10QSB 1 lifestyle_10q-093003.txt 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 ------ ---------- (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 ------------ (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 . --- --- 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 . --- --- LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES (A MAJORITY OWNED SUBSIDIARY OF ERESOURCE CAPITAL GROUP, INC.) INDEX Page No. --- 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 ------------- Total assets $ 8,418,557 ============= 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 ------------- 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) ------------- Total stockholders' equity 458,666 ------------- Total liabilities and stockholders' equity $ 8,418,557 ============= 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 ------------- ------------- SALES AND REVENUES Products $ 394,055 $ 421,639 Services and other 86,394 118,151 ------------- ------------- 480,449 539,790 COST OF SALES 360,957 356,471 ------------- ------------- 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 ------------- ------------- Total operating expenses 567,917 699,259 ------------- ------------- 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) ------------- ------------- (41,916) (47,013) ------------- ------------- 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 -- ------------- ------------- (522,838) -- ------------- ------------- NET LOSS $ (1,013,179) $ (562,953) ============= ============= NET LOSS PER SHARE, BASIC AND DILUTED: CONTINUING OPERATIONS $ (0.02) $ (0.03) DISCONTINUED OPERATIONS (0.03) -- ------------- ------------- 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 ------------ ------------ 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 ------------ ------------ Net cash used in continuing operations (295,915) (320,110) Net cash provided by discontinued operations 72,928 -- ------------ ------------ Net cash used in operations (222,987) (320,110) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment (1,096) (34,622) ------------ ------------ Net cash used in continuing operations (1,096) (34,622) Net cash used in discontinued operations (9,871) -- ------------ ------------ Net cash used in investing activities (10,967) (34,622) ------------ ------------ 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) -- ------------ ------------ Net cash provided by continuing operations 230,602 558,073 Net cash used in discontinued operations (22,140) -- ------------ ------------ Net cash provided by financing activities 208,462 558,073 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,492) 203,341 CASH AND CASH EQUIVALENTS, beginning of period 27,770 12,277 ------------ ------------ 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