<PAGE>
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As filed with the Securities and Exchange Commission ("SEC") on March 31, 1999.
This Registration Statement has not yet been declared effective by the SEC,
thus, the information contained herein is subject to amendment.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
SKYNET HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 65-0861800
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(Jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
343 South Glasgow Avenue, Inglewood, CA 90301
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(Address of principal executive offices)
(310) 642-7776
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(Registrant's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
N/A N/A
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
------------------------------
Title of Class
<PAGE>
ITEM 1. BUSINESS
INTRODUCTION; GENERAL DEVELOPMENT OF BUSINESS
Skynet Holdings, Inc., a Delaware corporation, (the "Company"), is a full-
service provider of international transportation delivery services operating
primarily as an international express courier for time sensitive documents and
packages. The Company's primary operations are conducted in the United Kingdom
and Australia and to a lesser extent, the United States.
Unlike most nationally and internationally recognized express couriers, the
Company does not carry out all phases of the delivery process. Instead, the
Company utilizes available cargo space on commercial passenger and cargo
aircraft and effectuates most deliveries through a global alliance of
independent couriers with over 1000 offices in over 100 countries throughout
Europe, Asia, North and South America, Africa and Australia. The Company and
these independent couriers comprise the SkyNet Worldwide Express Network (the
"SkyNet Network" or "Network") and operate under the name "SkyNet Worldwide
Express" or "SkyNet". Each member of the SkyNet Network is linked together by
the SkyCom system, the Company's proprietary computerized tracking and billing
information system which tracks each package delivered through the SkyNet
Network from initial pick up to final delivery. The Company's long term goal is
to become a leading provider of international express delivery services by
pursuing a three-fold strategy of making select acquisitions both within and
outside of the United States, increasing operating efficiencies and
consolidating key members of the Network.
The Company operates through its wholly owned subsidiaries, Sky
International Limited, a United Kingdom corporation ("SIL"), SkyNet Worldwide
Express Pty Ltd., a New South Wales, Australia corporation ("SWEPL"), DPE
International, Ltd., a Delaware corporation ("DPE"), and Skynet, Inc., a New
York corporation, as well as through the SkyNet Network. SIL operates
the SkyCom system which provides the technological foundation upon which the
Network and the Company's operations are built. Unless otherwise specified,
references to the "Company" shall include SIL, SWEPL, DPE and Skynet, Inc.
The Company's revenues are primarily derived from its retail customers and
not from Network members. Revenues derived from Network members relate primarily
to charges for use of the Company's SkyCom tracking system and to a lesser
extent, linehaul charges for packages passing through the Company's hubs from
Network members. Other than revenues from the SkyCom system, the Company does
not break out revenues generated by Network members.
The Company is the surviving entity to a merger (the "Merger") between EPL
Resources (Delaware) Corp. ("EPLR") and Skynet Holdings, Inc., a Nevada
corporation ("Skynet Nevada"), effective as of October 14, 1998. Prior to the
Merger, EPLR was an inactive company whose shares were listed for quotation on
the OTC Bulletin Board. EPLR was organized December 15, 1994, under the laws of
the State of Florida. EPLR has no operations and was considered a development
stage company. During September 1998, EPLR issued and sold an aggregate
of 4,625,000 shares of Common Stock raising gross proceeds of $555,000. This
offering was undertaken by EPLR prior to the Merger with Skynet Nevada.
Skynet Nevada was formed on September 16, 1997 to effectuate the
consolidation of certain principal members of the Network. Pursuant to a Share
Exchange Agreement dated September 30, 1997 by and among Skynet Nevada and the
shareholders of SIL, SWEPL and DPE, as subsequently amended, Skynet Nevada
acquired all of the issued and outstanding shares of capital stock of these
entities in exchange for 4,200,000 shares of its common stock. This resulted in
Skynet Nevada owning and operating the principal distribution hubs of the
Network, operating the SkyCom proprietary computerized tracking and billing
system and gaining effective control of the Network. Pursuant to the Merger, all
of the issued and outstanding shares of Common Stock of Skynet Nevada were
exchanged for an aggregate of 9,901,500 shares of Common Stock of the
Company.
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On December 9, 1998, the Company signed a Placement Agency Agreement
with Puglisi Howells & Co., a broker dealer registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and member in good
standing of the National Association of Securities Dealers, Inc., for the
purpose of offering (the "Private Placement") up to 2,000,000 shares of Common
Stock, par value $.0001 per share, at a purchase price of $2.00 per share on a
"best efforts, 1,000,000 shares or none" basis. On February 19 and March 5,
1999, the Company conducted closings with respect to the Private Placement
resulting in the issuance of an aggregate of 1,325,500 shares of Common Stock
which generated net proceeds (after offering costs of approximately $441,000) of
approximately $2,210,000. The Company intends to use the net proceeds of the
Private Placement for general working capital and general corporate purposes,
primarily to finance the Company's business plan which includes an acquisition
and consolidation strategy, and to upgrade the Company's information technology,
including the Skycom system.
GEOGRAPHIC INFORMATION
- ----------------------
The Company operates in one principal industry segment: the delivery of
time sensitive documents and packages. A summary of the Company's geographic
information is presented below:
<TABLE>
<CAPTION>
United
States Europe Australia Total
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<S> <C> <C> <C> <C> <C>
Net Sales to Customers.......... 1998 $5,962,396 $21,250,613 $4,625,910 $31,838,919
1997 7,597,883 24,079,365 4,474,515 36,151,763
1996 7,714,977 22,661,783 4,028,186 34,404,946
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Operating Income (Loss)......... 1998 (384,849) 630,936 334,890 580,977
1997 107,664 (381,347) 244,176 (29,507)
1996 (341,921) 701,310 99,333 458,722
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Identifiable Assets............. 1998 882,250 5,066,925 936,640 6,885,815
1997 918,546 6,199,922 985,603 8,104,071
1996 1,102,830 5,502,766 699,721 7,305,317
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</TABLE>
INDUSTRY OVERVIEW
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The Company's principal operations are conducted overseas. In fact, 82% of
the Company's revenues during the fiscal year ended June 30, 1998 were generated
from deliveries outside of the United States. According to industry data
compiled by Triangle Management Services Ltd., a UK based consulting company to
the global express and freight industries, the estimated size of the world
international express delivery market (one of the markets in which the Company
competes) is approximately $14 billion, the estimated aggregate size of the
world domestic express markets is approximately $55 billion, and in 1997, the
global international market grew at an estimated annual rate of 12% while the
various domestic markets grew at an average of approximately 6%. In its recently
published 1998-1999 World Air Cargo Forecast, Boeing reported that the
international express delivery market currently accounts for 6% of the world air
cargo market, is experiencing rapid growth and by 2017 is expected to approach
40% of the total market.
The next-day and two-day express courier industry in the United States is
dominated by much larger competitors such as United Parcel Service, Inc. ("UPS")
and FDX Corp.'s Federal Express Division ("FedEx"). Although the Company offers
these services to its customers in the United States, such services represent a
small percentage of the Company's business and are not the focus for future
growth. This service often consists of picking up packages directly from a
customer and unless the destination is in or around one of the Company's
domestic stations (Los Angeles, San Francisco or New York), forwarding them via
other domestic couriers, typically at a lower wholesale rate, to their ultimate
domestic destination.
The same-day, regional, freight forwarding and international segments of
the courier services business are more fragmented and served by thousands of
smaller companies. Although major corporations such as DHL, FedEx and UPS have
substantial worldwide operations, the international express courier business is
also served by many smaller independent operators. These markets are more
fragmented and demand more specialized services than the domestic next day
delivery market. The Company primarily participates and competes in these
markets. Through Company owned stations and the Network, the Company serves
these specialized delivery needs of corporate and small business customers in a
retail environment.
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The same-day freight forwarding, regional express courier and international
segments of the industry are currently undergoing substantial growth and
consolidation. Management of the Company believes that several factors are
driving this growth and consolidation. First, commercial and industrial
companies are continuing to follow the trend of concentrating on their core
business by outsourcing non-core activities. The significant growth in catalogue
and at-home shopping, electronic commerce as well as modern inventory management
focused on just-in-time delivery, requires customized and reliable express
delivery services. Management believes that these trends will increase the
demand for specialized time-certain deliveries and provide significant
opportunities for the Company to expand its business both internally and through
strategic acquisitions of same-day, regional and international express delivery
companies.
OVERVIEW OF BUSINESS
- --------------------
The Company is a single-source provider of global transportation delivery
and logistic services to a diverse international customer base. These services
consist of the following:
. Time-certain deliveries of documents and packages within 24-48 hours of
pickup to most parts of the world.
. Next-flight-out services for same day expedited deliveries of the most
time-sensitive documents and packages.
. Local ground transport of hand-deliveries.
. Freight forwarding services for manufacturing and distribution
companies in the United States and overseas.
. Bulk shipment or "remailing" of mass mailing materials produced in one
country for distribution in another country.
. Global logistics services with respect to inventory management for
manufacturing and distribution companies.
Rather than focusing on particular segments of the industry and offering
standardized services based on rigid pickup and delivery times, the Company
designs and markets its services to meet the specific needs of its customers.
The variable cost, low overhead structure of the Company's current model of
operations provides the Company with the flexibility to provide such customized
services. For example, the Company utilizes excess cargo space on commercial
aircraft rather than operating its own fleet, and through the SkyNet Network,
enjoys a global presence without incurring the cost of maintaining its own
offices in most locations. As a result, the Company has access to a greater
number of aircraft with a wider range of scheduled departures. This allows the
Company to provide services tailored to any number of specific customer
requests.
3
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OPERATIONS OF SUBSIDIARIES
SIL, formed in 1978, maintains offices in London, Manchester and Bristol,
England, and acts as the European hub of the Network. SIL makes deliveries on
behalf of the Network throughout the United Kingdom and provides same-day
courier services in select regions of the United Kingdom. SIL also owns and
operates the SkyCom proprietary computerized tracking and billing information
system which tracks each package in the SkyNet Network from point of pickup to
final destination. SWEPL, formed in 1984, conducts operations in Sydney,
Melbourne and Brisbane, Australia and acts as a hub for the Pacific Rim
operations of the Network. DPE, formed in 1984, maintains offices in Los Angeles
and San Francisco, California. Los Angeles serves as the hub for deliveries
throughout the western United States, Canada and parts of the Far East. Skynet,
Inc. formed in 1991, maintains offices in Jamaica, New York and operates as the
hub for the Company's New York operations for deliveries throughout the eastern
United States and Canada.
In 1995, DPE filed for protection under Chapter 11 of the United States
Bankruptcy Code in the Central District of California. On August 1, 1996, an
Order was entered confirming DPE's Plan of Reorganization. On December 2, 1996,
an Order of Final Decree and Discharge was entered with respect to DPE. At
December 31, 1998, assets of DPE secure approximately $334,000 of obligations
under its Plan of Reorganization.
THE SKYNET NETWORK
Most express delivery companies, including UPS and FedEx, seek to carry out
all phases of the delivery process by using directly-owned offices, facilities
and equipment. By contrast, the Company utilizes the SkyNet Network to effect
the delivery of the vast majority of packages delivered under the SkyNet name.
As described above, the Network is comprised of the Company's subsidiaries and
independently owned and operated courier services located in some 1,000 cities
in over 100 countries throughout the world operating under the names "SkyNet" or
"SkyNet Worldwide Express."
SkyNet Network members ("Members") provide delivery of packages in their
region which are originated by other Network Members. In exchange, each Member
receives delivery of its packages by other Network Members in their respective
regions. Payment, if any, for deliveries by Network Members is dependent upon
the number of packages delivered as compared to the number of packages generated
by each Network Member. Established high volume Network Members have
historically achieved a balance between packages delivered and packages
generated for delivery by other Network Members. Accordingly, no payments are
made by or to such Members to or from the Company or any other Network Member
for such deliveries. Network Members who experience a significant difference
between packages delivered and packages generated for delivery by other Network
Members participate in a cost recovery system whereby they receive payments from
the Company or other Network Members for providing such delivery services. Any
transfer fee imposed by a hub operator for the transport of packages from one
country to another is borne by the transferor Member.
Each package generated by a Network Member is entered into and tracked from
pick-up to delivery by the SkyCom system for which SIL charges Network Members a
fee of approximately $.30 per package. In short, through its subsidiaries and
the SkyCom system, the Company forms the core of an extensive group of
independent delivery companies in different parts of the world which operate
under a common brand name and deliver each other's packages from airport-to-
door.
4
<PAGE>
The Network is an alliance of delivery professionals. In fact, most Network
Members are bound not by a formal licensing agreement, but rather by mutual
opportunity and need. Although management of the Company is currently evaluating
the merits of creating a more formalized arrangement, it believes that the
absence of contractual obligations between the Company and the vast majority of
the Network Members will not have an adverse effect on the Company's operations
even though there can be no assurance that Network Members will not enter into
exclusive or non-exclusive arrangements with competitive networks offering
greater benefits or lower costs. This belief is based, in part, on the fact that
many of the existing couriers are small businesses which have been operating as
Network Members for many years without a written contract. Management believes
that these entities may resist entering into a more formalized arrangement. In
addition, management continues to believe that independent couriers receive a
number of substantial benefits by being a Network Member and therefore have an
economic incentive to remain a member of the network.
First and foremost, by gaining access to the Network, independent couriers
have the ability to cost-effectively deliver packages to distant locations
throughout the world. For example, if a local courier in Turkey needed to
deliver a package to Los Angeles, it may incur an airbill as high as $70 or more
for an individual package. However, by sending the package to the Company's
European hub in London where it is consolidated with numerous other packages
which are going to the United States or the Far East, the unit cost of
transporting that particular package decreases dramatically. This allows the
individual Network Member to provide international delivery service to its
customers at a more reasonable rate. Second, each member has access to the
SkyCom system. This not only ensures that the package will be tracked
throughout the delivery process and will not be delivered without a signature,
but also serves as the customs declaration manifest ("Manifest") saving the
Member the administrative fees and expenses of preparing its own paper Manifest.
Third, the package originated by the local Network Member will be delivered at
its point of destination. All of the above reduce administrative and other
costs associated with numerous international transactions in varying currencies
and permit independent couriers to offer worldwide delivery services to their
customers at competitive rates.
THE SKYCOM SYSTEM
The SkyCom system is the Company's propriety computerized billing and
tracking information technology. The SkyCom system is an internet based
proprietary software program which provides computerized tracking and billing
information for each package delivered through the SkyNet Network. Upon a
package being generated by a Member, it is immediately given a tracking number
and entered into the SkyCom system. The tracking number is updated upon a
package's clearance through customs, arrival at a Company or other Network
station, its placement on a truck for local distribution and upon delivery to
the intended recipient.
Each Network Member has real time access to the SkyCom system. This allows
all Network Members to track the status of any package being delivered through
the SkyNet Network at any time. In addition, the Company's and any Network
Member's customers can access the SkyCom system through the Company's web site.
Larger customers are provided with customized software permitting them to
directly access the SkyCom system. Accordingly, at any point in the delivery
process, the Company, any Network Member and any customer is able to determine
the exact location of any particular shipment within the Network.
Management believes that the SkyCom system is one of the essential
components of the Company's operations. The SkyCom system provides the
framework upon which the Company will attempt to build a larger global
distribution system.
Management believes that superior information technology is essential to
maintaining the Company's competitive position within the industry. Although
management believes that the current SkyCom system is capable of effectively
serving the needs of the Company and the Network Members, it is currently
seeking to upgrade the Company's existing information technology and outsourcing
the ongoing upgrade and maintenance of the system. Any upgrade will be designed
to achieve the following three objectives:
. provide enhanced internet applications relying on recent technological
advances;
. provide additional and enhanced services to better fullfill the needs
of the SkyNet Network and its customers; and
. reduce the Company's dependence on its existing third party licensing
arrangements.
The Company has identified a qualified technology vendor who has submitted
a proposal to: (i) develop a state-of-the-art Company-owned information
technology system which would achieve the foregoing objectives; (ii) provide the
Company with technology upgrades and new developments; and (iii) manage and
operate the system through dedicated qualified personnel provided by the vendor.
The Company believes that this system would be technologically superior to its
existing SkyCom system.
The licensing agreement regarding the use of the existing SkyCom system is
perpetual, however, the consulting agreement, which covers the maintenance of
the current system, expires on June 1, 1999. Based on the anticipated
development of the new information technology system, it is unlikely that the
consulting agreement will be renewed after June 1, 1999. Since the Company will
maintain its current license to operate the existing SkyCom system, management
believes that any potential delay in the development and implementation of any
new system should not have a material adverse affect on the Company's
operations. At this time, management does not believe affect the existing SkyCom
system will be impacted by the so called "Year 2000 Problem". Any upgrade to the
SkyCom system will be Year 2000 compliant.
5
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CURRENT OPERATIONS
The Company is involved in all aspects of the express courier business
which consists of the following three distinct components: (i) pickup; (ii) line
haul; and (iii) delivery. In contrast to most express delivery companies,
including UPS and FedEx, as more fully explained below, the Company does not
carry out all phases of the delivery process for each package, but rather relies
on Network Members for pick up or delivery of most packages and available
aircargo space for line haul. Accordingly, the Company can be categorized as a
variable rather than fixed cost operator.
Pickup. Documents and packages delivered through the SkyNet Network are
typically picked up by a Company owned or Network Member van which transports
the parcel to one of the Member's or Company's stations. Specifically, Company
owned stations pick up approximately 27% of the total number of packages
delivered through the Network. Packages are then sorted by destination and
packed into air bags for transport throughout the world. At the time packages
are sorted, they are entered onto the SkyCom system and assigned a tracking
number. At the same time, an airway bill is generated based primarily on the
weight and to a lesser extent, the destination of the package. For international
deliveries, a Manifest is created describing the various documents and packages
being sent to a particular location. The Manifest is entered into the SkyCom
system and transmitted electronically to the point of destination so that it can
be reviewed and processed prior to the package's arrival. This saves the Company
and Members the expense related to preparing a paper Manifest and the
communication expense of transmitting it via facsimile.
Line Haul. Line haul refers to the transport of packages from point of
origination by ground or air to its city or country of destination. With respect
to air transport, the Company does not own or operate any aircraft but rather,
utilizes cargo space on commercial passenger and cargo aircraft. In this regard,
the Company has established relationships with a number of major international
airlines and large air freight companies from which the Company purchases cargo
space on an as-needed basis. The rates are typically charged per pound and,
depending upon departure times and space availability, are frequently subject to
negotiation. Although the Company has historically been able to secure air cargo
space as needed and believes its relations with commercial airlines and cargo
carriers are good, it has no contractual rights with respect to the acquisition
of cargo space and no assurance can be given that it will continue to be in a
position to secure such space in the future.
The Company believes this system is superior to the capital intensive
alternative of owning, operating and maintaining its own fleet of aircraft. In
order to most efficiently operate an air fleet, couriers such as FedEx must
ensure that each aircraft is filled to capacity. To best achieve this
objective, FedEx maintains a rigid departure schedule; typically one departure
each evening from each city in which it operates. By utilizing commercial
aircraft, the Company has access to many more destinations and departure times.
This provides the Company with the flexibility to provide next-flight-out
services for the fastest delivery of time sensitive documents and the ability to
more effectively meet special customer needs.
With respect to ground transport, the Company operates ground
transportation services at its hub locations for pickup and consolidation of
packages at such locations. Some of these services are performed on a "routed"
basis (i.e. scheduled route) while others are on an as requested basis. The
Company does not maintain receptacles which must be serviced by an extensive
route system which further increases fixed costs.
6
<PAGE>
Delivery. Upon reaching its destination, packages are sorted and released
in accordance with the Manifest. All non-documents must be cleared by a customs
agent. In this regard, the Company utilizes the services of a custom's broker to
manage the release of packages within the Network. Upon packages being released
from the airport, they are sorted at a Company or a Network Member owned
station. Documents and packages are then delivered by truck by the Company or,
more often, a Network Member. Specifically, during the year ended June 30,
1998, Company owned stations delivered approximately 20% of the total number of
packages delivered through the Network. Neither the Company nor any Network
Member will deliver a package without the signature of the recipient. This
ensures, to the best extent possible, that packages reach their intended
destination.
Pricing. Due to the highly competitive nature of the express courier
business, competitive pricing is critical to the Company's ability to
effectively compete in the market. The Company believes that its variable cost
structure permits it to provide quality services at reasonable rates. Pricing
is typically based on the weight and the destination of the package. Since the
Company and Network Members aggregate large volumes of packages for air cargo
shipment, the Company enjoys per unit air transportation costs which are less
than some smaller regional couriers. Since it does not maintain its own
aircraft, unit costs do not substantially rise or fall with volume fluctuations.
Customers. The Company maintains a diverse international customer base and
no customer accounts for in excess of 5% of the Company's annual consolidated
revenues. The Company's principal customer base can be divided into two (2)
distinct categories. First, commercial business enterprises with international
offices, customers or distribution centers which utilize the Company's
international services. Second, commercial entities based in the United Kingdom
or Australia which are primarily engaged in domestic manufacturing or service
business with delivery needs to the principal commercial centers of those
countries. Other than airbills for individual packages, the Company does not
have contracts with any of its customers. To date, the Company has not marketed
its services on a global basis to any of its customers but is currently
considering the benefits of such an approach.
Seasonality. Due to the international nature of the Company's business, it
is not subject to any material seasonal fluctuations. For example, although
volume in the United States and Europe decreases in July and August, volume in
Australia is substantially higher during these months.
BUSINESS STRATEGY
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The Company's objective is to become a recognized provider of express
delivery and logistics services throughout the world. The Company plans to
achieve its objective through implementation of a three-fold business strategy
involving strategic acquisitions within its industry, consolidation with key
Network Members and focus on internal growth and increased operating
efficiencies.
ACQUISITION STRATEGY
The Company intends to aggressively pursue an acquisition strategy to
enhance its position in its current markets and acquire operations in new
markets. The Company will focus its acquisition strategy on candidates that
either fit into or complement the Company's current operations. This will
include the acquisition of independent local and regional express courier
companies in the United States and overseas which can be consolidated into the
Company's current operations. It will also include targeting same-day couriers,
intra city couriers and global freight forwarders which can complement the
Company's current operations. For example, the Company could acquire an intra
city courier in a major US or European city or a domestic regional express
courier which, although it might not fit precisely within the Company's current
operations, could provide the Company with a more efficient delivery system and
substantial cross-selling opportunities by offering international delivery
services to a new set of customers.
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The Company's present strategy is to (i) acquire additional companies that
are intended to supplement the Company's existing market presence as "tuck-in"
acquisitions; and (ii) establish a significant presence in new markets or
geographic areas through the acquisition of established regional competitors as
"platform" acquisitions to be followed by additional "tuck-in" acquisitions.
Platform Acquisitions. A "platform acquisition" is defined by management
as one that creates a significant presence for the Company in a new geographic
market or market segment. The Company intends, where possible, to make platform
acquisitions in targeted markets by acquiring established high quality local and
regional express courier companies. In general, the Company intends to retain
the management as well as the operating and sales personnel of a platform
acquisition in order to maintain continuity of operations and customer service.
The Company will seek to increase an acquired company's revenues and improve its
profitability by integrating the acquired company into the SkyNet Network. The
Company believes that these acquisitions could provide significant cross-selling
opportunities by providing international express courier services to existing
customers on a cost-effective basis. These acquisitions are also intended to
provide a significant market presence from which additional "tuck-in"
acquisitions can be undertaken.
Tuck-In Acquisitions. A "tuck-in" acquisition will more likely occur in an
existing market, will be smaller than a platform acquisition and will enable the
Company to offer additional services or expand into secondary markets within a
region already served. In most instances, management believes that the
operations acquired by tuck-in acquisition can be integrated into the Company's
existing operations, resulting in the elimination of duplicative overhead and
operating costs and ultimately increasing operating margins and/or price
competitiveness.
The Company's acquisition strategy is intended to compliment rather than
replace the existing SkyNet Network. By focusing on "platform acquisitions" in
new markets, the Company is seeking to increase its global presence in order to
provide additional points of delivery for the Company and all Network Members.
Similarly, "tuck-in" acquisitions are primarily intended to provide additional
services or increased presence in existing markets to assist rather than
compete with existing Network Members. Accordingly, such acquisitions will
only be made in those markets which management believes are large enough to
absorb such new or additional services without adversely impacting the
operations of existing Network Members. Although the Company's acquisition
strategy will require the Company to directly pick-up and deliver additional
packages, the Company will continue to utilize available air cargo space on
commercial aircraft for line haul and rely on Network Members for most
deliveries in order to minimize fixed overhead costs.
The Company recently completed its first material acquisition. On March 15,
1999, the Company acquired the operating assets of Nevada Fleet management, Inc.
dba Fleet Delivery Service, ("Fleet"), a regional courier company which provides
air and ground delivery services in Nevada, Washington and Oregon, primarily to
the banking industry. The Company issued 1,479,415 shares of Common Stock as
consideration for the acquisition. Fleet has annual revenue of approximately $13
million, 450 employees and more than 200 delivery vehicles. The assets acquired
include; receivables, delivery vehicles, equipment, refundable deposits,
licenses, administrative material and equipment, records and documents, and all
personal property used in the operation of the business. The Company also
assumed approximately $300,000 in liabilities relating to the acquisition. The
Company accounted for the acquisition using the purchase method of accounting
with the assets acquired and liabilities assumed recorded at fair values, and
the results of the acquired business will be included in the Company's
consolidated financial statements from the closing date of the acquisition.
CONSOLIDATION OF CERTAIN NETWORK MEMBERS
The second component of the Company's business strategy is to consolidate,
via acquisition, certain of the Network Members. In this regard, the Company
intends to focus on acquiring Network Members who have a proven record of
generating a large volume of packages for delivery through the SkyNet Network.
Management believes this strategy will lead to increased productivity and
efficiency and substantially increase revenues by effectively converting certain
Network Members into revenue and profit centers for the Company and providing
such Network Members with an equity stake in the Company.
The Company believes it can successfully implement its acquisition and
consolidation strategy due to (i) the highly fragmented composition of certain
segments of the express courier industry; (ii) its unique position as a global
courier which will enable it to offer acquired companies the ability to
substantially expand the services provided to their existing customers; (iii)
the potential for increased profitability by consolidating the administrative
functions and package volume of the acquired company with those of the Company
and the Network; (iv) the extensive industry knowledge and experience of its
senior management both in the United States and overseas; and (v) the nature of
the industry which is characterized by mature privately held small businesses
whose owners might be receptive to being acquired by a larger corporation. To
date, although the Company has identified a number of potential acquisition
candidates, with the exception of the fleet acquisition described above, the
Company has not consummated any acquisition and there can be no assurance that
the Company will have the financial or personnel resources to effectuate this
strategy.
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Although the Company's capital resources are more limited than certain of
its larger competitors, the Company plans to accomplish acquisitions principally
through the issuance of its securities. The successful implementation of this
strategy depends upon the liquidity of the Company's securities which, in turn,
is facilitated by having a class of securities which are eligible for public
trading.
The use of Company securities to facilitate acquisitions, will rely to a
great extent upon the development and maintenance of an active trading market
for the Company's securities. The public trading market for the Company's
Common Stock has only recently commenced on a very limited basis. There can be
no assurance that a regular trading market will develop or if developed, will be
sustained on a long-term basis.
INTERNAL GROWTH AND INCREASED OPERATING EFFICIENCIES
Although the Network effectively provides the Company with a global
presence and international brand identity without incurring the associated costs
of owning and operating offices throughout the world, historically, it has not
been a significant source of revenue for the Company. Management also believes
that there is an imbalance of packages generated versus those delivered by
certain Network Members which is not fully covered by the Company's existing
cost recovery system and results in unequal monetary benefits and burdens among
such Members. Although management does not believe that this has resulted in any
material number of Members dropping out of the Skynet Network, it is currently
evaluating this situation in order to provide a more Equitable system of
distribution. Specifically, management is considering creating a clearinghouse
arrangement which would utilize a system of debits and credits to collect and
disburse fees from and to Members in order to equalize the economic benefits
among the Members. The Company's proposed upgrade to the Skycom system is
being designed to provide such a service. See "The Skycom System."
Management of the Company believes that accurate billing for each package
is critical to maintaining both fair pricing to its customers and consistent
margins. Since the pricing of an airbill is primarily determined by weight,
underestimating weight results in a loss of revenue. This aspect of the
Company's operation is largely controlled by Company employees and independent
contractors working at stations and hubs. Although management believes that
this has not resulted in a material loss of revenue, it continues to believe
that dedicated attention to detail by these employees is essential to the
efficient operation of the Company. Primarily through the grant of options
under the Company's broad based stock option plan, the Company believes it can
provide a sense of proprietorship to these employees which management believes
will improve their efficiency and ultimately benefit the Company.
SALES AND MARKETING
The Company and SkyNet Network Members engage in direct sales activities to
existing customers and prospects within their respective regions. This consists
of canvassing targeted markets and intensive follow-up on referrals from
existing customers. All sales and marketing is conducted on a local rather than
a global basis through the following Company owned and independently owned
Skynet stations throughout the world:
Skynet Network Stations
- -----------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Company Owned Stations Location Number of Stations
- ----------------------------------------------------------------------------
London England (3)
Sydney Australia (3)
Los Angeles, California United States (1)
New York, New York United States (1)
San Francisco, California United States (1)
</TABLE>
<TABLE>
<CAPTION>
Independently Owned Stations
----------------------------
<S> <C> <C>
Country Country Country
- -------------------------------------------------------------------------------
Antigua Haiti Peru
Argentina Honduras Philippines
Aruba Hong Kong Portugal
Austria Hungary Puerto Rico
Bahamas India Reunion Island
Bahrain Indonesia Russia
Barbados Iran Rwanda
Belgium Ireland Scotland
Belize Isle of Man Singapore
Bolivia Israel South Africa
Botswana Italy South Korea
Brazil Japan Spain
Brunei Jordan Sri Lanka
Canada Kenya St Denis
Cayman Islands Kuwait Swaziland
Channel Islands Lebanon Sweden
Czech Republic Malawi Switzerland
Chile Malaysia Syria
China Malta Taiwan
Colombia Mauritius Tanzania
Costa Rica Martinique Thailand
Curazao Mexico Trinidad
Cyprus Mozambique Turkey
Denmark Moresby U.A.E.
Dominican Republic Namibia Uganda
Egypt Nepal United States
El Salvador Netherlands Uruguay
Ecuador New Guinea Vanuatu
Estonia/Lithuania New Zealand Venezuela
Finland Nicaragua Vietnam
France Norway Virgin Islands
Germany Oman Western Samoa
Greece Pakistan Yemen
Guatemala Panama Zambia
Guernsey Paraguay Zimbabwe
Guyana Peking
</TABLE>
9
<PAGE>
As management continues to integrate and streamline the operations of the
Company, it will focus on implementing a formalized marketing and sales program.
At this time, the Company intends to expand its direct sales force rather than
engage in any mass marketing or media advertising. The Company believes that
direct sales is the most cost effective way to market the Company's specialized
delivery and logistics services to its current and future customers.
COMPETITION
The market for the Company's delivery services is highly competitive. The
Company believes that the principal competitive factors in the markets in which
it competes are reliability, quality, dependability of service and, most
importantly, price. Since the industry is essentially cost-driven, the Company
is continually seeking to streamline operations to further reduce costs.
Management believes that as it implements its acquisition strategy and
integrates certain Network Members, the Company's per unit costs should
decrease, which should make the Company more competitive in the market place.
Although many of the Company's current competitors, particularly those in
the same-day ground and air delivery market, are small privately held companies,
the industry is currently undergoing substantial consolidation. This will
likely increase competition as the Company's competitors become larger and
better capitalized. In addition, the domestic next-day and second-day express
courier market is dominated by large corporations such as UPS and FedEx who have
substantially greater market power and financial resources. The international
market in which the Company primarily operates is more fragmented. Since the
Company generates in excess of 80% of its revenues from international
deliveries, the impact of direct competition with FedEx and UPS for domestic
time sensitive deliveries is limited.
REGULATION
The Company's operations are subject to various state and local regulations
which require permits and licenses from state authorities. Interstate and
intrastate motor carrier operations are subject to safety requirements
prescribed by the United States Department of Transportation and by state
Departments of Transportation. The Company's failure to comply with applicable
regulations could result in fines or possible revocation of one or more of the
Company's operating licenses, any of which events could have a material adverse
effect on the Company. In addition, the Company is also subject to certain
Federal Aviation Administration regulations which require the Company to
identify the source of all packages placed onto aircraft originating or
terminating in the United States.
INTELLECTUAL PROPERTY
The Company operates under the tradenames "SkyNet" and "SkyNet Worldwide
Express". SkyNet is a registered trademark in Australia which is owned by
SWEPL. Both SkyNet and SkyNet Worldwide Express are registered as tradenames in
the United Kingdom by SIL. The Company has made trademark applications for
SkyNet and SkyNet Worldwide Express with the United States Patent and Trademark
Office and with each of the fifty (50) states, which applications have been
approved in approximately forty (40) states. With respect to the numerous other
countries in which Network Members operate, the Company does not own the
equivalent of registered trademarks in these countries. In some cases, the
names are owned by Network members. Management does not believe that failure to
own the name in each country will have a material adverse effect on the
Company's operation.
10
<PAGE>
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of March 1, 1999, the Company employed approximately 263 people; 51
as drivers or messengers, 93 in operations, 100 in sales and administrative
positions, and 19 in management. Approximately 55 are employed in the United
States. The Company is not a party to any collective bargaining agreements, has
not experienced any work stoppages and believes that its relationship with its
employees is good.
As of March 1, 1999, the Company also utilized 62 independent contract
drivers, primarily in stations outside of the United States. From time to time,
federal and state authorities assert that independent contractors in the
transportation industry, including those utilized by the Company, are employees,
rather than independent contractors. The Company believes that the independent
contractors utilized by the Company are not employees under existing
interpretations of federal and state laws. However, there can be no assurance
that federal and state authorities will not challenge this position, or that
other laws or regulations, including tax laws, or interpretations thereof, will
not change. If, as a result of any of the foregoing, the Company were held
liable for the acts of its contract drivers or required to pay for and
administer added benefits to them, the Company's operating costs would increase.
BUSINESS RISKS
When used in this filing, the words "may," "will," "expect," "anticipate,"
"believe," "continue," "estimate," "project," "intend," and similar expressions
are intended to identify forward-looking statements regarding events, conditions
and financial trends which may affect the Company's future plans of operations,
business strategy, operating results and financial position. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date made. The Company undertakes 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. Such statements are not guarantees of future
performance and are subject to risks and uncertainties and actual results may
differ materially from those included within the forward-looking statements as a
result of various factors. Such risks may relate to, among others:
1. Absence of Combined Operating History. The Company is the surviving
-------------------------------------
corporation of a merger completed on October 14, 1998 (the "Merger") between EPL
Resources (Delaware) Corp., a Delaware corporation ("EPLR"), and SkyNet
Holdings, Inc., a Nevada corporation ("SkyNet Nevada"). EPLR had been an
inactive company prior to the Merger and SkyNet Nevada had only been organized
since 1997 to consolidate the Company's operating subsidiaries. Prior to that,
each of these subsidiaries had been operating as independent legal entities. The
financial statements included within this registration statement reflect the
consolidated operations of the Company and each of its operating subsidiaries on
a consolidated basis for the fiscal years ended June 30, 1996, 1997 and 1998,
and for the six months ended December 31, 1997 and 1998. The absence of a
longer-term combined operating history may create uncertainty as to whether the
consolidated operations of the Company and its subsidiaries may be undertaken
profitably on a consolidated basis. This may subject an investor's evaluation of
the Company's long-term prospects to additional uncertainty.
11
<PAGE>
2. Profitability Likely to Depend Upon Success of Growth Strategy. The
--------------------------------------------------------------
Company has reflected only modest net income from operations during fiscal 1996
and fiscal 1998, and a net loss during fiscal 1997. Furthermore, the Company
incurred a net loss for the six months ended December 31, 1998. Management
attributes this loss to a number of factors, including an increase in the level
of corporate overhead associated with the Merger, the Company's anticipated
operations as a public company and the development and implementation of the
Company's growth strategy. If operations remain at current levels, the Company's
operating losses will most likely continue. As a result, the Company's future
profitability is likely to depend upon the successful implementation of its
business strategy, which primarily relies upon growth through acquisition.
3. Risks Related to Acquisition Strategy. One of the central elements of
-------------------------------------
the Company's business strategy is to grow through acquisitions. There can be no
assurance that the Company will be able to identify, acquire or profitably
manage additional businesses or successfully integrate acquired businesses, if
any, into the Company without substantial costs, delays or other operational or
financial problems. Since the Company has just recently commenced this strategy,
its management does not have a track record in completing such acquisitions. In
addition, the current consolidation of the express courier, same-day delivery
and freight forwarding industries will likely result in increased competition
for acquisition candidates in which event there may be fewer acquisition
opportunities available to the Company as well as higher acquisition prices.
Furthermore, acquisitions involve a number of risks, including possible adverse
effects on the Company's operating results, diversion of management resources,
possible failure to retain key personnel, risks associated with unanticipated
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Performance of, or other problems at, a
single acquired company could have an adverse effect on the Company's national
and international sales and marketing initiatives. In addition, there can be no
assurance that the Company or other courier service businesses acquired in the
future will achieve anticipated revenues and earnings. Finally, foreign laws
which restrict foreign investment or impose unduly restrictive regulations may
prevent the Company from completing acquisitions outside of the United States,
United Kingdom or Australia.
4. Need for Additional Financing; Risks Related to Acquisition Financing.
---------------------------------------------------------------------
The Company intends to use a substantial portion of the net proceeds of the
Private Placement to finance acquisitions in the short term. There can be no
assurances, however, that the net proceeds will be sufficient to finance any
material acquisitions. The Company will require further financing in order to
pursue its acquisition strategy beyond the short-term. The Company intends to
seek this financing through a combination of traditional debt financing and the
placement of debt and equity securities. Provided a liquid trading market for
the Company's Common Stock develops, the Company hopes to finance some portion
of its future acquisitions by using shares of its Common Stock for all or a
substantial portion of the consideration to be paid. However, in the event that
the Common Stock does not attain or maintain a sufficient market, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to utilize more of its cash resources, if available, in order to initiate and
maintain its acquisition program. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings.
12
<PAGE>
5. Limited Market for Common Stock; Possible Volatility of Stock Prices.
--------------------------------------------------------------------
The public trading market for shares of the Company's Common Stock has recently
commenced on the OTC Bulletin Board; however, in view of the minimal supply of
shares eligible for public resale, trading has been extremely limited. There can
be no assurances that a regular trading market for the Company's Common Stock
will develop, and if it develops, whether it can be sustained. By its very
nature, trading on the OTC Bulletin Board provides only limited market
liquidity. As a result of the limited market, purchasers of the Shares may have
difficulty in effecting sales of their Shares and/or obtaining a satisfactory
price for such Shares. The trading market for the Shares may be adversely
effected by the subsequent influx into the market of approximately 4,785,000
shares which the Company has agreed to register for resale under the Securities
Act and an additional 1,325,500 shares issued in the Private Placement which the
Company has also agreed to register for resale under the Securities Act by no
later than on or about February 19, 2000. As of March 12, 1999, the Company has
outstanding 17,424,500 shares of Common Stock of which approximately 100,000 are
eligible for public trading. The shares eligible for public resale will increase
dramatically when the Company effects the registration of the additional shares
for which it has granted registration rights. Although it is impossible to
predict market influences and prospective values for securities, it is possible
that, in and of itself, the substantial increase in the number of shares
available for public sale could have a depressive effect on the market. Until
its trading market develops, if at all, the market price for the Company's
Common Stock is likely to be volatile, and factors such as success or lack
thereof in acquiring suitable strategic targets, competition, governmental
regulation and fluctuations in operating results may all have a significant
effect. In addition, the stock markets generally have experienced, and continue
to experience, extreme price and volume fluctuations which have affected the
market price of many small capitalization companies and which have often been
unrelated to the operating performance of these companies. These broad market
fluctuations, as well as general economic and political conditions, may
adversely affect the market price of the Company's Common Stock.
6. Possible Limitations upon Trading Activities; Restrictions Imposed upon
-----------------------------------------------------------------------
Broker-Dealers Effecting Transactions in Certain Securities. The SEC has
- -----------------------------------------------------------
adopted regulations imposing limitations upon the manner in which certain low
priced securities (referred to as a "penny stock") are publicly traded. Under
these regulations, a penny stock is defined as any equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Such
exceptions include any equity security listed on the Nasdaq National Market
System or SmallCap Market and any equity security issued by an issuer that has
(i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average annual revenue of at least $6,000,000 if such issuer has
been in continuous operation for less than three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. Also, under these regulations,
certain broker/dealers who recommend such securities to persons other than
established customers and certain accredited investors must make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale.
If the Company's Common Stock trades below $5.00, it may be considered a
"penny stock." In which event, trading activities for the Company's Common Stock
will be made more difficult for broker-dealers than in the case of securities
not defined as "penny stocks." This may have the result of depressing the market
for the Company's securities and an investor may find it difficult to dispose of
such securities.
13
<PAGE>
7. Possible Adverse Impact of NASD Rule Change. The National Association
-------------------------------------------
of Securities Dealers, Inc. ("NASD") recently amended its rules applicable to
the OTC Bulletin Board. Under the new rules, "non-reporting" public companies
will no longer be eligible for quotation on the OTC Bulletin Board. Such
quotation will be available only to those companies which have securities
registered under the Exchange Act. Accordingly, in order for the Company's
Common Stock to remain eligible for quotation on the OTC Bulletin Board, the
Company is required to file a registration statement under the Exchange Act
which becomes effective no later than April 2000. The Company has prepared this
registration statement to register the Company's common stock under the Exchange
Act. Although management believes that this registration statement will be
effective prior to April 2000, in the event that it is not, the Company's common
stock would no longer be eligible for quotation on the OTC Bulletin Board which
would have a material adverse effect on its liquidity.
8. Possible Dilution. One of the principal elements of the Company's
-----------------
business strategy is to accomplish strategic acquisitions, principally through
the issuance of additional shares of the Company's Common Stock as purchase
price consideration. This would have the effect of increasing the number of
shares of Common Stock outstanding. In addition, in order to accomplish its
acquisition strategy on a longer-term basis, the Company is likely to require
additional financing to fund its acquisition strategy, which may entail the
issuance of additional shares of Common Stock or Common Stock equivalents, which
would have the further effect of increasing the number of shares outstanding. In
connection with other business matters, the Company will likely undertake the
issuance of more shares of Common Stock. This may be done in order to, among
others, facilitate a business combination, acquire assets or stock of another
business, compensate employees or consultants or for other valid business
reasons in the discretion of the Company's Board of Directors. Under Delaware
law, the Company can issue additional shares without notice to, or approval of,
existing stockholders. During November 1998, the Company adopted a stock option
plan pursuant to which it may grant options for the issuance of shares equal to
10% (currently 1,742,450) of the Company's outstanding shares of Common Stock.
In January 1999, the Company granted options to purchase approximately 920,000
shares of common stock under the plan. In addition, during October 1998, in
conjunction with the Merger, the Company granted options to purchase an
aggregate of 1,800,000 shares of Common Stock.
9. Reorganization of Subsidiary. DPE International, Inc. ("DPE"), a
----------------------------
wholly-owned subsidiary which operates the Company's Los Angeles and San
Francisco facilities, emerged from Chapter 11 reorganization proceedings on or
about September 2, 1996. Under its confirmed reorganization plan, DPE is
obligated to make payments to the Internal Revenue Service, the Employment
Development Department of the State of California and to certain creditors. As
of December 31, 1998, $551,000 is the aggregate amount due under the Plan.
Additional information is contained within Note 4 to the Consolidated Financial
Statements. DPE accounted for 11.6% of the Company's consolidated revenues
during the six months ended December 31, 1998.
14
<PAGE>
10. Competition. The Company faces intense competition from multinational,
-----------
regional and local companies in every market in which it operates. The
principal competitive factors within the courier services industry include
price, frequency and capacity of scheduled service, extent of geographic
coverage and reliability. Many of the Company's competitors have well
established reputations and significantly greater financial, marketing,
personnel and other resources than the Company. The Company's principal
competitors are DHL Worldwide Express, Federal Express, TNT Express Worldwide,
UPS and post offices providing express delivery services, all of which are
multinational, highly-visible and well-regarded enterprises. There can be no
assurance that the Company will be able to compete effectively against these or
any other competitors.
11. Control by Certain Stockholders. On the date of this registration
-------------------------------
statement, the Company's officers, directors and principal stockholders own
approximately 59% of the Common Stock of the Company. Consequently, under
applicable Delaware law, and in view of certain voting arrangements agreed
upon in connection with the Merger, these stockholders will be in a position to
elect all of the Company's directors and control the outcome of other corporate
matters without the approval of the Company's other stockholders. In addition,
applicable statutory provisions and the ability of the Board of Directors to
issue one or more series of preferred stock without stockholder approval could
deter or delay unsolicited changes in control of the Company by discouraging
open market purchases of the Company's stock or a non-negotiated tender or
exchange offer for such stock, which may be disadvantageous to a majority of the
Company's stockholders who may otherwise desire to participate in such a
transaction and receive a premium for their shares.
12. Reliance on Network Members; No Contractual Obligation. The Company's
------------------------------------------------------
operations are dependent upon its Network Members generating packages for
delivery through the Network and delivering packages in their respective regions
for other Network Members. The Network is a worldwide alliance of delivery
professionals and most Network Members are not bound by a formal licensing
agreement or other arrangement. Accordingly, most Network Members have no
contractual obligations to the Company or any other Network Member. Although
management believes that the absence of contractual obligations among Network
Members will not have an adverse effect upon the operations of the Company,
there can be no assurance that such Members will not enter into exclusive or
nonexclusive arrangements with competitive networks or others offering greater
benefits or lower costs.
13. Reliance on Commercial Air Carriers; No Contractual Obligation. The
--------------------------------------------------------------
Company relies on scheduled flights of commercial cargo and passenger aircraft
to provide its courier and freight forwarding services. Consequently, the
Company could be adversely affected by changes in policies and practices of air
carriers, such as pricing, payment terms, scheduling, and frequency of service.
The Company purchases cargo space from commercial air cargo and passenger
aircraft on an as-needed basis and has no contractual relationship with any
carrier for the procurement of such space. Although the Company has
historically been able to secure such space, there can be no assurance that it
will continue to be in a position to do so at rates acceptable to the Company,
if at all. The failure to obtain such space at acceptable rates, if at all,
would have a material adverse impact on the Company's results of operations.
14. Potential Liability Regarding Delivery of Shipments and Insurance
-----------------------------------------------------------------
Coverage. The Company assumes responsibility to its customers for the safe
- --------
delivery of shipments up to $100 in value. Upon the customer's request, the
Company insures amounts above $200 with various insurance companies. The
Company does not carry an umbrella insurance policy. The Company has, from time
to time, made payments to its customers for claims related to its shipments
which, to date, have not been material to the Company's results of operations.
Should the Company experience an increase in the number of such claims, there
can be no assurance that the Company's results of operations will not be
adversely affected.
15
<PAGE>
15. Liability Associated with Contracting Independent Owner/Operators.
-----------------------------------------------------------------
From time to time, federal and state authorities, including the Internal Revenue
Service, have asserted that independent owner/operators in the transportation
industry are employees rather than independent contractors, thus requiring the
payment of payroll and related taxes. The Company believes that the independent
contractors utilized by it and its Network Members are not employees under
existing interpretations of federal and state laws. However, there can be no
assurance that federal and/or state authorities will not challenge this
position, or that laws or regulations, including tax laws, or interpretations
thereof, will not change. If these independent contractors should be deemed to
be employees of the Company, the Company would be required to pay for and
administer added benefits to them. As a result, the Company's operating costs
would increase. Additionally, the Company could be liable for additional taxes,
penalties and interest for prior periods and additional taxes for future
periods, which could have a material adverse effect on the Company's business.
16. Dependence Upon Management Personnel and Executive Officers. The
-----------------------------------------------------------
Company's operations are dependent upon the continued services of Vjekoslav
Nizic its Chief Executive Officer and upon its ability to hire and retain other
qualified management and personnel. The loss of services of Mr. Nizic, any of
the Company's executive officers or other management or personnel, whether as a
result of death, disability or otherwise, would have a material adverse effect
upon the business of the Company. The Company does not maintain a key man life
insurance policy on Mr. Nizic.
17. Year 2000 Issues. The Company is presently attempting to respond to
----------------
Year 2000 issues. Year 2000 issues are the result of computer programs being
written using two digits rather than four to define the applicable year
associated with the program or an associated computation. Any such two-digit
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities. Management expects to have substantially
all of the systems application changes completed within the next 6 months and
believes that its level of preparedness is appropriate. In addition, to the
extent that any of the commercial cargo or passenger airlines utilized by the
Company rely upon computer programs which are subject to any Year 2000 issues,
the Company's financial condition and results of operation could be adversely
affected.
The total cost to the Company of these Year 2000 compliance issues is not
anticipated to be material to its financial position or results of operations in
any given year. These costs and the date on which the Company plans to complete
the Year 2000 modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurances that
these estimates will be achieved and actual results could differ from those
plans.
16
<PAGE>
18. Risks Inherent In International Operations. A majority of the
------------------------------------------
Company's business is conducted outside the United States. As a result, the
operations of certain Network Members in less stable developing countries are
subject to various risks such as loss of revenue, property or equipment due to
expropriation, nationalization, war, insurrection, terrorism or civil
disturbance, the instability of foreign economies, currency fluctuations and
devaluations, adverse tax policies and governmental activities that may limit or
disrupt markets, restrict payments or the movement of funds or result in the
deprivation of contract rights which could negatively affect the Company's
business. Additionally, the ability of the Company to compete may be adversely
affected by foreign governmental regulations that encourage or mandate the
hiring of local contractors, or by regulations that require foreign contractors
to employ citizens of, or purchase supplies from vendors in, a particular
jurisdiction. The Company is subject to taxation in a number of jurisdictions,
and the final determination of its tax liabilities involves the interpretation
of the statutes and requirements of various domestic and foreign taxing
authorities, particularly Australia and the United Kingdom. Moreover, many of
the countries where the Company operates and plans to operate have legal systems
that differ from the United States legal system and may provide substantially
less protection for foreign investors.
19. Restrictions and Controls on Foreign Investments and Acquisitions of
--------------------------------------------------------------------
Majority Interests. Foreign investment by the Company in local joint ventures
- ------------------
or business acquisitions (including investments in Network Members) may be
restricted, controlled, limited or even prohibited by foreign laws. Other
foreign laws require governmental approval of investments by foreign persons and
limit the extent of any such investment. There can be no assurance that
additional or different foreign restrictions or adverse policies applicable to
the Company will not be imposed in the future. The presence of such laws and
regulations may prevent the Company from executing its acquisition strategy
outside of the United States, United Kingdom and Australia.
20. Dependence on International Trade. International trade is essential to
---------------------------------
the Company's revenues and has played an important role in the economic
development of the regions in which the Company currently operates.
International trade is influenced by many factors, including economic and
political conditions, employment issues, currency fluctuations and laws relating
to tariffs, trade restrictions, foreign investments and taxation. A reduction
in the level of international trade, material restrictions on trade or a
downturn in the economies of the United States, United Kingdom or Australia
could have a material adverse effect on the Company.
21. Currency Fluctuations. The Company currently bills only in U.S. and
---------------------
Australian dollars and British pounds. Specifically, approximately 80% of the
Company's revenues are generated outside of the United States and billed in
foreign currencies. Of these foreign currencies, approximately 84% are received
in the form of British pounds and the remainder in the form of Australian
dollars. Exchange rates for these currencies and other local currencies in
countries where the Company may operate in the future often fluctuate in
relation to the U.S. dollar and such fluctuations may have an adverse effect on
the Company's earnings or assets when local currencies are exchanged for U.S.
dollars. The Company does not currently engage in any hedging transactions in
international currencies. Accordingly, any weakening of the value of such local
currency against the U.S. dollar could result in lower revenues and earnings for
the Company.
22. Government Regulation. The Company's operations require licenses,
---------------------
permits and approvals in each jurisdiction in which it operates. Specifically,
the Company's domestic interstate and intrastate motor carrier operations are
regulated by the United States Department of Transportation and various State
Departments of Transportation which prescribe certain safety requirements which,
if not complied with, may result in fines or the revocation of existing
licenses. The loss or revocation of any existing licenses, permits or approvals
or the failure to obtain any necessary licenses, permits or approvals that the
Company may require in the future would have an adverse effect on the ability of
the Company to conduct it business and/or on its ability to expand into
additional jurisdictions. No assurance can be given that the Company will
obtain such licenses, permits or approvals. In addition, countries in which the
Company seeks to operate may have regulatory systems that impose other
impediments on the Company's operations which may prevent the Company from
executing its acquisition strategy outside of the United States, United Kingdom
and Australia.
17
<PAGE>
ITEM 2. FINANCIAL INFORMATION
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On March 15, 1999, the Company completed the acquisition of the operating
assets of Fleet Delivery Service ("Fleet"), a courier delivery service in the
states of Nevada, Arizona, California, Oregon and Washington. The consideration
for the assets acquired is approximately $3,059,000 (including approximately
$100,000 acquisition costs) which the Company satisfied by the issuance of
1,479,415 shares of the Company's Common Stock. The assets acquired include;
receivables, delivery vehicles, equipment, refundable deposits, licenses,
administrative material and equipment, records and documents, and all personal
property used in the operation of the business.
The Company accounted for the acquisition using the purchase method of
accounting with the assets acquired and liabilities assumed recorded at fair
values, and the results of the acquired business will be included in the
Company's consolidated financial statements from the closing date of the
acquisition.
On February 19 and March 5, 1999, the Company conducted closings with
respect to the Private Placement resulting in the issuance of an aggregate of
1,325,500 shares of Common Stock which generated net proceeds (after offering
costs of approximately $441,000) of approximately $2,210,000.
The unaudited pro forma condensed combined statements of operations and
balance sheet presented below reflect the acquisition of Fleet and the Private
Placement described above. The pro forma condensed combined statements of
operations are presented as if these transactions had taken place at the
beginning of the earliest period presented. The pro forma condensed combined
balance sheet is presented as if such transactions had taken place on December
31, 1998. The pro forma condensed combined financial statements should be read
in conjunction with the historical financial statements and notes thereto of the
Company appearing elsewhere herein. The unaudited pro forma financial statements
are not necessarily indicative of what the actual results of operations would
have been had such transactions occurred on July 1, 1997 or what the results of
operations of the Company will be in the future.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
Skynet Fleet Pro forma Pro forma
Holdings Delivery Adjustments Combined
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Current assets $6,569,467 $1,622,181 $ (226,181)(1) $10,175,467
2,210,000 (2)
Property and equipment, net 758,891 203,110 121,890 (1) 1,083,891
Intangibles and other 266,051 19,840 1,620,160 (1) 1,906,051
---------- ---------- ----------
Totals $7,594,409 $1,845,131 $13,165,409
========== ========== ===========
Liabilities:
Current Liabilities $6,792,454 $1,552,358 $(1,250,358)(1) $7,094,454
Long-term debt 550,903 - 550,903
---------- ---------- -----------
Total Liabilities 7,343,357 1,552,358 7,645,357
2,210,000 (2)
Stockholders' Equity 251,052 292,773 2,807,227 (1) 5,520,052
---------- ---------- ----------
Totals $7,594,409 $1,845,131 $13,165,409
========== ========== ===========
</TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Six Months Ended December 31, 1998
<TABLE>
<CAPTION>
Skynet Fleet Pro forma Pro forma
Holdings Delivery Adjustments Combined
------------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $16,947,089 $ 6,775,377 (64,787)(3) $23,657,679
(40,604)(3)
Costs and expenses 17,293,639 6,645,563 78,000 (4) 23,976,598
----------- ------------ -----------
Income (loss) from operations (346,550) 129,814 (318,919)
Other expense, net (408,622) (12,893) 12,893 (5) (408,622)
----------- ------------ -----------
Income before income taxes (755,172) 116,921 (727,541)
Income taxes (6,300) - (6,300)
----------- ------------ -----------
Net Income (loss) $ (761,472) $ 116,921 $ (733,841)
=========== ============ ===========
Basic net loss per share $(0.06) $(0.05)
=========== ===========
Fully diluted net loss per share $(0.06) $(0.05)
=========== ===========
Basic weighted average shares
outstanding (6) 13,410,368 16,215,283
=========== ===========
Fully diluted weighted average
shares outstanding (6) 13,410,368 16,215,283
=========== ===========
</TABLE>
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Skynet Fleet Pro forma Pro forma
Holdings Delivery Adjustments Combined
------------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $31,838,919 $ 13,631,414 (667,608)(3) $44,577,878
(927,656)(3)
Costs and expenses 31,257,942 14,195,444 136,000 (4) 44,661,730
----------- ------------- ----------
Income from operations 580,977 (788,877) (83,852)
Other expense, net (229,523) (186,938) 189,034 (5) (227,427)
----------- ------------- ----------
Income before income taxes 351,454 (975,815) (311,279)
Income taxes (185,404) - (185,404)
----------- ------------- -----------
Net Income $ 166,050 $ (975,815) $ (496,683)
=========== ============= ===========
Basic net income per share $0.02 $(0.05)
=========== ===========
Fully diluted net income per share $0.01 $(0.05)
=========== ===========
Basic weighted average shares
outstanding (6) 7,346,500 10,151,415
=========== ===========
Fully diluted weighted average
shares outstanding (6) 9,796,500 10,151,415
=========== ===========
</TABLE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note A - Pro forma adjustments to the condensed balance sheet are as follows:
(1) To record: i) the acquisition of the assets and the allocation of the
purchase price on the basis of the fair values of the assets acquired and
liabilities assumed and ii) the issuance of 1,479,415 shares of the
Company's Common Stock.
The components of the purchase price and its allocation to the assets and
liabilities acquired are as follows:
<TABLE>
<CAPTION>
Components of purchase price:
<S> <C>
Common Stock issued to sellers.......... $2,059,000
Acquisition costs....................... 100,000
----------
Total purchase price.................. $3,059,000
==========
Allocation of purchase price:
Current assets acquired................. $1,396,000
Property and equipment.................. 325,000
Liabilities assumed..................... (302,000)
Cost in excess of net assets acquired... 1,640,000
----------
Total purchase price.................. $3,059,000
==========
</TABLE>
(2) To record the net proceeds of $2,210,000 from the sale of 1,325,500
shares of the Company's Common Stock.
Note B - Pro forma adjustments to the condensed statements of operations are as
follows:
(3) To eliminate operations of those locations not acquired.
(4) To record additional depreciation expense (over 3 years) based on the
revised values of the depreciable assets and amortization (over 15 years)
of the excess of the fair value over net assets acquired as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
1998 1998
---------- ----------------
<S> <C> <C>
Depreciation based on acquisition cost........ $102,000 $56,000
Historical depreciation....................... 76,000 38,000
-------- -------
Increase in depreciation...................... 26,000 18,000
Amortization of excess of fair value
over net assets acquired.................... 116,000 58,000
-------- -------
Increase in depreciation and amortization .... $142,000 $76,000
======== =======
</TABLE>
(5) To eliminate interest expense of acquired company.
(6) The weighted average shares outstanding were adjusted on a pro forma
basis to include the 1,479,415 additional shares of Common Stock
issued in connection with the Fleet acquisition plus 1,325,500
additional shares issued in a private placement.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's statements of operations for the years ended June 30, 1996, 1997 and
1998 and its balance sheets as of June 30, 1997 and 1998 are derived from the
Company's Consolidated Financial Statements which have been audited by BDO
Seidman, LLP. The selected consolidated financial data with respect to the
Company's statements of operations for the years ended June 30, 1994 and 1995,
and its balance sheets as of June 30, 1994, 1995 and 1996, are derived from
unaudited consolidated financial statements of the Company which in the opinion
of management present fairly the results of operations and financial position
for such periods. The selected consolidated financial data for the six month
periods ended December 31, 1997 and 1998 are derived from the unaudited
condensed consolidated financial statements of the Company, which in the opinion
of management include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations and
financial position for such period. The results of operations for the six months
ended December 31, 1998 are not necessarily indicative of the results of
operations to be expected for the year. The following data should be read in
conjunction with the Company's consolidated financial statements, the related
notes and the independent auditors' reports and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this registration statement.
<TABLE>
<CAPTION>
Statement of Operations Data: (1) Six Months Ended
Years Ended June 30, December 31,
--------------------------------------------------------------------- ------------------------
1994(2) 1995(2) 1996(3) 1997 1998 1997(2) 1998(2)
------------ ------------ -------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $31,373,057 $33,041,182 $34,404,946 $36,151,763 $31,838,919 $16,182,102 $16,947,089
Gross Profit 10,200,664 9,952,232 11,621,140 11,758,535 12,715,451 5,970,506 6,845,275
Income (loss) before
income taxes and
extraordinary income (860,308) (1,238,103) 317,909 (125,268) 351,454 (151,465) (755,172)
Net income (loss) (1,022,933) (1,238,103) 1,297,321(3) (39,668) 166,050 (167,465) (761,472)
Basic income (loss) per
share:
Income (loss) before
Extraordinary income (0.26) (0.31) 0.01 (0.01) 0.02 (0.02) (0.06)
Net income (loss) (0.26) (0.31) 0.19 (0.01) 0.02 (0.02) (0.06)
Dilutive income (loss)
Per share:
Income (loss) before
Extraordinary income (0.26) (0.31) 0.01 (0.01) 0.02 (0.02) (0.06)
Net income (loss) (0.26) (0.31) 0.14 (0.01) 0.02 (0.02) (0.06)
Weighted average number of
shares outstanding:
Basic 7,000,000 7,000,000 7,000,000 7,000,000 7,346,500 7,059,096 13,410,368
Diluted 7,000,000 7,000,000 9,450,000 7,000,000 9,796,500 7,059,096 13,410,368
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets $6,658,413 $6,052,484 $7,305,317 $8,104,071 $6,885,815 $6,988,264 $7,594,409
Long-term Debt 229,384 711,628 662,056 662,056 877,441 626,472 550,903
Total Liabilities 7,899,951 8,613,902 8,555,011 9,397,540 7,572,040 8,346,049 7,343,357
(footnotes appear on next page)
</TABLE>
____________________
(1) The financial data presented above reflects the relevant Statement of
Operations Data of Skynet Holdings, Inc., a Nevada corporation ("Skynet
Nevada"). Skynet Nevada was acquired by EPL Resources (Delaware) Corp., a
Delaware corporation ("EPLR"), by virtue of a merger transaction that was
completed on October 14, 1998 (the "Merger"). Upon completion of the
Merger, EPLR changed its name to "Skynet Holdings, Inc." Since the former
stockholders of Skynet Nevada acquired a controlling interest in EPLR, the
Merger has been accounted for as a "reverse acquisition." Accordingly, for
financial statement presentation purposes, Skynet Nevada is viewed as the
continuing entity and the related business combination is viewed as a
recapitalization of Skynet Nevada, rather than an acquisition by EPLR.
(2) Reflects unaudited data.
(3) Net income for the year ended June 30, 1996 includes extraordinary income
of $1,263,045 relating to the forgiveness of debt arising out of the former
reorganization of one of the Company's subsidiaries.
(4) Basic income (loss) per common share is based upon the weighted average
number of common shares outstanding for each period presented. Diluted
income (loss) per common share is based upon the weighted average number of
common shares plus the dilutive effect of the existing convertible
securities and options outstanding for each period presented.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The Company is a full service provider of international transportation
delivery services operating primarily as an express courier for time sensitive
documents and packages. The Company's services consist of: (i) time certain
deliveries within 24-48 hours of pickup; (ii) next flight out services for same
day expedited deliveries; (iii) local ground transport in select locations; (iv)
freight forwarding services; (v) bulk shipment of mass mailing materials for
local distributions; and (vi) global logistics services incorporating the
Company's proprietary computerized tracking system. These services are
formulated on a customized basis to meet the special needs of a diverse
international customer base. The Company provides these services through its
offices in London, England, Sydney, Melbourne and Brisbane, Australia, and New
York, San Francisco and Los Angeles, as well as through "SkyNet Worldwide
Express", a global network of over 1,000 offices which are independently owed
and operated in over 100 countries and functions as a worldwide network for its
members.
The Company has been formed as a result of two recent business
combinations. First, on October 1, 1997, SkyNet Nevada, a predecessor to the
Company, acquired the stock of four companies whose businesses provided
international express courier delivery services and freight forwarding services
for time sensitive documents and packages to customers throughout the world
under the name "SkyNet Express". These acquisitions were undertaken in order to
consolidate the Company's London offices with Network members in Sydney,
Melbourne and Brisbane, Australia and New York, San Francisco and Los Angeles.
These acquisitions were completed through an exchange of shares and were
accounted for as a reorganization of entities under common control in a manner
similar to a pooling of interest, whereby the Company's consolidated financial
statements have been restated to include the accounts and operations of the
merged companies for all periods presented prior to the merger.
On October 14, 1998, SkyNet Nevada merged with and into EPLR in a share
exchange transaction. Upon completion of the Merger, the combined companies
changed their name to "SkyNet Holdings, Inc.", a Delaware corporation. Prior to
the Merger, EPLR was an inactive company whose shares were eligible for
quotation on the OTC Bulletin Board. Since the former stockholders of SkyNet
Nevada acquired a controlling interest in EPLR in the Merger, the Merger has
been accounted for as a "reverse acquisition." Accordingly, for financial
statement presentation purposes, SkyNet Nevada is viewed as the continuing
entity and the related business combination is viewed as a recapitalization of
SkyNet Nevada, rather than an acquisition by EPLR.
Due to the size and nature of its particular industry segments, the Company
believes there is an opportunity to implement a market roll-up program through
selected acquisitions in the United States and overseas. Assuming it can
successfully implement this strategy, the Company intends to acquire
transportation service companies that fit into or compliment its current
operations, including express and same day courier businesses, as well as more
localized intra-city couriers, intra-regional couriers and global freight
forwarders. The Company intends to further enhance the Network's competitive
capabilities by focusing on initiatives designed to ensure a high standard of
quality control, global marketing and accelerated development of leading edge
technology, all of which, if successfully implemented, would enable the Company
to achieve greater global market penetration. Through the implementation of
this strategy, the Company believes it can enhance its position as a provider of
global delivery and transportation services.
20
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO 1997
REVENUES. Revenues for the six months ended December 31, 1998 amounted
to $16,947,089 compared to $16,182,102 for the six months ended December 31,
1997, an increase of 4.7%. The increase in revenues was attributable to higher
volume.
COST OF SALES. Cost of sales for the six months ended December 31, 1998
amounted to $10,101,814 compared to $10,211,596 for the six months ended
December 31, 1997. As a percentage of sales, such costs amounted to 59.6% for
the six months ended December 31, 1998 compared to 63.1% for the corresponding
period of the prior year. The improvement resulted from the elimination of
marginal business and improved rates received for existing business from
carriers utilized by the Company.
OPERATING EXPENSES. Compensation and compensation related costs increased
to $3,998,583 for the six months ended December 31, 1998 compared to $3,396,320
during the prior year. As a percentage of sales, compensation costs increased to
23.6% during the six months ended December 31, 1998 as compared to 21.0% for the
prior year. $271,527 of the increase relates to the addition of senior level
management personnel. The remainder of the increase principally relates to
additional staff level personnel.
Occupancy costs decreased to $277,156 for the six months ended December
31, 1998 compared to $277,394 during the prior year. Occupancy costs as a
percentage of sales remained constant during both periods. Communication
expense amounted to $375,670 during the six months ended December 31, 1998 as
compared to $304,392 for the prior year.
Other operating expenses for the six months ended December 31, 1998
amounted to $2,540,416 compared to $1,885,182 for the six months ended December
31, 1997. The increase in operating expenses resulted from: higher
communication expense of approximately $70,000, increased office expense of
approximately $63,000, increased audit fees of approximately $50,000, legal
costs of approximately $50,000 related to the Merger which was completed on
October 14, 1998, increased travel and related expenses of approximately
$140,000 and approximately $60,000 relating to a new regional office established
by the Company in the Far East.
YEAR ENDED JUNE 30, 1998 COMPARED TO 1997
REVENUES. Revenues for the year ended June 30, 1998 amounted to $31,838,919
compared to $36,151,763 for the year ended June 30, 1997, a decrease of 11.9%.
The decrease in revenues included the loss of a large customer in the United
Kingdom ($900,000) and management's decision to eliminate lower margin business
which resulted in a decrease in revenue of approximately $1,400,000.
COST OF SALES. Cost of sales for the year ended June 30, 1998 amounted to
$19,123,468 compared to $24,393,228 for the year ended June 30, 1997, a decrease
of 21.6%. As a percentage of sales, such costs amounted to 60.1% for the year
ended June 30, 1998 compared to 67.5% for the prior year. The improvement
during fiscal 1998 resulted from the elimination of marginal business and
improved rates received for existing business from carriers utilized by the
Company.
21
<PAGE>
OPERATING EXPENSES. Compensation and compensation related costs increased
to $7,178,941 for the year ended June 30, 1998 compared to $6,948,756 during the
prior year. As a percentage of sales compensation costs increased to 22.5%
during the year ended June 30, 1998 as compared to 19.2% for the prior year.
The increase as a percentage of sales resulted from a combination of lower sales
volume and wage increases as the number of employees during 1998 and 1997 was
approximately the same due to the retention of certain employees in spite of the
elimination of the low margin business described above.
Occupancy costs increased to $660,742 for the year ended June 30, 1998
compared to $529,876 during the prior year. Occupancy costs as a percentage of
sales increased from 1.5% during 1997 to 2.1% during 1998. During 1998 the
Company moved into larger facilities in London and Sydney. Communication
expense amounted to $630,221 during the year ended June 30, 1998 as compared to
$615,705 for the prior year.
Other operating expenses were approximately the same in both years and
included increased commissions of approximately $195,000.
YEAR ENDED JUNE 30, 1997 COMPARED TO 1996
REVENUES. Revenues for the year ended June 30, 1997 amounted to
$36,151,763 compared to $34,404,946 for the year ended June 30, 1996, an
increase of 5.1%. The increase in revenue resulted from higher volume.
COST OF SALES. Cost of sales for the year ended June 30, 1997 amounted to
$24,393,228 compared to $22,783,806 for the year ended June 30, 1996. As a
percentage of sales, such costs amounted to 67.5% for the year ended June 30,
1997 compared to 66.2% for the prior year.
OPERATING EXPENSES. Compensation and compensation related costs increased
to $6,948,756 for the year ended June 30, 1997 compared to $6,460,625 during the
prior year. As a percentage of sales compensation costs increased to 19.2%
during the year ended June 30, 1997 as compared to 18.8% for the prior year.
The increase as a percentage of sales resulted from wage increases plus the
addition of approximately 20 new employees during 1997.
Occupancy costs were approximately the same in both years at 1.5% of sales.
Communication expense amounted to $615,705 during the year ended June 30, 1997
as compared to $553,417 for the prior year. The increase in communication
expenses resulted from the expansion of the Company's business during 1997.
Other operating expenses were approximately the same in both years.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
A foreign subsidiary of the Company has a financing agreement with a bank
in London. The agreement provides borrowing for the subsidiary based on 75% of
customer receivables generated from accounts in the United Kingdom, which are
less than 90 days old up to a maximum of $1,700,000. The subsidiary pays an
administrative charge of .2% plus interest at the bank's base rate plus 2.25%
(10.0% at June 30, 1998). Borrowings under the agreement amounted to $1,466,422
and $782,012 at June 30, 1997 and 1998 and $1,068,690 at December 31, 1998.
Total cash and cash equivalents at December 31, 1998 amounted to
$78,455.
22
<PAGE>
Net cash provided by (used in) operating activities amounted to $387,511,
$(984,489) and $286,729 during the years ended June 30, 1996, 1997 and 1998. The
changes were primarily caused by fluctuations in receivables of $(1,119,315),
$(657,974) and $1,259,802 and fluctuations in payables and accrued liabilities
of $1,204,153, $(574,321) and $(1,356,475) during the years ended June 30, 1996,
1997 and 1998. Net cash used in operating activities during the six months ended
December 31, 1997 and 1998 amounted to $(338,304) and $(1,555,017). The increase
during the six months ended December 31, 1998 primarily results from the
increase in net loss of approximately $600,000 and changes in payables and
receivables.
Net cash used in investing activities, primarily the acquisition of
property and equipment, amounted to $282,381, $315,827 and $244,212 during the
years ended June 30, 1996, 1997 and 1998, and $69,191 and $253,269 during the
six months ended December 31, 1997 and 1998.
Net cash provided by (used in) financing activities amounted to $1,416,850
and $(70,867) during the years ended June 30, 1997 and 1998. The Company
received $1,466,422 from bank borrowings during the year ended June 30, 1997 and
repaid $684,410 during the year ended June 30, 1998. During the year ended June
30, 1998, the Company received net proceeds in the amount of $398,000 from the
sale of 258,000 shares of the Company's Common Stock at $2.00 per share. Net
cash provided by financing activities during the six months ended December 31,
1997 and 1998 amounted to $33,558 and $1,495,678. The increase in 1998 resulted
from increased bank borrowings of $286,678, proceeds from short term borrowings
of $1,195,538 and $500,000 received as part of the merger with EPLR partially
offset by repayments of long-term debt of $486,538.
At June 30, 1998 and December 31, 1998, management provided 100% valuation
allowances amounting to approximately $722,000 against the net deferred tax
asset represented by its net operating loss carry forwards due to the
indeterminate nature of the Company's ability to realize this deferred asset. On
December 1, 1998, the Company enhanced its liquidity through the repayment of an
aggregate of $1,145,000 of outstanding indebtedness through the issuance of
572,500 shares of Common Stock. See "Item 7 - Certain Relationships and Related
Transactions - Repayment of Indebtedness" and "Item 10- Recent Sales of
Unregistered Securities."
CAPITAL RESOURCES
During the year ended June 30, 1998, the Company completed a private
placement offering and received net proceeds in the amount of $398,000. In
connection with the Merger transaction, the Company received approximately
$500,000 from the sale of EPLR shares in a private placement transaction prior
to the Merger.
On February 19 and March 5, 1999, the Company conducted closings with
respect to the Private Placement resulting in the issuance of an aggregate of
1,325,500 shares of Common Stock which generated net proceeds (after offering
costs of approximately $441,000) of approximately $2,210,000. The Company
intends to use the net proceeds of the Private Placement for general working
capital and general corporate purposes, primarily to finance the Company's
business plan which includes an acquisition and consolidation strategy and to
upgrade the Company's information technology.
The Company anticipates incurring capital expenditures in the amount of
between $150,000 and $200,000 during the quarter ending June 30, 1999 in
connection with the upgrade of the Company's existing information technology.
This represents the initial software development and installation costs as well
as the additional hardware needed to effectively implement and operate the
proposed new system.
Management believes that with the completion of the Private Placement, the
Company's existing capital resources will be sufficient to fund its operations
during the next twelve months. The Company intends to pursue an aggressive
acquisition strategy. This may involve acquiring target companies for cash,
indebtedness, newely issued securities, or a combination thereof. The Company
will likely require additional capital in order to finance any acquisitions that
involve material cash components. In addition, the Company will likely require
additional operating capital to finance the continued growth of the Company, to
the extent its acquisition strategy is successful. The Company may seek
additional funds from public or private offerings of debt or equity securities
or from bank-financing facilities to the extent available to the Company.
23
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk sensitive instruments do not subject it to
material market risk exposures, except for such risks related to interest rate
fluctuations and foreign currency exchange rates. The carrying value of bank
debt and long-term debt approximates fair value at June 30, 1997 and 1998 and
September 30, 1998 since these notes substantially bear interest at floating
rates based upon the lenders' "prime" rate. The fair value of long-term debt in
the amount of $330,000 at September 30, 1998 related to the reorganization of a
subsidiary under bankruptcy cannot be estimated due to the court-mandated nature
of the debt.
Although the Company currently bills only in U.S. and Australian dollars
and British pounds, exchange rates for these and other local currencies in
countries where the Company may operate in the future may fluctuate in relation
to the U.S. dollar and such fluctuations may have an adverse effect on the
Company's earnings or assets when local currencies are exchanged for U.S.
dollars. Any weakening of the value of such local currency against the U.S.
dollar could result in lower revenues and earnings for the Company. To date,
gains and losses related to foreign currency transactions and foreign currency
translation have not been material for the Company.
Included in the Company's consolidated balance sheets at June 30, 1998 and
1997 and December 31, 1998 are the net assets (liabilities) of the Company's
United Kingdom subsidiary of approximately $410,000, $469,000 and $853,000 and
the Company's Australian subsidiary of approximately $212,000 and $(230,000) and
$(48,000) for the same periods.
SEASONALITY
Company revenues in certain geographic regions appear to be subject to
certain seasonal fluctuations. These seasonal fluctuations have not, to date,
been apparent in the Company's overall results of operations.
INFLATION
The Company does not believe that inflation has to date had a material
impact on its operations. Significant increases in labor, food, or other
operating costs could have a material adverse affect on the Company's results if
the Company were for some reason unable to pass along cost increases due to
general inflation by increasing its prices.
YEAR 2000 ISSUES
The Company is currently addressing Year 2000 issues. Year 2000 issues are
the result of computer programs being written using two digits rather than four
to define the applicable year associated with the program or an associated
computation. Any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
Management expects to have substantially all of the systems application changes
completed within the next 6 months and believes that its level of preparedness
is appropriate.
Management is currently replacing the accounting software used throughout
the Company with an updated version which includes accounts payable and accounts
receivable modules that are Year 2000 compliant. Management expects that the
upgrade will be completed by June 30, 1999. In addition, the Company has
received representations from its independent consultant that the SkyComs system
is Year 2000 compliant.
The Company also relies, both domestically and internationally, upon
airlines, government agencies (partially the Federal Aviation Administration),
utility companies, telecommunication service companies and other service
providers outside of the Company's control. The Company is monitoring
information provided by several national and international associations which
pursue common year 2000 objectives and are active in a global and industry-wide
effort to understand the year 2000 compliance status of airports, airlines, air
traffic systems, customs clearance and other U.S. and international government
agencies, and common vendors and suppliers. However, there is no assurance that
suppliers, governmental agencies, or other third parties will not suffer a year
2000 business disruption. Such failures could have a material adverse affect on
the Company's financial condition, liquidity or results of operations.
24
<PAGE>
The total cost to the Company of these Year 2000 compliance issues is not
anticipated to be material to its financial position or results of operations in
any given year. These costs and the date on which the Company plans to complete
the Year 2000 modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurances that
these estimates will be achieved and actual results could differ from those
plans.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The statement requires
restatement of all prior period earnings per share (EPS) data presented. The
new standard requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. The Company adopted SPAS 128 for the period ending June 30, 1998
and for prior periods as presented in the financial statements. Adoption of
this standard did not result in a restatement of prior periods EPS data.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") is effective for financial
statements ending after December 15, 1997. SFAS 129 reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS 128. The
Company adopted SFAS 129 on June 30, 1998, and it did not have any effect on its
consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. This standard was adopted during
fiscal 1999.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segment of an Enterprise and Related Information" ("SFAS 131"), is effective for
financial statements with fiscal years beginning after December 15, 1997. The
new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and condensed financial statements of interim periods issued to
stockholders. It also requires that public business enterprises report certain
information about their products issued to stockholders. It also requires that
public business enterprises report certain information about their products and
services, the geographic areas in which they operate and their major customers.
The Company does not expect adoption of SFAS 131 to have a material effect, if
any, on its consolidated results of operations.
Statement of Financial Accounting Standards No. 132, Employers' Disclosure
About Pensions and Other Postretirement Benefits ("SFAS 132") issued by the FASB
is effective for financial statements with fiscal years beginning after December
15, 1997. SFAS 132 revises employers' disclosures about pension and other
postretirement benefit plans. The Company does not expect adoption of SFAS 132
to have a material effect, if any, on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133") issued by the FASB is
effective for financial statements with fiscal years ending June 15, 1999 and
later. SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption of
SFAS 133 to have a material effect, if any, on its financial position or results
of operations.
Statement of Financial Accounting Standards No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale By A Mortgage Banking Enterprise ("SFAS 134") issued by the FASB
is effective for financial statements with fiscal years beginning after December
15, 1998. SFAS 134 amends SFAS No. 65, Accounting for Certain mortgage Banking
Activities, which establishes accounting and reporting standards for certain
activities of mortgage banking enterprises and other enterprises that conduct
operations which are substantially similar to the primary operations of a
mortgage banking enterprise. The Company does not expect adoption of SFAS 134 to
have a material effect, if any, on its financial position or results of
operations.
ITEM 3. PROPERTIES
As of March 1, 1999, the Company operated from six leased facilities.
These facilities are principally used for operations, general and administrative
functions. The facilities are located in London, England, Sydney and Melbourne,
Australia and New York, San Francisco and Los Angeles. In addition, the
Company's principal executive office is located in the leased facility in Los
Angeles. The Company's aggregate rental expense for the fiscal year ended June
30, 1998 amounted to $648,901. See Note 9 to the Company's Consolidated
Financial Statements. Management believes that the Company's facilities are
adequate for its current and reasonably foreseeable operations.
25
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 12, 1999, by (i) each
person who, to the knowledge of the Company, beneficially owned more than 5% of
the Common Stock; (ii) each director and executive officer of the company; and
(iii) all executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT OF PERCENT OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) CLASS
- ------------------ ---------------------- ----------
<S> <C> <C>
Vjekoslav Nizic 6,650,878(3) 39.1%
Christian J. Weber 200,000(4) 1.2%
Martin G. Paravato 50,000(5) *
Andrew Lovell 162,500 1.0%
Noel John Holmes 335,000(6) 2.0%
John Cathcart 1,600,000(7) 9.4%
Vincent J. Marold 1,680,151(8) 9.9%
All Directors, and Executive
Officers as a Group (5 persons) 7,398,378 42.5%
</TABLE>
______________________
*Represents less than 1% of the outstanding shares of Common Stock.
(1) The address of Vjekoslav Nizic, Martin G. Paravato, Andrew Lovell is in
care of the Company, 343 South Glasgow Avenue, Inglewood, California 90301,
the address of Christian J. Weber is c/o Skynet International Limited,
Stockley Close, West Drayton, England, UB7 9BL, the address of Noel John
Holmes is PO Box 320, Coolangatta, QLD 4225, Australia, the address of John
Cathcart is 774 Mays Boulevard #10-450, Incline Village, NV 89451 and the
address of Vincent J. Marold is c/o Synergy Group International, Inc. 3725
East Sunrise Drive, Tucson, Arizona 85718.
(2) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth in the
rules and regulations promulgated under the Exchange Act, and accordingly,
may include securities owned by and for among others the spouse and/or
minor children of an individual and any other relative who has the same
home as such individual, as well as other securities as to which the
individual has or shares voting or investment power or which such person
has the right to acquire within 60 days after the date of this filing
pursuant to the exercise of options, or otherwise. Beneficial ownership
may be disclaimed as to certain of the securities. This table has been
prepared based on 17,424,500 shares of Common Stock outstanding as of
March 12, 1999.
(3) Includes 3,121,023 shares of Common Stock held by Fir Construction Pty.
Ltd., of which Mr. Nizic is the managing director. Also includes 3,425,879
shares which are subject to an irrevocable proxy in favor of Mr. Nizic
which vests Mr. Nizic with the sole power to vote such shares with respect
to the election of directors and any amendment to the Company's Certificate
of Incorporation or By-Laws which (i) affects the size or composition of
the board of directors of the Company; or (ii) effects the supermajority
vote provisions required for board approval of certain transactions. Does
not include 700,000 shares issuable upon the exercise of options subject to
vesting commencing October 14, 2000.
(4) Consists of Common Stock owned of record by Deansley Limited, an affiliate
of Mr. Weber. Does not include 400,0000 shares issuable upon exercise of
options subject to vesting commencing October 14, 1999 which Mr. Weber
acquired from Synergy Group International, Ltd. Does not include 700,000
shares issuable upon the exercise of options granted in connection with the
Merger which were subsequently transferred to John Cathcart.
(5) Consists of shares issuable upon exercise of options.
(6) Consists of shares held by Pearlgold Pty Ltd, an entity affiliated with Mr.
Holmes.
(7) Includes 50,000 shares held of record by Mr. Cathcart which are subject to
options granted by Mr. Cathcart to third parties. Does not include 700,000
shares issuable upon the exercise of options transferred from Mr. Weber
which are subject to vesting commencing October 14, 2000.
(8) Includes shares held of record by Synergy Group International, Inc. of
which Mr. Marold is the sole shareholder. Does not include 170,000 shares
held of record by adult family members of Mr. Marold and 100,000 shares
held by a family trust, of which Mr. Marold has a 20% beneficial
interest.
26
<PAGE>
MATERIAL VOTING ARRANGEMENTS
Pursuant to the Merger, Christian J. Weber, Vjekoslav Nizic, John Cathcart,
Deansley Limited and Fir Construction Pty. Ltd. (collectively, the "Historic
Principal Shareholders") who held, as of the closing of the Merger, an aggregate
of 8,673,128 shares of the Company's Common Stock, have agreed that until
October 14, 2000, they will vote their shares at every annual meeting of
stockholders, at any special meeting of stockholders called for the purpose of
electing directors, or action by written consent or otherwise take such action
as is required, to vote for and elect a Board of Directors in the manner
described below in "ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS BOARD OF
DIRECTORS." In addition, the Historic Principal Shareholders have also agreed
not to vote their shares to amend the Company's Bylaws or Certificate of
Incorporation in a manner inconsistent with the provisions described below in
"ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS MATTERS OF CORPORATE GOVERANCE." On
February 26, 1999, Christian J. Weber and his affiliates, Deansley Ltd. and
Moontown Ltd., sold an aggregate of 3,425,879 shares of Common Stock to certain
institutional investors. The purchasers of such shares have executed an
irrevocable proxy in favor of Mr. Nizic vesting him with the sole power to vote
such shares in the manner described above until no later than on or about May
19, 2001.
MATERIAL ESCROW ARRANGEMENTS
3,750,000 shares of the Company's outstanding Common Stock are subject to
cancellation upon the terms set forth in Escrow Agreements entered into in
connection with the Merger. Specifically, the Historic Principal Shareholders
and the Company are parties to an Escrow Agreement pursuant to which the
Historic Principal Shareholders deposited an aggregate of 3,000,000 shares of
Common Stock into escrow to secure their indemnification obligations under the
Merger Agreement with respect to certain of their representations and
warranties. 1,250,000 of these shares were released upon completion of audited
financial statements of SkyNet Nevada by BDO Seidman LLP. An additional
1,000,000 of these shares are subject to release on or about April 13, 1999 and
the remaining 750,000 shares are subject to release on October 13, 1999 so long
as no claims for indemnification under the Merger Agreement are pending against
the Historic Principal Shareholders.
In addition, certain historic principal shareholders of EPLR, including
Vincent J. Marold, and the Company are parties to an Escrow Agreement pursuant
to which these shareholders placed 2,000,000 shares into escrow to secure the
obligation of EPLR to complete a private placement of Company's securities to
raise net proceeds of at least $2,500,000. In order to satisfy this obligation,
the Company undertook the Private Placement pursuant to which it realized net
proceeds of approximately $2,210,000. The Company has agreed to extend the
deadline to raise the additional capital until March 31, 1999. In the event that
an additional $300,000 of net proceeds is not raised by March 31, 1999, these
shares will be surrendered and returned to the Company for cancellation.
RESTRICTIONS UPON RESALE
In addition to any prohibition on transfers or sales under applicable
federal or state securities laws, the Historic Principal Shareholders may not
sell, transfer, encumber or otherwise dispose of the shares of the Company's
Common Stock issued to them in the Merger until October 14, 2000.
Notwithstanding this limitation, commencing January 14, 1999, the Historic
Principal Shareholders shall be permitted to sell up to an aggregate of 160,000
shares of the Company's Common Stock; provided, however, that any sale of such
shares prior to October 14, 1999 shall be on terms and to parties reasonably
acceptable to Mr. Marold's designee to the Company's Board of Directors. See
"ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS - BOARD OF DIRECTORS." In this
regard, the Company has agreed to include these shares in a registration
statement to permit the public resale thereof. Subject to compliance with
applicable federal and state securities laws and regulations, during the one
year period commencing October 14, 1999, each Historic Principal Shareholder
shall be permitted to sell up to 50,000 additional shares of the Company's
Common Stock.
In connection with the Private Placement, the directors and executive
officers of the Company entered into lock up agreements (the "Placement Agent
Lock-Up Agreement") with Puglisi Howells & Co., Inc. (the "Placement Agent").
Under the Placement Agent Lock-Up Agreement, such executive officers and
directors have agreed not to directly or indirectly, offer for public sale,
publicly sell, or otherwise publicly dispose of, directly or indirectly, any of
the shares of the Company's Common Stock which they may own legally or
beneficially for a lock-up period commencing February 19, 1999 and terminating
on the last to occur of: (i) August 19, 2000; (ii) the date ninety (90) days
after the effectiveness of the registration statement covering the resale of the
shares sold in this Private Placement; and (iii) the date ninety (90) days after
the effectiveness of the registration statement covering the shares issuable
upon exercise of the warrants issued to the Placement Agent, however, in any
event, such lock-up period shall expire no later than on or about May 19, 2001.
Notwithstanding the above, during such lock-up period, the executive officers
and directors are permitted to: (i) with the consent of a majority of the
Company's disinterested directors, engage in private resales, pledges or gifts
of the shares so long as the purchaser, pledgee or donee acquiring the shares
agrees to hold such shares in accordance with the restrictions identified herein
for the remainder of the lock-up period applicable to such shares; or (ii)
engage in private transfers or gifts of the shares to "affiliates" (as the term
is defined under the Securities Exchange Act of 1934) or family members, so long
as the transferee or donee acquiring the shares agrees to hold such shares in
accordance with the restrictions identified herein for the remainder of the
lock-up period applicable to such shares.
As described in "ITEM 9 - MARKET PRICE OF THE DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND STOCKHOLDER MATTERS," the Company has agreed to file a shelf
registration statement covering the public resale of approximately 4,785,000
shares of the Company's Common Stock. In connection with the Private Placement,
holders of 1,000,000 of these shares have agreed not to directly or indirectly,
offer for public sale, publicly sell, or otherwise publicly dispose of such
shares without the prior written consent of the Placement Agent for a lock-up
period commencing on February 19, 1999 and terminating sixty (60) days after the
later of (i) the date the shares of common stock issued in the Private Placement
are first eligible for public resale under either SEC Rule 144 or pursuant to an
effective registration statement under the Securities Act; or (ii) the
effectiveness of a registration statement under the Securities Act covering the
resale of the shares underlying the warrants issued to the Placement Agent,
however, in any event, such lock-up period shall expire no later than on or
about May 19, 2000. With the consent of a majority of the disinterested members
of the Company's Board of Directors, third-party private resales, pledges or
gifts of these shares will be permitted as long as the purchaser, pledgee or
donee of any such shares agrees to remain bound by the aforesaid restrictions
upon resale for the remainder of the lock-up period applicable to such shares.
Private transfers or gifts to affiliates or family members are also permitted as
long as the transferee or donee of any such shares agrees to remain bound by the
aforesaid restrictions upon resale for the remainder of the lock-up period
applicable to such shares.
27
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information regarding each of the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME Age Office
---- --- ------
<S> <C> <C>
Vjekoslav Nizic 45 President, Chief Executive
Officer and Director
Christian J. Weber 55 Chairman and Managing
Director of SIL
Martin G. Paravato 57 Chief Financial Officer,
Treasurer and Secretary
Andrew Lovell 40 Chief Operating Officer of
SkyNet Worldwide Express
Noel John Holmes 50 Director
</TABLE>
The following is a brief summary of the business experience of each of the
above-named individuals:
VJEKOSLAV ("VIC") NIZIC currently serves as the President, Chief Executive
Officer and Director of the Company. Mr. Nizic has been involved in the courier
business since 1978 when he founded Skyroad Express as a domestic courier
company in Australia, offering overnight and same-day service. Skyroad Express
became the largest privately-owned express courier company in Australia at that
time. In 1983, Mr. Nizic sold Skyroad Express and formed DPE International Pty.
Ltd., an international courier providing service from Australia to the rest of
the world. In 1987, Mr. Nizic sold DPE International Pty. Ltd., retaining DPE
International, Inc., its U.S. subsidiary, which filed for protection under
Chapter 11 of the U.S. Bankruptcy Code in 1995, emerging from the Chapter 11
proceedings in 1996. Mr. Nizic graduated from the University of New South Wales
in Australia.
CHRISTIAN J. WEBER currently serves as the Chairman of the Board of
Directors of the Company and the Managing Director of SIL. Mr. Weber has been
involved in the courier business since 1978, when he co-found Sky Courier
International, a company engaged in international courier services. In 1978,
Mr. Weber was also a founder of SkyNet, and in 1980 he purchased, with partners,
a controlling interest in SIL and its subsidiaries, which currently comprise the
largest of the Company's operating subsidiaries. In 1992, Mr. Weber developed
the SkyCom system used by the Company. Mr. Weber has acted as the managing
director of SIL since that time.
MARTIN G. PARAVATO has served as Chief Financial Officer, Treasurer and
Secretary of the Company since July 1998. Prior to joining the Company, from
1996 to 1998 Mr. Paravato was Sr. Vice President Finance and Special Projects
with Koo Koo Roo, Inc. a public company that owns and operates restaurants.
Prior to joining Koo Koo Roo, Mr. Paravato was an audit partner with the
international accounting firm of BDO Seidman, LLP specializing in serving
publicly held companies. Mr. Paravato has over 25 years experience in public
accounting. Mr. Paravato is a CPA and a member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants. He holds a Bachelor of Science - Business degree from California
State University at Northridge, California.
28
<PAGE>
ANDREW LOVELL joined the Company September 1, 1998 as Chief Operating
Officer of SkyNet Worldwide Express. Prior to joining the Company, he was
founder, managing director and part owner of a South African company, which is
one of the largest and most successful Members of the SkyNet Network. Prior to
that, he served as managing director of Sky Couriers, another Network Member.
Mr. Lovell has over 18 years experience in the courier delivery and freight
forwarding industries and holds a business management diploma from Damelin
College in Johannesburg, South Africa.
NOEL JOHN HOLMES has served as a director of the Company since November 16,
1998. Mr. Holmes is a chartered accountant and has been a partner with Holmes &
Partners Pty Ltd., an accounting firm on the Gold Coast, Australia since 1986.
Mr. Holmes has over 30 years of public and private accounting experience and is
a fellow of the Institute of Chartered Accountants in Australia, the Taxation
Institute of Australia and the Australian Institute of Company Directors, among
others.
BOARD OF DIRECTORS
All directors hold office until the next annual meeting of the stockholders
and the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The Board of Director presently consists of three (3) members. However, in
conjunction with the Merger, the Company agreed to maintain a Board of Directors
consisting of five (5) members including: (i) a designee of Vincent J. Marold, a
former EPLR board member and a principal stockholder of the Company; (ii) two
(2) designees of the Historic Principal Shareholders; (iii) a designee of the
disignee under item (i) above who shall be acceptable to the Historic Principal
Shareholders; and (iv) an additional designee of the Historic Principal
Shareholders who is acceptable to the designee under item (i) above. Mr. Nizic
and Mr. Weber are the designees under item (ii) above and Mr. Holmes is the
designee under item (iv) above. As of the date of this registration statement,
Mr. Marold has not designated the member covered under item (i) above.
MATTERS OF CORPORATE GOVERNANCE
Until October 13, 2000, the Company's Bylaws require that certain
fundamental corporate transactions require the approval of 80% of the members of
the Company's Board of Directors. These include (i) any merger, consolidation,
sale of all or substantially all of the assets of the Company or a
recapitalization involving the Company; (ii) transactions between the Company
and any interested party (including all directors, executive officers or persons
holding in excess of 5% of the Company's outstanding shares); (iii) any
modification to the terms of the Merger or any other agreements entered into in
connection with the Merger; (iv) any issuance of shares of the Company's Common
Stock, preferred stock or securities exercisable or convertible into shares of
the Company's Common Stock or preferred stock equal to or exceeding 10% of the
Company's then outstanding shares of Common Stock or voting power; and (v) any
amendment to the Company's Bylaws or Certificate of Incorporation. The Historic
Principal Shareholders have further agreed not to take any action inconsistent
with the foregoing, including voting any shares of the Company's Common Stock to
amend the Company's Bylaws or Certificate of Incorporation in a manner
inconsistent with the foregoing.
29
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid to or accrued by the Company's Chief Executive Officer,
Chairman of the Board and all other executive officers who earned more than
$100,000 (salary and bonus) (the "Named Executive Officers") for all services
rendered in all capacities to the Company during the fiscal years ended June 30,
1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation COMPENSATION AWARDS
-------------------------- ---------------------
RESTRICTED
NAME AND PRINCIPAL Fiscal Other Annual STOCK OPTIONS/
Position Year Salary BONUS COMPENSATION Awards SARs (#)
-------- ---- ------ ----- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Vjekoslav Nizic 1998 $128,863 -- -- -- --(2)
President and Chief 1997 $ 58,692 -- -- -- --
Executive Officer 1996 $ 59,829 -- -- -- --
Christian J. Weber 1998 $199,980 $20,625 -- -- --(3)
Chairman of the Board 1997 $196,350 $48,950 -- -- --
1996 $130,350 $69,135 -- -- --
</TABLE>
__________________________
(1) With respect to each of the executive officers named in the table, if not
separately reported the aggregate amount of perquisites and other personal
benefits, securities or property received was less than either $50,000 or
10% of the total annual salary and bonus reported for such executive
officer.
(2) Does not reflect 700,000 options granted to Mr. Nizic in conjunction with
the Merger.
(3) Does not reflect 700,000 options granted to Mr. Weber in conjunction with
the Merger, which were subsequently transferred to one of the Company's
principal stockholders.
EMPLOYMENT ARRANGEMENTS
The Company has employment agreements with each of Messrs. Nizic, Weber and
Paravato. Messrs. Nizic and Weber are employed for terms of three (3) years
commencing October 14, 1998, at annual base salaries of $175,000 and $200,000,
respectively. Mr. Paravato has been employed for a renewable term of one (1)
year, commencing October 14, 1998, at an annual base salary of $125,000, subject
to a mandatory bonus of $25,000 for fiscal 1999. Each of Messrs. Nizic, Weber
and Paravato are entitled to participate in the Company's fringe benefit, bonus,
profit-sharing and incentive plans adopted by the Company. They are also
entitled to reimbursement for certain Company-related travel expenses, including
use of an automobile and related expenses.
The Company also entered into a consulting agreement with a corporation
wholly-owned by Mr. Lovell, pursuant to which such corporation has agreed to
provide Mr. Lovell's services to the Company for a term of one year commencing
September 1, 1998, at an annual rate of $168,000.
30
<PAGE>
DIRECTORS COMPENSATION
Directors who are officers of the Company receive no additional
compensation for serving on the Board of Directors, other than reimbursement of
reasonable expenses incurred in attending meetings. Non-employee directors
receive a maximum annual compensation of $2,500, a fee of $500 for each meeting
attended and reimbursement of reasonable expenses incurred in attending
meetings. All directors are also eligible to participate in the Company's 1998
Stock Incentive Plan.
STOCK INCENTIVE PLAN; OUTSTANDING OPTIONS
The Company's Board of Directors and stockholders adopted the "SkyNet
Holdings, Inc. 1998 Stock Incentive Plan" (the "1998 Plan") during November
1998. The 1998 Plan covers the greater of 1,609,900 or 10% of the total number
of shares of the Company's Common Stock outstanding on each December 31,
beginning on December 31, 1998, provided, however, that the foregoing formula
-------- -------
shall never result in a decrease in the maximum number of shares available under
the 1998 Plan. Under its terms, officers, directors, key employees and
consultants of the Company are eligible to participate in the 1998 Plan. The
1998 Plan permits: (i) the grant of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code");
(ii) the grant of non-qualified stock options; (iii) the issuance or sale of
Common Stock, with or without vesting or other restrictions; (iv) the grant of
Common Stock upon the attainment of specified performance goals; and (v) the
grant of stock appreciation rights ("SARs"). The 1998 Plan contains certain
limitations on the maximum number of Shares of Common Stock that may be awarded
to any one individual in any calendar year for the purposes of Section 162(m) of
the Code.
The 1998 Plan is administered by the Board of Directors or a committee
consisting of no less than three members designated by the Board of Directors
(the "Plan Administrator".) Subject to the provisions of the 1998 Plan, the
Plan Administrator has full power and authority to determine, from among the
persons eligible for grants or awards under the 1998 Plan: (i) the individuals
to whom grants or awards will be made; (ii) the combination of grants or awards
to participants; and (iii) the specific terms of each grant or award. Incentive
stock options may be granted only to officers or other employees of the Company
or its subsidiaries, including members of the Board of Directors who are also
employees of the Company or its subsidiaries.
Incentive stock options granted under the 1998 Plan are exercisable for a
period of up to 10 years from the date of grant and at an exercise price that is
not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive stock option granted under the 1998
Plan to a stockholder owning more than 10% of the outstanding Common Stock may
not exceed five years and the exercise price of an incentive stock option
granted to such a stockholder may not be less than 110% of the fair market value
of the Common Stock on the date of the grant. Non-qualified stock options may
be granted on terms determined by the Plan Administrator. SARs, which give the
holder the privilege of surrendering such rights for the appreciation in the
Company's Common Stock between the time of grant and the surrender, may be
granted on any terms determined by the Plan Administrator.
Incentive stock options granted under the 1998 Plan are non-transferable,
except upon death, by will or by operation of the laws of descent and
distribution, and may be exercised during the employee's lifetime only by the
optionee. Under the terms of the 1998 Plan, the aggregate fair market value
(determined as of the date of grant) of the shares of Common Stock with respect
to which incentive stock options are exercisable for the first time by an
employee during any calendar year (under all such plans of the Company and any
parent and subsidiary corporation of the Company) may not exceed $100,000.
31
<PAGE>
Options granted under the 1998 Plan may be exercised within 12 months after
the date of an optionee's termination of employment by reason of death or
disability, or within three months after the date of termination by reason of
retirement or voluntary termination approved by the Plan Administrator, but only
to the extent the option was otherwise exercisable on the date of termination.
The 1998 Plan will expire on November 1, 2008, unless terminated earlier by
the Board of Directors. The 1998 Plan may be amended by the Board of Directors
without stockholder approval, except that, in general, no amendment that
increases the maximum aggregate number of shares that may be issued under the
1998 Plan, decreases the minimum exercise price of options provided under the
Plan, or changes the class of employees who are eligible to participate in the
1998 Plan, shall be made without the approval of a majority of the stockholders
of the Company. None of the above actions, if taken, may adversely affect any
right or obligation regarding any grants or awards previously made under the
1998 Plan without the written consent of the recipient. In the event of any
changes in the capital structure of the Company, such as a stock dividend or
split-up, the Board of Directors must make equitable adjustments to outstanding
unexercised awards to that the net value of the award is not changed.
As of February 28, 1999 options to purchase approximately 920,000 shares of
common stock have been granted under the 1998 Plan.
In connection with the Merger, the Company granted Vjekoslav Nizic and
Christian J. Weber options to purchase 700,000 shares of Common Stock at an
exercise price of $3.00 per share. The options have a term of five years and
are exercisable in full commencing two (2) years from the date of the Merger.
Subsequent to the Merger, Mr. Weber transferred his options to one of the
Company's principal stockholders. In connection with the Merger, the Company
also granted Synergy Group International, Inc., a Company controlled by Vincent
J. Marold, a principal stockholder of the Company, options to purchase 400,000
shares of Common Stock at an exercise price of $3.00 per share. These options
have a term of five years and vest in ratable installments over a three year
period commencing October 14, 1999. Subsequent to the merger these options were
transferred to Mr. Weber.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Waiver of Lock Up, Consent to Sale of Shares and Release from Escrow.
On February 26, 1999 the Company waived the application of the lock-up
provisions of the Merger Agreement in order to permit (i) Christian J. Weber and
his affiliates, Deansley Limited and Moontown Ltd., to sell an aggregate of
3,425,879 shares of Common Stock (the "Weber Shares"), (ii) Mr. Nizic to sell
100,000 shares of Common Stock (the "Nizic Shares"), and (iii) Mr. Cathcart to
sell 500,000 shares of Common Stock to certain institutional investors in
separate privately negotiated transactions. On March 15, 1999, Mr. Nizic sold
400,000 shares of Common Stock (the "Additional Nizic Shares") to his brother
in a private negotiated transaction. The Company also consented to the transfer
of the Weber Shares, Nizic Shares and Additional Nizic Shares in accordance with
the Placement Agent Lock Up Agreement in consideration of the purchasers of such
shares being bound by the Placement Agent Lock-Up Agreement which prohibits the
transfer or sale of such shares until no later than on or about May 19, 2001.
See "Item 4 -Security Ownership of Certain Beneficial Owners and Management --
Restrictions Upon Resale". Finally, the Company released 205,996 of the Weber
Shares from escrow.
Extension of Date for Surrender of Shares.
On February 26, 1999, the Company agreed to extend the deadline for EPLR to
raise net proceeds of at least $2.5 million until March 31, 1999. This extended
the date on which certain shares of Common Stock held by certain historical
stockholders of EPLR, including Vincent J. Marold, a principal stockholder of
the Company, will be subject to forfeiture and cancellation.
Issuance of Shares in Cancellation of Indebtedness
On December 1,1998, the Company issued 335,000 shares of its Common Stock
to Pearlgold Pty Ltd, an entity affiliated with Noel Holmes, a director of the
Company, in exchange for the cancellation of $670,000 short-term indebtedness.
On December 1, 1998, the Company issued 162,500 shares of its Common Stock
to Andrew Lovell, an officer, in exchange for the cancellation of $325,000
short-term indebtedness.
Transactions with Principal Stockholder
In October 1998, in connection with the Merger, the Company repaid $100,000
to John Cathcart, a principal stockholder. Mr. Cathcart had advanced these
funds to the Company in September 1997 pursuant to a non-interest bearing
promissory note. In addition, during the period July 1, 1998, through the date
hereof, the Company paid Mr. Cathcart consulting fees amounting to $68,000.
AGREEMENTS WITH OFFICERS AND DIRECTORS
The Company has entered into employment agreements with Messrs. Nizic,
Weber and Paravato and option agreements with Messrs. Nizic and Weber. See
"ITEM 6 EXECUTIVE COMPENSATION - EMPLOYMENT ARRANGEMENTS and STOCK INCENTIVE
PLAN; OUTSTANDING OPTIONS."
32
<PAGE>
SALE OF SHARES TO PRINCIPAL STOCKHOLDER
In September 1998, the Company issued 1,030,151 shares of Common Stock to
Vincent J. Marold, 100,000 shares to Marold Investment LLC, an entity affiliated
with Mr. Marold, and 170,000 shares to immediate family members of Mr. Marold,
in a private placement transaction. This offering was undertaken by EPLR prior
to the execution and closing of the definitive merger agreement with SkyNet
Nevada. At that time Mr. Marold was the sole officer and director of EPLR. These
shares were issued on the same terms and conditions as all other shares in such
private placement.
ITEM 8. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, although it
is involved from time to time in routine litigation incident to its business.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is listed for quotation on the OTC Electronic
Bulletin Board under the symbol "SKYN" however, the market for such shares is
extremely limited. No assurance can be given that a significant trading market
for the Company's Common Stock will develop or, if developed, will be sustained.
The Company's Common Stock has been eligible for such trading since May 15,
1998.
The following table sets forth the range of the high and low closing bid
prices of the Company's Common Stock during each of the calendar quarters
identified below. These bid prices were obtained from the National Quotation
Bureau, Inc. and do not necessarily reflect actual transactions, retail markups,
mark downs or commissions. The transactions include inter-dealer transactions.
Based on the very limited public float and trading in the Company's Common
Stock, management of the Company believes that such data is anecdotal and may
bear no relation to the true value of the Company's Common Stock or the range of
prices that would prevail in a fluid market.
<TABLE>
<CAPTION>
1999 High Low
---- ---- ---
<S> <C> <C>
1st Quarter (through
March 5, 1999) $7.25 $3.3125
1998 High Low
---- ---- ---
2nd Quarter * *
3rd Quarter $0.53125 $0.03125
4th Quarter $5.75 $0.03125
</TABLE>
* No bids reported
_______________________
The closing bid price of the Company's Common Stock as of March 5, 1999
was $7.25 per share.
33
<PAGE>
SHARES ISSUABLE UPON EXERCISE OF OPTIONS
The Company has issued options to purchase an aggregate of 2,492,000 shares
of the Company's Common Stock. Options to purchase 1,400,000 shares are subject
to vesting commencing October 14, 2000 and 920,000 shares are subject to vesting
commencing June 30, 1999. The remaining options to purchase 400,000 shares vest
in ratable installments over a three year period commencing October 14,
1999.
SHARES ELIGIBLE FOR PUBLIC RESALE AND REGISTRATION RIGHTS
As of December 18, 1998, no shares of Common Stock of the Company are
eligible for public resale pursuant to Rule 144 promulgated under the Securities
Act. The Company has granted shelf registration rights to the holders of
approximately 4,785,000 shares of the Company's Common Stock pursuant to which
the Company has agreed to register the public reoffer of such shares. This
includes 160,000 shares that may be offered by the Historic Principal
Shareholders. Management's preliminary plan, which remains subject to change, is
to file a registration statement for this purpose shortly after the effective
date of this Form 10. In addition, the Company has agreed to grant incidental
(piggy-back) registration rights under certain limited circumstances covering
the public resale of up the 1,325,500 shares issued in the Private Placement. In
the event that the resale of such shares has not been registered under the
Securities Act by February 19, 2000, the Company has agreed to file a shelf
registration statement to register the public reoffer of such shares.
HOLDERS
As of March 5, 1999, the number of stockholders of record of the Company's
Common Stock was approximately 125, although management believes that there are
additional beneficial owners of the Company's Common Stock who own their shares
in "street name."
DIVIDENDS
The Company has not paid any cash dividends to date, and has no intention
to pay any cash dividends on its Common Stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of the Board
of Directors and to certain limitations imposed by the General Corporation Law
of the State of Delaware. The timing, amount and form of dividends, if any,
will depend, among other things, on the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
Board of Directors.
34
<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
1. On October 14, 1998, in connection with the Merger, the Company issued
9,901,500 shares of Common Stock to the holders of all outstanding shares of
capital stock of SkyNet Nevada and options to certain affiliates to purchase
1,800,000 shares of Common Stock. These securities were issued directly by the
Company without payment of any commissions in a private placement transaction
exempt from the registration requirements of the Securities Act pursuant to
Section (4)(2) thereof to the following accredited investors:
Name Number of Shares
---- ----------------
John Cathcart 2,100,000
Deansley Limited 3,152,841
Fir Construction Pty Ltd 3,121,023
Christian J. Weber 509,397
Earnest N. Schnesel 140,000
Ms. Anne Schnesel 12,733
David Schnesel 12,733
Mrs. Jodi Spector-Klein 12,733
Mrs. Shan Spector-Keats 12,733
Ms. Fran Lefkowitz 12,733
Mrs. Stephanie Bower 31,819
Ms. Jamie Bank 31,819
Melvyn Ian Smith 31,819
Moontown Limited 63,641
Vjekoslav Nizic 203,976
Swiss Bank fbo Kettering Trust 35,000
Dr. Thomas J. Slobig 13,125
Arthur Rockert 8,750
Segal Communication, Inc. 8,750
Mark Scatterday 8,750
Sandra M. Lindzon 26,250
Cathy Graham 17,500
John Scatterday 8,750
Donald S. Lindsay 8,750
Thomas Grant Peterson 8,750
Jeff Silverman SEP IRA 8,750
Vincent R. Williams 8,750
Mike Campbell 8,750
Roger Barrett 8,750
Christopher F. Nelson 43,750
Christopher J. Lang 43,750
James B. Norman 17,500
Stephen A. McConnell 17,500
William H. Fisher 26,250
Vincent & Lois Gann Trust 26,250
Helen Patricia Smith IRA 14,875
George Brooks (MOD Financial Services) 26,250
Nils and Patricia Selden 12,250
Marc Federighi 43,750
---------
Total 9,901,500
=========
35
<PAGE>
Name Number of Options
---- -----------------
Vjekoslav Nizic 700,000
Christian J. Weber 700,000
Synergy Group International, Inc. 400,000
----------
Total 1,800,000
==========
2. During September 1998, the Company issued and sold an aggregate of
4,625,000 shares of Common Stock raising gross proceeds of $555,000. This
offering was undertaken by EPLR prior to the execution and closing of the
definitive merger agreement with SkyNet Nevada. At that time EPLR was an
inactive Company with no assets or liabilities. Investors in such offering
were, therefore, subject to a number of risks and uncertainties, including the
material contingencies associated with the execution of the merger agreement and
closing of the Merger. These shares were issued directly by the Company without
payment of any commissions to the following accredited investors in a private
placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder:
Name Number of Shares
- ---- ----------------
Mr. Kim B. Acorn 10,000
Claire Behar, Guardian For Bryce Behar 5,000
Claire Behar, Guardian for Jaclyn Behar 5,000
Chase Trust 25,000
Mr. David Cohen 10,000
Jennifer Cohen 20,000
Susan Nussbaum Cohen 10,000
Mr. Rich Davimos 20,000
Mr. Robert Davimos 10,000
EBR Investments 100,000
Fincord Holding Co. 695,000
J. Scott Flasburg 10,000
Mr. Philip L. Franckel 25,000
John Freedom 5,000
Mr. Marvin Gersten 100,000
Mr. Martin A. Goldstein 10,000
Ms. Aimee Gremmo 20,000
Mr. Edward Gurrieri 30,000
Mark S. Howells Trust 50,000
Mr. Kenneth Kirschenbaum 100,000
Larlan Investors Ltd 416,667
Mr. Howard Lindzon 75,000
Ms. Sandra Lindzon 130,000
Mr. Frank Marold 150,000
Mr. Franklin Marold 20,000
Vincent Marold 1,030,151
Marold Investment LLC 100,000
Mr. Jonathan Mazinter 2,500
Anna Maria Mintz 20,000
MCZ Investment Company 405,000
36
<PAGE>
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Mr. Casey O'Brien 20,000
Mr. Tomas Peterson 65,000
Mr. John Scott Polson 2,500
Mr. Jeffrey J. Puglisi 50,000
Ms. Linda Rufo 20,000
Ms. Rosemary SantaMaria 10,000
Mr. Charles Seavey 100,000
Mr. Mike Segal 20,000
Mr. Rob Segal 130,000
Jose Serrano 2,500
Patricia Trish Trust 20,000
Arnold Hendrik William van Hilton 10,000
Philip-Jan van Hilton 10,000
Veracruz Group Limited 333,182
c/o Bentley Agencies Limited
Wexler & Burkhart 35,000
Diane Winston 15,000
For Benefit of Elizabeth Cohen
Diane Winston 20,000
Custodian For Jarret Cohen
Ms. Diane Gail Winston 150,000
Mr. David M. Wrenn 2,500
---------
Total 4,625,000
=========
</TABLE>
3. On December 1, 1998, the Company issued an aggregate 572,500 shares of
Common Stock in exchange for the cancellation of $1,125,000 of short-term
indebtedness (including accrued interest), of which $670,000 had been
collectively advanced to the Company by an entity affiliated with a director.
These shares were issued directly by the Company without payment of any
commissions to the following accredited investors in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof:
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Pearlgold Pty Ltd (affiliated with Noel
Holmes, a director of the Company) 335,000
Andrew Lovell 162,500
Ceceile Klein 75,000
-------
Total 572,500
=======
</TABLE>
4. On February 19 and March 5, 1999 the Company issued an aggregate of
1,325,500 shares of common stock raising gross proceeds of $2,651,000. Puglisi
Howells & Co., a registered/broker dealer, acted as placement agent to the
Company pursuant to which it received sales commissions and non-accountable
expenses equal to $265,100. The securities were issued to the following
accredited investors in a private placement transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder.
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Todd and Kay Ziplow 25,000
CLS Associates, L.P. 50,000
Michael Ohlhausen 13,000
Irvine Capital Partners, L.P. 100,000
Schottenfeld Associates, L.P. 100,000
Aaron and Cynthia Shenkman 100,000
Puglisi Capital Partners 100,000
Bruce Derrick 125,000
Delaware Charter Guarantee & Trust Co. 12,500
Delaware Charter Guarantee & Trust Co. 12,500
Knut Jensen 25,000
Alan and Susan Shaw 12,500
Joshua and Chanie Manela 12,500
Alan and Jan Kelsey 25,000
Lindzon Capital Partners 70,000
Michael and Fran Mallace 5,000
Brent Richardson 50,000
Delaware Charter Guarantee & Trust Co. 12,500
Ziad M. Sultan Al-Essa 25,000
Philip Van Hilten 15,000
Dr. Leon Zieter 17,500
Mike Campbell and Lorene Hernandez 5,000
Gibralt US, Inc. 125,000
Carolyn Siskin Gordon 17,500
Michael G. Rowe 25,000
Steve and Marion Elbaum 50,000
Bank Julius Baer & Co. Ltd. Zurich 50,000
Sidney Sands (Millworth) 20,000
Jeffrey J. Puglisi 100,000
John Orlando 25,000
---------
Total 1,325,500
=========
</TABLE>
5. On March 15, 1999, the Company issued an aggregate of 1,479,415 shares
of Common Stock in connection with the acquisition of the operating assets of
Fleet Delivery Service. These shares were issued directly by the Company,
without payment of any commissions, to the following investors in a private
placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof:
<TABLE>
<CAPTION>
<S> <C>
Name Number of Shares
---- ----------------
Nevada Fleet Management, Inc. 1,358,790
Nevada Yellow Cab Corporation 116,875
Nevada Checker Cab Corporation 2,500
Nevada Star Cab Corporation 1,250
---------
Total 1,479,415
=========
</TABLE>
37
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
$.0001 par value per share, of which 17,424,500 are issued and outstanding as of
March 5, 1999.
Holders of Common Stock have equal rights to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Holders of Common Stock have one vote for each share held of record and do not
have cumulative voting rights.
Holders of Common Stock are entitled upon liquidation of the Company to
share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
Common Stock are not redeemable and have no preemptive or similar rights. All
outstanding shares of Common Stock are fully paid and nonassessable.
Preferred Stock
Within the limits and restrictions provided in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 5,000,000 shares of preferred stock, $.0001
par value per share (the "Preferred Stock"), in one or more series, and to fix,
as to any such series, the dividend rate, redemption prices, preferences on
liquidation or dissolution, sinking fund terms, conversion rights, voting
rights, and any other preference or special rights and qualifications. There
are presently no shares of Preferred Stock outstanding.
Shares of Preferred Stock issued by the Board of Directors could be
utilized, under certain circumstances, to make an attempt to gain control of the
Company more difficult or time consuming. For example, shares of Preferred
Stock could be issued with certain rights that might have the effect of diluting
the percentage of Common Stock owned by a significant stockholder or issued to
purchasers who might side with management in opposing a takeover bid that the
Board of Directors determines is not in the best interest of the Company and its
stockholders. The existence of Preferred Stock may, therefore be viewed as
having possible anti-takeover effects. A takeover transaction frequently
affords stockholders the opportunity to sell their shares at a premium over
current market prices. The Board of Directors has not authorized the issuance
of any series of Preferred Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends to date, and has no intention
to pay any cash dividends on its Common Stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of the Board
of Directors and to certain limitations imposed by the General Corporation Law
of the State of Delaware. The timing, amount and form of dividends, if any,
will depend, among other things, on the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by
Board of Directors.
38
<PAGE>
Delaware Anti-Takeover Law
The Company will be governed by the provisions of Section 203 of the
General Corporation Law of the State of Delaware (the "GCL"), an anti-takeover
law. In general, the law prohibits a public Delaware corporation from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. "Business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with its affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
The provisions regarding certain business combinations under the GCL could
have the effect of delaying, deferring or preventing a change in control of the
Company or the removal of existing management. A takeover transaction
frequently affords stockholders the opportunity to sell their shares at a
premium over current market prices.
TRANSFER AGENT
The transfer agent for the Company's securities is Stock Trans, Inc., 7
East Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300.
39
<PAGE>
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Bylaws reflect the adoption
of the provisions of Section 102(b)(7) of the GCL, which eliminate or limit the
personal liability of a director to the Company or its stockholders for monetary
damages for breach of fiduciary duty under certain circumstances. The Company's
Certificate of Incorporation and Bylaws also provide that the Company shall
indemnify any person, who was or is a party to a proceeding by reason of the
fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with such proceeding if he acted in good faith and in a manner
he reasonably believed to be or not opposed to the best interests of the
Company, in accordance with, and to the full extent permitted by, the GCL. In
addition, the Certificate of Incorporation and Bylaws authorize the Company to
maintain insurance to cover such liabilities.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in a successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Company 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 of such issuer.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index at "Item 15. Financial Statements and Schedules."
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
40
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Consolidated Financial Statements of the Company Skynet
Holdings, Inc.
Index to Consolidated Financial Statements F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders Deficiency F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
Financial Statements of Acquired Company
Nevada Fleet Management, Inc.
Independent Auditor's Report F-19
Balance Sheets F-20
Statements of Operations F-21
Statements of Shareholders' Equity F-22
Statements of Cash Flows F-23
Notes to Financial Statements F-24
(b) Exhibits
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger ("Merger Agreement"), dated as of
September 28, 1998, among SkyNet Holdings, Inc., EPL Resources
(Delaware) Corp., Christian J. Weber, Deansley Limited, John E.
Cathcart, Vjekoslav Nizic and FIR Construction Pty. Ltd (1)
2.2 First Amendment to Merger Agreement, dated October 8, 1998 (1)
3.1 Certificate of Incorporation, as amended (1)
3.2 Certificate of Merger (1)
3.3 By-Laws (1)
10.1 Employment Agreement, dated October 14, 1998, between
the Company and Vjekoslav Nizic (1)
10.2 Employment Agreement dated October 14, 1998, between the
Company and Christian J. Weber (1)
10.3 Employment Agreement dated October 14, 1998, between the
Company and Martin Paravato (1)
10.4 Option to Purchase 700,000 Shares of Common Stock of the
Company Granted to Vjekoslav Nizic (1)
10.5 Option to Purchase 700,000 Shares of Common Stock of the
Company Granted to Christian J. Weber (1)
10.6 Option to Purchase 400,000 Shares of Common Stock of the
Company Granted to Synergy Group International, Inc.
("Synergy") (1)
10.7 Escrow Agreement, dated October 14, 1998, among the Company,
Synergy, certain shareholders of Synergy and the Company as
Escrow Agent (1)
10.8 Escrow Agreement, dated October 14, 1998, among the Company,
Synergy,Vjekoslav Nizic, John E. Cathcart, Christian J. Weber,
Deansley Limited, Fir Construction Pty Limited, the
principal shareholders of SkyNet Holdings, Inc.
and EPL Resources (Delaware) Corp. (1)
10.9 Consulting Agreement dated August 24, 1998 between Tradeserv 94,
Inc. and the Company (1)
10.10 The Company's 1998 Stock Incentive Plan. (1)
10.11 Asset Purchase Agreement dated March 11, 1999 by and among
SkyNet Holdings, Inc., and Fleet Acquisition Corp. as the
Buyers and Nevada Fleet Management, Inc. as Seller (1)
10.12 Vehicle Purchase Agreement dated March 15, 1999 by and among
SkyNet Holdings, Inc. and Fleet Acquisition Corp. as the
Buyers and Nevada Yellow Cab Corporation and Nevada Checker
Cab Corporation and Nevada Star Cab Corporation as Sellers. (1)
21.1 Subsidiaries of the Registrant (1)
27.1 Financial Data Schedule (1)
</TABLE>
(1) Previously filed March 23, 1999 with Form 10.
41
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereto duly authorized.
SKYNET HOLDINGS, INC.
Date: March 30, 1998
By: /s/ Vjekoslav Nizic
-------------------------------------
Vjekoslav Nizic
President and Chief Executive Officer
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Consolidated Financial Statements of the Company
Skynet Holdings, Inc.
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity (Deficiency) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Financial Statements of Acquired Company
Nevada Fleet Management, Inc.
Independent Auditor's Report F-19
Balance Sheets F-20
Statements of Operations F-21
Statements of Stockholders' Equity F-22
Statements of Cash Flows F-23
Notes to Financial Statements F-24
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and
Stockholders of
SkyNet Holdings, Inc.
We have audited the accompanying consolidated balance sheets of SkyNet Holdings,
Inc. and subsidiaries as of June 30, 1997 and 1998 and the related consolidated
statements of operations, changes in stockholders' deficiency and cash flows for
each of the three years in the period ended June 30, 1998. 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 audit 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 consolidated financial position of SkyNet
Holdings, Inc. and subsidiaries as of June 30, 1997 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
November 2, 1998
Los Angeles, California
F-2
<PAGE>
SKYNET HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------------- December 31,
1997 1998 1998
------------------------------------- ----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 322,628 $ 337,314 $ 78,455
Accounts receivable trade, net of allowance
for doubtful accounts of $1,016,921, $734,257
and $950,769 6,824,929 5,646,209 6,025,176
Receivables -- other 92,091 11,009 106,253
Prepaid expenses and other 46,760 66,430 359,583
------------------------------------- ----------------
Total current assets 7,286,408 6,060,962 6,569,467
PROPERTY AND EQUIPMENT, net (Note 2) 665,064 704,296 758,891
INTANGIBLE AND OTHER ASSETS, net 152,599 120,557 266,051
------------------------------------- ----------------
$ 8,104,071 $ 6,885,815 $ 7,594,409
===================================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 6,095,321 $ 5,560,712 $ 4,243,573
Bank debt (Note 3) 1,466,422 782,012 1,068,690
Other accrued liabilities 507,484 107,514 941,098
Accrued payroll 230,421 209,368 291,027
Accrued income taxes 435,836 34,993 248,066
Current portion of long-term debt (Note 4) 72,615 424,619 78,245
------------------------------------- ----------------
Total current liabilities 8,808,099 7,119,218 6,870,699
------------------------------------- ----------------
LONG-TERM DEBT, net of current portion (Note 4) 589,441 452,822 472,658
STOCKHOLDERS' EQUITY (DEFICIENCY) (Notes 5 & 6)
Convertible preferred stock, $.001 par value,
5,000,000 shares authorized; 2,450,000, 2,450,000
and 0 shares issued and outstanding
(liquidation preference $7,000,000) 245 245 -
Common stock, $.001 par value, 50,000,000 shares
authorized; 7,000,000, 7,451,000 and 16,099,000
shares issued and outstanding 700 745 1,610
Additional paid-in capital 4,455 402,568 2,046,948
Foreign currency translation adjustment 10,296 53,332 107,081
Accumulated deficit (1,309,165) (1,148,115) (1,904,587)
------------------------------------- ----------------
Total stockholders' equity (deficiency) (1,293,469) (686,225) 251,052
------------------------------------- ----------------
$ 8,104,071 $ 6,885,815 $ 7,594,409
===================================== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SKYNET HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
Year ended June 30, December 31,
---------------------------------------------- ----------------------------
1996 1997 1998 1997 1998
---------------------------------------------- ----------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 34,404,946 $ 36,151,763 $ 31,838,919 $16,182,102 $ 16,947,089
COST OF SALES 22,783,806 24,393,228 19,123,468 10,211,596 10,101,814
---------------------------------------------- ----------------------------
GROSS PROFIT 11,621,140 11,758,535 12,715,451 5,970,506 6,845,275
---------------------------------------------- ----------------------------
OPERATING EXPENSES
Compensation 6,460,625 6,948,756 7,178,941 3,396,320 3,998,583
Occupancy costs 522,483 529,876 660,742 277,394 277,156
Communication expense 553,417 615,705 630,221 304,392 375,670
Other operating expenses 3,625,893 3,693,705 3,664,570 1,885,182 2,540,416
---------------------------------------------- ----------------------------
Total operating expenses 11,162,418 11,788,042 12,134,474 5,863,288 7,191,825
---------------------------------------------- ----------------------------
INCOME (LOSS) FROM OPERATIONS 458,722 (29,507) 580,977 107,218 (346,550)
OTHER INCOME (EXPENSE)
Interest expense (106,904) (169,817) (199,714) (95,439) (162,899)
Other (33,909) 74,056 (29,809) (163,244) (245,723)
---------------------------------------------- ----------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY INCOME 317,909 (125,268) 351,454 (151,465) (755,172)
Income tax (expense) benefit (Note 7) (283,633) 85,600 (185,404) (16,000) (6,300)
---------------------------------------------- ----------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY 34,276 (39,668) 166,050 (167,465) (761,472)
INCOME
EXTRAORDINARY INCOME (Note 8) 1,263,045 - - - -
---------------------------------------------- ----------------------------
NET INCOME (LOSS) $ 1,297,321 $ (39,668) $ 166,050 $ (167,465) $ (761,472)
============================================== ============================
BASIC INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary $ 0.01 $ (0.01) $ 0.02 $ (0.02) $ (0.06)
income
Extraordinary income 0.18 - - - -
---------------------------------------------- ----------------------------
Net income (loss) per share $ 0.19 $ (0.01) $ 0.02 $ (0.02) $ (0.06)
============================================== ============================
BASIC WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 7,000,000 7,000,000 7,346,500 7,059,096 13,410,368
============================================== ============================
DILUTED EARNINGS (LOSS) PER COMMON
SHARE
Income (loss) before extraordinary $ 0.01 $ (0.01) $ 0.02 $ (0.02) $ (0.06)
income
Extraordinary income 0.13 - - - -
---------------------------------------------- ----------------------------
Net income (loss) per share $ 0.14 $ (0.01) $ 0.02 $ (0.02) $ (0.06)
============================================== ============================
DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 9,450,000 7,000,000 9,796,500 7,059,096 13,410,368
============================================== ============================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SKYNET HOLDINGS, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Convertible Foreign
Preferred Stock Common Stock Additional Currency
----------------------- --------------------- Paid-In Translation Accumulated
Description Shares Amount Shares Amount Capital Adjustment Deficit
- ----------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1995 2,450,000 $ 245 7,000,000 $ 700 $ 4,455 $ - $ (2,566,818)
Foreign currency translation
adjustment - - - - - 14,403 -
Net income - - - - - - 1,297,321
---------------------------------------------------------------------------------------------
BALANCE, June 30, 1996 2,450,000 245 7,000,000 700 4,455 14,403 (1,269,497)
Foreign currency translation
adjustment - - - - - (4,107) -
Net loss - - - - - - (39,668)
---------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 2,450,000 245 7,000,000 700 4,455 10,296 (1,309,165)
Sale of common stock (Note 5) - - 451,500 45 398,113 - -
Foreign currency translation
adjustment - - - - - 43,036 -
Net income - - - - - - 166,050
---------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 2,450,000 245 7,451,500 745 402,568 53,332 (1,143,115)
Issuance of stock for debt (Note 6)
(unaudited) 572,500 57 1,144,943 - -
Adjustment - exchange of stock and
recapitalization (unaudited) (2,450,000) (245) 8,075,000 808 499,437 - -
Foreign currency translation
adjustment (unaudited) - - - - - 53,749 -
Net loss (unaudited) - - - - - - (761,472)
---------------------------------------------------------------------------------------------
Balance, September 30, 1998
(unaudited) - $ - 16,099,000 $1,610 $2,046,948 $107,081 $ (1,904,587)
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SKYNET HOLDINGS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash and cash equivalents)
<TABLE>
<CAPTION>
Six months ended
Years ended June 30, December 31,
-------------------------------------------- -----------------------------
1996 1997 1998 1997 1998
-------------------------------------------- -----------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,297,321 $ (39,668) $ 166,050 $ 167,465 $ (761,472)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in)
operating activities:
Extraordinary income (1,263,045) - - - -
Depreciation and amortization 278,479 294,646 237,022 77,159 53,182
Changes in operating assets and
liabilities:
Receivables (1,119,315) (657,974) 1,259,802 1,173,997 (474,211)
Prepaid expenses and other assets (10,082) (7,172) (19,670) (336,946) (293,153)
Accounts payable 1,092,869 (596,239) (534,609) (1,644,841) (1,317,139)
Accrued expenses and other 111,284 21,918 (821,866) (559,792) 1,237,776
liabilities
------------------------------------------- -----------------------------
Net cash provided by (used in)
operating activities 387,511 (984,489) 286,729 (338,304) (1,555,017)
------------------------------------------- -----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (310,709) (315,827) (244,212) (69,191) (107,777)
Other 28,328 - - - (145,492)
------------------------------------------- -----------------------------
Net cash used in investing activities (282,381) (315,827) (244,212) (69,191) (253,269)
------------------------------------------- -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from private placement of
Common stock - - 398,158 - 500,000
Proceeds from issuance of notes - - 288,000 - 1,195,538
Bank borrowings (repayments) - 1,466,422 (684,410) (377,241) 286,678
Debt repayments - (49,572) (72,615) 410,799 (486,538)
------------------------------------------- -----------------------------
Net cash provided by (used in)
financing activities - 1,416,850 (70,867) 35,558 1,495,678
------------------------------------------- -----------------------------
EFFECT OF FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS 14,403 (4,107) 43,036 103,151 53,749
------------------------------------------- -----------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 119,533 112,427 14,686 (270,786) (258,859)
CASH AND CASH EQUIVALENTS,
beginning of period 90,668 210,201 322,628 322,628 337,314
------------------------------------------- -----------------------------
CASH AND CASH EQUIVALENTS, end of
period $ 210,201 $ 322,628 $ 337,314 $ 51,842 $ 78,455
=========================================== =============================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 1.- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
SkyNet Holdings, Inc. (the "Company") was incorporated in Nevada on
September 16, 1997. The Company was incorporated for the purpose of acquiring
the outstanding shares of four companies whose businesses provide international
express courier delivery services and freight forwarding services for time
sensitive documents and packages to customers throughout the world under the
name SkyNet Express.
On October 1, 1997, the acquisition described above was completed through
an exchange of 2,800,000 shares of the Company's common stock and 1,400,000
shares of the Company's preferred stock for all shares of each of the companies
acquired. The transaction was accounted for as a reorganization of entities
under common control in a manner similar to a pooling of interest, whereby the
Company's consolidated financial statements have been restated to include the
accounts and operations of the merged companies for all periods presented prior
to the merger.
The Company currently operates (i) through its own courier facilities
located in London, Bristol and Manchester, England, Los Angeles and San
Francisco, California, New York, New York, and Sydney and Melbourne, Australia
and (ii) through the "SkyNet Worldwide Express" network, a global alliance of
independent express courier service companies that functions as a worldwide
delivery network for its members.
RECAPITALIZATION
EPL Resources (Delaware) Corp. ("EPLR") was organized December 15, 1994,
under the laws of the State of Florida. EPLR had no operations and was
considered a development stage company. EPLR was formed for the purpose of
raising capital and acquiring a suitable business opportunity through a merger
with, or acquisition of, a private business enterprise seeking to obtain the
perceived benefits of being a publicly owned company. During September 1998,
EPLR issued and sold an aggregate of 4,625,000 shares of Common Stock raising
gross proceeds of $555,000).
On October 14, 1998 EPLR acquired 100% of the outstanding capital stock
of SkyNet Holdings, Inc., a Nevada corporation ("SkyNet Nevada"), in exchange
for 9,901,500 shares of EPLR common stock. Concurrent with this transaction,
EPLR reincorporated in the State of Delaware and changed its name to SkyNet
Holdings, Inc. ("Skynet Delaware").
For accounting purposes, the acquisition of SkyNet Nevada by SkyNet
Delaware has been treated as a reverse acquisition in substance equivalent to
the issuance of stock for the net monetary assets of SkyNet Delaware,
accompanied by a recapitalization. The historical operating results reflected in
the accompanying financial statements are those of SkyNet Nevada as SkyNet
Delaware's operations prior to October 14, 1998 were nominal.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances are
eliminated.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet of the Company as of
December 31, 1998 and the related consolidated statements of operations,
stockholders' deficiency and cash flows for the six months ended December 31,
1998 and 1997 have been prepared in accordance with generally accepted
accounting principles for interim periods and are unaudited; however, in
management's opinion, they include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of results for such
interim periods. Interim results are not necessarily indicative of results for
the full year.
F-7
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 disclosure 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and trade
receivables. The Company restricts investment of temporary cash investments to
financial institutions with high credit standing. Credit risk on trade
receivables is minimized as a result of the large number of customers comprising
the Company's customer base and their dispersion across different businesses and
geographic regions.
Included in the Company's consolidated balance sheets at June 30, 1998 and
1997, and December 31, 1998 are the net assets (liabilities) of the Company's
United Kingdom subsidiary of approximately $410,000, $469,000 and $853,000 and
the Company's Australian subsidiary of approximately $212,000, ($230,000) and
($48,000) for the same periods.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost and are being depreciated over
estimated useful lives of 5 to 7 years using the straight-line method.
Leasehold improvements are recorded at cost and are amortized over the lesser of
the estimated useful lives of the property or the lease term using the straight-
line method.
INTANGIBLE ASSETS
The Company owns the rights to certain trademarks. These assets are being
amortized on the straight-line method over 15 years. Amortization expense
charged to operations for the years ended June 30, 1996, 1997 and 1998 was $0,
$33,721 and $32,042, and $8,000 for each of the six months ended December 31,
1997 and 1998.
F-8
<PAGE>
SKYNET HOLDINGS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impariment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
established guidelines regarding when impairment losses on long-lived assets,
which include property and equipment and certain identifiable intangible assets,
should be recognized and how impairment losses should be measured. The Company
periodically reviews such assets for possible impairment and expected losses, if
any, are recorded currently.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has cash, accounts receivable and accounts payable for which the
carrying value approximates fair value due to the short-term nature of these
instruments.
The carrying value of bank debt and long-term debt approximates fair value at
June 30, 1997, 1998 and December 31, 1998 since these notes substantially bear
interest at floating rates based upon the lenders' "prime" rate. The fair value
of notes related to the reorganization of a subsidiary under bankruptcy cannot
be estimated due to the court mandated nature of the debt.
REVENUE RECOGNITION
Revenue for delivery of packages is recognized upon delivery. Revenue from the
Skycom system, the Company's package tracking system, is billed monthly and is
recorded when billed. For the six months ended December 31, 1998, revenue from
Skycom represented approximately 2.0% of revenue.
Cost of Sales primarily includes charges for Linehaul, Pick-up and Delivery
including drivers salaries and other related costs.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at the current
exchange rate at the balance sheet date. Income and expenses are translated at
the average exchange rate in effect during the year. Resulting translation
adjustments are accumulated as a separate component of stockholders' equity.
Realized gains and losses related to other foreign currency transactions are
reported as income or expense in the current year. Such gains or losses were
not material for the years ended June 30, 1996, 1997 and 1998, and for the six
months ended December 31, 1997 and 1998.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." ("SFAS
No. 109"). SFAS No. 109 requires the use of the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
F-9
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the three months ended September 30, 1998 and 1997
is unaudited)
NOTE 1.- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The statement requires
restatement of all prior period earnings per share (EPS) data presented. The
new standard requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. The Company adopted SPAS 128 for the year-end June 30, 1998 and
for prior years as presented in the accompanying financial statements. Adoption
of this standard did not result in a restatement of prior periods EPS data.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129") is effective for financial
statements ending after December 15, 1997. SFAS 129 reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS 128. The
Company adopted SFAS 129 on June 30, 1998, and it did not have any effect on its
consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") is effective for financial statements with fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. This standard was adopted during fiscal 1999.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segment
of an Enterprise and Related Information" ("SFAS 131"), is effective for
financial statements with fiscal years beginning after December 15, 1997. The
new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and condensed financial statements of interim periods issued to
stockholders. It also requires that public business enterprises report certain
information about their products issued to stockholders. It also requires that
public business enterprises report certain information about their products and
services, the geographic areas in which they operate and their major customers.
The Company does not expect adoption of SFAS 131 to have a material effect, if
any, on its consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits, ("SFAS 132") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. The Company does not expect adoption of SFAS
132 to have a material effect, if any, on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133") issued by the FASB is effective
for financial statements with fiscal years ending June 15, 1999 and later. SFAS
133 establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The Company does not expect adoption of SFAS 133 to have a
material effect, if any, on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale By A Mortgage Banking Enterprise, ("SFAS 134") issued by the FASB
is effective for financial statements with fiscal years beginning after December
15, 1998. SFAS 134 amends SFAS No. 65, Accounting for Certain mortgage Banking
Activities, which establishes accounting and reporting standards for certain
activities of mortgage banking enterprises and other enterprises that conduct
operations which are substantially similar to the primary operations of a
mortgage banking enterprise. The Company does not expect adoption of SFAS 134
to have a material effect, if any, on its financial position or results of
operations.
F-10
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of common stock is computed by dividing net
earnings (loss) by the weighted average number of common shares. Diluted
earnings per share is computed based on the weighted average number of shares of
common stock and dilutive securities outstanding during the period. Dilutive
securities are options that are freely exercisable into common stock at less
than market exercise prices, the convertible debentures (after giving
retroactive effect to the elimination of interest expense, net of tax) and
convertible preferred stock. Dilutive securities are not included in the
weighted average number of shares when the inclusion would increase the earnings
per share or decrease the loss per share.
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------
1996 1997 1998
---------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON SHARE:
NUMERATOR
Income (loss) before extraordinary income $ 34,276 $ (39,668) $ 166,050
Extraordinary income 1,263,045 - -
---------------------------------------------
Net earnings (loss) available to common
shareholders $ 1,297,321 $ (39,668) $ 166,050
=============================================
DENOMINATOR
Weighted average common shares outstanding 7,000,000 7,000,000 $ 7,346,500
=============================================
PER SHARE AMOUNTS
Basic earnings (loss) before extraordinary income $ 0.01 $ (0.01) $ 0.02
Extraordinary income 0.18 - -
---------------------------------------------
Basic earnings (loss) $ 0.19 $ (0.01) $ 0.02
=============================================
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
NUMERATOR
Income (loss) before extraordinary income $ 34,276 $ (39,668) $ 166,050
Extraordinary income 1,263,045 - -
---------------------------------------------
Net earnings (loss) available to common shareholders $ 1,297,321 $ (39,668) $ 166,050
=============================================
DENOMINATOR
Weighted average common shares outstanding 7,000,000 7,000,000 7,346,500
Effect of dilutive securities:
Convertible preferred stock outstanding 2,450,000 - 2,450,000
---------------------------------------------
Weighted average common shares and assumed
conversions outstanding 9,450,000 7,000,000 9,796,500
=============================================
PER SHARE AMOUNTS
Diluted earnings (loss) before extraordinary income $ 0.01 $ (0.01) $ 0.02
Extraordinary income 0.13 - -
---------------------------------------------
Diluted earnings (loss) $ 0.14 $ (0.01) $ 0.02
=============================================
</TABLE>
F-11
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
June 30,
---------------------------------- December 31,
1997 1998 1998
================================== =================
<S> <C> <C> <C>
Leasehold improvements $ 212,941 $ 193,494 $ 200,992
Computer equipment 926,780 1,162,905 1,195,737
Furniture, fixtures and equipment 596,572 668,709 705,280
Transportation equipment 170,294 67,723 98,599
---------------------------------- -----------------
1,906,587 2,092,831 2,200,608
Less accumulated depreciation and amortization 1,241,523 1,388,535 1,441,717
---------------------------------- -----------------
Net property and equipment $ 665,064 $ 704,296 $ 758,891
================================== =================
</TABLE>
NOTE 3. BANK DEBT
A foreign subsidiary of the Company has a financing agreement with a bank in
London. The agreement provides borrowing for the subsidiary based on 75% of
customer receivables less than 90 days old up to a maximum of $1,700,000. The
subsidiary pays an administrative charge of .2% plus interest at the bank's base
rate plus 2.25% (10.0% at June 30, 1998). Borrowings under the agreement
amounted to $1,466,422 and $782,012 at June 30, 1997 and 1998 and $1,068,690 at
December 31, 1998.
NOTE 4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
June 30,
--------------------------- December 31,
1997 1998 1998
=========================== ================
<S> <C> <C> <C>
Promissory notes, payable in monthly payments
with an interest rate of 18%, due June 2004 $ 250,000 $ 350,000 $ 250,000
Creditors debt, non-interest bearing debt, payable
in annual installments, maturing June 2001 100,000 100,000 100,000
Internal Revenue Service debt, payable in sixty equal
Monthly principal and interest payments of $4,511
with interest charged at 8.0%, due May 2001 179,880 138,649 116,767
California State Employment Development Department debt,
payable in sixty equal monthly principal and interest
payments of $3,402 with interest charged at 8.0%, due 132,176 100,792 84,136
April 2001
Bridge financing, all principal and interest due at
maturity - 188,000 -
with interest charged at 24%, due September 1998
--------------------------- ----------------
662,056 877,441 550,903
Amount due within one year (72,615) (424,619) (78,245)
--------------------------- ----------------
Total long-term debt $ 589,441 $ 452,822 472,658
=========================== ================
</TABLE>
F-12
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 4. LONG-TERM DEBT (CONTINUED)
Annual maturities of long-term obligations as of June 30, 1998 are as follows:
Years ending June 30, Amount
-----------
1999 $ 424,619
2000 150,575
2001 189,915
2002 64,906
2003 47,426
-----------
$ 877,441
===========
NOTE 5. PRIVATE PLACEMENTS
During December 1997, the Company completed a private placement of 258,000
shares of its common stock at $2.00 per share. The Company received net
proceeds of $398,158 after deducting offering costs of $117,842.
On December 9, 1998, the Company signed a letter of intent with a Placement
Agent for the purpose of offering (the "Offering") up to 2,000,000 shares of
Common Stock, par value $.0001 per share (the "Shares"), at a purchase price of
$2.00 per Share on a "best efforts, 1,000,000 Shares or none" basis. If the
sale of 1,000,000 shares of Common Stock at $2.00 per share is consummated the
Company will receive estimated net proceeds (after offerings cost) of
approximately $1,710,000. If 2,000,000 shares are sold, the Company will
receive estimated net proceeds (after offering costs) of approximately
$3,505,000. The Company intends to use the net proceeds of the Offering for
general working capital and general corporate purposes, primarily to finance the
Company's business plan which includes an acquisition and consolidation
strategy.
On February 19 and March 5, 1999, the Company conducted closings with
respect to the Private Placement resulting in the issuance of an aggregate of
1,325,500 shares of Common Stock which generated net proceeds (after offering
costs of approximately $441,000) of approximately $2,210,000. The Company
intends to use the net proceeds of the Private Placement for general working
capital and general corporate purposes, primarily to finance the Company's
business plan which includes an acquisition and consolidation strategy.
NOTE 6. DEBT CONVERSION
During the six months ended December 31, 1998, the Company received proceeds
from short-term notes of $950,000. In addition, on October 14 and November 30,
1998, the Company received proceeds from short-term borrowings in the amount of
$245,000 from a corporate officer. The proceeds of the above noted borrowings
were used to repay existing outstanding indebtedness of $298,000 with the
balance added to working capital.
On December 1, 1998, outstanding indebtedness described above of $1,145,000,
including accrued interest was converted by the holders into 572,500 shares of
the Company's common stock. Of these shares, 495,000 were issued to related
parties.
NOTE 7. INCOME TAXES
The income tax provision (benefit) in the consolidated statement of operations
consists of the following components:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1996 1997 1998
---------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ - $ - $ -
State - - -
Foreign 283,633 (85,600) 185,404
---------------------------------------------------
283,633 (85,600) 185,404
---------------------------------------------------
Deferred
Federal - - -
State - - -
Foreign - - -
---------------------------------------------------
- - -
---------------------------------------------------
Total $ 283,633 $ (85,600) $ 185,404
===================================================
</TABLE>
F-13
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 7. INCOME TAXES (CONTINUED)
Deferred tax assets net included in the consolidated balance sheets are as
follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
1997 1998
-------------------------------------
<S> <C> <C>
Temporary differences resulting in future deductible amounts $ 340,534 $ 184,842
Federal net operating loss carryforwards 352,455 459,407
State net operating loss carryforwards 62,198 83,802
-------------------------------------
Deferred tax assets 755,187 728,051
Deferred tax liability (3,535) (6,198)
Valuation allowance (751,652) (721,853)
-------------------------------------
Deferred tax assets - net $ - $ -
=====================================
</TABLE>
At June 30, 1998 and 1997, management provided a 100% valuation allowance
against the net deferred tax asset due to the indeterminate nature of the
Company's ability to realize this deferred asset.
Reconciliations of the provision for income taxes to the expected income tax
based on the statutory rates are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1996 1997 1998
-----------------------------------------------
<S> <C> <C> <C>
Provision (benefit) Federal statutory rate $ 108,089 $ (42,713) 119,494
Increase (decrease) in income tax resulting from
foreign taxes 175,544 (42,887) 65,910
-----------------------------------------------
$ 283,633 $ (85,600) 185,404
===============================================
</TABLE>
At June 30, 1998, the Company has approximately $1.4 million of federal net
operating loss carryovers (expiring through 2013) and approximately $1.3 million
of state net operating loss carryovers (expiring through 2013) which may be
available to reduce future taxable income. Among potential adjustments which may
reduce available loss carryforwards, the Internal Revenue Code of 1986, as
amended ("IRC"), reduces the extent to which net operating loss carryforwards
may be utilized in the event there has been an "ownership change" of a company
as defined by applicable IRC provisions.
The Company believes that such a change may have occurred in 1997 and intends
to analyze the impact of such transfers on the continued availability, for tax
purposes, of the Company's net operating losses incurred through June 30, 1998.
Future ownership changes, as defined by the IRC, may reduce the extent to which
any net operating losses may be utilized.
Income taxes have been provided for foreign operations based upon the various
tax laws and rates of the countries in which the Company's operations are
conducted. There is no direct relationship between the Company's overall
foreign income tax provision and foreign pre-tax book income due to the
different methods of taxation used by countries throughout the world.
F-14
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 7. INCOME TAXES (CONTINUED)
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $48,000 at June 30, 1998. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for United States federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both United States income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred United States income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation.
NOTE 8. EXTRAORDINARY INCOME
During 1995, one of the Company's subsidiaries filed for protection under the
bankruptcy laws of the State of California. In connection with the Plan of
Reorganization, approved by the court in August 1996, certain indebtedness of
the subsidiary was discharged by the court. Accordingly, the subsidiary
recognized extraordinary income in the amount of $1,263,045 during the fiscal
year ended June 30, 1996.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancellable operating leases, which
expire at various dates through July 2016.
Future minimum payments, by year and in the aggregate, under noncancellable
operating leases with initial or remaining terms of one year or more consist of
the following at June 30, 1998:
Operating
Year Leases
--------------
1999 $ 560,148
2000 500,349
2001 357,480
2002 357,480
2003 354,060
Thereafter 2,480,358
--------------
Total minimum lease payments $ 4,609,875
==============
Rent expense for the fiscal years ended June 30, 1996, and 1997 and 1998
amounted to $522,483, $529,876 and $660,742.
In October 1998, three executive officers signed employment agreements for
periods ranging from one to three years and providing for aggregate annual
compensation of approximately $500,000, plus benefits. In addition, five-year
options to purchase an aggregate of 1,400,000 shares of restricted common stock
at an exercise price of $3.00 per share were issued to two executive officers.
Five-year options to purchase 400,000 shares of restricted common stock at an
exercise price of $3.00 per share were issued to a principal stockholder.
F-15
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------------- ---------------------------
1996 1997 1998 1997 1998
------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Interest $ 105,430 $ 165,638 $ 191,112 $ 98,006 $ 114,996
Income taxes 184,232 - 230,487 147,042 26,756
=========================================== ===========================
</TABLE>
F-16
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 11. RELATED PARTY TRANSACTIONS
During September 1997, a major shareholder loaned the Company $100,000 in the
form of a non-interest bearing demand note. The note was repaid from proceeds
in connection with the merger described in Notes 1 and 10. During the year
ended June 30, 1998, the Company paid a major shareholder consulting fees
amounting to $10,000.
NOTE 12. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of tax, are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------------------------------- ---------------------------
1996 1997 1998 1997 1998
-------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 1,297,321 $ (39,668) $ 166,050 $ (167,465) $ (761,472)
Foreign currency translation
adjustments 14,403 (4,107) 43,036 103,151 53,749
------------------------------------------- ---------------------------
Comprehensive income (loss) $ 1,311,724 $ (43,775) $ 209,086 $ (64,314) $ (707,723)
============================================ ============================
</TABLE>
F-17
<PAGE>
SKYNET HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months ended December 31, 1998 and 1997
is unaudited)
NOTE 13. GEOGRAPHIC INFORMATION
The Company operates in one principal industry segment: the delivery of
time sensitive documents and packages. A summary of the Company's geographic
information is presented below:
<TABLE>
<CAPTION>
United
States Europe Australia Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales to Customers 1998 $5,962,396 $21,250,613 $4,625,910 $31,838,919
1997 7,597,883 24,079,365 4,474,515 36,151,763
1996 7,714,977 22,661,783 4,028,186 34,404,946
Operating Income (Loss) 1998 (384,849) 630,936 334,890 580,977
1997 107,664 (381,347) 244,176 (29,507)
1996 (341,921) 701,310 99,333 458,722
Identifiable Assets 1998 882,250 5,066,925 936,640 6,885,815
1997 918,546 6,199,922 985,603 8,104,071
1996 1,102,830 5,502,766 699,721 7,305,317
</TABLE>
NOTE 14. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Write-offs Balance at
beginning of costs and against end of
Description period expenses reserve period
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for possible losses
Year ended June 30,
1998 $1,016,921 $400,955 $(683,619) $734,257
1997 999,506 329,841 (312,426) 1,016,921
1996 808,447 246,170 (55,111) 999,506
</TABLE>
Note 15. SUBSEQUENT EVENT (Unaudited)
On March 15, 1999, the Company acquired the operating assets of Nevada
Fleet Management, Inc. dba Fleet Delivery Service ("Fleet"), a regional courier
company which provides air and ground delivery services in Nevada, Washington
and Oregon, primarily to the banking industry. The Company issued 1,479,415
shares of Common Stock as consideration for the acquisition. Fleet has annual
revenue of approximately $13 million, 450 employees and more than 200 delivery
vehicles. The assets acquired include: receivables, delivery vehicles,
equipment, refundable deposits, licenses, administrative material and equipment,
records and documents, and all personal property used in the operation of the
business. The Company also assumed approximately $300,000 in liabilities
relating to the acquisition. The Company accounted for the acquisition using the
purchase method of accounting with the assets acquired and liabilities assumed
recorded at fair values, and the results of the acquired business will be
included in the Company's consolidated financial statements from the closing
date of the acquisition.
F-18
<PAGE>
[LETTERHEAD OF]
MCGLADREY & PULLEN, LLP
-----------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Nevada Fleet Management, Inc.
Las Vegas, Nevada
We have audited the accompanying balance sheets of Nevada Fleet Management, Inc.
dba Fleet Delivery Service as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' 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 audit 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 Nevada Fleet Management, Inc.
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 disclosed in Note 1 to the financial statements, there has been a change in
reporting entity from the prior year.
/s/ McGladrey & Pullen, LLP
Las Vegas, Nevada
January 11, 1999
F-19
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
- ------------------------------------------------------------------------------
Cash $ 382,446 $ 403,185
Accounts receivable, less allowance for doubtful
accounts 1998 $71,412 and 1997 $76,652 1,095,377 1,021,243
Due from related party (Note 6) 68,625 25,325
Other assets (Note 2) 75,733 87,783
-------------------------
Total current assets 1,622,181 1,537,536
Vehicles and equipment, net (Note 3) 203,110 295,724
Deposits 19,840 28,488
-------------------------
$ 1,845,131 $ 1,861,748
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Accounts payable $ 146,923 $ 462,025
Accrued expenses (Note 4) 545,491 623,219
Accident claim liability (Note 5) 515,000 606,000
Due to related party (Note 6) 344,944 -
-------------------------
Total current liabilities 1,552,358 1,691,244
Commitments and Contingencies (Notes 5 and 9)
Stockholders' Equity
Common stock, no par value, 2,500 shares
authorized, 1,500 shares issued and
outstanding $ 6,000 6,000
Additional Paid-in Capital 10,689,879 10,635,879
Accumulated Deficit (10,403,106) (10,471,375)
---------------------------
292,773 170,504
---------------------------
$ 1,845,131 $ 1,861,748
===========================
See Notes to Financial Statements.
F-20
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Courier revenue $13,501,266 $13,024,519
Record retention revenue 130,148 104,824
----------------------------------
Total revenue 13,631,414 13,129,343
----------------------------------
Operating expenses
Operating, including $166,179 and $649,550 incurred to a
related party in 1998 and 1997, respectively (Note 6) 11,538,951 12,080,083
General and administrative, including rent paid to
stockholders of $14,400 in 1998 and 1997 1,912,221 2,384,811
Depreciation and amortization 87,191 102,514
Shop and garage 3,855 21,381
----------------------------------
Operating expenses 13,542,218 14,588,789
----------------------------------
Operating income (loss) 89,196 (1,459,446)
Nonoperating income (expense):
Interest income 4,028 269
Loss on disposition of assets (3,862) (23,832)
Interest expense, including $14,000 and $363,658, incurred
to related parties in 1998 and 1997, respectively (Note 6) (21,093) (367,848)
----------------------------------
Net income (loss) $ 68,269 $(1,850,857)
==================================
Proforma net income (unaudited):
Historical income before income taxes $ 68,269
Proforma provision for taxes 26,657
-----------
Proforma net income $ 41,612
===========
Proforma net income per share, basic and diluted $ 27.74
===========
Weighted average shares outstanding, basic and diluted 1,500
===========
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,500 $6,000 $ 5,025,000 $ (8,620,518) $(3,589,518)
Stockholder contributions - - 5,610,879 - 5,610,879
Net loss - - - (1,850,857) (1,850,857)
-------------------------------------------------------------------------------
Balance at December 31, 1997 1,500 6,000 10,635,879 (10,471,375) 170,504
Stockholder contributions - - 54,000 - 54,000
Net income - - - 68,269 68,269
-------------------------------------------------------------------------------
Balance at December 31, 1998 1,500 $6,000 $10,689,879 $(10,403,106) $ 292,773
===============================================================================
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Cash received from courier revenue $ 13,557,280 $ 14,924,989
Cash paid to suppliers and employees (13,562,515) (14,450,927)
Interest received 4,028 269
Interest paid (21,093) (367,848)
-----------------------------------
Net cash provided by (used in) operating
activities (Note 7) (22,300) 106,483
-----------------------------------
Cash Flows from Investing Activities
Proceeds from sale of vehicles and equipment 2,661 300
Purchase of vehicles and equipment (1,100) (39,611)
-----------------------------------
Net cash provided by (used in) investing activities 1,561 (39,311)
-----------------------------------
Cash Flows from Financing Activities,
principal payments on notes payable - (8,981)
-----------------------------------
Net increase (decrease) in cash (20,739) 58,191
Cash
Beginning 403,185 344,994
-----------------------------------
Ending $ 382,446 $ 403,185
===================================
Supplemental Schedule of Noncash Investing and Financing Activities
Due to related party recorded as additional paid-in capital $ 54,000 $ 5,610,879
===================================
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
- ------------------
Nevada Fleet Management, Inc. dba Fleet Delivery Services, (the Company), a
Nevada corporation, operates principally as a courier service in Nevada,
California, Oregon, Utah, Arizona and Washington. The Company closed their Utah
operation during 1998. The Company also provides record retention storage
facilities in Nevada. Segment information is not presented since all of the
Company's revenue is attributed to a single reportable segment.
Change in reporting entity
- --------------------------
In the prior year, the Company's financial statements were presented on a
combined basis with Nevada Yellow Cab Corporation, Nevada Checker Cab
Corporation and Nevada Star Cab Corporation. Management has elected to present
the Company's financial statements on a stand-alone basis in the current year.
A summary of the Company's significant accounting policies follows:
Use of estimates in the preparation of financial statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. A
significant estimate which is particularly susceptible to change in a short
period of time includes the determination of the accident claim liability.
Actual results could differ from those estimates.
Cash
- ----
At various times throughout the year, the Company maintained cash balances at
financial institutions that exceeded federally insured limits.
Vehicles and equipment
- ----------------------
Vehicles and equipment are stated at cost. Depreciation and amortization are
provided by the straight-line method over the following estimated useful lives.
Years
-----
Vehicles 5-6
Automotive radios and equipment 7-10
Furniture, fixtures and equipment 7-10
Leasehold improvements 7
Improvements to leased property are amortized over the lesser of the life of the
lease or the life of the improvements.
F-24
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Revenue recognition
- -------------------
Revenue is recognized upon delivery.
Income tax
- ----------
The Company, with the consent of its stockholders, has elected to be taxed under
sections of the federal income tax laws which provide that, in lieu of
corporation income taxes, the stockholders separately account for their pro rata
shares of the Company's items of income, deduction, losses and credits.
Therefore, these financial statements do not include any provision for corporate
income taxes.
Concentration of credit risk
- ----------------------------
The Company has a major customer representing approximately 27% and 22% of
revenue for the years ended December 31, 1998 and 1997, respectively. During
the years December 31, 1998 and 1997 revenues and trade receivables from this
customer amounted to approximately $3,624,000 and $2,828,000 and $178,000 and
$334,000, respectively.
Reclassification of certain expenses
- ------------------------------------
Certain amounts for the year ended December 31, 1997 have been reclassified,
with no effect on net income, to be consistent with the classifications adopted
for the year ended December 31, 1998.
Pro forma income taxes and earnings per share
- ---------------------------------------------
The pro forma statement of operations information included in these financial
statements is to show what the significant effects might have been on the 1998
historical statements of operations had the Company not been treated as an S
corporation for income tax purposes. The pro forma information reflects a
provision for income taxes at an effective rate of 39%. The pro forma net
income per share is based on the weighted average number of shares of common
stock outstanding during the period.
Fair value of financial instruments
- -----------------------------------
The carrying amounts of due to and due from related parties are considered to
approximate fair value because the interest rates either approximate market
interest rates or the estimated fair values using current market rates are not
materially different from their carrying values.
F-25
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 2. Other Assets
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Prepaid expenses $ 66,515 $ 76,229
Other receivables 9,218 11,544
---------------------------------
$ 75,733 $ 87,783
=================================
</TABLE>
Note 3. Vehicles And Equipment
Vehicles and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Vehicles $ 245,642 $ 245,642
Automotive radios and equipment 350,463 364,030
Furniture, fixtures and equipment 79,462 78,364
Leasehold improvements 48,071 48,071
---------------------------------
723,638 736,107
Less accumulated depreciation and amortization (520,528) (440,383)
---------------------------------
$ 203,110 $ 295,724
=================================
</TABLE>
Note 4. Accrued Expenses
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Accrued salaries $210,180 $239,288
Accrued vacation 56,452 90,811
Other 278,859 293,120
--------------------------------
$545,491 $623,219
================================
</TABLE>
F-26
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Accident Claim Liability
The Company is involved in various claims and lawsuits resulting from injuries
and damages arising from vehicle accidents wherein substantial amounts are
claimed. The Company handles and settles smaller claims internally. Claims and
litigation with larger potential losses are referred to outside counsel. The
Company maintains insurance for claims but is generally self-insured for the
first $100,000. The Company has recorded approximately $515,000 and $606,000 at
December 31, 1998 and 1997, respectively, for the aggregate amount of estimated
losses from these known claims. This estimate is based on a range from counsel
on the larger claims and management's assessment and experience with smaller
claims. The upper end of the range of estimated loss is not reasonably
determinable.
Note 6. Related Party Balances and Transactions
The Company has entered into various transactions with the stockholders and a
company which is related by common ownership and management as disclosed below.
Due from related party consists of amounts due from Star Transit (Star), a
company affiliated through common ownership, for various operating expenses.
At December 31, 1998 and 1997, the amount due from Star is $68,625 and
$25,325, respectively.
Due to related party consists of amounts due to Nevada Yellow Cab Corporation
(YCC) for the payment of general operating expenses by YCC on behalf of the
Company. At December 31, 1998 and 1997, the amount due to YCC for these expenses
is $344,944 and $0, respectively. The amount due to related party accrues
interest at 6% per year. Included in interest expense is approximately $14,000
and $43,000 payable to YCC for the years ended December 31, 1998 and 1997,
respectively.
Interest expense also includes $0 and $320,658 for the years ended December 31,
1998 and 1997, respectively, payable to the stockholders.
In addition to YCC paying operating expenses on behalf of the Company, YCC
provides management services to the Company. Additionally, management entered
into an operating lease with YCC on January 7, 1995, whereby the Company leases
225 vehicles from YCC and YCC maintains them. These expenses are included in
operating expense as follows for the years ended December 31:
<TABLE>
<S> <C>
1998 1997
----------------------------------
Management fees $ - $ 49,950
Vehicle lease expense 40,000 510,000
Vehicle maintenance 126,179 50,000
Rent expense - parking lot - 39,600
----------------------------------
$ 166,179 $ 649,550
==================================
</TABLE>
F-27
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 6. Related Party Balances and Transactions (continued)
Approximately $54,000 and $5,600,000 of amounts due YCC was contributed to
additional paid in capital for the years ended December 31, 1998 and 1997,
respectively.
The Company leases office space from the stockholders. Rent expense for the
years ended December 31, 1998 and 1997 is $14,400.
Note 7. Cash Flows Statement
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------
<S> <C> <C>
Reconciliation of net income (loss) to net cash provided by
(used in) operating activities
Net income (loss) $ 68,269 $(1,850,857)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 87,191 102,514
Provisions for bad debts (5,240) (41,393)
Loss on disposition of assets 3,862 23,832
(Increase) decrease in:
Accounts receivable (68,894) 346,655
Other assets 12,050 (4,200)
Due from related party (43,300) -
Deposits 8,648 -
Increase (decrease) in:
Accounts payable (315,102) 85,855
Accrued expenses (77,728) (94,307)
Accident claim liability (91,000) 48,000
Due to related party 398,944 1,490,384
------------------------------------
Net cash provided by (used in) operating activities $ (22,300) $ 106,483
====================================
</TABLE>
Note 8. Employee Benefit Plan
The Company participates in a 401(k) plan established by a related party which
covers all qualified employees. Participants may elect to defer from 5% to 19%
of their annual compensation up to the maximum allowable amount. The Company is
required to match 1% of the participant's compensation if the participant has
made salary reductions for the prior three consecutive years. The Company's
contributions for the years ended December 31, 1998 and 1997 were $590 and
$510, respectively.
F-28
<PAGE>
NEVADA FLEET MANAGEMENT, INC.
dba Fleet Delivery Service
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Note 9. Lease Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases with terms ranging from four to twenty years. Rental expense
under these leases amounted to $104,695 and $169,729 for the years ended
December 31, 1998 and 1997, respectively.
As of December 31, 1998, approximate future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
Years Ending December 31,
- -------------------------
<S> <C>
1999 $ 136,004
2000 55,541
2001 9,436
------------
$ 200,981
============
</TABLE>
Note 10. Geographic Information
The following table represents information about the Company's revenue and
long-lived assets by geographic area:
<TABLE>
<CAPTION>
Long-Lived
Revenue Assets
------------------------------
<S> <C> <C>
Las Vegas $ 2,468,000 $ 36,000
Reno 1,717,000 11,000
Washington 2,529,000 42,000
Portland 4,184,000 46,000
Other 2,733,000 68,000
------------------------------
$ 13,631,000 $ 203,000
==============================
</TABLE>
Note 11. Letter of Intent
In December 1998, the Company entered into a letter of intent with SkyNet
Holdings, Inc., (SkyNet) pursuant to which all tangible assets and certain other
intangible assets will be purchased. SkyNet will also assume liability on all
accounts payable entered into during the Company's ordinary course of business.
In addition, the key executives of the Company entered into an agreement which
restricts competition with SkyNet for a period of two years following the date
of closing. The financial statements do not include any adjustments which may
occur as a result of this transaction. As of January 11, 1999, the Company has
not entered into a definitive agreement with regards to this pending
transaction.
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