<PAGE>
As filed with the Securities and Exchange Commission on April 11, 2000
Registration No. 333-93041
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LMKI, INC.
(Name of small business issuer in its charter)
Nevada 4813 33-0662114
(State Or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
3355 Michelson Drive, Suite 300
Irvine, California 92612
(949) 794-3000
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
--------------------------------
John W. Diehl, Jr., Chief Financial Officer
3355 Michelson Drive, Suite 300
Irvine, California 92612
(949) 794-3000
(Name, Address and Telephone Number of Agent for Service)
--------------------------------
Copy To:
Christopher A. Wilson, Esq.
PILLSBURY MADISON & SUTRO, LLP
650 Town Center Drive, 7th Floor
Costa Mesa, California 92626
(714) 436-6800
---------------------------------
Approximate date of commencement of proposed sale to the public: from time
to time after the effective date of this Registration Statement as determined by
market conditions and other factors.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
1
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
2
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Proposed
Maximum Proposed Maximum
Amount to be Offering Price Aggregate Amount of
Title of Each Class of Securities Registered Per Share (1) Offering Price Registration Fee
==================================================================================================================
<S> <C> <C> <C> <C>
Common Stock,
$.001 par value (2) 1,870,588 $10.50 $ 19,641,174 $5,185.28
- -------------------------------------- -------------------- ---------------- ------------------- -----------------
Warrant to purchase Common Stock (3) 500,000 $ 0.01 $ 5,000 $ 1.32
- -------------------------------------- -------------------- ---------------- ------------------- -----------------
Common Stock Underlying Warrants 500,000 $10.50 $ 5,250,000 $1,386.00
- -------------------------------------- -------------------- ---------------- ------------------- -----------------
Placement Agent Warrants (4) 63,636 $ 0.01 $ 636 $ 0.17
- -------------------------------------- -------------------- ---------------- ------------------- -----------------
Common Stock Underlying Placement
Agent Warrants 63,636 $10.50 $ 668,178 $ 176.40
- -------------------------------------- -------------------- ---------------- ------------------- -----------------
Total $ 25,564,988 $6,749.17 (5)
==================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee. Based on the average of the bid and asked prices per share of
our common stock as reported on the OTC Bulletin Board on December 10, 1999. In
accordance with Rule 457(g), the registration fee for shares underlying warrants
is calculated upon a price representing the highest of (i) the price at which
the warrants or options may be exercised; (ii) the offering price of securities
of the same class included in this registration statement; or (iii) the price of
securities of the same class, as determined pursuant to Rule 457(c).
(2) Includes an estimated 1,870,588 shares of common stock to be offered
and sold by the selling stockholders of series A convertible preferred stock
upon conversion into common stock, of which 374,118 shares of common stock would
be issuable upon conversion of series A convertible preferred stock that the
selling stockholders must purchase upon the election of the company.
(3) Includes warrants to purchase 400,000 shares of common stock granted to
Mesora Investors, LLC. Also includes additional warrants to purchase 100,000
shares of common stock, which vest upon the company's exercise of its option to
sell additional shares of series A convertible preferred stock to Mesora
Investors, LLC.
(4) Includes warrants to purchase 58,119 shares of common stock issued to
Dunwoody Brokerage Services, Inc. as partial payment for its services as
placement agent in connection with the sale of the series A convertible
preferred stock, and warrants to purchase an additional 5,517 share of common
stock to be issued to Dunwoody Brokerage Services, Inc., which vest upon
company's exercise of its option to sell additional shares of series A
convertible preferred stock.
(5) Issuer previously paid in filing fee of $6,970.76.
3
<PAGE>
Pursuant to Rule 416 under the Securities Act, there are also being
registered such additional number of shares as may be issuable as a result of
the anti-dilution provisions of the preferred stock.
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
4
<PAGE>
<TABLE>
PART I - INFORMATION REQUIRED IN PROSPECTUS
LMKI, INC.
Cross-Reference Sheet
Showing Location in the Prospectus of
Information Required by Items of Form SB-2
<CAPTION>
Form SB-2 Item Number and Caption Location In Prospectus
- --------------------------------- ----------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover of
Prospectus.................................................... Outside Front Cover
2. Inside Front and Outside Back Cover Pages of Prospectus....... Inside Front Cover Page
3. Summary Information and Risk Factors.......................... Summary; Risk Factors
4. Use of Proceeds............................................... Use of Proceeds
5. Determination of Offering Price............................... *
6. Dilution...................................................... *
7. Selling Stockholders ......................................... Selling Stockholders
8. Plan of Distribution.......................................... Plan of Distribution
9. Legal Proceedings............................................. Business - Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Persons.. Management
11. Security Ownership of Certain Beneficial Owners and Management Principal Stockholders
12. Description of Securities..................................... Description of Securities
13. Interest of Named Experts and Counsel......................... Legal Matters, Experts
14. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.................................... Management - Indemnification
15. Organization Within Last Five Years........................... Certain Transactions
16. Description of Business....................................... Business
17. Management's Discussion and Analysis or Plan or Operation..... Management's Discussion and
Analysis of Financial Condition and
Results of Operations
18. Description of Property....................................... Business - Facilities
19. Certain Relationships and Related Transactions................ Management - Certain Relationships
20. Market for Common Equity and Related Stockholder Matters...... The Market for our Common Equity
And Related Stockholder Matters
21. Executive Compensation........................................ Executive Compensation
22. Financial Statements.......................................... Financial Statements
23. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... *
- ---------
*Not Applicable
</TABLE>
5
<PAGE>
Information contained in this prospectus is subject to completion or
amendment. The selling stockholders may not sell these securities until the
Registration Statement filed with the Securities and Exchange Commission is
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful.
Subject To Completion, Dated April 11, 2000
================================================================================
SELLING STOCKHOLDER PROSPECTUS
LMKI, INC.
3355 Michelson Drive, Suite 300
Irvine, California 92612
(949) 794-3000
2,434,224 Shares of Common Stock
This prospectus relates to the offer and sale of our common stock by
the selling stockholders identified on page 57 of this prospectus. The common
stock covered by this prospectus includes:
(1) An estimated 1,496,470 shares of our common stock issuable to the
selling stockholders identified on page 57 upon conversion of their series A
convertible preferred stock and accrued dividends into common stock;
(2) An estimated 458,119 shares of common stock issuable upon exercise
of warrants granted to the selling stockholders, including warrants to purchase
58,119 shares of common stock granted to the placement agent for the sale of
series A convertible preferred stock. (See "Description of Securities" for a
description of the warrants);
(3) Approximately 374,118 shares of common stock issuable upon
conversion of series A convertible preferred stock and accrued dividends, which
shares of series A convertible preferred stock must be purchased by the selling
stockholders at our election; and
(4) Approximately 105,517 shares of common stock issuable upon exercise
of warrants, which vest upon the sale of series A convertible preferred stock at
our election (See (3) above).
We will not receive any proceeds from the sale of our common stock by
the selling stockholders. The selling stockholders may offer and sell some, all
or none of the common stock under this prospectus. The selling stockholders may
determine the prices at which they will sell such common stock, which may be at
market prices prevailing at the time of such sale or some other price. In
connection with such sales, the selling stockholders may use brokers or dealers
who may receive compensation or commissions for such sales.
Our common stock is currently traded on the over-the-counter Bulletin
Board under the symbol "LMKI". On April 10, 2000, the last reported sales price
for our common stock was $10.875 per share.
------------------------
6
<PAGE>
Investing in our common stock involves a high degree of risk. You
should not purchase our common stock unless you can afford to lose your entire
investment. See "Risk Factors" beginning on page 11 of this prospectus.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------------
The date of this prospectus is April __, 2000
7
<PAGE>
You should rely only on the information contained in this document. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. This document may only be used where it
is legal to sell these securities. The information in this document may only be
accurate on the date of this document.
TABLE OF CONTENTS
Page
TABLE OF CONTENTS..............................................................8
SUMMARY .......................................................................9
The Offering...................................................................9
Summary Financial and Operating Information...................................10
RISK FACTORS..................................................................11
USE OF PROCEEDS...............................................................25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................25
BUSINESS......................................................................30
MANAGEMENT....................................................................45
EXECUTIVE COMPENSATION........................................................47
CERTAIN TRANSACTIONS..........................................................50
PRINCIPAL STOCKHOLDERS........................................................51
THE MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS...............53
DESCRIPTION OF SECURITIES.....................................................54
SELLING STOCKHOLDERS..........................................................57
PLAN OF DISTRIBUTION..........................................................60
LEGAL MATTERS.................................................................61
EXPERTS ......................................................................61
WHERE YOU CAN FIND MORE INFORMATION ABOUT US..................................61
DEALER PROSPECTUS DELIVERY OBLIGATION.........................................61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
REPORT OF INDEPENDENT AUDITORS..............................................F-16
8
<PAGE>
We have informed the selling stockholders that the anti-manipulative
rules under the Exchange Act of 1934, as amended (the "Exchange Act"), including
Regulation M, may apply to their sales in the market. We have furnished the
selling stockholders with a copy of these rules. We have also informed the
selling stockholders that they must deliver a copy of this prospectus with any
sale of their shares.
SUMMARY
To understand this offering fully, we encourage you to read the entire
prospectus carefully, including the consolidated financial statements and the
notes to the consolidated financial statements of the company appearing
elsewhere in this prospectus.
Reference in this document to "company," "we," "us" and "our" refer to
LMKI, Inc.
ABOUT US
LMKI, Inc. delivers broadband network solutions including high-speed
Internet access, data, voice and video services to a wide spectrum of business
customers.
CORPORATE INFORMATION
We were incorporated under Nevada law on October 10, 1994.
Our executive offices are located at 3355 Michelson Drive, Suite 300,
Irvine, California 92612. Our telephone number is (949) 794-3000. Our fax number
is (949)794-3093.
<TABLE>
THE OFFERING
<CAPTION>
<S> <C>
Securities offered by the selling
stockholders........................................... 2,434,224 shares of common stock.
Common stock outstanding............................... 37,249,566 shares as of February 29, 2000.
Options and warrants outstanding....................... 9,713,911 as of February 29, 2000.
Excludes 1,870,588 shares of common
stock issuable on conversion of
series A convertible preferred stock
registered hereunder and excludes 105,517
warrants, which vest upon future sale
of series A convertible preferred stock.
Use of proceeds........................................ We will receive no proceeds from the sale of the common
stock offered hereby.
OTC Electronic Bulletin Board
symbol................................................. "LMKI"
</TABLE>
9
<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
This summary financial information below is from and should be read
with the consolidated financial statements and the notes to the financial
statements elsewhere in this prospectus.
We may receive $920,000 upon the future sale of series A convertible
preferred stock at our election and $2,517,397 upon the exercise of 563,636
warrants issued to selling stockholders to purchase common stock. (See
"Description of Securities" for a description of the warrants). The warrants may
never be exercised or may be exercised on a cashless basis, resulting in no cash
proceeds to our company.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Six Months ended
February 29 Years Ended August 31
2000 1999 1999 1998
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues $ 3,631,166 $ 238,389 $ 1,598,076 $ 397,363
Gross profit $ 1,874,824 $ 168,079 $ 675,487 $ 345,362
Loss before income taxes $(1,948,353) $ (101,429) $ (924,111) $ (51,519)
Net loss $(1,948,353) $ (101,429) $ (926,511) $ (53,819)
Net loss available to common
stockholders $(5,048,440) $ (101,429) $ (926,511) $ (53,819)
Basic and diluted loss per share (1) $ (0.14) $ (0.00) $ (0.04) $ (0.00)
Weighted average number of shares
outstanding (2) 36,327,149 21,581,111 26,241,335 15,809,222
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
As of February 29, 2000 As of August 31, 1999
----------------------- ---------------------
(unaudited)
<S> <C> <C>
Working capital (deficit) $(1,266,720) $ (217,061)
Total assets $11,157,165 $4,132,293
Total liabilities $ 6,435,857 $2,033,558
Stockholders' equity $ 4,721,314 $2,098,735
</TABLE>
- ---------------
(1) Net Loss per common share: stock options and warrants outstanding
and shares upon issuable upon conversion of series A convertible preferred stock
are not considered common stock equivalents because the effect would be to
reduce the net loss per share.
(2) Shares of common stock issuable upon exercise of options and
warrants, and issuable upon conversion of series A convertible preferred stock,
that have not been included in weighted average shares in the calculation of
diluted earnings per share total 10,664,598 and 8,000,000 for the six months
ended February 29, 2000 and February 28, 1999, respectively, and 8,000,000 and
4,000,000 for the years ended August 31, 1999 and 1998, respectively.
10
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW AND OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR
COMMON STOCK. THE RISKS DESCRIBED HEREIN ARE INTENDED TO HIGHLIGHT RISKS THAT
ARE SPECIFIC TO US AND ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND
UNCERTAINTIES, SUCH AS THOSE THAT GENERALLY APPLY TO OUR INDUSTRY MAY ALSO
IMPAIR OUR BUSINESS OPERATIONS. RISKS AND UNCERTAINTIES, IN ADDITION TO THOSE WE
DESCRIBE BELOW, THAT ARE PRESENTLY NOT KNOWN TO US OR THAT WE CURRENTLY BELIEVE
ARE NOT MATERIAL, MAY SUBSEQUENTLY BECOME MATERIAL AND MAY ALSO IMPAIR OUR
FINANCIAL CONDITION.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY, ADVERSELY AFFECTED. THIS
COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE AND A LOSS OF PART
OR ALL OF ANY INVESTMENT IN OUR COMMON STOCK.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
PROSPECTS.
We began offering commercial DSL service in February 1999. Because of
our limited operating history, you have limited operating and financial data
with which to evaluate our potential for future success. You should evaluate our
company in light of the expenses, development, uncertainties and complications
typically encountered by early-stage businesses, many of which will be beyond
our control. These risks include the following:
o Lack of sufficient capital;
o Unanticipated problems, technological delays and expenses;
o Competition; and
o Uncertain market acceptance of our products and services.
As a result of our limited operating history, our plan for rapid growth
and the increasingly competitive nature of the markets in which we operate, our
historical financial data is of limited value in anticipating future revenue and
operating expenses. Our planned expense levels will be based in part on our
stage of development. We may not be able to adjust spending in a timely manner
to compensate for any unexpected shortfall in revenues or capital.
THE CONVERSION OF THE SERIES A CONVERTIBLE PREFERRED STOCK BY THE SELLING
STOCKHOLDERS AND THE EXERCISE OF OUR CONDITIONAL WARRANTS MAY LOWER THE MARKET
PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY DILUTE THE INTERESTS OF OTHER
HOLDERS OF OUR COMMON STOCK.
OUR SERIES A CONVERTIBLE PREFERRED STOCK IS CONVERTIBLE AT A RATE BELOW
THE PREVAILING MARKET PRICE OF THE COMMON STOCK.
We have issued 4,000 shares of series A convertible preferred stock,
which are currently convertible into such number of shares of common stock equal
to the stated value of $1,000 divided by the per share conversion price of the
series A convertible preferred stock. The per share conversion price is equal to
the lower of $4.25 or eighty percent of the average closing bid price of the
three lowest trading days of common stock over the twenty-five consecutive
trading days ending on the trading day immediately preceding the date that the
11
<PAGE>
applicable holder of the series A convertible preferred stock elects to have
shares of series A convertible preferred stock converted. Accordingly, the
series A convertible preferred stock is convertible at a floating rate that will
be below the market price of our common stock. As a result if the closing bid
price of our common stock falls below $5.313 on any three trading days during
the twenty-five days prior to the time the holder converts, the holder will
receive more shares of common stock. This right of the holders of the series A
convertible preferred stock to receive more shares of common stock at
increasingly lower prices, may materially reduce the price of our common stock
to the detriment of our other stockholders.
THE CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK AND SALE OF
MATERIAL AMOUNTS OF COMMON STOCK COULD REDUCE THE PRICE OF OUR COMMON
STOCK AND ENCOURAGE SHORT SALES.
As the selling stockholders convert the shares of series A convertible
preferred stock and then sell the common stock, the common stock price may
decrease due to the additional shares in the market. As the price of the common
stock continues to decrease below $5.313 per share, the selling stockholders
will be able to convert their series A convertible preferred stock into a larger
number of shares of common stock. Similarly, as the price of our common stock
decreases, we will be required to issue more shares of our common stock upon
exercise of our conditional warrants for any given dollar amount invested by the
selling stockholders. This may encourage short sales, which could place further
downward pressure on the price of the common stock.
THE CONVERSION OF THE SERIES A CONVERTIBLE PREFERRED STOCK AND EXERCISE
OF OUR CONDITIONAL WARRANTS MAY SUBSTANTIALLY DILUTE THE INTERESTS OF
OTHER HOLDERS.
The holders of the series A convertible preferred stock may convert and
sell the full amount of the shares of common stock issuable upon conversion. As
additional shares of common stock are sold, the price of the common stock may
decrease below $5.313 per share, and entitle the holders of the series A
convertible preferred stock to receive a greater number of shares of common
stock upon conversion of the series A convertible preferred stock. As a result,
more shares of common stock will be available for sale by the selling
stockholders, who may sell the full amount issuable upon conversion of the
series A convertible preferred stock. Similarly, any shares of common stock that
we may issue upon exercise of our conditional warrants will be available for
sale immediately upon issuance. Accordingly, the conversion of the series A
convertible preferred stock by the selling stockholders and exercise of our
conditional warrants may result in substantial dilution to the interests of the
other holders of the common stock.
EXCHANGE RULES CONCERNING FUTURE PRICED SECURITIES MAY PREVENT US FROM
LISTING OUR SECURITIES WHILE THE SERIES A CONVERTIBLE PREFERRED STOCK
AND OUR CONDITIONAL WARRANTS ARE OUTSTANDING.
As long as the series A convertible preferred stock and our conditional
warrants are outstanding, we may not meet the listing standards of any
recognized exchange, including the Nasdaq SmallCap and Nasdaq National Market.
Because the conversion price of the series A convertible preferred stock is
linked to a percentage discount to the future market price of our underlying
12
<PAGE>
common stock, and accordingly the conversion rate can float with the market
price of the common stock, the series A convertible preferred shares are
considered future priced securities. The conversion of our future priced
securities may be followed by a decline in our common stock price, creating
additional dilution to our existing common stock stockholders. Such a price
decline allows the holders of our future priced securities to convert into even
larger amounts of our common stock. As a result, the holders of the series A
convertible preferred stock could obtain voting control of our company.
Similarly, the shares issuable upon exercise of our conditional warrants will be
issued at a substantial discount to the market price. Consequently, recognized
exchanges may not accept our securities for listing while we have future priced
securities and conditional warrants outstanding, and if accepted for listing,
the conversion of our future price securities and conditional warrants could
lead to our securities being delisted.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT OUR
OPERATING RESULTS, FINANCIAL CONDITION AND THE TRADING PRICE OF OUR COMMON
STOCK.
We cannot predict with any significant degree of certainty our
quarterly revenue and operating results, which have fluctuated in the past and
will likely fluctuate in the future. As a result, we believe that
period-to-period comparisons of our revenues and results of operations are not
necessarily meaningful and you should not rely upon them as indicators of future
performance. It is likely that in one or more future quarters our results may
fall below the expectations of analysts and investors. In such event, the
trading price of our common stock would likely decrease.
Our quarterly operating results may fluctuate significantly in the
future due to several factors, many of which are beyond our control. These
factors include the rate at which customers subscribe to our services, the
prices subscribers pay for such services, subscriber turnover rates, the prices
we pay for the services we provide to our subscribers and the demand for
Internet services. Additional factors that may affect our quarterly operating
results generally include the amount and timing of capital expenditures and
other costs relating to the expansion of our business, our or our competitors'
introduction of new Internet and telecommuting services, price competition or
pricing changes in the Internet, cable and telecommuting industries, technical
difficulties or network downtime, general economic conditions and economic
conditions specific to the Internet, Internet media and corporate intranet.
Because we rely on revenue forecasts when committing to a significant portion of
our future expenditures, we may not be able to adjust our spending in the event
of revenue shortfalls. Consequently, such shortfalls could have an immediate
material adverse affect on our business, financial condition and operating
results. We also plan on increasing our operating expenditures to fund increased
sales and marketing efforts, general and administrative activities and to
strengthen our infrastructure. To the extent that these expenditures are not
accompanied by a commensurate increase in revenues, our business, operating
results and financial condition could be materially adversely effected.
DISAPPOINTING QUARTERLY REVENUE OR RESULTS COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO FALL.
13
<PAGE>
Our quarterly revenue and operating results are difficult to predict
and may fluctuate significantly from quarter to quarter. If our quarterly
revenue or operating results fall below the expectations of investors or
security analysts, the price of our common stock could fall substantially. Our
quarterly revenue and operating results may fluctuate as a result of a variety
of factors, many of which are outside our control, including:
o The availability and costs of those services we provide to our
subscribers;
o The rate at which we are able to attract customers within our
target markets and our ability to retain these customers at
sufficient aggregate revenue levels;
o The ability to deploy our networks on a timely basis;
o The availability of financing to continue our expansion;
o The technical difficulties or network downtime; and
The introduction of new services or technologies by our competitors and
resulting pressures on the pricing of our service.
WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES AND EXPECT TO INCUR FUTURE LOSSES.
We have incurred substantial losses and have experienced negative
operating cash flow for each month since our formation and expect our losses and
negative operating cash flow to continue. If our revenue does not grow as
expected or capital and operating expenditures exceed our plans, our business,
prospects, financial condition and results of operations will be materially
adversely affected. We cannot be certain if or when we will be profitable or if
or when we will generate positive operating cash flow. We expect our operating
expenses to increase significantly as we expand our business. In addition, we
expect to make significant additional capital expenditures during 2000 and in
subsequent years. We also expect to substantially increase our operating
expenditures, particularly network and operations and sales and marketing
expenditures, as we implement our business plan. However, our revenue may not
increase despite this increased spending.
THERE IS NO GUARANTEE THAT WE WILL OBTAIN THE ADDITIONAL CAPITAL WE NEED TO
FINANCE OUR FUTURE OPERATIONS.
We have funded operations primarily through operating funds, loans from
stockholders, private 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 customer 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 estimates, we may require additional financing sooner than
anticipated.
We have no commitments for additional financing other than a $1.0
million commitment to invest in our series A convertible preferred stock under
certain conditions, and a $35.0 million commitment to invest in our common stock
under certain conditions.
14
<PAGE>
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.
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 customer base will be impaired, and as a result, our business
may suffer.
IF WE FAIL TO ATTRACT AND RETAIN KEY MANAGEMENT AND TECHNICAL PERSONNEL WE WILL
BE UNABLE TO EXECUTE OUR BUSINESS STRATEGY.
Our continued success depends on the continued services of key
management and technical personnel. The loss of any senior executive or other
key technical employee could have a material adverse effect on our business,
financial condition, results of operations and relationships with corporate
partners. Our success also depends upon our ability to attract and retain highly
qualified technical sales, marketing and customer service personnel. If we are
unable to attract and retain such qualified personnel, we may not be able to
continue our expansion, which will result in delays in deploying our network. As
a result our business, operating results and cash flows could be adversely
affected.
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 customer 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 customer needs on a
timely and cost-effective basis. In particular, we must provide customers 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. Additionally, 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 Level (3)
Communications, Qwest Communications 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.
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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.
The high-speed data communications industry is in the early stages of
development and is subject to rapid and significant technological change. Since
this industry is new and because the technologies available for high-speed data
communications services are rapidly evolving, we cannot accurately predict the
rate at which the market for our services will grow, if at all, or whether
emerging technologies will render our services less competitive or obsolete. If
the market for our services fails to develop or grows more slowly than
anticipated, our business, prospects, financial condition and results of
operations could be materially adversely affected. Many providers of high-speed
data communication services are testing products from numerous suppliers for
various applications, and these suppliers have not broadly adopted an industry
standard. In addition, certain industry groups are in the process of trying to
establish standards, which could limit the types of technologies we could use.
Certain critical issues concerning commercial use of DSL technology for Internet
access, including security, reliability, ease and cost of access and quality of
service, remain unresolved and may impact the growth of these services.
OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET.
Our future success substantially depends on continued growth in and 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 or at its present
pace. If Internet usage declines or evolves away from our business, our growth
will slow or stop and our financial results will suffer.
OTHER TECHNOLOGIES FOR THE HIGH-SPEED 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.
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.
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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
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. Other Internet service providers, such as
Concentric Network and Verio Communications, have also begun to develop
high-speed access capabilities to leverage their existing products and services.
Recently, several new technologies have emerged, including the
deployment of broadband services for high speed Internet access by cable and
telephone companies. These services 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.
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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.
Many of our current and potential competitors have longer operating
histories, greater brand name recognition, larger customer bases and
substantially greater financial, technical, marketing, management, service
support and other resources than we do. Therefore, they may be able to respond
as quickly to new or changing opportunities, technologies, standards or customer
requirements.
WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS TO CONNECT
OUR NETWORK.
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 supply sources,
it will be difficult, if not impossible, for us to provide our services.
Our success depends on negotiating and entering into strategic partner
interconnection agreements with providers of communications bandwidth. We must
enter into and renew interconnection agreements with providers of communications
bandwidth in each of our target markets in order to provide service in that
market. These agreements govern, among other things, the price and other terms
regarding our location of equipment in the offices of providers of
communications bandwidth which house telecommunications equipment and from which
local telephone service is provided, known as central offices, and our lease of
copper telephone lines that connect those central offices to our customers.
Delays in obtaining interconnection agreements would delay our entrance into
target markets and could have a material adverse effect on our business and
prospects. Our interconnection agreements generally have limited terms of one to
two years and we cannot assure you that new agreements will be negotiated or
that existing agreements will be extended on terms favorable to us.
WE FACE RISKS ASSOCIATED WITH OUR LEASE OF BANDWIDTH FROM NETWORK SUPPLIERS.
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We lease our bandwidth from Level (3) Communications and Qwest
Communications International, Inc. We are dependent upon their ability to
satisfy their obligations to us. If they cannot, we will incur significant
expenses to utilize other sources of bandwidth. We also have risks attendant
with their ability to build-out their networks under construction and our access
to that bandwidth. We are subject to a variety of risks relating to our recent
lease of fiber-based telecommunications bandwidth from our various global
network suppliers, including our strategic alliance with Level (3), and the
delivery, operation and maintenance of such bandwidth. Such risks include, among
other things, the following:
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 lease of sufficient
bandwidth.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH FUTURE ACQUISITIONS.
As part of our growth strategy, we may acquire complementary
businesses, although we have no definitive agreements to do so at this time. An
acquisition may not produce the revenue, earnings or business synergies that we
anticipate, and an acquired business might not perform as we expect. If we
pursue any acquisition, our management could spend a significant amount of time
and effort identifying and completing the acquisition and may be distracted from
the operation of our business. If we complete an acquisition, we would probably
have to devote a significant amount of management resources to integrating the
acquired business with our existing operations, and that integration may not be
successful.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
OUR BUSINESS.
We rely on unpatented trade secrets and know-how to maintain our
competitive position. Our inability to protect these secrets and know-how could
have a material adverse effect on our business and prospects. We protect our
proprietary information by entering into confidentiality agreements with
employees and consultants and potential business partners. These agreements may
be breached or terminated. In addition, third parties, including our
competitors, may assert infringement claims against us. Any such claims, could
result in costly litigation, divert management's attention and resources,
require us to pay damages and/or to enter into license or similar agreements
under which we would be required to pay license fees or royalties.
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A BREACH OF OUR NETWORK SECURITY COULD RESULT IN LIABILITY TO US AND DETER
CUSTOMERS FROM USING OUR SERVICES.
Our Internet network may be vulnerable to unauthorized access, computer
viruses and other disruptive problems. Corporate networks and internet services
providers have experienced in the past, and probably will experience in the
future, interruptions in service as a result of accidental or intentional
security breaches. Any such breach could result in liability to us and deter
customers from using our service. Unauthorized access could also jeopardize the
security of confidential information stored in the computer systems of our
customers. Eliminating computer viruses and alleviating other security problems
may require interruptions, delays or cessation of service to our customers,
cause us to incur significant costs to remedy the problem, and divert management
attention. We have implemented security measures that could be circumvented. Any
of these factors could have a material adverse effect on our business and
prospects.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Stock markets experience periods of extreme volatility. Many times
these periods are unrelated to the operating performance of common stock or to
public announcements concerning the issuers of the stock. Our common stock is
not actively traded and its price has fluctuated significantly. In the past two
fiscal years, our stock traded from a high of $19.125 to a low of $0.02. The
following factors could affect the price of the stock:
o general market volatility;
o announcements of technological innovations or new commercial
products by us or our competition;
o general regulatory developments or disputes concerning
proprietary rights;
o market conditions for Internet and communications companies in
general; and
o economic and other internal and external factors, including
periodic fluctuations in our financial results.
All of the shares registered for sale on behalf of the Selling
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. We filed a Registration Statement of which this
prospectus is a part to register these restricted shares for sale into the
public market by the Selling stockholders. The effect of this Registration
Statement is to increase the number of unrestricted shares. A sudden increase in
the amount of unrestricted shares may cause the price of the stock to go down
and also could affect our ability to raise equity capital. Any outstanding
shares not sold by the Selling stockholders pursuant to this prospectus will
remain "restricted shares" in the hands of the holder, except for those held by
non-affiliates, for a period of one year, calculated pursuant to SEC Rule 144.
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OUR COMMON STOCK COULD BECOME A "PENNY STOCK" AND, IF IT DOES, IT COULD BE
HARDER TO SELL IN THE SECONDARY MARKET.
If our stock price dropped and there were certain adverse changes to
our net tangible assets and revenues, our common stock might be subject to
certain rules, called "penny stock rules". These rules impose additional sales
practice requirements on broker-dealers who sell those securities. For any
transaction involving a penny stock, the rules require, among other things, the
delivery, prior to the transaction, of a disclosure schedule required by the SEC
relating to the market for penny stocks. The broker-dealer also must disclose
the commission payable to both the broker-dealer and its registered
representative, and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information for the penny stocks
held in the customer's account. Although we believe that our common stock is not
penny stock, in the event our common stock subsequently becomes characterized as
a penny stock, our market liquidity could be severely affected. If that happens,
the regulations relating to penny stocks could limit the ability of
broker-dealers to sell our common stock in the secondary market.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A SIGNIFICANT
PERCENTAGE OF OUR COMPANY AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE
OVER OUR COMPANY.
After this offering, our executive officers, directors and principal
stockholders and their affiliates will together control approximately 78.2% of
our outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, and will continue to have significant influence over our affairs.
This concentration of ownership may have the effect of delaying, preventing or
deterring a change in control, could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale and might affect
the market price of our common stock.
WE RESERVED SOME OF OUR UNISSUED SHARES FOR FUTURE SALE.
On February 29, 2000, we had options, warrants and other rights to
acquire common stock as follows:
(a) There are 5,000,000 common shares reserved in our amended and
restated 1999 Stock Plan, of which grants have been made for 1,536,760 shares
(of which 33,900 have been exercised), and 3,463,240 remain ungranted;
(b) There are 7,000,000 shares reserved for exercise of options held by
the Chief Executive Officer;
(c) There are warrants to purchase 1,236,051 shares of common
stock, of which 458,119 were granted to the selling stockholders;
(d) There are shares of common stock totaling 1,496,470 issuable to
selling stockholders upon conversion of series A convertible preferred stock
issued and outstanding as of February 29, 2000, including one year of accrued
interest;
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(e) There are warrants granted to selling stockholders to purchase
105,517 shares of common stock issuable upon sale of series A convertible
preferred stock at our election; and
(f) There are shares of common stock totaling 374,118 issuable to
selling stockholders upon conversion of series A convertible preferred stock
issuable upon sale of such stock at our election, including shares issuable upon
conversion of one year of estimated accrued interest.
Our series A convertible preferred stock is convertible into shares of
common stock at a conversion rate of $1,000 per share divided by the lower of
(i) $4.25 or (ii) 80% of the average of the three lowest closing bid prices for
our common stock for the 25 trading days immediately before the conversion date.
Since there is no minimum conversion price on the series A convertible preferred
stock, a reduction of the closing bid price of our common stock below $5.313 per
share could require us to issue an increased number of shares of common stock on
conversion of the series A convertible preferred stock.
Certain of our warrants have reset provisions that allow the holders to
receive additional shares if certain adjustments need to be made pursuant to the
warrant provisions. See "Description of Securities" for a description of the
warrants.
WE ARE SUBJECT TO 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.
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We provide Internet services through data transmissions over public
telephone lines and cable networks. The Federal Communications Commission
("FCC") governs these transmissions. 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.
WE ARE SUBJECT TO TELEMARKETING REGULATIONS.
Our marketing depends primarily on the telemarketing sale channel.
Telemarketing sales practices are regulated both federally, and at the state
level including the time telephone solicitations can be made to residences,
prohibiting use of automated telephone dialing equipment, maintaining "do not
call lists," and prohibiting misrepresentation. We train and supervise our
telephone service representatives to comply with these rules, however there can
be no assurance that such rules are not violated. In the event such rules are
violated we may be subject to fines and penalties.
WE ARE SUBJECT TO UNCERTAIN TAX AND OTHER SURCHARGES.
Telecommunications providers are subject to a variety of federal and
state surcharges and fees on their gross revenues from interstate and intrastate
services. These surcharges and fees may be increased and other surcharges and
fees not currently applicable to our services could be imposed on us. In either
case, the cost of our services would increase and that could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
WE HAVE NOT FILED ANY INCOME TAX RETURNS SINCE FISCAL YEAR ENDING 1995.
Given that we have experienced losses in each year subsequent to this
date, we do not believe that we will have a significant liability with respect
to the filing of such returns. However, we may incur taxes, penalties and/or
interest upon filing such returns.
LINGERING 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.
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.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS.
This prospectus contains "forward-looking statements." All
forward-looking statements involve substantial risk and uncertainty and you
should not place undue reliance on such forward-looking statements. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "intend," "anticipate," "believe," "estimate," "continue," "future,"
or similar terminology. You should read statements that contain these words
carefully because they discuss our future expectations, make projections of our
future results of operations or financial condition or state other
"forward-looking" information. We can give no assurance that the expectations
reflected in the forward-looking statements will prove to have been correct. Our
actual results could differ materially from those mentioned in the
forward-looking statements contained in this prospectus for a variety of
reasons, including the risks described in the sections captioned "Risk Factors"
and "Management's Discussion and Analysis of Financial Conditions and Results of
Operations," and elsewhere in this prospectus. Except as otherwise required by
federal securities laws, we undertake no obligation to update publicly or revise
any forward-looking statements.
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USE OF PROCEEDS
We will not receive any proceeds from the conversion of the preferred
shares into common stock by the selling stockholders. Upon the exercise of our
option, we will receive proceeds of $920,000. Upon the exercise of all the
warrants, we will receive approximately $2,517,397. We cannot, however,
guarantee that any or all the warrants will be exercised. We intend to use any
net proceeds from the sale of such series A convertible preferred stock and
exercise of the warrants for general corporate purposes.
We will bear the expenses of the registration of the shares of common
stock offered herein and estimate that these expenses will be approximately
$50,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto, as well as the other
information included elsewhere in this prospectus. Our discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations, and intentions.
Our actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "risk factors," "business" and
elsewhere in this prospectus.
SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
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.
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REVENUE. For the six-months ended February 29, 2000, net revenue was
$3,631,166 compared to $238,389 for the same period last year. This increase
reflects 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. 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.
GROSS MARGIN. For the six-months ended February 29, 2000, gross margin
was $1,874,824 compared to $168,079 for the same period last year. 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. 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. 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, totaling $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. 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 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. 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 28, 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.
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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.
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FISCAL YEARS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998
RESULTS OF OPERATIONS
Our operating results have fluctuated in the past due to intermittent
GTE sales promotions. As of January 1999, we canceled our contract with GTE and
have focused all of our attention on our broadband network solutions. Since we
started selling T-1 services last year we have been working closely with
MobileNetics Inc. and, as of June 1, 1999, we purchased all of the outstanding
stock of MobileNetics Inc. The management and employees of MobileNetics provided
the needed technical expertise to further our goal of being a leader in
broadband network solutions market. We have also formed strategic partnerships
with Covad, Level (3) and Qwest, which allow us to bring high speed Internet
connectivity to the marketplace and aggressively market our products nationwide.
LMKI has created alliances with Covad, Level (3) and Qwest to be in the
high speed Internet connectivity marketplace. We plan to leverage these
partnerships and others in order to become a nation-wide provider of broadband
network solutions.
As our operations expand and we become a nation-wide provider of
broadband network solutions, we expect to significantly increase our capital,
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 fiscal year ended August 31, 1999, we
entered the DSL and broadband network solutions Internet market and increased
our 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 and the rapid growth in customers in
both Los Angeles/Orange metro and San Francisco Bay areas. We expect revenues to
increase further as we expand our network within existing regions, 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 our DSL and broadband network
solutions network 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 attribute 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.
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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 disclosures of net income and earnings per
share, as if the fair value method of accounting defined is 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 $40,800, respectively.
In June of 1999 we recorded intangible assets of $3,022,062 in the
issuance of common stock for the acquisition of MobileNetics, Inc. 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, we have satisfied our cash requirements
primarily through the debt financings, capitalized lease financings and loans
from our CEO and principal stockholder. Our 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 for operations for the year ended August 31, 1999 was approximately
$626,970 and the cash used for 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 we were expanding our market share and
improving our 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 in 1999 was from the CEO and 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 for
the reasons discussed above.
At August 31, 1999, we had cash and cash equivalents of approximately
$125,692, and a working capital deficit of $217,061. The company has continued
to fund its operations and working capital requirements through equity, debt and
lease financing.
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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY. We maintain our portfolio of cash
equivalents primarily in money market funds. As of February 29, 2000, all of our
cash equivalents matured in less than three months. Accordingly, we do not
believe that our cash equivalents have significant exposure to interest rate
risk.
EXCHANGE RATE SENSITIVITY. We operate only in the United States, and
all sales to date have been made in U.S. dollars. Accordingly, we have had no
material exposure to foreign currency rate fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial
Accounting Standards Board issued Statement No. 133 ("FAS NO. 133"), "Accounting
for Derivative Instruments and Hedging Activities." FAS No. 133 establishes
methods for derivative financial instruments and hedging activities related to
those instruments, as well as other hedging activities. Because we do not
currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of FAS No. 133 will not have a material
impact on our consolidated financial position or results of operations.
LINGERING 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.
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.
BUSINESS
OVERVIEW
We are a provider of integrated communications solutions including
private networking and network integration, Website and server hosting,
high-speed Internet access and video streaming over a national network to
business customers worldwide. By planning our network in a manner that utilizes
the delivery and capacity of our strategic partners we are able to provide our
customers with high performance, cost-effective collocation and transport
services. Our broadband access offerings range from DSL to DS3 service and our
hosting products extend from the Web to the enterprise.
The result of our extensive experience in deploying
enterprise-networking solutions is a technology called Real Private Networking
(RPN), which applies a proprietary Asynchronous Transfer Mode (ATM) and Internet
Protocol network throughout our collocation within our partners fiber-optic
network facilities, primarily within the facilities of Level (3) Communications.
By meshing these networks against one another throughout the facilities of
multiple carriers we are able to provide a resilient, integrated platform for
deploying private, enterprise networks that do not engage the public Internet.
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Our integrated communications approach gives businesses less reason to
manage multiple providers to obtain a set of related services, with each
provider specializing in one facet of the solution. With our network design and
technical experience in deploying multi-faceted data, voice and video solutions,
our plan is to become a market leader in delivering solid, complete and
cost-effective network-based solutions to businesses that are attempting to
utilize broadband connectivity throughout their operations.
We are also an Internet Service Provider (ISP), offering small, medium,
and large-sized businesses connectivity to the Internet via high speed digital
subscriber line (DSL) technology. We package a full range of services with our
DSL Internet access solution including e-mail and Web hosting.
INDUSTRY BACKGROUND
DSL MARKET EXPANSION. Technological developments and regulatory changes
have caused DSL technology to emerge as a commercially available, cost-effective
means of providing high-speed data transmission. For telecommuters, small and
medium size businesses in need of high-speed data communication and Internet
access, DSL is a less expensive alternative to ISDN and T1. The deployment of
DSL-based solutions by competitive telecommunications companies has been
facilitated by changes in the regulatory framework in recent years. Under the
1996 Telecommunications Act, traditional telephone companies are generally
required to lease telephone lines to competitive telecommunications companies on
a wholesale basis through resale or unbundling and to allow these competitive
telecommunications companies to locate certain of their equipment in the
traditional telephone companies' central offices. By using existing facilities
and copper lines, DSL providers avoid the considerable up-front fixed costs
necessary to deploy alternative high-speed digital communications technologies,
such as cable, wireless and satellite networks. As a result, a significant
portion of the investment in a DSL network is incurred only as customers order
the service. Additionally, it is possible that continued advances in DSL
technologies and transmission speeds, as well as advances in DSL equipment
manufacturing efficiencies, will further reduce the cost of deploying DSL-based
networks.
BUSINESS BROADBAND. 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.
Alternatively, DSL 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.
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Although local phone companies are in the best position to offer DSL
since they own the core infrastructure that supports it, they were until very
recently, reluctant to market these services to business customers.
BUSINESS STRATEGY
We have identified an opportunity to deliver products built from the
combination of broadband fiber connectivity from our partner's network,
collocation space within our partner's facility, and "last-mile" broadband
copper connectivity from our local transit partners to our customer's premises.
This platform allows us to offer products that deliver redundant performance
across billion dollar networks harnessing the speed of DSL technology and
competing on price and availability with traditional providers.
By developing our ATM+IP solution within large carrier networks such as
those of Level (3), Broadwing and Qwest, and CLEC local transit loops such as
those of Covad and Rhythms Communications, Inc., we believe we can gain a share
of the enterprise wide area networking market traditionally belonging to
providers of dedicated frame relay and leased line services. Alongside our
collocated edge-switching and routing equipment, we maintain additional cabinet
and suites and lease access to this space, either in the form of configured
servers and applications with connectivity as part of a bundled package or
simply as an area for clients to connect their own servers to the high-speed
access of our partner's fiber-optic networks.
By choosing to exploit bandwidth and collocation space and
concentrating on services and applications, we are pursuing a Tier-1 service
provider business plan without the costs associated with building the core
network infrastructure typically necessary to support Tier-1 services. By
keeping costs down while developing a large area of coverage, we hope to
identify ourselves as a profitable next-generation integrated communications
provider operating on a global scale.
OUR COMPETITIVE ADVANTAGES
OUR KNOWLEDGEABLE AND GROWING SALES FORCE AND TECHNICAL STAFF. We are
striving to develop superior sales and technical staff by recruiting individuals
with skills and backgrounds that will permit them to succeed in the networking
industry. Additionally, we implement rigorous training schedules for our
employees in an effort to keep them abreast of the latest information and
knowledge from the industry in general and LMKI in particular. Our technical
teams are cross-trained wherever possible and encouraged to obtain technical
certification in their respective area of specialization.
OUR BUSINESS MODEL OPTIMIZES COST, EFFICIENCY AND FLEXIBILITY. In an
effort to keep costs down, we have attempted to lease rather than build
infrastructure in our initial network deployment. Additionally, by building our
network only at the "edge," we have greater flexibility in solving multiple
internetworking problems, thereby obviating the need to develop multiple
networks or write off existing data communications infrastructure.
OUR EFFICIENCY. We have established a network comprised of highly
intelligent and functional network elements such as our application of
multi-protocol label switching MPLS meshed with the backbones of Level (3),
Broadwing, Inc. and Qwest and the last mile services of Covad and Rhythms.
Additionally, we focus on support systems that harness the distributed
intelligence of our carriers and provide the functionality and access of the
carrier through specialized software applications.
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WE MAINTAIN A FLEXIBLE NETWORK. Our business model optimizes network
flexibility by utilizing strategic relationships with multiple carriers. This
allows us 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.
OUR STRATEGIC ALLIANCE STRENGTH. Relationships with Covad, Rhythms,
Level (3), Broadwing and Qwest give us the ability to deliver connectivity and
hosting solutions worldwide and to constantly take advantage of upgrades and new
services offered by these carriers on their networks.
INTEGRATION. Our application of (MPLS) technology and the Cisco
products that support MPLS allow us to seamlessly integrate many different
connectivity solutions and network applications. We use different strategic
partners to tailor the optimum solution for our customer.
AUTOMATION AND ADVANCED TELECOMMUNICATIONS TECHNOLOGY. Our network
management tools are automated which leads to less downtime and lower labor
costs. We use the latest equipment, work closely with strategic partners that
are forerunners in their fields and are not hampered by existing legacy
infrastructures.
OUR CUSTOMER-CENTRIC APPROACH. We emphasize direct relationships with
our customers. These relationships enable us to learn information from our
customers regarding their needs and preferences and help us expand our offerings
to include additional value-added services based on customer demand. We believe
that these customer relationships increase customer loyalty and reduce turnover.
In addition, our existing customers have provided customer referrals and we
believe strong relationships will result from further customer referrals in the
future.
Our success depends upon careful planning and the selection of
partners. We meet the customer's needs more effectively by implementing
procedures that we work jointly with our partners to develop. In that these
procedures represent the needs of both LMKI and the carriers whose networks we
utilize we believe that we are targeting a key aspect of successfully providing
ongoing customer-focused support.
OUR PRODUCTS
IP TECHNOLOGY. The Internet protocols are the world's most popular
open-system (nonproprietary) protocol suite because they can be used to
communicate across any set of interconnected networks and are equally well
suited for LAN and WAN communications. The Internet protocols consist of a suite
of communication protocols, of which the two best known are the transmission
control protocol (TCP) and the Internet protocol (IP). The Internet protocol
suite not only includes lower-layer protocols (such as TCP and IP), but it also
specifies common applications such as electronic mail, terminal emulation, and
file transfer. IP technology is able to realize the convergence of traditional
voice type applications with current and future data/Internet type applications.
IP provides operational efficiency when managing a single platform that can
carry any type of service application. At an early stage, we recognized this
potential and deployed a worldwide IP network. Our virtual private network (VPN)
and real private network (RPN) services qualify as Cisco Powered Networks, and
are a major step forward in materializing converged networks in the marketplace.
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Our main focus in deploying and managing RPN is to maintain and
guarantee the highest quality and reliability standards. The non-use of the
public Internet, has given us a competitive edge, therefore we can ensure a
better than carrier grade quality. RPN service incorporates the speed, security
and versatility of DSL technology with the wide geographical coverage of fiber
networks from Level (3), Broadwing and Qwest. By combining multiple connectivity
methods 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 (Optical Carrier-n), DS-3, T1, ATM, Frame Relay, ISDN and dial up
connectivity options. Using these multiple technologies gives us a differential
advantage over the competition in that we can mesh together connections that are
available and sensible to our customers at the local and regional level in a
private network environment.
STRATEGIC RELATIONSHIPS
We have established strategic relationships with several national
communications carriers that provide us with access to transit on their
respective network backbones and last-mile connectivity routes. Additionally, we
collocate next generation switching and routing hardware within the
infrastructure of these providers and employ network applications and protocols
that allow us to differentiate services and guarantee service quality, while
providing unmatched flexibility, scalability, and carrier-class reliability.
We have strategic partnerships with the following providers of national
fiber optic transit, collocation space and last-mile DSL connectivity:
Level (3): Level (3) is a communications and information services
company offering a wide selection of IP-based services including broadband
transport, co-location services and submarine transmission services. We were the
first service provider to deliver our services over the Level (3) Network. The
Level (3) Network includes metropolitan networks in 56 U.S. markets and 21
international markets connected by an approximately 16,000-mile U.S. inter-city
(long-distance) network, an approximately 4,750 mile European inter-city network
and both transpacific and transatlantic undersea cables.
Qwest: Qwest is an Internet communications company whose growing range
of advanced Internet applications and services are delivered -- and enabled --
by one of the most advanced networks on earth. The Qwest network is built with
the industry's most advanced technologies. It offers 10 gigabit, OC-192 speed
and is constructed on a "self-healing" SONET ring and 2.4 gigabit (OC-48) IP
architecture.
Broadwing: Broadwing is an integrated communications provider
delivering voice, data and Internet solutions nationwide. Broadwing has deployed
and continues to enhance its premier next-generation fiber network and
award-winning IP backbone. The fiber optics being deployed in Broadwing's
network utilize state-of-the-art, non-zero dispersion shifted fiber that enables
the support of the most advanced technologies.
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Covad: Covad's network currently covers more than 25 million homes and
businesses in major metropolitan statistical areas (MSAs). Covad services are
available across the United States in 56 of the top Metropolitan Statistical
Areas (MSAs). Covad services will be available in 100 MSAs by the end of 2000.
At that time, Covad's digital network will reach more than 40 percent of all US
homes and 45 percent of all US businesses. Covad currently has 1000 central
offices (COs) service ready and expects to have 2,000 COs service ready by the
end of 2000.
Rhythms NetConnections: Rhythms is a North American provider of
DSL-based, broadband communication services to businesses and consumers serving
43 markets and covering 74 MSAs. Since Rhythms began its network build in
September 1997, the company has built 1,225 central offices in just over two
years. Rhythms believes this is the fastest facility deployment of any data
competitive local exchange carrier (CLEC) in history.
New Edge Networks: New Edge is the leading national wholesale DSL
provider in small, midsize and semi-rural markets. Since its founding last June,
New Edge Networks has raised more than $300 million from top tier private
venture firms, global financial institutions and worldwide technology firms that
include: Accel Partners, Palo Alto, Calif.; Crosspoint Venture Partners,
Woodside, Calif.; Greylock, Boston, Mass.; Meritech Capital Partners, Menlo
Park, Calif.; Comdisco Ventures; Intel Corporation; Newbridge Networks; Goldman,
Sachs & Co.; and, Morgan Stanley Dean Witter.
SALES AND MARKETING
Our marketing professionals have developed a methodology to identify
the businesses that would benefit from our services. Once we identify businesses
in a target market, we employ a targeted local marketing strategy utilizing
telemarketing personnel.
Using targeted business lists and referrals, our telemarketers initiate
contact with potential customers. Our sales personnel are trained in customer
oriented, solution-based sales techniques and product knowledge.
We have a sales unit that focuses on the larger customers that have a
longer buying cycle. This unit develops business prospects from market research,
referrals from telemarketers and referrals from other customers.
CUSTOMER SUPPORT AND OPERATIONS
Our customer support team works to maximize the simplicity and
convenience of data communications and network access for our customers. They
provide our customers with a single point of contact for implementation,
maintenance and operations support.
IMPLEMENTATION. We manage the implementation of our service for each
customer. We work together with our strategic partners to ensure that lines are
installed, tested, and in good working order from all customer offices
throughout the network.
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MAINTENANCE. Our network operations center provides network
surveillance for all equipment in our customers' network. We are able to detect
and correct many of our customers' maintenance problems remotely, often before
our customer is aware of the problem. Customer-initiated maintenance and repair
requests are managed and resolved primarily through our help desk. Our
information management system, which generates reports for tracking maintenance
problems, allows us to communicate maintenance problems from the customer
service center to our network operations center 24 hours a day, seven days a
week.
OPERATIONS SUPPORT SYSTEMS. We are in the process of expanding our
operations support systems that will allow us to double our marketing staff and
develop the capacity to handle our expansion goals.
COMPETITION
We face competition from many companies with significantly greater
financial resources, well-established brand names and large installed customer
bases. Although we believe competition in many second and third tier cities is
less intense than competition in larger cities, we expect the level of
competition in our markets to intensify in the future.
WE EXPECT SIGNIFICANT COMPETITION FROM:
OTHER DSL PROVIDERS. Certain competitive carriers, including Network
Access Solutions, NorthPoint and Rhythms NetConnections offer DSL-based
services. The 1996 Telecommunications Act specifically grants competitive
telecommunications companies, including other DSL providers, the right to
negotiate interconnection agreements with traditional telephone companies,
including interconnection agreements which may be identical in all respects to,
or more favorable than, our agreements. Several of the large telecommunications
companies and computer companies, such as Microsoft and Intel, have made
investments in DSL service providers.
INTERNET SERVICE PROVIDERS. Several national and regional Internet
service providers, including America Online, Concentric Network, Flashcom,
Mindspring, PSINet and Verio, have begun developing high-speed access
capabilities to leverage their existing products and services. These companies
generally provide Internet access to residential and business customers over the
traditional telephone companies' networks at higher speeds. However, some
Internet service providers have begun offering DSL-based access using another
carrier's DSL service or, in some cases, building their own DSL networks. Some
Internet service providers combine their significant and even nationwide
marketing presence with strategic or commercial alliances with DSL-based
competitive telecommunications companies.
TRADITIONAL LOCAL TELEPHONE COMPANIES. Many of the traditional local
telephone companies, including Pacific Bell, Bell Atlantic, BellSouth and SBC
Communications, are conducting technical or market trials or have begun
deploying DSL-based services. These companies have established brand names and
reputations for high quality in their service areas, possess sufficient capital
to deploy DSL equipment rapidly, have their own copper telephone lines and can
bundle digital data services with their existing voice services to achieve a
competitive advantage in serving customers. We believe that the traditional
telephone companies have the potential to quickly deploy DSL services. In
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addition, these companies also offer high-speed data communications services
that use other technologies. We depend on these traditional local telephone
companies to enter into agreements for interconnection and to provide us access
to individual elements of their networks. Although the traditional local
telephone companies are required to negotiate in good faith in connection with
these agreements, future interconnection agreements may contain less favorable
terms and result in a competitive advantage to the traditional local telephone
companies.
NATIONAL LONG DISTANCE CARRIERS. National long distance carriers, such
as AT&T, MCI WorldCom, Qwest and Sprint, have deployed large-scale data
networks, sell connectivity to businesses and residential customers, and have
high brand recognition. They also have interconnection agreements with many of
the traditional telephone companies and are beginning to offer competitive DSL
services.
OTHER FIBER-BASED CARRIERS. Companies such as Allegiance, ChoiceOne,
e.spire, Intermedia and Williams have extensive fiber networks in many
metropolitan areas, primarily providing high-speed data and voice circuits to
small and large corporations. They also have interconnection agreements with the
traditional telephone companies under which they have acquired collocation space
in many large markets.
CABLE MODEM SERVICE PROVIDERS. Cable modem service providers, such as
At Home and its cable partners, are offering or preparing to offer high-speed
Internet access over cable networks to consumers. @Work, a division of At Home,
has positioned itself to do the same for businesses. Where deployed, these
networks provide high-speed local access services, in some cases at speeds
higher than DSL service. They typically offer these services at lower prices
than our services, in part by sharing the capacity available on their cable
networks among multiple end users.
WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Several new companies,
including Advanced Radio Telecom, Teligent and WinStar Communications, are
emerging as wireless data service providers. In addition, other companies,
including Motorola Satellite Systems and Hughes Communications, are emerging as
satellite-based data service providers. These companies use a variety of new and
emerging technologies to provide high-speed data services.
We may be unable to compete successfully against these competitors. The
most significant competitive factors include: transmission speed, service
reliability, breadth of product offerings, cost for performance, network
security, ease of access and use, content bundling, customer support, brand
recognition, operating experience, capital availability and exclusive contracts
with customers, including Internet service providers and businesses with
multiple offices. We believe our services compete favorably within our service
markets with respect to transmission speed, service reliability, breadth of
product offerings, cost for performance, network security, ease of access and
use, content bundling, customer support, and operating experience. Many of our
competitors enjoy competitive advantages over us based on their brand
recognition and exclusive contracts with customers.
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INTELLECTUAL PROPERTY
We regard our products, services and technology as proprietary and
attempt to protect them with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. We have not applied for any
patents. There can be no assurance these methods will be sufficient to protect
our technology and intellectual property. We also may enter into confidentiality
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products, services or technology without authorization, or to
develop similar technology independently. Effective copyright, trademark and
trade secret protection may be unavailable or limited in certain foreign
countries, and the global nature of the Internet makes it virtually impossible
to control the ultimate destination of our proprietary information. There can be
no assurance that the steps we have taken will prevent misappropriation or
infringement of our technology. In addition, litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition. Some of our information is a matter of public record and
can be readily obtained by our competitors and potential competitors, possibly
to our detriment.
GOVERNMENT REGULATION
A significant portion of the services that we offer will be subject to
regulation at the federal and/or state levels. The Federal Communications
Commission, or FCC, and state public utility commissions regulate
telecommunications common carriers, which are companies that offer
telecommunications services to the public or to all prospective users on
standardized rates and terms. Our data transport services are common carrier
services.
The FCC exercises jurisdiction over common carriers, and their
facilities and services, to the extent they are providing interstate or
international communications. The various state utility commissions retain
jurisdiction over telecommunications carriers, and their facilities and
services, to the extent they are used to provide communications that originate
and terminate within the same state. The degree of regulation varies from state
to state.
In recent years, the regulation of the telecommunications industry has
been in a state of flux as the United States Congress and various state
legislatures have passed laws seeking to foster greater competition in
telecommunications markets. The FCC and state commissions have adopted many new
rules to implement those new laws and to encourage competition. These changes,
which are still incomplete, have created new opportunities and challenges for
our competitors and us. Certain of these and other existing federal and state
regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals which could change, in varying degrees,
the manner in which this industry operates. Neither the outcome of these
proceedings nor their impact upon the telecommunications industry or us can be
predicted at this time. Indeed, future federal or state regulations and
legislation may be less favorable to us than current regulations and legislation
and therefore have a material and adverse impact on our business and financial
prospects by undermining our ability to provide DSL services at competitive
prices. In addition, we may expend significant financial and managerial
resources to participate in proceedings setting rules at either the federal or
state level, without achieving a favorable result.
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<PAGE>
FEDERAL REGULATION AND LEGISLATION. Through our strategic partners, we
must comply with the requirements of a common carrier under the Communications
Act of 1934, as amended, to the extent we provide regulated interstate services.
These requirements include an obligation that our charges, terms and conditions
for communications services must be "just and reasonable" and that we may not
make any "unjust or unreasonable discrimination" in our charges or terms and
conditions. The FCC also has jurisdiction to act upon complaints against common
carriers for failure to comply with their statutory obligations. We are not
currently subject to price cap or rate of return regulation at the federal level
and are not currently required to obtain FCC authorization for the installation,
acquisition or operation of our facilities.
The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic carriers, only the large traditional local
telephone companies are classified as dominant carriers and all other providers
of domestic common carrier service, including us, are classified as non-dominant
carriers. As a non-dominant carrier, we are subject to less FCC regulation than
are dominant carriers.
In October 1998, the FCC ruled that DSL and other advanced data
services provided as dedicated access services in connection with interstate
services such as Internet access are interstate services subject to the FCC's
jurisdiction. Accordingly, we could offer DSL services without state regulatory
authority, so long as we do not also provide local or intrastate telephone
services via our network. This decision allows us to provide our DSL services in
a manner that potentially reduces state regulatory obligations. This decision is
currently subject to reconsideration and appeal.
Comprehensive changes to the Communications Act were made by the 1996
Telecommunications Act, enacted on February 8, 1996. It represents a significant
milestone in telecommunications policy by establishing competition in local
telephone service markets as a national policy. The 1996 Telecommunications Act
removes many state regulatory barriers to competition and forecloses state and
local governments from creating laws preempting or effectively preempting
competition in the local telephone service market.
The 1996 Telecommunications Act places substantial interconnection
requirements on the traditional local telephone companies.
Traditional local telephone companies are required to provide physical
collocation, which allows companies such as us and other interconnectors to
install and maintain their own network termination equipment in the central
offices of traditional local telephone companies, and virtual collocation only
if requested or if physical collocation is demonstrated to be technically
infeasible. This requirement is intended to enable us, along with other
competitive carriers to deploy our equipment on a relatively convenient and
economical basis.
Traditional local telephone companies are required to unbundle
components of their local service networks so that other providers of local
service can compete for a wide range of local service customers. This
requirement is designed to provide us flexibility to purchase only the equipment
we require to deliver our services.
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<PAGE>
Traditional local telephone companies are required to establish
"wholesale" rates for their services to promote resale by competitive local
exchange carriers and other competitors.
Traditional local telephone companies are required to establish number
portability, which allows a customer to retain its existing phone number if it
switches from the traditional local telephone companies to a competitive local
service provider.
Traditional local telephone companies are required to establish dialing
parity, which ensures that customers will not detect a quality difference in
dialing telephone numbers or accessing operators or emergency services of local
competitive service providers.
Traditional local telephone companies are required to provide
nondiscriminatory access to telephone poles, ducts, conduits and rights- of-way.
In addition, the 1996 Telecommunications Act requires traditional local
telephone companies to compensate competitive carriers for traffic originated by
them and terminated on the competitive carrier's network.
The 1996 Telecommunications Act in some sections is self-executing. The
FCC issues regulations interpreting the 1996 Telecommunications Act that impose
specific requirements upon which our competitors and we rely. The outcome of
various ongoing FCC rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects by
increasing the cost or decreasing our flexibility in providing DSL services. The
FCC prescribes rules applicable to interstate communications, including rules
implementing the 1996 Telecommunications Act, a responsibility it shares in
certain respects with the state regulatory commissions. As part of its effort to
implement the 1996 Telecommunications Act, the FCC issued an order governing
interconnection in August 1996. A federal appeals court for the Eighth Circuit,
however, reviewed the initial rules and overruled some of their provisions,
including some rules on pricing and nondiscrimination. In January 1999, the
United States Supreme Court reversed elements of the Eighth Circuit's ruling,
finding that the FCC has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation, specifically
including authority over pricing methodology. The Supreme Court upheld the FCC's
directive to the traditional local telephone companies to combine individual
elements for competitors, and to allow competitors to pick and choose among
provisions in existing interconnection agreements. The Supreme Court also found
that the FCC's interpretation of the rules for establishing individual elements
of a network system was not consistent with standards prescribed in the 1996
Telecommunications Act, and required the FCC to reconsider and better justify
its delineation of individual elements. The pick and choose rule permits a
competitive carrier to select individual provisions of existing interconnection
agreements yet still tailor its interconnection agreement to its individual
needs by negotiating the remaining provisions. The FCC implemented a public
rulemaking seeking comment on these issues, including particularly, which
network elements should be offered on an unbundled basis by traditional local
telephone companies, and a decision is expected later this year. Although the
FCC has tentatively concluded that local copper telephone lines should continue
to remain available as an unbundled element, there is no certainty as to the
FCC's outcome on this issue or as to other network elements which the
traditional local telephone companies will be required to unbundle. Moreover,
this proceeding, as well as a companion FCC rulemaking, addresses related issues
of significant importance to us, including:
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<PAGE>
o the manner in which copper telephone lines should be subject
to unbundling;
o compatibility among DSL services and between DSL and non-DSL
services; and
o the sharing of copper telephone lines between DSL data
services offered by one provider and voice services offered by
another provider.
In addition, some traditional telephone companies may take the position
that they have no obligation to provide individual elements of their network
systems, including copper telephone lines, until the FCC issues new rules, which
could adversely affect our ability to expand our network in accordance with our
roll-out plan and therefore adversely affect our business.
In March 1998, several traditional local telephone companies petitioned
the FCC for relief from certain regulations applicable to the DSL and other
advanced data services that they provide, including their obligations to provide
copper telephone lines and resold DSL services to competitive carriers. In
August 1998, the FCC concluded that DSL services are telecommunications services
and, therefore, the traditional local telephone companies are required to allow
interconnection of their facilities and equipment used to provide data transport
functionality, unbundle local telecommunications lines and offer for resale DSL
services. In the same proceeding, the FCC issued a notice of proposed rulemaking
seeking comments on its tentative conclusion that traditional local telephone
companies should be permitted to create separate affiliates to provide the DSL
services. Under the separate affiliate proposal, traditional local telephone
companies would be required to provide wholesale service to other DSL carriers
at the same rates, terms and conditions that it provided to its separate
affiliate. The outcome of this proceeding remains uncertain. Any final decision
in this proceeding that alters our relationship with the traditional local
telephone companies could adversely affect our ability to provide DSL services
at a competitive price.
In March 1999, the FCC adopted regulations that require the traditional
local telephone companies to permit other carriers to collocate all equipment
necessary for interconnection. This requirement includes equipment that we use
to provide DSL data services. The FCC also adopted limits on the construction
standards and other conditions for collocation that may be imposed by
traditional local telephone companies. These rules should reduce our collocation
costs and expedite our ability to provide service to new areas. There is no
guarantee that these new rules will be implemented fully by the traditional
local telephone companies. Therefore, the benefits of these rules may be delayed
pending interpretation and enforcement by state and federal regulators. These
rules are currently subject to appeal by several traditional local telephone
companies.
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<PAGE>
The 1996 Telecommunications Act also directs the FCC, in cooperation
with state regulators, to establish a universal service fund that will provide
subsidies to carriers that provide service to individuals that live in rural,
insular, and high-cost areas. A portion of carriers' contributions to the
universal service fund also will be used to provide telecommunications related
facilities for schools, libraries and certain rural health care providers. The
FCC released its initial order in this context in June 1997, which requires all
telecommunications carriers to contribute to the universal service fund. The
FCC's implementation of universal service requirements remains subject to
judicial and additional FCC review. Additional changes to the universal service
regime, which could increase our costs, could have an adverse affect on us.
STATE REGULATION. In October 1998, the FCC deemed data transmission to
the Internet as interstate services subject only to federal jurisdiction.
However, this decision is currently subject to reconsideration and appeal. Also,
some of our services that are not limited to interstate access potentially may
be classified as intrastate services subject to state regulation. All of the
states where we operate, or intend to operate, require some degree of state
regulatory commission approval to provide certain intrastate services and
maintain ongoing regulatory supervision. In most states, intrastate tariffs are
also required for various intrastate services, although our services are not
subject to price or rate of return regulation. Actions by state public utility
commissions could cause us to incur substantial legal and administrative
expenses and adversely affect our business.
To date, we have been able to obtain authorizations to operate as a
competitive local exchange carrier in 41 states and the District of Columbia,
and we have filed for competitive local exchange carrier status in the remaining
states. Although we expect to obtain certifications in all states, there is no
guarantee that these certifications will be granted or obtained in a timely
manner.
LOCAL GOVERNMENT REGULATION. In certain instances, our strategic
partners may be required to obtain various permits and authorizations from
municipalities, such as for use of rights-of-way, in which we operate local
distribution facilities. Whether various actions of local governments over the
activities of telecommunications carriers such as ours, including requiring
payment of franchise fees or other surcharges, pose barriers to entry for
competitive local exchange carriers that violate the 1996 Telecommunications Act
or may be preempted by the FCC is the subject of litigation. While we are not a
party to this litigation, we may be affected by the outcome. If municipal
governments impose conditions on granting permits or other authorizations or if
they fail to act in granting such permits or other authorizations, the cost of
providing DSL services may increase or negatively impact our ability to expand
our network on a timely basis and adversely affect our business.
TELEMARKETING REGULATIONS. Our marketing depends primarily on the
telemarketing sale channel. 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.
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<PAGE>
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. we train our 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. We do not process card payments for any of our
customers and do 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. We cannot predict whether
this legislation will be enacted and what effect, if any, it would have on the
telemarketing industry.
SUBSIDIARIES
We have four 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; Color
Networks, Inc., a California corporation; and MobileNetics, Inc., a California
corporation.
EMPLOYEES
We employ one hundred ten (110) full-time employees, including five (5)
in executive management, seventy-five (75) in sales, marketing and customer
service, twenty-two (22) in operations, and eight (8) in finance and
administration. We believe that our future success will depend in part on our
continued ability to attract, hire and retain qualified personnel. Competition
for such personnel is intense, and we may be unable to identify, attract and
retain such personnel in the future. None of our employees is represented by
collective bargaining agreements and we consider relations with our employees to
be good.
FACILITIES
We rent approximately 33,000 square feet of commercial office space in
Irvine, California. The facility is leased through June 30, 2001, at a rate of
approximately $55,000 per month.
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<PAGE>
LEGAL PROCEEDINGS
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
the 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
the motion 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.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors and
executive officers as of March 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
Gene Elmore 58 Director
Robert C. Weaver, Jr. 55 Director
</TABLE>
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 1991. 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 our 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.
Gene Elmore has been a director since February, 2000 and has worked in
the telecommunications and long distance industry for over 20 years. Since 1995,
Mr. Elmore has been the managing member of Quimby, LLC, which has been
purchasing and renovating buildings to house collocation facilities for Internet
and long distance companies. From 1990, he founded and served as President of TM
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Sepulveda, Inc., a company licensed in 42 states to resell telecommunications
and long distance services. Mr. Elmore has served on the Board of Directors of
several charitable organizations, including the United Way and the American Red
Cross, and has served on the Advisory Board of the Los Angeles Chamber of
Commerce. He received his B.A. from California State University at Northridge,
and his M.A. from Pepperdine University.
Robert C. Weaver, Jr. has been a Director since March, 2000. A licensed
attorney since 1982, Mr. Weaver served as General Counsel, Secretary and as a
Director of Builders Staff Corporation from 1997 to 1999. From 1991 to 1997, he
served as Director and was the Secretary and Financial and Operations Principal
of La Jolla Capital Corporation in San Diego, California. Mr. Weaver also served
as General Counsel to numerous corporations from 1982 through 1991. He received
his J.D. from Thomas Jefferson School of Law and his Master of Science in
Business Administration from San Diego State University.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
All directors hold office until the next annual meeting of stockholder
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors.
Our directors have not been compensated for the services they provide
as directors. In the future, our non-employee directors may be reimbursed for
expenses incurred in connection with attending board and committee meetings and
compensated for their services as board or committee members. We may also grant
non-employee directors options to purchase our common stock pursuant to the
terms of our 1999 Stock Plan. See "Executive Compensation--Stock Plans."
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee is comprised of three (3)
directors of the company who oversee the actions taken by our independent
auditors and review our internal financial and accounting controls and policies.
Currently, the members of the Audit Committee are Gene Elmore, John W. Diehl,
Jr. and one independent member to be determined. As required by the NASD
marketplace unless, two of the Audit Committee members Messrs. Elmore and
Weaver, are independent.
COMPENSATION COMMITTEE. The three (3) member Compensation Committee is
responsible for determining salaries, incentives and other forms of compensation
for our officers, employees and consultants. The current members of the
Compensation Committee are Gene Elmore, Robert C. Weaver, Jr. and William J.
Kettle.
FAMILY RELATIONSHIPS.
Adela Maria Kettle is the wife of William J. Kettle. There are no other
family relationships among our directors and officers.
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<PAGE>
INDEMNIFICATION
Our Articles of Incorporation provide that we shall indemnify, to the
full extent permitted by Nevada law, any of our directors, officers, employees
or agents who are made, or threatened to be made, a party to a proceeding by
reason of the fact that he or she is or was one of our directors, officers,
employees or agents against judgments, penalties, fines, settlements and
reasonable expenses incurred by the person in connection with the proceeding if
specified standards are met. Although indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to our directors, officers and
controlling persons under these provisions, we have been advised that, in the
opinion of the SEC, indemnification for liabilities arising under the Securities
Act of 1933 is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information concerning the compensation of the
named executive officers for each of our last three completed fiscal years.
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation
-----------------------------------------------------------------------------------------------------
Awards Payouts
------------------------------------------------------
All
Other Annual Restricted Securities LTIP Other
Compen-sation Stock Underlying Payouts Compensation
Name and Principal Salary Bonus ($) Award(s) ($) Options/SARs (#) ($) ($)
Position (a) Year (b) ($)(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)
Chief Financial Officer, 1998 $0 $ 3,800 (5)
Secretary 1997 $0 $ 7,950 (5) $6,200 (7) 500,000 (8)
</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 $0.031 per share.
(3) Award granted as of December 28, 1997 for 4,000,000 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.
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<PAGE>
(6) Other employee benefits.
(7) Award granted as of December 28, 1998 for 200,000 restricted
common shares, valued at $6,200.
(8) Option granted as of December 28, 1998 for 500,000 restricted
common shares, exercisable at $.031 per share.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of stock options in
this last completed fiscal year and through February 29, 2000 to the executive
officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Individual Grants
Number of Securities % of Total Options/SARs Exercise or
Name Underlying Options/SARs Granted to Employees in Base Price Expiration Date
(a) Granted (#) (b) Period(c) ($/Sh) (d) (e)
- -------------------------- ------------------------------- ------------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
William J. Kettle 3,000,000 59.6% $ .031 12-28-2003
John W. Diehl, Jr. 500,000 9.9 $ .031 12-28-2003
John W. Diehl, Jr. 200,000 4.0 $ 4.531 11-25-2001
Other Employees 1,336,760 26.5 various (1) various (2)
</TABLE>
- ----------------------
(1) Exercise prices range from $4.00 to $15.00 per share, and the weighted
average exercise price was $8.32 per share.
(2) 285,360 options vested immediately and have terms of two years, 600,000
options vest over a one year period and have terms of two years,
560,400 options vest over a two-year period and have terms of three
years, and 91,000 vest over a three-year period and have terms of four
of four years.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE
The following table sets forth information concerning each exercise of stock
options (or tandem SARs) and freestanding SARs during the last completed fiscal
year and through February 29, 2000 by each of the executive officers named in
the Summary Compensation Table and the value of unexercised options and SARs as
of February 29, 2000.
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options/SAR's at Value of Unexercised In-The-Money
Shares 2/29/00 (#) Options/SAR's at 2/29/00 ($)
Acquired -------------------------------- -----------------------------------
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Kettle - - 7,000,000 - $104,867,000(1) -
John W. Diehl, Jr. 500,000 $5,359,500(2) 200,000 - $ 2,093,800(1) -
</TABLE>
- --------------------
(1) Based on the closing bid price of $15.00 per share on February 29,
2000.
(2) Mr. Diehl exercised 500,000 options on February 5, 2000, at which time
the closing sales price of the company's common stock was $10.75.
EMPLOYMENT AGREEMENTS
None of our executive officers are subject to an employment agreement
at this time. We intend to enter into employment contracts with some of our
executive officers in the near future.
STOCK PLANS
1999 STOCK PLAN. Our Board of Directors adopted our 1999 Stock Plan in
November 1999 reserving 5,000,000 shares for issuance. In March 2000 the Board
amended and restated the 1999 Stock Plan. Such amendment is subject to the
approval of the stockholders' at the next annual meeting. As of February 29,
2000, options to purchase an aggregate of 1,502,860 shares were outstanding
(1,536,760 options have been granted and 33,900 options have been exercised) and
3,463,240 shares were available for future grant.
Our 1999 Stock Plan provides for the grant of incentive stock options,
as defined in Section 422 of the Internal Revenue Code, to employees and
nonstatutory stock options, stock purchase rights and stock bonus rights to
employees, directors and consultants. The 1999 stock plan may be administered by
different committees with respect to different groups of service providers.
Options granted as performance-based compensation within the meaning of Section
162(m) are administered by a committee of two or more outside directors. Option
administration committees may make final and binding determinations regarding
the terms and conditions of the awards granted, including the exercise prices,
the numbers of shares subject to the awards and the exercisability of the
awards, forms of agreement for use under the plan and interpretation of plan
terms.
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<PAGE>
The exercise price of incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of our common stock
on the date of grant. However, for any employee holding more than 10% of the
voting power of all classes of our stock, including the stock of any parent or
subsidiary of the company, the exercise price will be no less than 110% of the
fair market value. The administrator of the 1999 Stock Plan sets the exercise
price of nonstatutory stock options. The maximum term of options granted under
the 1999 stock plan is ten (10) years.
An optionee whose relationship with us or any related corporation
ceases for any reason, other than death or total and permanent disability, may
exercise options in the three-month period following such cessation, or such
other period of time as determined by the administrator, unless these options
terminate or expire sooner, or for nonstatutory stock options, later, by their
terms. The three-month period is extended to 12 months for terminations due to
death or total and permanent disability. In the event of a merger, sale or
reorganization of us into another corporation that results in a change of
control of us, options that would have become vested within 18 months after the
closing date of the merger transaction will accelerate and become fully vested
upon the closing of the transaction. In the event of a change of control
transaction, either other outstanding options that are not accelerated would be
assumed by the successor company or the successor company would substitute an
equivalent option. If any of these options are not assumed or substituted, they
would terminate.
The 1999 Stock Plan will terminate in November 2009, unless sooner
terminated by the Board of Directors.
Our Board of Directors may also grant stock purchase rights to
employees, directors and consultants under the 1999 Stock Plan. These grants are
made pursuant to restricted stock purchase agreements, and the price to be paid
for the shares granted thereunder is determined by the administrator. We are
generally granted a repurchase option exercisable on the voluntary or
involuntary termination of the purchaser's employment with us for any reason,
including death or disability. The repurchase price must be the original
purchase price paid by the purchaser. The repurchase option lapses at a rate
determined by the administrator. Once the stock purchase right has been
exercised, the purchaser will have the rights equivalent to those of a
stockholder.
CERTAIN TRANSACTIONS
In December 1997, the Board of Directors authorized the issuance of
4,000,000 shares of common stock to our Chairman for services rendered, which
had a fair market value of $40,000 on the date of issuance. Also in December
1997, the Chairman was granted the option to purchase an additional 4,000,000
shares of our common stock at an exercise price of $0.01 per share, exercisable
until December 2002.
In December 1998, the Board of Directors authorized the issuance of
3,000,000 shares of common stock to our Chairman for services rendered which had
a fair market value of $64,000 on the date of issuance. Also in December 1998,
the Chairman was granted the option to purchase an additional 3,000,000 shares
of our common stock at an exercise price of $0.031 per share, exercisable until
December 2003.
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<PAGE>
During the fiscal year 1999, our principal stockholder and Chairman
advanced an aggregate of $797,680 for working capital purposes. The notes
payable bear interest at 10% per annum. During the period from September 1, 1999
through February 29, 2000 the principal stockholder and Chairman advanced an
additional $661,119 to the company. The notes accrued interest in the aggregate
amount of $34,682 through February 29, 2000.
The notes are repayable upon demand in cash. The company intends to
request the stockholder to convert his notes into shares of our common stock;
however, to date no such agreement has been entered into. The stockholder has
agreed not to demand repayment before November 11, 2000.
On June 1, 1999 the company consummated its acquisition of
MobileNetics, Inc. The company issued 10,000,000 shares of common stock in
consideration for 100% of the issued and outstanding shares of MobileNetics,
Inc. The sole shareholder of MobileNetics, Inc. was Bryan L. Turbow. On May 4,
1998, and prior to the consummation of the acquisition, the company issued
2,000,000 shares of its common stock to Bryan L. Turbow in connection with a
lease of certain equipment.
SEE THE FURTHER DISCUSSIONS WITH RESPECT TO THE AFOREMENTIONED
TRANSACTIONS APPEARING IN NOTES 2, 6 AND 7 TO THE COMPANY'S AUDITED CONSOLIDATED
FINANCIAL STATEMENTS.
PRINCIPAL STOCKHOLDERS
The following tables set forth information regarding the beneficial
ownership of our common stock as of February 29, 2000, for: (i) each of our
executive officers; (ii) each of our directors; (iii) each person or group of
affiliated persons whom we know beneficially owns more than 5% of our
outstanding common stock; and (iv) our directors and executive officers as a
group.
Unless otherwise indicated, the address for each stockholder on this
table is c/o LMKI, Inc., 3355 Michelson, Suite 300, Irvine, California 92612.
Except as otherwise noted, and subject to applicable community property laws, to
the best of our knowledge the persons named in this table have sole voting and
investing power with respect to all of the shares of common stock held by them.
Options, warrants, conversion and other rights to acquire shares of our
securities that are exercisable within 60 days of the table date are deemed to
be beneficially owned by the persons holding these options or warrants for the
purpose of computing percentage ownership of that person, but are not treated as
outstanding for the purpose of computing any other person's ownership percentage
or the total number of securities outstanding. As of the table date we had
37,249,566 common shares and 4,000 series A convertible preferred shares
outstanding.
51
<PAGE>
TITLE OF CLASS: COMMON STOCK
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------------------- ------------------------ -----------------
William J. Kettle (1)(2) 21,320,000 48.2%
Bryan L. Turbow (1)(3) 12,000,000 32.2
A. Maria Kettle (1)(3) 14,350,000 38.5
John W. Diehl, Jr. (1) 700,000 1.9
Robert C. Weaver (1) 600,000 1.6
Named Officers and Directors As a
Group (5 persons) 34,620,000 78.2%
- --------------------
(1) Officer and/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.
TITLE OF CLASS: SERIES A CONVERTIBLE PREFERRED STOCK(1)
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class
- --------------------------------------- ----------------------- ----------------
Mesora Investors, LLC 4,000(1)(2) 100%
c/o WEC Asset Management, LLC
One World Trade Center
Suite 4563
New York, New York 100048
(1) The series A convertible preferred stock is not registered with the
Securities and Exchange Commission.
(3) Currently convertible into 941,177 shares of common stock which are
included in the shares registered in this offering based on a
conversion price of $4.25 per share. (See "Selling Stockholders.")
52
<PAGE>
THE MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded in the over-the-counter market since
1995. It is currently traded in the over-the-counter market and quoted on the
OTC Electronic Bulletin Board (symbol "LMKI") maintained by NASDAQ. The market
for our common stock has often been sporadic, volatile and limited.
The following table shows the high and low bid prices for our common
stock as reported by NASDAQ during the past two years and current year. The
prices reflect inter-dealer quotations, without retail markup, markdown or
commissions and may not represent actual transactions.
High Bid Low Bid
--------- --------
FISCAL YEAR ENDED AUGUST 31, 2000
Third Quarter (through April 10, 2000).............. 15.00 7.8125
Second Quarter...................................... 18.375 5.50
First Quarter....................................... 5.875 2.6875
FISCAL YEAR ENDED AUGUST 31, 1999
Fourth Quarter...................................... 9.125 0.4375
Third Quarter....................................... 1.00 0.05
Second Quarter...................................... 0.09 0.02
First Quarter....................................... 0.03125 0.03125
FISCAL YEAR ENDED AUGUST 31, 1998
Fourth Quarter...................................... 0.03125 0.03125
Third Quarter....................................... 0.03125 0.03125
Second Quarter...................................... 0.0625 0.03125
First Quarter....................................... 0.0625 0.0625
On or about December 15, 1999, we filed an application for listing on
the NASDAQ National Market. We believe we qualify for such listing based on
meeting the NASDAQ market capitalization requirements. However, there can be no
assurance that our application will be approved.
HOLDERS
As of April 10, 2000 the closing bid price of our common stock was
$10.875. As of February 29, 2000, there were 440 registered holders of record of
our shares.
DIVIDENDS
We have never paid cash dividends on our capital stock. We currently
intend to retain all available funds to operate and expand our business and not
anticipate paying any cash dividends in the foreseeable future.
53
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 50,000,000 shares of common stock,
$.001 par value, of which 37,249,566 shares were issued and outstanding as of
February 29, 2000. All outstanding shares of our common stock are fully paid and
nonassessable and the shares of our common stock offered by this prospectus will
be, upon issuance, fully paid and nonassessable. The following is a summary of
the material rights and privileges of our common stock.
VOTING. Holders of our common stock are entitled to cast one vote for
each share held at all stockholder meetings for all purposes, including the
election of directors. The holders of more than 50% of the voting power of our
common stock issued and outstanding and entitled to vote and present in person
or by proxy, together with any preferred stock issued and outstanding and
entitled to vote and present in person or by proxy, constitute a quorum at all
meetings of our stockholders. The vote of the holders of a majority of our
common stock present and entitled to vote at a meeting, together with any
preferred stock present and entitled to vote at a meeting, will decide any
question brought before the meeting, except when Nevada law, our Articles of
Incorporation, or our bylaws require a greater vote and except when Nevada law
requires a vote of any preferred stock issued and outstanding, voting as a
separate class, to approve a matter brought before the meeting. Holders of our
common stock do not have cumulative voting for the election of directors.
DIVIDENDS. Holders of our common stock are entitled to dividends when
and if declared by the Board of Directors out of funds available for
distribution. The payment of any dividends may be limited or prohibited by loan
agreement provisions or priority dividends for preferred stock that may be
outstanding.
PREEMPTIVE RIGHTS. The holders of our common stock have no preemptive
rights to subscribe for any additional shares of any class of our capital stock
or for any issue of bonds, notes or other securities convertible into any class
of our capital stock.
LIQUIDATION. If we liquidate or dissolve, the holders of each
outstanding share of our common stock will be entitled to share equally in our
assets legally available for distribution to our stockholders after payment of
all liabilities and after distributions to holders of preferred stock legally
entitled to be paid distributions prior to the payment of distributions to
holders of our common stock.
PREFERRED STOCK
We are authorized to issue up to 10,000,000 shares of preferred stock,
par value $.001 per share, issuable from time to time in one or more series,
having such designation, rights, preferences, powers, restrictions and
limitations as may be fixed by the Board of Directors.
SERIES A CONVERTIBLE PREFERRED STOCK. On November 23, 1999, we filed
with the Nevada Secretary of State a Certificate of Designations establishing
the series A convertible preferred stock consisting of 5,000 shares. As of
54
<PAGE>
February 29, 2000, 4,000 shares of our series A convertible preferred stock were
issued and outstanding. We also granted a conditional warrant to purchase an
additional 1,000 shares of series A preferred stock to the selling shareholder.
See Description of Securities - Conditional Warrants. The following is a summary
of the rights, privileges and preferences of the series A convertible preferred
stock.
DIVIDENDS. The cumulative non-compounded dividend on the series A
convertible preferred stock is 6% per annum based on the stated value of $1,000
per share, payable as permitted by law and declared by the Board of Directors,
or upon the redemption or conversion of the series A convertible preferred stock
into common stock. We may not declare or pay any dividends on the common stock
unless we first declare and pay all unpaid dividends on the series A convertible
preferred stock.
CONVERSION. Each share of the outstanding series A convertible
preferred stock is convertible, at the election of the holder thereof, into the
number of shares of our common stock equal to $1,000 plus the amount of any
accrued and unpaid dividends divided by the lesser of (1) $4.25 per share, or
(2) 80% of the average of the three lowest closing bid prices of the our common
stock for the 25 trading days immediately preceding the election by the holder
to convert. At any time while any shares of the series A convertible preferred
stock are outstanding, we may not issue any classes or series of stock that are
senior to the series A convertible preferred stock in any respect, including
liquidation.
The following table shows the number of share of common stock and the
percentage of total outstanding shares the selling shareholder would receive
upon conversion of series A convertible preferred stock at various market and
conversion prices:
Percent of Total
Hypothetical Market Conversion Resulting Number Outstanding Common
Price(1) Price of Shares Stock(2)
- ------------------- ----------- ----------------- ------------------
$1.00 $0.80 6,250,000 14.37%
$2.00 $1.60 3,125,000 7.74%
$4.00 $3.20 1,562,500 4.03%
$5.3125
and above $4.25 1,176,471 3.06%
- --------------
(1) Hypothetical average of the three lowest closing bid prices during the
25 days preceding conversion.
(2) Calculated based upon 37,249,566 shares outstanding prior to
conversion, excluding options, warrants and other rights to purchase
additional shares of common stock.
VOTING. Each share of series A convertible preferred stock entitles the
holder to the number of votes equal to the number of shares of common stock into
which it is convertible. The holders of the common stock and the series A
convertible preferred stock vote as a single class on all matters on which our
stockholders vote, except where otherwise required by law. The holders of the
series A convertible preferred stock do not have cumulative voting for the
election of directors.
55
<PAGE>
PREEMPTIVE RIGHTS. The holders of the series A convertible preferred
stock do not have preemptive rights to subscribe for any additional shares of
any class of our capital stock or for any issue of bonds, notes or other
securities convertible into any class of our capital stock.
LIQUIDATION PREFERENCE. If we liquidate, dissolve or wind-up our
business, whether voluntary or otherwise, after we pay our debts and other
liabilities, the holders of the series A convertible preferred stock will be
entitled to receive from our remaining net assets, before any distribution to
the holders of our common stock, the amount of $1,000 per share of series A
convertible preferred stock in cash plus payment of all accrued but unpaid
cumulative dividends. Holders of the series A convertible preferred stock will
not be entitled to receive any other payments if we liquidate, dissolve or
wind-up our business.
REDEMPTION RIGHTS. If the Registration Statement of which this
Prospectus is a part is declared effective on or after May 21, 2000, or if
certain other events occur, we are required, at the option of the holder, to
redeem all outstanding series A convertible preferred stock at $1,250 per share
plus accrued and unpaid dividends.
OWNERSHIP LIMITATION. The investor in the series A convertible
preferred stock and warrants has a contractual limitation that stipulates that
they will beneficially own no more that 4.999% of our common stock at any one
time. However, the 4.999% limitation would not prevent such investor from
acquiring and selling in excess of 4.999% of shares of our common stock through
a series of acquisitions and sales under the warrants while never beneficially
owning more than 4.999% at any one time.
CONDITIONAL WARRANT. At our election, the holder of the conditional
warrant is obligated to purchase 1,000 shares of series A convertible preferred
stock issuable at $1,000 per share. We must provide the holder at least 7 days
and not more than 20 days notice of our election to exercise, at any time 75
days after the effective date of the Registration Statement. The conditional
warrant expires on November 23, 2000.
WARRANTS AND OPTIONS
As of February 29, 2000, we had outstanding options and warrants to
purchase an aggregate of 9,713,911 shares of common stock at an average weighted
exercise price of $1.766 per share. Such warrants and options expire on various
dates from November 2001 to February 2005.
On November 24, 1999, we granted Dunwoody Brokerage Services, Inc.
warrants to purchase 58,119 shares of common stock at an initial exercise price
of 4.25 per share. If the warrants are exercised more than six months after
issuance, the exercise price will be the lesser of (i) the exercise price then
in effect, or (ii) the lowest "reset" price, which equals one hundred percent of
the average closing bid price of our stock for the five trading days ending on
the six-month anniversary date of the date of issuance. These warrants expire on
November 24, 2004.
56
<PAGE>
LOCK-UP AGREEMENTS
Certain of our officers and directors have agreed, for a period of 6
months after November 23, 1999, not to offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of an
option to purchase or other sale or disposition) of any of their shares of our
common stock or other capital stock or any securities convertible into, or
exchangeable or exercisable for our common stock or other capital stock.
TRANSFER AGENT
The transfer agent for our securities is Nevada Agency and Trust
company, 50 West Liberty, Suite 880, Reno, Nevada 89501; telephone 775-322-0626.
SELLING STOCKHOLDERS
The securities offered by this prospectus may be offered from time to
time by the selling stockholders. The selling stockholders are the purchaser and
placement agent of our series A convertible preferred stock and associated
warrants. No selling stockholder has held any position or office or had any
material relationship with us or any of our predecessors or affiliates within
three years of the date of this prospectus.
Our agreement with the selling stockholders provide for us to reserve
for issuance 1.5 times the maximum number of shares issuable under the initial
terms of conversion of the series A convertible preferred stock and exercise of
the warrants. The actual number of shares of common stock issuable is subject to
adjustment and could be materially different than the amounts set forth in the
table below, depending on factors which we cannot predict at this time,
including:
o The number of shares issuable upon conversion of the series A
convertible preferred stock and accrued interest;
o The number of shares issuable upon exercise of the warrants;
o The potential increase in the number of shares issuable with
respect to the series A convertible preferred stock if the
conversion price declines due to a decline in the market price
for our common stock; and
o Our right to not call for the exercise of the conditional
warrants.
The following table sets forth, information provided by the selling
stockholders with regard to their beneficial ownership of our common stock as of
February 29, 2000 and upon completion of this offering. Unless otherwise
indicated in the footnotes, the persons and entities named in the table have
sole voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
57
<PAGE>
The number of shares of our common stock listed in the table below as
being beneficially owned by Mesora Investors, LLC includes the shares of our
common stock that are issuable to them, subject to the 4.999% limitation, upon
exercise of the warrants. However, the 4.999% limitation would not prevent
Mesora Investors, LLC from acquiring and selling in excess of 4.999% of shares
of our common stock through a series of acquisitions and sales under the
warrants while never beneficially owning more than 4.999% at any one time.
<TABLE>
<CAPTION>
Common Shares (1)
Number of Shares Prior to Number of Shares After
Selling Stockholder Sale(1) Sale(7) Percent After Sale(7)
- ------------------------------------- ---------------------------- ---------------------------- ----------------------
<S> <C> <C> <C>
Mesora Investors, LLC (3) (4) 2,370,588 -0- *
c/o WEC Asset Management, LLC
One World Trade Center,
Suite 4563
New York, New York 100048
Dunwoody Brokerage (5) 63,636 -0- *
Services, Inc.
1080 Holcomb Bridge Road
Roswell, GA 30076
Total (6) 2,434,224 -0- *
</TABLE>
- ----------------------------------------------
* Less than 1%.
(1) Assumes conversion of all outstanding shares of series A convertible
preferred stock at a conversion price of $4.25.
(2) The number of shares owned prior to the sale reflects the company's
obligation to register 150% of the common stock issuable upon
conversion of the series A convertible preferred stock and related
accrued interest.
(3) Holder of shares of common stock issuable upon (a) conversion of 4,000
shares of series A convertible preferred stock convertible into 941,177
shares of common stock, (b) 56,471 shares assessable upon conversion of
accrued interest (estimated for a period of one (1) year), and (c)
exercise of warrants to purchase 400,000 shares of common stock.
(4) Upon company's election, the holder is required to purchase an
additional 1,000 shares of series A convertible preferred stock. Shares
issuable related to such additional 1,000 shares upon (a) conversion of
1,000 share of series A convertible preferred stock convertible into
235,294 shares of common stock, (b) 14,118 shares issuable upon
conversion of accrued interest (estimated for period of 1 year), and
(c) exercise of warrants to purchase 100,000 shares of common stock.
(5) Holder of shares of common stock issuable upon exercise of placement
agent warrants to purchase 63,636 shares of common stock. The actual
number of shares issuable is subject to adjustment. (See "Description
of Securities Series A Preferred Stock Conditional Warrant" for a
description of the warrants.)
(6) The actual number of shares issuable is subject to adjustment and is
estimated to be 2,434,224 common shares.
58
<PAGE>
(7) Because the selling stockholders may offer all, some or none of their
common stock, no definitive estimate as to the number of shares thereof
that will be held by the selling stockholder after such offering can be
provided and the following table has been prepared on the assumption
that all shares of common stock offered under this prospectus will be
sold.
59
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholder may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholder may also engage in short sales against the box,
puts and calls and other transactions in our securities or in derivatives of our
securities and may sell or deliver shares in connection with these trades. The
selling stockholder may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling stockholder may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholder does not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
60
<PAGE>
The selling stockholder and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholder. We have agreed to indemnify the Selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the common stock offered
hereby will be passed upon by Pillsbury Madison & Sutro, LLP, Costa Mesa,
California.
EXPERTS
Our consolidated financial statements at August 31, 1999 and 1998, and
for each of the three years in the period ended August 31, 1999, appearing in
this prospectus and registration statement have been audited by Timothy L.
Steers, CPA, LLC, independent auditor, as set forth in his report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, and other information
with the SEC. You may read and copy any document we file with the SEC at the
SEC's public reference room located at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's public reference rooms located at it's regional offices
in New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0300 for further information on the operation of public reference
rooms. You can also obtain copies of this material from the SEC's Internet web
site, http://www.sec.gov containing reports, proxy statements and other
information regarding registrants that file electronically with the SEC.
Our common stock is quoted on the OTC Electronic Bulletin Board under
the symbol "LMKI".
This prospectus is a part of a registration statement on Form SB-2
filed by us with the SEC under the Securities Act. This prospectus omits certain
information contained in the registration statement, and we refer you to the
registration statement and to the exhibits to the registration statement for
additional information about the common stock and us.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until ______, 2000 (90 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
61
<PAGE>
<TABLE>
LMKI, INC.
(formerly Landmark International, Inc.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Page
----
<S> <C> <C>
Unaudited Interim Consolidated Financial Statements:
Balance Sheet as of February 29, 2000 and November 30, 1999............................F-2
Statements of Operations for the Three Months ended February 29, 1999
and 2000, and the Six Months ended
February 29, 1999 and 2000..........................................................F-3
Statements of Cash Flows for the Six Months ended
February 29, 1999 and 2000..........................................................F-4
Notes to Consolidated Financial Statements for the Six
Months ended February 29, 2000 and 1999......................................F-5 - F-15
Audited Consolidated Financial Statements:
Report of Independent Auditors.................................................................F-16
Balance Sheets as of August 31, 1999 and 1998.........................................F-17
Statements of Operations for the Fiscal Year ended
August 31, 1999, 1998 and 1997.....................................................F-18
Statements of Changes in Stockholders' Equity for the
Period from September 1, 1996 to August 31, 1999...................................F-19
Statements of Cash Flows for the Years ended
August 31, 1999, 1998 and 1997.....................................................F-20
Notes to Consolidated Financial Statements for the Period
September 1, 1996 through August 31, 1999...................................F-22 - F-35
</TABLE>
F-1
<PAGE>
LMKI, INC.
(formerly Landmark International, Inc.)
Consolidated Balance Sheet
February 29, 2000
-----------------
ASSETS (Unaudited)
Cash $ 1,754,353
Accounts receivable 1,401,311
-----------------
Total current assets 3,155,664
Equipment 3,681,228
Accumulated depreciation (143,065)
-----------------
Net equipment 3,538,163
Goodwill, less accumulated amortization
of $302,206 in 2000 and $151,103 1999 3,840,625
Deposits 291,810
Other assets 330,903
-----------------
Total other assets 4,463,338
-----------------
Total assets $ 11,157,165
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,324,829
Line of credit 593,150
Accrued payroll and related liabilities 49,062
Other accrued liabilities 154,026
Accrued dividends payable 40,087
Accrued interest to stockholder 34,682
Capitalized lease obligations due
within one year 226,548
-----------------
Total current liabilities 4,422,384
Capitalized lease obligations, long term 554,668
Loans from stockholder 1,458,799
-----------------
Total liabilities 6,435,851
-----------------
Stockholder's 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
50,000,000, shares issued and outstanding totaling
37,249,566 (2000) and 36,115,666 (1999)
Paid in capital 7,268,111
Notes receivable from stockholders (509,100)
Accumulated deficit (6,074,947)
-----------------
Total stockholders' equity 4,721,314
-----------------
Total stockholders' equity
and liability $ 11,157,165
=================
See accompanying notes.
F-2
<PAGE>
<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.
F-3
<PAGE>
<TABLE>
LMKI, INC.
(formerly Landmark International, Inc.)
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months ended Feb. 29,
2000 1999
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
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)
Account payable 2,915,179 (9,056)
Accrued payroll 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 obligations, 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 transaction which have been
reflected in the notes hereto.
See accompanying notes.
F-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.
F-5
<PAGE>
1. Nature of Business and Summary of Significant Accounting Policies
-----------------------------------------------------------------
(continued)
-----------
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).
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
F-6
<PAGE>
1. Nature of Business and Summary of Significant Accounting Policies
-----------------------------------------------------------------
(continued)
-----------
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.
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 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.
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
F-7
<PAGE>
2. Business Combinations (continued):
---------------------------------
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 $ 544,668
=============
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
--------------
In February 15, 2000, the Company entered into a $600,000 line of
credit with a bank. The line of credit provides for an interest 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.
F-8
<PAGE>
6. 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
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.
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
F-9
<PAGE>
7. Stock Options and Warrants (continued)
--------------------------------------
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.
F-10
<PAGE>
7. Stock Options and Warrants (continued)
--------------------------------------
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
F-11
<PAGE>
8. Common Stock (continued)
------------------------
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
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 to
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.
F-12
<PAGE>
8. Common Stock (continued)
------------------------
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 or 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.
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
F-13
<PAGE>
9. Preferred Stock (continued)
---------------------------
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.
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
F-14
<PAGE>
10. Investment Agreement (continued)
--------------------------------
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.
F-15
<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-16
<PAGE>
<TABLE>
LMKI, INC.
(formerly Landmark International, Inc.)
Consolidated Balance Sheets
<CAPTION>
August 31
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
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 current 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-17
<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-18
<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) 35,147
Shares issued in exchange
for services 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-19
<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 $ (926,511) $ (53,819) $ (68,105)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 36,585 3,897 -
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
================ ================ ===============
F-20
<PAGE>
Years ended August 31,
-----------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
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-21
<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-22
<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-23
<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-24
<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-25
<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:
<TABLE>
<CAPTION>
1999 1998 1997
------------- --------------- -------------
<S> <C> <C> <C>
Federal:
Current $ - $ 1,500 $ -
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
============= ============= =============
</TABLE>
A reconciliation of income taxes computed at the federal statutory rate
of 34% to the provision for income taxes is as follows for the years
ended August 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------- --------------- -------------
<S> <C> <C> <C>
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
============= =============== =============
</TABLE>
F-26
<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:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
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 $ - $ -
=============== ===============
</TABLE>
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-27
<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
F-28
<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)
-------------------------
stock options have characteristics significantly different from those
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.
F-29
<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)
------------------------
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 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.
F-30
<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)
------------------------
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
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-31
<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-
F-32
<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)
-----------------------------
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
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
F-33
<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 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 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
F-34
<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)
-----------------------------
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 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-35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada Revised Statutes Section 78.7502, 78.751, and 78.752 allow us to
indemnify our officers, directors and any corporate agents in terms sufficiently
broad to indemnify such persons under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under the Securities
Act. Our Articles of Incorporation and our bylaws provide for indemnification of
our directors, officers, employees and other agents to the extent and under the
circumstances permitted by Nevada law. We may enter into agreements with our
directors and executive officers that require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors and executive officers to the fullest extent
permitted by Nevada law. We have also purchased directors and officers liability
insurance, which provides coverage against certain liabilities including
liabilities under the Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of this offering in connection with the issuance and
distribution of the securities being registered, all of which are to be paid by
the Registrant, are as follows:
Registration Fee $ 7,193.86
Legal Fees and Expenses.................................$24,806.14
Accounting Fees and Expenses............................$15,000.00
Printing................................................$ 1,000.00
Miscellaneous Expenses..................................$ 2,000.00
-----------
Total.................................$ 50,000.00
===========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
(a) The following is a summary of our transactions during the last three years
preceding the date hereof involving sales of our securities that were not
registered under the Securities Act.
In December 1996, the Board of Directors authorized the issuance of 20,000
shares of common stock to each of 22 employees. The shares were to be
surrendered back to us in the event that any employee who received shares
terminated their employment with us, or was terminated by us for cause. We
issued an aggregate of 540,000 shares of its common stock to these employees.
In December 1996, the Board of Directors authorized the issuance of 4,000,000
shares of common stock in exchange for $100 and the provision of equipment under
a leasing arrangement.
In December 1997, the Board of Directors authorized the issuance of 80,000
shares of common stock in exchange for $100 and public relation services.
In December 1997, the Board of Directors authorized the issuance of 4,000,000
shares of common stock to our Chairman for services rendered. The common stock
was valued at $.01 per share.
II-1
<PAGE>
In December 1998, the Board of Directors authorized the issuance of 500,000
shares of common stock to two individuals in exchange for professional services.
The common stock was valued at $18,500 ($.031 per share) which represented the
bid price of the common stock and the approximate value of the services on the
date of exchange.
In December 1998, the Board of Directors authorized the issuance of 4,000,000
shares of common stock to our Chairman for services rendered. The common stock
was valued at $.01 per share.
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. The
common stock was valued at $36,000 ($.090 per share) which represented the bid
price of the common stock and the approximate value of the services on the date
of exchange.
Effective June 1, 1999, we acquired MobileNetics Corporation, a supplier of
communications equipment, in a business combination accounted for as a purchase.
We issued 10,000,000 shares of its common stock in exchange for all of the
outstanding shares of MobileNetics. The value of the shares issued for
MobileNetics was $100,000 ($.01 per share) which approximated the bid price of
our common stock on the date of exchange.
In August 1999, the Board of Directors authorized the issuance of 100,000 shares
of common stock to one individual in exchange for professional services. The
common stock was valued at $10,000 ($.10 per share) which represented the value
of the services rendered and the approximate average bid price of the common
stock during the year prior to the acquisition of MobileNetics.
During November 1999, we closed the placement of 2,500 shares of series A
convertible preferred stock, $.001 par value to one purchaser at a purchase
price of $1,000 per share or an aggregate purchase price of $2.5 million.
In February 2000, the Company closed the placement of an additional 1,500 shares
of series A convertible preferred stock to the same purchaser at a purchase
price of $1,000 per share, for an aggregate purchase price of $1,500,000.
The sales and issuances of securities in the transactions described above were
deemed to be exempt from registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act, Regulation D promulgated thereunder or Rule
701 promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving any public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with us to
information about us.
(b) There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 26(a).
II-2
<PAGE>
ITEM 27. EXHIBITS.
Index of Exhibits
Number Description
- ------ -----------
2.1 Merger Agreement - Acquisition of MobileNetics Corporation (3)
3.1.1 Articles Of Incorporation (1)
3.1.2 Name Change Pursuant to NRS 78.185 Filed 8/27/1998 (7)
3.1.3 Certificate of Amendment to the Articles Of Incorporation Filed
7/23/1999 (7)
3.2 By-Laws (1)
4.1 Specimen of Common Stock Certificate (1)
4.2 Investment Agreement - Swartz (5)
4.3 Registration Rights Agreement - Swartz (5)
4.4 Warrant To Purchase Common Stock Of LMKI Inc. - Swartz (5)
4.5 Commitment Warrant - Swartz (5)
4.6 Agreement (With Respect To Commitment Warrants) - Swartz (5)
4.7 Securities Purchase Agreement - West End (6)
4.8 Certificate Of Designations Of Series A Convertible Preferred
Stock Of LMKI Inc. - West End (6)
4.9 Warrant To Purchase Common Stock Of LMKI Inc. - West End (6)
4.10 Conditional Warrant To Purchase 6% Convertible Series A
Convertible Preferred Stock And Warrants to
Purchase Common Stock - West End (6)
4.11 Registration Rights Agreement - West End (6)
4.12 Form Of Lock-Up Agreement - West End (6)
4.13 Placement Warrant - Dunwoody (7)
5.1 Opinion of Pillsbury Madison & Sutro, LLP (++)
10.1 Agreement For Payment Of Tax Obligations (2)
10.2 Equipment Lease Agreement (2)
10.3+ Options Outstanding (4)
10.4 Form of Note Payable to William J. Kettle (4)
10.5+ 1999 Stock Plan and Form of Agreements thereunder (7)
10.6 Form of Indemnification Agreement Between Directors and Officers
and Certain Agents (7)
10.7 Covad Master Reseller Agreement (7)
10.8 Level (3) General Terms And Conditions For Delivery Of Service
(7)
10.9 Rhythms NetConnections Agreement (++)
10.10 Cisco Master Lease (++)
10.11 Insight Investments Master Lease (++)
10.12 Splitrock Services Master Service Agreement (++)
10.13 Dedicated Access Service Agreement with California State
Automobile Association (*)
21.1 List of Subsidiaries (7)
23.1 Consent Of Expert (*)
23.2 Consent of Counsel (see Exhibit 5.1 of this filing) (++)
24.1 Power of Attorney (see page II-6 of this filing) (*)
27 Financial Data Schedule
- ------------------------
(*) Filed herewith.
(+) Indicates a management contract or any compensatory plan, contract or
arrangement.
(++) To be filed by amendment.
(1) Previously filed in the original registration statement on Form 10-SB.
(2) Previously filed in Form 10-KSB for the year ended 8/31/1998.
(3) Previously filed in Form 10-QSB for the quarter ended 5/31/1999.
II-3
<PAGE>
(4) Previously filed in Form 10-KSB for the year ended 8/31/1999.
(5) Previously filed in Form 8K on 12/2/1999.
(6) Previously filed in Form 8K on 12/3/1999.
(7) Previously filed in Form SB-2 on 12/17/1999.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as express in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
such issue.
II-4
<PAGE>
(5) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(6) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-5
<PAGE>
POWER OF ATTORNEY
The Registrant and each person whose signature appears below hereby appoints
William J. Kettle as their attorney-in-fact, with full power to act alone, to
sign in the name and in behalf of the Registrant and any such person,
individually and in each capacity stated below, any and all amendments,
including post-effective amendments, to this Registration Statement.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Irvine,
State of California, on April 11, 2000.
LMKI, INC. (Registrant)
By: /s/ WILLIAM J. KETTLE
---------------------------------
William J. Kettle
Chairman, Chief Executive Officer
Date: April 11, 2000
By: /s/ JOHN W. DIEHL, JR.
---------------------------------
John W. Diehl, Jr.
Principal Accounting Officer
Date: April 11, 2000
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
<TABLE>
Signature Title Date
- --------- ----- ----
<CAPTION>
<S> <C> <C>
/s/ WILLIAM J. KETTLE Chairman, Director, Chief Executive April 11, 2000
- ---------------------------- Officer
William J. Kettle
/s/ BRYAN L. TURBOW President, Director April 11, 2000
- ----------------------------
Bryan L. Turbow
/s/ ADELA MARIA KETTLE Vice President, Director April 11, 2000
- ----------------------------
Adela Maria Kettle
/s/ JOHN W. DIEHL, JR. Chief Financial Officer, Secretary April 11, 2000
- ----------------------------
John W. Diehl, Jr.
/s/ GENE ELMORE Director April 11, 2000
- ----------------------------
Gene Elmore
/s/ ROBERT C. WEAVER, JR. Director April 11, 2000
- ----------------------------
Robert C. Weaver, Jr.
</TABLE>
II-6
ADDENDUM TO DEDICATED ACCESS
SERVICE AGREEMENT
------------------------------------------
THIS ADDENDUM TO DEDICATED ACCESS SERVICE AGREEMENT ("Addendum"), dated
for reference purposes as of July 13, 1999, is made and entered into by LANDMARK
COMMUNICATIONS, INC., a Delaware corporation ("LMCI") and CALIFORNIA STATE
AUTOMOBILE ASSOCIATION, INTER-INSURANCE BUREAU, a California reciprocal insurer
("Customer").
RECITALS
--------
A. LMCI owns all of the issued and outstanding capital stock of
MOBILENETICS CORPORATION, a Delaware corporation ("MobileNetics").
B. Concurrently herewith, MobileNetics and Customer are entering into a
Dedicated Access Service Agreement, a copy of which is attached hereto as
Exhibit A (the "Agreement"), pursuant to which MobileNetics provides the
services described therein ("MobileNet Services") as set forth in Schedule I
attached hereto ("Description to Services"). The terms on which the MobileNet
Services are provided to Customer are set forth in Schedule II attached hereto
("Terms of Service").
C. LMCI and MobileNetics are about to be merged, with MobileNetics
disappearing and LMCI surviving the merger.
D. The parties have agreed to modify certain provisions of the
Agreement to reflect the terms of their understanding, as set forth herein.
TERMS OF AGREEMENT
------------------
IN CONSIDERATION of the foregoing premises, the mutual promises set
forth herein, and the benefits to each of them, the parties hereby agree as
follows:
1. AMENDMENTS AND MODIFICATIONS. The following provisions of the
Agreement are hereby modified and amended as set forth herein.
(a) RENEWAL. The Agreement shall not renew automatically.
Customer may renew the Agreement for additional 12-month terms by
notifying MobileNetics in writing of its intention to do so not less
than 30 days prior to expiration of the Initial Term or any renewal
period.
(b) CANCELLATION. The following sentence is added immediately
following the first sentence: "Notwithstanding the foregoing, either
party may terminate this Agreement if the other party materially
breaches the Agreement and fails to remedy such breach within 10 days
after written notice of such breach."
-1-
<PAGE>
(c) PAYMENT. Payment of monthly fees shall be due upon receipt
by Customer of the invoice and shall be delinquent if not paid within
30 days. Any fees not received within 30 days after Customer's receipt
of the invoice are subject to a late charge of 1 1/2% per month.
(d) TAXES. Customer shall not be responsible for payment of
any federal or state income taxes payable by MobileNetics.
(e) INTERRUPTION OF SERVICE. MobileNetics shall provide
Customer with reasonable advance notice of any proposed interruption of
service except in cases of emergency, when no prior notice shall be
required.
(f) ASSIGNMENT. The language in the Agreement is deleted in
its entirety and replaced with the following: "Neither party shall,
without prior written consent of the other party, which consent shall
not be unreasonably withheld or delayed, assign, transfer, or in any
other manner dispose of, any of its rights, privileges, or obligations
under this Agreement. Notwithstanding the foregoing, Customer's consent
will not be required in the event of a merger of MobileNetics with LMCI
and Customer's obligations will not be affected thereby."
(g) LETTER OF AGENCY (LOA). The language in the Agreement is
deleted in its entirety and replaced with the following: "Customer
hereby authorized MobileNetics to act on its behalf with such Local
Exchange Carrier (LEC) or carriers and others as may be specified by
Customer for the provisioning of local access required as part of the
MobileNetics Services in accordance with a Letter of Agency (LOA)
substantially in the form attached as Exhibit B hereto. All LEC charges
shall be billed to MobileNetics and will be passed through to Customer
as a line item on monthly invoices for MobileNetics Services. The LOA
shall remain in effect until cancellation by Customer in writing.
(h) NO WARRANTY. At the beginning of the first sentence,
before "MobileNetics," insert "Except as expressly provided in the
Dedicated Access Service Level Agreement attached as Exhibit C hereto
and except as expressly set forth in the Year 2000 Statement and
Warranty attached as Exhibit D hereto ..."
(i) INDEMNITY. The language in the Agreement is deleted in its
entirety and replaced with the following: "Customer agrees to defend,
indemnify and hold MobileNetics and its affiliates harmless from any
and all liabilities, costs and expenses, including reasonable
attorneys' fees, settlement payments and any damages awarded related to
or arising from: (1) any violation of this Agreement by Customer of its
affiliates; (2) Customer's use of MobileNetics Services or Customer's
placement or transmission of any message, information, software or
other materials on any other network connected to MobileNetics; (3)
negligent or willful acts or omissions of Customer in connection with
the construction, installation, maintenance, presence, use or removal
of systems, channels, equipment or software not provided by
MobileNetics which are connected or are to be connected to MobileNetics
Services; and (4) claims for infringements arising from Customer's use
of equipment and software, apparatus and systems not provided by
MobileNetics. MobileNetics agrees to defend, indemnify and hold
Customer and its affiliates harmless from any and all liabilities,
costs and expenses, including reasonable attorneys' fees, settlement
payments and any damages awarded related to or arising from: (1) any
violation of any license, parent or intellectual property rights of any
third party as a result of Customer's use of the equipment or services
provided by MobileNetics hereunder; (2) the failure of the equipment or
services proved by MobileNetics hereunder; (3) any violation of this
Agreement by MobileNetics or its affiliates; and (4) negligent or
willful acts or omissions of MobileNetics in connection with the
provision of services and equipment hereunder."
-2-
<PAGE>
2. PERFORMANCE BY LMCI. Immediately upon consummation of the merger
between LMCI and MobileNetics, LMCI shall assume all of the duties and
obligations and acquire all of the rights and interests of MobileNetics under
the Agreement and all references to "MobileNetics" in the Agreement shall
thereupon and thereafter be changed to "LMCI."
3. EFFECT OF AGREEMENT. Except as expressly modified by this Addendum,
the terms and provisions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Addendum to
Dedicated Access Service Agreement as of the date first written above.
LANDMARK COMMUNICATIONS, INC.
By:
------------------------------------
MOBILENETICS CORPORATION
By:
--------------------------------------
CALIFORNIA STATE AUTOMOBILE ASSOCIATION,
INTER-INSURANCE BUREAU
By:
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<PAGE>
SCHEDULE 1
----------
DESCRIPTION OF SERVICES
-----------------------
2 Each: Wide Area Private Line DS-3 Connections from the CSAA Napa Data Center
to the Level 3 Communications Gateway in San Francisco, California
2 Each: Wide Area Private Line DS-3 Connections from the CSAA Walnut Creek Data
Center to the Level 3 Communications Gateway in San Francisco, California
Approximately 390 Each: Dedicated ISDN Dialup Ports
Approximately 25 Each: Dedicated V.90 Dialup Ports
Approximately 75 Each: Dedicated IDSL Connections with Router
Approximately 130 Each: Dedicated SDSL Connections with Router
2 Each: Cisco 7206 Routers
Network Integration of the Above
24x7 Service and Technical Support for the Above
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<PAGE>
SCHEDULE II
-----------
TERMS OF SERVICE
----------------
Attached Invoices No. 6201 and No. 6283 set forth the terms upon which
MobileNet Services are to be provided under the Agreement.
<PAGE>
MOBILENETICS CORPORATION
------------------------
DEDICATED ACCESS SERVICE AGREEMENT
----------------------------------
Service Date: The Service Date shall be the date any MobileNetics Services
ordered under this Agreement are first available for use by the Customer.
Initial Term. The Initial Term shall be for 12 months for the Agreement,
beginning on the Service Date.
Renewal. The Agreement shall renew automatically for additional 12-month terms
unless notification of non-renewal is provided by either party not less than 30
days prior to the expiration of the Initial Term or renewal period.
Price Changes. MobileNetics reserves the right to change its prices at any time
by giving 30 days prior notice to customer. Customer may elect not to accept any
increase in price, at which time MobileNetics may decide at its sole discretion,
to cancel this Agreement and terminate service.
Cancellation. The Agreement is cancelable by payment of all fees due for the
remainder of the Initial Term, or if the Agreement has been renewed, for the
renewal period.
Payment. Initial Fees are payable in advance of order, Monthly Fees will be
billed monthly in advance beginning one month from the Service Date. Payment of
Monthly Fees are due upon receipt of invoice, and are delinquent if not received
within 15 days. Any Fees not received 30 days from the date of invoice are
subject to a late charge of 1 1/2% per month.
Taxes. Customer agrees to pay any sales, use, gross, receipts, excise, access,
bypass or other local, state and Federal taxes or charges, imposed on or based
upon the provision, sale or use of the MobileNetics Services.
Interruption of Services. Services may be interrupted if any fees remain unpaid
30 days from date of invoice, or if Customer engages in any conduct or
activities which MobileNetics in its sole discretion believes violates any of
the terms of this Agreement. An interruption of service does not relieve
Customer of its obligation to continue to pay monthly fees.
Assignment. Customer shall not, without prior written consent of MobileNetics,
which shall not be unreasonably withheld, assign, transfer or in any other
manner dispose of, any of its rights, privileges, or obligations under this
Agreement.
Customer Equipment and Facilities. Customer shall at its own discretion
undertake all necessary preparations to comply with MobileNetics' Installation
instructions. If Customer is not ready to accept MobileNetics Services 30 days
after the Planned Services Date, MobileNetics may begin billing Monthly Fees
using the Planned Service Date as the Service Date. Customer is responsible for
the use, compatibility and maintenance of all Customer owned equipment.
-1-
<PAGE>
Letter of Agency (LOA). Customer hereby authorizes MobileNetics to act on its
behalf with the Local Exchange Carriers and others for the provisioning of local
access required as part of the MobileNetics Services. This LOA shall remain in
effect until cancellation by Customer in writing.
Acceptable Use. MobileNetics Services may only be used for lawful purposes.
Transmission of any material in violation of any Federal, state or local
regulation is prohibited. This includes without limitation material protected by
trade secret, copyrighted material, and material legally judged to be
threatening or obscene. Any access to and use of other networks connected to
MobileNetics, including the Internet, must comply with the rules and behavior
guidelines of that network. The sale of internet access by Customer using the
connection provided under this agreement to another entity which sells IP
transit to others is expressly prohibited.
No Warranty. MobileNetics Services are provided on an "as is" and "as available"
basis without warranties of any kind, either express or implied, including, but
not limited to, warranties or title, non-infringement, or implied warranties of
merchantability or fitness for a particular purpose. No advice or information
given by MobileNetics or its affiliates shall create a warranty. Neither
MobileNetics nor its affiliates warrants that the service will be interrupted or
error free or that any information, software or other material accessible on the
service is free or harmful components. Under no circumstances shall MobileNetics
or its affiliates be liable for any direct, indirect, incidental, special,
punitive or consequential damages that result in any way from the use of or
inability to use MobileNetics Services, or customer's reliance on or use of
information, services or merchandise provided on or via MobileNetics Services,
or that result from mistakes, omissions, interruptions, deletion of files,
errors, defects in operation, or transmission, or failure of performance.
Indemnify. Customer agrees to defend, indemnify and hold MobileNetics and its
affiliates harmless from any and all liabilities, costs and expenses, including
reasonable attorneys' fees, settlement payments and any damages awarded related
to or arising from: (1) any violation of this Agreement by Customer or its
affiliates; (2) the use of MobileNetics Services or the placement of
transmission of any message, information, software or other materials on any
other network connected to MobileNetics; (3) negligent acts or omissions of
Customer or its representatives in connection with the construction,
installation, maintenance, presence, use or removal of systems, channels,
equipment or software not provided by MobileNetics which are connected or are to
be connected to MobileNetics Services; and (4) claims for infringement arising
from the use of equipment and software, apparatus and systems not provided by
MobileNetics.
Disputes. This agreement shall be construed in accordance with the laws of the
State of California. For purposes of Venue and Jurisdiction, this Agreement
shall be deemed made and to be performed in the City of Los Angeles, CA.
Entire Agreement. This Agreement supersedes all prior representations,
agreements and understandings whether oral or implied, and may only be modified
in writing.
Agreed to as of this Effective Date: ___________________________________________
-3-
<PAGE>
I have read and understand the above Service Agreement and I authorize these
services to be ordered.
Authorized Signature: __________________________________________________________
Print Name/Title:_______________________________________________________________
Company Name:___________________________________________________________________
Social Security or Tax ID#:_____________________________________________________
Address:________________________________________________________________________
City:_________________________________________ State, Zip:_____________________
Phone Number:_________________________________ Fax Number:_____________________
E-mail:_________________________________________________________________________
-3-
<PAGE>
DEDICATED ACCESS SERVICE LEVEL AGREEMENT
----------------------------------------
MobileNetics Corporation offers you high-speed connectivity to the global
internet for corporate office locations and dial-up access for remote and
traveling employees. With one Toll-Free phone number you also get prompt service
across the U.S. and internationally, including billing, technical, and other
inquiries.
Additionally, MobileNetics Corporation offers an unprecedented concept in
customer service-one-call resolution for any customer issue. With one
nationwide, free phone number, you will have instant answers to any billing,
technical or other inquiry. MobileNetics Corporation customer care is staffed
around the clock and offers a mean time of two hours to repair your service.
Customer Service Guarantee
- --------------------------
Time to respond with corrective action update - within 30 minutes Time to repair
- - within 2 hours
Dedicated Connectivity Service Guarantee
- ----------------------------------------
On the network, MobileNetics Corporation guarantees 100% availability of your
internet port and MobileNetics Corporation provided access circuit at 100%
service liability.
Dedicated / VPN Connectivity Service Level Guarantee
- ----------------------------------------------------
MobileNetics Corporation shall provide the customer with a Service Level
Guarantee for Internet Connectivity equal to 100% Service Availability.
"Availability" refers to Customer's access point to the MobileNetics Corporation
internet network, including MobileNetics Corporation provided local-access
circuit and Customer's access port. "Unavailability Events" shall mean any
outage of the local access circuit and the Customer's port which is longer than
15 consecutive minutes, other than outages caused by regularly scheduled or
emergency maintenance events, or Customer caused outages or disruptions.
Customer may report Unavailability Events to MobileNetics Corporation customer
service within 48 hours of the Unavailability Event. If the Unavailability Event
is confirmed by MobileNetics Corporation, Customer will receive a pro-rated
service credit equal to the monthly recurring charges for the affected Service
for the duration of the outage.
-1-
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement on
Form SB-2/A to Registration Statement No. 333-93041 dated April 7, 2000, of our
report dated November 10, 1999, except for Note 10 as to which the date is
February 29, 2000, with respect to the consolidated financial statements of
LMKI, Inc. (formerly Landmark International, Inc.) included in the Annual Report
on Form 10-KSB/A for each of the years ended August 31, 1999 and to the
reference made to us under the caption "Experts" in the three year period in the
Registration Statement.
/s/ Timothy L. Steers,
------------------------------
Timothy L. Steers, CPA, LLC
Portland, Oregon
April 7, 2000
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