FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: SEPTEMBER 30, 2003
Commission File Number: 001-04026
LIFESTYLE INNOVATIONS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 82-6008727
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(State of Incorporation) (IRS Employer ID No)
3801 WILLIAM D. TATE AVENUE, SUITE 100, GRAPEVINE, TX 76051
(Address of principal executive office)
817-421-0010
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
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The number of shares outstanding of registrant's common stock, par value $.001
per share, as of September 30, 2003 was 20,794,325 shares.
Transitional Small Business Disclosure Format (Check one): Yes No X .
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LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF ERESOURCE CAPITAL GROUP, INC.)
INDEX
Page
No.
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Part I. Financial Information (unaudited)
Item 1. Condensed Consolidated Balance Sheet - September 30, 2003 3
Condensed Consolidated Statements of Operations - 4
Three Months Ended September 30, 2003 and 2002
Condensed Consolidated Statement of Stockholders' Equity - 5
Three Months Ended September 30, 2003
Condensed Consolidated Statements of Cash Flows - 6
Three Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements - 7-20
Three Months Ended September 30, 2003 and 2002
Item 2. Management's Discussion and Analysis of Financial 21-23
Condition and Results of Operations
Item 3. Controls and Procedures 23
Part II. Other Information 24-75
2
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF ERESOURCE CAPITAL GROUP, INC.)
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,278
Accounts receivable, net of allowance for bad debts of $123,705 390,246
Inventories 88,478
Prepaid expenses and other assets 141,095
-------------
Total current assets 622,097
Property and equipment, net 265,729
Other assets 15,080
Goodwill, net 6,899,454
Non-current assets of discontinued operations, net 616,197
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Total assets $ 8,418,557
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,239,919
Notes payable - related parties 957,440
Accounts payable and accrued expenses 2,460,434
Unearned income 41,435
Due to affiliates 1,944,711
Current liabilities of discontinued operations 1,179,952
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Total current liabilities 7,823,891
Note payable, non-current 136,000
STOCKHOLDERS' EQUITY
Series A Convertible Preferred stock, $.10 par value;
1,000,000 shares authorized, issued and outstanding;
liquidation preference $2,750,000; convertible into
common stock, currently 1,000,000 shares 100,000
Common stock, $.001 par value; authorized 250,000,000
shares; issued and outstanding 20,794,325 shares 20,794
Additional paid in capital 13,370,613
Deferred expenses (303,488)
Common stock warrants 206,295
Stock subscription receivable (4,000)
Accumulated deficit (12,931,548)
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Total stockholders' equity 458,666
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Total liabilities and stockholders' equity $ 8,418,557
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See accompanying notes to consolidated financial statements.
3
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF ERESOURCE CAPITAL GROUP, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
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SALES AND REVENUES
Products $ 394,055 $ 421,639
Services and other 86,394 118,151
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480,449 539,790
COST OF SALES 360,957 356,471
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GROSS PROFIT 119,492 183,319
OPERATING EXPENSES:
Selling, general and administrative expense 414,928 635,493
Stock option and warrant compensation 110,709 7,125
Depreciation and amortization 27,280 26,641
Management fee - parent 15,000 30,000
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Total operating expenses 567,917 699,259
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LOSS FROM OPERATIONS (448,425) (515,940)
OTHER INCOME (EXPENSE):
Rent and other income 2,775 506
Interest expense (27,513) (34,246)
Interest expense - related parties (17,178) (13,273)
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(41,916) (47,013)
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LOSS FROM CONTINUING OPERATIONS (490,341) (562,953)
Discontinued operations:
Loss from operation of discontinued subsidiary FutureSmart
Systems, Inc. (including no loss on disposal) (522,838) --
Income tax benefit --
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(522,838) --
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NET LOSS $ (1,013,179) $ (562,953)
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NET LOSS PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.02) $ (0.03)
DISCONTINUED OPERATIONS (0.03) --
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NET LOSS PER SHARE, BASIC AND DILUTED $ (0.05) $ (0.03)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 20,707,205 17,149,105
============= =============
See accompanying notes to consolidated financial statements.
4
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF ERESOURCE CAPITAL GROUP, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Additional Common
Preferred Stock Common Stock Paid-in Stock
Shares Par Value Shares Par Value Capital Warrants
------------ ------------ ------------ ------------- ------------ ------------
BALANCE, June 30, 2003 1,000,000 $ 100,000 20,469,325 $ 20,469 $12,639,673 $ 206,295
Issue subscribed, unissued
common stock -- -- 325,000 325 730,940 --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------- ------------ ------------
BALANCE, Sept. 30, 2003 1,000,000 $ 100,000 20,794,325 $ 20,794 $13,370,613 $ 206,295
============ ============ ============ ============= ============ ============
Subscribed
Unissued Stock
Common Deferred Subscription Retained
Stock Expenses Receivable (Deficit) Total
------------ ------------ ------------ ------------- ------------
BALANCE, June 30, 2003 $ 731,265 $ (303,488) $ (4,000) $(11,918,369) $ 1,471,845
Issue subscribed, unissued
common stock (731,265) -- -- -- --
Net loss -- -- -- (1,013,179) (1,013,179)
------------ ------------ ------------ ------------- ------------
BALANCE, Sept. 30, 2003 $ -- $ (303,488) $ (4,000) $(12,931,548) $ 458,666
============ ============ ============ ============= ============
See accompanying notes to consolidated financial statements.
5
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF ERESOURCE CAPITAL GROUP, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,013,179) $ (562,953)
Loss from discontinued operations (522,838) --
------------ ------------
Loss from continuing operations (490,341) (562,953)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 27,280 26,782
Common stock option expense 110,709 --
Sale of assets 1,114 --
Changes in operating assets and liabilities, net
of effects of acquisitions and divestitures:
Accounts and notes receivable 79,288 (97,131)
Inventories 12,605 (35,288)
Prepaid expenses and other assets (33,365) 11,137
Accounts payable and accrued expenses (3,949) 319,953
Deposits and unearned income 744 17,390
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Net cash used in continuing operations (295,915) (320,110)
Net cash provided by discontinued operations 72,928 --
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Net cash used in operations (222,987) (320,110)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (1,096) (34,622)
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Net cash used in continuing operations (1,096) (34,622)
Net cash used in discontinued operations (9,871) --
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Net cash used in investing activities (10,967) (34,622)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash -- 240,120
Cash received in excess of cash paid in acquisition -- 273,518
Loan proceeds 365,000 --
Repayment of notes payable (80,000) (9,000)
Loans from related parties 65,658 53,435
Advances from parent and related parties (120,056) --
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Net cash provided by continuing operations 230,602 558,073
Net cash used in discontinued operations (22,140) --
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Net cash provided by financing activities 208,462 558,073
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,492) 203,341
CASH AND CASH EQUIVALENTS, beginning of period 27,770 12,277
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CASH AND CASH EQUIVALENTS, end of period $ 2,278 $ 215,618
============ ============
See accompanying notes to consolidated financial statements.
6
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF ERESOURCE CAPITAL GROUP, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
A. BASIS OF PRESENTATION AND ORGANIZATION
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The
consolidated financial statements include the accounts of
Lifestyle Innovations, Inc. ("LFSI") and its wholly owned
subsidiaries LST, Inc. ("LST"), LST Integrators, Inc.
("Integrators"), LifeStyle Technologies Franchising Corp.
("Franchising"), FutureSmart Systems, Inc. ("FutureSmart") and
Brittany Enterprises, Inc. ("Brittany") (collectively the
"Company"). All material intercompany accounts and transactions
have been eliminated. Effective July 15, 2002 Princeton Mining
Company changed its name to Lifestyle Innovations, Inc.
At September 30, 2003 the Company has a significant working
capital deficit of $7,201,794. The major components of the working
capital deficit include: $1,944,711 due to affiliates, $2,460,434
in accounts payable and accrued expenses, notes payable in the
amount of $1,239,919, notes payable due related parties of
$957,440 and current liabilities of discontinued operations in the
amount of $1,179,952. The Company does not have sufficient cash
flows to meet its obligations currently due within the next 12
months. The Company is currently exploring additional sources of
liquidity, including debt and equity financing alternatives and
potential sales of its Common Stock in private placement
transactions. Additionally, the Company plans on negotiating with
its debt holders to continue to extend or convert some or all of
the debt. If the Company is (i) unable to grow its business or
improve its operating cash flows as expected, (ii) unsuccessful in
extending a substantial portion of the debt repayments scheduled
for August 2003, or (iii) unable to raise additional funds through
private placement sales of its Common Stock, then the Company will
need to seek alternative sources of working capital. There can be
no assurance that additional financing will be available when
needed or, if available, that it will be on terms favorable to the
Company and its stockholders. If the Company is not successful in
generating sufficient cash flow from operations, or in raising
additional capital when required in sufficient amounts and on
terms acceptable to the Company, these failures would have a
material adverse effect on the Company's business, results of
operations and financial condition. If additional funds are raised
through the issuance of equity securities, the percentage
ownership of the Company's current shareholders would be diluted.
The Company has a financing commitment for $300,000 from two
principal shareholders.
7
(2) ORGANIZATION - LFSI was organized in September 1950, under the
laws of the State of Idaho.
LFSI completed its acquisition of FutureSmart effective March 7,
2003. On May 28, 2003 the Board of Directors approved a plan to
dispose of FutureSmart. Accordingly, its operations since March 7,
2003 have been included in discontinued operations. The sale of
all assets together with assumption and settlement of most
liabilities was consummated on October 17, 2003. See Note C.
On September 5, 2002, LFSI acquired LST, a Delaware corporation,
and its wholly owned subsidiaries, Lifestyle Technologies
Franchising Corp., Lifestyle Security, Inc. and Lifestyle
Technologies Atlanta, all organized in July 2001. LFSI issued
16,000,000 shares of its common stock to eResource Capital Group,
Inc. ("RCG"), to acquire 100% interest in LST. At September 30,
2003 RCG owns 75% of the outstanding common stock of LFSI. On
February 20, 2003 LFSI reorganized its corporate structure. LST
Integrators, Inc. became a wholly owned subsidiary of LFSI and the
company-store operations located in Charlotte, NC and Atlanta, GA
were transferred to Integrators. Simultaneously Franchising became
a wholly owned subsidiary of LFSI and LST and LifeStyle Security,
Inc. became inactive. LFSI had only nominal operations prior to
the merger, leasing two condominium units, accordingly for
accounting purposes the transaction has been treated as the
issuance of stock by LST for the net monetary assets of LFSI,
accompanied by a recapitalization of LST. The accounting treatment
is identical to accounting for a reverse acquisition, except that
no goodwill or other intangible asset is recorded. The historical
financial statements prior to September 5, 2002 are those of LST.
On April 24, 2001, LFSI acquired Brittany, a Nevada corporation
organized on October 29, 1998. For accounting purposes, the
acquisition has been treated as the acquisition of Brittany by
LFSI with Brittany as the purchaser (reverse acquisition).
Brittany did not have operations until March 30, 2001, when it
acquired two condominium units that it is leasing.
Princeton Mining Company, an Idaho corporation, merged into its
wholly owned subsidiary, Princeton Mining Company, a Nevada
corporation on May 6, 2002. Princeton Mining Company, a Nevada
corporation, was the survivor.
(3) NATURE OF BUSINESS - LST is a full service home technology
integration company providing builders, homeowners, and commercial
customers with complete installation and equipment for structured
wiring, security, personal computer networking, audio, video, home
theater, central vacuum and accent lighting. LST has also secured
relationships with product manufacturers, distributors and service
providers (cable, Internet service, broadband and security). The
Company launched a national franchising program in the fourth
quarter of fiscal 2001 and, has since sold 18.5 franchises. LST
also owns and operates locations in the Charlotte, NC and Atlanta,
GA markets.
8
Brittany is the owner of two condominium units that are located in
Dallas, Texas which are currently under lease.
(4) GENERAL - The financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission for interim reporting
and include all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for
a fair presentation. These financial statements have not been
audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations for interim reporting. The
Company believes that the disclosures contained herein are
adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction
with the financial statements and notes thereto included in LST's
Annual Report for the period ended June 30, 2003, which is
included in the Company's Form 10-KSB filed on October 14, 2003.
(5) FISCAL YEARS - As used herein, fiscal 2004 refers to the periods
included in the fiscal year ended June 30, 2004 and fiscal 2003
refers to the periods included in the fiscal year ended June 30,
2003.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments which can be
readily converted to cash and have an original maturity of less than
three months. At times cash and cash equivalent balances at a limited
number of banks and financial institutions may exceed insurable
amounts. The Company believes it mitigates its risks by depositing cash
or investing in cash equivalents in major financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
o Cash and cash equivalents: The carrying amount reported in the
balance sheet for cash approximates its fair value.
o Accounts receivable and accounts payable: Due to their short term
nature, the carrying amounts reported in the balance sheet for
accounts receivable and accounts payable approximate their fair
value. The Company provides for any losses through its allowance
for doubtful accounts.
o Notes payable: The carrying amount of the Company's notes payable
approximate their fair value.
9
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts
receivable, investments, and notes payable. The Company places its cash
with high credit quality financial institutions. The Company performs
periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Although due dates of
receivables vary based on contract terms, credit losses have been
within management's estimates in determining the level of allowance for
doubtful accounts. Overall financial strategies are reviewed
periodically.
INVENTORIES
Inventories for the LifeStyle company owned stores consists of
purchased components, which are recorded at the lower of cost or market
with cost being determined on a first-in, first-out (FIFO) method.
Inventories for FutureSmart include materials, labor and overhead costs
and are stated at the lower of FIFO cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is calculated by using the straight-line
method over the estimated useful lives of the assets, which is five to
seven years for all categories except for computer software, with is
depreciated over 3 years. Leasehold improvements are amortized over the
life of the lease if it is shorter than the estimated useful life.
Repairs and maintenance are charged to expense as incurred.
Expenditures for betterments and renewals are capitalized. The cost of
property and equipment and the related accumulated depreciation are
removed from the accounts upon retirement or disposal with any
resulting gain or loss being recorded as other income or expenses.
Equipment under capital lease is recorded at the lesser of the fair
value of the asset or the present value of minimum lease payments.
GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill and intangible assets arising from
business combinations in accordance with FAS No. 141 "Business
Combinations" ("FAS 141") which requires that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. FAS 141 also specifies the criteria applicable to intangible
assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance
with FAS 142. The Company adopted FAS 142 effective July 1, 2001. In
completing the adoption of FAS 142, LST allocated its previously
existing goodwill as of July 1, 2001 to its reporting units, as defined
in FAS 142, and performed an initial test for impairment as of that
date.
In accordance with FAS 142, the Company no longer amortizes goodwill.
FAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested at least
10
annually for impairment. FAS 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and be reviewed for
impairment.
STOCK OPTIONS AND WARRANTS
The Company accounts for stock-based awards to employees using the
intrinsic value method described in Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the accompanying consolidated financial statements for
stock-based awards to employees when the exercise price of the award is
equal to or greater than the quoted market price of the stock on the
date of the grant.
On March 7, 2003, pursuant to her employment agreement, Jacqueline E.
Soechtig, Chief Executive Officer until October 14, 2003, was granted
(1) an incentive stock option to purchase 500,000 shares of Common
Stock at an exercise price equal to the trading price of such stock on
the last trading day prior to Board approval ($5.10), with 166,666
option shares to vest and become exercisable on the effective date of
the agreement and 166,667 option shares to vest and become exercisable
on each of the first and second anniversaries of the effective date,
subject to her continued employment and (2) a non-qualified stock
option to purchase 500,000 shares at an exercise price equal to $2.50,
with 166,666 option shares to vest and become exercisable on the
effective date of this agreement and 166,667 option shares to vest and
become exercisable on each of the first and second anniversaries of the
effective date, subject to her continued employment. Both options will
expire ten years from the effective date.
On September 5, 2002, Paul Johnson, Chief Executive Officer of the
Company until March 7, 2003, was granted an option to acquire 400,000
shares of Common Stock at an exercise price of $2.20, the trading price
on that day. The option will expire three years from the effective
date.
SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" require
disclosures as if the Company had applied the fair value method to
employee awards rather than the intrinsic value method. The fair value
of stock-based awards to employees is calculated through the use of
option pricing models, which were developed for use in estimating the
fair value of traded options, which have no vesting restrictions and
are fully transferable. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated values. The Company's
fair value calculations for awards from stock option plans were made
using the Black-Scholes option pricing model with the following
weighted average assumptions: expected term, three and ten years from
the date of grants in fiscal 2003; stock price volatility, 104% to
122%; risk free interest rate, 4.5% to 4.67%; and no dividends during
the expected term as the Company does not have a history of paying cash
dividends.
11
If the computed fair values of the stock-based awards had been
amortized to expense over the vesting period of the awards, net income
(loss) and net income (loss) per share, basic and diluted, would have
been as follows:
Three Months Ended September 30, 2003 and 2002
Fiscal 2004 Fiscal 2003
------------ ------------
Net loss, as reported $(1,013,179) $ (562,953)
Add: Stock-based employee compensation included
in reported net loss 108,334 --
Deduct: Total stock-based compensation expense
determined under fair value method for all awards (410,152) (576,000)
------------ ------------
Net loss, proforma $(1,314,997) $(1,138,953)
============ ============
Net loss per share, basic and diluted $ (.06) $ (.07)
============ ============
Options and warrants issued to non-employees are accounted for under
FAS No. 123, "Accounting for Stock Based Compensation". For the options
and warrants issued to non-employees, the fair value of each award is
calculated using the Black-Scholes Model in accordance with FAS No.
123.
On May 7, 2002 the Board of Directors adopted and the shareholders
approved by majority consent the Princeton Mining Company 2002 Stock
Option Plan. The Plan provides for the issuance of up to 2 million
shares of the Company's $.001 par value Common Stock in connection with
stock options and other awards under the Plan. The Plan authorizes the
grant of incentive stock options and non-statutory stock options. At
September 30, 2003 there were options granted under the Plan for
1,050,000 shares (716,666 shares vested) and 950,000 shares available
for grant.
REVENUE RECOGNITION
Integrator's home technology services work is completed in three phases
- pre-wiring, trim-out and hardware installation. Integrator invoices
its customers and records revenue as work is completed on each project.
For alarm monitoring service contracts sold by Integrator, revenue is
recognized only when the contracts are sold to third party finance
companies or as billed if Integrator holds and services the contract.
Integrator sells substantially all of its alarm monitoring contracts
immediately subsequent to the date the contracts are signed by the
customer.
Sales of franchise licenses are recognized as revenue when the
obligations under the franchise agreement are "substantially complete."
Franchising generally defines "substantially complete" as the
completion of training by the franchisee's General Manager and the
approval of the franchise location plan.
12
Royalties are based on a percentage of the sales recorded by
franchisees and are recorded as earned. Procurement fees charged to
franchisees are recorded in the month that the related product is
shipped to the franchisee.
NET LOSS PER COMMON SHARE
The Company has adopted SFAS No. 128 which establishes standards for
computing and presenting earnings per share (EPS) for entities with
publicly held common stock. The standard requires presentation of two
categories of EPS - basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company. All potential dilutive securities are antidilutive as a result
of the Company's net loss for the three month periods ended September
30, 2003 and 2002, respectively. Accordingly, basic and diluted EPS are
the same for each period.
ADVERTISING COSTS
Advertising costs are generally charged to operations in the period
incurred and totaled $4,678 and $3,291 for the three months ended
September 30, 2003 and 2002, respectively.
MARKETING FUND
Franchising's franchise agreement requires franchisees to pay 1.25% of
their sales into a general marketing fund to be used to promote the
Lifestyle name and home technology concept on a national basis.
Franchising records these receipts into the marketing fund liability,
classified in accounts payable and accrued expenses, which Franchising
administers. The marketing fund is managed by a committee consisting of
management of Franchising and representatives from certain franchises.
INCOME TAXES
Income taxes are accounted for in accordance with FAS 109, "Accounting
for Income Taxes", which prescribes the use of the asset/liability
method. Deferred taxes represent the expected future tax consequences
when the reported amounts of assets and liabilities are recovered or
paid. They arise from differences between the financial reporting and
tax basis of assets and liabilities and are adjusted for changes in tax
laws and tax rates when those changes are enacted. The provision for
income taxes represents the total of income taxes paid or payable for
the current year, plus the change in deferred taxes during the year.
Management of the Company elected to provide a reserve against the
potential future income tax benefits from its current net operating
loss, due to the uncertainty of its realization.
13
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, we adopted FASB Interpretation No. ("FIN")
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
elaborates on the disclosures that must be made by a guarantor in its
interim and annual financial statements about its obligations under
certain guarantees. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
adoption of this interpretation did not have a material effect on the
Company's financial position or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires a
variable interest entity ("VIE") to be consolidated by the primary
beneficiary of the entity under certain circumstances. FIN 46 is
effective for all new VIE's created or acquired after January 31, 2003.
For VIE's created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company adopted this interpretation
on January 31, 2003 with no impact on its financial position or results
of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement is
effective for contracts entered into or modified after June 30, 2003
and is to be applied prospectively. The Company adopted this Statement
on April 30, 2003 with no impact on its financial position or results
of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented
by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of
the Statement and still existing at the beginning of the interim period
14
of adoption. Restatement is not permitted. The Company does not expect
the adoption of this Statement to have a material impact on its
financial position or results of operations.
C. ACQUISITIONS AND DISPOSITIONS
FUTURESMART SYSTEMS, INC.
- -------------------------
LFSI completed its acquisition of FutureSmart effective March 7, 2003. On May
28, 2003 the Board of Directors approved a plan to dispose of FutureSmart.
Accordingly, its operations since March 7, 2003 have been included in
discontinued operations.
The purchase price of $801,910 consisted of the issuance of 1,000,000 shares of
LFSI's $.10 par value preferred stock, a bridge loan by LFSI to FutureSmart of
$224,830 and $477,080 in direct transaction costs.
The acquisition of FutureSmart was accounted for as a purchase in accordance
with SFAS No. 141, and the Company has accordingly allocated the purchase price
of FutureSmart based upon the fair values of the net assets acquired and
liabilities assumed.
Pursuant to the acquisition agreement, the shareholders of FutureSmart could
receive "Earn out Consideration" of up to 1,200,000 LFSI common shares if
FutureSmart achieves certain "Performance Milestones."
In connection with LFSI's acquisition of FutureSmart RCG agreed until March 3,
2005, or one year from the registration of the shares of common stock for the
FutureSmart shareholders if sooner, if RCG proposes to transfer 15% or more of
the shares of LFSI owned by RCG (excluding registered offerings, sales to
certain investors and related party sales) then certain of the FutureSmart
shareholders shall have the right to participate in such transfer of stock on
the same terms and conditions for up to 25% of the total sale.
On October 17, 2003 the Company completed its sale of all of the assets of
FutureSmart for an "Initial Purchase Price" of $1,500,000, which is subject to
adjustment as provided in the Asset Purchase Agreement to the "Final Purchase
Price." The Initial Purchase Price is allocated to the secured creditors of
FutureSmart, $200,000 to the Company and $1,300,000 to the other secured
creditors. Thirty percent ($450,000) of the Initial Purchase Price was paid at
Closing pro rata to the secured creditors ($60,000 to the Company) and the
remainder of $1,050,000 was placed in escrow. The escrowed amount is subject to
various adjustments, including determination of the final net assets as of the
Closing Date and settlement of certain other obligations. The remaining balance
will be disbursed by the Escrow Agent no later than one year and one day after
the Closing Date.
D. INVESTMENTS
The Company's investments, which are included in other assets, are comprised of
a certificate of deposit, including accrued interest, which is pledged as
collateral on a trade credit agreement with a vendor.
15
E. PROPERTY AND EQUIPMENT
A summary of property and equipment as of September 30, 2003 is as follows:
Real estate $ 46,394
Leasehold improvements 35,031
Showrooms 146,145
Vehicles 12,074
Computers and office equipment 167,374
Furniture and fixtures 50,030
Computer software 12,888
------------
469,936
Less: Accumulated depreciation (204,207)
------------
Property and equipment, net $ 265,729
============
F. NOTES PAYABLE
Notes payable at September 30, 2003 consist of the following:
Unsecured note payable - due October 1, 2003; with interest
at 12% $ 145,000
Note payable - due on demand; with interest at 10%;
collateralized by real estate 34,919
Note payable - due in August 2003 with interest at 12% and
collateralized by certain home technology accounts
receivable and inventory (1) 650,000
Note payable - due October 16, 2003; with interest at 12.59% 295,000
Note payable - due December 18, 2003; with interest at 36% 70,000
Note payable - due in monthly installments of $3,000 and a
balloon payment in July 2005; with interest at 8%;
collateralized by home technology accounts receivable 181,000
------------
1,375,919
Less current maturities, including demand notes 1,239,919
------------
Long-term portion $ 136,000
============
(1) At the option of the note holder, this note can be converted into RCG's
Common Stock at a ratio of one share of Common Stock for each $4.55 of
outstanding principal and interest. RCG's Common Stock closed at $1.87 on
September 30, 2003.
16
G. NOTES PAYABLE - RELATED PARTIES
Notes payable due related parties at September 30, 2003 consist of the
following:
Unsecured note payable to Mike Pruitt; due on demand; with
interest at 8% $100,000
Unsecured note payable to Mike Pruitt; due on demand; with
interest at 12% 10,658
Unsecured note payable to the wife of G. David Gordon; due on
demand; with interest at 6% 500,000
Unsecured notes payable due to G. David Gordon; due on
demand; with interest at 12% 346,782
---------
Notes payable due related parties $957,440
=========
H. INCOME TAXES
Deferred income taxes at September 30, 2003 consist primarily of net operating
loss carryforwards, which amount to approximately $9,000,000 and expire between
2020 and 2024. A valuation allowance has been recorded for the full amount of
the deferred tax assets. Further, due to substantial limitations placed on the
utilization of net operating losses following a change in control, utilization
of such NOL's could be limited.
I. NON-EMPLOYEE STOCK OPTIONS AND WARRANTS
During the year ended June 30, 2003, the Company sold 31 units of a private
placement and realized net proceeds of $693,765. Each unit consists of 10,000
shares of Common Stock, $.001 par value and a Series A Warrant to purchase 3,000
shares of Common Stock for $3.33 per share. Legend Merchant Group, Inc. acted as
placement agent for the offering and received a commission of 10%. In addition,
Legend Merchant Group, Inc was granted a warrant to acquire 50,000 shares of
common stock for $2.75 per share as a part of the acquisition of FutureSmart.
As a part of a private placement offering which was closed in December 2002, the
Company sold 99.6 Units. Each Unit consisted of 4,000 shares of its Common
Stock, 4,000 Series A Warrants and 4,000 Series B Warrants. The Series A Warrant
entitles the holder to acquire the Company's Common Stock for $4.00 per share
until its expiration on August 1, 2004. The Series B Warrant expires on August
1, 2005 and entitles the holder to acquire the Company's Common Stock for $6.00
per share.
J. CONVERTIBLE SERIES A PREFERRED STOCK
Effective March 3, 2003 the Company amended its Articles of Incorporation to
authorize the issue of 1,000,000 shares of Series A Convertible Preferred Stock,
par value $.10 per share. The principal preferences and rights of the Series A
Preferred Stock are: (i) entitled to receive dividends when and if declared;
(ii) liquidation value of $2.75 per share plus an amount equal to 5% per annum
on the original issue price; (iii) each holder of shares shall be entitled to
the number of votes equal to the number of shares of Common Stock into which
each share of Series A Preferred Stock could be converted; (iv) conversion is at
the option of the holder until 51% of the then outstanding shares elect to
17
convert, at which time all remaining outstanding Series A Preferred Stock shall
automatically be converted into Common Stock; (v) and the initial conversion
price of $2.75 per share is subject to adjustment in the event of certain
occurrences.
K. TRANSACTIONS WITH RELATED PARTIES
At September 30, 2003, advances due to affiliates consisted of the following
(See Note H for notes payable to affiliates of $957,440):
Due to RCG and its subsidiaries $1,859,098
Advance from and accrued interest payable to Mr. Pruitt 31,909
Advances from and accrued interest payable to G David
Gordon, a shareholder and creditor of LFSI and RCG 53,704
-----------
$1,944,711
===========
The amount due to RCG and its subsidiaries represents net advances to and from
RCG and its subsidiaries. RCG also provides various services to the Company,
including accounting and finance assistance, capital and debt raising, human
resources and other general and administrative services. For the three months
ended September 30, 2003 and 2002, RCG charged the Company $15,000 and $30,000,
respectively. In August 2003 a lender converted the Company's $300,000
obligation to the lender plus accrued interest of $42,500 into 200,000 shares of
RCG common stock. The $342,500 is included in the amount due RCG above.
Mr. Pruitt had pledged certain of his personal assets to secure a $100,000 bank
credit facility for LST's home technology business. On August 8, 2003, the
balance outstanding on this bank facility of $100,000 was paid by Mr. Pruitt and
the Company issued its $100,000 note payable to Mr. Pruitt.
Mr. Pruitt is also a minority investor in a company that has purchased franchise
licenses and business operations of LST's home technology business in three
markets in South Carolina and in another company that has purchased franchise
licenses in three locations in Maryland. At September 30, 2003, the franchise
locations in South Carolina owed the Company and its subsidiaries $40,000 and
the franchise locations in Maryland owed the Company and its subsidiaries
$4,000.
Paul B. Johnson, President of the Company, is an investor in a company, which in
November 2001 became a franchisee of the Company's home technology business in
the Dallas, Texas market and purchased two additional locations in the Dallas,
Texas market during the year ended June 30, 2003. The Dallas franchise location
owed the Company and its subsidiaries $68,000 at September 30, 2003.
During fiscal 2002, Glenn Barrett resigned as President of Lifestyle and began
LVA Technologies LLC ("LVA"), a low voltage wiring business that operates as a
Lifestyle franchisee headquartered in Charlotte, NC to service the commercial
market. The Company waived LVA's initial franchise fee for the commercial
franchise. LVA also owns the Greenville and Columbia, SC franchises. LVA's low
voltage wiring business pays royalties on products purchased from the Company at
the same rate as the Company's other franchisees, however, it does not pay
18
royalties on revenue generated from products purchased elsewhere as required of
the Company's other franchisees, including the Greenville and Columbia, SC
franchises. LVA and its subsidiaries owed the Company and its subsidiaries
$271,000 at September 30, 2003.
At September 30, 2003, total debt outstanding to G. David Gordon, his wife and a
company in which he is the president and a shareholder, was $846,782 which is
included in notes payable due related parties on the Condensed Consolidated
Balance Sheet. The loans bear interest at 6 to 12%. Mr. Gordon and this company
also loaned RCG an additional $1,144,000 ($750,000 balance at September 30,
2003) during fiscal 2002 at interest rates of 8% to 12%. During the three months
ended September 30, 2003, Mr. Gordon converted $267,500 in debt owed to him into
RCG common stock. Mr. Gordon also acts as special legal counsel to RCG and the
Company from time to time.
Mr. Gordon has an ownership interest in ten of the Company's franchises,
including two locations that were purchased during fiscal 2002 from the Company
and for which the Company recorded a gain of $119,000. Mr. Gordon has an
ownership interest in the three markets in South Carolina along with Mr. Pruitt,
as discussed above; three locations in the Dallas market along with Mr. Johnson;
and four additional markets in Houston, Texas, Raleigh, North Carolina,
Wilmington, North Carolina and Greensboro, North Carolina. These four markets
owed the Company and its subsidiaries $26,000 at September 30, 2003.
Revenues from the franchises discussed above for the three months ended
September 30, 2003 and 2002 are as follows:
Fiscal 2004 Fiscal 2003
Houston and the three North Carolina markets $ 59,000 $ 55,000
Three South Carolina markets 24,000 20,000
Three Maryland markets 6,000 --
LVA and subsidiaries 25,000 18,000
Dallas 17,000 9,000
--------- ---------
Total $131,000 $102,000
========= =========
19
L. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (amounts in thousands of
dollars):
Company
Owned
Locations Franchise Corporate Total
THREE MONTHS ENDED SEPTEMBER 30, 2003
Revenue
External customers $ 321 $ 159 $ -- $ 480
Intersegment $ -- $ 18 $ -- $ 18
Loss from continuing operations $ 203 $ 52 $ 193 $ 448
THREE MONTHS ENDED SEPTEMBER 30, 2002
Revenue
External customers $ 420 $ 118 $ -- $ 540
Intersegment $ -- $ 21 $ -- $ 21
Loss from continuing operations $ 356 $ 131 $ 29 $ 516
Corporate includes the real estate investment and the costs associated with the
requirements of a public company.
M. COMMITMENTS AND CONTINGENCIES
As a part of the issue of 16,000,000 shares of its Common Stock to RCG, LFSI was
obligated to file a registration statement within 90 days of the September 5,
2002 closing date of the transaction. If LFSI did not meet this deadline, it was
obligated to issue an option to RCG for 1,000,000 shares of LFSI common stock at
20% of the last bid price for the LFSI common stock on the triggering date. As a
result of the acquisition of FutureSmart Systems, Inc. ("FutureSmart") by LFSI
(See Note C), RCG and LFSI have agreed to extend the deadline for filing the
registration statement until May 31, 2003 or a later date consistent with any
registration rights associated with the acquisition of FutureSmart.
During 2001, FutureSmart approved a plan to exit, and subsequently vacated
certain facilities in San Jose, California and Murray, Utah. As of September 30,
2003, FutureSmart has accrued $210,921 for payment of minimum lease payments
under non-cancelable operating leases. The landlord of the San Jose lease has
demanded full payment of amounts due on the lease.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. All statements other than statements of historical fact included in
this section or elsewhere in this report are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Important
factors that could cause actual results to differ materially from those
discussed in such forward-looking statements include, but are not limited to,
the following: changes in the economy or in specific customer industry sectors;
changes in customer procurement policies and practices; changes in product
manufacturer sales policies and practices; the availability of product and
labor; changes in operating expenses; the effect of price increases or
decreases; the variability and timing of business opportunities including
acquisitions, alliances, customer agreements and supplier authorizations; the
Company's ability to realize the anticipated benefits of acquisitions and other
business strategies; the incurrence of debt and contingent liabilities in
connection with acquisitions; changes in accounting policies and practices; the
effect of organizational changes within the Company; the emergence of new
competitors, including firms with greater financial resources than the Company;
adverse state and federal regulation and legislation; and the occurrence of
extraordinary events, including natural events and acts of God, fires, floods
and accidents.
LFSI completed its acquisition of FutureSmart effective March 7, 2003. On May
28, 2003 the Board of Directors approved a plan to dispose of FutureSmart.
Accordingly, its operations since March 7, 2003 have been included in
discontinued operations.
The purchase price of $801,910 consisted of the issuance of 1,000,000 shares of
LFSI's $.10 par value preferred stock, a bridge loan by LFSI to FutureSmart of
$224,830 and $477,080 in direct transaction costs.
Pursuant to the acquisition agreements, the shareholders of FutureSmart could
receive "Earn out Consideration" of up to 1,200,000 LFSI common shares if
FutureSmart achieves certain "Performance Milestones."
On October 17, 2003 the Company completed its sale of all of the assets of
FutureSmart for an "Initial Purchase Price" of $1,500,000, which is subject to
adjustment as provided in the Asset Purchase Agreement to the "Final Purchase
Price." The Initial Purchase Price is allocated to the secured creditors of
FutureSmart, $200,000 to the Company and $1,300,000 to the other secured
creditors. Thirty percent ($450,000) of the Initial Purchase Price was paid at
Closing pro rata to the secured creditors ($60,000 to the Company) and the
remainder of $1,050,000 was placed in escrow. The escrowed amount is subject to
various adjustments, including determination of the final net assets as of the
Closing Date and settlement of certain other obligations. The remaining balance
will be disbursed by the Escrow Agent no later than one year and one day after
the Closing Date.
On September 5, 2002, LFSI acquired LST, a Delaware corporation, and its wholly
owned subsidiaries, Lifestyle Technologies Franchising Corp., Lifestyle
21
Security, Inc. and Lifestyle Technologies Atlanta. LFSI issued 16,000,000 shares
of its common stock to eResource Capital Group, Inc. ("RCG"), to acquire 100%
interest in LST. At September 30, 2003 RCG owns 75% of the outstanding common
stock of LFSI. LFSI had only nominal operations prior to the merger, leasing two
condominium units, accordingly for accounting purposes the transaction has been
treated as the issuance of stock by LST for the net monetary assets of LFSI,
accompanied by a recapitalization of LST. The accounting treatment is identical
to accounting for a reverse acquisition, except that no goodwill or other
intangible asset is recorded. The historical financial statements prior to
September 5, 2002 are those of LST.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 LFSI had a working capital deficit of $7,201,794 as
compared to a working capital deficit of $6,281,197 at June 30, 2003, an
increase of $920,597. Current assets decreased $83,373 and current liabilities
increased $837,224. The current asset decrease is primarily due to a decline in
accounts receivable of $79,288. The increase in current liabilities includes an
increase in notes payable and notes payable due related parties of $94,577; an
increase in accounts payable and accrued expenses of $106,760; an increase in
amounts due affiliates of $179,944 and an increase in the current liabilities of
discontinued operations of $455,199.
During the three months ended September 30, 2003 the Company had $365,000 in new
borrowings and reduced other loans by $80,000. In addition, in August 2003 a
lender converted the Company's $300,000 obligation to the lender plus accrued
interest of $42,500 into 200,000 shares of RCG common stock. The $342,500 is now
included in the amount due to RCG.
The Company has a financing commitment for $300,000 from two principal
shareholders.
As discussed above, at September 30, 2003 the Company has a significant working
capital deficit. The Company does not have sufficient cash flows to meet its
obligations currently due within the next 12 months. The Company is currently
exploring additional sources of liquidity, including debt and equity financing
alternatives and potential sales of its Common Stock in private placement
transactions. Additionally, the Company plans on negotiating with its debt
holders to continue to extend or convert some or all of the debt. If the Company
is (i) unable to grow its business or improve its operating cash flows as
expected, (ii) unsuccessful in extending a substantial portion of the scheduled
debt repayments, or (iii) unable to raise additional funds through private
placement sales of its Common Stock, then the Company will need to seek
alternative sources of working capital. There can be no assurance that
additional financing will be available when needed or, if available, that it
will be on terms favorable to the Company and its stockholders. If the Company
is not successful in generating sufficient cash flow from operations, or in
raising additional capital when required in sufficient amounts and on terms
acceptable to the Company, these failures would have a material adverse effect
on the Company's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the Company's current shareholders would be diluted.
SALES AND REVENUES
During the three months ended September 30, 2003, sales declined $59,341 (11%)
from the year earlier amount. During fiscal 2004, revenues included 67% from
company store operations and 33% from franchise operations. During fiscal 2003
22
revenues included 78% from company store operations and 22% from franchise
operations. The Company has made substantial cost reductions in its operations
and, as a result, revenues have declined.
During the three months ended September 30, 2003 the Company's location in
Charlotte terminated the majority of its direct labor and began utilizing
sub-contract services for the majority of its installation work. During this
period, overall costs of labor and materials were higher than normally
experienced, with total direct costs exceeding revenue. Accordingly, management
is still evaluating the effectiveness and cost of this approach and may make
further changes in the future. This accounts for the majority of the decrease in
gross profit, which declined from 34% to 25%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $220,565
(35%) during the three month period ended September 30, 2003 as compared to the
year earlier period. The following specific expenses were lower in fiscal 2004
as compared to fiscal 2003: salaries and wages - $106,792; professional fees -
$31,093; rent expense - $19,256; and commissions - $9,025. In addition,
virtually all other costs were proportionately lower in fiscal 2004 as compared
to fiscal 2003 due to the scaled down operations.
STOCK OPTION AND WARRANT COMPENSATION
Stock option and warrant compensation amounted to $110,709 and $7,125 during the
three-month periods ended September 30, 2003 and 2002, respectively. The
increase is the result of the amortization of the below market option granted to
the Company's new Chief Executive Officer which commenced on March 7, 2003.
INTEREST EXPENSE
Interest expense amounted to $44,691 ($17,178 for related parties) in fiscal
2004 and $47,519 ($13,273 for related parties) in fiscal 2003. The decrease in
interest expense of $6,733 from debt other than related party debt is primarily
the result of converting $300,000 in debt owed a lender to RCG common stock,
which effectively converted the obligation from interest bearing to non-interest
bearing.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the principal executive
officer and principal accounting officer, as appropriate to allow timely
decisions regarding required disclosure. Under the supervision of and with the
participation of management, including the principal executive officer and
principal accounting officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of September
23
30, 2003, and, based on its evaluation, our principal executive officer and
principal accounting officer have concluded that these controls and procedures
are effective.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation described above, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
(a) The Company currently does not employ a Chief Financial Officer.
(b) On October 17, 2003 the Company completed its sale of all of the
assets of FutureSmart for an "Initial Purchase Price" of
$1,500,000, which is subject to adjustment as provided in the
Asset Purchase Agreement to the "Final Purchase Price." The
Initial Purchase Price is allocated to the secured creditors of
FutureSmart, $200,000 to the Company and $1,300,000 to the other
secured creditors. Thirty percent ($450,000) of the Initial
Purchase Price was paid at Closing pro rata to the secured
creditors ($60,000 to the Company) and the remainder of $1,050,000
was placed in escrow. The escrowed amount is subject to various
adjustments, including determination of the final net assets as of
the Closing Date and settlement of certain other obligations. The
remaining balance will be disbursed by the Escrow Agent no later
than one year and one day after the Closing Date.
The sale was to an unrelated third party. No pro forma information
is included since the operations of FutureSmart have been
previously reported as discontinued operations.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10 Asset Purchase Agreement between LFSI, FutureSmart Pages 26-71
and Honeywell International, Inc.
31 Certifications pursuant to 18 U.S.C. Section 1350,
Section 302 of the Sarbanes-Oxley Act of 2002 Pages 72-73
32 Certifications pursuant to 18 U.S.C. Section 1350,
Section 906 of the Sarbanes-Oxley Act of 2002 Pages 74-75
(b) Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
LIFESTYLE INNOVATIONS, INC.
Date: November 14, 2003 By: /s/ Ron Pitcock
--------------------------------
Ron Pitcock, Chief Executive
Officer
Date: November 14, 2003 By: /s/ Paul Johnson
--------------------------------
Paul Johnson, President
and Principal Accounting Officer
25