<PAGE>
As filed with the SEC on July 23, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SKYLYNX COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
COLORADO 7375 84-1360029
(State or Other Jurisdiction (Primary Standard (IRS Employer
of Incorporation Industrial Classification Identification No.)
of Organization) Code Number)
600 South Cherry Street,
Suite 305
Denver, CO 80246
(303) 316-0400
(Address and Telephone Number of Principal Executive Offices)
Jeffery A. Mathias
President and Chief Executive Officer
SkyLynx Communications, Inc.
600 South Cherry Street
Suite 305
Denver, CO 80246
(303) 316-0400
(Name, Address and Telephone Number of Agent for Service)
COPIES TO:
Karen A. Dewis, Esq.
McDermott, Will & Emery
600 13th Street, N.W.
Washington, D.C. 20005
(202) 756-8000
Approximate Date of Commencement of Proposed Sale to the Public:
From time to time after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.[ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Title Of Each Proposed Proposed
Class Of Maximum Maximum
Securities Amount Offering Aggregate Amount Of
To Be To Be Price Offering Registration
Registered Registered Per Share/(1)/ Price/(2)/ Fee
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 9,996,954 (3) $6.597 $65,953,404 $18,335
par value $.001
per share
</TABLE>
(1) Calculated in accordance with Rule 457(c) under the Securities Act on the
basis of the average of the bid and asked prices of the common stock on
July 19, 1999, as quoted on the OTC Electronic Bulletin Board.
(2) Estimated solely for the purposes of calculating the registration fee.
(3) Includes 8,866,666 shares of common stock that have been or may be acquired
by the selling security holders upon conversion of shares of convertible
preferred stock, 1,115,288 shares of common stock that have been or may be
acquired upon exercise of warrants held by the selling security holders and
15,000 shares of common stock which have been issued directly to the
selling security holders.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
PROSPECTUS
SkyLynx Communications, Inc.
9,996,954 SHARES
COMMON STOCK
This is an offering of shares of the common stock of SkyLynx
Communications, Inc. by persons who were issued shares of our common stock,
shares of our series B, series D and series E convertible preferred stock or
warrants to purchase our common stock. These persons are referred to in this
prospectus as "selling security holders." Selling security holders holding
convertible preferred stock or warrants may sell common stock covered by this
prospectus when they have converted their preferred stock into common stock or
have exercised their warrants to purchase common stock. See the sections
entitled "Selling Security Holders" and "Description of Securities."
Selling security holders may sell shares covered by this prospectus at
prices related to prevailing market prices or at negotiated prices. Our common
stock is currently traded over-the-counter and quoted on the Over-the-Counter
(OTC) Electronic Bulletin Board under the symbol "SKYK". On July 22, the last
reported bid and ask prices of our common stock were $5.9062 and $6.0000,
respectively.
We will not receive any proceeds from the sale of the common stock. For
information regarding fees and expenses we may pay in connection with the
registration of the common stock covered by this prospectus, see the section
entitled "Selling Security Holders."
Investing in our common stock involves a high degree of risk.
You should read the "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 23, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
RISK FACTORS............................................................... 4
AVAILABLE INFORMATION...................................................... 8
SELLING SECURITY HOLDERS................................................... 9
USE OF PROCEEDS............................................................ 10
PLAN OF DISTRIBUTION....................................................... 10
LEGAL PROCEEDINGS.......................................................... 11
MANAGEMENT................................................................. 12
PRINCIPAL STOCKHOLDERS..................................................... 14
DESCRIPTION OF SECURITIES.................................................. 15
INDEMNIFICATION............................................................ 19
DESCRIPTION OF BUSINESS.................................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 27
DESCRIPTION OF PROPERTY.................................................... 33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 34
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................... 35
EXECUTIVE COMPENSATION..................................................... 36
CHANGES IN ACCOUNTANTS .................................................... 39
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
About our Company
Please note that throughout this prospectus, the words, "we", "our" or "us"
refer to SkyLynx Communications, Inc. and not to any of the selling security
holders.
We provide Internet connection and other Internet-related services to small
and medium-sized businesses and residential customers. Since January 1999, we
have acquired six Internet service providers serving customers in areas of
Florida, California, Washington, Oregon and Nevada. We currently have
approximately 12,000 subscribers to our services, and have entered into a
binding letter of intent to acquire an additional Internet service provider in
Sacramento, California serving approximately 7,800 customers. Our plan is to
acquire additional Internet service providers in select markets in the United
States, and to integrate these businesses into a central network that provides
Internet connection and advanced Internet services to small and medium-sized
businesses.
Our executive offices are located at 600 South Cherry Street, Suite 305,
Denver, Colorado 80246, and our telephone number is (303) 316-0400. Our world
wide web address is: http://www.skyk.com. Information contained in our web site
-------------------
is not part of this prospectus.
About the Offering
This is an offering of shares of our common stock by persons who were
issued shares of our common stock, shares of our convertible preferred stock or
warrants to purchase shares of our common stock.
We refer to these persons as "selling security holders" in this
prospectus. Selling security holders who were issued convertible preferred
stock or warrants may sell the shares of common stock covered by this prospectus
when they have converted their preferred stock into common stock or when they
have exercised their warrants to purchase common stock. We are registering the
common stock covered by this prospectus in order to fulfill obligations we have
under agreements with the selling security holders.
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Summary Pro Forma Condensed Combined Financial Data
The following summary pro forma condensed combined financial data give
effect to our acquisitions of the assets of InterAccess Corp., Simply
Internet, Inc. and Net Asset, LLC, and to our proposed acquisition of the
capital stock of CalWeb Internet Services, Inc.
The unaudited pro forma condensed combined statement of operations data
give effect to the acquisitions as if they had occurred at the beginning of the
earliest period presented, combining our results for the year ended December
31, 1998 and for the three months ended March 31, 1999 with those of the same
periods for InterAccess Corp., Simply Internet, Inc. and Net Asset, LLC and
with those of CalWeb Internet Services, Inc. for the year ended March 31, 1999
and for the three months ended March 31, 1999. The unaudited pro forma
condensed combined balance sheet data gives effect to the acquisitions and to
the proposed acquisition as if they had occurred on March 31, l999.
The unaudited pro forma financial data do not purport to represent what our
financial position or results of operations would actually have been if such
transactions had occurred on those dates and are not necessarily representative
of our financial position or results of operations for any future period. You
should refer to other sections of this prospectus for more information,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Unaudited Pro Forma Condensed Combined Financial
Statements" and the historical financial statements of SkyLynx Communications,
Inc., Simply Internet, Inc., Net Asset, LLC and CalWeb Internet Services, Inc.
Pro Forma Combined Statements of Operations Data
(unaudited)
Year Ended December 31,
1998
Pro Forma
Actual Combined
Statement of Operations Data:
Revenues............................................. 7,898 4,079,629
Operating cost and expenses.......................... 5,300,834 11,985,489
Loss from operations................................. (5,292,936) (7,905,860)
Interest and other income (expenses)................. 18,104 (57,984)
Net loss............................................. (5,274,832) (7,963,844)
Preferred stock dividends............................ (39,759) (434,259)
Accretion of beneficial conversion feature of
preferred stock.................................... (73,029) (73,029)
Net loss applicable to common stockholders........... (5,387,620) (8,471,132)
Basic and diluted loss per share..................... (.60) (0.92)
Shares used in computing basic loss per share........ 8,946,874 9,216,521
Three Months Ended March 31,
1999
Pro Forma
Actual Combined
Statement of Operations Data:
Revenues............................................. 67,888 1,040,469
Operating cost and expenses.......................... 3,360,606 5,061,954
Loss from operations................................. (3,292,718) (4,021,485)
Interest and other income (expenses)................. 2,895 (5,199)
Net loss............................................. (3,289,823) (4,026,684)
Preferred stock dividends............................ (239,642) (338,267)
Accretion of beneficial conversion feature of
preferred stock.................................... (138,442) (138,442)
Net loss applicable to common stockholders........... (3,667,907) (4,503,393)
Basic and diluted loss per share..................... (.35) (0.42)
Shares used in computing basic loss per share........ 10,572,168 10,841,815
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<PAGE>
Pro Forma Combined Balance Sheet Data
(unaudited)
At March 31, 1999
Pro Forma
Actual Combined
Balance Sheet Data:
Working capital...................................... 199,275 (350,408)
Total assets......................................... 3,871,197 11,892,016
Long-term liabilities................................ 25,000 462,169
Shareholders' equity................................. 2,932,571 9,732,571
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RISK FACTORS
Before you buy shares of common stock from any selling security holder, you
should be aware that there are various risks, including those described below.
You should consider carefully these risk factors, together with all other
information in this prospectus, before you decide to purchase shares of our
common stock.
Our shares of common stock represent a highly speculative investment. We
have been operating at a loss since our formation, and you cannot assume that
our plans will either materialize or prove successful. There is no assurance
that our operations will become profitable. In the event our plans are
unsuccessful, you may lose all or a substantial part of your investment.
Our strategy to acquire Internet Service provides may not be successful.
Our success will depend upon our ability to acquire local Internet service
providers and integrate these acquired businesses into a comprehensive network.
In addition, we must acquire a sufficient number of Internet service providers
to operate efficiently and profitably.
We believe that competition from other companies seeking to acquire and
consolidate Internet service providers is significant and that acquisition
prices will rise with the growth in demand for these companies in the future.
We may not be able to afford these higher prices. Any increase in acquisition
prices could also increase the amount of goodwill and other intangibles
associated with the purchase price we may pay for these companies.
Between December 31, 1998 and July 16, 1999, we acquired six Internet
service providers. Prior to their acquisition by us, the businesses we acquired
were operated as independent entities. We cannot assure you that we will be
able to integrate the operations of these businesses successfully into our
operations or to institute the necessary systems and procedures, including
accounting and financial reporting systems, to manage the combined business on
a profitable basis. Our management group has been assembled only recently, and
it may not be able to manage successfully the combined business to implement
effectively our operating strategy and acquisition program.
Any acquisitions we make may result in potentially dilutive issuances of
our securities, or our incurrence of additional debt. Further, acquisitions
involve a number of special risks, including failure of the acquired business to
achieve expected results, diversion of management's attention, failure to retain
key personnel of the acquired businesses and risks associated with unanticipated
events or liabilities. In addition, the businesses that we have already
acquired or other businesses that we may acquire in the future may not achieve
anticipated revenues and earnings.
Our inability to acquire additional Internet service providers, high costs
associated with any acquisitions we make or our failure to successfully
integrate and operate any companies we have acquired or may acquire in the
future could have a material adverse effect on our business, financial condition
or results of operations.
We cannot be sure that we will have enough capital to finance our business
strategy. We have have obtained only limited funds to date from the issuance of
our capital stock. We will continue to require substantial additional funds for
capital expenditures and related expenses in pursuit of our business strategy,
including the acquisition of additional Internet service providers and the
continued buildout and deployment of our Internet networks. The timing and
amount of this spending is difficult to predict accurately and will depend upon
many factors. At this time, we have no commitments for any additional financing
and there can be no assurance that any commitments can be obtained on terms
acceptable to us, or at all. We may seek additional funds through public
offerings or private placements of our equity securities. These public
offerings or private placements will not require the prior approval of our
shareholders. If we raise additional funds by issuing equity or debt
securities, further dilution to our shareholders could occur. Additionally, we
may grant registration rights to investors purchasing equity or debt securities.
Debt financing, if available, may involve pledging some or all of our assets
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and may contain restrictive covenants with respect to raising future capital and
other financial and operational matters. If we are unable to obtain necessary
additional capital, we may be required to reduce our operations, which would
have a material adverse effect on our business, financial condition and results
of operations.
We have a lack of operating history. Our company was incorporated in 1996
under the laws of the State of Colorado. From our inception until March 1998,
we conducted no operations and generated no significant revenue. Our operations
are subject to all of the risks inherent in a start-up business enterprise.
These risks include the absence of a substantial operating history, shortage of
cash, under-capitalization and lack of experience in our chosen industry. We
expect to encounter various problems, expenses, complications and delays in
connection with the development of our business. The profit potential of our
business model is unproven and there can be no assurance that our services will
achieve commercial acceptance.
Our success is dependent upon pricing of our services and obtaining
customers. Because we provide commercial Internet subscription services, our
success depends upon the willingness of subscribers to pay the installation
costs and monthly fees of our services. We cannot predict whether demand for
our services will materialize at the prices we expect to charge or whether the
market will accept prices we may set. Our failure to achieve or sustain desired
pricing levels or to obtain a sufficient number of subscribers for our services
could have a material adverse effect on our business, financial condition or
results of operations. Our ability to attract subscribers and generate future
revenues will be dependent on a number of factors, many of which are beyond our
control. We can provide no assurance that we will be able to increase our
subscriber base. Because of these variables, we are unable to accurately
forecast our revenues.
We have a history of operating losses, depletion of working capital and
financial instability. Since our inception, we have experienced significant net
losses and have acccumulated significant deficits. We expect these losses and
deficits to continue for an undetermined period of time. Since the commencement
of our operations, we have earned only limited operating revenues. There can be
no assurance that we will be able to achieve profitable operations or sustained
revenues.
We may suffer losses as a result of pending lawsuits. We are presently
involved in several lawsuits, described in this prospectus in the section
entitled "Legal Proceedings." If some or all of these matters are determined
adversely to our interests, we may be required to issue additional shares of our
common stock and/or pay money damages. Even if we prevail in all of the matters,
the cost of the litigation could be substantial. In addition, our management may
have to devote a substantial amount of time to these lawsuits. Accordingly, our
pending litigation could have a material adverse effect on our business,
financial condition and results of operations.
We rely on key employees whose absence could adversely affect our ability
to execute our business strategy. Our future success will depend in large part
on our ability to attract, motivate and retain highly qualified employees.
Competition for these employees is intense and the process of locating technical
and management personnel with the combination of skills and attributes required
to execute our business strategy is often lengthy. Once these employees are
hired, there can still be intense competition for their services from other
businesses, including other start-up or Internet-related businesses. If we are
successful in implementing our business strategy, additional strain will be
placed on our managerial, operating, financial and other resources.
In addition, we are highly dependent upon the experience, abilities and
continued efforts of our senior management, especially Jeffery A. Mathias, our
President and Chief Executive Officer. We do not presently maintain "key man"
life insurance with respect to the members of our senior management. Our
inability to attract key personnel or the loss of the services of one or more of
the key members of our senior management, including Mr. Mathias, could have a
material adverse effect on our business, financial condition or results of
operations.
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<PAGE>
Competition could adversely affect our revenues. The market for the
provision of Internet services to businesses is extremely competitive, and we
expect that competition will intensify in the future. In addition to other
Internet service providers, we may face competition from businesses in other
industries seeking to provide Internet connection and Internet-related services.
Virtually all of our competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories and greater name recognition than we have. In
addition, these competitors may have more established relationships with
advertisers and content and application providers than we do. These competitors
may be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing Internet services than we can. We can provide no assurance that we
will be able to compete successfully against our current or future competitors.
Further, in response to competition, we may make pricing, service or marketing
decisions that could have a material adverse effect on our business, financial
condition or results of operations.
We may incur expenses or suffer a loss of business if our network fails.
Our success will depend in part upon our ability to support a complex network
infrastructure and avoid damage from fires, earthquakes, floods, power losses,
telecommunications failures and similar events. The occurrence of a natural
disaster or other unanticipated problems at our network operations center or at
any of our regional operation locations could cause interruptions in our
services. Any damage or failure that causes interruptions in our operations
could have a material adverse effect on our business, financial condition or
results of operations.
We may lose customers if we are unable to respond to technological change
in the industry. The market for business Internet service is characterized by
rapid technological developments, frequent new product introductions and
evolving industry standards. The emerging nature of these products and services
and their rapid evolution will require that we continually improve the
performance, features and reliability of our system, particularly in response to
our competition. We can provide no assurance that we will be successful in
responding quickly, cost effectively or sufficiently to these developments. In
addition, we may be required to make substantial expenditures in order to adapt
to new Internet technologies or standards. These expenditures could have a
material adverse effect on our business, financial condition or results of
operations.
We are highly dependant on the acceptance and growth of the Internet.
Acceptance of our services is substantially dependent upon the widespread
adoption of the Internet for commerce, entertainment and communications. As is
typical in rapidly developing markets, demand for and market acceptance of
Internet products and services are subject to a high level of uncertainty. In
addition, issues concerning the commercial use of the Internet remain unresolved
and may affect the growth of Internet use, especially in the markets that we
will target. Despite growing interest in the commercial possibilities for the
Internet, we believe that many businesses and individuals have been deterred
from purchasing Internet access services for a number of reasons including:
. inconsistent quality of service;
. limited availability of cost effective, high-speed service;
. difficulty in integrating business applications on the Internet; and
. inadequate protection of the confidentiality of stored data and
information moving across the Internet.
The adoption of the Internet for commerce and communications, particularly
by those enterprises that have historically relied upon alternative means of
commerce and communication, generally requires understanding and acceptance of a
new way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information, or in relationships with other
Internet service providers, may be reluctant and slow to
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<PAGE>
adopt a new strategy that may make their existing personnel, infrastructure or
Internet service provider relationship obsolete. Failure of the Internet market
to develop or unexpectedly slow development of the Internet market may have a
material adverse affect on our business, financial condition or results of
operations.
We may lose customers or incur significant expenses as a result of security
breaches of our network. Despite our implementation of security measures, our
networks may be vulnerable to unauthorized access, computer viruses and other
disruptive problems. Internet service providers and online service providers
have in the past experienced, and may in the future experience, interruptions in
service as a result of the accidental or intentional actions of Internet users,
current and former employees or others. A person gaining unauthorized access to
our network may be able to view and download confidential information stored on
our systems or the systems of our subscribers. We could be found liable to our
subscribers for unauthorized access and we may lose potential subscribers if
they perceive our system to be unsafe. Although we have implemented industry
standard security measures, similar measures have been circumvented in the past,
and we can provide no assurance that measures we implement will not be
circumvented in the future. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of our
services, which could have a material adverse effect on our business, financial
condition or results of operations.
We may incur liability related to our network technology or the information
or content on our network. We may face liability under federal, state or
foreign laws for defamation, copyright, trademark or patent infringement,
negligence, obscenity or other claims related to the information or data on our
network or the technology used in our network. This potential liability may
require us to expend substantial resources or discontinue some of our services.
Although we carry general liability insurance, our insurance may not cover or
fully indemnify us for all iability that we may incur. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could have a material adverse effect on our business, financial condition or
results of operations.
Future sales of additional shares of our common stock into the market may
depress the market price of our common stock. We have issued common stock,
options and warrants to purchase our common stock, and preferred stock which is
convertible into our common stock. In the future, we may issue additional
common stock, options, warrants, preferred stock or other securities exercisable
to purchase or convertible into our common stock. Sales of these shares of our
common stock or the market's perception that these sales could occur may cause
the market price of our common stock to fall. These sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate or to use equity as consideration
for future acquisitions.
Issuance of preferred stock may adversely affect holders of our common
stock. Our Board of Directors has the authority, without any further vote or
action by our shareholders, to issue up to 50,000,000 shares of preferred stock.
The issuance of preferred stock by our Board of Directors could adversely affect
the rights of the holders of our common stock. An issuance of preferred stock
could result in a class of outstanding securities that would have preferences
with respect to voting rights and dividends and in liquidation over the common
stock, and could, upon conversion or otherwise, have all of the rights of our
common stock. Our Board of Directors' authority to issue preferred stock could
discourage potential takeover attempts and could delay or prevent a change in
control through merger, tender offer, proxy contest or otherwise by making these
attempts more difficult or more costly to achieve.
We may incur expenses as a result of the Year 2000 problem. "Year 2000
problems" exist because many computer programs, embedded systems and components
were designed to refer to a year by the last two digits of the year, such as
"99" for "1999." Any of our 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, our temporary inability to process
transactions, send invoices, or engage in similar normal business activities. We
have implemented a
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program to identify and address potential Year 2000 problems which is scheduled
to be completed by October 1999. As a result of this program, we have upgraded
some of our existing software and in some cases converted to new software. We
believe these actions have mitigated potential Year 2000 problems that might
affect our computer networks and other systems; however, we have not completed
our Year 2000 assessment and therefore have not fully determined the extent to
which Year 2000 problems may affect our network and systems. Although we have
contacted our suppliers, vendors and customers regarding Year 2000 issues, we
have not yet fully determined the extent to which we are vulnerable to the
failure of these third parties to remediate their own Year 2000 problems. In
view of the foregoing, there can be no assurance that Year 2000 problems will
not have a material adverse effect upon our business, financial condition or
results of operations. See the section entitled "Management's Discussion and
Analysis or Plan of Operation - The Year 2000 Problem."
The events described in forward-looking statements we make in this
prospectus may not occur. This prospectus contains forward-looking statements
as that term is defined in the federal securities laws. Generally, these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or
anticipated benefits from acquisitions made or to be made by us, or projections
involving anticipated revenues, earnings or other aspects of our operating
results. The words "may," "will," "expect," "believe," "anticipate," "project,"
"plan," "intend," "estimate," "continue," their opposites and similar
expressions are intended to identify forward-looking statements. We caution
readers that these statements are not guarantees of future performance or events
and are subject to a number of uncertainties, risks and other influences, many
of which are beyond our control, that may influence the accuracy of the
statements and the projections upon which the statements are based, including
but not limited to the factors discussed in the risk factors described above.
Any one or more of these uncertainties, risks and other influences could
materially affect our results of operations and whether forward-looking
statements made by us ultimately prove to be accurate. Our actual results,
performance and achievements could differ materially from those expressed or
implied in these forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether from new
information, future events or otherwise.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy our filings at the SEC's public reference rooms in Washington,
D.C., New York, New York or Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the operation of the public reference rooms.
Our SEC filings are also available to the public from commercial document
retrieval services and at the Internet web site maintained by the SEC at
"http://www.sec.gov."
We have filed with the SEC a registration statement on Form SB-2 to
register the shares of our common stock to be sold by the selling security
holders. This prospectus is part of that registration statement, and, as
permitted by the SEC's rules, does not contain all of the information set forth
in the registration statement. For further information with respect to us or our
common stock, you may refer to the registration statement and to the exhibits
and schedules filed as part of the registration statement. You can review a copy
of the registration statement and its exhibits and schedules at the public
reference room maintained by the SEC, and on the SEC's web site, as described
above.
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SELLING SECURITY HOLDERS
The selling security holders are offering to sell 9,996,954 shares of our
common stock covered by this prospectus. None of the selling security holders
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates.
The following table lists the selling security holders eligible to sell
shares of common stock under this prospectus, the number of shares beneficially
owned by each selling security holder prior to this offering, and the maximum
number of shares each selling security holder may sell under this prospectus.
<TABLE>
<CAPTION>
Number of Shares Maximum Number
Beneficially Owned of Shares to be Sold
Prior to Offering(1) in Offering(2)
--------------------- -----------------------
<S> <C> <C>
AMRO International, S.A....................... 553,353(3) 771,706
Bulk Trade Inc. (BVI)........................ 951,469 1,902,938
Homice Investments, Ltd....................... 1,332,058 2,664,116
Circle-T Partners, L.P........................ 127,373 254,746
Circle-T International, Ltd................... 54,588 109,176
Mabcrown, Inc................................. 327,529 655,058
Schottenfeld Associates, L.P.................. 90,980 181,960
Robb Peck McCooey Management Corp............. 90,980 181,960
Jeffrey Benton................................ 36,392 72,784
William Benton................................ 63,686 127,372
Gary Berardi.................................. 18,196 36,392
Robert Brooks................................. 27,294 54,588
James Desimone................................ 7,279 14,558
Paul Freyer................................... 9,098 18,196
Patrick Murphy................................ 36,392 72,784
Robert M. Murphy.............................. 36,392 72,784
Michael Nichols............................... 9,098 18,196
James Oliphant................................ 18,196 36,392
Frederick F. Tramutola........................ 10,918 21,836
Needham Capital Group, Inc.................... 13,465 26,930
Michael S. Liss............................... 13,829 27,658
Robert E. Enslein, Jr......................... 9,098 18,196
Eric T. Singer................................ 87,341 174,682
CK Capital, L.P............................... 36,392 72,784
Norman Tulchin................................ 72,785 145,570
Mikel M. Mahjobi.............................. 40,032 80,064
Special Situations Fund III, L.P.............. 454,902 909,804
Special Situations Private Equity Fund, L.P... 363,921 727,842
Special Situations Cayman Fund, L.P........... 145,568 291,136
Special Situations Technology Fund, L.P....... 127,373 254,746
--------- ---------
Total......................................... 5,165,977 9,996,954
========= =========
</TABLE>
- --------------------
(1) The number of shares indicated includes shares acquired directly from us by
the selling security holders as well as shares which have been issued or
are issuable upon the conversion of preferred stock or the exercise of
warrants held by the selling security holders.
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<PAGE>
(2) In order to account for potential decreases in the prevailing market price
of our common stock between the date of issuance of the preferred stock or
the warrants and the date of actual conversion of the preferred stock or
exercise of the warrants, we agreed to register twice as many shares of our
common stock as would have been received by the holders of our series D and
series E convertible preferred stock if conversion or exercise had occurred
on the day the shares were issued or the day the registration statement
containing this prospectus is filed, whichever results in a greater number
of shares. Except as described in note (3) below, all of the shares
covered by this prospectus were issued or are issuable to the selling
security holders pursuant to purchases of our series D or series E
convertible preferred stock.
(3) Includes 335,000 shares issued or issuable to this selling security holder
in connection with the sale of series B convertible preferred stock, and
218,353 shares issuable to this holder in connection with the sale of
series D convertible preferred stock.
If the selling security holders sell all of the shares of common stock
covered by this prospectus and do not acquire any additional shares, none of the
selling security holders would own any shares of our common stock after the
completion of this offering.
We will pay all expenses to register the shares, except that the selling
security holders will generally pay any underwriting and brokerage discounts,
fees and commissions, specified attorneys fees and other expenses to the extent
applicable to them.
We have agreed to indemnify the selling security holders and certain
affiliated parties against specified liabilities, including liabilities under
the Securities Act of 1933, as amended, in connection with this offering. The
selling security holders have agreed to indemnify us and our directors and
officers, as well as any persons controlling our company, against certain
liabilities, including liabilities under the Securities Act. Insofar as
indemnification for liabilities under the Securities Act may be permitted to our
directors or officers, or persons controlling our company, we have been advised
that in the opinion of the SEC this kind of indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
USE OF PROCEEDS
We will not receive any proceeds when selling security holders sell shares
of common stock under this prospectus. We have received proceeds from the sale
of the convertible preferred stock and may receive proceeds from the exercise of
the warrants.
PLAN OF DISTRIBUTION
Selling security holders may sell their shares of common stock either
directly or through a broker-dealer or other agent at prices related to
prevailing market prices or at negotiated prices, in one or more of the
following kinds of transactions:
. transactions in the over-the-counter market,
. transactions on a stock exchange that lists our common stock, or
. transactions negotiated between selling security holders and
purchasers, or otherwise.
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<PAGE>
Broker-dealers or agents may purchase shares directly from a selling
security holder or sell shares to someone else on behalf of a selling security
holder. Broker-dealers may charge commissions to both selling security holders
selling common stock and purchasers buying shares sold by a selling security
holder. If a broker buys shares directly from a selling security holder, the
broker may resell the shares through another broker, and the other broker may
receive compensation from the selling security holder for the resale.
To the extent required by laws, regulations or agreements we have made, we
will use our best efforts to file a prospectus supplement during the time the
selling security holders are offering or selling shares covered by this
prospectus in order to add or correct important information about the plan of
distribution for the shares.
In addition to any other applicable laws or regulations, selling security
holders must comply with regulations relating to distributions by selling
security holders, including Regulation M under the Securities Exchange Act of
1934, as amended.
Some states may require that registration, exemption from registration or
notification requirements be met before selling security holders may sell their
common stock. Some states may also require selling security holders to sell
their common stock only through broker-dealers.
LEGAL PROCEEDINGS
We are a party to the following material legal proceedings:
1. SkyLynx Communications, Inc. v. Network System Technologies, Inc., No.
98-2036-Civ-T-23F (United States District Court for Middle District of Florida).
On October 2, 1998, we filed a civil action in the United States District Court
for the Middle District of Florida against Network System Technologies, Inc.
and Mr. Eduardo Moura, its Chairman of the Board and Chief Executive Officer.
This suit arises out of an agreement and plan of reorganization under which we
agreed to acquire technology, rights to licensing arrangements and other assets
from Network System. In this action, we seek monetary damages and injunctive
relief based upon several claims including rescission of contract, breach of
contract, fraud in the inducement, breach of fiduciary duty and tortious
interference with business relations and prospective business advantage.
The basis of our claims is that Network System made material
misrepresentations and omissions that induced us to enter into the agreement and
plan of reorganization. In addition, we allege that Network System failed to
deliver to us the technology, licensing arrangements and assets required by the
agreement.
We further allege that Network System introduced onto the Internet a
corrupt home page with the domain name "skylynx.com" that unlawfully intercepted
e-mail and other electronic communications intended for our web site. In
addition, we allege that Network System filled this web site with untruthful
information and statements about our company, damaging our reputation and
business relationships with customers and other business associates.
In their responsive pleading, Network Systems and Mr. Moura deny our claims
and assert counterclaims against us as well as individuals who were or are our
employees, including Jeffery A. Mathias, our President and Chief Executive
Officer. Network System counterclaims include unfair competition,
misappropriation and/or theft of trade secrets, interference with contractual
relations and constructive fraud. Based on these claims, Network System seeks a
combination of monetary damages and injunctive relief, including rescission of
the agreement and plan of reorganization and restitution of confidential
information and trade secrets.
2. Network System Technologies, Inc. v. SkyLynx Communications, Inc., No.
CV-778872 (California Superior Court in and for Santa Clara County). On December
22, 1998, Network System filed a civil
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<PAGE>
law suit against us in California Superior Court in and for Santa Clara County.
The claims Network System raises in this suit are substantially similar to the
counterclaims made by Network System in the Florida civil suit described above.
In its complaint, Network System alleges misappropriation of trade secrets,
breach of written agreements leading to indebtedness for services rendered,
breach of oral agreement and a common count for money paid in connection with
the agreement and plan of reorganization. Network System seeks a combination of
injunctive relief and monetary damages against us.
3. James Gordon v. Gary Brown and SkyLynx Communications, Inc., No. 98-
6394-CC (Circuit Court for the Twelfth Judiciary Circuit in and for Sarasota
County, Florida). On October 30, 1998, James Gordon filed a civil action against
us and Gary Brown, our former President and Chairman of the Board, in the
Twelfth Judiciary Circuit Court in and for Sarasota County, Florida. The case
arises out of a private equity offering we made in October 1997. In the
offering, Mr. Gordon tendered stock he owned in Teleservices International
Group, Inc. in exchange for shares of our common stock. We rejected the tender
based on restrictions on transferability of the Teleservices stock. Mr. Gordon
alleges securities fraud and seeks specific performance of the tender, the
issuance of approximately 200,000 shares of our common stock and monetary
damages.
MANAGEMENT
The following table sets forth the name, age and position of our directors
and executive officers:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Jeffery A. Mathias 39 President, Chief Executive Officer and Director
Frank P. Ragano 70 Chairman of the Board
James E. Maurer 39 Chief Financial Officer and Director
Steven R. Jesson 50 Vice President, Integration
Ned Abell 44 Vice President, Mergers and Acquisitions
and Secretary
David H. Roberts 31 Vice President, Business Development
</TABLE>
JEFFERY A. MATHIAS has been a director and our Chief Executive Officer
since October 1998 and has served as our President since July 1998. From June
1997 to June 1998, Mr. Mathias was the Vice President of Business Development of
Network System Technologies Inc., a provider of wireless Internet service. From
August 1995 to May 1997, Mr. Mathias was Chairman and Chief Executive Officer of
Wireless Holdings International, a start-up venture pursuing wireless cable
television projects in Europe. From December 1993 to August 1995, Mr. Mathias
was the Director of International Development and a director of American
Telecasting, Inc., a leading wireless cable provider in the U.S.
FRANK P. RAGANO, Major General, U.S. Army (RET), has been a director since
February 1998 and has been our Chairman of the Board since July 1999. From
1988 until 1999, Mr. Ragano was President and CEO of CMS, Inc., a wholly-owned
subsidiary of Daimler-Benz GmbH. From 1982 to 1988, Mr. Ragano was Chairman and
CEO of BEI Defense Systems Company. He is currently a director of Irvine
Sensors, a manufacturer of infra-red sensors.
JAMES E. MAURER has been our Chief Financial Officer since December 1998,
and has been a director since July 1999. From August 1997 to December 1998, Mr.
Maurer was the Director of Finance for Formus Communications, Inc., an Internet
access and data transport business serving international markets. Mr. Maurer
served as a consultant to Formus Communications from April 1997 to August 1997.
From September 1995 to April 1997, Mr. Maurer was Vice President of Finance for
Wireless Holdings International, a startup venture pursuing wireless cable
television projects in Europe. From June 1994 to April 1995, Mr. Maurer worked
for American Telecasting, Inc. as its Director of Financial Planning and
Analysis.
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<PAGE>
STEVEN R. JESSON has served as our Vice President, Integration since
January 1999. Mr. Jesson worked with Wedbush Morgan Securities as Vice
President/Sales Office Manager for the San Francisco Bay Area from September
1997 to September 1998. From March 1986 to July 1997, Mr. Jesson worked in
various positions at Fidelity Brokerage Services, Inc., a wholly owned division
of Fidelity Investments, most recently as Regional Vice President with
responsibility over 19 offices and over 300 employees.
NED ABELL has served as our Vice President, Mergers and Acquisitions since
September 1998. From August 1994 to August 1998, Mr. Abell was Director of
Corporate Development of American Telecasting, Inc., with responsibility for
merger and acquisition activities. From 1990 to 1993, Mr. Abell was President
and Chief Operating Officer of Pioneer United Mallvision, a provider of
videowall technology, cable programming and advertising in indoor shopping
centers.
DAVID H. ROBERTS has served as our Vice President, Business Development
since January 1999. From October 1997 until January 1999, Mr. Roberts served as
Managing Director of The Hunter Group, a Washington, D.C. based consulting firm
advising developmental stage and medium-sized businesses. From October 1993 to
September 1997, Mr. Roberts was Vice President of Adelphi Group, a consulting
firm specializing in corporate development in the telecommunications and
transportation industries. From 1992 to 1993, Mr. Roberts worked in the
Republican Counsel's Office, House Energy and Commerce Committee.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table lists, as of the date of this prospectus, the number of
shares of our common stock owned by:
. each person who owned of record, or was known to own beneficially,
more than five percent (5%) of our outstanding shares of common stock,
. each of our directors and our current and former chief executive
officers, and
. all of our current directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of
Shares
Name & Address of Beneficially Percent of
Beneficial Owner (1)(2) Owned Class (3)
- ----------------------- -----
<S> <C> <C>
Jeffery A. Mathias 604,437(4) 5.3%
Frank P. Ragano 360,128(5) 3.2%
James E. Maurer 289,551(6) 2.5%
Gary L. Brown 2,235,353(7) 20.0%
718 Siesta Kay Circle
Sarasota, Florida 34242
Network System Technologies, Inc. 1,732,457(8) 15.5%
55 South Market Street
San Jose, California 96112
All Directors and Executive Officers
as a Group (6 Persons) 2,047,831 16.5%
</TABLE>
- --------------------
(1) Unless otherwise noted, each stockholder's address is c/o SkyLynx
Communications, Inc., 600 South Cherry Street, Suite 305, Denver, CO 80246.
(2) Unless otherwise noted, each stockholder exercises sole investment and
voting power with respect to the shares listed.
(3) The applicable percentage is based on 11,153,781 shares of common stock
outstanding as of July 8, 1999.
(4) Includes 279,437 shares issuable pursuant to options exercisable within
sixty days.
(5) Includes 200,000 shares issuable pursuant to options exercisable within
sixty days.
(6) Includes 214,551 shares issuable pursuant to options exercisable within
sixty days.
(7) Includes 38,400 shares issuable pursuant to options exercisable within
sixty days.
(8) Network System Technologies, Inc., a California corporation, is the record
owner of these shares. Voting and investment power with respect to these
shares is exercised by Network System's Board of Directors, which is
comprised solely of Eduardo J. Moura, Tony Coelho and J.R. Gallucci.
Messrs. Moura, Coelho and Gallucci disclaim beneficial ownership of such
shares for purposes of Section 16 under the Securities Exchange Act of
1934, as amended.
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<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 150,000,000 shares of common
stock, par value $.001 per share and 50,000,000 shares of preferred stock, par
value $.01 per share. The following summary of provisions applicable to our
common stock and preferred stock is subject to, and qualified in its entirety
by, our Articles of Incorporation and Bylaws and by the provisions of applicable
law.
Common Stock
As of July 21, 1999, 11,194,281 shares of our common stock were outstanding
and held of record by 161 holders of record.
Each holder of shares of common stock is entitled to one vote for each
share held on all matters submitted to a vote of holders of common stock. The
common stock does not have cumulative voting rights, which means that holders of
more than 50% of the shares of common stock are able to elect all of our
directors and, in this event, the holders of the remaining shares would not be
able to elect any directors. Each share of common stock is entitled to
participate equally in dividends, if, as and when declared by our Board of
Directors, and in the distribution of assets in the event of liquidation,
subject in all cases to any prior rights of outstanding shares of preferred
stock. We have never declared or paid cash dividends on our common stock and it
is our present intention not to pay any cash dividends to holders of common
stock but to reinvest our earnings, if any. The shares of common stock have no
preemptive, conversion or other subscription rights and there are no redemption
or sinking fund provisions applicable to the common stock. The outstanding
shares of common stock are, and all shares of common stock offered by this
prospectus will be, upon issuance and sale, duly authorized, validly issued,
fully paid and nonassessable.
Our Board of Directors has the authority, without shareholder approval, to
issue up to 100,000,000 shares of our common stock. The issuance of common
stock could, among other things and under some circumstances, have the effect of
delaying, deferring or preventing a change of control without any action by our
shareholders.
Preferred Stock
Our Board of Directors may, without shareholder approval and subject to the
rights of the holders of our existing preferred stock, establish and issue
shares of one or more classes of preferred stock having the designations, number
of shares, dividend rates, liquidation preferences, redemption provisions,
sinking fund provisions, conversion rights, voting rights and other rights,
preferences and limitations that our Board may determine. The Board may
authorize the issuance of preferred stock with voting, conversion and economic
rights senior to the common stock so that the issuance of preferred stock could
adversely affect the market value of the common stock. The creation of one or
more series of preferred stock may adversely affect the voting power or other
rights of the holders of common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things and under some circumstances, have
the effect of delaying, deferring or preventing a change in control without any
action by shareholders.
As of July 8, 1999, our authorized and outstanding preferred stock
consisted of the following:
. 805,191 shares of series A convertible preferred stock;
. 600 shares of series B convertible preferred stock;
. 721,419 shares of series C convertible preferred stock;
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<PAGE>
. 10,000 shares of series D convertible preferred stock; and
. 3,000 shares of series E convertible preferred stock.
Each series of preferred stock ranks prior to the common stock and equally
with each other series of preferred stock.
Series A Convertible Preferred Stock.
Each share of our series A convertible preferred stock is convertible
voluntarily by the holder into one share of our common stock, subject to
adjustments, after the earlier of one year following the date of issue or upon
the effective date of a registration statement covering the conversion shares.
Unless earlier converted by their holder, all of the shares of our series A
convertible preferred stock will automatically convert into shares of common
stock on the third anniversary of the date of issuance of the series A
convertible preferred stock, or sooner in some circumstances.
Holders of the series A convertible preferred stock are entitled to receive
payment of dividends at the annual rate of 10% of the stated value of $4.00 per
share. Dividends on the series A convertible preferred stock are cumulative.
Holders of the series A convertible preferred stock are also entitled to
participate, pro rata, in dividends paid on the outstanding shares of common
stock.
The outstanding shares of series A convertible preferred stock have a
liquidation preference equal to $4.00 per share. Holders of series A
convertible preferred stock are not entitled to demand, and we are not required
or entitled to effect, the redemption of any of the shares of series A
convertible preferred stock.
Holders of series A convertible preferred stock are entitled to vote with
the holders of shares of common stock as a single class on all matters presented
for a vote to our stockholders. Each holder of series A convertible preferred
stock may cast one vote for each share of common stock into which the holder's
shares of series A convertible preferred stock may be converted.
Series B Convertible Preferred Stock.
Each share of our series B convertible preferred stock is convertible
voluntarily by the holder into a minimum of 333 shares of common stock, subject
to adjustments with respect to the market value of the common stock and the
amount of accrued and unpaid dividends on the series B convertible preferred
stock, except to the extent that the aggregate number of shares of common stock
beneficially owned by a holder of series B convertible preferred stock and its
affiliates following the conversion would exceed 5.0% of the outstanding shares
of our common stock.
Holders of the series B convertible preferred stock are entitled to receive
payment of dividends at an annual rate of 8% of the stated value of $1,000 per
share. Dividends on the series B convertible preferred stock are cumulative and
are payable quarterly in cash or in shares of our common stock, at our option.
Holders of the series B convertible preferred stock are also entitled to
participate, pro rata, in any dividends paid on the outstanding shares of common
stock.
The outstanding shares of series B convertible preferred stock have a
liquidation preference equal to their stated value of $1,000 per share plus all
accrued and unpaid dividends.
We have the right to redeem the outstanding shares of series B convertible
preferred stock in the event that the public trading price of our common stock
is equal to or less than $2.00 per share for ten or more consecutive trading
days. If we elect to redeem the shares, the redemption price will be the sum of
the stated
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<PAGE>
value of $1,000 per share, plus the amount of all accrued and unpaid dividends,
multiplied by a percentage ranging from 117.5% to 125%, depending upon the date
of redemption. The holder of the series B convertible preferred stock may
decline to have its shares included in the redemption.
The holder of the series B convertible preferred stock has no right to vote
on matters submitted to our stockholders for a vote, except as required by
applicable law.
We have granted registration rights to the holder of the series B
convertible preferred stock pursuant to a registration rights agreement
requiring us to prepare and file a registration statement so as to permit the
public offering and resale of the shares of common stock issued to, or issuable
pursuant to preferred stock and warrants held by, the series B convertible
preferred stockholder.
Series C Convertible Preferred Stock.
Each share of our series C convertible preferred stock is convertible
voluntarily by the holder into one share of our common stock, subject to
adjustments. Unless sooner converted by their holders, all of the shares of our
series C convertible preferred stock will automatically convert into shares of
common stock on the third anniversary of the date of issuance of the series C
convertible preferred stock.
Holders of the series C convertible preferred stock are entitled to receive
payment of dividends at the annual rate of 10% of the stated value of $4.00 per
share. Dividends on the series C convertible preferred stock are cumulative and
are payable in the form of additional shares of series C convertible preferred
stock. Holders of the series C convertible preferred stock are also entitled to
participate, pro rata, in any dividends paid on the outstanding shares of common
stock.
The outstanding shares of series C convertible preferred stock have a
liquidation preference equal to $4.00 per share. Holders of series C
convertible preferred stock are not entitled to demand, and we are not required
to effect, the redemption of any of the shares of series C convertible preferred
stock.
Holders of series C convertible preferred stock are entitled to vote with
the holders of shares of common stock as a single class on all matters presented
for a vote to our stockholders. Each holder of series C convertible preferred
stock may cast one vote for each share of common stock into which the holder's
shares of series C convertible preferred stock may be converted.
Series D Convertible Preferred Stock.
Each share of our series D convertible preferred stock is convertible
voluntarily by the holder into 333 shares of our common stock, subject to
certain adjustments. Unless sooner converted by their holders, all of the
shares of our series D convertible preferred stock will automatically convert
into shares of common stock three years after the date of issuance of the series
D convertible preferred stock, which date may be extended under some
circumstances. Notwithstanding the foregoing, the shares of series D
convertible preferred stock will not convert into shares of common stock to the
extent that the aggregate number of shares of common stock beneficially owned by
a holder of series D convertible preferred stock and its affiliates following
conversion would exceed 4.99% of the outstanding shares of our common stock.
Holders of the series D convertible preferred stock are entitled to receive
payment of dividends at the annual rate of 5% of the liquidation preference of
$1,000 per share. Dividends on the series D convertible preferred stock are
cumulative and are payable in shares of common stock or cash, at the option of
the holders of the shares of series D convertible preferred stock, except that
dividends on the series D convertible preferred stock are payable only in shares
of common stock upon any conversion of the series D convertible preferred stock
into shares of common stock or upon the redemption of the series D convertible
preferred stock.
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<PAGE>
The outstanding shares of series D convertible preferred stock have a
liquidation preference equal to their stated value of $1,000 per share plus any
accrued and unpaid dividends.
If after one year following the issuance of the series D convertible
preferred stock, our common stock is trading for less than $3.00 per share, we
may redeem all or a portion of the series D convertible preferred stock
outstanding at a price per share equal to 120% of the liquidation preference of
$1,000 plus any accrued and unpaid dividends. Holders of the series D
convertible preferred stock may decline to have their shares included in the
redemption.
Except for the class voting rights discussed below and as otherwise
required by applicable law, the holders of series D convertible preferred stock
have no voting rights on matters submitted to our stockholders for a vote. The
class voting rights of the holders of series D convertible preferred stock
require that the Company receive the affirmative vote of 75% of the then
outstanding shares of series D convertible preferred stock in order to take
specified actions with respect to our liquidation, make specified changes to our
Articles of Incorporation or Bylaws or otherwise affect the rights of the series
D holders or take other actions as described in the certificate of designation
for the series D convertible preferred stock.
We have granted registration rights to the holders of the series D
convertible preferred stock under a registration rights agreement requiring us
to prepare and file a registration statement so as to permit the public offering
and resale of the shares of common stock issuable to series D convertible
preferred stock holders upon conversion of their preferred stock or exercise of
their warrants.
Series E Convertible Preferred Stock.
Each share of our series E convertible preferred stock is convertible
voluntarily by the holder into 333 shares of our common stock, subject to
adjustments. Unless sooner converted by their holders, all of the shares of our
series E convertible preferred stock will automatically convert into shares of
common stock three years after the date of issuance of the series E convertible
preferred stock, which date may be extended under some circumstances.
Notwithstanding the foregoing, the shares of series E convertible preferred
stock will not convert into shares of common stock to the extent that the
aggregate number of shares of common stock beneficially owned by a holder of
series E convertible preferred stock and its affiliates following conversion
would exceed 4.99% of the outstanding shares of our common stock.
Holders of the series E convertible preferred stock are entitled to receive
payment of dividends at the annual rate of 5% of the liquidation preference of
$1,000 per share. Dividends on the series E convertible preferred stock are
cumulative and are payable in shares of common stock or cash, at the option of
the holders of the shares of series E convertible preferred stock, except that
dividends on the series E convertible preferred stock are payable only in shares
of common stock upon any conversion of the series E convertible preferred stock
into shares of common stock or upon the redemption of the series E convertible
preferred stock.
The outstanding shares of series E convertible preferred stock have a
liquidation preference equal to their stated value of $1,000 per share plus any
accrued and unpaid dividends.
If after one year following the issuance of the series E convertible
preferred stock, our common stock is trading for less than $3.00 per share, we
may redeem all or a portion of the series E convertible preferred stock
outstanding at a price per share equal to 120% of the liquidation preference of
$1,000 plus any accrued and unpaid dividends. Holders of the series E
convertible preferred stock may decline to have their shares included in the
redemption.
Except for the class voting rights discussed below and as otherwise
required by applicable law, the holders of series E convertible preferred stock
have no voting rights on matters submitted to our stockholders for
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<PAGE>
a vote. The class voting rights of the holders of series E convertible preferred
stock require that we receive the affirmative vote of 75% of the then
outstanding shares of series E convertible preferred stock in order to take
specified actions with respect to our liquidation, make specified changes to our
Articles of Incorporation or Bylaws or otherwise affect the rights of the
series E holders or take other actions as described in the certificate of
designation for the series E convertible preferred stock.
We have granted registration rights to the holders of the series E
convertible preferred stock under a registration rights agreement requiring us
to prepare and file a registration statement so as to permit the public offering
and resale of shares of common stock issuable to series E convertible preferred
stockholders upon conversion of their preferred stock or exercise of their
warrants.
INDEMNIFICATION
Our Articles of Incorporation allow us to indemnify our directors,
officers, employees and agents for various acts to the full extent permitted by
the Colorado Business Corporation Act. Our Articles of Incorporation, and their
amendments, are incorporated by reference as Exhibits to the registration
statement which includes this prospectus.
In general under the Colorado Business Corporation Act, we may indemnify
any officer, director, employee or agent against expenses, fines, penalties,
settlements or judgments arising in connection with a legal proceeding to which
the person is a party, if the person's actions were in good faith, were believed
to be in our best interest, and were not unlawful. Indemnification is mandatory
with respect to a director or officer who was wholly successful in defense of a
proceeding. In all other cases, indemnification of, a director, officer,
employee, or agent requires the board of directors independent determination,
independent legal counsel's determination, or a vote of the shareholders that
the person to be indemnified met the applicable standard of conduct.
The circumstances under which we may grant indemnification in connection with
an action brought on our behalf are generally the same as those described above.
However, with respect to actions against directors, we may grant indemnification
only with respect to reasonable expenses actually incurred in connection with
the defense or settlement of the action. In these actions, the person to be
indemnified must have acted in good faith and in a manner the person reasonably
believed was in our best interest; the person must not have been adjudged liable
to us; and the person must not have received an improper personal benefit.
We are also obligated to indemnify some of our executive officers under
employment agreements we have with them, and may in the future grant
indmenification rights to other employees or agents under other agreements we
may make. In addition, we have purchased insurance which protects our directors
and officers against liabilities they may incur in connection with their
services in these positions.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC this kind of indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable.
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<PAGE>
DESCRIPTION OF BUSINESS
Overview
Our strategy is to become a leading provider of high-speed Internet
connected and advanced Internet services to small and medium-sized businesses.
Subject to our ability to obtain additional capital, we plan toacquire Internet
service providers in certain geographical areas and to integrate the companies
we acquire into a centralized network. We currently have networks providing
Internet services in Tampa and Sarasota, Florida; Fresno, California; and
Eugene, Oregon, and we have recently completed the acquisition of Internet
service providers located in Tampa, Florida; Fresno, California; San Diego,
California; Seattle, Washington; Eugene, Oregon; and Las Vegas, Nevada. We
currently have approximately 12,000 subscribers. We have entered into a binding
letter of intent to acquire an additional Internet service provider operating in
Sacramento, California serving approximately 7,800 subscribers.
Our company was incorporated in Colorado in 1996 under the name "Allied
Wireless, Inc." In December 1997, we merged with SkyLynx Express Holdings, Inc.,
and in February 1998 we changed our name to SkyLynx Communications, Inc.
Industry Background
The provision of Internet connection and advanced Internet services are two
of the fastest growing segments of the telecommunications services market.
According to International Data Corporation, total Internet service provider
revenues in the United States are projected to grow from $10.7 billion in 1998
to $37.4 billion in 2003. The availability of Internet connection, advancements
in technologies required to navigate the Internet and the growth 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
helps businesses reduce operating costs, access valuable information and reach
new markets. As a result, businesses increasingly are using the Internet to help
their sales, customer service and project coordination. International Data
Corporation estimates that U.S. revenues for corporate access to the Internet
will grow from $2.9 billion in 1998 to $12.0 billion in 2003.
In addition to Internet connection services, business customers
increasingly are seeking a variety of advanced products and services to take
full advantage of the Internet. The principal advanced services currently being
offered by business-oriented Internet service providers include:
. hosting world wide web sites;
. Internet and computer network security;
. commerce, including marketing and sales, known as "electronic
commerce";
. networks among computer users within a business, or at several
different locations, sometimes known as "intranets" or "extranets";
. voice and facsimile transmission; and
. data storage and retrieval.
According to International Data Corporation, the provision of advanced Internet
services is the fastest growing segment of the Internet services market and is
expected to grow from $3.0 billion in 1998 to over $12.9 billion in 2003.
The rapid development and growth of the Internet has resulted in a highly
fragmented industry. According to CS First Boston, there are approximately 5,000
national and local Internet service providers in the
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United States, and no dominant Internet service provider serves the needs of
small and medium-sized businesses. We believe that large national Internet
service providers have primarily focused on large businesses or consumers and
lack the local presence to provide the customized services required by small and
medium-sized businesses. According to CS First Boston, less than half of these
small and medium-sized businesses receive services from an Internet service
provider, and those that do are generally served by independent regional and
local Internet service providers.
Business Strategy
The key elements of our business strategy are outlined below.
Acquire local Internet service providers. Since January 1999, we have
acquired six Internet service providers and have entered into a binding letter
of intent to acquire one additional Internet service provider. We are also in
negotiations to acquire a number of other Internet service providers. Subject to
our ability to obtain additional financing, we intend to identify and acquire
additional business-focused Internet service providers to broaden our market
presence and to expand the advanced products and services we can offer to our
customers.
Integrate operations of acquired Internet service providers. We plan to
integrate the operations of our acquired Internet service providers in part by
connecting them to a single, high-speed, highly-reliable network and by
consolidating their accounting, customer billing, purchasing and other financial
operations at our headquarters. If we acquire several Internet service providers
in a single market, we plan to consolidate their marketing, sales, customer
service and technical operations, and intend to adopt the best ideas and
practices of each Internet service provider in that market. We have begun
integrating the operations of our the Internet service providers we have already
acquired.
Acquire and offer advanced products and services. Small and medium-sized
businesses are purchasing an increasing number of advanced Internet products and
services. We believe that we will be able to derive additional revenue from both
new and existing customers by selling an expanding array of services, including:
. enhanced broadband Internet access;
. web site hosting;
. electronic commerce;
. voice service over the Internet; and
. security services.
We intend to encourage our regional operations to share their ideas and
knowledge of innovative Internet services among our regional businesses and our
corporate development department.
Utilize experienced management. We believe that the quality and experience
of our management team will be critical to our success. Our senior management
team has successfully executed consolidation strategies similar to ours and has
experience in the management of telecommunications and technology businesses.
Current Markets and Acquisitions
Listed below are the markets in which we currently operate, or have plans
to operate, and the acquisitions we have made in these markets:
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Tampa, Florida. On February 2, 1999, we acquired substantially all of the
assets of InterAccess Corp., an Internet service provider operating in the
Tampa area serving approximately 250 customers, the majority of which are
businesses. The aggregate purchase price for this acquisition was $390,770,
consisting of $195,385 in cash and 25,607 shares of our common stock. We have
completed the construction of a wireless network in the Tampa metropolitan area,
consisting of three wireless cell sites. We have recently begun marketing
Internet services and are installing wireless services to customers in this
market.
Eugene, Oregon. On March 24, 1999, we completed the acquisition of
ContiNet, LLC, an Internet service provider serving approximately 1,100
customers in the Eugene area. The aggregate purchase price for this acquisition
was $497,540, consisting of $343,379 in cash, the assumption of $50,000 of debt
and 19,100 shares of our common stock. We retained the services of seven
employees of ContiNet, including the general manager and co-founder of the
business.
Fresno, California. We have acquired leases for two wireless channels in
the Fresno, California market. We have completed construction of these channels
and have begun operating the Fresno network. On April 29, 1999, we acquired
substantially all of the assets of Net Asset, LLC, an Internet service provider
operating in the Fresno area serving approximately 450 customers, the majority
of which are businesses. The purchase price for this acquisition was
approximately $1,175,000 in cash. We have initiated the integration of the Net
Asset acquisition into the Fresno system. Prior to the acquisition, we were
serving approximately 50 customers in the Fresno market.
San Diego, California. On April 28, 1999, we acquired substantially all of
the assets of Simply Internet, Inc., an Internet service provider operating in
the San Diego, California area serving approximately 6,000 customers. The
purchase price for this acquisition was approximately $2,123,775 in cash. We
retained the services of the general manager and co-founder of Simply Internet.
Seattle, Washington. On May 7, 1999, we completed the acquisition of
substantially all of the assets of SeaTac.Net, Inc., an Internet service
provider operating in the Seattle, Washington area serving approximately 900
customers. The aggregate purchase price for this acquisition was approximately
$400,000, consisting of $200,000 in cash and 19,865 shares of our common
stock. We retained the services of three key employees of SeaTac.Net,
including the general manager and co-founder of the business.
Sarasota, Florida. On June 4, 1999, we obtained a twenty-five year lease
for twelve wireless channels in the Sarasota-Bradenton area. The lease gives us
coverage over six Florida counties: Sarasota, Manatee, Charlotte, DeSoto, Pasco
and Pinellas. We have begun the process of applying to the Federal
Communications Commission to upgrade the system to a two-way licensed frequency
system. We recently have begun marketing of wireless Internet access services
in the Sarasota market.
Las Vegas, Nevada. On July 16, 1999, we completed the acquisition of
substantially all of the assets of Network Training and Consulting d/b/a
ISAT Network, an Internet service provider operating in the Las Vegas, Nevada
area serving approximately 3,100 customers. The aggregate purchase price for
this acquisition was approximately $900,000, consisting of $450,000 in cash and
56,250 shares of our common stock. We have retained the services of the two
former owners of ISAT Network for a period of three months following the
acquisition.
Sacramento, California. On April 20, 1999 we entered into a binding letter
of intent to acquire all of the capital stock of CalWeb Internet Services, Inc.,
an Internet service provider operating in the Sacramento, California area
serving approximately 7,800 customers. The aggregate purchase price for this
acquisition is expected to be approximately $4.3 million, consisting of
approximately $2.6 million in cash and a number of shares of our common stock
with an aggregate value of approximately $1.7 million, with the number of shares
calculated in accordance with our purchase agreement with CalWeb. Subject to
the satisfaction of several
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conditions, we expect this acquisition to close by July 27, 1999. Following the
closing of the acquisition, we expect to retain the services of the two former
owners of CalWeb.
Products and Services
We plan to offer, through our regional Internet service provider operations
and strategic partnerships, a comprehensive range of Internet connection and
advanced Internet services. The specific services we will offer in each market
will be determined based on the needs of the market and local competitive
conditions. We intend to continuously enhance the services we offer by
developing a broad range of services independently, through acquisitions and
through strategic relationships with our key vendors.
The following is a description of the services we currently offer, or
intend to offer in the future.
Basic internet services. We offer customers several high-speed Internet
services including local access connection, full service high-speed Internet
access and a variety of intranet/extranet connection services. We provide all
of our subscribers' Internet access, allowing customers to access the world wide
web to receive and send data, video and audio. Our subscribers can search the
Internet for data, download large files and exchange Internet mail. Our
Internet services also include interactive news services as well as connections
to other corporate computer networks outside the customer's local area.
Advanced internet services. We believe that our 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 advanced
services. Our product development and marketing groups will focus on developing
new advanced services through internal development, acquisitions and strategic
relationships with software, hardware and Internet content businesses. Below is
a description of each service we offer or plan to offer:
Web hosting services. Web hosting is performed by computers known as
web servers, which carry or "host" Internet web sites on their systems.
The web server enables anyone with access to the Internet to view the web
site. We offer our customers web hosting services through a combination of
internal efforts and the use of third party partners. We also provide our
customers web hosting services that will connect their corporate computer
networks to the Internet. In the future, we plan to administer and maintain
Internet web sites at our network operations center.
Web site management services. We offer web site management services
that maintain and update our customers' web sites on an ongoing basis.
Additionally, we provide our customers with statistics and analysis of the
Internet usage and use of their web sites by others.
Web site co-location. We also offer web site co-location, where a
customer-owned web server is located at one of our network locations for
higher reliability and security. This allows the customer to own its own
web server without having to maintain and manage the data center for the
web site. Our network supports high performance corporate servers, and our
network engineers administer and maintain our customers' hardware and
software in a secure and protected environment.
E-mail services. We provide and support Internet mail services. We
support customer's e-mail service with domain names (i.e., name@abc-
company.com), as well as without a domain (i.e.,
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[email protected]). Mail services may operate on customers' servers or on
servers we provide at our network operations center.
Electronic commerce. Electronic commerce provides customers with the
ability to market and sell products and services on the Internet. We
provide e-commerce services through strategic partnerships. We also intend
to provide advanced e-commerce hosting environments and to form
partnerships with software developers to provide certain e-commerce
services, such as online catalogs.
Voice on the Internet services. Voice on the Internet allows
customers to make telephone calls over the Internet, potentially lowering
the cost of some calls, including international calls. We are currently
developing and testing this service with the assistance of some of our
technology partners and non-paying customers.
Domain name services. We provide domain name service, which is a
general purpose data service used on the Internet for translating web host
names, like "www.yourname.com," into numeric Internet addresses. On behalf
of our customers, we register and administer Internet domain names. Our
customers retain ownership of each domain, although we act as the
administrative contact for the domain. We provide support services for
these domains including electronic mail services, file transfer programs,
world wide web services and electronic commerce.
Web site development services. An Internet homepage or a web site
consists of the graphics and text viewed on the Internet which is
associated with a specific world wide web address. We provide Internet
homepage and web site development services to our customers through
relationships with third party vendors.
System integration services. We provide system integration services
to our customers, specifically in the area of high-speed Internet and
intranet/extranet connections and gateways. Our services also include the
installation and configuration of routers, web servers, proxy servers and
Internet firewalls.
Security services. Security is vital to most businesses connected to
the Internet. Through strategic partnerships, we offer a comprehensive set
of security products, including authentication of network users and data
encryption services.
Professional services. We offer a full set of professional services
to our customers, including network and system design, security system
needs analysis and implementation, and other Internet-related consulting
services. We intend to invest in additional professional service
capabilities or form partnerships with technology leaders to provide
customers with additional professional services.
Target Market
Our plan is to focus our service offerings on the needs of small and
medium-sized businesses. We believe that these businesses are becoming
increasingly reliant on Internet access to significantly enhance communications
with other offices, employees, customers and suppliers. We also believe that
the Internet enables such businesses to reduce operating costs, access valuable
information and reach new markets. As a result, we believe that small and
medium-sized businesses increasingly are utilizing the Internet for crucial
business needs such as sales, customer service and project coordination.
According to CS First Boston, small and medium-sized businesses represent a
potential market of over seven million customers in the U.S., and Internet use
by this market segment is expected to grow substantially from its current low
level. Small and medium sized business customers are also increasingly seeking
a variety of advanced products and services to take full advantage of the
Internet and allow them to compete with larger companies cost-effectively. We
believe that small and medium-
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sized businesses generally seek an Internet service provider 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 the customer can establish a stable and long-term
relationship.
Sales and Marketing
We plan to offer our products and services through a direct sales force and
through resellers and indirect sales channels.
Direct sales. We plan to employ a direct sales force to focus on our
target customers. We plan to hire sales representatives who have strong
Internet-related backgrounds and who understand the needs of their local
businesses. These representatives will be based in the local communities
in which they will sell our products and services. We also plan to use
direct marketing techniques including direct mail, telemarketing, seminars
and trade-show participation.
Resellers and indirect sales. We intend to employ reseller and
referral programs to market and distribute our services. Resellers are
persons or entities not directly employed or affiliated with us who agree
to market and sell our products. Our reseller program will offer resellers
an up-front bonus for each new customer and the ability to share in
revenues from customers they bring to us. We have established reseller
arrangements with several Internet-related companies. Referral partners
will receive a fee or some other form of compensation for referring
customers or customer leads to us. We expect that referral partners will
include organizations such as local computer companies, information
technology consultants, web page designers, advertising agencies or other
entities that do not generally sell Internet services directly.
Operations
Network management. We intend to manage our network full-time using
management, monitoring and tracking systems at our network operations center.
We plan to deploy regional network operations centers which will report to a
centralized network management center at our headquarters in Denver, Colorado.
Our network operations center will monitor the local networks delivering
Internet services to our customers.
Support services. In addition to our network monitoring capability, we
plan to offer the following support services to increase the quality and
consistency of our services:
. Customer technical support. We intend to operate a central customer
support center to enable us to respond on a 24 hour basis to customer
needs. We also plan to maintain local customer support personnel to
provide installation assistance at customer sites, system maintenance
and troubleshooting services.
. Financial information management. We plan to employ a centralized
financial reporting and payroll/human resources system to provide a
central, standardized accounting system for all Internet service
providers we acquire.
. Billing and collections. We also plan to implement a centralized
billing and collections system for all Internet service providers we
acquire.
Competition
The market for Internet access and related services is extremely
competitive. We expect competition to increase as Internet use grows and
established national Internet service providers, telecommunications and
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computer related vendors expand their traditional products and services and new
start-up businesses emerge. Our competitors may include:
. national and regional commercial Internet service providers like
Verio, UUNet, GTE Internetworking, PSINet, Concentric Networks and
DIGEX;
. established online commercial information providers like AOL, MSN and
Prodigy;
. local Internet service providers in our target market areas who
provide services similar to ours;
. cable television operators like @Home and Roadrunner;
. national long distance telecommunications carriers like AT&T, MCI
Worldcom and Sprint; and
. regional telephone operating companies like US West, SBC
Communications and Bell South.
We also believe that new competitors will continue to enter the Internet
access market. These new competitors may include large computer hardware and
software companies, media and telecommunications entities and companies that
provide direct service to residential customers, including cable television
operators, wireless communication companies, local and long distance telephone
companies and electric utility companies.
Almost all of our competitors are larger than us and have greater
financial, technical, and operating resources than we do. We cannot assure you
of our survival in this intensely competitive environment. We will need to
distinguish ourselves by our technical knowledge, our responsiveness to our
target customers, our ability to market and sell customized combinations of
services within our markets and our capacity to offer diverse Internet services.
Employees
As of July 16, 1999, we employed approximately 84 people, including 66
full-time and 18 part-time employees. We consider our employee relations to be
good. None of our employees are covered by a collective bargaining agreement.
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MANAGEMENT'S DISCUSSION OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this
prospectus.
Overview
We provide a range of Internet connection and Internet-related services
to small and medium-sized business and residential customers. The services we
offer include:
. high-speed Internet connection and access;
. intranet/extranet connection services;
. registration and administration of customers' Internet domain names;
. web site hosting services; and
. web site development services.
We earn revenue primarily from subscriptions from our customers for
Internet connection and access. Subscription fees among our Internet service
providers vary between $15.00 and $200.00 per month, depending upon economic and
competitive conditions in their individual markets, and the billing plans each
Internet service provider offers. Most of our subscribers pay us on a monthly
basis. We earn additional revenue from providing intranet/extranet connection
services, hosting and developing commercial and individual web sites and
registration and administration of customers' Internet domain names. The rates
we charge for these services vary depending upon local competitive conditions,
and, in some cases, arrangements we have with third-party providers of these
services. Customers generally pay us directly on a per-service basis for these
services.
Our costs and expenses primarily fall into the following categories:
. telecommunications and operations;
. sales and marketing;
. general and administrative;
. amortization and depreciation.
Our telecommunications and operating expenses consist of our cost of non-
capital equipment and telecommunication costs, including the cost of local
telephone lines and the costs of leased lines connecting the Internet and our
operations centers. We expect these expenses to increase over time to support
our growing subscriber base.
Our operating expenses also include employee salaries and benefits,
equipment costs, office rent and utilities and customer service and technical
support costs. We expect customer service and support expenses to increase over
time to support new and existing subscribers. New subscribers tend to be
particularly heavy users of
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customer service and technical support.
Our sales and marketing expenses include costs associated with acquiring
subscribers, including advertising and commissions and bonuses paid to our sales
and marketing personnel. We expect our sales and marketing expenses to increase
with the expected growth of our subscriber base. We plan to increase advertising
in new markets we enter as we acquire new Internet service providers. We also
plan to hire additional sales and marketing personnel in each market we enter.
Our general and administrative expenses consist primarily of administrative
staff and related benefits. We expect our general and administrative costs to
increase to support our growth, and as we centralize our billing and financial
reporting system.
Our amortization expense primarily relates to the amortization of goodwill
and other intangibles acquired in our purchase of Internet service providers,
and, on a pro forma basis, is based upon the useful lives of these intangibles.
Our amortization expense is expected to increase as we make additional
acquisitions, and will vary according to purchase prices and intangible assets.
Our depreciation expense primarily relate to our equipment and is based on
the estimated useful lives of the assets ranging from three to five years using
the straight-line method for the equipment. Depreciation expense is expected to
increase as our Internet service providers increase their networks to support
new and existing subscribers and as we build a centralized billing and financial
reporting system.
Between February 2, 1999 and July 16, 1999, we acquired six Internet
service providers for aggregate consideration of approximately $4.5 million in
cash, 120,822 shares of our common stock and the assumption of approximately
$50,000 of indebtedness.
All of the acquisitions we have completed to date have been accounted for
using the purchase method of accounting. As a result, the amount by which the
fair value of the consideration we paid in these acquisitions exceeds the fair
value of the net assets we bought ($7,047,533), has been recorded as goodwill.
This goodwill will be amortized over its estimated useful life of 3 years
as a non-cash charge to operating income.
Reverse Split
Unless otherwise stated, all share and per share information contained in
this prospectus gives retroactive effect to a 1-for-13 reverse split of all
outstanding shares of our common stock which was effected on January 23, 1998.
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Results of Operations
The discussion of our pro forma results set forth below for the year ended
December 31, 1998 and for the three months ended March 31, 1999 assumes that we
acquired Simply Internet, Inc., Net Asset, LLC and CalWeb Internet Services,
Inc. on January 1, 1998 and January 1, 1999, respectively, with certain pro
forma adjustments as described elsewhere in this prospectus. The pro forma
results of operations are not necessarily indicative of the results we would
have obtained had we actually acquired these businesses on January 1, 1998 or
January 1, 1999, or of our future results.
The discussion of our historical results set forth below addresses our
historical results of operations and financial conditions as shown on our
Consolidated Financial Statements for the year ended December 31, 1998 as
compared to the period from July 29, 1997 (inception) through December 31, 1997,
and for the three-month period ended March 31, 1999 as compared to the three-
month period ended March 31, 1998. The historical results for the three-month
period ended March 31, 1999 include the results of the two businesses we
acquired prior to March 31, 1999 from their respective dates of acquisition.
Unaudited Pro Forma Results for Year Ended December 31, 1998
Revenue. Pro forma revenue was $4,079,629 for the year ended December 31, 1998.
Operating Costs and Expenses. Pro forma operating costs and expenses were
$11,985,489 for the year ended December 31, 1998, or 293% of pro forma
revenue. The most significant component of pro forma operating costs and
expenses was employee salaries. Pro forma amortization of goodwill was
$2,467,786 or 60% of pro forma revenue.
Loss from Operations. Pro forma loss from operations was $7,905,860, or 193% of
pro forma revenue for the year ended December 31, 1998.
Other Income and Expenses, Net. Pro forma other income and expenses, net were
$57,984, or 1% of pro forma revenue, for the year ended December 31, 1998.
The most significant component of pro forma other income and expenses, net
consisted of interest expense.
Net Loss. Pro forma net loss was $7,963,844, or 195% of pro forma net
revenue, for the year ended December 31, 1998.
Unaudited Pro Forma Results for the Three Months Ended March 31, 1999
Revenue. Pro forma revenue was $1,040,469 for the three months ended March 31,
1999.
Operating Costs and Expenses. Pro forma operating costs and expenses were
$5,061,954 for the three months ended March 31, 1998, or 487% of pro forma
revenue. The most significant component of pro forma operating costs and
expenses were employee salaries. Pro forma amortization of goodwill was
$597,180 or 57% of pro forma net revenue.
Loss from Operations. Pro forma loss from operations was $4,021,485, or 387% of
pro forma net revenue for the three months ended March 31, 1999.
Other Income and Expenses, Net. Pro forma other income and expenses, net were
$5,199, or less than 1% of pro forma net revenue, for the three months ended
March 31, 1999.
Net Loss. Pro forma net loss was $4,026,684 or 387% of pro forma net revenue,
for the year ended March 31, 1999.
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Historical Results for the Year ended December 31, 1998 as Compared to the Year
Ended December 31, 1997
Revenue. For the year ended December 31, 1998, we had revenues from operations
of $7,898, consisting primarily of subscriber revenues received for Internet
access services. We had no revenues from continuing operations for the year
ended December 31, 1997.
Expenses and Net Loss from Operations. 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 our continued activities, which consisted primarily of
efforts to purchase or otherwise acquire wireless frequencies for use in the
development and deployment of wireless data networks, development and
commercialization of our Tampa and Fresno networks, and efforts to purchase or
otherwise acquire Internet service providers in selected markets. These
activities resulted in a net loss for the year ended December 31, 1998 of
$5,274,832.
Historical Results for the Three Months ended March 31, 1999 as Compared to the
Three Months ended March 31, 1998
Revenue. For the three month period ended March 31, 1999, we had revenues from
operations of $67,888, consisting primarily of subscriber revenues from Internet
access services. We had no revenues from our continuing operations for the
three month period ended March 31, 1998.
Expenses and Net Loss from Operations. Selling, general and administrative
expenses for the three month period ended March 31, 1999 increased to $3,360,606
from $325,465 for the three month period ended March 31, 1998. The increase was
due to our continued activities, which consisted primarily of efforts to
purchase or otherwise acquire Internet service providers in selected markets,
efforts to purchase or otherwise acquire wireless frequencies for use in the
development and deployment of wireless data networks, development and
commercialization of our Tampa and Fresno networks and non-cash compensation
expense related to common stock grants to certain of our directors and officers.
These activities resulted in a net loss for the three month period ended March
31, 1999 of $3,289,823.
Assets, Liabilities and Shareholders' Equity
Assets. At March 31, 1999, we had total assets of $3,871,197, consisting
principally of cash of $843,365, prepaid expenses and other current assets of
$269,536, property and equipment of $1,728,989, net of accumulated depreciation,
intangible assets of $94,603, net of accumulated amortization, and other assets
of $934,704, net of accumulated amortization. Our total assets at December 31,
1998 and December 31, 1997 were $2,407,603 and $1,212,659, respectively. Our
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.
Liabilities and Shareholders' Equity. Our total liabilities at March 31, 1999
were $913,626, consisting principally of accounts payable of $356,057, accrued
liabilities of $184,476, and deposits on unissued shares of common stock and
preferred stock of $348,093. Our shareholders' equity at March 31, 1999 was
$2,932,571. Our total liabilities at December 31, 1998 and December 31, 1997
were $1,139,479 and $509,723, respectively. Our 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. Our shareholders' equity at December 31, 1998 and December 31, 1997
was $1,273,129 and $711,936, respectively.
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Liquidity and Capital Resources
Since our inception, we have relied principally upon the proceeds of
private equity financings to fund our working capital requirements. We have
generated only minimal revenues from operations to date.
During the year ended December 31, 1998, we completed a private offering of
units, each unit consisting of one share of our series A convertible preferred
stock and warrants to purchase two shares of common stock. In this offering, we
sold an aggregate of 988,750 units and received proceeds of approximately
$3,740,407, net of offering costs.
In January 1999, we 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 our common stock and
warrants to purchase two additional shares of our common stock.
In January 1999, we also completed the sale to one accredited investor of
600 shares of our series B convertible preferred stock, 15,000 shares of common
stock and warrants to purchase 120,000 shares of common stock. The aggregate
purchase price for these securities was $600,000.
In April 1999, we completed a private offering of 697,500 shares of our
series C convertible preferred stock at a private offering price of $4.00 per
share. We received aggregate gross proceeds $2,790,000 from this offering.
In May 1999, we completed a private offering of 10,000 shares of our series
D convertible preferred stock at a private offering price of $1,000 per share.
Each share of series D convertible preferred stock is convertible into shares of
common stock at a rate of 333 shares of common stock for each share of
convertible preferred stock, subject to adjustments. Series D investors also
received warrants to purchase an aggregate of 405,880 shares of common stock.
We received aggregate gross proceeds of $10,000,000 from this offering.
In May 1999, we also completed a private offering of 3,000 shares of our
series E convertible preferred stock at a private offering price of $1,000 per
share. Each share of series E convertible preferred stock is convertible into
shares of common stock at a rate of 333 shares of common stock for each share of
convertible preferred stock, subject to adjustments. Series E investors also
received warrants to purchase an aggregate of 91,764 shares of common stock. We
received aggregate gross proceeds of $3,000,000 from this offering.
Between February 2, 1999 and July 16, 1999, we acquired six Internet
service providers for aggregate consideration of approximately $4.5 million in
cash, 120,822 shares of our common stock and the assumption of approximately
$50,000 of indebtedness. We funded the cash portion of these acquisitions
through proceeds from our private placements of our convertible preferred stock.
We have also entered into a definitive letter of intent to acquire an additional
Internet service provider for aggregate consideration of approximately $4.3
million, consisting of approximately $2.6 million in cash and a number of shares
of our common stock having an aggregate value of approximately $1.7 million.
We will require substantial additional capital for the acquisition of
additional Internet service providers as well as for the continued deployment of
our current Internet service provider networks. We cannot accurately predict
the precise timing of our future capital requirements. In the future, we will
require additional financing through the sale of equity or debt securities. We
have no commitments for any additional financing and there can be no assurance
that we can obtain such commitments at all, or on terms acceptable to us. Any
additional equity financing we undertake may be dilutive to our existing
shareholders and debt financing, if available, may involve pledging some or all
of our assets and may contain restrictive covenants with respect to raising
future capital and other financial and operational matters. If we are unable to
obtain necessary additional capital, we may be
-31-
<PAGE>
<PAGE>
required to reduce our operations, which would have a material adverse effect
upon our business, financial condition or results of operations.
Under agreements we have with holders of our series B, D and E convertible
preferred stock, we are obligated to file a registration statement with the SEC
covering the resale of shares of our common stock which have been issued to
those holders or which may be issued in the future to those holders when they
convert preferred stock or exercise warrants they hold. These agreements require
us to pay penalties to the holders of the series B, D and E convertible
preferred stock if we do not file the registration statement by specified dates,
if the registration statement is not declared effective by the SEC by other
specified dates, or if the registration statement does not remain continually
effective for specified periods of time. The penalties are based on the
duration of our failure to meet the registration obligations. The penalties
payable to the holders of the series D and E convertible preferred stock for
each month of delay, or pro rata portion thereof, are generally 2% of the total
purchase price paid by the holders for their shares of preferred stock, although
the amount may be lower for the first month. The total purchase price paid by
the holders of the series D and E convertible preferred stock was $13.0 million.
The penalties payable to the holder of the series B convertible preferred stock
for each month of delay, or pro rata portion thereof, are 2% of the market
value, during the period of default, of all shares issuable to the holder upon
conversion of the series B preferred stock and all shares acquired directly from
us. It is likely that we will incur penalties to the holders of our convertible
preferred stock. We have missed some of the filing deadlines, and we cannot
determine when, if at all, the SEC will declare the registration statement
effective. In addition, our present acquisition plans may prevent us from
keeping the registration statement effective during portions of the required
periods. Although we cannot accurately predict the amount of penalties we may
have to pay, the penalties could have a material effect on our ability to fund
future acquisitions and operations, and on our financial condition and results
of operations.
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 our
financial statements.
The Year 2000 Issue
The "Year 2000 Issue" exists because many computer programs, embedded
systems and components were designed to refer to a year by the last two digits
of the year, such as "99" for "1999". Any of our information technology systems
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 our operations, including, among other
things, our temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Year 2000 problems also could affect our non-information technology
systems. These systems may contain a date function that could trigger a
malfunction. In addition, like every other business enterprise, we are at risk
to Year 2000 problems at our business partners, including suppliers,
distributors and customers, as well as potential failures in public and private
infrastructure services, including electricity, water, gas, communications and
financial services. System failures caused by Year 2000 problems could
adversely affect our operations and financial results.
We have implemented a multi-phase program to address potential Year 2000
problems. Our efforts are coordinated through a senior level task force and by
local task forces at each of our operating locations.
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<PAGE>
Primary Systems. During 1998, we assessed our primary information
technology systems including our accounting computing system, hardware and
software. We determined that these systems were and are Year 2000 compliant.
Non-Information Technology. We are continuing our assessment of our non-
information technology systems and are reviewing these systems in conjunction
with their manufacturers and suppliers. Most of these systems have been
certified by their suppliers or manufacturers to be Year 2000 compliant.
Third Parties. We have formally contacted our significant suppliers,
customers, and critical business partners to determine the extent to which we
may be vulnerable if those parties fail to properly remediate their own Year
2000 problems. While we are not presently aware of any significant Year 2000
exposure from third parties, there can be no guarantee that their systems will
be Year 2000 compliant or that any Year 2000 problems third parties may
experience would not have a material adverse effect on us.
Costs. We have incurred only minimal costs related to the Year 2000 issue.
The estimated additional costs to complete our Year 2000 compliance project are
expected to be approximately $25,000. These costs include both incremental
costs incurred plus internal costs that have been redeployed from other
activities.
We also rely, both domestically and internationally, on government
agencies, utility companies, telecommunications services and other service
providers outside our control. There is no assurance that these suppliers,
governmental agencies or other third parties will not suffer Year 2000 business
disruption. These failures could have a material adverse effect on our
operations and financial results.
Under our Year 2000 compliance program, we will develop contingency plans
if we discover significant risks from potential Year 2000 problems. In
addition, as a normal course of business, we maintain and deploy contingency
plans to address other potential business interruptions. We may apply these
plans to address business interruption caused by Year 2000 problems.
We may periodically revise our Year 2000 plans as we complete interim steps
and learn new information. In addition, this description of our Year 2000
efforts involves estimates and projections of future events and activities.
These estimates and projections are subject to change as work continues, and
the changes could be substantial.
The foregoing constitutes a Year 2000 statement and readiness disclosure
subject to the protections afforded it by the Year 2000 Information Readiness
Disclosure Act of 1998.
DESCRIPTION OF PROPERTY
We do not own any real property and lease all of our facilities. Our
corporate headquarters are located at 600 South Cherry Street, Suite 305,
Denver, Colorado, where we lease approximately 2,500 square feet of office
space. Our lease agreement commenced February 1, 1999, and has a term of two
years. We also lease the following amount of office space in the following
locations: Fresno, California, 4,000 square feet; San Diego, California, 1,647
square feet; Tampa, Florida, 2,500 square feet; Sarasota, Florida, 4,000 square
feet; Eugene, Oregon, 1,800 square feet; Washington, D.C., 500 square feet; and
Seattle, Washington, 505 square feet. We believe that our existing facilities
are adequate for the foreseeable future.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Founders' Stock
Upon our incorporation in September 1996, our Board of Directors authorized
the issuance of a total of 653,846 shares of common stock to Joseph Morgan and
Kenneth Marshall, two of our initial officers and directors, in consideration of
cash and services these persons provided to us in connection with our founding.
The shares were issued in our fiscal year ended December 31, 1997. The
aggregate value of these shares at the time of their issuance was $98,077.
Transactions with Network System Technologies, Inc.
In December 1997 in connection with our acquisition of SkyLynx Express
Holdings, Inc. we issued 1,923,077 shares of common stock to Network System
Technologies, Inc. and 2,163,462 shares of common stock to Gary L. Brown. Each
of Mr. Brown and Network System are beneficial holders of more than 5% of our
common stock. See the section entitled "Principal Stockholders."
As part of this acquisition, we obtained a right to utilize Network
System's technology, including wireless technology. In addition, Network
System agreed to deploy and operate our wireless networks utilizing Network
System's technology. As further consideration to Network System, we
. purchased a dishonored check issued by Paradise Cable Corporation to
Network System in the amount of $71,570.91;
. paid Network System's transaction fees and expenses in the amount of
$37,500;
. assumed Network System's obligations under a $100,000 promissory note;
and
. assumed and agreed to pay a Network System account payable to Hybrid
Network, Inc. in the approximate amount of $480,000.
Under the agreement and plan of reorganization related to this transaction,
Network System has the right to acquire a proportional amount of any additional
shares of common stock we issue in the future as long as Network System owns
more than 10% of our outstanding common stock at the time we issue those shares.
Network System's right to acquire additional shares does not apply to:
. shares we issue to our directors, officers, employees or agents as
compensation, including shares issued upon exercise of stock options
we grant as compensation;
. shares we issue upon the conversion of convertible securities or the
exercise of options or warrants issued by authorization of our Board
of Directors; or
. shares we issue for consideration other than cash.
Agreements with Gary L. Brown
Under an agreement we entered into with Mr. Brown in April 1999, Mr. Brown
has agreed not to sell any shares of our common stock he owns until February 1,
2000, except that he may sell:
. 50,000 shares at any time after the date of the agreement;
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<PAGE>
. an additional 100,000 shares after the SEC declares the registration
statement that includes this prospectus effective; and
. an additional 150,000 shares during specified periods after we make an
initial public offering.
In July 1999, we entered into an agreement with Mr. Brown in connection
with Mr. Brown's resignation from our Board of Directors. In consideration of
Mr. Brown's resignation, the agreement provides that when our shareholders
approve an increase in the number of shares we can issue under our 1998 Equity
Incentive Plan, we will issue Mr. Brown a non-qualified stock option under the
plan to purchase 50,000 shares of our common stock at an exercise price of
$2.30 per share. Mr. Brown agreed that he will transfer the options to a new
corporation he will control, and that the corporation will not sell more than
10,000 shares per month of the shares issued upon the new corporation's
exercise of the options. In addition, Mr. Brown agreed to be bound by any lock-
up restrictions imposed on other members of our senior management in
connection with any future public offering of our common stock.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
Our common stock is traded over-the-counter and quoted on the OTC
Electronic Bulletin Board on a limited and sporadic basis under the symbol
"SKYK". Our common stock began trading over-the-counter on July 31, 1998.
There is no assurance that our common stock will continue to be quoted or that
any liquidity exists or will exist for our common stock.
The reported high and low bid and ask prices are shown below for the period
from July 31, 1998 through July 21, 1999, as reported on the OTC Electronic
Bulletin Board. 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 may not necessarily reflect
actual transactions:
<TABLE>
<CAPTION>
BID ASK
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
1998:
Third Quarter (from July 31, 1998) $ 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 $11.500 $6.875 $13.250 $7.250
Third Quarter (through July 21, 1999) $ 9.000 $6.688 $ 8.813 $5.625
</TABLE>
The bid and ask prices of the common stock on July 21, 1999 were $5.9062
and $6.000, respectively, as quoted on the OTC Electronic Bulletin Board. As
of July 21, 1999, there were approximately 161 shareholders of record of our
common stock.
Dividends
Since inception, we have not paid or declared any cash dividends on our
common stock. Our Board of Directors does not currently intend to pay any cash
dividends on our common stock in the future. In addition, provisions of our
outstanding preferred stock restrict our ability to pay dividends on our common
stock.
-35-
<PAGE>
EXECUTIVE COMPENSATION
The following table and discussion set forth information concerning
compensation of our current and former chief executive officers during the
fiscal years 1997 and 1998 for services rendered by these officers in all
capacities. Except for these officers, none of our executive officers received
salary and bonus payments exceeding, in the aggregate, $100,000 during fiscal
years 1997 or 1998.
TABLE 1
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
-------------------- ------------- -------
Name and Year Salary Bonus Other Restricted Option LTIP All Other
Principal ($) ($) Annual Stock SARs Payouts Compen-
Position Compen- Award(s) ($) sation
sation ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary Brown, 1998 $106,369 $20,000 -0- -0- 57,600 -0- -0-
Chairman of
the Board
and former 1997 $ 47,346 -0- -0- -0- -0- -0- -0-
CEO
Jeffery Mathias, 1998 $ 53,877 $20,000 -0- -0- 130,434 -0- -0-
President
and CEO 1997 -0- -0- -0- -0- -0- 0- -0-
</TABLE>
Employment Agreements
We have entered into a written employment agreement with Mr. Mathias, as
our President and Chief Executive Officer. Mr. Mathias' agreement has a term
ending on October 31, 2000, subject to renewal for terms of one-year each
thereafter. Under the agreement, Mr. Mathias' annual base salary is $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 our common stock and
additional stock options exercisable to purchase, in the aggregate, 1,080,966
shares of common stock at an exercise price of $1.94 per share, subject to
vesting requirements based on Mr. Mathias' performance. The agreement further
provides that, after the completion of an initial or secondary public offering
of our common stock, Mr. Mathias will be entitled to receive additional
incentive stock options 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 our common stock.
If Mr. Mathias' employment agreement is terminated without "cause" or upon
a "change of control" of our company, or if Mr. Mathias terminates the agreement
for "adequate reason," we are obligated to pay Mr. Mathias a lump-sum severance
payment equal to one-half of his annual base salary, a lump-sum amount equal to
the pro-rata portion of any bonus Mr. Mathias received in the previous year, and
to continue to provide him with health, life and disability insurance for a
period of six months following termination. Upon a "change of control" of our
company, all of Mr. Mathias' unvested stock options will become vested,
regardless of whether his
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<PAGE>
employment is terminated. In addition, if Mr. Mathias' employment is terminated
without "cause," we are obligated to prepare and file with the SEC a
registration statement registering the sale of all shares of our common stock
Mr. Mathias owns as of the termination date and all shares of common stock
issuable to Mr. Mathias upon the exercise of stock options that are vested as of
the termination date. We are obligated to attempt to cause the registration
statement to become effective within 120 days of the termination date, and to
maintain the registration statement's effectiveness for a minimum of 180 days.
Equity Incentive Plan
Our Board of Directors and shareholders have adopted and approved our 1998
Equity Incentive Plan. Pursuant to the plan, stock options granted to eligible
participants may take the form of incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended, or options which do not qualify
as incentive stock options, known as non-qualified stock options. As required
by Section 422 of the Internal Revenue Code, the aggregate fair market value of
our common stock with respect to our incentive stock options granted to an
employee exercisable for the first time in any calendar year may not exceed
$100,000. This limitation does not apply to non-qualified stock options. The
exercise price of an incentive stock option may not be less than 100% of the
fair market value of the shares of common stock on the date of grant. The plan
administrator may set the exercise price of a non-qualified stock option. An
option is not transferable, except by will or the laws of descent and
distribution. If the employment of an optionee who has been granted incentive
stock options terminates for any reason, other than for cause, or by reason of
death, disability, or retirement, the optionee may exercise his incentive stock
options within a ninety day period following such termination to the extent he
was entitled to exercise the options at the date of termination. Either our
Board of Directors can administer the plan, provided that a majority of
directors are "disinterested," or the Board of Directors may designate a
committee comprised of directors meeting certain requirements to administer the
plan. The plan 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 common stock is currently reserved for issuance
under the plan.
As of March 31, 1999, we had granted stock options under the plan
exercisable to purchase an aggregate of 4,272,236 shares of common stock at a
weighted average exercise price of $2.13 per share to our directors, officers,
employees and consultants. Of these options, we granted options exercisable to
purchase: 1,211,400 shares to Mr. Mathias, 57,600 shares to Mr. Brown, 847,000
shares to Mr. Maurer and 200,000 shares to Mr. Ragano. Of the total number of
options we had granted as of March 31, 1999, options to purchase an aggregate of
2,437,450 shares of common stock are currently subject to future vesting.
The following tables set forth certain information concerning the granting
and exercise of incentive stock options during the last completed fiscal year by
each our current and former chief executive officers and the fiscal year-end
value of unexercised options on an aggregated basis:
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<PAGE>
TABLE 2
Option/SAR Grants for Last
Fiscal Year - Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise Expiration
Name Year Granted (#) Fiscal Year Price ($/sh) Date
<S> <C> <C> <C> <C> <C>
Gary Brown 1998 57,600 4.7% $2.53 Dec 2003
1997 -0- 0 -0-
Jeffery 1998 130,434 10.6% $2.30 Dec 2003
Mathias 1997 -0- 0
</TABLE>
TABLE 3
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Shares Options/SARs In-the-
Acquired Value Realized(1) at FY-End (#) Money
Name on Exercise (#) ($) Exercisable Options/
SARs at FY-
End ($)(2)
Exercisable
<S> <C> <C> <C> <C>
Gary Brown -0- -0- 19,200 $ 6,624
Jeffery
Mathias -0- -0- 43,478 $25,000
</TABLE>
(1) The 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 is based on the closing
bid price of our common stock at December 31, 1998.
Compensation of Directors
Each of our directors is entitled to receive cash compensation of
approximately $1,000 for each meeting of our Board of Directors they attend. Our
directors are also reimbursed for expenses incurred in attending meetings of our
Board of Directors.
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<PAGE>
CHANGES IN ACCOUNTANTS
Effective December 31, 1998, our Board of Directors approved a change in
our independent accountant. Cordovano and Harvey, P.C. had been engaged as our
principal independent accountants to audit our 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 for 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 our financial statements 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. There have not been at any time any
disagreements between us and Cordovano and Harvey, P.C. on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
Effective December 31, 1998, we retained the accounting firm of Arthur
Andersen, LLP to serve as our independent accountants to audit our financial
statements. Prior to its engagement as our independent accountants, Arthur
Andersen LLP had not been consulted by us either with respect to the application
of accounting principles to a specific transaction or the type of audit opinion
that might be rendered on our financial statements or on any matter that was the
subject of any prior disagreement between us and our previous certifying
accountant.
-39-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES F-3
UNAUDITED PRO FORMA CONDENSED, COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Condensed, Combined Financial Statements
Unaudited Pro Forma Condensed, Combined Balance Sheet as of March 31, 1999
Unaudited Pro Forma Condensed, Combined Statement of Operations for the three-month
period ended March 31, 1999
Unaudited Pro Forma Condensed, Combined Statement of Operations for the year ended
December 31, 1998
Notes to Unaudited Pro Forma Condensed, Combined Financial Statements
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES F-8
Report of Independent Certified Public Accountants
Consolidated Balance Sheet as of December 31, 1998
Consolidated Statements of Operations for the period from inception (July 29, 1997)
to December 31, 1997, and the year ended December 31, 1998
Consolidated Statements of Stockholders' Equity for the period from inception (July
29, 1997) to December 31, 1997, and the year ended December 31, 1998
Consolidated Statements of Cash Flows for the period from inception (July 29, 1997)
to December 31, 1997, and the year ended December 31, 1998
Notes to Consolidated Financial Statements
Unaudited Consolidated Balance Sheet as of March 31, 1999
Unaudited Consolidated Statements of Operations for the three-month periods ended
March 31, 1999 and 1998
Unaudited Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 1999 and 1998
Notes to Unaudited Consolidated Financial Statements
SIMPLY INTERNET, INC. F-36
Report of Independent Certified Public Accountants
Balance Sheet as of December 31, 1998
Statements of Operations for the years ended December 31, 1998 and 1997
Statements of Stockholders' Deficit for years ended December 31, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1998 and 1997
Notes to Financial Statements
Unaudited Balance Sheet as of March 31, 1999
Unaudited Statements of Operations for the three-month periods ended March 31, 1999
and 1998
Unaudited Statements of Cash Flows for the three-month periods ended March 31, 1999
and 1998
Notes to Unaudited Financial Statements
NET ASSET, LLC F-51
Report of Independent Certified Public Accountants
Balance Sheet as of December 31, 1998
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Operations for the years ended December 31, 1998 and 1997
Statements of Members' Deficit for years ended December 31, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1998 and 1997
Notes to Financial Statements
Unaudited Balance Sheet as of March 31, 1999
Unaudited Statements of Operations for the three-month periods ended March 31, 1999
and 1998
Unaudited Statements of Cash Flows for the three-month periods ended March 31, 1999
and 1998
Notes to Unaudited Financial Statements
CALWEB INTERNET SERVICES, INC. F-65
Report of Independent Certified Public Accountants
Balance Sheet as of June 30, 1998
Statements of Operations for the years ended June 30, 1998 and 1997
Statements of Stockholders' Equity for years ended June 30, 1998 and 1997
Statements of Cash Flows for the years ended June 30, 1998 and 1997
Notes to Financial Statements
Unaudited Balance Sheet as of March 31, 1999
Unaudited Statements of Operations for the nine-month periods ended March 31, 1999
and 1998
Unaudited Statements of Cash Flows for the nine-month periods ended March 31, 1999
and 1998
Notes to Unaudited Financial Statements
</TABLE>
F-2
<PAGE>
SKYLYNX COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma condensed combined financial statements give
effect to the acquisitions by SkyLynx Communications, Inc. of the assets of
Interaccess Corp., Simply Internet, Inc. and Net Asset, LLC, and to the proposed
acquisition of the capital stock of CalWeb Internet Services, Inc.
The Pro Forma Condensed Combined Balance Sheet gives effect to the acquisitions
and to the proposed acquisition as if they had occurred on March 31, 1999. The
Pro Forma Condensed Combined Statements of Operations give effect to the
acquisitions as if they had occurred at the beginning of the earliest period
presented, combining the results of SkyLynx Communications, Inc. for the three
months ended March 31, 1999 and the year ended December 31, 1998 with those of
the same periods for Interaccess Corp., Simply Internet, Inc. and Net Asset, LLC
and with those of CalWeb Internet Services, Inc. for the three months ended
March 31, 1999 and the year ended March 31, 1999, respectively. The results of
CalWeb Internet Services, Inc. for the three months ended March 31, 1999 are
included in the Pro Forma Condensed Combined Statement of Operations for both
the year ended December 31, 1998 and the three months ended March 31, 1999.
Revenue was approximately $382,000 and the net loss was approximately $10,000
for CalWeb Internet Services, Inc. for the three months ended March 31, 1999.
The pro forma adjustments are based on estimates, available information and
certain assumptions that management deems appropriate. The pro forma financial
data do not purport to represent what our financial position or results of
operations would actually have been if such transactions had occurred on those
dates and are not necessarily representative of our financial position or
results of operations for any future period. The pro forma financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this prospectus. See "Risk Factors" included
elsewhere herein.
F-3
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED, COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,1998
SkyLynx Simply Calweb Net Asset, Interaccess Pro forma Pro forma
Communications, Internet, Internet LLC Corp. Total Adjustments Combined
Inc. Inc. Services, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 7,898 1,353,746 1,636,387 819,307 262,291 4,079,629 - 4,079,629
Operating
cost
and expenses 5,300,834 1,431,225 1,361,475 1,104,949 319,220 9,517,703 2,467,786 (a) 11,985,489
Loss from (5,292,936) (77,479) 274,912 (285,642) (56,929) (5,438,074) (2,467,786) (7,905,860)
operations
Interest and
other
income (expenses) 18,104 (78,973) 9,959 (5,302) (1,772) (57,984) - (57,984)
---------- -------- --------- --------- ------- ---------- ---------- ----------
Net Loss (5,274,832) (156,452) 284,871 (290,944) (58,701) (5,496,058) (2,467,786) (7,963,844)
========== ======== ========= ========= ======= ========== ========== ==========
Preferred Stock
Dividends (39,759) (394,500) (b) (434,259)
Accretion of
Beneficial
Conversion
Feature of
Preferred Stock (73,029) (73,029)
---------- ----------
Net Loss
Applicable
to Common
Shareholders (5,387,620) (8,471,132)
Weighted average
commom shares
outstanding 8,946,874 269,647 (c) 9,216,521
Basic and diluted
loss per share (0.60) (0.32)(c) (0.92)
</TABLE>
(a) Adjustment to recognize twelve months amortization expense ($2,467,786) on
the customer lists and the covenant not to compete agreements. The property
was depreciated over three years and customer lists and covenant not to
compete agreements over two to three years.
(b) Adjustment to reflect dividends ($394,500) on additional preferred stock
issued in connection with the acquisitions.
(c) Adjustment to revise the weighted average common shares outstanding and
basic loss per share for the 269,647 common shares issued in the purchase
agreements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED, COMBINED BALANCE SHEET
AS OF March 31,1999
(b)
SkyLynx Simply Calweb Net Asset, Pro forma Pro forma Pro forma
Communications, Internet, Internet LLC Total Adjustments Adjustments Combined
Inc. Inc. Services, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash 843,365 19,323 314,772 21,113 1,198,573 (40,436) (5,486,397)(a) 771,740
5,100,000 (c)
Accounts receivable - - 155,994 44,031 200,025 - 200,025
Inventory - - - - - - -
Other current assets 269,536 4,353 99,728 1,486 375,103 - 375,103
---------------------------------------------------------------------------------------------------------
Current assets 1,112,901 23,676 570,494 66,630 1,773,701 (40,436) (386,397) 1,346,868
---------------------------------------------------------------------------------------------------------
Property and equipment 1,728,989 138,194 281,872 319,253 2,468,308 - 2,468,308
Other assets 1,029,307 - - - 1,029,307 7,047,533(a) 8,076,840
---------------------------------------------------------------------------------------------------------
Total assets 3,871,197 161,870 852,366 385,883 5,271,316 (40,436) 6,661,136 11,892,016
=========================================================================================================
Liabilities and Equity
Accounts payable 356,057 103,127 36,468 308,090 803,742 (411,217) - 392,525
Accrued expense 184,476 11,490 198,346 34,254 428,566 (45,744) - 382,822
Unearned revenue - 257,870 151,817 89,671 499,358 - - 499,358
Other Current Liabilites 373,093 71,523 49,478 174,239 668,333 (245,762) - 422,571
--------------------------------------------------------------------------------------------------------
Current liabilities 913,626 444,010 436,109 606,254 2,399,999 (702,723) - 1,697,276
---------------------------------------------------------------------------------------------------------
LT debt 25,000 - 24,791 10,950 60,741 - 60,741
Other LT Liabilities - 38,109 - 48,654 86,763 (86,763) 412,378(a) 412,378
---------------------------------------------------------------------------------------------------------
Total LT Liabilities 25,000 38,109 24,791 59,604 147,504 (97,713) 412,378 462,169
---------------------------------------------------------------------------------------------------------
Total Liabilites 938,626 482,119 460,900 665,858 2,547,503 (800,436) 412,378 2,159,445
Preferred stock 3,978,119 - - 3,978,119 5,100,000(c) 9,078,119
Common stock 10,889 52,632 10,000 482,992 556,513 (545,624) 234(a) 11,123
Paid in capital 7,786,972 96,117 - 7,883,089 (96,117) 1,699,766(a) 9,486,738
Retained earnings
(deficit) (8,843,409) (468,998) 381,466 (762,967) (9,693,908) 850,499 (8,843,409)
Total shareholders
equity 2,932,571 (320,249) 391,466 (279,975) 2,723,813 208,758 6,800,000 9,732,571
- -
--------------------------------------------------------------------------------------------------------
Total liabilities
and equity 3,871,197 161,870 852,366 385,883 5,271,316 (591,678) 7,212,378 11,892,016
=========================================================================================================
</TABLE>
(a) Adjustment reflects the $2,123,775 asset purchase of Simply Internet;
$2,239,098 customer list and covenant not to compete, $4,353 other assets,
$138,194 property and equipment and 257,870 deferred revenue. The
consideration paid in this transaction was $1,911,397 cash, and $212,378
purchase price holdback. Adjustment reflects the $1,175,000 purchase of Net
Asset; $899,901 customer list and covenant not to compete, $45,517 other
assets, $319,253 property and equipment, and unearned revenue of $89,671.
The consideration paid in this transaction was $975,000 cash and a purchase
price holdback of $200,000. Adjustment reflects the $4,300,000 acquisition
of CalWeb; $3,908,534 customer list and covenant not to compete, $314,772
cash, $255,722 other assets, $281,872 property and equipment, $309,083
other liabilities and $151,817 deferred revenue. The consideration paid in
this transaction was $2,600,000 cash and 234,483 shares of common stock
with a fair market value of $1,700,000.
(b) Adjustments to reflect balances at March 31, 1999 that were not acquired by
the Company.
(c) Adjustment to reflect the $5,100,000 cash required for acquisitions and the
adjustment to equity to fund acquisitions and continuing operations.
F-6
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED, COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,1999
SkyLynx Simply Calweb Net Asset, Interacess Pro forma Pro forma
Communications, Internet, Internet LLC Corp. Total Adjustments Combined
Inc. Inc. Services, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 67,888 348,097 381,569 221,482 21,433 1,040,469 - 1,040,469
Operating cost - -
and expenses 3,360,606 407,335 396,214 281,313 19,306 4,464,774 597,180 (a) 5,061,954
Loss from (3,292,718) (59,238) (14,645) (59,831) 2,127 (3,424,305) (597,180) (a) (4,021,485)
operations
Interest and
other income 2,895 (4,894) 4,464 (7,664) - (5,199) - (5,199)
(expenses)
--------------------------------------------------------------------------------------------------------------
Net Loss (3,289,823) (64,132) (10,181) (67,495) 2,127 (3,429,504) (597,180) (4,026,684)
==============================================================================================================
Preferred
Stock Dividends (239,642) (98,625) (b) (338,267)
Accretion of
Beneficial
Conversion
Feature of (138,442)
--------
Preferred Stock (138,442)
--------
Net Loss (3,667,907) (4,503,393)
Applicable
to Common
Shareholders
Weighted average
commom shares
outstanding 10,572,168 269,647 (c) 10,841,815
Basic and diluted (0.35) (0.07) (c) (0.42)
loss per share
</TABLE>
(a) Adjustment to recognize three months amortization expense ($597,180) on the
customer list and the covenant not to compete agreements. The property was
depreciated over three years and customer list and covenant not to compete
agreements over two to three years.
(b) Adjustment to reflect dividends ($98,625) on additional preferred stock
issued in connection with the acquisitions.
(c) Adjustment to revise the weighted average common shares outstanding and
basic loss per share for the 269,647 common shares issued in the purchase
agreements.
F-7
<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
F-8
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1998
-----------------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
CURRENT ASSETS:
<S> <C>
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
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-9
<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
------------------------------------
<TABLE>
<CAPTION>
Cumulative
Period from from Inception
Year Ended Inception (July 29, 1997) to
December 31, (July 29, 1997) to December 31,
1998 December 31, 1997 1998
------------ ----------------- ------------------
<S> <C> <C> <C>
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 AVAILABLE 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
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<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
------------------------------------
<TABLE>
<CAPTION>
Deficit
Additional Accumulated
Preferred Stock Common Stock Paid-in During
------------------ ------------------- ---------- Development
Shares Amount Shares Amount Capital Stage Total
-------- ------- --------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= ========== ======== ========== ========== =========
</TABLE>
F-11
<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
------------------------------------
(continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ---------------------
Shares Amount Shares Amount
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 - $ - 8,772,189 $8,772
Net loss - - - -
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 -
Common stock issued for acquired assets on
August 20, 1998 (Note 4) - - 50,000 50
Common stock issued for services on June 12,
1998, at fair value - - 653,997 654
Common stock issued for services on
September 23, 1998, at fair value - - 55,000 55
Preferred stock dividend - 39,759 - -
Accretion of beneficial conversion feature
of preferred stock - 73,029 - -
-------- ---------- ---------- --------
BALANCE, December 31, 1998 988,750 $2,645,828 9,531,186 $9,531
======== ========== ========== ========
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-In Development
Capital Stage Total
----------- ----------- ----------
<S> <C> <C> <C>
BALANCE, December 31, 1997 $ 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) 1,207,367 - 3,740,407
Common stock issued for acquired assets on
August 20, 1998 (Note 4) 206,200 - 206,250
Common stock issued for services on June 12,
1998, at fair value 1,559,369 - 1,560,023
Common stock issued for services on
September 23, 1998, at fair value 329,290 - 329,345
Preferred stock dividend (39,759) - -
Accretion of beneficial conversion feature
of preferred stock (73,029) - -
----------- ----------- ----------
BALANCE, December 31, 1998 $4,171,356 $(5,553,586) $1,273,129
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<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
------------------------------------
<TABLE>
<CAPTION>
Period from Cumulative from
Inception (July 29, Inception (July 29,
Year Ended 1997) to December 1997) to December 31,
December 31, 1998 31, 1997 1998
----------------- ------------------- ---------------------
<S> <C> <C> <C>
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 byoperating 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 amortization 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
============ ========== =============
</TABLE>
F-13
<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
------------------------------------
(continued)
<TABLE>
<CAPTION>
Period from Cumulative from
Inception (July 29, Inception (July 29,
Year Ended 1997) to December 1997) to December
December 31, 1998 31, 1997 31, 1998
----------------- ------------------- -------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for-
Interest $ 4,043 $ 583 $ 4,626
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCINGACTIVITIES:
Debt assumed in exchanged 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
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-14
<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.
F-15
<PAGE>
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.
F-16
<PAGE>
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.
F-17
<PAGE>
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:
<TABLE>
<CAPTION>
Useful Lives
in Years Amount
------------ -----------
<S> <C> <C>
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
==========
</TABLE>
F-18
<PAGE>
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:
<TABLE>
<CAPTION>
Amount
------------
<S> <C>
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 $ -
============
</TABLE>
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.
F-19
<PAGE>
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)%
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%
-----
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
========
F-20
<PAGE>
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.
F-21
<PAGE>
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.
11. 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.
F-22
<PAGE>
Stock option activity for the year ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
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
========= ========
</TABLE>
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)
F-23
<PAGE>
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 offering 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.
F-24
<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.
F-25
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET -- MARCH 31, 1999
-------------------------------------------------------
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 843,365
Prepaid expenses and other current assets 269,536
-----------
Total current assets 1,112,901
PROPERTY AND EQUIPMENT, net 1,728,989
INTANGIBLE ASSETS, net of accumulated amortization of $11,790 94,603
OTHER ASSETS, net of accumulated amortization of $41,238 934,704
-----------
Total assets $ 3,871,197
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of note payable $ 25,000
Accounts payable 356,057
Accrued liabilities 184,476
Deposits on unissued shares of common stock and preferred stock 348,093
-----------
Total current liabilities 913,626
-----------
COMMITMENTS AND CONTINGENCIES
NOTE PAYABLE, net of current maturities 25,000
STOCKHOLDERS' EQUITY:
Preferred stock 3,978,119
Common stock 10,889
Additional paid-in capital 7,786,972
Deficit accumulated during development stage (8,843,409)
-----------
Total stockholders' equity 2,932,571
-----------
Total liabilities and stockholders' equity $ 3,871,197
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-26
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
----------------------------------------------------------
AND THE PERIOD FROM INCEPTION (JULY 29, 1997) TO MARCH 31, 1999
---------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
from Inception
Three-month Period Ended (July 29,1997) to
---------------------------------------
March 31, 1999 March 31, 1998 March 31, 1999
---------------- ---------------- -------------------
<S> <C> <C> <C>
REVENUES $ 67,888 $ - $ 75,786
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,360,606 325,465 8,670,378
------------ ---------- -----------
OPERATING LOSS (3,292,718) (325,465) (8,594,592)
NET INTEREST INCOME 2,895 2,432 20,999
------------ ---------- -----------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (3,289,823) (323,033) (8,573,593)
PROVISION FOR INCOME TAXES - - -
------------ ---------- -----------
NET LOSS (3,289,823) (323,033) (8,573,593)
PREFERRED STOCK DIVIDENDS (239,642) - (279,401)
-
ACCRETION OF BENEFICIAL CONVERSION FEATURE OF
PREFERRED STOCK (138,442) - (211,471)
------------ ---------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
$ (3,667,907) $ (323,033) $(9,064,465)
============ ========== ===========
NET LOSS PER SHARE-BASIC $ (0.35) $ (0.04)
NET LOSS PER SHARE-DILUTED $ (0.35) $ (0.04)
SHARES USED IN COMPUTING NET LOSS PER SHARE-BASIC 10,572,168 8,772,189
SHARES USED IN COMPUTING NET LOSS PER SHARE-DILUTED 10,572,168 8,772,189
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
---------------------------------------------------------
AND THE PERIOD FROM INCEPTION (JULY 29, 1997) TO MARCH 31, 1999
---------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
from Inception
Three-month Period Ended (July 29,1997) to
-------------------------------------
March 31, 1999 March 31, 1998 March 31, 1999
---------------- ---------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,289,823) $(323,033) $(8,573,593)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-
Common stock issued for intellectual property
contributed by stockholders - - 8,938
Common stock issued for services 1,971,209 - 3,742,827
Depreciation and amortization 148,801 20,948 415,007
Changes in operating assets and liabilities; excluding
effects of purchases of assets-
Prepaid expenses and other current assets (207,548) - (227,683)
Other assets - - 91,772
Accounts payable (38,105) 27,879 263,265
Accounts payable, related party - - (391,299)
Accrued liabilities (3,306) - 356,706
Other current liabilities - (18,492) 6,674
----------- --------- -----------
Net cash used in operating activities (1,418,772) (292,698) (4,307,386)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (138,302) (84,605) (1,408,391)
Purchases of assets (497,928) - (497,928)
----------- --------- -----------
Net cash used in investing activities (636,230) (84,605) (1,906,319)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Recapitalization - - 620,061
Proceeds from the issuance of preferred stock,
net of offering costs 1,256,271 - 4,996,678
Proceeds from the issuance of common stock 232,939 - 232,939
Proceeds from the conversion of Series A warrants 506,232 - 506,232
Deposits on unissued shares 440,000 - 851,160
Reimbursement of deposits on unissued shares (50,000) - (50,000)
Principal debt payments - - (100,000)
----------- --------- -----------
Net cash provided by financing activities 2,385,442 - 7,057,070
----------- --------- -----------
</TABLE>
F-28
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
----------------------------------------------------------
AND THE PERIOD FROM INCEPTION (JULY 29, 1997) TO MARCH 31, 1999
---------------------------------------------------------------
(UNAUDITED)
(continued)
<TABLE>
<CAPTION>
Cumulative
from Inception
(July 29, 1997)
Three-month Period Ended to March 31,
----------------------------------
March 31, 1999 March 31, 1998 1999
---------------------------------- ---------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH 330,440 (377,303) 843,365
CASH, beginning of period 512,925 628,110 -
------------- ------------- -----------
CASH, end of period $ 843,365 $ 250,807 $ 843,365
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for-
Interest $ - $ 4,043 $ 4,626
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Debt assumed in exchange for license rights $ - $ - $ 100,000
Debt assumed in acquiring equipment $ - $ - $ 482,299
Issuance of common stock for property and equipment $ - $ - $ 117,750
Common stock issued for acquired assets $ 299,547 $ - $ 559,797
Shares issued on deposits $ 503,068 $ - $ 503,068
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<PAGE>
SKYLYNX COMMUNICATIONS, INC. AND SUBSIDIARIES
---------------------------------------------
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999 AND 1998
-----------------------
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations, although Skylynx Communications, Inc. and subsidiaries
(collectively, the Company) believes that the disclosures made are adequate to
make the information presented not misleading. In the opinion of the Company's
management, these unaudited condensed consolidated financial statements contain
all adjustments that are necessary to present fairly the financial position as
of March 31, 1999, and the results of operations for the three-month periods
ended March 31, 1999 and 1998. All such adjustments are of a normal, recurring
nature.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest shareholders' annual report (Form 10-KSB).
2. LIQUIDITY:
----------
The Company incurred operating losses for the three-month periods ended March
31, 1999 and 1998. Management plans to obtain future funding from outside
investors and financial institutions. Management believes that this funding
will allow the Company to increase its expansion efforts, which in turn, should
generate increased revenues and enable the Company to continue to meet its
obligations. The Company has been advised by its independent certified public
accountants that, if this contingency has not been resolved prior to the
completion of their audit of the Company's financial statements for the year
ending December 31, 1999, their auditors' report on those financial statements
may be modified for that contingency.
F-30
<PAGE>
-2-
3. PURCHASES OF ASSETS:
--------------------
On February 2, 1999, the Company purchased certain assets of Interaccess
Corporation (Interaccess). The assets purchased included property and
equipment, a covenant not-to-compete and a customer list. This acquisition was
accounted for as a purchase and has been reflected in the Company's condensed
consolidated financial statements from the date of acquisition. The
consideration paid in this transaction was $195,385 in cash and 25,607 shares of
common stock with a fair value of $195,385. Intangible assets resulting from
the asset purchase are stated net of accumulated amortization and amortization
is provided using the straight-line method over two years.
On March 23, 1999, the Company purchased certain assets of Continet. The assets
purchased included accounts receivable, inventory, property and equipment,
goodwill and a covenant not to compete. Liabilities assumed were accounts
payable and deferred income. This acquisition was accounted for as a purchase
and has been reflected in the Company's condensed consolidated financial
statements from the date of acquisition. The consideration paid in this
transaction was $343,379 in cash, a promissory note in the amount of $50,000,
and 19,110 shares of common stock with a fair value of $104,162. Intangible
assets resulting from the asset purchase are stated net of accumulated
amortization and amortization is provided using the straight-line method over
three years.
4. COMMON STOCK:
-------------
On January 1, 1999, the Board of Directors (the Board) issued 450,000 shares of
common stock as signing bonuses for three employees and 125,000 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.
On January 7, 1999, the Board issued 121,355 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.
On January 21, 1999, the Board issued 3,919 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.
F-31
<PAGE>
-3-
On January 31, 1999, the Company issued and sold 263,158 units to one investor
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.
5. UNIT OFFERINGS:
---------------
Series A
- --------
In January 1999, the Company, through a private placement offering, sold 79,591
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 publicly 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 March 31, 1999, the Company had accrued
but unpaid dividends of $264,647.
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.
During the three-month period ended March 31, 1999, the Company offered to all
investors who purchased units in the 1998 Private Offering, the opportunity to
exercise all Class A warrants to purchase shares of the Company's common stock
at a reduced exercise price of $2.00 per share upon the surrender to the Company
for cancellation all Class B warrants. As of March 31, 1999, 263,150 shares of
common stock were issued for total consideration of $526,300.
F-32
<PAGE>
-4-
Series B
- --------
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 securities was $600,000.
The Company's Series B convertible preferred stock has a par value of $0.01 per
share. Each share of preferred stock is convertible into shares of common stock
at a rate of $3.00 per share of common stock. Each Class A warrant entitles the
holder to purchase one share of common stock at $3.00 per share beginning on the
date of issuance and the warrants expire three years from the date of issuance.
The preferred stock has a liquidation preference of $1,000.00 per share. As of
March 31, 1999, the Company had accrued but unpaid dividends of $12,500.
Series C
- --------
During the three-month period ended March 31, 1999, the Company, through a
private placement offering, sold 207,750 units to qualified investors for $4.00
per unit for proceeds of $831,000. Each unit consisted of one share of Series C
convertible preferred stock.
The Company's Series C 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 third anniversary of the date of issue. The preferred
stock has a liquidation preference of $4.00 per share. As of March 31, 1999,
the Company had accrued but unpaid dividends of $2,254.
F-33
<PAGE>
-5-
6. PRO FORMA RESULTS OF OPERATIONS
-------------------------------
The following pro forma condensed consolidated statements of operations for the
three-month periods ended March 31, 1999 and 1998, includes the results of the
Company and Interaccess as if the acquisition had occurred as of January 1,
1998. The pro forma condensed consolidated statements of operations may not be
comparable to and may not be indicative of the Company's post-acquisition
results of operations.
<TABLE>
<CAPTION>
Three-Month Period Ended
----------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenues $ 99,141 $ 118,912
Net loss $ 3,696,631 $ 382,758
Net loss per share-basic $ 0.35 $ 0.04
Shares used in computing net loss
per share-basic 10,581,557 8,797,796
</TABLE>
7. SUBSEQUENT EVENTS:
------------------
In April 1999, the Company completed a private offering of 697,500 shares of
Series C convertible preferred stock at a private offering price of $4.00 per
share. The aggregate gross proceeds for the foregoing securities were
$2,790,000.
In May 1999, the Company completed a private offering of 9,890 shares of Series
D convertible preferred stock at a private offering price of $1,000 per share.
Each share of Series D convertible preferred stock is convertible into shares of
common stock at a rate of $3.00 per share of common stock. Series D investors
also received 302,821 warrants exercisable for one year to purchase 302,821
shares of common stock at an exercise price of $8.17 per share. The aggregate
gross proceeds for the foregoing securities were $9,890,000.
In May 1999, the Company also completed a private offering of 3,000 shares of
Series E convertible preferred stock at a private offering price of $1,000 per
share. Each share of Series E convertible preferred stock is convertible into
shares of common stock at a rate of $3.00 per share of common stock. Series E
investors also received 91,764 warrants exercisable for one year to purchase
91,764 shares of common stock at an exercise price of $8.17 per share. The
aggregate gross proceeds for the foregoing securities were $3,000,000.
Effective April 28, 1999, the Company acquired substantially all of the assets
of Simply Internet, Inc., an ISP operating in the San Diego, California area and
serving approximately 6,000 customers. The purchase price for this acquisition
was approximately $2,123,775 in cash.
F-34
<PAGE>
-6-
Effective April 29, 1999, the Company acquired substantially all of the assets
of Net Asset, LLC, an ISP operating in the Fresno, California, area and serving
approximately 450 customers, the majority of which are business customers. The
purchase price for this acquisition was approximately $1,175,000 in cash.
Effective May 7, 1999, the Company acquired substantially all of the assets of
SeaTac. Net, Inc., an ISP operating in the Seattle, Washington area and serving
approximately 900 customers. The purchase price for this acquisition was
approximately $400,000 in cash and stock.
The Company has also entered into Binding Letters of Intent to acquire
substantially all of the assets of two additional ISPs serving approximately
7,000 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.
As part of the confirmed Plan of Reorganization for Paradise Cable Corporation,
the Company has agreed to acquire substantially all of the assets of Paradise
Cable Corporation in consideration of the issuance of (i) $220,000 shares of the
Company's common stock; and (ii) the assumption by the Company of approximately
$900,000 of indebtedness remaining to be paid to the Federal Communications
Commission (FCC) in connection with the issuance of various multi-point
distribution system licenses (MDS) and multi-point multi-channel distribution
licenses (MMDS).
F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Simply Internet, Inc.:
We have audited the accompanying balance sheet of Simply Internet, Inc. (a
California corporation) as of December 31, 1998, and the related statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Simply Internet, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Tampa, Florida,
June 18, 1999
F-36
<PAGE>
SIMPLY INTERNET, INC.
---------------------
BALANCE SHEET -- DECEMBER 31, 1998
----------------------------------
<TABLE>
<CAPTION>
ASSETS
----------
<S> <C>
CURRENT ASSETS:
Cash $ 45,892
Prepaid expenses and other current assets 4,308
----------
Total current assets 50,200
PROPERTY AND EQUIPMENT, net 148,846
----------
Total assets $ 199,046
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 114,914
Accrued liabilities 11,490
Deferred revenue 225,156
Line of credit 14,876
Note payable to related party 28,637
Current maturities of capital lease obligations 40,445
----------
Total current liabilities 435,518
CAPITAL LEASE OBLIGATIONS, net of current maturities 48,502
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 1,000,000 shares authorized,
52,632 shares issued and outstanding 52,632
Additional paid in capital 66,117
Accumulated deficit (403,723)
----------
Total stockholders' deficit (284,974)
----------
Total liabilities and stockholders' deficit $ 199,046
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-37
<PAGE>
SIMPLY INTERNET, INC.
---------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES $1,353,746 $1,074,407
---------- ----------
COSTS AND EXPENSES:
Cost of revenues 255,861 181,266
Selling, general and administrative 1,175,364 837,329
---------- ----------
Total costs and expenses 1,431,225 1,018,595
---------- ----------
(LOSS) INCOME FROM OPERATIONS (77,479) 55,812
---------- ----------
OTHER EXPENSE:
Interest (20,664) (3,325)
Other (58,309) (25,724)
---------- ----------
Total other expense (78,973) (29,049)
---------- ----------
NET (LOSS) INCOME $ (156,452) $ 26,763
========== ==========
NET (LOSS) INCOME PER SHARE - BASIC AND DILUTED $ (2.97) $ .51
========== ==========
SHARES USED IN COMPUTING NET (LOSS) INCOME
PER SHARE - BASIC AND DILUTED 52,632 52,632
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
SIMPLY INTERNET, INC.
---------------------
STATEMENTS OF STOCKHOLDERS' DEFICIT
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 50,000 $50,000 $16,361 $(180,605) $(114,244)
Net income - - - 26,763 26,763
Capital contributions 2,632 2,632 14,368 - 17,000
Distributions to stockholders - - - (92,231) (92,231)
------ -------- --------- ----------- ----------
BALANCE, December 31, 1997 52,632 52,632 30,729 (246,073) (162,712)
Net loss - - - (156,452) (156,452)
Capital contributions - - 35,388 - 35,388
Distributions to stockholders - - - (1,198) (1,198)
------ -------- --------- ----------- ----------
BALANCE, December 31, 1998 52,632 $52,632 $66,117 $(403,723) $(284,974)
====== ======== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
SIMPLY INTERNET, INC.
---------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(156,452) $ 26,763
Adjustments to reconcile net (loss) income to net cash
provided by operating activities-
Depreciation 83,780 40,204
Changes in operating assets and liabilities-
Prepaid expenses and other current assets 3,150 (5,343)
Accounts payable 44,918 41,304
Accrued liabilities 1,479 6,753
Deferred revenue 37,900 106,411
--------- ---------
Net cash provided by operating activities 14,775 216,092
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of property and equipment (20,498) (161,977)
Proceeds from disposal of property and equipment 45,525 -
--------- ---------
Net cash provided by (used in)
investing activities 25,027 (161,977)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 10,064 24,602
Payments on line of credit (45,188) -
Proceeds from note payable to stockholder 30,000 -
Payments on note payable to stockholder (1,363) (6,614)
Payments on capital lease obligations (26,658) -
Capital contributions 35,388 17,000
Distributions to stockholders (1,198) (92,231)
--------- ---------
Net cash provided by (used in)
financing activities 1,045 (57,243)
--------- ---------
NET INCREASE (DECREASE) IN CASH 40,847 (3,128)
CASH, beginning of year 5,045 8,173
--------- ---------
CASH, end of year $ 45,892 $ 5,045
========= =========
</TABLE>
F-40
<PAGE>
SIMPLY INTERNET, INC.
---------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
(continued)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 20,724 $ 3,325
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 115,605 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
SIMPLY INTERNET,INC.
--------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1998
-----------------
1. ORGANIZATION AND BUSINESS:
--------------------------
Simply Internet, Inc. (the Company), was formed to provide high-speed Internet
connectivity and enhanced Internet services through the use of wireline
technologies. The Company was formed in 1996 through the investment of two
individuals who made an initial contribution of $50,000 in exchange for 50,000
shares of the Company's stock. The Company sells primarily to business customers
in the San Diego, California area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
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.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of
depreciable 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 statements of operations.
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Revenue, comprised primarily of billings on Internet and enhanced services, is
recognized as the services are provided. Amounts collected prior to the services
being provided are reflected as deferred revenue. Installation and customer set-
up fees are recognized upon completion of the services.
F-42
<PAGE>
Income Taxes
- ------------
The Company has elected to report its earnings under Subchapter S of the
Internal Revenue Code. All income or loss is reported through the stockholders'
personal tax returns. The tax returns and the amount of taxable income or loss
are subject to examination by federal and state taxing authorities. If such
examinations result in changes to taxable income or loss, the tax liabilities of
the stockholders could be changed accordingly.
Fair Value of Financial Instruments
- -----------------------------------
The Company believes that the carrying value of financial instruments on the
balance sheet approximates their fair value.
Income (Loss) per Share
- -----------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
(SFAS 128). The Company adopted SFAS 128 for the year ended December 31, 1997.
Under SFAS 128, net income (loss) per share-basic is determined by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the period. Net income (loss) per share-diluted is determined
by dividing the net income (loss) by the weighted average number of shares of
common stock outstanding and dilutive common equivalent shares during the
period.
3. LIQUIDITY:
----------
The Company incurred a loss from operations for the year ended December 31,
1998. As further discussed in Note 7 to the financial statements, the Company's
management sold substantially all of its assets to SkyLynx Communications, Inc.
(SkyLynx), in exchange for cash during the second quarter of 1999. Management
believes that the sale to SkyLynx will allow the Company to increase sales and
marketing efforts, which in turn should generate increased revenues and improve
operating results.
4. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment consisted of the following as of December 31, 1998:
<TABLE>
<CAPTION>
Useful Lives
in Years Amount
------------ ---------
<S> <C> <C>
Communications and computer equipment 3 $ 248,256
Furniture and fixtures 3 27,322
Less- Accumulated depreciation and amortization (126,732)
---------
Property and equipment, net $ 148,846
=========
</TABLE>
F-43
<PAGE>
5. NOTE PAYABLE TO RELATED PARTY:
------------------------------
The Company has an unsecured note payable (the Note) to a previous stockholder,
which bears interest at a rate of 10 percent and is due upon demand. Amounts
outstanding under the Note at December 31, 1998, are classified as current
liabilities in the accompanying balance sheet.
6. LINE OF CREDIT:
---------------
On November 17, 1997, the Company entered into a $50,000 line of credit
agreement (the Line) with a bank. The Line bears interest at 10.5 percent, which
is payable monthly. The outstanding principal balance was due on November 17,
1998. The Line is secured by certain assets of the Company. At December 31,
1998, there was $14,876 of outstanding borrowings on the Line, and there were no
borrowings available under the Line. The outstanding balance on the Line was
paid during the first quarter of 1999.
7. CAPITAL LEASE OBLIGATIONS:
--------------------------
The Company has capital leases for certain of its computers and equipment.
Assets under capital leases are capitalized using interest rates appropriated at
the inception of each lease. The leases generally provide for the lessee to pay
taxes, maintenance, insurance and certain other operating costs of the leased
property over the three-year term of each lease. The total cost of assets under
capital leases and accumulated amortization as of December 31, 1998, was
$115,605 and $28,914, respectively.
Future minimum lease payments required under capital leases for equipment at
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
----------------------- ------
<S> <C>
1999 $ 50,466
2000 47,114
2001 5,868
--------
Net minimum lease payments under capital leases 103,448
Less- Portion representing interest (14,501)
--------
Present value of net minimum lease payments 88,947
Less- Current maturities (40,445)
--------
Capital lease obligations, less current maturities $ 48,502
========
</TABLE>
The lease agreements required payments of principal and interest under
capital leases of $37,892 for 1998.
F-44
<PAGE>
6. COMMITMENTS AND CONTINGENCIES:
------------------------------
Operating Leases
- ----------------
The Company leases office space and equipment under operating leases. These
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 $34,978
2000 8,085
2001 8,085
-------
$51,148
=======
Rent expense under operating leases for the year ended December 31, 1998 and
1997, totaled $31,067 and $18,610, respectively.
7. SUBSEQUENT EVENT:
----------------
Effective April 26, 1999, the Company sold substantially all of its assets to
SkyLynx for $2,123,775 in cash.
F-45
<PAGE>
SIMPLY INTERNET, INC.
---------------------
BALANCE SHEET -- MARCH 31, 1999
-------------------------------
(Unaudited)
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 19,323
Prepaid expenses and other current assets 4,353
----------
Total current assets 23,676
PROPERTY AND EQUIPMENT, net 138,194
----------
Total assets $ 161,870
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 103,127
Accrued liabilities 11,490
Deferred revenue 257,870
Note payable to stockholder 28,136
Current maturities of capital lease obligations 43,387
----------
Total current liabilities 444,010
CAPITAL LEASE OBLIGATIONS, net of current maturities 38,109
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 1,000,000 shares authorized,
52,632 shares issued and outstanding 52,632
Additional paid in capital 96,117
Accumulated deficit (468,998)
----------
Total stockholders' deficit (320,249)
----------
Total liabilities and stockholders' deficit $ 161,870
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-46
<PAGE>
SIMPLY INTERNET, INC.
---------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
---------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three-month
Period Ended
March 31,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES $348,097 $315,442
---------- ----------
COSTS AND EXPENSES:
Cost of revenues 93,698 64,807
Selling, general and administrative 313,637 275,434
---------- ----------
Total costs and expenses 407,335 340,241
---------- ----------
LOSS FROM OPERATIONS (59,238) (24,799)
INTEREST EXPENSE (4,894) (2,693)
---------- ----------
NET LOSS $(64,132) $(27,492)
========== ==========
NET LOSS PER SHARE - BASIC AND DILUTED $ (1.22) $ (.52)
========== ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE -
BASIC AND DILUTED $ 52,632 $ 52,632
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
SIMPLY INTERNET, INC.
---------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
----------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three-month
Period Ended
March 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(64,132) $(27,492)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation 26,631 20,945
Changes in operating assets and liabilities-
Prepaid expenses and other current assets (45) (4,416)
Accounts payable (11,787) (7,153)
Deferred revenue 32,714 -
--------- ---------
Net cash used in operating activities (16,619) (18,116)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of property and equipment (8,079) (9,747)
--------- ---------
Net cash used in investing activities (8,079) (9,747)
--------- ---------
CASH FLOWS FINANCING ACTIVITIES:
Proceeds from line of credit - 10,064
Payments on line of credit (14,876) (16,077)
Proceeds from note payable - 30,000
Payments on note payable (501) -
Payments on capital lease obligations (15,351) -
Capital contributions 30,000 6,000
Distributions to stockholders (1,143) -
--------- ---------
Net cash (used in) provided by
financing activities (1,871) 29,987
--------- ---------
NET (DECREASE) INCREASE IN CASH (26,569) 2,124
CASH, beginning of period 45,892 5,045
--------- ---------
CASH, end of period $ 19,323 $ 7,169
========= =========
</TABLE>
F-48
<PAGE>
SIMPLY INTERNET, INC.
---------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
----------------------------------------------------------
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Three-month
Period Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $4,894 $2,693
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Equipment acquired under capital leases $7,900 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
SIMPLY INTERNET,INC.
--------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
MARCH 31, 1999
--------------
(Unaudited)
1. INTERIM FINANCIAL INFORMATION:
------------------------------
The interim financial statements as of March 31, 1999, and for the three-month
periods ended March 31, 1999 and 1998, are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Simply Internet, Inc.'s management, the unaudited interim
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
F-50
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members of
Net Asset, LLC:
We have audited the accompanying balance sheet of Net Asset, LLC (a California
limited liability company) as of December 31, 1998, and the related statements
of operations, members' deficit and cash flows for the years ended December 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Net Asset, LLC as of December
31, 1998, and the results of its operations and its cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
Tampa, Florida,
June 11, 1999
F-51
<PAGE>
NET ASSET, LLC
--------------
BALANCE SHEET -- DECEMBER 31, 1998
----------------------------------
<TABLE>
ASSETS
---------
<S> <C>
CURRENT ASSETS:
Cash $ 15,980
Accounts receivable, net of allowance for doubtful accounts
of $2,945 63,247
Prepaid expenses and other current assets 2,208
----------
Total current assets 81,435
PROPERTY AND EQUIPMENT, net 338,657
Total assets $ 420,092
==========
LIABILITIES AND MEMBERS' DEFICIT
--------------------------------
CURRENT LIABILITIES:
Accounts payable $ 216,072
Accrued liabilities 32,433
Deferred revenue 115,864
Current maturities of notes payable to members 165,492
Current maturities of capital lease obligations 28,559
----------
Total current liabilities 558,420
NOTES PAYABLE TO MEMBERS, net of current maturities 15,400
CAPITAL LEASE OBLIGATIONS, net of current maturities 58,752
----------
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT:
Contributed capital 482,992
Accumulated deficit (695,472)
----------
Total members' deficit (212,480)
----------
Total liabilities and members' deficit $ 420,092
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-52
<PAGE>
NET ASSET, LLC
--------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
REVENUES $ 819,307 $ 705,871
----------- ----------
COSTS AND EXPENSES:
Cost of revenues 467,934 434,237
Selling, general and administrative 637,015 411,917
----------- ----------
Total costs and expenses 1,104,949 846,154
----------- ----------
LOSS FROM OPERATIONS (285,642) (140,283)
OTHER INCOME 14,133 -
INTEREST EXPENSE (19,435) (12,602)
----------- ----------
NET LOSS $ (290,944) $(152,885)
----------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
NET ASSET, LLC
--------------
STATEMENTS OF MEMBERS' DEFICIT
------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
Members' Accumulated
Capital Deficit Total
--------- ----------- ----------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $402,992 $(251,643) $ 151,349
Net loss - (152,885) (152,885)
--------- ----------- ----------
BALANCE, December 31, 1997 402,992 (404,528) (1,536)
Capital contributions 80,000 - 80,000
Net loss - (290,944) (290,944)
--------- ----------- ----------
BALANCE, December 31, 1998 $482,992 $(695,472) $(212,480)
========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
NET ASSET, LLC
--------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(290,944) $(152,885)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation 80,695 54,893
Changes in operating assets and liabilities-
Accounts receivable 30,911 (92,192)
Prepaid expenses and other current assets 1,728 (2,341)
Accounts payable 125,189 13,089
Accrued liabilities 16,742 13,263
Deferred revenue 29,238 86,626
---------- ----------
Net cash used in operating activities (6,441) (79,547)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of property and equipment (45,734) (110,067)
---------- ----------
Net cash used in investing activities (45,734) (110,067)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on notes payable, net (13,108) 186,998
Payments on capital lease obligations (8,746) -
Capital contributions 80,000 -
---------- ----------
Net cash provided by financing activities 58,146 186,998
---------- ----------
NET INCREASE (DECREASE) IN CASH 5,971 (2,616)
---------- ----------
CASH, beginning of year 10,009 12,625
---------- ----------
CASH, end of year $ 15,980 $ 10,009
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 19,436 $ 12,634
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
Equipment acquired under capital leases $ 96,057 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
NET ASSET, LLC
--------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1998
-----------------
1. ORGANIZATION AND BUSINESS:
--------------------------
Net Asset, LLC (the Company), is a California limited liability company formed
in December 1996 pursuant to the terms of the Operating Agreement for Net Asset,
LLC. The Company was formed through the investments of several individuals and
a corporation, RhinoTrax, Inc. (RhinoTrax), collectively the Members. In
connection with the Company's formation, RhinoTrax contributed cash and
equipment of approximately $300,000 for a 73 percent interest in the Company.
The Company was formed to provide high-speed Internet connectivity and enhanced
Internet services to businesses through the use of wireline technologies. The
Company sells primarily to business customers in the Fresno, California area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
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.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of
depreciable 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 statements of operations.
F-56
<PAGE>
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Revenue, comprised primarily of billings on Internet and enhanced services, is
recognized as the services are provided. Amounts collected prior to the
services being provided are reflected as deferred revenue. Installation and
customer set-up fees are recognized upon completion of the services. Revenue
from consulting services is recognized as the services are provided. Revenue
from hardware sales is recognized upon shipment of the respective products.
Income Taxes
- ------------
The Company has elected to report its earnings as a limited liability company
under the Internal Revenue Code. All income or loss is reported through the
Members' personal tax returns. The tax returns and the amount of taxable income
or loss are subject to examination by federal and state taxing authorities. If
such examinations result in changes to taxable income or loss, the tax
liabilities of the Members could be changed accordingly.
Fair Value of Financial Instruments
- -----------------------------------
The Company believes that the carrying value of financial instruments on the
balance sheet approximates their fair value.
3. LIQUIDITY:
----------
The Company incurred operating losses from operations for the years ended
December 31, 1998 and 1997. As further discussed in Note 9 to the financial
statements, the Company's management sold substantially all of its assets to
SkyLynx Communications, Inc. (SkyLynx), in exchange for cash in April 1999.
Management believes that the sale to SkyLynx will allow the Company to increase
sales and marketing efforts, which in turn should generate increased revenues
and improve operating results.
4. PROPERTY AND EQUIPMENT:
-----------------------
Property and Equipment consisted of the following as of December 31, 1998:
Useful Lives
in Years Amount
------------ -------
Communications equipment 5 $ 221,876
Computer equipment 5 224,851
Furniture and fixtures 5 31,271
Less- Accumulated depreciation and amortization (139,341)
----------
Property and equipment, net $ 338,657
==========
F-57
<PAGE>
5. NOTES PAYABLE TO MEMBERS:
-------------------------
The Company has notes payable to various members. These members have loaned
monies to the Company to fund operations. The notes payable bear interest at
rates ranging from zero percent to 21.5 percent and mature at various dates
through the year ending December 31, 2000.
Maturities of notes payable to members at December 31, 1998, are as follows:
Year Ending December 31, Amount
---------------------------------------- ----------
1999 $ 165,492
2000 15,400
----------
180,892
Less- Current maturities (165,492)
----------
Notes payable to members, net of current maturities $ 15,400
==========
6. CAPITAL LEASE OBLIGATIONS:
--------------------------
The Company has capital leases for certain of its computers and equipment.
Assets under capital leases are capitalized using interest rates appropriated at
the inception of each lease. The leases generally provide for the lessee to pay
taxes, maintenance, insurance and certain other operating costs of the leased
property over the three-year term of each lease. The total cost of assets under
capital leases and accumulated amortization as of December 31, 1998, was $96,057
and $8,167, respectively.
Future minimum lease payments required under capital leases for equipment at
December 31, 1998, are as follows:
Year Ending December 31, Amount
------------------------------------------ ---------
1999 $ 41,227
2000 43,356
2001 28,357
---------
Net minimum lease payments under capital leases 112,940
Less- Portion representing interest (25,629)
---------
Present value of net minimum lease payments 87,311
Less- Current maturities (28,559)
---------
Capital lease obligations, less current maturities $ 58,752
=========
The lease agreements required payments of principal and interest under capital
leases of $14,999 for 1998.
F-58
<PAGE>
7. COMMITMENTS AND CONTINGENCIES:
------------------------------
Operating Leases
- ----------------
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 $ 17,256
2000 17,256
2001 17,256
2002 17,256
2003 18,300
Thereafter 87,048
--------
$174,372
========
Rent expense under operating leases for the years ended December 31, 1998 and
1997, totaled $18,682 and $12,850, respectively.
8. RELATED-PARTY TRANSACTIONS:
---------------------------
The Company obtained financing from various members to fund operations during
1998 and 1997. These obligations are payable according to the terms discussed
in Note 5.
9. SUBSEQUENT EVENT:
-----------------
Effective April 29, 1999, the Company sold substantially all of its assets to
SkyLynx for $1,175,000 in cash.
F-59
<PAGE>
NET ASSET, LLC
--------------
BALANCE SHEET -- MARCH 31, 1999
-------------------------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 21,113
Accounts receivable, net of allowance for doubtful accounts
of $2,215 at March 31, 1999 44,031
Prepaid expenses and other current assets 1,486
---------
Total current assets 66,630
PROPERTY AND EQUIPMENT, net 319,253
---------
Total assets $ 385,883
=========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 308,090
Accrued liabilities 34,254
Deferred revenue 89,671
Current maturities of notes payable to members 144,281
Current maturities of capital lease obligations 29,958
---------
Total current liabilities 606,254
NOTES PAYABLE TO MEMBERS, net of current maturities 10,950
CAPITAL LEASE OBLIGATIONS, net of current maturities 48,654
---------
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT:
Contributed capital 482,992
Accumulated deficit (762,967)
---------
Total members' deficit (279,975)
---------
Total liabilities and members' deficit $ 385,883
=========
The accompanying notes are an integral part of this balance sheet.
F-60
<PAGE>
NET ASSET, LLC
--------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
---------------------------------------------------------
(Unaudited)
Three-month
Period Ended
March 31,
-----------------------
1999 1998
--------- ---------
REVENUES $221,482 $180,311
--------- ---------
COSTS AND EXPENSES:
Cost of revenues 125,906 115,278
Selling, general and administrative 155,407 152,617
--------- ---------
Total costs and expenses 281,313 267,895
--------- ---------
LOSS FROM OPERATIONS (59,831) (87,584)
INTEREST EXPENSE (7,664) (4,093)
--------- ---------
NET LOSS $(67,495) $(91,677)
========= =========
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
NET ASSET, LLC
--------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
---------------------------------------------------------
(Unaudited)
Three-month
Period Ended
March 31,
---------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(67,495) $(91,677)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation 23,987 17,228
Changes in operating assets and liabilities-
Accounts receivable 19,216 19,367
Prepaid expenses and other current assets 722 (4,395)
Accounts payable 92,018 22,331
Accrued liabilities 1,821 (9)
Deferred revenue (26,193) 10,767
--------- ---------
Net cash provided by (used in)
operating activities 44,076 (26,388)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of property and equipment (4,583) (14,835)
--------- ---------
Net cash used in investing activities (4,583) (14,835)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings on notes payable, net (25,661) (14,271)
Payments on capital lease obligations (8,699) -
Capital contributions - 55,000
--------- ---------
Net cash (used in) provided by
financing activities (34,360) 40,729
--------- ---------
NET INCREASE (DECREASE) IN CASH 5,133 (494)
CASH, beginning of period 15,980 10,009
--------- ---------
CASH, end of period $ 21,113 $ 9,515
========= =========
F-62
<PAGE>
NET ASSET, LLC
--------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
---------------------------------------------------------
(Unaudited)
(Continued)
Three-month
Period Ended
March 31,
------------------
1999 1998
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 6,074 $ 4,131
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITY:
Equipment acquired under capital leases $ - $48,762
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
NET ASSET, LLC
--------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
MARCH 31, 1999
--------------
(Unaudited)
1. INTERIM FINANCIAL INFORMATION:
------------------------------
The interim financial statements as of March 31, 1999, and for the three-month
periods ended March 31, 1999 and 1998, are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Net Asset, LLC's management, the unaudited interim financial
statements contain all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
F-64
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
CalWeb Internet Services, Inc.:
We have audited the accompanying balance sheet of CalWeb Internet Services, Inc.
(a California corporation) as of June 30, 1998, and the related statements of
operations, stockholders' equity and cash flows for the years ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CalWeb Internet Services, Inc.
as of June 30, 1998, and the results of its operations and its cash flows for
the years ended June 30, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Tampa, Florida,
July 19, 1999
F-65
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
BALANCE SHEET -- JUNE 30, 1998
------------------------------
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $146,880
Accounts receivable, net of allowance for doubtful
accounts of $5,363 173,712
Prepaid expenses and other current assets 21,151
Deferred tax assets 26,710
--------
Total current assets 368,453
PROPERTY AND EQUIPMENT, net 235,610
--------
Total assets $604,063
========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 17,860
Accrued liabilities 123,304
Deferred revenue 58,292
Income taxes payable 23,697
Current maturities of long-term debt 34,312
--------
Total current liabilities 257,465
LONG-TERM DEBT, net of current maturities 82,048
DEFERRED TAX LIABILITIES 27,536
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value; 100,000 shares authorized,
100 shares issued and outstanding 10,000
Retained earnings 227,014
--------
Total stockholders' equity 237,014
--------
Total liabilities and stockholders' equity $604,063
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-66
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES $1,350,361 $1,081,633
---------- ----------
COSTS AND EXPENSES:
Cost of revenues 358,182 303,125
Selling, general and administrative 760,016 632,418
---------- ----------
Total costs and expenses 1,118,198 935,543
---------- ----------
INCOME FROM OPERATIONS 232,163 146,090
---------- ----------
OTHER INCOME (EXPENSE):
Interest 1,792 889
Other 2,191 (1,176)
---------- ----------
Total other income (expense) 3,983 (287)
---------- ----------
NET INCOME BEFORE PROVISION FOR INCOME TAXES 236,146 145,803
PROVISION FOR INCOME TAXES 94,071 58,803
---------- ----------
NET INCOME $ 142,075 $ 87,000
========== ==========
NET INCOME PER SHARE - BASIC AND DILUTED $ 1,421 $ 870
========== ==========
SHARES USED IN COMPUTING NET INCOME PER SHARE -
BASIC AND DILUTED 100 100
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
------------------------------------------
<TABLE>
<CAPTION>
Common Stock Retained
----------------------
Shares Amount Earnings Total
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1996 100 $10,000 $ (2,061) $ 7,939
Net income - - 87,000 87,000
---------- -------- ---------- ---------
BALANCE, June 30, 1997 100 10,000 84,939 94,939
Net income - - 142,075 142,075
---------- -------- ---------- ---------
BALANCE, June 30, 1998 100 $10,000 $ 227,014 $237,014
========== ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 142,075 $ 87,000
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 48,682 22,402
Loss on disposition of property and equipment - 1,466
Changes in operating assets and liabilities-
Accounts receivable (74,568) (27,990)
Prepaid expenses and other current assets (17,155) (18,499)
Deferred tax assets 26,796 (2,473)
Accounts payable (34,672) 38,510
Accrued liabilities 96,283 10,162
Deferred revenue (33,163) 26,029
Income taxes payable 8,226 12,303
---------- ----------
Net cash provided by operating activities 162,504 148,910
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of property and equipment (183,556) (66,834)
Proceeds from disposition of property and equipment - 2,900
---------- ----------
Net cash used in investing activities (183,556) (63,934)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 92,073 -
Principal debt payments (12,517) (22,360)
---------- ----------
Net cash provided by (used in) financing activities 79,556 (22,360)
---------- ----------
NET INCREASE IN CASH 58,504 62,616
CASH, beginning of year 88,376 25,760
---------- ----------
CASH, end of year $ 146,880 $ 88,376
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 3,997 $ 9,791
Taxes $ 73,750 $ 67,425
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
JUNE 30, 1998
-------------
1. ORGANIZATION AND BUSINESS:
--------------------------
CalWeb Internet Services, Inc., a California corporation (the Company), was
formed to provide high-speed Internet connectivity and enhanced Internet
services to businesses through the use of wireline technologies. Since its
incorporation in 1995, the Company has grown to provide Internet access to
approximately 7,000 residential and commercial customers in the Sacramento
metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
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.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of depreciable assets.
Amortization of leasehold improvements is determined using the straight-line
method over the shorter of the estimated useful life of the improvements or the
term of the lease.
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 statements of operations.
F-70
<PAGE>
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Revenue, comprised primarily of Internet and enhanced services, is recognized as
the services are provided. Amounts collected prior to the services being
provided are reflected as deferred revenue. Installation and customer set-up
fees are recognized upon completion of the services. Revenue from consulting
services is recognized as the services are provided. Revenue from hardware
sales is recognized upon shipment of the respective products.
Income Taxes
- ------------
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred amounts are measured using enacted tax rates expected to apply
to taxable income in the year those temporary differences are expected to be
recovered or settled.
Fair Value of Financial Instruments
- -----------------------------------
The Company believes that the carrying value of financial instruments on the
balance sheet approximates their fair value.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). The Company adopted SFAS 128 for the year ended June 30, 1997. Under
SFAS 128, net income (loss) per share-basic is determined by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Net income (loss) per share-diluted is determined by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding and dilutive common equivalent shares during the period.
3. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment consisted of the following as of June 30, 1998:
<TABLE>
<CAPTION>
Useful Lives
in Years Amount
--------------- ----------
<S> <C> <C>
Computer equipment 5 $309,081
Office equipment 5 6,101
Leasehold improvements 3 4,102
----------
319,284
Less- Accumulated depreciation and amortization (83,674)
----------
Property and equipment, net $235,610
==========
</TABLE>
F-71
<PAGE>
4. LONG-TERM DEBT:
---------------
Long-term debt consisted of the following at June 30, 1998:
<TABLE>
<CAPTION>
Amount
--------------
<S> <C>
Note payable to a bank, maturing 2002 $ 92,073
Notes payable to stockholders, maturities from 2000 to 2001 14,837
Note payable to an employee, maturing 2001 9,450
------------
116,360
Less- Current maturities (34,312)
------------
Long-term debt, net of current maturities $ 82,048
============
</TABLE>
For the fiscal years ending June 30, 1998 and 1997, the Company recorded $3,997
and $9,791 in interest expense, respectively.
The note payable to a bank is secured by all of the Company's assets. Principal
and interest are payable in monthly installments of $2,675 at the prime lending
rate plus 2.75 percent (11.25 percent at June 30, 1998). The Company has
restrictive and various financial covenants with which the Company was in
compliance at June 30, 1998.
Notes payable to stockholders consists of three notes payable to certain
officers of the Company. These notes are payable in equal quarterly principal
installments of $1,100, $500 and $63, respectively, plus accrued interest.
Each of the notes bears interest at a face rate of 5.75 percent. On December
31, 1998, the Company paid the remaining principal on two of the notes; the
Company paid the outstanding principal on the third note on February 28, 1999.
The note payable to an employee is payable in equal monthly principal
installments of $350 plus accrued interest and bears interest at a face rate of
8 percent. On August 31, 1998, the Company repaid the entire remaining
principal balance outstanding on this note.
At June 30, 1998, maturities of long-term debt were as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
---------------- ---------------
<S> <C>
1999 $ 34,312
2000 36,960
2001 31,706
2002 13,382
----------
$116,360
==========
</TABLE>
F-72
<PAGE>
5. COMMITMENTS AND CONTINGENCIES:
------------------------------
Operating Leases
- ----------------
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
June 30, 1998, are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
-------------- ------------
<S> <C>
1999 $15,278
2000 6,250
2001 4,451
2002 1,155
--------
$27,134
========
</TABLE>
Rent expense under operating leases for the years ended June 30, 1998, and 1997,
totaled $53,158 and $49,827, respectively.
6. INCOME TAXES:
-------------
Provision for income taxes consisted of the following as of June 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Current
Federal $52,349 $47,844
State 14,926 13,431
--------- ---------
Total current 67,275 61,275
--------- ---------
Deferred:
Federal 20,847 (1,930)
State 5,949 (542)
--------- ---------
Total deferred 26,796 (2,472)
--------- ---------
Provision for income taxes $94,071 $58,803
========= =========
</TABLE>
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial
statements. The components
F-73
<PAGE>
of the Company's deferred income tax assets and liability consisted of the
following as of June 30, 1998:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Deferred tax assets:
Deferred revenue $ 23,218
Accrued vacation 1,156
Allowance for doubtful accounts 1,856
Other 480
---------
Total deferred tax assets 26,710
Deferred tax liability:
Property and equipment (27,536)
---------
Net deferred tax liability $ (826)
=========
</TABLE>
The differences between the Company's effective income tax rate and the federal
statutory rate are reconciled as of June 30, 1998 and 1997, and are as follows :
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
State income taxes, net of federal taxes 5.8 5.8
Other - 0.5
-------- --------
Effective income tax rate 39.8% 40.3%
======== ========
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
--------------------------
As discussed in Note 4, the Company has several notes payable outstanding to its
officers and an employee.
During the first three months of the year ended June 30, 1997, the Company
leased its primary office facility from the officers of the Company. Of the
$49,827 charged to rental expense in fiscal 1997, $10,500 represents rental
payments made to the officers of the Company.
F-74
<PAGE>
In early fiscal 1997, the Company paid approximately $18,000 to an individual
with whom the Company had entered into a revenue sharing agreement. This
payment was made in consideration for early termination of the agreement and was
roughly equivalent to the economic benefit that this individual would have
received had the agreement remained in force for its full term. Based on the
terms of the release agreement, the Company bears no further liability for
amounts under the revenue sharing agreement; thus, no further amounts have been
reflected in the accompanying financial statements. The payment was expensed in
the year ended June 30, 1997.
8. SUBSEQUENT EVENTS:
-----------------
On April 20, 1999, the Company entered into an agreement with SkyLynx
Communications, Inc. (SkyLynx), pursuant to which SkyLynx will acquire the
Company for $2.6 million in cash and $1.7 million in SkyLynx common stock. The
SkyLynx common stock issued upon consummation of the transaction will be
classified as restricted shares under the Securities Act of 1933. Additionally,
SkyLynx will hold back shares having a market value equivalent to 10 percent of
the total purchase price for a period of one year following the transaction.
Such shares will be used as collateral to secure any obligation of the Company
to indemnify SkyLynx after the purchase has been closed.
F-75
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
BALANCE SHEET -- MARCH 31, 1999
-------------------------------
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $314,772
Accounts receivable, net of allowance for doubtful accounts of $4,659 155,994
Prepaid expenses and other current assets 66,766
Deferred tax assets 32,962
--------
Total current assets 570,494
PROPERTY AND EQUIPMENT, net 281,872
--------
Total assets $852,366
========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 36,468
Accrued liabilities 38,552
Deferred revenue 151,817
Income taxes payable 159,794
Current maturities of long-term debt 49,478
--------
Total current liabilities 436,109
LONG-TERM DEBT, net of current maturities 24,791
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value; 100,000 shares authorized,
100 shares issued and outstanding 10,000
Retained earnings 381,466
--------
Total stockholders' equity 391,466
--------
Total liabilities and stockholders' equity $852,366
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-76
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
STATEMENTS OF OPERATIONS
------------------------
FOR THE NINE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine-month
Period Ended
March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES $1,302,722 $1,016,696
---------- ----------
COSTS AND EXPENSES:
Cost of revenues 328,727 264,761
Selling, general and administrative 725,807 546,496
---------- ----------
Total costs and expenses 1,054,534 811,257
---------- ----------
OPERATING INCOME 248,188 205,439
---------- ----------
OTHER INCOME:
Interest 3,283 1,193
Other 5,290 1,404
---------- ----------
Total other income 8,573 2,597
---------- ----------
NET INCOME BEFORE PROVISION FOR INCOME TAXES 256,761 208,036
PROVISION FOR INCOME TAXES 102,309 70,553
---------- ----------
NET INCOME $ 154,452 $ 137,483
========== ==========
NET INCOME PER SHARE - BASIC AND DILUTED $ 1,545 $ 1,375
========== ==========
SHARES USED IN COMPUTING NET INCOME PER SHARE - BASIC AND DILUTED 100 100
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE NINE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
--------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine-month
Period Ended
March 31,
------------------------
1999 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 154,452 $ 137,483
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 54,017 35,035
Changes in operating assets and liabilities-
Accounts receivable 17,718 (46,422)
Prepaid expenses and other current assets (45,615) (38,750)
Deferred tax assets (33,788) 25,970
Accounts payable 18,608 (22,322)
Accrued liabilities (84,752) (3,765)
Deferred revenue 93,525 (24,872)
Income taxes payable 136,097 44,583
---------- ---------
Net cash provided by operating activities 310,262 106,940
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of property and equipment (100,279) (117,425)
--------- ---------
Net cash used in investing activities (100,279) (117,425)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 21,027 71,908
Principal debt payments (63,118) (9,804)
--------- ---------
Net cash (used in) provided by financing activities (42,091) 62,104
--------- ---------
NET INCREASE IN CASH 167,892 51,619
CASH, beginning of period 146,880 88,376
--------- ---------
CASH, end of period $ 314,772 $ 139,995
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 7,739 $ 2,998
Taxes $ 46,765 $ 38,750
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
CALWEB INTERNET SERVICES, INC.
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
MARCH 31, 1999
--------------
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Interim Financial Information
- -----------------------------
The interim financial statements as of March 31, 1999, and for the nine-month
periods ended March 31, 1999 and 1998, are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Calweb Internet Services, Inc.'s management, the unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. The results
of operations for the interim periods are not necessarily indicative of the
results for the entire fiscal year.
F-79
<PAGE>
================================================================================
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. This prospectus is not an offer to sell common
stock and is not soliciting an offer to buy common stock in any state where the
offer or sale is not permitted.
SkyLynx Communications, Inc.
Common Stock
9,996,954 Shares
July 23, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Our Articles of Incorporation allow us to indemnify our directors,
officers, employees and agents for various acts to the full extent permitted by
the Colorado Business Corporation Act. Our Articles of Incorporation, and their
amendments, are incorporated by reference as Exhibits to the registration
statement which includes this prospectus.
In general under the Colorado Business Corporation Act, we may indemnify
any officer, director, employee, or agent against expenses, fines, penalties,
settlements, or judgments arising in connection with a legal proceeding to which
the person is a party, if the person's actions were in good faith, were believed
to be in our best interest, and were not unlawful. Indemnification is mandatory
with respect to a director or officer who was wholly successful in defense of a
proceeding. In all other cases, indemnification of a director, officer,
employee, or agent requires the board of directors independent determination,
independent legal counsel's determination, or a vote of the shareholders that
the person to be indemnified met the applicable standard of conduct.
The circumstances under which we may grant indemnification in connection
with an action brought on our behalf are generally the same as those described
above. However, with respect to actions against directors, we may grant
indemnification only with respect to reasonable expenses actually incurred in
connection with the defense or settlement of the action. In these actions, the
person to be indemnified must have acted in good faith and in a manner the
person reasonably believed was in our best interest; the person must not have
been adjudged liable to us; and the person must not have received an improper
personal benefit.
We are also obligated to indemnify some of our executive officers under
employment agreements we have with them, and may in the future grant
indmenification rights to other employees or agents under other agreements we
may make. In addition, we have purchased insurance which protects our directors
and officers against liabilities they may incur in connection with their
services in these positions.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC this kind of indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
Company in connection with the sale of common stock being registered hereby.
Item Amount
---- ------
SEC registration fee $ 18,335
Legal fees and expenses $ 55,000
Accounting fees and expenses $190,000
Miscellaneous $ 6,665*
<PAGE>
Miscellaneous expenses $__________
Total $__________
* Estimated
Item 26. Recent Sales of Unregistered Securities
1. In September 1996, we issued an aggregate of 653,846 shares of our
common stock to our initial officers and directors for services provided to us
by these persons. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided in Section 4(2)
of the Securities Act.
2. In October 1997, we issued an aggregate of 492,307 shares of our
common stock to six consultants in consideration of services rendered. The
shares were valued at $.013 per share. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
3. Between April and December 1997, we sold an aggregate of 781,805
shares of our common stock for gross proceeds of $999,501. The shares were sold
exclusively to persons who qualified as "accredited investors" within the
meaning of Rule 501(a) of Regulation D under the Securities Act, and to a
limited number of other investors who satisfied certain investor suitability
requirements including, without limitation, that they possessed a level of
knowledge and experience in financial and business matters enabling them to
evaluate the merits and risks of an investment in our common stock. The shares
were issued without registration under the Securities Act in reliance upon the
exemption provided in Rule 504 of Regulation D under the Securities Act.
4. In December 1997, we issued an aggregate of 6,875,000 shares of our
common stock in exchange for all of the issued and outstanding capital stock of
SkyLynx Express Holdings, Inc. The shares were issued exclusively to persons who
qualified as "accredited investors" within the meaning of Rule 501(a) of
Regulation D under the Securities Act. The securities, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
5. In May 1998, we issued 50,000 shares of our common stock to Nadex
West, Inc. in consideration of the assignment of a lease covering two wireless
communication channels in the Fresno, California area. The shares were issued
exclusively to an entity that qualified as an "accredited investor" within the
meaning of Rule 501(a) of Regulation D under the Securities Act. The securities,
which were taken for investment purposes and subject to appropriate transfer
restrictions, were issued without registration under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act.
6. From May to October 1998, we sold an aggregate of 988,750 units, each
unit consisting of one share of series A convertible preferred stock and
warrants to purchase two shares of our common stock, for aggregate consideration
of $3,955,000, or $4.00 per unit. The shares were sold exclusively to persons
who qualified as "accredited investors" within the meaning of Rule 501(a) of
Regulation D under the Securities Act, and to a limited number of other
investors who satisfied certain investor suitability requirements including,
without limitation, that they possessed a level of knowledge and experience in
financial and business matters enabling them to evaluate the merits and risks of
an investment in our securities. The securities, which were acquired for
investment purposes and subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in reliance upon Section
4(2) thereof and Rule 506 of Regulation D thereunder.
II-2
<PAGE>
7. In June 1998, we issued an aggregate of 653,997 shares of our common
stock in consideration of services rendered by consultants and others between
April and June 1998. The shares were issued to non-affiliated persons, all of
whom were "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act. The securities, which were taken for investment and
were subject to appropriate transfer restrictions, were issued without
registration under the Securities Act in reliance upon the exemption provided in
Section 4(2) of the Securities Act.
8. In October 1998, we issued an aggregate of 55,000 shares of our common
stock in consideration of services rendered by consultants. The shares were
issued to four non-affiliated persons, all of whom were "accredited investors"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided in Section 4(2) of the Securities Act.
9. On January 1, 1999, we issued an aggregate of 450,000 shares of our
common stock as signing bonuses for three of our executive officers, and 125,000
shares of our common stock to a non-affiliated person in exchange for services
rendered. The shares were issued exclusively to persons who qualified as
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act.
10. On January 7, 1999, we issued an aggregate of 121,355 shares of our
common stock to a current employee and his consulting company as a signing bonus
and for services rendered while this executive officer was a consultant to us.
The securities were issued exclusively to persons who qualified as
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act.
11. On January 21, 1999, we issued 3,919 shares of our common stock to a
non-affiliated person in exchange for services rendered. The securities were
issued exclusively to a person who satisfied certain investor suitability
requirements including, without limitation, that he possessed a level of
knowledge and experience in financial and business matters enabling him to
evaluate the merits and risks of an investment in our common stock. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act.
12. In January 1999, we issued and sold to one 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 our common stock, and warrants
to purchase two additional shares of our common stock. The securities were sold
exclusively to a person who qualified as an "accredited investor" within the
meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act.
13. In January 1999, we issued an aggregate of 79,591 shares of our series
A convertible preferred stock and warrants to purchase an aggregate of 159,182
shares of our common stock to broker-dealers as commissions for services
rendered to us. The securities were sold exclusively to persons who qualified
as "accredited investors" within the meaning of Rule 501(a) of Regulation D
under the Securities Act. The securities, which were taken for investment and
were subject to appropriate transfer restrictions, were issued without
registration under Section 4(2) of the Securities Act and Rule 506 of Regulation
D thereunder.
II-3
<PAGE>
14. In January 1999, we issued to one investor 600 shares of our series B
convertible preferred stock, 15,000 shares of our common stock and warrants
exercisable to purchase, in the aggregate, 120,000 shares of our common stock.
The aggregate purchase price for these securities was $600,000. The securities
were sold exclusively to a person who qualified as an "accredited investor"
within the meaning of Rule 501(a) of Regulation D under the Securities Act. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D thereunder.
15. On February 2, 1999, we issued an aggregate of 25,607 shares of our
common stock in connection with our acquisition of substantially all of the
assets of InterAccess Corp. The securities were issued to a person who
qualified as an "accredited investor" within the meaning of Rule 501(a) of
Regulation D under the Securities Act and to one other investor who satisfied
certain investor suitability requirements including, without limitation, that he
possessed a level of knowledge and experience in financial and business matters
enabling him to evaluate the merits and risks of an investment in our common
stock. The securities, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
16. On March 23, 1999, we issued an aggregate of 19,110 shares of our
common stock in connection with our acquisition of substantially all of the
assets of ContiNet, LLC. The securities were issued to one investor who
satisfied certain investor suitability requirements including, without
limitation, that he possessed a level of knowledge and experience in financial
and business matters enabling him to evaluate the merits and risks of an
investment in our common stock. The securities, which were taken for investment
and were subject to appropriate transfer restrictions, were issued without
registration under the Securities Act in reliance upon the exemption provided by
Section 4(2) of the Securities Act.
17. In April 1999, we issued to private investors an aggregate of 721,419
shares of our series C convertible preferred stock, at a price of $4.00 per
share. The aggregate purchase price for these securities was $2,885,676. The
securities were sold exclusively to persons who qualified as "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D thereunder.
18. On May 7, 1999, we issued an aggregate of 19,865 shares of our common
stock in connection with our acquisition of substantially all of the assets of
SeaTac.Net, Inc. The securities were sold to one person who qualified as an
"accredited investor" within the meaning of Rule 501(a) of Regulation D under
the Securities Act and to one other investor who satisfied certain investor
suitability requirements including, without limitation, that he possessed a
level of knowledge and experience in financial and business matters enabling him
to evaluate the merits and risks of an investment in our common stock. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act.
19. In May 1999, we issued to private investors an aggregate of 10,000
shares of our series D convertible preferred stock, at a price of $1,000 per
share, and warrants to purchase an aggregate of 405,880 shares of our common
stock. The aggregate purchase price for these securities was $10,000,000. The
securities were sold exclusively to persons who qualified as "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D thereunder.
II-4
<PAGE>
20. In May 1999, we issued to private investors an aggregate of 3,000
shares of our series E convertible preferred stock, at a price of $1,000 per
share, and warrants to purchase an aggregate of 91,674 shares of our common
stock. The aggregate purchase price for these securities was $3,000,000. The
securities were sold exclusively to persons who qualified as "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the
Securities Act. The securities, which were taken for investment and were
subject to appropriate transfer restrictions, were issued without registration
under the Securities Act in reliance upon the exemption provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D thereunder.
21. Between March 9, 1999 and July 9 1999, we issued an aggregate of
581,300 shares of our common stock to holders of our series A convertible
preferred stock upon their conversion of 323,900 shares of series A convertible
preferred stock and the exercise of 257,400 warrants they held. The exercise
price for each of the warrants was $2.00 per share, and we received an aggregate
of $514,800 upon the exercise of the warrants by these preferred stockholders.
The shares of common stock were issued exclusively to persons who qualified as
"accredited investors" within the meaning of Rule 501(a) of Regulation D under
the Securities Act. The shares, which were taken for investment and were subject
to appropriate transfer restrictions, were issued without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
22. On July 16, 1999, we issued an aggregate of 56,250 shares of our
common stock in connection with our acquisition of substantially all the assets
of Network Training and Consulting d/b/a ISAT Network. The securities were
issued to investors who qualified as "accredited investors" within the meaning
of Rule 501(a) of Regulation D under the Securities Act. The shares, which were
taken for investment and were subject to appropriate transfer restrictions, were
issued without registration under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
Item 27. Exhibits
Exhibit No. Title
- ----------- -----
2.1 Agreement and Plan of Reorganization, dated as of August 5, 1997,
by and among SkyLynx Express Holdings, Inc., Network System
Technologies, Inc. and Allied Wireless, Inc. (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
2.2 Amendment No. 1, dated as of December 16, 1997, to Agreement and
Plan of Reorganization by and among SkyLynx Express Holdings,
Inc., Network System Technologies, Inc. and Allied Wireless, Inc.
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
3.1 Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
3.2 Articles of Amendment, dated as of August 7, 1997, to the
Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
3.3 Articles of Amendment, dated as of February 12, 1998, to the
Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
II-5
<PAGE>
3.4 Articles of Amendment, dated as of March 25, 1998, to the
Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
3.5 Bylaws of the Company (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form
10-SB, filed with the SEC on July 27, 1998).
3.6 Articles of Amendment, dated as of April 15, 1999, to the
Articles of Incorporation of the Company (filed herewith).
3.7 Articles of Amendment, dated as of May 6, 1999, to the Articles
of Incorporation of the Company (filed herewith).
4.1 Certificate of Designation of Rights and Preferences of the
Company's Series A Convertible Preferred Stock (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
4.2 Specimen Common Stock Certificate (incorporated by reference to
the same-numbered Exhibit to the Company's Registration Statement
on Form 10-SB, filed with the SEC on July 27, 1998).
4.3 Specimen Series A Convertible Preferred Stock Certificate
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
4.4 Specimen Class A Warrant Certificate (incorporated by reference
to the same-numbered Exhibit to the Company's Registration
Statement on Form 10-SB, filed with the SEC on July 27, 1998).
4.5 Specimen Class B Warrant Certificate (incorporated by reference
to the same-numbered Exhibit to the Company's Registration
Statement on Form 10-SB, filed with the SEC on July 27, 1998).
4.6 Certificate of Designation and Rights and Preferences of the
Company's Series B Convertible Preferred Stock (included in
Exhibit 3.3).
4.7 Certificate of Designation and Rights and Preferences of the
Company's Series C Convertible Preferred Stock (included in
Exhibit 3.4).
4.8 Certificate of Designation and Rights and Preferences of the
Company's Series D Convertible Preferred Stock (included in
Exhibit 3.6).
4.9 Certificate of Designation and Rights and Preferences of the
Company's Series E Convertible Preferred Stock (included in
Exhibit 3.7).
4.10 Form of Warrant issued to the holder of the Company's Series B
Convertible Preferred Stock (filed herewith).
4.11 Form of Warrant issued to the holders of the Company's Series D
Convertible Preferred Stock (filed herewith).
4.12 Form of Warrant issued to the holders of the Company's Series E
Convertible Preferred Stock (filed herewith).
II-6
<PAGE>
5.1 Opinion regarding the legality of securities being registered
hereby (to be filed by amendment).
10.1 SkyLynx Communications, Inc. 1998 Equity Incentive Plan
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
10.2 Asset Purchase and Sale Agreement, dated as of May 11, 1998,
between the Company and Nadex West, Inc. (incorporated by
reference to the same-numbered Exhibit to Amendment No. 1 to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on September 18, 1998).
10.3 License Agreement, dated as of December 16, 1997, between SkyLynx
Express Holdings, Inc. and Network System Technologies, Inc.
(incorporated by reference to the same numbered Exhibit to
Amendment No. 3 to the Company's Registration Statement on Form
10-SB, filed with the SEC on October 26, 1998).
10.4 [Reserved]
10.5 [Reserved]
10.6 Asset Purchase Agreement, dated as of February 2, 1999, by and
among the Company, InterAccess Corporation and Allen Cohen and
Mark Dranoff (incorporated by reference to Exhibit 1.1 to the
Company's Current Report on Form 8-K dated February 2, 1999 and
filed with the SEC on February 16, 1999).
10.7 Asset Purchase Agreement, dated as of March 24, 1999, between the
Company, ContiNet, LLC and the members thereof (incorporated by
reference to Exhibit 1.1 to the Company's Current Report on Form
8-K dated March 24, 1999 and filed with the SEC on April 7,
1999).
10.8 [Reserved]
10.9 Asset Purchase Agreement, dated as of April 26, 1999, by and
among the Company, Simply Internet, Inc. and Jay P. and
Sherilynne Lacny (incorporated by reference to Exhibit 1.1 to the
Company's Current Report on Form 8-K dated April 28, 1999 and
filed with the SEC on May 12, 1999).
10.10 Asset Purchase Agreement, dated as of April 23, 1999, by and
among the Company, SkyLynx Communications of California, Inc.,
Net Asset, LLC and the members thereof (incorporated by reference
to Exhibit 1.1 to the Company's Current Report on Form 8-K dated
April 29, 1999 and filed with the SEC on May 14, 1999).
10.11 Asset Purchase Agreement, dated as of May 6, 1999, by and among
the Company, SkyLynx Communications of Pacific Northwest, Inc.,
SeaTac.Net, Inc. and the stockholders thereof (incorporated by
reference to Exhibit 1.1 to the Company's Current Report on Form
8-K dated May 7, 1999 and filed with the SEC on May 21, 1999).
10.12 Purchase Agreement, dated as of January 18, 1999, by and between
the Company and the holder of the Company's Series B Convertible
Preferred Stock (filed herewith).
10.13 Registration Rights Agreement, dated as of January 18, 1999, by
and between the Company and the holder of the Company's Series B
Convertible Preferred Stock (filed herewith).
II-7
<PAGE>
10.14 Form of Purchase Agreement by and between the Company and the
holders of the Company's Series D Convertible Preferred Stock
(filed herewith).
10.15 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series D Convertible Preferred
Stock (filed herewith).
10.16 Purchase Agreement, dated as of May 6, 1999, by and between the
Company and the holders of the Company's Series E Convertible
Preferred Stock (filed herewith).
10.17 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series E Convertible Preferred
Stock (filed herewith) .
10.18 Amended and Restated Employment Agreement, dated as of April 20,
1999, between the Company and Jeffery A. Mathias (filed
herewith).
16.1 Letter of Cordovano and Harvey, P.C., former accountants to the
Company (incorporated by reference to Exhibit 18.0 to the
Company's Current Report on Form 8-K dated December 31, 1998 and
filed with the SEC on January 6, 1999).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Cordovano and Harvey, P.C. (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
24.1 Power of Attorney (included on signature page).
Item 28. Undertakings
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-8
<PAGE>
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matters
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Denver,
State of Colorado, on July 22, 1999.
SKYLYNX COMMUNICATIONS, INC.
/s/ Jeffery A. Mathias
----------------------------------------
Jeffery A. Mathias,
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that Mr. Ragano, whose signature
appears below, constitutes and appoints Jeffery A. Mathias and James E. Maurer
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution for him in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agents, or any of them, or their or his substitute, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
President, Chief Executive July 22, 1999
Officer (Principal Executive Officer)
/s/Jeffery A. Mathias and Director
- -----------------------
Jeffery A. Mathias
/s/ Francis Ragano Chairman of the Board July 22, 1999
- -----------------------
Francis Ragano
Chief Financial Officer July 22, 1999
(Principal Financial and Accounting
/s/ James E. Maurer Officer) and Director
- -----------------------
James E. Maurer
II-10
<PAGE>
Exhibit No. Title
- ----------- -----
2.1 Agreement and Plan of Reorganization, dated as of August 5, 1997,
by and among SkyLynx Express Holdings, Inc., Network System
Technologies, Inc. and Allied Wireless, Inc. (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
2.2 Amendment No. 1, dated as of December 16, 1997, to Agreement and
Plan of Reorganization by and among SkyLynx Express Holdings,
Inc., Network System Technologies, Inc. and Allied Wireless, Inc.
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
3.1 Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
3.2 Articles of Amendment, dated as of August 7, 1997, to the
Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
3.3 Articles of Amendment, dated as of February 12, 1998, to the
Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
3.4 Articles of Amendment, dated as of March 25, 1998, to the
Articles of Incorporation of the Company (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
3.5 Bylaws of the Company (incorporated by reference to the same-
numbered Exhibit to the Company's Registration Statement on Form
10-SB, filed with the SEC on July 27, 1998).
3.6 Articles of Amendment, dated as of April 15, 1999, to the
Articles of Incorporation of the Company (filed herewith).
3.7 Articles of Amendment, dated as of May 6, 1999, to the Articles
of Incorporation of the Company (filed herewith).
4.1 Certificate of Designation of Rights and Preferences of the
Company's Series A Convertible Preferred Stock (incorporated by
reference to the same-numbered Exhibit to the Company's
Registration Statement on Form 10-SB, filed with the SEC on July
27, 1998).
4.2 Specimen Common Stock Certificate (incorporated by reference to
the same-numbered Exhibit to the Company's Registration Statement
on Form 10-SB, filed with the SEC on July 27, 1998).
4.3 Specimen Series A Convertible Preferred Stock Certificate
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
4.4 Specimen Class A Warrant Certificate (incorporated by reference
to the same-numbered Exhibit to the Company's Registration
Statement on Form 10-SB, filed with the SEC on July 27, 1998).
4.5 Specimen Class B Warrant Certificate (incorporated by reference
to the same-numbered Exhibit to the Company's Registration
Statement on Form 10-SB, filed with the SEC on July 27, 1998).
4.6 Certificate of Designation and Rights and Preferences of the
Company's Series B Convertible Preferred Stock (included in
Exhibit 3.3).
4.7 Certificate of Designation and Rights and Preferences of the
Company's Series C Convertible Preferred Stock (included in
Exhibit 3.4).
4.8 Certificate of Designation and Rights and Preferences of the
Company's Series D Convertible Preferred Stock (included in
Exhibit 3.6).
4.9 Certificate of Designation and Rights and Preferences of the
Company's Series E Convertible Preferred Stock (included in
Exhibit 3.7).
4.10 Form of Warrant issued to the holder of the Company's Series B
Convertible Preferred Stock (filed herewith).
4.11 Form of Warrant issued to the holders of the Company's Series D
Convertible Preferred Stock (filed herewith).
4.12 Form of Warrant issued to the holders of the Company's Series E
Convertible Preferred Stock (filed herewith).
<PAGE>
5.1 Opinion regarding the legality of securities being registered
hereby (to be filed by amendment).
10.1 SkyLynx Communications, Inc. 1998 Equity Incentive Plan
(incorporated by reference to the same-numbered Exhibit to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on July 27, 1998).
10.2 Asset Purchase and Sale Agreement, dated as of May 11, 1998,
between the Company and Nadex West, Inc. (incorporated by
reference to the same-numbered Exhibit to Amendment No. 1 to the
Company's Registration Statement on Form 10-SB, filed with the
SEC on September 18, 1998).
10.3 License Agreement, dated as of December 16, 1997, between SkyLynx
Express Holdings, Inc. and Network System Technologies, Inc.
(incorporated by reference to the same numbered Exhibit to
Amendment No. 3 to the Company's Registration Statement on Form
10-SB, filed with the SEC on October 26, 1998).
10.4 [Reserved]
10.5 [Reserved]
10.6 Asset Purchase Agreement, dated as of February 2, 1999, by and
among the Company, InterAccess Corporation and Allen Cohen and
Mark Dranoff (incorporated by reference to Exhibit 1.1 to the
Company's Current Report on Form 8-K dated February 2, 1999 and
filed with the SEC on February 16, 1999).
10.7 Asset Purchase Agreement, dated as of March 24, 1999, between the
Company, ContiNet, LLC and the members thereof (incorporated by
reference to Exhibit 1.1 to the Company's Current Report on Form
8-K dated March 24, 1999 and filed with the SEC on April 7,
1999).
10.8 [Reserved]
10.9 Asset Purchase Agreement, dated as of April 26, 1999, by and
among the Company, Simply Internet, Inc. and Jay P. and
Sherilynne Lacny (incorporated by reference to Exhibit 1.1 to the
Company's Current Report on Form 8-K dated April 28, 1999 and
filed with the SEC on May 12, 1999).
10.10 Asset Purchase Agreement, dated as of April 23, 1999, by and
among the Company, SkyLynx Communications of California, Inc.,
Net Asset, LLC and the members thereof (incorporated by reference
to Exhibit 1.1 to the Company's Current Report on Form 8-K dated
April 29, 1999 and filed with the SEC on May 14, 1999).
10.11 Asset Purchase Agreement, dated as of May 6, 1999, by and among
the Company, SkyLynx Communications of Pacific Northwest, Inc.,
SeaTac.Net, Inc. and the stockholders thereof (incorporated by
reference to Exhibit 1.1 to the Company's Current Report on Form
8-K dated May 7, 1999 and filed with the SEC on May 21, 1999).
10.12 Purchase Agreement, dated as of January 18, 1999, by and between
the Company and the holder of the Company's Series B Convertible
Preferred Stock (filed herewith).
10.13 Registration Rights Agreement, dated as of January 18, 1999, by
and between the Company and the holder of the Company's Series B
Convertible Preferred Stock (filed herewith).
10.14 Form of Purchase Agreement by and between the Company and the
holders of the Company's Series D Convertible Preferred Stock
(filed herewith).
10.15 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series D Convertible Preferred
Stock (filed herewith).
10.16 Purchase Agreement, dated as of May 6, 1999, by and between the
Company and the holders of the Company's Series E Convertible
Preferred Stock (filed herewith).
10.17 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series E Convertible Preferred
Stock (filed herewith) .
10.18 Amended and Restated Employment Agreement, dated as of April 20,
1999, between the Company and Jeffery A. Mathias (filed
herewith).
16.1 Letter of Cordovano and Harvey, P.C., former accountants to the
Company (incorporated by reference to Exhibit 18.0 to the
Company's Current Report on Form 8-K dated December 31, 1998 and
filed with the SEC on January 6, 1999).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Cordovano and Harvey, P.C. (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
24.1 Power of Attorney (included on signature page).
<PAGE>
Exhibit 3.6
For Office use only
Mail to: Secretary of State
Corporation Section FILED-Customer Copy
1560 Broadway, Suite 200 Vicotria Buckley
Denver, CO 80202 Colorado Secretary
(303) 894-2251 Of State
19991072580
$ 40.00
SECRETARY OF STATE
MUST BE TYPED Fax (303) 894-2242 04-16-1999 12:21:51
FILING FEE: $25.00 -------------------
MUST SUBMIT TWO COPIES
ARTICLES OF AMENDMENT
Please include a typed TO THE
self-addressed envelope ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to the
Articles of Incorporation:
FIRST: The name of the corporation is SkyLynx Communications, Inc.
----------------------------
SECOND: The following amendment to the Articles of Incorporation was adopted on
April 15, 1999, as prescribed by the Colorado Business Corporation Act, in the
manner marked with an X below:
_____ No shares have been issued or Director Elected - Action by
Incorporators
_____ No shares have been issued but Directors Elected - Action by Directors
X Such amendment was adopted by the board of directors where shares have
- -----
been issued and shareholder action was not required.
_____ Such amendment was adopted by a vote of the shareholders. The number
of shares voted for the amendment was sufficient for approval.
THIRD: If changing corporate name, the new name of the corporation is
FOURTH: The manner, if not set forth in such amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the amendment
shall be effected, is as follows:
See Exhibit A attached hereto and incorporated by reference.
If these amendments are to have a delayed effective date, please list that date:
(Not to exceed ninety (90) days from the date of filing)
Signature /s/ Jeffrey A. Mathais
----------------------
Title Jeffrey A. Mathias, President
-----------------------------
Revised 7/95
<PAGE>
CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES
OF THE
SERIES D CONVERTIBLE PREFERRED STOCK
OF
SKYLYNX COMMUNICATIONS, INC.
Pursuant to Section 7-106-102 of the
Colorado Business Corporation Act
The undersigned, the President of SkyLynx Communications, Inc., a Colorado
corporation (the "Company"), in accordance with the provisions of the Colorado
Business Corporation Act, does hereby certify that, pursuant to the authority
conferred upon the Board of Directors by the Articles of Incorporation of the
Company, the following resolution creating a series of Series D Convertible
Preferred Stock, was duly adopted on April 16, 1999:
RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Company by provisions of the Articles of
Incorporation of the Company, as amended (the "Articles of Incorporation"),
there hereby is created out of the shares of Preferred Stock, par value $.01 per
share, of the Company authorized in Article IV of the Articles of Incorporation
(the "Preferred Stock,"), a series of Preferred Stock of the Company, to be
named "Series D Convertible Preferred Stock," consisting of twelve thousand
(12,000) shares, which series shall have the following designations, powers,
preferences and relative and other special rights and the following
qualifications, limitations and restrictions:
1. Designation and Rank. The designation of such series of the Preferred
--------------------
Stock shall be the Series D Convertible Preferred Stock, par value $.01 per
share (the "Series D Convertible Preferred Stock"). The maximum number of shares
of Series D Convertible Preferred Stock shall be 12,000 Shares. The Series D
Convertible Preferred Stock shall have a liquidation preference of $1,000 per
share. The Series D Convertible Preferred Stock shall rank (i) prior to the
common stock, par value $.001 per share (the "Common Stock"), and to all other
classes and series of equity securities of the Company which by its terms does
not rank senior to the Series D Convertible Preferred Stock ("Junior Stock") and
(ii) on parity with the currently issued and outstanding Series A, Series B and
Series C Preferred Stock and any other class and series of equity securities
which by its terms shall rank on parity with the Series D Convertible Preferred
Stock. The Series D Convertible Preferred Stock shall be subordinate to and rank
junior to all indebtedness of the Company now or hereafter outstanding.
2. Dividends.
---------
(1) Payment of Dividends. The holders of record of the shares of
--------------------
Series D Convertible Preferred Stock shall be entitled to receive, out of any
assets at the time legally available therefor and when and as declared by the
Board of Directors, dividends at the rate of
<PAGE>
five percent (5%) of the stated Liquidation Preference (as defined below) per
share per annum (the "Dividend Payment"), and no more, payable, at the option of
the holders of the shares of Series D Convertible Preferred Stock, in (i) shares
of Common Stock equal to the quotient of (a) the Dividend Payment divided by (b)
the Conversion Price (as defined in Section 5(d) below) on the trading day
preceding the date the dividend is to be paid, or (ii) cash. In the case of
shares of Series D Convertible Preferred Stock outstanding for less than a full
year, dividends shall be pro rated based on the portion of each year during
which such shares are outstanding. Such dividends on the Series D Convertible
Preferred Stock shall be cumulative and shall accrue and be payable only at
conversion of the Series D Convertible Preferred Stock into shares of Common
Stock or upon redemption of the Series D Convertible Preferred Stock. Such
dividends on the Series D Convertible Preferred Stock are prior and in
preference to any declaration or payment of any distribution (as defined below)
on any outstanding shares of Common Stock or any other equity securities of the
Company ranking junior to the Series D Convertible Preferred Stock as to the
payment of dividends. Such dividends shall accrue on each share of Series D
Convertible Preferred Stock from day to day from the date of initial issuance
thereof whether or not earned or declared so that if such dividends with respect
to any previous dividend period at the rate provided for herein have not been
paid on, or declared and set apart for, all shares of Series D Convertible
Preferred Stock at the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares on a pro rata basis with all other
equity securities of the Company ranking on a parity with the Series D
Convertible Preferred Stock as to the payment of dividends before any
distribution shall be paid on, or declared and set apart for Common Stock or any
other equity securities of the Company ranking junior to the Series D
Convertible Preferred Stock as to the payment of dividends.
(2) So long as any shares of Series D Convertible Preferred Stock are
outstanding, the Company shall not declare, pay or set apart for payment any
dividend or make any distribution on any Junior Stock (other than dividends or
distributions payable in additional shares of Junior Stock), unless at the time
of such dividend or distribution the Company shall have paid, or set apart for
payment, all accrued and unpaid dividends on the outstanding shares of Series D
Convertible Preferred Stock.
(3) In the event of a dissolution, liquidation or winding up of the Company
pursuant to Section 4, all accrued and unpaid dividends on the Series D
Convertible Preferred Stock shall be payable on the day immediately preceding
the date of payment of the preferential amount to the holders of Series D
Convertible Preferred Stock. In the event of (i) a mandatory redemption pursuant
to Section 9 or (ii) a redemption at the election of the Company pursuant to
Section 8, all accrued and unpaid dividends on the Series D Convertible
Preferred Stock shall be payable on the day immediately preceding the date of
such redemption. In the event of a voluntary conversion pursuant to Section
5(a), all accrued and unpaid dividends on the Series D Convertible Preferred
Stock being converted shall be payable on the day immediately preceding the
Voluntary Conversion Date (as defined in Section 5(b)(i)) and in the event of a
mandatory conversion pursuant to Section 5(c), all accrued and unpaid dividends
on the Series D Convertible Preferred Stock being converted shall be payable on
the day immediately preceding the Mandatory Conversion Date (as defined in
Section 5(c)(ii)).
(4) For purposes hereof, unless the context otherwise requires,
"distribution" shall
<PAGE>
mean the transfer of cash or property without consideration, whether by way of
dividend or otherwise, payable other than in shares of Common Stock or other
equity securities of the Company, or the purchase or redemption of shares of the
Company (other than redemptions set forth in Section 8 below or repurchases of
Common Stock held by employees or consultants of the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase) for cash or property.
3. Voting Rights.
-------------
(1) Class Voting Rights. The Series D Convertible Preferred Stock
-------------------
shall have the following class voting rights (in addition to the voting rights
set forth in Section 3(b) hereof). So long as any shares of the Series D
Convertible Preferred Stock remain outstanding, the Company shall not, without
the affirmative vote or consent of the holders of at least three-quarters (3/4)
of the shares of the Series D Convertible Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting, in which
the holders of the Series D Convertible Preferred Stock vote separately as
class: (i) authorize, create, issue or increase the authorized or issued amount
of any class or series of stock, including but not limited to the issuance of
any more shares of previously authorized Common Stock or Preferred Stock,
ranking prior to the Series D Convertible Preferred Stock, with respect to the
distribution of assets on liquidation, dissolution or winding up; (ii) amend,
alter or repeal the provisions of the Series D Convertible Preferred Stock,
whether by merger, consolidation or otherwise, so as to adversely affect any
right, preference, privilege or voting power of the Series D Convertible
Preferred Stock; provided, however, that any creation and issuance of another
-------- -------
series of Junior Stock shall not be deemed to adversely affect such rights,
preferences, privileges or voting powers; (iii) repurchase, redeem or pay
dividends on, shares of the Company's Junior Stock; (iv) amend the Articles of
Incorporation or By-Laws of the Company so as to affect materially and adversely
any right, preference, privilege or voting power of the Series D Convertible
Preferred Stock; provided, however, that any creation and issuance of another
-------- -------
series of Junior Stock shall not be deemed to materially and adversely affect
such rights, preferences privileges or voting powers; (v) effect any
distribution with respect to Junior Stock; or (vi) reclassify the Company's
outstanding securities.
(2) General Voting Rights. Except with respect to transactions
---------------------
upon which the Series D Convertible Preferred Stock shall be entitled to vote
separately as a class pursuant to Section 3(a) above and except as otherwise
required by Colorado law, the Series D Convertible Preferred Stock shall have no
voting rights. The Common Stock into which the Series D Convertible Preferred
Stock is convertible shall, upon issuance, have all of the same voting rights as
other issued and outstanding Common Stock of the Company.
4. Liquidation Preference.
----------------------
(1) In the event of the liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or involuntary, after payment or
provision for payment of the debts and other liabilities of the Company, the
holders of shares of the Series D Convertible Preferred Stock then outstanding
shall be entitled to receive, out of the assets of the Company whether such
assets are capital or surplus of any nature, an amount equal to $1,000 per share
(the
<PAGE>
"Liquidation Preference Amount") of the Series D Convertible Preferred Stock
plus any accrued and unpaid dividends before any payment shall be made or any
assets distributed to the holders of the Common Stock or any other Junior Stock.
If the assets of the Company are not sufficient to pay in full the Liquidation
Preference Amount plus any accrued and unpaid dividends payable to the holders
of outstanding shares of the Series D Convertible Preferred Stock and any series
of preferred stock or any other class of stock on a parity, as to rights on
liquidation, dissolution or winding up, with the Series D Convertible Preferred
Stock, then all of said assets will be distributed among the holders of the
Series D Convertible Preferred Stock and the other classes of stock on a parity
with the Series D Convertible Preferred Stock, if any, ratably in accordance
with the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. The liquidation payment with respect to each
outstanding fractional share of Series D Convertible Preferred Stock shall be
equal to a ratably proportionate amount of the liquidation payment with respect
to each outstanding share of Series D Convertible Preferred Stock. All payments
for which this Section 4(a) provides shall be in cash, property (valued at its
fair market value as determined by the Company's independent, outside
accountant) or a combination thereof; provided, however, that no cash shall be
-------- -------
paid to holders of Junior Stock unless each holder of the outstanding shares of
Series D Convertible Preferred Stock has been paid in cash the full Liquidation
Preference Amount plus any accrued and unpaid dividends to which such holder is
entitled as provided herein. After payment of the full Liquidation Preference
Amount plus any accrued and unpaid dividends to which each holder is entitled,
such holders of shares of Series D Convertible Preferred Stock will not be
entitled to any further participation as such in any distribution of the assets
of the Company.
(2) A consolidation or merger of the Company with or into any other
corporation or corporations, or a sale of all or substantially all of the assets
of the Company, or the effectuation by the Company of a transaction or series of
transactions in which more than 50% of the voting shares of the Company is
disposed of or conveyed, shall not be deemed to be a liquidation, dissolution,
or winding up within the meaning of this Section 4. In the event of the merger
or consolidation of the Company with or into another corporation, the Series D
Convertible Preferred Stock shall maintain its relative powers, designations and
preferences provided for herein and no merger shall result inconsistent
therewith.
(3) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, stating a payment date
and the place where the distributable amounts shall be payable, shall be given
by mail, postage prepaid, no less than 45 days prior to the payment date stated
therein, to the holders of record of the Series D Convertible Preferred Stock at
their respective addresses as the same shall appear on the books of the Company.
5. Conversion. The holder of Series D Convertible Preferred Stock shall
----------
have the following conversion rights (the "Conversion Rights"):
(1) Right to Convert. At any time on or after the Closing Date
----------------
(as such term is defined in the Series D Convertible Preferred Stock Purchase
Agreement dated as of April 16, 1999 between the Company and the initial holder
of the Series D Convertible Preferred Stock (the "Securities Purchase
Agreement")), the holder of any such shares of Series D Convertible Preferred
Stock may, at such holder's option, subject to the limitations set forth in
Section 7
<PAGE>
herein, elect to convert (a "Voluntary Conversion") all or any portion of the
shares of Series D Convertible Preferred Stock held by such person into a number
of fully paid and nonassessable shares of Common Stock (the "Conversion Rate")
equal to the quotient of (i) the Liquidation Preference Amount of the shares of
Series D Convertible Preferred Stock being converted divided by (ii) the
Conversion Price (as defined in Section 5(d) below) then in effect as of the
date of the delivery by such holder of its notice of election to convert.
(2) Mechanics of Voluntary Conversion. The Voluntary Conversion of
---------------------------------
Series D Convertible Preferred Stock shall be conducted in the following manner:
(1) Holder's Delivery Requirements. To convert Series D
------------------------------
Convertible Preferred Stock into full shares of Common Stock on any
date (the "Voluntary Conversion Date"), the holder thereof shall (A)
transmit by facsimile (or otherwise delivering), for receipt on or
prior to 11:59 p.m., New York Time on such date, a copy of a fully
executed notice of conversion in the form attached hereto as Exhibit I
---------
(the "Conversion Notice"), to the Company, and (B) surrender to a
common carrier for delivery to the Company as soon as practicable
following such date, the original certificates representing the shares
of Series D Convertible Preferred Stock being converted (or an
indemnification undertaking with respect to such shares in the case of
their loss, theft or destruction) (the "Preferred Stock Certificates")
and the originally executed Conversion Notice.
(2) Company's Response. Upon receipt by the Company of a
------------------
facsimile copy of a Conversion Notice, the Company shall immediately
send, via facsimile, a confirmation of receipt of such Conversion
Notice to such holder. Upon receipt by the Company of the Preferred
Stock Certificates to be converted pursuant to a Conversion Notice,
together with the originally executed Conversion Notice, the Company
or its designated transfer agent (the "Transfer Agent") (as
applicable) shall, on the next business day following the date of
receipt by the Company of both (or the second business day following
the date of receipt by the Company of both if received after 11:00
a.m. New York Time), (A) issue and surrender to a common carrier for
overnight delivery to the address as specified in the Conversion
Notice, a certificate, registered in the name of the holder or its
designee, for the number of shares of Common Stock to which the holder
shall be entitled, or (B) credit such aggregate number of shares of
Common Stock to which the holder shall be entitled to the holder's or
its designee's balance account with Corporate Stock Transfer, Inc. If
the number of Preferred Shares represented by the Preferred Stock
Certificate(s) submitted for conversion is greater than the number of
shares of Series D Convertible Preferred Stock being converted, then
the Company shall, as soon as practicable and in no event later than
two business days after receipt of the Preferred Stock Certificate(s)
and at its own expense, issue and deliver to the holder a new
Preferred Stock Certificate representing the number of shares of
Series D Convertible Preferred Stock not converted.
(3) Dispute Resolution. In the case of a dispute as to the
------------------
determination of the Average Share Prices (as defined in Section 5(d)
below) or the Conversion Price
<PAGE>
or the arithmetic calculation of the number of shares of Common Stock
to be issued upon conversion, the Company shall promptly issue to the
holder the number of shares of Common Stock that is not disputed and
shall submit the disputed determinations or arithmetic calculations to
the holder via facsimile as soon as possible, but in no event later
than two (2) business days after receipt of such holder's Conversion
Notice. If such holder and the Company are unable to agree upon the
determination of the Average Share Prices or the Conversion Price or
the arithmetic calculation of the number of shares of Common Stock to
be issued upon such conversion within one (1) business day of such
disputed determination or arithmetic calculation being submitted to
the holder, then the Company shall within one (1) business day submit
via facsimile (A) the disputed determination of the Average Share
Prices or the Conversion Price to an independent, reputable investment
bank or (B) the disputed arithmetic calculation of the number of
shares of Common Stock to be issued upon such conversion to its
independent, outside accountant. The Company shall cause the
investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the holder
of the results no later than seventy-two (72) hours from the time it
receives the disputed determinations or calculations. Such investment
bank's or accountant's determination or calculation, as the case may
be, shall be binding upon all parties absent manifest error. The
reasonable expenses of such investment bank or accountant in making
such determination shall be paid by the Company, in the event the
holder's calculation or determination was correct, or by the holder,
in the event the Company's calculation or determination was correct,
or equally by the Company and the holder in the event that neither the
Company's or the holder's calculation or determination was correct.
The period of time in which the Company is required to effect
conversions or redemptions under this Certificate of Designations
shall be tolled with respect to the subject conversion or redemption
pending resolution of any dispute by the Company made in good faith
and in accordance with this Section 5(b)(iii).
(4) Record Holder. The person or persons entitled to receive the
--- -------------
shares of Common Stock issuable upon a conversion of the Series D
Convertible Preferred Stock shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the
Conversion Date.
(5) Company's Failure to Timely Convert. If within five (5)
--- -----------------------------------
business days of the Company's receipt of the Preferred Stock
Certificates to be converted and the Conversion Notice (the "Share
Delivery Period") the Company shall fail to issue a certificate to a
holder or credit the holder's balance account with Corporate Stock
Transfer, Inc. for the number of shares of Common Stock to which such
holder is entitled upon such holder's conversion of the Series D
Convertible Preferred Stock or to issue a new Preferred Stock
Certificate representing the number of shares of Series D Convertible
Preferred Stock to which such holder is entitled pursuant to Section
5(b)(ii) (a "Conversion Failure"), in addition to all other available
remedies which such holder may pursue hereunder and under the
<PAGE>
Securities Purchase Agreement (including indemnification pursuant to
Article VIII thereof), the Company shall pay additional damages to
such holder on each date after such fifth (5th) business day that such
conversion is not timely effected in an amount equal 1% of the product
of (A) the sum of the number of shares of Common Stock not issued to
the holder on a timely basis pursuant to Section 5(b)(ii) and to which
such holder is entitled and, in the event the Company has failed to
deliver a Preferred Stock Certificate to the holder on a timely basis
pursuant to Section 5(b)(ii), the number of shares of Common Stock
issuable upon conversion of the shares of Series D Convertible
Preferred Stock represented by such Preferred Stock Certificate, as of
the last possible date which the Company could have issued such
Preferred Stock Certificate to such holder without violating Section
5(b)(ii) and (B) the Closing Bid Price (as defined in Section 5(d)
below) of the Common Stock on the last possible date which the Company
could have issued such Common Stock and such Preferred Stock
Certificate, as the case may be, to such holder without violating
Section 5(b)(ii) and the holder may after any time after such Share
Delivery Period send the Company a notice of revocation of conversion
(the "Revocation Notice") revoking such holder's Conversion Notice
(and requesting a return of the applicable Preferred Share Stock
Certificates) by (A) transmitting by facsimile (or otherwise
delivering), for receipt on or prior to 11:59 p.m., New York Time on
such date, a copy of an executed Revocation Notice and (B) sending by
a common carrier for delivery to the Company as soon as practicable
following such date, the originally executed Revocation Notice. If the
holder has delivered a Revocation Notice to the Company, then the
Company's obligation to pay additional damages to such holder (in
accordance with the preceding sentence) shall terminate. If the
Company fails to pay the additional damages set forth in this Section
5(b)(v) within five business days of the date incurred, then such
payment shall bear interest at the rate of 2% per month (pro rated for
partial months) until such payments are made.
(3) Mandatory Conversion.
--------------------
(1) Each share of Series D Convertible Preferred Stock
outstanding on the Mandatory Conversion Date (as defined below) shall,
automatically and without any action on the part of the holder thereof, convert
into a number of fully paid and nonassessable shares of Common Stock equal to
the quotient of (i) the Liquidation Preference Amount of the shares of Series D
Convertible Preferred Stock outstanding on the Mandatory Conversion Date divided
by (ii) the Conversion Price (as defined below) in effect on the Mandatory
Conversion Date.
(2) As used herein, a "Mandatory Conversion Date" shall be the
date which is three years after the date of issuance of the shares of Series D
Convertible Preferred Stock (the "Issuance Date"), provided that the Mandatory
Conversion Date shall be extended for any shares of Series D Convertible
Preferred Stock (x) for as long as the conversion of such shares of Series D
Convertible Preferred Stock would violate Section 7 and (y) pursuant to Section
3(n) of the Registration Rights Agreement, which extension shall be one day for
each of the days in any Blackout Period (as defined in Section 3(n) of the
Registration Rights Agreement). The
<PAGE>
Mandatory Conversion Date and the Voluntary Conversion Date collectively are
referred to in this Certificate of Designations as the "Conversion Date."
(3) On the Mandatory Conversion Date, the outstanding shares of Series
D Convertible Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the Preferred
Stock Certificates representing such shares are surrendered to the Company or
its transfer agent; provided, however, that the Company shall not be obligated
-------- -------
to issue certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Series D Convertible Preferred Stock unless the
Preferred Stock Certificates evidencing such shares of Series D Convertible
Preferred Stock are either delivered to the Company or the holder notifies the
Company that such Preferred Stock Certificates have been lost, stolen, or
destroyed, and executes an agreement satisfactory to the Company to indemnify
the Company from any loss incurred by it in connection therewith. Upon the
occurrence of the automatic conversion of the Series D Convertible Preferred
Stock pursuant to this Section 5, the holders of the Series D Convertible
Preferred Stock shall surrender the Preferred Stock Certificates representing
the Series D Convertible Preferred Stock for which the Mandatory Conversion Date
has occurred to the Company and the Company shall deliver the shares of Common
Stock issuable upon such conversion (in the same manner set forth in Section
5(b)(ii)) to the holder within three business days of the holder's delivery of
the applicable Preferred Stock Certificates.
(4) Conversion Price.
--- ----------------
(1) The term "Five Day Average Share Price" shall mean the average of
the five (5) Closing Bid Prices of the Company's shares of Common Stock (as
reported by Bloomberg Financial Markets ("Bloomberg'')) in the over-the-counter
market on the electronic bulletin board for such security (the "OTC Bulletin
Board") (or on such other United States stock exchange or public trading market
("Alternative Exchange") on which the shares of the Company trade if, at the
time of the conversion, they are not trading in the OTC Bulletin Board),
preceding the Voluntary Conversion Date or Mandatory Conversion Date, as
applicable.
(2) The term "Conversion Price" shall mean, with respect to any
conversion of Series D Convertible Preferred Stock converted prior to December
31, 1999, $3.00, except that if a Registration Violation has occurred and/or the
Conversion Date occurs after December 31, 1999, then the "Conversion Price"
shall be equal to the lesser of (x) $3.00 and (y) an amount equal to 105% of the
Five Day Average Share Price, as applicable; provided, however, that if (i) the
-------- -------
Company has filed a Registration Statement (as defined below in Section
5(d)(iv)) which has been declared effective by the Securities and Exchange
Commission (the "Commission"), (ii) the Company has filed a registration
statement on Form S-1 registering shares of Common Stock (a "Form S-1") in an
underwritten public offering which has been declared effective by the Commission
and (iii) the Closing Bid Price of the Common Stock has been at least $8.00 per
share for a period of 10 consecutive trading days with such period commencing at
any time after the ninetieth (90th) day after which the Form S-1 has been
declared effective by the Commission, then the "Conversion Price" shall be
$3.00.
(3) The term "Closing Bid Price" shall mean, for any security as of
any
<PAGE>
trading day, the last closing bid price of such security in the OTC Bulletin
Board for such security as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of a majority of the outstanding shares of Series
D Convertible Preferred Stock. If the Company and the holders of Series D
Convertible Preferred Stock are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved pursuant to Section
5(b)(iii) above with the term "Closing Bid Price" being substituted for the term
"Average Share Prices." (All such determinations to be appropriately adjusted
for any stock dividend, stock split or other similar transaction during such
period).
(4) The term "Registration Violation" shall mean the failure of the
Company to (i) prepare and file with the Commission on or prior to the Filing
Date a Registration Statement pursuant to the terms and conditions of the
Registration Rights Agreement dated as of April 16, 1999 by and among the
Company and the initial holder named therein (the "Registration Rights
Agreement"), (ii) use its best efforts to cause the Registration Statement to be
declared effective under the Commission as promptly as possible after the filing
thereof, but in any event prior to the Effective Date and (iii) otherwise
violate the terms and conditions of the Registration Rights Agreement. All
capitalized terms in this Section 5(d)(iv) shall have the meanings assigned to
them in the Registration Rights Agreement.
(5) Adjustments of Conversion Price.
--- -------------------------------
(1) Adjustments for Stock Splits and Combinations. If the Company
---------------------------------------------
shall at any time or from time to time after the Issuance Date, effect a stock
split of the outstanding Common Stock, the applicable Conversion Price in effect
immediately prior to the stock split shall be proportionately decreased. If the
Company shall at any time or from time to time after the Issuance Date, combine
the outstanding shares of Common Stock, the applicable Conversion Price in
effect immediately prior to the combination shall be proportionately increased.
Any adjustments under this Section 5(e)(i) shall be effective at the close of
business on the date the stock split or combination occurs.
(2) Adjustments for Certain Dividends and Distributions. If the
---------------------------------------------------
Company shall at any time or from time to time after the Issuance Date, make or
issue or set a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in shares of Common
Stock, then, and in each event, the applicable Conversion Price in effect
immediately prior to such event shall be decreased as of the time of such
issuance or, in the event such record date shall have been fixed, as of the
close of business on such record date, by multiplying, as applicable, the
applicable Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of shares of
<PAGE>
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and
(2) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution.
(3) Adjustment for Other Dividends and Distributions. If the Company
------------------------------------------------
shall at any time or from time to time after the Issuance Date, make or issue or
set a record date for the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in other than shares of Common
Stock, then, and in each event, an appropriate revision to the applicable
Conversion Price shall be made and provision shall be made (by adjustments of
the Conversion Price or otherwise) so that the holders of Series D Convertible
Preferred Stock shall receive upon conversions thereof, in addition to the
number of shares of Common Stock receivable thereon, the number of securities of
the Company which they would have received had their Series D Convertible
Preferred Stock been converted into Common Stock on the date of such event and
had thereafter, during the period from the date of such event to and including
the Conversion Date, retained such securities (together with any distributions
payable thereon during such period), giving application to all adjustments
called for during such period under this Section 5(e)(iii) with respect to the
rights of the holders of the Series D Convertible Preferred Stock.
(4) Adjustments for Reclassification, Exchange or Substitution. If
----------------------------------------------------------
the Common Stock issuable upon conversion of the Series D Convertible Preferred
Stock at any time or from time to time after the Issuance Date shall be changed
to the same or different number of shares of any class or classes of stock,
whether by reclassification, exchange, substitution or otherwise (other than by
way of a stock split or combination of shares or stock dividends provided for in
Sections 5(e)(i), (ii) and (iii), or a reorganization, merger, consolidation, or
sale of assets provided for in Section 5(e)(v)), then, and in each event, an
appropriate revision to the Conversion Price shall be made and provisions shall
be made (by adjustments of the Conversion Price or otherwise) so that the holder
of each share of Series D Convertible Preferred Stock shall have the right
thereafter to convert such share of Series D Convertible Preferred Stock into
the kind and amount of shares of stock and other securities receivable upon
reclassification, exchange, substitution or other change, by holders of the
number of shares of Common Stock into which such share of Series D Convertible
Preferred Stock might have been converted immediately prior to such
reclassification, exchange, substitution or other change, all subject to further
adjustment as provided herein.
(5) Adjustments for Reorganization, Merger, Consolidation or Sales of
-----------------------------------------------------------------
Assets. If at any time or from time to time after the Issuance Date there shall
- ------
be a capital reorganization of the Company (other than by way of a stock split
or combination of shares or stock dividends or distributions provided for in
Section 5(e)(i), (ii) and (iii), or a reclassification, exchange or substitution
of shares provided for in Section 5(e)(iv)), or a merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all of the Company's properties or assets to any other person (an "Organic
Change"), then as a part of such Organic
<PAGE>
Change an appropriate revision to the Conversion Price shall be made and
provision shall be made (by adjustments of the Conversion Price or otherwise) so
that the holder of each share of Series D Convertible Preferred Stock shall have
the right thereafter to convert such share of Series D Convertible Preferred
Stock into the kind and amount of shares of stock and other securities or
property of the Company or any successor corporation resulting from Organic
Change. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5(e)(v) with respect to the rights
of the holders of the Series D Convertible Preferred Stock after the Organic
Change to the end that the provisions of this Section 5(e)(v) (including any
adjustment in the applicable Conversion Price then in effect and the number of
shares of stock or other securities deliverable upon conversion of the Series D
Convertible Preferred Stock) shall be applied after that event in as nearly an
equivalent manner as may be practicable.
(6) Consideration for Stock. In case any shares of Common Stock or
-----------------------
any securities convertible into or exchangeable for, directly or indirectly,
Common Stock ("Convertible Securities"), other than the Series D Convertible
Preferred Stock, or any rights or warrants or options to purchase any such
Common Stock or Convertible Securities, shall be issued or sold:
(1) in connection with any merger or consolidation in which the
Company is the surviving corporation (other than any consolidation or merger in
which the previously outstanding shares of Common Stock of the Company shall be
changed to or exchanged for the stock or other securities of another
corporation), the amount of consideration therefore shall be, deemed to be the
fair value, as determined reasonably and in good faith by the Board of Directors
of the Company, of such portion of the assets and business of the nonsurviving
corporation as such Board may determine to be attributable to such shares of
Common Stock, Convertible Securities, rights or warrants or options, as the case
may be; or
(2) in the event of any consolidation or merger of the Company in
which the Company is not the surviving corporation or in which the previously
outstanding shares of Common Stock of the Company shall be changed into or
exchanged for the stock or other securities of another corporation, or in the
event of any sale of all or substantially all of the assets of the Company for
stock or other securities of any corporation, the Company shall be deemed to
have issued a number of shares of its Common Stock for stock or securities or
other property of the other corporation computed on the basis of the actual
exchange ratio on which the transaction was predicated, and for a consideration
equal to the fair market value on the date of such transaction of all such stock
or securities or other property of the other corporation. If any such
calculation results in adjustment of the applicable Conversion Price, or the
number of shares of Common Stock issuable upon conversion of the Series D
Convertible Preferred Stock, the determination of the applicable Conversion
Price or the number of shares of Common Stock issuable upon conversion of the
Series D Convertible Preferred Stock immediately prior to such merger,
consolidation or sale, shall be made after giving effect to such adjustment of
the number of shares of Common Stock issuable upon conversion of the Series D
Convertible Preferred Stock.
(7) Record Date. In case the Company shall take record of the holders
-----------
of its
<PAGE>
Common Stock or any other Preferred Stock for the purpose of entitling them to
subscribe for or purchase Common Stock or Convertible Securities, then the date
of the issue or sale of the shares of Common Stock shall be deemed to be such
record date.
(8) Certain Issues Excepted. Anything herein to the contrary
-----------------------
notwithstanding, the Company shall not be required to make any adjustment of the
number of shares of Common Stock issuable upon conversion of the Series D
Convertible Preferred Stock upon the grant after the Issuance Date of, or the
exercise after the Issuance Date of, options or warrants or rights to purchase
stock under the Company's stock option plan.
(6) No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith, assist in the carrying out of all the provisions of this Section 5 and in
the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series D Convertible
Preferred Stock against impairment.
(7) Certificates as to Adjustments. Upon occurrence of each adjustment or
------------------------------
readjustment of the Conversion Price or number of shares of Common Stock
issuable upon conversion of the Series D Convertible Preferred Stock pursuant to
this Section 5, the Company at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of such Series D Convertible Preferred Stock a certificate setting
forth such adjustment and readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. The Company shall, upon written
request of the holder of such affected Series D Convertible Preferred Stock, at
any time, furnish or cause to be furnished to such holder a like certificate
setting forth such adjustments and readjustments, the applicable Conversion
Price in effect at the time, and the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon the conversion of a share of such Series D Convertible Preferred
Stock. Notwithstanding the foregoing, the Company shall not be obligated to
deliver a certificate unless such certificate would reflect an increase or
decrease of at least one percent of such adjusted amount.
(8) Issue Taxes. The Company shall pay any and all issue and other taxes,
-----------
excluding federal, state or local income taxes, that may be payable in respect
of any issue or delivery of shares of Common Stock on conversion of shares of
Series D Convertible Preferred Stock pursuant thereto; provided, however, that
-------- -------
the Company shall not be obligated to pay any transfer taxes resulting from any
transfer requested by any holder in connection with any such conversion.
(9) Notices. All notices and other communications hereunder shall be in
--- -------
writing and shall be deemed given if delivered personally or by facsimile or
three business days following being mailed by certified or registered mail,
postage prepaid, return-receipt requested, addressed to the holder of record at
its address appearing on the books of the Company. The Company will give written
notice to each holder of Series D Convertible Preferred Stock at least twenty
(20)
<PAGE>
days prior to the date on which the Company closes its books or takes a record
(I) with respect to any dividend or distribution upon the Common Stock, (II)
with respect to any pro rata subscription offer to holders of Common Stock or
(III) for determining rights to vote with respect to any Organic Change,
dissolution, liquidation or winding-up and in no event shall such notice be
provided to such holder prior to such information being made known to the
public. The Company will also give written notice to each holder of Series D
Convertible Preferred Stock at least twenty (20) days prior to the date on which
any Organic Change, dissolution, liquidation or winding-up will take place and
in no event shall such notice be provided to such holder prior to such
information being made known to the public.
(10) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of the Series D Convertible Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Company shall pay cash equal to the product of such fraction multiplied by the
average of the Closing Bid Prices of the Common Stock for the five consecutive
trading days immediately preceding on the Voluntary Conversion Date or Mandatory
Conversion Date, as applicable.
(11) Reservation of Common Stock. The Company shall, so long as any
---------------------------
shares of Series D Convertible Preferred Stock are outstanding, reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Series D Convertible Preferred Stock,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all of the Series D Convertible Preferred Stock then
outstanding; provided that the number of shares of Common Stock so reserved
--------
shall at no time be less than 200% of the number of shares of Common Stock for
which the shares of Series D Convertible Preferred Stock are at any time
convertible. The initial number of shares of Common Stock reserved for
conversions of the Series D Convertible Preferred Stock and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Series D Convertible Preferred Stock based on the number of shares of Series
D Convertible Preferred Stock held by each holder at the time of issuance of the
Series D Convertible Preferred Stock or increase in the number of reserved
shares, as the case may be. In the event a holder shall sell or otherwise
transfer any of such holder's shares of Series D Convertible Preferred Stock,
each transferee shall be allocated a pro rata portion of the number of reserved
shares of Common Stock reserved for such transferor. Any shares of Common Stock
reserved and which remain allocated to any person or entity which does not hold
any shares of Series D Convertible Preferred Stock shall be allocated to the
remaining holders of Series D Convertible Preferred Stock, pro rata based on the
number of shares of Series D Convertible Preferred Stock then held by such
holder. The Company shall, from time to time in accordance with the Colorado
Business Corporation Act, as amended, increase the authorized number of shares
of Common Stock if at any time the unissued number of authorized shares shall
not be sufficient to satisfy the Company's obligations under this Section 5(k).
(12) Retirement of Series D Convertible Preferred Stock. Conversion
--------------------------------------------------
of Series D Convertible Preferred Stock shall be deemed to have been effected on
the applicable Voluntary Conversion Date or Mandatory Conversion Date. Upon
conversion of only a portion of the number of shares of Series D Convertible
Preferred Stock represented by a certificate surrendered for conversion, the
Company shall issue and deliver to such holder at the expense of
<PAGE>
the Company, a new certificate covering the number of shares of Series D
Convertible Preferred Stock representing the unconverted portion of the
certificate so surrendered as required by Section 5(b)(ii).
(13) Regulatory Compliance. If any shares of Common Stock to be
---------------------
reserved for the purpose of conversion of Series D Convertible Preferred Stock
require registration or listing with or approval of any governmental authority,
stock exchange or other regulatory body under any federal or state law or
regulation or otherwise before such shares may be validly issued or delivered
upon conversion, the Company shall, at its sole cost and expense, in good faith
and as expeditiously as possible, endeavor to secure such registration, listing
or approval, as the case may be.
6. No Preemptive Rights. Except as provided in Section 5 hereof and in
--------------------
the Securities Purchase Agreement, no holder of the Series D Convertible
Preferred Stock shall be entitled to rights to subscribe for, purchase or
receive any part of any new or additional shares of any class, whether now or
hereinafter authorized, or of bonds or debentures, or other evidences of
indebtedness convertible into or exchangeable for shares of any class, but all
such new or additional shares of any class, or any bond, debentures or other
evidences of indebtedness convertible into or exchangeable for shares, may be
issued and disposed of by the Board of Directors on such terms and for such
consideration (to the extent permitted by law), and to such person or persons as
the Board of Directors in their absolute discretion may deem advisable.
7. Conversion Restrictions. Notwithstanding anything to the contrary set
-----------------------
forth in Section 5 of this Certificate of Designations, in no event shall any
holder be entitled to convert Series D Preferred Stock in excess of that number
of shares of Series D Convertible Preferred Stock which, upon giving effect to
such conversion, would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such conversion. For purposes
of the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the shares of Series D
Convertible Preferred Stock with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) conversion of the remaining, nonconverted
shares of Series D Convertible Preferred Stock beneficially owned by the holder
and its affiliates, and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the holder
and its affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 2(a), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended.
8. Redemption. If at any time after the one year anniversary of the
----------
Issuance Date, the Company's Common Stock is trading for less than $3.00 per
share, the Company may redeem all or a portion of the Series D Convertible
Preferred Stock outstanding upon 30 days prior written notice (the "Company's
Redemption Notice") at a price per share of Series D Convertible Preferred Stock
equal to 120% of the Liquidation Preference, plus any accrued but unpaid
<PAGE>
dividends (the "Company's Redemption Price"); provided, that if a holder has
--------
delivered a Conversion Notice to the Company or delivers a Conversion Notice
within 30 days of receipt of the Company's Redemption Notice, the shares of
Series D Convertible Preferred Stock designated to be converted may not be
redeemed by the Company. The Company's Redemption Notice shall state the date
of redemption (the "Redemption Date"), the Company's Redemption Price and the
number of shares to be redeemed by the Company. The Company shall deliver the
Company's Redemption Price to the holder(s) within five (5) business days after
the Company has delivered the Company's Redemption Notice. If the Company fails
to pay the Redemption Price by the trading day following the Redemption Date,
the redemption will be declared null and void and the Company shall lose its
right to serve a Company's Redemption Notice in the future.
9. Inability to Fully Convert.
--------------------------
(1) Holder's Option if Company Cannot Fully Convert. If, upon the
-----------------------------------------------
Company's receipt of a Conversion Notice or on the Mandatory Conversion Date,
the Company can not issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because
the Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
Securities from issuing all of the Common Stock which is to be issued to a
holder of Series D Convertible Preferred Stock pursuant to a Conversion Notice
or (z) fails to have a sufficient number of shares of Common Stock registered
for resale under the Registration Statement, then the Company shall issue as
many shares of Common Stock as it is able to issue in accordance with such
holder's Conversion Notice and pursuant to Section 5(b)(ii) above and, with
respect to the unconverted Series D Convertible Preferred Stock, the holder,
solely at such holder's option, can elect to:
(1) require the Company to redeem from such holder those Series
D Convertible Preferred Stock for which the Company is unable to issue
Common Stock in accordance with such holder's Conversion Notice
("Mandatory Redemption") at a price per share equal to the Triggering
Event Redemption Price as of such Conversion Date (the "Mandatory
Redemption Price");
(2) if the Company's inability to fully convert Series D
Convertible Preferred Stock is pursuant to Section 9(a)(z) above,
require the Company to issue restricted shares of Common Stock in
accordance with such holder's Conversion Notice and pursuant to
Section 5(b)(ii) above; and/or
(3) void its Conversion Notice and retain or have returned, as
the case may be, the shares of Series D Convertible Preferred Stock
that were to be converted pursuant to such holder's Conversion Notice
(provided that a holder's voiding its Conversion Notice shall not
effect the Company's obligations to make any payments which have
accrued prior to the date of such notice).
(2) Mechanics of Fulfilling Holder's Election. The Company shall
-----------------------------------------
immediately send
<PAGE>
via facsimile to a holder of Series D Convertible Preferred Stock, upon receipt
of a facsimile copy of a Conversion Notice from such holder which cannot be
fully satisfied as described in Section 9(a) above, a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the "Inability to
Fully Convert Notice"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy such holder's
Conversion Notice, (ii) the number of Series D Convertible Preferred Stock which
cannot be converted and (iii) the applicable Mandatory Redemption Price. Such
holder shall notify the Company of its election pursuant to Section 9(a) above
by delivering written notice via facsimile to the Company ("Notice in Response
to Inability to Convert").
(3) Payment of Redemption Price. If such holder shall elect to have
---------------------------
its shares redeemed pursuant to Section 9(a)(i) above, the Company shall pay the
Mandatory Redemption Price in cash to such holder within thirty (30) days of the
Company's receipt of the holder's Notice in Response to Inability to Convert,
provided that prior to the Company's receipt of the holder's Notice in Response
- --------
to Inability to Convert the Company has not delivered a notice to such holder
stating, to the satisfaction of the holder, that the event or condition
resulting in the Mandatory Redemption has been cured and all Conversion Shares
issuable to such holder can and will be delivered to the holder in accordance
with the terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in this
Section 9(c) (other than pursuant to a dispute as to the determination of the
arithmetic calculation of the Redemption Price), in addition to any remedy such
holder of Series D Convertible Preferred Stock may have under this Certificate
of Designation and the Securities Purchase Agreement, such unpaid amount shall
bear interest at the rate of 2.0% per month (prorated for partial months) until
paid in full. Until the full Mandatory Redemption Price is paid in full to such
holder, such holder may (i) void the Mandatory Redemption with respect to those
Series D Convertible Preferred Stock for which the full Mandatory Redemption
Price has not been paid, (ii) receive back such Series D Convertible Preferred
Stock, and (iii) require that the Conversion Price of such returned Series D
Convertible Preferred Stock be adjusted to the lesser of (A) the Conversion
Price as in effect on the date on which the holder voided the Mandatory
Redemption and (B) the lowest Closing Bid Price during the period beginning on
the Conversion Date and ending on the date the holder voided the Mandatory
Redemption. Notwithstanding the foregoing, if the Company fails to pay the
applicable Mandatory Redemption Price within such thirty (30) days time period
due to a dispute as to the determination of the arithmetic calculation of the
Redemption Rate, such dispute shall be resolved pursuant to Section 5(b)(iii)
above with the term "Redemption Price" being substituted for the term
"Conversion Price".
(4) Pro-Rata Conversion and Redemption. In the event the Company
----------------------------------
receives a Conversion Notice from more than one holder of Series D Convertible
Preferred Stock on the same day and the Company can convert and redeem some, but
not all, of the Series D Convertible Preferred Stock pursuant to this Section 9,
the Company shall convert and redeem from each holder of Series D Convertible
Preferred Stock electing to have Series D Convertible Preferred Stock converted
and redeemed at such time an amount equal to such holder's pro-rata amount
(based on the number shares of Series C Convertible Preferred Stock held by such
holder relative to the number shares of Series D Convertible Preferred Stock
outstanding) of all shares of Series D Convertible Preferred Stock being
converted and redeemed at such time.
<PAGE>
10. Vote to Change the Terms of or Issue Preferred Stock. The affirmative
----------------------------------------------------
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of not less than three-fourths (3/4) of the then
outstanding shares of Series D Convertible Preferred Stock, shall be required
(a) for any change to this Certificate of Designations or the Company's Articles
of Incorporation which would amend, alter, change or repeal any of the powers,
designations, preferences and rights of the Series D Convertible Preferred Stock
or (b) for the issuance of shares of Series D Convertible Preferred Stock other
than pursuant to the Securities Purchase Agreement.
11. Lost or Stolen Certificates. Upon receipt by the Company of evidence
---------------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing the shares of Series D Convertible
Preferred Stock, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
-------- -------
be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such shares of Series D
Convertible Preferred Stock into Common Stock.
12. Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Certificate of Designations
- -----------------
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the Series D
Convertible Preferred Stock and that the remedy at law for any such breach may
be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the holders of the Series D Convertible Preferred
Stock shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
13. Specific Shall Not Limit General; Construction. No specific provision
----------------------------------------------
contained in this Certificate of Designations shall limit or modify any more
general provision contained herein. This Certificate of Designations shall be
deemed to be jointly drafted by the Company and all initial purchasers of the
Series D Convertible Preferred Stock and shall not be construed against any
person as the drafter hereof.
14. Failure or Indulgence Not Waiver. No failure or delay on the part of
--------------------------------
a holder of Series D Convertible Preferred Stock in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or
<PAGE>
privilege preclude other or further exercise thereof or of any other right,
power or privilege.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true this 16 day of April, 1999.
SKYLYNX COMMUNICATIONS, INC.
By:
Name: Jeffery A. Mathias
Title: President and CEO
<PAGE>
EXHIBIT I
SKYLYNX COMMUNICATIONS, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
SkyLynx Communications, Inc. for Series D Preferred Stock (the "Certificate of
Designations"). In accordance with and pursuant to the Certificate of
Designation, the undersigned hereby elects to convert the number of shares of
Series D Convertible Preferred Stock, par value $.01 per share (the "Preferred
Shares"), of SkyLynx Communications, Inc., a Colorado corporation (the
"Company"), indicated below into shares of Common Stock, par value $.001 per
share (the "Common Stock"), of the Company, by tendering the stock
certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.
Date of Conversion:
Number of Preferred Shares to be converted:
Stock certificate no(s). of Preferred Shares to be converted:
The Common Stock have been sold pursuant to the Registration Statement (as
defined in the Registration Rights Agreement): YES ____ NO____
Please confirm the following information:
Conversion Price:
Number of shares of Common Stock
to be issued:
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
Facsimile Number:
Authorization:
By:
Title:
Dated:
Account Number:
(if electronic book entry transfer):
<PAGE>
Transaction Code Number
(if electronic book entry transfer):
<PAGE>
Exhibit 3.7
Mail to: Secretary of State For Office use only
Corporation Section FILED
1560 Broadway, Suite 200 VICTORA BUCKLEY
Denver, CO 80202 SECRETARY OF STATE
(303) 894-2251
19991096069 C
$ 40.00
SECRETARY OF STATE
05-19-1999 14:41:23
MUST BE TYPED Fax (303) 894-2242
FILING FEE: $25.00
MUST SUBMIT TWO COPIES
ARTICLES OF AMENDMENT
Please include a typed TO THE
self-addressed envelope ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to the
Articles of Incorporation:
FIRST: The name of the corporation is SkyLynx Communications, Inc.
----------------------------
SECOND: The following amendment to the Articles of Incorporation was adopted on
May 6 __, 1999, as prescribed by the Colorado Business Corporation Act, in the
manner marked with an X below:
_____ No shares have been issued or Director Elected - Action by
Incorporators
_____ No shares have been issued but Directors Elected - Action by
Directors
X Such amendment was adopted by the board of directors where shares have
- ------
been issued and shareholder action was not required.
_____ Such amendment was adopted by a vote of the shareholders. The number
of shares voted for the amendment was sufficient for approval.
THIRD: If changing corporate name, the new name of the corporation is
FOURTH: The manner, if not set forth in such amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the amendment
shall be effected, is as follows:
See Exhibit A attached hereto and incorporated by reference.
If these amendments are to have a delayed effective date, please list that date:
(Not to exceed ninety (90) days from the date of filing)
Signature /s/ Jeffrey A. Mathias
----------------------
Title Jeffrey A. Mathias, President
-----------------------------
<PAGE>
Revised 7/95
<PAGE>
CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND PREFERENCES
OF THE
SERIES E CONVERTIBLE PREFERRED STOCK
OF
SKYLYNX COMMUNICATIONS, INC.
Pursuant to Section 7-106-102 of the
Colorado Business Corporation Act
The undersigned, the President of SkyLynx Communications, Inc., a Colorado
corporation (the "Company"), in accordance with the provisions of the Colorado
Business Corporation Act, does hereby certify that, pursuant to the authority
conferred upon the Board of Directors by the Articles of Incorporation of the
Company, the following resolution creating a series of Series E Convertible
Preferred Stock, was duly adopted on May 6, 1999:
RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Company by provisions of the Articles of
Incorporation of the Company, as amended (the "Articles of Incorporation"),
there hereby is created out of the shares of Preferred Stock, par value $.01 per
share, of the Company authorized in Article IV of the Articles of Incorporation
(the "Preferred Stock"), a series of Preferred Stock of the Company, to be named
"Series E Convertible Preferred Stock," consisting of 3,000 shares, which series
shall have the following designations, powers, preferences and relative and
other special rights and the following qualifications, limitations and
restrictions:
1. Designation and Rank. The designation of such series of the Preferred Stock
--------------------
shall be the Series E Convertible Preferred Stock, par value $.01 per share (the
"Series E Convertible Preferred Stock"). The maximum number of shares of Series
E Convertible Preferred Stock shall be 3,000 Shares. The Series E Convertible
Preferred Stock shall have a liquidation preference of $1,000 per share. The
Series E Convertible Preferred Stock shall rank (i) prior to the common stock,
par value $.001 per share (the "Common Stock"), and to all other classes and
series of equity securities of the Company which by their terms do not rank
senior to the Series E Convertible Preferred Stock ("Junior Stock") and (ii) on
parity with the currently issued and outstanding Series A, Series B, Series C
and Series D Preferred Stock and any other class and series of equity securities
which by its terms shall rank on parity with the Series E Convertible Preferred
Stock. The Series E Convertible Preferred Stock shall be subordinate to and rank
junior to all indebtedness of the Company now or hereafter outstanding.
2. Dividends.
---------
(a) Payment of Dividends. The holders of record of the shares of Series E
--------------------
Convertible Preferred
<PAGE>
Stock shall be entitled to receive, out of any assets at the time legally
available therefor and when and as declared by the Board of Directors, dividends
at the rate of five percent (5%) of the stated Liquidation Preference (as
defined below) per share per annum (the "Dividend Payment"), and no more,
payable, at the option of the holders of the shares of Series E Convertible
Preferred Stock, in (i) shares of Common Stock equal to the quotient of (a) the
Dividend Payment divided by (b) the Conversion Price (as defined in Section 5(d)
below) on the trading day preceding the date the dividend is to be paid, or (ii)
cash. In the case of shares of Series E Convertible Preferred Stock outstanding
for less than a full year, dividends shall be pro rated based on the portion of
each year during which such shares are outstanding. Such dividends on the Series
E Convertible Preferred Stock shall be cumulative and shall accrue and be
payable only at conversion of the Series E Convertible Preferred Stock into
shares of Common Stock or upon redemption of the Series E Convertible Preferred
Stock. Such dividends on the Series E Convertible Preferred Stock are prior and
in preference to any declaration or payment of any distribution (as defined
below) on any outstanding shares of Common Stock or any other equity securities
of the Company ranking junior to the Series E Convertible Preferred Stock as to
the payment of dividends. Such dividends shall accrue on each share of Series E
Convertible Preferred Stock from day to day from the date of initial issuance
thereof whether or not earned or declared. If such dividends with respect to any
previous dividend period at the rate provided for herein have not been paid on,
or declared and set apart for, all shares of Series E Convertible Preferred
Stock at the time outstanding, the deficiency shall be fully paid on, or
declared and set apart for, such shares on a pro rata basis with all other
equity securities of the Company ranking on a parity with the Series E
Convertible Preferred Stock as to the payment of dividends before any
distribution shall be paid on, or declared and set apart for Common Stock or any
other equity securities of the Company ranking junior to the Series E
Convertible Preferred Stock as to the payment of dividends.
(b) So long as any shares of Series E Convertible Preferred Stock are
outstanding, the Company shall not declare, pay or set apart for payment any
dividend or make any distribution on any Junior Stock (other than dividends or
distributions payable in additional shares of Junior Stock), unless at the time
of such dividend or distribution the Company shall have paid, or set apart for
payment, all accrued and unpaid dividends on the outstanding shares of Series E
Convertible Preferred Stock.
(c) In the event of a dissolution, liquidation or winding up of the Company
pursuant to Section 4, all accrued and unpaid dividends on the Series E
Convertible Preferred Stock shall be payable on the day immediately preceding
the date of payment of the preferential amount to the holders of Series E
Convertible Preferred Stock. In the event of (i) a mandatory redemption pursuant
to Section 9 or (ii) a redemption at the election of the Company pursuant to
Section 8, all accrued and unpaid dividends on the Series E Convertible
Preferred Stock shall be payable on the day immediately preceding the date of
such redemption. In the event of a voluntary conversion pursuant to Section
5(a), all accrued and unpaid dividends on the Series E Convertible Preferred
Stock being converted shall be payable on the day immediately preceding the
Voluntary Conversion Date (as defined in Section 5(b)(i)) and in the event of a
mandatory conversion pursuant to Section 5(c), all accrued and unpaid dividends
on the Series E Convertible Preferred Stock being converted shall be payable on
the day immediately preceding the Mandatory
<PAGE>
Conversion Date (as defined in Section 5(c)(ii)).
(d) For purposes hereof, unless the context otherwise requires, "distribution"
shall mean the transfer of cash or property without consideration, whether by
way of dividend or otherwise, payable other than in shares of Common Stock or
other equity securities of the Company, or the purchase or redemption of shares
of capital stock of the Company (other than redemptions set forth in Section 8
below or repurchases of Common Stock held by employees or consultants of the
Corporation upon termination of their employment or services pursuant to
agreements providing for such repurchase) for cash or property.
3. Voting Rights.
-------------
(a) Class Voting Rights. The Series E Convertible Preferred Stock shall have
-------------------
the following class voting rights (in addition to the voting rights set forth in
Section 3(b) hereof). So long as any shares of the Series E Convertible
Preferred Stock remain outstanding, the Company shall not, without the
affirmative vote or consent of the holders of at least three quarters (3/4) of
the shares of the Series E Convertible Preferred Stock outstanding at the time,
given in person or by proxy, either in writing or at a meeting, in which the
holders of the Series E Convertible Preferred Stock vote separately as class:
(i) authorize, create, issue or increase the authorized or issued amount of any
class or series of stock, including but not limited to the issuance of any more
shares of previously authorized Common Stock or [any] Preferred Stock ranking
prior to the Series E Convertible Preferred Stock, with respect to the
distribution of assets on liquidation, dissolution or winding up; (ii) amend,
alter or repeal the provisions of the Series E Convertible Preferred Stock,
whether by merger, consolidation or otherwise, so as to adversely affect any
right, preference, privilege or voting power of the Series E Convertible
Preferred Stock; provided, however, that any creation and issuance of another
-------- -------
series of Junior Stock shall not be deemed to adversely affect such rights,
preferences, privileges or voting powers; (iii) repurchase, redeem or pay
dividends on, shares of the Company's Junior Stock; (iv) amend the Articles of
Incorporation or By-Laws of the Company so as to affect materially and adversely
any right, preference, privilege or voting power of the Series E Convertible
Preferred Stock; provided, however, that any creation and issuance of another
-------- -------
series of Junior Stock shall not be deemed to materially and adversely affect
such rights, preferences privileges or voting powers; (v) effect any
distribution with respect to Junior Stock; or (vi) reclassify the Company's
outstanding securities.
(b) General Voting Rights. Except with respect to transactions upon which the
---------------------
Series E Convertible Preferred Stock shall be entitled to vote separately as a
class pursuant to Section 3(a) above and except as otherwise required by
Colorado law, the Series E Convertible Preferred Stock shall have no voting
rights. The Common Stock into which the Series E Convertible Preferred Stock is
convertible shall, upon issuance, have all of the same voting rights as other
issued and outstanding Common Stock.
4. Liquidation Preference.
----------------------
(a) In the event of the liquidation, dissolution or winding up of the affairs of
the Company, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities
<PAGE>
of the Company, the holders of shares of the Series E Convertible Preferred
Stock then outstanding shall be entitled to receive, out of the assets of the
Company whether such assets are capital or surplus of any nature, an amount
equal to $1,000 per share (the "Liquidation Preference Amount") of the Series E
Convertible Preferred Stock plus any accrued and unpaid dividends before any
payment shall be made or any assets distributed to the holders of the Common
Stock or any other Junior Stock. If the assets of the Company are not sufficient
to pay in full the Liquidation Preference Amount plus any accrued and unpaid
dividends payable to the holders of outstanding shares of the Series E
Convertible Preferred Stock and any series of preferred stock or any other class
of stock on a parity, as to rights on liquidation, dissolution or winding up,
with the Series E Convertible Preferred Stock, then all of said assets will be
distributed among the holders of the Series E Convertible Preferred Stock and
the other classes of stock on a parity with the Series E Convertible Preferred
Stock, if any, ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. The
liquidation payment with respect to each outstanding fractional share of Series
E Convertible Preferred Stock shall be equal to a ratably proportionate amount
of the liquidation payment with respect to each outstanding share of Series E
Convertible Preferred Stock. All payments for which this Section 4(a) provides
shall be in cash, property (valued at its fair market value as determined by the
Company's independent, outside accountant) or a combination thereof; provided,
--------
however, that no cash shall be paid to holders of Junior Stock unless each
- -------
holder of the outstanding shares of Series E Convertible Preferred Stock has
been paid in cash the full Liquidation Preference Amount plus any accrued and
unpaid dividends to which such holder is entitled as provided herein. After
payment of the full Liquidation Preference Amount plus any accrued and unpaid
dividends to which each holder is entitled, such holders of shares of Series E
Convertible Preferred Stock will not be entitled to any further participation as
such in any distribution of the assets of the Company.
(b) A consolidation or merger of the Company with or into any other corporation
or corporations, or a sale of all or substantially all of the assets of the
Company, or the effectuation by the Company of a transaction or series of
transactions in which more than 50% of the voting shares of the Company is
disposed of or conveyed, shall not be deemed to be a liquidation, dissolution,
or winding up within the meaning of this Section 4. In the event of the merger
or consolidation of the Company with or into another corporation, the Series E
Convertible Preferred Stock shall maintain its relative powers, designations and
preferences provided for herein and no merger shall result inconsistent
therewith.
(c) Written notice of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, stating a payment date and the place
where the distributable amounts shall be payable, shall be given by mail,
postage prepaid, no less than 45 days prior to the payment date stated therein,
to the holders of record of the Series E Convertible Preferred Stock at their
respective addresses as the same shall appear on the books of the Company.
5. Conversion. The holder of Series E Convertible Preferred Stock shall have
----------
the following conversion rights (the "Conversion Rights"):
(a) Right to Convert. At any time on or after the Closing Date (as such term is
----------------
defined in the Series
<PAGE>
E Convertible Preferred Stock Purchase Agreement dated as of May __, 1999
between the Company and the initial holders of the Series E Convertible
Preferred Stock (the "Securities Purchase Agreement")), the holder of any shares
of Series E Convertible Preferred Stock may, at the holder's option, subject to
the limitations set forth in Section 7 herein, elect to convert (a "Voluntary
Conversion") all or any portion of the shares of Series E Convertible Preferred
Stock held by such person into a number of fully paid and nonassessable shares
of Common Stock equal to the quotient of (i) the Liquidation Preference Amount
of the shares of Series E Convertible Preferred Stock being converted divided by
(ii) the Conversion Price (as defined in Section 5(d) below) then in effect as
of the date of the delivery by such holder of its notice of election to convert.
(b) Mechanics of Voluntary Conversion. The Voluntary Conversion of Series
---------------------------------
E Convertible Preferred Stock shall be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert Series E Convertible Preferred
------------------------------
Stock into full shares of Common Stock on any date (the "Voluntary Conversion
Date"), the holder thereof shall (A) transmit by facsimile (or otherwise
delivering), for receipt on or prior to 11:59 p.m., New York Time on such date,
a copy of a fully executed notice of conversion in the form attached hereto as
Exhibit I common carrier for delivery to the Company as soon as practicable
- ---------
following such date, the original certificates representing the shares of Series
E Convertible Preferred Stock being converted (or an indemnification undertaking
with respect to such shares in the case of their loss, theft or destruction)
(the "Preferred Stock Certificates") and the originally executed Conversion
Notice.
(ii) Company's Response. Upon receipt by the Company of a facsimile copy of a
------------------
Conversion Notice, the Company shall immediately send, via facsimile, a
confirmation of receipt of such Conversion Notice to the holder. Upon receipt by
the Company of the Preferred Stock Certificates to be converted pursuant to a
Conversion Notice, together with the originally executed Conversion Notice, the
Company or its designated transfer agent (the "Transfer Agent") (as applicable)
shall, on the next business day following the date of receipt by the Company of
both (or the second business day following the date of receipt by the Company of
both if received after 11:00 a.m. New York Time), (A) issue and surrender to a
common carrier for overnight delivery to the address as specified in the
Conversion Notice, a certificate, registered in the name of the holder or its
designee, for the number of shares of Common Stock to which the holder shall be
entitled, or (B) credit such aggregate number of shares of Common Stock to which
the holder shall be entitled to the holder's or its designee's balance account
with Corporate Stock Transfer, Inc. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion is
greater than the number of shares of Series E Convertible Preferred Stock being
converted, then the Company shall, as soon as practicable and in no event later
than two business days after receipt of the Preferred Stock Certificate(s) and
at its own expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of shares of Series E Convertible Preferred
Stock not converted.
(iii) Dispute Resolution. In the case of a dispute as to the determination of
------------------
the Average Share Prices
<PAGE>
(as defined in Section 5(d) below) or the Conversion Price or the arithmetic
calculation of the number of shares of Common Stock to be issued upon
conversion, the Company shall promptly issue to the holder the number of shares
of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile as soon as
possible, but in no event later than two (2) business days after receipt of such
holder's Conversion Notice. If the holder and the Company are unable to agree
upon the determination of the Average Share Prices or the Conversion Price or
the arithmetic calculation of the number of shares of Common Stock to be issued
upon such conversion within one (1) business day of such disputed determination
or arithmetic calculation being submitted to the holder, then the Company shall
within one (1) business day submit via facsimile (A) the disputed determination
of the Average Share Prices or the Conversion Price to an independent, reputable
investment bank or (B) the disputed arithmetic calculation of the number of
shares of Common Stock to be issued upon such conversion to its independent,
outside accountant. The Company shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results no later than seventy-two
(72) hours from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
manifest error. The reasonable expenses of such investment bank or accountant in
making such determination shall be paid by the Company, in the event the
holder's calculation or determination was correct, or by the holder, in the
event the Company's calculation or determination was correct, or equally by the
Company and the holder in the event that neither the Company's or the holder's
calculation or determination was correct. The period of time in which the
Company is required to effect conversions or redemptions under this Certificate
of Designation shall be tolled with respect to the subject conversion or
redemption pending resolution of any dispute by the Company made in good faith
and in accordance with this Section 5(b)(iii).
(iv) Record Holder. The person or persons entitled to receive the shares of
-------------
Common Stock issuable upon a conversion of the Series E Convertible Preferred
Stock shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within two (2) business days of the
-----------------------------------
Company's receipt of the Preferred Stock Certificates to be converted and the
Conversion Notice (the "Share Delivery Period"), the Company shall fail to issue
a certificate to a holder or credit the holder's balance account with Corporate
Stock Transfer, Inc. for the number of shares of Common Stock to which the
holder is entitled upon such holder's conversion of the Series E Convertible
Preferred Stock or to issue a new Preferred Stock Certificate representing the
number of shares of Series E Convertible Preferred Stock to which such holder is
entitled pursuant to Section 5(b)(ii) (a "Conversion Failure"), in addition to
all other available remedies which such holder may pursue hereunder and under
the Securities Purchase Agreement (including indemnification pursuant to Article
VIII thereof), the Company shall pay additional damages to such holder on each
date after such fifth (5th) business day that such conversion is not timely
effected in an amount equal 1% of the product of (A) the sum of the number of
shares of Common Stock not issued to the holder on a timely basis pursuant to
Section 5(b)(ii) and to which such holder is entitled and, in the event the
Company has failed to deliver a Preferred Stock Certificate to the
<PAGE>
holder on a timely basis pursuant to Section 5(b)(ii), the number of shares of
Common Stock issuable upon conversion of the shares of Series E Convertible
Preferred Stock represented by such Preferred Stock Certificate, as of the last
possible date which the Company could have issued such Preferred Stock
Certificate to such holder without violating Section 5(b)(ii) and (B) the
Closing Bid Price (as defined in Section 5(d) below) of the Common Stock on the
last possible date which the Company could have issued such Common Stock and
such Preferred Stock Certificate, as the case may be, to such holder without
violating Section 5(b)(ii). The holder may after any time after such Share
Delivery Period send the Company a notice of revocation of conversion (the
"Revocation Notice") revoking the holder's Conversion Notice (and requesting a
return of the applicable Preferred Share Stock Certificates) by (A) transmitting
by facsimile (or otherwise delivering), for receipt on or prior to 11:59 p.m.,
New York Time on such date, a copy of an executed Revocation Notice and (B)
sending by a common carrier for delivery to the Company as soon as practicable
following such date, the originally executed Revocation Notice. If the holder
has delivered a Revocation Notice to the Company, then the Company's obligation
to pay additional damages to the holder (in accordance with the preceding
sentence) shall terminate. If the Company fails to pay the additional damages
set forth in this Section 5(b)(v) within five business days of the date
incurred, then such payment shall bear interest at the rate of 2% per month (pro
rated for partial months) until such payments are made.
(c) Mandatory Conversion.
--------------------
Each share of Series E Convertible Preferred Stock outstanding on
the Mandatory Conversion Date (as defined below) shall, automatically
and without any action on the part of the holder thereof, convert (a
"Mandatory Conversion") into a number of fully paid and nonassessable
shares of Common Stock equal to the quotient of (i) the Liquidation
Preference Amount of the shares of Series E Convertible Preferred
Stock outstanding on the Mandatory Conversion Date divided by (ii) the
Conversion Price (as defined below) in effect on the Mandatory
Conversion Date.
As used herein, a "Mandatory Conversion Date" shall be the date
which is three years after the date of issuance of the shares of
Series E Convertible Preferred Stock (the "Issuance Date"), provided
that the Mandatory Conversion Date shall be extended for any shares of
Series E Convertible Preferred Stock (i) for as long as the conversion
of such shares of Series E Convertible Preferred Stock would violate
Section 7, (ii) pursuant to Section 3(n) of the Registration Rights
Agreement, which extension shall be one day for each of the days in
any Blackout Period (as defined in Section 3(n) of the Registration
Rights Agreement), (iii) until the shares of Common Stock to which the
holder is entitled upon a Mandatory Conversion are duly authorized and
available for issuance in connection with such Mandatory Conversion,
(iv) until a registration statement registering such shares of Common
Stock has been declared effective by the Securities and Exchange
Commission (the "Commission") and is currently effective as of the
Mandatory Conversion Date and (v) until such shares of Common Stock
are listed on the OTC Bulletin Board, the Nasdaq SmallCap
<PAGE>
Market, the Nasdaq National Market, The New York Stock Exchange, Inc.
or the American Stock Exchange, Inc. The Mandatory Conversion Date and
the Voluntary Conversion Date collectively are referred to in this
Certificate of Designation as the "Conversion Date."
On the Mandatory Conversion Date, the outstanding shares of
Series E Convertible Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether
or not the Preferred Stock Certificates representing such shares are
surrendered to the Company or its transfer agent; provided, however,
-------- -------
that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any
shares of Series E Convertible Preferred Stock unless the Preferred
Stock Certificates evidencing such shares of Series E Convertible
Preferred Stock are either delivered to the Company or the holder
notifies the Company that such Preferred Stock Certificates have been
lost, stolen, or destroyed, and executes an agreement satisfactory to
the Company to indemnify the Company from any loss incurred by it in
connection therewith. Upon the occurrence of the automatic conversion
of the Series E Convertible Preferred Stock pursuant to this Section
5, the holders of the Series E Convertible Preferred Stock shall
surrender the Preferred Stock Certificates representing the Series E
Convertible Preferred Stock for which the Mandatory Conversion Date
has occurred to the Company and the Company shall deliver the shares
of Common Stock issuable upon such conversion (in the same manner set
forth in Section 5(b)(ii)) to the holder within three business days of
the holder's delivery of the applicable Preferred Stock Certificates.
(d) Conversion Price.
----------------
The term "Five Day Average Share Price" shall mean the average of
the Closing Bid Prices of the Company's shares of Common Stock (as
reported by Bloomberg Financial Markets ("Bloomberg'')) in the over-
the-counter market on the electronic bulletin board for such security
(the "OTC Bulletin Board") (or on such other United States stock
exchange or public trading market on which the Common Stock trades (an
"Alternative Exchange") if, at the time of the conversion, the Common
Stock is not trading in the OTC Bulletin Board), for the five (5)
consecutive trading days immediately preceding the Voluntary
Conversion Date or Mandatory Conversion Date, as applicable.
The term "Conversion Price" shall mean, with respect to any
conversion of Series E Convertible Preferred Stock converted prior to
December 31, 1999, $3.00 (as adjusted herein), except that if a
Registration Violation has occurred and/or the Conversion Date occurs
after December 31, 1999, then the "Conversion Price" shall be equal to
the lesser of (x) $3.00 (as adjusted herein) and (y) an amount equal
to 105% of the Five Day Average Share Price, as applicable; provided,
--------
however, that if (i) the Company has filed a Registration Statement
-------
(as
<PAGE>
defined below in Section 5(d)(iv)) which has been declared effective
by the Commission, (ii) the Company has filed a registration statement
on Form S-1 registering shares of Common Stock (a "Form S-1") in an
underwritten public offering which has been declared effective by the
Commission and (iii) the Closing Bid Price of the Common Stock has
been at least $8.00 per share for a period of 10 consecutive trading
days with such period commencing at any time after the ninetieth
(90th) day after which the Form S-1 has been declared effective by the
Commission, then the "Conversion Price" shall be $3.00 (as adjusted
herein).
The term "Closing Bid Price" shall mean, for any security as of
any trading day, the closing bid price of such security in the OTC
Bulletin Board for such security as reported by Bloomberg (or the
closing bid price for such security as reported on an Alternative
Exchange), or, if no closing bid price is reported for such security
by Bloomberg (or on such Alternative Exchange), the closing trade
price of such security as reported by Bloomberg (or on such
Alternative Exchange), or, if no closing trade price is reported for
such security by Bloomberg (or on such Alternative Exchange), the
average of the bid prices of any market makers for such security as
reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Bid Price cannot be calculated for such security on
such date on any of the foregoing bases, the Closing Bid Price of such
security on such date shall be the fair market value as mutually
determined by the Company and the holders of a majority of the
outstanding shares of Series E Convertible Preferred Stock. If the
Company and the holders of Series E Convertible Preferred Stock are
unable to agree upon the fair market value of the Common Stock, then
such dispute shall be resolved pursuant to Section 5(b)(iii) above
with the term "Closing Bid Price" being substituted for the term
"Average Share Prices." (All such determinations to be appropriately
adjusted for any stock dividend, stock split or other similar
transaction during such period).
The term "Registration Violation" shall mean the failure of the
Company to (i) prepare and file with the Commission on or prior to the
Filing Date a Registration Statement pursuant to the terms and
conditions of the Registration Rights Agreement dated as of May __,
1999 by and among the Company and the initial holders of the Series E
Preferred Stock named therein (the "Registration Rights Agreement"),
(ii) cause the Registration Statement to be declared effective under
the Commission as promptly as possible after the filing thereof, but
in any event prior to the Effectiveness Date and (iii) otherwise
comply with the terms and conditions of the Registration Rights
Agreement. All capitalized terms in this Section 5(d)(iv) shall have
the meanings assigned to them in the Registration Rights Agreement.
(e) Adjustments of Conversion Price.
-------------------------------
Adjustments for Stock Splits and Combinations. If the Company
---------------------------------------------
shall, at
<PAGE>
any time or from time to time after the Issuance Date, effect a stock
split of the outstanding Common Stock, the applicable Conversion Price
in effect immediately prior to the stock split shall be
proportionately decreased. If the Company shall at any time or from
time to time after the Issuance Date, combine the outstanding shares
of Common Stock, the applicable Conversion Price in effect immediately
prior to the combination shall be proportionately increased. Any
adjustments under this Section 5(e)(i) shall be effective at the close
of business on the date the stock split or combination occurs.
Adjustments for Certain Dividends and Distributions. If the
---------------------------------------------------
Company shall at any time or from time to time after the Issuance
Date, make or issue, or set a record date for the determination of
holders of Common Stock entitled to receive a dividend or other
distribution payable in shares of Common Stock, then, and in each
event, the applicable Conversion Price in effect immediately prior to
such event shall be decreased as of the time of such issuance or, in
the event such record date shall have been fixed, as of the close of
business on such record date, by multiplying, as applicable, the
applicable Conversion Price then in effect by a fraction:
(A) the numerator of which shall be the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date; and
(B) the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution.
Adjustment for Other Dividends and Distributions. If the Company
------------------------------------------------
shall at any time or from time to time after the Issuance Date, make
or issue, or set a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution
payable in other than shares of Common Stock, then, and in each event,
an appropriate revision to the applicable Conversion Price shall be
made and provision shall be made (by adjustments of the Conversion
Price or otherwise) so that the holder of Series E Convertible
Preferred Stock shall receive upon conversions thereof, in addition to
the number of shares of Common Stock receivable thereon, such dividend
or other distribution which the holders would have received had their
Series E Convertible Preferred Stock been converted into Common Stock
on the date of such event and had thereafter, during the period from
the date of such event to and including the Conversion Date, retained
such dividend or other distribution (together with any distributions
payable thereon during such period), giving application to all
adjustments called for during such period under this Section 5(e)(iii)
with respect to the rights of the holders of the Series E Convertible
Preferred Stock.
<PAGE>
Adjustments for Reclassification, Exchange or Substitution. If
----------------------------------------------------------
the Common Stock issuable upon conversion of the Series E Convertible
Preferred Stock at any time or from time to time after the Issuance
Date shall be changed to the same or different number of shares of any
class or classes of stock, whether by reclassification, exchange,
substitution or otherwise (other than by way of a stock split or
combination of shares or stock dividends or distributions provided for
in Sections 5(e)(i), (ii) and (iii), or a reorganization, merger,
consolidation, or sale of assets provided for in Section 5(e)(v)),
then, and in each event, an appropriate revision to the Conversion
Price shall be made and provisions shall be made (by adjustments of
the Conversion Price or otherwise) so that the holders of the Series E
Convertible Preferred Stock shall have the right thereafter to convert
the Series E Convertible Preferred Stock into the kind and amount of
shares of stock and other securities receivable upon reclassification,
exchange, substitution or other change, which such holders would have
received had such holders' Series E Convertible Preferred Stock been
converted immediately prior to such reclassification, exchange,
substitution or other change, all subject to further adjustment as
provided herein.
Adjustments for Reorganization, Merger, Consolidation or Sales of
-----------------------------------------------------------------
Assets. If at any time or from time to time after the Issuance Date
------
there shall be a capital reorganization of the Company (other than by
way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 5(e)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in
Section 5(e)(iv)), or a merger or consolidation of the Company with or
into another corporation, or the sale of all or substantially all of
the Company's properties or assets to any other person (an "Organic
Change"), then as a part of such Organic Change an appropriate
revision to the Conversion Price shall be made and provision shall be
made (by adjustments of the Conversion Price or otherwise) so that the
holder of each share of Series E Convertible Preferred Stock shall
have the right thereafter to convert such share of Series E
Convertible Preferred Stock into the kind and amount of shares of
stock and other securities or property of the Company or any successor
corporation resulting from Organic Change. In any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section 5(e)(v) with respect to the rights of the
holders of the Series E Convertible Preferred Stock after the Organic
Change to the end that the provisions of this Section 5(e)(v)
(including any adjustment in the applicable Conversion Price then in
effect and the number of shares of stock or other securities
deliverable upon conversion of the Series E Convertible Preferred
Stock) shall be applied after that event in as nearly an equivalent
manner as may be practicable.
Consideration for Stock. In case any shares of Common Stock or
-----------------------
any securities convertible into or exchangeable for, directly or
indirectly, Common Stock ("Convertible Securities"), other than the
Series E Convertible Preferred Stock, or any rights or warrants or
options to purchase any such Common Stock
<PAGE>
or Convertible Securities, shall be issued or sold:
(C) in connection with any merger or consolidation in which the Company is the
surviving corporation (other than any consolidation or merger in which the
previously outstanding shares of Common Stock shall be changed to or exchanged
for the stock or other securities of another corporation), the amount of
consideration therefore shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Company, of such
portion of the assets and business of the nonsurviving corporation as such Board
may determine to be attributable to such shares of Common Stock, Convertible
Securities, rights or warrants or options, as the case may be; or
(D) in the event of any consolidation or merger of the Company in which the
Company is not the surviving corporation or in which the previously outstanding
shares of Common Stock of the Company shall be changed into or exchanged for the
stock or other securities of another corporation, or in the event of any sale of
all or substantially all of the assets of the Company for stock or other
securities of any corporation, the Company shall be deemed to have issued a
number of shares of its Common Stock for stock or securities or other property
of the other corporation computed on the basis of the actual exchange ratio on
which the transaction was predicated, and for a consideration equal to the fair
market value on the date of such transaction of all such stock or securities or
other property of the other corporation. If any such calculation results in
adjustment of the applicable Conversion Price, or the number of shares of Common
Stock issuable upon conversion of the Series E Convertible Preferred Stock, the
determination of the applicable Conversion Price or the number of shares of
Common Stock issuable upon conversion of the Series E Convertible Preferred
Stock immediately prior to such merger, consolidation or sale, shall be made
after giving effect to such adjustment of the number of shares of Common Stock
issuable upon conversion of the Series E Convertible Preferred Stock.
Record Date. In case the Company shall have failed to take
-----------
record of the holders of its Common Stock or any other Preferred Stock
for the purpose of entitling them to subscribe for or purchase Common
Stock or Convertible Securities, then the date of the issue or sale of
the shares of Common Stock or Convertible Securities shall be deemed
to be such record date.
Certain Issues Excepted. Anything herein to the contrary
-----------------------
notwithstanding, the Company shall not be required to make any
adjustment of the number of shares of Common Stock issuable upon
conversion of the Series E Convertible Preferred Stock upon the grant
after the Issuance Date of, or the exercise after the Issuance Date
of, options or warrants or rights to purchase stock under the
Company's stock option plan.
(f) No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith, assist in the carrying out of all the provisions of this Section 5 and in
the taking of all
<PAGE>
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Series E Convertible Preferred Stock
against impairment.
(g) Certificates as to Adjustments. Upon occurrence of each adjustment or
------------------------------
readjustment of the Conversion Price or number of shares of Common Stock
issuable upon conversion of the Series E Convertible Preferred Stock pursuant to
this Section 5, the Company at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of such Series E Convertible Preferred Stock a certificate setting
forth such adjustment and readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. The Company shall, upon written
request of the holder of such affected Series E Convertible Preferred Stock, at
any time, furnish or cause to be furnished to such holder a like certificate
setting forth such adjustments and readjustments, the applicable Conversion
Price in effect at the time, and the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon the conversion of a share of such Series E Convertible Preferred
Stock. Notwithstanding the foregoing, the Company shall not be obligated to
deliver a certificate unless such certificate would reflect an increase or
decrease of at least one percent of such adjusted amount.
(h) Issue Taxes. The Company shall pay any and all issue and other taxes,
-----------
excluding federal, state or local income taxes, that may be payable in respect
of any issue or delivery of shares of Common Stock on conversion of shares of
Series E Convertible Preferred Stock pursuant thereto; provided, however, that
-------- -------
the Company shall not be obligated to pay any transfer taxes resulting from any
transfer requested by any holder in connection with any such conversion.
(i) Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by facsimile or
three business days following being mailed by certified or registered mail,
postage prepaid, return-receipt requested, addressed to the holder of record at
its address appearing on the books of the Company. The Company will give
written notice to each holder of Series E Convertible Preferred Stock at least
twenty (20) days prior to the date on which the Company closes its books or
takes a record (I) with respect to any dividend or distribution upon the Common
Stock, (II) with respect to any pro rata subscription offer to holders of Common
Stock or (III) for determining rights to vote with respect to any Organic
Change, dissolution, liquidation or winding-up and in no event shall such notice
be provided to such holder prior to such information being made known to the
public. The Company will also give written notice to each holder of Series E
Convertible Preferred Stock at least twenty (20) days prior to the date on which
any Organic Change, dissolution, liquidation or winding-up will take place and
in no event shall such notice be provided to such holder prior to such
information being made known to the public.
(j) Fractional Shares. No fractional shares of Common Stock shall be issued
-----------------
upon conversion of the Series E Convertible Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to the product of such fraction multiplied by the average
of the Closing Bid Prices of the Common Stock for the five consecutive trading
days immediately preceding the Voluntary Conversion Date or Mandatory Conversion
Date, as applicable.
<PAGE>
(k) Reservation of Common Stock. The Company shall, so long as any shares
---------------------------
of Series E Convertible Preferred Stock are outstanding, reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Series E Convertible Preferred Stock,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all of the Series E Convertible Preferred Stock then
outstanding; provided that the number of shares of Common Stock so reserved
--------
shall at no time be less than 200% of the number of shares of Common Stock for
which the shares of Series E Convertible Preferred Stock are at any time
convertible. The initial number of shares of Common Stock reserved for
conversions of the Series E Convertible Preferred Stock and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Series E Convertible Preferred Stock based on the number of shares of Series
E Convertible Preferred Stock held by each holder at the time of issuance of the
Series E Convertible Preferred Stock or increase in the number of reserved
shares, as the case may be. In the event a holder shall sell or otherwise
transfer any of such holder's shares of Series E Convertible Preferred Stock,
each transferee shall be allocated a pro rata portion of the number of reserved
shares of Common Stock reserved for such transferor. Any shares of Common Stock
reserved and which remain allocated to any person or entity which does not hold
any shares of Series E Convertible Preferred Stock shall be allocated to the
remaining holders of Series E Convertible Preferred Stock, pro rata based on the
number of shares of Series E Convertible Preferred Stock then held by such
holder. The Company shall, from time to time in accordance with the Colorado
Business Corporation Act, as amended, increase the authorized number of shares
of Common Stock if at any time the unissued number of authorized shares shall
not be sufficient to satisfy the Company's obligations under this Section 5(k).
(l) Retirement of Series E Convertible Preferred Stock. Conversion of
--------------------------------------------------
Series E Convertible Preferred Stock shall be deemed to have been effected on
the applicable Voluntary Conversion Date or Mandatory Conversion Date (subject
to revocation). Upon conversion of only a portion of the number of shares of
Series E Convertible Preferred Stock represented by a certificate surrendered
for conversion, the Company shall issue and deliver to such holder at the
expense of the Company, a new certificate covering the number of shares of
Series E Convertible Preferred Stock representing the unconverted portion of the
certificate so surrendered as required by Section 5(b)(ii).
(m) Regulatory Compliance. If any shares of Common Stock to be reserved
---------------------
for the purpose of conversion of Series E Convertible Preferred Stock require
registration or listing with or approval of any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise before such shares may be validly issued or delivered upon
conversion, the Company shall, at its sole cost and expense, in good faith and
as expeditiously as possible, endeavor to secure such registration, listing or
approval, as the case may be.
6. No Preemptive Rights. Except as provided in Section 5 hereof and in
--------------------
the Securities Purchase Agreement, no holder of the Series E Convertible
Preferred Stock shall be entitled to rights to subscribe for, purchase or
receive any part of any new or additional shares of any class, whether
<PAGE>
now or hereinafter authorized, or of bonds or debentures, or other evidences of
indebtedness convertible into or exchangeable for shares of any class, but all
such new or additional shares of any class, or any bond, debentures or other
evidences of indebtedness convertible into or exchangeable for shares, may be
issued and disposed of by the Board of Directors on such terms and for such
consideration (to the extent permitted by law), and to such person or persons as
the Board of Directors in their absolute discretion may deem advisable.
7. Conversion Restrictions. Notwithstanding anything to the contrary set
-----------------------
forth in Section 5 of this Certificate of Designation, in no event shall any
holder be entitled to convert Series E Preferred Stock in excess of that number
of shares of Series E Convertible Preferred Stock which, upon giving effect to
such conversion, would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such conversion. For purposes
of the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the shares of Series E
Convertible Preferred Stock with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) conversion of the remaining, nonconverted
shares of Series E Convertible Preferred Stock beneficially owned by the holder
and its affiliates, and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the holder
and its affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 7, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended.
8. Redemptions. (a) If at any time after the one year anniversary of
-----------
the Issuance Date, the Company's Common Stock is trading for less than $3.00 per
share, the Company may redeem all or a portion of the Series E Convertible
Preferred Stock outstanding upon 30 days prior written notice (the "Company's
Redemption Notice") at a price per share of Series E Convertible Preferred Stock
equal to 120% of the Liquidation Preference, plus any accrued but unpaid
dividends (the "Company's Redemption Price"); provided, that if a holder has
--------
delivered a Conversion Notice to the Company or delivers a Conversion Notice
within 30 days of receipt of the Company's Redemption Notice, the shares of
Series E Convertible Preferred Stock designated to be converted may not be
redeemed by the Company pursuant to this Section 8(a). The Company's Redemption
Notice shall state the date of redemption, which shall not be later than 30 days
following the date of the Company's Redemption Notice (the "Redemption Date"),
the Company's Redemption Price and the number of shares to be redeemed by the
Company. The Company shall deliver the Company's Redemption Price to the
holders on or prior to the Redemption Date. If the Company fails to pay the
Redemption Price by the trading day following the Redemption Date, the
redemption will be declared null and void and the Company shall lose its right
to serve a Company's Redemption Notice in the future.
(b) If at any time the Company redeems shares of the Company's Series
D Convertible Preferred Stock, the Company shall redeem all of the Series E
Convertible Preferred Stock outstanding upon 30 days prior written notice (a
"Series D Redemption Notice") at a
<PAGE>
price per share equal to the Company Redemption Price; provided, that if a
--------
holder has delivered a Conversion Notice to the Company or delivers a Conversion
Notice within 30 days of receipt of a Series D Redemption Notice, the shares of
Series E Convertible Preferred Stock covered by such Conversion Notice shall not
be redeemed by the Company. The Series D Redemption Notice shall state the date
of redemption, which shall not be later than 30 days following the date of the
Series D Redemption Notice (the "Series D Redemption Date") and the Company's
Redemption Price. The Company shall deliver the Company's Redemption Price to
the holder on or prior to the Series D Redemption Date.
9. Inability to Fully Convert.
--------------------------
(a) Holder's Option if Company Cannot Fully Convert. If, upon the
-----------------------------------------------
Company's receipt of a Conversion Notice or on the Mandatory Conversion Date,
the Company can not issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because
the Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
securities from issuing all of the Common Stock which is to be issued to a
holder of Series E Convertible Preferred Stock pursuant to a Conversion Notice
or (z) fails to have a sufficient number of shares of Common Stock registered
for resale under the Registration Statement, then the Company shall issue as
many shares of Common Stock registered for resale under the Registration
Statement as it is able to issue in accordance with such holder's Conversion
Notice and pursuant to Section 5(b)(ii) above and, with respect to the
unconverted Series E Convertible Preferred Stock, the holder, solely at such
holder's option, can elect to:
(i) require the Company to redeem from the holder those Series E Convertible
Preferred Stock for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("Mandatory Redemption") at a
price per share equal to the Company's Redemption Price as of such Conversion
Date (the "Mandatory Redemption Price");
(ii) if the Company's inability to fully convert Series E Convertible
Preferred Stock is pursuant to Section 9(a)(z) above, require the Company to
issue restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 5(b)(ii) above; and/or
(iii) void its Conversion Notice and retain or have returned, as the case may
be, the shares of Series E Convertible Preferred Stock that were to be converted
pursuant to such holder's Conversion Notice (provided that a holder's voiding
its Conversion Notice shall not effect the Company's obligations to make any
payments which have accrued prior to the date of such notice).
(b) Mechanics of Fulfilling Holder's Election. The Company shall immediately
-----------------------------------------
send via facsimile to a holder of Series E Convertible Preferred Stock, upon
receipt of a facsimile copy of a Conversion Notice from such holder which cannot
be fully satisfied as described in Section 9(a) above, a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the "Inability to
Fully Convert Notice"). Such Inability to Fully Convert Notice shall indicate
(i)
<PAGE>
the reason why the Company is unable to fully satisfy such holder's
Conversion Notice, (ii) the number of Series E Convertible Preferred Stock which
cannot be converted and (iii) the applicable Mandatory Redemption Price. Such
holder shall notify the Company within 15 days of its election pursuant to
Section 9(a) above by delivering written notice via facsimile to the Company
("Notice in Response to Inability to Convert").
(c) Payment of Redemption Price. If such holder shall elect to have its
---------------------------
shares redeemed pursuant to Section 9(a)(i) above, the Company shall pay the
Mandatory Redemption Price in cash to such holder within thirty (30) days of the
Company's receipt of the holder's Notice in Response to Inability to Convert,
provided that prior to the Company's receipt of the holder's Notice in Response
- --------
to Inability to Convert the Company has not delivered a notice to such holder
stating, to the satisfaction of the holder, that the event or condition
resulting in the Mandatory Redemption has been cured and all Conversion Shares
issuable to such holder can and will be delivered to the holder in accordance
with the terms of Section 9(a). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in this
Section 9(c) (other than pursuant to a dispute as to the determination of the
arithmetic calculation of the Redemption Price), in addition to any remedy such
holder of Series E Convertible Preferred Stock may have under this Certificate
of Designation and the Securities Purchase Agreement, such unpaid amount shall
bear interest at the rate of 2.0% per month (prorated for partial months) until
paid in full. Until the full Mandatory Redemption Price is paid in full to such
holder, such holder may (i) void the Mandatory Redemption with respect to those
Series E Convertible Preferred Stock for which the full Mandatory Redemption
Price has not been paid, (ii) receive back such Series E Convertible Preferred
Stock, and (iii) require that the Conversion Price of such returned Series E
Convertible Preferred Stock be adjusted to the lesser of (A) the Conversion
Price as in effect on the date on which the holder voided the Mandatory
Redemption and (B) the lowest Closing Bid Price during the period beginning on
the Conversion Date and ending on the date the holder voided the Mandatory
Redemption. Notwithstanding the foregoing, if the Company fails to pay the
applicable Mandatory Redemption Price within such thirty (30) days time period
due to a dispute as to the determination of the arithmetic calculation of the
Redemption Rate, such dispute shall be resolved pursuant to Section 5(b)(iii)
above with the term "Redemption Price" being substituted for the term
"Conversion Price".
(d) Pro-Rata Conversion and Redemption. In the event the Company receives a
----------------------------------
Conversion Notice from more than one holder of Series E Convertible Preferred
Stock on the same day and the Company can convert and redeem some, but not all,
of the Series E Convertible Preferred Stock pursuant to this Section 9, the
Company shall convert and redeem from each holder of Series E Convertible
Preferred Stock electing to have Series E Convertible Preferred Stock converted
and redeemed at such time an amount equal to such holder's pro-rata amount
(based on the number shares of Series E Convertible Preferred Stock held by such
holder relative to the number shares of Series E Convertible Preferred Stock
being converted and redeemed at such time).
10. Vote to Change the Terms of or Issue Preferred Stock. The affirmative
----------------------------------------------------
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of not less than three-fourths (3/4) of the then
outstanding shares of Series E Convertible Preferred Stock, shall be required
(a) for any change to this Certificate of Designation or the Company's Articles
of
<PAGE>
Incorporation which would amend, alter, change or repeal any of the powers,
designations, preferences and rights of the Series E Convertible Preferred Stock
or (b) for the issuance of shares of Series E Convertible Preferred Stock other
than pursuant to the Securities Purchase Agreement.
11. Lost or Stolen Certificates. Upon receipt by the Company of evidence
---------------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing the shares of Series E Convertible
Preferred Stock, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
-------- -------
be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such shares of Series E
Convertible Preferred Stock into Common Stock.
12. Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Certificate of Designation
- -----------------
shall be cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designation. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the holder thereof and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of the Series E Convertible
Preferred Stock and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, any holder of the Series E Convertible Preferred Stock
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
13. Specific Shall Not Limit General; Construction. No specific provision
----------------------------------------------
contained in this Certificate of Designation shall limit or modify any more
general provision contained herein.
14. Failure or Indulgence Not Waiver. No failure or delay on the part of
--------------------------------
a holder of Series E Convertible Preferred Stock in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true this 6th day of May, 1999.
SKYLYNX COMMUNICATIONS, INC.
By:
Name: Jeffery A. Mathias
Title: President and CEO
<PAGE>
EXHIBIT I
SKYLYNX COMMUNICATIONS, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series E Convertible Preferred Stock of SkyLynx
Communications, Inc. In accordance with and pursuant to the Certificate of
Designation, the undersigned hereby elects to convert the number of shares of
Series E Convertible Preferred Stock, par value $.01 per share (the "Preferred
Shares"), of SkyLynx Communications, Inc., a Colorado corporation (the
"Company"), indicated below into shares of Common Stock, par value $.001 per
share (the "Common Stock"), of the Company, by tendering the stock
certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.
Date of Conversion:
Number of Preferred Shares to be converted:
Stock certificate no(s). of Preferred Shares to be converted:
The Common Stock have been sold pursuant to the Registration Statement (as
defined in the Registration Rights Agreement): YES ____ NO____
Please confirm the following information:
Conversion Price:
Number of shares of Common Stock
to be issued:
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
Facsimile Number:
Authorization:
By:
Title:
Dated:
Account Number:
(if electronic book entry transfer):
<PAGE>
Transaction Code Number
(if electronic book entry transfer):
PRICES ATTACHED
<PAGE>
Exhibit 4.10
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). NEITHER THIS WARRANT NOR THE SHARES
ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT
FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS.
STOCK PURCHASE WARRANT
To Purchase 120,000 Shares of Common Stock of
SKYLYNX COMMUNICATIONS, INC.
THIS CERTIFIES that, for value received, __________________ (the
"Holder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time on or after the date of issuance of this Warrant (the
"Initial Exercise Date") and on or prior to the close of business on January 31,
2002 (the "Termination Date") but not thereafter, to subscribe for and purchase
from SKYLYNX COMMUNICATIONS, INC., a Colorado corporation (the "Company"), up to
One Hundred Twenty Thousand (120,000) shares (the "Warrant Shares") of Common
Stock, $0.001 par value per share of the Company (the "Common Stock"). The
purchase price of one share of Common Stock (the "Exercise Price") under this
Warrant shall be Three Dollars ($3.00). The Exercise Price and the number of
shares for which the Warrant is exercisable shall be subject to adjustment as
provided herein. This Warrant is being issued in connection with the Convertible
Preferred Stock and Warrant Purchase Agreement between the Holder and the
Company dated as of January 18, 1999 (the "Agreement") and is subject to its
terms and conditions. In the event of any conflict between the terms of this
Warrant and the Agreement, the Agreement shall control. Capitalized terms used
and not otherwise defined herein shall have the meanings set forth for such
terms in the Agreement.
<PAGE>
1. Title of Warrant. Prior to the expiration hereof and subject to
-- ----------------
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
-- -----------------------
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Except as provided in Section 4 herein,
-- -------------------
exercise of the purchase rights represented by this Warrant may be made at any
time or times on or after the Initial Exercise Date, and before the close of
business on the Termination Date, or such earlier date on which this Warrant may
terminate as provided elsewhere in this Warrant, by the surrender of this
Warrant and the Notice of Exercise Form annexed hereto duly executed, at the
office of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company) and upon payment of the
Exercise Price of the shares thereby purchased by wire transfer or cashier's
check drawn on a United States bank, the holder of this Warrant shall be
entitled to receive a certificate for the number of shares of Common Stock so
purchased. Certificates for shares purchased hereunder shall be delivered to the
holder hereof within three (3) business days after the date on which this
Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to
have been exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised by payment to the
Company of the Exercise Price and all taxes required to be paid by Holder, if
any, pursuant to Section 5 prior to the issuance of such shares, have been paid.
If this Warrant shall have been exercised in part, the Company shall, at the
time of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased shares of Common Stock called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.
4. No Fractional Shares or Scrip. No fractional shares or scrip
-- -----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
-- ---------------------------
of
<PAGE>
Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involving the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its shareholder
-- ----------------
books or records in any manner which prevents the timely exercise of this
Warrant.
7. Transfer, Division and Combination. (a) Subject to compliance
-- ----------------------------------
with any applicable securities laws (including the provision to the Company of
an opinion of counsel for the assignor of this Warrant), transfer of this
Warrant and all rights hereunder, in whole or in part, shall be registered on
the books of the Company to be maintained for such purpose, upon surrender of
this Warrant at the principal office of the Company, together with a written
assignment of this Warrant substantially in the form attached hereto duly
executed by Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination specified in such instrument of assignment, and shall issue to the
assignor a new Warrant evidencing the portion of this Warrant not so assigned,
and this Warrant shall promptly be cancelled. A Warrant, if properly assigned,
may be exercised by a new Holder for the purchase of shares of Common Stock
without having a new Warrant issued.
(b) This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d) The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Warrants.
<PAGE>
8. No Rights as Shareholder until Exercise. This Warrant does not
-- ---------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
-- -------------------------------------------------
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
certificate or any stock certificate relating to the Warrant Shares, and in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to it, and upon surrender and cancellation of such Warrant or stock certificate,
if mutilated, the Company will make and deliver a new Warrant or stock
certificate of like tenor and dated as of such cancellation, in lieu of such
Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
--- ---------------------------------
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. Adjustments of Exercise Price and Number of Warrant Shares. (a)
--- ----------------------------------------------------------
Stock Splits, etc. The number and kind of securities purchasable upon the
- ------------------
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following. In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the
kind and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per such Warrant Share or other security
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of Warrant
Shares or other securities of the Company resulting from such adjustment. An
adjustment made pursuant to this paragraph shall become effective immediately
after the effective date of such
<PAGE>
event retroactive to the record date, if any, for such event.
(b) Reorganization, Reclassification, Merger, Consolidation or
--- ----------------------------------------------------------
Disposition of Assets. In case the Company shall reorganize its capital,
- ---------------------
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the holder of this Warrant shall have the right thereafter
to receive, upon exercise of this Warrant, the number of shares of common stock
of the successor or acquiring corporation or of the Company, if it is the
surviving corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 11. For purposes of
this Section 11, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 11 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
12. Voluntary Adjustment by the Company. The Company may at any time
--- -----------------------------------
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
13. Notice of Adjustment. Whenever the number of Warrant Shares or
--- --------------------
<PAGE>
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made. Such notice, in absence of
manifest error, shall be conclusive evidence of the correctness of such
adjustment.
14. Notice of Corporate Action. If at any time:
--- --------------------------
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the record date for such dividend,
distribution or right or for determining rights to vote in respect of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, at least 30 days' prior
written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause also shall specify (i) the date on which
the holders of Common Stock shall be entitled to any such dividend, distribution
or right, and the amount and character thereof, and (ii) the date on which any
such reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up is to take place and the
time, if any such time is to be fixed, as of which the holders of Common Stock
shall be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such disposition, dissolution, liquidation or
winding up. Each such written notice shall be sufficiently given if addressed to
Holder at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 17(d).
15. Authorized Shares. The Company covenants that during the period
--- -----------------
the
<PAGE>
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of NASDAQ or any domestic
securities exchange upon which the Common Stock may be listed.
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
Before taking any action which would cause an adjustment reducing the
current Exercise Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock at
such adjusted Exercise Price.
16. INTENTIONALLY OMITTED.
17. Miscellaneous.
(a) Jurisdiction. This Warrant shall be binding upon any successors or assigns
of the Company. This Warrant shall constitute a contract under the laws of New
York without
<PAGE>
regard to its conflict of law, principles or rules, and be subject to
arbitration pursuant to the terms set forth in the Agreement.
(b) Restrictions. The holder hereof acknowledges that the Warrant Shares
acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws and by the
Agreement.
(c) Nonwaiver and Expenses. No course of dealing or any delay or failure to
exercise any right hereunder on the part of Holder shall operate as a waiver of
such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Termination Date. If the
Company fails to comply with any provision of this Warrant, the Company shall
pay to Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys' fees, including
those of appellate proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.
(d) Notices. Any notice, request or other document required or permitted to be
given or delivered to the holder hereof by the Company shall be delivered in
accordance with the notice provisions of the Agreement.
(e) Limitation of Liability. No provision hereof, in the absence of
affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall give rise
to any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
(f) Remedies. Holder, in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Warrant. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Warrant and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
(g) Successors and Assigns. Subject to applicable securities laws, this Warrant
and the rights and obligations evidenced hereby shall inure to the benefit of
and be binding upon the successors of the Company and the successors and
permitted assigns of Holder. The provisions of this Warrant are intended to be
for the benefit of all Holders from time to time of this Warrant and shall be
enforceable by any such Holder or holder of Warrant Shares.
(h) Cooperation. The Company shall cooperate with Holder in supplying such
information as may be reasonably necessary for Holder to complete and file any
information reporting forms presently or hereafter required by the SEC as a
condition to the availability of an exemption from the Securities Act for the
sale of any Warrant or any Warrant Shares.
<PAGE>
(i) Indemnification. The Company agrees to indemnify and hold harmless Holder
from and against any liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, attorneys' fees, expenses and
disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; provided,
however, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
(j) Amendment. This Warrant may be modified or amended or the provisions
hereof waived only with the written consent of the Company and the Holder.
(k) Severability. Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provisions
or the remaining provisions of this Warrant.
(l) Headings. The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated: January _____, 1999
SKYLYNX COMMUNICATIONS, INC.
By:
Jeffery Mathias,
President
<PAGE>
NOTICE OF EXERCISE
To: SKYLYNX COMMUNICATIONS, INC.
The undersigned hereby elects to purchase ________ shares of Common
Stock (the "Common Stock"), of SKYLYNX COMMUNICATIONS, INC. pursuant to the
terms of the attached Warrant, and tenders herewith payment of the exercise
price in full, together with all applicable transfer taxes, if any.
Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
_______________________________
(Name)
_______________________________
(Address)
_______________________________
Dated:
______________________________
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_____________________________________________________________________.
_____________________________________________________________________
Dated: ______________, _______
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
<PAGE>
Exhibit 4.11
WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED
- ---------------
OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR SKYLYNX COMMUNICATIONS, INC. SHALL HAVE
RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER
THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
SkyLynx Communications, Inc.
Expires the later of April 16, 2000
and a date six (6) months following
an Offering (as defined below)
No.: W-___ Number of Shares: ______
Date of Issuance: ________, 1999
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, SkyLynx Communications, Inc., a Colorado corporation (together with
its successors and assigns, the "Issuer"), hereby certifies that
------
_________________ or its registered assigns is entitled to subscribe for and
purchase, during the period specified in this Warrant, up to _______ shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise
price per share equal to the Warrant Price then in effect, subject, however, to
the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall
have the respective meanings specified in Section 7 hereof.
1. Term. The right to subscribe for and purchase shares of Warrant Stock
----
represented hereby shall commence on the date of issuance of this Warrant and
shall expire at the
<PAGE>
later of (i) 5:00 p.m., New York Time, on April 16, 2000 and (ii) a date six (6)
months following an underwritten public offering (an "Offering")of any security
--------
of the Issuer (such period referred to herein as the "Term").
----
2. Method of Exercise Payment: Issuance of New Warrant: Transfer and
-----------------------------------------------------------------
Exchange.
- --------
(a) Time of Exercise. The purchase rights represented by this Warrant may
----------------
be exercised in whole or in part at any time and from time to time during the
Term.
(b) Method of Exercise. The Holder hereof may exercise this Warrant, in
------------------
whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal office of the Issuer, and by the
payment to the Issuer of an amount of consideration therefor equal to the
Warrant Price in effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at such Holder's election (i) in cash by certified or
official bank check, (ii) at any time on or after the Original Issue Date
through the date on or before the date the registration statement filed in
accordance with the Registration Rights Agreement has been declared effective by
the Securities and Exchange Commission by surrender to the Issuer for
cancellation of a portion of this Warrant representing that number of unissued
shares of Warrant Stock which is equal to the quotient obtained by dividing (A)
the product obtained by multiplying the Warrant Price by the number of shares of
Warrant Stock being purchased upon such exercise by (B) the difference obtained
by subtracting the Warrant Price from the Per Share Market Value as of the date
of such exercise, or (iii) by a combination of the foregoing methods of payment
selected by the Holder of this Warrant. In any case where the consideration
payable upon such exercise is being paid in whole or in part pursuant to the
provisions of clause (ii) of this subsection (b), such exercise shall be
accompanied by written notice from the Holder of this Warrant specifying the
manner of payment thereof and containing a calculation showing the number of
shares of Warrant Stock with respect to which rights are being surrendered
thereunder and the net number of shares to be issued after giving effect to such
surrender.
(c) Issuance of Stock Certificates. In the event of any exercise of the
------------------------------
rights represented by this Warrant in accordance with and subject to the terms
and conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant representing
the number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have been exercised (less any amount thereof which shall
have been canceled in payment or partial payment of the Warrant Price as
hereinabove provided) shall also be issued to the Holder hereof at the Issuer's
expense within such time.
(d) Transferability of Warrant. Subject to the provisions of subsection
--------------------------
(e) of this
<PAGE>
Section 2, this Warrant may be transferred by a Purchaser without the consent of
the Company. If transferred pursuant to this paragraph and subject to the
provisions of subsection (e) of this Section 2, this Warrant may be transferred
on the books of the Issuer by the Holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant at the principal office of the Issuer,
properly endorsed (by the Holder executing an assignment in the form attached
hereto) and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer. This Warrant is exchangeable at the principal
office of the Issuer for Warrants for the purchase of the same aggregate number
of shares of Warrant Stock, each new Warrant to represent the right to purchase
such number of shares of Warrant Stock as the Holder hereof shall designate at
the time of such exchange. All Warrants issued on transfers or exchanges shall
be dated the Original Issue Date and shall be identical with this Warrant except
as to the number of shares of Warrant Stock issuable pursuant hereto.
(e) Compliance with Securities Laws.
--------------------------------
(i) The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant and the shares of Warrant Stock to be issued upon
exercise hereof are being acquired solely for the Holder's own account and
not as a nominee for any other party, and for investment, and that the
Holder will not offer, sell or otherwise dispose of this Warrant or any
shares of Warrant Stock to be issued upon exercise hereof except pursuant
to an effective registration statement, or an exemption from registration,
under the Securities Act and any applicable state securities laws.
(ii) Except as provided in paragraph (iii) below, this Warrant and
all certificates representing shares of Warrant Stock issued upon exercise
hereof shall be stamped or imprinted with a legend in substantially the
following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE
SECURITIES LAWS OR SKYLYNX COMMUNICATIONS, INC. SHALL HAVE RECEIVED AN
OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED.
(iii) The restrictions imposed by this subsection (e) upon the
transfer of this Warrant and the shares of Warrant Stock to be purchased
upon exercise hereof shall terminate (A) when such securities shall have
been effectively registered under the Securities Act, (B) upon the Issuer's
receipt of an opinion of counsel, in form and substance reasonably
satisfactory to the Issuer, addressed to the Issuer to the effect that
<PAGE>
such restrictions are no longer required to ensure compliance with the
Securities Act or (C) upon the Issuer's receipt of other evidence
reasonably satisfactory to the Issuer that such registration is not
required. Whenever such restrictions shall cease and terminate as to any
such securities, the Holder thereof shall be entitled to receive from the
Issuer (or its transfer agent and registrar), without expense (other than
applicable transfer taxes, if any), new Warrants (or, in the case of shares
of Warrant Stock, new stock certificates) of like tenor not bearing the
applicable legends required by paragraph (ii) above relating to the
Securities Act and state securities laws.
(f) Continuing Rights of Holder. The Issuer will, at the time of or at any
---------------------------
time after each exercise of this Warrant, upon the request of the Holder hereof
or of any shares of Warrant Stock issued upon such exercise, acknowledge in
writing the extent, if any, of its continuing obligation to afford to such
Holder all rights to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant, provided that if any such
--------
Holder shall fail to make any such request, the failure shall not affect the
continuing obligation of the Issuer to afford such rights to such Holder.
3. Stock Fully Paid: Reservation and Listing of Shares: Covenants.
---------------------------------------------------------------
(a) Stock Fully Paid. The Issuer represents, warrants, covenants and
----------------
agrees that all shares of Warrant Stock which may be issued upon the exercise of
this Warrant or otherwise hereunder will, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable and free from all taxes, liens and
charges created by or through Issuer. The Issuer further covenants and agrees
that during the period within which this Warrant may be exercised, the Issuer
will at all times have authorized and reserved for the purpose of the issue upon
exercise of this Warrant a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(b) Reservation. If any shares of Common Stock required to be reserved for
-----------
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon the exercise of this Warrant
if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
(c) Covenants. The Issuer shall not by any action including, without
---------
limitation, amending the Articles of Incorporation or the by-laws of the Issuer,
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or
<PAGE>
any other action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of the Holder hereof against
dilution (to the extent specifically provided herein) or impairment. Without
limiting the generality of the foregoing, the Issuer will (i) not permit the par
value, if any, of its Common Stock to exceed the then effective Warrant Price,
(ii) not amend or modify any provision of the Articles of Incorporation or by-
laws of the Issuer in any manner that would adversely affect in any way the
powers, preferences or relative participating, optional or other special rights
of the Common Stock or which would adversely affect the rights of the Holders of
the Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant,
and (iv) use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
reasonably necessary to enable the Issuer to perform its obligations under this
Warrant.
(d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
------------------------------------
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(e) Rights and Obligations under the Registration Rights Agreement. The
--------------------------------------------------------------
shares of Warrant Stock are entitled to the benefits and subject to the terms of
the Registration Rights Agreement dated as of even date herewith between the
Issuer and the Holders listed on the signature pages thereof (as amended from
time to time, the "Registration Rights Agreement"). The Issuer shall keep or
-----------------------------
cause to be kept a copy of the Registration Rights Agreement, and any amendments
thereto, at its chief executive office and shall furnish, without charge, copies
thereof to the Holder upon request.
4. Adjustment of Warrant Price and Warrant Share Number. The number and
----------------------------------------------------
kind of Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
------------------------------------------------------------------
Merger or Sale. (i) In case the Issuer after the Original Issue Date shall do
- --------------
any of the following (each, a "Triggering Event"): (a) consolidate with or merge
----------------
into any other Person and the Issuer shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) permit any other Person to
consolidate with or merge into the Issuer and the Issuer shall be the continuing
or surviving Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged for Securities of
any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect
a capital reorganization or reclassification of its Capital Stock, then, and in
the case of each such Triggering Event, proper provision shall be made so that,
upon the basis and the terms
<PAGE>
and in the manner provided in this Warrant, the Holder of this Warrant shall be
entitled (x) upon the exercise hereof at any time after the consummation of such
Triggering Event, to the extent this Warrant is not exercised prior to such
Triggering Event, or is redeemed in connection with such Triggering Event, to
receive at the Warrant Price in effect at the time immediately prior to the
consummation of such Triggering Event in lieu of the Common Stock issuable upon
such exercise of this Warrant prior to such Triggering Event, the Securities,
cash and property to which such Holder would have been entitled upon the
consummation of such Triggering Event if such Holder had exercised the rights
represented by this Warrant immediately prior thereto, subject to adjustments
and increases (subsequent to such corporate action) as nearly equivalent as
possible to the adjustments provided for in Section 4 hereof or (y) to sell this
Warrant (or, at such Holder's election, a portion hereof) to the Person
continuing after or surviving such Triggering Event, or to the Issuer (if Issuer
is the continuing or surviving Person) at a sales price equal to the amount of
cash, property and/or Securities to which a holder of the number of shares of
Common Stock which would otherwise have been delivered upon the exercise of this
Warrant would have been entitled upon the effective date or closing of any such
Triggering Event (the "Event Consideration"), less the amount or portion of such
----- -------------
Event Consideration having a fair value equal to the aggregate Warrant Price
applicable to this Warrant or the portion hereof so sold.
(ii) Notwithstanding anything contained in this Warrant to the contrary,
the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer
under this Warrant (and if the Issuer shall survive the consummation of such
Triggering Event, such assumption shall be in addition to, and shall not release
the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to such Holder such shares of Securities, cash
or property as, in accordance with the foregoing provisions of this subsection
(a), such Holder shall be entitled to receive, and such Person shall have
similarly delivered to such Holder an opinion of counsel for such Person, which
counsel shall be reasonably satisfactory to such Holder, stating that this
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of this subsection (a))
shall be applicable to the Securities, cash or property which such Person may be
required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
(iii) If with respect to any Triggering Event, the Holder of this Warrant
has exercised its right as provided in clause (y) of subparagraph (i) of this
subsection (a) to sell this Warrant or a portion thereof, the Issuer agrees that
as a condition to the consummation of any such Triggering Event the Issuer shall
secure such right of Holder to sell this Warrant to the Person continuing after
or surviving such Triggering Event and the Issuer shall not effect any such
Triggering Event unless upon or prior to the consummation thereof the amounts of
cash, property and/or Securities required under such clause (y) are delivered to
the Holder of this Warrant. The obligation of the Issuer to secure such right of
the Holder to sell this Warrant shall be subject to such Holder's cooperation
with the Issuer, including, without limitation, the giving of customary
representations and warranties to the purchaser in connection with any such
sale. Prior notice of any Triggering Event shall be given to the Holder of this
Warrant in accordance with Section 11
<PAGE>
hereof.
(b) Subdivision or Combination of Shares. If the Issuer, at any time while
------------------------------------
this Warrant is outstanding, shall subdivide or combine any shares of Common
Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of Holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of Holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(c) Certain Dividends and Distributions. If the Issuer, at any time while
-----------------------------------
this Warrant is outstanding, shall:
(i) Stock Dividends. Pay a dividend in, or make any other
---------------
distribution to its stockholders (without consideration therefor) of,
shares of Common Stock, the Warrant Price shall be adjusted, as at the date
the Issuer shall take a record of the Holders of the Issuer's Capital Stock
for the purpose of receiving such dividend or other distribution (or if no
such record is taken, as at the date of such payment or other
distribution), to that price determined by multiplying the Warrant Price in
effect immediately prior to such record date (or if no such record is
taken, then immediately prior to such payment or other distribution), by a
fraction (1) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or
distribution, and (2) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution (plus in the event that the Issuer paid cash for fractional
shares, the number of additional shares which would have been outstanding
had the Issuer issued fractional shares in connection with said dividends);
or
(ii) Other Dividends. Pay a dividend on, or make any distribution of
---------------
its assets upon or with respect to (including, but not limited to, a
distribution of its property as a dividend in liquidation or partial
liquidation or by way of return of capital), the Common Stock (other than
as described in clause (i) of this subsection (c)), or in the event that
the Company shall offer options or rights to subscribe for shares of Common
Stock, or issue any Common Stock Equivalents, to all of its holders of
Common Stock, then on the record date for such payment, distribution or
offer or, in the absence of a record date, on the date of such payment,
distribution or offer, the Holder shall receive what the Holder would have
received had it exercised this Warrant in full immediately prior to the
record date of such payment, distribution or offer or, in the absence of a
record date, immediately prior to the date of such payment, distribution or
offer.
(d) Issuance of Additional Shares of Common Stock. If the Issuer, at any
---------------------------------------------
time while this Warrant is outstanding, shall issue any Additional Shares of
Common Stock (otherwise than
<PAGE>
as provided in the foregoing subsections (a) through (c) of this Section 4), at
a price per share less than the Warrant Price then in effect or less than the
Per Share Market Value then in effect or without consideration, then the Warrant
Price upon each such issuance shall be adjusted to that price (rounded to the
nearest cent) determined by multiplying the Warrant Price then in effect by a
fraction:
(i) the numerator of which shall be equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus (B) the number of
----
shares of Common Stock (rounded to the nearest whole share) which the
aggregate consideration for the total number of such Additional Shares of
Common Stock so issued would purchase at a price per share equal to the
greater of the Per Share Market Value then in effect and the Warrant Price
then in effect, and
(ii) the denominator of which shall be equal to the number of shares
of Common Stock outstanding immediately after the issuance of such
Additional Shares of Common Stock.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or (c)
of this Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) upon the issuance of any Additional Shares of Common Stock which
are issued pursuant to any Common Stock Equivalent if upon the issuance of such
Common Stock Equivalent (x) any adjustment shall have been made pursuant to
subsection (e) of this Section 4 or (Y) no adjustment was required pursuant to
subsection (e) of this Section 4. No adjustment of the Warrant Price shall be
made under this subsection (d) in an amount less than $.01 per share, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment, if any, which together with
any adjustments so carried forward shall amount to $.01 per share or more,
provided that upon any adjustment of the Warrant Price as a result of any
dividend or distribution payable in Common Stock or Convertible Securities or
the reclassification, subdivision or combination of Common Stock into a greater
or smaller number of shares, the foregoing figure of $.01 per share (or such
figure as last adjusted) shall be adjusted (to the nearest one-half cent) in
proportion to the adjustment in the Warrant Price.
(e) Issuance of Common Stock Equivalents. If the Issuer, at any time while
------------------------------------
this Warrant is outstanding, shall issue any Common Stock Equivalent and the
price per share for which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent shall be less than the
Warrant Price then in effect or less than the Per Share Market Value then in
effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable thereafter
is amended or adjusted, and such price as so amended shall be less than the
Warrant Price or less than the Per Share Market Value in effect at the time of
such amendment, then the Warrant Price upon each such issuance or amendment
shall be adjusted as provided in the first sentence of subsection (d) of this
Section 4 on the basis that (1) the maximum number of Additional Shares of
Common Stock issuable pursuant to all such Common Stock Equivalents shall be
deemed to have been issued (whether or not such Common Stock Equivalents are
actually then exercisable,
<PAGE>
convertible or exchangeable in whole or in part) as of the earlier of (A) the
date on which the Issuer shall enter into a firm contract for the issuance of
such Common Stock Equivalent, or (B) the date of actual issuance of such Common
Stock Equivalent, and (2) the aggregate consideration for such maximum number of
Additional Shares of Common Stock shall be deemed to be the minimum
consideration received or receivable by the Issuer for the issuance of such
Additional Shares of Common Stock pursuant to such Common Stock Equivalent. No
adjustment of the Warrant Price shall be made under this subsection (e) upon the
issuance of any Convertible Security which is issued pursuant to the exercise of
any warrants or other subscription or purchase rights therefor, if any
adjustment shall previously have been made in the Warrant Price then in effect
upon the issuance of such warrants or other rights pursuant to this subsection
(e). If no adjustment is required under this subsection (e) upon issuance of any
Common Stock Equivalent or once an adjustment is made under this subsection (e)
based upon the Per Share Market Value in effect on the date of such adjustment,
no further adjustment shall be made under this subsection (e) based solely upon
a change in the Per Share Market Value after such date.
(f) Purchase of Common Stock by the Issuer. If the Issuer at any time
--------------------------------------
while this Warrant is outstanding shall, directly or indirectly through a
Subsidiary or otherwise, purchase, redeem or otherwise acquire any shares of
Common Stock at a price per share greater than the Per Share Market Value then
in effect, then the Warrant Price upon each such purchase, redemption or
acquisition shall be adjusted to that price determined by multiplying such
Warrant Price by a fraction (i) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such purchase,
redemption or acquisition minus the number of shares of Common Stock which the
aggregate consideration for the total number of such shares of Common Stock so
purchased, redeemed or acquired would purchase at the Per Share Market Value;
and (ii) the denominator of which shall be the number of shares of Common Stock
outstanding immediately after such purchase, redemption or acquisition. For the
purposes of this subsection (f), the date as of which the Per Share Market Value
shall be computed shall be the earlier of (x) the date on which the Issuer shall
enter into a firm contract for the purchase, redemption or acquisition of such
Common Stock, or (y) the date of actual purchase, redemption or acquisition of
such Common Stock. For the purposes of this subsection (f), a purchase,
redemption or acquisition of a Common Stock Equivalent shall be deemed to be a
purchase of the underlying Common Stock, and the computation herein required
shall be made on the basis of the full exercise, conversion or exchange of such
Common Stock Equivalent on the date as of which such computation is required
hereby to be made, whether or not such Common Stock Equivalent is actually
exercisable, convertible or exchangeable on such date.
(g) Other Provisions Applicable to Adjustments Under this Section 4. The
---------------------------------------------------------------
following provisions shall be applicable to the making of adjustments in the
Warrant Price hereinbefore provided in Section 4:
(i) Computation of Consideration. The consideration received by the
----------------------------
Issuer shall be deemed to be the following: to the extent that any
Additional Shares of Common Stock or any Common Stock Equivalents shall be
issued for a cash consideration, the consideration received by the Issuer
therefor, or if such Additional Shares of Common Stock or Common Stock
Equivalents are offered by the Issuer for subscription, the
<PAGE>
subscription price, or, if such Additional Shares of Common Stock or Common
Stock Equivalents are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price, in any such
case excluding any amounts paid or receivable for accrued interest or
accrued dividends and without deduction of any compensation, discounts,
commissions, or expenses paid or incurred by the Issuer for or in
connection with the underwriting thereof or otherwise in connection with
the issue thereof; to the extent that such issuance shall be for a
consideration other than cash, then, except as herein otherwise expressly
provided, the fair market value of such consideration at the, time of such
issuance as determined in good faith by the Board. The consideration for
any Additional Shares of Common Stock issuable pursuant to any Common Stock
Equivalents shall be the consideration received by the Issuer for issuing
such Common Stock Equivalents, plus the additional consideration payable to
the Issuer upon the exercise, conversion or exchange of such Common Stock
Equivalents. In case of the issuance at any time of any Additional Shares
of Common Stock or Common Stock Equivalents in payment or satisfaction of
any dividend upon any class of Capital Stock of the Issuer other than
Common Stock, the Issuer shall be deemed to have received for such
Additional Shares of Common Stock or Common Stock Equivalents a
consideration equal to the amount of such dividend so paid or satisfied. In
any case in which the consideration to be received or paid shall be other
than cash, the Board shall notify the Holder of this Warrant of its
determination of the fair market value of such consideration prior to
payment or accepting receipt thereof. If, within thirty days after receipt
of said notice, the Majority Holders shall notify the Board in writing of
their objection to such determination, a determination of the fair market
value of such consideration shall be made by an Independent Appraiser
selected by the Majority Holders with the approval of the Board (which
approval shall not be unreasonably withheld), whose fees and expenses shall
be paid by the Issuer.
(ii) Readjustment of Warrant Price. Upon the expiration or
-----------------------------
termination of the right to convert, exchange or exercise any Common Stock
Equivalent the issuance of which effected an adjustment in the Warrant
Price, if such Common Stock Equivalent shall not have been converted,
exercised or exchanged in its entirety, the number of shares of Common
Stock deemed to be issued and outstanding by reason of the fact that they
were issuable upon conversion, exchange or exercise of any such Common
Stock Equivalent shall no longer be computed as set forth above, and the
Warrant Price shall forthwith be readjusted and thereafter be the price
which it would have been (but reflecting any other adjustments in the
Warrant Price made pursuant to the provisions of this Section 4 after the
issuance of such Common Stock Equivalent) had the adjustment of the Warrant
Price been made in accordance with the issuance or sale of the number of
Additional Shares of Common Stock actually issued upon conversion, exchange
or issuance of such Common Stock Equivalent and thereupon only the number
of Additional Shares of Common Stock actually so issued shall be deemed to
have been issued and only the consideration actually received by the Issuer
(computed as in clause (i) of this subsection (g)) shall be deemed to have
been received by the Issuer.
(iii) Outstanding Common Stock. The number of shares of Common
------------------------
Stock at any time outstanding shall (A) not include any shares thereof then
directly or indirectly
<PAGE>
owned or held by or for the account of the Issuer or any of its
Subsidiaries, and (B) be deemed to include all shares of Common Stock then
issuable upon conversion, exercise or exchange of any then outstanding
Common Stock Equivalents or any other evidences of Indebtedness, shares of
Capital Stock (including, without limitation, the Preferred Stock) or other
Securities which are or may be at any time convertible into or exchangeable
for shares of Common Stock or Other Common Stock.
(h) Other Action Affecting Common Stock. In case after the Original Issue
-----------------------------------
Date the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections (a) through (g) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(i) Adjustment of Warrant Share Number. Upon each adjustment in the
----------------------------------
Warrant Price pursuant to any of the foregoing provisions of this Section 4, the
Warrant Share Number shall be adjusted, to the nearest one hundredth of a whole
share, to the product obtained by multiplying the Warrant Share Number
immediately prior to such adjustment in the Warrant Price by a fraction, the
numerator of which shall be the Warrant Price immediately before giving effect
to such adjustment and the denominator of which shall be the Warrant Price
immediately after giving effect to such adjustment. If the Issuer shall be in
default under any provision contained in Section 3 of this Warrant so that
shares issued at the Warrant Price adjusted in accordance with this Section 4
would not be validly issued, the adjustment of the Warrant Share Number provided
for in the foregoing sentence shall nonetheless be made and the Holder of this
Warrant shall be entitled to purchase such greater number of shares at the
lowest price at which such shares may then be validly issued under applicable
law. Such exercise shall not constitute a waiver of any claim arising against
the Issuer by reason of its default under Section 3 of this Warrant.
(j) Form of Warrant after Adjustments. The form of this Warrant need not
---------------------------------
be changed because of any adjustments in the Warrant Price or the number and
kind of Securities purchasable upon the exercise of this Warrant.
5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share
---------------------
Number shall be adjusted pursuant to Section 4 hereof (for purposes of this
Section 5, each an "adjustment"), the Issuer shall cause its Chief Financial
Officer to prepare and execute a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant
Price and Warrant Share Number after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the Holder of this Warrant
promptly after each adjustment. Any dispute between the Issuer and the Holder of
this Warrant with respect to the matters set forth in such certificate may at
the option of the Holder of this Warrant be submitted to one of the national
accounting firms currently known as the "big five" mutually agreed upon by the
Issuer and the Holder or, in the event the Issuer and the Holder are unable to
agree, a "big five" national
<PAGE>
accounting firm (other than the Issuer's independent auditors) selected by the
Issuer's independent auditors. The firm selected in the manner as provided in
the preceding sentence shall be instructed to deliver a written opinion as to
such matters to the Issuer and such Holder within thirty days after submission
to it of such dispute. Such opinion shall be final and binding on the parties
hereto. The fees and expenses of such accounting firm shall be paid by the
Issuer.
6. Fractional Shares. No fractional shares of Warrant Stock will be
-----------------
issued in connection with and exercise hereof, but in lieu of such fractional
shares, the Issuer shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Per Share Market Value then
in effect.
7. Definitions. For the purposes of this Warrant, the following terms
-----------
have the following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock
---------------------------------
issued by the Issuer after the Original Issue Date, and all shares of Other
Common, if any, issued by the Issuer after the Original Issue Date, except
the Warrant Stock and the Preferred Shares.
"Articles of Incorporation" means the Articles of Incorporation of the
-------------------------
Issuer as in effect on the Original Issue Date, and as hereafter from time
to time amended, modified, supplemented or restated in accordance with the
terms hereof and thereof and pursuant to applicable law.
"Board" shall mean the Board of Directors of the Issuer.
-----
"Capital Stock" means and includes (i) any and all shares, interests,
-------------
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (ii) all partnership interests (whether general or
limited) in any Person which is a partnership, (iii) all membership
interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any
other type.
"Common Stock" means the Common Stock, $0.001 par value, of the Issuer
------------
and any other Capital Stock into which such stock may hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or warrant,
-----------------------
option or other right to subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Security.
"Convertible Securities" means evidences of Indebtedness, shares of
----------------------
Capital Stock or other Securities which are or may be at any time
convertible into or exchangeable for Additional Shares of Common Stock.
The term "Convertible Security" means one of the Convertible Securities.
"Five Day Average Share Price" means the average of the five (5)
----------------------------
closing bid
<PAGE>
prices of the Issuer's shares of Common Stock (as reported by Bloomberg
Financial Markets) in the over-the-market on the electronic bulletin board
(the "OTC Bulletin Board") for such security (or on su ch other United
------------------
States stock exchange or public trading market on which the shares of the
Company trade if, at the time of the conversion, they are not trading on
the OTC Bulletin Board), preceding the date of determination.
"Governmental Authority" means any governmental, regulatory or self-
----------------------
regulatory entity, department, body, official, authority, commission,
board, agency or instrumentality, whether federal, state or local, and
whether domestic or foreign.
"Holder" or "Holders" mean the Person or Persons who shall from time
------ -------
to time own any Warrant.
"Independent Appraiser" means a nationally recognized or major
---------------------
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Issuer) that is regularly engaged
in the business of appraising the Capital Stock or assets of corporations
or other entities as going concerns, and which is not affiliated with
either the Issuer or the Holder of any Warrant.
"Issuer" means SkyLynx Communications, Inc., a Colorado corporation,
------
and its successors.
"Majority Holders" means at any time the Holders of Warrants
----------------
exercisable for a majority of the shares of Warrant Stock issuable under
the Warrants at the time outstanding.
"Original Issue Date" means April __, 1999.
-------------------
"Other Common" means any other Capital Stock of the Issuer of any
------------
class which shall be authorized at any time after the date of this Warrant
(other than Common Stock) and which shall have the right to participate in
the distribution of earnings and assets of the Issuer without limitation as
to amount.
"OTC Bulletin Board" means the over-the-counter electronic bulletin
------------------
board.
"Person" means an individual, corporation, limited liability company,
------
partnership, joint stock company, trust, unincorporated organization, joint
venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the Five Day
----------------------
Average Share Price on such date on the OTC Bulletin Board or other
registered national stock exchange on which the Common Stock is then listed
or if there is no such price on such date, then the Five Day Average Share
Price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the OTC
Bulletin Board or any registered national stock exchange, the Five Day
Average
<PAGE>
Share Price in the over-the-counter market, as reported by the OTC Bulletin
Board or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at
the close of business on such date, or (c) if the Common Stock is not then
reported by the OTC Bulletin Board or the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions
of reporting prices), then the average of the "Pink Sheet" quotes for the
relevant conversion period, as determined in good faith by the holder, or
(d) if the Common Stock is not then publicly traded the fair market value
of a share of Common Stock as determined by an Independent Appraiser
selected in good faith by the Majority Holders; provided, however, that the
-------- -------
Issuer, after receipt of the determination by such Independent Appraiser,
shall have the right to select an additional Independent Appraiser, in
which case, the fair market value shall be equal to the average of the
determinations by each such Independent Appraiser; and provided, further
-------- -------
that all determinations of the Per Share Market Value shall be
appropriately adjusted for any stock dividends, stock splits or other
similar transactions during such period. The determination of fair market
value by an Independent Appraiser shall be based upon the fair market value
of the Issuer determined on a going concern basis as between a willing
buyer and a willing seller and taking into account all relevant factors
determinative of value, and shall be final and binding on all parties. In
determining the fair market value of any shares of Common Stock, no
consideration shall be given to any restrictions on transfer of the Common
Stock imposed by agreement or by federal or state securities laws, or to
the existence or absence of, or any limitations on, voting rights.
"Preferred Shares" means Common Stock issuable upon the conversion of
----------------
any Preferred Stock.
"Preferred Stock" means the Series D Preferred Stock issued and sold
---------------
pursuant to the Purchase Agreement.
"Purchase Agreement" means the Series D Convertible Preferred Stock
------------------
Purchase Agreement dated as of April __, 1999 among the Issuer and the
investors a party thereto.
"Registration Rights Agreement" has the meaning specified in Section
-----------------------------
3(e) hereof.
"Securities" means any debt or equity securities of the Issuer,
----------
whether now or hereafter authorized, any instrument convertible into or
exchangeable for Securities or a Security, and any option, warrant or other
right to purchase or acquire any Security. "Security" means one of the
Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding
----------
Voting Stock shall at the time be owned directly or indirectly by the
Issuer or by one or more of its Subsidiaries, or by the Issuer and one or
more of its Subsidiaries.
<PAGE>
"Term" has the meaning specified in Section 1 hereof.
----
"Trading Day" means (a) a day on which the Common Stock is traded on
-----------
the over the counter market as reported by the OTC Bulletin Board, or (b)
if the Common Stock is not listed on the OTC Bulletin Board, a day on which
the Common Stock is traded on any other registered national stock exchange,
or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day
on which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices);
provided, however, that in the event that the Common Stock is not listed or
-------- -------
quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean
any day except Saturday, Sunday and any day which shall be a legal holiday
or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Voting Stock", as applied to the Capital Stock of any corporation,
------------
means Capital Stock of any class or classes (however designated) having
ordinary voting power for the election of a majority of the members of the
Board of Directors (or other governing body) of such corporation, other
than Capital Stock having such power only by reason of the happening of a
contingency.
"Warrants" means the Warrants issued and sold pursuant to the Purchase
--------
Agreement, including, without limitation, this Warrant, and any other
warrants of like tenor issued in substitution or exchange for any thereof
pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any
of such other Warrants.
"Warrant Price" means $8.17, as such price may be adjusted from time
-------------
to time as shall result from the adjustments specified in Section 4 hereof.
"Warrant Share Number" means at any time the aggregate number of
--------------------
shares of Warrant Stock which may at such time be purchased upon exercise
of this Warrant, after giving effect to all prior adjustments and increases
to such number made or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any
-------------
Warrant or Warrants or otherwise issuable pursuant to any Warrant or
Warrants.
8. Other Notices. In case at any time:
-------------
(A) the Issuer shall make any distributions to the holders of Common
Stock; or
(B) the Issuer shall authorize the granting to all holders of its
Common Stock of rights to subscribe for or purchase any shares of
Capital Stock of any class or of any Common Stock Equivalents or
Convertible Securities or other rights; or
<PAGE>
(C) there shall be any reclassification of the Capital Stock of the
Issuer; or
(D) there shall be any capital reorganization by the Issuer; or
(E) there shall be any (i) consolidation or merger involving the
Issuer or (ii) sale, transfer or other disposition of all or
substantially all of the Issuer's property, assets or business
(except a merger or other reorganization in which the Issuer
shall be the surviving corporation and its shares of Capital
Stock shall continue to be outstanding and unchanged and except a
consolidation, merger, sale, transfer or other disposition
involving a wholly-owned Subsidiary); or
(F) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Issuer or any partial
liquidation of the Issuer or distribution to holders of Common
Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
days prior to the action in question and not less than twenty days prior to the
record date or the date on which the Issuer's transfer books are closed in
respect thereto. The Issuer shall give to the Holder notice of all meetings and
actions by written consent of its stockholders, at the same time in the same
manner as notice of any meetings of stockholders is required to be given to
stockholders who do not waive such notice (or, if such requires no notice, then
two Trading Days written notice thereof describing the matters upon which action
is to be taken). The Holder shall have the right to send two representatives
selected by it to each meeting, who shall be permitted to attend, but not vote
at, such meeting and any adjournments thereof. This Warrant entitles the Holder
to receive copies of all financial and other information distributed or required
to be distributed to the holders of the Common Stock.
9. Amendment and Waiver. Any term, covenant, agreement or condition in
--------------------
this Warrant may be amended, or compliance therewith may be waived (either
generally or in a particular instance and either retroactively or
prospectively), by a written instrument or written instruments executed by the
Issuer and the Majority Holders; provided, however, that no such amendment or
-------- -------
waiver shall reduce the Warrant Share Number, increase the Warrant Price,
shorten the period during which this Warrant may be exercised or modify any
provision of this Section 9 without the consent of the Holder of this Warrant.
10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
<PAGE>
YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
11. Notices. Any and all notices or other communications or deliveries
-------
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., New York Time, on a
Business Day, (ii) the Business Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., New York Time, on any date and
earlier than 11:59 p.m., New York Time, on such date, (iii) the Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service or (iv) actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be with
respect to the Holder of this Warrant or of Warrant Stock issued pursuant
hereto, addressed to such Holder at its last known address or facsimile number
appearing on the books of the Issuer maintained for such purposes, or with
respect to the Issuer, addressed to:
SkyLynx Communications, Inc.
600 South Cherry Street
Suite 305
Denver, CO 80246
Attention: Jeffery A. Mathias, President and CEO
Facsimile No.: (303) 316-0404
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Issuer shall be sent to Kelley Drye &
Warren LLP, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut
06901-3229, Attention: M. Ridgway Barker, Esq., Facsimile no.: (203) 324-1400.
Copies of notices to the Holder shall be sent to the address or addresses
specified for such Holder on Exhibit A to the Purchase Agreement.
12. Warrant Agent. The Issuer may, by written notice to each Holder of
-------------
this Warrant, appoint an agent having an office in New York, New York for the
purpose of issuing shares of Warrant Stock on the exercise of this Warrant
pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant pursuant
to subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. Remedies. The Issuer stipulates that the remedies at law of the
--------
Holder of this Warrant in the event of any default or threatened default by the
Issuer in the performance of or compliance with any of the terms of this Warrant
are not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
14. Successors and Assigns. This Warrant and the rights evidenced hereby
----------------------
shall inure
<PAGE>
to the benefit of and be binding upon the successors and assigns of the Issuer,
the Holder hereof and (to the extent provided herein) the Holders of Warrant
Stock issued pursuant hereto, and shall be enforceable by any such Holder or
Holder of Warrant Stock
15. Modification and Severability. If, in any action before any court or
-----------------------------
agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
16. Headings. The headings of the Sections of this Warrant are for
--------
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and
year first above written.
SKYLYNX COMMUNICATIONS, INC.
By:__________________________
Name:
Title:
<PAGE>
EXERCISE FORM
SKYLYNX COMMUNICATIONS, INC.
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of
___________________ covered by the within Warrant.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
<PAGE>
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-_____ cancelled (or transferred or exchanged) this _____ day
of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of _______________.
<PAGE>
EXHIBIT 4.12
WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED
- ---------------
OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR SKYLYNX COMMUNICATIONS, INC. SHALL HAVE
RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
SkyLynx Communications, Inc.
Subject to Section 1 hereof, expires the later of May __, 2000
and a date six (6) months following
an Offering (as defined below)
No.: W-___ Number of Shares: ______
Date of Issuance: ________, 1999
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, SkyLynx Communications, Inc., a Colorado corporation (together with
its successors and assigns, the "Issuer"), hereby certifies that
------
_________________ or its registered assigns is entitled to subscribe for and
purchase, during the period specified in this Warrant, up to _______ shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise
price per share equal to the Warrant Price then in effect, subject, however, to
the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall
have the respective meanings specified in Section 7 hereof.
1. Term. The right to subscribe for and purchase shares of Warrant Stock
----
represented hereby shall commence on the date of issuance of this Warrant and
shall expire at the later of (i) 5:00 p.m., New York Time, on May __, 2000, (ii)
a date six (6) months following an underwritten public offering (an "Offering")
--------
of the Common Stock (the "Initial Term") provided,
<PAGE>
that, if at the date of the expiration of the Initial Term, (a) the Warrant
Stock shall not be listed on the OTC Bulletin Board, the Nasdaq SmallCap Market,
the Nasdaq National Market, The New York Stock Exchange, Inc. or The American
Stock Exchange, Inc., (b) the Warrant Stock shall not be freely tradeable
pursuant to an effective registration statement or otherwise or (c) the Company
shall not have sufficient shares of Warrant Stock issuable upon a full exercise
of this Warrant, then the Initial Term shall be extended until such date on
which none of the foregoing events shall exist (the Initial Term, as such may be
extended, being hereinafter called the "Term").
2. Method of Exercise Payment: Issuance of New Warrant: Transfer and
-----------------------------------------------------------------
Exchange.
- --------
(a) Time of Exercise. The purchase rights represented by this Warrant may
----------------
be exercised in whole or in part at any time and from time to time during the
Term.
(b) Method of Exercise. The Holder hereof may exercise this Warrant, in
------------------
whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal office of the Issuer, and by the
payment to the Issuer of an amount of consideration therefor equal to the
Warrant Price in effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at the Holder's election (i) in cash by certified or official
bank check, (ii) at any time on or after the Original Issue Date through the
date on or before the date the registration statement filed in accordance with
the Registration Rights Agreement has been declared effective by the Securities
and Exchange Commission by surrender to the Issuer for cancellation of a portion
of this Warrant representing that number of unissued shares of Warrant Stock
which is equal to the quotient obtained by dividing (A) the product obtained by
multiplying the Warrant Price by the number of shares of Warrant Stock being
purchased upon such exercise by (B) the difference obtained by subtracting the
Warrant Price from the Per Share Market Value as of the date of such exercise,
or (iii) by a combination of the foregoing methods of payment selected by the
Holder of this Warrant. In any case where the consideration payable upon such
exercise is being paid in whole or in part pursuant to the provisions of clause
(ii) of this subsection (b), such exercise shall be accompanied by written
notice from the Holder of this Warrant specifying the manner of payment thereof
and containing a calculation showing the number of shares of Warrant Stock with
respect to which rights are being surrendered thereunder and the net number of
shares to be issued after giving effect to such surrender.
(c) Issuance of Stock Certificates. In the event of any exercise of the
------------------------------
rights represented by this Warrant in accordance with and subject to the terms
and conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant representing
the number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have been exercised (less any amount thereof which shall
have been canceled in payment or partial payment of the Warrant Price as
hereinabove provided) shall also be issued to the Holder hereof at the Issuer's
expense within such time.
<PAGE>
(d) Transferability of Warrant. Subject to the provisions of subsection
--------------------------
(e) of this Section 2, this Warrant may be transferred by the Holder without the
consent of the Company. If transferred pursuant to this paragraph and subject
to the provisions of subsection (e) of this Section 2, this Warrant may be
transferred on the books of the Issuer by the Holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant at the principal office of
the Issuer, properly endorsed (by the Holder executing an assignment in the form
attached hereto) and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. This Warrant is exchangeable at
the principal office of the Issuer for Warrants for the purchase of the same
aggregate number of shares of Warrant Stock, each new Warrant to represent the
right to purchase such number of shares of Warrant Stock as the Holder hereof
shall designate at the time of such exchange. All Warrants issued on transfers
or exchanges shall be dated the Original Issue Date and shall be identical with
this Warrant except as to the number of shares of Warrant Stock issuable
pursuant hereto.
(e) Compliance with Securities Laws.
--------------------------------
(i) The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant and the shares of Warrant Stock to be issued upon
exercise hereof are being acquired solely for the Holder's own account and
not as a nominee for any other party, and for investment, and that the
Holder will not offer, sell or otherwise dispose of this Warrant or any
shares of Warrant Stock to be issued upon exercise hereof except pursuant
to an effective registration statement, or an exemption from registration,
under the Securities Act and any applicable state securities laws.
(ii) Except as provided in paragraph (iii) below, this Warrant and
all certificates representing shares of Warrant Stock issued upon exercise
hereof shall be stamped or imprinted with a legend in substantially the
following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE
SECURITIES LAWS OR SKYLYNX COMMUNICATIONS, INC. SHALL HAVE RECEIVED AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
(iii) The restrictions imposed by this subsection (e) upon the
transfer of this Warrant and the shares of Warrant Stock to be purchased
upon exercise hereof shall terminate (A) when such securities shall have
been effectively registered under the Securities Act, (B) upon the Issuer's
receipt of an opinion of counsel, in form and
<PAGE>
substance reasonably satisfactory to the Issuer, addressed to the Issuer to
the effect that such restrictions are no longer required to ensure
compliance with the Securities Act or (C) upon the Issuer's receipt of
other evidence reasonably satisfactory to the Issuer that such registration
is not required. Whenever such restrictions shall cease and terminate as to
any such securities, the Holder thereof shall be entitled to receive from
the Issuer (or its transfer agent and registrar), without expense (other
than applicable transfer taxes, if any), new Warrants (or, in the case of
shares of Warrant Stock, new stock certificates) of like tenor not bearing
the applicable legends required by paragraph (ii) above relating to the
Securities Act and state securities laws.
(f) Continuing Rights of Holder. The Issuer will, at the time of or at any
---------------------------
time after each exercise of this Warrant, upon the request of the Holder hereof
or of any shares of Warrant Stock issued upon such exercise, acknowledge in
writing the extent, if any, of its continuing obligation to afford to the Holder
all rights to which the Holder shall continue to be entitled after such exercise
in accordance with the terms of this Warrant, provided that if the Holder shall
--------
fail to make any such request, the failure shall not affect the continuing
obligation of the Issuer to afford such rights to the Holder.
3. Stock Fully Paid: Reservation and Listing of Shares: Covenants.
---------------------------------------------------------------
(a) Stock Fully Paid. The Issuer represents, warrants, covenants and
----------------
agrees that all shares of Warrant Stock which may be issued upon the exercise of
this Warrant or otherwise hereunder will, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable and free from all taxes, liens and
charges created by or through Issuer. The Issuer further covenants and agrees
that during the period within which this Warrant may be exercised, the Issuer
will at all times have authorized and reserved for the purpose of the issue upon
exercise of this Warrant a number of shares of Common Stock equal to at least
200% of the aggregate number of shares of Warrant Stock issuable upon the
exercise of the Warrants.
(b) Reservation. If any shares of Common Stock required to be reserved for
-----------
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon the exercise of this Warrant
if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
(c) Covenants. The Issuer shall not by any action including, without
---------
limitation, amending the Articles of Incorporation or the by-laws of the Issuer,
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or
<PAGE>
any other action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of the Holder hereof against
dilution (to the extent specifically provided herein) or impairment. Without
limiting the generality of the foregoing, the Issuer will (i) not permit the par
value, if any, of its Common Stock to exceed the then effective Warrant Price,
(ii) not amend or modify any provision of the Articles of Incorporation or by-
laws of the Issuer in any manner that would adversely affect in any way the
powers, preferences or relative participating, optional or other special rights
of the Common Stock or which would adversely affect the rights of the Holders of
the Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant,
and (iv) use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
reasonably necessary to enable the Issuer to perform its obligations under this
Warrant.
(d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
------------------------------------
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(e) Rights and Obligations under the Registration Rights Agreement. The
--------------------------------------------------------------
shares of Warrant Stock are entitled to the benefits and subject to the terms of
the Registration Rights Agreement dated as of even date herewith among the
Issuer, the Holder and the other parties thereto (as amended from time to time,
the "Registration Rights Agreement"). The Issuer shall keep or cause to be kept
-----------------------------
a copy of the Registration Rights Agreement, and any amendments thereto, at its
chief executive office and shall furnish, without charge, copies thereof to the
Holder upon request.
4. Adjustment of Warrant Price and Warrant Share Number. The number and
----------------------------------------------------
kind of Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
------------------------------------------------------------------
Merger or Sale. (i) In case the Issuer after the Original Issue Date shall do
- --------------
any of the following (each, a "Triggering Event"): (a) consolidate with or merge
----------------
into any other Person and the Issuer shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) permit any other Person to
consolidate with or merge into the Issuer and the Issuer shall be the continuing
or surviving Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged for Securities of
any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect
a capital reorganization or reclassification of its Capital Stock, then, and in
the case of each such Triggering Event, proper provision shall be made so that,
upon the basis and the terms and in the manner provided in this Warrant, the
Holder of this Warrant shall be entitled (x) upon
<PAGE>
the exercise hereof at any time after the consummation of such Triggering Event,
to the extent this Warrant is not exercised prior to such Triggering Event, or
is redeemed in connection with such Triggering Event, to receive at the Warrant
Price in effect at the time immediately prior to the consummation of such
Triggering Event in lieu of the Common Stock issuable upon such exercise of this
Warrant prior to such Triggering Event, the Securities, cash and property to
which the Holder would have been entitled upon the consummation of such
Triggering Event if the Holder had exercised the rights represented by this
Warrant immediately prior thereto, subject to adjustments and increases
(subsequent to such corporate action) as nearly equivalent as possible to the
adjustments provided for in Section 4 hereof or (y) to sell this Warrant (or, at
the Holder's election, a portion hereof) to the Person continuing after or
surviving such Triggering Event, or to the Issuer (if Issuer is the continuing
or surviving Person) at a sales price equal to the amount of cash, property
and/or Securities to which a holder of the number of shares of Common Stock
which would otherwise have been delivered upon the exercise of this Warrant
would have been entitled upon the effective date or closing of any such
Triggering Event (the "Event Consideration"), less the amount or portion of such
-------------------
Event Consideration having a fair value equal to the aggregate Warrant Price
applicable to this Warrant or the portion hereof so sold.
(ii) Notwithstanding anything contained in this Warrant to the contrary,
the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer
under this Warrant (and if the Issuer shall survive the consummation of such
Triggering Event, such assumption shall be in addition to, and shall not release
the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to the Holder such shares of Securities, cash
or property as, in accordance with the foregoing provisions of this subsection
(a), the Holder shall be entitled to receive, and such Person shall have
similarly delivered to the Holder an opinion of counsel for such Person, which
counsel shall be reasonably satisfactory to the Holder, stating that this
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of this subsection (a))
shall be applicable to the Securities, cash or property which such Person may be
required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
(iii) If with respect to any Triggering Event, the Holder of this Warrant
has exercised its right as provided in clause (y) of subparagraph (i) of this
subsection (a) to sell this Warrant or a portion thereof, the Issuer agrees that
as a condition to the consummation of any such Triggering Event the Issuer shall
secure such right of Holder to sell this Warrant to the Person continuing after
or surviving such Triggering Event and the Issuer shall not effect any such
Triggering Event unless upon or prior to the consummation thereof the amounts of
cash, property and/or Securities required under such clause (y) are delivered to
the Holder of this Warrant. The obligation of the Issuer to secure such right
of the Holder to sell this Warrant shall be subject to the Holder's cooperation
with the Issuer, including, without limitation, the giving of customary
representations and warranties to the purchaser in connection with any such
sale. Prior notice of any Triggering Event shall be given to the Holder of this
Warrant in accordance with Section 11 hereof.
(b) Subdivision or Combination of Shares. If the Issuer, at any time
------------------------------------
while this
<PAGE>
Warrant is outstanding, shall subdivide or combine any shares of
Common Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(c) Certain Dividends and Distributions. If the Issuer, at any time
-----------------------------------
while this Warrant is outstanding, shall:
(i) Stock Dividends. Pay a dividend in, or make any other
---------------
distribution to its stockholders (without consideration therefor) of,
shares of Common Stock, the Warrant Price shall be adjusted, as at the date
the Issuer shall take a record of the holders the Issuer's Capital Stock
for the purpose of receiving such dividend or other distribution (or if no
such record is taken, as at the date of such payment or other
distribution), to that price determined by multiplying the Warrant Price in
effect immediately prior to such record date (or if no such record is
taken, then immediately prior to such payment or other distribution), by a
fraction (1) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or
distribution, and (2) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution (plus in the event that the Issuer paid cash for fractional
shares, the number of additional shares which would have been outstanding
had the Issuer issued fractional shares in connection with said dividends);
or
(ii) Other Dividends. Pay a dividend on, or make any distribution of
---------------
its assets upon or with respect to (including, but not limited to, a
distribution of its property as a dividend in liquidation or partial
liquidation or by way of return of capital), the Common Stock (other than
as described in clause (i) of this subsection (c)), or in the event that
the Company shall offer options or rights to subscribe for shares of Common
Stock, or issue any Common Stock Equivalents, to all of its holders of
Common Stock, then on the record date for such payment, distribution or
offer or, in the absence of a record date, on the date of such payment,
distribution or offer, the Holder shall receive what the Holder would have
received had it exercised this Warrant in full immediately prior to the
record date of such payment, distribution or offer or, in the absence of a
record date, immediately prior to the date of such payment, distribution or
offer.
(d) Issuance of Additional Shares of Common Stock. If the Issuer, at any
---------------------------------------------
time while this Warrant is outstanding, shall issue any Additional Shares of
Common Stock (otherwise than as provided in the foregoing subsections (a)
through (c) of this Section 4), at a price per share less than the Warrant Price
then in effect or less than the Per Share Market Value then in effect or without
consideration, then the Warrant Price upon each such issuance shall be adjusted
to that price (rounded to the nearest cent) determined by multiplying the
Warrant Price then in effect by
<PAGE>
a fraction:
(i) the numerator of which shall be equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus (B) the number of
----
shares of Common Stock (rounded to the nearest whole share) which the
aggregate consideration for the total number of such Additional Shares of
Common Stock so issued would purchase at a price per share equal to the
greater of the Per Share Market Value then in effect and the Warrant Price
then in effect, and
(ii) the denominator of which shall be equal to the number of shares
of Common Stock outstanding immediately after the issuance of such
Additional Shares of Common Stock.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or (c)
of this Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) upon the issuance of any Additional Shares of Common Stock which
are issued pursuant to any Common Stock Equivalent if upon the issuance of such
Common Stock Equivalent (x) any adjustment shall have been made pursuant to
subsection (e) of this Section 4 or (Y) no adjustment was required pursuant to
subsection (e) of this Section 4. No adjustment of the Warrant Price shall be
made under this subsection (d) in an amount less than $.01 per share, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment, if any, which together with
any adjustments so carried forward shall amount to $.01 per share or more,
provided that upon any adjustment of the Warrant Price as a result of any
dividend or distribution payable in Common Stock or Convertible Securities or
the reclassification, subdivision or combination of Common Stock into a greater
or smaller number of shares, the foregoing figure of $.01 per share (or such
figure as last adjusted) shall be adjusted (to the nearest one-half cent) in
proportion to the adjustment in the Warrant Price.
(e) Issuance of Common Stock Equivalents. If the Issuer, at any time
------------------------------------
while this Warrant is outstanding, shall issue any Common Stock Equivalent and
the price per share for which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent shall be less than the
Warrant Price then in effect or less than the Per Share Market Value then in
effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable thereafter
is amended or adjusted, and such price as so amended shall be less than the
Warrant Price or less than the Per Share Market Value in effect at the time of
such amendment, then the Warrant Price upon each such issuance or amendment
shall be adjusted as provided in the first sentence of subsection (d) of this
Section 4 on the basis that (1) the maximum number of Additional Shares of
Common Stock issuable pursuant to all such Common Stock Equivalents shall be
deemed to have been issued (whether or not such Common Stock Equivalents are
actually then exercisable, convertible or exchangeable in whole or in part) as
of the earlier of (A) the date on which the Issuer shall enter into a firm
contract for the issuance of such Common Stock Equivalent, or (B) the date of
actual issuance of such Common Stock Equivalent, and (2) the aggregate
consideration for such maximum number of Additional Shares of Common Stock shall
be deemed to be the minimum consideration received or receivable by the Issuer
for the issuance of
<PAGE>
such Additional Shares of Common Stock pursuant to such Common Stock Equivalent.
No adjustment of the Warrant Price shall be made under this subsection (e) upon
the issuance of any Convertible Security which is issued pursuant to the
exercise of any warrants or other subscription or purchase rights therefor, if
any adjustment shall previously have been made in the Warrant Price then in
effect upon the issuance of such warrants or other rights pursuant to this
subsection (e). If no adjustment is required under this subsection (e) upon
issuance of any Common Stock Equivalent or once an adjustment is made under this
subsection (e) based upon the Per Share Market Value in effect on the date of
such adjustment, no further adjustment shall be made under this subsection (e)
based solely upon a change in the Per Share Market Value after such date.
(f) Purchase of Common Stock by the Issuer. If the Issuer at any time
--------------------------------------
while this Warrant is outstanding shall, directly or indirectly through a
Subsidiary or otherwise, purchase, redeem or otherwise acquire any shares of
Common Stock at a price per share greater than the Per Share Market Value then
in effect, then the Warrant Price upon each such purchase, redemption or
acquisition shall be adjusted to that price determined by multiplying such
Warrant Price by a fraction (i) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such purchase,
redemption or acquisition minus the number of shares of Common Stock which the
aggregate consideration for the total number of such shares of Common Stock so
purchased, redeemed or acquired would purchase at the Per Share Market Value;
and (ii) the denominator of which shall be the number of shares of Common Stock
outstanding immediately after such purchase, redemption or acquisition. For the
purposes of this subsection (f), the date as of which the Per Share Market Value
shall be computed shall be the earlier of (x) the date on which the Issuer shall
enter into a firm contract for the purchase, redemption or acquisition of such
Common Stock, or (y) the date of actual purchase, redemption or acquisition of
such Common Stock. For the purposes of this subsection (f), a purchase,
redemption or acquisition of a Common Stock Equivalent shall be deemed to be a
purchase of the underlying Common Stock, and the computation herein required
shall be made on the basis of the full exercise, conversion or exchange of such
Common Stock Equivalent on the date as of which such computation is required
hereby to be made, whether or not such Common Stock Equivalent is actually
exercisable, convertible or exchangeable on such date.
(g) Other Provisions Applicable to Adjustments Under this Section 4. The
---------------------------------------------------------------
following provisions shall be applicable to the making of adjustments in the
Warrant Price hereinbefore provided in Section 4:
(i) Computation of Consideration. The consideration received by
----------------------------
the Issuer shall be deemed to be the following: to the extent that any
Additional Shares of Common Stock or any Common Stock Equivalents shall be
issued for a cash consideration, the consideration received by the Issuer
therefor, or if such Additional Shares of Common Stock or Common Stock
Equivalents are offered by the Issuer for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Common Stock
Equivalents are sold to underwriters or dealers for public offering without
a subscription offering, the public offering price, in any such case
excluding any amounts paid or receivable for accrued interest or accrued
dividends and without deduction of any compensation, discounts,
commissions, or expenses paid or incurred by the Issuer for or in
connection with the underwriting thereof or otherwise in connection with
the issue
<PAGE>
thereof; to the extent that such issuance shall be for a consideration
other than cash, then, except as herein otherwise expressly provided, the
fair market value of such consideration at the, time of such issuance as
determined in good faith by the Board. The consideration for any Additional
Shares of Common Stock issuable pursuant to any Common Stock Equivalents
shall be the consideration received by the Issuer for issuing such Common
Stock Equivalents, plus the additional consideration payable to the Issuer
upon the exercise, conversion or exchange of such Common Stock Equivalents.
In case of the issuance at any time of any Additional Shares of Common
Stock or Common Stock Equivalents in payment or satisfaction of any
dividend upon any class of Capital Stock of the Issuer other than Common
Stock, the Issuer shall be deemed to have received for such Additional
Shares of Common Stock or Common Stock Equivalents a consideration equal to
the amount of such dividend so paid or satisfied. In any case in which the
consideration to be received or paid shall be other than cash, the Board
shall notify the Holder of this Warrant of its determination of the fair
market value of such consideration prior to payment or accepting receipt
thereof. If, within thirty days after receipt of said notice, the Majority
Holders shall notify the Board in writing of their objection to such
determination, a determination of the fair market value of such
consideration shall be made by an Independent Appraiser selected by the
Majority Holders with the approval of the Board (which approval shall not
be unreasonably withheld), whose fees and expenses shall be paid by the
Issuer.
(ii) Readjustment of Warrant Price. Upon the expiration or
-----------------------------
termination of the right to convert, exchange or exercise any Common Stock
Equivalent the issuance of which effected an adjustment in the Warrant
Price, if such Common Stock Equivalent shall not have been converted,
exercised or exchanged in its entirety, the number of shares of Common
Stock deemed to be issued and outstanding by reason of the fact that they
were issuable upon conversion, exchange or exercise of any such Common
Stock Equivalent shall no longer be computed as set forth above, and the
Warrant Price shall forthwith be readjusted and thereafter be the price
which it would have been (but reflecting any other adjustments in the
Warrant Price made pursuant to the provisions of this Section 4 after the
issuance of such Common Stock Equivalent) had the adjustment of the Warrant
Price been made in accordance with the issuance or sale of the number of
Additional Shares of Common Stock actually issued upon conversion, exchange
or issuance of such Common Stock Equivalent and thereupon only the number
of Additional Shares of Common Stock actually so issued shall be deemed to
have been issued and only the consideration actually received by the Issuer
(computed as in clause (i) of this subsection (g)) shall be deemed to have
been received by the Issuer.
(iii) Outstanding Common Stock. The number of shares of Common
------------------------
Stock at any time outstanding shall (A) not include any shares thereof then
directly or indirectly owned or held by or for the account of the Issuer or
any of its Subsidiaries, and (B) be deemed to include all shares of Common
Stock then issuable upon conversion, exercise or exchange of any then
outstanding Common Stock Equivalents or any other evidences of
Indebtedness, shares of Capital Stock (including, without limitation, the
Preferred Stock) or other Securities which are or may be at any time
convertible into or exchangeable for shares of Common Stock or Other Common
Stock.
<PAGE>
(h) Other Action Affecting Common Stock. In case after the Original
-----------------------------------
Issue Date the Issuer shall take any action affecting its Common Stock, other
than an action described in any of the foregoing subsections (a) through (g) of
this Section 4, inclusive, and the failure to make any adjustment would not
fairly protect the purchase rights represented by this Warrant in accordance
with the essential intent and principle of this Section 4, then the Warrant
Price shall be adjusted in such manner and at such time as the Board may in good
faith determine to be equitable in the circumstances.
(i) Adjustment of Warrant Share Number. Upon each adjustment in the
----------------------------------
Warrant Price pursuant to any of the foregoing provisions of this Section 4, the
Warrant Share Number shall be adjusted, to the nearest one hundredth of a whole
share, to the product obtained by multiplying the Warrant Share Number
immediately prior to such adjustment in the Warrant Price by a fraction, the
numerator of which shall be the Warrant Price immediately before giving effect
to such adjustment and the denominator of which shall be the Warrant Price
immediately after giving effect to such adjustment. If the Issuer shall be in
default under any provision contained in Section 3 of this Warrant so that
shares issued at the Warrant Price adjusted in accordance with this Section 4
would not be validly issued, the adjustment of the Warrant Share Number provided
for in the foregoing sentence shall nonetheless be made and the Holder of this
Warrant shall be entitled to purchase such greater number of shares at the
lowest price at which such shares may then be validly issued under applicable
law. Such exercise shall not constitute a waiver of any claim arising against
the Issuer by reason of its default under Section 3 of this Warrant.
(j) Form of Warrant after Adjustments. The form of this Warrant need not
---------------------------------
be changed because of any adjustments in the Warrant Price or the number and
kind of Securities purchasable upon the exercise of this Warrant.
5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share
---------------------
Number shall be adjusted pursuant to Section 4 hereof (for purposes of this
Section 5, each an "adjustment"), the Issuer shall cause its Chief Financial
Officer to prepare and execute a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant
Price and Warrant Share Number after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the Holder of this Warrant
promptly after each adjustment. Any dispute between the Issuer and the Holder
of this Warrant with respect to the matters set forth in such certificate may at
the option of the Holder of this Warrant be submitted to one of the national
accounting firms currently known as the "big five" mutually agreed upon by the
Issuer and the Holder or, in the event the Issuer and the Holder are unable to
agree, a "big five" national accounting firm (other than the Issuer's
independent auditors) selected by the Issuer's independent auditors. The firm
selected in the manner as provided in the preceding sentence shall be instructed
to deliver a written opinion as to such matters to the Issuer and the Holder
within thirty days after submission to it of such dispute. Such opinion shall
be final and binding on the parties hereto. The fees and expenses of such
accounting firm shall be paid by the Issuer.
6. Fractional Shares. No fractional shares of Warrant Stock will be
-----------------
issued in connection with and exercise hereof, but in lieu of such fractional
shares, the Issuer shall make a
<PAGE>
cash payment therefor equal in amount to the product of the applicable fraction
multiplied by the Per Share Market Value then in effect.
7. Definitions. For the purposes of this Warrant, the following terms
-----------
have the following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock
---------------------------------
issued by the Issuer after the Original Issue Date, and all shares of Other
Common, if any, issued by the Issuer after the Original Issue Date, except
the Warrant Stock and the Preferred Shares.
"Articles of Incorporation" means the Articles of Incorporation of
-------------------------
the Issuer as in effect on the Original Issue Date, and as hereafter from
time to time amended, modified, supplemented or restated in accordance with
the terms hereof and thereof and pursuant to applicable law.
"Board" shall mean the Board of Directors of the Issuer.
-----
"Capital Stock" means and includes (i) any and all shares,
-------------
interests, participations or other equivalents of or interests in (however
designated) corporate stock, including, without limitation, shares of
preferred or preference stock, (ii) all partnership interests (whether
general or limited) in any Person which is a partnership, (iii) all
membership interests or limited liability company interests in any limited
liability company, and (iv) all equity or ownership interests in any Person
of any other type.
"Common Stock" means the Common Stock, $0.001 par value, of the
------------
Issuer and any other Capital Stock into which such stock may hereafter be
changed.
"Common Stock Equivalent" means any Convertible Security or warrant,
-----------------------
option or other right to subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Security.
"Convertible Securities" means evidences of Indebtedness, shares of
----------------------
Capital Stock or other Securities which are or may be at any time
convertible into or exchangeable for Additional Shares of Common Stock.
The term "Convertible Security" means one of the Convertible Securities.
"Five Day Average Share Price" means the average of the closing bid
----------------------------
prices of shares of the Common Stock (as reported by Bloomberg Financial
Markets) in the over-the-market on the electronic bulletin board for such
security (the "OTC Bulletin Board") (or such other United States stock
------------------
exchange or public market (an "Alternative Exchange") on which the Common
--------------------
Stock trades if, at the time of exercise, the Common Stock is not trading
on the OTC Bulletin Board), for the five (5) consecutive trading days
immediately preceding the date of determination.
"Governmental Authority" means any governmental, regulatory or self-
----------------------
regulatory entity, department, body, official, authority, commission,
board, agency or
<PAGE>
instrumentality, whether federal, state or local, and whether domestic or
foreign.
"Holder" or "Holders" mean the Person or Persons who shall from time
------ -------
to time own any Warrant.
"Independent Appraiser" means a nationally recognized or major
---------------------
regional investment banking firm or firm of independent certified public
accountants of recognized standing (other than the firm that regularly
examines the financial statements of the Issuer) that is regularly engaged
in the business of appraising the Capital Stock or assets of corporations
or other entities as going concerns, and which is not affiliated with
either the Issuer or the Holder of any Warrant.
"Issuer" means SkyLynx Communications, Inc., a Colorado corporation,
------
and its successors.
"Majority Holders" means at any time the holders of Warrants
----------------
exercisable for a majority of the shares of Warrant Stock issuable under
the Warrants at the time outstanding.
"Original Issue Date" means May __, 1999.
-------------------
"Other Common" means any other Capital Stock of the Issuer of any
------------
class which shall be authorized at any time after the date of this Warrant
(other than Common Stock) and which shall have the right to participate in
the distribution of earnings and assets of the Issuer without limitation as
to amount.
"OTC Bulletin Board" means the over-the-counter electronic bulletin
------------------
board.
"Person" means an individual, corporation, limited liability
------
company, partnership, joint stock company, trust, unincorporated
organization, joint venture, Governmental Authority or other entity of
whatever nature.
"Per Share Market Value" means on any particular date (a) the Five
----------------------
Day Average Share Price on such date, (b) if the Common Stock is not listed
then on the OTC Bulletin Board or any Alternative Exchange, then the
average of the "Pink Sheet" quotes for the five consecutive days
immediately preceding such date, as determined in good faith by the holder,
or (c) if the Common Stock is not then publicly traded, the fair market
value of a share of Common Stock as determined by an Independent Appraiser
selected in good faith by the Majority Holders; provided, however, that the
-------- -------
Issuer, after receipt of the determination by such Independent Appraiser,
shall have the right to select an additional Independent Appraiser or
Appraisers, in which case, the fair market value shall be equal to the
average of the determinations by each such Independent Appraiser; and
provided, further that all determinations of the Per Share Market Value
-------- -------
shall be appropriately adjusted for any stock dividends, stock splits or
other similar transactions during such period. The determination of fair
market value by an Independent Appraiser shall be based upon the fair
market value of the Issuer determined on a going concern basis as between a
willing buyer and a willing seller and taking into account all relevant
factors
<PAGE>
determinative of value, and shall be final and binding on all parties. In
determining the fair market value of any shares of Common Stock, no
consideration shall be given to any restrictions on transfer of the Common
Stock imposed by agreement or by federal or state securities laws, or to
the existence or absence of, or any limitations on, voting rights.
"Preferred Shares" means Common Stock issuable upon the conversion
----------------
of any Preferred Stock.
"Preferred Stock" means the Series E Preferred Stock issued and sold
---------------
pursuant to the Purchase Agreement.
"Purchase Agreement" means the Series E Convertible Preferred Stock
------------------
Purchase Agreement dated as of May __, 1999 among the Issuer and the
investors listed on Exhibit A thereto.
"Registration Rights Agreement" has the meaning specified in Section
-----------------------------
3(e) hereof.
"Securities" means any debt or equity securities of the Issuer,
----------
whether now or hereafter authorized, any instrument convertible into or
exchangeable for Securities or a Security, and any option, warrant or other
right to purchase or acquire any Security. "Security" means one of the
Securities.
"Securities Act" means the Securities Act of 1933, as amended, or
--------------
any similar federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding
----------
Voting Stock shall at the time be owned directly or indirectly by the
Issuer or by one or more of its Subsidiaries, or by the Issuer and one or
more of its Subsidiaries.
"Term" has the meaning specified in Section 1 hereof.
----
"Trading Day" means (a) a day on which the Common Stock is traded on
-----------
the over the counter market as reported by the OTC Bulletin Board, or (b)
if the Common Stock is not listed on the OTC Bulletin Board, a day on which
the Common Stock is traded on any other registered national stock exchange,
or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day
on which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices);
provided, however, that in the event that the Common Stock is not listed or
-------- -------
quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean
any day except Saturday, Sunday and any day which shall be a legal holiday
or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Voting Stock", as applied to the Capital Stock of any corporation,
------------
means Capital Stock of any class or classes (however designated) having
ordinary voting power for the election of a majority of the members of the
Board of Directors (or other governing body)
<PAGE>
of such corporation, other than Capital Stock having such power only by
reason of the happening of a contingency.
"Warrants" means the Warrants issued and sold pursuant to the
--------
Purchase Agreement, including, without limitation, this Warrant, and any
other warrants of like tenor issued in substitution or exchange for any
thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or
of any of such other Warrants.
"Warrant Price" means $8.17, as such price may be adjusted from time
-------------
to time as shall result from the adjustments specified in Section 4 hereof.
"Warrant Share Number" means at any time the aggregate number of
--------------------
shares of Warrant Stock which may at such time be purchased upon exercise
of this Warrant, after giving effect to all prior adjustments and increases
to such number made or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any
-------------
Warrant or Warrants or otherwise issuable pursuant to any Warrant or
Warrants.
8. Other Notices. In case at any time:
-------------
(A) the Issuer shall make any distributions to the holders of
Common Stock; or
(B) the Issuer shall authorize the granting to all holders of its
Common Stock of rights to subscribe for or purchase any shares
of Capital Stock of any class or of any Common Stock
Equivalents or Convertible Securities or other rights; or
(C) there shall be any reclassification of the Capital Stock of the
Issuer; or
(D) there shall be any capital reorganization by the Issuer; or
(E) there shall be any (i) consolidation or merger involving the
Issuer or (ii) sale, transfer or other disposition of all or
substantially all of the Issuer's property, assets or business
(except a merger or other reorganization in which the Issuer
shall be the surviving corporation and its shares of Capital
Stock shall continue to be outstanding and unchanged and except
a consolidation, merger, sale, transfer or other disposition
involving a wholly-owned Subsidiary); or
(F) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Issuer or any partial
liquidation of the Issuer or distribution to holders of Common
Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
<PAGE>
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
days prior to the action in question and not less than twenty days prior to the
record date or the date on which the Issuer's transfer books are closed in
respect thereto. The Issuer shall give to the Holder notice of all meetings and
actions by written consent of its stockholders, at the same time in the same
manner as notice of any meetings of stockholders is required to be given to
stockholders who do not waive such notice (or, if such requires no notice, then
two Trading Days written notice thereof describing the matters upon which action
is to be taken). The Holder shall have the right to send two representatives
selected by it to each meeting, who shall be permitted to attend, but not vote
at, such meeting and any adjournments thereof. This Warrant entitles the Holder
to receive copies of all financial and other information distributed or required
to be distributed to the holders of the Common Stock.
9. Amendment and Waiver. Any term, covenant, agreement or condition in
--------------------
this Warrant may be amended, or compliance therewith may be waived (either
generally or in a particular instance and either retroactively or
prospectively), by a written instrument or written instruments executed by the
Issuer and the Majority Holders; provided, however, that no such amendment or
-------- -------
waiver shall reduce the Warrant Share Number, increase the Warrant Price,
shorten the period during which this Warrant may be exercised or modify any
provision of this Section 9 without the consent of the Holder of this Warrant.
10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW.
11. Notices. Any and all notices or other communications or deliveries
-------
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., New York Time, on a
Business Day, (ii) the Business Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., New York Time, on any date and
earlier than 11:59 p.m., New York Time, on such date, (iii) the Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service or (iv) actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be with
respect to the Holder of this Warrant or of Warrant Stock issued pursuant
hereto, addressed to the Holder at its last known address or facsimile number
appearing on the books of the Issuer maintained for such purposes, or with
respect to the Issuer, addressed to:
SkyLynx Communications, Inc.
600 South Cherry Street
Suite 305
Denver, CO 80246
<PAGE>
Attention: Jeffery A. Mathias, President and CEO
Facsimile No.: (303) 316-0404
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Issuer shall be sent to Kelley Drye &
Warren LLP, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut
06901-3229, Attention: M. Ridgway Barker, Esq., Facsimile no.: (203) 324-1400.
Copies of notices to the Holder shall be sent to the address or address
specified for the Holder on Exhibit A to the Purchase Agreement.
12. Warrant Agent. The Issuer may, by written notice to each Holder of
-------------
this Warrant, appoint an agent having an office in New York, New York for the
purpose of issuing shares of Warrant Stock on the exercise of this Warrant
pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant pursuant
to subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. Remedies. The Issuer stipulates that the remedies at law of the
--------
Holder of this Warrant in the event of any default or threatened default by the
Issuer in the performance of or compliance with any of the terms of this Warrant
are not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
14. Successors and Assigns. This Warrant and the rights evidenced hereby
----------------------
shall inure to the benefit of and be binding upon the successors and assigns of
the Issuer and the Holder and shall be enforceable by the Holder.
15. Modification and Severability. If, in any action before any court or
-----------------------------
agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
16. Headings. The headings of the Sections of this Warrant are for
--------
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and
year first above written.
SKYLYNX COMMUNICATIONS, INC.
By:__________________________
Name:
Title:
<PAGE>
EXERCISE FORM
SKYLYNX COMMUNICATIONS, INC.
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of
___________________ covered by the within Warrant.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
_____________________
<PAGE>
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-_____ cancelled (or transferred or exchanged) this _____ day
of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of _______________.
<PAGE>
EXHIBIT 10.12
CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
Between
SkyLynx Communications, Inc.
and
AMRO International, S.A.
CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT dated as of
January 18, 1999 (the "Agreement"), between AMRO International, S.A., a Panama
corporation (the "Investor"), and SkyLynx Communications, Inc., a corporation
organized and existing under the laws of the State of Colorado (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase pro-rata, as set forth on the signature page
hereof, (i) 600 shares of Series B Convertible Preferred Stock (as defined
below), (ii) Warrants (as defined below) to purchase up to 120,000 shares of the
Common Stock (as defined below) and (iii) 15,000 shares of Common Stock.
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") of the United States Securities Act of 1933, as
amended, and Regulation D ("Regulation D") and the other rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in the securities to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1. "Capital Shares" shall mean the Common Stock and any shares of
--------------
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
<PAGE>
Section 1.2. "Capital Shares Equivalents" shall mean any securities, rights,
--------------------------
or obligations that are convertible into or exchangeable for or give any right
to subscribe for any Capital Shares of the Company or any warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 1.3. "Closing" shall mean the closing of the purchase and sale of the
-------
Convertible Preferred and Warrants pursuant to Section 2.1.
Section 1.4. "Closing Date" shall mean the date on which all conditions to the
------------
Closing have been satisfied (as defined in Section 2.1 (a) hereto) and the
Closing shall have occurred.
Section 1.5. "Common Stock" shall mean the Company's common stock, $0.001 par
------------
value per share.
Section 1.6. "Conversion Shares" shall mean the shares of Common Stock
-----------------
issuable upon conversion of the Convertible Preferred or issued as dividends
upon the Convertible Preferred.
Section 1.7. "Convertible Preferred" shall mean the 600 shares of Series B
---------------------
Convertible Preferred Stock, the terms of which are set forth in the Certificate
of Designation in the form of Exhibit A hereto, to be issued to the Investors
pursuant to this Agreement.
Section 1.8. "Damages" shall mean any loss, claim, damage, judgment, penalty,
-------
deficiency, liability, costs and expenses (including, without limitation,
reasonable attorney's fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).
Section 1.9. "Effective Date" shall mean the date on which the SEC first
--------------
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.
Section 1.10. "Escrow Agent"
-------------
<PAGE>
shall have the meaning set forth in the Escrow Agreement.
Section 1.11. "Escrow Agreement" shall mean the Escrow Agreement in
----------------
substantially the form of Exhibit D hereto executed and delivered
contemporaneously with this Agreement.
Section 1.12. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder.
Section 1.13. "Legend" shall mean the legend set forth in Section 9.1.
------
Section 1.14. "Market Price" on any given date shall mean the average of the
------------
lowest closing bid prices on the Principal Market (as reported by Bloomberg
L.P.) of the Common Stock on any three (3) Trading Days during the twenty-two
(22) Trading Day period ending on the Trading Day immediately prior to the date
for which the Market Price is to be determined, as selected by the Investor.
Section 1.15. "Material Adverse Effect" shall mean any effect on the business,
-----------------------
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole, and/or any condition, circumstance, or situation that would prohibit
or otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement, the Registration Rights Agreement,
the Escrow Agreement, the Convertible Preferred or the Warrant in any material
respect.
Section 1.16. "Outstanding" when used with reference to shares of Common Stock
-----------
or Capital Shares (collectively the "Shares"), shall mean, at any date as of
which the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not mean any such Shares then
- -------- -------
directly or indirectly owned or held by or for the account of the Company.
Section 1.17. "Person" shall mean an individual, a corporation, a partnership,
------
an association, a trust or other
<PAGE>
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.18. "Principal Market"
----------------
shall mean the OTC Bulletin Board, the American Stock Exchange, the New York
Stock Exchange, the NASDAQ National Market, or the NASDAQ Small-Cap Market,
whichever is at the time the principal trading exchange or market for the Common
Stock.
Section 1.19. "Purchase Price" shall mean six hundred thousand dollars
--------------
($600,000) in the aggregate.
Section 1.20. "Registrable Securities" shall mean the 15,000 shares of Common
----------------------
Stock, the Conversion Shares and the Warrant Shares until the earliest to occur
of: (i) the Registration Statement has been declared effective by the SEC, and
all Conversion Shares and Warrant Shares have been disposed of pursuant to the
Registration Statement, (ii) all Conversion Shares and Warrant Shares have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (iii) all Conversion Shares and Warrant Shares have been
otherwise transferred to holders who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive legend
or (iv) such time as, in the opinion of counsel to the Company, all Conversion
Shares and Warrant Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act.
Section 1.21. "Registration Rights Agreement" shall mean the agreement
-----------------------------
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investor as of
the Closing Date in the form annexed hereto as Exhibit C.
Section 1.22. "Registration Statement" shall mean a registration statement on
----------------------
Form S-1 or SB-2 (if use of such form is then available to the Company pursuant
to the rules of the SEC and, if not, on such other form promulgated by the SEC
for which the Company then qualifies and which counsel for the Company shall
deem appropriate, and which form shall be available for the resale of the
Registrable Securities to be registered thereunder in accordance with
the provisions of this Agreement, the Registration Rights Agreement and in
accordance with
<PAGE>
the intended method of distribution of such securities), for the registration of
the resale by the Investor of the Registrable Securities under the Securities
Act.
Section 1.23. "Regulation D" shall have the meaning set forth in the recitals
------------
of this Agreement.
Section 1.24. "SEC" shall mean the United States Securities and Exchange
---
Commission.
Section 1.25. "Section 4(2)" shall have the meaning set forth in the recitals
------------
of this Agreement.
Section 1.26. "Securities Act" shall have the meaning set forth in the recitals
--------------
of this Agreement.
Section 1.27. "SEC Documents" shall mean the Company's Registration Statement
-------------
on Form 10-SB and each report, proxy statement or registration statement filed
by the Company with the SEC pursuant to the Exchange Act or the Securities Act
since the filing of such Registration Statement through the date hereof and
available through the SEC's EDGAR system.
Section 1.28. "Shares" shall have the meaning set forth in Section 1.16.
------
Section 1.29. "Trading Day" shall mean any day during which the Principal
-----------
Market at such day shall be open for business.
Section 1.30. "Warrant(s)" shall mean the warrant substantially in the form of
----------
B to be issued to the Investor hereunder. "Warrant Shares" shall mean all shares
--------------
of Common Stock or other securities issued or issuable pursuant to exercise of
the Warrants.
ARTICLE II
Purchase and Sale of Convertible Preferred and Warrants
Section 2.1. Investment.
<PAGE>
(a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investor agrees to purchase, for an aggregate
Purchase Price of $600,000, 600 shares of Convertible Preferred, together with
the Warrant and 15,000 shares of Common Stock, on the Closing Date as follows:
(i) Upon execution and delivery of this Agreement, the Investor
shall deliver to the Escrow Agent immediately available funds
in the amount of the Purchase Price, and the Company shall
deliver the certificates representing the Common Stock, the
Convertible Preferred and the Warrant to the Escrow Agent, to
be held by the Escrow Agent pursuant to the Escrow Agreement.
(ii) Upon satisfaction of the conditions set forth in Section 2.1(b),
the Closing ("Closing") shall occur at the offices of the Escrow
Agent at which the Escrow Agent (x) shall release the
Convertible Preferred certificates, the Common Stock and the
Warrant to the Investor and (y) shall release the Purchase Price
(after all fees have been paid as set forth in the Escrow
Agreement) to the Company, pursuant to the terms of the Escrow
Agreement.
(b) The Closing is subject to the satisfaction of the following
conditions:
(i) acceptance and execution by the Company and by the Investor of
this Agreement and all Exhibits hereto;
(ii) delivery into escrow by the Investor of immediately available
funds in the amount of the Purchase Price of the Convertible
Preferred, as more fully set forth in the Escrow Agreement;
(iii) all representations and warranties of the Investor contained
herein shall remain true and correct ' as of the Closing Date
(as a condition to the Company's obligations);
(iv) all representations and warranties of the Company contained
herein shall remain true and correct as ' of the Closing Date
(as a condition to the Investor's obligations);
(v) the Company shall have obtained all permits and qualifications
required by any state for the offer and sale of the Common
Stock, the Convertible Preferred and the Warrants, or shall
have the availability of exemptions therefrom;
(vi) the sale and issuance of the Common Stock, the Convertible
Preferred and Warrants hereunder, and the proposed issuance by
<PAGE>
the Company to the Investor of the Common Stock underlying
the Convertible Preferred and Warrant Shares upon the
conversion or exercise thereof shall be legally permitted by
all laws and regulations to which the Investor and the
Company are subject and there shall be no ruling, judgment
or writ of any court prohibiting the transactions
contemplated by this Agreement;
(vii) delivery of the original fully executed Common Stock,
Convertible Preferred and Warrant certificates to the Escrow
Agent;
(viii) receipt by the Investor of an opinion of Neuman Drennen &
Stone, LLC, counsel to the Company, in the form of Exhibit E
hereto;
(ix) delivery to the Escrow Agent of the Irrevocable Instructions
to Transfer Agent in the form attached hereto as Exhibit F;
and
(x) delivery to the Investor of the Registration Rights
Agreement.
Section 2.2. Liquidated Damages.
------------------
The parties hereto acknowledge and agree that the sum payable pursuant to
the Registration Rights Agreement shall constitute liquidated damages and not
penalties. The parties further acknowledge that (a) the amount of loss or
damages likely to be incurred is incapable or is difficult to precisely
estimate, (b) the amounts specified in such Sections bear a reasonable
proportion and are not plainly or grossly disproportionate to the probable loss
likely to be incurred by the Investor in connection with the failure by the
Company to timely cause the registration of the Registrable Securities and (c)
the parties are sophisticated business parties and have been represented by
sophisticated and able legal and financial counsel and negotiated this Agreement
at arm's length.
ARTICLE III
Representations and Warranties of Investor
The Investor represents and warrants to the Company that:
Section 3.1. Intent.
------
The Investor is entering into this Agreement for its own account and the
Investor has no present arrangement (whether or not legally binding) at any time
to sell the Common
<PAGE>
Stock, the Convertible Preferred, the Warrant, any Conversion Shares or Warrant
Shares to or through any person or entity; provided, however, that by making the
representations herein, the Investor does not agree to hold such securities for
any minimum or other specific term and reserves the right to dispose of the
Common Stock, the Conversion Shares and Warrant Shares at any time in accordance
with federal and state securities laws applicable to such disposition.
Section 3.2. Sophisticated Investor.
----------------------
The Investor is a sophisticated investor (as described in Rule
506(b)(2)(ii) of Regulation D) and an accredited investor (as defined in Rule
501 of Regulation D), and Investor has such experience in business and financial
matters that it is capable of evaluating the merits and risks of an investment
in the Common Stock, the Convertible Preferred, the Warrant and the underlying
Common Stock. The Investor acknowledges that an investment in the Common Stock,
the Convertible Preferred, the Warrant and the underlying Common Stock is
speculative and involves a high degree of risk.
Section 3.3. Authority.
---------
This Agreement and each agreement attached as an Exhibit hereto which is
required to be executed by Investor has been duly authorized and validly
executed and delivered by the Investor and is a valid and binding agreement of
the Investor enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application.
Section 3.4. Not an Affiliate.
----------------
The Investor is not an officer, director or "affiliate" (as that term is
defined in Rule 405 of the Securities Act) of the Company.
Section 3.5. Absence of Conflicts.
--------------------
The execution and delivery of this Agreement and the agreements the forms
of which are attached as Exhibits hereto and executed by the Investor in
connection herewith, and the consummation of the transactions contemplated
hereby and thereby, and compliance with the requirements thereof, will not
violate any law, rule, regulation, order, writ, judgment, injunction, decree or
award binding on Investor or (a) violate any provision of any indenture,
instrument or agreement to which Investor is a party or is subject, or by which
Investor or any of its assets is bound; (b) conflict with or constitute a
material default thereunder; (c) result in the creation or imposition of any
lien pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by Investor to any third party;
or (d) require the approval of any third-party (which has not been obtained)
pursuant to any material contract, agreement,
<PAGE>
instrument, relationship or legal obligation to which Investor is subject or to
which any of its assets, operations or management may be subject.
Section 3.6. Disclosure; Access to Information.
---------------------------------
The Investor has received all documents, records, books and other publicly
available information pertaining to Investor's investment in the Company that
have been requested by the Investor. Investor acknowledges that the Company is
subject to the periodic reporting requirements of the Exchange Act, and the
Investor has reviewed or received copies of all SEC Documents that have been
requested by it.
Section 3.7. Manner of Sale.
--------------
At no time was Investor presented with or solicited by or through any
leaflet, public promotional meeting, television advertisement or any other form
of general solicitation or advertising by the Company.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investor that:
Section 4.1. Organization of the Company.
---------------------------
The Company is a corporation duly incorporated and existing in good
standing under the laws of the State of Colorado and has all requisite corporate
authority to own its properties and to carry on its business as now being
conducted. The Company does not have any subsidiaries and does not own more that
fifty percent (50%) of or control any other active business entity except as set
forth in the SEC Documents. The Company is duly qualified and is in good
standing as a foreign corporation to do business in every jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect.
Section 4.2. Authority.
---------
(i) The Company has the requisite corporate power and corporate authority
to enter into and perform its obligations under this Agreement, the Registration
Rights Agreement, the Escrow Agreement, and the Warrants and to issue the Common
Stock, the Convertible Preferred, the Conversion Shares, the Warrants and the
Warrant Shares pursuant to their respective terms, (ii) the execution, issuance
and delivery of this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Common Stock, the Convertible Preferred and the Warrants by the
Company and the
<PAGE>
consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or shareholders is
required, and (iii) this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Common Stock certificates, the Convertible Preferred stock
certificates and the Warrants have been duly executed and delivered by the
Company and at the Closing shall constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application. The Company has duly and validly authorized and reserved for
issuance shares of Common Stock sufficient in number for the conversion of the
Convertible Preferred (assuming a Market Price of $.50) and for the exercise of
the Warrants. The Company understands and acknowledges the potentially dilutive
effect to the Common Stock of the issuance of the Conversion. The Company
further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Convertible Preferred and Warrant Shares upon exercise of the
Warrants in accordance with this Agreement is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other shareholders of the Company and notwithstanding the
commencement of any case under 11 U.S.C. (S) 101 et seq. (the "Bankruptcy
Code"), subject only to compliance with any applicable federal or state
securities laws. The Company shall not seek judicial relief from its obligations
hereunder except pursuant to the Bankruptcy Code. In the event the Company is a
debtor under the Bankruptcy Code, the Company hereby waives to the fullest
extent permitted any rights to relief it may have under 11 U.S.C. (S) 362 in
respect of the conversion of the Convertible Preferred and the exercise of the
Warrants. The Company agrees, without cost or expense to the Investor, to take
or consent to any and all action necessary to effectuate relief under 11 U.S.C.
(S) 362.
Section 4.3. Capitalization.
--------------
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, $0.001 par value per share, of which 9,531,186 shares are
issued and outstanding as of December 1, 1998, 50,000,000 shares of preferred
stock, $.01 par value per share, 5,000,000 of which have been designated as
Series A Convertible Preferred Stock, of which 988,750 shares are issued and
outstanding, and 988,750 Redeemable Class A Common Stock Purchase Warrants and
988,750 Redeemable Class B Common Stock Purchase Warrants are issued and
outstanding. Except as set forth on Exhibit 4.3 hereto, there are no other
outstanding Capital Shares Equivalents. All of the outstanding shares of Common
Stock of the Company have been duly and validly authorized and issued and are
fully paid and non-assessable.
<PAGE>
Section 4.4. Common Stock.
-------------
The Company has registered its Common Stock pursuant to Section 12(g) of
-----------------------------------------------------------------------
the Exchange Act and is in full compliance with all reporting requirements of
- -----------------------------------------------------------------------------
the Exchange Act, and the Company is in compliance with all requirements for the
- --------------------------------------------------------------------------------
continued listing or quotation of its Common Stock, and such Common Stock is
- ----------------------------------------------------------------------------
currently listed or quoted on the Principal Market. As of the date hereof, the
- ------------------------------------------------------------------------------
Principal Market is the OTC Bulletin Board and the Company has not received any
- -------------------------------------------------------------------------------
notice regarding, and to its knowledge there is no threat, of the termination or
- --------------------------------------------------------------------------------
discontinuance of the eligibility of the Common Stock for such listing.
- -----------------------------------------------------------------------
Section 4.5. SEC Documents.
- ------------ -------------
The Company has delivered or made available to the Investors true and
complete copies of the SEC Documents. The Company has not provided to the
Investors any information that, according to applicable law, rule or regulation,
should have been disclosed publicly prior to the date hereof by the Company, but
which has not been so disclosed. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act, and
rules and regulations of the SEC promulgated thereunder and the SEC Documents
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents complied in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto at the time of such
inclusion. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company nor any
of its subsidiaries has any material indebtedness, obligations or liabilities of
any kind (whether accrued, absolute, contingent or otherwise, and whether due or
to become due) that would have been required to be reflected in, reserved
against or otherwise described in the financial statements or in the notes
thereto in accordance with GAAP, which was not fully reflected in, reserved
against or otherwise described in the SEC Documents, financial statements or the
notes thereto included in the SEC Documents or was not incurred in the ordinary
course of business consistent with the Company's past practices since the last
date of such financial statements.
<PAGE>
Section 4.6. Exemption from Registration; Valid Issuances.
--------------------------------------------
Subject to the continuing accuracy of each Investor's representations in
Article III, the sale of the Common Stock, the Convertible Preferred, the
Conversion Shares, the Warrants and the Warrant Shares will not require
registration under the Securities Act and/or any applicable state securities
law. The Common Stock to be issued at Closing shall be validly issued fully paid
and non-assessable. When issued and paid for in accordance with each Warrant and
the Convertible Preferred, the Conversion Shares and the Warrant Shares will be
duly and validly issued, fully paid, and non-assessable. Neither the sales of
the Common Stock, the Convertible Preferred, the Conversion Shares, the Warrants
or the Warrant Shares pursuant to, nor the Company's performance of its
obligations under, this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Convertible Preferred, or the Warrants will (i) result in the
creation or imposition by the Company of any liens, charges, claims or other
encumbrances upon the Common Stock, the Convertible Preferred, the Conversion
Shares, the Warrants or the Warrant Shares or, except as contemplated herein,
any of the assets of the Company, or (ii) entitle the holders of Outstanding
Capital Shares to preemptive or other rights to subscribe to or acquire the
Capital Shares or other securities of the Company. The Common Stock, the
Convertible Preferred, the Conversion Shares, and the Warrant Shares shall not
subject the Investor to personal liability to the Company or its creditors by
reason of the possession thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
--------------------------------------------------------
Transaction.
- -----------
Neither the Company nor any of its Affiliates (as defined in Rule 405 under
the Securities Act) nor, to its knowledge, any person acting on its or their
behalf has conducted or will conduct any general solicitation (as that term is
used in Rule 502(c) of Regulation D) or general advertising with respect to the
sale of the Common Stock, the Convertible Preferred or the Warrants.
Section 4.8. Corporate Documents.
-------------------
The Company has furnished or made available to the Investor true and
correct copies of the Company's Articles of Incorporation, as amended and in
effect on the date hereof (the "Articles"), and the Company's By-Laws, as
amended and in effect on the date hereof (the "By-Laws").
Section 4.9. No Conflicts.
------------
Except as set forth on Schedule 4.9, the execution, delivery and
performance of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby, including without limitation the
issuance of the Common Stock, the Convertible Preferred, the Conversion Shares,
the Warrants and the Warrant Shares, do not and will not (i) result in a
violation of the Company's Articles of Incorporation
<PAGE>
or By-Laws, (ii) conflict with, or constitute a material default (or an event
that with notice or lapse of time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
any material agreement, indenture or instrument, or any "lock-up" or similar
provision of any underwriting or similar agreement to which the Company is a
party, or (iii) result in a violation of any federal, state or local law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or by which any material
property or asset of the Company is bound or affected, nor is the Company
otherwise in violation of, conflict with or default under any of the foregoing
(except in each case for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not have, individually or
in the aggregate, a Material Adverse Effect). The business of the Company is not
being conducted in violation of any law, ordinance or regulation of any
governmental entity, except for possible violations that either singly or in the
aggregate would not have a Material Adverse Effect. The Company is not required
under federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or issue and sell the Common Stock, the
Convertible Preferred or the Warrants in accordance with the terms hereof (other
than any SEC or state securities filings that may be required to be made by the
Company subsequent to Closing, any registration statement that may be filed
pursuant hereto); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of each Investor herein.
Section 4.10. No Material Adverse Change.
--------------------------
Since September 30, 1998, no Material Adverse Effect has occurred or exists
with respect to the Company, except as disclosed in the SEC Documents.
Section 4.11. No Undisclosed Events or Circumstances.
--------------------------------------
Since September 30, 1998, no event or circumstance has occurred or exists
with respect to the Company or its businesses, properties, prospects, operations
or financial condition, that, under applicable law, rule or regulation, requires
public disclosure or announcement prior to the date hereof by the Company but
which has not been so publicly announced or disclosed in the SEC Documents or in
this Agreement.
Section 4.12. Not Used.
Section 4.13. Litigation and Other Proceedings.
--------------------------------
<PAGE>
Except as disclosed in the SEC Documents or on Schedule 4.13 hereto,
there are no lawsuits or proceedings pending or, to the knowledge of the
Company, threatened, against the Company, nor has the Company received any
written or oral notice of any such action, suit, proceeding or investigation,
which could reasonably be expected to have a Material Adverse Effect. Except as
set forth in the SEC Documents and in Schedule 4.13, no judgment, order, writ,
injunction or decree or award has been issued by or, to the knowledge of the
Company, requested of any court, arbitrator or governmental agency which could
result in a Material Adverse Effect.
Section 4.14. No Misleading or Untrue Communication.
-------------------------------------
The Company and, to the knowledge of the Company, its officers and directors,
have not made, at any time, any oral communication to the Investor in connection
with the offer or sale of the Convertible Preferred and the Warrants which
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.15. Material Non-Public Information.
-------------------------------
The Company has not disclosed to any Investor any material non-public
information that (i) if disclosed, could reasonably be expected to have, a
material effect on the price of the Common Stock or (ii) according to applicable
law, rule or regulation, should have been disclosed publicly by the Company
prior to the date hereof but which has not been so disclosed.
Section 4.16. Insurance.
---------
The Company maintains property and casualty, general liability, workers'
compensation, environmental hazard, personal injury and other similar types of
insurance with financially sound and reputable insurers that is adequate,
consistent with the Company's historical claims experience and comparable
industry standards. The Company has not received notice from, and has no
knowledge of any threat by, any insurer (that has issued any insurance policy to
the Company) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any insurance policy presently in force.
Section 4.17. Tax Matters.
-----------
(a) The Company has filed all Tax Returns which it is required to file
under applicable laws, except where the failure to file any Tax Return would not
have a Material Adverse Effect on the Company; all such Tax Returns are true and
accurate and have been prepared in compliance with all applicable laws; the
Company has paid all Taxes due and owing by it (whether or not such Taxes are
required to be shown on a Tax Return) and have withheld and paid over to the
appropriate taxing authorities all Taxes which it is required to withhold from
amounts paid or owing to any employee,
<PAGE>
shareholder, creditor or other third parties; and since December 31, 1997, the
charges, accruals and reserves for Taxes with respect to the Company (including
any provisions for deferred income taxes) reflected on the books of the Company
are adequate to cover any Tax liabilities of the Company if its current tax year
were treated as ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction where
the Company does not file tax returns that such corporation is or may be subject
to taxation by that jurisdiction. There are no foreign, federal, state or local
tax audits or administrative or judicial proceedings pending or being conducted
with respect to the Company; no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority; and, except
as disclosed above, no written notice indicating an intent to open an audit or
other review has been received by the Company from any foreign, federal, state
or local taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to (S) 7121 of the Internal Revenue
Code or any predecessor provision thereof or any similar provision of state,
local or foreign law; or (B) has not agreed to or is required to make any
adjustments pursuant to (S) 481 (a) of the Internal Revenue Code or any similar
provision of state, local or foreign law by reason of a change in accounting
method initiated by the Company or any of its subsidiaries or has any knowledge
that the IRS has proposed any such adjustment or change in accounting method, or
has any application pending with any taxing authority requesting permission for
any changes in accounting methods that relate to the business or operations of
the Company. The Company has not been a United States real property holding
corporation within the meaning of (S) 897(c)(2) of the Internal Revenue Code
during the applicable period specified in (S) 897(c)(1)(A)(ii) of the Internal
Revenue Code.
(c) The Company has not made an election under (S) 341(f) of the Internal
Revenue Code. The Company is not liable for the Taxes of another person that is
not a subsidiary of the Company under (A) Treas. Reg. (S) 1.1502-6 (or
comparable provisions of state, local or foreign law), (B) as a transferee or
successor, (C) by contract or indemnity or (D) otherwise. The Company is not a
party to any tax sharing agreement. The Company has not made any payments, is
obligated to make payments or is a party to an agreement that could obligate it
to make any payments that would not be deductible under (S) 280G of the Internal
Revenue Code.
(d) For purposes of this Section 4.17:
"IRS" means the United States Internal Revenue Service.
---
"Tax" or "Taxes" means federal, state, county, local, foreign, or
--- -----
other income, gross receipts, ad valorem, franchise, profits,
sales or use,
<PAGE>
transfer, registration, excise, utility, environmental,
communications, real or personal property, capital stock,
license, payroll, wage or other withholding, employment, social
security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever
(including, without limitation, deficiencies, penalties,
additions to tax, and interest attributable thereto) whether
disputed or not.
"Tax Return" means any return, information report or filing with
----------
respect to Taxes, including any schedules attached thereto and
including any amendment thereof.
Section 1.18. Property.
--------
Neither the Company nor any of its subsidiaries owns any real property except
as disclosed in the SEC Documents. Each of the Company and its subsidiaries has
good and marketable title to all personal property owned by it, free and clear
of all liens, encumbrances and defects except such as do not materially affect
the value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and, except as set forth in
Schedule 4.18, to the Company's knowledge any real property and buildings held
under lease by the Company as tenant are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and intended to be made of such property and buildings by the
Company.
Section 4.19. Intellectual Property.
---------------------
Except as disclosed in the SEC Documents or in Exhibit 4.19 hereto, each of
the Company and its subsidiaries owns or possesses adequate and enforceable
rights to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright applications,
licenses, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) and
other similar rights and proprietary knowledge (collectively, "Intangibles")
necessary for the conduct of its business as now being conducted. To the
Company's knowledge, except as disclosed in the SEC Documents neither the
Company nor any of its subsidiaries is infringing upon or in conflict with any
right of any other person with respect to any Intangibles. Except as disclosed
in the SEC Documents, no claims have been asserted by any person to the
ownership or use of any Intangibles and the Company has no knowledge of any
basis for such claim.
Section 4.20. Not Used.
--------
Section 4.21. Payments and Contributions.
--------------------------
<PAGE>
Neither the Company nor any of its directors, officers or, to its knowledge,
other employees has (i) used any Company funds for any unlawful contribution,
endorsement, gift, entertainment or other unlawful expense relating to political
activity; (ii) made any direct or indirect unlawful payment of Company funds to
any foreign or domestic government official or employee; (iii) violated or is in
violation of any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any bribe, rebate, payoff, influence payment, kickback or
other similar payment to any person with respect to Company matters.
Section 4.22. No Misrepresentation.
--------------------
No representation or warranty of the Company contained in this Agreement, any
schedule, annex or exhibit hereto or any agreement, instrument or certificate
furnished by the Company to the Investors pursuant to this Agreement, contains
any untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
ARTICLE V
Covenant of the Investor
The Investor covenants and agrees with the Company as follows:
Section 5.1. Compliance with Law.
-------------------
The Investor's trading activities with respect to shares of the Company's
Common Stock will be in compliance with all applicable state and federal
securities laws, rules and regulations and rules and regulations of the
Principal Market on which the Company's Common Stock is listed.
ARTICLE VI
Covenants of the Company
Section 6.1. Registration Rights.
-------------------
The Company shall cause the Registration Rights Agreement to remain in full
force and effect and the Company shall comply in all material respects with the
terms thereof.
Section 6.2. Reservation of Common Stock.
---------------------------
<PAGE>
As of the date hereof, the Company has reserved and the Company shall continue
to reserve and keep available at all times, free of preemptive rights, shares of
Common Stock for the purpose of enabling the Company to issue the Conversion
Shares and the Warrant Shares pursuant to any conversion of the Convertible
Preferred or exercise of the Warrants; such amount of shares of Common Stock to
be reserved shall be calculated based upon a Market Price for the Common Stock
under the terms of the Convertible Preferred of $.50. The number of shares so
reserved from time to time, as theretofore increased or reduced as hereinafter
provided, may be reduced by the number of shares actually delivered pursuant to
any conversion of the Convertible Preferred or exercise of a Warrant and the
number of shares so reserved shall be increased or decreased to reflect
potential increases or decreases in the Common Stock that the Company may
thereafter be obligated to issue by reason of adjustments to the Warrants.
Section 6.3. Listing of Common Stock.
-----------------------
The Company hereby agrees to use best efforts to maintain the listing of the
Common Stock on a Principal Market, and if required by the rules of the
Principal Market, to list the Common Stock, the Conversion Shares and the
Warrant Shares on the Principal Market. The Company further agrees, if the
Company applies to have the Common Stock traded on any other Principal Market,
it will include in such application the Common Stock, the Conversion Shares and
the Warrant Shares, and will take such other action as is necessary or desirable
in the opinion of any Investor to cause the Common Stock to be listed on such
other Principal Market as promptly as possible. The foregoing sentence shall not
be construed to require the Company to seek to list its Common Stock on any
market other than the OTC Bulletin Board. The Company will use best efforts to
take all action to continue the listing and trading of its Common Stock on a
Principal Market (including, without limitation, maintaining sufficient net
tangible assets) and will use best efforts to comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the Principal Market and shall provide each Investor with copies of any
correspondence to or from such Principal Market which questions or threatens
delisting of the Common Stock, within three (3) Trading Days of the Company's
receipt thereof, until each Investor has disposed of all of its Registrable
Securities.
Section 6.4. Exchange Act Registration.
-------------------------
The Company will cause its Common Stock to continue to be registered under
Section 12(b) or (g) of the Exchange Act, will use its best efforts to comply in
all material respects with its reporting and filing obligations under the
Exchange Act, and will not take any action or file any document (whether or not
permitted by the Exchange Act or the rules thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under said Act until each Investor has disposed of all of its
Registrable Securities.
<PAGE>
Section 6.5. Legends.
-------
The certificates evidencing the Registrable Securities shall be free of
legends, except as set forth in Article IX.
Section 6.6. Corporate Existence.
-------------------
The Company will take all steps necessary to preserve and continue the
corporate existence of the Company.
Section 6.7. Consolidation; Merger.
---------------------
The Company shall not, at any time after the date hereof, effect any merger or
consolidation of the Company with or into, or a transfer of all or substantially
all of the assets of the Company to, another entity (a "Consolidation Event")
unless the resulting successor or acquiring entity (if not the Company) assumes
by written instrument or by operation of law the obligation to deliver to the
Investor such shares of stock and/or securities as the Investors are entitled to
receive pursuant to this Agreement.
Section 6.8. Private Offering Exemption.
--------------------------
The sale of the Convertible Preferred, the Common Stock and the Warrants and
the issuance of the Warrant Shares pursuant to exercise of the Warrant and the
Conversion Shares upon conversion of the Convertible Preferred shall be made in
reliance upon the provisions and requirements of Section 4(2) of the Securities
Act and any applicable state securities law. The Company shall make all
necessary SEC and "blue sky" filings required to be made by the Company in
connection with the sale of the Securities to the Investors as required by all
applicable Laws, and shall provide a copy thereof to the Investors promptly
after such filing.
Section 6.9. Limitation on Future Financing.
------------------------------
The Company agrees that it will not enter into any sale of its securities
until the Convertible Preferred has been fully converted or redeemed, without
the Investors' prior written consent, except (x) pursuant to any (i) presently
existing employee benefit plan which plan has been approved by the Company's
shareholders, (ii) compensatory plan for a full-time employee or key consultant,
or (iii) strategic partnership or other business transaction, the principal
purpose of which is not simply to raise money; (y) if the Market Price of the
Common Stock is less than $1.00 for 30 out of 45 consecutive Trading Days, and
the Investor does not agree in writing to provide financing to the Company on
terms offered by a bona fide third party within three (3) Trading Days of notice
from the Company setting forth the terms of such proposed financing or (z) up to
$1,900,000 of Series C Preferred Stock privately placed through Grady & Hatch
and Company, Inc. and an unlimited amount of equity securities in a firm
commitment
<PAGE>
underwritten offering through one or more of Gerard Klauer Mattison and/or
Furman Selz (and/or another investment banking firm of comparable size). If the
Company should breach this provision and enter into a financing arrangement on
terms which are, in the commercially reasonable judgment of the Investor, more
favorable to the subsequent investors than those contained in the Convertible
Preferred and Warrants provided for herein, then the Investor shall have, as its
sole remedy, the right, but not the obligation, to exchange its unconverted
shares of Convertible Preferred for an equal purchase price amount of such new
securities, and to exchange its unexercised Warrants for any new warrants issued
as part of such new financing.
ARTICLE VII
Survival; Indemnification
Section 7.1. Survival.
--------
The representations, warranties and covenants made by each of the Company and
the Investor in this Agreement, the annexes, schedules and exhibits hereto and
in each instrument, agreement and certificate entered into and delivered by them
pursuant to this Agreement, shall survive the Closing and the consummation of
the transactions contemplated hereby. In the event of a breach or violation of
any of such representations, warranties or covenants, the party to whom such
representations, warranties or covenants have been made shall have all rights
and remedies for such breach or violation available to it under the provisions
of this Agreement or otherwise, whether at law or in equity, irrespective of any
investigation made by or on behalf of such party on or prior to the Closing
Date.
Section 7.2. Indemnity.
---------
(a) The Company hereby agrees to indemnify and hold harmless the Investor,
its Affiliates and their respective officers, directors, partners and members
(collectively, the "Investor Indemnitees"), from and against any and all
Damages, in each case promptly as incurred by the Investor Indemnitees and to
the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any of the
Company's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement; or
<PAGE>
(ii) any failure by the Company to perform in any material respect any
of its covenants, agreements, undertakings or obligations set forth in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company pursuant
to this Agreement.
(b) The Investor hereby agrees to indemnify and hold harmless the Company,
its Affiliates and their respective officers, directors, partners and members
(collectively, the "Company Indemnitees"), from and against any and all Damages,
and agrees to reimburse the Company Indemnitees for reasonable all out-of-pocket
expenses (including the reasonable fees and expenses of legal counsel), in each
case promptly as incurred by the Company Indemnitees and to the extent arising
out of or in connection with:
(i) any misrepresentation, omission of fact, or breach of any of the
Investor's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Investor pursuant to this
Agreement; or
(ii) any failure by the Investor to perform in any material respect
any of its covenants, agreements, undertakings or obligations set forth in
this Agreement or any instrument, certificate or agreement entered into or
delivered by the Investor pursuant to this Agreement.
Section 7.3. Notice.
------
Promptly after receipt by either party hereto seeking indemnification pursuant
to Section 7.2 (an "Indemnified Party") of written notice of any investigation,
claim, proceeding or other action in respect of which indemnification is being
sought (each, a "Claim"), the Indemnified Party promptly shall notify the party
against whom indemnification pursuant to Section 7.2 is being sought (the
"Indemnifying Party") of the commencement thereof; but the omission to so notify
the Indemnifying Party shall not relieve it from any liability that it otherwise
may have to the Indemnified Party, except to the extent that the Indemnifying
Party is materially prejudiced and forfeits substantive rights and defenses by
reason of such failure. In connection with any Claim as to which both the
Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party
shall be entitled to assume the defense thereof. Notwithstanding the assumption
of the defense of any Claim by the Indemnifying Party, the Indemnified Party
shall have the right to employ separate legal counsel and to participate in the
defense of such Claim, and the Indemnifying Party shall bear the reasonable
fees, out-of-pocket costs and expenses of such separate legal counsel to the
Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed
to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party
and the Indemnifying Party reasonably shall have concluded that representation
of the Indemnified Party and the
<PAGE>
Indemnifying Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the Indemnified Party,
potentially differing interests between such parties in the conduct of the
defense of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those available to
the Indemnifying Party, or (z) the Indemnifying Party shall have failed to
employ legal counsel reasonably satisfactory to the Indemnified Party within a
reasonable period of time after notice of the commencement of such Claim. If the
Indemnified Party employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and expenses of such
legal counsel shall be borne exclusively by the Indemnified Party. Except as
provided above, the Indemnifying Party shall not, in connection with any Claim
in the same jurisdiction, be liable for the fees and expenses of more than one
firm of legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
Section 7.4. Direct Claims.
-------------
In the event one party hereunder should have a claim for indemnification that
does not involve a claim or demand being asserted by a third party, the
Indemnified Party promptly shall deliver notice of such claim to the
Indemnifying Party. If the Indemnified Party disputes the claim, such dispute
shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association as set forth in
Article X. Judgment upon any award rendered by any arbitrators may be entered
in any court having competent jurisdiction thereof.
ARTICLE VIII
Due Diligence Review; Non-Disclosure of Non-Public Information
Section 8.1. Due Diligence Review.
--------------------
Subject to Section 8.2, the Company shall make available for inspection and
review by the Investor, advisors to and representatives of the Investor (who may
or may not be affiliated with the Investor and who are reasonably acceptable to
the Company), any underwriter participating in any disposition of the
Registrable Securities on behalf of an Investor pursuant to the Registration
Statement, any such registration statement or amendment or supplement thereto or
any blue sky, Nasdaq or other filing, all SEC
<PAGE>
Documents and other filings with the SEC, and all other publicly available
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees to supply all such publicly available information reasonably requested
by an Investor or any such representative, advisor or underwriter in connection
with such Registration Statement (including, without limitation, in response to
all questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling such Investor and such
representatives, advisors and underwriters and their respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
Section 8.2. Non-Disclosure of Non-Public Information.
----------------------------------------
(a) The Company shall not disclose material non-public information to the
Investor, advisors to or representatives of the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such non-
public information for review. Other than disclosure of any comment letters
received from the SEC staff with respect to the Registration Statement, and as
required by Section 6.3, the Company may, as a condition to disclosing any non-
public information hereunder, require the Investors' advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investors. '
(b) Nothing herein shall require the Company to disclose material non-public
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate material non-public information to any
investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
promptly notify the advisors and representatives of the Investor and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of which it becomes
aware, constituting material non-public information (whether or not requested of
the Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein in light of the circumstances in which they were
made, not misleading. Nothing contained in this Section 8.2 shall be construed
to mean that such persons or entities other than the Investor (without the
written consent of the Investor prior to disclosure of such information) may not
obtain non-public information in the course of conducting
<PAGE>
due diligence in accordance with the terms of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading.
ARTICLE IX
Legends; Transfer Agent Instructions
Section 9.1. Legends.
-------
Unless otherwise provided below, each certificate representing Registrable
Securities will bear the following legend or equivalent (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION.
Section 9.2. Transfer Agent Instructions.
---------------------------
Upon the execution and delivery hereof, the Company is issuing to the transfer
agent for its Common Stock (and to any substitute or replacement transfer agent
for its Common Stock upon the Company's appointment of any such substitute or
replacement transfer agent) instructions in substantially the form of Exhibit F
hereto. Such instructions shall be irrevocable by the Company from and after the
date hereof or from and after the issuance thereof to any such substitute or
replacement transfer agent, as the case may be. It is the intent and purpose of
such instructions, as provided therein, to require the transfer agent for the
Common Stock from time to time upon transfer of Registrable Securities by the
Investor to issue certificates evidencing such Registrable Securities free of
the Legend during the following periods and under the following circumstances
and without consultation by the transfer agent with the Company or its
<PAGE>
counsel and without the need for any further advice or instruction or
documentation to the transfer agent by or from the Company or its counsel or the
Investor:
(a) at any time after the Effective Date, upon surrender of one or more
certificates evidencing Common Stock that bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered; provided that (i) the Registration
Statement shall then be effective; (ii) the Investor confirms to the transfer
agent that it has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Common Stock in a bona fide transaction to a
third party that is not an affiliate of the Company; and (iii) the Investor
confirms to the transfer agent that the Investor has complied with the
prospectus delivery requirement.
(b) at any time upon any surrender of one or more certificates evidencing
Registrable Securities that bear the Legend, to the extent accompanied by a
notice requesting the issuance of new certificates free of the Legend to replace
those surrendered and containing representations that (i) the Investor is
permitted to dispose of such Registrable Securities without limitation as to
amount or manner of sale pursuant to Rule 144(k) under the Securities Act or
(ii) the Investor has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Registrable Securities in compliance with Rule
144.
Any of the notices referred to above in this Section 9.2 may be sent by
facsimile to the Company's transfer agent.
Section 9.3. No Other Legend or Stock Transfer Restrictions.
----------------------------------------------
No legend other than the one specified in Section 9.1 has been or shall be
placed on the share certificates representing the Registrable Securities and no
instructions or "stop transfer orders," so called "stock transfer restrictions,"
or other restrictions have been or shall be given to the Company's transfer
agent with respect thereto other than as expressly set forth in this Article IX.
Section 9.4. Investor's Compliance.
---------------------
Nothing in this Article shall affect in any way the Investor's obligations
under any agreement to comply with all applicable securities laws upon resale of
the Common Stock.
ARTICLE X
<PAGE>
Choice of Law
Section 10.1. Governing Law/Arbitration.
-------------------------
This Agreement shall be governed by and construed in accordance with the laws
of the State of New York applicable to contracts made in New York by persons
domiciled in New York City and without regard to its principles of conflicts of
laws. Any dispute under this Agreement or any Exhibit attached hereto shall be
submitted to arbitration under the American Arbitration Association (the "AAA")
in New York City, New York, and shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three (3) members
(hereinafter referred to as the "Board of Arbitration") selected as according to
the rules governing the AAA. The Board of Arbitration shall meet on consecutive
business days in New York City, New York, and shall reach and render a decision
in writing (concurred in by a majority of the members of the Board of
Arbitration) with respect to the amount, if any, which the losing party is
required to pay to the other party in respect of a claim filed. In connection
with rendering its decisions, the Board of Arbitration shall adopt and follow
the laws of the State of New York. To the extent practical, decisions of the
Board of Arbitration shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. Any decision made by the Board of Arbitration (either
prior to or after the expiration of such thirty (30) calendar day period) shall
be final, binding and conclusive on the parties to the dispute, and entitled to
be enforced to the fullest extent permitted by law and entered in any court of
competent jurisdiction. The non-prevailing party to any arbitration (as
determined by the Board of Arbitration) shall pay the expenses of the prevailing
party including reasonable attorney's fees, in connection with such arbitration.
ARTICLE XI
Assignment; Entire Agreement
Section 11.1. Assignment.
----------
The Investor's interest in this Agreement may be assigned at any time, in whole
or in part, to any other person or entity (including any affiliate of the
Investor) who makes the representations and warranties contained in Article III
and who agrees to be bound by the covenants of Article V.
ARTICLE XII
<PAGE>
Notices
Section 12.1. Notices.
-------
All notices, demands, requests, consents, approvals, and other communications
required or permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted to
be given hereunder shall be deemed effective (a) upon hand delivery or delivery
by facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by reputable
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
If to the Company: SkyLynx Communications, Inc.
103 Sarasota Quay
Sarasota, FL 34236
Attention: Jeffery Mathias, President
Telephone: (941) 366-4947
Facsimile: (941) ______-__________
with a copy to: Neuman Drennen & Stone, LLC
(shall not constitute notice) Temple-Bowron House
1507 Pine Street
Boulder, CO 80302
Attention: Cliff Neuman, Esq.
Telephone: (303) 449-2100
Facsimile: (303) 449-1045
if to the Investor:
as set forth on the signature page hereto.
<PAGE>
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Facsimile: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
ARTICLE XIII
Miscellaneous
Section 13.1. Counterparts/ Facsimile/ Amendments.
-----------------------------------
This Agreement may be executed in multiple counterparts, each of which may be
executed by less than all of the parties and shall be deemed to be an original
instrument which shall be enforceable against the parties actually executing
such counterparts and all of which together shall constitute one and the same
instrument. Except as otherwise stated herein, in lieu of the original
documents, a facsimile transmission or copy of the original documents shall be
as effective and enforceable as the original. This Agreement may be amended
only by a writing executed by all parties.
Section 13.2. Entire Agreement.
----------------
This Agreement, the agreements attached as Exhibits hereto, which include, but
are not limited to the Certificate of Designation for the Convertible Preferred,
the Warrant, the Escrow Agreement, and the Registration Rights Agreement, set
forth the entire agreement and understanding of the parties relating to the
subject matter hereof and supersedes all prior and contemporaneous agreements,
negotiations and understandings between the parties, both oral and written
relating to the subject matter hereof. The terms and conditions of all Exhibits
to this Agreement are incorporated herein by this reference and shall constitute
part of this Agreement as is fully set forth herein.
Section 13.3. Severability.
------------
In the event that any provision of this Agreement becomes or is declared by a
court of competent jurisdiction to be illegal, unenforceable or void, this
Agreement shall continue in full force and effect without said provision;
provided that such severability
<PAGE>
shall be ineffective if it materially changes the economic benefit of this
Agreement to any party.
Section 13.4. Headings.
--------
The headings used in this Agreement are used for convenience only and are not
to be considered in construing or interpreting this Agreement.
Section 13.5. Reporting Entity for the Common Stock.
-------------------------------------
The reporting entity relied upon for the determination of the trading price or
trading volume of the Common Stock on any given Trading Day for the purposes of
this Agreement shall be Bloomberg, L.P. or any successor thereto. The written
mutual consent of the Investor and the Company shall be required to employ any
other reporting entity.
Section 13.6. Replacement of Certificates.
---------------------------
Upon (i) receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of a certificate representing the Common
Stock, the Convertible Preferred or any Conversion Shares or Warrant or any
Warrant Shares and (ii) in the case of any such loss, theft or destruction of
such certificate, upon delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company (which shall not exceed that
required by the Company's transfer agent in the ordinary course) or (iii) in the
case of any such mutilation, on surrender and cancellation of such certificate,
the Company at its expense will execute and deliver, in lieu thereof, a new
certificate of like tenor.
Section 13.7. Fees and Expenses.
-----------------
Each of the Company and the Investor agrees to pay its own expenses incident
to the performance of its obligations hereunder, except that the Company shall
pay the fees, expenses and disbursements of Investor's counsel in the amount of
$15,000.
Section 13.8. Brokerage.
---------
Each of the parties hereto represents that it has had no dealings in
connection with this transaction with any finder or broker who will demand
payment of any fee or commission from the other party, other than Grady & Hatch
and Company, Inc., whose fee of 6% of the purchase price of the Convertible
Preferred and a Warrant to purchase 50,000 shares of the Company's Common Stock,
identical in all other respects to the Warrant set forth as Exhibit B. The
Company on the one hand, and the Investor, on the other hand, agree to indemnify
the other against and hold the other harmless from any and all liabilities to
any person claiming brokerage commissions or finder's fees on
<PAGE>
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by the undersigned, thereunto duly authorized, as of the date first
set forth above.
SKYLYNX COMMUNICATIONS, INC.
By:
Jeffery Mathias,
President
INVESTOR:
Address: AMRO International, S.A.
c/o Ultra Finance
Grossmunster Platz 26
Zurich CH8022 By:
Switzerland H. U. Bachofen, Director
Facsimile: 011-411-262-5515
Amount subscribed for:
600 shares of Convertible Preferred at $1,000 per share.
<PAGE>
Exhibit 10.13
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of the 18th day of January, 1999,
between AMRO INTERNATIONAL, S.A., a Panama corporation, ("Holder"), and SkyLynx
Communications, Inc., a corporation incorporated under the laws of the State of
Colorado (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Holder is purchasing from the Company, pursuant to a Convertible
Preferred Stock and Warrant Purchase Agreement dated the date hereof (the
"Purchase Agreement"), 600 shares of Series B Convertible Preferred Stock,
15,000 shares of the Company's Common Stock and a Warrant to purchase up to
120,000 shares of the Company's Common Stock (terms not defined herein shall
have the meanings ascribed to them in the Purchase Agreement); and
WHEREAS, the Company desires to grant to the Holder the registration
rights set forth herein with respect to the shares of Common Stock issued
pursuant to the Purchase Agreement and issuable upon conversion of or as
dividends upon the Convertible Preferred and upon exercise of the Warrants
(hereinafter referred to as the "Stock" or "Securities" of the Company).
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
----------------------
"Registrable Security" means the Securities and the shares of Common Stock
issuable upon exercise of the Grady & Hatch Warrant to purchase up to 50,000
shares of Common Stock, until (i) the Registration Statement has been declared
effective by the Commission, and all Securities have been disposed of pursuant
to the Registration Statement, (ii) all Securities have been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) all Securities have been otherwise transferred to holders who may trade
such Securities without restriction under the Securities Act, and the Company
has delivered a new certificate or other evidence of ownership for such
Securities not bearing a restrictive legend or (iv) such time as, in the opinion
of counsel to the Company, all Securities may be sold without any time, volume
or manner limitations pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act. The term "Registrable Securities" means any
and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the Common Stock, such adjustment shall be deemed to be made in the definition
of "Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Agreement.
<PAGE>
Section 2. Restrictions on Transfer. The Holder acknowledges and
------------------------
understands that prior to the registration of the Securities as provided herein,
the Securities are "restricted securities" as defined in Rule 144 promulgated
under the Act. The Holder understands that no disposition or transfer of the
Securities may be made by Holder in the absence of (i) an opinion of counsel to
the Holder that such transfer may be made without registration under the
Securities Act or (ii) such registration.
With a view to making available to the Holder the benefits of Rule 144
under the Securities Act or any other similar rule or regulation of the
Commission that may at any time permit the Holder to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
(a) comply with the provisions of paragraph (c)(1) of Rule 144;
and
(b) file with the Commission in a timely manner all reports and
other documents required to be filed by the Company pursuant to Section 13 or
15(d) under the Exchange Act; and, if at any time it is not required to file
such reports but in the past had been required to or did file such reports, it
will, upon the request of any Holder, make available other information as
required by, and so long as necessary to permit sales of, its Registrable
Securities pursuant to Rule 144.
Section 3. Registration Rights With Respect to the Securities.
--------------------------------------------------
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("Commission") a registration statement (on
Form S-1 or SB-2, or other appropriate registration statement) under the
Securities Act (the "Registration Statement"), at the sole expense of the
Company (except as provided in Section 3(c) hereof), in respect of all holders
of Securities, so as to permit a public offering and resale of the Securities
under the Act. Such Registration Statement shall be filed no later than April
15, 1999 except as provide by Section 3(f) hereof.
The Company shall use its best efforts to cause the Registration
Statement to become effective within ninety (90) days from the filing date, or,
if earlier, within five (5) days of SEC clearance to request acceleration of
effectiveness. The number of shares designated in the Registration Statement to
be registered shall include all 15,000 shares of Common Stock issued at Closing,
the Warrant Shares and the number of shares of Common Stock which would be
issued upon conversion of the Convertible Preferred assuming a Market Price of
$.50 per share of Common Stock, and as many shares as the Company reasonably
estimates it may issue as dividends upon the Convertible Preferred, and shall
include appropriate language regarding reliance upon Rule 416 to the extent
permitted by the Commission. The Company will notify Holder of the
effectiveness of the Registration Statement within one Trading Day of such
event.
<PAGE>
(b) The Company will maintain the Registration Statement or
post-effective amendment filed under this Section 3 hereof effective under the
Securities Act until the earlier of (i) the date that none of the Convertible
Preferred, the Warrants or the Securities are or may become issued and
outstanding, (ii) the date that all of the Securities have been sold pursuant to
the Registration Statement, (iii) the date the holders thereof receive an
opinion of counsel to the Company, which counsel shall be reasonably acceptable
to the Holder, that the Securities may be sold under the provisions of Rule 144
without limitation as to volume, (iv) all Securities have been otherwise
transferred to holders who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend, or
(v) all Securities may be sold without any time, volume or manner limitations
pursuant to Rule 144(k) or any similar provision then in effect under the
Securities Act in the opinion of counsel to the Company, which counsel shall be
reasonably acceptable to the Holder (the "Effectiveness Period").
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys' fees
of the Company) shall be borne by the Company. The Holder shall bear the cost
of underwriting and/or brokerage discounts, fees and commissions, if any,
applicable to the Securities being registered and the fees and expenses of its
counsel. The Holder and its counsel shall be provided with and shall have a
reasonable period, not to exceed three (3) Trading Days, to review the proposed
Registration Statement or any amendment thereto, prior to filing with the
Commission, and the Company shall provide each Holder with copies of any comment
letters received from the Commission with respect thereto within two (2) Trading
Days of receipt thereof. The Company shall make reasonably available for
inspection by each Holder, any underwriter participating in any disposition
pursuant to the Registration Statement, and any attorney, accountant or other
agent retained by such Holder or any such underwriter all relevant financial and
other records, pertinent corporate documents and properties of the Company and
its subsidiaries, and cause the Company's officers, directors and employees to
supply all information reasonably requested by such Holder or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
provided, however, that all records, information and documents that are
- -------- -------
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material non-public information shall be kept
confidential by such Holder and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such Holder or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
promptly to seek a protective order or otherwise limit the scope of the
information sought to be
<PAGE>
disclosed) or is required by law, or such records, information or documents
become available to the public generally or through a third party not in
violation of an accompanying obligation of confidentiality; and provided further
-------- -------
that, if the foregoing inspection and information gathering would otherwise
disrupt the Company's conduct of its business, such inspection and information
gathering shall, to the maximum extent possible, be coordinated on behalf of the
Holder and the other parties entitled thereto by one firm of counsel designated
by and on behalf of the Holder and other parties. The Company shall qualify any
of the securities for sale in such states as such Holder reasonably designates
and shall furnish indemnification in the manner provided in Section 6 hereof.
However, the Company shall not be required to qualify in any state which will
require an escrow or other restriction relating to the Company and/or its
affiliates or the sellers, or which will require the Company to qualify to do
business in such state or require the Company to file therein any general
consent to service of process. The Company at its expense will supply the Holder
with copies of the Registration Statement and the prospectus included therein
and other related documents in such quantities as may be reasonably requested by
the Holder.
(d) The Company shall not be required by this Section 3 to
include the Holder's Securities in any Registration Statement which is to be
filed if, in the opinion of counsel for both the Holder and the Company (or,
should they not agree, in the opinion of another counsel experienced in
securities law matters acceptable to counsel for the Holder and the Company) the
proposed offering or other transfer as to which such registration is requested
is exempt from applicable federal and state securities laws and would result in
all purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the Securities Act.
(e) Subject to the provisions of Section 3(f) below, in the event
that (i) the Registration Statement to be filed by the Company pursuant to
Section 3(a) above is not filed with the Commission by April 15, 1999, (ii) the
Registration Statement is not declared effective by the Commission within ninety
(90) days from the filing date or (iii) the Registration Statement is not
maintained as effective by the Company for the period set forth in Section 3(b)
above (each a "Registration Default") then the Company will pay Holder (pro
rated on a daily basis), as liquidated damages for such failure and not as a
penalty two percent (2.0%) of the aggregate market value of shares of Common
Stock purchased from the Company (including the Conversion Shares which would be
issuable upon conversion of the Convertible Preferred on any date of
determination) and held by the Holder for every month or portion thereof
thereafter until the Registration Statement has been filed, and in the event of
late effectiveness (in case of clause (ii) above) or lapsed effectiveness (in
the case of clause (iii) above), two percent (2.0%) of the aggregate market
value of shares of Common Stock purchased from the Company (including the
Conversion Shares which would be issuable upon conversion of the Convertible
Preferred on any date of determination) and held by the Holder for every month
or portion thereof thereafter (regardless of whether one or more such
Registration Defaults are then in existence) until the Registration Statement
has been declared effective. Such payment of the liquidated damages shall be
made to the Holder in cash, within
<PAGE>
five (5) calendar days of demand, provided, however, that the payment of such
liquidated damages shall not relieve the Company from its obligations to
register the Securities pursuant to this Section. The market value of the Common
Stock for this purpose shall be the closing price (or last trade, if so
reported) on the Principal Market for each day during such Registration Default.
Notwithstanding anything to the contrary contained herein, a failure to maintain
the effectiveness of the Registration Statement or the ability of a Holder to
use the Registration Statement to effect resales of Securities during the period
after 45 days and within 90 days from the end of the Company's fiscal year
resulting solely from the need to update the Company's financial statements
contained or incorporated by reference in the Registration Statement shall not
constitute a Registration Default and shall not trigger the accrual of
liquidated damages hereunder.
If the Company does not remit the damages to the Holder as set
forth above, the Company will pay the Holder reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. The
registration of the Securities pursuant to this provision shall not affect or
limit Holder's other rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any Registration Statement in which it is
required to include Securities pursuant to this Section 3. It is the
understanding of the Holder that the Company may undertake a firm commitment
underwritten public offering through one or more of Furman Selz and Gerard
Klauer Mattison (and/or another investment banking firm of comparable size) (the
"Public Offering"). In the event that the registration statement for the Public
Offering is filed on or before April 15, 1999 (which may be extended to no later
than May 15, 1999 by the managing underwriter of the Public Offering), then
Holder agrees that in lieu of the Registration Statement required by this
Agreement, the Company may include Holder's Registrable Securities as a selling
securityholder in the Public Offering registration statement, but not as part of
the underwritten offering. The Public Offering registration statement will be
kept effective (at least as to Holder's Registrable Securities) for the period
otherwise required herein. Holder shall agree to such "lockup" as may be
required by the underwriters of the Public Offering, provided that under no
circumstances shall Holder be required to agree to any lockup of more than 75%
of its Registrable Securities (allocated proportionately among the Common Stock,
Conversion Shares and Warrant Shares), and as to such locked-up Registrable
Securities, such lock-up shall not exceed 180 days from the effective date of
the Public Offering registration statement. If the Public Offering is abandoned,
or the underwriters of the Public Offering require a lock-up from Holder which
is more severe than that set forth above, then the Company shall again be
obligated to file the Registration Statement called for by this Agreement for
Holder's benefit, and shall so file within 15 business days of such event. No
late filing or late registration penalties set forth in Section 3(e) shall
accrue during any period when the Public Offering registration statement is on
file and not withdrawn or abandoned, provided that the lock-up provisions
relating to Holder are as set forth in this subsection.
<PAGE>
(g) If at any time or from time to time after the effective date
of the Registration Statement, the Company notifies the Holder in writing of the
existence of a Potential Material Event (as defined in Section 3(h) below), the
Holder shall not offer or sell any Securities or engage in any other transaction
involving or relating to Securities, from the time of the giving of notice with
respect to a Potential Material Event until such Holder receives written notice
from the Company that such Potential Material Event either has been disclosed to
the public or no longer constitutes a Potential Material Event; provided,
however, that the Company may not so suspend the right to such holders of
Securities for more than twenty (20) days in the aggregate (or such greater
period, not to exceed 90 days in the aggregate, as may be required to prepare
and file audited financial statements of a company or business acquired) during
any twelve month period, during the periods the Registration Statement is
required to be in effect. If a Potential Material Event shall occur prior to the
date the Registration Statement is filed, then the Company's obligation to file
the Registration Statement shall be delayed without penalty for not more than
twenty (20) days (or such greater period, not to exceed 90 days in the
aggregate, as may be required to prepare and file audited financial statements
of a company or business acquired). The Company must give Holder notice in
writing at least two (2) Trading Days prior to the first day of the blackout
period.
(h) "Potential Material Event" means any of the following: (a)
the possession by the Company of material information not ripe for disclosure in
a registration statement, as determined in good faith by the Chief Executive
Officer or the Board of Directors of the Company that disclosure of such
information in the Registration Statement would be detrimental to the business
and affairs of the Company; or (b) any material engagement or activity by the
Company which would, in the good faith determination of the Chief Executive
Officer or the Board of Directors of the Company, be adversely affected by
disclosure in a registration statement at such time, which determination shall
be accompanied by a good faith determination by the Chief Executive Officer or
the Board of Directors of the Company that the Registration Statement would be
materially misleading absent the inclusion of such information.
Section 4. Cooperation with Company. Holder will cooperate with the
------------------------
Company in all respects in connection with this Agreement, including timely
supplying all information reasonably requested by the Company (which shall
include all information regarding the Holder and proposed manner of sale of the
Registrable Securities required to be disclosed in the Registration Statement)
and executing and returning all documents reasonably requested in connection
with the registration and sale of the Registrable Securities and entering into
and performing its obligations under any underwriting agreement, if the offering
is an underwritten offering, in usual and customary form, with the managing
underwriter or underwriters of such underwritten offering. Nothing in this
Agreement shall obligate the Holder to consent to be named as an underwriter in
the Registration Statement. The obligation of the Company to register the
Registrable Securities shall be absolute and unconditional as to
<PAGE>
those Securities which the Commission will permit to be registered without
naming the Holder as an underwriter.
Section 5. Registration Procedures. If and whenever the Company
-----------------------
is required by any of the provisions of this Agreement to effect the
registration of any of the Registrable Securities under the Act, the Company
shall (except as otherwise provided in this Agreement), as expeditiously as
possible, subject to the Holder's assistance and cooperation as reasonably
required:
(a) (i) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the Holder of such Registrable Securities shall desire to sell or otherwise
dispose of the same (including prospectus supplements with respect to the sales
of securities from time to time in connection with a registration statement
pursuant to Rule 415 promulgated under the Act) and (ii) take all lawful action
such that each of (A) the Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading and (B) the Prospectus forming part
of the Registration Statement, and any amendment or supplement thereto, does not
at any time during the Registration Period include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) (i) prior to the filing with the Commission of any
Registration Statement (including any amendments thereto) and the distribution
or delivery of any prospectus (including any supplements thereto), provide draft
copies thereof to the Holder and reflect in such documents all such comments as
the Holder (and its counsel) reasonably may propose respecting the Selling
Shareholders and Plan of Distribution sections (or equivalents) and (ii) furnish
to each Holder such numbers of copies of a prospectus including a preliminary
prospectus or any amendment or supplement to any prospectus, as applicable, in
conformity with the requirements of the Act, and such other documents, as Holder
may reasonably request in order to facilitate the public sale or other
disposition of the securities owned by such Holder;
(c) register and qualify the Registrable Securities covered by
the Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Holder shall reasonably request (subject to the limitations
set forth in Section 3(d) above), and do any and all other acts and things which
may be necessary or advisable to enable Holder to consummate the public sale or
other disposition in such jurisdiction of the securities owned by
<PAGE>
Holder, except that the Company shall not for any such purpose be required to
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified or to file therein any general consent to service of
process;
(d) list such Registrable Securities on the OTC Bulletin Board,
if required, or the American Stock Exchange, other national securities exchange,
the NASDAQ National Market or the NASDAQ Small-Cap Market, on which the Common
Stock of the Company is then listed, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or NASDAQ;
(e) notify each Holder of Registrable Securities covered by the
Registration Statement, at any time when a prospectus relating thereto covered
by the Registration Statement is required to be delivered under the Act, of the
happening of any event of which it has knowledge as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, and the Company
shall prepare and file a curative amendment under Section 5(a) as quickly as
commercially possible;
(f) as promptly as practicable after becoming aware of such
event, notify each Holder who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the Commission of any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time and
take all lawful action to effect the withdrawal, recession or removal of such
stop order or other suspension;
(g) cooperate with the Holder to facilitate the timely
preparation and delivery of certificates for the Registrable Securities to be
offered pursuant to the Registration Statement and enable such certificates for
the Registrable Securities to be in such denominations or amounts, as the case
may be, as the Holder reasonably may request and registered in such names as the
Holder may request; and, within three Trading Days after a Registration
Statement which includes Registrable Securities is declared effective by the
Commission, deliver and cause legal counsel selected by the Company to deliver
to the transfer agent for the Registrable Securities (with copies to the Holder
whose Registrable Securities are included in such Registration Statement) an
appropriate instruction and, to the extent necessary, an opinion of such
counsel;
(h) take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Holder of their Registrable
Securities in accordance with the intended methods therefor provided in the
prospectus which are customary for issuers to perform under the circumstances;
<PAGE>
(i) in the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment; and
(j) maintain a transfer agent and registrar for its Common Stock.
Section 6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Holder
and each person, if any, who controls such Holder within the meaning of the
Securities Act ("Distributing Holder") against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees), to which the Distributing
Holder may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, or any related
preliminary prospectus, final prospectus or amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
preliminary prospectus, final prospectus or amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished to the
Company by the Distributing Holder, specifically for use in the preparation
thereof. This Section 6(a) shall not inure to the benefit of any Distributing
Holder with respect to any person asserting such loss, claim, damage or
liability who purchased the Registrable Securities which are the subject thereof
if the Distributing Holder failed to send or give (in violation of the
Securities Act or the rules and regulations promulgated thereunder) a copy of
the prospectus contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of such Registrable
Securities, where the Distributing Holder was obligated to do so under the
Securities Act or the rules and regulations promulgated thereunder. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be
<PAGE>
limited to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees) to which the Company or any such officer, director or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, or any
related preliminary prospectus, final prospectus or amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but in each case only to the extent
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, preliminary prospectus, final
prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by such
Distributing Holder, specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Distributing
Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
except to the extent of actual prejudice demonstrated by the indemnifying party.
In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, assume the defense
thereof, subject to the provisions herein stated and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless the indemnifying party shall not
pursue the action to its final conclusion. The indemnified party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall not be at the
expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is the Distributing Holder, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party, or (ii) the named parties to any such action
(including any impleaded parties) include both the Distributing Holder and the
indemnifying party and the Distributing Holder shall have been advised by such
counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Distributing Holder (in which case the indemnifying
party shall not have the right to assume the defense of such action on
<PAGE>
behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 7. Contribution. In order to provide for just and equitable
------------
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 6 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 6 hereof provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any indemnified party, then the Company and the
applicable Distributing Holder shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable costs
of defense and investigation and all reasonable attorneys' fees), in either such
case (after contribution from others) on the basis of relative fault as well as
any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the applicable Distributing Holder on the other hand, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Distributing Holder
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section 7. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section 7 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
Notwithstanding any other provision of this Section 7, in no event shall any (i)
Holder be required to undertake liability to any person under this Section 7 for
any amounts in excess of the dollar amount of the proceeds to be received by
such Holder from the sale of such Holder's Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) pursuant to
any Registration Statement under which such Registrable Securities are to be
registered under the Securities Act and (ii) underwriter be required to
undertake liability to any person hereunder for any amounts in excess of the
aggregate
<PAGE>
discount, commission or other compensation payable to such underwriter with
respect to the Registrable Securities underwritten by it and distributed
pursuant to the Registration Statement.
Section 8. Notices. All notices, demands, requests, consents,
--------
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a Trading Day during normal business hours where such notice is to
be received), or the first Trading Day following such delivery (if delivered
other than on a Trading Day during normal business hours where such notice is to
be received) or (b) on the second Trading Day following the date of mailing by
reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company:
SkyLynx Communications, Inc.
103 Sarasota Quay
Sarasota, FL 34236
Attention: Jeffery Mathias, President
Telephone: (941) 366-4947
Fax: (941) ____-_____
with a copy to: Cliff Neuman, Esq.
(shall not constitute notice) Neuman Drennen & Stone, LLP
Temple-Bowron House
1507 Pine Street
Boulder, CO 80302
Telephone: (303) 449-2100
Fax: (303) 449-1045
If to the Investor: As set forth on the signature page of the
Purchase Agreement.
with a copy to: Joseph A. Smith, Esq.
<PAGE>
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Fax: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 8 by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 9. Assignment. This Agreement is binding upon and inures to
----------
the benefit of the parties hereto and their respective heirs, successors and
permitted assigns. The rights granted the Holder under this Agreement may be
assigned to any purchaser of substantially all of the Registrable Securities (or
the rights thereto) from Holder, as otherwise permitted by the Purchase
Agreement. In the event of a transfer of the rights granted under this
Agreement, the Holder agrees that the Company may require that the transferee
comply with reasonable conditions as determined in the discretion of the
Company.
Section 10. Additional Covenants of the Company. The Company agrees
-----------------------------------
that at such time as it meets all the requirements for the use of Securities Act
Registration Statement on Form S-3 it shall file all reports and information
required to be filed by it with the Commission in a timely manner and take all
such other action so as to maintain such eligibility for the use of such form.
Section 11. Counterparts/Facsimile. This Agreement may be executed
----------------------
in two or more counterparts, each of which shall constitute an original, but all
of which, when together shall constitute but one and the same instrument, and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other party. In lieu of the original, a
facsimile transmission or copy of the original shall be as effective and
enforceable as the original.
Section 12. Remedies. The remedies provided in this Agreement are
--------
cumulative and not exclusive of any remedies provided by law. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
<PAGE>
Section 13. Conflicting Agreements. The Company shall not enter into
----------------------
any agreement with respect to its securities that is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement or
otherwise prevents the Company from complying with all of its obligations
hereunder.
Section 14. Headings. The headings in this Agreement are for
--------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 15. Governing Law, Arbitration. This Agreement shall be
--------------------------
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made in New York by persons domiciled in New York City
and without regard to its principles of conflicts of laws. Any dispute under
this Agreement shall be submitted to arbitration under the American Arbitration
Association (the "AAA") in New York City, New York, and shall be finally and
conclusively determined by the decision of a board of arbitration consisting of
three (3) members (hereinafter referred to as the "Board of Arbitration")
selected as according to the rules governing the AAA. The Board of Arbitration
shall meet on consecutive Trading Days in New York City, New York, and shall
reach and render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to the amount, if any, which
the losing party is required to pay to the other party in respect of a claim
filed. In connection with rendering its decisions, the Board of Arbitration
shall adopt and follow the laws of the State of New York. To the extent
practical, decisions of the Board of Arbitration shall be rendered no more than
thirty (30) calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the
Board of Arbitration (either prior to or after the expiration of such thirty
(30) calendar day period) shall be final, binding and conclusive on the parties
to the dispute, and entitled to be enforced to the fullest extent permitted by
law and entered in any court of competent jurisdiction. The non-prevailing
party to any arbitration (as determined by the Board of Arbitration) shall pay
the expenses of the prevailing party, including reasonable attorneys' fees, in
connection with such arbitration.
Section 16. Severability. If any provision of this Agreement shall
------------
for any reason be held invalid or unenforceable, such invalidity or
unenforceablity shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable provision had never been
contained herein.
Section 17. Capitalized Terms. All capitalized terms not otherwise
-----------------
defined herein shall have the meaning assigned to them in the Purchase
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, on the day and year first above written.
<PAGE>
SkyLynx Communications, Inc.
By:
Jeffery Mathias, President
AMRO INTERNATIONAL, S.A.
By:
H. U. Bachofen, Director
<PAGE>
Exhibit 10.14
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
Dated as of April __, 1999
among
SKYLYNX COMMUNICATIONS, INC.
and
THE PURCHASERS LISTED ON EXHIBIT A
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Purchase and Sale of Preferred Stock............................................................ 1
Section 1.1 Purchase and Sale of Stock............................................................... 1
--------------------------
Section 1.2 The Conversion Shares.................................................................... 1
---------------------
Section 1.3 Purchase Price and Closing............................................................... 1
--------------------------
Section 1.4 Warrants................................................................................. 2
--------
ARTICLE II Representations and Warranties................................................................. 2
Section 2.1 Representation and Warranties of the Company............................................. 2
--------------------------------------------
(a) Organization, Good Standing and Power......................................................... 2
-------------------------------------
(b) Authorization; Enforcement.................................................................... 2
--------------------------
(c) Capitalization................................................................................ 3
--------------
(d) Issuance of Shares............................................................................ 4
------------------
(e) No Conflicts.................................................................................. 4
------------
(f) Commission Documents, Financial Statements.................................................... 5
------------------------------------------
(g) Subsidiaries.................................................................................. 5
------------
(h) No Material Adverse Change.................................................................... 6
--------------------------
(i) No Undisclosed Liabilities.................................................................... 6
--------------------------
(j) No Undisclosed Events or Circumstances........................................................ 6
--------------------------------------
(k) Indebtedness.................................................................................. 6
------------
(l) Title to Assets............................................................................... 7
---------------
(m) Actions Pending............................................................................... 7
---------------
(n) Compliance with Law........................................................................... 7
-------------------
(o) Taxes......................................................................................... 7
-----
(p) Certain Fees.................................................................................. 7
------------
(q) Disclosure.................................................................................... 8
----------
(r) Operation of Business......................................................................... 8
---------------------
(s) Environmental Compliance...................................................................... 8
------------------------
(t) Books and Record Internal Accounting Controls................................................. 9
---------------------------------------------
(u) Material Agreements........................................................................... 9
-------------------
(v) Transactions with Affiliates.................................................................. 9
----------------------------
(w) Securities Act of 1933........................................................................ 9
----------------------
(x) Governmental Approvals........................................................................ 10
----------------------
(y) Employees..................................................................................... 10
---------
(z) Absence of Certain Developments............................................................... 10
-------------------------------
(aa) Use of Proceeds............................................................................... 11
---------------
(ab) Public Utility Holding Company Act and Investment Company Act Status.......................... 12
--------------------------------------------------------------------
(ac) ERISA......................................................................................... 12
-----
(ad) Dilutive Effect............................................................................... 12
---------------
Section 2.2 Representations and Warranties of the Purchasers......................................... 12
------------------------------------------------
(a) Organization and Standing of the Purchasers................................................... 12
-------------------------------------------
(b) Authorization and Power....................................................................... 12
-----------------------
(c) No Conflicts.................................................................................. 13
------------
(d) Acquisition for Investment.................................................................... 13
--------------------------
(e) Accredited Purchasers......................................................................... 13
---------------------
(f) Rule 144...................................................................................... 13
--------
(g) Conversion Restrictions....................................................................... 14
-----------------------
(h) General....................................................................................... 14
-------
ARTICLE III Covenants..................................................................................... 14
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 3.1 Securities Compliance.................................................................... 14
---------------------
Section 3.2 Registration and Listing................................................................. 15
------------------------
Section 3.3 Inspection Rights........................................................................ 15
-----------------
Section 3.4 Compliance with Laws..................................................................... 15
--------------------
Section 3.5 Keeping of Records and Books of Account.................................................. 15
---------------------------------------
Section 3.6 Reporting Requirements................................................................... 15
----------------------
Section 3.7 Amendments............................................................................... 16
----------
Section 3.8 Other Agreements......................................................................... 16
----------------
Section 3.9 Distributions............................................................................ 16
-------------
Section 3.10 Status of Dividends...................................................................... 16
-------------------
Section 3.11 Rule 144A................................................................................ 17
---------
Section 3.12 Regulation S............................................................................. 17
------------
Section 3.13 Reservation of Shares.................................................................... 18
---------------------
Section 3.14 Transfer Agent Instructions.............................................................. 18
---------------------------
Section 3.15 Lock-up Agreements by Company Stockholders............................................... 18
------------------------------------------
Section 3.16 Limitations on the Transfer of Shares by the Purchasers.................................. 19
-------------------------------------------------------
Section 3.17 Purchase Option.......................................................................... 19
---------------
Section 3.18 Release of Purchase Price................................................................ 19
-------------------------
ARTICLE IV Conditions..................................................................................... 19
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell the Shares................. 19
------------------------------------------------------------------------
(a) Accuracy of each of the Purchaser's Representations and Warranties............................ 20
------------------------------------------------------------------
(b) Performance by the Purchasers................................................................. 20
-----------------------------
(c) No Injunction................................................................................. 20
-------------
Section 4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase the Shares.......... 20
-------------------------------------------------------------------------------
(a) Accuracy of the Company's Representations and Warranties...................................... 20
--------------------------------------------------------
(b) Performance by the Company.................................................................... 20
--------------------------
(d) No Suspension, etc............................................................................ 20
------------------
(e) No Injunction................................................................................. 21
-------------
(f) No Proceedings or Litigation.................................................................. 21
----------------------------
(g) Certificate of Designations of Rights and Preferences......................................... 21
-----------------------------------------------------
(i) Registration Rights Agreement................................................................. 21
-----------------------------
(j) Preferred Stock Certificates.................................................................. 21
----------------------------
(k) Resolutions................................................................................... 21
-----------
(l) Reservation of Shares......................................................................... 21
---------------------
(m) Transfer Agent Instructions................................................................... 22
---------------------------
(n) Secretary's Certificate....................................................................... 22
-----------------------
ARTICLE V Registration Rights............................................................................. 22
ARTICLE VI Stock Certificate Legend....................................................................... 22
Section 6.1 Legend................................................................................... 22
------
ARTICLE VII Termination................................................................................... 23
Section 7.1 Termination by Mutual Consent............................................................ 23
-----------------------------
Section 7.2 Other Termination........................................................................ 23
-----------------
Section 7.3 Effect of Termination.................................................................... 23
---------------------
ARTICLE VIII Indemnification.............................................................................. 24
Section 8.1 General Indemnity........................................................................ 24
-----------------
Section 8.2 Indemnification Procedure................................................................ 24
-------------------------
ARTICLE IX Miscellaneous.................................................................................. 25
Section 9.1 Fees and Expenses........................................................................ 25
-----------------
Section 9.2 Specific Enforcement, Consent to Jurisdiction............................................ 25
---------------------------------------------
Section 9.3 Entire Agreement; Amendment.............................................................. 26
---------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 9.4 Notices.................................................................................. 26
-------
Section 9.5 Waivers.................................................................................. 27
-------
Section 9.6 Headings................................................................................. 27
--------
Section 9.7 Successors and Assigns................................................................... 27
----------------------
Section 9.8 No Third Party Beneficiaries............................................................. 27
----------------------------
Section 9.9 Governing Law............................................................................ 27
-------------
Section 9.10 Survival................................................................................. 27
--------
Section 9.11 Counterparts............................................................................. 28
------------
Section 9.12. Publicity................................................................................ 28
---------
Section 9.13 Severability............................................................................. 28
------------
Section 9.14 Further Assurances....................................................................... 28
------------------
</TABLE>
<PAGE>
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
This SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the
"Agreement") is dated as of April __, 1999 by and among SkyLynx Communications,
- ----------
Inc., a Colorado corporation (the "Company"), and each of the Purchasers of
-------
shares of Series D Convertible Preferred Stock of the Company whose name is set
forth on Exhibit A hereto (each a "Purchaser" and collectively, the
---------
"Purchasers").
----------
The parties hereto agree as follows:
ARTICLE I
Purchase and Sale of Preferred Stock
Section 1.1 Purchase and Sale of Stock. Upon the following terms and
--------------------------
conditions, the Company shall issue and sell to the Purchasers and the
Purchasers shall purchase from the Company, the number of shares of the
Company's Series D Convertible Preferred Stock, par value $.01 per share (the
"Preferred Shares"), at a purchase price of $1,000 per share, set forth with
- -----------------
respect to such Purchaser on Exhibit A hereto. Upon the following terms and
conditions, the Purchasers shall be issued Warrants, in substantially the form
attached hereto as Exhibit B (the "Warrants"), to purchase the Company's Common
--------
Stock, par value $.001 per share (the "Common Stock"). The designation, rights,
------------
preferences and other terms and provisions of the Series D Convertible Preferred
Stock are set forth in the Certificate of Designations attached hereto as
Exhibit C (the "Certificate of Designations"). The Company and the Purchasers
---------------------------
are executing and delivering this Agreement in accordance with and in reliance
upon the exemption from securities registration afforded by Rule 506 of
Regulation D ("Regulation D") as promulgated by the United States Securities and
------------
Exchange Commission (the "Commission") under the Securities Act of 1933, as
----------
amended (the "Securities Act").
--------------
Section 1.2 The Conversion Shares. The Company has authorized and has
---------------------
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, a sufficient number of its
authorized but unissued shares of its Common Stock, to effect the conversion of
the Preferred Shares and exercise of the Warrants. Any shares of Common Stock
issuable upon conversion of the Preferred Shares and exercise of the Warrants
(and such shares when issued) are herein referred to as the "Conversion Shares"
-----------------
and the "Warrant Shares", respectively. The Preferred Shares, the Conversion
--------------
Shares and the Warrant Shares are sometimes collectively referred to as the
"Shares".
- -------
Section 1.3 Purchase Price and Closing. The Company agrees to issue and
--------------------------
sell to the Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers, severally but not jointly, agree to purchase that number of the
Preferred Shares set forth opposite their respective names
<PAGE>
on Exhibit A. The aggregate purchase price of the Preferred Shares being
acquired by each Purchaser (the "Purchase Price") is set forth opposite such
Purchaser's name on Exhibit A. The closing of the purchase and sale of the
Preferred Shares to be acquired by the Purchasers from the Company under this
Agreement shall take place at the offices of Kelley Drye & Warren LLP, 101 Park
Avenue New York, New York (the "Closing") at 11:00 a.m. New York Time on April
-------
__, 1999 or such other time and place or on such date as the Purchasers and the
Company may agree upon (the "Closing Date"). On the Closing Date, the Company
------------
shall deliver to each Purchaser a certificate for the number and series of
Preferred Shares set forth opposite such Purchaser's name under the heading
"Number of Preferred Shares to be Purchased" on Exhibit A hereto, registered in
such Purchaser's name (or its nominee) and such Purchaser shall pay the Purchase
Price by wire transfer of funds into the Company's account at Norwest Bank
Colorado, N.A., ABA #102000076, Account #1063047378.
Section 1.4 Warrants. The Company agrees to issue to the Purchasers the
--------
Warrants to purchase 30,588 shares of Common Stock per $1,000,000 purchased (or
such pro rata amount if more or less than $1,000,000 is purchased). The Warrants
shall have an exercise price of $8.17 (as such price may be adjusted from time
to time as shall result from the adjustments specified in Section 4 of the
Warrants) and shall expire at the later of (i) the date of the first anniversary
of the issuance date of such Warrant and (ii) the date six (6) months following
an underwritten public offering of any security of the Company (an "Offering").
--------
ARTICLE II
Representations and Warranties
Section 2.1 Representation and Warranties of the Company. The Company
--------------------------------------------
hereby makes the following representations and warranties to the Purchasers:
(a) Organization, Good Standing and Power. The Company is a
-------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Colorado and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted. The Company does not have any subsidiaries except as set
forth in the Company's Form 10-KSB for the year ended December 31, 1998,
including the accompanying financial statements (the "Form 10-KSB") or on
-----------
Schedule 2.1(a) hereto. The Company and each such subsidiary is duly qualified
- ---------------
as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary except for any jurisdiction(s) (alone or
in the aggregate) in which the failure to be so qualified will not have a
material adverse effect on the Company's financial condition.
(b) Authorization; Enforcement. The Company has the requisite
--------------------------
corporate power and authority to enter into and perform this Agreement, the
Irrevocable Transfer Agent Instructions (as defined in Section 3.14), the
Registration Rights Agreement attached hereto as Exhibit D (the "Registration
------------
Rights Agreement") and the Warrants (collectively, the
<PAGE>
"Transaction Documents") and to issue and sell the Shares in accordance with the
---------------------
terms of this Agreement, the Certificate of Designations and the Warrants. The
execution, delivery and performance of the Transaction Documents and the
Certificate of Designations by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required. This Agreement has been duly executed and delivered by the Company.
The Registration Rights Agreement will have been duly executed and delivered by
the Company at the Closing. Each of the Transaction Documents constitutes, or
shall constitute when executed and delivered, a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally the enforcement of, creditor's
rights and remedies or by other equitable principles of general application.
(c) Capitalization. The authorized capital stock of the Company
and the shares thereof currently issued and outstanding as of April 16, 1999 are
set forth on Schedule 2.1(c) hereto. All of the outstanding shares of the
--------------
Company's Common Stock and Series D Convertible Preferred Stock, and of any
other series of the Company's preferred stock, if any, have been duly and
validly authorized. Except as set forth in the Form 10-KSB, the Articles or on
Schedule 2.1(c) hereto, no shares of Common Stock or Series D Convertible
- --------------
Preferred Stock or any other shares of any of series the Company's preferred
stock, if any, are entitled to preemptive rights or registration rights and
there are no outstanding options, warrants, scrip, rights to subscribe to, call
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company. Furthermore,
except as set forth in this Agreement and the Registration Rights Agreement and
as set forth in the Form 10-KSB, the Articles or on Schedule 2.1(c), there are
---------------
no contracts, commitments, understandings, or arrangements by which the Company
is or may become bound to issue additional shares of the capital stock of the
Company or options, securities or rights convertible into shares of capital
stock of the Company. Except for customary transfer restrictions contained in
agreements entered into by the Company in order to sell restricted securities or
as provided on Schedule 2.1 (c) hereto, the Company is not a party to any
----------------
agreement granting registration or anti-dilution rights to any person with
respect to any of its equity or debt securities. Except as provided on Schedule
--------
2.1(c), the Company is not a party to, and it has no knowledge of, any agreement
- ------
restricting the voting or transfer of any shares of the capital stock of the
Company. Except as set forth on Schedule 2.1(c) hereto, the offer and sale of
---------------
all capital stock, convertible securities, rights, warrants, or options of the
Company issued prior to the Closing complied with all applicable Federal and
state securities laws, and no stockholder has a right of rescission or damages
with respect thereto which would have a Material Adverse Effect (as defined in
Section 2.1(e) herein) on the Company's financial condition or operating
results. The Company has furnished to each Purchaser a true, complete and
correct copy of the Company's Articles of Incorporation, with any and all
amendments thereto, as in effect on the date hereof (the "Articles"), and the
--------
Company's Bylaws, with any and all amendments thereto, as in effect on the date
hereof (the "Bylaws").
------
<PAGE>
(d) Issuance of Shares. The Preferred Shares to be issued at the
------------------
Closing have been duly authorized by all necessary corporate action and, when
paid for or issued in accordance with the terms hereof, the Preferred Shares
shall be validly issued and outstanding, fully paid and nonassessable and
entitled to the rights and preferences set forth in the Certificate of
Designations. When the Conversion Shares and the Warrant Shares are issued in
accordance with the terms of the Preferred Shares as set forth in the
Certificate of Designations and the Warrants, respectively, such shares will be
duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, and the holders shall be entitled to
all rights accorded to a holder of Common Stock. A sufficient number of shares
of Common Stock (subject to adjustment as pursuant to the Company's covenant set
forth in Section 3.13 below) has been duly authorized and reserved for issuance
upon conversion of the Preferred Shares and upon exercise of the Warrants.
(e) No Conflicts. The execution, delivery and performance of the
------------
Transaction Documents by the Company, the performance by the Company of its
obligations under the Certificate of Designations and the consummation by the
Company of the transactions contemplated herein and therein do not (i) violate
any provision of the Articles or Bylaws, (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, mortgage, deed of trust,
indenture, note, bond, license, lease agreement, instrument or obligation to
which the Company is a party, (iii) create or impose a lien, charge or
encumbrance on any property of the Company under any agreement or any commitment
to which the Company is a party or by which the Company is bound or by which any
of its respective properties or assets are bound, or (iv) to the best of the
Company's knowledge, result in a violation of any federal, state, local or
foreign statute, rule, regulation, order, judgment or decree (including Federal
and state securities laws and regulations) applicable to the Company or any of
its subsidiaries or by which any property or asset of the Company or any of its
subsidiaries are bound or affected, except, in all cases other than violations
pursuant to clause (i) above, for such conflicts, defaults, terminations,
amendments, acceleration, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect. For the
purposes of this Agreement, "Material Adverse Effect" means any adverse effet
-----------------------
on the business, operations, properties, prospects, or financial condition of
the Company or its subsidiaries and which is material to such entity or other
entities controlling or controlled by such entity. The business of the Company
and its subsidiaries is not being conducted in violation of any laws, ordinances
or regulations of any governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a Material Adverse
Effect. The Company is not required under Federal, state or local law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under the Transaction
Documents or the Certificate of Designations, or issue and sell the Preferred
Shares, the Conversion Shares and the Warrant Shares in accordance with the
terms hereof or thereof (other than any filings which may be required to be made
by the Company with the Commission or state securities administrators subsequent
to the Closing, any registration statement which may be filed pursuant hereto,
and the Certificate of Designations with the Secretary of State of the State of
Colorado); provided that, for purposes of the representation
<PAGE>
made in this sentence, the Company is assuming and relying upon the accuracy of
the relevant representations and agreements of each Purchaser herein.
(f) Commission Documents, Financial Statements. The Common Stock of
------------------------------------------
the Company is registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, except as disclosed
------------
in the Form 10-KSB or on Schedule 2.1(f) hereto, the Company has timely filed
---------------
all reports, schedules, forms, statements and other documents required to be
filed by it with the Commission pursuant to the reporting requirements of the
Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the
Exchange Act (all of the foregoing including filings incorporated by reference
therein being referred to herein as the "Commission Documents"). The Company
--------------------
has delivered or made available to each of the Purchasers true and complete
copies of the Commission Documents filed with the Commission since December 16,
1998. The Company has not provided to any of the Purchasers any material non-
public information or other information which, according to applicable law, rule
or regulation, should have been disclosed publicly by the Company but which has
not been so disclosed, other than with respect to the transactions contemplated
by this Agreement. As of their respective dates, the Form 10-KSB for the year
ended December 31, 1998 and the Form 10-QSB for the fiscal quarter ended
September 30, 1998 complied in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Commission promulgated
thereunder and other federal, state and local laws, rules and regulations
applicable to such documents, and, as of their respective dates, none of the
Form 10-KSB and the Form 10-QSB referred to above contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Commission Documents comply as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") applied on
----
a consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements), and fairly present in all material
respects the financial position of the Company and its subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) Subsidiaries. Schedule 2.1(g) hereto sets forth each subsidiary
------------ ---------------
of the Company, showing the jurisdiction of its incorporation or organization
and showing the percentage of each applicable person's ownership of the
outstanding stock or other interests of such subsidiary. Each subsidiary is a
corporation duly incorporated, validly existing and in good standing under the
laws of the state of its incorporation and has the requisite corporate power to
own, lease and operate its properties and assets and to conduct its business as
it is now being conducted. For the purposes of this Agreement, "subsidiary"
----------
shall mean any corporation or other entity of which at least a majority of the
securities or other ownership interest having ordinary voting power (absolutely
or contingently) for the election of directors or other persons performing
similar functions are at the time owned directly or indirectly by the Company
and/or
<PAGE>
any of its other subsidiaries. All of the outstanding shares of capital stock of
each subsidiary have been duly authorized and validly issued, and are fully paid
and nonassessable. There are no outstanding preemptive, conversion or other
rights, options, warrants or agreements granted or issued by or binding upon any
subsidiary for the purchase or acquisition of any shares of capital stock of any
subsidiary or any other securities convertible into, exchangeable for or
evidencing the rights to subscribe for any shares of such capital stock. Neither
the Company nor any subsidiary is subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of the
capital stock of any subsidiary or any convertible securities, rights, warrants
or options of the type described in the preceding sentence. Neither the Company
nor any subsidiary is party to, nor has any knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of any
subsidiary.
(h) No Material Adverse Change. Since September 30, 1998, the date
--------------------------
through which the most recent quarterly report of the Company on Form 10-QSB has
been prepared and filed with the Commission, a copy of which is included in the
Commission Documents, the Company has not experienced or suffered any Material
Adverse Effect, except as disclosed on Schedule 2.1(h) hereto.
---------------
(i) No Undisclosed Liabilities. To the best of the Company's
--------------------------
knowledge, except as disclosed on Schedule 2.1(i) hereto, neither the Company
---------------
nor any of its subsidiaries has any liabilities, obligations, claims or losses
(whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) other than those incurred in the ordinary course of the
Company's or its subsidiaries respective businesses since December 31, 1998 and
which, individually or in the aggregate, do not or would not have a Material
Adverse Effect on the Company or its subsidiaries.
(j) No Undisclosed Events or Circumstances. No event or circumstance
--------------------------------------
has occurred or exists with respect to the Company or its subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(k) Indebtedness. The Form 10-KSB or Schedule 2.1(k) hereto sets
------------ ---------------
forth as of the date hereof all outstanding secured and unsecured Indebtedness
of the Company or any subsidiary, or for which the Company or any subsidiary has
commitments. For the purposes of this Agreement, "Indebtedness" shall mean (a)
------------
any liabilities for borrowed money or amounts owed in excess of $25,000 (other
than trade accounts payable incurred in the ordinary course of business), (b)
all guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value of
any lease payments in excess of $25,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any subsidiary is
in default with respect to any Indebtedness.
<PAGE>
(l) Title to Assets. Each of the Company and the subsidiaries has
---------------
good title to all of its real and personal property reflected in the Commission
Documents, free of any mortgages, pledges, charges, liens, security interests or
other encumbrances, except as that, individually or in the aggregate, do not
cause a Material Adverse Effect on the Company's financial condition or
operating results. All said leases of the Company and each of its subsidiaries
are valid and subsisting and in full force and effect.
(m) Actions Pending. There is no action, suit, claim, investigation
---------------
or proceeding pending or, to the knowledge of the Company, threatened against
the Company or any subsidiary which questions the validity of this Agreement or
the transactions contemplated hereby or any action taken or to be taken pursuant
hereto or thereto. Except as set forth on Schedule 2.1(m) hereto, there is no
---------------
action, suit, claim, investigation or proceeding pending or, to the knowledge of
the Company, threatened, against or involving the Company, any subsidiary or any
of their respective properties or assets. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their capacities as such.
(n) Compliance with Law. The business of the Company and the
-------------------
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as that, individually or in the aggregate, do not cause a
Material Adverse Effect. The Company and each of its subsidiaries have all
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals necessary for the conduct of its business as now
being conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations and
approvals, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.
(o) Taxes. The Company and each of the subsidiaries has accurately
-----
prepared and filed all federal, state and other tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown
to be due and all additional assessments, and adequate provisions have been and
are reflected in the financial statements of the Company and the subsidiaries
for all current taxes and other charges to which the Company or any subsidiary
is subject and which are not currently due and payable, except for taxes, if
unpaid, individually or in the aggregate, do not and would not have a Material
Adverse Effect on the Company or its subsidiaries. None of the federal income
tax returns of the Company or any subsidiary for the years subsequent to
December 31, 1996 has been audited by the Internal Revenue Service. The Company
has no knowledge of any additional assessments, adjustments or contingent tax
liability (whether federal or state) pending or threatened against the Company
or any subsidiary for any period, nor of any basis for any such assessment,
adjustment or contingency.
(p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, no
------------ ---------------
brokers, finders or financial advisory fees or commissions will be payable by
the Company or any subsidiary or any of the Purchasers with respect to the
transactions contemplated by this Agreement.
<PAGE>
(q) Disclosure. To the best of the Company's knowledge, neither this
----------
Agreement or the Schedules hereto nor any other documents, certificates or
instruments furnished to each of the Purchasers by or on behalf of the Company
or any subsidiary in connection with the transactions contemplated by this
Agreement contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made herein or therein,
in the light of the circumstances under which they were made herein or therein,
not misleading.
(r) Operation of Business. The Company and each of the subsidiaries
---------------------
owns or possesses all patents, trademarks, service marks, trade names,
copyrights, licenses and authorizations as set forth in the Form 10-KSB and on
Schedule 2.1(r) hereto, and all rights with respect to the foregoing, which are
- ---------------
necessary for the conduct of its business as now conducted without any conflict
with the rights of others.
(s) Environmental Compliance. Except as disclosed in the Form 10-KSB
------------------------
or on Schedule 2.1(s) hereto, the Company and each of its subsidiaries have
---------------
obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any
Environmental Laws. The Form 10-KSB or Schedule 2.1(s) hereto sets forth all
---------------
material permits, licenses and other authorizations issued under any
Environmental Laws to the Company or its subsidiaries. "Environmental Laws"
------------------
shall mean all applicable laws relating to the protection of the environment
including, without limitation, all requirements pertaining to reporting,
licensing, permitting, controlling, investigating or remediating emissions,
discharges, releases or threatened releases of hazardous substances, chemical
substances, pollutants, contaminants or toxic substances, materials or wastes,
whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
material or wastes, whether solid, liquid or gaseous in nature. Except as set
forth in the Form 10-KSB or on Schedule 2.1(s) hereto, the Company has all
---------------
necessary governmental approvals required under all Environmental Laws and used
in its business or in the business of any of its subsidiaries. The Company and
each of its subsidiaries are also in compliance with all other limitations,
restrictions, conditions, standards, requirements, schedules and timetables
required or imposed under all Environmental Laws. Except for such instances as
would not individually or in the aggregate have a Material Adverse Effect, there
are no past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its subsidiaries
that violate or may violate any Environmental Law after the Closing or that may
give rise to any environmental liability, or otherwise form the basis of any
claim, action, demand, suit, proceeding, hearing, study or investigation (i)
under any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous substance.
"Environmental Liabilities" means all liabilities of a person (whether such
- --------------------------
liabilities are owed by such person to governmental authorities, third parties
or otherwise) whether currently in existence or arising hereafter which arise
under or
<PAGE>
relate to any Environmental Law.
(t) Books and Record Internal Accounting Controls. The records and
---------------------------------------------
documents of the Company and its subsidiaries accurately reflect in all material
respects the information relating to the business of the Company and the
subsidiaries, the location and collection of their assets, and the nature of all
transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary.
(u) Material Agreements. Except as set forth in the Form 10-KSB or
-------------------
on Schedule 2.1(u) hereto, neither the Company nor any subsidiary is a party to
---------------
any written or oral contract, instrument, agreement, commitment, obligation,
plan or arrangement, a copy of which would be required to be filed with the
Commission as an exhibit to a registration statement on Form S-3 or applicable
form (collectively, "Material Agreements") if the Company or any subsidiary were
-------------------
registering securities under the Securities Act. The Company and each of its
subsidiaries have in all material respects performed all the obligations
required to be performed by them to date under the foregoing agreements, have
received no notice of default and, to the best of the Company's knowledge are
not in default under any Material Agreement now in effect, the result of which
could cause a Material Adverse Effect. No written or oral contract, instrument,
agreement, commitment, obligation, plan or arrangement of the Company or of any
subsidiary limits or shall limit the payment of dividends on the Company's
Preferred Shares, other preferred stock, if any, or its Common Stock.
(v) Transactions with Affiliates. Except as set forth in the Form
----------------------------
10-KSB or on Schedule 2.1(v) hereto, there are no loans, leases, agreements,
---------------
contracts, royalty agreements, management contracts or arrangements or other
continuing transactions exceeding $50,000 between (a) the Company, any
subsidiary or any of their respective customers or suppliers on the one hand,
and (b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person owning any capital stock of
the Company or any subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder.
(w) Securities Act of 1933. The Company has complied and will comply
----------------------
with all applicable Federal and state securities laws in connection with the
offer, issuance and sale of the Preferred Shares and the Warrants hereunder.
Neither the Company nor anyone acting on its behalf, directly or indirectly, has
or will sell, offer to sell or solicit offers to buy the Preferred Shares, the
Warrants or similar securities to, or solicit offers with respect thereto from,
or enter into any preliminary conversations or negotiations relating thereto
with, any person, or has taken or will take any action so as to bring the
issuance and sale of the Preferred Shares and the Warrants under the
registration provisions of the Securities Act and applicable state securities
laws. Neither the Company nor any of its affiliates, nor any person acting on
its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of the Preferred Shares and the Warrants.
<PAGE>
(x) Governmental Approvals. Except as set forth in the Form 10-KSB
----------------------
or on Schedule 2.1(x) hereto, and except for the filing of any notice prior or
---------------
subsequent to the Closing that may be required under applicable state and/or
Federal securities laws (which if required, shall be filed on a timely basis),
including the filing of a registration statement or statements pursuant to the
Registration Rights Agreement, and the filing of the Certificate of Designations
with the Secretary of State for the State of Colorado, no authorization,
consent, approval, license, exemption of, filing or registration with any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with, the execution or delivery of the Preferred Shares, or for the
performance by the Company of its obligations under the Transaction Documents or
the Certificate of Designations.
(y) Employees. Neither the Company nor any subsidiary has any
---------
collective bargaining arrangements or agreements covering any of its employees,
except as set forth in the Form 10-KSB or on Schedule 2.1(y) hereto. Except as
---------------
set forth in the Form 10-KSB or on Schedule 2.1(y) hereto, neither the Company
---------------
nor any subsidiary has any employment contract, agreement regarding proprietary
information, non-competition agreement, non-solicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be
employed or engaged by the Company or such subsidiary. Since December 31, 1998,
no officer, consultant or key employee of the Company or any subsidiary whose
termination, either individually or in the aggregate, could have a Material
Adverse Effect, has terminated or, to the knowledge of the Company, has any
present intention of terminating his or her employment or engagement with the
Company or any subsidiary.
(z) Absence of Certain Developments. Except as provided in the Form
-------------------------------
10-KSB or on Schedule 2.1(z) hereto, since December 31, 1998, neither the
---------------
Company nor any subsidiary has:
(i) issued any stock, bonds or other corporate securities or
any rights, options or warrants with respect thereto;
(ii) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities
incurred in the ordinary course of business which are comparable
in nature and amount to the current liabilities incurred in the
ordinary course of business during the comparable portion of its
prior fiscal year, as adjusted to reflect the current nature and
volume of the Company's or such subsidiary's business;
(iii) discharged or satisfied any lien or encumbrance or paid
any obligation or liability (absolute or contingent), other than
current liabilities paid in the ordinary course of business;
(iv) declared or made any payment or distribution of cash or
other property to stockholders with respect to its stock, or
purchased or redeemed, or made any
<PAGE>
agreements so to purchase or redeem, any shares of its capital
stock;
(v) sold, assigned or transferred any other tangible assets,
or canceled any debts or claims, except in the ordinary course of
business;
(vi) sold, assigned or transferred any patent rights,
trademarks, trade names, copyrights, trade secrets or other
intangible assets or intellectual property rights, or disclosed
any proprietary confidential information to any person except to
customers in the ordinary course of business or to each of the
Purchasers or their representatives;
(vii) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of
business, or suffered the loss of any material amount of
prospective business;
(viii) made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;
(ix) made capital expenditures or commitments therefor that
aggregate in excess of $100,000;
(x) other than the transactions contemplated by this
Agreement, entered into any other transaction other than in the
ordinary course of business, or entered into any other material
transaction, whether or not in the ordinary course of business;
(xi) made charitable contributions or pledges in excess of
$25,000;
(xii) suffered any material damage, destruction or casualty
loss, whether or not covered by insurance;
(xiii) experienced any material problems with labor or
management in connection with the terms and conditions of their
employment;
(xiv) effected any two or more events of the foregoing kind
which in the aggregate would be material to the Company or its
subsidiaries; or
(xv) entered into an agreement, written or otherwise, to take
any of the foregoing actions.
(aa) Use of Proceeds. The proceeds from the sale of the Preferred
---------------
Shares will be used by the Company for acquisitions of national and local
Internet Service Providers listed on Schedule 2.1(aa) attached hereto.
-----------------
(ab) Public Utility Holding Company Act and Investment Company Act
-------------------------------------------------------------
Status. The Company is not a "holding company" or a "public utility company" as
- ------ --------------- ----------------------
such terms are
<PAGE>
defined in the Public Utility Holding Company Act of 1935, as amended. The
Company is not, and as a result of and immediately upon Closing will not be, an
"investment company" or a company "controlled" by an "investment--------------
company," within the meaning of the Investment Company Act of 1940, as amended.
- -------
(ac) ERISA. No liability to the Pension Benefit Guaranty Corporation
-----
has been incurred with respect to any Plan by the Company or any of its
subsidiaries which is or would be materially adverse to the Company and its
subsidiaries. The execution and delivery of this Agreement and the issue and
sale of the Preferred Shares will not involve any transaction which is subject
to the prohibitions of Section 406 of ERISA or in connection with which a tax
could be imposed pursuant to Section 4975 of the Internal Revenue Code of 1986,
as amended, provided that, if any of the Purchasers, or any person or entity
that owns a beneficial interest in any of the Purchasers, is an "employee
--------
pension benefit plan" (within the meaning of Section 3(2) of ERISA) with respect
- --------------------
to which the Company is a "party in interest" (within the meaning of Section
-----------------
3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if
applicable, are met. As used in this Section 2.1(ac), the term "Plan" shall
----
mean an "employee pension benefit plan" (as defined in Section 3 of ERISA) which
is or has been established or maintained, or to which contributions are or have
been made, by the Company or any subsidiary or by any trade or business, whether
or not incorporated, which, together with the Company or any subsidiary, is
under common control, as described in Section 414(b) or (c) of the Code.
(ad) Dilutive Effect. The Company understands and acknowledges that
---------------
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares in accordance
with this Agreement and the Certificate of Designations and its obligations to
issue the Warrant Shares upon the exercise of the Warrants in accordance with
this Agreement and the Warrants, is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interest of other stockholders of the Company.
Section 2.2 Representations and Warranties of the Purchasers. Each of
------------------------------------------------
the Purchasers hereby makes the following representations and warranties to the
Company with respect solely to itself and not with respect to any other
Purchaser:
(a) Organization and Standing of the Purchasers. If the Purchaser is
-------------------------------------------
an entity, such Purchaser is a corporation or partnership duly incorporated or
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.
(b) Authorization and Power. The Purchaser has the requisite power
-----------------------
and authority to enter into and perform this Agreement and to purchase the
Preferred Shares being sold to it hereunder. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by such
Purchaser and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate or partnership
action (if the Purchaser is an entity), and no further consent or authorization
of such
<PAGE>
Purchaser or its Board of Directors, stockholders, or partners, as the
case may be, is required. Each of this Agreement and the Registration Rights
Agreement has been duly authorized, executed and delivered by such Purchaser.
(c) No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Registration Rights Agreement and the consummation by such
Purchaser of the transactions contemplated hereby and thereby or relating hereto
do not and will not (i) result in a violation of such Purchaser's charter
documents or bylaws or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument to which such Purchaser
is a party, or result in a violation of any law, rule, or regulation, or any
order, judgment or decree of any court or governmental agency applicable to such
Purchaser or its properties (except for such conflicts, defaults and violations
as would not, individually or in the aggregate, have a Material Adverse Effect
on such Purchaser). Such Purchaser is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or the Registration Rights Agreement or to
purchase the Preferred Shares in accordance with the terms hereof, provided that
for purposes of the representation made in this sentence, such Purchaser is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Company herein.
(d) Acquisition for Investment. Such Purchaser is purchasing the
--------------------------
Preferred Shares solely for its own account for the purpose of investment and
not with a view to or for sale in connection with distribution. Such Purchaser
does not have a present intention to sell the Preferred Shares, nor a present
arrangement (whether or not legally binding) or intention to effect any
distribution of the Preferred Shares to or through any person or entity;
provided, however, that by making the representations herein and subject to
- -------- --------
Section 2.2(f) below, such Purchaser does not agree to hold the Preferred Shares
for any minimum or other specific term and reserves the right to dispose of the
Preferred Shares at any time in accordance with Federal securities laws
applicable to such disposition. Such Purchaser acknowledges that it is able to
bear the financial risks associated with an investment in the Preferred Shares
and that it has been given full access to such records of the Company and the
subsidiaries and to the officers of the Company and the subsidiaries as it has
deemed necessary or appropriate to conduct its due diligence investigation.
(e) Accredited Purchasers. Such Purchaser is an "accredited
--------------------- ----------
investor" as defined in Regulation D promulgated under the Securities Act.
(f) Rule 144. Such Purchaser understands that the Shares must be
--------
held indefinitely unless such Shares are registered under the Securities Act or
an exemption from registration is available. Such Purchaser acknowledges that
such person is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
--------
and that such person has been advised that Rule 144 permits resales only under
certain circumstances. Such Purchaser understands that to the extent that Rule
144 is not available, such person will be unable to sell any Preferred Shares
without either registration under the Securities Act or the existence of another
exemption from such registration
<PAGE>
requirement.
(g) Conversion Restrictions. Notwithstanding anything to the
-----------------------
contrary set forth herein or in the Certificate of Designations, in no event
shall any holder be entitled to convert Series D Preferred Stock in excess of
that number of shares of Series D Convertible Preferred Stock which, upon giving
effect to such conversion, would cause the aggregate number of shares of Common
Stock beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such conversion. For purposes
of the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the shares of Series D
Convertible Preferred Stock with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) conversion of the remaining, nonconverted
shares of Series D Convertible Preferred Stock beneficially owned by the holder
and its affiliates, and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the holder
and its affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 2(a), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended.
(h) General. Such Purchaser understands that the Shares are being
-------
offered and sold in reliance on a transactional exemption from the registration
requirement of Federal and state securities laws and the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Shares.
ARTICLE III
Covenants
The Company covenants with each of the Purchasers as follows, which
covenants are for the benefit of the Purchasers and their permitted assignees
(as defined herein).
Section 3.1 Securities Compliance.
---------------------
(a) The Company shall notify the Commission in accordance with
their rules and regulations, of the transactions contemplated by any of the
Transaction Documents, including filing a Form D with respect to the Preferred
Shares, Warrants, Conversion Shares and Warrants Shares as required under
Regulation D, and shall take all other necessary action and proceedings as may
be required and permitted by applicable law, rule and regulation, for the legal
and valid issuance of the Preferred Shares and the Warrant Shares to each of the
Purchasers or subsequent holders.
<PAGE>
(b) The Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
such Purchasers set forth herein in order to determine the applicability of
Federal and state securities laws exemptions and the suitability of such
Purchasers to acquire the Preferred Shares.
Section 3.2 Registration and Listing. The Company will cause its Common
------------------------
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to this Agreement or the Registration Rights Agreement,
and will not take any action or file any document (whether or not permitted by
the Securities Act or the rules promulgated thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act, except as permitted
herein. The Company will take all action necessary to continue the listing or
trading of its Common Stock on the over-the-counter electronic bulletin board
(the "OTC Bulletin Board") or any relevant market or system, if applicable, and
------------------
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of NASD, the Nasdaq system or any relevant
market or system.
Section 3.3 Inspection Rights. The Company shall permit, during normal
-----------------
business hours and upon reasonable request and reasonable notice, each Purchaser
or any employees, agents or representatives thereof, so long as such Purchaser
shall be obligated hereunder to purchase the Preferred Shares or shall
beneficially own any Preferred Shares, or shall own Conversion Shares which, in
the aggregate, represent more than 2% of the total combined voting power of all
voting securities then outstanding, to examine and make reasonable copies of and
extracts from the records and books of account of, and visit and inspect the
properties, assets, operations and business of the Company and any subsidiary,
and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees.
Section 3.4 Compliance with Laws. The Company shall comply, and cause
--------------------
each subsidiary to comply, with all applicable laws, rules, regulations and
orders, noncompliance with which could have a Material Adverse Effect.
Section 3.5 Keeping of Records and Books of Account. The Company shall
---------------------------------------
keep and cause each subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
Section 3.6 Reporting Requirements. The Company shall furnish the
----------------------
following to each Purchaser so long as such Purchaser shall be obligated
hereunder to purchase the Preferred Shares or shall beneficially own any
Preferred Shares, or shall own Conversion Shares which, in the aggregate,
represent more than 2% of the total combined voting power of all voting
securities then outstanding:
<PAGE>
(a) Quarterly Reports filed with the Commission on Form 10-QSB as
soon as available, and in any event within 45 days after the end of each of the
first three fiscal quarters of the Company or such later date pursuant to an
extension granted by the Commission;
(b) Annual Reports filed with the Commission on Form 10-KSB as
soon as available, and in any event within 90 days after the end of each fiscal
year of the Company or such later date pursuant to an extension granted by the
Commission; and
(c) Copies of all notices and information, including without
limitation notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.
Section 3.7 Amendments. The Company shall not amend or waive any
----------
provision of the Articles or Bylaws of the Company, or Registration Rights
Agreement in any way that would adversely affect the liquidation preferences,
dividends rights, conversion rights, voting rights or redemption rights of the
holders of the Preferred Shares.
Section 3.8 Other Agreements. The Company shall not enter into any
----------------
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any subsidiary under any
Transaction Document or the Certificate of Designations.
Section 3.9 Distributions. So long as any Preferred Shares or Warrants
--------------
remain outstanding, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock or (ii)
purchase or otherwise acquire for value, directly or indirectly, any Common
Stock or other equity security of the Company.
Section 3.10 Status of Dividends. The Company covenants and agrees that
-------------------
(i) no Federal income tax return or claim for refund of Federal income tax or
other submission to the Internal Revenue Service will adversely affect the
Preferred Shares, any other series of its Preferred Stock, or the Common Stock,
and any deduction shall not operate to jeopardize the availability to Purchasers
of the dividends received deduction provided by Section 243(a)(1) of the Code or
any successor provision, (ii) in no report to shareholders or to any
governmental body having jurisdiction over the Company or otherwise will it
treat the Preferred Shares other than as equity capital or the dividends paid
thereon other than as dividends paid on equity capital unless required to do so
by a governmental body having jurisdiction over the accounts of the Company or
by a change in generally accepted accounting principles required as a result of
action by an authoritative accounting standards setting body, and (iii) other
than pursuant to this Agreement or the Certificate of Designations, it will take
no action which would result in the dividends paid by the Company on the
Preferred Shares out of the Company's current or accumulated earnings and
profits being ineligible for the dividends received deduction provided by
Section 243(a)(1) of the Code. The preceding sentence shall not be deemed to
prevent the Company from designating the Preferred Stock as "Convertible
Preferred Stock" in its annual and quarterly financial statements in accordance
with its prior practice concerning other series of
<PAGE>
preferred stock of the Company. In the event that the Purchasers have reasonable
cause to believe that dividends paid by the Company on the Preferred Shares out
of the Company's current or accumulated earnings and profits will not be treated
as eligible for the dividends received deduction provided by Section 243(a)(1)
of the Code, or any successor provision, the Company will, at the request of the
Purchasers of 51% of the outstanding Preferred Shares, join with the Purchasers
in the submission to the Service of a request for a ruling that dividends paid
on the Shares will be so eligible for Federal income tax purposes. In addition,
the Company will reasonably cooperate with the Purchasers (at Purchasers'
expense) in any litigation, appeal or other proceeding challenging or contesting
any ruling, technical advice, finding or determination that earnings and profits
are not eligible for the dividends received deduction provided by Section
243(a)(1) of the Code, or any successor provision to the extent that the
position to be taken in any such litigation, appeal, or other proceeding is not
contrary to any provision of the Code or incurred in connection with any such
submission, litigation, appeal or other proceeding. Notwithstanding the
foregoing, nothing herein contained shall be deemed to preclude the Company from
claiming a deduction with respect to such dividends if (i) the Code shall
hereafter be amended, or final Treasury regulations thereunder are issued or
modified, to provide that dividends on the Preferred Shares or Conversion Shares
should not be treated as dividends for Federal income tax purposes or that a
deduction with respect to all or a portion of the dividends on the Shares is
allowable for Federal income tax purposes, or (ii) in the absence of such an
amendment, issuance or modification and after a submission of a request for
ruling or technical advice, the service shall rule or advise that dividends on
the shares should not be treated as dividends for Federal income tax purposes.
If the Service determines that the Preferred Shares or Conversion Shares
constitute debt, the Company may file protective claims for refund.
Section 3.11 Rule 144A. The Company covenants and agrees that if the
---------
Company fails to register the Conversion Shares within 150 days from the Closing
Date under the terms and conditions of the Registration Rights Agreement
attached hereto as Exhibit E, then for so long as any of the Preferred Shares
remain outstanding and continue to be "restricted securities" within the meaning
---------------------
of Rule 144 under the Securities Act, the Company shall make available to the
Purchasers in connection with any sale thereof, the information required by Rule
144A(d)(4) under the Securities Act in order to permit resales of the Preferred
Shares pursuant to Rule 144A, if applicable.
Section 3.12 Regulation S. The Company covenants and agrees that if the
------------
Company fails to (i) file a registration statement within 30 days from the
Closing Date and/or (ii) register the Conversion Shares within 90 days from the
Closing Date, under the terms and conditions of the Registration Rights
Agreement attached hereto as Exhibit E, then for so long as any of the Preferred
Shares or Conversion Shares remain outstanding and continue to be "restricted
----------
securities" within the meaning of Rule 144 under the Securities Act, the Company
- ----------
shall, in order to permit resales of the Preferred Shares or Conversion Shares
pursuant to Regulation S under the Securities Act, (a) continue to file all
material required to be filed pursuant to Section 13(a) or 15(d) of the Exchange
Act, and (b) not knowingly engage in directed selling efforts in connection with
the resale of securities by any Purchaser under Regulation S.
Section 3.13 Reservation of Shares. So long as any of the Preferred
---------------------
Shares or Warrants
<PAGE>
remain outstanding, the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance, no less than 200% of
the aggregate number of shares of Common Stock needed to provide for the
issuance of the Conversion Shares and the Warrant Shares.
Section 3.14 Transfer Agent Instructions. The Company shall issue
---------------------------
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each Purchaser or its
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by each Purchaser to the Company upon
conversion of the Preferred Shares or exercise of the Warrants in the form of
Exhibit F attached hereto (the "Irrevocable Transfer Agent Instructions").
---------------------------------------
Prior to registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 6.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 3.14 will be given by the Company to its transfer agent and that
the Shares shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the Registration
Rights Agreement. Nothing in this Section 3.14 shall affect in any way each
Purchaser's obligations and agreements set forth in Section 6.1 to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Shares. If a Purchaser provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of the Shares may be made without registration under the Securities Act
or the Purchaser provides the Company with reasonable assurances that the Shares
can be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold,
the Company shall permit the transfer, and, in the case of the Conversion Shares
and the Warrant Shares, promptly instruct its transfer agent to issue one or
more certificates in such name and in such denominations as specified by such
Purchaser and without any restrictive legend. The Company acknowledges that a
breach by it of its obligations under this Section 3.14 will cause irreparable
harm to the Purchasers by vitiating the intent and purpose of the transaction
contemplated hereby. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 3.14 will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 3.14, that the Purchasers shall be entitled, in
addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
Section 3.15 Lock-up Agreements by Company Stockholders. The Company
------------------------------------------
shall have each of the current stockholders listed on Schedule 3.15 attached
-------------
hereto (the "Primary Stockholders") holding shares of Common Stock or other
--------------------
Company securities convertible into Common Stock, including, without limitation,
the Series A, B and C Convertible Preferred Stock to execute a lock-up
agreement, whereby each of such Primary Stockholders agrees not to sell, assign
or otherwise transfer (except as otherwise provided on Schedule 3.15) any of
-------------
his/her shares of Common Stock or other Company securities convertible into
Common Stock, including, without limitation, the Series A, B and C Convertible
Preferred Stock for a period beginning on the Closing Date and ending on
February 1, 2000,
<PAGE>
Section 3.16 Limitations on the Transfer of Shares by the Purchasers.
-------------------------------------------------------
None of the Purchasers shall, without the prior written consent of the Company,
offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase
or otherwise dispose of ("Transfer"), directly or indirectly, the Shares on or
--------
before the ninetieth (90th) day following the date on which the Commission
declares effective a registration statement filed by the Company on Form S-1
registering shares of Common Stock in an Offering; provided, however, the
-------- -------
Purchaser may Transfer any Preferred Shares so long as the transferees shall
agree to be bound by the terms and provisions of this Agreement, the Certificate
of Designations, the Registration Rights Agreement and the Irrevocable Transfer
Agent Instructions; and, provided further, that if on December 31, 1999 an
--- ----------------
Offering has not been completed, the Purchasers may sell their Shares without
any restriction.
Section 3.17 Purchase Option. If the Company (i) fails to complete an
---------------
Offering within one (1) year of the Closing Date and (ii) at such time the
Company's Common Stock has a five (5) Five Day Average Share Price of less than
$3.00 (which Five Day Average Share Price may be adjusted for stock splits,
subdivision or combination of shares of Common Stock, or reclassification), each
Purchaser shall have the option upon forty-five (45) days prior written notice
to purchase in an equitable manner any assets (other than those assets located
within the city limits of Fresno, California) acquired by the Company at any
time after the Closing Date, on a pro rata basis, for up to $the Purchase Price
paid by such Purchaser at a purchase price equal to the purchase price paid for
the assets by the Company at the time of acquisition. The Company shall not
sell any of the Assets on or before the second anniversary of the Closing Date
without the prior written consent of the Purchasers. Capitalized terms used in
this Section 3.17 and not otherwise defined in this Agreement shall have the
respective meanings specified in the Certificate of Designations.
Section 3.18 Release of Purchase Price. The Company shall place 58.3% of
-------------------------
the proceeds from the sale of the Preferred Shares to each Purchaser in a
segregated account at Norwest Bank Colorado, N.A. and shall apply such proceeds
solely to acquire the national and local Internet Service Providers listed on
Schedule 2.1(aa) attached hereto; provided, however, if upon the fifteenth
- ---------------- -------- -------
(15th) month anniversary of the Closing Date, the Company has not fully utilized
such proceeds, such proceeds shall be released from the segregated account at
Norwest Bank Colorado, N.A. solely for general corporate purposes to the
Company.
ARTICLE IV
Conditions
Section 4.1 Conditions Precedent to the Obligation of the Company to
--------------------------------------------------------
Sell the Shares. The obligation hereunder of the Company to issue and sell the
- ---------------
Preferred Shares and the Warrants to the Purchasers is subject to the
satisfaction or waiver, at or before the Closing, of each of the conditions set
forth below. These conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.
<PAGE>
(a) Accuracy of each of the Purchaser's Representations and
-------------------------------------------------------
Warranties. The representations and warranties of each Purchaser shall be true
- ----------
and correct in all material respects as of the date when made and as of the
Closing as though made at that time, except for representations and warranties
that are expressly made as of a particular date, which shall be true and correct
in all material respects as of such date.
(b) Performance by the Purchasers. Each Purchaser shall have
-----------------------------
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Purchaser at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive
------------
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.
Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
-----------------------------------------------------------
Purchase the Shares. The obligation hereunder of each Purchaser to acquire and
- -------------------
pay for the Preferred Shares and the Warrants is subject to the satisfaction or
waiver, at or before the Closing, of each of the conditions set forth below.
These conditions are for each Purchaser's sole benefit and may be waived by such
Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties.
--------------------------------------------------------
Each of the representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of the Closing
as though made at that time (except for representations and warranties that
speak as of a particular date), which shall be true and correct in all material
respects as of such date.
(b) Performance by the Company. The Company shall have
--------------------------
performed, satisfied and complied in all respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.
(c) No Suspension, etc. From the date hereof to the Closing
------------------
Date, trading in the Company's Common Stock shall not have been suspended by the
Commission (except for any suspension of trading of limited duration agreed to
by the Company, which suspension shall be terminated prior to Closing), and, at
any time prior to the Closing, trading in securities generally as reported by
Bloomberg Financial Markets ("Bloomberg") shall not have been suspended or
---------
limited, or minimum prices shall not have been established on securities whose
trades are reported by Bloomberg, or on the New York Stock Exchange, or on the
OTC Bulletin Board, nor shall a banking moratorium have been declared either by
the United States or New York State authorities, nor shall there have occurred
any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on, or any
material adverse change in any financial market which, in each case, in the
judgment of such Purchaser, makes it impracticable or inadvisable to purchase
the Preferred Shares.
<PAGE>
(d) No Injunction. No statute, rule, regulation, executive order,
-------------
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(e) No Proceedings or Litigation. No action, suit or proceeding
----------------------------
before any arbitrator or any governmental authority shall have been commenced,
and no investigation by any governmental authority shall have been threatened,
against the Company or any subsidiary, or any of the officers, directors or
affiliates of the Company or any subsidiary seeking to restrain, prevent or
change the transactions contemplated by this Agreement, or seeking damages in
connection with such transactions.
(f) Certificate of Designations of Rights and Preferences. Prior to
-----------------------------------------------------
the Closing, the Certificate of Designations of the Rights and Preferences for
the Preferred Shares in the form of Exhibit C attached hereto shall have been
filed with the Secretary of State of Colorado.
(g) Registration Rights Agreement. At the Closing, the Company shall
-----------------------------
have executed and delivered the Registration Rights Agreement to each Purchaser.
(h) Preferred Stock Certificates. The Company shall have executed
----------------------------
and delivered to each Purchaser the stock certificates (in such denominations as
such Purchaser shall request) for the Preferred Shares being purchased by such
Purchaser at the Closing.
(i) Resolutions. The Board of Directors of the Company shall have
-----------
adopted resolutions consistent with Section 2.1(b) above in a form reasonably
acceptable to such Purchaser (the "Resolutions").
-----------
(j) Reservation of Shares. As of the Closing Date, the Company shall
---------------------
have reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares and the exercise of
the Warrants, a number of shares of Common Stock equal to at least 200% of the
aggregate number of Conversion Shares issuable upon conversion of the Preferred
Shares outstanding on the Closing Date and the number of Warrant Shares issuable
upon exercise of the number of Warrants assuming such Warrants were granted on
the Closing Date (after giving effect to the Preferred Shares to be issued on
the Closing Date and assuming all such Preferred Shares and Warrants were fully
convertible or exercisable on such date regardless of any limitation on the
timing or amount of such conversions or exercises).
(k) Transfer Agent Instructions. The Irrevocable Transfer Agent
---------------------------
Instructions, in the form of Exhibit F attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.
(l) Secretary's Certificate. The Company shall have delivered to
-----------------------
such
<PAGE>
Purchaser a secretary's certificate, dated as of the Closing Date, as to (i) the
Resolutions, (ii) the Articles, (iii) the Bylaws, (iv) the Certificate of
Designations, each as in effect at the Closing, and (iv) the authority and
incumbency of the officers of the Company executing the Transaction Documents
and any other documents required to be executed or delivered in connection
therewith.
ARTICLE V
Registration Rights
At the Closing, the Company and each Purchaser shall enter into a
Registration Rights Agreement in the form attached hereto as Exhibit E (the
"Registration Rights Agreement").
- ------------------------------
ARTICLE VI
Stock Certificate Legend
Section 6.1 Legend. Each certificate representing the Preferred Shares,
------
and, if appropriate, securities issued upon conversion thereof, shall be stamped
or otherwise imprinted with a legend substantially in the following form (in
addition to any legend required by applicable state securities or "blue sky"
laws):
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER
THAT ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR SKYLYNX
COMMUNICATIONS, INC. (THE "COMPANY") SHALL HAVE RECEIVED AN OPINION OF
ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THAT ACT AND
UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED.
The Company agrees to reissue certificates representing the Preferred
Shares without the legend set forth above if at such time, prior to making any
transfer of any Preferred Shares or Conversion Shares, such holder thereof shall
give written notice to the Company describing the manner and terms of such
transfer and removal as the Company may reasonably request. Such proposed
transfer will not be effected until: (a) the Company has notified such holder
that either (i) in the opinion of Company counsel, the registration of such
Preferred Shares or Conversion Shares under the Securities Act is not required
in connection with such proposed transfer; or (ii) a registration statement
under the Securities Act covering such proposed disposition has been filed by
the Company with the Commission and has become effective under the Securities
Act; and (b) the Company has notified such holder that either: (i) in the
opinion of Company counsel,
<PAGE>
the registration or qualification under the securities or "blue sky" laws of any
state is not required in connection with such proposed disposition, or (ii)
compliance with applicable state securities or "blue sky" laws has been
effected. The Company will use its best efforts to respond to any such notice
from a holder within ten (10) days. In the case of any proposed transfer under
this Section 6, the Company will use reasonable efforts to comply with any such
applicable state securities or "blue sky" laws, but shall in no event be
required, in connection therewith, to qualify to do business in any state where
it is not then qualified or to take any action that would subject it to tax or
to the general service of process in any state where it is not then subject. The
restrictions on transfer contained in Section 6.1 shall be in addition to, and
not by way of limitation of, any other restrictions on transfer contained in any
other section of this Agreement.
ARTICLE VII
Termination
Section 7.1 Termination by Mutual Consent. This Agreement may be
-----------------------------
terminated at any time prior to the Closing by the mutual written consent of the
Company and the Purchasers.
Section 7.2 Other Termination. This Agreement may be terminated by the
-----------------
action of the Board of Directors of the Company or by any one or more of the
Purchasers at any time if the Closing shall not have been consummated by the
Closing Date, as long as the failure to so consummate is not the fault of the
terminating party.
Section 7.3 Effect of Termination. In the event of termination by the
---------------------
Company or any one or more of the Purchasers, written notice thereof shall
forthwith be given to the other party and the transactions contemplated by this
Agreement and the Registration Rights Agreement shall be terminated without
further action by either party. If this Agreement is terminated as provided in
Section 7.1 or 7.2 herein, this Agreement shall become void and of no further
force and effect, except for Sections 9.1 and 9.2, and Article VIII herein.
Nothing in this Section 7.3 shall be deemed to release the Company or any
Purchaser from any liability for any breach under this Agreement or the
Registration Rights Agreement, or to impair the rights of the Company and the
Purchasers to compel specific performance by the other party of its obligations
under this Agreement and the Registration Rights Agreement.
ARTICLE VIII
Indemnification
Section 8.1 General Indemnity. The Company agrees to indemnify and hold
-----------------
harmless the Purchasers (and their directors, officers, affiliates, agents,
successors and assigns) from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorney's fees, charges and disbursements) incurred by the
Purchasers as a result of any inaccuracy in or breach of the representations,
warranties or
<PAGE>
covenants made by the Company herein. Each Purchaser, severally but not jointly,
agrees to indemnify and hold harmless the Company and its directors, officers,
affiliates, agents, successors and assigns from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys fees, charges and disbursements) incurred by
the Company as result of any inaccuracy in or breach of the representations,
warranties or covenants made by such Purchaser herein.
Section 8.2 Indemnification Procedure. Any party entitled to
-------------------------
indemnification under this Article VIII (an "indemnified party") will give
-----------------
written notice to the indemnifying party of any matters giving rise to a claim
for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VIII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect of such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim. In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party's costs and expenses arising out of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder. The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the indemnified party which relates to such action or claim. The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. The indemnifying party shall not be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent. Notwithstanding anything in this Article VIII to the
contrary, the indemnifying party shall not, without the indemnified party's
prior written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the indemnified party of a
release from all liability in respect of such claim. The indemnification
required by this Article VIII shall be made by periodic payments of the amount
thereof during the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so long as the
indemnified party irrevocably agrees to refund such moneys if it is ultimately
determined by a court of competent jurisdiction
<PAGE>
that such party was not entitled to indemnification. The indemnity agreements
contained herein shall be in addition to (a) any cause of action or similar
rights of the indemnified party against the indemnifying party or others, and
(b) any liabilities the indemnifying party may be subject to pursuant to the
law.
ARTICLE IX
Miscellaneous
Section 9.1 Fees and Expenses. Except as otherwise set forth in this
-----------------
Agreement, the Registration Rights Agreement or the Certificate of Designations,
each party shall pay the fees and expenses of its advisors, counsel, accountants
and other experts, if any, and all other expenses, incurred by such party
incident to the negotiation, preparation, execution, delivery and performance of
this Agreement. The Company shall pay all stamp or other similar taxes and
duties levied in connection with issuance of the Preferred Shares pursuant
hereto.
Section 9.2 Specific Enforcement, Consent to Jurisdiction.
---------------------------------------------
(a) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement or the Registration Rights Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent or
cure breaches of the provisions of this Agreement or the Registration Rights
Agreement and to enforce specifically the terms and provisions hereof or
thereof, this being in addition to any other remedy to which any of them may be
entitled by law or equity.
(b) Each of the Company and the Purchasers (i) hereby irrevocably
submits to the jurisdiction of the United States District Court sitting in the
Southern District of New York for the purposes of any suit, action or proceeding
arising out of or relating to this Agreement or the Registration Rights
Agreement and (ii) hereby waives, and agrees not to assert in any such suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Each of the Company and the Purchasers consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address in effect for notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing in this Section 9.2 shall affect or limit any right to
serve process in any other manner permitted by law.
Section 9.3 Entire Agreement; Amendment. This Agreement contains the
---------------------------
entire understanding of the parties with respect to the matters covered hereby
and, except as specifically set forth herein or in the Transaction Documents or
the Certificate of Designations, neither the Company nor any of the Purchasers
makes any representations, warranty, covenant or undertaking with respect to
such matters. No provision of this Agreement may be waived or amended other
than by a written instrument signed by the Company and the holders of at least
two-thirds (2/3) of the Preferred Shares then outstanding, and no provision
hereof may be waived
<PAGE>
other than by an a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought. No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the Preferred Shares then outstanding. No consideration shall be offered or paid
to any person to amend or consent to a waiver or modification of any provision
of any of the Transaction Documents or the Certificate of Designations unless
the same consideration is also offered to all of the parties to the Transaction
Documents or holders of Preferred Shares, as the case may be.
Section 9.4 Notices. Any notice, demand, request, waiver or other
-------
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: SkyLynx Communications, Inc.
600 South Cherry Street
Suite 305
Denver, CO 80246
Attention: Jeffery A. Mathias, President and CEO
Fax: (303) 316-0404
with copies to: Kelley Drye & Warren LLP
281 Tresser Boulevard
Stamford, Connecticut 06901
Attention: M. Ridgway Barker
Telephone Number: (203) 324-1400
Fax: (203) 327-2669
If to any Purchaser: At the address of such Purchaser set forth on
Exhibit A to this Agreement, with copies to
Purchaser's counsel as set forth on Exhibit A or as
specified in writing by such Purchaser.
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days written notice of such changed address to the
other party hereto.
Section 9.5 Waivers. No waiver by either party of any default with
-------
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provisions, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise
<PAGE>
of any such right accruing to it thereafter.
Section 9.6 Headings. The article, section and subsection headings in
--------
this Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
Section 9.7 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties and their successors and assigns. After
Closing, the assignment by a party to this Agreement of any rights hereunder
shall not affect the obligations of such party under this Agreement.
Section 9.8 No Third Party Beneficiaries. This Agreement is intended for
----------------------------
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
Section 9.9 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the State of New York, without
giving effect to the choice of law provisions.
Section 9.10 Survival. The representations and warranties of the Company
--------
and the Purchasers contained in: (i) Section 2.1(o) shall survive until the
expiration of the statute of limitations applicable to the matters covered
thereby (giving effect to any waiver, mitigation or extension thereof); (ii)
Section 2.1(s) shall survive until three years after the Closing Date; and (iii)
those contained in Article II, with the exception of Sections 2.1(o) and (s),
shall survive the execution and delivery hereof and the Closing until the date
two years from the Closing Date, and the agreements and covenants set forth in
Articles I, III, V, VII, VIII and IX of this Agreement shall survive the
execution and delivery hereof and the Closing hereunder until the Purchasers in
the aggregate beneficially own (determined in accordance with Rule 13d-3 under
the Exchange Act) less than 2% of the total combined voting power of all voting
securities then outstanding, provided, that Sections 3.1, 3.2, 3.4, 3.5, 3.7,
3.8, 3.9, 3.10, 3.11 and 3.12 shall not expire until the Registration Statement
required by Section 2 of the Registration Rights Agreement is no longer required
to be effective under the terms and conditions of Registration Rights Agreement.
Section 9.11 Counterparts. This Agreement may be executed in any number
------------
of counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart. In the event any signature is
delivered by facsimile transmission, the party using such means of delivery
shall cause four additional executed signature pages to be physically delivered
to the other parties within five days of the execution and delivery hereof.
Section 9.12. Publicity. The Company agrees that it will not disclose, and
---------
will not include in any public announcement, the name of the Purchasers, unless
and until such disclosure is required by law or applicable regulation, and then
only to the extent of such requirement.
<PAGE>
Section 9.13 Severability. The provisions of this Agreement, the
------------
Certificate of Designations and the Registration Rights Agreement are severable
and, in the event that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of the provisions contained in this
Agreement, the Certificate of Designations or the Registration Rights Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement, the Certificate of
Designations or the Registration Rights Agreement shall be reformed and
construed as if such invalid or illegal or unenforceable provision, or part of
such provision, had never been contained herein, so that such provisions would
be valid, legal and enforceable to the maximum extent possible.
Section 9.14 Further Assurances. From and after the date of this
------------------
Agreement, upon the request of any Purchaser or the Company, each of the Company
and the Purchasers shall execute and deliver such instrument, documents and
other writings as may be reasonably necessary or desirable to confirm and carry
out and to effectuate fully the intent and purposes of this Agreement, the
Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares, the
Certificate Designations, and the Registration Rights Agreement.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorize officer as of the date first above
written.
SKYLYNX COMMUNICATIONS, INC.
By:____________________________________
Name:
Title:
_______________________________________
By:____________________________________
Name:
Title:
_______________________________________
By:____________________________________
Name:
Title:
_______________________________________
By:____________________________________
Name:
Title:
<PAGE>
EXHIBIT A to the
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
FOR SKYLYNX COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Names and Address Number of Preferred Dollar Amount
of Purchasers Shares Purchased of Investment Issuance Date
- ------------------- -------------------- --------------- -------------
<S> <C> <C> <C>
</TABLE>
<PAGE>
Exhibit 10.15
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made and
---------
entered into as of April __, 1999, between SkyLynx Communications, Inc., a
Colorado corporation (the "Company"), and each of the Purchasers listed on
-------
Schedule 1 attached hereto. Each of the Purchasers listed on Schedule 1
attached hereto is referred to herein as a "Purchaser" and collectively referred
---------
to herein as the "Purchasers."
----------
This Agreement is being entered into pursuant to the Series D
Convertible Preferred Stock Purchase Agreement, dated as of the date hereof, by
and among the Company and the Purchasers (the "Purchase Agreement").
------------------
The Company and the Purchasers hereby agree as follows:
1. Definitions.
-----------
Capitalized terms used and not otherwise defined herein shall have the
meanings given such terms in the Purchase Agreement. As used in this Agreement,
the following terms shall have the following meanings:
"Advice" shall have the meaning set forth in Section 3(m).
------
"Affiliate" means, with respect to any Person, any other Person that
---------
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
-------
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
---------- ----------- ----------
correlative to the foregoing.
"Blackout Period" shall have the meaning set forth in Section 3(n).
---------------
"Board" shall have the meaning set forth in Section 3(n).
-----
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the state of
New York generally are authorized or required by law or other government actions
to close.
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the Company's Common Stock, par value $0.001 per
------------
<PAGE>
share.
"Effectiveness Date" means with respect to the Registration Statement
------------------
the 90th day following the Closing Date.
"Effectiveness Period" shall have the meaning set forth in Section 2.
--------------------
"Event" shall have the meaning set forth in Section 7(e).
-----
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Filing Date" means the 30th day following the Closing Date.
-----------
"Holder" or "Holders" means the holder or holders, as the case may be,
------ -------
from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
-----------------
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
------------------
"Losses" shall have the meaning set forth in Section 5(a).
------
"OTC Bulletin Board" shall mean the over-the-counter electronic
------------------
bulletin board.
"Periodic Amount" shall have the meaning set forth in Section 7(e).
---------------
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Preferred Stock" means the Series D Convertible Preferred Stock, par
---------------
value $.01 per share and stated value $1,000 per share, of the Company issued to
the Purchasers pursuant to the Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or proceeding
----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
----------
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities
<PAGE>
covered by the Registration Statement, and all other amendments and supplements
to the Prospectus, including post-effective amendments, and all material
incorporated by reference in such Prospectus.
"Registrable Securities" means (i) the shares of Common Stock issuable
----------------------
upon conversion of the Preferred Stock (the "Conversion Shares") and exercise of
-----------------
the Warrants (the "Warrant Shares"), and upon any stock split, stock dividend,
--------------
recapitalization or similar event with respect to such Conversion Shares or
Warrant Shares and (ii) any other dividend or other distribution with respect
to, conversion or exchange of, or in replacement of, Registrable Securities;
provided, however, that Registrable Securities shall include (but not be limited
- -------- -------
to) a number of shares of Common Stock equal to no less than 200% of the maximum
number of shares of Common Stock which would be issuable upon conversion of the
Preferred Stock and upon exercise of the Warrants, assuming such conversion and
exercise occurred on the Closing Date or the Filing Date, whichever date would
result in the greater number of Registrable Securities. Notwithstanding
anything herein contained to the contrary, such registered shares of Common
Stock shall be allocated among the Holders pro rata based on the total number of
Registrable Securities issued or issuable as of each date that a Registration
Statement, as amended, relating to the resale of the Registrable Securities is
declared effective by the Commission. Notwithstanding anything contained herein
to the contrary, if the actual number of shares of Common Stock issuable upon
conversion of the Preferred Stock and upon exercise of the Warrants exceeds 200%
of the number of shares of Common Stock issuable upon conversion of the
Preferred Stock and upon exercise of the Warrants based upon a computation as at
the Closing Date or the Filing Date, the term "Registrable Securities" shall be
deemed to include such additional shares of Common Stock.
"Registration Statement" means the registration statements and any
----------------------
additional registration statements contemplated by Section 2, including (in each
case) the Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference in such registration
statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Special Counsel" means any special counsel to the Holders, for which
---------------
the Holders will be reimbursed by the Company pursuant to Section 4.
2. Shelf Registration.
-------------------
On or prior to the Filing Date the Company shall prepare and file with
the Commission a "shelf" Registration Statement covering all Registrable
Securities for an offering to be made on a continuous basis pursuant to Rule
415. The Registration Statement shall be on Form SB-2 (except if the Company is
not then eligible to register for resale the Registrable Securities on Form SB-
2, in which case such registration shall be on another appropriate form in
accordance herewith). The Company shall (i) not permit any securities other than
the Registrable Securities to be included in the Registration Statement and (ii)
use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as possible after the filing
thereof, but in any event prior to the Effectiveness Date, and to keep such
Registration Statement continuously effective under the Securities Act until
such date as is the earlier of (x) the date when all Registrable Securities
covered by such Registration Statement have been sold or (y) the date on which
the Registrable Securities may be sold without any restriction pursuant to Rule
144(k) as determined by the counsel to the Company pursuant to a written opinion
letter, addressed to the Company's transfer agent to such effect (the
"Effectiveness Period"). If an additional Registration Statement is required to
- ---------------------
be filed because the actual number of shares of Common Stock into which the
Preferred Stock is convertible and the Warrants are exercisable exceeds the
number of shares of Common Stock initially registered in respect of the
Conversion Shares and the Warrant Shares based upon the computation on the
Closing Date, the Company shall have twenty (20) Business Days to file such
additional Registration Statement, and the Company shall use its best efforts to
cause such additional Registration Statement to be declared effective by the
Commission as soon as possible, but in no event later than thirty (30) days
after filing.
3. Registration Procedures.
------------------------
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on Form SB-2 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form SB-2 such
registration shall be on another appropriate form in accordance herewith) in
<PAGE>
accordance with the method or methods of distribution thereof as specified by
the Holders (except if otherwise directed by the Holders), and shall use its
reasonable best efforts to cause the Registration Statement to become effective
and remain effective as provided herein; provided, however, that not less than
-------- -------
five (5) Business Days prior to the filing of the Registration Statement or any
related Prospectus or any amendment or supplement thereto (including any
document that would be incorporated therein by reference), the Company shall (i)
furnish to the Holders and any Special Counsel, copies of all such documents
proposed to be filed, which documents (other than those incorporated by
reference) will be subject to the review of such Holders and such Special
Counsel, and (ii) at the request of any Holder cause its officers and directors,
counsel and independent certified public accountants to respond to such
inquiries as shall be necessary, in the reasonable opinion of counsel to such
Holders, to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities or any Special Counsel shall reasonably
object in writing within three (3) Business Days of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as practicable to any comments
received from the Commission with respect to the Registration Statement or any
amendment thereto and as promptly as practicable provide the Holders true and
complete copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as so
amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold and any
Special Counsel as promptly as possible (and, in the case of (i)(A) below, not
less than five (5) Business Days prior to such filing) and (if requested by any
such Person) confirm such notice in writing no later than one (1) Business Day
following the day: (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement and (C) with respect to the Registration Statement
or any post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
<PAGE>
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of, (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by the Holders of a majority in interest of the
Registrable Securities, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
Company reasonably agrees should be included therein and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment.
(f) Furnish to each Holder and any Special Counsel, without charge,
one conformed copy of each Registration Statement and each amendment thereto,
including financial statements and schedules, all documents incorporated or
deemed to be incorporated therein by reference, and all exhibits to the extent
requested by such Person (including those previously furnished or incorporated
by reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder and any Special Counsel, without
charge, as many copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders and
any Special Counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of
<PAGE>
such Registrable Securities for offer and sale under the securities or Blue Sky
laws of such jurisdictions within the United States as any Holder requests in
writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by a Registration Statement;
provided, however, that the Company shall not be required to qualify generally
- -------- -------
to do business in any jurisdiction where it is not then so qualified or to take
any action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be sold
pursuant to a Registration Statement, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any Holder may request at least
two (2) Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)(vi),
as promptly as possible, prepare a supplement or amendment, including a post-
effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(k) Use its reasonable best efforts to cause all Registrable
Securities relating to such Registration Statement to be listed on the OTC
Bulletin Board and any other securities exchange, quotation system, market or
over-the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year or in each case within such extended period of time as may be
permitted by the Commission for filing the applicable report with the
Commission) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.
(m) The Company may require each selling Holder to furnish to the
Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from such registration the Registrable
Securities of any such Holder who unreasonably fails to
<PAGE>
furnish such information within a reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the "Advice")
------
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
(n) If (i) there is material non-public information regarding the
Company which the Company's Board of Directors (the "Board") reasonably
-----
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose and which the Company would be required to disclose
under the Registration Statement, then the Company may postpone or suspend
filing or effectiveness of a registration statement for a period not to exceed
20 consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 12 month period (each, a "Blackout Period"); provided, however, that no such
--------------- -------- -------
postponement or suspension shall be permitted for consecutive 20 day periods,
arising out of the same set of facts, circumstances or transactions.
4. Registration Expenses
---------------------
<PAGE>
All fees and expenses incident to the performance of or compliance
with this Agreement by the Company shall be borne by the Company whether or not
the Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The
fees and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with the OTC
Bulletin Board and each other securities exchange or market on which Registrable
Securities are required hereunder to be listed, (B) with respect to filings
required to be made with the Commission, (C) with respect to filings required to
be made under the OTC Bulletin Board and (D) in compliance with state securities
or Blue Sky laws (including, without limitation, fees and disbursements of
counsel for the Holders in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the holders of
a majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the holders of a majority of the Registrable
Securities included in the Registration Statement), (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company
and Special Counsel for the Holders, in the case of the Special Counsel, to a
maximum amount of $25,000 per Holder, (v) Securities Act liability insurance, if
the Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, the
Company's independent public accountants (including the expenses of any comfort
letters or costs associated with the delivery by independent public accountants
of a comfort letter or comfort letters). In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing or relisting of the
Registrable Securities on the OTC Bulletin Board or any securities exchange as
required hereunder.
5. Indemnification
---------------
(a) Indemnification by the Company. The Company shall,
------------------------------
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
------
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form
<PAGE>
of prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, except to the extent, but only to the extent, that such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, which information was reasonably relied on by the Company for use
therein or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto. The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of an Indemnified Party and shall survive the
transfer of the Registrable Securities by the Holders.
(b) Indemnification by Holders. Each Holder shall, severally and not
--------------------------
jointly, indemnify and hold harmless the Company, the directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising solely out of or based solely upon any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or arising solely out of or based solely upon any omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus and that such information was reasonably relied
upon by the Company for use in the Registration Statement, such Prospectus or
such form of prospectus or to the extent that such information relates to such
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus. Notwithstanding anything to the contrary contained herein, the
Holder shall be liable under this Section 5(b) for only that amount as does not
exceed the net proceeds to such Holder as a result of the sale of Registrable
Securities pursuant to such Registration Statement.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall
--------------------------------------
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
- ------------------
from whom indemnity is sought (the "Indemnifying Party) in writing, and the
------------------
Indemnifying Party shall assume the defense thereof,
<PAGE>
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have proximately and materially adversely prejudiced the Indemnifying
Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a)
------------
or 5(b) is unavailable to an Indemnified Party because of a failure or refusal
of a governmental authority to enforce such indemnification in accordance with
its terms (by reason of public policy or otherwise), then each Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses, in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and Indemnified Party in connection with the actions,
statements or omissions that resulted in such
<PAGE>
Losses as well as any other relevant equitable considerations. The relative
fault of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying, Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms. Notwithstanding anything to the
contrary contained herein, the Holder shall be liable or required to contribute
under this Section 5(c) for only that amount as does not exceed the net proceeds
to such Holder as a result of the sale of Registrable Securities pursuant to
such Registration Statement.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties
6. Rule 144.
--------
As long as any Holder owns Preferred Shares, Conversion Shares,
Warrants or Warrant Shares, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Holders
with true and complete copies of all such filings. As long as any Holder owns
Preferred Shares, Conversion Shares, Warrants or Warrant Shares, if the Company
is not required to file reports pursuant to Section 13(a) or 15(d) of the
Exchange Act, it will prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Person to
sell Conversion Shares and Warrant Shares without registration under the
Securities Act within the limitation of the
<PAGE>
exemptions provided by Rule 144 promulgated under the Securities Act, including
providing any legal opinions referred to in the Purchase Agreement. Upon the
request of any Holder, the Company shall deliver to such Holder a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
7. Miscellaneous.
-------------
(a) Remedies. In the event of a breach by the Company or by a Holder,
--------
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
--------------------------
subsidiaries has, as of the date hereof entered into and currently in effect,
nor shall the Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities that is
inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Neither the Company nor any of
its subsidiaries has previously entered into any agreement currently in effect
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict with the
provisions of this Agreement.
(c) No Piggyback on Registrations. Neither the Company nor any of its
-----------------------------
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statement, and the Company
shall not after the date hereof enter into any agreement providing such right to
any of its security holders, unless the right so granted is subject in all
respects to the prior rights in full of the Holders set forth herein, and is not
otherwise in conflict with the provisions of this Agreement.
(d) Piggy-Back Registrations. If at any time when there is not an
------------------------
effective Registration Statement covering (i) Conversion Shares or (ii) Warrant
Shares, the Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or its then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option
<PAGE>
or other employee benefit plans, the Company shall send to each holder of
Registrable Securities written notice of such determination and the Company will
cause the registration under the Securities Act of all Registrable Securities
(unless within fifteen (15) days after receipt of such notice, any such holder
shall notify the Company in writing that it elects to have less than all of its
Registrable Securities intended to be disposed of by such holder included in
such registration) to the extent requisite to permit the disposition of the
Registrable Securities so to be registered, provided that if at any time after
giving written notice of its intention to register any securities and prior to
the effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to such holder and, thereupon, (i) in the
case of a determination not to register, shall be relieved of its obligation to
register any Registrable Securities in connection with such registration (but
not from its obligation to pay expenses in accordance with Section 4 hereof),
and (ii) in the case of a determination to delay registering, shall be permitted
to delay registering any Registrable Securities being registered pursuant to
this Section 7(d) for the same period as the delay in registering such other
securities. The Company shall include in such registration statement all or any
part of such Registrable Securities such holder requests to be registered;
provided, however, that the Company shall not be required to register any
- -------- -------
Registrable Securities pursuant to this Section 7(d) that are eligible for sale
pursuant to Rule 144(k) of the Securities Act. In the case of an underwritten
public offering, if the managing underwriter(s) or underwriter(s) should
reasonably object to the inclusion of the Registrable Securities in such
registration statement, then if the Company after consultation with the managing
underwriter should reasonably determine that the inclusion of such Registrable
Securities, would materially adversely affect the offering contemplated in such
registration statement, and based on such determination recommends inclusion in
such registration statement of fewer or none of the Registrable Securities of
the Holders, then (x) the number of Registrable Securities of the Holders
included in such registration statement shall be reduced pro-rata among such
Holders (based upon the number of Registrable Securities requested to be
included in the registration), if the Company after consultation with the
underwriter(s) recommends the inclusion of fewer Registrable Securities, or (y)
none of the Registrable Securities of the Holders shall be included in such
registration statement, if the Company after consultation with the
underwriter(s) recommends the inclusion of none of such Registrable Securities;
provided, however, that if securities are being offered for the account of other
- -------- -------
persons or entities as well as the Company, such reduction shall not represent a
greater fraction of the number of Registrable Securities intended to be offered
by the Holders than the fraction of similar reductions imposed on such other
persons or entities (other than the Company).
(e) Failure to File Registration Statement and Other Events. The
-------------------------------------------------------
Company and the Purchasers agree that the Holders will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Time or if
certain other events occur. The Company and the Holders further agree that it
would not be feasible to ascertain the extent of such damages with precision.
Accordingly, if (i) the Registration Statement is not filed on or prior to the
Filing Date, or is not declared
<PAGE>
effective by the Commission on or prior to the Effectiveness Date (or in the
event an additional Registration Statement is filed because the actual number of
shares of Common Stock into which the Preferred Stock is convertible and the
Warrants are exercisable exceeds the number of shares of Common Stock initially
registered is not filed and declared effective within the time periods set forth
in Section 2(a)), or (ii) the Company fails to file with the Commission a
request for acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act within five (5) Business Days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed," or not subject to further review,
or (iii) the Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective as to all Registrable
Securities at any time prior to the expiration of the Effectiveness Period,
without being succeeded immediately by a subsequent Registration Statement filed
with and declared effective by the Commission, or (iv) trading in the Common
Stock shall be suspended or if the Common Stock is delisted from the OTC
Bulletin Board for any reason for more than three Business Days in the
aggregate, or (v) the conversion rights of the Holders are suspended for any
reason, including by the Company, or (vi) the Company breaches in a material
respect any covenant or other material term or condition to this Agreement, the
Certificate of Designation, the Purchase Agreement (other than a representation
or warranty contained therein) or any other agreement, document, certificate or
other instrument delivered in connection with the transactions contemplated
hereby and thereby, and such breach continues for a period of thirty days after
written notice thereof to the Company, or (vii) the Company has breached Section
3(n) of this Agreement (any such failure or breach being referred to as an
"Event"), the Company shall pay in cash as liquidated damages for such failure
-----
and not as a penalty to each Holder an amount equal to one percent (1%) of such
Holder's pro rata share of the purchase price paid by all Holders for all shares
of the Preferred Stock purchased and then outstanding pursuant to the Purchase
Agreement for the initial thirty (30) day period until the applicable Event has
been cured, which shall be pro rated for such periods less than thirty (30) days
and two percent (2%) of such Holder's pro rata share for each thirty (30) day
period thereafter until the applicable Event has been cured (which shall be also
pro rated, as aforesaid) (the "Periodic Amount"). Payments to be made pursuant
---------------
to this Section 7(e) shall be due and payable immediately upon demand in
immediately available funds. The parties agree that the Periodic Amount
represents a reasonable estimate on the part of the parties, as of the date of
this Agreement, of the amount of damages that may be incurred by the Holders if
the Registration Statement is not filed on or prior to the Filing Date or has
not been declared effective by the Commission on or prior to the Effectiveness
Date and maintained in the manner contemplated herein during the Effectiveness
Time or if any other Event as described herein has occurred and not been cured.
(f) Specific Enforcement, Consent to Jurisdiction.
---------------------------------------------
(i) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Registration Rights Agreement or the Purchase Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Registration
Rights
<PAGE>
Agreement or the Purchase Agreement and to enforce specifically the terms and
provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
(ii) Each of the Company and the Purchasers (i) hereby
irrevocably submits to the jurisdiction of the United States District Court
sitting in the Southern District of New York for the purposes of any suit,
action or proceeding arising out of or relating to this Agreement or the
Purchase Agreement and (ii) hereby waives, and agrees not to assert in any such
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Each of the Company and each of the Purchasers consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
such party at the address in effect for notices to it under this Agreement and
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing in this Section 7(f) shall affect or limit any right
to serve process in any other manner permitted by law.
(g) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and each of the Holders. Notwithstanding the foregoing, a waiver or consent to
depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of Holders and that does not directly or indirectly
affect the rights of other Holders may be given by Holders of at least a
majority of the Registrable Securities to which such waiver or consent relates;
provided, however, that the provisions of this sentence may not be amended,
- -------- -------
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.
(h) Notices. Any and all notices or other communications or
-------
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice prior to 5:00 p.m., New York
Time, on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice later than 5:00 p.m., New York Time, on
any date and earlier than 11:59 p.m., New York Time, on such date, (iii) the
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) actual receipt by the party to whom such
notice is required to be given. The addresses for such communications shall be
with respect to each Holder at its address set forth under its name on Schedule
1 attached hereto, or with respect to the Company, addressed to:
SkyLynx Communications, Inc.
600 South Cherry Street
Suite 305
<PAGE>
Denver, CO 80246
Attention: Jeffery A. Mathias, President and CEO
Facsimile: (303) 316-0404
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to any Holder shall be sent to the addresses
listed on Schedule 1 attached hereto, if applicable.
(i) Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their successors and permitted assigns
and shall inure to the benefit of each Holder and its successors and assigns.
The Company may not assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of each Holder. Each Purchaser may
assign its rights hereunder in the manner and to the Persons as permitted under
the Purchase Agreement.
(j) Assignment of Registration Rights. The rights of each Holder
---------------------------------
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any transferee of such Holder of all
or a portion of the shares of Preferred Stock or the Registrable Securities if:
(i) the Holder agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment the further disposition of such
securities by the transferee or assignees is restricted under the Securities Act
and applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. In
addition, each Holder shall have the right to assign its rights hereunder to any
other Person with the prior written consent of the Company, which consent shall
not be unreasonably withheld. The rights to assignment shall apply to the
Holders (and to subsequent) successors and assigns.
(k) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(l) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, without regard to
principles of conflicts of
<PAGE>
law thereof.
(m) Cumulative Remedies. The remedies provided herein are cumulative
-------------------
and not exclusive of any remedies provided by law.
(n) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held to be invalid, illegal, void or unenforceable in any
respect, the remainder of the terms, provisions, covenants and restrictions set
forth herein shall remain in full force and effect and shall in no way be
affected, impaired or invalidated, and the parties hereto shall use their
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(o) Headings. The headings herein are for convenience only, do not
--------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
(p) Shares Held by the Company and its Affiliates. Whenever the
---------------------------------------------
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
(q) Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the
Commission, the Company shall deliver, and shall cause legal counsel for the
Company to deliver, to the transfer agent for such Registrable Securities (with
copies to the Holders whose Registrable Securities are included in such
Registration Statement) confirmation that the Registration Statement has been
declared effective by the Commission in the form attached hereto as Exhibit A.
---------
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed by their respective authorized persons as of the
date first indicated above.
SKYLYNX COMMUNICATIONS, INC.
By:_____________________________________
Name:
Title:
_______________________________________
By:_____________________________________
Name:
Title:
_______________________________________
By:_____________________________________
Name:
Title:
_______________________________________
By:_____________________________________
Name:
Title:
<PAGE>
Schedule 1
Schottenfeld Associates, LP
800 Third Avenue
16th Floor
New York, New York 10022
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attn:
Re: Skylynx Communications, Inc.
----------------------------
Ladies and Gentlemen:
We are counsel to SkyLynx Communications, Inc., a Colorado corporation (the
"COMPANY"), and have represented the Company in connection with that certain
Series __ Convertible Preferred Stock Purchase Agreement (the "Purchase
Agreement") entered into by and among the Company and the buyers named therein
(collectively, the "Holders") pursuant to which the Company issued to the
Holders shares of its Series D Convertible Preferred Stock, par value $0.01 per
share (the "Preferred ShareS"), convertible into shares of the Company's common
stock, par value $0.001 per share (the "Common Stock"), and warrants to purchase
shares of the Common Stock (the "Warrants"). Pursuant to the Purchase
Agreement, the Company also has entered into a Registration Rights Agreement
with the Holders (the "Registration Rights Agreement") pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement), including the shares of Common
Stock issuable upon conversion of the Preferred Shares and exercise of the
Warrants, under the Securities Act of 1933, as amended (the "1933 Act"). In
connection with the Company's obligations under the Registration Rights
Agreement, on April __, 1999, the Company filed a Registration Statement on Form
SB-2 (File No. 333-_____________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities which names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[COMPANY'S COUNSEL]
By:
cc: [LIST NAMES OF HOLDERS]
<PAGE>
Exhibit 10.16
EXECUTION COPY
SERIES E CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
Dated as of May 6, 1999
among
SKYLYNX COMMUNICATIONS, INC.
and
THE PURCHASERS LISTED ON EXHIBIT A
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---
<S> <C>
ARTICLE I Purchase and Sale of Preferred Stock 1
Section 1.1 Purchase and Sale of Stock 1
Section 1.2 The Conversion Shares 1
Section 1.3 Purchase Price and Closing 1
Section 1.4 Warrants 2
ARTICLE II Representations and Warranties 2
Section 2.1 Representation and Warranties of the Company 2
(a) Organization, Good Standing and Power 2
(b) Authorization; Enforcement 2
(c) Capitalization 3
(d) Issuance of Shares 4
(e) No Conflicts 4
(f) Commission Documents, Financial Statements 5
(g) Subsidiaries 5
(h) No Material Adverse Change 6
(i) No Undisclosed Liabilities 6
(j) No Undisclosed Events or Circumstances 6
(k) Indebtedness 6
(l) Title to Assets 6
(m) Actions Pending 7
(n) Compliance with Law 7
(o) Taxes 7
(p) Certain Fees 7
(q) Disclosure 7
(r) Intellectual Property 8
(s) Environmental Compliance 8
(t) Books and Record Internal Accounting Controls 8
(u) Material Agreements 9
(v) Transactions with Affiliates 9
(w) Securities Act of 1933 9
(x) Governmental Approvals 9
(y) Employees 10
(z) Absence of Certain Developments 10
(aa) Use of Proceeds 11
(ab) Public Utility Holding Company Act and Investment Company Act Status 11
(ac) ERISA 12
(ad) Dilutive Effect 12
(ae) Other Sales 12
(af) Listing 12
(ag) Series D Convertible Preferred Stock 12
(ah) Section 3.18 Letter Agreements 12
Section 2.2 Representations and Warranties of the Purchasers 12
(a) Organization and Standing of the Purchasers 13
(b) Authorization and Power 13
(c) No Conflicts 13
(d) Acquisition for Investment 13
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(e) Accredited Purchasers 14
(f) Rule 144 14
(g) Conversion Restrictions 14
(h) General 14
ARTICLE III Covenants 15
Section 3.1 Securities Compliance 15
Section 3.2 Registration and Listing 15
Section 3.3 Inspection Rights 15
Section 3.4 Compliance with Laws 16
Section 3.5 Keeping of Records and Books of Account 16
Section 3.6 Reporting Requirements 16
Section 3.7 Amendments 16
Section 3.8 Other Agreements 16
Section 3.9 Distributions 16
Section 3.10 Status of Dividends 17
Section 3.11 Rule 144A 17
Section 3.12 Regulation S 18
Section 3.13 Reservation of Shares 18
Section 3.14 Transfer Agent Instructions 18
Section 3.15 Lock-up Agreements by Company Stockholders 19
Section 3.16 Limitations on the Transfer of Shares by the Purchasers 19
Section 3.17 Purchase Option 19
Section 3.18 Letter Agreements 20
ARTICLE IV Conditions 20
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell the Shares 20
(a) Accuracy of each of the Purchaser's Representations and Warranties 20
(b) Performance by the Purchasers 20
(c) No Injunction 20
Section 4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase the Shares 20
(a) Accuracy of the Company's Representations and Warranties 21
(b) Performance by the Company 21
(c) No Suspension, etc 21
(d) No Injunction 21
(e) No Proceedings or Litigation 21
(f) Certificate of Designations of Rights and Preferences 21
(g) Registration Rights Agreement 21
(h) Preferred Stock Certificates 22
(i) Resolutions 22
(j) Reservation of Shares 22
(k) Transfer Agent Instructions 22
(l) Secretary's Certificate 22
(m) Opinion of Counsel, Etc 22
ARTICLE V Registration Rights 22
ARTICLE VI Stock Certificate Legend 23
Section 6.1 Legend 23
ARTICLE VII Termination 24
Section 7.1 Termination by Mutual Consent 24
Section 7.2 Other Termination 24
Section 7.3 Effect of Termination 24
ARTICLE VIII Indemnification 24
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 8.1 General Indemnity 24
Section 8.2 Indemnification Procedure 24
ARTICLE IX Miscellaneous 25
Section 9.1 Fees and Expenses 25
Section 9.2 Consent to Jurisdiction 26
Section 9.3 Entire Agreement; Amendment 26
Section 9.4 Notices 26
Section 9.5 Waivers 27
Section 9.6 Headings 27
Section 9.7 Successors and Assigns 27
Section 9.8 No Third Party Beneficiaries 27
Section 9.9 Governing Law 28
Section 9.10 Survival 28
Section 9.11 Counterparts 28
Section 9.12. Publicity 28
Section 9.13 Severability 28
Section 9.14 Further Assurances 29
</TABLE>
<PAGE>
SERIES E CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
This SERIES E CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the
"Agreement") is dated as of May 6, 1999 by and between SkyLynx Communications,
- ----------
Inc., a Colorado corporation (the "Company"), and the Purchasers of shares of
-------
Series E Convertible Preferred Stock of the Company whose names are set forth on
Exhibit A hereto (the "Purchasers").
----------
The parties hereto agree as follows:
ARTICLE I
Purchase and Sale of Preferred Stock
Section 1.1 Purchase and Sale of Stock. Upon the following terms and
--------------------------
conditions, the Company shall issue and sell to each Purchaser and each
Purchaser shall purchase from the Company, the number of shares of the Company's
Series E Convertible Preferred Stock, par value $.01 per share (the "Preferred
---------
Shares"), at a purchase price of $1,000 per share, set forth opposite such
- ------
Purchaser's name on Exhibit A hereto. Upon the following terms and conditions,
each Purchaser shall be issued a Warrant, in substantially the form attached
hereto as Exhibit B (each, a "Warrant" and collectively, the "Warrants"), to
-------
purchase the Company's Common Stock, par value $.001 per share (the "Common
------
Stock"). The designation, rights, preferences and other terms and provisions of
- -----
the Series E Convertible Preferred Stock are set forth in the Certificate of
Designation attached hereto as Exhibit C (the "Certificate of Designation").
--------------------------
The Company and the Purchasers are executing and delivering this Agreement in
accordance with and in reliance upon the exemption from securities registration
afforded by Rule 506 of Regulation D ("Regulation D") as promulgated by the
------------
United States Securities and Exchange Commission (the "Commission") under the
----------
Securities Act of 1933, as amended (the "Securities Act").
--------------
Section 1.2 The Conversion Shares. The Company has authorized and has
---------------------
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, a sufficient number of its
authorized but unissued shares of its Common Stock, to effect the conversion of
the Preferred Shares and exercise of each Warrant. Any shares of Common Stock
issuable upon conversion of the Preferred Shares and exercise of the Warrants
(and such shares when issued) are herein referred to as the "Conversion Shares"
-----------------
and the "Warrant Shares", respectively. The Preferred Shares, the Conversion
--------------
Shares and the Warrant Shares are sometimes collectively referred to as the
"Shares".
- -------
Section 1.3 Purchase Price and Closing. The Company agrees to issue and
--------------------------
sell to the each Purchaser and, in consideration of and in express reliance upon
the representations, warranties, covenants, terms and conditions of this
Agreement, each Purchaser agrees to purchase that number of the Preferred Shares
set forth opposite such Purchaser's respective name
<PAGE>
on Exhibit A. The aggregate purchase price of the Preferred Shares being
acquired by the each Purchaser (the "Purchase Price") is set forth opposite such
Purchaser's name on Exhibit A. The closing of the purchase and sale of the
Preferred Shares to be acquired by the Purchasers from the Company under this
Agreement shall take place at the offices of Kelley Drye & Warren LLP, 101 Park
Avenue New York, New York (the "Closing") at 11:00 a.m. New York Time on the
-------
earlier of the following: (i) May 7, 1999, (ii) the date on which the last to be
fulfilled or waived of the conditions set forth in Article IV hereof and
applicable to the Closing shall be fulfilled or waived in accordance herewith,
or (iii) such other time and place or on such date as the Purchasers and the
Company may agree upon (the "Closing Date"). On the Closing Date, the Company
------------
shall deliver to each Purchaser a certificate for the number and series of
Preferred Shares set forth opposite the Purchaser's name under the heading
"Number of Preferred Shares Purchased" on Exhibit A hereto, registered in such
Purchaser's name (or its nominee) and such Purchaser shall pay the Purchase
Price by wire transfer of funds into the Company's account at Norwest Bank
Colorado, N.A., ABA #102000076, Account #1063047378.
Section 1.4 Warrants. On the Closing Date, the Company agrees to issue to
--------
each Purchaser a Warrant to purchase 30,588 shares of Common Stock per
$1,000,000 of Preferred Shares purchased (or such pro rata amount if more or
less than $1,000,000 is purchased) as set forth on Exhibit A hereto. Each
Warrant shall have an exercise price per share of $8.17 (as such price may be
adjusted from time to time as shall result from the adjustments specified in
Section 4 of such Warrant) and shall expire as provided in such Warrant.
ARTICLE II
Representations and Warranties
Section 2.1 Representation and Warranties of the Company. The Company
--------------------------------------------
hereby makes the following representations and warranties to each of the
Purchasers:
(a) Organization, Good Standing and Power. The Company is a
-------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Colorado and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted. The Company does not have any subsidiaries except as set
forth in the Company's Form 10-KSB for the year ended December 31, 1998,
including the accompanying financial statements (the "Form 10-KSB"), or on
-----------
Schedule 2.1(a) hereto. The Company and each such subsidiary is duly qualified
- ---------------
as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary except for any jurisdiction(s) (alone or
in the aggregate) in which the failure to be so qualified will not have a
Material Adverse Affect (as defined in Section 2.1(e) hereof).
(b) Authorization; Enforcement. The Company has the requisite
--------------------------
corporate power and authority to enter into and perform this Agreement, the
Irrevocable Transfer Agent Instructions (as defined in Section 3.14), the
Registration Rights Agreement attached hereto as
<PAGE>
Exhibit D (the "Registration Rights Agreement") and the Warrants (collectively,
-----------------------------
the "Transaction Documents") and to issue and sell the Shares in accordance with
---------------------
the terms of this Agreement, the Certificate of Designation and the Warrants.
The execution, delivery and performance of the Transaction Documents and the
Certificate of Designation by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required. This Agreement and the Certificate of Designation has been duly
executed and delivered by the Company. The Registration Rights Agreement and the
Warrants will have been duly executed and delivered by the Company at the
Closing. Each of the Transaction Documents constitutes, or shall constitute when
executed and delivered, a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally the enforcement of, creditor's
rights and remedies or by other equitable principles of general application.
(c) Capitalization. The authorized capital stock of the Company and
--------------
the shares thereof currently issued and outstanding as of May 5, 1999 are set
forth on Schedule 2.1(c) hereto. All of the issued and outstanding shares of
---------------
the Common Stock, Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible
Preferred Stock have been duly and validly authorized and issued and are fully-
paid and nonassessable. Except as set forth in the Form 10-KSB, the Articles or
on Schedule 2.1(c) hereto, no shares of Common Stock or of any series of the
---------------
Company's preferred stock are entitled to preemptive rights or registration
rights and there are no outstanding options, warrants, scrip, rights to
subscribe to, call or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company. Furthermore, except as set forth in this Agreement and the
Registration Rights Agreement and as set forth in the Form 10-KSB, the Articles
or on Schedule 2.1(c), there are no contracts, commitments, understandings, or
---------------
arrangements by which the Company is or may become bound to issue additional
shares of the capital stock of the Company or options, securities or rights
convertible into shares of capital stock of the Company. Except for customary
transfer restrictions contained in agreements entered into by the Company in
order to sell restricted securities or as provided on Schedule 2.1 (c) hereto,
----------------
the Company is not a party to any agreement granting registration or anti-
dilution rights to any person with respect to any of its equity or debt
securities. Except as provided on Schedule 2.1(c), the Company is not a party
---------------
to, and it has no knowledge of, any agreement restricting the voting or transfer
of any shares of the capital stock of the Company. Except as set forth on
Schedule 2.1(c) hereto, the offer and sale of all capital stock, convertible
- ---------------
securities, rights, warrants, or options of the Company issued prior to the
Closing complied with all applicable Federal and state securities laws, and no
stockholder has a right of rescission or damages with respect thereto which
would have a Material Adverse Effect. Company has furnished to each Purchaser a
true, complete and correct copy of the Company's Articles of Incorporation, with
any and all amendments thereto, as in effect on the date hereof (the
"Articles"), and the Company's Bylaws, with any and all amendments thereto, as
--------
in effect on the date hereof (the "Bylaws").
------
<PAGE>
(d) Issuance of Shares. The Preferred Shares to be issued at the
------------------
Closing have been duly authorized by all necessary corporate action and, when
paid for or issued in accordance with the terms hereof, the Preferred Shares
shall be validly issued and outstanding, fully paid and nonassessable and
entitled to the rights and preferences set forth in the Certificate of
Designation. When the Conversion Shares and the Warrant Shares are issued in
accordance with the terms of the Preferred Shares as set forth in the
Certificate of Designation and the Warrants, respectively, such shares will be
validly issued and outstanding, fully paid and nonassessable, and the holders
shall be entitled to all rights accorded to a holder of Common Stock. A number
of shares of Common Stock equal to not less than 200% of the aggregate number of
shares of Common Stock needed for the issuance of the Conversion Shares and the
Warrant Shares has been duly authorized and reserved for issuance upon
conversion of the Preferred Shares and upon exercise of the Warrants.
(e) No Conflicts. The execution, delivery and performance of the
------------
Transaction Documents by the Company, the performance by the Company of its
obligations under the Certificate of Designation and the consummation by the
Company of the transactions contemplated herein and therein do not and will not
(i) violate any provision of the Articles or Bylaws, (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company is a party or by which the Company's assets are bound,
(iii) create or impose a lien, charge or encumbrance on any property of the
Company under any agreement or any commitment to which the Company is a party or
by which the Company is bound or by which any of its respective properties or
assets are bound, or (iv) result in a violation of any federal, state, local or
foreign statute, rule, regulation, order, judgment or decree (including Federal
and state securities laws and regulations) applicable to the Company or any of
its subsidiaries or by which any property or asset of the Company or any of its
subsidiaries are bound or affected, except, in all cases other than violations
pursuant to clause (i) above, for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect. For the
purposes of this Agreement, "Material Adverse Effect" means any adverse effect
-----------------------
on the business, operations, properties, prospects, or financial condition of
the Company or its subsidiaries and which is material to such entity or other
entities controlling or controlled by such entity. The business of the Company
and its subsidiaries is not being conducted in violation of any laws, ordinances
or regulations of any governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a Material Adverse
Effect. The Company is not required under Federal, state or local law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under the Transaction
Documents or the Certificate of Designation, or issue and sell the Preferred
Shares, the Conversion Shares and the Warrant Shares in accordance with the
terms hereof or thereof (other than any filings which may be required to be made
by the Company with the Commission or state securities administrators subsequent
to the Closing, and any registration statement which may be filed pursuant
hereto, and the filing of the Certificate of Designation with the Secretary of
State of the State of Colorado); provided that, for purposes of the
<PAGE>
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Purchasers
herein.
(f) Commission Documents, Financial Statements. The Common Stock is
------------------------------------------
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, except as disclosed in the Form 10-KSB or on
------------
Schedule 2.1(f) hereto, the Company has timely filed all reports, schedules,
- ---------------
forms, statements and other documents required to be filed by it with the
Commission pursuant to the reporting requirements of the Exchange Act, including
material filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of
the foregoing, including filings incorporated by reference therein, being
referred to herein as the "Commission Documents"). The Company has delivered or
--------------------
made available to each of the Purchasers true and complete copies of the
Commission Documents filed with the Commission since December 16, 1998. The
Company has not provided to any of the Purchasers any material non-public
information or other information which, according to applicable law, rule or
regulation, should have been disclosed publicly by the Company but which has not
been so disclosed, other than with respect to the transactions contemplated by
this Agreement. As of their respective dates, the Commission Documents complied
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission promulgated thereunder and other federal,
state and local laws, rules and regulations applicable to such documents, and,
as of their respective dates, none of the Commission Documents contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the Commission Documents comply
as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the Commission or other applicable rules
and regulations with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
----
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements), and fairly present the
financial position of the Company and its subsidiaries as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) Subsidiaries. Schedule 2.1(g) hereto sets forth each subsidiary
------------ ---------------
of the Company, showing the jurisdiction of its incorporation or organization
and showing the percentage of each applicable person's ownership of the
outstanding stock or other interests of such subsidiary. Each subsidiary is a
corporation duly incorporated, validly existing and in good standing under the
laws of the state of its incorporation and has the requisite corporate power to
own, lease and operate its properties and assets and to conduct its business as
it is now being conducted. For the purposes of this Agreement, "subsidiary"
----------
shall mean any corporation or other entity of which at least a majority of the
securities or other ownership interest having ordinary voting power (absolutely
or contingently) for the election of directors or other persons performing
similar functions are at the time owned directly or indirectly by the Company
and/or any of its other subsidiaries. All of the outstanding shares of capital
stock of each subsidiary
<PAGE>
have been duly authorized and validly issued, and are fully paid and
nonassessable. There are no outstanding preemptive, conversion or other rights,
options, warrants or agreements granted or issued by or binding upon any
subsidiary for the purchase or acquisition of any shares of capital stock of any
subsidiary or any other securities convertible into, exchangeable for or
evidencing the rights to subscribe for any shares of such capital stock. Neither
the Company nor any subsidiary is subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of the
capital stock of any subsidiary or any convertible securities, rights, warrants
or options of the type described in the preceding sentence. Neither the Company
nor any subsidiary is party to, or has any knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of any
subsidiary.
(h) No Material Adverse Change. Since September 30, 1998, the date
--------------------------
through which the most recent quarterly report of the Company on Form 10-QSB has
been prepared and filed with the Commission, a copy of which is included in the
Commission Documents, the Company has not experienced or suffered any Material
Adverse Effect, except as disclosed on Schedule 2.1(h) hereto.
---------------
(i) No Undisclosed Liabilities. To the best of the Company's
--------------------------
knowledge, except as disclosed on Schedule 2.1(i) hereto, neither the Company
---------------
nor any of its subsidiaries has any liabilities, obligations, claims or losses
(whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) other than those incurred in the ordinary course of the
Company's or its subsidiaries respective businesses since December 31, 1998 and
which, individually or in the aggregate, do not or would not have a Material
Adverse Effect.
(j) No Undisclosed Events or Circumstances. No event or circumstance
--------------------------------------
has occurred or exists with respect to the Company or its subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(k) Indebtedness. The Form 10-KSB or Schedule 2.1(k) hereto sets
------------ ---------------
forth as of the date hereof all outstanding secured and unsecured Indebtedness
of the Company or any subsidiary or for which the Company or any subsidiary has
commitments. For the purposes of this Agreement, "Indebtedness" shall mean (a)
------------
any liabilities for borrowed money or amounts owed in excess of $25,000 (other
than trade accounts payable incurred in the ordinary course of business), (b)
all guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value of
any lease payments in excess of $25,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any subsidiary is
in default with respect to any Indebtedness.
(l) Title to Assets. Each of the Company and the subsidiaries has
---------------
good title to all of its real and personal property as reflected in the
Commission Documents, free of any
<PAGE>
mortgages, pledges, charges, liens, security interests or other encumbrances,
except which, individually or in the aggregate, do not cause a Material Adverse
Effect. All leases of the Company and each of its subsidiaries are valid and
subsisting and in full force and effect.
(m) Actions Pending. There is no action, suit, claim, investigation
---------------
or proceeding pending or, to the knowledge of the Company, threatened against
the Company or any subsidiary which questions the validity of this Agreement or
the transactions contemplated hereby or any action taken or to be taken pursuant
hereto or thereto. Except as set forth on Schedule 2.1(m) hereto, there is no
---------------
action, suit, claim, investigation or proceeding pending or, to the knowledge of
the Company, threatened, against or involving the Company, any subsidiary or any
of their respective properties or assets. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their capacities as such.
(n) Compliance with Law. The business of the Company and the
-------------------
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as that, individually or in the aggregate, do not cause a
Material Adverse Effect. The Company and each of its subsidiaries have all
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals necessary for the conduct of its business as now
being conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations and
approvals, individually or in the aggregate, would not have a Material Adverse
Effect.
(o) Taxes. The Company and each of the subsidiaries has accurately
-----
prepared and filed all federal, state and other tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown
to be due and all additional assessments, and adequate provisions have been and
are reflected in the financial statements of the Company and the subsidiaries
for all current taxes and other charges to which the Company or any subsidiary
is subject and which are not currently due and payable, except for taxes, if
unpaid, individually or in the aggregate, do not and would not have a Material
Adverse Effect. None of the federal income tax returns of the Company or any
subsidiary for the years subsequent to December 31, 1996 has been audited by the
Internal Revenue Service. The Company has no knowledge of any additional
assessments, adjustments or contingent tax liability (whether federal or state)
pending or threatened against the Company or any subsidiary for any period, nor
of any basis for any such assessment, adjustment or contingency.
(p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, no
------------ ---------------
brokers, finders or financial advisory fees or commissions will be payable by
the Company or any subsidiary or the Purchasers with respect to the transactions
contemplated by this Agreement.
(q) Disclosure. To the best of the Company's knowledge, neither this
----------
Agreement or the Schedules hereto nor any other documents, certificates or
instruments furnished to the Purchasers by or on behalf of the Company or any
subsidiary in connection with
<PAGE>
the transactions contemplated by this Agreement contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements made herein or therein, in the light of the circumstances under which
they were made herein or therein, not misleading.
(r) Intellectual Property. The Company and each of the subsidiaries
---------------------
owns or possesses all patents, trademarks, service marks, trade names,
copyrights, licenses and authorizations as set forth in the Form 10-KSB and on
Schedule 2.1(r) hereto, and all rights with respect to the foregoing, which are
- ---------------
necessary for the conduct of its business as now conducted without any conflict
with the rights of others.
(s) Environmental Compliance. Except as disclosed in the Form 10-KSB
------------------------
or on Schedule 2.1(s) hereto, the Company and each of its subsidiaries have
---------------
obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any
Environmental Laws. The Form 10-KSB or Schedule 2.1(s) hereto sets forth all
---------------
material permits, licenses and other authorizations issued under any
Environmental Laws to the Company or its subsidiaries. "Environmental Laws"
------------------
shall mean all applicable laws relating to the protection of the environment
including, without limitation, all requirements pertaining to reporting,
licensing, permitting, controlling, investigating or remediating emissions,
discharges, releases or threatened releases of hazardous substances, chemical
substances, pollutants, contaminants or toxic substances, materials or wastes,
whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
material or wastes, whether solid, liquid or gaseous in nature. Except as set
forth in the Form 10-KSB or on Schedule 2.1(s) hereto, the Company has all
---------------
necessary governmental approvals required under all Environmental Laws and used
in its business or in the business of any of its subsidiaries. The Company and
each of its subsidiaries are also in compliance with all other limitations,
restrictions, conditions, standards, requirements, schedules and timetables
required or imposed under all Environmental Laws. Except for such instances as
would not individually or in the aggregate have a Material Adverse Effect, there
are no past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its subsidiaries
that violate or may violate any Environmental Law after the Closing or that may
give rise to any Environmental Liabilities, or otherwise form the basis of any
claim, action, demand, suit, proceeding, hearing, study or investigation (i)
under any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous substance.
"Environmental Liabilities" means all liabilities of a person (whether such
-------------------------
liabilities are owed by such person to governmental authorities, third parties
or otherwise) whether currently in existence or arising hereafter which arise
under or relate to any Environmental Law.
(t) Books and Record Internal Accounting Controls. The records and
---------------------------------------------
documents of the Company and its subsidiaries accurately reflect in all material
respects the information relating to the business of the Company and the
subsidiaries, the location and
<PAGE>
collection of their assets, and the nature of all transactions giving rise to
the obligations or accounts receivable of the Company or any subsidiary.
(u) Material Agreements. Except as set forth in the Form 10-KSB or
-------------------
on Schedule 2.1(u) hereto, neither the Company nor any subsidiary is a party to
---------------
any written or oral contract, instrument, agreement, commitment, obligation,
plan or arrangement, a copy of which would be required to be filed with the
Commission as an exhibit to a registration statement on Form S-3 or applicable
form (collectively, "Material Agreements") if the Company or any subsidiary were
-------------------
registering securities under the Securities Act. The Company and each of its
subsidiaries have in all material respects performed all the obligations
required to be performed by them to date under the foregoing agreements, have
received no notice of default and, to the best of the Company's knowledge are
not in default under any Material Agreement now in effect, the result of which
could cause a Material Adverse Effect. No written or oral contract, instrument,
agreement, commitment, obligation, plan or arrangement of the Company or of any
subsidiary limits or shall limit the payment of dividends on the Preferred
Shares, other preferred stock, if any, or its Common Stock.
(v) Transactions with Affiliates. Except as set forth in the Form
----------------------------
10-KSB or on Schedule 2.1(v) hereto, there are no loans, leases, agreements,
---------------
contracts, royalty agreements, management contracts or arrangements or other
continuing transactions exceeding $50,000 between (a) the Company, any
subsidiary or any of their respective customers or suppliers on the one hand,
and (b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person owning any capital stock of
the Company or any subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder.
(w) Securities Act of 1933. The Company has complied and will comply
----------------------
with all applicable Federal and state securities laws in connection with the
offer, issuance and sale of the Preferred Shares, Conversion Shares and the
Warrant Shares. Neither the Company nor anyone acting on its behalf, directly
or indirectly, has or will sell, offer to sell or solicit offers to buy the
Preferred Shares, the Warrants or similar securities to, or solicit offers with
respect thereto from, or enter into any preliminary conversations or
negotiations relating thereto with, any person, or has taken or will take any
action so as to bring the issuance and sale of the Preferred Shares, the
Conversion Shares and the Warrant Shares under the registration provisions of
the Securities Act and applicable state securities laws. Neither the Company
nor any of its affiliates, nor any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act) in connection with the offer
or sale of the Preferred Shares, the Conversion Shares and the Warrant Shares.
(x) Governmental Approvals. Except as set forth in the Form 10-KSB
----------------------
or on Schedule 2.1(x) hereto, and except for the filing of any notice prior or
---------------
subsequent to the Closing that may be required under applicable state and/or
Federal securities laws (which if required,
<PAGE>
shall be filed on a timely basis), including the filing of a registration
statement or statements pursuant to the Registration Rights Agreement, and the
filing of the Certificate of Designation with the Secretary of State for the
State of Colorado, no authorization, consent, approval, license, exemption of,
filing or registration with any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, is or will be
necessary for, or in connection with, the execution or delivery of the Preferred
Shares, or for the performance by the Company of its obligations under the
Transaction Documents or the Certificate of Designation.
(y) Employees. Neither the Company nor any subsidiary has any
---------
collective bargaining arrangements or agreements covering any of its employees,
except as set forth in the Form 10-KSB or on Schedule 2.1(y) hereto. Except as
---------------
set forth in the Form 10-KSB or on Schedule 2.1(y) hereto, neither the Company
---------------
nor any subsidiary has any employment contract, agreement regarding proprietary
information, non-competition agreement, non-solicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be
employed or engaged by the Company or such subsidiary. Since December 31, 1998,
no officer, consultant or key employee of the Company or any subsidiary whose
termination, either individually or in the aggregate, could have a Material
Adverse Effect, has been terminated or, to the knowledge of the Company, has any
present intention of terminating his or her employment or engagement with the
Company or any subsidiary.
(z) Absence of Certain Developments. Except as provided in the Form
-------------------------------
10-KSB or on Schedule 2.1(z) hereto, since December 31, 1998, neither the
---------------
Company nor any subsidiary has:
(i) issued any stock, bonds or other securities or any rights,
options or warrants with respect thereto;
(ii) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities
incurred in the ordinary course of business which are comparable in
nature and amount to the current liabilities incurred in the ordinary
course of business during the comparable portion of its prior fiscal
year, as adjusted to reflect the current nature and volume of the
Company's or such subsidiary's business;
(iii) discharged or satisfied any lien or encumbrance or paid
any obligation or liability (absolute or contingent), other than
current liabilities paid in the ordinary course of business;
(iv) declared or made any payment or distribution of cash or
other property to stockholders with respect to its stock, or purchased
or redeemed, or made any agreements so to purchase or redeem, any
shares of its capital stock;
(v) sold, assigned or transferred any tangible assets, or
canceled any debts or claims, except in the ordinary course of
business;
<PAGE>
(vi) sold, assigned or transferred any patent rights,
trademarks, trade names, copyrights, trade secrets or other intangible
assets or intellectual property rights, or disclosed any proprietary
confidential information to any person except to customers in the
ordinary course of business or to the Purchasers or their
representatives;
(vii) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business, or
suffered the loss of any material amount of prospective business;
(viii) made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;
(ix) made capital expenditures or commitments therefor that
aggregate in excess of $100,000;
(x) other than the transactions contemplated by this Agreement,
entered into any other transaction other than in the ordinary course
of business, or entered into any other material transaction, whether
or not in the ordinary course of business;
(xi) made charitable contributions or pledges in excess of
$25,000;
(xii) suffered any material damage, destruction or casualty
loss, whether or not covered by insurance;
(xiii) experienced any material problems with labor or
management in connection with the terms and conditions of their
employment;
(xiv) effected any two or more events of the foregoing kind
which in the aggregate would be material to the Company or its
subsidiaries; or
(xv) entered into an agreement, written or otherwise, to take
any of the foregoing actions.
(aa) Use of Proceeds. The proceeds from the sale of the Preferred
---------------
Shares will be used by the Company for working capital and acquisitions.
(ab) Public Utility Holding Company Act and Investment Company Act
-------------------------------------------------------------
Status. The Company is not a "holding company" or a "public utility company" as
- ------ --------------- ----------------------
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended. The Company is not, and as a result of and immediately upon Closing
will not be, an "investment company" or a company "controlled" by an "investment
------------------
company," within the meaning of the Investment Company Act of 1940, as amended.
<PAGE>
(ac) ERISA. No liability to the Pension Benefit Guaranty Corporation
-----
has been incurred with respect to any Plan by the Company or any of its
subsidiaries which is or would be materially adverse to the Company and its
subsidiaries. The execution and delivery of this Agreement and the issue and
sale of the Preferred Shares will not involve any transaction which is subject
to the prohibitions of Section 406 of ERISA or in connection with which a tax
could be imposed pursuant to Section 4975 of the Internal Revenue Code of 1986,
as amended, provided that, if the Purchasers, or any person or entity that owns
a beneficial interest in any Purchaser, is an "employee pension benefit plan"
-----------------------------
(within the meaning of Section 3(2) of ERISA) with respect to which the Company
is a "party in interest" (within the meaning of Section 3(14) of ERISA), t he
-----------------
requirements of Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met.
As used in this Section 2.1(ac), the term "Plan" shall mean an "employee pension
----
benefit plan" (as defined in Section 3 of ERISA) which is or has been
established or maintained, or to which contributions are or have been made, by
the Company or any subsidiary or by any trade or business, whether or not
incorporated, which, together with the Company or any subsidiary, is under
common control, as described in Section 414(b) or (c) of the Code.
(ad) Dilutive Effect. The Company understands and acknowledges that
---------------
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares in accordance
with this Agreement and the Certificate of Designation and its obligations to
issue the Warrant Shares upon the exercise of the Warrants in accordance with
this Agreement and the Warrants, is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interest of other stockholders of the Company.
(ae) Other Sales. The Company has not and will not sell any shares
-----------
of Series E Convertible Preferred Stock to any person or entity other than the
Purchasers or their affiliates.
(af) Listing. The Common Stock is listed and traded on the over-the-
--------
counter electronic bulletin board (the "OTC Bulletin Board").
------------------
(ag) Series D Convertible Preferred Stock. The designations, powers,
------------------------------------
preferences, relative and other rights, terms and conditions of the Series E
Convertible Preferred Stock are materially the same as the designations, powers,
preferences, relative and other rights, terms and conditions of the Series D
Convertible Preferred Stock.
(ah) Section 3.18 Letter Agreements. From and after the Closing, all
------------------------------
of the letter agreements between the Company and the purchasers of Series D
Convertible Preferred Stock as described in Section 3.18 will be in force and
effect.
Section 2.2 Representations and Warranties of the Purchasers. Each
------------------------------------------------
Purchaser hereby makes the following representations and warranties to the
Company with respect solely to itself and not with respect to any other
Purchaser:
<PAGE>
(a) Organization and Standing of the Purchasers. If the Purchaser is
-------------------------------------------
an entity, the Purchaser is a corporation or partnership duly incorporated or
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.
(b) Authorization and Power. Each Purchaser has the requisite power
-----------------------
and authority to enter into and perform this Agreement and to purchase the
Preferred Shares being sold to it hereunder. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by each
Purchaser and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate or partnership
action (if the Purchaser is an entity), and no further consent or authorization
of such Purchaser or its Board of Directors, stockholders, or partners, as the
case may be, is required. Each of this Agreement and the Registration Rights
Agreement has been duly authorized, executed and delivered by each Purchaser.
(c) No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Registration Rights Agreement and the consummation by each
Purchaser of the transactions contemplated hereby and thereby or relating hereto
do not and will not (i) result in a violation of such Purchaser's charter
documents or bylaws or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument to which such Purchaser
is a party, or result in a violation of any law, rule, or regulation, or any
order, judgment or decree of any court or governmental agency applicable to such
Purchaser or its properties (except for such conflicts, defaults and violations
as would not, individually or in the aggregate, have a material adverse effect
on such Purchaser). No Purchaser is required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or the Registration Rights Agreement or to
purchase the Preferred Shares in accordance with the terms hereof, provided that
for purposes of the representation made in this sentence, such Purchaser is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Company herein.
(d) Acquisition for Investment. Each Purchaser is purchasing the
--------------------------
Preferred Shares solely for its own account for the purpose of investment and
not with a view to or for sale in connection with distribution. No Purchaser
has a present intention to sell the Preferred Shares, nor a present arrangement
(whether or not legally binding) or intention to effect any distribution of the
Preferred Shares to or through any person or entity; provided, however, that by
-------- --------
making the representations herein and subject to Section 2.2(f) below, none of
the Purchasers agrees to hold the Preferred Shares for any minimum or other
specific term and each of the Purchasers reserves the right to dispose of the
Preferred Shares at any time in accordance with Federal securities laws
applicable to such disposition. Each Purchaser acknowledges that it is able to
bear the financial risks associated with an investment in the Preferred Shares
and that it has been given full access to such records of the Company and the
subsidiaries and to the officers of the Company and the subsidiaries as it has
deemed necessary or appropriate to conduct its due diligence investigation.
Notwithstanding any investigation made by such Purchaser, this representation
shall not be deemed to limit the Company's representations and warranties
<PAGE>
contained in Article II of this Agreement or such Purchaser's right to rely on
such representations and warranties.
(e) Accredited Purchasers. Each Purchaser is an "accredited
--------------------- ----------
investor" as defined in Regulation D promulgated under the Securities Act.
(f) Rule 144. Each Purchaser understands that the Shares must be
--------
held indefinitely unless such Shares are registered under the Securities Act or
an exemption from registration is available. Each Purchaser acknowledges that
such person is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
--------
and that such person has been advised that Rule 144 permits resales only under
certain circumstances. Each Purchaser understands that to the extent that Rule
144 is not available, such person will be unable to sell any Preferred Shares
without either registration under the Securities Act or the existence of another
exemption from such registration requirement.
(g) Conversion Restrictions. Notwithstanding anything to the
-----------------------
contrary set forth herein or in the Certificate of Designation, in no event
shall any holder be entitled to convert Series E Preferred Stock in excess of
that number of shares of Series E Convertible Preferred Stock which, upon giving
effect to such conversion, would cause the aggregate number of shares of Common
Stock beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such conversion. For purposes
of the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the shares of Series E
Convertible Preferred Stock with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) conversion of the remaining, nonconverted
shares of Series E Convertible Preferred Stock beneficially owned by the holder
and its affiliates, and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the holder
and its affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 2(g), beneficial ownership shall be calculated in accordance
with Section 13(d) of Exchange Act.
(h) General. Each Purchaser understands that the Shares are being
-------
offered and sold in reliance on a transactional exemption from the registration
requirement of Federal and state securities laws and the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Shares.
ARTICLE III
Covenants
<PAGE>
The Company covenants with each of the Purchasers as follows, which
covenants are for the benefit of each of the Purchasers and its permitted
assignees (as defined herein).
Section 3.1 Securities Compliance.
---------------------
(a) The Company shall notify the Commission in accordance with
their rules and regulations, of the transactions contemplated by any of the
Transaction Documents, including filing a Form D with respect to the Preferred
Shares, Warrants, Conversion Shares and Warrants Shares as required under
Regulation D, and shall take all other necessary action and proceedings as may
be required and permitted by applicable law, rule and regulation, for the legal
and valid issuance of the Preferred Shares, Warrants, the Conversion Shares and
the Warrant Shares to the Purchasers or subsequent holders.
(b) The Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
the Purchasers set forth herein in order to determine the applicability of
Federal and state securities laws exemptions and the suitability of the
Purchasers to acquire the Preferred Shares.
Section 3.2 Registration and Listing. The Company will cause its Common
------------------------
Stock to continue to be registered under Section 12(g) of the Exchange Act, will
comply in all respects with its reporting and filing obligations under the
Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to this Agreement or the Registration Rights Agreement,
and will not take any action or file any document (whether or not permitted by
the Securities Act or the rules promulgated thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act. The Company will take all
action necessary to continue the listing or trading of its Common Stock on the
OTC Bulletin Board or any relevant market or system, if applicable, and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of NASD, the Nasdaq system or any relevant
market or system.
Section 3.3 Inspection Rights. The Company shall permit, during normal
-----------------
business hours and upon reasonable request and reasonable notice, the Purchasers
or any employees, agents or representatives thereof, so long as the Purchasers
shall be obligated hereunder to purchase the Preferred Shares or shall
beneficially own any Preferred Shares, or shall own Conversion Shares which, in
the aggregate, represent more than 2% of the total combined voting power of all
voting securities then outstanding, to examine and make reasonable copies of and
extracts from the records and books of account of, and visit and inspect the
properties, assets, operations and business of the Company and any subsidiary,
and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees.
Section 3.4 Compliance with Laws. The Company shall comply, and cause
--------------------
each subsidiary to comply, with all applicable laws, rules, regulations and
orders, noncompliance with
<PAGE>
which could have a Material Adverse Effect.
Section 3.5 Keeping of Records and Books of Account. The Company shall
---------------------------------------
keep and cause each subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
Section 3.6 Reporting Requirements. The Company shall furnish the
----------------------
following to the Purchasers so long as the Purchasers shall be obligated
hereunder to purchase the Preferred Shares or shall beneficially own any
Preferred Shares, or shall own Conversion Shares which, in the aggregate,
represent more than 2% of the total combined voting power of all voting
securities then outstanding:
(a) Quarterly Reports filed with the Commission on Form 10-QSB as
soon as available, and in any event within 45 days after the end of each of the
first three fiscal quarters of the Company or such later date pursuant to an
extension granted by the Commission;
(b) Annual Reports filed with the Commission on Form 10-KSB as
soon as available, and in any event within 90 days after the end of each fiscal
year of the Company or such later date pursuant to an extension granted by the
Commission; and
(c) Copies of all notices and information, including without
limitation notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.
Section 3.7 Amendments. The Company shall not amend or waive any
----------
provision of the Articles or Bylaws of the Company or Registration Rights
Agreement in any way that would adversely affect the liquidation preferences,
dividends rights, conversion rights, voting rights or redemption rights of the
holders of the Preferred Shares.
Section 3.8 Other Agreements. The Company shall not enter into any
----------------
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any subsidiary under any
Transaction Document or the Certificate of Designation.
Section 3.9 Distributions. So long as any Preferred Shares or Warrants
--------------
remain outstanding, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock or (ii)
purchase or otherwise acquire for value, directly or indirectly, any Common
Stock or other equity security of the Company.
Section 3.10 Status of Dividends. The Company covenants and agrees that
-------------------
(i) no Federal income tax return or claim for refund of Federal income tax or
other submission to the Internal Revenue Service will adversely affect the
Preferred Shares, any other series of its
<PAGE>
Preferred Stock, or the Common Stock, and any deduction shall not operate to
jeopardize the availability to Purchasers of the dividends received deduction
provided by Section 243(a)(1) of the Code or any successor provision, (ii) in no
report to shareholders or to any governmental body having jurisdiction over the
Company or otherwise will it treat the Preferred Shares other than as equity
capital or the dividends paid thereon other than as dividends paid on equity
capital unless required to do so by a governmental body having jurisdiction over
the accounts of the Company or by a change in generally accepted accounting
principles required as a result of action by an authoritative accounting
standards setting body, and (iii) other than pursuant to this Agreement or the
Certificate of Designation, it will take no action which would result in the
dividends paid by the Company on the Preferred Shares out of the Company's
current or accumulated earnings and profits being ineligible for the dividends
received deduction provided by Section 243(a)(1) of the Code. The preceding
sentence shall not be deemed to prevent the Company from designating the
Preferred Stock as "Convertible Preferred Stock" in its annual and quarterly
financial statements in accordance with its prior practice concerning other
series of preferred stock of the Company. In the event that the Purchasers have
reasonable cause to believe that dividends paid by the Company on the Preferred
Shares out of the Company's current or accumulated earnings and profits will not
be treated as eligible for the dividends received deduction provided by Section
243(a)(1) of the Code, or any successor provision, the Company will, at the
request of the Purchasers of 51% of the outstanding Preferred Shares, join with
the Purchasers in the submission to the Service of a request for a ruling that
dividends paid on the Shares will be so eligible for Federal income tax
purposes. In addition, the Company will reasonably cooperate with the Purchasers
(at the Purchasers' expense) in any litigation, appeal or other proceeding
challenging or contesting any ruling, technical advice, finding or determination
that earnings and profits are not eligible for the dividends received deduction
provided by Section 243(a)(1) of the Code, or any successor provision to the
extent that the position to be taken in any such litigation, appeal, or other
proceeding is not contrary to any provision of the Code or incurred in
connection with any such submission, litigation, appeal or other proceeding.
Notwithstanding the foregoing, nothing herein contained shall be deemed to
preclude the Company from claiming a deduction with respect to such dividends if
(i) the Code shall hereafter be amended, or final Treasury regulations
thereunder are issued or modified, to provide that dividends on the Preferred
Shares or Conversion Shares should not be treated as dividends for Federal
income tax purposes or that a deduction with respect to all or a portion of the
dividends on the Shares is allowable for Federal income tax purposes, or (ii) in
the absence of such an amendment, issuance or modification and after a
submission of a request for ruling or technical advice, the service shall rule
or advise that dividends on the shares should not be treated as dividends for
Federal income tax purposes. If the Service determines that the Preferred Shares
or Conversion Shares constitute debt, the Company may file protective claims for
refund.
Section 3.11 Rule 144A. The Company covenants and agrees that if the
---------
Company fails to register the Conversion Shares and the Warrant Shares within
120 days from the Closing Date under the terms and conditions of the
Registration Rights Agreement attached hereto as Exhibit D, then for so long as
any of the Preferred Shares, the Conversion Shares and the Warrants Shares
remain outstanding and continue to be "restricted securities" within the meaning
---------------------
of Rule 144 under the Securities Act, the Company shall make available to the
Purchasers in connection with any sale thereof, the information required by Rule
144A(d)(4) under the Securities Act in
<PAGE>
order to permit resales of the Preferred Shares, the Conversion Shares and the
Warrant Shares pursuant to Rule 144A, if applicable.
Section 3.12 Regulation S. The Company covenants and agrees that if the
------------
Company fails to (i) file a registration statement within 30 days from the
Closing Date and/or (ii) register the Conversion Shares and the Warrant Shares
within 90 days from the Closing Date, under the terms and conditions of the
Registration Rights Agreement attached hereto as Exhibit D, then for so long as
any of the Preferred Shares, the Conversion Shares or the Warrant Shares remain
outstanding and continue to be "restricted securities" within the meaning of
---------------------
Rule 144 under the Securities Act, the Company shall, in order to permit resales
of the Preferred Shares, the Conversion Shares or the Warrant Shares pursuant to
Regulation S under the Securities Act, (a) continue to file all material
required to be filed pursuant to Section 13(a) or 15(d) of the Exchange Act, and
(b) not knowingly engage in directed selling efforts in connection with the
resale of securities by any Purchasers under Regulation S.
Section 3.13 Reservation of Shares. So long as any of the Preferred
---------------------
Shares or Warrants remain outstanding, the Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 200% of the aggregate number of shares of Common Stock
needed to provide for the issuance of the Conversion Shares and the Warrant
Shares.
Section 3.14 Transfer Agent Instructions. The Company shall issue
---------------------------
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of the Purchasers or their
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by the Purchasers to the Company upon
conversion of the Preferred Shares or exercise of the Warrants in the form of
Exhibit E attached hereto (the "Irrevocable Transfer Agent Instructions").
---------------------------------------
Prior to registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 6.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 3.14 will be given by the Company to its transfer agent and that
the Shares shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the Registration
Rights Agreement. Nothing in this Section 3.14 shall affect in any way the
Purchasers' obligations and agreements set forth in Section 6.1 to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Shares. If any Purchaser provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of Shares may be made without registration under the Securities Act or
such Purchaser provides the Company with reasonable assurances that Shares can
be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold,
the Company shall permit the transfer, and, in the case of the Conversion Shares
and the Warrant Shares, promptly instruct its transfer agent to issue one or
more certificates in such name and in such denominations as specified by such
Purchaser and without any restrictive legend. The Company acknowledges that a
breach by it of its obligations under this Section 3.14 will cause irreparable
harm to the Purchasers by vitiating the intent and purpose of the transactions
contemplated
<PAGE>
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 3.14 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 3.14, that the Purchasers shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.
Section 3.15 Lock-up Agreements by Company Stockholders. The Company
------------------------------------------
shall have each of the current stockholders listed on Schedule 3.15 attached
-------------
hereto (the "Primary Stockholders") holding shares of Common Stock or other
--------------------
Company securities convertible into Common Stock, including, without limitation,
the Series A, B, C and D Convertible Preferred, Stock to execute a lock-up
agreement, whereby each of such Primary Stockholders agrees not to sell, assign
or otherwise transfer (except as otherwise provided on Schedule 3.15) any of
-------------
his/her shares of Common Stock or other Company securities convertible into
Common Stock, including, without limitation, the Series A, B, C and D
Convertible Preferred Stock for a period beginning on the Closing Date and
ending on February 1, 2000,
Section 3.16 Limitations on the Transfer of Shares by the Purchasers.
-------------------------------------------------------
The Purchasers shall not, without the prior written consent of the Company,
offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase
or otherwise dispose of ("Transfer"), directly or indirectly, any Shares on or
--------
before June 30, 1999. After June 30, 1999, upon the reasonable request of an
underwriter (the "Underwriter") of an underwritten public offering of the Common
Stock (the "Offering"), the Purchasers shall not Transfer, directly or
indirectly, any Shares for a period of seventy-five (75) consecutive days from a
date, prior to December 31, 1999, as may be designated, in writing, by the
Underwriter. Notwithstanding any other provision hereof, the Purchasers may
Transfer any Preferred Shares so long as the transferees shall agree to be bound
by the terms and provisions of this Agreement, the Certificate of Designation,
the Registration Rights Agreement and the Irrevocable Transfer Agent
Instructions; and, provided further, that if on December 31, 1999 an Offering
--- ----------------
has not been completed, the Purchasers may sell Shares without any restriction.
Section 3.17 Purchase Option. If the Company (i) fails to complete an
---------------
Offering within one (1) year of the Closing Date and (ii) at such time the
Company's Common Stock has a five (5) Five Day Average Share Price of less than
$3.00 (which Five Day Average Share Price may be adjusted for stock splits,
subdivision or combination of shares of Common Stock, or reclassification), each
Purchaser shall have the option upon forty-five (45) days prior written notice
to purchase in an equitable manner any assets (other than those assets located
within the city limits of Fresno, California) (the "Assets") acquired by the
Company at any time after the Closing Date, on a pro rata basis, for up to the
Purchase Price paid by such Purchaser at a purchase price equal to the purchase
price paid for the Assets by the Company at the time of acquisition. The
Company shall not sell any of the Assets on or before the second anniversary of
the Closing Date without the prior written consent of the Purchasers.
Capitalized terms used in this Section 3.17 and not otherwise defined in this
Agreement shall have the respective meanings specified in the Certificate of
Designations.
<PAGE>
Section 3.18 Letter Agreements. Prior to the Closing, the Company and
-----------------
each purchaser of Series D Convertible Preferred Stock shall have executed a
letter agreement substantially in the form of Exhibit F attached hereto. After
the Closing, the Company will cause any purchaser of Series D Convertible
Preferred Stock to execute such letter agreement. Following the Closing, the
Company will not amend or terminate (i) the letter agreements referred to in
this Section 3.18 or (ii) amend or terminate Section 3.17 of any Series D
Convertible Preferred Stock Purchase Agreement, in each case in a way that would
adversely affect the rights of the Purchasers under Section 3.17 hereof or under
any of the Company's letter agreements with the Purchasers relating to such
Section 3.17 without the prior written consent of the Purchasers.
ARTICLE IV
Conditions
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell
-------------------------------------------------------------
the Shares. The obligation hereunder of the Company to issue and sell the
- ----------
Preferred Shares and the Warrants to the Purchasers is subject to the
satisfaction or waiver, at or before the Closing, of each of the conditions set
forth below. These conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.
(a) Accuracy of the Purchasers' Representations and Warranties.
----------------------------------------------------------
The representations and warranties of the Purchasers shall be true and correct
in all material respects as of the date when made and as of the Closing as
though made at that time, except for representations and warranties that are
expressly made as of a particular date, which shall be true and correct in all
material respects as of such date.
(b) Performance by the Purchasers. The Purchasers shall have
-----------------------------
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Purchasers at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order,
-------------
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
-----------------------------------------------------------
Purchase the Shares. The obligation hereunder of the Purchasers to acquire and
- -------------------
pay for the Preferred Shares and the Warrants is subject to the satisfaction or
waiver, at or before the Closing, of each of the conditions set forth below.
These conditions are for the Purchasers' sole benefit and may be waived by the
Purchasers at any time in their sole discretion.
(a) Accuracy of the Company's Representations and Warranties.
--------------------------------------------------------
Each of the representations and warranties of the Company shall be true and
correct in all material respects as
<PAGE>
of the date when made and as of the Closing as though made at that time, except
for representations and warranties that speak as of a particular date, which
shall be true and correct in all material respects as of such date.
(b) Performance by the Company. The Company shall have performed,
--------------------------
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.
(c) No Suspension, etc. From the date hereof to the Closing Date,
------------------
trading in the Common Stock shall not have been suspended by the Commission
(except for any suspension of trading of limited duration agreed to by the
Company, which suspension shall be terminated prior to Closing), and, at any
time prior to the Closing, trading in securities generally as reported by
Bloomberg Financial Markets ("Bloomberg") shall not have been suspended or
---------
limited, or minimum prices shall not have been established on securities whose
trades are reported by Bloomberg, or on the New York Stock Exchange, or on the
OTC Bulletin Board, nor shall a banking moratorium have been declared either by
the United States or New York State authorities, nor shall there have occurred
any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on, or any
material adverse change in any financial market which, in each case, in the
judgment of the Purchasers, makes it impracticable or inadvisable to purchase
the Preferred Shares.
(d) No Injunction. No statute, rule, regulation, executive order,
-------------
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(e) No Proceedings or Litigation. No action, suit or proceeding
----------------------------
before any arbitrator or any governmental authority shall have been commenced,
and no investigation by any governmental authority shall have been threatened,
against the Company, any subsidiary thereof or any Purchaser, or any of the
officers, directors or affiliates of the Company, any subsidiary thereof or any
Purchaser seeking to restrain, prevent or change the transactions contemplated
by this Agreement, or seeking damages in connection with such transactions.
(f) Certificate of Designation of Rights and Preferences. Prior
----------------------------------------------------
to the Closing, the Certificate of Designation for the Preferred Shares in the
form of Exhibit C attached hereto shall have been filed with the Secretary of
State of Colorado.
(g) Registration Rights Agreement. At the Closing, the Company
-----------------------------
shall have executed and delivered the Registration Rights Agreement to the
Purchasers.
(h) Preferred Stock Certificates. The Company shall have executed
----------------------------
and delivered each Purchasers a stock certificate or certificates (in such
denominations as the such Purchaser shall request) for the Preferred Shares
being purchased by such Purchaser at the Closing.
<PAGE>
(i) Resolutions. The Board of Directors of the Company shall have
-----------
adopted resolutions consistent with Section 2.1(b) above in a form reasonably
acceptable to the Purchasers (the "Resolutions").
-----------
(j) Reservation of Shares. As of the Closing Date, the Company
---------------------
shall have reserved out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of the Preferred Shares and the exercise
of the Warrants, a number of shares of Common Stock equal to at least 200% of
the aggregate number of Conversion Shares issuable upon conversion of the
Preferred Shares outstanding on the Closing Date and the number of Warrant
Shares issuable upon exercise of the number of Warrants (after giving effect to
the Preferred Shares to be issued on the Closing Date and assuming all such
Preferred Shares and Warrants were fully convertible or exercisable on such date
regardless of any limitation on the timing or amount of such conversions or
exercises).
(k) Transfer Agent Instructions. The Irrevocable Transfer Agent
---------------------------
Instructions, in the form of Exhibit E attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.
(l) Secretary's Certificate. The Company shall have delivered to
----------------------
the Purchasers a secretary's certificate, dated as of the Closing Date, as to
(i) the Resolutions, (ii) the Articles, (iii) the Bylaws, (iv) the Certificate
of Designation, each as in effect at the Closing, and (iv) the authority and
incumbency of the officers of the Company executing the Transaction Documents
and any other documents required to be executed or delivered in connection
therewith.
(m) Opinion of Counsel, Etc. At the Closing, the Purchasers shall
-----------------------
have received opinions of counsel to the Company, dated the Closing Date, in
substantially the form of Exhibit G hereto and such other certificates and
documents as the Purchasers or their counsel shall reasonably require incident
to the Closing.
ARTICLE V
Registration Rights
At the Closing, the Company and the Purchasers shall enter into a
Registration Rights Agreement in the form attached hereto as Exhibit D (the
"Registration Rights Agreement").
- ------------------------------
ARTICLE VI
Stock Certificate Legend
Section 6.1 Legend. Each certificate representing the Preferred Shares,
------
and, if appropriate, securities issued upon conversion thereof, shall be stamped
or otherwise imprinted
<PAGE>
with a legend substantially in the following form (in addition to any legend
required by applicable state securities or "blue sky" laws):
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THAT ACT AND
UNDER APPLICABLE STATE SECURITIES LAWS OR SKYLYNX COMMUNICATIONS, INC. (THE
"COMPANY") SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT REGISTRATION OF SUCH SECURITIES UNDER THAT
ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED.
The Company agrees to reissue certificates representing the Preferred
Shares or Conversion Shares without the legend set forth above if at such time,
prior to making any transfer of any Preferred Shares or Conversion Shares, such
holder thereof shall give written notice to the Company describing the manner
and terms of such transfer and removal as the Company may reasonably request.
Such proposed transfer will not be effected until: (a) the Company has notified
such holder that either (i) in the opinion of counsel reasonably satisfactory to
the Company, the registration of such Preferred Shares or Conversion Shares
under the Securities Act is not required in connection with such proposed
transfer; or (ii) a registration statement under the Securities Act covering
such proposed disposition has been filed by the Company with the Commission and
has become effective under the Securities Act; and (b) the Company has notified
such holder that either: (i) in the opinion of Company counsel, the registration
or qualification under the securities or "blue sky" laws of any state is not
required in connection with such proposed disposition, or (ii) compliance with
applicable state securities or "blue sky" laws has been effected. The Company
will use its best efforts to respond to any such notice from a holder within ten
(10) days. In the case of any proposed transfer under this Section 6, the
Company will use reasonable efforts to comply with any such applicable state
securities or "blue sky" laws, but shall in no event be required, in connection
therewith, to qualify to do business in any state where it is not then qualified
or to take any action that would subject it to tax or to the general service of
process in any state where it is not then subject. The restrictions on transfer
contained in Section 6.1 shall be in addition to, and not by way of limitation
of, any other restrictions on transfer contained in any other section of this
Agreement.
ARTICLE VII
Termination
Section 7.1 Termination by Mutual Consent. This Agreement may be
-----------------------------
terminated at any time prior to the Closing by the mutual written consent of the
Company and the Purchasers.
<PAGE>
Section 7.2 Other Termination. This Agreement may be terminated by the
-----------------
action of the Board of Directors of the Company or by the Purchasers at any time
if the Closing shall not have been consummated by the Closing Date, as long as
the failure to so consummate is not the fault of the terminating party.
Section 7.3 Effect of Termination. In the event of termination by the
---------------------
Company or the Purchasers, written notice thereof shall forthwith be given to
the other party and the transactions contemplated by this Agreement and the
Registration Rights Agreement shall be terminated without further action by
either party. If this Agreement is terminated as provided in Section 7.1 or 7.2
herein, this Agreement shall become void and of no further force and effect,
except for Sections 9.1 and 9.2, and Article VIII herein. Nothing in this
Section 7.3 shall be deemed to release the Company or the Purchasers from any
liability for any breach under this Agreement or the Registration Rights
Agreement.
ARTICLE VIII
Indemnification
Section 8.1 General Indemnity. The Company agrees to indemnify and hold
-----------------
harmless the Purchasers (and their directors, officers, partners, affiliates,
agents, successors and assigns) from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorney's fees, charges and disbursements) incurred by
the Purchasers as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein. The
Purchasers, severally but not jointly, agree to indemnify and hold harmless the
Company and its directors, officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys fees, charges
and disbursements) incurred by the Company as result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Purchasers
herein.
Section 8.2 Indemnification Procedure. Any party entitled to
-------------------------
indemnification under this Article VIII (an "indemnified party") will give
-----------------
written notice to the indemnifying party of any matters giving rise to a claim
for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VIII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect of such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole
<PAGE>
cost and expense, any action, proceeding or claim (or discontinues its defense
at any time after it commences such defense), then the indemnified party may, at
its option, defend, settle or otherwise compromise or pay such action or claim.
In any event, unless and until the indemnifying party elects in writing to
assume and does so assume the defense of any such claim, proceeding or action,
the indemnified party's costs and expenses arising out of the defense,
settlement or compromise of any such action, claim or proceeding shall be losses
subject to indemnification hereunder. The indemnified party shall cooperate
fully with the indemnifying party in connection with any negotiation or defense
of any such action or claim by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the indemnified party
which relates to such action or claim. The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense or
any settlement negotiations with respect thereto. If the indemnifying party
elects to defend any such action or claim, then the indemnified party shall be
entitled to participate in such defense with counsel of its choice at its sole
cost and expense. The indemnifying party shall not be liable for any settlement
of any action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VIII to the contrary, the indemnifying
party shall not, without the indemnified party's prior written consent, settle
or compromise any claim or consent to entry of any judgment in respect thereof
which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect of
such claim. The indemnification required by this Article VIII shall be made by
periodic payments of the amount thereof during the course of investigation or
defense, as and when bills are received or expense, loss, damage or liability is
incurred, so long as the indemnified party irrevocably agrees to refund such
moneys if it is ultimately determined by a court of competent jurisdiction that
such party was not entitled to indemnification. The indemnity agreements
contained herein shall be in addition to (a) any cause of action or similar
rights of the indemnified party against the indemnifying party or others, and
(b) any liabilities the indemnifying party may be subject to pursuant to the
law.
ARTICLE IX
Miscellaneous
Section 9.1 Fees and Expenses. Except as otherwise set forth in this
-----------------
Agreement, the Registration Rights Agreement or the Certificate of Designation,
each party shall pay the fees and expenses of its advisors, counsel, accountants
and other experts, if any, and all other expenses, incurred by such party
incident to the negotiation, preparation, execution, delivery and performance of
this Agreement. The Company shall pay all stamp or other similar taxes and
duties levied in connection with issuance of the Preferred Shares pursuant
hereto.
Section 9.2 Consent to Jurisdiction. Each of the Company and the
-----------------------
Purchasers (i) hereby irrevocably submits to the jurisdiction of the United
States District Court sitting in the Southern District of New York for the
purposes of any suit, action or proceeding arising out of or relating to this
Agreement or the Registration Rights Agreement and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally
<PAGE>
subject to the jurisdiction of such court, that the suit, action or proceeding
is brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper. Each of the Company and the Purchasers consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing in this Section 9.2 shall affect
or limit any right to serve process in any other manner permitted by law.
Section 9.3 Entire Agreement; Amendment. This Agreement contains the
---------------------------
entire understanding of the parties with respect to the matters covered hereby
and, except as specifically set forth herein or in the Transaction Documents or
the Certificate of Designation, neither the Company nor the Purchasers make any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and all of the holders of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an a
written instrument signed by the party against whom enforcement of any such
amendment or waiver is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares
then outstanding. No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of any of the
Transaction Documents or the Certificate of Designation unless the same
consideration is also offered to all of the parties to the Transaction Documents
or holders of Preferred Shares, as the case may be.
Section 9.4 Notices. Any notice, demand, request, waiver or other
-------
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: SkyLynx Communications, Inc.
600 South Cherry Street
Suite 305
Denver, CO 80246
Attention: Jeffery A. Mathias, President and CEO
Fax: (303) 316-0404
with copies to: Kelley Drye & Warren LLP
281 Tresser Boulevard
Stamford, Connecticut 06901
Attention: M. Ridgway Barker
Telephone Number: (203) 324-1400
Fax: (203) 327-2669
<PAGE>
If to the Purchasers: At the address of the Purchasers set forth on
Exhibit A to this Agreement, with copies to
Purchasers' counsel as set forth on Exhibit A or as
specified in writing by the Purchasers.
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days written notice of such changed address to the
other party hereto.
Section 9.5 Waivers. No waiver by either party of any default with
-------
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provisions, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
Section 9.6 Headings. The article, section and subsection headings in
--------
this Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
Section 9.7 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties and their successors and assigns. After
Closing, the assignment by a party to this Agreement of any rights hereunder
shall not affect the obligations of such party under this Agreement.
Section 9.8 No Third Party Beneficiaries. This Agreement is intended for
----------------------------
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
Section 9.9 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the State of New York, without
giving effect to the choice of law provisions.
Section 9.10 Survival. The representations and warranties of the Company
--------
and the Purchasers contained in: (i) Section 2.1(o) shall survive until the
expiration of the statute of limitations applicable to the matters covered
thereby (giving effect to any waiver, mitigation or extension thereof); (ii)
Section 2.1(s) shall survive until three years after the Closing Date; and (iii)
those contained in Article II, with the exception of Sections 2.1(o) and (s),
shall survive the execution and delivery hereof and the Closing until the date
two years from the Closing Date, and the agreements and covenants set forth in
Articles V and VIII of this Agreement shall survive the execution and delivery
hereof and Closing hereunder for an indefinite period and the agreements and
covenants set forth in Articles I, III and VII of this Agreement shall survive
the execution and delivery hereof and the Closing hereunder until the Purchasers
and their affiliates in the aggregate or their permitted transferees
beneficially own (on a fully-diluted basis, giving effect to the issuance of the
Conversion Shares and the Warrant Shares, and determined in
<PAGE>
accordance with Rule 13d-3 under the Exchange Act) less than 2% of the total
combined voting power of all voting securities then outstanding, provided, that
Sections 3.1, 3.2, 3.4, 3.5, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.17
and 3.18 shall not expire until the Registration Statement required by Section 2
of the Registration Rights Agreement is no longer required to be effective under
the terms and conditions of Registration Rights Agreement and provided further
that the agreements and covenants set forth in this Article IX shall survive
indefinitely.
Section 9.11 Counterparts. This Agreement may be executed in any number
------------
of counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart. In the event any signature is
delivered by facsimile transmission, the party using such means of delivery
shall cause four additional executed signature pages to be physically delivered
to the other parties within five days of the execution and delivery hereof.
Section 9.12. Publicity. The Company agrees that it will not disclose,
---------
and will not include in any public announcement, the name of the Purchasers,
unless and until such disclosure is required by law or applicable regulation,
and then only to the extent of such requirement.
Section 9.13 Severability. The provisions of this Agreement, the
------------
Certificate of Designation and the Registration Rights Agreement are severable
and, in the event that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of the provisions contained in this
Agreement, the Certificate of Designation or the Registration Rights Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement, the Certificate of
Designation or the Registration Rights Agreement and this Agreement, the
Certificate of Designation and the Registration Rights Agreement, as applicable,
shall be reformed and construed as if such invalid, illegal or unenforceable
provision, or part of such provision, to the extent of its invalidity,
illegality or unenforceability, had never been contained herein or therein.
Section 9.14 Further Assurances. From and after the date of this
------------------
Agreement, upon the request of any Purchasers or the Company, each of the
Company and the Purchasers shall execute and deliver such instrument, documents
and other writings as may be reasonably necessary or desirable to confirm and
carry out and to effectuate fully the intent and purposes of this Agreement, the
Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares, the
Certificate Designation, and the Registration Rights Agreement.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorize officer as of the date first above
written.
SKYLYNX COMMUNICATIONS, INC.
By:_______________________________________________
Name:
Title:
SPECIAL SITUATIONS FUND III, L.P.
By:_______________________________________________
Name:
Title:
SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
By:_______________________________________________
Name:
Title:
SPECIAL SITUATIONS CAYMAN FUND, L.P.
By:_______________________________________________
Name:
Title:
SPECIAL SITUATIONS TECHNOLOGY FUND, L.P.
By:_______________________________________________
Name:
Title:
<PAGE>
EXHIBIT A to the
SERIES E CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
FOR SKYLYNX COMMUNICATIONS. INC.
<TABLE>
<CAPTION>
Names and Address Number of Dollar Issuance Date Number of Shares of
of Purchaser Preferred Amount ------------- Common Stock Issuable
------------ Shares Purchased of Investment upon Exercise of Related
---------------- ------------- Warrant (Subject to
Adjustment as Provided
in the Warrant)
------------------------
<S> <C> <C> <C> <C>
Special Situations 1,250 $1,250,000 Closing Date 38,235
Fund III, L.P.
Special Situations 1,000 $1,000,000 Closing Date 30,588
Private Enquity Fund,
L.P.
Special Situations 400 $400,000 Closing Date 12,235
Cayman Fund, L.P.
Special Situations 350 $350,000 Closing Date 10,706
Technology Fund, L.P.
</TABLE>
<PAGE>
Exhibit 10.17
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made and
---------
entered into as of May __, 1999, between SkyLynx Communications, Inc., a
Colorado corporation (the "Company"), and each of the Purchasers listed on
-------
Schedule 1 attached hereto (collectively, the "Purchasers").
----------
This Agreement is being entered into pursuant to the Series E
Convertible Preferred Stock Purchase Agreement, dated as of the date hereof, by
and among the Company and the Purchasers (the "Purchase Agreement").
------------------
The Company and the Purchasers hereby agree as follows:
1. Definitions.
-----------
Capitalized terms used and not otherwise defined herein shall have the
meanings given such terms in the Purchase Agreement. As used in this Agreement,
the following terms shall have the following meanings:
"Advice" shall have the meaning set forth in Section 3(m).
------
"Affiliate" means, with respect to any Person, any other Person that
---------
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
-------
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
---------- ----------- ----------
correlative to the foregoing.
"Blackout Period" shall have the meaning set forth in Section 3(n).
---------------
"Board" shall have the meaning set forth in Section 3(n).
-----
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the state of
New York generally are authorized or required by law or other government actions
to close.
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the Company's Common Stock, par value $0.001 per
------------
share.
<PAGE>
"Effectiveness Date" shall, with respect to the Registration
------------------
Statement, have the meaning assigned to such term in the Series D Registration
Rights Agreement.
"Effectiveness Period" shall have the meaning set forth in Section 2.
--------------------
"Event" shall have the meaning set forth in Section 7(e).
-----
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Filing Date" shall, with respect to the Registration Statement, have
-----------
the meaning assigned to such term in the Series D Registration Rights Agreement.
"Holders" means the holders from time to time of Registrable
-------
Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
-----------------
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
------------------
"Losses" shall have the meaning set forth in Section 5(a).
------
"OTC Bulletin Board" shall mean the over-the-counter electronic
------------------
bulletin board.
"Periodic Amount" shall have the meaning set forth in Section 7(e).
---------------
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Preferred Stock" means the Series E Convertible Preferred Stock, par
---------------
value $.01 per share and stated value $1,000 per share, of the Company issued to
the Purchasers pursuant to the Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or proceeding
----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
----------
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the
<PAGE>
Prospectus, including post-effective amendments, and all material incorporated
by reference in such Prospectus.
"Registrable Securities" means (i) the shares of Common Stock issuable
----------------------
upon conversion of the Preferred Stock (the "Conversion Shares") and exercise of
-----------------
the Warrants (the "Warrant Shares"), and upon any stock split, stock dividend,
--------------
recapitalization or similar event with respect to such Conversion Shares or
Warrant Shares and (ii) any other dividend or other distribution with respect
to, conversion or exchange of, or in replacement of, Registrable Securities;
provided, however, that Registrable Securities shall include (but not be limited
- -------- -------
to) a number of shares of Common Stock equal to no less than 200% of the maximum
number of shares of Common Stock which would be issuable upon conversion of the
Preferred Stock and upon exercise of the Warrants, assuming such conversion and
exercise occurred on the Closing Date or the Filing Date, whichever date would
result in the greater number of Registrable Securities. Notwithstanding anything
herein contained to the contrary, such registered shares of Common Stock shall
be allocated among the Holders pro rata based on the total number of Registrable
Securities issued or issuable as of each date that a Registration Statement, as
amended, relating to the resale of the Registrable Securities is declared
effective by the Commission. Notwithstanding anything contained herein to the
contrary, if the actual number of shares of Common Stock issuable upon
conversion of the Preferred Stock and upon exercise of the Warrants exceeds 200%
of the number of shares of Common Stock issuable upon conversion of the
Preferred Stock and upon exercise of the Warrants based upon a computation as at
the Closing Date or the Filing Date, the term "Registrable Securities" shall be
deemed to include such additional shares of Common Stock.
"Registration Statement" means the registration statements and any
----------------------
additional registration statements contemplated by Section 2, including (in each
case) the Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference in such registration
statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
<PAGE>
"Series D Registration Rights Agreement" means the Registration Rights
--------------------------------------
Agreement dated as of April 16, 1999 among the Company and the holders of Series
D Convertible Preferred Stock listed on Schedule 1 attached thereto.
"Special Counsel" means any special counsel to the Holders, for which
---------------
the Holders will be reimbursed by the Company pursuant to Section 4.
2. Shelf Registration.
-------------------
On or prior to the Filing Date, the Company shall prepare and file
with the Commission a "shelf" Registration Statement covering all Registrable
Securities for an offering to be made on a continuous basis pursuant to Rule
415. The Registration Statement shall be on Form SB-2 (except if the Company is
not then eligible to register for resale the Registrable Securities on Form SB-
2, in which case such registration shall be on another appropriate form in
accordance herewith). The Company shall (i) not permit any securities other than
the Registrable Securities to be included in the Registration Statement and (ii)
use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as possible after the filing
thereof, but in any event prior to the Effectiveness Date, and to keep such
Registration Statement continuously effective under the Securities Act until
such date as is the earlier of (x) the date when all Registrable Securities
covered by such Registration Statement have been sold or (y) the date on which
the Registrable Securities may be sold without any restriction pursuant to Rule
144(k) as determined by the counsel to the Company pursuant to a written opinion
letter, addressed to the Company's transfer agent to such effect (the
"Effectiveness Period"). If an additional Registration Statement is required to
- ---------------------
be filed because the actual number of shares of Common Stock into which the
Preferred Stock is convertible and the Warrants are exercisable exceeds the
number of shares of Common Stock initially registered in respect of the
Conversion Shares and the Warrant Shares based upon the computation on the
Closing Date, the Company shall have twenty (20) Business Days to file such
additional Registration Statement, and the Company shall use its best efforts to
cause such additional Registration Statement to be declared effective by the
Commission as soon as possible, but in no event later than thirty (30) days
after filing.
3. Registration Procedures.
------------------------
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission, on or prior to the
<PAGE>
Filing Date, a Registration Statement on Form SB-2 (or if the Company is not
then eligible to register for resale the Registrable Securities on Form SB-2
such registration shall be on another appropriate form in accordance herewith)
in accordance with the method or methods of distribution thereof as specified by
the Holders, and shall use its reasonable best efforts to cause the Registration
Statement to become effective and remain effective as provided herein; provided,
--------
however, that not less than five (5) Business Days prior to the filing of the
- -------
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated therein by
reference), the Company shall (i) furnish to the Holders and their Special
Counsel copies of all such documents proposed to be filed, which documents
(other than those incorporated by reference) will be subject to the review of
the Holders and their Special Counsel, and (ii) at the request of the Holders
cause its officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of counsel to the Holders, to conduct a reasonable
investigation within the meaning of the Securities Act.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as practicable to any comments
received from the Commission with respect to the Registration Statement or any
amendment thereto and as promptly as practicable provide the Holders true and
complete copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as so
amended or in such Prospectus as so supplemented.
(c) Notify the Holders and their Special Counsel as promptly as
possible (and, in the case of (i)(A) below, not less than five (5) Business Days
prior to such filing) and (if requested by any Holder or its Special Counsel)
confirm such notice in writing no later than one (1) Business Day following the
day: (i)(A) when a Prospectus or any Prospectus supplement or post-effective
amendment to the Registration Statement is proposed to be filed; (B) when the
Commission notifies the Company whether there will be a "review" of such
Registration Statement and whenever the Commission comments in writing on such
Registration Statement and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the
<PAGE>
Registrable Securities or the initiation of any Proceedings for that purpose;
(iv) if at any time any of the representations and warranties of the Company
contained in any agreement contemplated hereby ceases to be true and correct in
all material respects; (v) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any jurisdiction,
or the initiation or threatening of any Proceeding for such purpose; and (vi) of
the occurrence of any event that makes any statement made in the Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of, (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by the Holders of a majority in interest of the
Registrable Securities, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
Company reasonably agrees should be included therein and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment.
(f) Furnish to any Holder and its Special Counsel, without charge, one
conformed copy of each Registration Statement and each amendment thereto,
including financial statements and schedules, all documents incorporated or
deemed to be incorporated therein by reference, and all exhibits to the extent
requested by the Holders or their Special Counsel (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.
(g) Promptly deliver to each Holder and its Special Counsel, without
charge, as many copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such Holder or its
Special Counsel may reasonably request; and the Company hereby consents to the
use of such Prospectus and each amendment or supplement thereto by each of the
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the Holders and their
Special Counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
<PAGE>
jurisdictions within the United States as the Holders request in writing, to
keep each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
-------- -------
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be sold
pursuant to a Registration Statement, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any Holder may request at least
two (2) Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)(vi),
as promptly as possible, prepare a supplement or amendment, including a post-
effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(k) Use its reasonable best efforts to cause all Registrable
Securities relating to such Registration Statement to be listed on the OTC
Bulletin Board and any other securities exchange, quotation system, market or
over-the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year or in each case within such extended period of time as may be
permitted by the Commission for filing the applicable report with the
Commission) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.
(m) The Company may require each selling Holder to furnish to the
Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from registration the Registrable
Securities of any such Holder who unreasonably fails to furnish such information
within a reasonable time after receiving such request.
<PAGE>
If the Registration Statement refers to any Holder by name or otherwise as the
holder of any securities of the Company, then such Holder shall have the right
to require (if such reference to such Holder by name or otherwise is not
required by the Securities Act or any similar federal statute then in force) the
deletion of the reference to such Holder in any amendment or supplement to the
Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any Registrable
Securities under the Registration Statement until it has received copies of the
Prospectus as then amended or supplemented as contemplated in Section 3(g) and
notice from the Company that such Registration Statement and any post-effective
amendments thereto have become effective as contemplated by Section 3(c) and
(ii) it and its officers, directors or Affiliates, if any, will comply with the
prospectus delivery requirements of the Securities Act as applicable to them in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the "Advice")
------
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
(n) If (i) there is material non-public information regarding the
Company which the Company's Board of Directors (the "Board") reasonably
-----
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose and which the Company would be required to disclose
under the Registration Statement, then the Company may postpone or suspend
filing or effectiveness of a registration statement for a period not to exceed
20 consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 12 month period (each, a "Blackout Period"); provided, however, that no such
--------------- -------- -------
postponement or suspension shall be permitted for consecutive 20 day periods,
arising out of the same set of facts, circumstances or transactions.
4. Registration Expenses
---------------------
All fees and expenses incident to the performance of or compliance
with this
<PAGE>
Agreement by the Company shall be borne by the Company whether or not the
Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with the OTC
Bulletin Board and each other securities exchange or market on which Registrable
Securities are required hereunder to be listed, (B) with respect to filings
required to be made with the Commission, (C) with respect to filings required to
be made under the OTC Bulletin Board and (D) in compliance with state securities
or Blue Sky laws (including, without limitation, fees and disbursements of
counsel for the Holders in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions), (ii) printing
expenses (including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses), (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company
and Special Counsel for the Holders (in the case of the Special Counsel, up to a
maximum amount of $25,000), (v) Securities Act liability insurance, if the
Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, the
Company's independent public accountants (including the expenses of any comfort
letters or costs associated with the delivery by independent public accountants
of a comfort letter or comfort letters). In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing or relisting of the
Registrable Securities on the OTC Bulletin Board or any securities exchange as
required hereunder.
5. Indemnification
---------------
(a) Indemnification by the Company. The Company shall,
------------------------------
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, agents, investment advisors and employees of each
such controlling Person, to the fullest extent permitted by applicable law, from
and against any and all losses, claims, damages, liabilities, costs (including,
without limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
------
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case
<PAGE>
of any Prospectus or form of prospectus or supplement thereto, in the light of
the circumstances under which they were made) not misleading, except to the
extent, but only to the extent, that such untrue statements or omissions are
based solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, which information was
reasonably relied on by the Company for use therein or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto.
The Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of an
Indemnified Party and shall survive the transfer of the Registrable Securities
by the Holders.
(b) Indemnification by Holders. The Holders shall, severally and not
--------------------------
jointly, indemnify and hold harmless the Company, the directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising solely out of or based solely upon any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or arising solely out of or based solely upon any omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus and that such information was reasonably relied
upon by the Company for use in the Registration Statement, such Prospectus or
such form of prospectus or to the extent that such information relates to such
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus. Notwithstanding anything to the contrary contained herein, the
Holder shall be liable under this Section 5(b) for only that amount as does not
exceed the net proceeds to such Holder as a result of the sale of Registrable
Securities pursuant to such Registration Statement.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall
--------------------------------------
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
-----------------
from whom indemnity is sought (the "Indemnifying Party) in writing, and the
------------------
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of
<PAGE>
its obligations or liabilities pursuant to this Agreement, except (and only) to
the extent that it shall be finally determined by a court of competent
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a)
------------
or 5(b) is unavailable to an Indemnified Party because of a failure or refusal
of a governmental authority to enforce such indemnification in accordance with
its terms (by reason of public policy or otherwise), then each Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses, in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and Indemnified Party in connection with the actions,
statements or omissions that resulted in such Losses as well as any other
relevant equitable considerations. The relative fault of such Indemnifying Party
and Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a
<PAGE>
material fact or omission or alleged omission of a material fact, has been taken
or made by, or relates to information supplied by, such Indemnifying, Party or
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any Losses shall
be deemed to include, subject to the limitations set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
Notwithstanding anything to the contrary contained herein, such Holder shall be
liable or required to contribute under this Section 5(c) for only that amount as
does not exceed the net proceeds to such Holder as a result of the sale of
Registrable Securities pursuant to such Registration Statement.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties
6. Rule 144.
--------
As long as any Holder owns Preferred Shares, Conversion Shares,
Warrants or Warrant Shares, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Holders
with true and complete copies of all such filings. As long as any Holder owns
Preferred Shares, Conversion Shares, Warrants or Warrant Shares, if the Company
is not required to file reports pursuant to Section 13(a) or 15(d) of the
Exchange Act, it will prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Person to
sell Conversion Shares and Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including providing any legal opinions
referred to in the Purchase Agreement. Upon the request of any Holder, the
Company shall deliver to such Holder a written certification of a duly
authorized officer as to
<PAGE>
whether it has complied with such requirements.
7. Miscellaneous.
-------------
(a) Remedies. In the event of a breach by the Company, on the one
--------
hand, or by a Holder, on the other hand, of any of their respective obligations
under this Agreement, each Holder or the Company, as the case may be, in
addition to being entitled to exercise all rights granted by law and under this
Agreement, including recovery of damages, will be entitled to specific
performance of its respective rights under this Agreement. The Company and the
Holders agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
--------------------------
subsidiaries has, as of the date hereof, entered into and currently in effect,
nor shall the Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities that is
inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Without limiting the generality
of the foregoing, without the written consent of the Holders of a majority of
the then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in all
respects to the prior rights in full of the Holders set forth herein, and are
not otherwise in conflict with the provisions of this Agreement.
(c) No Piggyback on Registrations. Neither the Company nor any of its
-----------------------------
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statement, and the Company
shall not after the date hereof enter into any agreement providing such right to
any of its security holders, unless the right so granted is subject in all
respects to the prior rights in full of the Holders set forth herein, and is not
otherwise in conflict with the provisions of this Agreement.
(d) Piggy-Back Registrations. If at any time when there is not an
------------------------
effective Registration Statement covering (i) Conversion Shares or (ii) Warrant
Shares, the Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or its then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee benefit
plans, the Company shall send to each holder of Registrable Securities written
notice of such determination and the Company will cause the registration under
the Securities Act of all Registrable Securities (unless within fifteen (15)
days after receipt of such notice, any such holder shall notify the Company in
writing that it elects to have less than all of its Registrable Securities
intended to be disposed of by such Holder included in such registration)
<PAGE>
to the extent requisite to permit the disposition of the Registrable Securities
so to be registered, provided that if at any time after giving written notice of
its intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to such Holder and, thereupon, (i) in the case of a determination
not to register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from its obligation to
pay expenses in accordance with Section 4 hereof), and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering any
Registrable Securities being registered pursuant to this Section 7(d) for the
same period as the delay in registering such other securities. The Company shall
include in such registration statement all or any part of such Registrable
Securities such Holder requests to be registered; provided, however, that the
-------- -------
Company shall not be required to register any Registrable Securities pursuant to
this Section 7(d) that are eligible for sale pursuant to Rule 144(k) of the
Securities Act. In the case of an underwritten public offering, if the managing
underwriter(s) or underwriter(s) should reasonably object to the inclusion of
the Registrable Securities in such registration statement, then if the Company
after consultation with the managing underwriter should reasonably determine
that the inclusion of such Registrable Securities would materially adversely
affect the offering contemplated in such registration statement, and based on
such determination recommends inclusion in such registration statement of fewer
or none of the Registrable Securities of the Holders, then (x) the number of
Registrable Securities of the Holders included in such registration statement
shall be reduced pro rata among such Holders (based upon the number of
Registrable Securities requested to be included in the registration), if the
Company after consultation with the underwriter(s) recommends the inclusion of
fewer Registrable Securities, or (y) none of the Registrable Securities of the
Holders shall be included in such registration statement, if the Company after
consultation with the underwriter(s) recommends the inclusion of none of such
Registrable Securities; provided, however, that if securities are being offered
-------- -------
for the account of other persons or entities as well as the Company, such
reduction shall not represent a greater fraction of the number of Registrable
Securities intended to be offered by the Holders than the fraction of similar
reductions imposed on such other persons or entities (other than the Company).
(e) Failure to File Registration Statement and Other Events. The
-------------------------------------------------------
Company and the Purchasers agree that the Holders will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Time or if
certain other events occur. The Company and the Holders further agree that it
would not be feasible to ascertain the extent of such damages with precision.
Accordingly, if (i) the Registration Statement is not filed on or prior to the
Filing Date, or is not declared effective by the Commission on or prior to the
Effectiveness Date (or in the event an additional Registration Statement is
required to be filed because the actual number of shares of Common Stock into
which the Preferred Stock is convertible and the Warrants are exercisable
exceeds the number of shares of Common Stock initially registered is not filed
and declared effective within the time periods set forth in Section 2(a)), or
(ii) the Company fails to file with the Commission a
<PAGE>
request for acceleration in accordance with Rule 12d1-2 promulgated under the
Exchange Act within five (5) Business Days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed," or not subject to further review,
or (iii) the Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective as to all Registrable
Securities at any time prior to the expiration of the Effectiveness Period,
without being succeeded immediately by a subsequent Registration Statement filed
with and declared effective by the Commission, or (iv) trading in the Common
Stock shall be suspended or if the Common Stock is delisted from the OTC
Bulletin Board for any reason for more than three Business Days in the
aggregate, or (v) the conversion or exercise rights of the Holders with respect
to Preferred Stock or the Warrants are suspended for any reason or (vi) the
Company breaches in a material respect any covenant or other material term or
condition to this Agreement, the Certificate of Designation, the Purchase
Agreement (other than a representation or warranty contained therein) or any
other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby, and such
breach continues for a period of thirty days after written notice thereof to the
Company, or (vii) the Company has breached Section 3(n) of this Agreement (any
such failure or breach being referred to as an "Event"), the Company shall pay
in cash as liquidated damages for such failure and not as a penalty to each
Holder an amount equal to one percent (1%) of such Holder's pro rata share of
the purchase price paid by all Holders for shares of the Preferred Stock
purchased and then outstanding pursuant to the Purchase Agreement for the
initial thirty (30) day period until the applicable Event has been cured, which
shall be pro rated for such periods less than thirty (30) days and two percent
(2%) of such Holder's pro rata share for each thirty (30) day period thereafter
until the applicable Event has been cured (which shall be also pro rated, as
aforesaid) (the "Periodic Amount"). Payments to be made pursuant to this
---------------
Section 7(e) shall be due and payable immediately upon demand in immediately
available funds. The parties agree that the Periodic Amount represents a
reasonable estimate on the part of the parties, as of the date of this
Agreement, of the amount of damages that may be incurred by the Holders if the
Registration Statement is not filed on or prior to the Filing Date or has not
been declared effective by the Commission on or prior to the Effectiveness Date
and maintained in the manner contemplated herein during the Effectiveness Time
or if any other Event as described herein has occurred and not been cured.
(f) Specific Enforcement, Consent to Jurisdiction.
---------------------------------------------
(i) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Registration Rights Agreement or the Purchase Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Registration
Rights Agreement or the Purchase Agreement and to enforce specifically the terms
and provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
(ii) Each of the Company and the Purchasers (i) hereby
irrevocably
<PAGE>
submits to the jurisdiction of the United States District Court sitting in the
Southern District of New York for the purposes of any suit, action or proceeding
arising out of or relating to this Agreement or the Purchase Agreement and (ii)
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper. Each of the Company and
the Purchasers consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing in this
Section 7(f) shall affect or limit any right to serve process in any other
manner permitted by law.
(g) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders. Notwithstanding the foregoing, a waiver or consent to depart
from the provisions hereof with respect to a matter that relates exclusively to
the rights of Holders and that does not directly or indirectly affect the rights
of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent relates; provided,
however, that the provisions of this sentence may not be amended, modified, or
supplemented except in accordance with the provisions of the immediately
preceding sentence.
(h) Notices. Any and all notices or other communications or
-------
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice prior to 5:00 p.m., New York
Time, on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice later than 5:00 p.m., New York Time, on
any date and earlier than 11:59 p.m., New York Time, on such date, (iii) the
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) actual receipt by the party to whom such
notice is required to be given. The address for such communications with respect
to each of the Holders shall be that set forth under such Holder's name on
Schedule 1 attached hereto, or with respect to the Company, addressed to:
SkyLynx Communications, Inc.
600 South Cherry Street
Suite 305
Denver, CO 80246
Attention: Jeffery A. Mathias, President and CEO
Facsimile: (303) 316-0404
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of
<PAGE>
notices to any Holder shall be sent to the addresses listed on Schedule 1
attached hereto, if applicable.
(i) Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their successors and permitted assigns
and shall inure to the benefit of each Holder and its successors and assigns.
The Company may not assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of the Holders. The Purchasers may
assign their rights hereunder in the manner and to the Persons as permitted
under the Purchase Agreement.
(j) Assignment of Registration Rights. The rights of each Holder
---------------------------------
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any transferee of such Holder of all
or a portion of the shares of Preferred Stock or the Registrable Securities if:
(i) the Holder agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment the further disposition of such
securities by the transferee or assignees is restricted under the Securities Act
and applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. In
addition, each Holder shall have the right to assign its rights hereunder to any
other Person with the prior written consent of the Company, which consent shall
not be unreasonably withheld. The rights to assignment shall apply to the
Holders (and to subsequent) successors and assigns.
(k) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(l) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, without regard to
principles of conflicts of law thereof.
(m) Cumulative Remedies. The remedies provided herein are cumulative
-------------------
and not exclusive of any remedies provided by law.
(n) Severability. If any term, provision, covenant or restriction of
------------
this
<PAGE>
Agreement is held to be invalid, illegal, void or unenforceable in any
respect, the remainder of the terms, provisions, covenants and restrictions set
forth herein shall remain in full force and effect and shall in no way be
affected, impaired or invalidated, and the parties hereto shall use their
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(o) Headings. The headings herein are for convenience only, do not
--------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
(p) Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the
Commission, the Company shall deliver, and shall cause legal counsel for the
Company to deliver, to the transfer agent for such Registrable Securities (with
copies to the Holders) confirmation that the Registration Statement has been
declared effective by the Commission in the form attached hereto as Exhibit A.
---------
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed by their respective authorized persons as of the
date first indicated above.
SKYLYNX COMMUNICATIONS, INC.
By:_____________________________________
Name:
Title:
SPECIAL SITUATIONS FUND III, L.P.
By:_____________________________________
Name:
Title:
SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
By:_____________________________________
Name:
Title:
SPECIAL SITUATIONS CAYMAN FUND, L.P.
By:_____________________________________
Name:
Title:
SPECIAL SITUATIONS TECHNOLOGY FUND, L.P.
By:_____________________________________
Name:
Title:
<PAGE>
Schedule 1
Special Situations Fund III, L.P.
153 East 53rd Street
51st Floor
New York, NY 10022
Special Situations Private Equity Fund, L.P.
153 East 53rd Street
51st Floor
New York, NY 10022
Special Situations Cayman Fund, L.P.
153 East 53rd Street
51st Floor
New York, NY 10022
Special Situations Technology Fund, L.P.
153 East 53rd Street
51st Floor
New York, NY 10022
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
ATTN:
RE: SKYLYNX COMMUNICATIONS, INC.
----------------------------
Ladies and Gentlemen:
We are counsel to SkyLynx Communications, Inc., a Colorado corporation (the
"COMPANY"), and have represented the Company in connection with that certain
Series __ Convertible Preferred Stock Purchase Agreement (the "PURCHASE
AGREEMENT") entered into by and between the Company and the buyers named therein
(the "HOLDERS") pursuant to which the Company issued to the Holders shares of
its Series E Convertible Preferred Stock, par value $0.01 per share (the
"PREFERRED SHARES"), convertible into shares of the Company's common stock, par
value $0.001 per share (the "COMMON STOCK"), and a warrant to purchase shares of
the Common Stock (the "WARRANT"). Pursuant to the Purchase Agreement, the
Company also has entered into a Registration Rights Agreement with the Holders
(the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company agreed,
among other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement), including the shares of Common Stock issuable
upon conversion of the Preferred Shares and exercise of the Warrant, under the
Securities Act of 1933, as amended (the "1933 ACT"). In connection with the
Company's obligations under the Registration Rights Agreement, on April __,
1999, the Company filed a Registration Statement on Form SB-2 (File No. 333-
_____________) (the "REGISTRATION STATEMENT") with the Securities and Exchange
Commission (the "SEC") relating to the Registrable Securities which names each
of the Holders as selling stockholders thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[COMPANY'S COUNSEL]
By:
cc: [HOLDERS]
<PAGE>
Exhibit 10.18
SKYLYNX COMMUNICATIONS, INC.
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made
---------
this 20th day of April 1999 between SKYLYNX COMMUNICATIONS, INC., a Colorado
corporation (the "Company") and JEFFERY A. MATHIAS ("Mathias").
------- -------
W I T N E S E T H:
WHEREAS, the parties entered into an Agreement on the 1st day of December,
1998 and wish to amend certain provisions and restate the remaining provisions
of that Agreement;
WHEREAS, it is intended that this Agreement will supercede the prior
Agreement and that all the provisions of the earlier Agreement be deemed in
effect as of the date of the first Agreement;
WHEREAS, the parties hereto wish to enter into an employment agreement to
employ Mathias and to set forth certain additional agreements between Mathias
and the Company.
NOW, THEREFORE, in consideration of the premises and of the mutual,
promises, covenants and representations herein contained, the parties hereto
agree as follows:
1. Amended Agreement. The Company and Mathias enter into this Agreement
------------------
for the purposes of amending certain provisions and restating the remaining
provisions of an employment Agreement entered into by the Company and Mathias on
the 1st day of December, 1998. The provisions of this Agreement are intended to
supercede the provisions of the prior Agreement and it is intended that all the
provisions of the earlier Agreement be deemed in effect as of the date of the
first Agreement.
2. Term. The Company will employ Mathias, and Mathias will serve the
----
Company, under the terms of this Agreement for an initial term ending October
31, 2000 (the "Initial Term"), commencing on the date hereof (the "Effective
------------ ---------
Date"). Effective as of the expiration of the Initial Term and as of each
- ----
anniversary date thereof, the term of this Agreement shall be extended for an
additional one-year period unless, not later than two months prior to each such
respective date, either party hereto shall have given notice to the other than
the term shall not be so extended. Notwithstanding the foregoing, Mathias'
employment hereunder may be earlier terminated, as provided in Section 5 hereof.
The term of this Agreement, as in effect from time to time in accordance with
the foregoing, shall be referred to herein as the "Term". The period of time
----
between the Effective Date and the termination of Mathias' employment hereunder
shall be referred to herein as the "Employment Period".
-----------------
3. Employment. The Company hereby employs Mathias as President and Chief
----------
Executive Officer of the Company upon the terms and conditions herein set forth.
Mathias shall exercise such authority, perform such duties and functions and
discharge such responsibilities as are reasonably associated with Mathias'
position, commensurate with the authority vested in Mathias pursuant to this
Agreement and consistent with the bylaws of the Company. In connection with
performance of his duties, Mathias shall report directly to the Board of
Directors of the Company (the "Board"). During the Employment Period, Mathias
-----
shall devote full business time, skill and efforts to the business of the
<PAGE>
Company. Notwithstanding the foregoing, Mathias may (i) make and manage personal
business investments of his choice and serve in any capacity with any civic,
educational or charitable organization, or any trade association, without
seeking or obtaining approval by the Board, provided such activities and service
do not materially interfere or conflict with the performance of his duties
hereunder and (ii) with the approval of the Board, serve on the boards of
directors of other corporations. The Company shall provide Mathias, incident to
the performance of such duties, with office space, facilities and secretarial
assistance commensurate with his position. Mathias shall principally perform his
duties for the Company at the corporate headquarters to be located in Denver,
Colorado, or at such location as the Board may determine in consultation with
Mathias and with his express consent.
4. Compensation and Benefits.
-------------------------
(a) Base Salary. During the Employment Period, the Company shall pay
-----------
to Mathias, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $144,000 per annum, payable
in arrears not less frequently than twice monthly in accordance with the normal
payroll practices of the Company (the "Base Salary"). The Compensation
-----------
Committee shall increase Mathias' base salary annually, at a rate of not less
than ten percent (10%) per year.
In the event the Company completes an initial or secondary public
offering of its common stock, Mathias' base salary shall be immediately
increased to an amount to be determined by the Compensation Committee of the
Board. Under no set of circumstances shall Mathias' base salary be decreased at
any time.
(b) Bonuses. The Company agrees to pay Mathias an annual cash bonus,
-------
on or about March 31st of each year for his efforts in the prior calendar year.
The amount of such bonus shall be determined by the Compensation Committee of
the Board.
(c) Advance Incentives. Concurrently with the execution of this
------------------
Agreement, the Company agrees to grant Mathias three hundred and twenty-five
thousand (325,000) shares of the Company's common stock. The Company agrees to
register the sale of the shares underlying this Stock Agreement with the
Securities and Exchange Commission at the time the Company files for its an
Initial Public Offering or a Secondary offering, subject to the requirements of
the underwriter. The total number of shares the Company must register for
Mathias shall be no more than the aggregate number of shares the Company is
otherwise registering. The Company shall bear all costs of registration
associated with such piggyback registration for Mathias.
(d) Incentive Stock Options ("ISOs"). The Company has caused to be
--------------------------------
established a qualified incentive stock option plan (the "ISO Plan") under
--------
Section 422 of the Internal Revenue Code of 1986, as amended. Each year during
the Employment Period, Mathias shall fully participate in the ISO Plan and be
granted a number of ISOs commensurate with his position in the Company. The
number of ISO's granted shall be calculated using the same formula used to
calculate the amount of ISOs granted other senior executives of the Company.
(e) Non-Qualified Stock Options ("NSOs"). The Company has caused to
-------------------------------------
be established a Non-qualified Stock Option plan (the "Equity Incentive Plan")
---------------------
that is not intended to qualify as an "incentive stock option" under Section 422
of the Internal Revenue Code of 1986, as amended. Concurrently with the
execution of this Agreement, the Company and Mathias will enter into a Stock
Option Agreement, attached hereto as Exhibit A, pursuant to which the Company
shall grant to Mathias an
<PAGE>
option to purchase one million eighty thousand nine hundred and sixty-six
(1,080,966) shares of Common Stock of the Company on the terms and conditions
set forth therein.
<PAGE>
(f) Accelerated Vesting. The parties agree that all of Mathias'
--------------------
Incentive Stock Options and Non-qualified Stock Options shall immediately vest,
regardless of the performance criteria, in the event of a Change in Control of
the Company as defined in Paragraph 5(e) herein.
(g) Equity Catch-Up or Claw-Back. Notwithstanding anything contained
-----------------------------
herein to the contrary, the parties agree that, upon the completion of an
initial or secondary public offering of the Company's Common Stock, the sum of
(i) the number of shares of Common Stock granted to Mathias according to
Paragraph 4(c), plus (ii) the number of shares of Common Stock represented by
Incentive Stock Options granted to Mathias according to Paragraph 4(d), plus
(iii) the number of shares of Common Stock represented by Non-Qualified Stock
Options granted to Mathias according to Paragraph 4(e) shall represent an equity
interest in the Company equal to seven percent (7%) of the Company's issued and
outstanding Common Stock on a fully diluted basis. To the extent that Mathias'
equity interest at such time is less than or greater than seven percent (7%),
the Company and/or the Company's Compensation Committee shall either increase or
decrease the number of Non-Qualified Stock Options granted to Mathias (through
the grant of additional Non-Qualified Stock Options to Mathias or through the
cancellation of Non-Qualified Stock Options held by Mathias) so that Mathias'
equity interest at such time is equal to seven percent (7%) of the Company's
issued and outstanding Common Stock on a fully diluted basis.
(h) Benefits. During the Employment Period, Mathias shall receive
--------
such life insurance, disability, pension, health insurance, holiday, and sick
pay benefits and other benefits which the Company extends, as a matter of
policy, to its executives and, except as otherwise provided herein, shall be
entitled to participate in all deferred compensation and other incentive plans
of the Company on the same basis as other like executives of the Company.
(i) Vacation. Mathias shall be entitled to four (4) weeks of vacation
--------
each year with full compensation. Mathias agrees to schedule his vacation in a
way that least interferes with the Company's business.
(j) Expenses. Mathias shall be reimbursed for his reasonable
--------
expenses, commensurate with his position and related to the carrying out of his
duties, including expenses for entertainment, travel and similar items. The
Company shall reimburse Mathias for such expenses in a timely manner and in
accordance with the policies and procedures of the Company in effect from time
to time.
(k) Perquisites. During the Term of this Agreement, Mathias shall be
-----------
entitled to perquisites and fringe benefits that are accorded senior executives
of the Company. Such perquisites shall include an automobile allowance of six
hundred and fifty dollars ($650) per month, reimbursement for medical expenses
which may otherwise be uninsured or unreimbursed under the Company's medical
plan for Mathias and his dependents, payment for all premiums for Mathias and
his dependents under its medical insurance plans, and payment for all premiums
for Mathias under its life and disability insurance plans. The Company shall
also waive any applicable waiting periods for such benefits, if any.
(l) Cumulative Compensation. The compensation provided for in
-----------------------
Paragraphs 3(a) - (k) herein are in addition to the benefits provided for upon
termination pursuant to Section 6 herein.
5. Termination of Employment.
-------------------------
<PAGE>
(a) Termination for Cause. The Company may terminate Mathias'
---------------------
employment hereunder for cause. For purposes of this Agreement and subject to
Mathias' opportunity to cure as provided in Section 5(c) hereof, the Company
shall have "cause" to terminate Mathias' employment hereunder if Mathias shall
commit any of the following:
(i) any act or omission which shall represent a material breach
in any material respect of any of the terms of this Agreement;
(ii) gross misconduct that, in the reasonable good faith opinion
of the Company, is or is likely to be significantly injurious to the
Company;
(iii) gross negligence or wanton and reckless acts or omissions
in the performance of Mathias' duties, in any such case which are
significantly injurious to the Company;
(iv) bad faith in the performance of Mathias' duties, consisting
of willful acts or omissions, which are significantly injurious to the
Company;
(v) addiction to illegal drugs or chronic alcoholism; or
(vi) any conviction or pleading of guilty to a crime that
constitutes a felony under the laws of the United States or any political
subdivision thereof.
(b) Termination with Adequate Reason. Mathias shall have the right at
--------------------------------
any time to terminate his employment with the Company with adequate reason. For
purposes of this Agreement and subject to the Company's opportunity to cure as
provided in Section 5(c) hereof, Mathias shall have adequate reason to terminate
his employment hereunder if such termination shall be the result of:
(i) a diminution during the Employment Period in Mathias'
title, duties or responsibilities as set forth in Section 2 hereof;
(ii) a breach by the Company of the compensation and benefits
provisions set forth in Section 4 hereof;
(iii) any action of the Company to which Mathias does not consent
which would require Mathias to change his present place of residence;
(iv) a material breach by the Company of any material terms of
this Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing, it
------------------------------
shall be a condition precedent to the Company's right to terminate Mathias'
employment for "cause" under Section 5(a) and Mathias' right to terminate his
employment for "adequate reason" under Section 5(b) that (1) the party seeking
the termination shall first have given the other party written notice stating
with specificity the reason for the termination ("breach") and (2) if such
------
breach is susceptible to cure or remedy, a period of thirty (30) days from and
after the giving of such notice shall have elapsed without the breaching party
having effectively cured or remedied such breach during such 30-day period,
unless such breach cannot be cured or remedied within thirty (30) days, in which
case the period for remedy or cure shall be extended for
<PAGE>
a reasonable time (not to exceed thirty (30) days) provided the breaching party
has made and continues to make a diligent effort to effect such remedy or cure.
(d) Termination Upon Death or Permanent and Total Disability. The
--------------------------------------------------------
Employment Period shall be terminated by the death of Mathias. The Employment
Period may be terminated by the Company if Mathias shall be rendered incapable
of performing his duties to the Company by reason of any medically determined
physical or mental impairment that reasonably can be expected to result in death
or that can be expected to last for a period of six (6) or more consecutive
months from the first date of the disability ("Disability"). In the event of a
----------
dispute as to whether Mathias is mentally impaired within the meaning of this
Section 5(d), or as to the likely duration of any incapacity of Mathias, either
party may request a medical examination of Mathias by a doctor appointed by the
Chief of Staff of a hospital selected by mutual agreement of the parties, or as
the parties may otherwise agree, and the cost of such written medical opinion of
such doctor shall be borne by the Company. If the Employment Period is
terminated by reason of Disability of Mathias, the Company shall give thirty
(30) days' advance written notice to that effect to Mathias.
(e) Change in Control. A "Change in Control" shall be deemed to have
------------------
occurred if and when (i) any "person" (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities and Exchange Act of 1934, as amended) who does
not own fifty percent (50%) or more of the combined voting power of the
Company's then issued and outstanding securities is or becomes a beneficial
owner, directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the Company's then issued
and outstanding voting securities; (ii) the Company sells all or substantially
all of the assets of the Company; (iii) a merger is effected whereby the Company
is not the surviving entity after the merger (except in the instance where the
sole purpose of the merger is to effect a change in domicile of the Company from
one state to another); or (iv) a majority of the individuals who were members of
the Board of Directors of the Company immediately prior to an action or series
of actions, do not constitute a majority of the Board of Directors following
such action or series of actions. In the event of a Change in Control, if
Mathias and the new controlling entity do not agree to continue with the terms
of this Agreement, then this Agreement shall be terminated and the Company shall
pay Mathias the liquidated damages defined in Paragraph 6(a) below.
6. Consequences of Termination.
---------------------------
(a) Termination Without Cause or for Adequate Reason or Change of
-------------------------------------------------------------
Control. In the event of termination of Mathias' employment hereunder: (1) by
- -------
the Company without "cause" (other than upon death or Disability); (2) by
Mathias for "adequate reason"; or (3) termination effected after or upon a
Change of Control (each as defined in Section 5 hereof), in addition to any
other benefits and payments as may be required by law or otherwise accrued as of
such termination date by Mathias, Mathias shall be entitled to the following
severance pay and benefits:
(i) Severance Pay - a lump sum amount equal to one half (1/2) of
-------------
Mathias' then annual Base Salary;
(ii) Benefits Continuation - continuation for six (6) months (the
---------------------
"Severance Period") of coverage under the group medical care, disability
----------------
and life insurance benefit plans or arrangements in which Mathias is
participating at the time of termination with the Company continuing to pay
its share of premiums and associated costs as if Mathias continued in the
employ of the Company; provided, however, that the Company's obligation to
-------- -------
provide such coverages
<PAGE>
shall be terminated if Mathias obtains comparable substitute coverage from
another employer at any time during the Severance Period. Mathias shall be
entitled, at the expiration of the Severance Period, to elect continued medical
coverage in accordance with Section 4980B of the Internal Revenue Code of 1986,
as amended (or any successor provision thereto); and
(iii) Pro Rata Bonus Amounts - a lump sum amount equal to the
pro rata portion of any bonus amounts paid by the Company in the prior year
as bonuses.
(b) Termination Upon Disability. In the event of termination of
---------------------------
Mathias' employment hereunder by the Company on account of Disability, Mathias
shall be entitled to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
-------------
continuation of Mathias' Base Salary as in effect immediately prior to such
termination for a period of 6 months following the first date of
Disability; and
(ii) Benefits Continuation - the same benefits as provided in
---------------------
Section 6(a)(ii) above, to be provided during the Employment Period while
Mathias is suffering from Disability and for a period of three (3) months
following the effective date of Mathias' termination by reason of
Disability.
(c) Termination Upon Death. In the event of termination of Mathias'
----------------------
employment hereunder on account of Mathias' death, Mathias' heirs, estate or
personal representatives under law, as applicable, shall be entitled to the
payment of Mathias' Base Salary as in effect immediately prior to death for a
period of not less than two (2) calendar months and not more than the earlier of
six (6) calendar months or the payment of benefits pursuant to Mathias' life
insurance policy, as provided for in Section 4(h) above. Mathias' beneficiary
or estate shall not be required to remit to the Company any payments received
pursuant to any life insurance policy purchased pursuant to Section 4(h) above.
(d) Accrued Rights. Notwithstanding the foregoing provisions of this
--------------
Section 6, in the event of termination of Mathias' employment hereunder for any
reason, Mathias shall be entitled to payment of any unpaid portion of his Base
Salary through the effective date of termination, accrued but unpaid vacation or
benefits otherwise agreed to by the Company, and payment of any accrued but
unpaid rights solely in accordance with the terms of any incentive bonus or
employee benefit plan or program of the Company.
(e) Conditions to Severance Benefits.
--------------------------------
(i) The Company shall have the right to seek repayment of the
severance payments and benefits provided by this Section 6 in the event
that Mathias fails to honor in accordance with their terms the provisions
of Section 7 hereof.
(ii) For purposes only of this Section 6(e), Mathias shall be
treated as having failed to honor the provisions of Sections 7 hereof only
upon the vote of two-thirds of the Board following notice of the alleged
failure by the Company to Mathias, an opportunity for Mathias to cure the
alleged failure for a period of thirty (30) days from the date of such
notice and Mathias' opportunity to be heard on the issue by the Board.
<PAGE>
(f) Registration and/or Buyback of Securities. No later than ninety
------------------------------------------
(90) days following termination of this Agreement by Company without cause (as
described in Section 5(a)) or by Mathias with adequate reason (as described in
Section 5(b)), the Company shall cause to be prepared and filed at its sole cost
and expense registration documents with the Securities and Exchange Commission
for the purpose of registering for sale under the Securities Act of 1933, as
amended, all shares of the Company's common stock owned by Mathias or
purchasable by Mathias upon exercise of outstanding Incentive Stock Options and
Non-Qualified Stock Options that are vested as of the date of termination. In
connection with such registration, the Company shall do the following: (i)
attempt to cause such registration statement to be declared effective by the
Securities and Exchange Commission within one hundred twenty (120) days of the
date of termination, (ii) if successful in (i) above, maintain the effectiveness
of such registration for a minimum period of one hundred eighty (180) days, and
(iii) qualify the sale of all shares of the Company's common stock owned by
Mathias or purchasable by Mathias upon exercise of his outstanding, vested
Incentive Stock Options and Non-Qualified Stock Options in such states and under
such Blue Sky regulations as Mathias may reasonably request. In the event said
registration fails to become effective, Mathias shall be permitted to sell in
accordance with the provisions of Rule 144 and the remaining shares shall be
registered in accordance with 4(c) above.
7. Confidential Information and Covenant Not to Compete. All payments and
-----------------------------------------------------
benefits to Mathias shall be subject to Mathias' compliance with this Agreement
and the provisions of this Section 7. However, Mathias' covenants contained in
this Section 7 shall terminate and shall be unenforceable and of no further
legal force or effect in the event the Company, its successors or assigns,
becomes insolvent, is liquidated or ceases for any reason to conduct business
operations for a continuous period of at least thirty (30) days.
(a). Confidentiality. Mathias agrees that he will not at any time
---------------
during the employment period or for a period of two (2) years following
employment with the Company, for any reason, in any fashion, form or manner,
either directly or indirectly, divulge, disclose or communicate to any person,
firm, corporation or other business entity, in any manner whatsoever, any
confidential information or trade secrets concerning the business of the
Company, including, without limiting the generality of the foregoing, the
techniques, methods or systems of its operation or management, any information
regarding its financial matters, or any other material information concerning
the business of the Company (including customer lists), its manner of operation,
its plans or other material data (the "Business"). The provisions of Section
--------
7(a) shall not apply to (i) information disclosed in the performance of Mathias'
duties to the Company based on his good faith belief that such a disclosure is
in the best interests of Company; (ii) information that is, at the time of the
disclosure, public knowledge; (iii) information disseminated by the Company to
third parties in the ordinary course of business; (iv) information lawfully
received by Mathias from a third party who, based upon inquiry by Mathias, is
not bound by a confidential relationship to the Company; or (v) information
disclosed under a requirement of law or as directed by applicable legal
authority having jurisdiction over Mathias.
(b) Litigation Support. During the Term of this Agreement, Mathias
------------------
shall, upon reasonable notice, furnish such information and proper assistance to
the Company as may reasonably be required in connection with any litigation in
which the Company or any of its subsidiaries is, or may become, a party. Except
for litigation that may be between the Company and Mathias, Mathias' reasonable
expenses (including, but not limited to, travel and attorneys' fees) incurred in
complying with this covenant shall be either advanced or promptly reimbursed by
Company to Mathias.
(c) No Solicitation of Employees. Mathias agrees that during the Term
----------------------------
of this
<PAGE>
Agreement and continuing for a period of one (1) year after termination under
Paragraph 5 herein, neither Mathias nor any person or enterprise controlled by
Mathias, will solicit for employment any person employed by the Company, with
the exception of James E. Maurer.
(d) Covenant Not to Compete. Mathias agrees that he shall not during
------------------------
the Employment period, without the approval of the Board, directly or
indirectly, alone or as partner, joint venturer, officer, director, employee,
consultant, agent, independent contractor, guarantor, financier, consultant,
option holder or stockholder (other than as provided below) of any company or
business, participate in, engage in or have a financial interest in any
"Competitive Business" within the United States. For purposes of the foregoing,
the term "Competitive Business" shall mean any business, firm, corporation or
other business entity related to the provision of Internet access or Internet
related services and any business directly competing with any product or service
of the Company or any affiliate thereof. Notwithstanding the foregoing, Mathias
shall not be prohibited during the noncompetition period applicable above from
acting as a passive investor where he owns not more than five percent (5%) of
the issued and outstanding capital stock of any publicly-held company.
8. Breach of Restrictive Covenants. The parties agree that a breach or
-------------------------------
violation of Section 7 hereof will result in immediate and irreparable injury
and harm to the innocent party, and that such innocent party shall have, in
addition to any and all remedies of law and other consequences under this
Agreement, the right to seek an injunction, specific performance or other
equitable relief to prevent the violation of the obligations hereunder.
9. Indemnification and Duty to Defend.
----------------------------------
(a) Indemnification. Except for litigation between the Company and
----------------
Mathias, the Company agrees to indemnify Mathias to the fullest extent against
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative in which he is made party or is
threatened to be made a party by reason of his having been an officer or
director of the Company or any of its subsidiaries or affiliates, or for actions
taken purportedly on behalf of the Company or any of its subsidiaries or
affiliates. Indemnification shall include, but is not limited to: expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by Mathias as long as Mathias acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful. Indemnification shall
extend to all matters that relate to Mathias' association with the Company
beginning on July 1, 1998, and such indemnification shall survive the
termination of this Agreement, regardless of the reason for termination.
(b) Duty to Defend. Except for litigation between the Company and
--------------
Mathias, the Company will provide Mathias with a legal defense with counsel of
his choosing against any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative in which he
is made party or is threatened to be made a party by reason of his having been
an officer or director of the Company or any of its subsidiaries or affiliates,
for action taken purportedly on behalf of the Company or any of its subsidiaries
or affiliates. No settlement shall be entered into with respect to litigation
pursuant to this Section 9(b) without the express written approval of Mathias.
Additionally, upon request by Mathias, the Company will promptly advance or pay
any amounts for costs, charges, or expenses in respect to his right to a defense
and indemnification hereunder. This duty to defend shall extend to all matters
that relate to Mathias' affiliation with the Company beginning from July 1,
1998, and such duty shall survive the termination of this Agreement.
<PAGE>
10. Notice. For the purposes of this Agreement, notices, demands and all
------
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Company, to: If to Mathias, to:
Chairman of the Board Jeffery A. Mathias
SkyLynx Communications, Inc. 724 The Circle
600 South Cherry Street - Suite 305 Elkhart, Indiana 46514
Denver, Colorado 80246
or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
11. Waiver of Breach. Any waiver of any breach of this Agreement shall
----------------
not be construed to be a continuing waiver or consent to any subsequent breach
on the part either of Mathias or of the Company.
12. Non-Assignment: Successors. Neither party hereto may assign his or
--------------------------
its rights or delegate his or its duties under this Agreement without the prior
written consent of the other party; provided, however, that: (i) this Agreement
-------- -------
shall inure to the benefit of and be binding upon the successors and assigns of
the Company upon any sale of all or substantially all of the Company's assets,
or upon any merger, consolidation or reorganization of the Company with or into
any other corporation, all as though such successors and assigns of the company
and their respective successors and assigns were the Company; and (ii) this
Agreement shall inure to the benefit of and be binding upon the heirs, assigns
or designees of Mathias to the extent of any payments due to them hereunder. As
used in this Agreement, the term "Company" shall be deemed to refer to any such
successor or assign of the Company referred to in the preceding sentence.
13. Withholding of Taxes. All payments required to be made by the Company
--------------------
to Mathias under this Agreement shall be subject to the withholding of such
amounts, if any, relating to tax, and other payroll deductions as the Company
may reasonably determine it should withhold pursuant to any applicable law or
regulation.
14. Severability. To the extent any provision of this Agreement or
------------
portion thereof shall be invalid or unenforceable, it shall be considered
deleted therefrom and the remainder of such provision and of this Agreement
shall be unaffected and shall continue in full force and effect.
15. Payment. All amounts payable by the Company to Mathias under this
-------
Agreement shall be paid promptly on the dates required for such payment in this
Agreement without notice or demand. Any salary, benefits or other amounts paid
or to be paid to Mathias or provided to or in respect of Mathias pursuant to
this Agreement shall not be reduced by amounts owing from Mathias to the
Company.
16. Authority. Each of the parties hereto hereby represents that each has
---------
taken all actions necessary in order to execute and deliver this Agreement and
the Stock Option Agreement attached hereto as Exhibit A.
<PAGE>
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. Governing Law. This Agreement shall be construed, interpreted and
-------------
enforced in accordance with the laws of the State of Colorado, without giving
effect to the choice of law principles thereof.
19. Entire Agreement. This Agreement, the attached Stock Option
----------------
Agreements and the Plan as defined in the Stock Option Agreements constitute the
entire agreement by the Company and Mathias with respect to the subject matter
hereof and supersedes any and all prior agreements or understandings between
Mathias and the Company with respect to the subject matter hereof, whether
written or oral. This Agreement may be amended or modified only by a written
instrument executed by Mathias and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and month first above-written.
SKYLYNX COMMUNICATIONS, INC.
By:
Francis P. Ragano
Chairman of the Board
Jeffery A. Mathias
<PAGE>
EXHIBIT "A"
-----------
AMENDED AND RESTATED
STOCK OPTION AGREEMENT
SkyLynx Communications, Inc.
Stock Options
-------------
This AMENDED AND RESTATED STOCK OPTION AGREEMENT (the "Agreement") dated as
of the 20th day of April, 1998 is intended to amend certain terms and restate
the remaining provisions of an Agreement entered into on the 1st day of
December, 1998 (the "Date of Grant"), between SkyLynx Communications, Inc., a
Colorado corporation (the "Company") and Jeffery A. Mathias (the "Optionee").
Pursuant to any authorized stock option plan of the Company or any other
appropriate and lawful method (collectively, the "Plan"), the Company has
authorized the execution and delivery of this Agreement. A copy of the Plan as
in effect on the Date of Grant has been supplied to the Optionee and the
Optionee hereby acknowledges receipt thereof. The provisions of the Plan,
including the definitions of capitalized terms that are not otherwise defined in
this Agreement, are incorporated herein by reference.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
1. Grant of Option. Subject to all the terms and conditions of the Plan
---------------
and this Agreement, the Company grants to the Optionee as of the date of grant
an option (the "Option") to purchase one million eighty thousand nine hundred
and sixty-six (1,080,966) shares of common stock, par value $.001, of the
Company ("Common Stock"). The Option is not intended to qualify as an "incentive
stock option" under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and shall be treated as a non-qualified stock option under the
Plan.
2. Exercise Price. The exercise price per share of Common Stock covered
--------------
by this Option (the "Option Price") shall be $1.94.
3. Vesting. The Optionee's right to purchase shares of the Company's
-------
Common Stock under the Option shall vest according to the following milestones:
a. When the Company achieves certain performance based milestones as
detailed in the Performance Criteria ("Performance Criteria") set forth on
--------------------
Schedule 3(a) hereto; or
- ------------
b. In any event, upon the tenth (10th) anniversary of the grant of
the options all options that are not then vested will immediately vest.
4. Term. The term of the Option (the "Option Term") shall commence on the
----
Date of Grant and shall expire on the tenth anniversary thereof unless the
Option shall have been earlier terminated in accordance with the terms hereof or
of the Plan. Shares of Common Stock as to which the Option becomes exercisable
pursuant to Section 3 hereof may be purchased at any time during the Option
Term.
<PAGE>
5. Termination of Option. The unexercised portion of the Option shall
---------------------
automatically terminate and shall become null and void and be of no further
force or effect upon the expiration of the Option Term.
6. Notices. All notices or other communications which are required or
-------
permitted hereunder shall be deemed sufficient if contained in a written
instrument given by personal delivery, telex, telecopier, telegram, air courier
or registered or certified mail, postage prepaid, return receipt requested,
addressed to such party at the address set forth below or such other address as
may thereafter be designated in a written notice from such party to the other
party.
If to the Company:
Attn: Chairman of the Board
SkyLynx Communications, Inc.
600 South Cherry Street - Suite 305
Denver, Colorado 80246
If to Mathias, to:
Jeffery A. Mathias
724 The Circle
Elkhart, Indiana 46514
All such notices, advances and communications shall be deemed to have been
delivered and received (i) in the case of personal delivery, on the date of such
delivery, (ii) in the case of telecopier, upon receipt of machine confirmation
and (iii) in the case of mailing, on the third business day following such
mailing.
7. No Waiver. No waiver of any breach or condition of this Agreement
---------
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
8. Optionee Undertaking. The Optionee shall take whatever additional
--------------------
actions and execute whatever additional documents the Company or the Committee
may in its reasonable judgment deem necessary or advisable in order to carry out
or effect one or more of the obligations or restrictions imposed on the Optionee
pursuant to the express provisions of this Agreement.
9. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Colorado, excluding the choice of law
rules thereof.
10. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above-written.
SKYLYNX COMMUNICATIONS, INC.
By:
Francis P. Ragano
Chairman of the Board
Jeffery A. Mathias
<PAGE>
SCHEDULE 3(A)
-------------
PERFORMANCE CRITERIA
The Optionee's right to purchase shares of the Company's Common Stock under
the Option shall vest immediately, subject to Section 3 hereof, pursuant to the
following schedule:
(1) Upon acquisition of the Company's twenty-fifth thousand (25,000)
subscriber, Mathias shall vest in 288,258 stock options.
(2) Upon obtaining acceptable commitments to fund the Company for a
minimum $30,000,000, Mathias shall vest in 384,343 stock options. Such
commitments may consist of, but shall not be limited to, any combination of the
following:
(i) Initial or Secondary Public Offering;
(ii) Private Equity Placement;
(iii) High Yield Debt Offering;
(iv) Private Debt Placement;
(v) Public or Private Placement of Convertible Securities;
(vi) Joint Venture / Project Financing; and
(vii) Vendor Financing.
(3) Upon the acquisition of the Company's fifth (5th) Internet Service
Provider, Mathias shall vest in 192,172 stock options.
(4) Upon obtaining annualized gross revenues of $15,000,000 for the
Company, (based upon last quarter revenues annualized), Mathias shall vest in
another 216,193 stock options.
<PAGE>
Exhibit 21.1
SUBSIDIARIES
The following are the subsidiaries of SkyLynx Communications, Inc., a
Delaware corporation, and each of such subsidiaries' state of incorporation:
SkyLynx Communications (Fresno), Inc. California
SkyLynx Communications of California, Inc. California
SkyLynx Communications, Inc. Delaware
SkyLynx Communications of California, Inc. Delaware
SkyLynx Communications of Pacific Northwest, Inc. Delaware
SkyLynx Communications MST, Inc. Delaware
SkyLynx Communications (Tampa), Inc. Florida
SkyLynx Communications (Sarasota), Inc. Florida
SkyLynx Communications of Oregon, Inc. Oregon
SkyLynx Communications of Washington, Inc. Washington
<PAGE>
EXHIBIT 23.1
TO: The Securities and Exchange Commission
Washington, D.C.
RE: Skylynx Communications, Inc.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Skylynx Communications, Inc. on Form SB-2 of our report dated March 4, 1998 for
the period from inception (July 29, 1997) to December 31, 1997.
/s/Cordovano and Harvey, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
July 23, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our reports (and to all references to our firm) included in or made a part of
this registration statement.
/s/ Arthur Andersen LLP
Tampa, Florida
July 19, 1999
