<PAGE>
Amendment No. 1 as Filed with the
Securities and Exchange Commission on April 24, 1998
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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................................. 21
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................... 22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS........... 24
ITEM 6. EXECUTIVE COMPENSATION..................... 28
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................... 33
ITEM 8. LEGAL PROCEEDINGS.......................... 34
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON LSI'S
COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................... 34
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.... 35
ITEM 11. DESCRIPTION OF LSI'S SECURITIES TO BE
REGISTERED................................. 39
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.. 40
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................. 41
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.......... 41
SIGNATURE PAGE............................. 46
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PART I
ITEM 1. BUSINESS
SUMMARY OF BUSINESS
Lanstar Semiconductor Inc. ("LSI"), through its subsidiaries,
manufactures 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 has recently completed the design of its semiconductor 16 Meg (4X4)
Dynamic Random Access Memory ("DRAM") product that will be sold as packaged
devices and Single In-line Memory Modules ("SIMMs") in various product
configurations. LSI anticipates incorporating these memory products into its PC
subsystems and complete PC systems to further enhance brand name quality and
reliability while reducing product cost.
GENERAL DEVELOPMENT
Lanstar Semiconductor Inc. ("LSI")
- ----------------------------------
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 with Lanstar
Semiconductor Corporation ("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.
Until its purchase of LSC in 1995, Kazmir Kliffs, Inc. had no activity. Unless
otherwise indicated in this Form 10, LSI includes LSI and its subsidiaries.
LSI is a holding company organized functionally with each subsidiary
specializing in the marketing, distribution and/or production of PC components,
CPUs, subsystems, peripherals and complete PC systems. The following discussion
outlines the development of and principal products and services provided by each
current and former subsidiary.
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CURRENT SUBSIDIARIES
Lanstar Semiconductor Corporation ("LSC")
- -----------------------------------------
LSC was organized as a Texas corporation in June 1995 to design,
develop, manufacture and distribute semiconductor memory DRAM, IC (Integrated
Circuit) and SIMM components.
In September 1995, LCC issued as a dividend, 5,183,333 shares of
Restricted Common Stock of LSC to the shareholders and convertible debenture
holders (for the stock underlying their debenture) of its parent, LCC, for the
purpose of spinning off LSC from its parent. LSC received an investment of
$407,017 in operating capital as consideration for the exchange.
LSI has recently restructured such that LSC is now the technology and
manufacturing subsidiary. As a result, LSC is currently responsible for design,
development and manufacturing for semiconductors, SIMM memory products, computer
components, computer subsystems, integrated circuits and finished PC computer
systems.
Lanstar Hong Kong Limited ("LHK")
- ---------------------------------
During December 1996, LSI acquired all the outstanding stock of LHK
from an affiliate. LHK is primarily responsible for procuring raw materials
necessary for DRAM/SIMM manufacturing. Future plans include expanding
procurement to source primarily PC related components including subsystems and
peripherals to further support the manufacturing and sales of LCP, CIT and LSC.
LSI anticipates utilizing LHK for manufacturing operations in the
Pacific Rim for its subsidiaries once development of proprietary memory products
is complete.
Lanstar Computer Products, Inc. ("LCP")
- ---------------------------------------
LCP was organized 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 as a Texas corporation in October 1997 and is a
wholly-owned subsidiary of LSI. LST was originally organized to develop,
manufacturer and distribute nonbranded, private label and Lanstar brand name PC
computers
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to wholesalers, computer retailers, corporations and consumers. LST also
provides ongoing repair and customer services.
Due to dealer conflicts in the PC marketplace in selling Lanstar
branded products to consumers, LST has totally withdrawn from the PC market. All
future consumer sales by Lanstar will be directed through its newly developed
subsidiary, Celex Technology, Inc.
Celex Technology, Inc. ("CTI")
- ------------------------------
CTI was organized March 19, 1998, as a Texas corporation and is a
wholly-owned subsidiary of LSI. CTI develops and distributes brand name PC
computers to corporate and consumer markets through direct sales with increasing
focus on the internet as the prime medium.
LST has ceased development and manufacturing operations. LST has also
ceased all distribution activities. LST's prior operations have been
transferred to LSC and CTI respectively.
FORMER SUBSIDIARIES
Lanstar Computer Corporation ("LCC")
- ------------------------------------
LCC was organized as a Texas corporation in September 1993 for the
purpose of distributing PC workstations, memory, and subsystems. During 1996,
the majority of LCC's operations were acquired by LSI and its subsidiaries.
Simmco Memory Products, Inc., a Texas corporation organized in 1994 and a
wholly-owned subsidiary of LCC, was dissolved in November 1997.
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. 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 the operating of 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 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
Historically 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, integrated circuits,
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 as follows:
95% Distribution of non-Lanstar PC memory, CPUs, PC subsystems and
peripherals
5% Distribution of LSI manufactured memory components
Currently, LSI's revenues are generated as follows:
75% Distribution of non-LSI PC memory, CPUs, PC subsystems and peripherals
25% Distribution of complete PC systems
LSI DRAMs/OTHER IC's
- --------------------
LSI has completed the development of its 16 Meg (4X4) DRAM which was
originally scheduled for production and distribution in early 1998. 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 is that the product is completing its life cycle relative to
computer applications. Next generation products such as the 16 and 64 Meg
products are now in mass-production and meeting current and anticipated market
demand. In addition, SDRAM meets higher speed requirements needed to support
faster (CPU) microprocessor requirements increasingly in demand. Management is
now directing all engineering and manufacturing efforts to LSI's 64 Meg SDRAM
product line, and other PC related ICs.
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LSI is 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 are 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 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 June,
1998. Internal production at the Dallas facility is currently scheduled for
July and August, 1998.
PC Memory Devices, CPUs, Subsystems and Peripherals
- ---------------------------------------------------
Currently, the majority 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. Manufacturing 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, DRAMS, 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 DRAM 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 DRAM and future IC's products are 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 integrated
circuits. Future process development efforts will be directed toward developing
.25, .18, .13 and .10 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 16, 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
and LSI's first in-house design was the 16 Meg DRAM to be followed closely by a
64 Meg SDRAM scheduled for production in calendar 1998. Design work may continue
with the 4 Meg DRAM as a product vehicle to complete and optimize the
development of LSI's DRAM and supporting .35 micron manufacturing process
technologies.
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LSI plans to continue development of its Chip-on-Board ("COB")
technology during the second half of 1998. This emerging technology in low-cost
packaging will also be utilized, if successfully developed, for packaging of
high pin count integrated circuits 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.
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. The Mosaid agreement does not terminate until the cessation of
sales by LSC of the product.
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. Using
the base technology from the 4 Meg design to complete the design of the 16 Meg
DRAM has saved significant time and money for the company's on-going IC
development. 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. The Mosaid agreement has terminated by cessation of
sales of the 4 Meg DRAM by LSI.
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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 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 Contract
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 16 Meg DRAM production. Meetings are scheduled in May to
negotiate a longer term relationship with Sony which would be tied to on-going
production of multiple products . In the event that LSI is not successful in
negotiating a 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 April 15, 1998, LSI had 41 full-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
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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 manufacturing 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,
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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
and proceeds from the sale of products. LSI does not have a line of credit with
a financial institution.
BACKLOG ORDERS
LSI does not have any material backlog orders. LSC plans to manufacture
and distribute the new Lanstar DRAM standard memory products by late-1998.
Consequently, LSC does not 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 personal computers. Consequently, it does not have any material
backlog orders.
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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 inception through the year
ended December 31, 1997, is derived from audited consolidated and combined
financial statements of LSI. 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.
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FINANCIAL INFORMATION
OF LSI/LCC
CONSOLIDATED AND COMBINED
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
INCEPTION FISCAL YEAR FISCAL YEAR
THROUGH ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
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<S> <C> <C> <C>
Sales $ 6,154 $ 5,765 $ 7,442
Cost of goods sold (6,015) (5,507) (6,964)
------- ------- -------
Gross profit 139 258 478
Selling, general and administrative (1,016) (1,019) (2,240)
Research and development (656) (476) (1,887)
Bad debt expense (85) -0- (60)
Other income (expense) (16) (7) (76)
------- ------- -------
Net loss from continuing operations
before income tax (1,634) (1,244) (3,785)
Provision for income tax -0- -0- -0-
------- ------- -------
Net loss from continuing operations (1,634) (1,244) (3,785)
Income from discontinued operations (SWMI) -0- 457 962
------- ------- -------
Net Loss $(1,634) $ (787) $(2,823)
======= ======= =======
Allocated to LCC $ (446) $ (9) $ -0-
======= ======= =======
Allocated to LSI $(1,188) $ (778) $(2,823)
======= ======= =======
LSI loss per share from
continuing operations $ (0.16) $ (0.03) $ (0.09)
======= ======= =======
LSI income per share from discontinued
operations (SWMI) $ -0- $ 0.01 $ 0.02
======= ======= =======
<CAPTION>
DECEMBER 31, 1996
---------------------------
(PRO FORMA) WITH DECEMBER 31,
WIHOUT SWMI SWMI 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance sheet
Current assets $ 955 $ 7,020 $ 623
Total assets 1,327 7,629 1,252
Current liabilities 1,337 1,851 1,176
Long-term liabilities 750 750 -0-
Stockholders' equity (761) 5,028 76
</TABLE>
Page 13
<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 LSI's fiscal years
ended December 1996 and December 1997.
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, and fiscal period ended
December 31, 1997. LSI acquired all the outstanding stock of SMI in November
1996. SMI was subsequently resold to its original shareholder effective as of
October 13, 1997. SMI was incorporated in January 1996 and, accordingly, has a
limited operating history.
OVERVIEW
LSI, through its subsidiaries, manufactures and/or purchases and
distributes a full product line of PC memory components, CPUs, subsystems,
peripherals, integrated circuits and PC systems to small computer retailers,
VARs, system integrators, memory and computer product distributors,
corporations, and consumers.
Currently, LSI has completed the design of its semiconductor 16 Meg (4X4)
DRAM that will be sold as packaged devices and SIMMs in various product
configurations. LSI anticipates incorporating these memory products into its PC
subsystems and complete PC systems to
Page 14
<PAGE>
further enhance brand name quality and reliability while reducing product cost.
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 page 13, all net income earned by
SMI have been segregated as net income from discontinued operations.
Development of a New Product Line
- ---------------------------------
LSI incorporated LST in October 1997 to manufacture and distribute personal
computers. Subsequently, LSI transferred LST's manufacturing 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
manufacture and distribute a variety of PC related integrated circuits. Refer
to Item 1 for a more complete discussion of the product line expansion.
Page 15
<PAGE>
RESULTS OF OPERATIONS
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 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 16
<PAGE>
TOTAL ASSETS
Consolidated total assets decreased from $7,628,709 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.
CURRENT LIABILITIES
Consolidated current liabilities decreased from $2,600,821 to $1,176,842
primarily due to the sale of SMI. Liabilities were further reduced by the
conversion of $750,000 of debt into equity.
EQUITY
Stockholders' equity without SMI increased for a negative $761,000 at the
end of December 31, 1996 to a positive $75,879. This increase in stockholders'
equity was due 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 sales
will continue to increase in its computer components distribution business
during 1998. Management basis this expectation on the development of increased
market share by expansion of LCP's production and sales force. With the
completed design of LSC's 16 Meg DRAM, semiconductor sales are anticipated in
second half of the year. Further, 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 17
<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 18
<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 DRAM 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 19
<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 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 have been met during 1996 and 1997 by equity and
convertible debt financing. The company received $1,777,749 in 1996 and
$2,286,930 in 1997 from private sales and placements of convertible debt and
equity. During the period from January 1, 1998 through March 25, 1998, LSI
received an additional $1,251,662 from private equity sales. Management believes
that additional private sales of equity and/or the exercise of outstanding
warrants to acquire common stock may occur before the end of 1998.
LSI intends to improve its cash flows through its operating subsidiaries.
LCP achieved profitability during the fourth quarter of 1997 due to increased
sales and higher gross profit margins. Increased sales should continue
throughout 1998 as improved market share is realized in the U.S. domestic
marketplace. In addition, Management anticipates establishing LCP's
international
Page 20
<PAGE>
program in the Pacific Rim and then expanding into Europe and certain South
American countries throughout 1998.
LSC is scheduled to start shipping its first standard and proprietary SIMM
designs in the third quarter of 1998. Additional SIMM products are planned to
be designed and introduced to the marketplace throughout 1998. LSC plans to
start shipment of its 16 Meg DRAM by the third quarter of 1998.
During 1997, LSI along with their respective subsidiaries incurred a net
loss of $3,784,880 exclusive of net income earned by SWMI. From their
inceptions through December 31, 1997, LCC and LSI incurred losses of $6,662,912
exclusive of net income earned by SWMI. As of December 31, 1997, the Company
had a working capital deficit of approximately $553,122. The Company's auditors
have expressed substantial doubt about its ability to continue as a going
concern.
After December 31, 1997, the Company was able to procure capital of
approximately $1,252,000 through the sale of equity during 1998 as explained in
Note 15.
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.
There are no assurances that management will be successful in its efforts.
Management anticipates that CTI will achieve profitability in the third
quarter of 1998 as volume sales are increased. Management anticipates profits
will improve throughout 1998 as increased market share is achieved in selected
markets and sales are expanded on the internet to consumer customers.
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
located at 13703 and 13707 Gamma Road in Dallas, Texas. The new facility
includes LCP's distribution business, corporate headquarters, LSC's IC and
system design center and LCS's PC manufacturing facility. The new location will
also house planned SIMM surface mount production facility. LSI has an option to
purchase the property which expires at the end of 1998.
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 expires in April 1998. LSI anticipates
continuing in this location on a month-to-month basis. In the event that the
lease is not renewed, management believes that current general office operations
can be continued by leasing any noncustomized facility. The second lease for
approximately 2,500 square feet expires in November, 1999.
LST previously had a manufacturing center of approximately 3,288 square
feet located in Arlington, Texas. This lease was terminated in February, 1998.
Page 21
<PAGE>
LSI believes that its existing facilities are suitable and adequate for PC
and PC component manufacturing, distribution and research and development
operations and that productive capacity is being utilized. Management's
intention to fully develop a DRAM 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 currently utilizes, at no charge, facilities located in Hong Kong
provided by Whitways Enterprises Limited.
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 22
<PAGE>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
- ------------------- -------------------- -----------
Lewis D. Rowe 2,900,000 8.3%
Zephyr International Limited
Zephyr House - Fifth Floor
Mary Street
Grand Cayman, Cayman
Islands, British West Indies
(1) Determined on the basis of 34,884,525 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 23
<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 2.9%
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 3.9%
</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 Hong Kong 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 24
<PAGE>
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Dennis Poole 59 Director of LCC and Managing Director of LHK
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
</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 this
position 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 25
<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
Armker, 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, President, Secretary and Treasurer of LCP and a
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 where he managed a number of their retail stores.
Mr. Porter joined LSI in June 1994 and is currently President and Chief
Operating Officer of Celex Technology, Inc. Mr. Porter was in Retail Management
at Radio Shack/Tandy Corporation from January 1993 to June 1994.
Mr. Porter is a Director of LSC; Director, President and Chief Operating
Officer of LCP; Director of LCC; and Director and President of LST and Director
and President of CTI.
Wilton Workman. Mr. Workman has been with LSC, the semiconductor memory
products design subsidiary, for over two years and has been in the semiconductor
industry for the past 37 years, with major manufacturers such as Texas
Instruments, Eastman Kodak, ITT and VTC, a division of Control Data. He 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 26
<PAGE>
semiconductor products and the joint venture between LSC and Sony Semiconductor
Company of America. Mr. Workman is a Director, President and Chief Operating
Officer of LSC.
Dennis Poole. Mr. Poole is a British subject and a Chartered Mechanical
Engineer with a degree in Electronics from London University. Mr. Poole began
his career with Dehavil Aircraft Company; from there he moved to General
Electric and Standard Cable, covering the full gamut of positions leading to the
executive level. Mr. Poole has spent the last 12 years in the Pacific Rim
market in various executive roles for British, American and Hong Kong based
companies. Mr. Poole is currently Managing Director of LHK and a Director of
LCC.
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 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 $4-5 million in sales monthly. Mr. Salem is a graduate of the
University of Cincinnati, with a Bachelor of Arts in English. Mr. Salem is
currently a Director of CTI.
Mr. Salem is currently Vice President Sales and Marketing for LCP. He is
also Director of Celex Technology, Inc. Mr. Salem joined LSI in August 1997.
From January 1996 to July 1997, he was a start-up partner in Memory Masters,
Inc. From October 1992 to December 1995 he was in sales and sales management
positions for Southwest Memory, Inc./Southwest Memory International, Inc.
Dr. Tian-Shen Tang. Dr. Tang joined LSI in 1997, bringing with him an
academic background as an Associate Professor at Texas A&M University. His
experience includes consulting services with Futura
Dr. Tang is currently Lead Design Engineer for LSC. He joined LSI in May
1997. Prior to joining LSI, Dr. Tang was assistant and Associate Professor at
Texas A&M University from September 1990 to May 1997.
Page 27
<PAGE>
Development Co. and foundation research activities in the areas of CMOS and
SRAM. Dr. Tang received a Bachelor of Science in Mathematics from NanKai
University in China. He also holds an Electrical Engineering Degree and a Ph.D.
in Electrical Engineering from Texas A&M University.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Other Annual
Name and Principal Year Salary Bonus Compensation
Position ($) ($)(1) ($)(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 $100,000.
No employee of LSI has a written employment agreement.
Overview of the LSI 1997 Stock Option Plan
- ------------------------------------------
On November 21, 1997, LSI implemented the 1997 Stock Option Plan (the
"Plan"). The Plan provides for the granting of incentive stock options and
nonqualified stock options as defined in the Plan and collectively referred to
herein as "Awards". The purpose of the Plan is to enable employees of LSI, its
subsidiaries and affiliates to participate in LSI's future by offering to them
proprietary interests in LSI. The Plan is also intended to provide a means
through which LSI can attract and retain key employees of merit.
Page 28
<PAGE>
The following description is intended to be a summary of the Plan's
principal terms and is qualified in its entirety by reference to the complete
text attached as an exhibit to the Form 10.
General
- -------
The Plan authorizes the Board of Directors or its Compensation Committee
(the Board of Directors and the Compensation Committee being collectively
referred to hereinafter as the "Committee") to grant to officers and other
employees of LSI, its subsidiaries and affiliates (excluding any nonemployee
directors) stock option awards in the form of one or any combination of the
Awards. Approximately 39 employees are presently eligible to participate in the
Plan. As of the date of this filing, incentive stock options for the right to
purchase 4,090,000 shares of the corporation have been granted to 39 employees.
Officers and key personnel of the corporation were granted options in the
following amounts:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Alternative To
(f) And (g):
Percent Of Grant Date
Number Of Total Value
Securities Options/
Underlying SARs Granted Exercise Of
Option/SARs To Employees Base Price Expiration Grant Date
Name Granted (#) In Fiscal Year ($/Sh) Date Present Value $
(a) (b) (c) (d) (e) (h)
- ------------------- ----------- -------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Maxie R. Smith 400,000 9.7% $.25 10/31/2000 $.25
Gerald F. Brunton 300,000 7.3% $.25 10/31/2000 $.25
Lynn Mahanay 150,000 3.7% $.25 08/06/2001 $.25
James Osmun 75,000 1.8% $.25 10/31/1999 $.25
Steven L. Porter 100,000 2.4% $.25 10/31/1999 $.25
Dean Salem 300,000 7.3% $.25 08/01/2000 $.25
Wilton Workman 150,000 3.7% $.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 Committee (or in the absence of a Committee, the Board of Directors)
administers the Plan. The Committee has complete discretion, subject to the
Page 29
<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 Committee 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 Committee 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 Committee 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
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<PAGE>
an outstanding stock option or other Award without the recipient's consent.
The Committee 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 Committee has wide discretion and flexibility, enabling
the Committee 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 Committee'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 Committee 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
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<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
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<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
In 1996, Jenalong Holdings, Inc., a Texas corporation, which is owned by
Mr. Maxie R. Smith and Mr. Dennis V. Poole, 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. Mr. Poole is a Vice
President of Marketing for Whitways Enterprises Limited. In consideration,
Whitways provided the Company with a verbal commitment to manufacture and
co-develop chip-on-board SIMM Products. Whitways is in the business of
sub-contract manufacturing of electronic products. During 1997, LSI purchased
the above-mentioned equipment for $112,674.
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<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 34,884,525 shares outstanding as of the date of this
filing, held by approximately 420 shareholders. There are currently nonqualified
stock options for 350,000 shares outstanding. LSI has 25 warrants outstanding
which, if exercised, would result in the issuance of 32,615,184 shares. LSI has
no current plans to register securities in a public offering.
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<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, in the next three years and the amount
of the corresponding investment of capital into LSI:
Year No. of Shares Total Purchase Price
Eligible to be Purchased
-----------------------------------------------------------------
1997 1,068,333 $255,083.75
1998 1,291,666 $322,916.50
1999 1,141,667 $285,416.75
2000 588,334 $147,083.50
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 memory-based products and
operational efficiencies to decrease costs.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion outlines all securities sold by LSI or its
subsidiaries 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.
In November 1994, Simmco Memory Products, Inc. ("Simmco"), a now dissolved
subsidiary of LCC, sold 1,000 shares of Restricted Common Stock at one dollar
per share for a total of $1,000 to Lanstar Computer Corporation to satisfy state
incorporation requirements.
In March 1995, LCC initiated an offering of Restricted Common Stock
pursuant to Rule 504 with an aggregate offering price of $750,000. In September
1995, LCC offered and sold $407,017 of convertible debentures to less than a
total of 35 accredited and nonaccredited investors. The debentures were
convertible at a rate of $1 into 1 share of
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LSC or any future publicly-traded company into which LCC would be merged. During
1995, the debentures were converted to 400,017 shares of LCC Restricted Common
Stock.
In March 1995, LCC issued to Henry H. Schwartz d/b/a IIBC, Incorporated, in
his capacity as a financial consultant 276,316 shares of Restricted Common Stock
at par value in consideration for consulting services for the procurement of
capital.
In June 1995, LSC sold 1,000 shares of Restricted Common Stock to LCC at
one dollar per share for a total of $1,000 to satisfy state incorporation
requirements.
In September 1995, LSC issued 5,183,333 shares of Restricted Common Stock
in exchange on a 1 for 1 basis with shareholders and convertible debenture
holders (for the stock underlying their debenture) of its parent, LCC, for the
purpose of spinning off LSC from its parent. LSC received an investment of
$407,017 in operating capital from LLC as consideration for the exchange from
LCC.
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.
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. During 1996, 297,663 shares of Restricted Common Stock 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.
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.
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<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.
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 booked as stockholders equity of
$1,750.
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. During 1997, Simmco redeemed $6,000 of debentures.
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 June 10, 1996, LSI issued 120,000 shares of Restricted Common Stock to
the shareholders and debenture holders of LCC as part of the consideration for
the purchase of 100% of the assets of LCC on a one for one share basis.
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 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.
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<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.
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. 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 December 1996, LSI acquired the outstanding shares of LHK for $15,000.
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.
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. 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 7/31/96.
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.
On August 25, 1997, LCP issued 1,000 shares of Restricted Common Stock at a
dollar per share to LSI in exchange for $1,000 to satisfy state incorporation
requirements.
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<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.
In October 1997, LST sold 1,000 shares of Restricted Common Stock at a
dollar per share to LSI to satisfy state incorporation requirements.
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.
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. 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 outstanding warrants
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. Subsequently, and in consideration of the amended
exercise price, certain of those warrant holders exercised warrants and
purchased, pursuant to Regulation S, 715,973 shares of Restricted Common Stock
of LSI at $.75 per share for a total of $536,979.75. Management believes that
additional private sales of equity and/or the exercise of outstanding warrants
to acquire Common Stock may occur before the end of 1998.
As of November 17, 1997, LSI issued 715,973 shares of Restricted Voting
Common Stock to four accredited investors pursuant to the exercised four
warrants at seventy-five cents per share for a total value of $536,979.75. The
shares were issued pursuant to Regulation S.
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.
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.
As of April 21, 1998, LSI has amended 23 warrants for the purchase of
14,000,000 shares to change the exercise price from $.75 cents per share to
$.50 cents per share in exchange for a promise by a non-US citizen to exert
maximum best efforts to encourage the holders of the warrants and to find
additional other 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.
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 34,884,525 shares are currently outstanding. Currently, LSI has
reserved 4,090,000 shares of its Common Stock for issuance pursuant to exercise
of outstanding options. Currently, LSI has also reserved 32,615,184 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
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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.
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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
</TABLE>
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<PAGE>
(b) Exhibits
--------
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Reorganization by and between Kazmir
Kliffs, Inc., a Utah corporation, and Lanstar Semiconductor
Corporation, a Texas corporation, entered into in November 1995
2.2 Stock Purchase Agreement entered into as of November 4, 1996, by
and among Lanstar Semiconductor, Inc., a Utah corporation, World
Data Limited, a Cayman Islands corporation, and Southwest Memory
International, Inc., a Texas corporation
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2.3 Stock Purchase Agreement executed on October 1,1997, by and among
Lanstar Semiconductor Inc., a Utah corporation, Ilya Drapkin,
World Data Limited, a Cayman Islands corporation, Southwest
Memory International, Inc., a Texas corporation, Southwest
Memory, Inc., a Texas corporation, and MG TK Corp., a Texas
corporation
3.1 Articles of Incorporation of Kazmir Kliffs, Inc. dated October
24, 1980
3.2 Amended Articles of Incorporation of Kazmir Kliffs, Inc. dated
November 30, 1995
3.3 Articles of Amendment to the Articles of Incorporation of Lanstar
Semiconductor Inc. dated September 11, 1997
3.4 Amended and Restated Bylaws of Lanstar Semiconductor Inc. dated
as of October 31, 1997
4 Sample Stock Certificate
10.1 Design and License Agreement as of July 27, 1995, by and between
Mosaid Technologies Incorporated, a Canadian corporation, and
Lanstar Semiconductor Corporation, a Texas corporation
10.2 Amendment to Design and License Agreement as of March 8, 1996, by
and between Mosaid Technologies Incorporated, a Canadian
corporation, and Lanstar Semiconductor Corporation, a Texas
corporation
10.3 License Agreement between Texas Instruments Incorporated, a
Delaware corporation, and Lanstar Semiconductor Corporation, a
Texas corporation, effective as of January 1, 1996
10.4 Addendum to License Agreement between Texas Instruments
Incorporated, a Delaware corporation, and Lanstar Semiconductor
Corporation, a Texas corporation, dated March 8, 1996
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<PAGE>
10.5 Foundry Production Agreement dated as of June 27, 1996, by and
between Sony Semiconductor Company of America and Lanstar
Semiconductor Inc.
10.6 Amendment to Foundry Production Agreement dated as of November 4,
1996
10.7 Extension of Foundry Production Agreement dated as of November
15, 1996
10.8 Amendment to Foundry Production Agreement dated as of June 13,
1997
10.9 Product Development and Fabrication Agreement dated as of January
30, 1996, by and among UTRON, MUTRON and Lanstar Semiconductor
Inc.
10.10 Assignment of Product Development and Fabrication Agreement dated
as of January 30, 1996, by and among UTRON, MUTRON and Lanstar
Semiconductor Inc. executed on September 20, 1997, to be
effective as of January 1, 1997
10.11 Lease Agreement by and between Continental Properties Joint
Venture #5 and Lanstar Semiconductor Inc. dated May 1, 1996
10.12 Lease Agreement by and between Continental Properties Joint
Venture #5 and Lanstar Semiconductor Inc. dated December 1, 1996
10.13 Lease Agreement by and between DSW Property Management and
Lanstar Systems Technology, Inc. dated October 9, 1997
10.14 Lanstar Semiconductor Inc. 1997 Stock Option Plan
10.15 Agreement to Surrender Lease dated February, 1998
10.16 Option to Purchase dated as of the 6th day of April, 1998.
10.17 Agreement to assign intellectual property dated September 9,
1997.
11 See Financial Statements - Item 15(a) filed herewith
21 Subsidiaries of LSI
23 Consent of Cheshier & Fuller, L.L.P.
Page 44
<PAGE>
27 Financial Data Schedule
99.1 Proxy Statement for Special Meeting of Shareholders - September
9, 1997
99.2 Notice of Shareholder Action Upon Consent of a Majority Vote of
the Shareholders - October 2, 1997
Page 45
<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: April 23, 1998 By: /S/ MAXIE R. SMITH
--------------------------------
Maxie R. Smith, President and
Chief Executive Officer
Page 46
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
AND LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
-----------------
Page
------
Independent Auditor's Report F - 1
Consolidated and Combined Balance Sheets F - 2
Consolidated and Combined Statements of Income F - 5
Consolidated and Combined Statements of Changes
in Stockholders' Equity F - 7
Consolidated and Combined Statements of Cash Flows F - 10
Notes to Consolidated and Combined Financial Statements F - 12
<PAGE>
[CHESHIER & FULLER, L.L.P. LETTERHEAD APPEARS HERE]
Independent Auditor's 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 14 to the consolidated and combined financial statements, the
Companies have suffered recurring losses from operations and has a working
capital deficiency, which raise substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters also are
described in Note 14. 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
<PAGE>
LANSTAR SEMICONDUCTOR INC. AND SUBSIDIARIES
-------------------------------------------
and LANSTAR COMPUTER CORPORATION AND SUBSIDIARY
-----------------------------------------------
Consolidated and Combined Balance Sheets
----------------------------------------
December 31, 1997 and 1996
--------------------------
ASSETS
------
1997 1996
---------- ----------
Current assets:
Cash and cash equivalents $ 1,708 $ 382,125
Marketable securities available for sale -0- 530,093
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
Accounts receivable - other 10,914 2,770,747
Inventory 259,812 668,768
Prepaid expenses 20,590 110,099
---------- ----------
622,720 7,019,770
---------- ----------
Furniture and equipment, less accumulated
depreciation of $318,905 at December 31, 1997
and $179,999 at December 31, 1996 623,976 492,529
Other assets:
Other assets 5,025 116,410
Deferred income tax benefit -0- -0-
---------- ----------
5,025 116,410
---------- ----------
Total Assets $1,251,721 $7,628,709
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
<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
------------------------------------
1997 1996
----------- ----------
Current liabilities:
Accounts payable $ 695,570 $ 458,917
Accrued expenses 349,060 785,454
Bank overdraft 131,212 115,529
Margin account -0- 231,799
Accrued income taxes -0- 212,122
Debentures payable - private placements -0- 47,000
----------- ----------
1,175,842 1,850,821
Long-term debt:
Debenture payable - private sale -0- 750,000
----------- ----------
Total Liabilities 1,175,842 2,600,821
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
Additional paid-in capital 402,947 402,947
Retained deficit (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
Treasury stock at cost, 25,855,000 shares at
December 31, 1997, 300,000 shares at
December 31, 1996 (6,289,520) -0-
Additional paid-in capital 11,123,344 7,806,188
Unissued common stock 536,980 -0-
Note receivable SWMI (500,000) -0-
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
------------------------------------
1997 1996
----------- -----------
Stockholder/management loans
Southwest Memory, Inc. -0- (580,088)
Components & 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)
Unrealized loss - marketable securities
available for sale -0- (4,937)
Retained deficit (4,788,805) (1,966,063)
----------- -----------
Total Stockholders' Equity 75,879 5,027,888
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,251,721 $ 7,628,709
=========== ===========
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 Statements of Income
----------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Inception through
December 31,
1997 1996 1995
----------- ----------- -----------------
<S> <C> <C> <C>
Sales, of which $1,018,132 in 1997 and
$1,300,000 in 1996 are sales to SWMI $ 7,442,038 $ 5,765,629 $ 6,154,060
Cost of goods sold, of which $562,046 in
1997 and $550,000 in 1996 are purchases
from SWMI and $500,000 in 1995 are
from Southwest Memory, Inc. (6,963,977) (5,507,265) (6,015,155)
----------- ----------- -----------
Gross profit 478,061 258,364 138,905
----------- ----------- -----------
Selling, general and administrative expenses (2,239,637) (1,019,421) (1,016,574)
Research and development (1,886,811) (476,055) (655,704)
Bad debt expense (60,264) (377) (84,531)
----------- ----------- -----------
(4,186,712) (1,495,853) (1,756,809)
----------- ----------- -----------
Operating loss (3,708,651) (1,237,489) (1,617,904)
Other income (expense):
Interest income 7,441 2,501 153
Interest expense and finance charges (83,670) (8,993) (16,300)
----------- ----------- -----------
Net loss from continuing operations
before income tax (3,784,880) (1,243,981) (1,634,051)
Provision for income tax -0- -0- -0-
----------- ----------- -----------
Net loss from continuing operations (3,784,880) (1,243,981) (1,634,051)
Discontinued operations:
Income from operations of SWMI
(less applicable income taxes
of $0 in 1997 and $212,122 in 1996) 962,138 457,189 -0-
----------- ----------- -----------
Net loss (2,822,742) (786,792) (1,634,051)
Allocated to Lanstar Computer Corporation -0- (8,714) (446,066)
----------- ----------- -----------
Allocated to Lanstar Semiconductor Inc. $(2,822,742) $ (778,078) $(1,187,985)
=========== =========== ===========
</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, continued
---------------------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Inception through
December 31,
1997 1996 1995
-------- -------- -----------------
<S> <C> <C> <C>
Basic and diluted loss per share of
Lanstar Semiconductor Inc.
Net loss $(0.07) $(0.02) $(0.16)
Income from discontinued operations (0.02) (0.01) .00
------ ------ ------
Loss from continuing operations $(0.09) $(0.03) $(0.16)
====== ====== ======
</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 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 30, 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 30, 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-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>
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
Capital contributed by
stockholders of Southwest
Memory International, Inc.
prior to merger 29,000,000 29,000 6,021,978 6,050,978
Unrealized loss (4,937) (4,937)
Net loss (778,078) (786,792)
------------------------------------------------------------------------------------ -------------
Balance,
December 31, 1996 41,815,371 42,115 7,806,188 -- (849,415) (4,937) (1,966,063) 5,027,888
</TABLE>
The accompanying notes are an integral 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>
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) (6,289,500)
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 $ 11,123,344 $ (6,289,520) $ 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 (6,289,520)
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 (2,822,742) (2,822,742)
-------------------------------------------------- ----------------
Balance,
December 31, 1997 $(563,374) $ - $(4,788,805) $ 75,879
================================================== ================
</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 Cash Flows
--------------------------------------------------
For the Years Ended December 31, 1997 and 1996 and
--------------------------------------------------
For the Period from Inception through December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Inception through
December 31,
1997 1996 1995
----------- ----------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,822,742) $ (786,792) $(1,634,051)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation 212,460 143,204 36,795
Interest paid with common stock 76,350 -0- -0-
Services rendered for common stock 290 1,580 7,067
Bad debt expense 447,734 423,688 84,531
Amortization -0- 15,000 -0-
Employee stock options vested 58,805 -0- -0-
(Increase) decrease in:
Trade receivables (2,406,216) (2,957,882) (108,274)
Other receivables 2,675,700 (2,770,747) -0-
Inventories (315,929) (659,345) (9,423)
Prepaid expenses 55,371 (110,099) -0-
Increase (decrease) in:
Accounts payable - trade 513,321 290,718 168,199
Account payable - Southwest Memory, Inc. -0- -0- 469,443
Accrued expenses (74,529) 274,064 505,389
Accrued income taxes (212,122) 212,122 -0-
----------- ----------- -----------
Net cash used for operating activities (1,791,507) (5,924,489) (480,324)
----------- ----------- -----------
INVESTING ACTIVITIES:
Furniture and equipment additions (452,116) (355,324) (317,205)
(Increase) decrease in other assets (6,615) (112,790) (3,620)
Purchase of goodwill -0- (15,000) -0-
Sale (purchase) of marketable securities 303,231 (303,231) -0-
----------- ----------- -----------
Net cash used for investing activities (155,500) (786,345) (320,825)
----------- ----------- -----------
FINANCING ACTIVITIES:
Payment of debentures payable (6,000) -0- -0-
Proceeds from private sales of debentures and
common stock 2,286,980 7,828,727 760,267
Increase in bank overdraft 17,027 43,940 71,589
Increase in stockholder loan (298,086) (797,101) (13,314)
Purchase of treasury stock (433,331) -0- -0-
----------- ----------- -----------
</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>
Inception through
December 31,
1997 1996 1995
---------- ---------- ----------------
<S> <C> <C> <C>
Net cash provided by financing activities 1,566,590 7,075,566 818,542
---------- ---------- --------
Increase (decrease) in cash and cash equivalents (380,417) 364,732 17,393
Cash and cash equivalents, beginning of period 382,125 17,393 -0-
---------- ---------- --------
Cash and cash equivalents, end of period $ 1,708 $ 382,125 $ 17,393
========== ========== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 7,320 $ 9,053 $ 11,825
========== ========== ========
Income taxes (from discontinued
operations) $ 212,122 $ -0- $ -0-
========== ========== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Issuance of common stock in settlement of
interest expense and financing expense $ 76,350 $ -0- $ -0-
========== ========== ========
Net change in unrealized loss on marketable
securities available for sale $ (4,937) $ 4,937 $ -0-
========== ========== ========
Marketable securities acquired by
margin debt $ -0- $ 231,799 $ -0-
========== ========== ========
Convertible debentures tendered for
common stock $1,541,000 $1,330,998 $ -0-
========== ========== ========
Margin debt liquidated through sale
of marketable securities $ 231,799 $ -0- $ -0-
========== ========== ========
Issuance of common stock in settlement of
accounts payable $ 156,140 $ 463,443 $ -0-
========== ========== ========
Treasury stock acquired by relinquishing SWMI
assets (other than cash) less liabilities $5,856,189 $ -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
-----------------------------------------------
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,
manufacturing 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 1996,
most operations of LCC and Simmco ceased and were assumed by LSI and
its subsidiaries.
Lanstar Semiconductor Inc. and Subsidiaries:
Lanstar Semiconductor Corporation (LSC) was organized as a Texas
corporation in June, 1995, to develop and manufacture computer memory
products. It acquired its operations from LCC when LCC issued, as a
dividend, 5,183,333 common shares of LSC to the stockholders of LCC.
The operations thus acquired were reflected at no cost.
Lanstar Semiconductor Inc. (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. During the period
from 1989 until November, 1995, Kazmir Kliffs, Inc. had no activity.
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, continued
NATURE OF BUSINESS
During November, 1996, LSI acquired all of the outstanding stock of
Southwest Memory International, Inc. (SWMI) 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. SWMI is
engaged in the distribution of computer memory products. SWMI was
organized as a Texas corporation in January, 1996. The operations of
SWMI were acquired from a predecessor company, Southwest Memory, Inc.,
during early 1996.
Effective October 13, 1997, LSI sold 100% of the outstanding stock of
SWMI 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 SWMI 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, manufacture 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-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
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 SWMI was accounted for as a pooling of
interests. In the case of a pooling of interests, activity of all
entities are retroactively presented.
All intercompany profits and transactions have been eliminated in
combination and consolidation, except for intercompany transactions
with SWMI. 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 SWMI 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. All manufacturing is performed by a third
party. As a result no indirect costs are associated with manufactured
inventory.
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-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
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 pooling of interests or 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 SWMI is included as a consolidated subsidiary of LSI from
its inception in January, 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 13.
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 $143,204,
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-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
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, manufacture and
distribution of computer components, computer memory, CPU products,
and personal computers. Revenue is reflected upon consummation of
sales of such products to customers.
INCOME FROM DISCONTINUED OPERATIONS
As explained in Note 13, SWMI was sold during 1997. SWMI 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-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
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
The provision for income tax benefit (expense) consisted of the
following:
Inception to
December 31,
1997 1996 1995
----- --------- ------------
Federal:
Current $ -0- $(194,847) $ -0-
Deferred -0- -0- -0-
----- --------- --------
-0- (194,847) -0-
----- --------- --------
State:
Current -0- (17,275) -0-
Deferred -0- -0- -0-
----- --------- --------
-0- (17,275) -0-
----- --------- --------
Total $ -0- $(212,122) $ -0-
===== ========= ========
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 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 $ 930,571 $ 203,530 $ 479,766
Benefit at expected State
statutory rates 103,396 18,500 50,459
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- $(212,122) $ -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-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 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-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, 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 $2,822,742 42,706,995 $0.07
Income from discontinued
operations 962,138 42,706,995 0.02
---------- -----
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 $ 778,078 37,489,225 $0.02
</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 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 457,189 37,489,225 0.01
---------- ----
Loss from continuing operations
operations attributed to
LSI stockholders 1,235,267 37,489,225 $0.03
=====
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-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
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, SWMI purchased inventory from its predecessor, Southwest
Memory, Inc., which is wholly owned by a member of management of SWMI.
The predecessor sold the inventory to Sterling International for
approximately $827,000. The inventory was purchased by the Company
from Worldwide Memory, Inc. by SWMI for approximately $903,000. The
inventory was subsequently written down by approximately $95,000.
During 1995, the Company purchased inventory from Southwest Memory,
Inc., in the amount of $500,000.
SWMI leases furniture and equipment from, and sub-leases office space
to Southwest Memory, Inc. The furniture and equipment is leased on a
month to month basis at $6,000 per month. The office space is 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 SWMI. In 1996, $71,445 in lease expense and $10,000 in
sub-lease income was recognized by SWMI. 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, 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
------- --------
$63,374 $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-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 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.
Note 7 - Results of Operations
Summarized consolidated results of operations of LCC and LSI and SWMI
from January 1, 1996 through the end of November 1996, the effective
date of acquisition, are as follows:
LCC and
LSI SWMI
---------- -----------
Net sales $5,057,911 $50,014,884
========== ===========
Net income (loss) $ (963,254) $ 184,391
========== ===========
LCC and
LSI SWMI
---------- -----------
Debenture converted to common
stock of LSI - 437,163 shares $ 580,998
==========
Shares issued to consultants
and their affiliates for
services - 1,580,151
shares of LSI $ 1,580
==========
Debenture converted to
common stock - 3,000,040
shares of LSI $ 750,000
==========
Issuance of common stock
in release of trade payable
- 111,000 shares of LSI $ 463,443
==========
Sale of common stock $6,050,978
==========
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 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-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 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-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
The warrant to purchase the 18,000,000 common shares, which was issued
as explained in Note 13, 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 - Changes to Previously Issued Financial Statement
Subsequent to the issuance of its December 31, 1995 financial
statements, the Company discovered errors in recording conversion of
certain convertible debentures, and the accrual of certain expenses.
The Company also changed its method of depreciation from the double
declining balance method to straight line. The corrections and
restatement increased net loss and retained deficit from $655,495 to
$1,187,985. No income tax effects are applicable to these changes.
Note 11 - 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-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 11 - 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-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
--------------------------------
<TABLE>
<CAPTION>
Note 11 - Outstanding Rights to Acquire Common Stock, continued
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-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 11 - 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 12 - 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.
There has been certain threatened litigation against the Company.
Management considers these complaints to be without merit. No
provision has been made in the financial statements related to these
matters.
Note 13 - Sale of Southwest Memory International, Inc.
On October 13, 1997, LSI sold 100% of the outstanding stock of SWMI
for 25,550,000 common shares of LSI. No gain or loss was reflected
for this disposition.
As part of the agreement, LSI granted to SWMI, 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.
The revenue of SWMI was $53,468,000 during 1996 and $47,157,000 during
the period from January 1, 1997, through October 13, 1997.
Note 14 - Liquidity
During 1997, LSI along with their respective subsidiaries incurred a
net loss of $3,784,880 exclusive of net income earned by SWMI. From
their inceptions through December 31, 1997, LCC and LSI incurred
losses of $6,662,912 exclusive of net income earned by SWMI. As of
December 31, 1997, the Company had a working capital deficit of
approximately $554,122.
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 14 - Liquidity, continued
After December 31, 1997, the Company was able to procure capital of
approximately $1,252,000 through the sale of equity during 1998 as
explained in Note 15.
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.
There are no assurances that management will be successful in its
efforts.
Note 15 - 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, 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.
F-30
<PAGE>
EXHIBIT 10.15
AGREEMENT TO SURRENDER LEASE
----------------------------
This Agreement to Surrender Lease (the "Agreement") is executed by DSW
---------
PROPERTY MANAGEMENT, a Texas General Partnership (the "Lessor") and LANSTAR
------
SYSTEMS TECHNOLOGY, INC., a Texas Corporation (the "Lessee"). The Lessor and
------
the Lessee are hereinafter collectively called the "Parties".
-------
WHEREAS, the Parties executed a Commercial Lease Agreement (the "Lease")
-----
whereby the premises commonly known as 801 Stadium Drive, Suites 103 and 104,
Arlington, Texas 76011 (the "Leased Premises") were leased by the Lessor to the
---------------
Lessee for the period beginning on October 11, 1997, and ending on October 31,
1999; and
WHEREAS, a true and correct copy of the Lease is attached hereto, marked
Exhibit A and incorporated herein; and
- ---------
WHEREAS, the Lessee wishes to surrender the Lease and all rights to
possession of the Leased Premises, and to release the Lessor from its
obligations under the Lease; and
WHEREAS, the Lessor wishes to accept the surrender of the Lease and to
release the Lessee from its obligations under the Lease;
NOW, THEREFORE, in consideration of the mutual promises contained in this
Agreement and the additional consideration described below, the Parties agree as
follows:
(1) The Lessee agrees to forfeit its security deposit in the amount of
Two Thousand Three Hundred Fifty Dollars ($2,350.00) that was paid to the Lessor
under Section 3(a) of the Lease.
(2) The Lessee shall deliver to the Lessor two (2) lap top computers
with the following specifications:
Pro Book 166 MMX
32 Megabyte RAM
2 Gigabyte HDD
(3) The Lessee will surrender the Lease and vacate the Leased Premises
no later than 6:00 P.M. on February 28, 1998 (the "Surrender Date").
--------------
AGREEMENT TO SURRENDER LEASE - Page 1 of 2 Pages
- ------------------------------------------------
<PAGE>
(4) The Lessor agrees to accept the surrender of the Lease and the
Leased Premises effective as of the Surrender Date.
(5) Effective as of the Surrender Date, the Parties fully and finally
release and discharge each other from all obligations under the Lease.
Executed this ____ day of February, 1998.
DSW PROPERTY MANAGEMENT
LESSOR
BY:
---------------------------------------------------
NAME:
----------------------------------------------
TITLE:
---------------------------------------------
LANSTAR SYSTEMS TECHNOLOGY, INC.
LESSEE
BY:
---------------------------------------------------
NAME:
----------------------------------------------
TITLE:
---------------------------------------------
AGREEMENT TO SURRENDER LEASE - Page 2 of 2 Pages
- ------------------------------------------------
<PAGE>
EXHIBIT 10.16
OPTION TO PURCHASE
THIS AGREEMENT, dated as of this 6 day of APRIL 1998, by and between
ANDRE VAN'T WESTEINDE, who resides at 4554 HARRY'S LANE, DALLAS, Texas,
(hereinafter referred to as "Seller") and LANSTAR SEMICONDUCTOR, INC., a
UTAH corporation with its principal place of business at 13707 Gamma Road,
Dallas, Texas 75244, and/or assigns (hereinafter referred to as
"Purchaser").
The parties hereto hereby agree as follows:
1. GRANT OF OPTION.
1.01 In consideration of the execution of that certain Modification of
Commercial Lease Agreement dated contemporaneously herewith by Purchaser as
Tenant of a building situated on the below-described real estate, together with
TEN DOLLARS ($10.00) in hand paid by Purchaser to Seller, and other good
valuable consideration reflected herein, all of which is acknowledged by Seller,
Seller hereby grants and conveys to Purchaser an irrevocable and exclusive
option, upon the terms and conditions hereinafter set forth, to purchase that
certain real property located in the City of FARMERS BRANCH , Dallas County,
State of Texas, consisting of all of the following:
A. The land, together with the improvements located thereon and all and
singular the tenements, hereditaments and appurtenances thereunto belonging
or in anywise appertaining, now or hereafter erected on said plot, piece or
parcel of land more particularly described in Exhibit A annexed hereto and
made a part hereof (hereinafter referred to as the Exhibit A Tract). This
sale includes all right, title and interest of Seller, in and to any land
lying in the bed of any street, road or avenue, opened or proposed, in
front of or adjoining said Exhibit A Tract, to the center line thereof, and
all right, title and interest of Seller in and to any award made or to be
made in lieu thereof and in and to any unpaid award for damage to the
Exhibit A Tract and improvements by reason of change of grade of any
street;
B. All improvements on the Exhibit A Tract including a commercial building
having approximately 38,000 square feet, with such fixtures and equipment
in place and warranties on such fixtures and equipment as exist and
enforceable on the closing date; and
C. All of Seller's right, title and interest to any leases and rental
agreements with tenants for the Exhibit A Tract and Improvements
(hereinafter collectively called the "Leases"),
OPTION TO PURCHASE Page 1
<PAGE>
and any prepaid rents and security deposits held by Seller or its agents in
connection with said Leases, if any.
1.02 To exercise this option, Purchaser must give written notice of its
election to purchase the Exhibit A Tract executed by Purchaser, in the form
required for notices under Article 11, hereof, to Seller at Seller's address set
forth in said Article (the "Notice of Election") in the amount of TEN THOUSAND
DOLLARS ($10,000) provided with such notice, Purchaser's check payable to the
order of the title insurance company named herein, as escrow agent, to be held
in escrow in accordance with the provisions of Paragraph 3 below. To be
effective, the Notice of Election and check for deposit in escrow must be given
no later than October 30, 1998.
1.03 If Purchaser does not exercise this option on or before the Option
Expiration Date in accordance with the provisions of this Agreement, this
Agreement and all rights of Purchaser hereunder shall terminate, and neither
party shall have any further claim against the other arising out of this Option
Agreement and Purchaser shall have no further claim as to the EXHIBIT A TRACT;
provided, however, Purchaser's failure to exercise this option shall not
constitute a breach of the Lease as modified by and between the Landlord and
Tenant.
1.04 If Purchaser does exercise this option in accordance with this
Agreement, the parties shall close title to the EXHIBIT A TRACT pursuant to the
following provisions of this Agreement. The Exhibit A Tract shall be sold and
conveyed subject only to (i) the covenants, conditions, restrictions, rights-of-
way and easements reflected in the commitment for Title Insurance as its
standard exceptions, (ii) liens or claims created by or resulting from Tenant's
possession and/or use of the property, (iii) any liens created in connection
with purchase of the property, and (iv) other liens and/or encumbrances approved
by Purchaser in writing prior to the closing (collectively the "Permitted
Exceptions").
2. PURCHASE PRICE.
2.01 The purchase price for the Exhibit A Tract shall be TWO MILLION
($2,000,000 U.S.).
2.02 The purchase price shall be payable to Seller by Purchaser in cash
at the closing.
OPTION TO PURCHASE Page 2
<PAGE>
3. THE CLOSING. The consummation of the transactions provided for in this
Agreement (the "Closing") shall take place at any mutually agreeable hour, or if
the Seller and Purchaser are unable to agree on such hour, then at 2:00 p.m. on
a business day to be selected by Seller and Purchaser, subsequent to Purchaser's
delivery of the Notice of Election, but not later than December 31, 1998,
(hereinafter referred to as the "Closing Date) at CHICAGO TITLE INS., CO., 2828
TRINITY MILLS, STE. 221, CARROLLTON, TX, provided that if on such date the title
company has not yet approved title or if there are title objections which have
not yet been cured, the Closing Date shall be postponed not less that five (5)
nor more than thirty (30) days to such date as shall be mutually agreed by
Seller and by Purchaser.
4. REPRESENTATIONS AND WARRANTIES OF SELLER.
4.01 Seller, to induce Purchaser to enter into this Agreement, to
exercise the option granted hereunder and to purchase the EXHIBIT A TRACT,
represents and warrants to Purchaser as follows:
A. Seller has no knowledge of any existing or threatened action,
condemnation, highway relocation or change in grade suit or proceeding
affecting the Exhibit A Tract or any portion thereof or relating to, or
arising out of the ownership, of the EXHIBIT A TRACT, in any court or
before or by any federal, state, county or municipal department,
commission, board, bureau or agency or other governmental instrumentality,
save and except the claims of the Purchaser as Tenant, under the existing
Commercial Lease Agreement, as modified on this date;
B. This Agreement has been duly executed by and on behalf of Seller, and
constitutes the Seller's valid and binding agreement, enforceable in
accordance with the terms hereof; and
C. The improvements to the Exhibit A Tract is insured for its full value
of $2,000,000 under that certain all risks policy attached hereto as
Exhibit B, and within fifteen (15) days of the execution of this Option to
Purchase Agreement, shall cause Purchaser to be named as an additional
insured, and to continue such insurance coverage until the earlier of (i)
expiration of the option period, the option not being exercised, or (ii)
the closing date. PURCHASER (TENANT) AGREES TO PAY INCREASE IN PREMIUM OVER
PRESENT POLICY OF $1,000,000.00.
D. Seller agrees that until the earlier of the expiration of the
option, the option not being exercised, or the closing, that Seller shall
(i) perform all obligations arising under the leases referred to
hereinabove, (ii) maintain the property
OPTION TO PURCHASE Page 3
<PAGE>
in good repair and in the same condition, reasonably wear and tear accepted
as of the time this Option to Purchase Agreement is executed, and (iii)
continue to operate and manage said property in a reasonable, diligent and
prudent manner; provided, however, so long as the Purchaser, as Tenant, is
in possession of the property, the Seller shall not enter into any
additional leases, licenses or agreements pertaining to the property prior
to the earlier of the expiration of the option period, the option not being
exercised, or the closing date.
4.02 Notwithstanding Purchaser's exercise of the option granted and
conveyed hereunder, it shall be a condition of Purchaser's obligation to
consummate the sale herein provided for, that all of the warranties and
representations of Seller herein contained shall be true both at the time the
same are made and as of the Closing Date; provided Purchaser shall be entitled,
in its sole discretion, to waive the foregoing condition with respect to one or
more of such warranties and representations; and those not so waived shall
survive the closing of title and delivery of the deed as hereinafter set forth.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASE
Purchaser represents and warrants to Seller that:
5.01 Purchaser has full power, in accordance with law, to enter into this
Agreement and to carry out the transactions provided for herein.
5.02 This Agreement has been duly executed by Purchaser, and is a valid
and binding agreement of Purchaser, enforceable in accordance with the terms
hereof.
5.03 In entering into this Agreement, Purchaser has not been induced by
and has not relied upon any representations, warranties or statements, whether
oral or written or express or implied, made by Seller or by any broker or any
other person representing or purporting to represent Seller, which are not
expressly set forth in this Option Agreement and the other agreements by,
between and among the Seller, Purchaser and others executed contemporaneously
herewith, whether or not any such representations, warranties or statements were
made in writing or orally.
6. PRE-CLOSING COVENANTS OF SELLER.
Seller covenants and agrees and it shall be a condition of Purchaser's
obligation to consummate the transaction herein
OPTION TO PURCHASE Page 4
<PAGE>
provided for that all of such covenants shall be performed) that subsequent to
the date hereof and until the Closing Date:
A. Seller, if it contemplates taking any action to withdraw, settle or
otherwise compromise any protest or reduction proceeding affecting real
estate taxes assessed against the EXHIBIT A TRACT for any fiscal period
after 1996, during the term of this option shall give Purchaser written
notice of such intention thirty (30) days prior to taking such action.
7. CONDITION OF TITLE-TITLE INSURANCE.
7.01 Seller agrees to make, promptly after the receipt of Purchaser's
Notice of Election in exercise of the option granted and conveyed hereunder,
application for a title insurance fee owner's policy to be issued to Purchaser,
and in connection with the issuance of such title policy, to cause title to the
EXHIBIT A TRACT to be searched and examined by CHICAGO TITLE INS. CO.
(hereinafter the "Title Insurance Company") and to deliver to the Purchaser,
copies of the title insurance Company's report, and the tax search. The title
insurance policy to be issued at Closing shall carry only the standard
exceptions and exceptions regarding Permitted Encumbrances. The title insurance
policy, however, will have all standard provisions regarding insuring the
boundary lines deleted and will issue such in accordance with the survey.
7.02 On the Closing Date Seller will convey to Purchaser good and
marketable title to the EXHIBIT A TRACT, free and clear of any and all
encumbrances, covenants, conditions and restrictions other than the Permitted
Encumbrances, which shall not be deemed to be title defects. Seller agrees not,
either voluntarily or by agreement, to consent, prior to the Option Expiration
Date, to the imposition of a matter constituting an encumbrance on the title to
the property. If Seller shall be unable to convey title in accordance with the
terms of this Agreement, Purchaser shall have the option to accept title subject
to such objections.
7.03 Seller shall pay the costs of examination of title and of an owner's
policy of title insurance to be issued insuring the Purchaser's title to the
EXHIBIT A TRACT to the amount of the Purchase Price, and shall pay as well as
all other title charges, notary fees, and any and all other costs or expenses
incident to recordation of documents required in order to transfer title.
Purchaser shall pay for the costs of the survey and any inspections required by
Purchaser. Each party shall pay its own attorneys' fees in connection herewith.
7.04 Seller and Purchaser agree that any and all 1998 or 1999 municipal,
County, State or other accrued but unpaid property taxes, transfer taxes and
filing fees on the deed to be executed,
OPTION TO PURCHASE Page 5
<PAGE>
delivered and recorded pursuant hereto to the extent same may be required to be
paid in connection with the closing of title hereunder, shall be pro-rated and
paid on the Closing Date by Seller, Purchaser and Purchaser's assigns, if any,
based on the date of sale.
8. DELIVERIES AT CLOSING.
8.01 On the Closing Date, the Seller shall deliver to the Purchaser or
its designee the following:
A. A general warranty deed for the EXHIBIT A TRACT and Improvements, duly
executed and acknowledged by the Seller and in proper form for recording,
subject only to the Permitted Encumbrances, if any. Acceptance of such deed
by the Purchaser shall be deemed full and complete performance on the part
of Seller hereunder with respect to condition of title;
B. Seller's certification that all of the representations and warranties
of Seller, contained in this Agreement are true and correct as of the
Closing Date and there exist no conditions which upon notice or the passage
of time or both would constitute default by Seller under this Agreement;
C. All such further conveyances, assignments, confirmations,
satisfactions, releases, powers of attorney, instruments of further
assurance, approvals, consents, and any and all such further instruments
and documents as may be reasonably necessary, expedient or proper in the
opinion of Purchaser, in order to complete any and all conveyances,
transfers, sales and assignments herein provided for; and
It is understood that Seller's delivery of the foregoing documents named in this
Section constitute conditions Purchaser's obligation to close title.
8.02 On the Closing Date the Purchaser shall deliver to Seller:
A. The Purchase Price in the form of the escrowed sum plus cash for a
total of TWO MILLION DOLLARS ($2,000,000).
B. Such other and further documents as may be reasonably required by
Seller or the Title Insurance Company to consummate the transaction
contemplated herein.
9. BROKERAGE.
9.01 The Seller shall pay any and all commissions due to properly
licensed real estate brokers as a result of the
OPTION TO PURCHASE Page 6
<PAGE>
consummation of the sale of the Exhibit A Tract to Purchaser or its assigns.
9.02 Each party shall indemnify and hold the other free and harmless from
and against all claims for brokerage commissions or fees or finder's fees by any
person or entity claiming (i) to have been retained by the maker of this
indemnity in connection with this transaction or the EXHIBIT A TRACT or (ii) to
be the procuring cause of this transaction.
10. EXPENSES. Except as otherwise provided in this Agreement, each party hereto
will bear and pay its own expenses of negotiating and consummating the
transaction contemplated hereby.
11. NOTICES. All notices and other communications under this Agreement shall be
in writing and shall be sent by registered, or certified mail, return receipt
requested, postage prepaid, addressed as follows: if intended for the Seller, to
the Seller named and at the address reflected hereinabove, and if intended for
the Purchaser, to the Purchaser named and at the address reflected hereinabove
or at such address, and to the attention of such person, of which the Seller or
the Purchaser shall have given notice as herein provided. Any such notice or
other communication shall be deemed to have been sufficiently given for all
purposes hereof on the day following the date on which the same is deposited in
a general of branch post office or mail box maintained by the Postal Service.
12. BINDING EFFECT. This Agreement shall be binding upon the parties hereof,
their respective successors and assigns.
13. GOVERNING LAW. The terms and provisions of this Agreement shall be governed
by the law of the State of Texas pertaining to agreements made and performed
entirely within such State.
14. ENTIRE AGREEMENT. The Agreement, together with the schedules, exhibits and
other documents referred to herein or executed contemporaneously, contain the
entire agreement of the parties with respect to the subject transactions and
supersede all other or prior agreements oral or in writing, and may not be
amended, modified, released or discharged in whole or in part except by an
instrument in writing and signed by both parties, and then only to the extent
set forth in such instrument.
15. ASSIGNMENT. The Purchaser shall be free to assign its rights and
obligations under this contract so long as the ASSIGNEE is a corporate entity
which Purchaser controls through majority ownership and by common officers. Any
Such assignee shall assume all of the Purchaser's obligations hereunder and in
such event the Purchaser shall thereafter have no further obligations hereunder.
OPTION TO PURCHASE Page 7
<PAGE>
The Purchaser shall promptly notify the Seller upon the Purchaser making any
such assignment and the Purchaser shall deliver to the Seller a counterpart of
the instrument of assignment and assumption, which shall constitute an
assignment of all of Purchaser's interest hereunder, and upon such delivery,
such assignment shall be effective against Seller. Upon any such assignment, the
Purchaser shall not be liable hereunder. The term "Purchaser" shall be deemed to
include the assignee under any such effective assignment.
16. PARTIAL INVALIDITY. In the event any one or more of the provisions
contained in this Option Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
17. DEFAULTS:
A. DEFAULT BY SELLER. In the event of default by the Seller, the Purchaser
may, at Purchaser's option, elect to enforce the terms of this Option
Agreement, if it is duly exercised by the Purchaser, or the Purchaser may
terminate this option, even if exercised, and receive a full refund of the
Purchaser's deposit.
B. DEFAULT BY PURCHASER. In an event of default by the Purchaser, the
Seller may, at the Seller's option, elect to enforce the terms of this
Option Agreement, if it is duly and properly exercised by the Purchaser, or
declare forfeiture under this Option Agreement and retain the escrow
deposit as a full and complete payment of its' damages, the amount of
escrow being considered liquidated damages for the purposes of the Seller's
recovery of its damages.
OPTION TO PURCHASE Page 8
<PAGE>
18. CAPTIONS. The section headings in this Agreement are intended for
convenience of reference only and shall not govern the interpretation or meaning
of any section of this Agreement.
IN WITNESS WHEREOF, the parties have executed his Option to Purchase
Agreement as of the day and year first above written.
SELLER:
By: /s/ ANDREW VAN'T WESTEINDE
----------------------------------------------------
ANDREW VAN'T WESTEINDE
PURCHASER:
LANSTAR SEMICONDUCTOR, INC.
By: /s/ MAXIE R. SMITH
----------------------------------------------------
MAXIE R. SMITH
PRESIDENT/CEO
PRINCIPAL BROKER:
CAMPBELL COMPANIES
By: /s/ ILLEGIBLE
----------------------------------------------------
COOPERATING BROKER:
HENRY S. MILLER COMMERCIAL
By: /s/ JANICE ILLEGIBLE
----------------------------------------------------
BUY ACKNOWLEDGES AND AGREES THE PROPERTY WILL BE SOLD AND CONVEYED TO BUYER ON
AN "AS IS" BASIS, WITH NO WARRANTY OF HABITABILITY, MERCHANTABILITY, CONDITION,
OR FITNESS, OR OF ANY OTHER KIND WHATEVER EXCEPT AS SET FORTH HEREIN.
OPTION TO PURCHASE Page 9
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared ANDRE
VAN'T WESTEINDE acknowledged to me that he has executed the same for the
purposes and considerations therein expressed and in the capacity herein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 6th day of April 1998.
/s/ KIM A. PRINCE
----------------------------------------------------
Notary Public in and for
the State of T E X A S
My commission expires: [NOTARY STAMP APPEARS HERE]
KIM A. PRINCE
NOTARY PUBLIC
STATE OF TEXAS
COMM. EXP. 02-24-99
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared MAXIE
R. SMITH, known to me to be the Chief Executive Officer of LANSTAR
SEMICONDUCTOR, INC., a Texas corporation, and acknowledged to me that he has
executed the same for the purposes and considerations therein expressed and in
the capacity herein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 6th day of April 1998.
/s/ KIM A. PRINCE
----------------------------------------------------
Notary Public in and for
the State of T E X A S
My commission expires: [NOTARY STAMP APPEARS HERE]
KIM A. PRINCE
NOTARY PUBLIC
STATE OF TEXAS
COMM. EXP. 02-24-99
OPTION TO PURCHASE Page 10
<PAGE>
VERIFICATION
------------
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, undersigned notary public, on this day personally appeared
[ILLEGIBLE], known to me to be the person whose name is subscribed to the
- -----------
foregoing instrument, and acknowledged to me that he/she executed the same for
the purposes and consideration therein expressed.
SUBSCRIBED AND SWORN to before me this 7th day of April, 1998, to certify
which witness my hand and seal of office.
/s/ EARL BENTLEY
----------------------------------------------------
Notary Public in and for
the State of T E X A S
My commission expires: [NOTARY STAMP APPEARS HERE]
EARL BENTLEY
NOTARY PUBLIC
STATE OF TEXAS
COMM. EXP. 04-09-2000
VERIFICATION
------------
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME the undersigned notary public, on this day personally appeared
JANICE [ILLEGIBLE], known to me to be person whose name is subscribed to the
- ------------------
foregoing instrument, and acknowledged to me that he/she executed the same for
the purposes and consideration therein expressed.
SUBSCRIBED AND SWORN to before me this 7th day of April, 1998, to certify
which witness my hand and seal of office.
/s/ EARL BENTLEY
----------------------------------------------------
Notary Public in and for
the State of T E X A S
My commission expires: [NOTARY STAMP APPEARS HERE]
EARL BENTLEY
NOTARY PUBLIC
STATE OF TEXAS
COMM. EXP. 04-09-2000
<PAGE>
EXHIBIT A
---------
BEING a tract of land situated in the METROPOLITAN BUSINESS PARK, SECTION
ONE, an Addition to the City of Farmers Branch, Texas, according to the Plat
thereof recorded in Volume 68194, Page 1210, of the Map Records of Dallas
County, Texas, and being more particularly described by mates and bounds as
follows:
BEGINNING at a point that is North 524.11 feet from the intersection of the
North line of Alpha Road (a 60.0 foot wide street) and the West line of Gamma
Road (a 60.0 foot wide street), said point being in the West line of Gamma Road;
THENCE West for a distance of 240.00 feet to a point for corner;
THENCE North for a distance of 300.00 feet to a point for corner;
THENCE East for a distance of 240.00 fact to a point for Corner in the West
line of. Gamma Road;
THENCE South for a distance of 300.00 feet along said West line of Gamma
Road to the PLACE OF BEGINNING.
CONTAINING 72,000 square feet or 1-6529 acres of land.
<PAGE>
EXHIBIT 10.17
AGREEMENT
THIS AGREEMENT, by and between James E. Mallory, whose address is 1012
Cimmaron Circle, Burleson, Texas 76028 ("Assignor"), and Lanstar Semiconductor
Inc., a Utah corporation whose principal place of business is at 2501 Avenue J,
Suite 125, Arlington, Texas 76006 ("Assignee"). Assignor and Assignee are
hereinafter collectively referred to as the "Parties".
R E C I T A L S:
- - - - - - - -
WHEREAS, Assignor created and developed those certain drawings ("Drawings")
which are depicted on the exhibits attached to this Agreement as Exhibit A and
Exhibit B; and
WHEREAS, Assignor does hereby desire and agree to convey to Assignee all
rights in and to the use of the Drawings;
NOW, THEREFORE, in consideration of the foregoing recitals, of the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Parties hereby
agree as follows:
(1) ASSIGNMENT. For and in consideration of the issuance by Assignee of
----------
two thousand nine hundred (2,900) restricted shares of Assignee's common stock
and other good and valuable consideration, Assignor does hereby covenant and
agree to assign all of the Assignor's interest in and to the Drawings, including
any copyright and trademark registration rights, together with any and all
goodwill of any business in which the Assignor has used the Drawings to the
Assignee.
(2) WARRANTY. The Assignor warrants that he is owner of the exclusive
--------
rights to the use of the Drawings reflected in Exhibit A and has not
transferred, assigned, hypothecated or pledged any rights in the attached
Drawings or transferred the right to receive periodic distribution of funds as a
result of such assignment or conveyance.
(3) TRADEMARK APPLICATION ASSISTANCE. Assignor agrees to undertake all
--------------------------------
acts which are reasonable in nature and requested by Assignee in connection with
Assignee's plan to obtain a trademark or trademarks incorporating the Drawings
depicted on Exhibit A, or a
AGREEMENT - Page 1 of 4 Pages
- ---------
<PAGE>
variation thereof, including executing all trademark registration documents,
additional assignments, licenses or other instruments and delivering the same to
or at the direction of Assignee.
(4) RENEWAL OF ASSIGNMENT. In the event that this assignment terminates by
---------------------
operation of law, Assignor further conveys to Assignee, in consideration of the
above-referenced shares of stock, an option to renew the transfer of all rights
in the Drawings, including patent rights and copyrights, every thirty-five (35)
years from the date of this Agreement in exchange for an additional Ten Dollars
($10.00) in consideration to be payable by Assignee upon the date of each
renewal.
The Parties hereby agree that this Agreement shall be registered as an
assignment of copyright interests with the Copyright Office and shall serve as
notice to others, including third parties, of the assignment of all Assignor's
rights in the Drawings to Assignee.
(5) SUCCESSORS IN INTEREST BOUND. The terms and provisions contained in
----------------------------
this Agreement shall apply to, be binding upon and inure to the benefit of the
Parties and their respective legal representatives and successors.
(6) ENTIRE AGREEMENT. This Agreement supersedes any and all other prior
----------------
understandings and agreements, either oral or in writing, between the Parties
with respect to the subject matter hereof and constitutes the sole and only
agreement between the Parties with respect to the subject matter hereof. Each
Party to this Agreement acknowledges that no representations, inducements,
promises or other agreements, orally or otherwise, have been made by any Party
hereto or by anyone acting on behalf of any Party hereto which are not embodied
herein and that any agreement, statement or promise that is not contained in
this Agreement shall not be valid or binding or of any force or effect.
(7) TEXAS LAW GOVERNS. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND
-----------------
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUDING ANY
CONFLICTS-OF-LAW RULE OR PRINCIPLE OF TEXAS LAW THAT MIGHT REFER THE GOVERNANCE,
CONSTRUCTION OR INTERPRETATION OF THIS AGREEMENT TO THE LAWS OF ANOTHER STATE).
(8) MODIFICATION. No change or modification of this Agreement shall be
------------
valid or binding upon the Parties unless the change or modification is in
writing and signed by both Parties.
AGREEMENT - Page 2 of 4 Pages
- ---------
<PAGE>
(9) ACCEPTANCE OF TERMS. The Parties hereby acknowledge that they have
-------------------
reviewed this Agreement and, with full understanding, hereby accept and agree to
the terms set forth herein, and that the Parties have been offered, and have
accepted, a copy of this Agreement.
(10) LEGAL REMEDIES. Both Parties acknowledge and agree that damages at
--------------
law alone will be an insufficient remedy for a complaining Party and that the
complaining Party would suffer irreparable injury if the other Party violates or
threatens to violate the terms of this Agreement. Accordingly, both Parties
agree that the complaining Party, upon application to a court of competent
jurisdiction, shall be entitled to injunctive relief to enforce the provisions
of this Agreement in the event of any breach, or threatened breach, of its
terms. Injunctive relief may be sought in addition to any other available
rights or remedies at law. Both Parties further agree that if relief is sought
as a result of the other Party's violation of the terms of this Agreement, the
complaining Party shall be entitled to reasonable attorneys' fees incurred in
enforcing this Agreement.
(11) LEGAL CONSTRUCTION. In the event that any one or more of the terms,
------------------
provisions or agreements that are contained in this Agreement shall be held by a
court of competent jurisdiction to be invalid, illegal or unenforceable in any
respect for any reason, the invalid, illegal or unenforceable term, provision or
agreement shall not affect any other term or provision of this Agreement and
this Agreement shall be construed as if the invalid, illegal or unenforceable
term, provision or agreement had never been contained herein.
The Parties acknowledge that each Party has reviewed this Agreement and
that the normal rule of construction to the effect that any ambiguities are to
be resolved against the drafting Party shall not be employed in the
interpretation of this Agreement.
(12) FACSIMILE COPY. A signed facsimile copy of this Agreement shall be as
--------------
binding and enforceable as an original signed copy of this Agreement.
AGREEMENT - Page 3 of 4 Pages
- ---------
<PAGE>
IN WITNESS WHEREOF, the undersigned have set forth their names as of the
9th day of September, 1997.
-------------------------------------------------
JAMES E. MALLORY
ASSIGNOR
LANSTAR SEMICONDUCTOR INC.
ASSIGNEE
BY:
-----------------------------------------------
MAXIE R. SMITH
PRESIDENT
AGREEMENT - Page 4 of 4 Pages
- ---------
<PAGE>
[LOGO APPEARS HERE]
EXHIBIT A
<PAGE>
[LOGO APPEARS HERE]
EXHIBIT B
<PAGE>
[LOGOS APPEARS HERE]
-----------------------------
| Layer 1 |
| COMPANY LOGO |
| Orignated 29 Feb, 1996 |
| Electronic Art: Macintosh |
| Software: Adobe Illustrator |
| by: |
| James E. Mallory |
| 1012 Cimmaron Court |
| Burleson, Tx 76028 |
| for: |
| Lanstar Semiconductor Inc. |
-----------------------------
<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
<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> 2,557,938 329,696
<ALLOWANCES> 105,607 30,995
<INVENTORY> 668,768 259,812
<CURRENT-ASSETS> 7,019,770 622,720
<PP&E> 492,529 623,976
<DEPRECIATION> 179,999 318,905
<TOTAL-ASSETS> 7,628,709 1,251,721
<CURRENT-LIABILITIES> 1,850,821 1,175,842
<BONDS> 750,000 0
0 0
0 0
<COMMON> 41,815,371 31,399,669
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 7,628,709 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> (1,495,853) (4,186,712)
<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> 457,189 962,138
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (786,792) (2,822,742)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (.03) (.09)
</TABLE>
