<PAGE>
As filed with the SEC on August 11, 1999
Registration No. 333-83705
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON
FORM SB-2
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.[ ]
<PAGE>
PROSPECTUS
SkyLynx Communications, Inc.
9,996,954 SHARES
COMMON STOCK
This prospectus relates to an offering of shares of the common stock of
SkyLynx Communications, Inc. by holders of our common stock. These persons are
referred to in this prospectus as "selling security holders." The selling
security holders were issued common stock in connection with our capital raising
activities or have been or will be issued common stock upon conversion of shares
of our series B, series D and series E convertible preferred stock or warrants
to purchase common stock issued in connection with our capital raising
activities. 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 August 9, 1999, the
last reported bid price of our common stock was $6.375 and the last reported ask
price was $6.9375.
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 before
investing in the common stock.
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 August __, 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
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 eight Internet service providers serving customers in areas of
Florida, California, Washington, Oregon, Nevada and Arizona. We currently have
approximately 28,900 subscribers to our services. Our plan is to acquire
additional Internet service providers in select markets in the United States,
and to integrate thes
e 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.
The Offering
This prospectus relates to an offering of shares of our common stock by
holders of our common stock. We refer to these persons as "selling security
holders" in this prospectus. The selling security holders were issued common
stock in connection with our capital raising activities or have been or will be
issued common stock upon conversion of our series B, series D and series E
convertible preferred stock or warrants to purchase common stock issued in
connection with our capital raising activities. We are registering the common
stock covered by this prospectus in order to fulfill obligations we have under
agreements with the selling security h
olders.
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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 our 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 as of January 1, 1998,
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 Simply Internet,
Inc. and Net Asset, LLC, with those of Interaccess Corp. for the year ended
December 31, 1998 and for the period from January 1, 1999 through the acquistion
date of February 4, 1999 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
results of CalWeb Internet Services, Inc. for the three months ended March 31,
1999 are included in the unaudited pro forma condensed combined statement of
operations data for both the year ended December 31, 1998 and the three months
ended March 31, 1999. For the three months ended March 31, 1999, CalWeb's
revenue was approximately $382,000 and its net loss was approximately $10,000.
The unaudited pro forma condensed combined balance sheet data give effect to the
acquisitions 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 and diluted 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 and diluted 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 an investment in the common stock involves 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 providers may not be successful.
Our success will depend upon our ability to acquire local Internet service
providers at attractive prices and integrate these acquired businesses into a
comprehensive network that is able 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 January 1, 1998 and July 29, 1999, we acquired eight 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 network. 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 debt or 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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<PAGE>
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 unable to execute our business strategy, 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 working capital 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 sustain revenues or
achieve profitable operations.
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 and residential customers 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,
systems 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 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 dependent 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 liability 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
for 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.
with such rights, preferences and limitations as the Board determines in its
discretion. 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 provide
Internet service, 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, Year 2000 problems could have a material adverse effect
upon our business, financial condition or results of operations. See the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - 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 identif
y 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 repor
ts, 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 registrat
ion 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)
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<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
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Total......................................... 5,165,977 9,996,954
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</TABLE>
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(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. The number of shares
indicated assumes a conversion rate of 333 shares of common stock for each
share of series B, series D and series E convertible preferred stock and
the exercise of all warrants held by the holders of the series B, series D
and series E preferred stock.
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<PAGE>
(2) We have agreed to register at least 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 their
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 liabilities,
including liabilities under the Securities Act, relating to information supplied
by them for use in this prospectus. 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 and may in the future
receive proceeds from the sale of the convertible preferred stock. We also 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 seeking monetary damages, rescission and
injunctive relief against Network System Technologies, Inc. and Mr. Eduardo
Moura, its Chairman of the Board and Chief Executive Officer. Mr. Jeffery A.
Mathias, one of our directors and our President and Chief Executive Officer,
served as Vice President of Business Development of Network System from June
1997 to June 1998. Network System also owns approximately 15% of our common
stock. See "Principal Stockholders." 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.
The basis of our claims is that Network System made material
misrepresentations and omissions that fraudulently induced us to enter into the
agreement and plan of reorganization. In addition, we allege that Network System
breached the agreement by failing 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, which damaged our reputation and
tortiously interfered with our business relations and prospective business
advantage.
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's 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.
While discovery has commenced in this matter, no trial date has been
scheduled. While the ultimate outcome of this litigation cannot be predicted at
this time, Network System's success in prosecuting its counterclaims could have
a material adverse effect on our financial condition or future results of
operations.
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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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 in this suit. We cannot
predict the outcome of this litigation at this time. However, resolution of this
matter against our interests could have a material adverse effect on our
financial condition or our future results of operations.
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. See
"Legal Proceedings." 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 June 1999, Mr. Ragano was President and CEO of CMS, Inc., a wholly-
owned subsidiary of Daimler-Benz GmbH. 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 for 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.
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.
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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) 5.1%
Frank P. Ragano 360,128(5) 3.1%
James E. Maurer 289,551(6) 2.5%
Gary L. Brown 2,235,353(7) 19.4%
718 Siesta Kay Circle
Sarasota, Florida 34242
Network System Technologies, Inc. 1,732,457(8) 15.1%
55 South Market Street
San Jose, California 96112
All Directors and Executive Officers
as a Group (6 Persons) 2,047,831 16.1%
</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 11,463,830 shares of common stock
outstanding as of Agust 9, 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 August 9, 1999, 11,463,830 shares of our common stock were
outstanding and held by 196 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.
Under the agreement and plan of reorganization related to our acquisition
of Skylynx Express Holdings Inc., Network System Technologies, Inc. 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.
Network System is a beneficial holder of approximately 19.4% of our common
stock. See "Principal Stockholders."
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 August 9, 1999, our issued and outstanding preferred stock consisted
of the following:
. 487,941 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 with respect to the payment of
dividends and the right to share in our assets upon liquidation.
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 $0.40 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 after payment of
dividends on the preferred 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 s
eries 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 c
onvertible preferred stock are entitled to receive
payment of dividends at an annual rate of $80 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 after payment of
dividends on the preferred stock.
The outstanding shares of series B convertible preferred stock have a
liquidation preference equal to $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 for each share will
be the sum of
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<PAGE>
$1,000 plus the amount of all accrued and unpaid dividends with respect to the
share, 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. We are filing the registration statement, of which this
prospectus is a part, in satisfaction of these registration rights.
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 $0.40 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 o
f the
series C convertible preferred stock are also entitled to participate, pro rata,
in any dividends paid on the outstanding shares of common stock, after payment
of dividends on the preferred 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 conve
rtible
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 $50 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 $1,000 per share plus any accrued and unpaid
dividends.
If after April 16, 2000, 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 $1,200 plus any accrued and
unpaid dividends.
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. We are filing the registration statement of which this
prospectus is a part, in satisfaction of these registration rights.
Series E Convertible Preferred Stock.
Each share of our series E con
vertible 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 $50 per share. Dividends on the
series E convertible preferred stock are cumulative and are paya
ble 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 $1,000 per share plus any accrued and unpaid
dividends.
If after May 6, 2000, 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 $1,200 plus any accrued and
unpaid dividends.
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 su
bmitted 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. We are filing the registration Statement, of which this prospectus is
a part, in satisfaction of these registration rights.
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
amendments to our Articles, 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.
Under the Colorado Business Corporation Act, 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
connection and advanced Internet services to small and medium-sized businesses.
Subject to our ability to obtain additional capital, we plan to acquire 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; Las Vegas, Nevada; Sacramento,
California; and Phoenix, Arizona. We currently have approximately 28,900
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
We believe that 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, we believe
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, we believe 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
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 eight 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 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.
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.
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 Internet service 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 July 27, 1999 we acquired 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 was approximately $4.3 million,
consisting of approximately $2.6 million in cash and 255,639 shares of our
common stock. We retained the services of the two former owners of CalWeb.
Phoenix, Arizona. On July 29, 1999 we acquired substantially all of the
assets of Inficad Computing and Design, L.L.C., an Internet service provider
operating in the Phoenix, Arizona area serving approximately 9,100 customers.
The aggregate purchase price for this acquisition was approximately $2.6
million, consisting of approximately $1.1 million in cash and approximately
216,620 shares of our common stock.
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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.
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:
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.
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.
Consulting services. We offer a full set of consulting 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 consulting service
capabilities or form partnerships with technology leaders to provide
customers with additional consulting services.
In addition to the services drescribed above, we intend to offer our
customers 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.
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. 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 other 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 August 9, 1999, we employed approximately 142 people,
including 96
full-time and 46 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 AND ANALYSIS 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;
. selling, general and administrative;
. sales and marketing; and
. 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 selling, general and administrative expenses 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 selling, general and administrative
expenses also include 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 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 amortization expense primarily relates to the amortization of goodwill
and other intangibles acquired in our purchases of Internet service providers,
and 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 the proportion of intangible assets.
Our depreciation expense primarily relates 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. 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 January 1, 1999 and July 29, 1999, we acquired eight Internet
service providers for aggregate consideration of approximately $8.2 million in
cash, 593,081 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 (approximately $12.7 million), 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, 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 of our future results.
The discussion of our historical results set forth below addresses our
historical results of operations and financial condition 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, 1999, or 487% of pro forma
revenue. The most significant component of pro forma operating costs and
expenses was 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 three months 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 increased activities during 1998, which consisted
primarily of efforts to purchase or otherwise acquire wireless frequencies for
use in the devel
opment 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 increased activities during the three months ended March 31, 1999,
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 a warrant 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
a warrant to purchase two additional shares of our common stock.
In January 1999, we issued and sold to one accredited investor 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 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 price of $1,000 per share. Each share of
series D convertible preferred stock is convertible into 333 shares
of common 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 price of $1,000 per share. Each share
of series E convertible preferred stock is convertible into 333 shares of common
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 January 1, 1999 and July 29, 1999, we acquired eight Internet
service providers for aggregate consideration of approximately $8.2 million in
cash, 593,081 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 will require substantial additional capital for the acquisition of
additional Internet service providers as well as for the continued deployment of
our Internet service provider network. We cannot accurately predict the precise
timing of our future capital requirements. In the future, we may seek 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 not be able to execute our business strategy or may
be
-31-
<PAGE>
required to reduce our operations, which could have a material adverse effect
on 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 ot
her
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. Because we
have missed some of the filing deadlines, it is likely that we
will incur
penalties to the holders of our convertible preferred stock. 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 adverse 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. The adoption of SFAS 131 did not
have a material effect on our financial statements.
The Year 2000 Issue
The "Year 2000 Issue" exists becaus
e 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 service
s. System failures caused by Year 2000 problems could
adversely affect our business, 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.
-32-
<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 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 p
roblems. 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
business, 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. 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 office space: Fresno, California, 4,000
square feet; San Diego, California, 2,347 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; Seattle, Washington, 505 square feet;
Sacramento, California, 4,000 square feet; Las Vegas, Nevada, 1,000 square feet;
and Phoenix, Arizona, 7,000 square feet. We believe that our existing facilities
are adequate for the foreseeable future.
-33-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 conside
ration 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.
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;
-34-
<PAGE>
. an additional 100,000 shares after the SEC declares effective the
registration statement of which this prospectus forms a part, 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 August 9, 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 August 9, 1999) $ 8.816 $5.625 $ 9.000 $6.375
</TABLE>
On August 9, 1999, the last reported bid price of our common stock was
$6.375 and the last reported ask price was $6.9375. As of August 9, 1999, there
were approximately 196 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 (whom we refer
to as our "Named 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, $100,000 during fiscal years 1997 or 1998.
TABLE 1
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensati
on Awards Payouts
-------------------- ------------- -------
Securities
Name and Year Salary Bonus Other Restricted Underlying LTIP All Other
Principal ($) ($) Annual Stock Options Payouts Compen-
Position Compen- Award(s) ($) 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 $ 53,87
7 $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 an 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. Mathi
as 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
-36-
<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 pl
an, 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. 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 exer
cise 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 $2.13 per share to our directors, officers,
employees and consultants. Of these opt
ions, we granted options exercisable to
purchase: 1,211,400 shares to Mr. Mathias, 57,600 shares to Mr. Brown, 847,000
shares to Mr. Maurer and 200,000 shares to Mr. Ragano. Of the total number of
options we had granted as of March 31, 1999, options to purchase an aggregate of
1,834,786 shares of common stock are currently vested.
The following tables set forth certain information concerning the stock
options granted to the Named Executive Officers during the last completed fiscal
year.
-37-
<PAGE>
TABLE 2
Option/SAR Grants for Last
Fiscal Year - Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise Expiration
Name Year Granted (#) Fiscal Year Price ($/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% $2.30 Dec 2003
Mathias 1997
-0- 0
</TABLE>
TABLE 3
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Shares Options/SARs In-the-
Acquired Value Realized at FY-End (#) Money
Name on Exercise (#) ($) Exercisable Options/
SARs at FY-
End ($)(1)
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 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.
-38-
<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 31, 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 from 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-35
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-50
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-64
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 the acquisition
of the capital stock of CalWeb Internet Services, Inc.
The Pro Forma Condensed Combined Balance Sheet gives effect to the acquisitions
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
as of January 1, 1998, 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 Simply Internet, Inc. and Net Asset, LLC with
those of Interaccess Corp. for the year ended December 31, 1998 and for the
period from January 1, 1999 through the acquisition date of February 4, 1999 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-5
<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-6
<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-7
<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-8
<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-9
<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-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
------------------------------------
(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-11
<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-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
------------------------------------
(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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-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)
(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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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
August __, 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.
Under the Colorado Business Corporation Act, 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 expenses $ 6,665*
Total $270,000
*Estimated
<PAGE>
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 i
n
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 a
nd 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-affi
liated 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 Securitie
s 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 e
nabling 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 Securiti
es 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 Febr
uary 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 appro
priate 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 pr
ovided 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.
23. On July 27, 1999, we issued an aggregate of 255,639 shares of our
common stock in connection with our acquisition of all of the capital stock of
CalWeb Internet Services, 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 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.
24. On July 29, 1999, we issued an aggregate of 216,620 shares of our
common stock in connection with our acquisition of substantially all of the
assets of Inficad Computing and Design, L.L.C. 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 two other persons who
each 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 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.
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 (previously filed).
3.7 Articles of Amendment, dated as of May 6, 1999, to the Articles
of Incorporation of the Company (previously filed).
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 (previously filed).
4.11 Form of Warrant issued to the holders of the Company's Series D
Convertible Preferred Stock (previously filed).
4.12 Form of Warrant issued to the holders of the Company's Series E
Convertible Preferred Stock (previously filed).
II-6
<PAGE>
5.1 Opinion of Neuman, Drennen & Stone, LLC (filed herewith).
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 (previously filed).
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 (previoulsy filed).
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
(previously filed).
10.15 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series D Convertible Preferred
Stock (previously filed).
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 (previously filed).
10.17 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series E Convertible Preferred
Stock (previously filed).
10.18 Amended and Restated Employment Agreement, dated as of April 20,
1999, between the Company and Jeffery A. Mathias (previously
filed).
10.19 Stock Purchase Agreement, dated as of July 27, 1999, by and among
the Company, SkyLynx Communications of California, Inc., CalWeb
Internet Services, Inc., Robert DuGaue and Gloria DuGaue
(incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K, dated July 27, 1999 and filed with the SEC on
July 28, 1999).
10.20 Asset Purchase Agreement, dated as of July 29, 1999, by and among
the Company, Skylynx Communications MST. Inc., Inficad Computing
and Design, L.L.C. and the members of Inficad (incorporated by
reference to Exhibit 1.1 to the Company's Current Report on Form
8-K, dated July 29, 1999 and filed with the SEC on August 10,
1999).
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 (previously filed).
23.1 Consent of Cordovano and Harvey, P.C. (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
23.3 Consent of Newman, Drennen & Stone, LLC (included in Exhibit
5.1).
24.1 Power of Attorney (previously filed).
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 controllin
g 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 Amendment No. 1
to registration statement to be signed on its behalf by the undersigned, in the
City of Denver, State of Colorado, on August 9, 1999.
SKYLYNX COMMUNICATIONS, INC.
/s/ Jeffery A. Mathias
----------------------------------------
Jeffery A. Mathias,
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to registration statement was signed by the following persons in
the capacities and on the dates stated.
SIGNATURE TITLE DATE
President, Chief Executive August 9, 1999
Officer (Principal Executive Officer)
/s/Jeffery A. Mathias and Director
- -----------------------
Jeffery A. Mathias
/s/ Francis Ragano* Chairman of the Board August 9, 1999
- -----------------------
Francis Ragano
Chief Financial Officer August 9, 1999
(Principal Financial and Accounting
/s/ James E. Maurer Officer) and Director
- -----------------------
James E. Maurer
* By: /s/ James E. Maurer August 9, 1999
----------------------
James
E. Maurer
Attorney-in-fact
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 (previously filed).
3.7 Articles of Amendment, dated as of May 6, 1999, to the Articles
of Incorporation of the Company (previously filed).
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 (previously filed).
4.11 Form of Warrant issued to the holders of the Company's Series D
Convertible Preferred Stock (previously filed).
4.12 Form of Warrant issued to the holders of the Company's Series E
Convertible Preferred Stock (previously filed).
<PAGE>
5.1 Opinion of Neuman, Drennen & Stone, LLC (filed herewith).
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 (previously filed).
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 (previously filed).
10.14 Form of Purchase Agreement by and between the Company and the
holders of the Company's Series D Convertible Preferred Stock
(previously filed).
10.15 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series D Convertible Preferred
Stock (previously filed).
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 (previously filed).
10.17 Form of Registration Rights Agreement by and between the Company
and the holders of the Company's Series E Convertible Preferred
Stock (previously filed) .
10.18 Amended and Restated Employment Agreement, dated as of April 20,
1999, between the Company and Jeffery A. Mathias (previously
filed).
10.19 Stock Purchase Agreement, dated as of July 27, 1999, by and among
the Company. SkyLynx Communications of California, Inc., CalWeb
Internet Services, Inc., Robert DuGaue and Gloria DuGaue
(incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K, dated July 27, 1999 and filed with the SEC on
July 28, 1999).
10.20 Asset Purchase Agreement, dated as of July 29, 1999, by and among
the Company, SkyLynx Communications MST. Inc., Inficad Computing
and Design, L.L.C. and the members of Inficad (incorporated by
reference to Exhibit 1.1 to the Company's Current Report on Form
8-K, dated July 29, 1999 and filed with the SEC on August 10,
1999.
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 (previously filed).
23.1 Consent of Cordovano and Harvey, P.C. (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
23.3 Consent of Neumen, Drennen & Stone, LLC (included in Exhibit
5.1).
24.1 Power of Attorney (previously filed).
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF NEUMAN, DRENNEN & STONE, LLC]
Telephone: (303) 449-2100
Facsimile: (303) 449-1045
August 10, 1999
VIA FACSIMILE
- -------------
SkyLynx Communications, Inc.
600 Cherry Street, Suite 305
Denver, CO 80246
Re: SEC Registration Statement on Form SB-2
Dear Ladies and Gentlemen:
We have acted on special counsel to SkyLynx Communications, Inc. (the
"Company") in connection with a Registration Statement on Form SB-2 filed with
the United States Securities and Exchange Commission, Washington, D.C., pursuant
to the Securities Act of 1933, as amended, covering the registration of an
aggregate of 9,996,954 shares of the Company's $.001 par value Common Stock (the
"Common Stock") for resale by certain selling security holders. In connection
with such representation of the Company, we have examined such corporate records
and have made such inquiry of government officials and Company officials and
have made such examination of the law as we deemed appropriate in connection
with delivering this opinion.
Based upon the foregoing, we are of the opinion that the shares of
Common Stock being registered for resale and offered by the selling security
holders which are issued and outstanding on this date are lawfully and validly
issued, fully paid and non-assessable shares of the Company's Common Stock. In
addition, we are of the opinon that, upon the lawful conversion of outstanding
shares of convertible perferred stock and/or the exercise of outstanding
warrants in accordance with all legal requirements, the shares of Common Stock
issuable upon conversion of the preferred stock and/or exercise of the warrants
will be lawfully and validly issued, fully paid and non-assessable shares of the
Company's Common Stock.
We hereby consent to the references to our form in the Registration
Statement and to the use of this opinion as an exhibit to the Registration
Statement.
Sincerely,
NEUMAN, DRENNEN & STONE, LLC
/s/ NEUMAN, DRENNEN & STONE, LLC
<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
August 11, 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
August 10, 1999
