-----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, E70YzBAQeG4P319QGjov6iGvwJHKjLqC2ke7G6GbStOnPZBDi2OwauNVZCjFltq0 g2topAxCrJ58LeiA2ncjhw== 0001019687-00-000445.txt : 20000414 0001019687-00-000445.hdr.sgml : 20000414 ACCESSION NUMBER: 0001019687-00-000445 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000413 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-26578 FILM NUMBER: 600693 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 10QSB 1 LMKI, INC. U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB [X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended February 29, 2000 [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 for the transition period from . . . . to . . . . Commission file number 0-26578 LMKI, INC. Exact name of small business issuer as specified in its charter) Nevada 33-0662114 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3355 Michelson Drive, Suite 300, Irvine, CA 92612 (Address of principal executive offices) (Zip Code) (949) 794-3000 (Registrant's telephone number, including area code) Check whether the issuer (1) filed all the reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X --- --- As of February 29, 2000 the number of shares of common stock outstanding was 37,249,566. Transitional Small Business Disclosure Format (check one): Yes ... No .X. PART I - FINANCIAL INFORMATION LMKI, INC. (formerly Landmark International Inc.) Consolidated Balance Sheets
FEB. 29, AUG. 31, -------- -------- 2000 1999 ---- ---- ASSETS (Unaudited) Cash $ 1,754,353 $ 125,692 Accounts receivable 1,401,311 837,850 ----------------- ----------------- Total current assets 3,155,664 963,542 Equipment 3,681,228 302,549 Accumulated depreciation (143,065) (40,482) ----------------- ----------------- Net equipment 3,538,163 262,067 Goodwill, less accumulated amortization of $302,206 in 2000 and $151,103 1999 3,840,625 2,870,959 Deposits 291,810 35,725 Other assets 330,903 - ----------------- ----------------- Total other assets 4,463,338 2,906,684 ----------------- ----------------- Total assets $ 11,157,165 $ 4,132,293 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 3,324,829 $ 999,319 Line of credit 593,150 - Accrued payroll and related liabilities 49,062 133,749 Other accrued liabilities 154,026 7,133 Accrued dividends payable 40,087 - Accrued interest to stockholder 34,682 3,112 Capitalized lease obligations due within one year 226,548 37,290 ----------------- ----------------- Total current liabilities 4,422,384 1,180,603 Capitalized lease obligations, long term 554,668 55,275 Loans from stockholder 1,458,799 797,680 ----------------- ----------------- Total liabilities 6,435,851 2,033,558 ----------------- ----------------- Stockholders' equity Preferred stock, Series A 6% convertible 4,000,000 - 10,000,000 authorized, 4,000 issued and outstanding; liquidation preference of $4,000,000. Common stock, $.001; shares authorized 37,250 36,116 50,000,000, shares issued and outstanding totaling 37,249,566 (2000) and 36,115,666 (1999) Paid in capital 7,268,111 3,089,125 Notes receivable from stockholders (509,100) - Accumulated deficit (6,074,947) (1,026,506) ----------------- ----------------- Total stockholders' equity 4,721,314 2,098,735 ----------------- ----------------- Total stockholders' equity and liability $ 11,157,165 $ 4,132,293 ================= =================
See accompanying notes. 2 LMKI, INC. (formerly Landmark International, Inc.) Consolidated Statements of Operations (Unaudited)
Three Months ended Feb. 29, Six Months ended Feb. 29, ------------------------------------ ------------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net sales $ 2,126,113 $ 197,508 $ 3,631,166 $ 238,389 Cost of sales 1,352,499 67,136 1,756,342 70,310 ----------------- ----------------- ----------------- ----------------- Gross Profit 773,614 130,372 1,874,824 168,079 Selling expense 768,265 84,138 1,141,787 156,726 General and administrative expenses 1,813,573 81,434 2,566,538 106,897 ----------------- ----------------- ----------------- ----------------- Loss from operations (1,808,224) (35,200) (1,833,500) (95,544) Interest expense 88,370 3,867 114,853 5,885 ----------------- ----------------- ----------------- ----------------- Loss before provision for income taxes (1,896,593) (39,067) (1,948,353) (101,429) Provision for income taxes - - - - ----------------- ----------------- ----------------- ----------------- Net loss (1,896,593) (39,067) (1,948,353) (101,429) Less: Dividends accrued on Preferred stock 40,087 - 40,087 - Preferred stock beneficial conversion feature 1,500,000 - 3,060,000 - ----------------- ----------------- ----------------- ----------------- Net loss allocable to common stockholders $ (3,436,680) $ (39,067) $ (5,048,440) $ (101,429) ================= ================= ================= ================= Basic and diluted net loss per common share $ (0.09) $ (0.00) $ (0.14) $ (0.00) ================= ================= ================= ================= Weighted average shares outstanding 36,538,633 23,175,555 36,327,149 21,581,111 ================= ================= ================= =================
See accompanying notes. 3 LMKI, INC. (formerly Landmark International, Inc.) Consolidated Statements of Cash Flows (Unaudited)
Six Months ended Feb. 29, ------------------------------------ Cash flows from operating activities: 2000 1999 ---- ---- Net loss $ (1,948,353) $ (101,429) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 102,583 5,844 Amortization of goodwill 302,206 - Options issued in exchange for services 267,818 Stock issued in exchange for services 85,102 Changes in operating assets and liabilities: Accounts receivable (563,461) 68,346 Deposits (256,085) Other assets (330,903) Accounts payable 2,915,179 (9,056) Accrued payroll and related liabilities (84,687) 11,115 Other accrued liabilities 150,374 - Accrued interest to stockholder 31,570 - ----------------- ----------------- 671,343 (25,180) ----------------- ----------------- Cash flows from investing activities: Purchase of capital equipment (3,378,679) - ----------------- ----------------- (3,378,679) - ----------------- ----------------- Cash flows from financing activities: Repayment of capitalized lease obligation, net 16,778 (13,916) Proceeds from common stock 40,000 Proceeds from preferred stock, net of offering costs 3,658,100 - Proceeds from notes payable to stockholder 661,119 - ----------------- ----------------- 4,335,997 26,084 ----------------- ----------------- Net increase in cash 1,628,661 904 Cash at beginning of periods 125,692 3,772 ----------------- ----------------- Cash at end of periods $ 1,754,353 $ 4,676 ================= ================= Supplemental cash flow disclosures: Cash paid for interest $ 114,853 $ 5,885 ================= ================= Cash paid for taxes $ - $ - ================= =================
The company has entered into certain non-cash transactions which have been reflected in the notes hereto. See accompanying notes. 4 LMKI, Inc. (formerly Landmark International, Inc.) Notes to Consolidated Financial Statements For the six-months ending February 29, 2000 and 1999 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: LMKI, Inc. (formerly Landmark International, Inc.) (The "Company" or "LMKI") is a Nevada Corporation engaged in providing high-speed Internet access, data, voice and video services to individuals and businesses. BASIS OF PRESENTATIONS: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The unaudited condensed consolidated financial statements include the accounts of LMKI, Inc. and its wholly owned subsidiary Mobilenetics Corporation ("Mobilenetics"), Landmark Communications, Inc. and Color Networks, Inc. ("Color Networks"). The operating results for interim periods are unaudited and are not necessarily an indication of the results to be expected for the full fiscal year. In the opinion of management, the results of operations as reported for the interim periods reflect all adjustments which are necessary for a fair presentation of operating results. All intercompany accounts and transactions have been eliminated. EQUIPMENT: Equipment is carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets, which range from three to seven years. Equipment under capitalized lease obligations are carried at estimated fair market value determined at the inception of the lease. Amortization is computed using the straight-line method over the original term of the lease or the estimated useful lives of the assets, whichever is shorter. GOODWILL: Goodwill represents the excess purchase price over the estimated fair value of the net assets of Mobilenetics and Color Networks. Goodwill is being amortized using the straight-line method over five years. IMPAIRMENT OF LONG-LIVED ASSETS: The Company assess the recoverability of long-lived assets by determining whether the depreciation and amortization of the assets' balance over its remaining life can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on fair value and charged to operations in the period in which the impairment is determined by management. Management has determined that there is no impairment of long-lived assets as of February 29, 2000 and August 31, 1999. REVENUE RECOGNITION: Fees for high-speed Internet access, data, voice and video services are recognized as services are provided. STOCK BASED COMPENSATION: The Company accounts for stock based compensation under Statement of Financial Accounting Standard No. 123 ("SFAS 123"). SFAS 123 defines a fair value based method of accounting for stock based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock issued to Employees". Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in SFAS 123 had been applied. The Company has elected to account for its stock based compensation to employees under APB 25 (see Note 7). 5 ADVERTISING: The Company expenses the cost of advertising as incurred as selling expenses. Advertising expenses was approximately $58,000 for the six-months ended February 29, 1999 ($898 for 1999). INCOME TAXES: Income taxes are provided on the liability method whereby deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases and reported amounts of assets and liabilities. Deferred tax assets and liabilities are computed using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The Company provided a valuation allowance for certain deferred tax assets. It is more likely than not that the Company will not realize tax assets through future operations. NET LOSS PER COMMON SHARE: Net loss available to common stockholders per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Net loss has been increased for the effect of accrued dividends to preferred stockholders and the effect of the preferred stockholder beneficial conversion feature (Note 9). Stock options and warrants outstanding are not considered common stock equivalents, as the affect on net loss per share would be anti-dilutive. CONCENTRATION RISK: The Company grants credit to customers in the State of California. The Company's ability to collect receivables is affected by economic fluctuations in the geographic areas served by the Company. RISKS AND UNCERTAINTIES: The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Management of the Company has made certain estimates and assumptions regarding the collectibility of accounts receivable. Such estimates and assumptions primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ materially from estimated amounts. SEGMENT REPORTING: The Company adopted SFAS No. 131 ("SFAS"), "Disclosures about Segments of an Enterprise and Related Information," during fiscal 1999. SFAS 131 establishes standards for the way that public companies report information about operating segments and related disclosures about products and services, geographic areas and major customers in annual consolidated financial statements. The Company views its operations and manages its business as principally one segment. 6 2. BUSINESS COMBINATIONS: Effective June 1, 1999, LMKI, Inc. acquired Mobilenetics Corporation ("Mobilenetics"), in a business combination accounted for as a purchase. Mobilenetics is a provider of communications consulting and systems integration services that primarily involve Internet and network solutions. It services a diverse base of customers that are located primarily in California. Prior to the business combination, the majority stockholder of Mobilenetics was a stockholder of the Company and Mobilenetics provided communication equipment to the Company under a capitalized lease agreement. The Company issued 10,000,000 shares of its common stock in exchange for all of the outstanding shares of Mobilenetics. The shares issued for Mobilenetics were valued at $2,655,000 ($0.265 per share), which represented 50% of the closing bid price of the Company's common stock on the date of issuance. Management of the Company estimated the value of the Company's shares exchanged after considering the historical trend of the trading prices for its' common stock and the limited volume of shares being traded. The acquisition of Mobilenetics can be summarized as follows: Fair value Mobilenetics: Assets acquired $ 141,810 Liabilities assumed (508,872) ----------- Fair value of net assets acquired (367,062) Fair value of consideration tendered 2,655,000 ----------- Goodwill assigned to acquisition $3,022,062 =========== The results of operations of Mobilenetics are included in the accompanying consolidated financial statements as of June 1, 1999. On December 6, 1999, the Company consummated its purchase of Color Networks. The Company issued 75,000 shares of common stock in consideration for 100% of the issued and outstanding shares of common stock of Color Networks. The fair market value of the stock issued was $8.00 per share, for consideration totaling $600,000. In addition, the Company issued warrants to two non-employee owners of Color Networks. to purchase 15,000 shares of common stock of the Company at an exercise price of $8.00 per share. The warrants vested immediately and expire December 5, 2004. Management determined the fair value of the option granted utilizing the Black-Scholes option-pricing model. Management of the Company assigned a value of $8.00 per option, for consideration totaling $120,000. 3. CAPITALIZED LEASE OBLIGATIONS: The Company leases equipment under non-cancelable lease agreements. Equipment under lease agreements aggregated at February 29, 2000 totaled $726,000, less accumulated amortization of $37,000. Aggregate future minimum lease payments and the present value of minimum lease payments are as follows: YEARS ENDING AUGUST 31: - ----------------------- 2000 $ 194,543 2001 415,605 2002 337,565 2003 62,935 ----------- Total minimum lease payments 1,010,648 less amount representing interest (at annual interest rates ranging from 11.4% TO 27.1%) 229,432 ----------- Present value of minimum lease payments 781,216 Less amounts due within one year 226,548 ----------- Long-term capitalized lease obligations $ 554,668 =========== 7 4. NOTES PAYABLE TO STOCKHOLDER For the six-months ended February 29, 2000, the principal stockholder and Chairman of the Company advanced an aggregate of $661,119 for working capital purposes. The notes payable to stockholder total $1,458,799 at February 29, 2000. The notes payable bear interest at 10% per annum. The notes are repayable upon demand in cash. The Company intends to request the chairman to exchange his notes for common stock of the Company. The chairman has agreed not to demand repayment before November 30, 2000. 5. LINE OF CREDIT On February 15, 2000, the Company entered into a $600,000 line of credit with a bank. The line of credit provides for an interest rate at prime plus 2% (10.75% at such date). The line allows for the Company to draw up to $600,000 based upon eligible collateral, as defined. The line matures on February 15, 2001. 6. INCOME TAXES The Company has incurred losses for both financial and tax reporting purposes for all periods presented. As a result, the Company's provision for taxes consists solely of minimum state taxes. Net deferred income taxes are as follows as of August 31: 1999 1998 ---- ---- Deferred tax assets: Net operating losses $ 317,500 $ 50,900 Amortization of goodwill 42,800 - Less allowance for deferred tax assets (360,300) (50,900) ---------- ---------- Net deferred income taxes $ - $ - ========== ========== The Company has approximately $750,000 in Federal net operating losses as of August 31, 1999, which, if not utilized, expire through 2018. The Company has $375,000 as of August 31, 1999 in State of California net operating losses, which if not utilized, expire through 2004. The utilization of the net operating loss carry-forwards could be limited due to restrictions imposed under federal and state laws upon a change in ownership. The amount of the limitation, if any, has not been determined at this time. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of the Company's continued losses and uncertainties surrounding the realization of the net operating loss carry-forwards, management has determined that the realization of the deferred tax assets is not more likely than not. Accordingly, a valuation allowance equal to the net deferred tax asset amount has been recorded as of the periods presented. 7. STOCK OPTIONS AND WARRANTS On December 28, 1997, the Company granted an option to its chairman to acquire 4,000,000 shares of common stock at an exercise price of $.01 per share. The closing price of the Company's common stock was $.062 at the date of grant. The exercise price represented an 84% discount from such closing price. Management determined that the exercise price approximated the fair value of the Company's common stock at the date of grant. Management of the Company estimated the value of the Company's shares at the date of grant based on the historical trend of the trading prices for its' common stock and the limited volume of shares being traded. Such option vested immediately and expires five years from the date of grant. 8 On December 28, 1998, the Company granted an option to its chairman to acquire 3,000,000 shares of common stock at an exercise price of $.031 per share. The closing price of the Company's common stock was $.031 at the date of grant. The exercise price represented no discount from such closing price. Such option vested immediately and expires five years from the date of grant. On December 28, 1998, the Company granted an option to its chief financial officer to acquire 500,000 shares of common stock at an exercise price of $.031 per share. The closing price of the Company's common stock was $.031 at the date of grant. The exercise price represented no discount from such closing price. Such option vested immediately and expires five years from the date of grant. On December 28, 1998, the Company granted an option to its legal counsel to acquire 500,000 shares of common stock at an exercise price of $.031 per share. The closing price of the Company's common stock was $.031 at the date of grant. Management determined the fair value of the option granted utilizing the Black-Scholes option-pricing model. Management of the Company assigned a value of $.02 per option. As such, the Company recorded services expense totaling $10,000 during the year ended August 31, 1999. Such option vested immediately and expires five years from the date of grant. On November 26, 1999, the Company granted options to members of senior management to acquire 1,200,000 shares of common stock at an exercise price of $4.531 per share. Subsequent to the grant, three members of senior management voluntarily canceled 600,000 shares. The closing price of the Company's common stock was $4.531 at the date of grant. The exercise price represented no discount from such closing price. Such options vest over one year and expire two years from the date of grant. On November 26, 1999, the Company granted an option to purchase 200,000 shares of common stock of the Company at a price of $4.531 per share to its prior external legal counsel. Such legal counsel became a member of the Company's Board of Directors subsequent to the date of grant. The option vests over a year period and expires November 25, 2001. The closing price of the Company's common stock was $4.531 at the date of grant. Management determined the fair value of the option granted utilizing the Black-Scholes option-pricing model. Management of the Company assigned a value of $4.40 per option, for consideration totaling $880,000. In February 2000, the Company granted an option to purchase 25,000 shares of common stock of the Company at a price of $10.50 per share to its new external legal counsel. The option vested immediately and expires February 9, 2002. The closing price of the Company's common stock was $10.50 at the date of grant. Management determined the fair value of the option granted utilizing the Black-Scholes option-pricing model. Management of the Company assigned a value of $10.00 per option, for consideration totaling $250,000. In February 2000, the Company granted an option to purchase 17,932 shares of common stock of the Company at a price of $12.54 per share to a third party leasing company. The option vested immediately and expires January 31, 2005. The closing price of the Company's common stock was $10.87 at the date of grant. Management determined the fair value of the option granted utilizing the Black-Scholes option-pricing model. Management of the Company assigned a value of $10.86 per option, for consideration totaling $195,000. 9 From September 1, 1999 through February 29, 2000, the Company issued to employees options to purchase 1,536,760 shares of common stock of the Company. The options where granted at exercise prices ranging from $4.00 to $15.00 per share. The weighted average exercise price of such options was $7.83 per share. All of the options were issued at exercise prices equal to the closing bid price of the Company's common stock at the date of grant, except for 115,760 options which were granted with exercise prices of $4.00 per share when the market price was $4.531 per share. Of the options, 285,360 vested immediately and have terms of two years, 600,000 vests over a one-year period and have terms of two years, 560,400 vests over a two-year period and have terms of three years, 91,000 vests over a three-year period and have terms of four years. The following table summarizes stock option activity for the six-months ended February 29, 2000: 2000 ---- Options and warrants outstanding, Aug. 31, 1999 8,000,000 Options and warrants granted 3,372,811 Options and warrants expired or canceled (608,900) Options and warrants exercised (1,050,000) ----------- Outstanding, February 29, 2000 9,713,911 =========== Weighted average exercised price per share of all options and warrants $ 1.77 =========== Options and warrants exercisable at Feb. 29, 2000 8,831,411 =========== Weighted average fair value of options and warrants granted during the six-month period $ 1.27 =========== 8. COMMON STOCK The Company issued 10,000,000 shares in connection with its' acquisition of Mobilenetics and 75,000 shares in connection with its' acquisition of Color Networks (See Note 2). In December 1996, the Board of Directors authorized the issuance of 20,000 shares of common stock to each employee of the Company at that time. The shares were to be surrendered back to the Company in the event that any employee who received shares terminated their employment with the Company, or was terminated by the Company for cause. The Company issued an aggregate of 540,000 shares of its common stock to these employees. Management of the Company valued the share grants at $.01 per share, which represented a 99.6% discount from the closing bid price of the Company's common stock at the date of grant. Management of the Company estimated the value of the company's shares granted after considering the historical trend of the trading prices for its common stock and the limited volume of shares being traded. The Company recorded compensation expense totaling $5,400 during the year ended August 31, 1997 as a result of these grants. 10 In December 1997, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to the Chairman of the Company in exchange for compensation and the issuance of 80,000 shares of common stock in exchange for public relation services. Management of the Company valued the share grants at $.062 per share, which represented an 83.8% discount from the closing bid price of the Company's common stock at the date of grant. Management of the Company estimated the value of the company's shares granted after considering the historical trend of the trading prices for its common stock and the limited volume of shares being traded. The Company recorded compensation expense and services expense totaling $40,000 and $800, respectively, during the year ended August 31, 1998 as a result of these grants. In May 1998, the Company issued 4,000,000 shares of common stock to two suppliers in exchange for $200 and a communications equipment lease. Management of the Company valued the share grants at $.075 per share, which represented an 86.7% discount from the closing bid price of the Company's common stock at the date of grant. Management of the Company estimated the value of the company's shares granted after considering the historical trend of the trading prices for its common stock and the limited volume of shares being traded. The Company recorded capitalized lease costs totaling $40,200 during the year ended August 31, 1998 as a result of these grants. In December 1998, the Board of Directors authorized the issuance of 4,000,000 shares of common stock to the Chairman of the Company in exchange for compensation and 500,000 shares of common stock to two individuals in exchange for professional services. Management of the Company valued the shares granted to its Chairman at $.015 per share, which represented a 50.0% discount from the closing bid price of the Company's common stock at the date of issuance. Management of the Company valued the grants to its service providers at $.031 per share, which represented no discount from the closing bid price of the Company's common stock at the date of grant. Management of the Company estimated the value of the company's shares granted after considering the historical trend of the trading prices for its common stock and the limited volume of shares being traded. The Company recorded compensation expense and service expense totaling $62,000 and $15,500, respectively, during the year ended August 31, 1999 as a result of these grants. In March 1999, the Board of Directors authorized the issuance of 400,000 shares of common stock to two individuals in exchange for professional services. Management of the Company valued the share grants at $.09 per share, which represented no discount from the closing bid price of the Company's common stock at the date of grant. The Company recorded service expense totaling $36,000 during the year ended August 31, 1999 as a result of these grants. Also in March 1999, the Company issued 1,000,000 shares of common stock to a related party in exchange for communication software developed specifically for the Company. Management of the Company valued the share grant at $.09 per share, which represented no discount from the closing bid price of the Company's common stock at the date of grant. The Company capitalized software costs totaling $90,000 during the year ended August 31, 1999 as a result of this grant. 11 In June 1999, the Board of Directors authorized the issuance of 229,000 shares of common stock to four employees in lieu of compensation and one individual in exchange for professional services. Management of the Company valued the share grants at $.531 per share, which represented no discount from the closing bid price of the Company's common stock at the date of grant. The Company recorded service expense totaling $68,499 and $53,100, respectively, during the year ended August 31, 1999 as a result of these grants. In January 2000, the Company granted 8,900 shares in common stock to employees in lieu of compensation. The closing bid price of the Company's common stock at the date of grant was $9.56 for consideration totaling $85,000. 9. PREFERRED STOCK In November 1999, the Company closed the placement of 2,500 shares of Series A 6% Convertible Preferred Stock, $.001 par value (the "Series A Preferred Stock"), to one purchaser (the "Purchaser") at a purchase price of $1,000 per share, for an aggregate purchase price of $2,500,000, pursuant to a securities purchase agreement (the "Purchase Agreement"). The Company entered into a registration rights agreement and a warrant agreement. Concurrent with the closing of the placement, the Company issued warrants to the Purchaser for the purchase of 250,000 shares of the Company's common stock at an exercise price of $4.25 per share, subject to customary anti-dilution provisions, expiring on May 5, 2002. The Company also issued warrants for the purchase of 49,844 shares of common stock to the Placement Agent, exercisable at $4.0125 per share, expiring on November 22, 2004. The Company also paid $222,000 in cash to the Placement Agent for fees and costs associated with the Purchase Agreement. In conjunction with the Purchase Agreement, the Company valued the Purchaser and Placement Agent warrants utilizing the Black-Scholes option-pricing model. Management of the Company arrived at a fair market value of $1,220,000 for the warrants. In February 2000, the Company closed the placement of an additional 1,500 shares of Series A Preferred Stock to the same Purchaser at a purchase price of $1,000 per share, for an aggregate purchase price of $1,500,000, pursuant to the Purchase Agreement. In conjunction with the Purchase Agreement, the Company entered into a registration rights agreement and a warrant agreement. Concurrent with the closing of the placement, the Company issued warrants to the Purchaser for the purchase of 150,000 shares of the Company's common stock at an exercise price of $4.25 per share, subject to customary anti-dilution provisions, expiring on February 28, 2002. The Company also issued warrants for the purchase of 8,275 shares of common stock to the same Placement Agent, exercisable at $14.50 per share, expiring on February 28, 2005. The Company also incurred $120,000 in expenses to the Placement Agent for fees and costs associated with the Purchase Agreement. The Company valued the Purchaser and Placement Agent warrants utilizing the Black-Scholes option-pricing model. Management of the Company arrived at a fair market value of $2,320,000 for the warrants. The convertible feature of the Series A Preferred Stock provides for a rate of conversion that is below market value. Such feature is normally characterized as a "beneficial conversion feature". Pursuant to Emerging Issues Task Force No. 98-5 ("EITF 98-5"), the Company has valued such beneficial conversion feature for the first issuance of Series A Preferred Stock in the amount of $1,560,000. Management of the Company has determined the value of the beneficial conversion feature of the second issuance of Series A Preferred Stock to be $5,294,000; however, pursuant to EITF 98-5, in valuing the beneficial conversion feature, it cannot exceed the face value of the related stock issuance. As a result, the beneficial conversion feature for the second issuance of Series A Preferred Stock had been valued at $1,500,000. In the calculation of basic and diluted net loss per share, such beneficial conversion features have increased the net loss allocable to common stockholders. 12 10. INVESTMENT AGREEMENT In September 1999, the Company entered into an irrevocable Investment Agreement for a "private equity line" of up to $35,000,000. Under the Investment Agreement an investment banking company has made a firm commitment to purchase the Company's common stock and resale the securities in an offering under Regulation D of the United States Securities and Exchange Commission. Subject to an effective registration statement and ending 36 months from the initial subscription date, the Company at its discretion may "Put" common stock to the investment banking company. The purchase price per share will equal 92% of the lowest closing bid price of the common stock during the 20 business days following each Put, subject to a minimum price specified by the Company as defined in the Investment Agreement. The amount of each Put sold to the investment banking company may be up to $2,000,000, but the number of shares sold may generally not exceed 15% of the aggregate trading volume of the Company's common stock during the 20 business days following each Put. The investment banking company shall receive warrants to purchase 10% of the number of shares of the Company it purchases under each Put. The warrants are exercisable at a price equal to 110% of the market price for each Put. In consideration of the Investment Agreement, the Company granted the investment banking company warrants to purchase 490,000 shares of its common stock. The warrants are exercisable upon the successful completion of certain tasks, as defined, and at a price equal to the lowest closing bid price for the 5 days prior to the execution of the Investment Agreement of the 5 days following its execution, whichever price is lower. The Company has not valued the warrants as they vest upon a contingent event. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT: This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations and beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying works (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgment of the Company and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, actions of government regulators, the level of market 13 interest rate and general economic conditions. All forward-looking statements included herein are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements due to the factors cited above. As a result of these factors, there can be no assurance the Company will not experience material fluctuations in future operating results on a quarterly or annual basis, which would materially and adversely affect the Company's business, financial condition and results of operations. RESULTS OF OPERATIONS - --------------------- The Company's operating results have fluctuated in the past and may in the future fluctuate significantly, depending upon a variety of factors, including the timely deployment and expansion of new network architectures, the incurrence of related capital costs, variability and length of the sales cycle associated with the Company's product and service offerings, the receipt of new value-added network services and consumer services subscriptions and the introduction of new services by the Company and its competitors. Additional factors that may contribute to variability of operating results include: the pricing and mix of services offered by the Company; customer retention rate; market acceptance of new and enhanced versions of the Company's services; changes in pricing policies by the Company's competitors; the Company's ability to obtain sufficient supplies of sole or limited-source components; user demand for network and Internet access services; balancing of network usage over a 24-hour period; the ability to manage potential growth and expansion; the ability to identify, acquire and integrate successfully suitable acquisition candidates; and charges related to acquisitions. In response to competitive pressures, the Company may take certain pricing or marketing actions that could have a material adverse affect on the Company's business. As a result, variations in the timing and amounts of revenue could have a material adverse affect on the Company's quarterly operating results. Due to the foregoing factors, the Company believes the period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance. In the event that the Company's operating results in any future period fall below the expectations of securities analysts and investors, the trading price of the Company's common stock would likely decline. REVENUE: Revenue totaled approximately $2,126,113 for the three-month period ended February 29, 2000, a 976% increase over revenue of $197,508 for the three-month period ended February 28, 1999. For the six-months ended February 29, 2000, net revenue was $3,631,166 compared to $238,389 for the same period last year. These increases reflect the growth in revenue for exclusive selling of DSL and T-1 services resulting from marketing arrangements with new strategic partners, the continued growth derived from Internet access customers, and sale of equipment to support network systems. COST OF SALES: Cost of sales increased for the three-month period ended February 29, 2000 was approximately $1,352,499, an increase of 1,915% from $67,136 for the three-month period ended February 28, 1999. For the six-months ended February 29, 2000, cost of sales was $1,756,342 compared to $70,310 for the same period last year. Cost of sales consists primarily of access charges from local exchange carriers, backbone and Internet access costs, and the cost of customer equipment to support network systems. The Company expects its cost of sales to continue to increase in dollar amount, while declining as a percentage of revenue as the Company expands its customer base. 14 GROSS MARGIN: The gross margin for the three-month period ended February 29, 2000 was approximately $773,614 compared to $130,732 for the same period ended February 29, 1999. For the six-months ended February 29, 2000, gross margin was $1,874,824 compared to $168,079 for the same period last year. Gross margins for the three-months ended February 29, 2000 and 1999 respectively were 36% and 66%. For the six-month period ended February 29, 2000 and 1999, respectively, the gross margins were 52% and 71%. These decreases were attributable to the increased mix of our product services. SALES EXPENSE: Sales expense consists primarily of personnel expenses, including salary and commissions, and costs for customer support functions. Marketing and sales expense was approximately $768,265 for the three-month period ended February 29, 2000 and $84,138 for the three-month period ended February 28, 1999, which represents a 813% increase. For the six-months ended February 29, 2000 selling expense was $1,141,787 compared to $156,726 for the same period last year, which represents a 629% increase. The increase reflects an expansion of the direct sales organization necessary to support increased revenue volumes. The Company expects sales expenditures to continue to increase in dollar amount, but to decline as a percentage of revenue. GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense consists primarily of personnel expense, rent and professional fees. General and administrative expense was approximately $1,813,573 for the three-month period ended February 29, 2000 and $81,434 for the three-month period ended February 28, 1999, which represents a 21,270% increase. For the six-months ended February 29, 2000 these expenses were $2,566,538 compared to $106,897 for the same period last year, which represents a 23,009% increase. This higher level of expense reflects an increase in personnel and professional fees necessary to manage the financial, legal and administrative aspects of the business. In addition, the Company amortized goodwill relating to the June 1, 1999 acquisition of Mobilenetics, for three-months ended February 29, 2000 totaling $151,103 and $302,206 for the six-month period. The Company expects the general and administrative expense to increase in dollar amount, reflecting the growth in operations, but to decline as a percentage of revenue. INTEREST EXPENSE: Interest expense was $88,370 for the three-months ended February 29, 2000 and $3,867 for the three-months ended February 28, 1999. For the six-months ended February 29, 2000 interest expense reflected $114,853 compared to $5,885 for the same period last year. The increase is related to new leases of capital equipment, interest on the Company's line of credit and on notes from the principal stockholder that advanced funds for working capital. NET LOSS: The Company incurred a net loss for the three-month period ended February 29, 2000 of $1,896,593 compared to $39,067 for the three-month period ended February 28, 1999. For the six-month period ended February 29, 2000 the net loss was $1,948,353 compared to $101,429 for the period ending February 29, 1999. We expect to focus in the near term on building and increasing our revenue base, which will require us to significantly increase our expenses for personnel, marketing, network infrastructure and the development of new services, and may adversely impact our short term operating results. As a result, we believe that we will incur losses in the near term and we cannot assure you that the Company will be profitable in the future. 15 FINANCIAL CONDITION - ------------------- To date, we have satisfied our cash requirements primarily through debt and equity financings and capitalized lease financings. In late November 1999, the company received $2,278,100 from an equity placement. In late February 2000, the Company received $1,500,000 from a second equity placement. The Company's principal uses of cash are to fund working capital requirements, acquisition of additional DSL lines and capital expenditures, and to service our capital lease and debt financing obligations. Net cash provided by operations for the six-month period ended February 29, 2000 and 1999 was approximately $671,343 and ($25,180), respectively. Cash provided by (used in) operating activities in the period ending February 29, 2000 was primarily affected by the net loss from operations and the increases of accounts receivable and accounts payable as we were expanding our market share and improving our infrastructure. Net cash used in investing activities for the six-month period ended February 29, 2000 was $3,378,679 for the purchase of equipment. No cash was either used or provided by investing activities in the three-month period ending February 29, 2000. DSL routers located at client sites represented $550,000, Cisco routers in support of broadband sales represented $1,486,000, computer software and equipment for $1,229,000 and $114,000 was for miscellaneous equipment. Net cash provided by financing activities for the period ending February 29, 2000 came from an increase in notes payable to officer of $661,119 and sale of preferred stock for a net proceeds of $3,658,100. During November 1999, the Company closed the placement of the initial tranche of 2,500 shares of Series A 6% Convertible Preferred Stock, $.001 par value (the "Series A Preferred Stock"), to one purchaser (the "Purchaser") for an aggregate purchase price of $2.5 million (less $221,900 placement fees and commissions). In February 2000, the Company closed the placement of the second tranche of 1,500 shares of Series A 6% Convertible Preferred Stock, $.001 par value, to one purchaser for an aggregate purchase price of $1.5 million (less $120,000 placement fees and commissions). Net cash used for financing activities for the six-month period ending February 29, 2000 was for repayment and buy-out of capitalized leases thereby reducing leasing expenses. The net cash increase for the six-month period ended February 29, 2000 was $1,628,661 as compared to the six-month period ended February 28, 1999 of $904. Such increase came as a result of the events discussed above. At February 29, 2000, we had cash and cash equivalents of approximately $1,754,353, and negative working capital of $1,266,720. The Company expects to satisfy its working capital needs for the foreseeable future through additional debt and equity placements, and capital leases. There can be no assurances that the Company will be successful in securing additional financing, and if secured, it will be sufficient to satisfy working capital needs for the foreseeable future. 16 Year 2000 Compliance - -------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of normal business activities. We have reviewed our products and services, as well as our internal management information systems in order to identify and modify those products, services and systems that are not year 2000 compliant. 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Table: 10.5 Form of Note Payable to William J. Kettle EX-27 Financial Data Schedule (b) Form 8-K: None 18 POWER OF ATTORNEY The Registrant and each person whose signature appears below hereby authorizes William J. Kettle, the agent for service named in this Report, with full power to act alone, to file one or more amendments to this Report, which amendments may make such changes in this Report as such agent for service deems appropriate, and the Registrant and each such person hereby appoints such agent for service as attorney-in-fact, with full power to act alone, to execute in the name and in behalf of the Registrant and any such person, individually and in each capacity stated below, any such amendments to this Report. 19 [SIGNATURES] In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 11, 2000 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. LMKI, INC. (Registrant) Signature Title Date - --------- ----- ---- /s/ William J. Kettle Chairman, Director and April 11, 2000 - -------------------------------- Chief Executive Officer William J. Kettle /s/ John W. Diehl, Jr. Chief Financial Officer, April 11, 2000 - -------------------------------- Secretary (Principal John W. Diehl, Jr. Accounting Officer) 20 EX-10.5 2 FORM OF NOTE PAYABLE TO WILLIAM J. KETTLE PROMISSORY NOTE $ _______________________ SANTA ANA, CALIFORNIA Dated: __________________ Debtor: Landmark International, Inc. Lender: William J. Kettle 1. NOTE. In consideration for a loan in the principal amount of $____________ the Debtor promises to pay to the order of Lender, the principal amount plus interest thereon at the rate of ten percent per annum. 2. COLLECTION COSTS. Debtor agrees to pay the actual expenditures made in any attempt to collect the amount due pursuant to this Note. 3. ATTORNEY'S FEES. Debtor agrees that if any legal action is necessary to enforce or collect this Note, the prevailing party shall be entitled to reasonable attorneys' fees in addition to any other relief to which that party may be entitled. This provision shall be applicable to the entire Note. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date hereinabove. DEBTOR: Landmark International, Inc. By: ______________________________________ 21 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the February 29, 2000 consolidated financial statements and is qualified in its entirety by reference to such financial statements and the notes thereto. 1 US DOLLARS 6-MOS AUG-31-2000 SEP-01-1999 FEB-29-2000 1 1,754,353 0 1,401,311 0 0 3,155,664 3,681,228 (143,065) 11,157,165 4,422,384 0 4,000,000 0 37,250 684,064 11,157,165 3,631,166 3,631,166 1,756,342 1,756,342 3,708,325 0 114,853 (1,948,353) 0 (1,948,353) 0 0 0 (1,948,353) (.14) (.14)
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