As filed with the Securities and Exchange Commission on May 31, 2000
Registration No. ____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 SB
AMENDMENT NO.1
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(g) of
The Securities Exchange Act of 1934
LSI COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0627349
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
112 West Business Park Drive
Draper, Utah 84020
(801) 572-2555
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Copies to:
David Hunt
Wangsgard & Associates, LLC
5252 N. Edgewood, Dr. Ste 210A
Provo, UT 84604
(801) 852-8452
Securities to be registered pursuant to Section 12(g) of the Act:
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Title of each class Name of each exchange on which
to be registered: each class is to be registered:
----------------- -------------------------------
Common Stock n/a
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Securities to be registered pursuant to Section 12(b) of the Act: None
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FORWARD-LOOKING STATEMENTS
This Registration Statement contains forward-looking statements,
including statements regarding, among other items, the availability of supplies,
our ability to retain our competitive position, expected realization of our
business strategy and costs associated therewith, governmental regulation, the
sufficiency of cash flow and other sources of liquidity to fund our debt service
requirements, working capital needs and other significant expenditures and
anticipated trends in our business, including with respect to industry capacity,
product demand and pricing. Forward-looking statements typically are identified
by the words "believe," "expect," "anticipate," "intend," "seek," "estimate,"
"project" and similar expressions. These forward-looking statements involve
risks and uncertainties that are beyond our control. These risks and
uncertainties include unanticipated trends in the software and personal coaching
businesses, and economic, competitive, legal, governmental, and technological
factors. These factors could include global economic conditions, currency
fluctuations, product demand and industry capacity, competitive products and
pricing, manufacturing efficiencies, availability and cost of critical
materials, new product development and commercialization, manufacturing
capacity, facility expansion costs, the effect of regulatory and legal
developments, capital resource and cash flow activities and interest costs.
Actual results could differ from those contemplated by these forward-looking
statements. In light of these risks and uncertainties, there can be no assurance
that the results and events contemplated by the forward-looking information
contained in this Registration Statement will in fact transpire. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates.
BUSINESS
General
LSI Communications, Inc. (OTC Non-BB: LSIM) is a technology
development, sales and training company based in Draper, Utah, just outside of
Salt Lake City. We were incorporated as TPI, Inc., under the laws of the State
of Utah on April 26, 1983. In 1985, the Corporation changed its situs from Utah
to Nevada and changed its name to Connections Marketing Corp. In July, 1992, our
shareholders voted to change our name to LSI Communications, Inc. ("LSI"). We
held mineral properties in Beaver County, Utah; however, no extraction
operations ever commenced and the properties were distributed to the
shareholders through a subsidiary spin-off.
On November 20, 1998, we entered a Plan of Reorganization and
Acquisition agreement with Warever, Inc., a Utah Corporation, wherein we issued
3,000,000 shares of common stock for 85% of Warever's outstanding common stock.
. The acquisition was recorded as a reverse acquisition, with Warever being the
accounting survivor, therefore all historical financial information prior to
November 20, 1998 in this registration statement is that of Warever.
On June 21, 1999, we acquired 85% of Coaching Institute, Inc.,
(hereafter, "Coaching Institute") a Utah corporation. Coaching Institute is a
majority owned subsidiary. The acquisition of Coaching Institute is discussed
further in the section entitled "Merger and Business Combinations."
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Warever Corporation ("Warever") is in the business of developing,
programming, selling, and marketing computer software packages. Its primary
product, Action Plus, is a management assistance software tool. Warever was
organized in the State of Utah on May 13, 1992 under the name of Action Plus
Software, Inc. On January 17, 1995 the name Action Plus Software was changed to
Warever.
We operate two distinct, but complementary subsidiaries, Warever and
Coaching Institute. Warever Corporation primarily on developing sales
automation, personal productivity and Internet-based software products. It is
involved in the contact management industry and has been involved since the
industry's formative years in the late 1980s and early 1990s. The majority of
Warever applications focus on development of sales force automation and personal
productivity.
Coaching Instituteoffers fully integrated "coaching" programs designed
specifically for sales trainers, seminar leaders, motivational speakers and
network marketers who are interested in extending their programs to seminar
attendees through one-on-one training. By implementing an after-market program
such as one-on-one coaching, companies are able to assist clients r personal
development, create additional profits, and increase client loyalty.
We lost money in each of the last fiscal years and our net losses have
been significant. Our continued operations have depended, to some extent, on
loans from a family member of one of our directors. Despite the fact that
revenues from coaching are increasing and we are about to release a new software
program, there is no assurance that we will ever become consistently profitable.
This Registration Statement is being filed on a voluntary basis as a
step to re-establish our real-time quotations on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc., (the "NASD").
NASD OTC Bulletin Board Quotations
Our common stock was formerly quoted on the OTC Bulletin Board of the
NASD under the symbol "LSIM." For information concerning these stock quotations
during the past two years, see the section entitled "Market Price Of And
Dividends On The Registrant's Common Equity And Related Stockholder Matters."
The quotations presented do not represent actual transactions or broker/dealer
markups, markdowns or commissions.
Effective January 4, 1999, the NASD adopted rules and regulations
requiring that prior to any issuer having its securities quoted on the OTC
Bulletin Board of the NASD that such issuer must be a "reporting issuer" which
is required to file reports under Section 13 or 15(d) of the Securities and
Exchange Act of the 1934, as amended (the "1934 Act"). We are not currently a
"reporting issuer," but this Registration Statement is a step in bringing us
into compliance with the listing provision of the OTC Bulletin Board. The NASD
has "delisted" quotations of our common stock. Under the "phase-in" schedule of
the NASD, we had until January 19, 2000, within which to become a "reporting
issuer." We intend for our stock to again be quoted on the OTC Bulletin Board
once we satisfy all comments of the SEC with respect to this Registration
Statement and meet NASD requirements.
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Merger and Business Combinations
Effective November 20, 1998, we entered into an agreement and Plan of
Reorganization with Warever, Inc., a private company. The agreement provided for
our merger into Warever to be treated as a reverse merger, with Warever as the
surviving business. Pursuant to the agreement we issued 3,000,000 shares of
common stock to Warever's shareholders of for 85% of the outstanding shares of
Warever. Our management resigned and the management and board of Warever filled
the vacancy. LSI had no assets or liabilities at the time of the merger, but was
only a public shell. We acquired the remaining 15% of Warever in the first
Quarter of 2000 by exchanging 2,500,000 LSI shares.
During November and December of 1998, we sold 1,000,000 shares of
Common Stock at $.05 per share to "accredited investors" pursuant to Rule 504.
On June 21, 1999, we acquired 85% of Coaching Institute by issuing
2,500,000 shares of common stock for 85,000 shares, 85%, of the outstanding
common stock of Coaching Institute. We valued the acquisition of Coaching
Institute at $1,375,000 which was the market value of its common stock less a
60% discount for the restriction on the stock. The acquisition agreement also
provided for us to receive options to acquire the remaining 15% of Coaching
Institute's issued and outstanding common stock in exchange for 2,045,455 shares
of our common stock. The option can be exercised after January 1, 2001 for a
period of 60 days. After the June 21, 1999 acquisition, Coaching Institute
survived as our majority-owned subsidiary. Its operating activities have been
included in our consolidated financials since June 21, 1999.
Common stock in the Company was issued and delivered to the
shareholders of Coaching Institute as set forth below, such certificates to bear
a restrictive legend in compliance with Rule 144 promulgated by the Securities
and Exchange Commission under the Securities Act of 1933 as amended:
o Craig R. Hendricks 1,062,500 shares
o Steven E. Carlson 1,062,500 shares
o Lona J. Hendricks 175,000 shares
o Richard A. McAllister 150,000 shares
o Roger G. Williams 50,000 shares
Operations
We are a technology development, sales, and training company comprised
of two subsidiaries, Warever and Coaching Institute. Our two subsidiaries
provide complementary products, services and contacts to each other. Our
products assist personal and business betterment, through organization and
training.
Warever has primarily developed sales force automation and personal
productivity software. Sales force automation software is designed to improve
the efficiency of the sales process by tracking customer information, such as
names and addresses, correspondence,
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and scheduling. Warever intends to expand more heavily into developing software
that interacts more fully with the Internet.
Coaching Institutewas founded in June, 1998. Personal Coaching is an
emerging industry where clients are assisted in reaching goals, implementing
real, long-term change. Our coaches work with individuals one-on-one to:
o facilitate change
o motivate the individual
o promote creativity
o demand accountability
o channel energy and desire
o Implement skills and habits
Industry Background
Warever is in the software development industry, and is primarily
focussed on developing software related to Customer Relations Management
("CRM"). CRM is a comprehensive integration of every area of business touching
the customer, namely marketing, sales, customer service and field support. CRM
software assists sales people in tracking client information, time management,
and facilitating regular client correspondence. The CRM sector of the software
industry is fairly new, but like the bulk of the software industry, there is
intense competition, dangers of rapid technological obsolescence and
intellectual property issues.
Coaching Institute provides personal development coaching services.
Personal development coaching is a new and evolving training methodology that is
growing in popularity and is commonly referred to as "coaching." Coaching is
primarily a service where an individual is assisted in implementing information
learned at the seminar. Normally, the coach telephones the customer at
designated times, such as once a week. During the phone conference the coach
will answer questions, help the customer set goals, assess the customer's
progress in implementing the principles taught at the seminar. The coaching
relationship will commonly continue for 8 to 12 weeks. Coaching may also be used
by purchasers of products, such as durable office equipment and software to
assist the purchaser to effectively implement the products into their business
operations. Coaching supports a variety of topics. Such as:
o Sales
o sales management
o personal development
o professional speaking
o network marketing
o anxiety and stress management
o business growth and development
o real estate sales
o real estate investment; and
o areas where personal change would be a benefit
o areas where use of new products is to be implemented
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Coaching is used as a format of employee training for major businesses
including Fortune 500 Companies such as Ameritech, Merrill Lynch, Amoco,
Northwestern Mutual Life and Arthur Anderson. We do not currently provide
coaching services to any of these companies. Many members of the National
Speakers Association, as well as such notables as Zig Ziglar, Ron LeGrand, A.D.
Kessler, Roger Butcher, Denis Waitley, Tom Hopkins, Brian Tracy, Peter Lowe,
Stephen R. Covey, Les Brown, and Omar Periu have personal coaching programs.
Many more National Speakers Association members are coaches themselves as well
as professional speakers. We do not have a relationship with the National
Speakers Association, but we do have relationships with many of its members. A
list of vendors with whom we have relationships is listed in the section
entitled "Customers."
Competition in the Market
Competition in the software market has increased dramatically in recent
years. Software products are sold through mail, seminars, over the Internet,
through telemarketing and retail. Software is also given away as a promotion to
sell other software programs. Warever faces competition from software
manufacturers offering customer relationship management software related to a
variety of industries ranging from real estate and insurance sales to multilevel
marketing. Hundreds of companies including Act, Goldmine and Top Producer
develop software products. Competitors selling CRM software include companies
such as BT Squared Technologies, Inc., Symantec, ARI Network Services, Inc.,
Industri Matematik Abalon AB, Moss Micro, Inc., Information Management
Associates, Inc., Applix, Inc., Saratoga Systems, Inc., Baan Company,
Brightware, Inc., Sunset Software, Inc., Callback Software, Inc., Clarify, Inc.,
On!contact Software Company, ClientXchange, Epicor Software Corporation, DSI
Management Systems, PowerCerv Technologies, Group 1 Software, Inc.
Our software is tailored to a fairly narrow market. We have attempted
to direct product sales and CRM product development toward businesses in
specific industries, such as real estate. Our market position is turning toward
the Powerbase series which, like our software Action Plus, will consist of
functions that can assist companies and particularly sales people's day to day
operations such as data-base maintenance, marketing using the database, time
management, word processing, correspondence and accounting. However, Powerbase
has not yet been fully tested or released and there can be no assurances as to
its successor ability to compete in its sector of the market.
Coaching Institute faces competition from other businesses offering
coaching services such as Franklin Covey Coaching, and dozens of new companies
which are being formed around the country. Coaching is a form of self-help,
which has traditionally been provided in books, tapes, seminars, and speakers.
Competition in the coaching industry is difficult to assess because of the
infancy of the industry. There is a trend for self-help providers, such as
public speakers, motivators and organizers to expand or modify their services
into the area of coaching. A common method of competition is for self-help
providers to use their existing sales and customer contacts to sell coaching
services. Well known self-help providers have an advantage due to their
familiarity to customers and potential outside vendors. The competition from
self-help providers is intense.
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We are attempting to gain notoriety and to establish relationships with
outside vendors. We do not have a large market share. We currently have
relationships with about a dozen outside vendors. However, there is no assurance
that we will be able to gain notoriety or continue to establish or maintain
relationships with outside vendors.
General Operations
Warever must adjust to the changing nature of the software industry.
There is a shift to more industry specific software applications. Warever is
attempting to tailor software programs to cover all of a small business' needs
for certain particular industries, especially needs related to CRM. For example,
Powerhouse, a software program currently under development for real estate
agents and brokers, has contact management, calendaring, property management,
presentations, and internet marketing. Currently, we are not aware of other
software programs that have all of these functions. A real estate agent would
need to purchase three different software packages to achieve the same function
provided by Powerhouse. Further, Warever Corporation will continue to add
functions to Powerhouse and its mother program, Powerbase, such as, full
accounting, financial analysis, IRS reports, and networking. We intend to
distribute our products through relationships with SDI LeGrand, RE Marketing,
and others. Currently, we have oral agreements with SDI Marketing and RE
Marketing to sell Powerbase and its sister software programs, however, we have
no formal written agreements. We anticipate that they will be paid 30% from the
proceeds of sales that they refer to us. They will likely be paid approximately
50% for sales of our software that they completely facilitate. We anticipate
written agreements with SDI and RE Marketing this year. We anticipate
relationships with other entities that can sell or facilitate sales of our
software. We do not anticipate contracts that will require minimum sales by our
outside vendors. The companies provide us with attendance rosters from their
seminars. In return, when we sell products to the attendees, we give them a
percentage of the revenues. In some cases these companies will sell our software
directly and be paid a percentage of the revenues. These companies are not bound
to provide us with names or sell our products and there is no assurance that
these companies will continue to produce for us.
Coaching Institute must maintain a steady flow of clients because each
coaching arrangement usually lasts only 8-12 weeks. We are actively seeking
referral relationships with professional speakers and seminar companies.
Coaching Institute attends the National Speakers Association convention on an
annual basis for the purpose of acquiring new speakers, and increase the
visibility of Coaching Institute in the speaking and seminar community. We have
also begun to expand into coaching the purchasers of complex products, such as
office equipment. We have formed a relationship with Automation Quest to assist
their customers with implementing newly purchased products. We have no contracts
binding anyone to provide us with coaching leads or to sell our services. Our
agreements focus on outside vendors' compensation for referrals and sales, but
do not create binding assurances that such vendors will perform on our behalf.
Coaching Institute currently actively recruits and trains coaches and sales
professionals. Our management believes that quality coaching personnel are key
to the competitiveness of a coaching services provider, because consumers of
coaching will be unwilling to recommend or purchase coaching services from
coaches with substandard interpersonal and coaching skills.
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Sales and Marketing
Warever has a three tiered sales strategy.
o Direct sales to end users and corporate clients through an
internal sales force.
o Arrangements with outside vendors to sell our software
o Sales through regional distributors.
Warever utilizes outside vendors as our main marketing strategy. For
example, American Greetings has licensed a customized version of our software
called "Pocket-it" Software. Pocket-it Software is a product designed to be the
electronic companion to a paper-based planner called Pocket-it for which
American Greetings has acquired retail distribution rights. The software will
print schedules, notes, and lists onto the patented Pocket-it paper for
insertion into the planner. We delivered the software source codes to American
Greetings which is solely responsible for replication of the software, including
all associated costs. In return for developing the software, Warever will
receive a $5.00 royalty per unit sold by American Greetings. We have not
received any royalties from the sales of "Pocket-it", nor are we aware of any
sales of the software. Moreover, American Greetings has informed us that they
may not distribute Pocket-it. Warever currently has two regional distributors,
both of whom work on straight commission. Their sales are a minor portion of our
software sales.
Coaching Institute's sales are conducted in two ways. Similar to
Warever's software, Coaching Institute's sales are primarily made through
follow-up telephone calls to individuals who have attended a seminar held by an
organization with which we have sales agreements. Our agreements with outside
vendors both for the sale of our software and coaching services do not require
outside vendors to sell our products and services. The arrangements set out a
percentage of the revenue for the sale of the product or service that will be
given to the outside vendor as compensation for selling the product or service.
Secondly, sales are made directly by our outside vendors in a seminar
environment. The outside vendor can pitch our software during a presentation and
have a table set up in the seminar room from which our software is sold.
Coaching Institute's coaching services are marketed primarily through
direct mail followed by an outbound telephone campaign to the direct mail
recipients. Outside vendor seminars are the source of the names, numbers, and
addresses in our direct mailing and outbound telephone campaigns. We intend for
marketing and sales responsibilities to be increasingly performed by outside
vendors. One of our outside vendors, Automation Quest, for example, sells
technology packages to real estate agents. The packages include office
technology items useful to real estate agents, such as a laptop computer,
digital camera, web site, and software. Our coaching services are also sold by
Automation Quest as part of these technology packages. Automation Quest is
compensated for selling our coaching services by payment of approximately half
of the sale price. The total price of Automation Quest's technology package is
about $6,500. Automation Quest sales account for several hundred coaching
programs annually. In addition to outside vendors, Coaching Institute plans to
utilize print media and radio and other traditional forms of marketing and
advertising in the future.
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Customers
Warever's relationship with outside vendors allows mutual profit from
the sale of our products and services to the outside vendor's clients. This
relationship is beneficial because of the outside vendor's distribution channels
and their ability to set up a table and sell products at seminars. Warever has
similar sales relationships with network marketing companies such as SDI /
LeGrand, RE Marketing, and American Greetings.
Over the past several years, Warever Corporation has sold to
approximately 30,000 individuals and businesses, ranging from home-based
businesses to Fortune 1000 companies. Our customers have included:
Radisson Hotels International Franklin Quest Corporation
Bank of New York Blue Cross/Blue Shield
United Technologies (Carrier) Bank One
Nu Skin International Canadian Government
Fruit of the Loom American Home Business Assoc.
Zions Bank Paragon Trade Brands
California Steel SKF
Library of Congress Imall
Coaching Institute has sales arrangements with well known people or
organizations that have distribution channels or that speak in front of large
audiences, such as, motivational speakers, sales trainers, seminar companies,
and network marketing organizations. These people and organizations that act as
outside vendors are not bound to sell our products or services. Pursuant to
written agreements, these people and organizations are paid a pre-designated
percentage of sales that they generate. However, there is no assurance that they
will continue to sell our products. Currently we have sales arrangements with:
Omar Periu A.D. Kessler
RE Marketing Automation Quest
Complete Cyber Solutions SDI Ron LeGrand Publishing
Rory Aplanalp Skin Secrets
Xtax - Jim Burton
Automation Quest is the source of 67% of our coaching customers.
SDI/LeGrand is responsible for 23%, and RE Marketing is the source of 7% or our
coaching customers. The remaining outside vendors supply only 3% of our coaching
customers. A reduction in sales generated by Automation Quest would have a
detrimental impact on our coaching sales.
Products and Services
Warever has several products currently available.
o Action Plus ($395.00) - The flagship product of Warever
Corporation, is a database program for businesses that
includes a time manager, word processor and sales module that
creates sales invoices, tracks inventory and performs certain
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accounting functions. Action Plus has received recognition
from PC Computing Magazine and Portable Computing Magazine.
o Legion ($29.00)- An internet product specifically designed to
increase the speed of your internet connection up to a factor
of 10. It essentially bypasses all intermediary connections,
taking you directly to the URL of the site you specify.
o Powerbase Financial Advisor ($99.00)- This program tracks
personal financial information, including assets, liabilities,
and net worth. It also tracks cash flow and debt, giving
different methods of debt reduction. Financial calculators are
included.
o Idea Bank ($99.00)- This multimedia product is ideal for
motivation speakers and other professional speakers, trainers
or anyone who needs to reference large amounts of text data.
Idea Bank stores, sorts and facilitates the retrieval of
information such as quotes and anecdotes. Users can listen to
audio or watch video presentations of the speaker.
We have sold approximately 30,000 units of Action Plus. Our other
software programs have been used as incentives, promotions and giveaways, and
direct revenues from these programs have been minute as we have sold less than
100 total units. Sales of Action Plus have decreased in recent years leaving
Warever with dramatically reduced revenues. We hope to revive our software sales
with the release of Powerbase and its sister programs.
Warever has several products currently in production:
o Powerbase - In 2000, we plan to release Powerbase, a brand-new
32-bit, internet-enabled business automation product.
Powerbase allows those that market products on the internet to
download customer inquiries directly into their marketing
database for follow-up. Powerbase includes the following:
o powerful, customizable database
o enterprise-wide time management and scheduling system
o full-featured word processor with high-end graphics
capabilities
o Excel(R) compatible spreadsheet for financial
analysis
o Customizable label/envelope and forms generator for
marketing activities
o Integrated e-mail client with "e-merge" capabilities
for internet marketing
After Powerbase is released, we intend to commence development of upgrades of
Powerbase, for release in the future that will include some of the following
features:
o networking capability
o full accounting (see Powerbase Accounting below)
o sales action plans and forecasting
o Powerhouse (under development) - Is a software program for real
estate agents and Brokers that has contact management, calendaring, property
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management, presentations and internet marketing functions. Powerhouse is a
sister program to Powerbase.
o Action Accounting (under development) - Powerbase Accounting, coupled
with the Powerbase base modules, is for small to medium-sized businesses. Action
Accounting includes such standardized accounting modules as general ledger,
accounts payable, accounts receivable, inventory, and sales. It will also
directly integrate with the internet for order placement, fulfillment, and
customer interaction.
o Powerbase Dashboard (under development) - This product gives company
CEOs, presidents and department heads an immediate and real-time view into the
operations of their business through graphs and charts, alerting them to areas
of concern within each department at a moment's notice, whether it be in sales,
accounting, fulfillment, customer service, or web integration.
Coaching Institute provides the following services:
o Personal Coaching - Personal Coaching is conducted over the
telephone, offering the client the greatest opportunity to utilize their own
environment to make needed changes. Sessions last one half hour each over a
period of 8-12 weeks with up to a year of follow up.
o Telesales - Coaching Institute is equipped with advanced phone
systems and provides telesales services to our outside vendors.
o Data Base Management - Utilizing some of Warever Corporation's core
technologies, Coaching Institute is able to manage outside vendor databases. We
use our software and knowledge to operate and organize Omar Periu and RE
Marketing's customer databases. We benefit because they provide us with names in
the database to whom we market our coaching services. Database management is not
currently a source of direct revenues for Warever.
o Seminar Management - Seminars allow Coaching Institute to control
lead flow from start to finish as well as provide needed structure to beginning
speakers and fledgling organizations such as Xtax run by our outside vendor Jim
Burton.
Intellectual Property and Proprietary Rights
We rely on a combination of copyright, trade secret, and trademark law
to protect our technology, although we believe that other factors such as the
technological and creative skills of our personnel, new product developments,
frequent product and feature enhancements, and reliable product support and
maintenance are more essential to maintaining a technology leadership position.
We currently do not have any patents issued or pending.
We generally enter into confidentiality and nondisclosure agreements
with our employees, consultants, prospective customers, licensees, and corporate
partners. In addition, we control access to and distribution of our software,
coaching programs, documentation, and other
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proprietary information. Despite our efforts to protect our intellectual
property and proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Effectively policing the
unauthorized use of their products is time-consuming and costly, and there can
be no assurance that the steps we take will prevent misappropriation of our
technology.
We attempt to avoid infringing known proprietary rights of third
parties in our product development efforts. However, we do not regularly conduct
comprehensive patent searches to determine whether the technology used in our
products infringes on patents held by third parties. There are many issued
patents as well as patent applications in the electronic messaging field.
Because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which relate to our
software products. If we were to discover that our products violated or
potentially violated third party proprietary rights, we might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can we be
certain that any licenses would be available on commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists in
the software industry, and it is expected that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in the industry segments grows and the functionality of software
products in different industry segments overlaps. Any third-party infringement
claims could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product and service delays or
require us to enter into royalty or licensing agreements. Any royalty or
licensing arrangements, if required, may not be available on acceptable terms,
if at all. A successful claim of infringement against us and our failure or
inability to license the infringed or similar technology could have a material
adverse effect on our business, financial condition, and results of operations.
We may find defects in our sales automation and internet-based software
that may require us to incur substantial product liability costs and significant
redesign costs. Warever Corporation's product types often contain errors or
defects, particularly when first introduced or when new versions or enhancements
are released. Defects or errors in Warever Corporation's products could result
in a loss of customers, reduced revenues and higher sales automation and
internet-based software development costs, which would seriously harm our
business.
Acquisitions
We may seek to expand through acquisitions which are not currently
identified and which therefore may entail risks which cannot be evaluated at
this time. We may seek to expand our operations by acquiring companies in
businesses that we believe will complement or enhance our business, particularly
in the seminar or internet-related industries. We cannot be assured that we will
be able to ultimately effect any acquisition, successfully integrate any
acquired business in our operations or otherwise successfully expand our
operations. We have not established any minimum criteria for any acquisition and
our management may have complete discretion in determining the terms of any
acquisition.
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Supplies
The principal materials and components used in our software products
include computer media, including disks and CD-ROMs, and user manuals. For each
product, we prepare a master software disk or CD-ROM, user manuals, which may be
in printed form or distributed on a CD-ROM, and packaging. Substantially all of
our disk and CD-ROM duplication is performed by third-party vendors, using disks
and blank CD-ROMs acquired from various sources. Outside sources print Warever
Corporation's packaging and related materials to its specifications. Portions of
the completed packages are assembled by third-party vendors. To date, Warever
Corporation has not experienced any material difficulties or delays in the
manufacture and assembly of its products, or material returns due to product
defects. We do not have any contracts with our suppliers. We believe that we
could replace our current suppliers without great expense, although such a
replacement may slow down our operation and negatively impact our profits.
Software is not a raw materials intensive product. The floppy disks, computer
disks, and paper for manuals that we produce could be purchased from a number of
suppliers.
R&D
We spent $39,433 in 1998 on salaries for our software development
personnel. In 1999, we spent $76,348 on salaries for personnel and independent
contractors involved in the development of our software. These costs are not
directly borne by our customers.
Employees
We currently have a total of twenty-six full time employees, ten of
whom are in our sales department, six are coaches, four are programmers and six
are in administration. We do not have employment contracts that guarantee a term
or salary or grant stock options. We estimate our number of employees to
increase to about sixty-five by the end of 2000. We cannot be certain of the
number of employees that we will have by this years end, but the increase may
resemble the following:
Warever 1Q Warever 2Q Warever 3Q Warever 4Q
-----------------------------------------------------------------------
Admin: 2 Admin: 3 Admin: 3 Admin: 3
Programming: 3 Program: 4 Program: 5 Program: 6
Sales: 2 Sales: 4 Sales: 6 Sales: 7
Support: 2 Support: 3 Support: 3 Support: 4
Total: 9 14 17 20
Coaching 1Q Coaching 2Q Coaching 3Q Coaching 4Q
-----------------------------------------------------------------------
Officers: 3 Officers: 3 Officers: 3 Officers: 3
Admin Mgmt: 4 Admin Mgmt: 5 Admin Mgmt: 5 Admin Mgmt: 5
Coaches: 8 Coaches: 10 Coaches: 12 Coaches: 15
Sales: 12 Sales: 15 Sales: 18 Sales: 20
Support: 1 Support: 2 Support: 2 Support: 2
Total: 28 35 40 45
-----------------------------------------------------------------------
LSI Total: 37 49 57 65
13
<PAGE>
Offices
We operate from an office building in a business park where we have
leased and occupy approximately 3,100 square feet of usable office space and
1,100 square feet of warehouse space. We own thirty computers, fax, phones and
copiers, printers, typewriters, desks, a conference table, cabinets and other
general office equipment. The monthly rental/lease rate is approximately $4,000
per month. We believe that as we expand the business, and cultivate additional
relationships with outside vendors, we will need to relocate our executive
offices to a nearby location or expand into our connected warehouse space which
is currently part of our lease.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Our liquidity and capital resources as of December 31, 1998 were
$24,418, and as of December 31, 1999 were $18,393, a decrease of $6,025 or
24.6%. The cause of this decrease was due to expenditures related to the
development of our new software product Powerbase and its derivatives such as
Powerhouse. Our software division's sales were weak during this development
phase. In addition, funds were utilized to acquire and expand new Coaching
accounts such as SDI LeGrand Publishing and A.D. Kessler. Our current assets
exceed current liabilities. Neither Warever nor Coaching Institute has
significant payables balances outstanding.
Coaching Institute's debt payments and liabilities due in the next 12
months arise from three outstanding promissory notes issued to Lona Hendricks
involving principal loans totaling $190,000, with a total balance as of December
31, 1999 of $163,453. Interest and principal due on these notes in the next
twelve months is $145,400. Warever's debt payments and liabilities due in next
12 months arise from three outstanding promissory notes issued to Utah
Technology Finance Corporation involving principal loans totaling $102,000, with
interest and principal due on these notes in the next twelve months of $37,249.
Sale of Karl Malone project in October 1999 netted $378,000 in cash, $226,800 of
which was still due to Coaching Institute as of December 31. The Karl Malone
project, a fitness video hosted by professional basketball player Karl Malone,
was produced by Coaching Institute. During the first two months of 2000, we
received the remaining $226,800 due from the sale of the Karl Malone contract.
The proceeds were used to pay off long term debt.
We had negative cash flow from operations in 1999, due in large part to
investment in Karl Malone Fitness video, which has now been sold, and the
expansion of Coaching Institute. The video project was sold primarily because
Coaching Institute received an offer that would eliminate all project-associated
debt as well as provide money to expand Coaching Institute's primary operations.
We do not have any similar video projects under development, nor do we
anticipate producing any others, because our management has elected to focus
personnel and financial resources to our core business of coaching and software
development and sales. We may, however, produce much smaller scale videos in
conjunction with Coaching Institute's clients for use as promotional tools.
However, these promotional videos would not be sold in
14
<PAGE>
retail stores or similar venues as was anticipated with the Karl Malone project.
We had no material investments in 1999 with the exception of upgrading telephone
system in October 1999 which cost $18,000.
We do not have any financing transactions pending. We plan to explore
financing alternatives during 2000 to fund additional growth. During 2000
Coaching Institute could become self-funding through profits generated.
Warever's potential cash demands may be available from Coaching Institute's
surpluses. There is a seasonal impact on our sales. Generally, the slower months
are during the Summer and during the Christmas Holiday season.
We issued stock on February 1, 2000 in order to purchase the 15% of
Warever not yet owned by LSI. We also intend to purchase the remaining 15% of
Coaching Institute by issuance of stock in the first quarter of 2001.
Results of Operations- Three month Periods Ended March 31, 1999 and 2000
The following discussion and analysis should be read in conjunction
with LSI Communications' Financial Statements and the Notes thereto included
elsewhere in this Registration Form. The results of operations prior to July 1,
1999 are solely based on the operations of Warever. LSI Communications' results
for the three months ended March 31, 1999, as reflected in its unaudited
financial statements for the period then ended, have been compared with its
unaudited, interim results for the three months ended March 31, 2000. The
discussion of results, causes and trends should not be construed to imply any
conclusion that such results or trends will necessarily continue in the future.
Liquidity
Our liquidity and capital resources as of March 31, 2000 were $118,849,
and as of December 31, 1999 were $18,393, an increase of $100,456 or 546.2%. The
cause of this increase was due to the sale of the Karl Malone video.
Sales Revenues
Sale revenues for the three months ended March 31, 2000 were $286,077,
an increase of $234,108, or 450.5% from $51,969 for the three months ended March
30, 1999. Despite our overall sales increase, Warever's software sales, which
prior to 1999 was our only source of revenues, decreased 73.7% to $13,653 from
$51,969 in the first quarter of 1999. The decrease in Warever's software sales
is a trend that began in 1997 as a result of the declining demand for Action
Plus, our primary software product. We expect software sales trend to reverse to
some degree with the release of Powerbase during 2000. However, we have
performed no market tests and have insufficient information to assess the
potential demand, if any, for Powerbase.
The overall increase in our sales was due to $272,424 in revenues from
Coaching Institute during the three months ended March 31, 2000. We hope to
maintain and increase coaching revenues from Coaching Institute. There appears
to be a trend toward stable and possibly increased demand for our coaching
services. Our revenues from coaching have been increasing and Management has
observed an increasing number of speakers requesting coaching
15
<PAGE>
services at events such as the annual National Speakers Association convention.
Moreover, the coaching industry is attracting media coverage, including articles
in Realty Times, Creative Real Estate Magazine, Investor's Business Daily,
Nation's Business, the Salt Lake Tribune, the Orlando Sentinel, Inc. Magazine,
and Cooking Light Magazine. However, despite our increased coaching related
revenues and the increased consumer interest in coaching services perceived by
our management, we cannot ensure that we will be able to maintain or increase
revenues from coaching services.
Cost of Sales
Cost of sales increased by $62,187, or 4,562.5%, to $63,550 in the 1999
three-month period from $1,363 in the comparable 1998 three-month period. The
increase was attributable to the acquisition of Coaching Institute and its
relatively expensive product costs. Coaching services are very labor intensive.
Categorizing coaching related salaries in Cost of Sales resulted in a major Cost
of Sales increase. We expect cost of sales related to coaching services to
mirror coaching sales. Cost of Sales related to software actually decreased by
87.1% due to depleted software sales. We expect cost of sales related to
software sales to increase relative to sales of our new software product
Powerbase, however, we do not have reliable projections regarding consumer
demand for Powerbase.
Selling, General and Administrative Expenses
General and Administrative expenses increased by $64,352, or 173.1%, to
$101,526 in the 2000 three-month period from $37,174 in the 1999 three-month
period. A primary reason for the 2000 three-month period increase is the
acquisition of Coaching Institute in the third quarter of 1999. We now have
General and Administrative expenses for two subsidiaries where we only had one
in the comparable three month period ended March 31, 1999. Causes of increased
General and Administrative related expenses included a $13,000 increase in
telephone expenses, and a $9,000 increase accounting and legal fees.
Selling expenses increased by $99,250, or 1,001.4%, to $109,161 in the
three-month period ended March 31, 2000 from $9,911 in the comparable 1999
three-month period. This increase is the result of Coaching Institute's
salaries, commissions, advertising and general sales expenses that were not
present on our books prior to Coaching Institute's acquisition. Selling expenses
related to software sales actually decreased due to retraction of our software
selling efforts during the development phase of Powerbase. We expect our selling
expenses to increase as we expand coaching services and commence marketing of
the Powerbase software.
Payroll related expenses increased by $44,042, or 255.6%, to $61,276 in
the three-month period ended March 31, 2000 from $17,234 in the comparable 1999
three-month period. The Payroll line item of our Statement of Operations
includes all salaries, primarily administrative, not related to selling,
marketing or actual coaching. This increase is generally attributable to the
expansion of our administration to accommodate Coaching Institute.
16
<PAGE>
Interest Expense
Interest expense increased by $2,144, or 536%, to $2,544 in the 2000
three-month period from $400 in the 1999 three-month period. The increase was
primarily due to interest paid on loans from 1999. The loans were required to
continue our operations.
Net Loss
Our net loss for the 2000 three-month period increased by $23,129, or
112.1%, to a net loss of ($43,764) from a net loss of ($20,635) in the
comparable 1999 period. This increased net loss is due to operating expenses
that increased by 289.3% and Cost of Sales that increased by 4,562.5%, while
gross revenues increase of only 450.5%. Based on current fixed expenses and
profit margins, we would need to increase gross revenues from Coaching by
approximately $100,000 per quarter or increase software revenues by
approximately $60,000 per quarter to become profitable. Such increases are
possible, but uncertain because coaching sales tend to drop during the Summer
months and demand for our new software in the next year remains unclear.
Results of Operations - Twelve month Periods Ended December 31, 1998 and 1999
Discussion of the results of operations for the twelve-month period
ended December 31, 1999 contain financial information for Coaching Institute
from the time of its acquisition on June 21, 1999. The following discussion and
analysis should be read in conjunction with LSI Communications' Financial
Statements and the Notes thereto included elsewhere in this Registration Form.
In addition to LSI Communications' consolidated financial statements for the
Twelve month Periods Ended December 31, 1998 and 1999, a Pro forma statement of
operations at September 30, 1999 is presented later in this registration form
for purposes of additional analysis. The pro forma statement of operations
compares Coaching Institute and Warever through the first three quarters of
1999, despite the fact that Coaching Institute was not acquired until the latter
part of the three month period. Audited financial statements of Coaching
Institute for 1998 have also been included for additional analysis.
Sales Revenues
Sale revenues for the twelve months ended December 31, 1999 were
$533,047, an increase of $119,038, or 28.8% from $414,009 for the twelve months
ended December 31, 1998. Despite our overall sales increase, Warever's software
sales, which prior to 1999 was our only source of revenues, decreased 71.7% to
$117,316 from $414,009 in 1998. The overall increase in sales was due to
$415,731 in revenues from Coaching Institute. The decrease in Warever's software
sales is due to the fact that our limited resources were spent on developing new
software programs rather than marketing and sales efforts that may have
increased sales. Sales of our existing software is decreasing as the products
enter the declining phase of their product life cycle. Action plus was our only
source of meaningful income from software sales. The majority of consumers that
are within reach of our current marketing strategy have either purchased the
software or never will. This downward sales trend caused us to focus on
development of new software. Due to the rapid changes common in technology and
the software market, we intend to introduce new software products with
relatively long life cycles to
17
<PAGE>
reduce the risk of rapid technological obsolescence and to decrease revenue
peaks and valleys. Our management believes that software serving consistent,
ongoing business needs commonly has long life cycles. We believe that Powerbase,
our newest software program to be released the second quarter of 2000, serves
such needs. Powerbase supports salespeople in functions that remain constant in
the sales industry, including tracking client information, time management, and
regular client correspondence.
Increased software sales for Warever in 2000 are possible due to the
release of Powerbase during 2000. However, we have performed no market tests and
have insufficient information to assess the potential demand, if any, for
Powerbase. We also hope to maintain and increase coaching revenues from Coaching
Institute. As discussed, we cannot ensure that we will be able to maintain or
increase revenues from coaching services, but there appears to be a trend toward
stable and possibly increased demand for our coaching services.
Cost of Sales
Cost of sales increased by $147,708, or 10,892.9%, to $149,064 in the
1999 twelve-month period from $1,356 in the 1998 twelve-month period. The
addition of Coaching Institute and salaries related to coaching services causes
the bulk of the $147,708 increase. We expect cost of sales related to coaching
services to remain similar to current levels, increasing or decreasing relative
to the amount of coaching sales. Cost of sales related to software sales
increased by 321.8% or $4,363 to $5,719 in the 1999 twelve-month period from
$1,356 in the 1998 twelve-month period. The dollar amount of the increased cost
of sales related to software was not significant and the reason for the increase
was primarily due to the sale of some computer hardware which had a much higher
cost of goods than our software. The computer hardware sold was primarily laptop
computers. Warever Corporation has accounts with national distributors such as
PC Connection, Midwest Micro, and other computer hardware and software
distributors. In general, the laptop computers were sold to a few select
customers to test the market for hardware and software combination packages. The
costs of sales as a percentage of our software sales reflects that the bulk of
our software sales price is derived from its intellectual property value and not
included in cost of sales. We expect cost of sales related to software sales to
increase relative to sales of our new software products.
Selling, General and Administrative Expenses
General and Administrative expenses increased by $62,642, or 68.9%, to
$153,610 in the 1999 twelve-month period from $90,968 in the 1998 twelve-month
period. A primary reason is the acquisition of Coaching Institute in 1999. We
now have General and Administrative expenses for two subsidiaries where we only
had one in 1998. More specifically, General and Administrative expenses
increased due to additional accounting and auditing costs related to
registration of our securities and $20,000 for telephone expenses and $24,000 in
direct mailing expenses related to Coaching Institute's operations which were
not included in the 1998 twelve-month period. Increased expenses resulting from
the acquisition of Coaching Institute will continue indefinitely.
Selling expenses increased by $167,953, or 110.3%, to $320,242 in the
1999 twelve-month period from $152,289 in the 1998 twelve-month period. This
increase is due to the
18
<PAGE>
addition of Coaching Institute and the accompanying salaries, commissions,
advertising and general sales expenses related to coaching services. Selling
expenses related to software sales actually decreased due to retraction of our
software selling efforts during the development phase of Powerbase. We expect
our selling expenses to increase as we expand coaching services and commence
marketing of the Powerbase software.
Not included in the "Selling Expenses" and "General and Administrative
Expenses" line items were $95,500 in deferred compensation to Craig Hendricks
and Steve Carlson, $135,000 related to consulting agreements with Noble House of
Boston, Inc. and National Capital and $126,100 in production fees for the Karl
Malone project. Noble House agreed to act as a liaison between potential
investors and underwriters. Our management believes that Noble House no longer
provides any services and that we are not bound to pay additional consideration
under our contract. Our agreement with National Capital was related to
registration of our common stock. Our obligations to National Capital have been
satisfied.
Depreciation and Amortization
Depreciation and Amortization remained steady increasing slightly by
$755, or 7.4%, to $10,964in the 1999 twelve-month period from $10,209 in the
1998 twelve-month period.
Interest Expense
Interest expense increased by $7,452, or 90.9%, to $14,230 in the 1999
twelve-month period from $6,778 in the 1998 twelve-month period. The increase
was primarily due to new loans totaling $190,000 in 1999.
Net Loss
Our net loss for the 1999 twelve-month period increased by $314,230, or
1,745.8%, to a net loss of ($332,229) in the 1999 twelve-month period from a net
loss of ($17,999) in the 1998 period. This increased net loss is due to
operating expenses that increased by 96.9%, as discussed above, coupled with a
gross revenue increase of only 28.8%. We do not expect significant reductions in
our operating costs during 2000.
DESCRIPTION OF PROPERTY
Our corporate headquarters are located in Draper, Utah where we have a
lease for approximately 3,100 square feet of office space and 1,100 square feet
of warehouse space in a typical business park. We believe that as we expand the
business, we will need to lease additional space or add to the currently leased
square footage. We believe that suitable additional or substitute space will be
available on commercially reasonable terms.
19
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this registration
statement, the aggregate number of shares of common stock owned of record or
beneficially by each person who owned of record, or is known by us to own
beneficially, more than 5% of our common stock, and the name and holdings of
each officer and director and all officers and directors as a group:
<TABLE>
<CAPTION>
-------------------- ------------------------------------------- -------------------------------- ---------------------
Title of Class Name and Amount and Percent of Class
Address of Beneficial Owner Nature Beneficial Owner
-------------------- ------------------------------------------- -------------------------------- ---------------------
Officers and Directors:
<S> <C> <C> <C>
Common Stock Craig R. Hendricks 2,894,604 26.1%
112 W. Business Park Drive
Draper, Utah 84020
Common Stock Steven E. Carlson 2,894,604 26.1%
112 W. Business Park Drive
Draper, Utah 84020
5% Shareholders:
Common Stock Lona Hendricks 1,186,340 10.7%
4103 205th Ave. S.E.
Issaquah, WA 98029
-------------------- ------------------------------------------- -------------------------------- ---------------------
</TABLE>
The following table sets forth, as of the date of this registration
statement, the aggregate number of shares of common stock warrants held by each
person who owned of record, or is known by us to own beneficially, more than 5%
of our common stock, and the name and holdings of each officer and director.
20
<PAGE>
<TABLE>
<CAPTION>
----------------------------- ---------------------------------- ---------------------------- --------------------------
Name of Warrant Holder Title and Amount of Securities Exercise Price Date of Exercise
Called for by Warrants
----------------------------- ---------------------------------- ---------------------------- --------------------------
<S> <C> <C> <C>
Craig R. Hendricks 869,318 shares of common stock. .0073 shares of Coaching For a period of 60 days
112 W. Business Park Drive Institute, Inc stock per after January 1, 2001.
Draper, Utah 84020 share.
Steven E. Carlson 869,318 shares of common stock. .0073 shares of Coaching For a period of 60 days
112 W. Business Park Drive Institute, Inc stock per after January 1, 2001.
Draper, Utah 84020 share.
Lona Hendricks 143,182 shares of common stock. .0073 shares of Coaching For a period of 60 days
4103 205th Ave. S.E. Institute, Inc stock per after January 1, 2001.
Issaquah, WA 98029 share.
----------------------------- ---------------------------------- ---------------------------- --------------------------
</TABLE>
DIRECTORS, EXECUTIVE OFFICERS
PROMOTERS AND CONTROL PERSONS
Officers and Directors
The following table sets forth the names, age, and position of each of
our directors and executive officers.
Name Age Position and Office Held
---- --- ------------------------
Craig R. Hendricks 33 President, Chief Executive Officer
Chief Accounting Officer,
Chief Financial Officer, Director
Steven E. Carlson 30 Vice President, Director
Each of the above individuals became an officer and director in
connection with our re-organization on December 8, 1998. The term of office of
each officer and director is until his successor is elected and qualified.
Biographical Information
Set forth below is biographical information for each officer and
director. No person other than officers and directors will currently perform any
of our management functions.
21
<PAGE>
Craig R. Hendricks
Mr. Craig R. Hendricks has been with Warever Corporation since 1992. In
1993, he orchestrated and led the buyout of Warever Corporation from its
founding owners. Prior to joining Warever Corporation in 1992, Mr. Hendricks
began his career at WordPerfect Corporation. He served on the Board of CMS
Casuals, Inc., a manufacturing company based in Bellevue, Washington with
approximately 40 employees, which was sold to a group of Microsoft employees in
1990. He received a Bachelor of Science in accounting and a Master of Business
Administration Degree, graduating with distinction from Brigham Young University
in 1992.
Steven E. Carlson
Mr. Steven E. Carlson helped create Warever Corporation as one of the
original founders while attending the University of Utah. Mr. Carlson has been a
member of the board of directors since Warever's inception and the vice
president of sales and marketing since 1995. Mr. Carlson has been involved in
the productivity and sales automation industries since the late 1980's. For the
past five years, Mr. Carlson has focused on day to day operations related to
Warever's software sales and on-site implementation of Warever's automation
system software.
EXECUTIVE COMPENSATION
We have no written employment agreements with any officer or director.
The President and Vice President do not have set compensation and defer their
compensation from time to time. Commencing January 1, 2000, the President and
Vice President will be paid annual salaries of $100,000 each.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------------------
Name and Principal
Position (a) Year
(b) Long-Term Compensation
----------------------- -------- ------------------------------------------ ------------------------------------- -------------
Annual Compensation Awards Payouts
------------------------------------------ ------------ ------------------------ -------------
Salary (c) Bonus (d) Other Restricted Securities LTIP All
Annual Stock Under- Payouts Other
Compen- Award (f) Lying (h) Compen-
sation (e) Options/ sation (i)
SARs (g)
----------------------- -------- ------------- --------------- ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Craig Hendricks 1998 $ 50,250 $0.0 $0.0 $0.0 0 $0.0 $0.0
Chairman, CEO,
President 1999 $ 49,500 $0.0 $45,500 $0.0 0 $0.0 $0.0
----------------------- -------- ------------- --------------- ------------ ------------ ------------ ----------- -------------
Steven Carlson 1998 $ 50,250 $0.0 $0.0 $0.0 0 $0.0 $0.0
Vice President 1999 $ 49,500 $0.0 $45,500 $0.0 0 $0.0 $0.0
----------------------- -------- ------------- --------------- ------------ ------------ ------------ ----------- -------------
</TABLE>
There are no other agreements or arrangements, express or implied,
between us and any other officer or director, regarding any other form of
compensation, including stock options, warrants, employment incentives, or the
like.
No deferred compensation or long-term incentive plan awards were issued
or granted to our management during the year ended December 31, 1998. Deferred
compensation totaling
22
<PAGE>
$90,000, or $45,500 for each Steve Carlson and Craig Hendricks was booked for
the year ended December 31, 1999.
Compensation of Directors.
There are no standard arrangements pursuant to which our directors are
compensated for any services provided as a director. No additional amounts are
payable to our directors for committee participation or special assignments.
Employment Contracts and Termination of Employment and Change in Control
Arrangements.
There are no employment contracts, compensatory plans or arrangements,
including payments to be received from us, with respect to any of our directors
or executive officers which would in any way result in payments to any such
person because of his or her resignation, retirement or other termination of
employment with us, any change in control of our organization, or a change in
the person's responsibilities following a change in control of our organization.
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Loan From 5% Stockholder
There have been several transactions between members of management,
nominees to become a director or executive officer, 5% stockholders or
promoters. During 1995, Lona Hendricks, an immediate family member of Craig
Hendricks, one or our officers and directors, advanced $39,000 for working
capital. As of December 31, 1999 $35,866 in payments were made to him with a
balance due at December 31, 1999 and 1998, of $3,134 and $3,593, respectively.
During 1999, Craig Hendricks also advanced $5,000 for working capital. As of
December 31, 1999, $5,000 in payments were made to him removing the balance due
from our books. During 1999, Lona Hendricks loaned us a total of $190,000 in a
series of three similar transactions. As of December 31, 1999, $26,547 was paid
to her with a balance due at December 31, 1999 of $163,453. The loans and terms
are as follows:
<TABLE>
<CAPTION>
-------------------- -------------------- -------------- -------------- ----------------------------------------------
Date of Loan Principal Amount Interest Rate Term Payment Terms
-------------------- -------------------- -------------- -------------- ----------------------------------------------
<S> <C> <C> <C> <C>
April 1, 1999 $40,000 9.75% 3 years Monthly payments of principal and interest
amortized over 36 months
-------------------- -------------------- -------------- -------------- ----------------------------------------------
July 1, 1999 $50,000 9.75% 1 year Monthly payments of interest only with
balloon payment due on or before month 12.
-------------------- -------------------- -------------- -------------- ----------------------------------------------
August 1, 1999 $100,000 9.75% 1 year Monthly payments of interest only with
balloon payment due on or before month 12.
-------------------- -------------------- -------------- -------------- ----------------------------------------------
</TABLE>
DESCRIPTION OF SECURITIES
General
23
<PAGE>
LSI Communications is authorized to issue 50,000,000 shares of common
stock, par value $0.01 per share, of which 11,096,054 shares are issued and
outstanding. We have no preferred stock.
Common Stock
Holders of common stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of stockholders. Shares of common
stock do not carry cumulative voting rights and, therefore, holders of a
majority of the outstanding shares of common stock will be able to elect the
entire board of directors, and, if they do so, minority stockholders would not
be able to elect any members to the board of directors. Our board of directors
has authority, without action by the stockholders, to issue all or any portion
of the authorized but unissued shares of common stock, which would reduce the
percentage ownership of the stockholders and which may dilute the book value of
the common stock.
Shareholders have no pre-emptive rights to acquire additional shares of
common stock. The common stock is not subject to redemption and carries no
subscription or conversion rights. In the event of liquidation, the shares of
common stock are entitled to share equally in corporate assets after
satisfaction of all liabilities.
Holders of common stock are entitled to receive dividends as the board
of directors may from time to time declare out of funds legally available for
the payment of dividends. We have not paid dividends on common stock and do not
anticipate that we will pay dividends in the foreseeable future.
PART II
MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information.
Our common stock is quoted on the OTC Bulletin Board of the NASD. No
assurance can be given that any established market for our common stock will
develop or be maintained. For any market that develops for our common stock, the
sale of "restricted securities" (common stock) pursuant to Rule 144 of the
Securities and Exchange Commission by members of management or any other person
to whom any such securities may be issued in the future may have a substantial
adverse impact on any such public market. Information about the date when
current holders' holding period of "restricted securities" commenced can be
found under the caption "Recent Sales of Unregistered Securities." A minimum
holding period of one year is required for resales under Rule 144, along with
other pertinent provisions, including publicly available information concerning
our operations (this requirement will be satisfied by the filing and
effectiveness of this Registration Statement), limitations on the volume of
"restricted securities" which can be sold in any 90 day period; the requirement
of unsolicited broker's transactions; and the filing of a Notice of Sale on Form
144. We have 11,415,632 shares of common stock outstanding of which all but
5,668,284 are freely traded or can be currently sold
24
<PAGE>
under Rule 144, subject to its limitations. There are currently outstanding
options to purchase 2,045,455 shares of our common stock. The majority of these
options are held by our two directors and will require issuance of new stock
which will dilute the ownership interest of our shareholders.
Our common stock can be defined as a "penny stock" pursuant to Rule
3a51-1 under the Securities and Exchange Act of 1934 because our shares are
traded at a price less than $5 per share, we do not yet meet certain financial
size and volume levels, and our shares are not registered on a national
securities exchange or quoted on the NASDAQ system. A "penny stock" is subject
to rules 15g-1 through 15g-10 of the Securities and Exchange Commission. Those
rules require securities broker-dealers, before effecting transactions in any
"penny stock," to (a) deliver to the customer and obtain a written receipt for a
disclosure document set forth in Rule 15g-10 (Rule 15g-2), (b) disclose certain
price information about the stock (Rule 15g-3), (c) disclose the amount of
compensation received by the broker-dealer (Rule 15g-4) or any "associated
person" of the broker-dealer (Rule 15g-5), and (d) send monthly statements to
customers with market and price information about the "penny stock" (Rule
15g-6). Our common stock could also become subject to Rule 15g-9, which requires
the broker-dealer, in some circumstances, to approve the "penny stock"
purchaser's account under certain standards and deliver written statements to
the customer with information specified in the rules. (Rule 15g-9) These
requirements discourage broker-dealers form effecting transactions in "penny
stocks" and may limit the ability of our shareholders to sell their shares into
any secondary market for our common stock.
The following quotations were provided by Dreyfus Brokerage Services,
Inc. and represent historical pricing of our common stock by quarter over the
past two years on the over the counter bulletin board, but do not represent
actual transactions; these quotations do not reflect dealer markups, markdowns
or commissions.
Stock Quotations
CLOSING BID
December 31, 1998 4 3/4 25/32
March 31, 1999 4 3/4 1 /78
June 30, 1999 3 5/16 1 3/8
September 30, 1999 1 7/8 7/8
December 31, 1999 1 3/4 7/16
March 31, 1999 1/2 3/32
Holders.
25
<PAGE>
The number of record holders of our securities as of the date of this
Registration Statement is approximately 125.
Dividends.
We have not declared any cash dividends with respect to our common and
do not intend to declare dividends in the foreseeable future. Our future
dividend policy cannot be ascertained with any certainty, and if and until we
become profitable, no such policy will be formulated. There are no material
restrictions limiting, or that are likely to limit, our ability to pay dividends
on our securities.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings, or governmental
agency proceedings, and no such action by or, to the best of our knowledge,
against us has been threatened.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS
None.
RECENT SALES OF
UNREGISTERED SECURITIES
Common Stock
<TABLE>
<CAPTION>
--------------------------------------- ------------- ------------------ ---------------------------------------------
Name Date Number of Shares Aggregate Consideration
Acquired
--------------------------------------- ------------- ------------------ ---------------------------------------------
<S> <C> <C> <C>
Bismark Mining 6/11/98 96,000 80,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Steven E. Carlson 12/8/98 999,330 85,000 shares of Warever, Inc. stock.(2)
Steven E. Carlson 6/28/99 1,062,500 36,125 shares of Coaching Institute
Steven E. Carlson 2/1/00 832,775 stock.(3)
15,000 shares of Warever, Inc. stock.(9)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Chartlight Corp. 12/2/98 10,000 $500 in 1998 private placement(4)
--------------------------------------- ------------- ------------------ ---------------------------------------------
DFT Consultants, LTD 12/2/98 243,600 $121,800 in 1998 private placement(4)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Eastern Forest Resources, Inc. 12/2/98 20,000 $11,000 in 1998 private placement(4)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Helena Silver Mines, Inc. 6/11/98 132,000 110,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Craig R. Hendricks 12/8/96 999,330 85,000 shares of Warever, Inc. stock.(2)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Lona Hendricks 12/8/98 551,640 46,921 shares of Warever, Inc. stock. (2)
Lona Hendricks 6/28/99 175,000 5,950 shares of Coaching Institute (3)
Lona Hendricks 2/1/00 459,700 8,280 shares of Warever, Inc. stock.(9)
--------------------------------------- ------------- ------------------ ---------------------------------------------
26
<PAGE>
--------------------------------------- ------------- ------------------ ---------------------------------------------
Hercules Extension, Inc. 6/11/98 108,000 90,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Karl A. Malone 10/7/99 137,931 Services(5)
--------------------------------------- ------------- ------------------ ---------------------------------------------
M.B. Resources, Inc. 6/11/98 120,000 100,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Richard A. McAllister 6/28/99 150,000 6,000 shares of Coaching Institute stock.
(3)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Mark McKown 8/30/99 5,519 Services(5)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Northpost Operating Co. 6/11/98 120,000 100,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Don Robinson 12/8/98 299,800 25,500 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Savoy Industries, Inc. 6/11/98 96,000 80,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Scejon Investments, Inc. 12/2/98 225,000 $11,250 in 1998 private placement(4)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Starboard Financial Corp. 12/2/98 310,000 $15,500 in 1998 private placement(4)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Washington Mining Corp. 6/29/98 120,000 100,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Roger G. Williams 6/28/99 50,000 2,000 shares of Coaching Institute stock.
(3)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Wide West, Inc. 6/11/98 144,000 120,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Windlass Investments, Inc. 12/2/98 191,400 $9,570 in 1998 private placement(4)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Ross Wolfley 12/6/98 149,900 12,750 shares of Warever, Inc. stock. (2)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Security Insurers, Inc. 6/11/98 144,000 120,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Silverton Mines, Inc. 6/11/98 120,000 100,000 shares of Ferber stock.(1)
--------------------------------------- ------------- ------------------ ---------------------------------------------
Noble House of Boston, Inc. 4/99 200,000 Services(6)
--------------------------------------- ------------- ------------------ ---------------------------------------------
National Capital 4/99 35,000 Services(7)
--------------------------------------- ------------- ------------------ ---------------------------------------------
National Capital 4/99 50,000 Exercise of Options(8)
--------------------------------------- ------------- ------------------ ---------------------------------------------
</TABLE>
(1) LSI Communications, Inc., acquired all of the shares of Ferber
Corporation in June 1997 where the shareholders of Ferber exchanged
1,000,000 Ferber shares for 1,200,000 shares of LSI Communications,
Inc.
(2) Warever, Inc. merged into LSI Communications, Inc., which acquired 85%
of the shares of Warever, Inc. by issuing 2,500,000 shares of its stock
in exchange for 85%, or 255,171, shares of Warever, Inc. stock pursuant
to a November 20, 1998 transaction. LSI Communications, Inc., acquired
85% of the shares of
(3) Coaching Institute by issuing 2,500,000 shares of stock in exchange for
85%, or 85,000, of the shares of Coaching Institute stock pursuant to a
June 21, 1999 transaction.
(4) In November and December 1998 the company raised $50,000 in a private
offering pursuant to a Regulation D, Rule 504 exemption.
(5) Services related to the production of a fitness video project.
(6) Payment in stock for services related to public relations and funding.
(7) Payment in stock for services related to registration of securities.
(8) Payment for services related to funding.
(9) LSI Communications, Inc., acquired the remaining 15% of Coaching
Institute by issuing 2,500,000 shares of stock in exchange for 15%, or
15,000, of the shares of Coaching Institute stock in a February 1, 2000
transaction.
We believe that each of the foregoing persons or entities was either an
"accredited investor," or "sophisticated investor" as defined in Rule 506 of
Regulation D of the Securities and Exchange Commission. Each had access to all
material information regarding LSI Communications prior to the offer, sale or
issuance of these "restricted securities." We believe these shares were exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "1933 Act"), pursuant to Section 4(2) and applicable exemptions thereunder.
27
<PAGE>
We have taken the following factors into account in determining the
valuations of the above-referenced shares:
o the fact that the shares are "restricted"
o our history of limited revenues
o the limited market for our common stock on the OTC Bulletin
Board of the NASD
o the low book value per share
Transfer and Warrant Agent
Our transfer agent is Interwest Transfer Company, Inc., 1981 East
Murray-Holladay Road, Holladay, UT 84117.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.7502 of the Nevada Revised Statutes provides in relevant part as
follows:
1.A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
2.A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction
28
<PAGE>
determines upon application that in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such expenses as
the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense. Our articles of incorporation do not contain a
specific indemnification provision for its officers, directors and employees.
Insofar as indemnification by LSI Communications for liabilities
arising under the Securities Act may be permitted to our officers and directors
we are aware that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by LSI Communications of
expenses incurred or paid by an officer or director in the successful defense of
any action, suit, or proceeding) is asserted by such officer or director in
connection with the securities being registered hereby, LSI Communications 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 by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
29
<PAGE>
LSI Communications, Inc.
Interim Financial Statements
March 31, 2000 and 1999
UNAUDITED
30
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Statements of Operations
Unaudited
For the Period Ended
March 31, 2000 March 31, 1999
--------------- ---------------
REVENUES
<S> <C> <C>
Software Sales $13,653 $51,969
Training Sales 272,424 -
--------------- ---------------
TOTAL REVENUES 286,077 51,969
--------------- ---------------
COST OF SALES
Software 176 1,363
Training 63,374 -
--------------- ---------------
TOTAL COST OF GOODS SOLD 63,550 1,363
--------------- ---------------
GROSS PROFIT 222,527 50,606
--------------- ---------------
SELLING EXPENSES 109,161 9,911
PAYROLL 61,276 17,234
RESEARCH & DEVELOPMENT 1,705 5,975
GENERAL & ADMINISTRATIVE EXPENSES 101,526 37,174
--------------- ---------------
TOTAL OPERATING EXPENSES 273,668 70,294
--------------- ---------------
OPERATING INCOME (LOSS) (51,141) (19,688)
--------------- ---------------
OTHER INCOME AND (EXPENSES)
Forgiveness of Debt 13,368
Miscellaneous income (expense) (3,447) (547)
Interest expense (2,544) (400)
--------------- ---------------
Total Other Income and (Expenses) 7,377 (947)
--------------- ---------------
NET INCOME (LOSS) BEFORE INCOME TAXES (43,764) (20,635)
--------------- ---------------
PROVISION FOR INCOME TAXES - -
NET INCOME (LOSS) (43,764) (20,635)
=============== ===============
NET INCOME (LOSS) PER SHARE (0.004) (0.003)
=============== ===============
WEIGHTED AVERAGE OUTSTANDING SHARES 10,563,984 5,968,248
=============== ===============
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Balance Sheet
Unaudited
ASSETS
March 31, December 31,
2000 1999
--------------- ---------------
CURRENT ASSETS
<S> <C> <C>
Cash & Cash Equivalents $118,849 $18,393
Inventory 4,371 4,546
Accounts Receivable (Net of allowance
of $7,000 and 13,000, respectively) 132,728 157,829
Notes & Employee Receivable 200 226,800
--------------- ---------------
Total Current Assets 256,148 407,568
--------------- ---------------
PROPERTY & EQUIPMENT
(Net of Accumulated Depreciation) 28,579 26,135
--------------- ---------------
OTHER ASSETS
Deposits & Prepaids 6,076 6,076
--------------- ---------------
Total Other Assets 6,076 6,076
--------------- ---------------
TOTAL ASSETS $290,803 $439,779
=============== ===============
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Balance Sheet
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2000 1999
--------------- ---------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $22,382 $22,858
Accrued expenses 18,562 34,410
Current portion of long-term liabilities 95,700 195,081
Deferred Revenue 1,472 1,962
Deferred Compensation 91,000 91,000
--------------- ---------------
Total Current Liabilities 229,116 345,311
--------------- ---------------
LONG TERM LIABILITIES
Notes payable - 37,368
Notes payable-related party 113,055 166,587
Less current portion (95,700) (195,081)
--------------- ---------------
Total long term Liabilities 17,355 8,874
--------------- ---------------
TOTAL LIABILITIES 246,471 354,185
--------------- ---------------
Minority Interest - -
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock, authorized 50,000,000 shares
of $.001 par value, issued and outstanding
11,415,632 and 8,915,632 shares, respectively 11,416 8,916
Additional Paid-in capital 731,598 731,598
Retained Earnings (698,682) (654,920)
--------------- ---------------
Total Stockholders' Equity 44,332 85,594
--------------- ---------------
TOTAL LIABILITIES & STOCKHOLDERS EQUITY $290,803 $439,779
=============== ===============
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Statements of Cash Flows
Unaudited
For the Period Ended
March 31, 2000 March 31, 1999
--------------- ---------------
Cash Flows From Operating Activities
<S> <C> <C>
Net income (loss) ($43,764) ($20,635)
Non-cash items:
Depreciation 3,958 2,431
Bad Debt 7,000
Issuance of stock for remaining 15% Warever shares 2,500
Recognition of Deferred Revenue (490) -
(Increase)/decrease in currents assets:
Accounts receivable 30,901 (28,739)
Inventory 176 172
Increase/(decrease) in currents liabilities:
Accounts payable (475) 6,789
Accrued expense (15,848) 2,097
--------------- ---------------
Net Cash Provided (Used) by Operating Activities (16,042) (37,885)
--------------- ---------------
Cash Flows From Investing Activities
Cash received in sale of contract 226,800 -
Cash paid for property, equipment and software technology (6,402) -
--------------- ---------------
Net Cash Provided (Used) by Investing Activities 220,398 -
--------------- ---------------
Cash Flows From Financing Activities
Factoring Fees (13,000) -
Increase in long-term debt - 15,500
Principal payments on long-term debt (90,900) (1,727)
--------------- ---------------
Net Cash Provided (Used) by Financing Activities (103,900) 13,773
--------------- ---------------
Increase/(decrease) in Cash 100,456 (24,112)
Cash and Cash Equivalents at Beginning of Period 18,393 24,418
Cash and Cash Equivalents at End of Period $118,849 $306
Supplemental Cash Flow Information:
Cash paid for interest $2,544 $400
Cash paid for income taxes - -
</TABLE>
34
<PAGE>
LSI Communications, Inc.
Consolidated Financial Statements
December 31, 1999 and 1998
C O N T E N T S
Accountants' Report .................................................. 36
Consolidated Balance Sheets .......................................... 37
Consolidated Statements of Operations ................................ 39
Consolidated Statements of Stockholders' Equity....................... 40
Consolidated Statements of Cash Flows ................................ 41
Notes to the Consolidated Financial Statements ....................... 43
Proforma Consolidated Statements of Operations ....................... 53
35
<PAGE>
[letterhead of Crouch Bierwolf & Chisholm]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of LSI Communications, Inc.
We have audited the accompanying consolidated balance sheets of LSI
Communications, Inc. as of December 31, 1999 and 1998 and the related statements
of operations, stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LSI Communications,
Inc. as of December 31, 1999 and 1998 and the results of its consolidated
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Crouch, Bierwolf & Chisholm
Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
January 28, 2000
36
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Balance Sheets
ASSETS
December 31,
1999 1998
------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash & Cash Equivalents (Note 1) $ 18,393 $ 24,418
Inventory 4,546 5,286
Accounts Receivable (Net of allowance
of $13,000 and $8,500, respectively) 157,829 7,252
Notes Receivable (Note 3) 226,800 -
------------------ ------------------
Total Current Assets 407,568 36,956
------------------ ------------------
PROPERTY & EQUIPMENT (Note 2) 26,135 15,093
------------------ ------------------
OTHER ASSETS
Deposits & Prepaids 6,076 6,076
------------------ ------------------
Total Other Assets 6,076 6,076
------------------ ------------------
TOTAL ASSETS $ 439,779 $ 58,125
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
37
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Balance Sheets continued
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
CURRENT LIABILITIES 1999 1998
------------------------------------------
<S> <C> <C>
Accounts payable $ 22,858 $ 13,891
Accrued expenses 34,410 5,216
Current portion of long-term
liabilities (Note 4) 195,081 23,392
Deferred Revenues (Note 1) 1,962 5,000
Deferred Compensation 91,000 -
------------------ ------------------
Total Current Liabilities 345,311 47,499
------------------ ------------------
LONG TERM LIABILITIES (Note 4)
Notes payable 37,368 37,121
Notes payable-related party 166,587 3,593
Capital lease obligations - -
Less current portion (195,081) (23,392)
------------------ ------------------
Total long term Liabilities 8,874 17,322
------------------ ------------------
TOTAL LIABILITIES 354,185 64,821
------------------ ------------------
MINORITY INTEREST - -
------------------ ------------------
STOCKHOLDERS' EQUITY
Common stock, authorized 50,000,000 shares of
$.001 par value, issued and outstanding
8,915,632, and 5,959,697 shares,
respectively 8,916 5,960
Additional Paid-in capital 731,598 310,035
Retained earnings (654,920) (322,691)
------------------ ------------------
Total Stockholders' Equity 85,594 (6,696)
------------------ ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 439,779 $ 58,125
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
38
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Statements of Operations
For the Year ended
December 31,
1999 1998
------------------ ------------------
REVENUES
<S> <C> <C>
Software Sales $ 117,316 $ 414,009
Training Revenues 415,731 -
------------------ ------------------
TOTAL REVENUES 533,047 414,009
------------------ ------------------
COST OF SALES
Software 5,719 1,356
Training 143,345 -
------------------ ------------------
TOTAL COST OF SALES 149,064 1,356
------------------ ------------------
GROSS PROFIT 383,983 412,563
------------------ ------------------
SELLING EXPENSES 320,242 152,289
DEPRECIATION & AMORTIZATION 10,964 10,209
PRODUCTION FEES 126,100 -
CONSULTING FEES 135,000 -
PAYROLL 68,277 138,000
GENERAL &
ADMINISTRATIVE EXPENSES 153,610 90,968
RESEARCH & DEVELOPMENT 27,200 35,800
------------------ ------------------
TOTAL OPERATING EXPENSES 841,393 427,266
------------------ ------------------
OPERATING LOSS (457,410) (14,613)
------------------ ------------------
OTHER INCOME AND (EXPENSES)
Minority interest (5,209) -
Miscellaneous income 1,620 3,392
Interest expense (14,230) (6,778)
Gain on sale of contract 143,000 -
------------------ ------------------
Total Other Income and (Expenses) 125,181 (3,386)
------------------ ------------------
LOSS BEFORE INCOME TAXES (332,229) (17,999)
PROVISION FOR INCOME TAXES (Note 1) - -
------------------ ------------------
NET INCOME/(LOSS) $ (332,229) $ (17,999)
================== ==================
NET INCOME/(LOSS) PER SHARE $ (.05) $ (.01)
================== ==================
WEIGHTED AVERAGE OUTSTANDING SHARES 7,444,168 3,246,641
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
39
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Statements of Stockholders' Equity
From December 31, 1997 through December 31, 1999
Common Stock Additional Retained
---------------------- Paid-in Treasury Earnings
Shares Amount Capital Stock (Deficit)
------------ -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance on December 31, 1997 3,000,000 3,000 297,495 (29,000) (304,692)
October 12, 1998 - Purchase
of Treasury Stock - - - (500) -
November 98 - Reverse acquisition
and reorganization adjustment
(Note 1) 1,959,697 1,960 (31,460) 29,500 -
November 98 - Stock issued for
cash at $.05 per share 1,000,000 1,000 49,000 - -
Offering Costs - - (5,000) - -
Net Loss for the year
ended December 31, 1998 - - - (17,999)
----------- -------- ---------- -------- ----------
Balance on December 31, 1998 5,959,697 5,960 310,035 - (322,691)
March 3, 1999 - shares issued in
Shareholder settlement at
$.001 per share 27,485 27 (27) - -
April 1, 1999 - shares issued for
consulting agreement at
$1.00 per share 85,000 85 84,915 - -
June 28, 1999 - shares issued in
acquisition of Coaching Institute,
Inc. 2,500,000 2,500 27,019 - -
July 1, 1999 - shares issued for
consulting agreement at
$.25 per share 200,000 200 49,800 - -
August 30, 1999 - shares issued for
royalty agreement at $1.825
per share 143,450 144 259,856 - -
Net Loss for the year ended
December 31, 1999 - - - - (332,229)
----------- -------- ---------- -------- ----------
Balance on December 31, 1999 8,915,632 $ 8,916 $ 731,598 $ - $ (654,920)
=========== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
40
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Statements of Cash Flows
Year Ended
December 31,
1999 1998
------------- -------------
Cash Flows From Operating Activities
<S> <C> <C>
Net income (loss) $ (332,229) $ (17,999)
Non-cash items:
Consulting fee paid with stock issues 135,000 -
Depreciation & amortization 10,964 10,209
Account payable forgiveness 25,000 -
Bad Debt 17,593 4,400
Minority Interest 5,209 -
Gain on sale of contract (143,000) -
(Increase)/decrease in current assets:(net of acquisition)
Accounts receivable (43,023) 46,814
Inventory 740 2,442
Increase/(decrease) in current liabilities:
Accounts payable (7,752) (18,784)
Accrued expenses 19,277 (5,548)
Deferred revenues (3,038) 5,000
Deferred compensation 91,000 5,000
------------- -------------
Net Cash Provided (Used)
by Operating Activities (224,259) 26,534
------------- -------------
Cash Flows from Investing Activities
Cash from acquisition of
Coaching Institute, Inc. 14,448 -
Cash paid for property, equipment
and software technology (19,902) (1,769)
Cash paid for Treasury Stock - (500)
Cash received from sale of contract 151,200 -
------------- -------------
Net Cash Provided (Used)
by Investing Activities 145,746 (2,269)
------------- -------------
Cash Flows from Financing Activities
Proceeds from long term debt 120,000 -
Cash received from stock issuance - 45,000
Principal payments on long-term debt (47,512) (67,512)
------------- -------------
Net Cash Provided (Used)
by Financing Activities 72,488 (22,512)
------------- -------------
Increase/(decrease) in Cash (6,025) 1,753
Cash and Cash Equivalents
at Beginning of Period 24,418 22,665
------------- -------------
Cash and Cash Equivalents
at End of Period $ 18,393 $ 24,418
============= =============
(continued)
</TABLE>
The accompanying notes are an integral part of these financial statements
41
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Consolidated Statements of Cash Flows
(continued)
Supplemental Cash Flow Information:
<S> <C> <C>
Cash paid for interest $ 14,230 $ 21,697
Cash paid for income taxes $ - $ -
Non-Cash Investing Activities:
In 1999, the Company issued 2,500,000 shares of common stock for 85,000 shares (85%) of common stock
of Coaching Institute, Inc.
In 1998, the Company issued 3,000,000 shares of common stock for 85% of the outstanding common stock of
Warever.
Non-Cash Financing Activities:
In 1999, the Company issued 285,000 shares of common stock for services valued at $135,000.
In 1999, the Company issued 143,450 shares of common stock for a royalty agreement valued at $260,000.
</TABLE>
The accompanying notes are an integral part of these financial statements
42
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 1 - Summary of Significant Accounting Policies
a. Organization
The Company was incorporated as TPI, Inc., under the laws of
the State of Utah on April 26, 1983. In 1985, the Corporation changed
its situs from Utah to Nevada and its name to Connections Marketing
Corp. In July, 1992, the shareholders of the Corporation voted to
change the name to LSI Communications, Inc. (LSI). The Company held
mineral properties in Beaver County, Utah; however, no extraction
operations ever commenced and the properties were distributed to the
shareholders through a subsidiary spin-off.
On November 20, 1998, the Company entered a Plan of
Reorganization and Acquisition agreement with Warever, Inc. (Warever) a
Utah Corporation, wherein the Company issued 3,000,000 shares of common
stock for 85% of the outstanding common stock of Warever. The agreement
provides for the Company to acquire the remaining 15% of Warever for
2,500,000 shares of LSI through option agreements which are exercisable
for a period of 60 days following January 1, 2000 for no consideration.
Warever was organized in the State of Utah on May 13, 1992
under the name of Action Plus Software, Inc. On January 17,1995 the
company changed the name of the company to Warever, Inc.
Warever is in the business of developing, programming, selling
and marketing a computer software package named Action Plus, a
management assistance software tool.
The acquisition is recorded as a reverse acquisition, with
Warever being the accounting survivor, therefore all historical
financial information prior to November 20, 1998 in these statements
are those of Warever.
On June 21, 1999, the Company entered into a Plan of
Acquisition with Coaching Institute, Inc., a Utah corporation, wherein
the Company issued 2,500,000 shares of common stock for 85,000 shares,
85%, of the outstanding common stock of Coaching Institute, Inc. The
agreement provides for the Company to receive options to acquire the
remaining 15% of the issued and outstanding common stock of Coaching
Institute, Inc. in exchange for 2,045,455 shares of the Company's
common stock. After the acquisition, both companies are surviving with
Coaching Institute, Inc. being a majority-owned subsidiary of LSI
Communications, Inc.
43
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
a. Organization (continued)
The acquisition of Coaching Institute, Inc. has been recorded
using the purchase method of a business combination. Operating
activities have been included from Coaching Institute in the
consolidated financials since June 21, 1999. Due to the common
ownership of Coaching Institute and LSI, the Company valued the
acquisition of Coaching Institute at historical cost which was $34,728.
b. Recognition of Revenue/Deferred Revenue
The Company recognizes income and expense on the accrual basis
of accounting. The Company receives revenues from services provided for
custom program conversions and training. Pursuant to SOP 97-2, revenue
is recorded when the services are completed. The Company also generates
revenues from the sale of their Action Plus software technology. This
product is sold separately without future performance such as upgrades
or maintenance, and is not sold with PCS services, therefore according
to SOP 97-2 revenue is recorded upon the sale and delivery of the
product once an agreement exists, the price is fixed and collectability
is probable.
The Company sells post contract support services separately
for one year. The Company defers the revenue and recognizes it over the
contract term as required by SOP 97-2. The deferred revenue at December
31, 1999 and 1998 on contracts sold during 1999 and 1998 total $1,962
and $5,000, respectively.
c. Earnings (Loss) Per Share
The computation of earnings per share of common stock is based
on the weighted average number of shares outstanding at the date of the
financial statements.
d. Provision for Income Taxes
In 1997, Warever, Inc. elected to file federal and state
income taxes under the provisions of Subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay
corporate income taxes on its taxable income during that period of
time. Instead, the stockholders are liable for individual income taxes
on their respective shares of the Company's net operating income in
their individual income tax returns. Effective December 1, 1998, the
Company will file a consolidated return with it's parent and will lose
it's S-Corp status.
No provision for income taxes has been recorded due to net
operating loss carry forwards totaling approximately $654,000 that will
be offset against future taxable income. These NOL carry forwards begin
to expire in 2013. No tax benefit has been reported in the financial
statements because the Company has not yet proven it can generate
taxable income.
44
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
d. Provision for Income Taxes (continued)
Deferred tax assets and the valuation account is as follows at
December 31, 1999 and 1998:
December 31
1999 1998
----------------------------
Deferred tax asset:
NOL carry forward $ 222,000 $ 6,800
Valuation allowance (222,000) (6,800)
----------- ------------
Total $ - $ -
=========== ============
e. Cash and Cash Equivalents
The company considers all highly liquid investments with
maturities of three months or less to be cash equivalents.
f. Property and Equipment
Expenditures for property and equipment and for renewals and
betterments, which extend the originally estimated economic life of
assets or convert the assets to a new use, are capitalized at cost.
Expenditures for maintenance, repairs and other renewals of items are
charged to expenses. When items are disposed of, the cost and
accumulated depreciation are eliminated from the accounts, and any gain
or loss is included in the results of operations.
The provision for depreciation is calculated using the
straight-line method over the estimated useful lives of the assets.
Depreciation expense for the period ended December 31, 1999 and 1998 is
$9,586 and $10,209, respectively.
45
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
h. Inventory
Inventory consists primarily of software manuals and disks.
i. Advertising Costs
Advertising costs are charged to operations when incurred. The
cost for direct response advertising is also expensed because the
future benefit is only three days, therefore capitalization is
ineffective.
j. Consolidation Policy
These financial statements include the books of LSI
Communications, Inc., a public shell company, Warever Corporation, a
software sales and marketing company, and Coaching Institute, Inc.
(December 31, 1999 only), a training and consulting firm. All
intercompany accounts and transactions have been eliminated in the
consolidation.
NOTE 2 - Property & Equipment
Property and equipment consists of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Computer equipment $ 41,002 $ 20,195
Leased equipment 15,075 15,075
Furniture and fixtures 1,769 6,769
Software technology 916 2,847
--------- ---------
58,762 44,886
Less: Accumulated depreciation - equipment (18,557) (18,738)
Accumulated depreciation - leased equipment (14,070) (11,055)
--------- ---------
Total Property & Equipment $ 26,135 $ 15,093
========= =========
</TABLE>
NOTE 3 - Contract
In 1999, the Company acquired a contract for a video
production. The amount capitalized as the cost of the contract is the
value of the participation in the video by Karl Malone and others. For
their participation, 143,450 shares of common stock were issued at a
valuation of $1.825 per share or $260,000. The stock was valued at the
average market price at the time of issue. This cost is to be amortized
over three years.
46
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 3 - Contract (Continued)
On October 26, 1999, the contract for the video series
featuring Karl Malone was sold. On the date of the sale, the buyer
executed a $100,000 promissory note to the production company in order
to terminate the agreement with Coaching Institute, Inc. In addition,
the buyer executed an agreement with the production company to forgive
the $25,000 principal balance due from Coaching Institute, Inc.
Besides the above agreements, the buyer agreed to pay cash in
the amount of $378,000 to Coaching Institute, Inc. according to the
following schedule:
At Closing $ 75,600
November 15, 1999 75,600
December 15, 1999 75,600
January 15, 2000 75,600
February 15, 2000 75,600
--------
$378,000
========
At December 31, 1999, the balance due Coaching Institute was
$226,800.
NOTE 4 - Long-Term Liabilities
Long Term Liabilities are detailed in the following schedules
as of December 31, 1999 and 1998:
Note payable-related party is detailed as follows:
December 31
1999 1998
---------- ----------
Note payable to a relative of
an officer of the Company,
bears interest at 12%, with
principal due April 1999,
unsecured note $ 3,134 $ 3,593
Note payable to a relative of
an officer of the Company,
bears interest at 9.75%
payments due monthly of $1,286
through April 1, 2002,
unsecured 33,453 -
47
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 4 - Long-Term Liabilities (Continued)
Note Payable to a relative of
an officer of the Company,
bears interest at 9.75% with
principal due of $50,000 at
July 1, 2000, unsecured 50,000 -
Note Payable to a relative of
an officer of the Company,
bears interest at 9.75% with
principal of $100,000 due at
August 1, 2000, unsecured 80,000 -
--------- --------
Total notes payable - related
party 166,587 3,593
--------- --------
Notes payable are detailed as
follows:
Note payable to a corporation
for working capital, payments
due monthly of $698 through
June 2000, bears interest at
11%, uncolateralized. $ 10,821 $ 11,531
Note payable to a corporation
for working capital, payments
due monthly of $830 through
October 1998, bears interest at
12%, unsecured. 118 105
Note payable to a corporation
for working capital, payments
due monthly of $1,087 through
January 2000, bears interest at
11%, unsecured. 26,429 25,485
--------- --------
Total Note Payable 37,368 37,121
--------- --------
Total long term liabilities 203,955 40,714
--------- --------
Less current portion of:
Notes payable - related party 158,567 3,593
Notes payable 36,514 19,799
--------- --------
Total current portion 195,081 23,392
--------- --------
Net Long Term Liabilities $ 8,874 $ 17,322
========= ========
48
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
Future minimum principal payments on notes payable are as follows:
2000 $ 195,081
2001 8,874
---------------
Total $ 203,955
===============
49
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 5 - Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. In these financial statements, assets and liabilities
involve reliance on management's estimates. Actual results could differ
from those estimates.
NOTE 6 - Commitments and Contingencies
The Company is committed for their office facilities. Monthly
lease payments are due of $4,000 for a 24 month period beginning May 1,
1999.
Future minimum lease payments are as follows at December 31,
1999:
2000 $ 48,000
2001 20,000
------------
$ 68,000
============
NOTE 7 - Related Party Transactions
During 1995, a shareholder relative of Craig Hendricks, an
officer and director of the Company, advanced $39,000 for working
capital. As of December 31, 1999 $35,866 in payments were made to this
related party with a balance due at December 31, 1999 and 1998, of $
3,134 and $3,593, respectively.
During 1999, a shareholder relative of Craig Hendricks, an
officer and director of the Company, advanced $190,000 for working
capital. As of December 31, 1999 $26,547, was paid to this related
party with a balance due at December 31, 1999 of $163,453.
During 1999, Craig Hendricks, an officer and director of the
Company, advanced $5,000 for working capital. As of December 31, 1999
$5,000 in payments were made to this related party removing the balance
due from the Company's books.
50
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 8 - Software Technology
Pursuant to FASB 86, the Company expensed all costs associated
with the development of its software product until technological
feasibility is reached. At such time the Company capitalizes costs
associated with producing the master files. The Company also
capitalizes software purchased for internal use.
NOTE 9 - Reverse Merger
Effective November 20, 1998, LSI Communications, Inc. (a
public company) entered into an agreement and Plan of Reorganization
with Warever, Inc., (a private company). The agreement provides for the
merger of the Company into Warever to be treated as a reverse merger,
thus making Warever the accounting survivor. Pursuant to the agreement
the Company issued 3,000,000 shares of common stock to the shareholders
of Warever for 85% of the shares of their Company. Because the
historical financial information in these financial statements prior to
the reverse merger (November 20, 1998) is that of the accounting
acquirer (Warever), the 3,000,000 shares have been shown as if they
were issued at inception and a reorganization adjustment is shown for
the 1,959,697 shares held by the minority shareholders. The management
of the Company resigned and the management and board of Warever filled
the vacancy. LSI Communications, Inc. had no assets or liabilities at
the time of the merger, but was only a public shell.
NOTE 10 - Subsequent Event
During the first two months of 2000, the Company received the
remaining $226,800 due from the sale of the Karl Malone contract. The
proceeds were used to pay off long term debt.
51
<PAGE>
LSI Communications, Inc.
Notes to the Consolidated Financial Statements
December 31, 1999 and 1998
NOTE 11 - Segment Data
For the year ended December 31, 1999, the Company had two
reportable industry segments: (i) Software Sales and (ii) Training
Services.
Sales (Net of Accounts)
Software $ 117,316
Training 415,731
----------------
Consolidated $ 533,047
================
Operating Income (Loss)
Software $ (411,703)
Training (112,981)
--------------
Consolidated (524,684)
Other Income/(expense) (3,589)
Gain on Sale of Contract 143,000
Interest expense (14,230)
--------------
Net (Loss) before Income Taxes $ (399,50)
==============
Accounts Receivable
Software $ 3,240
Training 154,389
--------------
Consolidated $ 157,629
==============
Identifiable Assets
Software $ 248,782
Training 190,997
--------------
Consolidated 439,779
Goodwill 1,278,207
--------------
Total $ 1,717,986
==============
NOTE 12 - Fair Value of Financial Statements
Unless otherwise indicated, the fair values of all reported
assets and liabilities which represent financial instruments (none of
which are held for trading purposes) approximate the carrying values of
such instruments.
52
<PAGE>
LSI Communications, Inc.
Pro Forma Consolidated Statement of Operations
September 30, 1999
(unaudited)
53
<PAGE>
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
To the Board of Directors and Shareholders
of LSI Communications, Inc.
Our report on our audit of the basic financial statements of LSI Communications,
Inc. for December 31, 1999 appears on page 3. This audit was conducted for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The pro forma statement of operations for LSI Communications, Inc. at
September 30, 1999 is presented for purposes of additional analysis and are not
a required part of the basic financial statements. Such information has not been
subjected to the auditing procedures applied in the audit of the basic financial
statements, and accordingly, we express no opinion on it.
/s/ Crouch, Bierwolf & Chisholm
Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
January 28, 2000
54
<PAGE>
<TABLE>
<CAPTION>
LSI Communications, Inc.
Notes to Pro Forma Consolidated Statement of Operations
September 30, 1999
LSI Communications Warever Coaching Institute Pro forma
For the nine For the nine For the nine Consolidated
months ended months ended months ended Pro forma Balance
September 30, September 30, September 30, Adjustments September 30,
1999 1999 1999 dr cr 1999
-------------- ------------- --------------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues - 96,792 281,899 - - 378,691
-------------- ------------- --------------- --------- -------- ------------
Cost of Good Sold - 874 28,045 - - 28,919
-------------- ------------- --------------- --------- -------- ------------
Gross Profit - 95,918 253,854 - - 349,772
-------------- ------------- --------------- --------- -------- ------------
Selling expenses - 11,218 288,103 - - 299,321
General & Administrative - 388,092 225,989 - - 614,081
-------------- ------------- --------------- --------- -------- ------------
Total Operating Expenses - 399,310 514,092 - - 913,402
-------------- ------------- --------------- --------- -------- ------------
Income/ (Loss) from Operations - (303,392) (260,238) - - (563,630)
-------------- ------------- --------------- --------- -------- -------------
Other income/(expenses) - (2,900) (6,023) - - (8,923)
-------------- ------------- --------------- --------- -------- -------------
Net (Loss) - (306,292) (266,261) - - (572,553)
============== ============= =============== ========= ======== =============
Earnings/(Loss) Per Share (Pro Forma) (.07)
============
Weighted Average Outstanding
Shares (Pro Forma) 8,620,346
============
</TABLE>
55
<PAGE>
LSI Communications, Inc.
Notes to Pro Forma Consolidated Statement of Operations
September 30, 1999
NOTE 1 - Summary of Transaction
On June 21, 1999, the Company entered into a Plan of Acquisition with
Coaching Institute, Inc., a Utah Corporation, wherein the Company issued
2,500,000 shares of common stock for 85,000 shares (85%) of the outstanding
common stock of Coaching Institute, Inc. The acquisition was a merger of
entities under common control and therefore was recorded at historical cost.
After the acquisition, both companies are surviving with Coaching Institute,
Inc. being a majority-owned subsidiary of LSI Communications, Inc.
NOTE 2 -Management Assumptions
The pro forma consolidated statement of operations assumes that the
entities were together as of January 1, 1999 and no adjustments are necessary to
reflect a full year of activity.
56
<PAGE>
Coaching Institute, Inc.
Financial Statements
June 30, 1999
C O N T E N T S
Accountants' Report ..................................................... 58
Balance Sheet............................................................ 59
Statements of Operations ................................................ 60
Statements of Stockholders' Equity ...................................... 61
Statements of Cash Flows ................................................ 62
Notes to the Financial Statements ....................................... 63
57
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Coaching Institute, Inc.
We have audited the accompanying balance sheet of Coaching Institute, Inc. as of
June 30, 1999 and the related statements of operations, stockholders' equity and
cash flows for the six months ended June 30, 1999 and from inception on June 11,
1998 through December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement 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 Coaching Institute, Inc. as of
June 30, 1999 and the results of its operations and cash flows for the six
months ended June 30, 1999 and from inception on June 11, 1998 through December
31, 1998 in conformity with generally accepted accounting principles.
Crouch, Bierwolf & Chisholm
Salt Lake City, Utah
January 28, 2000
58
<PAGE>
Coaching Institute, Inc.
Balance Sheet
ASSETS
June 30,
1999
---------
CURRENT ASSETS
Cash & Cash Equivalents (Note 1) $ 14,449
Accounts Receivable (Net of allowance
of $10,000) 102,054
Notes Receivable (Note 6) 23,500
---------
Total Current Assets 140,003
---------
PROPERTY & EQUIPMENT (Note 2) 726
---------
TOTAL ASSETS $ 140,729
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,719
Accrued expenses 9,917
Current portion of long-term liabilities (Note 3) 62,906
---------
Total Current Liabilities 89,542
---------
LONG TERM LIABILITIES (Note 3)
Notes payable-related party 89,364
Less current portion (62,906)
---------
Total long term Liabilities 26,458
---------
TOTAL LIABILITIES 116,000
---------
STOCKHOLDERS' EQUITY
Common stock, authorized 1,000,000 shares
of no par, issued and outstanding 100,000 shares 1,000
Retained earnings 23,729
---------
Total Stockholders' Equity 24,729
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 140,729
=========
The accompanying notes are an integral part of these financial statements
59
<PAGE>
Coaching Institute, Inc.
Statements of Operations
For the Six From inception
Months Ended June 11, 1998
Through Through
June 30, December 31,
1999 1998
--------- --------
REVENUES $177,865 $260,137
COST OF SALES 9,844 7,079
--------- --------
GROSS PROFIT 168,021 253,058
--------- --------
SELLING EXPENSES 165,388 75,325
GENERAL & ADMINISTRATIVE
EXPENSES 118,786 37,824
--------- --------
TOTAL OPERATING EXPENSES 284,174 113,149
--------- --------
OPERATING INCOME / (LOSS) (116,153) 139,909
--------- --------
OTHER INCOME AND (EXPENSES)
Miscellaneous income 630 -
Interest expense (657) -
--------- --------
Total Other Income and (Expenses) (27) -
--------- --------
LOSS BEFORE INCOME TAXES (116,180) 139,909
PROVISION FOR INCOME TAXES (Note 1) - -
--------- --------
NET INCOME/(LOSS) $(116,180) $139,909
========= ========
NET INCOME/(LOSS) PER SHARE $ (4.65) $ 13.99
========= ========
WEIGHTED AVERAGE OUTSTANDING SHARES 25,000 10,000
========= ========
60
<PAGE>
<TABLE>
<CAPTION>
Coaching Institute, Inc.
Statements of Stockholders' Equity
From inception on June 11, 1998 through June 30, 1999
Common Stock Additional Retained
----------------------------- Paid-in Earnings
Shares Amount Capital (Deficit)
------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Balance on June 11, 1998 - $ - $ - $ -
June 98 - Stock issued at formation
at $.01 per share 10,000 100 - -
Net Income (Loss) for the year ended
December 31, 1998 - - - 139,909
------- ------ ------- ---------
Balance on December 31, 1998 10,000 100 - 139,909
June 1, 1999 - shares issued for
services at $.01 per share 90,000 900 - -
Net Income (Loss) for the period
ended June 30, 1999 - - - (116,180)
------- ------ ------- ---------
Balance on June 30, 1999 100,000 $1,000 $ - $ 23,729
======= ====== ======= =========
</TABLE>
61
<PAGE>
Coaching Institute, Inc.
Statements of Cash Flows
For the Six From inception
Months Ended June 11, 1998
Through Through
June 30, December 31,
1999 1998
------- -------
Cash Flows From Operating Activities
Net income (loss) $(116,180) $139,909
Non-cash items:
Shares issued for services 900 -
Depreciation & amortization 167 110
Bad Debt 10,000 -
(Increase)/decrease in current assets:
Accounts receivable 9,020 (121,074)
Increase/(decrease) in current liabilities:
Accounts payable 11,717 5,002
Accrued expenses 6,101 3,916
------- -------
Net Cash Provided (Used) by
Operating Activities (78,275) 27,863
------- -------
Cash Flows from Investing Activities
Cash paid for property, equipment and
software technology - (1,003)
Cash paid for Note receivable (23,500) -
------- -------
Net Cash Provided (Used) by
Investing Activities (23,500) (1,003)
------- -------
Cash Flows from Financing Activities
Proceeds from long term debt 90,000 -
Principal payments on long-term debt (636) -
------- -------
Net Cash Provided (Used) by Financing
Activities 89,364 -
------- -------
Increase/(decrease) in Cash (12,411) 26,860
Cash and Cash Equivalents at Beginning
of Period 26,860 -
------- -------
Cash and Cash Equivalents at End
of Period $14,449 $26,860
Supplemental Cash Flow Information:
Cash paid for interest $ 657 $ -
Cash paid for income taxes $ - $ -
Non-Cash Financing Activities:
In 1999, the Company issued 90,000 shares of common stock for services valued at
$900.
62
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies
a. Organization
Coaching Institute, Inc. (the Company) was incorporated under
the laws of the State of Utah on June 11, 1998. The Company is
currently engaged in providing coaching services to businesses and
individuals.
On June 21, 1999, the Company entered into a Plan of
Acquisition with L.S.I. Communications, Inc., a Utah corporation,
wherein L.S.I. issued 2,500,000 shares of common stock for 85,000
shares, 85%, of the outstanding common stock of the Company. The
agreement provides for L.S.I. to receive options to acquire the
remaining 15% of the issued and outstanding common stock of the Company
in exchange for 2,045,455 shares of L.S.I. common stock. After the
acquisition, both companies are surviving with Coaching Institute, Inc.
being a majority-owned subsidiary of L.S.I. Communications, Inc.
b. Recognition of Revenue/Deferred Revenue
The Company recognizes income and expense on the accrual basis
of accounting. The Company receives revenues from services provided for
custom program conversions and training. Pursuant to SOP 97-2, revenue
is recorded when the services are completed.
c. Earnings (Loss) Per Share
The computation of earnings per share of common stock is based
on the weighted average number of shares outstanding at the date of the
financial statements.
d. Provision for Income Taxes
In 1998, the Company elected to file federal and state income
taxes under the provisions of Subchapter S of the Internal Revenue
Code. Under those provisions, the Company does not pay corporate income
taxes on its taxable income during that period of time. Instead, the
stockholders are liable for individual income taxes on their respective
shares of the Company's net operating income in their individual income
tax returns. Effective June 21, 1999, the Company will file a return
with its parent and will lose its S-Corp status.
e. Cash and Cash Equivalents
The company considers all highly liquid investments with
maturities of three months or less to be cash equivalents.
63
<PAGE>
NOTE 1 - Summary of Significant Accounting Policies (continued)
f. Property and Equipment
Expenditures for property and equipment and for renewals and
betterments, which extend the originally estimated economic life of
assets or convert the assets to a new use, are capitalized at cost.
Expenditures for maintenance, repairs and other renewals of
items are charged to expenses. When items are disposed of, the cost and
accumulated depreciation are eliminated from the accounts, and any gain
or loss is included in the results of operations.
The provision for depreciation is calculated using the
straight-line method over the estimated useful lives of the assets.
Depreciation expense for the periods ended June 30, 1999 and December
31, 1998 is $167 and $110, respectively.
g. Advertising Costs
Advertising costs are charged to operations when incurred. The
cost for direct response advertising is also expensed because the
future benefit is only three days, therefore capitalization is
ineffective.
NOTE 2 - Property & Equipment
Property and equipment consists of the following at June 30, 1999:
Computer equipment $ 1,003
--------------
1,003
Less: Accumulated depreciation - equipment (277)
--------------
Total Property & Equipment $ 726
==============
NOTE 3 - Long-Term Liabilities
Long Term Liabilities are detailed in the following schedules
as of June 30, 1999:
Note payable-related party is detailed as follows: 1999
----------
Note payable to a relative of an officer of the
Company, bears interest at 9.75% payments due
monthly of $1,286 through April 1, 2002, unsecured $ 39,364
Note Payable to a relative of an officer of the
Company, bears interest at 9.75% with principal due
of $50,000 at July 1, 2000, unsecured 50,000
----------
64
<PAGE>
NOTE 3 - Long-Term Liabilities (continued)
Total notes payable - related party 89,364
----------
Total long term liabilities 89,364
----------
Less current portion of:
Notes payable - related party 62,906
----------
Total current portion 62,906
----------
Net Long Term Liabilities $ 26,458
=========
Future minimum principal payments on notes payable are as follows:
1999 $ 6,453
2000 62,906
2001 15,020
2002 4,985
---------------
Total $ 89,364
===============
NOTE 4 - Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period.
In these financial statements, assets and liabilities involve
reliance on management's estimates. Actual results could differ from
those estimates.
NOTE 5 - Commitments and Contingencies
The Company sub-leases office space from Warever Corporation,
a Company under common ownership. The agreement is month-to-month and
requires a monthly rent payment of $1,000.
NOTE 6 - Related Party Transactions
The Company advanced Warever Corporation, a company under
common ownership, $23,500 during the six months ended June 30, 1999.
The balance receivable at June 30, 1999 is $23,500.
During the six months ended June 30, 1999, a shareholder
relative of Craig Hendricks, an officer and director of the Company,
advanced $90,000 for working capital. The balance due at June 30, 1999
is $89,364.
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NOTE 7 - Subsequent Event
In 1999, the Company acquired a contract for a video
production. The amount capitalized as the cost of the contract is the
value of the participation in the video by Karl Malone and others. For
their participation, 143,450 shares of common stock were issued at a
valuation of $1.825 per share or $260,000. The stock was valued at the
average market price at the time of issue. This cost is to be amortized
over three years.
On October 26, 1999, the contract for the video series
featuring Karl Malone was sold. On the date of the sale, the buyer
executed a $100,000 promissory note to the production company in order
to terminate the agreement with Coaching Institute, Inc. In addition,
the buyer executed an agreement with the production company to forgive
the $25,000 principal balance due from Coaching Institute, Inc.
Besides the above agreements, the buyer agreed to pay cash in
the amount of $378,000 to Coaching Institute, Inc. according to the
following schedule:
At Closing $ 75,600
November 15, 1999 75,600
December 15, 1999 75,600
January 15, 2000 75,600
February 15, 2000 75,600
-------
$378,000
NOTE 8 - Fair Value of Financial Statements
Unless otherwise indicated, the fair values of all reported assets and
liabilities which represent financial instruments (none of which are held for
trading purposes) approximate the carrying values of such instruments.
ITEM 1. INDEX TO EXHIBITS
Copies of the following documents are included as exhibits to this Registration
Statement pursuant to Item Part III of Form I-A and Item 6 of Part II.
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<PAGE>
----------- --------------------- ----------------------------------------------
Exhibit No. SEC Reference No. Title of Document
----------- --------------------- ----------------------------------------------
2.1 Plan of Acquisition by which LSI
Communications, Inc. shall acquire Warever,
Inc.*
----------- --------------------- ----------------------------------------------
2.2 Plan of Acquisition by which LSI
Communications, Inc. shall acquire Coaching
Institute, Inc.*
----------- --------------------- ----------------------------------------------
3.1 Articles of Incorporation of Connections
Marketing Corp.*
----------- --------------------- ----------------------------------------------
3.2 Articles of Amendment to the Articles of
Incorporation of Connections Marketing Corp.*
----------- --------------------- ----------------------------------------------
3.3 Bylaws of Connections Marketing Corp.*
----------- --------------------- ----------------------------------------------
10.1 Promissory Note to Lona J. Hendricks
($100,000)*
----------- --------------------- ----------------------------------------------
10.2 Promissory Note to Lona J. Hendricks
($40,000)*
----------- --------------------- ----------------------------------------------
10.3 Promissory Note to Lona J. Hendricks
($50,000)*
----------- --------------------- ----------------------------------------------
10.4 Coaching and Strategic Agreement-8/25/99*
----------- --------------------- ----------------------------------------------
10.5 Coaching and Strategic Agreement-1/6/99*
----------- --------------------- ----------------------------------------------
10.6 Coaching and Strategic Agreement-6/5/99*
----------- --------------------- ----------------------------------------------
10.7 Standard Distribution Provisions--Columbia
House Co., and Warever, Inc.*
----------- --------------------- ----------------------------------------------
10.8 License Agreement*
----------- --------------------- ----------------------------------------------
21.1 Subsidiaries of the Company*
----------- --------------------- ----------------------------------------------
* previously filed
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the company has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
By: /s/ Craig Hendricks
----------------------------------
Craig Hendricks
Chief Executive Officer, President
Date 5/31/00
68
