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