MOBILENETICS CORPORATION
REPORT AND FINANCIAL STATEMENTS
* * *
YEARS ENDED DECEMBER 31, 1998 AND 1997
MOBILENETICS CORPORATION
CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT 1
BALANCE SHEETS 2 - 3
May 31, 1999 (unaudited)
December 31, 1998 and 1997
STATEMENTS OF OPERATIONS 4
Five Months Ended May 31, 1999 (unaudited)
Years Ended December 31, 1998 and 1997
STATEMENTS OF STOCKHOLDER'S EQUITY 5
Five Months Ended May 31, 1999 (unaudited)
Years Ended December 31, 1998 and 1997
STATEMENTS OF CASH FLOWS 6 - 7
Five Months Ended May 31, 1999 (unaudited)
Years Ended December 31, 1998 and 1997
NOTES TO FINANCIAL STATEMENTS 8 - 12
March 15, 2000
Independent Auditors' Report
----------------------------
To the Board of Directors and Stockholder of
MobileNetics Corporation
We have audited the accompanying balance sheets of MobileNetics
Corporation as of December 31, 1998 and 1997, and the related statements of
income, changes in stockholder's equity and cash flows for the years then ended.
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 financial statements referred to above present
fairly, in all material respects, the financial position of MobileNetics
Corporation as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 8 to the financial statements, on June 1,
1999 the Company was acquired and became a wholly-owned subsidiary of LMKI, Inc.
/s/ Lesley, Thomas, Schwarz & Postma, Inc.
A Professional Accountancy Corporation
Newport Beach, California
1
MOBILENETICS CORPORATION
------------------------
BALANCE SHEETS
--------------
ASSETS
------
MAY 31, DECEMBER 31,
1999 ---------------------------------
(UNAUDITED) 1998 1997
--------------- --------------- ---------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 4,018 $ 22,623 $ 730
Accounts receivable 62,989 68,801 78,628
Income taxes receivable 6,713 --- ---
--------------- --------------- ---------------
Total current assets 73,720 91,424 79,358
PROPERTY AND EQUIPMENT, net
(Notes 1, 2 and 5) 9,152 10,925 13,904
OTHER ASSETS
Advances to stockholder (Note 3) --- 226,785 166,375
Deposits 35,600 35,600 620
--------------- --------------- ---------------
Total assets $ 118,472 $ 364,734 $ 260,257
=============== =============== ===============
See the accompanying notes to these financial statements
2
MOBILENETICS CORPORATION
------------------------
BALANCE SHEETS
--------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
MAY 31, DECEMBER 31,
1999 ---------------------------------
(UNAUDITED) 1998 1997
--------------- --------------- ---------------
CURRENT LIABILITIES
Accounts payable $ 396,836 $ 106,351 $ 33,575
Accrued liabilities 51,988 6,186 42,723
Notes payable to related parties
(Note 4) 36,123 34,664 31,370
Income taxes payable (Note 6) --- 14,878 6,611
Current portion of long-term debt (Note 5) 2,664 2,484 2,110
--------------- --------------- ---------------
Total current liabilities 487,611 164,563 116,389
LONG-TERM DEBT, net of current portion (Note 5) 8,989 10,154 12,628
--------------- --------------- ---------------
Total liabilities 496,600 174,717 129,017
--------------- --------------- ---------------
COMMITMENTS (Note 7)
STOCKHOLDER'S EQUITY (DEFICIT)
(Notes 1, 3, 4, 7 and 8)
Common stock, no par value;
1,500 shares authorized
1,500 shares issued and outstanding 1,500 1,500 1,500
Retained earnings (accumulated deficit) (379,628) 188,517 129,740
--------------- --------------- ---------------
Total stockholder's equity (deficit) (378,128) 190,017 131,240
--------------- --------------- ---------------
Total liabilities and stockholder's
equity (deficit) $ 118,472 $ 364,734 $ 260,257
=============== =============== ===============
See the accompanying notes to these financial statements
3
MOBILENETICS CORPORATION
------------------------
STATEMENTS OF OPERATIONS
------------------------
FIVE MONTHS
ENDED
MAY 31, YEAR ENDED DECEMBER 31,
1999 ---------------------------------
(UNAUDITED) 1998 1997
--------------- --------------- ---------------
REVENUES $ 341,140 $ 835,362 $ 514,503
--------------- --------------- ---------------
OPERATING EXPENSES
Cost of sales 362,792 356,644 205,182
Wages and related expenses 189,275 242,629 72,118
General and administrative 373,623 136,270 194,439
Depreciation 3,281 2,979 994
--------------- --------------- ---------------
Total operating expenses 928,971 738,522 472,733
--------------- --------------- ---------------
Income (loss) from operations (587,831) 96,840 41,770
INTEREST EXPENSE, net (1,905) (11,470) (2,787)
--------------- --------------- ---------------
INCOME (LOSS) BEFORE TAXES (589,736) 85,370 38,983
INCOME TAX PROVISION (BENEFIT) (Note 6) 21,591 (26,593) (6,611)
--------------- --------------- ---------------
NET INCOME (LOSS) $ (568,145) $ 58,777 $ 32,372
=============== =============== ===============
See the accompanying notes to these financial statements
4
MOBILENETICS CORPORATION
------------------------
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
-------------------------------------------------------
COMMON STOCK
RETAINED
EARNINGS
(ACCUMULATED
SHARES DOLLARS DEFICIT) TOTAL
-------------- -------------- -------------- --------------
BALANCES, January 1, 1997 1,500 $ 1,500 $ 97,368 $ 98,868
NET INCOME --- --- 32,372 32,372
-------------- -------------- -------------- --------------
BALANCES, December 31, 1997 1,500 1,500 129,740 131,240
NET INCOME --- --- 58,777 58,777
-------------- -------------- -------------- --------------
BALANCES, December 31, 1998 1,500 $ 1,500 $ 188,517 $ 190,017
NET LOSS (unaudited) --- --- (568,145) (568,145)
-------------- -------------- -------------- --------------
BALANCES, May 31, 1999 (unaudited) 1,500 $ 1,500 $ (379,628) $ (378,128)
============== ============== ============== ==============
See the accompanying notes to these financial statements
5
MOBILENETICS CORPORATION
------------------------
STATEMENTS OF CASH FLOWS
------------------------
FIVE MONTHS
ENDED
MAY 31, YEAR ENDED DECEMBER 31,
1999 ---------------------------------
(UNAUDITED) 1998 1997
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (568,145) $ 58,777 $ 32,372
--------------- --------------- ---------------
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 3,281 2,979 994
Accrued interest on notes payable
to related parties 1,459 3,294 ---
Advances to stockholder converted
to compensation 226,785 --- ---
Change in assets and liabilities
(Increase) decrease in accounts
receivable 5,812 9,827 (35,421)
Increase in deposits (6,713) (34,980) ---
Increase in accounts payable 290,485 72,776 11,162
Increase (decrease) in accrued
liabilities 45,802 (36,537) 28,207
Increase (decrease) in income
taxes payable (14,878) 8,267 6,611
--------------- --------------- ---------------
Total adjustments 552,033 25,626 11,553
--------------- --------------- ---------------
Net cash provided by (used in)
operating activities (16,112) 84,403 43,925
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to stockholder --- (60,410) (49,451)
Purchase of equipment (1,508) --- (14,898)
--------------- --------------- ---------------
Net cash used in investing activities (1,508) (60,410) (64,349)
--------------- --------------- ---------------
See the accompanying notes to these financial statements
6
MOBILENETICS CORPORATION
------------------------
STATEMENTS OF CASH FLOWS
------------------------
FIVE MONTHS
ENDED
MAY 31, YEAR ENDED DECEMBER 31,
1999 ---------------------------------
(UNAUDITED) 1998 1997
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party loans --- --- 6,416
Proceeds from borrowings of long-term debt --- --- 14,738
Repayments of long-term debt (985) (2,100) ---
--------------- --------------- ---------------
Net cash provided by (used in)
financing activities (985) (2,100) 21,154
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,605) 21,893 730
CASH AND CASH EQUIVALENTS, beginning of year 22,623 730 ---
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 4,018 $ 22,623 $ 730
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for income taxes $ --- $ 18,326 $ ---
=============== =============== ===============
Cash payments for interest $ 520 $ 8,176 $ 2,787
=============== =============== ===============
See the accompanying notes to these financial statements
7
MOBILENETICS CORPORATION
------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
MAY 31, 1999, DECEMBER 31, 1998 AND DECEMBER 31, 1997
-----------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS - MobileNetics Corporation (the "Company")
was incorporated under the laws of the State of Delaware on October 5, 1993.
The Company is a provider of communications consulting and systems
integration services that primarily involve Internet and network solutions. It
services a diverse base of customers that are located primarily in California.
Effective June 1, 1999, the Company was acquired by LMKI, Inc.
(formerly Landmark International, Inc.) in an all stock transaction (see Note
8).
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION - The management of the Company has prepared the
financial statements as of and for the period ended May 31, 1999 herein and
these statements were compiled by Lesley, Thomas, Schwarz & Postma, Inc. The
financial statements for the period ended May 31, 1999 were not audited or
reviewed by Lesley, Thomas, Schwarz & Postma, Inc. and accordingly they
expressed no opinion or other form of assurance on them.
Such financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The unaudited financial
statements include all adjustments, consisting of all normal recurring
adjustments, which are in the opinion of management necessary to fairly state
the financial position of the Company as of May 31, 1999, and the results of its
operations and cash flows for the five month interim period ended May 31, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures included herein are adequate to make
the information presented not misleading. Operating results for the five month
interim period ended May 31, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999, or for any other
period.
8
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
All information with respect to the period ended May 31, 1999 is
unaudited. It is suggested that these unaudited financial statements are read in
conjunction with the annual 1998 and 1997 audited financial statements and the
notes related thereto.
CASH AND CASH EQUIVALENTS - For purposes of the balance sheets and
statements of cash flows, the Company considers all highly liquid instruments
with a maturity of three (3) months or less to be cash equivalents. There were
no cash equivalents at May 31, 1999 (unaudited), December 31, 1998 and December
31, 1997.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Repairs and maintenance to property and equipment
are expensed as incurred. When property and equipment is retired or disposed of,
the related costs and accumulated depreciation are eliminated from the accounts
and any gain or loss on such disposition is reflected in income.
REVENUE RECOGNITION - Revenue is recognized in the month in which
services are provided.
CONCENTRATION OF CREDIT RISK - During the five months ended May 31,
1999 (unaudited), 1998 and 1997, approximately thirty-one percent (31%), fifty
percent (50%) and eighty two percent (82%), respectively, of the Company's sales
were made to a single customer.
COMPENSATED ABSENCES - Employees of the Company are entitled to paid
vacation, paid sick days and personal days off, depending on job classification,
length of service, and other factors. It is impracticable to estimate the amount
of compensation for future absences, and accordingly no liability has been
recorded in the accompanying financial statements. Management believes that the
liabilities were minimal at May 31, 1999, December 31, 1998 and December 31,
1997 and therefore would not have a significant effect on the financial
statements. The Company's policy is to recognize the costs of compensated
absences when actually paid to employees.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment are as follows:
MAY 31, DECEMBER 31,
USEFUL 1999 -------------------------------
LIFE (UNAUDITED) 1998 1997
---------- ------------- ------------- -------------
Computer equipment 5 years $ 16,406 $ 14,898 $ 14,898
Less: accumulated depreciation (7,254) (3,973) (994)
------------- ------------- -------------
$ 9,152 $ 10,925 $ 13,904
============= ============= =============
9
NOTE 3 - ADVANCES TO STOCKHOLDER
MAY 31, DECEMBER 31,
1999 ------------------------------
(UNAUDITED) 1998 1997
------------- ------------- -------------
Unsecured advance to one hundred (100%)
stockholder, no interest, due on
demand. $ --- $ 226,785 $ 166,375
============ ============= =============
NOTE 4 - NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consisted of the following:
MAY 31, DECEMBER 31,
1999 ------------------------------
(UNAUDITED) 1998 1997
------------- ------------- -------------
Loan payable to father of one hundred
percent (100%) stockholder, with interest
accruing at ten percent (10%) per annum,
total balance of principal and accrued
interest due on June 30, 2000 $ 25,359 $ 25,359 $ 25,359
Loan payable to mother of one hundred
hundred percent (100%) stockholder, with
interest accruing at the Smith Barney
Margin Account rate (9.75% at December
31, 1998 and 10.25% at December 31, 1997),
total balance of principal and accrued
interest due on June 30, 2000. 6,011 6,011 6,011
Accrued interest on related notes payable 4,753 3,294 ---
------------- ------------- -------------
$ 36,123 $ 34,664 $ 31,370
============= ============= =============
10
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following:
MAY 31, DECEMBER 31,
1999 ------------------------------
(UNAUDITED) 1998 1997
------------- ------------- -------------
Loan payable collaterallized by computer
equipment, requiring principal and interest
payments of $369 per month, with interest
accruing at 16.9% per annum through
November 18, 2002. $ 11,653 $ 12,638 $ 14,738
Less: current portion (2,664) (2,484) (2,110)
------------- ------------- -------------
$ 8,989 $ 10,154 $ 12,628
============= ============= =============
NOTE 6 - PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
FIVE MONTHS
ENDED
MAY 31, YEAR ENDED DECEMBER 31,
1999 ------------------------------
(UNAUDITED) 1998 1997
------------- ------------- -------------
Federal tax provision (benefit) $ (22,391) $ 18,483 $ 3,788
California tax provision 800 8,110 2,823
------------- ------------- -------------
$ (21,591) $ 26,593 $ 6,611
============= ============= =============
DEFERRED INCOME TAXES - The Company recognizes a liability or asset for
the deferred tax consequences of temporary differences between the tax basis of
assets or liabilities and their reported amounts in the financial statements.
These temporary differences will result in taxable or deductible amounts in
future years when the reported amounts of the assets or liabilities are
recovered or settled. The deferred tax assets are reviewed for recoverability
and valuation allowances are provided as necessary. At May 31, 1999 (unaudited)
the Company had a deferred tax asset of $117,550 for net operating loss
carryforwards, but this asset was reduced one hundred percent (100%) by a
valuation allowance. At December 31, 1998 and 1997 the temporary timing
differences were insignificant and therefore, no deferred taxes have been
recorded.
11
NOTE 6 - PROVISION FOR INCOME TAXES (CONTINUED)
STATUTORY RATE RECONCILIATION - The provision for income taxes
(benefit) is different from that which would be obtained by applying the
statutory Federal income tax rate to income (loss) before income taxes. The
items causing this difference are as follows:
FIVE MONTHS
ENDED
MAY 31, YEAR ENDED DECEMBER 31,
1999 ------------------------------
(UNAUDITED) 1998 1997
------------- ------------- -------------
Tax expense (benefit) at U.S.
statutory rate $ (200,510) $ 17,748 $ 5,847
State income taxes, net 528 6,425 2,400
Change in valuation allowance 177,550 --- ---
Other, net 841 2,420 (1,636)
------------- ------------- -------------
$ (21,591) $ 26,593 $ 6,611
============= ============= =============
NOTE 7 - COMMITMENTS
LEASE REVENUE - The Company leased communications equipment to LMKI,
Inc. pursuant to a three (3) year agreement for approximately $5,700 per month.
The lease period commenced May 12, 1998 and lease receipts are included in the
Company's sales revenue.
LEASE EXPENSE - The Company was leasing office space in Rancho Santa
Margarita, California, pursuant to a month-to-month agreement. Rent expense for
the five months ended May 31, 1999 (unaudited) and the years ended December 31,
1998 and 1997 was $16,250, $11,430 and $2,750, respectively.
NOTE 8 - SUBSEQUENT EVENTS
Effective June 1, 1999, the Company was acquired by LMKI, Inc. in an
all stock transaction. The Company's one hundred percent (100%) stockholder
received ten million (10,000,000) shares of LMKI, Inc. stock as consideration.
During early 1999, the Company entered into various operating equipment
leases with lease payments totaling approximately $7,000 per month, expiring at
various dates through 2001.
12