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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED AUGUST 31, 1999
LMKI, INC.
(Name of small business issuer in its charter)
Nevada 0-26578 33-0662114
(State or other jurisdiction of (Commission File No.) (I.R.S. Employer
incorporation or organization) Identification No.)
3355 Michelson Drive, Suite 300, Irvine, California 92612
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 794-3000
Securities registered pursuant to Section 12(b) of the Act: NONE
Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE (Title of class)
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 ... No .X.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $1,598,076
The aggregate market value of the voting and non-voting common equity held by
non-affiliates was $47,742,239 computed by reference to the average bid and
asked price of such common equity, as of August 31, 1999, which was $4.91.
The number of shares outstanding of the issuer's common stock, as of August 31,
1999 was 36,115,666.
Transitional Small Business Disclosure Format (check one): Yes ... No .X.
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THIS ANNUAL REPORT ON FORM 10-KSB MAY CONTAIN CERTAIN PROJECTIONS, ESTIMATES AND
OTHER FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AT "Business - Risks And
Uncertainties." WHILE THIS OUTLOOK REPRESENTS MANAGEMENT'S CURRENT JUDGMENT ON
THE FUTURE DIRECTION OF THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW.
THE COMPANY UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
ARISING AFTER THE DATE HEREOF.
PART I
Item 1. Description of Business.
Overview
LMKI Inc., formerly Landmark International, Inc., delivers broadband
communications solutions including high-speed Internet access, data, voice and
video services over a revolutionary national network to a wide spectrum of
business customers. Additionally, LMKI Inc. offers application development,
network integration and systems management services to businesses worldwide.
Through strategic alliances and cost-effective network planning, LMKI Inc.
provides unparalleled performance and service.
LMKI provides both of the elements critical to the success of any business
interested in utilizing the Internet: Access and Communications Applications.
LMKI offers various cost-effective broadband connectivity options to businesses
of all scope and size. LMKI's broadband access offerings range from DSL to DS3
service. Additionally, LMKI offers Network Development solutions and Internet
Utility solutions. With our extensive knowledge and experience we are able to
deliver VPN solutions (Virtual Private Networking), RPN solutions (Real Private
Networking), Collocation, VOIP integration (Voice over IP) and
Inter/Intra/Extra/net application development. Furthermore, the design and
deployment of these solutions takes full advantage of the speed and reliability
provided by LMKI's broadband Internet connections.
LMKI's fully integrated, cost-effective solution approach gives businesses
little reason to search elsewhere for the same solution that would be delivered
by 2 to 3 different companies, each specializing in one facet to the whole
solution. Because LMKI's network is smarter than the competition and we have
extensive experience in deploying multi-faceted Internet solutions, our plan is
to brand LMKI as the clear market leader in delivering solid, complete and
cost-effective network solutions to businesses that need to integrate the
utility of the Internet into their operations.
Currently LMKI has a large number of customers that come from a wide range of
industries in the marketplace. With favorable partnering and peering agreements
ranging from backbone providers such as Level (3) and Qwest to DSL providers
such as Covad, LMKI has been able to grow at an accelerated pace. These
strategic partnerships have allowed LMKI to deliver dynamic solutions to
corporations such as Xerox Corporation, IBM, Playboy Enterprises,
CarsDirect.com, Southern California Automobile Association, Kanakaris.com and
many others.
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LMKI Inc. is an Internet Service Provider (ISP), offering small, medium, and
large-sized businesses the lowest-cost entry-level connection to the Internet
via high speed DSL, the newest and fastest communications technology. LMKI's
proprietary product, the Zip-DSL, allows all businesses to participate in the
full range of Internet services.
LMKI is customer-driven, providing subscribers 24-hours-a-day, seven-days-a-
week personal service. Partnership agreements with Covad (NASDAQ:COVD), Qwest
Communications (NASDAQ:QWST), and Level (3) Communications (NASDAQ:LVLT)
guarantee technical support and field service for near-perfect network
reliability for LMKI'S growing infrastructure.
DSL Expansion
According to TeleChoice, a telecommunications consulting firm, the market for
digital subscriber lines (DSL) has charted growth of 300% for the first half of
1999, well beyond analysts' expectations. Positioning itself to give cable modem
competition a good run, DSL is a technology that uses digital coding to push up
to 99% more information through a regular copper phone line. The result is that
the line can transmit data using a higher frequency, and simultaneous voice and
fax using a lower frequency. DSL services the "last mile"- the area stretching
from the central phone exchange to the customer - that has proven such a
challenge in providing fast connections to businesses. Laurie Falconer, DSL
analyst at TeleChoice, expects market growth for DSL to speed up, and
competition to increase. "There's a lot of demand for it," she says. Falconer
claims a main factor to separate the market leaders and losers will be the
viability of the targeted market. LMKI is only aiming to attract multi-location
businesses to its product.
Published figures and projections about growth of the Internet vary, but
agreement about rapid expansion is standard. A new study of the Internet
telephony business by Killen & Associates, a telecommunications research and
consultant group in Palo Alto, Ca. Forecasts an $8 Billion market by the year
2003 for providers of IP services offering voice, fax and video capabilities.
Recent mergers of telephone and cable companies, and acquisitions of Internet
technology companies predict that broadband access is the future of the online
world. LMKI Communications, which began its business activities in January 1999
has already achieved a doubling of its monthly growth rate, with current
subscribers and expects an exponential cumulative gross run rate over the next
year.
Business Broadband
Data Competitive Local Exchange Carriers (CLECs) have built their business
models around the small and medium-size markets for local broadband services,
and it's easy to see why. International Data Corp. (IDC) of Framingham,
Massachusetts estimates that as of year-end 1998, 3.9 million of the 7.4 billion
small businesses in the United States had Internet access. Nearly 3.3 million of
these small businesses were using dial-up services. According to John Stormer,
NorthPoint's Vice President of marketing, converting small business dial-up
customers to DSL "defines a big part of the market opportunity."
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The Internet's increasingly pivotal role in business via Web content, e-
commerce and virtual private networks (VPNs), combined with the lack of
affordable, high-speed access solutions for small businesses, have created a
large niche for DSL services. Although the market is still nascent, Morgan
Stanley Dean Witter & Co. of New York estimates the U.S. DSL service market for
access alone will reach $7 billion to $9 billion by 2002.
For a number of reasons, data CLECs have chosen to use DSL to reach their target
market instead of other access media. One factor is that competing access
technologies are not currently well-positioned for small businesses. ISDN, for
example, is a relatively slow broadband service with many hidden charges.
Broadband wireless has technology glitches to fix, and any business deployments
of cable modems would require further network build-outs and upgrades to two-way
high-speed service.
DSL, on the other hand, takes advantage of unused spectrum in existing copper
telephone wires, the same basic wiring used to supply a home or office with
regular telephone service. According to Peter Meade, a senior analyst with
market researcher Cahners In-Stat Group, Newton, Massachusetts, DSL is a great
solution for small businesses, remote offices and telecommuters. "T1 [a leased
line connection] is too expensive for this segment, dial-up is too slow, and
ISDN [offered by ILECs] adds per-minute online charges to their base monthly
price," Meade says.
J.P. Morgan's Langner agrees: "DSL is a dedicated service, and that makes it
much more attractive to business than cable, dial-up and ISDN. It is becoming a
viable T1 competitor on price."
Although local phone companies are in the best position to offer DSL because
they own the core infrastructure that supports it, until very recently, they
were reluctant to market these services to business customers. According to New
York based Bank of America Securities LLC senior analyst Michael Renegar, ILECs
won't aggressively sell DSL services to businesses. "DSL will cannibalize
existing T1 service, for which ILECs typically charge $1,000 a month," he says.
"It would reduce margins considerably."
Business Strategy
LMKI intends to capitalize on the enormous public attention focused on the
Internet by increasing its telemarketing sales and technical support staff,
targeting its advertising to its core audience, and by providing the most
efficient, lowest-cost high speed Internet service in its corridor.
LMKI Communication's Competitive Advantages
o LMKI's knowledgeable and growing sales force and technical
staff. LMKI is making sure that the sales force is trained on
the "high-end" networking elements in which LMKI deals so they
will be able to service the needs of their customers.
o LMKI's business model optimizes COST, EFFICIENCY AND
FLEXIBILITY. LMKI has addressed the largest cost factor in
their methodology for deploying their network through a
leasing strategy rather than a building strategy. This keeps
start-up costs as low as possible.
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o LMKI's efficiency can be seen in harnessing a network
comprised of highly intelligent and functional network
elements (such as their application of MPLS meshed with the
backbones of L3 and Qwest and the last mile services of
Covad). LMKI can focus on support systems that use the
carrier's distributed intelligence and are developed faster
and leaner.
o LMKI changes its network with keystrokes rather than
forklifts. LMKI's business model optimizes network flexibility
due to strategic relationships with multiple carriers. This
allows LMKI to use the latest network and software
technologies focused on meeting the business plan. This
advantage over embedded network elements and operation support
systems cannot be overstated and is the key to successful
competition.
o LMKI's lowest cost strategy for small and medium- sized
businesses that need to compete with and survive against
larger companies.
o Partner Strength. Covad, Qwest and Level (3) partnerships give
LMKI the ability to deliver connectivity solutions faster and
at a lower cost than the competition.
o LMKI's impressive client base. Including Southern California
Automobile Association (CSAA) with approximately 300 DSL and
250 ISDN connections in a private network, Playboy with
streaming video, Xerox with a private network, and
CarsDirect.com with broadband web hosting.
o Integration. All of the different connectivity solutions and
custom applications development can be seamlessly integrated.
o Automation. LMKI's Network Management tools are automated
which leads to less downtime, and lower labor costs.
o LMKI's customized customer approach and advanced
telecommunications technology.
o LMKI management's experience and knowledge and ability to
provide highest quality services.
o Success depends upon careful planning and the selection of
partners. LMKI can meet the customer's needs more efficiently
with entrenched procedures. This enables LMKI to excel at
customer service.
Innovative Products
IP Technology. The cutting edge technology in the telecommunications industry
moving forward to the future is based on the IP protocol. IP technology is able
to realize the convergence of traditional voice type applications plus current
and future data/Internet type applications. IP provides operational efficiency
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when managing a single platform that can carry any type of service application.
At an early stage, LMKI recognized this potential and deployed a worldwide IP
network. The Virtual Private Network (VPN), and Real Private Network (RPN),
qualify as Cisco Powered Networks, and are a major step in materializing
converged networks. The main focus of LMKI in deploying and managing the VPN and
RPN is to maintain and guarantee the highest quality and reliability standards.
The non-use of the public Internet, has given LMKI a competitive edge, therefore
we can ensure a better than Carrier Grade quality.
The Real Private Network service incorporates the speed, security and
versatility of DSL (Digital Subscriber Line) technology with the wide
geographical coverage of Qwest's and Level (3)'s fiber networks. By combining
multiple connectivity options with a homogenous, managed network, business
customers that do not yet have DSL available in their area can take advantage of
our RPN services through dedicated OC-n, T3, T1, ATM, frame relay, ISDN and dial
up connectivity services. Using these multiple technologies gives LMKI a
differential advantage over the competition. No competitor can offer the same
full service solution as LMKI. Other players can come in an offer a solution,
but at a much higher price, without the speed and reliability LMKI offers.
A Real Private Network is a unique service that securely links together each of
an organization's sites to create a private wide area network without touching
the Internet. By meshing together cutting edge technology such as, DSL, ISDN,
Frame Relay and Point to Point dedicated circuits, we deliver a cost-effective
alternative to deploying an internal network. Offering the features,
performance, and security that business information requires, a Real Private
Network includes pre-configured hardware, network management, and security
services, yet costs much less than traditional WAN solutions. Some of the main
benefits to LMKI's proprietary product:
o Offers the benefits of private networking without the burden
of network management, investment in Internet-access,
expensive hardware, and obsolete equipment.
o Optional mediated access to the public Internet in conjunction
with private site-to-site connectivity.
o Enables users to access files and applications from any
location on the Real Private Network as if the network were a
LAN; workers and workgroups anywhere can more efficiently
share information and collaborate on computer-based projects.
o Service guarantees assure the performance and reliability
needed for high priority information.
o Lets the client give customers and business partners
controlled access to their internal resources for strategic
and tactical advantage.
o Quickens the delivery of internal e-mail, file transfers, and
other internal traffic by avoiding the public Internet.
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Strategic Partnerships
LMKI has created strategic partnerships with Covad, Level (3), and Quest to be
the technological leader in the high speed Internet connectivity marketplace.
What makes LMKI so revolutionary is the backbone of our nationwide network has
been outsourced to nationwide carriers Qwest Communications International and
Level (3) Communications. LMKI was the first customer to collocate with Level
(3). By using Qwest's and Level (3)'s network infrastructure, we avoid all of
the costs and pitfalls of implementing our own infrastructure, yet we are able
to take advantage of the economies of scale and the redundancy that only
multi-billion dollar companies such as Qwest and Level (3) can afford. The
result: our network is faster, and can be re-tooled, re-configured and tuned to
match the changing needs of the market without the man-power overhead and
capital that our competition has to spend on their legacy networks. This keeps
LMKI growing and evolving as the market place changes, while the competition is
trying to gain ground on our previous accomplishments. We can focus our
resources on delivering value-added services and quality network access, rather
than on backbone technology that changes constantly.
Covad Communications Group is a packet-based Competitive Local Exchange Carrier
that provides high-speed digital communications services using Digital
Subscriber Line technology to LMKI's customers. Covad sells speed to users
hooked on LANs. Covad provides remote access to LANs and the Internet, with
speeds of up to 1.5 megabits per second (25 times faster than most modems).
Covad's use of existing copper phone lines allows it to offer lower rates and
24-hour local connectivity. Covad installs lines, configures equipment, and
designs networks in 22 regions. Other clients include Cisco Systems, Oracle, and
Sprint.
Level (3) Communications is a telecommunications & information services company
that plans to build an advanced, international facilities-based communications
network based on Internet Protocol (IP) technology. It is building an
international fiber-optic network, in which entities, like Nextel and Nextlink,
are investing in return for network capacity. Level (3) offers local,
long-distance and Internet service over leased network capacity in 15 cities in
the US and two in Europe. It also offers computer operations outsourcing and
owns stakes in telecom providers RCN and Commonwealth Telephone Enterprises.
Qwest Communications International is a telecommunications based company that
encompasses an 18,800-mile fiber-optic network connecting approximately 500 US
cities, and 90 countries. Qwest offers local and long-distance telephone,
Internet, and multimedia services to businesses and consumers over its Internet
protocol-based network -- 12,500 miles of which are active. The #4 US
long-distance provider is also building networks to serve Mexico (1,400 miles)
and Europe (9,100 miles, in a joint venture with Dutch phone company KPN). Qwest
has network capacity on three transatlantic cables and is helping to construct a
transpacific cable. Qwest has merged with US WEST.
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Government Regulation
Telemarketing sales practices are regulated both federally, and at the state
level. The Federal Telephone Consumer Protection Act of 1991 (the TCPA)
prohibits telemarketing firms from imitating telephone solicitations to
residential telephone subscribers before 8:00 a.m. or after 9:00 p.m. local
time, and prohibits the use of automated telephone dialing equipment to call
certain telephone numbers. In addition, the TCPA requires telemarketing firms to
maintain a list of residential customers that have stated that they do not want
to receive telephone solicitations and, thereafter, to avoid making calls to
such customers' telephone numbers.
The federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994
(the TCFAPA) broadly authorizes the Federal Trade Commission (the FTC) to issue
regulations prohibiting misrepresentation in telemarketing sales. In August
1995, the e FTC issued new telemarketing sales rules. Generally, these rules
prohibit misrepresentation regarding the cost, terms, restrictions, performance,
or duration of products or services offered by telephone solicitation and
otherwise specifically address other perceived telemarketing abuses in the
offering of prizes and the sale of business opportunities or investments. The
Company trains its telephone service representatives to comply with the TCPA and
programs its call management system to avoid telephone calls during restricted
hours or to individuals maintained on the Company's "do not call" list.
A number of states have enacted or are considering legislation to regulate
telemarketing. For example, telephone sales in certain states cannot be final
unless a written contract is delivered to and signed by the buyer and may be
cancelled within three business days. Several states require telemarketers to
obtain licenses and post bonds. The Company does not process card payments for
any of its customers and does not currently operate in any states where these
requirements are imposed. From time to time, bills are introduced in Congress,
which, if enacted, would regulate the use of credit information. The Company
cannot predict whether this legislation will be enacted and what effect, if any,
it would have on the telemarketing industry.
The telephone industry is also subject to government regulation, primarily by
state public utility commissions. The Company relies on its clients and their
advisers to develop the scripts to be used by the Company in making consumer
solicitations. The Company has never been held responsible for regulatory
noncompliance.
Risks And Uncertainties
OUR EXTREMELY LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS AND PROSPECTS
We only recently began to market our major service, DSL lines. We began offering
commercial service in 1999. Accordingly, you have limited information about our
company with which to evaluate our business, strategies and performance and an
investment in our common stock.
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OUR RAPID GROWTH MAY STRAIN OUR OPERATIONS
Our rapid growth will continue to cause a significant strain on our managerial,
operational, financial and information systems resources. To accommodate our
increasing size and manage our growth, we must continue to implement and improve
these systems and expand, train and manage our employees. Although we are taking
steps to manage our growth effectively, we may not succeed. If we fail to
successfully manage our growth, our ability to maintain and increase our member
base will be impaired, and as a result, our business may suffer.
TECHNOLOGY TRENDS COULD RENDER OUR BANDWIDTH OR TECHNOLOGY OBSOLETE
Our products and services are targeted toward users of the Internet, which has
experienced rapid growth. The Internet services market is characterized by
rapidly changing technology, evolving industry standards; changes in member
needs and frequent new service and product introductions. Our future success
depends, in part, on our ability to use leading technologies effectively, to
develop our technical expertise, to enhance our existing services and to develop
new services that meet changing member needs on a timely and cost-effective
basis. In particular, we must provide subscribers with the appropriate products,
services and guidance to best take advantage of the rapidly evolving Internet.
Our failure to respond in a timely and effective manner to new and evolving
technologies (such as those offering greater bandwidth services, among others)
could have a negative impact on our business and financial results.
We cannot assure that we will be successful in responding to changing technology
or market trends. In addition, services or technologies developed by others may
render our services or technologies uncompetitive or obsolete. Furthermore,
changes to our services in response to market demand may require the adoption of
new technologies that could likewise render many of our assets technologically
uncompetitive or obsolete. As we accept bandwidth from IXC and our other
existing global network suppliers or acquire bandwidth or equipment from other
suppliers that may better meet our needs than existing bandwidth or equipment,
many of our assets could be determined to be obsolete or excess. The disposition
of obsolete or excess assets could have a material adverse effect on our
business, financial condition and results of operations.
Even if we do respond successfully to technological advances and emerging
industry standards, the integration of new technology may require substantial
time and expense, and we cannot assure you that we will succeed in adapting our
network infrastructure in a timely and cost-effective manner.
Our business may also be affected by problems caused by computer viruses,
security breaches and other inappropriate uses of our network (e.g., email
"spamming"). Alleviating these problems may cause interruptions, delays or
cessation in service to our members, which could cause them to terminate their
membership or assert claims against us.
OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF THE INTERNET
Our future success substantially depends on continued growth in the use of the
Internet. Although we believe that Internet usage and popularity will continue
to grow as it has in the past, we cannot be certain that this growth will
continue or that it will continue in its present form. If Internet usage
declines or evolves away from our business, our growth will slow or stop and our
financial results will suffer.
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WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
We rely on traditional telecommunications carriers to transmit our traffic over
local and long distance networks. These networks may experience disruptions that
are not easily remedied. In addition, we depend on certain suppliers of hardware
and software. If our suppliers fail to provide us with network services,
equipment or software in the quantities, at the quality levels or at the times
we require, or if we cannot develop alternative sources of supply, it will be
difficult, if not impossible, for us to provide our services.
Our failure to develop and maintain good relationships with marketing partners
in a local service market could adversely affect our ability to obtain and
retain customers in that market.
In addition to marketing through our direct sales force, we rely on
relationships with local marketing partners, such as integrators of computer
systems and networks and consultants. These partners recommend our services to
their clients, provide us with referrals and help us build a local presence in
each market. We may not be able to identify, and maintain good relationships
with, quality marketing partners or assure you that they will recommend our
services rather than our competitors' services to their customers. Our failure
to identify, and maintain good relationships with, quality marketing partners
could have a material adverse effect on our ability to obtain and retain
customers in a market and, as a result, our business would suffer.
OTHER TECHNOLOGIES FOR THE HIGH-SPEED INTERNET CONNECTIVITY MARKET WILL COMPETE
WITH OUR SERVICES
Our services are competing with a variety of different high-speed Internet
connectivity technologies, including cable modem, satellite and other wireless
technologies. Many of these technologies will compete effectively with our
services. If any technology competing with our technology is more reliable,
faster, less expensive, reaches more customers or has other advantages over DSL
technology, then the demand for our products and services and our revenues and
gross margins may decrease.
YEAR 2000 RISK MAY ADVERSELY AFFECT OUR COMPANY
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We utilize software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. For example, we are dependent on the institutions involved in
processing our members' credit card payments for Internet services. We are also
dependent on telecommunications vendors and leased POP vendors to maintain
network reliability.
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We have assessed our proprietary software and internal systems and determined
them to be year 2000 compliant. We anticipate that our systems, including
components thereof provided by third-party vendors, will be year 2000 compliant
by 2000. The failure of our software and computing systems and of our
third-party vendors to be year 2000 compliant could have a material adverse
effect on us.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
We have funded operations primarily through operating funds, private and public
sales of equity securities, borrowings from third parties and capitalized
leases. Our capital requirements depend on numerous factors, including the rate
of market acceptance of our services, our ability to maintain and expand our
member base, the rate of expansion of our network infrastructure and potential
acquisitions. We cannot accurately predict the timing and amount of our capital
requirements. If our capital requirements vary materially from our plans, we may
require additional financing sooner than anticipated. We have no commitments for
any additional financing other than a $25 million (increasing to $100 million
over a three year period) line of credit from Qwest Communications, Inc. Any
additional equity financing may be dilutive to our stockholders, and debt
financing, if available, may involve restrictions on our financing and operating
activities. If we are unable to obtain additional financing as needed, we may be
required to reduce the scope of our operations or anticipated expansion.
RELIANCE UPON OPERATING MANAGEMENT
Our success is dependent substantially upon the efforts of certain key
personnel. No person should purchase the securities offered herein unless they
are willing to entrust all aspects of the Company to those persons. The loss of
any of such key personnel could adversely affect our business and prospects. We
may not be able to replace or add to such key personnel.
OUR GROWTH AND EXPANSION MAY STRAIN OUR ABILITY TO MANAGE OUR OPERATIONS AND OUR
FINANCIAL RESOURCES
Our rapid growth has placed a strain on our administrative, operational and
financial resources and has increased demands on our systems and controls. We
cannot assure that our existing operating and financial control systems and
infrastructure will be adequate to maintain and effectively monitor future
growth. Our continued growth may also increase our need for qualified personnel.
We cannot assure that we will be successful in attracting, integrating and
retaining such personnel.
We face risks associated with our acquisitions of bandwidth from network
suppliers, including our strategic alliances with Covad Communications Group,
Inc. and Qwest Communications International, Inc. relating to our dependence on
their ability to satisfy their obligations to us, the possibility that we may
need to incur significant expenses to utilize bandwidth and their ability to
build-out their networks under construction that could adversely affect our
ability to utilize acquired bandwidth
We are subject to a variety of risks relating to our recent acquisitions of
fiber-based telecommunications bandwidth from our various global network
suppliers, including our strategic alliance with IXC Communications Inc., and
the delivery, operation and maintenance of such bandwidth. Such risks include,
among other things, the following:
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o the risk that financial, legal, technical and/or other matters
may adversely affect such suppliers' ability to perform their
respective operation, maintenance and other services relating
to such bandwidth, which may adversely affect our use of such
bandwidth;
o the risk that we will not have access to sufficient additional
capital and/or financing on satisfactory terms to enable us to
make the necessary capital expenditures to take full advantage
of such bandwidth;
o the risk that such suppliers may not continue to have the
necessary financial resources to enable them to complete, or
may otherwise elect not to complete, their contemplated
build-out of their respective fiber optic telecommunications
systems; and
o the risk that such build-out may be delayed or otherwise
adversely affected by presently unforeseeable legal, technical
and/or other factors.
We cannot assure that we will be successful in overcoming these risks or any
other problems encountered in connection with our acquisitions of bandwidth.
FLUCTUATIONS IN OPERATING RESULTS
Our operating results could vary from period to period as a result of our
inability to increase continuously its number of subscribers. An economic
recession, downturn in consumer optimism or other factors may trigger an
economic environment that could negatively influence potential customers and may
affect the sales effort of the Company.
WE FACE A HIGH LEVEL OF COMPETITION IN THE COMMUNICATION SERVICES INDUSTRY
The market for high bandwidth communications connectivity and related services
is extremely competitive. We anticipate that competition will continue to
intensify as the use of the Internet grows. The tremendous growth and potential
market size of the Internet access market has attracted many new start-ups as
well as established businesses from different industries.
Our current and prospective competitors include other national, regional and
local ISPs, long distance and local exchange telecommunications companies, cable
television, direct broadcast satellite, wireless communications providers and
on-line service providers. We believe that our network, products and customer
service distinguish us from these competitors. However, some of these
competitors have significantly greater market presence, brand recognition and
financial, technical and personnel resources than we do.
We compete with all of the major long distance companies, also known as
inter-exchange carriers, including AT&T, MCIWorldCom, Sprint and Cable &
Wireless/IMCI, which also offer Internet access services. The recent sweeping
reforms in the federal regulation of the telecommunications industry have
created greater opportunities for local exchange carriers, including the
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regional Bell operating companies, to enter the Internet connectivity market. We
believe that there is a move toward horizontal integration through acquisitions
of, joint ventures with, and the wholesale purchase of connectivity from ISPs to
address the Internet connectivity requirements of the current business customers
of long distance and local carriers. The WorldCom/MFS/UUNet consolidation, the
WorldCom/MCI merger, the ICG/NETCOM merger, Cable & Wireless' purchase of the
Internet MCI assets, the Intermedia/DIGEX merger, GTE's acquisition of BBN,
Global Crossing's recently announced plans to acquire Frontier Corp. (and
Frontier's prior acquisition of Global Center), Qwest Communication's recently
announced plans to acquire US West and AT&T's purchase of IBM's global
communications network are indicative of this trend. Accordingly, we expect to
experience increased competition from the traditional telecommunications
carriers. Many of these telecommunications carriers may have the ability to
bundle Internet access with basic local and long distance telecommunications
services. This bundling of services may have an adverse effect on our ability to
compete effectively with the telecommunications providers and may result in
pricing pressure on us that could have a material adverse effect on our
business, financial condition and results of operations.
Many of the major cable companies have announced that they are exploring the
possibility of offering Internet connectivity, relying on the viability of cable
modems and economical upgrades to their networks. Several announcements also
have recently been made by other alternative service companies approaching the
high bandwidth connectivity market with various wireless terrestrial and
satellite-based service technologies.
The predominant on-line service providers, including America Online and
Microsoft Network, have all entered the Internet access business by engineering
their current proprietary networks to include Internet access capabilities. We
compete to a lesser extent with these on-line service providers. However,
America Online's acquisition of Netscape Communications Corporation and related
strategic alliance with Sun Microsystems will enable it to offer a broader array
of Internet protocol-based services and products that could significantly
enhance its ability to appeal to the business marketplace and, as a result,
compete more directly with us.
Recently, there have been several announcements regarding the planned deployment
of broadband services for high speed Internet access by cable and telephone
companies. These services would include new technologies such as cable modems
and xDSL. These providers have initially targeted the residential consumer.
However, it is likely that their target markets will expand to encompass
business customers, which is our target market. This expansion could adversely
affect the pricing of our service offerings. Moreover, there has recently been
introduced a number of free ISP services, particularly in non-U.S. markets, and
some ISPs are offering free personal computers to their subscribers. These
trends could have a material adverse effect on our business, financial condition
and results of operations.
As a result of the increase in the number of competitors and the vertical and
horizontal integration in the industry, we currently encounter and expect to
continue to encounter significant pricing pressure and other competition.
Advances in technology as well as changes in the marketplace and the regulatory
environment are constantly occurring, and we cannot predict the effect that
ongoing or future developments may have on us or on the pricing of our products
and services. Increased price or other competition could result in erosion of
our market share and could have a material adverse effect on our business,
financial condition and results of operations. We cannot assure you that we will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
13
<PAGE>
GOVERNMENT REGULATION
Our services are subject to federal, state and local regulation and changes in
laws or regulations could adversely affect the way we operate our business.
The facilities we use and the services we offer are subject to varying degrees
of regulation at the federal, state and/or local levels. Changes in applicable
laws or regulations could, among other things, increase our costs, restrict our
access to the central offices of the traditional telephone companies, or
restrict our ability to provide our services. For example, the 1996
Telecommunications Act, which, among other things, requires traditional
telephone companies to un-bundle network elements and to allow competitors to
locate their equipment in the telephone companies' central offices, is the
subject of ongoing proceedings at the federal and state levels, litigation in
federal and state courts, and legislation in federal and state legislatures. In
addition, FCC rules governing pricing standards for access to the networks of
the traditional telephone companies are currently being challenged in federal
court. We cannot predict the outcome of the various proceedings, litigation and
legislation or whether or to what extent these proceedings, litigation and
legislation may adversely affect our business and operations. In addition,
decisions by the FCC and state telecommunications regulators will determine some
of the terms of our relationships with traditional telecommunications carriers,
including the terms and prices of interconnection agreements, and access fees
and surcharges on gross revenue from interstate and intrastate services. State
telecommunications regulators determine whether and on what terms we will be
authorized to operate as a competitive local exchange carrier in their state. In
addition, local municipalities may require us to obtain various permits, which
could increase the cost of services or delay development of our network. Future
federal, state and local regulations and legislation may be less favorable to us
than current regulations and legislation and may adversely affect our businesses
and operations.
We provide Internet services through data transmissions over public telephone
lines and cable networks. These transmissions are governed by the Federal
Communications Commission (the "FCC"). As an Internet access provider, we are
not subject to direct regulation by the FCC or any other governmental agency,
other than regulations applicable to businesses generally. However, we could
become subject to FCC or other regulatory agency regulation especially as
Internet services and telecommunication services converge. Changes in the
regulatory environment could decrease our revenues and increase our costs.
Subsidiaries
The Company has three wholly owned subsidiaries: Landmark Communications, Inc.,
a Nevada corporation doing business as Landmark Long Distance Inc. in the State
of California; S.T.M. Communication, Inc., a California corporation; and
MobileNetics, Inc., a California corporation.
14
<PAGE>
Employees
The company has 50 employees, including 4 in executive management, 4 in
administration, 5 in operations, and 37 in marketing. The Company considers its
employee relations to be good.
Item 2. Description of Property.
The Company leases approximately 5,000 square feet of commercial office space at
1720 East Garry Avenue, Suite 201, Santa Ana, California 92705. The monthly rent
is approximately $5,000 on a one-year lease, which expires in November 1999, at
which time the Company may continue to rent the space on a month to month basis.
The Company is currently looking in for new space to accommodate its rapid
growth. The anticipated space required is 25,000 square feet which its expects
to pay between $1.20 to $2.00 per square foot, depending upon what services are
included. The Company foresees no problem in obtaining such space.
Item 3. Legal Proceedings.
S.T.M. Communications, Inc., a subsidiary of our Company, filed a voluntary
petition under Chapter 11 of the Bankruptcy Code on December 16, 1996, which was
subsequently converted to a liquidation under Chapter 7 of the Bankruptcy Code.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock has been traded in the over-the-counter market since
1995. It is currently traded in the over-the-counter market and is quoted on the
OTC Electronic Bulletin Board (symbol "LMKI") maintained by NASDAQ. The market
for the Company's Common Stock has often been sporadic and limited.
The following table sets forth the high and low bid prices for the Company's
common stock as reported by NASDAQ during the past two years and current year.
The prices reflect interdealer quotations, without retail markup, markdown or
commissions and may not represent actual transactions.
Quarter Ended High Bid Low Bid
- ------------- -------- -------
8/31/96 4.125 4.0
11/30/96 3.875 3.344
2/28/97 1.25 0.063
5/31/97 0.132 0.063
8/31/97 0.125 0.063
11/30/97 0.063 0.01
2/28/98 0.0625 0.03125
5/31/98 0.03125 0.03125
8/31/98 0.03125 0.03125
11/28/99 0.03125 0.03125
2/29/99 0.09 0.02
5/31/99 1.00 0.05
8/31/99 9.125 0.4375
15
<PAGE>
As of August 31, 1999 the closing bid price of the Company's common shares was
$4.875. As of August 31, 1999, there were 428 registered holders of record of
the Company's shares.
No dividends have been declared with respect to the Company's common shares
since inception. The Company is not likely to pay any dividends in the
foreseeable future. The Company intends to reinvest any earnings in its
operations.
The transfer agent for the Company's securities is Nevada Agency and Trust
Company, 50 West Liberty, Suite 880, Reno, Nevada 89501, 775-322-0626.
Item 6. Management's Discussion and Analysis of Financial Condition of
Operation.
Results of Operations.
FORWARD LOOKING STATEMENTS. The words "may," "will," "expect," "anticipate,"
"believe," "continue," "estimate," "project," "intend," and similar expressions
used in this annual report on Form 10-KSB are intended to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. You should
also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. Should any of these risks or
uncertainties materialize, or should any of our assumptions prove incorrect,
actual results may differ materially from those included within the
forward-looking statements.
The Company's operating results have fluctuated in the past due to on again off
again GTE sales promotions. As of January of 1999 LMKI canceled its contract
with GTE and focused all of its attention on its DSL and broadband business.
Since the Company started selling T-1 services last year it has been working
closely with MobileNetics, Inc. ("MobileNetics") and, as of June 1, 1999, LMKI
purchased all of the outstanding stock of MobileNetics. The management and
employees of MobileNetics provided the needed technical expertise to further its
goal in being a leader DSL and broadband market. LMKI has also formed strategic
partnerships with Covad, Level (3) and Quest, to bring high speed Internet
connectivity to the marketplace. These partnerships' provide LMKI with a
nation-wide foot print in which the Company plans to aggressively market its
products.
LMKI has created strategic partnerships with Covad, Level (3) and Qwest to be
the technological leader in the high speed Internet connectivity marketplace.
The Company plans to leverage these partnerships and others in order to become a
nation-wide provider of DSL and broadband services.
16
<PAGE>
In connection with our expansion in to a nation-wide provider, we expect to
significantly increase our capital expenditures, as well our sales and marketing
expenditures, to deploy our networks and support our customers. Accordingly, we
expect to incur substantial losses for at least the next two years.
Revenue
During the last half FYE August 31, 1999, LMKI entered the DSL and broadband
Internet market and increased its sales from $397,363 in 1998 to $1,598,076, a
302% increase. Two thirds of the sales were booked in the last quarter. This
increase is attributable to the switch to the DSL and broadband business, the
rapid growth in customers in both Los Angeles/Orange metro and San Francisco Bay
areas. We expect revenues to increase in future periods as we expand our network
within existing regions, and enter in to new regions and increase our sales and
marketing efforts in all of our target markets.
Cost of Sales.
We recorded network and product costs of $52,001 for the year ended August 31,
1998 and $922,589 for the year ended August 31, 1999. This increase is
attributable to the expansion of our DSL and broadband network services and
increased orders resulting from our sales and marketing efforts. We expect
network and product costs to increase significantly in future periods due to the
increased sales activity and expected revenue growth.
Sales, Marketing, General and Administrative Expenses
Sales, marketing, general and administrative expenses consist primarily of
salaries, expenses for the development of our business, the development of
corporate identification, promotional and advertising costs, expenses for the
establishment of our management team, and sales commissions. These expenses
increased from $391,038 for the fiscal year ended August 31, 1998 to $1,580,862
for the fiscal year ended August 31, 1999. This increase is attributable to the
growth in headcount in all areas of our Company as we expanded our sales and
marketing efforts, expanded our networks and broadband capabilities, and built
our operating infrastructure. Sales, marketing, general and administrative
expenses also increased due to non-cash compensation expenses and goodwill as
discussed below. Sales, marketing, general and administrative expenses are
expected to increase significantly as we continue to expand our business.
The Company accounts for stock based compensation under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"). SFAS 123 defines a fair value based
method of accounting for stock based compensation. However, SFAS 123 allows an
entity to continue to measure compensation cost related to stock and stock
options issued to employees using the intrinsic method of accounting prescribed
by Accounting Principals Board Opinion No. 25 ("APB 25"), "Accounting for Stock
issued to Employees." Entities electing to remain with the accounting method of
APB 25 must make pro forma disclosures of net income and earnings per share, as
if the fair value method of accounting defined in SFAS 123 had been applied. The
Company has elected to account for its stock based compensation to employees
under APB 25. Accordingly, we have recorded compensation and service expense
related to the granting of stock options in 1999 and 1998 totaling $235,099 and
$40,000, respectively. Such expense has been included in general and
administrative expenses.
17
<PAGE>
In June of 1999, we recorded intangible assets of $3,022,062 in the issuance of
common stock for the acquisition of MobileNetics. Annual amortization of this
asset will be approximately $605,000 in each of the next five fiscal years.
Amortization included in general and administrative expenses during 1999 totaled
$151,103.
Financial Condition
To date, the Company has satisfied its cash requirements primarily through the
debt financings, capitalized lease financings and loans from its principal
stockholder. The Company's principal uses of cash are to fund working capital
requirements and capital expenditures, to service its capital lease and debt
financing obligations, and to finance and fund acquisitions. Net cash used by
operations for the year ended August 31, 1999 was approximately $626,970 and the
cash used by operations for the year ended August 31, 1998 was approximately
$40,925. Cash used for operating activities in the year ending August 31, 1999
was primarily affected by the net loss from operations and the increase of
accounts receivable as the company was expanding its market share and improving
its infrastructure.
Net cash provided by investing activities for the years ended August 31, 1999
and 1998 was approximately $3,512 and $9,858, respectively.
Net cash provided by financing activities for the years ended August 31, 1999
and 1998 was approximately $745,378 and $29,431. The primary source of financing
for 1999 was from the Company's principal stockholder.
The net cash increase for the year ended August 31, 1999 was $3,772 as compared
to a net cash increase for the year ended August 31, 1998 of $5,408.
At August 31, 1999, the Company had cash and cash equivalents of $125,692, and a
working capital deficit of $217,061. The Company anticipates that it will
require additional financing on a continuing basis. The Company will be required
to raise such additional funds through public or private financing, capital
lease and debt financing, strategic relationships or other arrangements. We
cannot assure you that such additional funding, if needed, will be available on
terms attractive to the Company, or at all.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of normal business activities. The Company has reviewed its products
and services, as well as its internal management information systems in order to
identify and modify those products, services and systems that are not year 2000
compliant.
Based on the Company's assessment to date, the Company has determined that its
internally developed software, including all of its operational, financial and
management information systems software are year 2000 compliant.
18
<PAGE>
The Company's operational, financial and management information systems software
which have not been internally developed have been certified as year 2000
compliant by the third party vendors who have supplied the software.
The equipment and software that runs the Company's data centers are supplied by
Microsoft, Cisco Systems, and Intel Corporation. The Company has implemented
software patches supplied by Microsoft so that the Microsoft software in these
data centers no longer contains any material year 2000 deficiencies. The Company
implemented similar patches for the software supplied by Cisco Systems at the
end of 1998. LMKI is building a new communications network, and, as such, LMKI
does not have a technology infrastructure comprised of legacy software and
systems. In building its communications network, LMKI has adopted a strategy to
select technology vendors and suppliers that provide products that are
represented by such vendors and suppliers to be Year 2000 Ready. In negotiating
its vendor and supplier contracts, LMKI secures Year 2000 representations and
warranties that address the Year 2000 Readiness of the applicable product(s). To
date, LMKI has exclusively used equipment from Cisco Systems within our network
backbone, and Customer Premises Equipment (CPE) from both Cisco Systems and
Flowpoint / Cabletron. Both companies have provided LMKI with sufficient Year
2000 readiness information and test results for the equipment that we have
purchased from these vendors. LMKI has tested and validated the Year 2000
Readiness of the LMKI Network and select external systems, products, and
facilities that are essential components in LMKI's delivery of the Services by
engaging in a product delivery system tests. These system tests have been
performed in a controlled, defined laboratory environment utilizing procedures
to replicate the end-to-end delivery of Services. The Company does not
separately track internal costs incurred to assess and remedy deficiencies
related to the year 2000 problem, however, such costs are principally the
payroll costs for its information systems group. The Company does not have and
is not developing a contingency plan in the event its systems fail as a result
of year 2000 related problems.
However, despite testing by the Company and its vendors, the Company's products,
services and systems may contain undetected errors or defects associated with
year 2000 date functions. In the event any material errors or defects are not
detected and fixed or third parties cannot timely provide the Company with
products, services or systems that meet the year 2000 requirements, the
Company's operating results could be materially adversely affected. Known or
unknown errors or defects that affect the operation of the Company's products,
services or systems could result in delay or loss of revenue, interruption of
network services, cancellation of customer contracts, diversion of development
resources, damage to the Company's reputation, and litigation costs. There can
be no assurance that these or other factors relating to year 2000 compliance
issues will not have a material adverse effect on the Company's business,
operating results or financial condition.
Item 7. Financial Statements.
The financial statements required by this item begin immediately following the
exhibit pages of this report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
19
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with 16(a) of the Exchange Act.
Name Age Title
- ---- --- -----
William J. Kettle 69 Chief Executive Officer, Chairman, Director
Bryan Turbow 31 President, Chief Technical Officer, Director
Adela Maria Kettle 53 Vice President, Director
John W. Diehl, Jr. 45 Chief Financial Officer, Secretary, Director
William J. Kettle has been our Chief Executive Officer and a Director since
October 1994. He became Chairman in June 1999 after stepping down as President,
a position he had held since October 1994. He served as President and Chairman
of Thrifty-Tel, Inc. from 1988 until August 1994. Thrifty was engaged in the
business of providing discount long distance telephone services. From 1981 to
1985, Mr. Kettle served as Secretary, Treasurer and was a director of Sierra
College in Los Angeles, California. From 1972 to 1981 he was President of Bauder
College in Sacramento, California.
Bryan L. Turbow has been our President and Chief Technical Officer since we
merged with MobileNetics Corporation in June 1999. He became a Director in
October 1999. In June 1986, Mr. Turbow founded MobileNetics and was its
president and sole stockholder until it merged with the company. While at
MobileNetics he was responsible for telecommunications consulting and systems
integration.
Adela Maria Kettle has been our Vice President since September 1994. >From 1986
through August 1994, she was Executive Vice President of Sales and Marketing at
Thrifty-Tel, Inc. From 1981 to 1985, she served as Vice President of Sales and
Marketing at Sierra College in Los Angeles, California. From 1970 to 1981 she
was employed at Bauder College in Sacramento, California, where she was Vice
President of Sales and Marketing.
John W. Diehl, Jr. has been our Chief Financial Officer and Secretary since June
1999. He was an independent accounting and tax consultant to the company from
September 1994 to June, 1999. Mr. Diehl, a Certified Public Accountant, has ten
years of public accounting experience. He had his own practice for six years
after serving as Director of Internal Audit for Memorial Health Services, Long
Beach for ten years. He holds a B.S. in Business Administration with an emphasis
in Accounting from the California State University at Northridge, and a Masters
in Business Administration from the University of La Verne.
Compliance with 16(a) of the Exchange Act. Federal securities laws require the
Company's directors, certain of its officers, and persons owning beneficially
more than ten percent (10%) of a registered class of the Company's equity
securities, to file initial reports of ownership and reports of changes in
ownership with the Commission. The Company is required to disclose any failure
20
<PAGE>
of persons, who at any time during the fiscal year, were directors, officers
required to report, or more than ten percent (10%) beneficial owners, to file
timely those reports during the fiscal year. The Company undertakes the
responsibility to file all required reports on behalf of its directors and
officers. To the Company's knowledge, based solely upon information furnished to
the Company by its directors and certain of its officers, during the fiscal year
ended August 31, 1999, the following Company directors, officers required to
report, and greater than ten percent (10%) beneficial owners did not make all
such filings on a timely basis: John Diehl as to Form 5 pertaining to the
acquisition of common stock listed in Item 10 and 11, Adela Maria Kettle as to
Form 4 pertaining to the disposition of common shares listed in Item 11, William
Kettle as to Form 4 pertaining to the acquisition of common shares and options
listed in Item 10 and 11, Bryan Turbow as to Form 5 pertaining to his
acquisition of common stock listed in Item 11 in connection with the Company's
acquisition of MobileNetics.
In August 1994, William J. Kettle, the Chief Executive Officer and Chairman of
the Board of Directors, and Adela Maria Kettle, Vice President and Director of
the Company (and spouse of Mr. Kettle), filed a petition for personal bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code. Such petition was dismissed in
September 1995.
In 1989, Thrifty-Tel, Inc., a provider of discount long distance telephone
service, filed a voluntary petition for bankruptcy under Chapter 11 of
Bankruptcy Code. Mr. Kettle was an officer and director of Thrifty-Tel, Inc. at
the time of such filing. In January 1992, such petition was dismissed upon
emotion of Thrifty-Tel, Inc. In August 1994, Mr. Kettle was terminated as an
officer and removed as a director of Thrifty-Tel, Inc. In October 1994,
Thrifty-Tel, Inc. again filed a voluntary petition for bankruptcy under Chapter
11 of the Bankruptcy Code.
S.T.M. Communications, Inc., a subsidiary of our Company, filed a voluntary
petition under Chapter 11 of the Bankruptcy Code on December 16, 1996, which was
subsequently converted to a liquidation under Chapter 7 of the Bankruptcy Code.
Mr. Kettle is also the subject of several federal and state tax liens in an
aggregate amount of approximately $2.37 million arising from the alleged
non-payment of employee withholding and payroll taxes by Sierra College from
1985 and by Thrifty-Tel, Inc. from 1994. Mr. Kettle disputes liability for such
non-payment and is currently in negotiations with the Internal Revenue Service
to resolve or reduce such liens.
21
<PAGE>
Item 10. Executive Compensation.
Summary Compensation
The following table provides information concerning the compensation of the
named executive officers for each of the Company's last three completed fiscal
years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual
Compensation Long Term Compensation
-----------------------------------------------------------------------------------------------------
Awards Payouts
------------------------------------------------------
Restricted Securities All
Other Annual Stock Underlying LTIP Other
Name and Principal Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Position (a) Year (b) ($)(c) ($)(d) ($) (e) ($) (f) (#) (g) ($) (h) ($) (i)
- -------------------------- ---------- ---------- -------- --------------- -------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William J. Kettle 1999 $0 $64,000 (1) 3,000,000 (2)
Chairman, Chief 1998 $0 $40,000 (3) 4,000,000 (4)
Executive Officer 1997 $0
Bryan L. Turbow 1999 $36,174 $4,020 (6)
President, Chief 1998 $0
Technical Officer 1997 $0
Adela Maria Kettle, 1999 $47,977
Vice President 1998 $33,099
1997 $0
John W. Diehl, Jr. 1999 $0 $41,300 (5) $6,200 (7) 500,000 (8)
Chief Financial Officer, 1998 $0 $ 3,800 (5)
Secretary 1997 $0 $ 7,950 (5)
</TABLE>
(1) Award granted as of December 28, 1998 for 4,000,000 restricted
common shares, valued at $64,000.
(2) Option granted as of December 28, 1998 for 3,000,000
restricted common shares, exercisable at $.031, per share.
(3) Award granted as of December 28, 1997 for 4,000,000 restricted
common shares, valued at $40,000.
(4) Option granted as of December 28, 1997 for 4,000,000
restricted common shares, exercisable at $.01 per share.
(5) Payment as an independent consultant.
(6) Other employee benefits.
(7) Award granted at December 28, 1998 for 200,000 restricted
common shares, value at $6,200.
(8) Option granted at December 28, 1998 for 500,000 restricted
common shares, exercisable at $.031 per share.
22
<PAGE>
Option/SAR Grants
The following table shows information regarding grants of stock options in this
last completed fiscal year to the executive officers named in the Summary
Compensation Table.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
Individual Grants
% of Total
Number of Securities Options/SARs Granted
Underlying Options/SARs to Employees in Fiscal Exercise or Base
Expiration Name (a) Granted (#)(b) Year (c) Price ($/SH) (d) Date (e)
- ------------------------ ------------------------- ------------------------ ------------------ -----------
<S> <C> <C> <C> <C>
William J. Kettle 4,000,000 67% $.031 12-28-2003
John W. Diehl, Jr. 500,000 33% $.031 12-28-2003
</TABLE>
Aggregated option/SAR exercises and fiscal year-end option/SAR Value
The following table shows information concerning each exercise of stock options
(or tandem SARs) and freestanding SARs during the last completed fiscal year by
each of the executive officers named in the Summary Compensation Table and the
fiscal year-end value of unexercised options and SARs.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options/SAR's at In-The-Money Options/ SAR's at
FY-End (#) FY-End ($)
Shares ------------------------------- ------------------------------
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Kettle 0 $0 7,000,000 0 $34,426,000 $0
John W. Diehl, Jr. 0 $0 500,000 0 $ 2,453,000 $0
</TABLE>
(1) Option/SAR Values are based on exercise prices ranging from $.01 to
$.031 per share and the August 31, 1999 closing bid price of $4.937 per
share.
Long-Term Incentive Plans
The Company had an incentive plan adopted December 5, 1996 that granted 20,000
shares of common stock to each employee with the understanding that if they quit
or are fired with cause within two years they will surrender their stock back to
the company or the Company will have the right to cancel those shares
unilaterally. A total of 540,000 shares were issued under this plan.
23
<PAGE>
There was no compensation paid in the last fiscal year for services as a
director of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of the latest fiscal year end, the stock
ownership of each named executive officer, directors, all executive officers and
directors of the Company as a group, and of each person known by the Company to
be a beneficial owner of 5% or more of its Common Stock. As of the date of the
table, the Company had 36,115,666 common shares and 4,000 series A convertible
preferred shares outstanding. Except as otherwise noted, each person listed
below is the sole beneficial owner of the shares and has sole investment and
voting power of such shares. No person listed below has any option, warrant or
other right to acquire additional securities of the Company except as otherwise
noted.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- ---------------- -------------------- ----------------
William J. Kettle (1)(2) 21,320,000 49.4%
Bryan L. Turbow (1)(3) 12,000,000 33.2
A. Maria Kettle (1)(3) 14,350,000 39.7
John W. Diehl, Jr. (1)(4) 700,000 1.9
Robert C. Weaver (1)(5) 600,000 1.6
Named Officers and Directors
As a Group (5 persons) 34,620,000 78.5%
- --------------------
(1) Officer or Director.
(2) Includes 4,000,000 shares issuable upon exercise of options to purchase
common stock at an exercise price of $0.01 per share and 3,000,000
shares issuable upon exercise of options to purchase common stock at
$0.031 per share. Also includes 7,020,000 beneficially owned by A.
Maria Kettle or the Chapman Group, a revocable trust established by
Mrs. Kettle for her benefit, of which Mr. Kettle disclaims any
beneficial ownership.
(3) Includes 7,000,000 shares beneficially owned by the Chapman Group, a
revocable trust of which Ms. Kettle is the beneficiary. Also includes
7,330,000 shares of common stock beneficially owned by William J.
Kettle, of which Mrs. Kettle disclaims beneficial ownership.
(4) Includes options granted to Mr. Diehl on December 28, 1998 for 500,000
restricted common shares, exercisable at $.031 per share and which vest
immediately.
(5) Includes options granted to Mr. Weaver on December 28, 1998 for 500,000
restricted common shares, exercisable at $.031 per share and which vest
immediately.
24
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Adela Maria Kettle is the wife of William J. Kettle.
During fiscal year 1999, the principal stockholder and Chairman, William J.
Kettle, advanced $797,680 to the Company for working capital purposes. The notes
payable bear interest at 10% per annum. The notes are repayable upon demand in
cash. The Company intends to request Mr. Kettle to exchange his notes for common
stock of the Company. Mr. Kettle has agreed not to demand repayment before
November 11, 2000.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibit Table.
2.1 Merger Agreement - Acquisition of MobileNetics Corporation
(Incorporated by reference to Exhibit 2 of Form 10-QSB for the quarter
ended May 31, 1999)
3.1 Articles Of Incorporation (2)
3.2 By-Laws (2)
10.1 Agreement For Payment Of Tax Obligations (3)
10.2 Equipment Lease Agreement (3)
10.3 Investment Banking Agreement. (Incorporated by reference to Exhibit
10.3 of Form 10-QSB for the quarter ended May 31, 1999)
10.4 Options Outstanding (1)
10.5 Form of Note Payable to William J. Kettle (4)
23 Consent Of Expert (1)
24 Power Of Attorney (1)
27 Financial Data Schedule (*)
- --------------------
* Filed herewith.
(1) Previously filed in the original registration statement on Form 10-KSB.
(2) Previously filed in the original registration statement Form 10-SB.
(3) Previously filed in Form 10-KSB for the fiscal year ended August 31,
1998.
(4) Previously filed with Form 10-QSB for the fiscal quarter ended February
29, 2000.
(b) Reports on Form 8-K filed during the quarter ended August 31, 1999.
None.
25
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
For the three years in the period ended August 31, 1999
Index to Consolidated Financial Statements
Page
----
Consolidated Financial Statements:
Report of Independent Auditors.....................................F-2
Balance sheets.....................................................F-3
Statements of operations...........................................F-4
Statements of changes in stockholders' equity......................F-5
Statements of cash flows...........................................F-6
Notes to consolidated financial statements..................F-7 - F-20
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
LMKI, Inc.
We have audited the accompanying consolidated balance sheets of LMKI, Inc.
(formerly Landmark International, Inc.) as of August 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended August 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LMKI, Inc. (formerly
Landmark International, Inc.) as of August 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended August 31, 1999, in accordance with generally accepted accounting
principles.
/s/ TIMOTHY L. STEERS
-----------------------
Timothy L. Steers, CPA, LLC
Portland, Oregon
November 10, 1999, except for Note 10,
as to which date is February 29, 2000.
F-2
<PAGE>
<TABLE>
LMKI, INC.
(formerly Landmark International, Inc.)
Consolidated Balance Sheets
<CAPTION>
August 31
-----------------------------------
1999 1998
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 125,692 $ 3,772
Accounts receivable 837,850 98,352
--------------- ---------------
Total current assets 963,542 102,124
Equipment less accumulated depreciation and
amortization of $40,482 in 1999 ($3,897 in 1998) 262,067 143,161
Other assets:
Goodwill, less accumulated amortization of
$151,103 in 1999 2,870,959 -
Deposits 35,725 -
--------------- ---------------
2,906,684 -
--------------- ---------------
$ 4,132,293 $ 245,285
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 999,319 $ 81,089
Accrued payroll and related liabilities 133,749 8,089
Accrued interest to majority stockholder 3,112 -
Other accrued liabilities 7,133 2,000
Capitalized lease obligations due within one year 37,290 39,182
--------------- ---------------
Total liabilities 1,180,603 130,360
Capitalized lease obligations 55,275 79,7778
Notes payable to majority stockholder 797,680 -
--------------- ---------------
Total liabilities 2,033,558 210,138
--------------- ---------------
Commitments
Stockholders' equity:
Common stock, $.001; shares authorized
50,000,000, shares issued and
outstanding 36,115,666 in 1999
(19,986,666 in 1998) 36,116 19,987
Additional paid-in capital 3,089,125 115,155
Retained deficit (1,026,506) (99,995)
--------------- ---------------
Total stockholders' equity 2,098,735 35,147
--------------- ---------------
$ 4,132,293 $ 245,285
=============== ===============
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
LMKI, INC.
(formerly Landmark International, Inc.)
Consolidated Statements of Operations
<CAPTION>
Years ended August 31,
--------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Sales $ 1,598,076 $ 397,363 $ 285,200
Cost of sales 922,589 52,001 -
--------------- --------------- ---------------
Gross profit 675,487 345,362 285,200
Selling expense 111,903 130,050 159,751
General and administrative expenses 1,468,959 260,988 192,800
--------------- --------------- ---------------
Loss from operations (905,375) (45,676) (67,351)
Interest (income) expense, net 18,736 5,843 (46)
--------------- --------------- ---------------
Loss before provision for income taxes (924,111) (51,519) (67,305)
Provision for income taxes 2,400 2,300 800
--------------- --------------- ---------------
Net loss $ (926,511) $ (53,819) $ (68,105)
=============== =============== ===============
Net loss per common share $ (.04) $ (.00) $ (.01)
=============== =============== ===============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
LMKI, INC.
(formerly Landmark International, Inc.)
Consolidated Statements of Changes in Stockholders Equity
For the period from September 1, 1996 through August 31, 1999
<CAPTION>
Common stock Additional Retained Total
------------------------- paid-in equity stockholders'
Shares Amount capital (deficit) equity
------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1996 11,366,666 $ 11,367 $ 37,375 $ 21,929 $ 70,671
Shares issued in exchange
for services 540,000 540 4,860 - 5,400
Net loss - - - (68,105) (68,105)
------------- ----------- ----------- --------------- ---------------
Balance at August 31, 1997 11,906,666 11,907 42,235 (46,176) 7,966
Shares issued in exchange
for equipment 4,000,000 4,000 36,200 - 40,200
Shares issued in exchange
for services 4,080,000 4,080 36,720 - 40,800
Net loss - - - (53,819) (53,819)
------------- ----------- ----------- --------------- ---------------
Balance at August 31, 1998 19,986,666 19,987 115,155 (99,995) 35,819
Shares issued in exchange
for service 5,129,000 5,129 229,970 - 235,099
Shares issued in exchange
for software 1,000,000 1,000 89,000 - 90,000
Shares issued for purchase
of MobileNetics
Corporation 10,000,000 10,000 2,645,000 - 2,655,000
Fair value of options
granted to legal counsel - - 10,000 - 10,000
Net loss - - - (926,511) (926,511)
------------- ----------- ----------- --------------- ---------------
Balance at August 31, 1999 36,115,666 $ 36,116 $3,089,125 $ (1,026,506) $ 2,098,735
============= =========== =========== =============== ===============
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
LMKI, INC.
(formerly Landmark International, Inc.)
Consolidated Statements of Cash Flows
<CAPTION>
Years ended August 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Sales $ (926,522) $ (53,819) $ (68,105)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 36,585 3,897 5,400
Amortization of goodwill 151,103 - -
Services exchanged for common stock 235,099 40,800 5,400
Options issued in exchange for legal services 10,000 - -
Changes in assets and liabilities, net of
effects of purchase of MobileNetics
Corporation:
Accounts receivable (676,509) (59,738) 77,971
Accounts payable 412,588 64,031 -
Accrued payroll related liabilities 125,660 2,000 -
Accrued interest to shareholder 3,112 - -
Other accrued liabilities 1,903 1,904 -
--------------- --------------- ---------------
(626,970) (925) 15,266
--------------- --------------- ---------------
Cash flows from investing activities:
Decrease in advances - 9,858 (9,858)
Cash acquired in acquisition of MobileNetics
Corporation 3,512 - -
--------------- --------------- ---------------
3,512 9,858 (9,858)
--------------- --------------- ---------------
Cash flows from financing activities:
Repayments of capitalized lease obligations (52,302) (10,769) -
Proceeds from common stock - 200 -
Proceeds from notes payable to shareholder 797,680 - -
--------------- --------------- ---------------
745,378 (10,569) -
--------------- --------------- ---------------
Net increase (decrease in cash) 121,920 (1,636) 5,408
Cash at beginning of year 3,772 5,408 5,408
--------------- --------------- ---------------
Cash at end of year $ 125,692 $ 3,772 $ 5,408
=============== =============== ===============
Supplemental disclosure of cash flow information-
Cash paid during the year for interest $ 15,624 $ 5,843 $ -
=============== =============== ===============
Supplemental disclosure on noncash investing and
financing activities:
Equipment acquired under capitalized lease
agreement $ 49,085 $ 129,729 $ -
=============== =============== ===============
Equipment acquired in exchange for common stock $ 90,000 $ - $ -
=============== =============== ===============
Common stock issued in exchange for purchase of
MobileNetics Corporation $ 2,655,000 $ - $ -
=============== =============== ===============
Common stock issued in exchange for services $ 235,099 $ 40,800 $ 5,400
=============== =============== ===============
</TABLE>
See accompanying notes.
F-6
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements
For the period September 1, 1996 through August 31, 1999
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
NATURE OF BUSINESS: LMKI, Inc. (formerly Landmark International, Inc.)
(the "Company" or "LMKI") is a Nevada Corporation engaged in providing
high-speed Internet access, data, voice and video streaming services to
individuals and businesses.
BASIS OF CONSOLIDATION: The consolidated financial statements include
the accounts of LMKI, Inc. and its wholly-owned subsidiaries
MobileNetics Corporation ("MobileNetics") and Landmark Communications,
Inc. All intercompany accounts and transactions have been eliminated.
EQUIPMENT: Equipment is carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
depreciable assets, which range from three to seven years.
Equipment under capitalized lease obligations are carried at estimated
fair market value determined at the inception of the lease.
Amortization is computed using the straight-line method over the
original term of the lease or the estimated useful lives of the assets,
whichever is shorter.
GOODWILL: Goodwill represents the excess purchase price over the
estimated fair value of the net assets of MobileNetics. Goodwill is
being amortized using the straight-line method over five years.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company assesses the
recoverability of long-lived assets by determining whether the
depreciation and amortization of the asset's balance over its remaining
life can be recovered through projected undiscounted future cash flows.
The amount of impairment, if any, is measured based on fair value and
charged to operations in the period in which the impairment is
determined by management. Management has determined that there is no
impairment of long-lived assets as of August 31, 1999 and 1998.
REVENUE RECOGNITION: Fees for high-speed internet access, data, voice
and video services and application development and systems management
services are recognized as services are provided.
STOCK BASED COMPENSATION: The Company accounts for stock based
compensation under Statement of Financial Accounting Standards No. 123
("SFAS 123"). SFAS 123 defines a fair value based method of accounting
for stock based compensation. However, SFAS 123 allows an entity to
continue to measure compensation cost related to stock and stock
options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock issued to Employees". Entities electing to remain
with the accounting method of APB 25 must make pro forma
F-7
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
(CONTINUED)
-----------
disclosures of net income and earnings per share, as if the fair value
method of accounting defined in SFAS 123 had been applied. The Company
has elected to account for its stock based compensation to employees
under APB 25 (see Note 6).
ADVERTISING: The Company expenses the cost of advertising as incurred
as selling expenses. Advertising expenses was approximately $10,500 for
1999 ($2,000 for 1998; $3,300 for 1997).
INCOME TAXES: Income taxes are provided on the liability method whereby
deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases and
reported amounts of assets and liabilities. Deferred tax assets and
liabilities are computed using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. The Company provides a
valuation allowance for certain deferred tax assets, if it is more
likely than not that the Company will not realize tax assets through
future operations.
NET LOSS PER COMMON SHARE: Net loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding
during the period. The weighted average number of common stock shares
outstanding was 26,241,335 for 1999 (15,809,222 for 1998; 11,764,166
for 1997). Stock options and warrants outstanding are not considered
common stock equivalents, as the affect on net loss per share would be
anti-dilutive.
CONCENTRATION RISK: The Company grants credit to customers in the State
of California. The Company's ability to collect receivables is affected
by economic fluctuations in the geographic areas served by the Company.
RISKS AND UNCERTAINTIES: The process of preparing financial statements
in conformity with generally accepted accounting principles requires
the use of estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Management of the Company has made
certain estimates and assumptions regarding the collectibility of
accounts receivable. Such estimates and assumptions primarily relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
SEGMENT REPORTING: The Company adopted SFAS No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information,"
during fiscal 1999. SFAS 131 establishes standards for the way that
public companies report information about operating segments and
F-8
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
(CONTINUED)
-----------
related disclosures about product and services, geographic areas and
major customers in annual consolidated financial statements. The
Company views its operations and manages its business as principally
one segment.
2. BUSINESS COMBINATION
--------------------
Effective June 1, 1999, LMKI, Inc. acquired MobileNetics, a supplier of
communications equipment, in a business combination accounted for as a
purchase. MobileNetics is a provider of communications consulting and
systems integration services that primarily involve Internet and
network solutions. It services a diverse base of customers that are
located primarily in California. Prior to the business combination, the
principal stockholder of MobileNetics was a stockholder of the Company
and MobileNetics provided communication equipment to the Company under
a capitalized lease agreement (see Note 7). The Company issued
10,000,000 shares of its common stock in exchange for all of the
outstanding shares of MobileNetics. The shares issued for MobileNetics
were valued at $2,655,000 ($0.2655 per share), which represented 50% of
the closing bid price of the Company's common stock on the date of
issuance. Management of the Company estimated the value of the
Company's shares exchanged after considering the historical trend of
the trading prices for its' common stock and the limited volume of
shares being traded.
The acquisition of MobileNetics can be summarized as follows:
Assets acquired $ 141,810
Liabilities assumed (508,872)
------------
Fair value of net assets acquired (367,062)
Fair value of consideration tendered 2,655,000
------------
Goodwill acquired in acquisition $ 3,022,062
============
The results of operations of MobileNetics are included in the
accompanying consolidated financial statements as of June 1, 1999. The
following pro forma summary presents consolidated financial position
F-9
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
2. BUSINESS COMBINATION (CONTINUED)
--------------------------------
and results of operations as if MobileNetics had been acquired as of
the beginning of LMKI's 1999 and 1998 fiscal years:
August 31
----------------------------------
1999 1998
-------------- ---------------
Tangible current assets $ 963,500 $ 181,500
Total assets 3,679,000 2,524,600
Current liabilities 1,154,000 240,100
Total liabilities 2,033,600 332,500
Total stockholders' equity 1,672,019 2,192,000
Years ended August 31
----------------------------------
1999 1998
-------------- ---------------
Net sales $ 2,433,400 $ 911,900
Net loss (1,284,500) (519,600)
Loss per common share (.038) (.018)
The above amounts are based upon certain assumptions and estimates,
which the Company believes are reasonable. The pro forma financial
position and results of operations do not purport to be indicative of
the results which would have been obtained had the business combination
occurred as of September 1, 1997 or which may be obtained in the
future.
3. CAPITALIZED LEASE OBLIGATIONS:
-----------------------------
The Company leases equipment under non-cancelable lease agreements.
Equipment under lease agreements aggregated at August 31, 1999 $107,540
($129,929 in 1998) less accumulated amortization at August 31, 1999 of
$18,042 ($3,443 in 1998).
Aggregate future minimum lease payments and the present value of
minimum lease payments are as follows:
YEARS ENDING AUGUST 31:
-----------------------
2000 $ 59,873
2001 40,097
2002 18,064
----------
Total minimum lease payments 118,034
Less amount representing interest (at annual
interest rates ranging from 14.1% to 28.9%) 25,469
----------
Present value of minimum lease payments 92,565
Less amounts due within one year 37,290
----------
Long-term capitalized lease obligations $ 55,275
==========
F-10
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
4. NOTES PAYABLE TO MAJORITY STOCKHOLDER
-------------------------------------
During 1999, the majority stockholder and chairman of the Company,
advanced an aggregate of $797,680 for working capital purposes. The
notes payable bear interest at 10% per annum. The stockholder was paid
approximately $4,900 in interest during 1999.
The notes are repayable upon demand in cash. The Company intends to
request the chairman to exchange his notes for common stock of the
Company. The chairman has agreed not to demand repayment before
November 11, 2000.
5. INCOME TAXES
------------
The components of the provision for income taxes are as follows for the
years ended August 31:
1999 1998 1997
------------ ------------ ------------
Federal:
Current $ - $ - $ -
Deferred - - -
------------ ------------ ------------
- 1,500 -
------------ ------------ ------------
State of California:
Current 2,400 800 800
Deferred - - -
------------ ------------ ------------
2,400 800 800
------------ ------------ ------------
Provision for income taxes $ 2,400 $ 2,300 $ 800
============ ============ ============
A reconciliation of income taxes computed at the federal statutory rat
of 34% to the provision for income taxes is as follows for the years
ended August 31:
1999 1998 1997
------------ ------------ ------------
Tax at statutory rates $ (314,198) $ (17,518) $ (23,156)
Differences resulting from:
State taxes 2,400 800 800
Non-deductible and other
items 4,798 1,518 56
Change in allowance for
deferred tax assets 309,400 17,500 23,100
------------ ------------ ------------
Provision for income taxes $ 2,400 $ 2,300 $ 800
============ ============ ============
F-11
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
5. INCOME TAXES (CONTINUED)
------------------------
Net deferred income taxes are as follows as of August 31:
1999 1998
------------ ------------
Deferred tax assets:
Net operating losses $ 317,500 $ 50,900
Amortization of goodwill 42,800 -
Less allowance for deferred tax assets (360,300) (50,900)
------------ ------------
Net deferred income taxes $ - $ -
============ ============
The Company has approximately $750,000 in federal net operating losses
which, if not utilized, expire through 2018. The Company has
approximately $375,000 in State of California net operating losses,
which if not utilized, expire through 2004.
The utilization of the net operating loss carry-forwards could be
limited due to restrictions imposed under federal and state laws upon a
change in ownership. The amount of the limitation, if any, has not been
determined at this time. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax
assets will not be realized. As a result of the Company's continued
losses and uncertainties surrounding the realization of the net
operating loss carry-forwards, management has determined that the
realization of deferred tax assets is not more likely than not.
Accordingly, a valuation allowance equal to the net deferred tax asset
amount has been recorded as of December 31, 1999.
6. STOCK OPTIONS
-------------
On December 28, 1997, the Company granted an option to its chairman to
acquire 4,000,000 shares of common stock at an exercise price of $.01
per share. The closing price of the Company's common stock was $.062 at
the date of grant. The exercise price represented an 84% discount from
such closing price. Management determined that the exercise price
approximated the fair value of the Company's common stock at the date
of grant. Management of the Company estimated the value of the
Company's shares at the date of grant based on the historical trend of
the trading prices for its' common stock and the limited volume of
shares being traded. Such option vested immediately and expires five
years from the date of grant.
On December 28, 1998, the Company granted an option to its chairman to
acquire 3,000,000 shares of common stock at an exercise price of $.031
per share. the closing price of the Company's common stock was $.031 at
the date of grant. The exercise price represented no discount from such
closing price. Such option vested immediately and expires five years
form the date of grant.
F-12
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
6. STOCK OPTIONS (CONTINUED)
-------------------------
On December 28, 1998, the Company granted an option to its chief
financial officer to acquire 500,000 shares of common stock at an
exercise price of $.031 per share. The closing price of the Company's
common stock was $.031 at the date of grant. The exercise price
represented no discount from such closing price. Such option vested
immediately and expires five years form the date of grant.
On December 28, 1998, the Company granted an option to its legal
counsel to acquire 500,000 shares of common stock at an exercise price
of $.031 per share. The closing price of the Company's common stock was
$.031 at the date of grant. Management determined the fair value of the
option granted utilizing the Black-Scholes option price model.
Management of the Company assigned a value of $.02 per option. As such
the Company recorded services expense totaling $10,000 during the year
ended August 31, 1999. Such option vested immediately and expires five
years from the date of grant.
The following table summarizes stock option activity as of August 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at beginning of year 4,000,000 - -
Options granted 4,000,000 4,000,000 -
Options expired or canceled - - -
Options exercised - - -
--------------- --------------- ---------------
Outstanding at end of year 8,000,000 4,000,000 -
=============== =============== ===============
Weighted average price per share $ .02 $ .01 $ -
=============== =============== ===============
Options exercisable at end of year 8,000,000 4,000,000 -
=============== =============== ===============
Average fair market value of options granted $ .02 $ .06 $ -
=============== =============== ===============
</TABLE>
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
SFAS 123. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions for the years ended August 31: risk free
interest rate of 5.77% for 1999 (4.45% for 1998); no dividend yield for
1999 or 1998; expected life of the options of 5 years for 1999 and
1998; and volatility factor of the expected market price of the
Company's common stock of 286% for 1999 (365% for 1998).
The Black-Scholes option valuation model was developed for use in
estimating he fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require that input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
F-13
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
6. STOCK OPTIONS (CONTINUED)
-------------------------
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options vesting period.
Adjustments are made for options forfeited prior to vesting. The effect
on compensation expense, net loss, and net loss per common share had
compensation costs for the Company's stock option plans been determined
based on a fair value at the date of grant consistent with the
provisions of SFAS 123, are as follows:
<TABLE>
<CAPTION>
Years ended August 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss, as reported $ (926,511) $ (53,819) $ (68,105)
Adjustment to compensation expense under
SFAS 123 70,000 240,000 -
--------------- --------------- ---------------
Net loss, pro forma $ (996,511) $ (293,819) $ (68,105)
=============== =============== ===============
Net loss per common and common equivalent
share, as reported $ (.04) $ (.00) $ (.01)
=============== =============== ===============
Net loss per common and common equivalent
share, pro forma $ (.04) $ (.02) $ (.01)
=============== =============== ===============
</TABLE>
7. COMMON STOCK
------------
The Company issued 10,000,000 shares in connection with its acquisition
of MobileNetics (see Note 2).
In December 1996, the Board of Directors authorized the issuance of
20,000 shares of common stock to each employee of the Company at that
time. The shares were to be surrendered back to the Company in the
event that any employee who received shares terminated their employment
with the Company, or was terminated by the Company for cause. The
Company issued an aggregate of 540,000 shares of its common stock to
these employees. Management of the Company valued the share grants at
$.01 per share, which represented a 99.6% discount from the closing bid
price of the Company's common stock at the date of grant. Management of
the Company estimated the value of the Company's shares granted after
considering the historical trend of the trading prices for its common
stock and the limited volume of shares being traded. The Company
recorded compensation expense totaling $5,400 during the year ended
August 31, 1997 as a result of these grants.
In December 1997, the Board of Directors authorized the issuance of
4,000,000 shares of common stock to the Chairman of the Company in
exchange for compensation and the issuance of 80,000 shares of common
F-14
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
7. COMMON STOCK (CONTINUED)
------------------------
stock in exchange public relation services. Management of the Company
valued the shares grants at $.062 per share, which represented an 83.8%
discount from the closing bid price of the Company's common stock at
the date of grant. Management of the Company estimated the value of the
Company's shares granted after considering the historical trend of the
trading prices for its common stock and the limited volume of shares
being traded. The Company recorded compensation and services expense
totaling $40,000 and $800, respectively, during the year ended August
31, 1998 as a result of these grants.
In May 1998, the Company issued 4,000,000 shares of common stock to two
suppliers in exchange for $200 and a communications equipment lease.
Management of the Company valued the shares grants at $.075 per share,
which represented an 86.7% discount from the closing bid price of the
Company's common stock at the date of grant. Management of the Company
estimated the value of the Company's shares granted after considering
the historical trend of the trading prices for its common stock and the
limited volume of shares being traded. The Company recorded capitalized
lease costs totaling $40,200 during the year ended August 31, 1998 as a
result of these grants.
In December 1998, the Board of Directors authorized the issuance of
4,000,000 shares of common stock to the Chairman of the Company in
exchange for compensation and 500,000 shares of common stock to two
individuals in exchange for professional services. Management of the
Company valued the shares granted to its chairman at $.015 per share,
which represented a 50.0% discount from the closing bid price of the
Company's common stock at the date of issuance. Management of the
Company valued the grants to its service providers at $.031 per share,
which represented no discount from the closing bid price of the
Company's common stock at the date of grant. Management of the Company
estimated the value of the Company's shares granted after considering
the historical trend of the trading prices for its common stock and the
limited volume of shares being traded. The Company recorded
compensation expense and service expense totaling $62,000 and $15,500,
respectively, during the year ended August 31, 1999 as a result of
these grants.
In March 1999, the Board of Directors authorized the issuance of
400,000 shares of common stock to two individuals in exchange for
professional services. Management of the Company valued the share grant
at $.09 per share, which represented no discount form the closing bid
price of the Company's common stock at the date of grant. The Company
recorded service expense totaling $36,000 during the year ended August
31, 1999 as a result of these grants.
Also in March 1999, the Company issued 1,000,000 shares of common stock
to a related party in exchange for communication software developed
specifically for the Company. Management of the Company valued the
shares grants at $.09 per share, which represented no discount form the
F-15
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
7. COMMON STOCK (CONTINUED)
------------------------
closing bid price of the Company's common stock at the date of grant.
The Company recorded capitalized software costs totaling $90,000 during
the year ended August 31, 1999 as a result of this grant.
In June 1999, the Board of Directors authorized the issuance of 229,000
shares of common stock to four employees in lieu of compensation and
one individual in exchange for professional services. Management of the
Company valued the share grants at $.531 per share, which represented
no discount from the closing bid price of the Company's common stock at
the date of grant. The Company recorded compensation expense and
service expense totaling $68,499 and $53,100, respectively, during the
year ended August 31, 1999 as a result of these grants.
8. COMMITMENTS
-----------
The Company leases certain equipment under non-cancelable operating
lease agreements that expire between the years 2001 and 2003. Aggregate
minimum future lease payments under these leases are as follows:
YEARS ENDING AUGUST 31:
-----------------------
2000 $ 63,490
2001 58,857
2002 6,644
2003 739
--------------
Total minimum lease payments $ 129,730
==============
Equipment lease expense and a month-to-month facility lease expense
aggregated approximately $80,700 for the year ended August 31, 1999
($12,000 for 1998; and $3,000 for 1997).
9. SIGNIFICANT CUSTOMER
--------------------
The Company has entered into a Dedicated Access Service Agreement
("Service Agreement") with a customer to provide them with
communication services through July 2000. The Service Agreement is
renewable for an additional one year. The customer accounted for
approximately 25% of net sales in 1999. Management does not believe
that the Company is economically dependent upon any single customer.
The Company's policy is to perform on-going credit evaluations of its
customers and generally does not require collateral. The Company
maintains reserves for potential credit losses and such losses have
been within management's expectations.
F-16
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
10. SUBSEQUENT EVENTS
-----------------
Investment agreement: In September 1999, the Company entered into an
irrevocable Investment Agreement for a "private equity line" of up to
$35,000,000. Under the Investment Agreement an investment banking
company has made a firm commitment to purchase the Company's common
stock and resale the securities in an offering under Regulation D of
the United States Securities and Exchange Commission.
Subject to an effective registration statement and ending 36 months
from the initial subscription date, the Company at its discretion may
"Put" common stock to the investment banking company. The purchase
price per share will equal 92% of the lowest closing bid price of the
common stock during the 20 business days following each Put, subject to
a minimum price specified by the Company as defined in the Investment
Agreement. The amount of each Put sold to the investment banking
company may be up to $2,000,000, but the number of shares sold may
generally not exceed 15% of the aggregate trading volume of the
Company's common stock during the 20 business days following each Put.
The investment banking company shall receive warrants to purchase 10%
of the number of shares of the Company it purchases under each Put. The
warrants are exercisable at a price equal to 110% of the market price
for each Put.
In consideration of the Investment Agreement, the Company granted the
investment banking company warrants to purchase 490,000 shares of its
common stock. The warrants are exercisable upon the successful
completion of certain tasks, as defined, and at a price equal to the
lowest closing bid price for the 5 days prior to the execution of the
Investment Agreement or the 5 days following its execution, whichever
price is lower. The Company has not valued the warrants as they vest
upon a contingent event.
PREFERRED STOCK ISSUANCES: In November 1999, the Company closed the
placement of 2500 shares of series A 6% convertible preferred stock,
$.001 par value (the "Series A Preferred Stock"), to one purchaser (the
"Purchaser") at a purchase price of $1,000 per share, for an aggregate
purchase price of $2,500,000, pursuant to a securities purchase
agreement (the "Purchase Agreement"). The Company entered into a
registration rights agreement and a warrant agreement. Concurrent with
the closing of the placement, the Company issued warrants to the
Purchaser for the purchase of 250,000 shares of the Company's common
stock at an exercise price of $4.25 per share, subject to customary
anti-dilution provisions, expiring on May 5, 2002. The Company also
issued warrants for the purchase of 49,844 shares of common stock to
the Placement Agent, exercisable at $4.0125 per share, expiring on
November 22, 2004. The Company also paid $222,000 in cash to the
Placement Agent for fees and costs associated with the Purchase
Agreement. In conjunction with the Purchase Agreement, the Company
valued the Purchaser and Placement Agent warrants utilizing the
Black-Scholes option pricing model. Management of the Company arrived
at a fair market value of $1,220,000 for the warrants.
F-17
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
10. SUBSEQUENT EVENTS (CONTINUED)
-----------------------------
In February 2000, the Company closed the placement of an additional
1500 shares of Series A Preferred Stock to the same Purchaser at a
purchase price of $1,000 per share, for an aggregate purchase price of
$1,500,000, pursuant to the Purchase Agreement. In conjunction with the
Purchase Agreement, the Company entered into a registration rights
agreement and a warrant agreement. Concurrent with the closing of the
placement, the Company issued warrants to the Purchaser for the
purchase of 150,000 shares of the Company's common stock at an exercise
price of $4.25 per share, subject to customary anti-dilution
provisions, expiring on February 28, 2002. The Company also incurred
$120,000 in cash to the same Placement Agent for fees and costs
associated with the Purchase Agreement. The Company also issued
warrants for the purchase of 8,275 shares of common stock to the
Placement Agent, exercisable at $14.50 per share, expiring on February
28, 2005. The Company valued the Purchaser and Placement Agent warrants
utilizing the Black-Scholes option pricing model. Management of the
Company arrived at a fair market value of $2,320,000 for the warrants.
The convertible feature of the Series A Preferred Stock provides for a
rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature". Pursuant to
EMERGING ISSUES TASK FORCE No. 98-5 ("EITF 98-5"), the Company has
valued such beneficial conversion feature for the first issuance of
Series A Preferred Stock in the amount of $1,560,000. Management of the
Company has determined the value of the beneficial conversion feature
of the second issuance of Series A Preferred Stock to be $3,794,118;
however, pursuant to EITF 98-5, in valuing the beneficial conversion
feature, it cannot exceed the face value of the related stock issuance.
As a result, the beneficial conversion feature for the second issuance
of Series A Preferred Stock has been valued at $1,500,000. In the
calculation of basic and diluted net loss per share, such beneficial
conversion features will increase the net loss allocable to common
stockholders.
BEST EFFORTS PRIVATE PLACEMENT: In January 2000, the Company entered
into a "best efforts" agreement with a private placement agent to raise
$10,000,000 through the sale of common stock. To date, no activity or
significant efforts have occurred with respect to such private
placement. The Company issued to the private placement agent warrants
to purchase 30,000 shares of common stock of the Company at a price of
$10.25 per share, expiring January 27, 2003. The Company valued the
private placement agent warrants utilizing the Black-Scholes option
pricing model. Management of the Company arrived at a fair market value
of $305,000 for the warrants.
OPTIONS ISSUED TO NON-EMPLOYEES: In November 1999, the Company granted
an option to purchase 200,000 shares of common stock of the Company at
a price of $4.53 per share to its prior external legal counsel. Such
counsel became a member of the Company's Board of Directors subsequent
to the date of grant. The option vests over a year period and expires
F-18
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
10. SUBSEQUENT EVENTS (CONTINUED)
-----------------------------
November 25, 2001. The closing price of the Company's common stock was
$4.53 at the date of grant. Management determined the fair value of the
option granted utilizing the Black-Scholes option pricing model.
Management of the Company assigned a value of $4.40 per option, for
consideration totaling $880,000.
In February 2000, the Company granted an option to purchase 25,000
shares of common stock of the Company at a price of $10.50 per share to
its new external legal counsel. The option vested immediately and
expires February 9, 2002. The closing price of the Company's common
stock was $10.50 at the date of grant. Management determined the fair
value of the option granted utilizing the Black-Scholes option pricing
model. Management of the Company assigned a value of $10.00 per option,
for consideration totaling $250,000.
In February 2000, the Company granted an option to purchase 17,932
share of common stock of the Company at a price of $12.54 per share to
a third party leasing company. The option vested immediately and
expires January 31, 2005. The closing price of the Company's common
stock was $10.87 at the date of grant. Management determined the fair
value of the option granted utilizing the Black-Scholes option pricing
model. Management of the Company assigned a value of $10.86 per option,
for consideration totaling $195,000.
OPTIONS ISSUED TO EMPLOYEES: From September 1, 1999 through February
29, 2000, the Company issued to employees options to purchase 1,536,760
shares of common stock of the Company. The options were granted at
exercise prices ranging from $4.00 to $15.00 per share. The weighted
average exercise price of such options was $7.83 per share. All of the
options were issued at exercise prices equal to the closing bid price
of the Company's common stock at the date of grant, except for 115,760
options which were granted with exercise price at $4.00 per share when
the market price was $4.531 per share. Of the options, 285,360 vested
immediately and have terms of two years, 600,000 vest over a one-year
period and have terms of two years, 560,400 vest over a two-year period
and have terms of three years, and 91,000 vest over a three-year period
and have terms of four years.
STOCK GRANTS: In January 2000, the Company granted 8,900 shares in
common stock to employees in lieu of compensation. The closing bid
price of the Company's common stock at the date of grant was $9.56 for
consideration totaling $85,000.
ACQUISITION: On December 6, 1999, the Company consummated its purchase
of Color Networks, Inc. The Company issued 75,000 shares of common
stock in consideration for 100% of the issued and outstanding shares of
common stock of Color Networks, Inc. The fair market value of the stock
issued was $8.00 per share, for consideration totaling $600,000. In
addition, the Company issued warrants to two non-employee owners of
Color Networks, Inc. to purchase 15,000 shares of common stock of the
F-19
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements (continued)
For the period September 1, 1996 through August 31, 1999
10. SUBSEQUENT EVENTS (CONTINUED)
-----------------------------
Company at an exercise price of $8.00 per share. The warrants vested
immediately and expire January 31, 2005. Management determined the fair
value of the option granted utilizing the Black-Scholes option pricing
model. Management of the Company assigned a value of $7.99 per option,
for consideration totaling $120,000.
LINE OF CREDIT: On February 15, 2000, the Company entered into a
$600,000 line of credit with a bank. The line of credit provides for
interest at prime plus 2.0% (10.75% at such date). The line of credit
is secured by substantially all the assets of the Company. The line
allows for the Company to draw up to $600,000 based upon eligible
collateral, as defined. The line matures on February 15, 2001.
F-20
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