-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E5ssRoCS1TxD/s1X4h6at3n/nVeggYyb7P3ykWDYzxlghHKtVOraf+2F/ct54c4G MPB1bQwquhugfxNGe+iOeg== 0001015608-99-000063.txt : 19991220 0001015608-99-000063.hdr.sgml : 19991220 ACCESSION NUMBER: 0001015608-99-000063 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19991217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LMKI INC CENTRAL INDEX KEY: 0000949113 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 330662114 STATE OF INCORPORATION: NV FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-93041 FILM NUMBER: 99777043 BUSINESS ADDRESS: STREET 1: 1720 E GARRY AVE STE 201 STREET 2: STE 201 CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 9494754500 MAIL ADDRESS: STREET 1: 1720 E GARRY STREET 2: SUITE 201 CITY: SANTA ANA STATE: CA ZIP: 92705 FORMER COMPANY: FORMER CONFORMED NAME: LANDMARK COMMUNICATIONS INC/NV DATE OF NAME CHANGE: 19990825 FORMER COMPANY: FORMER CONFORMED NAME: LANDMARK INTERNATIONAL INC DATE OF NAME CHANGE: 19950808 SB-2 1 LMKI, WEC, SB-2, 991217 As filed with the Securities and Exchange Commission on December 17, 1999 Registration No. 333- ============================================================================= U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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 (Primary Standard Industrial (I.R.S. Employer of Incorporation Classification Code Number) Identification No.) or Organization) 1720 East Garry Avenue, Suite 201 Santa Ana, California 92705 (949) 475-4500 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) --------------------------- William J. Kettle, Chairman 1720 East Garry Avenue, Suite 201 Santa Ana, California 92705 (949) 475-4500 (Name, Address and Telephone Number of Agent For Service) --------------------------- Copy To: Robert C. Weaver, Jr., Esq. 721 Devon Court San Diego, CA 92109-8007 (858) 488-4433 --------------------------- 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. [ ] 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. [ ] CALCULATION OF REGISTRATION FEE Proposed Proposed Maximum Maximum Offering Aggregate Amount of Title of Each Class Amount to be Price Per Offering Registration of Securities Registered Share (2)(3) Price Fee Common Stock, (1) 2,514,706 $10.50 $26,404,412 $ 6,970.76 $.001 par value (1) Represents a presently indeterminate number of shares of our Common Stock issuable upon conversion of preferred stock and exercise of warrants and that may be offered by Selling Security Holders. See "SELLING SECURITY HOLDERS and DESCRIPTION OF SECURITIES." (2) 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. (3) In accordance with Rule 457(g), the registration fee for these shares is calculated upon a price which represents 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). ------------------------ 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. 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 Form SB-2 Item Number and Caption Location In Prospectus 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 Security Holders................. Selling Security Holders 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 Security Holders 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 of 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............................ Certain Transactions 20. Market for Common Equity and Related Stockholder Matters..................... Market for 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.............................. * _________ (*) None or Not Applicable The information in this Prospectus is not complete and may be changed. The Selling Security Holders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER ___, 1999 PROSPECTUS LMKI, INC. 2,514,706 Shares of Common Stock All of these shares are being offered for resale by existing security holders. These shares consist of 1,176,471 shares issuable on conversion of our Series B preferred stock and 750,000 shares issuable on exercise of our warrants. The number of shares issuable on conversion of the Series A preferred stock and the warrants is subject to adjustment. The Selling Security Holders may sell their shares at various times in usual brokerage transactions at the market price at the time of sale, at prices related to market price or at negotiated prices. The Selling Security Holders and any agents, broker-dealers or underwriters who act with or for the Selling Security Holders in the distribution of the shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, and any commission received by them and any profit on the resale of the common stock may be deemed underwriting discounts or commissions under the Securities Act of 1933. We will not receive any proceeds from the conversion of the preferred shares but we will receive $3,187,500 if all the warrants are exercised. We agreed to pay all expenses of registration of these shares, but we will not pay the Selling Security Holders' selling and brokerage expenses. Our Common Stock is traded on the OTC Bulletin Board under the symbol "LMKI". On December 14, 1999, the closing bid and asked prices were $11.125 and $11.625. Investing in our common stock involves risks. You should not purchase our common stock unless you can afford to lose your entire investment. See "RISK FACTORS" beginning on page XX of this prospectus. These securities have not been approved by the Securities and Exchange Commission or any state securities commission, nor have those organizations determined that this prospectus is accurate or complete. Any representation otherwise is a criminal offense. The date of this prospectus is ______, 1999 LMKI, INC. 1720 East Garry Avenue, Suite 201 Santa Ana, California 92705 (949) 475-4500 You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. 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. 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. TABLE OF CONTENTS Page Summary................................................................... Risk Factors.............................................................. Use of Proceeds........................................................... The Market for Our Stock and Other Stockholder Matters.................................................. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... Business.................................................................. Management................................................................ Executive Compensation.................................................... Certain Transactions...................................................... Principal Security Holders................................................ Description of Securities................................................. Selling Security Holders.................................................. Plan of Distribution...................................................... Legal Matters............................................................. Experts................................................................... Where You Can Find Additional Information................................. Index to Consolidated Financial Statements.for fiscal year ended September 30, 1999................................F-1 Consolidated Financial Statements for quarter ended November 30, 1999.............................................F- SUMMARY This summary highlights information we present more fully elsewhere in this prospectus. You should read this entire prospectus carefully. About Us LMKI, Inc. delivers broadband communications solutions including high-speed Internet access, data, voice and video services over a revolutionary national network to a wide spectrum of business customers. Additionally, we offer application development, network integration and systems management services to businesses worldwide. Through strategic alliances and cost-effective network planning, we provide superb performance and service. Our Industry According to TeleChoice, a telecommunications consulting firm, the market for digital subscriber lines (DSL) has charted growth of 300% for the first half of 1999, well beyond analysts' expectations. Positioning itself to give cable modem competition a good run, DSL is a technology that uses digital coding to push up to 99% more information through a regular copper phone line. The result is that the line can transmit data using a higher frequency, and simultaneous voice and fax using a lower frequency. DSL services the "last mile"- the area stretching from the central phone exchange to the customer - that has proven such a challenge in providing fast connections to businesses. Laurie Falconer, DSL analyst at TeleChoice, expects market growth for DSL to speed up, and competition to increase. "There's a lot of demand for it," she says. Falconer claims a main factor to separate the market leaders and losers will be the viability of the targeted market. We are only aiming to attract multi-location businesses to our product. Published figures and projections about growth of the Internet vary, but agreement about rapid expansion is standard. A new study of the Internet telephony business by Killen & Associates, a telecommunications research and consultant group in Palo Alto, Ca. Forecasts an $8 Billion market by the year 2003 for providers of IP services offering voice, fax and video capabilities. Recent mergers of telephone and cable companies, and acquisitions of Internet technology companies predict that broadband access is the future of the online world. The Internet's increasingly pivotal role in business via Web content, e- commerce and virtual private networks (VPNs), combined with the lack of affordable, high-speed access solutions for small businesses, have created a large niche for DSL services. Although the market is still nascent, Morgan Stanley Dean Witter & Co. of New York estimates the U.S. DSL service market for access alone will reach $7 billion to $9 billion by 2002. Although local phone companies are in the best position to offer DSL because they own the core infrastructure that supports it, until very recently, they were reluctant to market these services to business customers. According to New York-based Bank of America Securities LLC senior analyst Michael Renegar, ILECs ("Incumbent Local Exchange Carriers") won't aggressively sell DSL services to businesses. "DSL will cannibalize existing T1 service, for which ILECs typically charge $1,000 a month," he says. "It would reduce margins considerably." Our Business Strategy We intend to capitalize on the enormous public attention focused on the Internet and the need for increased bandwidth by increasing our telemarketing sales and technical support staff, targeting our advertising to our core audience, and by providing the most efficient, lowest-cost high speed Internet service in our service corridor. Corporate Information We were incorporated under Nevada law on March 31, 1997. Our executive offices are at 1720 East Garry Avenue, Suite 201, Santa Ana, California 92705. Our telephone number is (949) 475-4500. Our fax number is (949) 475-4518. This Offering Securities Offered.................... 2,514,706 Shares Of Common Stock At Various Times By The Selling Security Holders. Common Stock Outstanding...............36,115,666 Shares As Of November 30, 1999. Use Of Proceeds........................We Will Receive None Of The Proceeds Of The Conversion of Preferred Stock Into 1,176,471 Underlying Shares Of Common Stock. We Will Receive $3,187,500 Upon The Exercise Of The Warrants into 750,000 Underlying Shares Of Common Stock. We Will Use Any Proceeds For General Corporate Purposes. OTC Electronic Bulletin Board Symbol........................"LMKI" Risk Factors Turn to the Risk Factors section of this prospectus for information on some of the risk factors that should be considered before investing in the common stock. Summary Financial And Operating Information This summary financial information below is from and should be read with the financial statements, and the notes to the financial statements, elsewhere in this Prospectus. All numbers are in thousands, except for share and per share amounts. Statement of Operations Data: Year Ended August 31 Three Months ended November 30 1999 1998 1999 1998 Revenues 1,598,076 397,363 1,505,053 40,881 Gross Profit 675,487 345,362 795,666 37,707 Loss before income taxes (656,632) (11,019) (115,939) (62,362) Net Loss (427,532) (11,119) (115,939) (62,362) Basic and diluted loss per share: (2) (0) (0) (0) (0) Basic and Diluted Weighted average (1) (0) (0) (0) (0) Number of shares outstanding: 36,115,666 19,986,666 36,115,666 19,986,666 Balance Sheet Data: As of August 31, 1999 As of November 30, 1999 Working capital (deficiency) 121,920 1,928,230 Total assets 1,947,793 4,743,584 Total liabilities 2,033,558 2,667,188 Stockholders equity (deficit) (85,765) 2,076,396 (1) Net Loss per Common Share: Stock options and warrants outstanding are not considered common stock equivalents, as the affect on net loss per share would be anti-dilutive. RISK FACTORS An investment in our Common Stock involves a high degree of risk and should only be made by investors who can afford to lose their entire investment. 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. FORWARD LOOKING STATEMENTS. The words "may," "will," "expect," "anticipate," "believe," "continue," "estimate," "project," "intend," and similar expressions used in this Prospectus are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may differ materially from those included within the forward- looking statements. Financial Risks OUR EXTREMELY LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS. We only recently began to market our major service, DSL lines. We began offering commercial service in 1999. Accordingly, you have limited information about our company with which to evaluate our business, strategies and performance and an investment in our common stock. FLUCTUATIONS IN OPERATING RESULTS. Our operating results could vary from period to period as a result of our inability to increase continuously our number of customers. An economic recession, downturn in consumer optimism or other factors may trigger an economic environment that could negatively influence potential customers and may affect our sales effort. LOSSES. We have incurred losses and have experienced negative operating cash flow to date 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. WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE. We have funded operations primarily through operating funds, loans from shareholders, and 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 plans, we may require additional financing sooner than anticipated. We have no commitments for additional financing other than a $2.5 million commitment to invest in our Series A 6% Convertible Preferred Stock under certain conditions, and a $35 million commitment to invest in our Common Stock under certain conditions. 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. Industry Risks 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. In addition, services or technologies developed by others may render our services or technologies uncompetitive or obsolete. Furthermore, changes to our services in response to market demand may require the adoption of new technologies that could likewise render many of our assets technologically uncompetitive or obsolete. As we accept bandwidth from IXC and our other existing global network suppliers or acquire bandwidth or equipment from other suppliers that may better meet our needs than existing bandwidth or equipment, many of our assets could be determined to be obsolete or excess. The disposition of obsolete or excess assets could have a material adverse effect on our business, financial condition and results of operations. Even if we do respond successfully to technological advances and emerging industry standards, the integration of new technology may require substantial time and expense, and we cannot assure you that we will succeed in adapting our network infrastructure in a timely and cost-effective manner. 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 CONTINUED GROWTH OF THE INTERNET. Our future success substantially depends on continued growth in the use of the Internet. Although we believe that Internet usage and popularity will continue to grow as it has in the past, we cannot be certain that this growth will continue or that it will continue in its present form. If Internet usage declines or evolves away from our business, our growth will slow or stop and our financial results will suffer. 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. 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 Flashcom, have also begun to develop high-speed access capabilities to leverage their existing products and services. Recently, there have been several announcements regarding the planned deployment of broadband services for high speed Internet access by cable and telephone companies. These services would include new technologies such as cable modems and xDSL. These providers have initially targeted the residential consumer. However, it is likely that their target markets will expand to encompass business customers, which is our target market. This expansion could adversely affect the pricing of our service offerings. Moreover, there has recently been introduced a number of free ISP services, particularly in non-U.S. markets, and some ISPs are offering free personal computers to their customers. These trends could have a material adverse effect on our business, financial condition and results of operations. These providers of DSL-based services including Network Access Solutions, NorthPoint and Rhythms NetConnections; 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 more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. Operational Risks 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 sources of supply, 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 COMPETE WITH THE STRATEGIC PARTNERS ON WHOM WE DEPEND. Many of our strategic partners are providing communications bandwidth to our potential customers and to our competitors. Consequently, these companies have certain incentives to delay: our entry into, and renewals of, interconnection agreements with them, our access to their central offices to install our equipment and provide our services, providing acceptable transmission facilities and copper telephone lines, and our introduction and expansion of our services. Any such delays would negatively impact our ability to implement our business plan and harm our competitive position, business and prospects. WE PRIMARILY USE STRATEGIC PARTNERS TO INSTALL NECESSARY EQUIPMENT AND WIRING IN THE CENTRAL OFFICES OF TRADITIONAL TELEPHONE COMPANIES AND AT OUR CUSTOMERS PREMISES. These installations must be completed on a timely basis and in a cost-efficient manner. Failure of our strategic partners to install the equipment and wiring or failure to complete these installations on a timely, cost-efficient basis could materially delay our growth or damage our reputation, our business and prospects and results of operations. If we are unable to retain our partners to provide these services, we will have to complete these installations ourselves, with a diversion of our management attention and delays in installations, increased costs and lower quality. WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS OF BANDWIDTH FROM NETWORK SUPPLIERS. We acquire our bandwidth through our strategic alliances with Covad Communications Group, Inc. 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 acquisitions 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: 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; 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; 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 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 acquisition of sufficient bandwidth. WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH FUTURE ACQUISITIONS. 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 in 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. RELIANCE UPON OPERATING MANAGEMENT. Our success is dependent substantially upon the efforts of certain key personnel. No person should purchase the securities offered herein unless they are willing to entrust all aspects of the Company to those persons. The loss of any of such key personnel could adversely affect our business and prospects. We may not be able to replace or add to such key personnel. OUR 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. 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. A BREACH OF OUR NETWORK SECURITY COULD RESULT IN LIABILITY TO US AND DETER CUSTOMERS FROM USING OUR SERVICES. Our network may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Any of the foregoing problems could result in liability to us and deter customers from using our service. Unauthorized access could 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 can provide no assurance that the security measures we have implemented will not be circumvented or that any failure of these measures will not have a material adverse effect on our ability to obtain and retain customers. Any of these factors could have a material adverse effect on our business and prospects. 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. Regulatory Risks GOVERNMENT REGULATION. Our services are subject to federal, state and local regulation and changes in laws or regulations could adversely affect the way we operate our business. The facilities we use and the services we offer are subject to varying degrees of regulation at the federal, state and/or local levels. Changes in applicable laws or regulations could, among other things, increase our costs, restrict our access to the central offices of the traditional telephone companies, or restrict our ability to provide our services. For example, the 1996 Telecommunications Act, which, among other things, requires traditional telephone companies to un-bundle network elements and to allow competitors to locate their equipment in the telephone companies' central offices, is the subject of ongoing proceedings at the federal and state levels, litigation in federal and state courts, and legislation in federal and state legislatures. In addition, FCC rules governing pricing standards for access to the networks of the traditional telephone companies are currently being challenged in federal court. We cannot predict the outcome of the various proceedings, litigation and legislation or whether or to what extent these proceedings, litigation and legislation may adversely affect our business and operations. In addition, decisions by the FCC and state telecommunications regulators will determine some of the terms of our relationships with traditional telecommunications carriers, including the terms and prices of interconnection agreements, and access fees and surcharges on gross revenue from interstate and intrastate services. State telecommunications regulators determine whether and on what terms we will be authorized to operate as a competitive local exchange carrier in their state. In addition, local municipalities may require us to obtain various permits, which could increase the cost of services or delay development of our network. Future federal, state and local regulations and legislation may be less favorable to us than current regulations and legislation and may adversely affect our businesses and operations. We provide Internet services through data transmissions over public telephone lines and cable networks. These transmissions are governed by the Federal Communications Commission ("FCC"). As an Internet access provider, we are not subject to direct regulation by the FCC or any other governmental agency, other than regulations applicable to businesses generally. However, we could become subject to FCC or other regulatory agency regulation especially as Internet services and telecommunication services converge. Changes in the regulatory environment could decrease our revenues and increase our costs. 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. 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. Market Risks THE VALUE OF STOCKS IS 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. The bid and asked prices have fluctuated significantly. In the past two fiscal years, the stock traded from a high of $18.375 to a low of $0.02. The following factors could affect the price of the stock: general market price declines, market volatility (especially for low priced securities), and factors related to the general economy or our company. All of the shares registered for sale on behalf of the Selling Security Holders 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 Security Holders. 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 Security Holders 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. 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. Those 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. THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE LOWER THAN THE PRICE YOU PAY. Prior to this offering, there has been no public market for our common stock. After this offering, an active trading market in our stock might not develop or continue. If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay. 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 61.4% 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. THE MARKET PRICE OF OUR COMMON STOCK MAY DROP SIGNIFICANTLY WHEN THE RESTRICTIONS ON RESALE BY OUR EXISTING SECURITYHOLDERS LAPSE. Following this offering, we will have approximately 59,700,000 shares of common stock outstanding. Approximately 50,100,000 shares, or 83.9%, of our outstanding common stock will be subject to restrictions on resale under U.S. securities laws. Holders of a majority of these shares have agreed not to sell these shares for at least 180 days following the date of this prospectus although Deutsche Bank Securities Inc. can waive this restriction at any time. As these restrictions on resale end beginning in April 2000, the market price of our common stock could drop significantly if holders of these shares sell them or are perceived by the market as intending to sell them. These sales also may make it difficult for us to sell equity securities in the future at a time and price that we deem appropriate. DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO FALL. 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: 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; The ability to deploy our networks on a timely basis; The availability of financing to continue our expansion; 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. LACK OF DIVIDENDS. We have never declared any cash dividends on our common stock. If we were to become profitable, we expect that all earnings would be retained to support the business of our company. Accordingly, we do not anticipate paying cash dividends on our common stock in the foreseeable future. WE RESERVED SOME OF OUR UNISSUED SHARES FOR FUTURE SALE. On November 30, 1999, we had 13,514,706 shares of common stock reserved for exercise of options and warrants as follows: (a) Our 1999 Stock Plan has reserved 3,000,000 common shares, grants have been made for 1,515,440 shares and 1,484,560 remain ungranted; (b) There are 8,000,000 shares reserved for exercise of options held by senior management and counsel; (c) There are 2,514,706 common shares reserved for issuance under this offering; and (d) There are 490,000 shares of common stock reserved for issuance pursuant to a commitment warrant. Our Series A 6% 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 closing bid price for the common stock for the twenty five trading days immediately before the conversion date. Since there is no minimum conversion price on either the Series A Preferred Stock, a reduction of bid price could require us to issue a great amount of common stock on conversion of the Series A Preferred Stock. 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. When large amounts of common stock are sold or become available for sale in the public market, it could lower the market price of the common stock and hurt our ability to raise additional capital by selling our equity securities. USE OF PROCEEDS We will not receive any proceeds from the conversion of the preferred shares into common stock by the Selling Security Holders. We will receive $3,187,500 on the exercise of all of the warrants and we will use it 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 $20,000. THE MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our common stock has been traded in the over-the-counter market since 1995. It is currently is traded in the over-the-counter market and is quoted on the OTC Electronic Bulletin Board (symbol "LMKI") maintained by NASDAQ. The market for our Common Stock has often been sporadic and limited. The following table sets forth 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. Quarter Ended High Bid Low Bid 11/30/97 0.063 0.01 2/28/98 0.0625 0.03125 5/31/98 0.03125 0.03125 8/31/98 0.03125 0.03125 11/28/99 0.03125 0.03125 2/29/99 0.09 0.02 5/31/99 1.00 0.05 8/31/99 9.125 0.4375 Period 9/1/99 to 11/30/99 5.875 2.625 12/1/99 to 12/14/99 18.375 5.50 On or about December 15, 1999, we filed an application for listing on the NASDAQ National Market ("NNM"). We believe we qualify for such listing based on meeting the market capitalization requirements set forth in NNM Alternative 3, however there can be no assurance that our application will be approved. Holders As of December 14, 1999 the closing bid price of our Common Stock was $11.125. As of August 31, 1999, the end of our fiscal year, there were 428 registered holders of record of our shares. Dividends No dividends have been declared with respect to our Common Stock since inception. We are not likely to pay any dividends in the foreseeable future. We intend to reinvest any earnings in its operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our 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. Three Months Ended November 30, 1999 and November 30, 1998 Results of Operations Our operating results have fluctuated in the past due to on again, off again General Telephone & Equipment Corporation ("GTE") sales promotions. As of January of 1999 we canceled our contract with GTE and focused all our attention on the DSL and broadband business. Since we started selling T-1 services last year we were working closely Mobilenetics Corporation and as of June 1, 1999, we purchased all of the outstanding stock of Mobilenetics. The management and employees of Mobilenetcis provided the needed technical expertise to further our goal of being a leader in the DSL and broadband market. We have formed strategic partnerships with Covad, Level Three and Quest, to bring high speed internet connectivity to the marketplace. These partnerships' provide us with a nation-wide footprint in which we plan to aggressively market our products. With these partners, and InterNap, we will be a technological leader in the high speed internet connectivity marketplace. In connection with our expansion in to a nation-wide provider, we expect to significantly increase our capital expenditures, as well our sales and marketing expenditures, to deploy our networks and support our customers. Accordingly, we expect to incur substantial losses for at least the next two years. Revenue. Our revenue totaled approximately $1,505,053 for the three month period ended November 30, 1999, a 3,582% increase over revenue of $40,881 for the three month period ended November 30, 1998. The results of sales in the first quarter of FY 1998-1999 is reflective of the lack of a GTE sales promotion that quarter. The results of this year's quarter clearly demonstrates why we stopped selling GTE services and switched to selling DSL and broadband services. Sales for this quarter are over 25% greater than the prior quarters results partly from the compounding effects of recurring revenue sales from DSL and Broadband services and from the continued broadening of our customer base. Cost of Sales. Our cost of sales consists primarily of installation, usage and equipment charges from Covad, access charges from local exchange carriers, backbone and Internet access costs, equipment sold to customers and labor directly to the implementation and maintenance of our services. Cost of sales for the three month period ended November 30, 1999 was $709,387, and the cost of sales for the three month period ended November 30, 1998 was $3,173, an increase of 22,257%. This increase is attributable to the shift from reselling GTE and T-1 services exclusively to transforming into a DSL, ISP, Broadband provider. We expect our cost of sales to continue to increase in dollar amount, while declining as a percentage of revenue as we expand our customer base. Sales Expense. Our sales expense consists primarily of personnel expenses, including salary and commissions, and costs of for customer support functions. The marketing and sales expense was approximately $259,897 for the three month period ended November 30, 1999 and $72,589 for the three month period ended November 30, 1998. The $208,175 increase reflects an expansion of the sales organizations necessary to support our shift from reselling GTE services to selling DSL, T-1, broadband and co-location services. This increase also reflects a growth in subscriber acquisition costs, related to both increased direct marketing efforts as well as commissions paid sales staff. Sales expense as a percentage of revenue decreased to 17% for the three month period ended November 30, 1999 from 177% in the year earlier period as a result of our product shift and tremendous increase in sales. We expect sales expenditures to continue to increase in dollar amount, decline slightly as a percentage of revenue. General and Administrative Expense. General and administrative expense consists primarily of personnel expense, rent, professional fees, depreciation, amortization and utilities. General and administrative expense was $625,225 for the three month period ended November 30, 1999 and $25,463 for the three month period ended November 30, 1998. This higher level of expense reflects increases in all categories, and was necessary to manage the financial, legal and administrative aspects of our business. The total full time employees have grown from ten as of November 30, 1998 to 80 as of November 30, 1999. General and administrative expense as a percentage of revenue declined to 62% for the three month period ended November 30, 1999 from 35% in the year earlier period as a result of our increased revenue. We expect general and administrative expenses to increase in dollar amount, reflecting its growth in operations, but to decline as a percentage of revenue. Net Income (Loss) Attributable to Common Stockholders. Our net loss attributable to common stockholders was approximately $115,939 for the three month period ended November 30, 1999 as compared to net income approximately $62,362 for the three month period ended November 30, 1998. We expect to focus in the near term on building and increasing its 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 we will be profitable in the future. Financial Condition To date, we have satisfied our cash requirements primarily through debt financings and capitalized lease financings. In late November of 1999 we received $2,278,100 from an equity placement. Our 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 three month periods ended November 30, 1999 and 1998 was approximately $186,014 and $1,063, respectively. Cash provided by operating activities in the period ending November 30, 1999 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. The net cash provided from operations for the period ending November 30, 1997 was the result of a decrease in accounts receivable. Net cash used by investing activities for the three month period ended November 30, 1999 was $805,343 for the purchase of equipment. No cash was either used or provided by investing activities in the three month period ending November 30, 1998. DSL routers located at client sites represented $235,000, Cisco routers in support of broadband sales represented $428,000, deposits of $80,000 for software and $62,000 for miscellaneous equipment. Net cash used for financing activities for the three month period ending November 30, 1998 was for repayment of capitalized leases. During November 1999, we 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). Net cash provided by financing activities for the period ending November 30, 1999 came from an increase in notes payable to officer of $317,848 and sale of preferred stock for a net proceeds of $2,278,100. The net cash increase for the three month period ended November 30, 1999 was $1,928,230 as compared to a net cash decrease for the three month period ended November 30, 1998 of $3,369. At November 30, 1999, we had cash and cash equivalents of approximately $2,053,922, and positive working capital of $1,726,226. Fiscal Years Ended August 31, 1999 and August 31, 1998 Results of Operations. Our operating results have fluctuated in the past due to on again off again GTE sales promotions. As of January of 1999 LMKI canceled its contract with GTE and focused all of its attention on its DSL and broadband business. Since we started selling T-1 services last year it has been working closely the Mobilenetics Inc. and as of June 1, 1999 LMKI purchased all of the outstanding stock of Mobilenetics Inc. The management and employees of Mobilenetcis provided the needed technical expertise to further its goal in being a leader DSL and broadband market. LMKI has also formed strategic partnerships with Covad, Level Three and Quest, to bring high speed internet connectivity to the marketplace. These partnerships' provide LMKI with a nation-wide foot print in which we plan to aggressively market our products. LMKI has created strategic partnerships with Covad, Level Three, and Quest to be the technological leader in the high speed internet connectivity marketplace. We plan to leverage these partnerships and others in order to become a nation-wide provider of DSL and broadband services. In connection with our expansion in to a nation-wide provider, we expect to significantly increase our capital expenditures, as well our sales and marketing expenditures, to deploy our networks and support our customers. Accordingly, we expect to incur substantial losses for at least the next two years. Revenue During the last half FYE August 31, 1999, LMKI entered the DSL and broadband Internet market and increased its sales from $397,363 in 1998 to $1,598,076, a 402% increase. Two thirds of the sales were booked in the last quarter. This increase is attributable to the switch to the DSL and broadband business, the rapid growth in customers in both Los Angeles/Orange metro and San Francisco Bay areas. We expect revenues to increase in future period as we expand our network within existing regions, and enter in to new regions and increase our sales and marketing efforts in all of our target markets. Cost of Sales. We recorded network and product costs of $52,001 for the year ended August 31, 1998 and $922,589 for the year ended August 31, 1999. This increase is attributable to the expansion our DSL and broadband 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 $350,538 for the fiscal year ended August 31, 1998 to $1,313,383 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 are expected to increase significantly as we continue to expand our business. Deferred Compensation and Intangible Asset Amortization We account for our stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations. Since December of 1997, we have granted stock options with exercise prices equal to the fair value of the underlying Common Stock, as determined by our Board of Directors and based on our sales of stock to third parties and based on quoted market prices. Accordingly, we have not recorded compensation expense related to the granting of stock options in 1997 and 1998. In June of 1999 we recorded intangible assets of $443,709 for the issuance of common stock for the acquisition of Mobilenetics. Annual amortization of this asset will be approximately $89,000 in each of the next four years and approximately $44,000 in the fifth subsequent year. Financial Condition To date, we have satisfied its cash requirements primarily through the debt financings, capitalized lease financings and loans from shareholder. The Company's principal uses of cash are to fund working capital requirements and capital expenditures, to service its capital lease and debt financing obligations, and to finance and fund acquisitions. Net cash used by operations for the year ended August 31, 1999 was approximately $626,970 and the cash used by operations for the year ended August 31, 1998 was approximately $40,925. Cash used for operating activities in the year ending August 31, 1998 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 $0, respectively. Net cash provided by financing activities for the years ended August 31, 1999 and 1998 was approximately $745,348 and $29,431. The primary source of financing for 1999 was from one shareholder. The net cash increase for the year ended August 31, 1999 was $3,772 as compared to a net cash increase for the year ended August 31, 1998 of $5,408. At August 31, 1999, we had cash and cash equivalents of approximately $125,692, and positive working capital of $25,689. We anticipates that we will require additional financing on a continuing basis. We will be required to raise such additional funds through public or private financing, strategic relationships or other arrangements. We cannot assure you that such additional funding, if needed, will be available on terms attractive to us, or at all. Qualitative and Quantitative Disclosures About Market Risk Interest Rate Sensitivity We maintain our portfolio of cash equivalents and short-term investments primarily in a portfolio comprised of commercial paper, money market funds and short-term debt securities. As of September 30, 1999, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Exchange Rate Sensitivity We operate primarily 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 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 financial position or results of operations. Year 2000 Compliance The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of normal business activities. We have reviewed our products and services, as well as our internal management information systems in order to identify and modify those products, services and systems that are not year 2000 compliant. Based on our assessment to date, we have determined that our internally developed software, including all of its operational, financial and management information systems software is year 2000 compliant. Our operational, financial and management information systems software which have not been internally developed have been certified as year 2000 compliant by the third party vendors who have supplied the software. The equipment and software that runs our data centers are supplied by Microsoft, Cisco Systems, and Intel Corporation. We have implemented software patches supplied by Microsoft so that the Microsoft software in these data centers no longer contains any material year 2000 deficiencies. we implemented similar patches for the software supplied by Cisco Systems at the end of 1998. We are building a new communications network, and, as such, we do not have a technology infrastructure comprised of legacy software and systems. In building its communications network, we have adopted a strategy to select technology vendors and suppliers that provide products that are represented by such vendors and suppliers to be Year 2000 Ready. In negotiating its vendor and supplier contracts, we secured Year 2000 representations and warranties that address the Year 2000 Readiness of the applicable product(s). To date, we have exclusively used equipment from Cisco Systems within our network backbone, and Customer Premises Equipment (CPE) from both Cisco Systems and Flowpoint / Cabletron. Both companies have provided us with sufficient Year 2000 readiness information and test results for the equipment that we have purchased from these vendors. We have tested and validated the Year 2000 Readiness of the company Network and select external systems, products, and facilities that are essential components in our delivery of the Services by engaging in a product delivery system tests. These system tests have been performed in a controlled, defined laboratory environment utilizing procedures to replicate the end-to-end delivery of Services. We do not separately track internal costs incurred to assess and remedy deficiencies related to the year 2000 problem, however, such costs are principally the payroll costs for its information systems group. We do not have and is not developing a contingency plan in the event its systems fail as a result of year 2000 related problems. However, despite testing by us and our vendors, our products, services and systems may contain undetected errors or defects associated with year 2000 date functions. In the event any material errors or defects are not detected and fixed or third parties cannot timely provide us with products, services or systems that meet the year 2000 requirements, our operating results could be materially adversely affected. Known or unknown errors or defects that affect the operation of our products, services or systems could result in delay or loss of revenue, interruption of network services, cancellation of customer contracts, diversion of development resources, damage to our reputation, and litigation costs. There can be no assurance that these or other factors relating to year 2000 compliance issues will not have a material adverse effect on our business, operating results or financial condition. BUSINESS Overview LMKI Inc., formerly Landmark International, Inc., delivers broadband communications solutions including high-speed Internet access, data, voice and video services over a revolutionary national network to a wide spectrum of business customers. Additionally, we offer application development, network integration and systems management services to businesses worldwide. Through strategic alliances and cost-effective network planning, we provide our customers with high performance and service. We provide both of the elements critical to the success of any business interested in utilizing the Internet: Access and Communications Applications. We offer various cost- effective broadband connectivity options to businesses of all scope and size. Our broadband access offerings range from DSL to DS3 service. Additionally, we offer Network Development solutions and Internet Utility solutions. With our extensive knowledge and experience we are able to deliver VPN (Virtual Private Networking) solutions, RPN (Real Private Networking) solutions, Co- location (place our equipment in their facility), VOIP integration (Voice over Internet Protocol) and Inter/Intra/Extra/net application development. Furthermore, the design and deployment of these solutions takes full advantage of the speed and reliability provided by our broadband Internet connections. Our fully integrated, cost-effective solution approach gives businesses little reason to search elsewhere for the same solution that would be delivered by 2 to 3 different companies, each specializing in one facet to the whole solution. Because our network is smarter than the competition and we have extensive experience in deploying multi-faceted Internet solutions, our plan is to brand LMKI as the clear market leader in delivering solid, complete and cost-effective network solutions to businesses that need to integrate the utility of the Internet into their operations. We are also an Internet Service Provider (ISP), offering small, medium, and large-sized businesses the lowest-cost entry-level connection to the Internet via high speed DSL, the newest and fastest communications technology. Our proprietary product, the Zip-DSL, allows all businesses to participate in the full range of Internet services. We are customer-driven, providing subscribers 24-hours-a-day, seven-days-a- week personal service. Partnership agreements with Covad (NASDAQ:COVD), Qwest Communications (NASDAQ:QWST), and Level Three Communications (NASDAQ:LVLT) guarantee technical support and field service for near-perfect network reliability for our growing infrastructure. Currently we have a large number of customers that come from a wide range of industries in the marketplace. With favorable partnering and peering agreements ranging from backbone providers such as Level 3 and Qwest to DSL providers such as Covad, we have been able to grow at an accelerated pace. These strategic partnerships have allowed us to deliver dynamic solutions to corporations such as Xerox Corporation, IBM, CarsDirect.com, Southern California Automobile Association, Kanakaris.com and many others. 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. According to TeleChoice, a telecommunications consulting firm, the market for digital subscriber lines (DSL) has charted growth of 300% for the first half of 1999, well beyond analysts' expectations. Positioning itself to give cable modem competition a good run, DSL is a technology that uses digital coding to push more information through a regular copper phone line than previous technology. The result is that the line can transmit data using a higher frequency, and simultaneous voice and fax using a lower frequency. DSL services the "last mile"- the area stretching from the central phone exchange to the customer - that has proven such a challenge in providing fast connections to businesses. Laurie Falconer, DSL analyst at TeleChoice, expects market growth for DSL to speed up, and competition to increase. "There's a lot of demand for it," she says. Falconer claims a main factor to separate the market leaders and losers will be the viability of the targeted market. LMKI is only aiming to attract multi-location businesses to its product. 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. In addition, we anticipate 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 a DSL-based network. Recent mergers of telephone and cable companies, and acquisitions of Internet technology companies predict that broadband access is the future of the online world. Published figures and projections about growth of the Internet vary, but agreement about rapid expansion is standard. A new study of the Internet telephony business by Killen & Associates, a telecommunications research and consultant group in Palo Alto, Ca. Forecasts an $8 Billion market by the year 2003 for providers of IP (Internet Protocol) services offering voice, fax and video capabilities. BUSINESS BROADBAND. Data Competitive Local Exchange Carriers (CLECs) have built their business models around the small and medium-size markets for local broadband services, and it's easy to see why. International Data Corp. (IDC) of Framingham, Massachusetts estimates that as of year-end 1998, 3.9 million of the 7.4 billion small businesses in the United States had Internet access. Nearly 3.3 million of these small businesses were using dial-up services. According to John Stormer, NorthPoint's Vice President of marketing, converting small business dial-up customers to DSL "defines a big part of the market opportunity." The Internet's increasingly pivotal role in business via Web content, e- commerce and virtual private networks (VPNs), combined with the lack of affordable, high-speed access solutions for small businesses, have created a large niche for DSL services. Although the market is still nascent, Morgan Stanley Dean Witter & Co. of New York estimates the U.S. DSL service market for access alone will reach $7 billion to $9 billion by 2002. For a number of reasons, data CLECs have chosen to use DSL to reach their target market instead of other access media. One factor is that competing access technologies are not currently well positioned for small businesses. ISDN, for example, is a relatively slow broadband service with many hidden charges. Broadband wireless has technology glitches to fix, and any business deployments of cable modems would require further network build-outs and upgrades to two-way high-speed service. DSL, on the other hand, takes advantage of unused spectrum in existing copper telephone wires, the same basic wiring used to supply a home or office with regular telephone service. According to Peter Meade, a senior analyst with market researcher Cahners In-Stat Group, Newton, Massachusetts, DSL is a great solution for small businesses, remote offices and telecommuters. "T1 [a leased line connection] is too expensive for this segment, dial-up is too slow, and ISDN [offered by ILECs] adds per-minute online charges to their base monthly price," Meade says. J.P. Morgan's Langner agrees: "DSL is a dedicated service, and that makes it much more attractive to business than cable, dial-up and ISDN. It is becoming a viable T1 competitor on price." Although local phone companies are in the best position to offer DSL because they own the core infrastructure that supports it, until very recently, they were reluctant to market these services to business customers. According to New York based Bank of America Securities LLC senior analyst Michael Renegar, ILECs won't aggressively sell DSL services to businesses. "DSL will cannibalize existing T1 service, for which ILECs typically charge $1,000 a month," he says. "It would reduce margins considerably." Business Strategy We intend to capitalize on the enormous public attention focused on the Internet by increasing its telemarketing sales and technical support staff, targeting its advertising to its core audience, and by providing the most efficient, lowest-cost high speed Internet service in its corridor. Our Competitive Advantages OUR KNOWLEDGEABLE AND GROWING SALES FORCE AND TECHNICAL STAFF. We are making sure that the sales force is trained on the "high-end" networking elements in which we deal so they will be able to service the needs of their customers. OUR BUSINESS MODEL OPTIMIZES COST, EFFICIENCY AND FLEXIBILITY. We have addressed the largest cost factor in their methodology for deploying their network through a leasing strategy rather than a building strategy. This keeps start-up costs as low as possible. OUR EFFICIENCY. We harness a network comprised of highly intelligent and functional network elements (such as their application of MPLS meshed with the backbones of L3 and Qwest and the last mile services of Covad). We can focus on support systems that use the carrier's distributed intelligence and are developed faster and leaner. WE CHANGE OUR NETWORK WITH KEYSTROKES RATHER THAN FORKLIFTS. Our business model optimizes network flexibility due to 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 LOWEST COST STRATEGY. Our pricing enables small and medium- sized businesses that need to compete with and survive against larger companies. OUR STRATEGIC PARTNER STRENGTH. Partnerships with Covad, Qwest, Level 3, and others, give us the ability to deliver connectivity solutions faster and at a lower cost than the competition. INTEGRATION. We can seamlessly integrate all of the different connectivity solutions and custom applications development. 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 CUSTOMIZED CUSTOMER APPROACH. We emphasize direct relationships with our customers. These relationships enable us to learn information from our customers about their needs and preferences and help us expand our service 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 in customer referrals in the future. Our success depends upon careful planning and the selection of partners. We can meet the customer's needs more efficiently with entrenched procedures. This enables us to excel at customer service. Our Products IP TECHNOLOGY. The cutting edge technology in the telecommunications industry moving forward to the future is based on the IP (Internet Protocol). IP technology is able to realize the convergence of traditional voice type applications plus current and future data/internet type applications. IP provides operational efficiency 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. The Virtual Private Network (VPN), and Real Private Network (sm) (RPN), qualify as Cisco Powered Networks, and are a major step in materializing converged networks. Our main focus in deploying and managing the VPN and RPN is to maintain and guarantee the highest quality and reliability standards. The non-use of the public Internet, has given us a competitive edge, therefore we can ensure a better than Carrier Grade quality. The Real Private Network (sm) service incorporates the speed, security and versatility of DSL (Digital Subscriber Line) technology with the wide geographical coverage of Qwest's and Level Three's fiber networks. By combining multiple connectivity options with a homogenous, managed network, business customers that do not yet have DSL available in their area can take advantage of our RPN services through dedicated OC-n (Optical Carrier-n), T3 (Time Division Multiplexing at 44.736 Mbps), T1 (Time Division Multiplexing at 1.544 Mbps), ATM (Asynchronous Transfer Mode), Frame Relay, ISDN (Integrated Services Digital Network) and dial up connectivity services. Using these multiple technologies gives us a differential advantage over the competition. No competitor offers the same full service solution as we do for the price we charge. Other competitors can offer a solution, but at a much higher price, without the speed and reliability we offer. REAL PRIVATE NETWORK. A RPN is a unique service that securely links together each of an organization's sites to create a private wide area network without touching the Internet. By meshing together cutting edge technology such as, DSL, ISDN, Frame Relay and Point to Point dedicated circuits, we deliver a cost-effective alternative to deploying an internal network. Offering the features, performance, and security that business information requires, a Real Private Network includes pre-configured hardware, network management, and security services, yet costs much less than traditional WAN solutions. OUR PROPRIETARY PRODUCTS: Offer the benefits of private networking without the burden of network management, investment in Internet-access, expensive hardware, and obsolete equipment. Provide optional mediated access to the public Internet in conjunction with private site-to-site connectivity. Enable users to access files and applications from any location on the RPN as if the network were a LAN; workers and workgroups anywhere can more efficiently share information and collaborate on computer-based projects. Provide service guarantees that assure the performance and reliability needed for high priority information. Let the client give customers and business partners secure controlled access to their internal resources for strategic and tactical advantage. Quicken the delivery of internal e-mail, file transfers, and other internal traffic by avoiding the public Internet. Strategic Alliances We have created strategic alliances with Covad Communications Group, Inc. (NASDAQ:COVD), Level 3 Communications, Inc. (NASDAQ:LVLT), Quest Communications International, Inc. (NASDAQ:QWST), and InterNap Network Services Corporation (NASDAQ: INAP) to be the technological leader in the high-speed Internet connectivity marketplace. Covad is a packet-based CLEC that provides high-speed digital communications services using Digital Subscriber Line (DSL) technology to our customers. Covad sells speed to users hooked on LANs. Covad provides remote access to LANs and the Internet, with speeds of up to 1.5 megabits per second (25 times faster than most modems). Covad's use of existing copper phone lines allows it to offer lower rates and 24-hour local connectivity. Covad, which installs the lines, configures the equipment, and designs networks in 22 regions. Other Covad clients include Cisco Systems, Oracle, and Sprint. The backbone of our nationwide network has been outsourced to nationwide exchange carriers Qwest and Level 3. We were the first customer to co-locate with Level 3. By using the network infrastructure of Qwest and Level 3, we avoid all of the costs and pitfalls of implementing our own infrastructure, yet we are able to take advantage of the economies of scale and the redundancy that only multi-billion dollar companies such as Qwest and Level 3 can afford. The result: our network is faster, and can be re-tooled, re- configured and tuned to match the changing needs of the market without the man-power, overhead, and capital that our competitors have to spend on their legacy networks. This keeps us growing and evolving as the market place changes, while the competition is trying to gain ground on our previous accomplishments. We can focus our resources on delivering value-added services and quality network access, rather than on backbone technology that changes constantly. Qwest is a telecommunications based company that encompasses an 18,800-mile fiber-optic network connecting approximately 500 US cities, and 90 countries. Qwest offers local and long-distance telephone, Internet, and multimedia services to businesses and consumers over its Internet protocol-based network - -- 12,500 miles of which are active. The fourth largest US long-distance provider, Quest is also building networks to serve Mexico (1,400 miles) and Europe (9,100 miles, in a joint venture with Dutch phone company KPN). Qwest has network capacity on three transatlantic cables and is helping to construct a transpacific cable. Recently, Qwest has agreed to merge with Baby Bell US WEST. Level 3 is a telecommunications and information services company that plans to build an advanced, international facilities-based communications network based on Internet Protocol (IP) technology. It is building an international fiber-optic network, in which entities, like Nextel and Nextlink, are investing in return for network capacity. Level 3 offers local, long-distance and Internet service over leased network capacity in 15 cities in the US and two in Europe. It also offers computer operations outsourcing and owns stakes in telecom providers RCN and Commonwealth Telephone Enterprises. InterNap Network Services Corporation, is a leading provider of fast, reliable and centrally managed Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet- based applications. Customers connected to one of our Private- Network Access Points ("P-NAPs") have their data optimally routed to and from destinations on the Internet in a manner that minimizes the use of congested public network access points and private peering points. This optimal routing of data traffic over the multiplicity of networks that comprise the Internet enables higher transmission speeds, lower instances of packet loss and greater quality of service. Customers We have close to 2000 business clients, including: Southern California Automobile Association (CSAA) with approximately 300 DSL and 250 ISDN connections in a private network; Xerox with a private network; CarsDirect.com with broadband web hosting. 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. 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 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 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. 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. 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 patent, 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. In addition, some of our information, including our competitive carrier status in individual states and our interconnection agreements, 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 us and our competitors. 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. 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 and 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. 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: the manner in which copper telephone lines should be subject to unbundling; compatibility among DSL services and between DSL and non-DSL services; and 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. 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. 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 does not currently operate in any states where these requirements are imposed. From time to time, bills are introduced in Congress, which, if enacted, would regulate the use of credit information. We cannot predict whether this legislation will be enacted and what effect, if any, it would have on the telemarketing industry. Subsidiaries We have one wholly owned subsidiary, Landmark Communications, Inc., a Nevada Corporation doing business as Landmark Long Distance Inc. in the State of California. Employees We employ eighty (80) full-time employees, including four (4) in executive management, sixty seven (67) in sales, marketing and customer service, five (5) in operations, and four (4) 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 5,000 square feet of commercial office space in Santa Ana, California. The monthly rent is approximately $5,000. We are on a month to month tenancy since our lease expired in November 1999. We are currently looking in for new space to accommodate our rapid growth. We anticipate a space requirement of 25,000 square feet and expect to pay between $1.20 to $2.00 per square foot per month, depending upon what services are included. We foresee no problem in obtaining such space in Orange County, where we are located. The current landlord knows that we are likely to leave. Legal Proceedings We are not currently a party to any material legal proceedings. MANAGEMENT Executive Officers, Directors and Other Significant Employees Name Age Title William J. Kettle 69 Chief Executive Officer, Chairman, Director Bryan Turbow 31 President, Chief Technical Officer, Director Adela Maria Kettle 53 Vice President, Director John W. Diehl, Jr. 45 Chief Financial Officer, Secretary, Director William J. Kettle has been Chief Executive Officer and a Director of the Company since October 1994. He became Chairman in June 1999 at the time when he stepped down as President, a position he had held since October 1994. He was President and Chairman of Thrifty Telecommunicaitons, Inc. ("Thrifty") from 1988 until August 1994. Thrifty was engaged in the business of providing discount long distance telephone services. Thrifty filed a petition in Chapter 11 in 1994, after Mr. Kettle's disassociation. From 1981 to 1985, Mr. Kettle served as Secretary, Treasurer and a director of Sierra College in Los Angeles, California. From 1972 to 1981 he was President of Bauder College in Sacramento, California. Mr. Kettle attended Kilgore College and the University of Houston. Bryan L. Turbow has been the President and Chief Technical Officer of the Company since June 1999, when he merged MobileNetics Corporation with the Company. He became a Director in October 1999. He started MobileNetics in June 1986, and was the president, and sole shareholder until merging with the Company. At MobileNetics he was responsible for telecommunications consulting and systems integration. Adela Maria Kettle has since September 1994 been Vice President of the Company. From 1986 through August 1994 she was Executive Vice President of Sales and Marketing at Thrifty Telecommunicaitons, Inc. From 1981 to 1985, she was 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, ending as Vice President of Sales and Marketing. John W. Diehl, Jr. has since September 1994 been an independent accounting and tax consultant with us. As of June of 1999 he has been our Chief Financial Officer and Secretary. He is a Certified Public Accountant with ten years of public accounting experience, six years in his own practice and prior to that Director of Internal Audit for Memorial Health Services, Long Beach for ten years and two years as Director of Telecommunications after Director of Audit. He holds a BS in Business Administration with emphasis in Accounting from the California State University at Northridge and a Masters in Business Administration from the University of La Verne. Board of Directors Our board of directors consists of six (6) authorized members and we currently have four (4) directors and two (2) vacancies. The terms of the Board of Directors will expire at the next annual meeting of stockholders. No directors have been compensated for their activities 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." Executive Officers Our officers are elected by the Board of Directors and hold office at the will of the Board. Adela Maria Kettle is the wife of William J. Kettle. There are no other family relationships among our directors and officers. 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.
Annual Compensation Long Term Compensation Awards Payouts Other Securities Name Annual Restricted Under- All Other and Compen- Stock lying LTIP Compen- Principal sation Award(s) Options/ Payouts sation Position Year Salary ($) Bonus ($) ($) ($) SARs (#) ($) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) William J. Kettle 1999 $0 4,000,000 (1) 4,000,000 (2) Chairman, Chief 1998 $0 4,000,000 (3) 4,000,000 (4) Executive Officer 1997 $0 Bryan L. Turbow 1999 $36,174 $4,020 (6) Vice President, 1998 $0 President, Chief 1997 $0 Technical Officer Adela Maria Kettle 1999 $47,977 Secretary 1998 $33,099 1997 $0 John W. Diehl, Jr 1999 $41,300(5) 200,000 (5) Chief Financial 1998 $3,800 (5) Officer 1997 $7,950 (5)
Footnotes (1) Award granted as of 12-28-98 for 4,000,000 restricted common shares at $.01 per share. (2) Option granted as of 12-28-98 for 4,000,000 restricted common shares at $.01 per share. (3) Award granted as of 12-28-97 for 4,000,000 restricted common shares at $.01 per share. (4) Option granted as of 12-28-97 for 4,000,000 restricted common shares at $.01 per share. (5) Payment as an independent consultant. (6) Other employee benefits. Option/SAR Grants in Last Fiscal Year The following table shows information regarding grants of stock options in this last completed fiscal year to the executive officers named in the Summary Compensation Table. Individual Grants Number of % of Total Securities Options/SARs Underlying Granted to Exercise Options/SARs Employees or Base Expiration Name Granted (#) in Fiscal Year Price ($/Sh) Date (a) (b) (c) (d) (e) William J. Kettle 4,000,000 100% .01 12-28-2003 Footnotes (1) Award granted as of 12-28-98 for 4,000,000 restricted common shares at $.01 per share. (2) Option granted as of 12-28-98 for 4,000,000 restricted common shares at $.01 per share. Aggregated Option/SAR Exercises And Fiscal Year-End Option/SAR Value The following table shows information concerning each exercise of stock options (or tandem SARs) and freestanding SARs during the last completed fiscal year by each of the executive officers named in the Summary Compensation Table and the fiscal year-end value of unexercised options and SARs.
Shares Number of Securities Value of Unexercised Acquired on Value Underlying Unexercised In-The-Money Options/ Exercise Realized Options/SAR's at FY-End (#) SAR's at FY-End($) Name Exercisable Unexercisable Exercisable Unexercisable William J. Kettle 0 0 8,000,000 0 39,200,000
Footnotes (1) FY-End Option/SAR Values based on exercise price of $.01 per share and 8-31-99 bid price of $4.91 per share. 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 Options On December 28, 1997, we granted an option to William J. Kettle, Chairman, for 4,000,000 restricted common shares exercisable until December 28, 2002 at $.01 per share. On December 28, 1998, we granted an option to William J. Kettle, Chairman, for 4,000,000 restricted common shares exercisable until December 28, 2003 at $.01 per share. Stock Plans 1999 STOCK PLAN. Our Board of Directors adopted our 1999 stock plan in November 1999 reserving 4,000,000 shares for issuance. As of November 30, 1999, options to purchase an aggregate of 1,515,440 shares were outstanding, no shares of common stock had been purchased pursuant to exercises of stock options and stock purchase rights, and 1,404,560 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. 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 exercise price of nonstatutory stock options is set by the administrator of the 1999 Stock Plan. 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 an equivalent option would be substituted by the successor company. 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. Under the 1999 Stock Plan, on November 26, 1999, we granted options to senior management and counsel for an aggregate of 1,400,000, and restricted common shares exercisable until November 26, 2004 at $4.0625 per share. At that time, we also granted an aggregate of 115,440 shares of Common Stock at an exercise price of $4.000 per share to our employees. CERTAIN TRANSACTIONS Vice President Adela Maria Kettle is the wife of our Chairman, William J. Kettle. In December 1997, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to our Chairman for services rendered. Also in December 1997, the Chairman was granted the option to purchase an additional 4,000,000 shares of our common stock, exercisable until December 2002. In December 1998, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to our Chairman for services rendered. Also in December 1998, the Chairman was granted the option to purchase an additional 4,000,000 shares of our common stock, exercisable until December 2003. During the calendar year of 1999, our majority shareholder and Chairman advanced an aggregate of $1,081,680 for working capital purposes. The notes payable bear interest at 10% per annum. The shareholder was paid approximately $4,900 in interest during 1999. The notes are repayable upon demand in cash or in our Common Stock at 50% of the bid price on the date of the loan, or a combination thereof, at the option of the shareholder. At this time, the shareholder intends to exchange his notes for our common stock and has agreed not to demand repayment before November 11, 2000. The notes outstanding were issued as follows: Date Amount 6/9/1999 $20,000 6/21/1999 $70,000 6/25/1999 $25,000 6/28/1999 $20,000 7/8/1999 $21,500 7/12/1999 $42,180 7/13/1999 $29,000 7/27/1999 $220,000 8/4/1999 $300,000 8/31/1999 $50,000 9/1/1999 $74,000 9/7/1999 $50,000 9/10/1999 $25,000 9/15/1999 $35,000 9/24/1999 $50,000 10/26/1999 $50,000 In November 1999, pursuant to the 1999 Stock Plan, the Board of Directors authorized the grant of an aggregate of 1,225,000 shares of Common Stock at an exercise price of $4.0625 per share to members of senior management and counsel. PRINCIPAL SECURITY HOLDERS The following tables set forth information regarding the beneficial owners of our securities, as of November 30, 1999, by the following individuals or groups: Each of our executive officers; Each of our directors; Each person, or group of affiliated persons, whom we know beneficially owns more than 5% of our outstanding stock; and All of our directors and executive officers as a group. Unless otherwise indicated, the address for each stockholder on this table is c/o LMKI, Inc., 1720 East Garry Avenue, Suite 201, Santa Ana, California 92705. 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 36,115,666 Common shares and 2,500 Series A Preferred shares outstanding. Title of Class: Common Stock Name and Amount and Address of Nature of Percent Beneficial Beneficial of Owner Ownership Class William J. Kettle (1) 7,550,000 (2) 20.9 Bryan L. Turbow (1) 12,000,000 33.2 A. Maria Kettle (1) 7,070,000 (3) 19.6 John W. Diehl, Jr. (1) 200,000 (4) 0.6 Paul Gamberg 2,000,000 5.5 233 North Rampart Los Angeles, CA 90026 Named Officers and 26,820,000 74.3 Directors As a Group (1) Officer or Director. (2) Does not include shares issuable upon exercise of options to purchase 7,000,000 shares as they are not presently exercisable. (3) As Beneficiary of The Chapman Group. William J. Kettle is the Trustee of The Chapman Group and disclaims beneficial ownership thereof. Adela Maria Kettle is the wife of William J. Kettle. (4) Does not include shares issuable upon exercise of options to purchase 500,000 shares as they are not presently exercisable. Title of Class: Series A 6% Convertible Preferred Stock (1) Name and Amount and Address of Nature of Percent Beneficial Beneficial of Owner Ownership Class Mesora Investors LLC 2,500 (1) 100% c/o WEC Asset Management LLC One World Trade Center, Suite 4563 New York, New York 100048 (1) The Series A 6% Convertible Preferred Stock is not registered with the Securities and Exchange Commission. (2) Convertible into 588,235 shares of Common Stock which are included in the shares registered in this offering. See "SELLING SECURITY HOLDERS." DESCRIPTION OF SECURITIES Common Stock We are authorized to issue up to 50,000,000 shares of Common Stock, $.001 par value, of which 36,115,666 shares were issued and outstanding as of November 30, 1999. 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 shareholder 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 shareholders. 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 Colorado law, our articles of incorporation, or our bylaws require a greater vote and except when Colorado 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, as 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 shareholders 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 6% CONVERTIBLE PREFERRED STOCK. On November 23, 1999, we filed with the Nevada Secretary of State a Certificate of Designations establishing the Series A 6% Convertible Preferred Stock consisting of 5,000,000 shares. As of November 30, 1999, 2,500 shares of our Series A Preferred Stock were issued and outstanding. The following is a summary of the rights, privileges and preferences of the Series A Preferred Stock. Dividends. The cumulative non-compounded dividend on the Series A 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 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 Preferred Stock. Conversion. Each share of the outstanding Series A 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 three lowest closing bid prices of the our common stock for the twenty-five (25) trading days immediately preceding the election by the holder to convert. At any time while any shares of the Series A Preferred Stock are outstanding, we may not issue any classes or series of stock that are senior to the Series A Preferred Stock in any respect, including liquidation. Voting. Each share of Series A 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 Preferred Stock vote as a single class on all matters on which our shareholders vote, except where otherwise required by law. The holders of the Series A Preferred Stock do not have cumulative voting for the election of directors. Preemptive Rights. The holders of the Series A 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 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 Preferred Stock in cash plus payment of all accrued but unpaid cumulative dividends. Holders of the Series A Preferred Stock will not be entitled to receive any other payments if we liquidate, dissolve or wind-up our business. Redemption Rights. Should the Registration Statement of which this Prospectus is a part is declared effective on or after May 21, 2000, or should certain other events occur, we are required, at the option of the holder, to redeem all outstanding Series A Preferred Stock at $1,250 per share plus accrued and unpaid dividends. Ownership Limitation. The investor in the Series A 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. Warrants We have outstanding a warrant to purchase up of 250,000 shares of our Common Stock at an exercise price of $4.25 per share with anti-dilution provisions. This warrant has piggyback registration rights, anti-dilution provisions, is fully exercisable, and expires November 23, 2004. The Common Stock underlying these warrants is subject to registration rights and is being registered in this offering. We have outstanding a conditional warrant to purchase up to 2,500 shares of our Series A 6% Convertible Preferred Stock at an exercise price of $1000 per share, and a warrant exercisable for five years to purchase up of 250,000 shares of Common Stock at an exercise price of $4.25 per share with anti- dilution provisions. This conditional warrant is exercisable at our option as long as our common stock bid price is more than $4.00 per share beginning 75 days after this offering goes effective and expires November 23, 2004. The Common Stock issuable upon exercise of the conditional warrant and the underlying warrants, and the conversion of the Preferred Stock, is subject to registration rights and is being registered in this offering. We have outstanding a commitment warrant to purchase 490,000 shares of our Common Stock at an exercise price which is the lower of (1) $3.843 per share or (2) the lowest price which is calculate as the average closing bid price of our common stock for the 5 trading days prior to each successive six (6) month dates beginning September 29, 1999. This warrant has piggyback registration rights, anti-dilution provisions, is fully exercisable, and expires October 4, 2004. Under the terms of a warrant side agreement, in the event of a recapitalization, additional warrants may be issued to the holder. We have outstanding a placement warrant to purchase 49,844 of our Common Stock exercisable at an exercise price which is the lower of (1) $4.0125, or (2) the lowest price which is calculate as the average closing bid price of our common stock for the 5 trading days prior to each successive six (6) month dates beginning from November 24, 1999. This warrant has piggyback registration rights. anti-dilution provisions, is fully exercisable, and expires November 24, 2004. Lock-Up Agreements 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 SECURITY HOLDERS The securities offered by this Prospectus may be offered from time to time by the Selling Security Holders. The Selling Security Holders are the purchaser and placement agent of our Series A Preferred Stock and associated Warrants. The Selling Security Holders have not held any position or office or had any material relationship with us or any predecessors or affiliates within three years of the date of this Prospectus. Our agreement with the Selling Security Holders provide for us to reserve for issuance 1.5 times the maximum amount of shares issuable under the initial terms of conversion of the 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: The number of shares issuable upon conversion of the preferred stock, The number of shares issuable upon exercise of the warrants, The potential increase in the number of shares issuable with respect to the preferred stock if the conversion price declines due to a decline in the market price for our common stock, and Our right to not call for the exercise of the conditional warrant. The following table sets forth, as of November 30, 1999 and upon completion of this offering, information provided by the Selling Security Holders with regard to their beneficial ownership of the our Common Stock. 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. 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 it, 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. Common Shares Number of Shares Number of Shares Percent Selling Security Holder Prior to Sale After Sale After Sale Mesora Investors LLC (1)(2) 2,464,862 -0- + (4) c/o WEC Asset Management LLC One World Trade Center, Suite 4563 New York, New York 100048 Dunwoody Brokerage (3) 49,844 -0- + (4) Services, Inc. 1080 Holcomb Bridge Road Roswell, GA 30076 Total (4) 2,514,706 -0- + (4) + less than 1%. (1) Holder of shares of common stock issuable upon (a) conversion of 2,500 shares of Series A 6% Convertible Preferred Stock convertible into 588,235 shares of common stock, and (b) exercise of warrants to purchase 250,000 shares of common stock. (2) Holder of shares of common stock issuable upon (a) exercise of a conditional warrant to purchase up to 2,500 shares of Series A 6% Convertible Preferred Stock and a warrant exercisable for five years to purchase up to 250,000 shares of Common Stock, and (b) conversion of the preferred stock into 588,235 shares of common stock, and exercise of the warrant to purchase 250,000 shares of common stock. (3) Holder of shares of common stock issuable upon exercise of placement warrants to purchase 49,844 shares of common stock. The actual number of shares issuable is subject to adjustment. (4) The actual number of shares issuable is subject to adjustment and is estimated to be 2,514,706 common shares. (5) Because the Selling Security Holders 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 Security Holder 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. PLAN OF DISTRIBUTION The Selling Security Holders 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 Security Holders may use any one or more of the following methods when selling shares: ordinary brokerage transactions and transactions in which the broker- dealer solicits purchasers; 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; purchases by a broker-dealer as principal and resale by the broker- dealer for its account; an exchange distribution in accordance with the rules of the applicable exchange; privately negotiated transactions; short sales; broker-dealers may agree with the Selling Security Holders to sell a specified number of such shares at a stipulated price per share; a combination of any such methods of sale; and any other method permitted pursuant to applicable law. The Selling Security Holders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The Selling Security Holders 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 Security Holders 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 Security Holders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Security Holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Security Holders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The Selling Security Holders 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 Security Holders. We have agreed to indemnify the Selling Security Holders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the Common Stock being offered hereby will be passed upon for us by Robert C. Weaver, Jr., Esq., San Diego, California. Robert C. Weaver, Jr. is presently the holder of 100,000 shares of our Common Stock and has options for an additional 700,000 shares of which 200,000 were granted under the 1999 Stock Plan and 500,000 were assigned by William J. Kettle. None of these shares are being offered herein. 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) that contains 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. LMKI, Inc. (formerly Landmark International, Inc.) Consolidated Financial Statements with Report of Independent Auditors For the Three Years in the Period Ended August 31, 1999 Contents Page Report of Independent Auditors 1 Consolidated Financial Statements: Balance sheets 2 Statements of operations 3 Statements of changes in stockholders' equity (deficit) 4 Statements of cash flows 5 Notes to financial statement 6-12 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 operation, cash flows and changes in stockholders' equity (deficit) 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 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. Timothy L. Steers, CPA, LLC Portland, Oregon November 10, 1999 LMKI, Inc. 2 (formerly Landmark International, Inc.) Consolidated Balance Sheets August 31 1999 1998 ASSETS Current assets: Cash $ 125,692 $ 3,772 Accounts receivable 837,850 98,352 Deferred tax assets 242,750 13,650 Total current assets 1,206,292 115,774 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 $23,353 in 1999 443,709 - Deposits 35,725 - 479,434 - $ 1,947,793 $ 258,935 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 999,319 $ 81,089 Accrued payroll and related liabilities 133,749 8,089 Accrued interest to shareholder 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 79,778 Notes payable to shareholder 797,680 - Commitments Stockholders' equity (deficit): 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 345,796 68,955 Retained deficit (467,677) (40,145) Total stockholders' equity (deficit) (85,765) 48,797 $ 1,947,793 $ 258,935 See accompanying notes. LMKI, Inc. 3 (formerly Landmark International, Inc.) Consolidated Statements of Operations Years ended August 31 1999 1998 1997 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 1,201,480 220,488 188,200 Loss from operations (637,896) (5,176) (62,751) Interest (income) expense, net 18,736 5,843 (46) Loss before provision for income taxes (656,632) (11,019) (62,705) Provision (benefit) for income taxes (229,100) 100 (11,750) Net loss $ (427,532) $ (11,119) $ (50,955) Net loss per common share $ (.0162) $ (.0007) $ (.0043) See accompanying notes. LMKI, Inc. 4 (formerly Landmark International, Inc.) Consolidated Statements of Changes in Stockholders Equity (Deficit) For the period from September 1, 1996 through August 31, 1999 Additional Retained Total Common stock paid-in equity stockholders' Shares Amount capital (deficit) equity (deficit) 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 (540) - - Net loss - - - (50,955) (50,955) Balance at August 31, 1997 11,906,666 11,907 36,835 (29,026) 19,716 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 (4,080) - - Net loss - - - (11,119) (11,119) Balance at August 31, 1998 19,986,666 19,987 68,955 (40,145) 48,797 Shares issued in exchange for services 5,129,000 5,129 97,841 - 102,970 Shares issued in exchange for equipment 1,000,000 1,000 89,000 - 90,000 Shares issued for purchase of Mobilenetics Corporation 10,000,000 10,000 90,000 - 100,000 Net loss - - - (427,532) (427,532) Balance at August 31, 1999 36,115,666 $ 36,116 $ 345,796 $(467,677) $(85,765) See accompanying notes. LMKI, Inc. 5 (formerly Landmark International, Inc.) Consolidated Statements of Cash Flows Years ended August 31 1999 1998 1997 Cash flows from operating activities: Net loss $(427,532) $ (11,119) $(50,959) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 36,585 3,897 - Amortization of goodwill 23,353 - - Deferred income taxes (229,100) (1,900) (11,750) Services exchanged for common stock 102,970 - - Changes in assets and liabilities, net of effects of purchase of Mobilenetics Corporation: Accounts receivable (676,509) (59,738) 77,975 Accounts payable 412,588 24,031 - Accrued payroll related liabilities 125,660 2,000 - Accrued interest to shareholder 3,112 - - Other accrued liabilities 1,903 1,904 - (626,970) (40,925) 15,266 Cash flows from investing activities: Decrease in advances - 9,858 (9,858) Cash paid for Mobilenetics Corporation, net of cash acquired 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 - 40,200 - Proceeds from notes payable to shareholder 797,680 - - 745,378 29,431 - Net increase (decrease) in cash 121,920 (1,636) 5,408 Cash at beginning of year 3,772 5,408 - Cash at end of year $ 125,692 $ 3,772 $ 5,408 Supplemental disclosure of cash flow information- Cash paid during the year for interest $ 15,624 $ 5,843 $ - Supplemental disclosure on noncash investing and financing activities: Equipment acquired under capitalized lease agreements $ 49,085 $ 129,729 $ - Equipment acquired in exchange for common stock $ 90,000 $ - $ - Common stock issued in exchange for purchase of Mobilenetics Corporation $ 100,000 $ - $ - See accompanying notes. LMKI, Inc. 6 (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements August 31, 1999 1. Nature of Business and Summary of Significant Accounting Policies Nature of Business: LMKI, Inc. (formerly Landmark International, Inc.) (the "Company") is a Nevada Corporation engaged in providing communication services to individuals and businesses. Basis of Consolidation: The consolidated financial statements include the accounts of LMKI, Inc. and its wholly-owned subsidiary Mobilenetics Corporation ("Mobilenetics") since the date of its acquisition. 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 Mobilenetics. Goodwill is being amortized using the straight- line method over five years. Revenue Recognition: Fees for services are recognized at month-end as services are completed and income earned. 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 accounted for and reported using an asset and liability approach. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to effect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the year in deferred tax assets and liabilities. LMKI, Inc. 7 (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements August 31, 1999 1. Nature of Business and Summary of Significant Accounting policies (continued) 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 26,320,277 for 1999 (15,799,269 for 1998; 11,764,639 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 Southern portion of 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. 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. The Company 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 the Company's common stock on the date of exchange. The purchase price exceeded the fair market value of Mobilenetics by $467,062. Cash paid for Mobilenetics, net of cash acquired was as follows: Fair value of the Company's common stock $100,000 Fair value Mobilenetics: Accounts receivable 86,167 Equipment 16,406 Deposits 35,725 Cost in excess of fair value of net assets acquired 467,062 Accounts payable (508,872) 96,488 Cash Acquired $ 3,512 LMKI, Inc. 8 (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements August 31, 1999 2. Business Combination (continued) The results of operations of Mobilenetics are included in the accompanying consolidated financial statements since the date of acquisition. The following pro forma summary presents the consolidated financial position and results of operations of the Company as if the business combination occurred on September 1, 1998: As of August 31, 1999: Tangible current assets $ 963,542 Total assets 2,164,873 Current liabilities 1,180,603 Total liabilities 2,033,558 Total stockholders' equity 131,315 For the year ended August 31, 1999: Net sales 2,289,208 Net loss (1,257,202) Loss per common share (20.936) 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, 1998 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 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 LMKI, Inc. 9 (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements August 31, 1999 Notes Payable to Shareholder During 1999, the majority shareholder 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 shareholder was paid approximately $4,900 in interest during 1999. The notes are repayable upon demand in cash or in common stock of the Company, or a combination thereof, at the option of the shareholder. At this time, the shareholder intends to exchange his notes for common stock of the Company and has agreed not to demand repayment before November 11, 2000. 5. Income Taxes The components of the provision (benefit) for income taxes are as follows for the years ended August 31: 1999 1998 1997 Federal: Current $ - $ 1,500 $ - Deferred - net operating loss carryover (213,000) (1,600) (10,200) (213,000) (100) (10,200) State of California: Current - 500 - Deferred - net operating loss carryover (16,100) (300) (1,550) (16,100) 200 (1,550) Provision (benefit) for income taxes $(299,100) $ 100 $(11,750) Reconciliation of income taxes computed at the federal statutory rate to the provision (benefit) for income taxes is as follows for the years ended August 31: 1999 1998 1997 Tax at statutory rates $(223,255) $ (1,653) $(11,724) Differences resulting from: State tax, net of federal benefit (10,604) 159 Non-deductible and other items 4,759 1,594 (26) Provision (benefit) for income taxes $(229,100) $ 100 $(11,750) LMKI, Inc. 10 (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements August 31, 1999 6. Common Stock In December 1998, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to the Chairman of the Company for services rendered. Also in December 1998, the Chairman of the Company was granted the option to purchase an additional 4,000,000 share of the Company's common stock. As of August 31, 1999, an aggregate of 8,000,000 shares of stock were exercisable to the Chairman of the Company, of which 4,000,000 shares expire in December 2002 and 4,000,000 shares expire in December 2003, if not exercised. The options are exercisable at one cent per share and are exercisable in whole or part. The Company has reserved 8,000,000 shares of its common stock for issuance to the Chairman. The following table summarizes stock option activity as of August 31: 1999 1998 1997 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 Average price per share $.01 $.01 $.01 Options exercisable at end of year 8,000,000 4,000,000 Aggregate proceeds at end of year $80,000 $40,000 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock options. Had compensation cost for the Company's stock options been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per common share would have been reduced to the pro forma amounts indicated below: 1999 1998 1997 Net loss as reported $ (427,532) $ (11,119) $ (50,955) Net loss pro forma $ (511,532) $ (95,119) $ (50,955) Net loss per common share as reported $ (.0162) $ (.0007) $ (.0043) Net loss per common share pro forma $ (.0194) $ (0006) $ (.0043) LMKI, Inc. 11 (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements August 31, 1999 6. Common Stock (continued) 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 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 vale of the services on the date of exchange. In August 1999, the Board of Directors authorized the issuance of 100,000 shares of common stock to an 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. In December 1997, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to the Chairman of the Company for services rendered. Also in December 1997, the Chairman of the Company was granted the option to purchase an additional 4,000,000 shares of the Company's common stock. In December 1997, the Board of Directors authorized the issuance of 80,000 shares of common stock to two individuals in exchange for $100 and public relation services. 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. 7. Commitments The Company leases certain equipment under non-cancelable operating lease agreements which 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 aggregated approximately $50,700 for the year ended August 31, 1999. LMKI, Inc. 12 (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements August 31, 1999 8. 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. 9. Subsequent Event 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 and at a price equal to the lowest closing bid price for the 5 days prior to the exclusion of the Investment Agreement or the 5 days following its execution, whichever price is lower. Consolidated Financial Statements Unaudited For the Three Months Ended November 30, 1999 and 1998 LMKI, Inc. (formerly Landmark International Inc.) Balance Sheet (Unaudited) For the periods ended as indicated Aug. 31 Nov. 30 ASSETS 1999 1999 Cash 125,692 2,053,922 Accounts Receivable 837,850 946,855 Deferred tax assets 242,750 242,750 Total Current Assets 1,206,292 3,243,527 Equipment 302,549 1,027,417 Accumulated Depreciation (40,482) (63,916) Total Equipment less Accumulated depreciation 262,067 963,501 Goodwill 467,062 467,062 Accumulated Amortization (23,353) (46,706) Deposits 35,725 116,200 Total Other Assets 479,434 536,556 Total Assets 1,947,793 4,743,584 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable 999,319 1,356,343 Accrued payroll and related liabilities 133,749 113,954 Accrued interest to shareholder 3,112 0 Other accrued liabilities 7,133 37,187 Capitalized lease obligations due within one year 37,290 9,817 Total current liabilities 1,180,603 1,517,301 Capitalized Lease LT 55,275 34,359 Loans from officers 797,680 1,115,528 Stockholders' equity Common stock 36,116 36,116 Preferred stock 0 2,500,000 Paid in capital 345,796 123,896 Retained Earnings (467,677) (467,677) Current Years Earnings (115,939) Total Stockholders Equity (85,765) 2,076,396 Total Stockholders Equity and Liabilities 1,947,793 4,743,584 See accompanying notes. LMKI, Inc. (formerly Landmark International, Inc.) Statement of Operations (Unaudited) For the periods ended as indicated Three Months Ended Nov. 30 1998 1999 Sales 40,881 1,505,053 Cost of Sales 3,173 709,387 Gross Profit 37,707 795,666 Selling Expense 72,589 259,897 General and administrative expense 25,463 625,225 Gain or (loss) from operations (60,345) (89,456) Interest, net 2,018 26,483 Gain or (loss) before Provision for income Taxes (62,362) (115,939) Provision for income taxes 0 0 Net gain or (loss) (62,362) (115,939) See accompanying notes. LMKI, Inc. (formerly Landmark International, Inc.) Statement of Cash Flows Unaudited) For the periods ended as indicated Three Months Cash flows from operating activities: Ended Nov. 30 1998 1999 Net gain or (loss) (62,362) (115,939) Adjustments to reconcile net loss to net Cash used in operating activities: Depreciation 2,922 23,434 Amortization of goodwill 0 23,353 Changes in assets and liabilities Accounts Receivable 83,652 (109,005) Employee Advances (304) 0 Accounts Payable (24,735) 383,966 Accrued payroll related liability 1,890 (19,795) Accrued income taxes 0 0 1,063 186,014 Cash flows from investing activities Purchase of capital equipment 0 (805,343) Cash flows from financing activities Repayment of capitalized lease obligation (4,432) (48,389) Proceeds from preferred stock 0 2,278,100 Proceeds from notes payable to shareholder 0 317,848 (4,432) 2,547,559 Net increase (decrease) in cash (3,369) 1,928,230 Cash at beginning of periods 3,772 125,692 Cash at end of periods 403 2,053,922 See accompanying notes. LMKI, Inc. (formerly Landmark International, Inc.) Notes to Financial Statements (Unaudited) For the Three Months Ended November 30, 1999 1. Nature of Business and Summary of Significant Accounting Policies Nature of Business: LMKI, Inc. (formerly Landmark International, Inc.)(the "Company") is a Nevada Corporation engaged in providing communication services to individuals and businesses. 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 Mobilenetics. Goodwill is being amortized using the straight- line method over five years. Revenue Recognition: Fees for services are recognized at month-end as services are completed and income earned. Advertising: The Company expenses the cost of advertising as incurred as selling expenses. Advertising expenses was approximately $22,526 for the three months ended November 30, 1999 ($404 for 1998). Income Taxes: Income taxes are accounted for and reported using an asset and liability approach. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to effect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the year in deferred tax assets and liabilities. 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 36,115,666 for the three month period ending November 30, 1999 (26,320,277 for 1998). Stock options outstanding are not considered to be common stock equivalents, as the affect on net loss per common share would be anti-dilutive. Concentration Risk: The Company grants credit to customers in the Southern portion of the State of California. The Company's ability to collect broker fees and to fund borrower's transactions are affected both 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. 2. Business Combination: Effective June 1, 1999, the Company acquired Mobilenetics Corporation ("Mobilenetics"), a supplier of communications equipment, in a business combination accounted for as a purchase. The Company 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 the Company's common stock on the date of exchange. The purchase price exceeded the fair market value of Mobilenetics by $467,062. Cash paid for Mobilenetics, net of cash acquired was as follows: Fair value of the Company's common stock $100,000 Fair value Mobilenetics: Accounts receivable 86,167 Equipment 16,406 Deposits 35,725 Cost in excess of fair value of net assets acquired 467,062 Accounts payable (508,872) 96,488 Cash Acquired $ 3,512 The results of operations of Mobilenetics are included in the accompanying consolidated financial statements since the date of acquisition. The following proforma summary presents the consolidated financial position and results of operations of the Company as if the business combination occurred on September 1, 1998: As of August 31, 1999: Tangible current assets $ 963,542 Total assets 2,164,873 Current liabilities 1,180,603 Total liabilities 2,033,558 Total stockholders' equity 131,315 For the year ended August 31, 1999: Net sales 2,289,208 Net loss (1,257,202) Loss per common share (20.936) 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 gave been obtained had the business combination occurred as of September 1, 1998 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 November 30, 1999 $107,540 less accumulated amortization at November 30, 1999 of $5,377. 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 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 4. Notes Payable to Shareholder During the calendar year of 1999, the majority shareholder and Chairman of the Company, advanced an aggregate of $1,081,680 for working capital purposes. The notes payable bear interest at 10% per annum. The shareholder was paid approximately $4,900 in interest during 1999. The notes are repayable upon demand in cash or in common stock of the Company, or a combination thereof, at the option of the shareholder. At this time, the shareholder intends to exchange his notes for common stock of the Company and has agreed not to demand repayment before November 11, 2000. 5. Income Taxes The components of the provision (benefit) for income taxes are as follows for the years ended August 31: 1999 1998 1997 Federal: Current $ - $ 1,500 $ - Deferred net operating loss carryover (213,000) (1,600) (10,200) (213,000) (100) (10,200) State of California: Current - 500 - Deferred net operating loss carryover (16,100) (300) (1,550) (16,100) 200 (1,550) Provision (benefit) for income taxes $(299,100) $ 100 $(11,750) Reconciliation of income taxes computed at the federal statutory rate to the provision (benefit) for income taxes is as follows for the years ended August 31: 1999 1998 1997 Tax at statutory rates $(223,255) $ (1,653) $(11,724) Differences resulting from: State tax, net of federal benefit (10,604) 159 Non-deductible and other items 4,759 1,594 (26) Provision (benefit) for income taxes $(229,100) $ 100 $(11,750) 6. Common Stock In December 1998, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to the Chairman of the Company for services rendered. Also in December 1998, the Chairman of the Company was granted the option to purchase an additional 4,000,000 shares of the Company's common stock As of November 30, 1999, an aggregate of 8,000,000 shares of stock were exercisable to the Chairman of the Company or assignee, of which 4,000,000 shares expire in December 2002 and 4,000,000 shares expire in December 2003, if not exercised. The Company has reserved 8,000,000 shares of its common stock for issuance to the Chairman. In November 1999, the Company's Board of Directors approved the 1999 Stock Plan providing for the issuance of up to 4,000,000 shares of the Company's Common Stock to attract and retain the best available personnel. The Plan is administered by the Board of Directors or a committee thereof. Options granted under the Plan would be either incentive stock options or non- qualified stock options which would be granted to employees, officers, directors and other persons who perform services on behalf of the Company. Option vesting, exercise period, and exercise price are determined at the time of grant. In November 1999, pursuant to the 1999 Stock Plan, the Board of Directors authorized the grant of an aggregate of 1,400,000 shares of Common Stock at an exercise price of $4.0625 per share to members of senior management and counsel. The Board of Directors authorized the grant of an aggregate of 115,440 shares of Common Stock at an exercise price of $4.000 per share to employees of the company. The following table summarizes stock option activity as of: November August August 30, 1999 31, 1999 31, 1998 Options outstanding at the beginning of year 8,000,000 4,000,000 0 Options granted 1,515,440 4,000,000 4,000,000 Options expired or canceled 0 0 0 Options exercised 0 0 0 Outstanding at end of period 9,515,440 8,000,000 4,000,000 Average price per share $ .65 $ .01 $ .01 Options exercisable at end of period 9,515,440 8,000,000 4,000,000 Aggregate proceeds at end of period $6,229,260 $ 80,000 $ 40,000 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock options. Had compensation cost for the Company's stock options been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per common share would have been reduced to the pro forma amounts indicated below: Nov. 30 Aug. 31 Aug. 31 1999 1998 1998 Net loss-as reported $(115,938) $(427,532) $( 11,119) Net loss-pro forma $(115,938) $(511,532) $( 95,119) Net loss per common share-as reported $ (.0032) $ (.0162) $ (.0007) Net loss per common share-pro forma $ (.0032) $ (.0194) $ (.0007) 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 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. In August 1999, the Board of Directors authorized the issuance of 100,000 shares of common stock to an 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. In December 1997, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to the Chairman of the Company for services rendered. Also in December 1997, the Chairman of the Company was granted the option to purchase an additional 4,000,000 shares of the Company's common stock. 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 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. 7. 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: $34,125 29,492 6,644 739 Total minimum lease payments $71,000 Equipment lease expense aggregated approximately $12,700 for the three months ended November 30, 1999. 8. 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 for 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. 9. Significant Events 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 an 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 and at the price equal to the lowest closing bid price for the 5 days prior to the exclusion of the Investment Agreement or the 5 days following its execution, whichever price is lower. During 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 or an aggregate purchase price of $2.5 million, pursuant to a Securities Purchase Agreement (the "Purchase Agreement"). As part of its entry into the Purchase Agreement, the Company entered into a Registration Rights Agreement (the "Registration Agreement") and a Warrant Agreement. Concurrently with the closing of this sale, 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 for five (5) years. On the date of issuance, the Company determined these warrants had a value of $2,492. Subject to an effective registration statement and certain other conditions, under the Securities Purchase Agreement, the Company may require the Purchaser to purchase up to an additional 2,500 shares of Series A Preferred Stock at $1,000 per share, at which time it would issue up to 250,000 additional warrants exercisable at $4.25 per share, subject to anti-dilution provisions, for five (5) years. The Series A Preferred Stock is immediately convertible into shares of the Company's Common Stock at a conversion rate equal to $1,000 divided by the lower of (i) $4.25 or (ii) 80% of the average closing bid price for the Common Stock for the twenty five (25) trading days immediately preceding the conversion date. There is no minimum conversion price. Should the bid price of the Common Stock fall substantially prior to conversion, the holders of the Series A Preferred Stock could obtain a significant portion of the Common Stock upon conversion, to the detriment of the then holders of the Common Stock. The Series A Preferred Stock has a liquidation preference of $1,000 per share, plus any accrued and unpaid dividends, and provides for an annual dividend equal to 6% of the liquidation preference, which may be paid at the election of the Company in cash or shares of its Common Stock. 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 certificate 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 Delaware 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 $ 6,970.76 Legal Fees and Expenses................................... 5,000.00 Accounting Fees and Expenses.............................. 2,000.00 Printing.................................................. 1,000.00 Miscellaneous Expenses.................................... 2,029.24 Total............................................ $17,000.00 ========== 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 our employees at that time. 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 40,000 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. 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 ("Mobilenetics"), 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 an 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 6% Convertible Preferred Stock, $.001 par value (the "Series A Preferred Stock"), to one purchaser at a purchase price of $1,000 per share or an aggregate purchase price of $2.5 million. 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). 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 (*) 3.1.3 Certificate of Amendment to the Articles Of Incorporation filed 7/23/1999 (*) 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 6% 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 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) 4.12 Placement Warrant - Dunwoody (*) 5.1 Opinion of Robert C. Weaver, Jr., Esq. (**) 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 (*) 10.6 Form of Indemnification Agreement between directors and officers and certain agents (*) 10.7 Covad Master Reseller Agreement (*) 10.8 Level 3 General Terms And Conditions For Delivery Of Service (*) 21.1 List of subsidiaries (*) 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-5 of this filing) (*) - ------------------------------ (*) Filed herewith. (**) To be filed by amendment. + Indicates a management contract or any compensatory plan, contract or arrangement. (++) The Registrant will request confidential treatment with respect to certain portions of this exhibit. The omitted portions will be separately filed with the Commission. (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. (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. 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; 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. (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. 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 Santa Ana, State of California, on December ___, 1999. LMKI, INC. (Registrant) By:/s/_______________________________ William J. Kettle Chairman, Chief Executive Officer Date: 12/17/99 By:/s/_______________________________ John W. Diehl, Jr. Chief Financial Officer, Secretary Date: 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: Signature Title Date /s/_______________________________ 12/17/99 William J. Kettle Chairman, Director, Chief Executive Officer /s/_______________________________ 12/17/99 Bryan L. Turbow President, Director /s/_______________________________ 12/17/99 Adela Maria Kettle Vice President, Director /s/_______________________________ 12/17/99 John W. Diehl, Jr. Chief Financial Officer, Secretary EX-3.1.2 2 NAME CHANGE PURSUANT TO NRS 78.185 FILED 8/27/1998 (Name change pursuant to NRS 78.185 filed 8/27/1998) Application for Reinstatement This application authorizes the office of the secretary of state of Nevada to reinstate Landmark International, Inc. (old name) under the name of: Genesis Communications (new name). This application is accompanied with the sixty-day list or annual list, the designation of the resident agent, and all fees and penalties. /s/William J. Kettle 7/30/98 If a corporation, this application shall be signed by an officer If a limited partnership, application shall be signed by a general partner. If a limited-liability company, this application shall be signed by a manager or member. If a limited-liability partnership, this application shall be signed by a managing partner. EX-3.1.3 3 CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION FILED 7/23/1999 (filed 7/23/1999) Certificate Of Amendment To Articles Of Incorporation 1. Name of corporation: Genesis Communications. 2. The articles have been amended as follows (provide article numbers, if available): We are doing a name change to LMKI, Inc. 3. The undersigned declare that they constitute at least two-thirds of the incorporators (check) ____ or of the board of directors (check) ___ 4. The date upon which the original articles of incorpoation were filed with the Secretary of State: 10/10/1994 5. The undersigned affirmatively declare that to the date of this certificate, no stock of the corporation has been issued. 6. Signatures (all signatures must be acknowledged): /s/ William J. Kettle July 20, 1999 STATE OF CALIFORNIA} COUNTY OF ORANGE } This instrument was acknowledge before me on July 20, 1999 by William Kettle (Name of Person) as CEO as designated to sign this certificate of Genesis Communications (name on behalf of whom instrument was executed). /s/Robin Elaine Smith Commission #1078699 Notary Public - California Orange County My Comm Expires Jan 12, 2000 EX-4.12 4 PLACEMENT WARRANT - DUNWOODY THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. Warrant to Purchase ________ shares Warrant to Purchase Common Stock of LMKI INC. THIS CERTIFIES that Dunwoody Brokerage Services, Inc. or any subsequent holder hereof pursuant to Section 8 hereof ("Holder"), has the right to purchase from LMKI INC., a Nevada corporation (the "Company"), up to 49,844 fully paid and nonassessable shares of our common stock, $.001 par value per share ("Common Stock"), subject to adjustment as provided herein, at a price equal to the Exercise Price as defined in Section 3 below, at any time beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New York, New York time the date that is five (5) years after the Date of Issuance (the "Exercise Period"). Holder agrees with the Company that this Warrant to Purchase Common Stock of the Company(this "Warrant") is issued and all rights hereunder shall be held subject to all of the conditions, limitations and provisions set forth herein. 1. Date of Issuance and Term. This Warrant shall be deemed to be issued on November 24, 1999 ("Date of Issuance"). The term of this Warrant is five (5) years from the Date of Issuance. 2. Exercise. (a) Manner of Exercise. During the Exercise Period, this Warrant may be exercised as to all or any lesser number of full shares of Common Stock covered hereby (the "Warrant Shares") upon surrender of this Warrant, with the Exercise Form attached hereto as Exhibit A (the "Exercise Form") duly completed and executed, together with the full Exercise Price (as defined below) for each share of Common Stock as to which this Warrant is exercised, at the office of the Company, Attention: William Kettle or John Diehl, 1720 E. Garry Ave. #201, Santa Ana, CA 92705; (949) 475-4500, Facsimile: (949) 475-4511, or at such other office or agency as the Company may designate in writing, by overnight mail, with an advance copy of the Exercise Form sent to the Company and its Transfer Agent by facsimile (such surrender and payment of the Exercise Price hereinafter called the "Exercise of this Warrant"). (b) Date of Exercise. The "Date of Exercise" of the Warrant shall be defined as the date that the advance copy of the completed and executed Exercise Form is sent by facsimile to the Company, provided that the original Warrant and Exercise Form are received by the Company as soon as practicable thereafter. Alternatively, the Date of Exercise shall be defined as the date the original Exercise Form is received by the Company, if Holder has not sent advance notice by facsimile. (c) Cancellation of Warrant. This Warrant shall be canceled upon the Exercise of this Warrant, and, as soon as practical after the Date of Exercise, Holder shall be entitled to receive Common Stock for the number of shares purchased upon such Exercise of this Warrant, and if this Warrant is not exercised in full, Holder shall be entitled to receive a new Warrant (containing terms identical to this Warrant) representing any unexercised portion of this Warrant in addition to such Common Stock. (d) Holder of Record. Each person in whose name any Warrant for shares of Common Stock is issued shall, for all purposes, be deemed to be the Holder of record of such shares on the Date of Exercise of this Warrant, irrespective of the date of delivery of the Common Stock purchased upon the Exercise of this Warrant. Nothing in this Warrant shall be construed as conferring upon Holder any rights as a stockholder of the Company. 3. Payment of Warrant Exercise Price. The Exercise Price per share ("Exercise Price") shall initially equal (the "Initial Exercise Price") the average Closing Bid Price for the five (5) trading days immediately preceding November 24, 1999 (which is $4.0125). If the Date of Exercise is more than six (6) months after the Date of Issuance, the lesser of (i) the Exercise Price then in effect, or (ii) the "Lowest Reset Price," as that term is defined below. The Company shall calculate a "Reset Price" on each six-month anniversary date of the Date of Issuance which shall equal one hundred percent (100%) of the average Closing Bid Price of the Company's Common Stock for the five (5) trading days ending on such six-month anniversary date of the Date of Issuance. The "Lowest Reset Price" shall equal the lowest Reset Price determined on any six-month anniversary date of the Date of Issuance preceding the Date of Exercise, taking into account, as appropriate, any adjustments made pursuant to Section 5 hereof. Payment of the Exercise Price may be made by either of the following, or a combination thereof, at the election of Holder: (i) Cash Exercise: cash, bank or cashiers check or wire transfer; or (ii) Cashless Exercise: The Holder, at its option, may exercise this Warrant in a cashless exercise transaction under this subsection (ii) if and only if, on the Date of Exercise, there is not then in effect a current registration statement that covers the resale of the shares of Common Stock to be issued upon exercise of this Warrant . In order to effect a Cashless Exercise, the Holder shall surrender of this Warrant at the principal office of the Company together with notice of cashless election, in which event the Company shall issue Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B)/A where: X = the number of shares of Common Stock to be issued to Holder. Y = the number of shares of Common Stock for which this Warrant is being exercised. A = the Market Price of one (1) share of Common Stock (for purposes of this Section 3(ii), the "Market Price" shall be defined as the average Closing Bid Price of the Common Stock for the five (5) trading days prior to the Date of Exercise of this Warrant (the "Average Closing Price"), as reported by the O.T.C. Bulletin Board, National Association of Securities Dealers Automated Quotation System ("Nasdaq") Small Cap Market, or if the Common Stock is not traded on the Nasdaq Small Cap Market, the Average Closing Price in any other over-the-counter market; provided, however, that if the Common Stock is listed on a stock exchange, the Market Price shall be the Average Closing Price on such exchange for the five (5) trading days prior to the date of exercise of the Warrants. If the Common Stock is/was not traded during the five (5) trading days prior to the Date of Exercise, then the closing price for the last publicly traded day shall be deemed to be the closing price for any and all (if applicable) days during such five (5) trading day period. B = the Exercise Price. For purposes hereof, the term "Closing Bid Price" shall mean the closing bid price on the the Nasdaq Small Cap Market, the National Market System ("NMS"), the New York Stock Exchange, or the O.T.C. Bulletin Board, or if no longer traded on the Nasdaq Small Cap Market, the National Market System ("NMS"), the New York Stock Exchange, or the O.T.C. Bulletin Board, the "Closing Bid Price" shall equal the closing price on the principal national securities exchange or the over-the-counter system on which the Common Stock is so traded and, if not available, the mean of the high and low prices on the principal national securities exchange on which the Common Stock is so traded. For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended, understood and acknowledged that the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have been acquired at the time this Warrant was issued. Moreover, it is intended, understood and acknowledged that the holding period for the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have commenced on the date this Warrant was issued. 4. Transfer and Registration. (a) Transfer Rights. Subject to the provisions of Section 8 of this Warrant, this Warrant may be transferred on the books of the Company, in whole or in part, in person or by attorney, upon surrender of this Warrant properly completed and endorsed. This Warrant shall be canceled upon such surrender and, as soon as practicable thereafter, the person to whom such transfer is made shall be entitled to receive a new Warrant or Warrants as to the portion of this Warrant transferred, and Holder shall be entitled to receive a new Warrant as to the portion hereof retained. (b) Registrable Securities. In addition to any other registration rights of the Holder, if the Common Stock issuable upon exercise of this Warrant is not registered for resale at the time the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its Common Stock under the Act (other than a registration relating solely for the sale of securities to participants in a Company stock plan or a registration on Form S-4 promulgated under the Act or any successor or similar form registering stock issuable upon a reclassification, upon a business combination involving an exchange of securities or upon an exchange offer for securities of the issuer or another entity)(a "Piggyback Registration Statement"), the Company shall cause to be included in such Piggyback Registration Statement ("Piggyback Registration") all of the Common Stock issuable upon the exercise of this Warrant ("Registrable Securities") to the extent such inclusion does not violate the registration rights of any other securityholder of the Company granted prior to the date hereof. Nothing herein shall prevent the Company from withdrawing or abandoning the Piggyback Registration Statement prior to its effectiveness. (c) Limitation on Obligations to Register under a Piggyback Registration. In the case of a Piggyback Registration pursuant to an underwritten public offering by the Company, if the managing underwriter determines and advises in writing that the inclusion in the registration statement of all Registrable Securities proposed to be included would interfere with the successful marketing of the securities proposed to be registered by the Company, then the number of such Registrable Securities to be included in the Piggyback Registration Statement, to the extent such Registrable Securities may be included in such Piggyback Registration Statement, shall be allocated among all Holders who had requested Piggyback Registration pursuant to the terms hereof, in the proportion that the number of Registrable Securities which each such Holder seeks to register bears to the total number of Registrable Securities sought to be included by all Holders. If required by the managing underwriter of such an underwritten public offering, the Holders shall enter into a reasonable agreement limiting the number of Registrable Securities to be included in such Piggyback Registration Statement and the terms, if any, regarding the future sale of such Registrable Securities. 5. Anti-Dilution Adjustments. (a) Stock Dividend. If the Company shall at any time declare a dividend payable in shares of Common Stock, then Holder, upon Exercise of this Warrant after the record date for the determination of holders of Common Stock entitled to receive such dividend, shall be entitled to receive upon Exercise of this Warrant, in addition to the number of shares of Common Stock as to which this Warrant is exercised, such additional shares of Common Stock as such Holder would have received had this Warrant been exercised immediately prior to such record date and the Exercise Price will be proportionately adjusted. (b) Recapitalization or Reclassification. (i) Stock Split. If the Company shall at any time effect a recapitalization, reclassification or other similar transaction of such character that the shares of Common Stock shall be changed into or become exchangeable for a larger number of shares (a "Stock Split"), then upon the effective date thereof, the number of shares of Common Stock which Holder shall be entitled to purchase upon Exercise of this Warrant shall be increased in direct proportion to the increase in the number of shares of Common Stock by reason of such recapitalization, reclassification or similar transaction, and the Exercise Price shall be proportionally decreased. (ii) Reverse Stock Split. If the Company shall at any time effect a recapitalization, reclassification or other similar transaction of such character that the shares of Common Stock shall be changed into or become exchangeable for a smaller number of shares (a "Reverse Stock Split"), then upon the effective date thereof, the number of shares of Common Stock which Holder shall be entitled to purchase upon Exercise of this Warrant shall be proportionately decreased and the Exercise Price shall be proportionally increased. The Company shall give Holder the same notice it provides to holders of Common Stock of any transaction described in this Section 5(b). (c) Distributions. If the Company shall at any time distribute for no consideration to holders of Common Stock cash, evidences of indebtedness or other securities or assets (other than cash dividends or distributions payable out of earned surplus or net profits for the current or preceding years) then, in any such case, Holder shall be entitled to receive, upon Exercise of this Warrant, with respect to each share of Common Stock issuable upon such exercise, the amount of cash or evidences of indebtedness or other securities or assets which Holder would have been entitled to receive with respect to each such share of Common Stock as a result of the happening of such event had this Warrant been exercised immediately prior to the record date or other date fixing shareholders to be affected by such event (the "Determination Date") or, in lieu thereof, if the Board of Directors of the Company should so determine at the time of such distribution, a reduced Exercise Price determined by multiplying the Exercise Price on the Determination Date by a fraction, the numerator of which is the result of such Exercise Price reduced by the value of such distribution applicable to one share of Common Stock (such value to be determined by the Board of Directors of the Company in its discretion) and the denominator of which is such Exercise Price. (d) Notice of Consolidation or Merger. In the event of a merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or there is a sale of all or substantially all the Company's assets (a "Corporate Change"), then this Warrant shall be exerciseable into such class and type of securities or other assets as Holder would have received had Holder exercised this Warrant immediately prior to such Corporate Change; provided, however, that Company may not affect any Corporate Change unless it first shall have given thirty (30) days notice to Holder hereof of any Corporate Change. (e) Exercise Price Adjusted. As used in this Warrant, the term "Exercise Price" shall mean the purchase price per share specified in Section 3 of this Warrant, until the occurrence of an event stated in subsection (a), (b) or (c) of this Section 5, and thereafter shall mean said price as adjusted from time to time in accordance with the provisions of said subsection. No such adjustment under this Section 5 shall be made unless such adjustment would change the Exercise Price at the time by $.01 or more; provided, however, that all adjustments not so made shall be deferred and made when the aggregate thereof would change the Exercise Price at the time by $.01 or more. (f) Adjustments: Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 5, Holder shall, upon Exercise of this Warrant, become entitled to receive shares and/or other securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 5. 6. Fractional Interests. No fractional shares or scrip representing fractional shares shall be issuable upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may purchase only a whole number of shares of Common Stock. If, on Exercise of this Warrant, Holder would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon exercise shall be the next higher number of shares. 7. Reservation of Shares. The Company shall at all times reserve for issuance such number of authorized and unissued shares of Common Stock (or other securities substituted therefor as herein above provided) as shall be sufficient for the Exercise of this Warrant and payment of the Exercise Price. The Company covenants and agrees that upon the Exercise of this Warrant, all shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid, nonassessable and not subject to preemptive rights, rights of first refusal or similar rights of any person or entity. 8. Restrictions on Transfer. (a) Registration or Exemption Required. This Warrant has been issued in a transaction exempt from the registration requirements of the Act by virtue of Regulation D and exempt from state registration under applicable state laws. The Warrant and the Common Stock issuable upon the Exercise of this Warrant may not be pledged, transferred, sold or assigned except pursuant to an effective registration statement or unless the Company has received an opinion from the Company's counsel to the effect that such registration is not required, or the Holder has furnished to the Company an opinion of the Holder's counsel, which counsel shall be reasonably satisfactory to the Company, to the effect that such registration is not required; the transfer complies with any applicable state securities laws; and, if no registration covering the resale of the Warrant Shares is effective at the time the Warrant Shares are issued, the Holder consents to a legend being placed on certificates for the Warrant Shares stating that the securities have not been registered under the Securities Act and referring to such restrictions on transferability and sale. (b) Assignment. If Holder can provide the Company with reasonably satisfactory evidence that the conditions of (a) above regarding registration or exemption have been satisfied, Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder shall deliver a written notice to Company, substantially in the form of the Assignment attached hereto as Exhibit B, indicating the person or persons to whom the Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days, and shall deliver to the assignee(s) designated by Holder a Warrant or Warrants of like tenor and terms for the appropriate number of shares. 9. Benefits of this Warrant. Nothing in this Warrant shall be construed to confer upon any person other than the Company and Holder any legal or equitable right, remedy or claim under this Warrant and this Warrant shall be for the sole and exclusive benefit of the Company and Holder. 10. Applicable Law. This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the state of Nevada, without giving effect to conflict of law provisions thereof. 11. Loss of Warrant. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 12. Notice or Demands. Notices or demands pursuant to this Warrant to be given or made by Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Company, to the Attention: William Kettle or John Diehl, 1720 E. Garry Ave. #201, Santa Ana, CA 92705; (949) 475-4500, Facsimile: (949) 475-4511 Notices or demands pursuant to this Warrant to be given or made by the Company to or on Holder shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, to the address of Holder set forth in the Company's records, until another address is designated in writing by Holder. IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the 24th day of November, 1999. LMKI INC. By: ________________________________ William Kettle, CEO EXHIBIT A EXERCISE FORM FOR WARRANT TO: LMKI INC. The undersigned hereby irrevocably exercises the right to purchase ____________ of the shares of Common Stock (the "Common Stock") of LMKI INC.. a Nevada corporation (the "Company"), evidenced by the attached warrant (the "Warrant"), and herewith makes payment of the exercise price with respect to such shares in full, all in accordance with the conditions and provisions of said Warrant. 1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of any of the Common Stock obtained on exercise of the Warrant, except in accordance with the provisions of Section 8(a) of the Warrant. 2. The undersigned requests that stock certificates for such shares be issued free of any restrictive legend, if appropriate, and a warrant representing any unexercised portion hereof be issued, pursuant to the Warrant in the name of the undersigned and delivered to the undersigned at the address set forth below: Dated: _________ ________________________________________________________________________ Signature _______________________________________________________________________ Print Name ________________________________________________________________________ Address _______________________________________________________________________ NOTICE The signature to the foregoing Exercise Form must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. ________________________________________________________________________ EXHIBIT B ASSIGNMENT (To be executed by the registered holder desiring to transfer the Warrant) FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the "Warrant") hereby sells, assigns and transfers unto the person or persons below named the right to purchase _______ shares of the Common Stock of LMKI INC., evidenced by the attached Warrant and does hereby irrevocably constitute and appoint _______________________ attorney to transfer the said Warrant on the books of the Company, with full power of substitution in the premises. Dated: ______________________________ Signature Fill in for new registration of Warrant: ___________________________________ Name ___________________________________ Address ___________________________________ Please print name and address of assignee (including zip code number) _______________________________________________________________________ NOTICE The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. ________________________________________________________________________ EX-10.5 5 1999 STOCK PLAN AND FORM OF AGREEMENTS THEREUNDER LMKI, INC. 1999 STOCK PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means LMKI, INC., a Nevada corporation. (h) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "Director" means a member of the Board of Directors of the Company. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "Option" means a stock option granted pursuant to the Plan. (r) "Option Agreement" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (s) "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (t) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right. (u) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (v) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "Plan" means this 1999 Stock Plan. (x) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (y) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (z) "Section 16(b)" means Section 16(b) of the Exchange Act. (aa) "Service Provider" means an Employee, Director or Consultant. (bb) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (cc) "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 11 below. (dd) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares that may be subject to option and sold under the Plan is 4,000,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation,, within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors,, within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. 5. Eligibility. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder to Officers and Directors shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Non-Transferability of Options and Stock Purchase Rights. The Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right shall terminate immediately prior to the consummation of such proposed action. (c) Merger. In the event of a merger, sale or reorganization of the Company with or into any other corporation or corporations or a sale of all or substantially all of the assets or outstanding stock of the Company, in which transaction the Company's stockholders immediately prior to such transaction own immediately after such transaction less than 50% of the equity securities of the surviving corporation or its parent, all Options that have not been terminated in accordance with the Stock Option Agreement that will become vested within 18 months of the closing date of such merger, sale or reorganization will be accelerated. In the event of a merger of the Company with or into another corporation, each outstanding Option or Stock Purchase Right may be assumed or an equivalent option or right may be substituted by such successor corporation or a parent or subsidiary of such successor corporation. If, in such event, an Option or Stock Purchase Right is not assumed or substituted, the Option or Stock Purchase Right shall terminate as of the date of the closing of the merger. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger, the Option or Stock Purchase Right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger, the consideration (whether stock, cash, or other securities or property) received in the merger by holders of Common Stock for each Share held on the effective date of the transaction (and if the holders are offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger. 13. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 14. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. LMKI, INC. 1999 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the 1999 Stock Plan shall have the same defined meanings in this Stock Option Agreement. I. NOTICE OF STOCK OPTION GRANT NAME -------- The undersigned Optionee has been granted an Option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Date of Grant Vesting Commencement Date ________VCD~ Exercise Price per Share Total Number of Shares Granted ________Number of shares~ Total Exercise Price ________Total price~ Type of Option: Incentive Stock Option ________ ________ Nonstatutory Stock Option Term/Expiration Date: Vesting Schedule: This Option shall be exercisable, in whole or in part, according to the following vesting schedule: ___% of the Shares subject to the Option shall vest as of the Vesting Commencement Date, and 1/___ of the Shares subject to the Option shall vest each month thereafter, subject to Optionee's continuing to be a Service Provider on such dates. Termination Period: This Option shall be exercisable for one month after Optionee ceases to be a Service Provider. Upon Optionee's death or Disability, this Option may be exercised for one year after Optionee ceases to be a Service Provider. In no event may Optionee exercise this Option after the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the number of Shares set forth in the Notice of Grant, at the exercise price per Share set forth in the Notice of Grant (the "Exercise Price"), and subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the "Exercise Notice") which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. Lock-Up Period. Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash or check; (b) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or (c) surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law. 7. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 8. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 9. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of NSO. There may be a regular federal income tax liability upon the exercise of an NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (b) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (c) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the Fair Market Value of the Shares on the date of exercise, or (2) the sale price of the Shares. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (d) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. 10. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws but not the choice of law rules of California. 11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE LMKI, INC. - ---------------------------------- -------------------------------- - -- Signature By - ---------------------------------- -------------------------------- - -- Print Name Title - ---------------------------------- - ---------------------------------- Residence Address EXHIBIT A 1999 STOCK PLAN EXERCISE NOTICE LMKI, INC. 1720 East Garry Avenue, Suite 201 Santa Ana, California 92705 1. Exercise of Option. Effective as of today, ___________, 19__, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "Shares") of LMKI, INC. (the "Company") under and pursuant to the 1999 Stock Plan (the "Plan") and the Stock Option Agreement dated ________, 19__ (the "Option Agreement"). 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price of the Shares, as set forth in the Option Agreement. 3. Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares shall be issued to the Optionee as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance except as provided in Section 12 of the Plan. 5. Company's Right of First Refusal. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). (a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). (b) Exercise of Right of First Refusal. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) Purchase Price. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (d) Payment. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) Holder's Right to Transfer. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. (g) Termination of Right of First Refusal. The Right of First Refusal shall terminate as to any Shares upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 6. Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 7. Restrictive Legends and Stop-Transfer Orders. (a) Legends. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. Optionee understands that transfer of the Shares may be restricted by Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached to Exhibit B, the Investment Representation Statement. (b) Stop-Transfer Notices. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Notice or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 8. Successors and Assigns. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9. Interpretation. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Administrator which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties. 10. Governing Law; Severability. This Exercise Notice is governed by the internal substantive laws but not the choice of law rules, of California. 11. Entire Agreement. The Plan and Option Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. Submitted by: Accepted by: OPTIONEE LMKI, INC. - ---------------------------------- -------------------------------- - -- Signature By - ---------------------------------- -------------------------------- - -- Print Name Title Address: Address: - ---------------------------------- -------------------------------- - -- - ---------------------------------- -------------------------------- - -- -------------------------------- - -- Date Received EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE: ________Name COMPANY: LMKI, INC. SECURITY: COMMON STOCK AMOUNT: DATE: In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: (a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their transfer without the consent of the Commissioner of Corporations of the State of California and any other legend required under applicable state securities laws. (c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. (d) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. (e) Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. Optionee has read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Signature of Optionee: -------------------------------- - -- Date: , 19 -------------------- -- - -- ATTACHMENT 1 STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11: Restriction on Transfer. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." EX-10.6 6 FORM OF INDEMNIFICATION AGREEMENT BETWEEN DIRECTORS AND OFFICERS AND CERTAIN AGENTS LMKI, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of ____________, 1999 by and between LMKI, Inc., a Nevada corporation (the "Company"), and _________________________________________("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severelylimited; and WHEREAS, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement, with such changes as are required to conform the existing agreement to Nevada law and to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Nevada law; WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. a. "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. b. "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. c. References to the "Company" shall include, in addition to LMKI, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which LMKI, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. d. "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. e. "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. f. "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. g. "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other Indemnitees under similar indemnity agreements). h. References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. i. "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. j. "Section" refers to a section of this Agreement unless otherwise indicated. k. "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 2. Indemnification. a. Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. b. Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder under applicable law; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. c. Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. d. Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the employment of separate counsel by one or more Indemnitees has been previously authorized by the Company in writing, or (ii) an Indemnitee shall have provided to the Company a written statement that such Indemnitee has reasonably concluded that there may be a conflict of interest between such Indemnitee and the other Indemnitees with respect to the matters arising under this Agreement. e. Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expense Advances. a. Obligation to Make Expense Advances. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefore by the Company hereunder under applicable law, the Company shall make Expense Advances to Indemnitee. b. Form of Undertaking. Any obligation to repay any Expense Advances hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured and no interest shall be charged thereon. c. Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. Procedures for Indemnification and Expense Advances. a. Timing of Payments. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than thirty (30) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than ten (10) business days after such written demand by Indemnitee is presented to the Company. b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. c. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder under applicable law, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. d. Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. e. Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently retained by or on behalf of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. a. Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Nevada corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Nevada corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. b. Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Nevada, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: a. Excluded Actions or Omissions. To indemnify or make Expense Advances to Indemnitee with respect to Claims arising out of acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under applicable law. b. Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Nevada General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the case may be. c. Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. d. Claims Under Section 16(b). To indemnify Indemnitee for Expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 15. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 16. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Nevada for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Nevada in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 17. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 18. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Nevada as applied to contracts between Nevada residents entered into and to be performed entirely in the State of Nevada without regard to principles of conflicts of laws. 19. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 20. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 21. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 22. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. LMKI, INC. 1720 East Garry Avenue, Suite 201 Santa Ana, California 92705 By:_______________________________ William J. Kettle, Chairman AGREED TO AND ACCEPTED INDEMNITEE: __________________________________ (Signature) __________________________________ Name __________________________________ __________________________________ Address EX-10.7 7 COVAD MASTER RESELLER AGREEMENT COVAD Master Reseller/Distri Telecomm, Inc. Digital Subscriber Line Agreement 1. Definitions. As used herein: "Services" are services using digital subscriber line ("DSL") technology to provide high-speed telecommunications data services identified in the attached Price Schedule(s)(which may include business-grade Business DSL and Business DSL Remote Services and consumer-grade Residential DSL Services) to Customer's Internet and network access customers ("End User"), that Master Reseller/Distri makes available at its discretion; "End User Circuit" is a digital data telecommunications service that consists of one permanent virtual circuit to an End User's premise utilizing DSL technology. An End User Circuit provides upstream and downstream maximum throughput rates that range from 144Kbps up to 1.5Mbps (depending on what Customer orders for that End User). Provision of an End User Circuit does not include any Internet access service; "Customer Circuit" is a backhaul circuit between Master Reseller/Distri's regional data center or hub and Customer's point-of-presence in a particular region, that is generally required before Master Reseller/Distri can provide Services in that region. Customer must order a Customer Circuit from Master Reseller/Distri. 2. Provision of Services. Subject to payment of all applicable fees, Master Reseller/Distri will use reasonable commercial efforts to supply the Services that Customer may order from time to time through the Web Site. All Services will be supplied in accordance with the Agreement, these Terms and Conditions, and the then current standard Customer Policies. Customer shall purchase Services for each End User for an initial term of one (1) year, two (2) years, or three (3) years ("End User Term"), and shall maintain each Customer Circuit for a minimum one (1) year term ("Customer Term"), after which Master Reseller/Distri shall continue to provide Services to such Customer on a monthly basis, subject to continuing payment of applicable fees and Customer's compliance of terms and conditions requested by Master Reseller/Distri. Master Reseller/Distri reserves the sole and exclusive right to determine the expansion of its service area, and the right to maintain, reconfigure, or discontinue any Service. Customer understands that Master Reseller/Distri's performance is dependent in part on third party actions, including, without limitation, Customer and its End Users. Accordingly, any performance to be rendered by Master Reseller/Distri hereunder shall be appropriately waived or delayed to account for such actions or inactions. Customer shall provide Master Reseller/Distri with all information reasonably requested (including, without limitation, information about each End User) in connection with each order placed. 3. Customer Circuits. Customer must order, and Master Reseller/Distri must provide, a Customer Circuit before Master Reseller/Distri can supply any End User Circuits or Services through such Customer Circuit. All one-time fees ("One- time Fees") including all fees referred to as Non Recurring Fees will be due, and all monthly fees will start, for each Customer Circuit upon Master Reseller/Distri's notification to Customer that the Customer Circuit is complete. 4. End User Circuits. Customer must order, and Master Reseller/Distri must successfully provide, an End User Circuit for each End User before Master Reseller/Distri can supply any Services for that End User. Master Reseller/Distri and Customer agree that an End User Circuit shall be successfully provided if the maximum throughput of such End User Circuit is 80% of the ordered Service. If Master Reseller/Distri is unable to successfully provide an End User Circuit for the ordered service, Master Reseller/Distri will offer the End User the maximum available throughput rate and available Service. Master Reseller/Distri will notify Customer if End User declined the Circuit, or at what throughput rate the End User accepted the Circuit. All One-time Fees will be due, and all monthly fees will start, for each End User Circuit upon Master Reseller/Distri's notification to customer of successfully providing of such End User Circuit. 5. Equipment. Customer may choose to have Master Reseller/Distri supply and configure the necessary equipment for an End User Circuit and Services at the End User premises. Customer is responsible for changes to any End User premise equipment, software and configuration after Master Reseller/Distri completes its service setup. Master Reseller/Distri will bill any equipment charges to Customer as part of the One-time Fees for the End User Circuit. Master Reseller/Distri shall have no obligation or liability in connection with any equipment not purchased through Master Reseller/Distri and configured by Master Reseller/Distri, or for any abuse or misuse of any equipment by any party other than Master Reseller/Distri. Master Reseller/Distri shall pass through to Customer, to the extent that Master Reseller/Distri is legally entitled to do so, any warranties from the manufacturers of equipment that Master Reseller/Distri installs at Customer's or an End User's premises. Master Reseller/Distri shall have no obligation to repair or maintain any equipment, and Customer shall be responsible for seeking warranty and other service directly from the manufacturer. However, Master Reseller/Distri may be able to provide replacement End User premise equipment. If Customer purchases End User premise equipment directly from Master Reseller/Distri, it can be returned to Master Reseller/Distri only if the equipment is in original working condition and in its original packing within thirty (30) days from Master Reseller/Distri's original shipment date. A 25% equipment handling and restocking charge will be charged to the Customer by Master Reseller/Distri. Customer should call Master Reseller/Distri DSL Customer Service to receive a Return Materials Authorization (RMA) number and to ship the equipment back to Master Reseller/Distri (the Customer shall pay all shipping charges associated with this return). 6. Fees and Payment Terms. Customer shall pay Master Reseller/Distri the One- time Fees, monthly fees and other fees shown in the applicable Pricing Schedule(s) for the setup, operation and providing of Services, Customer Circuits, End User Circuits and other services obtained from Master Reseller/Distri. The monthly fees billed to the customer for End User Circuits shall not change during the term for which the End User DSL Circuit is ordered once such End User DSL Circuit order has been accepted by Master Reseller/Distri. Other than revising monthly fee charges for End User Circuits during the End User Circuit term, Master Reseller/Distri shall be free to revise all charges at any time upon notice to customer. Master Reseller/Distri shall invoice Customer once a month. Master Reseller/Distri's invoices shall bill Customer for Services one month in advance. For new End Users, setup during a month, Master Reseller/Distri's invoice will reflect all One-time Fees, prorated monthly fees for such month and the advance monthly fees. Customer shall pay all invoiced fees no later than thirty days from invoice date. Late payments will accrue interest at a rate of one and one-half percent (1 1/2%) per month, or the highest rate allowed by applicable law, whichever is lower, and Customer shall pay all collection costs incurred by Master Reseller/Distri (including, without limitation, reasonable attorney's fees). In certain situations, Master Reseller/Distri may require Customer to deposit funds with Master Reseller/Distri to secure payment of fees owed by Customer hereunder. If Customer has a bone fide dispute with any of the amounts on an invoice ("Disputed Amounts"), Customer must pay all amounts not in dispute as set forth above, and provide Master Reseller/Distri with a written request for billing adjustment together with all supporting documentation within sixty (60) days from the date of the invoice or customers right to billing adjustment shall be waived. In the event of a billing dispute the parties shall promptly resolve the dispute by mutual agreement or by arbitration. Unless otherwise specified by Master Reseller/Distri all payments shall be made to Master Reseller/Distri Telecomm, Inc and mailed to Accounts Receivable Dept., Master Reseller/Distri Telecomm, Inc., 4210 Coronado, Stockton, CA 95204. Customer shall be responsible for all applicable Federal, state, and local mandated, required or approved surcharges, fees, user's fees, universal service contributions and taxes applicable under this Agreement. 7. Cancellation and Disconnection. Customer shall give thirty (30) days written notice to Master Reseller/Distri to disconnect a Customer Circuit. All End User Circuits served by a Customer Circuit must be disconnected by Customer at the same time or before disconnecting such Customer Circuit. If Customer disconnects a Customer Circuit during the Customer Term for that Customer Circuit, Customer shall incur fees for the balance of the Customer Term. If Customer disconnects Services for an End User during the End User Term, Customer shall incur the lesser of the fees for the balance of the End User Term or the Disconnect Fee set forth in the Pricing Schedule. In any case, Customer will be obligated to pay Service Setup fees and will not be entitled to a refund of any fees at any time. If Customer cancels an End User Circuit prior to setup of such End User Circuit, Customer shall incur the End User Cancellation Fee as set forth in the Price Schedule. 8. Support and Maintenance. Customer shall provide all first-level support for all End Users. Master Reseller/Distri shall use reasonable commercial efforts to provide second-level support for the Customer Circuits, End User Circuits and Services. Customer understands that Master Reseller/Distri may, from time to time, need to interrupt Services for maintenance and other operational reasons, and that Customer shall not receive any compensation for such interruptions. Master Reseller/Distri will give Customer reasonable advance notice of all such interruptions. 9. Year 2000 Warranty. Master Reseller/Distri warrants to Customer, and only Customer, that the Services, provided they are used correctly and provided Master Reseller/Distri is supplied by Customer with dates in proper format, will be capable of processing dates before and after the year 2000. Customer acknowledges that the Services are dependent on third party equipment, software, and systems, including, without limitation, those of local telephone companies and other carriers. Master Reseller/Distri makes no representations and will not be liable with respect to Year 2000 compliance of such equipment, software, systems and third parties. Master Reseller/Distri's sole obligation for a failure of the Services to comply with the foregoing warranty is to use its reasonable efforts to correct such a failure. 10. Warranty Disclaimer. EXCEPT FOR THE WARRANTIES SET OUT IN SECTION 9, THE SERVICES, CUSTOMER CIRCUITS, AND END-USER CIRCUITS, AND ALL OTHER PRODUCTS AND SERVICES HEREUNDER ARE PROVIDED ON AN "AS IS" BASIS, AND CUSTOMER'S AND END USER'S USE THEREOF IS AT ITS OWN RISK. MASTER RESELLER/DISTRI DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL OTHER EXPRESS AND IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT AND TITLE, AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE. MASTER RESELLER/DISTRI DOES NOT WARRANT THAT THE SERVICES, CUSTOMER CIRCUITS, AND END-USER CIRCUITS WILL PERFORM AT A PARTICULAR SPEED, OR WILL BE UNINTERRUPTED, ERROR-FREE, OR COMPLETELY SECURE. 11. Customer Representations and Warranties. Customer represents and warrants that: (i) Master Reseller/Distri has informed Customer that the Services constitute telecommunications or telecommunications services ("Telecommunication Services") as defined by federal law, and as a result, Master Reseller/Distri will assume the obligations of providing such Telecommunications Services, including, billing, collecting and remitting to governmental authorities the applicable taxes such as the universal service tax (collectively, "Telecommunication Obligations"). In the event Customer chooses to use the Services to provide Telecommunication Services, Customer will provide Master Reseller/Distri thirty (30) days prior written notice so that Master Reseller/Distri may discontinue such Telecommunication Obligations and Customer will assume such Telecommunication Obligations thereafter); (ii) it shall not, in the ordinary course of its business, when using Services, be able to identify, and distinguish between, packet data transmissions that originate and terminate within the same state (intrastate transmissions), and those packet data transmissions that originate and terminate in different states (interstate transmissions), and states that it is impractical to identify, distinguish and measure its intrastate and interstate transmissions on Master Reseller/Distri's network; (iii) Customer estimates in good faith that more than ten percent (10%) of all data packets transmitted through Services will consist of interstate transmissions; and, (iv) it will inform all End Users that Services do not include 911 or other emergency and ancillary services conventionally available from incumbent local phone companies. 12. Term and Termination. This Agreement shall remain in effect until terminated as set forth in this Section. The initial term of this Agreement as set forth on the cover page of this agreement shall be one (1) year (the "Initial Term"). After the Initial Term, either party may terminate this Agreement with thirty (30) days written notice to the other party. After ten (10) business days of non-payment from any due date, Master Reseller/Distri may suspend Services. After thirty (30) days of nonpayment from any due date, Master Reseller/Distri may terminate the Services, and/or this Agreement. Customer shall remain responsible for all fees accrued prior to the date of termination. In addition, either party may terminate this Agreement if the other party materially breaches any term or condition of this Agreement and fails to cure such breach within thirty (30) days after receipt of written notice of the same. If service to the customer is terminated under this agreement for non payment or material breach by customer, Master Reseller/Distri shall have the right to provide service directly to customer's end users, including the right to subcontract all or any portion of said service to third parties, and shall be relieved of any confidentiality requirements associated with Master Reseller/Distri's providing such service. Customer agrees not to interfere with Master Reseller/Distri's right to provide service under these circumstances. 13. Effect of Termination. Upon expiration or termination of this Agreement, Master Reseller/Distri will continue to maintain all existing Customer Circuits and End User Circuits, and provide Services pursuant to the terms hereof, provided that Customer continues to pay all applicable fees therefor and complies with any additional terms and conditions requested by Master Reseller/Distri. Any accrued rights to payment, any remedies, and Sections 1, 6, 7, 8, 10, 11, 13, 14, 15, 16 and 17 will survive any expiration or termination of this Agreement. 14. Limitations of Liability. IN NO EVENT WILL MASTER RESELLER/DISTRI BE LIABLE TO CUSTOMER, ANY END-USER, OR ANY THIRD PARTY FOR ANY CLAIMS ARISING OUT OF OR RELATED TO CUSTOMER'S BUSINESS, CUSTOMERS RELATIONSHIP WITH ITS END-USERS, OR OTHERWISE. MASTER RESELLER/DISTRI SHALL NOT BE LIABLE FOR ANY DAMAGES ASSOCIATED WITH THE INTERRUPTION OR LOSS OF USE OF SERVICES, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. MASTER RESELLER/DISTRI'S MAXIMUM AGGREGATE LIABILITY TO CUSTOMER RELATED TO A CLAIM ARISING UNDER THIS AGREEMENT, UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY, WILL BE LIMITED TO THE TOTAL AMOUNT PAID BY CUSTOMER TO MASTER RESELLER/DISTRI FOR THE SERVICES GIVING RISE TO SUCH CLAIM IN THE SIX (6) MONTHS PRIOR TO THE OCCURRENCE OF SUCH CLAIM. NEITHER PARTY WILL BE LIABLE UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY FOR ANY LOST REVENUE, LOST PROFITS, INCIDENTAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT. 15. Indemnity. Customer shall defend, indemnify, and hold harmless Master Reseller/Distri, its officers and directors, employees, and agents from and against any and all lawsuits, claims, demands, penalties, losses, fines, liabilities, damages, and expenses (including attorney's fees) of any kind and nature (including damage to Master Reseller/Distri's property and injury to its employees), without limitation whatsoever, in connection with Customers operations, installation or maintenance of equipment and facilities contemplated by this agreement, or otherwise arising out of or in any way connected with customers provision of service or performance under this agreement, provided that this section shall not apply to the extent that any injury, loss, or damage is caused by the gross negligence or willful misconduct on the part of Master Reseller/Distri. Master Reseller/Distri hereby indemnifies and holds harmless Customer and its End Users from any physical injuries to person or property caused by Master Reseller/Distri or its agents during the course of providing or maintaining the End User Circuits or any End User premise equipment; provided, however, that such indemnity shall not be available if the cause of such damage is due to Customer's or End User's willful or negligent acts or omissions. 16. Force Majeure. Neither party hereto shall be responsible for any failure to perform its obligations under this Agreement (other than obligations to pay money) if such failure is caused by acts of God, war, strikes, revolutions, earthquake, lack or failure of transportation facilities, laws or governmental regulations or other causes that are beyond the reasonable control of such party. 17. Miscellaneous. This agreement may not be assigned by Customer except to a wholly-owned subsidiary or affiliate held under common control with the Customer, without prior written consent of Master Reseller/Distri which shall not be unreasonably withheld. Notwithstanding the foregoing, Customer may assign this agreement to a company that acquires Customer or into which Customer is merged, subject to Master Reseller/Distri's prior approval of the acquiring or surviving company's credit and increase of an existing, or imposition of a new, deposit or guarantee requirement, at Master Reseller/Distri's exclusive option. Master Reseller/Distri may subcontract the performance of Services to third parties. The parties agree that they are independent contractors and that this Agreement and relations between Master Reseller/Distri and Customer hereby established do not constitute a joint venture, agency or contract of employment between them, or any other similar relationship. Neither party has the right or authority to assume or create any obligation or responsibility on behalf of the other. This agreement and all of the non-tariffed rates, terms, conditions, and other information herein, are confidential and shall not be disclosed by either party to any other person, except as may be required by a court or government agency acting in accordance with its jurisdiction. Furthermore, Master Reseller/Distri may transmit one or more copies of this agreement to the appropriate state Public Utilities Commission, the Federal Communication Commission, or Public Services Commission for filing on a confidential basis. If either party discloses such information to a person within said party's company on a need to know basis, such person will be advised of the confidential and non-disclosable nature of said information and required to abide thereby. All confidential information shall remain confidential for a period of three (3) years after the termination of this agreement.. Any notice required or permitted to be given under this agreement by a party shall be in writing and shall be delivered by hand, mail, national overnight courier service or by fax if confirmed by telephone to the other party at the address or phone numbers shown herein or at such other address or phone numbers as shall be designated from time to time. No failure or delay in exercising any right hereunder will operate as a waiver thereof, nor will any partial exercise of any right or power hereunder preclude further exercise. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be unenforceable or invalid, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. This Agreement shall be deemed to have been made in, and shall be construed pursuant to the laws of the State of California and the United States without regard to conflicts of laws provisions thereof. Any waivers or amendments shall be effective only if made in writing. This Agreement is the complete and exclusive statement of the mutual understanding of the parties and supersedes and cancels all previous written and oral agreements and communications relating to any of the subject matter of this Agreement. This Agreement will be governed by and construed in accordance with the laws of the State of California. The venue for enforcement of this Agreement is San Joaquin County. Each party waives the right to a trial by jury in any suit based on or arising out of this agreement. Volume Commitment Schedule Volume Commitment Pricing If Customer has committed to a specified Volume Level ("Volume Commitment Level") as set forth on the cover page of the Agreement, then Customer will receive the applicable pricing as of the Effective Date of the Agreement ("Volume Commitment Pricing"). For example, if Customer commits to a 1000+ Volume Level, all End User DSL Circuits will be billed at the Volume Level Price for 1,000+ circuits. In order to maintain such Volume Commitment Pricing, Customer agrees to meet the following Volume Milestones: Volume Milestone Schedule In the event that the Customer fails to meet each of the above Volume Milestones, pricing will revert to the standard Volume Level Pricing FOR ALL END USER CIRCUITS, BOTH EXISTING AND NEW CIRCUITS. In this event, Customer would be required to pay the End User DSL Monthly Charges corresponding to Customer's actual order volume as of the respective Volume Milestone (i.e., 3 months, 6 months, etc.). For example, if Customer has a Volume Commitment of 1000+ Circuits, within 6 months of the applicable Effective Date, Customer must have at least 350 End User DSL Circuits invoiced. Assuming that at the six month Volume Milestone, Customer has only 300 End User DSL Circuits invoiced, then the Customer is obligated to pay the monthly charges associated with the <1,000 Volume Level (e.g., A: Business 144-$81.70; Business 384-$105.80; etc.) for the subsequent month(s) FOR ALL END USER CIRCUITS. The Customer would pay the End User DSL Monthly Charges associated with its actual order volume FOR ALL END USER CIRCUITS BOTH EXISTING AND NEW CIRCUITS until Customer satisfies its subsequent Volume Milestone. If at the nine month Volume Milestone, Customer has met or exceeded its Volume Milestone (e.g. 650 End User DSL Circuits invoiced), then Customer will receive Volume Commitment Pricing for future End User DSL Circuits. One-Time Service Setup Charges As part of Customer's Volume Commitment, Service Setup charges for services are billed at the level of Customer's commitment, as long as Customer is within the milestones established above. One-time Service Setup charges are listed in the Price Schedule for Business and Residential services. For example, if Customer has a volume commitment of 1,000+ Circuits, Customer will be billed for Service Setup charges of $225 for all Business DSL circuits, starting with the first circuit, as long as Customer meets the Milestones listed above. Price Schedule - DSL Services Description of DSL Services DSL Services Volume and Contract Level Pricing The following are the monthly charges for End User DSL Circuits based on the Information Server Access Services Agreement that Customer has signed with Master Reseller/Distri. The total of all of the Customer's End User Circuits in all regions are counted in determining the applicable Volume Level Price. End User DSL Circuit Monthly Charges Service Residential 384 Residential 768 Business 144* Business 192* Business 384* Business 768* Business 1.1m* Business 1.5m* Preferred Monthly Recurring Charges - 1 Year DSL Agreement 3 year Contract 1000+ 3 year Contract < 1000 2 year Contract Month to Month Standard - 1 Year DSL Agreement Month to Month or 2 year Month to Month DSL Agreement Mo. to Mo. DSL Agreement End User DSL Circuit Order and Other One-time Charges Service Setup Residential 384 Residential 768 Business 144* Business 192* Business 384* Business 768* Business 1.1m* Business 1.5m* Preferred Non-Recurring Charges NRC 1000+ Circuits. NRC <1000 Circuits. Standard NRC Month to Month DSL Agreement Mo. to Mo. DSL Agreement Residential Non-Recurring Charges (NRC) and Customer Premise Equipment (CPE) prices are after rebates to the end user. The current price for NRC and CPE for the Preferred Residential service is $348 and the end user will receive a rebate (currently $150) which will reduce the cost of the equipment and installation to the net $198 price. From time to time the cost of the installation and equipment to the ISP and the rebate to the end user may change. If the net cost is more than the price listed here we will provide the advance notification as required by our agreement. Customer Premise Equipment E.N.* 5250 SDSL Modem F.P.** 144 IDSL Router F.P.** 2200 SDSL Router F.P.** 2100 ADSL Router * E.N. Efficient Networks ** F.P. FlowPoint Service Order Charges One-Time Charge Inside Wiring from RJ45 Wall Jack to NID (optional) $ 88.00* Field Technician Dispatch (during normal business hours) $ 88.00* * First Hour/Minimum Charge. For each additional 15 minutes: $20. Field Technician Dispatch (other hours: after hours, weekends, holidays) $ 110.00** ** First Hour/Minimum Charge. For each additional 15 minutes: $25. Other Service Charges One-Time Charge Upgrade/downgrade of End User DSL Service (Involves a dispatch of FT) $199.00 Upgrade/downgrade of End User DSL Service (no dispatch of FT) $99.00 End User Circuit Disconnect Fee (per circuit) $250.00 End User Circuit Cancellation Fee (per circuit) $49.00 Missed Appointment ( i.e., End user no-show) Charge $99.00 AS A CONDITION OF MASTER RESELLER/DISTRI MAKING RESIDENTIAL SERVICES AVAILABLE TO CUSTOMER, CUSTOMER AGREES TO FOLLOW ALL MASTER RESELLER/DISTRI PROCEDURES RULES AND REGULATIONS INCLUDING THE USE OF ANY MASTER RESELLER/DISTRI PROVIDED WEB INTERFACE FOR ORDER ENTRY, PROVISIONING, AND OR MAINTENANCE REQUEST AND RESOLUTION. CUSTOMER AGREES TO USE COMMERCIALLY REASONABLE EFFORTS TO ENSURE THAT RESIDENTIAL LINES ARE INSTALLED AT RESIDENTIAL ADDRESSES ONLY. MASTER RESELLER/DISTRI RESERVES THE RIGHT TO BILL CUSTOMER FOR SERVICES AT APPLICABLE BUSINESS SERVICES PRICES FOR ANY RESIDENTIAL CIRCUITS INSTALLED AT LOCATIONS DEEMED TO BE NON-RESIDENTIAL. CUSTOMER AGREES TO USE COMMERCIALLY REASONABLE EFFORTS TO FULLY DISCLOSE TO END USERS THE FEATURES AND LIMITATIONS OF RESIDENTIAL SERVICES PRIOR TO ORDERING RESIDENTIAL SERVICES FOR SUCH END USER. Description of DSL Remote Services DSL Remote Service is an additional service to Master Reseller/Distri's standard DSL Service offerings. DSL Remote provides long-distance connectivity for DSL End Users located in distant metropolitan areas. DSL Remote Service - Monthly Recurring Service Charge (per End User) Distance Between End User Metro Area and Customer Metro Area DSL Remote 144 Monthly Charge DSL Remote 192 Monthly Charge DSL Remote 384 Monthly Charge DSL Remote 768 Monthly Charge DSL Remote 1.1 Monthly Charge DSL Remote 1.5 Monthly Charge Less than 500 miles Greater than 500 miles In addition to the other charges for DSL Services, Customer shall pay the applicable DSL Remote Monthly Charges set forth above. If DSL Remote is ordered at the same time as the DSL End User Circuit, then no additional one-time order charges apply. Additional service charges may apply if DSL Remote Service is added to or removed from an installed End User DSL Circuit. DSL Remote Services are not included for purposes of determining whether Customer has met its Volume Commitment Level. For Customer to order DSL Remote Services, such service must be available in both the metropolitan area where the End User DSL Circuit will be ordered and the metropolitan area where the Customer maintains a Customer Circuit. Standard DSL Services may be available within a metropolitan area before DSL Remote Service is available. Region Metro Areas within 500 miles Atlanta, Georgia Raleigh, NC Austin, Texas Dallas, TX; Houston, TX Baltimore, Maryland/Washington, D.C. * Boston, MA; New York, NY; Philadelphia, PA; Raleigh, NC; Detroit, MI Boston, Massachusetts New York, NY; Philadelphia, PA; Baltimore, MD; Washington, DC Chicago, Illinois Detroit, MI; Minneapolis, MN Dallas, Texas Austin, TX; Houston, TX Denver, Colorado - none - Detroit, Michigan Chicago, IL; Philadelphia, PA; Baltimore, MD; Washington, D.C. Houston, Texas Dallas, TX; Austin, TX Los Angeles, California San Diego, CA; San Francisco, CA; Sacramento, CA; Phoenix, AZ Miami, Florida - none - Minneapolis, Minnesota Chicago, IL; Detroit, MI New York, New York Boston, MA; Philadelphia, PA; Baltimore, MD; Washington, D.C.; Raleigh, NC Portland, Oregon Seattle, WA Philadelphia, Pennsylvania Boston, MA; New York, NY; Baltimore, MD; Washington, D.C.; Raleigh, NC; Detroit, MI Phoenix, Arizona San Diego, CA; Los Angeles, CA Raleigh, North Carolina Atlanta, GA; New York, NY; Philadelphia, PA; Baltimore, MD; Washington, DC Sacramento, California San Diego, CA; San Francisco, CA; Los Angeles, CA San Diego, California San Francisco, CA; Los Angeles, CA; Phoenix, AZ Seattle, Washington Portland, OR San Francisco, California San Diego, CA; Sacramento, CA; Los Angeles, CA * The Baltimore, MD and Washington, D.C metro areas are considered the same metropolitan region for purpose of DSL Remote. (Initials) ______ISP 5 of 5 ________(Master Reseller/Distri Telecomm, Inc.) 10/04/99 EX-10.8 8 LEVEL 3 GENERAL TERMS AND CONDITIONS FOR DELIVERY OF SERVICE Level 3 Communications, LLC GENERAL TERMS AND CONDITIONS FOR DELIVERY OF SERVICE These Terms and Conditions for Delivery of Service are applicable to Customer Orders executed by Customer for Services delivered by Level 3 Communications, LLC ("Level 3"), and are incorporated into each Customer Order. The Terms and Conditions include these General Terms and Conditions for Delivery of Service and all terms and conditions attached hereto which relate to any Service provided by Level 3 to Customer. These Terms and Conditions are applicable to sales of Services originating or terminating in the United States. DEFINITIONS Confidential Information: Licensed Software, and all source code, source documentation, inventions, know- how, and ideas, updates and any documentation and information related to the Licensed Software, and any non-public information regarding the business of a party provided to either party by the other party where such information is marked or otherwise communicated as being "proprietary" or "confidential" or the like, or where such information is, by its nature, confidential. Committed Data Rate: A commitment made by Customer (where applicable) obligating it to order and pay for a minimum amount of a Level 3 Service expressed in Megabits per second (Mbps). Customer: The person, firm or corporation so named on the Customer Order. Customer Order: A request for Level 3 Service submitted by the Customer for acceptance by Level 3. Facilities: Any and all devices supplied by Level 3 used to deliver Services, including but not limited to all terminal and other equipment, wires, lines, circuits, ports, routers, switches, channel service units, data service units, cabinets, racks, private rooms and the like. Facilities shall not include any such devices sold to Customer by Level 3 and paid for by Customer or owned by Customer or any third party. Licensed Software: Computer software, in object code format only, the use of which is required for use of Service ordered by Customer. Premises: The location(s) occupied by Customer or its end users to which Service will be delivered by Level 3. Premises does not include Space as defined below. Revenue Commitment: A commitment made by Customer obligating it to order and pay for a minimum volume of Services during an agreed term. Service: A service offered by Level 3 pursuant to a Customer Order. Space: The location(s) within Level 3 gateways into which Customer is permitted to colocate telecommunications or internet equipment pursuant to a colocation Customer Order accepted by Level 3. Target Install Date: A written communication from Level 3 to Customer indicating the date upon which it is anticipated that Services will be available to Customer. SECTION 1. CUSTOMER ORDERS 1.1 Submission of Customer Orders. To order any Service, Customer may submit to Level 3 an order form for Services, completed with Level 3's assistance ("Customer Order") requesting the provision of Service. Level 3's delivery of a Target Install Date respecting such Service shall constitute Level 3's acceptance of the Customer Order. The Customer Order and its backup detail shall set forth the Service, the Premises and/or Space, the prices to be charged for Services and any applicable term and/or Revenue Commitment. 1.2 Undertaking of Level 3. If Level 3 issues a Target Install Date respecting Services, Level 3 will furnish such Services in accordance with the Terms and Conditions and any Customer Orders. SECTION 2. BILLING AND PAYMENT 2.1 Payment of Bills. Level 3 bills all charges incurred by Customer on a monthly basis. Level 3 bills in advance for all Services to be provided during the ensuing month, except for charges which are dependent upon usage of Service, which are billed in arrears. Billing for partial months will be prorated based on a Calendar month. All bills are due upon receipt, and become past due thirty (30) days later. The unpaid balance of any past due balance which is not reasonably disputed under Section 2.4 hereof shall bear interest at a rate of 1.5% per month (prorated on a daily basis beginning on the past due date), or the highest rate allowed by law, whichever is less. To the extent Customer orders any service designated as "Burstable," the following billing method shall apply: Customer will be billed as set forth above for its Committed Data Rate. In addition, over each month, Customer's usage of the Service will be sampled by Level 3 in five minute inbound and outbound averages. At the end of the month, the top ten percent of the inbound and outbound averages shall be discarded. The highest of the resulting ninetieth percentile for inbound and outbound traffic will be compared to the Committed Data Rate. If the ninetieth percentile of either inbound or outbound traffic is higher than the Committed Data Rate, Customer will, in addition to being billed for its Committed Data Rate, be billed for its utilization of the Service that exceeds their Committed Data Rate, which shall be billed at the contracted-for price per Mbps. In the event the Services ordered by Customer involve a local loop, Customer may arrange, through a local exchange carrier colocated in Level 3's gateway Space, for its own local loop, or it may have Level 3 provide the same. In the event Customer provides for its own local loop, Customer must provide to Level 3 all circuit facility assignment information, firm order commitment information and the design layout records necessary to enable Level 3 to make the necessary cross-connection between the Services and Customer's designated local exchange carrier. Level 3 may charge Customer a non- recurring cross-connect fee to make such connection, and an additional non-recurring charge may apply in the event that Customer requests and Level 3 permits Customer to change its Service installation date. In the event Customer provides for its own local loop, Level 3's billing for the Services will commence once it has installed and tested the Services up to the Level 3 side of the cross-connect circuit. Otherwise, Level 3's billing for the Services will commence once the Services are installed and tested. 2.2 Taxes and Fees. Except for taxes based on Level 3's net income and ad valorem, personal and real property taxes imposed on Level 3's property, Customer shall be responsible for payment of all sales, use, gross receipts, excise, access, bypass, franchise or other local, state and federal taxes, fees, charges, or surcharges, however designated, imposed on or based upon the provision, sale or use of the Services. 2.3 Regulatory and Legal Changes. In the event of any change in applicable law, regulation, decision, rule or order that materially increases the costs or other terms of delivery of Service, Level 3 and Customer agree to negotiate regarding the rates to be charged to Customer to reflect such increase in cost and, in the event that the parties are unable to reach agreement respecting new rates within thirty (30) days after Level 3's delivery of written notice requesting renegotiation, then (a) Level 3 may pass such increased costs through to Customer, and (b) Customer may terminate the affected Customer Order without termination liability upon sixty (60) days' prior written notice. 2.4 Disputed Bills. In the event that Customer disputes any portion of a Level 3 bill, Customer must pay the undisputed portion of the bill and submit a written claim for the disputed amount. All claims must be submitted to Level 3 within sixty (60) days of receipt of billing for those Services. Customer acknowledges that it is able to and that it is reasonable to require Customer to dispute bills within that time, and Customer therefore waives the right to dispute charges not disputed within the time frame set forth above. 2.5 Credit Approval and Deposits. Customer shall provide Level 3 with credit information as requested, and delivery of Service is subject to credit approval. Level 3 may require Customer to make a deposit (which will not exceed Customer's estimated charges for two months' Service) as a condition to Level 3's acceptance of any Customer Order, or as a condition to Level 3's continuation of Service, which deposit shall be held by Level 3 as security for payment of Customer's charges. At such time as the provision of Service to Customer is terminated, the amount of the deposit will be credited to Customer's account and any credit balance which may remain will be refunded. 2.6 Fraudulent Use of Services. Customer is responsible for all charges attributable to Customer incurred respecting the Services, even if incurred as the result of fraudulent or unauthorized use of the Services, unless Level 3 has actual knowledge of the same and fails to notify Customer thereof. Level 3 may, but is not obligated to, detect or report unauthorized or fraudulent use of Services. SECTION 3. DISCONTINUANCE OF CUSTOMER ORDERS 3.1 Discontinuance of Customer Order by Level 3. Level 3 may terminate any Customer Order and discontinue Service without liability: A. If Customer fails to pay a past due balance for Services: (i) usage based and billed in arrears, provided the same is not paid within three (3) days of written notice thereof provided by Level 3; or (ii) flat rated and billed in advance, provided the same is not paid within fourteen (14) days of written notice thereof provided by Level 3; B. If Customer violates any law, rule, regulation or policy of any government authority having jurisdiction over the Services; if Customer makes a material misrepresentation in any submission of information in a Customer Order or other submission of information to Level 3; if Customer engages in any fraudulent use of the Services; or if a court or other government authority having jurisdiction over the Services prohibits Level 3 from furnishing the Services; C. If Customer fails to cure its breach of any provision of these Terms and Conditions or any Customer Order within thirty (30) days written notice thereof provided by Level 3; D. If Customer files bankruptcy, for reorganization, or fails to discharge an involuntary petition therefore within sixty (60) days; E. If Customer's use of the Services materially exceeds Customer's credit limit, unless within fourteen (14) days written notice thereof by Level 3, Customer provides adequate security for payment for the Services. 3.2 Effect of Discontinuance. Upon Level 3's discontinuance of Service to Customer, Level 3 may, in addition to all other remedies that may be available to Level 3 at law or in equity, assess and collect from Customer any applicable termination charge. 3.3 Resumption of Service. If Service has been discontinued by Level 3 and Customer requests that Service be restored, Level 3 shall have the sole and absolute discretion to restore such Service. Nonrecurring charges, with the exception of any charges for the build-out of Colocation Space already paid by Customer, may apply to restoration of Service. 3.4 Discontinuance of Customer Order by Customer. Customer shall have the right to terminate any Customer Order and discontinue Service prior to the end of the agreed term with respect to which a Customer Order has been executed without payment of any applicable termination charge if: (i) such Service is Unavailable (as defined below) on two or more separate occasions of more than eight (8) hours each in any 30 day period, and (ii) following written notice thereof from Customer to Level 3, Level 3 has an Unavailability event of more than 12 hours at any time within the 12 month period immediately following said notice. For purposes of the foregoing, Unavailability shall mean the period of time beginning when Customer reports an outage in its Service to the Level 3 Customer Service and Support Organization (1-877-4LEVEL3) and shall end when the Service is operative. Unavailability shall not apply to any outage which is caused by Customer, Customer's end users or any third party, which results from failure of power or equipment provided by Customer or others, which occurs or continues during any period in which Level 3 is not given access to the Premises or the Space, or which results from maintenance events. Customer must exercise its right to terminate under this Section, in writing, no later than thirty (30) days after the Unavailability event giving rise to a right of termination hereunder. SECTION 4. DELIVERY OF SERVICES 4.1 Level 3 Access to Premises and Space. Customer shall allow Level 3 access to the Premises to the extent reasonably determined by Level 3 for the installation, inspection and scheduled or emergency maintenance of Facilities relating to the Service. Level 3 shall notify Customer two (2) business days in advance of any regularly scheduled maintenance that will require access to the Premises. Level 3 retains the right to access any Space for any legitimate business purpose. 4.2 Level 3 Facilities. Level 3 will use reasonable efforts to provide and maintain the Facilities in good working order. Customer shall not and shall not permit others to rearrange, disconnect, remove, attempt to repair, or otherwise tamper with any of the Facilities. If the same occurs without first obtaining Level 3's written approval, in addition to being a breach by Customer of Customer's obligations hereunder, Customer shall (1) pay Level 3 the cost to repair any damage to the Facilities caused thereby; and (2) be responsible for the payment of service charges in the event that maintenance or inspection of the Facilities is required as a result of Customer's breach of this Section. In no event shall Level 3 be liable to Customer or any other person for interruption of Service or for any other loss, cost or damage caused or related to improper use or maintenance of the Facilities, unless the same is caused by the negligence of Level 3, and then only to the extent of Section 5.2 4.3 Title and Power. Title to all Facilities (except as otherwise agreed) shall remain with Level 3. The electric power consumed by such Facilities on the Premises shall be provided by and maintained at the expense of Customer. Electric power to the Space shall be provided by Level 3. 4.4 Customer-Provided Equipment. Level 3 may install certain Customer provided communications equipment upon installation of Service and the Facilities, but unless otherwise agreed by Level 3 in writing, Level 3 shall not thereafter be responsible for the operation or maintenance of any Customer provided communication equipment. Level 3 shall not be responsible for the transmission or reception of signals by Customer- provided equipment or for the quality of, or defects in, such transmission. 4.5 Removal of Facilities. Customer agrees to allow Level 3 to remove all Facilities from the Premises: A. after termination of the Service in connection with which the Facilities were used; and B. for repair, replacement or otherwise as Level 3 may determine is necessary, but Level 3 shall use reasonable efforts to minimize disruptions to the Service caused thereby. At the time of such removal, the Facilities shall be in the same condition as when installed, normal wear and tear excepted. Customer shall reimburse Level 3 for the depreciated cost of any Facilities not in such condition. 4.6 Service Subject to Availability. The furnishing of Service is subject to the availability thereof, on a continuing basis, and is limited to the capacity of Level 3 to provide the Service as well as the capacity which Level 3 may obtain from other carriers to furnish Service from time to time as required at the sole discretion of Level 3. Nothing in these Terms and Conditions shall be construed to obligate Customer to submit, or Level 3 to accept, Customer Orders. In the event Service becomes unavailable pursuant to this paragraph 4.6, Customer shall have the rights set forth in Section 3.4 of these Terms and Conditions. SECTION 5. OBLIGATIONS AND LIABILITY LIMITATION 5.1 Obligations of the Customer. Customer shall be responsible for: A. The payment of all charges applicable to the Service; B. Damage or loss of the Facilities installed on the Premises or in the Space (unless caused by the negligence or willful misconduct of the employees or agents of Level 3); C. Providing the level of power, heating and air conditioning necessary to maintain the proper environment on the Premises for the provision of Service; D. Providing a safe place to work and complying with all laws and regulations regarding the working conditions on the Premises; E. Granting Level 3 or its employees access to the Premises as set forth in Section 4.1 of these Terms and Conditions; and F. Keeping Level 3's Facilities located on Premises free and clear of any liens or encumbrances. 5.2 Liability. Except as provided in Section 8.4, the liability of Level 3 for damages arising out of the furnishing of or the failure to furnish Service, including but not limited to mistakes, omissions, interruptions, delays, tortious conduct, representations, errors, or other defects, whether caused by acts of commission or omission, shall be limited to the extension of credit allowances or refunds due under any applicable Service Level Agreement. Except as provided in Section 8.4, the extension of such credit allowances or refunds shall be the sole remedy of Customer and the sole liability of Level 3. 5.3 No Special Damages. Notwithstanding any other provision hereof, neither party shall be liable for any indirect, incidental, special, consequential, exemplary or punitive damages (including but not limited to damages for lost profits or lost revenues), whether or not caused by the acts or omissions or negligence of its employees or agents, and regardless of whether such party has been informed of the possibility or likelihood of such damages. 5.4 Disclaimer of Warranties. LEVEL 3 MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTORY OR OTHERWISE, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE, EXCEPT THOSE EXPRESSLY SET FORTH IN ANY APPLICABLE SERVICE LEVEL AGREEMENT. SECTION 6. SOFTWARE TERMS 6.1 License. If and to the extent that Customer requires the use of Licensed Software in order to use the Service supplied under any Customer Order, Customer shall have a nonexclusive, nontransferable (except pursuant to paragraph 8.2 hereof) license to use such Licensed Software only and solely to the extent required to permit delivery of the Service. Customer may not claim title to or any ownership interest in any Licensed Software (or any derivations or improvements thereto), and Customer shall execute any documentation reasonably required by Level 3 to memorialize Level 3's existing and continued ownership of the Licensed Software. 6.2 Restrictions. Customer agrees that it shall not: A. copy the Licensed Software except for emergency backup purposes or as permitted by the express written consent of Level 3; B. reverse engineer, decompile or disassemble the Licensed Software; C. sell, lease, license or sublicense the Licensed Software; or D. create, write or develop any derivative software or any other software program based on the Licensed Software. SECTION 7. CONFIDENTIAL INFORMATION 7.1 Disclosure and Use. Any Confidential Information disclosed by either party shall be kept by the receiving party in strict confidence and not disclose to any third party (except as authorized by these Terms and Conditions) without the disclosing party's express written consent. Each party agrees to treat all Confidential Information of the other in the same manner as it treats its own proprietary information, but in no case will the degree of care be less than reasonable care. 7.2 Restricted Use. Each party agrees: A. to use Confidential Information only for the purposes of performance of any Customer Order or as otherwise expressly permitted by these Terms and Conditions; B. not to make copies of Confidential Information or any part thereof except for purposes consistent with these Terms and Conditions; and C. to reproduce and maintain on any copies of any Confidential Information such proprietary legends or notices (whether of disclosing party or a third party) as are contained in or on the original or as the disclosing party may otherwise reasonably request. 7.3 Exceptions. Notwithstanding the foregoing, each party's confidentiality obligations hereunder shall not apply to information which: A. is already known to the receiving party; B. becomes publicly available without fault of the receiving party; C. is rightfully obtained by the receiving party from a third party without restriction as to disclosure, or is approved for release by written authorization of the disclosing party; D. is developed independently by the receiving party without use of the disclosing party's Confidential Information; E. is required to be disclosed by law. 7.4 Publicity. This agreement grants no right to use any party's or its affiliates' trademarks, service marks or trade names or to otherwise refer to the other party in any marketing, promotional or advertising materials or activities. Neither party shall issue any publication or press release relating to, or otherwise disclose the existence of, or the terms and conditions of any contractual relationship between Level 3 and Customer, except as may be required by law. 7.5 Remedies. Notwithstanding any other section of these Terms and Conditions, the non-breaching party shall be entitled to seek equitable relief to protect its interests, including but not limited to preliminary and permanent injunctive relief. Nothing stated herein shall be construed to limit any other remedies available to the parties. 7.6 Survival. The obligations of confidentiality and limitation of use shall survive the termination of any applicable Customer Order. SECTION 8. GENERAL TERMS 8.1 Force Majeure. Neither party shall be liable, nor shall any credit allowance or other remedy be extended, for any failure of performance or equipment due to causes beyond such party's reasonable control, including but not limited to: acts of God, fire, flood or other catastrophes; any law, order, regulation, direction, action, or request of any governmental entity or agency, or any civil or military authority; national emergencies, insurrections, riots, wars; unavailability of rights-of-way or materials; or strikes, lock-outs, work stoppages, or other labor difficulties. In the event any of the foregoing occur and Level 3 is unable to deliver the Service for fourteen (14) consecutive days, Customer shall not be obligated to pay Level 3 for the affected Service for so long as Level 3 is unable to deliver them, provided, however, that the term of the Customer Order respecting those Services shall be extended for a period of time equal to the period of time for which Level 3 was unable to provide and Customer was not required to pay for the affected Service. 8.2 Assignment or Transfer. Except with respect to a merger or sale of substantially all of Customer's assets, Customer may not transfer, sublease or assign the use of Service without the express prior written consent of Level 3, and then only when such transfer or assignment can be accomplished without interruption of the use or location of Service. Level 3 will not unreasonably withhold its consent. These Terms and Conditions shall apply to any transferees or assignees. Customer shall remain liable for the payment of all charges due under each Customer Order. 8.3 Notices. Notices hereunder shall be deemed properly given when delivered, if delivered in person, or when sent via facsimile, overnight courier, electronic mail or when deposited with the U.S. Postal Service, (a) with respect to Customer, the address listed on any Customer Order, or (b) with respect to Level 3, to: Contracts Management, Level 3 Communications, LLC, 1025 Eldorado Boulevard, Broomfield CO 80021. Customer shall notify Level 3 of any changes to its addresses listed on any Customer Order. 8.4 Indemnification by Level 3. Level 3 shall indemnify, defend and hold Customer harmless from any claim, loss, damage, expense or liability (including attorney's fees and court costs) (hereinafter "Claims") made against Customer for property damage, infringement of third party proprietary rights or personal injury caused by Level 3's negligence or willful misconduct. 8.5 Indemnification by Customer. Customer shall indemnify, defend and hold Level 3 harmless from Claims (including Claims for infringement of third party proprietary rights) (i) made against Level 3 by any end user of Customer in connection with the delivery or consumption of Service, (ii) made against Level 3 arising out of any commission or negligent omission by Customer in connection with the Service, or (iii) arising from Customer's negligence or willful misconduct. 8.6 Application of Tariffs. Level 3 may elect or be required to file with the appropriate regulatory agency tariffs respecting the delivery of certain Service. In the event that such tariffs are filed respecting Service ordered by Customer, then (to the extent such provisions are not inconsistent with the terms of a Customer Order) the terms set forth in the applicable tariff shall govern Level 3's delivery of, and Customer's consumption or use of, such Service. 8.7 Contents of Communications Level 3 does not monitor and shall have no liability or responsibility for the content of any communications transmitted via the Service, and Customer shall hold Level 3 harmless from any and all claims (including claims by governmental entities seeking to impose penal sanctions) related to such content attributable to Customer or its agents, employees or end users. 8.8 Entire Understanding These Terms and Conditions, including any Customer Orders executed hereunder, constitute the entire understanding of the parties related to the subject matter hereof. In the event of any conflict between these Terms and Conditions and the terms and conditions of any Customer Order, these Terms and Conditions shall control. These Terms and Conditions shall be governed and construed in accordance with the laws of the state of Colorado. 8.9 No Waiver. No failure by either party to enforce any rights hereunder shall constitute a waiver of such right(s). ADDITIONAL TERMS AND CONDITIONS FOR PRIVATE LINE SERVICE The following additional terms and conditions are applicable where, pursuant to a Customer Order, Customer orders metropolitan (local), city to city (within the United States) and international (from the United States to another country) private line, non-switchable circuits (the "Private Line Services"). 1. Any state or federal tariffs applicable to the Private Line Services to be delivered under any Customer Order are incorporated into the terms thereof. Level 3's pricing to Customer for Private Line Services may, if required, be subject to PUC or other regulatory approval. 2. The nonrecurring charges and monthly recurring rates for the Private Line Services provided by Level 3 shall be set forth in each Customer Order. 3. The rates and other charges set forth in each Customer Order are established in reliance on the term commitment made therein, and Customer shall pay the same in accordance therewith. In the event that Customer terminates Services ordered in any Customer Order which is accepted by Level 3 or in the event that the delivery of Services is terminated due to a failure of Customer to satisfy the requirements set forth in these Terms and Conditions prior to the end of the agreed term, Customer shall (unless Customer has made a Revenue Commitment) pay a termination charge equal to the percentage of the monthly recurring charges for the terminated Private Line Services calculated as follows: a. 100% of the monthly recurring charge that would have been incurred for the Private Line Service for months 1-12 of the agreed term; plus b. 75% of the monthly recurring charge that would have been incurred for the Private Line Service for months 13-24 of the agreed term; plus c. 50% of the monthly recurring charge that would have been incurred for the Private Line Service for months 25 through the end of the agreed term. In the event that a Revenue Commitment is made and is then being satisfied by Customer, Customer may terminate, rearrange or reconfigure the Private Line Services ordered under a Customer Order without payment of the termination charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible for payment of Level 3's then-current standard nonrecurring charges applicable to such termination, rearrangement or reconfiguration. 4. Level 3 makes the Service Level Agreements as attached respecting Private Line Service. ADDITIONAL TERMS AND CONDITIONS FOR COLOCATION The following additional terms and conditions are applicable where, pursuant to a Customer Order, Customer orders the use of space within Level 3 gateways to be used for the purpose of colocating telecommunications equipment or equipment used for connection to the internet (the "Space"). 1. Customer is granted the right to occupy the Space identified in a Customer Order. Customer shall be permitted reasonable access to the Space subject to any and all rules, regulations and access requirements imposed by Level 3 governing such access. Customer may submit multiple Customer Orders requesting use of different Space, each of which shall be governed by the terms hereof. 2. Customer shall be permitted to use the Space only for placement and maintenance of communications equipment. The nonrecurring and monthly recurring charges for the Space and any Services ordered by Customer shall be set forth in each Customer Order. Customer hereby agrees, within six (6) months of ordering such Space, to use the Space for placement and maintenance of telecommunications or internet access equipment. In the event Customer fails to fill said Space as set forth herein, Level 3 has the right to reclaim the proportion of Space not being used exclusively as indicated above, if the same is not cured within forty-five (45) days' prior notice thereof to Customer. Customer agrees to immediately vacate such recaptured Space and Level 3 shall reduce the Colocation fees allocated to such recaptured Space. Customer further agrees that no refunds shall be made to Customer regarding such recaptured Space. 3. Level 3 shall perform such janitorial services, environmental systems maintenance, power plant maintenance and other actions as are reasonably required to maintain the gateway in which the Space is located in a condition which is suitable for the placement of telecommunications and internet access equipment. Customer shall maintain the Space in an orderly and safe condition, and shall return the Space to Level 3 at the conclusion of the term set forth in the Customer Order in the same condition (reasonable wear and tear excepted) as when such Space was delivered to Customer. EXCEPT AS EXPRESSLY STATED HEREIN OR IN ANY CUSTOMER ORDER, THE SPACE SHALL BE DELIVERED AND ACCEPTED "AS IS" BY CUSTOMER, AND NO REPRESENTATION HAS BEEN MADE BY LEVEL 3 AS TO THE FITNESS OF THE SPACE FOR CUSTOMER'S INTENDED PURPOSE. 4. The term of use of the Space shall begin on the later to occur of the date requested by Customer or the date that Level 3 completes the build-out of the Space. Customer's use of the Space beyond the initial term shall be on a month-to-month basis, unless Customer and Level 3 have agreed in writing to a renewal of the right to use such Space. Customer hereby agrees to pay for the Space and any related Services for the term of this Agreement. The rates and other charges set forth in each Customer Order are established in reliance on the term commitment made therein. In the event that Customer terminates a Customer Order for Space which is accepted by Level 3 or in the event that the Customer Order is terminated due to a failure of Customer to satisfy the requirements set forth herein or in the Customer Order prior to the end of the agreed term, Customer shall pay a termination charge equal to the costs incurred by Level 3 in returning the Space to a condition suitable for use by other parties, plus the percentage of the monthly recurring fees for the terminated Space calculated as follows: a. 100% of the monthly recurring fees that would have been charged for the Space for months 1-12 of the agreed term; plus b. 75% of the monthly recurring fees that would have been charged for the Space for months 13-24 of the agreed term; plus c. 50% of the monthly recurring fees that would have been charged for the Space for months 25 through the end of the agreed term. In the event that a Revenue Commitment is made and is then being satisfied by Customer, Customer may terminate the Space ordered pursuant to a Customer Order without payment of the termination charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible for payment of Level 3's then-current standard nonrecurring charges applicable to such termination. 5. Level 3 shall use reasonable efforts to complete the build-out and make the Space available to Customer on or before the date requested by Customer. In the event that Level 3 fails to complete the build-out within sixty (60) days of the date requested by Customer, then Customer may terminate its rights to use such Space and receive a refund of any fees paid for the use or build-out of such Space. 6. Customer shall abide by any posted or otherwise communicated rules relating to use of, access to, or security measures respecting the Space. Customer's use of the Space will be immediately terminated in the event Customer or any of its agents or employees is found in Level 3's gateway with any firearms, drugs, alcohol or is found engaging in any criminal activity, eavesdropping, foreign intelligence, card selling or slamming. Persons found engaging in any such activity or in possession of the aforementioned prohibited items will be immediately escorted from the gateway. In the event that unauthorized parties gain access to the Space through access cards, keys or other access devices provided to Customer, Customer shall be responsible for any damages incurred as a result thereof. Customer shall be responsible for the cost of replacing any security devices lost or stolen after delivery thereof to Customer. In addition, Level 3 shall have the right to terminate Customer's use of the Space or the Services in the event that: (a) Level 3's rights to use the facility within which the Space is located terminates or expires for any reason; (b) Customer has violated the terms hereof or of any Customer Order submitted hereunder; (c) Customer makes any material alterations to the Space without first obtaining the written consent of Level 3; (d) Customer allows personnel or contractors to enter the Space who have not been approved by Level 3 in advance; or (e) Customer violates any posted or otherwise communicated rules relating to use of or access to the Space. With respect to items (b), (c), (d) and (e) immediately above, unless the same interferes or has the potential to interfere with other Level 3 Colocation customers, Level 3 shall provide Customer a written notice of the foregoing and a 10-day opportunity to cure the same before terminating Customer's rights to the Space. 7. Customer may sublease the Space under the following conditions: i) all proposed sublessees must be approved, in writing, by Level 3 in Level 3's sole discretion; ii) Customer hereby guarantees that all Sublessees shall abide by all terms and conditions set forth between Customer and Level 3; iii) Customer shall indemnify, defend and hold Level 3 harmless from all claims brought against Level 3 arising from any act or omission of any subcontractor and iv) any sublessee shall be considered customer's agent and all of sublessees' acts and omissions and usage of the Space or Services hereunder shall be attributable to Customer for the purposes of these Terms and Conditions. 8. Level 3 reserves the right to change the location or configuration of the Space, provided, however, that Level 3 shall not arbitrarily or discriminatorily require such changes. Level 3 and Customer shall work in good faith to minimize any disruption in Customer's services that may be caused by such changes in location or configuration of the Space. 9. Prior to occupancy and during the term of use of any Space, Customer shall procure and maintain the following minimum insurance coverage: (a) Workers' Compensation in compliance with all applicable statutes of appropriate jurisdiction. Employer's Liability with limits of $500,000 each accident; (b) Commercial General Liability with combined single limits of $1,000,000 each occurrence; and (c) "All Risk" Property insurance covering all of Customers personal property located in the Space. Customer's Commercial General Liability policy shall be endorsed to show Level 3 (and any underlying property owner, as requested by Level 3) as an additional insured. All policies shall provide that Customer's insurers waive all rights of subrogation against Level 3. Customer shall furnish Level 3 with certificates of insurance demonstrating that Customer has obtained the required insurance coverages prior to occupancy of the Space. Such certificates shall contain a statement that the insurance coverage shall not be materially changed or cancelled without at least thirty (30) days prior written notice to Level 3. Customer shall require any contractor entering the Space on its behalf to procure and maintain the same types, amounts and coverage extensions as required of Customer above. 10. Customer may order and pay for Level 3 to perform certain limited ("remote hands") maintenance services on Customer's equipment within the space, which shall be performed in accordance with Customer's directions. "Remote hands" maintenance services includes power cycling equipment. Level 3 shall in no event be responsible for the repair, configuration or tuning of equipment, or for installation of Customer's equipment (although Level 3 will provide reasonable assistance to Customer in such installation). 11. Level 3 makes the Service Level Agreement as attached respecting Colocation Services. ADDITIONAL TERMS AND CONDITIONS FOR DEDICATED INTERNET ACCESS AND RAPID ACCESS The following additional terms and conditions are applicable where, pursuant to a Customer Order, Customer orders Dedicated Internet Access and Rapid Access (the "Internet Access Services"). 1. Any state or federal tariffs applicable to the Internet Access Services to be delivered under any Customer Order are incorporated into the terms thereof. The Internet Access Services shall at all times be used in compliance with Level 3's then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3 from time to time and which are available through Level 3's web site. 2. The nonrecurring charges and monthly recurring rates for the Internet Access Services provided by Level 3 to Customer are set forth in each Customer Order. 3. The rates and other charges set forth in each Customer Order are established in reliance on the term and/or volume commitment made therein, and Customer agrees to pay the same. In the event that Customer terminates Internet Access Services ordered in any Customer Order which is accepted by Level 3 or in the event that the delivery of Internet Access Services is terminated due to a failure of Customer to satisfy the requirements set forth herein or in the Customer Order prior to the end of the agreed term, Customer shall (unless Customer has made a Revenue Commitment) pay a termination charge equal to the percentage of the monthly recurring charges for the terminated Internet Access Services calculated as follows: a. 100% of the monthly recurring charge that would have been incurred for the Internet Access Service for months 1-12 of the agreed term; plus b. 75% of the monthly recurring charge that would have been incurred for the Internet Access Service for months 13-24 of the agreed term; plus c. 50% of the monthly recurring charge that would have been incurred for the Internet Access Service for months 25 through the end of the agreed term. Customer may, in the event that a Revenue Commitment is made and is then being satisfied by Customer, terminate, rearrange or reconfigure the Internet Access Services ordered under a Customer Order without payment of the termination charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible for payment of Level 3's then-current standard nonrecurring charges applicable to such termination, rearrangement or reconfiguration. 4. Level 3 provides only access to the Internet; Level 3 does not operate or control the information, services, opinions or other content of the Internet. Customer agrees that it shall make no claim whatsoever against Level 3 relating to the content of the Internet or respecting any information, product, service or software ordered through or provided by virtue of the Internet. 5. If Customer orders Burstable Dedicated Internet Access Services pursuant to a Customer Order, the Customer shall be permitted to make two (2) changes to its Committed Data Rate each contract year, provided that such change be to a higher Committed Data Rate. 6. Level 3 makes the following Service Level Agreements as attached respecting Dedicated Internet Access and Rapid Access Service. ADDITIONAL TERMS AND CONDITIONS FOR MANAGED MODEM -- DEDICATED, QUICKSTART AND TRANSIT SERVICES The following additional terms and conditions are applicable where, pursuant to a Customer Order Customer orders services required to allow access to "Dedicated Services," "Dedicated Service with QuickStart" and "Transit Services" as offered by Level 3 (the "Managed Modem Services") ordered by Customer under any Customer Order. 1. Any state or federal tariffs applicable to the Managed Modem Services to be delivered under any Customer Order are incorporated into the terms thereof. The Managed Modem Services shall at all times be used in compliance with Level 3's then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3 from time to time and which are available through Level 3's web site. 2. In the event Customer orders "Dedicated Service," end user traffic will be routed through and aggregated in Level 3's facility, sent to the Customer's Premises via a dedicated circuit, and then routed to its final destination by Customer. In the event that Customer orders "Transit Services," End User traffic will be routed to Level 3's facility and then routed to its final destination by Level 3 via the Internet. Dedicated Service with "QuickStart" will initially be provisioned to the Customer in the same fashion as Transit Services, until such time as Level 3 has provisioned the dedicated circuit to send end user traffic from Level 3's facility to the Customer's Premises. QuickStart will then be migrated to standard Dedicated Service. Customers ordering Dedicated Services will be required to make a portion of the Premises available to Level 3 for the placement of equipment necessary to provide such Dedicated Services. For Dedicated Service, all Customer CPE as well as the private line necessary to support this service will be ordered, installed and managed by Level 3. Level 3 cannot and does not guarantee the availability of any port ordered for installation greater than 90 days from the date of the order. Any telephone numbers used in providing the Managed Modem Services shall be released to Customer upon expiration or termination hereof to the extent that it is technically feasible for Level 3 to port packet switched telephone numbers and then only if Customer is in compliance with all of the terms contained herein and in the General Terms and Conditions. 3. Section 1.1 of the General Terms and Conditions for Delivery of Service notwithstanding, a Customer order for Managed Modem Service shall be accepted by Level 3 once Level 3 has provisioned and tested the ports. Customer's billing respecting said ports shall commence once tested and found to be functioning properly by Level 3 notwithstanding Customer's: i) refusal to accept the ports or ii) Customer's refusal to acknowledge communications by Level 3 to Customer respecting the ports. In the event Customer moves an installation date provided by Level 3 more than ten (10) business days out from the original requested date, Level 3 will begin billing for Managed Modem Service eleven (11) business days after the initial requested installation date whether or not the Service is installed. 4. The nonrecurring charges and monthly recurring rates for the Managed Modem Services provided by Level 3 to Customer shall be set forth in each Customer Order. Level 3 will dedicate the specified number of ports to Customer in the Level 3 facilities as identified in each Customer Order. Customer shall have the option to purchase twenty percent (20%) port overage from Level 3. If ordered, Level 3 shall provision an additional twenty percent (20%) of ports over the number of ports actually ordered by Customer to accept Customer traffic in the event Customer's traffic bursts and its usage exceeds the capacity of the ports actually ordered. In the event Customer chooses not to purchase twenty percent (20%) port overage from Level 3, if the Customer's traffic bursts as set forth above, Customer will get a busy signal in the event its ordered capacity is exceeded. In the event that Customer purchases 20% port overage, Customer will be responsible for additional monthly charges to the extent it utilizes any additional capacity provided by Level 3. 5. Customer must utilize all Managed Modem ports provisioned hereunder at no less than fifty percent (50%) of the capacity of such port. Customer agrees to allow Level 3 to monitor Customer's utilization of the ports provisioned herein. In the event Customer is Under- Utilizing (as defined below) such ports, Level 3 retains the right to reclaim such ports after which Customer shall have no further right to use the ports Under-Utilized. Termination liability shall apply to any ports reclaimed pursuant to this paragraph. For the purpose of this Section, "Under-Utilization" shall mean the use of less than fifty percent (50%) of the capacity of any given port for any sixty (60) day period as determined by Level 3. Under-Utilization shall not be applicable to the first sixty (60) day period immediately following the provisioning of any Managed Modem port. 6. The rates and other charges set forth in each Customer Order are established in reliance on the term commitment made therein, and Customer agrees to pay the same. In the event that Customer terminates Managed Modem Services ordered in any Customer Order which is accepted by Level 3 or in the event that the delivery of Managed Modem Services is terminated due to a failure of Customer to satisfy the requirements set forth herein or in the Customer Order prior to the end of the agreed term, Customer shall (unless Customer has made a Revenue Commitment) pay a termination charge equal to the percentage of the monthly recurring charges for the terminated Managed Modem Services calculated as follows: a. 100% of the monthly recurring charge that would have been incurred for the Managed Modem Service for months 1-12 of the agreed term; plus b. 75% of the monthly recurring charge that would have been incurred for the Managed Modem Service for months 13-24 of the agreed term; plus c. 50% of the monthly recurring charge that would have been incurred for the Managed Modem Service for months 25 through the end of the agreed term. Customer may, in the event that a Revenue Commitment is made and is then being satisfied by Customer, terminate, rearrange or reconfigure the Managed Modem Services ordered under a Customer Order without payment of the termination charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible for payment of Level 3's then-current standard nonrecurring charges for such termination, rearrangement or reconfiguration. 7. Level 3 provides only access to the Internet; Level 3 does not operate or control the information, services, opinions or other content of the Internet. Customer agrees that it shall make no claim whatsoever against Level 3 relating to the content of the Internet or respecting any information, product, service or software ordered through or provided by virtue of the Internet. 8. Level 3 makes the Service Level Agreement as attached respecting Managed Modem Services. ADDITIONAL TERMS AND CONDITIONS FOR IP CROSSROADS The following additional terms and conditions are applicable where, pursuant to a Customer Order, Customer orders IP CrossRoads Services. 1. Any state or federal tariffs applicable to the IP CrossRoads Services to be delivered under any Customer Order are incorporated into the terms thereof. The IP CrossRoads Services shall at all times be used in compliance with Level 3's then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3 from time to time and which are available through Level 3's web site. 2. The nonrecurring charges and monthly recurring rates for the IP CrossRoads Services provided by Level 3 to Customer are set forth in each Customer Order. 3. The rates and other charges set forth in each Customer Order are established in reliance on the term and/or volume commitment made therein, and Customer agrees to pay the same. In the event that Customer terminates IP CrossRoads Services ordered in any Customer Order which is accepted by Level 3 or in the event that the delivery of IP CrossRoads Services is terminated due to a failure of Customer to satisfy the requirements set forth herein or in the Customer Order prior to the end of the agreed term, Customer shall (unless Customer has made a Revenue Commitment) pay a termination charge equal to the percentage of the monthly recurring charges for the terminated IP CrossRoads Services calculated as follows: a. 100% of the monthly recurring charge that would have been incurred for the IP CrossRoads Service for months 1-12 of the agreed term; plus b. 75% of the monthly recurring charge that would have been incurred for the IP CrossRoads Service for months 13-24 of the agreed term; plus c. 50% of the monthly recurring charge that would have been incurred for the IP CrossRoads Service for months 25 through the end of the agreed term. Customer may, in the event that a Revenue Commitment is made and is then being satisfied by Customer, terminate, rearrange or reconfigure the IP CrossRoads Services ordered under a Customer Order without payment of the termination charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible for payment of Level 3's then-current standard nonrecurring charges applicable to such termination, rearrangement or reconfiguration. 4. Level 3 provides only access to the Internet; Level 3 does not operate or control the information, services, opinions or other content of the Internet. Customer agrees that it shall make no claim whatsoever against Level 3 relating to the content of the Internet or respecting any information, product, service or software ordered through or provided by virtue of the Internet. 5. If Customer orders IP CrossRoads Services pursuant to a Customer Order, the Customer shall be permitted to make two (2) changes to its Committed Data Rate each contract year, provided that such change be to a higher Committed Data Rate. 6. Level 3 reserves the right, but does not undertake the obligation, to provide any Customer or potential customer bound by a Nondisclosure Agreement access to a list of (i) Level 3's Customers which are connected to the IP CrossRoads Intra-Gateway Exchange Network Platform; and/or (ii) Autonomous Systems Internet Networks connected to the IP CrossRoads On-Net Transport Network Platform. By this Agreement, Customer consents to such disclosures. Level 3 makes no guarantee of any Customer's willingness to exchange Internet traffic with any other customer. Level 3 will, however, use reasonable efforts to arrange an introduction between customers or prospective customers bound by a Nondisclosure Agreement to facilitate an agreement between them respecting the exchange of Internet traffic. Level 3 undertakes no obligations and accepts no liability for the configuration, management, performance or any other issue relating to Customer's routers or other customer provided equipment used for access to or the exchange of traffic in connection with Level 3's IP CrossRoads Service. 7. Level 3 makes the Service Level Agreement as attached respecting IP CrossRoads Service. Page 1 of 26 Level 3 9/1/99 186508V3.0 Page 5 of 17 Level 3 03/25/99 W186508.03 Page 6 of 26 Level 3 9/1/99 186508V3.0 Page 5 of 17 Level 3 /01/20/99 V 2.0 Page 7 of 26 Level 3 9/1/99 186508V3.0 Page 5 of 17 Level 3 /01/20/99 V 2.0 Page 11 of 26 Level 3 9/1/99 186508V3.0 Page 12 of 26 Level 3 9/1/99 186508V3.0 Page 16 of 26 Level 3 9/1/99 186508V3.0 Page 20 of 26 Level 3 9/1/99 186508V3.0 Page 21 of 26 Level 3 9/1/99 186508V3.0 Page 23 of 26 Level 3 9/1/99 186508V3.0 Page 5 of 14 Level 3 6/10/99 W186508 V2.5 Page 26 of 26 Level 3 9/1/99 186508V3.0 Page 24 of 26 Level 3 9/1/99 186508V3.0 EX-21.1 9 LIST OF SUBSIDIARIES 1. Wholly owned subsidiary, Landmark Communications, Inc., a Nevada Corporation doing business as Landmark Long Distance Inc. in the State of California. EX-23.1 10 CONSENT OF INDEPENDENT AUDITORS - CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this 1999 Annual Report on Form SB-2 of LMKI, Inc. of our report dated November 10, 1999 relating to the consoldiated balance sheets of LMKI, Inc. as of August 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period then ended. TIMOTHY L. STEERS, CPA, LLC Portland, Oregon November 10,1999 -----END PRIVACY-ENHANCED MESSAGE-----