<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended February 29, 2000
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
for the transition period from . . . . to . . . .
Commission file number 0-26578
LMKI, INC.
Exact name of small business issuer as specified in its charter)
Nevada 33-0662114
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3355 Michelson Drive, Suite 300, Irvine, CA 92612
(Address of principal executive offices) (Zip Code)
(949) 794-3000
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all the reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve 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
--- ---
As of February 29, 2000 the number of shares of common stock outstanding was
37,249,566.
Transitional Small Business Disclosure Format (check one): Yes ... No .X.
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
LMKI, INC. (formerly Landmark International Inc.)
Consolidated Balance Sheets
<CAPTION>
FEB. 29, AUG. 31,
-------- --------
2000 1999
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Cash $ 1,754,353 $ 125,692
Accounts receivable 1,401,311 837,850
----------------- -----------------
Total current assets 3,155,664 963,542
Equipment 3,681,228 302,549
Accumulated depreciation (143,065) (40,482)
----------------- -----------------
Net equipment 3,538,163 262,067
Goodwill, less accumulated amortization
of $302,206 in 2000 and $151,103 1999 3,840,625 2,870,959
Deposits 291,810 35,725
Other assets 330,903 -
----------------- -----------------
Total other assets 4,463,338 2,906,684
----------------- -----------------
Total assets $ 11,157,165 $ 4,132,293
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,324,829 $ 999,319
Line of credit 593,150 -
Accrued payroll and related liabilities 49,062 133,749
Other accrued liabilities 154,026 7,133
Accrued dividends payable 40,087 -
Accrued interest to stockholder 34,682 3,112
Capitalized lease obligations due
within one year 226,548 37,290
----------------- -----------------
Total current liabilities 4,422,384 1,180,603
Capitalized lease obligations, long term 554,668 55,275
Loans from stockholder 1,458,799 797,680
----------------- -----------------
Total liabilities 6,435,851 2,033,558
----------------- -----------------
Stockholders' equity
Preferred stock, Series A 6% convertible 4,000,000 -
10,000,000 authorized,
4,000 issued and outstanding;
liquidation preference of $4,000,000.
Common stock, $.001; shares authorized 37,250 36,116
50,000,000, shares issued and outstanding
totaling 37,249,566 (2000) and
36,115,666 (1999)
Paid in capital 7,268,111 3,089,125
Notes receivable from stockholders (509,100) -
Accumulated deficit (6,074,947) (1,026,506)
----------------- -----------------
Total stockholders' equity 4,721,314 2,098,735
----------------- -----------------
Total stockholders' equity
and liability $ 11,157,165 $ 4,132,293
================= =================
</TABLE>
See accompanying notes.
2
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<TABLE>
LMKI, INC. (formerly Landmark International, Inc.)
Consolidated Statements of Operations (Unaudited)
<CAPTION>
Three Months ended Feb. 29, Six Months ended Feb. 29,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 2,126,113 $ 197,508 $ 3,631,166 $ 238,389
Cost of sales 1,352,499 67,136 1,756,342 70,310
----------------- ----------------- ----------------- -----------------
Gross Profit 773,614 130,372 1,874,824 168,079
Selling expense 768,265 84,138 1,141,787 156,726
General and
administrative
expenses 1,813,573 81,434 2,566,538 106,897
----------------- ----------------- ----------------- -----------------
Loss from operations (1,808,224) (35,200) (1,833,500) (95,544)
Interest expense 88,370 3,867 114,853 5,885
----------------- ----------------- ----------------- -----------------
Loss before provision
for income taxes (1,896,593) (39,067) (1,948,353) (101,429)
Provision for
income taxes - - - -
----------------- ----------------- ----------------- -----------------
Net loss (1,896,593) (39,067) (1,948,353) (101,429)
Less:
Dividends accrued on
Preferred stock 40,087 - 40,087 -
Preferred stock
beneficial
conversion feature 1,500,000 - 3,060,000 -
----------------- ----------------- ----------------- -----------------
Net loss allocable to
common stockholders $ (3,436,680) $ (39,067) $ (5,048,440) $ (101,429)
================= ================= ================= =================
Basic and diluted
net loss per
common share $ (0.09) $ (0.00) $ (0.14) $ (0.00)
================= ================= ================= =================
Weighted average
shares outstanding 36,538,633 23,175,555 36,327,149 21,581,111
================= ================= ================= =================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
LMKI, INC. (formerly Landmark International, Inc.)
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months ended Feb. 29,
------------------------------------
Cash flows from operating activities: 2000 1999
---- ----
<S> <C> <C>
Net loss $ (1,948,353) $ (101,429)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 102,583 5,844
Amortization of goodwill 302,206 -
Options issued in exchange for services 267,818
Stock issued in exchange for services 85,102
Changes in operating assets and liabilities:
Accounts receivable (563,461) 68,346
Deposits (256,085)
Other assets (330,903)
Accounts payable 2,915,179 (9,056)
Accrued payroll and related liabilities (84,687) 11,115
Other accrued liabilities 150,374 -
Accrued interest to stockholder 31,570 -
----------------- -----------------
671,343 (25,180)
----------------- -----------------
Cash flows from investing activities:
Purchase of capital equipment (3,378,679) -
----------------- -----------------
(3,378,679) -
----------------- -----------------
Cash flows from financing activities:
Repayment of capitalized lease
obligation, net 16,778 (13,916)
Proceeds from common stock 40,000
Proceeds from preferred stock, net of
offering costs 3,658,100 -
Proceeds from notes payable to stockholder 661,119 -
----------------- -----------------
4,335,997 26,084
----------------- -----------------
Net increase in cash 1,628,661 904
Cash at beginning of periods 125,692 3,772
----------------- -----------------
Cash at end of periods $ 1,754,353 $ 4,676
================= =================
Supplemental cash flow disclosures:
Cash paid for interest $ 114,853 $ 5,885
================= =================
Cash paid for taxes $ - $ -
================= =================
</TABLE>
The company has entered into certain non-cash transactions which have been
reflected in the notes hereto.
See accompanying notes.
4
<PAGE>
LMKI, Inc.
(formerly Landmark International, Inc.)
Notes to Consolidated Financial Statements
For the six-months ending February 29, 2000 and 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 services to individuals and businesses.
BASIS OF PRESENTATIONS: The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and therefore do not include all information and notes necessary for
a fair presentation of financial position, results of operations, and cash flows
in conformity with generally accepted accounting principles. The unaudited
condensed consolidated financial statements include the accounts of LMKI, Inc.
and its wholly owned subsidiary Mobilenetics Corporation ("Mobilenetics"),
Landmark Communications, Inc. and Color Networks, Inc. ("Color Networks"). The
operating results for interim periods are unaudited and are not necessarily an
indication of the results to be expected for the full fiscal year. In the
opinion of management, the results of operations as reported for the interim
periods reflect all adjustments which are necessary for a fair presentation of
operating results. 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 and Color Networks. Goodwill is being
amortized using the straight-line method over five years.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company assess the recoverability of
long-lived assets by determining whether the depreciation and amortization of
the assets' 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 February 29, 2000 and August 31, 1999.
REVENUE RECOGNITION: Fees for high-speed Internet access, data, voice and video
services are recognized as services are provided.
STOCK BASED COMPENSATION: The Company accounts for stock based compensation
under Statement of Financial Accounting Standard 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 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 7).
5
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ADVERTISING: The Company expenses the cost of advertising as incurred as selling
expenses. Advertising expenses was approximately $58,000 for the six-months
ended February 29, 1999 ($898 for 1999).
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 provided a valuation
allowance for certain deferred tax assets. It is more likely than not that the
Company will not realize tax assets through future operations.
NET LOSS PER COMMON SHARE: Net loss available to common stockholders per share
is computed by dividing net loss by the weighted average number of common shares
outstanding during the period. Net loss has been increased for the effect of
accrued dividends to preferred stockholders and the effect of the preferred
stockholder beneficial conversion feature (Note 9). 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 materially from estimated amounts.
SEGMENT REPORTING: The Company adopted SFAS No. 131 ("SFAS"), "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 related disclosures about products 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.
6
<PAGE>
2. BUSINESS COMBINATIONS:
Effective June 1, 1999, LMKI, Inc. acquired Mobilenetics Corporation
("Mobilenetics"), 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 majority stockholder of Mobilenetics was a stockholder
of the Company and Mobilenetics provided communication equipment to the Company
under a capitalized lease agreement. 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 ($0.265 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:
Fair value Mobilenetics:
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 assigned to acquisition $3,022,062
===========
The results of operations of Mobilenetics are included in the accompanying
consolidated financial statements as of June 1, 1999.
On December 6, 1999, the Company consummated its purchase of Color Networks. 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. 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. to purchase 15,000 shares of common stock of the Company at an
exercise price of $8.00 per share. The warrants vested immediately and expire
December 5, 2004. Management determined the fair value of the option granted
utilizing the Black-Scholes option-pricing model. Management of the Company
assigned a value of $8.00 per option, for consideration totaling $120,000.
3. CAPITALIZED LEASE OBLIGATIONS:
The Company leases equipment under non-cancelable lease agreements. Equipment
under lease agreements aggregated at February 29, 2000 totaled $726,000, less
accumulated amortization of $37,000.
Aggregate future minimum lease payments and the present value of minimum lease
payments are as follows:
YEARS ENDING AUGUST 31:
- -----------------------
2000 $ 194,543
2001 415,605
2002 337,565
2003 62,935
-----------
Total minimum lease payments 1,010,648
less amount representing interest (at annual
interest rates ranging from 11.4% TO 27.1%) 229,432
-----------
Present value of minimum lease payments 781,216
Less amounts due within one year 226,548
-----------
Long-term capitalized lease obligations $ 554,668
===========
7
<PAGE>
4. NOTES PAYABLE TO STOCKHOLDER
For the six-months ended February 29, 2000, the principal stockholder and
Chairman of the Company advanced an aggregate of $661,119 for working capital
purposes. The notes payable to stockholder total $1,458,799 at February 29,
2000. The notes payable bear interest at 10% per annum. 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 30, 2000.
5. 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 an interest rate at prime plus 2% (10.75%
at such date). 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.
6. INCOME TAXES
The Company has incurred losses for both financial and tax reporting purposes
for all periods presented. As a result, the Company's provision for taxes
consists solely of minimum state taxes.
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 as of
August 31, 1999, which, if not utilized, expire through 2018. The Company has
$375,000 as of August 31, 1999 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 the 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 the periods presented.
7. STOCK OPTIONS AND WARRANTS
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.
8
<PAGE>
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 from the date of grant.
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 from 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-pricing 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.
On November 26, 1999, the Company granted options to members of senior
management to acquire 1,200,000 shares of common stock at an exercise price of
$4.531 per share. Subsequent to the grant, three members of senior management
voluntarily canceled 600,000 shares. The closing price of the Company's common
stock was $4.531 at the date of grant. The exercise price represented no
discount from such closing price. Such options vest over one year and expire two
years from the date of grant.
On November 26, 1999, the Company granted an option to purchase 200,000 shares
of common stock of the Company at a price of $4.531 per share to its prior
external legal counsel. Such legal 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 November 25, 2001. The closing price of the Company's common
stock was $4.531 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 shares 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.
9
<PAGE>
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 where 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 prices of $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 vests over a one-year period and have terms of two years,
560,400 vests over a two-year period and have terms of three years, 91,000 vests
over a three-year period and have terms of four years.
The following table summarizes stock option activity for the six-months ended
February 29, 2000:
2000
----
Options and warrants outstanding, Aug. 31, 1999 8,000,000
Options and warrants granted 3,372,811
Options and warrants expired or canceled (608,900)
Options and warrants exercised (1,050,000)
-----------
Outstanding, February 29, 2000 9,713,911
===========
Weighted average exercised price per share
of all options and warrants $ 1.77
===========
Options and warrants exercisable at Feb. 29, 2000 8,831,411
===========
Weighted average fair value of options and
warrants granted during the six-month period $ 1.27
===========
8. COMMON STOCK
The Company issued 10,000,000 shares in connection with its' acquisition of
Mobilenetics and 75,000 shares in connection with its' acquisition of Color
Networks (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.
10
<PAGE>
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 stock in exchange for
public relation services. Management of the Company valued the share 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 expense 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 share 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 grants at $.09 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 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 share grant at $.09 per share,
which represented no discount from the closing bid price of the Company's common
stock at the date of grant. The Company capitalized software costs totaling
$90,000 during the year ended August 31, 1999 as a result of this grant.
11
<PAGE>
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
service expense totaling $68,499 and $53,100, respectively, during the year
ended August 31, 1999 as a result of these 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.
9. PREFERRED STOCK
In November 1999, the Company closed the placement of 2,500 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.
In February 2000, the Company closed the placement of an additional 1,500 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 issued warrants for the purchase
of 8,275 shares of common stock to the same Placement Agent, exercisable at
$14.50 per share, expiring on February 28, 2005. The Company also incurred
$120,000 in expenses to the Placement Agent for fees and costs associated 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 $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 $5,294,000;
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 had been valued at $1,500,000. In the calculation of basic and diluted net
loss per share, such beneficial conversion features have increased the net loss
allocable to common stockholders.
12
<PAGE>
10. 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 of the 5 days following its
execution, whichever price is lower. The Company has not valued the warrants as
they vest upon a contingent event.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT: This discussion may contain statements that
could be deemed forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 and the Private Securities Litigation Reform
Act, which statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections, predictions,
expectations and beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by the
use of qualifying works (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgment of the Company and its management about future events.
Factors that could influence the accuracy of such forward-looking statements
include, but are not limited to, the financial success or changing strategies of
the Company's customers, actions of government regulators, the level of market
13
<PAGE>
interest rate and general economic conditions. All forward-looking statements
included herein are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. It is important to note that the Company's actual results could
differ materially from those in such forward-looking statements due to the
factors cited above. As a result of these factors, there can be no assurance the
Company will not experience material fluctuations in future operating results on
a quarterly or annual basis, which would materially and adversely affect the
Company's business, financial condition and results of operations.
RESULTS OF OPERATIONS
- ---------------------
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly, depending upon a variety of factors, including
the timely deployment and expansion of new network architectures, the incurrence
of related capital costs, variability and length of the sales cycle associated
with the Company's product and service offerings, the receipt of new value-added
network services and consumer services subscriptions and the introduction of new
services by the Company and its competitors. Additional factors that may
contribute to variability of operating results include: the pricing and mix of
services offered by the Company; customer retention rate; market acceptance of
new and enhanced versions of the Company's services; changes in pricing policies
by the Company's competitors; the Company's ability to obtain sufficient
supplies of sole or limited-source components; user demand for network and
Internet access services; balancing of network usage over a 24-hour period; the
ability to manage potential growth and expansion; the ability to identify,
acquire and integrate successfully suitable acquisition candidates; and charges
related to acquisitions. In response to competitive pressures, the Company may
take certain pricing or marketing actions that could have a material adverse
affect on the Company's business. As a result, variations in the timing and
amounts of revenue could have a material adverse affect on the Company's
quarterly operating results. Due to the foregoing factors, the Company believes
the period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. In the event that the Company's operating results in any
future period fall below the expectations of securities analysts and investors,
the trading price of the Company's common stock would likely decline.
REVENUE: Revenue totaled approximately $2,126,113 for the three-month period
ended February 29, 2000, a 976% increase over revenue of $197,508 for the
three-month period ended February 28, 1999. For the six-months ended February
29, 2000, net revenue was $3,631,166 compared to $238,389 for the same period
last year. These increases reflect the growth in revenue for exclusive selling
of DSL and T-1 services resulting from marketing arrangements with new strategic
partners, the continued growth derived from Internet access customers, and sale
of equipment to support network systems.
COST OF SALES: Cost of sales increased for the three-month period ended February
29, 2000 was approximately $1,352,499, an increase of 1,915% from $67,136 for
the three-month period ended February 28, 1999. For the six-months ended
February 29, 2000, cost of sales was $1,756,342 compared to $70,310 for the same
period last year. Cost of sales consists primarily of access charges from local
exchange carriers, backbone and Internet access costs, and the cost of customer
equipment to support network systems. The Company expects its cost of sales to
continue to increase in dollar amount, while declining as a percentage of
revenue as the Company expands its customer base.
14
<PAGE>
GROSS MARGIN: The gross margin for the three-month period ended February 29,
2000 was approximately $773,614 compared to $130,732 for the same period ended
February 29, 1999. For the six-months ended February 29, 2000, gross margin was
$1,874,824 compared to $168,079 for the same period last year. Gross margins for
the three-months ended February 29, 2000 and 1999 respectively were 36% and 66%.
For the six-month period ended February 29, 2000 and 1999, respectively, the
gross margins were 52% and 71%. These decreases were attributable to the
increased mix of our product services.
SALES EXPENSE: Sales expense consists primarily of personnel expenses, including
salary and commissions, and costs for customer support functions. Marketing and
sales expense was approximately $768,265 for the three-month period ended
February 29, 2000 and $84,138 for the three-month period ended February 28,
1999, which represents a 813% increase. For the six-months ended February 29,
2000 selling expense was $1,141,787 compared to $156,726 for the same period
last year, which represents a 629% increase. The increase reflects an expansion
of the direct sales organization necessary to support increased revenue volumes.
The Company expects sales expenditures to continue to increase in dollar amount,
but to decline as a percentage of revenue.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense consists
primarily of personnel expense, rent and professional fees. General and
administrative expense was approximately $1,813,573 for the three-month period
ended February 29, 2000 and $81,434 for the three-month period ended February
28, 1999, which represents a 21,270% increase. For the six-months ended February
29, 2000 these expenses were $2,566,538 compared to $106,897 for the same period
last year, which represents a 23,009% increase. This higher level of expense
reflects an increase in personnel and professional fees necessary to manage the
financial, legal and administrative aspects of the business. In addition, the
Company amortized goodwill relating to the June 1, 1999 acquisition of
Mobilenetics, for three-months ended February 29, 2000 totaling $151,103 and
$302,206 for the six-month period. The Company expects the general and
administrative expense to increase in dollar amount, reflecting the growth in
operations, but to decline as a percentage of revenue.
INTEREST EXPENSE: Interest expense was $88,370 for the three-months ended
February 29, 2000 and $3,867 for the three-months ended February 28, 1999. For
the six-months ended February 29, 2000 interest expense reflected $114,853
compared to $5,885 for the same period last year. The increase is related to new
leases of capital equipment, interest on the Company's line of credit and on
notes from the principal stockholder that advanced funds for working capital.
NET LOSS: The Company incurred a net loss for the three-month period ended
February 29, 2000 of $1,896,593 compared to $39,067 for the three-month period
ended February 28, 1999. For the six-month period ended February 29, 2000 the
net loss was $1,948,353 compared to $101,429 for the period ending February 29,
1999. We expect to focus in the near term on building and increasing our revenue
base, which will require us to significantly increase our expenses for
personnel, marketing, network infrastructure and the development of new
services, and may adversely impact our short term operating results. As a
result, we believe that we will incur losses in the near term and we cannot
assure you that the Company will be profitable in the future.
15
<PAGE>
FINANCIAL CONDITION
- -------------------
To date, we have satisfied our cash requirements primarily through debt and
equity financings and capitalized lease financings. In late November 1999, the
company received $2,278,100 from an equity placement. In late February 2000, the
Company received $1,500,000 from a second equity placement. The Company's
principal uses of cash are to fund working capital requirements, acquisition of
additional DSL lines and capital expenditures, and to service our capital lease
and debt financing obligations. Net cash provided by operations for the
six-month period ended February 29, 2000 and 1999 was approximately $671,343 and
($25,180), respectively. Cash provided by (used in) operating activities in the
period ending February 29, 2000 was primarily affected by the net loss from
operations and the increases of accounts receivable and accounts payable as we
were expanding our market share and improving our infrastructure.
Net cash used in investing activities for the six-month period ended February
29, 2000 was $3,378,679 for the purchase of equipment. No cash was either used
or provided by investing activities in the three-month period ending February
29, 2000. DSL routers located at client sites represented $550,000, Cisco
routers in support of broadband sales represented $1,486,000, computer software
and equipment for $1,229,000 and $114,000 was for miscellaneous equipment.
Net cash provided by financing activities for the period ending February 29,
2000 came from an increase in notes payable to officer of $661,119 and sale of
preferred stock for a net proceeds of $3,658,100. During November 1999, the
Company closed the placement of the initial tranche of 2,500 shares of Series A
6% Convertible Preferred Stock, $.001 par value (the "Series A Preferred
Stock"), to one purchaser (the "Purchaser") for an aggregate purchase price of
$2.5 million (less $221,900 placement fees and commissions). In February 2000,
the Company closed the placement of the second tranche of 1,500 shares of Series
A 6% Convertible Preferred Stock, $.001 par value, to one purchaser for an
aggregate purchase price of $1.5 million (less $120,000 placement fees and
commissions). Net cash used for financing activities for the six-month period
ending February 29, 2000 was for repayment and buy-out of capitalized leases
thereby reducing leasing expenses.
The net cash increase for the six-month period ended February 29, 2000 was
$1,628,661 as compared to the six-month period ended February 28, 1999 of $904.
Such increase came as a result of the events discussed above.
At February 29, 2000, we had cash and cash equivalents of approximately
$1,754,353, and negative working capital of $1,266,720.
The Company expects to satisfy its working capital needs for the foreseeable
future through additional debt and equity placements, and capital leases. There
can be no assurances that the Company will be successful in securing additional
financing, and if secured, it will be sufficient to satisfy working capital
needs for the foreseeable future.
16
<PAGE>
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. We have reviewed our products
and services, as well as our internal management information systems in order to
identify and modify those products, services and systems that are not year 2000
compliant.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Table:
10.5 Form of Note Payable to William J. Kettle
EX-27 Financial Data Schedule
(b) Form 8-K:
None
18
<PAGE>
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby authorizes
William J. Kettle, the agent for service named in this Report, with full power
to act alone, to file one or more amendments to this Report, which amendments
may make such changes in this Report as such agent for service deems
appropriate, and the Registrant and each such person hereby appoints such agent
for service as attorney-in-fact, with full power to act alone, to execute in the
name and in behalf of the Registrant and any such person, individually and in
each capacity stated below, any such amendments to this Report.
19
<PAGE>
[SIGNATURES]
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 11, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
LMKI, INC. (Registrant)
Signature Title Date
- --------- ----- ----
/s/ William J. Kettle Chairman, Director and April 11, 2000
- -------------------------------- Chief Executive Officer
William J. Kettle
/s/ John W. Diehl, Jr. Chief Financial Officer, April 11, 2000
- -------------------------------- Secretary (Principal
John W. Diehl, Jr. Accounting Officer)
20
PROMISSORY NOTE
$ _______________________
SANTA ANA, CALIFORNIA
Dated: __________________
Debtor: Landmark International, Inc.
Lender: William J. Kettle
1. NOTE. In consideration for a loan in the principal amount of $____________
the Debtor promises to pay to the order of Lender, the principal amount plus
interest thereon at the rate of ten percent per annum.
2. COLLECTION COSTS. Debtor agrees to pay the actual expenditures made in any
attempt to collect the amount due pursuant to this Note.
3. ATTORNEY'S FEES. Debtor agrees that if any legal action is necessary to
enforce or collect this Note, the prevailing party shall be entitled to
reasonable attorneys' fees in addition to any other relief to which that party
may be entitled. This provision shall be applicable to the entire Note.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
hereinabove.
DEBTOR: Landmark International, Inc.
By: ______________________________________
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the February
29, 2000 consolidated financial statements and is qualified in its entirety by
reference to such financial statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> FEB-29-2000
<EXCHANGE-RATE> 1
<CASH> 1,754,353
<SECURITIES> 0
<RECEIVABLES> 1,401,311
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,155,664
<PP&E> 3,681,228
<DEPRECIATION> (143,065)
<TOTAL-ASSETS> 11,157,165
<CURRENT-LIABILITIES> 4,422,384
<BONDS> 0
4,000,000
0
<COMMON> 37,250
<OTHER-SE> 684,064
<TOTAL-LIABILITY-AND-EQUITY> 11,157,165
<SALES> 3,631,166
<TOTAL-REVENUES> 3,631,166
<CGS> 1,756,342
<TOTAL-COSTS> 1,756,342
<OTHER-EXPENSES> 3,708,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,853
<INCOME-PRETAX> (1,948,353)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,948,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,948,353)
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
