997, bringing with him an
academic background as an Associate Professor at Texas A&M University. His
experience includes consulting services with Futura Development Co. and
foundation research activities in the area of CMOS and SRAM.
Dr. Tang is currently Lead Design Engineer for LSC. He joined LSI in May
1997. Prior to joining LSI, Dr. Tang was assistant and Associate Professor at
Texas A&M University from September 1990 to May 1997.
Page 28
<PAGE>
Dr. Tang received a Bachelor of Science in Mathematics from NanKai University in
China. He also holds an Electrical Engineering Degree and a Ph.D. in Electrical
Engineering from Texas A&M University.
Yu (David) Chang. Mr. Chang joined LHK in May 1998 as Director and
Managing Director. Dr. Chang holds a Masters Degree and a Ph.D. in Electrical
Engineering from Southern Methodist University.
From 1996 to 1998, Mr. Chang served as President of Coset International
Corp. From 1992 to 1996, Mr. Chang was Vice President for Astral Micro Corp.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Other Annual
Name and Principal Year Salary Bonus Compensation
Position ($) ($)(1) ($)(2)
- - ------------------ ---- ------ ------ ------------
<S> <C> <C> <C> <C>
Maxie R. Smith 1997 60,000 -0- -0-
President and 1996 60,000 (1) -0-
Chief Executive 1995 12,375 -0- -0-
Officer
</TABLE>
(1) Mr. Smith received a bonus of 500,000 shares of common stock in April
1996.
(2) All of the officers and directors of LSI are reimbursed for reasonable
out-of-pocket expenses incurred. LSI does not have any present
arrangements regarding compensation of directors for serving as a
director. No compensation for services as a director is presently
contemplated.
No officer of LSI received aggregate remuneration in excess of $100,000.
No employee of LSI has a written employment agreement.
Overview of the LSI 1997 Stock Option Plan
- - ------------------------------------------
On November 21, 1997, LSI's Board of Directors (no Compensation Committee
existed) implemented the 1997 Stock Option Plan (the "Plan"). The Plan provides
for the granting of incentive stock options and nonqualified stock options as
defined in the Plan and collectively referred to herein as "Awards". The purpose
of the Plan is to enable employees of LSI, its subsidiaries and affiliates to
participate in LSI's future by offering to them proprietary interests in LSI.
The Plan is also intended to provide a means through which LSI can attract and
retain key employees of merit.
Page 29
<PAGE>
The following description is intended to be a summary of the Plan's
principal terms and is qualified in its entirety by reference to the complete
text attached as an exhibit to the Form 10.
General
- - -------
The Plan authorizes the Board of Directors or its Compensation Committee
(the Board of Directors and the Compensation Committee being collectively
referred to hereinafter as the Board of Directors as LSI does not now have and
never has had a Compensation Committee) to grant to officers and other employees
of LSI, its subsidiaries and affiliates (excluding any nonemployee directors)
stock option awards in the form of one or any combination of the Awards. LSI has
not ever and does not currently have a Compensation Committee. The Board of
Directors has performed these and all other equivalent functions. The Board of
Directors is comprised of Messrs. Maxie R. Smith, Gerald F. Brunton, and Steven
L. Porter. Approximately 44 employees are presently eligible to participate in
the Plan. As of the date of this filing, incentive stock options for the right
to purchase 4,555,000 shares of the corporation have been granted to 44
employees. Officers and key personnel of the corporation were granted options in
the following amounts:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS TO DATE
Individual Grants Alternative To
(f) And (g):
Percent Of Grant Date
Number Of Total Value
Securities Options/
Underlying SARs Granted Exercise Of
Option/SARs To Employees Base Price Expiration Grant Date
Name Granted (#) In Fiscal Year ($/Sh) Date Present Value $
(a) (b) (c) (d) (e) (h)
- - ------------------- ----------- -------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Maxie R. Smith 400,000 8.8% $.25 10/31/2000 $.25
Gerald F. Brunton 300,000 6.6% $.25 10/31/2000 $.25
Lynn Mahanay 150,000 3.3% $.25 08/06/2001 $.25
James Osmun 75,000 1.6% $.25 10/31/1999 $.25
Steven L. Porter 100,000 2.2% $.25 10/31/1999 $.25
Dean Salem 300,000 6.6% $.25 08/01/2000 $.25
Wilton Workman 150,000 3.3% $.01 11/01/2000 $.25
---------
Total 1,475,000 shares
</TABLE>
A maximum of 7,500,000 shares of LSI Common Stock are reserved and available for
distribution pursuant to Awards granted under the Plan, subject to adjustment to
reflect stock splits, mergers, reorganizations and other changes in corporate
structure affecting LSI Common Stock. If shares subject to an Award granted
under the Plan cease to be subject to such Awards, such shares will again be
available for distribution under the Plan. Shares may be distributed under the
Plan, in whole or in part, from authorized and unissued shares or treasury
shares. The Board of Directors administers the Plan. The Board of Directors has
complete discretion, subject to the
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<PAGE>
terms of the Plan, to determine, among other things, which officers and key
employees will receive Awards, the type, number and frequency of and the number
of shares subject to such Awards and, to the extent not otherwise expressly
provided in the Plan, the terms and conditions of the Awards. Options may not be
exercised by tendering outstanding shares.
Awards
- - ------
Options granted under the Plan may be incentive stock options ("ISOs"), as
defined under and subject to Section 422 of the Internal Revenue Code (the
"Code"), or nonqualified stock options ("NQSOs").
The options will be exercisable at such times and subject to such terms and
conditions as the Board of Directors may determine. All options must expire no
later than ten years from the date of grant in the case of ISOs and as
determined by the Board of Directors at the date of grant in the case of NQSOs.
Generally, options will expire upon an optionee's termination of employment, one
year following the termination of employment due to death or one year following
termination due to permanent disability; provided, however, that options will
expire prior to said times if and at such time that the original option exercise
term otherwise expires. Generally, options may be exercised only to the extent
exercisable on the date of termination, death or disability.
The option price for any ISO will not be less than 100% of the fair market
value of LSI Common Stock as of the date of grant and will be paid by cashier's
check. The option price for a NQSO will be as set by the Board of Directors for
that NQSO and will be paid by cashier's check.
Stock options are not transferable except by will or the laws of descent
and distribution.
Miscellaneous
- - -------------
The Plan may be amended or discontinued by the Board of Directors, provided
that the Board may not, without the approval of LSI's stockholders, (a) except
as expressly provided in the Plan, increase the number of shares reserved for
distribution or decrease the option price of an ISO below 100% of the fair
market value at grant or change the pricing terms applicable to stock purchase
rights, (b) change the class of employees eligible to receive Awards under the
Plan, or (c) extend maximum exercise periods for Awards under the Plan. No
amendment or discontinuance may impair the rights of an optionee or recipient
under
Page 31
<PAGE>
an outstanding stock option or other Award without the recipient's consent.
The Board of Directors may amend the terms of any outstanding stock option
or other Award prospectively or retroactively (but no such amendment may impair
the rights of any holder without such holder's consent) and may substitute new
stock options for previously granted stock options, including prior options with
higher exercise prices.
Under the Plan, the Board of Directors has wide discretion and flexibility,
enabling the Board of Directors to administer the Plan in the manner it
determines to be in the best interests of LSI. Thus, Awards may be granted in
various combinations and sequences and may be subject to various conditions,
restrictions and limitations at grant or upon exercise or payment not
inconsistent with the terms of the Plan. The Board of Director's determinations
with respect to which employees will receive Awards, and the form, amount and
frequency and the terms and conditions thereof, need not be uniform as to
similarly situated persons. The designation of an employee to receive one form
of an Award under the Plan does not require the Board of Directors to designate
nor entitle such employee to receive any other form of Award.
The Plan does not limit either the number of officers or other employees
eligible to receive Awards or the type or number of shares which may be subject
to options or other Awards which may be granted to any one person. In addition,
the Plan does not limit the aggregate number of Awards that may be granted
except that the number of shares reserved for distribution under the Plan cannot
exceed 7,500,000 shares.
Federal Income Tax Aspects
- - --------------------------
The following is a brief summary of LSI's understanding of the principal
anticipated federal income tax consequences of Awards made under the Plan based
upon the applicable provisions of the Code in effect on the date hereof. This
summary is not intended to be exhaustive and does not describe foreign, state or
local tax consequences.
(1) Incentive Stock Options. An optionee will not realize taxable income
at the time an ISO is granted or exercised. Company Common Stock is issued to
an optionee pursuant to the exercise of an ISO, and if no disqualifying
disposition of the shares is made by the optionee within two years of the date
of grant or within one year after exercise of the option, then (a) any gain upon
the subsequent sale of the shares will be
Page 32
<PAGE>
taxed to the optionee as a capital gain, and any loss sustained will be a
capital loss, and (b) no deduction will be allowed to LSI for federal income tax
purposes. The spread between the ISO price and the fair market value of the
shares at the time of exercise is an adjustment item for purposes of the
alternative minimum tax.
If an optionee disposes of shares acquired upon the exercise of an ISO
before the expiration of the holding periods described above, then generally (a)
the optionee will be taxed as if he had received compensation income in the
year of disposition in an amount equal to the excess, if any, of the fair market
value of the shares on the exercise date (or, if less, the amount realized on
the disposition of the shares) over the option price paid for such shares, and
(b) LSI will generally be entitled to a corresponding deduction in that year.
Any further gain or loss realized by the participant will be taxed as short-term
or long-term capital gain or loss, as the case may be, and will not result in
any deduction by LSI.
Exercise of an ISO may cause the optionee to incur alternative minimum tax.
Stock acquired through exercise of an ISO must be held for more than 18
months to obtain long-term capital gains treatment.
All stock acquired pursuant to the exercise of an ISO is subject to the
holding period rules and disqualifying disposition rules described above.
Pursuant to the Plan, an ISO can only be exercised by payment of the
consideration by cashier's check.
To the extent that the fair market value of LSI's Common Stock (determined
as of the date of grant) subject to ISOs exercisable for the first time by an
optionee during any calendar year exceeds $100,000, those options will not be
considered ISOs.
(2) Nonqualified Stock Options. An optionee will not recognize taxable
income at the time a NQSO is granted, but taxable income will be realized, and
LSI will generally be entitled to a deduction, at the time of exercise of the
NQSO. The amount of income (and LSI's deduction) will be equal to the
difference between the NQSO exercise price and the fair market value of the
shares on the date of exercise. The income realized will be taxed at ordinary
income tax rates for federal income tax purposes. Withholding is required upon
exercise of a NQSO. On subsequent disposition of the shares acquired upon
exercise of a NQSO, capital gain or loss as determined under the normal capital
asset holding
Page 33
<PAGE>
period rules will be realized in the amount of the difference between the
proceeds of sale and the fair market value of the shares on the date of
exercise.
(3) Withholding. Under the Plan, a participant must pay LSI, no later than
the date on which an amount first becomes includable in the participant's gross
income for federal income tax purposes with respect to an Award, any taxes
required to be withheld with respect to such amount. Such withholding
obligation may be settled with already owned shares, including shares that
constitute part of the Award giving rise to the withholding obligation, at the
sole option of LSI. Otherwise, withholding must be made in a manner that
provides cash to LSI. The amount of income recognized is not reduced by the
delivery of already owned shares or the retention by LSI of shares issuable
under an Award to satisfy withholding obligations; the transaction is taxed as
if the shares were sold for the amount of the withholding tax.
Other Stock Options
- - -------------------
Prior to adoption of the 1997 Stock Option Plan, LSI has granted NQSOs
exercisable at 25c per share to two employees as follows:
Number of Shares
Name and Position Subject to Grant
----------------- -------------------
Mohammad Bari, 100,000
Senior Design Engineer
Nilesh Gharia, 100,000
Senior Design Engineer
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Dennis V. Poole, the former Managing Director of LHK and former
Director of LCC, is Vice President of Marketing for Whitways Enterprises Limited
which has engaged in related transactions with LSI. Whitways Enterprises Limited
is in the business of sub-contract manufacturing of electronic products.
During 1997, the Company purchased equipment totaling $112,674 from
Jenalong Holdings, Ltd., an affiliate of the Company owned by Mr. Maxie R.
Smith, President, Chairman, and Chief Executive Officer of LSI and Mr. Dennis V.
Poole, a former Director of LCC and former Managing Director of LHK. In
addition, the Company rented equipment from the same affiliate for a total of
$30,540 in rental expense for the year. The Company then purchased the equipment
subsequent to 1997 year-end.
Whitways Enterprises Limited historically allowed LHK to utilize its
facilities at no charge. Whitways Enterprises Limited has never received
consideration for LHK's use of this facility. These facilities are no longer
utilized by LSI.
Whitways Enterprises Limited manufactured certain SIMM memory products for
LSI during 1997 and 1996. Whitways Enterprises Limited was paid $52,903 and
$14,592 for manufacturing services in 1997 and 1996, respectively.
Mr. Poole has advanced funds for the purchase of inventory and provision of
living accommodations to LSI's management for personnel engaging in local
negotiations of vendor relationships. Mr. Poole is currently owed $51,281.08
which is due by November 5, 1998.
In 1996, Jenalong Holdings, Inc. advanced $45,567 for a down payment
toward the purchase of bonding and in-line production test equipment. In 1997,
Jenalong Holdings, Inc. purchased the equipment on behalf of LSC for
approximately $120,000. LSC assigned the equipment to Whitways Enterprises
Limited for use in its factory in Guan Dong Province, China. In consideration,
Whitways Enterprises Limited manufactured and co-developed chip-on-board SIMM
Products. During 1997, LSI purchased the above-mentioned equipment for $112,674.
Page 34
<PAGE>
In 1997, LSC leased from Jenalong Holdings, Inc., Sun Microsystem UNIX-
based computer equipment in the approximate amount of $30,540.
In 1996 and 1997, Jenalong Holdings, Inc., in a series of transactions,
loaned LSI up to approximately $135,000 at an approximate interest rate of 12%
on an unsecured basis, the proceeds of which were used for working capital. LSI
has fully repaid the principal and interest on the loan.
ITEM 8. LEGAL PROCEEDINGS
LSI is not a party to any material legal proceedings.
ITEM 9. MARKET PRICE AND DIVIDENDS ON LSI'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Trading of LSI's common stock was halted, by order of the SEC, on May 3,
1996, due to questions raised regarding the adequacy and accuracy of publicly
disseminated information concerning, among other things, unusual market activity
and the tradability of shares. Since May 3, 1996, LSI has undertaken a system
wide review of its policies and procedures. As of the date of this filing, there
is no established trading market for the stock. Upon compliance with Rule 15c2-
11, LSI intends to be traded over-the-counter and on the National Association of
Securities Dealer's Electronic Bulletin Board.
Upon becoming a 1934 Act reporting company, LSI shall furnish its
stockholders with annual reports containing audited financial statements
reported on by its independent auditors for each fiscal year and quarterly
reports containing unaudited financial statements for the first three quarters
of each fiscal year.
LSI currently has 36,099,709 shares outstanding as of the date of this
filing, held by approximately 441 shareholders. LSI has 23 warrants outstanding
which, if exercised, would result in the issuance of 31,400,000 shares. LSI has
no current plans to register securities in a public offering. There are
currently nonqualified stock options for 350,000 shares outstanding.
Page 35
<PAGE>
On November 21, 1997, LSI adopted a 1997 Stock Option Plan whereby
employees were offered the right to purchase increasing numbers of shares of LSI
depending on their length of tenure with LSI. The following table outlines the
numbers of shares eligible to be purchased by employees, under the 1997 Stock
Option Plan and two non-qualified plans, and the amount of the corresponding
investment of capital into LSI:
Year No. of Shares Total Purchase Price
Eligible to be Purchased
-----------------------------------------------------------------
1997 1,043,333 $243,833.25
1998 1,291,666 $322,916.50
1999 1,296,667 $324,166.75
2000 743,334 $185,833.50
2001 155,000 $ 38,750.00
As of the date of this filing, one employee has exercised an incentive
stock option to purchase 25,000 shares of LSI's Restricted Common Stock at 25
cents per share for a total investment of $6,250.00.
LSI has not in the past and has no current plans to issue dividends. All
profits in the foreseeable future will be reinvested to enable further research
and development of enhanced versions of LSI's products and operational
efficiencies to decrease costs.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion outlines all securities sold by LSI for cash or
services rendered during the previous three fiscal years. Unless otherwise
described, all of the shares sold or granted were issued pursuant to the
authority granted by the private offering exemption outlined in Section 4(2) of
the Securities Act of 1933, as amended. None of the below mentioned "sales" were
made to more than 35 nonaccredited investors and none were made with a view
toward distribution. All shares issued were restricted and contained either a
Rule 144 or Regulation S legend, as appropriate.
Page 36
<PAGE>
In 1995 and 1996, LSC offered and sold, pursuant to Rule 504, $140,500 of
debentures convertible at a rate of one share of LSC or any contemplated public
parent for each $1 of the face amount of each debenture. This liability was
assumed by LSI as the parent of LSC. During 1996, LSI issued 139,500 shares of
Restricted Common Stock in exchange for debentures with a face value of
$139,500. The remaining $1,000 of debt was converted by LSI during 1997.
In November 1995, pursuant to Rule 504, LSC offered and sold $441,498 of
debentures convertible to less than a total of 35 accredited and nonaccredited
investors, at a rate of one share of LSC for every $1.50 of the face amount of
the debenture. This liability was assumed by LSI as the parent of LSC. During
1996, 297,663 shares of Restricted Common Stock of LSI were issued to less than
a total of 35 accredited and nonaccredited investors, in conversion of
debentures.
LSI was organized as a Utah corporation in October 1980, as Kazmir Kliffs,
Inc. During November 1995, Kazmir Kliffs, Inc., changed its name to Lanstar
Semiconductor Inc. and entered into an agreement to issue up to 8,500,000 common
shares of LSI to the stockholders of LSC and debenture holders of debentures
that were convertible into LSC common stock in exchange for all the outstanding
common shares and all the outstanding convertible rights to common shares of
LSC. Prior to the closing of the agreement, there were 1,500,000 common shares
of LSI outstanding. Under this agreement, LSI issued a total of 5,183,333 shares
of Restricted Common Stock to the Shareholders of LSC in exchange for 100% of
the shares of LSC outstanding as of the date of the transaction. There was no
aggregate value ascribed to the 5,183,333 shares of LSI's common stock issued in
exchange for 100% of the outstanding shares of LSC in November 1995. There was
no third party valuation done on either LSI or LSC. At the time of the
transaction, LSI had a book value of zero and LSC had a negative stockholders
equity.
Prior to November 27, 1995, LSI initiated a 2 for 1 reverse stock split
which resulted in decreasing the number of issued and outstanding shares to
1,500,000 shares of common stock.
Page 37
<PAGE>
In 1995, LSI entered into several agreements for financial consulting
services, finder's fees and preparation of disclosure documents. LSI issued
553,684 shares of Restricted Common Stock in settlement for consideration due to
consultants and their affiliates pursuant to these agreements which was valued
and booked as stockholders equity of $554. The aggregate value of the 553,684
shares of LSI's common stock issued to financial consultants and their
affiliates in 1995 was determined by the Board of Directors to be $554.
In 1995, LSI issued as a bonus for services rendered, a total of 750,000
shares of Restricted Common Stock to three executive officers, Maxie R. Smith,
Wilton Workman and Steven Porter which was valued and booked as stockholders
equity of $750.
Simmco offered and sold in 1996, pursuant to Rule 504, $46,000 of
debentures to less than a total of 35 accredited and nonaccredited investors
convertible at a rate of one share of common stock of Simmco or a company with
which Simmco exchanged shares for each dollar of the face amount of the
debenture. The $46,000 was paid to LSI which assumed the corresponding short
term debt of $46,000. During 1997, Simmco redeemed $6,000 of debentures and LSI
issued 40,000 of its restricted common stock in liquidation of $40,000 in
debentures payable.
In May 1996, LCC acknowledged an accounts payable debt of $463,443 to
Integrated Circuit Technology, Inc., a Cayman Islands Corporation. Pursuant to
the request of the creditor, LSI issued 111,000 shares of Restricted Common
Stock, pursuant to Regulation S, on behalf of its affiliate, LCC, in full
settlement and release of the accounts payable in order to maintain beneficial
relations with the high volume vendor and customer.
On July 31, 1996, LSI offered and sold, pursuant to Regulation S, a
convertible debenture (subordinated to bank loans) for $750,000 and a warrant
for 3,000,000 shares, to Integrated Circuit Technology, Inc., a Cayman Islands
Corporation, payable on December 31, 1996, with an interest rate of 12%. The
debenture was convertible into 3,000,000 shares at a rate of 25c per share. The
warrant terms allowed the purchase of up to 3,000,000 shares at a price of $1.50
per share for a total aggregate exercise price of $4,500,000 within three years.
On August 29, 1996, Integrated Circuit Technology, Inc. converted its debenture
issued on July 31, 1996, pursuant to its terms into 3,000,040 shares of common
stock of LSI and directed the issuance to offshore accredited investors pursuant
to Regulation S. The interest due of approximately $6,083 was paid via the
issuance of 24,329 shares of common stock at $.25 per share on August 26, 1997
to an offshore accredited investor pursuant to Regulation S. LSI issued 300,000
shares as a finders fee as of August 25,1997.
Page 38
<PAGE>
During November 1996, LSI acquired all of the outstanding stock of SMI from
World Data Limited, a Cayman Islands Corporation, in exchange for issuing a
total of 29,000,000 shares of Restricted Common Stock of LSI of which 3,000,000
shares were allocated as a finder's fee relative to the transaction. The
aggregate value of the 29,000,000 shares of LSI's common stock issued in
exchange for 100% of the stock of SMI was not determined by a third party. In
addition, trading in the stock ceased in May 1996. There were Regulation S
transactions in LSI's securities in November 1996 at $1.50 per share. Management
discounted the value of the 29,000,000 from 1.50 to $1 per share for a total
transaction value of $29,000,000 because of the concentration of the 29,000,000
shares. The per share value was also reduced because the $1.50 per share was a
negotiated price associated with a debt instrument conversion which may not have
been a true market value. The aggregate value of the finder's fee of 3,000,000
shares of LSI's common stock issued as a finder's fee relative to this
transaction was included as a part of the 29,000,000 shares, was valued by the
Board of Directors at a discounted price of $1.00 per share and was charged to
additional paid in capital with a corresponding charge to the cost of SMI.
On December 31, 1996, LSI offered and sold, pursuant to Regulation S, a
convertible debenture and a warrant for 3,000,000 shares to Geninvest S.A., a
Panamanian Corporation, for $750,000. The debenture carried an interest rate of
12%, was subordinate to bank loans and was payable on November 29, 1997. The
debenture was convertible at a rate of 25c per share into 3,000,000 shares. The
warrant was exercisable for three years for up to 3,000,000 shares at $1.50 per
share for an aggregate exercise price of $4,500,000. Geninvest S.A. converted
its convertible debenture on August 26, 1997, into 3,000,000 shares of
Restricted Common Stock of LSI and directed the issuance to offshore accredited
investors pursuant to Regulation S. LSI issued an additional 300,000 shares as a
finder's fee and 128,082 shares in payment of the accrued interest.
In 1996, LSI issued 1,580,151 shares of Restricted Common Stock to United
States consultants and their affiliates in partial settlement of consideration
due for services rendered on behalf of LSC in 1995 and 1996. The aggregate value
of the 1,580,151 shares of LSI's common stock issued to United States
consultants in 1996 was determined by the Board of Directors to be $1,580.
On April 15, 1997, LSI offered and sold, pursuant to Regulation S, a
convertible debenture in the amount of $750,000 payable on April 15, 1998, with
an interest rate of 12% and a warrant for 3,000,000 shares to Geninvest S.A., a
Panamanian Corporation. The debenture was subordinate to bank loans and
convertible at 25c per share into 3,000,000 shares. The warrant was exercisable
for three years for up to 3,000,000 shares at $1.50 per share for an aggregate
exercise price of $4,500,000. Geninvest S.A. converted its convertible debenture
on August 26, 1997, into 3,000,000 shares of Restricted Common Stock of LSI and
directed the issuance to offshore accredited investors pursuant to Regulation S.
LSI also issued 300,000 as a finder's fee and 72,987 shares in lieu of accrued
interest of $18,246.75 on this debenture and the convertible debenture issued
July 31, 1996.
In August 1997, LSI in connection with attempts to renegotiate and
restructure the transaction and relationship with SMI, received 8,000,000 shares
of Restricted Common Stock from World Data Limited.
Page 39
<PAGE>
On August 26, 1997, LSI offered and sold, pursuant to Regulation S,
8,000,000 shares of Restricted Common Stock, as well as warrants for a total of
8,000,000 shares at $.125 per share, to several offshore accredited investors in
exchange for a total of $1,000,000. The warrants are exercisable for three years
at a price of $1.50 per share for an aggregate exercise price of $12,000,000.
As of August 13, 1997, LSI issued 800,000 shares, pursuant to Regulation S, to
an offshore accredited investor as a finders fee relating to the sale of
8,000,000 shares.
In October 1997, LSI issued a total of 200,000 shares of Restricted Common
Stock to a United States person and his related company in settlement of a
disputed claim based on professional services rendered. The aggregate value of
the 200,000 shares issued for professional services in October 1997 was
determined by the Board of Directors to be $20,000.
In October 1997, LSI issued a warrant for 18,000,000 shares to SMI pursuant
to an agreement to sell SMI to its previous shareholder. The warrant is
exercisable in any amount up to a total of 18,000,000 shares for three years at
$1.50 per share for an aggregate exercise price of $27,000,000. As a result of
the Stock Purchase Agreement, LSI received 25,555,000 Restricted shares of its
Common Stock into treasury as well as certain other considerations.
From November 1997 to January 1998, LSI amended 43 of LSI's 44 outstanding
warrants existing as of November 1997, which all 43 were held in the name of
offshore accredited investors for the right to purchase a total of 17,000,040
shares of LSI to reduce the exercise price from $1.50 per share to $.75 per
share for an aggregate exercise price of $12,750,030. As of November 17, 1997,
and in consideration of the amended exercise price, four of those warrant
holders which are accredited investors exercised warrants and purchased,
pursuant to Regulation S, 715,973 shares of Restricted Common Stock of LSI at
$.75 per share for a total exercise price of $536,979.75.
On November 21, 1997, LSI issued 2,900 shares of Restricted Voting Common
Stock in exchange for the assignment of all intellectual property rights to the
LSI logo from Mr. James E. Mallory, the father-in-law of Steven Porter, a
Director of LSI. Management valued and booked this transaction at $290.
As of January 14, 1998, LSI issued 179,105 shares of Restricted Voting
Common Stock to four accredited investors pursuant to the exercise of four
warrants at seventy-five cents per share for a total value of $134,328. The
shares were issued pursuant to Regulation S.
As of February 3, 1998, LSI issued 428,666 shares of Restricted Voting
Common Stock to four accredited investors pursuant to the exercise of four
warrants at seventy-five cents per share for a total value of $321,499.50. The
shares were exercised pursuant to Regulation S.
As of February 27, 1998, LSI issued 693,112 shares of Restricted Voting
Common Stock to six accredited investors pursuant to the exercise of six
warrants at seventy-five cents per share for a total value of $519,834. The
shares were issued pursuant to Regulation S.
As of March 16, 1998, LSI directed the cancellation of 12,500 shares of
Restricted Voting Common Stock in the name of Donald Varian to reflect the fact
that an additional 12,500 shares were issued on August 19, 1997 in replacement
of a lost Certificate No. 2643.
As of March 24, 1998, LSI has issued 800,000 shares of Restricted Voting
Common Stock with an original issue date of August 26, 1997 to an accredited
investor pursuant to Regulation S as a finder's fee relative to a sale of
8,000,000 shares on August 26, 1997.
As of March 25, 1998, LSI issued 368,000 shares of Restricted Voting
Common Stock to the accredited investor pursuant to the exercise of Warrant No.
WA96-020 at seventy-five cents per share for a total investment of $276,000. The
shares were issued pursuant to Regulation S.
On March 30, 1998, LSI issued 1,000 shares of Restricted Voting Common
Stock pursuant to a private placement exemption to one domestic investor
pursuant to conversion of a convertible debenture originally converted as of
December 15, 1995. The investor was entitled to 3,000 shares and was
inadvertently issued only 2,000.
As of April 20, 1998, LSI amended Warrant No. 96-019 to change the exercise
price of $.75 cents per share to $.50 cents per share in exchange for a verbal
committment by a non-US citizen to find additional short term financing. Warrant
No. 96-019 gives an offshore investor the right to purchase 615,184 shares of
Restricted Voting Common Stock at $.50 per share for an aggregate exercise price
of $307,592.
As of April 21, 1998, LSI has amended 23 of LSI's 24 warrants outstanding
as of 4/21/98 for the purchase of a total of 14,000,000 shares to change the
exercise price from $.75 cents per share to $.50 cents per share for an
aggregate exercise price of $7,000,000 in exchange for a promise by a non-US
citizen to exert maximum best efforts to encourage the holders of the warrants
to exercise those warrants as well as to find other additional financing.
As of April 21, 1998, LSI issued 300,000 shares of Restricted Voting Common
Stock to one accredited investor as a finder's fee related to a convertible
debenture originally issued to one accredited investor on July 31, 1996. LSI has
issued the 300,000 shares with an original issue date of August 25, 1997, which
is the date the shares issued pursuant to conversion of the debenture were
originally issued. These shares were issued pursuant to Regulation S.
As of May, 1998, one employee exercised an incentive stock option for the
purchase of 25,000 shares of LSI at $.25 per share for an aggregate purchase
price of $6,250.
ITEM 11. DESCRIPTION OF LSI'S SECURITIES TO BE REGISTERED
LSI is authorized to issue 250,000,000 shares of Common Stock, $0.001 par
value, of which 36,099,709 shares are currently outstanding. Currently, LSI has
reserved 4,555,000 shares of its Common Stock for issuance pursuant to exercise
of outstanding options. Currently, LSI has also reserved 31,400,000 shares of
its Common Stock for issuance pursuant to exercise of warrants. Holders of the
Common Stock are entitled to one vote per share on matters to be voted upon by
the stockholders, to receive dividends when and if declared by the Board of
Directors of the LSI and to share ratably in the assets of LSI legally available
for distribution to stockholders in the event of liquidation or dissolution. The
Common Stock has no preemptive rights and no subscription, redemption or
conversion privileges. The Common Stock does not have cumulative voting rights,
which
Page 40
<PAGE>
means the holders or more than one-half of the shares voting for the election of
directors can elect all of the directors. All of the outstanding shares of
Common Stock are fully paid and not liable for further call or assessment.
Interwest Transfer Co. Inc. at 1981 East 4800 South, Suite 100, Salt Lake
City, Utah 84117, is the registrar and transfer agent for its Common Stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 16-10a-902 of the Utah Revised Business Corporation Act (the "Act")
provides that a corporation may indemnify a director against liability in a
proceeding if: (a) his conduct was in good faith; and (b) he reasonably
believed that his conduct was not opposed to the corporation's best interests.
Section 16-10a-903 of the Act provides that a corporation shall indemnify a
director who was successful, on the merits or otherwise, in the defense of a
proceeding to which he was a party because he is or was a director of the
corporation, against reasonable expenses incurred by him in connection with the
proceeding or claim with respect to which he has been successful. Section 16-
10a-907 of the Act provides that an officer of the corporation is entitled to
mandatory indemnification under Section 16-10a-903 to the same extent as a
director.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to directors, officers
and controlling persons of LSI pursuant to the foregoing provisions, or
otherwise, LSI has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by LSI of
expenses incurred or paid by a director, officer or controlling person of LSI in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, LSI will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
Page 41
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data for LSI are set forth
following Item 15.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants or disagreements by LSI with its
accountants on accounting or financial disclosures.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. The following financial statements are presented
for LSI:
<TABLE>
<CAPTION>
Description of Report Date of Report Page
- - ----------------------------------------------- -------------------- ------
<S> <C> <C>
Audit of consolidated and combined financial
statements of Lanstar Semiconductor Inc. and
Subsidiaries and Lanstar Computer Corporation
and Subsidiary as of December 31, 1997 and
1996 March 26, 1998 F-1
Review of consolidated and combined statements
of Lanstar Semiconductor Inc. and Subsidiaries
and Lanstar Computer Corporation and Subsidiary
as of March 31, 1998 and 1997 June 8, 1998 F-2
</TABLE>
Page 42
<PAGE>
(b) Exhibits
--------
Exhibit No. Description
- - ----------- -----------
10.18 Lease Agreement by and between Continental Properties Joint
Venture #5 and CTI
11 See Financial Statements - Item 15(a) filed herewith
21 Subsidiaries of LSI
23 Consents of Cheshier & Fuller, L.L.P.
27 Financial Data Schedule
Page 43
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, LSI has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
LANSTAR SEMICONDUCTOR INC.
Date: June 17, 1998 By: /S/ MAXIE R. SMITH
--------------------------------
Maxie R. Smith, President and
Chief Executive Officer
Page 44
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
AND LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
-----------------
Page
------
Independent Auditors' Report F - 1
Independent Accountants' Report F - 2
Consolidated and Combined Balance Sheets F - 3
Consolidated and Combined Statements of Income F - 6
Consolidated and Combined Statements of Changes
in Stockholders' Equity F - 8
Consolidated and Combined Statements of Cash Flows F - 11
Notes to Consolidated and Combined Financial Statements F - 13
<PAGE>
[CHESHIER & FULLER, L.L.P. LETTERHEAD APPEARS HERE]
Independent Auditors' Report
----------------------------
To the Board of Directors and
Stockholders of Lanstar Semiconductor Inc.
We have audited the accompanying consolidated and combined balance sheets of
Lanstar Semiconductor Inc. and Subsidiaries and Lanstar Computer Corporation and
Subsidiary as of December 31, 1997 and 1996, and the related consolidated and
combined statements of income, changes in stockholders' equity and cash flows
for the years ended December 31, 1997 and 1996 and the period from inception
through December 31, 1995. These financial statements are the responsibility of
the Companies' 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 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 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 Lanstar Semiconductor Inc. and
Subsidiaries and Lanstar Computer Corporation and Subsidiary as of December 31,
1997 and 1996, and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1996, and for the period from inception
through December 31, 1995, in conformity with generally accepted accounting
principles.
The accompanying consolidated and combined financial statements have been
prepared assuming that the Companies will continue as a going concern. As
discussed in Note 13 to the consolidated and combined financial statements, the
Companies have suffered recurring losses from operations and LSI has a working
capital deficiency, which raises substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters also are
described in Note 13. The consolidated and combined financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
S/CHESHIER & FULLER, L.L.P.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
March 26, 1998
F-1
<PAGE>
[CHESHIER & FULLER, L.L.P. LETTERHEAD APPEARS HERE]
Independent Accountants' Report
-------------------------------
To the Board of Directors and Stockholders
Lanstar Semiconductor Inc.
We have reviewed the accompanying consolidated and combined balance sheets of
Lanstar Semiconductor Inc. and Subsidiaries and Lanstar Computer Corporation and
Subsidiary as of March 31, 1998, and 1997, and the related consolidated and
combined statements of income and cash flows for the three months ended March
31, 1998, and 1997, in accordance with Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. All information included in these financial statements is the
representation of management of Lanstar Semiconductor Inc. and Subsidiaries and
Lanstar Computer Corporation and Subsidiary.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ CHESHIER & FULLER, L.L.P.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
June 8, 1998
F-2
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Balance Sheets
----------------------------------------
December 31, 1997 and 1996
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended March 31,
1997 1996 1998 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,708 $ 382,125 $ 186,192 $ 243,147
Marketable securities available for sale -0- 530,093 -0- -0-
Trade accounts receivable, less allowance for
doubtful accounts of $30,995 and $105,607
at December 31, 1997 and 1996, respectively 329,696 2,557,938 533,254 3,508,232
Accounts receivable - other 10,914 2,770,747 71,852 2,099,276
Inventory 259,812 668,768 202,198 838,224
Prepaid expenses 20,590 110,099 88,556 118,291
---------- ----------- ---------- -----------
622,720 7,019,770 1,082,052 6,807,170
---------- ----------- ---------- -----------
Furniture and equipment, less accumulated
depreciation of $318,905 at December 31, 1997
and $179,999 at December 31, 1996 623,976 492,529 778,989 444,630
Other assets:
Other assets 5,025 116,410 5,595 117,850
Goodwill, less accumulated amortization of
$94,238 at December 31, 1996 -0- 22,522,986 -0- 22,240,271
---------- ----------- ---------- -----------
5,025 22,639,396 5,595 22,802,751
---------- ----------- ---------- -----------
Total Assets $1,251,721 $30,151,695 $1,866,636 $29,609,921
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Balance Sheets
----------------------------------------
December 31, 1997 and 1996
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended March 31,
1997 1996 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable $ 695,570 $ 458,917 $ 717,444 $ 174,777
Accrued expenses 349,060 785,454 492,633 937,528
Bank overdraft 131,212 115,529 -0- -0-
Margin account -0- 231,799 -0- -0-
Accrued income taxes -0- 212,122 -0- 212,122
Debentures payable - private placements -0- 47,000 -0- 46,000
----------- ----------- ----------- -----------
1,175,842 1,850,821 1,210,077 1,370,427
Long-term debt:
Debenture payable - private sale -0- 750,000 -0- 750,000
----------- ----------- ----------- -----------
Total Liabilities 1,175,842 2,600,821 1,210,077 2,120,427
Stockholders' equity:
Lanstar Computer Corporation -
Common stock - .01 par value, 10,000,000 shares
authorized, 5,183,333 shares issued and
outstanding at December 31, 1997 and 1996 51,833 51,833 51,833 51,833
Additional paid-in capital 402,947 402,947 402,947 402,947
Retained deficit (454,780) (454,780) (454,780) (454,780)
Lanstar Semiconductor Inc.-
Common stock - .001 par value, 250,000,000 share
authorized, 57,254,669 shares issued and
31,399,669 shares outstanding at December 31,
1997, 42,115,371 shares issued and 41,815,371
shares outstanding at December 31, 1996 57,254 42,115 59,640 42,115
Treasury stock at cost, 25,855,000 shares at
December 31, 1997, 300,000 shares at
December 31, 1996 (27,775,888) -0- (27,775,888) -0-
Additional paid-in capital 34,072,366 30,755,210 35,858,623 30,755,210
Unissued common stock 536,980 -0- -0- -0-
Note receivable SMI (500,000) -0- (500,000) -0-
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Balance Sheets
----------------------------------------
December 31, 1997 and 1996
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended March 31,
1997 1996 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stockholder/management loans
Southwest Memory, Inc. -0- (580,088) -0- (398,132)
Components & More/Mikhail Goldshtein -0- (125,517) -0- (118,688)
Jenalong Holdings, Inc. (53,064) (45,567) -0- (45,567)
Jenalong Holdings, Ltd. -0- (39,000) -0- (45,000)
Individual officers/stockholders (10,310) (59,243) -0- (389,122)
Unrealized loss - marketable securities
available for sale -0- (4,937) -0- -0-
Retained deficit (6,251,459) (2,392,099) (6,985,816) (2,311,322)
----------- ----------- ----------- -----------
Total Stockholders' Equity 75,879 27,550,874 656,559 27,489,494
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 1,251,721 $30,151,695 $ 1,866,636 $29,609,921
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Statements of Income
----------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended Inception through Three Months Ended
December 31, March 31,
1997 1996 1995 1998 1997
----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales, of which $1,018,132 in 1997 and
$1,300,000 in 1996 are sales to SMI $ 7,442,038 $ 5,765,629 $ 6,154,060 $ 2,239,027 $ 1,235,841
Cost of goods sold, of which $562,046 in
1997 and $550,000 in 1996 are purchases
from SMI and $500,000 in 1995 are
from Southwest Memory, Inc. (6,963,977) (5,507,265) (6,015,155) (1,976,618) (997,779)
----------- ----------- ----------- ----------- -----------
Gross profit 478,061 258,364 138,905 262,409 238,062
----------- ----------- ----------- ----------- -----------
Selling, general and administrative expenses (2,239,637) (1,019,421) (1,016,574) (858,423) (397,821)
Research and development (1,886,811) (476,055) (655,704) (137,411) (121,862)
Bad debt expense (60,264) (377) (84,531) (932) -0-
----------- ----------- ----------- ----------- -----------
(4,186,712) (1,495,853) (1,756,809) (996,766) (519,683)
----------- ----------- ----------- ----------- -----------
Operating loss (3,708,651) (1,237,489) (1,617,904) (734,357) (281,621)
Other income (expense):
Interest income 7,441 2,501 153 -0-
Interest expense and finance charges (83,670) (8,993) (16,300) -0- (2,076)
----------- ----------- ----------- ----------- -----------
Net loss from continuing operations
before income tax (3,784,880) (1,243,981) (1,634,051) (734,357) (283,697)
Provision for income tax -0- -0- -0- -0- -0-
----------- ----------- ----------- ----------- -----------
Net loss from continuing operations (3,784,880) (1,243,981) (1,634,051) (734,357) (283,697)
Discontinued operations:
Income from operations of SMI
(less applicable income taxes
of $0 in 1997 and $0 in 1996) (74,480) 31,153 -0- -0- 364,474
----------- ----------- ----------- ----------- -----------
Net loss (3,859,360) (1,212,828) (1,634,051) (734,357) 80,777
Allocated to Lanstar Computer Corporation -0- (8,714) (446,066) -0- -0-
----------- ----------- ----------- ----------- -----------
Allocated to Lanstar Semiconductor Inc. $(3,859,360) $(1,204,114) $(1,187,985) $ (734,357) $ 80,777
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Statements of Income, continued
---------------------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Inception through Three Months Ended
Fiscal Year Ended December 31, March 31,
1997 1996 1995 1998 1997
-------- -------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C>
Basic and diluted loss per share of
Lanstar Semiconductor Inc.
Net loss $(0.09) $(0.09) $(0.16) $(0.01) $ 0.00
(Income) loss from discontinued operations 0.00 0.00 .00 .00 (0.01)
------ ------ ------ ------ ------
Loss from continuing operations $(0.09) $(0.09) $(0.16) $(0.01) $(0.01)
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Statements of Changes in Stockholders' Equity
-----------------------------------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period From Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Lanstar Computer Corporation
---------------------------------------------------------------------------------
Additional Stockholder/
Par Paid-In Management Retained
Shares Value Capital Loans Deficit
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September, 1993 - $ - $ - $ - $ -
Shares issued for subscrip-
tion receivable-private sale 3,900,000 39,000 (39,000)
Shares issued to consultants
and their affiliates for services 476,316 4,763
Shares issued to officers
for services 100,000 1,000
Private sale of common stock 300,000 3,000
Shares of Lanstar Semi-
conductor Inc. outstanding
at date of merger
Shares issued to stockholders
of Lanstar Computer Corpora-
tion and assumption of
subscription receivable 39,000
Stockholder loans (8,714)
Common stock sold - March,
1995 amd September 1995,
offering of Lanstar
Computer Corporation 407,017 4,070 402,947
Net loss - inception through
December 31, 1995 (446,066)
---------------------------------------------------------------------------------
Balance,
December 31, 1995 5,183,333 51,833 402,947 (8,714) (446,066)
</TABLE>
<TABLE>
<CAPTION>
Lanstar Semiconductor Inc.
---------------------------------------------------------------------------------
Additional Stockholder/
Par Paid-In Management Unrealize Retained
Shares Value Capital Loans Loss Deficit
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September, 1993 - $ - $ - $ - $ - $ -
Shares issued for subscrip-
tion receivable-private sale
Shares issued to consultants
and their affiliates for services 553,684 554
Shares issued to officers
for services 750,000 750
Private sale of common stock
Shares of Lanstar Semi-
conductor Inc. outstanding
at date of merger 1,500,000 1,500 (1,500)
Shares issued to stockholders
of Lanstar Computer Corpora-
tion and assumption of
subscription receivable 5,183,333 5,183 (5,183) (39,000)
Stockholder loans (4,600)
Common stock sold - March,
1995 amd September 1995,
offering of Lanstar
Computer Corporation
Net loss - inception through
December 31, 1995 (1,187,985)
---------------------------------------------------------------------------------
Balance,
December 31, 1995 7,987,017 7,987 (6,683) (43,600) - (1,187,985)
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balance, September, 1993 $ -
Shares issued for subscrip-
tion receivable-private sale -
Shares issued to consultants
and their affiliates for services 5,317
Shares issued to officers
for services 1,750
Private sale of common stock 3,000
Shares of Lanstar Semi-
conductor Inc. outstanding
at date of merger -
Shares issued to stockholders
of Lanstar Computer Corpora-
tion and assumption of
subscription receivable -
Stockholder loans (13,314)
Common stock sold - March,
1995 amd September 30, 1995,
offering of Lanstar
Computer Corporation 407,017
Net loss - inception through
December 31, 1995 (1,634,051)
-------------
Balance,
December 31, 1995 (1,230,281)
</TABLE>
The accompanying notes are an intergal part of these financial statements.
F-8
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Statements of Changes in Stockholders' Equity
-----------------------------------------------------------------------
For the years ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Lanstar Computer Corporation
--------------------------------------------------------------
Additional Stockholder/
Par Paid-In Management Retained
Shares Value Capital Loans Deficit
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stockholder loans 8,714
Treasury stock acquired
at no cost
Debentures converted to
common stock - September,
1995 offering of Lanstar
Semiconductor Corporation
Issuance of common stock in
release of trade payable
Debentures converted to
common stock - November,
1995 offering of Lanstar
Semiconductor Corporation
Shares issued to consultants
and their affiliates for
services
Conversion of debenture
payable
Capital contributed by
stockholders of Southwest
Memory International, Inc.
prior to merger
Unrealized loss
Net loss (8,714)
--------------------------------------------------------------
Balance,
December 31, 1996 5,183,333 51,833 402,947 -- (454,780)
<CAPTION>
Lanstar Semiconductor Inc.
------------------------------------------------------------------------------------ -------------
Additional Stockholder/ Total
Par Paid-In Treasury Management Unrealized Retained Stockholders'
Shares Value Capital Stock Loans Loss Deficit Equity
------------------------------------------------------------------------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stockholder loans (805,815) (797,101)
Treasury stock acquired
at no cost (300,000) - -
Debentures converted to
common stock - September,
1995 offering of Lanstar
Semiconductor Corporation 139,500 139 139,361 139,500
Issuance of common stock in
release of trade payable 111,000 111 463,332 463,443
Debentures converted to
common stock - November,
1995 offering of Lanstar
Semiconductor Corporation 297,663 298 441,200 441,498
Shares issued to consultants
and their affiliates for
services 1,580,151 1,580 1,580
Conversion of debenture
payable 3,000,040 3,000 747,000 750,000
Purchase of Southwest
Memory International, Inc. 29,000,000 29,000 28,971,000 29,000,000
Unrealized loss (4,937) (4,937)
Net loss (1,204,114) (1,212,828)
------------------------------------------------------------------------------------ -------------
Balance,
December 31, 1996 41,815,371 42,115 30,755,210 -- (849,415) (4,937) (2,392,099) 27,550,874
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Statements of Changes in Stockholders' Equity
-----------------------------------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period From Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Lanstar Computer Corporation
---------------------------------------------------------------------------------
Additional Stockholder/
Par Paid-In Management Retained
Shares Value Capital Loans Deficit
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Conversion of debentures
payable
Shares issued for services
and financing expense
Issuance of common stock in
release of trade payable
Unissued common stock sold
Treasury stock acquired
Sale of common stock
Stockholder loans
Purchase of warrants to
acquire common stock
Employee stock options vested
Unrealized gain
Net loss
---------------------------------------------------------------------------------
Balance,
December 31, 1997 5,183,333 $ 51,833 $ 402,947 $ - $ (454,780)
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
Lanstar Semiconductor Inc.
---------------------------------------------------------------------------------------
Additional Unissued
Par Paid-In Treasury Common
Shares Value Capital Stock Stock
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Conversion of debentures 6,866,398 6,866 1,590,484
payable
Shares issued for services
and financing expense 202,900 203 20,087
Issuance of common stock in
release of trade payable 70,000 70 155,780
Unissued common stock sold 536,980
Treasury stock acquired (25,555,000) (27,775,888)
Sale of common stock 8,000,000 8,000 992,000
Stockholder loans
Purchase of warrants to
acquire common stock 500,000
Employee stock options vested 58,805
Unrealized gain
Net loss
---------------------------------------------------------------------------------------
Balance,
December 31, 1997 31,399,669 $ 57,254 $ 34,072,366 $(27,775,888) $ 536,980
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Lanstar Semiconductor Inc.
--------------------------------------------------
Stockholder/ Total
Management Unrealized Retained Stockholders'
Loans Loss Deficit Equity
-------------------------------------------------- ----------------
<S> <C> <C> <C> <C>
Conversion of debentures 1,597,350
payable
Shares issued for services
and financing expense 20,290
Issuance of common stock in
release of trade payable 155,850
Unissued common stock sold 536,980
Treasury stock acquired (27,775,888)
Sale of common stock 1,000,000
Stockholder loans 786,041 786,041
Purchase of warrants to
acquire common stock (500,000) -
Employee stock options vested 58,805
Unrealized gain 4,937 4,937
Net loss (3,859,360) (3,859,360)
-------------------------------------------------- ----------------
Balance,
December 31, 1997 $(563,374) $ - $(6,251,459) $ 75,879
================================================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Statements of Cash Flows
--------------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
Inception through Three Months Three Months
Fiscal Year End December 31, Ended Ended
1997 1996 1995 March 31, 1998 March 31, 1997
---------- ----------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) (3,859,360) $(1,212,828) $(1,634,051) (734,357) 80,777
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation 212,460 107,324 36,795 45,192 47,899
Interest paid with common stock 76,350 -0- -0- -0- -0-
Services rendered for common stock 290 1,580 7,067 -0- -0-
Bad debt expense 447,734 377 84,531 932 -0-
Amortization 1,036,618 109,238 -0- -0- 282,715
Employee stock options vested 58,805 -0- -0- -0- -0-
(Increase) decrease in:
Trade receivables (2,406,216) (14,796) (108,274) (204,490) (950,294)
Other receivables 2,675,700 25 573 -0- (60,938) 671,471
Inventories (315,929) (308,682) (9,423) 57,614 (169,456)
Prepaid expenses 55,371 (60,000) -0- (67,966) (8,192)
Increase (decrease) in:
Accounts payable - trade 513,321 209,058 168,199 21,874 (284,140)
Account payable - Southwest Memory, Inc. -0- -0- 469,443 -0- -0-
Accrued expenses (74,529) 28,420 505,389 143,573 152,074
Accrued income taxes (212,122) -0- -0- -0- -0-
---------- ----------- ----------- --------- -------
Net cash used for operating activities (1,791,507) (1,114,736) (480,324) (798,566) (177,146)
---------- ----------- ----------- --------- -------
INVESTING ACTIVITIES:
Furniture and equipment additions (452,116) (195,020) (317,205) (200,205) -0-
(Increase) decrease in other assets (6,615) 210 (3,620) (570) (1,440)
Purchase of goodwill -0- (15,000) -0- -0- -0-
Sale (purchase) of marketable securities 303,231 (303,231) -0- -0- 303,231
---------- ----------- ----------- --------- -------
Net cash used for investing activities (155,500) (513,041) (320,825) (200,775) 301,791
---------- ----------- ----------- --------- -------
FINANCING ACTIVITIES:
Payment of debentures payable (6,000) -0- -0- -0- (1,000)
Proceeds from private sales of debentures
and common stock 2,286,980 1,777,749 760,267 1,251,663 -0-
Increase in bank overdraft 17,027 39,153 71,589 (131,212) (115,529)
Increase in stockholder loan (298,086) (203,001) (13,314) 63,374 (147,094)
Purchase of treasury stock (433,331) -0- -0- -0- -0-
Cash acquired in SMI purchase -0- 378,608 -0- -0- -0-
---------- ----------- ----------- --------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Statements of Cash Flows
--------------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
Inception through Three Months Three Months
Fiscal Year Ended December 31, Ended Ended
1997 1996 1995 March 31, 1998 March 31, 1997
---------- ---------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net cash provided by financing activities 1,566,590 1,992,509 818,542 1,183,825 (263,623)
---------- ---------- -------- --------- --------
Increase (decrease) in cash and cash equivalents (380,417) 364,732 17,393 184,484 (138,978)
Cash and cash equivalents, beginning of period 382,125 17,393 -0- 1,708 382,125
---------- ---------- -------- --------- --------
Cash and cash equivalents, end of period $ 1,708 $ 382,125 $ 17,393 $ 186,192 $243,147
========== ========== ======== ========= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 7,320 $ 9,053 $ 11,825 $ -0- $ 2,076
========== ========== ======== ========= ========
Income taxes $ -0- $ -0- $ -0- $ -0- $ -0-
========== ========== ======== ========= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Issuance of common stock in settlement of
interest expense and financing expense $ 76,350 $ -0- $ -0- $ -0- $ -0-
========== ========== ======== ========= ========
Net change in unrealized loss on marketable
securities available for sale $ (4,937) $ 4,937 $ -0- $ -0- $ (4,937)
========== ========== ======== ========= ========
Marketable securities acquired by
margin debt $ -0- $ 231,799 $ -0- $ -0- $ -0-
========== ========== ======== ========= ========
Issuance of common stock for assets
(other than cash) less liabilities of SMI $ -0- 28,621,391 $ -0- $ -0- $ -0-
========== ========== ======== ========= ========
Convertible debentures tendered for
common stock $1,541,000 $1,330,998 $ -0- $ -0- $ -0-
========== ========== ======== ========= ========
Margin debt liquidated through sale
of marketable securities $ 231,799 $ -0- $ -0- $ -0- $231,709
========== ========== ======== ========= ========
Issuance of common stock in settlement of
accounts payable $ 156,140 $ 463,443 $ -0- $ -0- $ -0-
========== ========== ======== ========= ========
Treasury stock acquired by relinquishing SMI
assets (other than cash) less liabilities 27,342,557 $ -0- $ -0- $ -0- $ -0-
========== ========== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 1 - Nature of Business and Significant Accounting Policies
NATURE OF BUSINESS
Because they are under common control and management, the financial
statements of Lanstar Semiconductor Inc. and Subsidiaries and Lanstar
Computer Corporation and Subsidiary, collectively referred to as "the
Company," are combined. The Company is engaged in the development,
assembling and distribution of computer components, computer memory,
CPU products and personal computers, primarily in the continental
United States. A chronology of the Company's parents' and
subsidiaries' dates of organization and/or purchase is outlined below,
in addition to the Company's combination and consolidation policy.
Lanstar Computer Corporation and Subsidiaries:
Lanstar Computer Corporation (LCC) was organized as a Texas
corporation in September, 1993. Its wholly-owned subsidiary, Simmco
Memory Products, Inc. (Simmco) was organized by LCC as a Texas
corporation in November, 1994. Collectively, LCC and Simmco were
engaged in the distribution of computer memory products. During 1995
and 1996, most operations of LCC and Simmco were taken over by
Lanstar Semiconductor Inc. and Subsidiaries. LCC and Simmco became
dormant.
LSC was organized in June 1995 as a Texas corporation and a wholly-
owned subsidiary of LCC. Various intangible assets with no historical
cost were distributed from LCC to LSC. LCC then spun out the common
shares of LSC to the shareholders of LCC, through a dividend of
5,183,333 shares of LSC common stock.
Lanstar Semiconductor Inc. (LSI) was organized as a Utah corporation
in October, 1980, as Kazmir Kliffs, Inc. During November, 1995,
Kazmir Kliffs, Inc., which was controlled by Mr. Kurtis D. Hughes and
Ms. Shirrell Hughes, 2 of approximately 335 shareholders, changed
its name to Lanstar Semiconductor Inc. and entered into an agreement
to issue up to 8,500,000 common shares of LSI to the stockholders of
LSC and debenture holders of debentures that were convertible into LSC
common stock in exchange for all the outstanding common shares and all
the outstanding convertible rights to common shares of LSC. Prior to
the closing of the agreement, there were 1,500,000 common shares of
LSI outstanding. During the period from 1989 until November, 1995,
Kazmir Kliffs, Inc. had no activity. This acquisition was accounted
for as a reverse acquisition with LSC being the accounting acquirer.
F-13
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 1 - Nature of Business and Significant Accounting Policies, continued
NATURE OF BUSINESS
During November, 1996, LSI acquired all of the outstanding stock of
Southwest Memory International, Inc. (SMI) from World Data Limited in
exchange for 29,000,000 common shares of LSI of which 3,000,000 shares
were allocated as a finder's fee relative to the transaction. SMI is
engaged in the distribution of computer memory products. SMI was
organized as a Texas corporation in January, 1996. The operations of
SMI were acquired from a predecessor company, Southwest Memory, Inc.,
during early 1996.
Effective October 13, 1997, LSI sold 100% of the outstanding stock of
SMI for 25,555,000 common shares of LSI, plus additional
consideration in the form of cash, inventory, a promissory note and a
line of credit. The acquisition of the treasury stock was reflected at
the net book value of the stockholder's equity of SMI as of the date
of acquisition.
In 1997, Lanstar Computer Products, Inc., a Texas corporation, (LCP)
was organized as a wholly-owned subsidiary of LSI to engage in the
distribution of computer components, computer memory, CPU products and
complete computer systems. Also, in 1997, Lanstar Systems Technology,
Inc., a Texas corporation, (LST) was organized as a wholly-owned
subsidiary of LSI to manufacture and distribute personal computers and
computer networks to consumers and selected corporate entities.
CONSOLIDATION AND COMBINATION POLICY
Because they are under common control and management, the consolidated
financial statements of LSI and LCC are combined. The combined
financial statements are comprised of the development, assembly and
distribution of computer components, computer memory, CPU products and
personal computers by LSI and its subsidiaries and LCC and its
subsidiary. Combined financial statements are presented in a method
similar to a pooling of interests. The financial statement activity
has been combined from the inception of LCC in September, 1993, and
LSC in June, 1995. Because the combined companies have separate
ownership, the net losses incurred were allocated to each company.
During the period from inception through December 31, 1995, the
combined net loss was allocated to LSI and LCC based on the amount of
loss incurred by each company. During 1996, the combined net loss
allocated to LSI and LCC was based on the amount of loss borne by each
company; however, any losses incurred by LCC and its subsidiary in
excess of paid-in capital was borne by LSI and its subsidiaries.
F-14
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 1 - Nature of Business and Significant Accounting Policies, continued
CONSOLIDATION AND COMBINATION POLICY
The acquisition by LCC of Simmco was accounted for as a purchase of a
subsidiary. The merger of LSC and LSI was accounted for as a reverse
acquisition. As such, the historical statements are those of LSC
presented on a recapitalized basis through the issuance of shares by
LSI. The acquisition of SMI was accounted for as a purchase. The
purchase of SMI by LSI was computed at a cost of $1 per common share
and was reflected as follows:
Goodwill $22,617,224
Value of tangible net assets of SMI 6,382,776
----------
Total Cost $29,000,000
===========
The total cost was determined by management based on the discounted
estimated value of the common shares issued upon purchase of SMI.
The goodwill associated with the above purchase was amortized using
the straight-line method over twenty years. The reason for the period
adopted was that, in management's opinion, 20 years is the average
life of the business relationships which enable the business of SMI to
remain profitable. The amortization was $1,036,618 and $94,238 during
1997 and 1996, respectively, and was charged to income from
discontinued operations.
All intercompany profits and transactions have been eliminated in
combination and consolidation, except for intercompany transactions of
sales and expenses with SMI. These transactions have not been
eliminated and remain in their respective sales and expense categories
due to the fact that all results of operations of SMI have been
excluded from continuing operations and reflected as a discontinued
operation in the consolidated and combined statements of income.
INVENTORY
Inventory values are stated at the lower of first-in, first-out (FIFO)
and average cost or market. Through December 31, 1997, most
manufacturing was performed by third parties. As a result no general
and administrative costs were charged to inventories.
MARKETABLE SECURITIES AVAILABLE FOR SALE
Securities are to be held for indefinite periods of time and are not
intended to be held to maturity or on a long-term basis. They are
classified as available for sale. Realized gains and losses on
dispositions are based on the net proceeds and the adjusted book value
of the securities sold, using the specific identification method.
Unrealized gains and losses on marketable securities available for
sale are based on the difference between book value and fair value of
each security. These gains and losses are credited or charged to
stockholders' equity, whereas realized gains and losses flow through
the Company's operations.
LOSS PER SHARE
During 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
Loss per share has been reflected under those provisions for all
periods presented. The effect of this change was immaterial.
F-15
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 1 - Nature of Business and Significant Accounting Policies, continued
LOSS PER SHARE
Loss per share is calculated by dividing net loss attributable to LSI
by the average shares of LSI common stock outstanding during each
period presented. Loss per share for LCC is not presented because,
during 1996, its operations were assumed by LSI, and there is no
trading in its securities and there are no plans for such trading. In
the case of a reverse acquisition, all share and per share information
have been retroactively applied to give effect for all shares
outstanding immediately after the consolidating transactions.
PERIODS PRESENTED
The combined activity of LCC, Simmco and LSC are presented from their
respective inceptions through December 31, 1995. Their combined
activity is also presented for the year ended December 31, 1996. The
activity of SMI is included as a consolidated subsidiary of LSI from
its purchase in November, 1996, through December 31, 1996 and for the
period from January 1, 1997 until it was sold effective October 13,
1997, as explained in Note 12 on page F-30.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Depreciation is
calculated using straight-line method over the estimated useful lives
of the assets of 3 to 10 years. Depreciation expense for the period
from inception through December 31, 1995, was $36,795 and for the
years ended December 31, 1997 and 1996, it was $212,460 and $107,324,
respectively.
ALLOWANCE FOR BAD DEBTS
The Company provides an allowance for uncollectible accounts based
upon prior experience and management's assessment of the
collectibility of existing specific accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-16
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 1 - Nature of Business and Significant Accounting Policies, continued
INCOME TAXES
Deferred tax assets and deferred tax liabilities, if any, are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and their
tax basis as well as the effect of net operating loss carryforwards.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effect of changes in tax
laws and rates on the date of enactment.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all cash
accounts which are not subject to withdrawal restrictions or penalties
and interest bearing accounts with maturities of 90 days or less to be
cash or cash equivalents. At December 31, 1996, certain cash deposits
exceeded federally insured limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments reported on the Company's
balance sheet approximate fair value. Fair value is estimated using
published market values for similar types of instruments.
REVENUE RECOGNITION
The Company is involved primarily in the development, assembly and
distribution of computer components, computer memory, CPU products,
and personal computers. Revenue is recognized upon shipment of
products to customers.
INCOME FROM DISCONTINUED OPERATIONS
As explained in Note 12 on page F-30, SMI was sold during 1997. SMI
has been accounted for as a discontinued operation and the results of
operations have been excluded from continuing operations in the
accompanying consolidated and combined statements of income.
F-17
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 1 - Nature of Business and Significant Accounting Policies, continued
EMPLOYEE STOCK OPTIONS
The Company has elected to account for the compensation costs
associated with its employee stock option plans using the fair value
based method as prescribed in Statement of Financial Accounting
Standards Board No. 123, "Accounting for Stock-Based Compensation."
All compensation costs of the employee stock option arrangements have
been charged against income for the periods presented. The fair value
of each option grant is estimated on the grant date for fixed employee
stock-based compensation plans.
Note 2 - Inventories
At December 31, inventories consisted of the following:
1997 1996
--------- ---------
Raw materials $ 63,631 $ 246,900
Finished goods 196,181 421,868
--------- ---------
$ 259,812 $ 668,768
========= =========
Note 3 - Income Tax Matters
F-18
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 3 - Income Tax Matters
The net deferred tax asset and liabilities consisted of the following
components as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred tax assets (liabilities) relating to:
Lanstar Computer Corporation -
Net operating loss carryforward $ 68,218 $ 68,218
Lanstar Semiconductor Inc.
Net operating loss carryforward 1,669,209 571,284
License 158,000 169,000
Start-up costs and organization expense 98,665 124,185
Allowance for bad debts 12,243 41,187
Other 418 -0-
----------- ---------
2,006,753 973,874
Valuation allowance (1,983,059) (950,479)
----------- ---------
Net deferred tax benefits 23,694 23,395
Depreciation (23,694) (23,395)
----------- ---------
$ -0- $ -0-
=========== =========
</TABLE>
A reconciliation of income tax expense computed by applying the
expected Federal statutory tax rates by net loss is as follows:
<TABLE>
<CAPTION>
Inception to
December 31,
1997 1996 1995
----------- ---------- ------------
<S> <C> <C> <C>
Benefit at expected Federal
statutory rates $ 1,263,142 $ 422,740 $ 479,766
Benefit at expected State
statutory rates 154,374 48,165 50,459
Goodwill amortization (383,549) (36,753)
Travel and loss of foreign
corporation (1,387) (13,855) (43)
Change in valuation allowance (1,032,580) (420,297) (530,182)
----------- --------- ---------
Provision for income tax $ -0- $ -0- $ -0-
=========== ========= =========
</TABLE>
LCC has a net operating loss carryforward of approximately $454,780
expiring during years 2008 through 2011. LSI has a net operating loss
carryforward of $4,244,388 for income tax purposes which expires in
2010 and 2012. The realization of income tax benefits from these
losses is limited by certain code sections of the Internal Revenue
Code.
F-19
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 4 - Private Placements
During 1995 and 1996, the Company issued five private placement
memorandums for the sale of securities under various exempt provisions
of the Securities Act of 1933, as amended. The general provision and
capital procured with each offering is summarized as follows:
<TABLE>
<CAPTION>
Name of Date of LSI
Issuing Offering Capital Common Stock General Description
Entity Memorandums Procured Issued of Security Issued
------- ----------- -------- ------------ ------------------
<S> <C> <C> <C> <C>
LCC March 3, 1995 $407,017 407,017 Common stock and debentures payable of LCC - 1 common
and share of LCC for $1 and debenture payable convertible to
September 30, 1995 LSC common stock, or the common stock of any public
corporation into which LSC may be merged, at the rate
of 1 share for each $1 of the debentures' face value.
LSC September 15, 1995 $140,500 140,500 Debentures payable of LSC-Convertible to 1 share of LSC,
or the common stock of any public parent company, for
each $1 of the debentures' face value.
LSC November 15, 1995 $441,498 297,663 Debentures payable of LSC-Convertible to 1 share of LSC
common stock at the rate of 1 share for each $1.50 of
the debentures' face value.
Simmco January, 1996 $ 46,000 40,000 Debentures payable of Simmco-Convertible to 1 share of
Simmco common stock, or the common stock of a publicly
held corporation with which Simmco exchanges shares, for
each $1 of the debentures face value.
</TABLE>
F-20
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 4 - Private Placements, continued
By December 31, 1997, all debentures issued with respect to these
private placements had been paid or converted to common stock of LSI.
No interest expense was paid or accrued with regard to the debentures
payable noted above.
All equity values with regard to these private placements were
established by the Board of Directors of the Company.
Note 5 - Loss Per Share
The computation of loss per share is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------
Weighted-
Average
Outstanding
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net loss attributed to
LSI stockholders $3,859,360 42,706,995 $0.09
Income from discontinued
operations (74,480) 42,706,995 0.00
---------- -----
Loss from continuing
operations attributed to
LSI stockholders 3,784,880 42,706,995 $0.09
=====
Loss attributed to LCC
stockholders -0-
----------
Total loss from continuing
operations $3,784,880
==========
For the Year Ended December 31, 1996
------------------------------------
Weighted-
Average
Outstanding
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
Net loss attributed to
LSI stockholders $1,204,114 13,322,558 $0.09
</TABLE>
F-21
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 5 - Loss Per Share, continued
For the Year Ended December 31, 1996
--------------------------------------
Weighted-
Average
Outstanding
Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Income from discontinued
operations 31,153 13,322,558 0.00
---------- ----
Loss from continuing operations
operations attributed to
LSI stockholders 1,235,267 13,322,558 $0.09
=====
Loss attributed to LCC
stockholders 8,714
----------
Total loss from continuing
operations $1,243,981
==========
For the Period From Inception Through
December 31, 1995
---------------------------------------
Weighted-
Average
Outstanding
Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Net loss attributed to
LSI stockholders $1,187,985 7,335,175 $0.16
Income from discontinued
operations -0- 7,335,175 0.00
---------- -----
Loss from continuing
operations attributed to
LSI stockholders 1,187,985 7,335,175 $0.16
=====
Loss attributed to LCC
stockholders 446,066
----------
Total loss from continuing
operations $1,634,051
==========
F-22
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 5 - Loss Per Share, continued
Potential common shares (warrants, options, and contingently issuable
shares) were not included in the denominator of a diluted per share
computation because their inclusion would have an anti-dilutive
effect.
Note 6 - Related Parties
During 1996, SMI purchased inventory from its predecessor, Southwest
Memory, Inc., which was wholly owned by a member of management of SMI.
The predecessor sold the inventory to Sterling International. The
inventory was then purchased by Worldwide Memory, Inc. which sold it
to SMI for approximately $903,000.
During 1995, the Company purchased inventory from Southwest Memory,
Inc., in the amount of $500,000.
SMI leased furniture and equipment from, and sub-leased office space
to Southwest Memory, Inc. The furniture and equipment was leased on a
month to month basis at $6,000 per month. The office space was sub-
leased on a month to month basis at $1,000 per month. Through October
13, 1997, $36,000 in lease expense and $6,000 in sub-lease income was
recognized by SMI. In December 1996, approximately $6,000 in lease
expense and $1,000 in sub-lease income was recognized by SMI. There
were no leasing transactions between the Company and Southwest Memory,
Inc. during 1995.
The stockholder loans shown at December 31, 1997 and 1996 consist
primarily of open accounts receivable as follows:
1997 1996
-------- ---------
Southwest Memory International, Inc. $500,000 $ -0-
Southwest Memory, Inc. -0- 580,088
Components and More/
Mikhail Goldshtein -0- 125,517
Jenalong Holdings, Inc. 53,064 45,567
Jenalong Holdings, Ltd. -0- 39,000
Individual officers/stockholders 10,310 59,243
-------- --------
$563,374 $849,415
======== ========
During 1995, the Company entered into several agreements for financial
consulting services. Based upon the instructions of the consultants,
the Company issued stock to various individuals and entities.
Consulting expenses of $9,565 and $91,013 were recognized during 1996
and 1995, respectively. The agreements were terminated in July 1996.
F-23
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 6 - Related Parties, continued
An affiliate of a shareholder of the Company acts as the transfer
agent for the Company. The Company incurred $3,019, $7,467 and $500
of expense related to stock transfer services in 1997, 1996 and 1995,
respectively.
During 1996, the Company settled a $463,443 trade account payable to
Southwest Memory, Inc. by issuing 111,000 shares of stock of LSI to a
creditor of Southwest Memory, Inc.
During 1997, the Company purchased equipment totaling $112,674 from a
stockholder and affiliate owned by an officer of the Company. In
addition, the Company rented equipment from the same affiliate and
stockholder for a total of $30,540 in rental expense for the year.
The Company then purchased the equipment subsequent to year end.
The Company contracted with another entity to have certain
manufacturing processes done. One of the Company's officers was also
an officer of that entity. The Company paid $52,903 and $14,592 during
1997 and 1996, respectively, for the manufacturing processing
services.
Included in liabilities at December 31, 1997, was an amount of
approximately $36,000 due to an officer.
Note 7 - Results of Operations
The following summarized pro forma (unaudited) information for 1996
assumes the acquisition of SMI had occurred on the date of its
inception in January, 1996.
Sales $57,256,245
===========
Net Loss fom continuing operations $(1,243,981)
Loss from discontinued operations of SMI
(less applicable income taxes of $212,122
and amortization of goodwill of $1,130,861) (673,672)
-----------
Net loss $(1,917,653)
===========
Basic and diluted loss per share of Lanstar
Semiconductor Inc.
Net loss $ (0.05)
Loss from discontinued operations .02
-----------
Loss from continuing operations $ (0.03)
===========
F-24
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 8 - Operating Lease Commitments
The Company is leasing office space under three operating leases which
expire at various periods through 2003. These leases are reported as
operating leases. Under the leases, the Company is obligated to pay
the following minimum annual rents:
1998 $112,087
1999 119,786
2000 97,974
2001 102,719
2002 107,466
Thereafter 31,864
--------
$571,896
========
Total rent and lease expense was $271,744 for 1997, $217,662 for 1996
and $67,181 for the period from inception through December 31, 1995.
Note 9 - Private Sales and Outstanding Warrants
On July 31, 1996, the Company issued a subordinated convertible
debenture payable to Integrated Circuit Technology, Inc. in the amount
of $750,000. The debenture principal along with interest at the rate
of 12% per annum was payable December 31, 1996.
The debenture was convertible at the option of the holder into common
shares of LSI at the rate of $0.25 per share. On August 29, 1996, the
Company issued 3,000,040 shares of LSI common stock to various
offshore entities in exchange for the $750,000 debenture payable. Each
share had attached one warrant entitling the holder to purchase one
additional share of the common stock of LSI for $1.50 per share
exercisable at any time during a three-year period, commencing August
29, 1996.
On November 29, 1996, the Company issued a subordinated convertible
debenture payable to Geninvest S.A., in the amount of $750,000 with
essentially the same terms as that described above. On August 26,
1997, the debenture was converted to 3,428,082 shares of the Company's
common stock, which included a finder's fee of 300,000 shares and
accrued interest. 3,000,000 of the shares so issued had attached
warrants entitling the holders to purchase an aggregate of 3,000,000
shares of the common stock of LSI for $1.50 per share, exercisable at
any time during a three-year period, commencing on the date of
issuance of the shares and warrants.
F-25
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 9 - Private Sales and Outstanding Warrants, continued
On April 15, 1997, a subordinated convertible debenture in the amount
of $750,000 with essentially the same terms as that described above
was issued to Geninvest S.A. On August 26, 1997, the debenture was
converted to 3,397,316 shares of the Company's common stock, which
included a finder's fee of 300,000 shares and accrued interest.
3,000,000 of the shares so issued had attached warrants entitling the
holder to purchase an aggregate of 3,000,000 shares of the common
stock of LSI for $1.50 per share exercisable at any time during a
three-year period, commencing on the date of issuance of the shares
and warrants.
On August 26, 1997, the Company sold to various offshore investors
8,000,000 shares of common stock at $0.125 per share plus warrants
entitling the holders to purchase for a three-year period a total of
8,000,000 shares of common stock for $1.50 per share.
During November 1997, the Company agreed to amend the outstanding
warrants to purchase 17,000,040 shares of LSI common stock. Under the
agreement, in exchange for a commitment to exercise warrants for the
purchase of 3,000,000 shares of common stock no later than February 1,
1998, the Company agreed to reduce the exercise price from $1.50 per
share to $0.75 per share on warrants for the purchase of 17,000,040
shares of common stock.
On November 17, 1997, the Company received $536,980 as a part of the
above commitment. The 715,973 common shares that were issuable
relative to this transaction had not been issued by December 31, 1997.
The $536,980 was reflected as unissued common stock as of December 31,
1997.
As of December 31, 1997 and 1996, the outstanding warrants to purchase
common stock of LSI was as follows:
EXERCISE PRICE - $1.50 PER SHARE
Number of
Shares
-----------
Balance, January 1, 1996 -0-
Issued 3,000,040
Exercised (-0-)
Cancelled/expired (-0-)
-----------
Balance, December 31, 1996 3,000,040
Issued 32,000,000
Exercised (-0-)
Cancelled/expired (-0-)
Exercise price converted to $0.75 per share (17,000,040)
-----------
Balance, December 31, 1997 18,000,000
===========
F-26
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 9 - Private Sales and Outstanding Warrants, continued
The warrant to purchase the 18,000,000 common shares, which was issued
as explained in Note 12 on page F-30, expires October, 2000.
EXERCISE PRICE - $0.75 PER SHARE
Number of
Shares
----------
Balance, January 1, 1997 -0-
Exercise price converted to $.75 per share 17,000,040
Exercised (715,973)
Cancelled/expired -0-
----------
16,284,067
==========
The expiration date of the warrants to purchase the 16,284,067 shares
was as follows:
Number of
Year Shares
---- ----------
1999 2,284,067
2000 14,000,000
----------
16,284,067
===========
Note 10 - Outstanding Rights to Acquire Common Stock
During 1995, the Company granted non-qualified options to two
employees to purchase up to a total of 200,000 shares of LSI stock for
$0.25 per share. These options expire October 31, 1999.
On November 21, 1997, the Company adopted the Lanstar Semiconductor
Inc. 1997 Stock Option Plan (the Plan) which provides for the granting
of incentive stock options to employees of the Company. A maximum of
7,500,000 shares of
F-27
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 10 - Outstanding Rights to Acquire Common Stock, continued
common stock of LSI may be issued under the Plan. The option price,
subject to certain restrictions under the Plan, number of shares and
grant date are determined by the Company's Board of Directors. The
period of time available for exercise under each option granted under
the Plan is to be determined, subject to certain provisions of the
Plan, by the Board of Directors.
During 1997, the Company granted incentive stock options to purchase
3,540,000 shares at $0.25 per share under the Plan. Grantees vest in
the options over one to three year periods. All options expire at
various periods during 1999 through 2001.
During 1997, the Company granted a non-qualified option to an employee
to purchase 150,000 shares of LSI stock for $0.01 per share. The
grantee vests in the option over a two-year period. The option
expires November 1, 2000.
The fair value of each option grant is estimated on the date of grant.
The weighted average fair value of options granted during 1997 and
1995 was estimated using the following assumptions:
1997 1995
---- ----
Risk-free interest rate 5.84% 5.89%
Expected life 3.33 Years 4.5 Years
Expected volatility None None
Expected dividends None None
The market price of the LSI stock was determined to be $0.25 on the
grant date of all of the above options. The weighted-average fair
value of options granted during 1997 and 1995 was as follows:
1997 1995
--------------------- ---------------------
Per Share Per Share
Weighted- Weighted-
Exercise Number of Average Number of Average
Price Shares Fair Value Shares Fair Value
-------- --------- ---------- --------- ----------
$0.01 150,000 $0.24
$0.25 3,740,000 $0.05 200,000 $0.05
Compensation cost from fixed plans charged to operations was $58,805
during 1997.
A summary of option transactions of the fixed plans during the years
ended December 31, 1997, 1996 and 1995 is as follows:
F-28
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 10 - Outstanding Rights to Acquire Common Stock, continued
<TABLE>
<CAPTION>
1997 1995
Non-Qualified Non-Qualified
1997 Plan Grants Grants
-------------------------- -------------------- --------------------
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1995 -0- -0- -0-
Granted -0- -0- 200,000 $0.25
Exercised (-0-) (-0-) (-0-)
Cancelled (-0-) (-0-) (-0-)
--------- ----- ------- ----- ------- -----
Outstanding at December 31, 1995 -0- -0- 200,000 $0.25
Granted -0- -0- -0-
Exercised (-0-) (-0-) (-0-)
Cancelled (-0-) (-0-) (-0-)
--------- ----- ------- ----- ------- -----
Outstanding at December 31, 1996 -0- -0- 200,000 $0.25
Granted 3,740,000 $0.25 150,000 $0.01 -0-
Exercised (-0-) (-0-) (-0-)
Cancelled (-0-) (-0-) (-0-)
--------- ----- ------- ----- ------- -----
Outstanding at December 31, 1997 3,740,000 $0.25 150,000 $0.01 200,000 $0.25
========= ===== ======= ===== ======= =====
Exercisable at December 31, 1997 818,333 $0.25 50,000 $0.01 200,000 $0.25
========= ===== ======= ===== ======= =====
Available for Issue at
December 31, 1997 3,760,000
=========
</TABLE>
F-29
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 10 - Outstanding Rights to Acquire Common Stock, continued
A summary of options outstanding at December 31, 1997, is shown below:
Weighted Average
Number Remaining Contract Number
Exercise of Shares Life of Shares of Shares
Price Outstanding Outstanding Exercisable
-------- ----------- ------------------ -----------
$0.01 150,000 2.8 Years 50,000
$0.25 3,940,000 3.2 Years 918,332
Note 11 - Commitments and Contingencies
As of December 31, 1997, the Company had committed to issue to an
employee, as a bonus, up to 200,000 shares of LSI stock upon the
Company attaining certain potential patents. The patents have not yet
been attained.
Note 12 - Sale of Southwest Memory International, Inc.
On October 13, 1997, LSI sold 100% of the outstanding stock of SMI
for 25,555,000 common shares of LSI. The shares so acquired were
reflected at a cost $27,775,888 which was the net book value of the
assets less liabilities of SMI at the date of its sale. Thus, no gain
or loss was reflected on the disposition of SMI.
As part of the agreement, LSI granted to SMI, in exchange for a
promissory note payable to LSI in the amount of $500,000, a warrant to
purchase 18,000,000 shares of LSI common stock within three years of
October 13, 1997, at an exercise price of $1.50 per share. The note
is due October 13, 1998, and bears interest of 2% above prime.
Assets and liabilities of SMI consisted of the following at December
31, 1996:
Current Assets $ 6,095,466
Furniture and Equipment 124,424
Goodwill 22,522,986
Other Assets 113,000
-----------
Total Assets $28,855,876
Current Liabilities (544,214)
-----------
Net Assets $28,311,662
===========
Net assets of SMI at December 31, 1996, were not separately classified
in the accompanying balance sheet.
Net sales of SMI for the period from January 1, 1997, through October
13, 1997, were $47,157,000 and for the period from November 30, 1996,
through December 31, 1996 were $3,453,000.
Note 13 - Liquidity
During 1997, LSI along with its respective subsidiaries incurred a
net loss of $3,784,880 exclusive of the net loss earned by SMI. From
their inceptions through December 31, 1997, LCC and LSI incurred
losses of $6,662,912 exclusive of net income earned by SMI. As of
December 31, 1997, the Company had a working capital deficit of
approximately $553,122.
F-30
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Notes to Consolidated and Combined Financial Statements
-------------------------------------------------------
December 31, 1997, 1996 and 1995
--------------------------------
Note 13 - Liquidity, continued
After December 31, 1997, the Company was able to procure capital of
approximately $1,252,000 through the sale of equity through March 31,
1998 as explained in Note 14.
Management believes that additional private sales of equity and/or
exercise of outstanding warrants to acquire common stock may occur
before the end of 1998. Management has also committed to the expansion
of its distribution network.
Management intends to continue increasing sales by LCP in 1998 through
improving market share in the U.S. domestic marketplace via expansion
of its sales through the internet. In addition, management intends to
establish a more formalized international personal computer components
distribution program in the Pacific Rim and then expand it into Europe
and certain South American countries throughout 1998, 1999, and the
year 2000. Management anticipates international distribution of PC
components (primarily CPUs and memory) by the third quarter of
1998.
Approximately 10 to 15 additional SIMM products are planned to be
designed and introduced to the marketplace throughout 1998.
Management is attempting to achieve profitability of CTI no later than
the third quarter of 1998. Management is attempting to increase market
share by expanding marketing efforts on the internet toward consumer
customers.
In the event that LSI, as currently structured, cannot generate
additional funds internally from operations or from external sources,
LSI's management will re-prioritize capital expenditures away from
research and development of more complex products and toward simpler
integrated circuits and the purchase of a larger number of PC
components and subsystems for immediate distribution.
In the event that sufficient operating capital cannot be generated by
these actions, LSI's management will explore the possibility of
selling LSI and its subsidiaries as a going concern. In the event that
LSI is unable to negotiate a sale of LSI and its subsidiaries as a
going concern that would generate more value per share than a
liquidation of assets, management will liquidate its assets and
distribute them on a pro rata basis to LSI's shareholders.
There are no assurances that management will be successful in its
efforts.
Note 14 - Subsequent Events
Pursuant to the agreement to reduce the exercise price of warrants for
17,000,040 shares from $1.50 per share to $0.75 per share as explained
in Note 9 on page F-26, the Company received $1,251,662 during the
period from January 1, 1998 through March 25, 1998 for which 1,668,883
common shares are to be issued.
On March 24, 1998, the Board of Directors of LSI directed that 800,000
shares of common stock be issued as a finders fee relative to the
August 26, 1997, sale of 8,000,000 shares of common stock of LSI for
$0.125 per share as outlined in Note 9 on page F-26.
F-31
<PAGE>
EXHIBIT 10.18
[LOGO] LEASE CONTRACT
GREATER FORT WORTH BOARD OF REALTORS OFFICE LEASE, INC.
- - --------------------------------------------------------------------------------
STATE OF TEXAS
COUNTY OF TARRANT LEASE AGREEMENT
This Lease Agreement, made and entered into by and between
CONTINENTAL PROPERTIES JOINT VENTURE #5
LANDLORD 2501 AVENUE J, SUITE 103
ARLINGTON, TX 76006
hereinafter referred to as "Landlord", and
CELEX TECHNOLOGY, INC.
TENANT 2501 AVENUE J, SUITE 125
ARLINGTON, TX 76006
hereinafter referred to as "Tenant"
PREMISES 1. WITNESSETH: That Landlord in consideration of the
covenants and agreements to be performed by Tenant and upon
the terms and conditions hereinafter stated does hereby
lease, demise and let unto Tenant certain office space in
the CORPORATE EAST BUILDING located at 2501 AVENUE J,
ARLINGTON, TEXAS 76006 Texas, known as Suite No. 125, as
shown on the floor plan attached hereto as Addendum "A" and
containing the floor area indicated on said Addendum "A".
TERM For a term of 36 months, commencing on the 1st day of MAY,
1998 and ending on the 30th day of APRIL, XX 2001.
USE 2. The leased premises shall be used for no other purpose
than GENERAL OFFICE.
Tenant shall not perform any acts or carry on any practices
which may injure the building or be a nuisance to other
tenants in the building, or use the premises for any
business or purpose which is unlawful or violative of any
public or city ordinances.
RENT 3. Tenant agrees to pay to the Principal Realtor or to
whomever the landlord designates in writing at PO BOX 1108,
ALTO, NM 88312, XXXX, for the account of landlord rent for
said premises at the rate of THREE THOUSAND EIGHT HUNDRED
THIRTY THREE Dollars ($3,833.00) per month in advance. One
such monthly installment shall be due and payable on or
before the commencement date of this lease as set forth in
paragraph 1 above, and a like monthly installment shall be
due and payable on or before the same day of each succeeding
calendar month during the term hereof. With the execution of
this lease, Tenant does hereby pay and deliver to Principal
Realtor the sum of THREE THOUSAND EIGHT HUNDRED AND THIRTY
THREE Dollars ($3,833.00) the receipt of which is hereby
acknowledged by Principal Realtor, said sum to be applied to
the first and XXX months of the term of the Lease.
* TENANT HAS PREVIOUSLY PAID $3,620.00 TOWARDS LAST MONTH'S
RENT
POSSESSION 4. In the event the leased premises have been constructed
and completed at the time this Lease is executed, the Tenant
shall accept and occupy the same in "as is" condition except
as may be provided in an Addendum, if any, attached hereto
and signed by Landlord and Tenant. If the leased premises
have not been completed at the time this lease is executed,
the construction and completion of same shall be performed
in accordance with the terms and provisions of an Addendum
attached hereto and signed by Landlord and Tenant.
MAINTENANCE 5.a. Landlord shall at his expense maintain only the roof,
BY foundation, underground pipes, all outside plumbing, common
LANDLORD building corridors, stairways and common building
facilities, and the structural soundness of the exterior
walls of the building in good repair and condition, except
for reasonable wear and tear. Landlord shall be responsible
for replacement of windows and side lights unless the
breakage or damage results from negligence or intentional
act of Tenant or Tenant's employees, agents, guests, or
invitees. Landlord shall not be responsible or liable to
Tenant for interruption of building services or for
interference with Tenant's use and occupancy due to
building repairs. Tenant shall give immediate written notice
to Landlord of the need for repairs or corrections and
Landlord shall proceed promptly to make such repairs or
corrections.
MAINTENANCE 5.b. Tenant shall at all times maintain the interior of the
BY demised premises and all facilities therein in good
TENANT condition and repair and Tenant shall commit no waste or
damage to said premises. In the event Tenant should neglect
to maintain the demised premises, Landlord shall have the
right (but not the obligation) to cause repairs or
corrections to be made and any reasonable costs therefor
shall be payable by Tenant to Landlord as additional rental
on the next rental installment date. Upon termination of
this Lease, Tenant shall deliver up the demised premises in
good repair and condition, reasonable wear and tear, and
damage by fire, windstorm or other casualty only excepted.
Tenant shall repair any damage caused by Tenant's negligence
or default hereunder, or negligence of Tenant's invitees,
employees or customers.
SERVICES 6. Landlord agrees to furnish Tenant while occupying the
leased premises the following services in the manner and to
the extent deemed by Landlord to be standard.
(a) Water, at those points of supply provided for general
use of tenants.
(b) Electric service
(c) Heated and refrigerated air conditioning in season,
such service on Sunday and holidays to be optional on
part of Landlord.
(d) Elevator service in common with other tenants for
ingress and egress from the leased premises.
(e) Janitorial cleaning services
(f) Electric lighting for public areas and special service
areas of the building.
Failure to any extent to furnish or any stoppage of these
defined services, resulting from causes beyond control of
Landlord or from any cause, shall not render Landlord liable
in any respect for damages to either person or property, nor
be construed as an eviction of Tenant or work in abatement
of rent, nor relieve Tenant from fulfillment of any covenant
or agreement hereof. Should any equipment or machinery break
down, or for any cause cease to function properly, Landlord
shall use reasonable diligence to repair some promptly, but
Tenant shall have no claim for rebate of rent or damages on
account of any interruptions in service occasioned thereby
or resulting therefrom.
SIGNS 7. Tenant shall not erect or install any exterior or
interior signs or advertising media or window or door
lettering in, to, or on said premises, or introduce any
electric apparatus, wires or plumbing, therein without the
prior written consent of the Landlord.
ALTERATIONS 8. Tenant shall not create any openings in the roof or
exterior walls, nor make any alterations, additions, or
improvements to the demised premises without prior written
consent of Landlord. Consent for non-structural alterations,
additions, or improvements shall not be unreasonably
withheld by Landlord. All fixtures including floor coverings
and heating and air conditioning units, all electrical
apparatus, and all alterations, additions and improvements,
except trade fixtures, installed at the expense of the
Tenant shall be the property of the Landlord and shall
remain upon and be surrendered with the demised premises as
a part thereof at the termination of this Lease.
GFWBR-OL-1
- - --------------------------------------------------------------------------------
<PAGE>
LIABILITIES 9(a) Personal Injuries. Landlord shall not be liable or
responsible for any injury, death or inconvenience to Tenant or
to Tenant's employees, agents, invitees or guests, that may occur
in or on the building, the parking garage, or the land on which
same are located unless resulting solely from the negligence of
Landlord, its employees, or agents. Tenant agrees to indemnify
and save the landlord harmless of and from any liability,
responsibility, costs and expenses that may be occasioned by or
result from any such occurrence as a result of the negligence of
Tenant, his employees or agents.
(b) Damages to Contents of Leased Premises. All of Tenant's
personal property and trade fixtures in or upon the leased
premises and all personal property of Tenant's employees, agents,
invitees or guests, in or upon the leased premises shall be at
the sole risk of Tenant, and Landlord shall not be responsible to
Tenant or any other party for damages to or loss thereof whether
same may occur from theft, fire, water, bursting or leaking
pipes, collapse or otherwise, even if caused by the negligence of
Landlord, it employees or agents.
(c) Waiver of Subrogation. Each of the parties hereto agrees
that it will obtain from any insurance carrier with which it
carries fire or extended coverage policies covering any of its
property or improvements a waiver of subrogation rights as
against the other party to this Lease.
INSURANCE 10. Tenant shall not keep anything upon the premises, or do
anything in or about the premises except the usage specified
herein which will increase the rates for fire and standard
extended coverage insurance upon the building or buildings which
are a part of the leased premises. Tenant agrees to pay on demand
any increase in insurance premiums that may be charged to
Landlord during the term of this Lease resulting from a deviation
from the usage specified herein or from any other cause within
Tenant's control.
ASSIGNMENT 11. Tenant shall not assign this agreement or sublet the
premises, or any part thereof without the consent of the Landlord
in writing; which consent Landlord agrees it will not
unreasonably withhold, but no assignment or subletting shall
release Tenant from any obligations hereunder.
DAMAGE TO 12. In the event the demised premises or any part of the
PREMISES building used in common with other Tenants which directly
affects Tenant's use of its demised premises are partially
damaged or destroyed or rendered partially unfit for occupancy by
fire, tornado or other casualty, Tenant shall give immediate
notice to Landlord, who shall thereupon at his expense repair the
damage and restore the premises to substantially the condition in
which they were immediately prior to the happening of the
casualty, and Landlord shall allow Tenant a fair diminution of
rent during the time the premises are partially unfit for
occupancy; however, if the demised premises are totally destroyed
or deemed by the Landlord to be rendered wholly unfit for
occupancy by fire, tornado or other casualty, or if the Landlord
shall decide not to repair or rebuild, this Lease shall terminate
and the rent shall be paid to the time of such destruction or
casualty.
BANKRUPTCY 13. In the event that the Tenant shall become bankrupt or shall
make a voluntary assignment for benefit of creditors, or in the
event that a receiver of all or substantially all of the assets
of the Tenant shall be appointed, then, at the option of the
Landlord and upon five (5) days notice to the Tenant of the
exercise of such option, this Lease shall terminate.
DEFAULT OF 14. In case of default in any of the covenants herein, or if
TENANT Tenant abandons the premises, the Landlord may enforce the
performance of the Lease in any modes provided by law, and this
Lease may be forfeited at Landlord's discretion, if such default
continue for a period of five days after Landlord notifies said
Tenant in writing of such default and his intention to declare
the Lease forfeited; such notice to be sent by the Landlord by
mail or otherwise to the demised premises; and thereupon (unless
the Tenant shall have completely removed or cured said default)
this Lease shall cease and come to an end as it that were the day
originally fixed herein for the expiration of the term hereof,
and Landlord's agent or attorney shall have the right, without
further notice or demand, to re-enter and remove all persons and
Tenant's property therefrom without being deemed guilty of any
manner of trespass, and without prejudice to any remedies for
arrears of rent or breach of covenant; or, Landlord's agent or
attorney may resume possession of the premises and re-let the
same for the remainder of the term at the best rent said agent or
attorney may obtain for account of the Tenant, who shall make
good any deficiency; and Landlord shall have a lien as security
for the rent aforesaid upon all goods, wares, chattels,
implements, fixtures, furniture, tools, and other personal
property which are or may be put on the demised premises. If, on
account of breach or default by Tenant of any of the Tenant's
obligations, hereunder, it shall become necessary for the
Landlord to employ an attorney to enforce or defend any of
Landlord's rights or remedies hereunder, then in any such event
any reasonable amount incurred by Landlord as attorney's fees
shall be paid by Tenant. Failure of Landlord to insist in any one
or more instances upon the strict performance of any of the
covenants or conditions of the Lease shall not operate as a
waiver of any future breach by Tenant of any said covenants or
conditions.
HOLDING 15. In the event Tenant holds over after the expiration of this
OVER Lease, it shall be deemed to be occupying said premises as a
Tenant from month to month at a monthly rental of 1???? of the
last monthly rental amount paid hereunder; such tenancy shall be
subject to all the other conditions, provisions and obligations
of this Lease insofar as the same are applicable to a month to
month tenancy. This provisions shall not be construed as an
extension of this Lease but is to define any holding over, with
or without consent of the Landlord.
<PAGE>
SUBJECT TO 16. If this Lease is in fact a sublease, Tenant accepts this
ORIGINAL Lease subject to all of the terms and conditions of the
underlying Lease under which Landlord holds the demised premises
as lessee. Tenant covenants that it will do no act or thing which
would constitute a violation by Landlord of its obligations under
such underlying Lease, a copy of which is attached hereto and
made part hereof.
ACCESS 17. Landlord may during the term of this Lease, at reasonable
times, enter the premises to view, inspect, repair and show to
prospective purchasers or lessees.
18. Deleted by hand
19. Deleted by hand
CONDEMNATION 20. If the whole of the premises or access thereto should be
taken under the power of eminent domain or condemnation, or a
sale made under threat thereof then this Lease shall cease as of
the date of the taking without further liability upon either
Landlord or Tenant. If only a portion of the premises or access
thereto is taken under the power of eminent domain or
condemnation, or sale made under the treat thereof, and the
portion remaining will not, in the reasonable opinion of the
Tenant, be adequate for Tenant's continued use, Tenant shall have
the option to terminate this Lease by giving Landlord notice
thereof within thirty (30) days after the date of the taking. If
this Lease is not so terminated, Landlord shall promptly restore
the portion remaining to an integral unit resembling as much as
possible the premises prior to the taking. Any and all proceeds
resulting from a taking in whole or part of the premises under
the power of eminent domain or condemnation, or sale under threat
thereof, shall be paid directly to Landlord and shall be
Landlord's property.
MORTGAGE 21. This Lease, at the option of Landlord, shall be subordinate
to the lien of any mortgage or deed of trust or other security
instrument that is now or which hereafter may be placed on the
land and building of which said leased premises are a part, or
any building or buildings that hereafter may be placed on said
land; and the Tenant agrees to execute and deliver such
instrument or instruments as may be necessary or required by
Landlord or any mortgagee to evidence the subordination of this
Lease to any such mortgage, deed of trust, or other security
agreement or instrument; provided such subordination shall be
conditioned that the mortgagee will permit the Lease to remain in
effect as long as Tenant is not in default hereunder.
RULES AND 22. Tenant covenants and agrees that the attached rules,
REGULATIONS regulations, and stipulations, if any, and such other and further
rules and regulations as the Landlord may make, being, in the
Landlord's judgement needful for safety, care and cleanliness of
the building and premises, or the comfort of the Tenants, shall
be faithfully kept, observed, and performed by Tenant, and to the
best of Tenant's efforts, by the agents, clerks, servants,
invitees, guests and visitors of the Tenant, unless waived in
writing by the Landlord.
SOLE 23. Tenant and Landlord agree that unless and except as
AGREEMENT hereinafter specified, there are no verbal representations,
understandings, stipulations, agreements or promises pertaining
hereto not incorporated herein. And in addition, no provisions of
this Lease shall be altered, waived, amended, or extended, except
in writing signed by both Tenant and Landlord.
EXHIBITS 24. All exhibits, attachments, annexed instruments and addenda
referred to herein shall be considered a part hereof for all
purposes with the same force and effect as if copied at full
length herein.
LANGUAGE 25. Words of any gender used in this Lease shall be held and
construed to include any other gender, and words in the singular
shall be held to include the plural, unless the context otherwise
requires.
CAPTIONS 26. The captions or headings of paragraphs in this Lease are
inserted for convenience only, and shall not be considered in
construing the provisions hereof if any question of intent should
arise.
SUCCESSORS 27. The terms, conditions and covenants contained in this Lease,
shall apply to, inure of the benefit of, and be binding upon the
parties hereto and their respective successors in interest and
legal representatives except as otherwise herein expressly
provided. All rights, powers, privileges, immunities and duties
of Landlord under this Lease, including but not limited to any
notices required or permitted to be delivered by Landlord to
Tenant hereunder, may, at Landlord's option, be exercised or
performed by Landlord's agent or attorney.
NOTICES 28. Any notices or documents required or permitted to be
delivered hereunder shall be deemed to be delivered whether
actually received or not when deposited in the United States
Mail, postage prepaid, registered or certified mail, return
receipt requested, addressed to parties hereto at the respective
addresses set out opposite their names below, or at such other
address as they have theretofore specified by written notice
delivered in accordance herewith:
TENANT: CELEX TECHNOLOGY, INC.
2501 AVE J, SUITE 125
Arlington TX 76006
LANDLORD: CONTINENTAL PROPERTIES J.V. #5
PO BOX 1108
Alto, NM 88312
<PAGE>
SPECIAL 29. EXPENSE STOP: Landlord and tenant agree to establish 1998
PROVISIONS as the base year for building operating expenses. Any
increases above 1998 operating expenses will be passed thru
to the tenant in proportion to the tenant's occupancy of the
building. The tenant occupies 15% of the building.
EXECUTED this the day of , 19 .
LANDLORD
Continental Properties J.V. #5
------------------------------
By: /s/ Terry Dunlap Sr.
---------------------------
Terry Dunlap, Sr.
managing partner
------------------------------
Title
TENANT
________________________________________
PRINCIPAL REALTOR, MEMBER OF THE
FORT WORTH BOARD OF REALTORS
CELEX TECHNOLOGY, INC.
------------------------------
By:_____________________________________
By: /s/ Steve Porter
________________________________________ ------------------------------
Cooperating Realtor
Vice President
-------------------------------
By: ____________________________________ Title
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
Exhibit 21
ITEM 21. SUBSIDIARIES OF LSI
Lanstar Computer Products, Inc. Texas
Lanstar Hong Kong Limited Hong Kong
Lanstar Semiconductor Corporation Texas
Lanstar Systems Technology, Inc. Texas
Celex Technology, Inc. Texas
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Form 10 to be filed by Lanstar Semiconductor Inc.
of the following reports which are described below:
<TABLE>
<CAPTION>
Description of Report Date of Report
--------------------- --------------
<S> <C>
Audit of consolidated and combined financial statements
of Lanstar Semiconductor Inc. and Subsidiaries and
Lanstar Computer Corporation and Subsidiary as of
December 31, 1997 and 1996. March 26, 1998
</TABLE>
S/CHESHIER & FULLER, L.L.P.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
March 26, 1998
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the use in the Form 10 to be filed by Lanstar Semiconductor Inc.
of the following reports which are described below:
<TABLE>
<CAPTION>
Description of Report Date of Report
--------------------- --------------
<S> <C>
Review of consolidated and combined financial statements June 8, 1998
of Lanstar Semiconductor Inc. and Subsidiaries and
Lanstar Computer Corporation and Subsidiary as of
March 31, 1998 and 1997.
S/CHESHIER & FULLER, L.L.P.
CHESHIER & FULLER, L.L.P.
</TABLE>
Dallas, Texas
June 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 03/31/98
REVIEWED FINANCIALS AND IS QUALIFIED IN ITS ENITIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 186,192 243,147
<SECURITIES> 0 0
<RECEIVABLES> 636,061 5,789,823
<ALLOWANCES> 30,955 182,315
<INVENTORY> 202,198 838,224
<CURRENT-ASSETS> 1,082,052 6,807,170
<PP&E> 1,143,929 713,378
<DEPRECIATION> 364,940 268,748
<TOTAL-ASSETS> 1,866,636 29,609,921
<CURRENT-LIABILITIES> 1,210,077 1,370,427
<BONDS> 0 750,000
0 0
0 0
<COMMON> 111,473 93,948
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,866,636 29,609,921
<SALES> 2,239,027 1,235,841
<TOTAL-REVENUES> 2,239,027 1,235,841
<CGS> 1,976,618 997,779
<TOTAL-COSTS> 1,976,618 997,779
<OTHER-EXPENSES> 996,766 519,683
<LOSS-PROVISION> 932 0
<INTEREST-EXPENSE> 0 2,076
<INCOME-PRETAX> (734,357) (283,697)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (734,357) 80,777
<DISCONTINUED> 0 364,474
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (734,357) (283,697)
<EPS-PRIMARY> (0.01) 0
<EPS-DILUTED> (0.01) 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LANSTAR
SEMICONDUCTOR INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 382,125 1,708
<SECURITIES> 530,093 0
<RECEIVABLES> 5,434,292 371,605
<ALLOWANCES> 105,607 30,995
<INVENTORY> 668,768 259,812
<CURRENT-ASSETS> 7,019,770 622,720
<PP&E> 672,528 942,881
<DEPRECIATION> 179,999 318,905
<TOTAL-ASSETS> 30,151,695 1,251,721
<CURRENT-LIABILITIES> 1,850,821 1,175,842
<BONDS> 750,000 0
0 0
0 0
<COMMON> 93,948 109,087
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 30,151,695 1,251,721
<SALES> 5,765,629 7,442,038
<TOTAL-REVENUES> 5,765,629 7,442,038
<CGS> (5,507,265) (6,963,977)
<TOTAL-COSTS> 5,507,265 6,963,977
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (377) (60,264)
<INTEREST-EXPENSE> (8,993) (83,670)
<INCOME-PRETAX> (1,243,981) (3,784,880)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,243,981) (3,784,880)
<DISCONTINUED> 31,153 (74,480)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,212,828) (3,859,360)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (.09) (.09)
</TABLE>
