<PAGE> SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
----------- ------------
Commission file number 0-24687
SKYLYNX COMMUNICATIONS, INC.
----------------------------
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1360029
- - -------------------------------- ---------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification number
600 South Cherry Street, Suite 305, Denver, Colorado 80222
---------------------------------------------------- -----
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code: (303) 316-0400
103 Sarasota Quay, Sarasota, Florida 34236
-----------------------------------------------------
(Former Name or Address if Changed Since Last Report)
Securities to be registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended December 31, 1998 were
$7,898. As of April 9, 1999, the aggregate market value of the Common
Stock of the Issuer based upon the average bid and ask price of such common
equity as quoted on the OTC Electronic Bulletin Board held by non-
affiliates of the Issuer was $40,279,791. As of April 9, 1999, 10,741,081
shares of Common Stock of the Issuer were outstanding.
<PAGE>
INCORPORATION BY REFERENCE
ITEM 13. EXHIBITS
1. Incorporated by reference from the Company's Registration
Statement on Form 10-SB/A-4, Sec File No. 0-24687, as filed with
the Commission on December 16, 1998
2. Incorporated by reference from the Company's Registration
Statement on Form 8-K, as filed with the Commission on January 6,
1999
3. Incorporated by reference from the Company's Registration
Statement on Form 8-K, as filed with the Commission on February
16, 1999
4. Incorporated by reference from the Company's Registration
Statement on Form S-8, as filed with the Commission on March 16,
1999
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform
Act of 1995) regarding the plans and objectives of management for future
operations. Such statements involve known and unknown risks, uncertainties
and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements made in this
Report are based on current expectations that involve numerous risks and
uncertainties. The Company's plans and objectives are based, in part, on
assumptions involving the growth and expansion of business. Assumptions
relating to the foregoing involve judgments with respect to, among other
things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company.
Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could
prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements made in this Report will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements made in this Report, particularly in view of the Company's early
stage of operations, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
SkyLynx has as its objective to become a leading provider of high-
speed Internet connectivity and enhanced Internet services to small and
medium sized businesses, small office/home offices ("SOHO"), and multi-
development units ("MDU's"). The Company believes that its targeted
customer segments represent attractive markets for the provisioning of
Internet services due to low current penetration levels, low churn rates
and the expanding Internet needs of these customers. Because of their
limited internal technical resources, many of these potential customers
require hands-on local support and highly reliable turnkey solutions for
mission critical applications. SkyLynx believes that these needs currently
are underserved by both the national and local Internet Service Providers
("ISPs"). National ISPs lack the local presence to provide customized,
hands-on service, while local ISPs typically lack the scale and resources
required to provide dedicated, high-capacity Internet access, around-the-
clock support and tailored product offerings at competitive prices. The
Company currently has networks deployed in Tampa and Sarasota, Florida, in
Fresno, California, and in Eugene, Oregon, and it has recently completed
the acquisition of ISPs located in Tampa and Eugene. The Company currently
has approximately 1,400 subscribers. The Company has Letters of Intent
with ISPs that represent approximately 7,800 subscribers. In addition, the
Company has identified ISPs representing an additional 50,000 to 65,000
customers it believes it may be able to acquire in the next nine to twelve
months, assuming the ability to obtain additional financing.
The Company's success will hinge upon its execution of the following
five-part strategy:
- Acquire customers by consolidating local ISPs. The rapid growth
and development of the Internet has resulted in a highly
fragmented industry of over 4,000 ISPs in the United States. The
Company has identified a number of ISPs with a significant
proportion of business customers, and it believes that it has an
opportunity to acquire these ISPs at attractive valuations. The
Company plans to focus its search for acquisitions on the West
Coast and in Florida, areas which have concentrated populations,
Line-of-Sight ("LOS") capabilities and the potential for
international voice traffic.
- Integrate acquired operations into a comprehensive network and
capture economies of scale. The Company plans to integrate the
operations of the ISPs it acquires by consolidating their
operations into regional operating units with centralized
regional management, connecting their local networks to a high-
speed, highly reliable backbone, and providing them with
integrated national support services. These services include
national network transit, 24 x 7 x 365 network monitoring and
management, customer technical support, a centralized billing and
collections system, financial information management through a
central, standardized accounting system, and national marketing
and product development programs.
- Offer customers enhanced products and services. The Company
believes that it will be able to derive incremental revenue from
its customers by selling an array of enhanced services, including
enhanced bandwidth wired access, wireless access, Web hosting, IP
telephony, virtual private networks, security services,
electronic commerce, intranet/extranet services and other
advanced Internet applications. The Company believes that small
independent ISPs will have difficulties in providing such
services.
- Overlay markets with a "wireless cloud" and convert a portion of
customers to wireless service. The Company may choose to deploy
a wireless last mile access network in certain markets, utilizing
either licensed or unlicensed frequencies, or a combination of
the two. Once the "wireless cloud" is in place in a market, the
Company will convert some percentage of its customers from wired
to wireless service, and it will include wireless access in its
service offering to new customers. The Company believes that
there are two potential competitive advantages to a wireless
service. First, because wireless service provides last mile
access which bypasses the local telecommunications carrier
(thereby avoiding the local access charge), the Company may be
able to provide service to some customers at a lower overall cost
than it could with a wired solution. Some or all of these cost
savings could be passed on to the customer. Second, certain
customers may not have access to high-speed, high bandwidth wired
service due to their geographic locations. The Company may be
able to provide these customers with a high-speed solution using
wireless service. The Company believes that a wireless service
offering could give it a first to market advantage with those
customers who are currently unpassed by a wired high-speed
alternative.
- Build customer loyalty and name recognition. The Company's goal
is to achieve recognition as a leading provider of affordable
high-speed Internet connectivity and enhanced Internet services
while maintaining the market awareness developed over time by
acquired ISPs by attaching the SkyLynx name to the local ISP name
(e.g. "Local Name - a SkyLynx Company").
SkyLynx believes that a critical factor in the successful
implementation of its business strategy is the quality and experience of
its management team. The Company's senior management team has previously
successfully executed similar consolidation strategies and has experience
in the management of wireless telecommunications and technology businesses.
The Company was formed and incorporated in Colorado in 1996. The
Company's principal executive office is located at 600 South Cherry Street,
Suite 305, Denver, Colorado 80222, and its telephone number is (303) 316-
0400. The Company's World Wide Web home page is http://www.skyk.com.
Information contained in the Company's Web site does not constitute, and
shall not be deemed to constitute, part of this Annual Report. In August
1998 the Company began trading on the Over-the-counter (OTC) Bulletin Board
under the symbol "SKYK."
Industry Background
The U.S. based Internet connectivity and enhanced Internet services
represent two of the fastest growing segments of the telecommunications
services market. Total ISP revenues in the United States are projected to
grow at a 28.4% compound annual growth rate ("CAGR") from $10.7 billion in
1998 to $37.4 billion in 2003, according to International Data Corporation
("IDC"). Value-added services or enhanced Internet services are projected
to grow at a 34.0% CAGR from $3.0 billion in 1998 to $12.9 billion in 2003
according to IDC. The availability of Internet connectivity, advancements
in technologies required to navigate the Internet, and the proliferation of
content and applications available over the Internet have attracted a
rapidly growing number of users. Businesses are increasingly recognizing
that the Internet can significantly enhance communications among
geographically distributed offices and employees as well as with customers
and suppliers. In addition, the Internet presents a compelling profit
opportunity for businesses as it enables them to reduce operating costs,
access valuable information and reach new markets. As a result, businesses
increasingly are utilizing the Internet for mission critical applications
such as sales, customer service and project coordination. IDC estimates
that U.S. corporate access revenues will grow from $2.9 billion in 1998 to
$12.0 billion in 2003, representing a 32.5% compounded annual growth rate.
There can be no assurance that the bases for these projections or the
results generated thereby will be realized.
In addition to Internet connectivity, business customers increasingly
are seeking a variety of enhanced products and applications to take full
advantage of the Internet. For example, a growing number of businesses are
implementing secured virtual private networks ("VPNs") over the Internet as
a more economical option than dedicated private networks. Technological
advances such as increases in microprocessor speeds, the introduction of
innovative software tools and the development of higher bandwidth data
networking technology have led to rapid innovation and development of
enhanced Internet services. The principal enhanced services being offered
by business-oriented ISPs today include Web hosting, security, electronic
commerce, virtual private networks (sometimes called "intranets" and
"extranets"), and advanced Internet applications such as voice and fax,
video conferencing and data storage and retrieval solutions. According to
IDC, value-added services are the fastest growing segment of the Internet
services market and are expected to grow from $3.0 billion in 1998 to over
$12.9 billion in 2003. As business users of the Internet adopt enhanced
services, they also require additional bandwidth to support their expanded
use of the Internet. The Company expects this trend to continue as high-
bandwidth enhanced services continue to be developed, improve and
proliferate and as Internet usage continues to expand.
Industry analysts have reported that small and medium sized businesses
represent a potential market of over seven million customers in the U.S.,
and use of the Internet by this market segment is expected to grow
substantially from its current low level of market penetration. Small and
medium sized businesses generally seek an ISP with locally based personnel
who are readily available to respond in-person to technical issues, who can
assist in developing and implementing the customer's effective use of the
Internet, and with whom they can establish a stable and long-term
relationship. In addition, they are increasingly reliant on enhanced
product offerings that address their specific business needs on a cost-
effective basis, allowing them to compete with larger companies. For
example, IDC estimates Worldwide Shared Web hosting revenues will grow from
$316 million in 1998 to over $3.4 billion in 2002.
The rapid development and growth of the Internet has resulted in a
highly fragmented industry with an estimated 4,000 national and local ISPs
in the United States, with no dominant ISP serving the needs of small and
medium sized businesses. The large national ISPs have primarily focused on
the large business or consumer markets and lack the local presence to
provide the customized, hands-on service required by small and medium sized
businesses. The Company believes that independent local and regional ISPs
generally have been more adept at serving small and medium sized
businesses, and that these ISPs are often the source of innovative Internet
products and services. As a result, independent regional and local ISPs
have successfully captured approximately one-half of this market, despite
the substantially greater resources of the national providers. However,
rising costs and increasing demands from business customers are making it
more difficult for the small ISP to meet its customer's demands on a cost-
effective basis. Facing these competitive pressures, SkyLynx believes that
independent regional and local ISPs will continue to be attracted to and
benefit from the consolidation opportunity provided by SkyLynx.
Business Strategy
The goal of the Company is to be a leading full-service provider of
affordable and dependable high-speed Internet connectivity and enhanced
Internet services to small and medium sized businesses within the next two
to three years in selected markets. Key elements of the Company's strategy
in accomplishing this goal are to: (1) gain critical mass through
acquisitions of independent ISPs focused on the Company's intended target
markets; (2) integrate the operations of acquired ISPs and capture
operational economies of scale by leveraging its national infrastructure
and support services; (3) stimulate organic growth by developing and
offering additional high-margin enhanced services to increase revenues from
existing and future customers; (4) deploy a "wireless cloud" in certain
acquired markets and convert a portion of business customers to wireless
last mile connectivity; and (5) build customer loyalty and gain market
share by expanding the Company's technical, distribution and service
capabilities and establishing SkyLynx name recognition.
Gain Critical Mass through Acquisitions of Local ISPs. SkyLynx has
closed its first two acquisitions and has identified and has begun
negotiations with a number of other ISPs. It is anticipated that several of
these acquisitions will close within sixty to ninety days. The Company
intends to acquire additional business-focused ISPs to deepen and broaden
its market presence and to expand its presence in targeted product areas
such as enhanced Internet services and IP telephony. Given the increasing
competitive pressures facing the independent local and regional ISPs, the
Company believes that numerous ISPs will be attracted to the consolidation
opportunity provided by SkyLynx. The Company believes that current market
conditions provide SkyLynx with an opportunity to acquire ISPs at
attractive private market valuations vis-a-vis the valuations of publicly
traded ISPs.
Effective February 2, 1999, the Company consummated an Asset Purchase
Agreement pursuant to which it acquired substantially all of the assets of
Interaccess Corporation, an ISP operating in the Tampa, Florida area and
serving approximately 250 wired customers, the majority of which are
business customers. The purchase price of this acquisition was $390,770,
consisting of both cash and shares of the Company's Common Stock.
Effective March 24, 1999, the Company consummated an Asset Purchase
Agreement pursuant to which it acquired all of the assets of ContiNet, LLC
of Eugene, Oregon. ContiNet, LLC operates an ISP in the Eugene, Oregon
area and serves approximately 1,100 wired customers. The purchase price
for this acquisition was $497,540.77, consisting of cash, debt and shares
of the Company's Common Stock.
Effective February 12, 1999, the Company entered into a Letter of
Intent to acquire substantially all of the assets of Net Asset, LLC, an ISP
operating in the Fresno, California area and serving approximately 450
wired customers, the majority of which are business customers. The
purchase price for this acquisition will be approximately $1,175,000 in
cash. The Letter of Intent contemplates the execution and delivery of a
formal definitive agreement, the consummation of which is subject to
numerous conditions, including the completion of satisfactory due
diligence.
Effective March 1, 1999, the Company entered into a Binding Letter of
Intent to acquire substantially all of the assets of SeaTac.Net, an ISP
operating in the Seattle, Washington area serving approximately 900
customers. The purchase price for this acquisition will be approximately
$400,000 in cash and stock. The Binding Letter of Intent contemplates the
execution and delivery of a formal definitive agreement, the consummation
of which is subject to numerous conditions, including the completion of
satisfactory due diligence.
The Company has also entered into Binding Letters of Intent to acquire
substantially all of the assets of two additional ISPs serving
approximately 6,500 customers combined. These Binding Letters of Intent
contemplate the execution and delivery of formal definitive agreements, the
consummation of each of which is subject to numerous conditions, including
the completion of satisfactory due diligence.
These pending acquisitions are contingent upon the completion of a
private offering of its securities which is being undertaken but as of the
date of this Report has not been completed (the "Offering"). The Company
believes that it can use the proceeds of the Offering to complete
acquisitions adding 14,000 to 15,000 customers. Beyond this, the Company
has identified ISPs representing an additional 50,000 to 65,000 customers
it believes it may be able to acquire in the next nine to twelve months,
assuming the ability to obtain additional financing above and beyond the
proceeds of the Offering.
Integrate Operations and Capture Economies of Scale. SkyLynx plans to
integrate the operations of the ISPs it acquires by consolidating their
operations into regional operating units with centralized regional
management, connecting their local networks to a high-speed, highly
reliable backbone and providing them with integrated national support
services. These services include national network transit, 24 x 7 x 365
network monitoring and management, customer technical support, a
centralized billing and collections system, financial information
management through a central, standardized accounting system and marketing
and product development programs. The Company believes that through the
integration of its national infrastructure with its local ISP operations,
it will achieve a significant degree of operational control and efficiency
and improve the quality, consistency and scalability of its services. The
Company may also establish strategic relationships with hardware, software
and telecommunications providers in order to broaden its market presence
and to gain economies in purchasing equipment and backhaul connectivity.
Develop and Offer Enhanced Products and Services to Increase Revenues.
Small and medium sized businesses are purchasing an increasing number of
enhanced products and services as these businesses deploy mission critical
applications on the Internet. As a result, the Company believes that it
will be able to derive incremental revenue from these customers by selling
an expanding array of enhanced services and additional bandwidth to support
these services. These additional services include enhanced bandwidth wired
access, wireless access, Web hosting, IP telephony, virtual private
networks, security services, electronic commerce, intranet/extranet
services and other advanced Internet applications. The Company will
encourage innovation within its regional operations, and will support the
identification and transfer of products, services and "best practices"
among its regional operations. The Company will focus on additional
services to be developed internally, through acquisitions and in
conjunction with strategic partners.
Deploy a "Wireless Cloud" in Acquired Markets and Convert a Portion of
Business Customers. Once the Company has acquired a customer base through
the acquisition of an ISP, it may choose to deploy a wireless last mile
access network in that market, utilizing either licensed or unlicensed
frequencies, or a combination of the two. The wireless networks the Company
expects to deploy will be shared networks using two-way wireless
transmission technology, which typically can provide subscribers with high-
speed, robust service at a lower cost than that provided by traditional
wired copper or fiber-based services. This technology allows for the
provisioning of high-speed Internet access as well as cost-effective high-
speed communications between local branch offices, remote offices,
customers, affiliates, or suppliers using local networking
(intranets/extranets). The wireless network is a scaleable network in that
the capacity of the system can be increased through cellularization and
sectorization of the network architecture.
The Company expects that, once the "wireless cloud" is in place in a
market, it will convert some percentage of its customers from wired to
wireless service, and that it will include wireless access in its service
offering to new customers. The Company believes that there are two
potential competitive advantages to a wireless service. First, because
wireless service provides last mile access that bypasses the local
telecommunications carrier (thereby avoiding the local access charge), the
Company may be able to provide service to some customers at a lower overall
cost than it could with a wired solution. Some or all of these cost
savings could be passed on to the customer. Second, certain customers may
not have access to high-speed, high bandwidth wired service due to their
geographic locations. The Company may be able to provide these customers
with a high-speed solution using wireless service. The Company believes
that a wireless service offering could give it a first to market advantage
with those customers who are currently unpassed by a wired high-speed
alternative. The Company estimates that it may be able to convert
approximately 25-30% of it acquired business customers to a wireless
service, if so offered.
Build Customer Loyalty and Brand Name Recognition. The Company's goal
is to achieve recognition as a leading provider of affordable high-speed
Internet connectivity and enhanced Internet services while maintaining the
market awareness developed over time by acquired ISPs attaching the SkyLynx
name to the local ISP name (e.g. "Local Name - a SkyLynx Company"). The
Company intends to leverage its local presence by continuing to expand and
enhance local marketing, sales, technical, distribution and customer
support capabilities. By combining the quality of local service offered
through the Company's regional operations with the Company's national
backbone and support services, the Company expects to generate increased
customer loyalty and expanding market share at the local level while
enhancing its national brand. In conjunction with the consolidation of its
ISPs into integrated regional operating units, the Company will brand these
regional operations under the SkyLynx name, with a regional or local
geographical identifier to emphasize its local presence. As the Company
continues to expand, its acquisition strategy will be to continue to
identify and select ISPs that have developed a strong local presence
through quality service, hands-on customer support, local market knowledge
and an entrepreneurial culture.
Current Markets
Tampa, Florida. The Company has completed the engineering and
construction of the Tampa network, which consists of three wireless cell
sites constructed in the Tampa metropolitan area. The Tampa network is a
two-way wireless system with up to 11MB capability in both the upstream and
downstream modes operating on unlicensed frequencies. The Company has
recently begun marketing ISP services and is installing wireless customers
in this market. The Company has also initiated the integration of the
Interaccess acquisition into the Tampa system.
Fresno, California. The Company has acquired 96% net revenue leases
for two Multi-Point Distribution System ("MMDS") channels in the Fresno,
California market. The Company has completed engineering and construction
and has begun operating the Fresno network. The network consists of a two-
way asymmetric wireless system utilizing both licensed and unlicensed
frequencies. The system is offering up to 11Mb capability in the upstream
modes utilizing unlicensed frequencies; while the licensed frequencies give
the system downstream capability to 30Mb per channel. The Company is
currently serving approximately 50 customers in the Fresno market. The
Company expects that, upon consummation of the Net Access acquisition, it
will integrate that operation into its Fresno system.
Sarasota, Florida. On January 4, 1999, SkyLynx obtained an option on
a twenty five year lease for twelve wireless channels in the Sarasota-
Bradenton Basic Trading Area ("BTA") as well as an option on the operations
of Hi-Speed Networks, a wireless ISP in Sarasota. Hi-Speed is a two-way
wireless symmetric system utilizing unlicensed frequency upstream and
licensed frequency downstream. The lease is a 100% revenue lease and gives
SkyLynx coverage over six counties including Sarasota, Manatee, Charlotte,
DeSoto, Pasco, and Pinellas. SkyLynx has begun the process of applying to
the FCC to upgrade the system to a two-way licensed frequency system using
the MDS-1 and MDS-2A channels for upstream and the commercial E-Group for
downstream broadcasts. The Company recently has begun pre-marketing of the
Hi-speed Network's product.
Eugene, Oregon. On March 24, 1999, the Company completed the
acquisition of ContiNet, LLC, an ISP serving approximately 1,100 customers
in the Eugene area. The Company retained the services of seven key
employees of ContiNet, including the general manager and co-founder of the
business.
Products and Services
The Company plans to offer, through its regional ISP operations and
strategic partnerships, a comprehensive range of Internet connectivity and
enhanced products and services. The specific products to be offered in
each market will be determined based on the needs of the market and local
competitive conditions. The Company intends to continuously enhance its
offerings by developing a broad range of products and services
independently, through acquisition, and through strategic relationships
with key vendors.
End-to-End Internet and Intranet Communications Service Offerings.
SkyLynx offers customers high-speed end-to-end Internet services including
local access connectivity, full service high-speed Internet access and a
variety of intranet/extranet connectivity solutions. SkyLynx provides all
of its subscribers high-speed Internet access, allowing customers to access
the World Wide Web to receive and send data, full motion video, and audio
at speeds of up 11 megabits per second. The service also allows
subscribers to surf the net, download large files, exchange Internet mail,
provide interactive news service as well as the connectivity to other
corporate servers outside the local area.
Enhanced Internet Services. The Company believes that its small and
medium sized business customers will continue to increase their use of the
Internet as a business tool and, as a result, will require an expanding
range of enhanced services. The Company's product development and
marketing groups will focus on developing new enhanced services through
both internal development, acquisitions and strategic relationships with
software, hardware and content providers. The services will include the
full range of Web hosting, Web site maintenance and ongoing consulting
services. Below is a description of each:
Domain Name Services - On behalf of its customers, the Company shall
apply, register and administer unique domain names for customer application
servers that will participate on the Internet. Customers retain the
ownership of each domain, although SkyLynx will act as the administrative
contact. SkyLynx provides support for domains for mail services (e-mail);
file transfer programs (FTP); World Wide Web (WWW) services; and electronic
commerce (e-commerce).
Web Site Development Services - An Internet Homepage or a World Wide
Web Page is an essential component of a company's presence in the
marketplace. The Company expects to provide Web development services
through relationships with third party vendors.
Web Site Management Services - Maintaining current and accurate
information is critically important to maintain an effective corporate
message. The Company's Web site management services will maintain and
update its customers' sites on an ongoing basis with the latest
information. Additionally, the Company will provide customers with online
statistics, usage and trend analysis.
Web Hosting Services - Web hosting offers business customers a
presence on the Internet, enabling them to take advantage of the marketing,
customer service, internal company information dissemination ("intranets")
and other benefits offered by such presence. The Company will offer its
customers Web hosting services through a combination of internal efforts
and the use of third party partners. SkyLynx will provide its customers
with Web hosting services that will provide high-speed interconnect of
their corporate servers to the Internet. The Company will administer and
maintain Internet Web sites at its Network Operating Center ("NOC").
The Company will also offer Web site co-location, where a customer-
owned Web server will be located at a SkyLynx point-of-presence ("POP") for
higher reliability and security. This solution allows the customer to own
its own Web server without having to maintain and manage the data center
environment. The NOC will have the necessary infrastructure to support
high performance corporate servers, and the Company's network engineers
will administer and maintain the customers' hardware and software in a
secure and protected environment.
E-Mail Services - SkyLynx provides and supports Internet mail
services. SkyLynx will support customer's e-mail service with domain
names, i.e., [email protected] as well as without a domain, i.e.,
[email protected] Mail services may operate on customer premise servers or
on servers provided by SkyLynx at the NOC.
System Integration Services - The Company can provide systems
integration services to customers, specifically in the area of high-speed
Internet and intranet/extranet connectivity. The Company's services
include but are not limited to:
- Router installation and configuration services
- Virtual Private Network building using the Internet as the
client's WAN backbone
- Windows NT Server and Exchange Server installation and
configuration services
- Proxy Server and Internet firewall installation and configuration
Security Services - Security solutions are a vital component for most
businesses connected to the Internet. These solutions, which include
firewalls, packet filters and proxy servers, give the customer (i) an
ability to deter intruders from accessing its corporate network, (ii)
authentication of users attempting to gain access, and (iii) encryption
services, providing secured transmission of company data through the
Internet. Through strategic partnerships, the Company plans to offer a
comprehensive set of security products.
Virtual Private Networks ("VPN's") - Many companies today have private
data communication networks, which are often referred to as wide area
networks ("WANs") and built on expensive leased lines, to transfer
proprietary data between office locations. The Internet offers companies a
cost-effective replacement alternative to WANs through VPNs, which are
meant to provide secure transmission of private Internet Protocol ("IP")
traffic through the Internet. Additionally, many companies require that
their employees have remote access to these private networks from home or
while traveling. VPN products are available in hardware, software, and
firewall formats. VPN products are also the basis for offering intranet and
extranet services. Intranets are corporate/organizational networks that
rely on Internet-based technologies to provide secure links between
corporate offices. Extranets expand the network to selected business
partners through secured links on the Internet. Increasingly, companies are
finding that intranets and extranets can enhance corporate productivity
more easily and less expensively than proprietary systems.
Electronic Commerce Solutions - Electronic commerce provides customers
with the ability to sell products and services on the Internet. The Company
plans to provide e-commerce solutions via strategic partnerships to its
customers. The Company also intends to provide enhanced e-commerce hosting
environments, as well as to make use of third party software development
partners to provide certain turnkey e-commerce applications, such as online
catalogs.
Professional Services - The Company's target customers typically do
not have the internal resources or personnel to design and maintain
Internet services. As more businesses utilize the Internet for mission
critical applications, the Company expects its customers to rely on their
ISP for support of many of their information technology applications. As a
result, the Company believes it will be increasingly important for ISPs to
offer on-site, technical consulting to customers. The Company will offer a
full complement of professional services to its customers, including
network and system design, security system needs analysis and
implementation, virtual private network design and implementation, and
other Internet-related consulting projects. The Company intends to invest
in additional professional service capabilities and/or partner with leaders
in respective technology areas as required to provide customers with
turnkey Internet solutions.
Other Enhanced Products and Services - Customers are increasingly
seeking to tailor the use of the Internet to their business. SkyLynx
intends to serve these needs through the packaging and configuration of
third party applications, such as IP telephony (which permits users to make
voice calls on the Internet), Internet faxing, Internet audio and video
conferencing solutions and other applications that may be developed. As
businesses commit to using the Internet, the Company believes that the
advanced applications product category will continue to expand, offering
additional revenue opportunities.
Target Market, Sales and Marketing
Target Markets. SkyLynx plans to offer service to three distinct
customer segments: small to medium sized businesses, SOHO, and MDU's.
Small and Medium-Sized Business. The small to medium size business
segment is becoming increasingly reliant on Internet access to
significantly enhance communications among geographically distributed
offices and employees as well as with customers and suppliers. In addition,
the Internet presents a compelling profit opportunity for businesses as it
enables them to reduce operating costs, access valuable information and
reach new markets. As a result, businesses increasingly are utilizing the
Internet for mission critical applications such as sales, customer service
and project coordination.
The market opportunity for small to medium sized business Internet
connectivity and enhanced Internet services is large and is currently
under-penetrated. The table below provides an estimate of the penetration
of Internet access in the business market. This estimate is very
conservative because businesses of all types and sizes are counted; for
example, a company as large as IBM and a local dry cleaning store are each
counted equally in this estimate.
Industry analysts have reported that small and medium sized businesses
represent a potential market of over seven million customers in the U.S.,
and use of the Internet by this market segment is expected to grow
substantially from its current low level of market penetration. Total ISP
revenues in the United States are projected to grow at a 28.4% compound
annual growth rate ("CAGR") from $10.7 billion in 1998 to $37.4 billion in
2003, according to IDC.
In addition to Internet connectivity, business customers increasingly
are seeking a variety of enhanced products and applications to take full
advantage of the Internet. Value-added services or enhanced Internet
services are projected to grow at a 34.0% CAGR from $3.0 billion in 1998 to
$12.9 billion in 2003 according to IDC. As business users of the Internet
adopt enhanced services, they also require additional bandwidth to support
their expanded use of the Internet.
In addition, business users are increasingly reliant on enhanced
product offerings that address their specific business needs on a cost-
effective basis, allowing them to compete with larger companies. For
example, IDC estimates Worldwide Shared Web hosting revenues will grow from
$316 million in 1998 to over $3.4 billion in 2002.
SOHO and Corporate Telecommuters. The Company may target a segment of
the SOHO and telecommuter market with a strong need for high-speed,
bandwidth and mobility. Internet access is both a communications lifeline
and productivity tool for this segment. E-mail and file transfer
capabilities enable remotely located employees and small offices immediate
and cost-effective access to information needed to conduct daily business.
SOHO workers and telecommuters need high-speed access, but they also need
it at a reasonable cost. Estimates of the numbers of persons who work at
home are large, and this trend is expected to continue its rapid growth.
Multi-Dwelling Units. The Company may target apartment and
condominium complexes because of the large number of potential customers in
each building that may be serviced cost effectively through its two-way
wireless broadband technology. The Company's strategy is to profitably
install reception equipment on multi-unit buildings within its markets via
revenue sharing agreements with building owners. The Company's wireless
only technology is competitively advantaged from a time-to-deployment
perspective versus wired technologies because it can be implemented much
faster, since it would not involve any site surveys, tearing down walls or
installation of wires. It is also economically attractive versus wired
technology, since the installation of one receiver, placed on the roof of a
building, may service an entire complex. Once one unit is installed, it
can easily be modified to service other customers in the same building from
the same antenna. The Company will pursue this segment by marketing
directly to building owners and construction companies and through
strategic alliances with other provider of services to this market.
Sales and Marketing. The Company plans to employ distribution
capabilities through both a direct sales force and indirect channels. The
direct sales force will offer a core base of technically competent, locally
based and experienced Internet sales representatives. SkyLynx will offer
its products and services through a consultative sales approach which makes
use of local technical talent to understand customer applications and
provide bundled Internet applications solutions consisting of hardware,
software, access and value-added services. SkyLynx believes that this
localized approach will allow it to provide end-to-end customer solutions
and ongoing support.
Direct Sales. SkyLynx plans to employ a direct sales force to focus
on targeted business segments. These local sales representatives will have
strong Internet technical background and understand the local
telecommunications tariffs as well as the needs of their local business
community. Additionally, these representatives will be familiar with local
companies. Because they are locally based, these sales representatives are
able to meet face to face with prospective customers to discuss their
Internet needs and technical requirements and to develop tailored
solutions. The Company hopes to attract, hire and train high quality,
motivated sales representatives that have the necessary technical skills,
consultative sales experience and knowledge of their local markets. At the
local level, direct marketing techniques will be employed to target
customer segments that would achieve substantial benefit from the cost
effective wireless solution and business applications afforded by the
Internet through SkyLynx. Some direct marketing tactics will include
direct mail, telemarketing, seminars and trade-show participation.
Resellers and Indirect Sales. The Company also plans to employ a
reseller and referral program that permits the regional operating units to
adapt a formal indirect distribution program to markets. SkyLynx believes
indirect channels will be a significant contributor to its growth. The
Company has established reseller arrangements with several Internet related
companies. The reseller program will offer reseller partners an up-front
bonus for each new customer and the ability to share in the on going
revenue stream of customers they bring to SkyLynx. Reseller partners
include system integrators, value-added resellers and other companies that
have an established relationship with the prospective customer base and a
sales force capable of selling Internet services as a part of the
reseller's suite of services. Referral partners, including organizations
such as local computer companies, IT consultants, Web designers,
advertising agencies or property managers, are another source of customer
leads. The referral program targets organizations that are less capable of
or less interested in selling Internet services or where Internet services
fall outside their core business interests. The benefits of these programs
to SkyLynx include greater market reach without fixed overhead costs and
the ability to use the partners to assist in the delivery of complete
solutions to meet customer needs.
Building Awareness and Name Recognition. The Company's goal is to
achieve recognition as a leading provider of affordable high-speed Internet
connectivity and enhanced Internet services while maintaining the market
awareness developed over time by acquired ISPs by attaching the SkyLynx
name to the local ISP name (e.g. "Local Name - a SkyLynx Company"). The
Company will employ several communication strategies to raise the awareness
and visibility of the SkyLynx name to its target market, including radio,
outdoor, trade magazine and public relations efforts.
Operations
Network Management. Network management is an integral part of the
total service offering from SkyLynx. The Company will manage its network
on a real-time basis using management, monitoring and tracking systems
running at the Company's NOC. The Company will deploy a regional NOC which
reports to a centralized Network Management Center ("NMC") in Denver,
Colorado. The NOC will monitor the local "wireless clouds," POP's, cell
sites, antennas, routers and quality of service. Each device on the
network is monitored to verify a working condition. In the event that a
device in the network is not functioning property, a warning signal is sent
to the NMC operator.
Network Protocols. The SkyLynx network supports the following network
protocols: Internet Protocol ("IP"), Transmission Control Protocol
("TCP"), User Datagram Protocol ("UDP"), Internet Control Message Protocol
("ICMP") and Raster Image Processor ("RIP").
Wireless Frequencies. The Company expects that its wireless networks
will be capable of supporting several frequencies at or below 5 GHz.
Support Services. In addition to its network and network monitoring
capability, SkyLynx plans to implement three critical support services
designed to increase operational efficiencies and enhance the quality,
consistency and scalability of the Company's services. These support
services will include: (i) customer technical support and service, (ii)
financial information management through a central, standardized accounting
system, and (iii) a centralized billing and collections system. The
strategy of creating a partnership between local support teams and the
Company's national support services will enable the Company to capture
economies of scale, improve quality and accuracy, and increase
productivity, while allowing local personnel to focus on relationships with
customers.
Customer Technical Support. The Company expects that its customer
care services will combine the responsiveness and on-site capabilities of
local ISP presence with the scale economies of a centralized customer
support center in order to deliver customer care to businesses. While
local, independent ISPs bring the benefits of understanding customer needs
and providing hands-on support demanded by their customers, they lack the
ability to cost-effectively scale internal resources to independently
support their growing customer base. The Company's customer support
center, to be located in Denver, will enable SkyLynx to provide 24 x 7 x
365 responsiveness while maintaining the ability to provide on-site
installation assistance, hands-on troubleshooting and access to local
experts who understand the customer's business.
Financial Information Management. The Company plans to integrate
acquired ISPs into a centralized financial reporting system and
payroll/human resources system, in order to provide a central, standardized
accounting system. These systems will enable the Company to cost
effectively increase the productivity and quality of administrative support
by standardizing operational systems such as payroll, payables, purchasing
and financial reporting.
Billing and Collections. The Company plans to implement a centralized
billing solution system which will offer high quality, flexibility, cost
effectiveness and scalability.
Competition
The market for Internet connectivity and related services is extremely
competitive. The Company anticipates that competition will continue to
intensify as the use of the Internet grows. The tremendous growth and
potential market size of the Internet access market has attracted many new
start-ups as well as existing businesses from different industries.
Current and prospective competitors include, in addition to other national,
regional and local ISPs, long distance and local exchange
telecommunications companies, cable television companies, direct broadcast
satellite and wireless communications providers, and online service
providers. The Company believes that a reliable national network,
knowledgeable salespeople and the quality of technical support currently
are the primary competitive factors in the Company's target market, and
that price is usually secondary to these factors.
ISPs. According to Boardwatch magazine's directory of Internet
Service Providers, there are currently over 4,000 ISPs in the United
States, consisting of national, regional and local providers. The
Company's current primary competitors include other ISPs with a significant
national presence and which focus on business customers, such as Verio,
UUNet, GTE Internetworking (formerly BBN), PSINet, Concentric Networks and
DIGEX. While the Company believes that its level of local service and
support and target market focus distinguish it from these competitors, some
of these competitors have significantly greater market presence, brand
recognition, and financial, technical and personnel resources than the
Company, and have extensive coast-to-coast Internet backbones. The Company
also competes with unaffiliated regional and local ISPs in its targeted
geographic regions.
Telecommunications Carriers. All of the major long distance companies
(also known as interexchange carriers or IXCs), including AT&T, MCI, and
Sprint, offer Internet access services and compete with the Company. The
recent sweeping reforms in the federal regulation of the telecommunications
industry have created greater opportunities for Local Exchange Carriers
("LECs") to enter the Internet connectivity market. In order to address
the Internet connectivity requirements of the current business customers of
long distance and local carriers, the Company believes that there is a move
toward horizontal integration through acquisitions of, joint ventures with,
and the wholesale purchase of connectivity from, ISPs. The
WorldCom/MFS/UUNet consolidation, the NETCOM/ICG merger, the
Intermedia/DIGEX merger and GTE's acquisition of BBN are indicative of this
trend. Accordingly, SkyLynx expects that it will experience increased
competition from the traditional telecommunications carriers. Many of
these telecommunications carriers, in addition to their substantially
greater network coverage, market presence, and financial, technical and
personnel resources, also have large existing commercial customer bases.
Furthermore, telecommunications providers may have the ability to bundle
Internet access with basic local and long distance telecommunications
services. Such bundling of services may have an adverse effect on the
Company's ability to compete effectively with the telecommunications
providers and may result in pricing pressure on the Company that would have
an adverse effect on the Company's business, financial condition and
results of operations. The Company believes that its local presence and
its strong technical and data-oriented sales force is an important feature
distinguishing it from the centralized voice-oriented sales approach
typified by the current Internet connectivity services offered by the IXCs
and LECs.
Cable Companies, Direct Broadcast Satellite and Wireless
Communications Companies. Many of the major cable companies have announced
that they are offering Internet connectivity, relying on the viability of
cable modems and economical upgrades to their networks. MediaOne Group and
TCI have recently announced the availability of Internet cable service to
their residential customers in select areas. However, the cable companies
are faced with large-scale upgrades of their existing plant equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. In addition, their current subscriber
base and market focus is residential, requiring that they partner with
business-focused providers or undergo massive sales and marketing and
network development efforts in order to target the business sector. Several
announcements also have recently been made by other alternative service
companies approaching the Internet connectivity market with various
wireless terrestrial and satellite-based service technologies. These
include Hughes Network System's DirecPC product, which provides high-speed
data through direct broadcast satellite technology, CAI Wireless System's
announcement of an Multi-Point Multi-Channel Distribution System ("MMDS")
wireless cable operator launching data services via 2.5 to 2.7 GHz and
high-speed wireless modem technology, Cellularvision's announcement that it
is offering Internet access via high-speed wireless Local Multi-Point
Distribution System ("LMDS") technology, Winstar, which currently offers
high-speed Internet access to business customers over 38 GHz spectrum, and
Teligent, which currently offers high-speed Internet access to business
customers over 24 GHz spectrum.
Online Service Providers. The predominant online service providers,
including America Online, CompuServe, Microsoft Network, and Prodigy, all
provide local Internet access. The Company believes it competes to a
lesser extent with these online service providers.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high-speed Internet access by cable
and telephone companies through new technologies such as cable modems and
xDSL. While these providers have initially targeted the residential
consumer, it is likely that their target markets will expand to encompass
the Company's targeted markets, which may significantly affect the pricing
of the Company's service offerings.
Properties
The Company's corporate headquarters are located at 600 South Cherry
Street, Suite 305, Denver, Colorado, where the Company leases approximately
2,500 square feet of office space. The Company's lease agreement commenced
February 1, 1999, and is for a term of two years. Other office properties
include Fresno, California, 4,000 square feet; Tampa, Florida, 2,500 square
feet; Sarasota, Florida, 4,000 square feet; Eugene, Oregon, 1,800 square
feet; and Washington, D.C., 500 square feet. The Company believes that its
existing facilities are adequate for the foreseeable future.
Employees
As of April 1, 1999, the Company employed approximately 35 people,
including full-time and part-time employees at its corporate headquarters,
network operations and customer support center. The Company considers its
employee relations to be good. None of the employees of the Company are
covered by a collective bargaining agreement.
Investment Banking Agreement
In October 1998, the Company engaged Gerard Klauer Mattison & Co.,
Inc. ("GKM") to serve as financial advisor to the Company, to assist the
Company in connection with identifying acquisition opportunities as well as
sources of capital and consummating any transactions resulting therefrom.
In connection with its agreement with GKM, the Company paid GKM a non-
refundable fee of $25,000, which is deductible from any expense allowance
otherwise payable to GKM. The agreement also provides for the future
payment of fees to GKM in the event the Company undertakes an offering of
its securities or consummates a business combination with a party
identified by GKM. In addition, the agreement contemplates, although
without a binding commitment, that GKM will serve as managing underwriter
of an initial public offering to be undertaken by the Company during 1999,
subject to market and other conditions. There can be no assurance that an
underwriting will occur, or, if it does, the timing or amount thereof.
Recent Financings
Since December 31, 1998, the Company has undertaken several private
financings to provide additional working capital. All of these financings
were undertaken without registration under the Securities Act in reliance
upon an exemption from such registration requirements contained in Section
4(2) thereof and Regulation D promulgated thereunder. In each transaction,
the Company has granted customary registration rights to the investors, all
of whom acquired "restricted securities" within the meaning of the
Securities Act and Rule 144 thereunder.
In January 1999, the Company issued and sold to one accredited
investor 263,158 Units at a price of $1.90 per Unit, for aggregate
consideration of $500,000. Each Unit sold in this offering consisted of
one share of the Company's Common Stock, one Warrant exercisable for three
years to purchase one additional share of Common Stock at a price of $6.00
per share, and one Warrant exercisable for three years to purchase an
additional share of Common Stock at an exercise price of $8.00 per share.
In January 1999, the Company also completed the sale to one accredited
investor of 600 shares of Series B Convertible Preferred Stock, 15,000
shares of Common Stock and Warrants exercisable to purchase, in the
aggregate, 120,000 shares of Common Stock at an exercise price of $3.00 per
share. The aggregate purchase price for the foregoing securities was
$600,000.
Holders of the Series B Preferred Stock are entitled to receive
payment of dividends at an annual rate of 8% per share of Preferred Stock,
accruing in arrears from the date of first issuance, payable quarterly
either in cash or in the form of shares of the Company's Common Stock
valued at market price.
The outstanding shares of Series B Preferred Stock have a liquidation
preference equal to their Stated Value of $1,000 per share. Holders of the
Series B Preferred Stock have no right to vote except on limited matters
required by the Colorado Business Corporations Act ("CBCA").
The Company has the right to redeem the outstanding shares of Series B
Preferred Stock only in the event the public trading price of the Company's
Common Stock is equal to or less than $2.00 per share for ten or more
consecutive trading days. If the Company elects to redeem the shares, the
redemption price will be the sum of (i) the Stated Value of $1,000 per
share plus (ii) the amount of all accrued and unpaid dividends, multiplied
by a percentage ranging from 117.5% to 125%, depending upon the date of
redemption. Finally, the shares of Series B Preferred Stock are
convertible into shares of the Company's Common Stock at a conversion value
equal to 80% of the market price of the Company's Common Stock on the date
of conversion, but in no event more than $4.00 per share of Common Stock.
The Company has granted certain registration rights to the holder of
the Series B Preferred Stock requiring the Company to prepare and file a
Registration Statement covering all of the securities purchased by the
investor no later than April 15, 1999.
The Company is currently undertaking a private offering of a minimum
of 250,000 shares and a maximum of 2,000,000 shares of Series C Convertible
Preferred Stock (the "Series C Preferred Stock") at a private offering
price of $4.00 per share (the "Current Offering"). The Current Offering is
being undertaken by the Company through GKM which is serving as placement
agent. Each share of Series C Preferred Stock is convertible into one
share of the Company's Common Stock. In addition, holders of the Series C
Preferred Stock are entitled to receive payment of dividends at the annual
rate of 10% per annum, accruing in arrears from the date of first issuance,
payable through the issuance of additional shares of Series C Preferred
Stock valued at $4.00 per share. The outstanding shares of Series C
Preferred Stock have a liquidation preference equal to their stated value
of $4.00 per share. Holders of Series C Preferred Stock have the right to
exercise one vote for every share of Series C Preferred Stock outstanding,
voting as a group with holders of the Company's outstanding shares of
Common Stock and Series A Preferred Stock. The Preferred Stock is not
redeemable by the Company and holders of the Preferred Stock have no right
to compel the redemption by the Company of any of the outstanding shares of
Series C Preferred Stock. Unless sooner converted by the holder, all
outstanding shares of Series C Preferred Stock are automatically
convertible into Common Stock upon the third anniversary of the date of
issue.
As of April 8, 1999, the Current Offering was continuing and the
Company had sold 325,250 shares, or $1,301,000 in aggregate gross proceeds.
Acquisitions
The Company has adopted a strategy to aggressively acquire ISPs with
an established wired customer base that may in some cases be converted to
the Company's wireless network in the future. This strategy is designed to
enhance the Company's current income stream as well as solidify and expand
the Company's customer base for future conversion to wireless technology.
Effective February 2, 1999, the Company consummated an Asset Purchase
Agreement pursuant to which it acquired substantially all of the assets of
Interaccess Corporation, an ISP operating in the Tampa, Florida area and
serving approximately 250 wired customers, the majority of which are
business customers. The purchase price of this acquisition was $390,770,
consisting of both cash and shares of the Company's Common Stock.
Effective March 24, 1999, the Company consummated an Asset Purchase
Agreement pursuant to which it acquired substantially all of the assets of
ContiNet, LLC of Eugene, Oregon. ContiNet, LLC operates an ISP in the
Eugene, Oregon area and serves approximately 1,100 wired customers. The
purchase price for the assets was $497,540.77, payable in combination of
cash, assumption of debt and shares of the Company's Common Stock.
Effective February 12, 1999, the Company entered into a Letter of
Intent to acquire substantially all of the assets of Net Asset, LLC, an ISP
operating in the Fresno, California area and serving approximately 450
wired customers, the majority of which are business customers. The
purchase price for this acquisition will be approximately $1,175,000 in
cash. The Letter of Intent contemplates the execution and delivery of a
formal definitive agreement, the consummation of which is subject to
numerous conditions, including the completion of satisfactory due
diligence.
Effective March 1, 1999, the Company entered into a Binding Letter of
Intent to acquire substantially all of the assets of SeaTac.Net, an ISP
operating in the Seattle, Washington area serving approximately 900
customers. The purchase price for this acquisition will be approximately
$400,000 in cash and stock. The Binding Letter of Intent contemplates the
execution and delivery of a formal definitive agreement, the consummation
of which is subject to numerous conditions, including the completion of
satisfactory due diligence.
The Company has also entered into Binding Letters of Intent to acquire
substantially all of the assets of two additional ISPs serving
approximately 6,500 customers combined. These Binding Letters of Intent
contemplate the execution and delivery of formal definitive agreements, the
consummation of each of which is subject to numerous conditions, including
the completion of satisfactory due diligence.
The Company continues to evaluate additional acquisitions in
accordance with the foregoing strategy. However, except as described
herein, there exist no other agreements, understandings or arrangements for
any additional material acquisitions.
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 Network
Systems Technologies, Inc. ("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 (the "Tampa Litigation"). In their responsive pleading,
NST and Moura have asserted counterclaims against the Company similar to
those asserted in the California civil action described below.
If necessary, the Company intends to fully prosecute its claims
against NST and Moura and defend against the counterclaims which have been
asserted. 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. While it is not possible to
predict the outcome of such proceedings with certainty, in the opinion of
the Company's management, all such proceedings are adequately covered by
insurance or, if not so covered, should not materially result in any
liability which would have a material adverse effect on the financial
position, liquidity or results of operations of the Company.
Network Systems Technologies, Inc. vs. SkyLynx Communications, Inc.,
et. al., Superior Court of the Court of California in and for the County of
Santa Clara, Case No. CV-778872. In this matter, filed on December 22,
1998, the Plaintiff has asserted claims for infringement, misappropriation
of trade secrets, breach of written agreements, breach of oral agreement
and common counts. These claims appear to arrive out of the same common
nexus of operative facts as the litigation brought by the Company against
NST and pending in the United States District Court for the Middle District
of Florida, Tampa Division, as previously disclosed. In addition, certain
claims have been brought against individual defendants Jeffery Mathias,
Eric Prigge and Kenneth Sartain, persons who were formerly employed by NST
and who are currently or were employed by the Company. All claims brought
in this case have been removed to and refiled in the Tampa Litigation.
The Company is currently involved in a legal proceeding 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. The case
arises 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. 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.
There is pending litigation involving Cable Corporation of America
("CCA"), and its wholly owned subsidiary Paradise Cable Corporation
("Paradise"). The Company, and certain of its affiliates are involved in
several pending civil proceedings arising out of past business transactions
with CCA and Paradise. Those civil actions are identified below. All of
the various claims and counterclaims pending in these related civil actions
are addressed and are expected to be the subject of resolution in a
stipulated Plan of Reorganization which has been developed in a Chapter 11
Bankruptcy proceeding in which CCA is the Debtor, currently pending in the
United States Bankruptcy Court for the Middle District of Florida, Tampa
Division, Case No. 98-4207-8B1 (the "Bankruptcy Case"). Subject to
confirmation of the Plan of Reorganization, the Company will have the
option to purchase substantially all of the assets of Paradise in
consideration of shares of the Company's Common Stock (not to exceed
300,000 shares) and nominal cash consideration, and all of the related
pending litigation will be fully resolved, settled and dismissed. While
there can be no assurance that these related matters will ultimately be
resolved in accordance with the foregoing, the Company believes that it is
probable that the Plan of Reorganization will be confirmed.
1. Cable Acquisition Corp. v. Cable Corporation of America. This
matter has been abated pending the completion and adoption of the
Creditor's Plan to be filed in the U.S. Bankruptcy Court, Middle District
of Florida, Tampa Division, Case No. 98-4207-8B1. The Defendants have
filed a counterclaim in this action. The counterclaim was not listed as an
asset of the bankrupt in the Chapter 11 proceeding.
2. SkyLynx Communications, Inc. v. Paradise Cable, Inc., et al,
Case No. 98-2831-CA-01-Circuit Court In and For Sarasota County, Florida.
This is a suit against the Defendants for the issuance of a bad check in
the amount of $71,490.40 and no counterclaim has been filed. None is
expected. This matter has been abated pending the completion and adoption
of the Creditor's Plan to be filed in the U.S. Bankruptcy Court, Middle
District of Florida, Tampa Division, Case No. 98-4207-8B1.
3. Paradise Cable, Inc. v. SkyLynx Communications, Inc., et al, Case
No. 98-4166-CA-01 Circuit Court In and For Sarasota County, Florida. This
is a multicount complaint against SkyLynx, Gary L. Brown and Kenneth L.
Marshall alleging damages for tortious interference with a contract between
the Plaintiff and Network System Technologies, Inc.; Intentional
Interference with an Advantageous Relationship; Breach of Fiduciary Duty
against Marshall; Intentional Interference with an Advantageous
Relationship as to alleged employment of Marshall; and an alleged Civil
Conspiracy against Marshall, SkyLynx and Brown. This matter has been
abated as described above. This alleged asset was not claimed by CCA and
Paradise in the bankruptcy proceedings.
ITEM 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1998 to a vote of security holders.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price
The Common Stock of the Company is traded over the counter and quoted
on the OTC Electronic Bulletin Board ("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 April 12, 1999. 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:
BID ASK
HIGH LOW HIGH LOW
1998:
Third Quarter $5.250 $2.500 $6.000 $3.000
Fourth Quarter $4.250 $2.125 $4.500 $2.375
1999:
First Quarter $7.340 $2.500 $8.000 $2.750
Second Quarter (through
April 12, 1999) $9.125 $6.940 $9.375 $7.250
The bid and ask prices of the Common Stock on April 12, 1999 were
$8.375 and $8.50, respectively, as quoted on the Bulletin Board. As of
April 12, 1999, there were approximately 176 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 Common Stock. The Company's Board of Directors does not
currently intend to pay any such cash dividends on its Common Stock in the
future.
The Company has issued and outstanding an aggregate of 1,061,332
shares of Series A Convertible Preferred Stock ("Series A Preferred
Stock"), having a stated value of $4.00 per share. Holders of the
outstanding shares of Series A Preferred Stock are entitled to receive a
dividend equal to 10% per annum accruing from the date of first issuance.
As of December 31, 1998, an aggregate of $39,750 in accrued and unpaid
cumulative dividends are due and owing to holders of outstanding shares of
Series A Preferred Stock.
In addition, the Company has outstanding an aggregate of 600 shares of
Series B Convertible Preferred Stock (the "Series B Preferred Stock"),
having a stated value of $1,000 per share. Holders of the Series B
Preferred Stock are entitled to receive payment of dividends at the annual
rate of 8% per share of Series B Preferred Stock, accruing in arrears from
the date of first issuance, payable quarterly either in cash or in the form
of shares of the Company's Common Stock valued at market price. Such
shares of Series B Preferred Stock were issued in January 1999;
accordingly, no dividends had accrued or were outstanding as of December
31, 1998.
ITEM 6. 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 Annual Report 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 fund its working capital
requirements. The Company has generated only minimal revenues from
operations to date. During the year ended December 31, 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. In this offering, the Company sold an
aggregate of 988,750 Units representing proceeds of approximately
$3,740,407, net of offering costs.
In January 1999, the Company issued and sold to one accredited
investor 263,158 units at a price of $1.90 per unit, for aggregate
consideration of $500,000. Each unit sold in this offering consisted of
one share of the Company's Common Stock, one Warrant exercisable for three
years to purchase one additional share of Common Stock at a price of $6.00
per share, and one Warrant exercisable for three years to purchase one
additional share of Common Stock at a price of $8.00 per share.
In January 1999, the Company also completed the sale to one accredited
investor of 600 shares of Series B Convertible Preferred Stock, 15,000
shares of Common Stock and Warrants exercisable to purchase, in the
aggregate, 120,000 shares of Common Stock at an exercise price of $3.00 per
share. The aggregate purchase price for the foregoing securities was
$600,000.
At December 31, 1998 and December 31, 1997, the Company had total
assets of $2,407,603 and $1,212,659, respectively. The assets at December
31, 1998 consisted principally of cash of $512,925, prepaid expenses and
other current assets of $20,135, property and equipment of $1,632,370, net
of depreciation, and intangible assets of $89,195, net of accumulated
amortization, and other assets of $152,978.
Total liabilities at December 31, 1998 and December 31, 1997 were
$1,139,479 and $509,723, respectively. The liabilities at December 31,
1998 consisted primarily of accounts payable of $360,176, accrued
liabilities of $363,138, and deposits on unissued shares of Common Stock
and Preferred Stock of $411,160.
Stockholders' equity at December 31, 1998 and December 31, 1997 was
$1,273,129 and $711,936, respectively. The Company will require
substantial additional capital for the acquisition of additional ISPs as
well as for the continued deployment of its current ISP networks. The
precise timing of the Company's future capital requirements cannot be
accurately 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 and there can be no
assurance that such commitments can be obtained, and if so, on terms
acceptable to the Company. 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 capital 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 operations.
Results of Operations
For the year ended December 31, 1998, the Company had revenues from
operations of $7,898, consisting primarily of subscriber revenues received
for Internet access services provided. The Company had no revenues from
continuing operations for the year ended December 31, 1997.
Selling, general and administrative expenses for the year ended
December 31, 1998 increased to $5,300,834 from $8,938 for the period from
July 29, 1997 (inception) to December 31, 1997. The increase was due to
the Company's continued activities, which consisted primarily of efforts to
purchase or otherwise acquire wireless frequencies for use in the
development and deployment of 2-way wireless data networks, development and
commercialization of the Tampa and Fresno networks, and efforts to purchase
or otherwise acquire ISPs in selected markets. These activities resulted
in a net loss for the year of $5,274,832.
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 2017. 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." The Company adopted SFAS 128 for the period
from inception (July 29, 1997) to December 31, 1997. SFAS 128 established
new standards for computing and presenting earnings per share ("EPS").
Specifically, SFAS 128 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.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS
130, "Reporting Comprehensive Income." SFAS 130 established 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. 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. The adoption of SFAS 130 did not have a material
effect on the Company's 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. The adoption of SFAS 131 did not have a
material effect on the Company's 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. During 1998, 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 upgrades are scheduled to be
completed in the third quarter of 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. As of December 31,
1998, the Company had not incurred any expenses related to year 2000
compliance. The Company does not have a formal contingency plan, but
believes it will be able to create one in the third quarter of 1999, if it
is determined that any systems are at risk of being year 2000 non-
compliant. However, it cannot be assured that the remedial actions being
implemented will be completed by the time necessary to avoid year 2000
problems or that the cost, which is based on the Company's estimates, will
not be material. Although the Company is assessing the reliability of
their year 2000 compliance, disruptions of the computer systems of banks,
vendors, customers or other third parties, whose systems are outside the
Company's control, could impair the Company's ability to obtain necessary
equipment or to sell to or service their customers. Disruptions of the
computer programs or the computer systems of the Company's banks, vendors,
or customers, as well as the cost of avoiding such disruption, could have a
material adverse effect upon the Company's financial condition and results
of operations.
ITEM 7. FINANCIAL STATEMENTS
1. Report of Independent Certified Public Accountants
2. Consolidated Balance Sheet dated December 31, 1998
3. Consolidated Statements of Operations for the period from inception
(July 29, 1997) to December 31, 1997, and for the year ended December
31, 1998.
4. Consolidated Statements of Stockholders' Equity.
5. Consolidated Statements of Cash Flows for the period from inception
(July 29, 1997) to December 31, 1997 and the year ended December 31,
1998.
6. Notes to consolidated financial statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective December 31, 1998 the Company's Board of Directors approved
a change in the Company's independent accountant. Cordovano and Harvey,
P.C. had been the independent accountant who had been previously engaged as
the principal accountant to audit the Company's financial statements up
until December 31, 1997. Cordovano and Harvey, P.C.'s reports covered the
year ended December 30, 1997 and the period from inception (September 23,
1996) to December 31, 1996 of SkyLynx Communications, Inc. (formerly Allied
Wireless, Inc.) as well as the period of inception (July 29, 1997) to
December 31, 1997 for SkyLynx Communications, Inc. (formerly SkyLynx
Express Holdings, Inc.). None of the reports of Cordovano and Harvey, P.C.
on the financial statements of the Company for periods reported on by
Cordovano and Harvey, P.C. contained any adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. Nor have there been at any time any disagreements
between the Company and Cordovano and Harvey, P.C. on any matter of
accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
The Company retained the accounting firm of Arthur Andersen, LLP to
serve as the Company's independent accountant to audit the Company's
financial statements. This engagement was effective December 31, 1998.
Prior to its engagement as the Company's independent accountant, Arthur
Andersen LLP had not been consulted by the Company either with respect to
the application of accounting principles to a specific transaction or the
type of audit opinion that might be rendered on the Company's financial
statements or on any matter that was the subject of any prior disagreement
between the Company and its previous certifying accountant.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The name, position with the Company, age of each Director and
executive officer of the Company is as follows:
Name Age Position(1)
Jeffery A. Mathias 39 President, Chief Executive Officer and Director
Gary L. Brown 52 Director, Chairman of the Board
Frank P. Ragano 70 Director
Kenneth L. Marshall 59 Secretary and General Counsel
James E. Maurer 38 Chief Financial Officer
Steven R. Jesson 50 Vice President of Market Integration
Ned Abell 44 Vice President, Mergers and Acquisitions
Vincent Gordon 42 Vice President, Corporate Operations
(1) There exists no family relationship between any officer or director.
Each director is elected to serve for a term of one year until a
successor is duly elected and qualified.
The Board of Directors
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 as
a registered securities principal. Mr. Brown attended Central Missouri
State University from 1967 to 1972 and currently resides in Sarasota,
Florida.
JEFFERY A. MATHIAS serves as President and Chief Executive Officer
(CEO) of SkyLynx Communications, Inc. (See below.)
FRANK P. RAGANO, Major General, U. S. Army (RET) was, until 1999,
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) from
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 and Chairman and
CEO of BEI Defense Systems Company.
Executive Officers
JEFFERY A. MATHIAS - 39, President and CEO
Mr. Mathias has 14 years 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 was also
formerly the Director of International Development and a Director of
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. Mr. Mathias
graduated from Indiana University with an MBA. He also holds a BSEE from
Rose-Hulman Institute of Technology.
JAMES E. MAURER - 38, Chief Financial Officer
Mr. Maurer has over 10 years of financial and business development
experience, the last five of which have been spent in wireless
telecommunications. He has taken active roles in the capital formation of
both start-up ventures and publicly held companies, completing both private
and public equity and debt financing. He has also completed numerous joint
ventures and acquisitions in the wireless telecommunications industry.
Since 1997, Mr. Maurer has been Director of Finance for Formus
Communications, Inc., a company formed in 1996 to acquire LMDS spectrum in
international markets, and in those markets to operate fixed wireless
broadband networks offering high-speed, high bandwidth telecommunications
services, including data transport and Internet access. During his tenure,
Formus raised over $85 million in equity venture capital. Prior to joining
Formus, Mr. Maurer was Vice President of Finance from 1995 to 1997 for
Wireless Holdings International, a startup venture pursuing wireless cable
television projects in Europe. In 1994 and 1995, Mr. Maurer worked for
American Telecasting, Inc. as its Director of Financial Planning and
Analysis. Mr. Maurer holds a Bachelor of Arts in Economics from Harvard
University and also a Master of Science in Management from the MIT Sloan
School of Management.
NED ABELL - 44, Vice President, Mergers and Acquisitions
Mr. Abell has substantial experience in mergers and acquisitions in
the wireless industry and has broad senior management experience with
wireless telecommunications companies as well as prior financial and
operational experience. Mr. Abell has most recently been responsible for
the corporate development and merger and acquisition activities of American
Telecasting, Inc. Prior to American Telecasting, Mr. Abell was a Treasury
Analyst in Corporate Development with United Cable Television Corporate.
Mr. Abell holds a Bachelor of Science Degree in Business Administration
from the University of Colorado.
STEVEN R. JESSON - 50, Vice President, Market Integration
Mr. Jesson operates a resource center in the San Francisco Bay area,
where his primary role will be to establish a customer care center,
coordinate the process of integrating acquired ISPs and develop a
comprehensive network between the Company and various Value Added Resellers
and local ISPs. From 1986 to 1997, Mr. Jesson worked in various positions
at Fidelity Brokerage Services, Inc., a wholly owned division of Fidelity
Investments (FMR Corp.). As a Branch Manager he opened up new offices in
St. Petersburg, Florida and Honolulu, Hawaii. He rose to the Senior VP
position with responsibility over 19 offices and over 300 employees. Mr.
Jesson most recently worked with Wedbush Morgan Securities as Vice
President/Sales Office Manager for the SF Bay Area. Mr. Jesson holds a BA
degree in Political Economics from Colorado College.
VINCENT P. GORDON- 42, Vice President, Corporate Operations
Mr. Gordon has 20 years experience in the information systems and
telecommunications industry and startup companies. Mr. Gordon joined IBM
Corp. where he held various management positions in the telecommunications
industry, working closely with IBM/ROLM, MCI Communications and some of
IBM's largest telecommunications customers. Prior to joining the Company
in May 1998, Mr. Gordon spent the previous six years developing the China
Travel Network (a national travel and tourism network) in the People's
Republic of China. The China Travel Network utilized a combination of
traditional fiber and copper wired service as well as microwave and
satellite technologies. Mr. Gordon holds a Bachelor of Science Degree in
Marketing and Finance from Mt. St. Mary's College.
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, 1998, 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 1999.
It is expected the members of the Compensation Committee will receive
additional compensation for 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 Equity
Incentive Plan, and reporting regularly to the Board of Directors with
respect to its recommendations.
There are no family relationships among Directors, 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, 1998, with the exception of
Francis Ragano, who received 200,000 non-qualified stock options, no other
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.
Except as disclosed in this Report, 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 security holder 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.
Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, the Company's
directors, its executive officers (and certain other officers) and any
persons holding more than 10% of the Company's outstanding voting
securities are required to report their ownership in the Company's
securities and any changes in that ownership to the Securities and Exchange
Commission. Specific due dates for these reports have been established and
the Company is required to report any failure to file by these dates during
fiscal 1998. Based solely upon the Company's reliance upon the written
representations of its directors and officers or copies of the reports that
they have filed with the Commission, all of these filing requirements were
satisfied by the Company's officers, directors and 10% owners during the
prior fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following table and discussion set forth information with respect
to all compensation earned by or paid to the Company's 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 $100,000.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
Summary Compensation Table
---------------------------
Long Term
Compensation
Annual Compensation Awards
P
a
y
o
u
t
Other
A
l
l
Annual Restricted
L
T
I
P
O
t
h
e
r
Name and Compen- Stock
P
a
y
- Compen-
Principal Salary Bonus sation Award(s)
Options/ outs sation
Position Year ($) ($) ($) ($) SARS
($) ($)
<S> <C> <C> <C> <C> <C> <C> <
C
>
<
C
>
Gary Brown, 1998 $106,369 $20,000 -0- -0- 57,60
0-
0- -0-
Chairman of
the Board
and former CEO 1997 $47,346 -0- -0- -0- -0-
-0- -0-
Jeffery 1998 $53,877 $20,000 -0- -0- 130,4
34-
0- -0-
Mathias,
President
and CEO 1997 -0- -0- -0- -0- -0-
-0- -0-
<PAGE>
Employment Agreements
The Company has entered into written employment agreements with Mr.
Mathias, as President and CEO, with Mr. Maurer, as Chief Financial Officer,
with Mr. Abell, as Vice President of Mergers and Acquisitions, with Mr.
Gordon, as Vice President of Corporate Operations, and with Mr. Jesson, as
Vice President of Market Integration.
Mr. Mathias' agreement has a term ending on October 31, 2000 and
provides for an annual base salary of $144,000 per year, subject to minimum
annual increases of 10% per year. In addition, Mr. Mathias received a
stock grant of 325,000 shares of the Company's common stock and additional
stock options exercisable to purchase, in the aggregate, 1,080,966 shares
of the Company's common stock at an exercise price of $1.94 per share,
subject to future vesting. The agreement further provides that Mr. Mathias
will be entitled to receive additional incentive stock options in the
future such that he will be assured of holding, on a fully diluted basis,
shares of common stock and options exercisable to purchase common stock
representing 7% of the total outstanding shares of the Company's common
stock.
Mr. Maurer's agreement terminates on December 31, 2000 and provides
for an annual base salary of $120,000 per year, subject to minimum
increases of 10% per year. Mr. Maurer received a stock grant of 75,000
shares and additional stock options exercisable to purchase, in the
aggregate, an additional 716,566 shares at an exercise price of $1.94 per
share, subject to future vesting. Mr. Maurer's agreement also provides for
the future grant of additional incentive stock options such that he will be
assured of holding shares of Company common stock and incentive stock
options representing, on a diluted basis, not less than 3.7% of the total
issued and outstanding shares of the Company's common stock.
Mr. Abell's agreement terminates on November 30, 2000 and provides for
an annual base salary of $108,000 per year, subject to minimum increases of
10% per year. In addition, Mr. Abell received an initial stock grant of
50,000 shares of the Company's common stock and additional stock options
exercisable to purchase, in the aggregate,289,366 shares of the Company's
common stock at an exercise price of $1.94 per share, subject to future
vesting based upon performance.
Mr. Gordon's agreement terminates on April 30, 2000 and provides for
an annual base salary of $108,000 per year, which effective May 1, 1999
increases to $144,000 per year. In addition, Mr. Gordon received an
initial grant of 34,366 options to purchase shares of the Company's common
stock at an exercise price of $4.00 per share, subject to future vesting.
Mr. Jesson's agreement terminates on December 31, 2000 and provides
for an annual base salary of $144,000 per year, which effective January 1,
1999 increases to $156,000 per year. In addition, Mr. Jesson received an
initial grant of 34,366 options to purchase shares of the Company's common
stock at an exercise price of $4.00 per share, subject to future vesting.
Equity Incentive Plan
The Company's Board of Directors and Shareholders have adopted and
approved the Company's 1998 Equity 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 December 31, 1998, the Company had granted incentive stock options
under the Plan exercisable to purchase an aggregate of 1,229,106 shares of
Common Stock at a weighted average exercise price of $2.30 per share, of
which 808,378 options are subject to future vesting.
The following tables set forth certain information concerning the
granting and exercise of incentive stock options during the last completed
fiscal year by each of the named executive officers and the fiscal year-end
value of unexercised options on an aggregated basis:
TABLE 2
Option/SAR Grants for Last
Fiscal Year - Individual Grants
<S> <C> <C> <C> <C>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise Expiration
Name Year Granted (#) Fiscal Year Price ($/sh) Date
Gary Brown 1998 57,600 4.7% $2.30 Dec 2003
1997 -0- 0% -0-
Jeffery 1998 130,434 10.6% $2.30 Dec 2003
Mathias 1997 -0- 0% -0-
TABLE 3
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<S> <C> <C> <C> <C>
Number of Value of
Unexercised Unexercised
Shares Options/SARs In-the-
Acquired Value Realized(1) at FY-End (#) Money
Name on Exercise (#) ($) Exercisable Options/
SARs at FY-
End ($)(2)
Exercisable
Gary Brown -0- -0- 19,200 $11,040
Jeffery
Mathias -0- -0- 43,478 $25,000
(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,
1998.
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. 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 or profit
sharing plans for its officers and Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Annual
Report 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>
<TABLE>
<CAPTION>
Shares
Beneficially Percentage
Name & Address of Owner(4)(5) Owned Ownership(1)(2)
<S> <C> <C>
Gary L. Brown 2,395,353 21.0%
Joseph F. Morgan 974,616 8.6%
Frank P. Ragano 30,128 2.7%
Kenneth L. Marshall 317,225 2.8%
Jeffery A. Mathias 411,956 3.6%
James Maurer 161,956 1.4%
Steven R. Jesson 151,220 1.3%
Ned Abell 136,956 1.2%
Vincent Gordon 146,322 1.3%
Network System Technologies, Inc.(3) 1,827,767 16.1%
55 South Market Street
San Jose, California 96112
Rovel Finance, Ltd. (6) 673,077 5.9%
A.V.G. Enterprises, Inc. (7) 164,308 1.5%
All Directors and Officers as a
Group ( 8 Persons) 4,031,116 33.1%
(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 Series A Preferred Stock sold in the
1998 Private Offering into an equal number of shares of Common Stock.
Also assumes no conversion of the outstanding shares of Series B
Preferred Stock which are convertible at the option of the holder
into shares of Common Stock at a conversion price equal to a 20%
discount from the market price of the Company's Common Stock from the
date of conversion, subject to minimum and maximum values. Also
assumes that no outstanding options or warrants are exercised to
purchase additional shares of the Company's Common Stock.
(3) 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 12. 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,
which shares were issued in fiscal 1997. 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 Holdings, Inc. ("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. 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>
<TABLE>
<CAPTION>
<S> <C> <C>
SkyLynx Express Shareholder # of Shares
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
(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 for
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 13. EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements
The following financial statements are filed as part of this report:
1 Report of Independent Certified Public Accountants
2. Consolidated Balance Sheet dated December 31, 1998
3. Consolidated Statements of Operations for the period from
inception (July 29, 1997) to December 31, 1997, and for the year
ended December 31, 1998.
4. Consolidated Statements of Stockholders' Equity.
5. Consolidated Statements of Cash Flows for the period from
inception (July 29, 1997) to December 31, 1997 and the year
ended December 31, 1998.
6. Notes to consolidated financial statements
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
** 10.6 Asset Purchase Agreement with Interaccess Corporation dated as
of February 2, 1999
*** 10.7 Asset Purchase Agreement with ContiNet, LLC dated as of March
24, 1999
*** 10.8 Promissory Note
**** 18.0 Letter of Cordovano and Harvey, P.C., former accountants to the
Company
*****23.1 Consent of Cordovano and Harvey, P.C. dated April 14, 1999
*****23.2 Consent of Arthur Andersen LLP dated April 13, 1999
* Incorporated by reference from the Registrant's Registration Statement
on 10-SB/A-4 as filed with the Commission on December 16, 1998
** Incorporated by reference from the Registrant's Current Report on 8-K
as filed with the Commission on February 2, 1999
*** Incorporated by reference from the Registrant's Current Report on 8-K
as filed with the Commission on March 14, 1999
**** Incorporated by reference from the Registrant's Current Report on 8-K
as filed with the Commission on January 26, 1999
*****Filed herewith
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SKYLYNX COMMUNICATIONS, INC.
Date: April 15, 1999 By: /s/ Jeffery A. Mathias
-------------------------------------
Jeffery A. Mathias, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Jeffery A. Mathias President, Chief Executive April 15, 1999
----------------------
Jeffery A. Mathias Officer and Director
/s/ Gary L. Brown Director April 15, 1999
----------------------
Gary L. Brown
/s/ Francis Ragano Director April 15, 1999
----------------------
Francis Ragano
/s/ James Maurer Chief Financial Officer/ April 15, 1999
---------------------- Chief Accounting Officer
James Maurer
</TABLE>
<PAGE>
CORDOVANO AND HARVEY, P.C.
Certified Public Accountants
201 Steele Street
Suite 300
Denver, Colorado 80206
Telephone (303) 329-0220
Facsimile (303) 316-7493
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of SkyLynx
Communications, Inc. on Form S-8 - of our report dated March 4, 1998,
appearing in the Annual Report on Form 10-KSB of SkyLynx Communications,
Inc. for the year ended December 31, 1998, which is part of this
Registration Statement
Cordovano and Harvey, P.C.
Denver, Colorado
April 14, 1999
<PAGE> ARTHUR ANDERSEN
101 East Kennedy Boulevard
Tampa, Florida 33602-5141
Telephone: (813) 222-4600
Facsimile: (813) 222-4699
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-KSB, into SkyLynx
Communications, Inc.'s previously filed Registration Statement on Form S-8
File No. 333-74487.
Arthur Andersen
Tampa, Florida
April 13, 1999
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND AS AN ATTACHMENT TO THE COMPANY'S FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
[LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[CASH] 512925
[SECURITIES] 0
[RECEIVABLES] 0
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 533060
[PP&E] 1,891,638
[DEPRECIATION] 259268
[TOTAL-ASSETS] 2407603
[CURRENT-LIABILITIES] 1,134,474
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 2,645,828
[COMMON] 9,531
[OTHER-SE] (1,382,230)
[TOTAL-LIABILITY-AND-EQUITY] 2,407,603
[SALES] 7898
[TOTAL-REVENUES] 7898
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 5,300,834
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] (5,274,832)
[INCOME-TAX] 0
[INCOME-CONTINUING] (5,274,832)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (5,274,832)
[EPS-PRIMARY] (.60)
[EPS-DILUTED] (.60)
</TABLE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997,
TOGETHER WITH REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
SkyLynx Communications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of SkyLynx
Communications, Inc. and subsidiaries (a Colorado corporation in the
development stage) as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the
year then ended, and the related statements of operations and cash flows
for the period from inception (July 29, 1997) to December 31, 1998.
These consolidated 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 did not audit the
consolidated financial statements of SkyLynx Communications, Inc. and
subsidiary for the period from inception (July 29, 1997) to December 31,
1997. Such statements are included in the cumulative inception to
December 31, 1998, totals of the statements of operations and cash flows
and reflect total revenues and net loss of $0 and $8,938, respectively,
of the related cumulative totals. Those statements were audited by
other auditors whose report, dated March 4, 1998, expressing an
unqualified opinion on those statements, has been furnished to us, and
our opinion, insofar as it relates to amounts for the period from
inception (July 29, 1997) to December 31, 1997, included in the
cumulative totals, is based solely upon the report of the other
auditors.
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 financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of SkyLynx Communications, Inc. and
subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended and the period
from inception (July 29, 1997) to December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in
the accompanying consolidated financial statements, the Company is a
development stage company with no significant operating results to date.
The factors discussed in Note 3 to the consolidated financial statements
raise a substantial doubt about the ability of the Company to continue
as a going concern. Management's plans in regards to those matters are
also described in Note 3. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ARTHUR ANDERSEN LLP
Tampa, Florida,
April 13, 1999
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 512,925
Prepaid expenses and other current assets 20,135
------------
Total current assets 533,060
PROPERTY AND EQUIPMENT, net 1,632,370
INTANGIBLE ASSETS, net of accumulated amortization of
$6,938 89,195
OTHER ASSETS 152,978
------------
Total assets $ 2,407,603
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 360,176
Accrued liabilities 363,138
Deposits on unissued shares of common stock
and preferred stock 411,160
-----------
Total current liabilities 1,134,474
============
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 50,000,000
shares authorized, 988,750 shares issued
and outstanding 2,645,828
Common stock, $.001 par value; 150,000,000
shares authorized, 9,531,186 shares issued
and outstanding 9,531
Additional paid-in capital 4,171,356
Deficit accumulated during development stage (5,553,586)
------------
Total stockholders' equity 1,273,129
------------
Total liabilities and stockholders' equity $2,407,603
============
The accompanying notes are an integral part of this consolidated balance
sheet.
<PAGE>
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
--------------------------------------------
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JULY 29, 1997) TO DECEMBER 31, 1997,
AND THE YEAR ENDED DECEMBER 31, 1998
Year Ended December 31, 1998 Period from Inception
Cumulative from Inception (July
29, 1997) to (July 29, 1997) to December
December 31, 1997 31,
1998
---------------------------- --------------------- -----
- - ----------------------
REVENUES $ 7,898 $ - $ 7,898
SELLING, GENERAL
AND ADMINISTRATIVE
EXPENSES 5,300,834 8,938
5,309,772
------------ -----
- - ----------
OPERATING LOSS (5,292,936) (8,938)
(5,301,874)
NET INTEREST INCOME 18,104 -
18,104
------------ ------------- -----
- - -----------
NET LOSS BEFORE
PROVISION FOR
INCOME TAXES (5,274,832) (8,938)
(5,283,770)
PROVISION FOR
INCOME TAXES - -
- - -
------------ ------------- -----
- - -----------
NET LOSS (5,274,832) (8,938) (5,283,770)
PREFERRED STOCK
DIVIDENDS (39,759) -
(39,759)
ACCRETION OF
BENEFICIAL
CONVERSION FEATURE
OF PREFERRED STOCK (73,029) -
(73,029)
------------- -------------- -----
- - ------------
NET LOSS AVAIL-
ABLE TO COMMON
STOCKHOLDERS $(5,387,620) $(8,938)
$(5,396,558)
============= ==============
=================
NET LOSS PER
SHARE-BASIC $0.60 $ -
NET LOSS PER SHARE
- - -DILUTED $0.60 $ -
SHARES USED IN
COMPUTING NET LOSS
PER SHARE-BASIC 8,946,874 6,187,500
SHARES USED IN
COMPUTING NET LOSS
PER SHARE-DILUTED 8,946,874 6,187,500
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 29, 1997) TO DECEMBER 31, 1997,
AND THE YEAR ENDED DECEMBER 31, 1998
Preferred Stock Common Stock Additional
Deficit Accumulated
Paid-in
During Development
---------------- -------------- ---------- -----
- - --------------
Shares Amount Shares Amount Capital
Stage Total
----- ------ ------ ------ ------- -----
-----
BALANCE, at inception
(July 29, 1997) - $ - - $ - $ - $ -
$ -
Net loss - - - - -
(8,938) (8,938)
Common stock issued
in reverse
acquisition - - 6,875,000 6,875 2,063 -
8,938
Recapitalization - - 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
======= ======= ========= ======= ========
===========
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 29, 1997) TO DECEMBER 31, 1997,
AND THE YEAR ENDED DECEMBER 31, 1998
(continued)
Preferred Stock Common Stock Additional
Deficit Accumulated
Paid-in
During Development
---------------- -------------- ---------- -----
- - --------------
Shares Amount Shares Amount Capital
Stage Total
----- ------ ------ ------ ------- -----
-----
BALANCE,
December 31, 1997 - $ - 8,772,189 $8,772 $981,918 $
(278,754) $711,936
Net loss - - - - -
(5,274,832) (5,274,832)
Proceeds from issuance
of preferred stock with
1,977,500 warrants on
various dates, net of
offering costs of
$214,593 (Note 10) 988,750 2,533,040 - - 1,207,367 -
3,740,407
Common stock issued
for acquired assets
on August 20, 1998
(Note 4) - - 50,000 50 206,200 -
206,250
Common stock issued
for services on June
12, 1998, at fair value - - 653,997 654 1,559,369 -
1,560,023
Common stock issued
for services on
September 23, 1998,
at fair value - - 55,000 55 329,29 - 329,345
Preferred stock dividend - 39,759 - - (39,759) -
-
Accretion of beneficial
conversion feature
of preferred stock - 73,029 - - (73,029) -
-
------ ------- ------- ----- --------- -----
- - ----- ----------
BALANCE,
December 31, 1998 988,750 $2,645,828 9,531,186 $9,531 $4,171,356
$(5,553,586) $ 1,273,129
======== ========== ========= ======= ==========
============ ============
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 29, 1997) TO DECEMBER 31, 1997,
AND THE YEAR ENDED DECEMBER 31, 1998
Year Ended Period from Inception Cumulative
from Inception
December 31, 1998 (July 29, 1997) to (July 29,
1997) to
December 31, 1997 December
31, 1998
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(5,274,832) $ (8,938)
$(5,283,770)
Adjustments to reconcile
net loss to net cash
(used in) provided by
operating activities-
Common stock issued
for intellectual
property contributed
by stockholders - 8,938
8,938
Common stock issued for
services 1,771,618 -
1,771,618
Depreciation and amortiza-
tion 266,206 -
266,206
Changes in operating assets
and liabilities-
Prepaid expenses and
other current assets (20,135) -
(20,135)
Other assets 91,772 -
91,772
Accounts payable 301,370 -
301,370
Accounts payable,
related party (391,299) -
(391,299)
Accrued liabilities 360,012 -
360,012
Other current liabilities (1,375) 8,049
6,674
--------- ---------- ----------
- - ---
Net cash (used in) provided by
operating activities (2,896,663) 8,049
(2,888,614)
------------- ----------- ----------
- - ---
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of fixed assets (1,270,089) -
(1,270,089)
------------- ------------ ----------
- - ---
Net cash used in investing
activities (1,270,089) -
(1,270,089)
------------- ------------- ----------
- - ---
CASH FLOWS FROM FINANCING
ACTIVITIES:
Recapitalization - 620,061
620,061
Proceeds from the issuance
of preferred stock, net of
offering costs 3,740,407 -
3,740,407
Advances on unissued shares 411,160 -
411,160
Principal debt payments (100,000) -
(100,000)
------------- ------------- ----------
- - ----
Net cash provided by
financing activities 4,051,567 620,061
4,671,628
------------- ------------- ----------
- - ----
NET (DECREASE) INCREASE
IN CASH (115,185) 628,110
512,925
CASH, beginning of period 628,110 - -
-------------- ------------- ----------
- - ----
CASH, end of period $ 512,925 $ 628,110 $
512,925
============== ==============
===============
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 29, 1997) TO DECEMBER 31, 1997,
AND THE YEAR ENDED DECEMBER 31, 1998
(continued)
Year Ended Period from Inception Cumulative
from Inception
December 31, 1998 (July 29, 1997) to (July 29,
1997) to
December 31, 1997 December
31, 1998
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 4,043 $ 583 $
4,626
SUPPLEMENTAL DISCLOSURES
OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Debt assumed in
exchange for license
rights $ - $ 100,000 $
100,000
Debt assumed in
acquiring equipment $ - $ 482,299 $
482,299
Issuance of common
stock for property
and equipment $ 117,750 $ - $
117,750
Common stock issued
for acquired assets $ 206,250 $ - $
260,250
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1.ORGANIZATION AND BUSINESS:
SkyLynx Communications, Inc. (the Company) is the surviving company of a
reverse acquisition between Allied Wireless, Inc. (AWI) and SkyLynx Express
Holdings, Inc. (SEHI) effective December 31, 1997. The Company was formed
to provide high-speed Internet connectivity and enhanced Internet services
to businesses through the use of wireless and wireline technologies.
AWI was incorporated in Colorado on September 23, 1996. SEHI was
incorporated in Delaware on July 29, 1997. On December 16, 1997, AWI
acquired all of the outstanding common stock of SEHI. For accounting
purposes, the reverse acquisition has been treated as a recapitalization of
SEHI with AWI the legal surviving entity. The accompanying consolidated
financial statements have been prepared as if the recapitalization took
place on December 31, 1997. The historical financial statements prior to
December 31, 1997, are those of SEHI. Subsequent to the merger, AWI
changed its name to SkyLynx Communications, Inc.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Company's primary operations since inception have been devoted to
offering secure and reliable Internet and Intranet access through wireless
frequencies, using its wireless network, 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. Insignificant
operating revenue has been generated as of December 31, 1998. As a result,
the consolidated financial statements are presented in accordance with
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting by Development Stage Enterprises." In order to generate
significant revenues and become an operating business, the Company will
need to continue to market its internet access service offerings to
customers in its current markets and in markets to be acquired. In
addition, the Company will need to attain additional funding through
subsequent equity offerings.
Principles of Consolidation
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend
the useful lives of existing equipment, are capitalized and depreciated.
Upon retirement or disposition of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the consolidated statements of
operations.
Intangible Assets
Intangible assets are stated net of accumulated amortization and include
license rights. Amortization is provided using the straight-line method
over five years. The Company evaluates on a regular basis whether events
and circumstances have occurred that indicate that the carrying amount of
intangible assets may warrant revision. Management believes that there has
been no impairment of the intangible assets as reflected in the Company's
consolidated financial statements as of December 31, 1998.
Fair Value of Financial Instruments
The Company believes that the carrying value of financial instruments on
the accompanying consolidated balance sheet approximates their fair value.
Loss Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share" (SFAS 128). The Company adopted SFAS
128 for the period from inception (July 29, 1997) to December 31, 1997.
Under SFAS 128, net loss per share-basic excludes dilution and is
determined by dividing loss available to common stockholders by the
weighted average number of common shares outstanding during the period.
Net loss per share-diluted reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock. As of December 31, 1998, there were 3,579,736
stock options, 988,750 shares of convertible preferred stock, and 1,977,500
common stock purchase warrants outstanding which were not included in the
calculation net loss per share - diluted because they were antidilutive.
1 for 13 Reverse Stock Split
On January 23, 1998, the stockholders of the Company approved a 1 for 13
reverse stock split. The accompanying consolidated financial statements
have been retroactively restated to give effect to the reverse stock split.
Vendors
The Company purchased approximately 76 percent of its communications
equipment as of December 31, 1998, from one vendor.
3.LIQUIDITY:
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the accompanying consolidated financial statements, the Company is a
development stage company with insignificant revenue as of December 31,
1998, and has incurred losses of $5,274,832 and $8,938 for the year ended
December 31, 1998, and the period from inception (July 29, 1997) to
December 31, 1997, respectively. This factor among others may indicate
that the Company will be unable to continue as a going concern for a
reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis
and ultimately to attain profitability. The Company's management intends
to seek additional funding through equity offerings during 1999 to help
fund the Company's operations as it expands.
4. PURCHASE OF ASSETS FROM NADEX WEST, INC.:
In 1998, the Company purchased certain assets of Nadex West, Inc. (Nadex
West). The assets purchased included property and equipment, including
leases covering two Multipoint Distribution Service channels granted under
licenses issued by the Federal Communications Commission (FCC) within the
Fresno, California, geographical area. This acquisition was accounted for
as a purchase and has been reflected in the Company's consolidated
financial statements from the date of acquisition. The consideration paid
in this transaction was 50,000 shares of common stock with a fair value of
$206,250. In addition, 25,000 shares of the Company's common stock is
contingently issuable upon the Fresno operations achieving operating profit
of $850,000 in one year. In the event Nadex West is able to obtain for the
Company an option to purchase the FCC licenses for the channels included in
the leases, the Company has agreed to issue Nadex West an additional 50,000
shares of common stock.
5.PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31, 1998:
Useful Lives in Years Amount
Communications equipment 5 $1,514,384
Computer equipment 5
123,335
Furniture and fixtures 5 37,481
Office equipment 5
72,772
Leasehold improvements 5 143,666
------------
1,891,638
Less- Accumulated depreciation and
amortization
(259,268)
------------
Property and equipment, net $1,632,370
6.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 bore interest at 7.5 percent, was unsecured and
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 year ended December 31, 1998.
7.INCOME TAXES:
The Company follows the liability method of accounting for income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred income taxes are recorded based upon
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the underlying assets are received and
liabilities are settled. At December 31, 1998, the Company had net
operating loss (NOL) carryforwards of $5,283,770 that can reduce future
federal income taxes. Realization of the future tax benefits related
to the deferred tax asset is dependent on many factors, including the
Company's ability to generate taxable income within the NOL
carryforward period. If not utilized, the NOL carryforward will expire
in 2018. Due to uncertainties regarding the Company's ability to
realize the benefits of its deferred tax assets through future
operations, a valuation allowance has been established.
The income tax effect of temporary differences comprising the deferred
tax asset on the accompanying consolidated balance sheet is a result of
the following as of December 31, 1998:
Amount
Deferred income tax assets:
Allowance for doubtful accounts $ 14,010
Accrued liabilities 40,984
Net operating loss carryforward 1,932,034
Valuation allowance (1,987,028)
------------
Net deferred income tax asset $ -
The change in the valuation allowance from inception (July 29, 1997)
through December 31, 1997, and from December 31, 1997, to December 31,
1998, was $73,905 and $5,206,532, respectively.
A reconciliation between the statutory federal income tax rate (34 percent)
and the effective rate of income tax for the year ended December 31,
1998, is as follows:
Percentage
Statutory income tax rate (34.0)%
Increase (decrease) in taxes resulting from:
State taxes, net of U.S. Federal tax benefit (3.6)
Increase in valuation allowance 35.6
Other 2.0
------
0.0%
8.COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the
outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are adequately covered by insurance or, if
not so covered, should not materially result in any liability, which would
have a material adverse effect on the financial position, liquidity or
results of operations of the Company.
Lease Obligations
The Company leases real estate under operating leases. Certain real estate
leases require the Company to pay maintenance, insurance, taxes and certain
other expenses in addition to the stated rentals.
Future minimum lease payments for noncancellable operating leases in effect
at December 31, 1998, are as follows:
Year Ending
December 31, Amount
------------ ------
1999 $161,887
2000 166,472
2001 171,195
2002 176,277
2003 109,598
--------
$785,429
Rent expense under operating leases for the year ended December 31, 1998,
and the period from inception (July 29, 1997) to December 31, 1997, totaled
$90,292 and $0, respectively.
Employment Agreements
The Company has entered into employment agreements with certain Company
officers and management. The remaining commitment under the terms of these
agreements as of December 31, 1998, is approximately $1,400,000, of which
approximately $800,000 is payable in 1999 and approximately $600,000 is
payable in 2000. These employment agreements expire on various dates
through December 2000. In addition, under these employment contracts,
2,150,630 non-qualified stock options have been granted.
9. COMMON STOCK:
On August 10, 1997, the Board of Directors (the Board) approved the
issuance of 6,875,000 shares of the common stock, 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.
During 1998, the Board approved the issuance of 708,997 shares of common
stock in exchange for services. 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.
10.UNIT OFFERING:
During 1998, the Company, through a private placement offering, sold
988,750 units to qualified investors for $4.00 per unit. 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 has a par value of $0.01
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 common stock
at the option of the stockholder. 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, or (2) once the Company's common stock
trades above $6.00 per share for 10 consecutive trading days. The
preferred stock has a liquidation preference of $4.00 per share. As of
December 31, 1998, the Company had accrued but unpaid dividends of $39,759.
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 $10.00 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 30 days written notice at
$.01 per warrant.
Proceeds of $3,045,350 and $909,650 were allocated to the preferred stock
and to the warrants, respectively, based on their relative fair values.
The value of the beneficial conversion feature of the preferred stock was
recorded as a discount of $297,717 and is being accreted through additional
paid-in capital through the date the preferred stock is first convertible.
9. STOCK-BASED COMPENSATION:
Effective January 23, 1998, the Company adopted the 1998 Equity Incentive
Plan (the Plan), under which 1,750,000 shares of common stock were
authorized and reserved for use in the Plan. The Plan allows the issuance
of incentive stock options, nonqualified stock options, stock bonuses,
rights to purchase restricted stock, and stock appreciation rights.
Incentive stock options granted during 1998 become exercisable over three
years and expire five years from the date of grant. At December 31, 1998,
520,894 shares of common stock were available for future grant under the
Plan, and 1,229,106 options were outstanding at an exercise price of $2.30
per share.
In addition to the incentive stock options granted under the Plan, the
Company also granted 2,350,630 non-qualified stock options outside of the
Plan to certain officers, directors, and other employees. Of the non-
qualified options granted, 200,000 became exercisable immediately and
expire five years from the date of grant, and 68,732 become exercisable at
the rate of 4,166 options per month and expire five years from the date of
grant. The remaining 2,081,898 options vest based on certain performance
criteria and expire five years from the date of grant. At December 31,
1998, 200,000 options were outstanding at an exercise price of $2.30 per
share, 68,732 options were outstanding at an exercise price of $4.00 per
share and 2,081,898 options were outstanding at an exercise price of $1.94
per share.
Stock option activity for the year ended December 31, 1998, was as follows:
Number of Weighted
Shares Average
Exercise Price
Outstanding, beginning of period - $ -
Granted 3,579,736 2.12
Exercised - -
Canceled or expired - -
Outstanding, end of period 3,579,736 $ 2.12
Options vested at year-end 670,720 $ 2.43
The weighted-average remaining contractual lives for options outstanding at
December 31, 1998, was 4.9 years.
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25), under which no compensation expense has been recognized for
option grants. Compensation expense of $2,001,618 was recognized for stock
grants under APB 25. In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), which allows
companies to continue following the accounting guidance of APB 25, but
requires disclosure of net income and earnings per share for the effects on
compensation expense had the accounting guidance of SFAS 123 been adopted.
The Company has elected SFAS 123 for disclosure purposes. Under SFAS 123,
the fair value of each option granted has been estimated as of the grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 4.46 to 5.63
percent, expected volatility of 80 percent, expected life of four years,
and no expected dividends. During the year ended December 31, 1998, the
weighted-average fair values of options granted were $1.41 for options
granted with an exercise price equal to the market price of the stock,
$1.31 for options granted with an exercise price that exceeded the market
price of the stock, and $1.49 for options granted with an exercise price
that was less than the market price of the stock. Had compensation expense
been determined based on the fair value at the grant date consistent with
the provisions of SFAS 123, the Company's net loss and net loss per share
would have increased to the pro forma amounts indicated below:
Amount
As reported:
Net loss $(5,274,832)
Net loss per share - basic and diluted $(0.60)
Pro Forma:
Net loss $(6,215,209)
Net loss per share - basic and diluted $(0.71)
12. RELATED-PARTY TRANSACTIONS:
Effective December 16, 1997, the Company issued 4,230,770 shares of common
stock to affiliates in exchange for intellectual property and technology
and 2,644,230 shares of common stock to officers and directors in exchange
for intellectual property.
During 1998, despite suspension of agreement with NST, NST billed the
Company $735,256 for the construction of wireless data transmission plants
in Fresno, California, and in Tampa, Florida. Both transmission plants
were completed and this amount was paid during the year ended December 31,
1998.
During 1998, the Company issued 708,997 shares of common stock to
affiliates in exchange for services. The services were valued by
management at the fair value of the common stock on the date of issuance.
13. SUBSEQUENT EVENTS:
In January 1999, the Company issued an additional 72,582 units under the
1998 Private Placement Memorandum to affiliates in exchange for services.
The units issued in the 1998 private placement offering consisted of one
share of Series A convertible preferred stock, one Class A warrant
exercisable for three years to purchase one additional share of common
stock at an exercise price of $7.50 per share, and one Class B warrant
exercisable for three years to purchase one additional share of common
stock at an exercise price of $10.00 per share.
In January 1999, the Company issued and sold to one accredited investor
263,158 units at a price of $1.90 per unit, for aggregate consideration of
$500,000. Each unit sold in this offering consisted of one share of the
Company's common stock, one warrant exercisable for three years to purchase
one additional share of common stock at a price of $6.00 per share, and one
warrant exercisable for three years to purchase an additional share of
common stock at an exercise price of $8.00 per share.
In January 1999, the Company completed the sale to one accredited investor
of 600 shares of Series B convertible preferred stock, 15,000 shares of
common stock and warrants exercisable to purchase, in the aggregate,
120,000 shares of common stock at an exercise price of $3.00 per share.
The aggregate purchase price for the foregoing securities was $600,000.
In March 1999, the Company completed the sale to accredited investors of
326,500 shares of Series C preferred stock. The aggregate purchase price
for the foregoing securities was $1,306,000.
<PAGE>
Effective February 2, 1999, the Company acquired substantially all of the
assets of Interaccess Corporation for $195,385 in cash and issued 35,164
shares of the Company's common stock. Effective March 24, 1999, the
Company acquired ContiNet for $497,541, consisting of cash, assumption of
debt and shares of the Company's common stock.
Effective February 12, 1999, the Company entered into a letter of intent to
acquire substantially all of the assets of Net Asset, LLC, for $1,175,000
in cash. Effective March 1, 1999, the Company entered into a letter of
intent to acquire substantially all of the assets of SeaTac.Net for
$400,000 in cash and the Company's common stock. The Company has also
entered into letters of intent to acquire substantially all of the assets
of two additional internet service providers.
