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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A-4
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
SKYLYNX COMMUNICATIONS, INC.
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(Exact Name of Small Business Issuer in its Charter)
Colorado 84-1360029
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
103 Sarasota Quay, Sarasota, Florida 34236
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(Address of Principal Offices) (Zip Code)
Registrant's telephone number, including area code: (941) 366-4747
Securities to be registered under 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
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this Registration Statement are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are thus prospective. Such statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, competitive pressures, changing economic conditions and other
factors, some of which will be outside of the control of the Company.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
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SkyLynx Communications, Inc. (the "Company" or "SkyLynx") is a
corporation formed in 1996 under the laws of the State of Colorado. The
objective of SkyLynx is to globally install and operate its high speed
Internet service and its two-way Community Area Networking ("CAN") systems to
interconnect and transport computer data and information within a given city;
connecting Local Area Networks ("LANs") together, between cities; and
connecting each city to other cities by using Wide Area Networks ("WANs").
The SkyLynx Network Programming Service ("City Network") is designed to be a
cost-effective computer communications solution available for businesses
worldwide.
The features of the SkyLynx system include asymmetrical data
transmission with simultaneous downstream speeds of up to 10 Megabits per
second (Mbps) and upstream speeds of 2.0 Mbps, a price-competitive service,
security of user data and information, the ability to utilize existing
microwave infrastructure and technologies for system access and data transfer.
Deployment of the system can be undertaken through leases and/or purchases of
microwave facilities or channels and the formation of joint ventures can take
advantage of local sales affiliates already present in targeted markets.
Management projects that each licensed microwave communication
facility can support a minimum of 2,100 router locations on a full-time basis.
Each router location supports up to 20 workstations. Moreover, technology is
readily accessible which will increase the number of routers served to a level
of 3,500-4,000 routers and the number of network connections by 10,000 to
15,000 per microwave facility.
The Company has completed the development of the first two City
Networks ("CAN"): a symmetric system in the Tampa, Florida market using ISM
band and an asymmetric system in the Fresno, California market using a
licensed microwave communications facility. The Fresno Network was
substantially completed and began transmission on August 20, 1998. The
Network, operating under the assumed trade name of "CyberLynx Communications,"
currently has orders for approximately 150 beta customers and 10 commercial
customers, all of which are small businesses within the geographical region.
The Tampa Network has been completed and is operational and expects to begin
commercial transmission by the end of October 1998.
History and Background
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The Company was formed and organized under the laws of the State of
Colorado in September 1996 under the name "Allied Wireless, Inc." In 1997 the
Company consummated the acquisition of SkyLynx Express Holdings, Inc.
("SkyLynx Express"), which was then merged with and into the Company.
Subsequently in 1998, the Company changed its name to "SkyLynx Communications,
Inc." SkyLynx Express had been formed and organized on July 29, 1997 by
Network System Technologies, Inc., a California corporation, ("NST") to become
a wireless data network services provider through the use of a proprietary
high speed 2-way wireless router product line. Prior to and subsequent to the
acquisition of SkyLynx Express, the Company has been actively involved in
acquiring rights to utilize FCC licensed spectrum in several metropolitan
areas to support the development and deployment of wireless network systems.
Financing for these activities has been provided through private offerings of
the Company's securities undertaken in reliance upon exemptions from the
registration requirements of the Securities Act of 1933, as amended, (the
"Securities Act"), contained in Regulation D thereunder. The Company is
voluntarily filing this Registration Statement in order to become a reporting
company under Section 13 of the Securities Exchange Act of 1934, as amended,
(the "Exchange Act") with the expectation that such status will enhance the
Company's opportunities to expand the deployment of networks into new markets
through the purchase or lease of FCC approved licenses, the formation of a
partnership, joint venture and other arrangements with third parties which
control spectrum and potential transmitter locations in those markets. In
addition, the Company has developed a limited, highly sporadic public trading
market for its common stock, which trades on the OTC Electronic Bulletin Board
("Bulletin Board") under the symbol "SKYK."
Business
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The Company is engaged in providing high-speed Internet access to
businesses through the use of wireless frequencies. Through a non-exclusive
license from Network System Technologies, Inc. ("NST"), the Company has
obtained the use of a high-speed 2-way wireless router product.. The Company
has supplier relationships with other wireless data transmission equipment and
systems vendors, however, and is not dependent upon NST as a source of supply.
The Company intends to form strategic relationships with wireless operators to
market its "SkyLynx Network" Internet service initially to non-residential
customers in the United States and internationally.
Industry Overview
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Growth Of Internet Usage And Content
The Internet, a network of thousands of interconnected, separately-
administered public and commercial networks, has emerged as a
global communications medium enabling millions of people to share information
and conduct business electronically. During the past few years, the number
of Internet users, advertisers and content developers and businesses online
has grown dramatically. With readily-available, low-cost Internet
access, consumers and businesses are making increased use of Web browsers,
electronic mail, corporate intranets, telecommuting, online advertising and
electronic commerce. According to Jupiter Communications, the number of
Internet households worldwide will grow from an estimated 23.4 million in 1996
to 66.6 million by 2000. The Company believes that this growth in the number
of users will drive more substantial increases in Internet commerce,
which International Data Corporation ("IDC") estimates will grow from $318
million in 1995 to $95 billion in 2000. Increased Internet usage and the
availability of powerful new tools for the development and distribution of
Internet content have led to a proliferation of Internet-based services, such
as advertising, online magazines, specialized news feeds, interactive games
and educational and entertainment applications, that are increasingly
incorporating multimedia information such as video and near-CD- quality audio
clips. The Internet has the potential to become a platform through which
consumers and businesses easily access rich multimedia information and
entertainment, creating new sources of revenue for advertisers, content
providers and businesses. The growth of Internet advertising and commerce
depends, in part, on the ability of advertisers and online merchants to
deliver a compelling multimedia message to attract viewers and potential
customers. However, multimedia content and other data-intensive applications
require wide bandwidth.
The potential of the Internet as a medium for communication,
education, entertainment and commerce remains unfulfilled due to problems with
its performance and reliability. The Internet's performance limitations stem
from its basic architecture, which is not optimized for distribution of data-
intensive multimedia content. A limitation associated with any element in
the system, whether it is the "last-mile" connection to the user (the
"local loop"), the infrastructure of the Internet Service Provider ("ISP") or
the Online Service Provider ("OSP"), the Internet backbone or the content
provider's Web server, can result in performance bottlenecks that slow data
transmission speed to that of the weakest link. For example, dial-up users
frequently encounter busy signals upon attempting to connect to their ISP/OSPs
and are unable to access quality multimedia content readily due to the slow
speed of their analog modems. Performance limitations of the Internet
frustrate and discourage users from fully utilizing it as a convenient and
effective information tool, a compelling educational and entertainment
resource, or a way to purchase goods and services.
Several new technologies attempt to address the performance
problems of the Internet which increase the transmission speed of data across
the local loop.
- Improved Modem Offerings. In early 1997, dial-up modems
offering a peak data transmission speed of 56 kilobytes per
second ("Kbps") were introduced for use with ISP/OSPs
over existing telephone lines, although many ISP/OSPs do not
yet support this transmission speed. The lack of a universal
standard has slowed the rate of adoption of faster modems.
- Telecommunications-Based Offerings. Integrated Services Digital
Network ("ISDN") technology enables a peak data transmission
speed of 128 Kbps between the user and the ISP/OSP over
specially conditioned telephone lines. Although ISDN technology
has been available for several years, it has not been
widely deployed due primarily to its high costs.
- Asymmetric Digital Subscriber Line ("ADSL") is currently the
most prominent implementation of Digital Subscriber Line
("xDSL") technology, an emerging telecommunications protocol
originally developed to deliver video on demand. ADSL enables
peak data transmission speeds of 8.4 megabytes per second
("Mbps") downstream from the ISP/OSP to the user and 640
Kbps upstream from the user to the ISP/OSP; however, typical
implementations realize substantially lower data transmission
speeds because of the distance limitations that exist in this
"last mile" connection. ADSL access is priced significantly
above other access services and is not expected to be
widely available in the near term.
- Satellite Offerings. Satellite-delivered approaches such as
direct broadcast satellite ("DBS") currently provide a peak
data transmission speed of approximately 400 Kbps downstream
and rely on dial-up modems and the telephony network for
upstream transmission ("telephone return"). These approaches
have scaling limitations due to the necessity of dividing a
finite amount of satellite bandwidth among subscribers in a
broad geographic area.
- Cable Offerings. Transmission of two-way signals over cable is
dependent on the availability of high-speed two-way hybrid
fiber coaxial ("HFC") cable. Although large cable system
operators have begun upgrading to HFC cable infrastructure,
only a small portion of existing cable plants in the United
States have been upgraded, and the Company believes that even
less are capable of high-speed two-way transmission. Peak data
transmission speeds across HFC cable approach 27 Mbps
downstream and 10 Mbps upstream.
The Wireless Industry
The wireless industry has many facets to it and it has traditionally
been a very segmented industry with many niches such as cellular, paging,
data, private radio and subscription television, just to name a few. In
addition, the wireless industry can be segmented into two very distinct
groups, the mobile wireless industry and the fixed wireless industry. In
turn, the fixed wireless industry is mostly famous for backbone "trunk" links
for telephone networks and for the television networks. The subscription
television industry was begun in the late 1940s to serve the needs of
residents of predominantly rural areas having limited access to local off-air
VHF/UHF channels. The industry subsequently expanded to metropolitan areas
because, among other reasons, its systems were able to offer better reception
and more programming than local off-air VHF/UHF channels. Currently,
subscription television systems typically offer a variety of services
including basic service, enhanced basic service, premium service and, in some
instances, pay-per-view service. Typically, subscription television providers
charge customers an installation fee plus a fixed monthly fee for basic
service. Monthly fees constitute the major source of revenue for subscription
television providers.
Most subscription television systems are hard-wire cable systems
which currently use coaxial cable to transmit television signals, although
many have upgraded or are considering upgrading to fiber optic cable which
provides greater channel capacity than coaxial cable. Traditional hard-wire
systems have headends which receive signals for programming services, which
signals have been transmitted to the headend by local broadcast or satellite
transmissions. A headend consists of signal reception, decryption,
retransmission, encoding and related equipment. The operator then delivers
the signal from the headend to customers via an extensive network of coaxial
or fiber optic cable, amplifiers and related equipment. The use of a network
of coaxial cable inherently results in signal degradation and increases the
possibility of outages. Although fiber optic networks will substantially
reduce the transmission problems of coaxial cable systems and will expand
channel capacity, the installation of such networks will require a substantial
investment by hard-wire cable operators.
Like a traditional hard-wire cable system, a wireless system
receives programming at a headend. Unlike traditional hard-wire cable
systems, however, programming is then retransmitted by microwave transmitters
located on a tower or building to a small receiving antenna located at each
subscriber's premises. At the subscriber's location, the signals are
descrambled, converted to frequencies that can be viewed on a television set
and relayed to a subscriber's television set by coaxial cable. Because the
microwave frequencies used will not pass through trees, hills, buildings or
other obstructions, wireless systems require a clear line of sight ("LOS")
from the headend to a subscriber's receiving antenna. Many LOS obstructions
can be overcome with the use of signal repeaters which retransmit an otherwise
blocked signal over a limited area. Because wireless systems do not require
an extensive network of coaxial cable and amplifiers, wireless operators can
provide subscribers with a reliable signal having few transmission
disruptions, resulting in a television signal of a quality comparable or
superior to traditional hard-wire cable systems, and at a significantly lower
system capital cost per installed subscriber.
Wireless Data
Wireless data is the most recent segment of the wireless industry.
There are many existing wireless data networks that cater to mobile data
users, but there aren't yet many wireless data networks that cater to fixed
site "broadband" data users. Only recently with the advent of the Internet
has there been strong demand for broadband networks. Now, fixed site,
wireless data networks are a viable alternative to high speed telephone lines,
cable TV or fiber optics. The reason "broadband" wireless data networks have
been slow to appear in the marketplace is that most corporate network business
users have relied primarily on high speed telephone lines to build their
networks. This is because, in the past, broadband wireless data links did not
have the availability, reliability and network management sophistication that
is needed to run corporate Intranet data networks.
The Company's Technology
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The Company has a non-exclusive sub-license from NST to utilize a
proprietary high-speed 2-way wireless router product line using technology
licensed from Hybrid Networks, Inc. This 2-way wireless router operates with
licensed frequencies in the downstream direction and unlicensed, point-to-
point, spread spectrum wireless links in the upstream direction. However, the
Company believes that there are several potential vendors of equipment
offering similar capabilities and does not plan to rely on any single vendor
or source of supply.
This 2-way wireless router offers advantages over wireless system
operators that do not offer 2-way wireless configurations. The wireless
router provides a shared 10Mbps service in the downstream direction with
shared and/or dedicated 2.0 Mbps wireless links in the upstream direction.
This means that a subscriber to the Company's system, which the Company calls
the "SkyLynx Network," will enjoy high-speed connectivity for many
applications. The high speed downstream channel is ideal for high speed
Internet access and also for high speed access to digital content on
centralized servers, host computers and/or databases. The upstream wireless
channels are fast enough to support the uploading of digital information and
for full-duplex video conferencing applications.
Because of disagreements between the Company and NST and the
availability of suitable substitute products from other vendors, the Company
has written off residual value of the NST license rights. See "Item 8--Legal
Proceedings" and Notes A and G to Financial Statements.
In the future, the Company will look for other manufacturers and
technologies to augment these 2-way wireless products to offer more choices to
its subscribers and to help scale the networks. Additionally, the Company is
reviewing plans to market a point-to-point microwave wireless link that would
be used to interconnect larger information/content providers and larger
corporate office networks to the Company's distribution centers and Internet
points-of-presence ("PoPs"). This product would also be used in the backbone
side of a broadband wireless network to interconnect various cell-sites to the
PoPs. The Company is also reviewing a plan to add certain local multipoint
distribution service ("LMDS") products to some of its high density cells in
regions in which it can gain access to such frequencies. But, in regions
where the Company cannot get access to licensed frequencies (LMDS or other
licensed frequencies), the Company is also considering other higher frequency
symmetric wireless routers that operate only on unlicensed frequencies (e.g. 5
GHZ). Finally, the Company plans to develop products that will help it deploy
these broadband wireless data networks in apartments, hotels, condominiums
and other residential or commercial buildings that have large concentrations
of professional workers.
The Company does not claim to have any unique technological
advantage or believe that its business prospects are technology based.
Rather, the Company uses and plans to use in the future the technology of
others to offer a competitive service. The Company anticipates that it will
receive some revenue from selling the wireless router products to subscribers.
However, the Company believes it will generate most of its revenue from
service fees collected for connection to the SkyLynx Network. Network fees
will depend on the end-user services being contracted for. These fees will be
shared with the Company's strategic partners on a case-by-case basis as those
relationships are formed in various geographical markets.
Plan of Operation
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The Company will offer reliable Internet and Intranet access
through wireless frequencies, using its wireless router, directly to end-
users, as well as through connections to corporate local area networks, which
will provide companies the ability to create virtual private networks. The
Company expects that many of its services will be highly transferable to
international markets, recognizing that some degree of localization of content
will be essential to achieving success. The SkyLynx Network will be scalable,
enabling it to provide sustainable high performance as usage increases. In
order to shorten time to market for wireless operators and other frequency
holder RBU partners, the Company provides a turnkey solution, which includes
or will include not only a technology platform, but also a national
brand, marketing, customer service and billing. This solution will enable
wireless operators and RBU partners to leverage their infrastructures to
deliver high-bandwidth, interactive data services that represent significant
new revenue opportunities.
The Company plans to form strategic relationships with wireless
operators, broadcasters, and wireless frequency holders. As relationships are
developed with these persons, the Company will seek to establish Regional
Business Units ("RBU"s) that will market and sell the SkyLynx wireless data
network "brand name" in their respective territories. Those RBUs, with the
assistance of NST, will be able to deploy turn-key systems to customers
quickly, efficiently, and relatively inexpensively.
The Company will own a significant percentage of the recurring
revenues of each system, depending on who pays for equipment and its initial
installation, local sales, and who owns the spectrum, among other things.
RBUs will be staffed with individuals organized into specialized
teams consisting of an experienced account lead, who will manage varied
customers within the RBU service area and who will be the individual most
accountable to the RBU management for revenue growth and profitability. Each
account lead will be supported by network services specialists, customer
premises management specialists, and content/application specialists,
depending on the size of the service area and the resources available to the
RBU management. The account lead, network services and content/application
tooling specialists will normally be employed by the RBU; whereas the customer
premises management specialist will normally employed by an affiliate
organization.
Infrastructure of RBU's
The Company uses the services of independent companies to provide
system integration services for the asymmetric network in the Fresno
Network. They have also provided system design and installation, network
deployment and testing, and initial end user beta site installations. Once a
system has been fully deployed, the Company's own staff engineers will
provide support on adds, moves and changes to the subscriber database. The
installed systems will be monitored from a Network Operations Center ("NOC").
The NOC is a network management center that will primarily be used to monitor,
control and troubleshoot the wireless networks from a centralized location.
The NOC will also maintain the integrity of databases of various network
elements (e.g., routers and servers).
Vertical Markets
In addition to the forming of strategic partnerships and RBUs, the
Company will target certain vertical markets at the RBU level to which it
plans to sell its network services and to offer information products which
will be developed by the Company to meet the needs of those markets. The
Company believes that the following types of customers would be able to
utilize a network that the Company could provide. Accordingly, the Company
initially plans to focus its marketing efforts on the following groups of
customers:
- telecommuters - individuals that usually work in an office
environment for a business or an institution and either extend
their working day by continuing to work at home with personal
computers, or completely substitute working at home for going
to the office; e.g. persons employed by high technology firms
that wish to provide their employees with remote computing
capabilities similar to those available to them in their
primary workspaces;
- medium size and small businesses - small branch or field
offices of a business or institution which is most productive
when the staff has full access to the computer networks of the
headquarters office; e.g. insurance adjusters wishing to search
their company's claims databases from their sales offices, or a
bank researching a credit history, or an institutional buyer
tying in to large product databases;
- businesses that require frequent and timely updates of large
software modules; e.g., sales offices and major customers of
software companies, where the ability to quickly distribute
updates and to de-bug software has become increasingly
important as businesses become more and more dependent on
software supplied and supported by outside vendors;
- businesses that need to access large amounts of data, quickly
and efficiently, from locations remote to the source; e.g.,
hospitals, healthcare providers and managers, universities and
other educational and training facilities, and government
agencies.
The Company foresees the demand for better networking of
professional users to increase steadily over the next decade. The growing
need for such "Information Superhighways" is demonstrated by the current US
Administration's National Information Infrastructure (NII) initiatives.
Indeed, many large cities are considering legislation that would force
companies to provide alternatives to the traditional one-car-one-person
commuting. Networks and services that give these companies alternatives to
the traditional commute, while satisfying legislative mandates, are extremely
valuable.
Networks under Development
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Tampa Network
The Company has entered into an agreement with an affiliate of a
national broadcast network facilities operator covering the greater Tampa Bay
metropolitan area. Under the terms of the agreement, the Company has leased
all excess capacity and agreed to develop a network system linking all
American Red Cross offices located in the Tampa, Florida metropolitan area
using the shared community broadband network. The initial network linkage to
the American Red Cross will also permit the network to service the
requirements of at least seven major medical facilities in the greater Tampa
Bay area or 500 to 900 business users.
Under the terms of the agreement, the Company has provided all
funds, equipment, engineering, sales, marketing, legal and related expenses to
engineer, install, deploy and operate the network system. The geographical
area which will be covered by the network extends from Brooksville, Florida in
the north to Naples, Florida in the south. This area has a general population
of approximately 3,000,000 persons with 50,000 or more potential business
users. Under the terms of the excess capacity lease, the Company has agreed
to pay the facilities operator a royalty equal to 20% of all network revenues.
To date, the Company has completed the engineering and construction
for the Tampa network which will initially consist of four cell sites being
constructed near the American Red Cross facilities in the Tampa metropolitan
area. The network is completed and is currently deployed to beta customers.
As currently configured, the Tampa network will be initially an intranet 2-way
wireless symmetric system with two megabyte capability in both the upstream
and downstream modes. This system will operate on unlicensed frequencies
initially.
Fresno Network
The Company has acquired a 96% net revenue lease covering two MDS
channels in the Fresno, California market. The leases cover two FCC licenses
for microwave spectrum in these markets which the Company acquired in
consideration of the issuance of 50,000 shares of common stock and the
agreement to issue in the future an additional 25,000 shares of common stock,
subject to the Fresno network achieving annual net income for a full fiscal
year of at least $835,000. The lease requires payment of approximately
$47,000 per year to maintain in full force and effect.
Utilizing the FCC licenses held under the foregoing lease
assignment, the Company has completed engineering and construction of the
Fresno Network, which was deployed in August 1998. As originally configured,
the Fresno Network consists of a 2-way asymmetric wireless system utilizing
both licensed and unlicensed frequencies. With the unlicensed frequencies,
the Company's system offers two megabyte capability in both the upstream and
downstream modes; while utilizing the licensed frequency of the Company will
be able to upgrade the downstream capability to 30 megabytes per second per
channel. The Company currently has arrangements with approximately 150 beta
site users and 10 commercial customers for the Fresno Network.
The Microwave Communications Industry
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The microwave communications infrastructure, as it is still utilized
today to provide private backbone services for only a small number of major
customers in our cities, is poised for rapid growth as new technologies from
SkyLynx and others are making the sharing of these very dynamic facilities by
large groups of customers affordable. For example, until the early 1980's,
the U.S. long distance network was carried exclusively over private microwave
facilities. SkyLynx permits the conversion of these facilities to digital
transmission formats that include shared computing network architectures.
In the 50 largest markets of the U.S., 33 shareable analog channels,
among others, are authorized for conversion by the Federal Communications
Commission. In the smaller markets, 32 are available. Each of these channels
is 6 Megahertz ("MHZ") in bandwidth. Persons and entities that control this
spectrum in the larger and medium sized markets do not often have sufficient
resources to operate as a full service provider.
In addition to microwave spectrum lease agreements with existing
facility operators, SkyLynx will also implement two additional strategies that
will allow the Company to achieve rapid deployment of its high-speed data
access services. The first strategy involves the use of both the Industrial,
Scientific and Medical (ISM) bandwidth and the National Information
Infrastructure (NII) bands. The second strategy involves the creation of
other strategic experimental bands, by working with the FCC to expand the
allocation of certain spectrum for high-speed (broadband) Internet access
services.
There are several bands of spectrum that have been allocated by the
FCC to be used for unencumbered data transmission. The most popular of those
bands are in the 900 MHZ, 2.4 GHZ and 5 GHZ bands. Specifically, at 2.4 GHZ,
the FCC allocated 83 MHZ of bandwidth for ISM operation. The modulation
schemes approved for these ISM bands are known as "spread spectrum" modulation
techniques and they include both frequency hopping and direct sequence spread
spectrum techniques.
Given these circumstances, SkyLynx has identified many opportunities
for joint ventures with existing operators to build and operate two-way high-
speed asymmetric data networks using these facilities.
There are many existing low speed data networks that cater to mobile
data users, but few microwave data networks that cater to fixed site
"broadband" computing network users. Only recently with the advent of the
Internet has there been strong demand locally for broadband computing
networks. Now, fixed site, microwave data networks are a viable alternative
to high-speed telephone, CATV cable or fiber optic facilities. The primary
reason broadband wireless data networks have been slow to appear in the
marketplace is that most corporate network business users have so far relied
on high speed telephone lines to build their wide area computing networks.
This is due to the fact that broadband microwave data links did not have the
availability, reliability and network management sophistication that is needed
to run most corporate Intranet data networks.
Direct Microwave Facilities Purchases and Leases
The owners of microwave facilities who decide to rely exclusively on
SkyLynx 's expertise to operate the resulting asymmetric data network, are the
most likely candidates to be strategic business partners of SkyLynx. These
microwave operators become joint owners of the RBUs that are formed to offer
our network services in the various cities. Candidates include existing
owners of commercial MDS, MMDS, ITFS, VHF, UHF or LPTV microwave facilities,
who want to get into the data networking business with SkyLynx. SkyLynx is
currently negotiating with many of these individuals and organizations that
want to participate in building City Networks by SkyLynx.
Competition
As the Company has only a non-exclusive license to use the NST 2-way
asymmetric wireless technology and no agreement or commitment from NST to
limit or restrict the grant to third parties of the same or similar license
rights, the Company must compete not only with NST and other potential NST
licensees, but also with other entities using competitive technologies and
telecommunication media. As a result, the Company must rely upon a "first to
the market" approach to competing successfully, of which there can be no
assurance.
The markets for consumer and business Internet services and on-line
content are extremely competitive, and the Company expects that competition
will intensify in the future. The principal competitive factors in this
market include product performance and features (including speed of
transmission and upstream transmission capabilities), reliability, price, size
and stability of operations, breadth of product and service lines, technical
support and service, strategic relationships and standards compliance and
general industry and economic conditions. Certain of these factors are
outside of the Company's control. The existing conditions in the high speed
network connectivity market could change rapidly and significantly as a result
of technological changes and the development and market acceptance of
alternative technologies could decrease the demand for the Company's networks
or render them obsolete. Similarly, the continued emergence or evolution of
industry standards or specifications may put the Company at a disadvantage in
relation to its competitors.
The Company's most direct competitors are Internet service providers
("ISPs"), national long distance carriers and local exchange carriers
("TelCos"), other wireless service providers, on-line service providers
("OSPs") and operators in the cable-based services market. Many of these
competitors are offering (or may soon offer) technologies that will attempt to
compete with some or all of the Company's high speed data service offerings.
Such technologies include Integrated Services Digital Network ("ISDN") and
Digital Subscriber Line ("xDSL"). The factors affecting competition in these
markets include transmission speed, reliability of service, ease of access,
price/performance, ease of use, content quality, quality of presentation,
timeliness of content, customer support, brand recognition, operating
experience and revenue sharing.
ISPs provide basic Internet access to residential consumers and
businesses, generally using existing telephone network infrastructures. This
method is widely available and inexpensive. Barriers to entry are low,
resulting in a highly competitive and fragmented market.
Long distance inter-exchange carriers have deployed large-scale
Internet access networks and sell connectivity to business and residential
customers. The regional Bell operating companies ("RBOCs") and other local
exchange carriers have also entered this field and are providing price
competitive services. Many of such carriers are offering diversified packages
of telecommunications services, including Internet access service, to
residential customers and could bundle such services together, which could
place the Company at a competitive disadvantage.
Other wireless service providers, including AT&T and Hughes Network
Systems, are developing wireless Internet connectivity, such as multi-channel,
multi-point distribution service, local multi-point distribution service and
digital broadcast satellite.
OSPs that provide, over the Internet and on proprietary online
services, content and applications ranging from news and sports to consumer
video conferencing. These services are designed for broad consumer access
over telecommunications-based transmission media, which enables the provision
of data services to the large group of consumers who have personal computers
with modems.
The Company's competitors in the cable-based services market are
those cable companies that have developed their own cable-based services and
market those services to unaffiliated cable system operators that are planning
to deploy data services. Several cable system operators, including
Telecommunications, Inc. ("TCI"), Time Warner, Inc. ("Time Warner") and the
Continental Cablevision subsidiary of US West, Inc. ("US West") have deployed
high speed Internet access services over their existing local HFC cable
networks.
Many of the Company's competitors and potential competitors have
substantially greater financial, technical and marketing resources, larger
subscriber bases, longer operating histories, greater name recognition and
more established relationships with advertisers and content and application
providers than the Company. Such competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing Internet services than the
Company. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adverse effect the
Company's business, operating results or financial condition. In particular,
it is possible that the perceived high speed access advantage provided by
cable may be undermined by the need to share bandwidth, which results in the
reduction in individual throughput speeds. In addition, the emergence or
evolution of industry standards, through either adoption by official standards
committees or widespread use by cable system operators, other broadband
wireless system operators or TelCos, could require the Company to redesign its
products, resulting in delays in the introduction of products and services.
Product Development and Engineering
The Company's product development and engineering efforts focus on
the design and development of new technologies and products to increase the
speed and efficiency of the network and to facilitate the development and
distribution of broadband communications. The principal areas of current
product development and engineering include:
- enhancing techniques to improve network performance and
efficiency;
- advancing multi-casting technologies to provide efficient
transport of "one-to-many" content;
- developing advertisement targeting and content personalization
systems to fit desired subscriber profiles;
- developing virtual private network technology solutions to
enable secure and scalable end-to-end telecommuting and
commercial services over the network;
- enhancing the Company's advanced network management
capabilities to identify and address network performance issues
before they affect user experience.
Under the Company's General Operating Agreements with NST, the
Company plans to be the beneficiary of much of the product development and
enhancement undertaken by NST to improve performance. The Company also plans
to retain engineers and other computer experts to further enhance and develop
its technologies internally, although to date the Company has engaged in no
internal product development.
Intellectual Property
The Company regards its licensed technology, while non-exclusive, as
proprietary and attempts to protect it with copyrights, trademarks, trade
secret laws, restrictions on disclosure and other methods. The Company also
generally enters into confidentiality or license agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
as the Company has only a non-exclusive right to use the NST technology and
has no commitment or agreement from NST to limit or restrict the grant of
similar rights to third parties, it is probable that the Company will be
forced to compete directly with other potential NST licensees as well as those
offering competitive technologies. In addition, effective copyright,
trademark and trade secret protection may be unavailable or limited in certain
foreign countries, and the global nature of the Internet makes it virtually
impossible to control the ultimate destination of the Company's content
offerings. Policing unauthorized use of the Company's content offerings is
difficult. There can be no assurance that the steps taken by the Company will
prevent misappropriation or infringement of its technology. In addition,
litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company may receive in the future, notice of claims of
infringement of other parties' proprietary rights, including claims for
infringement resulting from the downloading of materials by the online or
Internet services operated or facilitated by the Company. There can be no
assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company or that any assertions or prosecutions will not
materially adversely affect the Company's business, operating results and
financial condition. Irrespective of the validity or the successful assertion
of such claims, the Company would incur significant costs and diversion of
resources with respect to the defense thereof, which could have a material
adverse effect on the Company's business, operating results and financial
condition. If any claims or actions are asserted against the Company, the
Company may seek to obtain a license under a third party's intellectual
property rights. There can be no assurance, however, that under such
circumstances a license would be available on commercially reasonable terms,
or at all.
Employees
As of December 1, 1998, the Company had 15 employees, consisting of
its Chief Executive Officer, President, Executive Vice President, Executive
Vice President of Sales and Marketing, Chief Financial Officer, General
Counsel, four employees involved in operating the Fresno Network, and one
administrative assistant. The Company considers its relations with its
employees to be good. The Company's ability to achieve its financial and
operational objectives depends in large part upon the continued service of its
senior management and key technical personnel and its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such qualified personnel in the Company's industry is intense.
Facilities
The Company is headquartered in facilities consisting of
approximately 1,250 square feet in Sarasota, Florida, which the Company
occupies under a five year lease. The Company also maintains two offices in
the Silicon Valley, California, one satellite office in San Jose, California
consisting of 500 square feet which it occupies under a one year lease, and
the other in Fresno, California consisting of approximately 3,800 square feet.
The Company anticipates that its existing facilities are adequate for the
foreseeable future. The Tampa facility has a multi-year lease and occupies
3,000+ square feet of office space.
The Company has substantially completed the construction of
transmission facilities in both Fresno, California and Tampa, Florida.
The Fresno Network currently uses two transmitters with six antennas
located on a rooftop tower, one for downstream and five for upstream
transmissions. The antennas and transmitters have been installed under a five
year lease calling for rental payments of $950 per month, with an option to
renew for an additional period of five years. In the same building, the
Company has installed its head end equipment and its network operation center
(NOC) operations. Subject to adequate commercial demands and working capital,
the Fresno Network may be expanded by an additional two cell sites, each of
which will require approximately $20,000 in capital.
The Tampa Network is currently operated as a beta site with rooftop
antennas located on buildings in downtown Tampa, St. Petersburg and
Clearwater, Florida. Each site has two antennas mounted on rooftop towers,
each of which is held under a five year, $500 per month lease. The Tampa
Network currently operates as a point-to-point transmission network. Plans
include ungrading the system to a point to multi-point system which will
require approximately $50,000 in capital expenditures for antenna,
transmitters and head end equipment. See, "Financial Statements -- Note C."
Investment Banking Agreement
The Company has engaged Gerard Klauer Mattison & Co., Inc. ("GKM"),
a New York Stock Exchange Member, to assist the Company in identifying and
consummating acquisition opportunities as well as sources of capital. The
Company intends to conduct a public offering of its securities in the first
half of 1999 on a firm commitment basis. The occurrence of the future
underwriting is subject to market and other conditions. There can be no
assurance that the underwriting will occur or, if it does, the timing or
amount thereof.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
report.
Reverse Split
- -------------
Unless otherwise stated, all share and per share information
contained in this Registration Statement gives retroactive effect to a 1-for-
13 reverse split of all outstanding shares of common stock which was effected
on January 23, 1998.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has relied principally upon the
proceeds of private equity financings to provide working capital. The Company
has not generated any revenues from operations to date. During the year ended
December 31, 1997, the Company sold an aggregate of 781,805 shares of its
Common Stock in private offerings realizing proceeds, net of offering
expenses, of $963,227. In October 1998, the Company completed a private
offering of units ("Units"), each Unit consisting of one share of the
Company's Series A Convertible Preferred Stock and two Common Stock Purchase
Warrants (the "1998 Private Offering"). The Company has received and accepted
subscriptions to purchase an aggregate of 988,750 Units representing proceeds
of approximately $3,560,000, net of offering costs.
At September 30, 1998, the Company had total assets of $2,794,656.
The assets consisted principally of cash of $892,516, communications and
related equipment of $677,783 net of depreciation, inventory of $318,952 and
construction in process of $856,394, consisting of the Fresno and Tampa
Networks. The Company has written off any residual value derived from the
license rights obtained from NST which were initially valued at $100,000. See
"Description of Business -- Facilities" and Financial Statements, Note C. The
Company believes it has sufficient working capital to complete both of these
deployments.
Total liabilities at September 30, 1998 were $133,343, consisting
primarily of accounts payable in the aggregate amount of $90,155, or 67.6%.
Stockholders' equity at September 30, 1998 was $2,661,313. The
Company will require working capital for the acquisition of licensed or leased
wireless spectrum as well as the deployment of more wireless data networks.
The precise timing of the Company's future capital requirements cannot
accurately be predicted. The Company will require additional financing
through the sale of equity or debt securities in the future. The Company has
no commitments for any additional financing in the 1998 Private Offering or
otherwise and there can be no assurance that such commitments can be obtained.
Any additional equity financing may be dilutive to the Company's existing
stockholders and debt financing, if available, may involve pledging some or
all of the Company's assets and may contain restrictive covenants with respect
to raising future capital and other financial and operational matters. If the
Company is unable to obtain additional financing as needed, the Company may be
required to reduce the scope of its operations, which would have a material
adverse effect upon the Company's business, financial condition and results of
operation.
Results of Operations
- ---------------------
The Company has realized no revenues from continuing operations.
For the nine months ending September 30, 1998, the Company's
activities were limited to completing the acquisition of SkyLynx Express,
efforts to purchase or otherwise acquire wireless frequencies for use in
connection with the development and deployment of 2-way wireless data
networks, and development of the Tampa and Fresno networks. These activities
resulted in a net loss for the period of $2,194,357 for the consolidated
entities.
Subject to the Company being successful in its efforts to raise
additional working capital of which there can be no assurance, future revenues
will depend upon its ability to acquire wireless frequencies and construct,
deploy and profitably operate high-speed two-way wireless networks. There can
be no assurance that these efforts will be successful.
Net Operating Loss Carryforwards
- --------------------------------
At December 31, 1997, the Company had a net operating loss
carryforward for income tax purposes of approximately $2,200, which expires
beginning in 2012. Under the Tax Reform Act of 1986, the amounts of and the
benefits from net operating loss carryforwards are subject to certain
limitations in the amount of net operating losses that the Company may utilize
to offset future taxable income.
Earnings Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board issued
SFAS 128, "Earnings Per Share." SFAS 128 establishes new standards for
computing and presenting earnings per share ("EPS"). Specifically, SFAS 128
replaces the currently required presentation of primary EPS with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures, and requires a reconciliation of the numerator and denominator of
the basic and diluted EPS computations to the financial statements issued for
periods ending after December 15, 1997, and early application is not
permitted. Upon adoption, SFAS 128 requires restatement of prior period EPS
presented to conform to the requirements of SFAS 128. Management believes the
adoption of SFAS 128 will not have a material effect on the Company's
previously-issued financial statements.
Comprehensive Income
- --------------------
In June 1997, the Financial Accounting Standards Board issued SFAS
130, "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expense, gains, and losses) in a full set of general purpose financial
statements. Specifically, SFAS 130 requires that all items that meet the
definition of components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. However, SFAS 130 does not specify when to recognize or how to
measure the items that make up comprehensive income. SFAS 130 is effective for
fiscal years beginning after December 15, 1997, and early application is
permitted. SFAS 130 requires reclassification of financial statements for all
periods presented for comparative purposes. Management believes the adoption
of SFAS 130 will not have a material effect on the Company's future financial
statements.
Reporting For Segments
- ----------------------
In June 1997, the Financial Accounting Standards Board issued SFAS
131, "Financial Reporting for Segments of a Business Enterprise." SFAS 131
supersedes the "industry segment" concept of SFAS 14 with a "management
approach" concept as the basis for identifying reportable segments. SFAS 131
is effective for fiscal years beginning after December 15, 1997, and early
application is permitted. Management believes the adoption of SFAS 131 will
not have a material effect on the Company's future financial statements.
The Year 2000 Issue
- -------------------
The Year 2000 Issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have date 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 miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based upon a recent assessment, the Company has made a preliminary
determination that it may be required to upgrade or replace certain portions
of its software so that its computer systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that, with upgrades
of existing software and conversions to new software at an estimated cost of
$25,000, Y2K can be mitigated. However, the Y2K solutions have not been
implemented and are not scheduled to be completed until the first quarter of
1999. If such upgrades and conversions are not made, or are not completed or
available timely, the Year 2000 Issue could have a material impact on the
operations of the Company. Furthermore, since the Company is in the
development stage and has yet to develop broad relationships with suppliers
and customers, the Company cannot determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. As a result, there can be no guarantee that the systems of other
companies on which the Company's business relies will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. In view of the foregoing, there can be no assurance
that the Year 2000 Issue will not have a material adverse effect upon the
Company.
ITEM 3. DESCRIPTION OF PROPERTY
The Company has no ownership interest in any real or personal
property. The Company currently maintains its corporate offices at 103
Sarasota Quay, Sarasota, Florida 34236. This facility consists of
approximately 1,250 square feet and is occupied under a five year lease,
subject to the Company's right to enter into a five year lease convering the
same premises. The Company also maintains two satellite offices, one in San
Jose, California consisting of 500 square feet which it occupies under a one
year lease, and the other in Fresno, California consisting of 3,793 square
feet which it occupies under a three year lease. The Company anticipates that
its existing facilities are adequate for the foreseeable future.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the date of this Registration
Statement, the number of shares of the Company's Common Stock owned by (i)
each person who owned of record, or was known to own beneficially, more than
five percent (5%) of the Company's outstanding shares of Common Stock,
(ii) each of the Company's current directors and executive officers and (iii)
all of the Company's current directors and executive officers as a group:
<TABLE>
<CAPTION>
Shares
Beneficially Percentage
Name & Address of Owner(4)(5) Owned Ownership(1)(2)
- ----------------------- ------------ ---------------
<S> <C> <C>
Gary L. Brown 2,550,816 24.2%
Joseph F. Morgan 1,009,615 9.6%
Frank P. Ragano 60,128 0.6%
Kenneth L. Marshall 230,769 2.2%
Jeffery A. Mathias -0- -0-
Ben Nelson, Jr. 7,500 nil
Steven R. Jesson 32,900 0.3%
Ned Abell -0- -0-
Network System Technologies,
Inc.(3) 1,923,077 18.3%
55 South Market Street
San Jose, California 96112
Rovel Finance, Ltd. (6) 673,077 6.4%
A.V.G. Enterprises, Inc. (7) 817,308 7.8%
All Directors and Officers as a
Group (8 Persons)
3,891,728 37.0%
</TABLE>
- --------------------
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them within sixty (60) days of the date of
this Registration Statement are treated as outstanding when determining
the percent of the class owned by such individual and when determining
the percent owned by the group.
(2) Assumes the conversion of all Preferred Stock sold in the 1998 Private
Offering into an equal number of shares of Common Stock. Also assumes
that none of the warrants issued in the 1998 Private Offering are
exercised.
(3) Network System Technologies, Inc. ("NST"), a California corporation, is
the record owner of the subject shares. Voting and investment power with
respect to such shares is exercised by the NST Board of Directors which
is comprised solely of Eduardo J. Moura, Tony Colheo and J.R. Gallucci.
Mssrs. Moura, Colheo and Galucci disclaim beneficial ownership of such
shares for purposes of Section 16 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(4) Unless otherwise noted, each person's address is c/o SkyLynx
Communications, Inc., 103 Sarasota Quay, Sarasota, Florida 34236.
(5) Each shareholder exercises the sole investment and voting power with
respect to their shares.
(6) Voting and investment power with respect to these securities is exercised
by Camille Froideveaux, Geneva, Switzerland.
(7) Voting and investment power with respect to these securities is exercised
by Camille Froideveaux, Geneva, Switzerland.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Directors and Executive Officers
- --------------------------------
The name, position with the Company, age of each Director and
executive officer of the Company is as follows:
<TABLE>
<CAPTION>
Name Age Position (1)
- ---- --- ------------
<S> <C> <C>
Jeffery A. Mathias 38 President, Chief Executive Officer and
Director
Gary L. Brown 50 Director
Joseph F. Morgan 51 Executive Vice President and Director
Frank P. Ragano 69 Director
Kenneth L. Marshall 58 Secretary and General Counsel
Ben Nelson, Jr. 56 Chief Operating Officer
Steven R. Jesson 48 Vice President of Market Development
Ned Abell 44 Vice President of Mergers and
Acquisitions
</TABLE>
- --------------------
(1) There exists no family relationship between any officer or director.
Jeffery A. Mathias has 14 years of experience in both technical and
business related start-up and early stage companies specifically in the fields
of software, finance and wireless communications. Mr. Mathias has been
President of SkyLynx Communications, Inc. since August, 1998 and was formerly
the Vice President of Business Development at Network System Technologies,
Inc. Prior to that, he was the founder, majority stockholder and Chairman of
WHI Europe, N.V. WHI Europe is active in acquiring the spectrum rights to
transmit wireless telephony and multichannel pay TV in Spain and Poland. Mr.
Mathias has developed business partnerships with both Antenna 3, the largest
TV broadcast network in Spain, and France Telecom while pursuing wireless
communications in Europe.
Mr. Mathias was also formerly the Director of International
Development for American Telecasting, Inc. (ATEL), a leading wireless cable
provider in the U.S. Prior to ATEL, Mr. Mathias co-founded The Choice TV
Group, Inc., which included 11 wireless cable companies in the United States
providing service to customers in the Midwest, Colorado and California.
Additionally during this time, Mr. Mathias also formed New Zealand Wireless
Cable, Inc. and acquired the rights to broadcast multichannel pay television
in Auckland, Wellington and Christchurch.
Mr. Mathias founded First Midwest Financial Group, a capital assets
management company servicing the investment needs of high net worth
individuals. In addition, Mr. Mathias also co-founded SYMTEQ, Inc., a company
which developed and marketed sophisticated trading software for equity and
debt trading desks of regional brokerage companies.
Mr. Mathias has been an invited speaker and panelist in many
international wireless and pay TV industry conferences in Europe and South
America. He is a graduate of Indiana University with an MBA and holds a BSEE
from Rose-Hulman.
Gary L. Brown is Chairman of the Board and original founder of
Allied Wireless, Inc. Mr. Brown has been in the securities industry since
1973, most recently as a registered securities principal with Barron Chase
Securities, Inc. from 1992 to February 1998, Certified Investments, Inc. in
1991, Roth & Company from 1990 to 1991 and Rocky Mountain Securities, Inc.
from 1985 to 1990. Mr. Brown attended Central Missouri State University from
1967 to 1972 and currently resides in Sarasota, Florida.
Joseph F. Morgan is Executive Vice President, Director and serves as
Chief Financial Officer. Mr. Morgan received his B.S. degree in Accounting
from Kings' College in 1968 and an M.B.A. degree in Finance from Temple
University in 1976. Mr. Morgan started his business career in 1968 with the
international public accounting firm of Arthur Andersen & Company and
subsequently served as a senior level financial officer for several publicly
listed companies. Mr. Morgan has been a CPA since 1972 and for ten years
served as an Associate Professor of Finance and Management at Temple
University, Monmouth University and several other northeastern universities.
For the past twelve years, Mr. Morgan has managed his own CPA firm and has
specialized in assisting development stage companies become operational.
Frank P. Ragano, Director; Major General, U. S. Army (Ret.); Mr.
Ragano is President and CEO of CMS, Inc., a wholly owned subsidiary of
Daimler-Benz GmbH. He graduated with a B. S. degree from Duquense University
in 1950 and later graduated with a Master of Business Administration (MBA),
Syracuse University, New York. After his well-decorated career in the
military, Mr. Ragano retired from active Army service and became Vice
President of the American Defense Preparedness Association; Chairman and CEO
of BEI Defense Systems Company.
Kenneth L. Marshall is Secretary and General Counsel; member of the
Florida Bar, he has practiced law in Sarasota, FL since April, 1972. Mr.
Marshall was the President and Director of a microwave communications company
for the last 4 1/2 years.
Ben Nelson, Jr. Mr. Nelson serves as Chief Operating Officer of the
Company from its Tampa office. He is a retired United States Air Force
General officer, having served command positions in the Netherlands, Germany
and Italy. He was assigned to the Pentagon in Washington, D.C. where he was
responsible for the strategic planning and integration of new aircraft and
weapon systems being designed and built for the tactical air forces. Mr.
Nelson has a Bachelor's Degree from the University of Texas in Industrial
Relations. He also holds two Masters Degrees, one in Public Administration in
Urban, State and Federal Government and the other in Administration of
International Policy and Management.
Steven R. Jesson. Mr. Jesson serves as Vice President of Marketing
Development from the Company's California office. His primary responsibility
will be the establishment of customer services in the creation of strategic
relationships with local high technology companies in the Silicon Valley area.
His background is in financial services which has included experience as an
Account Executive, Branch Manager and Vice President of Sales and Marketing.
From 1986 to 1997 he was employed by Fidelity Brokerage Services, Inc., a
wholly owned division of Fidelity Investments. As a Branch Manager for
Fidelity, he opened new offices in St. Petersburg, Florida and Honolulu,
Hawaii. He held the position of Senior Vice President and was responsible for
over 19 offices and 300 employees. Following his employment with Fidelity
Investments, he served as Vice President and Sales Office Manager for Wedbush
Morgan Securities in San Francisco. He holds a Bachelor's Degree in Political
Economics from Colorado College.
Ned Abell. Mr. Abell has recently been hired as Vice President of
Mergers and Acquisitions. He has significant experience in mergers and
acquisitions in the wireless industry as well as broad senior management
experience with wireless telecommunications companies. Prior to joining the
Company, he served as a Corporate Development and Merger and Acquisition
Specialist for American Telecasting, Inc., a wireless telecommunications
company. Prior to his service with American Telecasting, Mr. Abell was
Treasury Analyst in Corporate Development with United Cable Television
Corporate. Mr. Abell holds a Bachelor's of Science Degree in Business
Administration from the University of Colorado.
Each director is elected to serve for a term of one year until a
successor is duly elected and qualified.
The executive officers of the Company are elected annually at the
first meeting of the Company's Board of Directors held after each annual
meeting of stockholders. Each executive officer will hold office until his
successor is duly elected and qualified, until his resignation or until he
shall be removed in the manner provided by the Company's By-Laws.
During the fiscal year ended December 31, 1997, the Company had no
standing Audit Committee. The Company plans to form an Audit Committee during
the current fiscal year. No member of the Audit Committee receives any
additional compensation for his service as a member of that Committee. The
Audit Committee is responsible for providing assurance that financial
disclosures made by management reasonably portray the Company's financial
condition, results of operations, plan and long-term commitments. To
accomplish this, the Audit Committee oversees the external audit coverage,
including the annual nomination of the independent public accountants, reviews
accounting policies and policy decisions, reviews the financial statements,
including interim financial statements and annual financial statements,
together with auditor's opinions, inquires about the existence and substance
of any significant accounting accruals, reserves or estimates made by
management, reviews with management the Management's Discussion and Analysis
section of the Annual Report, reviews the letter of management Representations
given to the independent public accountants, meets privately with the
independent public accountants to discuss all pertinent matters, and reports
regularly to the Board of Directors regarding its activities.
The Company plans to form a Compensation Committee during fiscal
1998. No member of the Compensation Committee will receive any additional
compensation for his service as a member of that Committee. The Compensation
Committee will be responsible for reviewing pertinent data and making
recommendations with respect to compensation standards for the executive
officers, including the President and Chief Executive Officer, establishing
guidelines and making recommendations for the implementation of management
incentive compensation plans, reviewing the performance of the President and
CEO, establishing guidelines and standards for the grant of incentive Stock
options to key employees under the Company's Stock Incentive Plan, and
reporting regularly to the Board of Directors with respect to its
recommendations.
There are no family relationships among Directors or persons
nominated or chosen by the Company to become a Director, nor any arrangements
or understandings between any Director and any other person pursuant to which
any Director was elected as such. The present term of office of each Director
will expire at the next annual meeting of stockholders.
During the fiscal year ended December 31, 1997, outside Directors
received no cash compensation or other remuneration for their services as
such, however they were reimbursed their expenses associated with attendance
at meetings or otherwise incurred in connection with the discharge of their
duties as Directors of the Company.
Directors who are also executive officers of the Company receive no
additional compensation for their services as Directors.
There are no material proceedings to which any director, officer or
affiliate of the Company, or any owner of record or beneficiary of more than
five percent (5%) of any class of voting securities of the Company, or any
associate of any such director, officer, affiliate of the Company, or
securityholder is a party adverse to the Company or any of its subsidiaries or
has a material interest adverse to the Company or any of its subsidiaries.
During the past five years, no director or officer of the Company
has:
(1) Filed or has had filed against him a petition under the federal
bankruptcy laws or any state insolvency law, nor has a receiver, fiscal agent
or similar officer been appointed by a, court for the business or property of
such person, or any partnership in which he was a general partner, or any
corporation or business association of which he was an Executive Officer at or
within two years before such filings;
(2) Been convicted in a criminal proceeding or is a named subject
of a pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining such person from, or
otherwise limiting his involvement in any type of business, securities or
banking activities.
(4) Been found by a court of competent jurisdiction in a civil
action, the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated any federal or state securities or
commodities law, which judgment has not been reversed, suspended, or vacated.
ITEM 6. EXECUTIVE COMPENSATION.
The following table and discussion set forth information with
respect to all compensation earned by or paid to the Company's Chief Executive
Officer ("CEO"), and its most highly compensated executive officers other than
the CEO, for all services rendered in all capacities to the Company and its
subsidiaries for each of the Company's last three fiscal years; provided,
however, that no disclosure has been made for any executive officer, other
than the CEO, whose total annual salary and bonus does not exceed $100,000.
<PAGE>
<PAGE>
<TABLE>
TABLE 1
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation(1) Awards Payouts
-------------------------- --------------------- -------
Other All
Annual Restricted Other
Name and Compen- Stock LTIP Compen-
Principal Year Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($)(2) ($) SARs ($) ($)
- --------------- ------- -------- ----- --------- ---------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary L. Brown, Chairman
of the Board 1997 $47,346 -0- -0- -0- -0- -0- -0-
- ------------------------------
</TABLE>
<PAGE>
<PAGE>
Employment Agreements
- ----------------------
The Company has undertaken and agreed to enter into, although to
date has not, written employment agreements for a term of one year expiring
December 31, 1998 with each of its executive officers. Gary Brown, as
Chairman of the Company, receives a base salary of $96,000 for the year; Mr.
Jeffery A. Mathias, as President, receives a base salary of $144,000 per year
and a housing allowance of $1,500 per month; Mr. Joseph Morgan, as Executive
Vice President, receives a base salary of $60,000 for the year; and Kenneth
Marshall, as General Counsel, will receive a base salary of $52,000 for the
year. Each employee will also be eligible to participate in the Company's
Stock Incentive Plan which the Board of Directors and shareholders have
adopted. Each of the foregoing persons devotes his full time and attention to
the business of the Company.
The Company has also entered into one year employment agreements
with three individuals who were affiliates of the entity from which the
Company acquired the lease covering the MDS channels for the Fresno,
California market. Under the terms of these agreements which expire in April
1999, Til Fritzsching, Daniel Marshall and Michael Corcoran are employed on a
full-time basis and are responsible for the development, deployment and
operation of the Fresno network which is currently under construction.
Stock Incentive Plan
- --------------------
The Company's Board of Directors and Shareholders have adopted and
approved the Company's 1998 Stock Incentive Plan (the "Plan"). Pursuant to
the Plan, Stock options granted to eligible participants may take the form of
Incentive Stock Options ("ISO's") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") or options which do not qualify as ISO's
(Non-Qualified Stock Options or "NQSO's"). As required by Section 422 of the
Code, the aggregate fair market value of the Company's Common Stock with
respect to its ISO's granted to an employee exercisable for the first time in
any calendar year may not exceed $100,000. The foregoing limitation does not
apply to NQSO's. The exercise price of an ISO may not be less than 100% of
the fair market value of the shares of the Company's Common Stock on the date
of grant. The exercise price of an NQSO may be set by the administrator. An
option is not transferable, except by will or the laws of descent and
distribution. If the employment of an optionee terminates for any reason
(other than for cause, or by reason of death, disability, or retirement), the
optionee may exercise his options within a ninety day period following such
termination to the extent he was entitled to exercise such options at the date
of termination. Either the Board of Directors (provided that a majority of
directors are "disinterested") can administer the Plan, or the Board of
Directors may designate a committee comprised of directors meeting certain
requirements to administer the Plan. The Administrator will decide when and
to whom to make grants, the number of shares to be covered by the grants, the
vesting schedule, the type of award and the terms and provisions relating to
the exercise of the awards. An aggregate of 1,750,000 shares of the Company's
Common Stock is reserved for issuance under the Plan.
At October 1, 1998, the Company had granted no stock options under
the Plan.
The following tables set forth certain information concerning the
granting and exercise of incentive Stock options during the last completed
fiscal year by each of the named executive officers and the fiscal year-end
value of unexercised options on an aggregated basis:
<TABLE>
TABLE 2
Option/SAR Grants for Last
Fiscal Year - Individual Grants
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- ---------------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Gary L. Brown -0- 0% -0-
- ---------------------
</TABLE>
<PAGE>
<TABLE>
TABLE 3
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
----------------------------------------------------
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($) (1)
Shares Acquired Value Realized Exercisable Exercisable/
Name on Exercise (#) ($) (Unexercisable) Unexercisable
- ---------------- --------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Gary L. Brown -0- -0- -0- -0-
- ------------------------------
</TABLE>
<PAGE>
<PAGE>
(1) Value Realized is determined by calculating the difference between the
aggregate exercise price of the options and the aggregate fair market
value of the Common Stock on the date the options are exercised.
(2) The value of unexercised options is determined by calculating the
difference between the fair market value of the securities underlying the
options at fiscal year end and the exercise price of the options. The
fair market value of the securities underlying the options, based on the
closing bid price of the Company's Common Stock at December 31, 1997.
Indemnification and Limitation on Liability of Directors
- --------------------------------------------------------
The Company's Articles of Incorporation provide that the Company
shall indemnify, to the fullest extent permitted by Colorado law, any
director, officer, employee or agent of the corporation made or threatened to
be made a party to a proceeding, by reason of the former or present official
of the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceeding if certain
standards are met. At present, there is no pending litigation or proceeding
involving any director, officer, employee or agent of the Company where
indemnification will be required or permitted. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 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 Act and is, therefore, unenforceable.
The Company's Articles of Incorporation limit the liability of its
directors to the fullest extent permitted by the Colorado Business Corporation
Act. Specifically, directors of the Company will not be personally liable for
monetary damages for breach of fiduciary duty as directors, except for (i) any
breach of the duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or that involved intentional misconduct or a
knowing violation of law, (iii) dividends or other distributions of corporate
assets that are in contravention of certain statutory or contractual
restrictions, (iv) violations of certain laws, or (v) any transaction from
which the director derives an improper personal benefit. Liability under
federal securities law is not limited by the Articles. There are no written
employment agreements between the Company and any of its officers or
Directors. The officers of the Company will dedicate sufficient time to
fulfill their fiduciary obligations to the Company's affairs. The Company has
no retirement, pension, profit sharing or insurance or medical reimbursement
plans, or stock incentive or other option plans for its officers and
Directors, and does not contemplate implementing any such plans at this time.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Founders' Stock
- ---------------
Upon formation of the Company in September 1996, the Board of
Directors of the Company authorized the issuance of a total of 653,846 shares
of Common Stock to the Company's initial officers and directors, in
consideration of cash and services provided the Company by such persons. The
services were valued at $0.001 per share, and the shares were issued for that
consideration.
Consultants' Shares
- -------------------
On October 15, 1997 the Company issued an aggregate of 492,307
shares of Common Stock valued at $.013 per share to six consultants in
consideration of services rendered in connection with the identification,
negotiation and consummation of the Company's acquisition of SkyLynx Express.
Among such consultants, Joseph F. Morgan, the Company's Executive Vice
President and Director, received 192,308 shares and Kenneth Marshall, the
Company's General Counsel, received 230,769 shares.
Acquisition of SkyLynx Express Holdings, Inc.
- ---------------------------------------------
In 1997 the Company consummated the acquisition of 100% of the
outstanding Common Stock of SkyLynx Express Holdings, Inc. (the "SkyLynx
Express"). In the transaction, the Company issued to the shareholders of
SkyLynx Express, pro rata, an aggregate of 6,875,000 shares of the Company's
Common Stock. Those shareholders of SkyLynx Express, and the number of shares
received by each, is set forth below:
<TABLE>
<CAPTION>
SkyLynx Express Shareholder # of Shares
--------------------------- ----------
<S> <C>
Network System Technologies, Inc. 1,923,077
Gary Brown 2,163,462
William Chastain 480,769
Rovel Finance, Ltd. (1) 673,077
Joseph F. Morgan 817,308
A.V.G. Enterprises, Inc. (2) 817,308
</TABLE>
- ----------------------
(1) Voting and investment power with respect to these securities is exercised
by Camille Froideveaux, Geneva, Switzerland.
(2) Voting and investment power with respect to these securities is exercised
by Camille Froideveaux, Geneva, Switzerland.
SkyLynx Express had been formed and organized by NST networking the
purpose of developing and serving markets utilizing NST's asymmetric wireless
technology. As part of the acquisition, the Company obtained from NST a
nonexclusive, worldwide, royalty-free sublicensable right to utilize or
otherwise commercially exploit the NST technology, including its two-way
wireless asymmetric digital high speed data technology. In addition, NST
committed to become engaged by the Company under general operating agreements
("GOAs") to deploy and operate the Company's wireless networks utilizing NST
technology.
As further consideration of the foregoing, and in addition to the
issuance of the 6,875,000 shares of the Company's Common Stock, the Company
(i) purchased a dishonored check issued by Paradise Cable Corporation to NST
in the amount of $71,570.91, (ii) paid NST fees and expenses in the amount of
$37,500, (iii) assumed NST's obligations under a $100,000 promissory note and
(iv) assumed and agreed to pay an NST account payable to Hybrid Network, Inc.
in the approximate amount of $480,000.
ITEM 8. LEGAL PROCEEDINGS.
On October 2, 1998, the Company filed a civil action in the United States
District Court for the Central District of Florida against NST and Mr. Eduardo
Moura, individually, ("Moura"), in which the Company has alleged claims for
unspecified damages based upon breach of contract, fraud in the inducement,
breach of fiduciary duty and tortious interference with business relations and
prospective business advantage. It is to be anticipated that, in their
responsive pleading, NST and Moura will likely assert counter claims against
the Company for sums due and owing under the Project Agreements between the
Company and NST covering the Fresno and Tampa Networks, which NST claims are
approximately $350,000, breach of the License Agreement and infringement upon
NST's technology.
The NST litigation was brought by the Company as the result of an
increasing number of areas of dispute between the Company and NST concerning
the nature and extent of NST's technology as well as NST's performance, or
non-performance, under the two Network Project Agreements. Within the context
of these disputes, the Company has learned that implementation of its high
speed, 2-way wireless internet service is not dependent upon intellectual
property rights which are specifically proprietary to NST; but, rather, the
implementation can be accomplished through relationships with any one of
several vendors who manufacture products which satisfy the Company's
performance and technological specifications. In light of the commencement of
this litigation and the areas of dispute between the Company and NST, the
Company is proceeding to complete and expand the deployment of its Networks
without reliance upon any hardware or software which may have been offered by
NST.
If necessary, the Company intends to fully prosecute its claims against
NST and Moura and, if necessary, defend against any counter claims which may
be asserted. Nevertheless, there can be no assurance that the Company will be
successful in asserting its claim or successful in defending against possible
counter claims that may be asserted by NST. Even if the Company is successful
in those efforts, the cost could be substantial and the Company's management
may be required to devote a substantial amount of time to the litigation.
Management of the Company assessed these risks prior to commencing the NST
litigation and has made the business judgment to nevertheless proceed with the
civil action.
The Company is currently involved in two legal proceedings arising out of
the same operative set of facts. The first case was brought by the Company,
as Plaintiff, against James Gordon, as Defendant, in the District Court for
the County of Boulder, State of Colorado, Case No. 98-CV1745; and the second
case was brought by James Gordon, as Plaintiff, against the Company and Gary
Brown, the Company's former President, in the Circuit Court for the 12th
Judicial District in and for Sarasota County, Florida, Case No. 98-6394CA.
Both cases arise out of the Company's 1997 Private Offering in which Mr.
Gordon tendered a subscription but failed to deliver the necessary
consideration. As a result, the Company rejected the subscription. In the
case brought by the Company in Colorado, the Company is seeking declaratory
judgment that it is not obligated to issue the disputed approximately 180,000
shares of its Common Stock arising out of the failed subscription. In the
Sarasota proceeding, Mr. Gordon is seeking specific performance of that
subscription and the issuance of approximately 180,000 shares of its Common
Stock. The Company believes that there is absolutely no basis in fact or law
to support Mr. Gordon's claim and that it is wholly without merit and, if
necessary, the Company will vigorously defend both actions.
The Company is also involved in another civil action brought by Paradise
Cable, Inc., as Plaintiff, against the Company, Gary Brown, Eduardo J. Moura
and Kenneth L. Marshall in the Circuit Court for the 12th Judicial District in
and for Sarasota County, Florida, Civil Action No. 98-0166. This case arises
out of prior transactions between Paradise Cable, Inc. and NST for the
construction of a wireless network in the Tampa, Florida area. The case also
includes claims involving the Company and two of its principals alleging
claims arising out of the Company's acquisition of SkyLynx Express Holdings,
Inc. from NST and related matters. Paradise Cable, Inc. is a wholly owned
subsidiary of Cable Corporation of America, Inc. ("CCA") which is involved in
bankruptcy proceedings in which the Company, Mr. Marshall and Mr. Brown are
creditors. The Company views the litigation as having been brought in a
retaliatory manner in an attempt to create leverage in the bankruptcy
proceeding. The Company is confident that there is absolutely no merit to the
claims and intends to vigorously defend same. The Company believes that the
likelihood of a material adverse outcome from this litigation is extremely
remote.
Other than the foregoing, neither the Company nor any of its management
in their capacities as such is the subject of any pending material legal
proceedings.
<PAGE>
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS.
Market Price
- ------------
The common stock of the Company is traded over the counter and quoted on
the Bulletin Board on a limited and sporadic basis under the symbol "SKYK."
The reported high and low bid and ask prices are shown below for the period
through October 8, 1998. The prices presented are bid and ask prices which
represent prices between broker-dealers and do not include retail mark-ups or
mark-downs or any commission to the broker-dealer. The prices do not
necessarily reflect actual transactions:
<TABLE>
<CAPTION>
BID ASK
--------------- ---------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
1998:
Third Quarter $5.250 $ 2.500 $ 6.000 $ 3.000
Fourth Quarter (through
December 1, 1998) $4.250 $ 2.125 $ 4.500 $ 2.375
</TABLE>
The bid and ask prices of the common stock on December 1, 1998 were
$2.34 and $2.44, respectively, as quoted on the Bulletin Board. As of
December 1, 1998, there were approximately 142 stockholders of record of the
common stock.
The Securities Enforcement and Penny Stock Reform Act of 1990
- -------------------------------------------------------------
The Securities Enforcement and Penny Stock Reform Act of 1990
requires additional disclosure, relating to the market for penny stocks, in
connection with trades in any stock defined as a penny stock. The Commission
recently adopted regulations that generally define a penny stock to be 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
NASDAQ 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.
The securities of the Company are subject to rules adopted by the
Commission regulating broker-dealer practices in connection with transactions
in "penny stocks." Those disclosure rules applicable to penny stocks require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized list disclosure document prepared by
the Commission. That disclosure document advises an investor that investments
in penny stocks can be very risky and that the investor's salesperson or
broker is not an impartial advisor but rather paid to sell the shares. It
contains an explanation and disclosure of the bid and offer prices of the
security, any retail charges added by the dealer to those prices ("markup" or
"markdown"), and the amount of compensation or profit to be paid to or
received by the salesperson in connection with the transaction. The
disclosure contains further admonitions for the investor to exercise caution
in connection with an investment in penny stocks, to independently investigate
the security as well as the salesperson with whom the investor is working, and
to understand the risky nature of an investment in the security. Further, the
disclosure includes information regarding the market for penny stocks,
explanations regarding the influence that market makers may have upon the
market for penny stocks and the risk that one or two dealers may exercise
domination over the market for such security and therefore control and set
prices for the security not based upon competitive forces. The broker-dealer
must also provide the customer with certain other information and must make a
special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written agreement to the
transaction. Further, the rules require that following the proposed
transaction the broker provide the customer with monthly account statements
containing market information about the prices of the securities. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. Many brokers may be unwilling to engage in transactions in the
Common Stock because of the added disclosure requirements, thereby making it
more difficult for security holders to dispose of their securities.
Dividends
- ---------
Since inception, the Company has not paid or declared any cash
dividends on its securities. The Company's Board of Directors does not
currently intend to pay any such cash dividends in the future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
1. In September 1996, the Company issued an aggregate of 653,846
shares of common stock valued at $.001 per share to the Company's initial
officers and directors for services provided the Company by such persons. The
securities which were taken for investment and were subject to appropriate
transfer restrictions were issued without registration under the Securities
Act in reliance upon the exemption provided in Section 4(2) of the Securities
Act.
2. In October 1997, the Company issued an aggregate of 492,307
shares of common stock to six consultants in consideration of services. The
shares were valued at $.013 per share. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
3. Between April and December 1997, the Company sold an aggregate
of 781,805 shares of common stock for gross proceeds of $999,501. The shares
were sold exclusively to persons who qualified as "accredited investors"
within the meaning of Rule 501(a) of Regulation D under the Securities Act,
and to a limited number of other investors who satisfied certain investor
suitability requirements including, without limitation, that they possessed
such knowledge and experience in financial and business matters that they were
capable of evaluating the merits and risks of an investment in the Company.
The shares were issued without registration under the Securities Act in
reliance upon the exemption provided in Rule 504 of Regulation D under the
Securities Act.
4. In December 1997, the Company issued an aggregate of 6,875,000
shares of common stock in exchange for 100% of the issued and outstanding
shares of common stock of SkyLynx Express Holdings, Inc. The securities,
which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act.
5. In May 1998, the Company issued 50,000 shares of common stock
to Nadex West, Inc. in consideration of the assignment of a 96% net revenue
lease covering two MDS channels in the Fresno, California market. The
securities, which were subject to transfer restrictions, were issued without
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act.
6. From May to October 1998, the Company has sold an aggregate of
988,750 Units, each Unit consisting of one share of Series A Convertible
Preferred Stock and two Common Stock Purchase Warrants for a total
consideration of $3,955,000, or $4.00 per unit. The shares were sold
exclusively to persons who qualified as "accredited investors" within the
meaning of Rule 501(a) of Regulation D under the Securities Act, and to a
limited number of other investors who satisfied certain investor suitability
requirements including, without limitation, that they possessed such knowledge
and experience in financial and business matters that they were capable of
evaluating the merits and risks of an investment in the Company. The
securities, which were acquired for investment purposes and subject to
appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon Section 4(2) thereof and Rule 506 of
Regulation D thereunder.
7. In July 1998, the Company issued an aggregate of 638,997 shares
of common stock in consideration of services rendered by consultants and
others between April and July 1998. The shares were issued to non-affiliated
persons, all of whom were "accredited investors" within the meaning of Rule
501(a) of Regulation D, valued at $1.00 per share. The securities, which were
taken for investment and were subject to the appropriate transfer
restrictions, were issued without registration under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act.
8. In October 1998, the Company issued an aggregate of 55,000
shares of common stock in consideration of services rendered by consultants.
The shares were issued to four non-affiliated persons, all of whom were
"accredited investors" within the meaning of Rule 501(a) of Regulation D,
valued at $2.00 per share. The securities, which were taken for investment
and were subject to appropriate transfer restrictions, were issued without
registration under the Securities Act in reliance upon the exemption provided
in Section 4(2) of the Securities Act.
ITEM 11. DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 150,000,000 shares of $.001
par value Common Stock and 50,000,000 shares of $.01 par value Preferred
Stock. As of December 1, 1998, 9,531,186 shares of Common Stock and 988,750
shares of Preferred Stock were issued and outstanding.
Common Stock
- ------------
Each holder of Common Stock of the Company is entitled to one (1)
vote for each share held of record. There is no right to cumulative voting of
shares for the election of directors. The shares of Common Stock are not
entitled to pre-emptive rights and are not subject to redemption or
assessment. Each share of Common Stock is entitled to share ratably in
distributions to shareholders and to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive, pro-rata, the assets of the Company
which are legally available for distribution to shareholders. The issued and
outstanding shares of Common Stock are validly issued, fully paid and non-
assessable.
Preferred Stock
- ---------------
The Company is authorized to issue up to 50,000,000 shares of $.01
par value Preferred Stock, of which 5,000,000 shares have been designated
Series A Convertible Preferred Stock. The preferred Stock of the corporation
can be issued in one or more series as may be determined from time-to-time by
the Board of Directors. In establishing a series the Board of Directors shall
give to it a distinctive designation so as to distinguish it from the shares
of all other series and classes, shall fix the number of shares in such
series, and the preferences, rights and restrictions thereof. All shares of
any one series shall be alike in every particular. All series shall be alike
except that there may be variation as to the following: (1) the rate of
distribution, (2) the price at and the terms and conditions on which shares
shall be redeemed, (3) the amount payable upon shares for distributions of any
kind, (4) sinking fund provisions for the redemption of shares, and (5) the
terms and conditions on which shares may be converted if the shares of any
series are issued with the privilege of conversion, and (6) voting rights
except as limited by law.
Although the Company currently does not have any plans to designate
any additional series of Preferred Stock, there can be no assurance that the
Company will not do so in the future. As a result, the Company could
authorize the issuance of a series of Preferred Stock which would grant to
holders preferred rights to the assets of the Company upon liquidation, the
right to receive dividend coupons before dividends would be declared to common
stockholders, and the right to the redemption of such shares, together with a
premium, prior to the redemption to Common Stock. The common stockholders of
the Company have no redemption rights. In addition, the Board could issue
large blocks of voting Stock to fend off unwanted tender offers or hostile
takeovers without further shareholder approval.
Series A Convertible Preferred Stock
- ------------------------------------
The Company has issued and outstanding 988,750 shares of Series A
Convertible Preferred Stock (the "Preferred Stock"). The relative rights and
preferences of holders of shares of Preferred Stock are controlled by a
Certificate of Designation of Rights and Preferences of Series A Convertible
Preferred Stock (the "Certificate"). The following is a brief summary of the
provisions of the Certificate, does not purport to be a complete statement of
all of the relative rights and preferences of holders of Preferred Stock and
is qualified in its entirety by reference to the Certificate.
Holders of Preferred Stock shall hold and exercise the right to one
(1) vote for every share of Preferred Stock owned at any meeting of the
shareholders of the Company. Holders of Preferred Stock are entitled to
receive payment of dividends on the Preferred Stock at the annual rate of 10%
per share of Preferred Stock, accruing in arrears from the date of first
issuance, payable quarterly in arrears when, as and if declared by the
Company's Board of Directors. The Company anticipates that dividends will be
paid quarterly as accrued, although no assurance can be given that dividends
will always be declared. Cumulative dividends which are not paid shall be
carried forward as an accrued obligation without interest. Holders of
Preferred Stock are not entitled to receive payment of any additional
dividends on the Preferred Stock, but rather are entitled to participate pro
rata in dividends paid on outstanding shares of Common Stock when and if
declared and paid by the Company.
The Preferred Stock is not redeemable by the Company and holders of
Preferred Stock have no right to compel the redemption by the Company of any
shares of the Preferred Stock.
Holders of outstanding shares of convertible Stock have an option to
convert each share of Preferred Stock into one (1) share of the Company's
Common Stock (the "Conversion Stock"). The conversion value is subject to
certain anti-dilution adjustments, including adjustments in the event of stock
splits, dividends, reclassifications and the like. Such optional conversion
may be exercised at any time commencing the earlier of (i) one year from the
date of issue or (ii) the effective date of a registration statement
(the"Registration Statement"), registering for sale under the Securities Act
the issuance of the Conversion Stock. In addition, each share of Preferred
Stock will convert, automatically, into one share of Common Stock upon the
earlier of (i) the third anniversary of the date of issue or (ii) in the event
(a) there has developed a public trading market for the Company's Common
Stock, (b) the Registration Statement registering for sale the Conversion
Stock has been filed and declared effective by the Commission and (iii) the
closing bid price of the Company's Common Stock has been at least $6.00 per
share (150% of the then effective conversion value) for at least ten (10)
consecutive trading days.
Upon liquidation, dissolution or winding up of the Company, holders
of Preferred Stock shall be entitled to receive, pro rata, cash or assets of
the Company which are legally available for distribution to shareholders equal
to $4.00 per share of Preferred Stock prior to any distributions to the common
stockholders. The issued and outstanding shares of Preferred Stock shall be,
when subscribed and paid for as provided for herein, validly issued, fully
paid and non-assessable.
Class A and Class B Redeemable Common Stock Purchase Warrants
- -------------------------------------------------------------
The Company has issued as part of the Units sold in the 1998 Private
Offering 988,750 Class A and 988,750 Class B Warrants each exercisable to
purchase shares of Common Stock for the period commencing the earlier of (i)
the effective date of the Registration Statement or (ii) one year from the
date of issue, and expiring on the third anniversary of the date of issue (the
"Exercise Period").
During the Exercise Period, each Class A Warrant is exercisable to
purchase one share of the Company's Common Stock at an exercise price of $7.50
per share; and each Class B Warrant is exercisable to purchase one share of
the Company's Common Stock at an exercise price of $10.00 per share. The
Company has authorized and reserved for issuance the Common Stock issuable
upon exercise of the A and B Warrants offered hereby.
The Company has the right to extend the Expiration Date of the
Warrants by resolution of the Board of Directors. There currently exists no
plan or intention to extend the expiration date of the Warrants.
The Warrants are redeemable by the Company at any time after
issuance at a price of $0.01 per Warrant (the "Redemption Price") upon thirty
(30) days' written notice in the event (i) the Registration Statement has been
filed and has been declared effective by the Commission covering the issuance
of shares of Common Stock upon exercise of the Warrants, (ii) there has been
developed and exists a public trading market for the Company's Common Stock,
and (iii) the public trading price of the Company's Common Stock has equaled
or exceeded one hundred fifty percent (150%) of the then current respective
exercise prices of the A and/or B Warrant ($11.25 per share for the A Warrant
and $15.00 per share for the B Warrant) for ten (10) or more consecutive
trading days. The holders of Warrants called for redemption have exercise
rights until the close of business on the date next preceding the date fixed
for redemption.
The Company has agreed to register for sale under the Securities Act
in the Registration Statement (i) the Warrant Stock and (ii) Conversion Stock.
However, the Warrant Stock and Conversion Stock will be subject to a six (6)
month lockup following the effective date of the Registration Statement
pursuant to which those shares may not be sold during the six (6) month lockup
period without the consent of the Company.
The Company has not agreed and is under no obligation to register
for resale under the Securities Act the Warrants. As a result, the Warrants
may not be resold except pursuant to an exemption from the registration
requirements of the Securities Act. Further, it is unlikely that a public
trading market for the Warrants will develop or exist at any time during their
respective exercise periods. In the event the outstanding Warrants are not
exercised on or before the Expiration Date, all unexercised Warrants will,
thereafter, become void and be of no further force and effect.
The Warrants do not contain anti-dilution provisions that prevent
dilution of the equity interest represented by the underlying Common Stock
upon the occurrence of certain events such as share dividends. Moreover, no
anti-dilution provisions will apply in the event a merger or acquisition is
undertaken by the Company. In the event that the Company adopts a resolution
to merge, consolidate or sell percentages in all of its assets, prior to the
expiration of the Common Stock Purchase Warrants, each Warrantholder upon the
exercise of his/her Warrants would be entitled to receive the same treatment
as a holder of any share of Common Stock. In the event the Company adopts the
resolution for the liquidation, dissolution or winding up of the Company's
business, the Company will give written notice of the adoption of such
resolution to the registered holders of the Common Stock Purchase Warrants.
Thereupon, all liquidation and dissolution rights under the Common Stock
Purchase Warrants will terminate at the end of thirty (30) days from the date
of the notice to the extent not exercised within those thirty (30) days.
Holders of the Warrants will have no voting, preemptive, liquidation or other
rights of a shareholder, and no dividends will be declared on the Warrants.
Warrant Solicitation Fees
- -------------------------
The Company has no agreement nor any arrangement whereby any fees or
other compensation will be paid to any person or entity upon exercise of any
or all of the Warrants.
Transfer Agent and Registrar
- ----------------------------
The transfer agent for the Company's common stock is Corporate Stock
Transfer, Inc., 370 17th Street, Suite 2350, Denver, Colorado 80202.
Reports to Stockholders
- -----------------------
The Company intends to furnish annual reports to shareholders which
will include certified financial statements reported on by its certified
public accountants. In addition, the Company may issue unaudited quarterly or
other interim reports to shareholders as it deems appropriate.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, bylaw, contract, or other
arrangement under which any controlling person, director or officers of the
Company is insured or indemnified in any manner against any liability which he
may incur in his capacity as such, is as follows:
Article IX of the Company's Articles of Incorporation provides as follows:
The Corporation may and shall indemnify each director,
officer and any employee or agent of the Corporation, his
heirs, executors and administrators, against any and all
expenses or liability reasonably incurred by him in
connection with any action, suit or proceeding to which he
may be a party by reason of his being or having been a
director, officer, employee or agent of the Corporation to
the full extent required or permitted by the Colorado
Business Code.
Article XII of the Company's Articles of Incorporation provides as follows:
DIRECTORS' LIABILITY
a. A director of this corporation shall not be liable to
the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except to the
extent that such exemption from liability or limitation
thereof is not permitted under the General Corporation Law
of the State of Colorado as the same exists or may
hereafter be amended.
b. Any repeal or modification of the foregoing paragraph
A by the stockholders of the corporation shall not
adversely affect any right or protection of a director of
the corporation existing at the time of such repeal or
modification.
The By-Laws of the Company, as amended, provide for the
indemnification of officers and Directors to the maximum extent allowable
under Colorado law. Insofar as the indemnification for liabilities arising
under the Securities Act of 1933, as amended, may be permitted to Directors,
officers or persons controlling the Company pursuant to such provisions, the
Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND EXHIBITS.
Financial Statements
- --------------------
See Indices to Financial Statements following the list of exhibits.
<PAGE>
<PAGE>
Exhibits
- --------
Exhibit No. Title
- ---------- -----
2.1 Agreement and Plan of Reorganization dated August 5, 1997
2.2 Amendment No. 1 to Agreement and Plan of Reorganization dated
December 16, 1997
3.1 Articles of Incorporation
3.2 Articles of Amendment to Articles of Incorporation dated August
1997
3.3 Articles of Amendment to Articles of Incorporation dated
February 1998
3.4 Articles of Amendment to Articles of Incorporation dated March
1998
3.5 Bylaws
4.1 Certificate of Designations of Rights and Preferences of Series
A Convertible Preferred Stock
4.2 Specimen Common Stock Certificate
4.3 Specimen Preferred Stock Certificate
4.4 Specimen Class A Warrant Certificate
4.5 Specimen Class B Warrant Certificate
10.1 1998 Stock Incentive Plan
10.2 Asset Purchase and Sale Agreement dated May 11, 1998 between
the Company and Nadex West, Inc.
10.3 License Agreement dated December 16, 1997 between the Company
and Network System Technologies, Inc.
* 10.4 Tampa Network Agreement
* 10.5 Gerard Klauer Mattison & Co. Engagement Letter
- ---------------------------
* Filed herewith
<PAGE>
SKYLYNX COMMUNICATION, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Index to Consolidated Financial Statements
Page
-----
Independent auditor's report F-2
Consolidated balance sheets, December 31, 1997
and September 30, 1998 (unaudited) F-3
Consolidated statements of operations, from July 29,
1997 (inception) through December 31, 1997, for the
nine months ended September 30, 1998 (unaudited),
and from July 29, 1997 (inception) through September
30, 1998 (unaudited) F-4
Consolidated statement of shareholders' equity, from
July 29, 1997 (inception)
through September 30, 1998 (unaudited) F-5
Consolidated statements of cash flows, from July 29,
1997 (inception) through December 31, 1997, for
the nine months ended September 30, 1998 (unaudited),
from July 29, 1997 (inception) through September 30,
1997 (unaudited) and from July 29, 1997 (inception)
through September 30, 1998 (unaudited) F-6
Notes to consolidated financial statements F-7
F-1<PAGE>
<PAGE>
To the Board of Directors and Shareholders
SkyLynx Communications, Inc.
Independent Auditors' Report
We have audited the consolidated balance sheet of SkyLynx Communications, Inc.
(formerly SkyLynx Express Holdings, Inc.) (A development stage company) and
subsidiary as of December 31, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the period from July 29,
1997 (inception) through December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SkyLynx
Communications, Inc. as of December 31,1997, and the related statements of
operations and cash flows for the period from July 29, 1997 (inception)
through December 31, 1997, in conformity with generally accepted accounting
principles.
The information for the nine months ended September 30,1998 and from July 29,
1997 (inception) through September 30,1998, has been included on an unaudited
basis. Accordingly, we do not express an opinion or any other form of
assurance on it.
Cordovano and Harvey, P.C.
Denver, Colorado
March 4, 1998
Securities and Exchange Commission
Washington, D.C.
We consent to the use in this Amendment No. 4 to the Registration Statement of
SkyLynx Communications, Inc. of our report dated March 4, 1998 and to the
reference to us under the heading "Experts" in such Registration Statement.
Cordovano and Harvey P.C.
Denver, Colorado
December 11, 1998
F-2
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec 31, Sept 30,
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash $ 628,110 $ 892,516
Due from employees (Note B) - 18,492
Materials and supplies (Note B) - 318,952
Construction work in progress (Notes B and C) - 856,394
Property and equipment, less accumulated
depreciation of $-0- and $37,470,
respectively (Note C) 482,299 677,783
License rights, less accumulated amortization
of $-0- and $-0-, respectively (Note G) 100,000 -
Deposits - 28,644
Organization costs, less accumulated
amortization of $250 and $625, respectively 2,250 1,875
----------- -----------
$1,212,659 $2,794,656
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES (Notes B&D)
Accounts and notes payable
Accounts payable $ 4,923 $ 90,155
Accounts payable, related party (Note G) 391,299 -
Note payable 100,000 -
Dividends payable - -
Accrued payroll taxes payable - 43,188
Other current liabilities 4,501 -
----------- -----------
TOTAL LIABILITIES 500,723 133,343
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note I)
SHAREHOLDERS' EQUITY (Note E)
Convertible preferred stock, $.01 par value,
50,000,000 shares authorized, -0- and
886,650 shares issued and outstanding,
respectively - 8,867
Common stock, $.001 par value, 150,000,000
shares authorized, 8,772,189 and 9,531,186
shares issued and outstanding, respectively 8,772 9,531
Additional paid-in capital 981,918 5,116,026
Deficit accumulated during the development
stage (278,754) (2,473,111)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 711,936 2,661,313
----------- -----------
$1,212,659 $2,794,656
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
<PAGE>
SKYLYNX COMMUNICATION, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 29, 1997 July 29, 1997 For The July 29, 1997
(inception) (Inception) Six Months (Inception)
through through Ended through
December 31, Sept 30, June 30, June 30,
1997 1997 1998 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ - $ - $ 1,124 $ 1,124
COSTS AND EXPENSES
Consulting, related parties
(Note B) 8,938 8,938 716,897 725,835
Consulting, other - - 120,569 120,569
Selling expenses - - 58,519 58,519
Salaries and payroll taxes - - 459,271 459,271
Travel - - 340,485 340,485
Legal and accounting - - 96,730 96,730
Rent and utilities - - 130,383 130,383
Depreciation - - 37,470 37,470
Amortization - - 17,042 17,042
Insurance - - 35,009 35,009
Printing - - 35,872 35,872
Write-off of advances in connection
with merger (Note H) - - 36,500 36,500
Impairment of license rights - - 83,333 83,333
Other - - 42,423 42,423
------------ ------------ ------------ ------------
(8,938) (8,938) (2,210,503) (2,219,441)
LOSS FROM OPERATIONS (8,938) (8,938) (2,209,379) (2,218,317)
OTHER INCOME (EXPENSE)
Interest income - - 18,964 18,964
Interest expense - - (3,942) (3,942)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (8,938) (8,938) (2,194,357) (2,203,295)
INCOME TAX BENEFIT (EXPENSE)
(NOTE E) - - - -
------------ ------------ ------------ ------------
NET LOSS $ (8,938) (8,938) $ (2,194,357) $ (2,203,295)
============ ============ ============ ============
Loss per common share $ * * $ (0.25) $ (0.28)
============ ============ ============ ============
Basic weighted average common
shares outstanding 6,187,500 6,875,000 8,925,790 7,947,829
============ ============ ============ ============
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS $ (8,938) (8,938) $ (2,194,553) $ (2,203,491)
============ ============ ============ ============
Loss per share of common stock
after dividends on preferred
stock $ * * $ (0.25) $ (0.28)
============ ============ ============ ============
* Less than $.01 per share
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
July 29, 1997 (Inception) through September 30, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Convertible During the Total
Preferred Stock Common Stock Additional Develop- Share-
---------------------- ----------------------- Paid-in ment holders'
Shares Amount Shares Amount Capital Stage Equity
---------- ---------- ---------- ---------- -------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 29, 1997
(Inception) - $ - - $ - $ - $ - $ -
Net loss for the period
ended December 31, 1997 - - - - - (8,938) (8,938)
Common stock issued for
intellectual property
at estimated fair
value (Note B) - * 6,875,000 6,875 2,063 - 8,938
Recapitalization
(Note G) - * 1,897,189 1,897 979,855 (269,816) 711,936
---------- ---------- ---------- ---------- -------------------- ----------
BALANCE DECEMBER
31, 1997 - - 8,772,189 8,772 981,918 (278,754) 711,936
Net loss for the nine
months ended Sept 30,
1998 (unaudited) - - - - - (2,194,357) (2,194,357)
Preferred stock issued
for cash, net of
offering costs totaling
$204,885 (unaudited) 886,650 8,867 - - 3,273,370 - 3,282,237
Common stock issued for
property, at cost, as
determined by manage-
ment (unaudited) - - 50,000 50 97,450 - 97,450
Common stock issued for
property, at cost, as
determined by manage-
ment (unaudited) - 47,100 47 47,053 - 47,100
Common stock issued for
services, at cost,
(Note B) (unaudited) - - 661,897 662 716,235 - 716,897
---------- ---------- ---------- ---------- -------------------- ----------
BALANCE SEPT 30,
1998 (unaudited) 886,650 $ 8,867 9,531,186 $ 9,531 $5,116,026 $(2,473,111) $2,661,313
========== ========== ========= ========= ========== =========== ==========
</TABLE>
*Restated for one for 13 reverse stock split
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 29, 1997 July 29, 1997 For The July 29, 1997
(inception) (inception) Nine Months (inception)
through through Ended through
Dec 31, Sept 30, Sept 30, Sept 30,
1997 1997 1998 1998
------------ ------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (8,938) $ - $ (2,194,357) $ (2,203,295)
Transactions not requiring cash:
Common stock issued for
intellectual property
contributed by shareholder 8,938 - - 8,938
Impairment of license rights - 100,000 100,000
Depreciation and amortization - - 37,845 37,845
------------ ------------ ------------
- - (2,056,512) (2,056,512)
Changes in operating assets
and liabilities:
Due from employees - - (18,492) (18,492)
Inventories - - (318,952) (318,952)
Accounts payable related party
(Note B) - - (391,299) (391,299)
Accounts payable and other
current liabilities - - 123,919 123,919
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES - - (2,661,336) (2,661,336)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Construction of transmission
plant - - (856,394) (856,394)
Deposits made - - (28,644) (28,644)
Purchases of property and
equipment - - (232,954) (232,954)
------------ ------------ ------------ ------------
NET CASH (USED IN)
INVESTING ACTIVITIES - - (1,117,992) (1,117,992)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Issuance of preferred stock
net of offering costs - - 4,143,734 4,143,734
Debt reduction - (100,000) (100,000)
Recapitalization (Note G) 628,110 - - 628,110
------------ ------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 628,110 - 4,043,734 4,671,844
------------ ------------ ------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 628,110 - 264,406 892,516
Cash at beginning of period - 628,110 -
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 628,110 - $ 892,516 $ 892,516
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 583 3,126 $ 3,126 $ 6,835
============ ============ ============ ============
Cash paid for income taxes - - - -
============ ============ ============ ============
Non-cash investing and financing
activities:
Debt assumed in exchange for
license rights $ 100,000 - $ - $ 100,000
============ ============ ============ ============
Debt assumed in acquiring
equipment $ 482,299 - $ - $ 482,299
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
September 30, 998
Note A: Organization and summary of significant accounting policies
Organization and basis of presentation
Effective December 31, 1997, SkyLynx Express Holdings, Inc. (SEHI) merged with
Allied Wireless, Inc. (AWI). After the merger, AWI changed its name to
SkyLynx Communications, Inc. (the "Company" and "SCI") (see Note G). AWI was
incorporated under the laws of Colorado on September 23, 1996 and was formed
for the purpose of engaging in the wireless communication industry. In 1997,
AWI sold 6,163,342 shares of its common stock at a price of $.15 per share and
4,000,000 at $.01875 per share. AWI closed the offering and realized
approximately $961,852 from the offering, after related expenses (see Note E).
SEHI was initially capitalized with certain intellectual property useful in
the wireless industry. It was incorporated under the laws of Delaware on July
29, 1997.
The Company is a development stage company and its consolidated financial
statements are prepared in accordance with Statement of Financial Accounting
Standards (SFAS) No. 7. Its consolidated financial statements include the
accounts of SkyLynx Communications, Inc. and its wholly owned subsidiary,
SEHI. All material intercompany accounts and transactions have been
eliminated in consolidation.
Unaudited financial information
The accompanying financial information for the periods from July 29, 1997
through September 30, 1998, for the period from July 29, 1997 through
September 30, 1997 and for the nine months ended September 30, 1998 is
unaudited. In management's opinion, such information includes all normal
recurring entries necessary to make the financial information not misleading.
Cash equivalents
For financial accounting purposes and the statement of cash flows, cash
equivalents include all highly liquid debt instruments purchased with an
original maturity of three months or less.
Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities;
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. Accordingly, actual results could differ from those
estimates.
Equipment and depreciation
Equipment is stated at cost. Expenditures for maintenance and repairs are
charged to expense as incurred. Additions and improvements are capitalized.
The cost and related accumulated depreciation of equipment sold or otherwise
disposed of are removed from the accounts and any gain or loss is reported in
the year's revenue or expense. Depreciation expense is calculated based on
the straight-line method over the estimated useful lives of the assets.
F-7
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
September 30,1998
Note A: Organization and summary of significant accounting policies, continued
Transmission plant
Transmitter equipment is stated at cost. Since the property has not yet been
placed in service, no depreciation expense has been recorded.
Intangible assets and amortization
Organization costs
Intangible assets, consisting of organization costs, are stated at cost and
amortized over five years.
License rights
The Company acquired license rights in connection with its business
combination on December 16, 1997. These rights have been capitalized and are
amortized over three years using the straight-line method commencing January
1, 1998. Amortization expense for the period ended December 31, 1997 and the
nine months ended September 30,1998 totaled $-0- and $16,667 (unaudited),
respectively. During June 1998, changes in operating conditions raised doubts
about the ability of the Company to recover the carrying value license rights.
An impairment loss for the full amount of the net carrying value ($83,333)
(unaudited) was recognized as of September 30, 1998.
Income Taxes
The company reports income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes", which requires the liability method in accounting for
income taxes. Deferred tax assets and liabilities arise from the difference
between the tax basis of an asset or liability and its reported amount on the
financial statements. Deferred tax amounts are determined by using the tax
rates expected to be in effect when the taxes will actually be paid or refunds
received, as provided under currently enacted law. Valuation allowances are
established when necessary to reduce the deferred tax assets to the amounts
expected to be realized. Income tax expense or benefit is the tax payable or
refundable, respectively, for the period plus or minus the change during the
period in the deferred tax assets and liabilities.
Loss per common share
The Company reports loss per share using a dual presentation of basic and
diluted loss per share. Basic loss per share excludes the impact of common
stock equivalents and preferred stock dividends. Diluted loss per share uses
the average market price per share when applying the treasury stock method in
determining common stock equivalents. The amount of preferred dividend
deducted in arriving at the amount of loss available to common shareholders
was $-0-, $196 (unaudited), and $196 (unaudited) for the period from July 29,
1997 through December 31, 1997, the nine months ended September 30, 1998, and
from July 29, 1997 through September 30, 1998, respectively. The effect on
earnings per share of contingently issuable shares, Class A warrants, and
Class B warrants was anti-dilutive for all periods presented. Accordingly,
diluted loss per share was not presented in the accompanying financial
statements.
F-8
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
September 30,1998
Note B: Related party transactions
During the nine months ended September 30, 1998, the Company paid an
affiliate, NST, $757,245 (unaudited) for the construction of a wireless data
transmission plant in Fresno, California and a wireless data transmission
plant in Tampa, Florida. Both transmission plants were under construction as
of September 30, 1998. This amount was subsequently paid on June 29, 1998.
During the nine months ended September 30, 1998, the Company paid an affiliate
a total of $157,817 (unaudited) for routers and radios. The expenditures are
reflected in inventory in the accompanying financial statements.
During the nine months ended September 30, 1998, the Company issued 661,897
(unaudited) shares of its $.001 par value common stock to consultants in
exchange for their services. The services were valued at a cost of $716,897
(unaudited).
As of September 30, 1998, employees were indebted to the Company a total of
$18,492 (unaudited) for payroll taxes not withheld. The $18,492 is included
in the accompanying financial statements as due from employees.
Effective December 16, 1997, the Company entered into the following
transactions: 1) issued 2,307,692 shares of common stock to NST in exchange
for intellectual property - the property was valued by management at $3,438 or
$.0013 per share; 2) issued 2,644,230 shares of common stock to officers and
directors in exchange for intellectual property -- the property was valued by
management at $3,438 or $.0013 per share; and 3) issued 1,923,078 shares of
common stock to NST in exchange for technology -- the technology was valued by
management at $2,500 or $.0013 per share.
Note C: Construction in progress, property and equipment
Construction in progress
As of September 30, 1998, the Company's transmission plants in Fresno,
California and Tampa, Florida were under construction. The Fresno plant is
expected to support five wireless asymmetrical areas of coverage providing
service to a 40-mile area. The Tampa plant will support a two-way wireless
symmetrical network in the Tampa, St. Petersburg, and Clearwater area. The
Fresno plant is expected to come on line in the fourth quarter of 1998 and the
Tampa plant is expected to be completed in the fourth quarter of 1998.
Property and equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Dec 31, Sept 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Communications equipment (Note G) $ 482,299 $ 482,299
Office equipment - 144,601
Leasehold improvements - 88,353
------------ ------------
482,299 715,253
- (37,470)
------------ ------------
Less accumulated depreciation $ 482,299 $ 677,783
============ ============
</TABLE>
F-9
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
September 30,1998
Note D: Note payable
Effective December 16, 1997, the Company assumed an affiliate's promissory
note payable totaling $100,000, and accrued interest of $3,126, to an
individual. The note bears interest at 7.50 percent, is unsecured and is
convertible into 2,564 shares of the Company's $.001 par value common stock at
the option of the holder. The note and related accrued interest was paid in
full during the nine months ended September 30, 1998.
Note E: Shareholders' equity
Unit offering (unaudited)
During May 1998, the Company, through a private placement, offered 3,750,000
units to qualified investors, for $4 per unit, through its officers and
directors on a "best efforts" basis. Each unit consisted of one share of
Series A convertible preferred stock, one Class A warrant and one Class B
warrant. The Company's Series A convertible, preferred stock, authorized
50,000,000 shares, has a par value of $.01 per share and a dividend rate of 10
percent. Each share of preferred stock is convertible into one share of the
Company's $.001 par value per share common stock at the option of the
shareholder. The option may be exercised after one year from the date of
issue, upon effective registration of the underlying common shares, or
automatically upon the earlier of (1) the third anniversary of the date of
issue, (2) the Company's common stock trades above $6 per share for 10
consecutive trading days. Upon, liquidation, holders of preferred stock
shall be entitled to receive, pro rata, cash or assets equal to $4.00 per
share of preferred stock prior to any distribution to common shareholders.
Each Class A warrant entitles the holder to purchase one share of common stock
at $7.50 per share beginning one year from the date of issuance or beginning
on the effective date of registration of the underlying common shares,
whichever comes first. Each Class B warrant entitles the holder to purchase
one share of common stock at $10 per share beginning one year from the date of
issuance or beginning on the effective date of registration of the underlying
common shares, whichever comes first. Both the Class A and Class B warrants
expire three years from the date of issuance. The Company may, under certain
circumstances, redeem all of the outstanding Class A and Class B warrants upon
thirty days written notice at $.01 per warrant.
As September 30, 1998, 886,650 (unaudited) units had been sold for $3,282,237
(unaudited), after deducting offering costs from the proceeds.
Common stock issuance
On August 10, 1997, the Board of Directors approved the issuance of 6,875,000
shares of common stock, after giving effect to the reverse split of one for 13
shares, in exchange for intellectual property consisting of expertise and
trade secrets. The shares were issued without registration under the federal
securities laws in reliance upon an exemption from registration requirements
contained in the Securities Act of 1933, as amended. Management expensed the
intellectual property in the period ended December 31, 1997.
F-10
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
September 30,1998
Note E: Shareholders' equity, concluded
One for 13 reverse stock split
On January 23, 1998, the shareholders of the Company approved a one for 13
reverse stock split. The accompanying financial statements have been
retroactively restated to give effect to the stock split.
Note F: Income taxes
A reconciliation of U.S. statutory federal income tax rate to the effective
rate follows for the period from July 29, 1997 (inception) through December
31,1997, the nine months ended September 30,1998, and the period from July 29,
1997 (inception) through September 30,1998:
<TABLE>
<CAPTION>
July 29, July 29,
1997 For The 1997
(inception) nine months (inception)
through ended through
Dec 31, Sept 30, Sept 30,
1997 1998 1998
----------- ---------- -----------
(Unaudited)(Unaudited)
<S> <C> <C> <C>
U.S. statutory federal rate 15.00% 35.79% 35.79%
State income tax rate, net of
federal benefits 4.25% 3.21% 3.21%
Net operating loss for which
no tax benefit
is currently available -19.25% -39.00% -39.00%
----------- ---------- -----------
0.00% 0.00% 0.00%
=========== ========== ===========
</TABLE>
The benefit for income taxes from operations consisted of the following
components at December 31, 1997: current tax benefit of $1,721 resulting from
a net loss before income taxes, and deferred tax expense of $1,721 resulting
from the valuation allowance recorded against the deferred tax asset resulting
from net operating losses.
The change in the valuation allowance from July 29, 1997 (inception) through
December 31, 1997 and from December 31, 1997 to September 30,1998 was $1,721
and $855,799 (unaudited), respectively. Net operating loss carryforwards at
December 31, 1997 will expire in 2012. The valuation allowance will be
evaluated at the end of each year, considering positive and negative evidence
about whether the asset will be realized. At that time, the allowance will
either be increased or reduced; reduction could result in the complete
elimination of the allowance if positive evidence indicates that the value of
the deferred tax asset is no longer impaired and the allowance is no longer
required.
F-11
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
September 30,1998
Note G: Agreement and plan of reorganization
Effective December 15, 1997, AWI entered into an Agreement and Plan of
Reorganization (the "Agreement") with SEHI and Network System Technologies,
Inc. (NST) in order to acquire certain equipment and rights to the technology
necessary to use such equipment. The Company acquired the equipment and
rights to support the development and implementation of wireless networks,
which became the business of the Company as a result of the transaction.
Under the Agreement, SEHI became a subsidiary of the Company through a reverse
acquisition and NST became an affiliate by virtue of the issuance of common
shares to the developer of the technology.
Specifically, the Agreement called for (1) the issuance of 6,875,000 (post-
split) shares of common stock representing approximately 78 percent of the
then total issued and outstanding shares. Management assigned a value of
$0.0013 per share to the shares issued and expensed this cost; (2) The payment
of $71,571 to NST as part of the assumption of NST's activities to deploy a
system in the Sarasota area. This amount was expensed in the accompanying
financial statements; (3) the Company to assume NST's obligations under a
$100,000 promissory note. This amount was capitalized in the accompanying
financial statements as license rights; (4) the Company to pay NST's
transaction fees and expenses in the amount of $37,500 which were expensed in
the accompanying financial statements; and (4) the Company to pay NST $482,299
for the equipment purchased in the transaction.
Nature of the License rights
The license gives the Company the nonexclusive rights to use the equipment
acquired from NST as well as to develop and implement wireless networks using
the technology underlying the rights as well as future upgrades to the
technology. It also gives the Company the exclusive rights to the technology
provided the Company is first to deploy them in a basic trading area.
Management determined that the carrying value of the license rights would not
be recovered and recorded an impairment loss for the full amount of the net
carrying value as of September 30, 1998.
Recapitalization
This acquisition has been treated as a recapitalization of SEHI with AWI the
legal surviving entity. The historical financial statements prior to the
merger are those of SEHI. The recapitalization has been accounted for as the
exchange of SEHI common stock for the net assets of AWI. Costs of the
transaction have been charged to the period. The recapitalization took place
on December 16, 1997; however, the financial statements have been prepared as
if the recapitalization took place on December 31, 1997. Subsequently, AWI
changed its name to SkyLynx Communications, Inc. The transaction was valued
at AWI's net tangible assets.
Deposit on equipment
The Company made an earnest money deposit of $91,000 on special communications
equipment, valued at $482,299, acquired from NST. On June 29,1998, the
balance of $391,299 (unaudited) was paid to NST.
F-12
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(Formerly SkyLynx Express Holdings, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Notes to Consolidated Financial Statements
September 30,1998
Note H: Merger attempt
On December 17, 1997 and again on December 31, 1997, the Company executed a
letter of intent to purchase certain assets of Cable Corporation of America,
Inc. (CCA). Following the letters of intent, the Company paid certain
operating expenses on behalf of CCA totaling $23,500 through December 31,
1997. In addition, the Company paid an obligation on behalf of CCA to NST
totaling $71,763.
During 1998, acquisition negotiations between the two companies broke off.
Accordingly, the advances totaling $95,263, as of December 31, 1997, have been
charged to operations in the accompanying financial statements.
Additional advances paid during the nine months ended September 30,1998, prior
to negotiation termination, totaling $36,500 (unaudited) have also been
charged to operations.
Note I: Commitments and contingencies
Operating Lease Commitments
The Company is a party to various operating leases for office space, office
equipment, rooftop space for its transmitters, and airspace.
Future minimum payments required under the leases, as of September 30, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 49,248
2000 $ 151,321
2001 $ 134,974
2002 $ 113,246
2003 $ 55,047
</TABLE>
Contingently issuable shares
On May 11, 1998, the Company completed an asset purchase. The assets included
property and equipment, including leases covering two MDS channels granted
under licenses issued by the Federal Communications Commission within the
Fresno, California geographical area. The purchase price included 25,000
shares of the Company's common stock issuable upon the Fresno operations
achieving operating profit of $850,000 in one year.
Year 2000 Compliance
The Company plans to work with its equipment suppliers to confirm that its
equipment is Year 2000 compliant. The Company believes this review will be
completed during 1999 and that the cost of this review will not be material.
Until the review has been completed, the Company has no estimate of the cost
to correct any deficiency in Year 2000 compliance for this equipment.
F-13
<PAGE>
<PAGE>
SKYLYNX COMMUNICATION, INC.
(Formerly Allied Wireless, Inc.)
(A DEVELOPMENT STAGE COMPANY)
Index to Financial Statements
Page
Independent auditor's report F-15
Balance sheets, December 30, 1997 and December 31, 1996 F-16
Statements of operations, from January 1, through
December 30, 1997, from September 23, 1996 (inception)
through December 31, 1996, and from September 23,
1996 (inception) through December 30, 1997 F-17
Statement of shareholders' equity, from September 23,
1996 (inception) through December 30, 1997 F-18
Statements of cash flows, from January 1, through
December 30, 1997, from September 23, 1996
(inception) through December 31, 1996, and from
September 23, 1996 (inception) through December 30,
1997 F-19
Notes to financial statements F-20
F-14
<PAGE>
<PAGE>
To the Board of Directors and Shareholders
SkyLynx Communications, Inc.
Independent Auditors' Report
We have audited the balance sheet of SkyLynx Communications, Inc. (formerly
Allied Wireless, Inc.) as of December 30, 1997 and December 31, 1996, and the
related statements of operations and cash flows for the period from January 1
through December 30, 1997, September 23, 1996 (inception) through December 31,
1996, and for the period from September 23, 1996 (inception) through December
30, 1997, and the statement of shareholders' equity (deficit) for the period
from September 23, 1996 (inception) through December 30, 1997. 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 audit.
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 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 in the first paragraph
present fairly, in all material respects, the financial position of SkyLynx
Communications, Inc. as of December 30,1997 and December 31, 1996, and the
related statements of operations and cash flows for the period from January 1,
through December 30, 1997, September 23, 1996 (inception) through December 31,
1996, and for the period from September 23, 1996 (inception) through December
30, 1997, and the statement of shareholders' equity (deficit) for the period
from September 23, 1996 (inception) through December 30, 1997, in conformity
with generally accepted accounting principles.
Cordovano and Harvey, P.C.
Denver, Colorado
March 4, 1998, except as to
Note F, which is June 30, 1998
F-15
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(formerly Allied Wireless, Inc.)
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
December 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
------
Cash $ 628,110 $ -
License rights (Note F) 100,000 -
Deposit 91,000 -
Intangible assets, less accumulated
amortization of $250 and $0 2,250 500
----------- -----------
$ 821,360 $ 500
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES
Accounts payable $ 4,923 $ 500
Note payable (Note C) 100,000 -
Accrued interest payable 3,126 -
Other current liabilities 1,375 -
----------- -----------
TOTAL LIABILITIES 109,424 500
----------- -----------
SHAREHOLDERS' EQUITY (Note D)
Preferred stock, $.01 par value; 50,000,000
shares authorized, -0- and -0- issued and
outstanding - -
Common stock, $.001 par value; 150,000,000
shares authorized, 1,897,189 and -0-
shares issued and outstanding 1,897 -
Additional paid-in capital 979,855 -
Deficit accumulated during development stage (269,816) -
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 711,936 -
----------- -----------
$ 821,360 $ 500
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-16
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(formerly Allied Wireless, Inc.)
(A Development Stage Company)
Statements of Operation
<TABLE>
<CAPTION>
September 23, September 23,
January 1, 1996 1996
1997 (inception) (inception)
through Ended through
December 30, December 31, December 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
COSTS AND EXPENSES
Consulting, related parties
(Note B) $ 73,261 $ - $ 73,261
Compensation 16,330 - 16,330
Professional fees 50,894 - 50,894
Write-off of advances in
connection with merger (Note G) 95,263 - 95,263
Amortization 250 - 250
Other 34,386 - 34,386
------------ ------------ ------------
(270,384) - (270,384)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 4,278 - 4,278
Interest expense (3,710) - (3,710)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (269,816) - (269,816)
INCOME TAX BENEFIT (EXPENSE)
(NOTE E) - - -
------------ ------------ ------------
NET LOSS $ (269,816) $ - $ (269,816)
============ ============ ============
See accompanying notes to financial statements
F-17
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(formerly Allied Wireless, Inc.)
(A Development Stage Company)
Statement of Shareholder's Equity
September 23, 1996 (Inception) through December 30, 1997
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Convertible During the Total
Preferred Stock Common Stock Additional Develop- Share-
---------------------- ----------------------- Paid-in ment holders'
Shares Amount Shares Amount Capital Stage Equity
---------- ---------- ---------- ---------- -------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sept 23, 1996
(Inception) - $ - - $ - $ - $ - $ -
---------- ---------- ---------- ---------- -------------------- ----------
Balance December 31,
1996 - - - - - - -
Issuance of common stock
for services, valued
at cost (Note B) - - 7,250,000 7,250 5,000 - 12,250
Sale of common stock to
founders - - 1,250,000 1,250 - - 1,250
Sale of common stock,
pursuant to a private
placement memorandum,
net of offering costs
of $3,650 (Note D) - - 4,000,000 4,000 67,351 - 71,351
Sale of common stock,
pursuant to a private
placement memorandum, net
of offering costs of
$34,000 (Note D) - - 6,163,342 6,163 884,338 - 890,501
Issuance of common stock
for services, valued at
cost as determined by
management (Note B) - - 6,400,000 6,400 - - 6,400
One for 13 reverse stock
split (Note D) - -(23,166,153) (23,166) 23,166 - -
Net loss for the period
from January 1 through
December 30, 1997 - - - - - (269,816) (269,816)
---------- ---------- ---------- ---------- -------------------- ----------
Balance December 30,
1997 - $ - 1,897,189 $ 1,897 $ 979,855 $(269,816) $ 711,936
========== ========== ========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-18
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(formerly Allied Wireless, Inc.)
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
September 23, September 23,
January 1, 1996 1996
1997 (inception) (inception)
through through through
December 30, December 31, December 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (269,816) $ - $ (269,816)
Transactions not requiring cash:
Common stock issued in
exchange for consulting
services provided by
shareholders (Note B) 16,150 - 16,150
Write-off of cash advances
in connection with merger
(Note G) 95,263 - 95,263
Amortization 250 - 250
------------ ------------ ------------
(158,153) - (158,153)
Changes in current liabilities:
Increase in accounts payable 4,923 500 5,423
Increase in other current
liabilities 1,375 - 1,375
Increase in accrued interest
payable 3,126 - 3,126
------------ ------------ ------------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES (148,729) 500 (148,229)
------------ ------------ ------------
INVESTING ACTIVITIES
Deposit on equipment paid to
related party (Note B) (91,000) - (91,000)
Organization costs incurred - (500) (500)
Cash advanced to merger candidate
(Note G) (95,263) - (95,263)
------------ ------------ ------------
NET CASH (USED IN)
INVESTING ACTIVITIES (186,263) (500) (186,763)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from the issuance
of common stock 1,000,752 - 1,000,752
Offering costs incurred (37,650) - (37,650)
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 963,102 - 963,102
------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 628,110 - 628,110
Cash and cash equivalents,
beginning of period - - -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 628,110 $ - $ 628,110
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 583 $ - $ 583
============ ============ ============
Cash paid for income taxes $ - $ - $ -
============ ============ ============
Noncash investing and financing
activities:
Common stock issued for
consulting services
capitalized as organization
costs (Note B) $ 2,500 $ - $ 2,500
============ ============ ============
Debt assumed in exchange for
license rights (Note C) $ 100,000 $ - $ 100,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 30, 1997
Note A: Organization and summary of significant accounting policies
Basis of presentation: SkyLynx Communications, Inc. (the "Company") is a
development stage company in accordance with Statements of Financial
Accounting Standard No. 7.
Organization: The Company was incorporated under the laws of Colorado on
September 23, 1996 as Allied Wireless, Inc. (AWI). The Company changed its
name on February 12, 1998. The Company intends to become involved in the
wireless communications industry through the purchase of one or more licenses
or franchises or through the acquisition of entities that are in control of
such licenses or franchises. The principal activities since inception have
been organizational matters, the sale and issuance of shares of its $.001 par
value common stock, and the acquisition of certain technology. The Company
has adopted a calendar year end.
Cash equivalents: For the purpose of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Intangible assets and amortization: Organization costs and license rights are
recorded at cost. Amortization is calculated by the straight-line method over
a period of sixty months, once operations commence for organization costs and
thirty-six months for license rights.
Income Taxes: Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the recorded book
basis and tax basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset future
federal income taxes.
Shares issued for noncash consideration: Common stock issued for services is
valued at the regular billing rates charged for that service.
Offering costs: In connection with a private offering of its common shares,
the Company incurred certain offering costs consisting of legal and accounting
fees. These costs are deducted from the offering proceeds upon completion of
the offering, and reflected in the accompanying financial statements as a
reduction of additional-paid-in capital.
Use of estimates: The preparation of the financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
F-20
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 30, 1997
Note B: Related party transactions
During the period ended December 30, 1997, the Company issued approximately
7,250,000 shares of its common stock to shareholders in lieu of cash payment
for services provided by the Company. The services were valued at their cost
of $12,250, as determined by management. $2,500 of the services were
capitalized as organization costs and $9,750 were charged as consulting costs
in the accompanying financial statements.
Effective December 16, 1997, the Company issued 6,400,000 (pre-split) shares
of common stock to affiliates in exchange for services. The services were
valued by management at $6,400, or $.013 per share.
During the period ended December 30, 1997, the Company paid a shareholder
$20,000 for consulting fees, an affiliate $27,346 for consulting fees, office
expenses, travel reimbursements, and another affiliate $9,765 for consulting
fees.
Note C: Note payable
On December 16, 1997, the Company assumed an affiliate's promissory note
payable in the amount of $100,000, plus accrued interest, to an individual.
The note is unsecured and is convertible into 33,333 (pre-split) shares of the
SkyLynx Express Holdings, Inc. $.0001 par value common stock, at the option of
the holder. The note matures on July 31, 1998 and the principal plus any
unpaid interest is due at that time. Accrued interest as of December 30, 1997
was $3,126.
F-21
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 30, 1997
Note D: Shareholders' equity
Common stock offering
During the period ended December 30, 1997, the Company sold at $.01875 per
share, an aggregate of 4,000,000 shares of its $.001 par value per share
common stock and received $71,351, after related costs. In addition, the
Company sold, at $.15 per share, an aggregate of 6,163,342 shares of its $.001
par value per share common stock and received $890,501, after related costs.
The shares were offered and sold without registration under the federal
securities laws in reliance upon an exemption from registration requirements
contained in Rule 504 of Regulation D of the Securities Act of 1933, as
amended.
Preferred stock
The Company's preferred stock, authorized 50,000,000 shares, has a par value
of $.01 per share. The preferred stock is issuable in series by the Board of
Directors who establish the terms and preferences in the series.
Reverse stock split
On January 23, 1998, the shareholders of the Company approved a one for 13
reverse stock split. The accompanying financial statements, however give
effect to this reverse stock split as if it had occurred as of December 30,
1997.
Note E: Income taxes
A reconciliation of U.S. statutory federal income tax rate follows for the
period from January 1, through December 30, 1997 and for the period from
September 23, 1996 through December 31, 1996:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
U.S. statutory graduated federal rate 32.47%
State income tax rate, net of federal benefits 3.37%
-----------
35.84%
NOL for which no tax benefit is currently
available -35.84%
-----------
0%
===========
</TABLE>
The benefit for income taxes from operations consisted of the following
components: current tax benefit of $96,708 resulting from a net loss before
income taxes, and deferred tax expense of $96,708 resulting from the valuation
allowance recorded against the deferred tax asset resulting from net operating
losses. The change in the valuation allowance from January 1, through
December 30, 1997 and from September 23, 1996 (inception) through December
31,1996 was $96,708 and $-0-, respectively. Net operating loss carryforwards
for 1997 will expire in 2012.The valuation allowance will be evaluated at the
end of each year, considering positive and negative evidence about whether the
asset will be realized. At that time, the allowance will either be increased
or reduced; reduction could result in the complete elimination of the
allowance if positive evidence indicates that the value of the deferred tax
asset is no longer impaired and the allowance is no longer required.
F-22
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 30, 1997
Note F: Agreement and plan of reorganization
Effective December 16, 1997, AWI entered into an Agreement and plan of
Reorganization (the "Agreement") with SkyLynx Express Holdings, Inc. (SEHI)
and Network System Technologies, Inc. (NST). Under the Agreement, AWI was
acquired, in a reverse acquisition by SEHI. In addition, AWI acquired certain
license rights, and made an earnest money deposit on equipment to be acquired
from NST by SEHI. The Agreement was ratified by the Company's shareholders on
January 23, 1998.
Reverse acquisition
Effective December 16, 1997, SEHI exchanged 100 percent of its outstanding
shares of common stock for 6,875,000 (post-split) shares of the Company's
common stock. This transaction has been treated as a reverse acquisition
whereby SEHI is considered the surviving entity. Costs of the transaction
have been charged to the period. The reverse acquisition took place on
December 16, 1997; however, the accompanying financial statements have been
prepared as if the acquisition took place on December 31, 1997.
Acquisition of license rights
In addition to the above capitalization, the Company acquired certain license
rights from NST covering technology (consisting of computer software, know-
how, trade secrets, and licensed patent rights) used to deploy a wireless data
network. The company assumed a note payable of $100,000 in consideration for
the rights. The Company extinguished the debt with cash on June 30, 1998.
Deposit on equipment
In addition, the Company made an earnest money deposit on special
communications equipment, valued at $482,299, to be acquired from NST.
Note G: Merger negotiations
On December 17, 1997 and again on December 31, 1997, the Company executed a
letter of intent to purchase certain assets of Cable Corporation of America,
Inc. (CCA). Pursuant to the letters of intent, the Company paid payroll and
certain operating expenses on behalf of CCA totaling $95,263 through December
30, 1997.
During 1998, acquisition negotiations between the two companies broke off.
Accordingly, the advances totaling $95,263, as of December 30, 1997, have been
written off in the accompanying financial statements.
Additional advances in 1998, prior to negotiation termination, totaling
$36,000 have also been written off.
F-23
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
(formerly SkyLynx Express Holdings, Inc.) (prior to merger)
INTRODUCTION
The following unaudited pro forma condensed combined statement of operations
gives effect to the merger of SkyLynx Express Holdings, Inc. and Allied
Wireless, Inc. for the one-year period ended December 31, 1997. SkyLynx
Communications, Inc. (formerly SkyLynx Express Holdings, Inc.) will be the
surviving entity.
The unaudited condensed combined statements of operations are presented as if
the merger had occurred on January 1, 1997. The pro forma financial
information is presented for informational purposes only and does not purport
to be indicative of the results of operations that actually would have
resulted if the merger had been consummated on January 1, 1997 nor which may
result from future operations.
The pro forma financial information should be read in conjunction with the
separate audited financial statements and notes thereto of each of the
companies included in the pro forma financial information as of their
respective balance sheet dates and for the periods from July 27, 1997 through
December 31, 1997 for SkyLynx Communications, Inc. (formerly SkyLynx Express
Holdings, Inc.) and for the period from January 1, 1997 through December 30,
1997 for SkyLynx Communications, Inc. (formerly Allied Wireless, Inc.).
F-24
<PAGE>
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
SkyLynx
Express Allied
Holdings, Wireless, Pro Forma
Inc. Inc. Combined
------------ ------------ ------------
<S> <C> <C> <C>
COSTS AND EXPENSES
Consulting, related parties $ 8,938 $ 73,261 $ 82,199
Compensation - 16,330 16,330
Legal and accounting - 50,894 50,894
Amortization - 250 250
Write-off of advances in
connection with merger - 95,263 95,263
Other - 34,386 34,386
------------ ------------ ------------
(8,938) (270,384) (279,322)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income - 4,278 4,278
Interest expense - (3,710) (3,710)
------------ ------------ ------------
- 568 568
============ ============ ============
LOSS BEFORE INCOME TAXES (8,938) (269,816) (278,754)
INCOME TAX BENEFIT (EXPENSE)
Current - - -
Deferred - - -
------------ ------------ ------------
- - -
============ ============ ============
NET LOSS $ (8,938) $ (269,816) $ (278,754)
============ ============ ============
</TABLE>
F-25
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
SKYLYNX COMMUNICATIONS, INC.
Date: December 16, 1998 By: /s/ Jeffery A. Mathias
----------------------------------
Jeffery A. Mathias, President
<PAGE>
CUSTOMER AGREEMENT
This Customer Agreement, including the attached Annex A (together,
referred to herein as "Agreement"), is between the American Red Cross, Tampa
Bay Chapter, located at 4611 N. Himes Ave., Suite 286, Tampa, FL 33814
("Subscriber") and SkyLynx Communications, Inc., located at Sarasota, FL 34236
("SkyLynx").
By executing this Agreement, registering for the SkyLynx Network and
accessing the SkyLynx Network Services, Subscriber is agreeing to the terms
and conditions of this Agreement which includes certain disclaimers.
AGREEMENT
Skylynx Network Services will: (1) link Subscriber's four (4) offices in
a Wide Area Network (WAN), with each location capable of sending and
retrieving e-mail, regulations, guidance, course data and class schedules and
accessing a central data base for volunteer administration; (2) provide
internet access with two-way, near simultaneous communications not requiring a
dial up (perpetually on line); (3) establish the capability for video
conferencing; and (4) maintain such equipment and links in good working order
and repair.
Following the six-month Trial Period (see Payment For Services" section),
Subscriber shall be responsible for use of Subscriber's account with SkyLynx
for any fees incurred for use of the SkyLynx Network Services, or for software
or merchandise purchased thereon, or any other expenses authorized by
Subscriber and incurred in accordance with the terms of this Agreement.
Subscriber promises to pay such amounts billed by SkyLynx for such service,
software, or merchandise and any related fees, taxes and charges. Subscriber
also agrees to the other terms and conditions of this Agreement as stated
below and the attached Annex A. SkyLynx reserves the right to change these
terms and conditions, including the applicable fees and charges, but only in
accordance with the terms of this Agreement.
SUBSCRIBER
Subscriber agrees to use the SkyLynx Network in accordance with all
applicable laws and regulations and in accordance with the terms of this
Agreement.
SUBSCRIBER EQUIPMENT REQUIREMENT AND MAINTENANCE
SkyLynx will install and maintain in good working order and repair such
suitable and fully compatible network equipment and communication devices
required to access the SkyLynx Network as Subscriber may require and request.
SkyLynx installation will be at a rate equal to one-half (1/2) the rate it
would ordinarily charge other customers. Subscriber will receive all software
updates and equipment upgrades and changes/replacements at no cost. SkyLynx
will own all transmission and antenna equipment and be responsible for the
maintenance and repair of said equipment.
Subsequent to the Initial Trial Period (see "Payment For Services"
section), Subscriber will purchase and own the SkyLynx routers and be
responsible for their maintenance and repair except that which is covered by
warranty. Subscriber will be responsible for individual PC interconnections
and functioning,
CERTIFIED INFORMATION RATE
The SkyLynx Network Services are provided to Subscriber at a Certified
Information Rate (CIR) which is initially elected by Subscriber when
Subscriber's service is established and also updated online from time to time
via the SkyLynx Network System Software. SkyLynx will make its best efforts
to maintain the CIR level of service at Subscriber's local area network
elected by Subscriber on a continuous basis, but in no case will a temporary
lack of CIR maintenance by SkyLynx be cause for service rebates, refunds or
other forms of account credit.
TERM
This Agreement shall commence on the date of registration by Subscriber
with SkyLynx for a trial period of six months from said date and may continue
to be renewed for successive twelve-month periods until termination. Either
party may terminate this Agreement at any time during the first six-month
trial period upon thirty days' written notice to the, other or upon thirty
days' written notice within any successive twelve-month contract period. (See
"Notices" section.) SkyLynx reserves the right to suspend access to the
SkyLynx Network upon five days' written notice, upon non-payment by
Subscriber, rejections of any payment arrangements by any agent appointed by
Subscriber, non-payment by Subscriber's bank of authorized charges, any breach
of the SkyLynx Software Licensing Agreement or for any breach of the terms of
this Agreement.
PAYMENT FOR SERVICES
SkyLynx Network subscriber access rates including the basic subscription
fee and charges for other basic services are Two Hundred Twenty-five Dollars
($225) per month per site, plus an installation fee of the SkyLynx System at a
cost not to exceed $2,000 per site, beginning with the first successive
twelve-month period following the six-month Trial Period. During the six-month
Trial Period, SkyLynx agrees to waive all service and access fees. After the
Trial Period, Subscriber agrees to pay SkyLynx for any and all charges arising
from Subscriber's subscription to the SkyLynx Network including the
subscription fee and the fees for any software, merchandise or other services
acquired by Subscriber or anyone else who uses Subscriber's SkyLynx Network
Account, including, without limitation, any minors. Subscriber further agrees
to pay, after the Trial Period, any adminlstratlve fees and any other fees as
provided for in this Agreement or by applicable law and all taxes and
governmental fees, including all federal, state, local and user taxes,
franchise fees and other charges, if any, which are now or may In the future
be assessed because Subscriber receives the SkyLynx Network Services.
Subscriber will receive a rebate In the sum of five percent (5%) of
Gross Profit received from any customer resulting from Subscriber's
introduction of the customer to SkyLynx or the demonstration of the SkyLynx
system at Subscriber's office that ultimately results In a sale to the
customer.
CHANGE OF ACCOUNT NAME, ADDRESS OR TELEPHONE NUMBER
Subscriber agrees to give SkyLynx prompt notice of Subscriber's change of
business name, business mailing address and applicable business telephone
number. Subscriber may do this by notifying the SkyLynx Customer Care Center
by telephone or in writing.
ASSIGNMENT OF ACCOUNT
Neither SkyLynx nor Subscriber may sell, assign, or transfer Subscriber's
account to a third party without prior notice and consent by the other, which
consent shall not be unreasonably withheld. In the absence of a notice of such
sale or transfer, Subscriber must continue to make all required payments to
SkyLynx in accordance with Subscriber's billing statement.
APPLICABLE LAW
The terms and conditions in this Agreement, including all matters
relating to their validity, construction, performance and enforcement, shall
be governed by applicable federal law, the rules and regulations of the
Federal Communications Commission (FCC), and the laws and regulations of the
state and local area where service is provided. These terms and conditions are
subject to amendment, modification, or termination if required by such
regulations or laws. If any provision in this Agreement is declared to be
illegal or in conflict with any law or regulation, that provision may be
deleted or modified without affecting the validity of the other provisions.
Use of this Service will be for only such business purposes which are legal
and allowed by state or federal law.
NOTICES
All notices mentioned in this Agreement shall be written and deemed
received by either party when sent via Registered Mail, Return Receipt
Requested, mailed to the receiving party's address given at the beginning of
this document and signed for by the receiving party; or when hand-delivered to
the receiving party's place of business.
IN WITNESS THEREOF, the parties hereto have caused this Agreement to be
executed as of the date written below,
THE AMERICAN RED CROSS SKYLYNX COMMUNICATIONS, INC.
Tampa Bay Chapter
______________________________ ___________________________________
______________________________ ___________________________________
Typed or Printed Name and Title Typed or Printed Name and Title
Date:____________________ Date:___________________
<PAGE>
<PAGE>
Annex A
Terms & Conditions
A-1 CONTACTING SKYLYNX:
Subscriber may contact Subscriber's local Customer Care Center during the
hours of 8:00 a.m. to 5:00 p.m. local time, Monday through Friday by calling:
(XXX) XXX-XXXX or by e-mail at: (customer [email protected])/
A-2 PAYMENTS:
SkyLynx will send Subscriber a monthly statement for each billing cycle
showing payments, network purchases, and other charges. Payment of the
outstanding balance is due in full each month. * If Subscriber's payment Is
not received by SkyLynx before the next statement is issued, Subscriber may be
charged interest on the delinquent balance at the rate of one and one-half
percent (1.5%) per month, prorated on a daily basis. Furthermore, If SkyLynx
does mot receive payment from Subscriber before Subscriber's next statement is
issued, SkyLynx has the right to inactivate Subscriber's service upon the
expiration of any applicable grace period as reflected on each statement as
"payment due no later than 30 days" with respect to the amount due.
*SkyLynx may, but is not required to, accept partial payments from
Subscriber. If partial payments are made, they will be applied to
statements starting with the oldest outstanding statement. Late less
will be assessed monthly as allowed by applicable law until the total
outstanding account balance, including late fees and all other charges,
are paid. If Subscriber sends SkyLynx checks or money orders marked
"payment in full" or otherwise labeled with restrictive endorsements,
SkyLynx can, but is rot required to accept them, without losing any of
its rights to collect all amounts owed by Subscriber under this
Agreement.
In the case of late payment or non-payment for any of the SkyLynx
services ordered by Subscriber or any of the charges stated below, SkyLynx may
report such late payment or non-payment to the appropriate credit reporting
agencies. If SkyLynx chooses to use any collection agency or attorney to
collect money that Subscriber owes SkyLynx or to assert any other right which
SkyLynx may have against Subscriber, Subscriber agrees to pay the reasonable
costs of collection or other action Including, but not limited to, the costs
of a collection agency, reasonable attorney's fees, and court costs, as
provided by applicable law.
Subscriber should notify SkyLynx as soon as possible of any apparent
breaches of security, such as loss, theft, or unauthorized disclosure or use
of a credit card, bank or credit union account, SkyLynx account number or
password, if any. Until SkyLynx is notified as directed in the "Notices"
section above, Subscriber will remain liable for any unauthorized use of the
SkyLynx Network. Subscriber is responsible for all charges at the time of
service is used.
A-3 REACTIVATION DEPOSIT, REACTIVATION FEE
If Subscriber's service if inactivated because Subscriber did not submit
payments on time or for any other reason, in addition to payment of past due
amounts, SkyLynx may require a Reactivation Deposit before reactivating
Subscriber's SkyLynx Network Service. Amounts deposited by Subscriber will
appear on Subscriber's, statement as credits, and service charges and other
fees will be invoiced as set forth above. Any unpaid amounts will be deducted
each billing cycle from the deposit amount. Deposits shall not earn or accrue
interest.
If SubscrIber's SkyLynx service is inactivated for any reason, including
at Subscriber's request or because of Subscriber's failure to pay any post due
amounts, and Subscriber wants to reactivate the service, Subscriber agrees to
pay a Reactivation Fee in accordance with SkyLynx's current rates, in addition
to bringing Subscriber's account up to date by payment in full of any accrued
charges, outstanding balance, fees and other charges.
A-4 CHANGE IN SERVICE
SkyLynx reserves the right to rearrange, delete, add to, or otherwise
change the SkyLynx Network Service in any way. For any material changes to
the SkyLynx Network Service, SkyLynx will notify Subscriber of the change and
its effective date. In most cases, where the change is within SkyLynx's
control, notice will be made approximately one month In advance. If the
change is not acceptable to Subscriber, Subscriber may cancel Subscriber's
SkyLynx Network Service. If Subscriber does not cancel Subscriber's service,
Subscriber's continued receipt of any SkyLynx service after the effective date
of the change will be deemed to be Subscriber's acceptance of that change, and
Subscriber will continue to be responsible for payment.
A-5 DISCLAIMER OF WARRANTIES
The SkyLynx Network Service and any information, data, software programs,
content, images, sound recording or the like provided therein ("content") are
provided "as is" without warranty of any kind, either express or implied,
including but not limited to any implied warranties of merchantability or
fitness for a particular purpose. Further, SkyLynx does not warrant,
guarantee, or make any representations regarding the use, or the results of
the use, of the SkyLynx Network Service or content in terms of correctness,
accuracy, reliability, currentness, or otherwise. The entire risk as to the
results and performance of the SkyLynx Network Service is assumed by
Subscriber.
In particular, because SkyLynx may provide its subscribers with
electronic access to the content available on the SkyLynx Network, which
content may be originated by indepor4ent publishers and/or providers and which
content Is not augmented by SkyLynx, SkyLynx cannot and does not warrant the
accuracy of any of the Information as originated by said independent
publishers and/or providers, and SkyLynx shall not be liable in any manner
whatsoever for any errors, omissions, or inaccuracies relating thereto. If
defective, Subscriber, not SkyLynx, its dealers, distributors, affiliates,
operators, agents, employees or any third-party content provider, assume the
consequences resulting therefrom.
No oral or written information or advice given by SkyLynx, its dealers,
distributors, affiliates, operators, agents, employees or any third-party
content provider, shall create any warranty in or to the SkyLynx Network
Service or the content, and Subscriber may not rely an any such information or
advice. This warranty gives Subscriber specific legal rights. Subscriber may
have other rights, which vary from state to state.
A-6 LIMITATION ON LIABILITY
Neither SkyLynx nor anyone else Who has been involved in the creation,
production, or delivery of this product shall be liable for any direct,
indirect, consequential, incIdental or punitive damages (including damages for
loss of business profits, business interruption, loss of business information.
and the like) arising out of the use of or inability to use the SkyLynx
Network Service or for any other loss from a cause or causes beyond control of
SkyLynx or any third party content provider, including, without limitations,
acts of God, power failure, or any other cause even if SkyLynx or such other
person has been advised of the possibility of such damages.
A-7 PROPRIETARY RIGHTS
Except for public domain material, all copyrightable Content distributed
over the SkyLynx Network is copyrighted by SkyLynx or the third party Content
provided. SkyLynx and/or such third party Content providers own all right,
title and interest to such Content and Subscriber may not copy, distribute,
transmit or publish, in any form, including printed, electronic, digitized,
audio or otherwise, or modify all or any portion of such Content without the
prior written consent of the copyright owner; provided, however, that
Subscriber may store one copy of the Content an Subscriber's personal computer
for Subscriber's personal use for a period not to exceed thirty calendar days.
All copyright or other proprietary rights notices contained in or associated
with the Content or contained therein must be preserved in, or on, any copies
made of such material. The placement of copyrighted material in any public
posting area, or software library whether of SkyLynx or not, without the
consent of the copyright owner is in violation of this Agreement
A-8 THIRD PARTY BENEFICIARIES
Subscriber acknowledges that the third parties providing Content
distributed over the SkyLynx Network have relied upon and are third party
beneficiaries of the provisions set forth in Sections entitled "Limitation on
Liability" and "Proprietary Rights".
A-9 LIABILITY FOR UNAUTHORIZED USE
Subscriber agrees to notify SkyLynx immediately, after Subscriber sells,
gives away or otherwise transfers Subscriber's SkyLynx equipment to anyone
else. Subscriber is considered the registered recipient of the SkyLynx
Network Services until SkyLynx receives such notice, and Subscriber may be
liable for any charges or fees incurred by the use of SkyLynx equipment by
anyone else up to the time that SkyLynx receives Subscriber's notice.
Subscriber may not assign or transfer Subscriber's services without our
written consent. If Subscriber does, SkyLynx may inactivate Subscriber's
service, If Subscribers SkyLynx equipment is stolen or otherwise removed from
Subscriber's premises without Subscribers authorization, Subscriber must
notify the SkyLynx Customer Care Center immediately, or else you may be liable
for payment to SkyLynx for unauthorized use of your SkyLynx system. You will
not be liable for unauthorized use after we have received your notification.
<PAGE>
October 1, 1998
CONFIDENTIAL
SkyLynx Communications, Inc.
103 Sarasota Quay
Sarasota, Florida 34236
Attention: Jeff Mathias, Chief Executive Officer
Ladies and Gentlemen:
Gerard Klauer Mattison & Co., Inc., ("GKM") is pleased to have been
selected to serve as the investment banker for SkyLynx Communications, Inc.
and its affiliates (the "Company"). This letter agreement (the "Agreement")
confirms the terms of our engagement.
GKM intends to work toward a firm commitment underwriting to effect
a public offering of common stock of the Company (the "Securities"). GKM's
intention is subject to satisfactory completion of its due diligence, the
Company reporting financial results consistent with the estimates the Company
has provided GKM, formal approval of GKM's commitment committee, no adverse
change in the condition (financial or otherwise) of the Company or in general
economic or financial market conditions, or in the price of the Company's
publicly traded common stock, execution of an underwriting agreement (the
"Underwriting Agreement") satisfactory to GKM and agreement on the price and
terms of the offering.
In order that GKM may work toward a firm commitment underwriting as
described herein, the Company will use its best efforts to register the
Securities under the Securities Act of 1933 and to register or qualify the
Securities under the various state Blue Sky laws.
In connection herewith, the Company shall pay to GKM a non-
refundable retainer fee of $25,000 which is payable on the date of this
agreement. This fee will be deducted from any expense allowance to which GKM
is entitled.
With regard to the terms of the offering, it is GKM's present
intention, subject to the conditions listed above, to pursue an offering of
approximately $25,000,000 to $40,000,000 in common stock. This amount does
not include an underwriter's over-allotment option (which may be exercised on
more than one occasion) of 15% of the securities offered, which option will be
granted to GKM by the Company and will remain open for a period of 45 days.
The underwriting commission for the offering will be 7% of the price of the
Securities to the public. The actual pricing of the Securities to be sold in
the public offering will be determined by GKM and the Company at the time of
the offering, subject to then existing market and other conditions.
Except as otherwise set forth in this Agreement, the Company will be
responsible for all of the expenses of the offering of the Securities
(regardless of whether or not the offering is consummated), including the
following:
a) the fees and disbursements of the Company's counsel and
independent accountants;
b) the cost of printing the registration statement (and any
amendments or supplements thereto), prospectuses (including
preliminary and final prospectuses, and any amendments or
supplements thereto, and any term sheets as contemplated by SEC
Rule 434), underwriting documents (including the Underwriting
Agreement) and Blue Sky memoranda;
c) the filing fees paid to the Securities and Exchange Commission,
the National Association of Securities Dealers (the "NASD"),
state Blue Sky commissioners;
d) the fees and disbursements of underwriter's counsel in
connection with state Blue Sky filings and filings with the
NASD;
e) the cost of listing the Securities on Nasdaq;
f) any costs associated with settlement in same day funds, if
desired by the Company;
g) any costs associated with preparing certificates for the
Securities, and the fees of any transfer agent or registrar;
and
h) any travel and other out-of-pocket expenses of Company
personnel.
In addition, the Company agrees to pay GKM an expense allowance
equal to 1% of the gross proceeds of the Offering on a non-accountable basis.
It is understood that GKM may enter into other agreements with brokers/dealers
who shall act as co-underwriters and/or dealers in connection with the
offering of the Securities.
The Underwriting Agreement shall provide that the Company and each
of its present and future subsidiaries and affiliates will grant to GKM a
right of first refusal for the period of two years after the closing date of
the offering to act as lead-managing underwriter or lead-managing placement
agent, as the case may be, for any public or private sale of any equity
securities to be made by the Company or any of its present or future
subsidiaries or affiliates; provided, however, that the material terms and
conditions of GKM's retention are competitive with (a) the material terms and
conditions customary for similar public or private offerings, as applicable,
for similar companies in Company's sector or (b) if more favorable to the
Company than the terms described in (a), the material terms and conditions
contained in a bona fide proposal for a public or private offering from
another prospective underwriter of which GKM shall have been informed. With
respect to each sale, the Company agrees that (i) GKM's name shall appear on
the cover of each prospectus at the top left of any list of co-managers and
(ii) GKM shall have the right to "run the books" for the underwriters of such
sale.
The Underwriting Agreement shall provide that the Company and each
of its present and future subsidiaries and controlled affiliates will grant to
GKM a right of first refusal for the period of two years after the closing
date of the offering to act as underwriter or placement agent, as the case may
be, for any public or private sale of any debt securities to be made by the
Company or any of its present or future subsidiaries or controlled affiliates;
provided, however, that, subject to the last sentence of this paragraph, the
material terms and conditions of GKM's retention are competitive with (a) the
material terms and conditions customary for similar public or private
offerings, as applicable, for similar companies in the Company's sector or (b)
if more favorable to the Company than the terms described in (a), the material
terms and conditions contained in a bona fide proposal for a public or private
offering from another prospective underwriter of which GKM shall have been
informed. To the extent that GKM exercises the right of first refusal
contained in this paragraph, the Company agrees that GKM shall receive a
minimum of 20% of the gross underwriting or placement fees, including any non-
accountable expenses, associated with any such sale of debt securities and
that (i) GKM's name shall appear on the cover of each prospectus at the top
left of any list of co-managers and (ii) GKM shall have the right to "run the
books" for the underwriters of such sale.
If a business combination involving the Company or any of its
subsidiaries, including, without limitation, a merger or consolidation, a sale
or purchase of assets of or formation of a joint venture, or an exchange or
tender offer involving outstanding securities (a "Business Combination")
occurs during the term of this Agreement, as amended or extended, or during
the year after the expiration of such term, with any person identified to the
Company by GKM or to whom GKM rendered any services under this Agreement, then
the Company shall pay GKM an amount equal to 2% of the Total Consideration (as
hereinafter defined) of the Business Combination. If the Company or any of
its subsidiaries sells, or enters into any agreement to sell, in a public
offering or private placement, any of its securities ("Sale") during the term
of this Agreement, as amended or extended, or during the year after the
expiration of such term, to any person identified to the Company by GKM or to
whom GKM rendered any services under this Agreement, then the Company shall
pay GKM an amount equal to 7% of the Total Consideration.
For purposes of the preceding paragraph, "Total Consideration" is
defined as the total value of all property (real or personal), cash,
securities and other benefits, directly or indirectly, received or receivable
by the Company or its officers, directors, subsidiaries, affiliates or
shareholders. Total Consideration shall include, without limitation, the
aggregate of all amounts payable pursuant to (i) any warrants, options, stock
appreciation rights, convertible securities, stock purchase rights, whether or
not vested, (ii) covenants not to compete, earn-out or contingent payment
rights, or (iii) any other agreements, arrangements or understandings (other
than bona fide employment, consulting or similar agreements, arrangements or
understandings). Property shall be valued at the fair market value thereof as
agreed by the parties hereto or, if the parties hereto are unable to so agree,
as determined by a mutually acceptable independent appraiser, the cost of
which shall be borne equally by the Company and GKM. Securities which are
publicly traded shall be valued at the closing price of such securities as
reported on a national exchange or the Nasdaq National Market if so listed or
quoted or, if not so listed or quoted, the average of the closing ask prices
as reported by Nasdaq, in either event for the last day prior to the closing
date of such Sale or Business Combination; provided, however, that if the
securities are not so listed or quoted, the securities shall be valued in the
same manner as property. All debt instruments and other evidences of
indebtedness and all obligations referred to in clauses (ii) or (iii) above
shall be valued at the aggregate amount payable thereunder, irrespective of
whether such payments are absolute or contingent, and irrespective of the
period or uncertainty of payment, the rate of interest, if any, or the
contingent nature thereof. All amounts payable pursuant to the preceding
paragraph are due and payable to GKM, in cash or by certified check, at the
closing of such Business Combination or Sale.
The Company agrees to the indemnification and other agreements set
forth in the Indemnification Agreement attached hereto, the provisions of
which are incorporated herein by reference.
The Company shall not, and shall cause each of its executive
officers, directors and each beneficial owner of more than 5% of the
outstanding shares of Common Stock to enter into agreements to the effect that
they shall not, for a period of 180 days after the commencement of the public
offering of the Shares, without the prior written consent of GKM, offer to
sell, sell, contract to sell, grant any option to sell, or otherwise dispose
of, or require the Company to file with the Commission a registration
statement under the Act to register, any shares of Common Stock or securities
convertible into or exchangeable for Common Stock or warrants or other rights
to acquire shares of Common Stock of which the undersigned is now, or may in
the future become, the beneficial owner (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934, as amended), other than pursuant to
employee stock option plans or in connection with other employee incentive
compensation arrangements.
GKM's engagement hereunder may be terminated by either the Company
or GKM at any time after one year from the date of this Agreement, upon
written notice to that effect to the other party, it being understood that the
expense, indemnification, reimbursement and contribution obligations of the
Company shall survive any such termination. If GKM's services are terminated
without just Cause (as defined herein), the Company shall pay to GKM (a) an
aggregate fee of $50,000 ("Break-up Fee") (b) all reasonable out-of-pocket
expenses incurred by GKM in connection with its services to be rendered
hereunder, including all reasonable fees, disbursements and other charges of
GKM's counsel and (c) all travel and other out-of-pocket expenses incurred by
GKM (including fees and expenses of counsel) prior to, or as a result of, the
determination not to proceed or breach of the said provisions hereof. For
purposes hereof, "Cause" shall mean gross negligence, willful malfeasance,
illegal actions, repeated failure (after notice) by GKM to discharge its
obligations hereunder, or other acts or omissions of similar gravity.
While this Agreement sets forth the present intentions of the
Company and GKM with respect to the proposed offering, except for the
obligations of the Company set forth in the next sentence, the obligations of
the Company with regard to Business Combinations and the provisions relating
to the payment of fees and expenses and indemnification, this Agreement does
not constitute a legally binding agreement, and neither the Company nor GKM
shall be legally bound until such time as a definitive Underwriting Agreement
satisfactory to the parties is entered into. In the event the offering is not
consummated due to any action or inaction of the Company or if GKM declines to
enter into the Underwriting Agreement on the basis of a material adverse
change in market conditions or in the business or financial results, financial
condition or business prospects of the Company, the Company will reimburse
GKM, upon request, for all of its out-of-pocket expenses incurred in
connection with the public offering, including the fees, disbursements and
other charges of its legal counsel.
The Company represents and warrants to GKM that the consummation of
the transactions contemplated hereby will not, as of the effective date of the
offering of the Securities, result in a material breach of any of the terms,
provisions or conditions of any agreement or understanding to which it is, or
may become prior to such date, a party. The Company further agrees that, as
of such effective date, there will be no legal basis for any claims or
payments for services by any party (engaged by it) in the nature of a finder's
fee with respect to the proposed offering of the Securities. During the term
of this Agreement, the Company agrees not to enter into any agreement with, or
engage, any other underwriter relating to a possible public offering of
securities of the Company or any of its subsidiaries, or to effect any such
transaction.
This Agreement (including the attached Indemnification Agreement)
sets forth the entire agreement between the parties, supersedes and merges all
prior written or oral agreements with respect to the subject matter hereof,
may only be amended in writing and shall be governed by the laws of the State
of New York applicable to agreements made and to be performed entirely within
such State. Each party hereto hereby irrevocably submits for purposes of any
action arising from this Agreement brought by the other party hereto to the
jurisdiction of the courts of New York State located in the Borough of
Manhattan and the U.S. District Court for the Southern District of New York.
The Company (for itself, anyone claiming through it or in its name, and on
behalf of its equity holders) and GKM each hereby irrevocably waive any right
they may have to a trial by jury in respect of any claim based upon or arising
out of this Agreement or the transactions contemplated hereby. This Agreement
may not be assigned by either party without the prior written consent of the
other party.
Please confirm that the foregoing correctly sets forth our
understanding by signing and returning to GKM the enclosed duplicate copy of
this letter.
Very truly yours,
GERARD KLAUER MATTISON & CO., INC.
By:____________________________________
Name:
Title:
Accepted and Agreed to as of
the date first written above
SKYLYNX COMMUNICATIONS, INC.
By:_________________________
Name:
Title:
