David Smith thought it would be a good idea to repost the shareholders letter sent out about LPS. It explains the concept and potential. I apologize for any scanning and format errors. It is pretty long.
COCONINO S.M.A., INC.
3855 South 500 West #R * Salt Lake City, UT 84115
Phone: (801) 277-0544 * Fax: (801} 277 0629
March 4, 1998
Dear Coconino S.M.A shareholders:
We get investor and shareholder inquiries; lots of them, frankly.
Shareholders want to know what their company is doing, how it's doing,
and perhaps most importantly what they can expect in the future. We
publish a great deal of information and are recently averaging a press
release nearly every other week. There are some important areas that
don't lend themselves to press releases such as "What is LPS, Ltd.'?
What do they do?" We want to introduce you to LPS, Ltd. and its
tremendous potential impact on Coconino earnings.
First, what about the other components of Coconino SMA?
Coconino SMA, Inc. is a diversified holding company operating through
tbur wholly owned subsidiaries in four industries.
1 ) Retail manufacturing and distribution. The Ad-HaTTeRs, lnc,
subsidiary was the first subsidiary of the four distinct companies under
the Coconino umbrella. AdHaTTeRs is best described as a wholesale
manufacturer of various retail products, specifically scented air
fresheners used in every, type of on-road and off-road vehicle as well
as in-the-home and workplace environments.
2) Oil & gas development and production. Coconino Oil & Gas, Inc. is the
most recently formed subsidiary. It followed the acquisition and
subsequent sale of Uinta Oil & Gas and a change of direction in Coconino
SMA's oil production philosophy. CO&G will start its first new
drilling/reentry opportunity within a matter of days, depending upon the
availability of rigs. If successful. and several independent geologists
concur in the probability of gas reserves being present in the Conroe,
TX prospect, CO&G should begin to generate cash flow belZ~re the end of
the current fiscal year, May 31, 1998.
3) Environmental cleanup and non-hazardous waste disposal. Enviro-Tec,
Inc. was acquired with Uinta Oil & Gas in 1996 and remains with Coconino
SMA's family debt free after the sale of Uinta in September of '97.
Enviro-Tec has just been granted a Class V permit for its Duchesne. UT
disposal well which allows for significantly increased earnings
potential. Under the pre-existing Class II permit. disposal fees were
typically about fifty cents per barrel. Under the new Class V permit.
fees range from $10 to just under $30 per barrel. The permit allows for
daily disposal of up to 14,400 barrels of nonhazardous industrial waste
liquids. Enviro-Tec has embarked on an aggressive marketing campaign to
align customers with this service.
Additionally, the Conroe, TX property has an existing Class II disposal
well and the company intends to seek a commercial permit for it. The
company is also looking at a site located in Wyoming. By year's end,
EnviroTec's goal is to have at least two revenue-producing waste
disposal wells in full operation.
4) Financial Services. This is our exciting LPS, Ltd. (LPSL) subsidiary.
Many have remarked they don't really understand what this company does.
Are they in the retail mortgage business? Not exactly--it is much more
than that. Let us go into some detail and try to clarify LPSL's role at
Coconino.
THE PRODUCT:
LPS, Ltd. is pioneering a new segment of the financial services industry
called "Life Planning." Through a series of home study courses marketed
through a network of financial service professionals, LPSL provides a
powerful means by which mortgage brokers, home lenders, insurance agents
and others can attract and keep new clients. These courses are tools for
the individual that easily and conveniently teach the concepts of how to
free oneself from a lifetime of debt. At the same time the courses
provide a template on how to create a healthy estate to provide for
retirement, all without materially increasing monthly cash outflows from
current levels.
INITIAL MARKETING:
The first marketing thrust for these products has been directed towards
mortgage brokers for the simple reason that they are currently enjoying
tremendous interest in debt consolidation loans known as "125"
mortgages. These are loans that provide up to 125% of the homeowners'
equity and are typically secured by a junior lien on the property. As
LPSL home study courses teach the principles of accelerated debt
repayment and longterm wealth building, what better place to offer the
product to the public? Add to that another marketing alliance whereby
LPSL can and does provide a competitive wholesale mortgage financing
package the mortgage broker can access, and the return to the company is
substantially enhanced as an example below will illustrate.
Life Planning is more than the traditional financial planning offered
industry wide in that it considers the entirety of family dreams and
goals, not just the financial component. A Life Planning interview
conducted by financial services professional makes assessments in the
personal, family, work, and financial areas using analytical tools
provided by LPSL. Clients may then avail themselves of a specific home
study course (or the entire series of courses) that helps them
understand issues most important to their specific needs. The importance
of this information-gathering function will become clear as you read
further.
INDUSTRY ACCEPTANCE:
Industry professionals welcome the LPSL products. Mortgage brokers,
insurance professionals (life, health, & property/casualty alike),
securities brokers, and tax preparers understand that the innovations of
the Life Planning courses automatically provide an additional earnings
path for career financial service professionals. They, and we, are
excited by reports that appointments are currently being arranged with
an incredible 60% of those who respond to various advertisements. Of
those who made appointments, an astounding 80% are buying their first
course and 33% are applying for new mortgage financing. These
percentages are considered higher than what is expected in the larger,
mature picture. Nevertheless they are impressive and attract the
attention of potential marketing alliance groups.
EXAMPLE:
For an example of how LPSL receives income, consider an applicant for a
debt consolidation loan utilizing a second mortgage and a third party
administrator to accelerate the repayment of the loan.
Loan amount applied for $30,000
Retail points charged by broker for loan (avg. 5%) 1,500
Add LPSL Course I (debt consolidation) 249
LPSL receives net for course $ 99
LPSL receives wholesale points participation (.5%) 150
LPSL receives portion of monthly admin fees 6 (for 48-120 mos. )
Sub total $ 255 (minimum)
That sub total is more than the retail cost of the course, and the
administration fee continues month after month.
MORE REVENUES:
There's even more. All the mortgages will eventually be bundled and sold
to Wall Street by our mortgage industry partners. LPSL participates in
that profit center as well. The typical size of a mortgage pool for sale
to Wall Street is $50 million. LPSL can receive 1% ($500,000) as its
participation in such a transaction.
In order to get to a $50 million Wall Street mortgage backed security
transaction, LPSL needs to have participated in 1,667 mortgage
transactions averaging $30,000 each. LPSL will already have received its
$255 per client (per above example) or $425,085. The total amount for
all of this approaches $1 MILLION DOLLARS for the 1,667 transactions, or
an average of $600 per client. In addition there is a continually
increasing amount representing the ongoing monthly administration fees
on each transaction (that is, on each client each month for an
ever-increasing client base).
MORE MARKETING:
The company has embarked on a marketing plan that calls for acquiring as
many as 180 "office" locations in 1998. An "office" is a place of
business owned and operated by a financial professional at their
expense, not by LPSL. Each of these locations is projected to be
generating approximately 100 customers per month after the initial 120
days of participation. They can do this because most have several
producing sales reps in a location. For purposes of this example, assume
that only 40 "offices" achieve their goal, that the average number of
clients is only 50 per month, and that the targeted level of production
doesn't start until June, three months from now. The numbers are 40 x 50
x 7 (months) or 14,000 transactions for the remainder of 1998. Look at
this in light of the previous paragraph, but remember that all of this
is speculative until the company achieves these goals.
THE BOTTOM LINE:
Not accounting for the ongoing administrative fees, production at that
level would amount to revenues of $8,400,000 in seven months. Assuming
the total shares of Coconino SMA common stock outstanding remains
22,721,000 (as of 1/31/98) revenues per share could equal thirty-seven
cents ($.37). These projections are based on the company's best
estimates of the potential at LPS, Ltd. but, of course, we cannot assure
anyone that this will occur. If it does, though, what would be a
reasonable multiple for translating those revenues to a stock value?
One final point about the potential for this Coconino SMA subsidiary. A
very valuable asset this company is already developing is its database.
There are companies who pay enormous sums of money just to have access
to the type of information such a database will contain. A recent
example of this phenomenon is Microsoft's purchase of an Internet e-mail
company by the name of Hotmail last December. It was reported Microsoft
paid between $300 to $500 million for the company, the assets of which
were almost exclusively a database of several million subscribers. The
suggestion here is that, not only does Coconino anticipate LPSL will be
a big current earnings generator, but that its ultimate value may be
realized in a later buyout.
Your company hopes this memorandum has given you a better understanding
of our most recent acquisition. We hope, too, that you share our
excitement at its prospects as well as the prospects of our other
subsidiaries. Recognizing that you may still have questions, please
direct them to our corporate spokesman, Michael Millis, at 800-733-0087.
Sincerely,
COCONINO S.M.A., INC. |
